Endologix's (ELGX) CEO John McDermott on Q4 2015 Results - Earnings Call Transcript

| About: Endologix Inc (ELGX)

Endologix Inc (NASDAQ:ELGX)

Q4 2015 Results Earnings Conference Call

February 22, 2016, 05:00 PM ET

Executives

Zack Kubow - IR

John McDermott - CEO

Vaseem Mahboob - CFO

Analysts

Brooks West - Piper Jaffray

Matt Blackman - Stifel

Chris Pasquale - JPMorgan

Matt Keeler - Credit Suisse Group

Jeff Chu - Canaccord Genuity

Steven Lichtman - Oppenheimer

Joanne Wuensch - BMO Capital Markets

Glenn Novarro - RBC Capital Markets

Larry Haimovitch - HMTC

Operator

Greetings and welcome to the Endologix Incorporated Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Zack Kubow. Thank you, Zack. You may begin.

Zack Kubow

Thanks, operator, and thanks everyone for participating in today's call.

Joining me from the company are John McDermott, Chief Executive Officer; and Vaseem Mahboob, Chief Financial Officer. This call is also being broadcast live over the Internet at www.endologix.com, and a replay of the call will be available on the company's website for one year.

Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Endologix annual report on Form 10-K and subsequent reports as filed with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 22, 2016. Endologix undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

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

John McDermott

Thanks, Zack, good afternoon everyone, and thank you for joining us today for Endologix's fourth quarter 2015 conference call.

This afternoon, I’ll provide a brief overview of our fourth quarter results followed by an update on the recently completed merger with TriVascular and our key growth drivers. I’ll then turn the call over to Vaseem for a review of our fourth quarter financial results, 2016 guidance, and an update on our synergy plan from the merger. I’ll then come back on to provide an overview of our top priorities and then we’ll open up the call for questions.

Fourth quarter revenue was $39.2 million, an increase of 4% on a constant currency basis and in line with our expectations following the announcement of the merger with TriVascular in October. Vaseem will provide more detail in his remarks, but at a high level the merger related disruption in the fourth quarter was consistent with our expectations.

In the fourth quarter, we also experience continued significant growth with Nellix in Europe, where our direct business systems sales increased 49%. We’re also pleased to announce the completion of our 5,000 Nellix procedure.

We just recently achieved this milestone and continue to see significant growth potential as we leverage Nellix together with Ovation and AFX to become the leader in endovascular aortic aneurysm therapy.

Turning now to the merger, I’d first like to thank everyone from both teams for their hard work and dedication throughout the merger process. The significant planning and preparation from both sides allowed us to hit the ground running, and we are very pleased with the early results and collaboration.

This past weekend, we held our first national sales meeting for the combined U.S. sales and clinical team, which averaged around 130 experienced professionals. The focus of the meeting was training on the Ovation iX system, and there’s a tremendous amount of excitement for the product and its great clinical results.

What stood out for me at the sales meeting was the level of EVAR experience in the combined team and the enthusiasm for being able to offer physicians the best device for each individual patient.

The power of the portfolio was highlighted again this morning as we had our first implanted AFX2 systems in the United States. The procedure went extremely well and the patient is doing great.

Over the next few months in the U.S., the U.S. team will focus on driving adoption of Ovation iX while we concurrently do procedures and plan for the launch of AFX2 later in Q2. As you can imagine, there’s a lot of excitement in the U.S. and significant growth potential for launching two new devices within six months followed by Nellix around the end of this year.

Turning to Europe, our combined sales and clinical team of 50 professionals will be getting it together later over the next couple of months for their first sales meeting in the coming weeks to train on Ovation iX and the newest design of Nellix.

These products along with AFX are very complementary and we are already getting reports of positive feedback from physicians who appreciate the ability to pick the optimal device for each patient. We’re very encouraged by this feedback as it underscores one of the key benefits of the merger and highlights the significant growth potential of our portfolio approach.

In other international markets, we now have 15 reps, clinical specialists, and agents. We are actively meeting with our distributor partners and training our representatives and agents on the products available in their markets.

It will take time to complete the distributor transitions, but our partners are enthusiastic and we see significant growth potential in Asia and Latin America over next several years.

In addition to our global sales force activities and upcoming product launches, we continue to make very good progress with our clinical studies in new product development programs. We currently have five clinical studies that are actively enrolling patients.

First is our Nellix continued access protocol. We have enrolled over 100 patients in the CAP and expect to submit for additional patients next month.

The LEOPARD study is the first and only head to head clinical trial with AFX against Gore, Medtronic, and Cook. We have over 170 patients enrolled and expect to get up around 400 patients by the end of 2016.

