Greetings, welcome to the Establishment Labs fourth quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Raj Denhoy, Chief Financial Officer. Thank you. You may begin.
Thank you, operator, and thank you everyone for joining us. With me today is Juan José Chacón-Quirós , 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 plan to timing for product development and sales. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. For 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.
I'd also like to remind you that our comments will include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results, which can be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. Please also note that 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 with 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, February 27th, 2023.
Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. It is my pleasure to turn the call over to our CEO, Juan José.
Thank you, Raj, and good afternoon, everyone. Record revenue in the fourth quarter of 2022 totaled $43.8 million, a 24% increase over the fourth quarter of 2021. Excluding the negative impact of foreign currency changes, our growth in the fourth quarter would have been approximately 28%. For the full year of 2022, revenue totaled $161.7 million, a 28% increase over 2021. Excluding changes in currency, growth in 2022 would have been 32%. These results are at the midpoint of the pre-announced ranges we provided in early January. We are growing well in excess of our underlying markets, and the key to these market share gains is our singular focus on building a new breast aesthetics and reconstruction industry on the fundamental pillars of women's health.
This focus has allowed us to develop a 12-year track record of excellent clinical and aesthetic outcomes since we first commercialized Motiva implants. Over that period of time, we have elevated standards for breast aesthetics and reconstruction by bringing to market a number of meaningful innovations based on science and patient-centric design, and this will continue into 2023 and beyond. For 2023, we are providing revenue guidance in the range of $200 million-$210 million. This outlook represents estimated growth of 24%-30% over 2022. Raj will provide additional detail on our fourth quarter performance and our 2023 guidance in a moment. Last week was another big moment at Establishment Labs, and I am pleased to report that we filed Module 4 of our modular PMA with the FDA.
This is a significant step toward Motiva being approved for sale in the United States. The submission of the final module also represents a transition in the approval process where the FDA will now begin their formal review of our full PMA. Our interactions with the FDA through the modular review period have been very collaborative, and the level of interaction has been high. We look forward to the relationship continuing on a positive path as we work to bring Motiva to the United States. On Mia Femtech, the new category we are creating in breast aesthetics, we provided an update in early January that we have signed up our first clinic partner. Seishin Plastic and Aesthetic Surgery Clinic operates a network of 10 high-end aesthetic practices in Japan.
They will first offer Mia at their two locations in Tokyo, their flagship clinic in Roppongi and their newest clinic in Ginza. Seishin is one of the most prestigious aesthetic practices in the world. We are so happy to have them as our first partner in the global rollout of Mia. Our practice development and medical education teams are actively engaged with them in preparation for our launch. With Mia, we are creating a new category in aesthetics for women that don't want a traditional augmentation but are conscious about the shape and proportions of their breast. Mia offered these women a minimally invasive procedure that can be performed without general anesthesia in less than 15 minutes with an easy return to their daily activities. By providing a solution that is more appealing to consumers, we are opening up a whole new group of women to breast aesthetics.
As we launch Mia, we are focused on demonstrating that this is a new category bringing new women into breast aesthetics and that surgeons are seeing improved efficiency and our partner clinics are benefiting from higher economics. These proof points will be important as we look to scale Mia into the multibillion-dollar opportunity that it has the potential to become. We look forward to providing updates over the coming months. In our aesthetic breast recon franchise, the rollout of our Motiva Flora tissue expander continues. The market feedback is very positive, with more and more surgeons making it their expander of choice in post-mastectomy breast reconstruction. In November, we announced regulatory approval for Flora and Motiva implants in Japan. As we commented at the time, launching Flora with Motiva implants in the Japanese market is a significant step in changing the global standard in breast reconstruction.
What continues to resonate with clinicians globally is that Flora is a much improved offering with many new advances in what has unfortunately been a neglected category in breast reconstruction. 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 reconstruction surgeries that achieve the aesthetic ideals to which they aspire. As a global medical device company focused on women's health, Establishment Labs has the opportunity and the responsibility to improve breast reconstruction. We are not only bringing to market new technologies like Flora that can improve outcomes, but we are also engaging in advocacy efforts to promote education, awareness, and access. The need and the opportunity are significant.
