Establishment Labs Holdings Inc. Q4 FY2022 Earnings Call

Greetings, and welcome to the Establishment Labs Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to our host, Raj Denhoy, Chief Financial Officer. Thank you. You may begin.

Thank you, operator, and thank you everyone for joining us. With me today is Juan Jose Chacon-Quiros, our Chief Executive Officer. Following our prepared remarks, we'll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs' financial outlook and the company's plans and timing for product development and sales. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. For a discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent annual and quarterly reports on Form 10-K and Form 10-Q as well as other SEC filings, which are available on our website at establishmentlabs.com. I'd also like to remind you that our comments will include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results, which can be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. Please also note that Establishment Labs received an investigational device exemption from the FDA for Motiva Implants and is undergoing a clinical trial to support regulatory approval in the United States. We continually seek to expand the geographies in which our products are regulatory approved. Please check with your local authorities for specific product availability. The content of this conference call contains time-sensitive information, accurate only as of the date of this live broadcast February 27, 2023. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. With that, it is my pleasure to turn the call over to our CEO, Juan Jose.

Thank you, Raj, and good afternoon, everyone. Record revenue in the fourth quarter of 2022 totaled $43.8 million, a 24% increase over the fourth quarter of 2021. Excluding the negative impact of foreign currency changes, our growth in the fourth quarter would have been approximately 28%. For the full year of 2022, revenue totaled $161.7 million, a 28% increase over 2021. Excluding changes in currency, growth in 2022 would have been 32%. These results are at the midpoint of the pre-announced ranges we provided in early January. We are growing well in excess of our underlying markets, and the key to these market share gains is our singular focus on building a new breast aesthetics and reconstruction industry on the fundamental pillars of women's health. This focus has allowed us to develop a 12-year track record of excellent clinical and aesthetic outcomes since we first commercialized Motiva Implants. Over that period, we have elevated standards for breast aesthetics and reconstruction by bringing to market a number of meaningful innovations based on science and patient-centric design, and this will continue into 2023 and beyond. For 2023, we are providing revenue guidance in the range of $200 million to $210 million. This outlook represents estimated growth of 24% to 30% over 2022. Raj will provide additional detail on our fourth quarter performance and our 2023 guidance in a moment. Last week was another big moment at Establishment Labs. I am pleased to report that we filed module four of our modular PMA with the FDA. This is a significant step toward Motiva being approved for sale in the United States. The submission of the final module also represents a transition in the approval process where the FDA will now begin their formal review of our full PMA. Our interactions with the FDA through the modular review period have been very collaborative, and the level of interaction has been high. We look forward to the relationship continuing on a positive path as we work to bring Motiva to the United States. On Mia Femtech, the new category we are creating in breast aesthetics, we provided an update in early January that we have signed up our first clinic partner. Seishin Plastic and Aesthetic Surgery Clinic operates a network of 10 high-end aesthetic practices in Japan. They will first offer Mia under two locations in Tokyo; their flagship clinic in Roppongi and their newest clinic in Ginza. Seishin is one of the most prestigious aesthetic practices in the world, and we are so happy to have them as our first partner in the global rollout of Mia. Our practice development and medical education teams are actively engaged with them in preparation for a launch. With Mia, we are creating a new category in aesthetics for women who don't want a traditional augmentation but are conscious of the shape and proportions of their breasts. Mia offers these women a minimally invasive procedure that can be performed without general anesthesia in less than 15 minutes, with an easy return to their daily activities. By providing a solution that is more appealing to consumers, we are opening up a whole new group of women to breast aesthetics. As we launch Mia, we are focused on demonstrating that this is a new category, bringing new women into breast aesthetics and that surgeons are seeing improved efficiency, and our partner clinics are benefiting from higher economics. These proof points will be important as we look to scale Mia into the multibillion-dollar opportunity that it has the potential to become. We look forward to providing updates over the coming months. In our aesthetic breast recon franchise, the rollout of our Motiva Flora tissue expander continues. The market feedback is very positive, with more and more surgeons making it their expander of choice in post-mastectomy breast reconstruction. In November, we announced regulatory approval for Flora and Motiva Implants in Japan. As we commented at the time, launching Flora with Motiva Implants in the Japanese market is a significant step in changing the global standard in breast reconstruction. What continues to resonate with clinicians globally is that Flora is a much-improved offering with many new advances in what has unfortunately been a neglected category in breast reconstruction. Flora is only the first step in our aesthetic breast recon initiative, where Establishment Labs will offer tools and techniques that allow women to receive reconstruction surgeries that achieve the aesthetic ideals to which they aspire. As a global medical device company focused on women's health, Establishment Labs has the opportunity and the responsibility to improve breast reconstruction. We are not only bringing to market new technologies like Flora that can improve outcomes, but we are also engaging in advocacy efforts to promote education, awareness, and access. The need and the opportunity are significant. One in eight women globally will experience breast cancer in her lifetime. But very few of them will undergo reconstruction as part of their recovery from the disease. As we make progress in our aesthetic breast recon initiatives, the global impact will be meaningful. On China, we continue to make progress in the regulatory approval process, and we expect approval for Motiva in this market in the first half of 2023. The recent lifting of COVID restrictions and the return to more normal activity in China are encouraging, not only for our approval but also for adoption once we launch into what is the second-largest market in the world. In January, at the J.P. Morgan Healthcare Conference, we provided an outlook for Establishment Labs to achieve $500 million in revenue in 2026. This works out to an average annual growth rate of 33% and contemplates contributions from our existing markets: EMEA, China, the U.S., and from breast reconstruction globally. With the many layers of growth behind this target, we don't expect growth will be linear over the next four years. However, the many layers also suggest that this target is well supported, even conservative, and that growth will continue for many years beyond 2026. We are ready for the next chapter in our growth story, and providing a long-range view not only suggests the potential we see before us but also provides us with a target around which to plan and organize. It is well within our reach to become the leading global company in breast aesthetics and reconstruction. We will continue to transform our markets and in doing so, we will create new opportunities for growth and, more importantly, create new options for women around the world. I will now turn the call over to Raj.

