Endologix's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Endologix Inc (ELGX)
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Endologix Inc. (NASDAQ:ELGX) Q1 2012 Earnings Call April 26, 2012 5:00 PM ET


Zack Kubow - IR, The Ruth Group

John McDermott - President & CEO

Bob Krist - CFO & Secretary


Brooks West - Piper Jeffery

Steven Lichtman - Oppenheimer & Company

Chris Cooley - Stephens

John Putnam - Capstone Investments


Greetings and welcome to the Endologix Inc. first 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) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zack Kubow. 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, the 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, April 26, 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 would like to turn the call over to John McDermott.

John McDermott

Thanks Zack. We are pleased with our first quarter results, both in terms of sales growth and progress in our new product initiatives. I’ll start today’s call with a quick overview of our results followed by an operational and pipeline update. Then I’ll turn the call over to Bob for his financial review and after that I’ll come back on to discuss our goals for the remainder of the year.

First quarter global sales revenue was up 32% to a record $24.5 million. In the US, our sales team continue to leverage the recently launch AFX System and drove 37% year-over-year growth. Outside the US, our European team is off to a good start and our distributors in the other markets are looking forward to AFX approvals later this year. We’re pleased with the strong start to 2012 and are reiterating our full-year guidance of 22% to 28% annual revenue growth.

During the quarter, our domestic sales team demonstrated their effectiveness at promoting the clinical advantages of AFX. We continue to receive very good physician feedback on the device and expect to continue adding new customers as well as achieving deeper penetration in our existing accounts. We currently have 72 reps and clinical specialists in the US and are targeting to finish the year around 77.

In Europe, we are pleased with our initial results and the reception we are receiving from physicians. As of today, we have 16 employees in Europe and expect to finish the year with a total of around 30 with approximately 20 of those should be able to eventually support clinical cases. In January, we launched the AFX device in Europe at the Link meeting in Germany and earlier this month had a very strong presence at the Charing Cross Meeting in London. This is one of the most well attended vascular meetings in Europe and there were several presentations on both Nellix and Ventana. We received positive feedback from physicians that attended the meeting and there is a lot of interest in the commercial availability of the devices.

Turning to our pipeline, we expect to receive CE Mark for Nellix sometime this summer and are planning on limited market introduction over the balance of 2012. Initially, we will be working with the regional EVAR centers who will also participate in additional clinical trials that we will start later in the year.

We believe Nellix has market leading potential and our goal is to ensure excellent clinical outcomes in the initial rollout phase plus gather additional clinical evidence before opening it up for broader commercial launch in 2013. For Ventana, during the first quarter, we completed enrollment in our international clinical study and are now in the follow up phase. Depending upon the clinical results from the study, we have the potential to file our dossier and receive CE Mark for Ventana in the fall of 2012.

Similar to Nellix, we will begin with a limited rollout in selected centers and focus on achieving positive clinical outcomes and building training centers. In the United States, we hit two important clinical milestones for our pipeline during the quarter. First we completed enrollment in our 150 patient multi-center PVAR clinical trial. We are now gathering and analyzing the data and expect to submit our PMA supplement in the second quarter.

If we get approval as anticipated, we will be in a position to begin promoting and training physicians on percutaneous aortic aneurysm repair by the end of this year. The second important clinical milestone in the first quarter was initiation of patient enrollment in our US Ventana IDE clinical trail. We have approval for up to 25 sites in the study and plan to unroll about 120 patients. We currently have 11 sites that are approved to enroll patients and are currently working to get the rest of the sites up and running over the next few months.

We are hoping to complete enrollment around the end of this year or the first part of next year and then we will follow those patients for one year gathering up the clinical data and submitting a PMA to the FDA. Depending upon the enrollment in clinical results, we could potentially get approval of Ventana in the US by the end of 2014. For Nellix in the United States we plan to submit our IDE to the FDA in the middle of this year which hopefully will set us up to begin enrollment before the end of 2012.

Based upon the anticipated number of patients and the follow-up period for the trial, this would position us to potentially gain PMA approval for Nellix in 2015. We believe that we have the most innovative new product pipeline in the end of endovascular aortic repair market and are well positioned for long-term growth.

