Establishment Labs Holdings Inc. Q2 FY2021 Earnings Call

Good morning and welcome to Establishment Labs' Second Quarter 2021 Earnings Call. At this time, all participants will be in a listen-only mode. At the end of this call, we will open the lines for a question and answer session and instructions will follow at that time. As a reminder, today's call is being recorded. I will now turn the call over to Raj Denhoy, Head of Strategy and Investor Relations. 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. I am pleased, once again, to be able to report a record quarter, with 2021 second quarter revenue totaling $32 million. Second quarter revenue increased 205% over the second quarter of 2020, and was up 5% sequentially from the first quarter of this year. Our continued strong sales results show that a singular focus on women's health, innovation based on science, and a track record of over 10 years of excellent clinical and aesthetic outcomes with Motiva Implants can drive significant share gains. It is not by accident that we remain on track to achieve the dominant share position in our industry. As our story continues to resonate with surgeons, and most importantly with women, we expect to continue to post strong results. With strong momentum in our business, we are raising full-year guidance for 2021 to a range of $122 million to $126 million. This is an upward revision from the previous guidance of $118 million to $122 million we provided with our first quarter results. This updated outlook represents growth of 44% to 49% over 2020. This updated guidance captures our continued momentum, including strong underlying market demand and our capturing of share in geographies around the world.

Thank you, Juan José. The significant momentum in our business carried into the second quarter. We saw strong growth again in sales to a new record level, and our operating expenses and cash are being managed effectively. Total revenue for the quarter was $32 million. Direct sales were approximately 44% 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 45% of global sales, Asia-Pacific and Middle East was 30%, and Latin America made up the balance. Brazil, which is our largest single market globally, accounted for 7.7% of total quarterly sales.

Thank you, Renee. The record revenue we generated in the second quarter and recent developments in our industry show again that ESTA is on the right path to be the leading company in breast aesthetics and reconstruction, and we are preparing for the next chapter in this growth story, fueled by our commitment to women's health. During the second quarter, we announced the groundbreaking on our new Sulayöm Innovation Center in Costa Rica. This new facility will house expanded research and development labs, a new state-of-the-art media center, and world-class surgeon education and training facilities. The facility will also more than double our manufacturing capacity to over 1.9 million implants a year, which is enough to satisfy more than half the current world market. I'm pleased to also announce that after his previously announced leave, Salvador Dada returned earlier this month to the position of Head of Special Projects, the first of which will be to oversee the construction and validation of the new facility. I want to close by again thanking our outgoing CFO, Renee Gaeta. Renee has been with us through our IPO and through a time of significant expansion of our company. But more than that, she also is a good friend to me and everyone at Establishment Labs. You will be missed, Renee. And we wish you well as you embark on the next chapter of your life. I will now turn the call over to the operator for your questions.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today is from Matt Taylor of UBS Investment Bank. Please proceed with your question.

Hi, good morning, and thanks for taking the question. So, I wanted to just ask one on market dynamics. You had a nice quarter, you're in so many countries. I was wondering if you could just give us some more color on how things are doing in those different geographies. Maybe you could characterize some of the ones that are still seeing some pockets of disruption and how that could improve through the year. And then also would love some color on whether you think you're gaining share.

Yes, thank you, Matt, and good morning. So, we continue to see a good recovery in Q2. And we do believe we are taking market share globally. We saw good growth taking place in Europe and Asia-Pacific. Latin America was down sequentially, but we're not surprised. Brazil usually has a very strong first quarter, and then the second quarter is usually down from that. There was some small impact from FX. But overall, we're very happy about this quarter. It shows that there's business. We understand what's going on globally with regards to the pandemic and some of the challenges that it poses. But we continue to perform well, and we're very happy with the way the team is doing all around the world.

Okay, great. And then you talked about some more pronounced seasonality. Maybe you could just talk about any color that you have on the cadence that we should expect for Q3 versus Q4, if that's going to be different than we would see normally?

