Establishment Labs Q1 2023 Earnings Call Transcript

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May 8, 2023

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to Establishment Labs First 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 question and answer session and instructions will follow at that time. As a reminder, today's call is being recorded. I will now turn the call over to Raj Denhoy, Chief Financial Officer.

Operator

Please go ahead, Raj.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us. With me today is Juan Jose Jacone Curis, our Chief Executive Officer. Following our prepared remarks, we'll take your questions. Before we begin, I would like to remind you that Statements made by management during this call will include forward looking statements within the meaning of federal securities laws. These include statements on Established Labs' financial outlook The company's plans and timing for product development and sales.

Speaker 1

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 ks 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, 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 Establisha 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.

Speaker 1

We continually seek to expand the geographies in which our products are regulatory approved. Please check with the 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, May 8, 2023. Except as required by law, Established 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.

Speaker 2

Thank you, Raj, and good afternoon, everyone. Revenue in the Q1 of 2023 totaled $46,500,000 a 21% increase Over the Q1 of 2022 in a new quarterly record for our company, excluding the negative impact of foreign currency changes, Our growth in the Q1 would have been approximately 22.9%. Our revenue guidance for 2023 remains unchanged At $200,000,000 to $210,000,000 representing growth of 24% to 30% over 2022. Raj will provide additional details on our Q1 performance and our outlook in a moment. The last few weeks have seen a number of significant events at Establishment Labs.

Speaker 2

On March 29, we announced that we have 3,000,000 Motiva devices in market. This is an important event, not only because of the scale we have achieved in market since we began commercialization over 12 years ago, but also because of the exceedingly positive outcomes we have achieved with such a large number of devices. Just like we do every year, we recently released to the scientific community our post market surveillance report, which includes data From independent national registries, all consistently showing less than 1% device related complications. These excellent results were corroborated and expanded upon when the 3 year data from our Motiva U. S.

Speaker 2

IDE study was presented at the Aesthetic Meeting on April 20. Doctor. Caroline Glicksman, the principal investigator of the study, Provided an update following the aesthetic cohort passing the 3 year endpoint in the trial. What is particularly notable about the results The rates of the major device related complications of capsular contracture rupture did not change from year 2 to year 3. There continue to be only 2 patients with capsular contracture and only one patient with a suspected rupture at 3 years, which was the exact same number at 2 years.

Speaker 2

Beyond the rates themselves being quite low and much lower than has ever been U. S. Plastic surgeons are now asking the most important question. When will Motiva be available in the United States? And while we can't give them a definitive answer, we can tell them that our final module of our PMA was submitted to the FDA In the Q1, and the full PMA has now been accepted and is under review by the agency.

Speaker 2

Of course, with so many catalysts in the near future, how we are going to fund our growth is always an important question. We answered this to a large degree on April 27 when we completed a follow on share offering that raised gross proceeds of $90,400,000 Our team did a wonderful job in just a one day Warcross that was many times oversubscribed and that brought On April 10, we announced the launch of MiaFEMTECH in Japan. The idea for Mia originated a decade ago When we recognize that breast augmentation was not meeting the needs of women in Japan, with the experience of MiyaFemtek, we are providing a solution. With Mia, a plastic surgeon can shape the breast in a 15 minute minimally invasive procedure without the need for general anesthesia. The result is natural and discrete with a 1 to 2 cup proportionate result.

Speaker 2

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. Our lunch activities are centered on creating this new category in Japan With our partner clinics, we have created marketing materials localized for the Japanese market, including a Japanese language MiyaFemTech website, Social media and traditional media all directed at creating demand and then directing interested women to our clinic partners. MiaFemtek is being launched initially at 2 clinic chains in Japan. Seixin Plastic and Aesthetic Surgery Clinic Operates 10 premium clinics with MiaFemtek now available at their main Tokyo clinic in Roppongi and at their newest clinic in Ginza. JoelClinic is a high end medical aesthetics chain in Japan that will offer Mia FEMTECH initially at its Tokyo and Osaka locations.

