Sientra Inc (SIEN) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Sientra Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to Zack Kubow at The Ruth Group.

Thanks, operator. In our remarks today, 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 that the company filed on March 14, 2017, and the company will provide updated risk factor disclosures with the company's quarterly report on Form 10-Q to be filed with the SEC this afternoon.

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 Jeff Nugent, Chairman and CEO of Sientra.

Thanks, Zack, and good afternoon, everyone. Thank you for participating in today's call. Joining me are Patrick Williams, our Chief Financial Officer, Senior Vice President and Treasurer; and Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy.

Throughout 2017, we have outlined our strategic vision for what I refer to as the new Sientra: a diversified global aesthetics company with a significantly expanded total addressable market. We have continued to make good progress executing our strategic plan for our existing business while once again, significantly expanding our market opportunity with the acquisition of Miramar Labs, which closed late in July.

As a result, the new Sientra is now well-positioned for growth in several attractive adjacent markets, with innovative product offerings in the estimated $360 million North American breast augmentation market and the $300 million North American breast reconstruction market in addition to the $30 million scar management treatment markets.

Finally, we believe the large and expanding market addressed by Miramar, the only FDA-cleared product to reduce sweat, odor and permanently reduce hair of all color with demonstrated high marks for patient satisfaction, is highly complementary to our best-in-class franchise. This presents well over a 5x increase in our total addressable market.

We expect that the acquisition of Miramar will be immediately accretive to revenue in the second half of 2017 and meaningfully accretive in 2018. We are particularly excited that Miramar leverages a familiar, proven aesthetic industry model, with system placements plus consumables driving high-margin recurring revenue. We are working closely with our newest board member, Keith Sullivan, who we brought on as a strategic adviser as part of our acquisition planning to consult on Miramar's commercial execution and potential.

Keith served most recently as the Chief Commercial Officer at ZELTIQ, with their successful focus on CoolSculpting prior to the recent acquisition by Allergan, where he had responsibility for total global sales, marketing and training. The franchise grew at over 50% compound annual growth during this period. We look forward to leveraging Keith's extensive and proven aesthetic experience across our entire product portfolio and welcome him to the board.

We have aggressively begun to integrate Miramar as we take the necessary steps to bring the proven yet underpenetrated miraDry technology to higher levels of commercial and operational execution. To this end, we have been most focused in the near term on internal reviews facilitated with Keith and key members of the global, commercial and clinical organizations at Miramar to identify some key areas for improvement and investment.

In terms of sales synergies, we continue to receive positive feedback on the acquisition from many of our existing plastic surgery customers, adding to the excitement about the technology and potential cross-selling opportunities.

On a personal note, we recently visited the miraDry facility as part of our closing celebrations, and my experience in interacting with the Miramar team gives me even greater conviction of the opportunity ahead for this promising franchise.

As we have also stated previously, our focus in the near term with miraDry is to: number 1, evaluate and optimize the treatment protocol; number 2, deploy proven marketing tactics, primarily at the practice level; and 3, to invest, to expand the sales force and demand generation tools.

With miraDry, we are targeting the 15 million people in the U.S. that clinical suffer from sweating and resulting odor. As a reminder, 5 million of those patients have severe underarm-specific sweating that greatly impacts daily activities and self-confidence.

To target these potential users, we plan to initially target Sientra customers who already own aesthetic devices such as CoolSculpting sculpture systems as they appreciate the economic benefits of a strong capital plus consumable business model and are accustomed to implementing the required marketing programs to build local market awareness and drive utilization.

As we look forward to our longer-term strategic vision over time, we still see tremendous opportunity to further expand our total addressable market by entering the $300 million regenerative product market, including breast reconstruction, as well as the $500 million international market for breast implants as well as reconstruction.

We will continue to evaluate and take advantage of these expansionary opportunities in the medium to longer term, particularly building on the international base that already exists with Miramar. While expansion into adjacent -- attractive adjacencies has been a key piece of our strategic intent, we remain steadfastly committed to our core Sientra breast aesthetics business and our planned relaunch of our Breast Products as we move into 2018.

We are confident in our ability to establish a high-quality, U.S.-based manufacturing supply capability with our partner Vesta, a Berkshire Hathaway subsidiary. In the near term, we remain on track for FDA approval of this new manufacturing site by 2017 fourth quarter. Supporting this objective, our experienced internal team continues to work closely with out side consultants, many of whom are former senior FDA employees conducting full mock audits in preparation for the official FDA inspection. Results of these mock audits are very encouraging to date.

