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VIVE: Warning Letter Headwinds Persist, Although Dissipating. 2019 Guidance Implies Much-Improved Operating Loss

By Brian Marckx, CFA



Q4 Results: Warning Letter Headwinds Persist, Although Dissipating. 2019 Guidance Implies Much-Improved Op Loss

Viveve (VIVE) reported Q4 financial results and provided a business update. Relative to the financials, as expected following the company’s preannouncement in January, revenue was approximately $4.5M. While this is down 12% from the prior year, it is about 16% better than what we had anticipated (prior to the preannouncement) and, per management’s comments on the call, reflective of the continued hangover from FDA’s late-July warning letter (which, as a reminder, was not addressed to Viveve but did cause industry-wide disruptions). And while the sales headwind persists, indications are that it is incrementally dissipating.

Also on the encouraging side is recent widening of gross margin which came in at respectable 37.2% in Q4. While down from 54.3% in the prior year period, it is up more than 600 basis points from the prior quarter and expected to continue to widen. Cost of the Viveve 2.0 system is ~30% - 35% less than the legacy machine (and treatment tips) and will benefit margins going into 2019. The 2.0 system launched in the U.S. in Q4 and is expected to begin to roll out internationally during the year (as regulatory clearances are obtained).

Operating expenses were elevated in Q4. At $13.9M, this is the highest quarterly operating spend in company history. But a recently implemented restructuring plan, which included a 36% reduction in headcount, means operating expenses should drop fairly dramatically. While VIVE will take severance-related charges, we expect to see a significant reduction in operating expenses beginning with Q2.

As we noted in our January Investor Note, 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, as FDA’s July 2018 warning letter created a stiffer and longer than expected headwind to Viveve’s sales, we think that 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. This includes the positive 12-month data from the U.S. SUI feasibility study, which was announced in December (and which we discuss below), as well as anticipated other data releases in SUI. This includes results of LIBERATE International, expected in July or August, and potential data from LIBERATE U.S., the commencement of which is anticipated later this year.

And while VIVE is retrenching to a degree as they wait out the warning letter headwinds and progress through their ongoing sexual function and SUI studies, they clearly do believe that there are near-term opportunities to improve upon their financial performance. Management reiterated their previously issued 2019 revenue guidance of approximately $20M and expectations that gross margin widens. And, coupled with significant operating expense reductions, we think operating loss improves from $45.0M in 2018 to $33.3M in 2019.

They also anticipate several important near-term operational milestones, including;

- Q3 2019: IDE approval and commencement of LIBERATE-U.S.
- July / August 2019: final 6-month SUI results from LIBERATE-international
- April 2020: 12-month (i.e. final) results of VIVEVE II

Q4 total revenue was $4.5M, down 12% yoy, down 7% sequentially and 16% better than our (pre-preannouncement) $3.8M estimate. While management noted that the FDA warning letter remained an impediment to revenue growth in the quarter, the beat to our number reflects a lighter-than-we-had-anticipated headwind in that regard. But while U.S. sales performed better than we had been expecting, the opposite was true for international system sales.

Console placements totaled 57 units (vs. 55 E) including 48 U.S. (vs 40 E) and 9 OUS (vs 15 E). Perhaps noteworthy is that Q4’18’s nine international system sales was the lowest in at least the last three and half years. Treatment tips totaled 4,600 (vs 5,047 E).

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. North America’s contribution to the topline increased to 77% in 2018, up from 72% in the prior year. 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 down from 57 sold in Q4’17 and flat from Q3’18 (48). For the full year, 259 systems were sold (227 in 2017) including 203 (160 in 2017) in the U.S. and 56 (67 in 2017) internationally. As part of the recently implemented restructuring, the direct sales force was significantly cut. As of the close of Q3 VIVE had a total sales team of 49, which included 23 capital reps, 10 associate sales reps, 10 practice development managers, 3 regional sales directors and 1 practice development strategic partnership director – all of which reported to a V.P. of sales. Today, the sales team consists of 14 direct sales reps, in addition to the company’s U.S. distribution partner, AMP (which has 20 – 24 reps). While the size of the sales team has been slashed, management noted that those retained are relatively high-producing. As such, we do not expect anything close to a proportional drop in sales as a result of the headcount reductions.

We reiterate that 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, 4,600 were recognized as sales in Q4 – which is third-best in company history and behind Q1’18 (5,400) and Q3’18 (5,700) but well ahead of the 2,600 sold in the comparable prior year period. For the full year, approximately 18,450 treatment tips were sold, or about 70% more than the 10,800 sold in 2017. According to our calculations, utilization averaged approximately 2.6 treatments per unit per month in 2018, only slightly lower than the 2.7 tips per system per month in 2017. This is inline with what we had forecast. We also note that, intuitively, we would expect to see attrition in per-system utilization with regular growth in the installed base. The total installed base grew to 703 at the close of 2018, up 58% from a year earlier.

Operational Update:

12-Month SUI Feasibility Study Data Further Supports Compelling Efficacy Signal…
In December 2018 Viveve announced 12-month results of its feasibility study evaluating their Viveve System technology for the treatment of women with mild-to-moderate stress urinary incontinence (SUI). 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. And while it appears, as might be expected, that there was somewhat of a deterioration of effectiveness from the six-month to the twelve-month follow up, with results of the 1-hour pad weight test continuing to show substantial improvement from baseline, we think this latest data further bolsters the likelihood of eventual success of the pivotal LIBERATE SUI studies.

As a reminder, in mid-June Viveve announced what we characterized as potentially compelling 6-month data from its SUI 12-month feasibility study. Results at six-months and our accompanying commentary are available in our Appendix (see link to our full report). And, for ease of reference, we have also included them in our 12-month results table below.