Speaker 1

It is

Speaker 2

still early in the launch of MIA and we are focused on demonstrating that this is a new category, bringing new women into breast aesthetics Scale Mia into the multibillion dollar opportunity that it has the potential to become. We look forward to providing updates on our progress in Japan for the coming months. We recently also announced our 1st European clinic partners for MEA. We have partnered clinics in Spain, Switzerland and Sweden, And I'm pleased to report that we have signed our 1st NIA partner in France. Clinique de Jean des Elysees is a prestigious center for medical and surgical aesthetics Based in Paris, with a chain of 12 clinics throughout France.

Speaker 2

We continue to make good progress on finalizing European Union approval For the tools that are part of the minimally invasive system used for MEA Semtech. In our Aesthetic Breast Recon franchise, The rollout of our Motiva Flora tissue expander continues. The market feedback continues to be very positive with more and more surgeons making it Your expander of choice in post mastectomy breast reconstruction. What continues to resonate with clinicians globally is that FluorA is a much improved offering with many new advances in what is unfortunately a large and often neglected category In a recently published paper, scientists at the Medical University of Innsbruck in We're able to confirm in a comparative study that FLORA provides much improved patient comfort and satisfaction in their breast reconstruction journeys. 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 reconstructive surgeries that achieve the aesthetic ideals to which they aspire.

Speaker 2

On China, we are actively preparing for the launch of Motiva with our distribution partner. Over the last couple of months, we have conducted a significant amount of research In order to understand the opportunity in what is now the 2nd largest market for breast devices globally. The market in China continues to recover With procedures in 2025 expected to exceed pre COVID levels, there continues to be a very healthy luxury segment in China, Consumers are paying procedure prices similar to the upper end of market in places like United States and Europe. Given the premium positioning of Motiva in other Asian markets, including South Korea and Japan, and the strong awareness of our devices in the Chinese market, Process and expect to launch Motiva in this market in the second half of twenty twenty three. I will now turn over the call to Raj.

Speaker 1

Thank you, Juan Jose. Total revenue for the Q1 is $46,500,000 Reported revenue growth in the Q1 was 21%. Foreign currency changes reduced our 1st quarter revenue growth by approximately $750,000 Excluding the impact of currency, Revenue growth in the quarter would have been 22.9%. Direct sales were approximately 36% of Global Motiva Implants sales, While distributor sales made up the balance. From a regional perspective, Motiva sales in Europe, Middle East and Africa were approximately 44% of the global total Asia Pacific, 31% and Latin America made up the balance.

Speaker 1

Brazil, which is our single largest market globally, accounted for approximately 13% of total quarterly Motiva sales. Our gross profit for the Q1 was $30,100,000 or 64.7 percent of revenue Compared to $24,900,000 or 64.8 percent of revenue for the same period in 2022. Our gross Profit in the Q1 was negatively impacted by higher overhead and labor costs. Direct labor costs were higher in part from changes in foreign currency exchange rates between the U. S.

Speaker 1

Dollar and the Costa Rican cologne. As we report in U. S. Dollars, a significant revaluation of the clone resulted in higher costs in the period. Average selling prices in the Q1 are up from the Q4 of 2022.

Speaker 1

We continue to see regular fluctuations in gross margin on mix and other factors. However, the trend in our gross margin is expected to be positive over time. SG and A expenses for the Q1 increased approximately $4,800,000 to $31,700,000 compared to $26,900,000 in the Q1 of 2022. The increase in SG and A in the Q1 results in part from our investments in new growth initiatives like MEA and preparations for our launch in the United States. R and D expenses in the Q1 increased approximately $2,900,000 in the same quarter a year ago to $6,500,000 Higher personnel costs and increased activity related to our U.

