AXNX - Axonics Inc. (AXNX) Q2 2023 Earnings Call Transcript

2023-07-27 23:27:09 ET

Axonics, Inc. (AXNX)

Q2 2023 Earnings Conference Call

July 27, 2023 16:30 ET

Company Participants

Neil Bhalodkar - Vice President of Investor Relations

Raymond Cohen - Chief Executive Officer

Dan Dearen - President & Chief Financial Officer

Conference Call Participants

Chris Pasquale - Nephron Research

Michael Polark - Wolfe Research

Shagun Singh - RBC Capital Markets

Presentation

Operator

That today's conference is being recorded. I would now like to hand the conference over to your speaker today, Neil Bhalodkar. Please go ahead.

Neil Bhalodkar

Thanks, Victor. Good afternoon and thank you for joining Axonics' Second Quarter 2023 Results Conference Call. Presenting on today's call are Raymond Cohen, Chief Executive Officer; and Dan Dearen, President and Chief Financial Officer.

Before we begin, I would like to remind listeners that statements made on this conference call that relate to future plans, events, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs. These statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call. These risks and uncertainties are disclosed in more detail in Axonics' filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date, July 27, 2023. Except as required by law, Axonics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or anticipated events that may arise.

With that, I'd now like to turn the call over to Ray.

Raymond Cohen

Thanks, Neil. I'd like to welcome everyone joining this afternoon's call. So with strong company-wide execution, Axonics generated record results in the second quarter. Revenue was $92.9 million in the second quarter, an overall increase of 35% compared to the prior year period. More specifically, neuromodulation revenue was $74.2 million, an increase of 33% compared to the prior year period. We are particularly proud of this level of growth considering this is the first quarter in which we anniversary last year's launch of the F-15 recharge-free system, which is currently our top-selling S&M system. Revenue growth is being driven by a combination of higher utilization and share of wallet in existing accounts as well as the addition of competitive accounts that have converted to Axonics.

Internationally, our S&M revenue grew by over 50% compared to last year as a result of a of a measurable contribution from our recently deployed direct sales force in Australia. Bulkamid revenue was $18.7 million, an increase of 41% compared to the prior year period. Results were driven by increasing reorder rates from existing accounts, the onboarding of new accounts and the addition of new sales reps primarily focused on promoting Bulkamid.

Our gross margin in the quarter was 75.6%, up from 72.8% in the prior year period. The most exciting news for us is that we generated over $18 million of adjusted EBITDA in the quarter as we continue to benefit from the operating leverage inherent in our business model. Dan will discuss our margin expectations and financial performance outlook in further detail in his prepared remarks. I would now like to provide several other corporate updates. On the reimbursement front, CMS recently published proposed Medicare payment rates that will take effect in the calendar year 2024.

In summary, the proposal includes S&M facility fees that would increase by 1.5% in surgery centers and be flattish in hospital outpatient departments. As for physician fees, while the conversion factor was down 3.4% across the board for all specialties, physicians performing sacral neuromodulation would actually see an increase due to the work RVUs increasing for implanting the neurostimulator. More specifically, physicians performing an external trial with a PNE in their office, followed by a full implant in a facility would see a 50 basis point increase in reimbursement under the proposal, while physicians who perform an advanced trial in a facility, followed by an implant would see a 23% increase in reimbursement.

Our commercial team currently accounts for nearly 60% of Axonics 725 person full-time employee head count. We have approximately 400 commercial team members in the United States, of which 185 are directly involved in selling or sales management with the balance of the personnel being field clinical specialists, field marketing specialists and remote therapy support specialists. Internationally, we now have approximately 25 field-based personnel and they're located in Western Europe and Australia. We are well staffed at this time and expect only a modest increase in our commercial team headcount for the balance of 2023.

Turning to the Axonics find real relief direct-to-consumer advertising campaign, we continue to generate more than 10,000 qualified leads each month. A qualified lead is those individuals that complete a symptom questionnaire on our website, telling us about their symptoms and providing contact information. In addition, many of our customers tell us that patients come into their practice asking about Axonics therapy after seeing our ads on television or on the Internet. The campaign continues to generate goodwill within our physician customers as they are grateful that we are helping to ensure that adults with these conditions are seen by a clinician and advancing along the care pathway. Now we continue to note that over half of the individuals filling out these questionnaires are treatment naive, underscoring the notion that people don't know that it's not normal -- that's not a normal part of aging to leak urine and that advanced therapies exist to treat incontinence. Our call center continues to work diligently to connect qualified leads with a physician specialist in their local community.

