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Edited Transcript of SIEN earnings conference call or presentation 7-Nov-17 9:30pm GMT

Q3 2017 Sientra Inc Earnings Call

Santa Barbara Nov 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Sientra Inc earnings conference call or presentation Tuesday, November 7, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Huiner

Sientra, Inc. - COO and SVP of Corporate Development & Strategy

* Jeffrey M. Nugent

Sientra, Inc. - Chairman and CEO

* Patrick F. Williams

Sientra, Inc. - CFO, SVP and Treasurer

* Zack Kubow

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Conference Call Participants

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* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* Kyle William Rose

Canaccord Genuity Limited, Research Division - Senior Analyst

* Scott R. Schaper

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q3 2017 Sientra, Inc, Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Zack Kubow with The Ruth Group. You may begin.

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Zack Kubow, [2]

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

A detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K that the company filed on March 14, 2017, and the company will provide updated risk factor disclosures with the company's quarterly report on Form 10-Q to be filed with the SEC shortly. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projection or forward-looking statement.

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

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

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Thanks, Zack, 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.

We continue to make good progress on our strategic objectives in support of the vision of the new Sientra, which I have continued to reference throughout 2017. This includes our focus on the combined $700 million market opportunity for our best-in-class breast implant portfolio; our world-class tissue expander portfolio, led by AlloX2 and bioCorneum, as well as our advanced silicone gel management products.

Securing FDA approval for U.S.-based manufacturing capability with our partner Vesta clearly remains our most critical corporate objective, and we have made significant progress towards approval, the current details of which I will outline later in the call.

Our strategic objectives also include integrating, repositioning and optimizing the recently acquired Miramar business to drive growth in the large underserved market for the reduction of underarm sweat, odor and hair of all colors.

I'm pleased to report that the FDA has completed its inspection of the Vesta manufacturing facility in Wisconsin. The regulatory team at Vesta managed the inspection since it is their facility being approved, but I can tell you that Sientra and our team of experienced experts were on-site to work closely with them through the entire process.

The reviewer cited 2 minor 483 observations, which were administrative in nature that we have already addressed and submitted to the FDA and are now filing -- excuse me, finalizing the remaining documentation to submit to the agency that would enable us to still get approval by the end of this year, first statutory review windows from the FDA.

Having said that, given the FDA inspection took longer to schedule, and frustratingly so, than we had rigidly anticipated, we would not be surprised if final approval slipped into Q1 2018. Based on our confidence of receiving approval, which was confirmed post the inspection, we started manufacturing finished goods product in early October that we are holding in quarantine as we build supply in preparation for the FDA approval and launch of Vesta-manufactured products. We remain confident in Vesta's ability to ramp production to satisfy our demand needs as we move into the second half of 2018.

To further underscore our commitment, on balance, the progress we are making with our PMA Supplement and manufacturing activities is very positive news. We are near completion of a significant step in the process towards unconstrained relaunch of breast implant products, which continue to be in high demand among plastic surgeons.

This was evident at the annual meeting of the American Society of Plastic Surgeons in Orlando in early October. We had exceptional booth traffic -- and it really was exceptional -- and physician interest in our breast implants and the AlloX tissue expanders at the meeting. We were particularly pleased with the positive feedback on our expanders and confident in our ability to gain share in the breast reconstruction market, pulling through our implant and scar management products.

The miraDry team joined Sientra at the ASPS meeting in our first customer event as a combined organization, and we made quite an impact. We leveraged the meeting to introduce miraDry to existing Sientra customers through KOL presentations and the miraDry booth itself. Many of our reps took the time to walk physicians to the miraDry booth and introduce their team to our customers, and I'm encouraged by this teamwork demonstrated by our sales teams and believe it is indicative of the enthusiasm from both segments working together and our ability to achieve cross-selling synergies going forward.

To further underscore our commitment to breast reconstruction market. In October, in conjunction with breast cancer aware -- month, we launched the Sientra full-circle program, a unique first-of-its-kind charitable program to support research to breast cancer prevention, detection and treatment to elevate awareness among the breast cancer and breast reconstruction communities.

As part of the full-circle program, Sientra will donate a portion of every tissue expander sale to breast cancer support and awareness initiatives. This initiative demonstrates our commitment to best serving reconstructive patients in multiple ways, and we look forward to helping to provide grants for up to 3 nonprofit organizations or research projects beginning in 2018.

