Sientra, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Sientra's Second Quarter 2018 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 is being recorded. I would now like to introduce your host for today's conference, Tram Bui with The Ruth Group. Please go ahead, ma'am.

[Tram Bui:]

Thanks, Operator. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of the 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 a quarterly report on Form 10-Q that the company will file with the SEC shortly. 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 Chief Executive Officer of Sientra.

[Jeffrey Nugent:]

Thank you, Tram, and good afternoon everyone. Joining me today are Patrick Williams, who we announced in our press release earlier today, will be transitioning from his role as CFO to Senior Vice President and General Manager of our miraDry business; Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy; and I'd also like to welcome Paul Little, who is joining us today as our newly appointed Chief Financial Officer, Senior Vice President and Treasurer. Since our last call, we have continued to build on our first quarter momentum, making significant progress on a number of initiatives which I'll review on a high level before Patrick provides additional insights on our second quarter performance. First, we achieved another record quarter, with $17.6 million in consolidated net sales, marking the second consecutive record revenue level for the company, reflecting positive growth in both our Breast Products as well as miraDry segments. Second, along with these strong business results, we have begun the leverage our recently strengthened balance sheet with a particular new focus on driving innovation, product improvements, and line extensions that can enable sustainable, short, medium, and long-term organic growth across both miraDry and Breast Products segments. We have decided to make innovation a significant focus for Sientra. And for miraDry is continue to expand the miraDry platform beyond its current indication for the permanent reduction of sweat, odor, and hair of all colors in the underarm area, which I must say is unique claim that is proprietary to miraDry and Sientra. To do so we are looking to address other clinically relevant body parts while simultaneously exploring new indications for this novel technology. Related to our Breast Products segment, last week we announced the launch of SLICE, the Sientra Laboratory and Innovation Center of Excellence, our new development center for breast products and a signal of our commitment to driving competitive differentiation to benefit our board-certified plastic surgeon customer base and their patients. And finally, we strengthened our team at an operation level, mostly notably with today's announcement that Patrick will transition to General Manager of miraDry with which he has extensive experience, as Keith Sullivan remains engaged in an advisory role and a member of our Board of Directors. And last, Paul Little, another aesthetics veteran, takes over as Chief Financial Officer. And I'll speak a little bit more about each of these individuals in a minute. I am confident that these achievements combined with a number of other positive developments in the second quarter have increased our momentum toward becoming a leading global partner for aesthetic physicians. Let me continue with more detail on the progress we're making, starting with the Breast Product business. As we discussed on our last call, the FDA approval of our PMA supplement, in April, allowed us to initiate the commercialization of our Vesta-manufactured OPUS-branded silicone breast implant line to increase our ability to meet the strong physician demand we continue to garner in the second quarter. We remain committed to continue to recapture market share even as we remain in a precision-controlled re-launch mode while we ramp up manufacturing capacity through the second-half of 2018. We remain confident in the market demand for our products and services, but recognize that our Breast Products revenue growth in the back-half remains dependant on Vesta's continue supply ramp rate through the balance of 2018, as well as the traditional quarterly seasonality factors. Since reentering the market, we've continued to receive overwhelmingly positive feedback on our recently published 10-year comparative clinical study which provides compelling data on the long-term safety and effectiveness of Sientra's implants, including the lowest rupture rates in the industry, and our best-in-class Sientra Platinum20 warranty program, the longest and most comprehensive in the industry, that we also launched in the second quarter. This warranty is grounded on the confidence we have in the 10-year clinical data, together along with the excellence demonstrated by our highly experienced Breast Products sales force of approximately 40 plastic surgery consultants or PSCs, and the demand for our products at the physician and patient level, we remain confident in our ability to continue to grow our breast implant market share, particularly as we look into 2019. Additionally, we are experiencing year-over-year growth in the reconstruction category, a move that we recently made approximately a year ago. And it's an example of how we are utilizing an adjacency strategy in our overall growth plans. To further enhance our competitive position and long-term growth prospects, we are also investing in product development capabilities to advance new and innovative solutions for board-certified plastic surgeons and their patients at the same time that we believe our competitors are decreasing their investment and commitments to this specialty. Last week, we announced the launch of SLICE. SLICE is a state of the are clean room and research lab located near our Santa Barbara headquarters where we will advance our efforts to drive product development, research and innovation activities tied to our surgical breast segment. The collaboration center, led by Dan Carlisle, our Vice President of Innovation and Product Development, and one of the foremost experts in the world, is a formal initiative that will bring together our experience, product development, and clinical teams with plastic surgeon KOLs, and technical experts to drive projects that can provide meaningful improvements to clinical practices. SLICE will also enable Sientra to accelerate development efforts on key portfolio additions and enhancements tied to Sientra's stated goal to be the leading