Sientra Inc (SIEN) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sientra Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to you Tram Bui of the Ruth Group. Ma'am, 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 risk and uncertainties that the company faces is contained in its annual report on Form 10-K that the company will file with the SEC shortly.

Actual results may differ materially from those expressed in or implied by the forward-looking statement. 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 Chief Executive Officer of Sientra.

Thanks, Tram, and good afternoon, everyone. Joining me today are Patrick Williams, Chief Financial Officer, Senior Vice President and Treasurer; and Charlie Huiner, our Chief Operating Officer and Senior Vice President of Corporate Development and Strategy.

I'm extremely proud of everything our team accomplished in 2017, that we demonstrated our ability to grow Breast Product segment sales over 50% year-on-year despite operating in a significant supply constrained environment. I want you to think about that, that's a significant accomplishment for Sientra.

We also made significant progress on each of our strategic initiatives designed to position a new Sientra to reenter an even stronger growth phase than we have just completed.

Over the past year, we have grown our addressable market substantially, primarily by diversifying our aesthetic portfolio through the addition of miraDry and we've accomplished this transformation while maintaining our best-in-class sales force and most importantly, steadily advancing our submission with the FDA to secure approval for a U.S.-based manufacturing facility with our partner, Vesta. And I want to point out that, that part is done, it's been approved.

We remain extremely confident in our ability to commercialize U.S. manufactured products of our silicone breast implants in the near term.

Although our time line for FDA approval has been slightly delayed. As a reminder the FDA has already granted approval of the site-change PMA Supplement for Vesta to manufacture Sientra's implants. By far, the most critical and pressing piece of our regulatory filings.

The FDA has also approved 2 of the 3 additional supplemental submissions related to the manufacturing process improvements, which we pursued opportunistically in consultation with the FDA beforehand to improve our manufacturing efficiencies.

As it relates to the final outstanding PMA submission, we have now provided the FDA with a comprehensive response that include all of the information requested and we continue to work closely and interactively with the agency to gain final approval. Though statutorily, the FDA has until the middle of the second quarter 2018 to respond to the one outstanding submission, we continue to believe the questions raised by our reviewers should be resolvable well before then, based on the encouraging dialogue over these past few weeks.

Upon the expected approval, Sientra will be able to sell the Vesta manufactured breast implants in the United States immediately and we are fully prepared to move on that as soon as we get word.

As a reminder, we continue to manufacture finished goods at the Vesta facility, maintaining those products in quarantine at our distribution center as we prepare a ready supply of the highest demand SKUs.

We continue to believe that the final FDA approval is a question of when, not if. We obtained the approval of the final process enhancement submission. We remain confident in Vesta's ability to ramp production to satisfy our growing demand as we move into the second half of 2018.

In the meantime, we continue to manage our inventory with a unique precision-controlled selling approach and our sales organization has been actively managing our customers' needs with respect to implant supply in the near term.

To augment the relaunch of our breast implants, we are pleased to announce a new branding strategy that will elevate our best-in-class products in the market.

Moving forward upon approval, all Vesta supplied implants will be sold under the name Sientra OPUS. The word opus brings to mind an artist's best body of work and we believe that our board-certified plastic surgeons deliver the true balance of artistry and science in the work that they do. The name opus evokes excellence, quality and performance and is backed by our exceptional 10 year clinical study safety profile.

In addition to our OPUS rebrand, we are prepared and are excited to launch additional, unique value-added programs to the customers we serve, some of which we'll be ready to announce upon final FDA approval.

As our team prepares for imminent relaunch back into the market with our U.S-sourced OPUS implants, our tissue expanders and bioCorneum Scar Management Products continue to take market share while our tissue expander category continues to grow sequentially and significantly quarter-by-quarter.

We remain extremely encouraged by the traction we're seeing in both of these categories within our Breast Product segment, especially with the continued strong performance of our breast tissue expanders led by our novel AlloX2 dual port product line.

Additionally, we remain increasingly pleased with our sales force's ability to leverage our entire surgical products portfolio across all accounts.

Overall, we believe our success in the field and the cross-selling of these products validates our diversification strategy and that we are well positioned to deliver balanced revenue across each category of our Breast Products portfolio moving forward.

I'd now like to move on to the miraDry business, which has become the second leg of a broadened aesthetics platform throughout the second half of 2017. We've made substantial progress in optimizing, repositioning and integrating miraDry into Sientra following our acquisition of Miramar Labs in July of 2017.

We remain confident that the achievement of our near-term strategic objectives, specifically in relation to treatment protocol improvements, device improvements and global commercial infrastructure investments will allow us to drive growth in large and underserved markets for the permanent reduction of underarm sweat, odor and hair of all colors. No other treatment can make that claim.

As part of our efforts to better characterize the market opportunity for miraDry, we recently completed a survey of over 2,000 people, evaluating criteria, including those who are sweat bothered, the dissatisfaction with current treatments, interest in a nonsurgical long-term solution and interest in the miraDry product description. Based on this comprehensive survey, we believe the market for miraDry in the U.S. alone is approximately 35 million people. 15 million of whom, our survey data would characterized as being immediately interested in the miraDry treatment. Our survey also validated the demographics sweet spot for miraDry, both related to age and gender. Critical perspectives that will allow our marketing team to better create demand generation programs for miraDry practices.