In the third quarter, we were extremely pleased that our newly available 10-year safety data was published in the Aesthetic Surgery journal, highlighting the longest long-term peer-reviewed competitive comparison of the data of U.S. breast implants. The comprehensive review confirms that the textured and smooth implants are both safe and important options for patients undergoing aesthetic or reconstructive breast surgery and notably also highlights the strong relative to performance of our Sientra products as compared to 10-year data of our 2 U.S. competitors. As a clinically driven company, we are greatly encouraged by the objective and independent results and stand behind the demonstrated safety and efficacy of our products.

Shifting to miraDry segment, which we took over late in July following a short deal close period, and therefore, had 2 months in the third quarter to begin making some necessary changes to improve the business. On our call last quarter, I identified 3 key areas of near-term focus that our team, led by board member and strategic adviser Keith Sullivan, who's the ex-Chief Commercial Officer of ZELTIQ, would evaluate our -- with respect to our miraDry business.

These included in evaluating, optimizing our treatment protocol, investing to expand the sales force and deploying proven marketing tactics with an efficient go-to-market strategy. I'm very pleased with the progress we've made in all 3 areas thus far and look forward to rolling these improvements out of the market -- into the market with a targeted relaunch of miraDry expected to drive the business starting as early in 2018 as possible.

With respect to the optimization of our treatment protocol, we've already made significant progress in identifying a path to simplify and shorten the procedure for clinicians. We expect this will enhance the treatment experience for patients and generally broaden the appeal of the product as we move to make miraDry faster and easier for a broader group of physicians and patients. We believe this is the basis of expanding the appeal of the miraDry technology.

We're working with a few customer sites to finalize the updated treatment protocol and develop the training and messaging in anticipation to roll out our sales force in early 2018 at our sales meetings. We have also made strong progress in expanding our sales team, especially in North America. Finally, we begun the process to better understand our marketing position through primary market research, but at this time, we are limiting market investment to drive demand until we complete our work on further improving the protocol and, of course, having the necessary sales force headcount to capture the demand.

Overall, I am extremely encouraged by the quick advancement we have made in the integration and repositioning of the Miramar and miraDry segment. That being said, our third quarter sales were around the lower end of our expectations due primarily to some large consumable sales sold into the channel at the end of the second quarter and in early Q3 before we closed on the transaction.

As a result, we expect the segment to contribute closer to the lower end of the previously stated range of $8 million to $10 million in the second half of 2017. But we continue to feel confident in the market opportunity as we move into 2018 with the technology and people changes we are making.

As we look beyond our current offerings, I'd like to reiterate that we see a significant opportunity to further expand our current $700 million total addressable market. First is the $300 million regenerative product market, which is directly adjacent to our breast reconstruction business. Second is the $500 million international market for breast implants that is now open to us with the expiration of our Silimed agreement.

As I've stated in the past, we will continue to evaluate OUS opportunities in the medium to longer term, particularly building on the growing miraDry international base and sales channel. And this is one of the synergies that is resulting from this combination of companies. While expansion into attractive adjacencies has been a key piece of our strategic intent to diversify our revenue, we remain steadfastly committed to our Sientra breast aesthetics business and a planned relaunch of our breast products since we moved into 2018.

I'll now turn the call over to Patrick for a detailed review of our third quarter '17 financial results and some further details on the miraDry product expansion. Patrick?

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [4]

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Thanks, Jeff. I'll now provide commentary on our third quarter 2017 results, and greater detail can be found in our earnings release issued earlier today; our 10-Q to be filed shortly, and our supplemental financial information reference, which can be found on our Investor Relations website.

Before jumping into the financials, we wanted to provide some further color on our acquisition of the miraDry procedure and 2 of the 3 near-term areas of focus for us: technology and people. On the technology front, we continue to get strong feedback from our customer base, confirming all of the market research that supported our acquisition that miraDry works. Our near-term efforts have been focused on improving the treatment protocol with the goal to reduce the procedure time to under an hour and simplify the delivery in order to improve the adoption across all specialties.

The key drivers of this improvement include, delivering the high-volume anesthesia using a multi-injector needle array with lower gauge needles versus the current large-gauge single needle or cannula. We believe this will be a more efficient, simpler and more comfortable delivery of anesthesia with the opportunity to reduce the time of this part of the procedure in half from the current approximate 20 minutes to anesthetize 2 underarms on a single patient.

Number two, redesigning and simplifying the templates used to mark the treatment area in order to guide the placement of the handpiece during the procedure. This will not only significantly reduce the number of individual templates from the current 17 used today, but it will also make the templates more intuitive and representative of the new protocol.

