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Executives

Greg Fluet - EVP, COO and CEO

Brian Smrdel - CFO

Analysts

Deepak Chaulagai - Dougherty & Company

Urologix Inc (OTCQB:ULGX) F2Q13 Earnings Call February 5, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Urologix Incorporated Fiscal Year 2013 Second Quarter Conference Call. My name is Jeff, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this 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 risks and uncertainties. A detailed discussion of risks and uncertainties will be 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 obligation to update any forward-looking statements made during the course of this call.

At this time, I will turn over the call to Mr. Greg Fluet, Chief Executive Officer. Please proceed, sir.

Greg Fluet

Thank you Jeff, and welcome to everyone joining us today to discuss Urologix’s results for the second quarter of fiscal year 2013. With me is Brian Smrdel, the Company’s Chief Financial Officer.

Today's call we’ll begin with a brief update on a leadership transition at Urologix and then a summary of our second quarter operating performance. Brian will then review the financial results and I will then provide a brief update on the BPH market opportunity and the progress we have made this quarter on the key initiatives we have discussed on our prior conference calls. Then we will open up the call for questions.

This past November Stryker Warren Jr. retired as CEO from Urologix and I was asked to step in as interim CEO. Stryker joined the company in 2008 and recruited me into the COO position shortly thereafter. I would like to take a moment to thank him for all he has contributed to the Company during that time, his passionate commitment to patients, customers and employees and for his active support during this leadership transition.

With the Board of Directors appointment on January 25th, I am now honored to serve as the new CEO and excited to help build on the foundation we put in place over the last four years. During this time the company rebuilt customer relationships, and built out the senior management team with a number of high potential individuals, restructured the sales organization, launched our Think Outside the Pillbox patient education campaign and added a new technology in the Prostiva acquisition that has made us the clear leader for in-office BPH therapy. Going forward we will continue to build on this foundation as one team with a goal to grow the market for our proven non-surgical in-office BPH technologies as an alternative to chronic drug management.

Now let me turn to our second quarter performance. Aside from our top line revenue results we will provide specific revenue for the two product lines in our earnings releases through at least this fiscal year 2013. Given the additional challenge we took on of turning around the Prostiva witness, we believe it is important for investors to have visibility into relative performance of these two products lines. Second quarter sales of $4.4 million increased 10% sequentially but declined by 6% year-over-year. The sequential increase in total revenue was due to growth in both Cooled ThermoTherapy and Prostiva product lines.

The year-over-year decline in sales was primarily due to a 13% decline in U.S. sales of Prostiva and a 5% decline in U.S. sales of CTT. While we are pleased with our sequential performance in the quarter, we are focused on continuing to improve our execution in the third quarter of fiscal year 2013.

We believe the second fiscal quarter stronger sequential performance was driven by a combination of factors. First, we improved our execution of our patient education seminar campaign, second, we believe we benefited from improving tenure within the sales organization, and third, we believe there is better overall procedure volumes in the quarter compared to the first quarter of our fiscal year.

We continue to focus on expanding our market position between drugs and surgery, targeting largest opportunity for us those patients on chronic BPH medication. We are continuing to see positive results when we’re able to partner with our Urologix customers to educate patients on their choices for treating their enlarged prostates including in-office nonsurgical procedural options.

Some positive updates to share before I turn the call over to Brian to discuss the financial results. First, we continue to stay on track to meet our expectation for seminar program execution. As we have stated in the past, in fiscal year 2012 we had approximately 10% of our customer base participate in our patient education seminar campaign. In this fiscal year 2013, we have targeted to double the total number of customers participating, bringing an incremental 10% of our customer base into the patient education seminar program in this fiscal year.

Seminar performance was not the sole contributor to the sequential growth, as we saw some improve sequential performance in the quarter from accounts that have now participated the program; however, accounts participating in seminar programs continued to show markedly stronger year-over-year performance compared to nonparticipating accounts.

Scaling this seminar program across our customer base is the most important tactic we currently have to drive growth in both product lines in United States. In addition, we ended the quarter fully staffed in our sales organization with 22 sales representatives.

Our last six quarters were transformational for the company not only in our acquisition of the Prostiva product line, but also in the cultural transformation of our sales organization both in senior leadership and in sales team members. We continue to believe that we have the right team in place and we expect to realize measured improvements in our financial performance as their tenure grows over the balance of this year, which we expect will result and improves sales productivity. Importantly the team is properly focused to execute on our sales strategy, particularly in increasing the penetration of patient education seminars into our existing customer base.

While we think these are very powerful positives that contributed significantly to our second quarter results and are critical to our future successes, the long term challenge remains the same and now we are up against continued growth and the use of chronic medication for the treatment of BPH. Near term, the beginning of the calendar year is historically a quarter with lower procedure volumes due to the readying of many patient deductibles including those of Medicare beneficiaries.

