Sientra, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Nick Laudico from The Ruth Group. You may begin.

[Nick Laudico:]

Thanks, operator. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of the United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current assumptions and expectations of future events and trends which may affect the Company's business, strategy, operations or financial performance. A detailed discussion of the risks and uncertainties that the Company faces is contained in its annual report on Form 10-K. 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 Jeffrey Nugent, Chairman and CEO of Sientra.

[Jeffrey Nugent:]

Thanks Nick. Good afternoon everyone and thank you for participating in today's call. Joining me are, Matt Pigeon, our Chief Financial Officer and Treasurer, and Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy. First, I'll provide an update on our progress and accomplishments during the first quarter, and then turn the call over to Matt who will provide specific details on our first quarter 2016 financials. I'll return to provide closing remarks, and then we'll open up the lines to questions. I want to start by saying that our objective to re-enter our market in the first quarter was successful. The quarter was extremely productive for Sientra. After several months of hard work and robust independent testing that confirms the excellent safety of our products, we re-entered the U.S. market on March 1 with a precision launch strategy. Our experience in the first month of market re-entry has solidified our confidence in the business and reinforced our conviction in our actions related to our temporary and voluntary product hold. Let me briefly provide a bit more detail behind the reasons for our confidence. First, our customer relationships are strong, we've seen it, demand is robust, plastic surgeons are committing to using Sientra products. Second, leading board-certified plastic surgeons have determined the issue of particulate matter is no longer an issue, in fact it has never been an issue. Third, our top-tier sales force is energized in making progress restoring sales with our previously active customers. Fourth, we made substantial progress on a long-term manufacturing solution. And fifth, we rapidly integrated and acquired product and a dedicated team that diversifies our revenues and leverages our sales force. I'll provide some additional detail on each of these important accomplishments in the context of our ongoing commercial efforts and long-term strategic objectives. Let me describe our market re-entry strategy. Demand has exceeded our expectations in the first months of commercial activity. Since the market re-entry, we have contacted 84% of our total previous customers who were active prior to our voluntary hold. Nearly 80% of the customers we contacted are committed to using Sientra products and only 2% have decided to pass, for now. In addition, more than 90% of those in the committed category have already made at least one purchase during the precision launch, and that's through the first quarter of 2016. Our objectives of our precision launch are to optimize our inventory, maintain a consistent supply for our active customers, and establish a commercial foundation to build upon. Once a manufacturing solution is in place, we are confident we can build on that foundation and return to and surpass our historical revenue growth rate. From a sales force perspective, our PSCs are highly motivated to be back in the market and encouraged by the continued positive feedback from our surgeons. We continue to have the highest quality, most experienced reps in the industry, I am convinced of that. Our current sales force of 35 PSCs have moved rapidly in our first month of market re-entry, educating plastic surgeons about the scientific evidence generated by our independent review as well as restarting the flow of sales orders. They have demonstrated incredible professionalism and loyalty to the Company and are excited about the rewarding quarters ahead. From a clinical data perspective, the safety of our products was further confirmed in April with the publication of a nine year clinical data update in the peer-reviewed Aesthetic Surgery Journal. The data continue to confirm strong safety and high patient satisfaction levels. As we previously announced, we completed the acquisition of bioCorneum, the advanced silicone gel scar management therapy, in the first quarter, diversifying our product portfolio which is an important part of our strategy and further leveraging our existing sales infrastructure. Through the acquisition, we acquired seven additional specialty sales reps responsible for driving bioCorneum success in the cosmetic dermatology and facial plastic specialties. In parallel, we now begin to leverage our PSCs to build the bioCorneum brand and drive penetration into the board-certified plastic surgery channel. Our PSCs began selling bioCorneum in April and have received favorable early feedback. We estimate the opportunity for silicone gel topicals to be over $300 million when combining multi-specialty and board-certified use cases, and we remain very excited about our prospects for building a significant market position through our two complementary sales groups. Looking beyond the initial relaunch and current product sales, the management team is committed to achieve our stated objective of establishing this stable, long-term manufacturing supply chain and we are confident that we will achieve this goal based on the following. The Company has been engaged in this process before the issues occurred with our current partner and we are well-positioned with several potential alternatives. The process is tracking with our expectations and we are working against a number of important strategic goals. Our primary goal is to re-establish manufacturing in a world-class facility that is recognized for its dedication to quality control and safety. We're also focused on maintaining a high level of manufacturing efficiency and providing the attractive gross margins for Sientra products that we have achieved in the past. In terms of our interactions with customers, we have clearly communicated our precision launch and ability to meet their demand, and remain on track to provide uninterrupted service. We have line of sight on the important steps ahead and we'll communicate our major milestones as the process goes forward. The decisions will be based on several factors; overall strategic benefit to increasing shareholder value, timing, and the confidence in meeting all of the requirements of an FDA approved medical device. We are highly confident we have the experience, the right people and processes in place to execute this strategy and ensure uninterrupted supply for our customers, which is the most important thing we see. I want to reassure you that there is no higher priority within Sientra at this time. I'll now turn the call over to Matt Pigeon for his review of the financial results for the quarter. Matt?

