Sientra, Inc.
Q3 2018 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sientra Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Brian Johnston, with The Ruth Group. Sir, please go ahead.

[Brian Johnston:]

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 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:]

Thanks, Brian. And good afternoon, everyone, and thank you for participating in the call today. Joining me are Paul Little, Chief Financial Officer, Senior Vice President and Treasurer; Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy; and Patrick Williams, our Senior Vice President and General Manager of our miraDry business. In the third quarter we continued to make significant progress on our goal of becoming a leading, diversified global partner to aesthetic physicians. On today's call I will first provide an overview of our third quarter performance and review our near- and longer-term corporate objectives before Paul provides a detailed commentary on the third quarter financial performance. First, I'm very pleased to report that we achieved strong consolidated net sales of $16.9 million in the third quarter, which equates to year-on-year pro forma growth of 58%. For the 9 months of 2018, we achieved solid year-on-year pro forma net sales growth of 38%. Both the Breast Products and miraDry segments reported double-digit growth and contributed to our financial performance, with the Breast Products segment growing 13% year-over-year. miraDry achieved another quarter of record sales, representing the third consecutive quarter of sequential growth and 174% pro forma growth year-over-year, despite the typical seasonality seen in this third quarter. I want to emphasize that miraDry's strong results demonstrate the benefits of diversification and validate our strategy of acquiring and developing adjacent technologies to complement our core Breast Products business, and we are committed to growing Sientra both organically and through continued strategic business diversification. Second, active and increased investment in R&D remains a priority in both of our segments. For miraDry, we're exploring incremental indications and delivery methods to expand the addressable market for our best-in-class treatment and technology. Our commitment to product development and innovation for Breast Products was reinforced by the opening of SLICE, our Sientra Lab and Innovation Center of Excellence, during the quarter. This effort is accelerating our ability to develop and launch unique products in the U.S. surgical breast aesthetics market, a category that is currently underserved from an innovation perspective. We also look forward to initiating our international expansion plans with our expected Canadian market launch late in 2019. Third, we further strengthened our sales and marketing team with the appointment of Jane Wolf as Vice President of Marketing for Breast Products, adding yet another aesthetics industry veteran to our commercial organization. Jane has significant experience in building and leading aesthetic brands at companies such as Allergan and Kythera. Jane led the competitive strategy for BOTOX against the introduction of 2 new neurotoxins into the North American market. Her leadership contributed to the significant market share achieved and maintained by BOTOX, which has become undoubtedly the most recognized aesthetic brand in the world. She recently left Establishment Labs, building out its marketing capabilities, and Jane has joined us in September and we're very excited to have her on our team. I'll now provide some key highlights of our progress in driving Breast Products segment, and I'll follow with the same for our miraDry business. Overall, the launch of our OPUS-branded breast implants following the FDA's approval of our site change PMA Supplement in April continues to support our precision-controlled selling strategy, which is to maintain our focus on fulfilling implant sales to a core group of our top-tier surgeons as we build inventory to service a broader surgeon base. While we've been able to meet our internal sales expectations through this precision-controlled strategy with the supply we've received, upside from the breast implant portion of our Breast Products revenue remains range-bound as the manufacturing ramp trends behind our initial expectations. As such, our Breast Products revenue growth rate remains dependent on Vesta's continued supply ramp rate through the balance of 2018 and '19. Still, we are seeing encouraging progress based on this. We've initiated limited new customer engagement programs in the fourth quarter to expand beyond our core surgeon base. We expect to increase these activities further each quarter into 2019 as the implant supply levels continue to improve. From a market demand perspective, the brand equity and clinical differentiation of our breast implants continues to resonate in the field while we have deliberately held back our demand generation efforts to maintain service levels and related credibility within the market. I'm encouraged by a number of factors which, together, give me great confidence in our ability to deliver a steady ramp of strong organic growth within our Breast Products segment in the quarters ahead, driven by our diversified portfolio within the segment that now includes breast implants, reconstruction-focused tissue expanders and our topical bioCorneum scar treatment. As previously mentioned, we remain confident in the strong demand of our breast products. A few supporting points here include our sales force of approximately 40 plastic surgery consultants, or PSCs, as we've discussed, continues to report that physician loyalty and demand for our breast products remains strong. We witnessed this support firsthand a few weeks ago during the American Society of Plastic Surgeons, or ASPS, annual meeting in Chicago, giving us continued confidence in our ability to retake and grow our U.S. implant market share. Also during the second quarter we launched our breakthrough Sientra Platinum20 warranty, which is grounded in the very high level of confidence we have in our compelling 10-year clinical data. We are still in the early innings of communicating the competitive benefits of this best-in-category warranty program. Feedback so far on Platinum20 is extremely encouraging, and we are confident it will have positive impact on our business as awareness grows with surgeons as well as patients. We also remain excited about the $300 million U.S. breast implant and tissue expander reconstruction market, the opportunity in which Sientra is showing positive growth, yet also early in its market share growth cycle. Demand for our next-generation tissue expander portfolio has remained particularly strong, which allowed us to drive another record quarter of AlloX2 and Dermaspan sales, which delivered 76% year-on-year growth. We're passionate in our commitment to helping women who are undergoing breast reconstruction, and we are proud to have recently announced the inaugural recipients from the Sientra Full Circle Program, our philanthropic initiative to support U.S.-based nonprofit breast cancer organizations. As breast implant supply grows into 2019, we also expect to launch an expanded portfolio of breast reconstruction solutions from our product development pipeline, which I'll further detail later in the call. Overall, we remain confident in the broader opportunity to build meaningful breast reconstruction-related revenue, going forward. And I'll point out that this is another example of the impact of our strategic diversification. As I mentioned in my opening remarks, we're making real progress on executing our new product road map at SLICE, our recently opened state-of-the-art clean room and research lab. As we previously outlined, we conceived of SLICE specifically to accelerate development efforts on key portfolio additions and enhancements and also to serve as a formal collaboration effort with our top-tier, board-certified plastic surgeon key opinion leaders. We believe that our dedication to investing in our surgical breast category will prove critical in ensuring that we maintain and extend our position as the premium provider of breast products in the U.S., as well as global markets, and should also expand the loyalty that our unique relationship with board-certified plastic surgeons show to Sientra. As just 1 example of the progress in this regard and consistent with our efforts to grow our reconstruction category, I'm very pleased to report that for the first time our SLICE and regulatory teams just submitted our PMA Supplement to the FDA for our new ultra-high profile breast implant, with the goal to launch in 2019, as a key product addition in our growing portfolio of breast reconstruction solutions. Finally, we also remain on track with our efforts to expand our breast products into international markets. During the third quarter, we submitted our breast implant medical device license application to Health Canada with a goal to launch breast implant and tissue expanders into Canada also during 2019. We are also actively reviewing opportunities to register our novel tissue expanders in strategic international markets to accelerate and broaden sales of those products, targeted for late 2019, as well. This is the first step in our focused effort to drive our differentiated breast products into the most attractive international markets and further diversify our organic revenue streams. We look forward to executing our international registration plans that will allow us to market our strong 10-year clinical data and become only the third company with FDA approval selling breast implants outside the United States. Moving now to our miraDry business. In the third quarter we achieved record sales of $8.3 million, representing year-on-year pro forma sales growth of 174%, an outstanding result. These results were driven by strong system placement and consumables growth internationally, as well as continued traction in the United States in spite of the typical seasonality we usually see in the third quarter. The strong growth at miraDry confirms our assessment of the long-term opportunity with this truly novel technology platform and supports our belief that the market for the permanent reduction of underarm sweat, odor and hair of all colors remains large and highly underpenetrated. As we look ahead, we'll maintain our focus on growing system sales in the U.S., specifically, which will in turn provide an even stronger foundation for driving higher-margin consumable sales in the medium to longer term. For some perspective, our average U.S. rep tenure is currently less than 6 months within miraDry, and we believe that under Patrick's leadership our sales force will continue to ramp along the productivity curve through the year ahead. We also expect to continue to benefit from an expansion in our direct-to-consumer marketing efforts and co-op marketing strategies, which involves partnering with our physicians to drive utilization. We expect these initiatives to accelerate our ability to identify and connect with the 15 million people in the United States that our market research indicates are bothered by underarm sweat and odor and would be interested in a unique permanent solution like miraDry. Simultaneously, we're exploring options relative to incremental applications for miraDry to expand our addressable market as we establish broad traction in our primary underarm indication. We're also exploring the addition of connectivity features to all new and installed systems worldwide to provide real-time utilization data to assist practices in enhancing their business performance. This will provide us with best practices execution advantages, without question. Before turning the call over to Paul, I'd like to thank the total Sientra team for representing us at yet another successful ASPS meeting in Chicago. We are extremely encouraged by the level of physician interest and positive feedback on miraDry. Furthermore, the ASPS meeting this year represented a great opportunity to visualize the potential for cross-selling across our product portfolio. With the miraDry and Sientra booths adjacent on the floor for the first time as a combined company, we saw strong attendance at our educational forum, with over 100 board-certified plastic surgeons attending, giving us further confidence in the demand for our products with leading physicians in the space. With that, I'll hand the call over to Paul, who will review the company's third quarter 2018 financial results. Paul?

