Endologix's (ELGX) CEO John McDermott on Q3 2016 Results - Earnings Call Transcript

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About: Endologix Inc (ELGX)
by: SA Transcripts

Endologix, Inc. (NASDAQ:ELGX) Q3 2016 Results Earnings Conference Call November 1, 2016 5:00 PM ET

Executives

Zack Kubow - The Ruth Group

John McDermott - CEO

Vaseem Mahboob - CFO

Analysts

Brooks West - Piper Jaffray

Rick Wise - Stifel

Chris Pasquale - Guggenheim

Joanne Wuensch - BMO Capital Markets

Jason Mills - Canaccord Genuity

Steve Lichtman - Oppenheimer

Glenn Novarro - RBC Capital Markets

Ravi Mishra - Leerink Partners

Operator

Greetings and welcome to the Endologix Incorporated Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Zack Kubow of The Ruth Group. Thank you, please 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 risk and uncertainties.

For discussion of Risk Factors I encourage you to review the Endologix’s Annual Report on Form 10-K and subsequent report that’s 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, November 01, 2016. Endologix undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this call.

With that said I’d now like to turn the call over to John.

John McDermott

Thanks, Zack, and good afternoon, everyone. And thank you for joining us today for Endologix’s third quarter 2016 conference call. This afternoon I’ll provide a brief overview of our third quarter results and key business updates. Then I’ll turn the call over to our Chief Financial Officer, Vaseem Mahboob; for a review of our third quarter financial results, our 2016 guidance and an update on our synergy plan from TriVascular merger. After Vaseem, I will come back on to provide an overview of our top priorities and then we’ll open up the call for questions.

Starting with the third quarter global revenue was $52.1 million representing 10% pro forma constant currency growth in the third consecutive quarter of good top line results following the merger with TriVascular. These results are due to a successful merger integration which is now mostly behind us along with our broad and innovative product portfolio supported by our high caliber sales, clinical marketing and medical affairs professionals.

In U.S. revenue was $36.3 million representing pro forma growth of 9%. During the quarter we continue benefit from the launch of AFX2 which began in the second quarter. We also made excellent progress in the training and certification of our U.S. sales team on Ovation and now have over 80% of the team certified. This keeps us on track to have the entire U.S. team certified on Ovation by the end of the year which is particularly important given the very positive results from the Ovation LIFE study that we announced at VIVA few weeks ago. Highlights from this 250 patient multicenter study include a low 30 day major adverse event rate of 0.4% which is the lowest ever reported in the history of EndoVascular Aneurysm repair. No ruptures, no conversions or secondary interventions and 99% freedom from type 1 Endologix and a 30 EVAR hospitalization readmission rate of .16% which compares to 8% from the American Colleges Surgeons – National Surgical quality improvement program. These results are outstanding and we think will help drive the adoption of Ovation in the U.S. and other markets over the next year.

Outside of the U.S. our third quarter revenue was $15.8 million representing constant currency pro forma growth of 12% which compares to international market growth of about 6%. During the quarter we also treated the first patient with the Ovation Alto system in New Zealand, this represents an important milestone towards bringing this next generation version of Ovation to the market. Ovation Alto has the potential to expand the addressable EVAR market by treating AAA patients with short and challenging aortic necks which represent a meaningful segment of the underserved complex AAA market. When available Ovation Alto is expected to provide the broadest indications of all interregnal EVAR devices in the world.

On the clinical front, we recently completed enrollment in the ASCEND study which is a physician led trial on the on Nellix with brand stenograph for the ChEVAS procedure. The study enrolled 187 patients and the results to be presented at the meeting comparing ChEVAS to other treatments for complex aneurisms.

In addition we remain on track to complete enrollment in the 225 patient LUCY study by the end of this year. LUCY is a study innovation and patients with challenging aortic necks and small access vessels. Our LEOPARD clinical study is also on track and expected to enroll about 400 patients in the first quarter of 2017 and represents the first head-to-head clinical trial in EVAR comparing AFX against Gore, Medtronic and Cook.

On a related note we recently announced that Dr. Matt Thompson will be joining us as Chief Medical Officer in December. We’re excited to have Dr. Thompson join the Endologix leadership team, as many of you know from attending various medical meetings, he is an international thought leader in vascular surgery and endovascular therapies. His deep experience treating the wide variety of aortic conditions will benefit our clinical program, physician training initiatives and product development activities. In addition Dr. Thompson is one of our most experienced [indiscernible] and clinical investigator which will be valuable as we continue to advance EVAR in the global market.

Regarding Nellix, we recently ran an updated data cut from the IDE clinical database and noticed an increase in migration in aneurism enlargement in some patients with two year follow up. We’ve learned that migration with Nellix can occur patients with small [indiscernible] and a lot of thrombus because there isn’t enough space to inject sufficient polymer to support the stent. Our solution is a simple update to the patient’s election criteria that measures the ratio of an aneurism diameter to the flow to ensure there is enough space for polymer. To further minimize migration forces and address aneurism enlargement we’re also reducing the aortic neck diameter indication from 32 millimeters down to 28 millimeters and will now require a distill iliac seal zone of 10 millimeters which is standard for EVAR.

