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Endologix, Inc. (NASDAQ:ELGX)

Q2 2011 Earnings Call

July 21, 2011 5:00 PM ET

Executives

Zack Kubow – IR, The Ruth Group

John McDermott – President and CEO

Bob Krist – CFO

Analysts

Duane Nash – Wedbush Securities

Marie Ann – Lazard Capital Markets

Steven Lichtman – Oppenheimer and Company

Larry Neibor – Robert W. Baird

Chris Cooley – Stephens

Brooks West – Piper Jaffray

John Putnam – Capstone Investments

Operator

Greetings and welcome to the Endologix Inc Second Quarter 2011 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 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 would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of Federal Securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Endologix’ Annual Report on Form 10-K and subsequent reports as filed with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, July 21, 2011. Endologix undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

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

John McDermott

Thanks, Zack. We are very pleased with our progress in the first half of 2011 and continue to be focused on building a top-notch global sales organization and introducing the most innovative and effective new endovascular aortic devices.

In the second quarter, we grew total revenue by 22% year-over-year and our U.S. business grew 30%, which represents 8% sequentially over Q1. These results reflect the effectiveness of our sales team and their ability to leverage the strong clinical results achieved with anatomical fixation in our exciting new product pipeline. We finished Q2 with 65 reps and five clinical specialists and are encouraged by the early productivity of our new clinical specialists.

Our international sales in Q2 were down compared to prior year, but this was related to the early termination of our distribution agreement with LeMaitre Vascular that was announced on Monday. The new agreement enables us to start selling direct in most European countries starting on September 1 instead of the original termination date of June 2013.

We felt it was important to transition our current business now, so we can be ready to maximize the planned launches of Nellix and Ventana in 2012. We have already begun building our team in Europe and are attracting strong candidates with existing physician relationships and vascular experience. As you can imagine, there is significant interest in our pipeline and we are encouraged by the level of enthusiasm from European physicians.

Despite the impact of the LeMaitre transition on our international sales in Q2, we think the new agreement will be neutral for the full year 2011 and are reiterating our revenue guidance of $78 million to $82 million. In addition to our domestic and international sales initiatives, we continue to make good progress with our new product pipeline. Our U.S. sales force is eagerly awaiting the launch of the AFX Endovascular AAA System, which received FDA approval in June. AFX provides physicians with three key benefits, access, precision, and seal. The system has 17 French introducer making it the lowest profile device in the United States for the treatment of aortic neck diameters of 22 millimeters or larger. AFX also has a new dial mechanism that provides precise controlled stent graft positioning and deployment.

And lastly, the AFX stent grafts have our new proprietary STRATA graft material, a durable, highly conformable ePTFE that enhances seal. We introduced AFX at the Annual Meeting of the Society for Vascular Surgery in June. Physician feedback has been very positive and we are currently working to train the sales force and build inventory in anticipation of a full commercial launch in September. We look forward to launching AFX and believe it will give our sales force a powerful new tool to continue expanding our market share. We also provided updates on Nellix and Ventana at the SVS meeting and continue to receive a significant amount of physician interest in both products. Nellix remains on track for a European introduction and the initiation of a US clinical trial in 2012. Enrollment in the Ventana international clinical study continues and is expected to be complete by the end of this year leading to an anticipated introduction in Europe in 2012. Additionally, we continue to work with the FDA on our IDE and expect to begin enrolling patients in the US before the end of this year.

Enrollment in our percutaneous EVAR clinical trial known as PEVAR is also continuing and we are planning to complete enrollment by the end of this year. The results from the rolled in patients continue to look encouraging and will be published in the Journal of Cardiovascular Surgery in August. Based on the current timeline, we could receive approval for an expanded percutaneous indication by the end of 2012 further enhancing our ability to bring innovation to physicians’ treating abdominal aortic aneurysms. Overall the pipeline is progressing nicely and we're pleased with our sales results in the first half of 2011.

