Sientra, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Sientra’s Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Oliver Bennett, Chairman and CLO. Please go ahead, sir.

[Oliver Bennett:]

Thanks, operator. Good afternoon, and welcome to the Sientra fourth quarter and full year 2020 earnings conference call. I would like to remind everyone that in our remarks today, we will include statements that are considered forward-looking statements within the meaning of United States securities laws.

[Ron Menezes:]

Thanks, Oli, and thank you all for joining us today on our fourth quarter and full year 2020 earnings call. Before we begin the discussion on our strong fourth quarter performance and strategic priorities for 2021, and I’d like to first introduce Valerie Miller, our Vice President, Corporate Controller and Interim Chief Financial Officer. Val joined Sientra in 2017, following decades of experience at several companies, including LinkedIn and Mentor. Given her strong knowledge of our business and financial reporting standards, I have great confidence in her ability to lead the finance team on an interim basis as I recruit a new Chief Financial Officer. Also like to take a moment to thank Paul for his role in positioning our company for future growth. He leaves Sientra with a strong balance sheet that will help accelerate our path to revenue growth. I wish him well in his future endeavors. With that, I’ll now move on to a summary of our fourth quarter results, an overview of our business and my vision and focus for the year ahead. Without doubt, the fourth quarter validated our decision to focus on our Breast Products business. Net sales for the Breast Products segment totaled $17.9 million in the fourth quarter, another record quarter, representing 40% growth year-over-year and 17% over the third quarter 2020.

[Valerie Miller:]

Thanks, Ron. In the fourth quarter of fiscal 2021, Sientra achieved consolidated net sales of $22.6 million, a 2% year-over-year decline with the decrease driven specifically by the expected decrease in sales attributed to our miraDry business segment due to the impact of COVID-19, our decision to focus on bioTips sales and the reduction in the overall level of investment in this business. Net sales for the Breast Products segment totaled $17.9 million in the fourth quarter 2020, representing an increase of 40% compared to $12.8 million for the same period in 2019 and 17% sequential growth over the quarter ending September 30, 2020. Net sales for the miraDry segment totaled $4.8 million in the fourth quarter 2020, a 54% decrease year-over-year and a 22% sequential increase over the quarter ending September 30, 2020. Gross profit for the fourth quarter 2020 was $11.1 million or 48.9% of sales compared to gross profit of $14.2 million or 61.3% of sales for the same period in 2019. Excluding impacts from our miraDry segment, gross profit for the fourth quarter of 2020 was $13.2 million or 58.4% of sales. These impacts include inventory reserves and unfavorable overhead absorption versus the prior period related to a decline in miraDry console production. Excluding restructuring charges of $1.1 million related to Sientra’s organizational efficiency initiative, operating expenses for the fourth quarter of 2020 were $28.2 million compared to $32.4 million for the same period in 2019. Looking ahead, the company expects 2021 annual operating expenses to be in the range of $85 million to $90 million compared to $101.1 million in 2020, excluding impairment and restructuring charges. Net loss for the fourth quarter 2020 was $21.2 million or $0.42 per share compared to a net loss of $20.2 million or $0.41 per share for the same period in 2019. On a non-GAAP basis, adjusted EBITDA loss for the fourth quarter 2020 decreased by 24.6% to $10.5 million from $14 million for the same period in 2019.

[Operator:]

Certainly. Our first question comes from the line of Margaret Kaczor from William Blair. Your question, please.

[Margaret Kaczor:]

Hey guys, good afternoon. Valerie, good to meet you over the phone, at least.

[Valerie Miller:]

Nice to meet you.

[Margaret Kaczor:]

Good to meet you. So the first question is just about the detail of Paul leaving. I know – I read the press release, I’ve got to sort of ask the question if there’s anything else around that. And the second piece of it is because he’s the guy that’s really been trying to push you guys to operating profitability. So any color you can give around that, whether it’s commitment to net income profitability in 2022 still? Are we pushing that up?

