Sientra Inc (SIEN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sientra third quarter 2015 earnings conference call.

(Operator instructions)

As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Nick Laudico, you may begin.

Thanks, operator.

In our remarks today we will include statements that are considered forward-looking statements within the meaning of the United States Securities Laws. In addition, Management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on Management's current assumptions and expectations of future events and trends which may affect the Company's business, strategy, operations, or financial performance.

A detailed discussion of the risks and uncertainties that the Company faces is contained in its quarterly report on Form 10-Q. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The Company undertakes no obligation to update or review any estimate, projection or forward-looking statement.

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

Thanks, Nick.

Good afternoon, everyone, and thank you for participating in today's call. Joining me on the call is Matt Pigeon, our Chief Financial Officer and Treasurer and Charlie Huiner, our Chief Strategy and Corporate Development Officer. I will provide a general business update including a brief recap of our October 28th conference call and then turn the call over to Matt who will provide specific details on our financial performance for the third quarter.

Before we jump in to the update on the quarter, I want to briefly mention our leadership transition. As I'm sure most of you know, Sientra announced on November 12th that Hani Zeini stepped down as president and CEO and I was appointed chairman and CEO.

Hani will continue to serve on the Board and as a valued consultant to the company and we all look forward to benefiting from his continued guidance and support moving forward and we're confident that this will be a seamless transition.

On a personal note, I'm very excited to be speaking to all of you today. I've been a member of the Board of Directors for over a year and believe deeply in the quality and the foundation that has been built as well as our ability to continue delivering innovation to our community of Board-certified plastic surgeons. I'm honored to be taking on the role of Chairman and CEO at this important point and to be working with a talented team here in Sientra as we continue to address our recent challenges and position Sientra for future success.

I greatly look forward to continuing our dialogue with investors and analysts and getting to know as many of you as possible in the coming weeks and months.

As we outlined on our business update call, Sientra has been actively working through a series of very challenging events related to our contract manufacturer Silimed that have caused us to voluntarily suspend sales of our products. In response to these events, the company is working closely with the FDA with the goal of getting existing inventory back into the market as quickly as possible.

Additionally, we continue to evaluate our longer term manufacturing needs in all options to meet our manufacturing and supply requirements. We have maintained the strong sense of focus and urgency as we diligently work through these initiatives.

Additionally, we have continued our discussions with Silimed regarding the process of modifying production in what we refer to as building F1, the smaller Silimed manufacturing building that was not impacted by the recent fire.

We are not yet in a position to provide detail or timing of alternative manufacturing or supply scenarios. But to reiterate, executing on these initiatives remains the laser focus priority of this company. We continue to hear from surgeons who voice a strong interest in having access again to the Sientra's differentiated products as soon as possible.

I want to reiterate that all regulatory bodies that have been involved in the Silimed review including the FDA have consistently stated that there are no indications of risk to patient safety as it relates to Silimed manufacturing products. I also want to specifically mention the organizational commitment and strong sense of community and the culture that we are maintaining at Sientra despite these recent circumstances.

Specifically, as it relates to our highly experienced and dedicated plastic surgery consultants or PSCs, as mentioned on our last call, we've instituted a retention program to ensure that we maintain the commercial foundation we have built to serve our partnership of plastic surgeons.

As a reminder, we have maintained a sales force of 45 PSCs as of the end of the quarter. We are confident that Sientra still has a tremendous opportunity in the foundation that we've built serving board-certified plastic surgeons in the United States. Our unique product portfolio has established a compelling value proposition with plastic surgeons and their patients leading to a strong adaption in our first three years of commercialization.

Our immediate priorities remain to resolve the outstanding regulatory questions, resume shipment of our existing inventory and ensure stable manufacturing supply going forward.

Utilizing my collective industry experience and tenure on the Sientra Board, I look forward to working with our highly motivated and talented team to meet these critical objectives as soon as possible.

Now, I'd like to turn the call over to Matt who will discuss our third quarter financial results. Matt?

Great. Thanks, Jeff. I will now discuss our third quarter and year-to-date 2015 results. Our third quarter and nine months 2015 financials are available in greater detail in our earnings press release issued earlier this afternoon, an additional detail will be available in our 10-Q being filed today.

Total sales for the quarter ended September 30th 2015 were $9.9 million, a decrease of 6.9% compared to total sales of $10.7 million for the same period in 2014. Total sales for the nine month ended September 30th 2015 were $36.6 million and the increase of 12.1% compared to total sales of $32.6 million for the same period in 2014.

Third quarter and nine months ended September 2015 included an additional $3 million reserve for estimated product returns as a result of the company's voluntary action to temporarily put on hold the sale and implanting of all Silimed manufactured devices.

Gross profit for the third quarter of 2015 was $7 million or 70.5% of sales compared to gross profit of $7.8 million or 73.5% of sales for the same period in 2014. Gross profit for the nine months ended September 2015 was $26.5 million or 72.4% of sales compared to gross profit of $24.3 million or 74.6% of sales for the same period in 2014.

