AXONICS, INC. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto, and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 , as filed with theSEC onMarch 1, 2023 .
Overview
We are a global medical technology company that is developing and commercializing novel products for adults with bladder and bowel dysfunction, including: (i) implantable rechargeable sacral neuromodulation (SNM) systems to treat urinary urge incontinence (UUI) and urinary urgency frequency (UUF), together referred to as overactive bladder (OAB), as well as fecal incontinence (FI), and non-obstructive urinary retention (UR); and (ii) a urethral bulking agent (Bulkamid) to treat female stress urinary incontinence (SUI).
SNM Systems
Our newly developed rechargeable SNM system, Axonics R20, is designed to last 20 or more years in the human body and is only 5cc in volume. R20 provides constant current stimulation and offers broad MRI access with 1.5T and 3.0T scanners. R20 utilizes an easy-to-use, intuitive patient remote control and requires recharging for only one hour every 6 to 10 months, which is the longest interval between recharging among rechargeable SNM systems. The R20 replaces the previous rechargeable SNM system offered byAxonics that was the first to be marketed worldwide. Our recharge-free SNM system, Axonics F15, utilizes a primary cell battery with an expected life of 15 years at typical stimulation parameters and over 20 years at lower amplitude settings. The recharge-free implantable neurostimulator (INS) is approximately 10cc in volume, utilizes constant current stimulation, a recharge-free patient remote control and offers broad MRI access. We beganU.S. commercialization in the middle of the fourth quarter of 2019 after receiving premarket approval (PMA) of our first rechargeable SNM system by the FDA. We also have marketing approvals from regulators inEurope ,Canada , andAustralia for all relevant clinical indications. SNM therapy has been commercially available inthe United States for over 20 years and has been clinically proven to provide a safe, effective, reversible, and long-lasting symptom relief. We believe that our SNM systems offer therapeutic benefits and competitive advantages compared to the InterStim SNM systems offered by Medtronic. We engineered our SNM systems to deliver constant-current stimulation, which automatically adjusts stimulation based on changes to impedance that occur as the implanted lead scars into the body, which we believe provides a more consistent therapy over time and reduces management of the therapy. Our SNM systems include an 24
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easy-to-use wireless patient remote control that does not require recharging or replacement batteries. We also designed and custom built a clinician programmer that guides the implanting physician through lead placement and stimulation programming. We continue to invest in research and development activities to expand our suite of products for SNM therapy. InMarch 2022 , we received FDA approval for the Axonics F15, a long-term, recharge-free SNM system. InJanuary 2023 , we received FDA approval for the Axonics R20, our fourth-generation rechargeable SNM system.
We focus most of our sales and marketing efforts in
Urethral Bulking Agent
On
SUI is a common condition that afflicts women of all ages, with childbirth as one of the main contributing factors. SUI is caused by weakness in the pelvic floor, preventing the urethra from closing fully when sudden pressure is put on the bladder. This can allow urine to leak out during normal daily activities such as coughing, laughing, exercising, or lifting an object. Bulkamid received a Conformité Européenne (CE) Mark in 2003 and a PMA from the FDA in 2020 and is sold through a combination of a direct sales force inthe United States ,Germany ,United Kingdom , and the Nordic countries and distributors in certain international markets. As a next-generation bulking agent, we believe Bulkamid addresses the shortcomings of legacy particulate-based bulking agents. It is a unique and patented non-particulate hydrogel that is injected into the urethral wall to restore the natural closing pressure of the urethra. It is a simple, quick, and easy-to-learn and perform procedure that can be performed in either a physician's office or an outpatient facility. Bulkamid is biocompatible, consisting of 97.5% water, and does not induce a chronic inflammatory response. Bulkamid's bulking effect is aided by the volume of each injection being predictable, controllable, and precise. Bulkamid retains its bulking characteristics for a number of years, thereby maintaining efficacy and providing women with long lasting relief of their SUI symptoms. Bulkamid is clinically validated and generates high rates of patient satisfaction.
