Establishment Labs Holdings Inc. Q3 FY2023 Earnings Call

Good afternoon. Welcome to Establishment Labs' Third Quarter 2023 Earnings Call. At this time, all participants will be in a listen-only mode. At the end of this call, we will open the line for questions-and-answers session and instructions will follow at that time. As a reminder, today's call is being recorded. I will now turn the call over to Raj Denhoy, Chief Financial Officer. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us. With me today is Juan Jose Chacon Quiros, our Chief Executive Officer. Following our prepared remarks, we'll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs' financial outlook and the company's plans and timing for product development and sales. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. For a discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent annual and quarterly reports on Form 10-K and Form 10-Q, as well as other SEC filings, which are available on our website at establishmentlabs.com. Please also note that Establishment Labs received an investigational device exemption from the FDA for Motiva Implants and is undergoing a clinical trial to support regulatory approval in the United States. We continually seek to expand the geographies in which our products are regulatory approved. Please check with your local authority for specific product availability. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, November 7, 2023. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. With that, it is my pleasure to turn the call over to our CEO, Juan Jose.

Thank you, Raj, and good afternoon, everyone. Revenue in the third quarter of 2023 totaled $38.5 million, in line with the third quarter of 2022. Our results this quarter reflect lower demand for breast procedures globally. This lower demand developed over the quarter in our direct markets and was also reflected in orders we received from our distributors, and we expect this trend will persist in the fourth quarter. As such, we are lowering our full-year guidance to approximately $165 million, representing annual growth of 2% over 2022. I would note that while we still expect China approval by the end of this year, we have removed it from our guidance as we have less than two months remaining in this year. This is a meaningful portion of our reduction in guidance. However, even during this period, we continue to gain accounts around the world. This slowdown seems fairly broad across aesthetics and does not seem to be related to anything specific in the breast implant industry. While anecdotal, in international markets, both plastic surgeons and dermatologists report to us that they have seen a noticeable slowdown in their practices across all procedure types, both surgical and non-surgical. This is, of course, not the first for the aesthetics industry, and both precedents and our experience suggest that this will be transitory and relatively short-lived. That said, we are being very careful in this environment, and we have taken steps to ensure our business is spending in relation to the current demand among the steps we are taking are a reduction in global headcount and a reduction in operating expenses. We are also prioritizing our main growth initiatives, the United States, China, and Mia, as well as cautiously managing our global inventory levels. Even as we take these steps, we expect growth to resume in 2024, which includes doubling our total addressable market with our entry into the United States and China. Our access to capital is a significant advantage here and we are positioning ourselves to take advantage as demand inevitably returns to our industry. There has been worldwide dislocation in the competitive markets for breast implants, and this presents a sizable opportunity. It is also important to note that we continue to grow our market share. Our internal data shows that we continue to gain surgeon accounts in our markets, and our competitive positioning is strengthening. We are taking market share globally and this should continue through the remainder of 2023 and into 2024. We are raising the standard of what women and surgeons should expect from the technologies they choose, and we are distancing ourselves from the remaining players in this industry. Our pipeline of new products and new geographic markets will help fuel our momentum, and we have a very solid foundation on which to build for 2024 and beyond. Raj will provide additional details on our third quarter performance and our outlook in a moment. But I would like to highlight that we expect to be EBITDA-positive by the end of 2024 and cash-flow positive in 2025. These are corporate goals that reflect throughout our business planning and are of the utmost priority. On October 15th, we announced that the U.S. FDA granted 510(k) clearance for the Motiva Flora SmoothSilk Tissue Expander. This was a major milestone for the company as it is our first implantable approved for the United States. Flora offers several proprietary and unique innovations, including Establishment Labs' patented SmoothSilk surface technology. SmoothSilk was the subject of the landmark paper published in Nature Biomedical Engineering by MIT scientist Bob Langer, in which the surface was shown to be the most biocompatible compared to other implantable surfaces. Flora also includes an RFID-enabled non-magnetic port and is labeled as MRI conditional by the FDA. By being magnet-free, Flora avoids the interference that magnets cause during MR imaging and can improve the precision of radiation oncology treatment. This is a distinct advantage for Flora as all other commercially available breast tissue expanders include magnets. In the FDA's letter of the Flora approval, the