Greetings and welcome to Establishment Labs' First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. It is now my pleasure to introduce your host Raj Denhoy, Head of Strategy and Investor Relations. Thank you, sir. Please go ahead.

Thank you, operator and thank you everyone for joining us. With me today are Juan José Chacón Quirós, our Chief Executive Officer; and Renee Gaeta, our Chief Financial Officer. Following their prepared remarks, we'll take your questions.

Thank you, Raj and good morning everyone. I hope everyone is healthy and continues to remain safe. First of all, we would like to express our sympathy to everyone around the world suffering from the effects of the pandemic. We do business in more than 80 countries including India, Thailand, Costa Rica, and others that are currently experiencing a surge in cases. We continue to support our employees and communities through this difficult time and we look forward to improving conditions in these hard-hit areas over the next coming months. Now, turning to our business performance, 2021 first quarter revenue was $30.3 million, a new record for our company. First quarter revenue increased 24% over the first quarter of 2020 and was up 13% sequentially from the fourth quarter of 2020. Our singular focus on women's health and the superior aesthetic and safety profile of our Motiva platform continues to resonate in the marketplace. With our strong start to the year and the significant momentum in our business, we are raising our full-year guidance for 2021 to a range of $118 million to $122 million. This is a substantial upward revision from our previous guidance of $110 million to $112 million. This updated outlook represents growth of 39% to 44% over 2020. As always, and especially during a pandemic, we are going to be conservative with our guidance. Renee will provide additional detail on our first quarter performance and updated outlook in a moment. Before I turn the call over to her, I'd like to provide an update on recent events as well as key initiatives underway at Establishment Labs.

Thank you, Juan José. The significant momentum we saw at the end of 2020 continued into this year. We saw strong growth again in sales this quarter to a new record level and our operating expenses and cash are being managed effectively. Total revenue for the quarter was $30.3 million. Direct sales were approximately 42% of this total, while distributor sales, which can fluctuate based on changes in inventory levels and the timing of reorders, made up the balance. From a regional perspective, sales in Europe comprised approximately 42% of global sales, Asia-Pacific and Middle East was 31%, and Latin America made up the balance. Brazil, which is our single largest market globally, accounted for approximately 11% of total quarterly sales. Our reported gross profit for the first quarter was $20.1 million or 66.2% of revenue compared to $15.5 million or 63.2% of revenue for the same period in 2020. Our gross profit this quarter also improved from the 54.3% reported in the fourth quarter of 2020. The year-over-year increase was due to the growth in revenue and better absorption as our production volumes increased. Average selling prices in the first quarter improved slightly from the year-ago period. As we saw in this quarter and last, there will be fluctuations in gross margins. We continue to believe the best way to gauge our progress is on an aggregate basis over time and we remain comfortable with gross margin in the low 60% range for the near-term. SG&A expenses for the first quarter decreased approximately $850,000 to $18.1 million compared to $19 million for the first quarter of 2020. SG&A in the first quarter was consistent with the level reported in the fourth quarter of 2020. Our R&D expenses for the first quarter decreased $150,000 from the same quarter a year ago to $4 million. R&D expenses were down approximately $400,000 from the fourth quarter, due to timing of clinical trial and other expenses.

Thanks Renee. We are off to a very good start this year. The record revenue we generated in the first quarter and recent developments in our industry show again that Establishment Labs is on the right path to be the leading company in breast aesthetics and reconstruction. However, we are not satisfied with just taking share within the current breast implant market. We are focused on fundamentally changing the patient journey in breast aesthetics and reconstruction through innovation, science, and technology. Motiva Mia has real potential to transform breast aesthetics and the launch of Motiva Flora this year will mark our entry into the breast reconstruction segment, where we see an opportunity to improve outcomes for the millions of women diagnosed with breast cancer each year. As perceptions change and as new possibilities become available, the total addressable market for our technologies could grow substantially. I want to close by noting that with operations in over 80 countries around the world, we are mindful in these times that things remain unsettled and challenging for many. I want to thank the entire Establishment Labs' team for their dedication to our mission of improving women's health.

Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Josh Jennings of Cowen. Please go ahead.

