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Edited Transcript of VIVE earnings conference call or presentation 9-May-19 9:00pm GMT

Q1 2019 Viveve Medical Inc Earnings Call

FRANKLIN Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Viveve Medical Inc earnings conference call or presentation Thursday, May 9, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Gregory Atkinson

Viveve Medical, Inc. - Chief Business Officer & President

* Jeannie Swindle

Viveve Medical, Inc. - Senior Director of Corporate Communications

* Scott C. Durbin

Viveve Medical, Inc. - CEO & Director

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Conference Call Participants

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* Alexander Lim

Mizuho Americas Llc - MD & Head of Investment Banking

* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Brian W. Marckx

Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst

* Jonathan David Block

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the Viveve Medical First Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jeannie Swindle, Senior Director of Corporate Communications for Viveve. Please go ahead.

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Jeannie Swindle, Viveve Medical, Inc. - Senior Director of Corporate Communications [2]

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Thank you, operator, and welcome, everyone. Before we begin, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company. Any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the corporation's projections, expectations, plans, beliefs and prospects. These statements are based on judgments and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties are described more fully in the company's annual report on Form 10-K and other filings made with the SEC, which are also available on the company's website.

Also, any forward-looking statements represent management's view only as of the date of this conference call and should not be relied upon as representing management's views as of any subsequent date.

I would now like to turn the conference call over to Scott Durbin, our Chief Executive Officer.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [3]

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Thank you, Jeannie. Good afternoon, everyone, and thank you for taking the time to join us today. Also on the call today is Jim Atkinson, our President and Chief Business Officer. I'd like to begin today's call by commenting on the state of our business and the incredible commercial opportunity we have ahead of us. I'd like to address our commercial growth, manufacturing improvements, moves towards greater operational efficiency and underscore the scope of our clinical programs and what this means for our business going forward. Finally, I'd like to ask Jim to comment on the current market dynamics as it relates to the FDA actions taken last August, and then we'll open the call to your questions.

Viveve's mission has been and always -- has always been and remains to be the leader in women's intimate health indications. And today, we are on the precipice of major clinical and regulatory milestones, which put us in a position to be the first FDA energy-based device approved for the treatment of any vaginal indication in the United States. And throughout 2018 and through the early part of '19, we further expanded our development efforts and have made significant clinical progress towards stress urinary incontinence indications globally.

Each of these commercial markets, sexual function as a result of vaginal laxity and stress urinary incontinence, will only reach their full potential with FDA approvals and regulatory clearances, especially in light of the actions taken by the FDA in August of last year. Importantly, no other company in this area has more robust clinical evidence nor is anywhere close to gaining an FDA clearance for vaginal laxity, sexual function nor stress urinary incontinence, and these indications represent multibillion-dollar consumable markets.

Fundamentally, Viveve has never been stronger operationally than it is today. We continue to grow revenue year-over-year with an ever-increasing proportion of consumable sales to system sales. For example, from 2016 through year-end 2018, global consumable sales grew from 6% of sales in '16 to 19% in 2018, indicating a heightened demand for procedures to address these conditions through the use of a clinically proven, safe and efficacious treatment. In 2019, we expect global consumable sales to increase further to approximately 30% of total sales and are reiterating our 2019 total revenue guidance of $20 million.

Further, in Q1 and Q2 of this year, as our installed base in the United States and outside the United States has grown to a critical mass, physician utilization that is based on scientific clinical evidence is growing. We have also begun to implement several focused initiatives that will continue to accelerate growth in consumable utilization in the future. These include the launch of a new internal customer care team who will be the primary touch point for our continuously growing customer base as well as programs to help our physician customers adopt best practices from clinics and practitioners around the country. Further, we continue to test other key programs that we will be prepared to discuss in more detail on a future earnings call.

Operationally, the launch of our 2.0 technology in the United States and most recently in Europe through our new, large-scale manufacturing partners, which includes our console and all the related consumables, has enabled us to decrease our manufacturing costs significantly. This includes significant reductions in the cost to produce not only our console, but our treatment tips as well. And the sale of Viveve 2.0 will begin to improve our gross margins later this year as we work through legacy inventory and gain additional regulatory approvals internationally throughout the year.

