Sientra, Inc.
Q4 2017 Earnings Call Transcript

Published: 14 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sientra Fourth Quarter and Full-Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tram Bui of The Ruth Group. Ma’am, you may begin.

[Tram Bui:]

Thanks, operator. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of the United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management’s current assumptions and expectations of future events and trends, which may affect the company’s business, strategy, operations or financial performance. A detailed discussion of the risks and uncertainties that the company faces is contained in its Annual Report on Form 10-K 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, Tram, 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. I’m extremely proud of everything our team accomplished in 2017 that we demonstrated our ability to grow Breast Products segment sales over 50% year-on-year, despite operating in a significant supply constrained environment. I want you to think about that, that’s a significant accomplishment for Sientra. We also made significant progress on each of our strategic initiatives, designed to position a new Sientra to reenter even stronger growth phase than we have just completed. Over the past year, we have grown our addressable market substantially, primarily by diversifying our selling portfolio through the addition of miraDry and we’ve accomplished this transformation, while maintaining our best-in-class sales force and most importantly, steadily advancing our submission with the FDA to secure approval for a U.S.-based manufacturing facility with our partner, Vesta. And I want to point out that that part is done, it’s been approved. We remain extremely confident in our ability to commercialize U.S. manufactured products of our silicone breast implants in the near-term. Although our timeline for FDA approval has been slightly delayed, as a reminder, the FDA has already granted approval of the site-change PMA supplement for Vesta to manufacture Sientra implants, by far the most critical impressing piece of our regulatory filings. The FDA has also approved two to three additional supplemental submissions related to the manufacturing process improvements, which we pursued opportunistically in consult patients in consultation with the FDA beforehand to approve our manufacturing efficiencies. As it relates to the final outstanding PMA submission, we have now provided the FDA with a comprehensive response that includes all of the information requested, and we continue to work closely and interactively with the agency to gain final approval. Those statutorily, the FDA has until the middle of the second quarter of 2018 to respond to the one outstanding submission, we continue to believe the questions raised by our reviewers should be resolvable well before then based on the encouraging dialogue over these past few weeks. Upon the expected approval, Sientra will be able to sell the best of manufactured breast implants in the United States immediately and we are fully prepared to move on that as soon as we get word. As a reminder, we continue to manufacture finished goods at the Vesta facility, maintaining those products in quarantine at our distribution center as we prepare a ready supply of the highest demand SKUs. We continue to believe that the final FDA approval is a question of when, not if. We obtained the approval of the final process enhancement submission. We remain confident in Vesta’s ability to ramp production to satisfy our growing demand as we move into the second-half of 2018. In the meantime, we continue to manage our inventory with a unique precision control selling approach, and our sales organization has been actively managing our customer’s needs with respect to implant supply in the near-term. To augment the relaunch of our breast implants, we’re pleased to announce a new branding strategy that will elevate our best-in-class products in the market. Moving forward upon approval, all best supplied implants will be sold under the name Sientra OPUS. The word OPUS brings to mind an artist’s best body of work. And we believe that our board-certified plastic surgeons deliver the true balance of artistry and science in the work that they do. The name OPUS evokes excellence, quality and performance and is backed by our exceptional ten-year clinical study safety profile. In addition to our OPUS rebrand, we have prepared and are excited to launch additional unique value-added programs to the customers we serve, some of which will be ready to announce upon final FDA approval. As our team prepares for imminent relaunch back into the market with our U.S. sourced OPUS implants, our tissue expanders and BIOCORNEUM scar management products continue to take market share, while our tissue expander category continues to grow sequentially and significantly quarter-by-quarter. We remain extremely encouraged by the traction we’re seeing in both of these categories with Sientra’s best product segment, especially with the continued strong performance of our breast tissue expanders, led by our novel Allox2 dual port product line. Additionally, we remain increasingly pleased with our sales forces ability to leverage our entire surgical products portfolio across all accounts. Overall, we believe our success in the field and the cross-selling of these products validates our diversification strategy and that we’re well-positioned to deliver balanced revenue across each category of our breast products portfolio moving forward. I’d now like to move on to the miraDry business, which has become the second leg of a broadened aesthetics platform throughout the second-half of 2017. We’ve made substantial progress in optimizing, repositioning and integrating miraDry into Sientra following our acquisition of Miramar Labs in July of 2017. We remain confident that the achievement of our near-term strategic objectives specifically in relation to treatment protocol improvements, device improvements and global commercial infrastructure investments will allow us to drive growth in large and underserved markets for the permanent reduction of underarm sweat, odor and hair of all colors. No other treatment can make that claim. As part of our efforts to better characterize the market opportunity for miraDry, we recently completed a survey of over 2,000 people evaluating criteria, including those who are sweat bothered, the dissatisfaction with current treatments, interest in a non-surgical long-term solution and interest in the miraDry product description. Based on this comprehensive survey, we believe the market for miraDry in U.S. alone is approximately 35 million people, 15 million of whom our survey data would characterize as being immediately interested in the miraDry treatment. Our survey also validated the demographic sweet spot for miraDry, both related to age and gender. Clinical perspectives that will allow our marketing team to better create demand generation programs for miraDry practices. We have also been able to quantify additional value and ROI at the practice level that can be derived from miraDry patients. We remain our conviction – conviction that the miraDry business will be a strong revenue growth driver for the company moving into 2018 and beyond, as we continue to augment our sales team, launch our marketing initiatives to drive demand from the bottom up and search for a permanent General Manager of this Miramar group. As we look beyond our current offerings, I would like to once again reiterate that we see significant opportunity to further expand our current total addressable market, which consists of the $400 million U.S. breast augmentation market plus the $300 million breast reconstruction market. First, we will seek to expand into the $500 million international market for breast implants, which was recently partially open to us as we received our ISO 13485 certification. This incremental ISO certification is a significant and required next step to enter selective international markets with both our breast implants and tissue expanders. As we’ve stated in the past, we believe that we will be able to leverage the existing miraDry international business infrastructure base and the sales channel as we look to commercialize breast products internationally. In addition to our planned expanded international presence, we see a potential opportunity in the $300 million regenerative product market, which is directly adjacent to our breast reconstruction business. This could be a longer financial opportunity to further diversify our product offerings, while leveraging our existing commercial infrastructure. Excuse me, with that said, while expansion into attractive adjacencies has played into our strategic intent to diversify our product portfolio and revenues, we remain unwaveringly committed to our core Sientra breast aesthetics business and the planned U.S. relaunch of our breast products in 2018. I’ll now turn the call over to Patrick Williams for a detailed review of our fourth quarter and full-year 2017 financial results. Patrick?

