EXHIBIT 99.2
LIPPERT HEILSHORN & ASSOCIATES
Moderator: Jody Cain
7-26-07/4:00 pm CT
Confirmation # 7242145
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LIPPERT HEILSHORN & ASSOCIATES
MODERATOR: JODY CAIN
JULY 26, 2007
4:00 PM CT
Operator: Welcome to the Endologix Second Quarter Conference Call.
At this time all participants are in a listen-only mode.
Following management's prepared remarks we'll hold a Q&A
Session. To ask a question please press star followed by
1 on your telephone keypad.
If you have difficulty hearing the conference please
press star 0 for Operator assistance. As a reminder this
conference is being recorded today, July 26, 2007.
I would now like to turn the conference over to Jody
Cain. Please go ahead ma'am.
Jody Cain: This is Jody Cain with Lippert Heilshorn &
Associates. Thank you for participating in today's call.
Joining me from Endologix are Paul McCormick, President
and Chief Executive Officer, and Bob Krist, Chief
Financial Officer.
Earlier this afternoon Endologix issued a press release
announcing financial results for the 2007 second
quarter. If you've not received this news release
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or if you'd like to be added to the Company's
distribution list, please call Lippert Heilshorn in Los
Angeles at 310-691-7100 and speak with Lateisha Hall.
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 Web site for the next 14
days.
Before we begin I'd 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 discussion of risk factors I
encourage you to review the Endologix Annual Report on
Form 10-K and subsequent reports as filed with the
Securities & 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, July 26,
2007. 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 Paul
McCormick. Paul.
Paul McCormick: Thank you Jody. And I'd like to extend my
thanks to each of you for joining us this afternoon.
Today we are reporting our tenth consecutive quarter of
domestic sales growth with domestic product revenue up
93% over the comparable quarter last year.
Total product revenue for the second quarter increased
82% over the prior year and year-to-date total product
revenue reached $12.5 million, more than double the
first six months of last year. We are tracking well
against our previously announced 2007 revenue guidance.
Our sales force continues to
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successfully expand the role for the Powerlink so we
have decided to expand the size of that domestic sales
force.
We have just increased our regional sales managers from
seven to ten. Two are new hires who come to Endologix
with both AAA and management experience. And we promoted
one of our sales reps for the third position.
Our plan is to increase our sales reps to 50 by the end
of the year with five reps reporting to each of our 10
regional managers. We've been extremely pleased with our
recruitment efforts in the first half of the year. As
you know, success in the AAA stent graft market requires
strong clinical skills as a rep must establish
credibility.
With three other FDA approved technologies the
environment to attract highly qualified reps is
competitive. In the past our recruits with strong
medical device experience needed time to develop the
clinical skills pertaining to the AAA procedure while
former clinical specialists, radiology technologists, or
physician's assistants who joined our sales force needed
the support and time to develop their sales skills.
The success of our sales force over the past two years
in establishing the Powerlink as a significant clinical
tool combined with other market dynamics in the medical
device arena are making the sales opportunity at
Endologix attractive.
Just take a look at the new hires the Company has made
since the beginning of the year. We have 11 new hires.
Nine have started and two will begin in August. Seven of
the 11 have both strong medical device sales experience
and have sold competitive AAA stent grafts during their
careers.
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There is a palpable difference how the market place is
viewing the sales opportunity Endologix and this bodes
well for the second half of 2007 and beyond.
Turning to the Japanese Shonin our distributor reports
that the PMDA is in its final examination and we expect
to obtain a formal marketing approval for the Powerlink
system in Japan soon. We are working with our Japanese
distributor to make preparations for market entry in the
second half of this year. We expect modest orders
initially and for uptake to increase over time as more
physicians in that country gain experience with the
Powerlink.
At this time I'd like to turn the call over to Bob for a
financial review.
Bob Krist: Thanks Paul, and good afternoon to all. As
mentioned our product revenue for the second quarter of
$6.3 million represented an 82% increase from $3.4
million in the second quarter of 2006. Domestic product
sales increased by 93% to $5.4 million from $2.8 million
last year and increased by five percent from $5.1
million in this year's first quarter.
The 93% year over year increase was driven by a 38%
increase in the number of covered sales territories and
a 40% increase in average sales per territory. The 5%
sequential quarter increase was the result of an 8%
decrease in the number of covered sales territories
combined with a 14% increase in average sales per
covered territory.
International sales for the quarter were $895,000, up
34% from $666,000 in last year's second quarter.
International sales for the first quarter this year were
$1.1 million and included roughly $300,000 of stocking
orders from LeMaitre Vascular, excluding that stocking
order international sales increased by 9% sequentially.
