Establishment Labs Holdings Inc. (ESTA) Earnings Call Transcript & Summary

Good morning. We're continuing down the medical device track at the 41st Annual Cowen Healthcare Conference. I'm Josh Jennings, along with Brian Kennedy, Neil Chatterji and Eric Anderson, represent the medical devices team. We're thrilled to have the management -- the executives of Establishment Labs here this morning: Juan Jose Chacon Quiros, the Founder and CEO; and Renee Gaeta, Chief Financial Officer. Good morning to both of you, and thank you guys so much for making time out of your busy schedules and then joining the conference once again this year.

Thank you, Josh.

First things first, congratulations on recruiting Raj Denhoy over to the team. That's a big move and congratulations to Raj.

But to start off, I wanted to just talk about the big events that have occurred recently, a lot of them for Establishment. But in January, one of your key competitors pulled the implant products from international markets. And I would note that they pulled their smooth implants Allergan did or AbbVie from the markets where Motiva is commercial. And so it may not be coincidence that kind of that data point and then only remaining in markets where they will not compete directly with Motiva. Can you help us quantify the void that Allergan's removal of their implant portfolios creates in those international markets you participate in?

Yes. Of course. So as you know, Josh, we were taking market share from our competitors, including that one, even before they took that decision. So we are going to continue to work through our efforts in medical education and digital interactions with patients to continue on that path. The important thing is that the rigorous science and the clinical outcomes with Motiva are the driving force beyond these market share gains. So for us, what we see is a pretty much a logical response to what we have been doing for so many years. And of course, we look forward to continuing to do so even in the markets that we will enter in the near future, like the U.S. and China.

Excellent. And just in terms of -- I think one of the other elements that may not be or maybe underappreciated of the market dynamics internationally with textured implant controversy and in Allergan's recent just decision to move their smooth implants even out of some of these markets. There's been some of the smaller competitors internationally that have been impacted and have removed their products from the market. Can you just help us understand maybe quantify some of the smaller competitors that have evacuated their or just kind of back away their positions and now there's jump of share in that channel as well?

Yes. I think what we have to be aware of is that this has been a multiyear process in which regulators are being acting on these legacy technologies. So already in the last couple of months, we've seen regulators acting on some of our competitors. And we have, for instance the SCHEER committee that was put together in Europe to look at texture devices, and we are expecting them to give out their decision later this year regarding the safety of texture devices. So of course, all of this is something that we have been looking at for years now. The other very important point, though, is that as these legacy technologies get flushed out, then I think the negative headlines will go away, and this is good for everyone. Because we need to focus on getting new patients, a new category of patients to things like Motiva MIA. minimal invasive is such a powerful story. So we don't want that to be contaminated by issues of safety that plague our competitors. So these are the things that we care about really. It's expanding the market through, of course, our pristine safety record, but more than that, pushing the new things that we have coming like MIA and aesthetic breast reconstruction.

Absolutely. And I apologize for sticking on this point on the competitive dynamics and the headlines. But as the -- as over the past couple of years, there's been a more intense focus by the breast surgeon, plastic surgeon community to track ALCL rates with specific implants. I mean clearly, the BIA-ALCL line in Allergan's textured -- macrotextured implant was taken off the markets globally. But there are other textured implants out there and with this intense focus, ALCL rates seem to be increasing. I mean any sense of where those rates stand now that you can share with investors and the risk that presents for those microtextured and other macrotextured implants?

Well, it's hard to really quantify where the risk is because it's changing all the time. With more screening for things like breast-implant-associated anaplastic large cell lymphoma, then, of course, they're finding more and more cases. The important thing is to realize that if you have the category of smooth breast implants driving most of the cases of breast augmentation in the future, you will have less and less new cases of ALCL. What you're looking at right now are the cases related to the legacy technologies. Highly macrotextured implants were the ones mostly at fault. But all these different agencies that continue to put out report, as post-market vigilance improves, we are going to have more and more data points. For Motiva, it's very simple. The rate of reported cases for ALCL stands at 0, but it's not a coincidence. It's a basic outcome of our technology. A low inflammatory surface creates the conditions for being away as possible from that type of condition.