Number three, updating the user interface to allow clinicians an easier process to unlock higher-energy options and decreasing the posttreatment cooldown time, which we believe will improve not only efficacy and single-treatment success but also still maintain the safety profile which we are known for.

On the people front, we have made strong progress in completing the build-out of our sales leadership team in North America. We appointed Chris McGreevy as Vice President of North America Sales, who I worked with at ZELTIQ as we built the CoolSculpting brand and most recently served as Vice President in charge of the entire East region of sales for CoolSculpting. Under Chris, we have since added 2 new regional sales directors on the capital sales side, filling out our management team to cover our 3 sales regions.

On the consumable sales side, we added a senior director and filled our open director positions to round out our PDM or consumable team. We are very pleased with the quality of candidates that we have attracted to these roles, many of whom I have worked with directly before as well as Keith.

With this proven sales leadership team in place, they have begun actively recruiting individual territory sales reps. In North America, we currently have 8 capital reps or area sales managers and 8 consumable reps or practice development managers with the goal of reaching approximately 20 ASMs and 15 PDMs in the near term. Through our near-term focus and hiring efforts are in North America, going forward, we may make some additional -- additions in sales leadership internationally, and we'll provide more details in our international strategy and plan as we move through 2018.

To put our hiring efforts into perspective, since taking over on July 25, we have added a total of 17 heads but are only net up 1 head, which speaks to the significant turnover in the last few months. Due to the closing of the Miramar acquisition within the quarter, today's earnings release only shows GAAP recorded results for the stub period based on Miramar closing as of July 25, 2017. In an effort to provide historical consolidated results and a full consolidated Q3, the supplemental financial and operational information schedule on our website shows all periods on a pro forma consolidated basis.

The rest of our financial results with the exception of adjusted EBITDA are all reported on a U.S. GAAP basis. As a reminder, we will continue referencing an adjusted EBITDA margin, which we define as earnings before interest, tax, depreciation amortization, stock-based compensation and onetime legal settlement. Please refer to our supplemental financial information, earnings release and 10-Q for tables on non-GAAP and GAAP -- for tables on GAAP and non-GAAP pro forma net sales and a full reconciliation of adjusted EBITDA to its GAAP counterpart.

Beginning this quarter, we are also reporting our results in 2 segments: breast products and miraDry. Breast products will include our breast implant portfolio, our tissue expander portfolio and our bioCorneum scar management product. MiraDry will include the entirety of the recently acquired MiraDry -- Miramar business for both capital and consumable revenue.

Moving now to our financial performance. Consolidated total net sales for the third quarter 2017 were $9.8 million on a GAAP business and $10.7 million on a pro forma basis compared to total net sales of $6.5 million under GAAP for the same period in 2016. Net sales for our breast products segment totaled $7.7 million. This compares to total net sales of $6.5 million for the third quarter 2016, driven primarily by continued strong performance of our breast tissue expanders, led by our novel AlloX2 dual-port product line.

We expect sales in the breast product segment to continue to grow modestly in the near term driven by the lack of implant supply, and the growth in our breast tissue expander portfolio will augment this as we continue to ramp up manufacturing capacity and as our sales team continues to gain tenure and penetrates deeper within the breast tissue expander market. I want to reiterate that we do not expect to sell entirely out of breast implants ahead of resupply. We do still expect sales in the segment to begin to slow modestly relative to 2016 in the second half of 2017 and even going into Q1 2018, depending on the timing of our FDA approval.

We began to see the slowdown trend this quarter related to the full utilization or usage of some of our most popular or highest demand SKUs. As we have stated in the past, we have prioritized manufacturing of these SKUs at our Vesta facility ahead of our full commercial relaunch in 2018.

To be clear, this is not a demand issue. 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 on past calls, as planned, we have begun manufacturing Vesta supply product ahead of approval with new implants under quarantine until approval is final, which given unexpected delays of scheduling, the FDA plant inspection could occur in Q1 2018. 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 third quarter 2017 for miraDry business segment totaled $2.2 million on a GAAP basis and $3 million on a pro forma basis. We expect revenue growth within this segment to accelerate sequentially in Q4 and more meaningfully in 2018. We believe that as our growing sales organization is rounded out, and we are able to leverage our enhanced protocol in marketing initiatives, we can drive increased adoption and utilization in the miraDry segment.

