Executives
Jody Cain – IR, Lippert/Heilshorn & Associates
Bob Krist – CFO and Secretary
John McDermott – President and CEO
Analysts
Shawn Fitz – Stephens Inc.
John Putnam – NextWave Research
Boris Peaker – Rodman & Renshaw
Endologix, Inc. (ELGX) Q1 2009 Earnings Call Transcript April 23, 2009 5:00 PM ET
Operator
Welcome to the Endologix 2009 first quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A Session. (Operator instructions) As a reminder, this conference is being recorded on April 23, 2009.
I would now like to turn the conference over to Ms. Jody Cain. Please go ahead ma'am.
Jody Cain
This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating on today's call. Joining me from Endologix are John McDermott, President and Chief Executive Officer; and Bob Krist, Chief Financial Officer. Earlier this afternoon, Endologix issued a press release, announcing financial results for the 2009 first quarter. If you have not received this news release or would like to be added to the company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with Amy Higgins.
This call is also being broadcast live over the internet at www.endologix.com and a replay of the call will be available on the company's website for the next 14 days. Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws.
These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Endologix Annual Report on Form 10-K and subsequent reports as filed with the Securities and Exchange Commission.
Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, April 23, 2009. Endologix undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.
With that said, I would like to turn the call over to John McDermott. John?
John McDermott
Thank you, Jody, and I would like to welcome everyone joining us on the call today. We are pleased to report another quarter of strong sales growth. Our global revenue for Q1 2009 reached a record level $11.8 million or 42% increase over Q1 last year and an 11% increase from the fourth quarter of 2008. Our first-quarter domestic sales increased 49% compared with the prior year and were up 11% sequentially, this is our 17th quarter of consecutive domestic sales growth.
We attribute this strong sales increase to a combination of new product introductions and the effectiveness of our domestic sales force. As a reminder we have received for FDA approvals in the past six months, which has put us in a great position to drive revenue. Of those four approvals, we have recently launched three in the US and plan to launch the fourth next quarter.
Last November, we introduced our new Powerlink XL system, which is a device that enables us to treat the aortic aneurysms with necks up to 32 millimeters. The Powerlink XL opened an additional 15% of the US market worth an estimated $70 million. Powerlink XL has the lowest profile delivery system of any AAA device in the US to treat large neck aneurysms.
Also last November we launched our suprarenal proximal extensions, which positioned Endologix as the only AAA device company to offer physicians the choice of either infrarenal or suprarenal configurations. The first presentation of our clinical trial data for the suprarenal extension was presented last month at the society for clinical vascular surgery meeting by principal investigator Dr. Stuart Harlin, Sacred Heart medical Center in Pensacola, Florida.
Highlights from this study where 100% technical success, no aneurysm ruptures, no conversion to open surgical repair, no stent graft migration, no stent fractures, no ePTFE graft material failures, and no Type III or IV endoleak. These outstanding results are consistent with our prior clinical trials, but are particularly impressive given the fact that 93% of the patients in the study had one or more hotel neck anatomies, which demonstrates the capability in clinical effectiveness of this new device. Another one of our recent new product introductions is the IntuiTrak delivery system, which simplifies delivery and deployment of the Powerlink device.
IntuiTrak is a low-profile system that features enhanced flexibility, advanced hemostasis control, and a hydrophilic coating to facilitate smooth delivery. The device has an integrated sheath so physicians don't have two exchange introducers, which minimizes vessel trauma and reduce overall procedure time. Following the FDA approval in October of last year, we introduced IntuiTrak to a limited market release to gain more clinical experience, to train our sales force and build inventory. Based upon positive physician feedback during a limited release, we moved up to timing for the full commercial launch to mid-March. IntuiTrak was used in approximately 40% of our domestic Powerlink cases during the first quarter and we expect that it will be used in virtually all future domestic Powerlink procedures.
Last month we received FDA approval for our IntuiTrak Express delivery system. Express incorporates all of the advantages of IntuiTrak, but it further reduces the delivery system profile and makes us the only AAA device company that can deliver a 34 millimeter device to a 19 (inaudible). We are currently conducting a limited market release with this device and expect a full commercial launch in third-quarter of this year.
