Axonics Inc

NASDAQ:AXNX

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Axonics Q1 '21 Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Neil Bhalodkar, Investor Relations. Please go ahead.

[Neil Bhalodkar, executive]

Thank you, Peter. Good afternoon, and thank you for joining Axonics' quarterly results and update call. Presenting on today's call are Raymond Cohen, Chief Executive Officer; and Dan Dearen, President and CFO. Ray and Dan will provide prepared remarks on first quarter financial results, commercial progress and a general business update, followed by a Q&A session.

Before we begin, I would like to remind listeners that statements made on this conference call that relate to future plans, events, prospects, 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 result 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, May 6, 2021. Except as required by law, Axonics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or unanticipated events that may arise.

I'd now like to turn the call over to Ray for his remarks.

[Raymond Cohen, executive]

Thank you, Neil. I'd like to welcome everyone joining the conference call this afternoon and for folks who may be dialing in for the playback. I'm pleased to report that Axonics generated $34.4 million of revenue in the first quarter of 2021, which represents an increase of 31% compared to the same period of 2020. We're proud of this result considering the strong headwinds in January and February, which disproportionately affected elective procedures as well as the normal seasonal impact of patients not having yet met their insurance deductibles.

The good news is that in the U.S., we saw a solid rebound in sales in March that has continued into April and early May. By contrast, much of Europe continues to remain in lockdown. We're confident, however, that as more people are vaccinated and we return to a more normalized elective procedure environment in the months ahead, that Axonics is poised to continue to grow revenue meaningfully in 2021 and beyond. There is no doubt that the U.S. sacral neuromodulation market is growing, and this will become much easier to measure once the pandemic recedes.

The opportunity for Axonics is significant considering how vastly underpenetrated the market is for treating any form of incontinence. Sacral neuromodulation is poised to expand into a multibillion-dollar annual market in the United States based on the fact that tens of millions of women are suffering from these conditions. Now response to our recent acquisition of Bulkamid has been overwhelmingly positive as anticipated, the expanded offering has elevated Axonics stature with the urology and urogynecology community.

Bulkamid in is a strong strategic fit for Axonics, given that our commercial team is already calling on these customers. Clinicians are enthusiastic to offer the safe and efficacious next-generation bulking agent to women suffering from stress urinary incontinence. And we see Bulkamid is providing us with an opportunity to sell more sacral neuromodulation, in particular, to those accounts in the United States that have not yet converted their sacral neuromodulation business to Axonics.

Physicians working with Axonics now have a complete set of tools to treat patients presenting with stress urinary incontinence, urge urinary confidence, mixed incontinence, urge urinary frequency, urinary retention as well as bowel incontinence. Integration and trading for Bulkamid is ongoing and is anticipated to be completed during this quarter, at which point, we will be able to fully leverage our 250-person commercial team and roll out Bulkamid more broadly in the United States.

Internationally, we're also working to get Bulkamid sales representatives trained on sacral neuromodulation and for the Axonics SNM team to be trained on Bulkamid. Our commercial success continues to be grounded in providing our customers with exceptional support while simultaneously or significantly, I should say, improving the quality of life for their patients.

We continue to hear from clinicians that more of their patients are saying yes to sacral neuromodulation therapy than ever before and that they're excited to incorporate Bulkamid into their practices. As we speak, the overall market for SNM is expanding, driven by technological advances, strong clinical outcomes and increased patient awareness. We believe that Axonics will continue to be cause in the matter of driving durable sacral neuromodulation market growth in the years ahead.

Now for the first time in our history as a public company, we're instituting full year revenue guidance. To that end, for the full year of 2021, we anticipate revenue to fall between $176 million and $180 million, which represents an approximate 60% increase compared to revenue of $111.5 million in 2020. We expect slightly more than 90% of that revenue to be attributable to sacral neuromodulation sales and the balance to Bulkamid.

Now changing topics on the subject of clinical and regulatory. We continue to enhance the patient experience and build a strong body of clinical evidence for Axonic's sacral neuromodulation therapy. A few notable items from the past quarter include that in January of 2021, a manuscript, discussing the 2-year outcomes of our ARTISAN-SNM pivotal study were published in neurology -- Neurourology and Urodynamics, the official journal of the International Continence Society.

The 2-year responder rates in the ARTISAN-SNM pivotal study represent the highest ever reported in this body of clinical literature. Moreover, the clinically significant and durable symptom relief and high degree of patient satisfaction reported by study participants is being replicated every day by our customers around the world. In February, the FDA approved Axonics third-generation implantable neurostimulator.

And as a reminder, the third-generation neurostimulant has upgraded embedded software, which enhances the functionality of the device system and the patient remote control. These modifications give patients the ability to make broader stimulation parameter adjustments at home, including selecting a second therapy program that was set postoperatively based on interoperative findings.

Now we began shipping the third-generation implantable neurostimulator in the first week of March and the feedback from both physicians and patients has been overwhelmingly positive. We also have a registry study, called ARTISTRY. And that study is now enrolling and implanting patients at a nice clip. We have over 50 patients already enrolled in the registry towards our goal of approximately 300.

On the product development front, we continue to make strong progress on our nonrechargeable or primary-cell neurostimulator. We are working diligently and expect to file with the FDA before the end of June. And are optimistic that we can have the product approved and in the market in the United States in the first part of 2022.