[Patrick Williams:]

Thanks, Jeff. I first want to provide some more details on the miraDry business segment. With respect to the optimization of the miraDry treatment protocol, we have successfully delivered on our promise to simplify and shorten the procedure for clinicians and launched our miraDry fresh protocol last month at the American Academy of Dermatology Annual Meeting. At a high-level, our updated protocol reduces overall procedure time by about 35%, enables physicians to more easily delegate the treatment with a simpler anesthetic process and simplifies our template design and GUI interface. We have received fantastic feedback on the efficacy of the system. And with the updated protocol announced at the meeting, we were able to generate a significant number of qualified leads. Together, this new fresh protocol enables us – enables users to deliver the highly efficacious miraDry procedure with even greater ease and confidence and with less hands-on treatment time. We are confident that these enhancements will significantly improve the miraDry experience for patients and generally broaden the appeal of the product in procedure across all geographies. Now that we have completed the design and testing of these protocol enhancements, our nearest-term goal has been to train and fill out our sales team for the full scale relaunch of our revised miraDry sales strategy, which we were able to accomplish starting early February. This strategy has been highly vetted out by our senior management team of aesthetic capital and consumable space experts and is supported by our primary market research that Jeff just mentioned. In terms of our progress in building our miraDry commercial team, in North America, we currently have 22 capital reps or area sales managers and 15 consumable reps or practiced development managers, which is in line with our hiring targets set last year. Additionally, we have opportunistically built out our international commercial team with over 15 individuals, who are primarily focused on Asia Pacific and Europe. This high caliber team is well-positioned to expand our global presence and drive revenue by leveraging a combination of distributor relationships and direct sales efforts. Though revenue is tracking nicely for both business segments in the first quarter of 2018, I want to remind everyone that the miraDry segment follows the typical capital aesthetic business model, which is heavily back-end loaded with revenue, with the majority of it coming in the final two weeks of the quarter. Now let me turn to our fourth quarter and full-year 2017 results. Greater detail can be found in our earnings release issued earlier today, our 10-K to be filed shortly, and our supplemental financial information reference, which can be found on our Investor Relations website. As a reminder, with the exception of adjusted EBITDA, all of our financial metrics are reported on to U.S. GAAP basis. Additionally, we will continue referencing an adjusted EBITDA margin which we define as earnings before interest, tax, depreciation, amortization and stock-based compensation. Specifically, we are moving non-cash like items for this non-GAAP measure. Again, please refer to our supplemental financial information, earnings release and 10-K for tables on GAAP and non-GAAP or pro forma net sales and a full reconciliation of adjusted EBITDA to its GAAP counterpart. As another reminder, we have – we are starting to report our results in two segments, Breast Products and miraDry. Breast Products include all of our breast implant portfolio, our tissue expander portfolio and our BIOCORNEUM scar management products. miraDry includes the entirety of the recently acquired miraDry business, so both capital and consumable. Moving now to our financial performance. Consolidated total net sales for the fourth quarter 2017 were $11.1 million on a GAAP basis, compared to total net sales of $6.5 million under GAAP for the same period in 2016. The fourth quarter net sales were slightly lower than what was anticipated in our preliminary revenue release due to a small deferral [ph] miraDry revenue, which will be now recognized in Q1 of 2018. Total GAAP sales for the full-year 2017 were $36.5 million, compared to $20.7 million for the full-year 2016. Within our Breast Products segment, net total sales of $8.2 million for the quarter, a 26% increase, compared to $6.5 million for the fourth quarter 2016, driven primarily by continued strong performance of our breast tissue expanders. For the full-year 2017, net sales increased over 50% or 52% to $31.5 million compared to full-year 2016 of $20.7 million. As we stated on our last earnings call, we expect sales within the Breast Products segment to continue to remain flat or slightly down in the first quarter of 2018 compared to 2017, due to the lack of breast implant supply as we await FDA approval. To be clear, this is not a demand issue. We do expect to see growth in our breast tissue expander portfolio as we continue to ramp-up manufacturing capacity and productivity. I want to reiterate that we do not expect to sell entirely out of breast implants ahead of resupply. Through our precision controlled selling strategy, we have deliberately constrained supply and continue to adjust based on usage in inventory levels. As Jeff mentioned earlier and as we have both spoken to on past calls, as planned, we continue to manufacture Vesta supply product ahead of approval with new implants under quarantine until approval is final. And all, we still expect to have a Vesta facility fully scaled up in the second-half of 2018 following typical new manufacturing ramp up. Net sales attributed in the first quarter – fourth quarter 2017 by our miraDry business segment totaled $2.9 million on a GAAP basis and $5.1 million for the full-year. On a pro forma basis, net sales for miraDry were $15.3 million for the full-year 2017. We expect revenue growth within the segment to accelerate sequentially starting in Q1 and more meaningfully as we continue to 2018. Gross profit for the fourth quarter was $5.3 million, or 48% of sales, compared a gross profit of $3.9 million, or 61% of sales for the same period in 2016. Overall, gross profit for the full-year 2017 was $22.4 million, 61% of sales, compared to full-year 2016 of $13.9 million, or 67%. The large decrease in gross profit for both the quarter and year is primarily due to the inclusion of miraDry, which carried a lower margin than breast products primarily due to product and geography mix. And additionally, in the fourth quarter, gross profit was impacted by a $2.3 million inventory reserve in our Breast Products segment, resulting from the timing and recognition of implant products anticipated to expire prior to being sold. Our implants have a five-year shelf life. And as we approach FDA approval of the Vesta site, we now have a clear plan of how we will transition to the new Vesta products. Excluding this reserve adjustment, gross margin in the fourth quarter of 2017 came in as expected at approximately 69%. Operating expenses for the fourth quarter were $22.7 million, an increase of $10.7 million, or 89%, compared to $12 million of expenses for the same period in 2016. Full-year operating expenses grew 58% year-over-year to $85.3 million. The increase is primarily related to the increase in employee-related costs and the inclusion of miraDry operating expenses subsequent to the acquisition. Net loss for the fourth quarter of 2017 was $17.8 million on a GAAP stub period basis, compared to a loss of $8.1 million for the same period. Full-year 2017 net loss of $64 million versus a loss of $40.2 million in the prior year period. Adjusted EBITDA for Q4 2017 was a loss of $14.2 million versus a loss of $7 million in Q4 2016, whereas full-year 2017 adjusted EBITDA was a loss of $42.1 million versus a loss of $35.6 million in the previous year. Once again, the year-over-year decrease can be mainly attributed to the inclusion of miraDry. Net cash and cash equivalents as of December 31, 2017 were $26.6 million, compared to $37.6 million at the end of Q3 2017. In early January of 2018, we filed $150 million mix shelf registration as part of our strategy to maintain flexibility and our ability to raise capital. We then subsequently increased our flexibility of the shelf by enabling an At-The-Market feature that allows for the sale of common stock for aggregate proceeds up to $50 million of the $150 million shelf. It is important to note that the ATM does not obligate us to sell any equity, but rather just provide us with more financial latitude. Additionally, we will also gain access to $10 million from an existing credit facility when we get final FDA manufacturing approval, which will further our capital optionality. We also believe our capital options and the associated economics become more favorable upon FDA approval. As always, we will strive to be good stewards of our cash and we will look to strengthen our balance sheet opportunistically with market conditions to ensure we maintain adequate capitalization. I’ll conclude by noting that consistent with our previous comments, we will not be providing any financial guidance as we remain in a market precision controlled selling mode. We await FDA approval of the Vesta manufacturing facility and continue to complete the integration of miraDry. And with that, I’ll turn the call back over to Jeff for final closing remarks.

