Good afternoon. Welcome to Establishment Labs' First Quarter 2022 Earnings Call. At this time, all participants will be in a listen-only mode. At the end of this call, we will open the lines for a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 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 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 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, May 9th, 2022. 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. With that, it is my pleasure to turn the call over to our CEO, Juan José.
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 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. 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 22nd. As impressive as the sub 1% rates of capsular contracture and rupture at two 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. 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 26th. 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 prospect 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 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'm pleased to announce we have submitted our second module to the agency for review. We also remained 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 our progress towards launching our Motiva Implants into the United States.
In our 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 non-magnetic, Flora potentially opens new options for radiation oncology treatment during this stage of recovery. Flora also features our patented cell-friendly SmoothSilk 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 into 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 José. 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 increased 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 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 $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 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 31st 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 Sulàyöm Innovation Campus. On the capital front, we are extremely pleased to have announced our new term loan facility with Oaktree Capital Management on April 26th. Oaktree Capital Management is an excellent partner with a deep experience in life science investing. The new loan provides us with up to $225 million of non-dilutive capital at fixed interest rates over the five-year term of the loan. The facility is tranched, allowing us to manage our capital needs, and it gives us the option to PIK up to 2/3 of our interest payments over the first two years, lowering our cash interest rate to 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 forecasts, 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 Sulàyöm Innovation Campus that will allow us to produce more than half the world's implants. We are maintaining our sales guidance for 2022 in a range of $155 million-$165 million, representing estimated annual growth of 22%-30%.
As we saw in our first quarter results, there is 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 two 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 in the significant number of development and commercialization programs we have underway. Preparing for entry 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. With that, I will turn the call back over to Juan José.
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 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 now be conducting a 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 your line is in the question queue. You may press star two 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. One moment, please, while we poll for your questions. Our first question has come 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 one Q that you provided the rundown of on the prepared remarks. Juan José, I wanted to ask about the Motiva US IDE trial first and just the differentiated capsular contracture rate. Our team was impressed with how differentiated and how low Motiva's capsular contracture rate came in. But perhaps even more impressive was the mix of prepectoral versus subpectoral implant placement cases enrolled. Just wanted to kind of sanity check, you know, the historical capsular contracture rate associated with smooth implants placed prepectoral versus subpectoral, because it seems like that big delta is probably even bigger considering the mix of approaches in the U.S. IDE trial.
Just to follow up is why is the prepectoral approach potentially better than subpectoral, and will this Motiva data potentially open up a prepectoral approach and make it more common in the United States?
Yeah. Thank you, Josh. Yeah, I think this is one of the key questions, because when you think about, you know, what can Motiva do for women in the U.S., you know, one of the things that we can do is open new options. Those options are based on, you know, the superior design technology we have created over the years. When we think about the importance of being able to use the subglandular plane, you know, what we are talking about is, you know, 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, you know, in front of the muscle, which is called the subglandular plane.
Furthermore, you know, there's a reason why textured implants came to market. There's a reason for that. The reason for it is that, you know, there was very high capsular contracture rates with smooth implants. The second thing that surgeons did to reduce the capsular contracture rate is start putting the implants behind the muscle. Between those two things, textured implants and the submuscular 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's no significant difference between the capsular contracture rates that we have seen subglandular or subpectoral. That is definitely due to, you know, the design of our smooth implants, which has an architecture that lowers the inflammatory response.
I think it is fundamental for people to understand that not only you can compare that, you know, 0.5% capsular contracture rate against, you know, other trials that have combination of, you know, textured and smooth implants, but also that they're comparing it to mainly, you know, submuscular pocket, you know, in those trials. When we go to market, of course, we are going to make it very visible that, you know, the smooth implant subglandular capsular contracture rate is, you know, double digits, in many cases, 20, 30, 40%. And that is something that I think we have solved with our technology.
Oh, thanks for the help thinking through that. Just on a follow-up, just thinking about the FDA module submission pathway, and Establishment Labs has now submitted the second module. Can you just remind us about the third module? What needs to be completed before the manufacturing module can be submitted? I mean, how any just color that you can share just in terms of where you are with that module and when that can be submitted. Thanks a lot for taking the questions.