Excellent. And then just one last question on competition before we move to the more exciting MIA and recon and everything else that's going on with Establishment. But we've been surprised that some of the bigger players, historically bigger players in the space kind of rested on their laurels, if you will, and on the innovation side in terms of developing the next-generation breast implant. We have not been able to track any developments from any other players. But I mean what is the competitive landscape in terms of innovation or a platform that could compete more effectively against Motiva? Is there anything that's on your radar? Or are our checks consistent with yours that there really is not much going on, on the competitive landscape?

Yes, I think the short answer is no. There's nothing significant happening out there. What we see are technologies that date back to last century. And I think it's -- this comes out of the history of the moratorium in the U.S. that eventually led to companies derisking those divisions. And as a result, they decided not to invest in innovation. This company I founded was on the premise of bringing innovation, and this innovation driving better safety and aesthetic outcomes. And I think that's what we're going to continue doing. You see us doing that with the Ergonomix2 platform that we are bringing to market. You see us doing it with Motiva MIA. You see us doing it with what we'll do in the next few years with breast reconstruction. So all of that is our focus. We're not worried about what our competitors do. And even if they get serious about it, I think it's good for the entire industry that women's health is on the radar of the entire category of breast implants. But to us, the important thing is what we do internally, and we will continue to drive innovation with those objectives.

Excellent. And just moving on to Motiva MIA, Establishment hosted Investor Day a few weeks back, unveiling the platform. You've been talking about it. You showed it at Investor Day, I believe, in 2019 as well. And -- but you have now early case-series experience and physician feedback, patient feedback, and thank you for sharing so much detail during that Investor Day. And you enlisted a third-party to kind of size the market and do some research there. And you laid that out very nicely. We have not been able to contest any of the assumptions that you guys have -- that your third-party made. But I mean would you, the 4 to -- I think $4 billion to $5.5 billion opportunity here, kind of a new segment, if you will, in breast augmentation and new market, do you think that, that ultimately could prove conservative? I mean how do you guys feel about that third-party -- their market research and the kind of numbers that were put in front of you guys?

Yes. Certainly, as we looked at the information and we were doing a survey of over 4,300 individuals, we were initially getting a sense of what their receptiveness was to sort of that one cup upsizing. And as we look to see the results that came out of the case series, initial case series in Costa Rica, we're getting even more than that. So it is really exciting to see that what the future actually holds for -- the ultimate potential is yet to be determined, and we'll continue to do market research. But the feedback has been amazing, and we're really excited.

Before we get into that new segment, the MIA procedure is creating, I mean, just as you referenced, Renee, the more than 1 cup size of augmentation, and I mean up to 2 cup size augmentation, how disruptive could MIA be just in this traditional market, breast augmentation market? Maybe Juan Jose or Renee, if you want to answer that one?

Yes. I think it's highly disruptive because you're going to the true realm of minimally invasive with everything that it brings. You're going away from general anesthesia. You have a short procedure time that is less invasive. So you have better outcomes in terms of pain levels. Patients going home 30 minutes after the procedure and reporting very low pain levels in the immediate aftermath of that, which allows them to get back to their daily lives very quickly. So that's highly valuable for everyone. So of course, we expect to attract, mainly through awareness, a new group of women to breast aesthetics, women that are probably using padded bras or any of these other things to give more -- a better appearance to their breasts. And on top of that, of course, there are women who are interested in breast augmentation who then say, "You know what, that seems like a better choice for me." And we were so happy to see that in the Costa Rica series that we performed, the results in terms of effectiveness by going to 2 and even 3 sizes up, we'll have that potential. So at this point, we don't want to get ahead of ourselves with the market sizing. But already, what we have done is so important because we're talking about 3x the current market.

