Q1 2022 Establishment Labs Holdings Inc Earnings Call
Good afternoon, welcome to establishment Labs' first quarter 2022 earnings call.
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I'll now turn the call over to Raj down Hoyt Chief Financial Officer.
Thank you. Please go ahead. Thank you operator, and thank you everyone for joining US with me today is Juan Jose Chacon Quiros, Chief Executive Officer, following our prepared remarks, we'll take your questions.
Before we begin I would like to remind you that comments made by management. During this call will include forward looking statements within the meaning of federal Securities laws. These.
These include statements on establishment Labs' financial outlook, and the company's plans and timing for product development and sales. These forward looking statements are based on management's current expectations and involve risks and uncertainties for a discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements.
Curt you to review our most recent annual and quarterly reports on Form 10-K, and Form 10-Q, as well as other SEC filings, which are available on our website at establishment labs Dot com.
As a reminder, establishment labs received an investigational device exemption from the FDA for Motiva implants, and is undergoing a clinical trial to support regulatory approval in the United States.
We continually seek to expanded geographies in which our products are regulatory approved please check your local authorities for specific product availability.
The content of this conference call contains time sensitive information accurate only as of the date of this live broadcast may nine 2022, except as required by law established labs undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances. After the date of this call with that it is my pleasure to hand, the call over to our CEO Juan <unk>.
Hey.
Thank you Raj and good afternoon, everyone. I hope everyone is healthy and continues to remain safe.
Revenue in the first quarter of 2022 totaled $38 $5 million or 27% increase over the first quarter of 2021.
This is a new quarterly record for a company.
Our singular focus on developing highly differentiated technologies based on science and patient centric design with far superior clinical results continues to be the key for market share gains and we expect these gains to continue.
Most importantly, our innovations are aimed at creating new categories and markets that will help sustain our growth far beyond the current market as we know it today, we see a future of woman empowered with abundant new options.
Raj will provide additional detail on our first quarter performance and our outlook in a moment.
Before I turn the call over to him I would like to highlight several recent events.
The past several weeks have seen two seminal events in our company's history of improving women's health.
The first of these was the presentation of two year data from the primary augmentation cohort of our U S. IV clinical study the data was presented by Dr. Caroline Glicksman. The principal investigator in the study at the aesthetics meeting in San Diego on April 22nd I assume.
Crescive as the sub 1% rates of capsular contracture and rupture at two years or in the U S study. They mirrored the results we have seen over the past 11 years with the over 2 million Motiva implants in market.
The results are another confirmation that the performance we have seen across real world data and numerous studies with Motiva is absolutely, creating a new standard in breast aesthetics and reconstruction Motiva implants have changed with surgeons and women should expect from breast implants.
I think the preliminary data should be cause for optimism that we are in a position to take a very meaningful share of the United States market.
This has certainly been true in every single market that we have entered and we are now in more than 80 markets.
Estimates have the United States, making up about 40% of the world market with premium pricing compared to other geographies. So our success in the U S will obviously very very important for our company.
I think the optimism should extend past our ability to take market share though.
We have proven that again and again over the past 11 years.
The question now is not that we can take continued market share in the United States and abroad, but how much can we grow the market itself more than ever before women are doing extensive research under one before making choices in breast aesthetics and reconstruction.
Women are presented with markedly improved safety data and the possibility of results that mirrored their goals. We believe this market may be multiple times larger than it is today.
Second seminal event is the financing we secured with our new lending partner Oaktree capital on April 26th we have gotten to know the team at Oaktree over the past few months and we believe they share our passion for science and innovation and have a deep understanding of our strategy and the growth prospects in front of us over the <unk>.
Next decade.
This financing fully funds, our innovation driven business model and we can reach cash flow breakeven, even as we invest in new markets and develop new technologies with this investment our business is on very solid financial footing.
As you May have noted with the two year data from our study we continue to move forward with our modular PMA submission with the FDA. We remain in active discussion with the FDA and I am pleased to announce we have submitted our second module to the agency for review. We also remain on schedule to complete the remaining implants in.