We have also been able to quantify additional value and ROI at the practice level that can be derived from miraDry patients. We remain our conviction that the miraDry business will be a strong revenue growth driver for the company, moving into 2018 and beyond, as we continue to augment our sales team, launch our marketing initiatives to derive demand from the bottom up and search for a permanent General Manager of this Miramar group. As we look beyond our current offerings, I would like to once again reiterate that we see significant opportunity to further expand our current total addressable market, which consists of the $400 million U.S. breast augmentation market plus the $300 million breast reconstruction market.

First, we will seek to expand into the $500 million international market for breast implants, which was recently partially open to us as we received our ISO 13485 certification.

This incremental ISO certification is a significant and required next step to enter selective and national markets with both our breast implants and tissue expanders.

As we've stated in the past, we believe that we will be able to leverage the existing miraDry international business infrastructure base and the sales channel as we look to commercialize Breast Products internationally. In addition to our planned, expanded international presence, we see a potential opportunity in the $300 million regenerative product market which is directly adjacent to our breast reconstruction business. This could be a longer financial opportunity to further diversify our product offerings while leveraging our existing commercial infrastructure.

With that said, while expansion into attractive adjacencies has played into our strategic intent to diversify our product portfolio and revenues, we remain unwaveringly committed to our core Sientra breast aesthetics business and the planned U.S. relaunch of our Breast Products in 2018.

I'll now turn the call over to Patrick Williams for a detailed review of our fourth quarter and full year 2017 financial results. Patrick?

Thanks, Jeff. I first want to provide some more details on the miraDry business segment. With respect to the optimization of the miraDry treatment protocol, we have successfully delivered on our promise to simplify and shorten the procedure for clinicians and launched our miraDry fresh protocol last month at the American Academy of Dermatology annual meeting.

At a high level, our updated protocol reduces overall procedure time by about 35%, enables physicians to more easily delegate the treatment with a simpler anesthetic process and simplifies our template design and GUI interface.

We have received fantastic feedback on the efficacy of the system and with the updated protocol announced at the meeting, we were able to generate a significant number of qualified leads.

Together, this new fresh protocol enables us -- enables users to deliver the highly efficacious miraDry procedure with even greater ease and confidence and with less hands-on treatment time.

We are confident that these enhancements will significantly improve the miraDry experience for patients and generally broaden the appeal of the product and procedure across all geographies.

Now that we have completed the design and testing of these protocol enhancements, our nearest term goal has been to train and fill out our sales team for the full scale relaunch of our revised miraDry sales strategy, which we were able to accomplish starting early February.

This strategy has been highly vetted out by our senior management team of aesthetic capital and consumable space experts and is supported by our primary market research that Jeff just mentioned.

In terms of our progress and building our miraDry commercial team, in North America, we currently have 22 capital reps or area sales managers and 15 consumable reps or practice development managers, which is in line with our hiring target set last year.

Additionally, we have opportunistically built out our international commercial team with over 15 individuals who are primarily focused on Asia Pacific and Europe.

This high-caliber team is well positioned to expand our global presence and drive revenue by leveraging a combination of distributed relationships and direct sales efforts.

Though revenue is tracking nicely for both business segments in the first quarter of 2018, I want to remind everyone that the miraDry segment follows the typical capital aesthetics business model, which is heavily back-end loaded with revenue, with the majority of it coming in the final 2 weeks of the quarter.

Now let me turn to our fourth quarter and full year 2017 results, greater detail can be found in our earnings release issued earlier today; our 10-K to be filed shortly, and our supplemental financial information reference, which can be found on our Investor Relations website.

As a reminder, with the exception of adjusted EBITDA, all of our financial metrics are reported on a U.S. GAAP basis.

Additionally, 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-like items for this non-GAAP measure. Again, please refer to our supplemental financial information, earnings release and 10-K for tables on GAAP and non-GAAP or pro forma net sale and a full reconciliation of adjusted EBITDA to its GAAP counterpart.

As another reminder, we are starting to report our results in 2 segments, Breast Products and miraDry. Breast products include all of our breast implant portfolio, our tissue expander portfolio and our bioCorneum scar management products.

miraDry includes the entirety of the recently acquired miraDry business, so both capital and consumable.

Moving now to our financial performance. Consolidated total net sales for the fourth quarter 2017 were $11.1 million on a GAAP basis compared to total net sales of $6.5 million under GAAP for the same period 2016.

The fourth quarter net sales were slightly lower than what was anticipated in our preliminary revenue release due to a small deferred miraDry revenue, which will be now recognized in Q1 of 2018.

Total GAAP sales for the full year 2017 were $36.5 million compared to $20.7 million for the full year 2016.

Within our breast product segment, net total sales of $8.2 million for the quarter, a 26% increase compared to $6.5 million for the fourth quarter 2016, driven primarily by continued strong performance of our breast tissue expanders.