With that said, I'll turn the call over to Dan, who will review our first quarter 2021 financial results. Dan?

[Danny Dearen, executive]

Thank you, Ray. For the first quarter of 2021, Axonics generated net revenue of $34.4 million. This represents an increase of 31% compared to $26.3 million in the prior year period. Sacral neuromodulation revenue was $32.9 million, of which $31.7 million was generated in the United States and the remainder in select international markets. Bulkamid revenue for March was $1.5 million, of which $578,000 was generated in the United States and the remainder overseas. The Bulkamid contribution this quarter was for only 1 month and 1 day as the acquisition closed on February 25 of this year.

Overall, total net revenue from the United States accounted for $32.3 million with certain international markets contributing $2.1 million of revenue. Gross profit for the first quarter of 2021 was $20.4 million, representing a gross margin of 59.3% compared to 62.4% for the 3 months ended March 31, 2020. The decrease in gross margin for the quarter is due to lower absorption and manufacturing variances, which included a lower yield rate than anticipated as we continued to work with our contract manufacturers to increase our manufacturing output.

While we expect to see some variability in gross margin quarter-to-quarter, we fully anticipate gross margins will increase during 2021 and land in the low to mid-70s in the next few years. Total operating expenses for the first quarter of 2021 were $42 million, included in this figure is $4.4 million of onetime legal, consulting and advisory expenses related to the Bulkamid acquisition. Also included in operating expenses is $700,000 of amortization of intangibles expense related to the acquisition.

Adjusting for these items, operating expenses were approximately $36.9 million, in line with our budget and reflective of increased headcount compared to the prior year period. In the year ago period, operating expenses totaled $31.1 million. We expect operating expenses in Q2 to be in the range of $43 million to $45 million. This increase is mainly due to the additional operating costs for Bulkamid. This estimate includes approximately $3 million in incremental operating expenses and $2 million in amortization expense on the acquired intangible assets.

Net loss for the first quarter of 2021 was $22.5 million compared to a net loss of $14.6 million in the prior year period. Cash and cash equivalents were $131 million as of March 31, 2021. I will now turn the call back over to Ray for additional remarks.

[Raymond Cohen, executive]

Thank you, Dan. So I'd like to add some color on a number of items. First, as of April 25, we now have over 503 employees at Axonics. This is more than double since this time in 2020. The number of employees engaged in field activities is about half of our total headcount. Now in the U.S., we have a total of 107 salespeople and sales managers. We have nearly 110 clinical and therapy support specialists, a handful of field marketing specialists and a clinical education group representing -- which represents 5 professionals, and they are led by our Chief Medical Officer and one of the world's foremost experts in urogynecology, Dr. Karen Noblett.

In Europe, between Bulkamid's salespeople and sacral neuromodulation salespeople and clinical specialists, we have 27 individuals. Now I think this is an important comment to make, considering the variation in the gross market for the first quarter. And that is our average selling prices over the past 3 quarters have been stable. Although the mix of where purchase orders are coming from, are -- or originating from has shifted whilst all procedures are performed in outpatient settings, either in the hospital or an ASC, now nearly 2/3 of our purchase orders come from hospital systems. This is resulting from the fact that we have signed agreements to supply our sacral neuromodulation system to over 200 national and regional IDNs and local facilities, and we've accomplished this over the past year. As stated in the past, these agreements are mainly hunting licenses with certain volume targets. We are now adding Bulkamid as an addendum to many of these agreements.

Now I know there's been some interest in hearing more about our marketing efforts and particularly direct-to-consumer advertising. So during Q1, we invested approximately $1 million in a combination of activities, including Facebook ads, paid Internet search and search engine optimization. In addition, we work with our customers to support mailings from physicians to their own patients, some local print advertising and some short TV spots. Suffice it to say, we've reached tens of thousands of potential patients, we've generated hundreds of leads and appointments in physician offices and are now seeing this interest turning into procedures.

Our messaging will now include offering solutions for all types of incontinence regardless of whether it's stress or urge incontinence. We believe this will also increase our response rates, lower cost per lead and drive even more patients into the practices of the physicians who are loyal to Axonics. We are now live in 42 markets in the United States, up fourfold from December 2020, and we will continue to expand into more markets and invest a reasonable amount of additional capital into these efforts throughout 2021.

Now in closing, with respect to prepared remarks, we're incredibly bullish about the outlook for our sacral neuromodulation portfolio and Bulkamid over the next several years. We're grateful for the trust that physicians, patients and shareholders have placed in Axonics. And I can assure you we continue to work diligently every day to fulfill our mission of changing the lives of patients suffering from bladder and bowel dysfunction and being the market leader for sacral neuromodulation. At this time, we're happy to take some questions. So we'll turn it to the operator.

[Operator]

[Operator Instructions]

And your first question comes from the line of Bob Hopkins with Bank of America.

[Robert Hopkins, analyst]

Great. And congrats on a strong quarter.

[Raymond Cohen, executive]

Thank you, Bob.

[Robert Hopkins, analyst]

Appreciate the detail. Maybe just a couple of clarifying questions. On the -- looks like you're guiding to about $18 million of Bulkamid sales for the year and about $160 million on the sacral neuromodulation side. Is that -- first of all, is that correct?

