Description

Viveve (VIVE)

Situation Overview

We believe there is an asymmetric risk/reward in shares of Viveve right now, a women’s health company in the process of commercializing a patented RF device/procedure to restore vaginal tissue and improve sexual function. The company launched its product (capital equipment/ consumable model) in Q3 2015 and has grown from $1.4mm in sales in 2015 to ~$15mm in sales in 2017e, or 100% yoy growth from ‘16 (currently unprofitable). While they have achieved regulatory clearance in 54 countries to date, they have yet to achieve U.S. approval for sexual function (expected 2h 2018), though even without overcoming that hurdle there is an attractive growth story. While we are mindful of the single-product risk, execution risk, funding risk given cash burn/small market cap/equity market volatility, and binary nature of pending U.S. approval for sexual function indication, we believe VIVE has large growth runway in an underserved segment of the consolidating aesthetics sector with a high probability of being taken out in the next 12-24 months.

Business Description

Viveve is a women’s health company in the early stages of the commercial launch of Geneveve, a radiofrequency technology platform/treatment that generates new collagen and restores vaginal tissue to treat the condition of vaginal laxity and improve sexual function. Vaginal treatment is one of the hottest sectors of the aesthetics industry right now. Since launch in Q3 2015, the company has ramped to a current install base of 259 systems worldwide and is approved in 54 countries, with 14 more approvals pending. Note that vaginal laxity and improvement of sexual function are two separate indications. In the U.S., they are currently only approved for a general surgical indication for electrocoagulation and hemostasis (as of Q4 2016), with a pending IDE with the FDA for label expansion to include improvement in sexual function. The clinical study for sexual function will commence in late 2017 with <250 patients at 25 sites in the U.S. and Canada, with data expected in 2h 18 and FDA clearance expected in mid-2019. If approved, Geneveve would be the first ever FDA approved treatment for improvement of sexual function for women.

Before getting into the product, a brief overview of the industry tailwinds. The medical aesthetics space is attractive due to recurring consumable business models, favorable cash-pay dynamics, growing market size and M&A activity with few clean public pure-plays left after 5-6 years of consolidation. The global aesthetics market expected to grow at an 11% CAGR from 2016-21 and reach ~$13bn, driven by growing adoption of minimally invasive and non-invasive aesthetic procedures, aging population, technological advancements in energy-based medical aesthetic devices, increasing demand for aesthetic treatments among the male population and availability of user friendly aesthetic devices. Already this year we’ve seen a wave of M&A in the U.S. at full valuations, with Hologic buying CYNO, Allergan buying Zeltiq, and Apax buying ELOS, leaving few pure-play public names left, including Cutera, Sientra and Viveve. Despite this scarcity value, Viveve has received relatively little investor attention (with the exception of a piece in IBD a few months back, highlighting VIVE as a potential target for Hologic or Allergan). This is most likely a result of the small market cap <$200mm and messy reverse-merger history.

Viveve’s product treats the condition of vaginal laxity, an underserved market globally that affects millions of women around the world. Vaginal laxity is the #1 reported physical change after a vaginal delivery. According to the company, 50% of women after a vaginal delivery experience some degree of vaginal laxity, including a feeling of looseness, diminished sensation during sexual intercourse, and reduction in quality of life/sexual function. The analogous condition in men is erectile dysfunction. Perhaps shockingly, there are very few treatment options currently available. Doctors generally recommend Kegel exercises, yet these are not effective in treating vaginal laxity. The only other option is surgery, which is highly invasive, costly, and comes with significant risk factors. Nonetheless, 115,000 women worldwide in 2015 opted for a surgical procedure (implying a $500mm market just for surgery alone).

Viveve’s Geneveve treatment uses radiofrequency energy and coolant, which penetrates deeply into the tissue and operates on a cellular level while allowing the procedure to be painless and have a strong safety profile. It is minimally invasive, non-ablative and consists of a single 30-minute outpatient session done by a nurse, with no anesthesia required, no side-effects or tissue damage and little-to-no patient recovery time. It takes 30-90 days post-treatment for the new tissue to form and effects to be felt. Results in the clinic have shown it to be durable to at least 12 months. The company has treated thousands of women worldwide without a single adverse event thus far and has a strong safety profile demonstrated in large-scale, randomized clinical trials. The company has 50 issued patents, with 25 pending applications (note that much of the IP is licensed perpetually, royalty-free, fully-paid from Solta and their ThermaCool RF technology, now owned by Valeant). The Geneveve treatment is indicated for the treatment of vaginal laxity or improvement of sexual function in 54 countries around the world, with significant recent regulatory momentum. The company recently completed the largest clinical trial for vaginal laxity and sexual function, publishing results in Feb. 2017 in the Journal of Sexual Medicine that demonstrated statistically significant improvement in 155 trial patients.

