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VIVE: Guiding for ~100%+ Revenue Growth in 2017

02/21/2017
By Brian Marckx, CFA

NASDAQ:VIVE

Q4 Financial Results: Huge Jump in Consumables, Guiding for ~100%+ Revenue Growth in 2017

Viveve (NASDAQ:VIVE) reported financial results for the fourth quarter ending December 31
st and provided a business update.  Management also provided initial 2017 revenue guidance of $14M - $16M, which implies growth of 96% - 124%, and also noted that they expect strong improvement in gross margin.

Relative to Q4, it marked the sixth straight quarter of sequential double-digit percentage increase in revenue growth.  It also set new records in both the number of consoles and treatment tips sold.  And while the 55 consoles sold was inline with our 55 estimate, the 1,300 treatment tips was not only more than twice the prior best (522 in Q3 2016), it was also well ahead of our 911 estimate.  While the big jump in treatment tips likely represents some stocking (or otherwise lumpy ordering patterns), we remain very encouraged that this continues to show a significant ramp given that consumables sales are relatively high-margin and a rough proxy for utilization.

Total revenue increased 226% yoy and 33% sequentially to $2.45M, a new record and ahead of our $2.19M estimate by about 12%.  Viveve system placements, which included 55 in Q4 (vs. our 55 estimate), up from 47 in Q3 (the prior record) and almost 62% more than the 34 sold in all of 2015, continue to drive the vast majority of the top-line.  However, we continue to expect consumables (i.e. treatment tips) sales to accelerate from a growing installed base (currently at 217) and increased utilization as a result of greater awareness, including clinical evidence, supporting the benefits of Viveve System therapy.  There were 1,300 treatment tips sold in Q4, compared to 216 in the comparable prior year period and 522 in Q3 of this year.

For the full year 2016, total revenue grew 394% to $7.14M with consoles increasing from 34 to 175 and the number of treatment tips sold growing from 615 to 2,698.

Q4 gross margin, at 39.0%, was ahead of our 36.2% estimate.  Gross margin has shown fairly significant and regular widening  - growing from 27.1% in Q1 2016 and from 31.9% in 2015 to 35.4% for the full year 2016.   Management noted on the Q4 call that they expect GM to continue to expand due to a combination of increased average selling price (direct sales in U.S.) of both the treatment tips and consoles and through a reduction in COGS.  We also expect gross margin to benefit as the company moves from initial launch and marketing strategies which include preferred pricing to KOL’s to help build awareness to more account maintenance and growth related strategies, at which point there should be much less of a dilutive-pricing effect.

Cash

VIVE used approximately $5.9M ($5.4M ex-changes in working capital) and $18.1M ($18.4M ex-changes in working capital) of cash in the three and twelve months ending December 31, 2016.  Cash balance stood at $8.1M at year-end which represents approximately four months of operating capital based on management’s ~$2M/month anticipated burn rate throughout 2017.

Operational Update:  U.S. Expected to Accelerate Revenue, Widen Margins. IDE Response Could Be Soon…

Management is guiding for 2017 revenue of $14M - $17M.  While not offering geographically-itemized revenue guidance, we expect much of this anticipated ~100%+ revenue growth is attributable to an expected warm reception of the Viveve System in the U.S.  We also think other 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 in 2017.  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 grew from 42 at the end of 2015 to 217 at the end of 2016).

Relative to the U.S., while Q4 included initial sales (seven consoles) of the Viveve System in this country, we expect 2017 to benefit from a much more significant contribution.  Viveve has their initial U.S. sales team in place which they expect to incrementally add to later in the year.  The U.S. sales team currently consists of eight direct reps which cover the entire U.S.(and part of Canada), two regional directors and an executive VP.  VIVE expects to add an additional four to six reps in 2H 2017.

