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Endologix, Inc. (NASDAQ:ELGX)

Oppenheimer 22nd Annual Healthcare Conference

December 13, 2011, 09:40 a.m. ET

Executives

John McDermott - President and CEO

Analyst

Steven Lichtman - Oppenheimer

Steven Lichtman - Oppenheimer

Welcome to the 22nd Annual Oppenheimer Healthcare Conference. We are going to kick it off this morning with a few medical device names. I’m very happy to have with us, first, John McDermott, Chief Executive Officer of Endologix, pure play in the abdominal aortic aneurysms market. We are going to a presentation here in the room and then we will open it up to some Q&A here in the room as well. So, with that I’m going to turn it over to John. Thanks sir.

John McDermott

Thanks Steve. Good morning everyone. Steve pointed out we are medical device company located in Irwin, California. We focus on repair of abdominal aortic aneurysms, I have got a several slides here. I’m going to take you through these pretty quickly just to make sure that we have plenty of time at the end for Q&A. It's a large and growing market, as I take you through the product portfolio you will see that we have got a very differentiated approach relative to our competitors treating aneurysms. The company has grown nicely or direct in the U.S. going direct right now in Europe. And as you can see from the sales figures here, plenty of resources continue the growth.

So, this is what we do, the picture is on the left, show a catheter base therapy to repair aneurysms, the picture on the right kind of the historical f the standard abdominal aortic repair used to be in open surgical procedure. Today it's down to about 60% of the time through catheter or what we call EVAR, endovascular aneurysm repair. About 72,000 procedures last year in the United States and we are starting to grow on to 60, 65% penetration. And I will talk to you about what’s involved with getting the remaining 35 to 40% switched over to EVAR.

This is the market, it's about $1 billion global market, the blue slice of the pie represents the United States, clearly the largest segment and this just for aneurysms below the renal arteries and the importance of that anatomy will become clear as I take you through the pipeline.

Here is the competitive set, it's truly us in three other companies, two of which are private, Gore and Cook and Medtronic. As you will see all of those devices which fall into a category called proximal fixation rely upon a similar methodology where the device is inserted through a catheter, implanted and deployed and anchors into the aortic wall with a series of hooks and barbs are attachments to attach itself and hang from the area just below the renal arteries.

Our devices you can see over on the left is just fundamentally different. We have a single piece bifurcated system that actually sits right on the patients bifurcation where the aortis splits up and goes down the leg. Instead of attaching via hooks and barbs up near the renal arteries, we sit on that natural junction where the aortis splits up that’s where we get our platform and our foundation, our stability. And then we add a second piece of just to get seal below the renal arteries.

This unique approach offers patient the advantage to preserve that bifurcation for future peripheral cross-over procedures. So, any one of the other devices once you put that in, you have now lost the ability to do a future peripheral intervention, in a cross-over way with ours we preserve the bifurcation and enable patients to have that opportunity which is important because about a third of AAA patients also have PAD. So, that’s really one of the key distinguishing features of our system and has helped fuel our growth, which as highlighted here you can see we have grown nicely over the last several years, 83 million is the mid-point of our recently increased guidance.

Most recent product introduction is a new device we called AFX, it stands for anatomical fixation which is that platform sitting on the bifurcation. The features of this new device is it got a relatively low profile system, but most importantly is this new graft materially called Strata. And I will talk to you little bit about this as we go through the presentation.

We developed a new graft material for one of our other new product called Ventana. And this graft material is very, very strong and highly conformable and crates very good sealing characteristics for the device.

From the sales perspective, at the end of the third quarter we had 72 reps and clinical specialist. We plan next year to be at 66 reps and 11 clinical specialist, they are total of 77 feet on the street in the United States. As you can see over 400 years of EVAR experience, it's important to know that the reps and the clinical specialist work every case. So, we have somebody there to support the doctor for all their procedures and we just this last quarter transition to direct sales operation in Europe, previously we sold in most of Western Europe through our distribution partner and are now in the process of building our own team. We plan to finish this year with about 12 full time folks on the ground in Europe and grow that up by the end of next year to about 30, still covered in Asia and Latin America through dealers.

