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VIVE: U.S. Demand Robust, Driving Revenue and Margins

05/22/2017
By Brian Marckx, CFA

NASDAQ:VIVE

Q1 Financial Results: U.S. Demand Already Robust, Driving Both Revenue and Gross Margin…

Viveve (NASDAQ:VIVE) reported Q1 financial results and provided a business update.  Management also reiterated 2017 financial guidance of revenue between $14M and $16M (implying growth of 96% - 124%) and strong improvement in gross margin.  

Total revenue increased 137% yoy and 24% sequentially to $3.04M, a new record and ahead of our $2.76M estimate by about 9%.  Q1 marked the seventh straight quarter of sequential double-digit percentage increase in revenue growth.  While the 42 consoles sold in the quarter was well below our 62 estimate, this was more than offset by what appears (the company does not disclose pricing) to be very strong average pricing as well as more sales of treatment tips, which at 2,200 were more than 50% above our expectations and also at a record high.

Particularly noteworthy is that U.S. demand appears to already be quite robust with 29 of the consoles placed in the domestic market – and that was accomplished in just nine weeks as the official launch in this country happened at the end of January.  The significant U.S.-related contribution which comes at a higher net average selling price, coupled with a record number of tips sold, resulted in a big jump in gross margin.  

As a reminder, Viveve is using a direct sales force in the U.S. and third-party distribution overseas.  Management indicated on the call that demand here remains strong, that they anticipate adding another four direct reps by the end of July and that they expect U.S. sales will grow sequentially throughout 2017.  Selling direct not only affords more control over the sales strategy, it also provides much more at the margin. 

Meanwhile the 13 OUS console placements was relatively soft, down from 33 in Q1 2016 and 48 in Q4 2016.  While this is also the lowest number in international console unit sales since Q3 2015, we think that’s more a timing factor than anything fundamental.  In fact there’s several reasons why we expect international sales to pick up throughout 2017 – including the agreement with Dynamic Medical Technologies, their distributor in China, requiring that company to purchase at least 75 units this year – Q1 included none.  Additionally, 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, VIVE believes they could receive regulatory clearance for their device in another 14 countries before year end.    

The significant U.S.-related sales (approximately 62% of total revenue in Q1 came from North America) had a dramatically positive effect on gross margin – which jumped to 46.8%, dwarfing historical levels.  This compares to 27.1% in Q1 2016 and an average of 35.4% for the full year 2016 – it was also well ahead of our 40.3% estimate.  Gross margin should continue to benefit as U.S. sales and treatment tip revenue, both which carry higher margins than that of international consoles, continue to increase as a percentage of total revenue.  Based on our calculations, we estimate that in Q1 VIVE realized an approximate 67% premium in average (net) price per console sold in the U.S. as compared to those shipped internationally.  As such, U.S. sales growth will provide an outsized benefit to the top-line and at the margin.  Gross margin may also benefit from VIVE’s direct efforts to reduce COGS – something that they alluded to on the earnings call and that they expect to talk about more in the future.     

System placements continue to drive the vast majority of the top line, although we continue to expect consumables (i.e. treatment tips) sales to accelerate from a growing installed base (currently at 259) and increased utilization as a result of greater awareness, including clinical evidence, supporting the benefits of Viveve System therapy.  While VIVE does not disclose console vs. consumable revenue, we estimate ~85% of 2016 revenue related to consoles and the remainder to consumables.    

Cash

VIVE used approximately $8.1M ($6.2M ex-changes in working capital).  Recently bolstered by the March equity raise (8.625M shares @ $4/share) that netted approximately $31.5M, cash balance at quarter end was ~$31.4M.  The company, per 10-Q footnotes, expects cash balance to be sufficient to fund operations for the next 18 months.  This should certainly provide a runway to scale U.S. sales activities, including further build-out of the sales force.  

Operational Update:  U.S. Expected to Accelerate Revenue, Widen Margins. FDA Asks For More Data…

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 expectations of continued strong demand in the U.S.  As noted, management indicated that the U.S. launch drew strong interest and will look to capitalize on this as they layer on additional sales personnel – including another four reps by the end of July and possibly another two to four by year-end 2017.  

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.  S. Korea, where the Viveve System just received a vaginal laxity indication, is an area to keep a particularly keen eye on.  With regulatory clearance in 54 countries and another ~14 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 by more than 6x since the end of 2015 - from 42 to 259 as of the close of Q1 2017).

Relative to the U.S., while VIVE is off to a strong start, we expect domestic sales to accelerate throughout 2017.  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 ten 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 reps by the end of July and have a total of 16 to 18 by the end of this year. 

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.  While we had hoped the pivotal study would begin this year, that timeline may now be pushed to 2018 given that FDA recently asked for additional safety related data – which will require VIVE to conduct additional preclinical work – more on that below.  

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 recently published results of the VIVEVE study in the February 2017 issue of the Journal of Sexual Medicine.  That is likely having a positive impact on U.S. sales.  VIVE noted that ~2/3 of U.S.-related sales in Q1 were to the aesthetic medicine channel and the other 1/3 to gynecological clinics.  

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 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 the country in August 2016.  The vaginal laxity indication (May 2017) provides 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 in that country as management noted on recent earnings calls that sales in S. Korea have been brisk.   

The Viveve System is now cleared for sale in 54 countries.  In addition, regulatory submissions in approximately 14 other countries are currently pending.  
 
U.S. VIVEVE II (Sexual Function) Study Update: FDA Asks For Add’l Safety Data, Could Be ~6-Month Delay…

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 2016 (February 2017) call that FDA had recently came back with a second round of questions related to the study protocol.  Then on the Q1 2017 call (May 2017) management noted that late in Q1 2017 they received additional notice from FDA – including that the agency “signed off on all major components of the protocol” but also that they requested additional safety data.  

Specifically, FDA has asked VIVE 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).  Management noted that they hope to have the studies completed over the next four to six months (i.e. ~Sept – Nov 2017) and resubmit the IDE at that point.  If all goes well, VIVE believes they may still be able to start VIVEVE II before year-end – that timeline, however may prove somewhat aggressive depending on when VIVE completes these studies.  As such, we think VIVEVE may not start until sometime in 2018.  

While the delay is a disappointment, particularly as VIVE had previously hoped to begin VIVEVE II in Q1 2017, it may prove to be relatively meaningless if these tissue studies satisfy FDA’s concerns, particularly given that there are no direct competitors on the horizon seeking a claim as robust as that of Geneve in the U.S.  And while the delay does impact our modeled U.S. revenue (mostly in 2018 and 2019), much of the effect was actually offset by upward revisions to our modeled revenue related to off-label use – the latter which was prompted by the strong showing in Q1 and management’s comments related to growing robust domestic demand. 

And on the positive side, the fact that FDA signed off on the study protocol is a meaningful ‘win’.  As it relates to that – earlier indications were that FDA would require a 12-month follow-up for the primary efficacy endpoint, mean change in FSFI score.  However, management noted on the Q1 2017 call that FSFI follow-up will be at 6 months, not 12 months.  Change in FSFI at 6 months was a secondary endpoint in VIVEVE I.

As a reminder, results of the randomized, sham-controlled VIVEVE I study (chart below and more detail in our updated report – see link below), 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.

Proposed VIVEVE II 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 at 6 months.  FSFI is a clinical industry metric which has already been well-validated and documented.  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 VIVEVE I results).  Follow-up on the secondary efficacy measures as well as on safety will be through 12 months.  

READ THE FULL RESEARCH REPORT HERE

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