Q3 2019 Earnings Call
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I'll now turn the conference over to your host.
Jeremy Feffer Investor Relations, Sir you may begin.
Thank you Gerry Thank you for everyone. Thank you everyone for participating on today's call joining me from the company or one who say sugarcoat Akira Chief Executive Officer, and when they Guy at a chief financial Officer before we begin I'd like to caution listeners. The comments made by management. During this call will include forward looking statements within the meaning of.
Federal Securities Laws. These include statements and establish relapse financial outlook and the company's plans and timing for product development itself.
These forward looking statements involve material risks and uncertainties and the company's actual results may differ materially for a discussion on risk factors I encourage you to review the company's quarterly report on Form 10-Q that will be filed later today with the FCC. The content of this conference call contains time sensitive information accurate only as of the data Thislife broadcast.
November 12, 2019, except as required by law Sandwich with labs undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances. After the data this call.
With that said, it's my pleasure to turn the call over to the Companys Chief Executive Officer, Juan Jose should come to us as long as they [noise].
Thank you Jeremy and good morning, everyone.
During the third quarter of this year revenue was $22.9 million, an increase of 40% do the same period of 2018.
This is another record quarter made possible like the continued global adoption of let Pete I implants, and marks our fifth consecutive quarter record performance.
Patient safety and improved outcomes as the main drivers for capturing market share the company's focused on breast aesthetics and reconstruction has allowed us to consistently drive strong revenue growth and capture new accounts.
At a time of concern for woman about the breath safety and outdoor implants are innovative and differentiated products offer important support and alternative for the plastic surgery community and their patients.
Our commitment to woman's health is Paramount as we transformed the industry and this will continue to be our main guiding principle.
Stylish and lab continues to add to science in patient data regarding what do you buy implant superior safety profile.
We are also proud to see an increasing number of surgeons, providing independent verification both in conferences in publications of the merits of our technology platform.
And the work also contributes to our growth.
You know continued momentum in Q3, youre comfortable once again, raising our full year 2019 revenue guidance to a range of $86 million to $87 million.
From the prior range of $84 million to $86 million.
We're very pleased with our sales growth trajectory and this guidance reflects what conviction that we will achieve a minimum of 14% year over year growth from the full year 20, I 18 to full year 29 team.
Turning now to the specific drivers of our Q3 performance.
Our increased market share was driven by balanced growth across all regions of the world.
Alongside double digit growth in our direct markets, Australia, and Vietnam were particularly strong and underscore the rest of our success in different markets.
The launch of our direct sales force across Europe in Brazil positively impacted our performance direct market revenue for the third quarter accounted for 41% of total revenue and 45% for the nine months ending September thirtyth.
As expected this represents an anticipated that clint decline relative to last quarter.
Driven by the fact that Q3.
Finally softer in our direct markets.
Our expectation is that our direct market revenue as a percentage of total revenue will continue to grow over the long term.
Particularly as we expand our direct sales teams into other territories.
During the third quarter, Brazil was once again, our strongest market generating 16.3% of or total year to date revenue.
Additionally, we enter two new distributor markets earlier, this year, Taiwan and Thailand.
These markets are performing ahead of plan and are ramping faster than anticipated as a reminder, Thailand is one of the largest breast aesthetics market in Asia.
Do you buy in France are now commercially available in 80 countries.
Graphic expansion is a key part of a long term strategy.
And we will continue to grow product portfolio into the global standards in breast aesthetics and reconstruction.
Our regulatory work continues to make progress with geographic expansion for current product offerings in a path towards the approval of several new products.
We have the most comprehensive portfolio of advanced smooth implants worldwide.
Continuing the expansion of our product portfolio, we announced last month, the five 10-K submission for Smoots, Phil anatomical tissue expander.
We also filed for CE, Mark registration about tissue expander at the end up the fourth quarter of 2018.
These submissions are important milestones for global regulatory pipeline and demonstrate our commitment to the breast reconstruction market. What do you buy implants are already being used by plastic surgeons in breast reconstruction much of the total addressable market is driven by the inclusion of a tissue expander as a part.
I'll be product portfolio.
