Establishment Labs Holdings Inc (ESTA) Q2 2019 Earnings Call Transcript

ESTA earnings call for the period ending June 30, 2019.

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Establishment Labs Holdings Inc (NASDAQ:ESTA)
Q2 2019 Earnings Call
Aug 14, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to Establishment Labs' Second Quarter 2019 Earnings Call. [Operator Instructions] At the end of this call, we will open the line for question-and-answer session and instructions will follow at that time. [Operator Instructions]

I will now turn the call over to Jeremy Feffer of LifeSci Advisors. Please go ahead.

Jeremy Feffer -- Managing Director

Thank you, Jimmy, and thank you, everyone, for participating on today's call. Joining me from the Company are Juan Jose Chacon-Quiros, Chief Executive Officer; and Renee Gaeta, Chief Financial Officer. Before we begin, I would like to caution listeners that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs' financial outlook and the Company's plans and timing for product development and sales. These forward-looking statements involve material risks and uncertainties and the Company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the Company's quarterly report on Form 10-Q that will be filed later today with the SEC. The content of this conference call contains time sensitive information accurate only as of the date of this live broadcast, August 13th, 2019. 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 said, it is my pleasure to turn the call over to the Company's Chief Executive Officer, Juan Jose Chacon-Quiros.

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Thank you, Jeremy, and good morning everyone. During the second quarter of this year, revenue was $21.7 million, an increase of 58.2% over the same period of 2018. This record high-performance was made possible by the continued global adoption of Motiva Implants and the success of our direct sales force across Europe and Brazil. With patient safety and improved outcomes as the main drivers for capturing market share, we believe that our Company's singular focus on breast aesthetics and reconstruction has allowed us to consistently drive strong revenue growth.

We continue to add to the growing body of evidence regarding Motiva Implants' unique safety profile, and we are confident that our ongoing U.S. FDA clinical trial will further demonstrate the transformational aspects of our technology. With our continued momentum in Q2, we are comfortable raising our full year 2019 revenue guidance to a range of $84 million to $86 million, up from the prior guidance range of $80 million to $84 million. We are very pleased with our sales growth trajectory, and this guidance reflects our conviction that we will achieve a minimum of 35% year-over-year growth from full year 2018 to -- full year 2019. As we have seen in previous quarters, our increased market share was driven by growth across all regions of the world, highlighted by double-digit growth in Latin America, Europe, Middle East, Africa and Asia Pacific. The launch of our direct sales forces across Europe and Brazil, positively impacted our performance. For the second quarter, our total direct market revenue again accounted for more than 30% -- 45% of total revenue. Furthermore, Brazil continues to be our strongest market worldwide with 16.1% of our total year-to-date revenue. Our expectation is that our direct market revenue, as a percentage of total revenue, will continue to grow over the long-term, particularly as we expand our direct sales teams into other territories.

We continue to invest in our successful direct market strategy, expanding our global sales teams to 92 employees and contractors up from 83 at the end of the first quarter, and expect to continue to adding resources to support this growth. Additionally, we launched Motiva Implants in two new distributor markets during the second quarter, Taiwan and Thailand, both key breast aesthetic markets in Asia. Motiva Implants are now commercially available in 75 countries. Geographic expansion is a key part of our long-term growth strategy, and we will continue to grow our differentiated product portfolio into the global standard in breast aesthetics and reconstruction. We also strengthened our Board of Directors during the quarter with the appointment of Lisa Gersh. Lisa brings a wealth of experience as both an Executive and a Board member. I am pleased as she has joined us, and we'll look forward to her contribution as we continue to execute our growth.

Turning to our product and regulatory pipeline, we made progress with additional global regulatory approvals and expansion of our product portfolio. We are progressing with the U.S. FDA clinical trial for Motiva Implants. Last quarter, we announced that we completed enrollment in the aesthetic cohorts of the trial. To date, we have completed all surgeries in the primary augmentation cohort. We have completed all surgeries in the revision augmentation cohort. We continue to make progress with enrollment in the reconstruction cohorts. As a result, we are implementing a bifurcation strategy that allows us to pursue submission for the aesthetic indication sooner while pursuing approval for the reconstruction indication separately. This keeps the time line of our PMA package submission to the FDA on track.

