Since its inception, Sientra was quickly able to establish itself as one of the best providers of breast implants and tissue expanders, thus gaining market share among both the plastic surgeons and their clients. This rapid growth was attributed to their innovative implant design. Previously, the only implants sold in the United States were round-shaped, however, Sientra began providing implants that were more representative of the natural shape of a woman’s breasts. Furthermore, the implants were made from compounds that allowed for the implants to retain their form compared to competitors. The company was thriving having had a 50% growth since its IPO in matter of ~9 months.

Figure 1 – The breast implants that gave Sientra an initial market edge (top) along with their market growth depicted by their price action (bottom).

The Fall

On September 24th, Sientra’s share price plummeted 53% as news surfaced that Sientra’s only manufacturer, Silimed Indústria de Implantes (Silimed), a Brazilian firm, was flagged by the UK Medicines and Healthcare Products Regulatory Agency (MHRA) for presence of silica and cotton particles on the surface of their manufactured implants. MHRA then revoked Sientra’s Brazilian supplier, marketing certificate to sell their products in Europe and the company’s share price dropped substantially. Shares plummeted further, after Brazilian regulators decided to halt all production in Silimed factory. Sientra then made the voluntary decision to suspend sales in the United States and work towards verifying and sorting out the regulatory claims brought about by the EU. It is important to note, that none of these claims were brought by the FDA. In fact, the FDA had/has inspected Sientra’s product runs at Silimed factory since the inception of the company.

The consequence of these events resulted in ~90% drop in the share price of Sientra in matter of few months. The share price plummeted to as low as $3.34 from a high of $26.67 in matter of few months (Figure 2).

Figure 2 – Graphical depiction of Sientra’s price action during the initial release of news surrounding their manufacturer issues.

On December 5th, 2015, the company released a press release regarding a FDA pre-market supplement (PSA) approval for four new implants with revolutionary styles and shapes. Which they expect to deliver by this 4Q of this coming year. Additionally, they hired a third party to test and verify the safety of their products – the result of which indicated no safety concerns for the patients. Having built some positive momentum, on March 1st of this year, Sientra decided to break back into the US market. Here is the kicker, they have been currently selling their old inventory, and it was not until August 1st, 2017, that Sientra was able to come to a settlement of their lawsuit against the Brazilian breast implant manufacturing company, Silimed. Jeffrey M. Nugent, Chairman and Chief Executive Officer of Sientra, said,

“We are pleased to enter this settlement agreement, which ends the disputes between the two companies. We view the settlement as an attractive conclusion for Sientra, with a net positive impact on our strategic plans.  Our actual expense and cash outlay is significantly lower when accounting for the savings from ongoing legal costs associated with taking both the litigation and arbitration lawsuits through to trial.  We look forward to moving our business forward without the distraction of these issues and focus on the many strategic opportunities in front of us.”

Meaning, that the company is moving forward and putting this whole matter behind them. And they have, more about manufacturing below. On June 2017, Sientra announced the acquisition for $20M cash and up to $14M in milestones of Miramar Labs, Inc. which is the ONLY non-invasive FDA approved treatment for reduction of underarm sweat, odor and hair of all colours. There is actually a significant market for this product. Approximately 15M people seek sweat control options, and 10M of those are seeking solutions for their underarm sweat. The company’s solution to this has led to a 100% satisfaction in patients after 2years, which is astonishing. The company’s revenue has also grown ~20% per annum since 2013, and was ~$20M last year. I strongly suggest you have a look through this presentation here. Some of their figures have been highlighted below in Figure 3.

In August 2016, Sientra announced a service agreement with Vesta, a Berkshire Hathaway company. Vesta is solely Sientra focused, and has no indicated capacity constraints and is able to supply all of US customer’s needs. Below are some highlights from their last investor’s presentation.

Figure 3 – Highlights of Sientra’s investor presentation.