company dedicated to providing aesthetic solutions, support, and services exclusively to board-certified plastic surgeons. Dan and his team are already leveraging the facility to take new concepts, early prototypes to the next level. And we believe that we have a robust pipeline of new products and product improvements that will supplement our growth in each category in which we compete. In sum, consistent with Sientra's core vision, we feel passionately that our breast augmentation and reconstruction physician customers and their patients have not benefitted sufficiently from investments in new technology and clinical functionality. And our investment in SLICE is intended to change that. Our SLICE initiative is just the latest tangible demonstration of our commitment to advance the clinical and business objectives of our board-certified plastic surgeon customer set. Moving to the miraDry performance, in the second quarter we achieved 33% sequential quarterly growth, and nearly 50% year-over-year on a pro forma basis in miraDry sales, driven primarily by our ability to place systems in international geographies while growing system and consumable sales in the United States. We believe that the initial success of our miraDry commercial strategy to deliver growth in a large and underserved market for the permanent reduction of underarm sweat, odor, and hair of all colors is attributable to a number of factors. Including, number one, our decision to rapidly build an experienced world-class sales team, which now numbers 55 globally, and is lead by all proven veterans in the aesthetic space. Second, the launch of a digital direct-to-consumer marketing strategy to activate the 15 million people in the United States, increasing the overall awareness, which are survey dated characterized as being interested in the miraDry treatment. Third, the launch of the first phase of our miraDry fresh treatment protocol enhancements launched in the first quarter that optimize the clinical and patient experience, including reducing the overall procedure time. And finally, the validation strategy that is demonstrated sustained procedure efficacy and customer satisfaction of approximately 90% through 12 months. Also, in the second quarter, we received final approval of miraDry from the Japanese pharmaceuticals and medical devices agency or PMDA, this is a critical milestone which allows our physician customers in Japan, which we consider to be a significant market to actively market the miraDry procedure, something that they previously could not do. This approval was essential to help further build brand awareness and this large market opportunity for miraDry, and we are already seeing a significant increase in consumable sales in Japan following this approval. As we look ahead, we remain confident that miraDry will continue to be a significant growth driver for the company, especially as higher margin consumable sales continues to grow as market awareness further drives demand for the miraDry treatment. We are currently exploring options to expand the direct-to-consumer marketing campaign from predominantly targeting potential customers in large metro areas to a nationwide campaign. We are also encouraged by the current utilization trends that are tracking well to our market survey data in terms of targeting the right key demographic targets, giving us increased confidence in the prospects of a larger but still somewhat targeted campaign and our experience --sense of experience in the DTC strategies provides us the basis for expanding in an efficient manner. On the R&D front for miraDry, we continue to believe that there are a number of additional applications that represents significant incremental usage of beyond that which is available for miraDry today. Specifically we see treatment of the chest, back, groin, and hands representing substantial expansion opportunities in the near and medium-term. In some of my previous experience, I saw this firsthand. Our miraDry R&D team is led by Bo Chan, who recently joined us from Signature, and has a strong background in the aesthetics capital device space. Bo and this team will continue to explore the use of microwave technology to expand indications to help further expand our addressable market. I'm also pleased to announce Patrick's transition to take the lead at miraDry as our new General Manager, replacing Keith Sullivan, who remains directly at an advisory level. And as many of you have come to know Patrick, you know that he has consistently gone beyond the typical CFO in terms of his active engagement at the commercial and operational levels of the businesses, and I'm extremely confident in his appointment and success as General Manager. Patrick brings with him deep knowledge of the aesthetics capital consumable space, and he understands the complexities of how to achieve aggressive growth and value creation with this business model. Patrick is extremely well-positioned to work with Keith based on this past history, and I'm confident that he and the rest of the leadership team in place will look to lead miraDry through a new chapter of growth. That being said, I would also like thank Keith for his tenure as Interim General Manager of miraDry. Keith is an exceptional leader, and his expertise has undoubtedly allowed for our initial success with miraDry since our acquisition of the technology in July of last year. Keith will support Patrick in an advisory role, while continuing his duties as the Sientra board member. We also announced today the appointment of Paul Little as Chief Financial Officer and Paul's appointment represents the addition of yet another extensive aesthetics industry veteran to our leadership team and my view is an exceptional choice. Paul formally led the finance team at Allergan's Medical Aesthetics division where he worked closely with Philippe Schaison, a member of our Board of Directors and has a deep understanding of not only the breast products market but also accounting for a considerably more diverse portfolio of aesthetic products. I'm confident that Keith, Patrick and Paul will collaboratively as they transition into their new rules. I look forward to introducing you to Paul in the coming weeks and months. With that, I would now like to turn the call over to Paul for a short introduction before Patrick provides a detailed review of our second quarter results and I'll return to provide some concluding comments and open up the session for questions from those who have dialled in. Paul?

