Viveve Medical, Inc.

Jeannie Swindle - Senior Director, Corporate Communications Scott Durbin - CEO, Secretary & Director

Joshua Jennings - Cowen and Company Jayson Bedford - Raymond James & Associates Jonathan Block - Stifel, Nicolaus & Company Difei Yang - Mizuho Securities Anthony Vendetti - Maxim Group Jeffrey Cohen - Ladenburg Thalmann & Co. Suraj Kalia - Northland Capital Markets Matthew Hewitt - Craig-Hallum Capital Group

Thank you, Operator, and welcome, everyone. Before we begin, I would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company.

Any statement that is not a statement of factual 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 the company's annual report on Form 10-K and other filings made with the SEC, which are also available on the company's website.

In addition, any forward-looking statements represent management's view only as of the date of this conference call and should not be relied upon as representing management's views as of any subsequent date. I would now like to turn the conference over to Scott Durbin, our CEO.

Thank you, Jeannie. Good morning, everyone, and thank you for joining us today.

I am pleased to report that Viveve achieved strong quarter -- third quarter financial results and made significant advancements on the clinical and regulatory fronts in pursuit of approvals for sexual function and stress urinary incontinence indications for our preeminent cryogen-cooled, monopolar radiofrequency, or CMRF, technology platform. To begin, I'd like to highlight some of our third quarter financial results.

Revenue for the third quarter of 2019 was $4.8 million from the sale of 64 systems globally, 48 of which were sold in the U.S. market, and 5,700 disposable treatment tips, a record number of treatment tips sales for any quarter so far.

This represents a quarterly revenue growth rate of 18% year-over-year compared to $4.1 million for the same period in 2017. And the success of our global commercial -- commercialization efforts was demonstrated most notably in the U.S.

market, which has been affected by the FDA's Safety Communications issued in late July, and I'd like to address this issue in more depth in a few minutes. Gross profit for the third quarter of 2018 was $1.5 million or 31% of revenue.

While this was lower than our expectations for the quarter, our gross margins are extremely sensitive to product mix between our consoles and treatment tips and the relative proportion of direct versus sales through our distribution channels internationally and through our recently launched partnership in the United States with Aesthetic Management Partners. While we sold a record number of treatment tips, this had a negative impact on our gross margins for the period because historically our Viveve 1.0 system has higher gross margins as compared to our disposable treatment tips.

However, we're pleased to announce that we began the initial launch of our next-generation system Viveve 2.0 and the treatment tips in late Q3, which will result in a substantial improvement in our gross margins going forward. In fact, our new system and treatment tips now being manufactured through large-scale contract manufacturing partners have resulted in a 30% and 35% reduction in cost of goods sold, respectively.

Additionally, we are currently undergoing additional cost of goods sold reduction efforts that will result in further gross margin improvements in the back half of 2019. On the expense side, total operating expenses for the third quarter of 2018 were $12.6 million and were in line with our expectations for the quarter.

The increase over Q3 2017 was primarily driven by increased sales and marketing activities. As we move forward, we will continue our focus on reducing operating expenses and evaluating various ways to leverage our operational infrastructure.

Finally, from a balance sheet perspective, we ended the third quarter with $20.1 million in cash, a decrease of $10.1 million from $30.2 million as of June 30, 2018, and this was in line with our expectations. I'd now like to take a few minutes to comment on the impacts we've seen caused by the FDA's Safety Communication and marketing letters received by many of our competitors this past summer.

As many of you maybe aware Viveve was not 1 of the 7 companies to receive a letter. And we have and will continue to be focused on safety and the clinical outcomes of our patients, as we move closer and closer towards the label expansion opportunities ahead of us in sexual function and SUI.

We believe that our CMRF technology, preclinical and robust clinical safety and efficacy data are unsurpassed in the industry and set us apart as the leader in gold standard technology in women's intimate health indications. Because of our long-term clinical approach, we believe the FDA letters have benefited Viveve, in particular, by reducing the number of competitors, leveling the plainfields from a marketing perspective and creating a more aware physician consumer, who is not paying closer attention to the safety profile and clinical evidence of devices being offered for use in vaginal indications.

