Establishment Labs Holdings Inc. (ESTA) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Establishment Labs’ Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants will be on mute. At the end of this call, we will open the lines for a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the call over to Kaitlyn Rawlett from 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 José Chacón-Quirós, 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 the federal securities laws. 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 the Company's actual results may differ materially. For a discussion of risk factors, I encourage you to visit the Company's annual report on Form 10-K, which will be filed later today with the SEC. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast March 20, 2019. Except as required by law, the Company 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 the Company's Founder and Chief Executive Officer, Juan José Chacón-Quirós. Juan José Chacón-Quirós: Thank you, Kaitlyn, and good afternoon, everyone. I am pleased to report a strong fourth quarter and an outstanding finish to our first year as a publicly traded company. We ended 2018 with $61.2 million in sales, a 76.5% increase when compared to 2017. Our fourth quarter sales were $16.4 million, a 38.8% increase compared to the fourth quarter of 2017. Our success continues to be driven primarily by the adoption of our Motiva Implants across all markets, which were differentiated science and improved safety outcomes. In 2018, we continued to invest in our business to ensure growth for many years to come. In particular, we invested in our clinical trials in the United States and enhanced our direct salesforce across European markets. Additionally, we improved our manufacturing capabilities and global infrastructure as we pursued multiple initiatives in our R&D pipeline. Some additional color on our fourth quarter performance, Brazil continues to perform well and remains an important market for us, as it represents the world's second largest market for breast augmentation procedures. Since entering the market in 2017, we have experienced consistent high growth and continued with a strong fourth quarter. We still consider ourselves in the early stages of market penetration here, and we are focused on capturing additional market share. Direct market strategies continued to be a focus during the fourth quarter, and at this time, approximately 35% of our breast implant revenues come from direct market sales, and we expect that percentage to continue increasing towards 50% in the coming years. We communicate directly with surgeons in this market, and this allows us to closely follow the impact of today's regulatory environment and new cycle. While we regularly talk to surgeons about the market, the most recent regulatory event started late in the quarter and we feel that they did not have a meaningful impact on our 2018 results. Going beyond our strong performance in the fourth quarter and 2018, the market dynamics and ongoing regulatory response do merit quite a bit of discussion. We share many of the concerns of patient groups and regulatory bodies with regards to the legacy of the breast implant industry and it is of the utmost importance that women have trust and confidence in the safety of breast implants. The latest regulatory developments from around the world demonstrate the need for products with an improved safety profile and our commitment to R&D for so many years has positioned us to communicate to both plastic surgeons and patients the substantial benefits of our patented implant technologies. The continued widespread adoption of our Motiva Implants reinforces our confidence that our product portfolio is the answer to an industry that has yet to fully meet the needs of women. Establishment Labs was founded to develop a breast implant that incorporated the latest technology and scientific understanding of biomedical engineering, material sciences, and surface technology. In doing so, our team committed to designing an implant with the highest level of biocompatibility, which is critical to a substantially improved safety profile. Motiva Implants are clearly differentiated from any other implants sold today, and we believe this [indiscernible] result in fewer complications than textured or traditional smooth implants. As many of you are aware, a pilot study completed by the Langer Lab at MIT founded patented surface optimizes the implant biocompatibility with tissue through a unique cell adhesion design that reduces the body's inflammatory reactions. Also, in the past month, LNE, a prestigious independent third-party laboratory based in France unequivocally confirmed in blinded testing that our implants are characterized in the smooth category. In 2019, the opportunity to continue to capture competitive market share and introduce our exclusive and differentiated implant surface technology is significant. Our distribution centers across key markets, including Europe and Brazil, continue to see an influx of inquiries about our product portfolio from new customers. Especially in these times, a story is resonating more than ever as surgeons and women seek both an improved safety profile and a natural aesthetic that is more in line with their expectations. In addition to the continued organic growth across our existing markets, we are excited to enter new geographic markets in 2019, including Thailand and Taiwan. Both of these markets present us with significant opportunity to capture market share, and Thailand is considered to be one of the largest breast aesthetic markets in Asia. Turning now to our US IDE clinical trial, we filed our first annual report with the FDA, and are pleased to announce that as of this past week, our IDE study-defined enrollment targets for the aesthetic cohorts, which include primary augmentation and revision, have been reached with a total of 450 and 100 patients, respectively. This is an important milestone and a necessary initial step towards the path to FDA approval for our devices in United States. We are continuing to enroll subjects in the remaining cohorts and believe we are on track to meet all of the remaining enrollment targets in this coming quarter. Our success now is directly attributable to our R&D efforts over the past 10 years and to ensure equal and ongoing success in the future, we continue to invest substantially in R&D and we'll do so in 2019 and beyond. At the end of 2018, we submitted for CE Mark registration, our smooth anatomical tissue expander and our latest version of Motiva Ergonomix, which are part of our minimally invasive initiatives. These efforts mark our expansion into breast reconstruction and our initial attempts to create a new market for minimally invasive surgeries within breast aesthetics. While we are encouraged by these developments, we plan a cautious market launch and do not expect to recognize top line contributions until sometime in 2020. Separately, we continue to work on enhancing certain implant safety features, such as the bio-sensing capabilities of our RFID platform. It is our belief that we can have as big of an impact on reconstruction and on procedure improvements as we have had on surface biocompatibility and we look forward to bringing these technologies to market. In conclusion, 2018 was a remarkable year for our Company, as we demonstrated our ability to deliver on our commitments, reported strong financial results and made meaningful progress on our strategic initiatives. Although the first quarter of 2019 is not yet complete, I can tell you that we continue to see strong growth across our business, and we look forward to reporting those results to you in May. I am excited for the opportunity that lies ahead to create even more value for physicians, patients, employees and shareholders alike. With that, I'd like to turn the call over to Renee. Renee?