Our LIFE study is a 250-patient, multi-centered, post-market registry with Ovation. The study is the first of its kind using a fast track protocol that includes a percutaneous procedure, local anesthesia, no time in the ICU, and next day discharge. To-date over 200 patients have been enrolled and we expect to complete enrollment later this year.

LUCY is a 225 patient prospective study to evaluate Ovation in women and other patients with short aortic necks and small access vessels. To-date, we have enrolled just over 40 patients and expect to complete enrollment next year.

And lastly, the ASCEND study that was kicked off last call by physicians to evaluate the use of Nellix together with aortic branch devices to treat patients with complex aneurysms. The 200-patient study already has over 100 patients enrolled and we expect to complete enrollment by the end 2016.

So as you can see we have a number of important clinical research projects designed to provide clinical and economic evidence to further driver the adoption of our broad portfolio of products.

From a product perspective, in the near term we expect our growth to come from Ovation iX, AFX2, and Nellix. Ovation iX and AFX2 are both FDA approved and we already have approval in Europe for Ovation iX, AFX2, and the current generation of Nellix.

For Nellix in the U.S., we continue to be on schedule and are planning to submit the final PMA modules within the next 60 days targeting FDA approval at the end of this year or into the first quarter of 2017.

We expect the one-year follow-up clinical data from the U.S. IDE to be presented at the SVS meeting in June. Longer term, we believe our ChEVAS and Ovation Alto programs will enable us to penetrate the underserved complex abdominal aneurysm market. We’re also interested in devices for the treatment of thoracic aneurysms and dissections, and we’ll provide updates on those programs later this year

Between our expanded global sales and clinical teams, our pending product launches are significant and growing clinical evidence in our deep new product pipeline, we feel Endologix is extremely well positioned for significant growth.

I’ll now turn the call over Vaseem for his financial review. Vaseem?

Vaseem Mahboob

Thank you, John. Good afternoon everyone. The total revenue in the fourth quarter of 2015 was $39.2 million, up 1% reported and up 4% on a constant currency basis compared to the fourth quarter 2014.

As we had indicated at prior events, we were expecting a sales disruption in the range of zero to $2 million, and we estimate that our fourth quarter 2015 revenue was impacted by around $1 million to $1.5 million due to the anticipated disruption related to the merger with TriVascular.

On a pro forma basis, the combined companies’ revenue in 2015 was as follows; first quarter $44.7 million, second quarter $49.2 million, third quarter $47.7 million, fourth quarter $49 million, So for the full year of $191 million. The geographic split was $134 million in the U.S. and $57 million outside of the U.S.

Turning back to Endologix's fourth quarter 2015 results, in the U.S. revenue was $26.4 million, down slightly compared to the fourth quarter of 2014. This decrease was due to the temporary postponement of the Continued Access Protocol or CAP in our U.S. Nellix IDE clinical study, which was restarted in November and merger related disruption.

Excluding the impact of the CAP, our U.S. sales were flat compared to the fourth quarter in 2014, which was in line with our expectations given the announcement of the merger. International revenue was $12.8 million, up 17% on a constant currency basis, including European revenue growth of 18% on a constant currency basis to $8.2 million.

Noble Nellix sales reached 692 systems for the quarter, which is up 15% from 2014. This includes our European direct business which was up 49% compared to 4Q last year and then indirect European business which was down 54% for the same period due to a large order in Q4 last year and some anticipated disruptions related to the merger. On a full year basis world-wide Nellix system saw a 38% growth year-over-year.

Gross margins in the fourth quarter, 2015 was 60% compared to 76% in the fourth quarter 2014, the decrease was primarily due to an inventory write-off of $3.4 million in the fourth quarter of 2015 for product transitions and then increase for obsolete inventory reserve as a result of quality and process improvements.

Operating expenses for the fourth quarter 2015 were $45.5 million compared to $40.5 million in the fourth quarter of 2014. Fourth quarter 2015 operating expenses included a $5.1 million in one-time charges, $1.9 million of which was contract termination fee to our distribution in Japan and $3.2 million of acquisition related expenses.

Our GAAP net loss was $15.3 million or a loss of $0.22 per share in the fourth quarter 2015, compared to a GAAP net loss of $14.8 million or a loss of $0.22 per share for the fourth quarter of 2014.

This included a $9.6 million or $0.14 per share non-cash tax benefit associated with the accounting treatment for the 125 million convertible offering in Q4, 2015 to finance the merger.

Adjusted EBITDA for the fourth quarter of 2015 was a loss of $11.5 million, or $0.17 per share, compared to adjusted EBITDA net loss of $3.4 million, or $0.05 per share in Q4, 2014.

