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Edited Transcript of SIEN.OQ earnings conference call or presentation 9-Nov-20 9:30pm GMT

·42 min read

Q3 2020 Sientra Inc Earnings Call Santa Barbara Nov 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Sientra Inc earnings conference call or presentation Monday, November 9, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jeffrey M. Nugent Sientra, Inc. - Advisor * Kirk Gunhus Sientra, Inc. - SVP of Worldwide Sales * Oliver Christian Bennett Sientra, Inc. - General Counsel and VP of Compliance & Legal * Paul Sean Little Sientra, Inc. - CFO, Senior VP & Treasurer * Ron Menezes Sientra, Inc. - President & CEO ================================================================================ Conference Call Participants ================================================================================ * Alexander David Nowak Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Anthony V. Vendetti Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst * Christopher Cook Cooley Stephens Inc., Research Division - MD * Ian Tolle Canaccord Genuity Corp., Research Division - Associate * Jonathan David Block Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research 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's Q3 2020 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 today, Mr. Oliver Bennett. Thank you. Please go ahead. -------------------------------------------------------------------------------- Oliver Christian Bennett, Sientra, Inc. - General Counsel and VP of Compliance & Legal [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon, and welcome to the Sientra Third Quarter 2020 Earnings Conference Call. I would like to remind everyone that in our remarks today, we will include statements that are considered forward-looking statements within the meaning of United States security 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 previously filed annual and quarterly reports on Form 10-K and 10-Q and its quarterly report on Form 10-Q that the company filed this afternoon. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projection or forward-looking statement. I would also like to note that Sientra uses its Investor Relations website to publish important information about the company, including information that may be deemed material to investors. Financial and other information about Sientra is routinely posted and is accessible on the company's Investor Relations website at www.sientra.com. Today, on our call, we have Jeff Nugent, Sientra's Chairman and Chief Executive Officer; Paul Little, Sientra's Chief Financial Officer, Senior Vice President and Treasurer; Kirk Gunhus, Senior Vice President of Worldwide sales; and Ron Menezes, Sientra's incoming President and Chief Executive Officer. I will now turn the call over to Jeff. Jeff? -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [3] -------------------------------------------------------------------------------- Thanks, Oli, and thank you all for joining us today. Sientra recorded exceptional results in the third quarter, with net sales of $19.2 million. This represented a 54% sequential growth versus the prior quarter. Most importantly, despite the challenges in the marketplace, our Core Breast Products segment grew by 21% year-over-year to record the highest-ever breast products net sales in the company's history. On the Breast Products segment front, total breast products net sales in Q3 was $15.3 million, which is the highest quarterly breast product sales in our history, as I said, and this represents a 21% year-over-year growth and demonstrates the continued trends that we've been experiencing despite COVID in an overall down aesthetics market. Growth was driven in part by our first gel implant shipments to Medical U&A, our distributor in Japan, representing another milestone for the company. Excluding sales to Japan, U.S. growth for the Breast Products segment was 16% year-over-year. Our exceptional third quarter performance was predominantly driven by the U.S. gel implants and increased market share gain due to our strong value proposition and sales talent, with gel implant net sales up 33% year-over-year, exceeding our pre-COVID Q1 2020 growth of 30%. The feedback we've received from our customers indicates that patient demand is exceeding expectations given market conditions. And based on their experience, the actual recovery is hovering around approximately 75% of the pre-COVID level. We believe the augmentation market is benefiting from pent-up demand from Q2, with patient interest remaining strong throughout the quarter. In Q3, our expander sales were down 20% year-over-year and up 8% sequentially. Expander performance was in line with expectations due to COVID. We believe the reconstruction market trailed behind augmentation in the quarter due to certain restrictions still in effect in the hospital environment due to COVID. Diagnostic testing, such as MRIs and mammograms, have been reduced and certain reconstruction procedures have also been delayed due to COVID. Once this backlog clears, we expect the reconstruction market to come back very strong and build throughout Q4 and into 2021. The value of our strategic decision to focus on our Core Breast Products business was validated by our momentum exiting the third quarter. We believe we are now in a position of strength as we continue to take share from our competitors. Our share gains have been driven by the durability of demand for our OPUS brand breast implants and tissue expanders and by our sales team's ability to partner with customers through our proprietary drive-the-recovery initiatives and to continue building momentum from Q2. In the third quarter alone, our plastic surgery consultants safely supported the needs of our customers in the field. As a result, we're able to add approximately 100 new accounts, and we continue to see deeper penetration into our existing accounts, supporting our belief that our market share gain is both increasing and sustainable. As a reminder, we received PMDA approval in Japan in August, becoming one of only 2 breast implant brands to receive approval through the rigorous PDMA process, a testament to the strong safety profile of our product line. We're excited to announce on the 6th of October, our first patient was implanted with an OPUS implant in Japan. And