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Abdominal Aortic Aneurysm is a weakening of the aorta wall, the largest artery found in human body. When this weakening occurs, it results in balloon-like enlargement of the artery, and if left untreated, it is susceptible to rupture. In the US alone, ruptured AAA is among the top leading causes of death as the patient mortality rate for ruptured AAA stands at 75%. Currently, an estimated 1.7 million people over the age of 55 have AAA and each year, approximately 200,000 people in the US are diagnosed with AAA.

Source: Company presentation

This is where Endologix, Inc., (NASDAQ:ELGX) comes in. The company develops, manufactures, markets and sells minimally invasive treatments for aortic disorders. Its main product is a stent graft and delivery system (ELG System). It is mainly for the treatment of AAA which is carried out through endovascular repair (NASDAQ:EVAR).

The Company

Endologix, Inc. has its corporate office in Irvine, California. The company was originally founded in 1992 as Radiance Medical Systems, Inc., but in May, 2002, it changed its name to Endologix, Inc. The company's products are sold through direct U.S. sales force and network of agents both in the U.S. and various other parts of Europe, Asia, South America, and Mexico.

Overall, the company maintains 83 U.S. reps and clinical specialists and 22 European reps and clinical specialists. As at March14, 2013, the company had 411 employees in its record.

The company's number one product, the ELG system, is made up of a self-expanding cobalt chromium alloy stent that is covered by ePTFE graft material and a delivery catheter. This system relieves the pressure within the already weakened aorta wall by providing a conduit for blood flow. This way, the potential rupture of the already enlarged aorta walls is averted.

Also to the company's credit is Nellix. This is an investigational EndoVascular Aneurysm Sealing (EVAS) system. It is uniquely designed for treatment of AAA by sealing the aneurysm sac. Another investigational system from the company is Ventana Fenestrated system.

Nellix EndoVascular Aneurysm Sealing System

Source: company presentation

Future Outlook

In comparison to fiscal year 2012, Endologix looks forward to revenue growth of $126 million to $133 million in fiscal 2013. This means a percentage growth of 19-25%. There is a positive anticipation in terms of cash flows from operations in Q2 of fiscal 2013 with the company expecting global revenue for the quarter to be in the range of $34.0 million. If this comes to pass, it means the company will be exceeding analysts' estimate of $130.0 million for fiscal 2013 and $31.2 million for Q2 of fiscal 2013.

For me, I believe it is an achievable feat. This is especially if you consider that the company's Powerlink, Intui Trak System and the AFX Endovascular AAA System are the first among the commercially available endografts to achieve total labeling expansion. This made them to be steps ahead of the competition.

The company's Q1 2013 earnings conference call held on April 30, 2013, revealed that the Ventana IDE clinical trial has been put on hold. The management noted that with this temporary pause, the company expects its gross margins percentage for the middle of the year to be lower than that of the previous fiscal year, being 76%. After that, an increase will be experienced. This is especially with the approval of Nellix and the conclusion of the training of physicians in the U.S. on PEVAR procedures, which the company said it will undertake this second quarter of fiscal 2013.

At the same time, revenue growth outside U.S. in the second half of the year is expected to be in the range of 40-50% while revenue growth in the U.S. is within the range of 15-20%, with possibility of increase as the company brings more centers online with Nellix. The Q2 of fiscal 2013 global revenue is expected to be approximately $34.0 million, a 14% growth in comparison to Q1 of fiscal 2013 and 33% growth in comparison to Q2 of fiscal 2012.

All these point to great potential for the company. Endologix maintains a leadership position in the industry it operates in as far as AAA treatment is concerned and this is the leverage it has against its competitors.

Risks

From the several pages of risks outlined in the company's 10-K, I picked a few that should keep investors on their feet as far as investing in Endologix is concerned. Some of these risks are:

