Sientra, Inc. (NASDAQ:SIEN) Q4 2022 Earnings Call Transcript

Sientra, Inc. (NASDAQ:SIEN) Q4 2022 Earnings Call Transcript March 30, 2023

Operator: Good day. And welcome to the Sientra Incorporated Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen only mode . after today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to your host, Mr. Oliver Bennett, Sientra’s General Counsel and Chief Compliance Officer. Mr. Bennett, you may begin.

Oliver Bennett: Thank you. Good afternoon. We are pleased that you could join us on today’s call to discuss Sientra’s fourth quarter and full year 2022 financial results and business update. On our call today, we have Ron Menezes, Sientra’s President and Chief Executive Officer; Andy Schmidt, Sientra’s Chief Financial Officer; Lisa Rosas, Sientra’s Senior Vice President of Marketing; and Dr. Denise Dajles, Sientra’s Senior Vice President of Research and Development, Regulatory and Quality. As reported earlier today, we have achieved another record quarter and year for Sientra. Our Q4 revenue of $25.1 million is the highest quarterly revenue in the history of the company and represents almost 100% growth in our breast product business from our pre-pandemic high of $12.8 million in Q4 2019.

While we see continued strength in our core implant and expander portfolio, we have also taken steps to accelerate our growth with the commercial launch of our Viality fat transfer system and our recently announced partnership with Aziyo Biologics. As Ron will provide more detail on, these new products dramatically increase our total addressable market to over $1 billion in the United States alone, while also enhancing our pathway to profitability. Of course, I must remind everyone that in our remarks today, we will include forward-looking statements in our prepared remarks and in response to any questions you may ask. These forward-looking statements are based on management’s current assumptions and expectations of future events and trends.

Our actual results may differ materially from those expressed in or implied by those forward-looking statements. The company undertakes no obligation to update or review any estimate, projection or forward-looking statement. For a more detailed discussion of the company’s risks and uncertainties, I would refer you to our SEC filings, including our Form 10-K and Form 10-Q available on the company’s Web site. With that, I’ll turn the call over to our President and Chief Executive Officer, Ron, to comment on our continued exemplary growth this past quarter and provide a look ahead at 2023 and beyond.

Ron Menezes: Two and half years ago in the middle of the pandemic I stepped into my role as CEO of Sientra. At that time, the management team and I redefined Sientra’s corporate mission. We set the goal to create an all inclusive platform that will deliver innovative solutions to plastic surgeons within the broader aesthetic community. Today, I’m pleased to report that not only we are well on our way to meeting our goal but also that this year will be a transformational year for Sientra. Our management team has made a concerted effort to invest in our infrastructure. Our goal was to create a platform to enable new products to through our organization, creating leverage and paving the path to profitability. We are now seeing the results of those efforts come to fruition; first, we commenced commercial shipping of our Viality fat transfer system on March 1st; second, as we announced last week, we have entered into a partnership with Aziyo Biologics to add their SimpliDerm acellular dermal matrix product to our portfolio.

The addition of those products dramatically increases Sientra’s total addressable market with the ADM market alone estimated to be around $500 million. Both products are highly synergistics for Sientra, allowing us to use our existing sales and distribution teams with no significant capital investments. We believe the addition of those highly complementary products will not only accelerate our market share gains and overall growth but also enhance our pathway to profitability by creating leverage on our existing organization. ’22 ended strong for Sientra with year end operational results, the first shipments of Viality and SimpliDerm joining our portfolio, I am pleased to report today that we expect to make our path to profitability and positive free cash flow a reality by year end 2023.

We’ll continue to follow successful corporate strategy this year, which emphasizes the following; one, streamlining the resources and time towards Sientra’s high growth, high margin business; and two, focusing every team on increasing operating efficiencies. The critical steps we took in ’22 sets the pathway for ’23 to be a transformational year for Sientra. I’ll now turn the call over to Lisa Rosas, our SVP of Marketing.