So, what are the unmet needs in EVAR as I mentioned about 60% of the patients are currently treated with endovascular devices, that’s in the U.S. outside the U.S. it's more like 50-50. The biggest limitation are these short aortic necks or this as you can see from the CT scan over on the right, that landing zone that you saw in the previous picture doesn’t exist here, because the anatomy, the aneurysm extends up to and include the renal artery. This patient would not have an endovascular alternative, would have to go to surgery unless they want a surgical candidate then they would get no treatment. And unfortunately that still happens all too often patients that are not surgical candidates don’t get treated at all.

So, types of anatomy is represented by 20% of what’s diagnosed and these patients here they go to surgery and get nothing today. The other unmet need in the EVAR space is what we call secondary interventions. One of the limitations with the current generations of devices is that they can still get what we call an endoleak, a leak brought from the top or the bottom or side branches into the aneurysm which is why the patients have to be followed for their entire life with annual CT scans. So the real unmet need is to prevent these endoleaks from happening and thereby be able to reduce the need for lifetime surveillance.

So, one of the technologies, one of the most exciting new advances in EVAR is this device we called Nellix. This is an acquisition that we completed just about almost exactly a year ago, and what’s unique about this for those of you who track medical devices, you have seen or heard of a similar technology used in perennial aneurysms, neuro aneurysms where they fill the space this is what that device does, none of the other devices in EVAR fill the aneurysms space except for Nellix. It's basically two stents, on the outside of those stents are polyurethane bags that are filled with a biostable peg, which completely seals and locks the aneurysm and has been proven so far to significantly reduce endoleaks. Therefore, sealing the sack and hopefully leading us to a day where we can cut back on this surveillance.

The device is also extremely easy to use, and brought the indication dramatically over the other competing technologies. As you can see here, this is just a list of different companies and where they are out with their devices. The box in green highlights the Nellix anatomical advantages. When we talk about neck length that’s the length of the artery below the renal artery. The length of the aorta before the aneurysm starts. It's kind of the landing zone for all of the other devices, so now we will be able to treat this shortest neck aneurysm, the largest diameter neck aneurysm and largest diameter iliacs.

Right now about 60% as I mentioned the patients get treated with the current EVAR devices, we expect this broaden indication to open up the market another 75%. So, it will be the only device that can treat this wide range of patients and the only device that completely seals the aneurysm sect. So, we are pretty excited about it, as our all of the doctors they get exposure to the technology.

Another new and important device for us is called Ventana. About 20% of the diagnosed aneurysms are up above and include the renal arteries. So, today those patients have to go to surgery. There is no alternative for them, and again if they are not surgical candidates they don’t get treated at all. We developed a device that as you can see includes side branches into the renal arteries, and are expecting to do our first patient here in the U.S. hopefully by the end of this year. We have a conditional IDE approval and plan to start enrolling our U.S. trial shortly as well as continue and complete our international trial enrollment here very soon.

So, this another exciting new program for us that opens up the market considerably. As you can see from this chart, yellow, that’s the existing market, 60% are treatable, 60% are diagnosed aneurysms are treatable. With Nellix we expect that to be able to increase to 75% and another 20% of patients with Ventana. So, we think we can shift the market from 60% treatable to over 90% treatable over the next several years with the introduction of these new technologies.

It is our pipeline, it's the busy slide, just take you through a couple of the highlight as you can see here, AFX, this is our newest device which we just introduced in the third quarter. We are slated to begin a limited rollout of the Nellix technology around the middle of 2012, and before the end of next year we started also a limited market introduction with Ventana. The launch of Nellix and Ventana was part of the reason that we decided to go direct in Europe, because we wanted to control those products and launch them ourselves instead of few dealers. PVAR stands for the percutaneous clinical program that we have going on right now. It's collaboration with Abbott they have a closure device. We have got an EVAR device. This clinical trial will give us the only percutaneous indication of all EVAR devices. So, we will have a very minimally invasive approach to insert the catheter into the patient’s artery. And you can see AFX down here we will roll that out gradually, we will begin that process in Europe and continue that over the course of 2012, we have a pending submission in Japan for our previous generation device in (inaudible).