Thank you, Juan José, and I'd like to thank you all again for joining us on the call today. As Juan José stated earlier, we are very proud of our accomplishments in 2018 and it is a pleasure to cap off the year with another strong quarter. You can find additional details on our fourth quarter and our full-year 2018 financials in our earnings press release and our Form 10-K, which we plan to file later today. Our total revenues for the fourth quarter were 16.4 million, which represents a 38.8% increase when compared to the fourth quarter in 2017. Total revenues for the year ending December 31, 2018, were 61.2 million, representing a 76.5% increase when compared to the same period in 2017. The growth in the fourth quarter was primarily due to the continued volume growth across all of our addressable markets, alongside the improved average selling price driven by our direct market strategies in Europe and Brazil. We are extremely pleased with our sales growth in 2018 and we are confident in our ability to continue capturing additional market share in 2019 and beyond. We remind investors that we are still a very young company and future results can fluctuate quarter-to-quarter as we manage our global footprint, entering new markets and make enhancements to our business model. Gross profit for the fourth quarter was 9.9 million or 60.2% of revenues, as compared to gross profit of 6.6 million or 55.6% of revenues in the fourth quarter of 2017. Gross profit for the year ended December 31, 2018, was 36.1 million or 59% of revenues, as compared to gross profit of 17.7 million or 51% of revenues for the same period in 2017. The increase in gross margin in the fourth quarter and the year ended December 31, 2018, was due to an increase in production volume and the continued contribution from direct market revenues with generally higher average selling prices. Total operating expenses for the fourth quarter of 2018 were 18.5 million, an increase of 65.9% when compared to the same quarter in 2017. SG&A expenses increased 6.1 million or 70.4%, to 14.8 million, mainly due to the hiring of additional sales and administrative employees, an increase in consulting and audit fees and higher insurance costs. Our R&D expenses increased 1.2 million or 49.8%, to 3.7 million, primarily due to investments in our FDA clinical trial in the United States. For the year ended December 31, 2018, our operating expenses were 60 million, with an increase of $22.3 million, compared to operating expenses of 37.7 million for the same period in 2017. While this reflects a 59.1% year-over-year increase, it is primarily resulting from the initiation of our FDA clinical trial at United States, costs associated with operating as a public company and our expanding operation. Net loss for the fourth quarter was 10.5 million, an increase from net loss of 7.1 million for the same period in 2017, as a result of our continued growth in operations to support our expected business needs. For the full year ended December 31, 2018, net losses increased to 21.1 million from 34.9 million for the same period in 2017. We note that the decrease in net losses for the full year was primarily attributable to a non-cash change in the fair value of derivative from our Madryn credit facility we entered into in August 2017. We effectively managed our capital during the fourth quarter, allocating resources to efforts that will increase our market share and help bring our products to new geographies. Looking ahead, we will continue to make strategic investments in engineering, marketing and our direct sales forces in key growth markets like Brazil and Europe. Additionally, we intend to continue to make significant investments in our FDA clinical trial in United States and in research that will help drive new product innovation. The Company's cash position remains strong and we have held a cash balance of 52.6 million as of December 31, 2018. As Juan José indicated, we continue to see strong growth in our business in Q1 of 2019 and our organic growth is particularly promising. With this early knowledge, we are very comfortable with the analysts' consensus estimates for 2019 and think that there is a potential for meaningful upside to their numbers. That said, quantifying the amount of upside at this point in time is difficult given the fluid nature of today's environment within the breast implant industry, so we ask that you use the analysts work for now as you think about our business. As we see the positive catalysts solidify in 2019 and beyond, we may very well issue additional guidance on future calls this year. That being said, I'd like to turn the call back over to Juan José for some concluding remarks. Juan José? Juan José Chacón-Quirós: Thank you, Renee. We are pleased to deliver this fourth quarter and full year 2018 results, meeting and exceeding our goals for the year. Our accomplishments this year are a testament to the incredible work and steadfast dedication of the entire Establishment Labs seen and our partners across the globe. I am confident we will build upon the success we experienced in 2018 to deliver continued growth in 2019 and beyond. With that, I will now turn the call back to the operator to open the call to Q&A.

