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

Good morning, everybody. Thank you so much for joining us this morning. Happy to be here. My name is [ Chris Holt ], I'm an associate in the health care group at JPMorgan. Today, I have the pleasure of introducing these 2 gentlemen. Juan Jose Chacon Quiros, who's the Founder and CEO of the company; and Raj Denhoy, Chief Financial Officer. Juan Jose is planning on doing about a 20-25-minute presentation followed by Q&A, so that we'll have runners in the back with microphones for that session. Thank you very much.

Thank you, everyone, and good morning. Thank you for being here so early. And I'm going to tell you about Establishment Labs. This is a company founded in 2004. I come from a family of plastic surgeons, and this has some very deep connection to the way I grew up, I grew up in plastic surgery, I grew up watching the interactions between women and plastic surgeons. And eventually, I realized there was something different that needed to be done in breast aesthetics and reconstruction. And that's why this angle of women's health is so important to be able to solve the different problems that women have encountered in these 2 indications. And when you look at the breast implant market, it has grown, but it has grown very little. It is now around $2.2 billion annually between breast aesthetics at $1.5 billion and around $600 million for breast reconstruction. But the challenges remain. You have lack of innovation, you have insufficient safety. And also from the woman's perspective, there's many things that have been lacking in the way women are represented in this industry. And I think that's part of what we tried to do from the beginning is to really look at the problems from the patient perspective and in this case, from the woman's perspective. And that's why we think this triad of mandates that we have to heal, to normalize, to democratize and is so important to what is coming in the future. Why healing? Because there was a lot of things that needed to be solved in terms of looking at the amount of reoperations that are device related in this industry. So we spent the first decade really working on this part of healing. And now we are focusing on normalizing breast aesthetics and democratizing the access to breast reconstruction. And I'll explain a little bit more about that. When you think about like this healing period that we underwent, it was based on the reality that this industry is led by 2 very big companies, Johnson & Johnson and Allergan Medical now part of AbbVie, but that did not centered in innovation. They wanted to have the relationship with the plastic surgeons, but not necessarily to innovate. And that led to a decimation of the technology over time and eventually to problems with regulators and even women's groups. When we launch our product in 2010, what we seek to do with that first generation was to solve for capsular contracture and rupture. These are the 2 main reasons for reoperation in breast aesthetics and reconstruction. And how did we do that? We did that by creating a stronger foundation, we remade the entire implant technology from the ground up, and that stronger foundation has led to a lot less reoperations because of a rupture. Same thing with the surface technology. Surface technology finally going into a biocompatible, not about textured or smooth, but really about a biocompatible implant. And beyond that, we continue to work in 2011, we brought BlueSeal which is basically a berry-layer indicator that allows you to detect the potential for ruptures ahead of time so that these implants never go to market with that. In 2012, we created RFID enablement for the implants. And why is that so important? Because the FDA has very clearly stated for years that the biggest problem with breast implants is that women don't know which breast implants they have. And what RFID enablement does, it allows women to, number one, verify that they have received the implants that they had agreed. And remember, in elective surgery is very important. And then after that, should there be a problem in the future? Should they hear about a recall of a product, they will know that they don't have that. Furthermore, it is important from the perspective of a reoperation. This way surgeons can plan accordingly, depending on the implant that they have. In 2014, we created the ergonomic implant. This was a major change with what is ergonomy in breast surgery, it's about having implants that are comfortable. And this is very important from the women's perspective. Eventually, in 2018, we IPO-ed on NASDAQ. And we did that so we could get the necessary funding for our U.S. clinical trial because we've been present OUS, but we still needed to get through that. We've continued to innovate beyond that, creating a lot of data in that period and eventually having more launches, like the ones that I'm going to talk to you about in the near future. So just to recap on the technology, what makes our technology so different is this biocompatible surface technology patented. After that, the durability that we have in our shell and implant construction, the safety-focused technologies like the RFID and BlueSeal and definitely the design that is made to improve the women's lifestyle with these implants. It's been over 2.5 million implants in the market since 2010 in over 85 countries. We have a very strong patent portfolio around 25 patent families and more importantly, less than 1% complications that are device related. If you look at that, and I really want to get into this part, it's important because if you look at our surface, it's a low inflammatory surface -- so what that means is that eventually, you'll have less capture contracture because less inflammation, less