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Urologix Inc. (NASDAQ:ULGX)

F1Q2011 Earnings Call

November 3, 2010 05:00 pm ET

Executives

Stryker Warren Jr. - CEO

Brian Smrdel - CFO

Greg Fluet - EVP & COO

Analysts

Operator

Good day ladies and gentlemen and welcome to the Urologix Incorporated Fiscal 2011 First Quarter Conference Call. My name is Stacy and I will be your conference moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (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 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's recent Annual Report on Form 10-K of the fiscal year ended June 30, 2010, 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.

Stryker Warren Jr.

Good afternoon this is Stryker Warren and as Chief Executive Officer of Urologix, I welcome you to this earnings call to discuss the company’s results for the first quarter of fiscal year 2011. Joining me are Brian Smrdel the company’s Chief Financial Officer; and Greg Fluet, the Executive Vice President and Chief Operating Officer of Urologix.

Before I share my perspective, I will ask Brian to review the financial results.

Brian Smrdel

Thank you, Stryker. Revenue for the first quarter was $3.4 million, 3% higher than the $3.3 million reported in the fourth quarter of the 2010 fiscal year and 13% less than the $3.9 million reported in the same period of fiscal year 2010. The increase in revenue compared to fourth quarter is a result of the continuation of sales of our Prostaprobes to third-party mobiles following a temporary back order for the product in the prior quarter. The year-over-year revenue decline is primarily a result of the benefit from the temporary withdrawal of a competitors product in the prior year and the impact of changes in our sales force during the first quarter

To further break down the sources of Urologix's revenue on a sequential basis, revenue from catheter sales to direct accounts contributed 38% of overall revenue in the first quarter of fiscal year 2011 compared to 39% in the previous quarter. Urologix mobile service treatment revenue contributed 46% of overall revenue and third-party mobile revenue contributed 14% of overall revenue in the first quarter of fiscal 2011 compared to 49% and 10%, respectively, for the fourth quarter of the prior year.

The net loss for the fiscal 2011 first quarter was $708,000 or $0.05 per diluted share. This represents a 14% increase in net loss compared to the $622,000 or $0.04 per diluted share loss in the fourth quarter of 2010 fiscal year and a 5% increase in our net loss compared to the net loss of $677,000 or $0.05 per diluted share in the first quarter of fiscal year 2010.

Cash and cash equivalents were $4.7 million at September 30 of 2010 compared to $5.7 million at June 30 of 2010 and $6 million at September 30 of 2009. Cash utilization increased $939,000 from the prior quarter but decreased $42,000 from the first quarter of fiscal year 2010.

Historically, cash utilization is the greatest in the first quarter as annual payments including insurance premiums, bonuses earned in the prior year, year end audit fees and other yearly expense items are made during this period.

On a trailing 90-day sales basis our day sales outstanding at the end of the first quarter was 40 days, slightly higher than the 38 days reported at the end of the fourth quarter of fiscal year 2010 but an improvement compared to 46 days at the end of the third quarter of fiscal year 2010.

As mentioned in today's press release based on our fiscal year 2011 projection management believes that the $4.7 million cash balance at September 30th, of 2010 will be sufficient to fund our working capital needs beyond the next 12 months.

Gross profit for the first quarter of fiscal year 2011 was $1.8 million or 55% of revenue an increase of 1% point when compared to the gross profit rate in the prior quarter. Gross profit as a percentage of revenue was unchanged when compared to the prior year first quarter. The 1 percentage point increase in the gross profit rate compared to prior quarter is a result of our favorable product sales mix.

Reported first quarter operating expense totaled $2.5 million an increase of $79,000 or 3% when compared to the fourth quarter of fiscal year 2010 and a decrease of $287,000 or 10% when compared to the $2.8 million reported in the first quarter of fiscal year 2010.

The increase in operating expense when compared to the fourth quarter of the 2010 fiscal year is a result of the $227,000 increase in general and administrative expense and the $33,000 increase in research and development partially offset by a $181,000 decrease in sales and marketing expense.

The decrease in operating expense when compared to the first quarter prior fiscal year is primarily the result of reduction of $306,000 in sales and marketing expense partially offset by an increase of $104,000 in research and development as the company increased its investment in additional R&D headcount. I will now turn the call back to Stryker.

