Endologix, Inc. (NASDAQ:ELGX)
Stephens Inc. Fall Investment Conference
November 15, 2011 11:30 AM ET
John McDermott – President and CEO
Good morning everyone. Thank you for joining us in the courtesy (ph) for our next presentation we’re honored to have John McDermott, the President and Chief Executive Officer of Endologix with us here today. Endologix is one of our top techs in a Medtech’s face. We have the stock rate overweight with a $14 price target. And you’re going to find that this is definitely the most prolific growth portfolios in the interventional space today and clearly, one of the top 10 growers in Medtech across our 100 plus company universe.
So, with that, I’ll turn it over to John.
Thanks Chris, good morning. John McDermott, I’m the CEO of Endologix. And I’ll take you through our company here. These are our Safe Harbor Statements.
Just briefly executive summary, this is a fast growing medical technology company located in Irvine California. We repair abdominal aortic aneurysms with a very differentiated technology and have a promising pipeline, and I’ll take you through all those details.
The company has also grown nicely. We just reported our third quarter revenue growth of 25%, better than 33% in the US and we’ll go through these markets and the technologies here in detail.
So, this illustrates what we do. The traditional way to repair an aneurysm is the picture on the right, open surgical repair where you get an open abdominal incision from just below your sternum down below your belly button. Your aorta lay is very deep in your torso, it actually is almost laying on your backbone when you lay down. So, it’s a difficult, very invasive procedure.
The newer approaching to repairing these aneurysms is on the illustrations on the left. It’s a catheter based therapy, where through a catheter we have a device that basically realigns the inside, the aorta from the inside out. And basically what we want to do is take the blood flow off of that aneurysm and prevent it from a rupture and now we can do that through a catheter based therapy.
In the United States, about 60% of the EVAR procedures are now done catheter based like you see on the left whereas 40% open repair. And I’ll talk to you about the limitations with EVAR today and how that’s likely to change in the years ahead.
This is the current market for Endovascular grafts, what we call intra-renal or devices below the renal arteries. The importance of that, I’ll make more clear as we go through this. It’s a $1 billion market. Different growth rates in different market segments in the US, it’s growing 6% to 8% in Europe, closer to 5% to 6% in the outside. And the other more emerging markets closer to 10% to 12%.
Blended growth rate of around 8% globally, that’s procedure growth, you can see the average selling prices. These are expensive devices. We have a rep for a clinical specialist in every procedure, so it’s a high touch clinically sophisticated type of an implant. Primary physician that does these is vascular surgeons, also some interventional cardiologists and some cardiac and cardiovascular physicians as well.
This is the competitive landscape, what’s unique about these devices is the evolution, really all of the devices over on the right, the three proximal fixation that was kind of the earlier, the first generation devices. They are grafts with stents basically stone to them. They are implanted through a catheter and deployed and then at the top, there are I don’t have a pointer, but there is, hooks or barbs that attach and anchor into the vessel valve. And that’s what holds the device in place, just below the renal arteries which you can see coming off of this middle picture with Medtronic.
So, these stents that you see right here, they attach and then, the limbs are added to the device from the bottom. So, it’s a top down type of a device. The limitation with that type of an approach is if you lose your purchase and the aortic neck and you slip, then the device is no longer excluding the aneurysm and that’s a type (ph) mode we call a migration.
You can also get Endoleaks in this aneurysm picture you see here in the center. Sometimes you can get leaks from the top, sometimes from the bottom and actually even from the sides or side branches. So, you could effectively exclude an aneurysm but still get an Endoleak and I’ll talk about how we address that later.
Our device is the furnished (ph) over on the left and you can see it’s very different. And instead of using hooks and barbs to attach ourselves into the aortic valve, we actually set the device right on that saddle, where the aorta splits off and goes down into your legs that’s our fixation. So, we don’t fix mechanically per say, but we actually set and using the patients on anatomy. And of course there is nowhere for the device to go. So, migration is not a failure mode with this device.
Early on, yet that being a very intuitive approach obviously, the device has always go very clinical – good clinical results which I’ll show you in a minute. But it was a more difficult system to use. So, early in the company’s evolution, it had a limited range of sizes in a more cumbersome delivery system and that’s what we’ve really worked on over the last few years. Made the device a lot easier to use, built out the range or sizes, so it’s no longer kind of a hard to use niche product. Now it’s just as easy to use as the other devices and to treat a wide range of patients.