[Jeffrey Nugent:]

Thanks, Patrick. In all, I’m pleased with Sientra’s progress in 2017, as we’ve continued to grow and evolve into a larger, more diverse global aesthetics company. As we wait approval of our final PMA submission, I’m more confident than ever and Sientra’s ability to regain and grow our market shares across every one of our business segments. With renewed branding and stronger marketing energy applied across the entire portfolio, we have an extremely compelling source of clinical data and a world-class manufacturing partner, our core implant business is poised for growth following approval. Within the miraDry segment, our enhanced miraDry fresh protocol that is simplified and shortened the miraDry procedure will allow for our growing sales force to effectively sell systems and drive utilization in the near-future on a fully global basis. In addition to these more significant revenue drivers, we also continue to drive deeper into the breast reconstruction market with our differentiated AlloX2 tissue expanders as we’ve strengthened our commercial presence and manufacturing capacity. Meanwhile, we expect revenues from our BIOCORNEUM scar management product will continue to grow at double digits as we effectively cross-sell and build brand awareness. Finally, with our implant supply chain improving and the initial software and protocol changes completed with miraDry, we’ve been reallocating resources back to our research and development pipeline on both business segments. We believe we have some truly innovative organic opportunities in our pipeline that will further drive our growth, and I look forward to sharing them with you as we make further progress. As I mentioned earlier, I can’t say enough about the performance under less than ideal conditions in 2017. I’m extraordinarily proud of our team and our ability to demonstrate growth despite our supply-related constraints, which have been significant and I’m optimistic on the growth that we can deliver once this major challenge is resolved. We remain confident and focused on our two major objectives for 2018, which include receiving full FDA approval to reenter the breast implant market and to maximize the Miramar – the miraDry acquisition. These are clearly a focus of our entire company. I want to thank, everyone, within Sientra and the extended Sientra family for their hard work and dedication. I’m so excited to continue to build on our momentum across our business segments, as we move into 2018 and relaunch our entire breast implant line, while realizing the potential of miraDry. We continue to leverage our exceptional products, people and relationships as the basis for the new Sientra. With that, I will now turn the call over to question-and-answer. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Margaret Kaczor with William Blair. Your line is now open.

