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

Okay. I think we are going to get started. Thanks, everyone for being here today. My name is Allen Gong. I am on the medical supplies and devices team here at JPMorgan. I am really excited to be introducing Establishment Labs. We are going to start off with prepared remarks from CEO, Juan Jose Chacon Quiros. And then we are going to move on to Q&A where Raj Denhoy, CFO, will be joining us as well.

Thank you, Allen, and very happy to be here at this conference. And we're going to do an update on Establishment Labs and the outlook for 2024. One of the important things for people that don't know well our story is who we are. So we are a medical technology company that is focusing on transforming breast aesthetics and breast reconstruction, with this view, that what was missing was a woman's health angle. And this is fundamental when you think about everything that we do at Establishment Labs, and also the choices that we make, the things that we choose not to do as well. We're a global company. We have -- our headquarters are based in Costa Rica, where we have our manufacturing facilities. And we are also present directly in several countries, Brazil and Argentina with a distribution center in Brazil. In Europe, we have direct presence in the 5 biggest markets in Scandinavia with a distribution center for EMEA and Asia Pacific and Belgium. And now we are setting our footprint in the United States with our main offices in Texas. And as we begin our commercial roll up, then we will begin adding sales reps all over the country. In terms of the market, the market for breast implants and tissue expanders is about $2 billion to $2.2 billion. Of that, around $1.5 billion comes from breast aesthetics and around $600 million from breast reconstruction. And what this industry has had or at least the legacy of this industry is this lack of innovation that you got from 2 very large players who were focused on being market leaders but did not renew their product offerings. And as a result, has had safety concerns and problems with regulators. And of course, that has led to slowing growing markets. And definitely, there's an opportunity to renew the way these devices are marketed to be able to expand the markets. In our case, we've been 13 years in the market. We have more than 3 million devices that have been placed. And if you look at our results from our post-market surveillance and also the confirmation that we got from the 3-year results in our Motiva U.S. IDE study is that you get less than 1% device-related complications. So most common device-related complications in this field is rupture of the implant and also capsular contracture, which basically is the body's reaction to this foreign object. We have many patents across our different technologies that are protecting us from our competitors. Our growth story is basically -- I usually think about it in like 3 different ways. There's this idea that we are healing the legacy of this industry through the technology that we are bringing to market, and that has got to help expand markets. If these subdevices are considered safe, then more women would be looking to get them. The #1 search in Google for breast implants is are breast implants safe, tells you a lot about the legacy of this industry. But then there's the view that if we can do a safe device, eventually what you need is to normalize access to this indication. And this is what we are doing with our minimally invasive offerings and what we are doing with creating a new category within breast aesthetics, which has half the opportunity to expand markets. And then after that, in breast reconstruction, we talk a lot about democratizing access to breast reconstruction. In the U.S., access to breast reconstruction is widely available, especially to white women. There's a lot of work to be done in black and Latino communities. But outside of the U.S., even in Europe, it's only like 30% to 40% of women that actually go for a breast reconstruction after breast cancer. And if you look beyond that, in Latin America, for instance, in Brazil, you have waiting time lines up to 8 years to 10 years for a breast reconstruction. In Asia and many other places, you also have a lot of challenges in terms of the access to breast reconstruction. So with our program of aesthetic breast recon, we think we can solve a lot of that. If you look at our portfolio beyond our breast reconstruction technology, which we have now included our Tissue Expander Flora, what you can think about is our breast implants are all sharing the same safety profile. We don't make people pay more for safety, but the design of our implants when you move from a Round to our Ergonomix to our second generation of Ergonomix or to our minimally invasive, the idea is that women are empowered through education on these options to make choices. And these choices often bring them to upgrade from what used to be a commodity market in which everyone was saying, I'll just use the cheapest device to actually devices that bring about different levels of benefits. And this is fundamental when we think also about the pricing. With our round implant, we're always going to be competitive but then our job is to teach women about the options and then they often decide to upgrade. If you look at our revenue for last few years, we're definitely a growth story across the board. We hit a rough patch during the pandemic just like many other companies. And then last year, in the second half of the year, just like other aesthetic companies, we were dealing with a softening demand in the aesthetic market, which also affected the breast aesthetics market. So what did we do about it? Well, starting in September and all the way through December, we engaged in this very strong reorganization for healthy growth in the company. We let go almost 25% of our workforce. We closed programs that were nice to have. And by eliminating those programs and also streamlining all of our back office and support functions, we are able to get into this position in which now as we grow, we are able to get to this healthy growth. Most importantly, we didn't touch one head when it comes to commercial. All of those stay there because the focus is on growth. So our target is to be EBITDA positive by the end of this year and cash flow positive in 2025. And most importantly, I think, is that when you think about all the