Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) Q3 2020 Earnings Conference Call October 4, 2020 4:20 PM ET

Company Participants

Neil Bhalodkar – Investor Relations

Raymond Cohen – Chief Executive Officer

Dan Dearen – President & Chief Financial Officer

Conference Call Participants

David Lewis – Morgan Stanley

Bob Hopkins – Bank of America

Adam Maeder – Piper Sandler

Kaila Krum – Truist Securities

Michael Pollack – Baird

David Saxon – Needham & Company

Disclaimer: *NEW* We are providing this transcript version in a raw, machine-assisted format and it is unaudited. Please reference the audio for any questions on the content. A standard transcript will be available later on the site per our normal procedure. Please enjoy this timely version in the interim.

Operator

[00:00:04] Good afternoon, ladies and gentlemen, and welcome to the Axonics Q3 Twenty twenty 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, anyone should require assistance during the conference, please. Faster than zero on your touchtone telephone. As a reminder, this conference call is being recorded now. Like to turn the call over to your host, Neal.

Neil Bhalodkar

[00:00:32] Good afternoon and thank you for joining Axonics quarterly results and update call presenting on today’s call. Our Raymond Cohen, chief executive officer, and Dan Durin, president and chief financial officer Brandan Wright prepared remarks and commentary on third quarter financial results, US commercial progress and a general business update 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 nineteen ninety five. 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, including risks and uncertainties disclosed in Sonic’s filings with the Securities and Exchange Commission, all of which are available online at w w w SEC ago. Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of today’s date November 4th. Twenty twenty, except as required by law, Sonic’s undertakes no obligation to update or revise any forward looking statements to reflect new information, circumstances, unanticipated events that may arise. I’d now like to turn the call over to Ray for his remarks.

Raymond Cohen

[00:02:02] Thanks, Neal. I’d like to welcome everyone dialing into today’s call and those of you who are joining by the webcast. But before we begin, on behalf of all the stakeholders of Sonic’s, I would like to express our gratitude to the health care workers providing care for those impacted by covid-19 and also to recognize all of our employees for their dedication to our customers and patients during these extraordinary times. I’d also like to note that today is approximately two years from the date of Iconix going public and approximately one year from the date of our launch of our Secondo modulation system in the United States. Now onto the business at hand. It’s my pleasure to report that sales rebounded sharply in the third quarter, with Iconix generating thirty five point two dollars million of revenue. This was despite the launch of a rechargeable S.A.M. device and an all out effort by our competitor to take back converted accounts. Our commercial success continues to be grounded in providing our customers with exceptional support while delighting their patients with a long lived, life changing therapy that is easy to use. I’ll provide some additional commentary on the business trends after Dan’s prepared remarks on the clinical and regulatory front. We continue to enhance the patient experience and build a strong body of clinical evidence for the S.A.M. therapy. Notable items from this quarter include in July, the FDA approved our implantable device for full body MRI scans with a three Tesla MRI scanner. As noted during our Emet hour excuse me, our MRI, a webinar last week, which was attended by an independent physician and an experienced radiology technician. Exon X’s MRI conditions are meaningful, better, meaningfully, better and less burdensome than our competitor. So for those of you in the analyst and investor community that have conducted physician surveys, you are likely to have independently corroborated the same sentiment.

[00:04:13] Now, this is actually an important distinction since the interest in two is being promoted as MRI compatible. However, it is, if it’s burdensome to actually get an MRI completed in one patient appointment, that’s information that physicians need to take into account when making a decision on which product to recommend to their patients. Now, in August, we began shipping our second generation implantable neurostimulator to customers in the United States and then followed up in September by shipping to Canadian customers once we received regulatory approval from Health Canada. Now, this second generation implantable neurostimulator reduces how frequently a patient needs to recharge their implanted device to only once a month for about. An hour for some patients, we’ve seen the recharge interval go as long as forty nine days between recharging this long interval between recharging is an important point of competitive differentiation for our rechargeable device. And physician and patient response has been very positive to this enhancement. Now, in September, we also reported to your post implant results from our artists in S.A.M. Pivotal Study. Now, these clinical results were the strongest ever reported in ethnonym clinical literature. Now, this is especially notable considering none of our study patients underwent an external trial. So what does that mean? It means that all patients were implanted in a true intent to treat manner at two years. Eighty eight percent of all implanted patients were therapy responders. Now, this is consistent with the eighty nine percent for therapy responder rate we reported at one year now. Eighty two percent of these therapy responders achieved greater than 75 percent reduction in the number of urinary leaks. And actually 37 percent of the patients were completely dry. We also reported that ninety three percent of patients reported being satisfied with exotic therapy and stated they would undergo the procedure again. Patients were also very satisfied with the recharging experience, with ninety one percent reporting charging as easy. In late October, we launched a post market clinical registry study named Artistry. Now this registry will collect and analyze real world data of patients treated with the exotic system. And we intend to enroll approximately 300 patients across 30 centers in North America and include patients across all four secondo modulation clinical indications. And we’re confident that the technological advances or advancements and the strong clinical outcomes that Exon continues to produce will bring Sequenom modulation to the fore and drive meaningful market expansion in the years ahead. So with that said, I’m now going to turn the call over to my colleague Dan Dearest, and he will review our third quarter twenty twenty financial results and then I’ll provide a further business update after Dan is complete.

