All righty. Well, thank you for joining us this afternoon. Thrilled to have right now with us, Establishment Labs, including the CEO, President, and Founder, Juan José. I'm gonna kill your last name. Say your last name for me.
Chacon Quitos.
Chacón-Quirós. Thank you. Beautiful name. And Raj Denhoy, and, I'm still Joanne Wuensch. And, I have a whole list of questions here, but admittedly, all of these were written before you reported last night. So I'm gonna skip over most of them and go straight to, can you give us a summary of the quarter and your guidance, and how the guidance came together, but mostly the quarter. Start there.
Sure, I can start there. You know, certainly, I think in the context of the latter half of last year, I think we need to talk about the first quarter. You know, we experienced a slowdown in our markets, you know, in the second half of last year. You know, when we saw, you know, both our direct markets, and we sell roughly 40% of our revenue through direct markets and 60% through distributors.
W e saw some softness in our direct markets as patients were delaying procedures. That got magnified significantly as distributors, seeing that same sort of dynamic, chose to stop ordering from us for a period of time, right? So there was that kind of disconnect between what they were selling out and what they were purchasing from us.
That dynamic really really hit us in the back half of last year. The fourth quarter, I think, was a reflection of that continuing, as again, that dynamic of distributors, you know, essentially selling out inventory, continued. As we're entering here into 2024, and with the guidance that we've given, we are seeing our market starting to stabilize. And we are seeing improved demand. So both in direct markets, you know, surgery schedules that surgeons are starting to improve, and then with distributors, we're starting to see the orders start to come back, and even in commentary from distributors, they're starting to sell out more, and over time, those orders will start to improve.
T he guidance that we've given for this year is really a reflection of that, right? So again, the markets are stabilizing. We're not saying it's all the way back, but things are improving, and we expect to see a continued improvement over the course of the year.
When you put together your 2024 guidance, that was your base case, improving, stable to improving?
Yes, stabilizing and improving as the year unfolds.
You're starting to launch in China. How did that factor into the guidance?
Yes. So on top of that kind of dynamic in the base business that we have now, we have a couple of new things coming this year. So China, you mentioned, we have now launched into China, second largest market in the world. And we've also launched our tissue expander, Flora, in the United States, and so those will contribute as well on top of that.
It includes China and includes Flora. Let's spend a little bit more time on China. I think your language last evening was that you pulled $10 million out of the guide at the end of 2023, and that's a good place to start to think about for 2024. Am I paraphrasing correctly?
Yeah, I think you need to understand the market dynamics to go to that number. And when you think about, you know, Tier One cities in China and Tier Two cities in China, where we will be having this product at different locations, chains of clinics, new clinic centers, on the aesthetic side, then this is what it takes to be able to start the business in Tier One and Tier Two cities. So that should happen throughout Q1, Q2, and maybe into Q3. And after that, what you will see is a pattern of reordering. Now, the guidance was constructed with that number in mind and being very cautious with the reordering patterns.
Mm-hmm.
Because at this point, you know, it's too early on to know exactly what those reorders will be later in the year.
Walk me through... It's a distributor model that you're selling in China with. Is there a stocking that happens that you can count on, or is it a you know, sort of a pull method as it's being needed?
To all distributors that we have around the world, we sell Ex Works, so we recognize the revenue the moment it leaves our manufacturing facilities. So these are, like, these orders will be the stocking orders for those Tier One and Tier Two cities.
Okay.
T hen, as they, you know, need to reorder, you know, based on demand that they have in market, we will see new orders coming in later in the year. But, you know, the construction of the guidance includes that base case scenario of the stocking.
That's the roughly $10 million. That's your base case?
Yes.
Okay, and that most of that is stocking, and then you have to see the distributor afterwards.
Yes.
What are your Tier One and Tier Two cities or regions?