As noted on previous calls and as a sign of our confidence, we intend to start manufacturing our most popular SKUs ahead of official approval so that we are better positioned to quickly ramp our commercial relaunch efforts to meet our customers' demand. We expect to reach full-scale inventory levels by the second half of 2018, following a standard yet aggressive scale-up process timeline.

In the meantime, we continue to execute on our precision controlled selling strategy, which we discussed before, with a tight management of existing inventory levels to help mitigate the potential impact of selling out some of our most popular SKUs in the nearer term. Our PSCs have been working closely with our local, loyal, board-certified plastic surgeon customers who have remained active with us these past 18 months.

Also, as I have said in the past, our management team, sales force and entire Sientra organization are laser focused on the transition from this precision-controlled approach to fully meet or exceed the expectations of our board-certified plastic surgeon customers.

On the bioCorneum front, our sales force is working to enhance same position practice sales, an effort we expect to be bolstered by a recent rebranding of the product. We are also beginning to see positive momentum in selling our world-class tissue expander portfolio led by AlloX2.

The breast reconstruction segment is an important growth opportunity, especially upon resupply, where we can more aggressively pull through our breast implants. We are particularly excited to see further growth in the second half of 2017 as our tissue expander manufacturing capacity continues to ramp up, allowing us to meet increased demand.

I'd like to share a legal update regarding the litigation with our former contract manufacturer, Silimed. I'm pleased to report that we have reached a comprehensive settlement with Silimed, which removes a significant and totally unwarranted distraction for our business as we integrate Miramar and prepare for our commercial relaunch. It also removes uncertainty associated with the jury court case and the ongoing associated legal expense.

As disclosed in our recent 8-K filing with the SEC, the settlement, results, all claims, everything that the parties filed against each other and Sientra will pay Silimed a lump sum payment of $9 million in early September and another $1 million by July 1, 2018. Additionally, Sientra agreed to make royalty payments of $12.50 per Sientra's breast implant products sold outside of the United States and Canada, up to a cumulative maximum of $5 million.

To be clear, these royalties would only be payable pending Sientra's decision in the future to sell breast implants of certain specifications outside of the U.S. markets. In all, we're pleased to put these matters behind us, and on a net basis, we believe it will have a minimal impact to our cash position due to the offsetting legal expense savings through the end of 2018 and into 2019 related to potential court trials.

I'll now turn the call over to Patrick Williams for a detailed review of our second quarter 2017 results. Patrick?

Thanks, Jeff. I will now provide commentary on our second quarter 2017 results, and greater detail can be found in our earnings release issued earlier today; our 10-Q, which will be filed later today; and our supplemental financial information records, which can be found on our investor relations website.

As a reminder, we will continue referencing an adjusted EBITDA margin, which we define as earnings before interest, tax, depreciation, amortization and stock-based compensation. Specifically, we are removing noncash items from this non-GAAP measure. Please refer to our supplemental financial information in the earnings release for a full reconciliation of adjusted EBITDA to its GAAP counterpart. The following results, with the exception of adjusted EBITDA, are all reported on a U.S. GAAP basis.

Total net sales for the second quarter '17 were $8.2 million compared to net sales of $6.2 million for the same period in 2016. The current quarter increase was primarily driven by Breast Products sales to the additional tissue expander portfolio acquired from specialty surgical products last year.

In terms of product mix, Breast Products accounted for 83% of our total net sales in Q2 '17; and bioCorneum, our scar management product, accounted for 50% of total net sales in Q2 '17.

As a reminder, I would like to reiterate that while we do not expect to sell entirely out of breast implants ahead of resupply, we do expect sales within the segment to begin to slow modestly relative to 2016 in the coming quarters. The slowdown in the segment will be related to the full consumption of our most popular SKUs, and we will, as we have stated in the past, consequently prioritize manufacturing of these SKUs ahead of our full commercial relaunch in 2018.

As Jeff mentioned earlier, our intention to begin manufacturing best-to-supply products ahead of full PMA approval, with new implants under quarantine until final approval is received, which we still expect to be by the end of 2017.

In all, we expect to have the Vesta facility fully scaled up in the second half of '18 as they work to the typical new manufacturing ramp up. We expect the sale of products from our breast tissue expander portfolio to continue to grow at a steady rate as we continue to ramp up manufacturing capacity and as our sales team gains tenure and penetrates deeper within the market. We expect sale of our bioCorneum product to grow throughout 2017 as well as we see the rebranding and bolstering marketing efforts translate to segment growth.