[Matthew Pigeon:]

All right, thanks Jeff. I will now discuss our first quarter 2016 results. Our first quarter 2016 financials are available in greater detail in our earnings press release issued earlier this afternoon, and additional detail will be available in our 10-Q which we'll be filing shortly. Total sales for the quarter ended March 31, 2016 were $1.5 million, compared to total sales of $12.4 million for the same period in 2015. The first quarter of 2016 decrease in net sales was driven by our voluntary hold on the sale and implanting of all Sientra devices between October 9, 2015 and March 1 of 2016. Net sales of our Breast Products accounted for 79% of our total net sales for the three months ended March 31, 2016. During the first quarter of 2016, on March 9, we acquired bioCorneum, an advanced silicone scar treatment, and have included the results of operations from that date of acquisition. Net sales of bioCorneum or Scar Management Products accounted for 17% of our total net sales for the three months ended March 31, 2016. Gross profit for the first quarter of 2016 was $0.7 million or 48.3% of sales, compared to gross profit of $9.2 million or 74% of sales for the same period in 2015. This decrease in gross margin was primarily due to an incremental $0.3 million reserve for inventory obsolescence recorded for product that we estimate will expire prior to being sold and greater fixed overhead as a percentage of lower net sales. Operating expenses for the first quarter of 2016 were $12.7 million, an increase of $0.9 million or 6.9%, compared to operating expenses of $11.8 million for the same period in 2015. The increase is primarily due to an increase in product development costs, legal costs, employee related costs and expenses associated with being a public company. In addition, the increase in costs for the period were partially offset by a decrease in employee-related expenses for the sales department as a result of decreased employee headcount and also a decrease in marketing costs. Net loss for the first quarter of 2016 was $11.9 million, compared to $3.4 million for the same period in 2015. Net cash and cash equivalents as of March 31, 2016 were $93.5 million, compared to $112.8 million at the beginning of the year. We continue to maintain a healthy balance sheet with no debt and sufficient cash to fund our market re-entry and execute on our growth strategy. As of March 31, 2016, our sales organization included 35 plastic surgeon consultants or PSCs, as compared to 43 PSCs as of March 31, 2015. In addition, through the bioCorneum acquisition, we added seven additional sales representatives focused on serving those customers outside of the board-certified plastic surgery channel in support of our Scar Management Products. The addition of these seven sales representatives brings our total sales force to a total of 42 persons. As we stated on our last conference call, we remain in the very early stages of our market re-entry, therefore we will not be providing 2016 financial guidance at this time. As we continue to execute on our market re-entry, we expect to gain more visibility on our commercial sales rate, and we will continue to closely monitor the data we are collecting in order to be in a position to provide guidance at the appropriate time. I will now turn the call back over to Jeff for final closing remarks.

[Jeffrey Nugent:]

Thanks Matt. Before taking your questions, let me briefly summarize our accomplishments to date and our focus for the remainder of the year. Our high level of confidence is based on a deep understanding of the market, the strength of our team, and the advantages and level of professional acceptance of our product line. We have achieved a great deal in a short period of time during that first quarter. The early stages of our market re-entry have gone well and physician feedback has been encouraging and I'm going to say surprising. We are focused on a strategic launch that will optimize continued supply for customers. Our highest priority is to establish a stable, long-term manufacturing capability and a high-quality, efficient facility. And last, we are excited about the anticipated upside from bioCorneum. While starting small, we believe we have significant opportunity to leverage the product over a much larger PSCs sales force. Taken together, we believe our execution on these initiatives will deliver long-term accelerated revenue growth, expand market share gains and place us on a path toward our ultimate goal to become a leading diversified world-class aesthetics company. Operator, I'd like to now open the lines for callers.

