Establishment Labs Holdings Inc. Q2 FY2023 Earnings Call

Good afternoon. Welcome to Establishment Labs’ Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. At the end of this call, we will open the line up for a question-and-answer session. As a reminder, today’s call is being recorded. I will now turn the call over to Raj Denhoy, Chief Financial Officer. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us. With me today is Juan José Chacón-Quirós, 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 in 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. Please also note that Establishment Labs received an investigational device exemption from the FDA for Motiva Implants and is under clinical trial to support regulatory approval in the United States. We continually seek to expand the geographies in which our products are regulatorily approved. Please check with 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, August 8, 2023. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statements 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 José.

Thank you, Raj, and good afternoon, everyone. Revenue in the second quarter of 2023 totaled $48.6 million, an 18% increase over the second quarter of 2022, making it a new quarterly record for our company. We are growing well in excess of our underlying markets, and there are several positive catalysts we expect over the coming months, all of which is providing a strong foundation on which to build for 2024 and beyond. Raj will provide additional details on our second quarter performance and our outlook in a moment. On July 19, marking the 5-year anniversary of our listing as a public company, we held the grand opening of our Sulayom innovation campus. Approximately 400 people attended the event, including representatives from the Costa Rican government, plastic surgeons, distributors from around the world, suppliers, and other business partners. The new campus supports our strategic plans with additional capacity and capabilities in R&D, manufacturing, digital media, training, and medical education. This year, we will bring online approximately 35,000 square feet of new manufacturing and warehouse space that will more than double our manufacturing capacity to over 1.5 million units a year, which represents about half of the current global demand. We also have the ability to add an additional 45,000 square feet of manufacturing as our growth requires. The new facilities include advanced R&D labs and a global learning center that allows us to produce content that we can stream around the world. On-site surgical theaters and procedure rooms enable medical education and training that can scale to our global business and help us expand the market, creating broad demand for our products. This state-of-the-art facility is designed to be carbon neutral and uses sustainable materials and other green design elements throughout. Our goal was to build a center for creation and innovation, where our employees, healthcare professionals, and partners from all over the world can introduce new standards for the future of plastic surgery. With the opening of the Sulayom, we are certain that we have succeeded. We are better positioned than we have ever been to create and expand new markets and to make a meaningful change in the lives of women around the world. One of the most exciting near-term opportunities for us is Mia Femtech. With the recent approval in Europe of the tools needed, the global rollout of this new category in breast aesthetics is picking up pace. Our launch activities are focused on creating this new category with our growing list of certified partner clinics. We are strengthening our pipeline of partner clinics with new centers in Japan, Spain, Switzerland, Sweden, Germany, England, Costa Rica, and France, with more requests arriving every week to join. We have created branding and marketing programs localized for each market that are designed to create and capture consumer demand. In Spain, where we launched our first campaign in July, we generated over 175 leads in the first week, 30 of which resulted in patients seeking appointments. Most importantly, 47% of these patients were not seeking a breast augmentation prior to learning about Mia. As a reminder, as part of the Mia experience, a plastic surgeon can shape the breast in a 15-minute minimally invasive procedure without the need for general anesthesia. The result is a growing, discreet enhancement with a 1 to 2 cup proportionate result. The procedure requires minimal downtime, with women returning to most activities the same day. By providing a solution that overcomes many of the obstacles of traditional breast augmentation, we are opening up a whole new group of women to breast aesthetics. It is still early in the launch of Mia, and we remain focused on attracting women into this new category of breast aesthetics, as plastic surgeons see improved efficiency with our partner clinics benefiting from better economics. We are seeing early indicators that we can scale this new category with Mia into a multi-billion dollar opportunity. In our aesthetic breast reconstruction franchise, the rollout of our Motiva Flora tissue expander continues. We developed Flora to provide surgeons and the women who receive these devices with better options. Though 1 in 8 women develop breast cancer, tissue expanders prior to Flora have seen little meaningful innovation in decades. Among the improvements in Flora are a first-of-its-kind RFID-enabled port, which allows for MRI imaging without artifacts during the time the expander is used after a mastectomy. By being non-magnetic, Flora also opens new options for radiation oncology treatment. Flora features our patented SmoothSilk surface technology, which can provide improved patient comfort and promote healthy capsule formation. Market feedback has been very positive, and we are seeing an increasing number of clinical publications confirming the benefits of Flora. A recent publication from Switzerland was the first in-human study to confirm that Flora does not affect the image quality of artifact-prone image sequences during MRI, a significant advancement in the standard of care for women undergoing breast reconstruction with tissue expanders. A recent publication from South Korea demonstrated that in radiotherapy planning, the Motiva Flora, with the non-metallic RFID-enabled port, showed superior dosimetric results to the heart and lungs compared to traditional metallic ports, potentially reducing side effects to these organs. Another recently published paper from the Medical University of Business Work in Austria confirmed in a head-to-head study that Flora provides much improved patient comfort and satisfaction during their breast reconstruction journeys, compared to an FDA-approved expander. As a global medical device company focused on women’s health, Establishment Labs has the opportunity and the responsibility to improve breast reconstruction. Flora is only the first step in our aesthetic breast reconstruction initiative, where Establishment Labs will offer tools and techniques that allow women to receive reconstructive surgeries that achieve the aesthetic ideals they aspire to. Regarding China, we are actively preparing for the launch of Motiva with our distribution partner. We continue to make progress in the regulatory process and expect to launch Motiva in this market later this year. We have been in active communication with our partners in China to resolve the final questions remaining before regulatory approval. In the U.S., the final module of the PMA was submitted to the FDA in the first quarter, and the full PMA has now been accepted and is under review by the agency. The pace of activity and our interactions with the agency remain positive. Clinical sites around the country have now undergone their inspections, bringing us closer to this process of approval. It is difficult to predict regulatory timelines, but nothing in the process thus far has diminished our confidence that Motiva Implants will be available soon to women in the United States. I will now turn the call over to Raj.

