U.S. Markets closed

Edited Transcript of SIEN earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Sientra Inc Earnings Call

Santa Barbara Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Sientra Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jeffrey M. Nugent

Sientra, Inc. - Chairman & CEO

* Kirk Gunhus

* Neil Bhalodkar

Sientra, Inc. - Senior Director of IR and Business Analytics

* Paul Sean Little

Sientra, Inc. - CFO, Senior VP & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Alexander David Nowak

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* Jonathan David Block

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Kyle William Rose

Canaccord Genuity Corp., Research Division - Senior Analyst

* Malgorzata Maria Kaczor

William Blair & Company L.L.C., Research Division - Research Analyst

* Richard S. Newitter

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Sientra Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker for today, Neil Bhalodkar. You may begin.

--------------------------------------------------------------------------------

Neil Bhalodkar, Sientra, Inc. - Senior Director of IR and Business Analytics [2]

--------------------------------------------------------------------------------

Thanks, operator. In our remarks today, we will include statements that are considered forward-looking within the meaning of United States securities law. 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 previously filed annual report on Form 10-K and quarterly report on Form 10-Q that the company will file with the SEC shortly. Actual results may differ materially from those expressed and/or implied by forward-looking statements. The company undertakes no obligation to update or review any estimate, projection or forward-looking statement.

Today on our call, we have Jeff Nugent, Sientra's Chairman and Chief Executive Officer; and Paul Little, Chief Financial Officer, Senior Vice President and Treasurer.

I'll now turn the call over to Jeff.

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thanks, Neil. Good afternoon and thank you for joining this afternoon's call. I'd like to start the call by highlighting the key topics before discussing each in greater detail.

First, as highlighted in our earnings release, Sientra had a very strong third quarter across both of our business segments. We achieved record net sales of $22.4 million, which equates to a 33% year-over-year increase. We're also pleased to raise our 2019 sales outlook between $82.5 million and $83.5 million, which Paul will discuss later on this call.

Second, in addition to these solid quarterly results, we're excited to announce the acquisition of the OPUS breast implant manufacturing operation in Franklin, Wisconsin. Vertical integration is a critical next step in advancing Sientra's strategic objectives, and the in-sourcing of our breast implant supply chain provides numerous strategic, operational and financial advantages, which we will also discuss in further detail on the call.

Finally, we also announced an organizational efficiency initiative designed to simplify operations and reduce spending, ensuring that resources are prioritized on physician and patient-facing activities. I'm confident that these strategic actions and our business momentum position Sientra for continued long-term profitable growth and success.

With that as backdrop, I'll review our third quarter results in more detail. Our entire team is extremely proud of Sientra's third quarter results. The company achieved record quarterly net sales of $22.4 million, which equates to year-on-year growth of 33%. The quarterly performance was driven by strong growth in our Breast Products segment and another record quarter for miraDry. Total Breast Products sales grew 47%, that's 47% year-on-year third quarter of '19 to $12.6 million. Our plastic surgery consultants continue to demonstrate strong execution against their targets and market share capture objectives. I'm confident that we are well positioned to continue to capitalize on this momentum in the quarters ahead.

Core breast implant and tissue expander sales have grown 35% year-to-date in an overall breast market that we estimate to be flat as clear evidence of our continued market share gains from our targeted new customer conversion programs as well as deeper penetration of existing accounts. The success of our customer conversion programs in both physician practices and hospitals supports my continued enthusiasm for the share recapture opportunity going forward particularly in light of market conditions that increasingly favor Sientra's points of difference.

Our miraDry segment delivered another record quarter, achieving net sales of $9.8 million equating to year-on-year growth of 18%. Sales were well balanced across geographies as well as the mix between capital and consumables, with a record quarter in U.S. system placements and continued growth in bioTips utilization. MiraDry's strong results reflect the scaling effect of the marketing initiatives we launched earlier this year as part of our No Sweat global campaign. We continue to place cost-effective, targeted digital ads across highly trafficked and focused digital platforms, including Instagram, Facebook, Google and others and to build awareness plus interest in miraDry. Our marketing initiatives have resulted in a larger, higher-quality capital sales funnel and increased utilization across the installed base. The miraDry team is demonstrating the attractiveness and sustainability of this razor-razorblade business model.

