John McDermott – President and Chief Executive Officer
Sean Lavin – Lazard Capital Markets
Endologix, Inc. (ELGX) Lazard Capital Markets 8th Annual Healthcare Conference Call November 16, 2011 11:00 AM ET
Sean Lavin – Lazard Capital Markets
[Starts Abruptly] He is going to give presentation and take questions. Thank you.
John McDermott – President and Chief Executive Officer
Okay, good morning everybody. Thanks Sean. Endologix is a medical device company located in Irvine, California. Very differentiated technology, which I’ll take you through in a minute, strong performing core business were one of the higher growth stories in Medtech, I think Q3 revenue growth of 25%, good growth better than 30% United States good gross margins. I’ll take you through both the core business as well as our pipeline, which is gained a lot of the attention over the last year.
So this is what we do. We repair abdominal aortic aneurysms, it’s a leading cause of death in the United States it’s an asymptomatic disease, which means you don’t know you have one unfortunately until it’s a serious problem. The historical way of treating aneurysm is the picture on the right open surgical repair, but over the last several years less-invasive therapies have been developed. And now most aneurysms are treated with catheter-based technology you see the illustration on the left.
So, we take a device in a catheter inserted in the groin guided up into and reline the aorta from the inside out. Therefore excluding the aneurysm from blood flow and preventing rupture and that’s the new technique represents over 60% of how AAA’s are fixed today. The primary limitation, the reason that more of them are fixed with this less-invasive therapy is that there are wide range of different anatomies, which the current technologies are unsuitable to treat.
As well as there are still some limitations with EVAR and I’ll touch on those as I go through the presentation. This is the current size of the markets about a $1 billion globally and you can see over on the right, the number of procedures as well as the ASPs, it’s a high average selling price. These devices are expensive life saving devices and we tend to have our sales representative, our clinical specialists participate in every case. So this is the high touch, high clinical sophistication type of a product area. When we talk about it had been a $1 billion market that is just for aneurysms below the renal arteries are what we call infrarenal.
The importance of that will become clear as I go through the presentation because we have a pipeline that we will be able to treat anatomies that are up and including the renal arteries and we’ll move our way up in the thoracic aorta over time. This is the competitive set, all of the three devices on the right, these are approved devices in the United States, our competitors are Gore, Medtronic and Cook, Gore and Cook are private companies, Medtronic you know. And you can see there is a similarity with all of these devices. They have these open cells stent architecture up above in this area, you can see the branch.
The branch is coming off that middle picture with Medtronic, those are the renal arteries. So, that’s the landing zone for these devices. They tend to be physicians just below the renal artery that’s the fixation zone. And all these devices rely upon some type of active fixation hooks or barbs or something that anchors into the vessel wall and then limbs are connected from the bottom up. As you can see from our device over on the left looks very different, it works on the different methodology of fixation. So instead of rely upon hooks or barbs to attach in the aortic valve, we actually set our device right on the patient’s native bifurcation.
Where the aorta comes down and splits off and goes down into the patient’s legs, we use that natural bifurcation or saddle as the place to fixate our graft and have demonstrated great durability and long-term results with that approach. And then our device also positions just below the renal arteries that’s where we get feel. And so it’s a different methodology, it’s a different approach. It certainly gained a lot of traction over the last several years, everything that unique with this device compared to all of the other devices including those in various stages of development is those are the only EVAR device that preserves the patient’s native bifurcation.
And the importance of that is clinically if you have a patient with peripheral arterial disease and that patient is ever treated with the peripheral intervention at some point in the future whether it’s a balloon or an angioplasty or stent. They tend to enter into the vasculature from the opposite groin. So, if you had a lesion in your left leg, they would actually access your artery through your right groin. And once you put in any one of the other EVAR devices you’ve lost now the opportunity to treat that patient with an endovascular cross-over procedure with the one exception begin the Endologix device. So, about a third of AAA patients have PAD and this is a growing area of importance to preserve the ability to do these cross-over inventions.
Lots of clinical data published on this, I won’t go through this in great detail, but I can tell you that the devices been around now clinically implanted since 1999 with a very long and successful track record of durability and successful aneurysm treatments.
Here is our historical sales growth, as you can see, we got approval into late 2004, launched the device in the U.S. in 2005 and had a nice steady growth rate. This $83 million that I am showing you in the 2011 that’s the midpoint of our recently increased guidance from our last quarterly call.
Here is our most recent new product introduction. We just launched this in the United States in the second half of August, so we are still early in the introduction of this new device, it’s called AFX, that stands for anatomical fixation, which is really our approach to aneurysm repair. What’s unique about this device is that it has a lower profile sheets than most of the other devices on the marketplace, and importantly, it’s got a new graft material that we call STRATA. This material really provides an exceptional seal, which is an important characteristic of EVAR devices.
