AXNX - Axonics: Q1 Fall Provides Great Entry Point

2023-05-04 06:22:39 ET

Summary

• Axonics is under pressure after Q1 results came in solid but guidance didn't increase as much as hoped.
• The company has 2 solid products and the medical technology space has performed well recently.
• AXNX is a volatile small cap but the recent weakness gives long-term investors a good entry.

Axonics ( AXNX ) is a medical technology company focused on incontinence - a little talked about but immense market with the world's aging female population. They have 2 products both growing nicely, with high margins allowing for some strong earnings growth over the long term. Operating margins are trending towards positive and EBITDA in the quarter was positive, allowing AXNX to hold its cash position for potential acquisitions in future. The company is focused on providing a better customer experience than competition and really growing its market - which is chronically underserved. AXNX stock is trading at its lowest level in 10 months under $52 per share, even as it ramps revenue well and increases forward guidance.

First quarter - consistent execution

AXNX had a solid first quarter, with both products outperforming initial expectations on growth. As you can see above, the company has seen solid gross and operating margin growth over the past 5 quarters as it has ramped its two product lines. The two major products they have are Bulkamid and several variations of its Sacral Neuromodulation offering. Bulkamid is a gel that reduces incontinence in women with SUI (stress urinary incontinence) by shrinking the urethral opening with just a few small incisions. They paid $200 million US for this product in early 2021 and it has proven a good compliment to their main product. It's in the same space and provided $15.5 million in revenue, up an impressive 64.9% over 2022 Q1. The product is succeeding as a low risk and effective therapy that can be used in cases where surgery would be riskier. The procedure is minimally invasive and allows some people to avoid a more complex surgery they may not be able to do. Consistently adding revenue over time and high margins should allow this product to easily provide solid earnings in the future. Overall gross margins are up to 74.3% which is a solid level and in the company's target of mid 70% range over the long term. At this point the company just needs to scale its product lines and add more complimentary offerings. Neuromodulation revenue was up 41.1% to $55.1 million revenue with most revenue being from the United States. This gives a longer term international opportunity, after the company expands sufficiently in its United States footprint. AXNX reduced net loss to $9.2 million in the quarter from $22.7 million last year as ramped margins and sales team scaling helped reduce the loss. They did achieve positive adjusted EBITDA in the quarter, which is mostly from backing out $10.7 million in stock based compensation. This expense will continue to be a significant portion of revenue preventing net income from growing quickly until scale is met. They upgraded guidance for rest of year by just $6 million - which has disappointed investors short term and gave this great entry point. However, consistent execution should mean the $348 million guidance is bumped up each quarter this year.

The company is competing against Medtronic ( MDT ) with its Sacral Neuromodulation product, which is superior in several ways. Implant life is 20 years with only 1 recharge every 6 months - a big improvement on the MDT legacy technology. It is 60% smaller and weighs less which increases comfort and its fully compatible with several types of MRIs. Considering the age of these clients requiring removal for a MRI is a big deal, and is a hindrance to market growth which AXNX is avoiding. These features are allowing it to continue to take share in a growing market over time, even as Medtronic is a much larger and well-funded competitor. This product was once considered a last resort option, but AXNX is changing perceptions with a far superior SNM product. Management called out that from 2019 to 2022 the sacral neuromodulation sector has grown 14%, far below the 41% growth for AXNX in this area. They continue to gain share and show this isn't just a fringe product for a small percent of cases. They are also gaining trust in the customer accounts through Bulkamid due to its success as well. They put the work in with clinical trials as well which show 82% are better than 75% improved of symptoms with the treatment. Look for them to continue to invest in the sales organization - of which they have top of funnel such as SUI and incontinence knowledge campaigns to help drive awareness of conditions. They can use these to funnel clients to a provider that can assist in whatever the client needs whether its AXNX or another option. Many of the medical technology markets with emergent products have a large portion of patients without knowledge options exist to help them today. Minimally invasive products are seeing strong growth throughout medtech and AXNX will likely focus on acquisitions in that area going forward if it fits their sales motion.

Entry point

Trading at $52.70 and as low as $51.79 as of today, Axonics' lack of bigger guidance bump has provided investors with a solid entry point. At a price to sales ratio of 8.4 the stock is as cheap as it has been for the past several years. Add to that the positive EBITDA in the quarter and a cash pile of $357 million the need for additional funds isn't there. This means over the next few years the company will be scaling both revenue and EBITDA at a good clip with a solid path to profitability in 2025. The potential for return is strong here with upside to 26% and 21% revenue growth in 2023/2024 allowing for a return back to the $80 per share level of September 2022.

For further details see: