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Executives

John McDermott - President & Chief Executive Officer

Bob Krist - Chief Financial Officer

Zack Kubow - The Ruth Group, Investor Relations

Analysts

Imesh (ph) - Piper Jaffray

Steven Lichtman - Oppenheimer

Charles Croson - Sidoti & Company

Chris Cooley - Stephens Inc.

John Putnam - Capstone Investment

Jake McRobie - BMO Capital Markets

Endologix, Inc. (ELGX) Q3 2012 Earnings Call October 25, 2012 5:00 PM ET

Operator

Greetings and welcome to the Endologix Inc, third quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Zack Kubow of The Ruth Group for Endologix Inc. Thank you Mr. Kubow; you may begin.

Zack Kubow

Thanks operator and thanks everyone for participating in today’s call. Joining me from the company are John McDermott, President and Chief Executive Officer; and Bob Krist, 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 30 days.

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’s 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, October 25, 2012. 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 and welcome everybody to today’s call. We are very pleased with our third quarter results, growing 20% year-over-year despite increased competitive activity and very tough comp from last year when we launched AFX in the third quarter of 2011.

Our international team has done a great job growing sales 170% over last year and clearly demonstrating the benefits of building the direct sales force in Europe. We’ve also made excellent progress with the Nellix program and expect to do our first cases with the enhanced design next month.

I will start today’s call with a quick overview of our results for the quarter, followed by an operational and pipeline update. Then I’ll turn the call over to Bob for his financial review. After that I’ll come back on to discuss our goals for the remainder of the year and into the first part of 2013 and then we’ll open it up for questions.

Global revenue for the quarter was a record $26.7 million, driven by continued excellent clinical results with our current products and interest in our new technologies. In the U.S. sales grew 5% year-over-year, which is in line with our expectations given the recent competitive activity and the significant sales boost from the launch of AFX in the third quarter of last year.

We continue to execute our sales strategy in the field and are effectively gaining ground with new and existing customers. We ended the quarter with 76 U.S. reps and clinical specialists and expect to add a few more by the end of the year.

In Europe, we are making steady progress in building our team and introducing more physicians to AFX. Following on the acquisition of our Italian distributor in July, we began selling through our small team and a network of agents and sub-dealers. With the addition of our new people in Italy, we expect to finish the year with 28 to 32 employees in Europe, of which about 70% will be dedicated to sales and clinical support.

I recently spent several days in Italy with our new team and local thought leading physicians and believe we are off to a good start in solidifying key relationships and laying the groundwork for continued growth. Outside of Europe we also had a very strong quarter as our distributors in Latin America prepared for the market introductions of AFX.

Now switching to the new product pipeline, we have several upcoming milestones that represent incremental growth opportunities. The first is potential FDA approval for percutaneous labeling on the AFX system. As a reminder, Endologix is the only company to run a randomized multi center clinical trial to demonstrate the safety and effectiveness of percutaneous abdominal aneurysm repair.

We completed the study earlier this year and have submitted the PMA supplement to the FDA, hoping for approval by the end of this year. If we receive approval as anticipated, we’ll begin providing training programs across the country in early 2013, featuring through leading physicians demonstrating the best practices learned in the clinical trial. The results from the clinical study are expected to be presented at both the SAVS and the ISET meetings in January with publications to follow.

The second near term milestone is the potential CE Mark for the Ventana finished rated system, which we hope to receive before the end of this year. Once we receive CE Mark, we’ll begin a limited market introduction in selected centers and gradually build a network of trained Ventana users across Europe.

During the quarter we received CE Mark on the current version of the Nellix system, which included several significant design modifications compared to the first generation device that was previously approved in Europe. We view this approval as a positive stepping-stone towards the commercialization of our final design, which we plan to submit for approval in Q1 of 2013.

We have completed our design enhancements ahead of schedule and expect to do our first cases with the optimized device in November, which will allow us to gather clinical experience with the final design, while we complete the testing required for the CE Mark and IDE submissions.

Based on our current timelines, we except to earn CE Mark in the second quarter of 2013 and begin a controlled market introduction in Europe in the second half of 2013. Our plan is to go slowly and work with selected centers across Europe, while we gather more clinical experience and establish one good customer at a time.

The final design of the Nellix system will also be used in our U.S. IDE clinical trial and we expect to file the IDE in Q1 of next year. Based upon the projected timelines for IDE approval, trial enrollment and patient follow-up, this positions us for a potential FDA approval of Nellix in the U.S. in 2016.

