Honne Capital

Hedge fund manager, bonds, long/short equity
Honne Capital
Hedge fund manager, bonds, long/short equity
Contributor since: 2011
Company: Honne Capital
It would be logical to speculate that Sientra is arranging a second source for its implants. This is inevitable given the terrible experience with having a sole source. Various manufacturers have reached out Sientra to help. This is positive for the company longer term. In the short run, I believe Silimed will do a fine job and will resume production shortly.
You're welcome. Clearance from ANVISA is a big deal. One of my sources who previously worked at Inamed told me that ANVISA was the most demanding of all the regulatory agencies. They requested more data than others and were the hardest to please.
There's got to be a little price-fixing going on in the industry. OPEC: Organization of Pectoral Enhancement Corporations
I agree that Sientra will have to reduce pricing in the near term. They already have the best warranties in the industry... maybe they can do even better.
I've been thinking longer term about this business once we get past the regulatory hurdles.
Sientra has gross margins of over 70%. I'm sure Allergan and Mentor do as well. They all make similar products, which (let's be real) are just pieces of silicone. The R&D is a joke. This is not rocket science.
Plastic surgeons charge $4,000 on average for augmentation and the cost of the implant itself is not a very large component of that (less than a fifth). So it doesn't really matter how much he pays for the implant; they are an inelastic good.
What matters more to the plastic surgeon is his relationship with his salesperson. He wants to go to fancy dinners, parties, etc. Have you seen plastic surgeons on reality TV?
Breast implant companies are simply marketing operations. The value is in the salesforce. If you can hire away the top salespeople from your competitors, the salespeople will bring along their clientele of doctors and you'll have sales growth in no time. You have to retain these salespeople. It is critical that Sientra has enough cash to pay salespeople during the voluntary hold.
Over time, the big question is whether Sientra can increase sales without increasing the costs to Sientra. I think they should be able to do this easily.
To keep this simple, we'll just assume Sientra continues to depend on breast implants for virtually all of its revenue. (People in the industry have indicated to me that Sientra will eventually branch out in the aesthetics field via acquisition.)
Breast implant sales in the U.S. are approximately $600 million per year. Based on data from ASAPS and ASPS, between 1997 and 2013, the number of breast augmentation and breast reconstruction procedures has grown at a compound annual growth rate of approximately 7.3% and 4.4%, respectively. Since there are only three competitors in the market it is reasonable to expect Sientra to capture at least 25% share over the next three to five years. In the beginning phase, the goal should be to generate share of mind with plastic surgeons. Profitability will come later once more surgeons become familiar with Sientra's products and customer acquisition costs therefore go down. I believe Sientra will end up working out similarly to the case studies in The Art of Profitability.
The markets are generous to above average sales growth, especially during this slowing phase of the business cycle. The market will probably pay 3x sales for SIEN, which would work out to $450 million. 3x sales is conservative. This stock IPO'd at $15 per share with 14 million shares outstanding. That was about 5x 2014 sales! When the stock traded up to $20 it was being valued at 6x sales. Also remember that Sientra will likely have lots of excess cash.
Under every plausible scenario the going concern value is a lot more than the current share price.
1. I provided the link to RealSelf because I wanted to give proof straight from the horse's mouth. You can see numerous surgeons stating that they pay similar prices for Sientra implants vs. competitors. I don't see how I'm "confusing marketing with truth."
This commentary is in-line with what I've heard from plastic surgeons, one of whom told me he actually pays slightly less for Sientras. This conflicts with your statements.
2. I'm sure it occurred to the management team that they were severely limiting sales because of their policy to only sell to board certified plastic surgeons. Without this policy, their market share would be at least in the high teens. Sientra is now a publicly traded company, which means there is a natural impetus to maximize sales. It is the company's prerogative to keep the policy or scrap it.
3. No need to try to act authoritatively. I'm curious to know the name of your practice. Are you a board-certified plastic surgeon?
We'll see how sales do once the products are reintroduced.
Sorry, Zaphod. Your statement above is patently false. Silimed-U.S. (acquired by Sientra in 2007) initiated clinical trials for breast implants in 2002 and did not get FDA PMA until 2012. Devices can take just as long as drugs to get PMA, even when there is technically nothing really new being introduced.
