Four Bagging Fun Bags?: Establishment Labs Holdings $ESTA

I wasn’t planning on writing about a Costa Rican breast implant research lab, and yet, here we are. Healthcare is one of the worst performing sectors year to date; it’s due for some multi-year sector inflows, but I don’t want exposure to anything related to insurance providers as I strongly suspect Healthcare Reform is going to be on the President’s agenda after the midterms. Also, one of my former university students became an analyst at an investment bank, and he occasionally gets back to me with the answer to the best question to ask his fellow analysts, “if you weren’t prohibited from investing in the sector you cover, what’s the number one stock you would buy right now.” Well, there is a healthcare analyst out there who wishes he could invest in Establishment Labs Holdings (ESTA), but the compliance department won’t allow it.

Breast implants generally are not only part of the K-shaped economy thesis, but they are also part of the Ozempic revolution. Semaglutide costs have fallen from $1,000 a month to $150 for certain brands, and they are available in pill form for people who have an aversion to needles, which is a substantial proportion of the population (I’ve seen estimates as high as 50%). The average GLP-1 user is a female millenial, they lose around one cup size on average, although results vary significantly between users, and women tend to be quite fond of their breasts. Not to brag, but I knew a lot of chubby girls in college, and big breasts are fat chicks’ best friends, they were her best attribute when she was at her lowest, and she isn’t happy to find the twins looking “saggy”, or “deflated.” In the age of Ozempic, breast implants are less of a cosmetic enhancement, and more of a corrective surgery.

With secular tailwinds of the K-shaped economy and Ozempic, it’s time to look at Establishment Labs specifically. ESTA has pioneered their Motiva breast implant, has over 200 patents, and received FDA approval for augmentation in the US in September of 2024. Approval is still pending for use in reconstruction. The Motiva implant has a more natural feeling softer texture, which allows the surgery to be significantly less invasive, doesn’t require general anesthesia, leaves minimal scarring, the implant has a nano-textured surface which results in less inflammation post surgery, and changes shape dynamically to be round while lying down, and teardrop shape while upright.

I don’t really want to get too far into the weeds on the medical aspects, but the nano-textured surface reduces the rate at which scar tissue attaches to the implants. That scar tissue attachment makes implants hard, eventually misshapen, and eventually results in requiring surgery to remove the implant. Motiva’s incidence rate at 3 years is less than 1%, meanwhile, their best competitor currently is closer to 3.6%. Older technologies had rates as high as 8% after three years and 18.9% after ten years.

According to ESTA management, however, the value proposition which really resonates with the client is that Motiva doesn’t require general anesthesia; in the patients’ minds, that is the difference between breast implants being a major decision or a minor decision.

Marketing is a mix of social media driven, and cosmetic surgeon driven. Either influencers talk about their experiences with Motiva and provide a special offer code, or the cosmetic surgeons are given a junket to the state of the art breast implant research facility in Costa Rica, and go on to recommend Motiva to their clients. The enthusiasm of the surgeons toward Motiva have led to an increase in breast implant customers who were not considering breast implants before their plastic surgeon recommended it.

The US breast implant market is dominated by AbbVie, Johnson & Johnson, and Tiger Biosciences with 23%, 21%, and 14% market share respectively. North America has about 35% of the roughly $3 billion global breast implant market, estimated to be around $5 billion by 2030. Establishment Labs currently has about $229 million of trailing twelve month revenue, implying about 7% global market share, and the question remains how much market share they can take before being acquired by one of their larger competitors.

Looking forward, management expects continued revenue growth from the rollout of higher end options, and continued market share capture. One possible impending catalyst is a flip to GAAP Net Income profitability. And with the increase in Ozempic usage, there is a potential for the global breast implant market to grow more quickly than expected.

I didn’t catch ESTA at the bottom, the last insider buy was from the CEO in August of last year at around $35 a share. It currently trades closer to $70, and the company isn’t finished diluting to fund their innovation.

A $2 billion market capitalization for $229 million of trailing twelve month revenue isn’t my normal hunting grounds for value. But valuations are anchored by their sectors, and in healthcare, I am out of my circle of competence. The analyst who wishes they could buy ESTA believes it has room to be a four bagger, that would be a price target of somewhere around $280. That is based on pretty aggressive market share capture, but channel checks to plastic surgeons find that the doctors are raving about the product.

This isn’t my typical sort of company, and I wouldn’t feel comfortable having a large percentage of my portfolio here. I do want more exposure to Healthcare, and right now, my only positions are LFMD, AUNA, and AIDR.CN. Having already doubled in price since August, I wouldn’t be surprised if ESTA gives a buyable dip. With pending FDA approval for reconstruction (as opposed to augmentation), a negative news headline could send the stock price down. I would probably open a starter position, a tiny nibble, while waiting for a better entry, but aware of the possibility that a better entry might never come. I wouldn’t kick myself for missing out if the stock price runs away from me, because I don’t have the competence here to be aggressive. But I can still have a little fun.