Okay, we're gonna keep it moving with our next fireside chat here. We have Establishment Labs Holdings with company representative, Raj Denhoy, the CFO. Thank you, Raj, for being here today.
Yeah.
We appreciate it.
Thank you. Thanks for the invitation.
Absolutely. Before we get started, I think there's probably some investors who are maybe less familiar with the story in the audience. So maybe a good place to start would be a high-level overview of the business, how your device is differentiated in the market, and some of the longer term growth opportunities and your strategic priorities.
Sure, happy to. So Establishment Labs is the leading global company in breast aesthetics and reconstruction. We have a portfolio of implants and associated technologies and techniques that we have brought to market that offer, frankly, safer and better outcomes for, for women. We sell our products in 85 countries around the world. We've been on the market for about 13 years. Over 3 million devices we've brought to market now. We just received approval last week for China, so that's the second largest market in the world, and we are doing the work to get approval in the United States, and we expect that to happen very soon. We continue to take share globally as we offer safer, better solutions for women. We expect that will continue, and the future's very bright for our company.
Absolutely. Could you speak to maybe the specific safety differences versus some of the competitors in the, in the U.S. market, maybe for most of our U.S. investors?
So with breast implants, the two major complications that you see with these devices are what's called capsular contracture and then rupture. And capsular contracture is any time you put an implant, a foreign body, into the human body, it's gonna encapsulate it, it's gonna wall it off. The rates of capsular contracture with our implants are less than 1%, and we've shown that in a number of global registries, that we've verified that in our U.S. FDA study. That compares to rates of capsular contracture with competitive devices, which are 10 times that. So really an order of magnitude better with our devices than relative to anything else. In terms of rupture, as I mentioned, we've been on the market for 13 years now globally. We have rupture rates that are well less than 1%.
It's almost insignificant relative to our devices. And that compares to some of the competitive devices, which have been shown to have rupture rates at 10 years, which can be as high as 24%. And so we think with the technologies behind our devices, we've really solved some of the major complications and drawbacks with these devices.
Okay. That's great context and clearly been a significant driver for some growth. The next opportunities are some of these new markets, with the most recent one being China, which you received approval for last week, so maybe we could start there. How are you thinking about the market opportunity for ESTA? What does that market look like, maybe compared to some of your other markets? And could you also speak to that approval process? There were some questions around the timing with, you know, the relationship with earnings and those sort of things. So maybe you could speak to some of those details.
Yeah. So as I mentioned, China's the second largest market globally for breast augmentation. Roughly 100,000 procedures a year and growing. Certainly, there's a recovery coming out of the pandemic still taking place in China, but it is the largest and most dynamic market for breast implants currently globally. Our devices are the leading implants in most of the surrounding Asian countries in Asia. So places like South Korea, Japan, Taiwan, we have north of 50% market share. So we're a very well-known brand in the region. And frankly, a lot of Chinese surgeons will travel outside of China and have used our products in some of these surrounding countries. And so there's a high level of awareness of our implants in the country currently.
So we are using a distributor in that market. It's the same distributor who sells our products in Korea, so that entity has quite a bit of experience in how to sell these products into Asian markets. As I noted, South Korea, we have well north of 50% market share. You know, the Chinese market is unique in that it's a very digitally savvy market, as some of the other Asian markets are, and so we have the ability to appeal directly to consumers in that market, which we will do so, as we have done in other areas. As I mentioned, it's also a very we're a known entity there.
So I would offer that, you know, our prospects in China are quite good, and we have high hopes for taking quite a bit of market share there.
Okay.
You asked a question also on the approval process. You know, on our third quarter call, which was a couple weeks ago now, we did take China out of our fourth quarter guidance, simply that we didn't have approval at the time of the third quarter call. As you noted, we received approval just the next day. We have not yet updated guidance for whether we'd include China into the fourth quarter or not, but at this point, you know, we're happy to have the approval and planning to commercialize there aggressively in 2024.
Okay. And you mentioned the distributor in China is the same distributor that you use in South Korea. With that, are there any additional investments that need to be made ahead of launching in China, besides the typical inventory and working capital?