[Operator:]

[Operator Instructions] Our first question comes from Jon Block from Stifel. Your line is now open.

[Ethan Roth:]

This is actually Ethan Roth on for Jon Block. A few questions here. To start, you provided some very helpful metrics there on the early re-entry to the market, specifically the 80% of customers that you reached out to deciding to move forward with purchasing product in 1Q. Maybe just focusing on the 2% who decided to pass and the other 18% still waiting to make a decision, what's been the biggest pushback so far?

[Jeffrey Nugent:]

The pushback has been surprisingly minimal. And if I can just take a minute and explain what this really means. We were removed from the market voluntarily and our primary competitors naturally came in and took over those customers that we were no longer able to serve. So what encourages us, and me particularly, is the relative speed and ease of converting those previous customers to come back from those products that they used as a replacement. So, I could give you a number of other statistics. We have a very high level of analytics inside the Company. We know exactly who is ordering what. We're following that on a very detailed basis. But as far as pushback, we're not seeing much. There are virtually no concerns about the safety issues that were raised and we've been able to convince those customers that we have the confidence and are giving them the assurance that we are not going to allow them to go back on backorder. And that's all part of the master-planning that we're doing in terms of when we can expect to begin resupply. Does that help?

[Ethan Roth:]

Yes, it does. Maybe just two here on the manufacturing. You mentioned you'll provide updates I believe on major milestones as the process goes forward. Can you give us any details around what these milestones are that we should be focusing on, and then timing around when you'd start to expect to see these milestones occur?

[Jeffrey Nugent:]

Again, we've been consistent in saying that we are deeply involved in several alternatives and each one requires a different strategy, and it would be premature to give you a timeframe because we may decide that one re-entry strategy and one manufacturing approach would be better than another. And I want to point out that while speed of getting manufacturing facilities back in place is important, but it's not the most important thing. So I'm not trying to dodge the question other than to say, we are on track with our initial timelines and I would just ask for your patience and stay tuned that we – I'm advised to say, we will share with you the specifics at the appropriate time, and I would go a little bit further than that in saying that, we want to share the specifics and reach those decisions as quickly as possible. So I can't give you what you asked for, but I am confident that we know what we're doing. I've done this numerous times. So it's a combination of speed and quality to make sure that we've got a long-term solution that will take us well into the future.

[Ethan Roth:]

Okay, thanks. And then maybe just last one. We've got a pretty good sense for the sales just through the first month that you reported today that you are back on the market, but maybe kind of take that out to two months, anything you can share with us or an early look at the monthly run rate post the launch and how that's trending through April?

[Jeffrey Nugent:]

Again, this borders a bit on some guidance, but we have put together a forecast which was admittedly conservative in the first quarter, and we're expecting that to ramp up through the balance of the year within the constraints of how I describe the sizable inventory that we have. So I expect this to continue to ramp up in terms of sales per day, sales per rep and actually be very precise on the specific SKUs we have to be able to meet specific needs of those that are in our first phase commercial group.

[Ethan Roth:]

Okay, thank you. Very helpful.

[Operator:]

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

[Margaret Kaczor:]

First, just to keep maybe asking a similar question to the question before, but kind of based on your breast implant inventory of $20 million and roughly about $1.2 million in breast implant revenue you guys had, if I just do the math on that based on your gross margins, that would suggest something along the lines of 50 months worth of inventory, again pretty easy math, two years worth. So is that kind of the main target where you are getting at, and in which case, how do you add more accounts or at what point do you become comfortable that it's the right level of sales for you guys to be able to get manufacturing back in line?

[Jeffrey Nugent:]

It's a very carefully thought-out process and I think we discussed a little bit of that at ASAPS in Las Vegas. But what we're really doing is micromanaging every single account and dialing that back into our inventory. And as you figured out, which is fairly easy, the inventory we have on our balance sheet equates to conservatively $60 million in revenue. And with that, we are planning this, like I said, meticulously to provide those physicians the confidence that we are going to be able to serve their needs, which has been individually determined by each one of our PSCs. We know what their demand is for the next 18 to 24 months. And I think I've said this before, because on a very conservative basis, I want the most conservative estimate of time when we will be in full production. While having confidence that we are going to be able to do that sooner, but I'm going into it with the commitment to not put our customers on backorder. Therefore, we have a very sophisticated planning process. We have daily dashboards that tie back into the amount of inventory we have left. So, our intent is to beat that target but we're assuming in the worst-case scenario that we will have sufficient supply to meet the needs for a minimum of 18 to 24 months from the point of beginning, and that's March 1. Does that help?

