Axonics, Inc.

Good day, and thank you for standing by. Welcome to Exonix Q3 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Neil Ballacher. Please go ahead.

Thank you. Good afternoon and thank you for joining Exonix's third quarter 2022 results and update call. Presenting on today's call are Raymond Cohen, Chief Executive Officer, and Dan Deren, 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 Axonix's 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 31st, 2022. Except as required by law, Exonix 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 two really notable events. That is, today on October 31st, Halloween, is exactly four years since the date of our initial public offering. So it's kind of a big day for us today with our four-year anniversary. And moreover, On November the 1st, which would be tomorrow, was the date of our first U.S. implant of a sacral nomodulation device in America. So October 31st, November 1st, these are dates that they really resonate with us at Exonix. So getting on to the business at hand, we're really proud of our third quarter 2022 financial results in which Exonix generated record total revenue of $70.4 million in This is now the second quarter in a row in which our total revenue has grown by over 50% year-over-year and demonstrates the growing demand for Exonix's best-in-class incontinence products. More specifically, cyclonal modulation revenue was $56.9 million, representing an increase of 42% compared to the same period of last year. This record level of synchronal modulation 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 S&M system, as we've dubbed the Exonix F15, has been very well received by implanting physicians and continues to exceed even our own high expectations. Now turning to BulkMed, 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 BulkMed 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.

Thanks, Ray. As Ray noted, Axonix generated net revenue of $70.4 million in the third quarter of 2022. This represented an increase of 50% compared to the prior year period. Sacral neuromodulation net revenue was $56.9 million, of which 98% was generated in the United States. Volcomed net revenue was $13.5 million, of which 82% was generated in the U.S., Gross profit for the third quarter of 2022 was $51.3 million, representing a growth margin of 72.8% compared to 66.5% in the prior year period. Overall, manufacturing efficiencies, higher sales volume, bulk in that sales, and a product mix weighted toward the F15 neurostimulator contributed to a favorable gross margin compared to the prior year period. Regarding supply chain, we continue to experience challenges in sourcing certain components for our implantable S&M system. To date, we've been able to manage through these issues. However, it remains an area we are monitoring and managing closely. Operating expenses for the third quarter of 2022 were $67.6 million, Included in operating expenses are $8.2 million of non-cash costs for the change in the fair value of contingent consideration related to the $35 million milestone payment tied to the BulkMed acquisition. Excluding acquisition-related costs, adjusted operating expenses were $59.4 million compared to $47.7 million in the prior year period. Net loss for the third quarter was $16.3 million, compared to a net loss of $17.3 million in the prior year period. We are pleased to note that this marks the second quarter in a row that Axonics generated positive adjusted EBITDA. In addition to interest, taxes, depreciation, and amortization, we are also excluding stock-based compensation and non-cash acquisition-related costs in our calculation of adjusted EBITDA. The attractive financial profile of the company and the inherent operating leverage in our business model is becoming more evident in our financial results. To set proper expectations, in the quarters ahead, there will be periods where we will swing back and forth between positive and negative adjusted EBITDA based on the seasonality of top-line results in corresponding gross margins. With that said, based on current trends, we expect that Exxonix will be adjusted EBITDA and cash flow positive on a consistent basis at an annualized revenue level of approximately $350 million. As of September 30, cash, cash equivalents, and short-term investments were $350 million compared to $213 million as of June 30th. This increase was a result of the $128 million equity offering we completed in August and positive cash generated during the quarter. With respect to fiscal year 2022 guidance, our updated outlook is as follows. 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 bulk embed 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 Axonix F15 cyclinomodulation system. Physician response to the introduction of the F15 continues to be overwhelmingly positive. We are enjoying the benefits of having a complete sequential modulation portfolio, and are capturing a higher share of wallet in existing accounts and selling our S&M 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 Exonix 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 incontinence symptoms to visit findrealrelief.com, our patient-based patient-facing landing page. The website provides information about Exonix's incontinent solutions and directs 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 exonics 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 exonics 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 six months for one 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 nerve stimulator 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 Exonix. 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 Exonix 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, Exonix 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. We would like to ensure that each analyst gets the opportunity to ask a question. So we request that you please limit yourself to one question and one follow-up. Amy, please begin the Q&A session.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. And our first question comes from Adam Meter with Piper Sandler. Your line is open.