At the time of the 6-month data release we noted that while given that this was a small single-arm study with data only through 6 months, we could not draw concrete conclusions in terms of efficacy. But, we also noted that combined with positive data of the prior n=10 pilot study, results certainly appeared to support the hypothesis that the Viveve system may have real clinical utility in improving SUI symptoms. Further, we explained that from a regulatory standpoint, efficacy through 12 months is what is important - we expected to know a lot more in terms of the potential utility of the Viveve system in SUI when 12-month results of this study were available.

Results: 72% Experience Reduction in Pad Weight Resulting in 56% Mean Reduction. Response Particularly Strong in More Severe SUI

While intended enrollment was 36, 28 patients completed follow-up through six months and 25 through 12 months. On a side note, this ~30% drop out rate may actually be quite indicative of some of the difficulty in effectively treating SUI with non-surgical therapy such as pelvic floor muscle exercises. Specifically, non-compliance (due to busy lives or other reasons) results in less effective outcomes. It is also suggestive of some of the potential appeal of Viveve SUI therapy – that is, a single, non-invasive treatment does not require rigid compliance (which is in addition to the benefits to surgical options).

- 1-hour pad weight test: this is the primary endpoint in LIBERATE International (through six months) and is expected to also serve as the primary endpoint in LIBERATE U.S. (through 12 months). As measured by the 1-hour pad weight test, average aggregate urine leakage decreased by 56% from baseline (7.3g vs 3.2g) and 72% (18 of 25) of women experienced improvement.

For reference, FDA recommends (for the design of pivotal SUI studies) defining 'clinically meaningful improvement' as a reduction in urine leakage of 50% or more. On this measure, 52% of all patients showed a clinically meaningful improvement. And perhaps even more compelling, is that 67% of those patients (n=10) diagnosed as having moderate (that is, more severe) SUI, had a clinically meaningful reduction in leakage. Additionally (as it relates to the 1-hour pad weight test), 60% and 50% of all women and women with moderate SUI, respectively, met the clinically meaningful definition of 'dryness' - which is defined as urine leakage of one gram or less.

Given the particularly robust effectiveness in ‘moderate’ SUI patients, VIVE expects to power their U.S. LIBERATE study with similarly diagnosed severity – which should further enhance the chances of success of that study – which would further enhance eventual likelihood of U.S. label expansion for SUI.

- Secondary endpoints: while detailed results of the PRO secondary endpoints were not discussed in detail, Viveve noted in the data release that clinically meaningful benefit was achieved at 12 months across all patient reported outcome measures. The results are also included in the table below.

View Exhibit II

View Exhibit III

We think this data affirms the efficacy signal witnessed through six months and further bolsters the likelihood of eventual success of both LIBERATE studies.

As it relates to the LIBERATE studies….
In August 2018 VIVE 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. Enrollment (n=~100) across ten study sites in Canada completed in early January 2019. Management is currently estimating that full results could be available in late-July / early-August of this year (inline with prior expectations).

Meanwhile, in September 2018 VIVE made an IDE filing seeking approval to commence its U.S. SUI pivotal study, LIBERATE-U.S. While the hope had been that LIBERATE-U.S. could begin by late-2018/early-2019, that did not happen. Management recently noted that, after a couple of rounds of questions from FDA regarding VIVE’s IDE application, the agency requested that the company conduct a sheep safety study. VIVE further noted that this is very similar to what was required of them for final support of their VIVEVE IDE – which was eventually approved.

Given the demonstrated safety to-date in SUI (including acceptable safety/tolerability in the latest 12-month results) as well as in sexual function/vaginal laxity indications, coupled with the fact that this sheep study may effectively be a repeat of what was just successfully conducted, we have little concern that this will be problematic towards eventual IDE approval. But, it does push back anticipated timelines for LIBERATE U.S. Management hopes to have the sheep study completed near mid-year. They will then need to file an IDE supplement and, if all goes well, be in a position to start LIBERATE U.S. in the back half of this year. If that happens, management thinks they could have full 12-month data in late-2020/early-2021.

We are already anxiously awaiting data from LIBERATE – and particularly from the U.S. study – which we do think is likely to successfully navigate the IDE process. If this recent compelling 12-month feasibility study data can be replicated (or at least strongly supported) in a pivotal U.S. study, we think it could be a substantial value inflection event for VIVE. The relatively massive size of the SUI market (~30M women) and current lack of effective, non-invasive and affordable treatment options means adoption of Viveve treatment in this indication could be quite rapid and potentially dwarf that of use for vaginal laxity/sexual function.

VIVEVE II: Enrollment completes, further bolsters safety. Could have topline results by Q2 2020…
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 used as a staged roll-in enrollment approach which was further aimed at ensuring safety. While total enrollment was 250, the staged roll-in meant a safety review was required to be conducted on the initial patients before additional subjects could enter the study. In early August 2018 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).
FDA did another safety review once another 25 patients had been followed for one-month and 3-month data was available on a total of 50 patients. Viveve then filed this safety data, accompanied with an IDE application requesting to enroll the remaining 150 patients.

The company announced in December that FDA approved enrollment to continue through to the total of 250 and earlier this month, announced that the study was fully enrolled. We think successful navigation of the relatively strict staged roll-in design and swift completion of full enrollment of VIVEVE II provides additional credence to the safety of Viveve treatment. We think this may help in re-accelerating domestic sales growth given that it further separates the Viveve System from those products that were the subject of FDA’s warning letters. As a reminder, those warning letters were prompted by the U.S. regulators’ concerns over “the use of energy-based devices to perform vaginal "rejuvenation," cosmetic vaginal procedures, or non-surgical vaginal procedures to treat symptoms related to menopause, urinary incontinence, or sexual function may be associated with serious adverse events.”

Management hopes to have topline results from VIVEVE II in Q2 2020.

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