[Paul Little:]

Thank you, Jeff. 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 an adjusted EBITDA margin, which we define as earnings before interest, tax, depreciation, amortization, fair value adjustments, legal settlement expense and stock-based compensation. Specifically, we are removing noncash items and/or nonrecurring items for this non-GAAP measure. Again, please refer to our supplemental financial information, earnings release and 10-Q for tables on GAAP and non-GAAP pro forma net sales and a full reconciliation of adjusted EBITDA to its GAAP counterpart. Consolidated total net sales for Q3 was $16.9 million on a GAAP basis, an increase of 72% compared to total net sales of $9.8 million under GAAP for the same period in 2017. Total net sales increased 58% on a pro forma basis year-over-year compared to a pro forma total net sales of $10.7 million in third quarter 2017. As expected, third quarter Breast Products revenue was impacted by typical summer month seasonality. Within the Breast segment, net sales totaled $8.6 million for the quarter, a 13% increase compared to $7.7 million for Q3 '17. The increase was driven primarily by continued strong performance of both our AlloX2 and Dermaspan breast tissue expanders, partially offset by a change in implant revenue recognition accounting related to our Sientra Platinum20 warranty program, the impact of which will be ongoing. Breast Products performance was also impacted by relatively soft bioCorneum sales, which came in at approximately $1.1 million for the third quarter. As we look ahead, we expect to see slight growth for bioCorneum sales into Q4, followed by a relatively flat performance through 2019 as we actively evaluate options to re-accelerate growth of this brand. We maintain our strong conviction behind the clinical profile and the opportunity for bioCorneum, as it remains the preferred scar treatment option for plastic surgeons. We expect to increase Breast Products sales in the fourth quarter of 2018 as Vesta continues to ramp implant supply and, as Jeff mentioned, we initiate customer conversion programs. Furthermore, as it relates to tissue expanders, we continue to see strong market acceptance and expect further growth in the fourth quarter and into next year. Our miraDry business segment achieved net sales of $8.3 million in Q3 '18, representing a 174% year-over-year increase on a pro forma basis compared to $3 million in Q3 '17. Gross profit for the third quarter was $10.5 million, or 62.1% of sales, compared to gross profit of $6.3 million, or 64.5% of sales, for the same period in 2017. The decrease is primarily due to the acquisition of miraDry on July 25, 2017, which carries a lower margin that Breast Products. As a reminder, our overall consolidated gross margin is highly dependent on the overall mix of Breast Products versus miraDry, as well as the components within miraDry, as we continue to expect that this mix will evolve as the segment continues to grow. Operating expenses for Q3 '18 were $30 million, an increase of $9.8 million, or 49%, compared to $20.2 million of expenses for the same period in 2017. Operating expenses in Q3 '18 were driven higher primarily by the inclusion of miraDry and the 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 Products side of the business. The higher stock-based compensation expense will continue for the balance of the year due to this renewed investment in our employees, and it is contemplated across all OpEx categories. Moving forward, we would expect R&D expense to reflect the increased product pipeline investments 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 business. In terms of sales and marketing, we expect expenses to be up in Q4 '18, associated with higher revenue and investments in our global sales and marketing teams. Net loss for Q3 '18 was $20.5 million, or a loss of $0.72 per share, on a GAAP basis, compared to a loss of $14.4 million, or a loss of $0.74 per share, for the same period in 2017. Adjusted EBITDA for the quarter was a loss of $13.9 million, compared to a loss of $10.7 million in Quarter 3 '17. The year-over-year loss increase can be mainly attributed to the inclusion of miraDry. Net cash and cash equivalents as of September 30, 2018, were $103 million, compared to $112.6 million at the end of second quarter 2018. Our balance sheet continues to provide us with the necessary capital to invest and grow both the Breast Products and miraDry segments of our business as we drive towards cash flow breakeven. Our cash burn was down this quarter, to $10 million, due to the timing of payments, and we are expecting approximately $16 million in the fourth quarter of '18. 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 reentered the breast implant market at full scale and have sufficient time to forecast near-term growth across both Breast Products and miraDry segments. I'll now turn the call back over to Jeff for final closing remarks.

