Sientra, Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to Q3 2016 Sientra 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 is being recorded. I'd now like to introduce your host for today's conference, Nick Laudico, Investor Relations. Sir, please begin.

[Nick Laudico:]

Thanks, operator. In our remarks, we will include statements that are considered forward-looking statements within the meaning of United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current assumptions and expectations of future events and trends, which may affect the Company's business, strategy, operations or financial performance. A detailed discussion of the risks and uncertainties that the Company faces is contained in its annual report on Form 10-K and the Form 10-Q that company will be filing tomorrow. 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, projections 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 Patrick Williams, who we recently announced as our new Chief Financial Officer, Senior Vice President and Treasurer, and Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy. We are extremely pleased with our progress since our last conference call, and are even more excited about what we expect to accomplish going forward. Our third quarter revenue results continued to demonstrate the strong demand our physician customers have for our products, and we continue to make excellent progress towards our strategic objectives. On today’s call, I’ll outline what we are doing to not only return our business to a robust growth trajectory, but to also emerge as a stronger, more diversified aesthetics company. First, our manufacturing operations have transitioned from the development stage to a state of manufacturing readiness for validation and product testing. This gives us further confidence in meeting our previously stated objective of PMA supplement submission by the end of the first quarter 2017 and we remain confident in our ability to deliver newly manufactured product by the end of Q4 2017. Second, we continue to make strong progress on the commercial front as we execute on our precision launch strategy to properly manage supply and customer expectations. Third, we have just announced that we have acquired Specialty Surgical Products' broad portfolio of premium tissue expander products, including the patented and recently introduced Allox2 dual port expander. This significantly strengthens our position in the $235 million U.S. breast reconstruction market. Fourth, we reached a preliminary settlement agreement on our shareholder class action litigation. And last, we appointed Patrick Williams as Chief Financial Officer enhancing our management team with an executive with proven experience in aesthetics and in guiding high growth organizations. I’ll now provide you a bit more detail on our most important near term corporate initiative, establishing high quality uninterrupted manufacturing supply. Since our last earnings call, we have continued to work closely with our partner Vesta and have leveraged Vesta's manufacturing knowhow in order to complete the development phase of our manufacturing plan to produce our PMA-approved implants. A new, state of the art manufacturing facility dedicated to Sientra's products is now complete and producing test implants. I personally have spent time in this built-for-purpose facility, and have been impressed with the quality of the operation from the clean room through to all areas of the manufacturing operation. We can confirm that the facility has the scale and capacity to accommodate anticipated demand for Sientra’s breast implants for the foreseeable future. This includes completing the testing of already manufactured sample products and qualifying those test samples to confirm they satisfy the requirements of our PMA supplement, which we continue to expect will be submitted by the end of the first quarter of 2017. Based on our experience and a timely approval, we anticipate being in a position to ship initial product manufactured by Vesta by the end of 2017 with continued ramp up as we move into 2018. In sum, we will continue with the precision controlled selling of our existing inventory through 2017 with the current expectation that we will be able to fluidly replenish our supply with product manufactured by Vesta according to the regulatory development timeline that we just discussed. Our precision launch continues to move forward as planned and we remain pleased with our sales and customer service performance since we began this launch in March of 2016. While the obvious objective of the precision strategy has been to support our board-certified plastic surgeon customers with adequate supply until we restore manufacturing, another primary objective has been to restore and strengthen the excellence in professional customer satisfaction and quality that Sientra is known for. This means sustaining our ongoing education programs and reinforcing our dedication to their needs every day. Transparency has also been a key focus of our sales force. And I can't say enough about this. We have kept our customer base updated on the latest developments on our manufacturing development process, including today's update that we are moving into testing and verification of a fully functional manufacturing facility. Our feedback from the board certified plastic surgeon community has been very encouraging on all of our efforts in these areas. From a market perspective, we continue to see stability with respect to augmentation procedure volume trends with higher growth in the breast reconstruction market. From a corporate development standpoint, we continued to broaden our addressable market, diversify our business and leverage our high quality sales force. The acquisition of the Specialty Surgical Products issue expander portfolio, which we announced today, demonstrates the progress we are making to position our business for growth. SSP expands our portfolio to include premium breast tissue expander products and strongly positions our business to compete in this $235 million U.S. breast tissue expander and gel implant reconstruction market. The complete portfolio includes differentiated tissue expanders, including the