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Endologix Inc. (ELGX)

Q1 2010 Earnings Call Transcript

April 22, 2010 5:00 pm ET

Executives

Nick Laudico – IR, The Ruth Group

John McDermott – President and CEO

Bob Krist – CFO and Secretary

Analysts

Robert Poole – Bricoleur Capital

Cynthia Yee – Piper Jaffray

Sean Lavin – Lazard Capital Markets

Gene Baxter – UBS

Operator

Greetings and welcome to the Endologix Incorporated first quarter 2010 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, Mr. Nick Laudico of The Ruth Group. Thank you, Mr. Laudico. You may begin.

Nick Laudico

Thanks, operator. Thanks, everyone, for participating in today’s call. Joining me from the company are John McDermott, President and Chief Executive Officer, and Bob Krist, 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 the Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. For discussion of risk factors, I encourage you to review the Endologix's 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 22, 2010. 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, Nick. I’d like to welcome everyone to the Endologix’s first quarter 2010 conference call. Joining me on the call today is Bob Krist, our Chief Financial Officer, who will provide an overview of our financial results following my comments.

We have a very good start to 2010 with total revenue for the first quarter of $14.5 million up 22% year-over-year. Domestic revenue of $12 million was up 18% year-over-year and 11% sequentially. Internationally, our distribution partners continued their growth leading to 49% year-over-year growth on sales of $2.5 million for the quarter.

We are particularly pleased with the 11% sequential growth in domestic sales, which was consistent with our guidance to grow domestic sales sequentially in the first quarter and demonstrates our ability to withstand increased competitively activity and continue to capture market share. We attribute these results to the caliber of our sales organization and the clinical advantages of our products.

Later this month a new article is expected to be published in a preview journal that examines the results from anatomical fixation in all three of our FDA clinical studies. We’ll provide more details when the article publishes, but what I can tell you is that data on anatomical fixation continues to be very compelling.

Switching now to the sales force. At the end of the first quarter we had a total of 54 sales representatives, up from 51 at the end of 2009. During the quarter we hired three very talented individuals with strong physician relationships in their respective markets. These new reps have begun our comprehensive sales training program, which typically takes around six month to complete.

We’ve been very pleased with the number of highly qualified candidates interested in joining the Endologix team and are on track to fill the targeted new sales territories by the end of the year.

During the quarter, we also made good progress with our new product pipeline. We are on schedule with the Powerlink line extensions and expect to launch several new sizes during the second half of 2010. Last week we announced the first patient enrollment in our PEVAR clinical trial. The procedure was performed by Dr. Jim Melton Oklahoma Heart Hospital and we expect the other clinical sites to begin enrolling soon.

We anticipate that it will take approximately one year to complete enrollment, so we are targeting approval in the first half of 2012. The study includes 20 sites across the country approximately half of which are new physician customers. We also continued to move forward with our other product initiatives including a lower profile AAA system, the fenestrated graft and a thoracic device.

We are making progress with each of these programs and look forwards providing further updates later in the year. Before turning the call over to Bob, I would like to give the quick update on the patent litigation with Cook. Well, the case is currently stayed, we believe it’s likely that the stay will be lifted during the second quarter and we will start discovery sometime at summer.

We continue to believe that we have a very strong defense against the alleged claims and we have the necessary resource to vigorously defend our position. This dispute will not distract us from our focus on new product development in sales growth. Lastly I would like to inform everyone that we will be exhibiting at the Society for Vascular Surgery meeting in Boston from June 10th to the 13th.

We will also be presenting at the Jefferies Global Life Sciences Investor Conference in New York just prior to the SVS. We look forward to meeting with many of these events.

I’ll now turn the call over to Bob.

Bob Krist

Thanks, John, and good afternoon to all. Today I will provide an overview of our key financial results and metrics for the first quarter of 2010. Total revenue increased by 22% year-over-year to $14.5 million in the first quarter driven by sales force productivity additional sales territories and overall growth in international markets.

During the first quarter the number of covered sales territories increased by 8% compared to the first quarter of 2009, and averaged sales dollars per territory increased by 10%. International sales growth in the first quarter was driven by the initial rollout up Intuitrak in certain European and South American markets. And as John mentioned, domestic sales grew sequentially by 11% and total sales grew sequentially by 6%.

