Axonics Inc

NASDAQ:AXNX

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Axonics Fourth Quarter and Year-End 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference Mr. Matt Clawson from W2O Group. Sir, you may begin.

[Matt Clawson, W2O Group, Investor Relations]

Thank you very much, and thanks everyone for joining the Axonics quarterly results and update call. Joining me on the call from Axonics this afternoon are Ray Cohen, Chief Executive Officer; Dan Dearen, President and Chief Financial Officer; and Karen Noblett M.D., Chief Medical Officer. Ray and Dan will provide prepared remarks and commentary on the fourth quarter financial results and business update. And Dr. Noblett will provide details on the ARTISAN-SNM clinical study followed by a Q&A session.

Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs these statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed 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 to place undue reliance on these forward-looking statements which speak only as of today March 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'd like to now turn the call over to Ray Cohen for his remarks. Ray, good afternoon.

[Ray Cohen, Chief Executive Officer]

Thanks, Matt. And thank you to everyone who's dialing in for today's call and who will listen into the webcast. So since our last call in December, I'm confident we provided evidence that Axonics is moving forward with velocity. We've continued to enrich our literature-based PMA with six-month data from the ARTISAN-SNM pivotal clinical study. We've also submitted full-body MRI data to the FDA. We've gained momentum in our international business in the U.K., the Netherlands and Canada. We've gained CE Mark for the full-body MRI labeling in Europe, which is expected to have a further positive impact. And we've continued to build out our U.S. sales and marketing team in preparation for the U.S. launch. We've also filed for a new PMA with the FDA for bowel dysfunction. And least but – last but not least we've enhanced our Board of Directors.

So, I'll provide an update on these key initiatives on today's call. Dr. Noblett will speak to our clinical results. But first similar to our Q3 call, Dan Dearen, our President and CFO will start by reviewing our Q4 and full year 2018 numbers.

So, Dan, I'll turn it to you.

[Dan Dearen, President & Chief Financial Officer]

Thank you, Ray. For the fourth quarter of 2018, we reported net revenue of $494,000 compared to no revenue in the fourth quarter of 2017 and $201,000 in the third quarter of 2018. Net revenue for the fourth quarter of 2018 was derived from the sale of our r-SNM Systems to customers in Europe and Canada including the initiation of commercial sales in the United Kingdom in December.

The gross profit for the fourth quarter of 2018 was $249,000 representing a gross margin of 50.4%, that gross margin figure will likely move around in the early periods as we process to ramp manufacturing are implemented. And we of course anticipate increases commensurate with volumes and scale, but we are pleased with that initial full quarter figure at this level of sales.

The total operating expenses for the fourth quarter of 2018 were $9.7 million, which is an increase of $4.8 million compared to the same period in 2017. The increase in operating expense was driven primarily by increases in personnel costs, marketing expenses, regulatory submissions, infrastructure expenses associated with the expansion of the office and training facilities and the cost associated with operating as a public company. I would like to expand on this topic for a minute about the current strategy, timing and pace of investment in coming quarters.

First, I will note that some of the expenses anticipated in 2018 were not recognized in that period simply due to timing, meaning that between $4 million and $5 million in anticipated 2018 expenses are most likely to be realized in 2019, with some of the costs impacting the Q1 2019 operating expenses.

In addition and as Ray mentioned earlier in his comments, and as was noted in the press release, the company has accelerated a number of programs that are now tracking to potential earlier completion dates. I would point out particularly the key areas of hiring the U.S. commercial team and additional hiring in support of manufacturing.

While we are still anticipating and projecting that FDA clearance in the United States is likely to come in the latter part of the year, we want to be ready for commercial launch and our strategy has always been to have U.S. sales team in place and product inventory on hand ahead of the launch date. These are costs that would have been necessary regardless of the FDA clearance date. And we determined that in order to maintain our commitment to launch with a full team, our hiring was completed faster than we had initially expected.

Consequently, the related sales and marketing expenses will ramp more sharply throughout 2019 than our original plans. The risk in doing so is that we have invested in building the organization ahead of plan, and we'll carry a full team from an earlier date. But we have deemed that risk to be outweighed by the benefit of being fully prepared since our primary focus is on optimizing the capture of market share as rapidly as possible.

Operating losses for the fourth quarter of 2018 were $9.5 million as compared to operating losses of $4.9 million in the fourth quarter of 2017. Cash, cash equivalents and short-term investments on the balance sheet were approximately $157.5 million as of December 31, 2018.

And now I will turn the call back over to Ray.