[Margaret Kaczor:]

Hey, guys, thanks for taking the questions. Just making sure, can you guys hear me?

[Patrick Williams:]

Yes.

[Jeffrey Nugent:]

Absolutely. Hi, Margaret.

[Margaret Kaczor:]

Hi. Hey, Jeff. So first one for me is broaden U.S. demand, so you guys were delayed a little bit on the FDA approval. But if you look at your anticipated internal targets for the second-half of 2018 in breast, has anything really changed? Because you guys are building up the inventory to be on track. So has anything changed? And have you heard any kind of disappointment or feedback from plastic surgeons regarding the delay, or is it pretty straightforward?

[Jeffrey Nugent:]

I’ll take that, and I think it is pretty straightforward, and as I know, you have checked as well along with many others. We continue to have a very high-level of loyalty even among those plastic surgeons who have not been receiving Sientra products, and we pay a lot of attention to that. So we can’t predict precisely. But the sense from our people on the front line, we are very optimistic that we’re going to be able to start moving our current customers into a higher percentage of their practice, as well as those who have not been able to be supplied to be able to bring them back into the fold. So, again, I can’t tell you, coming off of the national sales meeting two weeks ago, I have never seen a more pumped up group of people in my life. And that comes along with very close relationships that I know you’ve talked to many of them yourself. So does that answers your question?

[Patrick Williams:]

Yes, I’ll add a couple of things. I think, it’s a great question, Margaret. And I think to your point, you’re correct in that. We are building through Vesta. They do plan to scale up through the first-half of 2018. So FDA approval coming yesterday, today, tomorrow whatever it is, whatever that timeline is, it’s not going to impact our second-half gel implant numbers at this point based on all the schedules that we have. And then I think, secondarily, just to kind of reiterate what Jeff just said, is certainly, as as we continue to reduce our supply of gel implants just by the nature of not having the resupply yet ready to go, we are reducing certainly the number of sales that we have for the gel implant, which we mentioned in the prepared comments. But those are temporary issues, this is not a demand issue. We still see this is very much a supply issue. And any customer that’s not getting their current allotment, we’ve been very clear and through the national sales meeting that Jeff just mentioned that our sales team is very clear that we’re going to get back on track to you very shortly.

[Margaret Kaczor:]

Okay, that’s great. And then in terms of international, maybe two-fold question. One on breast. Have you guys started incorporating that in any of the distributor contracts to date? And then if you just look at your distributor contracts internationally broadly, what stage are you guys at with those contracts? How long is it going to take to reaccelerate that business? And if we look out a year or two from where we are today, what – what’s the profile of Miramar from either revenue basis, either in dollars or growth, as well as from a gross margin basis, because it does seem like you guys are raising price, now releasing more consistent on price and that should help?

[Jeffrey Nugent:]

Well, to that point on miraDry, we’re focusing on maintaining ASP, which is certainly going to help the business segment. I think, in addition to that, the international opportunity and I think you were referring to the Breast Products segment, that’s something that is frankly in the future. We are focusing on getting traction on both of U.S. launch on Breast Products with the approval of Vesta and miraDry is of very aggressively, both domestically and internationally. So the real answer here, Margaret, is that we’ve gotten our ISO certification, which is a great first step. But this is something that we have not paid a lot of attention to. We want to get first things first.

[Patrick Williams:]

Yes, I think, we’re still running the business segments very separately. So just to be clear on that. We are international certainly on the miraDry side ad we’re moving forward with those arrangements. In regard to the ASP, we have – we did increase our price when we launched the miraDry fresh on both the system, because it is an upgraded system. It is essentially a new system out there in terms of its functionality, as well as on the bioTip side, that’s still in the early stages, obviously. But in terms of gross margins moving forward, 2018 will still be a little bit of a transition year because of the fact that we’re going to have a heavy focus on the capital side of the business for miraDry. So because that has a lower gross margin around 50% to 55%, that’s going to pull down our overall corporate gross margin. But we still believe we can get above 70% as we move into 2019, see a little bit more of a balance on the bioTip of the consumable piece of the business, which is at a 85% margin and then of course, maintaining those ASPs and everything else moving forward.

[Margaret Kaczor:]

Yes. And just last one for me just kind of a big picture miraDry question. And I know [indiscernible] is excited about breast survey. But if you look at miraDry, it’s probably one of the largest opportunities for you guys on our three to five-year basis. So maybe if you guys can describe some of the work you’re doing on awareness since bringing on miraDry some of the work maybe that you’ve done for those survey works to try to drive patients into the plastic surgeons’ office, anything there would be great? Thank you.