Thank you, Juan José. Total revenue for the second quarter was $48.6 million, which represents a growth of 18%. From a regional perspective, sales in Europe, the Middle East, and Africa accounted for approximately 42% of the global total; Asia Pacific, 24%; and Latin America made up the balance. Direct sales were approximately 37% of implant sales, while distributors made up the remainder. Brazil, which is our single largest market globally, accounted for approximately 14% of total quarterly Motiva sales. Our gross profit for the second quarter was $30.3 million, or 62.3% of revenue, compared to $27.5 million, or 66.7% of revenue for the same period in 2022. Our gross profit in the second quarter was negatively impacted by higher overhead and labor costs. Direct labor costs were higher in part due to changes in foreign exchange rates between the U.S. dollar and the Costa Rican colon. Since we report in U.S. dollars, the significant revaluation of the colon over the last year resulted in higher costs in this period. We are also absorbing the early start-up costs for the training and certification of EMEA clinics, which is reflected in our cost of goods. Average selling prices in the second quarter increased from the first quarter of 2023 and year-over-year, confirming that we are providing increased value even while we continue to gain market share. SG&A expenses for the second quarter increased approximately $4 million to $37 million compared to $33 million in the second quarter of 2022. The increase in SG&A in the second quarter was partly due to our investments in new growth initiatives like Mia, preparations for our launch in the United States, and the underlying growth in our business. R&D expenses for the second quarter increased approximately $2 million from the same quarter a year ago to $6.9 million. Higher personnel costs and increased activity related to the U.S. clinical trial contributed to higher spending in this period. Total operating expenses for the second quarter were $44 million, an increase of approximately $6.1 million from the year-ago period. Net loss from operations for the second quarter was $13.7 million compared to a net loss of $10.4 million in the same period in 2022. Our cash position as of June 30 was $90.2 million, compared to $66.4 million at the end of 2022. Our cash position reflects the 1.265 million share offer we completed in late April, as well as cash used in the second quarter that included approximately $9 million of investment in capital expenditures, including for our new manufacturing facility, as well as a planned increase in inventories we prepared for the launches of Motiva in China and the United States and further growth we expect in the near future. As a reminder, we have two remaining tranches on our debt facility, which totaled $50 million and become available upon the achievement of sales and regulatory milestones. These, along with the cash we have on hand at the end of Q2, provide us with access to approximately $140 million in capital. Under our current forecast, the cash we currently have on hand, as well as the additional capital available to us under our credit facility, will allow us to achieve cash flow profitability while still funding our growth initiatives. We are maintaining our revenue guidance for 2023 in a range of $200 million to $210 million. There are a couple of things to note regarding revenue for the second half of the year. We expect the approval of the launch of Motiva in China in the fourth quarter. Additionally, Mia was launched in Europe during the summer months, which is typically a seasonally slower period. We expect consultations to begin in earnest in the third quarter, with procedures contributing more meaningfully in the fourth quarter of the year. Overall, we continue to see good momentum in the underlying business, and we expect to finish the year very strongly. We expect gross margin in 2023 to be approximately 100 basis points lower than in 2022, which reflects higher overhead and labor costs, the early costs of the global rollout of Mia, and the startup of manufacturing at our new Sulayom facility. We continue to see regular fluctuations in gross margin. However, the trend in our gross margin is expected to be positive over time. The prices we expect to realize for our products in the U.S. and China, which are the highest paying in the world, will provide a tailwind to our gross margins as we gain market share in these new markets. We continue to expect operating expenses as a percentage of revenue in 2023 to be similar to those in 2022. Operating spending over the near-term reflects our investments in development and commercialization programs. However, we expect expenses as a percentage of revenue to trend down as we move into these initiatives and begin to leverage our spending. I will now turn the call back to Juan José.