Excellent. And just on the simple math in terms of some of the market dynamics or metrics that you laid out, you back into an ASP for Motiva MIA procedure in that kind of $2,000, $2,500 range. That is a premium, but you have instrumentation, propriety instrumentation that's going to be included in that, I believe. But maybe you can just lay out, I know there's a lot of work to be done on pricing. It's going to vary country-by-country. But maybe you can just provide some high-level thoughts on pricing and why that premium is digestible for plastic surgeons and for patients?

Yes. The goal of our company is to provide women's health needs, benefits and partnering with plastic surgeons that believe in that as well. And so while we haven't identified the specific costs per region, there will be some geography differences there, for sure. At the end of the day, we're providing value not only for the patient, but ultimately for the plastic surgeon too by expanding the market and a shorter procedure time, right? So we'll work on that. We understand that MIA needs to work for all stakeholders.

Excellent. And just to talk about the new MIA injector, proprietary new MIA injector for one. I mean just the no-touch technique, I mean, literally improves, I mean bacterial contamination, if I should start with that. Bacterial contamination has been hypothesized to be linked to chronic inflammation and potentially ALCL. And so how big of a deal is this no-touch technique with a new MIA injector just as a stand-alone as part of a breast augmentation procedure?

It's a huge improvement because you're talking about literally picking up the implant with the injector for a true no-touch technique. So definitely, that is an improvement. But additional to that, think about the insertion process, the way it happens today. It is not a standardized process even when you use a funnel. So what we see is the opportunity for us to control what is called iatrogenic ruptures that may happen during the insertion process. And that is something that I think it's -- we will evaluate over time. But we think that combination of a truly standardized procedure in so many different ways. We can talk also about the balloon dissector that we're using that creates the pocket that matches the size of the implant. So there are many things around this that are standardized in a way that reduces the risk for the surgical procedure, but also reduces the risk of potential complications that may happen related to things like bacterial contamination, technic related dependencies. And that overall will have an impact on the overall complication rate with Motiva MIA.

Excellent. And remind me, I may be thinking about this incorrectly. But at one point, were you looking at the Motiva MIA procedure in terms of implanting the -- placing the implant behind the pectoralis muscle? Or has it always been in front of the pectoralis muscle?

That's a really good question. Just -- we just have to be mindful that the breast implants sits anatomically in front of the pectoralis muscle. In the past, surgeons have used the prepectoral space with, I would say, some degree of caution because they were afraid of capsule contracture rates being higher. So when we think about the possibilities with Motiva MIA because our SmoothSilk Surface has no statistical difference between capture contracture rates behind the muscle or in front of the muscle. So it allows for patients to receive the Diamond breast implant in the adequate plane. We think that the right place for it is where it naturally sits anatomically, which is in front of the muscle.

And that's also helped the multiple -- or not just a single cup size enhancement, but also 2 and 3 cup size enhancements because of the placement in the prepectoral space?

Oh, definitely. I think that not only it allows for that, but also gives more naturality to the final result. So I think that combination is one of the key things here. When you think about the rate of capsule contracture with traditional smooth implants, which drive 95% of procedures in the U.S. They are fundamentally higher when you're in the prepectoral space. So I think with all the talk about what can competitors do about MIA, I think that's one of the key things where you have a patented technology that cannot be replicated.

Excellent. I just wanted to talk about the Diamond implant. I think, it achieved CE Mark approval as part of the Ergonomix2 package, same surface, SmoothSilk Surface, proprietary, Establishment Labs service technology, and I believe the same super silicone formulation as well as Ergonomix2, right?

Exactly.

And just wanted to sanity check. I mean our assumption is that surgeons will look at the long-term track record of Motiva and extrapolate that, because of that, those 2 dynamics, the same silicon, same surface, silicon surface technology. In terms of the safety profile and obviously, aesthetics outcomes will be what they will be in Motiva MIA procedure. But is that how you guys are thinking about it? Is that the feedback you've gotten from your surgeon customers or, at least, those that have been introduced to MIA so far?

