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

Well, thank you all for joining, and welcome to the UBS Global Healthcare Conference. I'm Connor [indiscernible] from the Global Healthcare Banking team, and I'm joined today by Establishment Labs. On my right is Raj Denhoy, CFO and joined by Juan Jose Chacon Quiros, Founder and Chief Executive Officer. For starters, why don't you guys just give us a company background, the company vision, how you guys fit into the broader medical device aesthetic space for us?

Yes. I founded this company 20 years ago because I saw the need to bring technology into the breast aesthetics and breast reconstruction space. And we did so with an angle of women's health. If you think about like what was going on in those years, the U.S. was coming out of a moratorium in breast implant technology. And you had 2 companies that basically were leaders in the market, but not leaders in technology. And what we did is fundamentally rethought the entire technology base. And since 2010, when we first went to market OUS until today, we've proven that a completely different set of technology can move markets and can create new opportunities for growth.

Great. And you guys just reported earnings last Friday, you want to give the audience a quick summary and download.

Sure, happy to do so, and thanks for having us. So we did report our third quarter results last Thursday. We grew about 4.5% on the top line, which matched our expectations. But we had a number of, I think, very positive updates on the quarter. As it relates to our operating expenses and the way we've been managing the business, we were able to reduce our cash burn from north of $30 million to less than $15 million in the quarter. EBITDA loss went from $16 million to about $7 million. We've made some significant improvements over the last 9 months or so in terms of head count reduction. We shuttered one of our manufacturing facilities. And importantly, a lot of these improvements in our operating structure have been while we've been investing in the United States. So all of those are net of what we've been doing as we're preparing for the launch in the United States. We gave some very positive metrics on the United States and some of the early experience there. We've been on the market for about 3 weeks as and when we reported and we already had over 250 accounts we've signed up in the United States, 70 of which had ordered from us. We were onboarding 15 to 20 new accounts per day. So the U.S. is off to a really strong start. We also announced that we had shored up our balance sheet. We had brought in some additional capital that was led by the Qatar Investment Authority. We put in $30 million plus a couple of other investors, and we brought in about $50 million and we also updated our financial forecast. So we gave an initial outlook for 2025, which rolls up to about 25% growth for us overall as a company, being driven mostly by the United States. So again, I think a very positive update for the company and setting ourselves up for a really good 2025.

Yes. And congrats on the FDA approval. I know that was a long time coming. Maybe take us through that process over the years and how it sets you guys up for success going forward?

Yes, of course. So in 2010, when we went to market, we started in the international market. And we grew in a very entrepreneurial fashion, but we always continue to innovate. So pretty much every 2 years, we brought out a significant innovation that has gone to market. And by 2015, we realized that we needed the capital necessary to be able to go under the PMA process because it's an investment of over $50 million. So once we were able to do that, we started our clinical trial. Basically, these is over 800 patients that are being followed in different cohorts for aesthetics and reconstruction. And -- we announced our 3 years results last year in our 4-year results of the study this year with numbers that have never been seen in this industry, basically, an order of magnitude better than everyone else. And with that, the FDA on September 26 gave us the approval for the PMA. And on top of that, we also have a clearance for our tissue expanders that are used in breast reconstruction. So now we are playing in the aesthetic space with Motiva implants and with our Motiva Flora tissue expander in the reconstruction space.

Got you. Yes, it's very impressive. I think the athletic space in particular, is one where product safety and product efficiency is very much valued and very much in process in terms of the industry as a whole. Could you talk about some just general operating initiatives that you guys have emphasized to deliver such good clinical results and safety from a product and technology perspective.

Yes. When we started our work in R&D and the development of this technology, we created this patient-centric risk-benefit analysis. And what that allowed us to do is to make sure that we were making the right decisions when putting these products together. So one of the most important things is what we've done in surface technology. So we have this patented surface architecture that basically is slow inflammatory. Because it is slow inflammatory, not only you are reducing the risk of capsular contracture, which is basically body's over reaction to a foreign object. So if you look at the rates of capsular contracture, in our primary augmentation cohort in our study, they're less than 1%. If you look at our post-market surveillance, now at 14 years, almost 4 million devices, also less than 1%, very consistent. But beyond that, what the surface technology allows is to put the implant basically above the muscle and not behind it. So if a surgeon believes that there is no need to put it behind the muscle, then they have new options. And of course, in aesthetics women are very active physically. Do they want to sacrifice their pectoralis muscle unnecessarily? Of course, not. So it's creating these new options and this new level of softness that is in the outcomes in breast aesthetics so important to patients. Beyond that, I think one of the most important things we did is create this very strong foundation for our implants. It's called the monoblock and with that, basically through better chemistries, better manufacturing processes, we are able to reduce the reoperation rate for implant rupture. So again, now at 14 years and also in our U.S. clinical study, rupture rates of less than 1%. And that's how this company is making a difference. All the way to now bringing to market outside of the United States minimally invasive breast aesthetics, which is game changing in every sense of the word.