Speaker 1

S. Clinical trial contributed to higher spending this period. Total operating expenses for the Q1 were $38,200,000 an increase of approximately $7,700,000 from the year ago period. Net loss from operations for the Q1 was $11,900,000 1st was $42,800,000 compared to $66,400,000 at the end of 20 22. Cash used in the Q1 included $3,800,000 of investments in our new manufacturing facility as well as a planned increase in inventory of $8,500,000 as we prepare for the growth we expect over the near future.

Speaker 1

On April 27, we completed a 1,265,000 share follow on offering The net proceeds to establish the labs after fees and expenses were approximately $84,000,000 With the cash on hand at the end of the first quarter, Proceeds of the offering as well as the 2 remaining tranches of our debt facility, which totaled $50,000,000 and become available on the achievement of sales and regulatory milestones, We have access to approximately $175,000,000 We are reaffirming the revenue guidance we provided for 20 3 of $200,000,000 to $210,000,000 representing annual growth of 24% to 30%. We continue to expect gross margins in 2023 to be similar 2022. Operating expenses as a percent of revenue in 2023 are also expected to be similar to 2022. Operating spending over the Neerich firm is reflecting our investments in development and commercialization programs. However, we expect expenses as a percentage of revenue will trend down as we move into these new initiatives and I will now turn the call back to Juan Jose.

Speaker 2

Thank you, Raj. With the launch of MiyaFEMTECH in Japan, The presentation of the 3 year data from our U. S. Study and the successful follow on offering the last few weeks have been very meaningful for our company, But we expect the coming months to be just as eventful. We look forward to providing updates on the commercial launch of MEAN Japan And the expansion into Europe.

Speaker 2

We are also preparing for the launch of Motiva into China. As we enter the United States and China, It is a major step in our efforts to build a breast aesthetics and reconstruction industry based on technology solutions to improve women's health and well-being. This has been more than a 12 year journey for us since we first went to market with Motiva. And each year, we publish our post market surveillance report, which in effect details how we are doing. This is the only document of its kind in our industry, released every year as an exercise of transparency With our stakeholders, it catalogs the clinical data that has been collected on the performance of our devices from several different countries.

Speaker 2

The report includes our own product and warranty claims information as well as registry data from different countries and independent clinical publications on Motiva. They are all telling the same story, namely that after over 12 years in the market, Motiva Implants continue to have device related complications in the very low single digits, in many cases, well less than 1%. And this is not a surprise for us. It is downstream effect of science and technology as all the papers about Motiva in published Peer reviewed publications attest. We look forward to making our products and solutions available to the largest markets in the world.

Speaker 2

We continue to publish this report every year. It is available on our website at establishmentlabs.com, and we encourage everyone to download it and review We will also hold the opening ceremony for our new Sulayon campus on July 19. The new manufacturing capacity at Sulayon More than doubles the number of implants we can produce per year, and it allows us to provide over half the current world demand. This facility also brings us significant new capabilities in R and D, media and surgeon training. We are making progress every day Towards our goal of building a strong women's health foundation to create vibrant and expanding markets for breast aesthetics and reconstruction and to make a meaningful change in the lives of women around the world.

Speaker 2

I will now turn the call over to the operator for your questions.

Speaker 1

Thank

Speaker 2

you.

Operator

Our first question is coming from Anthony Petrone from Mizuho Group. Your line is now live.

Speaker 3

Thanks and congratulations here. Strong Start to the year and then of course on the IDE data from a couple of weeks ago. I think I'm going to start on Japan. Maybe just qualitatively how the launch of MIA in Japan is going? And then maybe more specifically, when we think about The Seishin network of clinics, there was the initial launch in Tokyo there, but there's also the Joe Clinics as well, the medical aesthetic locations.

Speaker 3

When we think about those collective sites, I think Station has 10 sites, not sure how many Joe has in their network. But how many sites are represented in those two networks and how many of those are you in currently? And then I'll have a couple of follow ups. Thanks. Yes.