With that I will turn the call over to Bob Krist, our Chief Financial Officer. Bob?

Bob Krist

Thank you, John and good afternoon to all. So, today I will provide a brief overview of our financial results and key metrics for the second quarter of 2011. As John highlighted total revenue in the second quarter increased by 22% year-over-year to $19.2 million, domestic revenue in the second quarter increased by 30% year-over-year to $16.6 million and was up by 8% sequentially from the first quarter. Domestic growth was driven by the addition of new sales territories relative to the prior year and by the new product sizes and power fit extensions launched in the US in the middle of 2010.

The international business, however, was down year-over-year and sequentially which is a reflection of discussions we had during the quarter with LeMaitre concerning the early termination of their exclusive distribution rights in Europe. To put this into context, second quarter 2011 sales to LeMaitre were $512,000 less than in the second quarter of 2010.

Gross margin in the quarter was 78.4% compared to 76.9% in the second quarter of last year. This 150 basis point increase in gross margin was driven by more favorable product mix due to those new products launched in the second half of 2010 and by faster overall revenue growth in the higher margin domestic market. The sequential increase from 76.4% gross margin in the first quarter reflects the improvement in operational efficiencies back to normal levels following the short-term effects we experienced from adding a second manufacturing shift and scaling up production capacity.

Operating expenses for the second quarter were $20.2 million compared to $12.2 million in the same period last year. Of this $8 million increase, $3.5 million was directly related to the Nellix acquisition including the ongoing technology development work, the establishment of a direct sales organization in Europe, and general integration expenses. Research, development and clinical expenses grew to $6.1 million from $2.4 million in the second quarter of 2010. This increase was in line with our expectations and was driven primarily by our pipeline development programs and clinical trials in support of the regulatory pathways for Nellix and Ventana.

Marketing and sales expenses grew from $7.6 million in the second quarter of 2010 to $10.8 million in 2011, due to growth in the base business principally the addition of new sales territories and variable commission expense on the 30% increase in US revenues, a larger presence at major vascular surgery meetings and expenses related to developing the direct sales organization in Europe.

G&A expense grew from $2.2 million in the second quarter of 2010 to $3.3 million in the June 2011 quarter. This included $676,000 in litigation expenses related to the patent disputes with Cook Medical and Bard Peripheral Vascular compared to $143,000 in the second quarter of 2010. G&A also included additional dollars related to the integration of the Nellix acquisition.

For the second quarter 2011 our GAAP net loss was $13.7 million or $0.24 per share compared to a net loss of $380,000 or $0.01 per share for the second quarter of 2010. On an adjusted non-GAAP basis and excluding the fair value adjustment related to the contingent purchase price liability from the Nellix acquisition, we reported adjusted net loss in the second quarter of 2011 of $5.1 million or $0.09 per share, and a $9.9 million loss or $0.18 per share for the six months ended in June 2011.

The contingent payment is non-cash and is solely payable in shares of Endologix common stock. These milestone payments were structured in the merger agreement such that as the share price exceeds $7.50, the absolute number of shares payable to dilution impact declines even as the dollar value of the milestone payments continues to increase. In this case the $8.6 million increase in the contingent consideration liability was almost entirely related to the 53% increase in Endologix stock price from the Nellix acquisition date in December 2010 to June 30 2011.

During the second quarter we used $3.5 million in cash including a $2 million increase in working capital investments primarily for building inventory in preparation for the AFX launch. We ended the second quarter with $30.9 million in cash. We have no outstanding bank debt though we do have $10 million available on our revolving line of credit. Accounts receivable days outstanding including both domestic and international accounts was 59 days at the end of the second quarter 2011 compared to 54 days at the close of 2010. Inventory turnover was at 1.2 turns at quarter end versus 2 turns at the prior year end again due to the planned inventory build for the AFX launch. Inventory turnover will begin to improve over the second half of 2011 following the launch.