When we examine the IDE data for patients that fit within the sub dated selection criteria we see extremely positive safety and durability results after two years which gives us confidence that Nellix can be a leading device in the abdominal aortic aneurysms. Keep in mind that unlike other EVAR devices Nellix has the potential to treat both traditional and complex aneurisms. So this refinement of indication only affects the subset of the traditional aneurisms that are easily treated with Ovation or AFX.

In terms of sales impact we may feel little softening with Nellix’s position adopt a new guidelines, but we still expect it’s achieved solid growth in the fourth quarter due to the depth of our overall product portfolio. In terms of the U.S. PMA, we achieved the clinical endpoints in the IDE share dilated clinical data with FDA. We’ve also provided them with our updated patient selection criteria and have had positive discussion so far. Nellix PMA approval time lines are unchanged although we think a panel is more likely now given the updated indications. We estimate the panel meeting will be in April or May which will lead to a potential PMA approval in the third quarter of 2017.

For the Nellix gen two device we hope to begin enrolling in the cap around the end of this year and will provide an estimated time line at our Investor Meeting scheduled for November 17 at the VEITH meeting in New York.

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

Vaseem Mahboob

Thank you, John and good afternoon everyone. As a reminder unless otherwise indicated the comparisons made in my remarks to financial results for the third quarter of 2015 will be on a pro forma basis to include the results of those Endologix and TriVascular in the quarterly period.

Starting with the revenue, total revenue in the third quarter 2016 was $52.1 million, a 10% constant currency increase compared to pro forma revenue of $47.7 million in the third quarter 2015. U.S. revenue in the quarter was $36.3 million which represents a 35% growth as reported and a 9% pro forma increase versus last year Q3. U.S. results were supported by the launch of AFX2 and our increased trust selling opportunities with an expanded portfolio.

International revenue was $15.8 million which represents growth of 40% as reported and up 12% on a constant currency pro forma basis for the same period last year. We saw some softness in Europe outside of the normal seasonality primarily driven by reduction and reimbursement in Poland and security issues in Turkey. We will continue to monitor these issues which may continue to have a near term impact. On a positive note we’re pleased that the Ovation business is gaining traction in Europe and came in ahead of plan in the third quarter.

Overall, we’re pleased with our global sales performance and continue to outperform the market growth in both U.S. and U.S. market. Switching gears to gross margins, gross margin in the third quarter 2016 was 70.9% compared to pro forma 69.3% in the third quarter 2015. Operationally we adjusted gross margin with 74.8% and represents an improvement of 6 points versus last year. This was driven by continued focus on improved processes around face and face up of new products in Europe and international markets, manufacturing efficiencies in both [Indiscernible] facilities. We continue to make investments in manufacturing process capability and leverage sigma and lean tools to drive margin improvements.

We had another strong quarter as related to our ability to manage costs and drive synergy commitments. We’ve made very good progress on our goals and our operating expenses at $48.2 million compared to $53.8 million on a pro forma basis in the third quarter 2015. Third quarter 2016 operating expenses included approximately $400,000 and one-time acquisition related expenses and excluding these items operating expenses were $47.7 million. The lower cost were in-line with the communicator synergy plans and tighter cost controls across the company.

We continue to invest in the key priorities like Nellix CMA our international expansion into Asia and critical new parts development activities. Year-to-date we’ve now incurred a total of $23 million in deal related expenses and are projecting another $1 million in the remainder of this year. This puts us at a total of $28 million in deal related expenses since the announcement of the merger in the fourth quarter last year. On the synergy front we’re on track deliver the $70 million in merger synergies in 2016.

G&A is down 14%, sales and marketing down 10% and R&D down 12% reflecting the cost actions and spending controls we’ve undertaken to achieve our cost goals. We continue to make investments in information technology and longer term continuous improvement projects to drive operating leverage and gross margin expansion.

Our GAAP net loss was $15.2 million or a loss of $0.18 per share in the third quarter 2016 compared to a pro forma net loss of $24.5 million for the third quarter 2015. Adjusted net loss for the third quarter 2016 was $9.1 million or a loss of $0.11 per share compared to adjusted pro forma net loss for the third quarter 2015 of $20.6 million. Adjusted EBITDA for the third quarter 2016 was a loss of $3.8 million or $0.05 per share compared to adjusted EBITDA net loss of $15.1 million in the third quarter 2015.

Moving onto cash, we ended the third quarter 2016 with cash, cash equivalents and investments of $63 million compared to $72.9 million as of June 30, 2016. Now turning to guidance, we plan to increase sales about 10% in Q4 and expect to finish 2016 with a total revenue of $198 million to $201 million. This range is within our original guidance for the year but at the low end of Q4 to accommodate any potential impact from the updated Nellix indication and headwinds in Europe. We’re reiterating our 2016 GAAP loss per share guidance for $1.80 to $1.85 per share and 2016 adjusted non-GAAP loss per share $0.70 to $0.75 per share. This guidance excludes purchase price accounting impact related to the TriVascular merger.