Allox2®, which I previously mentioned, with its innovative and patented dual port drainage design which provides access to the peri prosthetic space. The DermaSpan line of breast tissue expanders, which has proven itself as a trusted product over the years, ideal for latissimus flap and other reconstructive procedures. And finally, the Softspan line of expanders for minimizing critical potential erosion points through its low and flat profile design to address challenging extremity reconstruction cases. With this acquisition, we are also retaining SSP’s highest performing sales agents to strengthen our tissue expander distribution into the hospital channel. Just as a reminder, since initial commercialization in 2012, Sientra has generated the bulk of its business and share penetration by serving the cash-pay, elective breast augmentation market, which we estimate to be over $400 million today. In doing so, we have not fully tapped into the estimated $235 million breast reconstruction category opportunity, which is largely a hospital based, reimbursed market enjoying higher average selling prices. The SSP acquisition is a natural portfolio extension for Sientra, and provides a strong foundation for us to begin building meaningful share in the U.S. breast reconstruction market. We now have a broad and well established expander line to further strengthen our offering in this market where the standard of care often begins with breast tissue expansion and follows with gel implants. And in the case of the recently introduced, dual port AlloX2 product, we now have a truly innovative product designed to address post-surgical seromas and infection. With clinical performance and results confirmed by Key Opinion Leaders, we are confident in the value of the SSP product portfolio and we look forward to building on these results as we continue to expand the clinical evidence behind these products. This strategic addition complements our recently acquired bioCorneum scar management products, which continue to gain commercial acceptance. Our sales force is making progress in this market as they broaden their physician relationships and product adoption. We are pleased with the early results of our move into the adjacent scar management surgical category as we continue to validate that we can successfully leverage our broad coverage and strong professional relationships to drive incremental revenue at the plastic surgeon call point. We expect that SSP will be another strong example to validate this adjacency model. With the acquisition late in the year and the need to still fully train our PSC’s on the SSP product line we expect any material revenue contribution from this new product line to begin in the first quarter of 2017. Moving to some legal updates, last week we announced an agreement to settle all shareholder class action litigation previously disclosed in our public filings with the SEC. There are still some administrative court procedures to be completed including final court approval which all parties intend to promptly file. The total settlement was for $10.9 million of which $9.3 million will be paid by our insurance carriers with only $1.6 million impacting our cash balance. We are very pleased to have reached this point, as it is expected to remove potential distraction or interruption to our momentum as we move into 2017 and beyond. On a separate matter, we have been notified that Silimed, the Brazilian manufacturer that was supplying our implants, filed a complaint essentially claiming breach of contract related to our 2007 Supply Agreement. While we cannot comment on ongoing legal matters, what we can say about our relationship with Silimed is this. Number one, Silimed has not been in a position to supply us since the third quarter 2015and it remains unclear when they will be able to do so. As a reminder the current supply agreement expires on its own terms in April 2017. Second, Silimed has been involved in a series of regulatory and operational challenges these past 14 months, including their primary manufacturing facility in Brazil burning to the ground under yet to be determined circumstance. Third, Silimed has yet to resolve its CE mark suspension and continues to fall under a manufacturing hold in a number of major markets, including the United States. Given Silimed's failure to fulfill its supply obligation, we are disappointed that they have decided to take this approach and we take note of this timing of the filing right before our scheduled earnings call. We have yet to be formally served and we will make clear in our responsive filings that we believe Silimed's allegations are factually and legally baseless and we have full and absolute confidence in our freedom to operate and the rights that we have to use all of the assets supporting our product. We will provide updates when appropriate and will work through this with our legal counsel. In the meantime, we remain laser focused on our manufacturing and development partnership with Vesta to supply future implants. Given Silimed's inability to supply us since third quarter 2015, we have advanced our partnership with Vesta out of necessity to the point that was previously mentioned, and we remain on track to submit our PMA supplement in the first quarter of 2017 with a path to Vesta supplied product by the end of 2017. Last, before turning the call over to our newly appointed CFO, Patrick Williams, I want to briefly welcome Patrick to the Sientra organization. Patrick brings with him nearly 20 years of financial management and public company experience, including his most recent position as CFO of ZELTIQ, a well respected public company in the high growth aesthetics realm. We think the timing of this transition fits extremely well with the inflection point in our business as a key component of building a leading world class diversified aesthetics organization. Patrick's prior leadership experience is very well suited to both help guide and support the company as we move forward. We welcome him to the team and look forward to his contributions. I'll now turn the call over to Patrick for his review of our financial results and return with closing remarks before opening the line for questions.

