May 11, 2017
Executives
Scott Durbin - CFO Patricia Scheller - CEO and Director
Analysts
Joshua Jennings - Cowen and Company Dominick Leali - Raymond James Jeffrey S. Cohen - Ladenburg Thalmann Lucas Lee - Maxim Group Brian Marckx - Zacks Investment Research
Operator
Good afternoon and welcome to the Viveve First Quarter 2017 Conference Call. All participants will be in listen-only mode.
[Operator Instructions] After today's presentation, there will be a brief opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Scott Durbin. Please go ahead.
Scott Durbin
Thank you, operator, and good afternoon everyone. Thanks for joining us today to discuss our first quarter 2017 financial results.
Before we begin, let me remind you that on today's call we will be making forward looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement.
This includes remarks about the Corporation's projections, expectations, plans, beliefs and prospects. These statements are based on judgments and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
These risks and uncertainties are described more fully in our annual report on Form 10-K and other filings we make with the SEC, which are also available on our Web-site. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.
Joining me on the call today is Viveve's Chief Executive Officer, Patricia Scheller, and following our prepared remarks, we will open the call to your questions. I'll begin today's call with a brief review of the first quarter.
Since launching commercially in the third quarter of 2015, we continue to see tremendous sales momentum around the globe, resulting in seven consecutive quarters of double-digit sales growth. Revenue for the first quarter of 2017 was slightly higher than $3 million from the sale of 42 systems.
29 of these systems were sold in the U.S. market through our direct sales force, with only nine weeks in the field.
Q1 also saw our largest quarter of disposable sales with nearly 2,200 treatment tips sold globally. During Q1, total sales were attributable to the following regions; 62% from North America; 24% from Asia Pacific; 10% from Latin America; and 4% from the Middle East.
Gross profit for the first quarter of 2017 was $1.4 million, or 47% of revenue. This compares to gross profit of $348,000, or 27% of revenue, just one year ago in Q1 2016.
Total operating expenses for the first quarter of 2017 were $7.8 million and were the result of increased efforts to support our commercialization in the U.S. and international markets, ongoing R&D efforts and strategies to protect our intellectual property, as well as for working capital and general corporate purposes.
Spending on R&D specifically during the first quarter of 2017 was $2.4 million, and was associated with predominantly engineering and development work with our contract manufacturer related to product design improvements. Selling, general and administrative expenses for the first quarter of 2017 were $5.4 million, and were due to ongoing and increasing sales and marketing efforts to build brand and market awareness worldwide, expenses associated with being a public company, and financing efforts.
Net loss for the first quarter of 2017 was $6.7 million or a loss of $0.57 per share. Today, the Company has a much stronger balance sheet due to the extremely successful $34.5 million follow-on offering, which was completed in March and resulted in cash and cash equivalent balance of $31.4 million as of March 31, 2017.
With the strength of our current balance sheet and near term plans to refinance and upsize our current debt facility, we believe the Company is in a very strong cash position to execute our commercial strategy. Finally, I'd like to reiterate our guidance regarding full year 2017 revenue expectations.
With ongoing international regulatory approvals and the launch of our U.S. sales force, we continue to anticipate a strong 2017.
We expect our current worldwide installed base of 259 systems to increase significantly and expect full-year revenue for 2017 to again be between $14 million and $16 million. In addition, we also anticipate strong gross margin improvement this year as our average selling price of both our systems and treatment tips increase and as we simultaneously seek to reduce our cost of goods sold later this year.
With that, I'd now like to turn the call over to Pat Scheller, our Chief Executive Officer.
Patricia Scheller
Thank you, Scott. Good afternoon, everyone, and thank you for joining us.
Today we're pleased to report we delivered another quarter of outstanding results. This was a very busy and successful first quarter of 2017, as Scott mentioned, our seventh consecutive quarter of double-digit growth.
