Earnings Call Transcript - ESTA Q3 2020

Operator, Operator

Good afternoon and welcome to Establishment Labs Third Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded.

David Erickson, Vice President of Investor Relations

Thank you, operator, and thank you, everyone, for joining us. With me today are Juan José Chacón Quirós, our Chief Executive Officer; and Renee M. Gaeta, our Chief Financial Officer. Following their 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 involve material risks and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review our quarterly report on Form 10-Q that we filed with the SEC today and is available on our website at establishmentlabs.com. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, November 9, 2020. 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's my pleasure to turn the call over to our CEO, Juan José.

Juan José Chacón Quirós, CEO

Thank you, David, and good afternoon, everyone. I hope everyone is healthy and continues to be safe. As we guided to in October preannouncement, total revenue in the third quarter was $22.8 million, which is comparable to the $22.9 million reported in the third quarter of 2019 and more than double the sales reported for the second quarter this year. With a strong recovery from the pandemic well underway, we are comfortable issuing full year 2020 revenue guidance of $80 million to $82 million. While we are now back to our 2019 revenue levels, we believe we are actually recovering faster than our global industry. Our success at returning to prepandemic levels is indicative of continued market share gains, which can be attributed not only to the superior aesthetic and safety profile of our implants but also in how our digital efforts have enhanced how we communicate with both patients and doctors. In addition to strong top line sales this quarter, our focus on lowering expenses and driving efficiencies led to a continued decrease in our operating cash burn. During the third quarter, our cash burn was $3 million, giving us a cash position at September 30 of $81.4 million. This keeps us in a strong financial position and affords us the flexibility to continue managing our business for ongoing growth and market share gains. Importantly, we continued to advance the technologies in our R&D pipeline that will contribute to our sales growth in 2021. Equally important, our submission timeline to gain regulatory approval and enter the U.S. market remains on track. Like most of the world, our business and industry have not yet returned to normal, but we are on a clear path towards doing so. Of course, we are seeing country-to-country volatility as COVID-19 flares up in some locations, but sales in more than 80 countries have given us some stability to manage our business throughout this period. As of today, plastic surgeons are operating even where government restrictions have limited other activities. It certainly helps that the majority of breast enhancement procedures are not performed in hospitals but in private clinics, which are generally owned or controlled by plastic surgeons. While not all countries are performing procedures at prepandemic levels, all countries in which we operate are open and performing procedures. Our Q3 sales in Europe and Asia were at or above levels reported in the third quarter last year. Latin America appears to have seen the worst of things and finished October fully reopened with continuing improvement across the region, including Brazil. Most importantly, we have seen continued month-over-month improvements since the lows of April, and this has continued into the fourth quarter. Third quarter direct sales, which continue to be the most reliable indicator of real-time trends, were back to the levels of direct sales in the first quarter of 2020, which, except for the final two weeks of March, were mostly unaffected by COVID shutdowns. Distributor sales, which are best viewed as an indicator of future demand, showed stronger sequential gains than direct sales. The most important takeaway from our third quarter results is this: patient demand is strong. Across our many geographies, we consistently hear from surgeons that they have never been busier, as they work through their backlogs, and that new patients are interested in using this time to recover at home from aesthetic procedures. One of the interesting and unexpected outcomes of the pandemic is that with the increased time at home, patients are eager to invest in themselves. Both plastic surgeons and patients have become much more adept and comfortable with online tools for education and initial consultations. As we noted last quarter, the level of optimism and business outlook among our plastic surgeon customers remains quite positive. Turning to some recent events, I would like to recap some of the data we announced at our 10-year Motiva symposium a few weeks ago. At that event, we were pleased to report 10-year post-market surveillance data from a variety of sources, demonstrating an unmatched device-related complication rate of less than 1% for the key safety endpoints of capsular contracture and implant rupture. These are two of the most important safety metrics when evaluating the success of breast augmentation procedures. Of all the data sets that we discussed at our symposium, I would like to highlight one in particular, our warranty data from the past five years. With approximately 12,500 women purchasing extended warranty coverage, only 9 of them, just 0.73%, required coverage for reoperations. This data is incredibly compelling. Patients and doctors are economically incentivized to let us know about every complication, and yet the reported number remained below 1%. If continued studies support these findings, it will represent a dramatic improvement over the historical published