that as of today, we are already seeing the procedure pipeline continue to build. As marketing and promotional activities ramp-up in Japan, we expect demand for Sientra, the implants, in particular, and our share gains to accelerate. Consistent with our objective to solidify Sientra as the leading provider of premium, differentiated breast products and services, we've continued to focus our resources and investments on the breast segment. We're confident that focusing and reallocating resources to that segment will allow us to most efficiently prioritize investments to best leverage that competitive advantage. Specifically, we will start our direct resources and investments on enhancing and expanding our portfolio of premium breast products while prioritizing high-impact services toward specifically the needs of physicians and their patients. As we discussed in our Q2 earnings call, this includes a 510(k) for Gel Sizers that we expect to have approved by the fourth quarter of this year, a PMA supplement for larger sizes and a 510(k) for our next-generation tissue expanders. We believe these enhancements are an example of our innovation pipeline and will add significantly to our portfolio and further support our expansion and our market position. Turning to miraDry. We achieved third quarter net sales of $3.9 million, which equates to a 60% year-over-year decline. The reduction we saw in the miraDry business was in line with expectations due to the COVID effect as well as our intentional focus on higher-margin bioTip sales and a deprioritization of miraDry console sales. During the third quarter, approximately 60% of miraDry revenue came from outside of North America, with Asia representing approximately 30% of total revenue. BioTip revenue represented 77% of revenue during the quarter and the remainder comprised of consoles and service revenue. While we've reduced our overall spending, we've continued to strategically invest in key sweat-bothered markets that are less restricted by COVID such as China, Taiwan and Korea, to drive utilization of bioTip sales. We're seeing a strong recovery following COVID and an increase in utilization in all the trackable APAC markets compared to Q3 2019. Even though market conditions have been more challenging in the U.S. and Europe coming out of the lockdowns, our strategy shift with streamlined spending drove a modest increase in same account utilization in both the U.S. and Europe in Q3 year-on-year. As we progress through the fourth quarter and look ahead into 2021, we expect the Breast Product segment sales momentum to continue to build. Our miraDry strategy on profitable bioTip sales is beginning to pay off with a corresponding decline in company cash burn, where Paul will provide further details. We believe our investment strategy, focused on our Breast Products franchise, provides a line of sight to a continued 30% plus annual growth for this business segment for the next several years. With that, I'll now turn it over to Paul. Paul? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Jeff. As you've heard in Jeff's remarks, we are very pleased with the sales momentum we are seeing with our Breast Products segment. The reduction we saw in the miraDry business was in line with expectations given our of the business on recurring high-margin bioTip revenue and the impact of COVID. In the third quarter of fiscal 2020, Sientra achieved consolidated net sales of $19.2 million, a 14% year-over-year decline, which decrease was caused by our miraDry business segment. Relative to our Q3 '20 quarter spend, cash burn from operating activities was $6.1 million. This was the lowest operating burn in any quarter of the past 14 quarters. The steps we took in response to the COVID pandemic, and in conjunction with our previously announced organizational efficiency initiatives, is clearly paying off. Importantly, this puts us on a strong path to cash flow breakeven without impacting top line growth. Net sales for the Breast Products segment totaled $15.3 million in the third quarter, a 21% increase compared to $12.6 million for the same period in 2019. For the third quarter, net sales for miraDry were $3.9 million or a 60% decline year-over-year as the segment was impacted by our strategic decision to shift focus away from console sales as the business was impacted more significantly by COVID relative to Breast Products. Gross profit for the third quarter was $10.8 million or 56.3% of sales compared to gross profit of $12.7 million or 56.5% of sales for the same period in 2019. Excluding noncash impairment charges and restructuring charges, operating expenses for the third quarter 2020 were $25.2 million compared to $34.1 million for the same period in 2019. This represents an $8.9 million or 26% reduction in operating costs year-over-year. Expenses in the current quarter were impacted by bad debt provisions associated with the miraDry business. Similar to the second quarter, we were able to successfully reduce operating expenses while ensuring that our revenue-generating operations were not impacted and we continue to invest in critical breast initiatives in line with our go-forward business and cash preservation strategies. Net loss for the third quarter 2020 was $5.8 million or a net loss of $0.12 per share compared to a net loss of $22.4 million or a net loss of $0.45 per share for the same period in 2019. Net loss for the third quarter of 2020 includes a $10.1 million noncash gain in fair value derivative liability related to the convertible debt we announced in quarter 1 of this year. On a non-GAAP basis, the company reported an adjusted EBITDA loss of $11.4 million for the third quarter compared to an adjusted EBITDA loss of $17.3 million for the third quarter of 2019. Turning to our balance sheet. We ended the quarter with $63.5 million of cash and cash equivalents compared to $71.8 million at the end of June 30, 2020. Given our performance to date and our visibility through the fourth quarter, we are reinstating guidance for 2020 and expect total net sales in the range of $63 million to $66 million compared to sales of $83.7 million in 2019. The company is lowering its 2020 annual operating expense forecast to approximately $104 million to $106 million, excluding impairment and restructuring charges compared to $140 million in 2019. I will now turn the call back