fibrosis, downstream less capsular contracture. But more than that, entities that are related to chronic inflammatory conditions like ALCL or squamous cell carcinoma, we have no relationship to these type of entities. And it is very important to us. Disposed market surveillance would be really good at every year bringing out in a transparent way. We continue to be the only company that does that. Every year, we put out our post-market surveillance report, which now includes also the independent registries around the world that are also part of putting out numbers. And it all speaks to the same results, less than 1% device-related complications. And that isn't striking difference to what the legacy industry has. And it's very important that when you look at these numbers, those numbers are unchanged. Why? Because there's no innovation. If we look at our 2-year data from our U.S. clinical study, we presented this back in April of last year. And you look at, again, capture contractor at less than 1% at 0.5%. [ Rupture ] at 0.3%, including an MRI cohort and basically completely different numbers. And we already have our 3-year data, and we will look for the right forum to present that 3-year data in the near future. But it's not a coincidence that we're getting those outcomes downstream. It is the science and the engineering behind our implants. And we have more than 25 peer-reviewed scientific publications and they speak to the very different aspects in terms of why this technology was designed this way. Perhaps the most important one is the publication that happened in 2021 in Nature biomedical engineering. This was a study that was conducted by Dr. Robert Langer, the world's most renowned biomedical engineer. And with this study, which is a Linemark study in plastic surgery did was to confirm the very mechanism by which the surface technology reduces the inflammatory response. So basically, what SmoothSilk does is that it has dimensions in which it creates a self-friendly relationship. And it's very important to understand that it is the higher levels of key regulatory cells that are down-regulating that inflammatory response over time. And that's why we see less capsular contracture and no relationship to chronic inflammatory conditions like ALCL or SEC or others. So beyond the improved clinical outcomes, it is important that most women want to have these outcomes that are related to their lifestyle. So the concept of ergonomy, having comfortable implants, hybrid surgery, in which you are combining a fat graft with a smaller implant to create a balance between native tissue and the implant and of course, smaller incisions. And these are things that we brought to market, and we've been very successful at helping plastic surgeons upgrade their value proposition to women around the world. So to recap, we are currently basically competing in less than half of the world's market, yet we continue to grow organically with our market share now approximately 33%. We still have a lot of room to grow. And we have very exciting things in terms of geographical expansion. We have clearly said that we expect in the first half of this year to receive regulatory approval in China, leading to a product launch in that country. That is perhaps the fastest growing aesthetic market in the world, and it is true as well for breast aesthetics. Furthermore, in South Korea, which is kind of like the reference point for breast aesthetics in China, we are, by far, the market leaders at a premium from our competitors. In the United States, we continue to make progress. Last year, we submitted our first 3 modules. And we told the FDA in December that we were ready to submit the fourth module. In [ the ] comparative conversation with them, it was decided that it was in the best interest to more efficiently address the process of our FDA approval that we would move this approval so that we can present module 4 in Q1 of this year. Now I'm going to talk about normalized in breast aesthetics because that healing period in which we were solving for the legacy problems of this industry is moving into this new phase in which we talk about normalizing breast aesthetics. And what exactly is that is the biggest opportunity in breast aesthetics in, I would say, 60 years since the first implant came to market. Why? Because if you think about what this industry has been focusing on has been focusing on women that want big augmentations. But there are many women who are using compensatory behaviors like padded bras, push up bras, using certain clothing, not using certain clothing and they don't see the current offering in breast aesthetics as appealing to them. So we have done a lot of work on this. And what we created over the last decade is a technology that can address this group. And with Mia, which is the technology that we are bringing to market, what it does is a 15-minute minimally invasive procedure without general anesthesia using this breakthrough minimally invasive technologies. It's been amazing to see the appeal that this procedure has in women. And it is very important to us that when you think about all these tools in the system, it goes from the ergonomics diamond implants, all the way to the different tools that allow for that minimally invasive procedure to take place. We're using a channel-dissector to create the space from the underarm and then using a proprietary balloon to create the space without having to cut tissue and then using an injector to carefully put that implant in there. And that diamond implant because of its geometry can recruit this rounding tissue and create a 1 to 2 cup -- up result without having to go for big volumes. And this is very important because when you think about like the results, think about like, for instance, this case, and the testimonials here are just amazing again and again, this is an engineer, had the procedure done on a Wednesday, got married on Saturday. And she was very happy to do this because she felt like I'm not fitting well in that dress -- we'll look at her. It's a face of happiness. And this is the type of testimonials that we are seeing again and again with Mia that speak of not having a painful recovery, being able to go back to their daily life, the same day. And that's why this is going to open a new category. So just some key facts on that market opportunity, 11x more women would choose Mia over other traditional breast aesthetic procedures. The other part that is amazing to me is that it's really a new category with new entrants. 