On the regulatory front, Q2 was no less busy than Q1, with global regulatory actions and their coverage by media outlets. In May, Health Canada suspended the license for a major competitor's textured breast implants after a safety review found their implants had an increased risk of breast implant-associated anaplastic large cell lymphoma, BIA-ALCL, a rare type of non-Hodgkin's lymphoma.

Similarly, in July, Australia's Therapeutic Goods Administration, TGA, proposed plans for safety alert following its review of textured breast implants that may also result in a recall. The U.S. FDA also recently issued safety alerts on certain textured breast implants due to similar risks. And this alert prompted a major competitor to issue a voluntary global recall of other textured implants. Against this challenging regulatory environment and negative news coverage, we continue to be unaffected by the recent safety-related bans on silicone breast implants associated with BIA-ALCL from international regulatory bodies. While we continue to vigilantly monitor our products with our post-market surveillance, we believe these developments are further confirmation of the unique safety profile of Motiva Implants. While we are seeing earnings reflect positive short-term results, the entire management team is confident about our long-term growth prospects.

Before turning the call over to Renee to review the financials, I'd like to mention that we will be hosting the Fifth Annual World Symposium on Ergonomic Implants in early October in Gardone, Italy. This annual event brings together over 60 faculty and 300 attendees from across the globe to discuss the techniques and technologies shaping the future of breast aesthetics and reconstructive surgery. Industry gatherings like these are an important forum for us to better understand surgeon experiences with Motiva Implants in breast aesthetics and reconstruction. We look forward to another productive meeting this year.

With that, I'd like to turn the call over to Renee to discuss the financials in more detail. Renee?

Renee M. Gaeta -- Chief Financial Officer

Thank you, Juan Jose. As Juan Jose stated earlier, our momentum from the first quarter carried into Q2 and we are pleased once again to report record revenues. You can find additional details on our second quarter financials in our earnings press release and our Form 10-Q, which we plan to file later today. Our total revenues for the second quarter was $21.7 million, which represents a 58.2% increase over the second quarter of 2018. Revenue growth for the second quarter was again driven by continued organic growth across all of our markets and by improved average selling prices attributable to our direct market strategy in Brazil and key European geographies. Gross profit for the second quarter was $13 million or 60% of revenues, which compares favorably to 54.2% of revenues for last quarter and in line with second quarter of 2018. The sequential increase in gross margin percentage was driven by our increased volumes and higher average selling prices in our direct market. Our gross profit percentage was negatively impacted by 5.9% during the quarter due to amortization to the fair value of inventory recorded from our asset acquisitions from distributors in the recent quarters. As we sell-through this acquired inventory, this amortization impact will dissipate.

The total operating expenses for the second quarter of 2019 were $22.4 million, an increase of 54.1% compared to the second quarter of 2018, driven by our continued investment across the Company, including the expansion into our European sales -- direct sales markets and related supporting systems required for this growth. SG&A expenses increased $7.6 million or 69.9% to $18.4 million. The increase in SG&A was primarily due to a $3.1 million increase in personnel costs as a result of hiring additional sales, marketing and administrative employees, a $2.3 million increase in sales and administrative consulting fees, including associated stock compensation expense, a $1.1 million increase in sales commissions and a $700,000 increase in marketing expenses.

Our research and development increased approximately 8% to $4 million. The total increase in research and development was primarily due to $0.5 million increase in research and development personnel and $100,000 increase in expenditures related to our U.S. FDA clinical trial, primarily consisting of third-party fees for setup and management of the clinical trial. Net loss for the second quarter was $9 million, an increase from $5.4 million for the same period in 2018 due to the required growth in our operations to support the expected increase in our market demand. Our cash position remains strong, we held a cash balance of $31.9 million as of June 30th, 2019. We continue to prudently manage our cash and continuously look to drive efficiencies throughout our organization, while providing the necessary support to maintain our current growth trajectory.

