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VIVE: Anticipating IDE Approval, Utilization Jumps

08/22/2017
By Brian Marckx, CFA

NASDAQ:VIVE

Q2 Results: Jump In Utilization, OUS Pipeline, U.S. Sales Force Growth Bodes Well for 2H. VIVEVE II On-Track For Q4

Viveve (NASDAQ:VIVE) reported Q2 financial results and provided a business update.  Management also reiterated 2017 revenue guidance of $14M to $16M (implying growth of 96% - 124%).  Gross margin is also expected to show strong improvement versus 2016.  

Total revenue, of $3.1M, increased 98% yoy but was up just 1% from Q1 2017.  It was also about 6% lower than our $3.3M estimate.  The 45 consoles sold in Q2 were lower than the 52 we were looking for, although still up from 40 in the comparable prior-year period and 42 in Q1 of this year.  While VIVE does not disclose the break-out of revenue from consoles versus that from consumables (i.e. treatment tips), we think the miss to our number and meager sequential growth was a result of lower than anticipated U.S. console sales.  

On the much more encouraging side was very strong treatment tip unit sales – the ~3,300 tips sold in the period were a record and 50% higher than the prior best (2,200 in Q1 2017).  Most of the treatment tips were sold internationally – which represents ~80% of the 304-unit total installed base.  But with tips’ sales price only a fraction of that of the consoles’, the beat in consumables unit sales versus our 1,300 estimate was not enough to offset the miss in console placements.  Reassuring, however, is management commenting on the call that utilization rates are rising substantially which they relate to sales and marketing efforts towards educating physicians on the benefits of treatment with Geneveve.  We have since made upward revisions to our forecasted utilization rates and related consumable revenue.

Of the 45 consoles sold in Q2, 27 were sold in the U.S. – which is down from 29 in Q1 2017 and lower than our 35 estimate.  As a reminder, the official domestic launch happened at the end of January 2017.  Given that Viveve sells direct in the U.S., they benefit from a much higher average sales price as compared to OUS (distributor-based pricing) sales.  So the 8-unit difference versus our estimate and 2-unit sequential decline in U.S. placements explains all of the total revenue miss to our number as well as the flattish sequential growth – both of which were partially offset by the very strong consumables sales.  But, the rapid growth of the sales force - from ten in May to 23 today, is expected to accelerate both domestic console placements and utilization.  And as U.S. sales grow as a percentage of total revenue, gross margin should benefit as well.

Meanwhile the 18 OUS console placements were dead-on with our 18-unit estimate – while this is down from 40 in Q2 2016, it is up from 13 in Q1 of this year.  We continue to look for this to ramp in the second half of 2017, however.  Dynamic Medical Technologies, their distributor in China, is required to purchase at least 75 units this year – the indication on the Q2 call was that most (perhaps all) of this minimum remains outstanding.  Additionally, the recent regulatory approval in Brazil and label expansion in S. Korea to include a vaginal laxity indication, could be significant catalysts for international sales.  Both of those countries consistently rank among the top in the world in number aesthetic-related procedures performed each year.  And, finally, regulatory clearance in several more countries could materialize between now and the end of the year.  

The lower than anticipated U.S. sales looks to have also negatively impacted gross margin, which came in at 40.2%.  While up from 34.3% in Q2 2016 (when 100% of revenue was OUS), it is down from 46.8% in Q1 2017 and meaningfully lower than our 46.6% estimate.  But, management is guiding for strong GM improvement in 2H which we think is highly achievable given expectations of outsized proportional growth of U.S. sales as well as from (relatively high-margin) consumables, the latter driven by the aforementioned accelerating utilization. 

System placements continue to drive the vast majority of the top line (we estimate consoles currently contribute ~75% of total revenue), although we continue to expect consumables (i.e. treatment tips) sales to accelerate from a growing installed base (currently at 304) and increased utilization as a result of greater awareness, including clinical evidence, supporting the benefits of Viveve System therapy. 