This year there’s additional uncertainty going into this fiscal quarter among some of our customers around the potential impact to the Medicare program from the fiscal cliff and a Medicare sustainable growth rate or SGR formula which was only fixed with last minute passage of the American Tax Payer Relief Act of 2012. Therefore, while having posted a stronger second quarter, we are maintaining our full year revenue guidance to arrange of $16 million to $17 million.

And now I’ll turn the call over to Brian Smrdel, our CFO who will provide more details on our financial performance.

Brian Smrdel

Thank you, Greg. Revenue for the second quarter of fiscal year 2013 was $4.4 million, up 9.7% sequentially and down 6.4% year-over-year. Revenue for Cooled ThermoTherapy grew by $247,000 or 9.5% and Prostiva revenue grew by $137,000, also up 10% sequentially but off of a smaller base.

On a year-over-year basis, our U.S. revenue performance was driven by 5.3% decline in the Cooled ThermoTherapy business and a 12.6% decline in our Prostiva business. International sales of Prostiva grew by 60% in the second quarter of fiscal year 2013, compared to the prior year as we benefited this year from a full quarter of international distribution compared to the prior year when we only have part of distribution in place. International revenue was flat, compared to the first quarter of fiscal year 2013.

Gross profit for the second quarter fiscal year 2013 was $2.2 million or 51.4% of revenue, compared to $2.3 million or 49.2% of revenue in the second quarter of fiscal year 2012. The increase in the percentage of gross profit compared to the prior year was due to increased production volumes that reduced the allocation of fix manufacturing cost on a per unit basis. Gross margin also increased sequentially from 50.8% as a result of improving production efficiencies.

Total operating expense of $3.1 million in the second quarter of fiscal year 2013 in the second quarter of fiscal year 2013 increased 4.2% sub sequentially and declined 3.9% year-over-year. The sequential increase in operating expense was driven primarily by increased spending in sales and marketing, specifically for additional investments in the direct sales force and an expansion of our patient seminar program.

Total operating expense declined 3.9% year over year as a result of a non cash gain of $215,000 reported in the second quarter of fiscal year of 2013 due to the change in the fair value of the acquisition consideration for the Prostiva business. Excluding this non cash gain, total operating expense increased by 2.9% year-over-year. Again, the increase in operating expense excluding the non-cash gain was driven by increased investments and sales and marketing.

For the second quarter of fiscal year 2013, Urologix reported in net loss of $970,000 or $0.05 per diluted share compared to a net loss of $1.1 million for $0.08 per diluted share in the second quarter fiscal year 2012. The net loss from the second quarter of fiscal year 2013 was positively impacted by the gain of $215,000 due to the change in the fair value of the acquisition consideration.

The net loss this quarter represented a modest sequential improvement over the net loss of $1.1 million or $0.05 per diluted share in the first quarter fiscal year 2013. The sequential improvement in net loss this quarter was driven primarily by higher sales and gross profit compared to the last quarter.

Turning to the balance sheet, as of December 31, 2012, the Company's cash balance was $4.9 million compared to $5.3 million as of September 30, 2012. Cash utilization in the second quarter was $470,000. Our cash utilization benefitted from the ability to defer $489,000 of payments for Prostiva product purchased during the quarter. In addition, we continue to defer payments, due and accrued in prior periods related to the Prostiva business.

I want to take a moment to summarize the impact of our balance sheet from the continued deferral of these payments. In total, since the close of the license agreement we have received $5.3 million of Prostiva product from Medtronic with extended payment terms, of which approximately $2.1 million is currently due. In addition, we have accrued for the royalty and license obligations due under the Prostiva license agreement totaling approximately $1.2 million.

These obligations are reflected on our balance sheet and accounts payable in short term deferred acquisition payments. As we have disclosed in our prior quarterly reports, we continue to be in discussion with Medtronic regarding the timings of this payments. It is our preference to extend the payment terms as long as possible in order to allow us to deploy our cash resources to turn around the Prostiva business and implement our market development strategy. Given the ongoing negotiations we are not at liberty to discuss any additional details. What we wanted to provide is an interim update. Additional details will be provided in our 10-Q when that's filed next week.

I'll now turn the call back to Greg.

Greg Fluet

Thank you, Brian. Before we open the call for your questions let me reiterate what gives us confidence, we are targeting the right market segment of BPH therapy to achieve growth. It is well known that the population of men suffering from lower urinary tract symptoms is enormous with over 4 million men in the U.S. on chronic drug therapy trying to alleviate their symptoms and more than that number in watchful waiting.

In addition this aging population of men is growing due to the current demographics. What is also known as FBPH drugs are not completely effective. Many men do not get adequate symptom relief. The most popular class of drugs alpha blockers are also proven to not slow down disease progression. Patient compliance with BPH drug therapy is also challenging, given the well documented side effects, short term and long term as well as the lack of meaningful symptom relief.