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Gross profit was 58% of total revenue in the second
quarter of 2007 which was up from 49% in the prior year
quarter and down slightly from 59% for the first quarter
of this year. We continued to experience the expected
effect of the higher outside purchase price of the EPTFE
graft raw material. We believe that the impact of this
higher material price is fully reflected in the cost of
product and in finished good inventories on hand.
As stated in last quarter's call we expect that by
producing this material in-house we will increase gross
margins by 1500 to 1800 basis points and we anticipate
that we will begin to see this impact early in 2008.
Total operating expenses were $7.6 million compared with
$6.3 million in the prior year quarter. While operating
expenses increased by 20% driven by the increase in
sales and marketing expense, domestic revenues grew by
93%.
Research, development, and clinical expenses for the
quarter were $1.5 million, down from $1.8 million in the
second quarter of 2006 driven by concluding our in-house
ePTFE development project early in the first quarter of
this year and by lower clinical trial expenses.
General and administrative expenses of $1.4 million were
up from $1.3 million in the second quarter of 2006
primarily due to an increase in stock option expense.
Total stock option expense in the second quarter was
$625,000 compared with $388,000 in the second quarter
last year.
The line item breakdown for 2007 was the following -
$84,000 charged to cost of sales, $102,000 charged to
R&D, $202,000 charged to sales and marketing, and
$237,000 charged to GNA. The net loss for the second
quarter of 2007 was $3.7 million or 9 cents per share,
which compares with a net loss of $4.4
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million or 11 cents per share for the second quarter of
2006. Stock-based compensation expense equal one cent
per share in both periods.
Now turning to the first six months of 2007, total
product revenue was $12.5 million, up by 104% from $6.1
million for the first six months of 2006. Domestic
revenue grew by 114% to $10.5 million and international
revenue increased by 66% to $2 million. The 114% year
over year domestic sales increase was driven by a 59%
increase in the number of covered sales territories and
a 35% increase in average sales per territory.
Gross profit dollars increased by 124% compared to the
first six months of 2006 driven by the 104% product
sales increase and by a 5-1/2 percentage point increase
in the comparable period gross margins.
Operating expenses for the six months were $16 million.
That was up by 31% from $12.2 million last year again
due to the increase in sales and marketing expense
resulting from the growth in the sales force. On a
combined basis R&D and G&A expenses decreased by 5% from
2006.
The net loss for the first six months of 2007 was $8.2
million or 19 cents per share which compares with a net
loss of $8.5 million or 23 cents per share for the first
six months of 2006. Stock option expense increased by
$400,000 in 2007 and represented 3 cents per share this
year versus 2 cents per share in 2006.
During the second quarter accounts receivable DSOs
averaged 58 days including both domestic and
international accounts and DSO at quarter end was 62
days. Inventory turnover remained at 11 months at the
end of June.
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Total cash and marketable securities at June 30 were
$12.8 million, which compared with $15.3 million as of
March 31. Consequently our net cash usage in the second
quarter was $2.5 million and this included approximately
$800,000 of outside ePTFE graft purchases which will not
be of cash use after 2007 when our outside supply
agreement has ended.
On a pro-forma basis then our cash usage was $1.7
million in the quarter. This is consistent with our
expectation that currently available cash together with
our $5 million revolving credit line will provide ample
cash and working capital flexibility for Endologix to
achieve sustainable positive cash flow in 2008.
And finally in our 10-Q filing we will comment on a
proposed transaction by Hologix Corporation to purchase
BioLucent, a private company in which we hold a small
ownership position. Subject to the successful completion
of that transaction which is expected before the end of
this calendar quarter Endologix will receive
approximately $275,000 in Hologix stock which will be
freely tradable as well as a cash payment of
approximately $22,000.
In addition Endologix has licensed certain non-AAA
technology to BioLucent in return for future royalties
based on sales. This transaction would trigger a change
of control provision in that agreement which would give
Endologix the option to continue the license and royalty
agreement or to receive a lump sum cash payment in
return for a fully paid up license.
With that, I will turn the call back over to Paul.
Paul McCormick: Thanks Bob. Among our clinical programs, we
are conducting three ongoing trials to elevate the
Powerlink System to treat AAA patients with large
diameter aortic necks.
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Each study has its own device and patient anatomy
combination and each includes a one-year follow-up
period. We are targeting enrollment completion in one of
those trials this month.
These studies in combination with a continued access
provision granted by the FDA in the study nearing
enrollment completion provides physicians the
opportunity to use the Powerlink to treat the 10% to 15%
of patients with aortic necks larger than 26 millimeters
in diameter.
The Powerlink can be used to treat most anatomies and we
are reinforcing this message through our marketing
activities.
Additionally the Powerlink is gaining reputation as the
device of choice for patients having what is considered
unfavorable anatomy for treatment with standard ELGs.
