Endologix Inc (ELGX)
2012 Bank of America Merrill Lynch Health Care Conference
May 16, 2012 6:00 PM EST
John D. McDermott – President & CEO
Endologix. I’m pleased to introduce to you John McDermott, President and CEO. We’ll have a brief presentation and we’ll go to Q&A thereafter. Thanks.
John D. McDermott
Okay, thank you. Good afternoon everybody. Those are Safe Harbor Statements. So this is going to be quick. I am going to give you a very accelerated version of the company. I can talk all afternoon about it, but I’ll give you a quick overview and then we’ll open it up for Q&A as he mentioned.
Just briefly, the company is well positioned for ultimately a leadership position in a large and growing market. A lot of growth drivers, very deep new product portfolio as well as a strong core business. We’ve been expanding our sale force in the United States and now we are embarking on an effort to go direct in Europe, as well as we’ve been putting up some pretty good numbers along the way as you can see here. Good gross margins and good anticipated continued growth.
So this is what we do. We repair Aneurisms and we do that through catheter-based therapy. Years and years ago if you had an Abdominal Aortic Aneurism, there was really one way to fix it and that was through an open incision from above the bottom of your Sternum, down below your belly button, what we call Open Surgical Repair.
The picture over on the right, they sew in a synthetic graft to by pass that disease area, and you can see over on the left that aneurisms below the renal arteries and a catheter inserted in through the patients right groin and a stent graft, or an endoluminal graft deployed, which was designed to realign the aorta from the inside out in a less invasive type of approach.
Today that approach, or what we call EVAR is used in about 65% of the aneurisms treatments that are performed in the United States. 35% are still treated with Open Surgical Repair. The primary reason there are still 35% open repair disease aneurisms come in a lot of different shapes and sizes and the currently available technology just can’t treat that wide range of anatomy and I’ll touch on that as I go through the presentation.
Here’s the primary competitors in this market. And you can see I have got this into two categories. One, the guys on the right, which includes WL Gore, Medtronic and Cook. Both Gore and Cook as you probably know are private companies and you know Medtronic.
All three of those devices really evolved out of the original surgical graft technology. They took those surgical grafts; they sewed them on stents and put them down into delivery catheters and inserted them through the groin. Our device, which was the last to market or fourth to the US market is fundamentally different and you can tell by looking at it, it’s something different. And what it is, is all of these other devices are delivered through the vessel and they are deployed in the anchor into the Aortic wall right around the renal arteries. Notice hooks and barbs that are catch and the device hangs. What you don’t want to do is have that fixation loss, okay.
So these devices are all top down. They get this over here if you look at the right, this Cook device. That goes in first and then they add the limps from the bottom. So their fixation comes from these attachments, these hooks and barbs. Our device, the Endologix device over on the left actually is designed to sit on the patient’s bifurcation. So we inserted it in the groin but we pulled the device down and actually fit it right on the bifurcation where the aorta splits off and goes down the leg.
So we get our fixation and our stability from the patient’s own anatomy. And it’s really the only device that returns the aorta back to its native configuration. So unlike the other devices that are top down, we are bottoms up. The benefit is that we can’t have any migration. There’s nowhere for that device to go. It sticks and so we don’t have the same kind of movement as the other devices.
And the other thing that’s unique is that by sitting on the bifurcation, we preserve that bifurcation, which is important for our peripheral arterial procedures. So if you ever had a peripheral stent or a peripheral angioplasty. The way they perform those procedure is they’ll enter the patient from one groin, they’ll go up and over and they’ll treat from the other side. It’s called the crossover intervention. Once you put in any one of the competitive devices, you no longer can do that. You can’t take the catheter up and over that. And even if you could you wouldn’t want to pull down on that device and run the risk that you are going to pull the device down out of the aneurism.
So our device is very unique and it’s got excellent clinical data and it’s been really responsible for driving the growth that you can see here in this chart. So the midpoint of our guidance this year is $104 million. We’ve grown very nicely over the last few years and the core business is doing well. But probably what is most exciting about the company as of late is the pipeline.
So we’ve got a good core product that’s taking market share and growing nicely. Where we focus on are the remaining unmet needs which are these three categories. One is Short Aortic Neck. The aortic neck is that small space just below the renal artery. This is between the renal artery and where the aneurysms take off from where the native aorta. That area is kind of the landing zone for all of these devices and that’s where you either get seal and in the case of the other devices you get fixation. If that area is too short or too angled or too diseased, those patients can’t be treated. And about 20% of the diagnosed aneurysms today don’t have an adequate neck for them to be candidates for EVAR. So they have to go to surgery. And in some cases, they are not even surgical candidates. So if you have an aneurysm with an inadequate landing zone at the aortic neck and you are not a surgical candidate, you don’t get any treatment at all, which is a shame. So one of the big limitations is these aortic necks and I will talk about that in a minute.
