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Executives

Stryker Warren, Jr. – Chief Executive Officer

Rebecca Weber – Director of Finance and Controller

Greg Fluet – Chief Operating Officer

Analysts

Ernest Andberg – Feltl & Company

Unidentified Analyst

Urologix, Inc. (ULGX) F2Q08 Earnings Call January 28, 2009 5:00 PM ET

Operator

Welcome to the Urologix Incorporated fiscal 2009 second quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Statements made at this presentation may contain forward-looking statements that are pursuant to the safe harbor provisions of Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties may be found in our most annual recent report on Form 10-K for the year ended June 30, 2008, and other documents filed with Securities and Exchange Commission.

At this time, I would like to turn the call over to Mr. Stryker Warren, Jr., Chief Executive Officer.

Stryker Warren, Jr.

This is Stryker Warren. I am the Chief Executive Officer of Urologix. Joining me on today are Rebecca Weber, Urologix’s Director of Finance and Controller, and Greg Fluet, Urologix’s Chief Operating Officer. Before I share my perspective on the second quarter of fiscal 200, I will ask Rebecca to review the financial results.

Rebecca Weber

Revenue for the second quarter increased 28% to $3.4 million, compared to $2.7 million reported in the first quarter of fiscal 2009; however, when compared to the prior year period, revenue decreased 11% from the $3.8 million reported for the quarter ending December 31, 2007. As discussed in today’s press release, the 28% revenue increase from the first quarter of fiscal 2009 is a result of increased catheter sales to direct accounts as well as increased revenue from Urologix owned Cooled ThermoTherapy mobile service and third-party mobile service providers. These increases are due to an increase in the number of accounts ordering as well as an increase in the number of accounts that perform treatment with Urologix-owned mobile service.

Revenue from catheter sales to direct accounts increased 50% from that reported in the first quarter of fiscal 2009. Direct sales constituted 37% of overall revenue in the second quarter fiscal 2009, as compared to 32% in the previous quarter. Urologix’s mobile service treatment revenue increased 11% from the previous quarter and constituted 44% of overall revenue in the second quarter of fiscal 2009 compared to 50% in the first quarter of fiscal 2009.

Third party mobile revenue represented approximately 16% of overall revenue in the second quarter of fiscal 2009 compared to 14% in the previous quarter. The net loss for the second quarter was $1.1 million or $0.07 for diluted share, a reduction of 16% when compared to the net loss of $1.3 million, or $0.09 per diluted share reported in the first quarter of fiscal 2009. The net loss for the second quarter of fiscal 2008 was 10.1 million, or $0.71 per diluted share which includes a net non-cash impairment charge of $8.6 million, or $0.60 per share.

Gross profit for the second quarter of fiscal 2009 was $1.8 million or 54% of revenue, a 10% increase when compared to the first quarter of fiscal 2009 and a 5% increase when compared to the second quarter of fiscal 2008. The increase in the gross profit percentage when compared to the prior quarter is largely due to a decrease in unabsorbed manufacturing expenses as well as a decrease in some expenses included in cost of goods sold. The increase in the gross profit percentage when compared to the second quarter of fiscal 2008 is due to the writeoff of the remaining developed technology and tangible asset as well as an increase in the provision for Prostaprobe inventories, purchase commitments, and warranties as part of the end-of-life projection for this product line in the prior year period.

Second quarter operating expenses totalled $2.9 million, which were higher than the first quarter of fiscal 2009 by $419,000, or 17 percent, but lower than the prior year period by $10.8 million, or 79 percent. The increase in operating expenses from the first quarter of fiscal 2009 is a result of the first quarter sales tax reserve reversal of approximately $396,000. Excluding this reversal, overall operating expenses would have been flat with the first quarter of fiscal 2009. The year-over-year decrease of $10.8 million in operating expenses is largely due to the goodwill impairment of $10.2 million recorded in the second quarter of 2008, as well as decreases in selling, general and administrative expenses.

Cash and cash equivalents were approximately $8.5 million as of December 31, 2008. We burned approximately $665,000 of cash in the current quarter. This is down from the $1.8 million cash burned in the first quarter of fiscal 2009. The decrease in our cash burn in the result of an improvement in our days sales outstanding, the improvement noted in our operating margin for the second quarter of fiscal 2009, as well as an increase in our accounts payable. Our days sales outstanding at the end of the second quarter were 40 days, down 8 days when compared to 48 days for the quarter ending September 30, 2008.