Turning to the breast implant operation -- acquisition, I'm pleased to provide details behind today's announcement that we've completed the acquisition of the dedicated Class III FDA-approved silicone breast implant manufacturing operation at Franklin, Wisconsin from Lubrizol Life Science. The strategic importance of this transaction cannot be overstated. Vertical integration of our Breast Implant business is a critical step in Sientra's overall business model evolution and creates significant value for both plastic surgeons and shareholders. Having control of our product development and manufacturing is imperative for a Class III breast implant company given the complex competitive dynamics, product margin requirements and product development advantages to maintain the highest safety and quality standards of any of our competitors. Acquiring this established operation offers a turnkey transaction and an intelligent way to achieve our goal with the best mix of risk, reward, investment and speed. With this acquisition, Sientra is now positioned to leverage the global physician relationships already in place through our established miraDry installed base.

The Franklin operation is now 19 months into commercial manufacturing and continues to steadily ramp its production capabilities. We're pleased with the positive state of manufacturing that we are now taking over. Our experienced Sientra operations team brings decades of extensive experience that will continue to improve cost and efficiency with additional focus and targeted investments. A vertically integrated supply chain will also provide numerous strategic, operational and financial benefits that include: first, this transaction allows for direct control of our OPUS breast implant manufacturing and product development efforts, allowing strategic oversight to optimize the manufacturing processes and invest where appropriate. Franklin will be a Sientra-dedicated Class III facility with no shared resources or competing priorities; second, and related to the previous point, a key benefit of this transaction is the speed to market, with improved and innovative product offerings that address unmet market needs. The acquisition complements our ongoing innovation efforts in our R&D lab in Carpinteria, California and aims to reduce time from concept feasibility to new product introductions, seamlessly integrating development and manufacturing; third, this transaction allows Sientra to realize the economic benefits of scale as production ramps. We're convinced there's an opportunity to expand gross margin from in-sourcing manufacturing. Paul will provide further details on this gross margin recapture opportunity in his remarks.

Finally, the transaction enables our addressable international market opportunities. Driving from the submission of our Canadian registration in the third quarter of '18, we've strategically evaluated additional OUS markets, considering a number of factors related to growth, competitive dynamics, profitability, regulatory environments and time to market. We're being deliberate and thoughtful on which markets we pursue, with a focus on unit economics and return on investment, and we expect the margin and pricing advantages afforded by this transaction over time to increase the number of international markets that Sientra can profitably enter into and drive incremental revenue.

I want to conclude my prepared remarks by commenting just briefly on our conviction in successfully executing this acquisition. This is critical. Through close coordination with our Lubrizol Life Science counterparts, a well-organized due diligence review, structuring of a well-vetted integration and transition services plan, I'm confident in our ability to execute a smooth integration of the breast implant manufacturing operation. We also recently this year hired Jeff Jones as Vice President of Operations to lead manufacturing and all supply chain functions within Sientra. Jeff's an industry veteran with over 30 years of manufacturing and quality experience, joined most recently from EarLens Corporation and previously held senior positions at both Boston Scientific and J&J. Jeff will be directly responsible for overseeing plant operations in Franklin and will manage the current Sientra dedicated team of managers, supervisors, engineers and operators, many of whom have been involved with this business since day 1.

In sum, I'm confident that we have taken the appropriate measures to maintain the supply and quality levels currently in place to meet our commercial objectives as we execute on a well-organized integration plan.

With that, I look forward to sharing updates from Sientra's new breast implant manufacturing operation in the coming quarters as we realize the expected benefits of this critical and necessary strategic addition to our business.

I'll now turn the call over to Paul to discuss the organizational efficiency initiative, provide further details on the manufacturing acquisition, our cash position and our updated 2019 outlook, before turning the call over to questions and answers. Paul?

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [4]

--------------------------------------------------------------------------------

Thanks, Jeff. Today, we also announced an organizational efficiency initiative designed to simplify operations and reduce spending, ensuring that resources are prioritized on physicians and patient-facing activities. Under the plan, Sientra will implement numerous initiatives to optimize and streamline spending, including closing miraDry's Santa Clara facility, outsourcing miraDry product assembly and consolidating a number of business support functions via a shared service organization at the company's Santa Barbara headquarters. The shared service organizations will streamline miraDry's quality, clinical, regulatory, customer service and G&A functions. We are confident that this plan will result in a simpler and more cost-efficient operation, while creating significant value. To be clear, Sientra will continue to strategically invest commercial initiatives to maintain a strong top line momentum in both our breast products and miraDry businesses.