The reconstruction cohort of the trial and we expect to have this final cohort of the trial complete during the month of May we.
We will provide additional updates over the coming months on their progress towards launching our motiva implants into the United States.
And our aesthetic breast reconfirmed choice the launch of our Motiva flora tissue expander in Europe , and other CE Mark countries is ongoing.
Florida has many advantages over other commercially available tissue expanders, including a first of its kind RFID enabled port which allows for MRI imaging without artifacts during the time and expand or is used after mastectomy by being non magnetic Florida potentially opens new options for radiation oncology treat.
During this stage of recovery, Florida also features our patent itself friendly smooth silk surface technology and early users have noted improved patient comfort and healthier capsule formation with this unique tissue expander adoption.
Adoption of Florida will take time, but early efforts have been encouraging and that to our belief that we can help support women in their breast reconstruction journey surgeons are adopting our technology with many making it their expander of choice. We continued to wind tender contracts in Europe and are expanding into new markets. This year.
<unk>.
Florida is only the first step in our aesthetic breast Recon initiative, where establishment labs will offer tools and techniques that allow women to receive reconstructive surgeries that achieved the aesthetic ideals to which they aspire and work to democratize breast reconstruction worldwide. We look forward to sharing more with you on these efforts in the future.
In our consumer franchise Motiva Mia, our minimally invasive breast enhancement procedure. We continued to perform you cases as well as track. The original 100 patient cohort. We completed in April of last year, we have 100% follow up on this group of patients and the outcomes continue to support our.
Belief that this approach will transform breast aesthetics and bring in a new base of consumers. We plan to provide an update on these patients.
Regulatory clearance in Europe for the tools that are part of the Motiva EMEA system are ongoing and we continue to plan to perform our first cases in the first half of 2022.
According to our market research the new category created by EMEA could grow to more than $5 billion globally with approximately half of the opportunity from new patients that had not previously considered a breast augmentation, our clinical and commercial efforts in China are ongoing and we continue to make progress in the regulatory process.
Our expectation remains to obtain regulatory approvals for motiva in this significant market by the end of the year.
Finally, we continue to work on to transition into European Union from the medical device directive to the new medical device regulations, a process, which is expected to be finalized over the next few months.
I will now turn the call over to Raj to cover our financial results.
Thank you Juan Jose.
Total revenue for the quarter was $38 $5 million.
Revenue growth in the first quarter was 27%.
Foreign currency changes reduced our first quarter revenue by approximately two percentage points.
Direct sales were approximately 45% of this total while distributor sales, which can fluctuate based on changes in inventory levels and the timing of Reorders made up the balance.
A regional perspective sales in Europe comprised approximately 37% of global sales.
Asia Pacific and Middle East was 30% and Latin American made up the balance.
<unk>, which is our single largest market globally accounted for approximately 17, 4% of total quarterly sales.
Our reported gross profit for the first quarter was $24 9 million or 64, 8% of revenue compared to $20 1 million or 66, 2% of revenue for the same period in 2021.
The change in gross margin was primarily the result of a $1 2 million dollar increase in inventory reserve for pure graft products.
Distribution agreement for these products as far as the end of this year given the historic sales rates fully reserving for these items was deemed appropriate.
Excluding this incremental inventory reserve gross profit margin would've been approximately three points higher or 67, 9%.
Overall average selling prices in the first quarter were up slightly from the fourth quarter of 2021.
SG&A expenses for the first quarter increased approximately $8 8 million to $26 $9 million compared to $18 $1 million in the first quarter of 2021.
The increase in SG&A in the first quarter resulted from continued normalization of business practices. Following the disruption from the global pandemic and the year ago period Andrew.
And our prioritization of investment in new growth initiatives like Mia.
The first quarter increase in SG&A resulted in part from increased personnel related costs as we increased head count to support these initiatives.
We also continue to see a resumption of in person medical meetings and Congresses.
