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Urologix Inc. (NASDAQ:ULGX)

F1Q10 Earnings Call

October 27, 2009; 05:00 pm ET

Executives

Stryker Warren Jr. - Chief Executive Officer

Rebecca Weber - Director of Finance and Controller

Greg Fluet - Chief Operating Officer

Analysts

Shaun Vincent - Felt & Company

Larry Hemowich - HMPC

Operator

Good day ladies and gentlemen, and welcome to the Urologix Inc, fiscal 2010 first quarter conference call. My name is Anita, and I will be your coordinator for today. At this time all participants and in a listen only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions)

Statements made at this presentation 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 projected in any forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties maybe found in Urologix recent Annual Report on Form 10-K for the year ended June 30, 2009, and other documents filed with the Securities and Exchange Commission.

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

Stryker Warren, Jr.

Good afternoon. This is Stryker Warren. As Chief Executive Officer of Urologix, I welcome you to this earnings call. We are pleased you could join us, and joining me 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 first quarter of fiscal 2010, I will ask Rebecca to review the financial results.

Rebecca Weber

Thank you, Stryker. Revenue for the first quarter increased 45% to $3.9 million, compared to $2.7 million reported in the first quarter of fiscal 2009. Compared with the fourth quarter of fiscal 2009, revenue increased 12% over the $3.4 million reported. The increase in revenue over both the first and fourth quarter of fiscal 2009 is due to increased sales in all of our distributions channels, Urologix mobile service, direct and third party mobile services.

Revenue derived from the Urologix mobile service contributed 45% of overall revenue in the first quarter of fiscal 2010, compared to 48% in the fourth quarter of fiscal 2009. As mentioned in today’s press release the Urologix mobile treatment volume grew sequentially for the fourth consecutive quarter.

Revenue from catheter sales to direct accounts contributed 33% of overall revenue in the first quarter of this fiscal year, compared with 36% of revenue in the prior quarter, and finally, third party mobile revenue contributed 19% of overall revenue in the first quarter of fiscal 2010, compared to 14% in the prior quarter. In addition, the company achieved its second consecutive quarter of sequential growth in all distribution channels, Urologix mobile, direct and third party mobile.

The net loss for the first quarter was $677,000 or $0.05 per diluted share. This represents a 47% reduction in net loss, when compared to the $1.3 million or $0.09 per diluted share reported in the first quarter of fiscal year 2009, as well as a 23% reduction in our net loss when compared to the net loss of $876,000 or $0.06 per diluted share in the previous quarter.

Balances of cash and cash equivalents were $6 million at September 30, 2009, compared to $9.2 million at September 30, 2008, and $7 million at June 30, 2009. Cash utilization decreased $791,000 from the first quarter of fiscal 2009 as a result of our increased sales in gross margin period-over-period.

Cash utilization increased $440,000 when compared to the fourth quarter of fiscal 2009. This sequential increase in cash utilization was expected due to the timing of annual expenses, such as insurance premiums, year end audit fees and fiscal 2009 bonus payments. As has been previously mentioned, management believes that the $6 million cash balance at September 30, 2009 will be sufficient to fund our working capital needs beyond the next 12 months.

Gross profit for the first quarter of fiscal 2010 increased 11 percentage points, to $2.1 million or 55% of revenue, when compared to the $1.2 million or 44% of revenue reported in the first quarter of fiscal 2009. Gross profit as a percentage of revenue increased by three percentage points when compared to the prior quarter. The increase in the gross margin over the prior year period and fourth quarter of fiscal 2009 is primarily due to increased production volumes in response to increased sales.

First quarter operating expenses totaled $2.8 million, an increase of $362,000 or 15%, when compared to the $2.5 million reported in the first quarter of fiscal 2009. This increase in expense is primarily due to the $396,000 sales tax reversal in the first quarter of the prior fiscal year. Excluding this reversal, operating expenses would have remained relatively flat year-over-year.

In addition, operating expenses increased $97,000 or 4% when compared to the $2.7 million reported in the fourth quarter of fiscal 2009. The increase in operating expense when compared to the prior quarter is the result of increased general and administrative expenses related to our year end reporting.

