Sientra's (SIEN) CEO Jeffrey Nugent on Q2 2016 Results - Earnings Call Transcript

| About: Sientra (SIEN)

Sientra, Inc. (NASDAQ:SIEN)

Q2 2016 Results Earnings Conference Call

August 9, 2016, 08:30 AM ET

Executives

Nick Laudico - Senior Vice President, The Ruth Group

Jeffrey Nugent - Chairman and Chief Executive Officer

Matthew Pigeon - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Jon Block - Stifel, Nicolaus

Margaret Kaczor - William Blair

Operator

Good day, ladies and gentlemen, and welcome to Sientra, Inc. Q2 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I'd like to introduce your host for today's conference, Mr. Nick Laudico. 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 today.

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.

That said, I'll hand the call over to Jeffrey Nugent, Chairman and CEO of Sientra.

Jeffrey Nugent

Thanks, Nick. And good morning, 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.

As we announced in separate releases earlier today, we’re pleased to share several pieces of good news. First, we’ve made significant progress our manufacturing solution through a manufacturing partnership with Vesta, a world-class medical device contract manufacturer. Second, we continue to see strong commercial traction, following our market reentry. And third, we finished the second quarter with a strong cash position to leverage moving forward.

We have consistently stated that our highest priority is to reestablish our manufacturing capabilities in order to expand the level of service to our board-certified plastic surgeons. Earlier today, we announced a manufacturing partnership with Vesta, an operating unit of Lubrizol and primary component of our go-forward supply chain strategy.

After a considerable amount of time and professional effort, we’ve achieved a level of progress and confidence that allows us to share more information on the programs that we’ve been developing for well over a year.

We’re particularly excited about partnering with Vesta as they are a well-respected manufacturer of high quality medical devices used in some of the most critical procedures in the industry. They provide implantable silicon components and products for cosmetic, reconstructive, cardiac, bariatric, dermal and wound care procedures and also manufacture FDA-regulated devices across the cardiology, pulmonology, neurology and orthopedic markets.

Vesta has over 40 years of experience exclusively serving the medical device industry, including deep experience in the comprehensive silicon fabrication in the areas I just mentioned. Vesta has earned business relationship with hundreds of medical device OEMs worldwide, including leading medical device companies. The products are designed to meet some of the most stringent global standards using Six Sigma management principles at every level of their organization.

From a capacity standpoint, we expect that Vesta will have significant capacity for our immediate and long-term needs, with the ability to scale significantly in the future. We believe that Vesta’s long history and exceptional record of quality and safety provides us with an extremely stable partner to support our objective of sustained long-term manufacturing supply and we’re very confident of Vesta’s ability to meet our needs and timelines.

This is not a newly formed alliance. We've already made significant progress with Vesta. Our plan is to continue to work with them closely to establish the manufacturing operations required to meet our PMA specifications. Sientra’s approval represents one of the three approved in the United States. There are only three.

As our partner, Vesta has shown a true commitment to make the necessary investments in order to meet our timelines for establishing a new source of finished goods for our board-certified plastic surgeon customers. We also believe that we can scale the partnership moving forward to support significant long-term growth objectives.

In terms of timing, we expect to complete this process over the course of 2016 in order to submit the PMA supplement in the first quarter of 2017. Based on experience with our timely approval, we anticipate we could be shipping product manufactured by Vesta by the end of 2017.

I want to thank all of our employees and the team of professionals at Vesta who’ve been involved in this process and who have been and are continuing to work tirelessly to make this partnership a reality. We’re very pleased to be able to announce the accomplishment and look forward to working with such a highly respected organization.

Now, let me provide an update on our return to market and precision control launch, which is going well and tracking right on our plan. We’ve seen that plastic surgeons remain committed to using Sientra products and our top-tier our sales force continues to accomplish the objective of restoring sales with our previously active customers.

The reception in the precision launch has been outstanding. We’ve contacted and engaged with 100% of our previously active customers and more than 90% of those customers have made a purchase and are using Sientra products.

This morning, our sales team has begun communicating to those board-certified physician customers that we are partnering with Vesta, highlighting our commitment to providing them with uninterrupted supply.

