Establishment Labs Holdings Inc. (ESTA) CEO Juan José Chacón-Quirós on Q1 2019 Results - Earnings Call Transcript

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About: Establishment Labs Holdings Inc. (ESTA)
by: SA Transcripts
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Earning Call Audio

Establishment Labs Holdings Inc. (NASDAQ:ESTA) Q1 2019 Earnings Conference Call May 15, 2019 8:30 AM ET

Company Participants

Kaitlyn Rawlett - Investor Relations

Juan José Chacón-Quirós - Chief Executive Officer

Renee Gaeta - Chief Financial Officer

Conference Call Participants

Raj Denhoy - Jefferies & Company, Inc.

Josh Jennings - Cowen and Company

Operator

Good morning. Welcome to Establishment Labs First Quarter 2019 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 is being recorded.

I'll now turn the call over to Kaitlyn Rawlett from Weber Shandwick. Please go ahead.

Kaitlyn Rawlett

Thank you, operator, and thank you, everyone for participating on today's call. Joining me from the Company includes Juan José Chacón-Quirós, 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 laws. These include statements on the Company's financial outlook and the Company's plan 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 the Company's Quarterly Report on Form 10-Q that 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 May 15, 2019. Except as required by law, the Company undertakes no obligation to revise or otherwise update, statements 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 Chief Executive Officer, Juan José Chacón-Quirós.

Juan José Chacón-Quirós

Thank you, Kaitlyn, and good morning, everyone. I am pleased to report a strong first quarter and start to the year. For the first quarter of 2019, revenue was $20.8 million representing a year-over-year increase of 40.2%. This performance is a record high for Establishment Labs and is driven by the continued adoption of Motiva Implants, our increased direct sales effort and the ongoing strong performance of our distributors worldwide.

We continue to see strong demand for Motiva Implants from both new and existing customers. Patients and surgeons are increasingly informed and enthusiastic about our differentiated products and our commitment to women's health. Even with the industry headwinds that started in the fourth quarter of 2018, we did not see a reduction in surgical volumes. We continue to attract new surgeons and received consistent feedbacks that adopting Motiva Implants as part of their practice can result in increased patient inquiries.

With the continued momentum experienced in the first quarter, we are now issuing guidance and anticipate 2019 revenues in the range of $80 million to $84 million. We are very pleased with our growth and remain focused on expanding our market share and delivering shareholder value for years to come.

In first quarter, business highlights. We experienced increased market share across all regions. Our product portfolio, which incorporates advanced material sciences, is attracting many surgeons who have used a wide variety of implants. We continue to expand our geographic footprint and Motiva Implants are now commercially available in more than 70 countries worldwide.

We received regulatory approval in February to launch our Motiva Implants in Taiwan and Thailand, and are now preparing for the commercial launch in these markets from the current quarter. The launch of our direct salesforce in Europe, in 2018 continued to contribute to our performance and resulted in meaningful growth in the first quarter. Our ability to be on the ground, working closely with surgeons is more vital than ever across our direct markets in Europe and Brazil.

For the first quarter, our direct market revenue accounted for more than 45% of our total revenues and we expect this figure to continue to grow in 2019. Brazil continued to perform well. According to our conversion report, we saw 297 new account activated in Brazil in the first quarter.

The Brazilian market comprised over 17% of our total first quarter revenue. As the second-largest market in the world for breast augmentation procedures, our success in Brazil is indicative of our worldwide growth potential. To support the ongoing growth of our business, we expanded our global sales team by more than 20% during the quarter from 67 to 83 dedicated sales team members and contractors. We also continued to attract accomplished talents across the industry.

Of note, I would like to take this moment to announce Carole Chan, as Executive Vice President of our Commercial Operations and Ivan Bilic, as Senior Sales Director in Europe. They bring experiences in breast surgery from Allergan and POLYTECH respectively.

Plastic surgeons teaching one another about the benefits of Motiva Implant remains one of our strongest sources of growth. Most notably, a peer-reviewed expert consensus published in the Aesthetic Surgery Journal disclosed Motiva Implants as the sixth-generation of silicone breast implants.

We are confident that this expert consensus will help practitioners with implant selection, preoperative planning and surgical techniques. As more and more surgeons need extensive experience with Motiva, we expected a number will publish regarding their experiences and results.