And it saw the launch of our inaugural U.S. sales organization, a very successful follow-on offering that substantially strengthened our balance sheet, and several other key accomplishments.
I'll start by reviewing those key accomplishments in the first quarter, then provide some updates on our regulatory status of pending investigational device exemption or IDE to achieve an expanded indication in the U.S., and we will end by taking your questions. We kicked off the first quarter with the launch of our initial North American commercial team in late January.
These talented and professional industry veterans completed their training in mid-January and began their sales efforts the last week of January. The scope of our domestic opportunity was underscored by the remarkable execution delivered by our U.S.
sales organization, especially in recognition of the fact that they were actively deployed in their territories for only nine weeks. Sales momentum in the U.S.
is strong, as demonstrated by the 29 Viveve System placements, and the demand is growing rapidly. Approximately two-thirds of our initial U.S.
installations were in aesthetic medicine practices, with the remaining one-third in gynecologic subspecialty clinics. Due to the strong reception we have experienced in the U.S., we have begun expanding our sales organization and anticipate hiring four additional sales representatives by the end of July.
International sales volume in the first quarter appeared overshadowed by that in the U.S., but this was anticipated and due in part to strong sales to our global distribution partners in the fourth quarter of 2016. International sales volume in the aesthetic market typically varies by region quarter to quarter.
The Asia Pacific region recorded strong demand for treatments as a result of the significant marketing efforts launched in China by our distribution partner, Dynamic Medical Technologies. And just this week, we received notice and announced that our regulatory approval in South Korea has been expanded to include the treatment of vaginal laxity as an indication.
This is a great milestone for Viveve and for our distribution partner, JOYMG. South Korea is one of the largest global markets for aesthetic procedures in women's health and plays an important role in influencing medical health trends throughout Asia.
We believe the broadening of our indication for use in Korea, bringing it in line with many other countries around the world, will further stimulate this market. We also received regulatory approval in Malaysia for the treatment of vaginal laxity to improve sexual function.
In the first quarter, Latin America saw the distributor-managed commercial launches of the Viveve System in both Brazil and Colombia. Renowned high-volume aesthetic physicians from around the world shared their experiences with the Geneveve procedure with Brazilian and Colombian physicians.
Their testimonials and the outcomes of the women treated both locally and throughout the region is resulting in increased patient awareness and demand. Representing some of the largest markets in the world for aesthetic medical procedures, our marketing and efforts have positioned Viveve as a leader in supporting women's sexual health in Latin America, thereby advancing our global growth strategy.
On the regulatory front, Viveve has to date received regulatory approval or clearance in a total of 54 countries. In 37 of those countries, the regulatory approvals are for vaginal laxity, and in 14 they include improved sexual function.
We believe these regulatory clearances and approvals position the Company for continued growth in 2017. Further, we have regulatory submissions in place in 14 different countries and anticipate receiving additional clearances in the coming months.
Publication in the February 2017 Journal of Sexual Medicine of the VIVEVE I clinical results has garnered global attention to the proven safety and efficacy of the Geneveve treatment to improve vaginal laxity and sexual function. The significance of the results published in a peer-reviewed journal serve as a benchmark for the use of energy-based treatments for women's sexual health conditions and differentiates Viveve's technology and the Company's commitment to scientific rigor by undertaking and successfully completing a large randomized, sham-controlled study of the magnitude of the VIVEVE I trial.
To date, Viveve is the only company in the energy-based device arena to undertake, successfully complete and have published the results from a female sexual function study of this magnitude. On March 17th, we announced the closing of a successful $35 million fully marketed follow-on deal.
The offering, which was upsized due to overwhelming demand, brought many strong institutional investors to our shareholder base. Our superior aftermarket performance has positioned Viveve as the best performing follow-on across all sectors so far in 2017.
The capital injected into the Company from this raise will allow us to accelerate our commercial efforts and thoughtfully expand our product offerings to include new indications and products. And to facilitate our efforts to broaden our portfolio, we will be establishing advisory boards for a wide variety of physician specialties.
