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| ELGX > SEC Filings for ELGX > Form 10-Q on 28-Jul-2009 | All Recent SEC Filings |
28-Jul-2009
Quarterly Report
In addition to the historical financial information included herein, this
Quarterly Report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based
on management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this Quarterly Report on Form 10-Q, including
without limitation, statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and statements located elsewhere
herein regarding our financial position and business strategy, may constitute
forward-looking statements. You generally can identify forward-looking
statements by the use of forward-looking terminology such as "believes," "may,"
"will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or
"continues," or the negative thereof or variations thereon or similar
terminology although not all forward-looking statements contain these words.
Such forward-looking statements involve known and unknown risks, including, but
not limited to, market acceptance of our Powerlink® System and related products,
economic and market conditions, estimates regarding patient populations, number
of procedures performed and market statistics, the regulatory environment in
which we operate, the availability of third party payor medical reimbursements,
competitive activities or other business conditions. Our actual results,
performance or achievements may differ materially from any future results,
performance or achievements expressed or implied from such forward-looking
statements. Important factors that could cause actual results to differ
materially from our expectations are disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2008, including but not limited to those factors
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Risk Factors," "Consolidated Financial Statements" and
"Notes to Consolidated Financial Statements." All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements. We
expressly disclaim any intent or obligation to update information contained in
any forward-looking statement after the date hereof to conform such information
to actual results or to changes in our opinions or expectations.
Overview
The sections below entitled "Introduction," "Industry Background," "Market
Opportunity," "Our Products," "Research and Development," "Marketing and Sales"
and "Patents and Proprietary Information" update and restate certain information
contained in the similarly named sections of our Annual Report on Form 10-K
under "Item 1. Business." To the extent the information set forth below is
inconsistent with the information in our Annual Report on Form 10-K, the
information set forth below shall control.
Introduction
We develop, manufacture, market and sell innovative treatments for aortic
disorders. Our principal product, the Powerlink® System is a minimally invasive
device for the treatment of abdominal aortic aneurysm, or AAA. AAA is a
weakening of the wall of the aorta, the largest artery of the body. Once AAA
develops, it continues to enlarge and if left untreated becomes increasingly
susceptible to rupture. The overall patient mortality rate for ruptured AAAs is
between 50% and 80%, making it a leading cause of death in the United States
today.
The Powerlink System is a catheter and endoluminal stent graft, or ELG,
system. The device consists of a self-expanding cobalt chromium alloy stent cage
covered by ePTFE, a common surgical graft material. The Powerlink ELG is
implanted in the abdominal aorta, which is accessed through the femoral artery.
Once the Powerlink ELG is deployed into its proper position, blood flow is
shunted away from the weakened or "aneurismal" section of the aorta, reducing
pressure and the potential for the aorta to rupture. Our clinical trials
demonstrated that implantation of our products reduces the mortality and
morbidity rates associated with conventional AAA surgery, as well as provides a
clinical alternative for many patients who could not undergo conventional
surgery. Sales of our Powerlink System in the United States, Europe, Japan, and
South America are the primary source of our reported revenues.
Industry Background
Atherosclerosis is the thickening and hardening of arteries. Some hardening
of arteries occurs naturally as people grow older. Atherosclerosis involves
deposits of fatty substances, cholesterol, cellular waste products,
calcium and other substances on the inner lining of an artery. Atherosclerosis
is a slow, complex disease that starts in childhood and often progresses with
age.
Atherosclerosis also can reduce the integrity and strength of the blood
vessel wall, causing the vessel to expand or balloon out, which is known as an
aneurysm. Aneurysms are commonly diagnosed in the aorta, which is the body's
largest artery. The highest incidence of aortic aneurysms occurs in the segment
below the opening of the arteries that feed the kidneys, the renal arteries, and
the area where the aorta divides into the two iliac arteries that travel down
the legs. Once diagnosed, patients with AAA require either a combination of
medical therapy and non-invasive monitoring, or they must undergo a procedure to
repair the aneurysm.
For years, physicians have been interested in less invasive methods to treat
AAA disease as an alternative to the current standard of open surgical repair.
The high morbidity and mortality rates of this surgery are well documented, and
medical pharmacological management for this condition carries the catastrophic
risk of aneurysm rupture. Physicians and commercial interests alike began
investigating catheter-based alternatives to repair an aneurysm from within,
utilizing surgical grafts in combination with stents to exclude blood flow and
pressure from the weakened segment of the aorta.
