tags: - potential/short - analyst/hindenberg ...

(NASDAQ:ESTA)

• Founded in 2004, Establishment Labs manufactures and sells breast implants that it claims are vastly safer than competitors due to its "revolutionary technology" backed by "rigorous science" and "clinical data".
• Echoing the narrative of innovative companies like Apple, Amazon, HP and others, Establishment CEO Juan José Chacón-Quirós has touted that he developed his implant prototypes with a modified pizza oven in his garage.
• Establishment has incurred losses every year as a public company, accumulating a $249.4 million deficit. Recent losses have accelerated; in Q2 2022 it lost $37.1 million, compared to a loss of $5.3 million in Q2 of the previous year.
• With only $91.3 million in cash and ~$145.5 million in debt at a 9% interest rate and burning about $14.2 million in free cash flow per quarter, Establishment will continue to require capital to fuel its operations.
• Nonetheless, investors have awarded a nosebleed ~9.5x sales multiple for Establishment. Investors anticipate the company will receive quick FDA approval in mid to late 2023 and dominate the world's largest augmentation market, the United States, with its product’s superior safety record. Its closest publicly traded peer Sientra trades for 0.5x sales.
• The advisor Establishment just hired to support its U.S. launch was sued by the SEC in 2018 for fraudulently lying and then destroying records that concealed regulatory and safety issues with breast implants. He is currently in the midst of a 5-year ban from serving as an officer or director of any public company.
• Despite claims of superior safety, we found that almost all key safety studies touted by the company have conflicts of interest, with many undisclosed or under-disclosed.
• Australian and French authorities expressed concerns with the company's data, with Australian regulators calling the company's main safety data "observational uncontrolled studies".
• The lead surgeon on what Australian authorities believed to be the company's only unconflicted paper told us he stopped using Establishment's implants because of mobility issues, such as displacement and rotation. He told us he received pushback from Establishment for publishing evidence showing complication rates higher than reported by the company.
• Plastic surgeons from Italy and Argentina wrote a letter-to-the-editor of the Aesthetic Surgery Journal, published in 2019, questioning the "expert consensus" recommendation of Motiva implants that was touted by the company. The doctors described the data as a "survey" that was gathered in part using an “electronically delivered questionnaire via Survey Monkey”.
• Dozens of patient testimonials and multiple lawsuits stand at stark odds with Establishment's claims of safety and satisfaction. One complained of a rupture, prompting an emergency surgery. Another said her husband needs to stop during sex to rotate her implants back into place.
• Establishment’s Founder & CEO was previously a key distributor of Poly Implant Prothèse (PIP). In 2000, the FDA seized and banned PIP saline implants over massive manufacturing and safety risks. Following this, the company controlled by Establishment’s CEO marketed and sold PIP’s silicone implants across Latin America anyway. They were eventually recalled after up to 400,000 women received faulty implants, with the founder of PIP sentenced to 4 years in prison.
• Establishment claims to have pioneered innovations like its “Qid” chip technology, a scannable RFID chip embedded inside its implants used by doctors to obtain serial numbers and other basic information about the implant.
• The RFID chips were originally intended for pets. Establishment bought the technology from a company that reportedly “improperly marketed its implanted microchip for medical uses” before failing after cancer concerns about the chip were revealed by the media.
• Another of Establishment’s “innovations”, its SmoothSilk/Nano-Surface technology, was touted as producing positive clinical safety outcomes and inducing a lower-level immune response. 15 of 24 authors of its key safety study had ties to Establishment and 12 of those 15 had financial ties.
• The FDA, which holds the keys to the company's expansion plans in the U.S., presented an existential risk to the industry a month ago, issuing a new warning on ALL implants in response to women who have been getting mysteriously sick after augmentations. The FDA noted an “emerging issue” of cancers and lymphomas linked to all brands, textures and types of implants, signaling an industry crackdown.
• Establishment claims to have successfully piloted a "revolutionary" technique to place implants through the armpit using local anesthesia (instead of general), claiming the technique will greatly expand its Total Addressable Market (TAM). This type of insertion has been reported since the 1970s and has been widely available for almost 20 years. It has failed to gain traction due to safety risks.
• Beyond undisclosed safety questions, we have also identified financial risks. Import/export records show that Establishment ships product to entities formerly owned by the CEO and his family, raising questions of conflicts of interest.
• Establishment is currently priced as if dominating the U.S. market is a sure thing, largely over its claims of superior safety. We expect the company’s U.S. launch will flop and its stock will see 90%+ long-term downside given the significant safety risks and its stretched balance sheet.

Initial Disclosure: After extensive research, we have taken a short position in shares of Establishment Labs Holdings Inc. (NASDAQ:ESTA). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report

Read The Full Report Here