Urologix, Inc. (NASDAQ:ULGX)
F4Q09 Earnings Call
August 25, 2009 5:00 pm ET
Stryker Warren, Jr. – Chief Executive Officer
Rebecca Weber – Director of Finance and Controller
Greg Fluet – Chief Operating Officer
Ernest Andberg – Feltl & Company
Welcome to the Urologix Incorporated fiscal year 2009 and fourth 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 will turn the call over to Mr. Stryker Warren, Jr., Chief Executive Officer.
Stryker Warren, Jr.
This is Stryker Warren. As Chief Executive Officer of Urologix, I welcome you to this earnings call. Joining me on today are Rebecca Weber, Director of Finance and Controller, and Greg Fluet, Executive Vice President and Chief Operating Officer. Before I share my perspective on the fourth quarter and full year of fiscal 2009, I will ask Rebecca to review the financial results.
Revenue for the fourth quarter was $3.4 million, or 4% more than the $3.3 million reported in the third quarter of this fiscal year; however, it was 6% less than the $3.7 million reported in the same period of fiscal 2008. The 4% increase in revenue over the third quarter is a result of increased sales of our procedure kits to our direct and third party mobile customers as well as an increase in the Urologix mobile service ASPs and number of treatments performed. The year over year revenue decline, however, is the result of reduced orders for procedure kits as well as a decrease in the number of procedures performed by Urologix’s mobile service.
Revenue from catheter sales to direct accounts contributed 36% of overall revenue in the fourth quarter of fiscal 2009 compared to 35% in the previous quarter. Urologix mobile service treatment revenue contributed 48% of overall revenue, and third party mobile revenue contributed 14% of overall revenue in the fourth quarter of fiscal 2009, both consistent with the third quarter of this year.
The net loss for the fourth quarter was $876,000 or $0.06 per diluted share. This represents a 27% reduction in our net loss compared to the net loss of $1.2 million or $0.08 per diluted share in the third quarter of fiscal 2009 and a 61% reduction in net loss compared to the $2.2 million or $0.16 per diluted share loss in the fourth quarter of fiscal year 2008.
Balances of cash and cash equivalents were $7 million at June 30, 2009, compared to $7.6 million at March 31, 2009, and $11 million at June 30, 2008. Cash utilization decreased 33% from the prior quarter and 11% from the fourth quarter of fiscal 2008 as we continued to manage our expenses. Our days sales outstanding at the end of the fourth quarter was 39 days, an improvement when compared to 42 days at the end of the third quarter of fiscal 2009 and 44 days at June 30, 2008.
As mentioned in today’s press release, based on our fiscal 2010 planning process, management believes that the $7 million cash balance at June 30, 2009, will be sufficient to fund our working capital needs beyond fiscal year 2010. This evaluation includes the expected increase in cash utilization in the first quarter of fiscal 2010 associated with annual expenses that occur in the first quarter of each fiscal year including annual insurance premiums, independent auditor fees, and payment of other accruals associated with the end of the prior fiscal year.
Gross profit for the fourth quarter of fiscal 2009 was $1.8 million or 52% of revenue, a 2% increase when compared to the prior quarter. However, gross profit as a percentage of revenue decreased by 3 percentage points when compared to the prior year fourth quarter. The increase in the gross profit rate over the prior quarter period is due to continued decrease in unabsorbed manufacturing expenses as a result of increased production as well as a decrease in manufacturing expenses. The increase in production is the result of an increase in the number of shipments as finished goods inventory decreased quarter over quarter. The 3% decrease in gross margin from the fourth quarter of the prior fiscal year is the result of higher manufacturing expense per unit due to lower volume as well as mix shift as our percentage of mobile revenue increased quarter over quarter.
Reported fourth quarter operating expenses totalled $2.7 million, a decrease of $137,000 or 5% when compared to the $2.9 million reported in the third quarter of fiscal 2009 and a decrease of $1.6 million or 37% when compared to the $4.3 million reported in the fourth quarter of fiscal 2008. The decrease in operating expense when compared to the third quarter is the result of a $71,000 decrease in R&D expenses and a $214,000 decrease in general and administrative expenses, partially offset by $148,000 increase in sales and marketing expenses as we continue to invest in our sales and marketing efforts.