[Jeffrey Nugent:]

Thanks, Paul. In closing, we continue to be encouraged by our progress in achieving our goal of becoming a fully scalable, diversified global aesthetic company and positions us well for a strong finish to 2018 and an even stronger 2019. We've generated a sustained level of combined high growth through the third quarter. Both segments delivered strong results and demonstrated the benefits of our focused diversification efforts. Our Breast Products segment continues to make progress, and we look forward to servicing the strong demand for our implants as we continue to scale up supply. The progress we are seeing from our manufacturing partner is encouraging and provides confidence that our supply and demand curves are approaching a balance. miraDry's strong execution, continued professional and patient acceptance demonstrate that we have a superior lasting solution to the significant unmet need and validates the size of this technology-driven opportunity. We also remain confident that our exceptionally strong physician relationships in combination with the spectacular commitment of our entire team will advance Sientra on its path to achieve our goal of attaining global leadership position. With that, I want to once again thank our entire team for their hard work, dedication, and I'm excited, extremely excited, to continue to build on our momentum across our business through 2019 and beyond. We look forward to seeing many of you in the coming weeks at a number of investor conferences in New York, and I'll now turn the call over for Q&A.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Jon Block with Stifel.

[Jonathan Block:]

I've got two for you. Maybe just the first one, Jeff or Charlie, any more color you can give on the ramp for Breast exiting '18, going into '19? And I know we want to stay away from guidance; I've got that. But just curious for some color on where you are from a capacity standpoint going into '19. Is it proceeding as planned with Vesta? Any positives or negatives that's developed over the past 3 to 6 months?

[Jeffrey Nugent:]

Obviously, it's important to all of us, but as we mentioned in the prepared remarks related to Vesta's supply, the manufacturing ramp has trended behind our initial expectations and has caused us to slow our breast implant sales conversion programs by 1 or 2 quarters, because that's the extent of our being behind expectation. This remains a supply, not a demand, issue, as I know you're well aware. And while we remain in this precision selling mode, we have initiated limited new customer conversion programs already in Q4 and expect to increase these activities further each quarter throughout '19 as implant supply levels continue to improve. And I guess the best way to put it is that we still expect to achieve sequentially quarterly Breast Products growth from here as we move into 2019.

[Charles Huiner:]

Just a little bit of further color. And as you know and everybody who's been following this knows, this has remained our #1 priority, and we are encouraged, as Jeff mentioned, with the progress that Vesta is making as they continue to scale up. They're less than 10 months into a scale-up of a Class 3 device that was new to them prior to having started working with us almost three years ago. So I wouldn't say we're surprised. As Jeff mentioned, I think we had hoped that they'd be a little further along by now, but certainly we're encouraged by the progress they're making. And we do continue to have confidence in the supply that we're receiving from them and our ability to continue to meet internal expectations as well as the expectations that have been laid out ahead of us. And I would say that really the key to that is, as Jeff mentioned, the initiation this quarter of some of these programs that we've been holding off on, to begin the conversion process of accounts that we haven't really been selling a lot to since we've come back on the market. And we do feel confident enough to begin those programs starting. We already started those in Q4, and we're going to continue to do that quarter-by-quarter into next year.

[Jeffrey Nugent:]

Just a last point on that, I think it's important to understand that we refuse to be overly optimistic until we see the results that we have programmed in our plan to date. So what we're trying to communicate is that we are being conservative and, I think, correctly conservative in terms of being able to expand to additional customers, as Charlie indicated. And we wouldn't have done that unless we had the confidence that we could supply them.

[Jonathan Block:]

Okay. Understood. And apologies, just juggling a couple of calls. So let me try to maybe reframe the question a little bit, and then I've got 1 other quick question. For many of us, we sort of had that inflection point maybe 1Q into 2Q in '19. You're saying delayed by a couple of quarters, but yet no change in demand from end markets, so to say. So if we picked that up, Jeff or Charlie, and moved that to the right 6 months, is that still fair to have an inflection point at some point in '19, maybe plus 6 months? Is that the right way to think about the demand coming back online over the next several quarters?