[Operator Instructions] Our first question comes from Raj Denhoy of Jefferies.

I could start with you Renee, just on the guidance, the commentary on the guidance there at the end. I appreciate the thinking behind not giving more specific guidance, but as I'm sure you know, the spread in the analyst -- our estimates for next year are quite broad, below 20% or I think north of 30% in terms of what you guys could do for growth on the top line, and so I don’t know if you had just any additional thoughts on where you're more comfortable, at the higher end of where we're shaking out or perhaps the lower end, just anything more helpful would be helpful.

Yes, Raj, I appreciate that. Yes, we're definitely focused on the consensus of sort of the average of the numbers. I fully appreciate that that's a decent range at this point in time, but we're definitely comfortable with that right now.

Okay. So, the midpoint is where you guys are good.

Correct.

Okay. And maybe Juan José, can I ask you a couple of questions about the dynamics in the marketplace currently? There's been a lot of activity, as we're all aware, with Europe removing heavily textured breast implants and the US now -- the FDA seeming to have a little bit more focus on breast implants safety. So, a couple levels to the question, I'm curious what you're seeing from a competitive standpoint, are you seeing a lot of increase from competitive or previously competitive accounts or surgeons wanting to talk to you guys now or is it creating an opening for you? And then the second question is really -- is there any risk around this? Have you seen anything in the marketplace that would suggest that women are perhaps rethinking getting breast augmentation given all this -- the enhanced scrutiny around the procedure? Juan José Chacón-Quirós: Thank you, Raj. No, and I think that's the big question. We have and we see an opportunity to capture a competitive market share and introduce our differentiated implants in all markets. We are seeing an influx of new inquiries in all of the direct markets where we can monitor this directly. One important thing to say around that is that because of the amount of countries where we are now directly involved, we are monitoring the potential for patients postponing their surgeries or, let alone, cancel them. But until now, we have not seen that. So, we will remain watchful over those dynamics, but to date we have not seen any reduction in the potential number of procedures.

Okay, that's helpful. Maybe sorry, just one last one for you Renee, and then I'll hop off, but, I was curious about the acquisition of your distributors in Germany and Spain towards the end of last year. How much has that contributed? And as you think about the numbers here for 2019, how much does that add to the revenue base?