Now turning to guidance, as John mentioned for the full year 2011 we are reiterating guidance for revenue to be in the range of $78 million to $82 million which should amounts to a 16% to 22% increase relative to 2010, and a net loss between $0.25 and $0.30 per share. This loss per share guidance assumes further development of the acquired Nellix Technology in anticipation of the commercial launch in Europe and the initiation of a U.S. IDE clinical trial in 2012, and building a direct sales force in Europe. This guidance also assumes ongoing base business investments in the U.S. sales force, research development and clinical initiatives and litigation expenses.

However, not included in our guidance are the potential impacts of adverse litigation outcomes, acquisition related charges like the fair value adjustment to the Nellix merger consideration or other business development transactions such as the LeMaitre early termination agreement.

In summary, our operating performance to-date is right on our plan and we have the necessary financial resources in place to support the continued execution of our growth strategies.

With that I’ll turn the call back to John.

John McDermott

Thanks Bob. And before we open it up to questions, I often get asked by investors and analysts what are the key events and activities we should monitor over the next couple of quarters to evaluate the company’s performance? I think the best way to answer this is to share with you our specific goals for the remainder of 2011. First, of course, we planned to launch AFX in the U.S in September and continue to drive revenue growth. Number two, transition to direct sales in Europe on September 1 and continue building the top-notch team. Three, complete enrollment in the PEVAR clinical trial. Four, complete international trial enrollment with Ventana and start our U.S. clinical study. And five, complete our development in testing on Nellix and prepared EU regulatory submission.

These are our top priorities for the balance of 2011 and we have got everyone in the organization focused on getting these done. We think we are making good progress on our mission to become the leading innovator of treatments for aortic disorders and believe we can capture significant market share in the years ahead. We’ll keep you post on our progress and we’ll be presenting at several upcoming conferences.

In August, we’ll be at the Lazard Conference in Chicago; the Canaccord Genuity Growth Conference in Boston; and the Wedbush Life Sciences Conference in New York. In September, we’ll be at the R. W. Baird Healthcare Conference; the Morgan Stanley Global Healthcare Conference; and the UBS Global Life Sciences Conference all in New York. We look forward to seeing many of you at these conferences over the next couple of months.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from Duane Nash with Wedbush Securities. Please proceed with your question.

Duane Nash – Wedbush Securities

Good afternoon gentlemen and thanks for taking the questions. How quickly do you expect all cases to be switched to AFX and what you would expect to be rate limiting steps, for example, would it be inventory training or perhaps something else?

John McDermott

Yeah, so Duane we’ll actually plan to start doing cases with AFX in the middle of August. So, we’ll have a training for our sales organization here around the end of this month first part of August. And then have adequate inventory for our team to start doing cases in the middle of August. And by September 1, we should be selling exclusively AFX in the United States. So, really the rate limiter at this point is just an inventory build. We chose to not double down inventory and take the regulatory risk. We wanted to get the FDA approval first and then start to build. So, we may do a couple of cases here and there between now and then, but they will be on a very limited basis really for training purposes.

Duane Nash – Wedbush Securities

And have you made any comments on the pricing of AFX compared to Powerlink and how that could affect, for example, margins in Q4 if the pricing is higher or?

John McDermott

We haven’t really talked much about it. We think it will be comparable to the existing devices as do we believe that the margins will also be comparable.

Duane Nash – Wedbush Securities

Great. Well, thanks very much and congratulations on the quarter.

John McDermott

Thanks.

Operator

Our next question is from Sean Lavin with Lazard Capital Markets. Please proceed with your question.

Marie Ann – Lazard Capital Markets

Hi it’s Marie Ann (ph) for Sean. How are you?

John McDermott

Hi, Mary.

Marie Ann – Lazard Capital Markets

Hi. Just a quick question I wanted to get a few more details on the LeMaitre determination agreement. Will you need to wait until September 1 to start going direct with those customers who are served by the distribution contract? And then I guess in the other words can we expect European sales to be relatively low in the third quarter?

