Endologix's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: Endologix Inc (ELGX)

Endologix, Inc. (NASDAQ:ELGX)

Q2 2013 Earnings Conference Call

July 30, 2013 05:00 pm ET

Executives

Zack Kubow – Investor Relations, The Ruth Group

John McDermott – Chairman, President and Chief Executive Officer

Shelley Thunen – Chief Financial Officer

Analysts

Brooks E. West – Piper Jaffray, Inc.

Steve M. Lichtman – Oppenheimer Securities

Joanne K. Wuensch – BMO Capital Markets

Chris Cooley – Stephens, Inc.

Operator

Greetings and welcome to the Endologix Inc. Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zack Kubow of The Ruth Group. Thank you Mr. Kubow, you may begin.

Zack Kubow

Thanks operator, and thanks, everyone, for participating in today’s call. Joining me from the Company are John McDermott, President and Chief Executive Officer and Shelley Thunen, Chief Financial Officer. 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 30 days.

Before we begin, I’d 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 that’s 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, July 30, 2013. 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’d like to turn the call over to John McDermott.

John McDermott

Thanks Zack and good afternoon everyone. As previously announced, we had a strong revenue growth in the second quarter driven by good clinical outcomes achieved by physicians with our AFX device, and the support provided by our sales professionals and clinical specialists.

I’ll begin the call today with a quick overview of our results for the quarter followed by business and pipeline update. Then I’ll turn the call over to our CFO, Shelley Thunen, who’ll provide a detailed review of our financial results. After that, I will come back on to review our key goals for the rest of the year and then, we’ll open it up for questions.

Global revenue for the second quarter was a record $34 million, up 33% compared to the prior year. This included 23% growth in the U.S., and 81% international growth driven by the ongoing success of the AFX system. AFX is the only EVAR device that offers the unique benefits of anatomical fixation, which allows physicians to effectively treat a broad range of aortic anatomies with excellent clinical outcomes. In addition, over the last several years, we have introduced enhancements and additional sizes that have made the device easier to use and expanded the addressable patient population.

In April, we received FDA approval for a Percutaneous Indication for AFX, making Endologix the first and only EVAR company to ever run a randomized multicenter clinical trial to evaluate the safety and effectiveness of the PEVAR procedure.

To our collaboration with Abbott, we now have the only EVAR sales force in the world that is trained on the PEVAR technique to provide clinical support and certification to positions. We began PEVAR training sessions in May and today, they have trained almost 80 positions on the procedure, (inaudible) include a mix of new and existing customers, and we’ve received positive feedback on the clinical benefits on the PEVAR procedure and the AFX systems. We will continue to conduct training sessions each month over the remainder of the year and expect data from the PEVAR clinical trial to be published in the Journal of Vascular Surgery, which will further support the procedure, AFX and our training programs.

Another important growth driver in the quarter was the effectiveness of our sales professionals and clinical specialists. We are gaining productivity from the addition of highly trained clinical specialists, which create bandwidth for our reps to introduce AFX to new customers, and expand existing relationships.

We ended the quarter with 82 U.S. and 21 European reps in clinical specialists. Over the remainder of the year, we will continue to add to both teams and expect to finish the year with 87 to 90 in the U.S. and 27 to 30 in Europe. The recruitment process is longer in Europe, but we’re pleased with the caliber of people joining the team and think we’re well-positioned for the future.

Now, let me turn to an update on our new product pipeline. I’ll start with Nellix. As discussed on our second quarter preliminary results call, our limited market introduction outside the U.S. continues to go very well. We have now completed over 100 procedures in 13 different centers. The overall feedback continues to be positive and physicians have been extremely supportive of collaborating with us on this exciting new technology. During this limited market pace, we have learned a lot over the past few months about case planning, sizing, procedure steps, training and further enhancements who want to make for future generations of the system. Over the remainder of 2013, we’ll gradually expand a limited market release to around 25 centers and take on more challenging anatomies.

In 2014, we will continue to add centers and gradually transition into a controlled market launch in Europe. In the U.S., we are currently working with the FDA on our IDE and remain hopeful that we can obtain approval for the study by the end of this year. If everything that goes according to plan, we expect to begin enrollment in a few international clinical study sites in the fourth quarter based upon our current assumptions and timelines, we remain on track with the potential to achieve PMA approval in the U.S. in 2016. Overall, we remained very enthusiastic about the long-term potential for Nellix to become the market leading device for the treatment of abdominal aortic aneurysms.