Gross profit for the third quarter 2017 was $6.3 million or 65% of sales. This compares to gross profit of $4.7 million or 72% of sales for the same period in '16. This decrease is primarily due to the increase in miraDry, which carried a lower margin than breast products at this point in time.

Operating expenses for the third quarter of 2017 were $20.2 million, an increase of $5.7 million compared to operating expenses of $14.5 million for the same period in 2016. The increase in operating expenses was primarily related to Miramar-related acquisition costs as well as the inclusion of the miraDry operating expenses subsequent to the acquisition. Net loss for the third quarter 2017 was $14.4 million on a GAAP stub period basis compared to $10 million for the same period in 2016.

Adjusted EBITDA for Q3 '17 was a loss of $11 million versus a loss of $8.5 million in Q3 '16. The year-over-year decrease can be mainly attributed to the inclusion of miraDry. Net cash and cash equivalent, as of September 30, 2017, were $37.6 million compared to $55.5 million at the end of Q2 '17.

The larger-than-normal decrease in cash was due to our previously announced onetime $9 million settlement -- legal settlement with our former breast implant manufacturer. We still have in place our $50 million credit facility comprised of a $10 million revolver and $40 million in term debt. We have drawn down $25 million on the term debt and have access to another $10 million upon FDA approval. And another $5 million upon achieving $75 million in trailing 12-month consolidated revenue.

Our $10 million revolver is based on eligible accounts receivable in finished goods, which we expect will increase with the relaunch of our breast implants and the growth of miraDry. We have no current outstanding amounts under this $10 million revolver today. As always, we will continue to be good stewards of our cash, and opportunistically with market conditions, we'll look to potentially strengthen our balance sheet to ensure we maintain adequate capitalization.

As we have stated in the past, we will not be providing full revenue and profitability financial guidance. As we remain in market position control selling mode, we are still awaiting FDA approval of the Vesta manufacturing facility and now working through the integration of miraDry.

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

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

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Thanks, Patrick. And thanks for describing the continued disciplined company that we've created here.

I am pleased with the progress Sientra has made in the past quarter as well as the recent past 18 to 24 months in solving the challenges and in executing on each of our near- and long-term strategic objectives. I want to repeat that we continue to grow into a larger, more diverse, global aesthetics company. That is what we're doing. That's what we're building. While it is possible that the FDA's approval of our facility may take marginally more time than previously expected, we are confident in our ability to manage existing inventories as we await full approval and drive towards full-scale manufacturing and supply in mid-2018.

We are seeing a strong growth opportunity across the broader portfolio with a differentiated AlloX2 tissue expanders breast reconstruction market, bioCorneum for scar management and a promising lifestyle aesthetic market for miraDry, the only FDA-approved treatment option for excessive sweat, odor and hair of any color.

I remain extremely proud of our team, and we couldn't have made these accomplishments without them. And I'm excited to continue to build on our momentum across new segments as we move into 2018 and relaunch our entire breast implant line. And as we continue to leverage our exceptional products, people and relationships, as the new Sientra, I cannot say enough about the quality and commitment of our people and the unique culture that we have supporting them.

I've personally been fortunate to have worked in strong organizations and cultures in my career. The Sientra team we have with us is by far the strongest that I have ever had the privilege of working with. This team is capable of continued superior performance and overcoming significant obstacles like the one we have overcome during these past 18 to 24 months.

We will be at the Stevens Fall Investment Conference tomorrow, Canaccord Genuity Medical Technology and Diagnostics forum on Thursday, followed by the Stifel Healthcare Conference on Tuesday November 14. We look forward to seeing as many of you there as possible, and now I'd like to turn the call over for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Kyle Rose from Canaccord Genuity.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [2]

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So I just wanted to ask a few more questions on the status of the FDA. Obviously, it seems like the inspection took a little bit longer, but that seems to be wrapped up. You talked about a few just administrative-type questions that you've already responded to. I guess could you give us a little more color on what specifically needs to take place on your end before you'll actually get the full submission package to the FDA? And just trying to understand -- how big of items are still outstanding, or if it's just we've got the holidays and the government slows down around the holidays?