numbers of our industry. This data speaks to something beyond a competitive advantage, however. It could change how women perceive the safety of breast augmentation procedures in general. If perception of the industry improves, along with widely reported new safety data, the total addressable market could grow substantially. While we would like to focus on the data that we are generating regarding our improved safety profile, even more important is improved patient experiences. Word-of-mouth and online forums are an important component of our growth, and the superior performance and results of our products are at the heart of our success. As firsthand experiences are the driving force behind our business, the second part of this symposium featured a panel of leading plastic surgeons who discussed the important technological differences between Motiva and other implants and shared their real-world experiences with our products. Their belief in Motiva and the growing body of evidence supporting our unmatched clinical results are why nearly 1.3 million Motiva implants have been placed worldwide over the last 10 years. If you did not get a chance to catch the symposium, we have archived it on our website, and I hope you find time to do so. Surgeons are taking time to listen to their peers. Our digital platform, MotivaEdge, offers online training programs and seminars and attracts both new and existing surgeons interested in education and the latest innovations in breast implant technology. So far this year, the total audience for online MotivaEdge scientific events has been more than 19,000 plastic surgeons and other medical professionals. Now for an update on our product pipeline. We have a number of exciting and innovative new technologies, several of which represent potential growth drivers in 2021. Beginning with our Motiva Flora tissue expander. We are continuing to collect early patient experience in advance of our broad commercial launch in Europe early next year. We believe the market will be receptive to the advancements offered by Flora, including a proprietary integrated RFID port in our SmoothSilk bioengineered surface. In the eight sites that have used Flora so far, feedback has been very encouraging with surgeons commenting on its ease of use and patients reporting overall satisfaction and comfort. Although our Motiva implants are already used in breast reconstruction procedures in Europe, the ability to pair them with one of the most advanced tissue expanders available means that we will be able to fully access this important market. As for Flora in the U.S., we now expect to submit our 510(k) in the first half of 2021. Once cleared by the FDA, we will be able to access the largest portion of the $225 million global tissue expander market. We expect receipt of CE Mark in Europe for Motiva Ergonomix2 implant in the fourth quarter. Ergonomix2 builds upon our successful Ergonomix implant, which has become our best-selling and most premium offering in many markets, including Europe and Asia Pacific. The features of this innovative new product, including enhanced mechanical properties, advanced chemistry, and improved ergonomics, should result in even greater patient satisfaction. As it is so feature-rich, we expect Ergonomix2 to command a premium price over Ergonomix. Plastic surgeons familiar with Ergonomix should be able to switch easily to Ergonomix2, which will be available in a wide range of sizes throughout Europe. Turning to Motiva Mia, our minimally invasive breast augmentation program. We are continuing to make good progress as we fine-tune the surgical technique. During the quarter, we received IRB approval to begin a patient series in Thailand. To broaden our experience even further, we are also planning to initiate a patient series in Latin America by the end of the year. Motiva Mia is a very promising technology, and we are excited by the opportunity to expand the addressable market for breast aesthetics by creating a new product category. We are confident of the large number of women who would be interested in a less-invasive breast procedure with safety and aesthetic outcomes similar to our current Motiva implants. If Mia is successful, it would contribute meaningfully to our growth and further differentiate us in the market. Motiva is already the implant of choice for many surgeons and patients around the world, and we are eager to introduce our innovative product portfolio to the large Chinese and U.S. markets. We are continuing to make progress with our regulatory submission in China, and we expect approval during the first half of 2022, as previously discussed. Customers in this market are active digital users for product information, breast enhancement education, and scheduling of plastic surgeon consultations, and this plays very well to our strong digital capabilities. The United States represents the single largest breast implant market in the world, and we are continuing to pursue approval to offer Motiva to women and plastic surgeons in this geography. Study follow-up visits are continuing for all patients of our U.S. IDE clinical trial, and follow-up compliance is high, even during the more challenging pandemic environment. Approximately half of the patients in the aesthetic cohorts have reached their two-year anniversary date, and all study-related activities remain on track for FDA requirements. We are very eager to demonstrate the advantages of Motiva in an FDA clinical trial. You will recall we successfully completed enrollment in the revision reconstruction subcohort during the second quarter. Enrollment in our remaining reconstruction cohorts, which was delayed by the pandemic, still continues, and we are making steady progress. With that, I'd like to turn the call over to Renee to discuss the financials in detail. Renee?