Dan Dearen

[00:07:33] Thank you, Ray. For the third quarter of twenty twenty, Pythonic generated net revenue of thirty five point two dollars million. This compares to one point three dollars million in the third quarter of twenty nineteen. Net revenue from the United States accounted for thirty four point one dollars million, with certain European markets and Canada accounting for the balance of third quarter Twenty twenty revenue. As a reminder, we sell our products through our direct sales force and all jurisdictions and there were no stocking orders in the quarter. Gross profit for the third quarter of Twenty twenty was twenty one point eight dollars million, representing a gross margin of sixty one point nine percent. We anticipate gross margins in the low to mid 60s in the fourth quarter and continue to anticipate gross margins in the low to mid 70s. Over the long term, total operating expenses for the third quarter of twenty twenty or thirty point six dollars million, which compares to twenty five point seven dollars and the year ago period. The increase in operating expenses was primarily due to increased personnel cross costs across the organization, as well as increased R&D and consulting costs. We expect operating expenses in the fourth quarter to be in the range of thirty three million to thirty six million dollars. Given recent increases in headcount and other expenses, including our first expenditures and our new direct to consumer marketing campaign, a net loss for the third quarter of twenty twenty was nine point two dollars million as compared to a net loss of twenty five million dollars and the third quarter of twenty nineteen cash and cash equivalents were two hundred and sixty nine point three dollars million as of September 30th. Twenty twenty. I will now turn the call back over to Ray.

Raymond Cohen

[00:09:31] Great. Thank you, Dan. So as mentioned earlier on the call, Iconix experienced a strong rebound in third quarter sales as there was a rebound, obviously in elective procedures. And as we all know, physicians and institutions are eager to generate income and see patients return to the clinic. Sequenom modulations, short procedure, time, outpatient setting and solid reimbursement helped drive a recovery in procedural volume, while difficult. To quantify in absolute terms, we believe there was a benefit early in the third quarter from procedures that were deferred from the second quarter into early third quarter. Now, we have read all of the recent analyst surveys and listen to what Medtronic has reported about the sequential modulation market, which they claim is now growing at 20 percent. We also note that physicians are optimistic about the future of Sequenom modulation and expect increases in procedure volume in twenty, twenty one and beyond. What is clear is that our physician customers are enthusiastically recommending Iconix to their patients and more of those patients are saying yes to psychonaut modulation therapy than ever before. Now, there’s no doubt that under normal non pandemic circumstances, market growth would be more obvious. However, quantifying the rate of market expansion at this moment is challenging, given a this is our first year in the US market and the covid dynamics. Moreover, Medtronic is not disclosing official revenue or unit volume volumes for secondary modulation in its earning releases, which this makes, which of course makes it difficult to evaluate US market growth and market share numbers.

[00:11:21] While we are hopeful that the pace of elective procedures continue in the fourth quarter. We recognize that covid hospitalizations have increased to levels not seen since the early days of the pandemic. Now, given that or given that reality, Sonic’s has experienced patients canceling scheduled procedures in October. And this is not only in the Midwest, but in other states around the country as well. And moving outside the United States to Europe, we’re experiencing what we’re seeing is really a shutdown with elective procedures not being allowed or significantly curtailed in certain markets. Now, this is especially relevant for England and the Netherlands, where most of our European businesses thrive. So we anticipate this could potentially reduce Q4 revenue in Europe by up to a million dollars. Now, despite the covid headwinds, the October was a solid month for exotics. However, if these headwinds, the ones we’ve observed in this past month, continue for the balance of the year, we anticipate some issues and therefore are suggesting a revenue range between thirty four and thirty six million in Q4, with the vast majority of revenue coming from de novo patients as opposed to replacements of interest them two which have, as expected, decline from volume volumes reported in earlier periods. As we have stated previously, we believe that taking on modulation is experiencing a renaissance based on new and effective technology coming to the market. And as a result, we believe the sequential modulation category is poised to double over the next several years.

[00:13:10] On the marketing front, we’re partnering with practices to identify patients that have been previously treated with drugs that are eligible for third line therapy. We know that psychonaut modulation is significantly under penetrated due to lack of patient awareness, with many physicians historically viewing Sequenom modulation as a therapy of last resort. Given the need for replacement surgery, the historical lack of MRI compatibility, and the less than optimal efficacy and the history of fussiness with our competitors product. Now, we started piloting various DTC strategies to test the most effective messaging channels and content to reach patients suffering from overactive bladder and physical incontinence. And we’re placing targeted ads across highly trafficked digital platforms. And using a baseball analogy, we would characterize these efforts as just the top of the first inning in our DTC journey. Given the limited scale in which we are testing these strategies, we do not expect these efforts to have an impact on procedure volume in the fourth quarter of Twenty twenty. However, we look forward to sharing more of our learnings and the go forward DTC strategy with you in the New Year. Now, turning to operations and business development, we continue to make significant progress year to date and certainly in the third quarter. Our manufacturing and quality team was very productive during this past quarter and as seen on our balance sheet, the team has built a significant quantity of finished goods inventory.

[00:14:49] Now we have over five thousand five hundred patients that have been implanted with our system over the last year. And our data continues to show that nearly 90 percent of patients who undergo an external trial are ultimately implanted with a permanent device. And as of September 30th, over 600 unique accounts in the United States have implanted patients with the exotic system. This represents an increase of over one hundred and fifteen accounts from the prior quarter. So as we stand today, Iconix now has a presence in over half of the top implanting centers that practice Sequenom modulation in the United States. Now we’re we’re expecting that this will be the last quarter that we report the number of U.S. accounts and quarterly increases in accounts. And we believe this was an important metric to provide to analysts and investors during the first few quarters of our U.S. commercial launch so they could track progress in acquiring customers. However, as we have now signed more national and regional IDs and contracts with hospitals, the setting for our on modulation procedures continues to evolve, with over half a full system purchase orders now coming from hospitals as such, from a modeling perspective, the quarterly account metric is becoming less meaningful and less instructive, since hospitals tend to have multiple locations and implant from multiple practices performing procedures in these institutional settings. That said, we added new accounts in October and we will continue to add accounts in the quarters ahead. Now there is also a long tail of sequential modulation in planters outside of the top 1000 accounts. These implants represent a group that has not received much support from our competitor. We have already brought some of these implants back into sequential modulation and we have also trained some new physicians on how to implant. Now, these folks are excited to grow with exotics and participate in the highly under penetrated market opportunity.