You want to realign the blood flow, but you also need to get good seal proximally and distally to make sure you don’t have endoleaks. And so far the results have been really excellent with this new graft material. Sales force in the United States were direct. We’ll finish this year with 72 sales reps and clinical specialists. Over 400 years of EVAR experience, as I mentioned earlier, these reps work in every procedure. So, their clinical experience is an important part of providing good service to these reps. The profile are to the doctors. The profile, top-performing peripheral vascular reps that we teach EVAR and these are generally top performers from the other peripheral vascular companies.
Outside the United States, we previously sold through distributors. In Europe, we’ve just recently converted that to a direct model starting September 1, and we are in the process of building our own direct sales force literally as we speak, primarily to launch AFX, but more importantly, to launch a couple of other new devices, which I’ll touch on in a minute. In Asia and South America, we continue to be supported by dealers. Only about 15% of our current sales are come from outside the United States, but I expect that never to change dramatically in the years ahead.
So, what are the problems with EVAR? As I mentioned earlier, the reason that the market is still relatively under-penetrated is primarily a function that there is lot of anatomies that can’t be treated with currently available devices. That neck or that landing zone is too short or doesn’t exist at all as evidenced in the picture that you see here in the right. There is an anatomy that has no landing zone. So, this patient would have to go to open repair and if they warrant a candidate for open repair, they would get sent home without their aneurysm being treated at all.
Unfortunately, that still happens far too often with these patients. So, you’ve got anatomical restrictions that create an issue. And then the other issues what we call secondary interventions. You can get leaks. These devices can leak from the top or from the bottom or actually from side branches in the aneurysm themselves. So, even if you put an EVAR device in, there is no guarantee that you won’t get a leak. And as a result of that, patients have to sign up for a lifetime surveillance, which typically involves an annual CT scan. So, you have the cost and the radiation exposure of surveillance. So, one of the unmet needs is there a way to reduce or eliminate endoleaks, and therefore, reduce or eliminate this long-term radiation and expensive surveillance.
So, we have a multitude of different programs going on in our pipeline, one of which is called PEVAR. We, with our latest version, not the AFX, but the one prior to that, we introduced a device and we got very good feedback from doctors that they could use this device to do these procedures percutaneously or not have to make any kind of a groin incision, but just insert the devices over a guidewire. There is no device in the United States that has that indication. All of the other devices require bilateral groin incision cut down to insure the device in the patient.
So, we embarked on a clinical program partnering with Abbott who has the closure devices and are running the trial right now we’re almost done, in fact we’ve just got about 12 patients left to enroll. So, we’ll finish by the end of this year, submit that data in a PMA supplement to the FDA to get a broadened indication, where we will have the only device that’s actually indicated for percutaneous EVAR. I expect to get that accomplished by the end of next year, which would give us a full year of marketing that broadened indication in 2013.
Another new technology that’s gaining considerable amount of interest and enthusiasm, in fact, this week here in New York, there is a conference call, the VEITH Symposium. This is one of the premier vascular and endovascular symposiums in our market segment. There will be considerable attention on this device both with presentations in our pavilion as well as from the podium. What’s unique about this device it still it chunks the blood from just below the renal artery down into the iliac arteries, but unlike any of the other technologies it actually has bags which are filled with the biostable polymer that completely sealed the aneurysm sac and has been proven so far in clinical results out to two years to provide remarkable results in resistance to endoleaks.
Prompt, we are therefore providing the potential for reduced surveillance over time. So, this technology, it’s early, but we do have two-year follow-up on a subset of patients and I’ll show you the timeline of when we plan to launch this year – this next year in Europe. What’s also interesting about this device in addition to being extremely simple to use. So, the procedures are very fast, very simple, there is only 14 total product codes compared to 50 or 60 codes with most of the other companies. It will also treat the widest range of anatomies. So, it will treat the shortest aortic necks, the largest diameter necks, and the largest diameter iliac arteries. So, it will be the easiest to use, it will treat more patients than any other device, and it will be the only technology that completely seals the aneurysm sac, which is why this particular technology gains a lot of attention from the clinicians.
The other one of our important new products is the device called Ventana. And as I mentioned earlier, one of the limitations with EVAR devices today is they don’t comment enough different sizes and shapes to treat a wide range of anatomies. One of the prevalent problems with aneurysms is if there is no adequate landing zone, just below the renal arteries as I said before those patients have to go to open surgery or get nothing at all. We developed the device that actually extends up to and includes the renal arteries. So, that these patients now, which represents about 20% of the diagnosed aneurysms have an endovascular alternative.