[Margaret Kaczor:]

Okay. No, that doesn't. Really what I'm trying to get at here is, given that you've already got that $1.2 million in the bag based on the existing accounts that you have re-entered, how many more accounts can you add from here, is it just another 25%, just kind of based on the math I'm just trying to get a better figure of how many more you can continue to supply?

[Jeffrey Nugent:]

It's being evaluated literally on a daily basis where we look at the requests, because we've got a high number of requests to get back into Sientra products. And before we bring new customers onboard, we work out a specific forecast for their practice, and in effect put a lien on the inventory such that we are reserving the products that they are going to need. And I think one other statistic that I don't think was mentioned is that the customers that we brought on to date represent over 70% of the inventory that we have available spread out over the next year and a half, plus or minus. So we're being very seriously reserving the products that we jointly agree that they need. So another way to answer your question I think more directly is that we have room for additional accounts. It's going to vary based on what their projected needs are, and we make decisions literally on a daily basis as to how many more we bring in.

[Margaret Kaczor:]

Okay, that's helpful. And I assume as manufacturing goes along, that those constraints will be minimized or not minimized as that goes on. So the other question that I had was regarding gross margins. Matt, they are maybe a little bit lower than what we anticipated and even when we exclude that inventory obsolescence charge. So how is pricing on the breast side now that you have re-entered the market and should that change at all in the next year?

[Matthew Pigeon:]

It's a good question and when we look at our – I'll answer from the top down – when we look at our ASP's, they've been holding up very nicely and that's been certainly a part of our strategy going forward. In regards to the gross margins, if you look at the $0.3 million or $300,000, that's just under 20 percentage points, given our revenue is so low. And so if you compile that with the fixed overhead as a percentage of lower revenues and also a couple of smaller items related to our acquisition, some non-cash items for purchase price adjustments for inventory, you get there very quickly. But without those, we would expect the margins to be in line with our historicals.

[Margaret Kaczor:]

Great. And last one for me. Jeff, in terms of your interest in acquisition target going forward, bioCorneum obviously seems like it was a really great target, we heard great things about it at ASAPS, but how much can you and the organization handle from here and what potential other adjacencies are you guys looking at, both near-term and long-term?

[Jeffrey Nugent:]

We have a growth strategy that is made up of organic growth and acquired growth, and at this point we had an opportunity with bioCorneum that was just too good to pass up. In fact, we've been looking at that for a while. We have targets that we are evaluating that are both small and large and the criteria is their ability to add shareholder value, give us greater critical mass and make better utilization of what I'm convinced is the best sales force in this category. So I can't give you any specifics, as much as I'd like to, other than, I've spent 25 years building businesses by moving into adjacencies, and there are a lot of adjacencies that are available to us. One of the considerations here is that our dedication and commitment to board-certified plastic surgeons limits us to a certain number of acquired products, but we also have this separate sales force and focus on non-board-certified plastic surgeons as well that we want to expand. And it's all based on the premise of our outstanding field sales force, which I believe you have some sense of how good they are, and giving them more products to leverage – not leverage, but share with our primary customers, to me is a no-brainer. We need to make better use out of our very talented PSC sales force.

[Margaret Kaczor:]

Great and congrats on the relaunch.

[Jeffrey Nugent:]

Great. Thank you very much. We are feeling very good about it, because if you think about it, this is almost like a 0-to-60 Road & Track test, because we started from zero and literally in the last month made significant progress in getting up to the number of prior accounts that we did with a positive commitment to switch back to Sientra. I'm very, very proud of the organization doing that.

[Operator:]

Thank you. And this does concluded our question-and-answer session. I would now like to turn the call back over to Jeff Nugent, Chairman and CEO, for any further remarks.

[Jeffrey Nugent:]

I just want to thank you all for your joining the call today and your interest in understanding our business, because we are so convinced that we have unique advantages in this category. But as you can tell, there are some complexities in our getting back to where we previously were, but I want to be able to share as much as I can to increase your confidence that we really know how to do that. So with that, thank you very much for your attention and I look forward to speaking with you in the future.

[Operator:]

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