Speaker 3

Thank you,

Speaker 2

Anthony. We're very pleased with our launch of MEA in Japan. But I do have to remind absolutely everyone of the importance to see this as the launch of a new category and not another product into traditional breast aesthetics. If it was a traditional launch, our main target would be The objective here is really to bring in consumers that are currently not interested in traditional breast augmentation. And that's why it is so important to address the potential obstacles that these women would see in traditional breast augmentation.

Speaker 2

If you look at all the marketing efforts that we are doing in partnership with Seixin and Joe Clinic, they are focused on that. So it hasn't been yet 1 month, but we are already pleased with the amount of traffic we are getting in the different digital assets So we are utilizing. We are working right now with Tokyo and expect to see expansion in And furthermore, later in the next year to the other locations. These are chains of clinics, so they have a presence all over Japan. And we do expect to see me expanding as well geographically throughout Japan.

Speaker 3

That's helpful. And then the follow-up would be just On the U. S. Side and following the final clinical module submission, not necessarily on timing, but maybe as we look The remainder of 2023, when you think about the buildup of the infrastructure on the U. S.

Speaker 3

Side, how much of that Really is ongoing now, potentially accelerates ahead of a potential approval and then how much sort of bridge is after A potential approval whenever that may come over the next year or so. Thanks again and congratulations.

Speaker 2

Yes. We have a very detailed, carefully thought out plan for launch in the U. S. It's going to be our most important launch ever for this company. We have now launched Motiva in more than 85 countries.

Speaker 2

So we have a very clear blueprint of how we do things. We've already been building up towards the launch. And as we get closer and closer, Adding people to that team, we're making sure that we have what is necessary. While we don't Bring in people too early that would increase our potential spend unnecessarily. So that's kind of like the balance that we're trying to play With our U.

Speaker 2

S. Launch strategy.

Speaker 3

Very helpful. I'll get back in queue. Thanks again.

Operator

Thank Your next question is coming from Joshua Jennings from TD Cowen. Your line is now live.

Speaker 4

Hi, good afternoon. Thanks. And echo and Denise, congratulations on the strong start to the year and all the progress. I was hoping to just first I asked just two questions on EMEA. First, maybe getting a little bit ahead of myself or but just thinking about the U.

Speaker 4

S. Approval Track for EMEA once you have Motiva approved. It is a supplemental PMA pathway, A reasonable pathway to think of that could be open for establishment for media approval.

Speaker 2

Thanks, Josh. So right now all of our efforts are geared towards getting approval For Motiva Round and Ergonomix. Ergonomix 2 is the next generation platform That makes MIA possible. We do believe, and our regulatory experts have supplemented this, Once we gain approval for Motiva in the U. S, we would be able potentially to use that approval To build on it with an extension for the new catalogs that are necessary for EMEA.

Speaker 2

So that's something that we need to explore more and definitely they will become more and more important as we get over with the current approval

Speaker 4

And then just second question, again, I have myself again here. But just thinking about Mia, the approach, the technique, the mini laser technique your team has developed, I mean, should investors be thinking of Mia as a potential

Speaker 2

So if you think about other surgical specialties moving into minimally invasive, the creation of MIA As an experience required not only the Ergonomix II platform, but also a series of tools and techniques that go with it so that you can have a true minimally invasive approach. So absolutely, you can use these technologies to go into other types of treatments in which minimally invasive would be required in order to get a similar experience at what you see with Mia. It's a little bit early to go into that, but we absolutely do think that it is a platform.

Speaker 4

Okay, great. Thanks a lot.

Operator

Thank you. Next question is coming from George Sellers from Stephens. Your line is now live.

Speaker 5

Hey, guys. This is Harrison on for George. Just want to reiterate again, congrats on the strong quarter and thanks for taking the question. So I wanted to start on Flora. I was wondering if you can give us an update on where you are as you build out that international market And specifically, what your expectations are in 2023 in terms of Florida contributing to growth and any additional geographic

Speaker 2

Yes, thank you. And FluorA is the first technology that we have exclusively devoted to our aesthetic breast recon program. So it is very important to us and what we see is quarter to quarter more surgeons and more Hospitals taking on Flora. The build out though of breast reconstruction demand It's slower because it requires different tenders that may vary in timing from region and countries. So it is a build out that cannot happen as accelerated as a normal breast aesthetics launch.

