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

Okay. I hear the chime. So that means it's time for the medtech portion of the conference. Welcome to day 2.5 of our in-person conference here in Laguna, and I hope you're having a good time. I know I am. So this morning, in our first session, we have management from Establishment Labs. To my left here is Juan Jose Chacon, who's the President, CEO and Founder of the company; and then directly to his left is Raj Denhoy, who's joined as Head of Strategy and IR, who many of you, I'm sure, know. So this will be a fireside chat. I have a lot of questions to ask. [Operator Instructions] So guys, thanks a lot for joining us and looking forward to the conversation.

Good morning, and thank you.

So I want to start with a high-level question. JJ, maybe you could just give us kind of your vision, talking about the -- your company and your vision for ESTA as a women's health company and give us a little sense of where [indiscernible].

All right. So when we talk about what it means to be a women's health company in aesthetics, it is kind of a new concept. And you think in the past, women's health referred to other things. So why did we create this approach 0is because of the legacy of this industry. And we thought that when you look at the journey of women in breast health And the options that they have in aesthetics and reconstruction was so much to be done. And for years, the incumbents left this space dormant. And for us, it was just an amazing opportunity to make a change. And when you're a woman's health company in aesthetics, you have to prove yourself. I mean what does that really mean? And we made those choices very early on. If you think about when we went to market in 2010, at that time, textured breast implants were touted as the best technology all over the world, the most expensive implants. And we decided not to do that. But we also decided not to go with the traditional smooth implants because we knew that those implants also had their issues. I mean they date back to 1962. And we made a decision to go with a science-based approach. We have a bioengineered surface. And that surface now with 10 years of data has proven to change the way surgeons and patients are looking at one of the most important complications in breast surgery, which is capsular contracture. And our first generation of implants was really about that, about solving the 2 main safety-related complications: capsular contracture and rupture. If you think about how we fixed the rupture rate, it was about reengineering the implant all the way up to a new type of foundation that is stronger. And now with 10 years of data, we are at less than 1% rupture rate. And we moved from that to creating solutions in our second, third, fourth generations that are more women-centric. And that has been a fundamental approach when you think about ergonomy. Ergonomy was not a concept in breast surgery before we arrived. And why is ergonomy so important? Because it's about the patient experience, it's about comfort, it's about having these devices feel like real breast tissue. And of course, all of that has brought about new excitement in this field. We see a lot of women who are asking about what their options are in breast aesthetics. And now that we are going into breast reconstruction, our idea is to bring the same type of science, excitement and new options for women worldwide.

Right. You mentioned 10 year-data [indiscernible]. So maybe you could frame how [ comfortable ] what it means to have this 10-year data. And can you just talk about the safety relative to some of your [ peers ]?

I think it's very important to talk about the 10-year data because we're talking about 1.6 million devices in the market. We're also talking about this data coming not only from our registry, but also from publications from different surgeons and clinics from around the world, some of them sponsored, some of them independent. But also in our last report that we've given, it includes independent registry data from Sweden and Australia that again, reinforces this less than 1% complication rates related to capsular contracture and rupture. And this is what is so important that we're not talking about. This is what Establishment Labs says the data is. Now is that when you look at older data sets from different surgeons, from different regions, from different type of publications, they all match. They're consistent. And as we look forward, of course, we want to do better. But we've kind of like really solve those 2 complications. Now we have to move on to creating better solutions, more sophisticated options in breast aesthetics and reconstruction.

And looking from the outside, and it just seems like it's such an advantage. So when surgeons choose not to use Establishment Labs in places where it's approved, why is that so? What leg do they have to stand on from a safety standpoint? And what are the reasons why you actually lose to competitors at this point?

Yes. I think that when we talk to our sales force in countries where we are market leaders, we also ask the same question like, why aren't these other guys using Motiva? And it goes back to several factors, some of them historic. Some surgeons have used textured implants in the international market for all their lives. And they feel very strongly about them. And our job is to teach them that there are new options, that these new options are going to help them with these patients. And of course, we are not there to tell them what to do, but we are there to give them those options to improve safety. Many of these surgeons have started to understand that there is a path forward with this new type of smooth implants and that with the 10-year data, we can go to them and explain it. We can have medical education events where they learn how to best use the devices. The other thing is that some countries have been very conservative in the way that they let us talk to patients on social media and other digital channels. Because in countries where we can have that conversation ahead of them visiting a surgeon, they become more educated about their options, and they push the plastic surgeon to make those decisions.

And to give folks a sense for your moat, you talked about the 10-year data, the science. How hard would it be for one of the incumbents or a new company to replicate some of the things that you've done? How much would it cost? And how long would it take?