Turning now to Ventana, we have continued to make progress since our call at the beginning of July. Design enhancements are showing encouraging preliminary result in bench testing and we’ve learned a lot in our evaluation of the patients treated today.

As previously communicated, we expect to meet with the regulatory agencies over the next few months and firm up approval requirements and timelines. Once again, our physician partners have been very supportive and anxious to collaborate with us on the clinical validation and commercialization of an off the shelf system to treat patients with short neck and juxta renal aortic aneurysms.

We look forward to providing a detailed overview and timeline for the Ventana program towards the end of this year. And lastly, we remain on track to initiate a limited market release of our AFX II device in the United States before the end of this year. The new system incorporates enhancements to our existing AFX aortic extension and was designed based upon input from physicians around the world. We plan to start the limited market release in Q4 and if everything goes as expected, we’ll transition to a full market release in 2014. We’ll provide an update and more details on this device during our Q3 earnings call in October.

Before I hand the call over to Shelley, I’d like to also comment briefly on the 8-K, we filed earlier this month about Stefan Schreck, our Chief Technology Officer. For sometime now, Stefan has been interested in transitioning to more of a technical role and moving away from the day-to-day operations of product development.

With that in mind, several months ago, we recruited Jim Machek as our Vice President of the Nellix Technology. Jim has a long and successful track record in new product development at St. Jude, Covidien, and Medtronic, including over 10 years in endovascular aortic stent grafts. Once Jim got settled in the organization, it was a good time for Stefan to take a few months off and come back later this year to focus on new technologies. This planned transition provides the Company with significant leadership depth in research and development and supports our mission to become the leading innovator in treatments for aortic disorders.

Now I’d like to hand the call over to Shelley Thunen for a financial review. Shelley?

Shelley Thunen

Good afternoon and thank you John. Today, we are pleased to report our financial results in key metrics for the second quarter of 2013. Total revenue for the second quarter increased by 33% year-over-year to $34 million for the six months ended June 30. Total revenues increased by 27% year-over-year to $63.7 million.

Domestic revenue in the second quarter increased by 23% year-over-year to $26.4 million. For the six months ended June 30, domestic revenue increased by 20% year-over-year to $51 million. Our domestic growth was driven by the introduction of the two new AFX fibers in the first quarter, and expansion of the sales force and clinical specialists during the last year.

International revenues increased by 81% year-over-year to $7.6 million. For the six months ended June 30, international revenues increased by 67% year-over-year to $12.7 million. International revenue increases were primarily driven by continued adoption of AFX in the European market, and the transition from the distributor to direct model in most of Western Europe.

Gross margin in the second quarter of 2013 was 74% compared to 75% in a prior year, or the six months ended June 30, gross margin was 75% compared to 77% in the prior year period. A decrease in gross margin for the three and six months ended June 30 was primarily due to the $1.2 million, it’s an inventory reserve taken in the second quarter of 2013, primarily for the obsolescence of Ventana inventories due to planned product enhancements.

Secondly to product mix and the greater proportion of international sales to U.S. sales as compared to the corresponding period of 2012. Operating expenses for the second quarter of 2013 were $27.5 million, compared to $24.8 million in the same period last year. For the six months ended June 30, operating expenses were $54.5 million, compared to $47.6 million in the prior year period.

Total operating expenses for the three and six months ended June 30, 2012. included $1.4 million of business development and investments related to the acquisition of the company distribution partner in Italy and the exclusive rights acquired to the polymer technology utilized in the Nellix system.

Research development and clinical expenses in the second quarter was $6 million compared to $6.9 million in the second quarter of 2012. For the six months ended June 30, research, development and clinical expenses were $11.9 million compared to $12.1 million in the prior year period. The decrease for the three and six months ended June 30, 2013 was primarily due to lower R&D expenses, partially offset by increased clinical and regulatory expenses typical to Ventana U.S IDE study. Nellix and Ventana study follow up costs and regulatory costs associated with FDA and CE submission. Excluding the one-time business development in the Nellix polymer license in the second quarter of 2012. Research and development expenses remained relatively flat.

Marketing and sales expenses grew from $13.1 million in the second quarter of 2012 to $16.5 million in the second quarter of 2013, 26% increase on a revenue increase of 33%, reflecting U.S. operating leverage offset by continued investments building our European direct sales team, variable sales commission costs associated with our revenue growth and an increase in non-cash stock comp expense primarily associated with stock option grants for top sales performers in the U.S. and the hires made in Europe.

