Sientra, Inc.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Good day ladies and gentlemen, and welcome to Sientra Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference call may be recorded. I would now turn the conference over to Zack Kubow at The Ruth Group. You may begin.

[Zack Kubow:]

Thanks operator. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current assumptions and expectations of future events and trends, which may affect the company's business, strategy, operations or financial performance. A detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K that the company filed on March 14, 2017 and the company will provide updated risk factor disclosures with the company's quarterly report on Form 10-Q to be filed with the SEC this afternoon. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projection or forward-looking statement. With that said, I'll hand the call over to Jeff Nugent, Chairman and CEO of Sientra.

[Jeff Nugent:]

Thanks Zack and good afternoon everyone. Thank you for participating in today's call. Joining me are Patrick Williams, our Chief Financial Officer, Senior Vice President and Treasurer; and Charlie Huiner our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy. Throughout 2017, we have outlined our strategic vision for what I refer to as the new Sientra. A diversified global aesthetics company with a significantly expanded total addressable market. We have continued to make good progress executing our strategic plan for our existing business, while once again significantly expanding our market opportunity with the acquisition of Miramar labs which closed late in July. As a result, the new Sientra is now well positioned for growth in several attractive adjacent markets. With the innovative product offerings in the estimated $360 million North American breast augmentation market and the $300 million North American breast reconstruction market. In addition to the $30 million scar management treatment markets. Finally, we believe the large and expanding market addressed by Miramar the only FDA cleared product to reduce sweat, odor, and permanently reduced hair of all color. With demonstrated high marks for patient satisfaction, it is highly complementary to our best in class franchise. This presents well over a 5X increase in our total addressable market. We expect that the acquisition of Miramar will be immediately accretive to revenue in the second half of 2017 and meaningfully in 2018. We are particularly excited that Miramar leverages a familiar proven aesthetics industry model where system placements plus consumables, driving high margin recurring revenue. We are working closely with our newest board member Keith Sullivan, who we brought on as a strategic advisor as part of our acquisition planning to consult on Miramar's commercial execution and potential. He served most recently as the Chief Commercial Officer at Zeltiq with their successful focus on CoolSculpting prior to the recent acquisition by Allergan. Where he had responsibility for total global sales marketing and training. The franchise grew at over 50% compound annual growth during this period. We look forward to leveraging Keith's extensive and proven aesthetic experience across our entire product portfolio and welcome him to the board. We progressively begun to integrate Miramar as we take the necessary steps to bring the proven yet under penetrated MiraDry technology to higher levels of commercial and operational execution. To this end, we have been most focused in the near term on internal reviews facilitated with Keith and key members of the global commercial and clinical organizations at Miramar to identify some key areas for improvement and investment. In terms of sale synergies, we continue to receive positive feedback on the acquisition from many of our existing plastic surgery customers. Adding to the excitement about the technology and potential cross-selling opportunities. On a personal note, we recently visited the MiraDry facility as part of our closing celebrations. And my experience in interacting with the Miramar team gives me even greater conviction of the opportunity ahead with this promising franchise. As we have also stated previously, our focus in the near term with MiraDry is to number one, evaluate and optimize the treatment protocol. Number 2, deploy proven marketing tactics primarily as a practice level and 3 to invest, to expand the sales force and demand generation tools. With MiraDry, we are targeting the 15 million people in the US, that clinically suffer from sweating and resulting odor. As a reminder, 5 million of those patients have severe under arm specific sweating that greatly impacts daily activities and self-confidence. To target these potential users, we