over to Jeff for his concluding remarks. Jeff? -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [5] -------------------------------------------------------------------------------- Thanks, Paul. I'd like to address the second announcement that we made today, which is my retirement. At a time of important transformation for Sientra with a firm foundation in place, strong momentum behind us and an increased focus on our core breast products, the Board of Directors and I have decided that this is the ideal time to pass the leadership role to Ron as the new CEO to lead Sientra into a new chapter of continuous high growth. Over the past years, we've built an exceptional foundation to expand and solidify our position as the premier provider of differentiated breast products and services, which I'm extremely proud and thankful for the entire Sientra team. As demonstrated by our third quarter performance in breast, our future continues to be very bright, and our aspirations are strong. To lead Sientra into this new chapter of growth, Ron is the perfect leader to take the company forward. As described in our press release, Ron is a seasoned, driven commercial leader with deep aesthetics category expertise and a strong record of driving results. He brings broad and deep expertise, leading sales, marketing and operations teams. He was most recently the President and General Manager for Almirall in the United States for Dermatology, where he led exceptional growth and profitability improvements over the past 3 years. In addition to his earlier responsibility, he held Vice President roles for both Sales and Marketing within Allergan as an integral part of his deep understanding of the aesthetics category. Prior to this, Ron held key leadership positions at Abbott, Astellas Pharma, Pfizer and Eli Lilly. Finally, I want to once again thank all of our employees, customers and stakeholders around the world for your support. I'd like to reemphasize our confidence in Sientra's ability to move into 2021 from a position of strength. We believe that our premium portfolio will allow the company to build on its accelerating market position and further our ability to adapt and overcome, as we always have. While I will remain at Sientra through the end of the year in an advisory role, I have full confidence in Ron's ability to lead Sientra into this next growth phase. With that, I'll turn the call over to Ron for a brief introduction before we move into Q&A. Ron? -------------------------------------------------------------------------------- Ron Menezes, Sientra, Inc. - President & CEO [6] -------------------------------------------------------------------------------- Thanks, Jeff, for the kind words, and good afternoon to all of you. This is definitely an exciting time to join Sientra on the heels of the best quarter ever for our breast business. I am ready to dive in and help the company keep the current momentum going. I do look forward to work with Sientra's leadership team to continue to improve, one, our market position; two, enhance our partnership with plastic surgeons; and three, establish Sientra as the leading provider of premium breast products and services. And again, thank you, Jeff, for your leadership and for the kind words. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [7] -------------------------------------------------------------------------------- Thanks, Ron. With that, let's open the line to questions and answers. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Margaret Kaczor from William Blair. -------------------------------------------------------------------------------- Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- First one for me on the third quarter. Obviously, things are going very, very strongly and you guys came out with full year guidance with an implied fourth quarter that maybe seems a more conservative versus that strong third quarter. So maybe can you give us more clarity around where Breast and miraDry should end up for the fourth quarter? And if you're seeing anything so far in the quarter that would make you feel more conservative about results? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [3] -------------------------------------------------------------------------------- Thanks, Margaret. I'll take that. So I think in the script, we spoke about the strength we saw in quarter 3, primarily around augmentation. There was some pent-up demand, and we saw that strength continued through quarter 3 and into quarter 4. We have not seen a slowdown. But I would just -- our hesitation would be on the recon market, right? We've not seen that come back like aug has. So our forecast is reflective of some -- just what we're taking in the business on recon, but in no way does it imply that the strength of aug has not maintained its trajectory that we saw in the quarter 3. It really picked up in July, coming off of June and it was very consistent through the entire quarter. -------------------------------------------------------------------------------- Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. That's helpful. And then as we look at 2021, Paul, your estimates are pretty broad. I know there's a lot of uncertainty, and you guys aren't providing guidance for '21. But maybe talk to how comfortable you are with these estimates and if you will or won't do that, I guess I'll push you on the 30% growth for breast that you referenced in the opening remarks over the next few years. So should we look at 2020 as a baseline for that 30% growth for breast or should it be higher just given kind of lower recon results? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [5] -------------------------------------------------------------------------------- I think it all depends on when the market comes back. We expect the -- both markets, both aug and recon to come back next year. I think everybody in the space is trying to figure out, will it come back completely in '21 or will take a few -- will take 24 months? We're confident that our growth rates, we project over 30%. We will -- the market will grow next year in our -- per our assumptions. We will participate in that growth, and we'll continue to add share at the same time. So at this point, I'm not going to talk to numbers next year other than to say is I believe the market growth and continued market gains, we're going to participate in both segments of that growth next year. And nothing is showing us right now that that's not going to occur next year. We're excited with what we saw this quarter. We're excited what we saw in the first quarter this year. And again, it was a great quarter for the company, given everything I think the industry has been facing. -------------------------------------------------------------------------------- Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Yes. No, that's helpful. And then just the last one for Ron. Congrats on the new spot. I look forward to working with you. As we look out and as you look out, what's your familiarity with Sientra? How close were you with the business prior? And then as we look out over your strategy over the next 2 to 3 years, what are the immediate changes you want to make, if any? Or is it just more about kind of pushing the continued strategy that Jeff and the rest of the team have already started to play out? -------------------------------------------------------------------------------- Ron Menezes, Sientra, Inc. - President & CEO [7] -------------------------------------------------------------------------------- Margaret, thanks. First of all, I'm very excited to be on Board of Sientra. And if you look at my experience has been mostly from a SkinMedica perspective of direct sell to physicians when I was at Allergan. So obviously, breast is a new adventure for me. And my goal in the short term is continue the current strategy that Jeff and Paul has set for the company. And obviously, as I dive in, you're going to hear more beginning of the year or next time we meet in the beginning of 2021. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from Jon Block from Stifel. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [9] -------------------------------------------------------------------------------- Nice quarter. I think, look, we identified some gains in share in our checks, but it really looks like the curve is steeper. And I think we and, I'm guessing, others anticipated too. Jeff or Paul, can you just talk to the rate of market share gains? And if you feel like they're more pronounced in one area versus the other? And obviously, I'm alluding to just augmentation versus that of recon. And then sort of as a follow-up to that same line of questioning, Paul, the market info is just harder to come by with the acquisition of Allergan. But any idea what you think the breast market may have grown overall in the third quarter year-over-year? And then I just got a follow-up. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [10] -------------------------------------------------------------------------------- Jon, the first part of the question is, certainly, the augmentation partial segment is what's leading this growth right now. And as Paul indicated, there is a delayed recovery on the reconstruction side. So that's clearly an exciting development that we're frankly enjoying right now. And it gets back to the advantages we have. But I think the underlying message here is that reconstruction is coming back. We know that these are procedures that have been delayed for very real reasons. And we expect that to begin to pick up in the fourth quarter. But I think we're going to see the fuller extent of that beginning in 2021. -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [11] -------------------------------------------------------------------------------- I think I'll add a few more elements. We look at like 3 things we're trying to gauge market share on this business. One is adding new accounts, which is pretty easy to measure and we also look for accounts if we lose any. We also look at existing accounts and Kirk's team is also not just trying to -- same-store sales. One account might have 3 doctors, maybe we had 1 doctor last year, this year, too. So if we look at same-store accounts, we call them, they're small to us, they can be very large accounts, and we look at the growth in those. We also look at the growth on expanders with implants at the hospitals. Obviously, we want implants to follow the expanders. We look at all 3 to gauge how we're doing. And from that, I'm not going to, at this point, break out, new customer growth versus existing customer growth, but it's healthy on both fronts. So we're getting it on both sides, just to be honest with you. I say on the hospitals, the contract in quarter 2, that's a longer process to get into it. We have the hunting license from last quarter, and we're going after it. I'd say implants, though, even on the reconstruction did okay this quarter. You're seeing more direct-to-implant procedures or stage 2 procedures occurring where stage 1s were not. So it was very interesting. We -- across the board, every state was up on implants. Ones that were down were very minor. And it was like Wisconsin and Arizona where we might have had resurges of COVID, even their decline was very mild or very immaterial. Across the board, all states were looking good. We did great on new customers, and we did great on existing customers, if that helps? -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [12] -------------------------------------------------------------------------------- It does. And maybe just to clarify, Jeff, just to be clear, maybe I didn't lay out the question right, you guys were very clear on which market was performing better. I guess my question was more specific to share. And where I'm going with that is, obviously, you have a lower amount of share in recon versus aug. So one would think that the curve would be steeper in recon, especially with some of the recent contract wins and investments in the hospitals. But it seems like what you're saying is, at least for the time being, the share gains, again not the market, but the share gains are actually steeper in aug versus recon, is that correct? -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [13] -------------------------------------------------------------------------------- That is correct. And the other part of it is too, Jon, that we've discussed before, is that when you talk about reconstruction, it's not just a tissue expander piece of that, but it's the tissue expander and the corresponding implant that goes along with it. And we've been making steady progress on expanding that expander entrée into the reconstruction sites with additional implant sales. So that's really the way we're looking at this. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [14] -------------------------------------------------------------------------------- Okay. And just second quick question. Paul, can you just talk about sort of the gross margins and expense structure? I guess twofold there. Gross margins, how do we think about it with the favorable mix shift with the focus on the tips going into 2021? And then on the OpEx side, good expense management, and you lowered the target for the year, do we sort of extrapolate that fourth quarter run rate out into 2021 on OpEx? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [15] -------------------------------------------------------------------------------- Couple. So margin here is always going to be a combination of miraDry and the breast business. And even within the breast business, it will be a combination of expanders or augmentation and reconstruction. So I think last quarter, I said the range would be about 56% to 60% for the year, and that's what I'm sticking with. The following year, again, our margin will tick up over the coming years more quite dramatically once we -- we talked about the efficiencies in our manufacturing facility. And as we get better at that process, our margins will improve. But what you saw this quarter maybe slightly better next quarter, they're pretty much in line with our expectations. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from Kyle Rose from Canaccord. -------------------------------------------------------------------------------- Ian Tolle, Canaccord Genuity Corp., Research Division - Associate [17] -------------------------------------------------------------------------------- This is Ian on for Kyle. You talked about Japan a bit with the first patient in early October. I was hoping to get a bit more detail there. How has the first month in that country gone? Are you seeing the numbers you expected? And then how big can Japan be in 2021? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [18] -------------------------------------------------------------------------------- Yes. As you are aware, thank you for the question, we're using a distributor there, so they're -- we're selling to the product and they're running the sales and marketing of that. Initial order this quarter was initial stocking order, although the demand we're seeing there on the business, a lot of the stuff is through [named doctor] patients. It's -- we're the only 1 of other -- only 1 of 2 approved breast products in the country. So the feedback we're getting from our distributor is the demand and interest are very high in this market. They were anticipating a new entrance to the market. It's a heavily textured shape market, of which there really are no choices right now with top competitors' texture being out of the market. So what we're just hearing is the demand and enthusiasm are high. And that as this builds over the coming months, it's probably a $15 million market all-in. I've said it's about 7,000 reconstructive surgeries, 3,000 augmentation procedures there. The market is predominantly not breast implants there, it's fat injections -- HAs and fat injections. So -- but in terms of that market, we think we're going to take a meaningful share of that over the coming years with our partner. -------------------------------------------------------------------------------- Ian Tolle, Canaccord Genuity Corp., Research Division - Associate [19] -------------------------------------------------------------------------------- Perfect. And then I know it's early days for the HPG contract last quarter, I think you estimated you had less than 5% share in those accounts. Have you seen that meaningfully tick up at all here? I know it's still early innings. But was there any low-hanging fruit with a certain number of those hospitals wanting to use your products, specifically needing to wait until that contract was signed? Any detail on that would be great. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [20] -------------------------------------------------------------------------------- Yes, let's ask Kirk who's on the line to answer that. Kirk, can you address that, please? -------------------------------------------------------------------------------- Kirk Gunhus, Sientra, Inc. - SVP of Worldwide Sales [21] -------------------------------------------------------------------------------- So the HPG contract that was established last quarter, it takes about 3 to 4 months before you start to really break in and get a champion doctor, get everything aligned and signatures dotted in by each of the different owners of that. So for example, they have an HSA Group. That's about 100 network -- hospital network of 100, we just signed some paperwork with them so that we can get further into their specific hospitals. There's Trinity, which has 30 to 40 locations. It's a network in and of itself. And so we've just established a relationship with them to sign and get documentation. So the first initial signature was to get into HPG, but now you have to break into their individual units and some of them of these networks are rather large and some are rather small. We have been able -- through this quarter been able to get to their top 10 networks, which now allows us to really go hunt individually with each of the different offices. What does that mean is, right now, we have gained not a major market share. I think it's gone up from 5%, it's around 8%, 9%. But what it has allowed us to do is now that we believe, with Q1 and Q2, we are in a really good spot to see growth because now we are developing those relationships and will see those orders come in both for our expanders as well as our implants over the next 6 months. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- And our next question comes from Chris Cooley from Stephens. -------------------------------------------------------------------------------- Christopher Cook Cooley, Stephens Inc., Research Division - MD [23] -------------------------------------------------------------------------------- First and foremost, Jeff, congratulations on all your achievements here and best of wishes into retirement. We look forward to working with you as well, Ron. I guess for me, if we could maybe just kind of come back into the U.S. market a little bit again. I appreciate that aug is driving the growth right now relative to recon for you. But could you maybe just talk to us a little bit about maybe variances you saw by practices. Which types of practices are really rebounding the fastest in helping you to gain share here in the U.S. with these incremental practices coming on board? I think you mentioned you had 100 that are higher volume. Or is it existing high-volume customers going deeper? Just would like a little bit additional color there? And similarly, where do you think that the U.S. market exits the calendar year? I mean you mentioned 75% coming out of pre-COVID levels exiting the 3Q. What kind of baseline should we think about as like the jumping-off point going into calendar 2021? And then I've got a quick follow-up. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [24] -------------------------------------------------------------------------------- Chris, I'm going to let Kirk address that also. We're very close to a very deep level in the account structure. But Kirk, can you add some context to that, please? -------------------------------------------------------------------------------- Kirk Gunhus, Sientra, Inc. - SVP of Worldwide Sales [25] -------------------------------------------------------------------------------- So we have aligned our structure that we have a Tier 1, Tier 2, Tier 3, Tier 4 and it basically is that it's a percent of business in what we own. So Tier 1 is our highest producing accounts. In that particular area, we're up 15%, 20%, and it's just really our loyal tiers that have used us year after year after year. And now that we've got a manufacturing plant that we own, and we can build our own products, we're able to get and fulfill their needs immediately. Where it starts to get really interesting is in our Tier 4 and that -- or how we develop that is anybody who's done business with us for the last year, less than $10,000. And there's about 407 accounts that live in that category. This is one that we are positioning our sales force to go deeper into. And so we've used the drive-the-recovery initiatives that we have established in Q2 to allow our sales force to go in and really build a stronger relationship with the doctor and their staff and gain more market share. And so we're seeing some tremendous growth coming from that category. And then you added the big category as well as the new accounts. So the 100 new accounts that we're adding, these are not just small accounts. These are very large accounts that are moving 80% of their business to us. And yet, there's some of these large accounts that are maybe moving 10% of their business, and we've got to prove ourselves to get more. So those are where our growth engines are coming from. -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [26] -------------------------------------------------------------------------------- Do you have another question? -------------------------------------------------------------------------------- Christopher Cook Cooley, Stephens Inc., Research Division - MD [27] -------------------------------------------------------------------------------- Yes. Just -- if I could squeeze one quick one in here on a follow-up. Just was curious. Paul, you did a great job there from an OpEx management standpoint. And I just want to make sure I understood it correctly, you think that the prior guidance in terms of where you go there for the full year holds, but it sounds like with a little bit more lift in the breast business, you could see a little bit better margin. Just curious if you think there's opportunity there for additional savings or you need to basically take some of that additional margin lift that looks like we'd be getting here as we're exiting the year and invest that back just to support the growth. Just want to make sure I'm thinking it correctly... -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [28] -------------------------------------------------------------------------------- Yes, I have all the figures, operating costs and margins, so I did give some flavor on we lowered our forecast for expenses, a good thing. So we lowered that. 90% of the cost reductions to date have been either miraDry or G&A. These are sustainable reductions. Actually, if you look in quarter 3, 100% of the reduction is against miraDry and G&A, which means we actually invested a little more into breast already. So we have already shifted spend to breast this year, even when you see these lower cost baselines. In terms of margins, I was saying 56% to 60% for the remainder of the year, as we get into next year and the year after the acquisition of Vesta which is the best thing this company has done to give us control of our destiny is that our margins will move up as we improve the efficiencies of that facility, as we improve the throughput of that facility. So that margin is more of a 12- to 24-month game. That's been consistent with what I've been saying now, probably since we purchased it last November. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes from Richard Newitter from SVB Leerink. -------------------------------------------------------------------------------- Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [30] -------------------------------------------------------------------------------- Wanted to just go back to guidance. I think someone earlier on in the queue had mentioned that it looked a touch conservative. And I want to reconcile just what the messaging is for the fourth quarter here. It sounds like you're saying, augmentation momentum, no signs of that slowing. So I guess -- and the recon business isn't getting worse and should only improve as we move forward is what your expectation is. What would be the reason for a retracement if you're gaining share? Is there something as a baseline assumption in the underlying market that you're assuming to be conservative that it pulls back? Or just help me understand why it looks like growth might be taking a step back, if it seems like the underlying drivers should be getting better or continuing from third quarter? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [31] -------------------------------------------------------------------------------- Good question. First, I'm not -- we had a Japan stocking order in quarter 3. So you've got to back that element out for one. Second is we're confident enough to give guidance on the total business. We're not seeing a slowdown in augmentation. But we are in environment of COVID, where there's still lot of unknowns out there. Hospital groups still have to open up. They have not. If you look at our top 3 markets, California, Texas, New York, they were down on expanders. And there might have been implant growth there for augmentation -- for recon, but it wasn't the same level of the augmentation channel. So I would just say that we're confident to give guidance, but nothing is -- it does not imply that we're not in any way confident of our numbers for the rest of the year. I think just in this environment right now where we are, we want be very reasonable. -------------------------------------------------------------------------------- Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [32] -------------------------------------------------------------------------------- All right. So Paul, if I'm hearing you correctly, it's not like you've picked up any trends thus far in October to suggest a reversal here. It's just a... -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [33] -------------------------------------------------------------------------------- There was no change -- yes. There was no change in October versus the trend lines before. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [34] -------------------------------------------------------------------------------- No. It's consistent. -------------------------------------------------------------------------------- Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [35] -------------------------------------------------------------------------------- Great. One follow-up. Just -- Paul, you had mentioned cash flow breakeven and that you feel good about this. I'm just curious, what's the time line out there for when that might be achieved? And do you think this cash burn level or basically better from here holds out to get there? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [36] -------------------------------------------------------------------------------- You're still going to get quarter-to-quarter change. I mean it was very low this quarter. It's still kind of coming off quarter 2. We expect this business to be in a cash flow breakeven by at least second half of 2022. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Our next question comes from Anthony Vendetti from Maxim Group. -------------------------------------------------------------------------------- Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [38] -------------------------------------------------------------------------------- Welcome aboard, Ron, and thanks for all our hard work, Jeff. Appreciate everything. -------------------------------------------------------------------------------- Ron Menezes, Sientra, Inc. - President & CEO [39] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [40] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [41] -------------------------------------------------------------------------------- Just a follow-up. So the momentum in the breast implant business has continued for almost half of the fourth quarter here. Just want to confirm that. And if infection rates keep rising and the number of cases keep rising, do you have a plan in place that will account for that in terms of how you access the physicians? Or are you going to go back to Zoom meetings? Or what's the plan if infection rates continue to pick up here? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [42] -------------------------------------------------------------------------------- Yes, I heard that was breaking up a little bit. I mean we plan for multiple scenarios on this case. The business is going to continue to grow, but we also have contingencies in place in case it were to change. But right now, we have no plans -- our reps have been in the field since May, really April. We have no change in that. Remote when you need to, virtual when you have to. Otherwise, our plans on multiple contingencies based on what the market is doing and we can -- we're very flexible on how we can -- if you're talking about spend, how we can ebb and flow spend depending on how we're seeing demand. But again, we're -- our reps are already adjusting to a virtual market. If they can't get into the hospitals, it doesn't stop them, they can still get into that through virtual. If they can't do consultation, they'll do it virtual. So it really is -- they've already adapted to this environment. And our -- and I would say our cost structure, the way we've been working at the rest of this year, we have contingencies in place if we have to adjust for them or if we have to, even increase the spend if we wanted to. But you were breaking up a bit, I couldn't hear everything at the end. I apologize. -------------------------------------------------------------------------------- Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [43] -------------------------------------------------------------------------------- Okay. No, that's -- I just have a quick follow-up. Paul, that answered most of the question. Just in terms of your sales reps, are you all set with where you are? Or as business is picking up, are you starting to add a few more sales reps as we move into the end of the year? -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [44] -------------------------------------------------------------------------------- We have a very experienced, successful team on the commercial side. And we are constantly looking at opportunities to bring in additional experienced people to continue to drive this growth that we've been seeing. And while we're not in a position to give guidance beyond the quarter, we have confidence, and we have very significant objectives that we're trying to achieve. Long-winded way of answering your question, of course, we're looking at selective additions as we go forward. -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [45] -------------------------------------------------------------------------------- We always watch recent frequency, and we'll invest where we need to. And Kirk has been in that group now since the beginning of this year, he has brought about a whole different perspective to that business. So we will invest in