Good day and thank you for standing by. Welcome to Axonics Q3 2022 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Neil Bhalodkar. Please go ahead..

Thank you. Good afternoon and thank you for joining Axonics' third quarter 2022 results and update call. Presenting on today's call are Raymond Cohen, Chief Executive Officer; and Dan Dearen, President and Chief Financial Officer.

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 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, October 31, 2022.

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. With that, I'd like to now turn the call over to Ray..

Thanks, Neil. I'd like to welcome everyone joining this call this afternoon. And before I begin with my remarks, I want to note 2 really notable events that is today on October 31, Halloween, is exactly 4 years since the date of our initial public offering. So it's kind of a big day for us today with our 4-year anniversary.

And moreover, on November 1 which would be tomorrow, was the date of our first U.S. implant of a sacral neuromodulation device in America. So October 31, November 1, these are dates that they really resonate with us at Axonics. So getting on to the business at hand.

We're really proud of our third quarter 2022 financial results, in which Axonics generated record total revenue of $70.4 million. This is now the second quarter in a row in which our total revenue has grown over -- or grown by over 50% year-over-year and demonstrates the growing demand for Axonics' best-in-class incontinence products.

More specific, sacral neuromodulation revenue was $56.9 million, representing an increase of 42% on compared to the same period of last year. This record level of sacral neuromodulation revenue is being driven by a combination of market expansion and continued share capture from the incumbent. The broad U.S.

commercial launch of our recharge-free SNM system as we've dubbed the Axonics F15 has been very well received by implanting physicians and continues to exceed even our own high expectations. Now, turning to Bulkamid. Revenue in the third quarter was $13.5 million, including $11 million which was generated in the United States.

Record results were driven by solid reorder rates from existing accounts and the onboarding of new accounts. We expect approximately 50,000 women will have their stress urinary incontinence symptoms treated with Bulkamid worldwide during calendar year 2022.

We're humbled by this result and believe we are still scratching the surface of what is possible in this large and highly underserved and undertreated female stress urinary incontinence market.

Based on this past quarter’s strong results, we are raising our fiscal year 2022 total company revenue guidance to $262 million which represents an increase of 45% compared to 2021. Now I’m going to provide some additional business updates prior to the Q&A session.

However, I’d like to turn the call over to Dan for his detailed review of third quarter financial results. So Dan, take it away..

total company revenue of $262 million, an increase of $9 million compared to prior guidance. This represents an overall revenue increase of 45% compared to fiscal year 2021.

We now anticipate sacral neuromodulation revenue of $212 million, an increase of 35% compared to fiscal year 2021 and Bulkamid revenue of $50 million, an increase of 120% compared to fiscal year 2021. I will now turn the call back over to Ray for additional remarks..

Thank you, Dan. So I would now like to provide a few updates on commercial, regulatory, manufacturing and product development initiatives. As most of you know, in April of this year, we commenced the broad U.S. commercial launch of the long-standing or long-lived, I should say, recharge-free Axonics F15 sacral neuromodulation system.

Physician response to the introduction of the F15 continues to be overwhelmingly positive. We are enjoying the benefits of having a complete sacral neuromodulation portfolio and are capturing a higher share of wallet in existing accounts and selling our SNM products into what were previously competitive accounts.

We now have 330 field-based personnel on the U.S. commercial team, of which 160 are directly involved in selling or sales management with the balance of personnel being clinical specialists. We are well staffed at this time and expect only a modest increase in commercial headcount into 2023.

The Axonics Find Real Relief direct-to-consumer advertising campaign continues to progress well. As a reminder, the advertisements are on national television, Facebook, digital radio and various websites. They encourage adults with urinary incontinent symptoms to visit findrealrelief.com, our patient-facing landing page.

The website provides information about Axonics' incontinence solutions and direct individuals to complete a short symptom quiz. The campaign underscores our commitment to a population, primarily female, that for too long, has gone underserved and undertreated due to a lack of awareness of advanced therapies.

Now many of our customers have told us that patients have come into their practices asking about Axonics therapy after seeing our ads on television or online.

The campaign continues to generate goodwill with our physician customers as they are grateful that we are helping ensure adults with these conditions are being seen by a clinician and advancing along the care pathway. In the third quarter alone, we had over 429,000 unique individuals visit our website to learn about Axonics therapy.

And since launching the campaign in April, the number of unique web visitors now totals 829,000. Qualified leads are those individuals that complete a symptom survey on the website. And in the third quarter, there were approximately 33,000 qualified leads. And since launching in April, our campaign has generated over 57,000 qualified leads.

Now our call center continues to work diligently to connect qualified leads with a specialist physician in the local community or their local community depending on where the person is responding from. So now turning to product development initiatives.

In late Q2, we submitted a PMA supplement to the FDA for our fourth-generation rechargeable neurostimulator. You may recall that this device utilizes the same small 5CC form factor as our current rechargeable device.