Yeah, that's the sign up or tissue expander should fuel adoption in the breast reconstruction market for all of our products.
Our tissue expander is a real difference for the industry at this product not only includes or smartsilc surface, but it will be the oneq tissue expander within integrated support with no magnets nailing the use of the expander safely alongside an MRI scanning and creating a reduced shield too.
Depreciation therapy.
This innovation that makes a substantial difference doing colleges plastic surgeons and patients and we'll have a real impact on the women's health.
They undergo breast reconstruction.
Our R&D team incorporated our existing RF I'd be technology into this new product reinforcing the strength of our intellectual property.
We continue to work hard on their minimally invasive breast augmentation initiative Motiva EMEA, we're scheduling the first clinical cases to take place in Japan before the end of the year with a carefully planned soft launch 2020 .
Similar to the introduction of minimally invasive surgeries in other medical specialties, we believe that bringing a minimally invasive breast augmentation to market may grow the worldwide total addressable market for breast aesthetics in Q3 regulatory agencies around the world continued to take action textured unfold you were.
In employment, notably in September the FDA identify a major competitors textured breast implants in tissue Expanders as a class one recall.
Due to the elevated risk of breast implant associated anaplastic large cell lymphoma.
Our type of non Hodgkin's lymphoma.
For the global plastic surgeon community. We believe this is the start of the transition to smooth them plant, which will take some time to complete.
Extra can smooth implants have different surgical techniques and responsibly transitioning from one to the other does involve medical education.
As global regulatory agencies take action, we would expect some doctors do move quickly into using smooth implants, but for many more their initial reaction is to continue using other available to extra them bunch in the market.
We provide considerable medical education around the world, we believe the transition to smooth implants, and more specifically, our advancing with them plant will accelerate.
While we did not see while we do see some modric pickup in our sales from their regulatory events like this year, we believe that most of the transition has yet to come.
And you will see this continue to be a factor in our growth.
No tober, Yeah, FDA released its draft guidance as a result of you advisory panel the FDA convene last March.
In full support of the guidelines as they should serve to help doctors and patients understand the differentiation of our implants relative to the current offerings in the market.
We do not expect east FDIC actions to have any negative impact on our ongoing U.S. clinical trial.
Yes, it's challenging regulatory environment and negative media coverage or product portfolio remains available in all markets.
With the unique safety profile of what do you buy implants, we remain confident about our long term growth prospects and continue to monitor a fraudulent products vigilantly, where product post market surveillance efforts.
We believe our implants can be a substantive part of the solution to the concerns raised by the global regulatory agencies and we have taken this as another opportunity to provide our industry votes surgeons and patients with further scientific detailed and medical education about our surface technology.
These regulatory concerns questionably demonstrate the need for innovation in our industry to research and development and we strive to take the lead in these efforts.
With that in mind, we continued to strengthen the intellectual property around lucky by implants.
In September we announced that we received a notice of allowance for U.S. patent applications covering our unique implant surface technology.
We continue to develop and filed patent applications around the world in an effort to protect our innovation.
We are progressing with the FDA clinical trial for MACI lie implants.
During our last call, we announced that we completed all surgeries, India static cohorts of the trial with the U.S. market constituting roughly half of the world market on the dollar basis entry into this new market for establishment labs is an important opportunity as are we manage reminder to date we have.
Completed all surgeries in the primary augmentation cohort completed all surgeries in the revision augmentation cohort and we continue to make progress with enrollment and surgeries indeed reconstruction cohorts.
We're very pleased to have achieved over 90% or roll meant in the revision reconstruction cohort in over 50% enrollment in the second stage reconstruction Port we continue to make progress enrolling the single stage reconstruction cohort and recently received approval from the FDA on a practical.
Amendment getting us one step closer to an important CMS approval required for some centers focused on single stage reconstruction.
In light of the fact that we were able to complete the primary augmentation a revision augmentation cohorts, we have implemented a bifurcation strategy.
Which we intend to pursue submission for get static indications ahead of our submission for the reconstruction indications. These keeps the timeline of a P. M. A package submission to the FDA on track.