[00:17:00] With our best in class technology and field team, feedback from implanting physicians and patients continues to be overwhelmingly positive, with clinical results consistent with the two year data we reported in our artists in pivotal study. We’re excited to launch the artistry registry, which will continue to expand our body of clinical evidence and demonstrate that the patient satisfaction rates and strong clinical outcomes reported in artisan are being replicated every day in the real world. On a related note, in early October we announced survey results of one hundred and thirty seven patients that had previously been implanted with interest them two that are now being treated with exotics. We specifically surveyed these patients because they have a direct basis of comparison and can provide unbiased feedback on both devices. The fact that ninety two percent of these patients that had been treated with both systems would choose a Sonic’s over interest. Them is compelling and underscores that patients want an implant that has long lived efficacious and easier to interface with. It’s important to note, while there’s a lot of talk among institutional investors about competition from the new Medtronic rechargeable device, the facts on the ground are that the non rechargeable interest interesting two still has the majority share of the secondary modulation market today, and it is the go to device among customers loyal to Medtronic. It’s clear that in our view, patients have a preference for longer live devices. If given the choice, there’s a significant benefit to a rechargeable implant that will last at least 15 years in the body versus a three to five year non rechargeable device. And in the survey, 78 percent of the patients said that the recommendation of the physician recommendation of their physician was the key to the decision to upgrade to Sonic’s from interesting to.

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[00:19:04] Therefore, it’s clear that while we will bring some new patients into the therapy from DTC and word of mouth referrals, our field team has a compelling opportunity to continue to make our case with implanting physicians that the exotic system provides patients with significant and distinct advantages as compared to them to in early September. The National Institute for Health and Care Excellence, nice as it’s referred to in England, published a medical technologies guidance report in which it recommended the exotic system to NHS hospitals for the treatment of overactive bladder. It’s unfortunate that hospitalizations from covid is leading to a reduction and in some cases a complete shutdown of elective procedures in certain NHS facilities across England. As such, we have not been able to capitalize on Nisa’s guidance. And in general, while the. Only accounts for three percent of our revenue, as I’ve mentioned earlier, our sales in the EU are being negatively impacted by covid. So moving on to the product development front, just today we filed a PMA supplement with the FDA for approval of our third generation implantable device and patient remote. Now, approval is subject to the standard 180 day review time and is expected. And we expect to have this product in the market during Q2 of twenty twenty one. The new system allows for nearly unlimited programing capabilities and allows patients additional flexibility to change programs remotely. Now, while we are close to a set it and forget it product, this is a feature that will benefit practices where patients have to travel long distance to come into the office for a therapy adjustment.

[00:20:57] This new filing and this new product represents the third significant upgrade that we’ve made to our ethnonym system during Twenty twenty and underscores that we’re nimble and capable of incorporating features that enhance the patient experience. Today, consumers of health care want devices that are effective and easy to use, especially when it comes to devices that will live in the body for a long time. And as such, we believe that producing great patient experiences will determine the share, will determine share in the marketplace and ultimately propel psychonaut modulation therapy as the preferred solution for urinary and fecal dysfunction. Now we’re also continuing to work diligently on our primary cell non rechargeable device. The new offering will leverage our existing technology and promises to be a long lived and be the first truly recharge free system available. And I say this given that none of the components, including the patient remote, will require recharging in terms of timing, we have entered the validation verification phase of this project and are working diligently to be able to file with the FDA before the end of Q1 two thousand twenty one. In closing, we continue to make strong progress on our vision of being the market leader in sequential modulation. We’re grateful for the trust of shareholders, physicians and patients. We’re grateful for the trust they’ve placed in exotics. And we continue to work diligently every day to fulfill our commitments to the implanting community and their patients. So at this time, we’re happy to answer any questions that analysts may have. So we’ll turn it over to the operator.

Question-and-Answer Session

Operator

[00:22:44] Gentlemen, if you have a question at this time, please press the star and the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. First question comes from David Lewis from Morgan Stanley. Your line is open.

David Lewis

[00:23:04] Good afternoon, Ray. Congrats on Nice Quarter. I want to focus on the future outlook here. So thinking about the fourth quarter guidance relative to third quarter performance, just sort of give us some more granularity there. There’s there’s going to be several investor questions on whether that reflects, you know, some some conservatism, whether it reflects a view on resurgence, given how the business was impacted previously. Most of our companies are not guiding particularly aggressively in the fourth quarter, but the splotchy reflect resurgence does reflect some conservatism or something you’re seeing in the channel from a from a share perspective.

Raymond Cohen

[00:23:38] Well, I’m going to take it backwards. First of all, thank you, Dave, and appreciate your comments and your question. Let’s take it with our conservatism, if you may. And Q4 has nothing to do with competition. I think we demonstrated in the third quarter, despite the fact that Medtronic launched their product in August, that, you know, that did not impact our ability to post some pretty pretty good numbers. I think that when we kind of break down what happened in the third quarter and we look at the early part of the of the quarter, it’s clear that we had some slop over a few may or benefited some from some deferment of procedures that would have occurred in Q2 that wound up being that wound up being done in July. So even though the quarter was was pretty flat in terms of quarter to quarter and all the rest of it, but that’s real and we recognize that. So that’s one. The second thing is that, you know, covid and the resurgence of covid and hospitalizations is putting a lot of pressure, not only on hospitals because of the increase in hospitalizations, but more so it’s the impact on the psychology of the patients that are out there. And the fact of the matter is, we are seeing and we particularly saw an increase of this in October where patients have canceled procedures, where they just you know, they can’t put the last minute. They don’t show up, they get cold feet. And I just think that we’re trying to be realistic and a bit conservative to recognize that this is a very real phenomenon. And, you know, we’re trying to put things in perspective and it’s very, very difficult for us to be able to, how shall we say, predict exactly what the impact is. This is the reason why we’re suggesting that, you know, Q4 may come out in a similar range to what we’ve seen in Q3 based upon these these facts and circumstances. David, do you have a follow up?

Neil Bhalodkar

[00:25:53] Operator, we could go to the next question please,

Operator

[00:25:54] Next question comes from Bob Hopkins from Bank of America. Your line is open.