For the balance sheet, we ended the year with the cash and cash equivalents and investments of $177.3 million compared to $86.7 million at the end of 2014. In October we raised $121.4 million in net proceeds from the sale of convertible senior notes and then underwritten public offerings of which a portion was used in February in conjunction with the closing of the TriVascular deal.

Now turning to guidance, for 2016 we expect revenues will be in the range of $192 million to $202 million, compared to pro forma 2015 revenue of $191 million. We believe the majority of the anticipated disruption related to the merger will occur in the first half of the year and we expect to see good growth in the second half of 2016 from our planned new product launches.

Although we do not plan to provide quarterly guidance in the future due to the expected merger disruption in 2016, we are providing directional ranges for quarter revenue. We expect Q1 revenue to be down 10% to 15% from last year, Q2 to be down 5% to 8% and then in Q3 up 10% to 15% and Q4 up 15% to 20%.

For the full year 2016, we expect our geographic revenue mix to be approximately 65% from the U.S. and 35% from outside of the U.S. We anticipate a GAAP loss per share of $0.20, $1.20 to $1.30 per share and then adjusted loss per share of $0.70 or $0.80 per share. This guidance excludes purchase price accounting impacts related to the TriVascular merger.

On the spend side as present at our October Investor Day, we expect approximately $35 million in one-time deal related expenses and we have already spend around $3.2 million in 2015. The remainder $32 million will be spent in 2016, majority of that in the first half of this year. We will provide visibility to these costs on our quarterly earnings calls as we progress throughout the year.

While we are talking about cost we are on-track to deliver the $17 million in merger synergies with the max majority of that coming from sales and marketing and G&A reduction. We have already executed on the headcount actions as planned.

On our related note beginning with the first quarter earnings report, we will no longer be providing sales by product lines, pricing information or details about our sales forces. There are two primary reasons for this decision.

First, we are mindful that certain product level revenues, pricing information and sales rep details essentially gives our competition a roadmap to our business plan. Second with the merger now complete we think it’s important to focus our quarterly metrics on the strength of the combined business and its ability to take global market share.

We completed the merger to the build the portfolio company within ability to be the market leader and a long term successful will be driven our ability to take market share with our entire product portfolio.

Importantly, we are more confident in Nellix today than ever before. As evidence by the 49% European direct Nellix systems growth in the fourth quarter. Nellix remains the most innovative solution in AAA and we anticipate the product will continue to deliver rapid global revenue growth over the next several years.

The good news for us is that Nellix is one of three excellent product in our portfolio and we are the only company with ability to offer physicians the best solution for each individual patient.

With that, I’ll hand it back to John. John?

John McDermott

Thanks, Vaseem. 2016 is off to a very good start and we’re pleased with the merger progress so far and the positive feedback we’re getting from the field. Our first consolidated U.S. sales meeting this past weekend was a major success and we’re excited about the growth potential of launching multiple new products to our larger more experienced global sales organization.

Our top priorities over the next 12 months are first, get Nellix PMA approval and prepare for the U.S. launch. Second, drive growth from three other upcoming new product launches. The first, which Ovation iX in the U.S., second is AFX2 in the U.S. and in Europe, and third our Next Generation Nellix system in Europe in Q2.

Another priority is to continue advancing our Ovation Alto and ChEVAS development in clinical programs for the treatment in complex AAAs. Third is to leverage our post-merger infrastructure and capabilities to achieve profitability as soon as possible.

And lastly, to continue building clinical and economic evidence with our LIFE, LUCY, LEOPARD and ASCEND clinical studies. As we execute on these priorities we expect to deliver significant value to our customers and shareholders while providing patients with the best possible device for the individual treatment of their abdominal aortic aneurysm.

We look forward to meeting with many of you at the RBC Healthcare and BTIG MedTech conferences later this week and to provide an update on our progress on the first quarter conference call in early May.

With that, we’ll now open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brooks West from Piper Jaffray. Please proceed with your questions.

Q – BrooksWest

Hi, guys. Vaseem, let me start with Nellix, you threw out a bunch of numbers, and I want to make sure I'm clear. So I think it was 18% growth, 49% in direct channel. Can you give us a little bit more detail on what that means?

It sounds like you had a distributor comp, how big is the direct versus distributor, just any more of a sense of kind of true underlying system sales growth, implant growth, whatever you could do?

Vaseem Mahboob

Sure. Thanks for the question, Brooks. I think the way to think about it is, the European direct business went up to almost 550 units. The indirect was down by about 54% and that was primarily driven by a very significant comp. We almost did about 160 units in Q4, 2014 and it was a unusual one-time order and that’s the comp.