The other thing that’s unique about this platform as you can see, it’s really the only device here that returns the patient’s anatomy, the blood flow in that anatomy back to its original configuration. And it preserves the bifurcation. So, by sitting on the bifurcation there at the bottom, you can still do what we call a cross-over procedure. So, if you hear about peripheral arterial disease or atherectomy devices, stents, balloons, anytime they do a peripheral intervention, they tend to access it from the opposite groin, go over the patient’s bifurcation to treat the other side.
Once you put in any of the other three devices, you no longer have the ability to do that. You can’t make that steep corner nor do you want to put any downward force on that device. So, our device is the only system that really enables the preservation of the bifurcation in future peripheral interventional procedures. So, it’s unique in its class and it’s also been the fastest grower in this category now for the last few years.
Just to touch on some of the clinical data, this is one of many peer reviewed papers. This is actually a combination of three PMA clinical trials that evaluated the product after five years. It’s got very, very good results as you can see here.
Here is the company’s historical growth rate. We actually got PMA approval in the United States at the end of 2004 and introduced the device commercially in 2005. So, you can see, we’ve grown nicely.
We just introduced our guidance on our last call and 83, is in the middle of our current full year guidance for 2011. Most recently also in Q3 we introduced a new device as I mentioned earlier, we’ve been working on making the device easier to use and treat a wider range of patients.
The newest device is called AFX that stands Anatomical Fixation, which is really our trademark it’s what we’re known for, it’s the setting the device on the bifurcation. What’s new and unique about this device is it’s got a very low profile, 17 spreadsheets so it’s the lowest profile device in the United States at present. And we’ve also developed a new graft material that we call STRATA which has a very unique and enhanced sealing property. What sealing is important for these aneurysms because not only do you want them to have good fixation, but you want to have a blood tight seal when you’re trying to exclude and aneurysm. So, this device has shown to have some great good clinical results early on and has had some very good uptake so far in its early release.
Sales wise, we have a direct sales force in the US, which we’ve been adding to gradually over the last few years. We plan to finish the year with 72 reps and clinical specialists. Over 400 years of EVAR experience that matters because this is such a clinically sophisticated procedure. And you have to have somebody in the room you’ve got to provide the physicians with a lot of technical support.
Profile for our reps is successful, vascular reps we typically get them from the peripheral vascular companies and train them, EVAR takes up to a year before they’re really capable of running their own procedures. Historically we had outside the US, we sold through distributors. We have recently converted our European distributor to direct, we started that in September. And are now building out our own direct sales force, plan to finish this year with 12 to 14 of our own people on the ground and probably we’ll double that next year.
The reason we decided to do that this year as we’ve built our core business and now our new product pipeline which I’ll talk about next, it has got enough depth to really support and leverage investment in a direct channel.
So, what are the unmet needs, I touched on this briefly, as you saw from the previous picture, the landing zone for these devices is just below the renal arteries. Well, and about 20% of the diagnosed aneurysms, there is no landing zone. The aneurysm continues right up to and include the renal arteries like this PT you see here. There is no place for the proximal edge of the device to go. So, at least 20% of anatomies like this don’t – aren’t even EVAR candidates, this patient would have to be repaired with open surgery.
And unfortunately many patients are not suitable candidates, it a very highly more bid procedure, not everybody can handle that kind of procedures. So, those patients get sent home with nothing, which is obviously very unfortunate. So, one of the biggest unmet need is these unusual anatomies represent roughly 20% that can’t be treated with EVAR.
The other thing I touched on was Endoleaks. Because these devices can get leaked from above, below or through the side branches, they have to be monitored very carefully. And patients with EVAR devices typically go in for an annual surveillance CT Scan. So, it’s a lot of cost, it’s a lot of radiation. And it’s clearly an opportunity. If you could develop a device that sealed the sac, it didn’t require long term surveillance that would be a meaningful step forward in this market.
And lastly Percutaneous access, right now all of the competitive devices are inserted in the patient through bilateral surgical incisions in their groins. And I’ll show you a technique that can minimize that as well.
PEVAR what we call Percutaneous EVAR, when we introduced our last system, the one before AFX which was called in ENTU Track (ph), we had a lot of doctors come to us and say, you know, this device is really ideal for Percutaneous which is to say, just inserting the device over a guide wire. It’s got a profile that’s small enough, that doesn’t require a full surgical incision and you can use a closure device in a technique we call pre-closed to do that without any kind of a groin incision. No EVAR device has a Percutaneous indication and ABBOTT to as a closure devices didn’t have an indication for larger closures.
