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Urologix, Inc. (NASDAQ:ULGX)

F4Q11 Earnings Call (Quarter Ended June 30, 2011)

August 23, 2011 5:00 p.m. ET

Executives

Stryker Warren, Jr. – CEO

Brian Smrdel – CFO

Analysts

Ernie Andberg – Feltl & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Urologix Incorporated Fiscal Year 2011 and Fourth Quarter Conference Call. My name is Melanie and I'll be your coordinator for today.

At this time, all participants are in 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.

Certain information discussed during this conference call, including answers to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those stated or implied 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. Urologix disclaims any obligation to update any forward-looking statements made during the course of this call.

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

Stryker Warren, Jr.

Good afternoon. I welcome you to this earnings call to discuss the company's results for the fourth quarter and fiscal year 2011. With me are Brian Smrdel, the company's Chief Financial Officer, and Greg Fluet, the Executive Vice President and Chief Operating Officer of Urologix. We're pleased you've joined us.

Today's call will begin with Brian reviewing the financial results for the fourth quarter of fiscal year 2011. I will then provide an update on our market dynamics and on recently-released clinical evidence supporting in-office treatments for BPH. I will then review some of our key strategic initiatives, talk about our key investment in our sales and marketing leadership, and conclude with some final thoughts and a perspective on the broader Urologix story. We will then open the call for a question-and-answer session.

I will now turn the call over to Brian to review the financial results.

Brian Smrdel

Thank you, Stryker.

Revenue for the fourth quarter of fiscal year 2011 was $2.9 million or 2% less than the $3 million reported in the third quarter of this fiscal year and 11% less than the $3.3 million reported in the same period of fiscal year 2010. The decrease in revenue compared to the third quarter is a result of the decrease in sales revenue performance in our third-party mobile channel. The year-over-year revenue decline results from an overall reduced order volume in all distribution channels: directs, mobile and third-party mobile.

To further break down the sources of Urologix's revenue on a sequential basis, revenue from catheter sales direct accounts contributed 40% of overall revenue in the fourth quarter of fiscal year 2011 compared to 36% in the previous quarter. Urologix's mobile service treatment revenue contributed 46% of overall revenue, and third-party mobile revenue contributed 12% of overall revenue in the fourth quarter of fiscal 2011 compared to 47% and 14%, respectively, for the third quarter of this year

Our net loss for the fiscal year 2011 fourth quarter was $1.3 million or $0.09 per diluted share compared to $983,000 net loss or $0.07 per diluted share in the third quarter of this fiscal year, and a net loss of $622,000 or $0.04 per diluted share in the fourth quarter of fiscal year 2010.

Cash and cash equivalents were $3.1 million at June 30, 2011 compared to $3.8 million at March 31, 2011 and $5.7 million at June 30, 2010. Cash utilization increased $231,000 from the prior quarter and $667,000 from the fourth quarter of fiscal year 2010. On a trailing 12-month sales basis, our days sales outstanding at the end of the fourth quarter was 38 days, similar to the end of the third quarter fiscal 2011, but up from 34 days at June 30th of 2010.

Gross profit for the fourth quarter of fiscal year 2011 was $1.3 million or 43% of revenue compared to $1.6 million or 54% of revenue for the prior quarter and $1.8 million or 54% of revenue when compared to the prior-year fourth quarter. The decrease in gross margin rate in the fourth quarter of fiscal year 2011 is the result of allocating fixed manufacturing costs over reduced sales volume, as well as the expensing of an additional $158,000 of capitalized manufacturing variance which had accumulated over fiscal year 2011.

Reported fourth quarter operating expense totaled $2.6 million, a decrease of $28,000 or 1% when compared to the third quarter of fiscal year 2011, and an increase of $117,000 or 5% when compared to the $2.5 million reported in the fourth quarter of fiscal year 2010. The decrease in operating when compared to the third quarter is the result of the $75,000 decrease in sales and marketing expense, partially offset by a $30,000 increase in research and development expense as the company continued its investment in product and clinical research efforts. The increase in operating expense when compared to the fourth quarter of the prior year is primarily the result of an additional $70,000 in research and development expense.

For the year ended June 30, 2011, revenue was $12.6 million, down $2.2 million or 15% when compared to the $14.8 million reported in fiscal year 2010. Our net loss for fiscal year 2011 was $3.7 million or 26% per diluted share. This compares to a net loss of $2.2 million or $0.15 per diluted share for fiscal year 2010.

