Description

We believe Axonics is an attractive investment opportunity. Our thesis is around 1) rapid adoption and share gain from previous single player market, and 2) SNM market expansion driven by greater awareness and product innovation. Our channel checks and conversations with management give us confidence that AXNX’s sacral neuromodulation system is performing strongly (to the point that demand is being managed down). We think the company will likely beat street estimates of $87.9m revenue this year/rebase out-year numbers. Coupled with revenue hikes driven by better adoption, we think AXNX’s multiple will likely expand/narrow vs peers. Our PT is $45 with majority catalyst in the first half of this year.

AXNX received FDA approval for a rechargeable sacral neuromodulation system (SNM) that treats overactive bladder (think involuntary urine leakage), fecal incontinence (uncontrolled bowels), and urinary retention. Prior to the company’s recent approval, Medtronic had a monopoly on the $600m+ market with its InterStim system. The system was first introduced in Europe in 1994, and was FDA approved in 1997. While there have been small advancements since then (implantable tinned lead, smaller neuromodulator), the general physician consensus is that MDT has been largely complacent - overpromising and underdelivering on innovation. SNM is a third-line treatment that works by sending mild electrical pulses to the sacral nerve to balance communications between the brain/pelvic region (MOA is not clearly understood -gobbledygook of afferent/efferent pathways and excitatory/inhibitory impulses of - but the therapy is effective). It is an implantable device that dramatically increases the quality of life (see AXNX site for clinically measured scores) for people with bladder or bowel control problems.

AXNX’s current device is 60% smaller, lasts 3x longer (replacement surgery once every 15 years instead of 4.4), and is MRI compatible (patients with Interstim II must surgically remove the device). By most metrics, it is clinically superior and a better product than Medtronic’s existing offering (echoing Dexcom vs. MDT diabetes). 

Medtronic will be releasing a new Interstim (Micro) later this year that looks great on paper (rechargeable, MRI safe, even smaller than AXNX at 3cc, but with some drawbacks on lead compatibility and voltage), but we believe the market has structurally split as physicians will have ~12 months to experiment and train on AXNX r-SNM. Indications to use r-SNM are high: 

·        Survey 1: Axonics Physician Seminar Survey

• Size: 326 Physicians attended one of five one-day seminars
• 27% of attendees expect the number of SNM implants they do in 2020 to increase between 26 - 50%. A little over 23% of attendees expect 51 – 100% increases in volume of implants with 46% of attendees anticipating procedures to increase by 10 - 25%
• 78% of attendees indicated that they were “definitely” planning to offer the Axonics r-SNM System to their patients and 20% indicated they were “likely.”
•  74% of attendees expect over 75% of their implant volume to be with the rechargeable Axonics r-SNM System and 20% expect 50% of their implant volume to be rechargeable. 6% expect 25% to be rechargeable

·        Survey 2: Morgan Stanley Urologist Survey

• Size: 83 US physicians (82 urologists and 1 urogynecologist) from 26 states, representing ~20% of annual US sacral neuromodulation system (SNM) volumes
• Respondents expect to ~double their SNM procedures within 1-2 years to perform ~14 monthly implants on average (vs. 6.9 SNM procedures currently)
• Physicians in the MS survey expect to implant Axonics' rSNM device in ~35% of procedures over the next 6 months
• MS survey of 80+ urologists is bullish for SNM market growth, indicating procedures can meaningfully accelerate if not double

Two other sellside firms have published physician surveys (WF,Barclays), which again support broad adoption. Ultimately, we believe the market can support two players (with MDT still retaining the vast majority of the market). This happened recently in the neuromodulation market when Nevro launched spinal cord stimulation (SCS) for chronic leg and back pain in May 2015. NVRO quickly took share behind its differentiated product offering and compelling clinical data (low double-digit US share in year 1 and mid-teens share in year 2). Competitors (ABT-STJ, BSX, and MDT) responded with increased marketing spend and new product offerings, which helped further drive an acceleration to broader SCS market growth

We believe AXNX could exceed $100 million in revenue this year and will do over >$200 million in revenue in 2021 as it captures 20-23% market share (assuming 59k SNM procedures at $15k a procedure after 12% discount). Putting an average med-tech small cap median multiple of 7.5x gives us upside to $45+ share. We believe longer term AXNX penetration, per physician surveys, could hit 35%

Market

The market isn’t particularly complex as MDT has 100% market share. MDT has dominated the SNM market ($528m 2019E sales with stable LSD growth), with no real product advancements over that time period and very limited innovation. Estimates put WW SNM market at $600-$700 million (US vast majority of that). While growth has been in low to mid single digits, we believe the major improvements in form factor and function (i.e. MRI compatibility) led by r-SNM and Interstim Micro will accelerate medium term growth to double digits (even MDT confirms this).

AXNX believes the addressable market for SNM is ~4.6 million, which is a small subsegment of 87 million adults that suffer from OAB and 38 million from FI. In contrast, MDT’s Interstim has been implanted in just over 300k patients worldwide, with 40k-45k patients a year (roughly 80+% are new, and the remainder are replacements). This puts current penetration of SNM therapy at just over 11% (and 6.6% worldwide) of the addressable market

Most OAB/FI can be treated or minimized through diet/activity changes and pharmacotherapies - SNM is a third line therapy (vs botox and TNS, both that suffer from lower compliance due to frequency of visits). Second line therapy has also had recent challenges that may lead to increased SNM volume growth. This involves:

• Recent dementia concerns from AChE inhibitors
• JAMA article (following a 2018 BMJ article) has increased awareness of dementia risks
• MS Survey confirmed this awareness with over 80% of physicians were familiar with studies associating AChE inhibitors with increased risk of dementia
• Further, 67% of participants indicated they are either reducing or stopping prescriptions of AChE inhibitors and recommending SNM and Botox therapy

Misc

Management is enthusiastic and energetic to take down MDT. They see no supply constraints on r-SNM, believe there is a big bolus of patients, and internally have much higher market share plans. They have seen MDT actually raise prices recently/MDT scurrying to appease physicians. Furthermore, Interstim Micro won’t have clinical efficacy data which will help encourage higher rates of r-SNM adoption. Axonics maintains a very active LinkedIn profile and constantly updates physician adopters

Revent Events

• Oct. 31, 2018: IPO priced at $15/share. Opened $16.05 and closed $14.98
• Jul. 1, 2019: Traded down from $42.41 once MDT announced next-gen system
• Nov. 14, 2019: Announced FDA approval for Urinary Clinical Indications
• Nov. 22, 2019: Capital raise at $22/share for $110m  - equity raise overhang gone
• Dec. 19, 2019: Granted Six U.S. Patents and Allowed Three Additional Patents Related to its Implantable Sacral Neuromodulation Technology 
• Jan. 9, 2020: Pre-announces Q4 numbers of $8.4 million in US sales vs. MS estimate of $3.1 million
• Jan. 21, 2020: FDA approval of an enhanced, second-generation Programmer for its r-SNM

Catalyst

Q4 Results in March