However, there is no doubt that these FDA actions created some near-term headwinds in the market. We have, like others, experienced physician caution to entering the field and, as a result, have seen a lengthened sales cycle for new systems sales in the U.S.

While we think these headwinds will end in a few quarters, and that the recent FDA actions will no doubt continue to benefit Viveve in the long-term, we are lowering our 2018 annual revenue guidance to $17.5 million to $18.5 million, which still represents 15% to 20% annual revenue growth over 2017. Particularly in the face of these recent headwinds, we are proud to have achieved the sales in treatment tip volumes recorded this quarter as we continue to educate and serve as a resource to our costumers and consumers on our technology differentiation, safety profile and clinical evidence.

And we firmly believe that we continue to be recognized by our physician customers as the leader in the industry. As Viveve continues it's rigorous commitment towards seeking label expansions in sexual function and stress urinary incontinence, we are tremendously excited about the progress we've made in the 2 registration trials we are currently conducting: VIVEVE II in the United States for sexual function; and LIBERATE-International for SUI.

Additionally, we're proud to have recently announced our IDE submission to the FDA to conduct our LIBERATE-U.S. trial for improvement in stress urinary incontinence.

Each of these studies, if successful, represent future label expansion opportunities in multibillion-dollar consumable markets, and, we believe, represent the most robust studies currently being conducted in the industry for these indications. As announced in August, VIVEVE II, a multi-center, randomized, double-blind sham-controlled trial to assess safety and effectiveness of the Viveve System for improvement of sexual function, received an IDE approval with a staged enrollment.

This month, we are preparing to submit the second stage of patient safety data from at least 50 patients at the 1- and 3-month follow-up points. Enrollment in the trial has been rapid, and to date we've enrolled 100 patients.

Following FDA review of the safety study and approval of an IDE supplement to expand the study, we hope to continue enrollment up to the full 250 patients. U.S.

and international clearances in stress urinary incontinence, a condition that affects an estimated 1 in 3 women worldwide, are also being pursued through 2 large scale clinical registration studies, the one underway in Canada and the second to be conducted in the U.S., as proposed in the recent IDE submission to FDA in September. LIBERATE-International, a multi-center, randomized, double-blinded an sham-controlled trial was approved by the Canadian Ministry of Health and initiated in the third quarter.

Planned enrollment is approximately 100 subjects at up to 10 study sites with subjects being randomized in a 2:1 ratio for active and sham treatments. Enrollment in this trial is proceeding rapidly, and to date we have enrolled more than 1/3 of the total patients at 8 active study sites.

The primary efficacy endpoint in this trial will be measured at 6 months using the objective 1-hour pad weight test. And it's important to understand that results of LIBERATE-International, if successful, could support multiple international clearances for use of our CMRF technology in the treatment of SUI next year, including Health Canada, CE mark as well as other international clearances.

And we hope to complete enrollment in this trial by year-end and look forward to the readout of the trial in mid-year 2019. LIBERATE-U.S.

is the large scale registration trial proposed in the IDE submitted to the FDA in the third quarter, and the study is intended to be a randomized, double-blinded and sham-controlled trial with enrollment of approximately 240 patients at up to 25 sites in the U.S. Subjects will be randomized in a 2:1 ratio for active and sham treatments, and the expected primary efficacy endpoint in the study is the proportion of patients experiencing a greater than 50% reduction in the standardized 1-hour pad weight test at 12 months.

The proposed study design also includes a variety of secondary and exploratory endpoints, including safety, efficacy, as measured by a 3-day voiding diary, and multiple quality of life outcome measures, and we hope to have clearance from FDA to begin the study by year-end, and are currently waiting for feedback from the FDA on our IDE submission. In addition to our registration trials, you may recall that we announced 6-month interim results in June from our SUI feasibility study, currently underway in Canada and being conducted by Dr.

Bruce Allan. Importantly, we are rapidly approaching the 12-month readout of the study and look forward to reporting these results within the next 45 days.

In summary, this was an extremely positive quarter for Viveve, and we look forward to a series of important clinical milestones over the next 15 months. To reiterate, we expect to announce the final 12-month SUI feasibility study results within the next 45 days; IDE approval to begin LIBERATE-U.S.

and SUI by year-end or early in 2019; final 6-month SUI results from LIBERATE-International in mid-year 2019; and finally, final 12-month VIVEVE II results in sexual function at the end of 2019 or early 2020. This is the end of our prepared remarks, and we'd like to open the call to questions.