No. I mean, frankly, that's the benefit of using a distributor, right? Is that, you know, we will manufacture product now that we have the approval, and we will sell it to that distributor, who will then distribute it for us in China. You know, as I mentioned earlier, I think one of the really unique aspects of that market, as well as the ability of that distributor to utilize digital channels to, you know, to really employ all of the tools to be successful in the market, has already been proven for us in Korea. You know, if you go to the train stations in Korea, even billboards on the main thoroughfares in Seoul, you'll see ads for Motiva, for the brand of our implants.
You can replicate some of those same activities in China, right? And so it's incumbent upon the distributor to do all of that work, but, you know, that distributor has a lot of experience in targeting markets like this.
... Okay, and you mentioned Motiva is well above 50% of the South Korean market. Could you talk about the timeline for getting there? This distributor, as you mentioned, has experience clearly. Could we expect a similar timeline or a potentially even shorter timeline for 50% plus of China's market?
You know, we haven't endorsed that, but realistically, given as everything I described about the understanding of our implants in that market, you know, really, it's the first implant approved in the Chinese market for more than a decade. You know, given all the tools and techniques that that distributor has, has proven, in other markets, we have, you know, we have high hopes for what they can do there. In Korea, they went from 0% to, to the majority share in that market in less than three years. And so something like that in China is certainly possible.
Okay. Can that distributor move any of the South Korean product to China immediately, or, or is that all new product that y'all have to, to build out?
It is all new product, so it has to be manufactured for the Chinese market. It has to have a manufacture date after the approval date that we received, and so, it is all product that we will have to bring out of production.
Okay. And then, as it relates to ASPs, I think, China's a higher ASP market, but it's also a distributor market. So how should we think about those two dynamics, as it relates to, the gross margin impact?
Sure. So China will be, amongst, if not our highest distributor ASP country in the world. You know, as you mentioned, we sell both in distributor and direct markets. You know, typically, our distributor markets will realize, you know, close to half of what the end market pricing is. China will be a similar market. But even with that dynamic, you know, given how high the ASPs are in China, the prices that we receive, even though it's a distributor market, will rival some of the direct market pricing we receive in other areas. So it is a very attractive market from a price standpoint for us.
Okay. Okay, and you touched on a little bit about the consumer preferences there, and they're attuned to the digital marketing, those types of things. But could you maybe go a little bit deeper on some of the similarities or differences in the Chinese demographics with some of the surrounding areas? How we should think about surgeon preference between smooth and textured, some of those details?
I think the way to think about it is that, you know, Motiva Implants are frankly the best implants on the market, right? We have the best technology, the most recent technology, the SmoothSilk surface on the implants being the most biocompatible surface available on the market. There's no reason why Chinese consumers, much like consumers in every other market, are not gonna be attracted to that end of the market, right?
Yeah.
There is a certain segment, a luxury segment of the market, to which these products will have quite a bit of appeal. We think it's actually gonna be quite a bit below that, but those will be the initial customers, consumers that we go after. So I think, again, think about the Chinese consumer, much like any other, in that they're going to be looking for the best, the safest, technologies and products available on the market, and that's what we're bringing.
Okay. Okay. Maybe before shifting gears, I'll just pause and see if there's any questions from the attendees here. Okay, perfect. We'll keep it rolling. The next significant market opportunity is the U.S. , of course, and you mentioned China's the largest market. I believe that's on a procedure basis, and the U.S. may be on a dollar basis. Could you clarify that point, and then also maybe provide an update on that approval timeline, how you're thinking about it?
The U.S. is the largest, both from procedures and dollar standpoint. You know, it has the most procedures globally, and the highest ASPs in the world, so the U.S. is the biggest market. China is second, you know, again, very high ASPs, smaller number of procedures, but also probably the fastest-growing market in the world. In terms of the United States, you know, we have completed the three-year follow-up on our U.S. aesthetic cohort for our trial. We have submitted all of that to the FDA, and it is under review. We submitted the PMA earlier this year in late February, and it's been under review since then. As we've commented, the interactions with the agency have been very positive. We continue to make progress.