Thank you, Raj. During the opening of the Sulayom campus, we held a discovery session as part of the program. The session highlighted the scientific and clinical foundations that have been established over the last two decades and have led to the products we’ve introduced to the market. Motiva Implants, JOY, Mia Femtech, and Flora are redefining breast aesthetics and reconstruction and are driving the strong growth we are observing globally. Beyond fundamentally changing the current landscape, the technologies behind them have provided platforms that we are now developing into new offerings. We’ve taken the minimally invasive platform developed with Mia Femtech and are leveraging it into new minimally invasive aesthetic categories. The first of these is minimally invasive Gluteal Armonic modeling, which we call Gem. The market for gluteal augmentation in 2021 was estimated by ISAPS, the International Society of Aesthetic Plastic Surgeons, to be 523,000 procedures globally, which is a 41% increase from just four years ago. Despite this strong demand, the current options are lacking, with high rates of morbidity and even mortality. We have an initial IRB-approved study underway and are encouraged by what we have seen so far. We are early in the development of this new product and procedure, and we will provide updates as we progress. Since 2014, our implants have been available with an RFID sensor platform we call QID. The passive, privacy-proven sensor provides identification information about the device, such as the serial number, date of manufacturing, and others. Sixty percent of our devices in the market now include the QID technology. In many markets, women are choosing devices with QID 41 or more over non-QID devices. We will soon introduce the next version of our sensor platform, which we are calling Zen. This new platform continues to be passive but is non-metallic and will add additional capabilities, such as temperature measurement, which is a very useful biomarker. With Zen, we have a device that can provide real-time measurements. Temperature is only the first of what we hope will be a suite of biomarkers enabled by the Zen platform. Gem and Zen are just two of the many exciting developments we are working on, and the expanded capabilities in our new Sulayom campus in research and development, medical education, media, and manufacturing will enable us to develop them to their full potential. We remain confident that the target we offered earlier this year of $500 million in revenue in 2026 will be proven conservative. With the continued contribution of our existing product portfolio and the growing contribution of new solutions like Gem and Zen, we believe that we will continue to grow at a healthy pace well beyond 2026. I will now turn the call over to the operator for your questions.

Thank you. And our first question comes from the line of Matt Taylor with Jefferies. Please proceed with your questions.