Now it's been about 18 months since the launch of the DTC program. And as we anticipated, it is yielding measurable F&M and Bulkamid revenue and an encouraging return on investment. Given the success of the DTC program, we are in the process of launching new commercials related to the conditions of stress urinary incontinence, which is served by vulcamed or fecal incontinence, which is part of our S&M system in the second half of this year. Now turning to the IP lawsuit with our competitor, we will limit our comments on this topic to the following. As we have previously said and continue to maintain, we do not believe that Axonics infringes on any of our competitors' patents. And this case is simply litigation to create a financial and legal burden on Axonics in an attempt to slow down our market penetration.

Now recently, the United States Court of Appeals for the Federal Circuit reversed the decision of the PTAB that the time lead patents asserted against Axonics were valid, finding instead that the PTAB committed legal errors in its analysis. The Federal Circuit remanded the matter to the PTAB for another review consistent with its opinion and direction. Now there are a few more patents under review by the Federal Circuit, and we anticipate that the appeals court decision will be forthcoming in a couple of weeks. Because of these developments, the U.S. District Court for the Central District of California issued a stay on the litigation proceedings pending the outcome of the proceedings before the PTAB. As a result, the JARE trial previously scheduled for August has been postponed indefinitely.

Now turning to product development initiatives. We're making really good progress on the foreman finder lead placement technology we acquired from Radian in April, and we continue to expect it to be commercially available in mid-2024. Another project we're working on internally is a new external trial system that aims to enhance the PNE trial experience, making it more comfortable for patients and more convenient for physicians. Now in closing, we feel like -- or closing from my perspective, we feel like we're just scratching the surface of really what is possible in this underpenetrated and undertreated patient population.

Now with that said, I'm going to turn the call over to Dan, who has some prepared remarks with respect to the financial results.

Dan Dearen

Thanks, Ray. As right noted, Axonics generated net revenue of $92.9 million in the second quarter of 2023, and -- this represented an increase of 35% compared to the prior year period. Bakeri Neuromodulation revenue was $74.2 million, of which 97% was generated in the United States. Valcomed revenue was $18.7 million, of which 79% was generated in the United States. Gross profit in the second quarter was $70.2 million, representing a gross margin of 75.6% compared to 72.8% in the prior year period. In the first half of 2023, gross margin was 75%. And -- while we are pleased with this result, as you know, gross margin is sensitive to overhead absorption, manufacturing yields and supply chain disruptions.

Taking these factors into account and given that we are continuing to ramp up the manufacturing lines of the R20 and F-15 products, we expect gross margin for 2023 to be within the 73% to 74% range for the remainder of the year. As we've stated previously, we expect gross margin at scale to be in the mid-70s. Operating expenses were $82.3 million in the second quarter. Note that this includes a onetime $15.4 million noncash charge for acquired in-process research and development related to the Radian technology acquisition of the Foreman finder and a $600,000 noncash charge for the change in fair value of contingent considerations related to the Bulkmed acquisition.

Excluding these noncash charges, adjusted operating expenses were $66.2 million in the second quarter of 2023. We continue to expect adjusted operating expenses of $280 million in fiscal year 2023. Net loss in the second quarter was $7.3 million compared to a net loss in the prior year period of $21.4 million. In the second quarter of 2023, Axonics generated $18.4 million of adjusted EBITDA compared to $1.6 million in the prior year period. The attractive financial profile of the company and the inherent operating leverage of our business model is becoming more evident in our financial results. In fact, this marks the first quarter that Axonics as profitable on an operating income basis, which includes stock-based compensation, depreciation and amortization expense and only excludes noncash charges associated with the Radian in-process R&D and the change in the fair value of the contingent consideration related to the Bulk Med acquisition.

Cash, cash equivalents and short-term investments totaled $331.5 million as of June 30. And -- during the second quarter, Axonics made a $35 million milestone payment to Contura Holdings Limited related to Bulkamid achieving over $50 million of sales in the 12-month period ended March 31, 2023. Turning to fiscal 2023 guidance. Our updated outlook is as follows: total company revenue of $358 million, an increase of $10 million compared to prior guidance. This represents an overall revenue increase of 31% compared to fiscal year 2022. The -- we now anticipate S&M revenue of $285.5 million, an increase of 29% compared to fiscal year 2022 and bulked revenue of $72.5 million, an increase of 40% compared to fiscal year 2022.

This concludes our prepared remarks, and I will now turn the call back over to Neil.