For the full year 2017, net sales increased over 50% or 52% to $31.5 million compared to full year 2016 of $20.7 million. As we stated on our last earnings call, we expect sales within the Breast Products segment to continue to remain flat or slightly down in the first quarter of 2018 compared to 2017 due to the lack of breast implants supply as we await FDA approval.

To be clear, this is not a demand issue. We do expect to see growth in our breast tissue expander portfolio as we continue to ramp-up manufacturing capacity and productivity.

I want to reiterate that we do not expect to sell entirely out of breast implants ahead of resupply. Through our precision control selling strategy, we have deliberately constrained supply and continue to adjust based on usage and inventory levels.

As Jeff mentioned earlier and as we have both spoken to on past calls, as planned, we continue to manufacture Vesta supply product ahead of approval, with new implants under quarantine until approval is final.

In all, we still expect to have the Vesta facility fully scaled up in the second half of 2018 following typical new manufacturing ramp-up.

Net sales attributed in the fourth quarter 2017 by our miraDry business segment totaled $2.9 million on a GAAP basis and $5.1 million for the full year.

On a pro forma basis, net sales for miraDry were $15.3 million for the full year 2017.

We expect revenue growth within this segment to accelerate sequentially starting in Q1 and more meaningfully as we continue through 2018.

Gross profit for the fourth quarter was $5.3 million or 48% of sales compared to gross profit of $3.9 million or 61% of sales for the same period in '16.

Overall gross profit for the full year 2017 was $22.4 million, 61% of sales compared to full year 2016 of $13.9 million or 67%. The large decrease in gross profit for both the quarter and year is primarily due to the inclusion of miraDry, which carried a lower margin than Breast Products primarily due to product and geography mix and additionally in the fourth quarter gross profit was impacted by a $2.3 million inventory reserve in our Breast Product segment resulting from the timing and recognition of implant products anticipated to expire prior to being sold.

Our implants have a 5-year shelf life and as we approach FDA approval of the Vesta site, we now have a clearer plan of how we will transition to the new Vesta Products.

Excluding this reserve adjustment, gross margin in the fourth quarter of 2017 came in as expected at approximately 69%.

Operating expenses for the fourth quarter were $22.7 million, an increase of $10.7 million or 89% compared to $12 million of expenses for the same period in 2016. Full year operating expenses grew 58% year-over-year to $85.3 million. The increase is primarily related to the increased employee related cost and the inclusion of miraDry operating expenses, subsequent to the acquisition.

Net loss for the fourth quarter of 2017 was $17.8 million on a GAAP-stub-period basis compared to a loss of $8.1 million for the same period.

Full year 2017 net loss was $64 million versus a loss of $40.2 million in the prior year period.

Adjusted EBITDA for Q4 '17 was a loss of $14.2 million versus a loss of $7 million in Q4 '16 whereas full year 2017 adjusted EBITDA was a loss of $42.1 million versus a loss of $35.6 million in the previous year. Once again, the year-over-year decrease can be mainly attributed to the inclusion of miraDry.

Net cash and cash equivalents as of December 31, 2017 were $26.6 million compared to $37.6 million at the end of Q3 2017.

In early January of 2018, we filed a $150 million mix shelf registration as part of our strategy to maintain flexibility in our ability to raise capital.

We then subsequently increased our flexibility of the shelf by enabling an at-the-market feature that allows for the sale of common stock for aggregate proceeds up to $50 million of the $150 million shelf.

It is important to note that the ATM does not obligate us to sell any equity but rather just provides us with more financial latitude.

Additionally, we will also gain access to $10 million from an existing credit facility when we get final FDA manufacturing approval, which will further our capital optionality. We also believe our capital options and the associated economics become more favorable upon FDA approval.

As always, we will strive to be good stewards of our cash and we will look to strengthen our balance sheet opportunistically with market conditions to ensure we maintain adequate capitalization.

I'll conclude by noting that consistent with our previous comments, we will not be providing any financial guidance as we remain in a market precision-controlled selling mode, we await FDA approval of the Vesta manufacturing facility and continued to complete the integration of miraDry.

And with that, I'll turn the call back over to Jeff for final closing remarks.

Thanks, Patrick. In all I am pleased with Sientra's progress in 2017 as we've continued to grow and evolve into a larger, more diverse global aesthetics company.

As we await approval of over final PMA submission, I am more confident than ever in Sientra's ability to regain and grow our market shares across every one of our business segments.

With renewed branding and stronger marketing energy applied across the entire portfolio, we have an extremely compelling source of clinical data and a world-class manufacturing partner, our core implant business is poised for growth following approval.

Within the miraDry segment, our enhanced miraDry fresh protocol that has simplified and shortened the miraDry procedure will allow for our growing sales force to effectively sell systems and drive utilization in the near future on a fully global basis.

In addition to these more significant revenue drivers, we also continue to drive deeper into the breast reconstruction market with our differentiated AlloX2 tissue expanders as we've strengthened our commercial presence and manufacturing capacity.

Meanwhile we expect revenues from our bioCorneum scar management product will continue to grow at double digits as we effectively cross-sell and build brand awareness.