Great. This is actually Young Li, in for Matt. Thanks for taking our question. I guess to start, maybe on the China launch. I recall you mentioning Q4, and you’re using the same distributor that you had been using in South Korea. I was wondering how you think about the adoption curve, and how China might differ from some of the other key markets.

Yes. Thank you. I think it’s important to remind everyone that China has the fastest-growing breast aesthetics market in the world, and of course, we are extremely excited about this opportunity. In the countries surrounding China, we’ve done a lot of activities to create awareness about Motiva Implants and establish them as the implant of choice. We are market leaders in Japan, Taiwan, South Korea, Vietnam, and Thailand, which underscores how the Asian consumer has embraced Motiva as the preferred choice. Before the pandemic, we had around 25% of consumers in South Korea traveling from China to receive Motiva Implants. Our market research indicates that there is a good reception and strong image for the Motiva brand, as patients request premium brands, and brand reputation is highly valued by hospitals. Given the importance of this launch and everything that we are preparing with our partner, we are optimistic about gaining the same type of traction that we have achieved in the rest of Asia.

Alright. Excellent. My follow-up is on Mia. It’s still very early in the launch, but I wanted to hear a little bit about how you think the launch is going relative to your expectations. The Spanish experience sounds very positive so far and confirms the market expansion opportunity. How is the Japan launch progressing? What are some of the positive or negative surprises you’re seeing so far?

Yes. Mia is an exciting new category for breast harmonization. What we are seeing is that this value proposition is opening breast aesthetics to a whole new group of women. For instance, in Spain, where we launched our first campaign just last month, in one week, we had 175 leads, leading to 30 patients seeking appointments. More importantly, 47% of those patients were not seeking a breast augmentation prior to learning about Mia. This is thrilling for us, as we are discussing a true new category and market expansion. We are strengthening our pipeline, and we now have new clinics completing the certification process in Germany, the United Kingdom, and even in Japan. It is early on, but prospects are very promising. In Japan, the progress may be slower for one simple reason: compliance. We must adhere to many rules in Japan that affect our ability to communicate directly with consumers. Therefore, it will take a little longer, relying more on word of mouth. However, when we evaluate the results, particularly the outcomes for patients and the response to the experience, we are confident it will eventually gain traction regarding patient acceptance and increased awareness and satisfaction.

Got it. Thank you very much.

Question is from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.

Congrats on a strong quarter here, as well as for the opening in Costa Rica, and thanks for hosting. It was a great event. Pivoting to Motiva, regarding U.S. clearance, the PMA is submitted. I was wondering about the behind-the-scenes mechanics here. How many rounds of questioning do you expect from the FDA? And I assume there is no advisory panel needed here, but I could be mistaken. Any thoughts on the necessity for an advisory panel for clearance of Motiva in the U.S.?

Yes. Thank you, Anthony. It’s important to note that we submitted the full PMA, and it has been accepted for review by the agency. We are trying to be careful about disclosing too many details regarding the trial. However, I can assure you that all of our clinical sites around the country have now undergone the necessary inspections, which brings us closer to approval. We also had the 100th day meeting, which occurred in June of this year, and we are still awaiting the inspection of our manufacturing. All our interactions with the agency have been very collaborative, and the level of engagement has been strong. Nothing at this point indicates that there will be a panel.

Okay. And then just a follow-up on Gem, which was unveiled at the Sulayom campus opening. You mentioned 523,000 procedures globally. Is there any pricing data you can share on gluteal implants relative to breast augmentation? Also, if I could sneak in another question for Raj, as we consider the expansion of the new manufacturing campus and the price adjustments from China, how should we think about gross margins over the next two years from the Q2 level? Thanks again, and congrats on a good quarter.

First, the interest from consumers in contour aesthetics, particularly gluteal aesthetics, has been rising steadily over the past few years. When you look at that number, more than half a million procedures occur globally each year. As a women's health company, we aim to address the problems observed concerning safety and quality outcomes. For the correct pricing of that procedure, we will gain a clearer understanding as we conduct more research. However, when considering Mia as a premium procedure compared to traditional breast aesthetics, we can utilize a similar mindset to evaluate what Gem could be compared to traditional gluteal options.

