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Urologix, Inc. (NASDAQ:ULGX)

F1Q2012 (Qtr End 09/30/2011) Earnings Call

November 07, 2011 05:00 pm ET

Executives

Stryker Warren, Jr. - CEO

Brian Smrdel - CFO

Analysts

Operator

Good day ladies and gentlemen, and welcome to the Urologix Incorporated fiscal year 2012 first quarter conference call. My name is Shinal 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. 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 provisions 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 and Form 10-K for the year ending June 30, 2011 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.

Thank you Shinal and good afternoon to all those joining us today to discuss the company's results for the first quarter of fiscal year 2012. With me are Brian Smrdel, the company's Chief Financial Officer and Greg Fluet, Executive Vice President and Chief Operating Officer of Urologix. Today's call will begin with a review of the recently completed Prostiva transaction. Brian will then review the financial results for the first quarter and I will share an update on the progress we are making on the integration of Prostiva, review our near-term priorities and then offer some thoughts in perspective on the trends in the broader market before opening up the call for questions.

The first quarter of this fiscal year was transformative for Urologix. The combination of the Prostiva RF therapy system with our Cooled ThermoTherapy technology has made Urologix to clear leader for the in office treatment of BPH.

The detailed more fully in our September 6th conference call, Urologix has signed an exclusive worldwide license for the Prostiva Radio Frequency Therapy System for BPH for Medtronic. This transaction significantly expands our position as the leading provider of in-office treatment solutions for symptomatic and obstructive urinary conditions attributable to BPH.

The combination of Prostiva RF therapy with Urologix’s Cooled ThermoTherapy allows us to offer urologists the broadest in-office solutions set and importantly we’ll expand our addressable patient population. 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 product, Prostiva is most commonly used in the urologist’s office.

Prostiva used radio frequency technology to treat symptoms of the obstruction due to BPH and can precisely target and treat areas within the prostrate while allowing the urologist direct visualization of the treatment area. Similar to CTT, the Prostiva technology is safe, effective, durable, preserves to the urethra has minimal post op complications, has minimal sexual side effects and is cost effective for both the patient and payer when compare to drugs and surgeries.

Despite 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. With the breadth of these two technologies indications, urologists are able to treat nearly all of their patients presenting with clinical BPH in their office with products from one trusted partner, Urologix.

We expect this transaction to accelerate our top line growth rate and create operating leverage that will improve our bottom line results attributable to substantial additional revenue accompanied by only a modest increase in anticipated expenses principally related to the addition of Prostiva sales force. I would now like to turn the call over to Brian to review the first quarter’s financial results. Brian?

Brian Smrdel

Thank you, Stryker. Our revenue for the first quarter of fiscal year 2012 was $3.1 million or 8% more sequentially than the $2.9 million reported in the fourth quarter of the last fiscal year, but 6% less than the $3.4 million reported in the same period of fiscal year 2011. The increase in revenue compared to the fourth quarter is the result of the contribution of Prostiva revenue into our product mix following the announcement of the transaction on September 6. The year-over-year revenue decline results from an overall reduced order volume for our Cooled ThermoTherapy products across direct to mobile and third party mobile distribution channels.

A further breakdown on the sources of our revenue on a sequential basis, revenue from sales to direct accounts contributed 44% of overall revenue in the first quarter of fiscal year 2012 compared to 40% in the previous quarter.

Urologix’s mobile service treatment revenue contributed 42% of overall revenue and third party mobile revenue contributed 13% of overall revenue in the first quarter of fiscal year 2012 compared to 46% and 12% respectively for the fourth quarter of fiscal year 2011.

The increase in the share of direct accounts as a percentage of total revenue is the result of the incremental direct sales from the Prostiva product line in September.

Gross profit for the first quarter of fiscal year 2012 was $1.4 million or 45% of revenue compared to $1.3 million or 43% of revenue for the prior quarter and $1.8 million or 55% of revenue when compared to the prior year first quarter.

The decrease in gross margin in the first quarter of fiscal year 2012 was primarily driven by planned lower production volume in the last two quarters to reduce inventory, combined with a lower volume of CTT products sold in the first quarter of fiscal year 2012. The combination of these factors impact our gross margin by approximately 450 basis points in the first quarter of fiscal year 2012, which will not continue based upon the achievement of production plans and sales results in the second quarter and going forward.

Reported first quarter operating expense totaled $2.7 million, an increase of $168,000 or 7% when compared to the fourth quarter of fiscal year 2011, and an increase of $206,000 or 8% when compared to the $2.5 million reported in the first quarter of fiscal year 2011. The increase in operating expense for the first quarter is primarily a result of acquisition costs and expenses related to the expansion of our direct sales force associated with the Prostiva transaction.

Net loss for the fiscal year 2012 first quarter was $1.4 million or $0.09 per diluted share compared to the $1.3 million net loss, also a $0.09 per diluted share in the fourth quarter of fiscal year 2011, and a net loss of $708,000 or $0.05 per diluted share in the first quarter of fiscal year 2011.

