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Endologix, Inc. (NASDAQ:ELGX)

JPMorgan Global Healthcare Conference (Transcript)

January 11, 2012 12:30 PM ET

Executives

John McDermott – President and CEO

Analysts

Kim Gailun – J.P. Morgan

Kim Gailun

Good morning. I’m Kim Gailun with the J.P. Morgan med tech team. And presenting next, we have Endologix. So, without any further ado, it’s my pleasure to introduce CEO, John McDermott.

John McDermott

Thanks, Kim. Good morning. Okay. So, Endologix, medical device manufacturer, located in Irvine, California. Here is our Safe Harbor disclosures. Just briefly, to kind of kick us off at a high level, we are competing in a large and growing market. I’ll walk you through all of the dynamics of that and how we plan to accelerate that growth. The company has grown very nicely over the last several years with significant number of continued growth drivers, which I’ll also touch on through the course of the presentation, as well as you can see we’ve had strong growth and expect to continue that over the next several years.

This is what we do. We treat abdominal aortic aneurysms. The picture over on the right shows the traditional or historical approach, which is open repair. And what’s evolved over the last several years is more of an endovascular approach or what we call EVAR, which is a catheter-based therapy, whereby devices inserted through a small incision in the patient’s groin and a device is guided up to in place and deployed, which basically relines the aorta from the inside out, therefore shunting the blood off of the fragile aneurysm and preventing a rupture, which is a fail.

In the United States now, little over 60% of the AAAs are repaired with endovascular therapy and another 40% are still treated surgically. The reason for that I’ll touch on as I go through the presentation is really primarily related to the wide range of different types of anatomies that we still see in the devices that are currently available are not suitable to treat all those different anatomies.

This is the current EVAR market. This is for devices that are used below the renal arteries. And the location within the aorta will become important as we talk about how we’re going to expand the market moving forward in our product portfolio. But if you just took last year’s total global sales of these devices used below the renal arteries, it’s about $1 billion. And you can see the segments, 60% of that is in the US, and you can see those relative market percentages. So, 85,000 procedures on a worldwide basis, and you can see the average selling prices are relatively high. We tend to have one of our clinical specialists or salespeople in the OR for every case. So this is a very high-touch, high-clinical type of sales.

This is the competitive landscape. All of the devices over the right, which we call proximal fixation or really the first generation or traditional types of devices, they look very similar to a surgically implanted graft. And in fact, that’s how the development evolved. They were surgically implanted graft, to which they sowed stents and they have put these devices inside catheters and they were delivered through the legs, as I mentioned.

Our device over on the left is fundamentally different. You can see that it sits. It actually sits on the patient’s native bifurcation. And that’s how it gets its fixation. With all of the other devices, they are deployed up near the renal arteries, and when they come out, there is anchors, hooks and barbs that attach and try to adhere to the vessel valve for their fixation. That’s how they are put into place.

Unlike all of those devices, ours is actually positioned to sit right on the patient’s native bifurcation. So we get our stability. We don’t hang from the artery like the other devices. We actually sit on that patient’s natural bifurcation. The advantage to that is we can’t lose our purchase. There’s nowhere for the device to go. So we’ve got very good long-term clinical data.

The other advantage to that is we preserve that bifurcation. So if you put in any of the other competitive devices, once that device is in, you can no longer go back through that graft if you ever wanted to do a future peripheral intervention, which is common. About a third of aneurysm patients also have peripheral arterial disease, and the preferred approach to treat somebody with PAD has come in from one side of the groin and cross over to treat the lesion on the other side.

Once you have one of the competitive devices in place, you can no longer do that. So it’s the only device that preserves the ability to go back over the bifurcation for future interventions. And that has become more and more important as you get a larger installed base of these Endografts and these patients are living longer and they are coming back now with PAD and it becomes a problem for the doctors to treat them with the exception of our device. So we kind of grew up being the other guy.

The analogy we use in the company is we’re – you need more than one type of screwdriver in your toolbox. You’ve got a Phillips-head and a fly head, and we are the Phillips. And we grew up treating some more challenging anatomies than the other companies. But over the last few years, as we’ve worked our way into physicians’ practices, they’ve realized they can use us for the common cases as well as the challenging cases, and that has contributed to our growth, as well as we’ve worked hard to broaden the range of sizes that the device can now treat and made it easier to use.