Thank you, Juan Jose. Total revenue for the fourth quarter was $43.8 million. Reported revenue growth in the fourth quarter was 24.1%. Foreign currency changes reduced our fourth quarter revenue growth by approximately $1.3 million. Excluding the impact of currency, revenue growth in the quarter would have been 27.7%. Direct sales were approximately 37% of sales this quarter, while distributor sales made up the balance. From a regional perspective, sales in Europe were approximately 28% of global sales; Asia Pacific and Middle East, 40%; and Latin America made up the balance. Brazil, which is our single largest market globally, accounted for approximately 14.6% of total quarterly sales. Our revenue distribution this quarter reflected a rebound in sales in Europe from the seasonally slower third quarter as well as strong sales to our distribution partners across multiple geographies. Our gross profit for the fourth quarter was $28.2 million, or 64.3% of revenue. This compared to $24.2 million, or 68.6% of revenue, for the same period in 2021. Our gross profit in the fourth quarter was negatively impacted by approximately 300 basis points from foreign currency rate fluctuations. Average selling prices in the fourth quarter were also down from the third quarter of 2022. We see regular fluctuations in gross margin and mix and other factors; however, the overall trend in our gross margin continues to be positive over time. SG&A expenses for the fourth quarter increased approximately $7.3 million to $34.8 million. This compared to $27.6 million in the fourth quarter of 2021. The increase in SG&A in the fourth quarter resulted from continued normalization of business practices and our investments in new growth initiatives like Mia and preparations for our launch in the U.S. R&D expenses for the fourth quarter increased approximately $400,000 from the same quarter a year ago to $6.5 million. Total operating expenses for the fourth quarter were $41.3 million, an increase of approximately $7.7 million from the year-ago period. The increase this period was again due primarily to the normalization of activity and spending relative to a year ago as well as the investments in growth initiatives. While we are investing, our operating expenses as a percentage of revenue were down slightly from the year-ago period as we continue to focus on managing our costs. Net loss from operations for the fourth quarter was $13.2 million compared to a net loss of $9.4 million in the same period in 2021. Our cash position as of December 31, 2022 was $66.4 million compared to $53.4 million at the end of the previous year. The increase in cash was a net result of the new term loan we secured in April. With the achievement of the required revenue milestone, we drew the second tranche of the facility in December. The term loan has two additional tranches totaling $50 million of non-dilutive capital we can access on the achievement of revenue and regulatory milestones. Cash used in the fourth quarter included approximately $9.6 million of investment in our new manufacturing facility. In total, we invested approximately $32 million in the new facility in 2022. We are providing revenue guidance for 2023 of $200 million to $210 million, representing annual reported growth of 24% to 30%. At current rates, we estimate foreign currency will have a minimal impact on 2023 sales. As we saw in our 2022 results, there is considerable momentum in our business, and we expect this will continue into 2023. We're also expecting early contributions from new initiatives like Mia in China. It's important to note that contributions from these new areas will be modest in 2023, and they will build as the year unfolds and these launches take place. As we look down the rest of the P&L, we expect gross margin in 2023 to be similar to 2022. Gross margin in 2023 will see the impact of new product and geographic launches, as well as the start of production from our new facility. As noted previously, we view the overall trend in our gross margin to be positive over time. Operating expenses as a percentage of revenue in 2023 are also expected to be similar to 2022. While operating spending over the near term is reflecting our investment in the significant number of development and commercialization programs we have underway, we expect expenses as a percentage of revenue will trend down as we get further into these growth initiatives. I will now turn the call back to Juan Jose.