Of course, this is not an ideal condition for us to be under, but it is reality. Having a PMA is an enormous advantage.
Doctors may be conservative, but they are also logical and scientific. This is precisely why they have been so supportive of Sientra during this turbulence, and every report in the press has indicated that plastic surgeons are clamoring for a return of Sientra's implants.
We conducted our own survey since many of our fund's investors are plastic surgeons covering a wide geography. The breast implant guys all think the regulators overreacted and they are angry that some operations have to be postponed because of the voluntary hold. Their patients, particularly the reconstruction patients, are even more angry. They just want to go ahead with the operation.
The odds of there being a patient health issue at Silimed are approximately zero.
One of our sources relayed a conversation he had with Don McGhan, mechanical engineer at Dow Corning, later Heyer-Schulte, eventually founder of his own company along with silicone chemist Dick Compton: McGhan Medical, which was sold to Inamed, which was in turn sold to Allergan.
"Don and his crowd had a worldview on silicone devices and he once observed to me that if rupture and dissemination of silicone polymers had any medical consequence, it should be apparent in Brazil. Yet reports of rheumatic symptoms and diseases were virtually unknown in Brazil.
"Why Brazil you might ask? Brazil is 2nd place (behind U.S.) for density of cosmetic procedures performed on a per capita basis. A larger proportion of those procedures in Brazil involve breasts."
Actually Brazil is now far ahead of the U.S. in the number of breast implant procedures per capita, according to NPR: http://n.pr/1OZXAre
Silimed has been making silicone gel breast implants since 1981 and has undergone hundreds of inspections without a single negative incident. What are the odds that this suddenly changed?
Zaphod,
1. Sientra does not price their implants at a premium. Its round and shaped silicone gel implants are priced similarly to competitors' silicone gel offerings. Let's not compare the price of Sientras with saline implants; compare apples to apples. http://bit.ly/1RgsQZl
2. Sientra started from zero just three years ago and is competing with two juggernauts, yet it already has 9% market share. Additionally, Sientra only sells implants to board-certified plastic surgeons, whereas Mentor and Allergan will sell to plastic surgery "pretenders." This policy has substantially restrained Sientra's potential market share.
Still, Sientra has achieved double-digit revenue growth every year and the economics of the business are such that profitability will follow. PMAs are very costly and difficult to achieve, and so there will be three competitors in the U.S. for the foreseeable future. One could argue that the current oligopoly situation is non-competitive since Sientra's gross margins are 70%+.
A friend of mine is a former vice president of Inamed, Mr. T. He has revealed that JNJ has reduced R&D spending at Mentor so it can milk the business for cash as much as possible. He has also revealed that employees at Allergan's breast implant division (especially salespeople) are expecting widespread layoffs after the Pfizer merger. The top salespeople are ready to move over to Sientra at a moment's notice, just as Mentor's top sales staff left for Sientra years ago.
3. Every indication is that plastic surgeons are looking forward to the reintroduction of Sientra implants. Sientra has not yet been tainted in the minds of plastic surgeons, because the company so far has gone above and beyond with the voluntary hold. Perhaps they feel a sense of loyalty because of the company's policy to only sell to board certified surgeons. More likely they are loyal because the implants have produced great results. Yes, there are alternatives to Sientra, but there is no way that Natrelle and Mentor can cover all the bases regarding size and shape. For women with lower amounts of fat, or those seeking reconstruction, Sientra is often the preferred choice due to its superior cohesiveness.
I'm not too concerned about the investor lawsuits. Every indication is that Hani Zeini is not a stupid person. And issuing a secondary offering while knowing about pending bad news would certainly be stupid, especially if the company did not have an urgent need for cash. If one could prove Zeini had scienter then he would likely face prison time.
I have been told that Sientra had ambitions to enter the dermal fillers business to compete more directly with Allergan. This was the rationale for the secondary.
Plus I have multiple character witnesses and several of Zeini's friends telling me he did not know anything beforehand.
Sure, there will a typical discover process, but there's nothing incriminating to find. The class action investor suit can only pursue damages of $10.88 per share, the amount that SIEN fell on September 24. They will likely settle with Sientra's D&O insurance carrier for 10 cents on the dollar and the company might have to pay $5 million. Not only will such a settlement be capped at a small dollar amount, it would take well over a year to be completed.