Neil Bhalodkar

Thanks, Dan. At this time, we are ready to begin the Q&A session. We would like each analyst to have an opportunity to ask a question. So we request that you please limit yourself to one question only. If you have an additional question, please reenter the queue and we will take your second question if time permits. With that, Victor, please begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Chris Pasquale from Neon Research.

Chris Pasquale

Congrats on a great quarter, guys. Ray, I thought the comments around the DTC campaign were interesting. It seems like the focus there is shifting a little bit, maybe getting a little bit more specific on the stress and fecal indications. I know one of the advantages you guys had there was the ability to be somewhat generic in the way you advertise because you covered the full spectrum. So just curious how you're thinking about sort of optimizing that program longer term? And if you could quantify in any way what kind of return you've gotten thus far off of the work you've done there.

Raymond Cohen

Sure. Thanks, Chris. Appreciate your comments and question. So our commercials now, whether they be found on Facebook or on television. They are generic in the sense that we're just talking about if you have these symptoms, you're leaking urine as an example, then we'd like to help you get a consult with a specialized with a physician in your area. We're not selling anything in 30-second TV commercials. We're not talking about psychonomodulation. We're not talking about Bulkamid. We're not being too specific at all about the condition. It's basically urinary incontinence has been the focus. So the commercial has been pretty much geared towards overactive bladder patients. The responses, as you've seen, have been really amazing. In the first 6 months of this year, 1 million people, unique visitors went to find real relief.com and about 8% of them filled out a questionnaire and told us who they are and indicated an interest in getting with the physician. Now of course, the challenge, of course, is getting those interested people actually booked with an appointment, and I'm sure everybody can appreciate. That's not a simple process.

Okay. Having said that, we now 18 months later, are able to measure a return on investment on a name to name basis, we can easily match the person who responded on the questionnaire to actually a patient who has an implant in their body. This is very encouraging for us. And it is exactly what we had hoped, but we knew it was going to take some time before we could actually measure a return. So given that we're encouraged by this, we want to now increase, if you may, the messages that we're providing, let's just say, on television or on the Internet. This doesn't imply an increase in expenditure per se, but we're going to have some different messages out there. So one of the things that we're going to do, and I'll try not to be too worry about all this, is that we're going to be running an ad on television on Facebook, where we have a patient who is younger, a woman in her 30s who had some children and had stressed urinary incontinence. And so she's going to say, when I laugh, when I lift, when I exercise or call for sneeze, I leak. And then I found Axonics, and I got Bulkin, -- so we're going to -- it's going to be a bulk of ed commercial, all right, which we haven't done before.

So even though we're getting a lot of patients getting Bocom as a result of our OAB commercial. So we're going to be a little more specific. And then, of course, their questionnaires will identify the symptoms that they have and so on and so forth. So that's going to -- we're excited about that. We think that makes a lot of sense for us to do that. We're also going to do a commercial for fecal incontinence. So we have a patient -- and by the way, these are all volunteers. These are not paid actors or actresses -- these are patients who volunteered to do these commercials. So we think that's a more powerful approach than having a celebrity or so on and so forth. So in any event, so we've got a gentleman who's got fecal incontinence and we'll be very specific about his condition and the fact that Axonics therapy can help resolve this. So that's what we're talking about when we say SUI and FI and so on and so forth. So we're going to run OAB commercials, SUI commercials and fecal incontinence commercials. And they'll all be running kind of simultaneously.

But once again, we're not talking about tripling our spend or even doubling our spend. We may spend a few more dollars incrementally, but we're getting a nice return. So hopefully, Chris, that's a super fulsome answer to your question.

Chris Pasquale

Yes, that’s great. And Dan, one for you the operating leverage has been very impressive, especially when you exclude some of the onetime items here. It certainly doesn’t seem like mid-70s needs to be a final resting place for gross margin given the progress you’ve already made. Why can’t you push it further than that, particularly as the portfolio over ti’e shifts, I think, entirely to F-15 and R2 versus carrying 3 products?

Dan Dearen

We agree with you, and we can. We're just not providing guidance for 2024 yet. But we picked mid-70s as the target going back a couple of years now. And the messaging, we just want to keep it on point that we're clearly trending in that direction, especially when you see 75.6% in the quarter, -- and we're just trying to keep everything in check as we ramp production. So you're correct. Look, we don't have to change the product. We don't have to change anything in the supply chain. We just have to keep executing and have longer production runs, and we see it trending the way you do.

Operator

Our next question will come from the line of Larry Biegelsen from Wells Fargo.