To raise awareness and education regarding the aesthetic and safety advantages of Motiva implants, we sponsored the fifth annual Worldsymposium on ergonomic implants in love with regard to Italy.
This annual event brings together hundreds of industry experts insurgents from around the world to discuss the evolution of surgical techniques and breast implant technology.
With a record 500 attendees, including top scientists from some of the world from your institution. This event speaks to the rapidly growing interest in Motiva.
For me some of the best moments are this year conference, where scientists from the langur lab at MIT, giving an update on their research regarding breast implants surface biocompatibility and the differentiation upper smoot silk implant surface surgeons from different countries in Europe , providing their K series with Motiva implants in breast reconstruction.
Including one center from Switzerland, delivering safety information with surgeries of up to five years that demonstrate a significant reduction in the percentage and severity of capsular contracture in an improvement in the quality of life of patient.
Plastic surgeons from around the world, giving lectures on the advance use of Motiva implants in breast augmentation with minimal scars surgical three d. planning using the algorithms of our Divina technology and hybrid use of Motiva implants with of Fat grafting suite.
Educational industry gatherings like these are an important forum for us to better understand surgeons experiences with multibillion plants and we are already looking ahead to the next year event.
We are conducting many medical education events across the world with more than 50, taking place this quarter alone.
With that I'll like to turn the call over to Renee to discuss the financials in detail Renee.
Thank you want to say Oh.
Oh, it's one of the they stated earlier our momentum from the second quarter carried into Q3, and we're pleased to again report record revenue.
You can find additional details on our third quarter financials in our earnings press release, and our Form 10-Q , which we plan to file later today.
Our total revenue for the third quarter with $22.9 million, which represents a 40% increase over the $16.3 million, we reported in Q3 2018.
As one Jose mentioned revenue growth for this quarter was driven by double digit growth in our direct market alongside strong performance in our distributor markets.
We anticipate full year 2019 revenues.
In a range of $86 million to $87 million up from our previous guidance at $84 million to $86 million.
The lower end of our revised guidance represents revenue growth of more than 40% year over year.
Our revised full year guidance.
Reflects a plant manufacturing and distribution delivery shut down in the fourth quarter as we complete a critical milestone in our planned ERP system implementation.
This allows for a higher process controls on production and supply chain alongside efficiencies to support our expected growth.
This year the shutdown happens in addition to our required annual maintenance that we perform every year in Q4.
I would like to mention that amid a major milestone for any med Tech company is achieving a 100 million dollar revenue run rate and based on our performance to date, we expect to achieve and exceed that milestone in 2020 .
Gross profit for the third quarter was $14.2 million were 62.3% of revenues, which compares favorably to 60% of revenues last quarter and is similar to the third quarter 2018.
The sequential increase in gross margin percentage was driven primarily by increased volume.
Our gross profit percentage was negatively impacted by 2.1% during the quarter due to amortization related to the fair value of inventory recorded from asset acquisitions from distributors in recent quarters as we sell through the remaining inventory acquired the impact of this amortization dissipate.
Total operating expenses for the third quarter 2018 were $23 million, an increase of 42.24% as compared to $16.2 million in the third quarter 2018.
This increase was driven by continued investment across the company it for our current and future growth.
Particular, we continue to implement our business excellence model and we are building efficiencies in our systems to ensure that organization can scale with the growth ahead.
For example, we are undertaking a comprehensive system upgrade to our ERP system with S&P, a multiyear investment across our global operate operation. It is key to our scalability and will bring us closer to our customers providing them with exceptional service using advanced digital tool.
I see an expense increased $6.2 million or 48.1% to $19.2 million.
The increase in S. you name it was primarily due to $3.2 million personnel and related costs is that as a result of hiring additional sales marketing and administrative employees.
$1.2 million, an increased legal and consulting costs.
700000 dollar increase in sales commissions, and a 700000 only increasing marketing expenses.
Our sales force has grown to 93 employees and contractors from 64 in the year ago period.
Driven by the new direct market additions from Q4 2018.
Well I direct markets have added to our S. DNA expenses the normal course of their operation. They have contributed to our revenue and they're accretive to our gross margin.
