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Urologix Inc. (NASDAQ:ULGX)

Signing of an Exclusive Worldwide License for the Prostiva RF Therapy System for BPH Conference Call

September 6, 2011 10:30 AM ET

Executives

Stryker Warren, Jr. – CEO

Greg Fluet – EVP and COO

Brian Smrdel – CFO

Analysts

Ernest Andberg – Feltl and Company

Operator

Good afternoon ladies and gentlemen, and welcome to the Urologix Conference Call to discuss the signing of an exclusive worldwide license for the Prostiva RF Therapy System from Medtronic, Inc. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded and will be available for replay on the Company's website, www.urologix.com, under the Investor Relations section after the completion of this call.

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. Words such as may, will, expect, believe, anticipate, estimate, or continue, or comparable terminology, are intended to identify forward-looking statements. 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 the press release issued by Urologix today in Urologix’s recent Annual Report on Form 10-K for the year ended June 30, 2010 and other documents filed with the Security and Exchange Commission. Urologix disclaims any obligation to update any forward-looking statements made during the course of this call.

It is now my pleasure to introduce your host, Mr. Stryker Warren, Jr. Chief Executive Officer. Please proceed, sir.

Stryker Warren

Good morning, and thank you for joining us to discuss our signing an exclusive worldwide license for the Prostiva RF Therapy System for BPH from Medtronic. Joining me on the call today are Greg Fluet, Urologix’s Executive Vice President and Chief Operating Officer and Brian Smrdel, Urologix’s Chief Financial Officer.

We are pleased to discuss the signing today of an exclusive worldwide license agreement for the Prostiva RF Therapy System for BPH to share why we believe this transaction is transformative for Urologix, to highlight how the addition of Prostiva improves our market position and to illustrate what we consider are growth opportunities in the years to come.

The agenda for the call is as follows. To begin, I will provide a high level overview of the Prostiva transaction and its financial implications. Then I will speak to the benign prostatic hyperplasia or BPH market, the treatment landscape today, and how our expanded product portfolio will serve this market going forward. Finally, I will discuss the key drivers of our growth strategy and then invite your questions.

Prostiva RF Therapy is a transurethral needle ablation device that is 510(k) cleared for the treatment of BPH. Similar to the Urologix’s Cooled ThermoTherapy or CTT product, Prostiva is most commonly used in the urologist’s office. Moreover this transaction will significantly expand Urologix’s position as the leading provider in-office treatment solutions for symptomatic and obstructive urinary conditions due to BPH.

The combination of Prostiva RF Therapy with Urologix’s Cooled ThermoTherapy affords Urologix the ability to offer urologists the broadest in-office solution set and more importantly, it will expand Urologix’s addressable patient population. As stated in the press release, the term of the worldwide exclusive license for Medtronic’s Prostiva is ten years with an option to acquire the technology. In exchange for the license, Urologix is paying Medtronic a license fee of $1 million, of which $500,000 was paid at closing, and $500,000 will be paid upon the one-year anniversary.

Urologix has also agreed to pay Medtronic a royalty fee on products sold with the maximum total payments for the license and royalty fees capped at $10 million, which is equivalent to the exercise price of the option to acquire the technology. Additional information relating to the transaction can be found in the Form 8-k that will be filed with the SEC.

In terms of the financial impact of the transaction as we reported on August 23, Urologix’s revenue for fiscal year 2011 on a standalone basis was $12.6 million. Following this transaction, we except the combined businesses, Prostiva plus Urologix’s CTT to generate revenue in the range of $18 million to $20 million for fiscal year 2012. We expect this transaction to materially contribute to future bottom line results as well. The structure of this transaction will provide opportunities to leverage our existing infrastructure as we add substantial revenues with only a modest increase in expected expenses, primarily related to the addition of Prostiva sales force.

Let me share our perspective on the BPH market in general and highlight the opportunities for Urologix to both serve and grow the BPH market in the years to come. Our primary focus has been and will continue to be the treatment of urinary obstruction in symptoms due to BPH, a major health problem in men. BPH is non-cancerous prostate growth often referred to as an enlarged prostate that can cause potentially severe lower urinary tract symptoms or LUTS and voiding dysfunction due to obstruction as the prostate grows in size.