[Raymond Cohen, executive]

No. It's not. I think you're about $4 million higher on the Bulkamid based on your comment. So that should be put into the sacral neuromodulation side of the ledger.

[Robert Hopkins, analyst]

Okay. So you're only guiding to like $14 million. I mean that would imply that you have no improvement in monthly run rate from here on Bulkamid? Is that just [indiscernible] or...

[Raymond Cohen, executive]

Yes. Let me just make a comment about that, Bob. I appreciate that question and a chance to clarify. So look, we clearly overachieved in the month of March. I mean, I don't think any of us expected to generate nearly $1.5 million of revenue in March. Now in Q2, things are going to not be at such a great clip, right?

In other words, if you took March, timed it by 3, you'd say, wow, you guys should do $4.5 million. But here's the difference. We had a nice strong result in the United States in March. However, those individuals that were involved in selling that product are the ones that are training our 110 clinical specialists and the salespeople and all that, and that's happening in Q2. So we're a little bit shy really about even the analyst consensus of $3.4 million in Bulkamid and we're a little more comfortable around $3 million just because we're diverting resources -- selling resources to do training.

And also just to underscore the point, our own sacral neuromodulation sales force is not out selling Bulkamid at this time. We are still in the mode of training people and getting up to speed. They will start to contribute in Q3 of 2021. So the increase, if you may, over and above consensus is from sacral neuromodulation. And Bob, as you saw from the numbers, we overachieved in that category in Q1. And we're saying, okay, fine, let's take that number, put it into the overall consensus number and then we're suggesting that we could be higher by some millions beyond that. So hopefully, this kind of clears up the story.

[Robert Hopkins, analyst]

Yes, it does. But just one follow-up on the Bulkamid side then. Just, obviously, is that sort of what you saw in April and early May in terms of more like $1 million monthly run rate versus the $1.5 million in March?

[Raymond Cohen, executive]

Yes. Just because, as I mentioned, we've diverted resources. I mean, we've trained nearly 60 people already just in these weeks in April and May. And obviously, our people can't be in 2 places at 1 time, right? They're good but they're not that good. So that's kind of the situation. So look, we're optimistic. But the other issue, just to put a finer point on it even further, I mean, Germany is under lockdown until the middle of June.

I mean that's almost all of the quarter, not really seeing any action with everybody still hiding under their desks in Germany. The U.K. is not in much better shape. And as you have seen from the historical numbers, the number was much bigger internationally than it was in the United States, which is the market that's just coming around. So really, so that's the issue, right? We've got U.S. people involved in training. And then we got the international markets, most of them still having problems from COVID.

So we just -- we'll do fine. I think it will be respectable, but we're just trying to provide some color so that people really can have a better sense about what to expect from the company in the short term.

[Robert Hopkins, analyst]

And then when does that sacral neuromodulation sales force really go out and market Bulkamid? When does that happen?

[Raymond Cohen, executive]

It won't happen until well into the third quarter, right? It's one thing to get sacral neuromodulation salespeople and clinical specialists who are engaged in a highly technical product and implants. It's one thing to get them up and running on Bulkamid. It's a little more of a heavy lift to go the other direction, so -- but it'll all come together, and we'll see some benefit from the synergy as we go forward.

I will add just one more comment since I've been -- sounds like I'm talking down Bulkamid, and we're really not because the demand for this product right now is significantly higher than our ability to actually get to these customers.

[Robert Hopkins, analyst]

Okay. Okay. That's helpful. One quick last one in terms of just the core sacral neuromodulation business, given it's such a unique quarter. Just wondering if we could get any rough sense for how March was and whether or not April was better?

[Raymond Cohen, executive]

Yes. Thanks, Bob. Yes, March was a really good, solid month. I think you've heard this refrain from all the other companies that have reported. April continued, even though it's the first month of the new quarter, it continued at that good pace and into the first weeks -- first days here of March, things are looking pretty good. So this is why we're being more bullish even in the short run and are suggesting that we could even see an increase over analyst consensus for Q2 in the short run.

So things are good, and it's just great to see more people getting vaccinated, elective procedures opening up and so forth. So things are definitely getting better, and we're seeing incremental improvements literally month-to-month now.

[Operator]

Your next question will come from Chris Pasquale with Guggenheim.

[Christopher Pasquale, analyst]

Congrats on the quarter, guys. Ray, I'm just curious whether you saw scheduled procedures canceled in the early part of the quarter that you then were not able to make up in March. Would love to get a sense for whether there's a new group of sort of pent-up demand patients that could come back in here over the next couple of months?

[Raymond Cohen, executive]

So Chris, look, there were some cancellations in the January -- particularly like in the January period, but they're nowhere near as much of a problem as what we saw in Q4, right, where we actually went out there, did a survey -- put a number to it, I think it was 320-odd procedures that were canceled in Q4. We just did not see anything near that in Q1. So really, there's not much for us to say about it.

I think the numbers that we generated in Q1, I think they speak for themselves. So it was a good quarter for us. And we're obviously seeing incremental increases and optimistic about uptake of the product as we continue.