Gross profit for the second quarter of '17 was $5.5 million or 68% of sales compared to gross profit of $4.5 million or 72% of sales for the same period in '16. The decrease in gross margin was primarily due to the increase in a noncash inventory purchase accounting adjustment recorded from our acquisition of specialty surgical products. Excluding this adjustment, gross margins in the first quarter of 2017 -- I'm sorry, gross margins in the second quarter of 2017 would have been approximately 71%. As we continue to sell through our existing inventory in 2017, we expect the gross margin to remain around 70%.

Operating expenses for the second quarter of '17 were $25.8 million, an increase of $11.1 million compared to operating expenses of $14.7 million for the same period in 2016. The increase in operating expenses was primarily related to the $10 million legal settlement with Silimed, as Jeff mentioned earlier.

Net loss for the second quarter of '17 was $20.4 million compared to $10.2 million for the same period in 2016. Adjusted EBITDA for Q2 '17 was a loss of $7.6 million versus a loss of $9 million in Q2 '16. The year-over-year improvement can be mainly attributed to the lifting of the voluntary hold on the sale and implanting of all Sientra breast implant devices manufactured by our former contract manufacturer between October 2015 and March 2016.

Net cash and cash equivalents as of June 30, 2017, were $55.5 million compared to $58.8 million at the end of first quarter 2017. This cash burn reflects the drawdown of approximately $5 million of debt from our prior $20 million credit facility we announced in March of 2017. We continue to remain focused on maintaining a level of cash sufficient to running our business following the closing of the Miramar acquisition and are confident in our ability to do so in the near term following our agreement with MidCap Financial Services and Silicon Valley Bank for a $50 million credit facility comprised of $40 million in term debt accessible in 3 tranches and another $10 million revolver. This new credit facility replaces our aforementioned $20 million credit facility, and allows the company to move opportunistically to acquire Miramar Labs.

Looking forward, we will continue to be good stewards of our cash. And opportunistically, with market conditions, we'll look to potentially strengthen our balance sheet to ensure we maintain adequate capitalization.

With respect to the Miramar acquisition, as previously stated, we estimate faster revenue growth of the combined company and an accelerated time line to positive cash flow than we would have had as a stand-alone business. We are required to file an 8-K in October of pro forma financials, showing us as combined companies back to 2015. And over time, we will be adding Miramar-specific additional information to our supplemental financial information for ease of reference.

As we have stated in the past, we will not be providing full revenue and profitability financial guidance at this time as we remain in market precision controlled selling mode and still awaiting FDA approval of the Vesta manufacturing facility. We still do expect the acquisition of Miramar to add approximately $8 million to $10 million of revenue in Q3 and Q4 and primarily backloaded in Q4.

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

Thanks, Patrick. I'm very pleased to summarize that Sientra remains on track with both near and long-term strategic objectives to expand our leadership position in the global aesthetics markets, and most importantly is well positioned to execute on our most critical corporate objective, and that is to achieve comprehensive, high-quality and reliable manufacturing with the FDA's approval of our new manufacturing facility by the end of 2017.

Each quarter, we continue to extend our progress in diversifying our revenue mix, which is core to our new Sientra strategy. With the addition of Miramar, we made a tremendous addition to our portfolio. Similar to last quarter, we remain confident in our execution of these initiatives because this really does boil down to execution at this point as we look forward to getting back to and beyond our previous market share position with the global aesthetics space.

Our confidence is still based on 3 important factors: 1, we remain on track with every one of our key objectives that we established at the beginning of 2017; 2, the Sientra team has passionately proven its ability to perform at an exceptionally high level during adverse conditions while continuing to scale up as we build its larger organization to fuel our growth; 3, in our relationships with our plastic surgeon customers, we remain as strong as ever, and we will continue to focus on our unique, exclusive relationships with board-certified plastic surgeons.

In all, I'm extremely proud of our team and excited to continue to build on our momentum across new segments as we move into 2018 and relaunch our entire breast implant line as we continue to leverage our exceptional products, people and relationships as the new Sientra.

I'd also like to add that we look forward to seeing many of you at the Canaccord Growth Conference in Boston tomorrow and the Lake Street Conference in New York in September to discuss some of these exciting developments.