73% of Mia candidates were not considering breast augmentation procedures before. But most likely that we're using compensatory behaviors and the willingness to pay. These consumers are willing to pay twice the amount that is there for traditional breast augmentation. I'll give you an example from Japan because this is most likely the first market that we will go into. We signaled a couple of weeks ago that we have signed our first chain of clinics in Japan, Seishin, which is one of the most premium chains of clinics in that country, and we will start with 2 clinics in Tokyo, in Roppongi and Ginza. And what this number tells you very clearly is that if you look at the target number and then you do all the market research, there's a lot of appeal for Mia. And we go down to 133,000 women who would be interested at purchasing Mia over the next 12 months. And that is in striking contrast with 5,000 women who are currently having breast augmentations with breast implants in Japan. So there's phenomenal difference between this and the market for Mia. The other part is for the plastic surgeons in the center. This procedure is very efficient. This is a proof of concept that we did. You can actually do 10 cases without rushing in less than 5 hours. And what that means is that coupled with the willingness to pay, coupled with the fact that you can have a more efficient flow in the clinic, basically in the morning, all of these patients will get resolved and go home. And that is, of course, very appealing to the aesthetic surgery centers. Beyond that, I think when we think about the entire opportunity, think about the current market for breast aesthetics $1.5 billion. And what Mia does, it expands significantly that market to $5 billion to $6 billion. And that's why we are so excited with Mia. And when we started, we thought this was going to be a technology mainly focused in the Asian market, but we've realized that it is so much more than that. And as we move into other areas like breast reconstruction, this is what we are about. Not looking at the markets as what it is today, looking at the markets of what they can be. And with breast reconstruction is so important for us because we're, again, a women's health company, and solving breast reconstruction is very important to us. And our concept is called aesthetic breast recon. What we believe is that we have to democratize the access for breast reconstruction, but one of the ways of doing that is by creating a standardized procedure for breast reconstruction so that most patients can go through a breast reconstruction and have an amazing result that is in part with breast aesthetics. Our first product is Flora. This is a game changer when it comes to tissue expansion. It doesn't have magnets or metals. So as a result, you can actually do MRIs. Think about women today in the journey of breast reconstruction after breast cancer. And if you need an MRI, you have to take off that device or basically go blind for those 6 months. And there are women that die because of a remission that was not seen on time. So it is very important that this new tissue expander is really changing protocols. Beyond that, there is a possibility of dramatically reducing the amount of radiation oncology because you can target much better that amount of radiation without having to touch the lung or the heart. When you think about the opportunity, of course, this is going to be a longer-term project. But there's about 1.7 million women every year that are diagnosed worldwide with breast cancer. And very few actually get a breast reconstruction. In the U.S. and other developed countries, women have more access. But if you go beyond that, in most countries around the world, that number is single digits. And that's something that we can change if we have the right technique with the right technology, and we are working towards that. And we totally believe that that's what's going to get us to full market leadership into expanding these markets significantly. We are finalizing our third facility. This will expand our capacity significantly. Basically, within the current units plus this unit, we will have the ability to serve 50% of the current world market for implants. And going back to our growth. Since we're going public, we have consistently delivered on our growth numbers, minus that 1 quarter during the peak of the pandemic. But we are very focused on execution. We are constantly getting to the numbers, and you've seen it. We just talked about 2022 in our preannounced with a growth of 31% to 32% ex currency. And we have signaled very clearly in an 8-K that we released yesterday that we expect to continue with these rates of growth into the future and beyond 2026. We believe that between all the different engines of growth that we have organically, also geographic expansion, MEA with a new category in breast aesthetics and also with democratizing breast reconstruction, we can get to $500 million by 2026 and beyond. Thank you very much.