And then you can see expand our slide drop back a slide here, these side branches right here offer the Ventana. We developed those specifically for that indication but they actually also have, it's a very nice standalone product. We will compete well in a market that’s about a $100 million. So, that’s an incremental opportunity for us. As well as you can Ventana and then Nellix both in the U.S. in 2014 and 2015. So, we have got a busy five years worth of new products introductions.

This is what we expect the market to look like over the next five years, the current $1 billion in for renal market is expected to grow to about 1.7 over this five year period of time. We have got AFX, PVAR and Nellix to address that market. Ventana that one slice will we expect to grow to about a $300 million segment, you can see the procedures and the ASPs over on the right. Certainly, their average selling price will be higher for that technology. There is really no competitive pressure there as well as it's a more sophisticated type of technology.

Then [thoracic], we have not put on the chart yet, our thoracic program. We have got a few very interesting technology for that segment. I just wanted to finish up the technology work both on Ventana and Nellix before we start to talk about our thoracic program, which we will begin to talk about more actively next year.

So, for a company our size we got over a $2 million opportunity and a very exciting pipeline. I think we have got great growth prospects, here is our guidance. We increased this 82 to 84 on our last call, forecasting a loss of $0.25 to $0.30 which excludes the Nellix acquisition related to accounting and the European (inaudible). This year we expect to be fully profitable in 2013 and grow on average over the next five years 25%.

This is our balance sheet, we finished the quarter with 24 million in the bank, plus we have a $10 million unused revolving line of credit. So, we think we are in good shape to continue to support our growth. And just to wrap it up, strong core business all of the numbers and the growth you have seen so far have just been out of the core business. We haven’t seen any benefit yet from the pipeline, multiple growth drivers and a large market, and lot of product launches over the next five years and we think we are in good position financially to continue support that growth.

So, with that I will open it to questions.

Question-and-Answer Session

Steven Lichtman - Oppenheimer

Talk a little about market development, even volumes are growing for the market as a whole. I guess in the upper single-digit. And people often ask what is driving that volume in the market, how underpenetrated it is, and so what the run rate is in terms of further growing the overall volumes in this market.

John McDermott

So, we forecast that the number the rate of increase in diagnosed aneurysms, we will talk about the U.S. right now, and it’s about 3%. So, every year a 3% more aneurysms are diagnosed, the reason that you get a 6 to 8% procedure growth rate in EVAR, is you still got this gradual shift from open repair to EVAR. So, right now again we are around 60% penetrated in the U.S. What’s happening right now is more and more physicians are continuing to use the devices, we started out using very simple anatomy. They are doing more and more complex anatomies and with the introduction of new technologies like us, we will be able to expand that, and continue to keep those procedure growth rate slowing. So, that’s where that procedure growth rate is coming.

Outside the U.S. it's about 50-50 in Europe and then when you move out of Europe it's 50-50 in some markets, but almost more 60% surgery, 40% EVAR. So, there is still a lot of growth opportunity O-U.S. as well.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Steve is talking about what we call the [stay back] this is legislation that was enacted several years ago for first time Medicare beneficiaries, when they come into Medicare they have any history of aneurysms in their family or any of the risk factors related to AAA. They get a one-time free scan, abdominal scan looking for a AAA coming into Medicare. So, that is there, it's been available, with the aging population, the average age if you look at the clinical, our clinical studies is 70. So, the demographics play very nicely into a lot of aneurysms being diagnosed in the future. There is growing awareness, but honestly for a company our size we are not, we don’t need to rely on significant market growth for us to continue to grow very nicely. Our forecasted 25% growth doesn’t assume any material change in the rate of diagnosis of AAA.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Spend time with clinicians profile and if you push into vascular surgeons, our international cardiologists, so the doctors that treat these patients it's primarily surgeons. The biggest unmet need is not profile. What the biggest unmet need is these all of these different anatomies they cannot be treated with currently available devices, and the need for lifetime CT scan surveillance. And all of our researchers have been the things that the doctors want us to focus on. The tendency is to go to lower profile and in fairness, it does offer an advantage in that. You can get through more difficult (inaudible). But I’d say that that is not a clinical problem in a high percentage of cases. It's 10% of the time roughly is profile going to matter in our view. So, we have where we can get lower profile we will do that, when we bought Nellix, it was a (inaudible) system, we brought it down to 17. But there is a point of diminishing return in our view where profile is not the thing to focus on, the thing to focus on is (inaudible).