I contacted the law firm handling the case and was told that the lead plaintiff is a small retail investor with a loss of $60,000. The lead plaintiff is not an institution, which is one more factor that indicates that the suit will not successful.
Yes, I did receive your email. And I concurred with your one-line statement, which is why I didn't respond.
Whoever is shorting this must know something I don't know, which is highly unlikely given that my entire chain of information comes from people directly or indirectly involved in this situation. No material non-public information, but these people are reliable.
I have been asked what I think about the timing of the secondary offering occurring so close to the bad news in late September. A friend of Hani Zeini had lunch with Zeini in September and told me that it was impossible that he knew anything beforehand. When the company one founded is about to receive an existential shock, one would probably be quite nervous. Zeini wasn't nervous.
Also I reached out to multiple law firms who have offered to bring a class action suit against Zeini and Sientra, posing as a potential lead plaintiff. None returned my calls or emails. I'm inferring that the lawyers don't think they have a great case. I did the same kind of posing while researching Imperial Holdings, and every lawyer I called got back to me.
All the big money is made in uncertain situations. This is the best uncertain situation I've seen in years.
No doubt BPI's earnings will be lower than they have been historically. I'd cut net income by 50% to be conservative. They would still be earning $60 million per year vs. an enterprise value of ~$400 million. About half the current market cap is in cash and short term investments. The stock is still very cheap.
We have a higher percentage of our assets invested in IFT than any other fund. At the same time we are below the 5% threshold that would require us to file a Form 13.
Not only is there a lot of upside if they turn it around, the downside is limited if management chooses to scrap the new model and return to the old. Before this strategy shift, revenues were flat to down 2% year over year. JCP could always go back to that if it needs to.
Correction: jcp is not subleasing space to brands.The merchandise within each shop is owned by jcp, and all shops are staffed by jcp team members.
If Kaz Hirai were CEO earlier, the Sony Ericsson partnership would have ended earlier. I thought of this idea at least four years ago because I noticed that people really like the Sony name... they do not like Sony Ericsson.
Nobuyuki Idei and Howard Stringer were two of Sony's worst managers. As soon as Norio Ohga passed the crown to people without a passion for gadgets, the slide began. Norio Ohga himself was more of a musical aficionado than a gadget guy. So I blame him, too.
I don't know whether the stock will be higher over the next month. I do think that I was wrong in my analysis by not overweighting the fact that Tech Mahindra has a lot of influence over Satyam and I'm not sure the corporate governance in India is set up well enough to prevent a takeunder of Satyam. Judging by how shares are trading, the market isn't too excited.
I have posted an improved version of my Mattress Firm write-up on Stableboyselections.com as an alternative to the old one featured here. The editors of Seeking Alpha have told me that they do not make changes to content already published on the site… only corrections. Since publication, I have added important details to strengthen my case.
I appreciate the response.
Admittedly this is not the most convincing article I've ever written about a company. When you suspect a company is being dishonest, you never can be dead sure about it. You can only have a hunch that things are too good to be true.
In order to believe me, you need to believe that I am not a crook (i.e. that I am not making up the information I purport to be from reliable "sources"). And even if you don't think I'm a crook, you can't really be sure whether my sources are crooks.
HOWEVER, if you believe that my sources are reliable and you accept what the employees and ex-employees have told me, there are some serious problems with this company. Maybe that is too big an "if" for some people to believe. Whatever. I am just putting this information out to the market because I feel that it HAS TO be mentioned. If I were invested in this company, I would want to know these kinds of details. You know Mattress Firm isn't going to tell people.
The most important thing here is the intent of the person giving you information. On one side you have Mattress Firm, which is still majority-owned and controlled by J.W. Childs who hasn't had a chance to exit yet. On the other you have a money manager who has detected similar behavior in the past and who has called out several other companies before their share prices dropped. My intent may be to cause the stock to drop (as I do have a short position). But my sources include people who currently work at Mattress Firm. And their suppliers.
The question is what holdings he will keep and which ones he'll dump. The fund has something like two-thirds invested in financials. My thinking is that if he is forced to sell something, it will be a financial stock rather than something non-financial.
Good job on this article. You have made my life a little easier.