Another example of an investment in 2018 is the many educational events, we're organizing a classic surgeons around the world to educate them on the important surgical technique nuances of our advanced made it implants.
We will continue to make these investments to improve both patient outcomes and satisfaction as well, it's creating loyal relationships with the plastic surgery community.
Our research and development expenses increased 19% to $3.8 million.
The increase in R&D expenses is primarily due to the related costs of art ft, a clinical trial in the United States.
Research and development continues to be a cornerstone of our future growth and product portfolio.
With an eye on both a short and long term, we evaluate the use of our capital with a high level of scrutiny and we are constantly making adjustments where necessary to capitalize on gross.
Our level of investment today. It is a deliberate strategy by management and we're confident that these steps will both reduced cash burn an increase growth in 2020 and beyond.
The investments we make today such as the years clinical trial should allow us to become the global market leader with a product portfolio any brands that is highly differentiated and creates long term competitive advantage.
As we continue with these investments we should begin to see cash burn come down and 2020 from its current highs as our business achieved scale.
Net loss for the third quarter 2018 was $12.8 million as compared to net income.
$1.3 million for the same period in 2018 as a reminder, that third quarter net income of 2018 was affected by noncash gain on the fair value of debt related derivatives of $11.4 million.
Our cash position remains strong.
Well the cash balance of $42.6 million at the end of September Thirtyth 2018 during the quarter, we used $10.9 million to fund our operations. We note that this is slightly higher than our average quarterly run rate for 2018 in part due to seasonal items, such as insurance renewals that occur in July .
Well now turn the call back over to Juan Jose for some concluding remarks Juan Jose.
Thanks Renee.
We continue to be very pleased with arc performance and we'll continue to work on maintaining this momentum by taking advantage of current an emerging market opportunities.
In the middle of the complicated regulatory environment, we work to lead the industry through a commitment to woman's health innovation and by setting new safety standards in the rest aesthetics and we construction market.
Our goal is to take a commanding position in the industry by bringing unmatched innovation and technologies that result in superior long term safety and improve the static outcomes.
With that I will hand to co over to the operator for the Q and <unk>.
Thank you.
Tom will be conducting a question and answer session if you'd like to ask a question. Please press star one on their telephone keypad, a confirmation told would indicate that your line is in the question Q. You May proceed star to if you'd like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please pull for questions.
The first question is from Raj Benoit from Jefferies. Please go ahead Sir.
Hi, good morning, I want to saying Renee.
Maybe I could start a bit on the comments you made around training right. So.
Having been to some of your sessions in meetings and things you know the necessity of training is I think something that maybe is coming to light and so I'm curious about the pace of training and the pace of demand for training are you seeing any acceleration in physicians that didnt want to learn about motif implants and learn about that that take techniques with the implants.
Oh.
Okay.
Thank you Raj for this question.
Yeah, I think the one of the most important things to understand these days is the process in which we acquire new accounts.
And by that I mean that most people would have a.
First impulse do you think that whatever allergan lose is because of the recall, we are going to get a substantial amount of it.
And that can be a logical thing to think but actually in reality. Most of these surgeons in the international market that have used highly texture devices for decades and were never trained into use of Smith devices. Their natural impulse is to move to the.
Next texture device that they can get their hands into.
Some of them do initially seed the really.
The reality of it which is that.
All texture devices have those same potential complications so our job is to train them.
Into the science behind MACI by implants into the new surgical techniques. So to your question I think that we youre seeing a lot more interest. That's why we are conducting so many events every quarter I mean last quarter. It was more than 50. This quarter, we're going to do at least 50, although you know we.
Have the Christmas shutdown early and what we do see is that more surgeons are also being put in this situation by their patients because there are patients are coming in and saying don't put textured then plans on me I want smooth implants, and if they don't know how to use them appropriately then they contact.
To us because we are doing currently most of the work that the scientific societies should have done we're doing most of the trainings to plastic surgeons on the use of advance smooth implants. So we do work hard to get more and more surgeons involved in our medical education, but this is a process that is not immediate.
It it takes time, but we're very happy to see that yields long term relationships with these accounts and we hope to see the surgeons with us for years to come with excellent.