We’ve received a conditional IDE approval are in the process of finalizing our full IDE approval and expect to begin enrollment in our U.S. clinical trial by the end of this year. Enrolling next year and I will show you the timeline here in a minute for the U.S. We are also running an international clinical trial of 30 patients, which will be adequate for our CE Mark, also expect to wrap that up in terms of our enrollment around the end of this year, which would position us for CE Mark before the end of next year.
So, the combination of these two technologies could have a very dramatic impact on the market. Today, if you follow the indications for use of the currently available devices and the devices that are in the pipeline. About 60% of the diagnosed aneurysms are treatable with EVAR. Nellix is expected to increase that number from 60% to 75% because of the shorter necks, the larger diameter necks, and the large diameter iliacs. Ventana, the blue bar adds that additional 20% of patients with no necks, juxtarenal or pararenal aneurysms. So, we could affectively increase the number of patients that could be treated with EVAR from 60% to over 90% when these technologies are available, representing a significant market expansion and a great commercial opportunity for Endologix.
This is a busy chart, but shows you our new product pipeline in our launch plans starting over from the left. AFX is the device I mentioned to kick off the presentation. We just launched that in the second half of August. So, we have got a full year of sales in 2012 of AFX. You can see if you go across the top, Nellix, we plan to do a limited market introduction of that technology in the middle of 2012 in Europe. And then similar limited market introduction of Ventana before the end of next year in Europe. The combination of AFX, Nellix, and Ventana, that’s the reason we decided to start to build the direct sales force this year have begun that effort. Expand, that is the branches that are used in conjunction with the Ventana device, that’s actually a nice standalone product by itself to about $100 million market. We have actually got a device. Those branches are lower profile version of a commercially available device, so that represents another incremental selling opportunity for us.
We have another version at AFX2 that we plan to introduce in the U.S. in 2013 and then you can see the commercial introduction of Ventana in the U.S. and Nellix in 2015. And then the corresponding international launches across the bottom, so we’ve got significant number of new product introductions over the next five years. This is what we think the market is going to look like if we forecast out five years, we think that the current billion dollar infrarenal market will grow to about $1.7 billion. We are very well-positioned to take significant share in that category between AFX, our percutaneous initiative as well as Nellix.
The orange slice of this market that $300 million that’s the juxtarenal segment. We’ve been fairly conservative at forecasting that at 15,000 global cases as you can it has a higher average selling price. There is one competitor in that market today. They have a custom device that sells for €20,000. So, I think that 20,000 U.S. is reasonably conservative. And then the yellow piece is thoracic, it’s not a device. We don’t have a thoracic device today, but we have development plans, it’s a natural market for us to evolve into same customer, many of the same technologies, and this time next year you will here us talking about our thoracic program.
So, for an $80 million company with over $2 billion market opportunity, we have the benefit of staying very, very focused on one blood vessel and treating only aortic disorders. So, this is where the growth is going to come from. We will continue to add into our sales force. We’ll finish this year with 72, probably end next year about 80. We are starting now to add more clinical specialists as we’ve got good sales network. And as I mentioned earlier, we are going direct in Europe and you have seen the pipeline now with AFX, our percutaneous initiative, Nellix, Ventana, and Expand.
It’s our guidance. We just increased our sales guidance on our last call from up to $82 million to $84 million. We are forecasting a loss of $0.25 to $0.30 this year. That excludes the Nellix acquisition accounting in our European distribution buy-outs. We are forecasting to be fully GAAP profitable in 2013 and have a five-year average compound annual growth rate of 25% or better.
Here is the balance sheet, got plenty of cash in good shape, $24 million at the end of the quarter plus we have a $10 million unused revolving line of credit, so we feel we have got sufficient liquidity to execute our continued growth. And just to wrap it up, so the $80 plus million in revenue right now growing at 25%, that’s just our core business, that is not yet influenced by the new product pipeline, which I think it really transformed the EVAR market. So, good core business with a great pipeline, multiple growth drivers in a large and growing market and we are in a good position to execute on strategy. That’s it.
Sure. So, we’ll do some questions. I guess to start your about four months since the AFX launch, so could you talk a little bit about how doctors are responding and how they are comparing the device to the old one? And then I don’t know if you give us any detail, but with AFX2 in your presentation anything you can talk about that device?