The fourth-generation rechargeable neurostimulator requires recharging just once every 6 months for 1 hour and has an expected useful life in the body of at least 20 years. Now in August, we participated in what we call a 90-day substantive review meeting with the FDA.

The review clock stopped for a few weeks while we prepared our responses to standard questions from the FDA that they had on our submission. As a result, we expect the fourth-generation rechargeable neurostimulator be approved in January with a limited commercial launch to customers in Q1 2023.

Now turning to respect -- or with respect to manufacturing and operations, we're in the process of doubling our manufacturing footprint in Irvine, California. We are investing in personnel and CapEx to ensure that we can fulfill demand for our products in 2023 and beyond.

Now in closing, I want to say that we remain grateful for the trust physicians, patients and shareholders have placed in Axonics. As always, I would like to thank our team in the field and our colleagues in Irvine for their diligent efforts and dedication to fulfilling the Axonics mission of improving the lives of adults with incontinence.

With hard work and a keen focus on quality, generating strong clinical outcomes and providing best-in-class support to physicians and their patients, Axonics is making significant progress on its path to market leadership. Now that concludes our prepared remarks and I'd like to turn the call back over to Neil..

Thanks, Ray. At this time, we are ready to move to the Q&A session. [Operator Instructions] Amy, please begin the Q&A session..

[Operator Instructions] And our first question comes from Adam Maeder with Piper Sandler..

Congrats on a great quarter. I wanted to start with the guidance update. And by my math, the Q4 implied guidance implies something like $74 million and change. That’s up about 5% sequentially quarter-over-quarter. You had a double-digit step-up sequentially in Q4 of last year.

So maybe just walk us through some of the puts and takes to kind of arrive at that figure? Is there some conservatism baked into the guidance raise? And then just any early commentary in the business for the month of October?.

Sure. And thanks, Adam. I appreciate the questions. So look, we've increased the guidance for the full year, a bit more than the beat of course. And the $74.2 million, if you do the math, turns out to be $60.3 million in SNM and $13.9 million in Bulkamid. Now the $13.9 million is unchanged from the consensus going into the quarter.

The $60.3 million is up $1 million over what the consensus was. So as always, we try to be a bit conservative in terms of the guidance. And we'll do our best to exceed those. But this is -- as you've seen, this is a really strong year for us. And we beat these numbers and we've increased the guidance every single quarter now during 2023.

So things are looking good. We've got good momentum in the business and not much more to add from there..

Okay, understood. That's helpful. And then for the follow-up, just wanted to ask about direct-to-consumer.

And maybe just remind us kind of the expectation for full year spend in 2022 from DTC initiatives? And then I know it's not quite 2023 yet but just talk about the game plan or the strategy and budget really for DTC spending in 2023? And just any other OpEx spend color you want to add at this point in time..

Yes. Thanks, Adam. So look, the DTC campaign has worked better than we could have expected. I think that's a fair way to put it. I mean, these -- the responses are quite amazing. And we're running about 7% -- for the unique visitors, 7% of them are filling out symptom surveys. That's the number that really matters.

I mean, it's great to have 830,000 people visit the website, learn about Axonics and obviously, that number is going to be well over 1 million clearly by the end of the year.

But it's the people who are filling out the survey who identify themselves, give us their information and that we can call those individuals and then get them placed with a local physician. That's really the key. So this has worked extremely well and a great halo effect for the company and actionable for the physicians.

Obviously, some are better than others, right and calling out to people to get them in the -- get them in their calendars and so forth. But nevertheless, we're going to continue. We've -- based on these results that we've seen since April of this year, we're going to continue with the campaign. We're going to continue into 2023 with the campaign.

And the numbers that we provided was around a $20 million, $24 million spend with respect to our DTC efforts and that's kind of an all-in cost. It's not just the advertising itself but it's the logistics and the back-end work to reach out and call people and so forth.

So in terms of a plug for 2023, I would anticipate a very similar number for the year. And I think that has covered your questions, Adam. So, thank you for that..

[Operator Instructions] And our next question comes from the line of Chris Pasquale with Nephron Research..

Congrats on another strong quarter, guys. Dan, you mentioned some challenges in the supply chain.

Just curious whether you felt like you had any issues meeting demand in the quarter or whether there are any other macro factors that you felt were a bit of a headwind in 3Q?.

Good question, Chris. No, no issue meeting demand just because of supply chain constraints, we feel it's prudent to mention it and to not just ignore it and make it look like we're somehow not aware of these issues.

So we continue to use our balance sheet to buy a way around it, place large purchase orders and we're working hard to build inventory and safety stock but some of these supply chain issues are preventing us from going as fast as we want. But we want no issue meeting demand..

Okay, that's helpful. And then, Ray, Bulkamid had another nice result. You talked about only scratching the surface despite being on track for $50 million in sales this year.

How are you thinking about the potential for that product now? And what do you need to do to realize that potential? Should we expect more dedicated sales resources or product iterations? Any color there would be helpful..