Yes, that's a good question, Raj, and some of the acquisitions, all three of them that we had in the fourth quarter, a couple of them happened later in the quarter. So, they didn't actually have a substantial impact into Q4 of '18. We're obviously working through setting up the subsidiaries and working through that dynamic. So, not a significant contribution. So, we're expecting to see the majority of that contribution really start in 2019 and pull forward.

And you haven't quantified that for us, have you in terms of what that could be?

No, I haven't.

[Operator Instructions] Our next question comes from Josh Jennings of Cowen.

Hi. Good afternoon. Thank you and congratulations on a strong end to the year. I was hoping to ask two questions about the pipeline that you mentioned in the prepared remarks and the press release about submitting CE Mark for smooth anatomical tissue expanders, and the updated version of the Ergonomix for minimally invasive. And just on tissue expanders first, can you talk about the tissue expander market internationally and how big is it? Could you commercialize -- when could you commercialize, it sounds like 2020 is when we could see some impact from commercialization. And how important is it to introduce new tissue expander in this era? Are most tissue expanders on the market today macro textured? And then I have one follow up on the Ergonomix, CE Mark submission. Juan José Chacón-Quirós: Thank you, Josh. I have to tell you that we are super excited of the opportunities that lie ahead for us in the breast reconstruction market. Until now, we've been extremely focused in breast aesthetics and we believe that our differentiated technology, because of the improvement in safety outcomes, can have a very meaningful impact in patients for breast reconstruction. And of course, that tissue expander that has taken us so much work is a testament to our commitment to become an important player in breast reconstruction. So that is a SmoothSilk tissue expander, that surface that we have seen performs so well for patients over the last eight years now in a tissue expander. So what we want to see, of course, is an improvement in the results for patients who are undergoing tissue expansion. At this point, we will not quantify the size of the international market, but I can tell you that the opportunity is important. Most of the products that are out there, and I would say the latest technologies of other companies are textured or macro textured tissue expanders. So, we are hoping to get this product to market as soon as possible, but we are undergoing the process and these days, there is uncertainty on how long these processes take. So, that's why, while we want to be in the market as soon as possible, we think that you will start seeing some of that revenue in 2020.

And then just a quick follow-up on that would be great, to ask my next question. Without a tissue expander currently, is it tough to penetrate the reconstructive portion of the market and with the tissue expander, could you just see significant pull through of Motiva Ergonomix into reconstructive cases? Juan José Chacón-Quirós: Our implants have been used for years in breast reconstruction. It is just that because of not having a tissue expander, we have not been able to provide the full spectrum of possibilities that patients need in breast reconstruction. However, last year, we had presentations from several European surgeons with some of the most prestigious institution in Europe who have been using Motiva Ergonomix and Motiva SmoothSilk Plus implants for years now. And they have presented excellent results with excellent safety outcomes. So we continue to see the opportunities there and now with a tissue expander even more.

Thanks for that. And just a follow up on the Motiva minimally invasive natural technique procedure that you seemed to be talking a bit more about and with the CE Mark submission of the most recent version of Ergonomix, one, can you just help us understand what's changed in Ergonomix and then secondly, any incremental color you can talk about in terms of when we might see the first [indiscernible] procedure being done internationally and then how you plan to roll that procedure out into more countries and regions? Juan José Chacón-Quirós: Thank you. And I have to say that when we launched the Ergonomix implant in 2014, we transformed the options for women worldwide because before that, you had a round implant and then so-called anatomical implant. So this Ergonomix implant has become our best selling product worldwide and now what we are going to do is put into market a second generation of that Ergonomix implant. So, it has improved mechanical properties along side to this SmoothSilk surface that has been proven to reduce capsular contracture and other chronic inflammatory conditions. So, of course, we believe that because of those mechanical properties, it lends itself very well for minimally invasive procedures. So we are, again, super excited to see this new version of that implant in the market as soon as possible. But again, we are counting on the regulatory processes and the current regulatory environment to bring perhaps those potential revenues in 2020.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Juan José for any further remarks. Juan José Chacón-Quirós: Thank you everyone for joining us on today's earnings call. As always, if you have any follow-up questions, please do not hesitate to reach out. We look forward to speaking with you on our next earnings call. Thank you and adios.

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