The decrease in gross margins for both periods was primarily due to an incremental $300,000 reserve for inventory obsolescence recorded for product that is estimated to expire prior to being sold and also greater fix overhead as a percentage of sales that were reduced by the additional $3 million reserve per estimated product returns.

Total expenses for the third quarter of 2015 were $12.6 million, an increase of $4 million or 46.3% compared to operating expenses of $8.6 million for the same period in 2014. And for the nine-month ended September 30th 2015, operating and extensive total of $36.8 million, and increase of $9.1 million or 33% compared to operating expenses of $27.7 million for the same period in 2014.

The increase is primarily due to an increase in sales representatives and general employee headcount, marketing programs, product development, and public company costs.

Net loss for the third quarter of 2015 was $6.6 million compared to $1.5 million for the same period in 2014 and for the nine-month ended September 30th 2015, net loss was $13 million compared to $2.6 million for the same period in 2014. The net loss for the period was impacted by the additional reserve for product return and also interest expense that was accelerated with the payoff of our term loans.

Net cash and cash equivalent as of September 30th 2015 were $148.9 million. This includes net proceeds from our public offering of common stock in October of approximately $61.4 million after deducting underwriting discounts and offering expenses.

Subsequently, on October 2015, after being notified by officer of finance that as a result of recent events involving Silimed, certain events of default had occurred under the term loan agreements. Sientra repaid all principal interests, other amounts and obligations owed to Oxford for a total of $24.5 million following which the company has no outstanding debt obligations.

Given the previously disclosed events related to Silimed manufactured products and the company's resulting actions to voluntarily place on hold the sale and implanting of Silimed manufactured products, the company is withdrawing its 2015 full year financial guidance at this time.

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

Thanks, Matt.

Before we open the call for questions, I want to repeat my confidence in and recognize the continued terrific efforts and dedication by everyone on the Sientra team. While there is still a lot of work to be done to address the challenges facing the company, Sientra remains a great business.

We have a strong brand, a strong value proposition of, base of loyal surgeons, a unique and differentiated product line and, of course, great people. I know we have a bright future.

As always, we will continue to inform our stakeholders of updates to our situation as they arise. With that, I will now turn the call back over to the operator to begin the Q&A portion of this call.

Thank you. (Operator instructions).

Your first question is from Thomas Gunderson of Piper Jaffray. Your line is open.

Hi. Good afternoon. So, on the 12 months or so, one year's inventory that you have in house that you're doing in the review and testing on, is there a shelf life, a natural or FDA shelf life time period on those breast implants?

Yes, Tom. This is Matt Pigeon. There is a shelf life on those implants and it's five years.

And what would you estimate as the average age of that inventory right now?

Yes, Tom. All the inventory is fairly new. I don't have the exact age to that up for this call but we're confident --

But less than a year?

Yes. There's a significant amount of time left on those products.

OK. And then regarding the Brazilian manufacturing, the fire in F1, you said in your prepared remarks that you don't have a timeline or decision yet. But I'm just wondering -- I'll ask Mr. Nugent this -- at what time period would you, personally, be disappointed that there wasn't a decision made? Would it be three months from now? Six months from now? Would you say that's a disappointment that the decision have been made or would it be longer or shorter?

Tom, this is trying to take a special camera to take a picture of future events. And I -- I can't answer that directly other than I know that everyone involved in this process including the top outside advisers in the world are working to get this resolved as quickly as possible. We're in direct contact with Silimed and our three basic priorities, I think as I've said, is to solve the regulatory issues, be able to re-commercialize the significant inventory we have on board, and to be able to secure a longer term supply chain as quickly as we can.

So, I've only been in this role for less than a week. So, while I'm very aggressive and optimistic, I can't tell you at what point I would disappointed.

OK. And then given you four days of experience, do you have any thoughts just from your general medical or med tech background as to what you do with cash flow going forward?

Obviously, you have no revenues, you have your sales force R&D, etc. How should we view how you handle your cash in this -- in this zone where there's no revenues?

Well, I'll start with my answer directly and I'd like to ask Matt to weigh in on it as well. But as we all know that there is a -- there's a premium on maintaining a significant cash reserve. So, and I'm not ducking the question but that's part of the analysis that we're going through tight now in determining the probability of being able to begin shipment in the timeframe that we expect. But in the meantime, we are very carefully managing our cash such that we've got the maximum one way possible.

Matt, do you want to add to that?

Yes. Now, that's right. Jeff, thanks. And I think the only thing to add to that is at this point, there's a lot of moving pieces and we're not giving forward-looking guidance but I will reiterate we have a strong balance sheet with approximately $149 million of cash on the balance sheet as of September 30th.

In addition, subsequently, we paid off our debt of almost $25 million. And so, the company has no debt obligations as well. So, we think we're in a strong position from a balance sheet.

OK. That's it for me, guys. Thanks.

Thanks, Tom.

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

Hi. Good afternoon, everyone.

So, first question for me, Jeff, given your background what experience can you draw in a unique situation like this? Can you give us any examples of, you know, obviously, not this exact situation but in your career being able to navigate or direct any discussions as well as kind of supply chain issues and how do you balance those discussions with the FDA with the need for a tighter supply chain and quality?