Next is Secondary Interventions. As I mentioned these devices can fall out of place or they can get leaks from above or below or actually you can even get leaks from aside. These aneurysms is not uncommon to have a side branch that feeds the aorta that continues to supply blood flow to the anatomy and can still pressurize that sac and lead to rapture. Because of those risks, if you are a patient and you get an EVAR device, you go through a lifetime of surveillance. You’ll come back every year and either get a CT scan or go through duplex ultrasound to make sure that you don’t a leak or that your device hasn’t moved. So one of the meaningful unmet needs in the space is to develop a device that completely seals the sac so the patients don’t have to sign up for a lifetime of surveillance.
And then lastly, percutaneous. Percutaneous access. What that refers to is with all of the other devices today, to insert these catheters up into the patient’s aorta you have to do bilateral groin incision. You have to cut down in both sides of the patient’s groin to access the femoral arteries to take up the catheters. There’s a growing trend right now in the market place to add percutaneous access, which is doing those procedures without making a surgical incision at all, but just doing them over a guide wire.
So just quickly, for these short aortic necks and what we call juxtarenal aneurysms, which is like the CT you see over here on the right, we’ve developed a device called Ventana. And it actually uses our current infrarenal device as a platform. The branch is up to and includes the renal artery so we can now treat these patients with the short aortic necks. That device is completed enrolment in a clinical trial in Europe and we are in the follow up phase of that and we hope to get CE mark for that device in Europe by the end of this year. In United States, that product is already under investigation with an approved IDE and we are currently enrolling patients and hope to complete enrollment around the end of this year or the first part of next year leading toward an approval in 2014.
For the next one, secondary Interventions. We have been developing a new technique internally to seal the aneurysm sac. Nobody has done anything like that. Everybody has used these kinds of combinations as stents and grafts and we are making good progress. The only other company that was doing anything like us was a little startup company in Palo Alto and we acquired them about 18 months ago, integrated their technology together with our program and developed a device that we now call Nellix, which is really the first and only EVAR device that was designed to completely seal the aneurysm sac. So it’s really shown very promising clinical results so far at preventing any kind of endo leaks. It also treats a wider range of anatomies than any of the other devices and frankly it’s substantially easier to use. This is an exciting new product, gets a lot of attention.
And then lastly, percutaneous. We completed enrolment in February of this year of the first ever randomized trial comparing open groin incision to percutaneous EVAR. We partnered with Abbott on that study. They have a closure device. We’ve just completed the follow up on that and are rolling up the data to submit in a P&A supplement and hope to get an indication for a percutaneous EVAR indication by the end of this year. So we’ve got exciting programs going on in all of these key categories.
When you think about market expansion as I mentioned in the United States, 65% of the diagnosed aneurysms are currently treated with EVAR. We think that with the introduction of Nellix, because it can treat a wider range of patients, we’ll be able to increase those numbers of patients that are candidates for EVAR from 65% up to 75%. And that additional 20% that I talked about for Ventana, those patients with inadequate aortic neck or no aortic neck, that’s an additional 20%. So we think we can expand the market from 65% treatable to well over 90% treatable over the next several years. And not only are we well positioned to capture share in that incremental market expansion, but we think we can go after a lot of share capture in the existing market as well with our technologies.
Here is the pipeline. This is a busy slide. I won’t talk about every one of these. But you can see if you start over on the left, AFX. That’s the product that generates all of the sales that you’ve seen in our numbers so far. We just introduced that in the first part of this year in our new European direct sales force. We’re in the process of building that sales force. You can see Nellix is slated towards CE mark in Europe around the middle of this year. We will start initially with a very, very limited market introduction in selected centers and then transition to a full market introduction in 2013 with that device.
IntuiTrak in Japan. That’s actually a generation behind where we’re at in the US. They currently in Japan sell our first generation device so we’re expecting to get approval this fall for IntuiTrak in Japan. Ventana, that again is that device that treats these juxtarenal aneurysms in short aortic neck. We expect to get CE mark for that device by the end of this year in Europe and then PEVAR. That’s the percutaneous indication that I talked about a minute ago where we’ve completed that trial. So we’ve got a very busy pipeline and as you follow these devices out, ROW stands for rest of world. You can see our tentative plans on when and where we’re going to launch these products leading toward in the US a Ventana approval and introduction in 2014 and Nellix in 2015.
So we’ve got a busy several years ahead of us. This is what we think the markets are going to look like over the next five years. The Infrarenal market, these are aneurysms below the renal arteries. We expect that market to be about $1.6 billion opportunity. The orange piece of the pie there, that’s this juxtarenal segment. There is one competitive device in that category already. The difference is though that’s the custom made device. So what they do is they get a CT scan, they convert it to a CAT drawing and then they actually make a custom device fitted for that patient. The problem is it takes six to eight weeks lead time. It’s very, very expensive and it’s complicated to put in. Ours is the first real off the shelf device. So we’ve developed a device that can accommodate a variety of renal anatomy and so we think that that segment of the market is going to grow dramatically. And then the yellow slide is thoracic.
