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

Good afternoon, and thank you for joining us today at the JPMorgan Healthcare Conference. My name is Caroline Borowski, and I'm a team member here at the JPMorgan coverage team. Today, we are pleased to welcome Establishment Labs. Before I introduce you to our presenters, I want to draw your attention to the Blue Button at the bottom of your screen. That is where you can submit questions that we can go through it in the later part of this session during the Q&A. With that, I will turn it over to Juan Jose, CEO of Establishment Labs.

Thank you, Caroline, and welcome, everyone. I am the Founder and Chief Executive Officer of Establishment Labs. And I want to tell you today about our story of innovation as a women's health company in breast aesthetics for reconstruction. So as a company dedicated to this field, we are in the medical device space. But what we have been doing very much to transform and reinvent this industry is to dedicate ourselves to our purpose, which is to put women's first in health and well-being, in science and technology and in our communities. When I founded this company, this is what I thought was really missing. If you think about it, breast augmentation is the #1 plastic surgery procedure worldwide and more than 1.5 million procedures are performed every year. When you look at breast reconstruction, it represents around 25% to 30% of the global market for breast implants, but it remains largely underpenetrated because of lack of access. And in many countries, you see less than 5% of women actually receiving a breast reconstruction after breast cancer. There's been very little innovation, most of it dating back to the moratorium that took place in the early '90s in the United States. As a result, the large companies in this field have historically struggled and have been getting into problems with regulators in women's health groups. If you look at our history, since our founding in 2004, we've been dedicated to transforming and reinventing this industry through technology. We worked for many years to look at this technology, benchmark and find new ways to improve the safety and aesthetic outcomes. When we went to market in 2010, we went with a completely different set of technologies that were addressing not only the safety-related problems but also unmet needs. Pretty much every 2 years, we have launched a new generation of our technologies. And as we've moved along, we've been able to prove that we can deliver on the promise that we gave early on. And now with over 2 million implants out there, we have been very good at providing the amazing safety and aesthetic results that are known to be Motiva's hallmark. If you look at the innovation that we brought, a lot of it at first was based on safety. We wanted to reduce device-related complications that led to reoperations. So those were traditionally breast implant rupture and also capsular contracture, which is basically an overreaction from the body to a foreign object, and that can lead also to a reoperation. We created this pioneering biocompatible surface technology that basically addressed the problem with capsular contracture. In terms of reducing the problems related to rupture, we created this new high-durability silicone shell, and we optimized the manufacturing process to make it less frequent. And after many years in the market, we can safely say that now these 2 complications are anecdotal for most of our patients. After 2012, we started dedicating our efforts to the unmet needs in aesthetics and reconstruction. So these were more patient-centric innovations in which we were trying to address some of the problems that some women saw in the existing problems. If you look at like the use of RFID technology in our implant, it provides the opportunity for women to fully verify what implants they have. Also, the FDA has said very clearly that they are concerned that most women don't know what implants they have. And this RFID technology, when chosen by women, allows them to fully verify and track over time, the quality of the implants. And finally, in 2015, we brought to market the ergonomic implant. So we went from women having to adapt to implants to implants that adapt to women and their lifestyles. And all of these innovations are backed by a very comprehensive suite of patents. We have over 100 patents in the market, out of them in different set of families and on top of that, many trade secrets. Our innovation is science-based. We are very strong in the way we have designed our products but also providing the scientific basis for the improved safety outcomes that we provide. For instance, last year, we published a landmark article in Nature Biomedical Engineering in which Professor Robert Langer, the most widely low-rated biomedical engineer in the world was able to prove what is the exact mechanism by which our surface technology becomes better biocompatibility downstream for patients that are in breast reconstruction and breast aesthetics. When you look at the difference in terms of the safety data, it's pretty striking. In over 10 years and over 2 million implants, we've been able to prove that our rates of complications lead to reoperations in less than 1% of cases. On top of that, there's been many scientific articles written about the mechanisms for this, which do happen But also downstream, what we see is in both sponsored and independent publications that these procedures are very rarely leading to reoperations for device-related events. And that is in stark contrast to the rest of the industry. If you think about the data at different time sets for our competitors, we're talking about as much as 1 in 4 women who have a reoperation in the first 5 years, leading to reoperations further along the line over time. And this is what we sought to solved with our first generation of products. But then we moved on to what is important to women when they are choosing to have a breast aesthetic procedure or a breast reconstruction reoperation. When you look at the growth of Establishment Labs, it's all been about our ability to execute on our technology in the market. Since 2018, when we went public, we've continuously proven that we can do organic growth across the board in all of the geographies that