Our Markets
The market for SNM therapy is large and growing, with approximately 19 million women inthe United States having moderate to severe UUI or mixed urinary incontinence (MUI) symptoms, which is urinary incontinence related to both urgency and stress. Before treating patients with a third-line therapy such as SNM, physicians are required to prescribe first- and second-line therapies. First-line therapies include behavioral changes such as diet and exercise, and second-line therapies include drug therapy. We believe the SNM market will continue to expand for the foreseeable future driven by increased awareness and education of SNM therapy, greater expectations for quality of life, and improved patient attitudes toward receiving medical attention. In addition, market growth is anticipated due to continued innovation and the introduction of new efficacious and long-lived products for SNM therapy. We believe that this represents a compelling opportunity for our SNM systems to capture market share and grow the market for SNM therapy. The market for SUI therapy is highly underpenetrated, with approximately 22 million women inthe United States having moderate to severe SUI or MUI symptoms. The first-line treatment options for SUI begin with lifestyle changes and continence pessaries. SUI lacks pharmacologic treatments, with patients next advancing to urethral bulking agents, pelvic floor sling surgery or colposuspension. We estimate that less than half of these women have sought medical treatment, most of whom were offered conservative therapy or opted for no treatment due to a lack of non-invasive treatment options with high efficacy. While we anticipate expanding into other geographic regions over time, we are primarily focusing on marketing our products inthe United States andEurope due to the large overall market size. 25
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Inthe United States , the cost required to treat each patient is reimbursed through various third-party payors, such as commercial payors and government agencies. Most large insurers have established coverage policies in place to cover SNM therapy. Certain commercial payors have a patient-by-patient prior authorization process that must be followed before they will provide reimbursement for SNM therapy. Outsidethe United States , reimbursement levels vary significantly by country and by region, particularly based on whether the country or region at issue maintains a single-payor system. SNM therapy is eligible for reimbursement inCanada ,Australia and certain countries inEurope . Annual healthcare budgets generally determine the number of SNM systems that will be paid for by the payor in these single-payor system countries and regions. Reimbursement is obtained from a variety of sources, including government-sponsored and private health insurance plans, and combinations of both. Some countries or regions may require us to gather additional clinical data before granting coverage and reimbursement for our SNM systems. We are currently engaged in the manufacturing of a number of processes of our SNM systems and outsource the manufacture of certain implantable components of our SNM systems with contract manufacturers who all have quality systems established that meet FDA requirements and are all recognized in their field for their competency to manufacture the respective portions of our SNM systems. We believe the manufacturers we currently utilize have sufficient capacity to meet our requirements and are able to scale up their capacity relatively quickly with limited capital investment. Prior to obtaining our initial FDA approval, we devoted substantially all of our resources to research and development activities related to our rechargeable SNM system, including clinical and regulatory initiatives to obtain marketing approvals. We spend a significant amount of our resources on sales and marketing activities to commercialize and market our line of SNM systems inthe United States . We incurred net losses of$9.2 million and$22.7 million for the three months endedMarch 31, 2023 and 2022, respectively, and had an accumulated deficit of$383.5 million as ofMarch 31, 2023 compared to$374.3 million atDecember 31, 2022 . As ofMarch 31, 2023 , we had available cash, cash equivalents, and short-term investments of approximately$357.1 million , current liabilities of approximately$66.2 million , and long-term liabilities of approximately$22.9 million .