Turning to the Ventana U.S. IDE clinical trial, we have enrolled 37 patients to-date and now have most of the study type screening patients. We are currently targeting to complete enrollment of all 122 patients around midyear 2013. The trial protocol includes the one year follow-up period, which would position us to submit our PMA to the FDA in the second half of 2014 and potentially get U.S. approval of Ventana in the first half of 2015.

In the near term we anticipate shown in approval for the IntuiTrak delivery system in Japan by the end of this year. Presently we are only clear to market our first generation delivery system, which we stopped selling here in the U.S. back in 2009. Given that IntuiTrak significantly simplifies the procedure, our Japanese distributor is very excited to begin offering IntuiTrak to its customers.

Once we get approval, we’ll work closely with our distributor to train our sales team and physician proctors with a goal of commencing commercial cases with the IntuiTrak system in Japan in early 2013. We have also received approvals for AFX in Argentina and Brazil and we’ll begin introducing that device with our distribution partners over the next several months.

Earlier this month we held a symposium at the Viva meeting in Las Vegas and another one at the TCT meeting earlier this week. These symposiums highlighted the capabilities of AFX and our new product pipeline, including Nellix, Ventana and PEVAR. These symposiums were well attended and we continue to see strong interest in our innovative pipeline. We expect a similar response at the Veet symposium next month in New York, which will also feature educational symposiums and KOL presentations highlighting our technology.

Overall, Endologix remains well positioned to continue growing, gaining market share and introducing innovative new technologies for the endovascular repair of aortic disorders. We have good momentum in the U.S., driven by the excellent clinical results achieved with AFX and our experienced team of sales reps and clinical specialists.

In 2013 we expect to gain additional market share in the U.S. through our PVAR training initiatives, additional 10 year in the sales force and continued enhancements to AFX. In Europe we are making solid progress in building our commercial team and selling AFX and look forward to the expected limited market introductions of Ventana and Nellix in 2013.

Based up on our results through Q3 and our forecasts for Q4, we are updating our full year 2012 revenue guidance to $104 million to $106 million, which represents growth of 25% to 27%. This compares to our previous full year revenue guidance of $102 million to $107 million.

On the bottom line we continue to anticipate an adjusted loss per share of $0.20 to $0.24, but expect to finish at the low end of this range due to launch related expenses associated with PVAR, Nellix and Ventana. We also have higher than normal expenses in Q4 due to the final Nellix design enhancements and year-end clinical meetings like Viva, TCT and the Veet symposium. These investments will put us in excellent position to continue driving growth as we transition into positive adjusted EBITDA and positive cash flow from operations in 2013.

With that, I’ll turn it over to Bob for his financial review. Bob.

Bob Krist

Thank you John. Good afternoon to all. Today I am pleased to report our financial results and key metrics for the third quarter of 2012; the quarter, which featured, continued strong revenue growth, sequential improvement in gross margin and progress in leveraging expenses relative to sales growth.

Total revenue for the third quarter 2012 increased by 20% year-over-year to $26.7 million and for the nine months ended September 30, total revenue increased by 28% year-over-year to $76.7 million.

Domestic revenue in the third quarter increased by 5% year-over-year to $21.3 million. As John discussed, the year ago period included the domestic launch of the AFX system, which provided a one-time boost to quarterly results and made for a more difficult year-over-year comparison this quarter.

Despite that we achieved a 6% increase in terms of revenue per sales territory during the third quarter, demonstrating the continued success of our strategy to leverage clinical specialists to support cases in order to increase the selling time available to our sales reps. Effectively increasing sales rep productivity, while lowering the cost per case serviced.

Third quarter international revenue nearly tripled and increased by 30% sequentially, driven by excellent progress in Europe. Despite a 12% year-on-year decline in the euro, sales in Europe were up more than three fold compared to the third quarter of 2011 and we’re up by 8% sequentially, despite the typical Q3 seasonal slowdown.

The year-over-year growth comparison now includes our transition to a direct sales force, in Europe, starting in September of last year. Outside of Europe, sales to our distributors in other rest of world markets more than doubled year-over-year and increased by 50% sequentially.

Gross margin in the quarter was 75.9% compared to 78.3% in the third quarter of last year. The decrease in gross margin was driven by a greater proportion of international sales to total sales by the decline in the euro and by royalty payments to CR Bard that has not yet commenced in the third quarter of 2011.