Finally, with our implant supply chain improving and the initial software and protocol changes, completed with miraDry, we have been reallocating resources back to our research and development pipeline on both business segments.

We believe we have some truly innovative organic opportunities in our pipeline that will further drive our growth and I look forward to sharing them with you as we make further progress.

As I mentioned earlier, I can't say enough about the performance under less-than-ideal conditions in 2017.

I am extraordinarily proud of our team and our ability to demonstrate growth despite our supply related constraints, which have been significant and I'm optimistic on the growth that we can deliver once this major challenge is resolved.

We remain confident and focused on our 2 major objectives for 2018, which include receiving full FDA approval to reenter the breast implant market and to maximize the Miramar -- the miraDry acquisition. These are clearly a focus of our entire company.

I want to thank everyone within Sientra and the accented -- the extended Sientra family with their hard work and dedication.

I am so excited to continue to build on our momentum across our business segments as we move into '18 and relaunch our entire breast implant line while realizing the potential of miraDry.

We continue to leverage our exceptional products, people and relationships as the basis for the new Sientra.

With that, I will now turn the call over to question and answer. Thank you.

(Operator Instructions) Our first question comes from the line of Margaret Kaczor with William Blair.

Just making sure, can you guys hear me?

Yes.

Absolutely.

So first one for me is broad U.S. demand. So you guys were delayed a little bit on the FDA approval but if you look at your anticipated internal targets for the second half of '18 in breast, has anything really changed? Because you guys are building up the inventory to be on track. So has anything changed? Have you heard any kind of disappointment or feedback from plastic surgeons regarding the delay or is it pretty straightforward?

I'll take that and I think it is pretty straightforward, and as I know, you have checked as well along with many others, we continue to have a very high level of loyalty even among those plastic surgeons who have not been receiving Sientra products and we pay a lot of attention to that. So we can't predict precisely but the sense from our people on the front line, we are very optimistic that we're going to be able to start moving our current customers into a higher percentage of their practice as well as those who have not been able to be supplied to be able to bring them back into the fold. So again, I can't tell you. Coming off the national sales meeting 2 weeks ago, I have never seen a more pumped up group of people in my life. And that comes along with very close relationships that I know you've talked to many of them yourself.

Yes. I'll add a couple of things. I think it's a great question, Margaret. And I think to your point you are correct in that, we are building through Vesta. They do plan to scale up through the first half of 2018. So FDA approval coming yesterday, today, tomorrow, whatever it is, whatever that time line is, it's not going to impact our second-half gel implant numbers at this point based on all the schedules that we have. And then I think secondarily, just to kind of reiterate what Jeff just said, is certainly as we continue to reduce our supply of gel implants just by the nature of not having the resupply yet, ready to go, we are reducing, certainly the number of sales that we have for the gel implant, which we mentioned in the prepared comments, but those are temporary issues, this is not a demand issue, we still see this as very much a supply issue and any customer that's not getting their current allotment, we've been very clear and through the national sales meeting that Jeff just mentioned that our sales team is very clear that we're going to get back on track very shortly.

Okay, yes, that's great. And then in terms of international, maybe a twofold question, one on breast, have you guys started incorporating that in any of the distributor contracts to-date? And then if you just look at your distributor contracts internationally, broadly, what stage are you guys at with those contracts? How long is it going to take to reaccelerate that business? And if we look out a year or 2 from where we are today, what's the profile of Miramar from either a revenue basis, either in dollars growth as well as from a gross margin basis? Because it does seem like you guys are raising price, staying more consistent on price and that should help.

Well, to that point on miraDry, we're focusing on maintaining ASP, which is certainly going to help the business segment. I think in addition to that, the international opportunity, and I think you were referring to the breast product segment, that's something that is frankly in the future. We are focusing on getting traction on both U.S. launch on Breast Products with the approval of Vesta and miraDry is off very aggressively both domestically and internationally. So the real answer to you, Margaret, is that we've gotten our ISO certification, which is a great first step but this is something that we have not paid a lot of attention to. We want to get first things first.

Yes. I think we're still running the business segments very separately so just to be clear on that, we are international certainly on the miraDry side and we're moving forward with those arrangements. In regard to the ASP, we did increase our price when we launched the miraDry fresh on both the system because it is an upgraded system, it is essentially a new system out there in terms of its functionality as well as on the bioTip side, that's still in the early stages obviously, but you know in terms of gross margins moving forward, 2018 will still be a little bit of a transition year because of the fact that we're going to have a heavy focus on the capital side of the business for miraDry. So because that has a lower gross margin around 50% to 55%, that's going to pull down our overall corporate gross margin but we still believe we can get above 70% as we move into 2019, I see a little bit more of a balance on the bioTip or the consumable piece of the business, which is at a 85% margin, and then of course, maintaining those ASPs and everything else moving forward.

Okay. And just last one for me, just kind of a big picture, miraDry question. And I know everyone is excited about breast so are we, but if you look at miraDry, it's probably one of the largest opportunities for you guys on a 3- to 5-year basis. So maybe if you guys can describe some of the work you're doing on awareness, since bringing on miraDry, some of the work maybe that you've done, particularly the survey work to try to drive patients into the plastic surgeon's office, anything there would be great?