Lisa Rosas: For the past two years, we have built continued momentum that has resulted in 10 consecutive quarters of record high sales growth with Sientra leading the charge. I think we can safely now say that Sientra is the fastest growing brand in the US breast market. The augmentation market in the United States is cyclical but over time has proven itself to be resilient. Last year, we saw a post pandemic correction in augmentation but Sientra held steady. It is a tribute to the strength of our team, products and loyalty of our customers that Sientra grew market share in the US augmentation market and exited the year at an all time high at 17%, a 7 point gain over prior year. The reconstruction market in the US remained strong with 4% growth over prior quarter and Sientra has crossed the chasm, so to speak, leaving the teams and growing to a broader market, exiting the year with 20% share overall, a 6 point increase over prior year.

In Q4, we grew 10 times faster than the US market, and it is our expectation that the coming years will continue in a similar way. For the remainder of ’23, we will continue to leverage our expertise and our industry leading sales infrastructure to launch new products, thus creating a more complete and integrated portfolio. The announcements made in just the first few months of ’23 demonstrate our dedication and progress toward achieving this goal. Our commercial team’s dedication to patient outcomes and exceeding expectations with our plastic surgery partners is what powers these gains in market share. In just the fourth quarter, our commercial team added 275 new accounts. Our commitment to peer-to-peer training and education speaks for itself.

In 2022, we hosted events with nearly 400 customers, resulting in a 50% average increase in attendee sales. We expect to reach at least as many customers, if not more, through these events in ’23. As Ron previously mentioned, March 1st marked the launch and first US commercial shipment of Viality, our novel fat transfer product. The launch of Viality is a pivotal milestone in our corporate history. With the expected uptake of the product by surgeons and the resulting growth in Viality sales, Sientra is poised to become a diversified aesthetics company. Our initial commercial shipments of Viality and enthusiastic feedback from attendees at our educational demonstrates the strong interest in the product from our customers. Our customers’ confidence in the success of this product is reinforced by the latest data Denise will share, which addresses the number one pain point surgeons have experienced with existing back drafting technologies, which is retention.

Like the other products in the Sientra portfolio, Viality brings proven clinical advantages backed by data and rigorous testing. Dr. Denise Dajles, SVP of R&D, Regulatory and Quality will now speak about the latest data on Viality and will provide more information about SimpliDerm.

Denise Dajles: We are very excited about the reception from our customers that Viality has already received. Viality offers an extraordinary and patented approach to fat transfer, also known as fat grafting. This includes using a surfactant wash with filtration and a concentrating step using a superabsorbent foam to improve the long term survival of fats, thus providing better predictability and long term results. The feedback we are receiving is that users really like the consistency of the fats, the ease of use of the system and the patient results. While we started with a breast focus, we are already working towards expanding into other areas where Viality’s enhanced viability fat transfer will also bring improved outcomes.

Viality has the potential to transform how facial rejuvenation and feminization, treatment of radiation burns and scarring and body contouring are addressed. Due to its broad indication, we are already hearing about great outcomes in these areas. Ultimately, we expect Viality to meet an unmet market need for fat transfer retention and allow our customers to offer their patients natural results with predictable outcomes. March was a very busy month for Viality. In addition to our first commercial shipments to customers, we also announced the preliminary results of our ongoing multicenter long term volume retention clinical study. These preliminary results show over 80% volume retention at both the three and six month time point with a high consistency between patients.

This preliminary data make Viality the first and only system to have clinically demonstrated such high levels of retention. The data also strongly supports the benefits of enhanced viability fat transfer, which is only available with Viality. The study is taking place at more than nine different clinical trial sites and includes a variety of patient types, including breast augmentation, explantation, mastopexy and breast reconstruction. We anticipate that the results of our ongoing study will establish a new standard of evidence in fat transfers, differentiating Sientra from all the other fat grafting products on the market. Finally, a few words about our newest addition to the portfolio, SimpliDerm just announced last week. SimpliDerm is a natural allograft option that supports the angiogenic product.