John McDermott

Well, we are not – let me answer the first question first, we cannot go direct to customers prior to September 1.

Marie Ann – Lazard Capital Markets

Okay.

John McDermott

But in terms of what to expect from Q3 sales, we really don’t give third quarter guidance at this point. So, September will be the first month that will start doing cases directly. So, we’ll have one month end of that quarter, but the volume is still relatively low. The base of business that’s moving over is pretty modest relative to our total mix. So, we don’t see it having a big impact, which is why we have maintained our full year guidance, where it is.

Marie Ann – Lazard Capital Markets

Okay, sure it makes sense. And then just a quick housekeeping question, can you tell me what the additional Nellix integration cost was included in the G&A line. I know you have given that out in the past?

Bob Krist

Yes, it was actually a bit lower in the second quarter than in the first we had a number of severance arrangements to honor in the first quarter. So the number in the second quarter was between 100,000 and 200,000.

Marie Ann – Lazard Capital Markets

Okay, very helpful. Thank you so much. That’s it from me.

Operator

Our next question is from Steven Lichtman with Oppenheimer and Company. Please proceed with your question.

Steven Lichtman – Oppenheimer and Company

Thank you. Hi guys. In terms of data presentations in the back half, you mentioned some data that’s going to be published, but you talk about also some potential presentations may perhaps at in this coming November?

John McDermott

Yeah, so what I believe is on the schedule for the podium at these would be a presentation on Ventana and another presentation on Nellix. I think there will also be presentation likely on PEVAR, touching on AFX, and then typically also at that meeting we will sponsor some other physician presentations as well. So it will be a busy meeting for us.

Steven Lichtman – Oppenheimer and Company

Okay, great. And then in Europe, how many reps direct do you have on board today and are you still targeting that through 12 to 15 by year end?

John McDermott

Yeah, we are still targeting that same range. The only thing that happens is we’ll accelerate that a bit. We estimate that to pickup the current customers from the, we need three dedicated folks to cover those cases. So that moves up slightly. Right now we have one of the three and are in process of securing the other two that will be required to cover the initial case volumes and then we’ll build into the 12 to 15 through the balance of the year.

Steven Lichtman – Oppenheimer and Company

Okay, great. And then lastly Bob, in terms of gross margin - I apologize if I missed this, but in terms of the trends coming out of 2Q and if you look forward, I mean, should we assume things are pretty stable in this sort of range that we saw in the second quarter?

Bob Krist

Yes, margins for the balance of 2011 should remain about flat at roughly 78%. John mentioned the AFX launch should be margin neutral. The LeMaitre early termination effect will be a slight positive, but not significant in terms of the size of that business initially. And then I would say production volumes will be a little lower in the second half of 2011 as we increase our inventory turnover following the AFX launch. So that will result in a slightly higher fixed overhead per unit cost effect. But, overall I would expect the margins for the balance of the year to remain roughly 78% and then given the lower 76.9% result on an actual basis in the first quarter, I would continue to expect the gross margin for the full year to average between 77 and 78.

Steven Lichtman – Oppenheimer and Company

Great, thanks guys.

Operator

Our next question is from Larry Neibor with Robert W. Baird. Please proceed with your question.

Larry Neibor – Robert W. Baird

Thanks good afternoon.

John McDermott

Hi Larry.

Larry Neibor – Robert W. Baird

Last year when you launched Powerlink you had an immediate increase in domestic sales volume. Are you anticipating the same type of effect this year when you launch AFX?

John McDermott

Well, I can’t quantify the effect, but I do expect there to be an uptake in business. Yeah, I mean there is a good bit of enthusiasm about the product both internally and externally. So although we will only really have it for a full month of the quarter, I still do expect it to have a positive impact.

Larry Neibor – Robert W. Baird

Great. When you plan on launching AFX in Europe?