As we reported earlier their year, Powerlink data was
presented in three presentations at the International
Congress on Endovascular Interventions which is among
the most important medical conferences focusing on AAA
procedures.
One presentation by Dr. Dieter Raithel of the Southern
Clinic in Nuremberg, Germany included data from an
experience of more than 1400 ELGs over the past seven
years with 378 patients treated with the Powerlink.
The focus of Dr. Raithel's presentation was a
comparative look at the various ELG's performance in
complex anatomy short and/or angulated aortic necks.
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Dr. Jack Collins from Borgess Medical Center, Kalamazoo,
Michigan, presented analysis on a subset of patients
having conical aortic necks, a particularly difficult
anatomy to treat with ELGs.
Both presentations correlated specific design features
unique to the Powerlink that support the use of our
device in patients with complex or unfavorable
anatomies.
Both Dr. Raithel and Collins' presentations are
available on the Clinical Information Section under
Healthcare Professionals on our company Web site at
www.Endologix.com.
I would encourage you to review these presentations.
They provide insight to the unique applicability of
Endologix technology.
Most analysts estimate the current worldwide market for
ELGs to be 450 million and that it will double over the
next five years fueled by screening, aging populations
and patient preference.
Some ask why isn't ELG uptake quicker? And others as
more specifically in light of the Powerlink best in
class data, why isn't the conversion rates to the
Powerlink faster?
Let me suggest that for physicians, personal experience
and results drive their decisions at times more so than
published reports good or bad.
Many physicians still have fairly narrow indications for
ELGs which is why that while 30,000 to 35,000 minimally
invasive procedures will be performed this year,
approximately the same number of open repairs will also
be performed.
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In reviewing the Raithel and Collins presentations, you
can see the utility of the Powerlink in cases with
unfavorable anatomies, cases that for a large number of
operators are being referred for open repair.
Not only does the Powerlink have advantages over
competitive ELGs due to its proprietary design, but the
data now indicate that it can effectively treat many
cases currently treated by open repair.
It's one conversation with a physician when we're trying
to sell him on the idea that he can get better results
with the Powerlink as opposed to a competitors ELG that
he is using.
It is quite another conversation altogether when we're
selling a physician on treating a patient by using a ELG
rather than open repair.
This is becoming a real door opener for our reps, and
our sales force is now armed with this compelling data.
We believe that the Powerlink is the only FDA approved
device that will speed up the adoption rate for the
minimally invasive approach, accelerate the growth rate
for - in the ELG market and ultimately become the
standard of care.
We continue to take steps to upgrade the Powerlink
system to allow further simplification in treating all
patients including those with complex anatomies.
We are very enthusiastic about the reception of our
Visiflex SurePass delivery system which allows
physicians to retain guide wire access through the
contralateral limb during ELG deployment to facilitate
adjunctive procedures.
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The Powerlink unibody design in combination with the
SurePass feature permits physicians greater control and
can further reduce procedure times even in complex
cases.
Approximately 25% of our domestic cases performed in the
second quarter were with the SurePass. And our
expectation is that we will fully integrate SurePass
into all Powerlink systems sold in the U.S. this
September.
As previously announced, we plan to incorporate the Sure
Pass into our third generation delivery system, the
Visiflex Integrated System or IS.
The IS will eliminate the front sheath which currently
deploys the main body of the Powerlink further
simplifying the procedure.
It also permits the operator to completely remove the
Powerlink delivery mechanism leaving the integrated
hemostatic sheath in place to facilitate any catheter
exchanges. This will simplify any adjunctive procedures
or facilitate an all percutaneous delivery by physicians
facile with closure devices.
We expect to perform the first Visiflex IS procedure in
Europe this September.
Updating our thoracic program, last April we announced
the successful treatment of three patients with the
Powerlink dissection stent system as part of a
feasibility study of Type B dissections that we are
conducting in Germany.
We are working to obtain approval for two more sites in
order to enroll 10 to 15 patients by the end of the
year.
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Our analysis of the results of this feasibility trial
will help determine if or how we move forward with our
regulatory strategy for the U.S.
Before opening the call to questions, I'd like to affirm
our financial guidance. We expect total product revenue
in 2007 including both domestic and international sales
to be between $25 million to $29 million.
This represents growth of 73% to 101% compared with the
total product revenue in 2006.
For the year, we expect gross margin to be in the 57% to
61% range which is in line with the gross margin
reported in 2006.
Operating expenses for 2007 are expected to range from
31 million to 33 million representing an increase of 16%
to 23% over 2006.
Within that, our G&A infrastructure is now at the size
we believe is adequate support operations for the
foreseeable future. We expect that most of the increase
in operating expenses this year will be in sales and
marketing as we continue building our sales force to
drive sales growth. And we expect only modest increases
in R&D and clinical expenses.
