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

Great. Good morning. I'm Emily West from Goldman Sachs, and I'm excited to welcome everyone to our conference. I'm joined today with Juan Jose and with Raj from Establishment Labs, and we're excited to get going. So we'll jump right in.

Juan Jose, do you want to tell us about your background and what opportunity did you see when you founded the company in 2004?

Yes. Good morning and thank you for that question. I think it's very interesting how I think the whole situation evolved for me because I come from a family of plastic surgeons, and we're very involved in the family business from a young age. Eventually, I was trained as an economist, but then I came back and I started running my family's clinic in plastic surgery. So the -- that gave me a big perspective on what was going on at the patient level with the patients undergoing breast aesthetics or breast reconstruction. Eventually, I started a company distributing plastic surgery products. And for several years, I distributed different types of brands of breast implants. And I came very close to understanding that there was going to be no innovation in the industry. And that's when I decided in 2004 that Establishment Labs could change that. And the founding principle was that what this industry lacked was a commitment to women's health, and that's what we brought in with Establishment labs. And we did that through science, the power of engineering and eventually that led to all the innovations that you see in the market today.

And maybe we can just kind of double-click on that. How specifically are your products and technologies differentiated from competitors?

I think they're based on this principle of bench-to-bedside. This idea that you can purposely design technology with a downstream effect that you'll see eventually in patients and hopefully improve their lives. And if you think about something as simple as surface technology, surface technology is something that we completely transformed in our industry. It was this idea that you had smooth implants and textured implants, but there was no conversation around biocompatibility. So we designed the surface. So that at the cell level, you would basically be able to reduce the inflammation, and that would lead to less fibrosis, less capsular contracture and eventually less of the other problems that we see that are related to information like anaplastic large cell lymphoma, squamous cell carcinoma and other type of B-cell lymphomas. And that was done in the lab early on, and now years later, what we see downstream is that the rate of complications related to that has never been seen before. And that's the type of things that we do. And we do that not only on the safety side. We also do it on things that are important to patients. Though most patients in this industry are elective, even in breast reconstruction, women elect not to have a breast reconstruction based on problems related to safety, but also on the aesthetic outcomes. So we've done a lot of things on the aesthetic outcome side with regards to creating the first ergonomic implant in the world, so ergonomic as in comfortable because you're wearing these things every day, so you want to make them comfortable. And what we've recently brought to market with minimally invasive, I think, has the same transformational effect.

Right. And how do you specifically approach educating surgeons and patients about kind of the differentiated parts of your products?

I think it changes from market to market because of compliance rules are very different. But if you take the surgeon side, in the international market, most of the education is about how to transition from the traditional textured devices, which was what most plastic surgeons in the international market were using to smooth-like devices like ours. And that takes time. A lot of these surgeons have used this textured devices for a very long time. So you have to like basically reteach them. In the scientific societies for a long time, we're not doing that. So we have to take like basically detask of doing this. In certain countries, we can go faster with that because surgeons are more open to education -- in some markets like, for instance, Brazil, where they're very committed to textured devices, it takes longer. On the patient side, I think it's one of the most interesting things because our story has always been one story in which patients get very involved. If you look at our social media handles, the amount of engagement that we have with potential patients is very interesting. And what that creates eventually is that patients are asking plastic surgeons about our technology. In many markets, we cannot do an effective communication directly with consumers. But for instance, in the U.S. is one of the things that we will be able to do. And that usually gives us speed. When you look at our market share data, usually the best market share data that we have are in countries where we can communicate more effectively with patients.

Great. And maybe building on the market share point, what can we -- what can you share with us about the market in terms of relative penetration, the dynamics, what's driving growth in the aesthetics market today?

Yes. I think I'll let Raj go with through like some of the percentages and the size of the market. But what I would say is that what we've been able to prove is that a non-commodity product and what used to be a commodity market can thrive, and we've done that at different price points. We have this view that there's a consumer for different price points in breast aesthetics, for instance. And our job is to bring with the same level of safety, different type of aesthetic benefits. And we price those. We just launched our JOY.(dot) program just in the last month. And what JOY.(dot) does is allow us to use our latest technology, ergonomics to or what it is a super minimal incision, which provides for a smaller scar, and women love that. So eventually, it's not only about the number of procedures, but the price that we can extract from each one of those procedures. And what we are doing with innovation is basically add to that. And maybe, Raj, you can talk about like the size of market and market share.