John McDermott

We are either going to do that around the end of this year or the first part of next year, Larry. We haven’t decided exactly. It will largely depend on our inventory situation. We would like to work office much of the intuitive stock as appropriate to meet customer requirements and then transition to AFX. And so that’s a bit of a demand forecast planning exercise at this point. I think it will be around the end of this year first part of next. We should be able to drill down into that on the next call.

Larry Neibor – Robert W. Baird

Okay. On the legal front, the cases expenses are picking up. Can you give us some outlook in terms of where you are in these cases?

John McDermott

Yeah, there is no real material update at this point other than in the Cook case the Markman ruling was delayed by a month just because of the court was busy. So, the current timeline is they did say the judge would give us a decision by August 15th and on the Bard case it’s still very and still in the early stages we are just getting a schedule now. The Markman hearings’ for the Bard cases has been scheduled for February 2012. So, that’s all we have at this point.

Larry Neibor – Robert W. Baird

With started to be covered by the vascular case?

John McDermott

Well, it is ePTFE and it is a different material than our current material. But in either event, we think our current material does not infringe the Bard patent. But I’d say that the strata material is even further away from the claims in the patent. That said that’s not the reason we developed or introduced to the material. The material strata was actually developed for Ventana device and it works so well we decided to used it on AFX.

Larry Neibor – Robert W. Baird

Great, thank you.

John McDermott

Welcome.

Operator

Our next question is from Chris Cooley with Stephens. Please proceed with a question.

Chris Cooley – Stephens

Good afternoon and thank you taking my questions.

John McDermott

Hi, Chris.

Chris Cooley – Stephens

Hey could you just help us think a little bit about just headcount on the U.S. side of things you are at 65 now. I think in the past you talked about exiting the year around 70 in terms of direct reps. Can you talk about the added spend will that accelerate here in the U.S. because it clearly you are getting traction with your direct sales force here in the U.S. up 30% year-over-year? And I have a follow-up.

John McDermott

Yes, so right now we are at 65 and 5 and what we’ve seen that’s really worked well for us. That still early in we are measuring effect is the new clinical specialists. So, at this point we’re thinking that we would finish the year around 72, which would be 66 reps and 6 clinicals, which represents a total increase over the last year of about 12% of full time people working in the field doing cases.

We would like a little more time under our belt to evaluate this clinical specialist model because its certainly get gives you more leverage and to the extent we are also adding more people earlier with LeMaitre transition, we want to be sure that we can do that early to cover those initial cases. So, that’s where we are planning to finish, in terms of reps for the end of this year and then for next year, we will provide guidance on the number of reps and clinical specialists in 2012, when we give our guidance.

Chris Cooley – Stephens

Understood and if I could apologize Bob, could you run back through, when you think about your guidance here for the full year in terms of what’s included, what’s excluded on the adjusted earnings guidance. Could you just run to that again very briefly, I apologize I think I may have missed one of the data points back in the amount here?

Bob Krist

Sure. Well, I think if you think of this way everything is included three total potential exceptions to which are in the numbers presently. So, the exceptions would be, if there were unfavorable outcome to one of these litigations, we haven’t tried to establish any contingent liability there. Its total unknown, if that were to be the case.

Secondly, we always prefaced our guidance with the exclusion of any business development transactions, which might prop up on one half basis and we have the opportunity were such a transaction with LeMaitre to get control of that market early. So, that one point $3 million in the charge that comes out of that transaction would not has been contemplated in our guidance.

And then finally regarding Nellix acquisition, all of the tangible real hard expenses involved in that integration, and the ongoing R&D and sales force in Europe and just the normal integration costs around retention awards and severance payments and so forth. All of that stuff is in the guidance. What is not in the guidance relative to Nellix acquisition, is this fair value accounting requirement from the new purchase accounting standard that as background you may recall that our merger agreement provided for most of the acquisition price to be contingent on two future milestones the CE Mark approval and commercial sales activities in Europe and the second milestone was the U.S. PMA approval. The GAAP purchase accounting requires that you make a fair value estimate at the acquisition date for the contingent consideration.