As an organization, we will be even better positioned to deliver on our commitments to patients, physicians, employees and shareholders. We appreciate the contributions of all the employees affected by this action and thank them for their dedicated service. The company has notified affected employees and has taken steps to ensure a smooth transition for those employees in the organization. We expect that the initial phase of this plan will be completed during the next 10 months, with all efficiency initiatives to be implemented and finalized by year-end 2020.

Sientra estimates that the plan will reduce annual pretax operating expenses by approximately $10 million in 2020 and $15 million in 2021 as savings initiatives are fully realized. The company expects to record total pretax charges related to the cost savings initially -- initiative of approximately $3.7 million to $4.5 million. These charges are expected to be recorded over the next 10 months.

Turning to the breast implant manufacturing acquisition, I would like to provide some details on the purchase price and the gross margin opportunity. As noted in this afternoon's press release, Sientra is paying $20 million in cash and up to 600,000 shares of Sientra for the acquisition, depending on Sientra's stock reaching certain price milestones. Of the $20 million of cash consideration, $14 million is payable in cash at closing, with another $3 million due in each of 2021 and the year 2023. In exchange for this cash and stock consideration, we are receiving approximately $9 million of tangible assets, which includes manufacturing equipment, building improvements and process inventory, raw materials and supplies. We are also acquiring intellectual property rights, processes and know-how necessary for Sientra to manufacture its OPUS breast implants.

In the near term, we expect an approximately 200 to 300 basis point decline in our gross profit margin as we assume control of the manufacturing operation, which is still less than 2 years into its ramp-up and optimization. We believe that the progress made to date and the combination of Sientra's singular focus and internal expertise will accelerate efficiency, yields and volumes. As yields and volumes continue to increase, we expect gross implant and gross margins to return to current levels and improve thereafter. In 3Q in '19, our consolidated gross margin was 56.5%, excluding an $800,000 write-off of related to old Silimed round implants, our consolidated gross margins would have been 60% in the quarter. The balance of the change year-over-year was driven by a higher level of mix of miraDry console sales in quarter 3 compared to the same quarter a year ago.

Turning to cash. Net cash and cash equivalents as of September 30, 2019, was $121 million compared to $146 million as of June 30, 2019. As expected in the third quarter, Sientra made a $7 million earn-out payment to Miramar Labs' contingent right value -- sorry, Miramar Labs' contingent value rights holders based on the miraDry segment achieving certain sales milestones.

With over $120 million of cash on the balance sheet and a detailed plan to reduce cash burn, Sientra has the capital needed to strategically invest and drive strong growth across our portfolio. As noted in this afternoon's press release, we are raising our 2019 net sales outlook. We expect total net sales in the range of $82.5 million to $83.5 million, which represents growth of 21% to 23% compared to sales of $68 million in 2018.

I will now turn the call back over to Jeff for concluding remarks before we begin the Q&A portion of the call. Jeff?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [5]

--------------------------------------------------------------------------------

Thanks, Paul. I just want to emphasize the overall progress that the Sientra team has achieved during the third quarter. Our sales growth continues to pace at the high end of the aesthetics category. Overall growth of 33% year-on-year is driven by strong performance across both of our business units. That's significant. We've completed the acquisition of our Class III OPUS breast implant manufacturing operation in Franklin, Wisconsin from Lubrizol Life Science. This acquisition provides Sientra with the strategic advantages of a vertically integrated business model, including direct manufacturing control of our high quality breast implants, speed to market on our innovation pipeline and improved margins as yields continue to ramp. And finally, we've announced the implementation of a carefully developed shared services strategy that will support our 2 commercial business units in the most efficient manner possible.

I want to particularly express my thanks to our completely dedicated team throughout Sientra. And I'll now turn the call back over to the operator for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of John Block with Stifel.

--------------------------------------------------------------------------------

Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

Really solid quarter and very interesting announcement this afternoon. So I'm going to jump around a little bit. I guess, the first one, Paul or Jeff, rev's up $2.5 million roughly Q-over-Q, with OpEx down a similar amount from 1H level. So a big change from what had been going on in the organization. That's even before the reorg that you announced this afternoon. So maybe if you can just talk about the better cash management that we saw in the quarter, getting the better return in the OpEx dollar. And do you think that continues going forward? And then I've got 1 or 2 follow-ups.