Yes. We've always talked about aesthetics being a business in which you do have seasonality in the third quarter. That is in normal conditions. For the past couple of years, between our rate of growth, the addition of new geographies, and the pandemic, it has been hard to compare. But normally, you would see seasonality in Q3, and our guidance contemplates that scenario. Approximately 45% of our business comes from Europe, and these doctors and their patients are going to take a vacation this year for sure. So, that's part of that. But that is normal in our business, so we don't see it as a negative. We see it as actually a reflection that things are getting to a more normalized condition in the European market. Furthermore, I think that you are seeing the effects of all the work that we've been doing over the last few years with regards to our science and innovation. We're launching new products as we speak into new lines like breast reconstruction, continuing to work with Mia. So, we're nothing but super excited about the second half of this year.

Yes, fantastic. And then maybe just one last one on Mia, I think a lot of investors are excited about that. Could you just give us more detailed and updated thoughts about how that initial launch could progress? And when we should start to expect a ramp in the CE mark countries from that product?

Yes, of course. And we are continuing to prepare very carefully for this launch. We want to make sure, and we have said this in the past, that we do things correctly. This is an entirely new category within breast aesthetics. We have applied for the CE mark for the tools that are necessary for Motiva Mia, and that is the Motiva injector and the balloon that are necessary for that minimally invasive approach. So, we expect approval for that to take place before the end of the year so we can begin our educational activities in Europe. After that, then in 2022, what you'll see us doing is working through a list of centers in which we think we will be able to show how we can attract new patients that would normally not go for these types of breast augmentation procedures. The most interesting part about Mia is not only the fact that it's a premium price over normal breast augmentation but the fact that you are bringing new patients. So, our launch is going to be directed specifically at showing that we can get a different group of patients interested in breast aesthetics.

Great. Thanks a lot for the thoughts, and thanks for taking the questions.

Thank you.

The next question is from Josh Jennings of Cowen and Company. Please proceed with your question.

Hi, good morning. Thanks for taking the questions and congratulations on the first half of the year and the recovery. I was hoping, Juan José, to just get a sense of how impactful you think the recent Langer publication on biocompatibility of Motiva and the earlier Mia SCHEER report have been to your direct and distributor sales efforts, and in terms of driving conversion of new surgeon customers, and how long do you think the tail is from those two reports? My second question would just be, historically you have transitioned from some markets from distributors over to a direct sales effort. Are there any territories, or should we be expecting more movement in the next 12 to 24 months? Thanks for taking the questions.

Thank you, Josh. Regarding the Langer paper, it is the strongest possible objective scientific evidence of why our implants perform better. We're very glad that this took place, especially in a paper in Nature. It confirms once again everything that we've seen in the market over the last 10 years, and now 1.6 million implants out there. To us, it is once again a confirmation. There are skeptical surgeons out there. We can't wait for the conditions of the pandemic to improve so that we can engage with them directly. The same goes for SCHEER, which recently concluded. It has an impact because it's the first scientific committee worldwide that creates a direct causal relationship between textured breast implants and this manmade cancer called ALCL. To us, these two things will be part of our strategy to capture new market share. But it's too early to say how impactful they will be in the short term. We think over the next few years, we'll gain market share from everything that we are doing, including the substantial proof from the Langer paper and definitely the results from the SCHEER committee. Looking at our growth, it stems from many sources. Safety over time is one of those, and these two elements definitely provide confirmation of that. So, at this time, we're not really considering moving any markets from distributors to direct, nor do we think we need to.

Great, thanks for those updates.

The next question is from Chris Cooley of Stephens. Please proceed with your question.