I t's basically, when you think about China, you know, you have the main cities like Shanghai, Beijing, Guangzhou, you know, where you see a lot of movement in aesthetics, but then you have, you know, new cities, as they call them, like, you know, like you go to Shenzhen, Tianjin, and places like that, where there's a lot of economic activity, you know, people that have, basically improved their, you know, their, their financial wealth and are very open to aesthetics.
T hat's the main focus for this year with our distribution partner. Our distribution partner is exclusive. It's basically the same group that we have as distributors in Hong Kong and also in South Korea, and they've been extremely successful with our brand.
Motiva is market leader in Asia, and, you know, when you look at reference markets for, China, you know, we're already market leaders, in Singapore, as I said before, in Hong Kong, in Taiwan, and those are markets that represent well what would happen in China.
Okay. What is the competitive landscape looking like in the markets that you're, that this distributor is already winning in, such as Singapore and Hong Kong and Korea? And are they the same competitors in China?
B asically, it's very similar in terms of the competitive landscape. In, you know, in many of these markets, when we have gone into over the last few years, what we have seen is, you know, Johnson & Johnson, with their Mentor brands, being the market leader, and us, over time, taking over, that leadership. You know, not only in, in the countries that I mentioned before, but also, you know, in Thailand, Japan, and Vietnam. So overall, it's been an exercise in, you know, basically attacking, with our technologies, those markets and making sure that, you know, consumers, potential patients, get an understanding of the benefits of the Motiva technology.
How long does it usually take you to get to the leadership position in the market?
It varies, but I think we have a very good blueprint in which we go 10, 20, 30, and eventually 40% of the market. In all the markets that I just mentioned, we are north of 40%, and some of them, north of 50% and more. So we've taken a, you know, substantial leadership position in those markets.
Is it based on the distributor just doing a very good job, the product, price, some combination?
I think it's, you know, it's the partnership that we've been able to craft and the blueprint that we are using that is very effective and that we've been able to, you know, roll out in each one of these markets. And on top of that, you know, the way we price, in which we are using a good, better, best pricing strategy, and, you know, we're not charging more for safety. All, you know, price points have the same level of safety, but then consumers can upgrade based on their, you know, on their, on their demand, basically.
Mm-hmm. What do you think? How do I word this? I don't want to say peak sales, but your revenue run rate in China can be after you go through this initial launch and stocking phase. I think it's too early to see that, but I think that, you know, what I just described as the market share taking exercise, you know, it's potentially one that we can replicate in China because there's a very good awareness already of the Motiva brand in China.
Mm-hmm.
In the past, we've spoken about, for instance, in South Korea, pre-pandemic, 25% of women getting Motiva came from China.
Mm-hmm.
They came not to pay less, actually, they were paying more. All of that awareness is built into, you know, the market share that we intend to take in that market.
Okay. Anything else we should talk about as it relates to that region?
W hat's really interesting about the Asia Pacific region for us, is that, these are very specific markets with different dynamics. Some are more price sensitive than others. China is probably the highest ASP, by far in the region. But in all of these different markets, we've been able to, you know, to go to market leadership, and it really shows you, you know, what the technology can do over time.
Okay. If I take your guidance, and I don't include anything from the U.S., and I assume $10 million for China, that leaves me with a base, other OUS, growing roughly mid-single digits year-over-year, if I've done my math right. What led you to sort of think about that as being the right number?
I think the way we look at it is not so much driven by just the percentage, right? I think given the slowdown we've seen in the markets, you know, the distributor dynamic, I think the guidance this year, there was quite a bit of kind of bottoms-up building of it, right?
Actually looking market by market in terms of where we saw potentials for growth, where we saw the distributor dynamic working itself out. And so we think it's more of a really just sort of a very well-grounded view on, you know, how this year will progress for us. You know, I think that base business, again, is recovering, and we'll see it continue over the course of the year, and then some of these new things we've just been talking about will add on top of that.
That's how the year's going to unfold for us.
For your base business, there is a difference between your direct and your distributor model. Remind us, what percentage of OUS sales are direct versus distributor?