  • The company operates in a highly competitive market segment that is subject to rapid technological change. What this means is that if the company's competitors successfully develop and market products that are safer, more cost-effective, easier to use and more effective than what Endologix offers, it could have an adverse effect on the company's business and revenues in particular. Therefore, it is important that the company maintain its competitive position as far as development of technologies and products used in aortic disorders are concerned, especially AAA.
  • The company's success depends mostly on the continued growth in the number of AAA patients who opt for treatment with endovascular devices instead of open surgery. The report from the company shows that in 2012, approximately 200,000 people in the U.S. were diagnosed with AAA and out of that number, only 68,000 opted for aneurysm repair through EVAR or open surgery. This points to the fact that not only does the company's growth depend on the number of people diagnosed but on the number of diagnosed patients who opt for aneurysm repair through EVAR as against treatment through open surgical procedure.
  • Endologix relies on a single vendor for the supply of the specialized graft material used for its products. This means that should there be any disruption in supply as a result of work stoppage, failure of the supplier to comply with regulatory requirements, disruptions in shipping or natural disaster like flood or earthquake, it would affect the company's ability to promptly meet customer demands for its products. This in turn will affect the company financially and at the end of the day, investors are sure to feel the pain as it might have negative impact on share prices.
  • All of the company's revenue is generated from a limited number of products. In this case, should there decline in sales, it will have a negative impact on the company's financial standing.
  • Finally, the company has a history of operating losses. This means that in order to finance most of the company's activities, the management may have to seek funds through borrowings, carry out debt offerings or initiate collaborative arrangements with some of its corporate partners. If this is the case, there is no assurance that the company will be able to raise such needed funds on favorable terms, or at all. On the other hand, should the company decide to initiate the sale of additional equity, this could lead to additional dilution to the company's stockholders.

Q1 Financial Results

Endologix released its Q1 fiscal 2013 earnings report which showed global revenue to be $29.8 million, a 22% increase in comparison to $24.5 million reported in the same quarter of fiscal 2012. The company's U.S. revenue for the quarter stood at $24.7 million, a 17% increase in comparison to $21.1 million reported as U.S. revenue in the same quarter of the previous year. This increase was mainly due to the continued adoption of the company's AFX system. It was also impacted by the expansion of the company's U.S. sales force as Endologix added more sales reps and clinical specialists for the purpose of providing field support to its sales reps.

The company reported international revenue of $5.1 million which indicates a 46% increase in comparison to $3.5 million reported as international revenue in the same quarter of the previous fiscal year. Europe contributed a higher percentage of the international revenue and this is attributed to the transition carried out in direct sales organization in Europe, which started in September, 2011. Endologix already knows it is at the helm of affairs in terms of the AAA treatment technology and it is widening its coast in order to make the most of the opportunity.

Income statement (millions)

3/31/2013

12/31/2012

9/30/2012

6/30/2012

Total Revenues(Net Sales)

29.78

29.22

26.70

25.51

Cost of Goods Sold

7.26

7.13

6.45

6.30

Selling & Admin Exps

23.50

23.10

24.11

19.75

Operating Income

-4.49

-5.70

-6.93

-5.59

Interest Exp

0.00

0.00

-0.02

0.01

Pretax Income

-9.00

-6.28

-6.01

-6.82

Other Income

-4.51

-0.58

0.91

-1.22

Net Income Bef Extraordinary ...

NA

NA

NA

NA

Net Income

-9.33

-6.52

-5.86

-6.70

Source: nasdaq.com

The company reported gross profit of $22.5 million for Q1 of fiscal 2013. This indicates a decrease to 76% in comparison to 78% reported in the same quarter of fiscal 2012. This decrease is attributed mainly to the outcome of product mix. The company's total operating expenses stood at $27.0 million for the quarter, in comparison to $22.8 million reported in the same quarter of the previous year. Marketing and sales expenses were put at $15.2 million, this shows an increase in comparison to $22.8 million reported in the same quarter of fiscal 2012. This increase is attributed mainly to costs related to the company's direct sales expansion in Europe. The increase in variable compensation expense related to the company's revenue increase also contributed to the increase in marketing and sales expenses.

$3.5 million was reported as expenses for research and development for Q1 of fiscal 2013. This is essentially unchanged in comparison to research and development expenses reported in the same quarter of fiscal 2012. These expenses are attributed to the company's continued development of its Nellix and Ventana systems. Enhancements to the AFX system also contributed to the research and development expenses. Clinical and regulatory affairs expenses increased from $1.4 million reported in the same quarter of the previous year to $2.4 million for Q1 of fiscal 2013. These expenses are associated with the regulatory costs for CE and FDA submissions and follow-up costs of Ventana and Nellix studies.

General and administrative expenses stood at $5.9 million in comparison to $4.1 million reported in the same quarter of the previous fiscal year. This increase is attributed to the expansion of the company's European operations, legal and consulting costs and the new federal Medical Device Excise Tax.