Additionally, we are affirming our belief that our
resources are sufficient to support our sales force and
our current R&D activities and as Bob mentioned, to see
us through to cash flow positive from operations in
2008.
In closing, we're making excellent progress toward our
goal of leadership in a fast-growing triple A market. We
expect to benefit from the increased tenure of our sales
representatives and are highly encouraged by the quality
of professionals we are tracking to our sales team.
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We expect to make the SurePass a standard for the
Powerlink systems sold in the U.S. in September of this
year.
Our ability to supply ePTFE is expected to dramatically
lower our cost of goods and increase gross margins.
We continue to be enthusiastic about our distribution
partner for the Powerlink in key European markets. We
anticipate a commercial launch of the Powerlink in Japan
later this year.
We are sufficiently capitalized to become cash flow
positive. And we continue to see significant opportunity
in the triple A market. And we are well positioned for
future growth.
With that said, I'd like to thank you for attention and
open the call to questions. Operator?
Operator: Ladies and gentlemen, if you wish to register for a
question for today's question and answer session, you
will need to press star then the number 1 on your
telephone.
You will hear a prompt to acknowledge your request.
Before your question has been answered and you wish to
withdraw your polling request, you may do so by pressing
star then the number 2.
If you are using a speakerphone, please pick up your
handset before entering your request. Again, we request
that if you press - again, we request that if you have
pressed star 1 to as a question before this time, please
press it once more to ensure you enter the queue. One
moment please for the first question.
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Paul McCormick: While we're waiting for the first question,
the company has plans to exhibit at the upcoming
Vascular Interventional Advances Meeting in Las Vegas
September 25 through the 28. And then we'll be
exhibiting at the VEITH Symposium in New York November
14 through the 17.
If you happen to be attending either meeting, we'd
encourage you to come by the booth.
In addition, I've been asked to present at the upcoming
UBS Global Life Sciences conference on September 26 in
New York City.
Operator, we're ready for the first question.
Operator: Our first question comes from Shawn Fitz with Stephens.
Shawn Fitz: Hey Paul, Bob, thanks for taking my question. Good
afternoon.
Paul McCormick: How are you doing?
Shawn Fitz: Good. Just quickly, you alluded to the sequential
growth rate. And I believe the data points you threw out
was that there was an 8% decrease in covered sales
territories. But did I get that correctly in terms of my
data?
Bob Krist: Yes you did, on a time-weighted average basis.
Paul McCormick: And let me put it in kind of a different way
of looking at it just from number of reps that we had in
the territory and the territories for the full quarter.
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So in Q2, we had approximately 34 reps on board for the
entire quarter versus 41 reps on board for all of Q1.
And this sales force turnover had a modest impact on
sequential growth.
A couple other issues though as you look at it, in Q1 we
had one hospital order approximately $140,000 of
inventory. And of course we note in the Q1 conference
call that our new distributor to selected European
markets LeMaitre, had purchased about $300,000 in
stocking inventory.
So if you reduce the Q1 revenue by that 470,000
sequential product usage is more significant than is
really reported in the sales number.
And then the other issue is if you really look at it, if
you take just half the territories and you move case
from one quarter to the next, it can have a swing of up
to about $200,000.
And so as we look at it, we're pretty excited about it.
We have affirmed our annual guidance. And that's why we
give annual guidance as opposed to working this on a
quarter by quarter basis.
Shawn Fitz: Okay great. Thanks for the clarification. So Paul,
bottom line is, where are you guys in terms of your
total reps now?
Paul McCormick: Well we're starting the - we are starting
with the two reps that'll start in August, we're
starting the headcount with 43.
Shawn Fitz: Okay, 43.
Paul McCormick: And our goal is to build this out to 70. One
of the reasons we hired the regional managers in advance
of this expansion is that it's - the regional
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managers frankly play an important role both from a
training process, both on the clinical and targeting.
And so by getting to a 5 to 1 ratio, they're spending
less time recruiting. And so that's why we've moved in
that direction to bring on the regional managers in
advance.
Shawn Fitz: And Paul, you said the goal was ultimately 70
reps? Is that - did I get that accurately?
Paul McCormick: Fifty.
Shawn Fitz: Fifty. So by year end your plan is to go from 43
where you stand at the beginning of August to 50. So you
need seven incremental hires I guess?
Paul McCormick: Exactly. And I've got to tell you, the
success that our sales forces had with the physicians
across the country and a lot of things that are
happening in the medical device arena, we're competing
very effectively for some very strong reps.
And just as a sidelight, seven of the 11 last hires come
to us not only with a strong sales background, they also
have sold AAA stent grafts in their history.
So I'll tell you it's a great dynamic at this point for
this company as we go forward.