agency noted, this is an innovative technology not available in other tissue expanders on the market. Flora has been available outside the U.S. since 2021 and we are gaining traction with the device. There have been several notable independent publications highlighting improved patient comfort with Flora compared to other devices and improved imaging and radiation treatment outcomes. Despite one in eight women developing breast cancer, tissue expanders have seen little innovation in decades. With Flora, we are providing surgeons and the women who receive these devices a better option. We are extremely proud to be able to offer Flora to women in the United States. We began to introduce Flora to plastic surgeons in the United States at the Annual Meeting of the American Society of Plastic Surgeons in Austin at the end of October, and the reception was highly encouraging. Leading plastic surgeons at some of the top institutions in America have indicated that they will begin to adopt Flora as their expander of choice. In October, we held our eighth world symposium on Ergonomix Implants in Lisbon, Portugal. Among the highlights was a presentation of two-year results from the Mia Feasibility Clinical Study. The Mia study is an IRB-approved prospective study that enrolled the first 100 subjects between December 2020 and April 2021. In the preliminary two-year Kaplan-Meier analysis of key events, there were no reports of capsule contracture and no ruptures. A sub-study of 33 subjects, who underwent an MRI at 18 months, also showed no ruptures. There were no reports of bleeding, hematoma, or seroma requiring intervention in the study. These are among the best results shown at two years for any breast implant technology and add further support that Mia Femtech is an entirely new category within breast aesthetics. With Mia, a plastic surgeon can shape the breast in a 15-minute, minimally invasive procedure without the need for general anesthesia. The result is natural and discrete, with a one-to-two cup proportionate result. The procedure requires minimal downtime with women returning to most activities the same day. By providing a solution that overcomes many of the obstacles of traditional breast augmentation, we are opening up a whole new group of women to breast aesthetics. Our list of countries where Mia is available continues to grow. We have partner sites in Spain, Switzerland, Sweden, Germany, France, Costa Rica, and Japan. We have partnered with our distributors in Turkey and the Middle East to begin opening sites in those regions in 2024. It is early in the launch of Mia, but we are seeing proof points that we are creating and capturing demand for this new category. One recent Mia consumer is Yokasta Valle. Yoka is a professional female boxer, and just this past weekend, she defended her International Boxing Federation and World Boxing Organization mini-flyweight titles by unanimous decision. Yoka has now defended her world titles twice just months since her Mia procedure. She's not only an inspiration as a world-class athlete, but is also a testament to how women can quickly return to their lives with Mia without limitation or restrictions. Already, we have reports of women flying internationally from the United States to receive the procedure abroad. In some cases, they are paying in excess of $20,000 for a premium experience. This is more than twice the cost of the average breast augmentation in the United States. Stories like these demonstrate that not only is this a new category in breast aesthetics, but that Mia is going to be firmly in the luxury category and highly aspirational. The momentum for Mia continues to build, and both awareness and lead generation continue to grow. This will eventually be converted into more procedures taking place at our Mia-certified partnered clinics. The launch of a new platform like Ergonomix2, which includes the implants for JOY and Mia, is an opportunity to price technology according to consumers' willingness to pay. Thus, we are glad to see the contribution toward total revenue of the JOY program now exceed 10% of our total implant revenue with an average selling price of more than double our blended rounded Ergonomix pricing. We are beginning to see positive contributions to our gross margins from this platform. As JOY and Mia scale, average selling price and gross margins will improve in the international markets. The United States and China have the highest prices in the world and would be significantly accretive to average selling price and gross margins. All of this together lays the foundation for a very strong company. We are actively preparing for the launch of Motiva in China with our distribution partner as we await the letter of approval from the NMPA for Motiva implants. In the U.S., the final module of our PMA was submitted to the FDA in the first quarter of 2023 and the full PMA remains under review by the agency. The pace of activity and our interactions with the agency remains very positive. It is notable that while the recent approval of Flora and the approval of Motiva are separate processes, the devices share the same surface technology and similar RFID technology and are manufactured under the same conditions at the same facility. We recently hired Elizabeth Panzica Newman to lead our U.S. business. Liz brings over 30 years of experience launching and growing aesthetic brands. She is moving quickly to build out the commercial and operational teams and is finalizing plans for launch. We look forward to sharing more with you about our progress over the coming months. Our confidence that Motiva Implants will soon be available to women in the United States continues to grow. I will now turn the call over to Raj.