I will now turn the call back to Stryker.

Stryker Warren, Jr.

The second quarter’s results offer encouragement, and the sequential improvement in revenue and the moderation of the cash utilization are at least partially reflective of the impact from the many changes we have initiated over the last three quarters. However, senior management is cautious given the inherent BPH market challenges and the current broader economic environment. We are closely monitoring the results of our prior and continuing efforts to mitigate any impact from CMS’s reimbursement changes to the physician fee schedule which became effective January 1, 2009.

In a moment, I will speak to the specifics of the changes in reimbursement, but I will now further the discussion of the company’s sales initiatives which remain a significant focal point of our efforts in rebuilding Urologix. These initiatives represent the cornerstone of the prescriptive back to basics begun three quarters ago. Concerning those efforts, the increase in revenues from the first quarter of fiscal 2009 is attributable to increased sales through our direct mobile and third party customers. This results from both the customary sales efforts of our direct employed sales force as well as our contracted independent representatives, but it is especially due to the complementary role of the applications specialists, our mobile technician, who is responsible as the interface with our mobile customer.

Measuring the results of changes and accomplishing mid-course corrections has taken time. Key examples have been the introduction of additional sales management competencies, productivity expectations, the provision of requisite sales tools and support, completion of territory staffing, training of new hires as well as continuing education for the tenured sales staff, with thoughtful compensation plans aligned with business goals and carefully structured pricing strategies.

It is our expectation that targeted marking efforts and the maturation of the sales force will contribute toward a more defined sales process with more predictable outcomes. Urologix as espoused a back to basics strategy in deploying a sales force, both direct and independent reps, that will sell on the basis of value. It will cultivate meaningful relationships with urologists and their staff, and it will at the same time de-emphasize the transational aspects of the business. The sales effort is being complemented by mobile technicians who spend considerable time with the customers’ clinical staff, Urologix’s answer to medical device competitors who have staff in the hospital OR with urologists. Urologix’s doubled effort to introduce clinical specialists for training, implementation, and ongoing discussion of best practices is intended to ensure maximal adoption, overall clinical and operational confidence, and a resultant loyalty to the uniqueness of Urologix’s therapy.

The effort in sales and marketing will continue to address certain historical perceptual issues, but it will take time and some initiatives will work better than others. We do believe the improved patient comfort with customized treatment is growing in recognition and is a focal point in our interaction with prospects and current customers. We intend to focus more attention on the BPH medications’ shortcomings through targeted efforts toward the primary care physician and through our marketing materials. The sales force is becoming more sophisticated in its interaction and its ability to discuss Urologix technology and superiority, particularly due to the efforts to provide a meaningful compendium of clinical proof statements. We will continue to emphasize durability while optimizing patient comfort of our high-energy therapy to demonstrate a commitment to the migration of BPH patients from the primary care physician’s office to the urologist’s office, to underscore the advantages of treating patients in an office setting versus sending them to the hospital operating room, and to reiterate the shortcomings of medication. Urologix intends to differentiate ourselves from the competition by re-establishing clinical superiority in the minds of urologists while beginning the process of educating the consumer. We also intend to continue our investment in customer service initiatives designed to demonstrate our commitment to best practices with the ongoing involvement of our clinical specialists.

On the promotional front, Urologix will participate in the AUA’s annual meeting in Chicago in April, both as a presenter of scientific findings and as a prominent exhibitor. The current messages, firstly promoting customized treatment employing variable energy to improve patient comfort during and post procedure without sacrificing efficacy, again demonstrative of the company’s strong desire to be responsive to our customer.

Secondly, the product offering. CPC advanced our proven Cooled ThermoCath product with enhanced flexibility and cooling proximal to the treatment zone, accomplishments responsive to the urologist’s expressed desires and perhaps of greater significance the distinction Urologix’s high-energy Cooled Thermo Therapy is the only TMT device FDA labelled to treat both the symptomatic as well as the obstructive phase of BPH. This distinction cannot be overemphasized given the incidence of obstruction in patients in retention. In this clinical indication, there has been one FDA approved microwave therapy and it belongs to Urologix.

Turning to the issue of reimbursement I mentioned earlier, effective January 1, 2009, CMS introduced the new fee schedule for the provision of medical services to the Medicare beneficiary. All office-based BPH therapies were impacted by significant reduction; however, transurethral microwave therapy maintains a very strong reimbursement profile when we compare it to other office-based and OR procedure. Cuts were anticipated, and now the challenge is to position Urologix Cooled ThermoTherapy based upon value, both for the patient and for the urologist.