I will now turn the call back to Stryker.

Stryker Warren, Jr.

Thank you, Brian.

The fourth quarter's results are disappointing and inconsistent with the leadership team's stated goal of generating sustainable annual revenue growth. The fourth quarter marked the continued trend in fiscal year 2011 of top line performance. It was below our expectations at the start of the fiscal year. We entered the calendar year on a positive note, fueled by clarity surrounding reimbursement rates, and we anticipated less sales disruption in our markets for the year as a result of that. Unfortunately, this is more than offset by the difficult economic environment this year.

Broadly, elective procedures across the country have dropped significantly this year, and the urology market was not immune to these trends. We do not believe other office-based procedures have gained at our expense, but rather, overall, procedural volumes were diminished. Procedure volumes this calendar and fiscal year have been weaker on a year-over-year basis in all of our sales channels: direct, company-owned mobile, and third-party mobile, this year, and we did not see a material improvement in trends in our fiscal fourth quarter.

While economic weakness continued to be the primary driver of slow in-office procedure volumes in most healthcare markets this year, Urologix's business remained challenged by strong competition in the BPH treatment space from chronic medical therapy options or BPH drugs. However, despite the difficult operating environment this year, we have not stood still but rather fortified our organization's foundation. I remain encouraged by Urologix's improving competitive position, fueled primarily by three factors I will share in this call.

First, Urologix's Cooled ThermoTherapy or CTT received favorable clinical support in the May 2011 issue of the Journal of Urology, which was timely given the American Urological Association's annual meeting in May. The publication of five-year durability data ahead of the meeting allowed us to call attention to favorable results and discuss these results with key participants in the AUA annual gathering.

Among the population of patients treated with Urologix's Cooled ThermoTherapy in the study, only 11% required BPH drugs at five years post-treatment, and 90% of patients treated with CTT were free from a secondary procedure during the five-year period. These treatment rates and durable outcomes clearly support our strategic effort to demonstrate CTT as a safe, durable and effective BPH treatment alternative to BPH drugs. Moreover, as I've shared in the past, because it is a reliable technology with reliable outcomes, Cooled ThermoTherapy presents a significant value proposition to patient, physician and the payer.

Second, let me update everyone on the early success we are seeing in our strategic efforts to increase awareness for CTT as an effective non-surgical alternative to chronic medical therapy or BPH drugs. We've launched our Think Outside the Pillbox campaign this past March and are encouraged by the program's early response. This strategic marketing initiative focused on raising awareness among urologists. The program is designed to support urologists in presenting CTT to patients as an early, effective, non-surgical alternative to drugs. Specifically, we are targeting the significant BPH chronic medical therapy patient population that is dissatisfied with the symptom improvement, large out-of-pocket costs and side effects associated with chronic drug therapy for BPH.

We are encouraged by the many urologists and urology practices choosing to incorporate this proactive approach to patient education and discussing BPH treatment options. Most of the urologists who have embraced patient education have been impressed by the response rate of men seeking additional information about a non-surgical alternative to drugs. We intend to continue to educate the market on the merits of early intervention in the in-office non-surgical treatment of BPH with CTT, as we believe the recently-published five-year data provides further support in our discussions with urologists going forward.

As we have shared in previous calls, Urologix's primary competition is chronic medical therapy options or drugs, not surgical procedures. The BPH drug market is a formidable competitor for in-office treatment such as CTT as it is supported by large-scale direct-to-consumer advertising across all media channels aimed at glamorizing drugs. Importantly, while we fully appreciate the challenge Urologix faces from BPH drug competition, we expect continued progress as we execute our strategic initiatives, and we are encouraged by the growing clinical support for in-office treatment options such as CTT.

In addition to the data supporting CTT, there has also been increased dialogue and a debate in a specialty press and in association meetings about the virtues and shortcomings of the use of BPH drugs to treat patients over longer timeframes. BPH is the only chronic progressive disease that I can think of that is primarily treated with drugs that provide symptomatic relief. The drugs mask the symptoms while the disease progresses, with muted patient awareness. There's an increasing body of literature that suggests this is resulting in sicker patients, requiring more serious procedures with less successful outcomes. It is against this backdrop we believe that offering a proven option for early intervention that treats the disease provides us an opportunity to take share from the palliative option.