[Patrick Williams:]

Thanks, Jeff. I appreciate that kind introduction. Before giving the third quarter results, I want to reiterate my excitement in joining the Sientra team. While the Company has faced some difficult headwinds over the past year, I firmly believe the Company is well positioned to regain momentum and drive significant growth in the aesthetics markets. I have had the benefit of being part of high growth and highly innovative organizations which has given me a front row seat to what it takes to be successful in the marketplace. My decision to join the Sientra team was not unlike my prior role. I look for an innovative technology which have high barriers entry, strong gross margins to provide the investment needed from market penetration and a quality management team and Board of Directors. Sientra check those boxes and I very much look forward to working with the teams as we execute on our strategy and reconnecting with members of the investment community as CFO of Sientra. I’ll now discuss our third quarter 2016 results and additional detail can be found in our earnings press release and 10-Q filings. Total net sales for the third quarter 2016 were $6.5 million, compared to total net sales of $9.9 million for the same period in 2015. This decrease as previously discussed was driven by the Company’s controlled market re-entry designed to optimize the availability of our Breast Product inventory as we reestablish its supply options following the voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016. Breast Products accounted for 76.9% of our total net sales in Q3 2016 and bioCorneum, or our Scar Management Products, accounted for 20.3% of our total net sales in Q3 2016. Gross profit for the third quarter of 2016 was $4.7 million, or 72.2% of net sales, compared to gross profit of $7.0 million, or 70.5% of net sales, for the same period in 2015. This increase was primarily due to lower inventory write-offs and lower warranty cost as a percentage of net sales for Q3, 2016. Operating expenses for the third quarter of 2016 were $14.5 million, an increase of $1.9 million, or 15.3%, compared to operating expenses of $12.6 million for the same period in 2015. This increase is primarily due to legal expenses associated with the class action securities litigation that was partially offset by a decrease in sales and marketing costs. Net loss for the third quarter of 2016 was $10.0 million, compared to $6.6 million for the same period in 2015.Net cash and cash equivalents as of September 30, 2016 were $79.3 million compared to $86.2 million at the end of the second quarter 2016. We continue to maintain a healthy balance sheet with no debt and believe we have sufficient cash to fund our precision launch and execute on our growth strategy. Given that we remain in market position launch mode, we will not be providing financial guidance at this time. I’ll now turn the call back over to Jeff for final closing remarks.

[Jeffrey Nugent:]

Thanks Patrick. In closing, I want to repeat my high level of pride in the entire Sientra organization and the significant progress that we have made on everyone of the key objectives as we reposition Sientra for a return to high growth and the level of performance that we previously achieved. We continue our total focus on execution and on reestablishing a predictable supply chain in order to approach historical levels of revenue growth. Most importantly those are partnership with Vesta. We remain on track with our number one priority of achieving long term manufacturing solutions. As I previously mentioned, our manufacturing and regulatory teams are actively advancing through the final testing and verification steps to support the submission of our PMA supplement to the FDA that we will follow with a resupply expected to commence during the fourth quarter of 2017. We are also now intently shifting parts of our organization to transition back to growth. Our reentry in to the market has shown the deep support from board-certified plastic surgeons we served and our precision launch is moving forward as planned. Simultaneously, bioCorneum sales are gaining momentum as our plastic surgery consultants become increasingly adept at marketing this opportunity to our customers. As a further sign of growth through high quality adjacencies, we acquired the SSP breast tissue expander product portfolio to further leverage our PSCs and position in the virtually untapped breast reconstruction market. We will continue to evaluate strategic additions that allow us to leverage our experienced, high quality sales organization and complement our existing aesthetics product portfolio. We have stated this before and it remains our operating strategy going forward. Overall, the Sientra team continues to perform extremely well and this was another productive quarter for us. We look forward to providing you with further updates as we make progress towards our objectives. We realized that we still have a long way to go, but we are all genuinely proud of the progress that we made to-date. With that, I would like to turn the call over for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Margaret Kaczor with William Blair. Your question please?