opportunities that are coming ahead of us, they come ahead with higher gross margins. And I'll explain a little bit more about that later. So for Q4, we had revenue in $31.4 million to $31.8 million. This is unaudited and preliminary. It came just in line with what we have guided to. And the cash use before our financing in -- it was reduced to $12.9 million in 4Q. We just did a private placement of $50 million, and that brings our cash to $89 million. And I think it's important to realize that, that was something that was necessary for us to engage in so that we can focus now on the growth opportunities. So we have seen an improvement in the expectations in our market, and I'll divide that between 2 areas. In direct markets, we have seen from our discussions with clinics and plastic surgeons that they are seeing more patients coming through their doors, and they have seen a diminishing of the postponement of procedures that they saw in September-October, especially when that peaked in terms of the affectation to the aesthetic markets in breast. And in terms of our distributors, I think we went through a period of destocking in 3Q and 4Q. And now with the visibility that we have towards this quarter, we feel comfortable that we are going to see the patterns of ordering from our distributor normalizing in Q1 and Q2. Now when we think about new engines of growth, and I think this is fundamental to us is that we have all these things that are coming ahead of us. We have the launch of Motiva in China in January of this year. So this is going to happen actually beginning next week with our first activity taking place in Hainan. And after that, you're going to see us participating in many other launch activities throughout this month. It's going to have the highest distributor average selling price and the highest distributor gross margin, and that is fundamental in this. The breast augmentation market in China actually hit a low during the pandemic. After that, it's starting to recover in a, I would say, difficult macroeconomic environment in China, but it is expected to come back to pre-pandemic levels by the end of 2025. And that's about 150,000 procedures per year in China across all market segments. When we think about the market segments in which we are going to play, those are the mid-end, premium, and luxury targets. And in that, when you think about like dollar terms, we're talking about this is about 70% of the total market. There are local players, so 5 local players in China, and they play in this lesser-value market segments. Most importantly, I think that when we did all these market research from consumers is that 78% of Chinese women are open to breast augmentation. They say they're willing to pay more if they see higher-quality options. 61% say that their families will actually support them in that choice. And this is very particular to the Chinese market. We haven't seen that in other places. And therefore, cost is not seen as a major obstacle for most people interested in the procedure. So when I showed that slide before, of 70% being in those market segments at a higher price, it's because Chinese consumers have come to appreciate that quality is important, safety is important, and they see these, if possible, as luxury items that they aspire to. With regards to Mia, we launched Mia in Japan in April of last year, and then we launched in several European countries in September of last year. And the most important thing is that this comes at a highest pricing per patient of all of our offerings. We are creating a new category. This new category is based on this minimally invasive technology. And this is a first in breast aesthetics. If you think about 60 years of breast augmentation, it was always done in a completely different way. And I want to talk about this. So if you see in this video, what you'll see is that the way the procedure is performed is one in which you are preserving tissue. If you look at it, basically, you're using a tracker to be able to get to the breast area. And then once you do that, you're placing a balloon to dilate the space and be able thereafter to put the implant in. The implant is placed in that space without having to use your hands at any point. It's basically a hands-free procedure, you are injecting that implant. That implant is a prefilled implant. It's a silicone gel, next-generation, different chemistry, different physics, and basically, this is how it's done. And as you can see here, this takes place in very little time. So this has never been done before in breast aesthetics. It completely changes everything. We are not using general anesthesia. These patients are awake under light sedation and just it redraws the map for what value is in breast aesthetics. So we have been able to prove that you can do 10 of these cases without rushing in the morning. Part of that is because the discharge time after the procedure is only 30 minutes. As you saw, we are doing these procedures in less than 15 minutes. So it's very efficient for the plastic surgery clinics. One very important thing in terms of brand equity is that these clinics are partner clinics. They are paying at least $100,000 for the license. In return for that, we are providing the entire medical education, certification, and the practice development. And as a result, these clinics are going out there talking about Mia. They're using our brand and our category. In terms of consideration time, for traditional breast augmentation, it's 3 years to 7 years. It's a big decision. When it comes to Mia, we've been able to reduce that in this first group of clinics to 1.9 months. So that is one of the most important things here. And these consumers have a willingness to pay that is higher. So this is real market data from these first group of countries in which we are able to charge 70% more than compared to a traditional breast augmentation. At the consumer level, in this first group, 38% were not interested in traditional breast augmentation. I think that as we create more awareness and move forward, that number is going to increase. And we've been able to create a lot of super-consumer audiences through our work in social media and direct-to-consumer. And of course, we're using the new types of ways of looking at the customer satisfaction and even an NPS score, which is a first in our industry. So we kick off 2024 moving from the 12 Mia clinics that we had originally