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Endologix Inc. (NASDAQ:ELGX)

Q3 2010 Earnings Call

October 27, 2010 5:30 pm ET

Executives

Nick Laudico - IR, The Ruth Group

John McDermott - President and CEO

Bob Krist - CFO

Bob Mitchell - President and CEO, Nellix

Analysts

Sean Lavin - Lazard Capital Markets

Chris Cooley - Stephens Incorporated

Tim Lee - Piper Jaffray

John Putnam - Capstone Investments

Operator

Greetings and welcome to the Endologix Inc. third quarter 2010 earnings and Nellix acquisition conference call. (Operator Instructions) It is now my pleasure to introduce your host, Nick Laudico of The Ruth Group.

Nick Laudico

Thanks, operator, and thanks everyone for participating in today's conference call to discuss Endologix third quarter results and the announcement release this afternoon that Endologix has signed a definitive agreement to acquire Nellix.

Endologix and Nellix issued a joint press release, announcing the acquisition. That is available on the Investor Relations section of the Endologix website at www.endologix.com. Presentation slides that will accompany management's remarks on today's conference call are also posted on the Investor Relations section of the Endologix website. I encourage you to open that presentation now so you can follow along when we get to that portion of the call.

Today's conference call is also being broadcast live over the internet at www.endologix.com, and a replay of the conference call will be available on the company's website for 30 days.

Participants from Endologix on today's conference call are John McDermott, President and Chief Executive Officer; and Bob Krist, Chief Financial Officer. Also participating on the call is Bob Mitchell, President and Chief Executive Officer of Nellix. Each of these gentlemen will make remarks, and then we'll open up the floor for questions.

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 meeting of federal securities laws. These statements are based on the current estimates and assumptions of Endologix management as of the date of this presentation and are subject to risks, uncertainties, changes in circumstances and other factors that may cause actual results to differ materially from the forward-looking statements made in this presentation.

Important factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, risks relating to the ability to consummate the proposed acquisition, the ability to successfully integrate the Nellix technology with our current and future product offerings, the scope of potential use of the Nellix technology, the ability to obtain and maintain required U.S. Food and Drug Administration and other regulatory approvals of the Nellix technology, the scope and validity of intellectual property rights available to the Nellix technology, the ability to build a direct sales and marketing organization in Europe, competition from other companies, the ability to successfully market and sell our products and for developing new products entering new markets and additional factors that may affect future results which are detailed in our Annual Report on Form 10-K filed with the SEC on March 3, 2010, and in other periodic reports filed with the SEC.

Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast October 27, 2010. Endologix undertakes no obligation to revise or update information herein to reflect events or circumstances in the future, even if new information becomes available.

With that said, I'd like to turn the call over to John McDermott.

John McDermott

I'll begin today's call with a quick overview of our third quarter results, then turn over the call to Bob Krist to go through the financial results in more detail. Next I'll provide a brief overview of the strategic rationale for the Nellix acquisition. Then Bob Mitchell will give an in-depth look at the Nellix technology. After Bob's remarks, I'll come back on to provide a more detailed overview of the acquisition, and then we'll open it up to questions.

To start things off, please open the presentation on our website titled Third Quarter 2010 Results and Nellix Acquisition. After taking a moment to review the Safe Harbor statement, please go to Slide 3.

As you can see, we had an exceptional quarter with revenue growth of 30% year-over-year and 14% sequentially. This performance was driven by continued productivity improvements by our U.S. sales force combined with the acceleration of the full launch of our expanded product line in PowerFit aortic extensions. We also increased gross margin and we're cash flow positive for the quarter.

Based on the strength of our third quarter results, we are raising our full year of 2010 revenue guidance. We now anticipate 2010 revenue to be in the range of $66 million to $67 million, up from the previous range of $62 million to $66 million. This represents annual growth of 26% to 28% for 2010, demonstrating the strong momentum in our core business as we move into 2011 and begin integrating Nellix into our growth strategy.

I'll now turn the call over to Bob Krist, our Chief Financial Officer.

Bob Krist

Thank you, John, and good afternoon to all. Today, I'll provide a brief overview of our key financial results and metrics for the third quarter 2010.