As Q4 approached, investors were excited to hear the news of FDA approval. After all, Sientra had indicated that they have taken all the necessary steps needed to get FDA approval. For those unaware, 58.94% of Sientra is institutionally owned as of the time of writing this article. Many of which increased their positions in this time frame. Out of the 90 institutions, 41 increased, while 36 decreased their positions, and 13 held to their current positions. This resulted in a 1,977,098 increase in total shares held by institutions, while 794,947 shares were sold out by 14 institutions. Please refer to the Figure 4 for more information.

Figure 4 – Breakdown of institutional investors – source: http://www.nasdaq.com/symbol/sien/institutional-holdings/increased

The combination of the positive sentiment and investors anticipation of FDA approval for mass production of their breast implants resulted in a staggering 60%+ run from the end of August/2017 to middle of October/2017, reaching as high as $16.68.

Initially it is safe to assume that most investors anticipated FDA approval to come prior to the earnings call on November 5th, 2017. Since no news prior to earnings, Sientra lost about 10% of share price from its more recent high of $16.68. On November 5th, earnings were released. Sientra reported a EPS of #-0.74 (missed by $-0.05) and Revenue of $9.82M (+50.4% Y/Y – missed by $-0.79M). The results of the earnings call led to another ~10% drop in Sientra’s share price.

HIGHLIGHTS OF THIRD QUARTER FINANCIAL RESULTS

It was not all bad. In fact, if you take the time and look at the full picture it was not bad at all.

  • Total net sales for the third quarter 2017 were $9.8 million ($6.5 million for the same period in 2016).
  • Net sales for the Breast Products segment totaled $7.7 million ($6.5 million) a 17% increase, driven by the Company’s acquisition of the Specialty Surgical Products tissue expander portfolio, completed in the fourth quarter of 2016.
  • Net sales for the miraDry segment in the third quarter of 2017 totaled $2.2 million under GAAP, and $3.0 million on a Pro Forma basis assuming the Miramar Labs acquisition was completed on July 1, 2017.
  • Gross profit for the third quarter 2017 was $6.3 million, or 65% of sales, compared to gross profit of $4.7 million, or 72% of sales, for the same period in 2016.
    • The decrease was primarily due to the inclusion of miraDry, which carries a lower margin than Breast Products.
  • Operating expenses for the third quarter 2017
    • $20.2 million ($14.5 million).
    • Operating expenses in the third quarter 2017 were driven higher by Miramar related acquisition costs as well as the inclusion of miraDry operating expenses subsequent to the acquisition.
  • Net loss for the third quarter 2017 was $14.4 million ($10.0 million)
  • On a non-GAAP basis, the Company reported adjusted EBITDA loss of $(11.0) million ($(8.5) million) for the third quarter 2017.
  • Net cash and cash equivalents as of September 30, 2017 were $37.6 million compared to $55.5 million at the end of the second quarter 2017.  During the quarter, the Company paid a one-time legal settlement payment of $9 million related to the previously announced settlement with its former breast implant contract manufacturer.

During the conference call, reference was made to a recent publication in Journal of Aesthetic Surgery, titled “Long-term safety of textured and smooth breast implants” via M. B. Calobrace et al., 2017. This paper essentially compares implants, smooth and textured, from three major manufacturers, Mentor, Sientra and Allergan, but comparing benefits and limitations of each. Although the paper states that one should not draw conclusions regarding the safety of each by comparing the data presented, it’s easy to see that out of the three Allergan may have the line with the most number of post-implant complications. I will highlight some of the findings below.

The first key point from the paper is that it appears that surgeons outside of the United States are using textured implants compared to the smooth. The total number of total implants used world-wide is approximately three times of that of United States, with almost all of them being textured. This is important to note, as studies suggest that textured implants along with use of inframammary incisions and submuscular placement of the implant tend to reduce the complication rates of capsular contracture (Stevens et al.).