Oh, hey, Josh, it's Raj. You know, 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 gonna be the group that kind of holds up the progress here. You know, we're happy to have just submitted this 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.
Understood. Thank you.
Thank you. Our next questions come from the line of Amit Hazan with Goldman Sachs. Please proceed with your questions.
Hi, thanks so much. This is Phil on for Amit. I wanna follow up with Josh's question, just there first on the U.S. side and then maybe on China, quickly thereafter. 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?
Oh, hey, Phil, it's Raj again. You know, we have purposely not endorsed a specific timeline for U.S. approval, primarily because, you know, again, a lot of this is when the FDA is ready to receive this information and when they're ready to review it. We, of course, you know, are moving as expeditious as we can. You know, we want to move this along, but endorsing a specific timeline around this is just very difficult to do.
Yeah. That totally makes sense. 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 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? Thanks.
Yeah. I think that, you know, we haven't moved on that position. It's very clear that we need to, you know, get the regulatory approval so that we can proceed to launch.
Okay, great. 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 all have to being able to reaffirm and feel confident in that timeline given things that are certainly outside of your control right now.
Yeah. I think, you know, the situation there of course is one of concern. Definitely we are looking at the situation and, you know, 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. It's good that, you know, we have received feedback, you know, from the regulators regarding our files. We are responding, you know, to their questions, so the process is moving ahead. You know, we're happy to be able to be in a position in which we can access a market as important as China.
Great. Thanks. Thanks so much, Juan José. Thank you both.
Thank you. Our next question has come from the line of Marie Thibault with BTIG. Please proceed with your questions.
Hi. Thank you for taking the questions and congrats on a nice quarter. I wanted to ask just a very simple question here on sort of the reactions you heard to the two-year data there at the aesthetic meeting. We certainly, you know, 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 firsthand.
Yeah. I think definitely, you know, one of the things that other companies have done, you know, to market against us is bring out, you know, the fact that at that time we did not have U.S. data. I think definitely this data is very important for the plastic surgery community. They've never seen data this good. Of course, it's being noticed, and I think many people that were told in the past, you know, "You can't believe those numbers, that's real world data. You will never be able to reproduce it in, you know, in a U.S. FDA trial." Now we have the evidence.
I think, you know, the evidence speaks for itself, and people are taking notice, and that's definitely going to help, you know, with reassuring plastic surgeon, most importantly, patients that, you know, technology and the design that we have created is transforming outcomes.
Right. Very good. Thank you for that. 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. If I could sneak one in here on just sort of an environment for discretionary spend. We haven't seen, you know, 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 spend or concerns about inflation. Thanks for taking the question.
Yeah. 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. JOY comes at a significant premium to our best-selling Ergonomix implants. What we see is that people realize that it's a great opportunity to upgrade to JOY. We're happy to see that even in what seems to be a complex environment, women are making those type of choices. In the past, you know, it's always been very resilient to recessions. You know, the aesthetic market has come through a lot of very difficult situations over last decade in different countries at different times.
We expect that to continue like that.
Deborah, maybe I could just also offer, you know, 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, you know, Russia and Ukraine, as well as a heavier foreign currency, right? So that should give you some confidence, you know, in what we're seeing in the market and in our ability to, again, endorse those sorts of growth rates for the year.
Yeah. 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. We're hoping for this approval to take place soon.
Very good. Thank you.
Thank you. Our next question has come from the line of Chris Cooley with Stephens. Please proceed with your questions.
Good afternoon, and thank you for taking the questions. Let me also just echo congrats on the potentially transformative data and to Dr. Caroline Glicksman and their team for the manner in which they conducted the trial throughout the pandemic. Two quick ones for me. This question, or maybe for Raj, you implied in maintaining the guidance, you're hurdling about 5% approximately in headwinds, 2% from Russia, Ukraine, 2.5 from incremental FX, I think the back half of the year. I just wanted to clarify that. Could you maybe just speak to seasonality trends and maybe relative pockets of strength that you're seeing in markets? Then as my follow-up, I'm just curious, you know, we do have an MRI-compatible tissue expander now moving forward in the U.S. as well.