As part of our ongoing efforts to educate the surgeon community, we have expanded our medical education program known as MotivaEDGE. This year, we are hosting more than 100 workshops worldwide, including 19 last month in Brazil. Through these, we work directly with surgeons to educate them on the benefits and advantages of our Motiva Implants and MotivaImagine products.

Shifting gears to our product portfolio and regulatory pipeline. I am pleased to report continued progress on the advancement and expansion of our product portfolio. We are progressing with our FDA clinical trial. We have completed enrollment for our aesthetic cohorts, which include primary augmentation and revision with a total patient enrollment of 492 and 109 respectively. We are still enrolling patients for the reconstruction cohorts and anticipate completing enrollment shortly.

Furthermore, our R&D team is actively working on additions to our product portfolio. We submitted our Motiva Ergonomix to breast implants and Motiva Flu tissue expander for CE-Mark approval to our EU modified body. This is the start of our efforts in minimally invasive surgery and breast reconstruction and we expect these products to begin to contribute to growth in 2020.

With that, I'd like to turn the call over to Renee to discuss the financials in detail. Renee?

Renee Gaeta

Thank you, Juan José. As Juan José stated earlier, our momentum in 2018 have carried into 2019 and we are happy to report strong first quarter results. You can find additional details of our first quarter financials in our earnings press release and our Form 10-Q, which we plan to file later today.

Our total revenues for the first quarter were $20.8 million, which represents a 40.2% increase when compared to the first quarter of 2018. We are very pleased to say that this quarter sales are the highest recorded by Establishment Labs.

The revenue growth in the first quarter was due to continued organic growth across our markets alongside improved average selling prices driven by our direct market strategy in Brazil and key geographies in Europe.

Gross profit for the first quarter was $11.3 million or 54.2% of revenue as compared to gross profit of $7.9 million or 53.4% of total revenues, for the first quarter of 2018. The increase in gross margin for the first quarter was the result of increased production volume and growing direct market revenues, which generally have higher average selling prices, offset by the amortization related to the fair values inventory recorded from our asset acquisitions, from a distributors during the quarter and during fourth quarter of 2018.

The amortization decreased our gross margins by approximately 70% for the quarter. Total operating expenses for the first quarter of 2019 were $19.6 million, an increase of 81.9% when compared to the prior period. While we are working to manage our expenses, we are still in an early stage company and making the necessary investments to ensure our long-term growth trajectory.

SG&A expenses increased $7.4 million or 85.7% to $16.1 million, primarily due to an increase in personnel costs as a result of hiring additional sales, marketing and administrative employees, as well as expenses related to consultants, marketing activities, freight and insurance.

Our R&D expenses increased $1.4 million or 66.9% to $3.6 million primarily due to an increase in personnel costs and our investments in our FDA trial.

Net loss for the first quarter of 2018 was $10.8 million, an increase from $6.5 million in the same period of 2018, as a result of our continued growth in operations to support our expected increase in market demand.

Our cash position remains strong. We held a cash balance of $43.1 million as of March 31, 2019. We continue to manage our capital for the first quarter, allocating resources to efforts that will increase our market share.

Our cash position is strong today. Our financial impact – our financial plans includes having strong reserves in the future as well. Our operational and financial performance has enhanced our access to lower cost debt capital and we are working in the second quarter to prudently increase our borrowing capacity, while extending maturities and reducing our interest rate.

Looking ahead, we will continue to make strategic investments in manufacturing, marketing and our direct sales. Additionally, we continue to make significant investments in our FDA clinical trial and in other R&D initiatives that help drive product innovation. As Juan José mentioned, we anticipate revenues in the range of $80 million to $84 million for the full-year 2019.

I will now turn the call back over to Juan José for some concluding remarks. Juan José?

Juan José Chacón-Quirós

Thanks, Renee. 2019 is off to a great start. We believe there are multiple catalysts ahead that will allow us to maintain this momentum. We remain focused on our strategy of bringing much needed innovation to the breast aesthetic and reconstruction market and believe that our products will be recognized by surgeons and patients alike is a safer choice would improve the aesthetic outcomes.

With this is our mission, we are focused on driving organic growth in our existing markets, entering new markets, expanding our direct sales model where we can better serve surgeons and patients and continuing to launch new innovative products in breast aesthetics and reconstruction. We are firing on all cylinders and we believe our record sales reported this quarter is a testament to our ability to win market share with our differentiated product portfolio.

