Urologix CEO Discusses F3Q11 Results - Earnings Call Transcript

| About: Urologix, Inc. (ULGX)

Urologix, Inc. (NASDAQ:ULGX)

Q3 2011 Earnings Call

April 26, 2011 5:00 pm ET

Executives

Brian Smrdel – Chief Financial Officer

Stryker Warren, Jr. – Chief Executive Officer

Analysts

Larry Haimovitch – HMTC

Ernest Andberg – Feltl & Company

Operator

Good day, ladies and gentlemen, and welcome to the Urologix Incorporated Fiscal 2011 Third Quarter Conference Call. My name is Ann and I will be your coordinator 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. 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 may be found in Urologix’s recent Annual Report on Form 10-K for the 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, sir.

Stryker Warren, Jr.

Thank you, and 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 third quarter and 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 third quarter was $3 million, 10% lower than the revenue reported in the second quarter of the 2011 fiscal year and 17% less than the $3.6 million reported in the same period of fiscal year 2010. The decrease in revenue compared to both the second quarter of fiscal year 2011 and the same period of the prior year is primarily the result of reduced order volume across our direct, mobile and third party mobile distribution channels.

The net loss for the fiscal year 2011 third quarter was $983,000 or $0.07 per diluted share. This represents a 38% increase in net loss compared to the $712,000 loss or $0.05 per diluted share in the second quarter of the 2011 fiscal year and $386,000 increase compared to the net loss of $597,000 or $0.04 per diluted share in the third quarter of fiscal year 2010. Cash and cash equivalents were $3.8 million as of March 31st, 2011 compared to $5.7 million at June 30 of 2010 and $5.8 million at March 31st of 2010.

Cash utilization was $498,000 in the third quarter, an increase of $85,000 from the prior quarter. In the third quarter of the prior fiscal year, the company utilized $247,000 in cash. On a trailing 90 days sales basis, our day sales outstanding at the end of the third quarter was 40 days, slightly lower than the 41 days reported at the end of the second quarter of fiscal year 2011, but above the 38 days reported at the end of fiscal year 2010.

As mentioned in today’s press release, based on our fiscal year 2011 projections, management believes that the $3.8 million cash balance at March 31, 2011 will be sufficient to fund our working capital needs beyond the next 12 months.

Gross profit for the third quarter of fiscal year 2011 was $1.6 million or 54% of revenue, a decrease of two percentage points when compared to the gross profit rate in the prior quarter.

Gross profit as a percentage of revenue was down one percentage point when compared to the prior year third quarter. The decrease in the gross profit rate is a result of allocating fixed manufacturing costs over the reduced volume of unit sales in the third quarter of fiscal year 2011.

Reported third quarter operating expense totaled $2.6 million, an increase of $29,000 or 1% when compared to the second quarter of fiscal year 2011 and an increase of $22,000, also 1% increase when compared to the third quarter of fiscal year 2010.

The increase in operating expense when compared to the second quarter of the 2011 fiscal year is a result of an increase in sales and marketing expense due to the launch of a new marketing campaign. The increase in operating expense when compared to the third quarter of the prior fiscal year is primarily the result of the company’s investment in additional R&D resources, which are up by 20% over the same period in the prior fiscal year. This increase was partially offset by lower sales expense due to the reduced revenue levels.

I will now turn the call back to Stryker.

Stryker Warren, Jr.

Thank you, Brian. The third quarter’s results are disappointing and inconsistent with the efforts towards sustained sequential revenue growth. While we ended the calendar year with reimbursement uncertainty taken out of play and believing there would be more normality in the sales patterns as a result. We’ve experienced a market slowdown in procedural volume at the beginning of the calendar year, which many of our customers attributed to the resetting of annual deductibles and continuing economic conditions.