Growth drivers in 2012 are AFX, both in the United States and Europe plus potential limited market introductions of Ventana and Nellix in Europe. In 2013 we expect growth in the US from our PVAR indication plus the anticipated full commercial launches of Nellix and Ventana in Europe. In 2014, we expect continued growth from Nellix and Ventana outside the U.S. plus the potential approval and launch of Ventana in the United States.

And lastly, we expect 2015 to be a very exciting year with potential FDA approval and launch of Nellix in the United States. So we've got a lot of growth potential over the next several years and we are off to a good start in the first quarter of 2012. Our U.S. sales force is demonstrating their ability to continue capturing market share with AFX and we are very pleased with the clinical results of the device.

In Europe we are building a strong team of experienced professionals who are looking forward to the anticipated limited market introductions of Nellix and Ventana later this year. Our entire organization is committed to making this new product introduction a success and we believe they will position us as the leading innovator in the treatment of aortic disorders.

Now, I will turn the call over to Bob for his financial review. Bob?

Bob Krist

Thank you, John and good afternoon all. Today I will provide a brief overview of our financial results and key metrics for the first quarter of 2012. Total revenue increased by 32% year-over-year to $24.5 million in the first quarter of 2012 and by 5% sequentially from the fourth quarter of 2011. Growth was driven by increased direct sales force productivity and the launch of the AFX system last August in the US in this past January in Europe.

Domestic sales increased by 37% versus the first quarter of 2011. The number of U.S. sales territories was approximately the same in 2012 as in 2011. So the 37% increase directly reflects increased sales force productivity in the form of revenue or territory.

International revenue increased by 9% year-over-year to $3.5 million and the key growth driver there was the initial productivity from our sales team in Europe, which generated just under $1 million in Q1 direct sales revenue. Gross margin in the quarter was 78.6% compared to 76.4% in the first quarter of last year.

The gross margin benefited from our higher proportion of direct sales to total sales, partially offset by royalty expense payable to Bard for the in IntuiTrak system, which is still sold in some international markets. The favorable margin comparison to the first quarter of 2011 also reflects what were then temporarily high production cost resulting from the startup of the second production shift.

Looking forward to our expected customer mix and product mix for the balance of 2012, we anticipate that our gross margin for the full-year will range between 77% and 78% as in 2011. Operating expenses for the first quarter were $22.5 million compared to $19 million in the same period of last year or an increase of 18%.

Marketing and sales expenses grew from $10.1 million in the first quarter of 2011 to $13.5 million in the first quarter of 2012, due primarily to costs associated with expanding our direct sales organization in Europe.

Of note, the significant productivity gain in the U.S. sales force in the quarter resulted in just a 13% increase in U.S. sales in marketing expense, which generated very positive leverage in contrast to the 37% growth in domestic sales. The remainder of the overall increase about $2 million of the $3.4 million total, as I said, is attributable to the investment to build a direct team in Europe.

During the first quarter of 2012, we maintained our high level of investment in research and development and clinical expenses at $4.9 million for the quarter, equal to the amount in the first quarter of 2011. The composition of the overall new product development expense however has shifted downstream somewhat towards regulatory and clinical expense from engineering, design and development expense.

Regulatory clinical was 29% of the total investment in 2012 versus 19% in the prior year. This was in line with our expectations and was driven primarily by our clinical trial activities in support of the ultimate commercialization goals for PEVAR, Nellix and Ventana.

G&A expenses increased from $3.6 million in the first quarter of 2011 to $4 million in the current quarter. The increase is related to establishing legal entities and support infrastructure in Europe. Of note, U.S. G&A expenses declined from the first quarter of 2011 largely due to lower legal fees, following resolution of the Bard patent matter in late 2011.

The 2010 acquisition of Nellix requires that we adjust the estimated fair value of contingent merger consideration to be paid in Endologix’s stock upon certain future milestone achievements, primarily due to the increase in the Endologix share price from $11.48 at December 31st to $14.65 at March 31st. The non-cash expense reported in the first quarter was $12.5 million.

Based on our Q1 results and our projected results for the full-year, we expect taxable income on a U.S. basis for 2012. As such GAAP requires that we book a tax provision each quarter based on our estimated effective rate for the full-year. This resulted in a $574,000 largely non-cash, tax expense being reported in the first quarter.