Andrea?

I just wanted to hopefully just dig in a bit more to -- in terms of the guidance revision and just understand the drivers here in terms of, I guess, what's implied to be a decline in the fourth quarter with some of the positive tailwinds that have potentially been in play with your competitors getting letters and then also the agreement and the partnership that you have with U.S. Aesthetics -- Aesthetic Management Partners, excuse me?

Yes, sure. Again, from a long-term perspective, we believe, the FDA letters have benefited and will benefit Viveve.

In the near term, the market has contracted, and while we're getting a larger share of that market today based on our safety profile and the clinical evidence generated to date, there is no doubt that the cautionary perspective of physicians today has lengthened the sales cycle for new U.S. placements.

We don't know how long that's going to lost, although we're sort of predicting a couple of quarters. And remember that our AMP relationship in the United States was only inked at the end of the summer and they just began their efforts.

And they too are experiencing the same headwinds for devices being sold in the vaginal indications.

Great. And just what do you foresee being, I guess, the catalyst to quash this consternation by physician customers?

Is there anything on the horizon? Is it just time in terms of moving further away from the acute impact of the letters?

Or is there something out there in the marketplace that you could point to where we could see more confidence or could it be clinical data that you put forward?

Yes, it's a great question, and I think you're right on both fronts. I think time, number one, and this is a market that now requires a little bit more education.

Physicians are being more discerning with respect to the adoption of these types of procedures into their practice and really looking at the safety and clinical evidence of devices being sold into these indications. And thankfully, it has always been our long-term view to pursue the labels in the United States, and as you know we have the label for sexual function and vaginal laxity in over 62 countries internationally.

And we're rapidly moving towards those trial readouts and the potential label expansion opportunity. And as we move over the next 15 to 18 months and continue to hit those catalysts and continue to prove that our device is safe and increase the amount of clinical evidence associated with our device for these procedures and ultimately the label, I think the market will start to expand significantly.

Just a few questions. On VIVEVE II, I apologize if I missed this at the end, did you mentioned that you expect to see the 12-month readout for VIVEVE II in late '19, early 2020?

Yes. And that presumes that we get through the second stage approval with FDA.

As I mentioned in the prepared remarks, the data from the second stage of enrollment, which was defined as submitting a minimum of 50 patients with 1-month and 3-month follow-up safety data to the FDA, I mentioned that, that data will be submitted imminently, most certainly this month. And it's our expectation, given the robustness of the data and our safety profile, and we hope to get final clearance to fully enroll the trial.

So enrollment in this trial has gone incredibly rapidly, and we are already at the 100-patient cap put on us by FDA under the staged enrollment. So we think once we have the opportunity to open up the study and continue enrollment, it will go very quickly.

And, as you know, the VIVEVE II is a 12-month endpoint measuring the change from baseline in female sexual function index.

Okay, that's helpful. And then just maybe on the current market and the contraction is understandable, the lengthened sales cycle is understandable, wondering if this has impacted price in the market at all?

We've not seen it have a substantial impact on pricing in the market.

Okay. In terms of the impact of the letters, are you seeing an impact in utilization from your core users?

Or is it just a lengthening of new sales to potential users?

Yes, it's a great question. Predominantly, it is the latter.

And that's evidenced by our performance in Q3 having a record number of treatment tip sales over any quarter that we've had thus far in the midst of all of the FDA letters -- the FDA Safety statement and the FDA letters to many of our competitors.

Okay. And then just last one, wondering if I'm going to call it noise here in the U.S.

has impacted the appetite internationally at all?

We've seen a little bit of that. So in the wake of the FDA Safety statement, we have seen a few other countries.

It's been limited sort of reflect the same concern, if you will, and issue formal statements, but it's only been from a few other countries, not many.

Scott, maybe just to start with the gross margin. You know there's been some really big swings over the past handful of quarters.

You mentioned some really big COG reductions that you have in front of you in terms of the 30% to 35% range, and I think to Jason's question you also alluded to stable pricing environment. So can you help us -- is there a real hard cutover on both the systems and the tips where we should see big moves in GM immediately, or is there a little bit more of a phased-in approach?