[Ron Menezes:]

Hey Margaret, this is Ron. So first of all, as you saw in the statement, there’s no reasons outside of personal reasons for Paul. He – that means he will be able to stay closer to his home. Not have to come to Santa Barbara. And he’ll make an announcement soon on his new opportunity. So really, it’s a personal decision by Paul. In regards to our commitment to really becoming – at least start with the breakeven, we have not changed that. That is still my goal when I came on Board in November, and we have not changed that to be committed to, by the end of 2022, be at least close to breakeven for the business.

[Margaret Kaczor:]

Okay, okay, great. Thanks. Quick and straightforward. And then if we look at guidance, the Breast Products and kind of core Sientra guidance is much stronger than what we thought going into the quarter. So can you give us a little bit more color around the drivers of that? I know you referenced rep productivity and so on. But if I look at that, that’s close to $1.5 million per rep, assuming you’re still at about 47 reps. So any color in terms of augmentation demand, expand or rebound, and then OUS sales that could be included within there?

[Ron Menezes:]

Yes. Margaret, all that will be really, first of all, a reflection of our focus on Breast Products. From increase in representatives, we’re seeing – usually, you hear in the past, it takes six months to see productivity. We’ve seen that sooner in some of our new representatives because they come to us with vast experience in medical devices and also hospitals. Number two is additional investment in our marketing team in regards to focus on driving consumers to the website.

[Margaret Kaczor:]

And the OUS sales?

[Ron Menezes:]

OUS sales, we haven’t changed much. We still project for Japan to be in the range that we shared before. It’s going to be modest for us. I think the opportunity for us is still very much in the U.S. driving that sales. We do expect to hear back from Health Canada sometime this summer. So it’s more – it’s probably late 2021 from a Canada perspective.

[Margaret Kaczor:]

Okay. And then just a last one on miraDry. You guys said you had – are expecting $8 million to $10 million for the year. Is that assuming any kind of strategic change within the business? Or should we assume kind of that $2 million to $2.5 million of sales a quarter? And maybe any color over whether you’re providing any support to customers in the field or any of your distributors? Thanks.

[Ron Menezes:]

Yes. We’re still looking at strategic alternatives for the business, that was stated. Right now, we still have a strong business in Asia driving a lot of the growth. And we still have growth coming from the U.S. as well. As you know, we minimized the cost structure of miraDry. At the same time, it’s a nice revenue, and we do expect to break even and have a positive cash flow this year, so.

[Margaret Kaczor:]

Okay. Thanks, guys.

[Operator:]

Thank you. Our next question comes from the line of Jon Block from Stifel. Your question, please.

[Jon Block:]

Great. Thanks, guys. Good afternoon. Maybe the first one form both Ron and Valerie. Just if you could talk a little bit more about the OpEx. I think you said the OpEx was $28 million, give or take, for the quarter, but sort of impressive 2021 OpEx guidance. I think it was $85 million to $90 million, call it a run rate of low 20s versus the 28 exiting the year. Ron, how do you achieve that while still making the investments that it seems like you want to make in the Breast business? So maybe you can just detail and talk about the reallocation of resources as you guys focus on Breast, please.

[Ron Menezes:]

Yes. And that’s why – because now you have very minimal cost structure for miraDry mostly dedicated to manufacturing and regulatory. For breast implants, there three key areas that we’re continuing to feel those areas. One is our commercial team from adding new representatives when needed. And it’s a very systematic approach to adding new PSCs. We’ve added PSCs in Nebraska. We have added more in Chicago and down in Florida. But it’ll be based on the needs and created demand. Number two is more resources for our marketing team to create the demand from patients. Patients actually use company websites as the number one or number two source of information to decide which implant and which surgeon they’re going to go see. So if you go at our sientra.com, you’d be very impressed how dynamic the website is to attract customers, plus provide great information about the safety of our implants and also safety of our expanders as well. And then finally – there are actually two more. One is manufacturing. We have our manufacturing team at half capacity. They are working seven days a week, and they are really doing great job back in Wisconsin, supplying our team in the field for the implants. And the last one is new product pipeline. We had several projects that we’re working through it. We’ve created a process where the project goes through it. A lot of those products will be probably 2022 – early 2022. But now we have a system to accelerate the development of new products and submission as well. So that’s the three key areas that we’ll be continuing to invest. Because we’re not having the miraDry expenses, you see a very streamlined ability to drive growth in the top line and also watch out our expenses.