we are present in. We are now in more than 85 countries. And as we announced yesterday, we just had in Q4 our -- another record quarter of revenue for this company. How do we drive our growth? It is not only driving organic market share taking in these markets, we're also entering new markets and bringing innovative patient-centric offerings to expand those markets. So it's not only about taking market share, it's also about the expansion of these markets that we are focused on. If you think about new markets, we are about 1/3 in market share in the existing markets. But over the next couple of years with the addition of China and the United States, which are some of the best markets in the world, we will be tripling our total addressable market. And this is very important because we've proven that we can be the market leaders in the geographies in which we are in and this is something that we plan to replicate in China and the United States. When you think about what we've done over the last year with new additions to our technology program, in breast reconstruction, we are going to do exactly what a women's health company should do, to change the protocols, to deliver with technology, better safety outcomes for women who have had breast cancer and choose to have a breast reconstruction. Unfortunately, 1 in 7 women could develop a breast cancer in their lifetime, and very little women have a breast reconstruction around the world. We have Motiva Flora, which is a revolutionary tissue expansion technology. Motiva Flora allows for surgeons to be able to do an MRI during the expansion process of a breast reconstruction. And this is particularly important in case of a remission of the breast cancer. And this is something that was not available before. It is available now, thanks to Flora. On top of that, we have our Advanced Smooth Surface, which allows for the patient not to have an overreaction like capsular contracture to these implants. But on top of that, in our early experience that we had, we were able to prove that these implants and tissue expanders are more comfortable for women in breast reconstruction. Our concept is called Aesthetic Breast Recon. What we tried to do with Aesthetic Breast Recon is to enable women after breast cancer to receive the standard of care that achieves the aesthetic outcomes to which they aspire. What do we mean by that? What we mean is that we want to democratize breast reconstruction worldwide. We want to be able to provide access to more women to breast reconstruction and also to provide the aesthetic outcomes that they aspire to. And if you look at the other product launch that we did last year, it was Ergonomix2 platform. This platform goes into the realm of the super silicones. These are the most advanced silicon chemistries available in the world. And thanks to that, we can do a lot of very important new offerings that allow women to have a minimally invasive breast augmentation for instance. So with this product offering, we are able to also price to patients in a way that they can find a price point that is adequate to them. So with this good, better, best pricing strategy, we are able to offer our safety technologies to all of the patients. But at the same time, as you move to the Ergonomix implant or the Ergonomix2 platform, you're able to get more value from these offerings. We launched Ergonomix2 not as a breast implant but as a program for patients called JOY. And JOY provides these patients with support in case they need a reoperation, we provide financial support. And through our network of surgeons, we make sure that this choice that they make to have or not have implants is not going to affect them financially. Thanks to the Ergonomix2 platform, we also are in the process in 2022 of moving minimally invasive augmentation from the clinical path into the markets. And this is particularly important because this constitutes a completely new category in breast aesthetics. Until now, the possibility of a minimally invasive augmentation was not really possible. And why is this so important is because this system which combines a proprietary delivery system with an implant that has more than 11 patents so that it can be injected safely into the breast pocket in less than 15 minutes and without general anesthesia. And what this does with this combination of amazing innovations is that it changes and radically transform the experience of patients in breast aesthetics. We've sized this market at over 1.9 million procedures per year at peak of which, very importantly, over 50% of them are new consumers. What do we mean by that? Women that are currently not in their journey of breast aesthetics are not interested in traditional breast augmentation. So this is the true market expansion opportunity for plastic surgeons. And definitely, we think that this is by far the most exciting time in breast aesthetics in several generations. So we take the total addressable market from $1.5 billion a year to a potential of $4 billion to $5 billion just for MIA alone. So as I was saying, we will continue to innovate, both in breast aesthetics and reconstruction through the delivery of better aesthetic outcomes. But most importantly, we have now with over 2 million implants in the market, proven that we have a superior safety profile. We will continue to expand regionally by adding 2 of the most important markets worldwide with the United States and China, but also into new markets with breast reconstruction and the expansion through minimally invasive. To us, it is fundamental that as a women's health company in aesthetics we can change the way women perceive aesthetic procedures. And also, we can bring to breast reconstruction patients the level of aesthetic outcomes that they aspire to. To us, this is as important as we look into the future because we have currently started the new manufacturing facility that will allow us to serve over 50% of the world market. That's how serious we are about this, and that's how important it is to us to continue to deliver on this promise and completely transform and reinvent an industry that had historically been in trouble with regulators and also with women's groups. So we are very excited about the opportunities in front of us, and we thank you very much for your time today.