We have long considered it a good corporate policy to have cash reserves. And with that in mind, in June, we announced that we had entered into a revised credit agreement with asset -- with Madryn Asset Management. The revised agreement provides for an additional $25 million in borrowing capacity and extends the maturity on all loans to September 30th, 2025.

We were also pleased to report that this revised agreement reduces the interest rate from LIBOR plus 8% -- down to LIBOR plus 8% from LIBOR plus 9%. On August 12th, we drew down this additional $25 million that became available under the revised agreement. As Juan Jose mentioned, we now anticipate the full year 2019 revenues to be in the range of $84 million to $86 million, an increase from our original guidance that we provided last quarter of $80 million to $84 million.

I will now turn the call back over to Juan Jose for some concluding remarks. Juan Jose?

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Thank you, Renee. With the first half of the year now complete, we are very pleased with our performance, and we'll continue to work on maintaining this momentum by taking advantage of market opportunities. In the middle of a complicated regulatory environment, we are aiming to lead the industry to our commitment to women's health, innovation and by setting new safety standards in the breast aesthetics and reconstruction markets. Our goal is to translate this leadership into a commanding position in our industry by bringing on much innovation and technologies that result in superior, long-term and improved aesthetic outcomes.

I said this last quarter, but it's worth repeating, we are laser-focused on driving organic growth in our existing markets, entering new markets, expanding our direct sales model into new geographies, where we can better serve surgeons and patients and continuing to launch new innovative products in breast aesthetics and reconstruction. Our record sales this quarter and increased full year revenue guidance demonstrate that we are successfully executing our business strategies for the benefit of our patients, customers and our shareholders alike.

With that, I will hand the call over to the operator for the Q&A.


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Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Raj Denhoy of Jefferies. Your line is now open.

Raj Denhoy -- Jefferies -- Analyst

Hi, good morning. May be I could start with just some broader comments in the market. You noted the regulatory activity in the quarter. So I guess, there are couple of questions on that front. I mean, what are you seeing anything in terms of demand in the market shifting or are women putting-off procedures? Have you seen anything on that front? And then secondly, obviously, very strong result for you in the quarter, but is there anything more you can offer in terms of whether you're seeing competitive conversions, whether doctors are entertaining the idea of shifting to Motiva from other implants given some of the scrutiny out there?

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Yeah. Thank you, Raj. I think what's interesting is that it is confirmation -- the current regulatory environment is a confirmation of everything that Motiva stands for. Remember, years ago, we were the only Company with the foresight to produce a very specific type of surface technology that improves biocompatibility. Our message has been consistent for a decade and that resonates with surgeons worldwide. While many of our competitors are having trouble explaining themselves and their technologies, we are consistently pushing to understand better the idea of our technology, improving safety and aesthetic outcomes.

With that, I think what we are seeing in those numbers is improved adoption of Motiva Implants across all geographies. But at the same time, I think, yes, we need to be prudent about what is going on. I mean, the new cycle is negative, and we have heard certain large accounts, voiced their concerns that they may be a downturn in the volumes in the market in the future. However, to this date, we have not been able to put a number or to actually move from this being just a comment to a trend that we will see in the future. We are being very careful about it, and that's why we expect to continue doing our work in medical education, which is the main reason why surgeons move from another implant manufacturer to Motiva. And we have many events planned for the rest of this year in both direct markets and in distributor markets. So that will be one of our main focus, as well as continuing to communicate through digital and social media with women about our safety message.

