Establishment Labs Holdings Inc. (NASDAQ:ESTA) Q3 2022 Earnings Call Transcript

Establishment Labs Holdings Inc. (NASDAQ:ESTA) Q3 2022 Earnings Call Transcript November 7, 2022

Establishment Labs Holdings Inc. misses on earnings expectations. Reported EPS is $-0.76 EPS, expectations were $-0.54.

Operator: Good afternoon. Welcome to Establishment Labs’ Third Quarter 2022 Earnings Conference Call. I will now turn the conference over to your host Raj Denhoy, Chief Financial Officer. Please go ahead.

Photo by National Cancer Institute on Unsplash

Raj Denhoy: Thank you, operator and thank you, everyone for joining us. With me today is Juan Jose Chacon-Quiros, our Chief Executive Officer. Following our prepared remarks, we’ll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs’ financial outlook and the Company’s plan to timing for product development and sales. These forward-looking statements are based on management’s current expectations and involve risks and uncertainties. For a discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent annual and quarterly reports on Form 10-K and Form 10-Q as well as other SEC filings which are available on our website at establishmentlabs.com.

I would also like to remind you that our comments will include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results which can be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial results can be found in today’s press release which is available on our website. Please also note that Establishment Labs received an investigational device exemption from the FDA for Motiva implants, is undergoing a clinical trial to support regulatory approval in the United States. We continually seek to expand the geographies in which our products are regulatory approved. Please check with the local authority for specific product availability. The content of this conference call contains time-sensitive information, accurate only as of the date of this live broadcast, November 7, 2022.

Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. With that, it is my pleasure to turn the call over to our CEO, Juan Jose.

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Juan Jose Chacon-Quiros: Thank you, Raj. And good morning, everyone. I hope everyone is healthy and continues to remain safe. Revenue in the third quarter of 2022 totaled $38.2 million, a 32% increase over the third quarter of 2021. Excluding the negative impact of foreign currency changes, our growth in the third quarter would have been approximately 38%. Our strong market share gains continue to be driven by our singular focus on women’s health and wellbeing. Our commitment to bring highly differentiated technology to the breast aesthetics and reconstruction markets based on science and patient-centric design is wholly unique in our industry. With this commitment to innovation, we are expanding existing markets and creating new categories that will sustain our growth for many years to come.

Raj will provide additional detail on our third quarter performance in our updated outlook, including tightening our revenue guidance range to $158 million to $162 million. But before I turn the call over to him, I would like to highlight recent events over the past several months. On Wednesday, October 5, we presented an update on Mia Femtech, the new category we are creating in breast aesthetics. During the presentation, we showed an update on the clinical progress with Mia, our expectations for commercialization in a video of the procedure, as well as testimonials from women who have had the Mia procedure. If you haven’t seen it, a recording of the webcast is available on our website and I highly recommend taking the time to watch it. We are creating a new category in aesthetics for women that don’t want a traditional breast augmentation, but are conscious about the shape and proportions of their breast.

Mia offers these women a minimally invasive procedure that can be performed without general anesthesia in less than 15 minutes with an easy return to their daily activities. The insights for the extensive consumer reasons we have completed, show that many more women are interested in Mia than receiving a traditional augmentation today. In Japan, for example, our primary research showed 155,000 women are interested in Mia with 133,000 saying they are interested in getting the procedure in the next 12 months. Japan is a market where there are currently only about 5000 traditional breast augmentations done every year. By providing a solution that is more appealing to consumers we are opening up a whole new group of women to breast aesthetics. We plan to commercialize Mia in the first half of 2023.

The recent regulatory updates out of the European Union on the common specifications around Annex XVI are encouraging. And our plans for market entering into Europe and other markets continue. We look forward to providing more updates over the coming months. As we announced in our second quarter call, all cohorts of our U.S. IDE study are fully enrolled and we are moving diligently through the follow-up. On the aesthetic cohort, as we previously communicated, we are pursuing a modular PMA submission path. All patients in the cohorts passed a three-year mark in August, and we continue to expect we will submit the fourth and final module to the FDA this quarter. In our Aesthetic Breast Recon franchise, the launch of our Motiva Flora tissue expander in Europe and other CE Mark countries is ongoing.

Flora has many advances of other commercially available tissue expanders, including a first-of-its-kind RFID-enabled port which allows for MRI imaging without artifacts. During the time an expander is used after mastectomy. By being non-magnetic, Flora potentially opens new options for radiation oncology treatment during this stage of recovery. Flora also features our patented, self-friendly smooth silk surface technology and early users have noted improved patient comfort and healthier capsule formation with this unique tissue expander. We are expanding the markets in which Flora is available. Adoption will take time, but early efforts have been encouraging and add to our belief that we can help support women in their breast reconstruction journey.