Consequently, the overall first quarter 2012 net loss was $16.3 million or $0.28 per share compared to a loss of $4.8 million or $0.9 per share for the first quarter 2011. Again the first quarter 2012 includes that $12.5 million non-cash fair value adjustment, which is equal to $0.22 per share. There was no comparable charge in the 2011 quarter. So on an adjusted or a non-GAAP basis, we reported adjusted net loss in the first quarter of 2012, up $3.8 million or $0.7 per share compared to $4.8 million or $0.9 per share in the first quarter 2011.

Turning to the balance sheet, accounts receivable, days outstanding, including both U.S. and international accounts was 59 days at the end of the first quarter 2012, unchanged from 59 days at the close of 2011. And inventory turnover was 1.1 turns at March 31st versus 1.2 turns at year end 2011.

Inventory levels increased during the quarter for two primary reasons, first to launch AFX in Europe and secondly to purchase significant quantities of raw materials to be used in the future production of Nellix finished goods. We expect that the absolute dollar amount of inventory will decline over the remainder of 2012 and improve on a turnover basis relative to sales in future quarters.

This increase in inventory together with the payment of employee bonuses which were earned in 2011, accounted for the majority of the net cash used in the first quarter and neither of these factors will impact in the remaining quarters of 2012.

So overall, as of March 31st, we had $14.6 million in cash and no outstanding bank debt. In addition, we have an unused $20 million line of credit and we are on-track with our expectation to become cash flow positive from operations in the second half of 2012. Accordingly, we believe we have adequate cash resources to fund our operations.

Finally, turning to guidance, as John mentioned for the full year 2012, we are reiterating our financial guidance. We expect revenue to be in the range of $102 million to $107 million, a 22% to 28% increase over 2011.

On the bottom-line, we expect an adjusted net loss between $0.12 and $0.18 per share with sequential quarterly improvement toward profitability over the course of the year. This net loss guidance takes into account the planned growth of the direct sales force in Europe and research, development in clinical regulatory initiatives particularly for the Nellix and Ventana devices.

Not included in this lost per share guidance, however, our potential adverse litigation outcomes, fair value adjustments associated with our Nellix acquisition and the effects of possible business development transactions.

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

John McDermott

Thanks Bob. During the quarter, the company performed very well in all key areas of the business and posted good financial results. As Bob pointed out, we’re on track to achieve our guidance for sales growth and progress toward profitability.

Following our key goals for the rest of 2012, one continue to grow and increase market share with AFX. Two, build our team in Europe with talented and experienced professionals. Three, get CE mark for both Nellix and Ventana. Four, launch and to attract in Japan an AFX and another internationals markets. Five, drive enrolment in the US, Ventana IDE clinical trial. Six, obtain IDE approval in the US to begin our Nellix clinical study. And lastly, gain FDA approval for our percutaneous PEVAR indication.

By achieving these goals we will continue on our path for becoming a leading inventor in the endovascular aneurism repair market. We look forward to keep you posted on our progress and are planning to participate in the Bank of America Healthcare Conference in May. We look forward to seeing many of you there.

And with that, we’ll open the call up for questions. Operator?

Question-and-Answer Session


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

Brooks West - Piper Jeffery

Hey John, thank you for taking the questions and I apologize I missed just the first couple of minutes of your comments, if you addressed this already. Just wanted to test on the geographic spilt, US was obviously very strong compared to our expectations.

Can you get into that little bit more, is there a bullish in there from the trial, is this better account penetration, is it successful pull-through in the new accounts from the Ventana study, some more detail there and then kind of same question on the European weakness? Thanks.

John McDermott

Yeah, I think if you recall under Q4 call, we had some seasonality in our Q4 numbers that we talked about last time and so I think some of the elective cases may have drifted into Q1 and also keep mind that we had AFX this year in the first quarter and we didn’t have it in Q1 of last year.

So I think those variables together with the fact that it takes a little bit of time for the sales team or any sales team for that matter to get familiar with a new device. So I think what you are seeing here is a growing level of clinical confidence in AFX and the part of the sales team. So that’s how I would attribute the nice growth in Q1.