Raj Denhoy -- Jefferies -- Analyst

Yeah, that's helpful. And maybe just for my second question, I kind of asked you back in June, where you're kind of, to open up the pipeline a little bit and show us your tissue expand as well as the minimally invasive technology you're working on. Is there any updates in terms of timing on those technologies? I think you had said the tissue expander, in particular, could be launched this year outside the United States and potentially next year in the United States. Are those still reasonable time lines for that product?

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

I think what we had said is that we had filed with the regulatory authorities to obtain approval by the end of this year for our differentiated flora [Phonetic] tissue expander. The product launch will most likely happen in 2020 in the international market. We are still looking at time lines for launching in the U.S., I think the most important thing at this point is that, we also have our Ergonomix 2 Implant aesthetic, also we are going through the regulatory filings, and that's a product that we believe will bring added revenue in 2020. With our minimally invasive suite of products, we continue to make progress in the fine-tuning of the techniques associated with that promising new indication, and we are on track for our first operations taking place in Japan at the end of this year.

Raj Denhoy -- Jefferies -- Analyst

That's great. Thank you.

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Thank you.

Operator

Thank you and our next question comes from Josh Jennings with Cowen. Your line is now open.

Joshua Jennings -- Cowen & Company -- Analyst

Hi good morning. Thanks for taking the questions and congratulations on another record revenue quarter. I was hoping to maybe just follow-up on the minimally invasive branded surgery. And just -- any details in terms of what hurdles are left unclear before that -- those initial implants in Japan later this year from a regulatory's perspective or a commercial perspective that you can share?

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Yeah, thank you, Josh. I think the most important thing is that the breast implant itself is finalized and fully validated, so that gives us comfort that we will meet the deadlines that we have set for us in Japan. I think at this point, most of the work is taking place on the technical side, meaning this is a new indication completely. So it's a technology on one side that makes possible the techniques to minimally introduce a breast implant in a human. So I think it's very important that we continue that work, that fine-tuning. This procedure is bound to transform breast aesthetics in the negative new cycle that we see right now. Minimally invasive, it could be one of the sources of new renewed interest in our industry.

Joshua Jennings -- Cowen & Company -- Analyst

Great. And then I was hoping to ask about or to hear more about the China -- potential China opportunity. I guess, it's just a three-tiered question. Sorry, for the layered question here. But I was wondering if you could just talk about the opportunity, one. Two, what's needed from a regulatory perspective in terms of getting into China? And do you need a distribution partner there? And lastly, could you be in China in 2020 -- sorry, that's four, actually. But I'll repeat them. Sorry about that. Again, one, just the opportunity; two, what's needed from a regulatory perspective, do you need a distribution partner? And can you be in China in 2020? Thank you. Thanks for taking the questions.

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Thank you. So China is one of the most promising breast implant markets worldwide. It is said that, there is over 100,000 women in China getting breast augmentation per year and at average selling prices that are higher than most of the world. So this, of course, creates a great opportunity for us. We have had a partner for quite some time now and with that partner, we are going through the regulatory hurdles with the Chinese FDA. We have a time line that brings us to market toward the end of 2020 or beginning of 2021. So we are working hard with our partners there to be able to make that time line. I think that once we are in the Chinese market, we may see it as an important source of revenue for Establishment Labs. So we are confident that we will be able to gain regulatory approval. But we will update you as we get closer to the exact quarter when we will be launching there.

Joshua Jennings -- Cowen & Company -- Analyst

Great. Thanks again.

Operator

Thank you. And our next question comes from Jacob Hughes with Wells Fargo. Your line is now open.

Jacob Hughes -- Wells Fargo Securities -- Analyst

Hi, good morning. Nice quarter. I just had a quick question on the bifurcation strategy. Do you expect the acceleration of the filing for the aesthetic cohorts after the bifurcation?

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

What we expect is that the bifurcation would allow us not to be over our time line with the aesthetic cohorts. So don't expect that should be a improvement in terms of the proposed time line that you've seen already. I think it is more a strategy to solidify our time line to market.