Moving to our recently acquired bioCorneum Scar Management Product, market expansion continues to go well. Our combined sales forces are gaining traction in the market as they broaden their physician relationships and the adoption of the product. This is proving the logic behind moving into complementary adjacent categories that benefit from our broad coverage and strong professional relationships.

I'll now turn the call over to Matt Pigeon for his review of the financial results and return with closing remarks before opening it up for questions. Matt?

Matthew Pigeon

Thanks, Jeff. I will now discuss our second quarter 2016 results. Our second quarter 2016 financials are available in greater detail in our earnings press release issued earlier this morning and additional detail will be available in our 10-Q which we will file later today.

Total net sales for the second quarter ended June 30, 2016 were $6.2 million compared to total net sales of $14.2 million for the same period in 2015. This decrease was primarily driven by our voluntary hold on the sale and implanting of all Sientra devices manufactured by Silimed between October 9, 2015 and March 1, 2016 and as a result of our controlled market re-entry designed to optimize the availability of our Breast Product inventory as we reestablish our supply options.

Net sales of our Breast Products accounted for 79% of our total net sales for the three months ended June 30, 2016. And net sales of bioCorneum, or our Scar Management Products, accounted for 18% of our total net sales for the three months ended June 30, 2016.

Gross profits for the second quarter of 2016 were $4.5 million, or 72.1% of net sales, compared to gross profit of $10.3 million, or 72.3% of net sales, for the same period in 2015. This slight decrease was primarily due to an incremental $0.1 million reserve for inventory obsolescence recorded for product that we estimate to expire prior to being sold and also greater fixed overhead as a percentage of lower net sales.

Operating expenses for the second quarter of 2016 were $14.7 million, an increase of $2.3 million, or 18.7%, compared to operating expenses of $12.4 million for the same period in 2015. The increase is primarily due to an increase in product development and legal costs that were also partially offset by a decrease in marketing costs and the medical device excise tax costs as a result of the suspension of this tax during calendar years 2016 and 2017.

Net loss for the second quarter of 2016 was $10.2 million compared to $3 million for the same period in 2015.

Net cash and cash equivalents as of June 30, 2016 were $86.2 million compared to $93.5 million at the end of the first quarter. We continue to maintain a healthy balance sheet with no debt and sufficient cash to fund our precision launch and execute on our growth strategy going forward.

As of June 30, 2016, our sales organization included a total of 38 sales representatives.

As we stated on our last conference call, we remain in the early stages of our market reentry and, therefore, will not be providing financial guidance at this time.

I will now turn the call back over to Jeff for final closing remarks.

Jeffrey Nugent

Thanks, Matt. In closing, we’re proud of the significant progress that we’ve made on each of our key objectives we defined last fall. We’re most excited about our partnership with Vesta providing a manufacturing solution that we believe will enable us to maintain our uninterrupted supply as we expand our customer base.

Our focus now will be on manufacturing development, final verifications and the submission of our PMA supplement to the FDA during first quarter 2017. Our reentry into the market has shown the deep support from the board-certified plastic surgeons that we served and our precision launch is moving forward, frankly, directly as planned.

Simultaneously, bioCorneum sales has been gaining momentum as our plastic sales consultants become increasingly confident in marketing the opportunity to our customers.

As I have consistently said, reestablishing a world-class supply chain has been our number one focus. With the progress and momentum we're seeing, our confidence remains strong that Sientra will regain our previous levels of professional preference.

While there is much left to be done, our joint teams are at a very high level of execution. But profitable growth is our overall objective and we're shifting some of our focus to both adjacent organic and non-organic opportunities with benefit of the strength of our balance sheet.

This is an exciting and productive quarter for us and we look forward to providing you with another update on our third quarter call.

And with that, I'd now like to turn the call over to questions. Nick?

Nick Laudico

Yes. Operator, we’d like to open the call for questions now, please.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question is from Jon Block of Stifel. Your line is open, sir.

Jon Block

Thanks. Good morning, guys.