Bob Hopkins

[00:26:01] Oh, thank you and good afternoon. So I apologize for the follow up on the fourth quarter, but it’s kind of a unique time. I’m just curious to hear the guidance that you’re giving for the for the fourth quarter. Does that assume that things get a little worse from where you were in October? You know, a little better or relatively the same.

Raymond Cohen

[00:26:28] I’m trying to think about how you ask the question, if things continue the way, based on what we saw in October, then we would certainly hit the high end of the range. I think that’s the direct answer to your question. So I’m what I’m worried about what I’m worried about, Bob, is I’m really worried now that the pace of cancelations and headwinds is more than what we’ve experienced as of right now as of what we saw in October. You know, that’s fine.

[00:27:02] We’re tracking in the direction that we would expect, but I’m afraid, honestly, about what’s going to happen. And I know that there’s been management teams that have been all over the board on this. Right. Some have been really ultra conservative about covid impact. Others have said they don’t see an impact. I’m just telling you, this is what we’re seeing and it’s just reality. So we take that into effect with the fact that we had some some deferment of cases from Q2 into the early part of Q3. That’s why I think this notion of a thirty four to thirty six dollars million range is a reasonable estimate. And as you could I think, appreciate is everybody in the call would appreciate. You know, our objective is to beat numbers, right? We want to beat the numbers. But, you know, here we are at the end of the year and you know, the Question of the day, what do you think about the current quarter? So nothing that really happened in October makes us want to hide under our desk. It’s just that, you know, I think we would have done a lot better had it not been for some of these comments that we’re hearing from across the United States. And this is no longer just a phenomenon in Wisconsin or some Midwest phenomenon. The fact is patients are nervous all over the United States.

Bob Hopkins

[00:28:17] So it makes sense. Look, this is all in the last 10 days. So people are reacting kind of on the fly that give guidance on that. That’s why I think you see the wide range of how managements are reacting here. So my my follow up is really just on. You know, one other question on the competitive dynamic, because I think most people on this call agree that the market looks like it’s expanding and there’s a lot to look forward to here. But I’m just curious if you could flesh out a little bit more from what you saw from the launch of Micro. Did you have a number of accounts that you were you were 70 or 80, went back to maybe 50 50, just maybe some anecdotes on the field on how you think that micro is gone and accounts of Medtronic accounts that you had penetrated.

Raymond Cohen

[00:29:04] So micro you now you’re asking again about people are asking about micro. We just have not seen much activity with micro. We saw some accounts, particularly, let’s say those calls out there who felt some obligation to try this new product, considering there’s no clinical data out there and they really don’t know how well it works. So we saw some people dabbling with that product, but I’d put that into the accounts that we penetrated. If they used micro, we’re curious about trying it. And that’s fine. Right. And it’s to be expected, but we didn’t see really much more than that. The point that I made in my prepared remarks, which I think people may find interesting, it’s interesting, too, that we’re competing with that really hasn’t changed.

[00:29:46] You know, and it’s interesting, too, which is now, quote unquote, MRI compatible. Right. That’s what’s being sold out there. And if you take a step back and just think about why would that be the case, considering the comments that Medtronic made at the end of July? Right. With their funky quarter ending at the end of July, they said their revenue is down 50 to 55 percent. And then we all know what happened in the March and in April and so forth. So we know nothing was sold then. So think about how much inventory these guys must have on this shelf right now. So it’s not that surprising to us that that’s what the message would be to their field force, you know, to push that product. I think that there’s a lot of reluctance in the marketplace from the average user about taking on a product which has no clinical data. That’s very real. And I know that, you know, some physicians were maybe, you know, more loose about their comments that, well, maybe it’s important, maybe it’s not important. But in general, I think urologists and your gynecologist are relatively conservative group. And this does matter. Clinical data does matter. We’ve been saying this all along, and I think we demonstrated in the face of this new competition, in the face of these new products that we you know, we had a great quarter. So, you know, you know, it’s you know, when you have somebody getting on a blower and saying, you know, we just took back 40 percent of the rechargeable market, I’m thinking 40 percent of what? No, you know, where’s where’s the data? There’s no data. You know, we we gained five or six share points. Well, wow. If they did that, why don’t you disclose the data? Let’s see what the numbers are. How can we talk about market share gains or losses or shifts, if anything, if we have no idea what the denominator is? So enough said about that. But, you know, we’re faring quite well, I think is the message I’m trying to get across in the face of new products being released by by the incumbent player in this market.

Bob Hopkins

[00:31:47] Thank you, Rick.

Raymond Cohen

[00:31:48] Thank you. Appreciate the question.

Operator

[00:31:55] Next question comes from Chris Pasko from Guggenheim. Your line is open.

Unidentified Analyst

[00:32:01] Thanks, appreciate taking the questions so rare. You mentioned that you expect your mix to shift primarily to legal cases going forward. Just remind us what your replacement mix was in the first half of the year and maybe give a sense of where that stood three to.

Raymond Cohen

[00:32:15] Sure, it was. Generally speaking, it was around 20 percent of unit volumes. And it’s it’s diminishing from that number. So that’s kind of what’s going on.

Unidentified Analyst

[00:32:30] Ok, that’s helpful. And then I was hoping you could spend some more time going into detail on the market development plans and the DTC initiative. Market growth here is going to be a bigger and bigger focus going forward. It seems like raising awareness is going to be an important component of that. So you talked about taking a targeted approach. Are you focusing initially on certain geographic regions or are you calibrating it some other way? And then how you measuring success there to know when it’s time to sort of step on the pedal and ramp that up? Sure.

Raymond Cohen

[00:33:00] Those are all good questions. Look, I think that, you know, measuring success is important, right? And you have to think about, you know, I think impressions and clicks are not something that’s that’s really meaningful and tangible in terms of tracking that to revenue. So you’ve got to go beyond that. Right. And what is beyond that? Well, when people actually take additional action and they qualify themselves, you know, that’s that’s the number one step that we’ve taken. I think of an intelligent and enlightened approach where we actually have a third party that we’ve contracted with, which is staffed with nurses who are actually calling those patients who fill out the survey, the online survey. Right. You know, they click through, they get a survey, they qualify themselves. And then at that point, we’re calling and following up with those people. Now, based on those conversations, we can then do what we call a warm handoff into practices based upon zip codes and trying to be fair and all those kinds of things. So that’s kind of how we’re doing it. We’re not doing physician locator stuff on our website. And I think that we’ve been able to get the benefit of going to school by seeing, you know, the journey that that inspire and the euro lift product from Teleflex has already gone through.