We believe the appeal of the Powerlink System for patients, physicians, and
health-care payors is compelling. The conventional treatment is a highly
invasive, open surgical procedure requiring a large incision in the patient's
abdomen, withdrawal of the patient's intestines to provide access to the
aneurysm, and the cross clamping of the aorta to stop blood flow. This procedure
typically lasts two to four hours and is performed under general anesthesia. The
complication rates for the open surgical procedure, as well as ELG systems, vary
depending upon patient risk classification.
An article published in the New England Journal of Medicine on January 31,
2008 compared the results of open surgical procedure and the endovascular
treatment of AAA on more than 45,000 patients over a three year period. Among
the findings discussed in the article were:
• The mortality rate of all patients in the study undergoing endovascular
repair was approximately 1.2% as compared to 4.8% for open surgical repair.
Importantly, these findings are based on a patient population that typically
has a significantly higher co-morbidity rate compared with those patients
treated by open surgery.
• Patients treated by endovascular repair were three times as likely to be discharged to their homes rather than another rehabilitation facility as compared to patients treated with open repair. This results in substantial clinical and economic benefits for patients and payors alike.
• The average hospital stay for patients in the study undergoing endovascular repair was 3.4 days versus 9.3 days for patients undergoing open repair.
• Open surgical repair entails risk of re-hospitalization due to problems associated with surgical incision. Patients had to be re-admitted over time for surgical complications associated with the laparotomy, such as adhesions and bowel resections, at a much higher rate than those undergoing endovascular repair.
Market Opportunity
In the United States alone, it is estimated that between 1.2 million and
2 million people have an AAA. Although AAA is one of the most serious
cardiovascular diseases, many AAAs are never detected. Approximately 75% of AAA
patients do not have symptoms at the time of their initial diagnosis, and AAAs
generally are discovered inadvertently during procedures to diagnose unrelated
medical conditions. Once an AAA develops, it continues to enlarge and if left
untreated, becomes increasingly susceptible to rupture. The overall patient
mortality rate for ruptured aneurysms is between 50% and 80%.
We estimate that approximately 250,000 people per year are diagnosed with AAA
in the United States and approximately 60,000 of those diagnosed will undergo
aneurysm repair, either via an ELG or via open surgery.
AAAs are generally more prevalent in people over the age of 65 and are more
common in men than in women. In addition to the current pool of potential
patients, we expect that the number of persons seeking treatment for their
condition will increase based on demographic factors. In 2008, the age 65 and
over population in the United States numbered approximately 38 million, or 12%
of the total population, and is expected to be 71 million by 2030. It is growing
at a higher rate than the overall United States population.
Over the next several years, we forecast the ELG market to increase by at
least 9% per year, and we estimate that up to 75% of AAA procedures will be
performed using ELGs by 2013. We estimate that the current total worldwide AAA
market is approximately $700 million, with approximately $450 million of the
market to be in the United States, and is expected to grow to approximately $1
billion by 2013. We expect that the total aortic stent graft market (including
thoracic stents, for which we do not currently have a product candidate) will
grow to $1.4 billion by 2013.
Our Products
Powerlink System
Our principal product is the Powerlink System for the treatment of AAA. The
device consists of a self-expanding cobalt chromium alloy stent cage covered
with ePTFE, a common surgical graft material. The Powerlink ELG is implanted in
the abdominal aorta, gaining access through a small incision into the femoral
artery. Once the Powerlink ELG is deployed into its proper position, blood flow
is shunted away from the weakened, or aneurismal, section of the aorta, reducing
pressure and the potential for the aorta to rupture.
We believe the Powerlink System is a superior design that overcomes the
inherent limitations of early generation AAA devices and offers the following
advantages:
• One-Piece, Bifurcated ELG. This eliminates many of the problems associated
with early generation multi-piece systems. Our products eliminate much of
the guide wire manipulation required during the procedure to assemble the
component parts of a modular system, thereby simplifying the procedure. In
addition, in the follow-up period, there can be no limb component separation
with a one-piece system. We believe this should result in continued
long-term exclusion of the aneurysm, and improved clinical results.
• Fully Supported. The main body and limbs of the Powerlink System are fully supported by a cobalt chromium alloy cage. The cobalt chromium alloy cage greatly reduces or eliminates the risk of kinking of the stent graft in even tortuous anatomies, eliminating the need for additional procedures or costly peripheral stents. Kinking may result in reduced blood flow and limb thrombosis.