Hi, good morning. Thank you for taking the questions and congratulations on another record quarter. I wanted to follow up on your comments regarding the share report and was hoping you could clarify the path forward concerning international regulatory decisions and the potential for individual countries to process the share report and implement any regulatory decisions or restrictions. Are there any ongoing processes in any regions? What should we anticipate regarding the share report results over the next 12 months?

Thank you, Josh. The key takeaway from the share report is that it is now acknowledged that there is a causal link between textured breast implants and ALCL. Physicians in the European Union need to inform patients about the potential risks associated with these devices based on this information. In the future, patients may believe they can take legal action against physicians if they feel they were not properly informed. Moving forward, the European Commission may initiate legislative action, but local health authorities can make decisions independently in the meantime. While I don't anticipate immediate changes, it's crucial that we continue to demonstrate that the safety of Motiva implants is unmatched, and an increasing number of women globally are requesting their surgeons to avoid textured devices. The shift toward smooth implants is evident, with Motiva representing the most advanced technology available. Other regulatory agencies outside the European Union may also make decisions based on the report, but we currently have no indications as to which countries might act or when those actions may occur.

Great. Thanks for laying that out for us. Then I wanted to follow-up just on the U.S. IDE trial for Motiva to your follow-up data or follow-up for the entire primary augmentation cohort and revision cohorts. Can you just help us understand the potential paths of releasing that data to the public and the potential to submit to the FDA on your data? Thanks for taking the questions.

Yes, thanks, Josh. So, we have now half of our patients that have passed the two-year mark in aesthetic cohorts. We're very happy with our follow-up rates. And that's been quite a challenge to do so during the pandemic, but the fact that we were able to move to virtual consultation quickly and get the approval from the FDA for that has definitely helped to keep those numbers where we want them. So, we certainly want to share our data and we will have this fall all of our patients in the aesthetic cohorts at the two-year mark. But we have to be mindful to keep the regulatory propriety. And at the same time, we want to be as open as we can. The company is always sharing data. We recently released our latest post-market surveillance report with 1.6 million implants at now more than 10 years and keeping the same trend as we have had in the past. But we'll keep you updated as we get closer to that two-year mark.

Thank you.

Thank you. Our next question is coming from Ross Osborn of Stephens. Please go ahead.

Good morning. Thanks for taking my questions. So, I wanted a couple on Mia. As the company continues to generate clinical and consumer data related to Mia, how do you envision positioning the benefits of Mia relative to traditional augmentation surgery in the marketplace without undermining or cannibalizing traditional breast augmentation procedures? And then just kind of going off of that, what are some of your learnings to date? Do you envision Mia being utilized in reconstruction procedures? Or do the delivery technique and implant placement limit adoption in cases of highly radiated tissue activity? And then are there any inherent limitations that preclude the use of Mia in reconstruction?

Yes, thank you. I'll try to answer all of those. So, we just finished our 100 patient series and just reiterated what we spoke about in our Investor Mia and that is that this procedure has the potential to truly transform breast aesthetics. We cite that market at 1.9 million patients per year and one of the interesting things there is that half of those patients are new patients, patients that would not go for traditional breast augmentation. But definitely there's the other half, which are patients that have the awareness and are interested in traditional breast augmentation, but when they see Mia, the appeal to that procedure and the benefits of it, general anesthesia, the fast recovery, less pain, a procedure that takes less than 15 minutes, going back home within 30 minutes after the procedure is over, all of that is very appealing. So, I think it's more of a case of positive cannibalization and because there will be upgrading the procedure. So, we will take that all day long. Now, when it comes to breast reconstruction, at this point, Mia is designed for aesthetics. Do I see a path for minimally invasive in breast reconstruction? Definitely, yes. But Mia is designed and will be an aesthetic procedure.

Okay, that makes sense. Thank you. If I may, regarding the competitive landscape and the changes in the environment, are you noticing more direct price-based competition, or is there simply a lack of focus from competitors? Additionally, I would like to hear your thoughts on ultrasound as a potential long-term competitive threat to SS RFID technology.