Turning to our sales force, we are very pleased by the results in increased productivity achieved during the quarter. We implemented a number of sales force initiatives in the second half of last year and is starting to see impressive gain in average sales per territory in increased account penetration. With those comments I would like to turn the call over to Bob Krist to review our financial performance. Bob?
Bob Krist
Thank you, John, and good afternoon to all. Powerlink system product revenue for the first quarter reached a record $11.8 million, which as John mentioned represents a 42% increase from $8.3 million in the first quarter of 2008 and an 11% sequential increase from the $10.7 million reported in the fourth quarter of 2008. Domestic product sales increased 49% to $10.2 million from $6.8 million in the 2008 first quarter and 11% from $9.1 million in the 2008 fourth quarter.
There were 46 covered sales territories in the first quarter of 2009 versus 48 in the prior year quarter. Consequently, the 49% year-over-year domestic sales increase was driven entirely by the increase in sales force productivity together with the first full quarter of Powerlink XL and suprarenal sales. We estimate that these new products contributed about $1.4 million of incremental revenue in the first quarter relative to the prior year quarter and about 700,000 of incremental revenue on the sequential quarter basis.
International sales for the quarter were $1.7 million up 13% from $1.5 million in the prior year first quarter, and up 7% from $1.6 million in the fourth quarter of 2008. Gross profit increased by 54% to $8.9 million compared with $5.8 million in the first quarter of last year. That was the product of the 42% increase in revenue and a further improvement in gross margin.
Indeed gross margin was 75% of total revenue in the first quarter up from 70% in the prior year first quarter and from 73% in the fourth quarter of 2008. Faster growth and domestic revenue relative to international sales through distributors, the change in product mix to now include Powerlink XL, and lower cost per unit due to volume efficiencies all contributed to the gross margin improvement.
Sales and marketing expense of $6.6 million increased 14% versus the prior year due primarily to the impact of higher sales commissions on the 49% domestic sales increase. We also incurred about $240,000 of expense associated with our once per year national sales meeting, which was focused on the training for and launch of the IntuiTrak delivery system. As mentioned on average there were 46 covered sales directories during the first quarter that was unchanged from the fourth quarter of 2008 and less than the 48 covered territories in the first quarter of 2008.
Research, development, and clinical expense for the first quarter of 2009 was $1.4 million versus $1.5 million last year. The decrease was primarily due to lower development material expenses for the IntuiTrak program relative to the prior year period and lower clinical trial expenses.
General and administrative expense was $2.1 million versus $2.3 million in the 2008 first quarter. During 2008, we resolved legal matters, which had represented about $1.5 million in legal or settlement related expenses and of that amount about 400,000 was incurred in the first quarter of 2008. Total operating expenses were $10 million in the first quarter, which was a 5% increase compared with $9.6 million in the prior year quarter. Stock option expense included in those numbers in the 2009 first quarter was
742,000 compared with 570,000 in the 2008 first quarter.
The line item breakdown for the 2009 charge was as follows. $38,000 charged to cost of sales, $81,000 charged to R&D, $238,000 charged to sales and marketing, and $385,000 charged to G&A. So overall, the net loss in the first quarter of 2009 was $1.2 million or $0.03 per share, which compares with a net loss of $3.7 million or $0.09 per share for the first quarter of 2008.
Stock option expense accounted for $0.02 of the $0.03 loss per share in the current first quarter and also $0.02 of the $0.09 loss per share in the prior year quarter. During the first quarter, we continue to control working capital, accounts receivable, day’s sales outstanding average 54 days including both domestic and international accounts and were 54 days at quarter-end.
Inventory turnover was at 1.6 turns at the end of the quarter and included a buildup of IntuiTrak inventory for our full commercial launch, which began in March. Inventory turnover at March 2008 was 1.4 turns.
Total cash as of March 31, 2009 was $7.3 million compared with $8.1 million as of December 31, 2008. Consequently the cash burn in the first quarter was $764,000. However, we did achieve positive earnings of $232,000 before the non-cash charges of depreciation, amortization, and stock-based compensation in the first quarter.
Indeed we achieved overall positive cash flow from operations in each of the months of February and March, which is a very strong indicator that we are on track to reach cash flow positive from operations in the second quarter of 2009.