[Christopher Pasquale, analyst]

That's helpful. And then I appreciate the comments around the DTC campaign and the work you're doing with customers. $1 million is not insignificant, but it feels as though the market is sort of taking off in advance of some of the investments that you guys have really talked about from a market development standpoint. Are you feeling that? How is your experience over the past, call it, 9 months or so, color your view on what's going to be necessary to get to that multibillion-dollar level of adoption that you spoke about in your script?

[Raymond Cohen, executive]

Yes. I think -- it's a good question, Chris. And I think that this is happening also on a very much of an organic basis, right? We continue to say -- we said this line many times, patients are saying yes to the therapy more often than ever before. That's what docs are telling us, that's what our customers are telling us. So there is a groundswell of interest that is happening organically, the fact that there are letters going out to patients from practices suggesting that they may want to come back in and talk about new technology, the fact that we're on Facebook and that there's a lot more action out there and more awareness, even our competitors are starting to do a little something in this particular area, which we applaud, so rising tide is going to help all players in the marketplace.

So there is -- it's happening. I mean, even look, I'm not a subscriber to Harper's Bazaar, but when you hear that the pelvic floor is getting a PR makeover, I mean there's a lot of interest now starting out there in how should we say, in the world and particularly in the United States, about this particular topic. So I think you're going to see that this is going to happen, both from an organic standpoint, just increased awareness, people talking to each other.

There's just a lot more action going on. But here's the bottom line. When it comes to sacral neuromodulation, this is really more about physicians being more comfortable with talking about the therapy because we've got a better product. And it's long-lived, and it's MRI-compatible, and it's easy to use, and you're going to get a great clinical result. This is the big difference. This is no longer a therapy of last resort, which is what it was before we entered the market.

And so it's a new day here. And I think what we're trying to do is just put some more gas on the fire, so to speak, and keep things moving in the right direction. So I don't need to be talking down DTC. We got tens of thousands of people who raised their hand and said they're interested. But it's a long-term process to convert that initial interest into actually somebody showing up for a procedure, right?

So that's -- it's a multiyear effort. And if I just -- we look at Inspire Medical, I mean, I think they disclosed this, and hopefully, I'm reporting something everybody knows, but they spent $27 million on DTC in 2020, and we applaud that. We think that's great. We're not quite there yet, and we're not the only player in the marketplace either. So it takes time, and there will need to be continued investments over time.

But we're trying to do this in a smart way, Chris, and kind of do the blocking and tackling before we get over our skis. So I think you're hearing a little bit of conservatism from us. We will continue to invest additional money in DTC, but we want to try to keep it in kind of a rational vein and really focus on how we're processing those leads. How they're landing in physicians' offices, how they're being followed up.

So we're really heavily engaged in kind of process of how these things really work because we're operators, and that's just kind of our background, and we want to make sure that we're getting a return on investment.

[Operator]

And your next question will come from Kaila Krum with Truist Securities.

[Kaila Krum, analyst]

Just one of the things I'm curious about is how you're assuming Bulkamid can have a halo effect on the SNM business? Because, I mean, a lot of patients have both SUI and OAB. So I guess are there SNM patients who actually have an Axonics implant today that could benefit from a Bulkamid injection? Just curious how you're thinking about some of the synergies between the 2 businesses.

[Raymond Cohen, executive]

Yes. Thanks, Kaila. So you are correct. I'll take the technical part of the question first. You are correct that there are a group, maybe as much as 20% of patients who we call mixed incontinence patients. These are patients that have a form of stress urinary incontinence and urge urinary incontinence. Now many times, the docs try to do a differential diagnosis, maybe using different techniques and your dynamic testing and things of that nature to make that differentiation. But really, it's about, which is the greater bother for the patient.

And we all know that if you've got urge urinary incontinence, I mean, that's a lot more bothersome than coughing, sneezing, lifting an object and leaking a little bit of urine. So there's no question that existing patients who may already have a sacral neuromodulation device in their body or maybe in the process of getting worked up for that could also benefit from bulking injections, Bulkamid in their urethra.

So that's the kind of the technical part. There is this crossover of these patients. They're not completely unique from one another. But the bigger question that you're asking really gets to why did we buy Bulkamid. Okay. Yes. We're excited about the product. It's cool. It's great. And we think we can do $50 million by 2024. But the main reason really is that we believe that Bulkamid is helping us right now in real-time and will continue to help us sell more sacral neuromodulation because we're able to get into accounts with Bulkamid that are -- they've been in the Medtronic camp in terms of sacral neuromodulation business.

So getting in there, working with those accounts, letting them see who Axonics is, how we go about doing our business, being professional and all the other things that we do, engenders confidence in that account and that customer and that physician and their staff and puts us in a position for them to give us a shot so that we can prove to them that, in fact, we've got a better product and superior service and so on and so forth on the sacral neuromodulation side.

I will tell you, Kaila. It is happening. It's happening in real time. And the fact of the matter is we've got accounts that we've not been able to sell sacral neuromodulation to that have invited us in because of Bulkamid, and they are now open, and some of them have already started working with us on sacral neuromodulation. So the theory or the hypothesis behind doing the acquisition is playing out in real-time and it's happening very quickly. So we're really thrilled about that, and that's going to help also fuel the growth of our sacral neuromodulation business, not only in 2021, but beyond.