Shawn Fitz: Okay, great. And then also just looking at the
international revenue.
Paul McCormick: Yes?
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Shawn Fitz: I guess I was surprised by how strong that was in
the second quarter, especially given the fact the first
quarter experienced some stocking orders.
Paul McCormick: We're going to try to dissuade people from using the
product to bring that more in line.
Shawn Fitz: The bottom line I guess, as we look at that
revenue for the second quarter, is that kind of the
baseline that we should see you guys building from or is
there something that was one-time in nature on the
second quarter?
Paul McCormick: No. No. I don't think there's anything - I
have to be honest with you, our international
distributors LeMaitre, obviously a major one, is putting
resources behind us. This is an important product for
them, worked very successfully now to make a transition
in some approvals in France as an example.
We'll have some sort of summer slowdown, but from a
usage standpoint and from purchases as a distributor, I
think we're in a different phase than we had been with
past distributors like Edwards in the past.
Shawn Fitz: Okay. And then Paul, if you look past the Japan
opportunity, what's kind of the underlying market growth
rate internationally, not for you specifically but just
for the market in general?
Paul McCormick: Oh, entire international?
Shawn Fitz: Yes, I'm just trying to quantify what the market
growth rate is internationally ex-Japan.
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Paul McCormick: Well if we want to - if we want to refer to
Millennium Research Group, for instance, in the major
markets they have in Europe which is Italy, UK, Germany
and France, they had it growing from 96 million in 2007
to 141 million by 2010.
If you look at Latin America, they have it growing from
46 million to 60 million. So that's kind of a reasonably
growth rate internationally. Obviously the growth rate
in the U.S. is going to be accelerated with things like
screening and our demographics. I mean we have a
different economic driver than many of the countries
overseas.
Shawn Fitz: Okay, great. Last question.
Paul McCormick: Sure.
Shawn Fitz: Just as we think about the margin opportunity on
the ePPFTE, it sounds like you guys are going to work
through all your existing inventories and then cut over
to your own internally manufacture material some time
early '08.
Is the full effect or the full margin impact, are you
going to see that immediately day one when you cut over
to your graph material? Or is there some learning curve
or some hurdle as it relates to volumes that will impact
that?
Paul McCormick: Yes, there won't be a learning curve. It's
just an issue of using up product on a FIFO basis. And
some devices may have components of both.
Shawn Fitz: Okay, but the bottom line is once you fully work
that through...
Paul McCormick: Yes.
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Shawn Fitz: ...there's a 1500 to 1800 basis point improvement
in margins?
Paul McCormick: Absolutely.
Shawn Fitz: Okay, thanks guys.
Paul McCormick: You bet. Thanks Sean.
Operator: Our next question comes from Christopher Warren with Sun
Trust.
Paul McCormick: Hey Chris.
Christopher Warren: Thanks for taking the question. Wanted to ask
about the reps again. You said, I guess you started the
quarter somewhere around 39 and ended up with 43. Didn't
you end up last quarter at about 43?
Paul McCormick: No. What we said is we started - we had 41
reps on board for all of Q1. I'm including anybody who
was there from day one to the last day of the quarter.
So if there's a couple terminations during the quarter I
don't include them. Because obviously they probably are
not contributing a whole lot. And I think we can
transition any interest by physicians pretty well.
So Q1 - in Q1 we had 41 reps on board for the entire
quarter. And then in Q2 we had 34 reps on board for the
entire quarter.
But as Bob pointed out, there's some time weighted, you
know, as you look at expenses, there's a time weighted
impact on expenses based on when they came in or came
out of the quarter.
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Christopher Warren: Got you. Could you explain the move between the
41 and the 34? What happened?
Paul McCormick: Well there's some people that during that
timeframe that were not either getting up to speed on
the clinical or the sales side. And we elected to look
to replace those individuals.
Christopher Warren: Okay. Should we expect that same level of
replacement for the rest of the year or do you think
that's kind of the time of year where that gets done?
Paul McCormick: Well I don't think it was the time of year. I
think it's all a function of if you look at the people
that we replaced and when they got hired which could be
anywhere from eight to 14 months ago, it is a function
of the ability to - of Endologix to compete for reps.
And I think if you look at the last 11 reps we hired
where seven of them have sold AAA stent graphs, they
have a much better grasp of what they're getting
themselves into with regard to the clinical implications
of these kinds of positions.
Because if you look at it, there's very few jobs out
there in the medical device arena where reps are kind of
very involved in the procedure. And frankly, that
attracts a lot of people to this space.
So a number of the people that we - or some of these
people, the last 11, they're not coming directly from an
AAA stent graph. They may be coming from a coronary
product but sold AAA in the past.