[Ray Cohen, Chief Executive Officer]

Okay, great. Thanks, Dan. So our Q4 revenue of approximately US$500,000 represents really an excellent start to the launch of the Axonics rechargeable Sacral Neuromodulation system in a handful of international sites in Canada, the United Kingdom and the Netherlands driven by a small four-person sales team. The early commercial feedback from physicians and patients in the aforementioned market has been very positive, underscoring our belief that the unique features of our system will drive measurable market share gains in these markets during 2019.

In the U.K., we are also benefiting from the NICE or NICE technology briefing which we noted on our Q3 call. Moreover, as of February 22 our product is the only Sacral Neuromodulation device in Europe with full-body MRI labeling, which is critical to avoid having the implanted neurostimulator explanted for patients that require an MRI scan to access -- to assess back pain or other health conditions they may have. Some physicians have referred to this feature as a game-changer.

Overall, our activity in Europe is off to a great start. Now this has continued in Q1 and we believe the rapid penetration into these three relatively small-size international markets is indicative of our potential to rapidly gain share in the U.S. upon FDA approval.

So, regarding our regulatory status in the United States, which of course is the number one topic for conversation with our shareholders. So I'm going to provide a number of very specific comments here to level set where we stand.

So as stated numerous times during our IPO roadshow and since getting FDA approval is the single most important objective for Axonics. We are continuing with the literature-based PMA path in order to obtain U.S. marketing approval in the shortest possible timeframe.

Since our last call in December, we've been working closely with the FDA. And based on a series of meetings and discussions, we have filed several supplements to our PMA which was originally submitted and accepted by the FDA on December 10 of 2018.

In early January, we submitted interim clinical data from the ARTISAN-SNM pivotal study. Then in February we filed the full 6-month data set from the ARTISAN-SNM study which confirmed and amplified the interim results.

In addition, following an early 2019 in-person meeting with our reviewers at the FDA, we also filed complete testing data to support full-body 1.5T MRI labeling for the implantable components of our rechargeable Sacral Neuromodulation system.

We are soon approaching the anticipated completion of the FDA's 90-day substantive review period. We have been recently informed that the FDA will not meet the March 10-date and anticipate feedback closer to the 1st week of April. At that time, the FDA will provide any questions they have from the review of the current PMA.

As I trust, anyone can gather from these activities our file is a hybrid PMA at this point. And based upon meetings and conversations with the FDA, we have decided to continue down this path in lieu of filing a separate additional PMA at this time. Therefore from a timing perspective, once we answer any remaining questions from the FDA from the April notification the clock would start on the second 90-day period in which -- 90-day FDA review period in which we would process and respond to any of the agency's questions and so forth.

So just to be clear April 1st or so, we get our response from the FDA. It will be official. It will be in writing. We review those responses. We take whether it's a day, a week, three weeks whatever it's going to be to answer those questions. We resubmit and then the second 90-day clock starts. In any case, the timing imply the earliest approval date that we would expect would be -- as Dan has already mentioned would be in the second half of 2019.

Now I want to point out that the current PMA covers all urinary indications. However we literally just filed a new PMA with the FDA to cover bowel dysfunction. And that was the date stamped at the FDA on March 4. Ideally this additional indication would be approved before the end of 2019 allowing us to market all Sacral Neuromodulation clinical indications during this -- during 2019. So that's where we stand from a regulatory standpoint.

Now we wanted to provide some more details with respect to the clinical results from the ARTISAN-SNM pivotal study. And certainly in advance we'll be talking more about our U.S. launch preparations. So I've asked Dr. Noblett if she wouldn't mind to provide some color with respect to the ARTISAN study.

So Karen I'll turn the call over to you.

[Karen Noblett, Chief Medical Officer]

Thanks, Ray. Certainly my pleasure to present the ARTISAN 6-month SNM data. So as you recall this was a 19-center, 129-patient IDE study conducted under an approved protocol on IDE from the FDA.

As the company announced on February 19 our clinical study demonstrated the patients implanted with the Axonics rechargeable Sacral Neuromodulation system received clinically meaningful and statistically significant improvements in urinary urgency incontinence symptoms as well as in quality of life.

The study met all its primary and secondary endpoints with 0 serious device-related adverse events observed or reported. Results were analyzed and reported for all implanted subjects. So this data is a true intent to treat population.

When we look at the demographics the mean age of our cohort was 59 years ranging from 21 to 86 years. 127 of the subjects were female. At the time of enrollment subjects had the primary diagnosis of urinary urgency incontinence for nearly seven years.

Interestingly 42 patients or almost one-third of the cohort were identified as suffering from fecal incontinence in addition to their urinary urgency incontinence symptoms. The presence of fecal incontinence was determined by the validated Cleveland Clinic Florida questionnaire, Fecal Incontinence Score.