Yeah, so prior to the slowdown, we were roughly 60% distributor, 40% were direct. You know, in the most recent quarter, as a matter of fact, it was 51% were through distributors, right? So it's, it's down from where it has been. You know, so we, you know, we sell in 85 countries globally, as you know. We're direct in most of the countries of Europe, as well as Brazil and Argentina, but the rest of the world, we sell through distributors.
What is the growth rate difference between the distributors and the direct?
I t varies by region, right? So, we have some very good distributors who have done quite well, as Juan José was describing about the share taking in some of the Asia Pacific markets. Those are all distributor markets for us. So some of our partners there have done a tremendous job in taking market share and really growing our business there.
In direct markets, we've also done, you know, pretty nicely in some of the European markets in which we've gone into. You know, I think it's probably better to think about it more kind of on a regional basis. You know, Asia has been probably where the growth has been coming from most recently. You know, that's probably thinking about it, kind of mid- to high-single-digit growth coming out of that market.
Again, this is all kind of pre the recent slowdown. Europe and Latin America are probably up, you know, low single digits. The US has historically been kind of growing low single digits, kind of flattish. You kind of roll all that up, and you have a global market that's kind of growing in the mid-single digits, you know, 3%-5% globally.
Okay. But you historically have been growing faster than 3%-5%?
Yeah, and again, that's as Juan José was describing about the technology and the share taking. We've built on top of that.
Excellent. United States, you put the fourth PMA module in February of 2023. So we're lapping the year. What has been the interaction with the FDA been like over the last 12 months?
It has been collaborative.
Okay.
Our team has participated in the previous breast implant PMAs, and they describe it as, you know, a very different approach from what they had seen in the past. So I think we, you know, we are making the best of, of that co-collaborative effort, and we've been making a lot of progress. I think right now we're just in the midst of getting our manufacturing inspection date. Once we get that, you know, we could run through any questions that they may have regarding our manufacturing. And then, you know, the labeling discussions will be done in parallel.
W e're really in the last phase of, you know, of our PMA, and considering that, you know, we were told by the FDA that there would be no panel, it really de-risks this last phase of the process.
What do you think is holding up setting the date for your manufacturing facility inspection?
We don't think there's anything-
Okay.
-particularly holding it up. We think it's just normal paperwork taking place, because with the visibility that we have is, you know, what is taking us to say that, you know, we expect this to happen imminently.
Happens imminently, how long do you think it takes until you get approval?
L ook, in the past, we have said super clearly, we're not going to speculate on dates, precisely because, you know, sometimes you get caught up in paperwork, sometimes, you know, things are going faster, so it's really difficult to do that. But what we are trying to do is be as transparent as possible with our progress so that people can see where, you know, where this is taking place.
Okay. It's going to be sold in the United States with a direct sales force. Are those people hired?
T he way to think about our commercial effort is to understand that, you know, we have been setting up for the last year and a half, our commercial operations, our medical affairs, structure exists already in the United States. You know, we can do all of this support for medical education, and, and whatever is needed to support the, the plastic surgery community once we launch.
In addition to that, you know, for the, launch of the tissue expander, we finalized, everything that we need to be able to invoice and ship. So all of those things already exist. You know, what we will be adding, you know, over the course of the year are more sales reps.
You know, of course, once we get the approval from Motiva Implants, we will need a significant amount more sales reps. But we don't need to, you know, hire them all at once.
Mm-hmm.
Depending on the target number of accounts, we will need, you know, a target number of sales reps.
There's this thought process that getting Flora approved in the U.S.... Flora? No, tissue expander approved-
It's Flora.
Thank you. Long day already. Flora approved in the United States was a leading indicator for Motiva. Is that the right way to think about it?
Well, it is a very important milestone for us, because there's a lot of commonality in terms of the technology between the tissue expander-
Mm-hmm.
and the breast implant. For instance, one of the biggest differentiators of our technology is the surface. And, you know, both of those devices share the same surface technology. So while it took us longer to get the tissue expander cleared, because of the discussions around how to describe this, you know, patented proprietary surface, it has now solved it for the breast implant.