Speaker 2

Now We are though very pleased with the response that we get and also for the scientific backing that we are getting. This paper that I referenced in my remarks earlier is particularly important because it compares a direct Competitor from the United States and their tissue expander to our FLORA tissue expander in the same patient. So this is a true direct comparative evidence and one in which most women were pleased With our expander as being their choice. So as we move along and we will continue to do so, I think this evidence will further prove the importance of this technology. And I will mention also the importance of And with Flora, because we received approval there at the end of last year and we continue to add hospitals in So I think that's going to be further proof that in this type of sophisticated markets, we can do very well with Flora.

Speaker 5

Yes, thanks. That sounds great. And then I wanted to ask one on Mia as well, as the launch In Japan and across Europe progresses, I wanted to ask about the partnership model and what kind of investment model, should we expect this to be used across the company more broadly going forward or is this specific to the

Speaker 2

So as a company, Establishment Labs has been moving closer and closer to consumer Over the last decade, Mia is the 1st offering that is truly conceptualized and designed for the type of experience that MIA is. So when we look at this partnership model, it also is a different business Proposition, one in which we are partnering with selected clinics. These clinics Understand very well that they will have to invest alongside with us to be able to bring in these new consumers that are not looking for traditional breast augmentation. So it is a very different type of thing. Remember, we don't have any sales reps for EMEA.

Speaker 2

We invest this money in creating demand. So we will continue working with this model in Europe once we are able to launch there. And we are very happy with the type of interactions We are doing with these partner clinics. We'll see what happens in the future if this is a model that we want to move across the organization.

Speaker 5

Great. Thanks for taking the questions.

Operator

Thank you. Next question today is coming from Neil Chatterjee from B. Riley Securities. Your line is now live.

Speaker 6

Hey, guys. Good afternoon. Thanks for taking our questions and congrats on the strong quarter. Maybe just sticking with me, Just curious more broadly how that partner funnel is shaping up in other markets? And then just secondly, Yes.

Speaker 6

What does that the French market look like with a new partner there, maybe in comparison to the Swiss market that had about, I believe, 100,000 women eligible for MIA and about 200,000 that were interested.

Speaker 2

Yes, thank you. And we are as excited as Everyone with Mia and the possibilities that it can have over time, we are looking at a multibillion dollar opportunity at And our job is to basically develop that market and prepare for it with these partner clinics. So if you look at Europe right now, we are looking at the 1st European partners in Sweden, Switzerland, Spain and now also in France. So when you look at clinics like Nordiska in Scandinavia, Lehman and the OTOK in Switzerland or Planas and Clinique de Champs Elysees in And friends, respectively, what we are looking at is like literally the best of the best in terms of the potential partners that you can use To go direct to consumer and compliantly be able to get them to understand that this is a different type of offering. When we look at the next few months, I think, again, it's about the qualitative part.

Speaker 2

It's about being able Get through that door a new type of consumer. With Clinique de Champs Elysees is a particularly interesting Group, if they have 12 clinics throughout France, we are going to begin at their main location in Paris And 9 additional other clinics throughout the country. So very excited about all these possibilities.

Speaker 6

Great. Great. Maybe just switching to China. So just wanted to check-in on how things are tracking with kind of The regulatory process for Motiva there, targeting that second half launch. And then just also, I believe you're planning to leverage The distributor you have for South Korea, just curious if you could just elaborate on what they're seeing on the ground and from any market research in front of that launch?