Thank you, Juan Jose. Total revenue for the third quarter was $38.5 million, which represents growth of 0.8%. From a regional perspective, sales in Europe, the Middle East, and Africa accounted for approximately 61% of the global total, Asia Pacific was 6%, and Latin America was 33%. Direct sales were approximately 54% of implant sales, while distributors made up the balance. Brazil, which is our single largest market globally, accounted for approximately 16% of total quarterly sales. Our gross profit for the third quarter was $26.1 million or 67.7% of revenue, compared to $26 million or 68.1% of revenue for the same period in 2022. Our gross profit in the third quarter was positively impacted by the increased contribution of Mia revenue. This was partially offset by higher overhead and labor costs. Costs were higher in part from changes in exchange rates between the U.S. dollar and the Costa Rican colon. As reported in U.S. dollars, the revaluation of the colon over the last year resulted in higher costs in the period. Average selling prices in the third quarter increased from the second quarter of 2023 and year-over-year. SG&A expenses for the third quarter increased approximately $8.7 million to $40 million, compared to $31.3 million in the third quarter of 2022. The increase in SG&A in the third quarter resulted in part from our investments in new growth initiatives like Mia and preparations for a launch in the U.S. R&D expenses for the third quarter increased approximately $1.8 million from the same quarter a year ago to $7.1 million. Higher personnel costs and increased activities related to our U.S. approval processes contributed to the higher spending in this period. Total operating expenses for the third quarter were $47.1 million, an increase of approximately $10.5 million from the year-ago period. The net loss from operations of the third quarter was $29.3 million, compared to a net loss of $18.6 million in the same period of 2022. Our cash position as of September 30th was $52.2 million, compared to $66.4 million at the end of 2022. Our cash use in the third quarter included approximately $6.6 million of investments in CapEx, including for a new manufacturing facility, which is now complete, as well as a $13.9 million increase in inventory as we prepare for the launches of Motiva in China and the United States. As a reminder, we have two remaining tranches in our debt facility, which totaled $50 million and which become available upon the achievement of sales and regulatory milestones. These, along with the cash on hand at the end of the third quarter, provide us with access to approximately $100 million in capital. As Juan Jose noted, we are lowering full-year revenue guidance to approximately $165 million. The updated guidance reflects lower demand globally, but also that we removed China from our forecast. We expect approval in China this quarter, but at this late point in the year, we are not forecasting any revenue contribution in 2023. The reduction in guidance is approximately two-thirds from the changes in demand and one-third from China timing. We continue to expect gross margin in 2023 to be approximately 100 basis points lower than 2022. We are taking steps to control expenses and cash use. This includes a target of 20% reduction in global personnel costs, focused reductions in operating expenses, and management of inventory levels. As a result, we expect cash use in the fourth quarter to be meaningfully lower than in the third quarter. Our objectives are to reduce cash use to less than $15 million in the fourth quarter, and based upon the actions we have taken thus far, we are confident we will meet this target. With these actions, we expect to be EBITDA-positive in 2024 and cash-flow positive in 2025. We believe we can achieve these targets with the cash we have on hand and with additional credit available to us. These are very important core objectives for Establishment Labs and will be reflected in our corporate planning, as well as in our employees' compensation structure. I will now turn the call back to Juan Jose.

Thank you, Raj. Establishment Labs is taking share and we expect to continue to do so. The clinical and scientific data supporting the use of our products is unprecedented and only grows stronger, and you are seeing this affect many of our competitors. With our entries into the U.S. and China, we will double our addressable markets and we are poised to become the leading global company in breast aesthetics and reconstruction. Over the next few years, we will continue to transform and expand our markets by creating new categories with innovations like Mia. We are very excited about our future and expect strong growth for many years to come. Our 2026 target of $500 million in revenue remains a key long-term corporate objective, and everything I see suggests we will be successful. I will now turn the call over to the operator for your questions.

Your first question comes from the line of Matt Taylor from Jefferies. Please go ahead.