Thank you so much. So I think for the first topic, if we could talk a little bit about MIA. For those of us who haven't heard about it, could you tell us a little bit about the differentiated approach of MIA?

Yes, of course. MIA is just a completely different experience for patients in breast aesthetics. If you think about what it does, is that it eliminates a lot of the obstacles where women who are not happy with their breast size or shape, don't choose a traditional breast augmentation. So if you think about traditional breast augmentation looking fake. This type of procedure does not create a stigmatized look. It creates a natural look. On top of that, there's no general anesthesia. For many women, that is a problematic part of traditional breast augmentation. Then you go to just the experience of that day. Women come into the procedure. And in 15 minutes, they receive their treatment and are discharged less than 30 minutes after. They are back to their daily lifestyle within 48 hours and with very little pain. So this scar, which is another obstacle for women is hidden under the axilla and is minimized as much as possible. So when you think about the experience for that patient compared to a traditional breast augmentation patient, it is completely different. And it is going into the same trends of the products and offerings that are winning in aesthetics in general. If you think about aesthetics, everything is going to noninvasive and minimally invasive. And for the first time, women and breast aesthetics are going to have that option as well.

And a little bit further on the topic, how are you exactly planning to market to new patients? And how big is the MIA segment?

Yes. This is a fundamental because 1 of the most exciting things about MIA is that it brings this new group of patients into the category. So we need to be able to speak to them at a different form. So we're not going to find them in the traditional places where women are looking for traditional breast augmentation. So think about, for instance, women who are buying padded bras, those are women that if they go online and are trying to look for a padded bra, may receive a pop-up in which they have the option to learn and educate themselves of the choice of a minimally invasive augmentation. And these are the type of things that are different also the narrative itself. We're not talking to breast augmentation patients. So we need to speak to them differently. So it is very important that in this targeted launch that we will begin later this year, we optimize our funnel so that not only we create a lot of awareness about this exciting procedure, but also bring these patients to the centers where they can get MIA.

Great. And last question and you kind of already touched a little bit upon it. But how should investors be thinking about the rollout of MIA?

So this year, it's super exciting because we're moving from clinical into the market. So that is a big milestone for Establishment Labs. As we think of this product being rolled out, it's going to happen in Europe first. But we're going to go slow because we want to get this right. We want to be able to, as I said before, test and optimize our funnel. And from there, we want to be able to expand. One of the most interesting things about this procedure is that the flow and the process for the aesthetic center is so efficient that you can do 10 of these procedures in the morning and go home early for lunch. That is something that is very different from traditional breast augmentation. So we have to educate the surgeons not only about how to safely do the procedure, which is completely standardized but also how to get this flow into their centers so that they can change their unit economics. And this is very important as well. So we will be doing all of that this year. And I think that when you see those numbers of the total addressable market for MIA, between $4 billion and $5 billion, we will get there. We just need to be able to roll out this in the way that we can protect this brand and make sure that we get the best of it in terms of value.

Great. Now moving on to a little bit of a different topic. You recently launched a tissue expander called Flora. So we were wondering if you could talk a little bit about the difference in your tissue expander versus others.

Yes, of course. Flora is truly revolutionary. If you think about until now, tissue expanders have in their port metal and also magnets, so that surgeons can find the port and begin the expansion cycle. Flora is fundamentally different. It includes an RFID-integrated port, doesn't have metal, doesn't have magnets. And because of that, you can do MRIs. Right now, if a woman needs an MRI, you actually need to take out the tissue expander. So what does that do to women in their journey of breast reconstruction, it is not the best thing. On top of that, because it doesn't have metal or magnets, you can potentially reduce the radiation oncology levels and target them more precisely without damaging the lung or the heart, which is something that could happen today because you need to go around the distortions that are created by those magnets and metal pieces. On top of that, it is very important to note that our surface technology, which has been proven to reduce the inflammatory response is one of the hallmarks of this product and is going to help also with a common complication of capsular contracture that can happen in up to 48% of women receiving radiation oncology in breast reconstruction.

And can you provide a little bit more detail on how large the breast reconstruction segment is of the actual breast implant market?

Yes, of course. So you're talking around globally $250 million market. United States being by far the largest contributor to that market. So that is for the tissue expanders. But if you add the implants to the recon space, you can think about twice that number.

And you mentioned how the market is underpenetrated. How are you planning to kind of penetrate that market? If you could provide a little bit more detail on that specifically?