launched to 6 more clinics that are expected to do commercial cases in this quarter. And then throughout the rest of the year, you should see 30-plus clinics starting in our distributor markets, and these are in the Middle East, Europe, and Turkey. Additionally, we have 9 clinics that are in the pipeline in direct markets in Europe that we will see getting onboarded over the next couple of quarters. So what that tells you is that as we expand the network of clinics, we are going to get a lot more information on the ramp, but I can already tell you that the clinics that we have launched in, they are experiencing more cases every month. It's still early, but it is very, very promising. Now with regards to Flora, our Tissue Expander and its launch in the United States. One of the most important things, again, this one is the highest average selling price tissue expander in the world. We're charging more than 3x what we are charging in Europe for an equivalent device and also with the highest gross margin for the category. We did our first commercial procedure a couple of weeks ago in the MD Anderson Cancer Center in Houston, and that we are very happy with the way things went. They are continuing to do cases. And what does Flora do, it changes the standard of care. Remember, you can do MRIs with this technology because you don't have a magnet in the port of the tissue expander, we're using our proprietary RFID technology. And because of this, also in the future, you're able to do proton therapy. And then proton really changes the game with this. That is MRI-guided, and that is why you can only do it with our tissue expander. And with proton therapy, you're really getting to be very precise with the amount of radiation therapy that you are imparting. And of course, that improves the standard of care and results. We're working towards our approval in the United States for Motiva implants. That would be the highest direct market average selling price and, of course, gross margin. Just a quick overview. It's about $400 million to $600 million market depending on how you're counting it. An average of 365,000 breast augmentations is what's been going. It's not really growing much and you shouldn't be surprised by that. Every single technology available in the United States dates back to the last century. And that's what we can do with our innovations in this market. So the milestones for approval, I just want to recap what we have done so far. We had the site BIMO inspections. 8 sites were inspected. It is complete and totally closed out. There's no more inspections that will happen. It's important that you understand that, that's how they curate the data. They actually go to each investigational site that is chosen and they look at every single file from every single patient and they go through it to see if there's not a missing adverse event or no double counting. Then after that, we had our sponsor BIMO inspection in which basically they curate all the data that we have aggregated that it has been complete and closed out without any observations. One very important thing is that we have had the direct indication from the FDA that we will have no panel. And I think that in terms of people thinking about this taking longer, this very much derisks the possibility of that taking a lot longer than we had expected. We are waiting for the GMP inspection, but there's good -- really good thing is that we are finishing the desk review. We have answered all the questions. So we are hoping that we are getting very quickly an inspection date for us. In terms of the labeling, we already started working on that in parallel. Draft has been submitted. And of course, one of the big wins for us was that we were able to confirm what the labeling of the surface of the implant will be, which was potentially a controversial thing, and that got done when we got the 510(k) clearance of our tissue expander. We've been making progress on our modules. All answers have been given to all questions in all modules. And of course, in this market, we have an opportunity to educate and differentiate because of our technologies. As I said before, all of our competitors are using technologies that date back to the last century. And by being able to provide these new technologies, we can change the equation of value for women consumers in the United States. So if you look at consumers today, they generally don't understand the benefits of each brand. It's really a commodity market. And we've been used to this. We've launched in 85 countries. And every time we go into a market, you have this commodity-like behavior. And it is our job to communicate directly with patients about those options. In most markets, we have a lot of restrictions on how we can do this. In the U.S., you can actually do it within certain rules, of course, but you can actually do a lot of that, and that is fundamental for us. When you think about the surgeons, same thing, they view all brands as undifferentiated. And that's not a surprise. Think about the surface of the implants that is more widely used in the United States by all of our competitors, dates back to 1962. And that's really rare in med tech, and that's what's happening today here. So as we move forward, of course, medical education is going to be important. They already know how to use smooth devices. And our job is going to be to teach them the benefits, smaller incisions, the ergonomic effect, softer like real breast tissue. And of course, the fact that we can use these implants above the muscle or behind the muscle without having to have more capsular contracture. If we look at 2024 and beyond, I think we're in a really good place when it comes to growth. We have the launch of Motiva in China, the continued expansion of Mia Femtech, the launch of our Tissue Expander, Flora in the United States, and, of course, the approval of Motiva later in the United States. So all of that gives us conviction to be able to achieve the target of $500 million in revenue per year. And before we had said that's going to happen in 2026. I think what we have done now because if it's a completely different situation in terms of the cost of capital and everything that we have seen is that we are adding on that. How we get there is as important as getting to that $500 million target. And that's why we will get there being cash flow positive. So thank you very much, and happy to take your questions.