So let me start off this one. So I think a couple of things, we did the market survey that Jeff talked about and one of the really key points that came out of that, that we were really excited about was the demographic of the patient being not only male and female, so about 40% male, 60% female, which is a much higher male population than you would normally see in a typical aesthetic channel. But then the second thing was the overall age group of the demographic was about 3/4 of them or 75% being under the age of 40. So for us, we think that's a compelling value proposition as we walk into these practices and talk to them about the ability to bring patients into their -- consumer patients into their channel, 5, 10, 15 years before they were ever thinking about maybe walking into their door and then of course the subsequent lifetime value of that patient. About 2 weeks ago, we just started, what I would call our digital awareness or marketing from that standpoint. The nice thing about this demographic is they get a lot of their content online or digitally, which is a much more cost effective marketing tool. We've seen some very big spikes on Google Trends. I'm sure some of you from our days at prior life here with Keith Sullivan, who was our acting General Manager and myself, we did see similar things when we started this so we're not quite ready to give all the details on that but I will tell you that we have seen an active spike on Google Trends, which I know all of you can go look at as well if you want to, and that is just kicking off but there is a lot of good momentum right now on the building of the brand awareness for miraDry and of course the overall consumer/patient market that we stated is very large, sitting at around $37 million -- 37 million people that are bothered by sweat in the U.S. only.

And let me, Margaret, this is Charlie. Let me just follow-up from Patrick's comments on the market opportunity and what we see now versus what we saw when we were doing due diligence on miraDry because I'll tell you, we're much more encouraged now than even we were back in the summer of last year when we acquired miraDry and that's really based on the survey that we did and the numbers that we have come up with in terms of 37 million people being the broader market for miraDry but the 15 million of that, the subset of that, which would be a direct hit on the miraDry treatment and if you take a look at what the ASP is at the practice level of about $2,000 a treatment, that's a $3 billion market for the practices in the U.S. alone. You take about 20% of that, which is the tip cost that the practices pay to Sientra or to miraDry, that's a $600 million market in the U.S. alone only for disposables. That doesn't take into consideration probably an $800 million to $1 billion market for the capital. So this is a really big market. Now obviously, our goal and to your question about how do you take advantage of that market opportunity, a lot of it is going to come down to blocking and tackling at the practice level, driving patients into the practices to take advantage of: one, raise awareness; and then two, take advantage of the value proposition at the practice level. But again, those are the kinds of numbers that we're really encouraged around and we're in the early innings of beginning to build the execution around taking advantage of what is a -- really a novel therapy.

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

I'll ask 2 or 3 and then maybe just follow-up off-line with any remaining questions. But the first one, just the timeline of the submission and I hate to harp on days but when the company updated investors at the end of January, the response to the FDA for the last remaining supplement, I thought it was likely to come in the next few days and today's update suggests that the submission happened late February. So I guess Jeff, maybe 2 questions: one, do I have that correct? I may not; and two, if correct, what caused the slight delay in the submission to the FDA? Was it just some extra time to make sure you were answering sort of any and all of the agencies remaining questions?

That's primarily the strategy we took, Jon, and that -- our experience with the FDA, I liken it to a tennis match in that there is a consistent return of serve where they ask questions, we respond with answers, they ask more questions and we respond with more questions. So that's what we've been dealing with. I would be happy to explore this separately with you but the point I want to make is that we've had a -- several encouraging developments where it's been difficult for us to understand exactly what the issue is. What is delaying this? And it is -- it's been difficult to get them to define it. And literally, within the last several weeks, we have gotten a very specific definition of what the issue is and I don't want to disparage our government employees but the questions that they are answering -- asking have been more than adequately addressed in the information we've already sent them. So what we're doing literally, and I think as Charlie said, literally a daily interactive review of the one specific thing that they're looking for more information on. And I want to emphasize that there has been no mention whatsoever of additional long-term studies or tests to confirm this one relatively minor 30-day notice. So the frustration that you can detect from the Sientra team is very appropriate. We've been frustrated and that I think we are at a point where, frankly, this has been elevated to the Branch Chief level and we think we've got a rational partner to resolve it. And it sounds like a bunch of excuses but I've had a lot of experience with the agency and this is one of the better ones of obfuscation and forcing us to jump through hoops to answer unnecessary questions. So how do I translate that in terms of getting this final approval on this last minor piece? I believe that we are -- and the way I explained it within the company, I am sleeping a lot better today than I was 48 hours ago. Now how do you translate that in terms of when we're going to get the last period on the last sentence of the approval that we expect from these guys?

