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VIVE: Short-Term Headwinds Result in Lowered Guidance. Clinical Progress Sets Up Several Upcoming Milestones

By Brian Marckx, CFA



Q3 Results: Results Inline But FDA-Action vs. Competitors Could Create Short-Term Headwind. Long-Term Outlook Intact…

Viveve (VIVE) reported Q3 2018 financial results and provided a business update. Relative to the financials, both the top and bottom lines were a hair lower than what we were looking for but generally, largely inline with our numbers. And while opex was a bit better (i.e. lower) than where we expected, gross margin was much worse (i.e. narrower). But, aside from gross margin, which really took it on the chin, the quarter was reasonably solid.

And while gross margin should start to rebound fairly soon with continued roll-out of Viveve 2.0, the next-gen system which (along with the related treatment tips) carries a better margin, the topline ‘solidness’ in Q3 is, unfortunately, not expected to bleed over into Q4. Management slashed FY2018 guidance from $22M - $24M to $17.5M - $18.5M, citing headwinds caused by the late-July warning letter from FDA to seven energy-based device manufacturers that the agency fingered as inappropriately marketing for off-label use in vaginal cosmetic procedures, including for the treatment of vaginal laxity.

While VIVE was not one of the seven, we are not overly surprised that this has caused what appears to be an overly cautious market reaction given FDA’s language in the letter that these devices (i.e. those specifically named in the letter) “may be associated with serious adverse events” if used to “perform rejuvenation, cosmetic vaginal procedures, or non-surgical vaginal procedures….”. In fact, we noted in our August 1st Note (FDA Warning Letter Should Weed-Out Imposters and Benefit VIVE – see Appendix) that while we believed that the agency’s action would benefit VIVE in the long-run, that the headline reaction “may be a short-term headwind to VIVE (and a much more significant defeat for the other manufacturers)…”

The bad news is that it appears our prediction was prescient, at least as it relates to the short-term. The good news is that comments from management on the call suggest that we may also prove accurate as it relates to the longer-term. Those comments, including that VIVE has immediately gained market share (as the cited companies presumably changed their marketing message or altogether ceased targeting the vaginal cosmetic market) and that physicians are taking a cautious approach towards safety, are reassuring that VIVE will indeed benefit once potential customers have become more educated on the difference between the Viveve System’s well-established safety record and that of ‘all the rest’.

So, while Q4 is already setting up to be less-than thrilling from a financial standpoint, the product development side of the business is nearly as active and exciting as it has ever been. Ongoing clinical progress made in both sexual function and SUI programs is setting up for what should be several significant near-term significant milestones.

Anticipated upcoming clinical development milestones
• ~end of 2018: 12-month SUI Feasibility study data
• ~end of 2018/early-2019: IDE approval to begin LIBERATE-U.S.
• mid-2019: final 6-month SUI results from LIBERATE-international
• late-2019/early-2020: 12-month (i.e. final) results of VIVEVE II

Q3 total revenue was $4.8M, up 19% yoy, down 13% sequentially and 2% lower than our $4.9M estimate. The qoq dip in total revenue was anticipated as Q3 is typically seasonally soft for cosmetic procedures. Console placements totaled 64 units (vs. 67 E) including 48 U.S. (vs 52 E) and 16 OUS (vs 15 E). Treatment tips totaled 5,700 (vs 4,089 E). While management noted that there were no SUI-related BOGOs in the quarter, based on the relatively weak (total) gross margin, we think there must have been some sort of promotional pricing.

Revenue (proportional contribution) per geographic territory:

View Exhibit I

North America not only continues to represent the most significant contributor to total revenue but it’s overall contribution also continues to grow. Accounting for 62% and 69% of total revenue through in the three and nine months ending 9/30/17, respectively, North America’s contribution to the topline increased to 72% and 76% in the most recent comparable periods. Despite VIVE’s regular expanding international reach (the Viveve System is now cleared for sale in more than 60 countries) and the relatively recent launch in the U.S. (Q4 ’16 was the first period of U.S. revenue), the domestic market has quickly become the major driver of, and contributor to, total revenue.

The 48 U.S. console placements is flattish from the 47 sold in Q3’17 and down from Q2’17’s 69. Through the first nine months of 2018 155 systems were sold in the U.S., up 51% from 103 in the prior-year period. VIVE noted on the call that their sales force remains at 49 total sales team members, unchanged from Q2 and includes; 23 capital reps, 10 associate sales reps, 10 practice development managers, 3 regional sales directors and 1 practice development strategic partnership director – all report to a V.P. of sales. We had previously reported on sales-rep efficiency analysis but, given the typical seasonably-soft summer months and the atypical market disruption caused by the FDA’s letter, we think that ratio is not particularly insightful for Q3. We will consider revisiting that metric when the safety-concern market turmoil settles.

Console unit sales numbers were just about dead-on where we had anticipated, although at what appears to be a moderate discount to our forecasted ASP. It is not clear if there was indeed some promotional pricing on the boxes. Management noted that Viveve 2.0, the next-gen system began roll-out in the quarter and accounted for roughly one-half of the unit placements. The new system and related treatment tips should aid margins – hopefully with some obvious benefit beginning as soon as Q4.