Great. Thank you. This is Mike Sarcone on for Matt. Thanks for taking the question. Just to start, you mentioned you expect growth to resume in 2024. I was hoping you could comment on that and just talk about your visibility and your confidence there. And if you could, maybe parse out growth expectations for existing markets versus the growth that you'd be expecting for newer markets that you're entering into like China and the U.S.

Yes, of course. First, I'll say that we are seeing the slowdown across aesthetics and in many markets globally. Surgery is often the tip of the spear as procedures that are more costly and require more of a commitment. However, our experience in precedent does show that these trends are usually transitory, and the demand for the procedures will tend to grow over time. Now, if you think about the softness in all of aesthetics, and you think about the position of Establishment Labs, in front of us, we have many growth opportunities that are real; the approval in China, the approval in the U.S., both of those are ASP and gross margin accretive. Thanks to both of them, we are doubling our total addressable market. We have already received the approval for Flora in the United States, which is an $180 million market. Flora is unique in its technology and can truly transform this market in the United States. On top of that, we have Mia, which continues to expand, and we will see Mia in more geographies next year. So, beyond what we are seeing in terms of the softness, there is all the greenfield that we see ahead of us in terms of these new opportunities. We may experience a time where the softness starts to clear out, and then we see growth in the traditional market. But I think between all of it, we're poised to come back to a percentage of growth like we had seen in the past, of 30% plus.

Got it. That's helpful. Thank you. And Raj, I think you mentioned a 20% reduction in global personnel costs, reducing certain opex. Could you talk about how quickly you plan to implement that and then what would the ramp back look like when you do get approval in China and the U.S., and you might need to increase headcount again?

Sure. So, we've actually already undertaken a lot of these initiatives in the last couple of weeks. We did have a reduction in force last week. So, a lot of this is already happening. I think, as Juan Jose noted in his remarks, what we are doing at this point is prioritizing the growth objectives in front of us. So, things like Mia, the United States, China; we are making sure that we are committing our resources into those areas, which provide the best opportunities for growth. You mentioned the U.S., for instance, in our prepared remarks; we also talked about how we have hired ahead of the U.S. business at this point, and we're building out the teams there. We really think about it as a reduction in certain areas of the business that are a little slower right now and emphasizing areas where we still have a lot of growth ahead of us. As these markets recover, which we expect they will, our core markets will continue to add back there. We expect, as Juan Jose mentioned, to get back on a nice growth trajectory in these markets. We're just trying to be judicious in this period where things are slower.

Got it. Thank you very much.

Your next question comes from the line of Allen Gong from JPMorgan. Please go ahead.

Hi. Sorry, it's a little bit loud where I am. I'll try to ask both questions at the same time. But just one question on your EBITDA and cash flow targets, right with kind of the market a little bit softer than expected and China coming a little bit later, and the U.S. potentially being a challenge market as well next year. What are you really assuming for these new markets to get to those targets? And then just as a quick follow-up, when I think about Mia, it's great to see, Mia is having success internationally, but I’m actually interested in the pipeline to the U.S. Thank you.

So, yes, Allen, I can take the first question. When we look at the outlook for 2024, we're preparing for a number of potential outcomes there, right, where the markets don't recover for a period of time. We're relying upon the growth of the new initiatives, which Juan Jose mentioned. In most scenarios with Mia ramping, with China coming online, and with Flora now approved, we expect that growth will pick up next year, even based just upon those three things that we already know about, even if the core markets remain soft for a period of time. However, we are preparing our budgets and spending for the eventuality that things don't improve for a period of time. We expect to be EBITDA-positive even in a market where these core markets remain soft.

Yes. Could you clarify the second question? It's very hard to hear you.

I think we might have lost Allen, operator. Allen, your line is open.

Allen, your line is open.

Oh, sorry. My question is just, it's great to hear Mia doing really well internationally, but I'm curious, once you get the Motiva approval in the U.S., how quickly do you think you will be bringing Mia to the U.S. as well?

Yes, it's too early to give you a lot of precision on that because we first need to gain the approval of Motiva Implants, and based on that approval, seek a supplement for the implant that is necessary for the Mia procedure. Then there are additional tools. As a result, what I can tell you is that our regulatory experts believe that this is a supplement. Supplements usually take around 18 months. Of course, we're very committed to the first approval, which is the one of Motiva implants, so that we can then bring the rest of the pipeline of innovation that is already available in the international market.

