Establishment Labs (NASDAQ:ESTA) stock is plunging lower today after short seller Hindenburg Research released a short report on the company. Establishment operates in the breast augmentation business, designing and developing silicone breast implants. The company claims that its implants are safer than competitors due to “clinical data” and “unique surface technology.” Its best-selling product is its Motiva implants, which have received authorization in Europe, Latin America and some parts of Asia.
However, Hindenburg points out that Establishment has lost money every year since becoming publicly traded, bringing total deficits to $249.4 million. During the second quarter, it lost $37.1 million. This is up from a $5.3 million loss in the prior-year period.
Meanwhile, Establishment’s need for cash isn’t going anywhere. The company currently has cash on hand of $91.3 million and total debt of about $145.5 million charged at a 9% interest rate.
Despite this, supporters believe that Establishment will receive U.S. Food and Drug Administration (FDA) approval for Motiva in mid-to-late 2023. As such, they have awarded ESTA stock a price-sales (P/S) multiple of 9.5 times. The U.S. boasts the world’s largest breast implant market; per the report, it accounted for an estimated 22.9% of global sales in 2020.
Hindenburg Releases Short Report on ESTA Stock
Despite the enthusiasm of supporters, the timeline for Establishment to receive FDA approval may take longer than expected. Hindenburg notes that FDA regulations concerning implants have gotten more strict over the years. This is due to patients getting implant illness and forms of cancer after operations.
Furthermore, Hani Zeini — the advisor Establishment hired last month to assist with its U.S. launch — was sued by the U.S. Securities and Exchange Commission (SEC) in 2018. The agency stated that Zeini concealed damaging information about Sientra (NASDAQ:SIEN), another breast augmentation company, before the company announced a $61 million stock offering. As a result, Zeini has been banned from serving as an officer or director of a company for five years.
Through research, Hindenburg concluded that “almost all” of the safety studies concerning Establishment’s products had conflicts of interest as well. The lead surgeon on Establishment’s “only unconflicted paper” even said he stopped using its products due to “displacement and rotation.” Plastic surgeons from Argentina and Italy have questioned Establishment’s “expert consensus” recommendations for Motiva as well. In the past, customers have issued negative reviews and “multiple lawsuits” concerning the implants.
Hindenburg has disclosed that it is short shares of ESTA stock.
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On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.