Renee Gaeta, CFO

Thank you, Juan José. Not only did we see strong sequential growth in sales this quarter, we aggressively controlled operating expenses, and I'd like to thank the team for helping to keep Establishment Labs in a very solid financial position. You can find additional details about our third quarter financials in our earnings press release and our Form 10-Q, which we filed today. Total revenue for the quarter was $22.8 million. Direct sales were approximately 40% of this total, while distributor sales, which can fluctuate based on changes in inventory levels and the timing of reorders, made up the balance. Our direct/distributor sales mix this quarter has returned to a more typical pattern and was similar to the same period a year ago. From a regional perspective, sales in Europe comprised approximately 45% of global sales; Asia Pacific, Middle East was approximately 35%; and Latin America made up the balance. Brazil, which is our single largest market globally, accounted for approximately 10% of total quarterly sales even though the Brazilian real has depreciated approximately 40% this year. As Juan José mentioned, both direct and distributor sales in Latin America were down year-over-year as the region continued to recover. By comparison, year-over-year growth was strongest in Asia Pacific and Europe as those regions recovered more quickly. Our reported gross profit for the third quarter was $15.1 million or 66.6% of revenues compared to $14.2 million or 62.3% of revenues for the same period in 2019. The year-over-year increase was due to the benefit of geographic mix, greater operating efficiencies, and enhanced manufacturing and planning capabilities. Total operating expenses for the third quarter was $17.7 million, a decrease of $5.3 million or 23%, compared to $23 million in the same period a year ago. SG&A expenses for the third quarter declined $4.2 million or 21.9% to $15 million compared to $19.2 million in the third quarter of 2018. The majority of this decrease resulted from our commitment to preserve cash by controlling expenses, including lowering consulting fees, marketing expenses, and the reduction of other discretionary expense categories. Our research and development expenses for the third quarter decreased $1.1 million from the same quarter a year ago to $2.7 million. Most of the reduction was due to the timing of clinical trial expenses and the reprioritization of certain projects. Strengthening our product portfolio to drive future growth remains a top priority, and we will continue to invest in research and development with discipline and focus. Net loss from operations for the third quarter was $2.6 million compared to net loss of $8.8 million in the year ago period. During the third quarter, we used $3 million to fund operations compared to $6.1 million in the second quarter of 2020 and $10.9 million for the third quarter of 2019. This demonstrates our ability to restrict cash burn when circumstances require it and invest when warranted, all while driving growth. From a balance sheet perspective, our cash position remains strong at $81.4 million as of September 30 compared to $86.4 million on June 30. To help you with some modeling, we expect to see fourth quarter expenses similar to what was reported in the third quarter, and we plan to provide more specific 2021 guidance next year. Overall, we believe our company is in a strong competitive position. The business fundamentals are sound, and we remain very optimistic about the potential for our new products to contribute to our growth in 2021. And while the COVID pandemic still presents a degree of uncertainty, I am confident we have the flexibility to respond quickly to changes in our business and will continue to remain diligent as we progress towards cash flow breakeven and profitability.

