VIVE: Q1 Results: Restructuring Dramatically Improves Op Loss. $20M Sales Guidance Intact. SUI Data Read-Out This Summer

By Brian Marckx, CFA

READ THE FULL VIVE RESEARCH REPORT  

NASDAQ:VIVE

Viveve (NASDAQ:VIVE) reported financial results for their fiscal Q1’19 and provided a business update.  Relative to the financials, while revenue was down considerably from both yoy and qoq comparable periods, the decrease was anticipated as VIVE had previously announced a sales force restructuring aimed at reducing expenses and cash burn.  Importantly, that has already resulted in operating expenses falling much more considerably than sales – with much of the credit going to trimming of the less productive reps and maintaining a leaner, yet more efficient sales force.  This, as was hoped, has resulted in a relatively massive improvement in operating loss (despite over $700k in restructuring-related charges in Q1) as well as in cash usage.     

Also encouraging is that gross margin continues to show signs of firming up.  While flat on a yoy basis and down slightly from Q4’18, gross margin should show a fairly regular move upwards.  Cost of the Viveve 2.0 system is ~30% – 50% less than the legacy machine (and treatment tips) and should benefit margins going forward.   The 2.0 system launched in the U.S. in Q4 of last year, recently received CE Marking and will roll out internationally during the year (as regulatory clearances are obtained). 

Operating expenses were $9.9M, down 22% from Q1’18 and 29% on a sequential basis.  In fact opex was the lowest since Q1’17.  VIVE’s restructuring slashed total headcount by 40 and included an almost two-thirds reduction of the direct sales force.  Management indicated on the Q1 call that they expect some further reduction in operating expenses in Q2 and are guiding for full-year opex of $35M – $36M and revenue of $20M.  For context, over the last two fiscal years revenue and operating expenses have averaged $16.9M and $46.7M, respectively.  
  
As we noted in our recent prior updates, while the reasoning behind the restructuring largely rests on cutting costs and cash burn, 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.  This shift appears to be at least partially related to what appears to be a much more aggressive approach by FDA towards certain invasive procedures for urinary incontinence.  

Market and regulatory dynamics surrounding UI may be shifting in VIVE’s favor…
In April of this year FDA ordered Boston Scientific (BSX) and Coloplast (CLPBY) to remove their vaginal mesh pelvic organ prolapse (POP) products from the market.  The agency, per their 4/16/19 letter, “determined that the manufacturers, Boston Scientific and Coloplast, have not demonstrated a reasonable assurance of safety and effectiveness for these devices…”  FDA’s letter further notes that in order for these products to remain on the market, manufacturers will need to demonstrate that they work better than surgery without the use of mesh to repair POP.  

Then in May 2019 a jury awarded a woman $80M who was seriously injured by Johnson & Johnson’s (JNJ) vaginal mesh implant.  The surgically implanted mesh, which physicians were unable to remove from her, resulted in pain, infection and scar tissue.  The Philadelphia Inquirer reported that the jury found that J&J failed to adequately describe the device’s risks when treating POP.  

While POP is different than urinary incontinence and can be effectively treated with non-mesh surgery, these recent events, in our opinion, are examples of FDA supporting less invasive, safer devices when it comes to women’s health.  It is indicative of a move by the agency towards a more conservative stance relatively to safety and is in some ways similar to their August 2018 action against manufacturers promoting their energy-based devices off label for vaginal laxity, SUI and other applications.  These recent actions also lend credence to the idea that FDA is in favor of the development and approval of novel, low-invasiveness devices such as the Viveve System for indications such as sexual function and SUI.  And, with the agency behind safer alternatives, that we believe will also ultimately help drive demand for these types of devices at the clinician and patient levels.  

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 $31.0M in 2019. 

Anticipated upcoming operational milestones, include;

– July / August 2019:  report full results of LIBERATE International
o Will then (assuming positive results)
• Seek approval for SUI indication in over 30 OUS countries
• Expand int’l distribution to include those focused on GYN, urogyn and urology (i.e. expand into women’s health specialties, in addition to the current int’l aesthetic-focused distribution already in place) (sexual function has always been viewed as more aesthetic procedure while SUI as more a medically oriented procedure)
• Look to present the data at an industry conference

– Q3 2019: (following completion of sheep safety study) resubmit IDE to FDA for LIBERATE U.S.
o Hopefully followed shortly by FDA clearance to commence the study

– April 2020: VIVEVE II read-out

Q1 total revenue was $3.0M, down 19% yoy, down 33% sequentially and inline with our $3.0M estimate.  While our total revenue estimate was just about dead-on, we missed fairly handily on the low side related to consoles and on the high side related to consumables.   

Console placements totaled 43 units (vs. 28 E) including 25 U.S. (vs 20 E) and 18 OUS (vs 8 E).  While the 25 systems sold in the U.S. was the lowest since the first quarter of launch (Q4’16 7 US units placed), the restructuring as well as seasonal Q1 softness are to blame (and it was nonetheless well ahead of our estimate).  International performed considerably better.  The 18 units placed in Q1 compares favorably to the prior year (15 units) and prior quarter (9 units) periods.  In fact, Q1’19 internationally placements were higher than every quarter in 2018.  

Treatment tips totaled 2,300 (vs 5,044 E).  This was the fewest tips sold since Q1’17 (2,200).  Management noted that the practice management team (charged with pushing utilization/consumables) was also pared back with the restructuring.  They also noted, however, that that expect treatment tips to significantly increase as a proportion of total revenue – from 19% in 2018 to 30% this year.  

 Revenue (proportional contribution) per geographic territory:  

 

View Exhibit I

While North America still represents the most significant contributor to total revenue, following the restructuring its contribution fell.  North America’s contribution to the topline fell from 70% in Q1’18 and 77% for the full-year 2018 to 59% in the most recent quarter.  We note, however, that based on the even more significant decrease in operating expenses, that the drop in North American revenue actually resulted in more efficient sales growth.  This, we think, is explained by VIVE being able to retain higher producing reps and shedding less productive ones.  

The sales organization currently consists of 14 people including one VP of sales, two regional directors and 11 filed representative and sales specialists.  This is in addition to the company’s U.S. distribution partner, AMP (which has ~25 reps).  VIVE’s direct sales team is down from 49 as of the close of Q3’18 (Sept 30, 2018), which included 23 capital reps, 10 associate sales reps, 10 practice development managers, three regional sales directors and one practice development strategic partnership director – all of which reported to a V.P. of sales..    

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.                   

We cover VIVE with a $4.50/share price target. See link for free access to our updated report on the company.

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