Sientra, Inc.
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Q3 2017 Sientra, Inc. 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Zack Kubow with 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 filed 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 CEO of Sientra.

[Jeff Nugent:]

Thanks, Zack, and good afternoon, everyone. Joining me today are Patrick Williams, Chief Financial Officer, Senior Vice President and Treasurer; and Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy. We continue to make good progress on our strategic objectives in support of the vision of the new Sientra which I have continued to reference throughout 2017. This includes our focus on the combine $700 million market opportunity for our best-in-class breast implant portfolio. Our world-class tissue expander portfolio lead by AlloX2 and BIOCORNEUM, as well as our advanced silicone gel management products. Securing FDA approval for U.S.-based manufacturing capability with our partner Vesta clearly remains our most critical corporate objective and we have made significant progress towards approval, the current details of which I will outline later in the call. Our strategic objectives also include integrating, repositioning and optimizing the recently acquired Miramar business to drive growth in the large underserved market for the reduction of underarm sweat, odor and hair of all colors. I am pleased to report that the FDA has completed its inspection of the Vesta manufacturing facility in Wisconsin. The regulatory team at Vesta managed the inspection since it is their facility being approved, but I can tell you that Sientra and our team of experienced experts were on site to work closely with them through the entire process. The reviewer cited two minor 483 observations which were administrative in nature that we have already addressed and submitted to the FDA, and are now filing, excuse me, finalizing the remaining documentation to submit to the agency that would enable us to still get approval by the end of this year first statutory review windows from the FDA. Having said that, given the FDA inspection took longer to schedule and frustratingly so then we had originally anticipated, we would not be surprised if final approval slipped into Q1 2018. Based on our confidence of receiving approval, which was confirmed post-inspection, we started manufacturing finished goods product in early October that we are holding and quarantine as we build supply and preparation for the FDA approval and launch of Vista manufactured products. We remain confident in Vesta’s ability to ramp production to satisfy our demand needs as we move into the second half of 2018. To further underscore our commitment, unbalanced the progress we’re making with our PMA Supplement and manufacturing activities is very positive news. We are near completion of a significant step in the process towards unconstrained re-launch of breast implant products, which continued to be in high demand among plastic surgeons. This was evident at the Annual Meeting of the American Society of Plastic Surgeons in Orlando in early October. With an exceptional booth traffic and it really was exceptional and physician interest in our breast implants and the AlloX2 tissue expanders at the meeting. We were particularly pleased with the positive feedback on our expanders and confident in our ability to gain share in the breast reconstruction market, pulling through our implant and scar management products. The miraDry team joined Sientra at the ASPS meeting and our first customer event as a combined organization, and we made quite an impact. We leverage the meeting to introduce miraDry to existing Sientra customers through KLO presentations and the miraDry booth itself. Many of our reps took the time to walk physicians to the miraDry booth and introduce their team to our customers. And I am encouraged by this team work demonstrated by our sales team and believe it is indicative of the enthusiasm from both segments working together and our ability to achieve cross-selling synergies going forward. To further underscore our commitment to breast reconstruction market, in October in conjunction with Breast Cancer Aware Month, we launched the Sientra Full Circle program, a unique first of its kind charitable program to support research to breast cancer prevention, detection and treatment to elevate awareness among the breast cancer and breast reconstruction communities. As part of the Full Circle program, Sientra will donate a portion of every tissue expander sale to Breast Cancer Support and Awareness initiatives. This initiative demonstrates our commitment to best serving reconstructive patience in multiple ways and we look forward to helping to provide grants for up to three non-profit organizations or research projects beginning in 2018. In the third quarter we were extremely pleased that our newly available 10-year safety data was published in the Aesthetic Surgery Journal highlighting the longest long-term peer-reviewed competitive comparison of the data of U.S. breast implants. The comprehensive review confirms that the textured and smooth implants are both safe and important options for patients undergoing aesthetic or reconstructive breast surgery. And notably also highlights the strong relative to performance of our Sientra products as compared to 10-year data of our two U.S. competitors. As a clinically driven company we are greatly encouraged by the objective and independent results and stand behind the demonstrated safety and efficacy of our products. Shifting to miraDry segment, which we took over late in July following a short deal close period, and therefore, had two months in the third quarter to begin making some necessary changes to improve the business. On our call last quarter I identified three key areas of near-term focus that our team led by Board member and strategic advisor, Keith Sullivan, who is the ex-Chief Commercial Officer of ZELTIQ would evaluate our -- with respect to our miraDry business. These included evaluating, optimizing our treatment protocol, investing to expand the sales force and deploying proven marketing tactics with an efficient go-to-market strategy. I am very pleased with the progress we’ve made in all three areas thus far and look forward to rolling these improvements out of the market -- into the market with a targeted re-launch of miraDry expected to drive the business starting as early in 2018 as possible. With respect to the optimization of our treatment protocol we have already made significant progress in identifying a path to simplify and shorten the procedure for clinicians. We expect this will enhance the treatment experience for patients and generally broaden the appeal of the product as we move to make miraDry faster and easier for a broader group of physicians and patients. We believe this is the basis of expanding the appeal of the miraDry technology. We are working with the two customer sites to finalize the updated treatment protocol and develop the training and messaging in anticipation to rollout our sales force in early 2018 at our sales meeting. We have also made strong progress in expanding our sales team especially in North America. Finally, we’ve begun the process to better understand our marketing position through primary market research, but at this time we are limiting marketing investment to drive demand until we complete our work on further improving the protocol, and of course, having the necessary sales force headcount to capture the demand. Overall, I am extremely encouraged by the quick advancement we have made in the integration and repositioning of the Miramar and miraDry segment. That being said, our third quarter sales were around the lower end of our expectations, due primarily to some large consumable sales sold into the channel at the end of the second quarter and in early Q3 before we closed on the transaction. As a result, we expect this segment to contribute closer to the lower end of the previously stated reign of $8 million to $10 million in the second half of 2017. But we continue to feel confident in the market opportunity as we move into 2018 with the technology and people changes we’re making. As we look beyond our current offerings, I’d like to reiterate that we see significant opportunity to further expand our current $700 million total addressable market. First, is the $300 million regenerative product market which is directly adjacent to our breast reconstruction business. Second is the $500 million international market for breast implants that is now open to us with the expiration of our Silimed agreement. As I have stated in the past, we will continue to evaluate OUS opportunities in the medium to longer term particularly building on the growing miraDry international base and sales channel, and this is one of the synergies that is resulting from this combination of companies. While expansion into attractive adjacency has been a key piece of our strategic intent to diversify our revenue we remain steadfastly committed to our Sientra breast aesthetics business and the plan re-launch of our breast products as we move into 2018. I will now turn the call over to Patrick for a detailed review of our third quarter 17 financial results and some further details on the miraDry product expansion. Patrick?