Stryker Warren Jr.

Thank you, Brian. The first quarter of the fiscal year is typically slower than the prior quarter, but due to the reimbursement confusion and the process to put a backorder in the company’s fourth quarter, we generated modest growth sequentially. There have been strengths in the first quarter reconfirmed efforts made and result in accomplishments and our continued focus on operational efficiencies, the quality of Urologix’s product and the promotion of a comparative effectiveness of high energy, Cooled ThermoTherapy or CTT versus lower energy competitors.

Despite the significant expenditures many attributable expenses tied to our year-end audit and annual insurance premiums that are paid in the first quarter of the fiscal year. There was a responsible utilization of our cash resources. Before turning to our performance, I will show some broader market influences that we’ve identified over the past three quarters. The impact to the economy in the reimbursement environment, we continue to hear from the market that elected procedure volume is down year-over-year in neurology as well as other specialties.

The current procedure volume trend is one we must overcome to grow our business while a challenge to many companies during this time, our analysis of publicly available information demonstrates Urologix has taken the number one market share position for in-office BPH therapies a share position we intend to retain and to expand.

Turning to reimbursement, we anticipate continued uncertainty due to short-term adjustments to Medicare payment formulas by Congress. The current temporary congressional adjustment will expire on November 30 and we do not have the ability to predict the timing of an extension of a temporary congressional fix, however on the positive side, the calendar year 2011 physician fee schedule file rule which was published yesterday in the federal register. For the first time in over 5 years, our CPT code had an increase in the assessed relative value by CMS or RVUs of 5%.

As many of you who follow this industry closely will realize what this means is that if congress does act to the extent that current Medicare formula fix beyond calendar 2010, our reimbursement in calendar year 2011 would increase by 5%. Obviously, Congress fails to act to adjust the broader payment formulas for all procedures, this will not occur but we view this RVU increase as a positive as it is the first increase since calendar year 2004.

Let me turn from these broader healthcare trends and focus on Urologix and our company performance over which we have more direct control. The company’s revenue in the first quarter of fiscal year 2011 was affected from transition within the company’s sales force comparing revenue year-over-year, it is easy to focus on the benefit last year from the temporary market withdrawal of the competitive product. While we continue to serve the majority of these customers we converted during that time frame, there has been some measurable attrition in that business. However the majority of this attrition was in geographies where we also had recent sale staff turnover.

There are two distinct aspects to these personnel changes. First, the transition from our sole remaining independent representative which was a group to direct sales representatives. This began at the end of the fourth quarter of fiscal year 2011 and our direct sales representatives have now completed training and are in the field as of the beginning of Q2 fiscal year ’11.

This marks the completion over the last two years of a total transition from the hybrid sale structure that was a mix of independent and direct sale staff to all direct sales representatives. This is a step we see as necessary for a clinical sales process in a complex market.

Second, the turnover in our territories in the first quarter of fiscal year 2011. For legal and competitive reasons, I will not share specifics associated with individual employee transitions. However there were various factors that drove the changes. What is consistent is the organization confidence we have as this process has resulted in a stronger sales structure.

We implemented a more rigorous process to identify the ideal sales rep profile that actively recruits direct candidates and to train the new hires. We took advantage of these events to realign territories based upon current customer loads and estimated revenue potential. In addition we have increased sales management debt leveraging some of our more tenured sales personnel which we believe will yield better performance and better accountability.

All the replacement sales representatives were hired before the end of the first quarter and have completed there initial training as of this week. There is one new or expansion territory that is current open.

Separately, we expanded our clinical specialist group with two new additions. This strength is a critical element of our field organization that is an essential component beyond our sales representatives and mobile application specialist. As a collaborative group, there is a deliberate redundancy in training and educational capabilities as well as a shared fundamental understanding of selling and user centric approach.

Sales representative productivity is the obvious driver to add new customers and to further penetrating existing customers. This is complimented by our mobile application specialist in our clinical training department who has significant interaction with customers and prospects.