Sure. Thanks, Chris. So look, I think that right now, with respect to Bulkamid, it's really just blocking and tackling. We don't need to do anything fancy at this point. I mean the number of customers that we have now just focusing on the United States because the international business is very mature.

It's pretty stable at a relatively modest line in the countries that we sell internationally but here in the U.S. is where all the action is. So we've got the sales footprint that we need. Will we add some incremental heads? Sure. We're going to do that across the board but it's going to be incremental.

I think that the Find Real Relief campaign also helps with Bulkamid because we're advertising generically just the people who are leaking for the most part.

So when people fill out the survey, that's when we get a chance to really differentiate between do they have stress urinary incontinence, do they have a urinary urge incontinence or they have mixed incontinence. And then we can kind of sort those individuals out and get them to the right providers. So I think there's an enormous amount of blue sky.

I'm obviously not -- I don't want to get over our skis in terms of what the numbers could be. We've been pleasantly surprised up to this point. I think that in terms of what our 2023 number will be, we'll speak about that when the year closes and provide some specific guidance. I mean we do anticipate, obviously, that the growth has got to trend down.

I mean, this is unbelievable, right, to have a 120% increase from the prior year. So we'll see some reduction in terms of the growth ramp. But 2 more comments. One, existing customers are seeing great results and they're doing -- they're treating more patients. And we still have a lot of interesting -- or interested parties coming to the company.

So we consistently are signing up new accounts every week. But I really do think that we’ve got a lot of room to go with this particular product line. And there’s other physician groups that we really haven’t called on yet. And we think GYNs, in particular, are an exciting opportunity for the company where they’re certainly capable.

They see the patients but we just haven’t been focused yet. I think I’ve mentioned this before that in 2023, we’re going to start to focus on also calling on GYN in addition to the urogynecologists and the urologists..

[Operator Instructions] And our next question comes from Travis Steed with Bank of America Securities..

I guess, Ray, to start out, I wanted to ask about the market growth in SNM. Just curious if you think the market is still growing at 15% now.

And how you think about that moving forward with DTC and Medtronic investing again?.

Yes. Well, thanks, Travis. Appreciate the question. Look, we really are encouraged to see that Medtronic is spending some money to create some awareness, maybe 20 years late but it's never too late, I guess, in this category. So we're pleased about that.

I think we're clearly causing the matter of seeing revenue growth, the question that the market is expanding and we're getting -- taking advantage of that but we're also creating that situation. So, I think there's a lot of -- a lot of different layers with respect to expansion of the market.

And it really comes back down to something we've talked about before which is the confidence that our product is in still in the physician implanter.

For the first time, they're seeing fuss-free products, patients getting really great clinical results, not coming back constantly for reprogramming or being confused about how to interface with their device. So, I think that there's -- we have to overcome what has been a therapy of last resort as it pertains to neuromodulation.

So we're changing that attitude with high-quality products with great support in the field from our people, not only in the OR or a procedure room when it's done but also in follow-up to make sure that they understand that we're horse of a different color, so to speak, versus what they might have experienced in the past when there was just one player with a monopoly.

So, I think it's a combination of factors. And quite frankly, Travis, I mean, we can create all the awareness in the world and get all kinds of leads and things coming into doctors' offices.

But the key thing is, man, that doc and the advanced providers, the nursing staff, those are the folks that really need to have to have the confidence to be able to communicate to that next patient that sacral neuromodulation is the way to go as compared to, say, BOTOX where you got to come back every 4 to 6 months for another treatment and that gets really tiresome after a while.

So a lot of moving parts here but no question the market is definitely expanding. I think that our prediction, if you may, a 15% annualized growth felt a little bold maybe at the time but it's certainly happening. And so we really feel good about the future of this market. And we think we've got a lot of legs here or a lot of blue sky to go yet..

Okay. No, that’s helpful. And on the 2023, I think earlier, you had said you were comfortable with like a 25% growth the Street modeled, making sure that’s still the right place and any other puts and takes on 2023. I don’t know, Dan, like you mentioned $350 million is kind of like breakeven better profitability.

And it seems like you'd be approaching that at some point in 2023 on an annualized basis.

So should we think about, at some point in 2023, your op margins could go positive? Or is that more of a 2024 standpoint?.

Dan, I'll let you answer the question. Yes, if you don't mind, just you may want to confirm the '23 guidance as well, as part of the answer..

Yes. I was going to say we're comfortable with current 2023 consensus. And so we'll provide official guidance on the 4Q earnings call in February. And Travis, you're correct. But as I mentioned in my talking points, we're going to see some swings up and down based on seasonality, revenue lines and margins.

And so we've been consistent in saying that we expect to cross over into positive cash flow and profitability consistently at an annualized run rate of $350 million. So I think for the past two quarters, what we’ve all seen is the operating leverage of the business.

