Description

Establishment Labs (ESTA) has a very skewed set up heading into 2024.

This is a company that had in the past traded at a 10-14X revenue multiple but has gotten smashed along with everything else in the MedTech/aesthetic space this year as they reported a weak Q3 and lowered guidance. The stock has gone from the $70-80 range down to $20-$30. It trades for $23 a share today.

Long story short – this is an opportune time to get into what will be the dominant player in the breast augmentation market at a big discount and ride what should be a multi-year structural growth story.

We value ESTA at roughly $100 a share on a DCF basis.

What is ESTA?

They are a Costa Rican based company that manufacture and sell breast implants. They have the best-in-class implant in Motiva that is taking market share away from all the legacy incumbents.

What does it mean to have a best-in-class breast implant?

Ergonomics and actual aesthetics aside (which they can lay claim to winning on both) – it means that your implants don’t rupture or cause cancer. Motiva implants have a less than 1% rupture rate with no cases of breast implant-associated anaplastic large cell lympoma (BIA-ALCL) or breast implant-associated squamous cell carcinoma (BIA-SCC). Their competitors have rupture rates that can exceed 15%.

So, this is a step change function difference and as such ESTA has been able to became the dominant market share in countries where they have launched like Brazil and South Korea – the two leading aesthetic markets – despite charging much higher prices.

Breast implants have long been dominated by JNJ and ABBV – but this is a small portion of their overall revenue and these divisions have tended to be run by lawyer types as the strategy is to simply optimize for not getting sued rather than gain share or innovate. So, when ESTA enters a market; they end up taking most of it within 3 to 4 years.

The problem is that they have not entered the most important market of them all – the US. This is slated to happen sometime in Q1 or perhaps Q2 of 2024.

Where things got screwed up this year was that they didn’t manage their inventory well and so built it up as the global breast augmentation market headed into a sharp de-stocking – they sell much of their product to distributors in certain markets like Asia. They guided to weak Q4 as a result, and they generated a lot of cash burn in Q3 which got investors worried.

The two key questions that should concern investors are -

Can they conserve cash between now and US approval?

When will US approval occur?

On the first question, on calls with management, they seem very confident that they can get cash burn down to $15mm in Q4, which would go a long way towards assuaging cash burn concerns. That step down comes from simply burning off the inventory that they built in Q3.

They should also be able to restructure their lending facility with Oaktree to get access to an additional $25mm in debt over the next month. The latter could serve as a near-term catalyst for shares as investors get comfortable that their cash position is being appropriately managed.

On the US approval question, this one is tougher to gauge, but it is a question of when not if. The FDA recently approved their breast reconstruction product and this is the same manufacturing facility for both.

The reality is that this is a product that is significantly safer and better for consumers than what currently exists and ESTA has the longer-term data to prove that. They are in year 4 of their FDA study and that data so far has just confirmed what they have seen globally – given most ruptures occur fairly early in the life cycle of the placement there should be no general concerns there.

ESTA getting US approval and continuing to take market share in their existing markets is one leg of this story.

The other leg that is just beginning is MIA – their minimally invasive product. MIA is a 15-minute procedure with no need to be put under and it can increase a woman’s cup size by up to 2 cups. This is potentially a huge new TAM and they have started launching it in Japan and Europe through MIA exclusive clinics.  

This procedure could re-define how breast augmentation works for a large number of women. Just as easy as it is to put in – it is easy to take out. Making breast implants an accessory as simple as getting your ears pierced.

Our model just assumes a continued ramp in market penetration outside the US as ESTA gains entry into new markets and increases market share in older markets.

We do not give any credit to MIA, but that could provide much further upside from here.

Without MIA and just continued growth abroad and ramp of the US market, we get to $80 a share today against $23 a share.

Risks: 

The two key risks here would be that they somehow continue to screw up the cash situation and have to do a secondary. US is somehow delayed or takes much longer than anticipated.  If the former happens, the key shareholders would all be big buyers at this share price haven spoken to most of them. A delay in the US approval would delay the big ramp in revenue but they could simply just grew in their foreign markets and grew MIA if need be. 

I get that it looks optically expensive to some - but a lot of the work we did was getting confident that this would be the big winner in the breast augmentation space and that this is the best in class product. If you feel confident there then the rest of this are just details. 

Catalyst

- reduced cash burn in Q4 - see that in their results

- re-negogiate Oak Tree debt - hopefully sometime in the next few weeks

- US Approval - I'm putting the over under by end of Q1