A 2015 meta-analysis of 16 randomized controlled trials and two retrospective studies demonstrated that smooth breast implants were significantly more likely to be associated with capsular contracture, with a relative risk of 3.10 (95% CI, 2.23-4.33) compared to textured implants. – Liu et al. 2015. PLoS One. 2015;10(2):e0116071

The textured implant of each implant has different microenvironment that allows for difference cell shape and integration. The surface of the implants is what encourages the integration of fibrous tissue, thus, each implant has different degree of resistance to movement through friction. The paper highlighted the difference between the surface of each different implant which can be seen in Figure 4.

Figure 4 – A scanning electron microscope image of the surface of each textured implant offered by the three manufacturers.

If you are wondering what the significance may be, please refer to the tables below. You can note that there is a significant difference in the outcomes of patients with different implants. I must note that these results are not to be used as a head to head comparison, because it is hard to assume that all complication rates have been reported.

In Canada, it appears that the general consensus is using smooth implants compared to the textured. The most cited reason is the most prominent complication – capsular contracture – and the increased risk of patients developing Breast Implant Associated – Anaplastic Large Cell Lymphoma (BIA-ALCL). The cause of this is unknown, however, it has been attributed to the biofilm that is developed by the gram-positive bacteria – most specifically Ralstonia Picketii – most commonly implicated type associated with BIA-ALCL.

The risk of BIA-ALCL has been sold to patients as if extremely likely to happen with textured implants. However, the FDA issued an update on this matter on March 2017 which included 359 medical device reports (MDRs) submitted to Manufacturer and User Facility Device Experience Database (MAUDE). They identified 258 unique cases of BIA-ALCL, of which 70% were associated with Allergan devices (saline and silicone) – (Plast Reconstr Surg. 2017;139(5):1029-1039). It is imperative to note that this could be due to the excellent reporting from Allergan, and under-reporting of others. Figures 5 and 6 highlight FDA’s findings.

however, the risk of developing BIA-ALCL associated with breast implants is only 0.003%, risk of developing advanced BIA-ALCL is 0.004%, and the risk of developing BIA-ALCL and not resolved within 3 months is about 0.0002%.

Figure 5 – BIA-ALCL reports grouped by implant surface (numbers provided in February 21, 2017 FDA update) (based on cases reported to the MAUDE Database).

Figure 6 – Summary of BIA-ALCL reports submitted to FDA’s MAUDE database by manufacturer as of September 10, 2015.

Sientra an acquisition target?

For several reasons we believe Sientra is a prime candidate for acquisition. We believe Sientra is well positioned to take advantage of opportunities afforded by current market dynamics. By focusing on products with technologically differentiated characteristics, demonstrating strong clinical data, offering more product choice and providing services tailored specifically to the needs of Plastic Surgeons, Sientra can continue to enhance its position in the breast implant market.

 

Competitive strengths include:

Differentiated silicone gel and texturing technologies –   Sientra incorporates differentiated technologies into its breast implants, including a proprietary high-strength, cohesive silicone gel and proprietary texturing branded TRUE Texture. The breast implants offer a desired balance between strength, shape retention and softness due to the high-strength, cohesive silicone gel used in the manufacturing process. In addition, TRUE Texture technology provides texturing on the implant shell that is designed to reduce the incidence of malposition, rotation and capsular contracture.

Strong clinical trial outcomes –   Sientra’s clinical trial results demonstrate the safety and effectiveness of it’s breast implants. The breast implants were approved by the FDA based on data collected from long-term clinical trial of breast implants in 1,788 women across 36 investigational sites in the United States. The clinical data collected over a five-year follow-up period demonstrated rupture rates, capsular contracture rates and reoperation rates that were comparable to or better than those of Sientra’s competitors, based on the competitors’ published six-year data.