• Unique, Minimally Invasive Delivery Mechanism. The Powerlink System requires only a small surgical incision in one leg. The other leg needs only placement of a non-surgical introducer sheath, three millimeters in diameter. Other ELGs typically need surgical exposure of the femoral artery in both legs to introduce the multiple components. Our unique delivery mechanism and downsizing of the catheter permits our technology to be used in patients having small or very tortuous access vessels.
• Self-Expanding. The stent is formed from cobalt chromium alloy in a proprietary configuration that is protected by our patent portfolio. This proprietary design expands to the proper size of the target aorta and eliminates the need for hooks or barbs for attachment. Based on our results to date, the Powerlink System has an excellent record of successful deployments.
• Single Wire and Long Main Body Design. The long main body of the stent cage is made of a continuous piece of wire shaped into its appropriate configuration. Migration of individual stent
graft sections is eliminated. In addition, the long main body places the Powerlink System near or at the aortic bifurcation, which minimizes the risk of device migration during the follow-up period.
Limitations of Earlier Technology
Our technology is dramatically different than other currently available AAA
devices. Despite enthusiasm by physicians and patients alike for minimally
invasive technology, we believe early generation devices have achieved a limited
market penetration due to design limitations and related complications. The
published clinical literature details many of the deficiencies of these
approaches. In our opinion, early generation devices were limited because
assembly was required by the surgeon. Multi-piece, or modular, systems require
assembly by the mating of multiple components to form a bifurcated stent graft
within the aneurysm sac. These systems can be more difficult to implant and lead
to longer operative times. In addition, there are a number of reports of
component detachment during the follow-up period. Component detachment can lead
to a leak and a re-pressurization of the aneurysm sac. We believe this increases
the risk of AAA rupture, often requiring a highly invasive, open surgical
procedure to repair the detachment.
Powerlink System Products
Variations in patient anatomies require an adaptive technology. We designed
our Powerlink System, with multiple proximal extensions, limb extensions,
bifurcated main body lengths and diameters to simplify procedures, improve
clinical results, and drive product adoption by offering physicians a full line
of products that are adaptable for treatment of the majority of patients with
AAA disease.
Powerlink Infrarenal Bifurcated Systems. The Powerlink Infrarenal Bifurcated
System is available in multiple diameters and lengths and can treat patients
that have an aortic neck up to 32 millimeters in diameter. The infrarenal device
is made of a cobalt chromium alloy stent covered by high density ePTFE for
placement below the renal arteries. The self-expanding stent permits the graft
to be used in a wide range of neck diameters, which allows us to treat a wide
variety of anatomies with a standard device. We obtained the CE Mark for this
product in Europe in August 1999, U.S. Food and Drug Administration, or FDA,
pre-market approval, or PMA, in October 2004, and Shonin approval, which is
equivalent to FDA approval of a PMA application in the United States, in Japan
in February 2008. We commenced commercial sales in the United States in late
2004 and to Japan in February 2008 through Cosmotec, our exclusive distributor
in that country.
Powerlink Aortic Cuffs and Limb Extensions. The Powerlink Proximal Extensions
and Limb Extensions permit the physician to treat a greater number of patients.
Proximal Extensions are available in 25, 28 and 34 millimeters in diameter and
multiple lengths. They also are available in both infrarenal and suprarenal
configurations. Limb extensions are available in 16, 20, and 25 millimeters in
diameter with various lengths, allowing the physician to customize the
technology to treat a wide range of patient anatomies. We have obtained the CE
Mark for these products in Europe in October 1999 (16/20 mm Limb Extensions),
December 1999 (25/28 mm Proximal Extensions), May 2002 (34 mm Proximal
Extensions) and November 2008 (25 mm Limb Extensions). We obtained FDA marketing
approval in October 2004 (25 and 28 mm proximal infrarenal extensions and the 16
and 20 mm limb extensions), March 2008 (25 mm limb extensions), and October 2008
(34 mm proximal infrarenal and suprarenal extensions and 25 and 28 mm proximal
suprarenal extensions). Our large diameter 34mm Proximal Extensions are marketed
under the trademark Powerlink XL.