We've answered all the questions that the FDA has provided to us. They will continue to ask questions, and we will continue to answer them. The next big step is for them to schedule an inspection of our facility in Costa Rica, our manufacturing facility, and so we're awaiting that. Once we have crossed that, then it is just a question of how long it takes to get approval. And so we haven't given a firm timeline on when we expect that, simply because it's a little bit outside of our control, but we remain very optimistic that our products will be approved sooner rather than later.
Okay, okay. I believe you noted in your most recent earnings a new hire ahead of launching in the U.S. Could you speak to maybe what she brings to the table and any additional investments, how you're thinking about the commercialization following approval in the U.S.?
Yeah, so we recently hired Elizabeth Newman. Liz Newman, who is heading our U.S. business, 30-year veteran in medical devices, has worked at companies like Align and Solta and a number of aesthetic companies and brands over the years. So Liz is really in the final stages of building out our strategy for the U.S. , building out our commercial teams, our logistics teams, our infrastructure, operations, all of that. You know, when one thinks about the U.S. , for us, it's a direct market. So you think about all the infrastructure one needs for a direct market.
You know, things again, like logistics, distribution, the ability to onboard customers, to invoice, all of that activity needs to be prepared for, and we are well in the way of doing that, well along the way of doing that. We've been investing in that for the better part of this year already. And that will continue into next year as we get closer to approval... The other piece of it beyond the foundational piece is the commercial piece, and that's the last piece that you add, right? So as you get closer to actually bringing these products to market and being able to engage with customers, is when we will start to ramp up those activities. And so again, we're still a little bit away from approval, but we are already working on all of those activities.
Yeah. Okay, okay. Maybe shifting gears, another exciting opportunity as we see it at least is the minimally invasive system, Motiva Mia. Could you speak to that launch? It recently was commercialized in Europe as well as Japan. Could you talk about that commercialization and how those markets differ? It seems like Europe's gotten off to a hotter start and Japan may be a little bit slower. Could you speak to some of those differences and why that is?
Yeah. So just to ground everybody in what Mia Femtech is. So it is the ability to do a breast augmentation procedure in less than 15 minutes without the need for general anesthesia and with no scars. So it is a truly minimally invasive way of offering a breast aesthetics procedure. We have chosen to commercialize this in a way that establishes it as a separate, wholly new category within breast aesthetics. So really appealing to women who maybe have shown some dissatisfaction with the shape or size of their breasts, but are unwilling to consider current options for breast augmentation. And so we have engaged with a small, select number of clinics globally, so in places like Japan, a number of countries in Europe, and we have undertaken a significant amount of direct-to-consumer activity.
So events, you know, direct-to-consumer kinds of marketing activities, to create the awareness, the interest in this procedure among, again, those women who might be interested in breast aesthetics, but simply were not willing to entertain it, given the current options. And so we have seen quite a bit of interest, right? The number of leads that we're generating, the number of consultations that those are leading to, and then ultimately, the number of procedures continues to grow for us month-over-month. And so thus far, we have been very excited about how this is building, and has really matched what we thought it could be. As you mentioned, so we have launched in Japan and a number of countries in Europe. Japan is different in that you cannot market directly to consumers.
So a lot of what happens there is through the clinic partners that we have and through word of mouth, but we are seeing that grow over time in Japan, and that continues to build. Europe, where we can do more direct-to-consumer activities, right? We are seeing the demand increase, perhaps a bit more quickly there. But I will tell you, in both markets, everything that we believed about this technology and its ability to bring new consumers into this and to really provide an amazing outcomes has proven true, and we remain as excited as we've ever been.
Okay. And you mentioned you're building a new category, really, with this system. Could you speak to how you're building that new category with physician investment and also those physician economics; they're significantly higher. Could you maybe speak to some of those and how it differs in some of the countries that you've launched in?