Jacob Hughes -- Wells Fargo Securities -- Analyst

Okay. And then secondly, on the cash balance and the subsequent drawn-down facility, I mean, can you comment on the cash burn rate and when do you expect that to fund you through?

Renee M. Gaeta -- Chief Financial Officer

Yeah. So at this time, of course, we're not going to provide guidance on cash flow, forward-looking information, but we're definitely comfortable with the cash on the balance sheet right now, and especially with the additional draw that we performed yesterday. We believe that, that puts our balance sheet in a healthy position, so that we can look forward over multiple quarters and not have a concern over cash burns.

Jacob Hughes -- Wells Fargo Securities -- Analyst

Okay. Thank you very much.

Operator

Thank you. [Operator Instructions] The next question comes from Chris Cooley with Stephens. Your line is now open.

Christopher Cooley -- Stephens Inc -- Analyst

Good morning and congratulations on the record quarter. If I may, maybe just Renee, following that last line of questions, could you maybe update us just in regards to capacity? Where you are today as you see these other opportunities ramping up? Help us think about where you are just from a capacity standpoint today and what type of growth your current working capital balance can also help you support, just as you build out that initial inventory going these additional markets. And I've got one quick follow-up.

Renee M. Gaeta -- Chief Financial Officer

Yeah. Chris, that's a great question, because definitely looking at cash burn and looking at the opportunity that we have in the marketplace right now, which is definitely sort of unprecedented. We're definitely focused on capturing market share and making sure that we've got inventory levels that are sufficient to support that, across the globe. So we've been hyper focused to inventory management, I think even prior to the announcements that started last November, and that we are very confident with our inventory capacity levels at this run rate and our ability to plan and forecast out in the future quarters.

Christopher Cooley -- Stephens Inc -- Analyst

I appreciate the additional color. And then, JJ, if I may, just one for you. Really impressed that you're able to increase pricing in this environment, in particular, in Brazil, realize a portion of that is going direct in some of those markets, but that's a price-sensitive area. Could you just talk a little bit more about how the Company's message is playing out in the end marketplace? And how those practices are able to, I guess, have a premium price in their local market to offset the rates in ASP? Or if that's an incorrect assumption, maybe just kind of help us think about the growth those practices are seeing that helps them absorb the increase in ASP relative to their peers. Thank you so much.

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Yeah. Thank you, Chris. I think, I mentioned this before, and it is the importance of our consistent messaging to plastic surgeons over -- since 2010. So over the last nine years, we've been telling plastic surgeons of the importance of safety in our industry. And many of them, when they are now coming to us, saying, you are now our trusted partner, one of those things they understand is that our prices are higher than most of our competitors. So they understand that all the innovation that we have done, all the work that we have done to communicate that innovation to women has value. And many of them agree with that value being fair. So in markets like Brazil, where you have a certain degree of price sensitivity, still, women understand that safety is a very important factor in breast aesthetics and reconstruction. So they are making their choices also understanding that. Of course, we want to gain market share, we want to be thoughtful about how we do our pricing. But I would say that more than a selected price increase, what you are seeing is that, as we continue to grow in direct markets, our total average selling prices remain very healthy.

Christopher Cooley -- Stephens Inc -- Analyst

Understood. Congratulations again on the great quarter.

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Thank you, Chris.

Operator

Thank you. And this is all the time we have for questions today. I will now turn the call back over to Juan Jose Chacon-Quiros for any closing remarks.

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Thank you, everyone, for joining us on today's earning call. We look forward to providing you our next quarterly update in November. We wish you a very good day.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Jeremy Feffer -- Managing Director

Juan Jose Chacon-Quiros -- Chief Executive Officer & Founder

Renee M. Gaeta -- Chief Financial Officer

Raj Denhoy -- Jefferies -- Analyst

Joshua Jennings -- Cowen & Company -- Analyst

Jacob Hughes -- Wells Fargo Securities -- Analyst

Christopher Cooley -- Stephens Inc -- Analyst

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