With that, I'd now like to turn the call over for Q&A.

(Operator Instructions) Our first question comes from the line of Chris Cooley of Stephens.

Two -- just 2 quick ones from me and then I'll get back in queue. First, as we think about Miramar, could you expand a little bit upon how long you think it might take to actually optimize those protocols so that you can be a little bit more aggressive in terms of marketing that offering and in conjunction with that, the magnitude of the sales force expansion, just thinking about that from an expense standpoint. And I've got a follow-up pertaining to the breast business.

All right. Patrick, do you want to take that?

Yes, sure. I think on the protocol, as Jeff outlined, it's obviously one of the things as we've talked about we want to look at. I can tell you, we just had some commercial off sites, where Keith Sullivan, brought him on board for this very reason. I think people, as you get to work with Keith, you'll understand that he is highly focused on how do we make a procedure, a much better experience, not just during the procedure, but the post procedure as well. How do we make that experience better for the physicians as well as they deliver anything that's out there. I saw him do this at ZELTIQ with CoolSculpting, and we're starting to see that happen now and we've got follow-up meetings to continue. So we're moving pretty quickly. And we do see this as an opportunity for us to enhance that as quickly as we can. So we'll keep everyone posted on that. But I will tell you, things are moving quickly on that front. With relation to the sales force, we've got about 7 or so capital reps today in North America. We've got about 8 or 9 consumable reps in North America. We are a direct sales force. We will be expanding both of those. Not quite ready to tell you what those numbers will end up being. I think people can go back. And on the consumable side, we ran anywhere between 35-ish accounts per consumable rep. So as you extrapolate out your models and you think about that, we'll be looking to do the similar kind of numbers at miraDry. And then on the capital side, certainly, we need to do more than 7. There's many more territories in the U.S. and a lot of opportunity out there. For 4 years at ZELTIQ, Keith and I kept that number steady at about 32 reps every single year, and we never changed that capital number. There was a real reason for that. What we wanted to do is make sure that when we brought on an account, that we can onboard that account well, whether that's in training, whether that's in through the [PDM] being able to get in there and talk to the staff, et cetera. We wanted to make sure that we just didn't inundate ourselves internally with a whole bunch of capital systems coming in. So I suppose that's a long way of saying the number is somewhere between 7 and 32 on the capital reps side, but we will be looking to add those hires as quickly as possible.

Yes. One other point, Chris, that we haven't spent much time, describing the synergies between the existing Sientra sales force and we spent a lot of time understanding it. And I'm convinced that there will be a substantial cross-reference and referral of high potential candidates, particularly on the Sientra to miraDry side, though we still have a lot of work to do with that because it could very easily go to the other direction as well.

Appreciate that color. And just lastly for me, on the breast side, and maybe this is a bit premature, but when we think about just the complexities of onboarding Miramar and integrating those offices with now the Sientra product as well, does that change at all your allocations here to the back half of the year as you're a little bit supply constrained? And then also, could you maybe give us any color as to the split? When you look at the --of the business you're doing in the quarter between reconstruction and augmentation?

Well, I think that gets back to Patrick's point, that we're really not in a position to provide any guidance. And frankly, the Miramar business is undergoing a significant review and their meetings next week that will continue to get us to answers to that. But while there's so much uncertainty, we believe that we have a solid net of opportunities that, like I said, we've said this time and time again, it's still too soon to give you any guidance beyond what we have.

Yes. I don't think we anticipate anything right now, changing from how we're going to go back to resupply and relaunch from a SKUs standpoint or inventory standpoint related to bringing on Miramar. On the breast products side, as we talked about, as I've -- we've been very clear, we got our implants which we know. We're starting to -- especially as we go into the second half of '18, we'll remain steady and even see maybe a little bit down on revenue for that. That is not a demand issue at all, let's be clear that is truly a supply. As I think as we've said probably 3 or 4 times in the prepared comments. We are seeing, however, on our expander side, the supply really free up on that as we talked about earlier this year, that the second half will be unconstrained supply for us. We just literally had a call yesterday and maybe a couple of weeks ago, we told the sales force similarly. And so we've got a bunch of plastic surgery consultants on the Sientra implant side that are excited to go out there and start selling not only our Dermaspan but our very novel AlloX2 dual port design. So we're looking for big things as we go through. So that upside that you saw which primarily related to the expander line in the quarter.

Our next question comes from the line of Margaret Kaczor of William Blair.