[Patrick Williams:]

So let me start off this one. So I think a couple of things. We did the market survey that Jeff talked about. And one of the really key point that came out of that that we were really excited about was the demographic of the patient being not only male and female, so about 40% male, 60% female, which is a much higher male population that you would normally see in a typical aesthetic channel. But then the second thing was the overall age group of the demographic was about three quarters of them were 75% being under the age of 40. So for us, we think that’s a compelling value proposition as we walk into these practices and talk to them about the ability to bring patients into their – consumer patients into their channel five, 10, 15 years before they would ever thinking about maybe walking into their door, and then of course, the subsequent lifetime value of that patient. About two weeks ago, we just started, what I would call, our digital awareness or marketing from that standpoint. The nice thing about this demographic is, they get a lot of their content online or digitally, which is a much more cost-effective marketing tool. We’ve seen some very big spikes on Google Trends. I’m sure some of you from our days and prior lives here with Keith Sullivan, who was our Acting General Manager and myself, we did see similar things when we started this. So we’re not quite ready to to give all the details on that. But I will tell you that we have seen an active spike in Google Trends, which I know all of you can go, look at as well if you want to and that is just kicking off. But there’s a lot of good momentum right now on the building of the brand awareness for miraDry and, of course, the overall consumer patient market that we stated is very large sitting at around $37 million – 37 million people that are bothered by sweat in the U.S. only.

[Charles Huiner:]

And let me – Margaret, this is Charlie. Let me just follow-up from Patrick’s comments on the market opportunity and what we see now versus what we saw when we were doing due diligence on miraDry, because I’ll tell you, we’re much more encouraged now than even we were back in the summer last year when we acquired miraDry. And that’s really based on the survey that we did and the numbers that we have come up with in terms of 37 million people being the broader market for miraDry. But the 15 million of that – the subset of that, which would be a direct hit on the miraDry treatment. And if you take a look at what the ASP is at the practice level of about $2,000 a treatment, that’s a $3 billion market for the practices in the U.S. alone. You take about 20% of that, which is the tip cost that the practices pay to Sientra or to miraDry, that’s a $600 million market in the U.S. alone only for disposables. That doesn’t take into consideration probably an $800 million to $1 billion market for the capital. So this is a really big market. Now, obviously, our goal and to your question about how do you take advantage of that market opportunity, a lot of it is going to come down to blocking and tackling at the practice level, driving patients into the practices to take advantage of

[Operator:]

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

[Jonathan Block:]

Thanks, guys. Good afternoon. I’ll ask two or three and then maybe just follow-up offline with any remaining questions. But the first one just, the timeline of the submission and I hate to harp on days. But when the company updated investors at the end of January, the response of the FDA for the last remaining supplement, I thought it was likely to come in the next few days. And today’s update suggest that the submission have been late February. So I guess, Jeff, maybe two questions. One, do I have that correct and may not? And two, if correct, what caused a slight delay in the submission to the FDA? Was it just some extra time to make sure you were answering sort of any and all of the agencies remaining questions?

[Jeffrey Nugent:]

That’s primarily the strategy we took, John, and that our experience with the FDA, I liken it to a tennis match. And that there is a consistent return of serve where they ask questions. We respond with answers. They ask more questions and we respond with more questions. So that’s what we’ve been dealing with. I would be happy to explore this separately with you. But the point I want to make is that, we’ve had a several encouraging developments, where it’s been difficult for us to understand exactly what the issue is? What is delaying this? And it is – it’s been difficult to get them to define it. And literally, within the last several weeks, we have gotten a very specific definition of what the issue is. And I don’t want to disparage our government employees. But the questions that they’re answering – asking have been more than adequately addressed in the information we’ve already sent them. So what we’re doing literally and I think as Charlie said, literally a daily interactive review of the one specific thing that they’re looking for more information on. And I want to emphasize that there has been no mention whatsoever of additional long-term studies or tests to confirm this one relatively minor 30-day notice. So the frustration that you can detect from the Sientra team is very appropriate. We’ve been frustrated. And I think we’re at a point where frankly, this has been elevated to the branch chief level and we think we’ve got a rational partner to resolve it. And it sounds like a bunch of excuses, but I’d have a lot of experience with the agency and this is one of the better months of obfuscation and forcing us to jump through hoops to answer unnecessary questions. So how do I translate that in terms of getting this final approval on this last minor piece? I believe that we are and the way I explained it within the company, I’m sleeping a lot better today than I was 48 hours ago. Now how do you translate that in terms of when we’re going to get the last period on the last seconds of the approval that we expect from these guys.

[Patrick Williams:]

So Jon, it’s Patrick, let me clarify. So there’s actually been a couple of submissions there related to this final 30-day supplement enhancement that we did. We did submit at the end of January, that is consistent with what we said. The FDA came back to akin to what Jeff just said, which is his back and forth tennis match. They had a couple more questions that they wanted clarity on. We have now moved to an interactive dialogue, which I would call via e-mail submissions and telephonic, which is what we believe is an extremely encouraging. Of those two things that they came back with, we actually narrowed that down to one final one. We actually removed one off the table already. So that’s what we were referring to in this latest conference call, which was, we just submitted now a response back to the final one. So we’re – we believe we are very much in the last innings here. And we’re highly encouraged by what I would say is and we keep on saying these two words, highly encouraged and interactive dialogue with the FDA. We are making what we believe to be very good progress here over the last couple of weeks here related to this last piece. So I just wanted to make sure that that’s crystal clear to everyone.