Per management, caution over safety concerns prompted by the FDA letter has elongated the sales cycle – although, based on our estimates, that was not necessarily noticeable in Q3 – perhaps as many of those booked as sales may have already been in the channel prior to regulatory headline. Nonetheless, it almost certainly will be obvious in Q4 as management’s revised guidance implies a sequential contraction between 8% and 28% - which is even more dramatic considering VIVE’s Q4 has historically been its strongest, and Q3 its weakest.

But while we did not expect that level of short-term disruption, we remain optimistic of the long-term growth curve given the Viveve System’s leading position as it relates to documented safety and efficacy. We also continue to believe that additional positive clinical data supporting both (i.e. safety and efficacy), along with efforts towards educating consumers of the difference between Viveve’s technology and what we have characterized as the imposters, will pay dividends in the form of accelerating growth. With several upcoming clinical milestones, Viveve’s awareness-building efforts could have even more firepower.

As it relates to consumables, 5,700 were recognized as sales – which is a new record high and more than double the 2,700 sold in Q3’17. As noted, no SUI-BOGO program was conducted in Q3. Nonetheless, gross margins (31% vs 51% in Q2’18, 49% in Q3’17 and 52% E) were fairly atrocious and weak margins on the tips cited as a significant contributor (along with product mix). But, again, with the new system rolling out, GM’s are expected to improve.

And, if growth in the tip sales volume is indicative of utilization, that certainly suggests physicians are not shying away from using the Viveve System, even if some consumers may be more cautious about making an initial purchase. In fact, utilization per console is holding up well – at 2.9 tips per system per month in Q3 and an average of 2.7 through the first nine months of 2018, per-system utilization is roughly inline with where it was the prior year. That is encouraging given that the installed base grew 77% since Q3’17 and, intuitively, the expectation would be for utilization per unit to fall with significant growth in the installed base.

Operational Update:

VIVEVE II: Enrolling as planned, FDA OKs initial safety review, filing of second IDE/safety cohort imminent …
As a reminder, VIVE received IDE approval of VIVEVE II in March 2018 and in mid-May announced that the study had started. VIVEVE II, if successful, is expected to provide the backbone for an eventual U.S. regulatory filing seeking an indication for ‘treatment of sexual function’.

VIVEVE II is using a ‘staged roll-in’ enrollment approach which is further aimed at ensuring safety. While total enrollment is expected to be 250, this staged roll-in requirement means a safety review must be conducted on the initial patients before additional subjects can enter the study. In early August VIVE announced that, following one-month safety review of the first 25 patients, that FDA approved enrollment to continue up to 100 (i.e. second stage). Enrollment continues and the second safety review will occur once another 25 patients have been followed for one-month and 3-month data is available on a total of 50 patients. Management noted on the Q3 call that they expect to file this safety data, accompanied with an IDE application requesting to enroll the remaining 150 patients, by the end of November.

If approved, the trial can then enroll through the total of 250. Assuming the IDE supplement is submitted by November 30th and based on FDA’s turnaround (~35 days) of the initial safety cohort (n=25/ 30-days), we think this second IDE supplement could be approved by late December 2018 or very early next year. Approval is, of course, critical as it is a gatekeeper to finishing the study but, we think, it may also play a role in re-accelerating domestic sales growth given that it is further evidence supporting the safety of Viveve treatment. If so, it is possible that FDA green-lighting the final enrollment cohort to proceed could resonate with potential purchasers of the system that may have been hesitant to do so due to the unfortunate halo effect of FDA’s warning letter.

Per VIVE’s current timeline, if all goes to plan, they believe final results of VIVEVE II could be available sometime in late-2019 or early-2020.

Viveve’s SUI clinical programs have moved relatively very rapidly. In June they announced compelling 6-month data from their ongoing (Canada-based) 12-month randomized (n=36) SUI feasibility study – see our discussion below (12-month data from this study is expected by current year-end). Then, in August they announced commencement LIBERATE-International, which (if successful) is expected to be used as primary support for SUI regulatory filings seeking marketing clearance in Canada and Europe. To-date, ~30 patients (of 100 total) have been enrolled across eight active sites. Current enrollment rate is approximately 1.25 patients per month per site. If that increases to two patients per site per month and two more sites come onboard, we estimate enrollment could complete by the end of February 2019 – as such, we think management’s guidance for data by mid-2019 could be a reasonable assumption.

Meanwhile, in September VIVE made an IDE filing seeking approval to commence its U.S. SUI pivotal study, LIBERATE-U.S. If all goes well, LIBERATE-U.S. could begin by late-2019/early-2019 and LIBERATE-International could have final (6-month) data by the middle of next year. Given the compelling 6-month data from the SUI pilot study and potential significant target-market expansion potential associated with an SUI indication, we will be eager to hear updates on all three of these SUI clinical studies. The relatively massive size of the SUI market and lack of current effective treatment options means meeting significance on the primary endpoints of the LIBERATE (pivotal) studies, could be a significant value inflection point for VIVE stock. The next glimpse of potential effectiveness of Viveve System in SUI could be only a few weeks away.