First one for me. Just wanted to follow up on some of the commentary you just talked about in terms of having some of the implant sales slow in the coming months. Can you give us a little bit more clarity in terms of whether you are at that point in the field today? Maybe give us a sense of how close you are, maybe if you're not at it today and then how much some of those high volumes SKUs represent.

Yes. We're not quite there, but we're getting pretty close. And so Charlie and I are sitting here, smiling at each other. So we have weekly operational meetings as you can imagine. We go through this and we talk about when a product is going to start going on what we call back order within the next 90 days, and that's starting to grow. So as I talked about for folks before, if you kind of use -- I think most (inaudible) are sitting right around that $5 million-ish number on implants. You can expect that number to go down a little bit each and every quarter as we move forward. I'm not talking about in terms of ranges. We're not talking about millions of dollars or maybe $1 million. It's closer to hundreds of thousands of dollars type thing. And as I said, we're working through that. So we'll work with the customers, Jason O'Hearn and his sales force are used to this, they've done it for a while now, and they are trying to work with our customer base to try to see if there's other products that -- other sizes, I should say, styles, SKUs, et cetera, that they can use. So long-winded answer probably for...

And I'll just add, and I think you've started to see the benefit -- or we've started to see the benefits of the very deliberate strategy we started taking even last year in bringing on a diversified mix of products so that -- such that when we start to see some of the slow decline in our breast implant sales, based on inventory levels, we're starting to pick up on tissue expanders and have a real focused effort off on bioCorneum. So net of that, and I know Patrick has walked everybody through this, you'll start to see the mix of our expanders, particularly in the second half of the year, begin to replace some of that slowdown on the implant side.

Okay. So it sounds like maybe the overall business will continue to grow just due to the expander business. Even this maybe you will get a little pressure on the implant side. And then in terms of the commentary on the full-scale inventory in the second half of '18, I know it's not the first time you've mentioned that, but can you give us a sense for how much that represents in revenues when you do reach that full scale? Is it maybe more or less than the revenues you had before the -- before you left the market? And then just even the 6 or 9 months, from getting manufacturing approval to full ramp, it seems like a little bit of a long time maybe. So why is it so long? And could that time frame be accelerated?

Well, I can speak to that, Margaret, because I've been dealing with manufacturing scale ups and whatnot for a long time. And I think as we've discussed before, this is a process of improving planning values that yield numbers, et cetera. And right now, our focus is not on the efficiency per se, but it's the quality of the output. So I'm going to try to make this as straight as I can. The focus with Vesta is to produce high-quality implants without distracting the organization from the quality objectives. Once that is established, it's much easier to start increasing output targets, yield numbers, because of all of the checks and balances within the manufacturing organization, they will exclude those products that don't meet the quality criteria. So once we get approval, once we have an established manufacturing process, it usually takes something on the order of that. And look, we're being conservative here. We are not putting out aggressive targets, where we're going to be able to get up to full-scale supply levels within the first 2, 3 months. So please understand it that way. And until we've learned better how the efficiency and planning values and so forth that Vesta are able to adapt, we're preferring to take the conservative approach, which could well be different depending on how quickly they can move.

And certainly, the goal for us is to get back to that. We were kind of at that low teens market share before the voluntary pull off on the cosmetic augmentation side. We've expanded that market now, as we've, I think, outlined a number of times at reconstruction. And also importantly, if you think back, I think it was the December of '16, we announced increasing our SKU offerings and our style offerings by quite a bit. So the good news of that is that we have it. I guess, the bad news, that we have to go build it now, right? And so there's tooling involved and everything else. So to your question, one would expect we have a much broader offering now, so one should expect that we should be able to sell more than what we did before. So a lot of things we're working through, and that's why we set it up for more than the second half of 2018 supply ramp-up.

And we could explain this further at some point, if you wish.

Perfect. And one more question for me. In terms of your movement into tissue expanders and AlloX2 , it seemed like a really strong quarter this quarter if we assume that tissue implants didn't change very much on a sequential basis, around that $5 million. So can you give us a sense of how many hospitals or programs are getting traction in? And really, how that ramp should look like over the next 12 months? Should we expect the level of change that we did see in the second quarter from the first?

Yes. I think I called it out, all right. I said we'll continue to kind of build up slowly on that. So it was a good quarter on that. We built on it from last quarter. And I think the models are pretty aligned on it. But we're not going to get ahead of ourselves just yet and we'll see how it goes. But we're bullish about the product. We're bullish about our sales force out there being able to sell something. And we're looking forward to what we call the second half of expanders for us, which is really what 2017 focus will be from a sales standpoint, related to the implants.