With that I will turn the call back to John.
John McDermott
Thanks, Bob. As you can see from the results we have made a lot of progress in the past six months and we have high expectations for continued sales growth and market share gains in 2009. Powerlink XL and also pouring of extensions were only launched in November, so we have still got a full-year of growth from those new devices.
IntuiTrak was just launched a little over a month ago and we are getting very positive feedback on the simplicity of the device, the integrated introducer, and the ability to navigate tight access vessels. Limited market for IntuiTrak express is going very well and we expect to launch that new product on time in Q3.
The sales force is doing a great job, we're penetrating current accounts more deeply and systematically adding new customers to build the business over the long term. And lastly we were cash flow positive in both February and March. So we're well on our way to generate positive cash flow from operations this second quarter. We don't need to raise capital to support the growth of our core business. Over the past year we studied the market and determined that are several unmet clinical needs to create aortic disorders.
We believe that the market opportunity for less invasive devices and the order will be worth well over $1 billion over the next several years and our vision is to become the innovator in this category. We have already established a strong technology platform and a direct sales force to treat infrarenal aneurysm and we plan to develop and introduce new technologies that will expand the aneurysm market and help patients with other aortic disorders. I'll provide more details about our internal programs and business development activities later in the year. With that overview I would like to open the call up for questions. Operator.
Question-and-Answer-Session
Operator
(Operator instructions)
John McDermott
While we wait for the first question, I am pleased to announce that we just found out yesterday that the clinical results from our Powerlink XL study were accepted for publication in the Journal of Vascular Surgery. So we expect those exceptional results to be published before the end of this year.
With that said, operator, we're ready for the first question.
Operator
Thank you, and our first question comes from the line of Shawn Fitz with Stephens Inc.
Shawn Fitz – Stephens Inc.
Hey, good afternoon, John, Bob and congratulations on another really solid quarter.
John McDermott
Thanks, Shawn.
Bob Krist
Thanks, Shawn.
Shawn Fitz – Stephens Inc.
Hey, John, you talked a little bit about the fact that your new product in particular IntuiTrak is enabling you to access new customers and penetrate your existing customer base more deeply. On the opening the doors to new accounts, could you maybe provide a handful of (inaudible) force to give us some idea of how significant impact that this and maybe how much headroom there is in terms of additional new market opportunities for you all to penetrate doctors you previously haven't done business with.
John McDermott
Yes, Shawn, I think the thing that's really been encouraging about IntuiTrak is there are lot of physicians who have heard of our device or have had some experience with it because we are able to treat some anatomies that the competitive devices don't do as well in, just because we build some of the bottom up with our anatomical fixation platform. One of the barriers to greater share capture over time has been the ease of use of our system and so what we're finding is that for physicians who have fundamentally liked the idea of anatomical fixation and the idea of our platform in general, now with the ease of use of IntuiTrak, it just makes a much greater willingness for them to try the new product. And when they do, generally what happens is they have a good experience and they want to schedule another case and another case.
So early on that is an anecdote, but it's gone very well. I will say when we launched Powerlink XL and the Suprarenal Extension at the end of last year, our initial focus was on existing accounts, because we didn't want to train physicians on the old system and then retrain them on the new system. So we had an opportunity to penetrate more deeply in our existing customer base in the fourth quarter of last year and then also for part of the first quarter this year. As we now start to transition some of our focused new accounts, we are getting very good up tick in physician feedback.
Shawn Fitz – Stephens Inc.
Okay, great, John. And then I guess maybe it's a direct towards Bob. Bob, as we think about the new products that you all have launched recently, could you just give us some idea of magnitude of impact may be to ASP if any and also kind of explain to us how that flows through from margin standpoint on each of your new products.
Bob Krist
Sure. While we do have a slight up charge with the new technology, but it’s not a significant driver of the margins, obviously it’s helpful and moves in the correct direction. But the significant effects on the margin related to a much faster growth rate of the domestic direct sales relative to the distribution based international sales and we largely have realized now the full benefit of the PTFE effect, so I wouldn't expect that to be dramatic on a going forward basis. So while there is a small benefit from pricing, it's not the principal driver.
Shawn Fitz – Stephens Inc.