Gross margin improved to 77% for the first quarter from 75% in the prior year quarter driven by new products and an overall lower cost per unit sold. Operating expenses for the first quarter increased by 13% year-over-year compared with the 22% year-over-year revenue growth. The principle driver of the expense growth was our planned increased product development investment in R&D.

In fact G&A expense was flat to the prior year and sales marketing expense increased by 5%. There were 54 filter [ph] sales territories at quarter end compared to 51 at the start of the year. The combined effect of the 22% growth in sales, the improved gross margin and the positive leverage on the operating expense line was a loss in the first quarter of 2010 of $225,000 or $0.00 per share compared with a loss of $1.2 million or $0.03 per share in the first quarter of 2009.

During the first quarter, we used $1.5 million in cash and we ended the quarter with $22.6 million available. We also have $10 million available on our line of credit and no currently outstanding bank debt.

During the quarter, we paid 2009 annual performance bonuses and increased our working capital investment in support of sales growth, which resulted in the reduction in cash. Accounts receivable days outstanding including both domestic and international accounts was 53 days at quarter end equal to the DSO at year-end. An inventory turnover moved to 2.3 turns at quarter end versus 2.4 turns at year-end. We expect to generate sufficient positive cash flow from operations for the full year 2010, which will fully fund our investments in the sales force expansion, and in our new product pipeline.

We continue to have a strong financial position and we’re confident we have the resources needed to execute our long-term growth strategy. And turning to our guidance for the full year 2010 and based on our actual results in the first quarter, we are reiterating our guidance for revenue in the range of $62 million to $66 million and 18% to 26% increase over 2009.

We also continue to expect to achieve positive earnings per share on a GAAP basis. This EPS guidance assumes planed investments in the sales force expansion, research and development and the PEVAR clinical study, but excludes the potential impact of legal expenses in connection with our pending pattern claim and any acquisitions or other business development transactions. Based on the timing of new product launches and continued improvements in sales force productivity. The majority of our growth in 2010 is expected to occur in the second half of the year.

So with that, I will turn the call back to John.

John McDermott

Thanks Bob. Overall, we’re pleased with our first quarter financial results, which strengthened our conviction in our 2010 full year guidance. For the balance of the year we expect continued growth and look forward to rolling out our Powerlink line extension in the second half. Longer term we are confident that our investments in the sales force and new product pipeline will create shareholder value as we build the global company focus exclusively on the treatment of aortic disorders.

With that I would like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. (Operator Instructions) We do have one question coming from the line of Mr. Bob Poole with Bricoleur Capital. Your line is now open. You may proceed with your question.

Robert Poole – Bricoleur Capital

Hey, guys. Congratulations on a real nice quarter.

John McDermott

Thanks, Bob.

Robert Poole – Bricoleur Capital

I wish that all of my company said they were going to be up and then actually were up 11% that would be great. Okay. So, a few housekeeping items. Bob, I am sorry, stock comp in the quarter and then the various components, could you give that?

Bob Krist

Okay. Why don’t you go on with the second part of our question, while I dig that out and I’ll respond to you here in just a moment?

Robert Poole – Bricoleur Capital

Okay. John is it possible now to say what you think the impact plus and minus of Obama care as you know it will be?

John McDermott

Not with great precision. Of course, longer term of our general outlook is that it’s going to be tougher to get price. I would say we expect in the future pricing increases to be more challenging, but the general view is that with more patients having healthcare coverage that more aneurysms are going to get diagnosed. So we think at least in our segment of the healthcare market the procedure growth should continue.

Robert Poole – Bricoleur Capital

Okay. And I forget where they came out on tax versus fee versus whatever, how did that come out and would it be correct that your tax laws carry forwards wouldn’t be any good against the tax that’s contemplated?

Bob Krist

Right Bob, this I believe will be structured as an excise tax, so not form of an income tax. It will be assessed against revenue at a rate I believe of 2.3% beginning in 2013. And my current understanding is that would be an expense however that would be tax deductible.

Robert Poole – Bricoleur Capital

That’s very helpful, Bob, thank you.