hi ray hi dan hi neil uh thanks for taking the questions here and uh congrats on a great quarter um wanted to start with the guidance update and uh by my math the q4 implied guidance implies something like 74 million and change that's up about five percent sequentially quarter over quarter you had a double digit step up sequentially um 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 you know, conservatism baked into the guidance raised, and then just any early commentary in the business for the month of October. Thanks.

Sure. And thanks, Adam. Appreciate the questions. So, look, we've increased the guidance for the full year a bit more than the BEAT, of course. And, you know, the $74.2 million, if you do the math, turns out to be $60.3 in S&M and $13.9 in Volcomet. Now, the 13.9 is unchanged from the consensus going into the quarter. The 60.3 is up a million over what the consensus was. So, you know, as always, we tried to be a bit conservative in terms of the guidance. And, you know, we'll do our best to exceed those. But, you know, this is, as you've seen, this is a really strong year for us. And we've, you know, we beat these numbers and we've increased the guidance every single quarter now during 2023. So, you know, things are looking good. We've got good momentum in the business and, you know, not much more to add from there.

Okay, understood. Thanks, Ray. That's helpful. And then for the follow-up, just wanted to ask about direct-to-consumer and, you know, maybe just remind us kind of the expectation for full-year spend. in 2022 from DTC initiatives. And then I know it's, you know, not quite 2023 yet, but, you know, just talk about the game plan or the strategy and budget really, you know, for DTC spending in 2023 and just any other OPEC spend color you want to add at this point in time. Thanks so much, guys, and congrats.

Yeah, 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, the responses are quite amazing. And, you know, 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, you know, 830,000 people visit the website, learn about exonics, and obviously, you know, that number is going to be well over a 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 then 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 great halo effect for the company and actionable for the physicians. Obviously, you know, some are better than others, right, in calling out to people to get them in their calendars and so forth. But nevertheless, we're going to continue. We've already, 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, $24 million increase 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 was covered, your questions, Adam. So thank you for that.

Thank you. Please stand by for our next question. And our next question comes from the line of Chris Pasquale with Nefron Research. Your line is open.

Thanks and 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.

No, 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 our way around it, place large purchase orders, and You know, 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 be blunt, no issue meeting demand.

Okay, that's helpful. And then, Ray, Bocomet 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, you know, right now, with respect to BulkMed, 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 Volcomed because we're advertising generically just to 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 do they have mixed incontinence. and then we can sort those individuals out and get them to the right providers. I think there's an enormous amount of blue sky. 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 You know, 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, the growth has got to trend down. I mean, you know, this is unbelievable, right, to have 120% increase from the prior year. So we'll see some reduction in terms of the growth ramp. But, you know, two more comments. One, existing customers are seeing great results and 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, you know, 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 GYNs in addition to the urogynecologists and the urologists. Thanks. Yeah, thank you, Chris. Appreciate it.

Thank you. One moment for our next question. And our next question comes from Travis Steed with Bank of America Securities. Your line is open.

Hey, good afternoon, and thanks for taking the questions. I guess you're ready to start out. I wanted to ask about the market growth in S&M. I'm just curious if you think the market's still growing at 15% now and how you think about that moving forward, you know, with DTC and Medtronic investing again.