Just briefly, the clinical results. We’ve got a lot of different peer-reviewed articles highlighting our data. We’ve done three PMA trials. The device has been used in thousands and thousands of patients with long-term follow-up. Our results are as good or better than any of the competitors. And again, what’s unique about this platform, it’s the only device that really sits on the bifurcation and preserves that anatomy.

Here is our historical growth. So the company has grown nicely over the last several years. 2011, we do not announce at this conference. Our call will actually be in the third week, I think, of February. That $83 million that you see on the slide here for 2011, that’s the midpoint of our guidance. But we haven’t reported our full year results yet.

So, as we go through the product portfolio, what I showed you a minute ago was this concept of what we call anatomical fixation. If you look at our sales today, all of our sales and expenses, that is all with this core product. And we just introduced a new version of that device that we call AFX, stands for Anatomical fixation. We introduced that in August of this last year and are still – I would say, still rolling that product out. what’s unique about it relative to our previous device is it’s the lower profile version as well as we developed a new graft material for one of our other devices, which I’ll talk about in a minute, called Ventana.

And this new graft material has really phenomenal seal characteristics. Sealing is what we do. If you think about these technologies, you want to shunt that blood, but you need to also have a very good seal, a blood-tight seal above and below the aneurysm to make sure that there is no leaks. And so far in the early clinical results with AFX, it’s performing extremely well. So this is our newest, most recently launched technology.

The way we sell these devices in the US, we have a direct sales force. As you can see, we finished the third quarter with 72 reps and clinical specialists. We plan to grow that up next year to about 77. But next year or this year now, for 2012, we’re putting much more effort into building our own direct channel in Europe. So we started in the second half of last year to build our own direct sales force and finished the year with 12 people, which was our plan, and we’ll more than double that by the end of 2012.

The reason to go direct in Europe is really driven by the portfolio of new devices. We have several launches of new technologies in Europe over the next few years and wanted to do that through our own team as opposed to through distribution partners. As I mentioned, it’s a very clinically involved sales process. It takes really years for these reps to become proficient and be able to treat complex anatomies. And as you can see, we’ve got well over 400 years of EVAR experience in the sales force.

So where are we focused on the new products? I just showed you our most recent device, which replaced our previous infrarenal system. But the big unmet needs in our marketplace have been more challenging anatomies. Specifically, this area just below the renal arteries, what we call the neck of the aneurysm, which is the landing zone of all of the competitive devices, all of those devices have to achieve both seal and fixation at that point. And if you don’t have enough real estate or enough good vessel, then those patients can’t be treated.

And as you can see here from this 3D reconstruction of this vessel, this is not an uncommon image where there is no neck. There is no narrowing below the renal arteries for one of these devices to attach. So this patient, which represents about 20% of the diagnosed aneurysms, could not be treated with the currently available devices. So they would have to go to surgery. And if they weren’t a surgical candidate, they would get no treatment at all. So there is a big portion of that 40% of patients that still goes to surgery that falls into this category with these very challenging anatomies that need a better solution. So that has been one of the major issues.

A second issue or limitation with EVAR is what we call secondary interventions. As I mentioned before, sealing is very important and you want to prevent leaks. The problem is, if you get any kind of leaking from above or below or in some cases, 15% to 20% of the time, you actually have side branches that remain patent or open, that profuse that aneurysm sac. So, even if the device is put in successfully, if there is a side branch vessel that continues to profuse that aneurysm, it’s still at risk of aneurysm expansion and rupture. So that’s why these patients, once they get a device, they need to be monitored really for the rest of their life.

And the standard protocol or monitoring EVAR patients is with CT follow-up. So once a year, they will go in for a CT scan and they have to do that for the rest of their life. Now there is a trend toward doing that with ultrasound, but there still the prevalence is CT. The reason they have to do that is to monitor these aneurysms and make sure they don’t expand and rupture. And that’s a limitation with the current technology. So we need a better way to seal these aneurysms permanently than we have today, and I’ll talk about that as we go into the portfolio.