Clinically, no other company is further along nor as close with respect to being able to truly access and expand these markets through regulatory clearances, enabling physician and consumer promotion of these indications. Last year, we began a focus on accelerating our path to expanded labels, which recently resulted in full enrollment of our VIVEVE II trial for sexual function in the United States and full enrollment of our LIBERATE-International trial for stress urinary incontinence. We're excited to say that in late July of this year, we will announce the final clinical results from LIBERATE-International and also expect to announce the final clinical results from VIVEVE II for sexual function in April of next year. Additionally, we continue to work through our IDE submission with the FDA and expect to have clearance to begin our LIBERATE-U. S. trial for SUI sometime in the third quarter.

Financially, we took critical steps in Q1 to realign our organization and reduce operating expenses significantly. In Q1, without the full effect of these reductions, we decreased total operating expenses from $12.7 million in Q1 of last year to $9.1 million in Q1 of this year, excluding onetime restructuring charges. We reduced SG&A by 26% year-over-year and R&D by 34% year-over-year, and we anticipate these reductions will be even greater going forward as our realignment takes full effect. As a result, we expect our current cash balance of approximately $18 million to last into 2020 as cash burn is reduced to approximately $4 million to $6 million a quarter, on average, through the remainder of 2019.

With that, I'd now like to turn the call over to Jim to briefly comment on and characterize the current commercial environment, following the FDA actions taken last year.

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James Gregory Atkinson, Viveve Medical, Inc. - Chief Business Officer & President [4]

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Thank you, Scott. Overall, I'm pleased with the sales we achieved in the first quarter from our global commercial teams. Despite the seasonal effect of first quarter and the disruption of our organizational realignment in January and February, our commercial team delivered revenue in line with our expectations and is building momentum as we move through the second quarter.

Today, we are operating far more efficiently with a North American direct commercial organization of 14 professionals, including 1 vice president of sales, 2 regional directors and 11 in-field representatives and sales specialists. These high-performing individuals are supplemented by our U.S. distribution partners, AMP, with their team of approximately 25 specialty representatives as well as additional regional distribution partnerships. Further, we are expanding our U.S. footprint with independent contractor reps in secondary and tertiary markets and will continue to employ this strategy throughout 2019.

Internationally, we continue to expand our distribution relationships as stress urinary incontinence approvals are anticipated later this year, following the readout of our LIBERATE-International trial in July. This is an important step forward for us internationally. As the predominance of our current distribution partnerships outside the United States are aesthetics specialty focused, we intend to supplement these partnerships in certain geographies with distributors oriented towards GYN, uro-GYN and urology focuses which will expand our reach significantly. In fact, we just accomplished this in the Middle East in early April and now have 2 specialty-focused distribution partners covering the entire region, one in aesthetics and the other one in women's intimate health.

Finally, I would like to comment on the market dynamics we are experiencing today in response to the FDA's safety communications and letters issued in August of last year. Without question, the greatest impact was felt in the back half of last year by every company in the industry. The FDA's actions did, however, fortunately create a more aware physician and consumer who are now paying closer attention to the safety profile and clinical evidence of devices being offered for use in various vaginal indications. The existence of robust medical evidence is now the basis of most physicians' decisions to treat these prevalent intimate health conditions being experienced by their patients, and we are now seeing physicians who were reluctant to make purchasing decisions becoming more active again. We believe this positive momentum will continue, particularly due to the quality and the ever-increasing amount of positive clinical data supporting Viveve's CMRF technology and the company's unparalleled pursuit of regulatory clearances for female sexual function and stress urinary incontinence.

With that, I'd like to turn the call back over to Scott Durbin. Thank you.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [5]

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Thanks so much, Jim. Operator, at this time, we'd like to open the call to questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Josh Jennings of Cowen.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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I was hoping to just start off with just looking at the reiteration of guidance and as we think about the step-up over the course of the year. I mean clearly you guys just relayed that the market conditions seem to be improving, and it's, in our opinion, Viveve sits in the driver's seat, just in terms of where you guys are and the data behind your platform. But I guess my first question is just on the sales force restructuring. Anything you can help us with, just in terms of giving the investment community some confidence that this is the right size of the sales force in order to get you to your targets here in 2019 and then

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and where your sales organization sits today in terms of numbers and feet on the street and then why that's the right size for this year.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [3]

