Sientra, Inc. (NASDAQ:SIEN) Q3 2022 Earnings Call Transcript

Sientra, Inc. (NASDAQ:SIEN) Q3 2022 Earnings Call Transcript November 10, 2022

Sientra, Inc. misses on earnings expectations. Reported EPS is $-0.24 EPS, expectations were $-0.23.

Operator: Welcome to the Sientra’s Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in listen only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I will now turn the call over to Mr. Oliver Bennett. Mr. Bennett, you may begin.

Oliver Bennett : Good afternoon, and welcome to this Sientra third quarter 2022 earnings conference call. On our call today, we have Ron Menezes, Sientra’s President and Chief Executive Officer; Andy Schmidt, Sientra’s Chief Financial Officer; Lisa Rosas, Sientra’s Senior Vice President of Sales and Marketing, and Denise Dajles, Senior Vice President of R&D and regulatory. We’re excited that you could join us today as we report yet another record-breaking quarter and provide our vision for why we believe Sientra is positioned to continue at market leading growth into 2023 and beyond. Has reported earlier today Sientra had Q3 revenues of $22.6 million, which is not only a record quarter, representing 15% year-over-year growth, but also equals one of the highest quarterly revenue performances for the company ever.

We are extremely proud of this achievement, as it comes not only in the seasonally the lowest quarter of the year, but also at a time when our competitors have reported declines in the United States breast fat businesses. Not only did we report record revenues for the third quarter of 2022, but we also reported a record low free cash outflow of $3.6 million for the quarter. And Andy will detail later our call our continued focus on bottom line discipline is paying results without compromising our top-line revenue growth. I have to remind everyone that in our remarks today, we will be including forward-looking statements, both in our prepared remarks and response to any questions you may ask. These forward-looking statements are based on management’s current assumptions and expectations of future events and trends.

Our 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. For more detailed discussion of the company’s risks and uncertainties, I would refer you to our SEC filings, including our form 10-K and form 10-Q available on the company’s website. With that reminder, I would now like to ask Ron to provide you with his comments on the quarter and where he sees the company heading into 2023 and beyond.

Ron Menezes : Oliver sets the stage perfectly even in the slowest quarter, in-spite of micro economic headwinds, we’re reporting on the best quarters ever. This results validate our strategy demonstrate the strong demand for Sientra’s industry leading products are backed by an unrivaled safety profile and innovative programs. I’ll strategy is focused on drives the top and bottom line, we see ample market opportunities in both augmentation and reconstruction. In augmentation, will continue to outperform the market. The average of our top tier surges of Sientra’s revenue grew by 7% this quarter versus Q3, 2021. In addition, we added 130 new accounts during the same time period. Now looking at reconstruction, we have seen accelerated market penetration.

Now top-tier hospital accounts grew by above 10% this quarter, compared to third quarter 2021. We also added 160 more accounts this past quarter. Now given what I’ve seen overall market is extremely encouraging. They will continue to sit up momentum from this past quarter into fourth quarter. We are now preparing to launch our novel enhanced viability fat transfer product in January. You’re going to hear more from how we’re getting ready to launch this product from Lisa and from Denise. The interim benefits from a deep infrastructure in the U.S. market which we have worked on for almost a decade. This position as well to grow our current business and introduce new lines of products without excessive funding requirements. I’ll ask Lisa to take a few minutes to highlight how we continue to grow and take market share away from our competitors, both augmentation and reconstruction

Lisa Rosas : As we continue to grow the Sientra brands, we’ve increased our penetration in both augmentation and reconstruction, knowing we have considerable upside in both segments. We also measured market dynamics to evolve our strategies based on macroeconomic and other conditions. The reconstruction segment remains strong and stable, which has enabled us to continue the strategies that are in place earlier this year. The augmentation category has proven to be resilient over time. And we recently validated that by serving a group of potential patients learning that demand remains strong, with 90% of them, planning to continue forward with surgery in the next 12 months. We also know that we can outperform the market by continuing to expand our footprint of accounts.

We have strong anecdotal evidence that affirms we are disrupting the traditional decision-making process among both patients and surgeons. We continue to grow our global presence fueled by our safety profile and the strength of our portfolio. We received approval for our breast implants in Saudi Arabia. And we also received approval from Health Canada for our newest implant, a low-tech profile. From the beginning, Sientra has been selective in bringing innovative technologies with meaningful advantages, backed by long term proven safety data, which is crucial for patients, physician and regulatory bodies. Sientra’s long-term, solid clinical data, as well as differentiated portfolio has kept us in a position of strength, increasing our market share, as well as expediting global approvals.