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And so you have to look at it that way. So I think based
on the 11 we've hired, when you have that many people
understanding the process and that Powerlink is so much
more established than it was 14 to 20 months ago, I
would suspect we probably would see it tapering off of
the turnover.
Christopher Warren: Okay. Could you talk a little bit about sales
force productivity in terms of like the freshman class
as it were, how they compare to previous freshman
classes?
Are you getting improved productivity for any level of
maturity from year to year as you go through these new
product extensions?
Paul McCormick: Yes we - well I think it's - and that's just
the product extensions. I think tenure on the job is
clearly a marker. The challenge we have which is why we
went to annual guidance is with changes in territories
and promotions, it's very difficult to provide guidance
on that that's going to be helpful.
But I can tell you that certainly we continue to see
improvement in the top group. And with tenure, these
people are becoming more productive.
Christopher Warren: But relative to the maturation curve a year ago?
Paul McCormick: It's pretty close to that. But it - the only
thing that tempers it is as you take away - let's say
you carve out part of a territory as you increase
coverage. How do you show comparable impact from period
to period?
Christopher Warren: Okay, so I guess it's tough for you to sort of
respond?
Paul McCormick: I mean here - maybe this is a good way to
look at them. And Bob referred to it a little bit in his
comments is we had a significant reduction in headcount.
And
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you had sales at least from a usage when you get rid of
stocking orders, the stocking order have gone up. I mean
they are getting more productive.
Christopher Warren: Okay. Okay, that's helpful.
Just looking back from quarter to quarter, you have had
for the last three years, some volatility in those
sales.
Is there anything to think that if, you know, second
quarter decelerates a little bit that third quarter
rebounds? Or should we just not be focused on quarter to
quarter revenue?
Paul McCormick: Well if I had my druthers, don't focus on
quarter. But that's like - it's hard to believe anybody
will just not focus on quarter.
I think we'll - we - our expectations, we will continue
to see growth. The growth rate from quarter to quarter
may change. And again, for the same reason as I talked
about, it's just a - these are elective procedures. And
patients typically have to clear - get cardiac clearance
for instance.
And all of a sudden, instead of doing it the second week
in March, it goes over to the first week in April or
something - you know, that type of shift.
So I think it's fair that number one, we're affirming
our annual guidance, but quarter to quarter, we would -
our expectation is to see continual growth. That growth
rate could modulate somewhat.
Christopher Warren: And if someone were to ask you, okay, so could
you use this growth rate this quarter as a rationale for
assuming revenue growth deceleration or peaking
penetration of the Powerlink, how would you best respond
to that?
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Paul McCormick: Well I wouldn't - peaking, I don't understand
what you mean by peaking penetration rate of the
Powerlink?
Christopher Warren: In terms of getting incremental docs to use the
Powerlink?
Paul McCormick: Oh, we're far from peaking. I mean on a
national basis we have probably 6% to 7% of the national
market keeping in mind that the vast majority of our
sales are coming in from only maybe 1/3 to 1/4 of all
potential hospitals. So we're getting a much greater
penetration in the more tenured territories. But we are
far from peaking out.
And I think particularly as you look at the data now
that is being - has been presented by Dr. Raithel and
Dr. Collins, we in fact are probably best positioned to
further expand the role of ELGs into those 30,000,
35,000 patients that are still going open repair.
So we're a ways off from peaking. Bob?
Bob Krist: Yes, I was just going to jump in and see if this
is helpful. We have not had a straight line growth in
the number of territories. We've done them - we've done
the expansions a little bit episodically.
And so you have to - if you factor out the change in the
number of actual territories in the given periods, the
actual sales per territory number in the first quarter
this year increased by 30% over last year.
And the actual sales per territory number in the second
quarter this year increased by 40% over prior year.
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So if you look at it on that basis, you're actually
seeing an acceleration in the productivity. But because
there is an uneven rate at which we're expanding the
number of territories, that gets a little bit hidden.
Christopher Warren: Okay. All right, yes. That's very helpful, super
appreciate that. Thank you very much for the question.
Paul McCormick: Yes, no problem.
Operator: Our next question comes from the line of John Putnam
with Dawson James.
John Putnam: Thanks. Hi guys.
Paul McCormick: Hey John.
John Putnam: A couple of questions. The seven reps that have
AAA experience, I hope that none of them were Guidant
salespeople.
Paul McCormick: I don't know, you can make the case that a
Guidant rep with that they had to deal with may be more
talented than guys when physicians are beating down your
door to get a product.
John Putnam: Yes, I'll take that - okay, for what it's worth.
Last quarter I think you said you were in about 300
accounts in the United States Paul?
Paul McCormick: We had said that we were - over the prior 12
months, we had sold into 300 accounts. And if you want
to take a look at let's say our last six months, we've
gotten revenue out of 272 accounts over the last six
months.