[Patrick Williams:]

Thanks, Jeff. I will now provide commentary on our third quarter 2017 results and greater detail can be found in our earnings release issues earlier today, our 10-Q to be filed shortly and our supplemental financial information reference which can be found on our Investor Relations website. Before jumping into the financials, we wanted to provide some further color on our acquisition of the miraDry procedure and two of the three near-term areas of focus for us, technology and people. On the technology front, we continue to get strong feedback from our customer base, confirming all of the market metrics that supported our acquisition that mireDry works. Our near-terms efforts have been focused on improving the treatment protocol with the goal to reduce the procedure time to under an hour and simplify the delivery in order to improve the adoption across all specialties. The key drivers of this improvement include, delivering the high volume anesthesia using a multi-injector needle array with lower gauge needles versus the current large gauge single needle or cannula. We believe this will be a more efficient, simpler and more comfortable delivery of anesthesia with the opportunity to reduce the time of this part of the procedure in half from the current approximate 20 minute to an emphasis two underarms on a single patient. Number two, redesigning and simplifying the templates used to market treatment area in order to guide the placement of the hand piece during the procedure. This will not only significantly reduce the number of individuals templates from the current 17 used today, but it will also make the templates more intuitive and representative of the new protocol. Number three, updating the user interface to allow clinicians an easier process to unlock higher energy options and decreasing the post-treatment cool down time, which we believe will improve not only efficacy and single treatment success, but also telling team the safety profiles which we are known for. On the people front we have made strong progress in completing the build out of our sales and leadership team in North America. We appointed Chris McGreevy as Vice President of North America Sales, who I work with at ZELTIQ as we got the CoolSculpting brand and most recently served as VP, In-Charge of the entire east region of sales for CoolSculpting. Under Chris we have since added two new regional sales directors on the capital sale side, filling out our management team to cover our three sales regions. On the consumable sale side, we added a Senior Director and filled our open Director position to round out our PDM or consumable team. We are very pleased with the quality of candidates that we have attract to these roles, many of whom I have worked with key people with directly before as well as Keith. With this proven sales leadership team in place, they have begun actively recruiting individual territory sales reps. In North America we currently have eight capital reps or area sales managers and eight consumable reps or practice development managers, with the goal of reaching approximately 20 ASMs and 15 PDMs in the near-term. So our near-term focus in hiring efforts in North America going forward we may make some additional -- additions in sales leadership internationally and we will provide more details on our international strategy and plan as we move through 2018. To put our hiring efforts into perspective, since taking over on July 25th we have added a total of 17 heads, but are only net up one head, which speak to the significant turnover in the last few months. Due to the closing of the Miramar acquisition within the quarter, today’s earnings release only shows GAAP reported results for the stub period based on Miramar closing as of July 25, 2017. In an effort to provide historical consolidated results and a full consolidated Q3, the supplemental financial and operational information schedule on our website shows all periods on a pro forma consolidated basis. The rest of our financial results with the exception of adjusted EBITDA are all reported on the U.S. GAAP basis. As a reminder, we will continue referencing an adjusted EBITDA margin which we defined as earnings before interest, tax, depreciation, amortization, stock-based compensation and one-time legal settlement. Please refer to our supplemental financial information, earnings release and 10-Q for tables on non-GAAP and GAAP -- for tables on GAAP and non-GAAP pro forma net sales and a full reconciliation of adjusted EBITDA to its GAAP counterpart. Beginning this quarter we’re also reporting our results in two segment, breast products and miraDry. Breast products will include our breast implant portfolio, our tissue expander portfolio and our BIOCORNEUM scar management products. miraDry will include the entirety of the recently acquired mireDry -- Miramar business to both capital and consumable