[Margaret Kaczor:]

So, first question for me maybe is just a follow-up on the manufacturing facility, you mentioned that kind of build out is already passed and you're manufacturing from the sample products, but can you walk us through how long that validation process that you reference take and why shouldn’t we expect you guys to file PMA supplement maybe earlier in the first quarter versus later?

[Jeffrey Nugent:]

Well, the fact of the matter is we have more aggressive internal objectives Margaret, but we are being conservative as we should be with the steps that are very well known to us, in terms of what has to happen to be able to complete a PMA supplement with a very high probability approval. So, I could get into some detail. This is probably something that we can provide in the future, but I can't stress enough the experience we have in this specific steps required to be able to submit the supplement with the intent of achieving a fast approval, and I just need to add to that and that is we are being conservative and not assuming the best case in the full FDA review. I hope that helps.

[Margaret Kaczor:]

That’s great. And then I also wanted to follow up on one of your comments at the end there, Jeff. In terms of shifting part of the organization back to growth, is that within the breast implant space? Is it more in relation to bioCorneum and SSP or where should we be thinking about there?

[Jeffrey Nugent:]

Best way to put it is that we are looking at both what I call incremental acquisitions and expansions adjacencies as well as more transformational ones. So, I think we talked about this a bit in past, but we are not trying to build Sientra in small steps. It's a combination and we have to find deals and opportunities that are the right mix of valuation and accretive power to be able to at the end of the day. We are not just looking to increase revenue. We are focused on increasing shareholder value, and you've got a lot of experience in this. But my point that I want to make is that we are moving down parallel paths, large scale and incremental scale.

[Margaret Kaczor:]

Okay, that’s helpful. In regards to SSP and it augmenting maybe your tissue expander portfolio, can you guys give us any commentary in terms of what kind of revenues and profits they had in last 12 months or 2015? And as you look at 2017, what's the go-to-market strategy, while you guys are waiting for the Vesta facility to come online and have the implant products to support the expander product?

[Jeffrey Nugent:]

Well, let me turn it over to Charlie. Charlie has been the architect of actually putting a lot of these strategic opportunities together. Charlie, do you want to expand on that a bit?

[Charlie Huiner:]

Sure, and thanks Margaret, there was a couple questions that I’ll try to handle them sequentially. First, with respect to size of the revenue opportunity and what we are acquiring. We are going to continue to defer -- respectfully defer on some of the details of that, but I think the way to think about it is similar to the Enaltus acquisition where we feel very good about acquiring assets like this in the 1.5 to 2 times revenue. And so, I think you can find that this is consistent type of acquisition in that way in the scope from that perspective. In terms of go-to-market, we feel very good about what this portfolio does for us, in particular you've heard Jeff talked about the reconstruction space. As you well know, this is space that we really haven't hit on very hard over the first three to four years of our commercial activity. It's about $235 million estimated market. And I think you can go back and look at your model, I think at our peak, we hit about $3.6 million of tissue expander sales into this market. So being generous, we reached at best about a 3% market share. We think what this portfolio does is really gives our team the opportunity to position a very strong portfolio of expanders, including importantly an innovative product in the AlloX2, which we think we can solve some very specific solutions unmet need with respect to managing seromas and infection. So, if you look at this in totality, we are really excited about it and the go to market is sort of twofold. One We will continue to sell through a very limited number of independent sales agents who have already built relationships with hospitals. And the real opportunity here again similar to Enaltus that acquisition is now broadening the distribution through our very qualified group of plastic surgery consultants, and really taking what we believe to be an under promoted, under developed tissue expander portfolio and really opening it up through our existing sales channel.