Jeffrey Nugent

Maybe just looking for more color on the manufacturing and, obviously, the update was very, very helpful, but just maybe some more details. Will you continue to source from Silimed for redundancies? And is it possible you’re able to receive product from Silimed over the next 12 months or so?

Jeffrey Nugent

The relationship with Silimed remains in place. And as you may be aware, Jon, that runs until April 2017. And we’re in the process continued discussions with them and that they’re a potential source of additional supply, which may result in further inventory during the short term. So Silimed remains a potential part of our supply chain solution.

Jon Block

Okay, got it. And then, if we were to look out to [indiscernible] if we were to look out to 2018, Jeff, you mentioned possibly getting the PMA supplement approval at the end of 2017, I just want to make sure I'm thinking about this correctly, Vesta will be the primary manufacturer. If you extended that April 17 from Silimed, they would sort of be your backup manufacturer. I guess, that’s the first question.

And if that's the case, Matt, even if it’s a wide range, any idea how those gross margins will look in the early days when you sort of cut over to Vesta?

Jeffrey Nugent

Well, the second question first, and we’ve spent a lot of time really drilling down on this and we’re confident that our gross margins will continue to stay at the level that we have seen. And that’s one of the criteria that we’ve used in working so closely over this extended period of time with Vesta. So we do not anticipate any erosion on that level of the P&L.

As far as Silimed is concerned, all I can say is that we're not aware of their progress in being reestablished as a certified US provider. But that remains an option going forward. Does that help?

Jon Block

Yep. No, it certainly does. Maybe one or two more. Just wanted clean up more on the sales reps. I think last quarter you had 42 all-in. Matt, you mentioned 38. What is the split – last quarter was 35 PFTs, 7 bioCorneum, how do I split out the 38 reps that you ended the second quarter with?

And then, is that sort of the right size, if you would, going forward?

Matthew Pigeon

Yeah. Jon, it’s a good question. Right now, as I mentioned, we have 38 total sales reps and that splits into – 32 are the PFTs and 6 are what we call MFTs that we brought over from bioCorneum. And we think that going forward that is the right size. That’s what we exactly forecasted to be at at this point in time and believe that that is the right size going forward.

Jon Block

Okay. And last question from me, just to maybe take a high level. Some of your competitors have moved around numbers in terms of their level of transparency when they report. But Allergan, the other day – it looks like the market – their numbers were sort of flattish. And maybe I was a bit surprised by flat US number because, overall, aesthetics seems to be pretty strong. And arguably, they would have had a little bit of a tailwind year-over-year in their June quarter from you guys. So maybe, Jeff or Matt, if you can just take a step back and comment on the health of the market when we look out over the next 6 to 12 months specifically in the US. Thanks, guys.

Jeffrey Nugent

Well, I think the projections going forward, Jon, remain strong based on everything that we have seen and we realize that there is a shift of market share between our two largest competitors and that varies over time. And we understand that there are some internal organization changes going on within Allergan specifically. And while we retain very close awareness of both of them, I think what you’re really seeing is, in part, a function of seasonality, which exists, as well as those internal tissues, both within Johnson & Johnson and Allergan. I can't be a whole lot more specific at this point for some reasons.

Jon Block

Understood. Thanks, guys. And congrats on the manufacturing agreement.

Matthew Pigeon

Thank you.

Jeffrey Nugent

Thank you very much.

Operator

Thank you. Our next question is from Margaret Kaczor of William Blair. Your line is open.

Margaret Kaczor

Good morning, guys.

Jeffrey Nugent

Good morning, Margaret.

Margaret Kaczor

In terms of your timing, you’ll submit for the PMA supplement in the first quarter, but is there a buffer at all in that guidance of launching at the end of 2017? So is the process, in your mind, going to take 6 months, 9 months and 12 months and then where is that coming from?

Jeffrey Nugent

Well, the FDA has a 180-day statutory requirement for approval. And we all know that is not accurately predictable in all cases. But with the advantages that we have with the strength of our regulatory experts in Sientra for sure, as well as the extensive regulatory experience at Vesta, I think I mentioned on one or more of our previous calls, we are taking great care to make this as compliant with all FDA requirements as we possibly can. I think it is a level of confident optimism that we represent a known commodity to the FDA. And, therefore, we are planning on the shorter-end of that cycle relative to their 180-day statutory requirement. Does that help?

