Oct 15 2013
In Vivo October 15th, 2013 written by Tom Salemi
AAA company Endologix Inc. is carving a niche for itself in the crowded endovascular aneurysm repair field with two new products. It has developed a method of delivering aortic aneurysm grafts through a percutaneous opening, but the company’s larger opportunity might lie in a piece of technology acquired three years ago – the Nellix Endovascular Aneurysm Sealing system.
Three years ago this month, EVAR company Endologix, fresh off a difficult ownership battle, tried to rise above its status as a middling device company by acquiring venture-backed Nellix. Today, the combined company is positioned well to compete in the growing AAA market.
Endologix and several other companies are developing new tools to bypass the damage wrought by atherosclerosis, namely the formation of aneurysms in the abdominal aortic artery.
The market is growing but competition for the business remains fierce with publicly traded companies and venture-backed start-ups battling for market share.
In 2010, Endologix made a move it hopes will separate it from the pack. The company agreed to pay close to $40 million for privately held Nellix Endovascular Inc., developer of a system to seal aneurysms for good.
Endologix is selling Nellix’s CE-marked EVAS technology in Europe while pursuing approval in the US. The device, along with Endologix’s own internally developed products, is putting the company on a path to gain market share in this competitive market.
Venture capitalists, including those in the medical device field, are pressed regularly to re-invent the venture capital model. The challenge centers specifically on the early stage of venture capital, the creation and funding of a new company. The hope is to use fewer dollars to carry the company to the point of sale. But the model for exits itself might benefit from a bit of tweaking. Endologix Inc., a player in the crowded endovascular aortic aneurysm repair field, and Essex Woodlands Health Ventures, a growth equity firm, have shown how a public companies and private equity firm can pair up to expand clinical pipelines and return capital to limited investors.
Three years ago this month, publicly held Endologix agreed to acquire Nellix Endovascular Inc., a privately held company in Essex Woodland’s portfolio. [See Deal] Endologix paid out stock for the deal while Essex Woodlands countered with a private investment in the AAA maker. [See Deal] The transaction gave Endologix a still investigational approach to reduce the chances of an aneurysm rupturing while also offering a treatment for AAA sufferers with challenging anatomies that make endovascular treatment impossible. Essex Woodlands, in return, obtained liquidity in the form of Endologix stock, much of which the firm has distributed to LPs, plus a sizable share in a company that was going to carry Nellix’s technology to the market.
Today, the deal looks to be paying off for both. Endologix is emerging as a leader in the AAA space. Just this past year, the company scored two regulatory victories. In April, the FDA approved a percutaneous indication for its flagship AFX endovascular AAA system, which consists of an endovascular delivery system and an AAA graft that’s inserted in the artery to divert blood away from the weakened arterial wall. The green light gives Endologix the only fully percutaneous indication for an endovascular AAA system in the US.
The opportunity to deliver endovascular AAA grafts via a percutaneous approach rather than a standard cut down in the groin, represents a big opportunity. The less invasive procedure means faster surgery and recovery times, both huge selling points in a health care market looking for financial, as well as clinical, justification. But Endologix’s larger – and more standout – opportunity might lie with the aneurysm-sealing technology it obtained in the Nellix acquisition. The Irvine, CA-based Endologix is beginning a limited commercial launch of a technology that could simplify the procedure, reduce secondary interventions and surveillance requirements, plus treat a broader range of AAA patients than possible with prior AAA devices.
While open surgery was once the norm, today most AAA patients – approximately 70% – undergo endovascular aneurysm repair (EVAR), during which a catheter is inserted through incisions in the patient’s groin. (See Exhibit 1.) This minimally invasive approach helps avoid the trauma of an open surgery that is more invasive than most, because it involves making a large incision in the patient’s abdomen, moving the patient’s abdominal organs, cross-clamping the aorta to stop blood flow, and implanting a synthetic vascular graft in the aorta. Endologix says open surgical repair may last two to four hours, whereas the typical EVAR procedure lasts one to two hours. In January, Endologix obtained CE mark for the Nellix endovascular aneurysm sealing system (EVAS), the first commercially available aortic aneurysm sealing system that could make minimally invasive aneurysm repair available for nearly all AAA sufferers.