[Charles Huiner:]

Let me take that, John. This is Charlie. I don't know that we've ever thought of it as an inflection point. I think what we've thought of it as, as supply continues to ramp, we can continue to have more confidence to drive more aggressively into really three tiers of accounts. The first tier, as we've talked about, is that Tier 1, what we're actually calling orange accounts. These are accounts that really account for a good portion of our revenue. They're the accounts that we've continued to service even before we brought Vesta online. And they're accounts that we believe there's still room to grow within those accounts. And our reps are continuing to stay very focused on servicing their needs. The next two tiers are the tiers that I think - again, inflection point may not be the right way to put it, but they're certainly key to us scaling sequentially our growth from here. And as we mentioned in our prepared remarks, we do feel like and we feel confident that you're going to continue to see sequential growth now in our breast implant business and our breast products business based on increasing supply coming from Vesta. So again, I would say those next 2 tiers now come into play for us. And as you think about the fourth quarter and moving quarter-by-quarter into '19, we're encouraged by the work being done at Vesta and their ability to provide sufficient inventory to enable us to begin those programs into those next 2 tiers. So again, I don't know if it's an inflection point, but certainly we mentioned 1 to 2 quarters. I think we had anticipated being where we are today maybe 1 quarter ago. And so you can push it to the right, but we still feel very good about the core demand for our products and our ability to begin servicing that demand with the progress being made at Vesta.

[Jonathan Block:]

All right. And I'll ask one quick one on miraDry. Was that a little bit more heavy on international and the boxes, Patrick, relative to maybe where we were three months ago? And then Paul, if you can quantify what the change in the rev rack or the rev rack impact was to the Breast side of the business.

[Patrick Williams:]

We continue to see really strong performance by international, and of course that's a good thing. We've talked about the fact that we were able to get some very high-quality people that we were very familiar with, I was very familiar with, from prior roles. They continue to focus on systems, as expected. The system of today is the consumable of tomorrow. And I'll let Paul talk a little bit about 606, but on the gross margin side we're highly dependent on that mix. And so when you see higher international sales, higher capital sales, it is pulling down our gross margin overall. I am going to take a chance to answer the Breast Products one a little bit, because I know what you were trying to ask here, John. And I would say this, is that I think this 6-month push-out, whatever you want to call it, 1 to 2 quarter, it is going to affect the overall revenue that we prior thought that we were going to be able to do in 2019. It's not overly significant, and I know we'll probably have some more follow-ups on it, but definitely we're not able to provide that upside that we thought we were going to have through Vesta. So I think everyone should kind of rethink their models a little bit as we exit '18 and start going into '19. And I'll turn it over to 606 for Paul.

[Paul Little:]

The 606 adjustment for the quarter is around $200,000 that was deferred.

[Operator:]

And our next question comes from the line of Richard Newitter with Leerink Partners.

[Richard Newitter:]

Maybe just to start off with miraDry. Can you give us a sense, or maybe I missed it, just give us a sense of what the seasonality looked like for the U.S. on the capital side, in particular? How normal was that? And can you give us any sense of the breakout between U.S. and o-U.S. capital?

[Patrick Williams:]

I'll let you - we were about 60% to 65% overall revenue on the international side. We did see seasonality, as expected, on U.S. capital. And so we definitely anticipated that, and I think we talked about sort of going flat from Q2 to maybe even down from Q2 to Q3. We were still very happy with the performance. We had a very strong ending to the quarter, and we're off to a nice start in Q4. So we would expect, as I think Paul said in his prepared remarks, that the normal seasonality uptrend that you get in Q4 normally happens. You've got a couple of the tax depreciation laws that come into effect that help us out. And then of course there's just the normal push. So it was a good quarter. I think for us to grow from Q2 to Q3, overall, going from $8.1 million to $8.3 million was very solid, especially as, to your point, Q3 is generally down. And back to John's question, international is just crushing it right now, and we're continuing to see very strong performance on consumables worldwide as we continue to drive brand awareness.

[Richard Newitter:]

Okay. That's helpful. And any color you can give on utilization per system, Patrick, or consumable growth either by region or for the total install base?

[Patrick Williams:]

I'll give you some general color. I would say that what's really exciting for us is that we're starting to move our digital brand awareness into some key cities, and I would call it still sort of in this Pilot 1, Pilot 2 phase. So we kicked off Pilot 2, which was more cities. What we're aiming to do is we're probably under 1 patient a week per account, we'll call it, but we're seeing some of these cities do as much as 3 to 4 patients a week right now. And that's really us driving leads into these accounts and those accounts actually listening and following exactly what we tell them. We're driving a lot of leads, as we've talked about, is 76% of our consumer potential patients are under the age of 40; they're millennials. And the way that they want to get their content, the way they want to be sold to, the way they want to be contacted is very different. And as we figure this out, we're finding some pretty exciting stuff, which is essentially we're the only med device aesthetic company out there that is truly driving this younger patient population, that's also heavy male, into the channel. And that's starting to resonate for us. Because what that means is you can get a patient 5, 10, 15 years earlier than they would ever be in the channel. So a lot more to come on that. We're in the early stages. But that's kind of where we're at. And I think utilization could be pretty exciting for us as we drive through '19 and, especially, as we get into 2020.

[Richard Newitter:]

Okay. That's helpful. And maybe if I could, just 1 more. Patrick, since you were the one who kind of gave us the directional color on '19 with respect to kind of street models and the Breast Products sales, it sounds like that 2019 maybe needs to come down by a modest amount. Is it right to think of the underlying trends in the miraDry business as at least partially kind of offsetting that to the extent that maybe street models may have been undermodeling and that's where the upside has been materializing for the past few quarters? Is that the right way to think about it?