the breast business as we see fit, but it will be at a marginal ROI where it makes sense as well, correct? So it's very predictable that we do when we add a territory. -------------------------------------------------------------------------------- Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [46] -------------------------------------------------------------------------------- Okay. And then just one question on the miraDry business. I know 77% of the revenues this quarter were from the bioTips. Just as you move through the rest of this year and into next year, is there going to be an emphasis on getting back into the capital equipment business? I know you're in it, but is there going to be an emphasis on trying to restart selling to new customers in that business or not at this time? -------------------------------------------------------------------------------- Paul Sean Little, Sientra, Inc. - CFO, Senior VP & Treasurer [47] -------------------------------------------------------------------------------- At this point, the decision we made to focus on the bioTips given the market on capital equipment. Concentrating on the higher-margin bioTips in a, I guess, cost-effective matter is our strategy right now. We'll watch it. And we think that's the best way to still create value for this franchise and to still drive the 1,600, I guess, and drive success to the 1,600 placements that we have out there. So right now, this is our strategy. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- And our next question comes from Alex Nowak from Craig-Hallum Capital. -------------------------------------------------------------------------------- Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [49] -------------------------------------------------------------------------------- Great. Jumping between a few calls here. But first of all, Jeff, appreciate all the efforts here in the last 5 years. Ron, very nice to meet you. Do you think any of the benefit in the quarter came from backlogs of orders or procedures getting pushed from Q2 to Q3 here? Or do you think the volume in the quarter was pretty representative of the underlying demand in the market? -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [50] -------------------------------------------------------------------------------- Well, I'll let Kirk add to that. But I think overall, there's no question that there was an effect of pent-up demand. That certainly at the beginning of the second quarter certainly trailed off that interest level, but we see it picking up significantly. And I think part of it that we don't often talk about is the effectiveness of the plastic surgeon community that they are extremely effective and talented business leaders in their own practices. So it's a combination and it's a true partnership. But Kirk, would you like to add something to that? -------------------------------------------------------------------------------- Kirk Gunhus, Sientra, Inc. - SVP of Worldwide Sales [51] -------------------------------------------------------------------------------- So I do think the initiatives we started in Q2 with Drive the Recovery has delayed a key part and answer to your answer (sic) [question] is both. We're seeing it in both. The other thing that we're starting to see is new offices that we recently brought in, in Q1 are starting to really use more depth of product line, starting to get more and more of their surgeries. And you add the 100 that we just started in Q3, and we believe that those will also start to show itself in Q4. So there's multiple effective momentum that's starting to really show itself when we see the new accounts coming in and then the Drive the Recovery initiatives that we're launching in a lot of our existing practices that we have relationships in. -------------------------------------------------------------------------------- Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [52] -------------------------------------------------------------------------------- That's really helpful. And I guess that kind of ties into my second question is, Sientra has been getting a really good foothold on these plastic surgeons with breast implants. But clearly, you've done a good job with the [tacom] product like the AlloX2 and you've generated some good incremental sales there. So this actually might be a better -- bigger picture question for Ron, but how are you thinking about adding tacom products here to breast implants such as cellular matrix or a void filler sort of solution? Anything else that might make sense to add to the bag? -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [53] -------------------------------------------------------------------------------- Yes. And I think we've mentioned a couple of our -- the results of our innovation program. And these have been in the works for some time. And one of the things that you have to consider, particularly in these categories is the regulatory process that's involved in getting those cleared. But yes, we are looking at adjacencies to add to the portfolio beyond the existing products. So we have a couple that we did include in the script that we're very confident about, but there's more that we're always looking at. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- And I'm showing no further questions from our phone lines. And I'd like to turn the conference back over to Jeff Nugent for any closing remarks. -------------------------------------------------------------------------------- Jeffrey M. Nugent, Sientra, Inc. - Advisor [55] -------------------------------------------------------------------------------- Thank you very much, operator. I can only say that this past 5-plus years has been one of the most challenging and rewarding in my career. And I can't say enough for all of the support and the commitment and real experience from the team here at Sientra. And there's no question that we have come a long way in being able to adapt and overcome whatever challenge we faced. So with that, I'm very confident that the company is in very good hands with Ron coming in, and I expect this momentum to continue. But with that, we appreciate all your support, and we're going to continue to be as transparent with you as we possibly can be. So thank you all very much. Have a great day. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.