Like the other successful medical aesthetic names, Viveve operates a razor/razor blade business model, selling doctor’s offices a system that consists of a table-top console ($60-65k ASP in the U.S. with direct sales force, $40-45k ASP international due to distributor margin) and a hand-piece with a consumable treatment tip ($600 consumable ASP per procedure, including treatment tip, grounding pads, fluid, and cryogen). The company estimates the global consumable opportunity at ~$7 billion alone ($1.9bn in the U.S.), which excludes capital equipment sales and does not include repeat procedures. 3 million women in the U.S. today would be candidates for VIVE’s procedure. Outside the U.S., the market is 3x larger, for a total of 13 million women around the world who could benefit from their procedure. Management has suggested that the technology platform may also have applications in other indications, including stress incontinence and vaginal atrophy. There is also a potential market for external cosmetic procedures.

In addition to meeting a significant medical need for women, the economics of the procedure are very attractive for doctors. The procedure costs $2500 for patients, and the company has reported that physicians will break-even in 3.5 months and make >$100k in gross profit in the first year (which compares favorably to ~$200k for Zeltiq’s CoolSculpting in light of the fact that ZLTQ plays in a much bigger market and has a much higher attach rate per system), making it lucrative for physicians to add to their practice. 84% of physicians have indicated it is a procedure they would like to add to their practice, while 55% of women in target demographic have indicated it as a procedure they would like to have. Testimonials have been very positive, and the clinical evidence compelling. It is truly a “lunch hour procedure.”

The company sells direct in the U.S. and Canada through a 15 person sales force (targeting gynecologists, plastic surgeons, and dermatologists) and sells internationally through a network of 26 distributors covering 67 countries (recall the procedure is approved in 54 countries and pending in 14 more). As the business shifts more towards the U.S. as we approach 2019 (potential approval that year for the broader sexual function indication), ASP will trend upward due to the distributor margin burdening international revenues. To prime the market for U.S. launch, the company is engaging in an unbranded campaign to raise awareness/educate women about vaginal laxity and a branded DTC campaign for the branded Viveve procedure/platform.

There is really not much competition in the space with respect to the sexual function indication. CYNO’s MonaLisa Touch is a laser-based treatment for vaginal atrophy, while Syneron’s Intima is a CO2 laser-based purely aesthetic procedure, relieving signs of childbirth/aging and restoring vaginal shape.  Neither company provides great segment-level disclosure in historical financials. IntimaLase (Fotona) and FermiLift (Alma Surgical) are two additional laser-based treatments for vaginal rejuvenation/tightening. The IntimaLase treatment consists of two procedures spaced 15-30 days apart (vs. a single procedure for VIVE), with results from a 2011 21-patient trial generally positive though only extending out to three months post procedure (vs. VIVE’s procedure lasting up to 12 months). FermiLift is similar to Intima and MonaLisa (all three are CO2 laser treatments), focusing on symptoms such as dryness, urinary burning and itching, as opposed to vaginal laxity or sexual function specifically. Although these aesthetic/tightening procedures may have a positive impact on sexual satisfaction, there is no clinical evidence demonstrating the effectiveness of CO2 lasers in treating these conditions. Lastly, ThermiVa (Thermi) is probably the most similar vaginal treatment to VIVE as it uses RF energy as opposed to lasers. In October 2016, Viveve filed a patent infringement lawsuit against Thermi alleging unauthorized use of Viveve’s patented technology. The litigation is still in process, though in April 2017 a federal judge denied Thermi’s motion to dismiss the case.

Overall, VIVE is the only company that has done clinical trials with any scientific rigor demonstrating an ability to improve sexual function.