And then the last unmet need is percutaneous. So there is – as the devices get smaller and smaller, we need right now to insert the devices you do bilateral surgical groin incisions. And we should be able to do this therapy over a guidewire like many other endovascular procedures. To that extent, a few years ago, when we introduced a device called IntuiTrak, which is a sheath-based system, a lot of physicians came to us and they said, this device is great for percutaneous. And we said, terrific, we’ll start to provide physician training and we’ll teach the market how to do this.

The problem is that it is an off-label indication. We went to the FDA and to seek an indication and had to do a clinical trial. And we’re just in the later stages of enrolling that. I think we’ll finish enrollment at the end of this month or first part of next month. We partnered with Abbott who has the closure devices. And by combining these technologies, our EVAR device and their closure device, we can actually – we can do these procedures fully percutaneous over a guidewire.

The benefit to the patient is there is no groin incisions at all. So they can literally go home with band-aids in their groins, and that should reduce groin-related complications as well as less pain and discomfort to the patient. So that trial is just about completing, and we would expect those results to be publicly available probably in the middle of this year and hope to receive that expanded indication by the end of 2012.

Another new technology that’s gotten a lot of attention is called Nellix. And we had a development program internally for a couple of years, looking at different ways to seal that aneurysm sac. As I mentioned, you can still get leaks. Once you put the device in, you still have an aneurysm sac and you need to prevent leaks. So we had looked at a variety of different technologies to seal that sac and make that a more permanent repair. And we had a program that was designed to do that, and we are making very good progress with it. And we’ve got excited and convinced that sealing the sac was the way to go.

There was only one other company that was doing anything like that, and it was the company actually located in Palo Alto called Nellix. And we looked at them and said, you know, if we are committed to sealing the sac, they are the only other competitor in this space. We think this is the way of the future. So we acquired them last year. It’s been just about one year ago today.

Completed that acquisition and fully integrated the technology, made significant improvements to it, and just at the end of December, filed for our CE.CA [ph] in Europe. And I’ll show you the new product pipeline in a minute. This is a very exciting product and that it’s the only device that really has the opportunity to completely seal the sac. It’s much easier to use than the existing EVAR devices and will treat a wider range of anatomies. And I’ll show you that in a minute.

So here is just a list of the competitive set, just kind of what I’ll call the specs, if you will. We measure indications in the EVAR world by vessel size. So you’ve got the profile, which is the outside diameter of the catheter, basically the size of the catheter that the vessel sees. The neck length, that’s that area of tissue just below the renal arteries. And right now, the limitation has historically been 10 to 15 millimeters.

As you can see, the Nellix device will be able to treat necks as short as five millimeters. So it will treat the shortest neck of all. And the reason is because it builds the sac, it doesn’t need that neck tissue as a way to anchor. It basically seals the sac and the stability comes by sealing that sac. And by the way, that is a biostable polymer that has the consistency of like a pencil eraser. So it’s body weight. You don’t have a cast. It’s not a heavy projecting object. It’s very biocompatible, soft and conformable.

The next dimension you will see there is neck diameter. It’s another limitation with the current devices as they can only treat up to 32-millimeter necks. This device will be able to treat larger necks. So these patients with larger aortic necks today, they have to go to surgery. And again if they are not surgical candidates, they don’t get treated. And then lastly, iliac diameters. About a third of the AAA patients actually have the disease that extends down into and includes their iliac arteries.

If the iliac arteries are too big, they too cannot get an EVAR treatment. So they are left of surgery if they are a surgical candidate. So we believe based upon the feedback from clinicians that today about 60% of the patients are treatable with the Nellix technology, which should be able to expand that up to about 75%, in addition to being the only device that completely seals the sac and is considerably easier to use than the other technologies. So we’re excited about this. And the clinicians that we showed to share that enthusiasm.

Another one of our devices, Ventana, because we sit on the bifurcation, we don’t have the same limitations as it relates to working our way up the aorta. And as I mentioned, about 20% of the diagnosed aneurysms have no aortic neck or have a very, very short aortic neck, and these patients don’t get treated today. We developed a device that you can see has branches that extend into the renal arteries. And we can open up another segment of this market that these patients today are just – they are destined for surgery if they are surgical candidates.