Margaret Kaczor

It does. Maybe a couple more on the manufacturing side. Is there any clarity that you can give us on their capacity at Vesta? When the process is over, can they manufacture at $60 million or $100 million in revenue? And then just to parlay that into the second question, in terms of having redundant supply that you’ve talked about in the past, Jeff, are you including Silimed in the discussion of redundant supplies? And what about an internal or Sientra-owned manufacturing facility? What process are you there?

Jeffrey Nugent

Well, those are three important questions. I think, as I recall, the first one really has to do with the capacity that we will be prepared to support and that's an area where we really can’t give guidance at this point. We’re confident with their ability – Vesta’s ability to scale to significant levels. But we can’t be more specific than that at this point.

As far as redundant supply, redundancy remains one of our important criteria. Silimed is currently a factor in that. But we also have additional parallel efforts ongoing that we’ll be in a position to announce at some point in the future.

And I'm sorry, what was your last claim?

Margaret Kaczor

No, I think you answered it, which was – well, I guess not. The timing or what process, what stage are you in in terms of creating maybe third or – second or third redundant supply?

Jeffrey Nugent

Well, we’ve made significant progress on a highly-regarded additional source in partnership. Bur we felt as though it was important that we share more information with you now based on the progress and confidence that we’ve achieved working with Vesta. So, in a perfect world, I would have liked to have been able to come out with a fully integrated supply chain strategy with the additional partners that we ultimately envision. But the fact is that we have that level of confidence with Vesta and we believe that with their reliability and very strong reputation, the importance of a redundant component is certainly less important than it has been in the future. That is still something that we are committed to provide.

Margaret Kaczor

Okay. And then, last one from me, bioCorneum, obviously, had some great growth sequentially, can you give us any more clarity in terms of how many new accounts you’re selling to of that product or any synergies as you go into your own account base and sell that product? Thank you.

Jeffrey Nugent

Well, the synergies are from the standpoint of the very strong relationships we have with our PFTs, obviously, and being able to introduce that product to essentially a low level of product adoption among those people. So we are beginning to make some good progress.

I think that one of the things that has given us more confidence is that our supply chain on bioCorneum has become more rigorous and that we have increased manufacturing capacity beginning last month, so that the supply will be there to increase the penetration. And that's all part of the integration of the product into the Sientra master-brand. But we're not delaying the expansion of the brand. But there is some certain marketing aspects that we want to include simultaneously.

Margaret Kaczor

So just to be clear, you guys are saying – or believe there is more demand than what you’ve largely been able to supply until the last month and you’re still low-level of penetration of that product into your existing silicone breast account. Thanks.

Jeffrey Nugent

That’s absolutely true. And in part – and full disclosure – the capacity to meet the full extent of the demand has just recently been put in place. We’re now confident that we have the capacity to drive this to the levels we originally thought, but that up until now we have been somewhat constrained. But those issues have been corrected. The confidence of our combined sales force has increased significantly and we now have complete supplies available to be able to achieve the targets that we originally set.

Margaret Kaczor

Great. Thank you.

Jeffrey Nugent

Great. Good questions. Thank you.

Operator

Thank you. At this time, I see no other questions in queue. I’d like to turn the call back to Mr. Nugent for any closing remarks.

Jeffrey Nugent

Great. I just want to emphasize that this is a key time for us to be able to share several things with all of you, the most important of which is establishing a very solid and robust solution to our manufacturing needs. The bulk of our effort, priority has been aimed at getting us to this point. And I think that you can hear from the remarks that we made today that our confidence level has gotten to a very high point and that we look forward to continuing a very fast pace partnership with Vesta as one of the leading medical device suppliers in the country.

So in addition to meeting our plans based on our reentry into the market, the major thing that we’re proud of at this point is that we’ve made real progress on answering that manufacturing solution.

So I appreciate your interest in the company and we’re confident that we’re going to be able to achieve and exceed the previous levels of physician preference that we had just a bit over a year ago. So thank you very much for your attention. Have a great day.

Operator

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

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