I will now turn the call back over to Stryker.

Stryker Warren, Jr.

Thank you, Rebecca. One year ago I reported our results for my first full quarter as CEO, having taken up the time to continue to derive change initiated in the prior quarter by the then interim CEO and current Urologix Chairman, Mitchell Dan. Our resorts over the next four quarters demonstrated that Urologix was at that time going through a significant turning point.

We had a consistent data driven belief that our Cooled ThermoTherapy treatment for BPH was the high quality choice for patients. Our new management team focus was to replicate this level of quality across all aspects of the business to achieve the highest quality of consultative sales, continuing clinical data, customer service, operational efficiency and personal accountability.

The first quarter of fiscal year 2010 represents reaffirmation of the progress we have made executing the initiatives, which I have shared in the past year’s earnings calls and a second consecutive quarter of sequential revenue growth. Urologix has been in a restoration process.

Clinical efficacy has been beyond reproach with scores of peer reviewed clinical papers, durability punctuated in the May 2009 AUA presentation when Dr. Claus Roehrborn shared the latest five year results. Many were impressed with the quality of this data. It was never about the technology, it has been about strategy and it has been about execution.

Restoration; this is involved with production facility, sales and marketing, the company owned mobile channel and customer service. There has also been a continued preoccupation with patient safety, the results of those efforts are evident in the continued momentum the company is enjoying the first quarters financial results.

We reminded the urology market, Urologix is the reliable choice; reliable product, reliable people, reliable outcomes. This is resonating with new and returning customers. Three words the Urologix lives by are quality, reliability and trust, and while a quarter nor does a year make, this one certainly amplifies what has become evident a fundamental shift within the company, product, sales and marketing and comparative effectiveness.

While this work-in process continues, and while the change has taken time, there is a sense of deep pride and conviction about our technology in the company’s clear focus. Senior leadership is pleased, but not satisfied with the financial results and the continued progress. We remain mindful we must build upon this momentum, and that has clearly been done in this first quarter when one examines the second consecutive quarter of sequential revenue growth and a quarter that historically has been a seasonal weakness.

The quarter one of 2010, revenues of approximately $3.9 million were encouraging. The sales efforts were complemented by continued aggressive expense management. We have continued to be very thoughtful about cash management, cash balances, with our focus on using our resources to reasonably manage and grow the business. This has meant reduced cash spend when compared with the first quarter of the prior year, and a quarter end cash balance of $6 million. As mentioned by Rebecca, the company has adequate cash resources to support the business beyond the next 12 months.

I believe Urologix’s results this quarter, reflective of the ability to leverage our improved clinical sales capabilities, our improved mobile efficiency, the recognition of our clinical data and the market’s enthusiasm for our newest cooled microwave catheter technology, the CTC advance and/or demonstration that high energy microwave therapy can be administered without untoward patient comfort issues. We’ve also continued to work with our clients to increase patient awareness of this minimal invasive therapy.

With this mix of attributes, Urologix accelerated market share growth in the quarter. We took advantage of opportunities associated with an interruption of supply of a competitor’s product. We had been successful converting customers from this low energy competitor in the past, but the supply interruption became an accelerant to this process. Aside from the competitive conversions in the first quarter, we continue to realize the increased strength of our business from our current customers.

The focus on relationship development continues. The sales force and you’ve heard me characterize this as both, our territory sales managers and/or company owned mobile service application specialists, has re-doubled its efforts to ensure a fundamental understanding of the differentiable aspects of High Energy, Cooled ThermoTherapy, all of which is supported by a growing library of clinical data and publications, the majority being peer reviewed journal articles. Beyond the data, we also attempt to dramatize our commitment to the urology practice through unparalleled support in service.

I’ve been gratified by those urologists returning to Urologix over the past six months. Many of these are urologists who had been wooed by competitors, the siren song being ‘low energies equivalent clinically to Urologix with better patient comfort’- a message with absolutely no clinical data to support the claim, none whatsoever.