As the urologist examines the impact of these changes in reimbursement, our key messaging includes an emphasis on improved comfort without sacrifice of patient outcomes and emphasis on the breadth of BPH patients Urologix is approved to treat to include symptomatic and obstructive phase of BPH, best exemplified by those patients in acute urinary retention, something our competitors are not FDA approved to treat and emphasis on our product enhancements and an emphasis on our very positive comparison to medications with their inherent limitations attributable to side effects, cost, and overall effectiveness.

We remain committed to our current customers and recovering business from accounts that have previously been our customers, to targeting accounts that have been using other competitive devices, and to training new customers and users. We believe we have superior technology, and we intend to continue to extol its unique virtues. The sales plan as previously discussed remains intact with singular focus. The company will continue to articulate and demonstrate its value proposition to patient and urologist, simply put durability in comparison to other therapies. The company will promote enhanced patient comfort during and after the treatment. The company will be more visible and the urologist’s office. The company will increase the penetration of its mobile business as it provides a low entry cost to the urologist, but at the same time establishes meaningful switching costs, and the company will continue to increase its operating efficiencies and continuously improve product quality.

Unchanged is the company’s commitment to clinical studies to support our durability while ensuring maximal patient tolerance and the support of our new but rapidly maturing salesforce. In this challenging economy and highly competitive device space, there is much to be accomplished, but senior management believes the requisite fundamentals are being put in place. We continue to believe that back to basics philosophy is appropriate in restoring the company’s historical prominence in the minimally invasive space for BPH therapy, and this is quite evident in the behaviours we are observing in the sales force.

I thank our shareholders for their support and patience, and I will now do my best to answer any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ernest Andberg from Feltl & Company.

Ernest Andberg – Feltl & Company

A surprisingly good quarter given what I guessed you might be able to do in the quarter, both at the sales line and the gross line. I’ll start at the sales line. There is some seasonality in your business. Can you sort out in your minds what kind of sequential improvement was due to improved sales performance and how much might have been seasonal, Stryker?

Stryker Warren, Jr.

Ernie, we have clearly seen an increase in productivity as it relates to the sales force that is now place. We are watching closely what is going on in the field through all three distribution channels, but I cannot point to any seasonality.

Ernest Andberg – Feltl & Company

So you think it was basically better sales performance on your guys’ part.

Stryker Warren, Jr.

Yes, I do.

Ernest Andberg – Feltl & Company

Can you give us a feel for the feet on the street both direct and the contract sales people right now?

Stryker Warren, Jr.

I can’t divulge the numbers. Again, we have a mix of the two, and also supported, Ernie, as you’ve heard me say before by the application specialists who are really turning out to be a unique sales force that we are attempting to leverage in a very significant way, but this is a stable and maturing sales force that I think has shown increased productivity and significant stability.

Ernest Andberg – Feltl & Company

In your first quarter 10-Q, you said that there was $210,000 of unabsorbed overhead which penalized gross margins in Q1. In Q2, obviously we had a nice bounce back from Q1 level. Are you still being impacted by unabsorbed overhead and maybe how much to give me a feel for where gross margins might be headed?

Rebecca Weber

We did still have unabsorbed manufacturing overhead expenses in the second quarter; however, as I did mention in the script, one of the main reasons for the increase in our improvement in gross margins is we did have a reduction in that unabsorbed manufacturing expense.

Ernest Andberg – Feltl & Company

Will you say how much it is either publicly now or in the Q when you file it, Becky?

Rebecca Weber

It will be in the 10-Q.

Ernest Andberg – Feltl & Company

Can we assume that the level of SG&A expenses ex the sales tax reversal in Q1 is running about where you guys think it’s reasonable level to run ex any change for variable sales commissions, Stryker?

Stryker Warren, Jr.

Yes.

Operator

(Operator Instructions). Your next question comes from the line of (Peter Wida).

Peter Wida

What percentage of urologists out there that are treating patients that could be using your treatment, your technology, what percentage of them are you currently reaching through direct sales people?

Stryker Warren, Jr.

I do not know the percentages.

Peter Wida

Could you give me a rough idea; is it like 5%, 50%, any idea?

Stryker Warren, Jr.