[Paul Little:]

Thank you, Jeff, and good afternoon everyone. As many of you know, I have spent a significant portion of my career working in the aesthetics industry and believe this a dynamic market with significant growth potential and opportunity. Sientra is well-positioned with two strong aesthetics business segments which both have recently entered their next growth phase. Through innovative technology, industry leading physician relationships and best-in-class sales force, I believe Sientra will become the most dynamic company in aesthetics. I'm excited to join this talented group of professionals and induce my deep industry knowledge to further our objectives. I look forward to meeting many of you in the coming weeks. With that, I will hand the call over to Patrick who will review the company's second quarter 2018 financial results.

[Patrick Williams:]

Thanks, Paul, and welcome aboard. As a reminder with the exception of adjusted EBITDA, all of our financial metrics are reported on a U.S. GAAP basis, additionally we will continue referencing in adjusted EBITDA margin which we define is earnings before interest, taxes, depreciation, amortization and stock based compensation. Specifically we are removing non-cash items and were non-recurring items for this non-GAAP measure. Again, please refer to our supplemental financial information our release and 10-Q for tables one GAAP and non-GAAP pro forma net sales and a full reconciliation of adjusted EBITDA to its GAAP counterpart. Before I go over second quarter 2018 financial results, I wanted to open up some comments on our cash position. Net cash and cash equivalents as of June 30, 2018 were a $112.6 million compared to $16.1 million at the end of Q1, 2018. This increase balance includes net proceeds of a $108.1 million from our follow-on common stock offering completed in May and an additional $10 million of cash received in April as a result of the FDA approval milestone achievement within our existing term loan credit facility. Our balance sheet is the strongest it is ever been and for guidance with the necessary capital to invest and grow both the breast products and miraDry segments of our business. As we drive toward cash flow breakeven and while our cash was higher this quarter as we caught up on our accounts payable. We do expect it to moderate down to approximately $12 million a quarter in the back half of this year. As I review our second quarter of 2018 results, I will provide additional color on where we expect each financial line item to trend for the balance of 2018. Consolidated total net sales for Q2, 2018 were $17.6 million on a GAAP basis and increase of a 115% compared to total net sales of $8.2 million under GAAP for the same period in 2017. Total net sales increased 28% on a pro forma basis, year-over-year compared to pro forma total net sales of $13.7 million in quarter 2017 to account for a full quarter of miraDry. Within our breast products segment, net sales total $9.4 million for the quarter up 15% increase compared to $8.2 million for Q2, 2017, driven primarily by continued strong performance of both our AlloX2 and Dermaspan breast tissue expanders. For the balance of 2018, we anticipate Q3 to be flat to slightly down at least our normal Q3 quarterly seasonality but ramping up as we move into Q4. Our miraDry business segment achieved net sales of $8.1 million in Q2 2018, representing a 33% sequential increase versus of 6.1 in Q1 2018 and 47% year-over-year increase on a pro forma basis compared to $5.5 million in Q2 of '17. The third quarter for miraDry is traditionally a slower quarter in the aesthetic capital markets and some international areas. And therefore we expect miraDry will follow these historical patterns. As our U.S. business gains more traction in the second half of 2018, we do expect the U.S. to contribute about 60% to total worldwide revenue in the second half and also expect about 60% in total worldwide capital sales for the second half 2018. Gross profit for the second half was $10.9 million or 62% of sales compared to gross profit of $5.5 million or 68% of sales for the same period in 2017. Our Q2 gross margin was impacted by a non-cash inventory reserve related to both business segments. Excluding this reserve would've resulted in a normalized gross margin of approximately 64%. The year-over-year percent decrease was primarily due to the inclusion of miraDry, which currently carries a lower gross margin than our breast product segment. We do expect to see a slight step-up in gross margin as we move into Q3 and Q4 of 2018. As a reminder, our strategy in the near-term is focused on system placements as we expand both our U.S. and international footprint. Still, our overall consolidated gross margin is highly dependant on the overall mix of breast products versus miraDry as well as the components within miraDry. Operating expenses for Q2 '18 were $27.8 million and an increase of $2 million or 8% compared to $25.8 million of expenses for the same period in 2017. Operating expenses in Q2 '18 were driven higher primarily by the inclusion of miraDry and a significant investment in its global sales and marketing teams. This investment included higher stock-based compensation as we issued new equity to miraDry employees as part of the acquisition as well as a significant equity refresh for employees on the breast product side of the business. The higher stock-based compensation expense will continue for the balance of this year due to this renewed investment in our employee base and is contemplated across all OpEx categories. We would expect R&D expense to be higher moving forward and to reflect the increased product pipeline involvements Jeff mentioned earlier in both segments of the business. On the G&A front, we expect the current expense levels to continue as it is important that we invest in our infrastructure to ensure it scales with our planned robust revenue growth including international expansion with miraDry now part of our total business. In terms of sales and marketing, we do expect expenses to be up slightly in Q3 '18 and up further in Q4 '18 associated with higher revenue and further investments in our global sales and marketing. Net loss for Q2 '18 was $80 million or $0.73 per share on a GAAP basis compared to a loss of $20.4 million or $0.07 per share for the same period in 2017. Adjusted EBITDA for the quarter was a loss of $11.8 million compared to a loss of $7.2 million in Q2 '17. The year-over-year loss increase can be mainly attributed to the inclusion of miraDry. I'll conclude by noting that consistent with our previous comments at this time we will not be providing any financial guidance until we have fully re-entered the breast implant market at full scale and sufficient time to forecast near-term growth across both breast products and miraDry segments. I look forward to my new role and I look forward to working with many of you and introducing Paul over the next several months, and I'll now turn the call back over to Jeff for final closing remarks.

[Jeffrey Nugent:]

Thank you, Patrick. Again, following another positive and exciting quarter and continued momentum toward our goals, I remain as confident as ever and in fact even more confident in the growth prospects for Sientra. Our path to a fully scaled diversified global aesthetic company has never been clearer. And our second quarter results further validate that strategic vision. As our breast product segment continues to ramp-up following April's FDA approval and our second quarter results are encouraging, considering we only benefited from approximately two months of post approval supply. We also expect our miraDry segment to continue to outperform as we advance our growth strategies. Our R&D efforts, namely the launch of SLICE and our commitment to grow the miraDry platform will best position Sientra for both mid and long-term success and I look forward to providing updates on these initiatives as we move forward. The combination of these parallel initiatives represents a significant commitment to grow the business to deliver better outcomes to our professional partners and their patients. Our team has never been stronger and I look forward to working closely with Patrick, Paul, Charlie, our board of directors and the entire team at Sientra to drive each strategic objective forward. I want to once again thank everyone at Sientra breast products, miraDry U.S. and International for their hard work and dedication and I'm excited to continue to build on our momentum across our business as we approach 2019 and beyond. With that I'll now turn the call over to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Kyle Rose with Canaccord. Your line is open.