Valuation

As mentioned, vaginal treatments are perhaps the strongest growth area of the aesthetics industry right now, on the cusp of broad adoption/awareness. Viveve is focused on continuing its strong commercial ramp, having grown the global installed base from 42 systems at YE2015 to the current 259 as of 1Q17 which will drive a long tail of consumable revenues. While laser based-treatments like MonaLisa, Intima, and FermiLift entered the market before VIVE, we believe VIVE has numerous competitive advantages over these laser treatments, including demonstrated clinical effectiveness for the sexual function indication. VIVE’s ability to defend its IP will be seen in the Thermi lawsuit. Further, not only do the competing laser treatments lack scientific evidence and are mostly just aesthetic, they are also generally only capital equipment sale models, while VIVE is building a business around a much more attractive razor/razor blade model. Lastly, given that the vaginal rejuvenation space is projected to grow to multiples of its current size over the next 3-5 years, we believe there is more than enough space for multiple competitors. As a stand-alone public company, VIVE would certainly benefit from the sales force of a larger player and thus represents a logical M&A target.

The company generated $7mm in revenue in 2016 (vs. $1.4mm 2015 revenue) and has guided to $14-16mm in revenue in 2017 (100% yoy growth). This revenue guidance does not include any U.S. revenue for the sexual function indication (again, not expected until 2019). We believe there is a significant growth opportunity still in front of Viveve, and forecast nearly $50mm of revenue in 2019 and >$100mm revenue in 2021, driven by a ~50% CAGR in the install base that leads to >2000 installed units in 2021. Say there are ~10k OBGYN practices in the U.S. and 7500 plastic surgeons, not including other potential points of sale, so an install base of 2000 units might imply ~10% penetration, which seems rather reasonable (For comparison, Solta’s ThermaCool, a cosmetic anti-aging procedure used for skin tightening, wrinkle reduction, etc. using technology on which Geneveve is based, reached an install base of 2700 units in year 5 of its commercial launch). At a $50k ASP, this implies a $100mm total U.S. revenue opportunity for systems alone over the next five years. Assuming a systems/consumable mix of 25/75 (in line with Thermacool; ZLTQ is closer to 50/50 but has a much lower priced consumable), there is a $400mm U.S. consumable opportunity, and if we assume that the global market is 2x the size of the U.S., then there is a $1.5bn revenue opportunity here vs. a ~$160mm market cap.

We model that the company can achieve $50mm of revenue in 2019, driven by an install base of >1000 systems and an attach rate of 4 consumables/system/month (slightly below Thermacool’s avg. monthly attach rate in its first 5 years; VIVE currently is averaging ~2.2 tips/system/month, but management has said they believe the attach rate could ultimately be as high as 8-10). We assume no increase in ASP, which will prove conservative given the shift to U.S. direct sales described above, but do contemplate acceleration in system sales in 2019 given the FDA approval. This implies VIVE is trading for 3x our 2019 sales estimate, and 1x 2021. Medical aesthetics companies trade for 3-4x EV/sales, with higher growth names above that range (CYNO was bought out for 3.5x sales, ZLTQ 6.3x LTM and top-line was growing 30-40% vs. VIVE at >100%). Given these recent transactions, and acknowledging VIVE’s smaller scale and that it is a single product company, we believe a 6x EV/sales multiple is achievable, and may even prove conservative. At such a multiple, the company could be worth ~$14/share or roughly double the current share price. We believe that as the company scales to >$100mm of revenue in 2021 and beyond, the stock price will increase to $20 and higher. 

The company completed a $32mm equity offering in March 2017, leaving the balance sheet in relatively good position for the commercial ramp. Management participated in the raise, as did Stonepine Capital, the largest shareholder (who now owns 21% of the company). Further, in May 2017, the company completed a $30mm debt financing with CRG, a middle-market healthcare-focused fund, providing an additional stamp of approval. Given a cash burn rate of ~ $2mm a month through 2017, the company will likely need to raise again in the next 12-24 months depending on U.S. approval/path to profitability.

Management and directors own 42% of the company.

In conclusion, we believe the stock is attractive on a stand-alone basis relative to the 3-5 year revenue opportunity and will work out very well if they are able to secure FDA approval for the sexual function indication and launch a DTC campaign in the U.S.. Key risks include the fact that this is a single-product, unprofitable small-cap name in the early stages of growth, highly dependent on execution of the commercial ramp. No adverse events have been reported thus far, and given the body of clinical evidence we believe the treatment is safe and effective. There is strong potential for M&A given the small market cap, growth rate, and recent strategic interest in the space from Allergan and Hologic, among many others. Profitability will be key for getting the multiple we assume.

Catalyst

Data from U.S. sexual function study 2h 2018 / launch mid-2019

Increased physician/patient/investor awareness of the treatment / the Viveve brand

Commercial ramp / sales growth