R&D expenses for the first quarter declined approximately zero point $5 million from the same quarter ago to $3 $6 million.
R&D expenses will fluctuate quarter to quarter based on the timing of clinical trials and other expenses.
Total operating expenses for the first quarter was $35 million, an increase of approximately $8 $3 million from the year ago period.
The increase this period was again due primarily to the normalization of activity in spending relative to a year ago as well as the investments in growth initiatives.
Net loss from operations for the first quarter was $5 $6 million compared to a net loss of $2 $1 million in the year ago period.
Our cash position as of March 31 was $44 $7 million.
This compared to $53 $4 million at the end of the previous year.
The $8 million of cash used in the first quarter included approximately $4 $5 million of investment.
Cilium innovation campus.
On the capital front, we are extremely pleased to have announced our new term loan facility with Oaktree capital on April 26th Oaktree.
<unk> is an excellent partner with deep experience in life science investing.
<unk> provides us with up to $225 million of non dilutive capital at fixed interest rates over the five year term it alone.
The facility's tranche to allowing us to manage our capital needs and it gives us the option to pick up to two thirds of our interest payments over the first two years lower our cash interest rate to 3%.
Through the first tranche of $150 million drawn and after retiring our previous term loan and accounting for expenses, our cash position at the end of the first quarter on a pro forma basis would've been approximately $116 million.
Under our current forecast this financing with Oaktree will allow us to reach cash flow breakeven, while still funding our launches in the U S, China, and our development and commercialization of new technologies like Mia.
The funding also will support other growth initiatives like construction of new Silicon innovation campus that will allow us to produce more than half the world's implants.
We are maintaining our sales guidance for 2022, and a range of a $155 million to $165 million, representing estimate annual growth of 22% to 30%.
As we saw in our first quarter results. There was considerable mentum in our business. We are taking share globally and we expect this will continue even in the current macro environment.
For example, we are assuming no revenue from Russia, or Ukraine over the balance of the year.
These two markets collectively were approximately two percentage points of revenue in 2021.
Foreign exchange has also become more of a headwind for us. This year, if current rates hold currency will negatively impact reported revenue by approximately two 5%.
As it relates to our supply chain, we have seen minimal impact on our results. So far this year and we continue to monitor the situation closely.
If you look down the rest of the P&L, we continue to expect to see spending levels increase as we prioritize investment in a significant number of development and commercialization programs we have underway.
Brian for entry into new markets and advancing our pipeline of new technologies to drive future growth remains a top priority. However.
However, given our strong top line growth operating expenses as a percentage of sales should trend down even as we increased strategic investments.
We believe our company remains in a very strong competitive and financial position and with that I will turn the call back over to Juan Jose.
Thank you Raj.
The last few weeks have strengthened the scientific clinical and commercial foundations of establishment labs with the data shown at the aesthetics meeting and with the financing with recently completed we are ready for the next chapter in our growth story.
Wound it solidly in our commitment to women's health and wellbeing. It is within our reach to become the leading global company in breast aesthetics and reconstruction, we will continue to transform our markets in doing so and we will create new categories for growth and more importantly, create new options for women around the world.
I will now turn the call over to the operator for your questions.
Thank you we will navigate deducting our question and answer session.
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Our first question is coming from the line of Josh Jennings with Cowen. Please proceed with your questions.
Hi, good afternoon, and thank you.
Congratulations on achieving multiple seminal milestones in Q.
It provided a download.
The prepared remarks, I wanted to say I wanted to ask about the Motiva USA. The trial first and just to differentiate capture contractually. Our team was impressed with how differentiated and how low motiva is cap con rate came in but perhaps even more impressive was the mix of prepaid toro versus subject implant placement cases enrolled.
Just wanted to kind of sanity check.
I know the historical.
Captured contracture rate associated with smooth implants placed pre pictorially versus post back to early because it seems like that big Delta is probably even bigger considering the mix of.
Broaches in the USA the trial, but and then just to follow up is why does the pre pectoral approach because you're better than some pictorial and will this motiva data potentially open up a pre pectoral approach in making more common in the United States.