Right.
I n that, in that sense, you know, it is a, it is a very positive thing for us from that perspective, but also it allows us to start conversations with the plastic surgery community, tell them about Establishment Labs, and start talking about our innovation and technology.
It also sounds like you had to create an infrastructure to start selling it that creates the base for when Motiva comes around.
Oh, absolutely. And that's why, you know, we are always being very clear in terms of all the work that has been done to create the commercial operations necessary to, you know, market the tissue expander and eventually the breast implants.
Okay. Are you building supply ahead of a U.S. launch?
Last year, we, you know, finalized the, you know, the new manufacturing unit.
Which is gorgeous, by the way.
Which is quite an accomplishment as well.
Yeah.
It is several times larger than our, you know, second biggest facility. So with that, we have the maximum manufacturing capacity to take on any demand from, you know, from the United States. We've been doing some efficiency measures because now that that facility is coming online, it gives us the opportunity to decommission the first facility and be more efficient with the manufacturing shifts and everything. But, you know, we were well prepared for this, and you know, the manufacturing unit that they will be inspecting when the FDA comes is our second facility.
Okay, Raj, for you, gross margins, how does the U.S. approval and the China approval, I'll make it a complex question, impact your margin leverage?
It's not as complex as you think. Both those markets will be higher ASPs than their respective a comparator, right? So you think about China is a distributor market for us. It will have the highest ASPs and the highest gross margin of any of our distributor markets. It actually has some of the highest ASPs in the world.
T hen the US is the highest priced market in the world, and it will be a direct market for us. And so when you think about, you know, the underlying cost of making a product for us, it is not different for either of those markets and the markets in which we currently serve. And so as those ASPs, you know, increase significantly, it's gonna have a pretty nice effect on our gross margin.
How long does it take? I mean, is this a conversation of, "Well, Joanne, we're ramping supply, you know, we're just getting there," or is this something like, "We're going?
It's pretty immediate. You know, the standard cost and the way we do it, it's once we start selling there, the cost of those implants will be sort of our standard cost, right? And you're just banking that against a much higher realized price. And so, of course, you know, the mix will take time to build from those markets relative to the overall business, but it'll start to contribute.
One of the things that struck me is your language around hitting cash flow break even, and if I remember correctly, it's next year. How much of that comes from just the ex- I don't want to say extreme, significant, cost management that you're currently doing, and how much of that comes from just simply putting more product at higher ASPs through the system? Or is there something else?
It's a combination of those things. I think from our perspective, when we look at the last, you know, 4 or 5 months, you know, when we started to see the slowdown in the markets kind of coming out of the third quarter, we took some very significant actions to reduce our cost base.
W e talked about last night on the call, reducing, you know, our headcount by 28% globally, taking some number of programs offline, really focusing on our inventory. You know, we're doing a lot to try to get our expenses down, get our cash use down to really kind of match the demand that we're currently seeing. And so we have taken a lot of cost out of our infrastructure.
T hose comments around getting to that profitability are based really around that, right? So as we see the stabilization in the markets, as we look at the reduced cost that we're now, the reduced cost base that we now as a company, it leads us to those, you know, to those targets of being EBITDA positive by the end of this year and then achieving, cash flow, break even early next year.
Do you have enough cash to get to cash flow break even early next year?
We do. You know, we ended the quarter with $40 million of cash. We did in early January a $50 million private placement. So that leaves us with, you know, roughly $90 million pro forma. We've talked about this year our cash use being less than $48 million. And so we feel we're in a really good position to get to those targets while still funding the growth that we expect to see this year.
Do you think about M&A?
Yeah, I think, you know, we've always been really good at having a very healthy pipeline of technologies that we are creating ourselves.
Mm-hmm.