See our Appendix for a refresher on the LIBERATE study designs and our discussion on SUI

Refresher on Compelling SUI Feasibility Study 6-Month Data: Meaningful Improvement On All Endpoints, Will Support IDE Filings…
In mid-June Viveve announced what we characterized as potentially compelling 6-month data from its ongoing SUI 12-month feasibility study. As a refresher, this is the second formal pilot/feasibility study assessing the Viveve System in the treatment of mild-to-moderate SUI (see below for refresher on the first). Listed under clinicaltrials.org Identifier: NCT03066180, the single-arm, 36-subject study is being conducted at Dr. Bruce Allan’s Allan Centre (Dr. Allan was also the principal investigator for the VIVEVE I vaginal laxity/sexual function study) in Calgary, Canada. Protocol allowed for one (just following baseline) or two (6 – 12 weeks later) Viveve treatments.

While only a single-arm feasibility study, it was clearly designed to be consistent with FDA's recommendations for SUI-device pivotal studies (FDA's guidance) for Clinical Investigations of Devices Indicated for the Treatment of Urinary Incontinence). This includes the inclusion and exclusion criteria as well as the choice of primary and secondary endpoints. Relative to SUI severity, inclusion criteria included diagnosis of mild-to-moderate SUI as determined by one-hour pad weight test (using International Continence Society definitions; mild = 1-10g, moderate = 11-50g, severe = > 50g). (See our Appendix for a more in-depth review of FDA’s guidance on SUI endpoints).

Primary endpoint is reduction in 1-hour pad weight versus baseline. Secondary measures are the 7-day bladder voiding diary and composite scores from three quality-of-life oriented questionnaires; UDI-6 (Urogenital Distress Inventory-Short Form), IIQ-7 (Incontinence Impact Questionnaire) and ICIQ-UI-SF (International Consultation on Incontinence Questionnaire-Urinary Incontinence-Short Form).

Results: 83% Response Rate on Primary Endpoint, 73% Average Reduction of Urine Leakage…
Of the 36 enrolled participants, 28 completed full follow-up (i.e. were assessed on all endpoints) through 6 months and one completed full follow-up except for the 7-day voiding diary through 6 months. Management mentioned on the call that while the two-treatment protocol was used with a few women, that there was not an obvious difference in efficacy as compared to a single treatment (a single treatment will be employed in upcoming studies). Results, which are also in the table below (from VIVE's press release), were;

1-hour pad weight test: the 1-hour pad weight test is also expected to serve as the primary endpoint in the two anticipated upcoming SUI LIBERATE studies. As measured by the 1-hour pad weight test (i.e. primary endpoint), average aggregate urine leakage decreased by 73% from baseline (6.2g vs 1.7g) and 83% (24 of 29) of women experienced improvement. For reference (and discussed in more detail below), FDA recommends (for the design of pivotal SUI studies) defining 'clinically meaningful improvement' as a reduction in urine leakage of 50% or more. Additionally (as it relates to the primary endpoint), 66% (19 of 29) of women met the clinically meaningful definition of 'dryness' - which is defined as urine leakage of one gram or less.

7-day voiding diary: the 7-day voiding diary, along with the 1-hour pad weight test, are two measures that FDA recommends using as primary endpoints for pivotal SUI device studies. Based on the 7-day voiding diary, VIVE's feasibility study showed that, through 6 months (n=28), average aggregate incontinence episodes decreased by 50% from baseline (2.0 vs 1.0) and 79% (22 of 28) of women experienced an improvement in incontinence episodes. For reference, FDA recommends defining 'clinically meaningful improvement' for the 7-day voiding diary as greater than 50% reduction in incontinence episodes compared to baseline. While VIVE did not report on 'dryness' as measured by the 7-day voiding diary (defined in our endpoints discussion below), that may be included in the 12-month data (which, potentially could be available late this year or early 2019).

QoL questionnaires: VIVE reported that, through 6 months, 'clinically meaningful' improvement was achieved on the composite scores of the three QoL questionnaires. Additionally, 69%, 83% and 86% of women reported improvement based on the IIQ-7, UDI-6 and ICIQ-UI-SF questionnaires. We discuss QoL measures for SUI device studies in more detail below.

View Exhibit II

Safety: as has largely been the case with Viveve treatment of vaginal laxity, there were no device-related adverse events through 6 months in this SUI feasibility study.

While, given this was a small single-arm study with data only through 6 months, we cannot draw concrete conclusions in terms of efficacy. But, combined with positive data of the prior n=10 pilot study (see Appendix), results to-date certainly appear to support the hypothesis that the Viveve system may have real clinical utility in improving SUI symptoms. Given that from a regulatory standpoint, efficacy through 12 months is what is important - we should know a lot more in terms of the potential utility of the Viveve system in SUI when 12-month results of this study are available – which is expected before current year-end.

We cover VIVE with a $6.75/share price target. See above for free access to our updated report which includes our financial model and Appendix.

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