As a remainder let me point out that royalty does not apply to AFX, Ventana or the Nellix product lines, only to IntuiTrak and after 2012, ending showing an approval, IntuiTrak will be sold only in Japan.

On a sequential quarterly basis, gross margin was up by 50 basis points from 75.4% in the second quarter of 2012, despite a less favorable U.S. versus international sales mix and a sequential weakening of the euro exchange rate. That improvement reflects the non-recurrence of inventory adjustments recorded in Q2, relative to the worldwide transition from IntuiTrak and AFX and a declining impact to the Bard royalty.

Gross margin through the first nine months of 2012 was 76.3% compared to 77.8% in the same period of 2011. The largest overall factors, which drove that 1.5 percentage point reduction over the Bard royalty and the euro declined, both of which are now moving in a positive relative direction. This suggests some sequential improvement in the gross margin in the upcoming fourth quarter and a full year gross margin in the range of 76.5% to 77%.

Operating expenses for the third quarter were $27.2 million compared to $22.6 million in the same period last year. Operating expenses for the third quarter 2012 include the $5 million settlement agreement with Cook. In 2011, third quarter operating expenses included a one time, $1.3 million payment for the early termination agreement with our previous distributor for most of Europe.

Excluding both items, operating expense increased by $900,000, it’s over 4%, which compares very favorably to the overall 20% revenue growth and the continued investment in our direct organization in Europe.

Research, development and clinical expenses decreased to $4.5 million from $4.8 million in the third quarter of 2011. As John noted earlier R&D expense will increase sequentially in the fourth quarter due to the Nellix enhancement program and increasing expenses related to the Ventana IDE trial.

Marketing and sales expense grew from $12.3 million in the third quarter of 2011 to $12.7 million the third quarter of 2012 due to expenses related to developing our direct sales organization in Europe. Looking at the U.S. alone sales and marketing expense in the quarter were $1.1 million or 9% below the third quarter of 2011. Marketing and sales expenses will also increase sequentially in the fourth quarter due to major trade show expenses and preparation for the launches of PEVAR in the U.S. and Ventana in Europe.

Finally G&A expense grew from $4.2 million in the third quarter of 2011 to $4.9 million in the current quarter. All of the increase was in Europe, while G&A expense in the U.S. was 2% lower than in the third quarter of 2011.

So to summarize the expense leverage which is occurring in the U.S. but which is difficult to see in the consolidated reports, SG&A expense that is sales, marketing, general and administrative expenses for the U.S. business only and also net of the litigation settlement and business development charges decreased from 2011 by 8% for the third quarter and for the nine months year-to-date period, U.S. only SG&A expense increase by just 5% relative to U.S. sales growth of 22% for the nine month period.

Overall for the third quarter 2012, our GAAP net loss was $5.9 million or $0.10 per share compared to a net loss of $6.6 million or $0.12 per share for the third quarter of 2011.

In the third quarter the Nellix contingent payment liability, which is a non-cash item and is solely payable in shares of Endologix common stock decreased by $1 million and that was almost entirely related to the decrease in Endologix stock price from the previous measurement date at June 30. Excluding that impact and the $5 million Cook settlement or on an adjusted non-GAAP basis we reported a net loss in the third quarter of 2012 of $1.8 million or $0.03 per share, compared to an adjusted loss of $0.07 per share in the third quarter of 2011. For the nine-month period we recorded an adjusted net-loss in 2012 of $10.1 million or $0.17 per share compared to $0.24 per share one year ago.

And now turning briefly to the balance sheet, accounts receivable days outstanding was 60 at the end of the third quarter 2012, compared to 59 days at the close of 2011, virtually unchanged despite an increasing mix of international accounts which are traditionally slower to pay.

Inventory turnover remained at 1.2 turns at quarter end unchanged from June 30. We expected inventory turnover will improve gradually in future quarters, but remain in a range from 1.2 to 1.4 turns through the launches of the Ventana and Nellix products in Europe in 2013.

During the third quarter we used $3.5 million in cash. Most of that was related to increasing accounts receivable balance in accordance with sales growth and to complete the acquisition of our distributor in Italy, a transaction which closed in July.

We ended the quarter with a cash balance of $47.7 million and an unused $20 million revolving line of credit. So despite the pending $5 million payment for the settlement of the Cook litigation, our cash position is strong. In addition, we expect operating cash to turn positive during 2013.