Financial Standing – Sientra recently completed a follow-on offering of common stock, for net proceeds of approximately $108 million, resulting in the strongest balance sheet also in the company’s history. Net cash and cash equivalents as of March 31, 2018 were $16.1 million compared to $26.6 million at the end of fourth quarter 2017. These balances do not include total net proceeds of approximately $108 million from the above mentioned follow-on common stock offering nor the figures include $10 million of cash received as a result of the FDA approval milestone achievement, with its existing term loan credit facility that was funded in April. The solid balance sheet will provide the necessary capital to invest and grow both the breast products and miraDry segments.

Consolidated total net sales for Q1 ’18 were $14.7 million. On a GAAP basis an increase of 96% compared to total net sales of $7.5 million under GAAP for the same period in 2017. Total net sales increased 30% on a pro forma basis year-over-year compared to pro forma total net sales of $11.3 million in the first quarter of 2017.

Breast product segment net sales totaled $8.5 million for the quarter, a 14% increase compared to $7.5 million for Q1 ’17. Driven primarily by continued strong performance of both AlloX2 and Dermaspan breast tissue expanders and record sales of BIOCORNEUM scar management product. For the balance of 2018 Sientra anticipates quarterly sequential growth in the breast products segment driven by implant manufacturing capacity ramp up and continued market traction of tissue expanders.

The miraDry business segment achieved net sales of $6.1 million in Q1 ’18 representing a 112% increase versus Q4 ’17 of $2.9 million. And on a pro forma basis, a 61% increase compared to Q1 ’17 of $3.8 million. All quite impressive given the recent manufacturing “noise”.

CEO Jeffery Nugent – Mr. Nugent succeeded the pervious CEO of in November 2015. If history is any indication, one could speculate that Mr. Nugent is priming Sientra for an acquisition. Mr. Nugent’s companies have had a history of being acquired by larger companies. For instance, he was the founder, president and CEO of Precision Dermatology, Inc., a multi channel skin care / dermatology company, that was later acquired by Valeant, Inc. in 2014 for approximately $500MM. Previously, he served as Worldwide President and Chief Executive Officer of Neutrogena from the time of its acquisition by Johnson & Johnson until 1999. Mr. Nugent has also served as Chairman, Director, President and Chief Executive Officer of a number of pharmaceutical, medical device and consumer focused companies including Bioform, Inc. prior to its acquisition by Merz Aesthetics, Inc. A common theme can be seen here, which adds to the validity of our theory.

 

Who may be looking?

Allergan is one company we believe may be circling the waters. Allergan recently announced its latest move to liquidate its infectious disease and health in order to possibly making acquisitions going forward. We believe Sientra’s sits in Allergan’s “wheelhouse”.  The synergies between a combined company could prove beneficial for Allergan, most notable with Sientra’s salesforce with 600 Tier 1 Plastic surgeons, most of which Allergan reprasentatives most likely already have a relationship with.  In addition to the breast implant market which both Sientra and Allergan serve, Sientra’s line of tissue expanders and scar management creams would fit nicely into Allergan’s current portfolio. Just in the breast implant segment, Sientra approached a 15% market share, and a corresponding share price ($28) that we believe is a conservative under an acquisition scenario.

Sientra, Inc., a medical aesthetics company, develops and sells medical aesthetics products to plastic surgeons and patients in the United States. The company offers a portfolio of silicone gel breast implants for use in breast augmentation and breast reconstruction procedures; and breast tissue expanders. It also provides body contouring and other implants, including gluteal, pectoral, calf, facial, and nasal implants, as well as nasal stents; silicone elastomer oval carving blocks to treat deformity caused by trauma, congenital and other deformities, or cancer therapy; scar management specialty products under the Medgel brand to treat various types of scars; breast sizers to identify the style and size of implants; and non-breast tissue expanders for expanding tissue and skin surface area for burn care and other reconstructive use. The company was formerly known as Juliet Medical, Inc. and changed its name to Sientra, Inc. April 2007. Sientra, Inc. was incorporated in 2003 and is headquartered in Santa Barbara, California.

Via FinViz.com