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

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Well, I'm personally familiar with that phenomenon, and we're taking it into account. I think that to be as clear as I can, I want to reiterate that we've already submitted our responses to those 483 observations with the heavily experienced supporters and attorneys that we have been using through this entire process. So those responses have already been submitted, and they have been described as extremely minor, technical, including misspellings and things of that nature, which are part of the perfection that the FDA requires. In terms of the remaining documentation, the FDA requested some information from the PMA Supplement to be broken out in a very different way, and we are providing that information in the coming weeks. Based on these stacks, our submission of the remaining documentation -- and I want to highlight the fact that the remaining challenge is documentation in the format that the FDA has requested. That would still enable us to get approval by the end of this year for all of the statutory review windows and time lines, that many of us have been through several times. However, given the unanticipated delay in the beginning of the inspection -- and I don't want to get into a lot of details here, but we had scheduled the inspection of at least 2 months sooner than it actually took place. And that even with that -- and the outcome of the inspection, we could possibly see the approvals slip into the first quarter of 2018. But we're prepared for that. I'd also like to add that based on our confidence of receiving approval, we began manufacturing commercial-ready finished goods at risk, I might add, but also with confidence that our facility in early October before the FDA inspection and that we continue to do so with a focus on our highest demand products. I hope that answers your question.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [4]

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Yes, I think, Kyle, it's Patrick. You brought up the holidays and we certainly took that into account. I mean, we are starting to get as we look at it, we can still hit the end of the year, but it is in the hands of the FDA. And we just wanted to get that out there in the marketplace Wall Street side of the world just over not sitting people with the people panicking with the binary event. So getting ahead of it.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [5]

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Great. I appreciate the extra color, and then, wanted to transition to the Miramar side. Just wondered, can you give us a little more color -- I mean, you talked about probably coming into the -- towards the lower end of the guidance in the second half of this year, but you're putting a lot of pieces in place and making some investments to your drive would -- what you characterize as a meaningful acceleration when we get into 2018. So I guess, just can you help walk us through the cadence of what that acceleration should look like when you think about getting the sales force investments made, realigning the strategy and just how we should expect that cadence over the course of the year?

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [6]

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So I'll take that one Kyle. It's a great question. I think we'll hold off a little bit on giving specifics on what the number looks like going into next year per the comments that I made. Everything's being focused right now. It's really not that different then historically what, I think, people have seen when Keith and I were at the CoolSculpting brand. It takes a little bit of time to right the ship. We've gone through the protocol. It's been very well received out there within the physician channel that we've spoken to, and as I mentioned on the prepared comments with the headcount, even though we're only up net 1 head, we've added 17 heads in the quarter. So as you can imagine, there was -- some of that was voluntary, and some of it was involuntary, but we've gone through -- and we're starting to build that foundation in place. And really, the key for us right now is we've got that sales leadership team in place, and if you are keenly familiar with our goal is to try to get all of those ASMs and PDMs onboard before we finish up the year so when we hit our sales meeting in that January time frame, we've got a cool group of people ready to go. So I'll hold off on talking about what cadence look like, but obviously, we would expect it to ramp up, what I would call, throughout the year just based on really how quickly can we bring people on and then start rolling out some of these improvements.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [7]

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And then last question and I'll hop back in the queue. Just where is the inventory and capacity of the AlloX2 stand now from the expander side and I guess the overall percentage of mix there? And then second part of that question is, I understand you guys are still inventory constrained on the augmentation side or on the implant side? But was there any impact from the hurricanes in the 3Q?

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Charles Huiner, Sientra, Inc. - COO and SVP of Corporate Development & Strategy [8]

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Yes, Kyle, this is Charlie. I'll take that. In terms of AlloX2 and capacity from SiMatrix, which is also a subsidiary of Vesta, we're feeling very good right now on the supply that we have now on our entire tissue expander portfolio inclusive of AlloX2. Clearly, AlloX2 has become sort of the cornerstone product, the most differentiated product in our tissue expander portfolio, and I would say with that certainly there's a lot of momentum there on AlloX2, although we see sales across all 3 lines of our expanders. The other sort of piece of information on the AlloX2 that we're starting to see is also that the smooth expanders, both AlloX2 to as well as our Dermaspan are starting to see sales. So just to remind you, we've got textured expanders as well as smooth expanders, and we're seeing good uptake on both smooth and textured. And really, we're feeling good about the sequential growth. In the expander category again, to remind you, we acquired this product really at the end of last year and really only began selling it beginning this year. So we're feeling very good about the expander business. We're feeling very good about that as with sort of initiation into our broader breast reconstruction intent, and again, no problem with supply. I'll pass it over to Patrick on the hurricane.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [9]

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Yes, a little bit, but what began, these are procedures that are just going to get pushed out. We definitely have some decent sized business in both Florida and Texas. And so I guess with us being constrained on the implant side, it's not going to really impact at all that much, but on the expander side, we had a really strong quarter, but it could've been a little bit better. So maybe a little bit of a pushout, Kyle, but nothing overly significant for us, at least based on the stage we're at right now.