VIVE hopes to eventually gain FDA clearance of the Viveve System for an indication related to the improvement of sexual function - a randomized study for which an IDE application has been submitted and which could commence in the very near term (details below).  In the meantime, the initial formal marketing message in the U.S. will be 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, we expect ‘off-label’ use related to reduction of vaginal laxity and for the improvement of sexual function – both of which were endpoints in the U.S. VIVEVE I study, to drive demand.  The informal sexual function-related marketing message was significantly enhanced with the recently published results of the VIVEVE study in the February 2017 issue of the Journal of Sexual Medicine.

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 the Viveve System in Brazil for “the treatment of the vaginal introitus, after childbirth, to improve sexual function”.  As Brazil ranks #2 to only the U.S. in not only vaginal rejuvenation but in total number of all types of cosmetic/aesthetic procedures, we think that country also offers substantial near-term revenue potential.

And another potential potent catalyst that recently came online was gaining regulatory approval (for general surgical procedures) of Geneveve in S. Korea in August 2016.  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 in that country as management noted on recent earnings calls that sales in S. Korea have been brisk.  Viveve is looking to further exploit the potential in S. Korea and submitted an application to expand the label to include the treatment of the vaginal introitus.  Management noted on the Q4 call (February 2017) that they expect to hear back from S. Korean regulators related to this application in 1H 2017.

The Viveve System is now cleared for sale in 51 countries with the most recent regulatory approvals coming since the beginning of 2017 which included Colombia, Costa Rica and Malaysia.  In addition, regulatory submissions in approximately 14 other countries are currently pending.  Viveve has distribution agreements in place that cover approximately 67 countries.

U.S. VIVEVE II (Sexual Function) Study Update: Responding to add’l questions, IDE approval could be forthcoming… 

In late September 2016 the company submitted an IDE to FDA seeking approval to commence VIVEVE II, a pivotal U.S.-based study expected to support an eventual regulatory filing seeking clearance (via de novo 510(k)) for an indication related to improvement in sexual function.  Management noted on the Q4 call that FDA recently came back with a second round of questions related to the study protocol which they expect to respond to by the end of this month (i.e. February).  Assuming timely approval of the IDE, this study could potentially commence in Q1 2017.

The recent discussions with FDA and the agency’s questions largely related to the proposed study design of VIVEVE II.  FSFI, expected to serve as the primary endpoint, is a clinical industry metric which has already been well-validated and documented.

Proposed study will include ~250 patients at up to 25 study sites in the U.S. and Canada which will be randomized 1:1 active/sham.  Primary endpoint is expected to be mean change in total FSFI score.  Secondary endpoints are expected to include two of the six domains of the FSFI questionnaire that contributed the most to the overall (statistically significant) outcome of the total FSFI score in VIVEVE I – those being the arousal and orgasm domains (both of which were highly statistically significant – see below for link to our report for VIVEVE I results).  Patient follow-up is expected to be at 12 months post-procedure (we note that VIVEVE I follow-up was through six months).

As a reminder, results of the randomized, sham-controlled VIVEVE I study, announced in April 2016, showed a highly statistically significant difference between the active and sham arms on the VSQ (i.e. laxity) primary endpoint as well as the FSFI (i.e. sexual function) secondary endpoint.  In addition, patients receiving Viveve treatment were 3x more likely to report no vaginal laxity at 6-month follow-up compared to control.  Safety was considered excellent with no difference in adverse event rates between the treatment and sham cohorts.

Our comments:  a significant update to the proposed study design of VIVEVE II is the 12-month follow-up.  While this differs from the 6-month follow-up used in VIVEVE II, the longer follow-up may actually improve on the already compelling efficacy seen in VIVEVE I given the drop-off observed in FSFI scores of the sham arm beginning after month 3 (chart below) – this is believed to be due to a placebo effect in the sham patients that started to wane after about three months.

We cover VIVE with an $11/share price target.  See below for free access to our updated report on VIVE which includes a refresher on VIVEVE I, our valuation methodology and our financial model.

READ THE FULL RESEARCH REPORT HERE

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