[Jonathan Block:]

Okay. No, that’s very helpful, both Patrick and Jeff, I appreciate that. And then, Miramar just, I’d say, as everyone was pretty bulled up as well. Maybe a couple things. If you can talk to what you’re seeing in some of your better miraDry accounts in terms of utilization, I think, if you try to calculate overall utilization, maybe you get around half of procedure a week. But are you seeing maybe one procedure per week plus in some of your better accounts? And then second question or add-on to that would be 22 capital reps and 15 consumables are sort of big numbers for the size of the business today, and I know you have big expectations. But are you fully staffed from a miraDry perspective when we look forward? Thanks, guys.

[Patrick Williams:]

Sure. This is Patrick, I’ll answer that. So on the utilization side, yes, you’ve always got. We do look at it on a quartile basis and we do have some practices that are doing closer to what I would call three to four patients a week. And then, of course, you’ve heard the average that might be sitting around about a half a patient to one patient a week. Obviously, our goal is to build that utilization over time as much as we can. But I would be remiss if I didn’t say, the business model is to play cap – is to place capital pieces of equipment. And a homerun is keeping utilization steady within that that growing and expanded installed base, as I know, you’re very familiar with as others folks on Wall Street are. If we can make increases in that utilization over time across a larger installed base that really does a push, not only a lot of revenue, but of course, gross profit down to the bottom line. In terms of the size for North America, there is no doubt that we have a operating expense infrastructure, including on the commercial team, as well as a working capital infrastructure, i.e., inventory build up, et cetera, that can support a much higher number than what we currently have planned. So what that means is, if the demand comes in higher than what we have planned, we will be able to meet that demand by not having to hire an incremental headcount on the commercial side nor necessarily investing more money on the inventory side. This is not different than how both Keith and I have done it in the past related to this business. We believe that having an opportunity to grab market share in a new market, where we are the market leader in the only defined entity out there with a solution, it’s important for us to be able to be very opportunistic and grab that market share.

[Jonathan Block:]

Okay. One last one, Patrick. If – I’ll stick with you for a moment. The cash burn in the fourth quarter, which I think was right around $12 million or $13 million. I know you’re not going to guide. But is that somewhat representative of what – how we should think about 2018 playing out maybe, at least, in the first-half? Thanks.

[Patrick Williams:]

Yes, I would say, Q1 is generally a little bit higher cash burn. But we will – based on the models that the Street has and everything else, you should expect a higher revenue number to help offset some of that. So obviously, the revenue number increases throughout the year. Cash burn will get less and less. But I think that number that you just read out is pretty close to what you could expect to see in Q1. Next caller question?

[Operator:]

Thank you. Our next question comes from the line of Kyle Rose of Canaccord. Your line is now open.

[Kyle Rose:]

Great. Thank you for taking the questions. And can everyone hear me all right?

[Patrick Williams:]

Yes.

[Jeffrey Nugent:]

Absolutely. Thank you.

[Kyle Rose:]

I wanted to expand the theme of Miramar here. You’ve talked about the protocol and the product changes for the fresh protocol and then kind of guided towards quarter-over-quarter improvements in 2018. I just want to go back to when you initially made the acquisition, you talked about $8 million to $10 million in the second-half of 2017. I think, we understand why things shaped up the way they did in the second-half versus that initial expectation? But what I’m really just trying to understand is, how we should think about the pace of the rebound over the course of 2018, particularly given you did make such wholesale changes to both the treatment protocol and the product, but also the marketing strategy and the commercial team, just how should we really think about where that growth can really look like in 2018?

[Patrick Williams:]

Sure. It’s totally a fair question. We’re still ramping up in the first quarter, because the miraDry fresh protocol is truly a brand-new procedure and a brand-new protocol. And we rolled that out to our sales team globally towards the end of January with the software getting rolled out on our new machines, new capital machines coming off the line February 1. And now we’re on track to reinstall the new updated software on all the teams and all the machines and hopefully have that done by the end of the quarter, but some of it may lead into Q2. So I would say, we still expect to see some pretty significant sequential growth on Miramar – miraDry from Q4 2017 to Q1. And if you’re going to see overperformance for miraDry, you’re likely going to see it in the second-half of 2018, just because it gives us one more quarter under our belt in Q2 to fine-tune anything we need to do. I just talked about the marketing that’s kicking off. And as we move into the second-half of 2018, we believe that’s where we could see what I was just mentioning, which is truly that overperformance that we hope to happen and we are certainly setting ourselves up to do that.

[Charles Huiner:]

And I would just add, again, this is Charlie is that, not only do we – do – are we going to take advantage of the first six months to rollout the software and create the marketing programs, but you’ve also got six months of seasoning now with what is almost an entirely new sales force selling miraDry. So when you pull together the miraDry fresh new protocol, you pull together the marketing programs that have been steadily rolling out over the course of this quarter into next quarter and then the seasoning of our sales force. Again, as Patrick mentioned, we do expect sequential growth even coming from last year into this year, but then you could start to see an acceleration as all those things come together in the second-half of this year.

[Kyle Rose:]

Okay, great. And then just, digging into the fresh protocol just a little bit, I mean, it sounded like you’ve gotten some really exciting feedback coming out of the conferences. Just wanted to see, I guess, is that resonating more with new customers or existing customers? I mean, were you seeing pent-up demand that was sitting on the sidelines saying, if you change X all step up and start treating patients, I guess, is what gives you the type of confidence that the changes you made here are what really needs to drive future growth?

