Establishment Labs Holdings Inc. (ESTA) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Establishment Labs' Second Quarter 2018 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Kaitlyn Rawlett of Weber Shandwick. Please go ahead.

Thank you, operator, and thank you, everyone, for participating on today's call. Joining me from the company includes Juan Jose Chacon Quiros, Founder and Chief Executive Officer; and Renee Gaeta, Chief Financial Officer. Before we begin, I would like to caution listeners that comments made by management during this call will include forward-looking statements within the meaning of federal securities law. These include statements on the company's financial outlook and the company's plans and timing for product development and sales. These forward-looking statements involve material risks and uncertainties, and our actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's quarterly report on Form 10-Q, which will be filed later today with the SEC. The content of this conference call contains time-sensitive information accurate only on the date of this live broadcast, August 14, 2018. 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 being said, it is my pleasure to turn the call over to our founder and Chief Executive Officer, Juan Jose Chacon Quiros.

Thank you, Kaitlyn, and good morning, everyone. We're excited to have you join us on our first earnings call as a publicly traded company. We are very pleased with the strong reception we received from the market for our IPO. I'm very excited about the journey ahead for Establishment Labs as we continue to innovate, improve patient safety and address further unmet needs in the aesthetics market. While I met many of you on a recent IPO roadshow, there might be some on the call who are new to our story. I'd like to start today's call with a brief overview of our company before jumping into the financial results. We are a growing medical technology company focused on improving patient safety and aesthetic outcomes, initially, in the breast aesthetics and reconstruction market. Our differentiated line of silicon gel-filled implants, branded as Motiva Implants, are the centerpiece of our MotivaImagine technology platform. Since launching our product in 2010, we have successfully penetrated and are selling in more than 60 countries outside of the United States. Importantly, we are in key high-growth countries, markets that include 9 of the top 10 countries for breast augmentations, such as Brazil, Germany and Russia, among others. We believe the improved appearance, feel and patient safety profile of our Motiva Implants provides a strong competitive advantage that help us to capture market share and achieve higher patient conversion rates by addressing the concerns described by patients who choose not to pursue breast augmentation surgery. Our products are made at our state-of-the-art manufacturing facilities, ensuring product quality through technological advancements. This has allowed us to establish and maintain a brand known for consistency, quality and safety. We sell our products both through exclusive arrangements with leading local distributors who have strong local surgeon relationships and through our direct sales force in key markets. We believe this approach has created an effective, efficient and sustainable worldwide sales platform. Beyond Motiva Implants, our technology platform enables unique surgical techniques that we promote as Motiva-branded surgeries. We have developed other complementary products and services, which are aimed at further enhancing patient outcomes among MotivaImagine platform. Before turning to second quarter results, I want to briefly touch on our IPO. As most of you are aware, we successfully completed our initial public offering in July, resulting in net proceeds of approximately $71.5 million after deducting underwriting discounts. The completion of the IPO will allow us to invest in our FDA clinical trial as we seek to bring our innovative solutions to women in the United States, the top aesthetic market in the world. Turning now to our second quarter results. Let me begin by saying that we are pleased with our performance to-date as we continue to meet and exceed our internal expectations. Our performance for the quarter was largely driven by the continued strong adoption of our Motiva Implants. Our revenues grew 59% when compared to the same period last year. The testament to our team's success is strengthening and growing our market position globally. We expect our revenues to continue increasing as we enter new markets, expand awareness of our products in existing markets and grow our distributor network and direct sales force. Please remember, with traditional seasonality factors, future results may fluctuate quarter-over-quarter, especially in the third quarter due to the summer holidays. We'll also continue to make significant investments in our business as we advance our products and branded surgeries currently under development. During the second quarter, R&D spend was primarily driven by the initiation of our PMA clinical trial in the United States. The successful execution of our FDA clinical trial is a key priority for Establishment Labs, and we remain on track. Now I would like to turn the call over to Renee Gaeta, who will discuss our financial results in greater detail. Renee?