So when we look at efficacy results at six months, 90% or 116 of the 129 patients of all implanted subjects were therapy responders having further improved from one and three months, whereby approximately 88% were therapy responders.

In terms of magnitude of response on average patients had 5.6 urinary urgency incontinence episodes per day, which was reduced down to 1.5 per day at three months and further reduced to 1.3 per day at six months. This was statistically significant with a p-value of less than 0.0001.

At six months, 80.2% of subjects or 93 of the 116 experienced greater than or equal to 75% reduction in urgency weeks showing marked improvement at symptom reduction. Further, 50% or 58 of the 116 had greater than or equal to 90% symptom reduction of which approximately 34% of subjects were completely dry which is a significant change in their day-to-day life -- excuse me their day-to-day quality of life for patients. Overall, 93% of patients reported being satisfied with the therapy.

Just as a frame of reference, the best Medtronic, InterStim II study which was the InSite trial where I was one of the primary investigators reported a 71% success rate in urinary urgency incontinence in 202 implanted subjects. If we were to compare this on a like-to-like basis, this compares to a 95% urinary urgency incontinence success rate on 129 subjects in the Axonics study. It's worth mentioning that due to certain disclosures in the Axonics IPO prospectus that there was a fair amount of speculation about what the FDA's study considerations actually meant.

Our view is that the submitted clinical study report to the FDA provided real-life data to justify the use of the three-day bladder diary, justification for inclusion of mixed urinary incontinence population and justification for use of a six-month endpoint. In conclusion, the ARTISAN-SNM study demonstrated that the Axonics Sacral Neuromodulation system provides significant clinical benefit to patients as an aid and a treatment of the symptoms of urinary urgency incontinence. This conclusion is supported by statistical significance of all secondary endpoints, which included disease-specific and quality-of-life-related measures. Overall, these results were highly encouraging and consistent with our prior clinical data.

And with that, I will turn the call back over to Ray.

[Ray Cohen, Chief Executive Officer]

Thank you, Karen. Since the IPO in November, we've made really excellent progress in achieving commercial readiness in order to hit the ground with velocity in the U.S. market. As previously discussed, we are focused on building an exceptionally talented sales organization. The process was focused first on attracting experienced sales managers, followed by sales representatives and ultimately clinical specialists. And as I believe, it's all about coming from the top I've been personally involved in interviewing every single individual who has joined our team.

We've completed our sales management hiring now and have 11 regional sales managers. These sales managers have assisted with hiring of 60 well-qualified sales professionals and 15 clinical specialists spread across the U.S. based strategically in locations where current high volume implanters are practicing. So just to repeat those numbers. As of today, we have 11 sales managers, 60 sales professionals and 15 clinical specialists who are employed by our company.

We completed our first training course in January and our next course is beginning on March 11. The energy engagement and overall talent level has been truly impressive. We continue to have the luxury -- or we continue to have the luxury of picking and choosing amongst high-caliber sales professionals and have not paid one single dollar in recruiting fees to date.

So the words out in the industry, if you are a high-caliber performer with experience in neuromodulation or urology and you wish to work for a company run by experienced people Axonics is the place to work. People understand that we have a long-lived highly differentiated product, which has the potential to substantially grow in Sacral Neuromodulation market well beyond the current revenue level. And from a cultural standpoint, Axonics is about operating with integrity and clarity of purpose.

In terms of the overall U.S. sales build, we are well on our way to meeting our goal of having between 60 and 100 field salespeople and a few dozen clinical specialists hired and fully trained prior to the summer of 2019. We will continue to build out this team as we approach the potential approval from the FDA putting us in a really good position to execute our launch plan fully staffed as the approval were to come before our initial production.

Outside of the sales organization as Dan covered in his remarks, we are also ramping up inventory and enhancing manufacturing and product assurance capabilities to support our goal of being the market leader in Sacral Neuromodulation.

Lastly, yesterday we announced the addition of Mike Carrel, President and CEO of AtriCure, to our Board of Directors. Mike is a high integrity person and a great leader. He will add valuable commercial experience at the Board level. And our Board will continue to evolve in this direction as we approach our first annual public shareholders' meeting which is slated for August 2019.

So, in closing, I believe we're making excellent progress on our strategic initiatives. We're excited about the future prospects for Axonics and we're working diligently every day to fulfill our vision.

So, at this point I'm happy to take some time with my colleagues here to answer any questions that people may have. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from David Lewis with Morgan Stanley. Your line is now open.

[Varun Kuchibhatla, Morgan Stanley]

Hi. This is Varun on for David. Thank you so much for taking the question. I just wanted to start out really quickly on the U.S. commercial sales force hiring. You indicated that you're basically very ahead of schedule. Could you just update us on where that number sits relative to the number you feel you need for launch and how we should expect to see that ramp throughout the year?