plan to initially target Sientra customers, who already own aesthetic devices such as CoolSculpting sculpture systems. As they appreciate the economic benefits to a strong capital plus consumable business model and are accustomed to implementing the required marketing programs to build local market awareness and drive utilization. As you look forward to our locker term strategic vision overtime, we still see a tremendous opportunity to further expand our total addressable market by entering the $300 million regenerative product market including breast reconstruction. As well as the $500 million international market for breast implants as well as reconstruction. We will continue to evaluate and take advantage of these expansionary opportunities in the medium to longer term particularly building on the international base that already exists with Miramar. While expansion into adjacent, attractive adjacencies has been a key piece of our strategic intent, we remain steadfastly committed to our course Sientra breast aesthetics business and are planning to relaunch our breast products as we move into 2018. We are confident in our ability to establish a high-quality US based manufacturing supply capability with our partner investor, a Berkshire Hathaway subsidiary in the near term. We remain on track for FDA approval of this new manufacturing site by 2017 fourth quarter. Supporting this objective, our experienced internal team continues to work closely with outside consultants many of whom are former senior FDA employees conduct a full mark audits in preparation for the official FDA inspection. Results of these mark audits are very encouraging today. As noted on previous calls, and as a sign of our confidence we intend to start manufacturing our most popular SKUs ahead of official approval so that we are better positioned to quickly ramp our commercial relaunch efforts to meet our customers demand. We expect to reach full scale inventory levels by the second half of 2018 following a standard yet aggressive scale up process timeline. In the meantime, we continue to execute on our precision controlled selling strategy which we've discussed before. With the tight management of existing inventory levels to help mitigate the potential impact of selling out some of our most popular SKU's in the near term. Our PSAs have been working closely with our local loyal board certified plastic surgeon customers, who have remained active with us these past 18 months. Also, as I've said in the past, our management team salesforce and entire Sientra organization are laser focused on the transition from this precision controlled approach to fully meet or exceed the expectations of our board certified plastic surgeon customers. On the BIOCORNEUM front our sales force is working to enhance same position practice sales. An effort we expect to be bolstered a recent rebranding of the product. We are also beginning to see positive momentum in shelling our world class tissue expander portfolio led by AlloX2. The breast reconstruction segment is an important growth opportunity, especially upon resupply when we can more aggressively pull through our breast implants. We are particularly excited to see further growth in the second half of 2017 as our tissue expander manufacturing capacity continues to ramp up allowing us to meet increased demand. I'd like to share a legal update regarding the litigation with our former contract manufacturer Silimed. I'm pleased to report that we have reached a comprehensive settlement with Silimed which removes a significant and totally unwarranted distraction for our business, as we integrate Miramar and prepare for our commercial relaunch. It also removes uncertainty associated with the jury court case and the ongoing associated legal expense. As disclosed in a recent 8-K filing with the SEC, the settlement results all claims, everything that the parties filed against each other and Sientra will pay Silimed a lumpsum payment of $9 million in early September and another $1 million by July 1, 2018. Additionally, Sientra agreed to make royalty payments of $12.50 per Sientra's breast implant products sold outside the United States and Canada up to a cumulative maximum of $5 million. To be clear these royalties would only be payable pending Sientra's decision in the future to sell breast implants of certain specifications outside of the US markets. In all we're pleased with these matters behind us, and on a net basis we believe it will have a minimal impact to our cash position due to the offsetting legal expense savings through the end of 2018 and into 2019 related to potential court trials. I'll now turn the call over to Patrick Williams for a detailed review of our second quarter 2017 results after. Patrick?