I define a workout as something that is totally uncorrelated with the market. Regardless of whether the market goes up or down, we will make money if Stefan buys TLB and we will lose money if he doesn't.
Wow. Two major typos here.
CORRECTION:
One of the most frustrating mistakes was that I did not buy Foxconn (FXTCF.PK) or BYD (SEHK: 1211) before they surged.
Then I discovered (belatedly) that Kyle Bass’ fund had purchased 4.9% of MGIC (ticker MTG).
I didn't think anyone else in the world followed this company. Despite the negatives you talk about in this article, I think this is a lousy short because most of their ships will come online in 2013. That's when the earnings will come in.
I'm not trying to pump my trade. I don't have a position here anymore (though I was LONG last week). And this blog post shouldn't even be on this website. I only want my research to be published here. The editors just take everything from my feed without telling me.
I agree that there will always be some people who prefer Blackberries. I just think you will be in the shrinking minority every year from now on. They no longer make anything that wows people. Apple does that. To some extent Samsung does that, too.
The operating momentum is so strong against RIM that owning the stock is like swimming up a waterfall.
I just read the BMO Capital Markets report, which I thought was good. Some highlights:
In conjunction with our updated handset model, we are lowering estimates for RIM. We see a somewhat weaker end market for Smartphones, and are taking a more cautious modeling approach to the impact of the recent service outage. In our model, we lower our assumptions for Smartphone and Playbook units, net additions, and service ARPU. We believe there will be a nice fundamental rebound in the November and February quarters as new Blackberry 7.0 phones ramp, but management for some reason has already guided for 50% growth in EPS for the second half compared with the first. The Street is below guidance, but headline risk remains.
Our recently updated global handset model highlights a weak September quarter, with Smartphones and 3G missing the mark. We believe the weakness seen by most vendors is a sign that the device market is not immune to a slowdown, particularly when products are late to market. We expect RIM to rebound in terms of unit shipments, but see less upside from consensus based on the changing industry dynamic.
Wow. I have only one thing to say to you RIMM longs. Learn to cut your losers. You will become better traders when you can put aside ego and lock in your losses. People like you thought RIMM was a great deal at $35. Are you going to keep holding on as it goes lower?
Yeah. I'm not counting on it though.
On the other hand, based on my observation of other "worthless" stocks, they trade at nonsensical prices for a long time. Does any smart equity holder expect to make any money after the holding company liquidates? No. But this stock could still trade at 20 cents by March. The costs of shorting this thing are so high that it's not worth it for a hedge fund to push the stock to its intrinsic value, which is zero.
Stock is trading under the ticker MFGLQ at 20 cents. My options are not trading but they should soon.
The November put I am long is worth 80 cents; bought it at 37. The March put I am short is worth 80 cents; sold it for 49. The March put will likely trade for more than its intrinsic value of 80 cents. After commissions I expect to make a small amount of money from this trade. Nothing to write home about, but the risks were very small as well.
As I wrote in the article, I do not trust Alexa's information because they have no incentive to put out accurate information. A web traffic analyst has told me that Quantcast is much more reliable.
George Soros would say that reflexivity makes it very likely that MF will file for bankruptcy. The ratings agency downgrades were the start of the dominos falling. The bonds dropped to 70 and the stock fell to $2. This all happened so fast that it was impossible to raise money by issuing bonds or stock. They had to max out their credit line. Major clients have left / are leaving to do business with other counterparties. Then, Gasparino reported that potential buyers are thinking about waiting to buy the assets in court. The bondholders were selling at 40 cents on the dollar today.
If there is a bankruptcy filing, the equity is worthless because there is no franchise value left if clients have left in droves. On a going forward basis this isn't as valuable as Lehman was because at least Lehman had Neuberger Berman. There would have to be a liquidation at MF. And seeing as how MF has risky assets 5X larger than its equity, it's likely that the bondholders will take losses. By the time you pay for lawyers, the equity would be way out of the money.
Alibaba.com's market cap is not $45 billion US. That figure is Hong Kong dollars. So your calculation is off by 7.7 times or so.
Cheers.
Anyone with access to the S&P report care to email it to me? My fund was short the stock and I would like to have a copy of the report to show my investors how stupid the sell-side research firms are. My email address is kaspergtmn at gmail dot com. THANKS!