revenue. Moving now to our financial performance. Consolidated total net sales for the third quarter 2017 were $9.8 million on the GAAP basis and $10.7 million on a pro forma basis, compared to total net sales of $6.5 million under GAAP for the same period in 2016. Net sales for our breast product segment totaled $7.7 million. This compared to total net sales of $6.5 million for the third quarter 2016, driven primarily by continued strong performance of our breast tissue expanders led by our novel AlloX2 dual port product line. We expect sales in the breast product segment to continue to grow modestly in the near-term driven by the lack of implant supply and the growth in our breast tissue expander portfolio will augment this as we continue to ramp up manufacturing capacity and as our sales team continues to gain tenure and penetrate deeper within the breast tissue expander market. I want to reiterate that we do not expect to sell highly out of breast implant that had to resupply. We do still expect sales in this segment begin to flow modestly relative to 2016 and the second half of 2017 and even going into Q1 2018 depending on the timing of our FDA approval. We began to see the slowdown trend this quarter related to the full utilization or usage of some of our most popular or highest demand SKUs. As we have stated in the past we have prioritized manufacturing of these SKUs at our Vesta facility ahead of our full commercial re-launch in 2018. To be clear, this is not a demand issue. Through our precision control selling strategy we have deliberately constrained supply and continued to adjust based on usage and inventory levels. As Jeff mentioned earlier and on past calls, as planned we have begun manufacturing Vesta supply product ahead of approval with new implants under quarantine until approval is final. We received an unexpected delay in scheduling the FDA plan inspection predicted in Q1 2018. We still expect to have the Vesta facility fully filled up in the second half of 2018 following typical new manufacturing ramp up. Net sales attributed in the third quarter 2017 for miraDry business segment totaled $2.2 million on the GAAP basis and $3 million on the pro forma basis. We expect revenue growth within this segment to accelerate sequentially in Q4 and more meaningfully in 2018. We believe that as our growing sales organization is rounded out and we are able to leverage our enhanced protocol and marketing initiatives, we can drive increase adoption and utilization in the miraDry segment. Gross profit for the third quarter of 2017 was $6.3 million or 65% of sales. This compares to gross profit of $4.7 million or 72% of sales for the same in ‘16. This decrease was primarily due to the inclusion of miraDry which carried the lower margin at breast product at this point in time. Operating expenses for the third quarter of 2017 were $20.2 million, increase of $5.7 million, compared to operating expenses of $14.5 million for the same period in 2016. The increase in operating expenses was primarily related to Miramar related acquisition cost, as well as the inclusion of the miraDry operating expenses subsequent to the acquisition. Net loss for the third quarter 2017 was $14.4 million on a GAAP stub period basis compared to $10 million for the same period in 2016. Adjusted EBITDA for Q3 ‘17 was a loss of $11 million versus a loss of $8.5 million in Q3 ‘16. The year-over-year decrease will be mainly attributed to the inclusion of miraDry. Net cash and cash equivalents as of September 30, 2017 was $37.6 million compared to $55.5 million at the end of Q2 ‘17. The larger than normal decrease in cash was due to a preview to our previously announced one-time $9 million settlement -- legal settlement with our former breast implant manufacturer. We still have in place our $50 million credit facility comprised of the $10 million revolver and $40 million in term debt. We have drawn down $25 million on the term debt and have access to another $10 million upon FDA approval and another $5 million upon achieving $75 million in trailing 12-month consolidated revenue. Our $10 million revolver is based on eligible account receivable and finished goods which we expect will increase with the re-launch of our breast implant and the growth of miraDry. We have no current outstanding amount under this $10 million revolver today. As always, we will continue to be good stewards of our cash and opportunistically with market condition, we will look to potentially strengthen our balance sheet to ensure we maintain adequate capitalization. As we have stated in the past we will not be providing full revenue and profitability financial guidance as we remain in market position control selling mode, we are still awaiting FDA approval of the Vesta manufacturing facility and now working to the integration of miraDry. I will now turn the call back over to Jeff for final closing remarks.