For the six months ended June 30, marketing and sales expenses grew from $26.2 million to $32 million, a 22% increase on a revenue increase of 27%. G&A expenses grew from $4.5 million in the second quarter of 2012 to $5 million in the second quarter of 2013. For the six months ended June 30, G&A expenses grew from $8.9 million in 2012 to $10.6 million in the first six months of 2013. The expense growth was driven primarily by investments in the European administrative and operations infrastructure, the federal medical device tax which took effect January 1 of this year and growth in consulting and outside service expenses associated with our general business growth.

Our GAAP net income was $5.7 million or $0.09 per share in the second quarter of 2013, compared to a net loss of $6.7 million or $0.11 per share for the second quarter of 2012. In the current quarter, the Nellix contingent consideration liability, which is payable in shares to Endologix common stock, decreased by $7.6 million or $0.12 a share, which is almost entirely related to the decrease in Endologix stock price at $2.87 or 18% from the previous measurement date at March 31, 2013.

As the stock price increases and decreases on a quarterly basis, the Nellix contingent consideration will fluctuate. Therefore, we believe it is important to evaluate performance on adjusted non-GAAP income or loss, which excludes the Nellix contingent consideration and other one-time expenses.

In the second quarter of 2013 on an adjusted non-GAAP basis, we reported a net loss of $1.9 million or $0.03 per share compared to an adjusted loss of $0.07 per share in the second quarter of 2012.

For the six months ended June 30, 2013, GAAP net loss was $3.7 million or $0.06 per share compared to a loss of $23.4 million or $0.40 a share in the prior year period. Adjusted non-GAAP loss, excluding business development cost and the Nellix consideration for the six months ended June 30, 2013 were $6.1 million or $0.10 a share per loss compared to non-GAAP adjusted loss, up $0.14 per share in the prior year period.

On an adjusted EBITDA basis, non-GAAP measure of the adjusted net loss, adding back all non-cash charges including the Nellix contingent consideration, stock-based compensation, depreciation and amortization, foreign currency exchange re-measurement, business development and tax expense, our income in the second quarter of 2013 was $425,000 or $0.01 per share income, compared to a loss of $2.2 million or $0.04 a share loss in the second quarter of 2012.

For the six months ended June 30, 2013, adjusted EBITDA loss was $100,000 or $0.00 per share loss, compared to a loss of $4.2 million or $0.07 a share loss in the prior-year period.

On a sequential basis, revenues in the second quarter of 2013 as compared to the first quarter of 2013 increased $4.2 million or 14% driven by an increase in international revenues of $2.5 million or 49% due to strong results in our direct markets in Europe and our distribution partners in the smaller European countries, Latin America and Japan.

U.S. sales increased sequentially $1.7 million or 7%. Sequentially gross profit was down 2 percentage points to 74% driven by our higher percentage of the international revenue from 17% in the first quarter of 2013 to 22% in the second quarter of 2013 and the second quarter inventory reserves of $1.2 million primarily for Ventana.

Total operating expenses increased by $500,000, a 2% increase, which compares favorably with the 14% sequential revenue increase. Overall, GAAP net income in the second quarter of 2013 was $0.09 per share including the $0.12 benefit for the mark-to-market of the Nellix contingent consideration, as compared to a GAAP net loss of $0.15 a share in the first quarter of 2013.

Non-GAAP adjusted EBITDA in the second quarter of 2013 was $425,000 or $0.01 per share income, as compared to a loss of $485,000 or $0.01 per share loss in the first quarter of 2013.

Now, turning to the balance sheet, account receivable days outstanding were 76 days at the end of the second quarter of 2013 compared to 71 days at the close of 2012 and 78 days at March 31, 2013. We expect days sales outstanding to increase slightly as the sales to international accounts increased as a percent of revenue, because they are traditionally slower to pay than our U.S. customers.

However, in the second quarter of 2013, our days sales outstanding improved as compared to the first quarter of 2013 as our operations and finance teams in Europe started to gain maturities at [PR], leading to improved collection processes and collection results in Europe.

Inventory turnover increased to 2 turns at quarter-end, compared to 1.6 turns at March 31, primarily due to the $1.2 million inventory, our reserve increase taken in the second quarter of 2013. We expect inventory turnover will return to and remain in the range of 1.5 turns despite preparation for the 2013 commercial launch of our Nellix system in Europe and introduction of AFX II at the end of this year.