[Patrick Williams:]

Thank you, Jeff. I will now provide commentary on our second quarter 2017 results and greater detail can be found in our earnings release issued earlier today are 10-Q which will be filed later today and our supplemental financial information reference which can be found on our Investor Relations website. As a reminder, we will continue referencing adjusted EBITDA margin which we define as earnings before interest, tax, depreciation, amortization and stock based compensation. Specifically, we are removing non-cash items for this non-GAAP measure. Please refer to our supplemental financial information in the earnings release for a full reconciliation over adjusted EBITDA to its GAAP counterpart. The following results with the exception of adjusted EBITDA are all reported on a US-GAAP basis. Total net sales for the second quarter 17 were $8.2 million compared to net sales at $6.2 million for the same period in 2016. The current quarter increase was primarily driven by breast product sales due to the additional tissue expander portfolio acquired from specialty surgical products last year. In terms of product mix, breast products accounted for 83% percent of our total net sales in Q2 17 and BIOCORNEUM our scar management products accounted for 15% of total net sales in Q2 17. At the reminder, I would like to reiterate that while we do not expect to sell entirely out of breast implant ahead of resupply. We do expect sales within a segment to begin to slow modestly relative the 2016 in the coming quarters. The slowdown in this segment will be related to the full consumption of our most popular skews and we will as we have stated in the past consequently prioritized manufacturing in each year ahead of our whole commercial relaunch in 2018. As Jeff mentioned earlier, our intention to begin manufacturing best of supply product ahead of 4 PMA approval with new implants under quarantine until final approval is received, which we still expect to be by the end of 2017. It all we expect to have invested facility fully scaled up in the second half of 18 as they work in the typical new manufacturing ramp up. We expect the sale of products from our breast tissue expander portfolio to continue to grow at a steady rate as we continue to ramp with manufacturing capacity ended our sales team gives tenure and penetrate deeper within the market. We expect sales of our BIOCORNEUM product to grow throughout 2017, as well as we see the rebranding and both your marketing efforts translates to segment growth. Gross profit for the second quarter 17 was $5.5 million 000000 or 68% of sales compared to gross profit of $4.5 million or 72% of sales for the same period in 16. The decrease in gross margin was primarily due to the increase in a non-cash inventory purchase accounting adjustment recorded from our acquisition of specialty surgical products. Excluding this adjustment, gross margins in the second quarter of 2017 would have been approximately 71% as we continue to sell through our existing inventory in 2017, we expect the gross margin to remain around 70%. Operating expenses for the second quarter of 17 were $25.8 million an increase of $11.1 million compared to operating expenses of $14.7 million for the same period in 2016. The increase in operating expenses was primarily related to the $10 million legal settlement with Silimed as Jeff mentioned earlier. Net loss for the second quarter of 17 was $20.4 million compared to $10.2 million for the same period in 2016. Adjusted EBITDA for Q3 17 was a loss of $7.6 million versus a loss of loss of $9 million in Q2 16. The year-over-year improvement can be mainly attributed to the lifting of the voluntary hold on the sale and implanting of all Sientra breast implant devices manufactured by a former contract manufacturer between October 2015 and March 2016. Net cash and cash equivalents as of June 30, 2017 were $55.5 million compared to $58.8 million at the end of first quarter 2017. This cash burn reflects the drawdown of approximately $5 million of debt from our prior $20 million credit facility we announced in March of 2017. We continue to remain focused on maintaining a level of cash sufficient to running our business following the closing of the Miramar acquisition and are confident in our ability to do so in the near term following our agreement with MidCap Financial Services and Silicon Valley Bank for a $50 million credit facility comprised of $40 million in terms debt accessible in 3 tranches and another $10 million revolver. This new credit facility replaces our aforementioned $20 million credit facility and allows the company to be opportunistically to acquire Miramar Labs. Looking forward we will continue to be good stewards of our cash. An opportunistically with market conditions we'll look to potentially strengthen our balance sheet to ensure we maintain adequate capitalization. With respect to the Miramar acquisition as previously stated, we estimate faster revenue growth at the combined company at an accelerated timeline to positive cashflow then we would have had as a standalone business. We are required to file an 8-K in October of proforma financials showing us as combined companies back to 2015 and over time we will be adding Miramar specific additional information to our supplemental financial information for ease of reference. As we have stated in the past, we will not be providing full revenue and profitability financial guidance at this time. As we remain in market precision control selling mode and still awaiting FDA approval of the best in manufacturing facility. We still do expect the acquisition of Miramar to add approximately $8 million to $10 million of revenue in Q3 and Q4 and primarily back loaded in Q4. I will now turn the call back over to Jeff. For final closing remarks.

[Jeff Nugent:]

Thanks Patrick. I'm very pleased to summarize that Sientra remains on track with both near and long-term strategic objectives to expand our leadership position in the global aesthetics markets and most importantly is well positioned to execute on our most critical corporate objective and that is to achieve comprehensive high quality and reliable manufacturing. With the FDA's approval of our new manufacturing facility by the end of 2017. Each quarter we continue to extend our progress in diversifying our revenue mix, which is core to our new Sientra strategy. With the addition of Miramar, we made a tremendous addition to our portfolio. Similar to last quarter, we remain confident in our execution of these initiatives because this really does boil down to execution at this point. As we look forward to getting back to and beyond. Our previous market share position with me global aesthetics base. Our confidence is still based on 3 important factors. One; we remain on track with every one of our key objectives will be established at the beginning of 2017. Two; the Sientra team has passionately proven its ability to perform at an exceptionally high level during adverse conditions while continuing to scale up as we build as a larger organization to fuel our growth. Three; and our relationships with our plastic surgeon customers remain as strong as ever and we will continue to focus on our unique exclusive relationship with board certified plastic surgeons. In all, I am extremely proud of our team and excited to continue to build on our momentum across new segments as we move into 2018 and relaunch our entire breast implant line as we continue to leverage our exceptional products, people and relationships as the new Sientra. I'd also like to add that we look forward to seeing many of you at the Canaccord Growth Conference in Boston tomorrow and the Lake Street Conference in New York in September to discuss some of these exciting developments. With that I'd now like to turn the call over for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Chris Cooley of Stephens. Your line is now open.