It has demonstrated to have superior performance characteristics and other leading human acellular dermal matrices used for various soft tissue reconstructive procedures, while closely matching the human disturbance. These characteristics include greater tissue strength and suture retention, lower inflammatory and fibrotic responses and better pliability. In a blinded test performed with a group of plastic surgeons, SimpliDerm was the preferred ADM based on pliability and strength. By adding SimpliDem to our portfolio of products, Sientra will offer additional options to surgeons and patients with a clinical and science backup that Sientra is known for. I’ll now turn it over to our CFO, Andy, to discuss the financial outlook.

Andy Schmidt: Thank you, Denise. As Ron, Lisa, Denise all mentioned, we are very encouraged by the marketplace reception for Viality and SimpliDerm, and I’m excited to share our record revenue results of $25.1 million in the fourth quarter of 2022. Another key financial highlight was our non-GAAP EBITDA and free cash flow performance. Our non-GAAP EBITDA for Q4 ’22 was a $6.9 million loss, our lowest this year and continuation of a positive trend. Our second half 2022 performance was a loss of $15.5 million as compared to a loss of $17.4 million for 2021, a $1.9 million improvement. More impressive, however, was our free cash flow performance referenced earlier by Ron. Our Q4 ’22 free cash flow of a $3.8 million use of cash, marks two consecutive quarters of sub-$4 million free cash flow burn for the company.

Our second half 2022 performance was a free cash flow burn of $7.4 million as compared to a free cash burn of $21.5 million for 2021, a $14 million improvement. Diving into our revenue numbers, the current period $25.1 million compares $22.7 million in Q4 ’21, an increase of 11%. Total year 2022 revenue of $90.5 million compares to $80.7 million for 2021, an increase of 12%. The pro forma gross margin for Q4 ’22 was 60%, which compares favorably to 54.4% for the same period last year. The key driver for gross margins is product and channel mix. GAAP gross margins were negatively affected by year end balance sheet adjustments. Most notable, a $5.7 million inventory reserve primarily related to our legacy textured implant inventory and a $6.1 million adjustment to our warranty liability due to revised projections.

Total GAAP operating expense for Q4 ’22 was $27.7 million, which compares to $26.1 million in Q4 ’21. Non-GAAP or cash based operating expense for Q4 ’22 was $22.8 million compared to $22.2 million for Q4 ’21. Our current period non-GAAP operating expense of $22.8 million continues a favorable expense trend this year, comparing to $21.7 million in Q3 of ’22, $22.3 million in Q2 of ’22 and $24.8 million in Q1 of ’22. Our favorable second half of year expense performance resulted in the total year non-GAAP expense of $91.6 million, the lower end of our $90 million to $94 million non-GAAP operating expense guidance. Total year 2022 GAAP operating expense of $110.6 million compares to $90.7 million in 2021. Total year ’22 non-GAAP operating expense of $91.6 million compares to $76.3 million for 2021 and is again primarily attributed to current year investments in commercial activities to support new product launches.

Total GAAP loss from continuing operations for Q4 ’22 was $22.3 million as compared to $15.9 million for the previous year period. Switching to key balance sheet items. As part of our year end adjustments to estimates, we have made two significant adjustments. First, we have taken a $5.7 million reserve against our finished goods inventory, primarily legacy textured implant stock, which was 2019 and prior manufactured product. We feel that the textured implant product will have limited marketability in the future. The adjustment reduces our inventory asset and is a noncash charge to current period cost of sales. Secondly, we have made a $6.1 million adjustment to our warranty liability. The adjustment increases their warranty liability and is also a noncash charge to current period cost of sales.