Sure. Yes. I think if you look at the global market for our technologies, it's estimated to be between $2 billion and $2.2 billion, something in that range. Most markets we go into is, Juan Jose noted, we strive to be market share leaders. And in most markets, we are between 25% and 50%, some even higher than that. And so if you think about the next couple of years, we've now entered China earlier this year, the second largest market in the world. We're going to the United States, hopefully, very soon, the largest market in the world. And so we are on the cusp now, I think, of essentially penetrating the entire market and then pushing towards those types of market shares, which and we've already achieved in most of the markets we've gone into.

Great. And maybe anything else you want to add in terms of how you're thinking about geographies specifically. So in terms of China is an important market. Any other markets you want to highlight?

Well, I think China is definitely one of the most interesting things that we are doing this year. China has most dynamic growing market in breast aesthetics. It kind of like had this deep during the pandemic, but it's coming back, and we expect it to be back at pre-pandemic levels by next year. The other part of the Chinese market that is very interesting is that it's a market in which women really value the quality of the products. And they're willing to make the effort that is necessary not only on the financial side, but also taking the time off to be able to have these procedures. And because they have this view that this is almost like a luxury treatment, then they command some of the highest ASPs in the world, and that's usually surprising. Definitely, the U.S. is by far the biggest market right now and one in which we will strive to become market leaders as quickly as possible because our technology has a differentiation, and it's very well adapted to this market. But beyond the geographical expansion, there are the things that we are doing to transform breast aesthetics and also breast reconstruction. In breast aesthetics, we have our minimally invasive program, which I think is so interesting in so many different ways on how we can attract new consumers to breast aesthetics. And in the breast reconstruction side, I think we're changing the way that breast reconstruction is defined. And with that, I think bringing more women into breast reconstruction is one of our big tasks.

Great. And so maybe shifting gears a little bit. Huge congrats on the announcement last week with the FDA announcing that the PMA for Motiva Implants is approvable, pending inspection. Maybe you can share with us a little bit, just an update, what are the kind of last steps for the approval process? And when do you expect launch in the U.S.?

Yes. I'll take the opportunity to talk about one of the things that might be missing from that conversation. And that is that in the normal cadence, we would have had the inspection. And after the inspection, we would have had a period of 3 to 6 months in which we would be basically finalizing the discussions around the clinical data so we can finish the labeling and also a discussion around post-market studies. And now that we were able to close that before the inspection, it completely takes away that period of time. And I think that's one of the most exciting things about what just happened. And it is important to really point that out. For the inspection, we're absolutely ready. Our team has had so many different inspections over the last 14 years by high vigilance authorities. So once they get down our facilities in Costa Rica, we will have the inspection, which takes place over several days. At the end, you have a basically an in-person meeting in which they report to you any nonconformities, and you address them so that it becomes acceptable for the agency to allow us commercial activities. So there's some paperwork that will go in there but we're literally in the last step.

And what about specifically on the commercial preparations and the commercial organization. So we saw the recent hire of Jeff Ehrhardt. Anything else you can share with us about the commercial team?

Yes. I think it's important to say that we've been preparing for quite some time. So all of our commercial operations are ready we're actually currently shipping and invoicing our Flora Tissue Expander to several hospitals in the U.S. So we've been testing our systems, our logistics. All of that is in place. And now we're with Jeff, I think we have a phenomenal Head of North America. He's got so much experience, he used to lead plastic surgery for Allergan Aesthetics. He was there for 25 years. Really brings so much in terms of the relationships with the plastic surgeons, and he's building the team. So Anne Pugh is going to be our head of sales, again, someone with a lot of experience from the industry and knowledge of the U.S. plastic surgery community. And as we add more sales reps, we already had sales reps for the Flora Tissue Expander. I think what you're going to see is that we're matching as closely as possible, what we are doing in terms of the regulatory path and the commercial path. And I think we're going to be in a really good place. These recent announcements on the regulatory side that are derisking our approval allow us to be a little bit more aggressive in the pace of hiring in the U.S.