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

John, I think Paul's in a better position to answer that. Paul?

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [4]

--------------------------------------------------------------------------------

Yes. I think we have said before that the businesses are starting to leverage on. And we've added a lot of the headcount last year. As revenues ramp up, you're seeing -- what you're seeing is natural leverage in the business that we've been discussing and that will continue to improve as we go forward.

--------------------------------------------------------------------------------

Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [5]

--------------------------------------------------------------------------------

Okay. Fair enough. And, Jeff, maybe I'll turn this one over to you. So breast market is flat, you called out, you guys are taking what looks like a lot of share with 35% implant and tissue expander growth. Might be a difficult question because we're not too far removed from the panel and Biocell, et cetera. But what are your expectations for market growth going forward from here? Or just even more broadly, are you seeing some of the headwinds that have been pretty pronounced around April or May? Are those starting to thaw a little bit here in the U.S.?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [6]

--------------------------------------------------------------------------------

Yes, it's a great question, John. What we're seeing is essentially a flat market as we indicated. And our projections going forward continue to paint a picture for flat demand with a combination of both augmentation and reconstruction. One of the things that we're most proud of is the progress we're making in the recon space with the superior -- we've got a superior portfolio on both sides, but we're particularly seeing some very encouraging growth on the reconstruction piece. So maybe that's a long-winded answer, but we expect the market to stay essentially flat and us to continue to take significant market share based on the combination of factors that are part of the Sientra difference.

--------------------------------------------------------------------------------

Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [7]

--------------------------------------------------------------------------------

Got it. And one last one, if I can quickly throw it in there. So, Paul, previously with the agreement, you didn't get the benefit, call it, of the scaling up of your breast implant volumes. Now you will, I get it. There's some near-term disruption, you're bringing on some employees, et cetera. But when we look out a couple of years, as the volumes continue to ramp, what does a, call it, a breast implant gross margin, look like for you guys at that point in time? And how accretive would it be versus where you had been over the past couple of quarters?

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [8]

--------------------------------------------------------------------------------

Yes. It's a good question. So we've been consistently saying that with the right mix of products and manufacturing, we -- our focus is go to a 70% margin on the breast implants, John. And we still have that same line of sight. And this, over time, will make that even more plausible. As we get in there, the volumes increase, and we push to the efficiency that we know the plan will be. Again, we're in second -- barely the second year of a start-up in this facility. As we gain experience, we have the volume throughput, that 70% is what our goal is.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from the line of Richard Newitter with SVB Leerink.

--------------------------------------------------------------------------------

Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [10]

--------------------------------------------------------------------------------

Congrats on the quarter. Wanted to start-off on guidance. So a big beat in the third quarter, and you're taking up the guide by less than the beat. And it implies a slight deceleration in the fourth quarter. I'm just curious, is this just conservatism? Or is there anything specific you'd call out with respect to the momentum pickup that you saw in the third quarter that doesn't continue in the fourth quarter? Any color there would be appreciated.

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [11]

--------------------------------------------------------------------------------

That's a good question, Rick. We provided guidance for the first time back in May, and that's with -- after several years of no guidance. The new midpoint of our revised guidance is at the high end of our original guidance. I would also say that the quarter 3 comp is easier than the fourth quarter comp, if you look at year-over-year numbers. And if you look at the -- if you normalize this by looking at a 2-year stack, you'll see that the quarter 3 growth rate and the implied 4 -- Q4 growth rate are the same. So we're very happy with where we are to date. We love the growth in both these businesses. So the year-over-year guidance, we're very happy with.

--------------------------------------------------------------------------------

Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. That's helpful. On miraDry, could you provide any color on the strength regionally? Was it balanced across U.S., OUS? Is it fair to say that you saw a sequential pickup in capital in both? And how is the consumable growth rate trending?

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [13]

--------------------------------------------------------------------------------

If you look at this quarter, we -- about 45% was in the U.S., and it was 55% international. It was a very strong console quarter. It's a record for North America, and our whole goal this year was actually -- our strategy was to get the placements out there as well. In addition to driving awareness, we wanted to drive the consoles. So between capital and consumables, it was about a 55-45 split, 55% being consoles for the quarter. But it was a very strong quarter on consoles.

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [14]

--------------------------------------------------------------------------------

And I'll just say that, Rick, that we're also very pleased to see the pickup in the domestic business here. As you've been following us, that's an area with significant upside opportunity. We're starting to see some very positive response on that front. So we're very pleased with the progress the team is making.