[Chris Cooley:]

Thank you. Good afternoon and appreciate you taking the questions. Just two quick ones from me then I'll get back in queue. First, as we think about Miramar, could you expand a little bit upon how long you think it might take to actually optimize those protocols so that you can be a little bit more aggressive in terms of marking that offering and in conjunction with that the magnitude of the sales force expansion just thinking about that from an expense standpoint? And I've got a follow-up pertaining the breast business.

[Jeff Nugent:]

Alright. Patrick, you want to take that?

[Patrick Williams:]

Yes, sure. Hi, Chris how is it going. I think on the protocol as Jeff outlined, it's obviously one of the things that we've talked about. We want to look at, I can tell you we just had some commercial offsite where Keith Sullivan brought him on board for this very reason. I think people as he gets to work with Keith, he'll understand that he is highly focused on how do we make a procedure, a much better experience not just during the procedure but the procedure as well. How do we make that experience better for the physicians as well as they deliver anything that's out there? I saw him do this at Zeltiq with CoolSculpting and we're starting to see that happen now and we've got follow-up meetings to continue. So, we're moving pretty quickly and we do see this as an opportunity for us to enhance that as quickly as we can. So, we'll keep everyone posted on that but I will tell you things are moving quickly on that front. With relation to the sales force, we've got about 7 or so capital reps today in North America. We've got about 8 or 9 consumable reps in North America we are direct sales force. We will be expanding both of those not quite ready to tell you what those numbers will end up being, I think people can go back and on the consumable side. We ran anywhere between 35 accounts per consumable rep, so if you extrapolate out your model and you think about that we'll be looking to do the similar kind of numbers at MiraDry. And then on the capital side, certainly we need to do more than 7. There are many more territories in the US and a lot of opportunity out there. For 4 years at Zeltiq, Keith and I kept that number steady at about 32 reps every single year, we never change that capital number. There was a real reason for that. What we wanted to do was make sure that when we brought on an account, if we could onboard that account well. Whether that be training, whether that though the PDN being able to get in there and talk to the staff et cetera. We wanted to make sure that we just didn't inundate ourselves internally with a whole bunch of capital systems coming in. So, suppose that's the wrong way of saving number somewhere between 7 and 32 on the capital rap side, but we will be looking to add those as quickly as possible.

[Jeff Nugent:]

One other point Chris, that no we haven't spent much time describing the synergies between the existing Sientra sales force and we've spent a lot of time understanding it. And I'm convinced that there will be a substantial cross reference and referral of high potential candidates particularly on the Sientra to MiraDry side although, we still have a lot of work to do with that because it could very easily go to the other direction as well.

[Chris Cooley:]

Appreciate that color. Then just lastly for me on the breast side, and maybe this is a bit premature. But when we think about just the complexities of onboarding Miramar and integrating those offices with now the Sientra product as well. Does that change at all your allocations here to the back half of the year, as you are little bit supply constrained? And also, could you maybe give us any color as to the split when you look at the business here during the quarter between reconstruction an augmentation? Thank you so much.

[Jeff Nugent:]

Well, I think that gets back to Patrick's point that you know we're really not in a position to provide any guidance. And frankly the Miramar business is undergoing a significant review and there are meetings next week that will continue to get us to answer to that. But while there is so much uncertainty, we believe that we have solid net opportunities that like I said, we've said this time and time again it still too soon to give you any guidance beyond what we have.

[Patrick Williams:]

Yes, I don't think we anticipate anything right now changing from how we're going to resupply and relaunch from the skew standpoint or inventory standpoint related to bring in Miramar. On the breast product side, as we talk about. We've been very clear, we've got our implants which we know we're starting to especially as we go into the second half of 18, we'll remain steady and even see maybe a little bit down on revenue for that. That is not a demand issue at all, let's be clear that is purely a supply. I think we've said probably 3 or 4 times in the prepared comments, we are seeing however on our expander side the supply really free up on that as we talked about earlier this year. The second half will be unconstrained supply for us. We just literally had a call yesterday, and maybe a couple weeks ago we told the salesforce similarly and so we got a bunch of plastic surgery consultants on the Sientra implant side that are excited to go out there and start selling not only our Dermaspan but our very novel AlloX2 dual port design. So, we're looking for big thing as we got through. So that upside that you saw was primarily related to the expander line in the quarter.

[Chris Cooley:]

Thank you.

[Operator:]

Our next question comes from the line of Margaret Kaczor of William Blair. Your line is now open.