As John just highlighted, total revenue increased by 30% year-over-year and by 14% sequentially to $17.9 million for the quarter. For the first nine months of 2010, revenue growth was 24% versus prior year. This growth was driven by sales force productivity, additional sales territories, new product launches and overall growth in international markets.

Domestic sales in the quarter increased over prior year by 35% and by 19% sequentially. There was a 24% increase in the number of staffed sales territories, and a 9% increase in sales per territory. Year-over-year international growth was 6%, however the increase was 10% on a constant currency basis, and the prior year amount included approximately $500,000 of IntuiTrak initial stocking orders.

Gross margin improved to 79% for the third quarter from 73% in the prior year quarter, and that was driven by new products and certain product cost reduction. Operating expenses in the quarter increased by a total of 42% versus the prior year quarter; and there were three key drivers. One, the base business growth; two, patent litigation expense which totaled $575,000 in the third quarter versus zero in the 2009 quarter; and third, a business development, expenses related to the Nellix transaction were approximately $290,000 in the quarter. And the Evasc Medical Systems balloon expandable stent license agreement signed and announced earlier in Q3 was $500,000.

Net of the patent litigation costs and business development investments, operating expenses increased by 29% over the third quarter of 2009; and excluding those amounts, selling expense grew by 30% due to new territories and higher growth related sales commissions. R&D expense increased by approximately 70% as planned and was driven by our Fenestrated device program and the PEVAR clinical trial. And lastly, G&A expense was 9% lower than in the third quarter of 2009.

Overall then, the net loss for the quarter was $466,000 or a loss of $0.01 per share compared to a loss of $156,000 or $0.00 per share in the third quarter of 2009. As I just mentioned, however, the loss in the current year quarter included $1.4 million of litigation expenses and business development cost which had a combined impact of $0.03 per share.

During the third quarter, cash flow was positive by $444,000. We ended the quarter with $22.9 million in cash, and we also have $10 million available on our line of credit with no outstanding bank debt. Accounts receivable days outstanding improved from 61 to 59 days at quarter end. And as John highlighted, based on our third quarter results, we are updating guidance for 2010.

We are raising our revenue guidance and now expect revenue to be in a range of $66 million to $67 million up from the previous range of $62 million to $66 million; this represents annual growth for the full year of 26% to 28% and is based on the success of our new product launched and improving sales force productivity. We are maintaining our 2010 guidance for earnings and cash flow, that is exclusive of patent litigation expense, the effects of the Nellix acquisition and other business development amounts. We expect to report positive earnings per share and positive cash flow for the full year.

With that, I'll turn the call back to John

John McDermott

Thanks, Bob. Now, I'd like to take you back to the slides on the website and have you go to Slide number 4. Over the past couple of years, we've worked hard to strengthen our sales force and build out our new product pipeline. We've made good progress and demonstrated our ability to grow revenue and execute. Our ambition has always been to become a market leader in the minimally invasive Aortic market place. So we've carefully evaluated the market for new technologies that address the limitations of current devices and have the potential to expand the market.

We started monitoring Nellix a couple of years ago, because we felt it was the one technology that has the potential to disrupt the market and expand the therapy to more patients. Over the past year, we've conducted comprehensive due diligence on Nellix and have become convinced that it represents the next generation in EVAR technology.

Turning now to Slide 5, is an overview of the Nellix acquisition. We believe that the Nellix platform has the potential to reduce secondary interventions and long term patient surveillance while offering the broadest indication of all other competitive EVAR devices. As a part of this acquisition, we've also decided to build a direct sales organization in Europe to launch the Nellix device in 2012 and have an established channel for our other products in the future.

To fund the integration of the technology in the European sales force, Essex Woodlands is providing $15 million of new capital and will join our Board of Directors.

To provide an overview of the Nellix technology, I'd now like to turn the call over to Bob Mitchell who will be a great addition to our leadership team. Bob?

Bob Mitchell

Thanks, John. It's a pleasure to participate in this call and to detail the Nellix technology. Before I discuss the device, let me just say that on behalf of the Nellix employees here in Palo Alto, I'd like to express how pleased we are to be partnering with Endologix. I've spent decades in leading high-performing organizations in the endovascular space.

Through it all, I have been intimately involved with the evolution of aortic stent grafts, and I've followed Endologix for some time now. One can't help but be impressed with the remarkable progress and success the company has experienced in recent years. I am confident that the combination of Endologix and Nellix represents a company with tremendous market leadership potential.

