Axonics Modulation Technlogs INC (AXNX) Q2 2019 Earnings Call Transcript

Axonics Modulation Technlogs INC (AXNX -0.55%)
Q2 2019 Earnings Call
Aug 05, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Axonics second-quarter 2019 results conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Matt Clawson.

Please, go ahead, sir.

Matt Clawson -- Investor Relations

Thank you Nora and thanks everyone for joining the Axonics' quarterly results and update call. Joining me on the call from Axonics this afternoon are Raymond Cohen, chief executive officer; and Dan Dearen, president and chief financial officer. Ray and Dan will provide prepared remarks and commentary on the first-quarter financial results, FDA status, U.S. commercial preparedness, and a general business update, followed by a Q&A session.

Before we begin, I would like to remind listeners that statements made in this conference call that relate to future plans, events, prospects or performance are forward-looking statements as defined under 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 and assumptions and other factors that could cause results to differ materially from the expectations expressed in the conference call, including the risks and uncertainties disclosed in Axonics' filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not only to place undue reliance on these forward-looking statements, which speak only as of today's date, August 5, 2019. Except as required by law, Axonics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances, unanticipated events that may arise.

With that said, I would like to now turn the call over to Raymond Cohen for his remarks. Ray, good afternoon.

Raymond Cohen -- Chief Executive Officer

Thanks, Matt, and thank you to everyone who's dialing in for today's call, or for those of you who may listen in to the webcast. So since our last call in May, Axonics continues to make excellent progress on numerous fronts. But most importantly, we have continued to engage with our reviewers at the FDA for both the urinary and fecal incontinence PMAs on a productive interactive basis, certainly on a weekly basis and during the last week or so virtually every day. As stated in today's news release, I can confirm with a high degree of confidence that there are no open items that would interfere with our ability to gain PMA approval.

And this is for both urinary and bowel clinical indications, along with full-body MRI approval. And we expect that this will occur sometime in September or early in the fourth quarter of 2019. Of course, we prefer to have the approval on our hands today. However, we have been consistent regarding our stated expectations of approvals in the second half of this year.

I will provide some more details on the call in a bit. So other accomplishments during the past few months include continued momentum with respect to our international business in England, the Netherlands and Canada, the publication of our Artisan-SNM pivotal study six-month results, which were published in the prestigious peer-reviewed Journal of Urology, as well as the completion of our one year follow-ups for our Artisan pivotal study patients. These clinical results are simply unprecedented. And we have completed the hiring and training of our North American commercial team in preparation for the U.S.

launch. So I will provide an update on these key initiatives on our call today, but first similar to our Q1 call, Dan Dearen, our president and CFO, will start by reviewing our Q2 financial results.

Dan Dearen -- President and Chief Financial Officer -- Analyst

Thank you, Ray. For the second quarter of 2019, we reported net revenue of approximately $1.5 million compared to minimal revenue in the second quarter of 2018 and $1.1 million in the first quarter of 2019. Net revenue for the second quarter of 2019 was derived from the sale of our r-SNM systems to customers in Europe and Canada. The gross profit for the second quarter of 2019 was $716,000, representing a gross margin of 48.1%.

That figure will continue to move around for the remainder of this year as processes to ramp manufacturing are implemented. And we, of course, anticipate margin improvement with increases in volume and scale, but we are pleased with the range we have seen out of the gate and at this level of sales. The total operating expenses for the second quarter of 2019 were $20 million, which is an increase of $11.4 million compared to the same period in 2018. The increase in operating expense was driven primarily by increases in personnel costs, particularly the buildout of a full commercial infrastructure in North America and the EU, marketing expenses from regions where Axonics is now commercially active, regulatory submissions, infrastructure and personnel expenses associated with the expansion of manufacturing capabilities and facilities and the costs associated with operating as a public company.

As we mentioned last quarter and in today's release, the company has accelerated a number of programs that are now tracking to earlier completion dates than initially planned. I would point out particularly the key areas of hiring the U.S. commercial team and additional hiring in support of manufacturing. We are anticipating FDA clearance in the next few months and are committed to being ready for the commercial launch.

Our strategy has always been to have the U.S. commercial team and necessary product inventory on hand ahead of the launch date. The increase in operating costs, in particular the sales and marketing expenditures, would have been necessary regardless of the FDA clearance date. Consequently, the corresponding sales and marketing expenses, combined with the operational costs mentioned earlier, will cause our opex line to continue to ramp steadily throughout 2019, up from the Q2 level with an additional step-up that the point of FDA clearance based on the start of active selling across the United States.