One in eight women globally will experience breast cancer in her lifetime, but very few of them will undergo a reconstruction as part of their recovery from the disease. As we make progress in our aesthetic breast recon initiatives, the global impact will be meaningful. China, we continue to make progress in the regulatory approval process, we expect approval for Motiva in this market in the first half of 2023. The recent lifting of COVID restrictions and the return to more normal activity in China are encouraging, not only for our approval, but also for adoption once we launch into what is the second-largest market in the world. In January, at the JP Morgan Healthcare Conference, we provided an outlook for Establishment Labs to achieve $500 million in revenue in 2026.
This works out to an average annual growth rate of 33%. It contemplates contributions from our existing markets, Mia, China, the U.S., and from breast reconstruction globally. With the many layers of growth behind this target, we don't expect growth will be linear over the next four years. However, the many layers also suggest that this target is well supported, even conservative, and that growth will continue for many years beyond 2026. We are ready for the next chapter in our growth story. Providing a long-range view not only suggests the potential we see before us, but it provides us with a target around which to plan and organize. It is well within our reach to become the leading global company in breast aesthetics and reconstruction.
We will continue to transform our markets, and in doing so, we will create new opportunities for growth, and more importantly, create new options for women around the world. I will now turn the call over to Raj.
Thank you, Juan José. Total revenue for the fourth quarter was $43.8 million. Reported revenue growth in the fourth quarter was 24.1%. Foreign currency changes reduced our fourth quarter revenue growth by approximately $1.3 million. Excluding the impact of currency, revenue growth in the quarter would have been 27.7%. Direct sales were approximately 37% of sales this quarter, while distributor sales made up the balance. From a regional perspective, sales in Europe were approximately 28% of global sales, Asia Pacific and Middle East, 40%, and Latin America made up the balance. Brazil, which is our single largest market globally, accounted for approximately 14.6% of total quarterly sales.
Our revenue distribution this quarter reflected a rebound in sales in Europe from the seasonally slower third quarter, as well as strong sales to our distribution partners across multiple geographies. Our gross profit for the fourth quarter was $28.2 million or 64.3% of revenue. This compared to $24.2 million or 68.6% of revenue for the same period in 2021. Our gross profit in the fourth quarter was negatively impacted by approximately 300 basis points from foreign currency rate fluctuations. Average selling prices in the fourth quarter were also down from the third quarter of 2022. We see regular fluctuations in gross margin on mix and other factors. However, the overall trend in our gross margin continues to be positive over time.
SG&A expenses for the fourth quarter increased approximately $7.3 million- $34.8 million. This compared to $27.6 million in the fourth quarter of 2021. The increase in SG&A in the fourth quarter resulted from continued normalization of business practices and our investments in new growth initiatives like Mia and preparations for our launch in the U.S. R&D expenses for the fourth quarter increased approximately $400,000 from the same quarter a year ago to $6.5 million. Total operating expenses for the fourth quarter were $41.3 million, an increase of approximately $7.7 million from the year ago period. The increase this period was again due primarily to the normalization of activity and spending relative to a year ago, as well as the investments in growth initiatives.
While we are investing, our operating expenses as a percentage of revenue were down slightly from the year-ago period as we continue to focus on managing our costs. Net loss from operations for the fourth quarter was $13.2 million compared to a net loss of $9.4 million in the same period in 2021. Our cash position as of December 31, 2022, was $66.4 million compared to $53.4 million at the end of the previous year. The increase in cash was the net result of a new term loan we secured in April. With achievement of the required revenue milestone, we drew the second tranche of the facility in December. The term loan has two additional tranches totaling $50 million of non-dilutive capital we can access on the achievement of revenue and regulatory milestones.