[Kyle Rose:]

Great. Thank you very much. Can you hear me all right?

[Jeffrey Nugent:]

Sure can. Thank you.

[Kyle Rose:]

Congrats on a strong quarter. I just wanted to touch a little bit on the miraDry business. I mean, obviously, the first-half has outperformed expectations, I think, both internally as far as how you've discussed the business starting the year as well as how investors have thought about it. And just from a big picture perspective, I guess, what's different than where we were 12 months ago when we were entering the second-half of '17 and we saw a little bit of a slower ramp versus where we are now and how we should really think about the sustainability of some of this growth, at least in the near-term. Particularly given it sounds like you expect the U.S. business to ramp in the second half of the year?

[Patrick Williams:]

Hey, Kyle, it's Patrick, yes. So I think the biggest thing is stability and part of that candidly, is the announcement we made today. So with me moving over into the permanent general manager role, we have fully embraced what we believe to be a nice asset for our business as we move forward. Stability in the sales force, you know, we still work through some things on that, stability in getting the protocol down, getting the message down of how we want to take this out to the physician customers. And now we're starting to see how we're going to take it out to the consumer patients as well. So it has been a year. We've learned a lot in a year and I think you're starting to see the benefit of a pretty big investment by Sientra into the miraDry business segment. And so it's on us to perform now. And as we move follow, I think you should expect to continue to see some nice growth as we go forward. Certainly, the second half comps are going to be much easier for us because of when we took it over in Q3 and Q4 of 2017, but we certainly did not buy this asset to grow it 20% a year.

[Kyle Rose:]

And then I think, Jeff, you also touched a little bit on the rollout of the Phase I of the miraDry fresh protocol and then just -- obviously, that's still early, but maybe just walk us through where that is in the rollout in the U.S. market? Are you in 20% of the way, 50% of the way over that to your customer base and then just how much of an impact that really is relative to the aforementioned stability and investments in the sales force?

[Jeffrey Nugent:]

The basic answer is that the new fresh protocol is a result of some very clever and creative people in the miraDry organization who have made significant changes to the protocol, software and training among our practitioners and that when you look at a comparison between the time of the procedure, for example, in the before state compared to the significant reduction in the overall treatment timeframe as well as the significant improvement in patient experience, that's something that has moved rather quickly. And it's in stark contrast to what we inherited. So I hope I'm answering your question, but I think those are some of the things that are making a difference and as we've indicated, you know, this afternoon, the more devices that we place, both domestically and internationally, it represents a consumables opportunity that continues to grow based on the positive experience of not only the professional but also the patient.

[Patrick Williams:]

Maybe a quick way to answer it is that's all we teach now in the fresh protocol, obviously, all new machines have it. We made a huge effort to make sure all the install base, both domestically and internationally was converted over to the fresh protocol, but I think importantly our entire sales force is teaching that. So you're going to have some outliers here and there that you're just not going to get to or they may be stubborn. But we are definitely seeing the benefits of that new protocol.

[Kyle Rose:]

Great. And then just one quick question or one more question and I'll jump back in the queue; on the breast business, you've made a bigger push into recon over the past 12 to 18 months. And I guess -- with the implants -- in the inventory improvement on the implant side, I guess, how should we think about what the growth trajectory of that recon business can look like and I guess, how does your first really -- you know, 12 months in that market, you really informed how you think about the growth trajectory of the recon business? I know it's a different sales channel, it's a different sales cycle as far as getting on accounts, but you know, now that we're 12 months into the big push here, I mean, maybe help us understand are we going to see an inflection point in that growth rate, moving forward? Do you have any inclusion of the implants? Are you now getting on different tenders and contracts just kind of give us a little more color there.

[Charles Huiner:]

Yes, Kyle, this is Charlie. I'll talk to the recon business. And certainly the expander portfolio that we acquired got us more into this side of the business and certainly if you look at our growth over the last four quarters, on the recon side, most of it, because of our supply constraint on the breast side, most of that growth is being seen in our tissue expander portfolio. And we continue to see that growth in scale. And we're putting additional effort into it. So as we've talked about in the past, we do have a national account lead, who is really driving -- to your question, driving our ability to get onto some of the hospital contracts that are important for this side of the business. We're going to expand that team just to give you a sense of the effort and the emphasis on -- and our belief in that side of the business. So we're going to continue to expand his team on the national accounts side to continue to open up our ability to land contracts on the hospital side. That should provide additional growth in the near-term more on the expander side. But as we continue to grow the supply side of the implants and again as we've been pretty consistent, we believe 2019 starts to open up the bigger picture for breast reconstruction, which will include both what we believe is continued scale on the expander side and then also starting to drive more scale on the implant side. So we really feel good about how we're setting up, wrapping up '18, continuing to drive scale and growth with our expander portfolio as we build up inventory in the implant side and start to think about 2019 as where we should start to get more scale on the implant side of breast reconstruction.