We can't control the precise timing of regulatory approval but with the primary focus on optimizing the capture of market share there are numerous and substantial benefits of investing in what we can control and in being fully prepared when the day comes to launch. Operating losses for the second quarter of 2019 were $19.3 million as compared to operating losses of $8.6 million in the second quarter of 2018, driven by the same factors discussed above. Cash, cash equivalents and short-term investments on the balance sheet totaled $125.7 million as of June 30, 2019. And now I will turn the call back over to Ray.

Raymond Cohen -- Chief Executive Officer

Great. Thanks, Dan. So as Dan mentioned, we had Q2 revenue of $1.5 million. That actually represents a 38% sequential increase from Q1 following the launch of the Axonics system in late 2018, primarily in England, the Netherlands and Canada.

Commercial feedback from physicians and patients continues to be very positive, confirming our belief that based on the unique features of our system and quality of our field personnel, we can not really compete but over time we believe we can dominate the markets we enter. As a result of our early success, we just expanded our European commercial team adding one new sales representative for the country of Switzerland and three clinical specialists to support the growing number of cases in England, the Netherlands and now Germany. So our EU commercial team now consists of six sales professionals and three clinical specialists. We will consider additional hires and further expansion in the European Union in 2020.

With respect to our penetration in Europe, we now have 20 hospitals in England, four hospitals in the Netherlands and one in Germany implanting the Axonics sacral neuromodulation system. In England, based on Q2 system sales, we estimate on a conservative basis that our sacral neuromodulation product now accounts for approximately a 35% market share of de novo implants. As stated previously, these numbers are derived from an estimate of NHS hospitals in England accounting for approximately 650 de novo SNM implants per year. So turning the conversation to Canada, which historically has been a relatively modest market and where only a handful of hospitals practice sacral neuromodulation.

While there are certainly patients that are in need, we believe that the market in a laggard due to the general lack of attention by the incumbent and resulting lack of access to the technology. As a result, we estimate that Canada implants less than 300 devices per year. Interestingly, Axonics believes that we captured around one-third of all patient implants in the second quarter of 2019. Moreover, this was accomplished at one hospital in Western Canada, which is now exclusively implanting Axonics devices for both de novo patients and patients requiring replacement.

In fact, a few patients coming back in for IPG replacements have had their leaves pulled along with their IPG swapped out for the Axonics device. This center did approximately 12 sacral neuromodulation implants in all of 2018 and has already implanted three times that number of Axonics devices to-date in 2019 and have indicated to us that they have a waiting list of patients ready for implants. The reasons are pretty clear. We have got a demonstrably better, smaller, long-lived and fuss-free product that is more comfortable and easy to use for patients.

In addition, our clinical studies, as well as our commercial practice have demonstrated significantly better clinical results. We believe this story is not a one-off and will be replicated in facilities across the United States subsequent to our market launch. Regarding our U.S. launch and the hiring and training of our U.S.

commercial team, I am pleased to report that we have completed the hiring and training of the U.S. commercial team. Our exceptionally talented team now numbers 146 individuals, including 100 sales professionals, 11 regional sales managers and 35 clinical specialists, strategically located around the United States. Nearly two-thirds of these individuals have either sacral neuromodulation experience for spinal cord stimulation neuromodulation experience with the balance of the folks having urology or relevant OR experience.

I am proud to state that we have accomplished this impressive hiring effort based upon word of mouth and referrals, not $1 was spent on recruiting fees. So going forward, we do not have plans to hire additional personnel for the balance of 2019 and instead have turned our attention to market launch activities. As stated previously, we would not have been able to accomplish this result without the luxury of time and the funding to invest in hiring the right people and putting them through months of rigorous training. I can assure our shareholders and future customers that our people are now expert in sacral neuromodulation and motivated to provide exceptional product and patient support.

In addition, we have the marketing materials and marketing initiatives ready to go, including a new website that has a physician and patient portal that will launch upon FDA approval. Now outside of the sales organization, as Dan covered in his remarks, we are also ramping up inventory and have enhanced manufacturing and product assurance capabilities to support our goal of gaining market leadership in sacral neuromodulation. Bottomline, we are highly motivated and ready to launch. OK.

Changing topics now to the regulatory status in the United States, which I know, is on first and foremost on everyone's mind. So as everyone listening in for today's call knows, gaining FDA approval is the single most important objective for Axonics. So let me begin by reviewing our relevant filing history. Our PMA filing for the urinary indication was accepted by the urology division of the FDA on December 10, 2018.