[Jeff Nugent:]

Thanks, Patrick, and thanks for describing the continued disciplined company that we have created here. I am pleased with the progress Sientra has made in the past quarter, as well as the recent past 18 months to 24 months in solving the challenges and then executing on each of our near and long-term strategic objectives. I want to repeat that we continue to grow into a larger more diverse global aesthetics company. That is what we are doing. That’s what we are building. While it is possible that the FDA’s approval of our facility may take marginally more time than previously expected, we are confident in our ability to manage existing inventories as we await full approval and drive towards full skill manufacturing and supply in mid 2018. We are seeing a strong growth opportunity across the broader portfolio with the differentiated AlloX2, tissue expanders, breast reconstruction market, BIOCORNEUM for scar management and the promising lifestyle aesthetic market for miraDry. The only FDA approved treatment option for excessive sweat, odor and hair of any color. I remain extremely proud of our team and we couldn’t have made these accomplishments without them and I am excited to continue to build on our momentum across new segments as we move into 2018 and re-launch our entire breast implant wine. And as we continue to leverage our exceptional products, people and relationships as the new Sientra, I cannot say enough about the quality and commitment of our people and the unique culture that we have supporting them. I have personally been fortunate to have worked in strong organizations and cultures in my career. The Sientra team we have with us is by far the strongest that I have ever had the privilege of working with. This team is capable of continued superior performance and overcoming significant obstacles like the one we have overcome during this past 18 months to 24 months. We will be at the Stephens for investment conference tomorrow, Canaccord Genuity Medical Technology & Diagnostics Forum on Thursday, followed by the Stifel Healthcare Conference on Tuesday November 14th. We look forward to seeing as many of you there as possible. And I would like to turn the call over for Q&A.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Kyle Rose from Canaccord Genuity. Your line is now open.

[Kyle Rose:]

Great. Thank you very much for taking the question. Can you hear me all right?

[Jeff Nugent:]

We can hear you fine.

[Kyle Rose:]

Terrific. So I just wanted to ask a few more questions on the status of the FDA, obviously, it feels like the inspection took a little bit longer, but that tends to be wrapped up, you talked about few just administrative type questions that you have already responded to, I guess, can you give us little more color on what specifically needs to take place on your end before you actually get the full submission package to the FDA. Just trying to understand how big of items are still outstanding or just we’ve got the holidays and the government slows down around the holidays?