[Margaret Kaczor:]

Hi, good afternoon guys thanks for taking the question. First one for me, I just wanted to follow-up on the country just talked about in terms of having some of the implant sales slow in the coming quarters. Can you give us a little bit more clarity in terms of whether you're at that point in the field today maybe give us a sense of how close you are maybe if you're not at it today and then how much some of those high volumes skews represent?

[Patrick Williams:]

Yes, we're not quite there but we're getting pretty close. So, Charlie and I sit here smiling at each other. So, we have weekly operational meetings as you can imagine, we go through this and we talk about when product is going to start going on what we call back order within the next 90 days and that's starting to grow. So, as I talked about for folks before, if you kind of use I think most people are sitting right around that $5 million number on implants. You can expect that number to go down a little bit, each and every quarter to move forward. I'm not talking about it, in terms of ranges, we're not talking about millions of dollars to a million, it's closer to hundreds of thousands of dollars type thing and as I said we're working through that. So, we'll work with the customers, Jason O'Hearn as salesforce are used to this, they've done it for a while now and they are trying to work with our customer base to try to see if there's other products that other side or actually say style skews et cetera that they can use. So long will be the answer probably.

[Jeff Nugent:]

And I'll just add and I think you started to see, or we started to see the benefits of the very deliberate strategy we started taking even last year in bringing on a diversified mix of products. So that such that when we start to see some of the slow decline in our breast implant sales based on inventory levels were starting to pick up on tissue expanders and have a real focused effort also on BIOCORNEUM. So, net of that and I know Patrick has walked everybody through this, you'll start to see the mix of our expanders particularly in the second half of the year begin to replace some of the slow down on the implants side.

[Margaret Kaczor:]

Okay. So, it sounds like maybe the overall business with continue to grow just due to the expander business, maybe it will get a little pressure on the implant side. And then in terms of the commentary on the full-scale inventory in the second half of 18. I know it's not the first time you've mentioned that, but I can you give us a sense for how much that represents in revenues when you do reach that full scale is that maybe more or less than the revenue they had before your left the market. And then just even the 6 or 9 months from getting manufacturing approval to full ramp. It seems like a little bit of a long time may be. So why is it so long and could that timeframe be accelerated?

[Jeff Nugent:]

Well, I can speak to that Margaret because I have been dealing with manufacturing scale ups and what not for a long time. And what I think as we've discussed before this is a process of improving planning values that yield numbers et cetera and right now our focus is not on the efficiency per se, but it's the quality of the output. So, I'm going to try to make this straight as I can. The focus with breast is to produce high quality implants without distracting the organization from the quality objectives. And look we're being conservative here. We are not putting out aggressive targets where we're going to be able to get up to full scale supply levels within the first two three months. So please understand it that way. And until we've learned better, how the efficiency and planning values and so forth at best are able to adapt. We're preferring to take the conservative approach, which could well be different depending on how quickly they can move.

[Patrick Williams:]

And certainly, the goal for us practice is to get back to that. We were kind of that low teens market share before the other voluntary pull off on the cosmetic augmentation side. We've expanded that market now as we I think outlined a number of times that reconstruction and also importantly if you think back and I think it was the December of 16, we announced increase in our skew offerings and our style offerings by quite a bit. So, the good news is that we have it, I guess the bad news is that we have to go build those now right. So, there is tooling involved in everything else. So, to your question, one would expect that we have a much broader offering now. So, one should expect that we should be able to sell more than what we did before. So, a lot of things are working through and that's why we set it up for more than second half 2018 supply ramp up.

[Jeff Nugent:]

Yes, we could explain this further at some point in future.

[Margaret Kaczor:]

Perfect. And then one more question from me. In terms of you are moving into tissue expanders and AlloX2 that seemed like a really strong quarter this quarter if we assume that issue implants didn't change very much on a sequential basis around that $5 million. So, can you give us a sense of how many hospitals or programs are getting traction and I'm really how that ramp should look like over the next 12 months. Should we expect the level of change that we did see in the second quarter from the first? Thanks.

[Jeff Nugent:]

Yes, I think I called it out and I said we'll continue to kind of build up slowly on that. So, it was a good quarter on that. We built on it from last quarter. And I think the models are pretty aligned, but not going to get ahead of ourselves just yet and we'll see how it goes but we we're bullish about the product, we're bullish about our sales force out there being able to sell something and we're looking forward to what we call the second half of expanders for us which is really what 2017 focus will be from the sales standpoint related to the implants of breast.

[Operator:]

Thank you. Our next question comes from the line of Jon Block with Stifel. Your line is now open.