The first advisory board chaired by Dr. Grant Stevens brought together luminaries in the field of plastic surgery who provided significant and meaningful input into the Company's strategic planning process.
The success of this meeting, compounded by the high physician interest in Viveve, reinforces our belief and that of physicians across multiple specialties that we are a company dedicated to evidence-based medicine, sound scientific research and will deliver innovative products and treatments that will benefit their practices and the health and well-being of the patients they serve. I would now like to pivot to our U.S.
regulatory process. As many of you are aware, Viveve's current FDA clearance in the United States is for general surgical procedures for electrocoagulation and hemostasis.
To obtain a new U.S. indication for the improvement of sexual function that is consistent with approvals in most countries around the world, Viveve has submitted an investigational device exemption or IDE to the FDA under a de novo 510(k) pathway for a multi-center U.S.
pivotal trial that we call VIVEVE II. The FDA late in the first quarter provided us with further feedback regarding our submission.
Importantly, the FDA has signed off on all major components of the protocol. However, the agency has requested that the Company complete some additional preclinical work to further demonstrate the safety of radio frequency on scar tissue.
Specifically, FDA has requested that we complete some ex vivo tissue studies to understand the impact of RF energy on vaginal tissue that has undergone prior episiotomies. Since we are seeking a claim for an energy device that the FDA has never before granted, the FDA is understandably cautious.
New indications typically require several rounds of questions and negotiations on protocol design, and we are working very closely with the agency to ensure that both the safety and the effectiveness of our procedure is well-documented. We are currently planning to complete the necessary preclinical work over the next four to six months, and plan to resubmit our IDE at that time.
As a result, we anticipate that we will start the VIVEVE II study in the fourth quarter of this year, assuming the FDA approves our IDE. As a reminder, the proposed VIVEVE II clinical study is a randomized, double-blinded and sham-controlled trial with a planned enrollment of approximately 250 patients from up to 25 study sites in the United States and Canada.
Subjects will be randomized in a 1-to-1 ratio for active and sham treatments. The primary efficacy endpoint will be the mean change in the total score of the Female Sexual Function Index or FSFI, a validated patient-reported outcome questionnaire acceptable to the FDA, at six months.
In addition, the trial will include several secondary endpoints as well as safety follow-up to 12 months. Viveve continues to see a growing awareness of the benefits of our technology throughout the medical community.
This has been demonstrated by a high level of interest by physicians and a number of presentations delivered at medical society conferences and meetings. We continue to build strong and lasting relationships with the growing number of physician customers around the world and are collaborating with our distribution partners and we're working directly with them in the U.S.
through our experienced sales and marketing teams. In summary, we are pleased with our first quarter progress and excited about the continued opportunities that lie ahead.
The significant progress achieved in the first quarter of 2017 can be attributed to the hard work, perseverance and dedication of the extraordinarily talented Viveve team. Due to their efforts, we believe Viveve is well-positioned to demonstrate continued success throughout 2017.
At this time, I'd like to turn it back over to the operator for a limited question-and-answer session.
Operator
[Operator Instructions] Our first question comes from Joshua Jennings with Cowen and Company. Please go ahead.
Joshua Jennings
Congratulations on the quarter. I wanted to start off with just, we see the strong U.S.
placement number in 1Q, 29 units, and you've indicated that U.S. sales were about 62% of total revenue.
Can you help us understand what else is tracking ahead of expectations in the U.S., system ASP, tip utilization, treatment tip ASP, or is it combination of all of those? Any color would help just as we're building our model.
Scott Durbin
It's Scott. I appreciate the question.
It's a combination of a whole host of factors. Obviously, system placements were ahead of our expectations in Q1 in the U.S., particularly given that the U.S.
sales force didn't hit the ground running until late in January. We think that's a view of things to come.