Bob Krist

And Bob, well, I got the line; I’ll give you the information on the stock-based compensation. The total impact in first quarter 2010 was 675,000, it was 359,000 on the G&A line, 236,000 on the marketing and sales line and 77,000 on research development and clinical with an additional 2000 and which was charged to cost of sales.

Robert Poole – Bricoleur Capital

Okay. And then just finally, I did see the – I came up with slightly different days receivables numbers and you did Bob but we will not debate that. But it does seem like receivables were up some in dollars up 1.4 million from the end of last quarter. Should would that be a reflection of the business ramping up as you went through the quarter?

Bob Krist

Yes, it worked.

Robert Poole – Bricoleur Capital

All right. That’s all I have for now thank you.

Operator

Thank you. Our next question is coming from the line of Mr. Sean Lavin with Lazard Capital Markets. Your line is now open you may proceed with your question.

Sean Lavin – Lazard Capital Markets

Thank you, and first congratulations on the excellent quarter.

John McDermott

Thanks, Sean.

Sean Lavin – Lazard Capital Markets

Sure. My first question has to do with the large neck markets. I wonder if you could maybe comment a bit on what you are seeing there, I know in the past quarter go and launch the product and is it fair to assume with the US you put up that you are beginning to take some of those cases back?

John McDermott

Yeah. You know Sean, as we talked about in the past. I think we had some customers they did try to go device and some of those came back, but what we’ve seen in our mix of large neck cases over the last several months they have been pretty stable. They kind a settled into kind of in the low to mid 30% of our total mix ranged. Previously, they were a little higher than that but again, over the last several months, they kind a settled and remained relatively stable. So, again it gives us conviction that the gore impact is behind us and moving forward, we don’t really expect that to be a problem.

Sean Lavin – Lazard Capital Markets

Okay. My second question has to do with sales reps. Can you talk a little bit about the one you hired last year and if you’re beginning to see them do cases and how you kind of expect them to proceed?

John McDermott

Yeah. So, we have – we have seen some nice performances from some of the reps that we hired last year. There’s a mixed, there are some guys that are already really gaining tracing and other that are getting started. They kind of vary by market. But we are starting to see contributions from them and even in some cases with our more recent reps, our model has evolved a bit or the profile over the last year and in addition to getting more refined with the people that we’re targeting which are to have really great relationships in their respective markets. And just the quality of the candidates I think has gone up over the past years. The company continues to do better and better, we’re attracting more and more talent. So, we are seeing some good productivity from the reps that we hired last year.

Sean Lavin – Lazard Capital Markets

All right. That’s all I have. Thank you very much.

John McDermott

Thanks, Sean.

Sean Lavin – Lazard Capital Markets

Thank you.

Operator

(Operator Instructions) Our next question is coming from the line of Ms. Gene Baxter with UBS. Your line is now open. You may proceed with your question.

Gene Baxter – UBS

John, can you give us a little color on the international sales for the quarter?

Bob Krist

Let me jump in on that if I can Gene. We introduce the IntuiTrak we did some different stocking orders to $300,000 in Q4 as you recall. And the distributors were in that period working through there remaining Visiflex inventories, so really it was just in Q1 where we started to see some impact from cases with IntuiTrak in Europe and South America. And we’ve had a good follow on orders and good growth of both of those markets so that’s drove 49% year-over-year increase.

John McDermott

And I could just add to that we just exhibited for the first time with the more meaningful presence at one of the larger European vascular surgery meetings called the Charing cross meeting just a couple of weeks ago and we’re just now really still in the early stages of rolling out IntuiTrak in the European market and their early feedbacks encouraging.

Gene Baxter – UBS

Thank you, good quarter.

John McDermott

Thanks.

Operator

Thank you, our next question is coming from the line of Ms. Cynthia Yee with Piper Jaffray. Your line is now open you may proceed with your question.

Cynthia Yee – Piper Jaffray

Hi, John congratulations on a good quarter. I just have few questions.

John McDermott

Thanks.

Cynthia Yee – Piper Jaffray

One on the competitive market backdrop. I know you said that the impact from quarters large net launch is seem so stabilize and I guess what I want to know is you’re gaining more traction in larger centers and now that you have the PEVAR trial?