[Kaila Krum, analyst]

Great. Okay. And then, I mean, we've heard from a surgeon who does a lot of -- or at least historically did a lot of slings. He thinks the market could go to a 80% of bulking within the SUI market. So -- and largely, again, because of Bulkamid. So what's your reaction to that estimate? Or your view there, as I'm sure, again, you have more -- a lot more conversations with customers than we've been able to.

[Raymond Cohen, executive]

Yes. Thanks, Kaila. Yes, no doubt about it. So it's interesting. I'm going to quote a study that was done actually in England. And it was under the banner of What Women Want, and it was with respect to not other things, but what they want in terms of treating their stress urinary incontinence. 67% of the respondents, and this was hundreds, not just a dozen people, right? These were hundreds of people who responded that Bulkamid is what they would prefer as a treatment as compared to an operation for sling.

So I -- that was a pretty impressive number, right? When you go out, you give some basic information and people responded in that way. So we may never get to 80% but the point is it's going to be better than 50 and maybe approaching this kind of number. The fact is people would prefer to have an injection in their urethra with a material that doesn't have adverse events, that is going to last for 5 to 7 years, that can be done in the office, that's a less than 15-minute procedure. I mean, given the choice, why would you choose an operation?

Now there may be other reasons and there may be some patients that are more suitable for a sling based on the severity of their condition. And Bulkamid is never going to be exactly as efficacious as a sling. But you're talking about something is going to give you 70% relief in terms of your symptoms as opposed to 90%, but turned out to be a 10 or 15-minute procedure in a doctor's office as opposed to an operation with recovery time, it's pretty clear what the preferences of these patients are.

So now the key thing is to get the docs that are out there to talk to their patients, to give them the option, explain the benefits. And I don't think there's any question that we are going to see a sea change here in how stress urinary incontinence is treated in America. And we already have seen it happen in the U.K. as an example, right? I mean in the U.K., this is the standard of care for patients with SUI.

[Operator]

And your next question will come from Larry Biegelsen with Wells Fargo.

[Unknown Analyst]

It's actually [indiscernible] calling in for Larry. I want to start with a comment you made about there was some backlog in Q4, there were some cancellations. Did that backlog get resolved this quarter? So was there a little bit of benefit from that?

[Raymond Cohen, executive]

It's one of these things where we have not spent a lot of organizational energy in tracking these patients by name. So I can't really answer that question in any kind of definitive terms. Clearly, some of these patients came back but I would say a fair number of them have not come back yet. I mean we're still -- if you think about where we are in terms of vaccination in America, we're, what, maybe 40% of the population.

So clearly, a lot of those patients that canceled, that had not been vaccinated and are still not vaccinated to this moment. So I cannot say that, oh, the increase in Q1 was a big pickup over cancellations from Q4.

[Unknown Analyst]

Got it. Okay. So it sounds like maybe there is still some pent-up demand, whether it's from Q4 or early part of Q1 just based on procedures getting canceled and may not be fully rescheduled?

[Raymond Cohen, executive]

Yes, I think that's a correct statement. And I think it really boils down to the environment, right? Elective procedures are starting to come back. Institutions are willing to allocate more time and resources and so on and so forth. So I think it's not one thing. It's a combination of many factors, but I do believe that what you're going to see, and I've said this before, is that if you draw a line and you trace the percentage of people that are being vaccinated in the United States, and you'll see that the Axonics' revenue will follow that trend line.

[Unknown Analyst]

Got it. Okay. That's helpful. And then just another question around revenue. So you mentioned that your SNM reps are getting trained on the new product. Would that have some sort of effect on the revenue cadence in Q2 versus second half of the year just in terms of these reps being off the field for training?

[Raymond Cohen, executive]

So to put a finer point on it, we're training our clinical specialists first, these are the people that are going to be doing wet lab training and they're going to be there to support the initial injections in patients. So this is more about our clinical specialist staff, not so much our salespeople. We are not taking time out of salespeople schedule to have them become experts on how to do injections. That's not their job, right?

They can talk about the benefit of the product and how it can help people, practices and all the rest of it, but we're not getting our salespeople bobbed down and becoming experts on how to inject this material because they're not going to be the ones that are going to be there to support these cases. So -- and with respect to clinical specialists, these are the folks that are focused on case coverage, and we have the ability, obviously, to manipulate these calendars and to keep the wheels on the bus as we're taking these people out of the field for 2 days or 3 days at a time.

So that -- you will not hear this as an excuse from us, that oh, gee, we had to train people, and therefore, we didn't make our numbers. You will not hear that excuse from us.

[Unknown Analyst]

Got it. Okay. Then just last question on your primary cell device, you plan to file that by the -- before the end of June. Can you just talk a bit about the potential advantages over the competition like InterStim II?

[Raymond Cohen, executive]

Thank you. I really appreciate that question, and I would be happy to speak in more detail about it because I think that this is this is really important, and this is a huge value driver for Axonics. So here are the facts. The device is approximately 11 CCs, which is about twice the size of our existing implanted neurostimulator. It's about -- that's about 20%, it's a little over 20% smaller than the InterStim II. Its profile is different, it's much thinner than the InterStim II.

All these things will accrue to our benefit in terms of placing this device in the body. The device will last for a nominal setting, meaning the average patient will get 10 years or more out of this device. This is a watershed, completely different story compared to what is available from the competition, where there are -- despite what they might say, there are dozens of clinical studies would suggest that, that device will last about 4 years.