Yes. Look, a lot of this is related to awareness. Many women do not receive the information ahead of time so that they understand the benefits of a breast reconstruction. So we are definitely going to be working on that in creating awareness to the new possibilities in breast reconstruction. So when we think about aesthetic breast recon, it really is about bringing this concept to women worldwide and also telling them how this concept can improve the outcomes. Very often women don't go for a breast reconstruction because they had seen very poor outcomes, and they just don't want to go through all that trouble and several surgeries if that's going to be the outcome. Furthermore, in many countries, unfortunately, it's a question of access. In Brazil, for instance, many times women wait up to 10 years for a breast reconstruction. And this is something in which we can work with women groups to be able to defend their rights to a breast reconstruction and also a pretty good outcome.

So now moving on a little bit more to the U.S. FDA process. Would you be able to maybe provide a little bit on the submission path that you are pursuing for the U.S. PMA approval?

Raj, would you like to answer that?

Sure. Yes, I can provide a little bit of update on that. So what we updated folks on after our third quarter results back in early November was that we are now pursuing a modular submission path with the FDA. And so essentially, what that involves is, we have agreed that with the FDA on what will comprise the 4 modules that will ultimately make up our PMA. So we have now submitted the first module, which has to do with the chemical composition of the implant. The subsequent modules will have to do with the mechanical performance of the implant, the manufacturing and ultimately the clinical data. And so we will submit these modules in order to the FDA. They will review them one at a time. Once they've signed off on 1 module, then we move to the next. And so we've now sort of defined the path for us in terms of what it will take for us to get -- ultimately to get that PMA submitted and hopefully approved in the United States. We have been a little reticent to endorse specific time lines. The FDA, I think, is still under a lot of pressure with COVID and things. But I think we're pretty excited now to have this path firmly defined in terms of what we need to provide the FDA and on what sort of schedule in order to ultimately get our products into the U.S. market.

And can you provide us with a little bit on the plans that you have for providing updates on the trial?

Sure. Yes. So we will periodically perhaps on earnings calls and other kind of public forums provide updates in terms of where we are in the modular submission path. It will take some time, so we want to be mindful not to create too much expectation around it, but our plan is to provide updates as we move through this process. We've also communicated that we would also like to, at some point, provide an update on the trial a bit more broadly, right, including potential end points of the study. We want to be mindful that we do it in a way that doesn't impact the trial or interactions with the FDA. So we continue to explore whether it's possible for us to perhaps provide some look into how the clinical endpoints of the trial are trending. So I would just say stay tuned for that, and we'll see if there's a way that we can do that.

And how are you expecting to take market share with this in the US?

Well, I think this is fundamental to our story. We've been taking market share from our competitors around the world. If you look at the quarter that we just closed with record revenue, of course, a lot of that was based on taking market share. This market is growing at 3% to 5% a year, and we grew around 50% in 2021. So a lot of that is at the detriment of our competitors. One of the most important things is that we are doing this while we are charging premium prices. And that strategy of good, better, best is really helping us in doing that because women see the value of our offerings. We do a combination of very strong medical education with all the work that we do to educate women ahead of them visiting a plastic surgeon in digital channels and social media platforms. So this is fundamental to this story. Because when we go to the U.S., we definitely have proven a blueprint on how to win and how to win faster every time. On top of that, in the international markets, what you see is that most plastic surgeons are -- historically have been using textured devices. And we have had to do the work of the scientific societies in teaching a generation of surgeons on how to best use an advanced smooth device like ours. So sometimes that can be very onerous in terms of resources and time. And when you look at the U.S. market, already 95% of patients are receiving a smooth device, and all U.S. surgeons know how to use smooth devices. So in terms of medical education, it's going to go much faster for us. We have taken market share in all of the different regions around the world. There is a path for us to market domination in every single 1 of the market. Sometimes it takes longer, sometimes it can be quicker. But definitely, we will not under invest in our market entry into the United States. We will do what is necessary to be able to capture the share that we can get in this market.

And a little bit further on the topic, what are some lessons from your international markets that you can learn when thinking about the U.S. market?

So there are many lessons that we have learned over the years. I think one of them that is very important is our ability to scale. So we've been growing very fast over the years, and we've proven that we can execute as we scale. So a lot of it has to do with our ability to produce these high-quality implants to meet the demand. And over the years, we've been increasing our manufacturing capacity. We are now entering into the construction of a new building so that we can meet up to 50% of the world demand for implants. But on top of that, I think it's very important to consider that we've also been growing our commercial footprint, both with sales calls to surgeons all over the world but also through all the marketing that we do in social media and other digital channels. To us, it is fundamental as we go into the U.S. that we've been doing this in very different markets like Brazil. It's a very large market, 5,000 plastic surgeons, and we've been able over the years to work to get the market share. And then you go to very competitive markets like South Korea or sophisticated markets like Scandinavia and we've gained market leadership in these regions through a combination of these strategies. So definitely when we go to the U.S., you're going to be seeing a lot more of that.