[Jeff Nugent:]

Well, I am personally familiar with that phenomenon and we are taking it into account. I think that to be as clear as I can, I want to reiterate that we’ve already submitted our responses to those 483 observations with the heavily experienced of supporters and attorneys that we have been using through this entire process. So those responses have already been submitted and they have been described as extremely minor technical including misspellings and things of that nature, which are part of the perfection that the FDA requires. In terms of the remaining documentation, the FDA requested some information from the PMA supplement to be broken out in a very different way and we are providing that information in the coming weeks. Based on these facts our submission of the remaining documentation and I want to highlight the fact that the remaining challenge is documentation and the format that the FDA has requested, that would still enable us to get approval by the end of this year for all of the statutory review windows and timelines that many of us have been through several times. However, given the unanticipated delay in the beginning of the inspection and I don’t want to get into a lot of details here, but we had scheduled the inspection at least two months sooner than it actually took place and that -- even with that and the outcome of the inspection we could possibly see the preview slip into the first quarter of 2018. But we are prepared for that. I would also like to add that based on our confidence of receiving approval we began manufacturing commercial ready finished goods at risk time might they add, but also with confidence that our facility in early October before the FDA inspection and that we continue to do so with the focus on our highest demand products. I hope that answers your question.

[Patrick Williams:]

Yeah. I think, Kyle, this is Patrick.

[Kyle Rose:]

Yes.

[Patrick Williams:]

You brought us the holidays that we have we certainly keep that into account, I mean, we are starting to hit out if you look at it, yeah, we could still hit the end of the year but it is in the hands of the FDA and we just wanted to get that out there in the marketplace whilst street of the world, just that we are not sitting here with people candidly with the binary event, so getting ahead of it.

[Kyle Rose:]

Great. No. I appreciate the extra color. And then, I wanted to transition to the Miramar side, I mean, just wondered you -- can you give us a little more color, I mean, you talked about you probably coming into the towards the lower end of the guidance in the second half of this year, but you put a lot of pieces in place and making some investments to drive what you characterize the meaningful acceleration when we get into 2018? So, I guess, can you help walk us through the cadence of what that acceleration should look like when you think about getting the sales force investment made realigning the strategy and just how we should expect that cadence over the course of the year?

[Patrick Williams:]

I will take that one, Kyle. That’s a great question. I think we will hold off a little bit on giving specifics on what the number look like going into next year for the comments that I made. Everything that focus right now, it’s really not that different than historically what I think people have seen when Keith and I we are at the CoolSculpting brand. It takes a little bit of time to write the shift. We have gone through the protocol. It’s been very well-received out there within the physician channel that we spoken to. And as I mentioned on the prepared comments with the headcount, even though we are only up net one head, we have added 17 heads in the quarter. So you can imagine there was -- some of that was voluntary and some of it was involuntary, but we have gone through and we are starting to build that foundation in place and really the key for us right now as we have got that sales leadership team in place and if you are keenly familiar with our goal is to try to get all of ASMs and PDMs on board before we finish up the year. So when we hit our sales meeting in the January timeframe, we have got a whole group of people ready to go. So I’ll hold up and talking about the cadence look like that obviously we would expect it to ramp up what I would call throughout the year, just based on really how quickly can we bring train people on and then start rolling out some of these improvements.

[Kyle Rose:]

And then last question and I will hop back in the queue is, just where is the inventory and capacity of AlloX2 stand now from the expander side and I guess the overall percentage of mixed there? And then second part of that question is, I understand you guys are still inventory constraint on the augmentation side, on the implant side, but were -- was there any impact from the hurricanes in the 3Q?

[Charlie Huiner:]

Yeah. Kyle, this is Charlie. I will take that. In terms of AlloX2 and capacity from [ph] Symetrix (33

[Patrick Williams:]

Yeah. A little bit we will begin. These are procedures that are just going to get pushed out. We definitely have some decent size business in both Florida and Texas and so, I guess, with that being constraint on the implant side, it’s not going to really impact that all that much, but on the expander side we had a really strong quarter, but it could have been a little better. So maybe a little bit of a push out, Kyle, but nothing overly significant for us as we based on the state we are at right now.

[Kyle Rose:]

Great. Thank you for taking the question.

[Jeff Nugent:]

You’re welcome.

[Patrick Williams:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Margaret Kaczor from William Blair. Your line is now open.

[Scott Schaper:]

Hey, guys. This is Scott on for Margaret. Thanks for taking the questions. I wanted to start first on Miramar, where is that revenue being generated at this point in the quarter, is it all U.S., are you placing systems, are you just servicing existing accounts with consumables. Then the second part of that question is, expectations for the productivity on the capital side. It sounds like you’re targeting stuff that have experienced placing capital needs in the aesthetics space, so is it reasonable that they can potentially ramp quicker than originally thought and ability to cross-sell?