Well, the most direct answer is that I'm extremely fortunate to have a firm foundation that I acquired at Johnson & Johnson. And I had a bit of an unusual career there where I spent significant -- I was in significant roles in R&D, manufacturing, CFO of one of the companies, and I could point to several but one I'd point out is when I acquired Neutrogena and that was a situation that did not allow us any due diligence whatsoever.

And I had to immediately assess the cash needs, the allocation of net cash to the most positive returns and untangle a series of very complex regulatory issues that the company previously wasn't adhering to.

So, I think, it's just that I could give you a number of different examples but I think this case, in particular, is going to require some very quick decisions on where the priorities in terms of allocating our resources are. And again, I'll stress the very first priority, where can we accelerate and invest in those activities that will accelerate resuming distribution of our product.

I could give you many more but I don't want to take too much time going through time.

Yes. No, that's helpful. And to that point, given the value of the PMA as well as kind of your position in the marketplace, I don't know if you guys has had any external indications of interest or, and not necessarily acquisitions but in terms of partnerships that you could do outside of Silimed that you're maybe considering entertaining or is it simply just too early?

Well, it's -- this is something that I've put a very high premium on and that is not losing our focus. And any considerations in this area would challenge our focus against the top three priorities that we've been very careful in defining.

OK. And then if I could sneak one more in obviously -- sorry, go ahead.

I said sure. Feel free.

All right. So, obviously, the FDA is very difficult to predict. But if you has plan on presenting data to the agency by your end, are they asking for specific set of data, for safety at this point, or is it just precautionary on your part because of having voluntarily pulled back off the market and then do you imagine that you're going to write your findings in a white paper and kind of just plans there going forward? Thank you.

Thank you. And you know, I think it is very clear that -- and I think you touched on key points in the question itself and that is this has been a voluntary cessation of commercial shipment of our products. And we're working very collaboratively with the FDA including a couple of extremely well regarded FDA consultants, one of whom I've worked with before for 25 years and he's one of the most respected people in the industry.

So, right now, this is falls into the collaborative process and doesn't fall in to one of the specific approval processes such as painting an NDA, PMA, 510(K), et cetera. So, I wish I could be more specific about it but this is a process of convincing the FDA that our products are safe and that there's no reason to continue withholding them from the market.

Thank you.

Sure.

Thank you. And the next question is from Jon Block of Stifel. Your line is open.

Great. Thanks and good afternoon. Obviously, [I realize] your regulatory body is the FDA but you did mention a pretty strong and ongoing dialogue with Silimed, is there any color that you can give on MHRA or in MHRA or ANVISA and when we may hear incremental information from those particular regulatory bodies?

I can't give you specifics because at this point, Silimed is the focal point for all communications with international regulatory bodies that we are in direct contact with them regularly. We have great respect for their abilities and our focus literally is with the FDA specific to our inventory that we have already in possession.

OK, got it. And just to shift gears for a second, on the PSC you mentioned the retention program and is there any color that you can give around that? In other words, the time period, the duration for how long that retention program lasts and, you know, we get into March or April or May of next year, we still don't have any data or information, excuse me, from the FDA on your ability or your decision to start selling again. Do you still have those PSCs intact, call it middle of 2016?

Yes, Jon. It's Matt Pigeon here. We won't go into specifics but the intent of the -- of the retention program is to a couple fold; to provide some short or some goals for the sales for the PSCs and offer a comp to be similar if we were commercialized but it's really just to retain what we believe is a world, you know, a group of world-class individuals that we've brought on.

So, I can't go into specifics on any of the value or the dollars or the timeframe but that's really the intent.

And I can add to that because as you know I've experienced these kind of situations before also. I am genuinely impressed with the loyalty that has been created, you know, within the organization. I think the culture that Annie and the senior team have created has stayed intact across, you know, as Matt described a very high quality sales team that are rearing to go and at the meantime, they're maintaining relationships with our current customers. So, it's not like they're off on holiday. They're directly involved every day.

Got it. And last one for me, just at a high level, I know a lot of these stuff is obviously very difficult to predict, but maybe just the roadmap from here and when the next, you know, public update may occur, is it fair to think that would sort of, you know, 4Q 2015 results and I don't know if February or March of next year or would it be the new [slope] from the FDA after you submit some of the testing, just your plans on how, you know, your thoughts on how you would want to update the community going forward over the next three to six months? Thank you.

Yes, thank you for the question. I think the best way to answer that is I have a reputation of being fairly open and being more forthcoming but at the same time, we're -- in a relatively early stage of determining what those major milestones are an that there are material events that would be required to file an 8-K and the corresponding press release and I want to frankly be as transparent as we can but there are a number of potentially material events that could happen before the end of the year and we're committed to share those with you as they happen.

Understood. Thanks for your time.

Sure. Thank you.

Thank you. This concludes today's Q&A session. I'll turn the call back over to Jeffrey Nugent for closing comments.

Thanks everybody for joining the call. We look forward to continued communications to the last question that was asked with all of you as we make continued progress on the initiatives that we've outlined for you today. We remain very focused on reestablishing this very high quality franchise. So, thank you again very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.