So, we partnered couple of years ago now and are just in the final stages of finishing a clinical trial which is comparing Percutaneous or pre-closed technique to open surgical groin incision and we’re about 12 patients away from closing that trial. 30-day follow-up and we expect to submit a PMA supplement and get approval by the end of next year.
What that would do is give us the only EVAR device with the percutaneous indication it will be a reply to the AFX device the one we just launched. And really what it gets us is an expanded indication to market the device to teach and train physicians how to do this technique, which we think through the course of the study will demonstrate an improved benefit for patients.
Next is a technology called Nellix, this has got a lot of interest from the clinical community. In fact, I’m here this week as one of our biggest annual meetings, it’s called the VEITH Symposium maturing in New York, it’s Thursday through Sunday. This device will get quite a bit of visibility from the podium. We had an internal development program inside the company a couple of years ago to build the aneurysm sac.
And we export a variety of different ways and we got very excited about that approach to aneurysm repaired, first of all nobody was doing it, second, our early bench and animal results are very encouraging. The only other company that had anything similar was a little – start up called Nellix.
We evaluated it very carefully and thought that and became convinced that sac sealing was going to be the way of the future, so we acquired the company about a year ago, we spent this year integrating that technology, finishing some design enhancements, we lowered the profile, we made it a lot easier to use. We integrated some of our technologies and are now preparing to introduce that device next year in Europe, which is the other reason we decided to build the direct channel, start to build that this year.
So, what’s unique and different about this device that it actually has bags, polyurethane bags on the outside of the stents that are filled with a bio-stable polymer, and that polymer completely fills and seals the aneurysm sac and has been proven so far to eliminate Endoleaks.
So, if we can demonstrate long-term that you don’t get Endoleaks with the Nellix system then we have the potential to reduce the long-term life time surveillance protocols that are currently required for EVAR. So, this is a potentially very disruptive new approach. It’s also considerably easier than any of the other devices. And significantly, more straight forward inventory requirements. If you were to stock the pieces and components for all the competitive devices, including our AFX system, it’s 50 to 70 different SKUs. We can treat a wider range of anatomies faster with this device with 14 product codes. So, it’s a very, very interesting and promising new technology.
This just shows you kind of the competitive line up of all of the devices that are either available or expected to soon be available in the United States, you can see that. And we measure EVAR devices are kind of measured in dimensions. So, neck line, that’s that area below the renal arteries, that’s that what I said the landing zone. That has been a limitation, the shorter that area, it gets there is no landing zone, and so those patients have to go to surgery. Because Nellix doesn’t require any hooks or barbs, it just feels the sac. You can treat a much shorter aortic neck. You can also treat a much larger diameter aortic neck as well as larger diameter iliac vessels which are common, about a third of patients that have an abdominal aneurysm, also have been aneurysmal disease in their iliac vessels.
And that’s another limitation where some patients fall out of EVAR because there aren’t devices with large enough limbs to treat those patients. So, it will treat more patients than any other devices, it’ll treat them faster and that’s the only device that seals the sac. So, this is why they should get a lot of attention on the podium here this weekend, the recent podium.
Another one of our pipeline products is a technology called Ventana. And I mentioned about 20% of patients that are diagnosed with aneurysms can’t be treated with EVAR because the aneurysm extends up to and includes the renal arteries. So, you need some kind of a branch technology.
There is one company, one of our competitors Cook that developed a branching kind of technology but it required a custom device. So, they would take a CT Scan, convert it to a CAD drawing, ship it off the Australia, it would take 6 to 8 weeks to have a custom device made, then it has to be imported back to the United States and then implanted. It’s a very cumbersome, very expensive and technically demanding procedure.
We developed a device that’s designed to be off the shelf. So, it doesn’t require anything custom. We just recently received our conditional IDE approval and expect to enroll our first patient in the United States before the end of this year. We already have a setting going outside the United States and plan to get a CE mark for this device before the end of next year.
So, if you hear about Ventana that is this technology which incorporate these branches into the renal. And what’s exciting about these two new pipeline programs, first of all, you got a nice core business that’s growing in the mid-20s. These devices, really we believe can expand the market considerably. So, it’s 60% that yellow bar of diagnosed aneurysms are treatable with an Ace devices. The Nellix platform will open that from about 60% to 75% because we can treat shorter necks, larger diameter necks and larger diameter heliacs.
The Ventana device will treat those other patients that have aneurysms up and around the renal, so another 20%. So, we believe we can significantly expand the treatable population for EVAR with these two new technologies.