As for Europe, it was actually in line with our expectations. So we didn’t see anything there that we didn’t anticipate.

Bob Krist

Yeah Brooks, this is Bob. If you think of Europe now in transition from market in 2011 Q1, that was all distribution based, now partial distribution, partial direct sales. Our overall top-line from both sources is up something like 18% in 2012 versus prior year. So we are progressing according to our expectations there.

Brooks West - Piper Jeffery

And then I guess as a follow-up there on your last comment, should we continue to see Europe then ramp throughout the year or how should we think about the cadence in Europe?

John McDermott

Yeah, I think we expect to see good continued growth from Europe over the course of the year and then certainly with the limited introductions that are anticipated in the latter part of the year that will provide a little bit of incremental growth over the core business growth we expect from AFX.

Brooks West - Piper Jeffery

And then I am sorry, one more if could, just what was the gross margin guidance again for the year and last month? Thank you.

Bob Krist

For the year, we see it coming in between 77% and 78%, as we look at the balance of the year, we do see little faster growth outside the US as well as after introducing Nellix based on very limited production quantities and OUS pricing. We’ll probably over the course of the year chip away a few basis points of what we achieved in Q1, but should still be in that zone of 77% to 78%


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

Steven Lichtman - Oppenheimer & Company

John, as you think about your build out in the US, at last we spoke in the last quarter, you guys talked about bringing out about further potential account. What is preventing you guys from continuing to march that for; is that just pretty more feet on the street, I mean is it your anticipation that over the next several years you will at least not on the doors of every account out there in the US? And is there any geography where you guys are little less penetrated than others?

John McDermott

Yes, the short answer to the question is yes, we expect to continue to have a growing presence and a higher percentage of the total number of hospitals. I think some gradual incremental adds to the sales force is appropriate over time, but I don't see that solely being the key to broader penetration.

Keep in mind that in terms of case productivity, we are still around 7 cases a month per rep. So there's still capacity and that's not just geographic limitations, we are still building the business. We still have a relatively young overall sales force. So I see a lot of new customer growth in addition to deeper penetration. As far as any geographic weaknesses, there isn't any particular area. You know not all of our territories are full, so wherever you have a vacancy, it is a bit of a soft spot, but I wouldn't say there is any particular part of the United States that stands out as a glaring weakness for us.

Steven Lichtman - Oppenheimer & Company

Okay, got it. As you launch IntuiTrak in Japan later this year, can you talk to us a little bit about the significance of that and how big of an opportunity incrementally you think this could be over the next couple of years?

John McDermott

Yeah, well, the Japanese market is estimated around between 5000 and 6000 EVAR procedures with ASPs that are comparable if not maybe a little better than the US market. So on balance you know it’s a pretty good-sized opportunity, especially relative to our current line item there for that market. So we are looking forward to that and they have done, our distributor there has done actually very well, given the fact they are still selling our first generation device.

So today they are selling our first generation device against Endurant to kind of put it in perspective. So as you can imagine they are anxious to get their hands on IntuiTrak and we’re working with the regulatory authorities there and hopeful to get an approval in the probably in the fall and get that product launched as soon as we can. So we see it as a good opportunity, I wish we could expedite the approval process. It’s a slow one as you know.

Steven Lichtman - Oppenheimer & Company

Last question, just in terms of the sale force build in Europe, what are the types of people that you are bringing, are these senior people that have done EVAR before. I am just going to a sense of how quickly they can kind get ramped up and start being you know pretty productive for you guys?

John McDermott

Yeah. So it’s a similar profile that we have in the United States in terms of, we like our new folks to have vascular experience. Of the people that we've hired so far I would say there are more with EVAR experience then we are able to get in the US. The non-competes aren’t as enforceable in Europe, but the problem, the offsetting problem to that is people don’t move as readily in Europe as they do in the United States, so the availability of talent is less.

We’re able to get more EVAR experienced people, but they are just aren’t as many of them or nor are they as willing to move but I am very pleased with the folks that we have recruited so far and especially after Chairing Cross Meeting that we just had a few weeks ago. I’ve been talking to our guys in Europe and they are extremely encouraged by the quality of enquiries we are getting for the open positions.


Our next question comes from the line of Chris Cooley from Stephens. Please proceed with your questions.