--------------------------------------------------------------------------------

Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [15]

--------------------------------------------------------------------------------

Great. And just one last one on the cash burn. It looks like if you back out the $7 million payment to Miramar or the milestone payment and you would have been at about an $18 million cash burn for the quarter, which is below both the first quarter and the second quarter. And then I just want to make sure, do you still feel comfortable, excluding all the payments related to the in-sourcing and the manufacturing announcement, do you still feel comfortable that you would have been on track to kind of achieve your cash burn of $35 million to $37 million in the back half, which would have been a big reduction from the first half?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [16]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [18]

--------------------------------------------------------------------------------

And I apologize in advance, I'm at an airport. So I guess, I just wanted to see -- maybe kind of talk a little bit about the breast recon side of that business. I mean, where are you now with respect to getting some of the follow-on implant revenues? And when I just think about that alone, like what does that opportunity represent if you were to get more convoyed sales just purely from capturing the implant where you weren't previously capturing them? And then also, maybe talk about what you're seeing in the market? I mean, you're taking 30 -- you're going 35%, competition is flat or losing share. I mean what's the competitive response in the market? What's the counter selling that you're seeing and kind of how has that adjusted your view of the go-forward dynamics here?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [19]

--------------------------------------------------------------------------------

Well, the last part first. We are not seeing any real significant effective response to the gains that we're seeing. It's a combination of the aggressive sales efforts from our PSC team but also the fundamental differences and the superiority we have in our products, both from an augmentation as well as our reconstruction portfolio. So we're seeing some very successful results from both our existing accounts and the new account acquisition programs that we put in place. And as far as your first question is concerned, on the follow through with the new accounts on reconstruction, which are essentially new accounts, we're adding new reconstruction accounts, primarily hospitals, at a very positive clip. So there's a lag between the sale of the tissue expanders that are the fundamental part of reconstruction and the follow through. And I use the razor-razorblade analogy on that side, too, that once we get into these new top-tier hospital accounts because of the quality of our tissue expanders, we see some significant upside with the follow-through on implants. I hope that answers your question? Does that help?

--------------------------------------------------------------------------------

Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [20]

--------------------------------------------------------------------------------

It absolutely does. And then just one follow-up question on just the breast implant business. I think you talked about taking competitive accounts. I guess, maybe could you help us understand how that dynamic works? If I'm a plastic surgeon, and I decided to start using Sientra products, how much of that account are you capturing day 1? Or is there trialing and what we're really seeing is the early days, and then you'll get higher utilization on an ongoing basis? Or just how much of that opportunity, just from the new accounts that you're opening up, is still on to come?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [21]

--------------------------------------------------------------------------------

Yes. It's very intuitive. It's logical. You don't go into a new account and all of a sudden take over 100% of the share of his practice. We're seeing some significant commitments upfront, but they're still relatively small parts of their overall practice. So we're earning that business starting from a relatively low level, and we're very pleased with the fact that we're growing in those new accounts as well as we are in the existing accounts. So I can't give you the specific numbers at this point, but we've looked at them in some detail, and I'm very encouraged by what I'm seeing.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [23]

--------------------------------------------------------------------------------

Congratulations on a really strong growth quarter, but equally as impressive, the leverage you drove there. Nicely done there, Paul. Just 2 quick ones for me. I just want to make sure I'm, I guess, both from a top line perspective, first. In the prior quarter, you were kind enough to give us a number of accounts that were new to Sientra. Just kind of curious if you could maybe either give that same statistic again or kind of help us better understand as you see this very strong market share growth here in the United States? Is that going deeper in those accounts? Or help us -- are you fanning out even broader? And then I just have one follow-up on the margins.

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [24]

--------------------------------------------------------------------------------

Sure. It's a great question. I mean, I'll give it a game as I've been giving it. We're -- year-to-date, we're -- 275 new accounts that did not buy last year. I think we were 200 last quarter. We're very happy with the growth of that. That's exceeding our internal expectations. And obviously, if the breast implant business is growing 47% for the quarter, obviously, we should be very happy with that. In terms of hospitals, we don't give it. We're also -- the number of the hospitals we've been adding all year in addition to the plastic surgery cash pay accounts is up dramatically as well. So 275, 9 months into the year, well ahead of what we wanted.