Now, the other point also we made was there is a little bit of the – on the indirect side, the disruption that we saw related to the merger where our partners were not very clear on how 2016 is going play out vis-à-vis the transition. So, all-in-all, I’d say the direct business was absolutely solid, 49% growth year-over-year, and then on the indirect side it was down 54%; as a result that’s up 18% in aggregate.

Brooks West

So do you have a sense – thank you for that, do you have a sense for I guess maybe what the underlying implant volume was and I know that’s maybe an uncomfortable level of detail but I’m just trying to cut through the numbers to kind of get a true underlying growth rate?

John McDermott

Brooks, this is John. Obviously you get a very clear picture of that on the direct side. The indirect side is much more choppy, so I think the direct business is the best reflection of market uptake and adoption and we’re going to get -- we had a stocking order in Q4 last year and then followed this Q4 with some distributor, merger, uncertainly, and an understandable back off of ordering patterns, so I think we’re just going to see some inventory movement on the dealer side, but the direct business I think is the best reflection of uptake.

Brooks West

So, is it fair to say, John, continued upward trend in general from what we’ve seen throughout the year for Nellix in Europe, is that a way to kind of bookend the statement?

John McDermott

Absolutely.

Vaseem Mahboob

Absolutely, yes.

Brooks West

Okay. And then maybe just one question on the merger, so you had been talking about some account overlap and maybe that was a little bit less than you had thought which is a positive before you did the deal. Just curious if you can give us a little clarity on how the combined comp base looks? And then have you picked the team at this point and you’re really moving forward, are you kind of through the personnel side of the disruption from the merger? Thanks.

John McDermott

Yes, Brooks, I’ll answer the last question first, the team is picked. In fact as I mentioned just briefly in my remarks, we all met. In fact, the sales meeting ended yesterday afternoon. So we had our first meeting and it was a huge success. Team is fired up. Lot of enthusiasm about the Ovation iX product and already a lot of examples being shared about having both products in their bag today and how that enables them to provide more solutions to the physicians, so it’s early, but we’re pretty encouraged by that feedback.

In terms of the account overlaps we put all the accounts together. We did have some overlaps, although wasn’t as many as we thoughts. There were some talk about maybe as much as 50%. It wasn’t that high. We ended up netting out on a consolidated basis just over 900 active accounts between the two businesses.

And the good news in that 900 accounts, so we’re – that puts us in over 50% of the accounts in the U.S. but under 30% penetration in those 900 accounts. So that’s a great sign for us, because there’s a tremendous amount of additional penetration opportunity in the existing accounts as well as a whole lot of Greenfield of accounts that are not active, so we feel like there’s bunch of upside in this new consolidated team.

Brooks West

Great. I’ll let some other to jump in. Thank you.

Operator

Our next question comes from the line of Rick Wise from Stifel. Please proceed with your question.

Matt Blackman

Good afternoon everyone. It’s Matt Blackman in for Rick. Can you guys hear me, okay?

John McDermott

Yes. Hey, Matt.

Matt Blackman

Okay. So, couple of questions. I wanted to first sort of follow-up on a couple of Brooks’ questions. First on Nellix that 49% direct unit growth, as we think about 2016, is that the right type of growth to think about that largest chunk of the business. Is that the right growth rate to think about?

John McDermott

No. I mean, Matt, 49% is a pretty significant number and remember we’ve been talking about this, this is off a base that’s been drawing, so I don’t think that we can today say that it’s going to grow at 40% or north of 40% in perpetuity.

So, I think for 2016 I think which you’ve got to assume is a very strong growth. And again, the guidance is reflective with certain amount of disruption that we can’t quantify at this point.

And I tried to make this point earlier that we just got to be very careful on the kind of information that we provide on these calls, so we are trying to move away from this product line details. So for 2016 I’d defer to saying that we’re going to have pretty robust growth. We’ve done 5,000 cases so far, it’s grown 49% and how Nellix will do, will be the way that the European growth will be translated and we’ll triangulate that in our quarterly reviews with you guys on how that region is doing.

So, Nellix is going to be the leading indicator or Europe and the only thing I can say it's going to be pretty robust growth.

Matt Blackman

I thought I’d try, but thanks. Thanks. The next question again another follow up on Brooks’s question. As we think about through the sales synergies. Thanks for the current update account overlap information, but as we think about the sales synergies how should we think about it in terms of the ability to cross-sell, obviously you’ve got Endologix's legacy account numbers are higher, so thinking about selling Ovation in those accounts, you said your number would be seem to the larger opportunity.

Am I thinking about that correctly or no, there is some reason that you could do well in AFX with AFX and some of these Ovation accounts, any way to sort of parse that how you’re thinking about the opportunities of cross-sell?