Many of these customers now recognize they should trust the data and not what a competitor’s rep tells them, and that all microwave is certainly not alike. We hear repeatedly from urologists who did not achieve satisfactory clinical outcomes with low energy options, that their experience with the new CTC advanced catheter and the ability to vary the delivery of the high energy treatment is resulting in equivalent or better patient comfort.

This is the new Urologix. We’ve discovered the Urologix the willingness to reexamine our capabilities. This is translated into enthusiasm in many instances for the new catheter and the new approach to patient comfort. We will continue to emphasize the comparative differences in the office-based BPH treatment choices, into solidifying the commitment from our current customers and new customers to high quality, High Energy Cooled ThermoTherapy.

On the topic of healthcare reform like all medical device companies, we contain yearly with the Medicare reimbursement process and the continuation of pressure on the physician fee schedule. This year there are many more variables in the equation, with the mix of legislation and CMS proposals that are being considered.

We continue to take an active role in the discussion, monitor the process and prepare strategies through adapt to the potential changes. As with last year, we’ve submitted a thoughtful and comprehensive response to the proposed changes and reimbursement of BPH treatments and proposed reductions in the physician fee schedule impacting the urologists. We have devoted substantial time to discussions in sharing results of our analysis with the American Urological Association; the American Association of Clinical Urologists, reimbursement specialists who work with BAUA, reimbursement specialists whom we’ve retained, and key opinion leaders within the Urologic community.

The proposed rule has potentially brought implications and impacts for many specialties, urology included. This has resulted in significant and vocal responses from many specialty groups. Because of the number of complex components in moving pieces, we have no means to predict 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 urologist customers.

Simply put, three basic objectives remain unchanged from my first year with the company; keep the base business stable, grow the number of active accounts, and increase account penetration across the board.

We have made gains in each area through our consultative sales approach to the urologists, helped the clinical data, demonstrate the new technology, let the urologists and nurse see, touch and hold the CTC advanced catheter, discuss the treatment algorithm for customization on a patient-by-patient basis, deliver service and support that is tangibly distinguishable from the competition, and then to help the data again, and remind the medical community that BPH drugs are not for a remand. Microwave occupies an important therapeutic space between drugs and surgery, and there are clear advantages to early intervention with minimally invasive alternatives, which can offer a BPH medication pre-existence.

Fiscal 2009 served as a year to reevaluate relaunch and recommit. In fiscal year 2010, we continue to promote the company’s unique capability, substantiating this through our product enhancements, treatment algorithms and comparative effectiveness story.

Urologix continues to advance internal development projects and we continue to improve efficiencies across the company. We arise daily to the challenge of demonstrating through words and deeds, that this is in fact the new Urologix.

In the remainder of fiscal year 2010, we plan to maximize our benefit from these efforts. This includes the continued increase in sales activities, accountability review as fundamental to our growth. Our sales force has grown a maturity over the last year and can engage confidently with physicians about the difference for the patient and the treatment choices that are in the physician’s hands. We have seen our low energy competitors stumbling.

When we see weakness in our competitor’s offerings, we have the ability to target their users and educate them to the documented outcomes of Urologix microwave technology. We intend to grow the market, but we will also fight for market share in the process. As you’ve heard from me and from others, Urologix is good technology and good people. With our data, the questions aren’t about our technology. However, in evaluating the competition, the phrase of the sage older woman does come to mind, ‘where’s the beef.’

We are certain, the urologists and their staff appreciate the demonstrable quality of both the technology and service we offer their offices and view this as a tangible benefit for their patients and their practice. Moreover quality, reliability and trust remain the currency upon which we trade and we are aggressively working to continuously demonstrate this commitment to our customers; in fact, with the currency of quality, reliability and trust, we are doubling down.

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 insure through our consultative sale that it is clearly understood, Urologix is labeled for the treatment of instruction, while several of our competitors are not.

Our refrain is chronic BPH medication is not the panacea, despite its glamorized portrayal of such during televised sporting events. Urologix’s technology is easily differentiable from two classes of drugs used individually or in combination where there are tendon issues of limited or unpredictable effectiveness, significant side effect profiles and cost associated with a requisite credicity of the drug therapy.