Sure. So when one thinks about, you know, what Mia, the value proposition of Mia, right? So it, it offers, quite a bit to the, to the consumer, to the woman who chooses this, right? So again, think about no anesthesia, quick recovery, a more natural, aesthetic result. You know, that has appealed to a certain segment of women that, again, previously might not have considered doing this, right? And so all of that, in the, in the willingness to pay work that we've done, suggests that women are willing to pay a, a premium for Mia. And again, thus far, we have seen that in what, in what we've realized commercially. When one thinks about the next step on that to the, to the surgeon, to the clinician offering Mia, for them, it's a faster procedure.
They're getting new patients into their clinic that previously wouldn't have come in, and so there's value that's created at that step as well. And that additional value then translates into our ability to charge more for the product to the channel. And so what we realize for Mia is 2-3 times the value that we receive for a standard pair of implants that we sell into the marketplace. And so thus far, again, the value at every step along the chain has been proven, and we continue to ramp that product. And it's still small, it's still early, we're still learning. But again, thus far, I tell you that the flywheel of what supports that growth long term, right? So we start to create awareness.
Women receive the procedure, they have a great outcome, they tell other people about it, and you just start to see it building. You know, that is what's taking place.
Okay. And in this early stage of commercialization, are you specifically targeting the physicians who already have this sort of elevated experience built into their practice, or is there some level of investment that goes along with building out that experience?
So the clinic partners that we're working with are those that, again, offer a premium experience to their, to their patients. They have clinics that are, you know, of that sort of status, right? And they also do have to essentially invest in this, right? This becomes a separate, offering within those clinics. And if you look at some of the, the pictures we've posted, and you can look at some of the... We have a site locator on the website now for Mia Femtech. You can see some of the sites. These are, these are really amazing, beautiful clinics. You know, women that select to do this are, are, expecting a, a premium experience, and so the clinics need to provide that to them.
We offer help in terms of setting up their clinics, you know, different types of materials in terms of marketing and other kind of customer-facing products and technologies that help them build out their clinics to provide that experience. But for the most part, it's upon the clinic to build that. But I would offer that we're selecting clinics that have that same mindset, right?
Yeah.
Thus far, again, it's proven everything we thought it could be.
Okay. There's another program that y'all talk about, the JOY P rogram. Could you maybe level set what that program really consists of? And then, how does that differentiate your business and the Motiva brand, and how have you rolled that out in various geographies?
Sure. So we offer basically three implants within our core family of implants, and then we also have Mia, which is this minimally invasive technology we've been talking about. We have Round, Ergonomix, and now Ergonomix2. Every step along the way, you have the same safety features, the same very biocompatible surface, the construction of the implants, all of the safety features. There is no sacrifice if one chooses to stay with the Round implants. When you step up to Ergonomix, you get this concept of ergonomics, where the implant is more natural. It moves along with the woman. It's a soft implant. And then when you step to Ergonomix2, it improves upon that.
It's the softest, most natural-feeling implant that we sell, but it also has a program called the Women's Choice Program. So if a woman selects Ergonomix2 in the JOY Program, they get, again, those implants, but also, what Women's Choice gives you is that if for any reason within the first two years, the woman decides that she does not want the implants, perhaps, you know, they made a mistake in their selection, or they just decided it wasn't for them, we will pay a fee to the surgeon to have those implants removed. And so it's really a peace of mind aspect to that that Ergonomix2 JOY platform, and it's really unlike anything else anyone has ever done in this industry.
And then when you step up from Ergonomix2 to Mia, you get all the benefits in terms of minimally invasive and no anesthesia and everything we've talked about. But JOY, as we mentioned in our most recent call, Ergonomix2 now is only available with JOY, so it's sold under the JOY kind of branding in the marketplace. It's now 10% of our implants are JOY at this point, so we are seeing increasing interest in that. And what we have found as a company is that when you offer choices, right? When you sort of allow women to decide where they wanna fall within that price and feature and benefit, they invariably will usually select higher.
And so as we bring these safer, better technologies to the marketplace, and we allow women to decide where they wanna be in that equation, invariably, we're seeing that people are trading up.
Okay. Clearly, some benefits to the patient there. How should we think about the, the impact to ESTA's, gross margins and, and the P&L? Is there an ASP, difference associated with that, or how should we think about some of the economics there?