We ended the quarter with cash, cash equivalents and restricted cash of $45.2 million, as compared to $42 million in cash at the end of the first quarter. All restrictions on the $5.4 million of restricted cash at June 30 were listed in July. Taking this into account, during the second quarter of 2013, we were cash flow positive through the second quarter and cash flow break-even in the first six months of this year.

In summary, in the second quarter of 2013 we continue to gain leverage in our U.S. business and international revenue expansion consistent with a continued investment in our European business. This led to continued strong revenue growth driven by AFX, stable growth margins excluding the one-time inventory reserves during the quarter and improved operating leverage.

During the quarter, we also entered into a long-term lease agreement for a new facility effective January 1, 2014 to court our continued growth. The new facility will double our space and give us the room we need to execute our growth strategy.

Now, turning to guidance; for the full year 2013 we are reiterating our revenue guidance with revenues expected to be in the range of $128 million to $134 million, a 21% to 26% increase over 2012. Our revenue guidance has seen seasonality in both Europe and the U.S. during this third quarter, which we have already begun to experience.

We expect 2013 adjusted net loss to be between $0.18 and $0.22. We expect 2013 adjusted EBITDA, which excludes non-cash expenses such as stock-based compensation and changes in the estimated Nellix consideration to be between $0.02 per share and a profit of $0.02 per share. This puts us in a position to use a small amount of cash the entire 2013 year and generate cash flow during the second half of the year excluding business development investments.

In addition, we expect to incur almost $2 million in business development during the third quarter, of which a little bit less than half will be paid in stock rather than cash. We will incur $1 million to maintain our exclusive license for our Nellix polymer, and the balance during exclusive patent license for expected future use in our product.

Not included loss per share guidance, however our potential adverse litigation outcomes, fair value adjustments associated with Nellix contingent consideration. The $2 million for business development investments incurred in the third quarter of 2013, and any other profitable business development transaction.

I will now turn the call back to John.

John McDermott

Thanks Shelley. We are extremely pleased with our sales performance so far this year, and remain confident in the long-term potential of our new product pipeline. Following are our key goals for the remainder of 2013; first is to achieve our revenue guidance and generate positive cash flow from operations during the second half of 2013. Next, continue to gain market share in the U.S. by driving our PVAR initiative and the AFX enhancements. Next, finalize the preliminary testing on the Ventana design enhancements and meet with the regulatory agencies to determine the best commercialization path and timelines; next, to gain FDA approval for the Nellix IDE clinical study; and last, to begin enrollment in the Nellix IDE with our physicians in the international trial sites.

By achieving these goals, we will continue on our path towards becoming the leading innovator in Endovascular Aortic Aneurysm Repair. We look forward to keeping you posted on our progress and are planning to participate in the Canaccord Growth Conference in August, The Stifel Healthcare Conference and a Credit Suisse Conferences in September. We look forward to seeing many of you there.

With that, we will open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Brooks West from Piper Jaffray. Please proceed with your question.

Brooks E. West – Piper Jaffray, Inc.

Thanks. Can you hear me?

John McDermott

Yeah, how are you Brooks?

Brooks E. West – Piper Jaffray, Inc.

Hey, John. John, I was hoping you would give a little bit more color around the impact of PEVAR. I know, it’s early but, is it a door opener or you seeing increased penetration, you are now looking for numbers specifically, but just looking around how are you seeing the impact of that of your business?

John McDermott

Well, asset numbers, what I can tell you as I mentioned on the call, it is a mix of existing and new customers, roughly two-thirds, one-third existing towards new. I won’t give you the absolute sales increases related to the attendees for the courses at this point, but I can tell you, it’s positive. And it’s encouraging in terms of us continuing these courses and running us certainly through the end of this year, and into next year. So, it is the door opener, it does kind of build on it self and that as you get into a market and more and more guys get trained on percutaneous technique than more physicians who are interested, that haven’t went through the certification process. So I think, we’re still in the early stage into this.

Brooks E. West – Piper Jaffray, Inc.

And John just as a follow-up, what are the percentage of patients that are considered to be eligible for percutaneous, and are you seeing physicians start to take their AFX volumes up towards that kind of level?