So in summary, we are leveraging nicely our market share gains and sales growth in the United States. The outstanding progress made by our international team is validating the substantial investment we are making in Europe and we have the necessary financial resources in place to support the continued execution of our growth strategy.

And with that, I’ll turn the call back to John.

John McDermott

Thanks Bob. We are pleased with our results in Q3 and the strength of our core business. The new product pipeline looks very promising and we are well positioned for continued growth and market share gains.

Following our key goals for the rest of 2012 and into the first part of 2013, first to achieve our sales guidance by driving AFX in the U.S., Europe and Latin America and rolling out IntuiTrak in Japan.

Second, gain CE Mark approval for Ventana and begin our limited market release in Europe. Third drive enrolment in the U.S. Ventana IDE clinical study. Fourth, gain FDA approval for percutaneous EVAR and prepare the physician training programs for 2013 and lastly, complete the testing, the regulatory submissions for Nellix.

By achieving these goals we will continue on our path towards becoming the leading innovator in endovascular aneurysm repair market. We look forward to keeping you posted on our progress and are planning to participate in the Lazard Healthcare conference, Stephens Investor Conference and the Piper Jaffray Healthcare Conference in November and the Oppenheimer Healthcare conference in December. We look forward to seeing many of you there.

With that we’ll open the call to questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Brooks West from Piper Jaffray. Please proceed with our question.

Imesh (ph) - Piper Jaffray

Imesh here. My first question is I was just wondering how the impact, I guess has competitive trialing in the U.S. has been going.

John McDermott

Well, I’m not sure I would attribute, that we can put a specific number on competitive trailing. We, as we evaluate our sales mix by customer, we don’t see any real losses. So I would say any softening, any softness we saw in Q3 was primarily attributed to seasonality at this point and may be some impact from the Medtronic Endurant II and also a little bit of pull-though from Cook. But I would actually say, most of the Q3 results in the U.S. were seasonality driven.

Imesh (ph) - Piper Jaffray

Okay, thank you. And then OUS, obviously a great job there. Just wondering, are we going to continue to see the rates growth at the same sort of places that the expectations and I know you plan on adding a few reps there? Are you getting close to where you think you need to be for critical mass?

John McDermott

Well, I do think we’ll continue to see good growth. The percentages will change over time as the base number gets bigger. And in terms of headcount in Europe, right now we’ve got 26 people in Europe in terms of the total organization, about half of them can support cases, by the end of this year we expect to be between 28 and 32 of which roughly 20 should be capable of support cases.

Just keeping in mind that we’ve got a six-month training program. So not everybody is certified to do cases immediately, but we should exit this year with a good size time that we will continue to add to next year. So we do see good growth prospects for the rest of this year and well into 2013 and 2014.

Imesh (ph) - Piper Jaffray

Okay, great. And then just one final question; as far as Nellix goes, have there been any updates as far safety. Has it still been, being evaluated for I guess the second-generation version?

John McDermott

Well as I said in the comments, we’re actually, we are a little ahead of schedule on the design enhancement and in fact plan to do some first cases with what we would consider the final commercial design next month. So the progress has been good, the teams worked hard, we liked the design, we feel good about it. We just need to complete some of the other testing that’s required for the regulatory submissions, which we plan to have down and submit in Q1, 2013.

Imesh (ph) - Piper Jaffray

Okay. Well just what I was trying to get at there, as far as the thrombosis that have been seen before, if there were any updates as far as that from the earlier generation?

John McDermott

No updates, really. Our focus, we did some events in the past with the previous design. We feel great about the new design and we are all systems ahead.

Imesh (ph) - Piper Jaffray

Okay, great. Thank you.

Operator

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

Steven Lichtman - Oppenheimer

Hi. John, just on the U.S., in terms of the sale force, I mean you have been pretty disciplined in terms of the growth there, as you have been focusing on Europe. At least my last check I think you were only in about a third of potential accounts. At what point can you flip the switch and start growing that U.S. sales forces more appreciably again, as you sort of maybe slowdown the growth in Europe in terms of hiring.

John McDermott

Yes, I think we’ll still stay fairly measured Steve with the U.S. sales force adds. We finished Q3 at 76. I think we’ll finish Q4 around 80, so we’ll show a little bit of growth; that’s about 8% increase in total sales and clinical folks over 2011.

