Endologix BUY

ELGX : NASDAQ : US$12.68

Target: US$17.50

Endologix develops, manufactures and markets
minimally invasive treatments for vascular diseases,
namely abdominal aortic aneurysms (AAA).

All amounts in US$ unless otherwise noted.

Life Sciences — Biomedical Devices and Services
Investment recommendation
We recommend investors add to positions in ELGX on the heels of an
encouraging first quarter, highlighted by the strong Nellix uptake in Europe,
which we believe is a precursor of great things to come for this technology WW.
Nellix holds the potential of making ELGX one of the most compelling long-term
growth stories in small-cap med-tech, in our view.
While challenges highlighted a quarter ago did in fact impact the U.S. business
in Q1, they weren’t worse than expected. To wit, ELGX maintained 2014 U.S.
sales growth guidance of 6-10% (we model 5.5%). Notably, OUS trends, namely
Nellix in Europe, give us confidence ELGX can deliver material upside to its 26-
30% OUS growth guidance (we model 47% and think this could be beaten). In
sum, if ELGX can hit the low end of its US guidance, there is material upside to
total 2014 revenue guidance, in our view. With the next-gen VELA now fully
launched, and stated plans to further expand its U.S. sales force, ELGX has a
good chance of delivering.
We continue to believe ELGX represents one of the most attractive growth
companies in med-tech, notwithstanding the near-term challenges to the U.S.
business. Our bullish view of ELGX is unchanged, supported by a robust product
pipeline and elite GM profile, which has room for expansion to the 77% level, in
our estimation. We maintain our BUY rating and $17.50 price target.
Investment highlights
 ELGX reported total Q1 revenue of $33.3M, representing Y/Y growth of
12%, eclipsing our $32.5M estimate and the Street’s $32.2M projection.
Gross margin of 73% declined from the 76% in the year-ago period but was
spot on with our projection.
 Our $17.50 year-end price target is predicated on a 6x EV/sales multiple
applied to our 2015 revenue estimate. The target multiple is a 5% discount
to the “growth equity” med-tech comp group (>12% forward 2-year revenue
CAGR). We model 16% forward 2-year CAGR for ELGX


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