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Eighty percent of the revenue coming from - just about
half of those -- 47%. And so when you look at it based
on Q2 domestic product sales, we have approximately
about 7% of the total domestic market while only selling
at about 25% to 30% of the total account.
So clearly we have a great opportunity and we're seeing
better penetration on our more tenured territories.
John Putnam: You said 47% or half the...
Paul McCormick: About half of those hospitals are contributing 80%...
John Putnam: Okay.
Paul McCormick: ...revenues in Q2.
John Putnam: All righty.
Paul McCormick: That's the rough guide. So clearly we're
getting a number of physicians up using the device and
making it part of their practice.
John Putnam: Okay. Have you seen any change or any shift in
the kind of physicians that are doing these procedures
from vascular surgeons to maybe some other specialties?
Paul McCormick: A little bit. We're seeing - and it's been
helpful in situations where there may be a corporate -
strong corporate tie in with a given account that - with
a given company.
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There is interest on the part of interventional
cardiologists to some extent oftentimes in conjunction
with their CT surgeon. And so together or CT surgeon
alone, will look to expand their own practices. And AAA
is a logical area for them to look at.
So there's some. I wouldn't call it major yet. But we
have some cardiologists, some CT surgeons utilizing the
technology.
John Putnam: Great. Thanks very much.
Paul McCormick: Okay.
Operator: Once again, ladies and gentlemen, as a reminder, to
register for a question, please press star 1 on your
telephone keypad. And our next question comes from
Daniel Mallin with WBB Securities.
Daniel Mallin: Hi Paul.
Paul McCormick: Hey Dan.
Daniel Mallin: Bob. Congratulations on the quarter.
Paul McCormick: Thank you.
Daniel Mallin: I apologize if I missed this. But I didn't hear
a whole lot of update on the Japanese approval process.
Is there anything that's changed there?
It seems like six months ago we were sort of right
around the corner. We're going to be there right side by
side with Cook.
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Now it appears that we're going to be second to market.
Is there any developments there in terms of - I mean
it's - did see an announcement. I think you signed on a
distributor there?
Paul McCormick: Well we've been working with - let me - first
of all, Gore is also approved. They've been approved
earlier. And we've commented on that.
We are - PMDA, we've been notified by our distributor
PMDA is in the final aspect of the review. They had
taken our answers. They sent them out to their expert
panel. It's come back in.
Our belief is we will launch it in the second half of
this year as we've talked about. We've - our distributor
has sent physicians to Germany for additional training.
Because as you may know, there are no phase 3 trials in
Japan. Once you stop enrolling you're done.
And our own internal people are going over in August for
training - additional training for the Cosmotech people.
So our belief if we are going to get that approval here
shortly and then launch second half of this year.
And the nice thing is, the approvals for reimbursement
have just been approved April/May timeframe. So in
essence the three of us will be launching almost
simultaneously.
This is a - this market is going to develop - the
Millennium Research Group probably has about a $40
million market by 2010. So you'll start with a couple of
hospitals where you have physicians proctors who will
gain their
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experience and then go out and proctor others. So we're
still very confident on a launch second half of this
year.
Daniel Mallin: So what I'm hearing the most significant
development there is that the insurance approvals have
come in place in Japan over the - in the previous
quarter?
Paul McCormick: That and the responses, our responses had
been reviewed by their expert panel. And I - we're just
waiting on that to get processes.
Daniel Mallin: Now I know in Japan they're not as transparent
in the US where you have the FDA is - kind of announces
when they have big meetings. There's no indication as to
when they're going to meet or when - is there like a
clock that's ticking like at the FDA, they have six
months to review?
Paul McCormick: I don't know about the FDA, but I've got a
clock ticking. This is not going to require another
panel. I think it's a question of just processing.
And we feel pretty confident because the questions that
came back had nothing to do with the clinical. It was
all related around some of the animal tests. And the
questions came from pathologists which is - it is what
it is.
Daniel Mallin: Okay. And on the changeover for the PTFE -- I
know this is in your filings, but if you can refresh my
memory -- when does the current contract with the
existing supplier run out? And what do the current
inventories look like? And how long you think before
you're going to be working through the expensive
material? I know you've covered this a number of
times...
Paul McCormick: That's okay.
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Daniel Mallin: ...but if you can just touch on that again?
Paul McCormick: Contract ends at the end of this year. It's
renewable or by either party if they want. Bob, you want
to give timing on the - what your gut feel is?
Bob Krist: Sure. And just to clarify that. We would have to
mutually agree to renew it. So we unilaterally control
ending it if that is in fact our choice.
And we have been producing the material in-house. And
the material has been approved as you know, by FDA. So
we are simply building inventories and working through
our existing inventories of the purchase material on a
FIFO or First In First Out basis.