We do plan a few more adds next year, not anything significant at this point, because we do see more growth opportunity in Europe and just in terms of needed geographic coverage, but I would expect us to still see us add mostly on the clinical side over the next 18 months to 24 months and build our average territory size as bigger. In preparation for the future launches of Nellix and Ventana, we’ll be well positioned when those products hit the market.

Steven Lichtman - Oppenheimer

And for Nellix, its great news that you guys are ahead of plan. In terms of what you are going to be doing over the next few months, how many cases do you need to do before you feel comfortable submitting that supplement in the first quarter?

John McDermott

Yes, there is no magic number; there is no regulatory required number. We’ll probably do somewhere between 10 and 20. We got good follow up on a lot of other patients. We’ll be looking specifically at thrombosis, but we really don’t expect to see that, but we’ll look at that carefully. But I would say 10 to 20 cases going as we expect will be well positioned going into the first part of next year.

Steven Lichtman - Oppenheimer

Okay, and then just lastly in the U.S., obviously PEVAR will be incremental next year. AFX too, is that still on the docket at some point next year to be an incremental add to the portfolio in the U.S. and when about it in the second half.

John McDermott

In the second half, I can’t tell you exactly when second half and it won’t be a full-blown new system. It will be some enhancements to the current device, but we do think it will offer some incremental clinical benefits and you should look for that. We’ll give you more visibility to that in the first part of the year, but right now we are thinking in the second half.

Steven Lichtman - Oppenheimer

Okay, great. Thanks John.

John McDermott

Yes.

Operator

Our next question comes from the line of Charles Croson from Sidoti & Company. Please proceed with your question.

Charles Croson - Sidoti & Company

Hey guys, how is it going? Thanks for taking the questions.

John McDermott

Sure.

Charles Croson - Sidoti & Company

So first one, I guess following-up on that AFX 2, that’s scheduled to go in the U.S. first right.

John McDermott

That’s correct.

Charles Croson - Sidoti & Company

Okay, and then the next question I have, I guess just because we are modeling a little bit more growth here for the U.S., maybe admittedly not counting fully for that seasonality. My question is just how confident are you that next quarter you won’t see some more competitive pressures and just kind of tying that in with your guidance.

John McDermott

Well, we did tighten the guidance range as you can see and here today we think that the range of 104 to 106 looks good. So I think we’ve made some estimates about seasonality and also integrated continued competitive activity, but based on what we know today, we think that’s a good range.

Charles Croson - Sidoti & Company

Okay, all right, that’s helpful. And then just two last quick ones here, how is pricing for the quarter?

John McDermott

Pricing was fine, we didn’t see anything. Bob, I don’t know if you have any color to add to that.

Bob Krist

Actually its really not measurable, but it was up a few dollars per case relative to Q2.

Charles Croson - Sidoti & Company

Okay, that’s helpful then. And then finally on the device tax, we’ve been hearing some more comments out there that there is a change that we get pushed back a year or even out right. Have you guys heard that sentiment or do you have any comments on that?

Bob Krist

Well, we are hopefully that that will be the case, but we are not expecting it to be the case. So we are planning for the implementation of what we need to do and trying to manage it in the most optimal way that we can. It would be a good outcome if it were deferred or eliminated, but that’s not our expectation.

Charles Croson - Sidoti & Company

I see, and do you expect that to mostly hit on the cost of goods sold or will that go forward through to the operating side.

Bob Krist

We haven’t completed our evaluation of that, but I would say we are leaning toward having that be booked in operating expense.

Charles Croson - Sidoti & Company

Okay, all right, that’s helpful then. That’s Bob. I’ll follow up after the call and thanks for taking the questions.

Operator

(Operator Instructions). Our next question comes from the line Chris Cooley from Stephens. Please proceed with your question.

Chris Cooley - Stephens Inc.

Thank you. Can you hear me okay.

John McDermott

Hey Chris.

Chris Cooley - Stephens Inc.

Thanks so much for taking the questions for this evening. Just kind of curious, two areas of focus. When you talk about the design enhancement on gen two of Nellix now or are current version of the Nellix proceeding ahead of schedule, can you elaborate on those design changes. I know early on you commented on the limits, but can you just give us anything additional regarding what those enhancements were and why you are now very confident in that design as a go forward? And then I have just a quick follow-up, thank you.