Yes. I think what surgeons understand is that after 10 years in the market and with more than 1 million devices implanted, we have proven an unheard of rate of capsule contracture and rupture. And those are the 2 main endpoints in terms of safety when surgeons look at new technologies. So when you think about using same manufacturing process, same manufacturing site, same design of surface, you take away those 2 main risks so that you can focus on what is important for surgeons, which is, can I learn this technique quickly, how easy it is to perform? And in these series that we have been doing, one other very positive key takeaway is that the learning curve is very short. This is actually easier than a traditional breast augmentation for plastic surgeons. It's just new to them. And therefore, we need to have the proper certification. And we will move through that process in the second half of this year, ahead of a potential launch in 2022.

Excellent. And I think it's a nice segue to -- you're talking about capture contractor rates and rupture rates to talk about the U.S. pivotal trial for Motiva. You'll be hitting the 2-year anniversary mark for completion of the aesthetics cohort enrollment in August of this year. I mean will Establishment be able to share your data with the investment community and the clinical community later in 2021 or early in 2022?

Yes. I think what you're alluding to is our clinical trial protocol includes a 2-year endpoint. So of course, everyone is asking us, would you be able to show that 2-year end point? And the answer is, those are conversations that we are having with the FDA constantly. We don't want to put ourselves in a difficult position with them. We are the most transparent company when it comes to showing data. So of course, we always want to be showing data. But we have to balance the requests that we believe are very logical from the investor community with keeping the propriety of our clinical trial and our relationship with the FDA.

Understood. Understood. And just -- we may not be able to see it, it will depend on how the FDA discussions go. But I think one of the elements that -- of the Establishment, the Motiva story has been the biocompatibility and all the work that your team did all the way back in the early days of when you founded the company and decided to move forward with a smooth surface implant with the proprietary SmoothSilk Surface and the biocompatibility was essential in your team's view and your view. And that has played out. There's some remarkable data that's come out of Dr. Langer. We haven't seen the full data set yet. But you got a teaser, if you will, or high-level presentations at the Ergonomic Symposium at the end of 2019. And could you just help us understand why that data is so important? Has that kind of high-level prepublication release been impactful in terms of marketing that to the surgeon community? Sorry, a couple of questions there in one. But maybe we can just talk about that, the biocompatibility and the material science that's evolved under your watch.

Yes. Look, the importance of the work being done at the Langer Lab cannot be underscored because it will be basically approved that surface architecture can drive lower inflammation. And that is a big thing in material science. And I think that all the work that has been done over the years at the Langer Lab will eventually be one of the most important things also for plastic surgeons because all of a sudden, they have to proof of why they are seeing so significantly lower capsular contraction rates. It explains it in a very detailed way using science to back everything. So in the past, what we had seen is an industry that created a texture device without the appropriate science behind it. And this time around, what we are doing is not only with the body of science that we use to base are proprietary technology, but also the way we basically created the surface in an implant that is used now for 10 years. So I think the fact that you can see downstream the effects of that science is going to be very powerful for many of the most conservative plastic surgeons that perhaps will need that proof, but also will help us with regulators. We plan to use that science with all the high vigilance countries across the world that want to know more about biocompatibility of breast implants.

Excellent. There are numerous layers of growth in the Establishment Labs' story over the next couple of years and then even beyond that. China is one that I think is appreciated, and may not be appreciated fully. And there's a potential for Motiva to be approved in 2022. Just wanted to check in there. Maybe if there's anything you can share, any more details just on the market opportunity. Clearly, China is always a huge market opportunity for devices. But what's the strategy there outside of moving down the regulatory path and getting Motiva approved?