With respect to ASPs, we don't comment publicly on it, but I can tell you that we were surprised on our average ASP in the U.S. And it's a little difficult, just to come full circle on your question, to judge treatment tip utilization right now since we are only out a couple of months and many of the systems from Q1, folks are getting trained and building their momentum in their practice.
Joshua Jennings
Understood. And then just a question on the OUS performance, you exceeded expectations for year-over-year increase in international system placements.
Systems will need to step up in terms of numbers in 2Q through Q4. And are you comfortable with kind of a 50 unit to 60 unit step-up number starting in Q2 or should we think about a more gradual ramp?
Scott Durbin
Q4 tends to be the strongest quarter internationally, particularly OUS. So, sales volumes in this market vary by region and quarter to quarter.
Internationally, we had a very strong Q4 last year, especially in the Asia Pacific region, and I can tell you we are very confident in the continued growth in that region and others around the world. As you know, just for China, which is publicly announced through our distribution agreement with DMT, we are expecting a minimum system order of 75 systems this year.
While those didn't come in Q1, we certainly expect them to come throughout the rest of the year. Also, with the recent expansion of the indication of vaginal laxity, as Pat mentioned in the formal remarks of the call, in South Korea, we anticipate that that's going to drive increased sales not only in adoption of systems but also in utilization and procedure volumes in Asia as well.
And with respect to Latin America, as Pat highlighted, Brazil and Colombia just got launched in Q1, and already we are seeing procedure volumes increasing there with key physicians. So, long-winded answer, but we're expecting the international contribution to this year to be very strong and continue to grow.
Joshua Jennings
Okay, appreciate that. And just wanted to lastly touch on VIVEVE II and the update there, understood the FDA is asking for a little bit more, but first, was the primary efficacy endpoint at six months a surprise?
And correct me if I'm wrong, but what I heard Pat say was that the endpoint would be a six-month follow-up period. And was that something new in terms of how you were envisioning the IDE design?
And then secondarily, what's your conviction level at fulfilling the FDA's latest request so then the agency formally approving the IDE, and then what's your basis for that view? Thanks so much for taking the questions.
Patricia Scheller
So with regard to VIVEVE II, the protocol design as it was originally submitted to the FDA did anticipate a six-month efficacy follow-up or endpoint and incorporated a 12-month safety endpoint as well. We have received confirmation in many of the meetings that we've had with FDA that they did want to have a 12-month safety follow-up endpoint, and that is what the protocol included when it was submitted.
With regard to whether or not that was a surprise, it was not. That was exactly how we had anticipated the study would be structured.
So, as far as we are concerned, we believe that at this point the protocol design is for all intents and purposes completed. The additional work requested by the FDA to study how RF energy will interact with scar tissue from episiotomies or other lacerations, we have already begun the process of generating that data and we anticipate that we will be able to submit that in the four to six-month timeframe.
And given that the FDA has accepted the other protocol designs, we believe that we have a very strong chance that they will approve the IDE once this additional information have been submitted.
Joshua Jennings
Great. Thanks for those answers.
I just wanted to quickly clarify my surprise question. I understood that the safety endpoint was going to be 12 months, but was there some risk that the efficacy endpoint could also be 12 months but now it looks like it's only going to be six months.
So a surprise to the upside was the intention of my question.
Patricia Scheller
Oh, I see, okay. No, we anticipated that the efficacy would be six months.
Joshua Jennings
Okay, fantastic. Thank you, guys.
Operator
The next question comes from Dominick Leali from Raymond James. Please go ahead.
Dominick Leali
This is Dominick in for Jason. I wanted to ask you about the U.S.
performance. It's very strong.
I was wondering if – you said you are seeing demand continue, and if we should think about sort of quarter over quarter increases in the U.S. as you add sales reps and as you build out the launch?
Scott Durbin
Yes, we are certainly anticipating quarter over quarter growth in the U.S. We are not guiding geographically and in specifics.
We are continuing to guide to $14 million to $16 million of top line revenue globally. But we are anticipating, given the demand we are experiencing, quarter over quarter growth in North America for this year.