[Jeffrey Nugent:]

And the other thing I would add to that is that there's a combination of efforts and initiatives that are going to continue to derive our reconstruction commitment, but it starts with superior products and I'm proud to say that we have superior products that offer advantages that frankly no other product does in this category. But you still have to go through the authorization institution-by-institution, but I think the medium to long-term opportunities in moving into this adjacency, which is one of the fundamentals for our continued growth is going to show very strong dividends.

[Kyle Rose:]

Great. Thank you for taking the question.

[Operator:]

Thank you, our next question is from Richard Newitter with Leerink Partners. Your line is open.

[Unidentified Analyst:]

Hey guys, it's Jamie [ph] on for Rich. A quick question on the SLICE innovation center and how you are thinking about competition entering the market, so you guys have a competitor that's coming on claiming best-in-class, capsular contracture rates and granted they're not in a trial yet. Just wondering what's kind of your confidence that you can get your revision rates and capsular contraction rates lower and then kind of how much of the focus in this SLICE innovation center is really going to be focused on these sorts of rates and the data collection around that?

[Jeffrey Nugent:]

Let me answer it this way. I think, first of all, I believe, you're referring to Establishment Labs and Motiva and we've been following them very closely for a long time. There are still questions about the validity of their claims are primarily related to the amount of time they have been implanted. So there are still questions to be answered, but at the same time, our 10-year objective peer-review journal article shows significant advantages that we have on virtually all dimensions and not least of which is rupture rates, capsular contracture and so forth and these have been measured over an extended 10 year period time which the new entry is attempting to duplicate or surpass. And in this category, so much depends on the length of time that we see the results in vivo. So I'm not criticizing anyone, but I think there are still significant questions as to what their ultimate comparison is going to be while we continue to improve ours. So that's the short answer, but it's a natural capitalistic society where innovation is being peaked up by a number of people, but we're so confident in where we stand today that the SLICE initiative is focused on a very aggressive attempt to continue to build that lead. I hope that answers the question.

[Unidentified Analyst:]

Okay, that's very helpful. And then I guess pivoting to the miraDry business, you guys say that of course sequential growth in both placements and consumables in the U.S. and solid growth, I mean international placement. So I guess I was wondering can you give us a sense of performance internationally relative to Q1 is the right way to think about that there was a sequential increase in placements and this revenue there and then just on like the split. I know you said 60% U.S. going forward, is that fair to assume in this quarter that it was still skewed more towards 50-50 given the strong international performance? Thanks for taking my questions.

[Patrick Williams:]

Yes. Thank you, it's Patrick. So we were right around 50-50 again for Q2 interestingly enough on the international side and Jeff mentioned a little bit in his prepared comments. We are seeing that utilization start to pick up on International which is great, I think that has a lot to do with the team engaging, a lot of the distributors, as well as the fact that one of our bigger markets out there right now is proving to be one of our bigger markets in the near-term is Japan. And we're starting to see some uptick on their consumable utilization or the consumable purchases. And that's directly correlated to the fact that we did get it an additional sort of official approval call it in the Japanese regulatory market. And what that really did was freed up those physician customers we've able to actually advertise miraDry on Web site, papers everybody want to do it right digital. And so, we did see some spike there, but generally I think we saw good everywhere. U.S. started picking up once again on consumables. And I think that the PDNs out there really working at hard and getting to some of the inventory issues that were legacy that we've been battling through over the last year, where the I think there was some channel stuffing, prior to us purchasing the company and were starting to get through that stuff. So we're very pleased with the overall performance.

[Unidentified Analyst:]

Great. And then if I could just ask one additional question, on the expanders, so I just curious kind of how much of the expanders that you're currently selling are getting used with or without a Sientra breast implant and kind of in other words what I'm trying to get out here is there a leading indicator of where the breast implants are currently being induced. Thanks.

[Charles Huiner:]

Yes, this is Charlie. And it's sort of consistent with the previous question and that because of the supply constraints that we've been living under really for the last two and a half to three years. There's not a direct correlation today or a leading indicator of breast implants sales attests to expanders, what we are doing and what we do believe will happen is that by creating the infrastructure and beginning to create awareness and demand on the expander side of the business into the hospitals. Once we do have full supply as we have into this the back-half of 2018 into 2019, we can begin to flip the switch on being much more aggressive at marketing our implants along with our expanders, leveraging some of the hospital contracts and relationships that we have with surgeons that are doing their reconstruction cases at the hospitals, and beginning to pick up more of a mix of implant business with our expander business. So we're very comfortable and confident that that will begin to happen. But of course, we have been holding back on making that strong push as we've been in the supply constrain mode.

[Unidentified Analyst:]

Great. Thanks for taking my questions, guys.

[Operator:]

Thank you. Our next question is from Jon Block with Stifel. Your line is open.

[Jon Block:]

Thanks. Good afternoon guys. Maybe two or three from me; Jeff, early days of the manufacturing ramp for breasts, but maybe you can discuss how that's progressing, and do you expect that plan to be, call it, fully up and running as we get to the early parts of 2019?