Overall, we had an outstanding quarter with 10% revenue growth, expanding gross margins and operating leverage coupled with the healthy cash position. This reflects the strength of our core business and a solid cross functional effort by the team.

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

John McDermott

Thanks Vaseem. We delivered another positive quarter and are extremely pleased with the TriVascular merger and the unique value proposition we bring to physicians, hospitals and patients around the world. Following our key goals for the remainder of the year and into 2017, first, for Nellix we want to keep the PMA approval process on schedule by providing all the required information and start enrolling the gen device in the cap. Second, we want to complete the Ovation certification of our U.S. sales force and continue building the clinical confidence of our team. We expect more good clinical data to be announced on Ovation at the VEITH Symposium and even more in 2017.

In Europe we just started the launch of AFX2 and have received positive physician feedback. We are looking forward to the introduction of both Ovation Alto and ChEVAS in 2017 and believe these two products can began to open up the complex aneurism market for us.

And last for Ovation Alto in U.S., we expect to receive IDE approval in the fourth quarter of this year and start enrolling patients early in 2017. As we execute our least priorities we expect to deliver significant value to our customers and shareholders while providing patients with the best possible device for the treatment of their abdominal aortic aneurysms. We look forward to meeting with many of you at the upcoming Stephens, Stifel, Canacord and Piper conferences in November and the Guggenheim conference in December. We’re also hosting our annual investor meeting in New York on November 17 at the VEITH Symposium with the details which are posted on our website.

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 with Piper Jaffray, please proceed.

Brooks West

Hi thanks, can you hear me.

John McDermott

Hi Brooks.

Brooks West

John I guess, the first question, can you talk a little bit about customer reaction to the IFU change and anything you can say about prevalence you’ve seen of the migration in the commercial cases you’ve done in Europe today?

John McDermott

Well, I’ll start with the last part of that question, the reported rate of migration in the commercial experience is low single digit. Now, we know however that there tend to be an underreporting in just commercial day-to-day business and the other thing about migration is just an imaging finding. So it’s often the case where you could have migration that doesn’t lead to any clinical tran-sequence. So it’s just one of those things you want to keep an eye on. But what we saw specifically in the two year data cut from the IDE trial is an increase in very specific anatomies, the ones I mentioned previously which are those patients with large [Indiscernible] and small flow movements. And as we’ve outlined we think it’s very easy situation to address this by narrowing for those particular anatomies which are easily treated with Ovation and AFX. The physician response has been very positive, I think people are given us a lot of credit for being so proactive and getting out ahead of it, I’ll say there are some physicians who think we’re being a little conservative but our view is let’s be, let’s think patient safety first and then we can see some ways to open up these patient criteria moving forward.

Brooks West

That’s helpful, thanks. And then, Vaseem on the guidance I just want to understand, can anything else you can share on the scale or the dynamics of the European Nellix business, it sounds like that’s where maybe you’re contemplating some potential weakness and just anything else you can share on kind of how you built up the guidance for Q4 and Nellix dynamics would be helpful?

John McDermott

Hi Brooks, it’s John I can give you a little bit of Nellix color. Of course, as you know we don’t provide the product line reporting but Nellix was a little softer in Q3 and primarily to our continued efforts to pick appropriate patients and we’re also wanting to hold on price. We may see a little more softness in Q4 as the physicians adopt the updated IFU but we expect it to pick up after that as we start the phase II of the global register with the gen 2 device and also prepare for the CE marking of ChEVAS next year. So, we know we’ve got a ton of growth potential with no expert, in the near term we want to focus on making sure we’re getting great clinical outcome and getting the PMA approved.

Vaseem Mahboob

And I think the only thing to add to that is that the softness really that we saw was primarily two things in Europe this quarter. One was the reimbursement change and the other one was impact on IFX business in Turkey because of the security issues there, but nothing till date.

Brooks West

Okay, thanks guys, I appreciate the color.

John McDermott

Thanks Brooks.

Operator

Thank you. Our next question comes from the line of Rick Wise with Stifel, please proceed.

Matt Blackman

Hi everyone, it’s Matt Blackman in for Rick. Can you hear me okay.

John McDermott

Hi Matt.

Matt Blackman

So John, I thought first maybe if you could, maybe size the impact of the IFU changes for Nellix on its addressable opportunity is it, are we talking about 5%, 10% of the population, just maybe in order of magnitude of what you think the changes would be addressable in Nellix opportunity?

John McDermott

Yes, we’ve run the new IFU across the few different datasets and in aggregate math we estimate about 40% of the traditional patients that are diagnosed will be ideal candidates for the new indications with the gen 2 device. And again for those patients that fall outside of the updated indications they’re easily treated with AFX2 Ovation. I think the other thing to keep in mind is that with that’s just for the traditional patients. We think that Nellix with branches or the ChEVAS procedure could be another 20% of patients which will bring the total for Nellix up to 60%. But for just this indication in traditional segment we think that the remaining will be about 40%. We do already have in the works, a more detailed patient inclusion criteria which allows more patients then what we’re talking about here but we want to pressure test that a little bit and make sure that it is incurred as it looks before we roll it out. But I think to get the complete picture, I just strongly encourage folks to join us the upcoming investor conference because I think you’re going to get a great update on Nellix and you’re going to like what you hear.

