Good afternoon. Welcome to Establishment Labs First Quarter 2022 Earnings Call. As a reminder, today's call is being recorded. I will now turn the call over to Raj Denhoy, 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, our 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 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, I encourage 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 establishmentlabs.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 expand the geographies in which our products are regulatory approved.

Please check to the 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 9, 2022.

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, it is my pleasure to turn the call over to our CEO, Juan Jose..

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, a 27% increase over the first quarter of 2021. This is a new quarterly record for our 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 our 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 women 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 2 seminal events in our company's history of improving women's health. The first of these was the presentation of 2-year data from this primary augmentation cohort of our U.S. IDE 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 22. As impressive as the sub-1% rates of capsular contracture and rupture at 2 years are in the U.S. study, they mirror 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 in numerous studies with Motiva is absolutely creating a new standard in breast aesthetics and reconstruction. Motiva Implants have changed what 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, I think 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 on their own before making choices in breast aesthetics and reconstruction.

As women are presented with markedly improved safety data and the possibility of results that mirror their goals, we believe this market may be multiple times larger than it is today. The second seminal event is the financing we secured with our new lending partner, Oaktree Capital on April 26.

We've 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 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 2-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'm 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 will provide additional updates over the coming months on their progress towards launching our Motiva Implants into the United States.

Non aesthetic breast recon franchise, the launch of our Motiva Flora tissue expander in Europe and other CE mark countries is ongoing.

Flora has many advances 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 an expander is used after mastectomy. By being nonmagnetic, Flora potentially opens new options for radiation oncology treatment during this stage of recovery.

Flora also features our patented self-friendly smooth cell surface technology and early users have noted improved patient comfort and healthier capsule formation with this unique tissue expander.

Adoption of Flora will take time but early efforts have been encouraging and add 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 continue to win tender contracts in Europe and are expanding in 2 new markets this year.

Flora 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 achieve 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 continue to perform new 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 soon.

Regulatory clearance in Europe for the tools that are part of the Motiva Mia 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 Mia 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 the transition in the 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. Reported revenue growth in the first quarter was 27%. Foreign currency changes reduced our first quarter revenue by approximately 2 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. From a regional perspective, sales in Europe comprised approximately 37% of global sales. Asia Pacific and Middle East was 30% and Latin America made up the balance.

Brazil 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 increase in inventory reserve for Puregraft products. The distribution agreement for these products expires at the end of this year and given the historic sales rates fully reserving for these items was deemed appropriate.

Excluding this incremental inventory reserve, gross profit margin would have been approximately 3 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 in the year ago period and our prioritization of investment in new growth initiatives like Mia.

The first quarter increase in SG&A resulted in part from increased personnel and related costs as we increase headcount 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 $0.5 million in 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 $30.5 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 and spending relative 2-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 $8.8 million of cash used in the first quarter included approximately $4.5 million of investment in our new Sulayom Innovation Campus. On the capital front, we are extremely pleased to have announced our new term loan facility with Oaktree Capital on April 26.

Oaktree is an excellent partner with a deep experience in life science investing. The new loan provides us with up to $225 million of nondilutive capital at fixed interest rates over the 5-year term of the loan.

The facility is tranched, allowing us to manage our capital needs and it gives us the option to pick up to 2/3 of our interest payments over the first 2 years, lowering our cash interest rates at 3%.

With 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 have 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 Sulayom Innovation Campus that will allow us to produce more than half the world's implants. We're maintaining our sales guidance for 2022 in a range of $155 million to $165 million, representing estimated annual growth of 22% to 30%.

As we saw in our first quarter results, there was considerable momentum 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 2 markets collectively were approximately 2 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 2.5%.

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.

As we look down the rest of the P&L, we continue to expect to see spending levels increase as we prioritize investment with a significant number of development and commercialization programs we have underway, prior to entering to new markets and advancing our pipeline of new technologies to drive future growth remains a top priority.

However, given our strong top line growth, operating expenses as a percentage of sales should trend down even as we increase 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 we recently completed, we are ready for the next chapter in our growth story.

Grounded solidly in our commitment to women's health and well-being, 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..

Our first questions come from the line of Josh Jennings with Cowen..

Congratulations on achieving multiple seminal milestones in 1Q that you provided a download on the prepared remarks. I wanted to ask about the Motiva IDE trial first. And just to differentiate capsular contracture, our team was impressed how differentiated and how low Motiva's CapCon rate came in.