Unidentified Analyst

This is Niko Trebek [ph] on for Larry. So in the past, you talked about your S&M sales growing at 25% and the market itself growing at 15%. How do you still feel about these targets considering the strong growth you posted in the first half. Has anything changed with regard to market growth? And if so, why?

Raymond Cohen

Well, look, I think that the market growth is going to continue. Unfortunately, only Axonics is involved in the market growth game. Our other competitor seems not to be too keen, let's just say, on doing some of the things that we're doing. So having said that, we're the ones carrying the water. We see that the market is growing. And in any given quarter, it's going to be up or down or whatever. But 10% to 15% is certainly in the range. And we think over time, 15% is what we would expect to see, which is consistent with what we've been saying since 2018. And the market has been growing. So we're just focused on putting our heads down and executing the plan. And we've got a lot of initiatives that are happening in accounts to help identify additional patients that could benefit from the therapy.

And the issue is, and I've said this many times before, every single urology and urogynecology practice in the United States has anywhere from hundreds to thousands of untreated patients in their paper filing cabinets or their electronic EMR system. And it's just simply a matter of activating those individuals and having somebody speak to them about the notion of a an advanced therapy like we have that provides a fundamentally permanent or long-term solution and measured in a couple of decades to these chronic problems. We don't believe that BOTOX, which is a 4- to 6-month treatment for OAB is appropriate. Most patients drop out after 2 injections. We know that adherence to OAB medications is terrible, and that 70% or 80% of the patients will stop their medication certainly within a year. So these are all the reasons why we believe that in the end of the day, secretomodulation is the way to go. It's going to provide long-term therapy relief for patients who have a chronic problem.

So the difference here is despite the fact that there was a product in the marketplace for 2 decades, okay, with a person – with a company that had a MONOPOLY, we’re overcoming that. The notion that psychoemodulation is the therapy of last resort. That attitude is now changing amongst our physician customers and so on and so forth. So we’re extremely bullish about the future, and we expect to continue to grow our revenue in Sequenomodulation for many years into the future. And I have to tell you, Bulkamid certainly is helping us as well because we’re able to get more mind share from these customers by providing additional therapies. And one last comment about that in that is that look, these are not discrete persons who show up. It’s not like a woman shows up today and she’s got urinary urge incontinence. And nobody has fecal incontinence or nobody has a stress urinary incontinence. The reality is 1/3 of our urinary urgent continence patients have fecal incontinence and almost 1/3 of those patients who have urinary urgincontinents have stress urinary incontinence. So that’s the reason why Volcaed is such an important part of our product line because we’re able to treat the whole person. And that’s what we’re up to.

Operator

One moment for our next question. Our next question comes from the line of Michael Polark from Wolf Research.

Michael Polark

I think we know the why behind it, the Axonics value proposition, the innovation you've introduced into the market. But I'm curious, Ray, for your perspective on recent account conversion. Order of magnitude, have the numbers gotten bigger again? Maybe the other way to ask the question is, as I look at, say, 30%, 35% S&M growth in the U.S. How much of that do you perceive to be from accounts that are freshly new to Axonics.

Raymond Cohen

As we -- Mike, thanks for the question. As we've said, and I think everybody is acknowledged and certainly yourself and other analysts have been writing about it. The reality is that 60% of all the people practicing secretomodulation in the United States, I mean I'm giving you a round number, are not our customers today, okay? Now I dare say that we're helping some of those accounts that are not our customers because people are walking in their office too asking about ecnonic therapy, and they go, "Oh, yes, well, we got that too, but it's called something else. So that's kind of what's going on out there. It was the first time we're creating awareness in the marketplace. So it's this awareness that's being created and the tools that we're providing. In other words, something as simple as a symptom questionnaire that is handed to new patients when they walk into -- or existing patients when they walk in the door so that the patient can sit there and in 2 minutes can score themselves. So if they're moderate to severe in terms of incontinence, then the physician and the staff can talk to them about this. This has never been done before. So I mean, this is basic blocking and tackling. I mean, we're talking the most basics.

Now have we been able to get every account that we have to implement this? No, okay? We're still working through those processes. But what we're seeing is better utilization in these accounts than we've seen before, and we've called it same-store sales. I think that's a good way to refer to it. So they are increasing. And that is really what is driving the revenue of the company. Now are we picking up new accounts Absolutely. And we're going to continue to pick up new accounts. And I would dare tell you that until we have them all, we're going to continue to hammer on everybody to get our message across. And so the word is out, right? The word is out. The docs are popping their head up out of the sand and are hearing from their other colleagues, hey, these Axonics folks, man, they got the technology, they've got great people. They provide great support, and these products last a really, really long time. So I think we're doing all the right stuff and it's just going to be a matter of time now before we continue to have more and more share of wallet and more and more share of this market.