OnAugust 5, 2022 , we completed a follow-on offering by issuing 2,012,500 shares of common stock, at an offering price of$63.85 per share. The gross proceeds to us from this follow-on offering were$128.5 million and the net proceeds were approximately$128.3 million , after deducting offering expenses payable by us. 26
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Components of Our Results of Operations
Net Revenue
Revenue during the three months endedMarch 31, 2023 and 2022 are as follows (in thousands): Three Months Ended March 31, 2023 2022 SNM net revenue United States$ 53,853 $ 37,715 International markets 1,305 1,355$ 55,158 $ 39,070 Bulkamid net revenue United States$ 11,613 $ 6,569 International markets 3,879 2,781$ 15,492 $ 9,350 Total net revenue$ 70,650 $ 48,420 We expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonality. For example, the industry generally experiences lower revenues in the first and third quarters of the year and higher revenues in the fourth quarter. Our revenue has been impacted by these industry trends.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of costs of the components of our SNM systems, third-party contract labor costs, overhead costs, Bulkamid product costs, as well as distribution-related expenses such as logistics and shipping costs. The overhead costs include the cost of material procurement and operations supervision and management personnel. We expect overhead costs as a percentage of revenue to decrease as our sales volume increases. Cost of goods sold also include other expenses such as scrap and inventory obsolescence. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows. We expect gross margin to vary based on manufacturing costs, regional differences in pricing, and discounts negotiated by customers. We calculate gross margin as gross profit divided by revenue. We expect future gross margin will be affected by a variety of factors, including manufacturing costs, the average selling price of our products, the implementation of cost-reduction strategies, inventory obsolescence costs, which may occur when new generations of our SNM systems are introduced, and to a lesser extent, the sales mix betweenthe United States and international markets as our average selling price inthe United States is expected to be higher than in international markets and foreign currency exchange rates. Our gross margin may increase over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs. Additionally, our gross margin may fluctuate from quarter to quarter as we continue to introduce new products and adopt new manufacturing processes and technologies.
Research and Development Expenses
Research and development expenses consist primarily of employee compensation,
including stock-based compensation, product development, including testing and
engineering, royalty expense, and clinical studies to develop and support our
SNM systems, including clinical study and registry management and monitoring,
payments to clinical investigators, and data management. Other research and
development expenses include consulting and advisory fees, royalty expense,
travel expenses, and equipment-related expenses and other miscellaneous office
and facilities expenses related to research and development programs. Research
and development costs are expensed as incurred. We expect to continue incurring
research and development expenses in the future as we develop new products and
expand to new markets. We expect research and development expenses as a
percentage of revenue to vary over time depending on the level and timing of
initiating new product development efforts and new clinical development
activities.
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The following table summarizes our research and development expenses by functional area for the three months endedMarch 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Personnel related$ 5,606 $ 5,137 Clinical development 134 268 Contract R&D and manufacturing 1,727 3,956 Royalty expense 307 1,555 Other R&D expenses 282 320 Total R&D expenses$ 8,056 $ 11,236
General and Administrative Expenses
General and administrative expenses consist primarily of employee compensation, including stock-based compensation, and spending related to finance, information technology, human resource functions, consulting, legal, and professional service fees. Other general and administrative expenses include director and officer insurance premiums, investor relations costs, office-related expenses, facilities and equipment rentals, bad debt expense, travel expenses, and impairment expenses. We expect our general and administrative expenses will significantly increase in absolute dollars as we increase our headcount and expand administrative personnel to support our growth and operations. Additionally, we anticipate increased legal expenses associated with our patent infringement litigation with Medtronic. We expect general and administrative expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows. Sales and Marketing Expenses Sales and marketing expenses consist primarily of employee compensation, including sales personnel commissions and stock-based compensation, direct-to-consumer advertising programs, trade shows, booth exhibition costs, and the related travel for these events. Other sales and marketing expenses include consulting and advisory fees. We expect sales and marketing expenses to continue to increase in absolute dollars as we continue to expand our commercial infrastructure to both drive and support our expected growth in revenue. However, we expect sales and marketing expenses to decrease as a percentage of revenue in the long term primarily as, and to the extent, our revenue grows.
Amortization of Intangible Assets
Amortization of intangible assets consist primarily of amortization expense on patent license asset, manufacturing license asset, technology, and customer relationships intangible assets. We amortize finite lived intangible assets over the period of estimated benefit using the straight-line method.