Static in safety results.
No that's helpful and maybe as a follow up to that you mentioned the.
The regulatory issues with textured implants, and while it's not obvious in your numbers, but have you seen any impact in the market are you seeing any slowdown or any.
In any having inpatient demand for for breast implant procedures.
We have not been able to quantify to date any slowdown.
What do we have seen is increased concern by patients worldwide. If you check the chatter.
On social media and the different messages that many patient advocates are giving of course there is concerned and there is reason for concern I think they are right to be concerned. So you know it's it's one of the things that we look for every quarter, but to date, we have not been able to quantify any significant slowdown.
In the market.
That's that's helpful as well maybe just one last one you mentioned the regulatory filing for the tissue expander in the United States you.
What are your plants I guess, just a question for that product we launch it in the United States prior to getting the Motiva implants approved.
Yes. This of course is a great opportunity for establishment labs to be in the U.S. market ahead up the launch of Motiva implants, but this is a decision that we cannot take lightly we are going to have to do significant investments to launch products in the U.S. market and bring.
King breast reconstruction tissue Expanders ahead of time could be one of the options that that we are looking at.
I would say the timing will be closer for a proper response from me when we get the final decision from the FDA and the timing of that but we certainly do you see it as a very important opportunity for the company.
That's helpful and congratulations on a good quarter.
Thank you.
The next question comes from Chris Cooley Stephens incorporated please go ahead Sir.
Mr. Cooley is your microphone open.
I'm sorry can you hear me now.
Okay.
Okay.
Modulations and thank you so much for taking my questions here. This morning.
Maybe just to for me that I'll get back in queue falling on a lot Raj touched on just the series. There also could you talk to a little bit about how you educate the end market to consumer.
Not only about benefit so to motiva implant, but also just.
Generally about their selection choice that's been positive feedback we received from some of our recent European survey work that we that Doug.
Not only practitioners, but also patients appreciated the information that the company was putting forth and so talk fell a little bit about how you start to balance about the clinical information.
The same time dry to a skilled and well trained surgeons and I have a quick follow up.
Yes. Thank you Chris for US patient education is Paramount, we have to balance the healthcare compliance rules, because we cannot be.
In direct contact with patients, but at the same time, we can put communications that are meaningful regarding the safety and effectiveness of Motiva implants in the international market. So it is for US one of the key drivers is that patients are beginning to understand that there are substantial debt.
Differences between Motiva implants, and the legacy products. So.
One example of that is that we have by far the largest presence on social media of all brands in the international market and that is part of the work that we are doing to educate the patient population about it.
At the time of this complex regulatory environment, we are putting out what we call. The good news campaign, so in different social media and digital channels, we are putting out the positive messages about all the work that we have done to innovate does industry about the qualities of or low inflammatory surf.
This technology.
What we can do in terms of reducing capsular contracture rates the understanding of women trying to get breast implants, and their commitment to it and that to be balanced with the potential complications and how much kiva can help them reduce those complications at the same time did you have old.
Patients asking surgeons about Motiva then you have all these surgeons asking themselves why or why am I not using motiva and that's part of the work that we have to do in terms of bringing quality medical education to surgeons. So that they can serve this population of patients who do.
C and Motiva a solution to their commitment to having a breast augmentation without the complications that they see in newspapers and beyond.
Thank you very much that's very helpful. Then maybe just as my follow on Tonight.
If you could maybe just give us a little bit more talk around your expectations for reducing the burden 2020.
As a function of further gross margin leverage shows you could you just scale getting some leverage to middle to you know the recent sales and marketing cars just help us think about what is going to be driving a reduction in cash burden to.
To the extent that you can original hubs 2020 garbage. So just maybe order of magnitude how we should be thinking about that reduction over the course superior. Thanks, so much.
Yeah sure Chris. Thanks for the question you know I think it's a combination of both of those thing of course is gonna be seeing topline revenue growth and improvement on the gross margins, especially as our direct markets continue to perform.