The slow commercial rollout of Nellix and the approval of the AFX Percutaneous Endovascular Aneurysm Repair (PEVAR) system is putting Endologix in a solid position in the growing AAA space. Surgeons and hospitals have been eager to adopt new technologies that can improve patient outcomes, save time, and steer patients away from open surgery. Competitors in the space are seeking to do this by introducing new grafts and stents capable of handling the complicated anatomy of the abdominal aorta. (For an overview of the EVAR space, see “EVAR Update: Competitors Stake Their Ground In A High-Growth Space” — Medtech Insight, April 2013.) Endologix – which sports a market capitalization of just over $1 billion – is poised to gain some market share against established players like Medtronic Inc., the Cook Medical Inc. division of Cook Group Inc., and WL Gore & Associates Inc. Other up-and-coming players include TriVascular Inc. and the most recent US entrant, Lombard Medical Technologies PLC.
Joanne Wuensch, medical device analyst at BMO Capital, says Endologix’s revenue is growing at 30% annually as the company snatches up market share. With AFX, she says, the company does “a very good job of selling a differentiated product,” which is a departure from other AAA grafts because it relies upon “anatomical fixation” to remain in place. The graft rests upon the split at the aortic bifurcation, using the artery itself as a stop against graft migration. Endologix is ramping up sales in Europe, where the company sells both AFX and Nellix.
Fighting A Silent Killer
Endologix and others in the AAA space are trying to mend the aortic aneurysms caused by atherosclerosis, the thickening and hardening of arteries brought on by smoking, high blood pressure, and cholesterol damage. Atherosclerosis weakens blood vessel walls, causing the vessel to expand or balloon out. Aneurysms frequently form in the aortic artery, the body’s largest artery, extending between the heart and the two iliac arteries that travel down the legs. According to Endologix, the overall patient mortality rate for ruptured AAA is approximately 70%, making it among the leading causes of death in the US. Patients diagnosed with AAA will either undergo noninvasive monitoring or, if the aneurysm is large enough, repair before the weakened wall ruptures. (Sadly, many AAAs are never detected as patients do not have symptoms at the time of their initial diagnosis. Diagnosis generally occurs during procedures to treat or diagnose unrelated medical conditions.)
Endologix was founded in 1997, built upon technology developed at the Arizona Heart Institute, by Edward Diethrich, MD and Myles Douglas, MD. Like most innovators, the founders were frustrated by limitations of AAA device designs at the time. In particular, the early implants leaked and were too large, with ranges in size from 21 French (21F) to 30F (catheter size, 7 mm to 10 mm).
Endologix made some progress developing its first product, Powerlink, getting it onto the market in Europe and beginning clinical trials in Japan. But by 2002, the company required more cash and sought access to public markets through a reverse merger with Radiance Medical Systems, which developed a “radiation angioplasty” technology that was made obsolete by the introduction of drug-eluting stents. [See Deal] Radiance had cash but no product. Endologix had the makings of a product but little cash, so the companies combined.
Current Endologix president and CEO John McDermott was running the peripheral vascular division at CR Bard Inc. around the time of the reverse merger. Bard had a strong interest in the AAA market and initially sought to acquire Endologix but instead obtained the European distribution rights for Powerlink. [See Deal] Bard built a small sales force in Europe and agreed to acquire Endologix if it obtained PMA approval within a specific time frame. McDermott recalls that the company’s clinical trial was taking longer than Bard had anticipated. Bard extended its acquisition option once, but when the second option came up it walked away. “We had other growth opportunities at Bard, so we just let it go.” Bard handed distribution rights back to the company, but McDermott didn’t forget Endologix.