Just curious if you've rethought, or given any new thoughts to, Flora, in the U.S. as well. Thank you.
Yeah. Thanks for the question, Chris. You know, yeah, your point is well taken, right? We are still endorsing, you know, very strong growth rates for the year despite the headwinds which you mentioned. It does speak to what we're seeing in the market. You know, as we've commented in the past, the fact that we're in, you know, over 80 countries around the world, you know, provides a nice balance to our business. We see some markets in some quarters that are a little softer, some doing better, you know, so there is a nice balance there. 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 know, you mentioned pockets of strength.
I think if you know, if you parse out, again, some of our comments around Brazil, for instance, it being more than 17% of revenue now, and it was, you know, closer to 11% a year ago, you know, that business has essentially doubled over the last year, right? We're seeing very, very strong growth in Brazil and, you know, that's just one of the many markets we're doing well in right now.
Thank you. Just to follow up on the tissue expander.
Just so we can understand your question again. You were asking about just the benefit of MRI? Sorry, just if you could maybe repeat your question.
Certainly. I just was curious of your thoughts of 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. Thank you.
Yep. You know, I think at this point, Chris, you know, what we've commented all along, and we're gonna stick to it, is that, you know, our plans for the U.S. remain, you know, in progress, right? As things get closer to market, both Flora and our implants, you know, we'll make decisions on when we launch and how we launch them. Just encourage everybody to stay tuned on that front.
Thank you, and congratulations on the record quarter.
Thank you. Our next question has come from the line of Zachary Weiner with Jefferies. Please proceed with your questions.
Hey, everyone. Thanks for taking the question, and 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?
Hey, Zach. We do have contributions, right, from a number of new products and initiatives over the balance of the year. You know, we haven't broken it out historically and we likely won't do it now, but you can count that out. You know, amongst the things that we're doing are those two initiatives and several others, right? You know, 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. Just can you give some color on, you know, I fully understand that 2022 we should see spending to normalize, but any color on, you know, the broader inflationary pressures that we're hearing across med tech and how that's gonna impact, you know, the P&L or the revenue line? Thanks for taking the questions.
Yeah. You know, we, like all companies, are not immune to it, of course. You know, we are seeing, you know, slightly higher costs in shipping and areas like that. As you've seen, you know, even in our gross margin this quarter, we continue to post very good profitability, at least at that level. As you look to the bottom of the income statement or the rest of the income statement, our spending is going higher, right? We have commented on that. Primarily it's to invest in the new areas, some of which you highlighted. You know, but the bookend to that is we're being very judicious about where we are spending, right?
We don't wanna over-invest in areas we don't have to, but we also aren't gonna under-invest in what's in front of us. I don't know if that gets to your question, but you know, we of course follow it as everybody does, and we wanna be good stewards of the capital that people have given us.
Yeah. Thanks for taking the questions.
Our next questions come from the line of Amit Hazan with Goldman Sachs. Please proceed with your questions.
Hey, it's Phil back on for Amit. Just on that kinda last point, I was hoping, Raj, maybe you could touch a little bit more on any kind of guideposts 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. 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. Thanks.
Yeah, no, it's a fair question, Phil, and I will tell you that, you know, the. You know, we're not yet ready to provide that level of detail in terms of kind of longer term targets for us. When we look at things like the construction of our new facility, the launch into the United States, the launch of MIA, China, you know, what we're doing in aesthetic breast recon, and all 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 Oaktree financing has given us, we believe there is, you know, more than sufficient room to get to a breakeven point and actually start being cash flow positive with what we currently have.
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.
No, it's helpful. Thanks. Thanks for taking the follow-up, Raj.
Okay. Thank you. There are no further questions at this time. I would like to turn the call back over to Juan José 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.