John McDermott

Well, I think you’re thinking about right. We started let’s say plus or minus with 750 active accounts and netted out at 900, so obviously there’s a bigger base of Endologix's AFX users and a lot of cross-selling. Like we talked about early on when we announced the merger, the TriVascular Ovation device, it can treat some patients that AFX just simply can’t treat. So it’s got a broader indication as well as profile and flexibility benefits, so there were CTs that we never even got to see because physicians know some of the limitations of AFX.

So I see a lot of growth potential, lot of expansion in our existing accounts with Ovation. That said, there are also anatomies in certain situations with the Ovation accounts that where AFX is a better solution or a solution that wasn’t going to work for Ovation. So its going to work both ways, Matt and I can tell you the team is fired up to take out for a spend. I know we’ll see some good results right out the gate, but once they really get cross trained and were deep in the launch of AFX2 as we turn the corner in the middle of this year, we should be building some real momentum.

Matt Blackman

Okay. That’s very helpful. My last question, the ASCEND study, it’s actually, I think seemingly enrolling a little bit faster than we expected. Is there any chance that we might see whether be 30 day data or procedure that anything as earlier as sharing cost, in at least some of the patients or now we have to wait till maybe 2017 or maybe later in 2016 and vis-à-vis. That's all I had. Thanks.

John McDermott

Yes. Now I think there’s a good chance, we’re going to get a sneak peak at some data churn cross. I don’t think they finalized the agenda yet but the investigators I know have requested the opportunity to share some of their early results so we’re hopeful the make it to the podium.

Matt Blackman

Thanks guys.

Operator

Our next question comes from the line of Chris Pasquale from JPMorgan. Please proceed with your question.

Chris Pasquale

Thanks, well start by circulating back to the Nellix performance in Europe this quarter and I appreciate the difficult year-over-year comp because what was happening on the indirect side but sequentially want to try better sense of how that direct piece is 550 direct units compared to what you saw in 2Q and 3Q do you have those numbers?

Vaseem Mahboob

Yes, sure if I can get so, in Q1 sequentially we were up 12, then Q2, we were up 23. In Q3 for the seasonality we were down 19 and then we are up 33 in Q4.

Chris Pasquale

Okay. And that’s specifically for the direct piece of the business.

Vaseem Mahboob

Yes.

Chris Pasquale

Great, that's helpful. And then Vaseem, what you're thinking about for gross margin in '16. You guys took a couple of large inventory ops lesson charge which to press numbers in '15. Are you pass that now or do you expect more of that as you roll out IX and AFX too.

Vaseem Mahboob

I think there been some incredible learning's in the last six months up to a year one inventory management the phase of phase out process which we feel pretty good that we have pretty good process going forward, a lot of it has been kind of related to inventory management and our quality and the quality improvements that we have been trying to make. So I feel pretty good about where we headed into '16.

The gross margins in '16 are going to be in 64% to 67% range and obviously we’ll kind of true that up as we see how the product mix evolves and it’s also some holding back to the distraction but I would say the worse is behind is we have a pretty good process going forward and we will continue to give you guys guidance on the quarterly calls on gross margin. But I would say expect about a 65% to 67% somewhere in that range.

Chris Pasquale

Okay. If I back out the inventory out-licensee charges for this year, you guys would have been comfortably north of 70 so, what drives the lack of improvement coming off a year and which margins were depressed is it because you are observing TriVascular and they have a little bit more excess capacity, is it disruption from the deal itself why doesn’t it get better faster.

John McDermott

Few drivers for that, so first of all we had excess capacity in terms of manufacturing footprint in TriVascular. So, the standard cost for Ovation is actually going to low because we - there were some period costing for some of the units. So I think that’s going to impact margin.

Second, as you think about the growth in the business, the U.S is still going to be relatively flat and as we grow outside of the U.S. the margins are actually lower so that actually is a little bit of makes impact there. So I think those are two big drivers of the gross margin being in 65% to 67% range.

Chris Pasquale

Thanks, that’s helpful.

Operator

Our next question comes from the line of Matt Keeler from Credit Suisse Group. Please proceed with your question.

Matt Keeler

Hi guys, thanks for taking that question. First, could you give us any color on the expected synergy impact U.S., ex-U.S. it's similar to the geographic but above revenue there a different impact that we should be thinking about?

John McDermott

Well, most of the synergy benefits are headcount related and the headcount actions that we had are mostly U.S. driven. So I’d say this predominately U.S. based.

Matt Keeler

So I meant revenue dissynergies for '16, I’m sorry I wasn't clear.

John McDermott

The revenue dissynergy its mostly going to be in the U.S and like we have said in the past its mostly driven by territory and rep alignment and as you guys have heard us saying in the past, we’ve talked about the resizing the sales force. So there is a pretty significant accounts that have a new rep overly redefined - will be reassigned to different territories.