The decrease in operating expenses when compared to the fourth quarter of the prior fiscal year is due to expense reductions in all departments, as well as the $755,000 sales tax reserve which was recorded in the fourth quarter of fiscal 2008.
For the year ended June 30, 2009, revenue was $12.8 million, down $2.1 million when compared to $14.9 million reported in fiscal 2008. The net loss for fiscal 2009 was $4.4 million or $0.31 per diluted share. This compares to a net loss of $14.9 million or $1.04 per diluted share for fiscal year 2008 which includes a net non-cash impairment charge related to the goodwill writeoff and related to deferred tax assets of $8.6 million or $0.60 per diluted share recorded in the second quarter of fiscal year 2008.
I will now turn the call back to Stryker.
Stryker Warren, Jr.
I will focus on the company’s fourth quarter of fiscal 2009, sharing some reflections upon the full year, and follow with specifics of how we plan to execute on our sales going forward and the standards to which we hold our salesforce for productivity and accountability. I will also address my view of the horizon, market development, competing technologies, the impact of medication therapies, and the reimbursement landscape, and how we are responding or poised to respond.
While a quarter does not a year make, the last several have shows signs of fundamental shift within the company—product, sales and marketing, comparative effectiveness, and attitude. The work in progress continues, and while change has taken time, across the company, I feel a sense of pride and conviction about our technology and the company’s clear focus.
What I’m hearing in the field from customers is good people, good technology. Your commitment to the patient experience is evident in the new catheter, the user-oriented control unit, angiotherapy customization capabilities, and you’re quite correct, no one can produce the data Urologix offers to substantiate efficacy.
While riding with one of our more successful territory sales managers, he remarked to me that clarity engendered by a back to basics sales approach perhaps cliché to some, back to basics became the remedial refrain espoused by our Chairman Mitchell Dan while interim CEO a year and a half ago, it remains fundamental to us and will for some time yet to come. It is neither a cliché nor a tag line for us; it’s a learned behaviour and a tangible commitment.
The results from the fourth quarter I believe are positive given what we’ve seen in the market place against the challenging broader economic backdrop, but management remains dissatisfied based upon our expectations. Sales results and expense management had been and will continue to be our financial priorities. For the fourth quarter, we saw an increase in revenue as compared to the third quarter, representing increases across all three distribution channels, modest but meaningful accomplishments and encouraging in a challenging economy.
For fiscal 2009, revenues were a disappointing $12.8 million, but there was aggressive expensive management without ignoring sales, marketing, R&D, and the investment in a new company-owned mobile route. We’ve been very thoughtful about cash management and cash balances with our focus on using our resources to responsibly manage and grow the business. This has meant decreases in certain departmental expenses where we found efficiencies, with a modest increase in sale and marketing expense, resulting in a reduced cash spend and a fiscal year end cash balance of $7 million. Again as previously mentioned by Rebecca, I believe the company has adequate cash resources to support the business beyond fiscal year 2010.
Some highlights going into fiscal year 2010 are the continued focus on disciplined selling. The salesforce is measured and incentivized to contribute toward the company’s overall growth by focusing on specific tactics that we believe will assist the achievement of this company goal. These tactics are designed to support and maintain the sales reps current base of accounts, increase the utilization in these accounts whether mobile or direct, and selectively target and convert new and competitive accounts.
In addition, we have implemented a customer relationship management system to provide better information to our salesforce on their accounts and assisted territory development and management. Part of this includes building the market knowledge so we have the ability to identify competitive accounts and target them with specific campaigns. I consider these fundamental to the re-ignition of growth, the reintroduction of predictability, and the resumption of market share gain.
In the last earnings call, I spoke of the then upcoming annual meeting most important to Urologix. The annual meeting of the American Urological Association in Chicago in late April served as a stage for the introduction of the newest member of the CTC advanced family of catheters, the Advance Short. The CTC Advance Short offers the third unique antenna length designed for smaller glands while incorporating the advances of additional design elements, cooling proximal to the treatment zone, and improved flexibility. The design and experience from urologists’ usage have made a very favourable impression. The catheter was very well received at the AUA and now subsequently.
