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Uroplasty, Inc. (NASDAQ:UPI)

Q3 2014 Earnings Conference Call

January 23, 2014 04:30 PM ET

Executives

Doug Sherk – Investor Relations, EVC Group

Robert Kill – President and Chief Executive Officer

Brett Reynolds – Chief Financial Officer

Analysts

Chris W. Lewis – ROTH Capital Partners LLC

Charles E Haff – Craig-Hallum Capital Group LLC

Chris Cooley – Stephens, Inc.

Jeb Barton Terry – Aberdeen Investment Management, LLC

Jose T. Haresco – JMP Securities LLC

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Uroplasty Third Quarter Fiscal 2014 Financial Results Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for question. (Operator Instructions) This conference is being recorded today, Thursday, January 23, 2014.

I would now like to turn the conference over to Doug Sherk. Please go ahead, sir.

Doug Sherk

Thank you, Sherrill, and good afternoon everyone. Thank you for joining us for Uroplasty’s conference call to review the financial results for the third fiscal quarter of 2014, which ended on December 31, 2013. The news release announcing the results crossed the wire this afternoon shortly after the market closed and is currently available on the Uroplasty website. We’ve arranged for a taped replay of this call which can be accessed by phone. This call is also being streamed live on the Investor Relations section of our web site at www.uroplasty.com and will be archived there.

Before we get started during the course of this conference call Uroplasty’s management may make projections and other forward-looking statements regarding feature events including but not limited to statements about sales, reimbursement for procedures performed with our products, the potential market opportunities for our products and new product initiatives. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties as well as others are more fully discussed in the Company’s Annual Report on the Form 10-K and other quarterly reports filed with the SEC. Additionally, the statements made in this conference call are made only as of today, January 23, 2014 and we assume no obligation to update these forward-looking statements to reflect future events or actual outcomes and do not intend to do so.

And with that, I’d like to turn the call over to Rob Kill, President and Chief Executive Officer of Uroplasty.

Robert Kill

Thanks, Doug, and good afternoon everyone. Thanks for joining us today to review Uroplasty’s third quarter financial results and recent corporate events. Joining me on the call is Brett Reynolds, our Chief Financial Officer.

Our results reflect another strong quarter of improvement in execution. We achieved record revenue of $6.4 million, a 14% increase over prior year and our third quarter consecutive quarter of sequential growth.

In the U.S., sales of our Urgent PC Neuromodulation System grew 19% to $3.2 million. Our revised approach to the U.S. market implemented earlier this year continues to drive our improvement.

Our objective to both re-engage and broaden our U.S. Urgent PC customer base is demonstrating traction. As we stated before, the key to success with the Urgent PC treatment is proper procedure technique as well as physician and patient education. Appropriate placement of the needle electrode, which means at the right depth and at the appropriate angle so that’s proximate to the tibial nerve and coaching the physician and the patient that is it’s a commitment to a 12-week treatment regimen are both critical components to achieving successful patient outcome.

Our sales strategy today includes a significant amount of time educating physicians and clinicians including many that had been prior customers, but were lost due to lack of initial training or proper follow-through. Largely due to these focused initiatives we had 92 new customers and 40 re-engaged customers during the third quarter. This resulted in 779 active customers in the United States for Urgent PC compared to 664 active customers in the same quarter a year ago.

Much of our sales team has been with the company less than a year and we’ve made it a priority to ensure that all of our field reps, both new and existing have received a solid foundation of training to support the success in reaching their sales targets going forward.

During the third quarter we elevated our commitment and dedicated over 100 field selling days to advance sales training per team. Even with the significantly reduced number of actual selling days in the field our sales team achieved our targets. Most importantly, I’m confident that the groundwork has been laid for building momentum through the calendar year as we finish the fiscal year and enter our fiscal 2015.

The increasing reimbursement coverage continues to be a key element of our strategy. The number of patients with insurance coverage for PTNS procedures delivered via our Urgent PC System grew 19% in calendar year 2013 with approximately 40 million Medicare lives under coverage compared to 37 million a year ago and approximately 107 million private payer lives under coverage, up from 87 million a year ago.

In December the Blue Cross and Blue Shield Association Medical Advisory Panel concluded that use of PTNS for the treatment of voiding dysfunction meets their Technology Evaluation Center criteria. This panel was responsible for assessing medical technologies through a comprehensive review of clinical evidence. This positive assessment demonstrates that PTNS improves net health outcome as much as or more than other established therapies and a strong validation of the acceptance of Urgent PC as an important treatment option for OAB.

Moreover, this positive conclusion is instrumental to the BCBS companies as they determine their individual coverage policies for PTNS. Currently there are approximately 100 million lives covered by the 37 independent companies across United States with 21 million of those lives currently having access to PTNS through positive coverage from the local plant. This decision can now be used by the remaining BCBS companies as an important tool in accessing positive coverage for PTNS for the treatment of overactive bladder, and over the next 12 to 18 months gives us an improved opportunity to add a meaningful portion of those nearly 80 million BCBS lives currently without coverage.

We’ve already contacted the medical directors of each BCBS company and once the detailed tech assessment is published, mostly likely by the end of February, we will then engage directly with each company to request positive coverage for PTNS.

Now I’d like to turn the call over to Brett to give some additional detail on our financial results for the quarter.

Brett Reynolds

Thank you, Rob, and good afternoon everyone. We are pleased with our Q3 results. Total revenues for the fiscal third quarter 2014 were $6.4 million, up 14% from the same quarter in the prior year. Sales in the U.S. were $4.8 million, driven by a 19% increase in sales of our Urgent PC System. U.S. Urgent PC sales in the current quarter were $3.2 million representing 67% of total sales in the U.S. compared to $2.7 million and 65% of total sales in the same quarter the prior year.

U.S. Macroplastique sales were $1.5 million, an increase of 11% compared to the same quarter a year ago. Sales outside the U.S. totaled $1.6 million in the third quarter, also representing 11% increase over the prior year. International Urgent PC sales in the third quarter grew by 22% and 18% on a constant currency basis.

Our gross margin increased to 87.8% for the third quarter, similar to our gross margin in the second quarter of this year excluding the impact of the currency rate fluctuations. The current quarter’s gross margin increased almost 1 percentage point from the year ago period driven by product and geographical mix as well as higher overall volumes.

Operating expenses totaled $6.3 million in the third quarter compared to $5.5 million in the same quarter last year. The increase was a result of higher sales and marketing costs reflecting higher personnel expenses through the expansion and reorganization of our sales and marketing team, revised variable compensation programs, cost for increased marketing activities and the cost for the new medical device tax.

Our operating loss for the quarter was $657,000 compared to an operating loss of $677,000 in the same quarter last year. Excluding non-cash charges for depreciation, amortization and stock-based compensation the operating loss for the quarter was $277,000 compared to $135,000 last year.

As Rob mentioned earlier, in the third quarter we had 779 active customers in the U.S. for Urgent PC, which compares to 664 active customers in Q3 of last year. Our definition of an active customer is one who is ordered in the current quarter. We had 92 new customers and 43 reengaged customers in the third quarter. A new customer is one who has never before purchased Urgent PC while a reengaged customer is the one who ordered in the current quarter and had ordered in the past, but not in the preceding four quarters. We sold 4,070 lead set boxes this quarter, up from 3,494 in the third quarter of last year.

Utilization per customer has remained constant over the past five quarters. In the just completed third quarter we reviewed and analyzed our database of customer information and we have made slight modifications to the way customer information is presented. However, all metrics discussed today and for all periods are of course presented on a consistent basis.

At December 31, 2013, we had cash, cash equivalents and investments of $12.6 million compared with $12.5 million at the end of September. We believe we have sufficient cash to meet our liquidity and growth requirements beyond the next 12 months.

As we look forward, we expect to achieve operating leverage as we believe that our current cost structure is sufficient to support higher revenue levels. We are currently holding 44 U.S. sales territories. In the third quarter, the average revenue per territory on an annualized basis was $430,000 and we expect to grow this number significantly. We believe that our ability to grow revenue with our current cost structure will allow us to be cash neutral on annualized revenue of approximately $28 million. For reference, Q3 revenue annualizes to almost $26 million.

Now I’ll turn the call back to you, Rob.

Robert Kill

Thanks, Brett. I’m really encouraged by the momentum and enthusiasm of our team. Our results this quarter reflect the impact of our new sales strategies, which focused on selling the clinical efficacy of Urgent PC treatments, improvements in training and support for both our rep center customers and winning not only new customers, but also re-engaging former customers of Urgent PC.

We also continue to develop and refine our strategies for fecal incontinence in a minimally invasive implantable device. We’ve added significant experience to our executive leadership team in both marketing and new product development to spearhead these initiatives and we’re excited by the potential opportunities here. Additionally, as 50% of OAB scripts are written in primary care and only 13% of OAB patients are referred on to specialists we’re investing opportunities in the primary care channel as well as in the senior market. We will have a more detailed report on each of these exciting initiatives for you on next quarter’s call.

More than 40 million Americans suffer from overactive bladder and related symptoms. Urgent PC is the least invasive alternative treatment following drug therapy. Clinical studies and published papers demonstrate up to 80% success rates with Urgent PC, the only commercially available FDA approved system that delivers TPNS for office-based treatment. With less than 1% penetration of the estimated market we believe there is more than ample opportunity to grow our business and I believe that we’ve established the strong core of sales professionals that have the knowledge base and tools to accelerate performance going forward.

For the fourth quarter of our fiscal year 2014, we expect to continue gaining momentum. As a result, we are forecasting 25% to 30% year-over-year revenue growth for Urgent PC in the U.S. in the fourth quarter. As we said in the past, Macroplastique and international sales should be relatively stable on an annual basis with some fluctuations on a quarterly basis.

That concludes our formal remarks. And now Brett and I will be happy to take your questions. So operator, if you could open the call for Q&A.

Question-and-Answer Session

Operator

Absolutely. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Chris Lewis with ROTH Capital. Please go ahead.

Chris W. Lewis – ROTH Capital Partners LLC

Hey, guys, can you hear me all right?

Robert Kill

Yes, we can.

Chris W. Lewis – ROTH Capital Partners LLC

Good. Congrats on the progress.

Robert Kill

Thank you.

Brett Reynolds

Thank you.

Chris W. Lewis – ROTH Capital Partners LLC

First question just related to the sales force. Obviously the company over the past several quarters has dealt with the turnover issues and headwinds there. I was hoping you could talk about how some of those reps that were higher towards the beginning of that turnover process, say mid-2013, have developed in terms of your expectations for their utilization ramp.

Robert Kill

Yes. I think the answer Chris is we’re getting there. We’ve said before it takes about a year to become fully productive in the territories for those who are hired at their early part of fiscal year in the April, May, June timeframe, are ramping up well and we’ve got another portion of reps who are hired in Q2 and Q3 and they’re doing well too, but it just takes some time. So I think the progress is reflected in the sales results and our belief is that you will continue to see steady sequential growth as we move forward, as the reps come fully up to speed.

Chris W. Lewis – ROTH Capital Partners LLC

Okay. And then congrats on the positive tech assessment that was awarded. I guess with that now in hand now what are your expectations both from a timing perspective and overall adoption standpoint going forward to gain further coverage from those Blue Cross companies that don’t currently cover PTNS? And then secondly, on top of that given kind of the notable criteria met during the assessment and the overall Blue Cross influence in the reimbursement environment, how does this change or possibly accelerate the company’s plans to reengage NGS and hopes of gaining positive reimbursement coverage with that Mac?

Robert Kill

Right. Well, you’re right. It’s a significant positive here and the level of review and clinical evidence that supports this is pretty powerful. Our plan is while they’ve assessed it positively they are in the midst of writing the detailed tech assessments, which should get published by the end of the February. Once we have that while we’ve already been contact with each of the medical directors we will then take that detailed published report and engage with them one-on-one. So we’ll begin that process as soon as the detailed report is published. Obviously you’re not going to knock them all down at once, but we think we’ll gain momentum over the next 12 to 18 months.

As it relates to NGS, I do think it’s obviously very positive news. We will take this published tech assessment and we will engage with NGS with this. At the same time there is a physician coalition of physicians who were treating patients with Urgent PC, who have gotten together and they are communicating with NGS and other, some patient efficacy letters that have come in and so I think there’s a lot of interest in this. And I think this positive tech assessment though is pretty significant and will allow us to engage with NGS once again.

Chris W. Lewis – ROTH Capital Partners LLC

Great. And then just one more for me. I think you mentioned you sacrificed 100 selling days for increased training programs. What are your plans? Are you going to continue to pull reps in from the field going forward to continue the training programs and how do you think that’s translated into some of the new accounts that you’ve won that showed a nice improvement there? Thanks.