Our PMA filing for the fecal indication was accepted by the gastro division of the FDA on March 4, 2019. We filed several amendments and supplements to our urinary PMA during the 2019 timeline, including interim data from our Artisan pivotal study, complete testing data to support full-body 1.5T MRI labeling and on February 21, we also filed an amendment containing the full six-month data set from the 129 patient Artisan pivotal study. Now the information that we submitted for the fecal incontinence PMA were in response to the 90-day substantive review letter that we received from the agency. However, this has not affected the approval timeline for that indication.

Now on August 1st, we issued a news release stating that our 12-month clinical results from our pivotal study demonstrated an 89% therapy response rate which is in effect equivalent to the six-month results that showed a 90% efficacy. Now the FDA has not requested any additional clinical information from the company nor do we believe that any additional clinical information is needed to approve our PMAs. Now since our last call, we have been interacting with the agency on even a more frequent basis. I can confirm that we have completed all aspects of the technical, clinical and literature review, inclusive of full-body MRI testing and the inspection of our quality system and manufacturing facility.

As a reminder, as stated on our last call, the FDA has confirmed there are no outstanding technical or clinical deficiencies to resolve. Interactions with both the urology and gastro reviewers over the past days and weeks have been focused on the report referred to as the Summary of Safety and Effectiveness Data or SSED, which is a document that will appear in our manuals, as well as on the FDA website. It has relevant, I should say relevant, technical data on our product, comparison to the predicate device, historical clinical sacral neuromodulation data, as well as the results of our own Artisan pivotal clinical study. Now this process represents a nontrivial work product that is a must-have for all FDA-approved products.

We have also been working interactively with the agency to gain alignment on the print content that will appear in the various instruction manuals for our product. So based on these facts, it is our view that we are nearing the end of the FDA review process. However, it appears likely that these two separate divisions of the FDA will issue their determination letters on different dates. The exact timing of FDA approval is 100% dependent upon when the FDA completes their internal work and gets the various signoffs that they need to issue approval letters.

In any case, we are highly confident that the FDA approval for our sacral neuromodulation system and one or more of both clinical indications is likely to come in the September-October timeframe. So in closing, in terms of my remarks, I want to say that I look forward to one-on-one meetings on August 13th at the Needham institutional investor event, which is occurring in Manhattan and Dan and I and the entire Axonics senior management team are looking forward to our first Annual Shareholder Meeting as a public company which will take place at NASDAQ in Times Square at 12:00 noon Eastern time, immediately followed by a management presentation and Q&A. All interested parties are cordially invited to attend. And in fact, later that day Axonics will ring the NASDAQ closing bell.

So in closing, we are making excellent progress on gaining FDA approval and our other strategic initiatives. We are confident about the future prospects for Axonics and are working diligently every day to fulfill our vision. So we are happy to at this time answer any questions that folks might have and I will turn it to the operator to see who is in the queue.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Bob Hopkins of Bank of America.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Thanks, and good afternoon. I appreciate all the detail on the FDA process. But, Ray, I just want to follow-up with one quick question on that front. You mentioned September-October.

Is August not possible simply because of the time of year? Or does the FDA still need to digest the one-year data for approval? Or is August possible?

Raymond Cohen -- Chief Executive Officer

So I would -- I'll answer it backwards. I mean, this has nothing to do with the one-year data, which has not been requested by the agency nor do we expect that it will be. So that is neither here nor there. I think the August -- or the month of August is just challenging in terms of the time of the year.

And what we have heard directly from the agency and the reviewer separately is that they are in the process of kind of wrapping up their internal work that they need to do. As we have gone back and forth with them, as I mentioned in my remarks about labeling items. Now when I use the word labeling, I mean, words that appear in instruction manuals, words that appear in the safety and effectiveness document, not indications for use or clinical or I should say, IFU, the indication for use of a product, which is super clear and has been from day one. So we're trying to be as transparent as possible, Bob, in terms of expectations.

But of course, if we could write the letter for the FDA, we would, but unfortunately, it has to come from them.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

OK. So it sounds like August possible, but not likely, mostly due to the time of year, just to kind of paraphrase. And I guess a couple other quick things.

Raymond Cohen -- Chief Executive Officer

Sure.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

When will you have inventory on hand and ready for your U.S. launch?