How we will market against it, we will just have a different and unique approach like we do today. With Nellix we will have the only technology that completely seals the sack. That’s a very much of a paradigm shift. When we talk with physicians we had a big group of docs in the office last Friday. We have this conversation all the time, what’s most important to you, they would much rather seal the sack, they would much rather treat a wider range of patients. So, I feel good that we will still be very competitive with the newer lower profile devices coming out.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Yes, if you get into the details of what the doctors has to do procedurally, the big step offs are right now as we have demonstrated in the PVAR clinical trial, we can do a fully percutaneous procedure. And also for those of you who are not familiar with our device, with all of the other competitive devices currently today, you have to do bilateral growing incisions, you have to cut down to the (inaudible) artery to insert the catheters on both sides. With the current device AFX our device, you only have to do that on one side. The other side is already (inaudible). So, we are unique already and a 50% of our procedure is already at the lowest profile system on the market by far. And lower than anything that’s even forecast in the future. So, we are already 50% better.

Once you get down, so you got to get down to 12 or sub 12 for to be meaningfully different from a physicians perspective in terms of how that changes, what they do, and the closure system that they use.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Cook has been working on (inaudible) for many years. Their current approach is with the custom device. So, you will get a patient CT scan on a patient, gets converted to a CAD drawing, within that CAD drawing to Australia custom devices made, the process can take 6 to 8 weeks. And the device is then shift back and implanted in the patient. It's a very complicated procedure, because you now got two custom drilled holes in the graft that have to be lined up precisely with that patients renal arteries. So, it takes a very high level of technical skills not a procedure for everybody. Our devices off the shelf so we don’t end it, it's available now if you diagnose today, you can do the procedure tomorrow. We haven’t seen anything that offers that same degree of flexibility. Cook is working on and off the shelf version. Based on the feedback we have received so far. It sounds like we still have a significant lead and one of the company that we are hearing about working on it is also (inaudible). But it seems to be more of a Cook similar solution. So, based on where we are at, the entry in the U.S. IDE and the physician feedback that we get so far, I think we got a couple of years ahead.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Yes, so for 2012 in the U.S. we added some more people over the course of 2011, so we get a full-year benefit of them. We have built out our clinical specialist organization, we started making those adds this year, the bias around the end of the first quarter, we should have ’11 on the ground. Now all be trained by the end of the first quarter but our goal is to have them all hired. And the clinical specialist is important for us because today when we have a [wrap] that double booked on a case, we have to pull a rep from an adjacent territory and to cover that case or hose this regional manager help them. We have now developed a network of clinical specialist, so that those individuals can cover cases and we don’t have to pull reps from their territories. So, that gives us, it's like adding new reps, but they are less expensive. So, we start to get some leverage. So, I think that represents a growth opportunity for us, full-year of AFX. So, you have got a tailwind of people, more feet on the street, more ten year. There is also a very incremental growth advantage in terms of case productivity by years in field. If you look at the ten year we measure our case productivity by ten year, you can see a very gradual progression. So, every year matters. So, you have ten year more feet on the street, full-year AFX and then hopefully by the end of the year the PVR indication.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

What Steve is talking about is our Ventana clinical trial, as 22 sites have been chosen to participate in that IVE, about half of those sites are new customers to us. So, there is some benefit to the core business, because to be involved in the clinical trial you have to be familiar and user of the (inaudible) system. So, nice thing about those technologies is Ventana sits on AFX. So, if you are going to use Ventana, you have to be comfortable with AFX system. So, we will get some benefit from that. As it relates to Nellix, we will start that site selection process, kind of probably in the middle of the year, the later part of the year. And our objective would be to not have overlapping sites. We may end up in a couple of unique situations with very large centers, with a lot of EVAR experience we have a couple, but generally speaking we have what we call the no double dipping rule. If you are in Ventana you are not in Nellix and vice-versa.