[Patrick Williams:]

Well as General Manager of miraDry, I don't want you to think about it that way. We've got a lot of momentum. I think you're interpreting our prepared comments that we said. As Jeff said, we still continue to push forward on the Breast Products side. We're going with international. We just got into Canada. So there is a lot of demand out there. We're just a couple of quarters behind, I'll say, on just getting that supply. And it's really about us on the precision-controlled selling strategy. We just don't want to disappoint customers as we get out there, and I think Charlie did a great job of outlining the different tiers. But my answer would be, no, don't be raising numbers on miraDry to make up for it at this point. But we had a good quarter and we'll kind of see how that plays out. And as Jeff likes to say, we're not in a position to give guidance, and Paul had similar thoughts. We'll give you guys more details as we know them.

[Operator:]

And our next question comes from the line of Kyle Rose with Canaccord.

[Kyle Rose:]

So we're bouncing between a few calls. So apologies if I ask a repetitive question here. But wanted to touch a little bit on the strength you're seeing in the recon side. I think you said as much as 75%, 76% growth on the expander side. And just wanted to see, now that you're kind of annualizing the full launch of AlloX2 and some of the inventory constraints you saw last year, I guess, how should we think about that type of growth, moving forward, particularly given you do have the breast implant inventory improving? And just how we should think about the overall recon business as a driver over the course of the next 12 months?

[Jeffrey Nugent:]

Well let me try to answer it this way. And again, this is an example of our diversification strategy, and moving into recon was an important step to accomplish that. And the basics of reconstruction right now include these expanders, and they've done superbly this year. We continue to see above-average growth. But again I've got to repeat, we're not prepared to give you the guidance but other than reconstruction as a subset of the overall breast products category continues to represent a big opportunity. So I can't get more specific than that, other than we're very confident what that's going to result for us.

[Charles Huiner:]

Maybe just a couple of indicators of that commitment. So we are continuing to expand our national accounts efforts on breast reconstruction. That's an important element that as we started to really build into breast reconstruction, we realized that we needed somebody focused on national accounts and hospital systems and really making sure that we were getting on those committees - getting through those committees and getting on the list of approved products. And so that process is bearing fruit, obviously, in some of the scale you're seeing in our expanders across the board, and we're continuing to scale that account group, that national hospital account group, to continue to give us more breadth across the country. The other thing that I'd mention, Jeff mentioned it a couple of times, SLICE, our innovation initiative. And I can say we're very focused on continuing to improve our tissue expander portfolio and continue to differentiate those expanders as it relates to the competitive set.

[Kyle Rose:]

Great. And then I don't want to belabor all of the supply comments you've already made, but maybe just help us understand or frame out specifically what's different, I guess, with where the manufacturing or the supply levels are now versus maybe what you would have thought potentially coming into it. I guess, it sounds like you're 1 quarter or 2 behind. But maybe just kind of help us understand, is that - is Vesta not getting the yields they want? Is there higher scrap? How should we think about specifically what that ramp looks like and where some of that can be brought back up to expectations?

[Jeffrey Nugent:]

Well I think the best way to answer that is that this is a very complex FDA-monitored PMA product line that is monitored very closely for compliance with all the quality and FDA expectations. So I think that, as we've said before, we've seen examples of this, frankly, take longer than we've seen with the experience with Vesta. But as we've indicated, we're seeing some real improvement. And going back to the inflection point question, I think Charlie answered it very well, that this, the plan is to see a steady flow of improvement through 2019 and not a Eureka! that's going to double yields and dramatically increase inventory at a particular point in time. This is hard work, and we are holding Vesta to very high standards. And aside from giving you specific expectations, which we can't do, we remain confident that it is the 1 to 2 quarter delay in where we thought we would be. So it's not as simple as taking the forecast and moving it two quarters behind where we expected to be throughout 2019. But I'll tell you this, that as soon as we get better information and a better basis for being confident in our forecast, we'll certainly include that in our quarterly reports.

[Charles Huiner:]

And I think that point that Jeff made is key, which is that notion that we may have thought there would be sort of this Eureka! point or threshold that we'd reach where all of a sudden we'd be able to go aggressively after every account, and we're realizing that this is a gradual process. And we are seeing improvements. We're seeing weekly improvements, actually, in the amount of product that we're receiving from Vesta. That gives us the confidence to begin the programs that, as I mentioned, we did begin in the fourth quarter, and that will be continuing into next year. So that could be the biggest insight, which is we probably thought that 6, 8 months ago as we scaled up there would be this point where we would just know that we had sufficient inventory across all of our SKUs to really go aggressive. And we're realizing it's more of a gradual process as they get into it, as they climb the learning curve. And we've had to adjust, in a sense, our commercial programs to that ramp, and I think we've done a pretty good job of that, frankly. And we've done that with the specific intent to not disappoint customers as we ramp with Vesta, and that's where we mentioned in our prepared remarks that we've deliberately not aggressively gone after demand generation. That's not an easy thing to do, because we've got a lot of people out. Our reps, our customers are waiting, and we've had to sort of hold back a little bit. We think it's been the right thing to do, and we're going to continue to open things up as we continue to make this progress that we're seeing from Vesta.

[Kyle Rose:]

Great. Thank you very much for the incremental color there. And just last question I had was you talked about the diversification strategy. You mentioned M&A and tuck-ins here and there. So I just wanted to see what your overall thoughts are as far as from a strategic aspect and being a buyer in the market where are valuations, where do you see opportunity, and kind of just how you think about some of the strategic decisions over the course of the next 12, 24 months.

[Jeffrey Nugent:]

Okay. I can answer that because diversification was one of our primary strategies very early on, I know when I started. And I learned that in my 21 years at Johnson & Johnson, where there's a pharma segment, there's a medical device sector and there's a consumer sector. And what we're looking for are related products and technologies that take advantage of our strengths. And you can enumerate those strengths, including our highly regarded sales force, our infrastructure, access to technology, KOLs, et cetera. So I'm not being as specific as I know you'd like, but we are constantly looking at both external acquisition opportunities as well as internally developed adjacencies that just expand our overall efficiency by taking advantage of, particularly, the sales force relationships, as a strong example. And we'll continue to do that.