So I’d say that’s the big driver of the disruption. Second, on the European side where we see a significant impact is going to be on the indirect side with the distributors. On the direct side to give you a data point, just for the month of January we have seen a slowdown in some of the Ovation cases in Europe already which is actually almost at 50% down clip for the month of January.

So, in terms of the big picture I'd say the disruption is going to predominately U.S. but then Europe is going to be driven by the distributors again that's not huge numbers not going to be north $5 million.

Matt Keeler

That sales mix for next year 65:35 is that a reasonable way to think about the synergy mix.

Vaseem Mahboob

No, I'd say it will be slightly heavier in the U.S. than in Europe. So I would say ballpark it's about 90:10.

Matt Keeler

Got it, okay.

John McDermott

Matt the fact - as you can appreciate it's hard number to forecast - I would say although like Vaseem pointed out we have seen a little bit – we saw a little bit of softness in January before the deal closed from TriVascular, those are in our numbers but the U.S. has been performing well, so things keep on track - so far Q1 looks very good.

Matt Keeler

Then just one last follow up and I will drop any update or any change on like-for-like pricing and either the U.S. or Europe or things are still pretty steady there?

John McDermott

The pricing is actually pretty good. I mean no change in European pricing, the TriVascular pricing in Q4 was very strong on the IX products. And on our AFX products we have been actually doing pretty good in holding price as well.

So there is no real change in pricing dynamics for 2016.

Matt Keeler

Thanks guys.

Operator

[Operator Instructions] Our next question comes from the line of Jason Mills from Canaccord Genuity. Please proceed with your question sir.

Jeff Chu

Hi this is actually Jeff Chu filling in for Jason. Can you hear me okay? John just wanted to ask about Ovation, do you know how many people has been trained or how many physicians have been trained on IX in the U.S. and what could be reasonable expectation for the first half of this year?

John McDermott

I don’t know at my fingertips number of physicians certified on Ovation. As we talked about before we had premerger I think around 275 active accounts. So there would typically be more than one physician in an account but I don't want to guess and give you the wrong number but I would say it is somewhere north of 300 as an estimate.

The potential significant right, I mean there are according to our available market data there are as many as 4000 physicians in the U.S. that do EVAR procedures. Now admittedly a fair number of those are low volume but at least half of those are active.

And so it's - there is a lot of growth potential with number of users that are currently using the Ovation system. And Ovation IX system as you know although we just got together to train the consolidated team, the products has been available for little while that's still for all practical purchases a brand new production in the U.S.

Jeff Chu

Great, very helpful. And just sticking with Ovation for a moment here, so how do you plan to position Ovation in the U.S. both pre and post Nellix approval to say the economy situation where the market can - where there will be two procedures based on how comfortable the surgeon is performing each of these - are we thinking about that in a right way?

John McDermott

I’m not going to go too deep on the positioning for the same reason that the mentioned we want to continue to provide enough information for people to make good investment decisions without sharing our playbook with the competition, we are mindful of that. That being said the start of that process is all about the physicians, individual experience and needs. So it is very much a solutions based approach and what is important to each doctor and each one of his patients.

So, instead of trying to push one product on a dock because we only have one, we get to actually explore what's most important to that physician and his individual patients and then provide the best solution.

Whether in the near term it is AFX or Ovation or hopefully by the end of the year Ovation, AFX 2 or Nellix. So it really is a portfolio approaching this idea giving the physician a power of choice to give each patient the best solution is - think of physician the physician more broadly that way.

Jeff Chu

Okay. And then last question from me is just on the pipeline, is still focus for you or TriVascular at this point?

John McDermott

Yes it is a indication of great interest for us. It will drop into the queue in terms of development after the completion of the Ovation Alto program. So we will provide a little bit more color on that in the latter part of this year.

Jeff Chu

All right, great. Thanks for taking the questions. I’ll get back in the queue.

Operator

Our next question comes from the line of Steven Lichtman from Oppenheimer. Please proceed with your question.

Steven Lichtman

Thank you. Hi guys. John, wondering on the ASCEND Registry. How do you anticipate that being used in the field? Obviously it is a Registry. So I assume this isn’t about a label change. But will you be able to leverage published data for training on ChEVAS. Overall, how are you envisioning that data being used in the field?

John McDermott

Well, as you pointed out, it’s not indicated yet for the treatment of these complex anatomy. So we won’t be promoting it or teaching or training on the technique. And what will likely happen is what has been happening or continue to happening, has been happening, and that it positions, identify other doctors who have had successful with their technique and they seek out their advice.