So Jon, it's Patrick. Let me clarify. So there has actually been a couple of submissions there related to this final 30-day supplement enhancement that we did. We did submit at the end of January that is consistent with what we said. The FDA came back to akin to what Jeff just said which is his back and forth tennis match, they had a couple more questions that they wanted clarity on. We have now moved to an interactive dialogue, which I would call via e-mail submissions and telephonic, which is what we believe is extremely encouraging. Of those 2 things that they came back with, we actually narrowed that down to one final one. We actually removed one off the table already. So that's what we were referring to in this latest conference call, which was, we just submitted now our response back to the final one. So we're -- we believe we are very much in the last innings here and we are highly encouraged by what I would say is, and we keep on saying these 2 words, highly encouraged and interactive dialogue with the FDA. We are making what we believe to be very good progress here over the last couple weeks here related to this last piece. So I just wanted to make sure that, that's crystal clear to everyone.

Okay. No, that's very helpful, both Patrick and Jeff. And then Miramar, just I'd say our survey work was pretty bulled up as well. Maybe a couple of things. If you can talk to what you're seeing in some of your better miraDry accounts in terms of utilization? I think if try to calculate overall utilization, maybe get around 1/2 a procedure a week, but are you seeing maybe 1 procedure, 1+ procedure per week in some of your better accounts? And then second question, or add on to that would be 22 capital reps and 15 consumables are sort of big numbers for the size of the business today and I know you have big expectations but are you fully staffed from a miraDry perspective when we look forward?

Sure. I'll -- this is Patrick. I'll answer that. So on the utilization side, yes, you've always got -- we do look at it on a quartile basis, and we do have some practices that are doing closer to what I would call 3 to 4 patients a week. And then of course, you heard the average that might be sitting around about 1/2 patient to 1 patient a week. Obviously, our goal is to build that utilization over time as much as we can, but I would be remiss if I didn't say the business model is to play -- is to place capital pieces of equipment. And a home run is keeping utilization steady within that growing and expanded installed base, as I know you're very familiar with as other folks on Wall Street are. If we can make increases in that utilization over time across a larger install base, that really does push not only a lot of revenue but, of course, gross profit down to the bottom line. In terms of the size for North America, there is no doubt that we have an operating expense infrastructure, including on the commercial team, as well as a working capital infrastructure, i.e., inventory buildup, et cetera, that can support a much higher number than what we currently have planned. So what that means is if the demand comes in higher than what we have planned, we will be able to meet that demand by not having to hire an incremental headcount on the commercial side nor necessarily investing more money on the inventory side. This is not different than how both Keith and I have done it in the past related to this business. We believe that having an opportunity to grab market share in a new market where we are the market leader and the only defined entity out there with a solution is important for us to be able to be very opportunistic and grab that market share.

Okay. And one last one, Patrick, if -- I'll stick with you for a moment. The cash burn in the fourth quarter, which I think was right around $12 million or $13 million, I know you're not going to guide, but is that somewhat representative of how we should think about 2018 playing out? Maybe at least in the first half?

Yes. I would say Q1 is generally a little bit higher cash burn, but we will -- based on the models that The Street has and everything else, you should expect a higher revenue number to help offset some of that. So obviously, as our revenue number increases throughout the year. Cash burn will get less and less, but I think that number that you just read out is pretty close to what you could expect to see in Q1.

Our next question comes from the line of Kyle Rose of Canaccord.

Great. Can everyone hear me all right?

Yes.

Absolutely. Thank you.

It's -- I wanted to stay on the theme of Miramar here. You've talked about the protocol and the product changes for the Fresh protocol and then kind of guided towards quarter-over-quarter improvements in 2018. I just want to go back to when you initially made the acquisition, you talked about $8 million to $10 million in the second half of '17. I think we understand why things shaped up the way they did in the second half versus that initial expectation, but what I'm really just trying to understand is how we should think about the pace of the rebound over the course of 2018, particularly given you did make such wholesale changes to both the treatment protocol and the product but also the marketing strategy and the commercial team. Just how should we really think about where that growth can really look like in 2018?

Sure. It's totally fair question. We're still ramping up in the first quarter because the miraDry Fresh protocol is truly a brand-new procedure and a brand-new protocol. And we rolled that out to our sales team globally towards the end of January, with the software getting rolled out on all new machines, new capital machines coming off the line February 1. And now we're track to reinstall the new updated software on all the teams and -- all the machines and hopefully have that done by the end of the quarter, but some of it may bleed into Q2. So I would say we still expect to see some pretty significant sequential growth on Miramar -- miraDry from Q4 '17 to Q1. And if you're going to see overperformance for miraDry, you're likely going to see it in the second half of 2018, just because it gives us one more quarter under our belts in Q2 to fine-tune anything we need to do. I just talked about the marketing that's kicking off, and as we move into the second half of 2018, we believe that's where we could see what I was just mentioning, which is truly that overperformance that we hope to happen, and we are certainly setting ourselves up to do that.

And I would just add, again, this is Charlie, is that not only do we -- are we going to take advantage of the first 6 months to roll out the software and create the marketing programs, but you've also got 6 months of seasoning now with what is almost an entirely new sales force selling miraDry. So when you pull together the miraDry Fresh new protocol, you pull together the marketing programs that have been steadily rolling out over the course of this quarter into next quarter and then the seasoning from our sales force, again, as Patrick mentioned, we do expect sequential growth even coming from last year into this year, but then you could start to see an acceleration as all those things come together in the second half of this year.