Sure. So every step along the way, Round, Ergonomix, Ergonomix2, is typically a 30%-50% increase in price. For us, the cost of manufacturing those implants does not change very much. In Ergonomix2 implant or Round implant, there's a slight increase in the cost of manufacturing Ergonomix2, given some of the, you know, the composition of that implant, but it is not that much more. And so every step is a significant increase in our gross margins as well. And so I think it's an important point that if one thinks about things like Ergonomix2, Mia, the reconstruction launch with the Flora tissue expander, and even these geographies like the United States, China, all of these are gross margin accretive endeavors for us-
Yeah.
because the cost of making an implant for us in Costa Rica does not change that much.
Yeah. Okay, and you mentioned my next question, the Flora tissue expander. Could you speak to the tissue expansion market, maybe give some background to help some of the investors who aren't as familiar with the story?
Sure.
Yeah.
When one thinks about the breast implant industry, there's really kind of two major segments to it, right? There's the purely aesthetic or augmentation side of the market, and then there is the post-mastectomy, post-cancer reconstruction market. Globally, it's about three-quarters is the augmentation and one quarter is reconstruction. Although reconstruction is growing probably faster than augmentation, unfortunately, given the rates of cancer. You know, one in eight women will have breast cancer in her lifetime. The...
You know, within breast reconstruction, there is, there is, what's called a two-stage breast reconstruction, where post the mastectomy, where the breast tissue is removed, oftentimes there isn't enough tissue to do a proper reconstruction, and so the surgeon will use what's called a tissue expander, which is essentially a deflated breast implant that is serially inflated over a period of weeks to create a pocket into which to put a permanent implant. And so Flora is our offering in the breast, excuse me, the breast tissue expander market. And so Flora has been available outside of the United States for a couple of years now, and we continue to see very good progress with it. And now we have just received approval for Flora in the United States. And the breast reconstruction market in the United States is the biggest by far, globally.
Flora has some really unique advantages that make us very optimistic about our prospects there. Flora includes our SmoothSilk surface, again, that biocompatible surface. It is also entirely magnet-free, so every other tissue expander available has a magnet in it, which allows. That's how one finds the port to inflate the tissue expander. Ours does not have any magnets. If there is a magnet, it can interfere with MRI imaging, it can interfere with radiation oncology treatment. Ours, again, does not have any of those limitations. And so we've seen quite a bit of interest amongst sites in the United States to bring it in.
We're even getting some inbound inquiries from some of the largest cancer centers in the United States to ask when they can receive this, "How do we get this?" And so Flora is an exciting product for us. And again, we have talked about generating revenue in 2024 in the United States with that product, and we expect it's gonna continue to grow nicely over time.
Okay, and I wanna touch on that revenue point, but before we get there, you mentioned it was just recently approved. Could you talk about the approval process for Flora? And really, as we think about the timeline and the ultimate approval for the Motiva brand broadly in the U.S., could you compare and contrast those two processes?
... Sure. So it was a monumental day for us as a company. It was the first of our products approved in the United States. It was a 510(k) clearance, which is different than a PMA approval, right? So the threshold is lower, but it was still our first product that was allowed to be sold into the U.S. market. Flora shares a lot of the same technologies as our core implants. So the same surface, this RFID technology, which we use for port location as opposed to magnets, is very similar. The products are manufactured in the same facilities, and so the FDA's comfort with those technologies, I think, speaks to how they will view the implant approval.
And so again, they are separate processes, so I don't want to imply that there's a lot of that one can look deeply into that. But the fact that the FDA, again, has shown willingness to approve our technologies into the U.S. market is what we view it as a good marker for what we should expect for the ultimate approval here for the implants.
Yeah. Yeah, and then, getting back to that revenue comment, how should we think about the cadence for that throughout 2024?
We haven't given any guidance yet for 2024, but if you think about the tissue expander market in the United States, it's approximately $150-$180 million market in the U.S. . As I mentioned, there are some very unique features of Flora. The fact that it's MRI compatible, it has no magnets, the very biocompatible surface of it. We're getting a lot of interest, and so, you know, stay tuned in terms of guidance, but we do expect it's going to be a contributor for us here in 2024.