Surgeons are adopting our technology with many more, making Flora their expander of choice. 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. Our clinical and commercial efforts in China are ongoing and we continue to make progress in the regulatory process. We continue to expect approval for Motiva in this market in the first half of 2023. Before I turn the call over to Raj to cover our financial results, I wanted to note the publication last month of our annual, post-market surveillance report, which is available on our website. The report, which we update every year, highlights the clinical and safety performance up to 2.5 million Motiva Implants in market over 12 years since we began commercialization in 2010.

After more than a decade in the market, Motiva Implants continue to show less than 1% device-related complications leading to re-operation, including capsular contracture and implant rupture. Also, we have no reported cases of squamous cell carcinoma, which was recently noted by the FDA. These unprecedented clinical results are supported by science behind our implants. In late October, Establishment Labs attended the American Society of Plastic Surgeons meeting in Boston. We hosted a symposium for surgeons where Dr. Robert Langer from MIT presented the results from the paper; he Co-Authored on the implant surfaces. The paper which was published last year in Nature Biomedical Engineering showed that our patented SmoothSilk surface produces the lowest rates of inflammation in the healthiest capsules compared to other commercially available smooth or textured implants.

Scientific research such as the work done by Dr. Langer and his lab provides the answer as to why our implants perform better than others. There are now more than 50 peer reviewed publications about Motiva and we look forward to more seminal papers like Dr. Langer’s over the coming months and years. I will now turn it over to Raj.

Raj Denhoy: Thank you, Juan Jose. Total revenue for the quarter was $38.2 million. Reporter revenue growth in the third quarter was 31.7%. Foreign currency changes reduced our third quarter revenue by approximately $1.7 million. Excluding the impact of currency revenue growth in the quarter would’ve been 6 percentage points higher or 37.7%. Direct sales were approximately 38% of this total, while distributor sales which can fluctuate based on changes in inventory levels and the timing of reorders made up to balance. From a regional perspective, sales in Europe comprised approximately 23% of global sales; Asia Pacific and Middle East was 44%; and Latin America made up to balance; Brazil which our single largest market globally accounted for approximately 18.6% of total quarterly sales.

The revenue distribution this quarter was impacted in part by foreign currency and more pronounced seasonality with the end of the pandemic. Both of these factors disproportionately affect our revenues in Europe where surgeons and patients take vacations in the summer months and where we price our products in local currencies like the Euro and British Pound, and many of the markets around the world we price in U.S. dollars. Our reporter gross profit in the third quarter was $26 million or 68.1% of revenue. This compared to 19.6% or 67.6% of revenue for the same period in 2021. Even with a negative effects of foreign currency exchange rates, overall average selling prices in the third quarter up slightly from the second quarter of 2022. SG&A expenses for the third quarter increased approximately $6.5 million to $31.3 million.

This compared to $24.8 million in the third quarter of 2021. The increase in SG&A in the third quarter resulted from continued normalization in business practices following the disruption from the global pandemic and our prioritization of investment in new growth initiatives like Mia and preparations for our launch in the U.S. R&D expenses for the third quarter increase approximately $1.4 million from the same quarter a year ago to $5.3 million. R&D expenses will fluctuate quarter-to-quarter based on the timing of clinical trial and other expenses. Total operating expenses for the third quarter were $36.6 million, an increase of approximately $7.9 million from the year-ago period. The increase this period was again due primarily to the normalization of activity and spending relative to a year ago, as well as the investments in growth initiatives.

Net loss from operations for the third quarter was $10.5 million compared to a net loss of $9 million in a year-ago period. Our cash position as of September 30th was $65.3 million, this compared to $53.4 million at the end of the previous year. The increase in cash this quarter was the net result of the first $150 million tranche from the new term-loan secured on April 26th. As a reminder, the term-loan has three additional tranches totaling $75 million of additional non-dilutive capital we can access on the achievement of revenue and regulatory milestones. With the revenue results in the third quarter we have achieved the milestone necessary to draw the next $25 million tranche bringing our currently accessible cash to approximately $90 million.

Cash used in the third quarter included approximately $5.2 million of investments in our new manufacturing facility that will expand our capacity, produce more than half of the world’s breast implants. We also increased inventories as we increase our purchase of raw materials. Overall changes in working capital investing activity including expenditures in the new facility reduced our cash position by approximately $17 million in the third quarter. Under our current forecast, the cash we currently have on hand, as well as the additional capital available to us under our credit facility, allows us to achieve cash flow profitability, while still funding our growth initiatives. We are tightening our sales guidance for 2022 to a range of $158 million to $162 million representing estimated annual growth of 25% to 28%.

This compares to our previous range of $155 million to $165 million. As we saw in our third quarter results there is considerable momentum in our business and we expect this will continue. However, as we also saw in the third quarter, the steeper headwind from form currency is impacting our report results. At current rates, we estimate a year-over-year currency impact of fourth quarter sales of approximately $2.5 million. In total, we now expect currency will negatively impact our reported revenue this year by approximately $6.5 million or 5 percentage points to full year 2022 sales compared to 2021. As we look down the rest of the P&L we expect to see spending levels increase as we prioritize investment in the significant number of development and commercialization programs we have underway.