We are trying to reach a significant number. We look at the universe as about 700,000 office-based urologists, and the AUA would tell you that on average the most recent figure is somewhere in the neighborhood of 3.3 urologists per practice. We have designed our territory strategy in such a way that each rep has what we consider to be a manageable number of accounts that they can go after, and it is our intent through a telemarketing process to pre-qualify that within a year’s time we have in one way or another touched all of the accounts within that territory.

Peter Wida

I understand what you are saying. Through your reps, are you covering all the territories within the 48 states, not every urologist, but do you have reps at this point in all the states?

Stryker Warren, Jr.

We have individuals that are covering every state including having accounts in Alaska and Hawaii, but there is a significant focus that takes place on that areas that are of greatest interest to us in terms of demographics and the characteristics of the medical community.

Peter Wida

In terms of getting leads for the sales reps in the good demographic areas, are you getting many results? There is only an annual meeting with urologists once a year, but do you foresee that meeting as being a good method to get urologists where they are anxious to see the rep when he comes through or are you thinking more towards the mailing program?

Stryker Warren, Jr.

There are several different aspects to what we do from the standpoint of marketing. The AUA is actually a site that we use for scientific presentations which we then leverage and not uncommonly on a multiple year basis, so part of the rationale for the AUA is to raise the level of visibility of urologics in terms of product development and clinical studies that we have done to demonstrate some therapeutic applications that we are interested in promoting. We also exhibit there and there is significant foot traffic both international and domestic. It’s what I would characterize as a meeting where we need to attend, and there is good visibility and it does generate leads, but the meetings that are of the greatest productivity for us are the sectional meetings of AUA, and then there are some smaller regions within sections because some of the sections cover a number of states, and some of those states choose to have their own meetings, so we are focused throughout the year on what’s going on at the regional level as well as the territory level. The mailing is not something that we’ve done a significant amount of, except through use of email in terms of followup with leads from meetings like the AUA. The principal method that we are currently employing is a very targeted, very efficient telemarketing campaign, so coming full cycle, the AUA is a meeting in which we exhibit, but we really showcase our clinical prowess there. The sectional meetings are where we believe there is the greatest opportunity to generate terrific leads and to increase the visibility of the company, and then from the standpoint of actually creating the productivity on the sales side, that’s a very targeted and very efficient telemarketing initiative.

Peter Wida

The showcasing, is that through presentations at the meeting through an individual presentation or is that in the technical booths where you’re showing in the general area at your booth?

Stryker Warren, Jr.

It’s both, but I think what we have found is that there is a certain pedigree that comes with being chosen to present there, and consequently, we have discussions of presentations we’ve made in the booth, and there are both scientists there and physician users there. It’s the presentations that our submissions have been judged and selected that create some prominence, particularly in the minds of the more clinically focused urologists.

Operator

You have a followup question from the line of Ernest Andberg from Feltl and Company.

Ernest Andberg – Feltl and Company

Stryker, do you have any observations on where the minimally invasive or office-based procedures are right now over the course of 2008, up, down, sideways?

Stryker Warren, Jr.

The challenge for us, Ernie, is that our competitors don’t report, and I have not seen anything recently from any of the banks that quantifies this space.

Ernest Andberg – Feltl and Company

I have the same issue. That’s why I asked the question Stryker just to see what kind of observation you might have on it.

Ernest Andberg – Feltl and Company

Can you elaborate on the CMS pricing decision? Where does TUMT on a global basis in sort of the delta versus competitive technologies and the hospital-based procedures now?

Stryker Warren, Jr.

Well, as it relates to microwave, we believe that we are still in excellent shape on a comparative basis. Is this creating discussion in the field? It absolutely is, as you would expect. The reductions of the office-based procedures are about 18%. It takes us, Ernie, on a national average to $2550 in the office, and we believe and certainly the surveys that we have done which seem to indicate that no one ever is enthusiastic about a cut in reimbursement, but this still has a very significant reimbursement profile relative to the other things that a urologist does in his or her office.

Ernest Andberg – Feltl and Company

So relative the direct expenses of doing it, you still got a decent margin at national average of $2550 based on the direct costs of doing it. Where there any changes to the professional fee for the urologist for doing a TURP or a laser procedure in the hospital?

Stryker Warren, Jr.

The professional fees in the hospital went up marginally, but yes, they did go up.

Operator

At this time, you have no further questions, so I would now like to turn the call over to Stryker Warren for closing remarks.

Stryker Warren, Jr.

I’d simply like to thank everyone on the call for your interest in Urologix. We look forward to sharing results and accomplishments with you in the future, and I wish you a good afternoon.

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Source: Urologix, Inc., F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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