Now with that, I'd like to turn your attention to Slide 6. Nellix was formed several years ago to address limitations of currently available EVAR devices. Specifically, these devices have relatively high rates of secondary interventions, which in turn require patience to undergo a lifetime of CT surveillance in order to continually monitor their aneurysms. To address these problems, Nellix developed a technology that completely fills the aneurysm space and as such has the potential to significantly reduce secondary interventions.

Turning now to Slide 7, the Nellix technology is truly differentiated from everything else on the market. It utilizes endobags that are filled with a biostable and biodurable polymer that conforms to the patient-specific anatomy. Through this process, the Nellix endografts, they fix it, fill and stabilize the aneurysm.

This unique platform represents the next generation of anatomical fixation, an approach that has been successfully developed and branded by Endologix and is rapidly gaining market acceptance.

Because the Nellix system fills the aneurysm sac, it doesn't need hooks or barbs to attach to the aortic wall, nor does the device apply continuous radial force on the aorta like all other EVAR devices.

Slide 9 outlines the basic steps in a Nellix procedure. First, catheters are introduced over guidewires and position within the aneurysm. When in the proper position, the endoframes, which are stent-like structures, are expanded and the endobags are filled with polymer, excluding and sealing the aneurysm from blood flow. As you can see from the angiographic images on Slide 9, the Nellix system achieves 100% aneurysm exclusion.

Now, turning to Slide 9, you can see that the clinical results for the Nellix system thus far have been exceptional. 34 patients have been treated with the device. And of interesting note, close to half of these patients would not have been able to be treated with other EVAR devices.

So those patients treated with the new generation Nellix system, the data demonstrates superior clinical results as evidenced by a 100% freedom from AAA related mortality, no aneurysm ruptures and no stent graft migration for up to two years post-procedure.

Slide 11 highlights physician feedback we have received on a Nellix device. The procedure steps are very simple, intuitive, and it's just as easy to treat a complex anatomy as it is to treat a straightforward one. Because the technology has such broad capabilities, it can be used to treat short neck aneurysms, large diameter aortic necks and iliac with aneurysms. This enables physicians to preserve the hypogastric arteries.

And the clinical experience with the Nellix device has shown a significant reduction in endoleaks and the subsequent need for secondary interventions. Again, this benefit has the potential to reduce the need for long-term patient surveillance.

Slide 12 shows how the Nellix device stacks up against the current and anticipated competitive EVAR devices. As you can see, Nellix has the potential to treat a wider range of anatomies than any other device, therefore expanding the overall EVAR market.

So we're clearly enthusiastic about the potential of this new technology. And again, we believe that's a perfect fit for Endologix to establish leadership position in the aortic stent graft market.

With that, I'll turn the call back to John.

John McDermott

Thanks, Bob. Picking up on Slide 13, based upon the significant opportunity for the Nellix device together with our deep portfolio of other new aortic devices, we've decided to begin building a direct sales organization in Europe in 2011.

As you can see from Slide 13, we're really just scratching the surface in this important market and are convinced that Europe represents a significant growth opportunity for us.

Turning now to Slide 14, you can see that we have a significant number of new product launches over the next four to five years. We plan to roll out our new sizes in PowerFit in Europe and international markets in 2011, plus launch AFX in the U.S. before the end of the year.

We expect to receive CE mark for the Nellix device in early 2012 and launch it through our new direct sales force in Europe. We also expect to get approval to introduce our IntuiTrak system in Japan in 2012, plus get our PEVAR indication in the U.S. as well as launch our new Ventana fenestrated stent graft in Europe.

Xpand is our new balloon expandable covered stent which was developed to branch into the renal arteries, but also represents an exciting new standalone product that we will begin selling outside the U.S. in 2013. We also expect to have the next-generation AFX system, which we'll call AFX2, to launch in the U.S. in 2013 to provide good continued domestic growth, plus the introduction of a bariatric stent also to be launched in 2013.

Following the timeline out to the right, you can see that we anticipate U.S. approval for our Ventana fenestrated stent graft in 2014 and expect the Nellix system to get PMA approval in the U.S. in 2015. I'll go through a more detailed timeline on the Nellix device in a few slides.