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Operator [10]

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

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Scott R. Schaper, William Blair & Company L.L.C., Research Division - Associate [11]

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Hi guys, this is Scott on for Margaret. I wanted to start first on Miramar. What are the revenues being generated at this point in the quarter? Is it all U.S.? Are you placing systems? Are you just servicing existing accounts with consumables? And then the second part of that question is, expectations for the productivity on the capital side. It sounds like you're targeting folks that have experience placing capital in the aesthetics base, so is it reasonable that they could potentially ramp quicker than originally thought in their ability to cross-sell?

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [12]

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Yes, I'll take that one. I think on the latter side, yes, our hope would be that because we're hiring folks that are experienced or even folks that we know that they would ramp up a little bit quicker and leverage not only their experience but the relationships that they've had in the past, it's -- there is a strong focus right now, Scott, on the North America side. I went through the headcount already, and I'll just say, look, we're adding those heads. We're trying to improve the protocol a little bit so a little bit lighter than what we had hoped in the quarter, but I think in light of the turnover that we had it's expected at this point. You'll probably note that we didn't break out capital versus consumable, and I know that, for modeling purposes, that creates some angst for you guys, but we want to get our arms around this. Qualitatively, I'll give you some color around that. The $3 million on a pro forma basis was a little heavier on international this quarter. And it was a little heavier on the bio [tip] size of the consumable side. And I would just say, I think, that speaks to the opportunity we still have in the U.S., which is one of just getting the team in place and starting to hit the ground running as we really, kind of, exit '17, but more importantly, as we go into '18. That's why we felt it was prudent to get some lowering of that range on that $8 million to $10 million.

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Scott R. Schaper, William Blair & Company L.L.C., Research Division - Associate [13]

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Okay. That's helpful. And then the details on the administrative things was helpful. I wanted to follow up on the comments you made about the building of the product already. I guess, what scale are you building these products at? And does this -- and could that potentially accelerate your timing of ramping by the second half of '18? I know you said that was still -- what your time frame was and what you guys are guiding to, but are you building -- are you building the inventory faster now post-discussions with the FDA than you were originally expecting. Could there be any impact from that?

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

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Let me take that because I've got a few decades of going through this process. That Vesta has demonstrated competence in being able to start up new processes and accepted, quality-compliant devices, but in any start-up situation, as you can imagine, there is a ramp that is -- starts at a conservative level and the challenge that we're working on together with Vesta is to accelerate that ramp as quickly as possible. That we've literally had approximately a month in producing finished goods that meet all criteria, but we have spent months prior to that optimizing all of the factors, including the process itself, and the short answer to that question is, we have a forecast of how quickly we're going to expand the yield, the planning values that go into this, but there is still work to be done. We find Vesta to be very cooperative and working towards with us toward that. But this is a nonanswer because we don't have the experience in terms of how quickly they're going to be able to ramp this up. The one statement that we've made is that we have a target to get out there as aggressively as possible but that our target is to reach a level of productivity by the early second half of the year that we expect to be able to meet a substantial portion of our demand. Does that help without giving you a specific timeframe, which I can't?

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Scott R. Schaper, William Blair & Company L.L.C., Research Division - Associate [15]

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No. Yes, that's helpful. And just one final one. It sounds like you guys have been making some improvements to the protocols in the actual procedure itself. But can you give any color on -- you've had Miramar in-house for a little while now. Does any improvements you've made to the organization or the infrastructure that could drive growth whether it be improving incentive constructures or anything like that, that maybe people are thinking about.

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Charles Huiner, Sientra, Inc. - COO and SVP of Corporate Development & Strategy [16]

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Yes, Scott, this is Charlie. Let me just tack onto what Jeff said to give you just a little bit more detail on our manufacturing strategy, and then I'll kick it over to Patrick to follow up on your question on Miramar and miraDry. So just to follow on from Jeff, what we are doing and very clearly focused on with our partner at Vesta is taking a look at our existing inventory and our high frequency or highest-order products, and we are absolutely prioritizing with Vesta the build-out -- the commercial build-out of products to meet the demand in those highest-demand SKUs. So in terms of what that means as we go through the year to Jeff's point, certainly, we feel very comfortable and confident that, by the second half of the year, we're going have -- the levels of inventory across all of our SKUs to be able to approach the market in a fully supplied way. In the first half of the year, as we've stated, we're going to be more focused -- and our build right now is really more focused on those products that are at highest risk of stock-out naturally. And that's really the sort of precision-level manufacturing that we're going through. With Vesta, you can imagine, as we do it, we are climbing the training curve or they are planning that curve. And that's really part of the reason that we've guided towards the back half of 2018 where we get to those full planning values and yields.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [17]