BPH is a progressive condition associated with age for which there is no cure. Importantly, BPH is not only a symptomatic disease but when left untreated obstructive BPH can lead to serious conditions including urinary retention, urinary tract infections, bladder stones, incontinence, bladder decompensation, and in extreme cases, chronic kidney disease.

BPH is the most frequently diagnosed urological problem in men. There are over 23 million men diagnosed with lower urinary tract symptoms due to BPH in the US and EU combined. Approximately, 11 million men in the United States alone are symptomatic, and of those, over 6 million men have both symptoms and urinary obstruction related to their enlarged prostate.

So how are the 11 million men in the United States with symptoms due to BPH being treated today? Approximately 6 million are under watchful waiting which is to say no drugs nor procedures. The urologist will monitor the patient to determine if the disease progresses or until the patient is too bothered by the symptoms and elects to seek some form of treatment. 4 million of the 11 million men in the United States with symptoms due to BPH are in the chronic medical therapy group, where they take daily prescription medication to relieve their BPH symptoms. While drugs can improve a patient’s symptoms, they come with numerous side effects and hassle, require daily compliance, significant out-of-pocket expense and sexual side effects.

Most importantly drugs only treat the symptoms of BPH and thus provide minimal relief of the obstructive component of the disease. Therefore as the prostate continues to grow, many men ultimately experience serious lower urinary tract complications that require more invasive treatments. Thus while more than 60% of men with BPH surveyed do not consider surgical therapy desirable, many of the surgical procedures are unavoidable due to the progressive nature of the disease even while on medication.

When a patient has waited until he has developed a condition such as urinary retention that requires an emergency room visit and for which a procedure is the only treatment option, irreversible damage may already have been done to his urinary tract. The only therapeutic options for BPH that effectively treat both the obstruction and the symptoms are either Urologix’s minimally invasive in-office solutions, now CTT and Prostiva, or surgical procedures. Despite patient perception, drugs are not a definitive treatment for this progressive disease.

Approximately 180,000 men in the United States have one of these procedures annually. 78% of the 180,000 men undergo a surgical procedure in a hospital or ambulatory surgery center setting. While there are certain criteria for surgery, these procedures are highly invasive, are performed under general anesthesia, carry risks of adverse events and higher risks of sexual function complications.

In contrast to surgical options, our minimally invasive procedures are performed in the urologist’s office, often in less than 30 minutes and require only local anesthesia. Our procedures are safe, effective and durable and are supported by strong clinical outcomes. Furthermore, both CTT and Prostiva technologies for the urologist, customization capabilities based upon the diagnostic workup and unique patient characteristics with durability, Urologix offers significant versatility.

Despite the superior efficacy and clinical support of in-office and surgical procedures, drug therapy continues to represent the fastest growing segment of the BPH market in recent years. This growth in drug utilization has come at the expense of procedure volumes for therapeutic treatment options. However, there is a growing body of clinical evidence supporting the argument that drug therapy is not a solution. And chronic use of BPH medications may lead to increased complications.

Importantly we see opportunity to reverse the headwind of delayed interventions caused by chronic drug usage in recent years. The key to reversing this headwind is to continue to educate the market that there are in-office minimally invasive procedures for the treatment of bladder outlet obstruction due to BPH. Urologix’s treatment options provide urologists the ability to treat the bladder obstruction early, not simply masks the symptoms with drugs, and in doing so, potentially prevent the progression to a more serious disease state.

Unlike BPH drugs which treat only the symptoms, Urologix’s in-office procedures, Prostiva and CTT, share the distinction as definitive first line therapies for the treatment of symptoms, and bladder outlet obstruction due to BPH and while still very early, the results of our think-outside-the-pillbox campaign have demonstrated encouraging patient response while dramatizing for the urologist there are many silently suffering men on medical therapy unaware of a non-surgical alternative. There are now two complementary definitive first line therapies. We’ve made a visible commitment to patient education.