However, it is reassured in the release, in March, we began to see recovery in Mobile procedure volume, which is correlated with the launch of our "Think Outside the Pillbox!" marketing campaign. That focused initiative is intended to raise urologists' awareness of the significant BPH medical therapy patient population to satisfy with the symptom improvement, costs or side effects of chronic BPH medication.

It is also been designed to support the urologists’ presentation of CTT or Cooled ThermoTherapy as an early therapeutic alternative to the patient in non-surgical alternative to drugs. The very early returns are encouraging as we are causing introspection amongst our customer base that the patient is perhaps not as vocal as one would expect and must therefore be drawn out on the level of satisfaction with medical therapy.

As we prepare for the AUA’s Annual Meeting at Washington DC in mid-May, we’re especially pleased by the publication of the five-year durability date in the May 2011 issue of The Journal of Urology. With Cooled ThermoTherapy, only 11% of patients require BPH drugs at five years post-treatment. Of particular note is the 90% freedom from secondary procedures through five years.

These low retreatment rates and durable outcomes clearly support the cost effectiveness of CTT. These data appearing in the top tier peer review journal of the Urologic community add long-term durability to the benchmarks of safety and effectiveness of Cooled ThermoTherapy to leading an office therapy for BPH. We consider think outside the pill box our new campaign when coupled with the Journal of Urology publication to represent a very compelling called action for the urologists.

As I assure we do not consider surgery our competition, rather it is medical therapy a formidable competitor given the size and funding of big pharma efforts when supported by direct-to-consumer advertising which glamorizes drugs. Nonetheless, a clear target upon which we have our sites set.

Our success in increasing sales to our urologists customers will depend upon the extent to which we realize our goal of raising awareness. Our Cooled ThermoTherapy is a treatment option early in the BPH patient management protocol that provide patients in effective and durable alternatives to chronic medication. These initiatives are directed at both urologists and the BPH patient. We have not preferentially seeking the drug failures, but rather the nearly prescribe 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 targeted patient education seminar initiative continues to demonstrate there are many men dissatisfied with our BPH medication for multiple reasons, but previously unaware of a non-surgical alternative. We continue to subscribe to the theory supported by recent literature that a high percentage of men taking BPH medication quietly suffer from an adequate symptom relief from side effects and ongoing costs of daily pills. This has been corroborated through patient surveys we have conducted and most especially patient seminars targeting the BPH patient on medical therapy.

Our sales initiatives, which include the new marketing campaign, our direct sales force of territory sales managers and regional managers as well as our mobile application specialists continued to be complicated by expense management with our focus on using our resources to responsibly invest and to grow the business.

This is particularly evident in the efforts being made in ongoing training and education as well as our commitment to clinical initiatives, this distinguishes Urologix. Incumbent upon us is to demonstrate we can convince the educated patient to ask urologists for CTT as a durable and effective first line therapy early in the BPH treatment paradigm. Our immediate focus remains unchanged, expand the in-office BPH market by promoting and providing CTT as an effective durable and save non-surgical alternative to BPH drugs.

And while the third quarter’s revenue did not satisfy our objective Urologix’s potential opportunity and taking competitive technology market share in market development and in active promotion of CTT as a non-surgical alternative to drugs is significant enough with successful execution in developing the BPH treatment market should generate meaningful shareholder value.

As I’ve stated in the past and I’ve come to appreciate through expensive time in the field, Urologix is good technology and good people. Quality, reliability and trust remain the keys to our stature and our status in the market. There has not been any change in our focus, I assured our highest priority is the patient outcome, followed by our next highest priority, achieving positive cash flow as a result of appreciable growth in revenue.

In closing, I remind all of us what we as a company have reminded the urology market of Urologix is the reliable choice, reliable product, reliable people and reliable outcomes. Amidst the challenging economy, competition, and significant advertising budgets for pharmaceuticals, we shall continue to pursue a differentiable clinical posture while at the same time marshaling resources.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Larry Haimovitch with HMTC. Please proceed.

Larry Haimovitch – HMTC

Hi, Stryker.