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Sure. Thanks for the question, Josh. I'll start with the beginning of that and then let Jim add some further color commentary. As you know, one of the most important missions for this company has been the label expansion opportunity. And while it's taken us longer due to the FDA to get to these clinical readouts, we're now on the precipice of those, and we needed to operate more efficiently. And so we believe we have the right size sales organization today for the opportunity ahead of us under the current general surgical indication. We have a lot of confidence in the team. We continue in the United States to build out the level of our partnerships beyond Aesthetic Management Partners, including what Jim mentioned, engaging with independent contractor reps in secondary and tertiary markets. And so we think this is the right recipe for right now as we're moving towards the clinical trial readouts and the regulatory label-expansion opportunity ahead of us. And I'll let Jim comment as well. Thanks.

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James Gregory Atkinson, Viveve Medical, Inc. - Chief Business Officer & President [4]

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Yes. Thank you, Scott. Josh, the 14 sales professionals we have in the United States, obviously the VP of sales and the 2 regional directors are seasoned professionals and actually headed up the organization with a much larger organization that was here last year. The 11 sales professionals were our top people in the field last year, and their quota this year is virtually the same quota or just a little bit larger than what they had last year. So we feel very confident on the $20 million number with the exact team we have in place.

AMP, with their 25 sales professionals, continue to do nice bundling job out there with our team, and we have added a number of 1099 other partners just in the last few months, and we'll continue to do that through 2019. And of course, waiting for the label, that will change everything next year with label, but we feel confident on the $20 million number and our current 14-person team.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [5]

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That's helpful. And just one other question. We're getting closer and closer to July and the LIBERATE-International readout. But I was hoping you could just help us think through how that data is going to be presented to the clinical community. Our assumption is that you guys will put a press release out for the investment community, but is there a medical meeting where this data will be presented and then any publication plans after that? And then lastly, sorry this is a 3-, 4-part question, but I mean, should we be assuming that the international clinician base will be able to digest this data in front of any publication and you should start to see some incremental demands OUS?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [6]

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Thanks, Josh. So to your point, we are approaching very rapidly the end of July readout for LIBERATE-International, which is a key and important step forward in our stress urinary incontinence program. As we've mentioned before, if positive, we believe that this data can be utilized to seek approval in over 30 countries internationally.

Our data, to answer the last question you asked, has had an incredibly important role in the adoption of our system and treatment for patients historically, and we don't expect that to change. So the clinical data will be incredibly important for international clinicians to get even more comfortable with our safety and efficacy profile. We have an evolving disclosure plan for that trial, which will include, as you mentioned, top line readout at the end of July, followed by a fairly robust plan to present that data. We haven't decided which meeting yet, but it will certainly be presented by investigators and our KOLs at scientific meetings and congresses that will be forthcoming following the data readout. And we will obviously be preparing the data for a publication submission.

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Operator [7]

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Our next question comes from Jon Block of Stifel.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [8]

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So maybe the first one, just more housekeeping. Can you provide details on the 43 boxes when we think about U.S. versus OUS and the same with the 2,300 tips, U.S. versus OUS. Well, let me stop there on the first question.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [9]

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Sure. So breakdown of the 43 system placements was 25 in the U.S. and 18 internationally.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [10]

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And on the tips, Scott?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [11]

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On the tip side, it was 1,310 in North America and just about 1,000 internationally.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [12]

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Okay. Got it. And maybe 1 or 2 more from me. Just, clearly, the mix was much heavier on the box side relative to consumables from where our expectations were, yet I thought I heard you say something about for the total revenue, still a very strong consumable number for the year. So was there any specific thing that went on in 1Q that you want to call out, and I guess per your commentary, you would expect that to reverse over the next several quarters?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [13]

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Yes. I think it's important to understand as we went through and made the strategic decision to implement this realignment that it was going to have an impact on us from a commercial perspective in Q1. This was an enormous undertaking that much to the current organization's credit, everyone remains focused and engaged and very enthusiastic about our near-term future. As Jim mentioned, we were able to achieve a Q1 that was in line with our expectations, taking into account the customary seasonality of Q1, which has always been soft for us and is typically soft for other medical device and certainly aesthetic companies.