One of the things that we’re keenly focused on in these accounts that we’ve converted is to get them to give us more of that business, right? So we still have people that are splitting their business and they’re maybe early in the conversion to Axonics. So we still have a long way to go even in the accounts that have recently converted. So I understand the question. I understand that there’s a lot of folks out there that are thinking, “Oh, wow, is this just a share shift game. And it’s not. I mean, the fact is, it’s not like these are budgets, not like sacadomodulation is budgeted, right? There’s so many patients that are going to get it. I mean, this is about patients walking in, coming to the realization between their physician and themselves that this is the right therapy for them, and we’re going to continue to stay focused on that.

Operator

[Operator Instructions] Our next question will come from the line of Shagun Singh from RBC Capital Markets.

Shagun Singh

Ray, just one from me. Could you discuss where utilization could go for S&M procedures longer term? And perhaps you can share the current range within your customer base, what that looks like and what you're doing to really expand that. You did touch on DTC, but just curious if there's anything else we should be focused on?

Raymond Cohen

We have -- so I understand the question. I appreciate the question. I think that everyone would be surprised at how low the utilization of S&M is on a per account basis. I mean the average, let's just say, the average is in the neighborhood of 12 to 15 per year. okay? I mean this is a dismal in terms of what is reasonable, what is possible, et cetera, et cetera. So we're dealing with a whole lot of dabblers as we refer to them out there, okay? So that's the state of the state. That's what we've kind of come into this market, and that's what we find. Now are we satisfied with that? No. It's ridiculous. It's ridiculously low. Now there are plenty of accounts that we have that they do 15 to 50 a year. Those are some really, really nice accounts, and then there's less that do more than, say, 50 implants in a year, right? Nice price. If you can get those accounts, obviously, and we're keenly focused on the smaller and larger accounts, all right? So what are we doing?

I mean it's -- there's too many things that we're up to for me to describe on a conference call like we have today. But I'll give you one of the most basic things that we do, which is the single most effective marketing program, and that is getting the account with our help to send a letter to their customers that have already been differentially diagnosed with, let's just say, overactive bladder or fecal incontinence or whatever the case might be. Simple letter goes out from the doctor, personalized, electronically signed by them and included in the letter, it says basically, hey, Dan, we've got new technology for your chronic condition. Why don't you fill out this symptom questionnaire and put it in this prestamp return envelope and centiback to our office. Okay?

As simple as that, it's all HIPAA compliance stuff, and it gets great response from the existing patient base. This is back to my comment about names in their file cabinets or in their EMR system. That is the #1 thing, and it really surprises our customers because they're like, "Oh, I thought I was doing a really good job, and then they realize they send 500 letters out next thing, oh, there's 30 or 40 people that have raised their hand and said, "Yes, yes, yes, yes, I want to come in, and I want to talk about this advanced therapy. So that's one example. We also spent a lot of time with the APPs, these advanced practice providers, the nursing staff, the NPs, PAs, RNs and the account so that we can help them with their talk tracks. How do you communicate about seconomodulation or Volcom to your patients? -- getting -- enrolling them in this process because physicians have very little time, and I'm sure everybody on the call understands this, the average doc spends maybe 10 minutes with the patient.

So you can’t rely on the physician to be explaining all these things to these patients. They’re very limited on time. So we realize this, and we’ve been working on all kinds of different programs where we can help utilize the staff and so on and so forth to get more patients into the therapy. So this is just one of a whole list of various different marketing programs that we have available. I mean basic stuff, even things like making sure that on the physician’s website that they actually have information about sacromodulation or Balcaen, you’d be surprised. A very small percentage of them even have invested in these types of basic things. So – it’s not – and this is the point I’ve been trying to get across for a number of years now that in order to grow this business in order for us to continue to see increases in utilization and for us to grow year-over-year, it is not rocket size. This is all basic stuff, 101 marketin– ri’ht, th– we're talking about and so forth. Now the fact that none of this has ever been done before, okay? This is not what was happening for Axonics showed up on the scene is the time that it's taking now, we have to overcome the legacy situation. So I appreciate the question. Hopefully, this was a good enough answer, so you get a sense about the kinds of things that we’re doing.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

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