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So then Scott, on your question, the answer is yes. We're making some tweaks already. We implemented some new stuff. You mentioned the commission plan and things like that. And the answer is, yes, those are things that we are addressing, and we have implemented some things, not dissimilar to what we've done in the past, at prior -- the handbook that was kind of, or the playbook, I should say, at CoolSculpting. So I think just stay tuned. A lot of that will come up. We've got a big event in the sales meeting coming up in the 2018 time period, and right now, we're just -- we're kind of just plugging away and trying to get the team built out and getting that protocol all squared away. So we're not looking to create a lot of demand right now until we get some of our ducks in a row, and once we do that, though, we do believe that we can ramp it up much quicker, and I think it gets to what your -- I think maybe your first question was, which is how quickly can you ramp up a new person coming onboard, and I think the answer is we have conviction that we can do that quicker, hence the strategy.

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Operator [18]

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And our next question comes from the line of Jon Block from Stifel.

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Unidentified Analyst, [19]

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This is actually Scott on for Jon. I just have 2 questions for you. First on the gross margin, kind of the mid-60s. How should we think about it moving forward with Miramar ramping. I know you said Miramar was a little heavier in international, which carries a lower gross margin, but how should we think about it kind of in the out years as both the businesses are more mature? How do we think about the gross margin there?

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [20]

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Sure, as a consolidated business in the out years, we should see gross margins exceed 70%. It really is a mix issue. So there's a couple dynamics happening. One right now is that we did have a higher percentage of revenue of that $3 million that was international. That's all through distributor so that's all wholesale pricing. And I would tell you that the wholesale pricing that was put into place when we took over the company was extremely, extremely low. That is one of the things we are actively working on right now is to harmonize all that stuff, and obviously ensure that it's a win-win not only for us as a company, but the distributors can make money. Over time, I guess in the near term as we right-size the ship with the North America sales, you will see more capital sales come in initially. That is the goal. The capital of tomorrow is the consumable -- the capital of today is the consumable of tomorrow. Capital does have a lower gross margin around that 50%, 55%, but that consumable is sitting at 85%. So I do have conviction that once we get the mix down and even on the international possibly moving into more of a direct sales force strategy with key markets, you will see that margin start to creep up, and I don't think it's going to be that dissimilar, and I hate to keep going back to CoolSculpting, but a very similar sort of cadence of how gross margin's crept up over the 3 or 4 years as we grew that business.

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Unidentified Analyst, [21]

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And then, on AlloX2, it's good to hear the positive momentum for that product. I just want you guys to talk about or give us a little more color on how that kind of -- what synergies there are to the implant business and do you see any pull-through just from the positive momentum of the tissue expander?

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Charles Huiner, Sientra, Inc. - COO and SVP of Corporate Development & Strategy [22]

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Yes, this is Charlie. And it's a good question. It's really again the whole breast reconstruction market is the market that we have started to open up when we made that acquisition earlier or late in 2016. And absolutely, the strategy was always to have it a very strong tissue expander portfolio, but as you may know, it's really typically a 2-stage process where you start with a tissue expander, expand, and then once you have expansion, you replace it with the breast implant. And so clearly going forward, when we have full supply, in particular, the goal is going to be to be in a position to offer the whole expander and implant and have that be a bigger sale each time we sell into a hospital. So clearly now with supply constrained, we don't have the same opportunity for that 1, 2 expander implant sale and pull-through, but we absolutely expect to see that, and again, that is sort of the foundational piece of our whole breast reconstruction strategy going forward.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [23]

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We still have the opportunity down the road of the larger size of the wall on the implant, which we continue to work through. As you can imagine, those are not our priority right now, and in terms of the first product that's coming off the line at Vesta and what we're building right now. So I think, there's a really good opportunity in reconstruction in general, and the AlloX2 is resonating. I think the ability to have the physician control, postop, and drain fluids to prevent seromas, et cetera, is truly resonating out there.