Okay. Maybe shifting to the financials a little bit more. You talked about some of these growth opportunities. We've talked a lot about China and the U.S. as well, and then the gross margin impact. How should we think about the incremental gross margins as we start to see some of these launches in China and the U.S., as well as acceleration growth from Mia from JOY? How should we think about the gross margin expansion throughout 2024 and towards your longer-term $500 million target in 2026?
Sure. You know, if one thinks about all the things we've been talking about, right? Mia, Flora, the geographic markets of the United States and China, Ergonomix2, and the JOY platform, all of these are gross margin accretive to where we currently are as a company. And yet the cost of manufacturing implants and technologies for into each of those is not that different. And so we expect there's going to be a natural tailwind to our gross margin over the next, several years. And so you mentioned that $500 million target in 2026 that we have recently re-endorsed. We expect significant gross margin, expansion over that time frame.
Okay. Okay. On the expense line, you recently said you're reducing personnel costs by about 20%. Could you speak to the specific areas in the business where those costs are coming out of?
Sure. So as you mentioned on the third quarter call, we did lower guidance for the fourth quarter, as we're seeing a little bit of softer demand right now in our end markets. That's being exacerbated a bit by our distributors also seeing that softness, not ordering from us. We do expect that this will prove transitory and that purchases from our distributors, as well as the end markets, will improve over time. But as we prepare for the uncertainty around that, we've taken some steps to reduce our internal cost structure. We had built a business this year that we thought would be north of $200 million. Our guidance now is roughly $165 million, and so some of the activities that we've undertaken have really been to rightsize the organization for the demand that we're seeing.
And so the reduction has been really across the board, but it has been primarily initially in manufacturing. So as we look at the demand we're seeing, we had been running the facility essentially 24 hours a day. We'd been running three shifts as we'd been building inventory and product for, you know, the demand that we have been seeing. And as it has now kind of ebbed a little bit, we have taken that manufacturing offline. And so a number of those reductions that you've seen in headcount have been on the manufacturing side. But we've also made reductions across the organization, so even in finance, for instance, my department, we've seen some headcount reduction, you know, marketing, selling, regulatory, really across the board.
Again, part of this is just preparing for the uncertainty that we're currently experiencing. As we've also mentioned, though, that we continue to prioritize investments in our growth initiatives, which are the United States and China, Mia. We won't underfund these businesses, but we're really trying to leverage the other parts of the business as we're in this period of a little bit softer demand.
Yeah, and you mentioned the distributor dynamics, and I appreciate you reminding me of a question I had planned on asking. But could you talk about those dynamics specifically... in the third quarter and really compare and contrast some of the geographic growth or lack thereof in the quarter from distributor reluctance to purchase versus what the underlying demand really looks like?
Sure, and just to ground everybody, so again, we sell through two channels, right? Direct and distributor channels. We're direct in most of the major countries in Europe and then Brazil and Argentina. Everywhere else in the world, we sell through distributors. You know, historically, our revenue has been about 50%-60%, recently even above 60%, through the distributor channel. As we were moving out of COVID in 2022, we, like a lot of companies around the world, simply couldn't supply all of the product that our distributors were asking from us. And so as our supply chain sort of normalized and we were able to produce more, our distributors took on inventory, right? And they started to build inventory in the first part of 2022 to really get back to more normalized levels.
As we moved through the third quarter and we started to see this slowdown developing in the market, our distributors, I think responding again to also seeing a little bit of softness in their demand, stopped ordering from us for a period of time. So our distributor orders in the third quarter, and what we are seeing in the fourth quarter, are quite a bit lower than what we are seeing in our direct markets. That can only continue for a period of time. You know, distributors only have a certain amount of inventory. As they work through that, they will invariably come back and order from us, that's what we've seen in other times.
So the question is, you know, more a question of when as opposed to if, and so right now we're managing through this, but we do expect our distributors will get to a point in their inventory levels where they need to start to replenish.