Okay, great. John, last question with a follow-up, any plans to add to your headcount from a sales force perspective?
John McDermott
Yes, I still think we have a little bit of an opportunity with the current team. As you can see, we held it relatively flat. Our target for this year is 50 to 52, as we continue to get more and more sales per territory, we will start to very gradually continue to add to the sales team as we move forward.
Shawn Fitz – Stephens Inc.
Okay, great. So John, even if we held the headcount on your covered territories constant at current levels, based on our model it seems that you can get modestly above the low end of your guidance with really no improvement in productivity. Is there any reason to think that we shouldn't contingent to see sequential improvements in your sales force productivity numbers?
John McDermott
No.
Shawn Fitz – Stephens Inc.
Okay, great guys. Thanks.
John McDermott
Welcome.
Operator
Thank you. Our next question comes from the line of John Putnam with NextWave Research.
John Putnam – NextWave Research
Thanks very much and that really was a super quarter. I wondered John if you might just give us some color on the international market, I mean there is a big divergence between the growth of the market here in the U.S. and let’s not saying the 30% overseas is in a nice increase, but could you just give use some color on that if you would?
John McDermott
Sure. We are still growing outside the U.S., but keep in mind that we already had the Powerlink XL and the Suprarenal Extensions outside the U.S. We also got a stocking order from Japan in Q1 of last year, so that affects our year-over-year comp and then lastly a few of our international distributors are invoiced in euros and to change an exchange rate over the past year negatively impacted the year-over-year growth rate of international sales by about 5%.
John Putnam – NextWave Research
Okay.
John McDermott
But overall, they are all still doing very well.
John Putnam – NextWave Research
I thought there was stocking order from Japan in the first quarter of last year. Was that about $400,000 if I remember correctly?
Bob Krist
I think that's a little on the high side, I think it was under 300,000, John.
John Putnam – NextWave Research
All right, thanks, Bob. I wondered if, John, you talked about the extensions increasing the market in the U.S. by about 17 million, what would be the figure overseas? Would you think it will be equal to that or?
John McDermott
A little bit less, but again we had already had Powerlink XL launched overseas.
John Putnam – NextWave Research
Okay.
John McDermott
So the incremental – the new market opportunity for Powerlink XL and Suprarenal Extensions was primarily in the U.S. which put to that $70 million new segment opportunity.
John Putnam – NextWave Research
Okay. And this IntuiTrak expand the market do you think or does it make it just more or easier if you will to gain market share?
John McDermott
I think it primarily makes it easier to gain market share. There are some situations – one of the listed feedbacks that we are getting is that physicians are surprised with their ability to navigate some anatomies that previously they had difficulty with, with other devices. So to the extent that they couldn't get into an aneurysm with one of the – there could be some market expansion there. There is also – there are some physicians who are choosing to use the device percutaneously and to the extent if that brings new customers into the marketplace, it could expand the market as well. So there may be a little bit of market expansion, but it's primarily focused on our ability to capture more share in the current market.
John Putnam – NextWave Research
And does it – how much does it reduce procedure time. Do you have any idea on that?
John McDermott
We did an evaluation of our first 100 procedures with IntuiTrak and we compared that first 100 procedure experience to the published data that we have on the competitive devices. So for our first 100 cases in – again that would include some learning curves, those guys were understandably going a little bit slower as they were learning the new systems. Our average procedure time was about 107 minutes and that compares to competitive clinical trial publish data, for example the talented Medtronic PMA, their average time was 167 minutes, the Cook Zenith average time was 153 minutes and the Gore Excluder average procedure time was 144 minutes. So this is anecdotal because it wasn't done in a clinical study, but certainly a good indication that there might be a procedure time advantage for our device.
John Putnam – NextWave Research
Okay, and one final question. One of the things that we've always known is that you do well in accounts that don't do a lot of procedures annually and have a much lower market share in the really large account. Is there any shift going on there and is it attributable to the new products and the new delivery system?
John McDermott
I would say so far that shifted thing negligible. We've got – we segment our business in several different categories in terms of hospital volume.
John Putnam – NextWave Research
Right.