And that’s how this market has started to evolve or the procedure has evolved. The presentation in publication of the data, I think, will just drive more awareness to the technique. And for the first time, people will get to see a decent body of evidence on the results.

Right now it’s conceptually a really good idea in there. The result so far have been anecdotally very good but we hope that the churn cost mean to get some real world data out there so people can see if this is a technique that’s got a lot of potential work. We’re excited about it.

Steven Lichtman

Great. And then, Vaseem, you seem comfortable on the synergy opportunities that you guys have laid out. I may have missed it, but how much are you thinking you will get in 2016? I assume that’s all, as you mentioned, all on the head count side SG&A.

A – VaseemMahboob

No. We are going to be on-target with the 17, slightly better, secret synergies a 30 million a year as we’ve talked about. So we have pretty good line of sight to the 2016 number, the $79 million. And I think it’s gone well. Especially with the one-one actions that we’ve already taken exactly the day after the close. So we should aim the ballpark.

Steven Lichtman

And then last thing John. In terms of Japan, where are you, I may have missed this – apologize it, but where are you on the rollout of AFX with the new partnership there?

John McDermott

They are just getting busy with it now. I don’t know the latest case count, off the top of my head, but feedback has been very positive, and Japan lifeline is actively launching. AFX is, we speak with plans to launch AFX2 later this year.

And we are also hopeful to get approval for Ovation in Japan by the end of this year. So Japan has been a busy year for us.

Steven Lichtman

Okay, got it. Great. Thanks guys.

Operator

Our next question comes from the line of Joanne Wuensch from BMO Capital Markets. Please proceed with your question.

Joanne Wuensch

Good afternoon and thank you for taking the question. On a spend moment on the continued access program, what was it that costed delay in procedures and how much you have dialed in for the Cap in 2016?

John McDermott

Yeah Joanne, I remember that delay in Cap. We talked about before. That was last year issue. So there is nothing new on that. The Cap right now is actively enrolling and everything is going great.

We’ve actually, in fact, with the Cap recently introduced a new polymer dispenser and some other things. So the Cap is chugging along. In fact, we are going to need to apply for additional patients here next month.

Joanne Wuensch

Can you comment this in 192 to 202 for next year?

John McDermott

It’s not a big number. I don’t know that we want to get into too much detail in terms of the total global consensus number. We are not depending upon that to hit our revenue, but what I can say is the Cap is progressing.

Joanne Wuensch

Okay, that’s very helpful. Thank you. And then as a follow up, qualitatively, from the merger, what has surprised you the most?

John McDermott

One thing that really stood out to me over the weekend with the sales team is just the level of experience. Collectively, it’s clear that the combined team has a tremendous amount of talent.

So I’d say it was very positively impacted by what I think is going to be a high potential team, and I think they are going to hit the ground running early. So far, knock on wood, there has been very little negative surprise. I can’t even think of one. Sales force retention, we are almost at 100% of the people that were invited to be on the team are on the team. So everything is moving forward really according to plan right now.

Joanne Wuensch

Thank you so much.

Operator

Our next question comes from the line Glenn Novarro from RBC Capital Markets. Please proceed with your question.

Glenn Novarro

Hi, good afternoon. I was wondering - the Nellix trends in the fourth quarter. We did see some very strong Registry data, at least late last year. I’m wondering if that had contributed to the strength in the fourth quarter with Nellix outside the U.S.

Is this what’s, I guess we are all trying to figure out, is this what’s give you the confidence that Nellix is going to have another really strong year in 2016, and then I had a follow up.

John McDermott

Glenn, it's a few sayings. One, the data was good but also, if you recall, just thinking back to 2015, we’ve brought on some new people at the end of '14 and the first half of ’15. So those folks are now starting to become productive in Europe.

So there is some system momentum there. Additionally though, as I mentioned, we are getting ready to introduce the newer version of Nellix in the latter part of the second quarter.

So part of our continued confidence in the growth of Nellix is we’ve got a team that’s getting more and more experienced of growing account base and a new product that we are going to drop into the mix here before the midpoint of the year, and it’s the combination of those variables that lead us to think that Nellix will keep growing nicely.

Glenn Novarro

Okay. And then as a follow up. Nellix, do you think in United States, you’ll lead the FDA Advisory Panel? And I know your guide is to receive FDA approval late 2016, early 2017. Is there a difference between late 2016 to early 2017?

Does that come down to an FDA Advisory Panel? In other words, no panel, we should get approval in 2016 with panel. It may move into 2017. Thanks.

John McDermott

It’s possible Glenn, if everything goes perfect, to even have time for panel meeting and get it by the end of the year. It depends on when the panel meetings are scheduled. So at this point, I can’t say that for sure.