And we have a remaining purchase commitment over the
next six months of this year something on the order of
1.2 million. And that would be the end of our
commitment.
And so as soon as we work through the existing
inventories of finished goods as well as these
additional purchases of the material that we're
committed to, then we will be strictly using our own
material. And we will see that impact early in 2008 on a
blended basis and probably by mid-2008 on an all-in
basis.
Daniel Mallin: So assuming that the current usage is indicative
of usage in the future, probably within a year you'll be
for all intents and purposes, exclusively into the lower
cost material of the higher margins?
Bob Krist: For all intents and purposes, yes.
Daniel Mallin: Okay, well that's about it for me. Thank you
very much.
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Paul McCormick: Thanks Dan.
Operator: Our next question comes from the line of Vivian Wohl
with Federated Kaufmann Fund.
Vivian Wohl: Hi Bob and Paul. Just a quick follow-up question
on the inventory. Bob, where do you think the year end
inventory will be?
Bob Krist: Are you referring to the overall dollar balance...
Vivian Wohl: Yes.
Bob Krist: inventories?
Vivian Wohl: Yes.
Bob Krist: I would say it will be very close to where it is
today.
Vivian Wohl: And the reason why it wouldn't be lower?
Bob Krist: Well principally because we still have this
additional $1.2 million of purchases.
Vivian Wohl: Right.
Bob Krist: And we will be producing product consistent with
our sales activity. So frankly, until we really make
that conversion to the in-house material and impact the
cost per unit significantly, the inventories will be
about flat and then they will come down even as sales
are increasing.
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Vivian Wohl: Okay. So at some point next year, they should be
running six months of inventory or I don't know, what
kind of number are you targeting?
Bob Krist: Oh you mean, now you're talking about turnover?
Vivian Wohl: Well they're related, yes.
Bob Krist: Yes. Well I think that even at a constant
turnover, the absolute dollar investment in inventory
will come down based on the cost per unit.
And yes I do foresee opportunities as volumes grow as
the Japan approval comes in to improve the turnover.
Right now it's about 11 months. And there is potential
to get that closer to a 2 times turnover over time.
Vivian Wohl: Does any of that include consignment inventory at
this point?
Bob Krist: It absolutely does. And that is part of why the
inventory levels are a little bit higher when you think
of them just compared maybe to other businesses. Because
we're effectively carrying our customers' inventory
domestically.
Vivian Wohl: Okay. And that's at the hospital. It's not trunk
stock?
Bob Krist: Well sort of in both cases. In other words,
whether it's temporary consignment at the hospitals or
whether we are maintaining inventories at each of our
sales representatives' locations, that is a higher
relative level of inventory that we're holding than if
the business model were based on direct sales.
Vivian Wohl: Okay. And for Paul, could you give us a little
more anecdotal feedback on the share pass from the
experience you've had thus far?
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Paul McCormick: Yes, what's been fascinating as we knew going
into it, the actual use of it is not going to be that
high because it's unpredictable when you're going to
actually need to access the other side.
It's really just a sense for the physician that he's got
total control from a wiring standpoint.
Unlike the modular systems, you won't have to can the
gate every time. And if he has to come up the
contralateral limb, he doesn't have to worry about
repairing it.
So it's - the times they've used it, it's been
significantly, probably has reduced times by 15 to 30
minutes, what you might have expected.
But again, it's there but it doesn't necessarily get
used a high percentage of the time. So it's a home run
from that standpoint.
Vivian Wohl: Got it. And what is the regulatory path on the IS?
Paul McCormick: That's unclear. We're going to go overseas to
do some cases there. We're not changing the implant.
We're generally not changing the implant procedure per
se. So that remains to be - we will obviously go forward
with a real-time review because it's just a catheter
change, no real material differences, unclear if we'll
have to do cases or not. If we do, obviously it would be
an acute event, follow-up.
Vivian Wohl: But you don't think it would require a supplement?
Paul McCormick: Don't know. I mean we've - well we don't
know. We haven't broached that yet with the agency.
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Vivian Wohl: Okay. Thanks very much.
Paul McCormick: Okay, thanks Vivian.
Operator: There are no further questions at this time. Please
proceed with your presentation or any closing remarks.
Paul McCormick: Well once again, I'd like to thank everyone
for joining us today for your question and for your
support. We are committed to expanding the market for
the Powerlink System and are investigating innovative
solutions for minimally invasive triple A treatment.
If you have any additional questions, please call Bob or
me. We look forward to keeping you apprised of our
progress. And thanks again for your interest in
Endologix.
Operator: Ladies and gentlemen, that concludes your conference
call for today. We thank you for your participation and
ask that you please disconnect your lines.
END