John McDermott

Yes, I will tell you in the first quarter, Cynthia if we look at our sales mix we did see some nice gains relative to our historical mix in larger accounts, some new accounts in larger categories, but also just deeper penetration in existing large accounts, so we did see a nice improvement there relative to our traditional mix in terms of account size.

Cynthia Yee – Piper Jaffray

Okay. And just on gross margins it seems to improved year-over-year and sequentially again, I am just wondering kind of where you see growth margins kind of topping out?

Bob Krist

Well, I will tackle that one, Cynthia. I would say given our expectations of continuing unit sales growth. We do have an opportunity to continue the benefit from the effect of spreading our fixed costs say from our quality system was the management supervision facility costs over a larger number of units build. Well that's a positive factor further improvement occurs that at a diminishing rate and there will be an offset to some degree by cost inflation on some materials and wage rates going up and so forth. So I would summarize net-net our expectation would be that margins would be stable to perhaps slightly better over the balance of 2010.

Cynthia Yee – Piper Jaffray

Okay. And is pricing stable as well or any improvement?

John McDermott

Our pricing seems to be stable. Cynthia, we haven't encounter much there, I don’t think I answered the second part of your first question which was regarding PEVAR. We just enrolled the first patient here as you know just very recently. So I wouldn’t say that the PEVAR study has yet really affected mix in terms in sales by size of account.

Cynthia Yee – Piper Jaffray

Okay. Great, thank you.

John McDermott

Welcome.

Operator

Okay, thank you. (Operator Instructions) We have another question coming from the line of Bob Poole with Bricoleur Capital. Your line is now open. You may proceed with your question.

Robert Poole – Bricoleur Capital

Hi, John, could you tell sort of what you think your total available market is for your product offerings sort to say in 2010? And then walk me out over the next couple of years and how you see that total available market expanding as you launch your new products? I think that’s story is a pretty important story at least me to understand. Thank you.

John McDermott

Yes, so in the market that we currently compete in Bob, which is the infrarenal AAA market. On a global basis that’s about $850 million market. About 570 million of that is in the US, which is about 44,000 procedures roughly estimated for 2010. The I expect the market to evolve over the next few years is that there is still about 15% roughly of the patients that get screened today end up still having to go to surgery because there is inadequate proximal neck. And that’s the segment of the market that we were targeting with our fenestrated stent graft. We forecast out several years from now that what we call the juxtarenal or fenestrated market could be upwards of $200 million to $300 million out in 2015. So that will be a completely incremental segment of the EVAR market that doesn’t exist today. And then the other shift in the market that we expect to play an important role and the evolution of the percutaneous EVAR market. And today we estimate that surround 10% to 15% of the procedures done, but once there is the device is on labeled and there is a company that can really be driving and promoting that indication as well as providing physician training programs. I believe that could easily represent 30% to 50% of the EVAR market. So I would say those are the large market moves that I would expect over the next several years.

Robert Poole – Bricoleur Capital

And your aortic effort non-AAA aortic effort is that something where you think could have a product in the next five years say and if so how large the market that you are going after there?

John McDermott

I want to make sure to understand when you say our non aortic.

Robert Poole – Bricoleur Capital

Yeah. I am sorry non-AAA, non abdominal aortic.

John McDermott

Okay. Okay.

Robert Poole – Bricoleur Capital

If you move up the A-order.

John McDermott

Yeah.

Robert Poole – Bricoleur Capital

Would you have a product in five years or so and how big is that market.

John McDermott

Yeah. So that thoracic market right now is about $250 million and its expected to grow over the next several years up to around 400 million again that market segment would be all incremental to us. I would like to think we would have a product within five years. It’s certainly outside the U.S within their timeframe. And in the U.S would just be a function of the time it takes to get through the chronicle on regulatory process.

Bob Poole – Bricoleur Capital

Great. And that, the terrific product would not require a whole new sales force. Is that correct?

John McDermott

No. It’s the exact same customer. So it’s a perfect channel said for us.

Bob Krist

Yes. It is.

Bob Poole – Bricoleur Capital

All right. Thank you, John and Bob, good luck to you guys.

John McDermott

Thanks.

Bob Krist

Thanks, Bob.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to management for any closing comments.

John McDermott

Well, thanks everyone for joining us on the call today and for your support and interest in Endologix. We look forward to updating you on our second quarter conference call in July.

Operator

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

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