Or breast implants.

Our next question comes from the line of Jon Block of Stifel.

Maybe I'll ask 2 or 3. Maybe first 1 Jeff, as we think about the opportunity and synergies with Miramar, is there an updated number for Sientra customers? And the number of those that are on a capital device, in other words, like that CoolSculpting or sculpture for the front of the office because -- and according to your comments, that's sort of the ones that you're targeting or the low-hanging fruit from a synergy perspective.

Yes. I think it's -- we are still deciphering the specifics here, Jon. But what it really boils down to is you're looking at it from 2 points of view. From a Miramar standpoint, the mix of customers who have Miramar devices is approximately 30% plastic surgeons. It's roughly the same on dermatologists. And if I'm not mistaken, the balance is made up from the other medical specialties. So we're coming at this from both standpoints. And on those accounts, with CoolSculpting and miraDry, you're talking about roughly 200 accounts out there, and that's a sizable target. And again, remember that -- and I'm sure you know extremely well, but this is a combination of selling capital equipment plus the frequency of use of the consumables. So this is a perfect ZELTIQ analogy, in that we need to find the right balance between the capital equipment and how we can increase the frequency of use of -- in a similar playbook with what ZELTIQ used. So the other part of it is, from a Sientra standpoint, we know that there is somewhere in the neighborhood of 100 to 130 accounts that have CoolSculpting as an example. And we know that these are accounts that are not only doing breast implants but also have adopted the CoolSculpting model, which we think is very similar to what we're doing with miraDry. Does that...

Yes, it really does. Maybe that was actually the number I was looking for. So roughly 100 or 130 docs out there that are Sientra docs that have CoolSculpting, again approximately?

Exactly.

Yes. And to be clear, that's only the active customers that we know. At our peak, we've talked about being closer to 2,000. We brought that down to 600, what we call our active customer list. And so that's when we added that 600 is how you should think about that. We're still working through some of the analytics as we've talked about. There's a lot of opportunity out there. Obviously, we've been somewhat reluctant to give all these numbers out there because we know you guys can start extrapolating and we just want to make sure people don't get too far ahead until -- we got to get that sales force intact and fine-tune a couple of things, but we're -- they're in the game plan.

Okay, that's a helpful number. I appreciate it. And then just maybe more big picture. Breast, as we think you guys coming back fully into the market in 2018, how would you characterize the competitive landscape and maybe how it's evolved since the time where you guys did the voluntary withdrawal? In other words, is it safe to assume, hey, Allergan is a more formidable net positive from a competitive landscape and maybe meant to have scaled back a bit? Just would love to get your thoughts as we think about you guys coming back to market.

That's a great question. And I don't say that frequently, Jon. So the point is, that is one of the critical aspects of our forward planning. And what we're doing is a series of analytics on an objective, anonymous basis to understand how, not only our core 600 but the remaining customers, have changed their attitude toward each of the 3 providers. There's no question that Mentor has weakened significantly. There's also no question that Allergan has become much more dominant with a number of recent acquisitions. And that there's several things that we have done to determine those strategies that will still allow us to be able to take share from both of them. I think we've announced recently that we've just brought in a new Vice President of Marketing, B.J. Scheessele, who was Vice President of Marketing for LifeCell, just acquired by Allergan. B.J. also has about a 10-year solid career with J&J's Cordis unit, a number of people back then I've known very well. And we're -- we have a real advantage with B.J. because he has experience in these categories. He's competed successfully against Allergan and Mentor. And he knows more about reconstruction, as far as I'm concerned, than anybody in the market. So I won't go through the entire list, but this gives you some idea of how increasing the strength of our organization is going to make the strategies that we're developing much more effective.

Very helpful. And last one, maybe if I could just slip in one more. So Patrick, I think when you alluded to the 70% gross margin, correct me if I'm wrong, but I thought that was sort of a specific breast gross margin number. So as we think about, call it, consolidated gross margins in the back half of the year, as you started to sell the $8 million to $10 million of Miramar, which clearly could have a capital component to it, is it more sort of 65-ish blended for the company? Maybe if you can just comment on that so we're on the same page.