Our entire team is driven by a shared dedication to make the surgical journey better for women and all our patients can believe that providing products with an unrivaled safety profile and putting them in the best hands, which is that of the board-certified plastic surgeon, we are truly doing something unique in our space. I’m very confident that we will continue the high growth trend while realizing efficiencies, but we recognizing the commercial team success is linked to the overarching corporate goals of both growth and profitability. Dr. Denise Dajles will now share how we are preparing to commercialize our game changing fat transfer technology, which will be unveiled next month at the Beauty True Science Conference in New York City.

Denise Dajles : With the launch of our novel that fat transplant system, we will become a much more diversified company that provides a full line of products for breast surgery and other body aid, enabling us to be the leader in total body transformation. This will expand our time by at least 25% and offer surgeons unique benefits to address unmet needs in the space and obtain safe, natural, predictable and reliable outcomes. I am very happy to share that this year, we’ve made significant progress in the fat transfer clinical study was over 10 sites actively enrolling patients. As patients reach the six month follow up mark, surgeons are impressed with the consistently high retention they are obtaining with our enhanced viability fat transplant system.

We have also been performing cases in other areas beyond the breast, with surgeons using our system for facial fat transfer and even for treating burns. Our early experiences validated the decision to acquire AuraGen. We strategically invested the time to improve system functionality and enhance the clinical data that is so valued in this category. We are confident that this product will be well received in the market. Now I’ll turn it over to Andy to discuss the financial outlook.

Q&A Session

Andy Schmidt : Highlighting our financial successes this quarter, I’ll reiterate our record revenue performance of 22.6 months demonstrating strong performance from all sectors reconstruction, augmentation and international. Another key financial highlights was our non-GAAP EBITDA and free cash flow performance. Our non-GAAP EBITDA up to Q3’22 was $8.6 million loss or lowest this year. More impressive was our free cash flow performance. Our Q3,’22, free cash flow of a $3.6 million use of cash is a record low cash burn for the company. Diving into our revenue numbers, the current trades by $2.6 million compared to $19.6 million in Q2’21, an increase of 15%. Year-to-date $65.5 million compares to $58 million for 2021 an increase of 13%.

The gross margin for Q3, ’22 was 56.6%, which compares favorably to 54% for the same period last year. The key driver for gross margins is products and channel mix. Q3’22 gross margins benefited from the continued expansion of the reconstruction businesses, which was balanced by the lower margin augmentation and international sectors. Total GAAP operating expense for Q3,’22 was $25.3 million which prepares to $22.3 million in Q3;’21. Non-GAAP or cash based operating expenses for Q3’22 was $21.7 million compared to $19.2 million for Q3, ’21. The increase includes the investment in sales and marketing and R&D initiatives to support the imminent launch or fat transfer products. Our current trade non-GAAP operating expense of $21.7 continues or favorable expense trends this year, comparing to $22.3 million in Q2 ’22 and $24.8 million in Q1 ’22.

Our current non-GAAP run-rate of 88 million annualized is a low $90 million to $94 million non-GAAP operating expense guidance. Looking forward to 2023, we expect to see continued improvement in non-GAAP operating expense performance as we realize efficiencies but leverage infrastructure, year-to-date ’22 GAAP operating expense of $82 million compares to $64.6 million in ’21. Year-to-date ’22 non-GAAP operating expenses of $68.8 million compares to $54.1 million for ’21 and it’s again partially attributed to correct your investment in commercial activities to support new product launches. Total GAAP loss from continuing operations for Q3, ’22 was $14.9 million, as compared to a profit of $28.5 million for previous year period. The previous year period includes several significant adjustments, including the fair value of derivative liability adjustment of positive $35.6 million.

Switching to key balance sheets. Our big news or the events that occurred after September 30, 2022 period and as documented in our 10-Q subsequent events such. In October, we took several initiatives to shore up our balance sheet. As previously disclosed, we entered into a new debt facility with Deerfield that achieved several important goals. One, extending the maturity date of our debt to 2026 and beyond; two, reducing our overall interest expense and three, lowering our total debt to $73 million. We also completed secondary equity offering, which resulted in approximately $14 million of additional cash for the company. We believe this provided us with sufficient balance sheet strength and flexibility to continue executing on our growth plans, including the commercial launch of our fat transport technology early next year.

Q3 has been busy and fantastic quarter for Sientra. Our record Q3 financial results, imminent launch of our novel fat transfer products and our strong balance sheet are inflection points, that sets the stage for a great Q4 22 That will slow sharp into 2023. At this point, I’ll turn the call back to the operator.

