Establishment Labs Holdings Inc (ESTA) 2018 Q3 法說會逐字稿

Good morning and welcome to Establishment Labs Q3 2018 Earnings Call. (Operator Instructions) I will now 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 from the company includes Juan Jose Chacon-Quiros, Founder and Chief Executive Officer; and Renee Gaeta, Chief Financial Officer.

Before we begin, I would like to caution listeners that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. This includes statements on the company's financial outlook and the company's plans for 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 the risk factors, I encourage you to review the company's quarterly report on Form 10-Q that will be filed later today with the Securities and Exchange Commission.

The content of this conference call contains time-sensitive information, accurate only as of the date of this live broadcast, November 13, 2018. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any 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 Founder and Chief Executive Officer, Juan Jose Chacon-Quiros.

Thank you, Kaitlyn, and good morning everyone. We are pleased to report another strong quarter. Revenue for the third quarter was $16.3 million, representing an increase of 122.4% compared to the same period in 2017. This represents a new record for Establishment Labs in terms of revenue. It is driven by the continued adoption of Motiva Implants, our increased direct sales effort and another quarter of strong performance by our distributors worldwide.

There are three important growth drivers fueling our business right now: organic growth in our current markets, entry into new markets, and the targeted expansion of our direct sales model. In any given quarter, some of these growth drivers will have a greater impact than in other quarters. Internally, we are very focused on growing our market share and revenue in a year over year basis, as well as focus on our global strategic commitment to commercializing innovative products that meaningfully improve breast aesthetic and safety outcomes.

Obviously, everyone at Establishment Labs is thrilled by our results. And we believe that this growth is a testament to the science and unique technology behind our Motiva Implants, and the many years of hard work in investment in research and development that has allowed us to bring differentiated products to market.

In terms of providing additional color in the third 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 consistently high growth and this momentum continued with a strong Q3. We still consider ourselves in the early stages in terms of market penetration, and we are focused on capturing additional market share.

During the quarter, we continue to take important steps to position ourselves for long-term sustainable growth. Specifically, we continue to invest in our USFDA clinical trial, develop new differentiated products for the aesthetic and reconstruction market, and as always improve upon our manufacturing and infrastructure.

In terms of the U.S. market, which is the largest market in the world for breast augmentation procedures, we continue to prioritize the successful execution of our FDA clinical trial, which will be the basis for the approval of Motiva Implants and the start of our commercialization in the United States. We continue to be on track and anticipate the completion of enrollment in early 2019.

Our research and development efforts include minimally invasive initiatives that aim to address unmet needs in breast aesthetics and separately enhance biosensing capabilities for our RFID platform. In manufacturing, we have implemented new cost controls in our state of the art facilities in Costa Rica while maintaining our stringent high-quality standards. On October 4, we announced the acquisition of certain assets from our exclusive distributors in Germany and Spain, and we'll close these transactions in the fourth quarter, completing the transition to a direct sales model in these countries. Our direct sales model allows us to fully engage with plastic surgeries, have total control over the sales and marketing process, and better manage the inventory needs of larger account. Looking ahead, we will continue to evaluate targeted [seat] direct sales opportunities and move forward on implementation in markets, where it will enhance our presence and competitive position.

I would also like to note that we hosted our 4th Annual World Symposium on Ergonomic Implant, where we brought together more than 400 of the world's leading plastic surgeons and scientists to discuss techniques and state of the art technologies that are shaping the future of breast aesthetics and reconstructive surgeries. I would like to reiterate that I am proud of what our team has accomplished to date. I'm excited about our opportunity to create more value for physicians, patients, employees, and shareholders for many years to come.

Before I turn the call over to Renee to discuss the financials in greater detail, I want to remind everyone that Establishment Labs will be presenting at the Jefferies Healthcare Conference in London this Thursday, November 15th at 8:40 a.m. GMT. I look forward to hopefully seeing some of you there.

With that, I'd like to turn the call over to Renee. Renee?

Thank you, Juan Jose, and thank you again everyone for joining us on the call. As Juan Jose stated earlier, we had a record third quarter, and it is a pleasure to be able to report these results today. You can find additional detail on our third quarter and the nine-month financials in our earnings press release as well as our 10-Q which we plan to file later today.

Our total revenue for the third quarter reached $16.3 million, which represents 122.4% increase compared to the third quarter 2017. Total revenues for the nine months ended September 30, 2018 was $44.8 million, representing a 95.9% increase compared to the same period in 2017. The continued growth in the third quarter was primarily due to the increase in Motiva Implants sales, the expansion of the company's direct sales force in key markets and greater market penetration in existing geographies, notably in Brazil and the Scandinavian regions.

Our entire management team is pleased with our sales growth to date, and we are confident in our ability to continue to capture additional market share. However, I want to remind everyone that we are still a young company and expect growth to fluctuate quarter to quarter as we manage our global footprint, enter new markets, and make enhancements to our business model.

Gross profit for the third quarter was $10.1 million or 62.1% of revenues compared to gross profit of $3.6 million or 49.2% of revenues in the third quarter of 2017. Gross profit for the nine months ended September 30, 2018, was $26.2 million or 58.6% of revenues compared to gross profit of $11.1 million or 48.7% of revenues in the same period of 2017. The increase in gross margin in the third quarter and the nine months ended September 30, 2018, was due to an increase in production volume, improved production efficiencies, and the addition of direct market revenue with generally higher average selling prices.