Matt Blackman

Okay. And then, any sort of future design enhancement whether it’s Nellix 3.0 or 4.0 or whatever that kind of address this migration issue?

John McDermott

We could make some design changes to the current version but candidly we’re already making such great progress on the next generation platform that embodies some of the best elements of all the platforms that we think we can get great results with gen 2 device in its current configuration and just with its narrowing and then we want to move into the next version of products because any changes we make at this point it seems that they could require clinical trials and if we’re going to go back in the clinical we would rather do with the next gen platform. So again, we think we can get great outcomes with these indications, with the current device and plan to stay on that path and then the next generation products, those will include design elements from all three of the current platforms.

Matt Blackman

Okay, that’s very helpful. I’m just going to sneak one last quick one and I think you definitely mentioned that we will see the updated ChEVAS, did you say anything about the updated look of the registry at least, I may have missed that?

John McDermott

What registry, I want to understand last part of your question.

Matt Blackman

The ongoing global Nellix registry, if we’re going to see an updated work, we obviously saw last look at – we’re going to see next year?

John McDermott

Yes, he is on the schedule to present the latest data cut for the global registry for EVAS.

Matt Blackman

Okay thanks so much, that’s it from me.

John McDermott

You bet.

Operator

Thank you. Our next question comes from the line of Mike Weinstein with JPMorgan, please proceed.

Unidentified Analyst

Hi guys, this is Andrew in for Mike, can you hear me?

John McDermott

Yes, we can hear you fine.

Unidentified Analyst

Go back to maybe setting some expectations as far as what’s going to be submitted and whether the data that we will see in the filing will be any difference and may be what we saw in June with the 12 month data given your cutting?

John McDermott

We started to lose you there at the end Andrew, but I think we got most of your question. So, I think it’s important when we think about the PMA approval to keep in mind that you just said which is, we did a successful clinical study and met the endpoints in the trial. So actually, when we interacted with the agency so far on the updated indications they have responded favorably they had some questions about migration and curiosity as it was progressive, so we’ve kind of taken that issue off the table. So we will use all of the clinical data both in the pivotal as well as the cap and enrolling patients as part of the study population that they will evaluate. But, as I pointed out in the prepared remarks when we apply the new IFU to those data, the results are fantastic. So I think you’re going to see some very encouraging clinical results presented at the panel meeting.

Unidentified Analyst

Okay, great. And then just one on gen 2, I don’t know if you provided any color on what the FDA is expecting as far as follow up with the three months, six months, twelve months any help would be – that would be helpful?

John McDermott

Andrew, I hope to have at least an estimate of that at the VEITH meeting we don’t have that complete agreement yet on the number of patients and the follow up. We’re encouraged though that the agency has been positive with us about enrolling the gen 2 device in the cap which has a little under 100 patients remaining and using the updated indications on those patients. We just don’t know at this point if that’s and in itself it’s going to be enough patients, we think it probably is, but we don’t know for sure and we don’t know the follow up. At this point if you look at our product launch schedule that is posted on the website. We estimate that the gen 2 device would get approval about one year after approval for gen 1 based on what we know today. As soon as we get more definitive feedback from the agency, we'll update that.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Please proceed.

Chris Pasquale

Thanks. John, you mentioned that this issue can be clinically silent. How often do these patients need to be intervened to stabilize aneurism and what's the typical treatment strategy in those cases?

John McDermott

Yes. Well, we can use the IDE result as an indication, Chris. We had a rate that was presented in June, I think a 2.3% in no clinical interventions related to migration. So, we'll need longer term follow-up frankly to know how that changes overtime. But assuming the positions are following them with good clinical follow-up and getting good imaging, they can start to detect movements of the devices and assess whether or not they think that movement is going to potentially lead to an endoleak or sac expansion.

So, it will be very individual for each patient. At this point, we don’t have enough long-term follow-up to have a percentage of patients that will require a re-intervention. So, far that number is extremely low for the number of patients that have required any kind of re-intervention related to what we can specifically pinpoint to migration too.

And if they have to do, I'm sorry, I'll answer the second part of your question. If there is a re-intervention, it really depends on how much movement there has been in the device. If there is still adequate knack, they could use the same procedure that we used for other type IA endoleaks which is what we call endoleak sealing where they'll use a coil and glue. And then we'll see if we can work with the agency ultimately to have them be able to use Nellix and Nellix, where we can add Nellix proximal extenders to the top.

That's not in the current protocol but it's something we're interested in exploring with the FDA moving forward. It's a solution that's being used in Europe with good success.