And just that on a mark-to-market basis of these subsequent balance sheet day and then the corresponding increase or decrease in that fair value is recorded as a charge or an income item on the income statement. The key factors that are affecting the fair value estimate are obviously the resolution of the uncertainties along the line to achieving the ultimate milestones. And then in our case because the payment will be in start not cash the fair value is also greatly dependent on the share price.

So with our share price having increased recently as much had that drove the valuation of this fair value up by some $8.5 million as of June 30th. That number is not included in our guidance it’s obviously dependent on a lot of external factors principally the stock price. And so it really would be possible for us to make a projection on that.

Chris Cooley – Stephens

Understood and if I could just squeeze one last one and I’ll get back in the queue. Just for clarification, you’ve talked about on the conference call, John still on track for 2012 with Nellix as well Ventana. Are you still thinking first half for Nillex in Europe, but just want to be clear about that or is that now a sometime 2012.

John McDermott

No, nothing is changed with it. It is what I’d say in the latter part of the first half. That’s our current estimate and at this point again it’s an estimate. We have not filed for CES.

Chris Cooley – Stephens

Understood.

John McDermott

It’s based upon our current timeline. But nothing is changed from our previous communications.

Chris Cooley – Stephens

Super, congratulations on the great quarter guys. I’ll get back in queue.

John McDermott

Thanks.

Operator

Our next question is from Brooks West with Piper Jaffray. Please proceed with your question.

Brooks West – Piper Jaffray

Hi guys can you hear me?

John McDermott

Yes. Hey Brooks.

Brooks West – Piper Jaffray

Hey, thanks for taking the questions. John I wanted to just go back through some of the mechanics on the revenue in Europe. How does the relationship with LeMaitre work. Did they take on inventory? And I’m trying to think through the next two months in terms of what we might see out of Europe given the short fall in this quarter?

John McDermott

Well, they do stock historically, but we don’t expect too much there from them. And what little inventory they buy to support cases one of the months of course it’s going to be August, which is a very low month in Europe would be shifted them on a consignment basis. So, whatever sales we’ve recognized in Q3 to LeMaitre would be we think pretty minimal.

Brooks West – Piper Jaffray

So, that fair to say that maybe the inventory correction took place in Q2 and we should just kind of see revenue to support cases in Q3. Is that the way to think about it?

Bob Krist

I would think about is the following way, during Q2, as we mentioned LeMaitre curtailed their ordering in anticipation of the agreement and I think other than for some very specific holes in the mix and so forth. That effect will continue during July and August during this transition period.

So, I’d say we would expect very minimal to know revenues in terms of shipments to LeMaitre. And then whatever opportunity we have in the month of September on a direct basis. So, I think in that context of we would expect a little bit of a continuation of what we saw on Q2 and then we would expect to offset those impacts during the fourth quarter consequently our comfort level with the overall revenue guidance for the year.

Brooks West – Piper Jaffray

Okay. That’s helpful. And then John, on Nellix versus selling AFX, when we talked a little bit about that SVS? It sounds like you’re going to go ahead and launch AFX in Europe in early ‘12. How do you see that transitioning once you have Nellix available in European market?

John McDermott

Well, we’re going to need a AFX are in two track like device in Europe either way to support Ventana. And so it just from the perspective of driving the majority of our volume through a single platform, it just makes sense to move over to AFX at some point in time. And so I think that Nellix will be the preferred device for infrarenal aneurysm repair, as we’ve talked about. There will be some anatomies might be more physicians are better treated with AFX in addition to all of those Juxtarenal, pararenal and short neck aneurysms. So, I still see Nellix is the go to ultimate infrarenal device. AFX by itself becoming more of a niche specialty product or when doctors want to preserve the bifurcation and AFX will also be the base for Ventana.