Your next question comes from the line of Anthony Petrone from Mizuho Group. Please go ahead.

Thank you and good afternoon. We'll begin with comments on global demand, and the numbers from Establishment Labs are echoing similar observations from Sientra, a company that will no longer be in the market. They discussed weakening demand. When we analyze this, the question is whether the fundamental demand has been affected because consumers are stretched thin and there's a lack of interest in the market, or if the recent reports indicating that credit card debt has surpassed $1 trillion suggest that increasing lending rates in the U.S. have curtailed demand. So, is there still a foundational demand for these procedures, or has the demand disappeared due to a shift in spending priorities? Let’s go into some follow-up questions.

Yes. Thank you, Anthony. What I'll tell you is that the slower demand developed over the quarter in our direct markets and eventually was reflected as well in the orders that we received from our distributors. In the first half of the year, around 60% of our orders came from distributors. We normally see a slowdown in procedures in late summer, and then they tend to recover once the seasonality disappears and September, we see it pick up again. Well, that did not happen this year. What we hear from doctors is that many patients are basically delaying the procedures, not because of lack of interest. I think there is a lot of uncertainty, both macroeconomic and geopolitical, and it is having an impact on all of aesthetics. However, in the past, we've seen this many times, in which periods like this in international markets have led to recovery after a crisis or another, then they do come back. In our case, we are even more confident because for that growth, we don't depend on the current market. We have new markets opening up. We've recently had the approval of Flora here in the United States with an $180 million market opening to us. We're going to see in the next few months, the approval in China and further after that, the approval in the United States. All that is potential growth for us, and that's what makes us confident, because not all companies have these types of milestones ahead of them.

Fair enough. And then just one on cash preservation and just how we should be thinking about a Motiva launch under a scenario, where we get FDA clearance. So first on cash, Raj, you mentioned that the burn rate would be limited to $15 million in 4Q. Just want to clarify that, that the cash burn is limited to $15 million. Is that kind of level we should be thinking about for the first half of '24? And then when you think about putting funding toward a potential U.S. Motiva launch next year, should we get FDA clearance? Is it more of a gradual launch now where you're not really going to go full tilt, or is that unchanged where it would be a full market clearance next year? Thanks.

Yes, your question, Anthony, I think that $15 million level in the 4Q, again, you've seen the guidance reduction that we've given. It's going to be a very slow top-line growth quarter, and we're guiding to about $15 million of cash use. As we move into next year and these opportunities improve, China, Flora in the United States, the continued growth of Mia, we're looking at keeping our cash use at that level, if not lower, going forward. We did talk about getting to EBITDA-positive by the end of next year and ultimately getting to cash-flow-positive with the cash we currently have access to. The preservation of cash will continue to be a big focus for us. But I would look at it more as the use of it in areas that provide us with the best growth. We talk about the United States, the biggest opportunity in front of us. We will not underfund that opportunity, but we'll look to find areas in the other parts of the business that we can leverage and devote capital to against the United States.

Thanks. I'll get back in queue.

Your next question comes from the line of Josh Jennings from TD Cowen. Please go ahead.

Hi, good afternoon. Thanks for taking the questions. I was hoping to just ask about the China approval timeline. It sounds like the team's still optimistic that the approval could be at hand by the end of this year. Any signals from China regulators or process updates that you can share that are driving that optimism, or is it just a matter of time?

Yes. Thank you, Josh. I think that we have enough signals in front of us to understand that the work on the final labeling is done, and usually, by that time, that you're going to get the letter from the NMPA. I think this is going to happen before the end of the year, at least that is our expectation. However, we expect to begin recognizing revenue from that market in 2024, and as such, we are preparing for it. We have been on calls with our team there on a weekly basis and we are preparing for a launch that should happen early next year if everything goes according to plan.

Thanks for that. And just to follow up on the process of the Flora 510(k) approval. Now that we have SmoothSilk cleared in the United States, was the 510(k) process independent of the PMA review process by the FDA? Did the FDA have to visit the manufacturing facilities prior to that Flora 510(k) approval? Thanks for taking all the questions.