With that, I will hand the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Raj Denhoy with Jefferies. Your line is open.

Raj Denhoy

Hi. Good morning. Congratulations on strong quarter. Maybe Juan José, I can start with you and just sort of asked about anything you can share with us in terms of market dynamics. Clearly there's been a lot of dislocation in the market with what's happened in France and Europe with the recalls, Brazil as well? And so I'm curious if any you can share in terms of how that's playing into the strong results you're seeing? Is there anything in terms of the number of accounts that are now reaching out to you and the amount of share that has started to open itself up to be available?

Juan José Chacón-Quirós

Well, it is clear to us, Raj that innovation is behind a lot of the growth that you see in Q1 just like you saw growth from that same reason in the previous years. Revenue was driven primarily by continued adoption of Motiva Implants. You see a lot of it coming from direct sales efforts and also from our distributors.

I think that just reinforces our optimism for the Company's long-term prospect. We do think that the market dynamics over the last quarter could have affected certain markets, but we did not see a reduction in surgical volume. So we think that with both the ANSM and FDA panels behind us, it just gives us confidence that we just need to execute on our plan in the coming quarters.

Raj Denhoy

Great. I guess part of it though there has been such an amazing dislocation right, with the recalls in France. Has the volume of new accounts that have reached out to you or the number of sales people in a sense that are also now perhaps looking for new places to go. Is there anything you can share in terms of whether that dynamic has started to play out or is that still something that that maybe we can expect to help your results going forward?

Juan José Chacón-Quirós

Well, I think that the fact that it became very public with the ANSM and FDA panels, really brought it to light for many in the investor community. But for plastic surgeons, this has been going on for many years as well for patients. So we have seen demand from new accounts for the last few years.

We think that the fact that it's become such a public thing, it's going to have a reaction from patients who are going to have more time to instruct themselves on the safety of the products that are available. As that happens, we do think there's going to be a continued adoption of Motiva Implants precisely because of those reasons. But I don't think this is new. It's been going on for years. And if anything deepens the belief that our commitment to women's health is going to continue to resonate in the market.

Raj Denhoy

It's helpful. And maybe just one on new products. You mentioned you’ve filed for the tissue expander in Europe, but I think you've also mentioned at times, you have a shaped implant, sort of a novel shaped implant with sort of tabs to fascinate in the breast cavity. Where does that stand at this point? Have you move that through clinical trials in Europe? Are you close to watching that?

Juan José Chacón-Quirós

So that product – and thank you for reminding us of that. That product has been available for the last year in the European market. So it is the only smooth anatomical implant available in Europe. So of course, we have seen a lot of inquiries from plastic surgeons who like anatomical implants, but who have patients that are concerned about textured implants. So we are happy to have the only available smooth anatomical implant in the market in Europe. And we do see strong demand from new surgeons that are looking for those type of options.

Raj Denhoy

Great. And then maybe just lastly – last one for Renee. The guidance, I appreciate you raising the guidance to north of $80 million now. You guys just did north of $20 million in the first quarter. So I guess the question is, is there still some conservatism baked into that? Because if you just continue at the run rate that you're at with no additional kind of step-up as the year progresses, you'll do it at least the lower end of your guidance. And so I'm just curious what went into the thinking on the guidance?

Renee Gaeta

Yes. Thanks, Raj. I definitely appreciate your confidence. Right now, we're seeing the projections for 2019 are significant improvement over 2018, and so we're comfortable with where they're at. Of course, as we move through the year, we'll continue to refine those. But we did a lot of assessment of the current year results or current quarter results talking with doctors and our boots on the ground and as we deploy more of those boots on the ground in the European markets watching that closely.

Raj Denhoy

That's great. Okay. Thank you.

Juan José Chacón-Quirós

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Josh Jennings with Cowen. Your line is open.

Josh Jennings

Hi. Good morning. Thanks for taking the questions and congratulations on a strong start to the year. I just want to follow-up on one of Raj's question. Just about the controversies around the textured implants and France now prohibiting textured and polyurethane implants. Is there any fuss meetings on the docket in any other country's regulatory bodies getting together to discuss the textured – we implanted in those countries that we should be - that you happen to be aware of?