Yes. That's a great point, Jon. So to clarify, yes, that was a Sientra prior. I guess, the implant breast products of bioCorneum. You are, I would say, in that mid-60s when you start combining on the $8 million to $10 million for Miramar. The real thing is the $8 million to $10 million, what's it comprised of. We are going to make a big push on the U.S. direct markets first. It's where we're going. It's what we want to make the investment in initially. Obviously, we get higher gross margin on those just because it's a direct instead of a retail channel, instead of a wholesale channel. So we're hoping that we might get a little bit of a nudge up on sort of the historical Miramar gross margins that you've seen because half of their business was international through distributorships, so it was wholesale. But it is fair point, and I appreciate you bringing that up.

(Operator Instructions) Our next question comes from the line of Brooks O'Neil of Lake Street Capital.

I have a couple of questions. It sounds like both the (inaudible) or the process of approval with FDA on the manufacturing is increasingly critical, if you will, but you seem highly confident in approval by year-end. I'm hoping you could give us just a little color in terms of where you're at with the FDA and what might be some of the key things that need to still be done to get across the goal line.

This is Jeff, in case you can't tell. And the thing about the criteria that need to be met for full manufacturing facility approval are prescribed in a large stack of government regulations. And I continue to have extreme confidence in the joint teams that we have between the Sientra experts that we have as well as the Vesta experts who are working in lockstep to be able to check off each one of those boxes. The question that I think you asked is what is 1 or perhaps the other 2 or 3 that is critical to getting the approval that we're still confident that we will get? And that one particular hurdle is to complete the FDA inspection with actually no exceptions. And the way they mentioned those in the FDA world is 483s. So we just recently finished a mock inspection by a senior -- retired senior FDA official who has given the guidance to be as brutal as you can possibly be, and we just finished that last week. And we came through that mock inspection with absolutely 0 defects. And that's an indication of the confidence that we have. And I don't want to get into all the micro details that go along with any FDA decision. But I remain confident that the strength of the teams we have are going to give us what we need for the one most important box that needs to be checked in order to get full approval.

Great. That's very, very helpful. You wouldn't, by any chance, be willing to tell us when that inspection is scheduled?

No, I am not inclined to give you that information. So please forgive me.

No, no, that's fine. So I have an...

Other than imminent, Brooks.

Right. Imminent is good. That's good. It gets nasty in Wisconsin as we get a little later in the year.

Yes, I know that.

Great. So I have to confess my personal biases. You did the absolute right thing with the settlement. But I want to say, I've gotten some questions from investors in terms of why and in particular, the $10 million payment you agreed to. Just curious if you can give us any color on your thinking there and how that sort of played out.

Well, I'm probably in the best position to answer that, although I have our lead attorney from K&E sitting across the table from me. But this really boiled down to a process of extortion and that we feel that the claims that Silimed had made up as the basis for both the litigation and the arbitration carried significant legal uncertainty that, "the prosecution through both of the legal channels could well have exceeded the amount that we ended up giving them." And from a financial standpoint, I can say that, that's a significant give on our part, but at the same time, this has been a significant distraction, dealing with this on a weekly basis, that it was worth it to us to get it behind us and not be distracted and not have Silimed go off and look for other partners of ours to intimidate. So that the final resolution, on all accounts, to me and to the group that we've made a decision together with, was by far in the best interest of Sientra. And I'll point out also that we have a number of involved investors who we talked to. And the overall reaction to this has been that they understand and that this was a very positive and intelligent decision on our part.

Real quick, Brooks, I just want to make sure to put maybe some context and framework around it. If you look at these things and when you do, it really does come down so much as to the straight economics. And so we were going to continue to spend legal costs to go from now until trial -- it was actually trials. And so when you net out what that cash expenditure on legal is and you deduct that really from the savings we'll get from that, we're looking at a much, much lower number than $10 million, right? So you're talking maybe $3 million or $4 million that we actually are out of cash between now and what I'll call the end of '18 going into '19. And I think Jeff said it, but what does that get us? That got us full global freedom to operate, took the overhang away. We got ahead of this way before the next few quarters here. And just for us, it just makes a lot of sense to do that. So people should really take that into account, and I'm sure you'll convey that message accordingly.

Absolutely. So it sounds like you've lined up adequate capital to run the business and potentially considered additional acquisitions. I was wondering if you'd be willing to provide any of your thinking about timing, sort of targets, et cetera, as you think about where you're at today and where you'd like to go down the road.