[Jeffrey Nugent:]

Thanks, Jon. I think the best way to explain it is that for the second quarter you'll remember that we just got FDA approval, I believe, in the very first part of April. So we have two-and-a-half months of experience in the quarter to show the scale-up that they've been able to achieve. They're making good progress. And as we've addressed a number of times, these are not as predictable as you would like to see them. However, we are optimistic that, and as we've also said, that this is going to give us an expanded supply moving into the second-half. And I think the message we've been consistent on delivering today is that we're going to see that ramp most clearly in the fourth quarter. So that we're not only focused on the 2018 results and showing some real significant growth on the breast products, but also we're paying very close attention to making a more aggressive move in 2019 where we think that we can begin to really make some market share improvement. So without getting into the specifics of planning values, yields, and things of that nature, we continue to have confidence in the overall supply chain improvements as we get later into the second quarter.

[Charles Huiner:]

And if I can just follow-up, Jon, this is Charlie. Again, to Jeff's point, we're certainly confident in Vesta's continued scale-up. The reality is we're very aware that, on the commercial side, given what we've gone through the last two to two-and-a-half years, we have one shot to get this right. And so our commercial team at the account level wants to know that before we start really opening up the rest of the market, that we have full supply that we're not going to risk stock-out. And the reality is we've doubled -- almost doubled the amount of SKUs that we offer based on some of the approvals we've gotten over the last two years. So the broader picture going on right now is maybe we're being a little conservative, but we really don't want to hit market running, and opening up to new accounts, et cetera, before we really feel confident that we have inventory levels that allow us to run the program aggressively and not disappoint customers. So we actually feel that we're doing this. We've used the word precision-controlled. Maybe there's a little impatience with the pace that we're going. But the reality is we think we're being appropriate given where we come from, given that we have one shot to get this right. We're scaling up, and we are preparing, as Jeff mentioned, to get much more aggressive as we head into the fourth quarter this year based on inventory supply building. And that's what we've been pretty consistent in saying over these past couple of quarters.

[Jon Block:]

Okay, and that's very helpful, Charlie. Maybe as a follow-up to that, I think the precision launch was more specific to roughly 600 customers. Jeff, in the last call I believe you alluded to sort of 1,400 that reside in tier 2. Are you guys still completely focused predominantly on that tier 1 or has there been some selling to that tier 2 level as well?

[Jeffrey Nugent:]

No, we're still primarily focused on that top tier, but we're beginning to make initiatives to that second tier, as well as we add headcount to the Breast Products sales organization. So the simple answer to your question, Jon, is that we're still focused on top tier. But reopening and I guess the best way to put it is opening up the doors to some of those previous relationships to prepare us for that tier 2 expansion.

[Jon Block:]

Okay. And last one from me, and then I'll follow-up offline. Patrick, would just love your thoughts on the transition, not a lot of CFOs have a balance sheet of $15 million, get a $100 million cash injection, and then decide to shift and pivot. So, we love your thoughts. I'm guessing you see a big opportunity with miraDry, but it's an interesting time, and any color would be helpful.

[Patrick Williams:]

Yes. No, I think it's a good time because of the fact that it kind of fell into place where obviously coming onboard wanted to make sure I provided the financial side of it. It's been almost two years, I guess, maybe a year and three-quarters. We did obviously raise the money, and that was a solid raise. And as I said in my statements, we're in a very well-positioned place. I'm very grateful to Jeff, and the Board, and the support of the management teams in general here of giving me the opportunity to kind of spread my wings and move on to this new role which I'm excited for. I think I've always had sort of that commercial and operational side to me. And going to put my money where my mouth is or something to that affect, and go out and try to make a go at miraDry. So I'm excited for it. And I think the good news is Paul brings with him a long history here with many companies, notably Allergan. He's going to be walking in to a situation where we do have a nice balance sheet, but I'm also still around to help out with the transition. And then for myself, personally, I still have Keith Sullivan to ping on, and of course the rest of the Board. But certainly notably having Keith as still a board member and advising in the near-term is going to be, I think, a benefit for the entire Sientra team.

[Jon Block:]

Okay. Thanks, guys.

[Jeffrey Nugent:]

Thank you, Jon.

[Operator:]

Thank you. Our next question is from Chris Cooley with Stephens. Your line is open.

[Chris Cooley:]

Good afternoon. And I appreciate you guys taking the questions. And I guess, first and foremost, congratulations Patrick, and welcome, Paul. Just maybe two quickies for me here at the end, could you -- and I apologize if I missed this at the outset, juggling a couple of calls here. But did you detail utilization between both capital and consumables when you think about the miraDry offering? And then could you characterize just how you're seeing utilization trends there within those existing practices on that front? And I just had one other quick follow-up thereafter. Thanks.

[Patrick Williams:]

Yes, sure. Chris, this is Patrick here. We did not get into details on it. I can tell you that what I did say, and I know you've been jumping around on calls, was we did see stronger consumable sales in the quarter, which we somewhat expected but were definitely pleasantly surprised by not only the U.S. but also the international side. And then the U.S. continues to see increasing system placements for miraDry. For now we're staying away from the accounts that I think people historically had been familiar with, and they covered us at former companies, like Zeltiq, but we obviously track them internally, and we are becoming more comfortable with what we're seeing and a lot of the programs that we're launching. I think I answered your question, so I'll let you go on to your next one.

[Chris Cooley:]

Okay. And then just switching gears to the breast business there, appreciate that you're still capacity-constrained. But could you talk to us a little about where you see the most interest for the OPUS line now, especially with the new warranty that you launched at ASAPS, back at the end of April. Is it within existent users there that are more skewed towards maybe Natrelle? Or is it greater opportunity coming more so maybe from, say, a JNJ-oriented provider? I'm just trying to get a feel for where you're getting the most receptivity for the new offering as you ramp up on production. Thanks so much.