Finally, I'm excited to announce a new hire, Lisa Ackermann, to the position of Vice President of Sales and Marketing. Lisa joins Urologix from Johnson & Johnson and brings notable sales leadership experience earned over many years working at a leading medical device division of a large global healthcare organization. Lisa will leverage her extensive product launch and market development experience as we she leads our recently refocused sales and marketing team.

Armed with compelling clinical support from the Journal of Urology, our strategic marketing campaign Think Outside the Pillbox and its solid focused team of direct sales and mobile sales specialists, I expect Urologix's sales efforts to flourish under Lisa's stewardship. What made Lisa such a remarkable candidate are a deep understanding of market analysis and development, her clinically-focused approach to consultative sales and her belief in the clinically-proven comparative effectiveness of CTT. I am pleased to welcome Lisa to the team and believe she will positively impact the sales team's focus and execution.

Before we open the call to your questions, I want to reiterate our dissatisfaction with our financial performance in fiscal year 2011. While our top line results this year were below expectations, our market share in the minimally-invasive space for BPH has grown, and we remain committed to executing on the strategic objectives discussed in this call.

Urologix's CTT serves a large and growing population of men suffering from urinary tract disruption and lower urinary tract symptoms, or LUTS, related to BPH. We see compelling evidence and opportunities for further market share gains as the economy improves and elective procedure volumes stabilize and return to a growth trajectory in the future.

Importantly, we are not standing still, as evidenced by our continued investments in improving Urologix's competitive position, our focused patient awareness campaign, proactive engagement in educating urologists, research and development initiatives to enhance product and performance as well as patient comfort, leveraging the valuable clinical studies supporting CTT, and positioning our sales and marketing organization at a new leadership with notable medical device industry experience.

While our fundamental belief in the business and products have not yet manifested themselves on our financial results, I continue to believe that ongoing organizational focus on our strategic initiatives along with the fundamentals of the business will ultimately make Urologix successful.

In closing, I assure you, Urologix's focused areas remain unchanged, to expand the in-office BPH market by increasing awareness of non-surgical alternatives to drugs, and to promote CTT as an effective, durable and safe non-surgical treatment option for the many men suffering from BPH. The entire Urologix organization is motivated by the sizable market opportunity Cooled ThermoTherapy addresses and expects our successful execution to drive improving operating and financial results in fiscal year 2012 as I'm convinced Urologix offers best-in-class technology.

With that, I am pleased to open the call to your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your touchtone phone. Again, to ask a question, that's star 1.

As a reminder, ladies and gentlemen, to ask a question, it's star 1.

And our first question comes from the line of Ernie Andberg with Feltl. Go ahead.

Ernie Andberg – Feltl & Co.

Hello, Stryker.

Stryker Warren, Jr.

Hi, Ernie.

Ernie Andberg – Feltl & Co.

Hey. You focused a lot on the competition from drugs, and it's tough out there obviously, and didn't mention the surgical side, except you think that that's not a viable alternative. But American Medical reported a decent increase in their GreenLight Laser [accounts and] sales and bundle, fiber bundle sales, in the last quarter before they disappeared into endo. Is that product line siphoning off potential patients into a surgical alternative, Stryker, that has potentially given you issues on just getting people into your urologist offices?

Hello?

Stryker Warren, Jr.

Ernie, we are not focusing our time going after the surgical competitors, and quite frankly, have come to believe that the size of the opportunity with drugs in the early intervention and the fact that many men are unaware of a non-surgical alternative and are in search of that given their dissatisfaction with drugs, we are concentrating in our messaging with the urologists on that particular patient cohort.

So, I can't speak specifically to GreenLight or any of the other surgical interventions. I think there are patients that are candidates for surgical intervention, but we are concentrating principally further up the treatment paradigm and trying to satisfy what we believe is an earlier intervention opportunity.

Ernie Andberg – Feltl & Co.

Thank you.

Operator

Again, ladies and gentlemen, to ask a question, it's star 1 on your touchtone phone.

And Mr. Warren, I'm showing no further questions at this time. I'd like to turn the call back over to you for closing remarks.

Stryker Warren, Jr.

Thank you. To everyone on 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 Urologix. We look forward to updating you on our progress on our first quarter of fiscal year 2012 conference call. Until then, good health and good evening. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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