John McDermott

Yes Chris, we’ve decided just based upon the proprietary nature of the device and the evolution of what we’ve learned over the many years that its been development, not to provide too many specifics about the various design enhancements as to prevent providing followers with a road map. So we are not trying to be evasive and not share the information, but it’s really that, the reason that we are not getting too specific with the nature of the enhancement.

The reason that we are bullish on these enhancements is they draw from some of the prior device features. So we got a reasonably good feel for what to expect. So we’ve kind of borrowed a little bit from past iterations and integrated some of that into the latest version, so that’s why we are confident, but we are not really going into too much detail on exactly what we did.

Chris Cooley - Stephens Inc.

Understood, understood and then just as a quick follow-up, this week here at TCT, I believe it was actually on Tuesday, the breakfast symposium you all hosted, and we saw some fairly impressive economic data when you saw the use of EVAR versus open surgical care, which I think we are all pretty familiar with. But furthermore we saw how that could enhanced with PEVAR.

Could you talk to us a little bit about how you see PEVAR? I know you said you thought it would be additive in terms of the company’s total share. But does this help in pricing as well, just in terms of durability of existing pricing. Can you get a premium when you bundle that, the prolog going forward, just kind of help us kind of quantify how we should think about that and its impact on the 2013 outlook. Thanks so much.

John McDermott

Yes, so just to make sure I understand the question, its regarding EVAR economics in the context of PEVAR.

Chris Cooley - Stephens Inc.

Correct, thanks.

John McDermott

Okay, I think the biggest impact Chris will be on procedure time. So the data has not been published or presented yet, but there is an expectation that there would be some procedure time advantage over open groin procedure. And depending upon the numbers that you use and the sources, there is good evidence that any blocks of time, whether its 10, 15, 20 minutes, can really make a meaningful reduction in the overall cost of the procedure, that’s where I think PEVAR provides the greatest economic advantage.

I don’t think it’s going to get people out of the hospital sooner. You might see small numbers there, but not anything statistically significant. I think the biggest advantage is going to be procedure time.

Chris Cooley - Stephens Inc.

Understood.

John McDermott

And it relates to a bundling. The way that the arrangement is with that, but they will continue to sell their prolog device directly and we’ll sell our device directly. So there isn’t any – we are not distributing that product or anything more integrated. We are collaborating on the physician training.

Chris Cooley - Stephens Inc.

Understood. Thanks so much.

John McDermott

You bet.

Operator

Our next question comes from the line of John Putnam from Capstone Investment. Please proceed with our question.

John Putnam – Capstone Investment

Yes, thanks very much. John without beating a dead horse, have you seen any pickup in October from the slower seasonality of the third quarter?

John McDermott

Yes.

John Putnam – Capstone Investment

Okay thanks. That’s all.

Operator

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

Jake McRobie - BMO Capital Markets

Good evening and thanks for taking the question. This is Jake in for Joanne. I was just wondering on the cost of good sold side, if you could break out the gross margin impact from FX versus borrowed versus the OUS ramp this quarter.

Bob Krist

Sure, I’ll fill that one. So in the quarter the impact of the year-over-year decline in the euro, which was close to 12% on a quarter-over-quarter average bases, that was about a 90 basis point impact.

The Bard royalty was in the range of a point to a point and a half and the balance was accounted for by this relatively faster rate of growth internationally versus in the U.S.; and of course the international revenue is a blend of sales to distributors and direct sales in Europe and while the margins are better on the direct sales in Europe, there is still less good that they are in the United States. So that relative mix of geographies is what accounted for the balance to the 2.4-point decline.

Jake McRobie - BMO Capital Markets

Very helpful, thank you. And then just on the ramp in Europe and international sales, was there stocking this quarter that would not be repeated or is this sort of a sustainable level that you are looking to grow from.

John McDermott

There is not much stocking in Europe as we are building the direct sales force. We’ve got some sub dealers in Italy, but actually most of that wasn’t, there wasn’t much growth there. So most of what you are seeing at this point in Europe is direct. There are some dealer markets, but I wouldn’t say they materially influenced the growth number.

Jake McRobie - BMO Capital Markets

Thank you so much.

John McDermott

Your welcome.

Operator

There are no further questions in the queue. I’d like to turn the call back over to management for closing comments.

John McDermott

Okay. Well, I’d like to just thank everyone for joining the call today and for your continued interest in Endologix. We look forward to seeing you at the upcoming conferences and keep you updated on our progress. Have a great evening.

Operator

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

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