Cash use in the fourth quarter included approximately $9.6 million of investment in our new manufacturing facility. In total, we invested approximately $32 million in the new facility in 2022. We are providing revenue guidance for 2023 of $200 million-$210 million, representing annual reported growth of 24%-30%. At current rates, we estimate foreign currency will have a minimal impact on 2023 sales. As we saw in our 2022 results, there is considerable momentum in our business, and we expect this will continue into 2023. We're also expecting early contributions from new initiatives like Mia in China. It is important to note that contributions from these new areas will be modest in 2023, and they will build as the year unfolds and these launches take place.
As we look down the rest of the P&L, we expect gross margin in 2023 to be similar to 2022. Gross margin in 2023 will see the impact of new product and geographic launches, as well as the start of production from our new facility. As noted previously, we view the overall trend in our gross margin to be positive over time. Operating expenses as a percent of revenue in 2023 are also expected to be similar to 2022. While operating spending over the near term is reflecting our investment in a significant number of development and commercialization programs we have underway, we expect expenses as a percentage of revenue will trend down as we get further into these growth initiatives. I will now turn the call back to Juan José.
Thank you, Raj. 2022 was a year of tremendous progress for our company, we are preparing for a busy 2023. Among the events we have coming are the commercial launch of Mia, our Motiva launch into China, and the approval process for Motiva in the U.S. In 2023, we will also finish the initial phases of construction of our new Sulàyöm campus and begin producing commercially sellable units out of the facility. As a reminder, the new manufacturing capacity at Sulàyöm more than doubles the number of implants we can produce per year, it allows us to provide over half the current world demand. We are also planning for the presentation of the three year data from our U.S. PMA study. With the PMA now submitted to the FDA, we will look for an appropriate forum to share this data with the scientific community.
As impactful as each of these initiatives will be, they are all part of a broader strategy we have to continue to heal the relationship that women have with the legacy breast implant industry by offering innovative and safer options backed by science and supported by clinical data which could expand the existing market. Normalize breast aesthetics with valuable new categories so that new groups of women will be open to our technologies. Finally, and perhaps most importantly, democratize access to breast reconstruction so that the restorative benefits of reconstruction after breast cancer can be available to women globally to at least the level of access that is available in the United States.
If we are successful in these initiatives, we will be able to achieve and even exceed the recent long-term revenue goal we provided of $500 million in revenue in 2026 and much more beyond. We are better positioned than we have ever been to transform our markets and to make a meaningful change in the lives of women around the world. I will now turn the call over to the operator for your questions.
Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one. We'll pause for a moment while we pull for questions. Thank you. Our first question comes from Matthew Taylor with Jefferies. Please state your question.
Hey, thanks for taking the question. This is Zach on for Matt. I'm just curious if you could talk about the infrastructure you're putting in place to support the U.S. launch and then also the Mia launch in Europe. Thanks for taking the question.
Yes, thank you, Matt. you know, we couldn't be more excited today with this news of the submission of module 4, which basically, you know, means that we are now in the full PMA approval phase. For competitive reasons and because we are getting closer to the timing of approval, we are not gonna give details on exactly what we are going to do. Make no mistake, we will be prepared. this year, you know, we are continuing, just like we did last year, to put in place, you know, systems. you know, we continue to work through, you know, what our logistics strategy is going to be like in the United States. As we get obviously closer, then we will be willing to share more.
When it comes to Mia in, you know, in Europe, and I will also mention in Japan, it's very important to understand that Mia is done through a business model without sales reps. It is done in a completely different way. It's, you know, a partnership that we create with selected clinics that can, you know, be good partners, that they have already good marketing assets that can be mixed with our amazing technologies that are embedded in Mia. When we think about like what we can do with Mia in the first half of this year with launches in Japan and Europe, you know, it's super exciting because it is really a different type of business model. We are looking to, you know, to this year as one of the most exciting ones in the history of our company.
Thanks for taking the question.