[Jon Block:]

Great. Okay, perfect. And maybe a follow-up, two-parter, disparate approach, if you would. But you gave explicit top line and you certainly talked about OpEx. I just want to make sure, did I miss a gross margin number or range? Maybe Valerie, that might be more for you. And then, Ron, if you can just talk to the push-pull dynamic that’s going on in the field, right? I mean you guys have been gaining share for quite some time, but I think a lot of it was going to the surgeons and highlighting your superior product and warranty, et cetera. Would everything that’s unfolded in the marketplace, do you feel a little bit more outreach from the plastic surgeon, the community, more coming at you guys wanting an alternative due to some of the issues or challenges that some of your competitors have faced? Thanks for the time.

[Ron Menezes:]

I’ll answer that, and then I’ll punt to Valerie for – in regards to the margins. That story I shared about Southwest is just one. With – I’ve had several stories than one from surgeon’s perspective where persistence of our sales team and working very closely with our marketing and also medical affairs team, we’re able to continue to expand our market share. And they see the dedication we have to plastic surgeons. They see we’re focused on plastic surgeons. We are a plastic surgeons company with – really, the goal is to be seen as synonymous to plastic surgeons. Now they see that and also in the hospital environment, we’re gaining share because the technical advantages of our products and the vast experience that our reps have now in those hospital environments. So you combine the two and you combine also drive incentives for the commercial team within the hospital and surgeons, you can see the continued share growth. I can’t comment what the competition is doing, but they obviously have multiple other products to discuss with that surgeon. We really have two key products, and we’re committed and focused on those two key products with our customers. So with that, Val, comments about margins?

[Valerie Miller:]

Sure. Our gross margin for Q4 was 48.9%. If you adjust out some of the impacts for miraDry related to inventory reserves and absorption of overhead, we would have been at 58.4% for the quarter. That’s slightly down from Q4 of 2019. The rest of that differential is mainly related to higher gel implant costs following the acquisition of the Franklin plant. We won’t really see the benefits of the lower unit cost out of the Franklin plant until we get into 2022 and start selling those through. In terms of 2021 and how to look at that, we think we are going to see the upper 50s for the year.

[Jon Block:]

Perfect. Thanks for the time, guys.

[Valerie Miller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Richard Newitter from SVB Leerink. Your question please.

[Richard Newitter:]

Thank you for taking the question. Maybe just to follow up on the gross margin question. Thanks for that. So upper 50s in 2021. I guess just as we think of the trajectory, I think in the past, you had talked about getting back up to a mid-60%, towards 70% range over the long run. I mean do we just maybe shave a little bit off that? Into 2022 and beyond, do we think of you as a low 60s? Or are you still on track for that mid-60 range?

[Ron Menezes:]

Yes. We’re still on track for the mid-60s in 2022, a lot of which is exactly what Val just said in regards to the cost and yield of our product back in Wisconsin. We’re accelerating. We’re giving the resources to our team in Wisconsin. And we’ve seen some really great improvements in yield, which translates, obviously, in lower cost of goods, which will translate as those new implants start selling through, which will probably be sometime this summer into the latter part of this year. So you’ll continue to see improvement in margins in the latter part of 2021 and go into 2022, with the goal of getting to mid-60s.

[Richard Newitter:]

Okay, thanks. That’s helpful. And just maybe two more, one housekeeping, one bigger picture. On the bigger picture, I guess what – just where is your market share kind of right now and where you see the market? How fast do you estimate the market is growing? And where do you think your market share can get to you over the next couple of years here? And then housekeeping, just in the past, you’ve given breast implant growth versus tissue expander growth. I was just wondering if you can break that down for us. Thanks.