Some people aren't so lucky. It only lasts for 2 or 3 years in their body. So the key thing is longevity in the body. Size is going to be attractive. A couple of other key points, this uses constant current technology. That's the same technology we use in our existing rechargeable device. So we expect excellent efficacy with this device, no change from that standpoint. It uses the same lead technology, right?

So we have the same lead that goes with either device. And I think the most important thing here is now we're going to have physicians that will be able to direct their patients or give them choice as to which way they would like to go. So think about the lineup. You've got a nonrechargeable device that could last 10 years in the body. It will be the first recharge-free system in sacral neuromodulation. What do I mean by that? You don't have to recharge the stimulator and our patient remote doesn't have replacement batteries, doesn't need to get plugged in the wall. You don't need to stand on your head to make it connect to the implanted stimulator.

So we got a recharge-free system. That's going to be long-lived, that's going to generate high levels of efficacy based on the constant current technology. And it's got a nice footprint in terms of the size and the shape. So that's the specs. And those are the key things that matter. And I dare say that we are very anxious to get this product in the market because we think this is going to be a big runner and is going to put a lot of pressure on the incumbents' franchise.

[Operator]

And your next question is from Michael Polark with Baird.

[Michael Polark, analyst]

I guess the veil has been lifted on the primary cell. So the question I had is, I think at the last disclosure, you had 600 centers signed up for SNM. Mentioned in the prepared remarks that obviously, Bulkamid is an opportunity to call on folks that aren't using Axonics. I think back last year or the year before, it was, give or take 1,000 centers, explain 80% of the SNM volume historically. So curious, not going to hold your feet to the fire on this, but what are your latest and greatest internal expectations for how many of these centers may take your call and start engaging with Axonics and SNM as a result of Bulkamid over the course of the next year or 2?

[Raymond Cohen, executive]

Yes. Michael, thank you for the question. That's a really hard question for me to answer. I mean, I'll tell you what our philosophy is and the things that I tell our own people, we want all the business. I mean we want them all. And we're not going to rest until we get our fair share of the market, which we define as at least 51%. And so we're at it.

We're at it every day. And it's hard to make a prediction in any kind of precise term. So I'm not trying to be evasive. I just -- it's a really difficult question to answer. But we're on it, and the hypothesis is working. And clearly, we're going to look to bring as many of those important accounts to Axonics as we can and as fast as we can. That's the game that we're applying.

[Michael Polark, analyst]

Fair enough. Follow-up easier one, perhaps for Dan. I appreciate the carve-out of the intangible amort and deal-related expenses in 1Q. The $4.4 million of deal-related expenses in 1Q, heard that. Is there anything like that you expect in 2Q? Or is 2Q really your core OpEx number plus the deal-related amort?

[Danny Dearen, executive]

That's correct. We're not expecting anything in the order of magnitude of, obviously, $4.4 million in onetime expenses. We're not planning on doing another Contura acquisition. I mean if you assume the current operating expense run rate for Q2 prior to Bulkamid, and put that at $38 million to $39 million, and then if you add the incremental expense associated with the Bulkamid OpEx, we expect to see those expenses, excluding amortization, of approximately $42 million. And then amortization of the intangibles is going to run at about $2 million per quarter going forward.

[Operator]

Next question is from Mike Matson with Needham & Company.

[Michael Matson, analyst]

Just want to clarify a few of the comments you guys made during the -- during Dan's portion. I think Dan's -- maybe not. But the ASPs, so I think you said it was -- they were stable, but the mix changed. I guess I was confused by what that means. Does that mean that look at the average price of everything you sold that was unchanged? Or within particular categories, it was unchanged with the mix shifted that caused the overall ASP to change?

[Raymond Cohen, executive]

Okay. So thank you for making us clarify that remark. And maybe I combined 2 thoughts together in the same sentence without a period. Okay. So let me -- so I apologize for that. So let me clarify. Our average selling prices are stable and they have been stable over the last 3 quarters. In other words, the -- I mean, literally, been a couple of dollars difference quarter-to-quarter. So it's -- they're 100% stable. I thought that was an important comment for me to make, Mike, because I didn't want people to think, given that we had this hiccup on the gross margin, which is really kind of a nonbig -- it's not a big deal. It's something when you're early in the cycle the way we are as a company, you're going to see some variability from quarter-to-quarter depending on how much product you make or don't make in things that way.

So the prices are stable, no sliding of our average sale price. Okay, period. Now what I did say is that purchase orders -- the purchase orders that we get as a company, now 2/3 of those purchase orders are coming out of hospital systems. As opposed to the last time I talked about it, I said it was kind of a split, half and half, if you may, between hospitals and ASCs. So given the number of big national IDNs and regional IDNs that we've signed up, we're just getting more business now purchase orders coming from those institutions, right? So that's -- those were the 2 messages I was trying to get across.

[Michael Matson, analyst]

Okay. That's helpful. And then I wanted to ask about Bulkamid, now that you've got it in the -- in your own hands and you're out there selling it. So what kind of reorders are you seeing? And I think part of the premise here was that the customers, once they kind of get trained and start using it, they'll continue to use it on your own. You won't need to have your reps there for every case. And I mean, is that actually playing out that way?