Yeah. So AFX the feedback has been good – very good, it’s a slightly lower profile, although in our experience profile is nice, but it’s not a key driver to share conversion. The greatest attribute to the device is more around the graft material. So, we developed the new graft material called STRATA to be used with our Ventana device. And it is a very, very durable material that conforms exceptionally well to the vessel valve. And what we’d actually seen is typically when they do these procedures with all the competitive devices, they put the device in and then they go for the large diameter balloon to press the device against the aortic valve.
That drives these hooks and barbs into the aortic valve and there are also presses out any folds or wrinkles to prevent any kind of endoleak. What we have seen so far with AFX in less than half of our cases now, they don’t even use a large diameter balloon. They will do a quick angio run after they implant a proximal extension, they have no leaks. There is no reason to spend another $400 per balloon or run the risk of putting radial pressure on the aortic neck, which is the fragile zone in the aorta. So, we are seeing and getting very good physician feedback on AFX, primarily from the perspective, of seal. As it relates to AFX2, I can tell you that our continued effort is to make the device even easier to use and it has been. If you went back in time and you looked at the platform if there was one primary limitation to Endologix’s share capture will be the difficulty to use the system in the limited range of sizes. We have broadened the range of sizes now dramatically and continued to make the device easier to use. So, that will be the focus of AFX2. And for competitive reasons, I can’t tell you too much more about it.
Okay. And then on Europe, can you talk a little bit about how the build-out is going there and have there been any surprises as you would in that region?
Yeah. So, we have right now nine people on the ground in Europe and are forecasting to finish the year around 12 and I would estimate that next year we’ll double that or a little bit more approaching 30 people by the end of next year. I would say that there haven’t been any surprises. It takes a little longer in Europe. There are longer notice periods. People in the U.S. can give two-week notice. It’s not quite as easy and fast as you could imagine in Europe, but beside and that’s not a surprise we knew that, but there is good availability of talent. So, it’s coming together pretty much on plan.
And then I guess given the synergies around thoracic and how well your stock and such are done, is there limitation on getting that into development sooner, is it people, is it cash, and if it’s cash why not consider raising money and bringing that along faster?
Yeah, it’s not cash, it’s just organizational focus. We are at a very important time in the company’s evolution. We – I believe that Nellix and Ventana are a big deal and could really change the EVAR landscape as we know it and as much as I would love to jump into thoracic program and add a whole another team we’ve got to manage and execute on that as well and I am a firm believer in focus and execution. And I think although there are opportunities to accelerate thoracic, it might – we might take our eye off the ball. So, I say give me another six months to button up my other two programs and then I will be able to dedicate the thoracic effort.
In the last quarter, your U.S. result was really strong probably stronger than like anybody expected. What was the biggest driver of that?
That was the introduction of AFX. So, we had – there is a lot of interest. There is a growing interest also not only just in AFX, but in the company, because doctors are hearing about the pipeline. They want to be a part of that whether it’s participation in clinical trials or they want to develop a relationship, so they can get in the queue to use these new devices when they are available. So, the combination of AFX and the growing visibility of the company, I think, attributes to the growth.
And then you have number of presentations here in New York this week, what do you think of the one or two most important ones for investors?
Well, there is going to be again, there is from the podium – from the main hall podium, there will be a presentation on PEVAR. Unfortunately, we can’t share any of the randomized data, so that will just be an update on the rolling data. So, interesting, but not going to be anything too major. I think people will be very interested to see the real world case images coming from Nellix and Ventana. Both of those technologies are enrolling more and more patients and the results continue to be very, very encouraging. So, I would say that those will be interesting and then we will have – those are relatively short presentations in the main hall. We will have longer presentations in our pavilion. So, we have a room like this only smaller, where physicians will come and present more case experience, they will show images, pre, post, follow-up and talk about the device for other interested physicians.
All right. And then I guess one last one, we recently saw the data from Trivascular?
I guess, what is (your opinion) or how the device compares to yours and do you think that long-term, they will have any problems with the rings creating pressure and potentially creating additional aneurysms?
Well, so how does the device compared to ours, I would say, that it’s much more like the other devices. So, it’s a proximal fixation device. It has the same large metal stent configuration above the renal arteries with barbs that anchor into the wall. It’s three-piece. Our device tends to be primarily two pieces. The biggest difference is its profile. So, the outside diameter of our sheath is 19 French and the outside diameter of their sheath is 14 or 15 depending upon the device side. So, it’s a lower profile device, which is interesting for some physicians. Some physicians don’t necessarily feel the profile as the big limitation with EVAR. Do I think the rings will have fatigue problems, I don’t know? And I haven’t heard of any reports of that, so I would just be speculating.
Sean Lavin – Lazard Capital Markets
All right, we are out of time. Well, thank you very much.
John McDermott – President and Chief Executive Officer