Cash
VIVE used in operating activities was $9.3M and $17.3M ($9.2M and $15.4M, ex-changes in working capital) in Q2 and 1H 2017.  Cash balance, recently bolstered by the equity raise in March that netted $31.4M and $9.2M in net proceeds from a new debt facility that closed in May, was $31.0M at Q2 quarter-end.  Management expects this to be sufficient to fund operations for at least the next 12 months – which, based on their current timelines, means current cash balance should be sufficient to fund operations through at least the beginning, and possibly to the conclusion of the U.S.-based VIVEVE II study (for support of a sexual function indication).

An additional $10M (in $5M increments) is available under this loan agreement subject to; VIVE meeting a minimum revenue threshold of $16M over any consecutive twelve-month period prior to July 1, 2018 and maintaining an average market cap of at least $60M over the 30 days prior to the notice of borrowing.  We think both of these milestones should be easily attainable - for context, we model VIVE to generate in excess of $25M of revenue in 2018 and current market capitalization is approximately $100M (and our target price implies market cap of over $200M).       

Operational Update:  ICM Distribution, Ex Vivo Study Results “Extremely Good”, IDE Approval Expected
 

One of the major operational items of interest since our Q1 update (May 19th) is an agreement with InControl Medical LLC (ICM), located outside Milwaukee, WI, for VIVE to serve as exclusive distributor of that company’s innovative incontinence therapy devices to U.S. healthcare providers.  ICM’s product line, sold under the apexM, InTone, InToneMV and Intensity names, mainly focus on female incontinence and pelvic floor muscle stimulation.  InTone and InToneMV are used to treat incontinence and require a doctor’s prescription.  apexM is also an incontinence device but is available without a prescription.  ICM lists apexM for $399 (currently discounted to $299) on their website.  Intensity is used to help strengthen pelvic floor muscles, does not require a prescription and is listed for $179.  Per the FDA’s medical device database, ICM’s products received regulatory clearance via 510(k) between January 2014 and April 2015.  

Relative to the market size, VIVE notes that, based on third-party research, there are four million women who are actively seeking therapy related to these conditions.  Importantly, per management’s comments on the call, the call points for ICM’s products are the same as VIVE’s existing target customers.  As such, ICM’s products should provide a relatively seamless add-to-the-bag opportunity for Viveve’s direct reps.  And while we have little insight into how substantial the revenue opportunity may be, given that the agreement is not expected to result in any meaningful incremental cost to VIVE (aside from a $2.5M equity investment into ICM), this could result in accelerated improvement in operating loss (i.e. little financial downside risk).  VIVE’s reps are now in-process of training on the ICM product line and expect to begin selling the devices in early September.   

The other noteworthy update relates to the VIVEVE II clinical study.  Management noted on the Q2 call that, since their May update, they completed the ex vivo study (which was requested by FDA late in Q1) and met with FDA on July 18th for feedback on the preclinical work aimed at supporting their IDE application.  

As a reminder, VIVE has been seeking IDE approval to conduct a U.S. clinical trial (“VIVEVE II”) to support an eventual regulatory filing seeking clearance (via de novo 510(k)) for an indication related to improvement in sexual function.  VIVE initially submitted the IDE to FDA in September 2016.  Since then the agency has come back with two rounds of additional questions – the most recent of which was in May when FDA requested the company to conduct ex vivo tissue studies to “understand the impact of RF energy on vaginal tissue that has undergone prior episiotomies.”  (Episiotomies are surgical cuts made at the opening of the vagina to aid difficult deliveries).  While the delays have been disappointing, VIVE has been judicious in responding to the additional requests.  In fact, their timelines for resubmitting the IDE remain on-track with what their expectations were in May.  

Management further commented on the Q2 call that results of the ex vivo study (which focused on the safety of radio frequency energy on tissue damaged by vaginal birth) were “extremely good”, that their meeting with FDA “was very successful” and that they believe their preclinical protocol will be acceptable by FDA.  Assuming positive feedback from FDA on the preclinical tissue studies, VIVE expects to resubmit the IDE by the end of Q3 (~late September).  Their expected timeline for commencement of VIVEVE II (assuming FDA approves the IDE), which includes a cushion for the possibility of additional questions from FDA, continues to be by current year-end.  However, perhaps conservatively, we do not model the study to begin until 1H 2018 which accounts for the potential for additional delays in IDE approval as well as a subsequent longer runway for IRB approvals and related trial-site preparations.   
  