Yes. The importance of our safety profile, I think is increasing every day as awareness levels among patients rise. So, to us, that is perhaps the biggest driver to convert the resurgence, especially during this time of the pandemic, where it's actually pretty difficult to go and do face-to-face visits and medical education is still mostly online. The most important thing for us is being patient-centric; there are things that we do with our implants that others cannot. So, to give you an example, the fact that our implants are RFID-enabled gives women the power to fully verify after the operation exactly what implant they received. In many geographies, this is a very important factor, and it's called women's empowerment, the fact that they have full control over that decision and they can verify it. So, I think many companies may look at that as a positive and may seem to find other ways of achieving that goal. At the FDA panel on breast implant safety, the FDA expressed its concern over the fact that most women don't know what devices they have in them and that's why the RFID enablement is so important. So, we continue to work on our next generation of RFID technologies. What you saw on the Flora already is a great improvement, the fact that we were able to use RFID technology and get rid of old metals and magnets in a tissue expander. That's going to have an effect on protocols; it's going to improve women's health, and that's where we are.

Thank you and congrats on a great quarter.

Thank you.

Thank you. Our next question is coming from Anthony Petrone of Jefferies. Please go ahead.

Thank you, and congratulations on a strong quarter. I have a couple of questions about volumes in general that you're observing and a few specifically about Motiva Mia. Regarding volumes, can you quantify how much is coming from a relatively higher level of discretionary spending? We are hearing from the refractive side that a key demographic is now spending more in areas where they previously spent less during the pandemic. Is this also happening in aesthetics? Additionally, how much of a benefit are you seeing from the withdrawal of textured implants in certain regions around the world? I will have a quick follow-up on Mia.

Sure. Thank you, Anthony. I think it's important to note that unlike most global medical device companies, we're not in the United States and so when you're talking about discretionary spend, I think that's largely probably more U.S. focused at the moment. So, we're not necessarily seeing a direct impact of that. But we're still seeing strong response to our implants and the safety data behind them. So, I think our volumes and our sales in both direct markets and distributor markets continue to see their messages resonating with patients and with plastic surgeons.

And then, again, the follow-up on share gains from exits from competitors, is there a way to sort of think about that for 2021 and how that progresses? And then, really quickly on Mia, when you think about the EU launch in 2022, just trying to get a sense of the spend ahead of that? How much will be allocated to feet on the street versus marketing push? And how should that progress in the P&L in 2021 ahead of that 2022 launch? Thanks.

Yes, I think that the actions that our competitors are taking are somewhat of a logical response to the innovation gap that we have opened up in the marketplace, and we will continue to penetrate. With one of our major competitors pulling out of the market, we're more confident than ever that we're down the right path and that we've got the best technology. So, I think that's where we're focused and we're just continuing the message both with medical education and social media involvement.

Thank you very much.

Thank you. Our next question is coming from Amit Hazan of Goldman Sachs. Please go ahead.

Hey, good morning. This is Phil on for Amit. Can you guys hear me okay?

Yes.

Thanks so much. First, I was hoping you could discuss the dynamics within the quarter. I'm curious about what you observed regarding exit rates for the month and your confidence in the forward guidance, especially since the guidance was increased after the quarter's performance. Additionally, could you share insights on what you're seeing from different regions, particularly those still affected by COVID? Thank you.

Yes, certainly. We do have variability within the quarter as we do each quarter and it's largely still impacted by various restrictions that are happening due to the pandemic. But it seems as though most countries are sort of able to work through that and either work through temporary lockdowns and suspensions. I think when we think about guidance, we're obviously balancing the strength and momentum that we saw during the quarter, but also with that still lens of the fact that we're in a lot of countries that are still handling the pandemic on a daily basis. So, that's what we're focused on and we're very comfortable with the guidance that we've provided.

Right, that's great. Maybe I'll stick with you, since you answered that one, on the OpEx side, my ears perked up for the cost efficiency programs that you were talking about. I'm hoping you could delve a little bit deeper into that. And then also sort of talk broadly about your thoughts on profitability timelines versus prior given some of these permanent cost savings?