Now a quick summary is we think about our in-office product portfolio comprised of both CTT and the complement of Prostiva. Urologix’s CTT is the only microwave-based minimally invasive product indicated for both the treatment of bladder outlet obstruction and symptoms due to BPH. This high energy microwave technology achieves significant debulking of the enlarged prostate, while our proprietary cooling technology preserves the urethra which increases patient comfort.

Urologix’s CTT received favorable clinical support in May 2011 issue of the Journal of Urology which was timely given the AUA’s annual meeting in May. The publication of the 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, in 90% of patients treated with CTT were free from a secondary procedure during the five-year period. These lower retreatment rates and durable outcomes clearly support our strategic effort to demonstrate CTT as a safe, durable and effective BPH treatment alternative to chronic medical therapy.

Prostiva used radio frequency technology in the form of transurethral needle ablation to treat bladder outlet obstruction in symptoms due to BPH. Prostiva can precisely target and treat specific areas within the prostate while allowing the urologist direct visualization of the treatment area. It too permits preservation of the urethra. Like CTT, the Prostiva technology is safe, effective and durable, has minimal postop complications, minimal sexual side effects, and is cost effective for both the patient and the payor when compared to drugs and surgeries.

Yet for the urologist, the reimbursement for both technologies is strong. All three constituents, patient, payor and provider are the beneficiaries of Urologix’s value proposition based upon the documented clinical outcomes. Despite the fact that both CTT and Prostiva are in-office treatments, this transaction expands our addressable market as each technology can treat uniquely different types of disease prostates most effectively. The combination of these two technologies will allow urologists to treat the vast majority of patients presenting with clinical BPH in their office from one trusted partner, Urologix.

I believe the Prostiva transaction is transformative for Urologix. This transaction consolidates within one company, to establish safe, efficacious, and durable, minimally invasive technologies that allows Urologix to offer an end-to-end therapeutic indications profile for BPH, and in the near-term the transaction is expected to have significant positive impact on our operating results.

Longer-term this transaction will also allow us the opportunity to grow the market for in-office treatment of obstructive and symptomatic BPH as we continue to raise the awareness in the patient population and amongst urologist on the merits of non-surgical alternatives to chronic BPH drug therapy at a time when there is increasing discussion of the potentially negative longer term impact of BPH drugs.

We intend to continue to educate the market on the merits of early intervention and the in-office non-surgical treatment of BPH with CTT and Prostiva. While CTT and Prostiva have a similar target market, I am encouraged by the minimal overlap in urologist’s accounts that are currently using both technologies. We anticipate that adding Prostiva to the Urologix’s platform, both mobile and direct, will grow our unique urologist’s accounts by more than 60%. We are also excited to welcome all of Prostiva sales personnel and we’ve a focused plan to integrate these employees within the existing sales organization in the coming weeks.

In addition, both organizations are similarly focused on the clinical consultative model, which is a strong fit with Urologix. As we recently announced, this organization is under the new leadership of Lisa Ackermann, Vice President of Sales and Marketing who is driving this integration process. Subsequent to the transaction, we are targeting a combined sales organization of 40 individuals including mobile application specialists, territory sales representatives, and regional managers.

Our goal is to have this organization clinically trained to represent both technologies by the end of the second quarter of fiscal 2012 promoting a unique value proposition heretofore unavailable to the urologist from a single solution source. Moreover, we expect increased sales force efficiency with the expanded field force coverage in smaller geographical territories enabling increased time with customers, as well as increased coverage in high density areas.

This transaction marks an important inflection point for Urologix as it improves our market position by combining two efficacious therapies with proven durability from a single trusted partner. In addition it expands our treatable patient population and adds significant resources to our sales force.

Going forward, we have four key initiatives to drive growth in our business. First, we will continue to educate the market on the merits of early intervention through an in-office minimally invasive approach to treat BPH. We believe the recently published data that highlights the risks of developing serious urinary complications while in drug therapy along with the long-term data demonstrating the efficacy and durability of our procedures, supports our message to urologists in recommending this definitive option earlier in the treatment algorithm.

Second, we intend to drive topline growth by expanding into new urologist’s offices. We believe that CTT and Prostiva combined are currently present in less than 20% of total urologist practices in the United States. Further penetration into the urologist’s community represents a significant growth opportunity for Urologix going forward.