Acquisition-Related Costs
Acquisition-related costs consist of expenses incurred and changes in contingent consideration related to the Contura acquisition.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest and accretion income earned on cash equivalents and short-term investments, gains and losses on foreign currency transactions, net of interest expense payable under the Loan and Security Agreement withSilicon Valley Bank and other debt arrangements.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily consists of losses benefited in certain
foreign jurisdictions. We maintain a full valuation allowance for deferred tax
assets in our domestic operations, including net operating loss carryforwards
and research and development credits.
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Results of Operations
The following table shows our results of operations for the three months ended
Three Months Ended Period to Period
March 31, Change
2023 2022
Net revenue $ 70,650 $ 48,420 $ 22,230
Cost of goods sold 18,150 15,178 2,972
Gross profit 52,500 33,242 19,258
Gross Margin 74.3 % 68.7 %
Operating expenses
Research and development 8,056 11,236 (3,180)
General and administrative 12,168 10,013 2,155
Sales and marketing 42,654 33,063 9,591
Amortization of intangible assets 2,222 2,463 (241)
Acquisition-related costs 1,766 - 1,766
Total operating expenses 66,866 56,775 10,091
Loss from operations (14,366) (23,533) 9,167
Other income (expense)
Interest and other income 3,628 43 3,585
Interest and other expense 683 (289) 972
Other income (expense), net 4,311 (246) 4,557
Loss before income tax benefit (10,055) (23,779) 13,724
Income tax benefit (807) (1,111) 304
Net loss (9,248) (22,668) 13,420
Foreign currency translation adjustment 3,071 (4,920) 7,991
Comprehensive loss $ (6,177) $ (27,588) $ 21,411 Comparison of the Three Months Ended
Net Revenue
Net revenue was$70.7 million for the three months endedMarch 31, 2023 , an increase of$22.2 million , or 45.9%, compared to$48.4 million for the three months endedMarch 31, 2022 . Net revenue is primarily derived from the sale of our products to customers inthe United States and certain international markets. The increase in net revenue is primarily due to increased sales of our products as we expanded our customer base in theU.S. and increased sales with our existing customer base. Our expanded product offering of the fourth-generation rechargeable SNM system inJanuary 2023 , recharge-free SNM system inMarch 2022 and the acquisition of the Bulkamid product inFebruary 2021 have also contributed to our expansion of customers and more patients being treated with our existing customers.
Cost of Goods Sold and Gross Margin
We incurred$18.2 million of cost of goods sold for the three months endedMarch 31, 2023 . We incurred$15.2 million of cost of goods sold for the three months endedMarch 31, 2022 . Gross margin was 74.3% in the three months endedMarch 31, 2023 , compared to 68.7% for the three months endedMarch 31, 2022 . The increase in gross margin is primarily due to higher sales volumes and product mix, partially offset by increased inventory production costs related to our recharge-free SNM system following its commercial launch inMarch 2022 . 29
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Research and Development Expenses
Research and development expenses decreased$3.2 million , or 28.3%, to$8.1 million in the three months endedMarch 31, 2023 , compared to$11.2 million in the three months endedMarch 31, 2022 . The decrease in research and development expenses was primarily attributable to a decrease of$2.2 million in contract R&D and manufacturing costs following FDA approvals of the fourth-generation rechargeable SNM system inJanuary 2023 and recharge-free SNM system inMarch 2022 , and a decrease of$1.2 million in royalty expense due to lower net revenue derived from the AMF Licensed Products.
General and Administrative Expenses
General and administrative expenses increased$2.2 million , or 21.5%, to$12.2 million in the three months endedMarch 31, 2023 , compared to$10.0 million in the three months endedMarch 31, 2022 , primarily as a result of an increase of$2.0 million in personnel costs including salaries and wages, stock-based compensation and other employee-related benefits.
Sales and Marketing Expenses
Sales and marketing expenses increased$9.6 million , or 29.0%, to$42.7 million in the three months endedMarch 31, 2023 , compared to$33.1 million in the three months endedMarch 31, 2022 . The increase in sales and marketing expenses was attributed to an increase of$7.7 million related to personnel costs including salaries, wages, sales personnel commissions, stock-based compensation and other employee-related benefits, an increase of$1.2 million related to facilities equipment, an increase of$1.1 million related to advertising expenses, partially offset by a decrease of$0.5 related to travel and expense fees.