[Ray Cohen, Chief Executive Officer]

Yeah. Hi, Varun. So, the answer is that we're at 60 salespeople, 11 sales managers, 15 clinical specialists as of Monday, March 11, right when we start a second training program. Our goal is, we'd like to have as many as 100 salespeople ready to go and train and be prepared to go out and sell the product at the U.S. launch. However, it's really not about quantity. It's about quality. So far, we've been able to have really only first round draft choices and we'll continue to move in that direction.

But anywhere between 60 and 100 would be the number in terms of sales professionals. We're done with hiring for sales managers at this point. And we will continue to add clinical specialists in advance of launch and then obviously as volume increases during the period from when we launch the product in the U.S. and going forward.

[Varun Kuchibhatla, Morgan Stanley]

Thank you. That's very clear. And then last question and I'll jump back into the queue. So, ex-U.S. results and traction looked particularly strong this quarter. Just I was wondering if you could talk to us about how we should think about that going forward. Maybe some color on what you're expecting from some of your key markets or sales force expansion ex-U.S.? Thank you.

[Ray Cohen, Chief Executive Officer]

Sure. Varun, thanks. Yeah, appreciate the question. As we stated many times certainly to our shareholders and on the IP road-show, our intention is not to significantly expand our staff outside the United States, given the weighting of the U.S. volume versus O-U.S. volume in terms of the overall impact on Sacral Neuromodulation market. We have four salespeople today. We're adding a fifth person. We're going to focus on those three key markets that I've mentioned on the call.

What I can tell you is that sales continue to move in a very positive direction. And more importantly -- I don't know if it's more importantly, but anyway moreover, what we have seen is that the penetration of the number of procedures in any given account is higher than our expectation. So, what does that mean? What it means is that when physicians get their hands on our product, they find it easy to use, easy to implant and their patients are doing really well as you've seen from our clinical study results. So our results are real-world results.

This is not some one-off based on a controlled study. This is happening. And it's happening in Europe and it's happening in every center that we're working with, so far so good. We think that -- that was our first commercial quarter in the history of our company. And it's not an unrespectable result. And we are very optimistic that we will continue to see increases in revenue in Europe during 2019 particularly now that we're the only player with full-body MRI compatibility.

[Varun Kuchibhatla, Morgan Stanley]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from Bruce Nudell of SunTrust. Your line is now open.

[Tyler Knisley, SunTrust]

This is Tyler on for Bruce. Thanks for taking the question. Can you expand a little bit on the PMA filings for bowel dysfunction? And then you mentioned that about one-third of the r-SNM patients also had fecal incontinence diagnosis. Will you be able to use some of that data? Or will a new clinical study need to be run?

[Ray Cohen, Chief Executive Officer]

Thanks for the question. So two comments. One is we filed a literature-based PMA for the expansion of fecal incontinence. We do not anticipate the need to have to run a clinical study to be able to get this expansion in labeling. And the fact that we have -- I think it was 42% of the patients or -- Karen was it 42% or 42 patients remind me.

[Karen Noblett, Chief Medical Officer]

42 patients 32% yes. Almost exactly one-third, yes.

[Ray Cohen, Chief Executive Officer]

Thank you. Okay. So we'll say it that way, one-third of the patients having fecal incontinence. This was not the intent of the study. It just so happens. And this is fairly consistent with clinical literature that patients with urinary incontinence also have fecal incontinence. And this is just part of the patient profile that we're going after. So we observed it. We measured it. But that's about as far as we're going to go with respect to that clinical data.

[Tyler Knisley, SunTrust]

Okay great. And then for the full-body MRI data you submitted for a 1.5T with the FDA. Are there any plans of pursuing 3T conditioning label? And is that a necessary path to pursue?

[Ray Cohen, Chief Executive Officer]

So I would tell you that the predominant market share of the United States is for 1.5T MRI scanners. We will pursue the 3T labeling as well. It's just that there is more testing that is required to be able to have that particular claim. And there is a very limited number of sites in the United States that even have the capability to do the testing. But that is something that we will continue to pursue.

[Tyler Knisley, SunTrust]

Okay. Thank you for taking the questions.

[Ray Cohen, Chief Executive Officer]

My pleasure, thank you.

[Operator]

[Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Ray Cohen for any further remarks.

[Ray Cohen, Chief Executive Officer]

Okay. Thank you, operator. No I think this has been a very productive call. We appreciate everybody's continued interest in Axonics and we will look forward to providing continual updates to the market about our status. So thank you so much for joining the call this evening and I wish everybody a good night.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.