Thirdly, a small portion of our customer base utilizes both of our technologies and thus we have the opportunity to cross-sell into urologist practices that only utilize either CTT or Prostiva. We have a clear explanation for that customer as to why the two technologies complement one another, gland anatomy being the principal focal point. Also we attempt to integrate the Prostiva platform and product line into the Urologix’s mobile services distribution platform. Finally, we will continue to evaluate opportunities to acquire complementary technologies and products to further leverage our strong distribution platform and broaden our value proposition to our customers in the in-office urology channel.

I trust you can appreciate now why we are enthusiastic about the licensing of the Prostiva RF Technology and the opportunities to grow our business. With that I’d like to open the call to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Ernest Andberg from Feltl and Company. Please proceed.

Ernest Andberg – Feltl and Company

Stryker, good morning.

Stryker Warren

Good morning, Ernie.

Ernest Andberg – Feltl and Company

This is an interesting move on your part. Are you going to actually be manufacturing the Prostiva line in your facility?

Stryker Warren

Ernie, what I’d like to do is turn that question over to Greg, who is responsible for operations and is also overseeing the integration and transition process.

Ernest Andberg – Feltl and Company

Could he also then just comment on whether this helps your overhead absorption and gross margin picture?

Greg Fluet

Hi Ernie, how are you?

Ernest Andberg – Feltl and Company

Good.

Greg Fluet

The Prostiva product line is manufactured by outsourced manufacturing and we are transferring those supplier agreements over to Urologix. We will be continuing to source those from those suppliers. The primary supplier of that handpiece is a company we already have an existing relationship with. So we expect that to be a very smooth transition. And aside from the topline revenue guidance, we are not providing any other additional guidance on gross margin or expense structure at this time.

Ernest Andberg – Feltl and Company

Second avenue, Stryker, when you integrate the two sales forces, how are they going to approach a prospective urology office and allocate time to sell either Prostiva or CTT? How does it fit together?

Stryker Warren

Well, we think that they are complementary from an anatomical treatment standpoint, given that there are glands that we cannot treat that Prostiva can and likewise CTT versus Prostiva. It’s our hope and expectation to educate the market about the opportunity to treat what we believe is an excess of 90% of the patients presenting that could be treated, to be treated in the office when you combine these two technologies. We believe they are complementary.

We believe that the urologists will recognize that. And there are offices with whom we now work that use both technologies. So we are familiar with that decision tree and the diagnostic workup and the way in which that selection process takes place. We are – we are very, very optimistic that the complementary nature of earnings is going to very, very evident as this is introduced by a single solution source, namely Urologix.

Ernest Andberg – Feltl and Company

Are you saying that the 40 total people interacting with the urology community, counting mobile, direct and managers, they are going to be selling both products into one office and they just have to then decide, in consultation with urologists, what’s best for the office? Is that what I hear you saying?

Stryker Warren

We will be promoting both technologies equally to the urologists. The Prostiva technologies you know, is a very technique driven technology and one that certainly requires more of a learning curve than necessarily CTT. But the advantages of it from a visualization standpoint treating median lobes, we believe, is going to make this an opportunity to introduce both technologies into the outpatient setting.

Ernest Andberg – Feltl and Company

Okay, last question, Stryker. What are the assumptions behind getting to an $18 million to $20 million run rate this year based off of $12 million plus in CTT last fiscal year? Is it all Prostiva add or are you expecting some growth in the CTT side?

Stryker Warren

Ernie, it’s the combined businesses and as you know, there are some OUS revenue on the Prostiva side. But we are looking at a nine-month period for the combined – ten-month period for the combined businesses and that’s reflected in the revenue range that we’ve provided.

Ernest Andberg – Feltl and Company

Thank you, that’s all.

Operator

[Operator Instructions]. At this time, we have no further questions in the queue. I would like to hand the call back over to Mr. Warren for closing remarks.

Stryker Warren

I would like to thank everyone for joining us today to discuss our license for the Prostiva Technology and we look forward to updating you on our progress during our fiscal first quarter earnings call. And I wish you good health and good day.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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