AXNX - Axonics: Rapid Growth But Waiting For Profitability

2023-07-29 00:22:52 ET

Summary

• Axonics Inc. has grown its valuation to $2.7 billion in the healthcare equipment industry.
• The company focuses on developing products for the treatment of bladder and bowel dysfunctions.
• Recent developments include acquiring technology for easier placement of implantable leads and FDA approval for their fourth-generation sacral neuromodulation systems.

Investment Outline

Axonics Inc ( AXNX ) has made a name for itself in the healthcare equipment industry where it has grown its valuation to $2.7 billion. Founded back in 2012 the company is yet to turn profitable though but is seemingly very much on the way. The coming reports from the company are expected to inch ever so closer to profitability. Full-year EPS for 2023 is predicted to be negative $0.38 and 2024 negative $0.08. That solid growth should have investors still interested in the company.

The company focuses on engaging and developing novel products for the treatment of bladder and bowel dysfunctions. In a quite niche market, it has made a name for itself as I said, and has a decent market share. Some of the qualities I look at when investing come down to profitability and consistently profitable. That so far isn't the case with AXNX and this hindered me from rating it a buy. But seeing the historical growth of the company and the projected growth it makes sense to me to rate AXNX as a hold.

Recent Developments

In recent news, we had some positive news that AXNX acquired the technology to help facilitate easier and also faster placement of implantable leads for sacral neuromodulation. the management of AXNX also shared some comments on the development, the CEO Raymond W. Cohen said the following:

“We expect the Radian technology will improve patient comfort, increase physician confidence and SNM access, simplify the learning curve for physicians new to SNM, and increase PNE trial success rates, which should ultimately result in more adults being treated with our life-changing SNM therapy. We are confident that empowering physicians with innovative technology and tools has the potential to drive significant SNM market expansion in the years ahead”.

Earlier on in the year though, AXNX received approval from the FDA for their fourth-generation rechargeable sacral neuromodulation systems. This marked a solid step forward in the development of the business and its future in the industry.

Margins

As expected, the margins of the business are not that great right now. There are several improvements necessary from the company to make an investment more appealing. The gross margins are very solid though at over 70%. Seeing as AXNX is scaling up more and more, I find it reasonable to assume the bottom-line margins will follow.

R&D expenses are not that big a part of the operating expenses, the vast expenses come from “selling, general & admin expenses”, making up around 80% of it.

The progress so far from AXNX, however, is very good and the company has been growing revenues at a fantastic rate since its first US commercial launch in 2022. The management also sees themselves as able to have significant operating leverage given the scalability of the product and the business model.

Valuation

Viewing the model above here it's quite easy to see why I don’t have a buy rating for the company. The price targets that I have are far from above the current price today. This leaves no inherent direct upside here for investors. But seeing as growth seems so large I find the hold to make sense. AXNX is like we have gone also not profitable yet either. The company lacks a positive net margin and this, of course, brings more risk into the equation of an investment. But once we reach profitability I don’t think AXNX will be slowing down a bit. They still have a large market to serve and they will likely do so very well I think. But without the positive net margins, it remains a speculative investment and I don’t like making assumptions too far out with that because you don’t have anything substantial to base it on.

Driving this growth forward is the fact that the market that AXNX is in is quite massive and leaves a lot of growth opportunities still. In the small amount of time operating in the industry, they have gathered up a strong market share of 27% already. This still leaves a very small overall OAB penetration for AXNX, just 0.4%. Over the 5 years, the SNM market is expected to double reaching $1.5 billion in valuation. Key drives seem to be long-lived (20+ years) miniaturized implants and full-body MRI compatibility. Increased patient awareness is also adding AXNX a lot in growing and getting its product out there.

Recent Report

The recent report from the company was a strong performance and resulted in a raised guidance for 2023 to $358 million.

Net revenues came in at $92.9 million showcasing a 35% increase YoY. Despite operating in a higher interest rate environment than last year the margins of the business grew too, reaching 75.6% For Q2 2023. The strong results translated to a raised guidance and if it comes true would mean 31% YoY growth of revenues. This isn't enough to make the company a buy just yet though, the bottom line needs further improvement and this is something I am keeping an eye on in coming reports by Axonics.

Risks

Axonics, currently a loss-making company, is strategically reinvesting profits to fuel its future growth. With the ongoing commercialization initiatives for its rechargeable and recharge-free Sacral Neuromodulation (SNM) systems, the company foresees increasing operating expenses, leading to the continuation of reported operating losses in the near term. While this might act as a limiting factor for the company's share price to surge significantly, I believe some promising drivers could propel its stock value upwards.

One of the key catalysts for potential share price growth is the expected revenue surge resulting from the successful commercialization of its SNM systems. As the demand for these innovative medical devices increases, driven by growing awareness and the need for effective treatment solutions, Axonics stands to benefit from a growing customer base. This upward revenue trajectory has the potential to boost investor confidence and attract interest from the market.

Investor Takeaway

For investors that want a high-growth company in the healthcare sector then I think AXNX is worth looking at if you can handle the associated risks with it. The company lacks profitability and this introduces risk that I don’t like to have. I want a solid and consistent few quarterly reports of positive EPS. So far I don’t think we will have that until 2025 or so.

But this isn't to say AXNX is a sell by any means. The company still has a lot of potential in my eyes and seeing as its market share is quite significant and the TAM is doubling too. This should make AXNX a good hold for now and when my criteria are reached I can see, depending on the results, that a buy rating might be in order.

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