[Operator:]

And our next question comes from the line of Margaret Kaczor with William Blair.

[Malgorzata Kaczor:]

First of all, just to kind of follow up on miraDry, obviously great results right off Patrick's entrance into that business. But if we look at the pace of marketing programs and investments, it seems like those have increased quite nicely or maybe even, arguably, accelerated. And it seems like maybe the uptake of those is a little bit faster than what we've seen, at least at some of your previous employers. So first of all, why is that the case? And second of all, what should we expect in the coming quarters and into 2019 in terms of both the extent of those investments and the types of investments?

[Patrick Williams:]

So I think the reason why it's going maybe quicker in the minds, we'll call it, the turnaround, and obviously the year-over-year growth is pretty good and we had a strong Q1 followed by a Q2 and now a Q3. As you referenced, we've done this before, quite a few of us that are associated with the miraDry business segment. And so there's a lot more confidence as we go out to the marketplace and not only know what to do, but have confidence into pulling the trigger and doing it. And then of course talking to management and talking to the board and making sure they understand. As you very well know, our board is also comprised of a couple of board members that were affiliated with CoolSculpting. We'll just say it, right? So I think all of that helps and been very grateful of Jeff and the board's support in allowing us to move forward. In terms of what you're going to see into '19, it's going to be a little bit of the same, but I will tell you that the last year that we've owned the business we are fundamentally starting to understand what it is about miraDry that's going to resonate. Certainly, we talked about the procedure itself, and it's an aesthetic procedure that addresses sweat and odor in the underarms. But I think that big thing that I mentioned earlier is this concept of driving new patients into a practice, but it's that type of patient. This millennial patient is something a practice simply does not get today. Am I'm telling you, you can't name another product out there that's doing that. You combine that with the fact that there is increasing brand awareness within the sweating and, some people would say, hyperhidrosis with some of these companies, we've got the only product out there. It's not invasive, it's a permanent solution, great cost point, great ROI for the customer, the physician customer. So like I said, I think we're doing all the right stuff. We talked about inflection points before. I'm not sure we're ready for an inflection point yet, but I think we're doing all the right things to start building up for it as we move through '19. And I've got to kind of hold off before we reveal some of that stuff. We've got to keep some stuff in our back pocket to not only give to our sales force and the physician customers, but of course we want to make sure we're ready to go with them. So more to come on some of those programs.

[Malgorzata Kaczor:]

Okay. And then just to maybe follow up on where some of the more recent placements have been going into, have they been plastic surgeons? Have they been some of these targeted accounts that maybe do have a CoolSculpting unit already in there? Or are you doing any other partnerships out there that could help drive that demand and that interest?

[Patrick Williams:]

So I would say no specific partnerships yet with any other sort of affiliated aesthetic folks out there. We are beginning, I would say, leveraging the Sientra brand; and so the Breast Products side of the business and the 40-person sales force-plus that we have there. So we've begun sort of the first steps of integrating that together. I'm going to leave out sort of specifics on that for now, but I would tell you that we've always seen that as an opportunity to leverage those strong plastic surgeon relationships that our PSC reps have. In terms of where we're selling, it's still what you would expect. It's, we'll call it, one-third plastic, one-third derm and one-third noncore. I didn't actually go through Q3 and look at every system to see where it was. So for now I'll stick with that. I don't think it's notably different than that. And we would expect that to continue. But of course as we maybe leverage some of the relationships on the Sientra side we could see maybe a little heavier on the plastics, which is great. I think they tend to be a little bit more out on the podium on the KOL standpoint. And if you can them adopting sooner - they usually take a little longer to adopt some of these things.

[Malgorzata Kaczor:]

Okay. And then last question, in regards to kind of some of the delays on the Breast side, a, is there anything that you could do to encourage Vesta to maybe, I don't know, accelerate their investments or gain some more comfort in getting those products out? And it doesn't sound like there's any issue on the rep side with that delay, given you're maybe helping pull them into the miraDry practice, as well. But anything in terms of customer rep feedback given the delays?

[Jeffrey Nugent:]

As far as the Vesta opportunity/challenge in front of us, I can tell you that, as Charlie indicated earlier on, that remains the #1 priority in the company, and we are working extremely closely with them to provide incentives, to bring in consultants who have much deeper experience in this category than had previously been placed in here. So Margaret, all I can tell you is that there is nothing that we are holding back on, because we consider this a real partnership. And we're not relying solely on them. This is as close to a 50/50, let's get this done as we can possibly make it.

[Charles Huiner:]

And I'll just say, I'll add to that, because I speak to them daily, they really have been good partners. They've increased their level of commitment as we've been falling a little bit behind. They've been bringing resources in from Lubrizol, their parent company, that have real supply chain and manufacturing expertise. And we're seeing real benefits of that, of that expertise as they bring it in. And they've also invested to increase capacity and to increase focus on certain things to get us an increased level of supply. So these are all things that are happening fluidly. They're happening, as I mentioned, on a weekly and monthly basis. And we're encouraged by the signs and the progress, and that has given us, as we mentioned, the confidence to begin the process of opening up and beginning some of these programs that we said we were going to start once we got to a sufficient level of supply.

[Paul Little:]

And also just to add some flavor, we're just talking here slight adjustments. We're looking for sequential growth this next quarter, sequential growth quarter-after-quarter next year. We're still looking for a very nice growth in the implant business. It's not to imply here that we don't believe that the growth rates aren't what we thought they were going to be. There's just a little delayed, but there's still some strong growth in this business. You look at our tissue expander business going high 20s and 30s last few quarters, 74% this quarter; except for bioC, that's really the only business we said is flat next year, and there was a slight adjustment on 606 for next year. But these are slight adjustments we're talking about here.

[Charles Huiner:]

Yes. I think that's a great thing that Paul just said. And if I presented that the sky was falling at all, I certainly hope I didn't make that come across. I should have left that up to Paul, but that's a good clarification on Paul's side.

[Operator:]

And our next question comes from the line of Chris Cooley with Stephens.

[Christopher Cooley:]

My apologies at the outset. I've been hopping between a couple of calls here, if this is repetitive. But I'm just curious, you mentioned at the outset of the call incremental investments both from the DTC and co-op spend on miraDry, as well as investment for expanded indications there. And so clearly that business is outperforming at this juncture. But just was hoping you could maybe help us quantify a little bit that incremental spend and maybe how we should think about that, either through the balance of the year or out into 2019. And then I have 2 quick follow-ups.

[Paul Little:]

Our R&D spend, we're talking R&D, the quarter that we reported here will be fairly consistent in the next quarter and then just slightly up even next year. These are not large investments, anything we're talking about today. The heavier spending will be on sales and marketing in our entire P&L. But the increase, Patrick would have more detail on the programs, marginal at best for any 1 of these programs. These are not expensive programs we're talking about.

[Patrick Williams:]

I think that's fair. We've got such an opportunity now with just axilla, underarm, that there's plenty of runway for us with just that product. Jeff mentioned it. There's 15 million people that are bothered by sweat in their underarms. There's 37 million people in the U.S. that are bothered by sweat. So that's where we talk about looking at those other indications and things like that. But that's not revenue-producing for us for quite some time, down the road, certainly not through '19. I wouldn't anticipate that. But it's more of the same. I think Paul already gave color on what sales and marketing would be kind of throughout this year going into next quarter.

[Paul Little:]

And even on the breast implant side, these are not studies we're doing. These are typically PMA Supplements. So they're actually, on the cost side, they're relatively inexpensive in relation to anything else in this space.

[Jeffrey Nugent:]

And also relatively shorter term than some of the other experiences that we've seen in the past.

[Paul Little:]

Long story short, what we saw in Q3 for R&D you should see roughly the same in Q4.

[Christopher Cooley:]

Understood. And then just two other quick ones from me. One, I think I understand the answer to this one already, but when you look at the growth in miraDry I'm assuming you're not seeing any hindrance from QBREXZA in the marketplace, but I would be curious where or how you see that being positioned relative to miraDry. Is that any type of gating in terms of adoption? Or is the bigger gating factor right now just driving awareness and increasing the install base?

[Patrick Williams:]

It's the latter. I think it's driving awareness and increasing the install base. We know about them. I haven't heard any of the reps come and say this is - a doctor is switching from this to this. You need to understand their business model, and I think as they talk about it some more we'll see that. But a lot of folks based on our marketing studies of awareness with excessive sweating, they're going to go to their General Practitioner first. The GPs are not actively in the aesthetic market within a hospital setting or within an insurance-based setting. This is a prescribed drug with the topical swipe that's being used by Dermira. So I think it's sort of - it's a little apples and oranges. The good news is we're fruit and it's about sweating and it's about awareness. So that's the nice part about it.

[Christopher Cooley:]

Appreciate that color. And then just lastly from me, going back to Breast business, and again I apologize if I missed this during either the prepared comments or during the early part of Q&A, but any discussion there regarding incremental investment in terms of the actual implants themselves, thinking about another next gen? I know there's obviously investment on miraDry now, but with a much longer lead time when we think about the regulatory process any thoughts to needing to make any kind of changes now or enhancements when we think about surface technology or just the process, in general? Or is the focus solely right now, let's scale Vesta, take share, expand into Canada and then [indiscernible] maybe kind of review the portfolio?

[Jeffrey Nugent:]

I think the best way to answer it is that we've given new life to innovation spread across both core business segments. And as far as the Breast Products are concerned, there is significant effort focused on increasing the competitiveness or breakthrough qualities in each of the segments. I think Charlie indicated earlier that we have a significant effort against reconstruction, and that is a relatively short-term but also a significant increase over the products that are available today. So we indicated that those would be expected to be launched during 2019, but we're also getting into fundamental research and finding - the way I describe it, as the first-sixth generation of implant that is applicable to both U.S. and international markets. So all I can say is that you grow businesses largely by innovation. We do not want to grow exclusively by acquisition. It's much more efficient to add to strong franchises we already have.

[Charles Huiner:]

And Chris, I think you did a nice job of picking up the theme that Jeff laid out in his prepared remarks, which is that we're really excited about the organic opportunities to grow our Breast business. There's a lot going on, as you picked up on. There's the launch of our ultra-high profile breast implant which we expect to happen in 2019 based on the submission that we just announced today. There's the AlloX2 improvements that our SLICE team is working on that we expect to take what is already a novel product to a whole new level in the market that, frankly, we don't see any other tissue expander out there that we think is going to be able to do what that AlloX is going to do once we get that on the market into next year with our SLICE team. You mentioned Canada and international, and you're right. Certainly, we have to get our supply to the levels where we can fulfill our core organic business in the U.S., and that's what we're focused on right now. But we think very nicely and sequentially as we get Canada approved hopefully towards the back half of next year, now you add another leg of organic growth to the stool. So we're trying very hard to sort of lay these things out in a very logical way. Supply is the key thing there, that we're also getting from Vesta to enable all of this to take place. But we've got organic programs on recon, we've got international programs and then we've got this great opportunity in the U.S. All of those things hit our Breast Products business, going forward.

[Operator:]

And our next question comes from the line of Alex Nowak with Craig-Hallum Capital Group.

[Alexander Nowak:]

Just staying on that last topic, Charlie, can you give us any more details on the ultra-high profile implant? Is this just a larger CC size implant? Or any other features not on the current OPUS line?