Thank you, Juan Jose, and thank you again, everyone, for joining today's call. As mentioned by Juan Jose, we are pleased with the second quarter and continue to exceed our internal expectations. You can find greater detail on our second quarter and 6-month financials on our earnings press release as well as our 10-Q, which we plan to file later today. Total revenues for the second quarter were $13.7 million, which represents 58.9% growth over the second quarter of 2017. Total revenues for the 6 months ended June 30, 2018, were $28.5 million, representing an 83.5% increase as compared to the same period in 2017. The increase in the second quarter and the 6 months ended June 30, 2018, was primarily due to increased sale of Motiva Implants, driven by greater market penetration in existing and new geographies, most notably, our direct market in Brazil. Gross profit for the second quarter was $8.2 million or 59.9% of revenues as compared to gross profit of $4.1 million or 47.8% of revenues for the second quarter in 2017. Gross profit for the 6 months ended June 30, 2018, was $16.1 million or 56.6% of revenues compared to gross profit of $7.5 million or 48.5% of revenues in the same period in 2017. The increase in gross margin for the second quarter and the 6 months ended June 30, 2018, was due to an increase in production volume that spread our fixed manufacturing costs over a larger number of units and the addition of direct market revenues in areas such as Brazil, which generally have higher average selling prices. Total operating expenses for the second quarter of 2018 were $14.5 million, an increase of 51.3% as compared to the same quarter in 2017. SG&A expenses increased $2.7 million or 33.3% to $10.8 million mainly due to the hiring of additional sales and administrative employees, an increase in consulting and audit fees and an increase in sales commissions. Additionally, our R&D expense increased $2.2 million or 150.2% to $3.7 million due to the initiation of our FDA clinical trial in the United States. During the second quarter, we continued to effectively manage our capital structure, allocating resources to efforts that will increase our market share and help bring our products to new geographies. Net losses for the second quarter decreased to $5.4 million from $12.1 million for the same period in 2017, while net losses for the 6 months ended June 30, 2018, decreased to $11.9 million from $17.1 million for the same period in 2017. Moving forward, we will continue to make strategic investments in manufacturing, marketing, customer service and our direct sales force in territories like Brazil and Europe. Additionally, we intend to continue to make significant investments in our FDA clinical trial in the United States. The company has a cash balance of -- at June 30, 2018, of $11 million -- $11.6 million, and as Juan Jose mentioned earlier, we received approximately $71.5 million in net proceeds from our IPO after deducting underwriter discounts. With that being said, I will now turn the call back over to Juan Jose for concluding remarks. Juan Jose?

Thank you, Renee. I'm very pleased to deliver such strong results, which reflect the work and dedication of the whole Establishment Labs team and all of our partners. We are in the business of improving safety outcomes and satisfaction for patients. We believe our products are the answer to an industry that has yet to fully meet the needs of women. I want to close by saying how proud I am of our accomplishment thus far, and I look forward to a bright future ahead. With that, I will now turn the call back to the operator to open the call to Q&A.

[Operator Instructions] And our first question comes from the line of Josh Jennings with Cowen.

Let's start off on the U.S. FDA IDE trial, Juan Jose, and it sounds like you're on track. Just wanted to be clear that you're still expecting complete enrollment by the end of this year or early 2019. And anything you can share about the enrollment pace would be helpful. And then also, any anecdotal feedback you're getting from the U.S. principal investigators on their early experience with Motiva. And I have one follow-up.

Well, thank you, Josh. Let me remind everyone that we are seeking FDA approval of Motiva Implants in female patients who are undergoing primary breast augmentation, primary breast reconstruction or revision surgery. The first patient in the study was enrolled in April of this year, and we anticipate completing enrollment in early 2019. One of the strong points of our clinical trials, I would say, is that it's being led by Dr. Caroline Glicksman, the first female surgeon to lead this type of trial in the United States. She has significant expertise in the field that makes her an invaluable asset to this process. And as I said before, we remain in track. The feedback from all the sites has been tremendous, and we are not surprised because it echoes what we have seen outside of the United States.

Our next question comes from the line of Sean Lavin with BTIG.

It's actually Andrea Alfonso in for Sean. So I guess, to start off, as we sort of look at this revenue number, maybe could you give us a little bit of a flavor of what exactly went on in the country -- rather in the quarter, sort of pockets of strength? Did you perhaps see maybe a pull-forward benefit that helped the first half trends at all? And then I have a follow-up question.