However while the patients on BPH drugs and thus the number of patients dissatisfied with BPH drugs has grown, this trend has not translated into growth in any BPH procedure market, surgical or non-surgical over the last few years. In fact growing reliance on drug management has burdened the healthcare system with more and more men having their BPH treated as a chronic disease.

What give us confidence our technologies have greater market potential, current procedure volume reflects is that we have seen the large unmet need from the patient response to our educational efforts, and know that patients are interested in non-surgical effective in-office alternatives such as our Cooled ThermoTherapy and Prostiva Technologies.

The power of these seminars is that it not only gives us confidence that there's an unmet patient need but it clearly illustrates that point to our urologist customers as well. The seminars are just a first step to educating the market and we have to continue to execute our mission of excellent product quality, customer service and clinical education to ensure continued adoption through patient and customer satisfaction following the seminar events. We believe that successful execution of this strategy will result in improved performance and that the BPH treatment market remains a compelling long term growth opportunity for the company.

In closing we view the second quarter performance as the first step. We must continue down this path to bring growth back into our markets. Our guidance reflects our measured expectations for results in the balance of this fiscal year and the continued challenges as we reinvigorate the Prostiva business.

As we have discussed in the past we believe we have the leverage to drive improved results in the future, specifically these are execution of patient education seminars in fiscal year 2013, targeting an additional 10% of our customer base in this fiscal year. Increased sales force productivity over the course of fiscal year 2013 driven by growing tenure of both the leadership team and our sales reps and increased stability and improved coverage.

In closing, we are intensely focused on leveraging our leading market share position, our expanded sales organization, and our innovative market development and patient education programs to drive topline growth. We appreciate the time and continued interest in our company.

And with that, I will open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Deepak Chaulagai of Dougherty & Company. Please proceed.

Deepak Chaulagai - Dougherty & Company

Do you have the procedures volume by product CTT and Prostiva as well as their gross margins, handy?

Greg Fluet

Deepak, we haven’t broken out the procedure volumes in the past just because of the competitive nature of the landscape and we haven’t disclosed ASPs related with those and we haven’t broken out gross margin separately in the past. The Prostiva line has been around about high 40% gross margin of product line, and we disclosed that in a queue and that’s consistent with this quarter.

Deepak Chaulagai - Dougherty & Company

And then did you add any sales reps, or has that remained constant?

Greg Fluet

22 was an incremental one sales rep from our prior quarter and but that our target, fully staffed them out.

Deepak Chaulagai - Dougherty & Company

So you have 22 sales reps now.

Greg Fluet

Correct.

Deepak Chaulagai - Dougherty & Company

Okay, I thought you had 24 in Q1, was that?

Greg Fluet

No.

Deepak Chaulagai - Dougherty & Company

Okay, 22. Obviously you did better strong sequential results, better than what we were looking, certainly on the CTT side, and the Prostiva business looks like although it’s been growing sequentially, it’s not up where you were looking for. Anything in particular that we should be looking at in terms of how you would be growing each of the product lines?

Greg Fluet

Well Deepak, we are deploying our market development strategy and with both product lines we really see them as complementary and that they both benefit from having increased patient awareness of what treatment options are available and so as we have success deploying our program we expect that it will benefit both product lines and so we’re really looking at it as growing the brand as opposed to just growing separate product lines within it.

Deepak Chaulagai - Dougherty & Company

I guess, asked differentially, you’ll think outside the Pillbox campaign, do you think that impacts sort of at least initially your CTT product or your Prostiva product, even though you think of it as one interrelated? Is there characteristics within that marketing strategy that would impact one product line over the other?

Greg Fluet

What I think just timing of the real implementation of the campaign within each kind of business if you will of Cooled ThermoTherapy and Prostiva, because we really started to begin the think outside the Pillbox campaign back, really at the very beginning of fiscal year 2012 before we acquired the Prostiva line and so we have had the benefit in the Cooled ThermoTherapy business of the results of that marketing and sales effort for almost a full year longer than Prostiva would have had any exposure to it. So I think we are seeing a benefit from longer involvement with those customers through the patient education program.

Deepak Chaulagai - Dougherty & Company

Okay and other than that marketing strategy, I know you have big presence at AUA. Are you progressing with that this year too or is there anything else that we should be thinking about in terms of market share growth?

Greg Fluet

We will be at the AUA this year and we continue to have a presence at all regional meeting, but nothing right now that we’re prepared to discuss beyond that.

Operator

(Operator instructions). Ladies and gentleman that concludes the time we have for questions. I would now like to turn the call over to Mr. Fluet for closing remarks.

Greg Fluet

Thank you Jeff. On behalf the Board of Director, Senior Leadership, and all Urologix’s employees, I thank our loyal shareholders for your continued interest in Urologix and we look forward to updating you on our progress, on our third quarter conference call. Thank you and good afternoon.

Operator

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

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