So, that what happens is we go through that process, of course we are inclined to select our customers to participate in these clinical programs. So, there is some indirect benefit we gain there.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Yes, so it will be targeted initially to just a very selected number of physicians, but not for narrow indications. So, it will have the same broad indications that I showed you a minute ago, but it will only be introduced to small group of physicians they have already been picked, we have already met with them several times, we plan to run a post market clinical trial in Europe that they will be a part of. So, the idea is to go out to roughly 20 sensors initially, and then gain more and more experience with the device and then gradually add more centers as we start to exit next year.

I think there is a lot of benefit and a lot of learning and it control cap over lease, we really think this is a game changing technology. And we are not in a big hurry. I mean we want to get it out there and demonstrate that it's as good as we think it is, but we don’t need to double down in one quarter to prove what we have got. We would rather go slow and prove it incrementally building one good customer at a time.

And we will take a very similar approach with Ventana. The difference in these two devices though is probably important to understand. Nellix is in perennial aneurysms, it treat a much wider range of them than all of the competitive devices. It's faster, it's easier and treats the wider range of patients. Most of the end perennial aneurysms now are treated in community hospitals. So, lot of the volume and EVAR now has gone from academic institutions down in this community and it's the academic institutions that get referred to more complex anatomies. So, Ventana is ideally suited for those academic institutions where they see more complex anatomies. Nellix is perfect for the community setting because it's very, very easy to use and can treat a wide range of patients. Plus I didn’t talk about it, but from a simplicity perspective Nellix is easier to use, it's easier to start, if you start one of the competitive devices used the Cook devices, as an example, you could have upwards of 100 product codes. With Nellix we will have less than 20 codes, because these endo bags that fill the sack to all of the work, you just need a few different lengths and diameters of the underlying stent. It's a very simple system we did, and we are excited about it.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

We are just a one blood vessel company, so for us it's very important to focus and we have chosen just the aorta. Today we only compete in aorta disorders below the renal arteries. Ventana starts to take us one step up, but then we will move into the thoracic aorta which consist of both aneurysms as well as dissections. That’s just on the descending side. Then you have the arch as well as what we call the ascending or that area between the arch and the heart. There is a tremendous number of unmet needs in this blood vessels that doesn’t event captured on this $2.4 billion forecast over the next several years. With our core technologies and what we have acquired with Nellix, we think we have got a couple of very good different ways to start to treat those other aorta disorders, both dissections as well as aneurysms. We created the branching technology to treat the renal arteries off Ventana, we can use that same branching technology to start to branch into the arch. Today when they do a thoracic endograph, about a third of the procedure they actually have to cross and cover the (inaudible) to have enough of a landing zone to get the device to stay up in the arch. And then they have to do with a surgical debranching procedure to get to reperfuse the less of perennial artery. As an example of the use of our applicability of our technology with the single branch, we can preserve the less perennial artery in the thoracic endograph pretty simply. So, technically that is not a big challenge for us.

If you talk to doctors they will tell you that that’s a meaningful advance in thoracic endography. So, that’s just one example. We showed a couple of other examples that the resymposium a few weeks ago in New York, just to highlight where we were planning to go in the future. There is 10 years worth of work to do in the aorta. And that excludes valves.

Steven Lichtman - Oppenheimer

(Question Inaudible).

John McDermott

Yes, in fact you will see our Nellix related investment on a dollar basis will be down in 2012 over 2011. Because it was a startup company located in Palo Alto, we have closed that facility, we have already gone through that transition, and the retention and other activities that were related to that integration are behind us. Now it will be replaced in large part with an increasing clinical activity for both Nellix and Ventana. But on a year-over-year basis our total R&D spend is flat. So you will start to see some leverage.

Steven Lichtman - Oppenheimer

Thanks John. Thanks everyone.

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