Well, that was my fear in 2010. We go out to market with this amazing new technology. And I thought, well, we're just waking up the sleeping giants. And it turns out that it didn't happen. I thought when we brought to market our RFID-enabled implants, they would react to that. When we brought Ergonomix, which has now become our best-selling product worldwide, we thought they would react to that. I think as a women's health company in aesthetics, we're happy to see that a lot of these companies are moving away from textured breast implants. We think that's going to be good for the field as a whole. But when it comes to the technology, we have so many patents. There are so many trade secrets, and the regulatory hurdles are just getting stronger and stronger. So even if you were to get serious about this today, it's going to take a lot of years to get there. And by the way, we continue innovating. We're just launching to market our Ergonomix2. And we are already thinking about what's coming after that. So we'll keep doing what we're good at, which is creating this innovative, science-based solutions and creating the clinical data to support it. I think that when you think about the opportunities in breast reconstruction for us, with the Flora Tissue Expander, how long it took us to do that. We could have gone to market with a me-too tissue expander years ago. But as a women's health company, again, we made the conscious decision not to participate in that market until we had something fundamentally better. And now it's paying off.

So maybe that's a good and natural segue when we talk about some of the pipeline products. We can start with Ergonomix2. Talk about how that builds on Ergonomix 1 and talk about the launch and the timing of that.

Yes. When we went to market in 2015 with the Ergonomix implant, not many people understood what exactly that meant. But the fact that we educated patients about comfort, about softness, tissue-like quality and movement, natural movement, then surgeons began to understand that patients wanted to pay more because they saw the value in that. So now that we are bringing Ergonomix2, we're talking about enhanced chemical and mechanical properties. It is a platform technology. We can use this new silicone chemistry in many different applications, everything going from new products for breast reconstruction to things like minimally invasive. So the nice thing about Ergonomix2 is that it allows us not only to build on the success of Ergonomix 1, it allows us to create new opportunities like Mia. Now when we think about Ergonomix2, it's really about something that you communicate directly to patients. If you look at the launch of Ergonomix2, it's mostly directed to patients. Because what you want is patients to understand those benefits, enhance ergonomy, more comfort, more feeling of a real breast and that natural movement. They are the ones that have to decide to pay more for it because they would see the value in it. And if we continue building this special relationship with women ahead of them visiting the plastic surgeon, we will continue to win based on this enhanced science and technology.

And can you just remind us of the launch timing of Ergonomix2? And then you mentioned Mia. So remind folks how you're able to facilitate the pull-forward of the Mia launch with Ergonomix.

So if you think about the Ergonomix2 platform, it's the second generation of our Ergonomix. So that is in the process of being launched right now in Europe. We had amazing early experience with great response from plastic surgeons and patients. So if you go online now, you can see all the messaging around the launch of Ergonomix2. So that's going to be taking place all over Europe in the second half of this year. And of course, we plan to go global with that product for so many good reasons. And then within the Ergonomix2 platform, there is minimally invasive, and that's something that we've scheduled for launch in Europe in the first quarter of next year.

And that Mia program is very exciting. We saw the initial cohort that you did in Costa Rica and there's other cohorts that are ongoing. Maybe we could talk about some of the highlights of that program in terms of a, minimally invasiveness, the quickness of the surgery, some of the things that are going to really enable that to facilitate fast and easy surgery for the practices, but also the benefits for women versus a traditional surgery. Why don't we go into that for a few questions?