Dominick Leali
Okay. And can I follow up on the decision to hire reps?
It sounded like it was a bit earlier than we were expecting. Is that a result of just the greater than expected demand during the first quarter?
Patricia Scheller
So when we spoke after last quarter, we had mentioned that we would be building out our sales organization in the second half of this year. And given that we have experienced significant demand, we have accelerated the hiring of some of those reps into the second quarter of this year.
Dominick Leali
Okay, that's helpful. And shifting to international, so I know Brazil was a relatively new approval in fourth quarter and you had the label change in South Korea.
I was wondering, are there other examples of countries like similar to South Korea who have had a label change, and then that resulted in increased demand due to the label change?
Patricia Scheller
So Korea will represent the first time that we have seen a broadening of our label to include vaginal laxity from a general hemostasis and coagulation claim. In almost all of the countries around the world, we have either a vaginal laxity indication, a sexual function indication or an indication that incorporates both of those indications into a single indication for use.
So, this will be a very interesting process to follow. We believe that it will accelerate adoption because the FDA equivalent in South Korea is very strong about enforcement and we have, just as we are doing in the U.S., abided by the letter of the law and have not been promoting it for any vaginal laxity or sexual function claims.
Dominick Leali
Okay, very helpful. And just one last one if I could squeeze it in, I was wondering if there were any examples of feedback from customers in the first quarter, maybe the responses you are getting, any surprises or is there any pushback you're seeing at all?
Patricia Scheller
Here in the U.S. after just nine weeks in the field, the reception we think has been very positive.
To date, we have not been getting any pushbacks from any of our customers. But it is very early days.
So we are trying to stay as close as we can to our customers and working very closely with our sales reps to make sure we can anticipate any issues that might arise and address them very quickly.
Dominick Leali
Okay. Thank you very much for taking the questions.
Operator
Next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Jeffrey S. Cohen
So I guess two questions I wanted to pursue. Could you talk a little bit about the sales force domestically, is it composed of both capital and clinical reps at this point or is it just a sales force?
And you mentioned that you expanded by four. What was the original size and what's the size now, and what might the size look like throughout 2017?
Patricia Scheller
Okay. So the sales force is comprised of predominantly capital equipment reps.
We do not have practice managers in the field to work with those capital equipment reps. We do however have a Medical Affairs team that is able to field questions that might come in and support any customer requests or questions that arise.
So, the composition of that group, many of them have come from the aesthetic industry. Some of them have come from the women's health industry.
So we have a nice mix of expertise within our sales organization. We originally started with a sales organization that consisted of 11 people, and that was comprised of eight territory managers, two regional directors, and a VP of Sales.
Over the course of the last couple of months, we have added two additional individuals to the territory manager roster, bringing the total to 10 territory managers, and we are going to be adding an additional four through the second quarter. And our plans in the back half of the quarter are to get that number to somewhere between 16 and 18 territory managers depending upon the demand that we experience.
Jeffrey S. Cohen
Okay, so all told, toward the end of the year, somewhere around 20 in total, if you include the VPs as well and the regional…
Patricia Scheller
Yes.
Jeffrey S. Cohen
Okay, got it. And then secondly, could you talk a little bit about R&D, and you did mention earlier in the call about some product design improvements, could you give us a little more color on that as far as is it relating to software or treatment tips or form factors, and what kind of timelines until different products are into the commercial marketplace as well, both domestically and internationally?
Patricia Scheller
Right. So all of our R&D is being done through contract suppliers and we partner with them to update not only the design of our treatment tips and to make the procedure itself more ergonomically efficient, we are working with our partners to look at new treatment tip designs as well as improved form factors for the platform itself.
From a timing perspective, we will be able to provide additional color on the timing at our next call.
Jeffrey S. Cohen
Okay. And as far as energy delivery, no change with regard to the regimen or the energy, correct?