Raymond Cohen -- Chief Executive Officer

So we are ready -- we have inventory on hand, and we are ready to supply product in the fourth quarter of 2019. And our objective, of course, is to continue to build that inventory so that during the fourth quarter, we've stacked up enough product to support the next quarter or a couple of quarters. So this is -- we're in good shape, and we're ready to go. And we should add that, obviously, the product that we're shipping international is modest in terms of the number of units, but we've got no more than a 48-hour turnaround in terms of deliveries to international customers.

So we know how to do it. We've got the infrastructure in place. We've got a product that is getting stacked in larger and larger quantities. And we do not see that as an issue as we launch the product.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Can you quantify that at all, though, just in terms of how much of the market you think you could support by, say, the fourth quarter?

Raymond Cohen -- Chief Executive Officer

Yes. That's kind of -- I appreciate the question, Bob. It's kind of a trick question in a way. So I'll -- let's just say that -- let me answer it in this way.

In terms of the general analyst consensus of the number of units that we might sell in 2020, you could be assured that we have sufficient inventory to meet that demand. With that projection I should say, that projection. Thank you.

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Larry Biegelsen of Wells Fargo. Your line is open.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Good afternoon, gentlemen. Thanks for taking this question. So Ray, let me just start with the pending U.S approval here. What do you expect at approval? Do you expect, obviously, urinary indication? How about the fecal indication and full-body MRI compatibility? What's your expectation upon approval?

Raymond Cohen -- Chief Executive Officer

So if I just put timing aside for a moment and just stick with this notion that the Septembe-October period would be the time line, I expect that during that time line, we will have urinary indication approved, the fecal indication approved, as well as the full-body MRI approved. So we expect to get without exception the full monty of these, how should we say, these approvals and these indications. So we don't see any difference in that. I think that when we started the year and started to talk about these things, we had indicated that maybe full-body MRI would come post-approval and that the fecal indication might come down the road.

But there's been kind of a collapsing of these things. And we see them all coming to bear fruit in the short term.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Thanks. That's helpful. Ray, just two more for me. One on the competitive response.

Anything noteworthy from your competitor, where you've commercialized in Europe or Canada? And I have one follow-up.

Raymond Cohen -- Chief Executive Officer

Sure. We actually -- we haven't seen anything that is worth noting in terms of a competitive response. I know that it may seem strange or kind of like a strange comment, but we just haven't seen anything in any substantive way. So I want to be very careful not to be flippant with any of my remarks because we obviously have a lot of respect for Medtronic, and we don't want to poke the bear.

But if they continue to just kind of let us go in there and take customers over, then that works just fine for us and our shareholders.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

And lastly, for me, Ray, I'm sure you know there was a JAMA publication in late June on large-scale study that showed that some anticholinergic drugs are associated with an increased risk of dementia. What are you hearing from clinicians on that? Do they believe the data? And how big of a tailwind do you think this could be for a device-based therapy, such as sacral neuromodulation?

Raymond Cohen -- Chief Executive Officer

Thank you, Larry. I appreciate the questions. And I have Dr. Karen Noblett, our chief medical officer, in the room with us, and I will give her the floor here to answer that question because I think it is a good question and a relevant question.

And this is -- this whole topic has been something in the making now for quite some time, and I think the JAMA article just kind of further reinforces the issue at hand. So Dr. Noblett?

Karen Noblett -- Chief Medical Officer -- Analyst

Hi, Larry. Thank you for that question. Really, really important and as Ray mentioned, this has been a topic of interest for physicians with the cholinergic burden on patients in multiple medications. So this article really demonstrated and did a very nice job in separating out the different types of anticholinergic medications and specifically, the anticholinergic medications to treat overactive bladder, which is the primary pharmacological intervention that we have.

And they demonstrated, they divided it into the type of burden, low burden, medium burden and high burden and found that the risk of dementia, even in the low burden, went up by 19% and in the high burden was up by 50%. And as -- those were just for patients with the overactive bladder anticholinergic. So this study really has brought home sort of definitive data about the relationship of dementia and the anticholinergic medications. And I think this will end up changing practice quite significantly as we go forward.

Raymond Cohen -- Chief Executive Officer

So I think as I just wish to pile on to Dr. Noblett's remarks, I think it's really good timing for us. Here we are entering a market, entering an existing market with a product that is long-lived and we are addressing a chronic problem with a long-lived device. So I think that physicians will be very receptive, maybe even more so, to our message and to this device than they might have been given that one of the primary tools in their tool chest now looks to be something that most patients are not going to want to take.

So anyway, we appreciate that question and we think it will be helpful in terms of providing some tailwinds.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Got it. Thanks so much for taking the questions.