Yes, absolutely. So during the pandemic, some of the government laboratories where the testing was being done closed down. So we're glad to see that we're back to doing testing. We passed the latest round of testing last year, and we continue to make progress with our target for regulatory clearance in 2022. Now beyond that, what we are thinking is, this is one of the most dynamic breast aesthetic markets worldwide, so what a great opportunity for Motiva. We already see, at least prepandemic, a lot of Chinese patients going to South Korea, to Japan and even to places like Thailand and Taiwan to get Motiva surgeries. And for us, that's actually a great data point for what we can do eventually in China. China is set to be around 100,000 procedures a year at a price point that is the highest in the world, around $15,000 per surgery. So because they see this as a luxury procedure, then I think it makes it even more appealing to our brand, which, in most countries, drives a higher price point than any of our competitors. So of course, we're super excited for the opportunity, and we're looking forward to doing this in the best possible way with our partners there.

Excellent. And can you just help us understand what are the domestic breast implant companies that are dominant in China right now? And how do you view the competitive landscape once you -- in the ability of Motiva to compete effectively in China? I mean we expect kind of a similar run as you've experienced in other international markets? But what are the -- any specific dynamics investors should understand just in terms of the competitive landscape and just domestic versus foreign company come into China and the hurdles that you guys have to clear?

Yes. I think that to understand the Chinese market for breast aesthetics, you need to understand that historically, there's been a market for the, let's call it, foreign brands. That is more of that luxury market that I was alluding to earlier. And then there's a low-cost market in which the -- these Chinese players are the driving force. We will be playing in that first market that I referred to. And the situation for us is very clear. In the countries of Asia, where we are currently commercial, we have taken a commanding position over the years. So of course, we expect to do the same in China.

Excellent. And just thinking about Motiva MIA in Asia Pac, but in China specifically as well. Japan, big opportunities. I mean there's a focus on just because of, I think, I believe, keloid formation is more common in Asian patients, and the avoidance of scars is more of an intense focus by patients to avoid scars. I mean MIA just sounds like a perfect addition to plastic surgeon's capabilities and then what they can offer patients, obviously. But I mean what -- I think you described at the Investor Day about China being potentially 20% of the Motiva MIA overall opportunity, but maybe just refresh that? And just why MIA is so important for your thrust in China eventually?

Yes. One of the key takeaways of our market research with Motiva MIA was that China came out as the #1 market worldwide for minimally invasive. So of course, that makes it incredibly appealing to us. You are right, hybrid -- the type of keloid and hypertrophic scar in that you see with Asian patients will be one of the key factors for women choosing a procedure like MIA. But also, how you sell MIA is as important. And the fact that China has become a market where most patients make those decisions digitally, and when you think about Motiva as a brand and the type of interactions that we have in digital channels, then it just kind of like creates a perfect situation for the type of interactions we want to have with Chinese patients in China.

Excellent. I only have a minute left. Sorry to only leave a minute for the recon opportunity, but a lot of positive events over the course of the last 6 to 12 months on the recon side with Flora, I think, CE Mark, Ergonomix2. And maybe just overall, talk to us about the percentage of the Motiva revenue base that has been generated in Recon surgeries? And why Ergonomix2 and Flora make a competitive combination in international recon surgeries?

Yes. I think that there's certainly a lot of excitement among the surgeons that have been part of the early experience with Motiva Flora. We got CE Mark in June 2020. And of course, we think that as a result of putting to market the only MRI-compatible tissue expander with the smooth sell surface and all the other extra benefits will not only drive sales of that tissue expander, but also sales of Motiva implants, especially the Ergonomix implants in breast recon. So of course, we are extremely excited about that. But as a women's health company, we're also very happy that we are putting a technology out that will change protocols and will improve the standard of care.

Outstanding. Well, wish we had some more time to dig a little deeper in more of these topics. But ton -- layers, many layers of growth in front of you guys, congratulations on all the progress, and thank you so much for joining the Cowen Healthcare Conference once again this year.

Thank you, Josh.

Thank you.

Great. We'll be in touch. Thanks. Have a great rest of the day.

Thank you.