Chris Pasquale

Okay. Thanks, that's helpful. And so, I mean, at this point can you say how many of these this type of patient was in the roles in U.S. pivotal trial. You talked about the one year results which obviously look very good. But just to try and handicap the risk that this causes some deterioration of that data as follow-up progress longer term?

John McDermott

Now, we can't really get into any of the data details at this point in time obviously we have got to preserve the integrity of that data to save that for the FDA and the panel meeting. But what I can tell you is that the re-interventions related to this issue are extremely low.

Chris Pasquale

And just one last one…

John McDermott

And the other thing Chris, I am sorry to interrupt you. The other thing just to point out is that the approval that we will be seeking will be with the new indications. So the data analysis will apply considering the new indications, and those data are exceptional. In fact, we beat all the other EVAR devices one-year results, and when we apply the new criteria even to the two-year KM curves, they are considerably better than any of the EVAR data we have seen now for two years. So we feel good about those results longer term based on the patients that have been out two years.

Chris Pasquale

Thanks for that. I think it is important for people to keep in mind. Just one last one from me, were you actively doing these cases internationally right up until the label change, I thought that this was an issue that had been speculated about as a potential weakness for Nellix even going back a ways here, so were physicians already starting to shy away from these patients in the commercial setting, or was this something that is still actively being done?

John McDermott

I would say honestly probably a mix for physicians that had a lot of experience with Nellix since its earlier introduction a few years ago to the extent that they had experienced any of this themselves, some of them had started to narrow a bit naturally, while we were gathering information to determine what were the optimum inclusion criteria.

So I think there was a little bit of that happening organically and meanwhile other physicians were starting to gradually adopt more ChEVAS. We think that the ChEVAS opportunity will also be very significant, especially when we get the indication for that.

Chris Pasquale

Thanks John.

John McDermott

Yes.

Operator

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

Joanne Wuensch

Thank you for taking the question. Have you seen any change in physician behavior in the ordering or the usage pattern of AFX and Ovation now that Nellix has been pushed out the little bit?

John McDermott

It is a good question. Not that it is noticeable; like Vaseem pointed out we have seen a nice up tick with Ovation in Europe, albeit on the small base. So I'm just thinking of those markets where we have – are you talking specific to the U.S. Joanne?

Joanne Wuensch

I am leaning towards the U.S., but I like the OUS?

John McDermott

Yes. Well, AFX and Ovation have bothdone pretty well as you saw by 9% growth, which is probably three times the market growth in the U.S. So both of those products are clicking along pretty nicely. I wouldn't say it has changed really with any of the timeline shifts with Nellix at this point. And then for OUS may be a little bit more growth with AFX and Ovation, but I don't know if it is really anything I will call a trend. What do you think Vaseem?

Vaseem Mahboob

No, I think Joanne on the OUS side as we have talked about previously, what is really driving some of the Ovation numbers is the indirect channel that had tend to go offline is starting to come back up. I think it is one, and I think in the U.S. what we are seeing is the – as we train our guys on the Ovation product line; we are expecting to see an uptick in those cases and more Ovation adoption across the board here in general. So outside of that no real mix change if you will – that is a trend at this point or that we can comment on, but we will continue to watch that here in Q4 and give you guys an update in the next call.

Joanne Wuensch

And given the numbers it looks as if the integration with TriVascular is doing quite well. Is there anything qualitatively you can share with us particularly around the stability of the sales force? Thank you.

John McDermott

Sure. While the sales team continues to be very stable, low, low, low turnover, well below market averages. So I think everyone is busy integrating – getting good at selling two products and looking forward to adding a third. And what we do see is although we are not yet 100% certified with Ovation, we do continue to get encouraging anecdotes from the field about situations where they are able to provide the best device for an individual patient. So we know this is a winning formula and we look forward to getting the teams fully trained and clinically comfortable with both devices, so that then we are ready to add a third device in the fall.

Joanne Wuensch

Thank you.

John McDermott

You are welcome.

Operator

Thank you. Our next question comes from the line of Jason Mills with Canaccord Genuity. Please proceed.

Jason Mills

Hi John, hi Vaseem, can you hear me okay?

John McDermott

Hi Jason.

Jason Mills

I like to start by going back to Matt’s question just John, your commentary about the addressable market, in light of the [Indiscernible] change, you talked about addressing 40% traditional, and then additional 20% with ChEVAS, could you talk to a little bit about what that has changed from given the upper end of 32 mm, I know it wasn’t all of the patients to begin with, but what sort of degradation in the traditional market are we talking about here specifically, and then as sort of correlated to that question, maybe talk about the addressable market with patient in AFX2 combined, does this change in IFU better enable you to dichotomize the market for your customers and better market the advantages of each product across a certain patient population?

John McDermott

Yes, great question. And the last part of it I think is important that it does exactly that because these specific anatomies that we are targeting, which are these small flow lumen anatomies with a lot of thrombus, these patients tend to not be at high risk for type 2 endoleaks, because they have already got aneurysm full of thrombus, which is evidence for lower blood flows in the aneurysm sac. So AFX and Ovation are great devices to treat those technologies. The harder aneurysms to treat are in fact these larger aneurysms with open space. They are more prone to type 2 endoleaks and they are also more prone to device movement because there is more open space.