John McDermott

Yeah, so, you’ll get different answers to that question depending on which physicians you ask. There were some doctors will tell you that routinely do it 100% at the time, what we teach in the courses based upon our experience in the clinical trial is probably closer to 70% to 80% of the patients are good candidates, what you want to avoid typically is patients with circumstantial calcium and a couple of other criteria, but generally for that majority of those patients. What was the second part of your question Brooks.

Brooks E. West – Piper Jaffray, Inc.

That covers it, and that’s it from me, thanks John.

John McDermott

Okay.

Operator

Our next question comes from the line of Steve Lichtman from Oppenheimer. Please proceed with your questions.

Steve M. Lichtman – Oppenheimer Securities

Thank you. Hi, guys.

John McDermott

Hi, Steve.

Shelley Thunen

Hi.

Steve M. Lichtman – Oppenheimer Securities

Just a first question I had which is on AFX II, can you talk, it sounds like you’re getting a little closer here obviously, can you talk maybe a little bit more about somebody improved functionality that we’ll see in that system versus AFX, John.

John McDermott

Yeah, the primary, again it’s – you think of AFX is a primarily a two component system. You’ve got the main body bifurcated device, and then you got the aortic extension, which bridges between the bifurcation in the renal arteries. This is that second piece that bridges between the bifurcated piece and the renal arteries.

The primary enhancement to that system are visibility and ease of use, which clinically result in more precise placements. And so we work on it now for a while and as I mentioned in our prepared remarks the design has really been build up physician input. We are in the regulatory process now for that device and remain on track to start a limited release by the end of this year.

Steve M. Lichtman – Oppenheimer Securities

And is that a U.S. and Europe release?

John McDermott

Just the U.S. initially, right now our view is that the folks in Europe are going to have their hands forward, Nellix we want, thankfully we are in a position to have more than one new product opportunities. So we’ll have them stay focused on Nellix for the time being then we’ll roll in AFX to later in 2014.

Steve M. Lichtman – Oppenheimer Securities

Got it. And then just my second question is sort of on the cadence of the quarters, here in the seasonality that you’ve mentioned. In the second quarter did was, there was a little bit of a catch-up in Japan from the first quarter. Is that right so, the base from which we’re talking was maybe a little bit elevated in 2Q internationally. Is that fair?

Shelley Thunen

Yes, that is fair. What you’ll see is probably consistency in Japan going out through the balance of the year. If you recall on the first quarter, we got a bit more orders than we could fulfill in the first quarter, because they’ll be only customers that still takes into a track version previous AFX, and second quarter, was up a bit, but I think you’ll see consistency in the third quarter and fourth quarter from our Japan distributors.

Steve M. Lichtman – Oppenheimer Securities

Consistency, when we look at the average over the first half. Is that right?

Shelley Thunen

Correct.

Steve M. Lichtman – Oppenheimer Securities

Okay. So the second quarter, again as we think about the seasonality coming down from third quarter, we should be mindful that 2Q internationally maybe it was a little bit elevated, again the blend over the first half was okay.

Shelley Thunen

Correct.

Steve M. Lichtman – Oppenheimer Securities

Okay. Great. Thank you.

Operator

Our next question comes from the line of Joanne Wuensch from BMO Capital Markets. Please proceed with your question.

Joanne K. Wuensch – BMO Capital Markets

Thank you very much and good afternoon. Can you give us an update on how comfortable you feel regarding the changes that you’ve made on Ventana. It sounds is, if you’ve identified what the problem is, but any type of additional color you can give in that area would be helpful?

John McDermott

Well, Joanne, so we’ve talked about in the past, we are evaluating all of the patients that have been treated in the clinical trials and concurrently developed several different design iterations, and has been putting them through testing. What I can say is the early testing results are encouraging. We do believe that we can recreate on the bench some of the failure modes we have seen clinically, so I would say directionally we feel positive about what we have done so far and the path we are on.

What will be occurring now over the next few months is, finalization of the testing is kind of narrowing and the design criteria as well as meeting with our key clinical advisors to share with them the results of our findings and leading into then our discussions with the FDA and the notified bodies on different clinical path and regulatory scenarios to determine what’s the shortest road back to market.

Joanne K. Wuensch – BMO Capital Markets

Okay. I will keep my question short. Thank you very much.

John McDermott

Sure.

Operator

(Operator Instructions) Our next question comes from the line of Chris Cooley from Stephens. Please proceed with your questions.

