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Urologix Inc. (NASDAQ:ULGX)

F1Q2013 Earnings Call

November 14, 2012 5:00 am ET

Executives

Stryker Warren Jr. - Chief Executive Officer, Director

Brian Smrdel - Chief Financial Officer

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the Urologix Inc. fiscal year 2013 first quarter conference call. My name is Dorsel and I will be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.

Certain information discussed during this conference call, including answers to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those stated or implied in any forward-looking statements due to the risks and uncertainties.

A detailed discussion of risks and uncertainties maybe found in Urologix’s recent Annual Report on Form 10-K for the year ended June 30, 2012 and other documents filed with the Securities and Exchange Commission. Urologix disclaims any obligations to update any forward-looking statements made during the course of this call.

At this time, I will turn the call over to Mr. Stryker Warren Jr., Chief Executive Officer. Please proceed, sir.

Stryker Warren Jr.

Thank you, Dorsel, and good afternoon to all of those joining us today to discuss the company’s results for the first quarter of fiscal year 2013. Joining me are Brian Smrdel, the company’s Chief Financial Officer and Greg Fluet, the company’s Executive Vice President and Chief Operating Officer.

Today’s call will begin with a summary of our first quarter operating performance. Brian will then review the financial results and I will follow with a brief update on the progress we have made this quarter on the priority items that I shared with you on our last conference call. Then I will detail the drivers of the lowered range of fiscal year 2013 revenue guidance reported in our earnings press release this afternoon. Then we will open the call for questions.

First quarter sales of $4 million increased 26% year-over-year but declined 12% sequentially and we are below our expectations. The increase in total revenue year-over-year was due to the contributions of Prostiva for the full fiscal quarter this year compared to the partial period in fiscal 2012. The sequential decline in sales was driven primarily by our direct sales channel, which declined approximately $500,000 this quarter split between both of our in-office technologies.

Sales in our mobile channel and third party mobiles were both relatively flat this quarter and international sales declined 20%, though the impact on total sales was limited given the relative size of this channel. The first quarter's performance relative to plan was driven by a combination of two factors, continuing challenges and our ability to drive a turnaround in Prostiva revenue and an unusually high slowdown during the summer in procedure volume that impacted the ordering patterns at some larger Cooled ThermoTherapy customers.

In general, trends across healthcare procedure volumes appeared to weaken this quarter. Some reports have indicated specific weakness in urological procedure volumes. Given our 60% market share in the in-office space, we feel the impacts of a market slowdown real time and we believe the slowdown in procedure trends in both of our technologies this quarter is representative of a broader market slowdown.

Against this backdrop of weaker procedure trends, we have continued to focus on expanding our market position between drugs and surgery targeting the largest opportunity for us, those patients on chronic BPH medication. Urologix's primary competition, medical therapy, continues to grow. Third party data on prescription volumes indicate that prescriber trends, at least through the first quarter of this year, have not slowed despite the mandated warnings on labels for one class of drugs and the resultant late press coverage in 2011.

Primary care physicians and urologists are prescribing more alpha-blockers and 5-alpha-reductase inhibitors than in years past. This remains the primary competitive challenge to procedure growth for Urologix. We are continuing to see positive results when we were able to partner with our urologist customers to educate their BPH patients on the choices for treating their enlarged prostrates including in-office non-surgical treatment options.

But these successes have not had the scale to offset the broader market weakness. Using historical market data for all BPH procedures, both surgical and in-office, we estimate the impacts of the steady growth in the patient population on medical therapy to be in the range of low to mid single-digit declines year-over-year for all BPH procedures.

Though both of our product lines would be affected by these headwinds, the Prostiva business had a greater percentage decline sequentially at 19% than our overall CTT business which declined 7%. We attribute the difference in sequential results for the Prostiva turnaround continuing to take longer than originally expected for many of the same issues discussed on prior calls.