Stryker Warren, Jr.

Hi, Larry.

Larry Haimovitch – HMTC

I wanted to just get, I jumped on the contact, you may have already covered it, but just to get a little more sense from you, obviously you are not pleased with the results. Is there anything going on competitively with other non-drug procedures that you feel are having a negative impact on the company’s situation?

Stryker Warren, Jr.

Larry, there is no apparent new technology or movement to an existent technology that I would identify as having had impact on our business.

Larry Haimovitch – HMTC

Would you think then that the other competitors are feeling the same kind of market pressures that you are?

Stryker Warren, Jr.

I certainly think that in the minimally invasive space that drugs have not only had a significant penetration into the market, but they seem to me quite resilient in maintaining a considerable market shares. So I would say that as mentioned in this call and previous calls medical therapy Larry I believe remains our principal competitor.

Larry Haimovitch – HMTC

Okay. And then with the other minimally invasive ones are really the issues just that the drugs continue to be tough competition for you?

Stryker Warren, Jr.

We feel we stack a very well against the MIT competitors and believe that we have had opportunities to take market share from other technologies, but drugs certainly remain as the principal target of our efforts and where we have mentioned to the investment community, as well as in the Urologic Community. Our objective is not to take surgical cases, our objective is to take the drug patient much earlier in the treatment paradigm and what has been very, very apparent to us is that if the patient does not raise his hand and be more vocal about side effects cause and what they would described is lack of efficacy, the prescriptions are refilled and other technologies particularly the minimally invasive are generally not are not discussed at great length, which is something we are trying to change.

Larry Haimovitch – HMTC

And then one more quick question I’ll turn back in the queue. And that is the May 11 Journal of Urology article. You’ve referenced it in the prepared remarks, you’ve referenced it in the press release itself as well. I don’t have any other details in that. Is there any other details that you can or would like to provide us at this point on that particular article?

Stryker Warren, Jr.

I would encourage anyone interested to go to the site that has been identified in the press release. We think this is a significant publication. We presented the information previously at the AUA through a poster presentation and now had the complete article published. And I think from the standpoint our credibility in the market, this is something that becomes a major part of are being able to point to and defend that this is one of the few minimally invasive technologies based upon high-energy that can treat both the symptoms and the obstruction associated with BPH. And Larry, I think the article does a very impressive job in calling out improvement in symptoms for a quality of life and flow rates and the 90% freedom from another procedure is something that we’re very, very pleased with, proud of, and something that we are clearly touting in our sales efforts.

Larry Haimovitch - HMTC

Okay. I have some other questions, but I’ll jump back in the queue.

Operator

(Operator Instructions). And our next question comes from the line of Ernie And berg with Feltl. Please proceed.

Ernest Andberg – Feltl & Company

Stryker, how are you?

Stryker Warren, Jr.

Well, Ernie. Thank you.

Ernest Andberg – Feltl & Company

In your prepared comments, Stryker you made a comment about either sales coverage remains complicated by expense controls or something to that effect. Can you tell us further?

Stryker Warren, Jr.

What I meant to say was complemented, not complicated.

Ernest Andberg – Feltl & Company

Okay, I may have missed it.

Stryker Warren, Jr.

No, it's Earnie, I intended to say that it continues to be complemented by expense management as opposed to the contrary.

Ernest Andberg – Feltl & Company

Okay. Have there been any material changes in your direct sales force or your mobile or third party mobile over the last three months, Stryker.

Stryker Warren, Jr.

None.

Ernest Andberg – Feltl & Company

What about ASPs on your product any pressures there?

Brian Smrdel

No, the ASP, Ernie, it's Brian. ASPs have held up fairly consistent

Ernest Andberg – Feltl & Company

Okay. Stryker, you said that you saw some improvement in sales late in the quarter from your new sales campaign trying to get people to think about minimum invasive rather than pills and we are now a month into the new quarter. Can you comment on whether that trend is continued?