While turnover sales ensures immediate momentum, the individuals joining the company’s direct sales force had very relevant experience. It had been tested and scored as high potential, high performers. The company has continued to promote the CTC Advance catheter family which was designed to optimize patient comfort without compromising durability, continue to promote and train our enhanced treatment algorithm and continue to promote the advantages of Cooled ThermoTherapy or CTT versus medical therapy rather than simply expecting some portion of the drug failures to find CTT.

Our targeted marketing efforts are intended to raise the awareness of Cooled ThermoTherapy as a treatment option, early in the BPH patient management protocol. As the BPH patient population prescribed medication is large and growing. These initiatives are directed at both the urologist and the BPH patient. We are not preferentially seeking the drug failures which we're certainly prepared to treat, but rather the newly prescribed BPH patient as well as those on chronic maintenance medication for BPH who do not know there is an effective durable non-surgical alternative to drugs.

Our patient seminar works supports recently presented data demonstrating there are many men unhappy with their BPH medication but previously unaware of a non-surgical alternative. We also continue to identify the clear evidence based differences provided by Urologix with CTT when compared to low energy devices that can provide no peer review data supporting durability. Moreover, Urologix choices are reflective of this difference as low energy microwave competitors have lost market share while Urologix was growing. We continue to view medical therapies the company’s primary competition and our promotional efforts while nascent are targeting the growing evidence with BPH drugs do not arrest disease progression and can contribute to a more complicated treatment decision subsequently due to their masking of the symptoms.

We are recognizing the continuous improvement in our clinical training capabilities, the market’s residence with our clinical data, the market’s enthusiasm for our CTC Advance catheter and customizable therapy, the continued progress in our marketing programs to reach BPH patients on drugs and our demonstration at high energy microwave therapy is the gold standard for office space BPH therapies.

Senior management is neither pleased nor satisfied with the financial results despite the continued progress. We recognized we must demonstrate market penetration against medical therapy. We are confident both the drug failure and the newly prescribed BPH patient will recognize the virtues of CTT. We must be more successful in ensuring the urologist presents Urologix to CTC to the patient as an early treatment option.

Assured over a year ago, give our highest priority to patient outcome followed by a net sized priority achieving positive cash flow. We continue to strive toward these objectives I believe that strengthened quality of our leadership, our product benefits, our operational excellence and our intense clinical focus will allow us to establish or maintain strong relationships with urologist with financial results improving to reflect this. For me and for my colleagues the first quarter results were exceptionally disappointing.

The company has always improved its operations but the singular focus of major improvement remains in growing revenue. We have fallen short for which we as a management team paid personal responsibility.

In closing I'll remind, we as a company have shared with the urology market. Urologix is the reliable choice, reliable product, reliable people, and reliable outcomes. Amidst reimbursement controversy competition in significant advertising budgets for pharmaceuticals, Urologix shall continue to pursue a differentiable clinical posture while at the same time responsibly managing our resources particularly cash.

CTT versus drugs remains our principle focus, and it is our conviction this sector is our clinical calling as we attempt to address the unmet needs of the BPH patient to satisfy with medical therapy.

I now invite your questions and Brian, Greg and I will do our best to answer any that you might have.

Question-and-Answer Session

Operator

(Operators Instructions). Your first question comes from the line of Benefit (inaudible) with Feltl and Company. Please proceed.

Unidentified Analyst

Hi guys. Just curious on the backlog from quarter four on Prostaprobe how much move from quarter-to-quarter their?

Unidentified Company Representative

About a 100,000, we'd discussed it I think in the last call too but it was about a 100,000 impact of the fourth quarter when we have the temporary back order.

Unidentified Analyst

And then regarding the turnover in sales personnel, is that compete now or the transition there to direct sales force.

Stryker Warren Jr.

There is three parts to your question, first of all the transition in terms of the original territories is complete we no longer have any IRs. The second part is those new hires have completed their training, there is one yet to be hired but that’s actually expansion territory so we view it as principally a completed project.

Operator

(Operator Instructions) And at this time there are no further questions in the queue.

Stryker Warren Jr.

On behalf of the board of director’s senior leadership in Urologix employees I thank our shareholders for your continued interest in Urologix, it is our intent daily to create shareholder value and we would welcome any of you and all of you to the annual shareholders meeting next Tuesday afternoon the details of which could be found on the website. With that I’d like to wish good health and good day.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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