Great. And what about some of the next-generation products like Mia and their timing for entering the U.S. market?

Yes, I think it's interesting in the very few opportunities that we've had to speak to U.S. plastic surgeons at some conferences that we've been invited to. It's interesting to see how about half of the questions that come to us are about Mia. I think it's so exciting and the plastic surgeons, they see it. They see that minimally invasive can transform breast aesthetics. And when we talk to them, they say, look, I love this idea of Motiva, but I want to have access to Mia. So we're very committed to bringing Mia to the U.S. Mia is part of a platform called Ergonomix2. That's our second-generation ergonomics technology. And with the approval as a supplement, hopefully, of Ergonomix2, we would be able to unlock 2 programs, JOY and also Mia. Our regulatory experts believe this is something that would take around 18 to 24 months. But we haven't had that conversation directly with the agency. I think that's going to happen shortly after we receive approval. We've been really focusing all of our airtime on the current approval. But with that, we will have all the necessary information and we'll be able to be more precise on the timing.

You kind of touched on it, but anything else you would add in terms of specific feedback from plastic surgeons when you talk to them about what Mia is bringing to the market? And what do you think surgeons are really looking for with what they have available today and what Mia can offer?

Yes, I think there's something very interesting. There's a first a lot of curiosity from plastic surgeons because, of course, they've seen their peers in other surgical specialties go sometimes [indiscernible] minimally invasive. So when you think about breast aesthetics and breast reconstruction, they've been some attempts to go minimally invasive, but they've been very complicated. Like when you try to do endoscopic breast aesthetics. It requires a lot of equipment. It actually lengthens the time of the procedure. You're still under general anesthesia. There are so many things that are not part of a better experience for both surgeon and patient. And Mia cuts right through all of that. And of course, there can be some healthy skepticism from some plastic surgeons, like how do you achieve this in just 15 minutes. How can you get rid of general anesthesia? There all these very interesting things. But the feedback from the plastic surgeons that are now part of this network of Mia clinics, is just an amazing thing. It's just that it is transforming their practice, just the fact that they are speaking to their patients during the procedure is something they've never done before. So I think with time and as the awareness about Mia goes wider, both in plastic surgery circles and also in the awareness from consumers. I think we'll see more of a push towards minimally invasive.

And I think when we think about the breast reconstructive market, I think a lot of people don't realize how big that is. What can you share with us just about breast reconstruction is 25% of the global market today, it's a larger share of the U.S. get. How are you targeting that market specifically and beyond the tissue expander, what are the other products that could be used in reconstruction?

We are totally committed to the transformation of breast reconstruction. We think there are many opportunities there. And it's interesting that you say like in the U.S. the size of the market for breast reconstruction is higher in terms of total share than the rest of the world. And that is because in the rest of the world, the percentage of women that have access to breast reconstruction is so much lower, in many countries, we're talking single digits. And then when you go to more advanced societies like in Europe, it actually doesn't go up to more than 50%. So there's still a lot of work to be done even in countries where you have access guaranteed by the public health system. A lot of women elect not to have breast reconstruction because they don't agree with the quality of the results. So what that tells you is that outside of the United States, there is this huge opportunity to grow breast reconstruction. And that's what we are doing with our concept called aesthetic breast recon. And what aesthetic breast recon does is using technologies just like Flora and some other technologies that we have been working on, then you can actually make breast reconstruction easier to perform by the reconstructive surgeons but also make it more accessible in terms of how you can scale it, but also the cost that it can have for the public health system. So this is something we are working on. And Raj, maybe you can comment on the U.S.

Yes. I mean with the size of the U.S. market, there's roughly 100,000 implant-based reconstructions, and those use a tissue expander, which you can think about $1,500, $1,700 kind of the price point for those. You're talking about a market just for tissue expanders, which is $150 million to $170 million. And then there are implants used in those procedures that are about that same size, about 1.7 procedures -- excuse me, implants per procedure, which given the ASPs in that market, it's about another $170 million or so. So right there, you're talking about a market that is approaching $300 million just in breast reconstruction. So again, the opportunity is there. And certainly with Flora now, which we've launched in the United States and the benefits of that technology versus anything else available in the market is just profound, and we're seeing really strong interest in that and traction with that product.