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[00:34:23] And we’ve seen them shifting away from physician locators and just leaving it up to the patient to take the action. So we’re being pretty, pretty proactive. So we’re going to measure based upon how many patients we can actually drive into a given practice. Now, we all know that not all patients are going to be absolutely ready for third line therapy on day one. Right. You could have this problem. You could have had the problem for many years. But, you know, you may have just tried a drug and maybe that’s as far as you’ve gone. So they’re going to be you know, they’re going to they’re going to show up in all categories of where they are in the in the patient care continuum or the care pathway. So, you know, that’s how we’re going to measure it. Right? I mean, and in the end of the day, what’s the whole point of the whole point is to drive up procedural volume. Right. That that’s that’s the point. Create awareness and get people to understand the scicluna modulation is the way to go.

[00:35:18] So I think we’re doing a lot to not just spend money without understanding what the result is, but it’s way early. Right. We’re one month into this endeavor. That’s why I mentioned, you know, the top of the first inning for us. So we’re you know, we haven’t even gotten, you know, kind of up to bat yet, let’s say. So we’ll we’ll be reporting more about this in the first quarter when we do our kind of Q4 and Twenty twenty wrap up. And I have no problem with providing color. It’s just that I just don’t have a lot of information at this time. Ultimately, we’ve seen that, you know, radio spots work for medical devices. We’ve seen the television advertising works for medical devices. This is this is the time or the what whatever the expression is, you know, the time has come now. We’ve seen, you know, Mossimo do it for pulse oximetry for at home. We’ve seen it for your life. We’ve seen it for Inspire, you know, so there’s quite a number of companies now that are actually advertising on television. And, you know, our colleagues in the business, I mean, they wouldn’t be doing this if it doesn’t work, but it does require investment of money. It is a campaign and it takes time to be able to measure these things properly. So I know that was a bit of a long winded answer, Chris, but hopefully that that was sufficient for today.

Unidentified Analyst

[00:36:46] That’s great. Thank you. Welcome. Thank you.

Operator

[00:36:50] So our next question comes from. A matter from five percent. Your line is open.

Adam Maeder

[00:36:55] Hey, guys, congrats on the quarter and thanks for taking the questions here. Maybe just one question on Q3, just around. Just a housekeeping question on the backlog benefit or the bullies. Are you guys able to quantify that to some degree, what you saw in July?

Raymond Cohen

[00:37:15] No, that’s why we’ve been a bit squishy about saying it. I mean, there’s some impact if I go one level down, but I can see is I can see the replacement they’re able to track, what is it, Denovo of sale versus a replacement of interest in, too. So that’s kind of we saw a bolus of these replacements in July, which then waned throughout the rest of the quarter so that, you know, without giving you absolute dollar amounts or unit numbers, that that’s the phenomenon that we’ve we observed. And you know that that’s the reason for mentioning it. And it’s not surprising. Also, we never, as you know, Adam, we never expected to really participate in the replacement market. It was really not part of kind of what we thought about or did much about.

[00:38:07] It just turned out that there’s been a lot of demand, right. To to flip these patients from the old interest them into our product. So we’re happy to have that business. But the shift now towards more Denovo procedures and the fact that we’re continuing to generate revenue at a good clip, I think that’s the direction that we would want to be going. So I’m happy to have had some replacement business in the past. It’s now waning and that’s fine. And, you know, we’re replacing that with real with, you know, new patients coming into the into the program, which is ultimately what we all want. We’re talking about market expansion. Know the market’s not going to expand by doing replacements. The market’s expanding for us by getting more Denovo patients coming in the door getting procedures. Great.

Adam Maeder

[00:38:52] Thanks for the additional color there. Right. And then just one question on the commercial organization. Just was hoping to get the latest update there. Both know in terms of rep and clinical specialist headcount and kind of how you plan to have that progressed over the next couple of quarters. Thanks so much, guys.

Raymond Cohen

[00:39:12] Yeah, thanks, Adam. Good question. It’s suffice it to say that we’re going to finish the year close to 200 people in total between sales managers, salespeople and clinical specialists, maybe a bit over that line. And as we have said many, many times in the past, that our strategy is to add more clinical specialist as case volume grows and we will continue to do that. So you would not be surprising for us to have a count of closer to 300 by the end of Twenty twenty one. So we’re going to continue to add those additional people to support increasing volumes throughout Twenty twenty one. And, you know, when you look at if we run the numbers based on what we just guided to, you know, you’re talking about 110, 112 million maybe maybe more for if we’re lucky, next year, we’re presenta what consensus is. We all understand that if we’re going to increase revenue by at least 50 percent, that means there’s going to be a lot more cases for us to cover. So we’re going to need more and more people to be able to do that, to maintain this level of how should we say, service and support that we’re providing to our customers. They really appreciate that. We want to continue with that. So you can see that, you know, this is just logical, right, in terms of how do we get to the promised land? How do we support that business?

Adam Maeder

[00:40:42] Very clear. Thank you. Thank you.

Operator

[00:40:46] Your next question comes from Kaila Krum from Travis Securities. Your line is open.

Kaila Krum

[00:40:52] Hi, guys. Thanks for taking my questions and congrats on the quarter. You know, just to follow up on Micro, you know, is there anything that you guys have been sort of surprised by as it relates to any of their tactics or pricing strategies in the rechargeable segment? And I guess I guess specific to kind of the last month or so, it would be really helpful just to make that clear.