[Ron Menezes:]

Yes. The American Society of Breast – Plastic Surgeons have not published the shares yet, they usually do that in April. But we are guessing based – we were 7% last year. We’re thinking about 10% to 11% now. And in regards to the market augmentation based on my conversations with multiple plastic surgeons, the market augmentation grew and the market in reconstruction went negative. So we have a goal to get in the mid-teens within the next 18 to 24 months, and obviously, getting to above 20% in 2023 – moving on 2023. But that’s kind of our goal that we have to accelerate our growth into – get within – to become a top two company within plastic surgery for breast implants and expanders.

[Richard Newitter:]

Thanks. And just the breast implant versus tissue expander?

[Ron Menezes:]

Right now because of what happened due to COVID, it’s 60-40 implants versus expanders. It’s a little – it was actually a little higher. But usually, it’s a little closer. But from implants, it was higher – I’m sorry, for implants this year was higher due to really the – driven by augmentation.

[Richard Newitter:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Kyle Rose from Canaccord. Your question please.

[Kyle Rose:]

Great. Thank you for taking the questions. So I just wanted to ask a little bit about some of the account additions. I mean, obviously, you have very strong account growth given the macro backdrop. There’s some disruption going on from some of your competitors. But maybe help us understand how you get confidence that some of the account growth is sticky, and the share gains you’re seeing are sticky versus maybe just some competitive trialing? Just trying to understand what you’re seeing from a utilization standpoint in the accounts that you’ve added this year as well as some of the historical Sientra loyalists.

[Ron Menezes:]

Yes. If you look at – from implants, there are two key areas that stand out in 2021. Our Sientra loyalists, they grew quite a bit, hit double-digit growth, and our new accounts. Our new accounts, as they jump in, they continue to expand market share. It takes a little longer, obviously, because as I stated in that example, it takes a lot of resources from the team to expand the share. But the data has proven to us once a surgeon tries our implants and see the patients outcome, he or she started to use more and start recommending more Sientra for their patients. So we’re tracking all those accounts. And like I said, we have over 1,800 accounts now, and to see the sticky rates, see which ones are sticking for us for longer. But right now – and a lot of the compensation for our reps is to add a certain number of accounts per quarter and also continue to expand share within their current accounts. But the two key drivers are new accounts and existing high supporters of Sientra products.

[Kyle Rose:]

Great. And then I think in the preannounced, you talked about $1.7 million in revenue from Japan in 2020. Maybe help us just understand how you expect that business to trend in 2021? How much of that was stocking versus sell-through? I mean I think you had previously talked about Japan as a $15 million opportunity. If I kind of just annualize that $1.7 million, that gets me to $3.5 million. So your 25-ish percent market share. Is that a fair way to think about it? How do we think about the trajectory there?

[Ron Menezes:]

Yes. We’ve had – the great thing about Japan, now there are 80 representatives there selling in Japan. So we do expect to meet and exceed our goals for Japan this coming year. But at the same time, we’re careful because the market was quite impacted, because it’s all reconstruction, by COVID. So we are assessing what happens in the first quarter to assess what would happen in the rest of the year. But we’re continuing to invest. We have – continuing to look at different sizes for the Japanese market. They are committed to drive the business there, the reconstruction business. So we do see within the guidelines we have for Japan for this year. It’s a hard one because of the impact of COVID in Japan in the first quarter.

[Kyle Rose:]

Great. Thank you for taking the questions.

[Operator:]

Thank you. Our next question comes from the line of Chris Cooley from Stephens. Your question please.

[Chris Cooley:]

Good afternoon and thank you for taking the questions. Maybe just firstly on a housekeeping note, wasn’t completely clear there. When you’re thinking about the growth for the Breast Products category in aggregate for 2021, it’s a very healthy growth rate. But I wasn’t clear if you were still assuming that kind of 60-40 balance between aug and recon that you referenced earlier that you’ve historically seen. Didn’t know if reconstruction should be assumed to take a greater weighting and be more of a primary driver in 2021. So just – if you can just give some clarity around that? And then I had a couple of quick follow-ups.