Thank you, Raj. 2022 was a year of tremendous progress for our company, and we are preparing for a busy 2023. Among the events we have coming are the commercial launch of Mia, our Motiva launch into China, and the approval process for Motiva in the United States. In 2023, we will also finish the initial phases of construction of our new Sulayom campus and begin producing commercially sellable units out of the facility. As a reminder, the new manufacturing capacity at Sulayom more than doubles the number of implants we can produce per year and allows us to provide over half the current world demand. We are also planning for the presentation of the three-year data from our U.S. PMA study. With the PMA now submitted to the FDA, we will look for an appropriate forum to share this data with the scientific community. As impactful as each of these initiatives will be, they are all part of a broader strategy we have to: continue to heal the relationship that women have with the legacy breast implant industry by offering innovative and safer options backed by science and supported by clinical data, which could expand the existing market; normalize breast aesthetics with valuable new categories so that new groups of women will be open to our technologies; and finally, and perhaps most importantly, democratize access to breast reconstruction so that the restorative benefits of reconstruction after breast cancer can be available to women globally to at least the level of access that is available in the United States. If we are successful in these initiatives, we will be able to achieve and even exceed the recent long-term revenue goal we provided of $500 million in revenue in 2026 and much more beyond. We are better positioned than we have ever been to transform our markets and to make a meaningful change in the lives of women around the world. I will now turn the call over to the operator for your questions.

Thank you. And ladies and gentlemen, at this time, we will conduct a question-and-answer session. Our first question comes from Matt Taylor with Jefferies. Please state your question.

Hey, thanks for taking the question. This is Zach on for Matt. I was just curious if you could talk about the infrastructure you're putting in place to support the U.S. launch and then also the Mia launch in Europe? Thanks for taking the question.

Yes. Thank you, Zach. We couldn't be more excited today with this news of the submission of module four, which basically means that we are now in the full PMA approval phase. For competitive reasons and because we are getting closer to the timing of approval, we are not going to give details on exactly what we are going to do. But make no mistake, we will be prepared. This year, we are continuing, just like we did last year, to put in place systems. We continue to work through what our logistics strategy is going to be like in the United States. As we get closer, then we will be willing to share more. When it comes to Mia, in Europe, and I would also mention in Japan, it's important to understand that Mia is done through a business model without sales reps. It is done in a completely different way. It's a partnership that we create with selected clinics that have good marketing assets that can be mixed with our amazing technologies embedded in Mia. So, when we think about what we can do with Mia in the first half of this year, with launches in Japan and Europe, it's super exciting because it is really a different type of business model. We are looking to this year as one of the most exciting ones in the history of our company.

Thanks for taking the question.

Hi, good afternoon. Congratulations on a strong finish to the year and on the submission of the fourth PMA module. I wanted to ask about 2023 guidance. And I think, Raj, you mentioned that there were some modest contributions baked in from Mia and China. Just wanted to make sure I was clear that this guidance range does not assume any revenues from the United States or that does not preclude any type of approval in 2023.