Thank you. Our next question comes from Josh Jennings with Cowen. Please state your question.
Hi, good afternoon. Congratulations on a strong finish of the year and on the submission of the fourth PMA module. Wanted to ask about 2023 guidance, and I think, Raj, you mentioned that there was some modest contributions baked in from Mia and China. Just wanted to make sure I was clear, that we're all clear that this guidance change does not assume any revenues from the United States or that does not preclude any type of approval in 2023.
I think that's a fair way to put it, Josh. I mean, we, you know, we haven't endorsed the timeline for U.S. approval, so we haven't included it in our 2023 guidance. You know, as you mentioned, Mia in China, we do expect contribution from those to build as the year unfolds.
Great. Thanks for that. Juan José, maybe just wanted to in the just with the fourth module being submitted and the four of you going on, you mentioned that three year data may be presented in the appropriate form at some point. I know you're not giving that timeline, or I'm assuming that you're not, but maybe it would be helpful just to, as a refresher, to remind us of the pathophysiology of capsular contracture, rupture, and maybe just reoperation rates as a whole. In terms of precedent data sets in the breast implant sector, just the increase of capsular contracture, rupture, reoperation rates from year 2 to year 3, would just be helpful to review and understand. Thanks for taking the questions.
Yes. Thank you, Josh. As you well noted, you know, we are always looking forward to, you know, showing our numbers, let the data speak for itself and for the safety of, you know, the Motiva implants. You know, when we published in Nature Biomedical Engineering about the mechanism by which our surface design creates higher biocompatibility, what we wanted to highlight is that when you see the numbers, whether in our 10-year, you know, post-market surveillance data with more than 2.5 million implants, when you look at the different data sets, when you look at our two year data, what you are looking at is at the downstream effect of that design. Of course, we do track numbers year to years. We've been in the market now for 12 years internationally.
you know, what we see is that, you know, of course, complications get aggregated over time, but capsular contracture is a phenomenon that takes place mostly in year one and two. Of course, you can continue capturing some of those numbers as patients come back for, you know, for their checkup. you know, overall this, you know, these additions tend to be modest. Same thing with rupture. Over time, you know, for the first few years, you will see, you know, things that may have happened inadvertently during the procedure or things that may happen, you know, towards the tail end of the life of those implants, but that would be many, many years later.
Overall, I think, you know, based on all the data sets that we have, we are extremely confident of on, you know, on our ability to gain approval for Motiva implants in the U.S.
Great. Thanks a lot.
Thank you. Our next question comes from George Sellers with Stephens. Please state your question.
Good afternoon and congrats on a great quarter. Maybe sticking with Mia in Japan, could you just give us some additional color on how that launch is progressing and maybe some early feedback from surgeons and patients? Also, maybe timing for expanding that launch to the additional clinics that this group, you know, sells through?
Yeah. Thanks, George. To be clear, we have signed up our first group of clinics, which is the Seishin Plastic and Aesthetic Surgery Clinics, which manage 10 high-end clinics overall Japan. We are planning to launch soon. You know, our medical education and practice development teams are working hard with them to put everything in place. As soon as we start doing commercial cases with Seishin, we will let you know. Of course, you know, we are very happy to do this in Japan. Japan is at the genesis of Mia. That's where we had the original idea of the need for this type of procedure. Eventually, we realized that there were these type of customers all over the world.
You know, what we plan to do with Mia this year is to prove that we have new consumers that were not seeking for a traditional breast augmentation. We want to be able to show how these clinics, you know, basically scale up because as we bring Mia to different geographies, this is the type of information that I think is gonna get everyone excited about the market expansion that it can create.
Okay. Got it. That's really helpful. Maybe switching gears a little bit to margins. There's obviously a lot of moving pieces this year with the launch of Mia in Japan and then in Europe as well, hopefully, Motiva in China and then potentially the U.S. at the end of the year. Could you just maybe help us with how we should think about the quarterly cadence for gross margins? It sounded like there were some, maybe, some ASP headwinds here in the fourth quarter, but how should we think about that as the year progresses and these additional markets start to contribute more significantly?