And maybe you could also just talk to natural offsets, i.e., transfer pricing withheld?

Yes. So look, gross margins at this basis, right, at this scale are very, very sensitive to two factors: number one, and historically, our legacy or Viveve 1.0 system has unusually had higher gross margins on our system than on our treatment tips.

That dynamic is shifting with the launch of Viveve 2.0. As I mentioned in the prepared remarks, we have initially launched 2.0, and we'll go into a more robust rollout at the beginning of '19.

So that transition to the new system and the gross margin improvement will of course be a phased approach over a few quarters. Importantly, it's also you need to understand that on the 2.0 system, while we are selling it in the United States, which is clearly our biggest market from a revenue perspective, we have to go through the regulatory process for that 2.0 system around the world and that will take us some time as well.

So for a period of a couple of quarters, we will be selling both systems, and that has an impact also on the gross margins. And then the second important factor is, obviously, as you pointed out, ASP.

And it's so dependent on the unit volume mix of the number of systems sold either by our direct sales force and then in contrast or proportionately to how many system sales and treatment tip sales are flowing through our international distribution network, which, obviously, has transfer pricing and lower ASPs as well as our recent partnership and our AMP distribution channel in the U.S. So it's very difficult for us to predict right now because of the sensitivities from those two factors, particularly on a quarter-by-quarter basis.

Okay, got it. Very helpful.

Maybe 1 or 2 more. Clearly, you've gained market share, in my opinion, in the back half of '18 in the U.S., and that might be hard to see with the new guidance, but literally others who are out there are not selling anything.

So do you expect to be able to maintain this new higher level of market share when the dust settles? And when you actually want to try to estimate, where do you think your North American share may be on new boxes relative to where you guys were 12 months ago?

Yes, I don't want to estimate on the latter because that's very difficult for us. We have market data that we assimilate on an anecdotal basis, but, as you know, many of the companies selling products for these indications are private or very large and don't report sort of unit volumes.

We're confident based on the anecdotal data that we are definitely gaining share, makes sense given the reduction in the number of competitors, and people have publicly announced not marketing their technology any longer and there have been quite a few of them. So it's tough to say share.

I think as we continue to push our clinical path forward, as you know, we believe we are the leader towards becoming the first company to ultimately have a label for any of these indications. And we think that changes the dynamic in the marketplace significantly, not only to the expansion of the market as a whole with physicians' willingness to adopt these procedures into their practice because there will be a company with a label, but also just to continuing safety profile and clinical evidence that will be behind that.

We put that -- we see -- that puts us in a leading position going forward. And these trials are reading out in the very near term.

Okay. And last one for me, just to your point on the trials.

I think you mentioned LIBERATE-U.S. endpoint is expected to be the proportion of patients with a greater than 50% reduction.

What about versus placebo and that might seem like a little bit of a silly question, but that did have a recent pretty big impact in a former trial that concluded. Maybe you can talk to that, Scott?

And is that mitigated by -- maybe your endpoint is different versus that other trial that I alluded to?

Yes, an important question. We have overpowered, I will say, LIBERATE-U.S.

And so with 240 patients, we have the power to detect a difference between treated and the control group of -- and it's powered for a 50% reduction, right? 50% of the patients in the treated group are exposed to have a 50% reduction.

And we're anticipating a very high control group rate just from a powering perspective. So we're not anticipating that this will happen, but from a powering perspective, we've powered it to a 27%, roughly, placebo rate -- and meaning 27% of the patients in the sham-control arm experience a 50% reduction.

There's an important nuance to this trial versus others you may be referencing, in that ours is a single treatment with a 12-month follow-up. And as is typical in the literature and trials, generally with placebo effects, they fall off significantly over time.

So the 12-month endpoint is a benefit to us in that regard. And also, this is a 1-hour pad weight test.

It's not a voiding diary as the primary efficacy endpoint, which has some subjective element to it. 1-hour pad weight test is very objective.

And so we anticipate a very low placebo affect. That being said, we're powered to a 27% placebo effect.

Just a quick one. Could you address the capital needs in the next 12 months?

Certainly. I can only make limited remarks about this.