Okay, great. And then just digging into the Fresh protocol just a little bit, I mean, it sounded like you've gotten some really exciting feedback coming out of the conferences. I just wanted to see, I guess, is that resonating more with new customers or existing customers? I mean, were you seeing pent-up demand that was standing on the sideline saying, "If you change x, I'll step up and start treating patients?" I guess, just what gives you the type of confidence that the changes you've made here are what really needs to drive future growth?

Yes. Ultimately, right, the revenue numbers that we post will be the true representation of whether or not we're moving in the right direction. I think, intuitively, we all understand that a faster, simpler, more delegatable protocol with the miraDry Fresh should drive more physician customer acceptance excitement as well as consumer patient acceptance and excitement. Not ready yet to give you what the numbers look like, as we stated in the prepared remarks, other than things are going well. I think it's across both new and existing customers. We're probably seeing it a little bit more from existing customers right now, Kyle, just because of the fact they have the machine, they're familiar with the protocol, a little bit the old one, and we obviously have enhanced how we deliver the anesthesia. The new systems that we're starting just to sell more of now, they're just really getting started, right? So there's always a bit of a ramp-up that happens when you place that first piece of capital equipment, but it's really a rejuvenation of the older -- of the existing customers, is what I would call that. We have a KOL. It's actually a big KOL for us on the plastics side that is super excited about the recent protocol changes and is now doing actually about 4 to 5 patients a week in his practice. So really good stuff happening out there.

Okay. That's very helpful. And then last question and then I'll hop off. Just I think, historically, you talked about potentially making some sales force investments on the breast side heading into the start of 2018 to kind of position yourselves for the increased inventory. So I guess, one, did you make those hires? And then two, I guess, just what's the overall state of the sales force on the breast side as we move through 2018?

Yes. We've been aggressive in adding to the -- and I keep repeating, clearly, the most highly regarded breast implant sales force in the market, and that 2 things I want to make sure that we all remember. One is, even after all of these challenges over the last 2.5 years, we have maintained everyone, with the possible exception of one individual, who have remained committed, see the potential and want to be part of the Sientra family. In addition to that, we've increased the total number of PSCs to approximately 40 individuals. So we've expanded into a number of high-potential markets, and again, I refer back to the national sales meeting in Chicago. And I've got to watch my language here, but these are totally turned-on individuals and we are prepared to take this to, frankly, back to the level that we are at in 2015. So I can't be any more demonstrative and positive about the -- our ability to cover the primary markets in the U.S.

Our next question comes from the line of Brooks O'Neil with Lake Street Capital.

So one question I've been curious about is to understand what changes you've made to the breast manufacturing process. And perhaps maybe even more importantly, why you decided to make the changes before you got FDA approval to manufacture in the United States. And have you been surprised by the delay that has all caused?

Yes, Brooks, this is Jeff. Good to hear your voice again. And there's a simple answer to this that, number one, we sought the agency's concurrence to make this change in the very early stages of our approval process. So they agreed to this improvement for a number of reasons. And that -- frankly, to be very blunt, we have a, for lack of a better word, a very sophisticated mathematical approach that is being applied to this change that we made that was fully explained in the original submission that we made. So I could define frustration many different ways, but this is certainly one of them. I'm not criticizing the FDA, I'm just saying that, as you know, you get different types of individuals who latch onto certain things, and like I said before also, there is no indication of any additional work that's required. Our regulatory affairs group have been turning the data that we've already shared into a format that the examiner wants. Literally, that's where we are. And also, I believe that we mentioned, we've made significant advances by moving up the authority chain by going to the branch chief, and we've gotten him directly involved and that's where we're making the most rapid progress. So why they have zeroed in on this, we can hypothesize but I'll let it go with that. This is a very minor issue that we just have to convince this individual, with the help of this branch chief, that this is not a productive way to spend additional energy.

Sure. So just so I'm clear, and I appreciate all that color, is there some consumer improvement you're seeking in the manufacturing process? Or is it more of a margin-enhancing manufacturing improvement? Or sort of why go to the trouble there?

The -- there are 2 answers in this too. I think number one is that, in the process of making the site change, we decided to standardize an ingredient in the process that is more up to date and, frankly, the standard in the industry. So we didn't want to be holding on to outdated components in the process. And frankly, this is a well-accepted alternative. So -- and secondly, you've mentioned the efficiency benefit which this particular ingredient provides us because there's certainly increased margins associated with a faster cycle time, higher yields, et cetera, and we weren't about to let this go.

Just real quick, Brooks. This is Patrick. So let's be clear on this. We -- these improvements that we made were actively discussed with the FDA for quite some time. I think Jeff has clearly expressed his frustration on how it's taking longer than expected, but we are in the final stages here of getting this, and these are improvements that we felt were good improvements to make. They're both consumer-enhancing as well as throughput-enhancing. But we're at where we're at right now, but we're in the final stages. So we're getting very close.

Great, great. And then the last question I had was can you give us any color on the response to the ATM? And kind of have you sold some stock? Have you raised some additional capital? Kind of anything you could tell us would be very useful.