Yes, Thank you Josh.
This is just one of the key questions because when you think about what can <unk> do for women in the U S.
One of the things that we can do is open new options and those options are based on.
Superior design and technology, we have created over the years and when we think about the importance of being able to use the sub <unk> plane.
What we are talking about is the possibility for women.
We're very physically active not to have an implant behind the muscle, let's just remember the anatomically.
Proper place for our breast is in front of the muscle which is called the <unk>.
Furthermore.
The reason why textured implants in each market.
There was a reason for that the reason for it is that there was very high capsular contracture rates would smooth implants.
The second thing that surgeons did to reduce capsular contracture rates you start putting the DM plants behind the muscle and between dose two things textured implants, and the sub modular plane, they were able to see and the interesting reduction and capsular contracture right now when we see our smooth silk Pat.
Did surface what do we see is that there is no significant difference between the capsular contracture rates that we have seen sub landler or sub petrol.
And that is definitely due to the design of our smooth implants, which as you know has an architecture that lowers the inflammatory response.
It is fundamental for people to understand that not only you can compare that 0.5% capsular contracture rate against other trials that have combination of.
Textured and smooth implants, but also that they're comparing it to mainly sub muscular pocket.
In those trials. So when we go to market of course, we are going to make it very visible that smooth implant sub landler capsular contracture rate is double digits in many cases, 20, 30%, 40% and and that is something that I think we have solved with our technology.
Yeah.
Thanks for the help thinking through that and just on the follow up just thinking about the ft module submission pathway.
Established was not submitted the second module can you just remind us about the third module what needs to be completed before the manufacturing model can be submitted I mean any color that you can share just in terms of where you are with that with that module and when that can be submitted thanks, a lot for taking my questions.
Hey, Josh it's Raj.
We said all along in this process right, we are going to be ready to submit the modules when the FDA is ready for them right, we're not going to be the.
Group to kind of holds up the progress here.
Hey, Jeff just submitted this the second module and keeping the process is moving along and we opened up did you guys very soon on where we are with the third module as well.
Understood. Thank you.
Thank you. Our next question comes from the line of Amit <unk> with Goldman Sachs. Please proceed with your questions.
Hi, Thanks. So much this is Phil on for Amit I wanted to follow up with Jonathan's question.
Just there first on the U S side, and then maybe on China quickly. Thereafter. So can you just I know you guys said on track still for your past comment can you remind us what the U S timeline that you guys. Most recently provided was four.
Hey, Phil its Raj again.
Purposely not endorsed a specific timeline for U S approval, primarily because.
Again, a lot of this is when the FDA is ready to receive this information and where they are ready to review it.
We of course, we're moving as expeditiously can we want to move this long.
But endorsing a specific timeline around this is just very difficult to do.
Yes that totally makes sense.
I appreciate the additional color on the on the China side, you've been more forthcoming though.
I was under the impression it was.
<unk> this year and planned launch by the end of this year I thought I heard just approval by the end of this year in China can you comment on that and also give us an idea of kind of what visibility has been given the situation that's going on in the country.
Yes, I think that it.
We haven't moved on that decision, it's very clear that we need to.
Get the regulatory approval. So that we can proceed to launch.
Okay, Great and just any color that you can give on the situation that's going on there. It's obviously very challenging I'm just wondering what kind of visibility you all have to being able to reaffirm and feel confident in that timeline given things that are certainly outside of your control right now.
Yes, I think the <unk>.
Duration. There of course is one of concern and definitely we are looking at the situation and we hope that in.
In the second half of this year that situation would have sold by itself.
The second thing I think is important to note that we are in communication with our regulatory experts in China, and we are making progress. So it's good that we have received feedback.
From the regulators regarding our files, we are responding to their questions. So the process is moving ahead and we're.
We're happy to be able to be in a position in which we can access a market as important is China.
Great. Thanks. Thanks, so much wanted to say thank you both.