But perhaps, even more impressive was the mix of prepectoral versus subpectoral implant placement cases enrolled. And just wanted to kind of sanity check the historical capsular contracture rate associated with smooth implants placed prepectorally versus postpectorally.

Because it seems like that big delta is probably even bigger considering the mix of approaches in the U.S. IV trial.

But -- and then just to follow up is, why is the prepectoral potentially better than subpectoral? And will this Motiva data potentially open up a prepectoral approach and make it more common in the United States?.

Thank you, Josh. Yes, I think this is one of the key questions because when you think about what can Motiva 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 the superior design technology we have created over the years.

And when we think about the importance of being able to use the subglandular plane, what we are talking about is the possibility for women who are very physically active, not to have an implant behind the muscle. Let's just remember the anatomically proper place for a breast is in front of the muscle which is called the subglandular plane.

Furthermore, there's a reason why textured implants came into market. There's a reason for that. The reason for it is that there was very high capsular contracture rates with smooth implants. And the second thing that surgeons did to reduce the capsular contracture rate is start putting the implants behind the muscle.

And between those 2 things, textured implants and the sub-muscular plane, they were able to see an interesting reduction in the capsular contracture rate. Now when we see our SmoothSilk patented surface, what we see is that there is no significant difference between the capsular contracture rates that we have seen subglandular or subpectoral.

And that is definitely due to the design of our smooth implants which is -- has an architecture that lowers the inflammatory response.

So, I think it is fundamental for people to understand that not only you can compare that 0.5% capsular contracture rate against other trials that have a 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 the smooth implant subglandular capsular contracture rate is double digits, in many cases, 20%, 30%, 40% and that is something that I think we have solved with our technology..

And just on the follow-up, just thinking about the FDA modular submission and it sounds it’s now submitted to second module.

Can you just remind us about the third module? What needs to be completed before the manufacturing model can be submitted? And how -- any just color you can share just in terms of where you are with that module and when that can be submitted?.

Josh, it's Raj. As we've 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 that kind of holds up the progress here.

We're happy to have just submitted the second module and keeping the process moving along and we hope to update you guys very soon on where we are with the third module as well..

Our next questions come from the line of Amit Hazan with Goldman Sachs..

This is Phil on for Amit. I want to follow up on Josh'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 comments. Can you remind us what the U.S.

timeline that you guys most recently provided was for?.

Phil, it's Raj again. We have 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're ready to review it. We, of course, are moving as expeditious as we can.

We want to move this along but endorsing a specific time line around this is just very difficult to do..

Yes, that totally makes sense. I appreciate the additional color. On the China side, you've been more forthcoming though. I was under the impression, it was approval this year and plan launched 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 out in the country?.

Yes, I think that we haven't moved on that position. 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.

Just wondering what kind of visibility you will have to being able to reaffirm and feel confident in that time line given things that are certainly outside of your control right now?.

Yes. I think the situation there, of course, is one of concern and definitely, we are looking at the situation. And we hope that in the second half of this year, that situation would have solved 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 happy to be able to be in a position in which we can access a market as important as China..

Our next questions come from the line of Marie Thibault with BTIG..

Congrats on a nice quarter. I wanted to ask just a very simple question here on sort of the reactions you heard to the 2-year data there at the Aesthetics Meeting.

We certainly heard some good survey responses on our own but we're curious what you're hearing in terms of pros and cons from the surgeons first hand?.

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 U.S. data. So I think, definitely, this data is very important for the plastic surgery community. They've never seen data this 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, that's real-world data, we'll never be able to reproduce it in a U.S. FDA trial and now we have the evidence.

So I think the evidence speaks for itself and people are taking notice and that's definitely going to help with reassuring plastics -- the most importantly patients that technology and the design that we have created is transforming outcomes..

Okay, very good. I wanted to ask a quick one here just on where we are with the Motiva Mia tools? I think I heard mention of the MDR process there.

And then if I could sneak one in here on just sort of an environment for discretionary spend, we haven't seen economic worries hurt the aesthetic market in the past but would love to hear what you're hearing from the field across your regions on discretionary standard concerns about inflation..