Juan José Chacón Quirós, CEO

Thanks, Renee. Before we open it up for questions, I'd like to express my gratitude to our plastic surgeons and business partners for their ongoing commitment to Establishment Labs. I also want to acknowledge and thank the employees of Establishment Labs for their tremendous effort and resilience, which has enabled us to successfully navigate a challenging year while meeting our operating and financial commitment. Establishment Labs has a very bright future, and we are excited about our ability to grow and create value for our shareholders. As we look to 2021, we have truly differentiated technologies coming that will expand our comprehensive portfolio. We expect continued market share gains, both from expanding our presence in breast reconstruction and also developing new product categories, like minimally invasive augmentation. These will help support our growth next year and for many years to come. We continue to plan for our entry into the U.S. and Chinese markets while staying committed to controlling expenses and increasing our efficiency to maintain the strong financial position. Finally, in honor of breast cancer and breast reconstruction awareness month in October, as part of our global campaign, Establishment Labs was privileged to partner with plastic surgeons and medical personnel in Brazil, who volunteered their time to perform more than 60 reconstruction surgeries for breast cancer survivors. Many of these women have been waiting for a long time for their surgeries, and being able to help them in their journey is an important and powerful reminder of our commitment to women's health and well-being. We thank you for your support as we continue to transform this industry while improving women's health. With that, I will turn the call over to the operator for Q&A.

Operator, Operator

Your first question comes from the line of Chris Cooley with Stephens.

Christopher Cooley, Analyst

Can you hear me okay? Well, congratulations on the very impressive results in light of an extremely challenging environment. Maybe just two quick ones for me. First, when we think about just what you saw in the third quarter and the exit rates here as we're going into 2021, curious what you anticipate seeing most specifically in the European theater in terms of growth here in the fourth calendar quarter. Do you think that we'll see additional spikes, and is that kind of what we need to bake in? Or is it an environment now that can manage through any flare-ups that you're seeing there? Just curious, again, a little bit more about what's built into the expectations for the fourth quarter from a top line perspective. And then similarly, if I could, maybe just as my follow-on with Renee in terms of your cash flow breakeven commentary. Could you just update us again when you expect to achieve those levels? I mean, clearly, you're getting much better leverage now, have done a great job of expense management. Just curious if you plan to spin some of those savings or if that initial target on cash flow breakeven could be pulled forward somewhat.

Renee Gaeta, CFO

Thanks for the questions, and thanks for joining us today. Certainly, as we went through the third quarter, we saw strong performance in Asia Pacific and Europe as those countries responded well to the pandemic and came back online. And Latin America was certainly behind that, but we've seen improvements and month-over-month progress. As we think about the guidance that we gave for the fourth quarter and full year, we're factoring in a variety of things that we're juggling at the moment and the fact that we're in over 80 countries. Our guidance represents our best estimate for Q4 based on everything that we presently know, and we're actively monitoring the situation in Europe. But it's nice to see that most of the governments that are providing restrictions are not implementing full lockdowns. As of today, we've continued to see procedures operate. But as your question implies, we're watching it closely, and we'll have to see how the rest of the quarter plays out. As you asked about cash burn, I'm very happy with the team's response this year given everything that we've been juggling. And it's great to see that we can restrict cash burn when needed, but we also appreciate that we want to continue to invest in R&D and new product innovation so we can continue to bring amazing products to this industry. So I’m not going to specifically comment on when I think the cash burn will turn profitable or positive, but I'm extremely excited about what we've accomplished this year and look forward to getting there.

Matthew Taylor, Analyst

So Renee, maybe one for you. I was wondering about the Q4 guidance, if you could help us understand between Q3 and Q4, how much stocking do you think there was for some of your distributors? Did that help you in Q3? And are you expecting a similar, more or less, benefit in Q4?