Slide 15 summarizes the total aortic stent graft market opportunity in 2015 and highlights all the products that we have in the pipeline to address each market segment.

Turning now to Slide 16, we get into the details of the acquisition. It's an all-stock deal with $15 million at closing and the balance of $35million to $39 million payable based upon achievement of milestones. The first milestone is $20 million in stock payable when we achieve $10 million in trailing 12-month sales outside the U.S. The final milestone of $15 million in stock is payable when we achieve our U.S. PMA approval.

In conjunction with the transaction, Essex Woodlands, which has been a majority owner of Nellix, is investing an additional $15 million to provide resources to integrate the technology, initiate our U.S. IDE clinical study and build the European sales force.

Essex is a $2.5 billion healthcare venture capital firm and is one of the oldest and largest firms in the business. As a part of the deal, they will be recommending two seasoned healthcare executives to join the Endologix Board of Directors, Guido Neels who is a former executive at Guidant, and Marty Sutter who is a co-founder of Essex. Both have extensive experience in medical device investing and have earned very good returns for their stockholders and investors.

Slide 17 highlights the current Med Tech portfolio at Essex, which includes many successful companies. Their most recent successful exit was the sale of ATS Medical to Medtronic for 4.4 times trailing 12-month revenue.

Slide 18 highlights the timelines for the Nellix technology and our anticipated commercialization. We will be integrating the device into Endologix in 2011 and have the opportunity to leverage some of our internal technologies and infrastructure. We'll begin building the European sales force in 2011 and expect that process to continue for many years much like it has in the U.S.

We expect to gain CE mark and launch the device in Europe in 2012 and start selling in some other international markets later that same year. Additionally, we expect to start the IDE clinical trial in the U.S. in 2012 and gain PMA approval and launch the device in the U.S. in 2015.

Slide 19 provides an indication of the potential value that the Nellix technology can bring to shareholders with incremental revenue beginning in 2011 and growing rapidly to an estimate of over $100 million in sales in 2016.

In addition to the explosive sales growth potential, we expect that the clinical study in the U.S. and our efforts in Europe will clearly position us as an innovator in the market and enable us to develop new and important relationships with thought-leading physicians.

Slide 20 highlights our guidance for 2011 with expected sales between $78 million and $82 million. Due to the investments in integrating the Nellix technology, building the European sales force and deal-related costs, we expect a loss of approximately $0.25 to $0.30 in 2011. We expect the core business to be profitable in 2011, and the combined companies to be profitable in Q4 2012.

Longer-term, we are forecasting operating margins in the 25% to 30% range and expect our sales to grow at a compounded annual growth rate of around 25% over the next five years.

Slide 21 shows our balance sheet after the closing. And as you can see, we'll have plenty of cash to integrate the Nellix technology, begin building the European sales force and initiate the IDE clinical study. We've also still got a $10 million unused line of credit. So we are in good shape to execute on our growth strategy.

Slide 22 is the final slide and highlights the benefits of the Nellix acquisition. We believe that the combined companies have the most compelling new product portfolio in the industry and position us to become a market leader in the treatment of aortic disorders.

Before we open it up to questions, I'd like to just welcome the Nellix employees to Endologix and formally congratulate them for developing what we think is the most promising new AAA technology in the world.

In addition to today's presentation, we've added additional information about the Nellix system on our website under the Investor Relations section. This includes recent presentations given by physicians at vascular conferences, a couple of published articles on the technology, plus an animation that shows how the device works.

Over the next few weeks, we'll also host a webcast with Dr. Andrew Holden who will give a physicians' perspective on the new device and share his personal clinical experience.

Lastly, I'd like to remind everyone that I'll be presenting on Tuesday next week at the Oppenheimer conference in New York and look forward to seeing many of you there.

Operator, we're now ready to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Sean Lavin of Lazard Capital Markets.

Sean Lavin - Lazard Capital Markets

If you could tell us a little bit more about the Nellix Acquisition, I know that you highlighted some data there. And I wanted to get a little more specific on the U.S. trial timeline and also what specific data makes you so confident in the technology?

John McDermott

Well, Bob why don't you address the Nellix the technology specifically and then may be I can jump into to cover the timeline.