Thank you, Andrea. Yes, we continue to have great success globally across all regions, and we've seen that result both in Q1 and Q2. We definitely continue to see great results in Brazil, where we set a plan in place, and we've been executing on that plan. And as you can see, we've had great results, both in Q1 and Q2. Our first half results really speak for themselves, and we're pleased with our outcome thus far.

Okay. Great. And then just touching on the Brazil opportunity. Could you maybe -- since it is sort of your first time really discussing it in a public setting, could you maybe discuss how large the opportunity is, what share you have now and sort of the action plan in place you have for the remainder of the year?

Sure. Well, everyone should be aware that Brazil is the #2 market in total breast augmentation procedures globally. So of course, it is an enormous opportunity for Establishment Labs. Since we launched our commercial operations in Brazil in July of 2017, we have experienced significant growth across the market, and we do anticipate this growth to continue. To give you some color, our sales reps currently are covering over 80% of the addressable market in Brazil. And over the next 12 months, we plan to build out our sales force in order to convert the entire Brazilian market. So with this coverage, we think we have significant opportunities ahead of us. And we believe that we have successfully penetrated this market in just the last 12 months. We are well positioned to continue to capture market share.

And our next question comes from the line of Raj Denhoy with Jefferies.

Wondered if maybe I could ask another question on Brazil. You noted you've been there for a year now. You've seen tremendous success there. When you think about the next few quarters in Brazil, do you expect you'll see growth similar to what we've already seen? Or is it going to be commensurately more difficult to take share now that you've anniversaried your launch there?

Well, I think it's -- the growth so far in Brazil has been tremendous, and it's only been 1 year. There's 5,000 estimated plastic surgeons in Brazil. And over the last 12 months, we've been able to access over 1,000 accounts. So we do feel there's room for continued growth, and we are working towards building the sales team to be able to cover all the geographies in Brazil so that we can continue growing in that market.

Okay. Fair enough. Maybe, Renee, gross margin was quite strong in the quarter at almost 60%. What -- you mentioned that there was some overhead absorption, but how much was price a contributing factor to that gross margin? And where is your price now on a global basis?

Yes. Thanks, Raj. So yes, during the first 6 months, gross margins were strong. We attribute that to a combination of things: definitely product mix where we're selling in what geographies and how we're selling; and alongside, continued improvements in our manufacturing process. So really, it's a variety of all different factors that have layered in, that have seen the growth there. And we continue to expect that we will continue to have similar results going forward. We're satisfied with our results for Q2. Of course, we don't really want to speak to what we should expect for going forward, but we are pleased with the current results.

Okay. Maybe I can just ask one last one. So in terms of the outlook, the guidance, you haven't given us anything for the third or fourth quarter. But do you have any sort of high-level expectations in terms of top line growth into the back half of the year?

So thank you for the question. I think you can appreciate and respect the fact that since we've just gone public and we're a growth company that we're not going to be providing guidance on a quarterly or annual basis at this time. As you know, there's financial models out there, and we're very comfortable with those models.

[Operator Instructions] We have a follow-up question from the line of Josh Jennings with Cowen.

Just wanted to ask about the planned transition from distributor model to a direct sales force in some countries over the next 18 to 24 months. If you have any further details there and just help us think about how that can help drive growth to the top line.

Thank you, Josh. And I would say we're very pragmatic as a company when it comes to deciding the model that we use. We look at different options in every market, and we see how those options evolve over time. In the case of Brazil, it has been a tremendous success for our direct-to-market strategy. And we have taken also decisions like that one in Europe where we are already direct in France and also in the Scandinavian countries. So we're looking into more opportunities to go direct in certain geographies, especially in Europe, as we have said before. I would say that the reasons we do it are both to be able to connect more directly with surgeons and patients, but also in some countries, it requires additional investments to bring the message forward. So you'll continue seeing some of these efforts going forward, but we don't have significant departures from the current pragmatic model, I would call it, that we are executing. And I think we just look at the opportunities as they come, and we'll continue to do it that way.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Juan Jose Chacon Quiros, CEO and Founder, for closing remarks.

Thank you, everyone, for joining us this morning. As always, if you have any follow-up questions, please do not hesitate to reach out. Look forward to speaking with you on our next earnings call. Thank you, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.