And maybe, Raj, we can spend a minute on financials. How is the company thinking about kind of path to profitability? And when do you expect to be cash flow positive?

Sure. So with the -- it was a slowdown in the market last year, we took some meaningful changes in terms of our cost base towards the end of last year. And I think you saw the benefit of that just even in the first quarter of this year, where our EBITDA loss improved to a less than $4 million, and that was a quarter which was our lowest revenue quarter of the year. And so we're already showing that the base of expenses that we currently have for our core business is already getting towards profitability on an EBITDA basis. And we've talked about that business getting to be EBITDA profitable by the end of this year and then cash flow positive early next year. So the base business or the core business, which is really everything outside the United States is already well on its path to do that. When we think about the spending in the United States, which is necessary to sort of stand up that business and get it ultimately to where it is also cash flow positive. On approval, we have access to an additional $25 million of capital through our current credit facility and then another $25 million that becomes available when we achieve a certain revenue milestone. So that additional $50 million that we get from the sort of pending the U.S. approval will more than pay for what we have planned in the U.S. to get that business to cash flow breakeven. And when you think about the U.S., it's probably about a year plus or minus that, that business will be loss-making before on an operating basis gets to breakeven. And so when you put those pieces together, outside the U.S. business that's already on its way to profitability and a U.S. business that we'll be loss-making for a year, perhaps but then having the capital to fully fund that U.S. business with this additional debt that we can take down under our credit facility, we feel in a very good position that by the middle towards the end of next year, we should be where the entire company is breaking towards cash flow breakeven and profitability.

Right. Maybe Juan Jose, how does -- you've been a founder of the company for almost 20 years. How does being a founder influence the way you lead the company as a CEO?

I think probably the most important thing is the pride of ownership that you bring to the company and the constant reminder of why we created the company in the first place. So I think throughout all these years, what you see at Establishment Labs is this amazing wave of innovations that have come one after the other, but it was never changes our commitment to women's health. And now we talk about that as Femtech and it's kind of like Women's Health 2.0 it's much more advanced and it's the way it's communicated, the narrative. I think it's better for the consumer to understand. But in general, it is that. It is that idea that you own this business and you have to make it happen. This year is going to be 20 years since the founding of Establishment Labs. And it's interesting that it's kind of like coinciding with our process in the U.S. because that was one of our dreams right at the beginning is like -- and we make this a true global solution and now it's actually happening.

An incredible journey over the last 20 years. And so thinking about the forward, what is the vision for the company, the next 5 years, the next 10 years, where are we going?

I think we can be the company that elevates plastic surgery to a different level. I think plastic surgery used to be this very innovative specialty. And over the last 20 years, kind of like loss of it's -- I think it requires technology to be able to match the creativity and the expertise of the plastic surgeons. And what happened is you had these companies that used to focus in plastic surgery and then they started to give all this technology to dermatologists and medical aesthetics and now even med spas, so the plastic surgeon has lost its edge in terms of technology. And what you see is like so often, it's almost like they have to be creative because of the lack of technology. And what I think we can bring to a plastic surgery is a wave of innovation so that you have technology under side. And already with minimally invasive, I think it shows that the market can be so much bigger, already in our first group of Mia clinics, we're proving that there's a market expansion of 37%. And I think with time, that will increase. There are so many more opportunities in plastic surgery. Last year, we gave the news that we have a program to transform gluteal aesthetics. There's about 800,000 of those procedures every year around the world. With technology that is not very safe. And I think we can change that. And beyond that, I think we have very good ideas about other things that we can do within plastic surgery that can bring a lot of value.

Great. Awesome. Maybe to wrap up. Any final thoughts, what excites you every day about getting up in the position you are today getting to be CEO of the company?

Well, I think one of the most important things for us is that we see every day the effects of our technology in the market, and that is very rewarding I actually make it to see surgery every month, I see several different procedures. When I'm able to -- watching a breast reconstruction is amazing, later this month, I'm in Paris because we're doing this new program about minimally invasive breast reconstruction. So those are the things that really matter because that's when we renew our commitment with technology to be transformational in every side of our business.

Great. Well thank you both for joining us, and we really appreciate the time and hope everyone has a great conference. Thank you.

Thank you.

Thank you.