Yes, I think that's a fair way to put it, Josh. I mean, we haven't endorsed the timeline for U.S. approval, so we haven't included it in our 2023 guidance. But as you mentioned, Mia and China, we do expect contributions from those to build as the year unfolds.

Great. Thanks for that. Juan Jose, with the fourth module submitted and the formal review underway, you mentioned that three-year data may be presented at some point. I understand you’re not providing a timeline, but could you help us recall the rates of capsular contracture, rupture, and reoperation overall? Additionally, it would be useful to review the increases in these rates from year two to year three based on precedent data sets in the breast implant sector. Thanks for addressing my questions.

Yes. Thank you, Josh. As you noted, we are always looking forward to showing our numbers, letting the data speak for itself and for the safety of the Motiva Implants. When we published in Nature Biomedical Engineering about the mechanism by which our surface design creates higher biocompatibility, what we wanted to highlight is that when you see the numbers, whether in our 10-year post-market surveillance data with more than 2.5 million implants, when you look at the different data sets, when you look at our two-year data, you are observing the downstream effect of that design. Of course, we track numbers year to year. We've been in the market now for 12 years internationally, and what we see is that, of course, complications tend to aggregate over time. Capsular contracture is a phenomenon that takes place mostly in year one and two. Of course, you can continue capturing some of those numbers as patients come back for their checkup. But overall, these additions tend to be modest. The same applies to rupture over time. In the early years, you may see incidents due to inadvertent procedures or events that may happen years later. Overall, based on all the datasets that we have, we are extremely confident in our ability to gain approval for Motiva Implants in the U.S.

Great. Thanks a lot.

Good afternoon, and congrats on a great quarter. Maybe sticking with Mia in Japan, could you just give us some additional color on how that launch is progressing and maybe some early feedback from surgeons and patients? And also, maybe the timing for expanding that launch to the additional clinics that this group sells through?

Yes. Thanks, George. To be clear, we have signed up our first group of clinics, which is the Seishin Plastic and Aesthetic Surgery Clinic, which manages 10 high-end clinics overall in Japan. We are planning to launch soon. Our medical education and practice development teams are working hard with them to put everything in place. As soon as we start doing commercial cases with Seishin, we will let you know. We are very happy to do this in Japan. Japan is at the genesis of Mia. That's where we had the original idea of the need for this type of procedure. We realized that there were similar customers all over the world. Our plan with Mia this year is to demonstrate that we have new consumers who were not seeking traditional breast augmentation. We want to show how these clinics scale up because as we introduce Mia into different geographies, that information will excite everyone about the market expansion that it can create.

Okay. Got it. That's really helpful. Maybe switching gears a little bit to margins. There's obviously a lot of moving pieces this year with the launch of Mia in Japan and in Europe as well, hopefully, Motiva in China and then potentially the U.S. at the end of the year. So, could you just help us with how we should think about the quarterly cadence for gross margins? It sounded like there were some ASP headwinds here in the fourth quarter, but how should we think about that as the year progresses, and these additional markets start to contribute more significantly?

Yes. Good question, George. You noticed in the quarter that the gross margin was down. As we said in the prepared remarks, it was the currency revaluation of the euro in the fourth quarter and the fact that a lot of our inventory is denominated in euros; we had to revalue it, and that translational effect flowed through our COGS. Overall, as we said, the trend in our gross margin is positive over time, and everything we're doing in terms of launching into these new geographies, the Mia system, these are all positive for gross margin over time. As you think about 2023, there are some mixed factors. The early launch of Mia, along with standing up the new facility and lower yields from there initially, will be slightly negative for gross margin. However, initiatives like China and continued new products will positively impact gross margin. The guidance is that we expect it to remain relatively flat for 2023, but we should see margins rising over time.

Okay, great. Thank you all for the time.

Great. Good afternoon. Congratulations on the submission of the clinical module. Maybe just a little on guidance, $200 million to $210 million. How should we be thinking about the contribution from Japan from the Mia launch in January as that flows through in the $200 million to $210 million? And when we think about Mia in China in the second half, potentially being launched upon receipt of regulatory clearances, how should we be thinking about that contribution in the top-line guidance? I have a couple of follow-ups.