Our Near-Term Outlook

We think certain high-potential territories which recently came online, including Brazil and S. Korea, along with regulatory clearance and launch in more countries to be meaningful contributors to revenue growth during the remainder of 2017.  S. Korea, where the Viveve System recently received a vaginal laxity indication, is an area to keep a particularly keen eye on.  With regulatory clearance in 54 countries and others that could come online before year-end, the geographic footprint continues to rapidly grow.  Additionally, we expect to see substantial increase in consumable sales from incremental increase in utilization but more significantly from increase in the installed base (which has increased 40% over just the last 6 months - from 217 at YE2016 to 304 as of the close of Q2 2017).

Relative to the U.S., while Q2 console placements were lower than our estimate, VIVE already has more than 50 units in the domestic market and we expect the placement rate to accelerate.  With 23 reps now onboard, the size of the U.S. sales force has more than doubled over the last three months and tripled since January and should be a catalyst in driving domestic (higher-margin) revenue.   

A sexual function indication could be a significant catalyst in driving U.S. sales but will not happen before 2017 year-end.  In the meantime, the initial formal marketing message in the U.S. is limited for “use in general surgical procedures for electrocoagulation and hemostasis”, the indication for which the Viveve System (recently rebranded as “Geneveve”) received FDA clearance in October of last year.  However, clearly initial demand is driven by ‘off-label’ use – likely for the reduction of vaginal laxity and for the improvement of sexual function – both of which were endpoints in the U.S. VIVEVE I study.  The informal sexual function-related marketing message was significantly enhanced with the published results of the VIVEVE study in the February 2017 issue of the Journal of Sexual Medicine.  That should help buoy U.S. sales growth.    

As a reminder, VIVEVE I was a multi-site, randomized, sham-controlled study which showed that just one ~30-minute treatment with the Viveve System resulted in a highly statistically significant difference in vaginal laxity and improvement in sexual function among those patients receiving treatment versus those given sham (i.e. control).

While other energy-based devices targeted to the U.S. vaginal laxity market have preceded Viveve’s entry, none are FDA-cleared for an indication related to that use.  And, more importantly, the Viveve System is the only device that has demonstrated significant efficacy for the improvement in vaginal laxity and/or sexual function.  As clinicians look to and often demand robust clinical evidence (i.e. U.S., multi-site, randomized, sham-controlled studies) as a prerequisite to adoption of a particular device, we believe Viveve will have a meaningful competitive advantage.       
  
On the international front, VIVE has been aggressively expanding their commercial footprint.  In October 2016 they met another significant milestone – gaining regulatory clearance of their device in Brazil for “the treatment of the vaginal introitus, after childbirth, to improve sexual function”.  While management noted on the Q2 call that political turmoil and a strike by customs personnel have been headwinds, we think Brazil offers substantial near-term revenue potential given that it ranks #2 to only the U.S. in not only vaginal rejuvenation but in total number of all types of cosmetic/aesthetic procedures.

And another potential potent catalyst that came online even more recently was expanding the label in S. Korea to include a vaginal laxity indication – as a reminder Geneveve received initial regulatory clearance (for general surgical procedures) in that country in August 2016.  The vaginal laxity indication (May 2017) provided the ability to market specifically for that claim.  S. Korea ranks third behind Brazil in total number of cosmetic/aesthetic procedures performed and ranks #1 in the number of procedures performed on a per-capita basis.  And it appears Viveve’s system has already been well received there as management noted on recent earnings calls that sales in S. Korea have been brisk.   

2017 Guidance:  100%+ Revenue Growth, Expanding Gross Margins

On the Q2 call management reiterated 2017 revenue guidance of $14M to $16M (implying growth of 96% - 124%).  And while not offering geographically-itemized revenue guidance, we think much of this anticipated ~100%+ revenue growth is expected to come from accelerating demand in the U.S.  Management has indicated that the U.S. launch drew strong interest and they appear to be looking to capitalize on this as they quickly ramped the size of the sales force.  Meanwhile, with much (most, or all?) of Dynamic Medical Technologies’ 75-unit quota still outstanding, coupled with other international catalysts (such as uptake in S. Korea, Brazil and regulatory clearances in other countries) OUS console sales should have a minimum of ~150% pent-up growth already in the barrel for Q3/Q4.         
  
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