[Ron Menezes:]

Yes. We expect the first quarter still at 60-40, very similar to fourth quarter. We do expect, as the recon market comes back sometime in the second quarter and obviously through the summer, to go back to 50-50 in the second half of the year. As I stated, we are very focused on gaining additional accounts from a hospital perspective. So as they come on online, those hospitals will generate quite a growth here in the second half for us. But that’s going to be second half 50-50. Probably the next – this quarter, definitely be 60-40.

[Chris Cooley:]

Understood. Thank you for clarifying that. And then I wanted to follow up on your commentary regarding the new product pipeline. If you could just maybe give us some additional color just as how we should think about prioritization of spend from an R&D perspective? It sounds like with these products coming in calendar 2022 that we should think of these as more of like a 510(k), so maybe more of a tool in nature. Just curious if you think you need to put greater focus on kind of transformative types of products in consideration of some of the competition, which you will ultimately be facing outside the United States and here in the U.S. most likely as well within the next 24 months. Thank you.

[Ron Menezes:]

Yes. The current products we’re looking at is more focusing on our core business, supporting core business. Some of them are line extensions, some of them will require a 510(k) expansion – submission. But really, at the end of the day, supporting our core business and bringing new technology that really improve our current technology from expander and also sizes that are currently missing in the reconstruction for us. For me, looking at 2022, that’s when we’re going to dive into additional areas that may be within plastic surgeons, plastic surgery, that kind of be transformative from adjacencies and also from growth perspective. But the focus on 2021 is how do we get all the products that we need to meet all the demand, one. And number two, the right products and improving the current technology and advantage we have in the hospital environment. So that’s really a goal for this year, and a launch in 2022.

[Chris Cooley:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Alex Nowak from Craig-Hallum. Your question please.

[Alex Nowak:]

Great. Good afternoon, everyone. Ron, you’ve been the CEO now for almost about five months. Can you maybe walk through what you’ve learned since joining the company, specifically about the plastic surgeons category in Sientra specifically? It sounds like one of the first efforts you’re doing here is doubling down on the patient marketing experience. But what else do you want to do over the next several years to really reshape Sientra to your vision?

[Ron Menezes:]

Yes. First of all, it’s really allocating resources on the right places, as I stated before. The commercial team, our supply and manufacturing back in Wisconsin, a lot of folks are working hard, but they needed their resources to make sure they are, I call it, feeding the beast. And they’re doing a great job now with the resources to manufacture and have the right SKUs for our team. And another part of this is also product development, to expedite and create a rigor and a process for the development. So we go through, we submit at the right time, and we have approvals as we plan in the next 12 to 18 months. From the next four or five years, it’s really find a way to come up with new technology and find a way to support the art of plastic surgery. How do we partner closely with the plastic surgeons? What awaits their partnership? And a lot of times, partnership is not necessarily spending more money. You find a way – what their needs are. Plastic surgeons like to educate each other from the latest greatest technique. Sometimes you – if you go to 10 different plastic surgeons, you’ll see 10 different ways to do the same surgery. How do we help facilitate them sharing those best practices? And a lot of times, ideas for new products come from plastic surgeons themselves. They’re always looking for new ideas, new ways to improve the patient outcome. So if we’re listening, if we’re talking to them, a lot of times, we can get those ideas, help them develop some new products, and we’re really focused on that as well. So you see some things that we’re working on it that are ideas from plastic surgeons. And they understand our focus on plastic surgery, so they want to partner with us for new ideas and new products moving forward. So for us to become a leader in transformational technologies, the key is to come up with products between the next four or five years that fit what the physicians need and improve the patient’s outcome.

[Alex Nowak:]

Okay. That’s helpful. And maybe how do you see this – the overall market for implants changing here coming out of COVID, if it does change at all? The category got hit back in 2019 with the safety concerns, and then it got initially dinged here in 2020, more so on recon than aug. But where does the market shake out in 2021? Does it go back to 2018 levels, or is it something new?