Yes, certainly. I think from the pandemic, we wanted to institute things like travel and really sort of focus on the core business, where do we want to see the best return on investment. And for us, it was a great learning experience and we are certainly taking some of those learnings and making them permanent as to how we operate more efficiently, more remotely, more online. It was always sort of a foundation of our business, but we've ramped that up and that ultimately just does mean cost efficiencies. Some of the in-person stuff is critical to our organization and we'll come back as permitted by travel restrictions or in-person gatherings. But I think when you think about the core of the business, we really took an internal mindset and thought about how do we run this business more efficiently, because we do know that we're going to have to have investments in strategic opportunities and we would much rather focus our dollars on that.

Just following on that one, OpEx down year-over-year with 25% topline growth. Maybe just a little bit of a comment on where you see OpEx trending from here. I'd have to imagine with all these strategic investments that it's going to be up on a dollar basis moving forward, but just some guidance around there would be helpful.

Yes, certainly. We are going to expect to see spending levels increase as we prioritize those significant investments and we think about the commercial launches that we have coming up and the new market entries that we have coming up, and that's where we would focus that spend. So, we're pleasantly happy with the results that we had for the quarter and like to see that come through and help. Like I said, the behaviors of the company, where we're spending the dollars, how we're using our money more efficiently. We're just super proud of the team as a whole.

That's great. If I can fit just one more in on the Mia front. I'm interested in what the discussions with the FDA have been like with how positive the progress has been on the Mia front with the IRB in Costa Rica and the progress in the European front from a regulatory standpoint, what have those discussions been like? And what's sort of the current plan for submitting the Diamond implant, is that potentially going to be in conjunction with the original Motiva approval like we saw with the CE mark? Thanks so much for taking my questions.

Thanks. So, our conversations with the FDA are focused under the current trial. And remember, we're continuing to roll into reconstructive cohorts of the trial and that's what we will continue to do until we get our PMA approval. Thereafter, is when the timeline for Mia will begin including the Diamond implant.

All right. Thanks so much for the questions.

Thank you. Our next question is coming from Matt Taylor of UBS. Please go ahead.

Hi, thank you for taking the questions. I wanted to ask about the timelines for the U.S. and China. Specifically, in the U.S., do you have any updated insights on whether the FDA will accept two-year or three-year data? Additionally, once you receive approval in each of these countries, could you outline the expected ramp-up and the duration of that process? This would help us project some of the future years in our models for the U.S. and China.

Yes, thanks Matt. I think the most important update is on the bifurcation strategy between aesthetic and reconstruction and how the FDA has expressed comfort with that strategy. So, we feel very confident in that. And to us, that is the most important thing because it is the fastest way to enter into the U.S. market, having aesthetics ahead of reconstruction. So, we're continuing to follow up with the patient. We will have our two-year data set this fall and thereafter, we will continue the conversation with the FDA about using a combination of data or going with the traditional guidance of three years. On China, we have continued to make progress. We have finalized testing. And we feel confident about our 2022 timelines for going into China. So, I think from the perspective of growth, it gives us many things going for the next few years, because we have not only our entry into breast reconstruction that is going to happen first in Europe, and then moving into other geographies around the world. We have China coming up, we have Mia coming up, and thereafter, we have the U.S. market entry. So, I think it just provides a multiplicity of growth drivers for the coming years. I think the speed with which we can affect those is probably one of the questions that everyone has, but we're still in a pandemic and we're still dealing with the fluidity of that. So, we're definitely trying to work all that out at the same time.

Okay. All right. And then I was hoping, I know you're in a lot of countries and we know some of the hotspots, but maybe you could give us some specificity on which of the countries or what percentage of your sales is in areas where there's still pressure versus ones that have really opened up and anything like that to help us think about how things could further improve through the year?

Certainly, Brazil remains our largest market, contributing about 11% of our revenue for the quarter and receiving a lot of attention. Surgical procedures are still occurring, and we have implemented necessary protocols, so the country is maintaining its performance. We also observed growth across all regions, which was encouraging, despite some areas experiencing temporary lockdowns or restrictions. Our distributors are considering these factors as they plan for the latter half of the year, determining their orders based on where demand is strongest. Overall, we continue to gain market share and make progress, even as we navigate the varying pandemic responses in Europe, Asia-Pacific, and Latin America, where each country is addressing the situation in its own way.