Okay, Anthony. Regarding gross margins, we are currently absorbing several factors, as noted in the prepared remarks. The Costa Rican colon alone revalued about 25% just in the second quarter. So we are facing that headwind at the moment. However, as we advance beyond this and into the next year, and with the forthcoming launches in China and hopefully in the U.S., the uptick in our gross margins will be significant. The pricing in those markets is the highest globally, leading us to expect a positive improvement in our gross margins over the next couple of years.

Thanks, again.

Our next question is from the line of Joanne Wuensch with Citi. Please proceed with your questions.

Hi, good afternoon, guys. This is actually Anthony on for Joanne. Thank you for taking our question. My first question is just on guidance since there are some moving pieces with the U.S. and China launches. Can you talk about what your assumptions are at the low end of the guidance versus the high end of the guidance? And then I just had a quick follow-up. Thank you.

Yes. Thanks for your question. There are indeed a lot of variables for us to consider over the remainder of the year. We are considering the contributions from Mia, as well as the anticipated approval for China, which we discussed, expected in the fourth quarter. There are numerous scenarios for how the year could unfold. Overall, we are confident in the entire range we provided, but it’s quite challenging to pinpoint exactly where we will land given the variety of dynamics at play.

That's helpful. I found the information on Spain regarding the leads to consultation conversion interesting. Do you know how many of those 30 patients who sought appointments actually went on to get the procedure?

Yes, thank you. I can tell you that because it is summer, many of these prospective patients are scheduling either their appointments or the procedures for after the summer break. In Europe, particularly in Spain, it is typical for individuals to take off the entire month of August. Part of what Raj mentioned is indicative of how we are evaluating Mia. We observe this remarkable initial response that could transform into many appointments and potentially procedures. As we advance, we expect to see more and more clinics become involved in the Mia launch.

Great. Thank you for taking the questions.

Thank you. Our next question is from the line of Josh Jennings with Cowen & Company. Please proceed with your question.

Good afternoon. Thanks for taking my questions. Raj, I wanted to start with JOY plus and the Ergonomix to implant. Can you provide insight into the premium pricing associated with that program and how you see the momentum progressing this year as you gain approvals in new countries for JOY plus over the next 6, 12, and 24 months?

As we launch new and exciting experiences like JOY, a program designed to promote the Ergonomix2 platform, we find that once consumers understand the value proposition, they see it worthwhile to invest in upgrades to these offerings. In certain countries, over 10% of the market has shifted towards JOY for us, and that is significant, as it indicates that the market we entered over a decade ago, which was predominantly a commodity market, has evolved. We have shaped it through technology and unique value propositions that JOY represents. There are still many countries we need to reach with JOY, but we remain very optimistic about our progress. Additionally, it’s crucial to note that while we are raising considerable awareness and interest through Mia, some patients may not be suitable candidates for Mia, making JOY a viable high-quality alternative.

That’s helpful. And I apologize for referencing JOY plus instead of just JOY. A follow-up on the topic: you unveiled a development program for Mia plus during the Sulayom campus opening. I know you’ve commented several times on the Mia launch so far, but I’m interested in whether you foresee Mia or Mia plus potentially cannibalizing traditional breast augmentation procedures as you progress with the Mia plus development program?

In all of the market research we have conducted over the past few years, we have observed that market expansion stems from approximately half of consumers interested in Mia who were not contemplating breast augmentation previously. The other half was contemplating it, but when they learned about Mia, it became appealing to them. Given the notable differences between the price points for Establishment Labs with Mia, I believe this is a positive development for our company. Overall, whether we see an influx of new entrants into the category with Mia or those moving through the consideration phase to Mia, it is all very encouraging for us.

Thanks for the insight. If I could sneak one more in for Raj, any FX impact on the top line this quarter would be helpful to quantify.

No problem, Josh. The impact was minimal in the quarter, not really worth highlighting.

Excellent. Thank you.

Our next question is from the line of Marie Thibault with BTIG. Please proceed with your question.