And so as revenue increases and margin is solid, right, you can really see that leverage and things improving. And so we have said it before and if we can significantly increase revenue without having to significantly increase spend in our sales and marketing line. So things are tracking perfectly according to plan and couldn’t be happier..

[Operator Instructions] And our next question comes from Larry Biegelsen with Wells Fargo..

This is Nikhil [ph] on for Larry. Congrats on the great quarter. Just thinking about the DTC efforts. So you recently indicated that your competitor has also stepped up its investment in SNM and began the DTC campaign.

Can you talk about how this compares to your DTC efforts? And do you expect this could drive volumes away from Axonics?.

Well, so look, we're certainly not expert on what the competitor is doing or not doing. My comments are fairly generic and nonspecific. So are they doing some things? Yes. It's search engine optimization, it's Facebook. We haven't seen them on national television but would encourage them to do so.

So I think if you're a Facebook user and you're in a certain demographic and you see some InterStim adds, you're going to probably click through there and get captured on their side equation. But I don't see -- I really don't see anything they're doing that's going to take away from our efforts. So it's not that generic.

This is a pretty specialized category. And besides, I think what is important to point out is -- the objective of our advertising on DTC is to get patients into a doctor's office for a consult. Now once they walk in that door, the physician has to decide really what is appropriate for that patient. They're going to work them up.

They got to figure out where they are in the care pathway. So just so we're clear, we're not selling sacral neuromodulation over the Internet. That's not what we're doing. What we want to do is get them to one of our customers and then play it by year. They might be appropriate for Bulkamid. They might be appropriate for sacral neuromodulation.

They may need to get a prescription for a drug. And if they do that and that is we found about 60% of all the patients that are filling out surveys are treatment naive which you could say, oh, that's a shame.

But actually, it really underscores how big and underpenetrated this market is when so many of these people have not even seen a physician for this problem, they may even try to drug before. Now there's no drugs for stress urinary incontinence.

So I'm referring to urge urinary incontinence which is what sacral neuromodulation treats along with frequency and along with fecal incontinence as well. So hopefully, that's a fulsome answer to your question, Nathan..

Yes, that's helpful.

And for my follow-up, around F15, can you provide a little more detail about the traction that you've made with competitive accounts?.

Well, I mean -- I'm sorry, I'm hesitating because I'm just trying to think about how I'm going to answer the question which is to give you a really polite non-answer. So what I can say is that every single day, we sign up a competitive accounts. Every single day this happens here.

So it's not like some unique odd thing, right? A lot of these customers are realizing that F15 is -- it’s a winning hand. I mean you’ve got a product that with a good implant can last 20 or more years in the body. It’s a beautiful form factor. It’s got a wireless patient remote that doesn’t need to be recharged.

I mean -- so it’s a true recharge-free system. And physicians are seeing that. This is a great product and it’s going to last on average probably twice as long as the competitive offering from Medtronic.

So people are gravitating to us because of this product and we got a pretty damn good rechargeable product as well and even a more interesting one coming down the pike.

So look, anybody who’s been watching us and paying attention since we launched in the United States and it’s only been 3 years to the day almost, it’s only been 3 years and we try to remind people regularly that we’ve made a lot of progress in this period of time and we’re going to continue to march towards leadership in this category..

[Operator Instructions] And our next question comes from the line of David Rescott with Truist..

Congrats on another strong quarter. Dan, I want to quickly just follow-up on one of the comments you made around gross margins. I think you heard supply chain. You mentioned that you’ve been kind of buying your way around some supply chain headwinds potentially but you’re still seeing kind of that 30% or 73% gross margin in the past 2 quarters.

And in the past, you’ve discussed that [indiscernible] could be at a mid-70% type company on the gross margin line. So just wondering if we’re potentially reaching that goal since you have done so well in the past 2 quarters on gross margins. And then just wondering if over the longer term, this mid-20s margin line could be ultimately conservative..

I think the way I'd answer the question is, look, it's going very well. Sales are strong. And so we've had the benefit of that plus the product mix with F15 which has a higher gross margin profile than R15. Also Bulkamid revenue coming in better than planned. And so those are all contributing to the margin improvement.

But the counter to that is because we haven't been building as much inventory as we would like in the short-term, we've had lower absorption of overhead which is going against the margin.

So I think what I would say is, since we're ramping up production of F15 and we'll be bringing R20 online as that's approved at the end of the year, that will have some impact anytime you start manufacturing. But look, as we go forward and we move through '23 and into '24, we still want people to be thinking about this as a mid-70s gross margin.

And look, if we can do better than that, fantastic. But I don't want to get people as Ray says over their skis, pushing the numbers higher and higher, let us continue to move it up. We were in the 60s last year. This last quarter, we're at 72.8%. We were at 72% in the previous quarter.

Let's just keep advancing the ball moving it up and get to the mid-70s first and then we'll see where we go..

Okay, that's helpful. And Ray, maybe on Bulkamid. And you mentioned that you're essentially 2 years ahead of plan relates to hitting the initial guidance that you gave when you converted the acquisition.