So today we have products for infrarenal and juxtrenal and we plan in the future to go into the thoracic aorta. So we’ve got well over a $2 billion market opportunity for a company that’s in the range of $100 million in revenue this year. We’ve got a long, long way to go and it’s great because we can focus just on one blood vessel. My experience is that you can pick out a large and growing market and stay focused that you can do very well in that.
So here’s our guidance for this year. We plan to achieve revenue between 102 and 107 which represents 22% to 28% growth over the prior year. $0.12 to $0.18 lost this year. Although we do expect to show quarterly improvements over the course of this year to be fully profitable next year and we do expect to grow at least to 25% or better over the next five years based on our pipeline. So just to wrap it up, very strong core business, great pipeline, a good market with tremendous continued growth prospects.
And with that I’m happy to field any questions.
How is pricing (inaudible).
John D. McDermott
Yes. So the question is how is pricing in the core business? Actually it’s been better than you would expect. Now, most of it has come from product introductions. So last year at this time, or actually a little earlier than this time, Medtronic had introduced a new device that they call Endurant and they took a pretty good premium with that introduction. We launched AFX in August and we also got premium. So what you’re seeing is some improving price typically associated with product line introductions. In our five year forecast we don’t expect to continue to be able to capture much price. Right now the average selling price is in the United States. We’re kind of in the $13,000 to $14,000 per procedure. We forecast that to be flattish over the next several years for the pressure that you’ve mentioned.
We do hope and expect to get some premiums on Nellix because of its ease of use and its capability to treat aneurisms that other devices won’t be able to. But we’ll have to see. We won’t price it at a point that would compromise our ability to capture share. But so far pricing has been good with some positive and this year they just announced the Medicare codes for next year and they’re planning a 2% increase in the EVAR codes for reimbursement. It’s a well reimbursed procedure. It has been for a long, long time for those of you who aren’t familiar with the state. It’s actually this legislation that goes back many, many years called the payback. So if you are a patient and you’re coming into Medicare for the first time and you’re a smoker or you have any history in your family of aneurism disease, you get a onetime free abdominal scan looking for an aneurism.
Other questions? Yes.
What are your market shares in the US and the EU right now?
John D. McDermott
In the US I think we’re about 11% based upon the most recent market size information that we have. In Europe we’re less than five. So the European market is about $250 million and last year we – if you looked at our 2011 revenue it was about $4 million. So last year in September we used to service Europe through a distributor. We had one main distributor and a few other small distributors. We announced our intention last year to go direct primarily because with Nellix and Ventana and AFX we now have enough of a bag to support the investment to go direct and we wanted to launch all these new technologies through our own team. So even though we’ve got a small share I will tell you they had a very good first quarter for such a small team. I’m pleased with their early results. We expect to finish the year probably with 15 to 17 clinicals and reps on the ground and a total organization of around 28 to 30 people and then we’ll continue to build that out over time.
If the AFX takes the shape of the aorta and it sits at that bifurcation as you were saying, how does it actually attach to the aneurism at the top?
John D. McDermott
So it doesn’t – once that it sits, effectively it sits on the bifurcation. The way it – it doesn’t really need to attach so much as it needs to seal. So it seals with radio force and actually if I go back you’ll notice something that looks a little bit different with our device than the other devices. See how that bulges out a little bit on the top? We’ve developed a graft material that is highly conformable. So we put that in that, if you look at that that’s a two piece system. So the bottom piece which has good longitudinal integrity is positioned on the bifurcation and then we come up with a second piece that overlaps into that main body and that top piece is very, very conformable graft material which seals and conforms any irregularities in the aortic neck and it also has a cobalt chromium scent on the inside which provides radio force. So it’s not hanging like the other devices. But it gets a very good seal at the proximal edge. That’s how it works. It’s a very good device.
Just an anecdote while somebody else thinks of another question. When I came from CR Bard years ago, I ran Bard Peripheral Vascular for many, many years and while I was there I tried to buy this company when it was small and you’ll find that startup at that time the device was really hard to use and it came in a limited range of sizes. But the results were really good. But it was a difficult to use niche product and what we’ve done over the last several years is just invest to really broaden the range of sizes to make the device very, very easy to use and it’s gotten great traction. It’s a good, good device and you’ve seen it from the numbers. And a lot of times people ask me well, what’s going to happen to AFX?
So here comes Nellix and here comes Ventana. What’s the mix of products going to look like? AFX will still be the only device that preserves the bifurcation. So I see an ongoing role for patients that have peripheral arterial disease. AFX is probably a better option. Nellix is great because it treats a wider range of patients. It’s faster and it’s the only thing that seals the sac. I would imagine that would become the workhorse product and AFX would become a nice niche product for certain anatomy and then Ventana will become the device that’s used for these juxtarenal aneurisms in these patients with no other option proximally. So actually the portfolio complements itself pretty nicely.
Any other questions? Okay, good. Well, thanks very much.
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