Also -- but the impact that took place in January and February was not only on the capital sales team but it was on our former practice management team. And so the disruption there caused a -- caused the decrease for this quarter in consumable sales, but we expect, given what we've seen in Q2, and we're gaining momentum that to change. And that's also being now supplemented with our focus on utilization and consumables now that our installed base has matured and gotten to a certain size, the programs that we've announced with respect to customer care, as well as other things we're doing to help physicians better market the procedure to their own patients, are going to pay dividends in the quarters to come. So we feel confident that we're going to end the year with 30% of our revenue being consumables because of those efforts and the fact that we -- Q1 is always a soft quarter.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [14]

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Okay. Very helpful, and one last one from me. Just longer term, if positive with LIBERATE-International, just how do we think about the long-term utilization in, call it, the GYN or urogyne channel versus what had been more aesthetics in nature internationally. I mean, just from a flow -- from a patient volume perspective, one-to-one utilization or would that urogyne channel just be that much greater?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [15]

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Yes. We've done a lot of work on the market sizing of both sexual function as well as stress urinary incontinence. And what you'll hear from the marketplace is people view stress incontinence as a much more medically oriented procedure, and they view sexual function as sort of an aesthetic-type procedure. That's a common theme that we hear. But the epidemiology and the demographics and prevalence of women's stress urinary incontinence is significant. The literature puts it as high as 1 in 3 women. And we think that while LIBERATE-International is an international study, it's going to do several things for us. It's going to, number one, offer us the opportunity to gain an SUI clearance in over 30 countries internationally. And we're already seeing significant attention being drawn at scientific congresses and meetings in the GYN, urogyne and urology side on our feasibility data from last December.

So this is a meaningful step forward. We think people pay a lot of close -- will pay close attention to it, and we do think it will be the basis for purchasing decisions internationally from those specialties in the near future.

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Operator [16]

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Our next question comes from Difei Yang of Mizuho.

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Alexander Lim, Mizuho Americas Llc - MD & Head of Investment Banking [17]

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This is Alex on for Difei. Do you think additional warning letters are possible in 2019? Or are we behind that at this point?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [18]

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I can't comment on what the FDA may or may not do. I think I can tell you we remain dedicated to very conservative and center-of-the-fairway marketing practices as we have for 3 years. It's one of the reasons we didn't get a letter last year. It's certainly possible, but I don't want to comment on or try to predict what the FDA may do with respect to other letters to other companies.

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Alexander Lim, Mizuho Americas Llc - MD & Head of Investment Banking [19]

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Okay. And then any comment you can make on the nature of discussions with an activist shareholder, I think that took a stake in the company recently.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [20]

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Sure. All we can say publicly is that Nantahala has been one of our larger shareholders for the last couple of years. I really can't comment on their decision to change to a 13D filing.

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Operator [21]

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Our next question comes from Anthony Vendetti of Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [22]

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Scott, you mentioned that you -- some of the restructuring. I know you've significantly reduced the workforce. Can you just remind me what the total employee count is? And I know not all of the savings were being realized here in the first quarter, and then what -- if they were all realized, what would be the run rate for expenses right now?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [23]

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Yes. So we're currently at a headcount of approximately 65 full-time employees. We did break out the onetime restructuring costs as a part of the P&L, which amounted to about $742,000 in Q1. That is the predominance of the restructuring cost. We don't expect a significant amount going forward. So my prepared remarks referenced sort of $9.1 million in total operating expenses for the quarter, and that was excluding the restructuring charges. So I think that -- also this restructuring was not implemented at the beginning of the quarter. It was in late January and in February, so we're going to see some continuing effect of the operating cost reductions for a full Q2. And again, I think we've put this number out there. We're sort of assuming that with this restructuring, we'll have total OpEx of about 36 -- $35 million to $36 million for the full year 2019.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [24]

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Okay. Great. I guess in terms of -- I know the -- it has come to our attention, letters has definitely impacted the whole space. In terms of competition you see right now, has anyone else risen back up after those letters where you feel like competition has come back? Or has these letters suppressed the competition to the point where if physicians are so inclined to buy one of these products, it's -- you believe it's heavily tilted in your favor? It's hard to say.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [25]

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I think it's -- I'll comment, and then I'll ask Jim to provide some commentary on that as well. I think, look, the competitive landscape for vaginal treatment as it has historically, despite the letters, remains extraordinarily crowded. Virtually, every aesthetic company, minus a few, today offers an add-on vaginal treatment to their aesthetic platforms and require multiple treatment sessions. I think, as Jim alluded to, I think what the letters did is really create a more educated and aware physician and consumer who are now paying closer attention to the safety profile and clinical evidence of the devices being used in this area, and we are the leader. And so when we come up against most people with a physician, most competitors with a physician who's concerned about safety and clinically proven efficacy, I'll tell you we win most of the time.