So those anatomies are actually much more challenging for EVAR and that happens to be the sweet spot in Nellix. So they are very complementary in terms of the overall portfolio, and in terms of the overall portfolio we don't lose anything. With the tightening we just narrow in on those anatomies that are really ideally suited for Nellix. In terms of what it was before Jason, we are estimating that was in the 50% to 55% range, but we are actually doing some work that we will roll out at the [meeting] to provide kind of a stack up chart.

So you can see specifically how the product portfolio adds up relative to ability to treat patients on IFU compared to our estimates of the competitors. So we will have that for you in a couple of weeks. But there aren’t any patients that are slipping through the cracks with this update.

Jason Mills

Great. And so just to be clear that 50% to 55% is on the traditional side going forward, correct?

John McDermott

That is correct.

Jason Mills

Okay, I just wanted to clarify that.

John McDermott

The other thing Jason, sorry to interrupt you, we will talk a little bit more about this at [Indiscernible], but we have already got, we wanted to get out quickly with an initial indication. We are already working on an enhanced version of that and we have made some good breakthroughs on that just recently, which we think can open that number back up and get that 40% to a bigger percentage. So we are testing it now to make sure that it is as good as it looks on paper so far. But I don't think we are going to be at this 40% for very long.

So I can't give you the details of that right now, but through looking at a variety of anatomical features, we think we will be able to broaden this in short order. So, I wouldn't spend too much time analyzing this level of detail because I don't think it is going to be with us that long.

Jason Mills

Okay. I look forward to the updated [VSAM]. On this call John you are obviously a bit more confident, I don't know if it is the right word, but things like you are confident you are going to need a panel, could you talk about where that guidance is coming from with respect to your conversations with the FDA and then your confidence in a Q3 approval if in fact you do see a panel in the spring, a turnaround of less than six months and sort of as we think about modeling 2017 and Nellix inclusion in our models for the U.S. market, soft of any qualitative guidance you could give us there would be helpful?

John McDermott

Sure. Well, as it relates to panels, the agency hasn't changed any of their messaging to us. I'm not sharing any new information with you, the only thing that leads us to believe that panel is more likely is our interactions with the firm that we are working with for our panel who has been through many, many, many panels with the cardiovascular group suggested in our recent activities that with an indication change even though the results are even better that you have got a clinical question, which would increase the likelihood of a panel. So we have assumed and we will continue to assume and we will continue to prepare us for going to panel.

So with that baseline again the agency hasn’t said anything, but we are preparing for that. We estimate based on the current timeline and getting all our information sent in by the end of this year that that would happen in the April May time frame, and then just based upon the average approval timeframes following panel, that is what gets us into the Q3 time period. I actually think updating the IFU now takes one clinical question off the table for the FDA. So I actually think it is positive as it relates to the FDA, but we will have to see. That is our perspective.

And now I can let Vaseem comment on the guidance piece.

Vaseem Mahboob

Yes, I think Jason just to kind of piggyback of what John said; our outlook on ’17 is totally unchanged in light of this IFU change. So consistent with what we have said in the past was that if we were in kind of the April 1st time frame for approval, we would be 15% to 20% top line, but if it was October 1st it would be in the 5% to 10% range, so there is no meaningful impact of this IFU change on what we have been talking about in terms of the impact of the ’17 model, if you will.

Jason Mills

Great, and I will just slip another one, to push back a little bit John, you sort of answered this question I am about to ask, but you are addressing one clinical question, couldn’t one surmise that for us the possibility of panel declines if you are narrowing the IFUs and the analysis of the data is more transparent and frankly to your point earlier, significantly better data off of data that was already pretty good.

John McDermott

Yes, I mean that is a – I want to believe that in the worst way, but I just want to be ready for the other way. So we are going to be – we are going to mock panel meetings, and we are doing on the stuff to be exceptionally well prepared. If we get a positive surprise that is great, but I also want to be careful that we manage – we set and manage expectations. I don't want too many people hanging on to a Q1 approval and then having a disappointment related to that. So that is why we are really leaning more towards Q3.

Jason Mills

Okay, fair enough. Lastly Alto, you seem pretty bullish about that, as you run through the enrollment, your expectations for enrollment and also run us through the next couple of years and what your timelines are for that and thank you for taking all my questions?

John McDermott

You bet. So the current timeline is to get the IDE approved this quarter. So we have already submitted the IDE, and hope to get that approval this quarter. We will probably kick off enrollment in the first part of the year. We will provide more of the details of the study and the study design and some of those elements at the investor meeting. But we will enroll that study in 2017, follow those patients for the period of time and then expect approval in the first half of 2019. That is our current estimate.

And then – that is in the U.S. In Europe, we actually anticipate a much earlier approval and are looking at the first half of next year for a CE Mark.

Jason Mills

Thank you.

John McDermott

You are welcome.