Yes. Thank you. I'll start with that one. What I will tell you is that remember, we are in the process of the JOY launch in Europe, just to give you an example. And JOY comes at a significant premium to our best-selling ergonomic implants. And what we see is that people realize that 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 types of choices. So in the past, it's always been very resilient to recessions. The aesthetic market 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....

Marie, maybe I can just also offer. I think you might have noticed in the comments in the script that we did maintain our guidance, right, despite the fact that we've incorporated things like Russia and Ukraine as well as heavier foreign currency rate.

So that should give you some confidence in what we're seeing in the market and our ability to again endorse those sorts of growth rates for the year..

Yes. And regarding the tools necessary for the Mia procedure, we are working with our notified body on the final steps of this approval and we're hoping that it happens soon. Of course, this move from the MDD to the MDR is one that has kept the notified bodies extremely busy. So we're hoping for this approval to take place soon..

Our next question is come from the line of Chris Cooley with Stephens..

And let me also just echo congratulations on the potentially transformative data and the Dr. Glicksman and her team for the manner in which they conducted the trial. Two quick ones from me. Question here, maybe for Raj.

You implicit maintain the guidance you're hurdling about 5% approximately in headwinds, 2% from Western Ukraine, 2.5% from incremental FX, I think, through the back half of the year, I just wanted to clarify that. So could you maybe just speak to seasonality trends and maybe for all those buckets of strength that you're seeing in end markets.

And then as my follow-up, I'm just curious, we do have MRI compatible tissue expander now moving forward in the U.S. as well. Just curious if you rethought or given any new thoughts to Flora in the U.S.

as well?.

Yes. Thanks for the question, Chris. Your point is well taken, right? So we are still endorsing very strong growth rates in the year, despite the headwinds which you mentioned. It does speak to what we're seeing in the market.

As we've commented 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 in some quarters that are a little softer, some doing better.

So there is a nice balance there and generally, when we look out over the complexion of what that represents for the back half of the year, we're very confident in the numbers that we've provided. You mentioned pockets of strength.

I think if you parse out again some of our comments around Brazil, for instance, being 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 breast implants and that's just one of the many markets we're doing well in right now..

And then, just a follow-up on the tissue expander..

Just so we can understand your question again. So you're asking about -- just the benefit of MRI? Sorry, just if you could maybe repeat your question..

Certainly. I just was curious if you give your thoughts on whether you would revisit the market in the U.S.

as a standalone? Or that would be something you would want to do in concert with the Motiva Implants once approved here in the U.S.?.

Yes. I think at this point, Chris, what we've 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 Flora and our Implants, we'll make decisions on when we launch and how we launch them. And so just to encourage everybody, stay tuned on that front..

Congratulations on the record quarter..

Our next questions come from the line of Zach Weiner with Jefferies..

Congrats on another great quarter. Just quickly on the guidance for this year.

Any material revenue contribution from Flora or Motiva in China that we should expect?.

Zach, so we do have contributions, right, from a number of new products and initiatives over the balance of the year.

We haven't broken it out historically and we likely won't do it now but you can count that though amongst the things that we're doing are those 2 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 -- I fully understand that 2022, we should see spending to normalize but any color on the broader inflationary pressures that we're hearing across medtech? And how that's going to impact the P&L below the revenue line?.

Yes. We, like all companies, are not immune to it, of course. We are seeing slightly higher costs and shipping in areas like that. But as you've seen even in our gross margin this quarter, we continue 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.

And -- but the book end to that is, we're being very judicious about where we are spending, right? So we don't want to overinvest in areas 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 want to be good stewards of the capital that people have given us..

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. I'm sorry, I do have -- someone who just rejoined the queue. Our next questions come from the line of Amit Hazan with Goldman Sachs..

It's Phil back on for Amit. Just on that kind of last point. I was hoping, Raj, maybe you could touch a little bit more on any kind of guidepost or key parameters you're thinking about when you make the breakeven comment. I know there were some milestone-based achievements for those remaining tranches in the Oaktree deal that you guys announced.

So just anything that you'd like to comment there about what you're looking for or what levels you'd like to get to, just to make that breakeven comment would be helpful..

Yes. No, it's a fair question, Phil. 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, the launch of Mia, 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 needed to spend against those and then the capital which the Oaktree financing has given us, we 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 again, I realize that doesn't give you the kind of detail you're probably looking for but we feel very comfortable with where we are that we can get to cash flow breakeven..

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. Enjoy the rest of your day..