Good morning and thank you for taking the questions, and congratulations on the record quarter; it's very impressive. Just two for me, if I may. First, Juan José, if you could speak to us a little bit about as you approach the European market with Flora or, I should say, more specifically, the reconstructive market in Europe with Flora. What do you need to do tactically that's different compared to the approach the company has taken on the augmentation side? I'm just curious to hear a little bit about the incremental investment that might be required; if there's additional data just to help us think a little bit about that ramp and what it entails. For my follow-up, I'm just curious if you could comment as well, just from a macro perspective. Clearly, we're seeing a rebound here in interest in breast aesthetics coming out of the COVID-19 pandemic. Surgeons are extremely busy right now. Curious how much of this you think is pent-up demand when you look at the growth rates in the broader market right now relative to just a step-function improvement in the overall interest in the procedure. I'm just trying to tease out what you think is durable as we go into 2022, and if you have a step-up in the organic growth rates that we've seen historically or if you see a reversion in the second half of next year? Thank you.

Thanks, Chris. Let me address both of your questions. Regarding Flora, we are so happy we can finally become a key player in breast reconstruction. The reason we took so long to enter that category is that we wanted to do so in a way that transforms the state of the art in breast reconstruction. We are doing this with Flora, which has numerous features that will make a difference in breast reconstruction. The non-magnetic nature of this device, the fact that it is RFID enabled, the proprietary surface that creates a healthier capsule, which is significant in breast reconstruction—remember, up to half of the women who receive a tissue expander will experience capsular contracture—this is important. Beyond that, we have potential improvements related to radiation oncology. We have a very strong team in clinical and medical affairs, and our sales force is experienced in handling scientific messaging. We also have our MotivaEDGE medical education platform, which we have already used during the early experience related to the launch of Motiva Flora. When discussing incremental spend, there will be new personnel involved, specifically regarding breast reconstruction. However, our team is strong and caters to that type of product, so it’s nothing new for the company. We're growing rapidly and expanding capabilities across the board. Now, regarding pent-up demand and the future, given how we're growing, it's challenging to provide a precise prediction. However, we can't wait for the pandemic to be over. We don't view the end of the pandemic as a time when growth will diminish. On the contrary, we see it as an excellent opportunity to again meet in person with surgeons, especially those who have been skeptics about Motiva. In terms of medical education, we will continue online medical education, but many surgeons will require in-person education. Those initiatives will become feasible once the situation improves.

Thank you.

The next question is from Anthony Petrone of Jefferies. Please proceed with your question.

Thanks. And first, good luck, Renee, as you go into your new endeavors, and good luck to the team as you transition. My questions will be on—first on China, and then pricing overall. So, JJ, I'm wondering if you could just recap the market opportunity around China. It was previously marked at $150 million to $200 million within the global market but at premium pricing. Just want to get a recap of that calculus. Additionally, as you look at implant pricing globally, the Nature report is published, and SCHEER was out there earlier this year. There’s been a lot of data on the lymphoma incidents due to those two publications. I’m curious if that has impacted the actual procedure pricing on the surgeon end and, by extension, implant pricing.

Yes, thank you, Anthony. It's always been about showing that a non-commodity product in a commodity market can truly stand out. We have been successfully winning market share over the last few years by pricing our products according to the science and innovation that we provide surgeons and patients. For example, our proprietary SmoothSilk surface enhances ergonomics, chemical, and mechanical properties, resulting in greater patient comfort, among many other features. So, regarding the Langer papers, these are among the many components reinforcing our premium pricing. As we move into Mia, we believe the value we are creating should be priced accordingly. Regarding China, it is a premium price country. There are about 100,000 procedures annually performed in China that involve products not native to its market and which carry the highest average selling prices globally for manufacturers. We're eager to gain approval in China so we can introduce our products, which are considered luxury items there. Before the pandemic, over 25% of our patients in South Korea opted to pay for Motiva Implants. This gives us good insight into potential performance in China. Overall, our strategy is to create healthy growth, as evidenced by the gross margins we continue to show and I believe these will improve over time as we roll out new products and enter markets like the U.S. and China.

Thank you.

Thank you.

The next question is from Philip Coover.