[Raymond Cohen, executive]

100%, Mike? 100%. People -- once they get trained, we don't need to be there. The idea is you do a wet lab, you get them up and running, get the practice. You get some patients that are either that day or the next morning, you support them with those first 3, 4, 5, 6 patients, whatever it might be, and then they're on their own. And then you're just going to pop in, as you normally would do as a company to make sure your customers are happy and things are going well, but we don't need to be there.

And that's great because that helps us a lot. It's a light touch from that standpoint. So -- but what I will say is that given that we have not unleashed our own sales force on the market, we have seen a nice brisk pace of reorders and we are seeing physicians becoming evangelists about this product. This is really amazing and well beyond our own expectations that the physicians that got trained in 2020 on this product, they are making the most effusive comments that you could possibly imagine.

Kaila mentioned a very experienced physician who said, hey, I think that Bulkamid is going to take up 80% of the sling market even. So we're seeing that kind of enthusiasm, a willingness of these urologists and urogynecologists to speak publicly about their experiences. We referenced previously that people should give a listen to the session that took place at SUFU, the conference, which we have a playback on our website.

In that playback, you can hear from 3 physicians that are using Bulkamid that weren't even our customers. They weren't even Axonics' customers previously. So they had a very much of an unbiased view. So anyway, it's really going quite well. I mean, this is a product that really works and truly is easy to inject and is getting great results on these patients immediately.

And you can imagine. You go in for a set of injections, you do a bit of a cough test and then they walk out dry. I mean, that's incredible. So we're going to start to see a lot of goodwill being generated from patients in these practices. Those patients talking to other family members, friends and so on and so forth, about their experience. And having satisfied physicians who are helping make their patients better.

And that is the name of the game in the end of the day, right? The docs love the idea to get the instant gratification that they're doing something that's really helping a person, increasing the quality of life and it happens immediately. There's like no delayed reaction. They can see it right there before the patient leaves the practice. So all in all, it's great. But we just remind people that this is a product that sells for like $1,000 a patient, right? So compared to almost $16,000 for sacral neuromodulation. So the meter doesn't move quite as fast when you're selling Bulkamid, right?

A really good customer is going to do between $100,000 and $200,000 for us. That represents 100 to 200 patients, which is fantastic. But the revenue, it just doesn't add up the way that sacral neuromodulation revenue adds up. Having said all that, it's great for our business. It's great for our position in the marketplace and for creating these long-lasting relationships with our customers.

[Michael Matson, analyst]

Okay. Great. And I mentioned Dan, so I have to get one in for him. This actually is for him. So gross margins, this manufacturing issue that you called out, can you maybe just explain what that was? And then I have to ask obligatory semiconductor supply question. Do you -- are you sure you're going to have adequate supply there, given all the headlines we've seen about that?

[Danny Dearen, executive]

No, it's a great question. So as we said on the call, the decrease in the margin for the quarter is really just the result of manufacturing variances, which included more yield loss than we had planned. And it's just a straightforward as that as we produce more product and work through these inefficiencies, we'll see margin improvements. And our target is still to reach mid-70s at scale. There's no change in plan.

If you look at the balance sheet, we increased the amount of inventory. And if you look at the amount of finished goods that we have in particular, we have plenty of product on the shelf to continue to meet demand for the foreseeable future. And we are actually quite pleased, given the worldwide shortage on chips, capacitors and resistors. And so I'd love to tell you that we were strategically brilliant and we looked forward and saw this coming as a result of the pandemic. But the truth of the matter is, look, we were preparing for rapid growth, which we've experienced.

And it just so happens, having significant inventory is going to be to our advantage, given the shortages other people are experiencing.

[Operator]

Our next question is from Adam Maeder with Piper Sandler.

[Adam Maeder, analyst]

Congrats on the nice start to the year. Two from me. The first one is on sacral market growth. I think you've talked, Ray, a little bit in the past about just a potential long tail of SNM accounts or implanters who have maybe been a bit underappreciated or overlooked historically. So I'm wondering how much of the market growth that we're seeing today is from new or newer docs to the procedure?

And how do you think about the contribution to growth from this group or this opportunity going forward? And then I have a follow-up.

[Raymond Cohen, executive]

Okay. Sure. Thanks, Adam. That's a good question. So at the moment, I would tell you that we are definitely adding some of these customers from the long tail, all right? That's happening. But they're primarily, up till now, physicians that are looking to just get back into the game in a bigger way, right? Particularly coming out of the pandemic, right? Everybody's practices have been down, and we got a better mousetrap and all that.

So they seem to be enthusiastic. And we'd like to get those dabblers, the people that are doing one a month, which is -- we've signed a number of them recently. If you can get them up to 2 or 3 per month, and they're right in the fat part of the business for us. So there's some of that.

Now we've also learned because of the pandemic, we had to figure out how could we do virtual training. And Dr. Noblett, in particular, has spearheaded this initiative where we now have tools that we can actually train people virtually with pretty sophisticated tools and really bring them through best practices and so on and so forth.

So for the first time -- and this was not part of our strategy in 2020, and I was very clear that in 2020, we only called on people that were doing sacral neuromodulation already. Now in 2021, we're now just starting to bring some physicians into the game who want to be doing sacral neuromodulation that have never done it before because we are now in a position to be able to support that initiative, right?