This is a busy but important slide this is our new product pipeline. As you can see, if you start over from the left, AFX, that’s the product we just introduced in the United States, so we just started doing cases in the second half of August, so another full year of AFX sales, next year with our direct sales force in the United States.
As you can see, working across at the top, Nellix, we are going to introduce that device probably around the middle of next year, we’ll start with a very limited controlled rollout. And we’ll probably keep it pretty controlled and limited through most of next year, maybe open it up closer to the end of next year. Ventana, we also expect to introduce that in Europe in the second half of next year. PVAR, that’s the percutaneous indication I talked about, we expect to get that in the United States before the end of next year, so that represents another good growth driver for us.
Expand, that’s those branches, those can actually be sold as standalone devices, that’s about $100 million market for a PTFE covered balloon expandable stent so it’s a nice device that fits well into our distribution channel. AFX2, we already know the enhancements we want to make to the device, we just launched. There we just ran out of time to get everything in so we will finish and develop a second version of AFX and launch that in 2013. And then, you can see Ventana and Nellix in 2014 and 2015 and then the corresponding international launches. So, we’ve got a very busy pipeline over the next five years.
This is how we think the market will evolve over the next five years. The $1 billion current info for renal market that I showed you on one of the first slides, we expect that to grow to about $1.7 billion, it’s about a 10% growth rate which between the continued evolution away from surgery to EVAR and these enabling technologies that’s not overly aggressive at all. We have a very compelling product portfolio to address that segment.
The orange slide that we call juxtarenal aneurysm that’s Ventana, that’s that segment of the aorta that is not currently treated except for the custom device from Cook. That market segment is expected to grow considerably when there is an off the shelf technically feasible device available.
And then, the yellow piece of the pie there is thoracic, that’s also a nice continuous market for us, we can use existing technologies, existing distribution channel. You’ll see me start to talk about our thoracic program next year. Right now we have our hands full with Ventana and Nellix and just launching those devices represents a significant growth opportunity for us.
So, where is the growth going to continue to come from? We will keep adding gradually to the US but you’ll see and from a salesforce perspective really put a lot more resource behind our European expansion. And the pipeline that we just talked about, full year AFX next year, Percutaneous, Nellix, Ventana and Expand, all represent great growth drivers for us.
Here is our guidance we just increased our revenue guidance in our last call to 82 to 84. We expect to lose $0.25 to $0.30 a share this year, which excludes the Nellix related acquisition, accounting and we bought out a couple of our European distributors to facilitate going direct September 1st. We forecast to be profitable in 2013 and we think we can grow on average 25% or better over the next five years.
Here is our balance sheet, we finished the quarter with $24 million in the bank plus we have $10 million unused revolving line of credit, so we think we’ve got ample resources to execute our strategy.
And just to wrap it up, we got a very good and growing core business. What we think is the best new product pipeline in our business, a very focused, we’re a one blood vessel company which I think provides a lot of clarity also and focuses our resources on what we think is a very promising market opportunity, multiple growth drivers in that pipeline as well as continuing to build our US and EU salesforce expansion and plenty of resources to execute our strategy. That’s it.
This question is that you said, you know all these new products that seemed to be approaching with the same problem with same vessel. If you look out through 20 years, you see yourself maybe picking (inaudible). I was trying to figure out some efficiency here the more?
Yeah, they actually complement each other really well. And the way I would think about it, our current core product line is unique and that is the only device that preserves the bifurcation, Nellix won’t do that. There will be a subset of patients as I said earlier. About a third of patients – a third of aneurysm patients have PAD. And a growing number of physicians that diagnose in aneurysm with PAD would like to implant a device that preserves the bifurcation. So, I think the vast majority of people are going to move to Nellix because it seals the sac and it’s so easy to use and treats a wider range of patients. I do think there will be a subset of patients that are ideal for AFX.
But the other thing about AFX and the reason I think why I know it will survive is AFX is the platform for Ventana. So, the device that treats these juxtarenal aneurysms, Nellix doesn’t do that. So, that 20% of the market will be uniquely treated by Ventana, AFX will treat patients where you need to preserve the bifurcation and Nellix treats everything else.
So, actually from a portfolio perspective, you know, I like the way we’re positioned to be able to, you know, one rep can treat that whole segment of the aorta from the distil vessels all the way down to the iliac bifurcation. So, it’s complimentary not competitive. There will be a point in time where – when we launched Nellix in the US that I would expect some cannibalization. But I would hope to do that at some bit of a premium price.
Are there questions, I know we have a breakout just right around the corner.
The breakout is in Kennedy-2 (ph) just right around the corner to the right. Thanks John.
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