Juan José Chacón-Quirós

Thank you, Josh for that question. Yes, I think that just like we were mentioning before, the FDA and ANSM panels have had a lot of impact in the international market because you have many regulatory bodies debating what they should do about this.

I think it's about risk management. In some countries, you do have a lot of textured implants. You do see reactions like, what France did, out rightly banned them. You do see in other countries like Switzerland, you had the local scientific society recommending their plastic surgeons to use only smooth implants. You had advisories in countries like Singapore, where they told basically to patients you should be thinking about using only smooth implants.

So I think there was a variety of reactions with the most important reaction comes from patients. Patients are reading more about their options and reading more about their option and instructing themselves, I think they realize that they will find in Motiva probably one of their best available options in their different markets. So we should continue to look at the regulatory situation in many of these markets. But we remain focused in our commitment to innovation in women's health.

Josh Jennings

And thanks for the answer and sorry to believe this. But just one more question specifically on Brazil. My understanding is that the penetration of textured implants that reached close to 100% historically. Is there anything you can share there just in terms of dynamic that are ongoing now that we've got the FDA panel meeting and the decision in France?

Juan José Chacón-Quirós

Josh, we're going to have to ask you to repeat the question. It was not – we couldn't hear you.

Josh Jennings

I apologize. I just wanted to say, sorry, not to believe with the point here, but I wanted to ask specifically about Brazil. My understanding is that textured implant had penetrated that country by close to a 100%. I'm just wondering, if you could share any dynamics that are ongoing in Brazil specifically. Now that we have the France decision and post the FDA panel?

Juan José Chacón-Quirós

Yes. And thank you for that. Well, Brazil is not the number two market worldwide for breast augmentation and traditionally it had been a textured only market. So since coming to market in Brazil almost two years ago, a lot of our work has been to teach at generation of plastic surgeons on the use of smooth devices.

So we are happy that those interactions through medical education and through our sales reps has paid off. You see Brazil now representing 17% of our revenues for Q1. And just this quarter, we continue to work diligently to bring more and more medical education, 19 Motiva workshops just last month. So there's a lot of business development going on in Brazil in that sense because we are teaching plastic surgeons how to use our devices. But also we think that will translate into more loyalty from these customers as they see the advantages of our devices. So it's a really large market. So we do think that there are more opportunities ahead for us in terms of gaining market share.

Josh Jennings

Excellent. My last question just on the pipeline and the minimally invasive procedure that Establishment is developing. Can you just talk about what's required for [indiscernible]?

Juan José Chacón-Quirós

Josh, sorry, but we can't hear you again.

Josh Jennings

I apologize. Juan José, can you hear me now?

Juan José Chacón-Quirós

Yes sir.

Josh Jennings

Okay. I apologize. Again, I was just asking about the pipeline question. Minimally invasive procedure that Establishment is developing. Can you just take us through the steps that are required for that early launch to occur in Japan by the end of 2019 and if that's still the timeline we should be thinking about? Thank you. I apologize for the disruption there.

Juan José Chacón-Quirós

Thank you. Well, the most important thing is that the implant that it will be used and can be used for minimally invasive has been already fully validated. And we have now a Free Sale Certificate for that product. From then on there are different steps depending on the markets.

In the case of Europe, we have to go through CE-Mark. In the case of Japan, it is done through surgeon prescription. So we do think that by the end of the year, the tools that go together with that implant for minimally invasive will be ready and validated. In time for the first group of clinics in Brazil start using our products for minimally invasive.

I want to remind everyone that Japan is a market that has always been on the forefront when it comes to you. Japan has been the market on the front for innovation for minimally invasive. So we will continue to work to bring to market at minimally invasive in Japan because we do see that there will be a need for it and a strong demand for it.

Josh Jennings

Great. Thanks again.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Juan José for any further remarks.

Juan José Chacón-Quirós

Thank you, everyone for joining us on today's earnings call. Before we go, I want to let everyone know we are hosting our first Investor Day at our global headquarters in San José, Costa Rica on June 18. We look forward to seeing many of you there and providing you with a firsthand experience of our innovation and an opportunity to meet the talented workforce driving your Company forward.

If you can't make it down for Investor Day, we hope to see you at one of the upcoming conferences, including the UBS Global Healthcare Conference on May 20 or the Jefferies Healthcare Conference on June 4. Thanks again and adios.

Operator

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.