Robert Kill

I think the answer is yes. We’re going to continue invest in training, the timing of when we’re still working through right now, but it’s really important to us. We’ve been very clear that part of the decline in sequential growth was a result of not investing in the appropriate training of our reps and of the physicians and their teams, and we think that’s an important investment to make. And, yes, absolutely we believe it has an impact on our results and that’s why we’ll continue to invest in it.

Chris W. Lewis – ROTH Capital Partners LLC

Thank you.

Robert Kill

Sure.

Operator

Thank you. Our next question comes from the line of Charles Haff with Craig-Hallum. Please go ahead.

Charles E Haff – Craig-Hallum Capital Group LLC

Hi, guys and congratulations also a nice steady improvement.

Robert Kill

Thanks, Charles.

Charles E Haff – Craig-Hallum Capital Group LLC

I had a question regarding part of your business that you don’t put too much focus on, but it has been a drag, foreign sales of Macroplastique. By our calculations it looks like those that growth rated turned positive on a year-over-year basis for the first time and probably year and a half. Is that correct? And how should we kind of view foreign Macroplastique sales as kind of a flattish business or can we expect moderate growth, how should we think about that?

Brett A. Reynolds

Hi, Chares this is Brett here. You did the math right. So, international Macroplastique in the quarter grew about 12% over a year ago. On a year-to-date basis it’s potentially flat. Rob had comments where on an annual basis we are expecting it be flat, maybe up single-digits, low single-digits and there’s going to be quarterly variation, relatively smaller base whatever. So overall each year expect flat to up slightly. This quarter was a good quarter.

Charles E Haff – Craig-Hallum Capital Group LLC

Okay, great. And then you have a clinical specialist program that you are kind of piloting right now. I’m sure it’s still early days, but can you talk a little bit about that program and how many people you have assigned to that and maybe any learnings that you’ve had so far?

Robert Kill

Sure. So we’ve hired six clinical specialists. Their role is to help us with account retention and utilization and we put in place a process where we’re going to measure their success before we make a decision that this is an investment that we want to put some additional dollars into. Early signs in the first quarter are the first quarter of them being on the field is very positive, but it’s still early. We want to make sure that the results that we’re seeing now are the results we’re going to see two months from now. And so we’re going to sit tight and continue to monitor the results, but the early indications are very positive and it’s an area that we’d make another investment if we think it has a positive impact on retention and utilization.

Charles E Haff – Craig-Hallum Capital Group LLC

And then, in terms of performance and measurement for those physicians, what are the metrics that you would use? Is it customer retention or new patient growth or…

Robert Kill

It’s retention, utilization and revenue growth.

Charles E Haff – Craig-Hallum Capital Group LLC

Okay, great. Thanks a lot guys.

Robert Kill

Sure. Thank you.

Operator

Thank you. (Operator Instructions)

Robert Kill

Okay. Well, it looks like we don’t have any more questions. So thank you everyone for participating today. We appreciate your interest and we look forward to updating you on your progress for our fourth quarter of 2014 in May.

Doug Sherk

Rob, I’m sorry. Chris Cooley has signed up to ask a question. Operator, can we take Chris Cooley?

Operator

Absolutely. Chris Cooley from Stephens, Inc. Please go ahead.

Chris Cooley – Stephens, Inc.

Thank you. Can you hear me okay?

Robert Kill

Yes. Be quicker next time, Chris.

Chris Cooley – Stephens, Inc.

Tell you what. I think was stuck in there. I just wanted to hop on, again congrats, but I want ask about utilization trends and just trying to get a better sense of how you anticipate that ramping up, because clearly you’re doing a wonderful job, bringing on new accounts and bringing old accounts back into the fold. But help us think about kind of the progression so that we start to see more utilization per account as we kind of think about that playing out over the balance of the year and the first half of the next. Thanks so much.

Robert Kill

Yes, Chris. So this was the year where we directed our sales team. The focus is on retention, re-engaging lost customers and winning new customers. We have recently hired a new VP of Marketing and the strategy that will go into our next fiscal year with this, right we’ve demonstrated that we can kind of put this on the right path and next year we’re focused on increasing utilization and taking best demonstrated practices from our very successful accounts and introducing those two other practices. So utilization has been relatively stable, which is what we expected to model and I think next we’ll be focused on increases in utilization growth and that’s the focus for the coming year.

Chris Cooley – Stephens, Inc.

Okay. Thanks so much.

Robert Kill

Sure.