Yes. Great. Maybe pivoting to commercial strategy. I know you guys just received FDA approval for the product launchs underway, but maybe touch on your guys' commercial strategy efforts as you think about different markets globally from Asia, Latin America, the U.S., et cetera?

Well, we're now in over 85 countries all over the world. We launched in China earlier this year and now the United States. So we're truly now a global company when it comes to our commercial footprints. And one of the most important things is that after several years in each market, what we see is that this technology is changing the way surgeons are doing their procedures. And more and more surgeons are asking for our products and using them day to day. So that market leadership of course, has been taking place around the world. And we believe that with our strategy in the United States, it's a matter of time until we reach that market leadership. So we've been hiring the sales reps since our launch. We are now at 32 sales reps. Before the end of the year, we should be at 40. And next year, we will add every quarter more sales reps as needed to command our growth and eventually achieve market leadership.

Great. And looking into 2025 on the commercial side, what key themes are you guys going to look out for, whether it's consumer appetite, physician activity, really anything top of mind for 2025 across the market?

Well, I think one of the most important things is that in the last 18 months, there's been a particular softness in many markets around the world. And yet, in our core business, we will grow this year in Europe, Middle East, Africa, we will grow in Asia Pacific. Latin America has been the most affected by macroeconomic conditions and especially Brazil. But if you look at even within those macro pressures, we've been able to deliver good results this year. Of course, next year, the opportunity will be for the LatAm region to improve. But we are being very careful in the way we are establishing our plans for next year because we have many potential upsides when it comes to our minimally invasive platform, markets continuing to stabilize and us continuing to take market share. On top, of what we can do in growth -- new growth in China and the United States.

Got you. That's great. And I guess we just had an election last week. As we move into a Trump administration more on the supply chain kind of manufacturing realm of things, how do you guys expect to manage that? And what expectations do you have just from a supply chain Trump administration perspective?

Well, I think one of the most important things is that all of our manufacturing is consolidated in Costa Rica. Costa Rica has become a hub for med tech manufacturing for companies across spectrum of med tech. And what we do is we import many of our raw materials. In fact, our most important raw material comes here from California. And with that raw material, we are processing it and eventually getting the silicon implant technology that we then export around the world. So we don't expect any particular effect in our business. These are medical devices. I don't think there's an appetite to tax health and definitely, we are ready to continue improving in our manufacturing efficiencies in our 2 manufacturing plants in Costa Rica.

Got you. Makes sense. And you touched on the point around minimally invasive technology products that you guys have. That's been a very common theme as just general medical devices, advance themselves and innovate. Could you touch on that? I think the Mia Femtech is a key product within your portfolio, but how do you guys see that playing out the next couple of years? Do you expect it to be growing quite a bit as consumers look for minimal invasive user-friendly technologies?

We absolutely believe that minimally invasive is going to take over breast aesthetics. It has already taken over aesthetics in general. What you see is a move from the more invasive to the minimally invasive or noninvasive. So consumers are demanding that. In breast aesthetics, there just wasn't the technology there for it. And what we did, we started this program 10 years ago, and over the years, we've created a different chemistry so that these implants can be injected basically. And we use a balloon technology to create the space and then our implants are made in a way that they can be safely deployed through a very small incision. And that allows for not only moving away from general anesthesia, the recovery is unheard of, basically women minus the exercise or keeping their lifestyle. And it's a different also set of efficiencies for the clinic because these procedures are taking 15 minutes. The patients are quickly discharged. So it helps them a lot in the way they're thinking about it. But our market research shows that eventually in terms of number of procedures at peak, minimally invasive should be as important as the current market that we see. Beyond that, we've been able to prove that this is a new category that there's a willingness to pay that is much higher, 30% to 50% in our year one in the clinics that are doing Mia. On top of that, the consideration time goes from 3 to 7 years in traditional breast augmentation to less than 2 months in minimally invasive. And beyond that, there's the market expansion. In our first year, more than 40% of the patients were not looking for a traditional breast augmentation. And in a market that has been pretty flat for the last 20 years, that's really exciting.

Yes. Very exciting. Maybe pivoting to just growth as you guys look forward. Can you share kind of some perspectives on growth strategy, whether it be organic R&D innovation, whether it be M&A, what's kind of top of mind as you look over the next couple of years?

Well, what we see is that our focus in breast aesthetics and breast reconstruction is based on the technologies that we have at hand and also this very rich organic pipeline that we have created over the years. So we've been really good at understanding market needs. And because of that, we've developed things like minimally invasive. Our tissue expander technology is the only tissue expander that is out there in the market that allows for MRI during the expansion process of the breast reconstruction. So these things are changing their paradigm. And as we think forward, we believe that there's still a lot of growth that is going to come from breast aesthetics and breast reconstruction. We also have a program what is called gluteal aesthetics, gluteal ergonomic modeling. Basically, there's about 800,000 of these procedures every year around the world. but there's no good options. In fact, you go from not only having a morbidity rate, but pretty much 100% reoperation rate in those indications. And with our minimally invasive program for gluteal ergonomic modeling. We believe that we will be able to create a new market. So we are currently in a clinical trial and as those results come, we feel very enthusiastic about what it can become in terms of growth for years to come.