Great. Very true. And maybe I can sneak one more. You talked about the competitor exit is really validating your strategy and had a lot of investor questions on this in terms of how much additional share dollars there can be up for grabs with Allergan's exit? Could you give some updated thoughts on that and whether any of that is contemplated in your guidance?

Yes, I would like to repeat what we've discussed previously. In the international market, Allergan primarily sold their macro textured devices, which they removed from the market a few years ago. Consequently, the market share gains related to those textured breast implants have mostly occurred over the last couple of years, and we have certainly benefited from that. We also consistently take market share from other competitors, including J&J and various companies in Europe. Our strategy is to focus on gaining market share from any available source. Part of that comes from increased patient awareness, as patients inform surgeons that they prefer non-textured devices, with Motiva being their first choice. The key point, which we have emphasized repeatedly, is that Allergan has chosen to remain in four markets where they do not compete with Establishment Labs, highlighting the effectiveness of our efforts. Eventually, we plan to enter those markets and achieve similar results.

Thanks a lot. Thank you.

Thank you.

Thank you. Our next question is coming from Marie Thibault of BTIG. Please go ahead.

Hi, thank you for taking the questions and congrats on a very nice quarter. I wanted to ask, I guess there to follow-up on the questions that have been asked earlier, some of the commentary on China, obviously, a very exciting growth driver and we know that it's a premium price, very large market opportunity. I wondered if you could help us start to think about that. And how you might approach that market, whether you'll work with a distributor or whether you'll plan to target patients through kind of digital means? We just sort of want to get a better understanding of what that could mean in the next couple of years in terms of thinking about our forecast. Thanks.

Yes, and China is an exciting opportunity for Establishment Labs. Before the pandemic, in other countries of Asia, like South Korea, many of the patients using Motiva came from China. South Korea was 30%, but we also have data coming out of Japan and now that we are in Taiwan and Thailand, many patients were coming from China to receive Motiva implants. So, we know that our product does very well with the Chinese consumer. So, the opportunity comes from the fact as well that the Chinese consumer is going into aesthetics, mostly through digital means, and that awareness that we can create can be very powerful in speeding up our market share gains in that market. I think that already outside of China, we have proven that we have the most engagement by far with patients on social media. So, that's a really good precedent for what can happen in China. When it comes to our pathway to market there, as we have said, we continue to make progress with product testing and we continue to stay with our regulatory target for 2022. We have mentioned before that we see China as a hybrid player for us and we have a great partner for that market. And we will work with that partner to be making the best, not only of the direct to surgeon, but also going direct to consumer in many different ways.

Okay, thank you. And then maybe a follow-up on the share report, obviously, great to see them finalize that report. I'd love to hear kind of the impact of the other parts of the world. I think I recall big markets like Brazil that are meaningful to your revenue still do a lot of macro textured, if I recall correctly. So, maybe you can detail for us what kind of impact the share report might have globally? And thanks for taking the questions.

Thank you. It's important to note that the share report focuses on developing a scientific assessment of the safety of textured devices in relation to ALCL, rather than setting policy. Those policies will then be communicated to health authorities and the legislative European Commission. We believe this serves as further evidence that many patients are likely to choose smooth implants due to these concerns. Additionally, surgeons will face the repercussions of not adequately informing patients about the risks tied to their choices. We do believe some devices should be removed from the market, but in areas outside Europe, it may take more time for countries to acknowledge their issues. For instance, Brazil's timeline is uncertain. Australia, on the other hand, has made significant progress, having banned several macro textured devices in the past two years and continuing to do so. Regulatory bodies have considerable work ahead, as they need to address numerous expectations. In Brazil, the existence of local manufacturers will also factor into these considerations.

Thanks so much.

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Yes, thank you for joining us on today's call. We look forward to providing our next quarterly update in August and please stay safe.

Ladies and gentlemen, thank you for your interest in Establishment Labs. You may disconnect your lines or log off the webcast at this time and have a wonderful day.