Good question, George. You, you noticed in the quarter that, you know, the gross margin was down in the quarter. As we said in the prepared remarks, you know, it was, it was currency. You know, with the revaluation of the euro in the fourth quarter and the fact that a lot of our inventory is denominated in euros, we had to revalue it, so that translational effect flowed through our COGS. Overall, as we've said, you know, the trend in our gross margin is positive over time. Everything we're doing in terms of, you know, launching into these new geographies, the Mia system, these are all positive to gross margin over time. The trend there is definitely to the upside.
You know, as you think about 2023, there are some puts and takes. You know, the early launch of Mia, as well as standing up the new facility, you know, and the lower yields out of that new facility initially will be, you know, slightly negative to gross margin. The things like China, you know, continued new products flowing through will be positive to gross margin. The guidance is really expected to remain, you know, sort of flattish here in 2023. Over time, we should definitely see that margin going higher.
Okay, great. Thank you all for the time.
Our next question comes from Anthony Petrone with Mizuho Group. Please state your question.
Greg, good afternoon. Congratulations on the submission of the clinical module. Maybe just a little bit on guidance, $200-$210. You know, how should we be thinking about contribution from Japan from the Mia launch in January? How does that flow through in the $200-$210? When we think about Mia in China in the second half, potentially being launched upon receipt of regulatory clearances, how should we be thinking about that contribution in the top line guidance? I'll have a couple of follow-ups.
Sure. Hey, Anthony. You know, when we think about guidance, right? There are a lot of moving parts, as you suggested here in 2023. You know, when we think about providing numbers, though, we're looking at, you know, different scenarios around when we could see the timing of these, the contribution of them. When we start looking at kind of risk adjusting the various pieces of that's how we kind of come up with that, you know, $200 million-$210 million number. You know, certainly, you know, the different analysts, yourself included, will have different expectations for that, and it's difficult for us to provide exact numbers.
I think you will see the contribution from those new things build as the year unfolds, you know, with the underlying business still posting really strong growth as we saw in 2022.
Then maybe, the couple of follow-ups here. One would be on the near to the medium term outlook on manufacturing, if you will. If I'm not mistaken, the new manufacturing site, you know, brings you from about 700,000 implants to, I think, nearly 2 million per year in terms of production capacity. Fully understand, you know, in the early days, maybe it's margin dilutive, but as you get out into year two, three, and four, you know, how does the new facility play into, you know, gross margins specifically of the Mia implants? Then I'll have one last follow-up. Thanks.
You know, overall, you know, the new facility, as you mentioned, the volumes that that facility is capable of producing, you know, and the efficiencies that we can get out of that facility are definitely a positive to our margin over time. You couple that with things like the United States, China, which are ASP accretive, Mia, which is ASP accretive. You know, the margin profile of our company on the gross margin line is going higher over time. You know, as we mentioned, 2023, there's some moving parts here, but overall that margin, you know, is well supported by a lot of different factors over time.
Last, and I'll hop back in, is just the $500 million in 2026. When we think about how we should be, you know, sort of modeling that from a geographic standpoint, you know, any, you know, kind of, you know, directional, you know, pointers you can give us would be helpful. Thanks.
You know, it's an interesting or a good question, right? Because there's a lot of layers to how you get to $500 million for us over time. You know, the number of permutations that can get you there is infinite, right? When we look at a number like that, though, and all the different supports we have underneath it, you know, as Juan José mentioned, it's not only well supported, it could even be proof-proven conservative over time. You know, in terms of breaking out individual contributions to that number, you know, I think it's a little bit early for us to do that. As we get further into it, we'll certainly provide more visibility into what contributes to it and then ultimately also kind of how we look at the margin profile over time as we move through that.
So we'll be providing more over time on that number.