[Jon Block:]

Great. Thanks guys, good afternoon. Maybe I'll ask 2 or 3 maybe first one Jeff, as we think about the opportunity and synergies of Miramar. Is there an updated number for Sientra customers and the number of those that are on the capital device, in other words like that CoolSculpting or sculpture for the front of the office because according to your comments, that's sort of the one that you're targeting on a low hanging fruit machines from a synergy perspective?

[Jeff Nugent:]

Yes, I think it's -- we're still deciphering specifics here John. But what it really boils down to is you're looking at it from two points of you from a Miramar standpoint. The mix of customers who have Miramar devices is approximately 30% plastic surgeons. Its roughly the same on dermatologist. And if I'm not mistaken, the balance is made from the other medical specialties. So, we're coming at this from both standpoints and on those accounts with CoolSculpting and MiraDry, you're talking about roughly 200 accounts up there. And that's a sizeable target and again remember that and I'm sure you know extremely well that this is a combination of selling capital equipment plus the frequency of use of the consumables. So, this is a perfect Zeltiq analogy and we need to find the right balance between the capital equipment and how we can increase the frequency of use and similar playbook with what Zeltiq use. So, the other part of it is from a chapter standpoint we know that there is somewhere in the neighborhood 100 to 130 accounts that have CoolSculpting as an example and we know that these are accounts that are not only doing breast implants, but also have adopted CoolSculpting model, which we think is very similar to what we're doing with MiraDry.

[Jon Block:]

Yes, maybe that was the actual number I was looking for. So roughly 100 or 130 docs that are Sientra docs that have CoolSculpting again approximately.

[Jeff Nugent:]

Exactly.

[Patrick Williams:]

And to be clear that's only the active customers we know at our peak we've talked about being closer to 2,000 we brought that down to 600 what we call our active customer list so that's when we added that 600 is how you should think about that. We're still working through some of the analytics as we talked about. There's a lot of opportunity out there, obviously we've been somewhat reluctant to give all these numbers out there because we know you guys can start extrapolating and we just want to make sure people don't get too far ahead until we've got to get that sales force intact and find the things. But there is a game plan.

[Jon Block:]

Okay. That's a helpful number, I appreciate it. Just maybe more a big picture, -- we think about you guys coming back fully into the market in 2018. How would you characterize the competitive landscape and maybe how it's evolved since the time when you guys did the voluntary withdrawal? In other words, it is safe to assume Allergan is sort of more formidable net positive from a competitive landscape and maybe meant to her scale back a bit. Just would love to get your thoughts, as we think about you guys coming back to market?

[Jeff Nugent:]

It's a great question and I don't say that frequently John. So, the point is that is one of the critical aspects of our forward planning. And what we're doing is a series of analytics on an objective anonymous basis to understand how not only our core 600 but the remaining customers have changed their attitude towards each of the 3 providers. There is no question that mentor has weakened significantly, there is also no question that Allergan has become much more dominant with the number of recent acquisitions. And that there are several things that we have done to determine those strategies that will still allow us how to be able to take share for both of them. I think we've announced recently that we've just brought in a new Vice President of Marketing, B.J. Scheessele who was Vice President of Marketing for LifeCell, just acquired by Allergan. B.J. also has about a 10-year solid career with JJ's core -- number of people back then I've known very well. And where we have a real advantage with B.J. because he has experience in these categories. He's competed successfully against Allergan and Mentor and he knows more about reconstruction as far as I'm concerned than anybody in the market. So, I won't go through the entire list, but this gives you some idea of how increasing the strength of our organization is going to make the strategies that we're developing much more effective.

[Jon Block:]

Very helpful. And last one maybe if I can just slip in one more too. Patrick, I think when you alluded to the 70% gross margin correct me if I'm wrong, but I thought that was sort of a specific breast gross margin number. So, as we think about consolidated gross margins in the back half of the year you start to sell the 8 million to 10 million Miramar which clearly was going to have a capital component to it. Is it more sort of 65-ish blended for the company. Maybe if you can just comment on that so we're on the same page.

[Patrick Williams:]

Yes, that's a great point John. To clarify, yes that was a Sientra prior I guess the implant breast product was BIOCORNEUM you are I would stay in that mid-sixties when you start combining on the $8 million to $10 million for Miramar. The real thing that is the 8 million to 10 million what's it comprised of. We are going to make a push on the US direct markets first. Its where we are going, it's what we want to make the investment initially obviously we get higher gross margin on those just because it's a direct instead of a retail channel instead of a wholesale channel. So we're hoping that we might get a little bit of a nudge up on sort of the historical Miramar gross margin that you've seen because half of their business was international through distributorship so was wholesale but it's a fair point then and appreciate you bringing that up.