The company reported a net loss of $9.3 million for Q1 of fiscal 2013. This is in comparison to $16.7 million reported as net loss for the same quarter of the previous fiscal year. The company's Adjusted Net Loss (non-GAAP) for the quarter stood at $4.1 million, in comparison to $4.3 million reported as Adjusted Net Loss (non-GAAP) for the same quarter of the previous fiscal year.

Cash and Liquidity

The Q1 of fiscal 2013 results showed the company's total cash and cash equivalents stood at $42.0 million, a decrease in comparison to $45.1 million reported in the three months ended December 31, 2012. There were no outstanding borrowings under the company's revolving credit facility. Endologix maintained a Quick Ratio of 3.60 at end of Q1 of fiscal 2013.

Balance sheet (millions)

Assets

3/31/2013

12/31/2012

9/30/2012

6/30/2012

Cash & Short Term Investments

42.03

45.12

47.74

51.19

Receivables - Total

25.98

22.92

19.92

18.25

Inventories - Total

18.60

18.09

19.06

19.84

Total Current Assets

88.18

87.57

88.30

91.01

Net Property, Plant & Equipment

5.62

4.98

4.95

4.82

Total Assets

166.18

165.10

165.83

166.19

Liabilities

Accounts Payable

18.78

17.19

18.73

13.39

Debt in Current Liabilities

NA

NA

NA

NA

Total Current Liabilities

18.78

17.19

18.73

13.39

Long-Term Debt

NA

NA

NA

NA

Total Liabilities

77.42

70.63

71.16

66.81

Stockholder's Equity

Minority Interest

NA

NA

NA

NA

Preferred Stock

0.00

0.00

0.00

0.00

Common Stock

0.06

0.06

0.06

0.06

Retained Earnings

-209.35

-200.01

-193.50

-187.64

Treasury Stock

-0.66

-0.66

-0.66

-0.66

Total Stockholders' Equity

88.77

94.47

94.67

99.38

Total Liabilities and Stockholders' Equity

166.18

165.10

165.83

166.19

Source: nasdaq.com

The company's management had this to say: "We believe that our cash resources are adequate to operate our business for at least the next 12 months. We expect to generate positive cash flows from operations in the second half of 2013."

Comparative Analysis

Endologix Inc.'s peers in the Medical Equipment industry include Medtronic Inc., Olympus Corp., Covidien Ltd. and Lombard Medical Technologies Plc.

Endologix Inc Benchmark

EV/EBITDA
next 12 mth

Company

Endologix Inc

272.91

Peer group

Endologix Inc excluded

9.70

Endologix Inc included

9.78

Sector

Medical Equipment

11.20

S&P 500

8.82

STOXX Europe 600

7.12

Country

USA

9.07

Source: infinancialsanalytics

The above table shows the company's EV/EBITDA ratio for the next 12 months in comparison to its industry peers. Endologix Inc.'s ratio stands at 272.91. In comparison to its peer group average of 9.70, it is significantly higher. In comparison to the Sector average of 11.20 and the S&P 500 average of 8.82, it is also significantly higher. Overall, the company's valuation is way above its peers.

Endologix also maintains a 244.2% in three year total returns which is well above its industry peers average and the S&P 500 average of 63.66%. The company has maintained high historical total returns in the last 3 years.

Below is a chart comparing the company's yearly percentage change in the cumulative total stockholder return on its common stock with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Medical Equipment Index. The period is December 31, 2007 to December 31, 2012.

(click to enlarge) Source: investing.businessweek.

Conclusion

All things said, I want to point out that although Endologix is growing from strength to strength, there is more work to be done. In order to continue with the growth streak, it is important that the company work towards successful development of new and additional technologies for the treatment of aortic disorders, especially AAA. This way, the company will be way ahead of its competitors in terms of innovation.

The company should also look into the risk associated with getting its specialized graft material from a single vendor as the threat it poses is very high. What happens to the company's business and stockholders if it is no longer possible for the company to get this material from the single vendor? I'll leave that question unanswered.

With the Endologix, Inc.'s continued strong revenue growth which is mainly driven by its AFX product, the stable gross margins and the improvement on its operating leverage, I think the company is a good addition to an investment portfolio.

Source: Endologix: Growing From Strength To Strength