Operator

Thank you. Our next question comes from the line of Steve Lichtman with Oppenheimer. Please proceed.

Steve Lichtman

Thanks. Hi guys.

John McDermott

Hi Steve.

Steve Lichtman

John, can you talk to Europe next year with ChEVAS and Alto launching, how much of the market does that open up for you, with ChEVAS is that both just the renal and super renal that you'll likely get indication for?

John McDermott

Yes, so we our initial targeted indication for ChEVAS will be two branches. So and Alto complements that, so for most patients you could treat -- you could use ChEVAS to cover the full indication of Alto, but the benefit of Alto of course is that you don't have to involve the renal arteries.

So again it would be the – the only infrarenal device with that short of an aortic neck, so you can avoid getting into the visceral vessel you will. So our view is that Alto will really, really should become the short neck device of choice, and that when you just run out of neck you'll then go to ChEVAS and we’ll provide kind of a stack up chart to show you how those indications build in the portfolio build to compares to competitive offerings at the investor meeting.

Steve Lichtman

And in terms of training for ChEVAS, kidneys are already pretty prevalent know in Europe, so this is just a different way of doing it versus obviously comparing it with connecting the chimneys with traditional EVAR, so do you anticipate a lot of training required?

John McDermott

Yes, you're right. There is quite a bit of chimney work being done, but we’ll still probably one of and deploy a very rigorous training program. We at least that's what we're designing. And for those physicians who already do quite a bit of ChEVAS [ph] or chimney work, they'll be quick studies, but we're going to build a robust plan and just make sure we're focused on getting great outcomes.

I think the -- the Alto training based on what I've seen so far which is pretty straightforward. It'll be very easy for physicians that are familiar with ovation and actually pretty straightforward I think for new doctors as well. So we're pretty excited about both of those products. I would think of, think in terms of cadences Alto first-half, ChEVAS second-half.

Steve Lichtman

Got it. Great. And then lastly following that the life data at EVAR, anything, any anecdotal or anything you could provide in terms of feedback from field and how that's have positively impacted perceptions on elevation if at all?

John McDermott

Yes, it’s anecdotal, but the feedback has been very positive. There's been several follow-up meetings and discussions in a Webex calls with the physicians that were involved. We’ll have more of that activity actually, we've got a nice Ovation investigators function planned at -- so the data for the Ovation platform continues to build and continues to be positive. So we'll announce that be it to five-year follow-up from the IDE.

And then there's the LUCY study as I mentioned, that will complete enrolment at the end of this year, so we would expect to release some data at the SBS next year, and so there's continues to be a nice pipeline of good clinical evidence for Ovation and the feedback continues to be positive from the field, so we're going to continue to build momentum with that product we see a bright future for the platform.

Steve Lichtman

Okay. Great, thanks gentlemen.

Operator

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

Glenn Novarro

Hi, good afternoon guys. Just going to follow up, one follow-up question on the IFU. John you said that 40% of the traditional patients still be treated with the IFU changing, you said 20% of the complex patients would be ideal. So you gave us the 40% is down from 50% to 55%, is that 20% that you gave us is that down from something or is that unchanged?

John McDermott

Now let me clarify [Indiscernible] because maybe I didn't communicate it very clearly. That 20% for ChEVAS is 20% of all diagnosed aneurysms, not 20% of the complex segment.

Glenn Novarro

Okay.

John McDermott

So when I talk about, when I talk about the 40% for now like I'm talking about all aneurysms, but all what I'm saying is of the exclusion, it’s just a subset of the traditional, but the 40% applies to all diagnosed aneurysms to be clear. And we pick up another 20 on top of that when we include ChEVAS.

Glenn Novarro

Okay, all right. Thank you. And then just Vaseem, just to clarify your comment because you said that the 2017 outlook is unchanged based on Nellix timing, can you run through those numbers again that you gave?

Vaseem Mahboob

Sure

Glenn Novarro

In terms of the top-line growth rates?

Vaseem Mahboob

Yes so what we have said consistent with what we have said in the past statement which is if we get the April first approval as you may know panel we would be growing 15% to 20% is what we have said assuming the April 1st launch. And if we do have an October 1st launch, then we will be able to grow that 5% to 10% which is essentially just one quarter of Nellix which we have said in the past for $7 million.

So there's no real meaningful change of this, have an impact on our guidance for 2017.

Glenn Novarro

And let me just ask you on that, on that $7 million number because timing of FDA panels, it can be three months sometimes, it's six months, it sounds like your consultants are telling you three months, but if it does turn into six months now you're looking at maybe just one or two months in the fourth quarter. So I'm wondering if the street should really have seven million in the model for next year; number one, just because of how hard it is to predict the FDA and timing, but also I wonder how the rollout will go in the fourth quarter of next year?

Is it just simply because my guess would be that you'll take a more measured approach to the roll out making sure that you train the centers, that the patients are picked, so maybe talk about should we really be really have seven million, the model for next year and maybe talk about how you see that first quarter of rollout occurring? Thanks.