Yes. Brooks, thanks for the question. This is Charlie Huiner. And what I'll say is a couple of things in terms of our ongoing strategic intent on acquisitions and M&A. I think we've been, as you know, and I think many people on the call know, pretty active these past 12 or 16 months on the acquisition side, starting with bioCorneum continuing with the purchase of a really leading novel tissue expander line from Specialty Surgical Products and finishing most recently with the acquisition of miraDry. These are 3 strategic acquisitions we made. We think we made them intelligently. I think if you look at the economics of what we paid versus the opportunity to create real lasting value and growth and scale going forward, we think that the mix of price pay versus upside for these assets should prove that we were good stewards of our shareholders' capital and that we've set up a very -- a much more diversified company for Sientra. Part of the strategy right now for us and for our team is to properly integrate these acquisitions and to begin actual -- and begin actualizing the benefits of these new revenue streams. So that's a long way of saying we certainly have a good number of things to bite off right now as it relates to integration and optimizing these assets and really starting to drive scale and growth, doesn't mean that we don't have other things that could be attractive. We have spoken certainly about continuing to expand our recon portfolio, regenerative -- on the regenerative side. There are assets out there. But at this point, I think we're going to keep it pretty general but also give you the visibility of where our focus is going to be for a period here, which is to really integrate and optimize those assets that we purchased over the last 12 to 14 months.

Great, that's very helpful. Another area I'm curious about, with the settlement, you open the door to talking about international. We know there's some big markets over there. Just talk about your appetite to take the business internationally and when we might begin to see some specific initiatives in that direction.

Yes. Brooks, I think there are a couple of things that come in to play here. Number 1 is the settlement that we reached with Silimed, where we are free to compete outside of the North American market for the first time without the threat of a legal challenge. So that's a significant piece. I think the other part of this is, we have an international distribution capability already in place with the acquisition of miraDry and Miramar. So these are all things that we're working through right now. And as you know and as I've learned, an objective of becoming a global leader comes with a mixed bag. So the basic international strategy we have is to confirm the logic of where we have Miramar international presence and also to make sure that we are picking those international markets that have the greatest profitability potential. So this is still relatively early stages. We've been focusing on the North American market, which we will continue to do. But now because of these other 2 developments, it gives us a much wider door to pursue.

Maybe just some additional color. This is Charlie again. We've made it pretty clear that North America is our primary focus. And today, as you ask certainly, again, we -- I think we've said this on previous calls, that Canada would be the next logical market to extend our North American direct presence in. Just to again be very clear about the dynamics for these 2 markets, clearly better pricing, better margins. These are the top 2 markets, aesthetic markets by far. And so as we think about, do we begin to really expand into o-U. S. and o-Canada markets? While we do have that opportunity, one of the real gating items to us is that we still have to go through a registration process. That takes time. I can tell you that we certainly are in the process of getting ourselves in a position at some point to do that. But that's certainly not our near-term focus and priority. We have, as Jeff mentioned, we do have an international business already now with miraDry. But as it relates to how attractive it us for us to take competing investment dollars and put them into, say Europe as an example, for breast aesthetics, I can just tell you, "No, that's not going to be where we think it's the best use of competing investment dollars. Vis-a-vis some of the other opportunities we have ahead of us on the commercial side in North America. And hopefully, that color sort of rounds out some of Jeff's commentary.

Absolutely. I just have one last one and we talked a little about it when you announced the Miramar deal. But I'm just continuing to be intrigued by the parallel with ZELTIQ and how you see that helping you achieve rapid success with the Miramar acquisition. And as you're now a little bit further into it, can you just talk about what you think some of the big takeaways or the big, big learnings might be that will help you scale quickly this acquisition?

Well, I think, Patrick is probably in the best position to comment on it. But let me try to summarize it this way, Brooks. I think the basic Miramar, miraDry franchise has significant and powerful analogies with CoolSculpting and ZELTIQ that -- and we could talk about this for hours. But I think the other part of it is having the experience in house that Patrick and Keith Sullivan bring, to me is a situation. I don't remember an analogous situation where a company has an analog to a very successful business with the level of experience and expertise that we already have associated with the business. And I don't want to talk anymore about that. But there are further aggressive steps that we're prepared to take.

And I'm showing no further questions at this time. I'd like to hand the call back over to Jeff Nugent for any closing remarks.

Thank you, everybody.

Yes, thanks for dialing in. We are very excited about the business and the progress that we're making. And I look forward to sharing the additional progress we're making in the future. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.