Operator: Thank you. We will now begin the question-and-answer session. We have a question from Alex Novak. Please go ahead.

Alex Novak: Greg. Good afternoon, everyone. I was hoping to start actually in the financials there, just to your last point, Andy, around this year and then slingshot in the next year. I just wanted to confirm are you reiterating the guidance that was given a couple of weeks back have $90 million to $95 million for the full year 2022. And then just how are you thinking about growth in the next year? Obviously, you’ve got more focus on the Recon side, you’ve got the fat grafting solution launching, how are you thinking about next year?

Andy Schmidt : Sure. So thanks for the question. Yeah, we’re not changing our guidance that we had previously, we are confident in that guidance. We’re — also in terms of our expense guidance we had $90 million — $93 million. We’re coming in at the lower end of that guidance range. Again, from continued very good cost performance to this year, we expect good continued cost performance into Q4. And certainly into 2023, we’re looking at lower annual numbers we don’t have guidance out yet. But we’re very bullish in terms of our ability to continue with the efficiencies that we read so far. In terms of market and whatnot, and what we expect to see in 2023. Obviously financially from my perspective, fat grafting is going to be a very big contributor, and Lisa’s prepared remarks, she had mentioned that we’re going to have the reveal, and essentially now a number of weeks.

So it’s right on top of a very exciting time for us. And we expect to be shipping in Q1. So that’s going to be a big plus. And then in terms of other market activities, have better experts here and on the phone to answer those questions. But from a modeling perspective, recon is going to continue to build we keep adding accounts. And that’s the count that’s like a waterfall. We keep adding adding and those accounts keep building their multiple year contracts.

Alex Novak: Okay, that’s extremely helpful. And then maybe a multi-part here, just what is your take on the FDA AdCom around tissue expanders. Just what’s the thought process coming out of that meeting for what it means for the existing tissue expander out there, but also the pipeline, AlloX2 Pro? And then second, is the clinical trial expected to read out for the fat grafting solution readouts at this a conference next month, or is that come out sometime next year?

Ron Menezes : Yeah, thanks, Alex. I’ll have Denise answer those questions. She has a regulatory things, Denise?

Denise Dajles : Thank you, Ron. And Hi, Alex. With regards to the tissue expanders after the final now it’s a period of public consultation, FDA still has to make a decision and give a ruling regards class two or class three classification we at this moment do not foresee an impact on products currently marketed. Even if a class three classification is selected, current products on the market would have the opportunity to submit a PMA which of course, we will be ready to do. And with regards to Pro, it’s still under active review with the FDA. And we continue to have active conversations with them through the review process. And again, no ruling has been made from the FDA. With regards to the fat transfer clinical study, during the BTS Conference in December, we will have some of the investigators from our study give their perspective. We expect to release first results when we launch the product early next year.

Alex Novak: That’s great. Appreciate the update. Thank you.

Operator: Thank you. Our next question comes from Kyle Rose. Please go ahead.

Caitlin Cronin: Hey, this is Caitlin on for Kyle. Just a couple questions on the fat technology, can you just elaborate more on conversations you mentioned last quarter that you had with GPOs about the product?

Ron Menezes : Yeah, we are already approaching some of the GPOs with that as a part of the bidding process and bundling process, with discussions, some of them already. It’s too early to tell about timeline of when to be added to GPOs.

Caitlin Cronin: Got it. And then just on aug, you mentioned on the Q2 call that Aug was down about 70% in the quarter. Did that weakness kind of continue into the Q3? I know you noted kind of a drop in activity in your middle of the road accounts last quarter. While you’re kind of A&B accounts were continually strong are you kind of seen this similar dynamic into Q3 and into Q4.

Lisa Rosas : So let me just give a little bit of color on the augmentation market. And then how we’re performing against that. So in terms of the augmentation market, there has been a slowdown, but we have shown that we consistently outgrow the market. And it’s really a function of both our superior product profile and our innovative programs. And so the Q3 aug revenue for future grew double digits, in fact, 16% versus last year, which is significantly better than the market, which is still below traditional levels. But no matter what the market does, we have and we continue to grow. So what we’ve seen is over the last three years about a tripling in our market share, we know that this is a durable market that ebbs and flows, but being an important part of our business. We do measure account performance and our top group of performed — a group of doctors which Ron mentioned earlier, continue to be busy and perform at a very high level.

Caitlin Cronin: Got it. And then just a quick one. Any market share data you could share in terms of Aug recon will be great.