[Margaret Kaczor:]

Great.

[Patrick Williams:]

And I think the timing of that has been on our National Sales Meeting when we will roll that out to our existing sales force on the SSP step, Margaret.

[Jeffrey Nugent:]

That’s in January.

[Margaret Kaczor:]

And if I could just make one in Patrick, good to hear you back on a public call. As you look at the opportunity for Sientra and I know you mentioned a few reason for why you joined the Company, but with no pun intended. How do you augment the strategy, of Sientra given your background at NuVasive and at ZELTIQ? Thanks.

[Patrick Williams:]

I appreciate and it's glad to be back. I think hit it obviously in my prepared comments, but I think the one thing that really resonated with me was just opportunity here, and the Company is well positioned as we move forward. And we outlined the stuff we have to get through, but I just really see a very compelling opportunity to grow the Company and to start looking toward future. I think you've seen a couple of things on the bioCorneum acquisition to now the SSP today. We're putting some of these things behind us and really starting to set the stage for what I would call a multi-year view where we wanted to be in the next few years. So, certainly, we will have more to talk about as we go forward, but I have been here for about week now and I am excited to be with the team. It's been a lot of fun. And I think my prior experience of what I have done, not only at ZELTIQ but at NuVasive are going to really give me, as I said that front row seat to what we need to do is, we get the team aligned and start setting our near and more importantly our longer term strategies.

[Operator:]

Our next question comes from Jon Block of Stifel. Your question please?

[Jon Block:]

Just first question, Jeff, maybe on the redundancies from manufacturing, I think last quarter you talked about giving a little bit more color on the parallel efforts on the redundancies. Just based on your comments, it doesn’t seem like that’s going to coming from Silimed, so can you talk to your current desire for redundant manufacturing or does that now to go back seat as you alluded to Vesta having ample capacity?

[Jeffrey Nugent:]

It's good to hear your question, Jon. I remain focused on developing a redundant capability because we learned very painfully, the things happen. But I also have to credit Vesta with an extraordinary commitment to quality and the confidence that we have in Vesta, frankly reduces the criticality of providing the redundancy. Now, having said that, I am going to contradict myself, because we are very active in identifying a secondary source and several ways to really to define this and what the need is. And while we are confident with Vesta's ability to provide a very high quality manufacturing in supply chain, we are also committed to innovation. And having a newly started manufacturing capability also be able to develop the level of innovation and new products is a tall task. So without getting anymore specific in that, I can say that we are very active in looking at a redundant and redundant kind of as a negative connotation through it, but a back up or an additional solution, not only for manufacturing assurance, but also for some more transformational innovation that I think this category needs very badly.

[Charlie Huiner:]

And maybe if I can just add to Jeff's comments on our current partnership with Vesta, couple of points here. One, Vesta and their subsidiary SiMatrix actually is the manufacturer of the SSP portfolio line. So just to shed some light there, we are very pleased with the expansion of our partnership with Vesta, and more broadly with Lubrizol. And I’ll also say that getting back to innovation, we are also very pleased and we are looking forward to continuing to work with Lubrizol and better understand an intersection between some of things that they are doing at a broader level at the Lubrizol Life Sciences level, and some product innovations that might be helpful for us to bring forward into our plastic surgery channel. So to Jeff's point, I think that there is a combination here of being very pleased with our partnership expanding today through our acquisition of SSP and the fact that is manufactured by a Vesta subsidiary. And we are also of course looking more broadly at other companies that can help us on the manufacturing and product development side to really take forward more innovation into the market.

[Jon Block:]

And just maybe a couple more, the tissue expander market in the U.S., I think you guys called out $235 million maybe just at a high level the underlying growth of that market, and then Charlie based on your comments, it seems like the run rate from SSP currently is pretty modest. So, if you can just talk to what is different with the product in your hand? Is it the bundling with your implants? And lastly you talked about AlloX2, how long has that been out there? Or it seems like you guys are pretty excited about that offering and its level of differentiation, so how long that has been in the market? Thank you.