Raymond Cohen

[00:41:15] You know, I appreciate the question. And, you know, the fact is that, you know, this is not our product. There’s been so few devices that, you know, that we know about. Right. That and we remember where we’re calling and we’re working with people who’ve already switched their business to exotics. And, yeah, some of them may have done some micro implants here or there, but it’s the it’s the customers that we don’t have that would be using that product. And, you know, that’s where Medtronic went. They went to their loyalists. They didn’t come banging on our customers because they got you know, they weren’t good. They’re not going to get rewarded that well, you know, come into people that have really switched and are happy with exotics. So, you know, yes, of course. Were there some procedures done that we know about? Of course. But we have really. And even though we ask and we’re looking for for data and would love to be able to report to you, the fact is there’s a paucity of data that’s out there. And I just don’t think that know. We’re going to be the source of providing that direct feedback, right? It’s just that we’re asking, but on the other hand, we just don’t know that much. And there aren’t that many data points for us to really follow up on.

[00:42:27] As I mentioned earlier, just worth repeating, we’re competing against the legacy product we’re competing against. Interesting to that’s what’s going on in the marketplace. That’s what they’re pushing. And, you know, they’re they’re up to their all their other tricks. You all have heard it directly. This information, you know, making bold statements that are not backed up by facts or numbers, disparaging remarks about us. I mean, that’s been their approach. And they continue to to to use that approach in the field. Our approach is to put the wife hat on, take the high road and continue to focus on doing what we’re doing because it’s working and we don’t want to we don’t want to get into some battle of words and all the rest. It’s bad enough that we have to even address these issues on these calls. Right. So the direction to our team is let’s continue to plow forward. Let’s provide excellent service and support to our customers. Let’s talk about what we’re doing. Let’s talk about the innovation. Let’s talk about the future pipeline of the company. Let’s talk about the fact that we are now here we are today. We just announced it. You know, we now have a third generation, a device that is been filed with the FDA in less than one year or in a one year period. These are all things that our team can be proud of. I mean, the whole MRI work that we’ve done to expand indications and so on. So I don’t want to turn this into a political stump speech. It’s just, you know, I appreciate the questions. I understand people are curious about it. But, you know, what we said earlier was, look, we’re going to let our numbers speak for themselves.

[00:44:09] And I think so far that’s exactly what we’ve done is very clear. And then I guess, you know, if I just analyze your current revenue, I mean, you guys are already annualizing at about one hundred and forty million. You’re gaining momentum. You’re launching a next gen product next year. You’re adding clinical specialists. You know, you mentioned you’re privy to where the street is is looking at for next year at one hundred and fifty five million. Is that sort of the right place to be? If there’s any sort of comments just directionally that you guys might be able to provide, that would be super helpful. Thank you.

Kaila Krum

[00:44:44] Yeah, thank you. I appreciate the question. Yeah. I mean, our our statement about next year is going to be that, hey, we’re comfortable with analyst consensus and we’ve said that all along this year, throughout this year for Twenty twenty.

Dan Dearen

[00:44:57] We’ve also been asked about it for Twenty twenty one and we’ve said the same thing. So, you know, we’re we’re focused on continuing to increase. Now, you’re correct. I mean, you just the numbers you rolling forward. But, you know, we’re we’re obviously looking to do better and we are gaining new customers and, you know, we’re looking to increase the business. So, you know, our objective is to do the same thing next year as we did this year, which is to surprise people with overachievement.

Kaila Krum

[00:45:30] Thank you. Thank you.

Operator

[00:45:36] Your next question comes from Michael Pollacks from Baird.

Michael Pollack

[00:45:41] Good evening, Dan and Neal. Thank you. Maybe a question on Demarai Nuance’s. I thought the webinar last week was very compelling. The physician that led that program admitted as a longtime interest in user that he had zero idea about the nuances of an MRI label until he put it in time to learn about it. And at least for me, it was quite clear that your label is far superior to even the recent improvements of your peers. So curious, what sort of physician response did you get to that webinar? Number one and the number two, what else can you be doing on this front to build awareness around what seems to be a clear differentiator? But admittedly, it’s in the weeds nuance that that could get lost in an elevator pitch.

Dan Dearen

[00:46:28] Yeah, I’m with you, Mike. You know, it’s pretty obscure. I mean, suffice it to say that urologists than you were gynecologists don’t know much about MRI, you know what I mean? They you know, their history with MRI as well. You can’t get an MRI if you have an implant with an interest in your body. So it’s not like something they ever spend much time on. So it’s not unusual that they would be confused or easily confused or easily led to believe things just based on the use of some fancy terms. So this is why we’ve taken it upon ourselves, you know, to try to educate our physician customers about the differences and also about how all this works. And I think the key takeaway. Which we appreciate that you observed and noticed that it’s just the fact that, you know, with our product, you don’t have to wait 60 minutes between scans. Right. And most scans, as the radiologist explained, take more than 30 minutes to do right. And and in the case of our competitor, you know, you’ve got to reset the clock, right. And a 60 minute time out in between an MRI scan. I mean, that’s a nonstarter. That means, for the most part, you’re coming back at another time. And that’s a big inconvenience. And I think Dr. Butyric, who spoke, I think that’s the thing that really got him to understand. And then the idea of resolution, right. With the SAAR rate and so forth, we can provide some better resolution as well. Now, we haven’t stopped. And, you know, we put out a news release that we’re now adding extremity coils to the MRI armamentarium. If you may, we are going to you know, we’re going to continue. But that’s that’s we’re pretty much now at the end of the road, right. Once these other additional enhancements get approved, there’s really nothing more that we could possibly do that would that would make it easier for patients or provide more flexibility for radiology technician. So as our Dr. GAO said on the on the seminar, when this current round of enhancements gets approved by the FDA and we’ve done all the testing and we are ninety nine point nine percent confident that it’s going to get the approval, then we’re going to have by far the best conditions in this particular category and also better than even our colleagues in the Sequenom in the spinal cord stimulation business for pain. So we think that this is important in the end of the day. Mike, what’s going to win the day? We believe it’s the patient experience, right? That’s what’s going to matter in the end of the day. And everything we’re doing and even what I talked about today with respect to the third generation implantable device, you can see the philosophy of our company is all about making it easier for patients that they have a better experience about this because happy patients make happy talk and they are the ones that provide referrals. Right. So that’s kind of what we’re up to. And you’re going to continue to see a steady drumbeat from the company with respect to these kinds of things.