[Ron Menezes:]

Yes. I talked to over 45 plastic surgeons in the last five months. Now there are 7,000 plastic surgeons out there, so this 45n is a small n. But I can tell you the majority of those surgeons have, if not their best year ever, closer to best year ever for augmentation. So you see augmentation, it will be interesting to see when the data comes out next month to see if the overall market, it was negative or down. So – and if you – I talked to those surgeons now, if you try to schedule a visit with those surgeons now, you’ll probably be in May or June before you actually sit down and have a initial consultation. So first quarter, they’re still very busy, just like fourth quarter for augmentation. For reconstruction, that’s what we’re obviously waiting to see happening. As states open up, as the COVID impact decreases, we expect it to move in a different direction. So as we look in 2021, we don’t know yet. But based on my conversations with those 45 surgeons, reconstruction was probably a negative number, won’t probably be positive. I doubt we’ll be close to 2019 because if you think about the first quarter, it’s still very similar to fourth quarter in regards to impact of COVID. But for augmentation, I’m as excited as you are to find out what’s going to happen because my conversation is it was a very healthy, robust market in 2020, even though most surgeons had somewhere between three to eight weeks with their office completely closed in second quarter 2020.

[Alex Nowak:]

Okay. Got it. No, makes sense. And then I might have just completely missed this, but again, what happened to miraDry, specifically? In the guidance, it looks like it’s getting cut by about half. And I think you did about $4 million in miraDry business last – or in Q4 here, and that was already after you made all the commercial changes. So I’m just curious why it’s taken another step down again?

[Ron Menezes:]

Well, it’s just like anything else, you invest less, you’re going to get less coming back. We – again, we are having very healthy revenue coming from Asia, and that will continue to do so and continue to do so in the first quarter. I think the impact you see is 100% focused on making – selling tips in the U.S. That’s our commitment, we’re manufacturing. We have still six representatives. Our practice development managers that have – do half – 50% of the time, they’ll help out the miraDry. So that’s why you’re seeing that lower demand. And number three, first quarter, you still have a little bit of impact of COVID, but the main thing is lower investment. But it’s still a very nice revenue, and I stated before, we expect to have a breakeven point this year.

[Alex Nowak:]

Okay, helpful. Thank you very much.

[Operator:]

Thank you. And our final question for today comes from the line of Anthony Vendetti from Maxim Group. Your question please.

[Matt Bullock:]

This is Matt Bullock on for Anthony Vendetti. I just wanted to quickly touch on what your plans are for the sales force in 2021. And if you could briefly talk about some of those educational peer-to-peer initiatives mentioned in the press release? Thanks.

[Ron Menezes:]

Yes. So for our sales force, I have told our Head of Sales, Kirk, that he has the ability to add representatives based on the needs and demands. I think Margaret said something about a certain number of dollars, we strive for that certain number of dollars per rep. We track it every week. I have a dashboard I review every Monday. And we have a goal to add reps based on the needs. Like I said before, we added somebody in Nebraska, somebody in Florida. And as the business continues to expand, we add more. In regards to hospital business, we had two reconstruction account managers. We now have four because, obviously, we’re adding more hospitals. And as we continue to increase the number of hospitals and some more GPO contracts, we’re going to look at that as well. We’ll be very systematic, very methodical based on we’re seeing the demand. So that’s kind of where we’re going from that perspective. With regards to peer-to-peer, plastic surgeons are very similar to a lot of specialties where they like to share best practice, they like to talk to each other. And our goal is to be – help them facilitate that discussion. That’s really at the end of the day, to facilitate that discussion as physicians teach physicians. It’s going to be their topic, but at the end of the day, we like to help them teach each other. So – and we’ll begin that as a part of our focus on surgeon and the plastic surgeons in the second half of the year. We’ll spend a lot of time this first four, five, six months in creating patient demand, enhancing our social media standing, and then we’ll shift to surgeon focus quite a bit in the second quarter and third quarter this year.

[Matt Bullock:]

Great. Thank you. That’s helpful.

[Operator:]

Thank you. This does conclude the question-and-answer session as well as today’s program. Thank you, ladies and gentlemen for your participation in today’s conference. You may now disconnect. Good day.