So just wondering, compared to the initial guidance, what's kind of changed since the acquisition? I mean, is that something that you can really kind of chalk up or just being conservative at the time? Or has the product in the U.S.

really just taken off a lot quicker than your initial expectations? And when you think about that as far as expanding the market, taking share from traditional booking agents, taking share from Sling.

Can you just level set us as far as to where a lot of that growth has come from?.

Yes. Thanks, David. So whenever you acquire a new product line, of course, you don't really know, right? And I think everybody on this call understands, right, that it's hard to predict. If you've never done something before, it's hard to predict. So I think that it's just gone significantly better than we would have anticipated.

And you say, okay, why? Well, number one, it's because the commercial reach of our organization. That is the number one reason. So it was having as many feet on the street as we do because I want to be mindful that this is a $1,000 product, right? This is not -- sacral neuromodulation is close to 16,000.

So each patient that we treat is only bringing $1,000 back to the company. So we're treating a lot of patients to get there. I think that, number one, that commercial reach, where we were able to get into more accounts very quickly, that has had a big part of it.

I think that once the product is in the hands of a physician, they're pretty amazed by how easy it is to deliver the merchandise. We've got a scope that is specifically designed for the female anatomy. Some of this may be old news to people but that's a big deal. The fact that the material is not viscous and that can be injected accurately and easily.

These are all part -- it's all part of it, right? So once again, it's easy to get a physician comfortable. We can do training with pig bladders so they can get -- practice their technique during a training session which these days, we do right in their office.

And then we like them to schedule, say, 5 patients right away, all stacked up in 1 day, hopefully, the same day, if not the next morning or a couple of days later, after their training and then we go in, we'll sit with them and make sure that they do a good job on the first group of patients.

And then they're pretty much on their own after that, right? We don't need to be there holding their hands. But we want to make sure that they're trained. We will not sell the product to a physician who is not trained and we want to make sure we're there to make sure these procedures go well.

And the reason I say that is because this is a technique-dependent product. If you don't put the hydrogel in the right spot, it's not going to work and very similar to the way sacral neuromodulation works as well. If you don't implant the lead in the right spot, it's not going to work. So we have to pay attention to that.

So getting back to your question, I think that when you look at what is it that women want, what is it -- well, besides handbags and jewelry? I mean, when it comes to treatment for stress urinary incontinence, they don't want a sling. I mean that is a real operation. It's a major operation with major downtime and recovery and all the rest of it.

It is not an attractive alternative to a person who's causing sneezing, exercising or lifting an object and leaking a little bit of urine. So when they're offered Bulkamid as a first-line therapy, in fact, it's an easy answer for them. It's covered by the insurance. It's covered by private insurance companies, Medicare, whatever.

It's easy for them to do something that's going to take 15 minutes. It's just not a big deal. There's no side effects. There's no downtime and it works extremely well.

And so if people can get dry based upon inexpensive situation where they're not spending a lot of time and don't have to take time away from work or their families or where the case might be. You can see this is a very attractive alternative.

So physicians, when they offer this and they get a positive response and they get a yes, once again, it's very reinforcing, right? So there are more -- when they see a good result and they're more willing to talk to the next woman about this potent treatment.

So it's not as if we're competing with slings, right? We're not -- we never talk about slings, right? We don't have to do a comparison against the sling. This is just a great alternative, first-line therapy for women. And I think from that standpoint, we truly have scratched the surface.

And we'll remind folks, there's like 28 million or 29 million women in the United States alone that are suffering from this problem. So when people say, "Well, what do you think is possible here?" I mean ultimately, we shouldn't only be talking about a few hundred thousand women. I mean we should be talking about much bigger numbers.

So we think we got a long way to go with this product line. And the only caution about it which will keep the numbers in some reasonable range is just that, once again, it’s a $1,000 per patient. So there’s a lot of logistics involved in treating as many patients as we’re treating in the United States.

So hopefully, that is a good answer to your question..

[Operator Instructions] And our next question comes from the line of Cecilia Furlong with Morgan Stanley..

I wanted to ask just on your next-gen rechargeable system.

Dan, how you’re thinking about really balancing volume build of your current rechargeable system ahead of launch? And then really how we should think about the rollout in ‘23, now noting the updated time lines?.

Yes. I think that -- thank you for the question, Cecilia. It's -- the time line is substantially the same as what we've talked about. Today, I said January just because we had a few weeks where we were off the clock.

So we're -- instead of 180 days, it will probably turn out to be 210 days in terms of regulatory time line which is still quite acceptable for us. We're going to roll the product out.

We're going to try to be, let's just say, more limited in the launch there than we might have otherwise given that we have multiple products now, right? So -- but I think it's going to be quite well received and it may take a little bit of time for people to really understand that this is a product that you hardly ever have to recharge.