Preparing for the launch of Mia and our entering into the U.S. remain top priorities, while operating spending over the near-term is reflecting our investments in these opportunities. We expect these expenses as a percentage of revenue will trend down over time. Overall, Establishment Labs remains in a very strong financial position to execute on our growth initiatives. And I will now turn the call back to Juan Jose.

Juan Jose Chacon-Quiros: Thank you, Raj. The launches of Motiva into the U.S. and China and the commercial launch of Mia are some of the many opportunities we have to positively impact women in their breast health journey. Our company’s mission is not limited to just aesthetics and we are equally focused on the work we are doing to democratize access to breast reconstruction. One-in-eight women will experience breast cancer in their lifetime. While survival rates have improved, the disease can still have a devastating impact on women’s lives. For those women who seek breast reconstruction surgery, the availability is low. Less than 10% of women globally approximately receive a breast reconstruction after a mastectomy, and the waiting times in some countries can be as long as 10 years.

While our commitment to these initiatives is year around, the month of October, which is breast cancer awareness month is a time to redouble our efforts in awareness and understanding of breast cancer. This year, we were involved in events across all continents including awareness and educational campaigns, program sponsorships and partnerships. For example, we ran our annual Pink is for Power breast reconstruction program in Brazil. In partnership with a network of plastic surgeons, this year Establishment Labs provided the resources to allow 310 women in 18 cities across Brazil to receive a breast reconstruction, providing them access to healthcare they were unable to obtain for many years. I personally traveled to Mali where we are helping to establish programs in Africa to promote access to breast reconstruction and generate awareness about the importance of breast health and early detection.

Is a global medical device company focus on women’s health, Establishment Labs has the opportunity and the responsibility to democratize access to breast reconstruction. Not only bringing to market technologies, techniques and education that can improve clinical and aesthetic outcomes, but also promoting education and awareness. We will continue to transform our markets and in doing so we will create new categories for growth, but more importantly, we are creating new options for women around the world and solidifying our credentials as leading the industry to a sustainable future. I will now turn the call over to the operator for your questions.

Q&A Session

Operator: Thank you. Our first question comes from Anthony Petrone with Mizuho Group. Please proceed with your question.

Anthony Petrone: Thanks and congratulations on another strong performance here in 3Q. I’ll start with the Motiva U.S. timelines here, J.J. and I’ll have a couple of follow ups. Appreciate the updated timelines and confirming that the clinical module will be submitted before year-end here. Just wondering, it sounds like in the aesthetic cohort, the threshold for at least three years of data €“ follow-up data post-surgery is satisfied there. And so when we think about that threshold being satisfied and all the other modules in place, is there a pathway perhaps to mid-to-late 2023 U.S. clearance? Just wondering if we can tighten up that timeline a bit and then I’ll have a couple of follow ups? Thanks.

Juan Jose Chacon-Quiros: Yes, thank you Anthony. And we are of course extremely happy that we have crossed that three-year mark, which is in the guidance from the FDA for the approval of silicone gel-filled breast implants. And we have confirmed that we plan to submit that clinical module Ds quarter. We are not going to speculate though on date of approval. This is a process of continuous communication with the FDA, and of course we will try to find the right scientific forum for the data to be shown at the three year mark. However, again we cannot speculate on the timing of approval. We are always very good at responding as quick as possible and doing everything that we can not to slow down the process, but we are dependent on a foreign external entity like the FDA.

Anthony Petrone: No. I appreciate that. And a couple of follow-ups, some pivot to Europe; two-part question for you J.J. would be, are you seeing any evidence of a demand slowdown just due to some economic constraints in Europe as certain regions? There seem to be a few months ahead of let’s say the U.S. as it relates to recessionary and even inflation pressures. But on the flip side in Europe, it’s still heavily tilted or textured implants. So wondering if you have an update on the mix between textured and smooth as it relates to overall volumes as we get to the end of 2022; and how quickly do you think it could shift over to smooth into 2023? Thanks again.

Juan Jose Chacon-Quiros: Thank you. And we are watching the developments in Europe closely. Definitely there is concern in Europe regarding what’s going on with the Ukraine, and all of that but there is no reason to believe at this point that this is going to have a significant impact in the aesthetic market. I would say that in this last quarter we were impacted on currency with the British pound, and also the Euro and this Scandinavian currency is being hit. But on the other hand, just like you said we do have a lot of accounts who are still to be targeted. Many of them are using textured and this is the opportunity for us because when you look at our rate of growth, so plus 30%. What you see is fundamentally a change in the shares of the market that we are taking in all of these markets.

So if the market is growing at roughly 3% and we are growing at 30% plus, what that means is that we continue to do our job to be effective at it. And medical education being back is a big thing for us because that, that means that we can impact directly a lot more accounts than we did before. So in most of Europe we are direct and we plan to continue working hard to make sure that we are getting more market share.