Bob Mitchell

Yes, Sean, we're starting the work with Janet who is the VP of Regulatory and Clinical Affairs of Endologix to help basically orchestrate this activity. However, we anticipate that we're going to start that within Q1 of next year. And there is going to be about 150 patients total enrolled with one year follow-up.

John McDermott

If I could add to Bob's comments about the clinical results so far, as highlighted in Bob's remarks, 34 patients have been treated so far with follow-up out to two years. We've look at all those follow-up images in great detail and results are really remarkable.

Again as Bob pointed out, there really isn't anything like this kind of technology that completely seals the sac. Which we think is going to significantly reduce secondary interventions, which continues to be the Achilles heal of the currently available EVAR devices. So that's why we think this is such a breakthrough technology.

Sean Lavin - Lazard Capital Markets

Looking at my models, if I did the math correctly, it looks like your average revenue per rep jumped sequentially by, I'm seeing about $100,000 this quarter. Is that also in the line extension? Or are you noticing more productivity with the recent hires?

Bob Krist

Well, I think it's a combination of a number factors. And I think you highlighted the two most significant of them. We did see a very meaning full response in procedure growth, particularly in our existing accounts with the launch of the new sizes and the PowerFit extensions, but we are also seeing now some good contribution from some of the more recently hired sales reps.

Sean Lavin - Lazard Capital Markets

Then last question from me. I noticed that your litigation expense was a bit higher that you did on the last earnings call. But of course the Bard lawsuit was announced between now then. Should we think of the $575,000 you saw this quarter as a new level for the next couple of quarters? Any color you could give on that would be helpful.

John McDermott

Well, I do think it will be a little bit choppy as the rhythm between the two lawsuits changes over time. But I think if you look at it on an overall annual basis, that would be a reasonable quarterly average.

Operator

Our next question is coming from the line of Chris Cooley of Stephens Incorporated.

Chris Cooley - Stephens Incorporated

Bob, may be you could just walk us through what type of activity test to occur from an integration standpoint? Clearly, you have tremendous developmental technology there are Nellix. Just help us kind of understand what has happen operationally here over the new few quarters to integrate it? And then I have one follow-up, please.

Bob Mitchell

As you can imagine, there is a number of activities going on right now. In fact, John and I just both independently announced the deal to our independent group. His group, a lot of his senior leadership is down here right now, and then we're starting to actually work on the integration activities as we speak.

Specifically, we're looking at certain things around the product build. We're looking about getting the next set of clinical activities up and going again for the EU registry. And though the process, John and I been talking back and forth about different iterations that we plan to incorporate in the product.

So a lot of the activities are going to be based on the operational activities and the transitional activities from here to there.

Chris Cooley - Stephens Incorporated

When we think about the continued expansion of your drug sales infrastructure, particularly here is the states, does the announcement of the Nellix transaction temporarily kind of hinder growth here in the U.S.? Or does that still progress as expected distance an terms of rep ads? And then additionally kind of along those same lines, could you give us some color, as you now have clearly more tenured individuals in the field, you have the expanded sizes of Powerlink, are you seeing stronger growth within some of the higher volume institutions? Or is the bread and butter account still more of a regional type center? Just trying to get a feel there for how the market penetration efforts are going?

John McDermott

So the plan for next year, as it relates to additional new hires in the sales force. This was a big year for us. We set out on a goal to add to our sales force by 30%. We've got much better geographic coverage now. As the territory size is down to a more manageable level. We do still have some opportunities to make some additional rep hires for this next year, but it won't be nearly to the same extent. We'll probably bring on may be another five to seven people as dedicated reps in 2011.

What we will start to do in 2011 though, is in those markets where we have reps that are at or approaching capacity, we'll selectively drop in clinical support specialists that can help cover cases so that our folks can get out and bring in new business. So what you would expect to see in the sales force next year is roughly five to six or five to sever new additional reps plus may be about the same number of clinical support folks to pick up case coverage.

In terms of the mix, between high volume and low volume and other, I think it's important to get kind of grounded back in the mix shift that's occurred actually within the market itself. If you go back in time, what you'd find out that there were a lot of the high volume centers where large academic centers in big groups. Over the last few years what's happened is more and more of the community doctors have been trained on EVAR. And actually the number of large centers is shrinking.