IntuiTrak. In October 2008, we received FDA approval for a new system to
deliver and deploy the Powerlink System. The new system, called IntuiTrak, was
designed to further simplify the implant procedure and provide a delivery
profile advantage over many competitive devices. We had a full market
introduction for the product in the second quarter of 2009.
IntuiTrak Express. In March 2009, we received FDA approval for a new system
to deliver the Powerlink XL stent graft. This completes the application of
IntuiTrak technology to the full range of sizes of the Powerlink System.
IntuiTrak Express was introduced to the market at the Society for Vascular
Surgery meeting in June 2009.
Research and Development
We spent $6.1 million in 2008, $6.4 million in 2007, and $6.8 million in
2006, on research and development, including clinical studies. Our focus is to
continually develop innovative and cost effective medical device technology for
the treatment of aortic disorders. We believe that our ability to develop new
technologies is a key to our future growth and success. Our research and
development activities have focused, or are expected to focus, on technology
that makes our existing products easier to use, developing products to treat
patients with AAA that are not able to be treated endovascularly due to
limitations of currently marketed products and new technologies to address AAA
and other aortic disorders, such as stent grafts for the thoracic region of the
aorta. Historically, we have focused on developing the Powerlink System for AAA.
However, we believe that we will need to continue to devote more resources to
new technologies for AAA and aortic disorders, such as thoracic aneurysms, to
continue to grow our business. Undertaking these research and development
activities will likely require significant cash resources and could take many
years to complete, if at all.
Marketing and Sales
We sell and market products both in the United States and internationally. As
of July 24, 2009, we market our products in 21 countries outside of the United
States through 12 active independent distributors.
United States. We began a focused launch of the Powerlink System in the
United States with six sales representatives and two clinical specialists in
late 2004. We have expanded our domestic sales force to 52 defined sales
territories and expect to have 54 territories by the end of 2009. As of July 24,
2009, 47 of these territories were filled. The primary customer and decision
maker for these devices in the United States is the vascular surgeon. Through
our direct sales force, we provide clinical support and service to many of the
approximately 1,600 hospitals in the United States who perform endovascular
aneurysm repair.
Europe. The market for ELGs in Europe is influenced by vascular surgeons,
interventional radiologists and, to a lesser extent, interventional
cardiologists who perform catheter directed treatment of AAA. The European
market is less concentrated than the domestic market. We have obtained the right
to affix the CE Mark to our family of Powerlink products. Europe represents a
smaller market opportunity due to capitated hospital budgets and a selling price
that is typically less than in the United States. We currently sell our devices
through exclusive independent distributors.
Japan. The Powerlink System received Shonin approval in February 2008. We
commenced commercial sales to Japan in February 2008 through Cosmotec, our
exclusive distributor in that country.
Rest of World. We have obtained regulatory approval and have active
distribution partners in a number of countries, including Argentina, Brazil,
Chile, Colombia, Mexico, Turkey and China. In addition, we have obtained
regulatory approval but have not initiated the distribution process in several
other countries, including Australia, Canada, and the European countries of
Norway, Poland, Portugal, and Spain. We may or may not pursue these markets
depending on the availability of a suitable distribution partner.
Patents and Proprietary Information
We have an aggressive program to develop intellectual property in the United
States, Europe and Asia.
We are building a portfolio of apparatus and method patents covering various
aspects of our current and future technology. In the AAA area, we have 18 United
States patents issued, including 393 claims, and 20 pending United States patent
applications. Our current AAA related patents begin expiring in 2017 and the
last patent expires in 2019. We intend to continue to file for patent protection
to strengthen our intellectual property position as we continue to develop our
technology.
In addition to our AAA intellectual property, we own or have the rights to 35
issued United States patents, one issued European patent, and one issued
Japanese patent relating to intravascular radiation, stents, and various
catheter technologies. The non-AAA patents begin expiring in 2012 and the last
patent expires in 2018.
Our policy is to protect our proprietary position by, among other methods,
filing United States and foreign patent applications to protect technology,
inventions and improvements that are important to the development of our
business.
We also own trademarks to protect the names of our products. In addition to
patents and trademarks, we rely on trade secrets and proprietary know-how. We
seek protection of these trade secrets and proprietary know-how, in part,
through confidentiality and proprietary information agreements. We make efforts
to require our employees, directors, consultants and advisors, other advisors
and other individuals and entities to execute confidentiality agreements upon
the start of employment, consulting or other contractual relationships with us.