Thank you. Our next question is coming from the line of Moray Tivo with Pete <unk>. Please proceed with your questions.
Hi, Thank you for taking my questions and congrats on the nice quarter.
I wanted to ask just a.
A very simple question here I'm, sorry, as a reaction as you've heard and seen year to date is there.
Ecstatic meeting.
We certainly heard from good survey responses on our own but we're curious what youre hearing in terms of pros and cons from the surgeons firsthand.
Yes, I think definitely.
One of the things that other companies have done to market against us is bring out.
The fact that at that time, we did not have USD. So I think definitely this this data is very important for the plastic surgery community David never seen data. That's good. So of course, it's been noticed and I think many people that were told in the past you can't believe those numbers.
Real World data, you will need it will never be able to reproduce it in and a U S. FDA trial and now we have the evidence I think evidenced speaks for itself and people are taking notice and that's definitely going to help.
With reassuring plastic surgeon and most importantly patients that <unk>.
Technology and the design that we have created is transforming outcomes.
Okay very good thank you for that.
Wanted to ask a quick one here just on <unk>.
Where we are with the Motiva Mia tools I think I heard mention of the MBR process. There and then if I could sneak one in here on just sort of in an environment like discretionary spend we haven't seen.
Economic worries hurt.
Direct market in the past, but would love to hear what you're hearing from the field the crafts.
Discretionary spending.
Thanks for taking my question.
Yes. Thank you I'll start with that one what I will tell you is that right.
We are in the process of.
Of.
Of the Joy launch in.
In Europe , just to give you. An example, and enjoy comes at a significant premium to our best selling ergonomics implants, and and what we see is that people realize that it's.
It's a great opportunity to upgrade to joy and we're happy to see that even in what seems to be a complex environment women are making those type of choices. So.
In the past.
It's always been very resilient two recessions.
<unk> market has has come through a lot of very difficult situations over the last decade in different countries at different times. So we expect that to continue like that.
Now.
Maybe I could just also offer I think you might have noticed in the comments in the script that we did maintain our guidance range. Despite the fact that we've incorporated things like Russia, and Ukraine as well as heavier foreign currency rates. So that should give you some confidence.
And what we're seeing in the market and our ability to again.
Those sorts of growth rates for the year.
Yeah and regarding the.
Tools necessary for EMEA procedure.
We are working with our.
Notified body on the final steps of disapproval, and where we are hoping that it happens.
Soon of course does move from the MDT each of the MTR is one that has.
The notified body is extremely busy so we're hoping for this approval to take place.
Okay got it thank you.
Thank you. Our next question is coming from the line of Chris Cooley with Stephens. Please proceed with your questions.
Good afternoon, and thank you for taking the questions and let me also just echo.
Hey, Raj.
Potentially transformative data and the Doctor.
But the manner in which they conducted a trial.
Yes.
Quick ones for me.
Just a question there maybe raj.
Maintaining the guidance Youre modeling about.
5%, approximately and headwinds of 2% from Russia and Ukraine.
Two and a half.
Back to the back half of the year just wanted to clarify that.
Could you maybe just speak to.
Seasonality trend maybe.
Relative pockets of strength that youre seeing in markets.
And then as my follow up I'm, just curious you know we do have.
Alright.
Tissue expander now moving forward in the U S as well just curious if you.
Mark.
Given any new thoughts.
Laura.
Yes.
Thank you.
Yes.
Yes, thanks for the question Chris.
Your point is well taken right. So we are still endorsing and a very strong growth rates for the year, Despite the headwinds, which you mentioned.
It does speak to what we're seeing in the market.
As we've mentioned in the past the fact that we're in over 80 countries around the world provides a nice balance to our business, we see some markets and some quarters that are a little softer so I'm doing better.
So there is a nice balance there and generally when we look out over the <unk>.
<unk> of what that represents for the back half of the year, we're very confident in the numbers that we provided.
You mentioned pockets of strength I think if you if you parse out some of our comments around Brazil for instance, as being a more than 17% of revenue now and it was.