We can't comment, obviously, on our financing strategy. As I mentioned in the prepared remarks, over the last couple of quarters, we've continued to pay significant attention to our operating expenses not only in reducing them, but evaluating various ways to leverage that operational infrastructure.

So we are -- excuse me, we are continuing to look at those things, and I can't comment on sort of near-term or longer-term financing strategy.

Yes. Just to follow-up on that, when you talk about leveraging the infrastructure, do you mean potentially selling a second product?

I don't want to reference anything specific, so I want to be clear about that. But clearly with the size, scale and experience of our current sales infrastructure, that is certainly one way to leverage our operational infrastructure, and we're constantly evaluating various ways to do that.

Scott, just to follow up on the gross margin. I know at this stage it fluctuates a lot, right?

The treatment tips themselves, just give us a general idea of the range of the gross margin for the disposable treatment tips?

Yes. The range generally on a reorder, Anthony, is in the 50% gross margin range, which I have to account for is the fact that there are demo tips, tree tips and when we -- free tips.

In certain instances, every system comes with a case of treatment tips. So when we report treatment tips sales, it includes all treatment tips placed.

And obviously, that brings the reorder rate down from an ASP perspective and when you start to -- in the early stages of market development, and where you are in a phase of system placements versus consumables, that ASP is affected substantially, although it has been climbing significantly over the last few quarters, that has a big impact on the gross margin for the tips.

Understood because how many tips are generally included in a system placement sale?

Generally, at least, six, so 1 case.

Okay, okay. And -- so you seem very confident, which I'm sure is true, that within 45 days, you'll have the readout from the feasibility study from SUI.

Do you have even more narrow time frame of that readout? Is that expected literally any day?

Or is it expected the first couple of weeks of December?

It is likely in early December.

Early December. Okay.

And when that happens, we should expect a press release?

Yes, we will certainly announce the 12-month SUI feasibility results, particularly because given the 12-month duration here from a single treatment, and recall that SUI feasibility study is using 1-hour pad weight as the endpoint primarily in the study, so it will be an important indicator for us and others to the potential success of LIBERATE-International as well as LIBERATE-U.S. once it's approved by FDA to begin.

So just a few, if I may. First, could you talk about the Q3 placements and what percent domestically were the new form factor that you've introduced?

Sure. So we probably placed about 50% of our system placements in Q3 roughly globally, about 50% were the 2.0 system.

Okay. And any commentary as far as how they may look in Q4 and 2019?

No commentary on 2019 yet. In Q4, it will probably be a little heavier than 50%, but -- maybe 60%.

That's -- it will be very much driven by the number of system placements internationally versus U.S.

Okay, got it. And remind us the size of the commercial organization now in North America?

Yes, it remains the same as we reported last quarter. A total of 49 people in the entire sales organization.

It includes capital reps, associate reps and our recently launched practice management team as well as sales leadership.

Okay. So 49 plus AMP?

Correct.

Okay, got it. And then lastly, as we've heard all this noise over the past few months, and as you think about the addressable market, both domestically and internationally for both indications potentially, has that changed as far as your thinking on the size of the market or the indications out there kind of bake into that?

Absolutely, not. I think what we're seeing is a temporary contraction due to physician caution about adopting technologies under a general indication without label.

I think importantly, we are winning that battle because we have the most robust safety preclin and clinical efficacy data in the industry. And as we evolve this market, too, ultimately -- and hopefully, the label, we think that, that immediately expands the market quite substantially.

And the opportunity in stress urinary incontinence for a noninvasive solution, a single treatment that lasts 6 to 12 months is an enormous market opportunity as is sexual function.

Given everything happening on the side, can you -- and maybe you've already shared this on the call, but can you give us an idea of the sales cycle, is it shortening for you all, is it status quo? Can you give us any color?

Sure. As I mentioned in the prepared remarks, I think, the sales cycle in the wake of the safety letter and letter -- marketing letters that came to several of our competitors and the publicity it received, the length -- the sales cycle has definitely lengthened and is predominantly the cause behind our actions to lower guidance for Q4 and the full year.

Got it. And in terms of the customers with competitive systems, Scott, can you -- and maybe again, forgive me, just been up.