This supported our overall theme of tailored treatment or unique therapy customization, patient by patient. We also presented the complete 5-year data on durability to emphasize Urologix’s efficacy. Unmatched by other microwave technologies and therapies, based upon our published data and data on the results at 1 year of variable high energy treatments, with physician modulated urethral temperatures ranging from 32 degrees Centigrade to 40 degrees centigrade to improve patient comfort. No appreciable differences in outcomes in this range of urethral temperatures based on subjective and objective, meaning out to 12 months, we’re achieving comparable symptom score improvement as well as flow rate improvement.
This is important because we continue to seek needs to achieve the objective of comfort with clinical outcome, the additional accomplishment being them returning home with confidence. They enjoy durable outcome which is a growing criticism of the lower energy microwave competitors. We will continue to improve the overall patient experience with a preoccupation toward clinical outcomes, marked durable predictable relief of symptoms and improvement in flow rates.
Many at the AUA annual meeting remarked about the obvious commitment Urologix has made to the technology—patient comfort, patient safety, and ease of use. Our suite of technology, the CoolWave control unit, the CTC Advance microwave catheter, the RTU, the rectal temperature sensor, and the coolant system. These have engendered confidence and commitment amongst many of our customers when they compare high-energy cool thermotherapy to the other microwave choices. This commitment and the advantages of our technology are becoming far more evident to our prospects as well.
Many urologists also remarked about the clinical presentation selected by the AUA’s editorial panel of judges, convincing data presented on our behalf by key opinion leaders within the profession, Dr. Claus Roehrborn, Chairman, Department of Urology, University of Texas Southwestern Medical Center, and Dr. William J. Utz, Mayo trained in a large Minneapolis private practice. As the only minimally invasive technology for the second year in a row at the AUA annual meeting with new clinical data to present, I believe Urologix continues to set the bar for clinical credibility in our space. The affirmation comes from our discussions in the field.
These clinical presentations can be reviewed on our website which has also been significantly enhanced. In the search rankings, traffic reports and other metrics demonstrate our commitment there as being rewarded. If you ask what is Urologix’s focus for fiscal year 2010, simply put, three basic objectives remain unchanged from my first year with the company. Keep the base of business stable, grow the number of active accounts, and increase account penetration across the board. We have made modest gains in each area through our consultative sales approach to the urologist customer. Count the clinical data, demonstrate the new technology, and let the urologist and nurse see, touch, and hold the CTC Advanced catheter, discuss treatment customization on a patient by patient basis, and then count the data again, and remind the medical community that BPH drugs are not for every man that while microwave occupies the space between drugs and surgery, there are clear advantages to early intervention with minimally invasive alternatives which can offer a medication-free existence.
All microwaves are not alike. That is our repetitive theme. Urologix can treat a broader cross section of patients, most notably the challenging patient in retention. We attempt to rnsure through our consultative sale that it is clearly understood Urologix is labelled for the treatment of obstruction while several of our key competitors are not. Our other repetitive theme is medication is not the panacea despite its glamorized portrayal as such during televised sporting events. Urologix’s technology is easily differentiable from two classes of BPH drugs used individually or in combination with their attendant issues of limited or unpredictable effectiveness, significant side effect profiles, and the cost associated with the requisite chronicity of the drug therapy.
Medication remains Urologix’s main competitor. Incumbent upon the company is to drive earlier referral for appropriate patients for a durable reliable treatment. This is a proactive strategy, a key sales offensive to ensure our office-based treatment is presented early in the patient education process. The majority of these men are within sphere of influence of primary care physician who tends toward drug therapy as the fix within their capacities and capabilities. It is our objective to develop early referral mechanisms to the urologist and to highlight that drugs are not for every man suffering from BPH. Some urologists actually use alpha blockers as their diagnostic and therapeutic marker, suggesting to the patient should this drug work, I have a 28-1/2 minute procedure I can do in my office anesthesia-free that could free you from drugs for up to 5 years.