We've got the tools, we've got the people, we have a whole clinical education department now that we didn't have before with 5 professionals in it, led by Dr. Noblett. So you're going to start to see some of that contributing to the growth and so forth. So Adam, it's not one thing, right? As you could imagine, it's a number of -- all of these types of initiatives that we're doing conspiring together to help fuel the growth in the marketplace.

[Operator]

Our next question comes from the line of Cecilia Furlong with Morgan Stanley.

[Marissa Bych, analyst]

This is Marissa Bych on for Cecilia. I just wanted to go back to the primary cell device progress. So we understand you plan to submit that to the FDA in the next month or so. Is there anything more specific you can tell us as far as launch plans for this in the first or second quarter of next year? Are you preparing to commercialize as soon as you have FDA approval? Or are there any further steps on prototyping or trialing that we would need to see?

[Raymond Cohen, executive]

Sure. Thanks, Marissa. Look, we're going to look to launch this product immediately after FDA approval. We are ramping up our manufacturing capabilities, if you may, to be able to produce the product ahead of the approval. So we'll build product, I mean, I shouldn't say at risk because there's no risk, but we'll build product. We are revamping space in our manufacturing facility.

This also, by the way, has a small part to play in kind of some of the comments that Dan has made and so forth. So things are a little bit in flux now as we get prepared to produce this new product. So nothing that would stand in our way per se. We're not -- our philosophy has been that we don't go-to-market with prototypes. We don't put prototypes in people's bodies. So we're talking about -- in a finished commercial product that I'd be comfortable to put in my mom. I am -- I may sound corny, but that's our philosophy, right?

So now having said that, will we run type of postmarket studies so that we can provide additional comfort to the market? Yes, certainly, we will. I think ARTISTRY is representative of our commitment to these types of things. And we'll obviously look to do some of that work as well with the nonrechargeable product. But this will be a ready to rock and roll, full-blown commercial product that we'll look to ship as quickly following FDA approval as possible, which has been our custom, by the way.

If you look at whether it's second-generation or third-generation devices that we've put out, we don't write-off stuff, right? We haven't been writing off these previous models. We sell them out, and we plan and prepare for the new version as it comes out. So we feel really comfortable about this. I wish that we could put the product in the market today.

But then again, this is the best we could do given COVID and everything else that has transpired until now. So we'll take it in 2022. And we're excited about the impact that this product can make on the company and the market.

[Operator]

And your next question will come from Danielle Antalffy with SVB Leerink.

[Fan Wang, analyst]

This is Rebecca Wang on for Danielle. So I want to circle back to Bulkamid. Can you update us on your headcount in sales reps and...

[Raymond Cohen, executive]

Okay. Operator, we seem to have lost Rebecca.

[Operator]

Danielle (sic) [ Rebecca ], please repeat your question.

[Fan Wang, analyst]

Sorry. Yes, my first question is, can you update us on your headcount in sales reps and clinical specialists including those reps you got from Bulkamid? And then next question, I understand there are potential sales synergies. And you said your own sacral neuromodulation reps will contribute to Bulkamid sales in third quarter. So could you give us more color here, what is your strategy to deploy those sales reps and clinical specialists to drive same-store sales without distraction to the core sacral neuromodulation business.

[Raymond Cohen, executive]

Okay. So Rebecca, in my prepared remarks, I thought I had provided some very detailed numbers. I'll repeat it. In the United States, we have 107 salespeople, including sales managers. We have nearly 110 clinical and therapy support specialists we've got less than -- almost half a dozen field marketing specialists and clinical education group of 5. So that's -- if you run those numbers, it totals up pretty quickly.

And in Europe, we have 27 people that are selling either Bulkamid or sacral neuromodulation. So that's how you get to the 250 number. In terms of how do you introduce a new product in the marketplace without screwing up your existing business? I think that was your question. And I think the only real answer is professional sales management and strong leadership and guidance from the people who run the business.

You can't focus all your energy as a salesperson on a product that sells at $1,000 a patient versus one that could be around $16,000, right? So the good news is that salespeople are, how should we say, their nature, their inherent nature is that they take the path of least resistance and they go where the money is. And that's why you hire professional salespeople to do this job.

So let me just say that I am 100% confident in my Chief Commercial Officer, Al Ford, in our sales managers that are out there in the United States and internationally, that they are expert at this business, and they know how to manage people, and we do not expect to see any drop-off or any cannibalization, let's say, of our energy. People understand that sacral neuromodulation is our core business. That's what keeps the lights on, so to speak, and that's where they're heavily incentivized, of course, to spend their time.

People get paid commission in our company based on volume. So it's pretty straightforward, right? The more sacral neuromodulation you sell, the more money you're going to make. And if Bulkamid can help you get into accounts that you're not in, and you can make some of your customers happy and all that with this product, then win, win, win all the way around for everybody.

[Operator]

Thank you, speakers. Q&A session is now complete. I will now hand it back over to Raymond Cohen for the closing remarks.

[Raymond Cohen, executive]

Thank you. Thank you, operator. Thank you to all the analysts who volunteered a question on today's call. Very helpful also for me to get the rest of the story out. We really appreciate your interest. And to all shareholders, we appreciate your confidence in the company, and we look forward to talking with you again shortly. You all have a nice evening.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.