Thank you for that. So just starting with the quarter, you reported sales around $31.5 million. It was basically right where you were expecting, right, where the streak was at. There clearly continued to be challenges with distributor restocking, with your end markets, but it's really encouraging to hear that, that's kind of hit the trough. But just out of curiosity and to help us kind of plot the trajectory into this year, how should we think about those dynamics that you were worried about, the end market softness, the distributor destocking through October, November, and December?

So I think it's important to understand that most likely, some of the softness that you saw in the overall aesthetics market and also in the breast aesthetics market started happening in Q2. It's just that we were coming from a fast period of growth. And when we started seeing it, it was after the summer break because at that point, we realized this is not seasonality, which we usually get. And we said, well, this is something different. So throughout that period of malaise that we had in third quarter and fourth quarter, I think there was a question about how long that's going to last. I think in the last part of the quarter, we started realizing that there was a change in sentiment from the different practices, and that gives us a lot of confidence in what we are seeing. We think Q1 is going to be sequentially higher than last quarter. And also we do expect a resumption of many of the distributors with their orders this quarter and into next quarter at different speeds, but this is going to start happening more and more.

So yes, I guess, because of that distributor dynamic, correct me if I'm wrong here, but I believe we can think of it as kind of like maybe a month 6- to 8-month inventory cycle. Normally, they -- it's not all just one bolus restocking. But because of the significant dynamic that we've seen this year, would we say that like we're set up to have a pretty strong first half because of that and then the back half might see a bit more of a market recovery, so it might be a little bit more rateable over the year?

Yes. I think as we've looked at our own internal data about where our distributors sit in terms of the inventory that they have and what we sold into them, what we think they've sold out, we are through the worst of the destocking. The pace at which they'd come back as Juan Jose was noting is a little bit unknowable, right? We have a number of distributors globally. But when we look at that data, it suggests that they're getting to the point where their inventory levels suggest they have to start coming back. But I think beyond that, as we look at the orders we're already getting here in the first quarter, we're actually seeing that demand already return. And so Juan Jose mentioned, I think we have seen the worst of this, and we do expect a recovery over 2024. Again, the pace of that is a little bit -- give us a little time to see how it plays out. But so far, we're seeing a nice resumption.

I don't want to get ahead of myself, but I think when you talked about the end market softness, you said they were down maybe like 10% to 20% depending on the geography and that you were actually outperforming that with Motiva seeing declines more in the single digits. So when I think about markets hopefully beginning to recover and everyone trying to kind of recapture that lost share, is that something that you could kind of see maybe an outsized benefit of and maybe take advantage of to kind of go after those accounts that stopped using as many implants because of this shortfall?

I think there's some of that. And also when we think about like what we see in the market is that when the distributors started destocking then in a place like APAC, it came down in the third quarter by 80%. Was the market down by 80% in Asia? Well, no. So it had this amplification of the effect of the market softness. So as it comes back, I think we'll also see an amplification on the positive side. Overall, our view is that this year, we're going to be able to gain new accounts through like initiatives like Mia. The most important clinic in Madrid that used to be in a competitor account basically is moving to all of Motiva, the entire portfolio because of Mia because they see it as the future. When you think about the approval of Motiva in the United States, it's going to have a halo effect in the rest of the world because there's still a group of clinics and plastic surgeons, it's not small that say I only use FDA-approved products, and they use that as a badge of honor. So once we get the approval, we're going to go and target all of those accounts. So there's many opportunities, I think, this year to be able to capture market share beyond these new engines of growth that we've been talking about.