Stryker Warren, Jr.

I can't talk about the trend from a standpoint of utilization, but rather the trend in terms of the receptivity of practices, and this is generally been born out of the patient seminar work or many practices I think under appreciate the number of patient dissatisfied with medical therapy and that has become a major, major emphasis and it really, it helps in two respects. Number one, we’ve always been committed to trying to help in terms of practice development and I think every practice recognizes that to the extent they may have patients dissatisfied or seeking other alternatives that they may be unaware of at that time or situations that that obviously need to be addressed.

We are attempting to do that through these campaigns, it’s very early in the new campaign and what generally happens Ernie, as if there is a time lag between discussing the campaign with the practice and they are choosing how to take advantage of several different approaches that we offer them and then to the extent that it's a seminar we are very actively identifying patients with them, who have BPH and more especially those on medication trying to single those individuals out, educate them. And then beyond that obviously comes the anticipated increase number of workups and then potential therapies from that.

Ernest Andberg – Feltl & Company

Okay. So your comments were more directed at awareness than actual change in disposable utilization?

Stryker Warren, Jr.

Well, in March as we mentioned, mobile utilization was up and we have always felt that the mobile serves in some regards as being indicative of the business.

Ernest Andberg – Feltl & Company

Fair enough, thank you. I'll get back in line.

Operator

And our next question is a follow-up from the line of Larry Hamovich with HMTC. Please proceed.

Larry Hamovich – HMTC

Stryker, how powerful do you think that article, but I didn't see on the press release any specific reference excerpt of Journal of Urology May 2011, which I hope to be able to tack down and get the article. Is this something you feel it's going to really be helpful to the sales force, I would think it could be very helpful to them?

Stryker Warren, Jr.

We expect it to be the idea of having reprints from a presentation, there was a poster session of AUA versus one of the top two preview journals in the specialty is quite different. And I suspect that this is something that will be recognized across the specialty being able to propose what impact it will have, far too early to know, but we feel very, very fortunate that the publication comes out almost coincident with AUA and it's something that from the standpoint of creditability and stature is very, very important to us, and I think is already being complimented by those in the field, who’ve read the online version and\or received the hardcopy.

Larry Hamovich – HMTC

Yeah. And that’s nice timing for you.

Stryker Warren, Jr.

Okay thanks.

Operator

And our next is a follow-up from the line of Ernie Andberg with Feltl. Please proceed.

Ernest Andberg – Feltl & Company

Thank you. Either Stryker or Brian, since we don’t have the advantage of knowing what the unabsorbed overhead is, this level of sales where that you have to get to Stryker to get to a state of not burning cash any more that one of your objectives.

Brian Smrdel

Ernie, this is Brian. Obviously, we have internally a level of sales in more than I guess on the margin side, but I can’t respeculate on how high, on what that level is going to be here in the public and on a public [cohere].

Stryker Warren, Jr.

I can’t give that type of guidance Ernie, we don’t really release that type of….

Ernest Andberg – Feltl & Company

Well, its not really guidance Brian it’s giving a feel for where you guys have to get to reach your objective.

Brian Smrdel

I understand that Ernie, but I’m just saying in terms of you know, if I’m not, I don’t think in the past and it going forward here we intended to disclose basically that what’s behind because its giving a way behind our expense structure as well as our margin rate in that respect.

Ernest Andberg – Feltl & Company

All right, that’s all I needed. Thank you.

Operator

Ladies and gentlemen, there would be no further questions, so I’d now like to turn the call back to Mr. Stryker Warren for closing remarks.

Stryker Warren, Jr.

Thank you, on behalf of the Board of Directors, all of Senior Leadership and the Urologix’s employees, I thank our loyal shareholders for your continued interest in Urologix, as I’ve said in the past and we will continue to demonstrate in the future it's our intent daily to create shareholder value and with that I wish you good health and good day.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference, this concludes the presentation. And you may now disconnect. Have a good day.

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