Hi, good afternoon, Juan José and Raj. This is Sam Eiber on for Marie. Thanks for taking the questions. My first question is on the cadence for the back half of the year. Raj, I appreciate your comments in the prepared remarks. But regarding seasonality in Q3, should we expect it to align relatively with 2021 and 2022?

We do anticipate some seasonality. One thing you're likely noticing in our numbers is that the volume of revenue generated through distributors is also increasing. As our distributors start to experience their own seasonality, it further accentuates its effects in our figures. We expect it will become evident in our third quarter just as we have seen in previous years.

Okay. That’s helpful. I appreciate the insights. My follow-up is in relation to the initial experience in Spain regarding Mia. Traditionally, for typical breast augmentations, we've heard it could take months to years for a patient to decide to go through the procedure, but it appears Mia might be accelerating some of that conversion. Is this experience something you believe may translate to the broader market for Mia?

One of the most intriguing aspects is that the decision-making cycle for traditional breast augmentation often spans 4 to 8 years. When observing the group that showed little interest in traditional augmentation, it indicates that the decision-making process has been accelerated by our efforts to eliminate obstacles linked to the decision. This makes perfect sense. Furthermore, among those who did consider breast augmentation, Mia is effectively guiding them to the finish line by alleviating the hurdles they were facing.

Thanks for your insights.

Thank you.

Our next question is from the line of Neil Chatterji with B. Riley. Please proceed with your question.

Yes. Good afternoon, and thanks for taking my questions. Sticking with Mia, I’m curious how the initial experience in Spain might be similar across other European countries or centers. If there are differences, any anecdotal insights from those centers would be appreciated.

We observe that clinics that have successfully moved from certification to actual launches are generating considerable interest among prospective consumers. The summer months have influenced this process. However, we anticipate that many of these potential consumers will progress to consultations and make decisions to proceed with Mia. Additionally, we have expanded our network of clinics in Japan and added two high-end clinics in Germany, enhancing our ability to push forward as the summer continues.

Great. Just one more follow-up: You discussed ASPs being up sequentially and year-over-year. Any nuances to think about regarding the dynamics across various international regions?

Hey Neil. I’d say it's a reflection of several factors. As noted earlier, JOY is seeing more usage, and that product carries a higher price point. We've also implemented modest price increases in a few of our markets. Overall, it reflects the value we are delivering with the products we are marketing. So, it is really a combination of that mix and the pricing improvements, and we are content with our progress.

Great. That's all from me. Thanks.

The next question is from George Sellers with Stephens. Please proceed with your question.

Hey, good afternoon, and thanks for taking my question. I apologize if I missed this. I'm hopping between calls, but I was curious if you could provide some color on what you are expecting in terms of contributions within the guidance from China. I’m not sure if you quantified that specifically, but with the approval process taking longer than anticipated, I’d like to know if that’s potentially a headwind or risk to the guidance at this point.

Hi George. We will not provide specifics around the number or revenue we expect from China for competitive reasons. However, I can assure you that our confidence level regarding approval this year remains high. We continue to collaborate closely with our partner in China, addressing the final remaining questions. As mentioned earlier, there are many ways the year can unfold concerning the contributions from Mia and the anticipated approval in China. Overall, we are comfortable with the comprehensive range we've provided, though it is quite difficult to pinpoint our precise position within that range.

That’s perfectly understandable. Just switching to Mia, you've announced 14 partnerships so far. I’m curious about your expectations for that growth this year. Are you looking to accelerate those partnerships, and what might drive quicker sign-ups, or is this a more deliberate, slower rollout, aiming to select the best partners at this stage?

Absolutely. We aim to expedite the onboarding of premium partner clinics in Europe. There is still substantial room for adding those premium partners to our network. More importantly, we need to train, certify, and help them launch effectively. As we progress month by month, we are learning more about what works best for generating awareness and increasing efficiency. Clinics joining us later will benefit from those insights.

Great. Thanks for the time again. I appreciate it.

Thank you. This concludes our question-and-answer session. I will turn the call back over to Juan José Chacón-Quirós for closing remarks.

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

Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.