W hen we think about our focus, our focus is very clear in, you know, transforming breast aesthetics and breast reconstruction, creating a new standard for breast reconstruction with Flora and other technologies that will go into that. You know, the new category of mini-based breast aesthetics. That, plus the regional, you know, expansions into China, into the United States, is a lot to work with.
Yeah.
W e don't need to buy growth. We don't need to go into, you know, facial aesthetics or other things. I think we have, you know, we have what it takes for multi-year growth.
One of the things that the language you use is a women's health company, and women's health has a lot that can go under that umbrella. Do you think of yourself as an aesthetics company, a women's health company? Like, obviously, you've got a lot near term, but I'm thinking visionary.
So if you think about what makes a difference for Establishment Labs in the market, is that we are a women's health company, and that translates into technologies that have less, much less adverse events. It also translates into creating new standards for breast reconstruction so that we can help women fully recover from breast cancer. And you know, and when you think about things that we are doing for the future, I mean, we've talked about Zen and you know, eventually putting into Zen you know, the temperature reader-
Mm.
- and getting approval for that. You know, the. We did a IRB-approved trial that we have fully enrolled, in which we have the Zen with temperature reading, and it's reading temperature every second at 0.1 degrees Celsius. So that eventually translates in understanding early on if there's going to be a complication post-surgery. Eventually, you can, you know, correlate that to potential cancer risk. So all of these things is so that we go from just addressing aesthetics and reconstruction and going more into the journey of breast health.
Okay. One of the things that struck me when I came to visit your facility was that there are many of the steps that are fairly manual. Do you see those as an opportunity for automation, or this is working just fine?
W ith silicone as a base material, automation in the past has meant lower quality of products and increased, you know, events of rupture and others. So you have to be very careful about what you automate, and we will always make sure that it does not come at the expense of patients. So we believe that, you know, with the very healthy gross margins that we have, that will be improving with China, with the US, with EMEA, you know, we will only do things that improve the quality of the products and not put them into question.
Okay. How many years do you think you'll be okay in that facility before you need more space?
We designed that facility so that we can meet up to 50% of the world's demand for breast implants. I think that, you know, gives us coverage for several years, and eventually, that can be expanded. You know, we already have blueprints for expansion, but all the way to 50% of world's demand, we are good to go.
But that also implies, you think you can get 50% market share of the world?
Well, it is one of our aspirations, and there are many markets in which we are north of 50%. So, this is not something that we are dreaming of. It's something that we have achieved in many markets.
Okay. You just, you filed a PMA application with three years of clinical data. You should be getting four years of data pretty quickly. When might we see that?
We were the first company ever to give data pre-approval.
Yeah.
We did that because we are very transparent with our, our clinical data. We did that with two-year data, we did that with three-year data, and we will do so with four-year data. Once the FDA has the data, and we can find a proper scientific conference for it, we will do so.
So they'll get the 4-year data? Do you have the steps by which they get 5-year, 6-year, 7-year, and out to how many years?
There's a periodic, you know, provision with the FDA so that they can get, you know, the data in due time.
Is there any reason the FDA would wait for four-year data before approval, or?
No, because the guidance document for breast implants of the FDA specifically says 3-year data.
Okay.
That's what they asked for, you know, and that's what we gave them. I think the, you know, the willingness to show four-year data is more out of transparency with the plastic surgery community.
More commercialization?
As well.
Okay. If, when you launch in the United States, my impression is you'll be launching at a premium price. Is that the right impression?
I have to be careful for competitive reasons-
Yes. Understood.
about what I say around that. But I think we've been very successful with matrix pricing, making sure that, you know, we are pricing at different points for different types of consumers. And, one thing we've done really well is communicate to patients the benefits of our technologies, and that they understand that, you know, we're not charging more for safety. All the products have the same level of safety, but that they can access, you know, more aesthetic benefits and sometimes will come at a premium.
Okay. Well said. The economics to the physician, is he or she agnostic to that? Because the quality and clinical data of Motiva.
Every time we go into a market that has been commoditized-
Yeah.
Then you do have to do some work to get plastic surgeons of that mindset.