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Michael Pollack

[00:49:33] Appreciate that, Ray. Maybe a quick one, perhaps, for Dan on the gross margin revenue, you know, comparing it to the first quarter of twenty. And I know it’s just been a weird year altogether and you’re in very early stages of ramp, but maybe comparing it to the first quarter of Twenty twenty revenue, you know, noticeably higher gross margin, you know, within your target range, but perhaps a little lower from the one to 20 level. You’re building inventory. Is that the is that the key item there or are there other kind of small variances to call out that might have been at play?

Dan Dearen

[00:50:08] I think the we had phrased our gross margin in the third quarter, as we said, with sixty one point nine percent, which is in line with our internal plan. And it’s consistent with past results, excluding the second quarter of this year, when obviously volumes and margins were lower due to overhead absorption and as a result of covid. And so what we’ve been projecting is, you know, as we ramp, there is a certain process of scaling up and there is some inefficiency combined with you get purchase volume discounts by building in larger quantities and longer production rooms, which is what we’re seeing as we scale and go over the long term. We’re still expecting gross margins to be in the low to mid 70 percent that. Does that answer your question?

Michael Pollack

[00:50:51] Yeah, no, I think it’s good. Thank you very much.

Operator

[00:50:58] Our next question. Your next question comes from Carrie Eagleson from Wells Fargo. Your line is open.

Unidentified Analyst

[00:51:05] Good afternoon. This is Kevin on for Larry. Congrats on the nice quarter. I just wanted to clarify a number I noticed in the press release as the preface to my question. You said you had over 50, 500 patients that had been treated with your product. I’m just wondering, is that through the end of the quarter or through October? So if I do the math, I’m getting slightly below that. If I use, you know, go through Q3 using your revenues with that. My question is kind of around putting a finer point on October and not not to beat a dead horse here. I’m just curious, you know, to parse out what type of headwinds you’re seeing of canceled procedures in October. And if you’re now below the run rate exiting Q3, or is it more you’re seeing cancelations today for procedures that are coming up in the next two months. Thanks very much.

Raymond Cohen

[00:52:04] All right, Kevin. So your first part of your question was the number that we put out there. This is since this is since October or will I’ll just say November 1st. In effect, I think our first procedure we ever did was maybe October 28th and maybe the next day was a Saturday. I don’t remember exactly, but it’s a year and that’s what we’re that’s what we’re reporting on. So, you know, and that was it wasn’t just the US. No, it’s just that’s the number we have, you know, to date. So I don’t think that’s controversial. The second part of the question was about canceled, canceled cancel procedures. So, OK, how do you how do you get visibility to cancel procedures? Well, we don’t we find out about canceled procedures pretty much a day or two or three or maybe a few days before the procedure is going to take place. So, you know, they always come as a surprise to our people in the field. I mean, that’s kind of how it how it happens. We’re not we’re not involved in the scheduling of these patients. We’ve got to go by what the physicians and hospitals tell us and we show up. Right. That’s kind of how it works. So what we saw was and this is not something that we can track. Absolutely right. This is a lot of anecdotal conversations that you have with your people in the field. Hey, what are you seeing? What’s going on? And when you start to ask these questions and people say, well, I’ve seen more procedures, more procedures canceled in October than I have, you know, from when when when we got back in business in the early part for, let’s say, in really kind of May, June, and then from there, that’s what’s happening. And it just seems that the pace of these cancelations is kind of tracking to what you hear on the news. I mean, it’s not this is not some amazing, enlightened comments that I’m making about this is just what’s happening around the country. And I think everybody sees it. Everybody knows that this is what’s going on. October was a good month for us. And I think, you know, despite the headwinds and everything else, we still continue to plug along. Right. So I’m really doing my best to try to provide a serious and balanced outlook for what is only two more months of this year. And I just want to put this in perspective and I appreciate the question, Kevin, since I haven’t said this. I mean, the expectations for our company were significantly lower than what we’re going to end up with. And this is despite the pandemic. And despite that, we were really out of business for two months.

[00:54:54] So, you know, I would hope that when people, you know, when was an eighty three million dollar expectation, then there’s a pandemic and then we’re going to finish the year, what we hope to be between 110 hundred and twelve million, maybe more. You know, that, you know, people would recognize that, you know, we’re doing a good job as a company and with our competitor having responded with some new products and some new technology, hats off to them. If they’re going to respond with some direct to consumer advertising, which I heard them say, then then we think that’s fantastic news. And as Dan has said many, many times, you know, this is going to benefit increase in the size of this market is going to benefit Medtronic and exotics. And so we shouldn’t be banging at each other and we should just simply be focused on how are we going to grow this business? And there’ll be plenty of business for everybody to be had. Right. And and I know they’re bullish. They’re talking 20 percent. Well, great. If the market’s growing 20 percent and we’re thrilled to death. Right. Because that that. Is consistent with what we said was going to happen, and we’re we’re happy if Medtronic is doing more fantastic, we’re doing more people know what our numbers are. We’re curious about there, but we think it’s fine. So we’re focused on what do we need to do, you know, to grow this business and to see the market expand. And we’re we’re committed to to this mission, if you may. And so I know I went a little bit off the rails there, Kevin, but I appreciate the question. And we’re going to continue to focus on executing our business.

Unidentified Analyst

[00:56:32] Absolutely, I appreciate it. My last one is just I wanted to spend a minute just on the primary cell divide. You know, you mentioned the Gen3 product coming out, but we didn’t hear anything about the primary cell divide. I think you said in the past year you’re planning to file as early as you can. And in twenty, twenty one, I’m just checking in. Is that still on track? And, you know, big picture, how would you frame up the level of interest in that product and what type of impact it could have to you? Thanks so much.