Speaker 2

Yes, actually we've been doing more and more work in preparation for the launch In the second half, and one of the important things is that breast aesthetics is bouncing in China from The Kavit levels into something that looks more like what we were seeing before Kavit. And it is expected by That by 2025, we will be back at 2019 levels. Now, the other very important thing is that you do see Patients continuing to request premium brands, so that plays particularly well for us. And we are working with our partner, Human Wellness Corporation, one of the reasons we chose them as our partner for China is that the Chinese consumer does look up To what is going on in South Korea when it comes to aesthetics. Now, of course, our partner is putting together an entire team in the ground in China, locals that understand the particularities of each region and can deal with those.

Speaker 2

So as soon as we receive the approval from the NMPA, we will move on into the launch phase with our partners.

Speaker 6

Great. That's it for me. Thanks.

Operator

Thank you. Next question is

Speaker 7

You say you're expecting to launch in second half. In the past, you've said approval planned in the first half. Is that still true? Are you able to reiterate that?

Speaker 2

We are so close to it that we think that it is time to focus on the launch. It is in the hands of the NMPA, But we have enough visibility to feel strongly that we are in the preparation last phase of the launch.

Speaker 7

Okay. And then a question here, probably a follow-up from what Anthony asked earlier about U. S. Commercialization preparation. Your SG and A was particularly well controlled this quarter.

Speaker 7

Wanted to ask what drove that and how to think about the trend for the rest of the year given you do have Plans for the U. S. Launch here. So how to think about the sales rep build and the SG and A build from here for the rest of the year? Definitely heard the commentary on it being OpEx being similar to 2022 for the full year, but just trying to understand the cadence.

Speaker 5

Yes. Thanks for

Speaker 1

the question, Marie. I would say that the Q1 as we entered the year just given some of the uncertainty that we and a lot of other companies were seeing, we took a very prudent approach to our spending and I think we saw that in the numbers. As we've talked about though, we do expect OpEx as you noted to be similar this year to last year as a percentage of revenue and We continue to expect that. So as we move through the year, some of the investments in things like media will continue to pick up and then certainly the U. S.

Speaker 1

Will start to come on. So I would really look at the Q1 as really us being kind of prudent as we started the year, but the spending is still on tap as the year unfolds.

Speaker 7

Okay. Thank you.

Operator

Thank you. Next question is coming from Matt Taylor from Jefferies. Your line is now live.

Speaker 8

Hi. Thank you for taking the question. So I had a couple of guidance questions for you. First thing I wanted to ask you to be clear about is, can you talk about how much China revenue and if there's any U. S.

Speaker 8

Revenue In guidance this year?

Speaker 1

So we haven't given specific numbers around that. So China is in the guidance for this year and we continue to have a lot of confidence in that. As Juan, as I mentioned, we're moving into the preparation for launch into China. I think you asked about the We have not included the U. S.

Speaker 1

In our guidance for this year. So that is still something that we're leaving out for now We're all waiting along with everybody else for the FDA's progress and so we've just elected not to put in at this point.

Speaker 8

Got you. And then Raj, one follow-up. So just on the guidance range for the year, Q1 EBITDA 23% growth on And the second easiest comp. So I guess what I'm getting at is maybe you could talk about the big factors that would take you to the higher versus the lower end of the guidance this year. In your mind, are they more macro or more of the micro things that you're discussing here with the product launches?

Speaker 1

Yes. I'd say it's certainly the macro is always something that we're watching. But I think the real swing factor is really the timing of some of these initiatives, right? So when China comes, the pace of Mia coming on, these are things that we are Watching very closely and controlling a little bit in terms of the spending we're voting to them. But the range really does reflect, I think, that there's still a little bit of uncertainty in how these things are going to unfold this year.

Speaker 1

I think as we reiterated the guidance this year, we're still very confident in the outlook and nothing has really changed in how we're seeing things.

Speaker 8

Great. Thanks for the comments,

Speaker 2

And we wish everyone continued good health and happiness.

Operator

Thank you. That does conclude today's teleconference and webcast. May disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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Establishment Labs Q1 2023
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