Renee Gaeta, CFO

Our Q3 results, most of our distributors are ordering based on sales forecasts for future quarters. I would not indicate that there was restocking or replenishments there. I think we're very happy to see the activity coming from our distributors, and we're communicating with them on a monthly basis. When I look back at Q3 and compare it to the prior year Q3, I see similarities in the return to normal, not only in the balance of direct versus distributor but also in the geographic aspects, so we’re pleased to see business returning that way.

Juan José Chacón Quirós, CEO

Yes. Matt, what we are seeing is that the business continues to progress well. Despite continuous flare-ups in different areas of the world, we have found that surgeons have adapted remarkably well to the situation. They are effectively conducting online consultations and have implemented safe protocols for patients to come in when they need to, ensuring safety for surgical procedures. The situation is very different from last spring. What we are seeing now in Europe has been observed in other places at different times. I think the plastic surgery community is well adapted to the situation. We’re monitoring things literally week-to-week across those 80 countries, but we feel confident regarding our position in patient demand, bolstered by online search activity that supports that confidence.

Raj Denhoy, Analyst

I wonder if you could start by discussing the rollout of Flora and the CE Mark later this year, possibly by the end of the year, and then the U.S. launch at some point next year. Could you share your thoughts on how quickly this could begin to capture market share? Regarding the $225 million market opportunity you mentioned, what would be a reasonable expectation for the next 12 to 18 months?

Juan José Chacón Quirós, CEO

Thank you, Raj. We are very pleased that we received the CE Mark for Motiva Flora earlier this year. We are conducting pre-marketing activities in preparation for a broader commercial launch in 2021. What we have observed so far in the different centers using Motiva Flora is encouraging; surgeons are commenting on its ease of use while patients report satisfaction and comfort with the device. Now, we need to educate surgeons about Flora's unique features, including its bioengineered surface and the integrated RFID port that is MRI compatible. We are putting a lot of effort into quantifying the benefits because when we launch this, we want to introduce it at the right price point. We are not rushing this launch. Sales of breast implants in reconstruction have historically been low for us as we have focused mainly on aesthetics. However, as we launch Motiva Flora next year, we will also be presenting the Ergonomix implants for breast reconstruction. Keep in mind that most of the reconstruction contracts in Europe involve government and hospital contracts which take time. Therefore, although we may have a broad launch in the first half of next year, we must navigate the contracting process.

Raj Denhoy, Analyst

That's helpful. I also wanted to inquire about Europe. There was a report, which I'm sure you guys actually circulated, from the European Commission recently on textured implants and their association with ALCL. It doesn't seem to get as much focus now, but could you describe how much these concerns around textured implants are still pushing surgeons towards Motiva? Do you think this transition is still active considering that surgeons have probably made decisions regarding their implant choices?

Juan José Chacón Quirós, CEO

As you know, we were the company that foresaw this issue a decade ago, which is why we developed our proprietary bioengineered surface. What I would say is that what we received last month is consistent with previous trends. The recent reports highlight regulators proposing restrictions again. We saw earlier last month that the TGA in Australia withdrew two microtextured devices and polyurethane implants from the market. The SCHEER Committee of the European Commission has also noted the association between textured implants and ALCL. Our products are smooth-surfaced according to ISO 14607. Therefore, we think that this elimination of unsafe devices is ultimately good for the industry. It brings us closer to the patients and to women concerned about these devices. Just as we have done over the past few years, we will continue to promote the message of safety and aim to gain market share based on our superior safety profile.

Joshua Jennings, Analyst

I want to ask two questions. First, about the FDA trial. The stellar data from your symposium has sparked questions about when we could see data from the augmentation cohort. The aesthetics cohort should be completed by next August. Should we expect to see initial data from that augmentation cohort before the end of 2021? Or could it come sooner? What can you share about the timing of that initial data from the FDA trial?