Medication remains Urologix’s main competitor. Incumbent upon the company as to ensure early referral for appropriate patients for a durable reliable treatment. We have reminded the urology market, Urologix is the reliable choice, reliable product, reliable people and reliable outcomes.

This is resonating with new and returning customers, the strength and quality of our leadership, our product prowess is academically grounded in the five year durability data presented at the AUA annual meeting, and our operational excellence to include patient comfort and our intense clinical focus will allow us to maintain strong customer relationships with urologists.

Our highest priority is the patient outcome. Our next priority is reaching a positive cash flow. Those who are exposed with the company quickly appreciate the commitment as broad and deep. Quality, reliability, trust and profitability, focused, confidence, commitment, data and did I say confidence, did I say commitment? Yes I did. The second consecutive quarter of sequential revenue growth and large part the first quarter of fiscal 2010 serves as senior management’s most significant deliverable.

Concluding Rebecca’s and my comments, we will now do our best to answer any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ernest Andberg of Felt & Company; please proceed.

Shaun Vincent - Feltl & Company

Hi everyone this is Shaun Vincent for Ernest Anderg couple of things he wanted to just ask, can you provide any insight into the CMS Medicare physician fee schedule reimbursement?

Stryker Warren, Jr.

We wish we could. We neither know when it’s going to be published nor do we know what the final rule is going to look like, and again our expectation is that this will be across many of the specialties, and we simply don’t know when we will have those specifics.

Shaun Vincent - Feltl & Company

Okay, and then can you provide any update on the Boston Scientific recall, and whether or not this has impacted any results?

Stryker Warren, Jr.

In the Boston Scientific earnings call, the CEO indicated that they expect to be back in the market in the fourth quarter and there was no more specificity in that.

With respect to the impact, we have pursued the low energy customer all along on the basis that from a clinical standpoint we can demonstrate through our data superior our technology and outcomes. So dating well back, we have targeted the low energy competitor, no doubt as I shared the fact that they have taken their product out of the market served as an accelerant but we had a very significant quarter just sort of on our core business.

Shaun Vincent - Feltl & Company

Okay, thank you very much.

Operator

(Operator instructions) Our next question comes from the line of Larry Hemowich [ph] of HMPC please proceed.

Larry Hemowich - HMPC

Hey Stryker good afternoon.

Stryker Warren, Jr.

Larry

Larry Hemowich - HMPC

Greetings from sunny California. I wanted to ask you, when you look at the sales growth, would you say that you are success this quarter reflects opening up new accounts or more opening or more expanding the accounts that currently do business that are doing more and more cases?

Stryker Warren, Jr.

It’s all of the above, and the way I would describe that is, that we have with a sales force that I think has matured significantly been able to work more broadly in respective territories, and I think we have also been able to with discussions about patient selection and the like, certainly work with customers to increase utilization.

Larry Hemowich - HMPC

Okay. So do you expect the install base of capital equipment to continue to grow as you go forward because you are making more in-roads?

Stryker Warren, Jr.

Could you restate the question about capital equipment?

Larry Hemowich - HMPC

Well, and I know most of lot of it’s a mobile model, but you need to get new boxes out too as well. So are you adding more mobile operators or are you adding more placements in doctors; offices is that a growth indicator for us to look at?

Stryker Warren, Jr.

All three channels have grown and we placed boxes in all three channels.

Larry Hemowich - HMPC

Okay, great thanks.

Operator

I would now like to turn the call over to Mr. Warren for any closing remarks; please proceed.

Stryker Warren, Jr.

First of all I’d like to thank everybody who have joined the call. On behalf of the board of directors senior leadership and Urologix employees, I especially thank our loyal shareholders for your continued interest in the company. It is our intent daily to create your whole value, and I look forward seeing some of you at the annual shareholders meeting I remind you that's on November 10 here in Minneapolis, and I also look forward to sharing the second quarter’s results with you in the New Year, and on behalf of our Greg, Becky and myself, good health and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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