The intent here is to offer choices but with encouragement a minimally invasive anesthesia-free treatment in the urologist’s office be seriously considered at the writing of the initial prescription for drugs. I have personally spoken to men recently who have had bad experiences with their prescribed BPH medication. Orthostatic hypotension sounds innocuous until you experience it first hand and it impacts your quality of life, such as the dizziness when standing to address the golf ball that one had moments earlier bent over and teed up. A department chairman also shared with me the tragedy of meeting a patient who had been symptom-free, the patient thought, and remained on his BPH medication until he presented to that urologist. His residual urine, that which he could not empty from his bladder, was so significant that the patient had virtually destroyed bladder tone and function. Can that situation be reversed? We do not yet know.
From a competitive standpoint, our goal is to develop a stronger referral relationship from the primary care physician to the urologist and also to educate the primary care physician on the limitation of drug therapy, especially as compared to our cooled microwave technology.
Yearly, we contend with Medicare reimbursement and a continuation of pressure brought to bear on the physician fee schedule. The timeline is generally a federal register announcement of the proposed rule in June, a comment period through the end of August, the published final rule in late October or early November, and implementation of the new fee schedule effective January 1. This year is no different. As with the last year, we’ve submitted a thoughtful and comprehensive response to the proposed changes in reimbursement of BPH treatments and proposed reductions in the physician fee schedule impacting urologists. We’ve devoted substantial time to discussions and sharing results of our analysis with the AUA, with the American Association of Clinical Urologists, with reimbursement specialists who work with the AUA, reimbursement specialists who we have retained and key opinion leaders in the urologic community.
The proposed rule has potentially broad impacts for many specialties, urology included. This has resulted in significant and vocal responses for many specialty groups. Because of the number of moving pieces, we have absolutely no way of predicting what will be decided and published as a final rule, but we continue to work our response marshalling support from within the specialty of urology and aligning the company with its urologists’ customers.
Fiscal 2009 served as a year to reevaluate, relaunch, and recommit. I expect the company to continue to promote its unique capabilities, substantiating this through our produce enhancements, our treatment customization, and our comparative effectiveness story. We continue to fund internal development projects, and we continue to improve efficiencies across the company.
In fiscal year 2010, we plan to maximize our benefit from these efforts. This includes the continued increase in sales activities and accountability that we view as fundamental to our growth. Our salesforce has grown in maturity over the last year and can engage confidently with physicians about the difference for the patients in the catheter choices that are in the physicians’ hands.
We have seen our low energy competitors stumbling. When we see a weakness in our competitors’ offering, we have the ability to target their users and educate them to the documented outcomes of Urologix’s microwave technology. We intend to grow the market, but we will fight for market share in the process.
Our highest priority is patient outcome. Our next highest priority is reaching a positive cash flow. Those exposed to the company quickly appreciate that commitment is both broad and deep.
Concluding Rebecca’s and my comments, we will now do our best to answer any questions that you might have.
(Operator Instructions). Your first question comes from the line of Ernest Andberg from Feltl & Company.
Ernest Andberg – Feltl & Company
Let’s talk about the issue you referenced last. American Medical said that their TherMatrx business was off sharply in the June quarter, and it represents less than 2% of their business which puts it under $10 million a year on an annualized basis, and you guys were flat sequentially, down a little bit year over year, and then Boston had the recall of their field inventory, and I can’t tell whether they’re in the market or out of the market right now. What’s going on and how can you benefit or take advantage of what’s happening out there?
Stryker Warren, Jr.
There are several parts to the question, Ernie. Let me see if I can answer them in order, and if I miss a point, please redirect me. First of all, we became aware of a recall on July 21st and that came from our field salesforce, and that was in the form of a letter authored by Boston Scientific instructing their customers to return catheters associated with lot numbers that they provided in their letter—approximately 196 lot numbers. As best we can tell, it covers all catheters that have not expired, and goes back some time as inconceivably two years. It’s our understanding that while it’s a voluntary recall it has been made very very clear to the customer that they must return the inventory. How we are taking advantage of that is we as I referenced with the CRM have been well aware of what urologists are using at particular practices. Some use many technologies. Some are wed to one for a variety of reasons. We have been very aggressive in pursuing those accounts that we recognize have had a history of treating patients suffering from BPH with microwave and have made it a point to not only go in to satisfy the mobile needs but also the direct needs and use it as an educational opportunity to talk about high energy. So we are aggressively pursuing this. It is far too early to be able to speak to what the results of that may mean, and we are obviously very interested in not only taking advantage of the opportunity but maintaining those relationships for an extended period of time, and we would hope that that will be considerable period of time based upon both the clinical outcomes and the levels of service.