When we look at the procedure growth across the United States what we see is a lot of the growth is coming out of the smaller accounts. So what used to feel a bit like a disadvantage to us because we didn't have as much penetration in the big accounts is actually starting to play now more to an advantage. Because there is a lot more smaller accounts doing these procedures.

Our mix has not changed dramatically over the past year or so. And we're seeing growth in all types of accounts. So I hope that helps.

Chris Cooley - Stephens Incorporated

It does. And if I may, just one other quick follow up and then I'll get back in queue. Just been thinking about the model a little bit here. So we should assume the timing of the cash receded sometime towards the end of the 15, the end of the fourth quarter. And then doing your dilution calculation, what are you assuming on an average share price there for that payment in stock?

John McDermott

That's right, the $15 million would come in upon the closing of the transaction which we expect to be around the end of the year. And the deal was struck on a 30 average prior to the announcement. I think the price is $4.73.

Operator

Our next question is coming from the line of Tim Lee of Piper Jaffray.

Tim Lee - Piper Jaffray

Just one on the quarter and a couple on the acquisition. In terms of revenue upside, was there any unusual one-time sales or any certain geographies or was that just strength across the board?

John McDermott

Tim, it was really across the board. And what happened is, we were starting to roll out some of these new sizes. And we kept getting more and more enquiries and more and more positive feedback from the field that this was really going to expand our reach in terms of the anatomies that we could treat. That's why we pulled it forward a little bit.

But as you know, we do recognize revenue only with each procedure that's done. So there's really no stocking or any unusual activity in that sales mix. It was just, there was a lot of interest in the new sizes, and it's gone well.

Tim Lee - Piper Jaffray

Then just in terms of the transaction, some of the mechanics of it, is there a collar on the initial $15 million, just looking. I think you had said it was just priced at $4.73, but in case stock goes up or down, are there any parameters on that side?

John McDermott

No collar on the upfront $15 million.

Tim Lee - Piper Jaffray

And same thing with the (inaudible) investment, whatever it is, time to close?

John McDermott

That's correct. They are both priced at $4.73.

Tim Lee - Piper Jaffray

And then just in terms of the U.S. clinicals, I think you provided some of the funding requirements in 2011. How should we think about from getting from here to the goal line in terms of the cost, the U.S. clinicals. What do you think the total R&D investments are going to be in terms of this transaction?

John McDermott

Well, I'll let Bob give you a more precise number, but I'll maybe start it with the way to think about it. So we had always believed that it was going to be important for us to have a next generation infrarenal device in our pipeline. And so our expectation was that we would start developing that project. In fact we were in early stages of doing that anyway while we were looking at Nellix.

And effectively what this does is, it just replaces what we would have done internally. Now it's going to cost us a little bit more on an incremental basis than our internal program, because there are some newer aspects to the technology there. We probably would have used more of our existing technology.

So there are some incremental costs, but in total it's not significantly different. The clinical study won't cost more than it would have cost to do our own internal program. And I think we figure that on an annual basis, the Nellix technology would cost us about $1 million more per year.

Bob, maybe you can provide a little bit more detail in terms of the totals.

Bob Krist

Well, I think that's right. If you were to look at it over a three to five year timeline, the incremental investment here will be comparable to what the incremental investment would have been for Endologix to undertake a next-generation technology development.

I think the one modification to that is that given the integration opportunity we have in 2011, we'll probably accelerate a greater proportion of that three to five year cost into 2011.

So right now, I anticipate that you'll see a meaningful bump in the R&D spending in 2011 and then a meaningful scaling back of that number as we move beyond 2011, have the integration work completed with Nellix. And we're moving at a more ordinary kind of a pace toward commercialization.

Tim Lee - Piper Jaffray

Bob, what is your role going to be within the Endologix organization? Would it be in targeted program? Would you have extended responsibilities? Any detail on that would be appreciated.

Bob Mitchell

Sure, Tim. Thank you. First and foremost is the continuation of the Nellix technology. I'm working directly with the team here to make sure that there is a seamless transition.

Secondly, we've talked as a new management team that my efforts will be focused a lot on the execution of the Nellix commercialization. So I will be working a lot in Europe, first of all, and making sure that we have the right structure from a sales and marketing and an infrastructure from an operational perspective.