Closer to 11% a year ago.
That business has essentially doubled over the last year right. So we're seeing very very strong growth in Brazil, and that's just one of the many markets we are doing well right now.
Thank you and then just to follow up on the tissue expander.
Just so we can understand your question again, so you were asking about.
Just the benefit of MRI, sorry, just if you could maybe repeat your question.
Certainly I just.
Curious.
Thoughts on whether you would.
Revisit the market in the U S. As a stand alone or that would be something you would want to do in concert.
With the moat.
CEVA implants once approved here in the U S. Thank you.
Yes.
I think at this point Chris.
Commented, all along and we're going to stick to it is that our plans for the U S remain.
In progress right and as things get closer to market, both Florida, and our implants, and we will make decisions on on when we launch and how we launch them and so just encourage everybody stay tuned on that front.
Thank you and congratulations on the record quarter.
Thank you. Our next question is coming from the line of Zachary <unk> with Jefferies. Please proceed with your questions.
Hey, everyone. Thanks for taking the question congrats on another great quarter, just quickly on the guidance for this year any material revenue contribution from from flora or Motiva in China that we should expect.
Hey, Zach.
Yes.
So we do have contributions from a number of new products and initiatives over the balance of the year, we havent broken it out historically and we likely won't do it now, but you didnt count that amongst the things that we're doing.
Are those two initiatives and several others right and so.
All of that is what gives us the confidence to continue to support the types of growth rates that we're guiding to.
Got it that's helpful. And then just can you give some color on what I understand the 22, we should see a spin.
Spending to normalize, but any color on the broader inflationary pressures that we're hearing across med tech and how that's going to impact.
Revenue revenue.
Thanks for taking the questions.
Yes.
<unk>.
Like all companies are not immune to it of course, we are seeing slightly higher costs and shipping and areas like that.
But as you've seen we've even in our gross margin. This quarter. We continued to post very good profitability at least at that level and as you look down the bottom of the income statement or the rest of the income statement.
Our spending is going higher right and we have commented to that.
Primarily it's to invest in the new areas some of which you highlighted.
But the book into that is we're being very judicious about where we are spending right. So we don't want to overinvest scenarios, we don't have to.
But we also aren't going to underinvest in what's in front of us.
And so I don't know if that gets to your question, but we of course follow it as everybody does and we wanted to be good stewards of the capital that.
The people that have given us.
Okay. Thanks for taking the questions.
Thank you there are no further questions at this time I would now like to turn the call back over to Juan Jose for any closing comments.
Oh, I'm, sorry, I do have someone who just rejoining the queue.
Our next question is coming from the line.
<unk> with Goldman Sachs. Please proceed with your questions.
Hey, let's go back on for me.
And the last point I was hoping Raj, maybe you could touch a little bit more on.
Any kind of guideposts are key parameters, you're thinking about when you make the breakeven comment.
I know there were some some milestone based achievements for those remaining tranches.
And the Oaktree deal that you guys announced so does anything that you'd like to comment there about what you're looking for or what levels you'd like to get to.
That breakeven comment would be helpful. Thanks.
Yes, it's a fair question Bill and I will tell you that.
We're not yet ready to provide that level of detail in terms of kind of longer term targets for us, but when we look at things like the construction of our new facility the launch into the United States to launch in.
China, what we're doing in aesthetic breast recon and all of the growth initiatives, we have out in front of us and we lay that against what we believe we need to spend against those and then the capital which the Yolked refinancing has given us.
Believe there is more than sufficient room to get to a breakeven point and actually start being cash flow positive with what we currently have and so on.
Again, I realize that doesn't give you the kind of detail, you're probably looking for but but we feel very comfortable with where we are that we can get to cash flow breakeven.
No. That's helpful. Thanks, Thanks for taking the follow up.
Okay. Thank you there are no further questions at this time I would like to turn the call back over to Juan Jose for any closing comments.
Thank you for joining us on today's call. We look forward to providing our next quarterly update in August and we wish everyone continued good health.
This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.