Operator

Thank you. And our next question comes from the line of Jeb Terry with Aberdeen Investment Management.

Jeb Barton Terry – Aberdeen Investment Management, LLC

Hey, Rob, it’s great to see you back in the side.

Robert Kill

Jeb, how are you?

Jeb Barton Terry – Aberdeen Investment Management LLC

I may be asking a dump question, I’m still building the model, but, yes I’m really impressed by the growth and the fact that you took 100 selling days out of the quarter and still you had that growth and I was just curious you seem like – you may have it done already for others. So if you might help me understand kind of your goals for the sales productivity of these reps, now newly trained and being more supported by clinical specialists. How should we be thinking about the go-forward in terms of – if you always get it from the total revenue or that you’re going mostly sell, buy them now that you are building retention processes on new customers wins? I know it’s challenging because it’s so widely penetrated. Where do you attack? You got so many different ways to go. So help me understand how I should be thinking about modeling this?

Robert Kill

Yes, Jeb, so we don’t get that granular in terms of where we direct people to. I think what we’ve said is that we’re going to hold tight 44 territories. There is plenty of room to grow. The average rep does $430,000 in revenue. We expect next quarter that U.S. Urgent PC will grow somewhere between 25% and 30%. The Macroplastique should be relatively flat. And, so I do think you should think of it in terms of a total revenue number and that’s the approach.

Jeb Barton Terry – Aberdeen Investment Management LLC

Okay. Very good. Well, in that essence great quarter.

Robert Kill

Thanks, Jeff.

Operator

Thank you. And our next question comes from the line of Jose Haresco with JMP Securities. Please go ahead.

Jose T. Haresco – JMP Securities LLC

Hi guys, good quarter. Good afternoon.

Robert Kill

Hi, Jose.

Jose T. Haresco – JMP Securities LLC

A question for you. I know it’s still early, but as you think about some of accounts that you’ve been successful of turning over from either getting them back and making new customers again or getting the increase of utilization. Do you have any sense of what some of the practices occurred and then realize it’s probably pretty small, but I guess could you give us a sense of what things have been working really well. And then as a follow-up are there any metrics that you’re looking at in terms of this big clinical support team before you start adding to that, I mean how do you measure their success internally?

Robert Kill

So the second question first is it’s a function of retention, utilization and revenue growth. Those are the things we’re looking at with the clinical specialists. In terms of the reengaged customers, Jose, it’s early right, and you remember we’ve talked about in the past it’s much harder to sell those customers who made the decision a year, year and a half ago that the treatment didn’t work because they weren’t trained appropriately. So while they’re reengaged they tend to start fairly slowly, right. They want to make sure that they are going to get reimbursed for it and that their patients are being helped and it certainly doesn’t hurt to have all the clinical evidence that we do to demonstrate that.

On the other accounts, we’ve been having a lot of success. It really is driven by appropriate training, by having a champion in that account and having success with the treatment and it builds upon itself and those are kind of the key things that we look for.

Jose T. Haresco – JMP Securities LLC

How should we think about the operating expenses as we starting building longer term models? Should we expect them to – I guess should we expect revenues as are expected to grow the, let’s say, patients and revenue for now, I mean it’s [indiscernible] some leverage or should we expect that to grow at a pace that the revenue growth as we start to invest more in the business?

Brett Reynolds

Jose, it’s Brett here. We’ve talk about maintaining the 44 sales territories. If you look at operating expenses sales and marketing is priced 75% give or take of our total operating expense. So we’re keeping that number stable. We’ll do further assessment of the clinical specialists. Certainly we would not expect baseline expenses to increase at the same rate as revenue.

Jose T. Haresco – JMP Securities LLC

Okay, great. Thank you very much. Congratulations again on a good quarter.

Robert Kill

Thank you.

Operator

Thank you. And there are no further questions at this time. I’d like to hand the call back to management for closing remarks.

Robert Kill

Well, since I’ve already made I’ll make them short and sweet here, but thank you all for your interest and we’ll talk to you at our next earnings call. Good night.

Brett Reynolds

Thank you.

Operator

Ladies and gentlemen, this concludes the Uroplasty third quarter fiscal 2014 financial results conference call. If you would like to listen to a replay of today’s conference please dial 303-590-3030 or 1800-406-7325 with the access code 4660925. We thank you for your participation and at this time you may now disconnect.

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