[Patrick Williams:]

Yes, you’re ultimately right, the revenue numbers that we post will be the true representation of whether or not we’re moving in the right direction. I think intuitively, we all understand that a faster, simpler more delegatable protocol with the miraDry fresh should drive more physician customer acceptance excitement, as well as consumer patient acceptance and excitement. Not ready yet to give you what the numbers look like, as we stated in the prepared remarks other than things are going well, I think, it’s across both new and existing customers. We’re probably seeing a little bit more from existing customers right now, Kyle, just because of the fact they have the machine, they’re familiar with the protocol a little bit the old one and we obviously have enhanced how we deliver the anesthesia. The new systems that we’re starting just to sell more of now, they’re just really getting started, right? So there’s always a bit of a ramp up that happens when you place that first piece of capital equipment. But it’s really a rejuvenation of the older – of the existing customers is what I would call that. We have a KOL that’s actually a big KOL for us on the plastic side that is superexcited about the recent protocol changes and is now doing actually about four to five patients a week in his practice. So really good stuff happening out there.

[Kyle Rose:]

I mean, that that’s very helpful. And then last question and then I’ll hop off. Just – I think you – historically, you talked about potentially making some of the sales force investments on the breast side heading into the start of 2018 to kind of position yourselves for the pretty increased inventory. So I guess, one, did you make those hires? And then two, I guess, just what’s the overall state of the sales force on the breast side as we move to 2018?

[Jeffrey Nugent:]

Yes, we’ve been aggressive in adding to the – and I keep repeating clearly, the most highly regarded breast implant sales force in the market. And two things, I want to make sure that we all remember. One is, even after all of these challenges over the last 2.5 years, we have maintained everyone with the possible exception of one individual, who have remained committed, see the potential and want to be part of the Sientra family. In addition to that, we’ve increased the total number of PSCs to approximately 40 individuals. So we’ve expanded into a number of high potential markets. And again, I refer back to the National Sales Meeting in Chicago, and I got to watch my language here, but these are totally turned on individuals, and we are prepared to take this through frankly back to the levels that we are at in 2015. So I can’t be anymore demonstrative and positive about the – our ability to cover the primary markets in the U.S.

[Kyle Rose:]

Thank you very much.

[Jeffrey Nugent:]

Sure. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Brooks O’Neil with Lake Street Capital. Your line is now open.

[Brooks O’Neil:]

Good afternoon, guys. So one question I’ve been curious about is to understand what changes you’ve made to the breast manufacturing process? And perhaps maybe even more importantly, why you decided to make the changes before you got FDA approval to manufacture in the United States? And have you been surprised by the delay that is all cost?

[Jeffrey Nugent:]

Yes, Brooks, this is Jeff. Good to hear your voice again.

[Brooks O’Neil:]

Thank you.

[Jeffrey Nugent:]

And there’s a simple answer to this that number one, we sought the agency’s concurrence to make this change in the very early stages of our approval process. So they agreed to this improvement for a number of reasons. And that frankly to be very blunt, we have a – for lack of a better word a very sophisticated mathematical approach that is being applied to this change that we made, that was fully explained in the original submission that we made. So I could define frustration in many different ways, but this is certainly one of them. I’m not criticizing the FDA, I’m just saying that, as you know, you get different types of individuals who latch on to certain things. And like I said before also, there is no indication of any additional work that’s required. Our Regulatory Affairs Group have been turning the data that we’ve already shared into a format that the examiner wants. Literally, that’s where we are. And also I believe that we mentioned we’ve made significant advances by moving up the authority chain by going to the branch chief, and we’ve gotten him directly involved and that’s where we’re making the most rapid progress. So why they have zeroed in on this? We can hypothesize, but I’ll let it go with that. This is a very minor issue that we just have to convince this individual with the help of this branch chief that this is not a productive way to spend additional energy.

[Brooks O’Neil:]

Sure. So I just wanted to clear and I appreciate all that color. Is there some consumer improvement you’re seeking in the manufacturing process, or is it more of a margin enhancing manufacturing improvement, or sort of – why go to the trouble there?

[Jeffrey Nugent:]

The – there are two answers in this, too. I think, number one is that, in the process of making the site-change, we decided to standardize an ingredient in the process that is more up to date and frankly, the standard in the industry. So we didn’t want to be holding on to outdated components in the process, and frankly, this is a well excepted alternative. So and secondly, you mentioned the efficiency benefit, which this particular ingredient provides us, because there’s certainly increased margins associated with a faster cycle time, higher yields, et cetera, and we weren’t about to let this go.

[Patrick Williams:]

Hey, just real a quick, Brooks, this is Patrick. Let’s be clear on this. We – these improvements that we made were actively discussed with the FDA for quite sometime. I think, Jeff, has clearly expressed his frustration on how it’s taking longer than expected. But we’re in the final stages here of getting this and these were improvements that we felt were a good improvements to make there, both consumer enhancing, as well as throughput enhancing. But we’re at where we’re at right now, but we’re in the final stages. So we’re getting very close.

[Brooks O’Neil:]

Great, great. And then the last question I have is, can you give us any color on the response to the ATM? And kind of have you sold some stock? Have you raised some additional capital kind of anything you could tell us would be very useful?

[Patrick Williams:]

Yes. I think, so in my prepared comments said, we put the aftermarket feature as increased optionality. I can tell you that we have not sold any stock to the ATM at this point.

[Brooks O’Neil:]

Okay, thank you very much.

[Patrick Williams:]

You’re welcome.