Some positive updates to share before I turn the call over to Brian to discuss our financial performance. First of all, while not strong enough to drive top line growth, we saw continuing indications of the potential of our Think Outside the Pillbox! marketing campaign in the first quarter. We are on track to meet our expectation of an incremental 10% seminar penetration in fiscal year 2013.

However, summer seminar performance did not offset the slowdown from accounts that have not yet participated in our patient education campaign. This is best illustrated by our mobile business where mobile revenue was stable. This channel was not immune to the effect of the first quarter slowdown in procedure volume, however, but our success in deploying seminars in a number of accounts drove growth, which offset the decline in volume in other accounts where we have not been able to drive seminar participation.

Secondly, we are fully staffed in our sales organization with 22 sales reps. Our last five quarters were transformational for the company not only in our acquisition of the Prostiva product license but also in the cultural transformation of our sales organization both leadership and sales force. We believe that we have the right team in place and we expect to we realize measured risk improvements in our financial performance as the tenure in sales productivity grows over the balance of the year. Importantly this team, under a strong new leadership, is properly focused to execute on our sales strategy, particularly in improving utilization by way of patient seminars.

Third of all, I am pleased to announce that the calendar year 2013 final rule for Medicare reimbursement rates was published on November 1 with positive support from the AMA and CMS for the RVUs associated with our Cooled ThermoTherapy code. This was a particularly important year for us as our category one CPT code for Cooled ThermoTherapy was one of 70 codes reevaluated by CMS in calendar year 2012. The American Urological Association, the American Medical Association and CMS were all involved in this process and CMS agreed with the recommendation to maintain the physician work RVUs for our code.

Given the current reimbursement environment, we took this as a strong sign of support for the continued value of our technology to patients, physicians and importantly, the healthcare system. The net impact to our reimbursement for calendar year 2013, factoring in other systemic Medicare changes, the net change is a 1.6% decline for CTT when conducted in-office which is less than the approximate 6% decline that many other office-based procedures will experience in calendar year 2013 and what we would have experienced for CTT without this reevaluation process.

While we think these positives are critical for future success, given the challenging market trends we experienced, the slower than anticipated rebound in Prostiva sales and the limited scale of our successful market development activities, we felt it was prudent to revise our guidance to a range of $16 million to $17 million from the $17.5 million to $19 million. Brian?

Brian Smrdel

Thank you, Stryker. Revenue for the first quarter of fiscal year 2013 was $4 million, up 26% year-over-year and down 12% sequentially. Revenue growth on a year-over-year basis was driven primarily by the growth in our Urologix direct channel which includes the contribution of Prostiva RF therapy product revenue for a full fiscal quarter, compared to a partial quarter and fiscal year 2012.

First quarter revenue declined approximately $530,000 or 12% sequentially due primarily to weaker sales in the Urologix direct channel and to a lesser extent in our international channel. The sequential decline in revenue in our direct channel this quarter was divided almost equally between each of the two product lines, CTT and Prostiva. Both company-owned mobile sales and third-party mobile sales were flat sequentially.

Regarding our international channel performance, the first quarter of fiscal year 2013 represented the third full quarter with European distribution capabilities for our Prostiva line. Continued uncertainty in European markets pressured revenue growth again this quarter. Gross profit for the first quarter of fiscal year 2013 was $2 million, or 50.8% of revenue compared to $1.4 million, or 45% of revenue in the first quarter fiscal year 2012.

The increase in the percentage of gross profit compared to the prior year was due to the negative impact of lower production volumes in the prior year as part of a plan to reduce inventory levels that reduced gross margin by 450 basis points in that period.

Total operating expense of $2.9 million in the first quarter of fiscal year 2013 increased 7.5% year-over-year driven primarily by the expansion of the direct sales force that occurred with the acquisition of the Prostiva product line. Total operating expense declined 12.5% on a sequential basis due to expenses related to the annual AUA meeting that were incurred in the fourth quarter of fiscal year 2012 and lower sales compensation expense as a result of the decrease in sales compared to the last quarter.