Several years later, McDermott received a call from a head hunter looking to fill the CEO position at Endologix. He remembered the company, of course, but he reacquainted himself with the products and markets. “My conclusion was that this had a lot of potential,” he says. “The product needed some work and the sales force had improvement opportunities, but the market was attractive.” He joined as CEO in 2008. McDermott says Endologix’s implant worked very well, but the delivery system needed refinement. Endologix also suffered from high turnover in the sales force, a serious problem for a company with a complex device that requires high-quality clinical support. “I knew we could fix that,” he says. “We could strengthen the sales force, make the device easier to use, and build out the range of sizes to treat more patients.”
Endologix did all three in the following years. McDermott brought a few of his connections from Bard into Endologix, including a former head of sales. “We had some very good people there, so the company was very fortunate. Good R&D, good regulatory, some really talented folks,” he says. For the first couple of years Endologix worked on improving the product line and the sales organization. The company broadened its product offering, introducing more sizes and a better delivery system. “Once we got the product and sales force humming, we turned our attention to the pipeline.” The company was still losing money, McDermott says, “but the business was really starting to get some traction.”
But Endologix needed a game changer. McDermott says the Endologix offerings, while improved, weren’t enough to carry the company to a market leading position. The firm began developing a technology that would seal the aneurysm sac, making secondary interventions and rupture far less likely. Current stent grafts allow the blood to pass by the aneurysm, but the weakened wall remains in place. The graft, although affixed to the arterial wall at certain points, can move over time and become dislodged or allow leaks into the aneurysm sac, a situation known as an endoleak. This is a known risk, and it’s why recipients of stent grafts must undergo regular monitoring through a CT scan or duplex ultrasound. Incomplete sealing of an aneurysm can lead to endoleaks or graft movement, and the need for secondary interventions. An EVAR procedure may be initially successfully at repairing an AAA, but if problems develop they’ll need to be addressed through another endovascular procedure or open surgery.
Endologix worked internally on a way to seal the aneurysm sac. The company’s development program was generating encouraging bench and animal results, but the executives also looked outside for answers and became aware of at least one other company pursuing this potential technology – Nellix. “We became convinced that treating the entire AAA sac was going to be the therapy of the future,” McDermott says. “We wanted to acquire comprehensive technology and IP in solutions related to sealing the sac.”
Finding A Fit
Endologix’ intentions led it to Nellix. Founded in 2001, the Palo Alto-based Nellix had raised $30 million from venture investors. McDermott already knew Nellix’s largest investor, Essex Woodlands. Not long after McDermott joined Endologix, a principal shareholder – Elliot Associates LP – made an unsolicited bid to buy the company, offering $98 million ($2.25 per share). [See Deal] The offer took into consideration the current share price, but Endologix rejected the bid suggesting it didn’t reflect the company’s potential. Rejecting the bid required Endologix executives to pursue alternatives, including strategic investors and other financial buyers. Essex Woodlands was on the list of meetings.
McDermott says meetings with Essex Woodlands were positive, but didn’t give Endologix the means to fend off the offer from Elliot.
Endologix did manage to stave off the acquisition. “We really didn’t want to sell the company, especially for those prices,” he says. With its independence re-established, Endologix looked forward and came to appreciate Nellix’s approach to sealing the aneurysm sac. Guido Neels, managing director of Essex Woodlands, agreed that his firm initially viewed Endologix as a potential portfolio company. “But we quickly started taking about a potential combination of the two companies.”
Neels saw the combination as a “win-win situation.” Endologix broadened its pipeline while Nellix obtained access to capital, experience, and a sales infrastructure. Despite the obvious fit, discussions took over a year. The technology and clinical data needed a bit more time to mature, according to Neels. But he was confident the deal would get done, citing the chemistry among himself, McDermott, and Robert Mitchell, the CEO of Nellix. “We all wanted to do a deal and if people want to do a deal it ultimately will get done.”
