With 2016 wrapping up, Irvine, Calif.-based Endologix Inc., is facing another challenge in the form of a temporary hold on shipments of its AFX endovascular abdominal aortic aneurysm system due to a manufacturing problem. The hold comes shortly after the company had its CE mark for AFX suspended, as well as the receipt of an FDA request for two-year patient follow-up data for the Nellix endovascular aneurysm sealing system.
The company's stock (NASDAQ: ELGX) was hit hard with the news. After closing last week at $ 7.19, it fell to $5.31.
During the call on the hold, analysts quizzed CEO John McDermott about "hiccups", as Joanne Wuensch of BMO Capital Markets termed them, that had occurred over the past couple of months. Wuensch asked if the company needs to make changes — particularly on the personnel level. "I do think we have the right people," McDermott said. "There is certainly some settling in, post the merger [with Trivascular Technologies, Inc.]. I don't believe that's really driven this issue." In February, Endologix completed its merger with former rival Trivascular.
McDermott handled many questions about this latest hurdle, which the company said was identified through internal testing. He stressed that the hold on some sizes of AFX could be lifted in the "near future," adding that Endologix is unaware of any clinical events related to the system's use in the field. However, the problem potentially could result in a Type IIIb endoleak.
Specifically, the company noticed damage to the graft material in some sizes of the AFX device. It believes it is related to the manufacturing process during which the graft is loaded into the delivery system.
McDermott explained that the company discovered the issue over the weekend and decided to put both AFX and AFX2 on hold, as they share similar loading processes. However, the internal testing found the issue in AFX2. The hold does not have an impact on Ovation and Nellix in the areas they are available.
In addition, McDermott noted the company was speaking with the FDA Tuesday to discuss the purpose of the hold. In addition, Endologix officials expect to provide an update on the hold before the end of the week.
Brooks West of Piper Jaffray asked about the potential effect on inventory in the field. McDermott said there was a potential for a product to be in the hospital; however, he said that there was not a lot of shelf inventory, as reps tended to bring AFX in for procedures.
McDermott also told West that the company had conducted process qualification activities over the summer, and they had gone well.
CE mark suspension
During the call, McDermott emphasized that the hold "is not related to any reported events from physicians or the recently announced CE suspension."
It was the latter issue that raised the interest of analysts, particularly as it was announced just two weeks ago. The company reported the suspension for AFX after reports of Type III endoleaks in the field with an older generation of the device. Newer AFX systems have device and graft material improvements — as well as updated instructions for use — resulting in a substantial reduction of Type III endoleaks, the company said.
It added that no such incidents have been reported with the AFX2, and it is providing documentation that demonstrates the reduction of endoleaks. It hopes to see the CE mark reinstated next month.
McDermott said the hold will not affect the situation in Europe, as "they are very unrelated" incidents. "I'm not saying we're not going to need to have a conversation, but I am saying that these are unrelated," he said when Chris Pasquale of Guggenheim Securities pressed the issue.
Portfolio size an issue?
News of the hold comes roughly a month after the company revealed that it expects a second quarter 2018 approval of the Nellix after the FDA asked for for two-year patient follow-up data. (See Medical Device Daily, Nov. 18, 2016.)
McDermott said at the time that the the company was "encouraged" by what it has seen so far related to the two-year clinical outcomes under the revised instructions for use.
Despite the FDA's move, Rick Wise of Stifel wrote in a Nov. 17 note that Endologix had a lot going for it, including a robust pipeline; however, there are other, larger rivals in the AAA endovascular aortic repair (EVAR) arena, namely Medtronic plc, W.L. Gore and Associates, and Cook Medical.
"The EVAR market is inherently more difficult than other med tech markets – the wide variety of patient anatomies presents a unique design challenge for any off-the-shelf products. As a result, ELGX has (and will likely continue) to experience product delays, and at worst, product failures," Wise has noted.
Given these pressures, Wise's colleague Mathew Blackman asked McDermott whether Endologix may have bitten off more than it could chew with such a broad portfolio, considering the market. "It's a fair comment," said McDermott, "I don't think that is the case; I think this is just an unusual situation." He also did not think it reflected upon the company's ability to handle such a portfolio.
"There continues to be a lot of positive energy ... [and] tremendous growth potential in the company still exists," McDermott told Chris Cooley of Stephens when asked about ways to strategically position itself in the new year in light of the recent issues. "It doesn't really change the long-term outlook for the business, which we think is very positive."
In a note following the call Stifel's Wise was cautiously optimistic. "With limited information in-hand today, but more hopefully to come later this week in another management-hosted follow-up conference call, our initial reaction to today's news suggests this issue is resolvable," he wrote in a note.