Juan José Chacón Quirós, CEO

Thank you, Josh. One of the positive aspects of our progress is that half of the patients in the aesthetic cohorts have reached their two-year anniversary date, so that shows good progress. We are looking forward to sharing our data because we believe it will be consistent with what we’ve seen outside the United States. However, these activities are ongoing. Our conversations with the FDA are part of that. We will inform you of any updates as soon as we have some concrete information. Yes. Thank you. The opportunity in China is very exciting for us. Patients have been traveling to countries like South Korea, Japan, or Vietnam to obtain Motiva implants, at least prior to the pandemic. In countries like South Korea, 25% of patients were from China. We are currently advancing our product testing and have recently passed our latest testing phase. We will continue working on the remaining regulatory steps, and we expect to receive approval in the first half of 2022 for Ergonomix and round SmoothSilk implants. We are also planning our efforts with Chinese regulators to introduce Ergonomix2 and especially Motiva Mia, as we believe Motiva Mia is particularly well-suited for the Chinese market.

Marie Thibault, Analyst

I wanted to ask about the symposium you hosted last month and the excellent 10-year data presented there. What feedback have you been hearing from the industry? Additionally, can you provide any details on Establishment Labs' ability to attract new surgeons during COVID?

Juan José Chacón Quirós, CEO

Certainly. As we've discussed before, for many years, our competitors claimed that Motiva implants had not been on the market long enough to accurately measure their safety profile. The FDA's 10-year study requirement makes surgeons very attentive to that duration. We have received positive feedback from both the plastic surgery community and patients with these devices in place for 10 years now. We were pleased to present this data during the symposium. This enhances our engagement in medical education via our MotivaEdge platform. As a reminder, we've had over 19,000 plastic surgeons trained on MotivaEdge, many of whom are new accounts. We are aiming to transition these new accounts to using Motiva implants promptly.

Marie Thibault, Analyst

Great. Regarding Motiva Mia, it's good to hear you'll be expanding into a patient series in Latin America. But where does this lead us concerning the timeline for Motiva Mia? When can we expect data from that patient series, and what plans do you have for formal trials and the regulatory process?

Juan José Chacón Quirós, CEO

Thank you. We aim to expand our patient series not only in terms of the number of patients receiving Motiva Mia but also across different geographies. We initiated the series in Asia with patients in Japan and the plan is to continue this work in Latin America to understand how quickly plastic surgeons can adapt to this procedure. While it's simpler, it requires a different approach. We want to ensure we can replicate this standard for minimally invasive breast augmentation. We are moving cautiously but patiently, ensuring we execute this correctly. The direct-to-consumer component is something we are working hard on, aiming to target women who may not currently consider breast augmentation. We will present data as soon as we're able, but we already possess safety data for the surface, manufactured under the same conditions as our other products. We are mostly focused on refining the surgical procedure and educating surgeons worldwide.

Philip Coover, Analyst

This is Phil on for Amit. Maybe one for Renee. I have a question about cost controls and the great job you guys have done with OpEx so far this year. How durable might these cost savings be as we look into 2021, and how might they relate to a resumption in procedures and a ramp-up in sales next year?

Renee Gaeta, CFO

Yes, thanks, Phil. We have been very pleased with how the team has worked diligently across all departments, considering different approaches to operate efficiently while still achieving our growth targets and innovation pipeline. Costs will inevitably increase again as growth ramps up, but we have learned valuable lessons this year, and I'm hopeful some changes will remain in place. While some cost controls are volume-based and will reset when revenues grow, initiatives around travel, events, and our relationships with vendors or consultants have created a new operational culture that we are pleased with. It's a good question, and I appreciate it. We are still finalizing our 2021 annual operating plan, which includes a real-time assessment of business conditions in all of the countries we operate in light of the pandemic. At this stage, I'm not ready to provide additional color on projections. We are trying to be very thoughtful, and we’re excited about the results we've seen to date.

Juan José Chacón Quirós, CEO

Thank you for joining us on today's call. We look forward to providing our next quarterly update early next year. Have a very good rest of the day, and please stay healthy.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.