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Operator [24]

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

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

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Maybe just from me to start, and I realize it's still early days in this regard, but could you maybe characterize or contrast the growth that you saw both in the aesthetic space from an augmentation perspective relative to recon perspective now that you're seeing the growth with both AlloX and also Dermaspan, and then I had a quick follow-up.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [26]

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I might need you to ask one that again, Chris, I just want to make sure I'm answering it correctly...

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

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Yes, I'm just trying to discern the relative growth rates that you're seeing between the 2 segments -- between reconstruction or just pure augmentation now that you have a more robust platform for reconstruction.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [28]

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And is that question market-wide or specifically for us or both?

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

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Specifically for you.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [30]

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Okay. So on the implants I would say, obviously, we're relatively flat if not down a little bit. As we mentioned in our prepared comments, we just don't have the supply right on the implant site. So that's just sort of it is what it is. On the AlloX2 side, we're -- what is it, breast tissue expander side in general, we're seeing some decent growth. In the beginning of the year, we talked about that number ramping up every quarter, and it has done that. And I will say that we're off to a decent start as we go into Q4. So it's -- all things are good. So we brought on some new marketing support. We've got a strong head of marketing now on the implant side for us with some very strong experience in the reconstruction market, and we're expecting some really good stuff on expanders as we go into 2018.

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Jeffrey M. Nugent, Sientra, Inc. - Chairman and CEO [31]

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I think the other part of that, that might help and I don't know if you're comparing the rate of growth when Sientra first started, but I'm sure you recall that we were on a very aggressive share-gaining profile. And that in a relatively short period of time, less than 3 years, we had gotten up to approximately a 15% market share. And that was all augmentation. Now the market has changed dramatically since then, but we have not relied on the old pattern, and we are, frankly, looking at more aggressive growth rates on both, period. And I think there are a number of differences between that, which we can discuss at a later time, but I would not automatically assume that the reconstruction segment would necessarily grow faster than the augmentation.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [32]

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Understood. And then maybe just to clarify one of your earlier comments about on the manufacturing scaleup a little bit there at risk with Vesta. Could you maybe highlight what -- when you're thinking about that initial production historically, your fastest growth area was on the textured side and the shaped and with some of the recent concerns we've had in the broader marketplace, not regarding your products specifically, is that where we should think about growth coming forward with the initial volumes? Or should we think about maybe more a reversion and more of a smooth round type portfolio when you think about the augmentation space?

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

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Well, I think the current plan calls for, as we've said earlier, to focus on the SKUs that are in most demand, and the SKU is going to be on the smooth round, but at the same time, we already have textured SKUs already in the production miss -- mix. And that there are a number of factors affecting the demand of one versus the other. So this is a question of current capacity, and we're going to have to switch from one to the other as quickly and intelligently as we can, but the other part of our plan is to expand capacity and to just drive the ramp that is typical of any new product or new manufacturing start-up. So I hope that answered your question.

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Patrick F. Williams, Sientra, Inc. - CFO, SVP and Treasurer [34]

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Yes. As a reminder, Chris, in the marketplace, smooth round is probably 80%, 85% of the products out there. And ours has historically not been that high because, to your point, when we came out, we were known as the textured shape company, right. So we are-- at our peak, we're probably about 60% and -- 40% on the textured, 60% on the smooth round. We will -- because of some of the issues happening out in the marketplace with some of the buzz on the textured product, we have seen doctors in our procedure migrate over to smooth rounds. So we're probably closer to call it 70%, 75% on the smooth round right now. I will say that we haven't seen a change in procedural volumes. This is simply just a shift-out of doctors choosing to go from textured to smooth.

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Operator [35]

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And that does conclude our Q&A session for today. I'll like to turn the call back over to management for closing remarks.

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Jeffrey M. Nugent, Sientra, Inc. - Chairman and CEO [36]

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Good. I'd like to, once again, thank you all for joining us on the call today. We are firmly convinced that we have the correct strategy and resources to include what I would consider to be best-in-class sales organizations that we are within striking distance of getting the full FDA approval with Vesta and that, in combination with that happening in the very close future that I look at Sientra as a significantly stronger organization in part because of the diversification that we have decided upon well over a year ago, and it's something that was just obvious to us. So it goes back to the vision that we have to create Sientra as a global aesthetics company and one of the strategies I know that I'd used a number of times in the past is by continuing to grow by both organic innovation as well as moving into adjacencies. So again, I can only tell you the confidence that we have here, and we look forward to continuing to share information as soon as it's available and consider ourselves a very unique company. So again, thank you all very much. Look forward to seeing you soon.

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Operator [37]

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