So I think longer term, I think this is going to be a really nice contributor to the company's revenue line. Shorter term, I'm not sure we're going to see a lot just because at the moment, the market is very much enamored with F15. I mean, they're just getting their teeth into that product as we speak today.

So we have high expectations for the product but once again, we don't see in the short-term, it's going to move the meter. And in terms of production, you asked a little bit about that. As Dan mentioned, when you build a new product, there are some issues in terms of availability of components and all that.

So as much as we'd like to have literally thousands of F15s and thousands of the new R20 on the shelf from the get-go, that's a little bit challenging given the current environment. So we have to balance all of these things together and so forth. But as Dan mentioned, we want to absorb overhead.

We want to build products they're not eggs, they're not going to go bad. We've got good long shelf life. How should I say, the shelf life on the device is lengthy. So no problem. We're going to do the best that we can to pile up as much inventory in the short run and try to overcome some of these supply chain issues that we have.

So sorry for going on and on with a simple question but I appreciate the question..

No, super helpful, Ray. And if I could follow up, just kind of how you're thinking about the mix near term specifically between rechargeable and recharge-free. And then also, I appreciate the longer-term outlook on gross margins. But as you're thinking about 4Q near-term set up some of the macro dynamics as well as the mix shift across your business.

Could you just help level set how you're thinking sequentially around gross margins?.

Yes, you bet. Thanks. Dan, if you don’t mind, I’ll let you answer this one..

Sure.

And so in the short term, I think the first question you were asking was the product mix split between F15 and R15? And did you also ask what we expect to see with the launch of R20?.

It was more the mix between the two ahead of launch and then how you see that transitioning post launch and then just midterm gross margin..

Sure. We're expecting the mix to stay fairly consistent as it is now. I mean and as Ray has said numerous times, we're agnostic. It doesn't matter to us. And then with the launch of R20 next year, we'll see it obviously tremendously attractive with a 6-month recharge interval and only having to recharge for 1 hour, once every 6 months.

Now we haven't stated anything about the change in our outlook on margin for the year. But on the last call, what I said was that we were asking people to think about modeling the second half of the year at, I believe, 69% gross margins.

And I think given what's happened over the last two quarters and given where we are today with manufacturing, I think it would be safe to say that people wanted to apply a 71% gross margin to Q4, that would be perfectly fine and in line with where we are now..

[Operator Instructions] Our next question comes from Michael Polark with Wolfe Research..

Happy Halloween. I’d just be curious, Ray, for your perspective on market conditions. A lot of medical device companies are having a [indiscernible] and comments on staffing and I didn’t hear anything about kind of facility level resourcing constraints.

So obviously not evident in your numbers here but what are you seeing on the ground? And how are you helping providers manage through it?.

Mike, it's kind of like as soon as we miss our numbers, we're going to have all kinds of supply chain problems and staffing issues and all the rest, right? But -- so look, here's the bottom line. I think our momentum in our business really is overcoming a lot of these, let's just call them, headwinds, maybe their macro headwinds.

Our customer not exempt. They have challenges. The private doctors have challenges with staff in their office. That's an accurate statement coming out of the mouths of other CEOs. We -- it's real. What the underlying reasons is, that's not my -- for me to say.

We are not challenged as much at the institutional level because all of our procedures, as you know, perfectly but they're done in a procedure room in the outpatient section of a hospital or in a true ambulatory surgery center.

And when you think about staff for us, for Axonics for sacral neuromodulation, it's basically the implanting physician, a scrub nurse and an Axonics personnel, that's who's in the room. You don't need a whole bunch of other people in there. So I think that's helpful. And then these are day cases. I shouldn't even say day cases.

They're hour -- a couple of hour cases. So patients come in, they get prepped up, they get some propofol, maybe a little Versed. They get the procedure done and then they're out, right? So we don't have to worry about is there a bed available and what the staffing level is up on the floor, so to speak.

So I think that's why our situation is a little different. Now having said that, we're overcoming some of these macro headwinds based upon the momentum in the business. And I think that's why you don't hear us kind of referring to these things as major topics for Axonics. So I think the success of our team and commercially has helped.

And I think, look, the secret sauce to us -- for us has been the clinical specialists that we have. I mean, we've got 170 people. They're all nurses. Some of them are PAs, NPs or RNs. The vast majority of them have a nursing degree. These are phenomenal people. They provide excellent service.

They've all kind of sort of done the job that ATPs in the physician's office or even in the institutions have done. So they're very empathetic. They understand the role. They understand what's going on and they're able to provide some additional support. And I think that goes a long way towards people being confident to do business with Axonics.

They know we are going to be in every single case. In three years, in the United States, we have never missed a case once, not once. So they know we're going to be there. They can count on us. They can count on competent people who are well trained with great attitudes and so on and so forth.

So I think it's not one thing, right? It's a big -- it's a combination of many different factors that I think are helping to conspire us -- conspire to help us be successful and continue to put some good numbers on the board..