We’ve tried to give a window of December through March. The end of the year through first quarter 2017, it’s our best estimate. But in a best case scenario would be possible to still go to panel and get approval by the end of ‘16. That does push it a little bit.

Right now, things are progressing right on schedule, and we are anxious to get the final modules submitted and get the clock ticking on the FDA review.

Glenn Novarro

Thank you.

Operator

Our next question comes from the line of Larry Haimovitch from HMTC.. Please proceed with your question.

Larry Haimovitch

Glenn just asked one of the questions I was going to ask about, whether you did a panel meeting. So the other question I wanted to get clarification on is, I believe there is typically four modules to file for PMA. Where do you stand in the number of module you filed at this point, on Nellix?

John McDermott

Yes. One and three are in, and two and four are on deck.

Larry Haimovitch

Okay. And four being the clinical data?

John McDermott

Exactly.

Larry Haimovitch

And two being -

John McDermott

Two is all of the testing data. So the preclinical, the bench and the durability and all of the DVNV data. So as you recall from previous discussions we had, we received some questions from the FDA about the use of adjunctive devices. In fact, this question goes back and it’s linked to Joanne's earlier question about the temporary postpone in the cap.

There was one request for additional patients in the cap where the FDA asks us to supply more data related to the use of adjunctive stents with the Nellix system. So we’ve worked with the FDA to provide them with the data. They then approved more patients in the cap and then have recently accepted our testing plan where the adjunctive device is. So we are clear selling now on the submission of the two remaining modules.

Larry Haimovitch

Okay. And then John one follow up question regarding manufacturing, I know from my long experience being associated with TriVascular that planned to accelerate - really oversight for public needed in terms of their capacity. Can you update us at all on what do you’re doing with manufacturing, where are doing at and what will happened to be very large plant in Santa Rosa?

John McDermott

Yes, I’ll give you the 40,000 foot level is its - we have a lot of capacity in Santa Rosa and we plan to use it all.

Larry Haimovitch

So you bring some manufacturing.

John McDermott

No, we’re going to move - our plan is into move anything right now. We expect to see a lot of growth out of Ovation and we think we’re going to need all that capacity. So we’re going to leave at right at there and scale at up to supply the volumes that we hope to achieve over the next few years.

Vaseem Mahboob

And Larry I can call off that window - if you remember at the Investor Day, we had talked about - in our stat plan we had assumed that we are going to add manufacturing footprint or the new capacity in 2018. So for us that kind of the table and that’s one of the synergy drivers for us in the future. So we plan to intend it all and especially with the ramp up for Nellix I’m sure we’ll need to use.

Larry Haimovitch

So in other words, you expect the unit growth it will grow into the – grow into the plans essentially.

A – John McDermott

Absolutely.

Larry Haimovitch

Thank you very much.

Operator

Our next question comes from the line of Brooks West from Piper Jaffray. Please proceed with your question.

Brooks West

Hi guys, thanks for the follow up. John I just wanted to circle back on the panel commentary because that’s a important - I think timeline for investors. So are you essentially saying that even if you do need to go to panel, you’re still confident in your ability to get the device on the market – to get Endologix on the market by the end of March, is that a correct statement?

John McDermott

Well, yes what I can tell you - what I don’t know is what are going to be the questions and the process right obviously I can't predict that with certainty. What I can tell you is that within the typical 180 day review cycle, we have allocated sometime within this window through March 2017 to go to panel. Whether we will need it all or not I don’t know or nor do I know exactly the nature of the questions and how long it will take us to respond in any other issues.

So when we layout the timeline and assume a normal series of questions and responses, it is possible to get through a panel review in that timeframe. That being said, there is no indication at this point in time will have to go to panel.

So although we have planted in our overall timeline, we won’t know until the agency has had the fourth module for a couple of months or so, whether or not leaving me to do that.

Brooks West

Okay. And that was the other point of clarity I wanted to ask was, it seems like over the last six months you have been fairly confident that you don't need to go to panel, has that changed at all or you still in the same place?

John McDermott

No it hasn’t changed. There isn’t anything that we can see that would lead to panel but again it is a new system, so the newer the device the more likely you are go to panel but this is in fact - they are treating aneurysms and there is other devices that have been doing that.

So we remain hopeful, we don’t have to go but we don’t know for sure and have built the timeline just in case.

Brooks West

Okay, thank you. Very helpful.

Operator

There are no furthers at this time. I would now like to turn the conference back over to Mr. McDermott for any closing remarks.

John McDermott

Okay, well, thanks everyone for joining us on the call this afternoon and your questions and interest in Endologix's. We look forward to seeing you at the upcoming conferences and will provide regular updates on our progress. Have a good evening.

Vaseem Mahboob

Thank you.

Operator

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

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