Thanks and good morning. This is Philip for Amit. But first, I want to emphasize Anthony's comments about Renee; congrats and good luck with everything going forward. I'm hoping, Juan José, that you can discuss the search process for replacing Renee, and maybe the points of emphasis or how, strategically, you're thinking differently than during the last time you went through this process?

Yes, of course. Good morning, Phil. I think last time we went through this process was pre-IPO. We had to set up a lot of things, and Renee did a fantastic job creating a strong team that could transition us from being a private company, mostly regional, to becoming a global company with compliance across the board. This time around, we have the opportunity to look towards the future—the company we aim to be in 2025. The Board views this as a great chance to find a person who can align us with that vision. When we discuss the future, we clearly intend to become the dominant player in this industry. We are launching new products that create new categories, like minimally invasive techniques, and transforming breast reconstruction into an aesthetic breast reconstruction concept. I see the goal as securing a CFO who can be a strategic partner in achieving that vision. Therefore, we'll take our time to ensure we evaluate all the opportunities. When the right time comes, we will let you know.

That's great. Thanks for all that. The second one, I appreciate the conservatism in forward numbers. The updated guidance does contemplate at least some slowing in the second half from the first half if you look against normalized 2019 numbers. I know you called out vacations, probably more so in Q3, but maybe comment on how COVID variants or vaccine rates may still be limiting procedure volumes, and what sort of is considered in the second-half guidance on the COVID front? Thanks very much.

Yes, I think that's a fair comment. We are witnessing outstanding momentum in our business. When we consider the second half of this year, we will always approach it conservatively, taking various scenarios into consideration. As we see the possibility of variants complicating matters in specific regions worldwide, our revenue distribution enables us to counteract that. When the situation deteriorates in Latin America, it tends to improve in Europe and Asia, and vice versa. We are very pleased with how the team has performed during the pandemic over the last year and a half. We believe the situation will improve as vaccination campaigns are implemented. We've already seen this trend in Europe during the first half of this year, and we anticipate that it will continue. However, we remain vigilant of what's happening globally. This sentiment can also be seen in our guidance and there is a scenario in which we perform even better than forecasted. So, I don't believe we're trying to be overly cautious, but it’s vital to remain aware of current developments.

Great, thanks for all the comments, Juan José.

The next question is from Marie Thibault of BTIG. Please proceed with your question.

Thank you. Good morning, and thanks for taking the questions, and congrats on a great quarter. I did want to ask one regarding the FDA. You've mentioned that the timelines are on track there. I'm curious if you've had any further discussions with the agency. I know there had been potential considerations for thinking about accelerating endpoints, so I wanted to hear the latest on those discussions.

Yes, thank you, Marie. One of the key milestones is that just next month, all of our patients in our aesthetic cohort will have passed the two-year mark. This is significant for us. Just a reminder, the FDA's precedent for approval of silicone gel-filled breast implants is three years of clinical data. We are actively exploring options with our two years' data as we approach that milestone, which should allow for more constructive conversations with the FDA.

Okay, that's great. We'll stay updated on that as well. And then, I guess, one last question for Renee. We're certainly sorry to see you go, Renee, and wishing you a lot of luck with your next role. I thought the cash burn this quarter was impressively low; very nice job with that. Wanted to hear what contributed to that and what we can expect for cash burn going forward? You certainly made a lot of progress on that metric.

Thank you, Marie, I appreciate it. Also, thank you to everyone else for your kind words. It's been lovely working with all of you. Yes, regarding cash burn, we are committed to managing it effectively, as you can see from the results in the first half of the year. We will continue investing in the business, which means cash burn will increase from where we are this quarter. However, it's encouraging to see how we've managed the balance sheet while still performing well. As we mentioned regarding COVID and activities returning, we expect to see cash burn increase going forward. Nonetheless, we remain committed to ensuring that overall cash burn for the year is lower than pre-pandemic levels.

All right, very good. Thanks again.

Thank you for joining us on today's call. We look forward to providing our next quarterly update in November. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.