Appreciate that, Ray. And I think I get a follow-up, so I will ask it. Zooming out, I think Bulkamid has proved to be a very successful extension of the platform. And I think you now clearly have a platform.

What are the prospects for Axonics adding a third product to the bag over the next year, two years or three years are you still looking? Any perspective you'd be willing to share on that would be appreciated..

Sure. Thanks. Appreciate the question. So look, we don't have a third act that we've been nursing, okay? Really cool products that fit perfectly with our call point of far and few between. We're -- I mean we're not going to get into, say, the BPH business that for men, you know what I mean, we're going to stay focused on treating women primarily.

Not to say that sacral neuromodulation doesn't work for men, it does but predominantly the population is female. We are open. We're receptive. We listen to anybody who's got something that they think is going to fit with us. We are actively looking for things. But we're going to be extremely cautious, very careful. We do not want to upset the apple cart.

Things are going quite well for the company and we have so much opportunity ahead of us. That, I think, is the key thing. When you have the prevalence and incidents of the conditions that we're going after and such an underpenetrated and underserved market, I think it would be foolish for us to take our eye off the ball, so to speak.

So I wouldn't be anticipating any kind of big news coming out of Axonics in the short run. The capital we have on our balance sheet is not burning a hole in our pocket. We're happy to be well financed to invest our money in expanding our manufacturing capabilities, bringing more procedures in house, expanding the number of units that we can make.

So I think this is that interesting time, Mike, I'm sure as you appreciate, having looked at many different companies, that management could really screw things up pretty good about right now. And we have no intention of doing that. So we want to really stick to what has gotten us to this point and continue to grow.

I mean to have lines that you could grow 40% to 50% and this is incredible. So we’re really pleased with what’s happening now and the products that we have and we’re becoming more and more important to the customers that we serve..

[Operator Instructions] And our next question comes from Michael [ph] with Jefferies..

First one on the -- you've got a really strong F15 launch past two quarters.

Outside of your competitors' investment and increasing awareness, are you seeing anything else on the competitive response front?.

Well, look, it depends on where -- what's your vantage point. If you're a rep in the field, obviously. And you're taking over some pretty good accounts, then they're going to hear some noise on the local level. We've always heard a lot of noise on a local level. But at 40,000 feet, there just isn't much happening.

So look, they're not laying down which is fine. But on the other hand, to be honest with you, I mean, we got some pretty strong medicine in terms of our product line and the capability of our people in the street. So I don't think the incumbent bargained for the kind of competitor that Axonics is. And I want to add that, look, we don't play games.

We play the game right. It's the tone from the top in this organization is always do the right thing. Everybody knows what that is. We don't shove products down people's throats. We don't stack the ceilings with product.

So what you guys are seeing from us is actual demand to these products and these are products that are going into -- they're either getting injected into the ladies or they're getting implanted and so forth. So I feel compelled to say that, right? We're trying to play this game as clean and as appropriate as possible.

And that's the tone of this organization..

Got it. That's helpful.

And just for my follow-up, can you just give us an update on how sales rep productivity has been trending, particularly against your expectations?.

Yes. I think it's been -- I think it's been along the lines of what we expected. I mean, we're seeing on average productivity of around $2 million per head in the field. And -- I mean, like ports, right? If you do the simple math, the number of salespeople we have times that $2 million.

Now clearly, we've got some people that are doing significantly more revenue than that. The folks at the top of the pyramid, it's -- we're talking $4 million to $7 million for some territories and some representatives. So there's a lot of headroom to go. But we -- I think the last time that this question was asked, my answer was around $1.5 million.

That was probably the 2021 number. And now this year, $2 million. Obviously, we have higher expectations for 2023. So it's not -- we don't -- we're working on the productivity per rep concept getting people to be more productive in a given geography as opposed to just constantly layering on people. We think that's important.

We want our folks to make money. That's important to us that they're well compensated and earning a good living and we like the productivity. So that -- we're quite pleased with how that's going. And look, there’s always going to be X amount of folks that you’d like to see them do better as particularly in some expansion areas and so forth.

But the productivity per rep is pretty solid. And I think $2 million is a good number to plug if you’re running a model or a spreadsheet..

[Operator Instructions] And our next question comes from Mike Matson with Needham & Company..

I guess I want to ask one on pricing.

So I know when you sort of entered the market, you were pricing -- trying to price at parity to Medtronic but I’m just curious if you’ve seen any pricing changes on their part? And is there maybe an opportunity to take some pricing on your side since it does seem like you have sort of an advantage here now with the lifespan of your products, particularly with the this new R20 coming?.

Sure. It's an interesting question, Mike. Price, it's really been interesting. We have seen a stable price of our products. Let's talk sacral neuromodulation first since we started. Prices have been pretty rock solid, stable during this period of time.

I think it's important for people to understand, if you're interested in this topic, that the prices are negotiated with institutions. That physicians, with the exception of maybe 20% of them who might have a financial interest in an ASC, whether they're a partner or participant in it.