Yeah, well, thanks, Travis. Appreciate the question. Look, we really are encouraged to see that, you know, Medtronic is spending some money, you know, to create some awareness, maybe, you know, 20 years late, but never too late, I guess, in this category. So we're pleased about that. I think, you know, we're clearly causing the matter of seeing revenue growth. There's no question that the market is expanding, and, you know, we're taking advantage of that, but we're also creating that situation. So I think, you know, there's 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 products instill 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 we have to overcome what has been a therapy of last resort as it pertains to sacral modulation. 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 procedure room when it's done, but also in follow-up to make sure that they understand that we're a horse of a different color, so to speak, versus what they might have experienced in the past when it 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 doctor's offices But the key thing is, man, that doc and the advanced providers, you know, 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, you know, sacral modulation is the way to go as compared to, say, Botox, where, you know, you've got to come back every four to six 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, of 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 uh on on this 2023 i think earlier uh you'd said you were comfortable with like a 25 growth the street modeled so making sure that's still the right place and any other puts and takes on on 2023 i don't know dan like you mentioned 350 million dollars is kind of like break even better profitability and i don't it seems like you could be approaching that uh at some point in 2023 on an annualized basis so Should we think about at some point in 2023 your margins could go positive, or is that more of a 2024 standpoint? Dan, I'll let you answer the question.

If you don't mind, you may want to confirm the 2023 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 margin. 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, you can really see that leverage and things improving. And so we have said it before, and it's we can significantly increase revenue without having to significantly increase spend in our sales and marketing lines. So things are tracking perfectly according to plan and couldn't be happier.

Great. Thanks for taking the questions. Thanks, Travis.

Thank you. One moment for our next question. And our next question comes from Larry Bejelsen with Wells Fargo. Your line is open.

Hi, this is Nathan Trebek for Larry. Congrats on the great quarter. Just thinking about the DTC effort, so you recently indicated that your competitor has also stepped up its investment in S&M. and began a DTC campaign. Can you talk about how this compares to your DTC efforts, and do you expect this could drive volumes away from Exonix?

Well, so look, you know, we're certainly not expert on, you know, what the competitor is doing or not doing. My comments are, you know, fairly generic and nonspecific, you know. So are they doing some things? Yeah. You know, it's search engine optimization. It's Facebook. We haven't seen them on national television, but would encourage them to do so. So, you know, I think, you know, if you're a Facebook user and you're in a certain demographic and you see some, you know, inter-STEM ads, you're going to probably, you know, click through there and get captured on their side of the 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, you know, it's not that generic. You know, 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 is to get patients into a doctor's office for a consult. Now, once they walk in that door, you know, the physician has to decide really what is appropriate for that patient. They've got to work them up. They've got to figure out where they are in the care pathway. So, just so we're clear, we're not selling saquenal modulation over the Internet. That is not what we're doing. What we want to do is get them to one of our customers. and then play it by ear. They might be appropriate for BocaMed. They might be appropriate for sacral modulation. 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 under-penetrated this market is when so many of these people have not even seen a physician for this problem. They never even tried a drug before. Now, there's no drugs for stress urinary incontinence, so I'm referring to urge urinary incontinence, which is what sacromodulation treats, along with frequency and along with fecal incontinence as well. So hopefully that's a fulsome answer to your question, Nathan.

Yeah, that's helpful. And for my follow-up, around S15, can you provide a little more detail about the traction that you have 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 account. Every single day this happens here. So it's not like some unique, you know, odd thing, right? A lot of these customers are realizing that, you know, F-15 is 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 You know, we got a pretty damn good rechargeable product as well, and even a more interesting one coming down the pike. So, you know, anybody who's been watching us and paying attention since we launched in the United States, and it's only been three years to the day almost, it's only been three 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.

Great. Thank you for that.

Congrats again. All right. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of David Rescott with Truist. Your line is open.

Hey, guys. Thanks for taking the questions and 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 were at 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 two quarters. And in the past, you've discussed that at scale, exonics could be at a mid-70%. type company on the gross margin line. So just wondering, you know, if we're potentially reaching that scale since you have done so well in the past two quarters on gross margins, and then just wondering if over the longer term this, you know, mid-70s margin line could be ultimately conservative.

I think the way I'd answer the question is, look, it's going very well. You know, sales are strong, and so we've had you know, the benefit of that plus the product mix with F-15, which has a higher gross margin profile than R-15, and then also bulk and med revenue coming in better than planned. And so those are all contributing to the margin improvement. 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 F-15 and we'll be bringing R-20 online as that's approved at the end of the year, that will have some impact any time you start to scale 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. 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 a tough one. Ray, maybe on bulk, I mean, you mentioned that, you know, you're essentially two years ahead of plan as it relates to hitting the initial guidance that you gave when you completed the acquisition. So just wondering, you know, 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 bulking agents, taking share from Sling. Can you just level set us as far as to where a lot of that growth has come from? Thanks and congrats again.