Brooks West – Piper Jaffray

Okay thanks. And then if I could ask one more on the U.S. just trying to understand the AFX ramp. From a training perspective and I forgot how many U.S. accounts you have, but is there a big training aspect to introducing the new product and you accomplish that from August to September 1st or could we see some kind of a slow ramp into early Q4.

And then I guess as the second part of that question, could there be some softness in your Q3 in anticipation of the new product sitting in Q4.

John McDermott

Yes, I’ll answer the last one first. There is awareness now of AFX and so to the extent people know its coming. They like to use the new thing. That said there is not that much timing flexibility with treating aneurysms. So, the only issue for Q3 and I don’t right now everything seems to be juggling along nicely. It tends to be more of a seasonal quarter with vacation in those activity. So, all that being said, we’re still very bullish about AFX and things there is a good bit of interest in it.

In terms of training, there are some slight differences actually some enhancements to the delivery and deployments, but for the existing customers, we don’t believe it’s a significant training effort to get them converted. So, I’d think of it as we will be fully converted in September and our base of business will be already converted to AFX.

Brooks West – Piper Jaffray

Okay great. Thank you very much.

John McDermott

Welcome.

Operator

(Operator Instructions) Our next question is from John Putnam with Capstone Investments. Please proceed with your question.

John Putnam – Capstone Investments

Hi gentlemen and I’ve got two questions one for Bob and one for you John. Bob, the $1.3 million that you have to pay LeMaitre, when those, when do you have to do that and where we see it on the P&L?

Bob Krist

Sure. The agreement with LeMaitre actually occurred in July. So, the transaction itself will be booked in the third quarter. After cleaning up some inventory reconciliations at the effective date September 1st, what you’ll see is that most close to all of that $1.3 million charge will impact on the selling expense line in our operating expenses in Q3.

John Putnam – Capstone Investments

Okay, great day. And then John the other day, when J&J reported their earnings they’ve talked about INCRAFT, which I guess their AAA device there sort of vague on details as you would expect from them. But have you seen the device and what do you think of the timing of this kind of impact they go forward?

John McDermott

Yes, I have seen it. Seen it presented at meetings and I’ve talked to doctors, who have seen it. It’s a traditional proximal fixation modular device. It’s got a very similar design to the other device is the only difference in that system. Well, the two major differences that I can see is they focused on profile. So, they are suggesting that it has a 14 French outside diameter profile. The range of anatomy that it will treat are very general, in fact, maybe slightly under the competitive range. And the other thing the graft material that they view seems to have a high bit of porosity. So, some of the early clinical feedback is typical to tell acutely whether or not you’ve got an endoleak. But assuming that they do move forward with the device, we have the timeline estimated for them that they would enter the European market in 2012. We know they have already enrolled or are enrolling a clinical trial there. We don’t know if they will get their CE by the end of this year or early next year.

And then depending on when they decided to go to the U.S., they started their IDE. It would be sometime in last 2014 or 2015. But, generally speaking I would say it’s very much an iteration of the current theme of proximal fixation modular devices.

John Putnam – Capstone Investments

Okay. And you would expect that they would have to do as much follow-up as you have had to have done in the past?

John McDermott

Oh, certainly, yeah, for sure.

John Putnam – Capstone Investments

Well, this might be in somebody else’s lifetime, is that what you are suggesting?

John McDermott

Well, I didn’t put it in those words, but it will take sometime and it will have to go through the same very rigorous process that all these devices has to go through.

John Putnam – Capstone Investments

Great, thanks very much and congratulations on your progress.

John McDermott

Thanks John.

Operator

Mr. McDermott, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

John McDermott

Okay, thanks operator, and thanks again to everyone for joining us on the call today and your interest in Endologix. We’ll certainly keep you posted on our progress and looking to seeing many of you at the upcoming conferences.

Operator

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

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