Cash and cash equivalents were $1.6 million at September 30, 2011 compared to $3.1 million at June 30 of 2011. Cash utilization in the quarter increased to $1.5 million from $1 million in the first quarter of prior year. During the first quarter of fiscal year 2012, the company paid $500,000 to the licensing fee related to the Prostiva agreement as well as additional one-time transaction costs for legal and accounting fees.

Our first quarter is historically the highest for cash utilization due to the timing of annual payments. Payments during this period included annual insurance premiums and year end audit fees, in addition to other annual expense items. The company does not have any debt obligations.

I’ll now turn the call back to Stryker.

Stryker Warren, Jr.

Thank you, Brian. Now an update on the progress that we made on the integration of the Prostiva product lines which we signed a licensing agreement in early September. When we closed the Prostiva transaction, we made offers to all the Prostiva sales personnel and met with them in person. Only one individual did not join Urologix just for personal reasons.

We are enthusiastic about the seven new individuals now in the Urologix team selling two safe, efficacious, durable and complementary technologies.

Despite only a partial multi-productivity from the combined businesses, September was a strong month for us, and I believe we will carry that momentum through the second quarter.

It is important to note that during September, the technologies continue to be represented by the respective sales personnel for each product line. It was in early October at our National Training Meeting that we completed the integration of the sales force team and related support infrastructure. This training meeting included combined product positioning and clinical training supported by revised collateral materials to support the consultative sale and an enhanced marketing program. The combined expanded sales force and mobile distribution channel are under new leadership and are highly focused on driving growth. While the external economic environment continues to pressure elective procedures, we believe that our leading market share and expanded sales organization in combination with our Think Outside the Pillbox! marketing campaign should generate top-line growth.

We have shared revenue guidance for fiscal year 2012 of $18 million to $20 million. Let me share the components of our growth strategy that contribute towards this guidance. First of all, with larger sales force with smaller territories selling two complimentary technologies into our expanded customer base which offers greater efficiency in meeting with urology groups.

Second, new sales leadership has made sales competency and clinical sales excellence priorities. We anticipate we will see improved productivity from the field force. Third, we are leveraging the combined offering of CTT and Prostiva across multiple distribution channels specifically the second quarter we have established the goals of introducing Prostiva across our company-owned mobile distribution channel and the initiation of EU distribution.

And finally, our Think Outside the Pillbox! patient education programs are taking hold and showing early positive results. We believe this program is scalable and represents the cornerstone over demonstrable commitment to supporting the urologist and realizing the Urologix’s value proposition.

Let me now offer a brief update on reimbursement. In-office BPH therapy both CTT and Prostiva continues to be well reimbursed by Medicare. The calendar year 2012 CMS physician fee schedule final rule was published on November 1, 2011. There is the question if and when Congress will address the annual Sustainable Growth Rate adjustment for calendar 2012, but we believe they will act as they have in the past to minimize that impact. If Congress acts to completely eliminate the SGR adjustment, the national average reimbursement level for CTT will be $2,156 and for Prostiva it will be $2,081.

[Literature] continues to emerge and questions the risk-reward relationship of chronic maintenance BPH medication. The recent announcement that non-prescription over-the-counter BPH preparation Saw palmetto is no better than placebo has generated significant attention amongst the way public as have other articles in the late press questioning some BPH medication risks.

You’ve heard me say this before, [that appears] repeating, there exists a large and growing population of men on chronic medical therapy who are dissatisfied and increasingly symptomatic. The company is not seeing and still nor ignoring this unique opportunity presented by the change in attitudes toward medical therapy. This is evidenced by our licensing of Prostiva the number two technology market share behind our number one CTT, but continued investment in expanding our sales and marketing organization and our new leadership and executing on our focus BPH patient awareness campaign.

Also, the research and development initiatives to enhance product and performance as well as patient comfort and leveraging the valuable clinical studies supporting both CTT and Prostiva; while our fundamental belief in our business and our superior product offering has not yet been substantiated by our financial results, I continue to believe that ongoing organizational focus on our strategic initiatives will prove successful in the near-term.

In closing, I assure you our key areas of focus remain unchanged and are dramatized by the Prostiva transaction. W are committed to expanding the in-office BPH market by increasing awareness of in-office nonsurgical alternatives to drugs and we will promote CTT and Prostiva as effective, durable and safe nonsurgical treatment options for the many men suffering from BPH.

The entire Urologix organization including the recently integrated Prostiva sales staff is highly motivated by the sizable market opportunity that CTT and Prostiva address, and we expect our successful sales execution and expense management will drive improving operating and financial results in fiscal year 2012.

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

Question-and-Answer Session

Operator

(Operator Instructions) And Mr. Warren, there are no questions.

Stryker Warren, Jr.

Chanel, thank you and to those of you on this call, on behalf of the Board of Directors, senior management and all Urologix employees I thank our loyal shareholders for your continued interest in Urologix and I look forward to meeting you personally should you attend tomorrow afternoon’s annual shareholders meeting which is scheduled for 4 PM at the Sheraton West Hotel in Minneapolis. In the meantime, we look forward to updating you on our progress on our second quarter conference call and until then we wish you good health and good day.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect.

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