[Jon Block:]

Thanks for the time guys.

[Jeff Nugent:]

Thank you, John.

[Operator:]

Our next question comes from the line of Brooks O'Neil of Lakestreet Capital. Your line is now open.

[Brooks O'Neil:]

Thank you. Good afternoon, I have a couple of questions. It sounds like both the -- or the process of approval with FDA on the manufacturing is increasingly critical if you will but you seem highly confident and approval by year-end. I'm hoping you could give us just a little color in terms of where you're at with the FDA and what might be some of the key things that need to still be done to get across the goal?

[Jeff Nugent:]

Well, good to hear your voice Brooks. This is Jeff, in case you can't tell. The thing about the criteria that need to be met for full manufacturing facility approval are prescribed in a large stack of government regulations. And I continue to have extreme confidence in the joint teams that we have between the Sientra experts that we have as well as the best of experts who are working in lockstep to be able to check off each one of those boxes. The question that I think you asked is what is one or you know perhaps other 2 or 3 that is critical to getting the approval that we are still confident that we will get. And that one particular hurdle is to complete the FDA inspection with actually no exceptions. And the way they measure those in the FDA is 4 A threes. So, we just recently finished a mock inspection by a senior retired senior FDA official who has given the guidance to be as brutal as you can possibly be. And we just finished that last week and we came through that mock inspection with absolutely 0 defects. And that's an indication of the confidence that we have and I don't want to get into all the micro details that go along with any FDA decision. But I remain confident that the strength of the teams we have are going to give us what we need for the one most important box that needs to be checked in order to get the approval.

[Brooks O'Neil:]

Great. That's very helpful, you wouldn't by any chance be willing to tell us when that inspection is scheduled.

[Jeff Nugent:]

No, I am not inclined to give you that information. So please forgive me.

[Brooks O'Neil:]

No, no that's fine. So…

[Jeff Nugent:]

Other than imminent Brooks.

[Brooks O'Neil:]

Right, imminent gets nasty in Wisconsin as we get a little later in the year.

[Jeff Nugent:]

Yes, I know that.

[Brooks O'Neil:]

Right. I have to confess my personal bias is you did the absolute right thing with the settlement. But I want to say, I've gotten some questions from investors in terms of why and in particular the $10 million pavement you agreed to. Just curious if you give us any color on your thinking there and how that sort of played out?

[Jeff Nugent:]

Well, I'm probably in the best position to answer that although I have the attorney from K&E sitting across the table from me. But this really boiled down to a process of extortion and that we feel that the claims that Silimed had made up as the basis for both the litigation and the arbitration carried significant legal uncertainty that the prosecution through both of legal channels could well have exceeded the amount that we ended up giving them. “And from a financial standpoint, I can say that that's a significant give on our part but at the same time this has been a significant distraction dealing with this on a weekly basis. That it was worth it to us to get it behind us and not be distracted and not have Silimed go off and look for other partners of ours to intimidate.” So that the final resolution on all accounts to me and to the group that we made the decision together with was by far in the best interest of Sientra. And I'll point out also that we have a number of involved investors who we talk to and the overall reaction to this has been that they understand and that this was a very positive intelligent decision on our part.

[Patrick Williams:]

Real quick, I just want to make sure to put maybe some context and framework around it. You look at these things and when you do it, it really does come down so much as the straight economics, and so we were going to continue to spend legal cost to go from now until trial was actually trialed. And so, when you net out with cash expenditure on legal is and you deduct directly from the savings we'll get from that we're looking at a much much lower number than $10 million right. So, you're talking maybe $3 million or $4 million that we actually are out of cash between now and what I'll call the end of 18 going into 19 and I think Jeff said it, but what did that get us that got us full global freedom to operate. Took the overhang away. We got ahead of this way before, the next few quarters here and just for us it just makes a lot of sense to do that. So, people should really take that into account and I'm sure you'll convey that message accordingly.

[Brooks O'Neil:]

Absolutely. So, it sounds like you lined up adequate capital to run the business and potentially consider additional acquisitions. I was wondering if you'd be willing to provide any of your thinking about timing sort or targets et cetera as you think about where you're at today and where you'd like to go down the road?