Have you all been called into some one of these existing customers. For example, if the Cynosure system is -- somebody has already paid for it, how are they handling it?

Are you guys getting calls for -- from those customers? Also what I am trying to understand is how are your field placements or new placement, let's say, are greenfield versus going into existing customers who already have a flow of patients and are sort of on -- are having blindsided by all this?

Yes, that's a great point and a great question, thank you. It's tough to quantify.

I think, we definitely are seeing that dynamic playing out with inbound calls from physician customers who may have purchased historically one of the -- one of our competitors' technologies. And because of the increasing awareness, both in the physician community regarding the safety profile and clinical data generated by Viveve to date, we are definitely receiving those inbound calls.

A little difficult for me today to quantify that relative to our placements in the quarter.

Got it. And finally, Scott, I feel this might be a little bit cheesy, but I'll still ask, LIBERATE, remind us if there is a defined protocol of application?

And the reason I ask is I am just trying to, at least, see if there is any relative data that could be introduced for variability?

Yes, sorry, Suraj, before you go, you were breaking up there, and I didn't get the whole question, could you repeat it, please?

Well, what I am saying is, is there a defined protocol for application in the LIBERATE study? I guess, what I am trying to understand is if any offering or variability could be introduced?

Yes, thanks, got it. No, we have a very defined treatment protocol that, as we've announced previously, was developed in conjunction with our investigators and advisers that we took into our feasibility study, and then will be the defined protocol for both our LIBERATE-International trial as well as our LIBERATE-U.S.

trial. And you bring up an important component with respect to trial and investigator training, and we go through a very robust process to train our investigators on the precise aspects of that new procedure for SUI.

First up, given the scrutiny with the FDA, kind of watching over your market yet you're going to have some -- I would presume, some good data coming out here over the near term that you want to make sure gets into the physician hands. Does the FDA's eyes on the market kind of change how you disseminate that information?

Or is it as simple as just putting out the data, press releases and then hoping that they're finding it? Just how does this environment change how you might normally get that information out?

Yes, that's a great question. And I think the short answer is, it doesn't really change how we present or intend to present our data as we move forward through these trials.

As you know, there are a lot of forums for the presentation of data. Not only public press releases, but podium presentations, at society meetings as well as submitting for peer review, journal publication.

We will continue to pursue and intend to release our data in all of those forums, and we don't think that's changed.

Okay. Well, that's great.

Secondly, I'm sorry, if I missed this, but, obviously, a very, very strong quarter for tips. Was there any contribution from buy one get one, or was that completed as of last quarter?

Yes, as we reported out in, I guess, it was mid-August for Q2, we made our software design change to our treatment tips, both for our Viveve 1.0 system as well as our 2.0 system, and no longer needed to offer the BOGO program as it related to SUI. So Q3 includes 0 BOGO program tips.

Fantastic, and a very strong performance. And then maybe one last one.

With -- the FDA, obviously, was targeting the physicians, but has there been any cautiousness from the actual patients? Or are they really relying on the doctor to kind of just steer them towards the best treatment for them?

I guess, what I'm trying to get at is, is this really right now about educating the physicians on Viveve versus educating the patients as well?

Thanks, Matt. I think it predominantly resides with educating the physicians right now.

As you know, to date, no one has attained a label in any of these indications. And quite frankly, we don't see -- we don't conduct nor do we see any consumer marketing going on in a broad fashion.

So I think, it's patient reliance on the physician's recommendation and education around this. And for us, it's really today, as we build our installed base and continue to move towards the labels, it's about continuing to educate physicians about the particular safety profile and clinical evidence that Viveve has generated to date with a single treatment that has the durability of effect set and expected by FDA for the approvable device.

Thank you, Andrea. Thank you, again, everyone, who joined the call this morning.

We very much appreciate your participation. Thank you to our analysts for the questions.

The third quarter was an outstanding quarter of achievements for us, both commercially and, importantly, clinically and as a result of a tremendously passionate and dedicated team of people. Together, our focus will continue to be on pioneering the way as the leader in women's intimate health by aggressively moving towards the data readouts from our 3 unparalleled registration trials, and ultimately, towards what we believe will be the first regulatory clearances for the improvement of sexual function and stress urinary incontinence in the United States.

Thank you, everybody.