[Jeffrey Nugent:]

Sure. And this is Jeff. And I think the best way to answer it is that we're seeing penetration on both sides. As we indicated that we picked up market share during the quarter, that initiatives such as this Platinum20 warranty, as an example, which really comes directly from that 10-year comparative study that we had published for the more objective plastic surgeons, actually five in practice. But I think the best way to put it is that, being very direct, that that comparative data highlighted a number of advantages and disadvantages among the manufacturers. And the one that stands out the most is that Mentor's own published data indicates that they have a 24% rupture rate. And that in comparison, our rupture rate is the lowest at approximately 8%. And again, this is over 10 year's in vivo implanted implants. And I got to tell you that the response that we get from many of the surgeons is why would I want to insert an implant with an average rupture rate of 24% when I can use something that's significantly, "Safer." So that's probably the most efficient way to explain it. Does that make sense?

[Chris Cooley:]

Yes, thank you.

[Jeffrey Nugent:]

Okay, thank you.

[Operator:]

Thank you. Our next question is from Alex Nowak with Craig-Hallum Capital. Your line is open.

[Alex Nowak:]

Great. Good afternoon everyone. Welcome aboard Paul, and congrats, Patrick, on the new role. This is the follow-up question to Jon's previous question, but of the amount of inventory that you want to have on hand before going back out there and really pushing the implant side of the business, can you say if we're at 50% of the required inventory? Just really any way we can quantify where we're currently at, and then we can better forecast the timing of the relaunch into the market?

[Jeffrey Nugent:]

Okay, I'll let Charlie answer that.

[Charles Huiner:]

Yes, so I don't think we're going to give percentages, but I think what we will give you is a little bit of guidance in terms of when we think we'll be ready to begin attacking a broader set of the market. And we really think that that starts to happen around the fourth quarter, where we believe we've got sufficient inventory levels to begin to ramp up the aggressiveness of our sales programs and detailing, and start to feel comfortable that we can not only satisfy the needs of the smaller subset of business that has been sort of our core business even during this last couple of years, but begin to open up and start brining back customers that currently were Sientra users as well as new users. So it's really a Q4 where we believe we'll be at that point where we've got sufficient inventory levels. Where we're not risking disappointing by pattern one or two skews for whatever reason were on backward. As I said before, we really -- we recognize that this is a one-shot deal, and we don't want to disappoint. And we'd rather be a little bit more conservative right now, manage with our existing customer base. And starting in Q4, begin to open up and be more aggressive given our inventory levels at that point.

[Jeffrey Nugent:]

There's one thing I'd like to add to that, and that is the progress that we're making to more of a Six Sigma environment. And one of the primary precepts of that approach is the concept of just-in-time. Just-in-time inventory, which reduces the overall bulk of the inventory that is characterized by a lot of other industries and companies, but by a more accurate prediction of the needs we're able to meet those needs, like I said, and literally what just in time means. So we're making progress. We're not there yet, but that's driving our overall supply chain strategy.

[Alex Nowak:]

Okay, understood, makes sense. And now that the reps are going back out to the surgeons with OPUS in the quarter, what are you hearing from the docs? Are you getting any pushback around them using Sientra's implants again, or are the docs really just simply asking for the inventory as this point?

[Jeffrey Nugent:]

I can't say that we're getting pushback. I think that what our commercial team has been doing a tremendous job of is being very direct and open with our customers. And that that, and combined with actually a connection with what I just said, just-in-time operating philosophy, we're got our PSCs, our sales people a direct part of that so that when they order products, you know, we predicted those, and the immediacy of the on-time delivered by our PSDs minimizes the disappointment on the part of our surgeons, but there is no question that we're not where we want to be yet, but we expect to be in a much stronger position by the end of second quarter.

[Patrick Williams:]

Second-half.

[Jeffrey Nugent:]

Second-half. Excuse me. We just finished second quarter, so…

[Patrick Williams:]

They want the inventory for sure, that's the short answer, and we are eagerly trying to get it to them as quickly as we can.

[Alex Nowak:]

Okay, got it. Thank you. And then, just Patrick real quick, I know we started to hear the miraDry ads in the Minneapolis market, how has the response been to the DTC ads and are you seeing any sort of meaningful pickup in Web site traffic? And just finally, do you think the DTC campaigns in Q2 do you think that drove any of the consumable growth in the quarter?

[Patrick Williams:]

I will go backwards; I'm sure it didn't hurt it. I think we are still in some select markets, and so as we look to expand DTC on what I would say more of a nationwide basis, that will obviously lift all markets. Yes, I think we're just at beginning stages of the direct-to-consumer. We are still feeling out of couple of things, did they work, is it resonating; we definitely -- and it's probably a little bit of alerted question on your side, but we can all track Google trends and things like that. We've definitely seen spikes not only in the app, but just increased traffic to our Web site itself on our position locator. We are working through a couple of ways to be able to track utilization out in the field, which will be the new Fresh Connect or something to that effect, which is the two-way connectivity device that's in our R&D pipeline. But once we get that, we will be able to have a better sort of cognitive factor to be able to link together marketing and the actual utilization in the field. That will come. And I think that will be a good tool for us if we can do it, but yes, we are trying to get out there for sure.

[Alex Nowak:]

All right, thank you. Nice job on a very nice quarter.