[Charles Huiner:]

Sure. And I'll share what I can, but we want to hold some in reserve for competitive reasons. But clearly when you take a look at breast reconstruction, particularly in the United States, but really even around the world, at least 20%, if not 30%, of cases being done are utilizing an ultra-high profile implant. That provides more projection than is the case with moderate height or high profile implants. Our competitive set in the U.S. both have ultra-high profile implants. So effectively, over these past few years as we've gotten more focus on breast reconstruction we've been, in a sense, giving up 20% to 30% of the business because we don't have an ultra-high profile implant for our reps to offer to surgeons who are doing breast reconstruction. We're filling that gap. We've been working on this project now for the past year. We've been very intent and focused on wanting to get that done because, indeed, breast reconstruction has become such a big thrust of our strategy and we felt we needed to get to competitive par with that particular implant tied together with now our leading portfolio of tissue expanders. We think it's a really nice 1-2 punch.

[Alexander Nowak:]

Okay. Got it. Understood. And then Paul, we're at an average of $15 million burn rate per quarter today. Where do you see that going next year? And at what run rate do we approach a breakeven point here?

[Paul Little:]

Expect about a $15.5 million run rate next year as well, by quarter. Next year we also have potentially 2 milestone payments in there, one for the miraDry acquisition and one for our tissue expanders. We're still saying early - sometime in 2021 is what we've been saying for breakeven cash.

[Operator:]

And our next question comes from the line of Anthony Vendetti with Maxim.

[Anthony Vendetti:]

Just a quick question on miraDry. I know you started out as treatment for hyperhidrosis. You've moved on to sweat-bothered and odor. You're talking about other indications. I was wondering if you can elaborate a little bit on that. And then Patrick, I don't know if you provided the breakout, but the breakout between capital and consumables for miraDry?

[Patrick Williams:]

So the other indications, we have talked a little bit about it. There's a lot of other body parts. There is anywhere you can imagine where sweat is or odor, but primarily sweat. So there's the chest, there's the back, certainly there's the hands and things like that. But these are concept things. Jeff is very, I would say, big on wanting to focus on the R&D side for both segments. I think you've heard that as a recurring theme now probably for all of 2018. And so we are putting some investment in that area. It's all still sort of early stuff. And then on the split - but regarding the opportunity we have, we still have a huge opportunity just with underarms, moving forward, over certainly through '19 and into '20. So I'm not worried about trying to come up with another indication at this point. In terms of the split, we did say, I said about 60% to 65% was international. It continues just to overperform tremendously for us. And then worldwide, we were about 50/50 on capital equipment and then consumables.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Kyle Bauser with Dougherty & Company.

[Kyle Bauser:]

Regarding the miraDry fresh treatment protocol enhancements that were launched earlier this year, I'm sure the feedback has been positive, particularly around reducing procedure time by one-third, which is quite significant. Has this been able to translate into increased utilization within current accounts? Any sort of commentary on the feedback you're receiving on that initiative and any progress updates would be great.

[Patrick Williams:]

I think it did two things. There was certainly a bit of a marketing aspect to it. The ability to go out and talk to new accounts and say that this is different than the miraDry maybe that you didn't purchase in the past, and then to reengage existing accounts is obviously the same thing, when you tell them we do have a new protocol out there. It's faster, more delegatable, et cetera. So I think all of those things help. I would say, though, that it's really less about the fresh protocol and really where we're starting to truly see what's resonating and then, as I said, we're in the early stages, is really this concept of driving a new type of patient into the practice. That is really a very compelling value proposition that we bring, unlike any other aesthetic product out there. So I talked about a younger, more males. And what that means is the lifetime value of that patient, especially when you start talking about the plastic surgery side where they're doing surgery. So you've got toxins and fillers and everything else, but when you start talking about doing things like breast augmentation or you start talking about doing plastic surgery, in general, that lifetime value becomes very compelling. Once again, a lot of history from prior roles that I've had that talked about the lifetime value and some very prominent doctors, like Doctor Grant Stevens, who's actually published papers out there. He does a fantastic job in terms of talking about that lifetime value, and I know he has a peer review published paper that we certainly do show quite a bit.

[Kyle Bauser:]

And you just talked about exploring other body part indications for miraDry. Given that miraDry is only a [indiscernible] device, full PMA, it would seem that any subsequent use on another body part wouldn't require an arduous amount of regulatory requirements. Can you talk about what regulatory steps you would need to take to explore these other indications?

[Patrick Williams:]

I think I'll hold off a little bit on that. I think conceptually you're in the right direction. We are 510(k) and not PMA. But we're taking a technology that isn't, what I would say, widely used out there by anyone else, which is obviously our value proposition, sort of our [indiscernible], which is microwave. And we need to go through teaching people what microwave is, and in this case [indiscernible] from a regulatory pathway and what microwave does and how it reacts in terms of mechanism of action. So we're actively having conversations like this. So I'll just kind of leave it for there for now. We're getting a lot of questions on indications. I'll stress again

[Kyle Bauser:]

Great. And then, just lastly, more a pipeline question, I know you've been hyper-focused on fully relaunching implants, but innovation within the Breast Products portfolio has also been a key focus, particularly with the creation of this SLICE facility you talked about. Can you talk more about some of the enhancements you're considering in the Breast Products? For example, I'm thinking of features like temperature sensing as a means of detecting infections or pressure sensing to detect shell rupture. These are a couple of features that are under consideration elsewhere. Are these the kinds of examples of the types of innovations that we could expect to see out of SLICE? So any sort of additional color around other ideas coming out of that would be helpful.

[Jeffrey Nugent:]

This is Jeff. It's a great question. But again, for competitive confidentiality reasons, I can assure you that we are thinking big. We're thinking of making significant improvements to existing and new products. But I can't get any more specific with you than that. You'll see the results beginning in '19.

[Operator:]

And I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Jeff Nugent for any further remarks.

[Jeffrey Nugent:]

Great. Thank you, operator. I just want to conclude by thanking everyone for participating and your interest in and support of Sientra. We think we have an outstanding platform to grow from. And frankly, I'm not aware of any aesthetics company that has a higher growth rate than we do. So I want to again thank you all and look forward to talking to you in the near future.

[Operator:]

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