Could you speak to the distribution of that inventory, the maybe bell curve that they have of the number of, you know, implants that are most frequently-
Sure
... asked for versus, maybe towards the tails of that bell curve? And really trying to get at the heart of how much inventory those distributors have on hand, if the market continues to be weak. How should we think about the timing for ordering?
Yeah. So most of our distributors carry 6-8 months of inventory. Some more, some less, you know, really a lot of it depends on the size of the market in which they're serving. So when one thinks about how inventory is distributed, right? If you're in a large market, Mexico, Colombia, you know, you might have inventory sitting at a lot of different sites in country. Even in some cases, it's sitting at the customer level. And so you need to have more inventory to service that, to service your customers. Within that inventory, there are certain what we call high runners, right? So the more commonly used sizes and shapes of implants, those are the ones that the distributors are gonna run out of, most frequently, right? Or soonest.
And as you described, really, it's a bell-shaped curve. They might have the large sizes, smaller sizes, different shapes that are more infrequently used on hand, but it's really that middle-of-the-road, steep middle part of the bell curve, where those implants will get used soonest. And as that inventory starts to become too a level where they can no longer supply those to their customers, these distributors invariably will come back. You know, the worst thing for a distributor is not being able to supply your customer, as it is for any business, right?
Yeah.
and so the question is, you know, when they get there, but given, you know, the markets are not, the end market demand is not, as soft as the orders we are seeing from the distributors. So at some point, that will equilibrate, right? And whether that's in the first quarter, or second, but at some point in 2024, we're gonna see that start to match up again.
Okay. And with that macro softness, globally, really, should we think about patients, sort of downshifting from the Ergonomix implant to a Round implant, or is it more, just postponing a procedure?
You know, for us, it's more postponement than-
Okay
... any sort of, you know, a negative mix. You know, there's a number of factors at play. I mean, certainly coming out of COVID, there may have been some pull forward, you know, as people were spending a bit more freely. Certainly the geopolitical challenges right now represent a hurdle, and certainly macroeconomic challenges, right? With inflation and tighter credit, all those are likely playing through. But what we have found invariably in this market is that once women enter the consideration phase for breast augmentation, they more often than not go through with it. They may delay the procedure, they might think about it for a period of time, but once they've made the decision that this is something that they wanna do, they usually go through with it.
We've seen in various markets over time, you know, Venezuela, Brazil, the Ukraine, even recently, that we see periods of softness, but the markets come back. Even Ukraine, for instance, you know, we are not down that much relative to where we were, you know, pre the conflict there.
Wow.
And so again, we are in a period of a little bit of softness, but invariably, these markets have proven very resilient over time.
Okay. Okay, and as you mentioned, some of that softness is a reason for some of the cost reductions. How should we think about the timing of those cost reductions, though, flowing through the P&L?
Yeah. So we've, as I mentioned, we've taken some aggressive steps already here in the late third quarter into the fourth quarter. We continue to look at it very aggressively. As we look at 2024, we'll of course be very flexible and dynamic in terms of how we think about spending for next year, so that we can weather whatever demand equation that we see. I think it's important, though, to note that, you know, for us as a company, you know, the approval in China, the approval of Flora in the United States, the pending approval of our implants in the United States, we have a lot of very positive developments coming for us.
And so our ability to, you know, to, grow in this dynamic or to survive this dynamic is a lot different than a lot of our competitors, and so we feel like we're in a very good spot here. Certainly, there's some short-term challenges, and we're managing through them, but, we like our position.
Absolutely. And with this sort of resetting of the cost base, if that's the right way to think about it, on the other side of these macro-related headwinds, should we see a stronger operating leverage flow through the model? Or given all the commercial activities and the exciting launches you have ahead, will that cost base sort of pick back up a little bit?
Well, we, we've committed, and we announced—we mentioned this on the third quarter call, about getting to be EBITDA positive by the end of 2024-
Yeah
... and cash flow positive in 2025. Those targets are irrespective of what the top line does, right? So we will drive efficiency in this business, and you will see us get to cash flow positive in 2025.