And that also underscores the importance of our near-term opportunity, not only in late July to have the readout in stress incontinence internationally. But 11 months from now, in April, we'll be reading out the VIVEVE II for sexual function, which could represent the first U.S. FDA clearance in this entire space.

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Operator [26]

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Our next question comes from Matt Hewitt of Craig-Hallum Capital Group.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

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Just one from me. I think you touched on it a little bit. I just want to make sure I've got the cadence right. But regarding gross margin, you're expecting that to trend higher over the course of the year. Will that be a step function up starting in Q2 or more of a gradual increase over the course of the year? And maybe where do you expect to exit Q4?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [28]

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Yes. Thanks for the question, Matt. We expect to exit at sort of the 48% range in total gross margins. As we've stated before, every quarter is very sensitive to not only the mix of systems and consumables, but it's also extraordinarily sensitive to the mix of those units, both consoles and treatment tips, between the U.S. and to our international and/or domestic distribution partners because of either direct pricing or transfer pricing. So it's -- there's a lot of moving parts in our gross margins today. I think the launch of Viveve 2.0 is a significant step forward for us. It was a long time in the making. It took us 18 months to develop that system. It's now being rolled out in the U.S. and in Europe and hopefully throughout the year in several other international geographies. And the cost reduction associated with that system reduces the cost to manufacture anywhere from 30% to 50%, depending on which product within the Viveve 2.0 system you're talking about. So it's a significant cost reduction.

So again, there's a lot of mix involved. So I would say, going back to your -- the first part of your question, I would expect it to be gradual as we move through the year and -- we're hopefully exiting with a gross margin that's in the 48% range for the year.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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That's great. And then maybe -- and you started to touch on this a little bit towards the end there. Regarding CE Mark in Europe for Viveve 2.0, and I'm sorry if I missed this in your prepared remarks, do you already have some distributors lined up for that product? Have they already started the sales process? Or is that going to be coming on over the course of the year?

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [30]

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Yes. Thanks, Matt. No. We've had a sales organization in Europe and the Middle East. In Europe, historically, we have approached it with sort of a direct distributor hybrid model. And so those folks are already on the ground. We've got a great team there, and we will -- they'll be -- it will be very seamless with respect to them selling 2.0 versus 1.0 in Europe going forward.

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Operator [31]

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Our next question comes from Brian Marckx of Zacks.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [32]

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Wondering about utilization and proportion of -- that's coming from SUI versus vaginal laxity and how that has trended over the recent past.

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Scott C. Durbin, Viveve Medical, Inc. - CEO & Director [33]

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Yes. We can't -- it's very difficult for us to quantify because, today, every treatment tip we sell can do either the sexual function or the SUI procedure. We're not at a point where we can differentiate that at the treatment level yet. But I will say the following and ask Jim to comment here as well. With the advent of the clinical data from Bruce Allan, both pilot and 12-month feasibility data last year that we announced in December and then our program -- continuing program with LIBERATE-International, more and more physicians tend to be offering the stress urinary incontinence treatment. I don't have today because it's difficult to measure a perspective on the proportion, but I'll ask Jim to make a comment here as well.

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James Gregory Atkinson, Viveve Medical, Inc. - Chief Business Officer & President [34]

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Yes. Thank you, Scott. Brian, so, as Scott said, it's hard to delineate which procedure is being done, but I can look at Asia, Asia Pacific, and talk about China, South Korea and Taiwan. In those 3 countries, and they are managed by distributors, so we're one step away, most of the patients are getting both procedures during the procedure. They'll start with a sexual function and move to the SUI combined, which works out to be about a 35-minute or 40-minute procedure. So throughout Asia, it's actually most patients doing both. Currently in Europe, to our knowledge, probably more in the SUI area. And then in the United States, it's pretty hard to understand because we're waiting for the label, which ones the physicians are doing. But remember that Asia really started with Korea, China and Taiwan. And as I've said, most patients get both procedures at once, okay?

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Operator [35]

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This concludes our question-and-answer session. The conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.