[Charlie Huiner:]

Yes, Brooks thanks for the question. This is Charlie Huiner. What I'll say is a couple of things in terms of our ongoing strategic intent on acquisitions and M&A. I think we've been as you know and I think many people on the call know pretty active these past 12 or 16 months on the acquisition side. Starting with BIOCORNEUM and continuing with the purchase of a really leading novel tissue expander line from especially surgical products and finishing most recently with the acquisition of MiraDry. These are three strategic acquisitions we made, we think we made them intelligently. I think if you look at the economics of what we paid versus the opportunity to create real lasting value in growth and scale going forward. We think that the mix of price paid versus upside for these assets should prove that we were good stewards of our shareholders capital and that we've set up a very much more diversified company for Sientra. A part of the strategy right now for us and for our team, is to properly integrate these acquisitions and to begin actualizing the benefits of these new revenue streams. So that's a long way of saying we certainly have a good number of things to bite off right now as it relates to integration and optimizing these assets and really starting to drive scale and growth. Doesn't mean that we don't have other things that could be attractive, we have spoken certainly about continuing to expand our recon portfolio on the regenerative side. There are assets out there, but at this point I think we're going to keep it pretty general but also give you the visibility of where our focus is going to be for a period here which is to really integrate and optimize those assets that we purchased over the last 12 to 14 months.

[Brooks O'Neil:]

Great. That's very helpful. Another area I'm curious about with the settlement you open the door to talking about international. We know there are some big markets over there. Just talk about your appetite to take the business internationally and when we might begin to see some specific initiatives in that direction?

[Jeff Nugent:]

Yes, Brooks I think there are a couple of things that come into play here. Number one is the settlement that we reached with Silimed where we are free to compete outside of the North American market. For the first time without the threat of a legal challenge. So that's a significant piece. I think the other part of this is, we have an international distribution capability already in place with the acquisition of MiraDry and Miramar. So, these are all things that we're working through right now. And as you know that -- and as I've learned an objective of becoming a global leader comes with a mixed bag. So, the basic international strategy we have is to confirm the logic of where we have Miramar international presence and also to make sure that we're taking those international markets that have the greatest profitability potential. So, this is still relatively early stages. We've been focusing on the North American market which we will continue to do. But now because of these other 2 developments it gives us a much wider door to pursue.

[Charlie Huiner:]

Maybe just some additional color. This is Charlie again, we've made it pretty clear that North America is our primary focus and today its US. Certainly, I think we've said this on previous calls that Canada would be the next logical market to extend our North American direct presence. And just to again be very clear about the dynamics for these two markets clearly better pricing, better margins. These are the top two markets, aesthetic markets by far. So, as we think about do we begin to really extend into OUS and OCanada markets while we do have that opportunity, one of the real gating items to us is that we still have to go through a registration process that takes time. I can tell you that we certainly are in the process of getting ourselves in a position at some point to do that. But that's certainly not our near-term focus and priority. We have as Jeff mentioned, we do have an international business already now with MiraDry, but as it relates to how attractive it is for us to take competing investment dollars and put them into say Europe as an example for breast aesthetics, I can just tell you no, that's not going to be where we think is the best use of competing investment dollars vis-à-vis some of the other opportunities we have ahead of us on the commercial side in North America and hopefully that color rounds out some of Jeff's commentary.

[Brooks O'Neil:]

Absolutely. I just have one last one. We talked a little bit about when you announced the Miramar deal but, I'm just continuing to be intrigued by the parallel with Zeltiq and how you see that helping you achieve rapid success with the Miramar acquisition and as you are now a little bit further into it can you just talk about what you think some of the big takeaways or the big learnings might be that will help you scale quickly this acquisition?

[Jeff Nugent:]

Well, I think Patrick is probably in the best position to comment on it. But let me try to summarize at this point Brooks. I think the basic Miramar, MiraDry franchise has significant and powerful analogies with CoolSculpting and Zeltiq and we could talk about this for hours. But I think the other part of it is having the experience in-house that Patrick and Keith Sullivan bring to me is a situation. I don't remember an analogous situation, where a company has the analog to a very successful business with the level of experience and expertise that we already have associated with the business. And I don't want to talk anymore about that but there are further aggressive steps that we're prepared to take.

[Brooks O'Neil:]

Great. Thank you very much.

[Jeff Nugent:]

Alright. Thank you, Brooks.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to hand the call back over to Jeff Nugent for any closing remarks.

[Jeff Nugent:]

Yes. Thanks for dialing in. We are very excited about the business and the progress that we're making and look forward to sharing the additional progress we're making in the future. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You all disconnect. Everyone have a great day.