[Operator:]

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

[Chris Cooley:]

Good afternoon and thanks for taking the questions.

[Jeffrey Nugent:]

Okay.

[Chris Cooley:]

Hey, maybe just two quick ones for me here. And could you maybe outline for us a little bit of the sales management and as you relaunch hopefully little sooner than lighter and certainly asyou gointo second-halfof you on the press side of the business, you talked about returning back to 2015 levels. But now you definitely have a far more robust portfolio and that’s been evidenced by expanders. I’m curious just kind of expectations maybe from a productivity level and then also from just a total number of accounts that you hope to people address as you start to relaunch here in the very near-term? I have a quick follow-up. Thanks.

[Patrick Williams:]

Why don’t I – do you want me to kick off? Jeff, do you want to take it?

[Jeffrey Nugent:]

Yes. let me just make the point that looking at the history of Sientra and the challenges that we’ve had, we have to remember that in the third quarter of 2015, we were running at about a $60 million run rate and strictly a cosmetic augmentation business. Since then, we’ve expanded into adjacent categories. But the fact remains that this business was doing a $60 million run rate and the stock price was $25. With the additional categories diversification that we’ve put together, we have established, I think, reasonably aggressive conservative forecast that we expect to be able to, at least, return to that level, particularly with the diversification we’ve added. I’m not sure if this gets directly to your question. But that – any company and certainly, any experienced growth-oriented company looks at where we were recently as just a starting point. So I don’t want to get into projections and timing of those returns to revenue levels and stock price. But we’re not here to frankly just return to where we were before. We’re here to go well beyond that. And I think, the strategic moves that we’ve made and we’ll continue to make is just going to position us as a much more competitive and diversified aesthetics organization.

[Chris Cooley:]

I appreciate the color and maybe just I have a follow-on. Would it be possible to characterize may be between augmentation and recon right now, seeing the growth, which you had in the breast business here with the back-half of 2017 and now early in 2018, especially when we see the very strong continued growth of Allox2? Thank you.

[Patrick Williams:]

Why don’t I give some color on that, because I think it’s a little bit of just an offshoot of what Jeff just answered. So, we’ve got close to now 40 plastic surgery consultants on the Breast segment side. The difference between now and 2015 is that, they’re selling more products. We’ve got a very good expander line, including the Allox2. We’ve got BIOCORNEUM that we’re selling. So when you look at productivity, the first-half is going to be limited, as we still go through precision controlled selling as we get supply ramped up from Vesta, forget about FDA approval for a second. There’s still a supply constraint that we are going through for the first-half as they ramp up. But as we move to the second-half and what I would say is really exiting in 2018 that run rate for our total breast products business starts getting up to those historical rep productivity levels. But I would say that we’re being a little bit cautious in terms of our internal planning or conservative just because, I think, as everyone else, we want to ensure we can not only get back to our existing customers have been loyal, but more importantly, as Jeff said is, how do we go beyond that 15% market share we used to have and get to 20% and 25% market share. The good news is, we’ve got enough rest in place right now to be able to once again meet unmet demand without having to hire another rep. And I would say that the supply that we’re making investments in with our cash and working inventory is also able to support a higher number than sort of what our internal metrics are saying. In terms of the split between augmentation and reconstruction, we’re still a very heavy augmentation business. But what we are seeing with our Allox2 device, especially even the Dermaspan on the expander, we are starting to see reconstruction to pick up. We’re probably about 25%, 30% of all implants we sell are right now on the reconstruction side, with the balance being augmentation. And that does make sense if you kind of look at our numbers on our split. Our revenue, you would expect if you sell an expander that you would get the follow-on gel implant business. We’re seeing more and more of that. We still need to get larger sizes on the gel implants to go to reconstruction cases. And once again, that will be more – actually more of, I would call it a second-half 2018 project and moving into 2019, where we really see 20109 is probably being a much bigger reconstruction push for us on not only the expander side, but the gel implant side as we get the sizes and supply and everything else ramped up.

[Charles Huiner:]

And on that – this is Charlie, just following-up on Patrick. I think that the recon play in terms of a 2019 story, really is the seasoning of the hospital contracts. This is a different market relative to how to sell through. You’ve got to go through a process with hospital committees. You’ve got to make a case to supplant or supplement existing contracts with existing products implants and expanders in this case. So as that’s happening and we are actively doing that right now. We’ve got a person in place running our national accounts, our hospital accounts, working with our reps and literally going IDN by IDN and region by region, getting ahead of this and starting to build the pipeline. So that, again, as we start looking into 2019 and beyond, we are now actively on those hospital contracts and can fulfill the full reconstruction package, which will include expanders as well as implants.

[Chris Cooley:]

Thank you. I appreciate the color.

[Operator:]

Thank you. I’m showing no further questions in queue at this time. I would like to turn the conference back over to Jeff Nugent for closing remarks.

[Jeffrey Nugent:]

Thank you, operator. As you can tell that I’m in the final stages of one of these monstrous flow things. But more importantly, I want to thank everybody for their continued interest in Sientra. We are making significant progress. It’s not all smooth, not to reference specific implants. But the point is, we are so confident that we have the challenges analyzed, fully understood. And that we believe this is a significant value creation opportunity and want to be able to be as transparent with you as we possibly can. So that we all share in this value creation that we’re committed to. So, again, thank you for sticking it up with us today, and look forward to talking to you again soon.

[Operator:]

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