Yes, I think, so as my prepared comments said, we've put the aftermarket feature as increased optionality. I can tell you that we have not sold any stock to the ATM at this point.

Our next question comes from the line of Chris Cooley of Stephens.

Maybe just 2 quick ones for me here at the [end]. Could you maybe outline for us a little bit of the sales management plan as you relaunch, hopefully here sooner rather than later, and certainly as we go in the second half here on the breast side of the business? You talked about returning back to 2015 levels, but now you definitely have a form of robust portfolio, and that's been evidenced by expanders. So I'm curious just kind of expectations maybe from a rep productivity level. And then also from just a total number of accounts that you hope to be able to address as you start to relaunch here in the very near term. And then I have one quick follow-up.

Go on, mate. You want me to kick off? Jeff, you want to take it?

Yes. Let me just make the point that, looking at the history of Sientra and the challenges that we've had, we have to remember that, in the third quarter of 2015, we were running at about a $60 million run rate in strictly a cosmetic augmentation business. Since then, we've expanded into adjacent categories, but the fact remains that this business was doing a $60 million run rate and the stock price was $25. With the additional categories diversification that we've put together, we have established, I think, reasonably aggressive, conservative forecast that we expect to be able to at least return to that level particularly with the diversification we've added. And I'm not sure if this gets directly at your question, but that -- any company, and certainly any experienced, growth-oriented company looks at where we were recently as just a starting point. So I don't want to get into projections and timing of those returns to revenue levels and stock price, but we're not here to frankly just return to where we were before. We're here to go well beyond that, and I think the strategic moves that we've made and we'll continue to make is just going to position us as a much more competitive and diversified aesthetics organization.

I appreciate the color. And maybe just from a follow-on, would it be possible to characterize maybe between augmentation and recon right now? I mean, seeing the growth that you've had in the breast business here through the back half of 2017, and now early in '18, especially when we see the very strong continued growth of AlloX2?

Why don't I give some color on that one, because I think it's a little bit of just an offshoot of what Jeff just answered. We've got close to now 40 plastic surgery consultants on the breast segment side. The difference between now and 2015 is that they're selling more products. We've got a very good expander line including the AlloX2. We've got bioCorneum that they're selling. So when you look at productivity, the first half is going to be limited as we still go through precision-controlled selling as we get supply ramped up from Vesta. Forget about FDA approval for a second; there's still a supply constraint that we are going through for the first of as they ramp up. But as we move to the second half, and what I would say is really exiting in 2018, that run rate for our total Breast Products business starts getting up to those historical rep productivity levels. But I would say that we're being a little bit cautious in terms of our internal planning or conservative just because, I think, as everyone else, we want to ensure we can not only get back to our existing customers that have been loyal but more importantly, as Jeff said is, how do we go beyond that 15% market share we used to have and get to 20% and 25% market share? The good news is we've got enough reps in place right now to be able to once again meet unmet demand without having to hire another rep. And I would say that the supply that we're making investments in with our cash and working inventory is also able to support a higher number than sort of what our internal metrics are saying. In terms of the split between augmentation and reconstruction, we're still a very heavy augmentation business, but what we are seeing with our AlloX2 device especially, even the Dermaspan on the expander, we are starting to see reconstruction to pick up. We're probably about 25%, 30% of all implants we sell are right now on the reconstruction side, with the balance being augmentation. And that does make sense if you kind of look at our numbers on our split. Our revenue, you would expect, if you sell an expander, that you would get the follow-on gel implant business. We're seeing more and more of that. We still need to get larger sizes on the gel implants to go to reconstruction cases. And once again, that'll be more, actually more of, I would call it, a second half 2018 project and moving into 2019, where we really see 2019 as probably being a much bigger reconstruction push for us on not only the expander side but the gel implant side as we get the sizes and supply and everything else ramped up.

And on that -- this is Charlie, just following up on Patrick. I think that the recon play in terms of a 2019 story really is the seasoning of the hospital contracts. This is a different market relative to how to sell through. You've got to go through a process with hospital committees. You've got to make a case to supplant or supplement existing contracts with existing products, implants and expanders in this case. So as that's happening and we are actively doing that right now. I mean, we've got a person in place running our national accounts, our hospital accounts, working with our reps and literally going IDN by IDN and region by region, getting ahead of this and starting to build the pipeline so that, again, as we start looking into '19 and beyond, we are now actively on those hospital contracts and can fulfill the full reconstruction package which will include expanders as well as implants.

I'm showing no further questions in queue at this time. I would like to turn the conference back over to Jeff Nugent for closing remarks.

Thank you, operator. As you can tell that I'm in the final stages of one of these monstrous flu things, but more importantly, I want to thank everybody for their continued interest in Sientra. We are making significant progress. It's not all smooth, not to reference specific implants, but the point is we are so confident that we have the challenges analyzed, fully understood, and that we believe this is a significant value-creation opportunity and want to be able to be as transparent with you as we possibly can, so that we all share in this value creation that we're committed to. So again, thank you for sticking it out with us today and look forward to talking to you again soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.