Lisa Rosas : Yeah. So our market share is still performing very well. What we would anticipate looking at progress through Q3 and through the end of the year, is augmentation to continue growing, ending the year in the mid-teens with reconstruction in the high-teens.

Caitlin Cronin: Awesome, thanks so much.

Operator: Thank you. Our next question comes from Anthony Vendetti. Please go ahead.

Jeremy Pearlman: Hi, this is Jeremy on the line for Anthony. Thanks for taking my question. Just strictly on the just overall accounts. I know you added about 290 this quarter. What does that bring your total number of accounts in between Aug and recon?

Ron Menezes : We’re a little over 3,000 accounts, dollar account. It’s still about 60% Aug and 40% and recon.

Jeremy Pearlman: So that’s a little — you said a little over 3,000?

Ron Menezes : Yeah, that’s correct.

Jeremy Pearlman: So does that mean, I know I think that was the same approximately the same amount you had at the end of last quarter. So just took should we assume that what site do you have any statistics on the attrition rate? And those accounts that are leaving maybe some a little more information why do you think they’re leaving?

Ron Menezes : We know some accounts leave, some accounts don’t order for a quarter. So we’re looking at what has been ordered the left this past quarter, some accounts because of the opposite impact of the market or have less for the great things by adding new accounts, we really much minimize that impact if someone has been a slow quarter and account is a slow quarter. The good thing is we don’t have many accounts leaving us for a competitor. They may have less orders because of the market. And that’s why we continue to add new accounts and then continue to expand share it with existing accounts.

Jeremy Pearlman: Okay, understood. So you’re saying they’re not leaving to go to competitors leaving because macroeconomic factors. Understood, that’s, that’s helpful, also. And then just to jump to the I know, you mentioned about the fat study. There’s going to be 200 patients do you have how many of those have been enrolled so far? And when can we expect the enrollment to be finished?

Ron Menezes : Denise, do you want to jump in on this one?

Denise Dajles : The rest of the enrollment to the fat transfer study. So we are on track to all of our projections, we are making significant progress, we have over 10 sites. And we will have vast six-month data to share when we launch. So right now the study is on track depends by site, but enrollment is as expected.

Jeremy Pearlman: So what was that I missed that?

Denise Dajles : So that enrollment is as we expected since the beginning of the year.

Jeremy Pearlman: Okay. And then just last question, maybe you could also then I know, you have a soft launch by the end of this year for the fat system full commercial launch in ’23 years and maybe any more information, you can share what that looks like to you?

Lisa Rosas : Yeah, I’ll take that one. So our fat transfer product is very unique. As you know, the team had mentioned, it’s novel. It gives us the opportunity to leverage deficiencies in the market and differentiate our approach from typical fat grafting. So one of the things that Denise is working on and that we’ve identified is the opportunity to go after long-term retention consistent results. And what we’re planning is a soft launch the first weekend in December in New York City with a group of surgeons and then a full commercial launch in January to our sales force to be sold in early Q1 directly to our customers. So we’re planning a disciplined approach to launch, building momentum and adoption And with this approach among both our core customer base and with new customers. So we’re very excited about it, the early feedback from the clinical users has been very positive. So we’re getting all of the pieces together to launch in just a few weeks.

Jeremy Pearlman: Okay, sounds great. So just a last quick —

Denise Dajles : I would just going to comment that the expectation amongst the plastic surgeons based on what they’ve heard from their peers who are part of the study, it’s really, really high.

Jeremy Pearlman: It’s great. Just and as a quick follow up, is there any plans to maybe bundles the breast implants with the fat grafting technology for customers or that haven’t been really thought about it yet?

Denise Dajles : Yes, absolutely. And there are a number of benefits with this technology underneath the Sientra umbrella and that is one of them, that it gives us the opportunity to expand the total product portfolio. So we do have plans in place to do that right out of the gate. Obviously, there’s a high level of strategic fit within our organization, subject matter expertise in the breast area, the opportunity to continue growing within our existing customer base and new customers. So, kind of the adjacencies are numerous. But to answer your question directly, yes, we do have plans to approach it from a total portfolio standpoint.

Jeremy Pearlman: Okay, thank you so much. I’ll hop back in the queue.

Operator: Thank you. Our next question comes from Jonathan Block. Please go ahead.

Jonathan Block : Thanks, guys. Good afternoon. Maybe just the first question. I’ll try to go down the fat transfer road. Certainly very excited about their product. Let me be more specific, is there a year one revenue contribution that we should be thinking about? And what about the gross margin profile of that product as it ran throughout 2023?