Chris Cooley – Stephens, Inc.

Thank you, good evening. I appreciate you taking the questions. John, could you maybe give us a little bit more color around Nellix, and specifically what I am interested in as you start to roll on the product out into new sites, talk to us little bit about the time requirements from the reps perspective in terms of proctored in converting that facility, and just trying to think about that as we built-in kind of some cost assumptions, not only into the back half, but obviously out in the 2014, which I don’t think you want to give guidance on yet, and then I have just a quick follow-up.

John McDermott

Sure. So just from a process perspective, although the systems itself is very simple, it is different. So we spend a little time with the folks in the operating room to just to kind of acclimate them to some of the new components and things that they are accustomed to seeing. As far as the physicians are concerned, they will have to go, see a case or at a minimum a videotape procedure, but ideally so far the centers that have been brought up so far have actually gone to see procedures, and then their first case is our proctored. So we’ll have a physician go and proctor those cases as well as of course one of our company representatives will attend those procedures as well and integrated into that training there is didactic as well as they will deploy several devices into models.

So there, is at this point, a fairly comprehensive training. We want to just be conservative and work through all the details. I would say as we develop more and more cases and more experience, we’ll be able to streamline aspects of it, but for the next year or so I think we will be fairly training intensive to bring up these sites. And as you mentioned in remarks, we are right now at 13. We will very gradually trend up towards the mid-20s by the end of this year. We expect August to be kind of quiet, August in part, most of September in some markets just because of holiday in Europe and then it should get a little busier in the fourth quarter.

Chris Cooley – Stephens, Inc.

Okay, great. And then if I could just follow-up on Brooks’ earlier question about PEVAR. You gave us a great split and I appreciate that between existing and new users, but little bit curious when you look at the sales today or the uses today in that regard, what percentage of these cases were already being done off label versus maybe incremental volume for you guys going forward doing an own level PEVAR. I think the market is around 25%. 30% and the cases are done bilaterally right now off label. Can you give us some color around that?

John McDermott

Yeah, it’s a good question. Unfortunately Chris, I don’t have a detailed answer of the on/off label mix. What we have measured so far is just our historical run rates in the existing accounts before training and after training and of course all the cases post-training with a new physician is incremental.

As for their mix, I don’t know that. That’s a good question. I know that it’s one of the follow on survey question. So after they go through a course, we ask them for a feedback just on the content and how we can support them moving forward. It’s a follow on question that we do solicit feedback on, but I don’t know that number off the top of my head and it would probably be better for us to get a few more months under our belt to get a good idea of their mix of PEVAR pre- and post-training. So that might be a good question for the next call.

Chris Cooley – Stephens, Inc.

Okay. Thanks so much.

Operator

(Operator Instructions) Our next question comes from the line of Rick Wise from Stifel Nicolaus. Please proceed with your question.

Unidentified Analyst

Hey, guys. It’s actually Matt (inaudible) in for Rick. How are you?

John McDermott

Hi, Matt.

Unidentified Analyst

John, question for you to start. Could you just tell us where you are sort of broadly speaking in the European sales force build out? I’m talking more in terms of geographies and countries. Did the 21 reps now cover all the major countries or are there still some hires that need to go on in some key territories?

John McDermott

That 21 is pretty equally spread over most of the major Western European markets. We do have some. In some of the smaller European countries we do use dealers and we also complement in a few areas, agents. But for the most part those are our folks and we haven’t yet disclosed kind of headcount by country. I don’t know that we will do it at that level, but there aren’t any major markets that are uncovered at this point.

Unidentified Analyst

Okay. That’s helpful. And then, Shelley, just a couple of quick questions for you. On gross margin, I just want to be clear here. If I exclude that Ventana write-down, would your gross margin have been closer to 77%, is that the way to think about it?

John McDermott

Yes.

Unidentified Analyst

And then, could you just give, and I may have missed it in the release, but the international break out, EU versus rest of world?

Shelley Thunen

I didn’t give that in the release. I don’t that have this number handy. Maybe we will disclose that in our 10-Q filing.

Unidentified Analyst

Okay. That’s great. Thanks so much.

Operator

There are no further questions in the queue. I would like to hand the call back over to John McDermott for closing comments.

John McDermott

Okay. Well, thanks everyone for joining on the call today and for your interest in Endologix. So we’ll look forward to seeing you at the upcoming conferences and keeping you updated on our progress. Have a good evening.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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