First quarter fiscal year 2013 operating expense included a gain of $154,000 due to a change in the fair value of the acquisition consideration for the Prostiva business. For the first quarter of fiscal year 2013, Urologix reported a net loss of $1.1 million, or $0.052 per diluted share, compared to a net loss of $1.4 million, or $0.09 per diluted share, in the first quarter of fiscal year 2012. The net loss in the first quarter of fiscal year 2013 was positively impacted by the gain of $154,000 due to the change in the fair value of the acquisition consideration.

Turning to the balance sheet. As of September 30, 2012 the company's cash balance was $5.3 million compared to $1.9 million as of June 30, 2012 the change in cash balance was driven primarily by the contributions from the company's completed follow-on offering in the period that added $3.9 million to our cash balance.

The company's cash flow benefited from the delayed timing of payments for Prostiva product, royalties and license fees. These delayed product payments are reflected in our balance sheet as an increase on the accounts payable line. The delayed non-product payments continue to be reported on the short-term deferred acquisition payments line.

Finally, as noted in our press release today, we are revising the fiscal year 2013 total revenue guidance range to $16 million to $17 million. I will now turn the call back to Stryker.

Stryker Warren Jr.

Thank you, Brian. Before we open the call for your questions, let me reiterate why we are enthusiastic about our target market.

First, the in-office BPH treatment market serves a large and growing patient population. An estimated 4 million men in the United States are in some form of chronic drug therapy for symptoms related to BPH.

Second we continue to believe there is a large portion of medical therapy patients who do not want to take BPH drugs long-term but are unaware of our non-surgical alternatives. This group of unsatisfied man is our long-term opportunity. Our message remains the same, drug therapy is not the answer, drugs treat the symptoms and not the underlying problem. Urologix's procedures are proven long-term in-office solutions to treat BPH. Urologix's in-office non-surgical procedures are the logical next step for these men.

Third, physicians appreciate the strong safety profile and clinical efficacy of our products.

Fourth the current reimbursement is good and the procedural efficiency is compelling. Urologix technologies provide a compelling cost effective solution for the treatment of BPH. We view the results of the CMS review for Cooled ThermoTherapy reimbursement as supportive of the value these technologies to the healthcare system.

The BPH treatment market remains a compelling long-term growth opportunity for the company. However near-term challenges have caused us to revise our fiscal year guidance expectations. Note the revised revenue range assumes no improvement in in-office procedure trends over the balance of the year. The lowered guidance range is largely influenced by continued uncertainty in procedure volume trends, challenges in turning around the Prostiva business and impacts related to customers affected by Hurricane Sandy. Unfortunately the Prostiva business is taking longer than we originally anticipated to address.

In closing, we were disappointed with our first quarter performance and our revised guidance reflects our cautiousness with respect to healthcare procedure trends for the balance of the fiscal year and the challenges related to reinvigorating the Prostiva business. While the first quarter of fiscal 2013 started off slower than we would have anticipated, we have levers to drive improving results in the future.

Specifically, our goals for improving our execution include organizing and conducting patient education seminars in fiscal year 2013, targeting 10% incremental penetration into our account base, increased sales force productivity over the course of fiscal '13 driven by growing tenure of both the leadership team and our sales reps, increased stability and improved coverage and intense focus on leveraging our leading market share position, our expanded sales organization and our innovative market development and patient education programs to drive top line growth.

We appreciate the time and continued interest in our company and with that I will open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have no questions at this time. Ladies and gentlemen, that concludes…

Stryker Warren Jr.

Dorsel, let me speak to those on the call. In closing, as I have shared in the past, on behalf of the Board of Directors, senior management and all of Urologix employees, I would like to thank our loyal shareholders for your continued interest in Urologix and we look forward to updating you on our progress on our second quarter conference call. Until then good health and good day. Dorsel?

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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