John McDermott
We track different hospital sizes, zero to ten cases a year, 10 to 20, 20 to 30 so on and so forth, and we have seen a fairly consistent mix among those various size accounts with a little bit of a bump up in the larger account in the first quarter of this year. So I do think that it does open us up to getting better penetration in those larger accounts as we move forward.
John Putnam – NextWave Research
That's great, thanks. So we have that to look forward to really.
John McDermott
I think so, yes.
John Putnam – NextWave Research
Good.
Bob Krist
John, let me just go back to your earlier question, I've had a moment to check the number and indeed it was 364,000 stocking order to Japan Q1 last year.
John Putnam – NextWave Research
Thanks very much, Bob. Thanks guys.
John McDermott
You bet.
Operator
The next question comes from the line of Boris Peaker with Rodman.
Boris Peaker – Rodman & Renshaw
Thank you for taking my question and congratulation on an excellent quarter. Just have a question in terms of the new data that you have on Powerlink XL, and I think that's going to be published through as well as your IntuiTrak device, what high-profile opportunities or medical meetings do you anticipate to present this data this year and the second part of that question is, are there CME's that you will be conducting at those meetings at some other time where you could really get this in front of the doctors and show them this new data.
John McDermott
Yes. Well we – actually the Powerlink XL data was presented for the first time at the Veith Symposium in November in New York. So that data has already been presented, when I mentioned earlier was the first time that data is going to be in print will probably be in the fall of this year. We just presented the suprarenal clinical study data last month at the Society of Clinical Vascular Surgery meeting. So most of the – most recent data has already had some degree of podium presence.
Now we do have some other data primarily as we are starting now to gather some clinical results with the IntuiTrak is that we will start to share at the medical meeting that – happening between now and the end of the year. As far as the CME's go, typically we don't – the company direct response to the CME activities to doctors depending on the meeting can get some CME credit for their participation in the meeting. What we do is, we work with the physicians who are going to be speaking on the podium to make sure that our data gets presented at those meetings. And so we expect to have more presentations during 2009 would primarily focus on IntuiTrak.
Boris Peaker – Rodman & Renshaw
Okay, great. And my second question in terms of accounts receivables, do you see potential improvement in the billing system to kind of decrease that duration or where do you think they could go?
Bob Krist
Our DSOs actually been very steady over the past few years between I would say about 52 and 54 day sales outstanding. Our sense is that’s a fairly reasonable level and we are monitoring more so from the other perspective as the economy continues to be under pressure here to pay attention that we are not seeing any trends towards lower pay or uncollectible accounts. And as I said, so far it is been very, very steady and we expect it to really remain in that range over that little 50s.
Boris Peaker – Rodman & Renshaw
Thank you very much. That’s my question.
Bob Krist
Welcome.
Operator
(Operator instructions) Our next question comes from the line of Ron Ree [ph] with Rodman & Renshaw [ph].
Ron Ree – Rodman & Renshaw
My questions have been answered. Thank you very much.
Operator
Thank you and we have another question from John Putnam with NextWave Research.
John Putnam – NextWave Research
Yes, thank you. John, traditionally AAA procedures has not been affected by any kind of economic conditions, is that still what you are seeing here?
John McDermott
Yes, really is. We are not – there is no indication that these procedures are just not active [ph].
John Putnam – NextWave Research
Right.
John McDermott
And there is already a fairly significant number of diagnosed aneurysm in the marketplace that are being tracked by their physicians. So they monitor the size and growth rate of these aneurysms and once they get to be a certain size or a certain growth rate, they really have to be treated because the alternative is rupture and death. So it doesn’t – we are seeing no indication of the slowdown in the number of procedures in the U.S.
John Putnam – NextWave Research
So, it’s still watchful waiting and then some kind of intervention.
John McDermott
That’s exactly right. Yes.
John Putnam – NextWave Research
Okay, great, thanks.
John McDermott
You bet.
Operator
There are no further questions at this time. Please proceed with your presentation or any closing remarks.
John McDermott
Okay. Once again, I would like to thank everyone for joining us today, and your questions, and your support. We are pleased with our recent development and committed to building Endologix into a leading innovator in the treatment of aortic disorders. If you have any additional questions, please don’t hesitate to give me a call. We look forward to keeping you apprized of our progress and thanks again for your interest in Endologix.
Operator
Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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