[Charlie Huiner:]

Sure, I’ll try to again take those three questions sequentially. The market itself, the breast reconstruction market itself is an interesting one, and that I think you are aware of the broader trends of unfortunately the incidence of breast cancer going up. But there is also relatively positive trend in that women's access and knowledge of reconstruction opportunities post-surgery, and the awareness of that has gone up too. So, we think that when you put that all together, the opportunity for breast reconstruction and for us to enter that market is quite good. If you look at the statistics and then compare that with what we see in the market, that’s a market growing at sort of the mid-single digits. Certainly, a little bit higher than breast augmentation. So from that vantage point, I think that’s little bit to the macro excitement of the market. In terms of the product itself, yes, the AlloX product was recently introduced. That was introduced last year. It is a patented device. It has dual port. The second port -- well, the first port is sort traditional expansion port. First, it helps to sort of expand the device. And then, the second port provides access to the surgeon to actually be able to manage, post-surgically manage infection. It's a novel device. It's not through SSP, but given a lot of marketing support and sales support, and I think of that really sort of feeds into your last question, which is why do we think that this product in our hands will be more successful. And I think it's a probably pretty obvious thing. We have proven ourselves to be able to disrupt the market, prior to last year getting to sort of double digit market shares in a pretty quick period time. We have a very strong distribution into the plastic surgeon channel that remains in place today. So, if you put that together with a compelling portfolio of products that have been under penetrated and underrepresented, I think that really forms the pieces of why we think we can be very successful with this portfolio.

[Jon Block:]

Great and maybe last one that will have two parts; first, Patrick it is good to have you back, I know you only have been there a couple of days, but just maybe your level thoughts about when you may reinstate guidance? And obviously just that’s important from a shareholder and investor perspective. Do you see that being a 2017 event or possibly later as you want to see the progress with PMA supplement? And then lastly, if you can just give us a quick update on the total reps, I think as of last call it was 32 in breast another 6 in the bioCorneum, any update will be helpful. Thanks guys.

[Patrick Williams:]

Sure, I am going to punt on that one a little bit, Jon. I think some of the stuff you just hit on is the key for us to get more comfortable about as a management team guidance in general right? So, first and foremost, this is our number priority which is getting PMA submitted, and then taking it from there and getting the supply up and running with Vesta. So, for now, I would say that as we progress through 2017 stay tuned and will of course be prudent and we certainly understand that the investment community wants to understand that before we are going to start attracting some more attention. So, I want make sure I understood your last question. You asked me the number of reps, is that what you are asking a little bit?

[Jon Block:]

Yes, I am sorry, number of reps, and previously, they've broken out a little bit on the breast side and on bioCorneum. So maybe any update there in what you expect to maintain from the SSP acquisition, if you want to share? Thanks guys.

[Charlie Huiner:]

Yes, so this is probably the one thing I did add as you know I try to give as much information. I think I am very transparent in my workings with our metrics, but I would say that our sales force continues to be very stable on the breast side. We are adding a handful of the SSP reps. But we are just going to leave it at that for now. And I'll just tell you that, a little bit of competitive situations, but the sales force is highly motivated. And basically, we are adding more products into their bag and I haven’t seen a sale force yet that doesn’t like that.

[Operator:]

I show no further questions at this time. I would like to turn the call back over to Mr. Nugent for closing remarks.

[Jeffrey Nugent:]

I again just repeat that we appreciate your interest in the Company. I again can't say enough about the caliber of the team that we have at Sientra. We are very proud of the progress that we are making. We are very practical and understanding that we have work to do. We are zeroing in on those priorities, and I think the progress that we shown over last several quarters indicates the capability to be able to not only return Sientra to the successful level that it was at prior to our cessation of manufacturing supply, but our vision for the Company is significantly larger. And I think bringing in talent such as Patrick is only going to help us to accomplish it. So, again I thank you for your interest, and we look forward to sharing further progress, not just on these quarterly calls, but as material developments occur. We will be the first to share them with you. So, again thank you all very much and I hope you all voted today.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. 2