So this is an exciting program for us. We are closing in on completing our CE trial enrollment, 30 patients. We should have that done end of this month or first part of February. We’ll file for it and I’ll show you a timeline in a minute for CE Mark. We had conditional IDE approval. As we exited last year, this week we received our formal final IDE approval and now we’ll start pulling on the sites. We’ve got 23 sites identified in the United States to run our IDE trial. And again, lot of enthusiasm for this technology because there isn’t a good solution for these patients today.

So if you combine these two new devices, today if you look at the blue bar, 60% of the diagnosed aneurysms are treatable with the currently available technologies. If you expand that 60% to 75% with Nellix and then you add the additional 20% that you can now capture with Ventana, we think we can expand the treatable population to over 90% from today’s 60%. So it’s a significant market expansion. And we’re not just going to grow from that market expansion. We think we can take significant share within the existing market because Nellix is significantly easier to use than the other devices. So we’re very bullish about the future.

This is a busy slide that gives you a perspective on the new product pipeline and the timing. As you can see, if you look over to 2012, we have not introduced AFX in Europe. We will do that slowly starting in the first quarter and roll that out gradually over the course of the year. You can see that Nellix is expected to get CE Mark around the middle of the year. That will be done in a very controlled limited market introduction through the balance of 2012.

We think we’ve got something special. We’re going to take our time and do it right. We’ve already got selected centers identified that will start a limited market introduction and then we’ll do fairly significant post market trial also in Europe to gather more data. And we should exit 2012 with some momentum to open that up more commercially in 2013.

Ventana is also slated for CE Mark before the end of this year. So, similar to Nellix, we will start that in a limited number of centers, building more and more clinical experience. We’ll have a post-market study there as well, rolling into a more full commercial launch in Europe in 2013. And then you can see, as you move your way across, Ventana would then be slated for US approval in 2014 and Nellix in 2015. Expand, if you see that name, that’s actually the name of the devices that were developed to treat those renal arteries, those branches.

That’s actually a really nice stand-alone product. It’s about $100 million market. It’s adjacent to us, same customer, same call point, our technology. So we would get another indication for that device as well. So we’ve got a busy several years ahead of us with all of these new product introductions. That’s why we decided to go direct in Europe. We didn’t want to launch all these new technologies in Europe through distributors. We thought we could do a better job, do it direct.

This is what we think the market is going to look like over the next five years. What’s different about this from the earlier chart I showed you was just the earlier chart, which was $1 billion, was just the infrarenal segment of the market. So, that $1 billion is expected over the next five years to grow to about $1.7 billion. We will create this new segment of the market for juxtarenal aneurysms that these aneurysms that are higher up, that are targeted for Ventana.

And then thoracic, that yellow slice of the pie, that’s the other aspect or the other area of the aorta where we don’t currently have a presence but have plans to. So, for us, we’re really a single blood vessel company, and we’re going to be competing in a market worth well over $2 billion. So, given our size and scope, we can do nothing but aortic work for a long, long time and grow the business very nicely. So, very focused with a lot of opportunity ahead of us.

Here is our 2011 guidance. Again, we don’t – we won’t provide our 2012 guidance until our Q4 call, which will be later in February. You can see the sales guidance for the year and our anticipated loss per share. We have guided to be profitable in 2013 as well as we forecast our average sales growth rate over the next five years to be 25%.

Here’s how we finished Q3 in terms of balance sheet. So we finished that quarter with $24 million in the bank in addition to a $10 million unused line of credit. So we feel we’ve got adequate liquidities worth of the growth and the needs of the business moving forward. And that’s it.

So we’ve got a very strong core business and obviously a very exciting pipeline that will both expand the market as well as enable us to capture more share in the existing market. The pipeline in addition to our continued gradual expansion of the US sales team and then building a whole new sales and marketing capability in Europe, we think, provides us with good long-term growth opportunity.

So I look forward to answering questions in the breakout. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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