Ernest Andberg – Feltl & Company
Are they out of the market right now or are they shipping replacement inventory to your knowledge, Stryker?
Stryker Warren, Jr.
They are not shipping replacement inventory.
Ernest Andberg – Feltl & Company
How about the other side who said their business was off sharply in the June quarter and they attributed it to a sharp decline in the microwave market which is not evident in your numbers? Can you respond to that?
Stryker Warren, Jr.
I can’t respond to it because certainly what we’re seeing and is represented by the numbers is that it’s a challenging economy, it’s a competitive market, and not just amongst the microwave. You know, the urologist has a number of therapeutic options to take advantage of, but we quite frankly have our head down and blinders on and are being as aggressive as we’ve always been there’s a new opportunity for us, but quite frankly we continue to see medication as our competition.
Ernest Andberg – Feltl & Company
A question which I know you’ve avoided addressing, but from the outside. Besides the fact that you believe you’ve got cash to last you well beyond fiscal 2010, and based on the burn in the fourth quarter that seems a reasonable assumption, but how can we on the outside think about what your objectives are in 2010 and where you think you can get, Stryker?
The way we are viewing the business, Ernie, is to continue to concentrate on generating additional utilization out of existent customers and converting those that either have been waiting and watching, and as I’ve said in previous calls, the CTC Advance Catheter has been a real advantage. The cool wave control unit that some practices have been unfamiliar with has been very advantageous, but what really has become a tremendous advantage for us is coming out of the AUA with two posters that have enabled us to point to documented durability that none of our competitors can speak to as well as the ability to customize therapy, so we in 2010 have some internal development projects going on, but by and large this is about continuing with what we discussed in prior earnings calls and that is it’s basic blocking and tackling in a fundamental sales and marketing approach with a preoccupation with touting patient outcomes as well as a very high level of service, and I think what we have been gratified by hearing from the market is what I indicated was one of the three bullets earlier, and that is we are repeatedly hearing good technology, good people, and I think that positions us well for this coming year.
Ernest Andberg – Feltl & Company
Historically the summer quarter here, September has seen some drop-off sequentially this year or last year fiscal 2009, bottom dropped off in your direct accounts. Is there any reason to suspect similar kind of experience this quarter, Stryker, or have you fixed that issue where in essence the direct accounts that cut in half?
I can’t speak to it because I think it’s quite frankly unfortunately too early. We have seen nothing in terms of flow of orders to suggest there’s anything to be concerned about. What I have seen is that there continues to be unpredictability regarding the economy, and it’s different in different geographies being more dramatic than others and sometimes quite frankly surprising. There is also the issue and for some reason year to year, you see some variation, it has to do with both how the patients decide to spend their summers and how urologists decide to take off time, so it’s a little bit of a complex calculus to try to be able to predict what’s going on at this time of year, and quite frankly Ernie I have given up on trying to predict that.
Ernest Andberg – Feltl & Company
Did you say Stryker that in the first month here, things are stable, we are not seeing the kind of washout that you had in the first quarter last year? Am I fair listening to what you said or am I stretching? Your direct business was half of what it was sequentially in the first quarter of 2009, and everything else stayed relatively stable through that period.
Ernie, a year ago, there was a lot going on in terms of transition. I think we’ve demonstrated that we’ve stabilized the business, but I would prefer not trying to share any predictions about the first quarter.
(Operator Instructions). You have no further questions at this time.
In closing, I would like to thank our shareholders for their continued confidence, patience, and interest as well as those participating in this call, and I’m especially grateful to our employees, scientists, clinicians, production staff, general administrative staff, and our salesforce and most especially I would like to extend sincere thanks to our customer service group and our remarkable application specialists, our mobile technicians, our customer nexus, frankly our goodwill ambassadors. This concludes the earnings call. I look forward to speaking with you again in November and seeing many of you at the annual meeting.
Thank you for your participation in today’s conference. This concludes the presentation.
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