Yes. On that, Josh, it is not the same process. One is a 510(k) that leads to a clearance, and the other one is a PMA that leads to an approval. However, it is the same division that is looking at both. As such, as part of the conversations for the clearance of the Flora Tissue Expander, they had to include people related to the potential approval of the Motiva Implants. We have definitely cleared an important hurdle when it comes to one of the most important aspects of the approval process for the Motiva Implants, which is surface biocompatibility. The surface is an important driver of safety. By having the clearance of Flora, we have a lot of confidence that we will finish the process as we expect with the Motiva Implants. No, they did not inspect our manufacturing facilities for the Flora Tissue Expander, but it is the same manufacturing facilities with equivalent processes used for the manufacture of Motiva Implants.

Your next question comes from the line of Neil Chatterji from B Riley. Please go ahead.

Hey, guys, good afternoon. Thanks for taking our questions. Just on the demand slowdown, I mean, are you seeing any nuances, I guess, between just the general aesthetic slowdown versus specifically the breast augmentation market? Are there any indications that could come back faster for implants?

So, like we said, you tend to see it first in surgical aesthetic procedures, because they tend to be more expensive and usually require more of a commitment. So that's why I think we're seeing it first there. When you look at the size of the impact, it is very important to understand that in direct markets, we are seeing an impact that is not more than 10%, for instance, in Europe. But in distributor markets, we are seeing a much bigger impact. That is related to the fact that distributors are very careful with their cash management. If they think that they can get through a softer market by ordering less, they will do so. The impact, as a percentage of our total revenue, is much stronger. Until we get to the U.S., the majority of our sales are going to go through the distributor channel. So far this year, in the first half, around 60% of revenue came from distributors, and now, you saw that turn around completely with close to 55% of our revenue coming from direct markets. It amplifies the impact. As we get through the rest of this year and the situation starts to resolve with our distributors, I think you're going to see resumption of ordering patterns, because they are going to consume those inventories and they will need to come back.

Great. Thanks for that color. Maybe just switching gears to Mia. Just curious about any more updates on the progress for the clinic partners there and the DTC efforts. How much is the two-year initial Mia feasibility study results helping generate leads?

Yes. That's a really good point because the two-year study, which has 0% caps or contractures, 0% rupture, 0% bleeding; all these things that people care about when they think about an innovative procedure like Mia tend to dissipate as the questions and concerns. We see two things: the number of clinics interested in becoming partner clinics is increasing. In fact, we're having almost a difficulty in onboarding and training fast enough for these clinics to begin transferring the awareness into leads. The second part is what we are doing with the clinics that have already been onboarded and are speaking to consumers. What we began with our awareness campaign is now turning into many leads coming to these clinics. That is something that is appreciated in the period of softness is that these clinics are receiving leads, and many of these leads are women who had not thought about traditional breast augmentation. Mia is going to be a shining light in the middle of this period of softness.

Great. That's it for me. I'll just hop back in queue.

Your next question comes from the line of Joanne Wuensch from Citibank. Please go ahead.

Thank you very much for taking the questions. The last time you experienced this was when, and how long did it take you to, for lack of a better term, dig out of it? My second question has to do with the FDA process. Where are you with that? Have they come in to inspect the facility? Anything you can help share to better understand where that is? Thank you.

Yes. Thank you, Joanne. I think from an industry perspective, probably '08-'09 was the deepest recession ever experienced. Procedures, at least for the U.S., where you have the best figures, fell for two years, but then recovered back pretty strongly. Within a year after that, they were back to pre-recession levels. In the international market, we see it more often. We see countries like Brazil, Venezuela, Argentina, Mexico going through periods of recession or political instability, lasting a couple of quarters. They tend to resume. We've seen similar situations in Asia, where growth stopped for a bit in certain markets like Thailand or Southeast Asia. They do tend to recover. This gives us the confidence to tell you that although this may be transitory, we are also taking the necessary steps to prepare in case it lasts longer. When it comes to the approval process for the PMA of Motiva Implants, we went from a modular PMA to full PMA. We have provided all the answers to all the questions for every module that the FDA asked, and we are now awaiting the manufacturing inspection. As soon as we have that inspection, it will be a major milestone towards the approval. It was quite important to receive the clearance of the Flora Tissue Expander because it is equivalent in many of the characteristics that are part of the breast implant.