So one of the big opportunities for you that you highlighted is going to be China, right? You took China out of the fourth quarter because of the timing of the approval. It came right after your earnings report. So how should we think about the contribution from China this year because the numbers that you gave us implied that roughly a little over $10 million of sales came out of fourth quarter because that initial stocking order wasn't going to make it in time. Should we think of that as something that is on track for first quarter? And then we should think of kind of normal distributor stocking, destocking dynamics after that?

Yes. So I think just for a little more context. That $10 million or so of stocking we expected in 2023 was really in the second half of the year. And so when one thinks about how that will play out now in 2024, I would think about it over that period as well. Don't expect it all to come in the first quarter. We are shipping product. There is -- that activity is picking up in China as Juan Jose noted. The launch is coming up in the next few days there. But really think about that stocking to take place over the first couple of quarters. And then as we move into the back half of the year, you'll start to see reordering from that distributor and as they continue to expand as well.

So distributor you're using in China is the same one that you've used to pretty great success in South Korea, I believe. Similar in the fact that they're in APAC, but how should we think about any potential differences, any potential challenges, whether it's just the end user or the competitive landscape? Just to kind of give us a little bit more nuance to how the China launch, like I guess, how quickly can you get to like a majority share in China like you did in South Korea?

Well, I think one of the most important things is that for Chinese consumers, they define their aesthetic aspirations through what is happening in South Korea. South Korea has been extremely successful in becoming the pioneer in many of the trends that you see in aesthetics and breast aesthetics is no different. Before the pandemic, 25% of patients getting Motiva in South Korea came from China. There's already good awareness of Motiva in Chinese consumers. And we've had similar comments from our partners in Japan, in Thailand, and even Vietnam. So what that tells you is that when they think about Motiva, they see the market leadership in South Korea as a very important factor. More than that, one of the things that our partner has done in South Korea is create this view that this is a luxury item. They've been able to communicate with consumers in a very effective way. And in that market, they've been able to take over 60% of it. If you look at every single market in Asia, it's been this exercise of going in there. Usually, market leader has been the J&J Mentor brands and us in a period of 3 years to 4 years, gaining market leadership. And we think that the way the launch has been prepared for China gives us the opportunity to follow a similar pattern. And if anything, we think that the particularities of the Chinese market make it even better for us to be able to be successful.

Pivoting away from China to the U.S. kind of those are your 2 biggest opportunities, like single biggest opportunities from a geographic standpoint going forward. You just talked about how you're really hoping to be able to convert the majority of China within a few years. U.S., a little bit different. It's been dominated by 2 players for quite a while. Hopefully, we'll get the approval later this year as planned. But how should we think about your ability to kind of take off running here as a direct market where you haven't really been able to directly sell or market your product ahead of the FDA approval?

Yes. I think we've been launching in so many different geographies, price-sensitive countries, sophisticated markets, and we see similar situations. When we arrive, it tends to be a commodity market. Surgeons don't see any differentiation and any reason to pay more. But we see 2 things that really come in our favor. One is the percentage of plastic surgeons who are used to smooth devices. Because in markets where there are mostly textured users, we need to do all of that work of doing the medical education to teach them how to properly use our devices, and that takes time and it takes resources. In the U.S., all plastic surgeons know how to use smooth devices. So our job is going to be more about teaching them the additional benefits like smaller incisions, prepectoral placement of the implant, the softer results that you get with it. So that gives us a possibility to speed adoption with less resources than we have done in other markets. And then additionally, the other thing that tends to speed our adoption is us speaking directly to consumers ahead of them visiting a plastic surgeon. And most markets have a lot of restrictions. In the U.S., you can actually do this effectively within a certain set of rules. So those 2 things give us comfort that we're going to be able to use all of our assets when it comes to taking market share. On the other hand, it is true. These are the 2 largest markets for the J&J brands and Allergan Aesthetics. So they're going to fight for it. But we have, I think, a very good understanding of what gets us there. And definitely, we're setting the stage. We've been preparing already since last year; we've been setting all the commercial operations already. We've been, with the tissue expander, beginning to invoice to get the logistics going. So all of that preparation are taking place already.