Sure. Hey, Anthony. When we think about guidance, there are a lot of moving parts, as you suggested, for 2023. When we provide numbers, we look at scenarios regarding the timing of contributions. We risk-adjust these various components, which is how we arrive at that $200 million to $210 million number. Certainly, different analysts, yourself included, will have varying expectations, and it's challenging for us to provide exact figures. However, you will see contributions from these new initiatives build as the year unfolds, while the underlying business continues to experience strong growth, as indicated in 2022.

And a couple of follow-ups here. One would be on the medium-term outlook on manufacturing, if I am not mistaken, the new manufacturing site brings you from about 700,000 implants to nearly 2 million per year in terms of production capacity. I fully understand that in the early days, it may be margin dilutive, but how does the new facility impact gross margins specifically for the Mia implants in year two, three, and four?

Overall, the new facilities' output will significantly impact our margins positively over time. You mentioned the increase in volume; coupled with contributions from the U.S. and China, which are ASP accretive, and the Mia system, will enhance our margin profile. We anticipate that despite certain complexities in 2023, our gross margin will improve as we progress.

And last, and I'll hop back in. Just the $500 million in 2026; when we think about how to model that geographically, any kind of directional point would be helpful. Thanks.

Yes. That's a good question, as there are multiple layers to reaching the $500 million target over time. The number of scenarios to achieve that figure is vast. However, we believe that the support we have underneath it is solid and may even be somewhat conservative. As for breaking down individual contributions, it’s premature at this stage. We will provide greater visibility into that as we advance.

Hi, guys. Thanks for taking the questions. Since we haven't touched on it yet in Q&A, could you provide additional color on the traction you're seeing with Flora in the breast reconstruction market and your pipeline for that market?

Yes, of course. I'm glad you asked about breast reconstruction because it is one of the most important areas for us. This is such an underpenetrated market globally, and Flora is the first of a series of technologies that we will bring to market to ensure we democratize access to breast reconstruction. Currently, the market may be viewed as appropriately sized in the U.S., but outside of the United States, that market would be substantially larger if you consider similar access numbers. We continue to make gains quarter-to-quarter with Flora. However, this market is driven by tenders, so it requires patience as we await the outcomes. Over the next few years, we plan to ensure that we become market leaders in breast reconstruction, as we see it today, and create a market that resembles that of the United States.

Great. Thanks for that. I'm curious how the launch partner for Mia might serve as a model for future clinics you target.

I think Seishin is a great model for what you will see in the future, as it represents a chain of 10 clinics equipped with marketing assets and professional staff capable of effectively scaling. We will be seeking partners like Seishin worldwide. This is not just a buy-sell relationship; it's a true partnership.

Hey, good afternoon, Juan Jose and Raj. This is Sam Eiber on for Marie. Thanks for taking the questions. Maybe I can start on OpEx cadence for this year. I appreciate the outlook you've provided. Would we expect some leverage more toward the back half of the year? It sounds like you might be front-loading some investments here. Then, as you see contributions on the top line, might we start to see leverage towards the back half and then more so in '24?

Yes, that's the right way to think about it. In 2023, there are numerous opportunities for us to support, including the launch of Mia, the preparations for the U.S., the establishment of our new facility. As these initiatives materialize, you will start to see the leverage from them. However, this year is one where we are investing, and you should see that leverage manifest in 2024 and beyond.

Okay, really helpful. Maybe I can ask a follow-up here on the regulatory environment in the U.S. Any updates on whether you expect an Ad Comm? How soon might you be able to figure that out? And is there potential for a faster approval process considering you've had this modular submission process for several months now?

Yes, it is a bit early for that. The most critical aspect is that we focus on the final stages of the regulatory process. Opportunities may arise as it unfolds, but we need to concentrate on the integrity of the trial and ensure we respond to every single query from the FDA.

Thank you. There are no further questions at this time. I will hand the floor back over to Juan Jose Chacon-Quiros for closing remarks. Thank you.

Thank you for joining us on today's call. We look forward to providing our next quarterly update in mid-May, and we wish everyone continued good health and happiness.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.