Okay. And part of those, that cash flow piece, I think one reason for a little bit of an elevated cash burn in some recent quarters is related to working capital investment. Could you talk to what that investment was for? Is that in part, investing ahead of some of the commercial launches that are coming up, or how should we think about that? And then, on the other side of the third quarter, so going forward, should that inventory level sort of come back down? Should we see a positive benefit from working capital?
Yeah, absolutely. So, you know, as you mentioned, we were talking about earlier, but inventory, right? So again, coming out of COVID into 2022, we relied on inventory, and we have been building inventory. Part of it has been in anticipation of, you know, essentially freeing capacity for the U.S. and China, right? So we built inventory to allow us to, again, shift manufacturing to those two opportunities. And so the inventory at the end of the third quarter was a bit higher than where we needed it to be, given the demand that we're seeing. And so as I mentioned, one of the cost-reduction initiatives we've undertaken is to reduce manufacturing. So we've been running the facility 24 hours a day. We've taken one of the shifts completely offline.
You know, that manufacturing is getting right-sized, and so inventory will follow a similar trajectory. You know, essentially, we have what we need right now for a period of time. And so working capital will be something we look at very closely, along with what we're doing on the operating expenses side to allow us to bend our cash use down.
Okay, and could you just remind us where your current liquidity position is, inclusive of the two debt tranches that you'll have access to?
Yeah, so we ended the third quarter with $52 million in cash on the balance sheet. We've talked about cash use in the fourth quarter, excuse me, being about $15 million. And we expect it to continue to come down from there. We have access to an additional $50 million under our credit facility with Oaktree. There are some revenue and regulatory milestones needed to achieve those in 2024. However, I'd note that Oaktree is a great partner of ours, and we continue to discuss with them about flexibility in those, you know, in those tranches. And, you know, again, I'd come back to again, they're a good partner and we remain in discussions with them about accessing those tranches.
Yeah. Okay. And one of the specific regulatory hurdles with that tranche is U.S. approval, but is there room? It sounds like there might be potential room to negotiate that regulatory pathway, or how should we be thinking about that?
Yeah, absolutely. I come back to again, you know, they when they selected us as a lending partner, and we selected them, you know, a lot of this was about a partnership, right? And about understanding what we as a company are trying to accomplish. And I think if you look at all of the milestones that we've hit over the last year with, and everything we've been talking about, with Mia ramping, with the approval of Flora, with China now, the U.S. making progress, all of this is what, you know, Oaktree invested in our company for and what a lot of people invested in our company for, and we continue to make progress. You know, we've, we're in a little bit of a pocket of slower demand, but we expect, again, this to be transitory.
The competitive dynamic for us has not changed. We're still taking market share globally. You know, so, you know, the story is not that different. And so again, we will work through this with them. We'll find a solution, and we'll let you know, all of the good things that are on the table for us continue to be what people should focus on.
Okay, and I think we're almost out of time, so, maybe I'll close by just simply asking, you know, what do you want investors to most take away from this? Obviously, a lot of positive things that we've talked about. What gives you confidence that you can weather this storm?
Yeah, I come back to again, when one looks at the structure of this industry, right? That, and what we as a company have brought. There has not been innovation in this industry for literally 40 years, and we bring to market, you know, improvements really in every aspect of these technologies. And you've seen it play out in the marketplace. You know, we have dominant market shares in a number of countries in which we compete. We continue to take market share globally. And really, nothing has changed on that. If anything, it continues to improve in our favor, right? You look at some of the data we've released over the last 12 months, which really just reinforces, again, the benefits of our technology relative to anything else that's available.
We're poised to enter the two largest markets in the world with the United States and China, and then Mia, with the ability to bring new women into this category that, you know, previously just wouldn't consider something like breast augmentation, but you offer them a safer, different type of technology, bringing in a whole new group of consumers. It's a really unique opportunity, we think, to continue to not only take market share, to grow, but to grow these markets for a number of years to come. And so I think that that is really the core of the story here, right? And that's what we want people to focus on.
Okay, perfect. Well, I think that's a great way to end it. Thank you so much again, Raj, for being here, and thank you all for participating this afternoon or this morning.
Yeah. Thanks again. Thanks again. My pleasure.