[Jeff Nugent:]

Yeah. I will take that. And I think on the latter side, yeah, our hope would be that because we are hiring folks that are experienced or even folks that we know that they would ramp up a little bit quicker and leverage not only their experience but the relationship that they have in the past. It’s -- there is a strong focus right now, Scott, on the North American side. I went through the headcount already and I will just say, look, we are adding those heads. We are trying to improve the protocol little bit. So a little bit lighter then what we had hoped in the quarter, but I think in light of the turnover that we had is expected at this point. You will probably know that we didn’t break out capital versus consumable and I know that for modeling purposes that creates an extra for you guys, but we want to get our arms around this. Qualitatively I will give you some color around that, the $3 million on a pro forma basis was a little heavier on international this quarter and it was a little heavier on the biotech side, so the consumable side. And I would just add, you guys speaks to the opportunity we still have in the U.S. which is one that just getting the team in place and starting to hit the ground running as we really kind of exit ‘17 but more importantly as we go into ‘18. That’s why we thought it was prudent to give some lowering of that range on that $8 million to $10 million.

[Scott Schaper:]

Okay. That’s helpful. And then the details on the administrative things was helpful, I wanted to follow up on the comments you made about the building of the product already, I guess, what scale are you buildings this products at and does this -- and could that potentially accelerate your time of ramping by the second half of ‘18 and I know you said that was still what your timeframe was and what you guys are guiding to. But are you building the inventory faster now post-discussions with the FDA than you were originally expecting could there be any impact on that?

[Jeff Nugent:]

Let me take that, because I have got few decades of going through this process that Vesta has demonstrated a confidence and being able to start up new processes and accepted quality compliant devices. But in any startup situation as you can imagine there is a ramp that has starts at a conservative level and the challenge that we are working on together with Vesta is to accelerate that ramp as quickly as possible that we have literally had approximately a month in producing finished goods that meet our criteria, but we have spent months prior to that on optimizing all of the factors including the process itself. And the short answer to that question is, we have a forecast of how quickly we are going to expand the yield, the planning values that go into this, but there is still work to be done. We find Vesta to be very corporative and working with us toward that, but this is a non-answer because we don’t have the experience in terms of how quickly they are going to be able to ramp this up. The one statement that we have made is that we have a target to get out there as aggressively as possible but that our target is to reach a level of productivity by the early second half of the year that we expect to be able to meet a substantial portion of our demand. Does that help without giving you a specific timeframe which I can?

[Scott Schaper:]

No. Yeah. That’s helpful.

[Jeff Nugent:]

Okay.

[Scott Schaper:]

And then just one final one, it sounds like you guys have been making some improvements to the protocol in the actual procedure itself, but -- and maybe just any color on, as you said, Miramar in-house for a little while now, does any improvements you have made to the organization or the infrastructure that could drive growth whether it would be improving incentive comp structures or anything like that that maybe people aren’t thinking about? Thanks.

[Charlie Huiner:]

Yes. Scott, this is Charlie. Let me just tag on to it, what Jeff said, to give you just a little bit more detail on our manufacturing strategy and then I will kick it over to Patrick to follow-up on your question on Miramar, miraDry. So just to follow on from Jeff, what we are doing and very clearly focused on with our partner at Vesta is taking a look at our existing inventory in our high frequency or highest order products and we are absolutely prioritizing with Vesta the build out or the commercial build out of products to meet the demand in those highest demand SKU. So in terms of what that means as we go to the year to Jeff’s point, certainly we feel very comfortable and confident that by the second half of the year we are going to have the levels of inventory across all of our SKUs to be able to approach the market in a fully supplied way. In the first half of the year as we stated we are going to be more focused and our build right now is really more focused on those products that are at highest risk of stock out naturally and that’s really the precision level manufacturing that we are going through. With Vesta you can imagine as we do, we are climbing the training curve or they are climbing that curve and that’s really part of the reason that we have guided towards the back half of 2018 where we get to those full planning values and yield.