These agreements provide that all confidential information developed or made
known to the individual or entity during the course of the relationship is to be
kept confidential and not be disclosed to third parties, except in specific
circumstances. In the case of employees and some other parties, the agreements
provide that all inventions conceived by the individual will be our exclusive
property.
Results of Operations
Comparison of the Three Months Ended June 30, 2009 and 2008
Product Revenue. Product revenue increased 42% to $13.2 million in the three
months ended June 30, 2009 from $9.3 million in the three months ended June 30,
2008. Domestic sales increased 45% to $11.4 million in the three months ended
June 30, 2009 from $7.9 million in the three months ended June 30, 2008. The
increase in domestic sales was primarily due to increased productivity of our
sales representatives, as well as the introduction of two new products in the
fourth quarter of 2008 and the marketing of IntuiTrak, our new system to deliver
and deploy the Powerlink System, in the first quarter of 2009.
International sales increased 27% to $1.8 million in the three months ended
June 30, 2009 from $1.4 million for the comparable period in the prior year.
This increase was driven primarily by higher sales to Cosmotec in Japan and
various distributors in South America, due to greater market acceptance.
We expect that product revenue will continue to grow, both sequentially in
the second half of 2009 relative
to the first six months and compared to prior year periods. We anticipate that
product revenue will be between $51.0 and $53.0 million for the year ending
December 31, 2009.
Cost of Product Revenue. The cost of product revenue increased 27% to
$3.3 million in the three months ended June 30, 2009 from $2.6 million in the
three months ended June 30, 2008, due to an increase in the volume of Powerlink
System sales. As a percentage of product revenue, cost of product revenue
decreased to 25% in the second quarter of 2009 as compared to 28% in the same
period of 2008. The percentage decline in the cost of product revenue was due to
a higher domestic to international sales mix in the products sold during the
period, favorable product mix due to new product introductions, and certain
product cost efficiencies due to higher volume.
We believe that gross profit will increase in the second half of 2009 due to
the expected higher commercial sales of the Powerlink System both in and outside
of the United States. We also expect gross profit as a percentage of product
revenue to increase modestly relative to the first six months of 2009 due to
expected continued effect of the factors mentioned above.
Research, Development and Clinical. Research, development and clinical
expense decreased 18% to $1.5 million in the three months ended June 30, 2009
from $1.8 million for the three months ended June 30, 2008. This decline was due
to the timing of expenses related to the development cycle for the IntuiTrak
delivery system.
We expect that research, development, and clinical expense will increase
sequentially over the remaining quarters of 2009 as we pursue opportunities to
develop additional new products for the treatment of aortic disorders.
Marketing and Sales. Marketing and sales expense increased 7% to $6.6 million
in the three months ended June 30, 2009 from $6.1 million in the three months
ended June 30, 2008. The increase in the second quarter of 2009 resulted
primarily from:
• marketing costs related to the launch of the IntuiTrak delivery system,
• expenses related to more intensive training of sales representatives, and
• higher commission expense on the 45% increase in domestic sales between those periods.
We anticipate that marketing and sales expense will increase sequentially at
a moderate rate for the remaining quarters of 2009 due to the expected addition
of four to six additional sales territories, the higher compensation associated
with the anticipated sales growth, the addition of executive staff in the second
quarter, and the increase in marketing related costs for the broader launch of
the IntuiTrak Express delivery system for Powerlink XL in the third quarter of
2009.
General and Administrative. General and administrative expense decreased 13%
to $2.3 million in the three months ended June 30, 2009 from $2.6 million in the
three months ended June 30, 2008. The decrease is primarily due to the
resolution in the second half of 2008 of certain legal matters which were
ongoing during the second quarter of 2008, offset by higher compensation expense
paid in 2009.
We expect general and administrative expenses to be in the $2.0 million to
$2.2 million range per quarter through the balance of 2009.
Other Income/(Expense). Other income decreased 6% to $17,000 in the three
months ended June 30, 2009 from $18,000 in the same period of 2008.
Comparison of the Six Months Ended June 30, 2009 and 2008
Product Revenue. Product revenue increased 42% to $25.0 million in the six
months ended June 30, 2009 from $17.6 million in the six months ended June 30,
2008. Domestic sales increased 47% to $21.6 million in the six months ended
June 30, 2009 from $14.7 million in the six months ended June 30, 2008. The
increase in domestic sales was due to the increased productivity of our sales
force, the introduction of new products including Powerlink
. . .
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