Moving on to a little bit of a different topic but still related. Can you talk a little bit about the market expansion opportunities and how you're thinking about expanding into new markets and provide a little bit of detail on that?

Yes, of course. So over the last 10 years, what we've been doing is taking market share. And when you look at the possibilities in breast aesthetics and reconstruction, we've been devoted over the last few years to market expansion. And market expansion is absolutely possible. It's just needs the right innovation, the technology that is backed by science and a different relationship with the plastic surgery community, 1 based on the partnership so that they can bring this value to the patients. So market expansion to us is, for instance, with MIA, a new category of -- in breast aesthetics bringing new patients into the market. And of course, remember, when those patients go and have MIA procedure, there is going to be other treatments that they get with those plastic surgeons over the years. So this is important not only in terms of what we can do for MIA, but all the value that we can provide to the plastic surgeons. On top of that, when you think about breast reconstruction, the fact that we can have an impact in the access to breast reconstruction, have an impact on the quality of the breast reconstruction. And that, of course, is going to be a market expansive opportunity for Establishment Labs.

And how specifically do you [indiscernible] yourself in going to markets versus others?

I would say that these days for us, the most important thing is the growth that we can do by entering China later this year and the United States thereafter because these 2 markets combine very interesting characteristics. China is the fastest-growing market worldwide. It has the highest average selling prices in the world and the United States in dollar terms is half of the world market. On top of it, it is the most valuable breast reconstruction market. So to us, the focus is going to be on that. And on top of it, of course, in the international market, with the work that we are doing right now, with the Ergonomix2 platform leading to MIA. We don't expect to continue expanding into many other markets, the focus is going to be majorly on these.

And when you think about expanding into China, are you thinking about doing this directly or via a partnership?

So we have an excellent partner in China. They are already our partners in South Korea. And we've been very successful in South Korea. We're by far the market leaders, although there is a local producer selling at much cheaper prices. And we've been able to conduct a very strong strategy. Before the pandemic, already about 25% of the patients receiving Motiva in South Korea came from China. And pretty much South Korea defines what happens in China in terms of the latest and best. So we are very much looking forward through our partners to affect our strategy in the Chinese market. And we have the best South Korean plastic surgeons that are going to be doing the medical education with the Chinese plastic surgeons.

Great. And now moving into the financials a little bit. You recently preannounced Q4 revenues. What are some key messages that you want investors to take away from this?

Yes. I guess I can take that. I mean it was a record quarter for us in terms of revenue, $35 million to $35.5 million, growth of over 30%. Also on an annual basis, right, we grew 50%. So I think we're quite proud of the numbers and think of it again as a testament to everything Juan Jose has been talking about in the presentation in terms of our share taking and innovation we're bringing. I think it's also worth noting in some of the prepared remarks in that press release around momentum in our business and our expectation for another very good year in 2022. And so I think at a high level, the takeaway should be that the business remains in very good shape, and we have a tremendous amount of momentum as we're leaving 2021.

Perfect. And can you provide a little bit more detail on the impact the recent COVID wave has had given all that has been happening?

Yes. I think it's important to note that we're in 85 countries around the world, right? And so over the last couple of years, we've seen certain markets shut down, certain markets open. There's been -- it's been a very dynamic time, right? But I think if you look at our results over that period, we've continued to perform at a very high level. And so even in this most recent wave of Omicron, I think the results speak to the -- again, the strength of what we're bringing to market and our share taking and really everything that we're doing. And so I'd say we're certainly mindful of what's happening in the world and around us, but the business continues to do very well even in the phase of it.

And I think last question for today, what are you kind of most excited about heading into 2022 that you kind of wanted to leave the audience with?

I think this is a super exciting year because there are so many catalysts happening this year, both in terms of geographical expansion, but also with the addition of minimally invasive and the continued development of the Ergonomix2 platform with JOY and aesthetic breast reconstruction. So all these things happening, I think, is just amazing. We've been executing all of this throughout the very difficult period with the pandemic. And we continue to prove that our products, our technologies and especially our women's health angle in aesthetics and reconstruction is going to make a big difference worldwide.

Awesome. Thank you. I think we're coming up on time. So I wanted to thank you for joining us today and thank our presenters for all of the information. We really appreciate it. And thank you again.

Thank you.

Thank you.