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [25]

--------------------------------------------------------------------------------

Sounds great. And then I apologize, I was juggling 2 calls, you may have addressed this earlier. You mentioned I think in your prepared remarks, Paul, that you expected a breast product gross margin to decline 200 to 300 basis points here initially as you roll in the Vesta facility, but I wasn't clear on when you expected to anniversary that and start to see that contribute from a margin perspective. And as an offshoot to that, I think I also heard you say this would be a dedicated Sientra facility, and it was my understanding that, that plant was also manufacturing some products for another breast implant player. So can I make the assumption that, that relationship would not be extended?

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [26]

--------------------------------------------------------------------------------

Let me take that one. So in terms of the acquisition, we've -- so we've leased the space that is dedicated to Sientra today. So it's over 24,000 square feet that's dedicated to us. It's our space and our lines and our people. So -- and we acquired the assets there that are associated with that. So it's a dedicated space within the facility with our employees, so now it is singularly focused. So that's what we acquire today. Does that help that question?

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [27]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [28]

--------------------------------------------------------------------------------

Okay. In terms of the margins, so the 200 to 300 impact, I said that on a consolidated basis. And the reason, and to be clear on what that is, is this is a start-up manufacturing facility less than 2 years in its ramp up, and the optimization is still in process. They've made tremendous progress to date, Lubrizol has, and we're going to take this over and continue that focus. As yields and volumes increase, we will expect the margins to come back in line in the near term and actually improve thereafter. So think of this as an acquisition of a facility 18 months in a start-up.

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [29]

--------------------------------------------------------------------------------

But I guess just to clarify that one last time, and I'll get back in queue. That consolidated basis is on the breast products or on the total corporate average?

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [30]

--------------------------------------------------------------------------------

Total corporate company.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from the line of Alex Nowak with Craig-Hallum.

--------------------------------------------------------------------------------

Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [32]

--------------------------------------------------------------------------------

Can you detail how the Allergan textured recall benefited the textured products in the quarter? And are the sales reps seeing from this disruption with Allergan, are they seeing any sort of cross-selling opportunities out there to hopefully transition those customers over to your smooth implants as well?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [33]

--------------------------------------------------------------------------------

The answer is, yes, that what we're seeing is a reaction among the plastic surgeons to take a different approach to their supplier of implants. There's no question, and I'm not trying to criticize anybody, but there's been some credibility that has been lost by Allergan with that whole ALCL safety issue. So what we are seeing is a -- more of an openness to the Sientra product line particularly with the established studies that indicate the superior safety profile that we have. So there are several ways to address this, but the bottom line is that the inherent advantages that we have in our portfolio are part of the process of getting this market share.

--------------------------------------------------------------------------------

Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [34]

--------------------------------------------------------------------------------

Okay. Understood. Got it. And you talked a bit about this when going through the manufacturing acquisition discussion. But just remind us, when do you plan to launch implants outside the U.S.? Is that still a 2020 story? And just in addition to Canada, how many other markets are you initially looking at?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [35]

--------------------------------------------------------------------------------

Well, we're not prepared to give guidance on other international markets at this point. But the point is that we've already initiated several regulatory filings and that we're approaching this in a very thoughtful way that the objective of global leadership is no longer the attractive objective. What we're looking at are those individual markets, where it is a profitable venture for us to launch the advantages of our existing products in the markets where we know that they will be accepted. So I don't want to make this a long story or a long-winded answer, but we're just being more selective in terms of the -- those markets that we're planning on launching in, and taking control of this manufacturing operation is going to be able to speed that up. So we'll share more of the details with you as we get into 2020.

--------------------------------------------------------------------------------

Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

--------------------------------------------------------------------------------

Okay. Got it. And just lastly, just confirming, there's no changes to sales functions here as part of the streamlining? And just kind of to that question, you're not assuming any sort of sales rep disruption over the next couple of quarters?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [37]

--------------------------------------------------------------------------------

I can't emphasize that enough that we have specifically cordoned off the 2 commercial groups, the miraDry Group and the Breast Products group, because the organization changes that we're making are really designed to be able to increase the support that we're giving them, so that I'm very focused on making sure that our frontline organization is not affected by any of these organization changes.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [39]

--------------------------------------------------------------------------------

I apologize, I'm going in between calls, but I'd like to focus on the miraDry business a bit. Now I know you had a pretty good U.S. quarter, it sounds like. So can you walk us through some of the operational metrics within that business and the results this quarter, including tenure of the reps, the structure of the sales reps in the business, consumables versus capital? And then just the profile of the accounts that are purchasing miraDry systems. Is it plastic surgeons, chains, medi spas, et cetera?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [40]

--------------------------------------------------------------------------------

Well, it's -- we have Kirk Gunhus in here with us, who's our General Manager, and Kirk knows more of the specific details than anyone else in the room. So I'm going to ask him to answer your question because it's a very important one. Kurt, would you like to address Margaret?