Got you. And as we think broadly about -- I think you guys quoted about a $2 billion or $2.5 billion TAM just as you think about the just women's health aesthetics market that you guys operate in. Do you expect over the next couple of years it to be the growth in the market to be uptake in new customers, new people using your technology? Or is it taking market share from other folks. What's kind of down between the market going forward as it grows?

Well, I think there's a lot of space for us to take market share from our peers, especially here in the United States and in China. Those are the 2 largest markets in the world. And basically, with the approvals that we've gotten over the last year, we're basically tripling our TAM. So there's a lot of growth ahead on that side. And then, yes, the market expansion that can take place from a minimally invasive, both in breast and also in gluteal. Those are fundamental to what can happen in terms of real, fresh, healthy growth for the years to come.

Got you. And maybe thinking even longer term, the next 10, 20 years, what does that look like for Establishment Labs?

Well, I think we continue to innovate in every sense of the word. Our programs are transforming plastic surgery. And we think that there's a lot of space for growth in plastic surgery. If you think about like the effect of GLP-1s in aesthetics, there's a limit to what you can do to patients that experience, for instance, facial wasting after having Ozempic or other GLP-1s. You also have breast wasting, you have gluteal wasting, in those patients, they become aesthetic patients. But there's a limit to what you can do with noninvasive. So there's a big opportunity with what you can do in plastic surgery to give the level of efficacy that these type of patients need. So we think that there's going to be a lot of opportunities in that space. And of course, being a company that is already in plastic surgery, we expect to create technologies that will address those needs.

Got you. Let's see what else. Maybe as you think about guidance for the next year, I know you guys disclosed that within your last quarterly earnings, but anything else you want to share?

Sure. When we gave a first outlook for 2025 on our call last week, importantly, it wasn't guidance, right? It was an initial outlook that we provided for a couple of reasons. The first being that it gives us a conservative target against which to budget. So part of what we've also guided towards is that we expect to become EBITDA positive next year and then cash flow positive the year after. And so as we looked internally at the types of revenue that we needed in order to build an operating expense base against that, we set out with what we view as a very conservative target for 2025. And what's incorporated within that is mid-single-digit growth outside the United States and then a minimum of $35 million in the United States. But as we think about that outside the United States piece, I think it's important that, that mid-single-digit guidance that we gave is a very conservative first cut at it. As Juan Jose noted, there are still some challenges in the market in certain areas, Latin America being the major one. We've assumed no recovery there. We're assuming that the markets generally are performing as they are now, which is frankly okay. We continue to take share, but we're not assuming a strong recovery. So we've set what we believe is a very conservative start to next year. And frankly, we expect to exceed it as we move into next year.

Great. What else should I be asking.

Well, I think it's important to to understand our path to profitability. And Raj, at the beginning was mentioning all the improvements in terms of the financial metrics. And on top of that, I think it's -- that all of those improvements have happened at the same time that we are heavily investing in our U.S. launch. And beyond that, the U.S. has the highest average selling prices for our products in the world. So when we think about the future, it's improving gross margins, improving revenue, more efficiencies and that's how we get to our first EBITDA positive quarter next year and then into profitability in '26.

In terms of getting to profitability, what are the key initiatives that you guys are most focused on internally? Is it product launch? Is it commercial?

Yes, I think as Jaun Jose mentioned, we've been doing a lot of internal efforts over the last 9 months to a year, really getting the business in a much more efficient footing essentially. And we continue to do things. As we mentioned, we closed or decommissioned one of our manufacturing facilities just a month or so ago, we were reducing headcount. We've been really focusing the organization on the areas that are offering the best return from a growth perspective. And that will continue. But you can't overlook simply how important to launch in the United States is as Juan Jose was noting the ASPs here are significantly higher than any place else in the world for us. Yet the cost of manufacturing product for the United States is essentially the same. And so you'll see a very pronounced improvement in our gross margin as we get bigger in the United States. And as we rightsize the organization against that, the profitability will start to come through.

Great. Any other closing remarks?

Well, I think that when we think about 2025, we think about a year in which all the things that we've been working for over the last 20 years since the founding of the company really come to life. This ability to sell into the United States, highest average selling prices in the world for us as a direct market. China, highest average selling prices in the world for a distributor market. And all the things that we are doing to improve our efficiencies. our innovation pipeline is organic. We don't need to go out there to buy anything for it. So all of these things will come to play in 2025. And of course, we're taking a conservative outlook because we think it's the right path for our planning. But absolutely, we believe that next year is going to be a real watershed moment for a company in the execution of our strategies.

Great. I think it's a great place to wrap it up. Thank you guys for joining. Thanks a lot for taking time.

Thank you.