Raymond Cohen -- Chief Executive Officer

Thank you, Larry.

Operator

Your next question comes from the line of David Lewis of Morgan Stanley.

Marissa Bych -- Morgan Stanley -- Analyst

Hi, all. This is Marissa Bych on for David Lewis. Thank you for the updates, Ray. I just wanted to ask if you could give us any more details around your marketing strategy, sort of coming out of the gate, pending approval and how you think about investing in a commercial organization.

So we understand you are not planning to expand the sales force further. But sort of what is the plan of attack, if you will, with any more specifics? And then how should we think about modeling personnel or broader SG&A expenses going forward, now that most of the hiring is complete?

Raymond Cohen -- Chief Executive Officer

Sure. Thank you for the question. I will let Dan take a stab at quantification, if it's appropriate. But in terms of the strategy, we have been, I think, very, very consistent since we started to talk to public investors about the company in late last year.

Our plan is to initially go after the 1,000 top volume implanters in the United States. And in fact, we have mapped our people strategically to those locations in terms of our sales force. Those 1,000 physicians account for approximately 80% of all the uptake in America in terms of the number of implants. So we don't have to go out there and find new physicians and train new physicians to get them into doing sacral neuromodulation in order to be successful as a company, certainly in the first number of years.

So that is the strategy. It's not complicated. It's pretty straightforward. We know exactly who those individuals are.

We know where they are located. We know what their volume is and so forth. And we have had, as we stated numerous times, we have had in five-and-a-half years of being able to traffic with these high volume implanters. So we understand that we have delivered to them what in fact is a product that has all of the features that they have been looking for.

And most importantly, the long-term implant or the long-lived implant that we have. So that's the plan. And when you think about having 100 salespeople, putting aside sales managers and clinical specialists, it's not that complicated or difficult to imagine that a hundred people can go out there and visit a thousand customers in a very, very short period of time. As we are under PMA review now, we are not and we are prohibited from speaking directly to healthcare practitioners and we have been very disciplined about that.

But the reality is, we are going to be able to get to 100% of the market immediately upon the FDA approval and make our case, if you may, one on one with these physicians and these hospitals. We at this time, just to add a little more color, we do not know of any contract that exists between the incumbent and any institution that would prohibit us from being able to aggressively market our product into those institutions. And we have been able to speak with institutions even while we are under PMA review and I can confirm that that is the case. So as far as we could tell, right now it is blue sky and an open field for us to go out there and run after this business.

So I will conclude and maybe Dan wants to provide a few comments about SG&A and so forth.

Dan Dearen -- President and Chief Financial Officer -- Analyst

Certainly. So if you were to look at the latest Q we filed today, what you would see for the three months ended June 30, 2019, is that we had total operating expenses of $19.986 million or $20 million. The big story here is the increase from the prior year from you know a de minimis number to $10.7 million for the quarter and $16.7 million for the six months ended June 30. So operating expenses for the six months ended June 30, 2019, totaled $34 million.

And what we haven't pointed out is that as we ramp the U.S. commercial team in the first half of this year, in Q2 alone we hired approximately 57 people in sales and marketing. And so if you were to... getting to your question, if you were to extrapolate that out for Q3 and Q4 of 2019, what you are going to see is consistent to flat R&D and G&A and you are going to see a commensurate increase in sales and marketing expense for these new hires.

And as Ray mentioned, since we have hired the U.S. commercial team and we don't have plans to hire additional people in sales, once that overhead of these new hires is absorbed, that number will also flatten out. So are expecting an increase in opex for Q3 and Q4, but nothing that you can't calculate based on hiring approximately 55 new people in the second quarter of 2019.

Marissa Bych -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

[Operator instructions] I am showing no further questions at this time. I would now like to turn the conference back to speaker Raymond Cohen.

Raymond Cohen -- Chief Executive Officer

OK. Thank you, operator, and thank you, everyone, for listening in. The call will be recorded and available on our website for playback. And once again, we look forward to seeing folks on August 19th in New York City at NASDAQ for our Annual Shareholders Meeting and management presentation.

So thank you for your continued interest in support of Axonics and we look forward to talking with you all soon. Bye, bye now.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Matt Clawson -- Investor Relations

Raymond Cohen -- Chief Executive Officer

Dan Dearen -- President and Chief Financial Officer -- Analyst

Bob Hopkins -- Bank of America Merrill Lynch -- Analyst

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Karen Noblett -- Chief Medical Officer -- Analyst

Marissa Bych -- Morgan Stanley -- Analyst

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