Amortization of Intangible Assets
Amortization of intangible assets was$2.2 million in the three months endedMarch 31, 2023 , compared to$2.5 million in the three months endedMarch 31, 2022 . Amortization of intangible assets consisted primarily of technology and customer relationships acquired related to the Contura acquisition.
Acquisition-Related Costs
Acquisition-related costs were
Other Income (Expense), Net
Other income, net was
Income Tax Benefit
Income tax benefit was$0.8 million for the three months endedMarch 31, 2023 primarily related to losses in certain foreign jurisdictions. Income tax benefit was$1.1 million for the three months endedMarch 31, 2022 primarily related to losses in certain foreign jurisdictions.
Liquidity and Capital Resources
We only began full-scale commercialization of our rechargeable SNM system in late 2019. We have expended significant resources on research and development activities, growing our operations organization and building and training our sales organization. We incurred net losses of$9.2 million and$22.7 million for the three months endedMarch 31, 2023 and 2022, respectively, and had an accumulated deficit of$383.5 million as ofMarch 31, 2023 compared to$374.3 million atDecember 31, 2022 . We expect to continue to spend a significant amount of our existing resources on sales and marketing activities as we continue to commercialize and market our products inthe United States and internationally.
As of
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compared to$357.2 million atDecember 31, 2022 . We expect that our cash, cash equivalents, and short-term investments on hand will be sufficient to fund our operations through at least the next 12 months. We fund our operations through a combination of proceeds from public offerings of our common stock and cash receipts from sales of our products. As ofMarch 31, 2023 , we had no outstanding borrowings. Beyond the next 12 months, our cash requirements will depend primarily on the amount of continued cash receipts from sales of our products, as well as our ability to develop or acquire new products, enter new markets, and compete effectively. We cannot accurately predict our long-term cash requirements at this time. We may need to raise additional financing in the future to facilitate our business operations. If we raise additional funds by issuing equity securities, our stockholders could experience dilution. Debt financing, if available, may involve covenants further restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing when needed to satisfy our liquidity requirements, we may be required to scale back our operations.
Contractual Obligations and Cash Requirements
There have been no material changes to our contractual obligations or material cash requirements from those described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 .
Cash Flows
The following table presents a summary of our cash flow for the periods
indicated (in thousands):
Three Months Ended
March 31,
2023 2022Net cash provided by (used in)
Operating activities$ (781) $ (9,167) Investing activities 694 (291) Financing activities 1,930 1,444
Effect of exchange rate changes on cash and cash equivalents (584)
316
Net increase (decrease) in cash and cash equivalents$ 1,259
Net cash used in operating activities
Net cash used in operating activities was$0.8 million for the three months endedMarch 31, 2023 and consisted primarily of a net loss of$9.2 million and a decrease from changes in net operating assets of$5.7 million , partially offset by non-cash charges of$14.1 million . Net operating assets consisted primarily of inventory and accounts receivable due to the commercial growth inthe United States . Non-cash charges consisted primarily of stock-based compensation. Net cash used in operating activities was$9.2 million for the three months endedMarch 31, 2022 and consisted primarily of a net loss of$22.7 million , partially offset by non-cash charges of$8.9 million and an increase from changes in net operating assets of$4.6 million . Net operating assets consisted primarily of inventory and accounts receivable due to the commercial growth of our r-SNM System inthe United States and the addition of Bulkamid sales. Non-cash charges consisted primarily of stock-based compensation and depreciation and amortization.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was
Net cash used in investing activities was
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Net cash provided by financing activities
Net cash provided by financing activities was$1.9 million for the three months endedMarch 31, 2023 and consisted primarily of proceeds from exercise of stock options.
Net cash provided by financing activities was
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 , as filed with theSEC onMarch 1, 2023 . We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three months endedMarch 31, 2023 .
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a significant impact on our unaudited condensed consolidated financial statements or do not otherwise apply to our operations.
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