Raymond Cohen

[00:57:04] So we think it can have a big impact on our business. We think it will help us grow. I don’t think it’s going to help us much in Twenty twenty one. I just based on the review time and all the rest. But as you look into the future, I think it’s going to be a big deal. Now in the prepared remarks. I indicated that we expect to be able to get that product through validation verification and get it filed with the FDA within the first quarter of next year. So that’s our objective. Everybody’s focused on that and we feel pretty good. The product looks great. And I’m being very, very careful not to provide specifications on this product. When we file with the FDA, we will fully disclose what this product is all about. But there’s just I don’t feel compelled on November the 4th to to provide the specifications to our competitor.

Unidentified Analyst

[00:58:06] Makes sense. Thanks again. Thank you, appreciate that.

Operator

[00:58:13] Your next question comes to the line of David Saxon from Needham. Your line is open.

David Saxon

[00:58:19] Yeah, hey, guys, thanks for taking the questions, I guess first, just on on rep productivity, I think Medtronic is around, you know, the three point five million range. Just wanted to see how you’re thinking about the long term productivity for Sonic’s reps. And, you know, if maybe longer term you can get about that.

Raymond Cohen

[00:58:43] So thank you for the question. Given the number of apparently let me let me be clear about how I said it based upon what we heard from Medtronic recently, apparently they have close to 500 people working for them in the cyclone undulation category. So unless there’s hundreds of these people that are out in the rest of the world, which is not that logical, considering only represent historically about 10 percent of their uptake, they must have a lot more people in the United States than than would support to three and a half million dollar number. So the three and a half million dollar number that you got, I think came from us based upon how we calculated the historical revenue in the United States and divided it by the number of reps that we understood that they had. Now, apparently, according to them, there have outpaced the number of feet on the street and they have twice as many people as we do. So if they have twice as many people as we do, then that means their productivity is significantly less than the number you just quoted. So once again, we’re dealing with a bunch of Kabuki numbers here, unfortunately. Do I believe that our reps can produce three and a half million dollars of revenue per year? Well, the answer is absolutely. I believe it because we already have a few reps that have done that in in this year despite the pandemic and so on, so forth. So the answer is absolutely. That is the kind of productivity that we can expect in future periods. As we’ve indicated, the number of accounts that we have is a leading indicator of what we think is going to happen in the future. And there’s no reason why our people cannot be productive at this at this level. And, you know, you could imagine that I don’t have there’s not one sales person working for us today that doesn’t believe they can do this. And that’s that’s important. And we’ve got folks that have just I mean, they are pointing the way as to what is really possible in terms of generating revenue. So I don’t I don’t think we’re you know, it just going to take some time. Right.

[01:00:57] Because when we talk about this, we always revert to the average. Right. And as everybody knows, you know, when you’re first starting, you know, the average is a bit misleading because you’ve got people in the top 20, you know, that put really big numbers on the board. And then you always have the people in the bottom 20 that for one reason or another are slow on the uptake. And so that’s that’s the game. So for us, it’s you know, I’ll just parrot what our chief commercial officer says on a regular basis. Right. It’s really, you know, you expect the top 20 to blow out the numbers, the bottom. You’re always going to have a bottom no matter what. It’s the people in the middle that are going to make or break in. And that’s where we need the increased productivity to be able to make numbers in Twenty twenty one.

David Saxon

[01:01:42] Great. That sounds good, and then just some utilization, can you talk about the trends you saw during the quarter, maybe relative to the first quarter up through mid-March? Thanks so much.

Raymond Cohen

[01:01:56] Yeah, I’m not really sure that the word utilization applies to our business, and it’s not like we put a piece of capital equipment in and people are utilizing it. They’re not utilizing it. You know, this is about really patients walking in the door. Right, and getting them into third line therapy and getting a device implanted. So, you know, that’s going to be all over the board. Right, depending upon the type of customer you have. Are they private or are they hospital employees that have their own AFSC? I mean, there’s a lot of different motivations. But then I think what Neal in particular we’ve tried to communicate is that we’ve kind of put this number around. What do we think, you know, an account is worth on average, and we’ve targeted that at about 30 procedures per year. So that that’s kind of how we look at the business. But once again, not all customers are created equal. Some do substantially more than that and others do less. So it’s a little bit misleading to talk about that. So, you know, this is about Denovo patients and, you know, getting them in the door. And for us, everything is brand new. We don’t have a historical context with any of these customers. We’re going to now, you know, first start to see that in Twenty twenty one where we really can compare, you know, what did you know, Dr. Cohen, as an example? What did he do with us in Twenty twenty? OK, granted, there was a pandemic and all that. But you know, how how much more productive would that practice be for us in terms of procedural volume in twenty one? So it’s it’s too early really to ask us because we just don’t have the historical data and everything has been mixed up because of the pandemic and different headwinds at different times and so on. So, so we’ll be as forthcoming as we can. I’m just being honest by saying we really don’t have that data and I don’t want to make up anything that would be potentially misleading.

David Saxon

[01:04:00] That’s fair. I’m just a quick follow up on a comment you just made about the assumption that one account is worth about 30 implants per year. So that I mean, during quick math, I mean that I’m getting 250 to 300 million annualized. Is that kind of the right way to think about it, you know, as as things normalize?

Raymond Cohen

[01:04:26] Yeah, I think what we have said, you know, is that the number of accounts is a leading indicator of what’s going to happen in future periods. So, you know, sure. I mean, we look at kind of our book of business. I mean, yeah, you can do quick math and you can say, well, certainly by Twenty twenty two, we would be hoping to be able to, you know, have those kinds of numbers across the board from all our accounts. That’s the future for us. There’ll be some more customers that will come our way. Some are going to be more or less productive. But it is an indicator if you don’t have a customers and I’m doing the volume, that’s for sure.

David Saxon

[01:05:08] Got it. Thanks so much in Congress in the quarter.

Raymond Cohen

[01:05:10] Thank you. Appreciate that.

Operator

[01:05:14] Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.

Raymond Cohen

[01:05:19] Great. Thank you.



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