--------------------------------------------------------------------------------

Kirk Gunhus, [41]

--------------------------------------------------------------------------------

Thank you, Jeff. The U.S. market in Q3 -- let's just -- let's start with the sales force. The tenured rep that we have is now closer to 2 years. We are doing special trainings each month to create a sales team that knows how to speak to the doctor and use the miraDry story to get the system sold. The second thing is -- that you mentioned, is that the mix right now is we wanted to put more razors in the field. So we want to get more systems in the field so that as we continue to build our miraDry story with the digital advertising that we're doing, we will create more utilization. And so the whole emphasis of Q3 was to get those systems in play. So the mix was closer to 60% or 50% -- in the U.S. market, 55% was in the systems and 45% was in utilization. The third piece that I think is really important is there is a momentum within the miraDry offer and that is because we are deviating ourselves versus other devices that are in the field. We are finding that 76% of the people who do this procedure are under the age of 40, and that 88% of those people are actually new to the aesthetic market. And so this is creating a whole new picture for our plastic surgeons, our med spas and our dermatologists to see that this is a way to enter into a new consumer group, which will be the largest consumer group -- spending group starting in 2020, the millennials.

So right now, we see as our plastic surgeons are the first person that are buying this system. The second is our med spas, and then the third is our dermatologists.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

Okay. That's very helpful. So maybe let's take this a step further. You guys are focused on the systems right now that creates razors, then you can be a little bit more efficient, it sounds like, in terms of bringing patients in and making sure that there's good utilization of the systems. Now can you give us a sense at all in terms of timing or if you're going to layer this in over time? And when we start to see maybe some of the payoff of these investments?

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [43]

--------------------------------------------------------------------------------

Well, I can answer that, Margaret, because it's clearly a top priority within the miraDry strategy that because of the obvious advantages of the margin associated with the tips, that's a priority, in effect now, that we're putting plans in place to drive even more aggressively in 2020. So part of this is we realize the importance of demonstrating the sustainability, the profitability of the miraDry business, and the primary way we're going to be able to do that is increase the ratio of, as Kirk said, the blades versus the razors. So that's a critical part of what we're doing. And we're starting to see some real traction on that front. It's a strategic shift that we know we have to make work, and we're encouraged. I'm very encouraged by what I'm seeing.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Okay. And then last question is, that's a lot of revenue upside scenario and kind of strategic scenario, but as you look at both the gross margin profile, which I think you referenced was skewed towards the boxes which are lower gross margin, but how do you look at maybe improving gross margin for both the boxes individually as well as for the business? Over what time frame would that happen? And can you give us a sense of how operating margin starts to move higher or operating profit dollar starts to move higher within this business? Since it seems like it's a pretty key part of Sientra as you move towards cash flow breakeven and positivity.

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [45]

--------------------------------------------------------------------------------

Margaret, it's Paul. In terms of the tips, we're at 90%, although -- so I wouldn't expect a lot more movement on the consoles. As part of our restructuring our initiatives -- improvement initiatives, we've announced we plan to improve margins on the consoles beginning in 2021 as we attack the consoles in that side of it. And again, we mentioned on breast side. Our line of sight has been and will continue to be 70% on the breast side. Overall, the business, in addition to the efficient -- the organizational efficiencies we announced today, you're starting to see and you will continue to see just the natural leverage of the business as we no longer need to add in the infrastructure to run this business. It is naturally leveraging, and it will continue to leverage. It was -- in a way, where it is turbocharged by what we announced today with the organizational efficiency announcement.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Thank you. I'm not showing any further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.

--------------------------------------------------------------------------------

Jeffrey M. Nugent, Sientra, Inc. - Chairman & CEO [47]

--------------------------------------------------------------------------------

Great. Thank you, guys. Have a great day.

--------------------------------------------------------------------------------

Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [48]

--------------------------------------------------------------------------------

Thank you, guys.