[Patrick Williams:]

So, Scott, on your question, yeah, the answer is, yes, we are making some resell already. We implemented some new stuff. You mentioned the commission plan things like that and the answer is, yeah, those are things that we are addressing and we have implemented some things not just similar to what we have done in the past as taking the prior the hand that there was kind of or the play book I should say in CoolSculpting. So I think just stay tune, a lot of that will come out. We have got a big event in the sales meeting coming up in the 2018 time period and right now we are just seeing over what kind of just plug-in away and trying to get the team build out in getting that protocol all squared away. So we are not looking to create a lot of demand right now until we get some of our ducks on our own, once we do that, so we do believe that we can ramp it up much quicker and I think it gets to what your, I think, maybe your first question was which is how quickly can you ramp up the new person coming onboard and I think the answer is, we have conviction that we can do that quicker against the strategy.

[Scott Schaper:]

Thanks guys.

[Operator:]

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

[Unidentified Analyst:]

Hi, guys. This is actually, Scott, on for Jon. I just have two questions for you. First on the gross margin kind of the mid 60s, how should we think about it moving forward with Miramar ramping, I know you said, Miramar was little heavier in international, which carries a lower gross margin. But how should we think about a kind of in the out years as both the businesses are more mature, how do we think about the gross margin there?

[Jeff Nugent:]

Sure. Understand as a consolidated business in the out years, we should see gross margins exceed 70%, it really isn’t mix issue, so there is a couple of dynamics happening. One right now is that we did have a higher percentage of revenue of that $3 million with international that’s all through distributors, so that’s also wholesale pricing and I will tell you that the wholesale pricing that was put into place when we took over the company was extremely, extremely low, that is one of the things we are actively working on right now is to harmonize all that stuff, and obviously, ensure that it’s a win-win not only for us as a company but the distributors can make money. Over time, I guess, in the near-term as we write size the shift with the North America sales, you will see more capital sales come in initially and that is the goal to capital of tomorrow is the consumable -- the capital of today is the consumable of tomorrow, capital does have a lower gross margin around that 50%, 55%, but that consumable is sitting at 85%. So I do have conviction that once we get the mix down even on the international possibly moving into more of a direct sales force strategy with market, you will see that margin start to creep up and I don’t think it’s going to be that the similar, I think, it keep going back to CoolSculpting, but a very similar sort of cadence of how gross margins crept up over the three years, four years as we grew that business.

[Unidentified Analyst:]

Got it. Okay. Thank you so much. And then on AlloX2, it’s good to hear the positive momentum for that product. I just want you guys to talk about or give us little more color on how that kind of -- what synergies there are to the implant business and do you see any pull-through just from the positive momentum of the tissue expander? Thank you.

[Charlie Huiner:]

Yeah. This is Charlie and it’s a good question. It’s really again the whole breast reconstruction market is the market that, that we have started to open up when we made that acquisition earlier or late in 2016. And absolutely the strategy was always to have a very strong tissue expander portfolio. But as you may know it’s really typically a two-stage process where you start with a tissue expander expand and then once you have expansion you replace it with the breast implant. And so, clearly, going forward when we have full supply in particular the goal is going to be to be in a position to offer the whole expander and implant and have that be a bigger sale each time we sell into a hospital. So, clearly, now with supply constraint, we don’t have the same opportunity for that one, two expander implant sale and pull-through, but absolutely expect to see that and again that is sort of the foundational piece of our whole breast reconstruction strategy going forward.

[Jeff Nugent:]

We still have the opportunity down the road with the larger sky as well as in the implant which we continue to work through, as you can imagine, we are not, those are not our priority right now and in terms of the first product that’s coming off the line at Vesta and what we are building right now. So, I think, there’s a really good opportunity in reconstruction and general and the AlloX2 is resonating. I think the ability to have the physician control post-op and drink fluid to prevents serum and et cetera is truly resonating out there.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Chris Cooley from Stephens. Your line is now open.

[Chris Cooley:]

Thank you. Good evening. I appreciate you are taking the questions. Maybe just from me to start and I realize it’s still early days in this regard but could you maybe characterize or contrast the growth that you saw both in the aesthetics space from an augmentation prospective relative to recon prospective now that you are seeing the growth with both AlloX2 and also Dermaspan and then I had a quick follow-up? Thank you.

[Jeff Nugent:]

Maybe you ask that one again, Chris, I just want to make sure I am answering it correctly or…

[Chris Cooley:]

I am just trying discerned kind of the relative growth rates that you are seeing between the two segments, between reconstruction or just pure augmentation now that you have more robust…

[Jeff Nugent:]

In that…

[Chris Cooley:]

… platform for reconstruction?

