By Brian Marckx, CFA
READ THE FULL VIVE RESEARCH REPORT
Q4 Preannouncement, 2019 Guidance / Strategic Restructuring
Earlier this week Viveve (VIVE) preannounced expected Q4 revenue of ~$4.4M (~16% ahead of our since-revised estimate), issued initial 2019 revenue guidance of $20.0M (~17% below our since-revised estimate) and outlined an already-underway operational restructuring plan aimed at slashing expenses and refocusing sales efforts at the physician (i.e. non-aesthetic)/SUI-interested segment.
Q4 numbers (vs our estimates) are 57 (vs 55 E) unit sales, including 48 (vs 40 E) in the U.S. and 9 (vs 15) OUS and 4,600 (vs 5,047 E) consumable treatment tips. The ~$4.4M in expected Q4 revenue implies declines of 13% from Q4’17 and 8% from Q3’18. But, it’s at the top-end of management’s prior FY2018 revenue guidance, which implied Q4 revenue in the range of $3.4M - $4.4M, and well ahead of our $3.8M estimate. Perhaps even more encouraging is that, based on our calculations, it looks like it also implies relatively healthy pricing – while we do not have any particular insight, we think this suggests ASPs of U.S. consoles may have returned to more normalized levels (and benefitted from the new-gen 2.0 system).
The restructuring plan includes significant cuts to the workforce. Per the 8-K, VIVE’s headcount will be slashed by 36% to 68 FTEs (from an implied 106) by January 22nd. While VIVE will take a severance-related charge of $900k, we expect the cuts to result in a significant reduction of operating expenses. Assuming a slightly lower proportional reduction to SG&A, we think total operating expenses (assuming flattish R&D) could fall by as much as $12M or more from 2018 to 2019. If that happens and VIVE can hit their $20M revenue guidance, we think operating loss could improve from ~$46M (estimated in FY2018) to under $32M in 2019.
While the reasoning behind the restructuring largely rests on cutting costs, we think the timing is also somewhat prescient given the not-so-subtle shift in focus that has been ongoing from sexual function over to the (much larger) SUI market. It appears that management is now more fully embracing that shift – while we expect the aesthetic/sexual function market to remain an important component of VIVE’s business, we think SUI may soon represent the majority of the company’s opportunity for accelerating growth. Given the relatively massive size of the target population (30M in U.S.) and compromise to quality of life among those suffering from the condition, an SUI indication for the Viveve System could prove a more potent revenue driver than that of sexual function.
In addition, FDA’s July 2018 warning letter to other energy-based manufacturers appears to have created a stiffer and longer than expected headwind to Viveve’s sales – which we think provides additional rationale to accelerate their shift from aesthetics to gynecologists and urologists which are seeking non-invasive SUI therapeutic alternatives.
And, with more and more data showing the effectiveness of the Viveve System in SUI, this should act as a catalyst to help drive awareness and adoption for use in that indication. An IDE seeking approval to commence LIBERATE U.S., the company’s proposed U.S.-based FDA pivotal study, is expected to be filed following conclusion of a sheep safety study. Successful completion of the safety study, which we have little concern about (see link to our report), would get them one important step closer to an FDA label for use in SUI – it should also help drive physician awareness about the technology.
And VIVE has already successfully completed SUI studies. As a reminder, in December VIVE announced 12-month results of its feasibility study evaluating their Viveve System for the treatment of women with mild-to-moderate stress urinary incontinence. The following week, results were presented at a SUI-focused KOL symposium sponsored by the company. The data, we believe, largely confirms the compelling efficacy signal seen at six months, which was announced in June.
In addition to those results, LIBERATE International, their pivotal OUS SUI study, is expected to read out later this year. If all goes well, VIVE could have CE Marking and Health Canada approval for an SUI indication shortly afterwards.
So, given the opportunity in SUI, we think VIVE’s strategic reorganization, including what appears to be a more determined shift with its direct sales efforts from sexual function to SUI, makes sense. And while SUI is where we have as of recently begun to believe where much of the upside growth potential lies, we do think sexual function will remain an important part of the company’s overall focus. With VIVEVE II enrolling rapidly, the final patient could run through in the next two or three months – and with a 12-month follow-up, this means topline data could be available sometime in 1H of next year.
Depending on what the data shows and assuming positive results from LIBERATE U.S. (in SUI), we think VIVE could be in an even more potent position – including potentially looking at on-label use in the U.S. for both sexual function and SUI. At that point their strategic options may once more be reevaluated and could include a re-expansion of their sexual function/aesthetic channel focus and complement their SUI/physician strategy. In the meantime, with VIVE’s direct reps now detailing to gyns and urologists, we expect they will look to broaden their third-party distribution capabilities to fill in gaps in the aesthetic space in both the U.S. and internationally.
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