Thank you. Our next question comes from Neil Chatterji with B. Riley Securities. Please state your question.
Hi, guys. Thanks for taking the questions. Maybe since we haven't touched on it yet in Q&A, just curious if you know, could provide maybe some additional color just on the kind of traction you're seeing with Flora, for the breast recon market and, you know, maybe the pipeline that you're planning for that market.
Yeah, of course, and I'm glad you asked about breast reconstruction because it is, to us, one of the most important things.
This is such an under-penetrated market globally. Flora is the first of a series of technologies that we will bring to market to make sure that we democratize access to breast recon. What we mean by that is that, you know, the current market may be considered, you know, of appropriate size in the United States. When you look at outside of the United States, if you were to take those same access numbers and moved it to the rest of the world, that market would be substantially higher. Now when we look at Flora, we continue to make, you know, gains quarter-to-quarter. However, this is a market that is based on tenders, takes time.
There are regions around the world that do this on an annual and even biannual basis. We have to wait for them as they happen. However, we do plan to make sure, over the next few years, that we become the market leaders in breast reconstruction as we see it today. More than that we are able to create the kind of market that we see in the United States for breast reconstruction.
Great. Thanks for that. Maybe just one quick follow-up. I mean, you've already kinda talked about, you know, the launch partner for Mia, but just kinda curious, you know, how might that launch partner in Japan, kind of serve as a model for future clinics that you're either, you know, prospecting or targeting?
I think Seishin is, you know, is a great model for what you will see in the future because, you know, you're talking about a chain of 10 clinics, with, you know, marketing assets, with, you know, a professional staff on the business side that can scale this to the right level. We will be looking for partners like Seishin around the world. Again, it's not a buy-sell, relationship. This is a true partnership.
Great. Thanks. I'll hop back in the queue.
Thank you. A reminder to the audience. To ask a question, press star one on your telephone keypad. To remove yourself from the queue, press star two on your telephone keypad. Our next question comes from Marie Thibault with BTIG. Please state your question.
Hey, good afternoon, Juan José and Raj. This is Sam Eiber for Marie. Thanks for taking the questions here. Maybe I can start on OPEX cadence for this year, and I appreciate the commentary on the outlook for this year. Maybe in terms of cadence, would we expect, you know, maybe some leverage more towards the back half of the year? It sounds like maybe you're front-loading some investments here, and then as you get the contribution in the top line, that's, you know, when we might start to see leverage towards the back half and then more so in 2024.
Yeah, I think that's the right way to think about it. I mean, as we've described here, right? In 2023, there's just so many opportunities for us to, you know, to support between the launch of Mia, you know, preparations for the United States. You know, the standing up of the new facility, you know, moving into an operational capacity there. You know, the early days in China, which, you know, again, we're using a distributor there, but there's some efforts we'll be supporting. As we move into those initiatives, you'll start to see the leverage, you know, flow out of them. This year is the year where we're investing, and as you get into 2024 and beyond, you should start to see that leverage materialize in our model.
Okay. Really helpful. Then maybe I can ask a follow-up here, on the regulatory environment in the U.S. You know, I guess any updates on if you're expecting an Advisory Committee, you know, how soon might you be able to figure that out? Is there even potential for, a faster approval process considering you've had, this modular submission process for a number of months now?
Yeah, I think it's a little bit early for that. You know, the most important thing is that we focus on the final stage of the regulatory process. I think as, you know, as this unfolds, there may be opportunities, but I think we just have to keep ourselves to the propriety of the trial in making sure that we answer every single question that comes our way from the FDA.
Okay. Really helpful. Thanks for taking the questions.
Thank you. There are no further questions at this time. I'll hand the floor back over to Juan José Chacón-Quirós for closing remarks. Thank you.
Thank you for joining us on today's call. We look forward to providing our next quarterly update in mid-May, and we wish everyone continued good health and happiness.
Thank you. This concludes today's conference. All parties may disconnect. Have a great day.