Ron Menezes : Sure. As we have commented, before, we expect to start the year with fat grafting fat transfer representing at least 5% of revenue and exiting the year at 10% revenue. The way I like to look at it is it’s we expected to have the type of attach rate that tissue expander dose. Our tissue expanders up to 25% of revenue, the fat transfer, looking at the same customer base. We’ve already got the embedded customers, it can perform the same way it’s going to be how fast we ramp. Other great news, we are having a reveal here and the number of weeks, we’re already manufacturing. So we’re good to go on that we don’t have any material questions or issues. And since we’re manufacturing ourselves, we are in complete control of the cost of goods sold, it’s going to be north of 70% margin product. And so it’s going to be very additive in terms of both revenue and gross margins next year.

Jonathan Block : Great, very helpful. Thanks. And then maybe you mentioned the gross margins. Let me follow up on that. And yeah, I didn’t hear anything one time. Maybe I missed it. But I think the GM for 56 and change on the quarter and sort of a step back from that more normalized 60 and change in 1H, and it seems like gross margins are really going to be a key determinant and eventually turning the corner on cash flow right. You can only get so thin on our back. So can you help us with gross margins, why to step back and three to ’22. And maybe more importantly, how that trajectory looks like going forward. Thanks for your time, guys.

Ron Menezes : Sure, so again, we’d like to use right now the way we’re wired about 60% a good benchmark. And it’s going to change quarter-over-quarter and our current quarter, we had actually some very good performance out of international, international, it’s more of a distributor model, which is fantastic on cash and contribution margin. But it’s a little bit different gross margin profile. So that’s one factor that came into play. Other factor that came into play is we have some fantastic loyalty programs that are very targeted, very pulse programs that come into play in Q3, possibly part of Q4. And if you’re tight, what that does is it allows us to actually gain market share that we’re pretty darn proud of. But also what it does is it does not touch our basic pricing. We feel our base pricing is protected. We don’t see price compression, but we do choose to use, again very targeted marketing programs that are loyalty based, depending on which period we’re in.

Operator: Thank you. And we have a question fromMargaret Kaczor. Please go ahead.

Maggie Boeye: Hey, everyone. This is Maggie Boeye on for Margaret today. Thanks for taking our questions. I wanted to first start maybe on reconstruction for the quarter. You guys talked about the growth that you’re seeing in your top tier accounts. So maybe if you could just parse out the overall growth you’re seeing just as you continue to gain share, and that business continues to see acceleration. Thanks.

Lisa Rosas : Hi, It’s Lisa. So the recon market is up double digits year-over-year. It’s a very stable market, where we’ve been able to make inroads due to our strong product advantages, that are really designed to help the woman’s journey and make it easier. So for us, we did also grow double digits, we continue to see that trend moving forward, as well as market share gains. We’ve seen over the past two years about a doubling in our market share, we anticipate that moving forward. And as I mentioned earlier, ending in the high-teens, the end of ’22, and then moving into the 20s in 2023.

Maggie Boeye: Got it thanks so much. And then maybe if I could just ask one for you Andy on operating expense, expectations. Just as we think about as you guys are gearing up for limited launch in Q4 of the fat grafting technology, and then as we enter it to 2023 and what we should kind of expect there? Thank you.

Andy Schmidt : Sure. So again, it’s been a great trend this year in terms of getting our op expense to where we want it, it’s based on efficiencies, not cutting into muscle by any means. We are 21.6-21.7 that we saw this quarter is probably the low part will be a little higher than that and Q4 just because of the launch, in terms of the fat grafting launch. And then as we go into ’23, however, we have a lot of different efficiencies that are going to come into play to where we expect that to continue to drop. When we do give out guidance, we will get our cash based op expense expectations here in the future. It’s going to be a number that’s less than what we see today. We’re trending at the low end of our guidance right now.

But our run-rate actually is at $88 million or lower per year. A little bit of a, you know, procedure, we’re going to come in lower than that next year. So we’re working on what that number is going to be. But we really do expect to see some great leverage in 2023 with rising revenues, lower cost, and very good cash performance.

Maggie Boeye: Great. Thank you all.

Operator: Thank you. And at this moment, we have no other questions. I would like to turn the call back to our presenters for any final remarks.

Ron Menezes : No, thank you, operator. Thanks, everyone for joining us the call. Look forward to a great finish at 2022 and a great start with lunch on new technology and next year. Thanks everyone. Have a good day.

Operator: Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you.