So maybe 20% of our physicians actually even know what the price of a full implant is. And it's negotiated with institutions. And the institutions are very sophisticated, meaning that they have access to pricing data. So they're actually able to see, as an example, what, let's say, an HCA pays or some other large institutions say.

There's visibility to those prices, not from us. It's just -- it's out there in the public domain. So what we have instituted has been a pricing policy based upon volume. So in other words, look, HCA is the biggest customer in America. So clearly, they're going to get the best price.

But if you're not doing -- in your network, if you're not doing some thousands of units, you're not going to get the HCA price and that's how we're able to try to keep things slotted. So we have basically gone to kind of volume-based pricing. Sometimes that is 100% comports with what they've been paying Medtronic and sometimes it's not.

It might be a little bit more or a little bit less depending. So we're not as lockstep with the parity pricing as much as we are now moved to a more sophisticated model which is much more defensible to basically give people prices based upon how many implants they do in a given year.

Bulkamid, of course, with $1,000 price, sure, maybe somebody pays $50 difference one way or another, $100 would be a big spread difference. So that's kind of off the table in terms of pricing. So long-winded answer but it's a very sophisticated market. These are doctors don't buy these products.

They put them in but they don't buy them, they're purchased through institutions which are run by supply chain individuals who are not really keen on paying higher prices for anything, in general. So we're more interested in growing the business, Mike, than trying to pick up a point or 2 on the aggregate..

Okay. No, that was very helpful. And then just looking at your R&D spending. I mean, it looks like we've had 2 quarters in a row now where it was down on a dollar basis year-over-year. So I'm just wondering kind of what's the outlook for R&D spending.

And I understand you might get some leverage but it looks like it's actually been down on a dollar basis as well. ..

So the reason it's down on a dollar basis, Mike, is because that's the line item where the royalty to the offered Men Foundation comes through and we're not paying that royalty on the F15 recharge-free system.

So if you were to break it out -- yes, if you were to break it out and look at the detail, what you would see is we're maintaining and slightly adding the number of engineers because of the amount of activity and new programs in development. But the overall spend on a dollar basis is down because of that royalty change..

[Operator Instructions] And our next question comes from Shagun Singh with RBC Capital Markets..

Hey, good afternoon. This is Vardy [ph] on for Shagun. Congrats on a good quarter. Just to circle back with just direct consumer ad campaign, thanks for giving some color on qualified leads and all that.

Can you give us a sense on the percentage of patients that are now coming in and like that you're converting and actually treating? Are you that far along in the process? Are there any data points you can give us? And at what rate you're doing that? Any color would be helpful..

Yes. Look, we've been hesitant to provide conversion statistics and we will continue to withhold that information for the time being. We'll -- we've been providing more and more color about our DTC efforts on each call. We'll continue to do that, provide some additional insights in 2023 about this.

Suffice it to say that in our opinions based upon being stewards of the company, this is providing us a respectable return on investment. So we would not be just -- we would not throw good money after bad if it wasn’t turning into revenue for us and it is.

As you might imagine, there are a lot of challenges in terms of tracking all this data and we are putting more and more sophisticated systems in to be able to get better visibility. But I would tell you that the DTC is just part of a bigger overall marketing strategy of the company.

So as an example, the single most productive effort that we do is what we call direct-to-patient marketing which is where physicians with our help are getting letters out with symptom surveys to their own patient population.

And I will tell you that is unbelievably productive and we’re seeing 5% to 10% response rates and 50% conversions to procedures within a quarter. So that’s our number one go-to program. It’s just that not everybody can take advantage of it.

There are some shared costs associated with those kinds of programs and large institutions sometimes are reluctant to pull ICD-10 data and have third-party mailings go out to their patients. So -- but that’s the immediate return on investment. So we don’t do just one thing. I think this is the point.

Everybody is kind of locked into the DTC program because of the visibility on television and people seeing ads and things of that nature. But we got a pretty sophisticated marketing setup, if you may and a suite of different options.

And Facebook is a very strong part of our DTC but these direct-to-patient mailings and other programs that we do with physicians, webinars and other things like that are also extremely productive. So it’s a combination, right? It’s -- in different markets, different things pull better than others and so on and so forth.

So part of the reason why I’m not answering your question directly is that there’s more than one thing that we’re up to but I’ll leave you with this silly comment and that is the juice is definitely worth the squeeze..

And I'm showing no further questions at this time. I would now like to turn the conference back to Raymond Cohen for closing remarks..

Thank you. Excellent. Thank you, operator and thanks to everybody, for answer -- for your questions. We really appreciate these questions are really important. It gives us a chance to tell a bit more of the story other than the prepared remarks. So thank you for your interest and attention.

And for those of you who are listening in covering the company, thanks for your continued interest in Axonics and we look forward to speaking with you all again publicly announced. Halloween, stay safe and we’ll talk to you soon..

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