Yeah, thanks, David. So, you know, whenever you acquire a new product line, of course, you know, you don't really know, right? And I think everybody on this call understands, right, that, you know, 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 of the commercial reach of our organization. That is the number one reason. So, in other words, having as many feet on the street as we do, because we want to be mindful that this is a $1,000 product, right? This is not, you know, a synchronous modulation is close to $16,000. So, you know, 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, you know, 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, you know, 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 practice their technique during a training session, which these days we do right in their office. And then we like them to schedule, say, five patients right away, all stacked up in one day, hopefully the same day, if not the next morning or a couple 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 sequential modulation 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 coughing, sneezing, exercising, lifting an object, and leaking a little bit of urine. So when they're offered BocaMed as a first-line therapy, in fact, it's an easy answer for them. It's covered by their 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 an 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 whatever 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 they're more, when they see a good result, then they're more willing to talk to the next woman about this potential treatment. So it's not as if we're competing with slings, right? 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 who And I think from that standpoint, you know, we truly have scratched the surface. And we'll remind folks there's like 28 or 29 million women in the United States alone that are suffering from this problem. So, you know, 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've 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 $1,000 per patient. So, you know, there's a lot of logistics involved in treating as many patients as we're treating in the United States. So hopefully that was a good answer to your question.

Yeah, very helpful. Thank you.

Thank you.

Thank you. One moment for our next question. And our next question comes from line of Cecilia Furlong with Morgan Stanley. Your line is open.

Great. Good afternoon. Hi, Ray. Hi, Dan. And thank you for taking the question. I wanted to ask just on your next-gen rechargeable system, today 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 timelines.

Yeah, I think that, and thank you for the question, Celia. The timeline 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, you know, instead of 180 days, it'll probably turn out to be 210 days in terms of regulatory timeline, 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, a little more limited in the launch there. than we might have otherwise given that we have multiple products now, right? 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 F-15. 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. As much as we'd like to have literally thousands of F-15s and thousands of the new R-20 on the shelf from the get-go, that's a little bit challenging given the current environment. 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, it's 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 setup, 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? And thanks for taking the call.

Yeah, 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 F-15 and R-15. And did you also ask what we expect to see with the launch of R-20?

It was more the mix between the two ahead of launch and then how you see that transitioning post-launch and then just near-term gross margin?

Sure. We're expecting the mix to stay fairly consistent as it is now. I mean, 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's obviously tremendously attractive with a six-month recharge interval and only having to recharge for one hour once every six months. 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.

Great. Thank you for taking the questions.

Our pleasure.

One moment for our next question. And our next question comes from Michael Polark with Wolf Research. Your line is open.

Good afternoon. Happy Halloween. Thank you for taking the question. I'd just be curious, Ray, for your perspective on market conditions. You know, a lot of medical device companies are having a rough go and comments on staffing. And I didn't hear anything about kind of facility-level resourcing and staffing constraints. So, you know, obviously not evident in your numbers here. But, you know, what are you seeing on the ground and how are you helping providers manage through it?

You know, 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? 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 they're macro headwinds. Our customers are 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 see it. It's real. What the underlying reasons is, that's not for me to say. We are not challenged as much at the institution level Because all of our procedures, as you know, 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 exonics, for sequinal modulation, it's basically the implanting physician, a scrub nurse, and an exonics 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 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, you know, we're overcoming some of these macro headwinds, you know, 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 Exonix. So I think the success of our team, you know, commercially has helped. And I think, look, the secret sauce to us, for us, has been the clinical specialists that we have. I mean... You know, 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. You know, they've all kind of sort of done the job that APPs 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 Exonix. 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 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 Bulk Amid has proved to be a very successful extension of the platform, and I think you now, it's clear, have a platform. What are the prospects for Exxonix adding a third product? to the bag over the next year, two or three, are you still looking? Any perspective you'd be willing to share on that would be appreciated. Thanks so much.