Yes. Of course. And I can take you to why we got interested into minimally invasive. If you think about Japan, that market contracted significantly over the last 20 years. So we started asking Japanese women and Japanese surgeons, why is that? And the response was, they don't want scars. They don't want general anesthesia. They don't want the downtime. They don't want to look fake. And as a result, they were choosing to have an augmentation with hyaluronic acid, which since then has become banned. So they were hurting themselves because their aspirations were not met by the technology. And we thought we can solve this. And eventually, as we continued on that program, we realized there's a big market for this in China, potentially in South Korea and the rest of Asia. And as we looked even further and did more research, we realized there's a huge market for this also in Europe, and eventually, in the United States. Why? Because it takes over the most important obstacles for women in breast aesthetics. Part of our research told us that around 50% of that market, a woman who would never consider traditional breast augmentation. And that is such an exciting moment for plastic surgeons. The fact that they can bring in a new generation of patients into their practice, there's so much value that we can build from that. And when we think about -- we did a lot of work to size that market, and we're talking about $4.5 billion TAM. And that is about 3x the current traditional market, and of course, at a different price point with different dynamics and based on technologies that we have created and patented. One thing I would like to say, though, is that minimally invasive is not a new idea in breast surgery. But in the past, it has been done in a way that the surgeon's ambitions have not been matched by the technology. And that's what we are doing here. We are creating an implant that is specifically made for minimally invasive with tools that allow for this to be done without expensive endoscopes, without having to general anesthesia, without having to do something like transumbilical breast augmentation, which was done in the past. It became kind of like the social phenomenon. It was in all the beauty magazines, but it did not provide for a good aesthetic result. So we're building on those initial ideas to create a procedure that is so much better in so many ways. So in this 100-patient series, what we saw is the patient time in the center for that day is so much lower. They come in. Very quickly, they go into the procedure room. The procedure takes about 15 minutes. And then 30 minutes later, they're going home. So the total time they spent at the center is so much lower than what they've done with traditional breast augmentation. The recovery time is down to 2 days. And when you think about the result -- the aesthetic results, that's what's getting us the most excited because these aesthetic results are natural. These patients are scoring very high, and you have scars that are hidden. These are all the things that we've been aiming for. And when the plastic surgeons that participated in this 100-patient series, 15 of them from different places around the world, they were matching our excitement with this. And we're going to make sure that we get it right. It's a huge opportunity. And that's why when we begin our launch next year in Europe, we're going to make sure that everyone is fully certified and educated to do this.

So I just wanted to double click on that because you hit a lot there on Mia. A few things I wanted to cover were, a, talk about how you hide the scars and what the scars look like. And then on the cohort, and you mentioned the times, what I thought was so impressive is there's no anesthesia. It's so quick. And then at 30 minutes, they're being discharged. And the women giving testimonials were talking about how they basically didn't feel anything. They felt good and they wanted to go home. So compare that to a traditional surgery and maybe talk about what that means for a practice as well.

Yes. Of course. Because when you think about the traditional experience, they usually come in an hour or 2 before. The surgery time can be between 45 minutes and 1.5 hours, depending on the type of surgeon and how fast they want to go. And they stay on in that clinic for about 6 hours. So it really takes their day. And they're not going to go back to normal activities in less than 14 days. Of course, some people try to speed that up, but it's not an easy thing to do. Most importantly, when you think about the pain levels that they're experiencing post op, how fast they feel like this is part of them, these are the things that are the most important because when you want to capture new patients, these are the testimonials that are going to help us drive a new generation of patients into this. But to me, probably the most interesting thing is the fact that for a surgical center moving into this type of procedure that is less surgical and the fact that they can discharge the patient so quickly allows for a flow of patients that changes the unit economics. Because then you're talking about, you can do 10 of these in the morning or an afternoon and not have the flow in that clinic be clogged with so many patients there, and that can be done in a way that can create a lot of value for those centers. And that's also going to help us in doing the sharing of that value with the centers and the plastic surgeons.

Right. Right. So you're eliminating a lot of costs when you take out the anesthesia, the OR time. All of that time can accrue to the center and also to Establishment. Maybe talk about what that could mean for pricing and what you've seen with your pricing versus some of the other implants that are out there with the other models that you have.

Look, what our research says is that women actually want to pay more, but they want to see the value in what they're paying for. And in the past, there was no value there. And surgeons were actually in the race to the bottom, with breast surgery just being not the best value option for many of them. Now with things like this, they can do many more. There are more patients that are coming to them, and the patients are making these choices to pay more. And that allows for the surgeons to really focus on their practice. And when they think about what they're spending with Mia versus traditional breast augmentation, the fact that these patients are coming to them, so their patient acquisition costs are being reduced and all the things that are being optimized here. What we are talking is a great value creation moment for them. And surgeons have been, in these last 20 years, seeing an erosion of their pedigree in aesthetics when you compare it to the dermatologists. The dermatologists are very happy right now. Plastic surgeons have had a difficult decade, I would say. And this is something where Mia can change those dynamics.

And just remind us, so you're going to start launching this in Europe towards the end of the year and into early next year. Can you talk about the time lines in other geographies as well?

So our launch is scheduled for the beginning of next year. We'll begin educational activities ahead of that. We're going to keep this with the plastic surgeon. We're going to certify the centers, and we're going to make sure that we get it right. On top of that, that digital funnel to bring patients to the plastic surgeons for Mia is a very important thing, and that component essential to Mia because you want to bring all of these new patients that would not traditionally go see a plastic surgeon. We're going to begin slow because we want to get it right. We'll begin in Europe, and then we'll extend to other geographies that we have selected around the world so that we can, I would say, make sure that the model that we are using because it's standardized procedure with standardized norms across the business cycle of that are followed by the centers and the surgeons.