Mm-hmm.
That they understand that actually, patients want to pay more, but they have to see the value-
Right
... for what they are paying more for. So it does take some work at the beginning, but very quickly, they see this as such a positive, because not only do they see less adverse events, but also they are seeing happier patients, and word of mouth really is what drives aesthetics. So, I would say in summary, this matrix pricing, in which you're not pricing out certain consumers, and then consumers can choose to upgrade, is a very powerful tool for that.
Okay. Do women know about different breast implants... When they walk into the doctor's office, have they done their homework? Do they ask for a certain product?
Women are asking more and more about their options way ahead of visiting a plastic surgeon.
Okay.
I think some of the concerns around breast implant safety have led them to that. And, we believe that educated patients will ultimately, you know, look at Motiva as their preferred choice, not only because of the safety outcomes, but, you know, their options in terms of aesthetics. And, you know, in many markets in which at first, some plastic surgeons were not willing to try our products, they eventually got convinced by the patients that were asking for them.
Okay. A competitor in the breast implant market has recently gone away. Should we look at that as, "Well, they couldn't make it, why can you?" Or should we look at it as, "Cool, more for us?
Well, it's definitely always better to have less competitors.
Mm-hmm.
But I think, you know, what that competitor tried to do is to prove that, you know, innovation had a space in the market. And you know, at first, you know, the first generation that they brought to market, you know, textured anatomical implants was actually an innovation for the U.S. market.
Eventually, as those products, you know, began not getting used because of concerns around ALCL, then basically what they were left with is round, smooth implants, just like the other two. So in a market like that, and in a year like last, I think it exacerbated those dynamics. But I think overall, for us, every time we go into a market, we are faced with many competitors of different types.
You know, we used to fight against Allergan in many markets, and they left all those markets. So, you know, we're sure it's not gonna be an easy task in the United States, but at the same time, there are many positives for us. In this market, all plastic surgeons know how to use smooth devices. You can communicate, you know, more with potential consumers, and those two things tend to be very good for us.
With the stock trading the way that it is, I don't think there's much that investors missed from last night's earnings call. But if you've been meeting with people all morning, talking to people all night, what may have been missed, or what do you think you wanna be like, "I wanna make sure everyone understands this?
So, I think there are things that are important that people see, you know, all of the efficiency and productivity measures that we have taken over the last few months do not take away from our ability to grow. We didn't touch one commercial head-
Yeah.
In all of the, you know, reduction in force that we did. We really, you know, cleared out many initiatives that were good to have, nice to have, but not necessary, so that we could refocus our, you know, our resources into growth. And that's what, you know, we will be doing this year, and that gives us the possibility not only to, you know, launch into the U.S. with Motiva Implants, but also to grow Mia.
Mm-hmm.
Mia is, you know, the most exciting thing that has happened in breast aesthetics in the last six years. Because when you see, you know, the patient experience with Mia and the type of aesthetic results, it really brings out that new consumer. So we gave some data yesterday, 38%, you know, in this first phase, are new consumers. That is an amazing thing, because in an industry that has had very little growth, all of a sudden, proving a 38% increase of new consumers really tells you where this could go.
Excellent. When we're together a year from now, when we're talking, what do you think we'll be talking about?
I think we will be talking about how the market in the U.S. is being transformed by technology, by providing more options. And also remember, you know, we are getting approval for our first two, you know, product families that we launched in the international market more than a decade ago.
Yeah.
T hen we have, you know, Ergonomix2 , with, you know, the platform in which we have the Joy program and the Mia programs. So those things will be coming after. So I think, there's a lot of exciting new things. We have GEM, which is a minimally invasive procedure for contour aesthetics that is also, you know, in the midst of a clinical trial, and that eventually, we hope, will, you know, come to market. So many exciting things, you know, to talk about next year as well.
Excellent. Well, Juan José and Raj, thank you so much for coming today. It's, it's great catching up with you so, so recently after a great quarter.