John McDermott

Yes, I think it's a great question, but I think it's being a conversation with quite a few of your peers, and I think there's some people like yourself who have already taken Nellix revenue out, like to have you out from the 2017 models.

I think our view has always been that it would be a limited market remains in Q4 as we would ramp into, that Nellix launch. So well if as we are trying to set the stage for 2017 to a conservative setting as John mentioned earlier with the idea that we might go to panel. I think it’s not a bad idea to be factoring that end and internally we are trying to be the skit [Ph] and say what, we’ll take the Nellix revenue out if it happens, if it happens if not it will be upside to the quarter.

So I think its a – its a point of discussion I think we’ll be having those conversations as we think about now until JPMorgan memory finally give out the guidance.

Glenn Novarro

Okay, but I guess what I'm hearing is, it's best to be conservative -- your models for 2017. Okay, thank you.

John McDermott

Thanks, Glenn.

Operator

Thank you. Our next question comes from the line of Ravi Mishra with Leerink Partners. Please proceed.

Ravi Mishra

Hi, thank you for taking the questions. Just follow up on, how are you. There’s another follow up on the migration commentary appreciate all the information you're given out there. That 2.3% rate how does that compare to or does it compare to other devices on the market and sort of what other intervention rates of non EVAS products when they do have migration?

John McDermott

Yes, the 2.3% if you did a literature search on migration, rather you'd find rates between 0% and 5%. So the 2.3% falls within the published literature. That said, I would think contemporary devices there those the rates are or low, more in the 1% range. So while it was within the range we still, it was a with something to monitor. I don't know to be honest off the top of my head what are the re-intervention rates associated with migration and other devices. My guess is they're very low, but there but did the big difference and the value proposition of course with EVAS is the associated endoleaks.

So what you see, if you look at the results is you have a 50% of the rate of endoleaks compared to EVAR and a substantially lower the re-intervention rate. So if you even if you did have a slightly higher rate of re-interventions related to migration, it would be more than offset by the reduction you see from the significant drop in endoleaks.

Ravi Mishra

And is that something that you're maybe implying about the two-year curve presentation that you're going to be showing over at the analyst day, could we expect more clarity or detail around this?

John McDermott

Yes, well I can tell you what the numbers are. So what we did is we took all of our data and we applied the new indications and look specifically at migrations, we looked at actually migrations down to five millimeters even though they got the SVS guideline is 10, we went to five, because we wanted to play it safe.

Then we included sack enlargement and then we further include Type 1a endoleak. And we did a two-year km curve by applying these new criteria and we ended up with a freedom from all of those events out to two years that was just about 97%. And if you wanted to benchmark that, it's kind of hard to find that exact benchmark metric with other EVAR devices, but as you go through their published data, you would find great rates that would be comparables in the low nineties.

So those results are actually superior out to two years with the new IFU.

Ravi Mishra

Great. Thanks, I appreciate that detail. And then maybe one on the model, just how should we think of that the OUS split given the dynamic mix that that you've been sighting here. Historically it looks like when you are standalone company's fourth-quarter was about in line at least U.S. with the third quarter, should we think about the same sort of pattern here in the fourth quarter or is there something that you want to point out as we update our models?

John McDermott

I think Ravi as we looked at a few years with the data here I think the business is kind of evolving consistently in the 70 to 30 range, 70% U.S. 30% OUS. I think the big mix change was going to happen with the launch of Nellix in the U.S. So for now, at least on a forecasted basis I kind of keep that mix the same and if it does change it will obviously continue to -- because with the quarters.

Ravi Mishra

Great. Now, but I was seeing for this coming fourth quarter, should we expect more in line with historical patterns, in terms of?

John McDermott

Yes, I think so.

Ravi Mishra

Okay. And then maybe one last one on Nellix, the -- the value analysis committee aspect. How have you guys factored that in to that $7 million assumption? I mean, does that bake in, it seems to me that the way to go after this would be going after your key initial accounts. So, I have experience with the product. But then can you talk a little bit about what you're putting together to address the VAC committees and how long that process takes. Thank you.

John McDermott

Yes. So, the -- as you pointe out, the starting point is the install base. So, we'll have roughly 60 physicians trained and certified on Nellix out of the gate. And those hospitals that are already IDE centres, will be well advised about Nellix. We do have and have continued to put together a compelling package of information relative to the value proposition on the economics and the technology assessment committees in the hospitals.

But to be honest, I don’t think we'll need it to get to 7 million in a full quarter. My experience is the device is not enough, the data isn’t good enough that I don’t think we're going to run into that too early. I think that's something that we'll start to, it will take time in some institutions but I think that there is going to be a lot of interest outside of that in the early going for sure.

Ravi Mishra

Great. Thank you.

John McDermott

Good day. Thanks, Ravi.

Operator

Thank you. We have reached the end of our Q&A session. I would like to return the call to management for closing remarks.

John McDermott

Okay. Well, thanks everyone for joining in on the call this afternoon and your continued interest in Endologix. We look forward to seeing you at the upcoming conferences and our investor meeting. Have a great evening.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.