Patricia Scheller
That is correct. It will remain radio frequency.
Jeffrey S. Cohen
Okay. And I'll throw out one more if I may, but I think it's going to be a short answer.
Any update on the legal front for us?
Patricia Scheller
As you have probably anticipated, there are active lawsuit litigation processes in place and we cannot comment any further on those.
Jeffrey S. Cohen
Got it. Okay, thanks for taking the questions.
Operator
Our next question comes from Lucas Lee with Maxim Group. Please go ahead.
Lucas Lee
So I have a quick question in regards to the systems place during the quarter. So it seems like the DMT didn't purchase any systems, right?
Scott Durbin
That is correct.
Lucas Lee
So, if you exclude the number of systems purchased by DMT in the first quarter of 2016, did OUS placement increase during the quarter or was it down?
Scott Durbin
It is up year-over-year, it is down quarter over quarter. But as I mentioned, international sales volumes and system placements in this market are going to vary in these early days, region by region and quarter by quarter.
Lucas Lee
Okay, that's really helpful. So if I could ask one more, are you still on track to get the approvals in 14 additional countries by the end of 2017?
Patricia Scheller
So yes, we believe we are on track for an additional 14 regulatory approvals this year, and all of those are actively going through the regulatory process even as we speak.
Lucas Lee
Okay, that's really helpful. And if I just sneak one in, the last one, so it was mentioned during the last call that you expect strong margin expansion in 2017, is this still the case and do you expect this trend to continue beyond 2017?
Scott Durbin
We do, for a few reasons, and we have commented publicly on this. We have seen gross margins in Q1 of this year 47%, year-over-year that's an increase of 20% on gross margins alone from Q1 of 2016.
We are expecting continued gross margin expansion throughout the year for two reasons. Number one, we are selling direct, and so our ASPs for our consoles, for our systems and our treatment tips are going to continue to increase, particularly as our installed base grows and matures.
And then secondly, we have commented on the fact that we have been working for some time on cost of goods sold reduction efforts, that Pat mentioned we'll talk more about on the next conference call, that will be coming – that we anticipate will come later this year. So, both of those factors will continue to have an improving effect on gross margins.
Lucas Lee
Okay. And just one more on modelling perspective, what is the total number of diluted shares including all the warrants and so forth?
Scott Durbin
So we currently have roughly 20 million common shares outstanding and there are 3 million or 4 million issued warrants and options outstanding.
Lucas Lee
Got it. Thank you.
That was really helpful.
Operator
The next question comes from Brian Marckx with Zacks. Please go ahead.
Brian Marckx
Really nice quarter, congratulations. Particularly in the U.S., it's a pretty impressive start.
Relative to the U.S. sales, when a sale is made, is it typically made with a certain number of treatment tips or is it bundled in some fashion?
Scott Durbin
Yes. So with a new system for an operator, it typically will come with a case of disposable treatment tips, and a case equates to six treatment tips.
And the reason for that is the sales team uses that case of treatment tips to not only train the physician, but also be able to be in a position to treat folks in a particular practice who are in ultimately the front line in terms of their interaction with patients and getting patients involved in having procedures. So yes, a system comes with one case of treatment tips.
Brian Marckx
The 69% of the U.S. sales, I assume that that would not reflect the 69% of the 2,200 treatment tips.
Is that fair to say?
Scott Durbin
I'm not sure I understand the question.
Brian Marckx
I'm sorry. I'm just trying to get an idea of how many of the treatment tips that were sold in the quarter were sold in the U.S.?
Patricia Scheller
Brian, to address your question, I think that here in the U.S., it was not a 69% split for treatment tips going to the U.S. Where we saw tremendous utilization improvement was in Asia, and in particular China, where our treatment tip utilization is increasing.
Brian Marckx
Okay, great. Thank you.
Operator
This concludes our question-and-answer session and also our conference. Thank you for attending today's presentation.
You may now disconnect.