We'd like to invite the audience to ask any questions there might be -- there is a question here on Jose. You updated the timing of the process for FDA approval. I'd just like to hear what drove your decision not to submit the fourth and final module in the fourth quarter and to instead do it in the first quarter.

Yes. Thank you. And I think that's very important because it should be clear to everyone that, that decision does not change our view on the timing for receiving approval. That decision was done in the best interest of the process. During the modular submission process, we have actually created a very good working relationship with the FDA. And there's been a crescendo in the frequency and the quality of our interactions with the agency. And in December, we were fully ready to submit module 4, but it is important for people to realize that they have to be ready on their side to take on what would now be a fully compressed full PMA, and that's what drove that. We expect to do that as soon as possible in Q1. And again, we believe this is in the best interest and does not change our outlook on the approval timing.

Another question here. You provided a longer-term target in the presentation of $500 million in revenue in 2026. What gives you the confidence at this point to endorse that outlook? And what are the main drivers of that growth?

I think we've worked for many years to create those drivers, and we decided that the proximity to these catalysts was near enough for us to be able to make that statement. For instance, if you look at the geographical expansion, we're very close to launching it in China. We will launch in the United States that was going to more than double our total addressable market. We will launch Mia in the first half of this year. That's an entire new category in breast aesthetics that is much bigger than the current market and the work that we are doing in aesthetic breast recon. When we launched Flora, we basically are saying we are going to transform the way breast reconstruction is done. So between all of those things, we are not dependent on one thing. We have enough drivers of growth to feel confident to say that we will continue growing at 30% plus for the foreseeable future.

I think just to add one point to that. I mean it doesn't stop in 2026 to Juan Jose's point. These drivers will continue for a long time to come, and so we expect growth will continue well beyond 2026 as well.

Great. Now Mia looks to be addressing a large untapped market for breast aesthetics. How do you plan to market the product to this new group of women?

It is a new category. So it's a very exciting opportunity. And we have to be very careful on how we address that because think about like all these wounds that are using compensatory mechanisms in breast, padded bras, push up bras. And how are we going to create the awareness for them to understand that this is an alternative that can be very appealing to them. So the idea is to create this very strong partnerships with clinics that already have an existing funnel so that when we create awareness, that can lead to the proper conversion. The other part of this is a word of mouth, is very important to understand that although we will have to invest to create awareness at the beginning, there are adjacent categories that already exist in those clinics. For instance, [ when Matador ] is doing BOTOX fillers, lasers and all of that. For them, traditional breast documentation is too far. But when you look at Mia, it is very close. You're talking about injectable implant. The downtime, very little pain, it's what speaks to women that are already doing these other types of aesthetic minimally invasive or noninvasive treatments. So it is very important for us that we have to create awareness on one side so that we can bring new entrants. We have to work with the clinics that already have a lot of consumers in the adjacent categories. And furthermore, through those great experience, continue to create word of mouth so that we get to the proper customer acquisition cost.