Chris Cooley - Stephens

I wanted to, I guess two questions, one housekeeping and then one just thinking about the growth. On the house keeping side, Bob, could you may be just remind us how much was in the quarter, when you think about the G&A number attributed to kind of these, building on these legal entities, I am assuming that’s one time in nature.

So kind of anything about what is the appropriate go forward rate from a G&A perspective. And then, when we think about growth, look at the United States, you’re growing almost four extra market, could you may be help us think a little bit about just, anything about the case volume or case productivity program in 18 of your reps. You know, what can they do going forward?

You know I think about your -- you are more seasoned guys, the double digits, the younger guys, fewer cases, just kind of help us think what the existing number of industry can probably on a best case scenario overtime if there have been from maximum productivity there. Thank you so much.

Bob Krist

Chris, I will handle the first question first. In the G&A number, there is roughly 400,000, may be a little bit more than that in the quarter. That’s involved with, working with various professional service providers to put in place an efficient tax planning structure, legal entity structure and get all of the infrastructure established for that taxation and reporting and so on and so forth. While that is one time, I am not sure that it is fully behind us at this stage but it certainly will be diminishing in Q2 and very much so in the second half of this year. So the way you should think about G&A is that Q1 is probably the high point for the year and will be flat to down on an absolute basis in the upcoming quarters.

Chris Cooley - Stephens

Okay, thank you very much.

John McDermott

Thank you and Chris in terms of rev productivity just to kind of give you the range in the first quarter, our rookie reps did just over a 3 cases per month per guy. And our most seasoned guys, on average, did little better than 12 a month.

So if you want to crystal ball a little bit in terms of what could you expect over time, you know, you would like to take the average of $6.8 which is what it was for the quarter per month per guy and take it to 7 to 8 to 9 to 10, you know, and by keeping your turn over low and continuing to introduce new products into that channel, that’s very achievable. So I think there is a good bit of productivity.

Again, it’s affected. In this case, you can get there without actually adding more guys just by continuing to get new indications, add new products and the benefit we get of tenure.

Chris Cooley - Stephens

Understood, and if I may just squeeze one, a very quick one in here. Just when you think about Nellix, your intention is to submit the ID by mid-year of this year. Will that be using the new 17 French delivery system that you showed us at Charing Cross.

John McDermott



(Operator Instructions) Our next question comes from the line of John Putnam from Capstone Investments. Please proceed with your question.

John Putnam - Capstone Investments

Couple of questions. I wondered if you could quantify what kind of share gains you might be achieving here domestically, and what you are seeing as a response from the competition if any.

John McDermott

Yeah, John I think just kind of a back of the envelope before, if the case volumes for the year are about 47,000 that still got us in around 11% range per procedure basis.

In terms of competitive response, no, I can’t pinpoint one particular thing; I mean all other companies are busy trying to keep their pipeline fresh. As you know Medtronic is working on a slightly improved version of Endurant; Gore has introduced some new limb sizes and I would say that's the primary activity, I don't see anything else that I would consider remarkable in terms of other sales and marketing tactics.

So we benefit as you know having such a unique platform. We are a little difficult to compete with from the perspective that we’re the only device that fits on the bifurcation and preserves the bifurcation, and so once we get a guy started on the device they tend to stick with it.

John Putnam - Capstone Investments

On another topic and I know you are days away from launching Ventana and Nellix, but what kind of price premium do you think you can achieve through those products John?

John McDermott

Yeah, that's a good question. We are doing a lot of market evaluation on pricing right now. Since those devices will come to market in Europe first, that's where our primary effort has been and that market is more price sensitive, Europe that is than the United States.

So it’s a bit of a balancing act. We believe we have an opportunity for premium, but we don't want to take it at the expense of limiting our share capture. So I can’t give you an exact number right now, but I can tell you that our desire is to get a slight premium above the market and as we get closer to being able to introduce those products, we can provide a little more clarity on that.


There are no further questions in the queue. I would like to hand the call back over to management for closing comments.

John McDermott

Okay. Well, thanks operator. I would like to thank everyone for joining us on the call today. And for you interest in Endologix. We look forward to seeing you at the upcoming conferences and keeping you posted on our progress. Have a good evening.


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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