Endologix Inc.’s bid to grow market share through a newly struck deal to acquire a competitor appears to have set investors in the Irvine-based medical device maker on edge.
Its shares went over the edge last week, plummeting 30% on Oct. 27 on heavy trading before stabilizing around that level toward the end of the week with a market value of $594 million.
The dip came as the maker of devices to repair abdominal aortic aneurysms announced it was buying Santa Rosa-based competitor TriVascular Technologies Inc. for $211 million in cash and stock.
Market talk suggests that investors could be jittery about how integrating TriVascular—which posted a net loss of $14.9 million on revenue of $9.7 million in the second quarter—might affect Endologix’ own moves toward profitability. A key concern is whether the acquisition will distract Endologix as it seeks Food and Drug Administration approval for Nellix, a next-generation abdominal aortic aneurysm device.
Endologix expressed confidence about the acquisition amid the sharp drop-off.
“Together we will provide the broadest product offering in [abdominal aortic aneurysm treatment] and be the only company that enables physicians to pick the best device platform for each individual patient,” said Endologix Chief Executive John McDermott.
McDermott is expected to lead the combined company, which will retain the Endologix name and the company’s Irvine Spectrum headquarters.
TriVascular Chief Executive Christopher Chavez is expected to join the combined company’s board.
Work Force
TriVascular has more than 300 workers, but it is not yet known how many will be coming to Irvine. Endologix has 609 workers, an estimated 350 of whom are in Orange County.
Endologix sought TriVascular in order to bolster its sales force and gain entree to the complex endovascular aneurysm repair market—a segment of the total market that’s growing, according to company officials.
“…The combination of Endologix and TriVascular brings together two innovation leaders with complementary technologies for addressing aortic disorders,” McDermott said, adding that the combined company has a “very deep patent portfolio of 370 issued and pending patents around the world to protect our proprietary technologies.”
TriVascular’s lead product is Ovation Prime, which is designed to allow less-invasive access to abdominal aortic aneurysms, providing doctors the ability to treat patients with narrow or tortuous blood vessels, which could be upward of a third of abdominal aortic aneurysm patients, according to Endologix.
Word on Street
Wall Street had a mixed mind on TriVascular.
Joanne Wuensch of Montreal-based BMO Capital Markets downgraded Endologix last week to a “market perform” rating in the wake of the deal.
“We anticipate [Endologix] will be down post this announcement, and while we rarely downgrade a stock after such an event, we do not believe that [the company] will outperform until a clear line of sight is available on what the ‘new’ Endologix will look like,” Wuensch said.
She said the TriVascular announcement doesn’t mean something was amiss with Nellix, which could be approved by the FDA at the end of 2016, “but it does muddy a clean story, indicates that [Endologix] is not a near-term take out, and adds integration risk and [disruptions].”
McDermott addressed the risks of integration during the call, saying that the company will likely “lose some days in the field” for sales staff training and shed relationships with some dealers during the period.
The company estimates a hit of $7 million to $12 million altogether.
“That’s just an estimate,” McDermott said.
Rosier Outlook
Some analysts offer a rosier outlook on the deal.
“In our view, the reason you own [Endologix], Nellix, is still intact, though a smooth integration of TriVascular will be key to maximizing the Nellix opportunity going forward,” Toronto-based RBC Capital Markets’ Glenn Novarro wrote in a research note.
Analysts also mentioned what the TriVascular acquisition would bring to Endologix in terms of its competitive position.
Analyst
The combined company will have 16% to 17% of the total abdominal aortic aneurysm market, according to Steven Lichtman, an analyst with New York-based investment bank Oppenheimer & Co.
Medtronic PLC, a Dublin, Ireland-based device maker that operates from Minneapolis and has some 1,300 OC employees, is the market leader.
Lichtman said in a research note on the deal that the deal for TriVascular would give Endologix a total of 160 U.S. sales representatives, rivaling Medtronic in size. Bloomington, Ind.-based Cook Group Inc. and Gore Medical, a unit of Newark, Del.-based W.L. Gore & Associates Inc., are two other large competitors in the abdominal aortic aneurysm repair market.
Endologix said it expected the TriVascular deal to close in next year’s first quarter. The company last week also announced the sale of $110 million worth of convertible notes, with some of the proceeds being used to pay off TriVascular’s $56 million in debt.
Q3 Results
Endologix also posted its third-quarter results.
The company had a loss of $10.9 million in the quarter, which beat analysts’ expectations. Revenue grew 7% to $38 million.
RBC Capital Markets’ Novarro mentioned that the revenue growth of Endologix primarily came on “strong Nellix momentum in Europe.” Sales for that device were up 45% year-over-year in Europe.