[Jeff Nugent:]

And does that question market wide or specifically for us or both?

[Chris Cooley:]

Specifically for you.

[Patrick Williams:]

Okay. So on the implant side we will say obviously we are relatively flat, not down a little bit as we mentioned in our prepared comments, we just don’t have the supply right on the implant side, so that’s a sort of it is what it is. On the AlloX2 side, we are seeing between about, I guess, breast tissue expander side in general. We are seeing some decent growth. At the beginning of the year we talked about that number ramping up every quarter and it has done that and I will say that we are off to a decent start as we go into Q4, so with -- all things are good. So we brought on some new marketing support. We have got a strong Head of Marketing now on the implant side for us with some very strong experience in the reconstruction market and we are expecting some really good stuff on expanders as we go into 2018.

[Chris Cooley:]

Okay.

[Jeff Nugent:]

I think the other part of that that might help and I don’t know if you’re comparing the rate of growth when Sientra first started but I am sure you recall that we were on a very aggressive share gaining profile and that in a relatively short period of time, less than three years we had gotten up to approximately a 15% market share and that was all augmentation. Now the market has changed dramatically since then, but we have not relied on old pattern and we are frankly looking at more aggressive growth rates on both period and I think there are number of differences between at which we can discuss at later time. But I would not automatically assume that the reconstruction segment would necessarily grow faster than augmentation.

[Chris Cooley:]

Understood. Thank you. And then, maybe just to clarify one of your earlier comments about -- on the manufacturing scale up a little bit there at risk with Vesta. Could you maybe highlight what you -- when you are thinking about that initial production historically, your fastest growth area was on the textured side and has shaped and was some of the recent concerns we have had in the broader marketplace not earning new products specifically, is that where we should think about coming growth forward with the initial volumes or should we think about maybe more reverse and a more of a smooth round type portfolio when we think about the augmentation space? Thanks.

[Jeff Nugent:]

Yes. Well, I think, the current plan calls for, as we said earlier, to focus on the SKUs that are in most demand and the SKU is going to be on the smooth round but at the same time we already have textured SKUs already in the production miss -- mix and that there are number of factors affecting the demand of one versus the other. So this is a question of current capacity and we are going to have to switch from one to the other as quickly and intelligently as we can, but the other part of our plan is to expand capacity and to just drive the ramp it is typical of any new product or new manufacturing start up. So I hope that answer your question.

[Patrick Williams:]

Yeah. As a reminder, Chris, in the marketplace smooth round is probably 80%, 85% of the products out there.

[Chris Cooley:]

Okay.

[Patrick Williams:]

And ours is historic not been that high because to your point when we came out we were knows as the textured shaped company right. So we are -- at our peak we were probably about 60% and 40% on the textured, 60% on the smooth round. We will because of some of the issues happening out in the marketplace with some of the buzz on the textured product. We have seen doctors and our procedure migrate over to smooth round, so we are probably closer to call it 70%, 75% on the smooth round right now. I will say that we haven’t seen any change in procedural volume. This is simply just a shift out of doctors choosing to go from textured to smooth.

[Chris Cooley:]

Understand. Thank so much and I look forward to seeing you guys tomorrow.

[Jeff Nugent:]

Yeah.

[Patrick Williams:]

Of course.

[Operator:]

Thank you. And that does conclude our Q&A session for today. I would like to turn the call back over to management for closing remarks.

[Jeff Nugent:]

Good. I would like to once again thank you all for joining us on the call today. We are firmly convinced that we have the correct strategy and resources to include what I would consider to be best-in-class sales organizations that we are within a striking distance of giving the full FDA approval with Vesta and that in combination with that happening in a very close future that I look at Sientra as a significantly stronger organization in part because of the diversification that we have decided upon well over a year ago and is something that was just obvious to us. So it goes back to the vision that we have to create Sientra as a global aesthetics company and one of the strategies I know that I use number of times in the past is by continuing to grow by both organic innovation, as well as moving into adjacencies. So again I can only tell you the confidence that we have here and we look forward to continuing to share information as soon as it’s available and consider ourselves a very unique company. So again thank you all very much. Look forward to seeing you soon.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.