Total operating expenses for the third quarter of 2018 was $16.2 million, an increase of 68.8% compared to the same quarter in 2017. SG&A expenses increased $4.8 million or 59.9% to $13 million mainly due to the hiring of additional sales and administrative employees, an increase in consulting and audit fees, and stock compensation expense. Notably, SG&A expenses decreased as a percentage of sales when compared to the third quarter of 2017.

Our R&D expense increased $1.7 million or 121% to $3.2 million compared to the third quarter of 2017 due to investments related to our FDA clinical trial in the United States but remained consistent as a percentage of sales from the same period last year.

Net income for the third quarter was $1.3 million, up from a net loss of $10.7 million in the same period in 2017. All net losses for the nine months ended September 30, 2018, decrease to $10.6 million from $27.8 million in the same period in 2017. We note that the increase in income is primarily due to the change of fair value derivatives related to our credit agreement entered into in August of 2017. During the third quarter, we effectively managed our capital structure, allocating resources to efforts that would 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 force in key growth markets like Brazil and Europe. Additionally, we intend to continue to make significant investments in our FDA clinical trial in the United States and research that will help drive new product innovation.

The company completed its initial public offering in July, resulting in net proceeds of approximately $71.5 million after deducting underwriter's discount. The company's cash position remains strong, and as of September 30, 2018, we held a cash balance of $65.6 million.

With that being said, I'll now hand the call back over to Juan Jose for some closing remarks. Juan Jose?

Thank you, Renee. We are pleased to be able to deliver these third quarter results, building on the momentum we witnessed in the first half of 2018. These efforts reflect the work and dedication of the whole Establishment Labs team and all of our partners worldwide.

We are in the business of improving safety outcomes in patient satisfaction in breast aesthetics and reconstruction. We believe our platform of products is the answer to an industry that has yet to fully meet the needs of women. I'm excited to build on our success as we approach 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 the line of Josh Jennings of Cowen.

I wanted to just start off and just ask, I think -- I think you guys were just at the ISAPS Conference earlier this month or in October, sorry, and you also hosted the World Symposium on Ergonomic Implants. As we speak to more and more US-based plastic surgeons, even since the IPO, it seems that Motiva is moving into their mindset, if you will, and just seeing the recognition of the Motiva Implants has even taken a step up in the last four to five months. Can you just talk about how you think and how you're strategically getting Motiva in front of U.S. surgeons despite -- I know you can't market it officially in front of FDA approval. But can you just talk about how you're seeing the progression of U.S. surgeon interest in Motiva over the last year?

Thank you, Josh, and I appreciate the question, and we, of course, appreciate the views of U.S. plastic surgeons on our technology. But we continue to prioritize the successful execution of our FDA clinical trial in the United States. We are pleased that these trial remains on track, and we have full confidence in the Dr. Caroline Glicksman, who's leading our clinical trial, and is the first female surgeon, by the way, to lead this type of trial in the United States. So we are committed to the clinical trial and hope to continue working on it so we eventually can enter the U.S. market.

And just in terms of the reconstructive segment of the market, it's a smaller seg is my understanding internationally. But can you just talk about any progress you made there over the last six-plus months and has that been one of the drivers for what sounds like multitude of drivers of the stronger growth and what we expected?

Yes, thank you. At this point, we continue to work on developing products for the breast reconstruction segment of the market. We are committed to becoming eventually a leader in breast reconstruction worldwide.

At the World Symposium of Ergonomic Implants, we held an entire section on breast reconstruction with our ergonomics implant. We were able to receive data from different centers in Europe regarding the performance of our implants. So we do think that in the future it will become an important revenue line. At this point, it remains one of our objectives, but it is not one of the main revenue drivers of Establishment Labs.

And then lastly just as we think about the pipeline not only reconstructive but thinking of the minimally invasive approach or the MINT procedure. Anything you can share with us in terms of how that pipeline is progressing? And anything we should be expecting over the next 12 to 18 months?

We continue to work very hard on our minimally invasive product pipeline. Our R&D staff is committed to getting these products to market. However, we cannot tell you given the fact that it's an externality to us in terms of the regulatory timelines when these products will be available in the international market.

(Operator Instructions) Our next question comes from the line of Raj Denhoy of Jefferies.

I wonder if I could maybe just ask about clearly very strong market share gains in a lot of international countries. [Certainly], you can offer in terms of, is there a ceiling in some of these countries because of the price premium for the product? Is there any -- anything we should think about in terms of the growth may be slowing at some point?

We believe that the growth that we have seen in 2018 is a testament to the science and our technology, and the many years of work that we have put into bringing these products to market. There are certain gains that we have experienced in many of the international markets but we think that we are still in the adoption phase in most of these markets. So while we don't comment on individual markets, we do believe we still have room to grow not only in each region of the world but also in indication such as breast reconstruction.

And that was my second question. And I apologize if this has already asked, I'd been hopping around a little bit. But in terms of the reconstruction, is there any update in terms of the timelines when you'll have things like a tissue expander, some of the other tools necessary to be a bigger player in that market?

Yes. We do believe that we can make a meaningful impact in breast reconstruction protocols and that these protocols, new protocols, could change the eventual results for women in many countries. However, our team is still working very hard on the development of these tissue expanders and other technologies that we would like to bring to market in the reconstruction market. But, again, the -- everything regarding regulatory timeline is to an externality to us. So, it's very hard for us to give you any clarity on that. I think the best answer is that we are working very hard to submit these products to regulatory authorities in due time.

And that's all the time we have for questions today. I would now like to turn the call back to Juan Jose Chacon-Quiros for further remarks.

Thank you, everyone, for joining us this morning. And 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 have a great day.

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