The negotiated deal offered modest upside to Nellix’s private investors including Essex Woodlands, Band of Angels, BioStar Ventures, and Saratoga Ventures. In addition to the up-front $15 million stock payout, investors are eligible for up to $39 million more in equity based upon the performance of Nellix.
McDermott says Endologix was about to break even prior to the purchase of Nellix. The company might have required a bit of additional capital. But the acquisition required Essex Woodlands’ capital infusion to fund continued development and the expansion of sales and marketing in Europe. Endologix also made some design enhancements to the Nellix device. (See Exhibit 2.) The company shrunk the profile from 22F to 17F. In its filing for CE mark the company combined clinical data performed prior to the acquisition with new results employing the new design. Endologix scored the CE mark at the beginning of the year and undertook a limited market launch earlier this year. Mitchell, who remains at Endologix as president of international sales, says improvements to the Nellix offering include a single-user console, an optimized SKU mix, better ease of use, more safety measures, a lower profile, and more efficient manufacturing. “Although time lines may have been delayed with the acquisition, the ultimate offering and potential is much stronger in the long run,” Mitchell wrote in an e-mail.
The acquisition of the Nellix EVAS (endovascular aneurysm sealing) technology did more than open up geographic markets to Endologix. The sealing technology could enable Endologix to treat parts of the aorta that can only currently be addressed through open surgical procedures. Instead of using traditional stent grafts that are affixed to the arterial wall with hooks or barbs, Nellix uses two covered stents surrounded by “endobags” that are filled with a biostable polymer. The endobags fill the aneurysm sac and hold the grafts in place. Nellix actually consists of two devices. Each is, using percutaneous access, inserted over a guidewire into the patient’s femoral arteries.
The two parts of the Nellis device meet in the artery. The polymer is injected in the endobags, filling out the space and sealing the AAA. McDermott says, “It really eliminates all blood flow in the aneurysm and seals the sac. The blood flow goes through the two stents from just below the renal arteries down into the iliac arteries providing blood flow to the legs.” McDermott says sealing the aneurysm sac should reduce the need for secondary interventions and eventually minimize the need for lifetime surveillance. The Nellix technology will also enable Endologix to treat previously unreachable aneurysms that couldn’t be repaired with existing grafts because of the patient’s anatomy, for example, very short or nonexistent aneurysm necks. “We think it’s got broad applicability throughout the aorta,” McDermott says. “We’ll move our way up the aorta, including the thoracic aorta.” BMO’s Wuensch agrees on the potential. “Based on our due diligence, Nellix is a real game changer,” she says. “It’s in limited launch in Europe and the initial feedback is that it’s being really well received.”
Counting On Nellix
Endologix is currently in talks with the FDA about an investigational device exemption. Nellix will require premarket approval, so Endologix is planning to conduct a pivotal clinical trial. McDermott is hoping to have the design of the device approved by the end of this year and to begin enrolling patients next year. Typically, EVAR trials have involved 150 patients, so that’s the scope of trial he’s anticipating for Nellix along with a 12-month follow-up. If all goes well, this would position Endologix to release the Nellix product in the US in 2016.
In the US, Endologix currently sells only the AFX EVAR system, making the device the company’s revenue “workhorse product,” says McDermott. The company also sells AFX in Europe, Latin America, and other smaller markets. In Japan, Endologix sells an earlier iteration of the AFX system, Intuitrak, but it’s trying to obtain regulatory approval for AFX.
Long-term the company is counting on Nellix to produce the bulk of the company’s revenues. As of last month, the rollout in Europe has reached only 15 centers, with 150 cases performed. McDermott says Nellix could replace AFX in most instances, with a couple of exceptions; AFX will continue to be ideal for patients with tight distal aortas and those with peripheral arterial disease who may need a future endovascular intervention. “AFX has kind of grown up treating these anatomies, and we have a lot of physicians who will continue to use the device. But if we had a crystal ball and could see in the future when Nellix is widely available, I would expect, over time, it could easily be 80% of our sales with AFX bringing in 20%.” Nellix could be priced a little higher than AFX, he says, but not high enough to make price a barrier to adoption.