As they have in the current year, and we expect them to doing 20, twond and beyond but of course, it's going to also come from and optimization of the piano as well I'm on operating expense side. So we are making critical investments this year and that will help us with leverage for next year, and you're right and I'm not going to provide an explicit.
Guidance right now for cash burn for 2020, but I will tell you that the improvements that we're making today leverage on top of the growth that we expect for next year and will allow for the cash burn to come down.
Understood Congrats on a great quarter.
Thank you.
As a reminder, if you wish to ask a question press star one on your telephone keypad that star one.
We have a question from Josh Jennings Cowen and company. Please go ahead.
Hi, good morning.
Taking the questions and congratulations as well on another record quarter.
I wanted to start off I want to say just on the ergonomic symposium the material science, that's been evolving and some of the presentations that occurred there, but particularly on [laughter] am I T lab. So biocompatibility data I know, it's a great place since that was presented but.
How's the response been from some surgeon customers it hasn't been as it resonated and how do you plan on on using that data to to market.
Motiva and.
Central safety benefits from the from the.
Compatibility that fits that has now been put on the table.
Thank you Josh Yes, and this is a very important set up new information that was giving at the ergonomic symposium and it highlights the work and the collaboration.
With professor Langer at MIT and his team and their work has proven that we have a low inflammatory surface technology and this can have.
A fundamental effect on the complication rates. So at a time, where everyone else is trying to explain their surface technology. We have now real scientific proof of how to surface technology and its architecture elicit a positive interaction with cells.
And this is something that you know is a first in their industry and it describes the difference with Motiva implants. So.
I think that it is a complex subject and at this point what we are doing is.
Definitely working through the material. So that we can explain the significance of it to the plastic surgery community, but most of this is going to happen in podium having.
Different of our experts explaining the importance of the MIT data and as we go forward definitely what would be more important is the final publication of that information in the peer reviewed journal.
Great and I wanted to follow up just on.
You mean.
The minima based approach and.
And the Japan first first enrollment and.
Then the soft launch in 2020.
Specifically can you just help frame the opportunity in Japan.
Maybe talk a little bit more about.
What your share position as in Japan today.
And whether or not minimally invasive.
Approach can expand.
Fair and also globally.
Thanks for taking the questions.
Thank you we have been present in the Japanese market since 2012.
And we now control over 60% of the market in breast aesthetics in Japan.
So while this is significant 70% of the total market for breast augmentation is not done with breast implants, but it is done by the injection of hydrogels like Yale or on the gas. It that procedure is banned in most countries, including the United States and the European Union.
But.
It is done in Japan, because Japanese woman do not want big scars. They want a minimally invasive type of augmentation. So we have.
The total 10000 approximate women that are being implanted every year with.
Implants breast implants silicon breast implants, you have 30%. So you have 7000 woman who are the lion share of the market, we're being implanted with yellow chronic asset or other hydrogels. So I would say our first objective is to.
Slowly train Japanese surgeons on how to use this novel minimally invasive silicone breast implant augmentation and this is going to take time. This is absolutely new to this industry. So we're going to be patient and we're going to go slow.
Because we want to get it right and at the same time Theres. The other part of it which is we have to talk to a completely new group of of customers about why does minimally invasive procedure is safer than the current use of yellow chronic asset or other hydrogels in breast augmentation, but further and that is to learn.
From it so that when we go in market in other countries in Asia, I, like Korea, or China or that we move this to Europe or the United States that we understand what is the best way to talk to women, who are not looking for a breast augmentation. They are looking to have a differentiated breast size and shape.
That is not a keen to what it is normally consider it to size up breast augmentation. So we do see a lot of potential in this.
We think that this has the potential to grow the market not only in Japan, but also worldwide. So because of it you will see is going very slow in 2020 before we accelerate in 2021 and beyond in other geographies.
[noise].
Mr Jennings.
Oh, you're all your questions answered [noise].
Oh, yes, thank you very much.
We have reached the end of the question and answer session I will now I'll turn the call back over to Juan Jose for closing remarks.
Thank you everyone for joining us in todays earnings call. We look forward to providing our next quarterly update in March we wish you a very good day.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a good thing thinking broad for [noise].
[noise] no interest happy.