Thank you.

Your next question comes from the line of Marie Thibault from BTIG. Please go ahead.

Hey, good afternoon. This is Sam Eiber for Marie. Thanks for taking the questions. I can start on the Flora approval that you guys just got here last month. I'm wondering if you can use that to essentially introduce the Motiva technology to customers that may be newer to Establishment Labs, considering it has similar properties like the SmoothSilk surface technology as the regular Motiva implant.

Yes. I think that's very important to us, because for the last few years, whatever interaction U.S. plastic surgeons had with Motiva came through international conferences they may have attended, or from friends in plastic surgery that have used the device and discussed it. Many of the things they heard were through the eyes of our competitors. It is very important to us that now we can introduce Establishment Labs to discuss our commitment to science and technology. We can talk about the surface technology, which is one of the most important things when it comes to biocompatibility, and definitely concerning our RFID technology, because it is equivalent to what we have also available in the final implant. All of this is going to give us many opportunities to begin talking about what this company is about, which is women's health and the introduction of this concept into the U.S. market for breast aesthetics and reconstruction eventually.

Okay, very good. And maybe I can use my follow-up here for Raj. I know it's difficult right now to figure out how long this transitory environment could be, but assuming the implied Q4 guidance of $31.5 million. Would that be an appropriate run rate to consider for core markets going forward in 2024 with some of the new markets as you open them up?

It's not a bad starting point. As Juan Jose noted, we've seen a much bigger slowdown in our distributor markets compared to our direct markets. We don't expect that to continue for an extended period, but as a conservative base to start from, that's not a bad estimate. As we layer on top of it things like Mia and Flora in the United States, as Juan Jose mentioned, we're very close to receiving Chinese approval. That should contribute next year. We have a lot of good things that build on top of that. We expect the fourth quarter to be the low watermark in terms of the demand we see for these products.

Got it. Thanks for taking the questions.

Your next question comes from the line of George Sellers from Stephens. Please go ahead.

Hey, good afternoon and thanks for taking the question. To start with Flora, I apologize if I missed this, but I'm just curious what that commercialization might look like, as well as what you're anticipating and including in your guidance for the fourth quarter, as well as the cadence of that in 2024. Also, in the U.S. market, do you need to have Motiva approval for Flora to really take off, or do physicians typically use the same tissue expander as the implant that they're going to use, or how does that market look in the U.S.?

Yes, of course. Just as a reminder, the market for tissue expanders in the U.S. is approximately $180 million and it has the highest average selling prices in the world. We will start generating revenue from Flora in the U.S. in 2024. With the technology we have based on science, the unique technology with no magnets, which really changes things for these centers. Now, they can perform MRIs. They can potentially reduce the amount of radiation oncology. It opens up new opportunities for them in many different ways. It is an important change for these centers in the United States. If you consider what Flora does, it creates a beneficial interaction with tissue inside a patient that is recovering from breast cancer. That tissue will define the type of capsule, and thereafter, that capsule can host an approved implant for breast reconstruction in the United States or eventually for our Motiva implants. There is no reason to believe that surgeons, who understand this, would not see it as a benefit that the initial capsule is created in such a healthy manner by our Flora Tissue Expander.

Okay, that's really helpful. I'm also curious about the Motiva FDA process; you touched on the manufacturing inspection. What steps are left after that manufacturing inspection? Have you seen or been given any timeline on when you should expect that?

No, we have not given any timeline because it is not in our hands. But we continue to make progress week to week in terms of the question-and-answer process with the FDA. Like I said before, we have provided answers to every single one of their questions, which indicates that the process is coming along quite well. They have not yet scheduled that inspection, but we have answered all the questions of module three, which is manufacturing. We expect that to happen hopefully sooner than later.

That is all the time we have for questions today. I will now turn the call back over to Juan Jose Chacon Quiros for closing remarks.

Thank you for joining us on today's call. We will be attending the Jefferies London Healthcare Conference and the Stephens Annual Nashville Conference next week. We look forward to providing our next quarterly update in the New Year and we wish everyone continued good health.

This concludes today's conference call. Thank you for your participation and you may now disconnect.