Nellix’s flexibility might also serve Endologix well as it deals with the setback of another product line, the Ventana fenestrated stent graft system. Ventana was developed specifically for the endovascular repair of juxtarenal and pararenal aortic aneurysms (accounting for roughly 20% of all AAAs). Designed to be used along with the AFX system, Ventana was developed to be the first graft that could be “adjusted” to fit the anatomy of a patient’s renal arteries, continuing the flow of blood into the kidneys. The openings in the renal artery aren’t uniform in the aorta, challenging the fitting of these grafts. Anatomies may differ from patient to patient, making it difficult for medical suppliers to mass produce an implant that fits everyone. Patients requiring the repair of a juxtarenal or pararenal aneurysm typically require open surgery. Cook Medical also offers a custom-made graft in the US. Terumo Corp. offers one in Europe. But the construction of a custom graft can take six to eight weeks, weeks that leave the patient at risk for a rupture. Endologix hoped Ventana could be adjusted during surgery to fit unique anatomies. “We developed Ventana as the first off-the-shelf device,” McDermott says.
Endologix had run Ventana through two international clinical studies and about half of its IDE trial (76 patients) when the company detected an unexpectedly high number of renal re-interventions. Stenosis was forming at the end of some renal branches of the device, cutting the flow of blood to the kidneys and requiring a second interventional insertion of a transitional stent to prop the artery open. Endologix plans to introduce a new design for Ventana with a new branching device to run into the renal arteries. The company is also exploring an alternative approach based on the Nellix’s EVAS technology to seal the areas around the renal arteries. The firm is still in the early stages of its product for this difficult area of the aortic artery. McDermott says Endologix also plans to revamp the training program for the centers where the trials have been run. “We had seen quite a bit of difference in clinical outcomes between sites,” McDermott says. “Clearly, an important component to these more complex procedures is training.”
Endologix has a big year ahead of it. The company will be launching commercial campaigns in US and Europe. In the US, Endologix will introduce a new version of AFX, plus continue to provide physician training programs for percutaneous AAA repair. The firm has partnered with Abbott Laboratories Inc., which will provide percutaneous closure devices. The two companies partnered in randomized, prospective, multi-center clinical trials comparing PEVAR with EVAR. “We demonstrated the procedure was faster; we saw fewer groin-related complications and less bleeding; and patients required less pain medication,” McDermott says. “They can basically repair an aneurysm without an incision. The patients go home with Band-Aids on their groins instead of bilateral groin incisions.”
Also this year, Endologix will push forward with Nellix, working to ramp up sales in Europe and design a pivotal clinical trial in the US. The commercial sales will help determine what sort of returns Essex Woodlands and other investors in Nellix will see in the future. Essex Woodlands’ Neels says additional returns will be welcome, but the firm already has seen “extremely gratifying” results of its investment in Endologix. Essex Woodlands invested when Endologix traded at $4.73. Now it’s trading at three times that amount.
The past three years have been huge for Endologix. The company’s internal research and development created a differentiating tool in PEVAR. Nellix offered enough potential to maintain the interest of its CEO, Robert Mitchell, who is staying at an acquired company far longer than most chief executives. Mitchell says initially he agreed to stay just long enough to build out the European operations, but he found himself working really well with McDermott and caring what happens to Nellix’s technology. The Nellix-Endologix connection “is very important to me personally and although not originally planned, I am honored to be part of its future,” he says. Looking to that future, it will be interesting to see if Endologix leaves its mark, not only on the AAA field but also on other companies and investors experimenting with the merger and acquisition model.