Operator

(Operator Instructions) Our next question is coming from the line of John Putnam of Capstone Investments.

John Putnam - Capstone Investments

If I go and look at Slide 6, it says that there are secondary interventions in 18% to 20% on the cases. 60% of secondary interventions are caused by endoleaks. Is that industry-wide, and how does that compare to Endologix's performance?

John McDermott

So that paper that is referenced there at the bottom is from a large center in Albany, New York, a very experienced large group. And that data comes from them, and I think that's a pretty good bench mark for the number of secondary interventions. I think if we could give you a handful or more other studies that would show on that same range.

And this data is consistent, again with what we see in other studies. So of those secondary interventions, the vast majority, in fact you'll find more 60% in some other studies are related endoleaks which would include Type I, IIs and IIIs. If you wanted to benchmark the secondary intervention number to the Powerlink System, it's about half of that. So we're about 9% secondary interventions compared to what I would say the other devices.

But the percentage of our secondary interventions that are endoleak related are comparable. So the endoleaks continue to be the issue. You can successfully exclude and aneurism with the other devices, but the problem is, is you can still have side branch profusion which can still pressurize the aneurism and have the risk of rupture. That's the beauty of the Nellix technology.

And there is actually in that, on the website, we've created another tab under investor relations section called Nellix Technology, there is animation there which I'd encourage you to take a look at, Because it really helps to see it. The device really opens up and completely seals and conforms to the inside diameter of the aneurism and really prevents those leaks from happening. And so, since leaks are the primary driver to secondary interventions, that's why we believe and what we've seen so far in the early clinical experience that this technology can make a big difference.

John Putnam - Capstone Investments

And then with respect to developing a European sales force, I'm assuming that you're going to try to get indigenous people who obviously know the account. Is that a big challenge? And how large a sales force do you think you need to adequately cover Europe?

John McDermott

We do think we can get people with EVAR experience. It is a competitive market. But this technology is magnetic. I will say that there's probably been more presentations and publications in visibility to the technology outside the U.S. So we think that, and Bob can add some color to this too, we think we can build a very high quality team in Europe.

Our plans for the first year is, we've modeled to have let's say roughly a sales and marketing organization around 15 people. And I think that's included in one of the slides; our estimated first year spend for the European sales and marketing is about $5.7 million.

John Putnam - Capstone Investments

And then ultimately, how large do you think it really needs to be?

John McDermott

Well, it models out over the next several years with continued growth. And we've used comparable productivity measures as we have experienced in the U.S. So we didn't push the model too hard. I think I'm hopeful that there's some upside there. But we basically build that organization over time.

I don't have those numbers right in front of me, John, but I think it gets up to 50 or 60 people in the outer years. It also drives a very good revenue number for us.

Operator

We have a follow-up question coming from the line of Tim Lee of Piper Jaffray.

Tim Lee - Piper Jaffray

Can you just walk us through the IP landscape? What prevents some competitors trying to replicate the concept of filling in the void? Any details you provide on that front will be appreciated. Thank you.

John McDermott

Bob, you want to take that one?

Bob Mitchell

So related to the Nellix intellectual property, specifically we cover a couple of key categories. Number one, we've captured the aneurysm treatment using fillable structures. Secondly, we have a lot of IP surrounding the Endobag design and the material construction surrounding that.

That way that the device actually positions as an anchor, we have some interesting IP around that. And then we have some new IP that is recently issued on containing the filling.

So overall, I think the IP portfolio we have, we feel are in a very fortunate position because we were the earliest in this methodology of aneurysm treatment. So we feel pretty comfortable. We have seven U.S. patents issued; we have ten U.S. pending right now and we have a number in the pipeline as well.

Tim Lee - Piper Jaffray

International IP standpoint?

Bob Mitchell

We have European and Australia, Asia as well.

John McDermott

Tim, just to add to that, within this patent portfolio, none of the really key IP even starts to expire until 2025. So there's also a good, long runway of protection here.

Operator

There appears to be no further questions or comments in our queue. Mr. McDermott.

John McDermott

Well, we covered a lot of ground today and hope you share our enthusiasm about the results in Q3 as well as the acquisition of Nellix.

We look forward to providing you with updates in the future and on our regularly scheduled calls. Thank you.

Operator

That does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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