And just to go back, you mentioned that your initial idea came from Japan and meeting an unmet need there. But what has your research told you about how ubiquitous this could be in terms of demand around the world?

Well, there were many interesting things in the research that we did. Because in all of our research, initially, we said, well, it's going to be Asia. That was our instinct. But as we did more and more research, we realized that China is the #1 market, and that's not a surprise. But Europe and the U.S. are very close behind them. So that was not something that we expected. We didn't expect to see such a big potential market in Europe and definitely not in the U.S. So that, I think, is very interesting for us because we're going to be launching into Europe. That's a region where breast aesthetics has been, I would say, stagnant over the last few years. U.S. is definitely a stagnant market for breast aesthetics. So I think this is going to bring a new level of excitement, new patients, a lot of value.

And then going back to the pricing. So could you talk about your pricing today as it stands with Ergonomix, Ergonomix2? How does that compare to the other products that are out there? And then with Mia, if that does come to pass and is commercial and offers these benefits, what kind of benefits could you see on price and margins from that?

It's interesting because over the years, what we have proved is that if you communicate with the patient ahead of them seeing a plastic surgeon, they become less price-sensitive. So what we see is that we want to be closer and closer to that patient as they make those choices. We want the surgeon to be our partner, but the decision has to be made by that patient. They are the ones that decide if they want to pay more or not. When we went from our round Motiva Implants to Ergonomix, we added approximately 50% premium on those implants. And a lot of people doubted that strategy. Now it's our best-sold implant worldwide. So when we think about Ergonomix2, of course, it commands a premium of over Ergonomix 1. But it also brings about a new patient program. There's more things in there to support the patient journey in aesthetics. When we think about Mia, of course, we do think that the value that is created not only to the surgeon given the shortened procedure time, but also to the patient because this is a procedure that is going to interfere less with their lifestyle. So this is something that we think will be valued accordingly. And as long as they understand that, I think it will be going just as well as when we move from round to Ergonomix.

Great. And you mentioned China, and that's a big market. You're not there yet. So just to remind folks, if they don't know, you're in 80 countries around the world but not in the biggest 2. And so that's been a big topic. And it's exciting now that we're getting to the 2-year point for the U.S. trial. So I wanted to talk about both the U.S. and China. Maybe first, for the U.S., could you give us some guidepost, what should we be looking out for in terms of getting some sense for how the data looks and the data release? Talk about that time line and your interaction with the FDA, if you would.

Yes. Of course. And very exciting time. Next week, we're going to be hitting our 2-year mark on the aesthetic cohorts. And that allows us, of course, to start pulling in all that 2-year data for the aesthetic indication that we will be presenting to the FDA. Now there's been a lot of talk about 2 years versus 3 years. I think the most important thing is to keep the process going in the way that the FDA feels that we are going to get through in this aesthetic indication approval. And when we think about that, the propriety of the trial is the most important thing. We have to follow the process. There are opportunities there for us, and we will seek them. But we're not going to do anything that upsets the FDA and creates problems with our trial. We're going to be conservative, just the way we are with so many things in our company. And we're going to make sure that the trial goes according to what the FDA wants. We get asked a lot about like, "Okay, you have so much better technology. Why isn't the FDA going to approve you ahead of that?" And of course, we understand that. And of course, we respect that. We agree with it. But at the same time, the FDA is judicious, is -- they're conservative, and we have to understand that. Now our 2-year data is going to be ready sometime this year as we bring in all the different patients into the consultation rooms of the surgeons participating in this. And that is something that we will see with the FDA if they feel comfortable with us showing this data to the investor community. In the past, no one has done that. So that's where this question is, will the FDA feel comfortable with us showing that ahead of time. But we do plan, as we are in more and more constant dialogue with the agency to update the investor community on our progress. That's something that you will see in the second half of this year and definitely next year.

Great. So I have a couple of follow-up questions on that. So one is, maybe first, just remind folks about this 2- to 3-year debate. Where is that coming from? Traditionally, FDA has asked for 3-year data, but of course, your trial was set up with the 2-year end point, right?

Yes. And the FDA guidance says very clearly, it's 3 years, but it also says that this is done on a case-by-case basis. But they've always done 3 years. So that's where this debate and this opportunity comes along. But if you think about it, we are making progress in everything related to the trial. And we're also getting prepared in many different ways. We just hired the U.S. head of commercial operations. We have a lot of things happening in terms of getting set up to also become a dominant force in this market. In every market that we go into, we seek to be the leader of that market based on the technology, the science, the better aesthetic outcomes, the better safety outcomes. And we plan to do that in the U.S. as well.