Sure. Thanks. Appreciate the question. So, look, we don't have a third act that we've been rehearsing, okay? You know, really cool products that fit perfectly with our call point or far and few between. You know, we're you know, I mean, we're not going to get into, say, the BPH business, you know, that for men, you know what I mean? We're going to stay focused on treating women primarily. Not to say that sequential modulation doesn't work for men. It does, but predominantly that 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 incidence 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 Exxonix 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, and 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 product lines that you could grow 40% to 50%, I mean, this is incredible. So we're real 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.

Thank you. One moment for our next question. And our next question comes from Michael Cercani with Jefferies. Your line is open.

Thanks. Good afternoon, Ray, Dan, and Neil, and thanks for taking the questions. This is about my first one. On the, you know, you've got a really strong F-15 launch past two quarters. You know, outside of your competitors' investment in increasing awareness? Are you seeing anything else on the competitive response front?

Well, look, it depends on 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 the local level. but at 40,000 feet, you know, there just isn't much happening. So, you know, 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 Exonix is. And I want to add that, look, we don't play games. We play the game right. 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 for these products, and these are products that are going into patients. They're either getting injected into the ladies or they're getting implanted and so forth. I feel compelled to say that. We're trying to play this game as clean and as appropriate as possible. That's the tone of this organization.

Got it. That's helpful. Thank you. Just for my follow-up, can you just give us an update on how sales rep productivity has been trending, particularly against your expectations?

Yeah, 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, it comports, 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, we're talking $4 to $7 million for some territories and some representatives. So there's a lot of headroom to go, but 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, you know, for 2023. So it's not, we don't, you know, we're working on the productivity per rep concept, you know, 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, you know, we like the productivity. So we're quite pleased with how that's going. And, you know, look, there's always going to be X amount of folks that, you know, you'd like to see them do better, particularly in some expansion areas and so forth. But the productivity per rep is pretty solid. And I think $2 million is is a good number to plug if you're running a model or a spreadsheet.

Great. Thanks a lot, Ray. Thank you.

Thank you. One moment for our next question. And our next question comes from Mike Mattson with Needham & Company. Your line is open.

Good evening. Thanks for taking my questions. I guess I want to ask one on pricing. I know when you entered the market, you were 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 this new R20 coming?

Sure. Yeah, it's an interesting question, Mike. Price, it's really been interesting. We have seen a stable price of our products. Let's talk cyclical modulation 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, you know, let's say an HCA pays or some other large institution pays. 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, you know, look, HCA is the biggest customer in America, so clearly they're going to get the best price. But if you're not doing, you know, in your network, if you're not doing some thousands of units, you know, 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, you know, 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. Bocumet, of course, with a $1,000 price, you know, 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. you know, 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 two 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 two 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, you know, is 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 Man Foundation comes through, and we're not paying that royalty on the F-15 recharge-free system. So 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 and development. But the overall spend on a dollar basis is down because of that royalty change. Okay, got it. Thank you. Thanks, Mike. Thank you.

Thank you. One moment for our next question. And our next question comes from Shagan Singh with RBC Capital Market. Your line is open.

Hey, good afternoon. This is Avi on for Chagoon. Congrats on a good quarter. Just to circle back with just the direct to consumer ad campaign. Thanks for giving some color on, you know, 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. Thank you.

Yeah, look, we've been hesitant to provide conversion statistics, and we will continue to withhold that information for the time being. You know, 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 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 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. But that's the immediate return on investment. So we don't do just one thing. I think this is the point. Everybody's kind of locked into the DTC program because of the visibility on television and people seeing ads and things of that nature. But We've got a pretty sophisticated marketing setup, if you may, and a suite of different options. And, you know, 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, you know, it's a combination, right? You know, 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.

Appreciate it. And that's it for me. Thanks.

All right. Thank you.

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, you know, for your questions. We really appreciate, you know, 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 Exonix. And we look forward to speaking with you all again publicly. Happy Halloween. Stay safe.

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