[Patrick Williams:]

Yes, thank you.

[Jeffrey Nugent:]

Thank you very much.

[Operator:]

Thank you. Our next question is from Anthony Vendetti with Maxim Group. Your line is open.

[Anthony Vendetti:]

Thanks. As miraDry continues to grow here and potentially approaching 50% of revenues as we move towards the back-half of this, how do you expect that to impact gross margin? And then, I don't know, I have also been jumping between calls, if you gave the number of miraDry systems sold this quarter or the current install base?

[Patrick Williams:]

We didn't it. We didn't give specific numbers on that. We did talk about it as a strong quarter, strong consumables, and we gave some color around the second-half of the year we would expect about 60% of our sales to come from U.S. It's been closer to about 50-50 right now for the first-half. And then we also said in the second-half for the year, we did expect to see an increase in worldwide system, I would say, so that would be 60% of our sales. Once again, we are seeing some traction on consumable. So we will have to see how that plays out. I think I blanked out on what your first part of your question was…

[Anthony Vendetti:]

The first part, gross margin impact from greater miraDry…

[Patrick Williams:]

Sure. Yes. So we are still -- obviously the breast product business is still 60% of our business, two-thirds, I would call easing us. And so, they saw a very solid gross margin, 70% plus. Right now what's happening with miraDry is you got the mix obviously of international, which is more wholesale pricing as well as systems which have a lower gross margin. So there is going to be some pressure that's really just mix pressure, mix of miraDry itself. And then over time, we would hope to see that flip in 60% capital to 60% consumable. We know from historical that that's a model that definitely can happen. We got to get the places and start the utilization. So I think that -- obviously, Paul has taken over the new CFO, so I won't sign him up for too much here, but I think the number that everyone wants to see in med device is 70% on a consolidated basis, and we do believe over time we can get there, but once again predicated on mix, but we got some things that we are working on in cost of goods as well.

[Anthony Vendetti:]

Okay, great. Thank you.

[Jeffrey Nugent:]

Thank you.

[Operator:]

Thank you. Our next question is from Margaret Kaczor with William Blair. Your line is open.

[Unidentified Analyst:]

Hi, guys, this is Anna [ph] on for Margaret. Thanks for taking my questions. In terms of miraDry, I just wanted to ask how are the new sales reps that you brought on for miraDry ramping, what is the average tenure of these drugs, and kind of what initial targeting have they done in the field? Thanks.

[Patrick Williams:]

Sure. So, kind of two questions, I will start with the capital side of it. So, on the capital side, I would say we are not getting sort of classic capital aesthetics reps from the companies that you would see out there; we do get them here and there. I think some of that have to do with -- you go back and I think it was one of the first questions someone asked, when we took over the company, we didn't throw up a very good first -- our Q3 and our Q4 in '17. We came off a strong Q1, and we just do what I think is a good Q2, we believe that will start attracting some better quality reps as we move forward. So in terms of tenure, I would say right now we are expecting these folks to take a solid six months, so a couple of quarters to get up to speed. We obviously are focused on training, and do a lot of that. As we get more of the -- what I would say, sort of the seasoned classic capital aesthetic reps, then you would expect that ramp up time would get reduced to probably somewhere around a quarter. And then on the PDM side, I think we have had a better track record of attracting folks that are more familiar to us within the aesthetic space, and I think we are starting to see the benefits of that on doing the events that they are doing on helping the market. And one of the things that we just recently did it was good, it's really supporting the practices more on how to market better digitally, which is actually a thing that we never quite got our hands around when Keith and I -- but we just started that off here at miraDry. And we are pretty excited about sitting down with the practices and doing that. But I think that speaks to the level of person that we are getting on the PDM side, the consumable side to be able to do that.

[Unidentified Analyst:]

Okay, that's helpful. Thank you. And then just on the breast side for a little bit, I know you have talked about this a little bit, but in terms of the Tier 1 customers, are you successfully reengaging with all those and kind of bring -- how many of those would you say you have successfully called back on board? Thanks.

[Patrick Williams:]

Yes. So we've talked about sort of 500 to 600 as our Tier 1 customers. And I would say it's an 80-20. Within those 600, we are getting a good percentage of business from 20%-30% of those. So again, the strategy right now with our reps is to continue to service and grow. Of course not only that 20%-30%, but also to begin to get more of the business of that overall group of 500-600. And we really believe that -- even historically if you look back to where we were getting our revenue at peak, that 600 customers are up on 80% of our revenues. So we feel pretty good about being able to harvest business from the core group of customers that have either been steady Sientra users even through this two-year period, and then even top tier of that, call it the 200 or so surgeons, we feel very good about our ability, and frankly, our focus on them right now, and our ability to drive additional business from that top group.

[Unidentified Analyst:]

Okay, thanks, and congrats on the new role as well, Patrick.

[Patrick Williams:]

Thank you.

[Jeffrey Nugent:]

Anything else, Margaret? Thank you all very much. Thank you.

[Operator:]

Thank you. I would like to turn the call back over to Jeffrey Nugent for any further remarks.

[Jeffrey Nugent:]

No. I think that we have shared as much information as we can today. I appreciate all those who dialed in and thoughtful questions they gave us. So again, I appreciate the support and interest in Sientra, and we look forward to keeping you as informed as we can. So, have a good evening, and thank you very much.

[Operator:]

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