Cash ending on December 31, 2022 was $26.1 million. We feel that we have sufficient cash to drive the business to a free cash flow positive performance exiting fiscal year 2023. Over the past few weeks, there has been great concern about the stability of certain banks. It’s important to know that Sientra believes firmly in a diversified strategy regarding banking facilities. As we are at the end of our first quarter of 2023, I’ll share that our current revenue estimates for Q1 2023 to be between $22 million and $23 million or growth of 3% to 8% versus prior year. At this time, I’ll turn the call back to Ron to provide our 2023 guidance and a few concluding remarks.

Ron Menezes: Thank you, Andy. Now to provide our 2023 full year guidance. The company is forecasting revenues of $104 million to $109 million or a year-over-year increase of 15% to 20%. The management team and I expect continued success in the growth of our aesthetic business. The launch of Viality and the launch of SimpliDerm, which is expected in the second quarter this year will be among the key drivers of revenue growth. In terms of full year expense guidance, we’re forecasting non-GAAP operating expense to be between $78 million and $82 million, down from $91.6 million in 2022. Again, thank you for joining us today. In closing, we believe that Sientra is well positioned for continued growth and profitability. We’ll now open the line for Q&A. Operator?

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Q&A Session

Operator: And the first question will come from Alex Nowak with Craig-Hallum Capital Group.

Alex Nowak: I was hoping to get a little bit more of a breakdown of revenue growth, that 15%, 20% for the full year. Based on the commentary there for Q1, it does seem like you’re baking in a more of a second half higher growth. Is that coming more from the Viality and then the SimpliDerm product versus implant, just how to think about all that?

Andy Schmidt: And sure, when we look at our guidance going forward, you’re right, we do have these great product launches that are going to be back half of the year loaded. But just in general, we’re having to get this continued success in recon. Our core business is still going to be, let’s call it, 85% of the guidance number. That’s basically, again, our gel implants, whether it’s recon and also our tissue expanders. As always, we have our BIOCORNEUM, a great product and our international work we’re doing, that’s still only be 5% to 10% of the revenue guidance. And then Viality, as we’ve said before, we expect it to be 5% to 10% of our total revenue exiting the year.

Alex Nowak: And, do you have anything in there for SimpliDerm?

Andy Schmidt: Right now, we’re looking at that as a straight upside. We’ll be — we expect to be launching. I can have Oli here talk a little bit more about what it means to launch that type of product. But we think it’s a tremendous upside for us.

Oliver Bennett: Alex, as we’re looking at it, we have to put some licenses in place to distribute the product throughout the country. And then as we’ve learned from our Viality launch, it’s important to take it slowly as we launch it the right way. So we’re making sure we put all the processes and everything in place. So we see it more as a back end of the year and as we get more visibility into how that is going. We expect to update guidance later on this year to account for SimpliDerm product.

Alex Nowak: And then as you think about Viality as is launching into the market, I mean, how has that attachment rate going with the recon side of the business but I guess also aug as well, but I know it’s more of a recon sort of sales product there? So I mean how is the attachment going when you’re going to a hospital, on the expander, the implant and now the Viality on there?

Ron Menezes: Well, let me answer that and I’ll pass it over to Lisa. Right now, the majority of sales are coming from augmentation, because we’re still in the process of setting up contracts, we’re working with the . It’ll take four to six months to get that moving. But the idea is to get into bundling process bidding for the hospitals. Lisa?

Lisa Rosas: So a couple of things on this. At this point, we’re focusing on selling in our early experience program where some of the top surgeons in the industry and many that are new to the Sientra have access to Viality and are paving the road for success as we expand broader next year or later this year, as Ron mentioned, into the reconstruction segment. So we’re trending slightly ahead right now in terms of revenue and trial expectations, but we do expect that to pick up here within the next several months and exiting Q2.

Alex Nowak: And then just final question, just around cash burning cash uses exiting the year with free cash flow positive on freight. The path to get there. Is this all solely really ramping revenue, keeping gross margin flat and maybe keeping operating expense flat as well, or do you expect gross margin to kind of creep up here throughout the year and OpEx to continue to trend lower? Just how you’re thinking about that?