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Urologix, Inc. (NASDAQ:ULGX)

Lazard Capital Markets 8th Annual Healthcare Conference Call

November 16, 2011 9:00 a.m. ET

Executives

Stryker Warren, Jr. - Chief Executive Officer

Gregory Fluet - Executive Vice President & Chief Operating Officer

Analysts

Karen Koski - Lazard Capital Markets

Karen Koski - Lazard Capital Markets

I think we will get started. My name is Karen Koski and I work in equity research at Lazard Capital Markets. We are very pleased to have Urologix here with us today. Presenting on behalf of Urologix is the company's CEO, Stryker Warren, and we invite you to ask questions at the end of the presentation. Stryker, so it’s over to you.

Stryker Warren, Jr.

Karen, thank you very much. It’s a pleasure to introduce the new Urologix to you today and much of this is driven by the recent announcement, September 6, of the exclusive worldwide license with Medtronic for the Prostiva RF therapy system. This puts Urologix into the leading position in terms of in-office solutions for benign prostate enlargement. And these two technologies are very very key to treating not only the symptomatic phase of the disease, but more importantly the longer-term implications associated with the obstructive component of the disease.

Some of the investments highlights. With the Prostiva transaction this combines the number one and number two technologies in the in-office minimally invasive space for the treatment of BPH. It has also effectively expanded our sales force, introduced additional distribution channels and what is very very important with these two technologies is that they are complementary in nature. I will share more details on that in a moment. They are both clinically proven with good reimbursement.

Something is changing in the market is very obvious to us is that there are more and more questions being asked in the clinical and related communities about the long term cost benefit relationship with oral medication which I think over the last ten years has been glamorized with both direct to consumer advertising, much of what's been in the nutraceutical news which recently has been called into question.

The management team is experienced, more details on that a little bit later in the presentation, but with a real preoccupation to market expansion and development of this integration platform. So deal structure, strategic reaction and its financial impact, it’s a ten year term on the license. $10 million option that are required that can be paid off with a combination of license fee and royalties. For us as a company this dramatically expands our customer base and it positions Urologix to be the single source solution set for the urologist in terms of addressing BPH in the office.

We believe that up to a 100% of the patients represent in the outpatient setting for the general urologist could be treated with one or the other of these two therapies. So giving a growth platform for the company, and we believe that with the combined sales forces there is a great opportunity to be more efficient in territory management as well as penetrating more deeply into the existing book of business through a very focused consultative selling approach.

Diversifies the revenue base for the company, certainly offer us great operating leverage, and while the company has not provided guidance for the Street historically, when we announced the transaction we gave guidance of $18 million to $20 million for partial year of consolidating Prostiva revenue with the legacy Urologix revenue.

What is BPH? For every male in this room it’s not a question of if it’s only a question of when and to what extent and degree. It’s a non-cancerous, progressive, gender specific, age related disease. Left untreated, BPH can lead to some very very serious problems in the lower urinary track to include issues with continence, bladder decompensation and kidney involvement. So when you look at these two technologies on a somewhat high level comparative basis, the legacy Urologix products, CTT, is high energy cooled microwave. Both of these technologies create necrosis, it’s a thermal injury that leads to debulking the gland.

With microwave we include proprietary cooling to protect the urethra as well as to patient comfort. The procedure is done well under an hour in the urologist’s office. And as I mentioned earlier, supported by very significant data on safety, efficacy and durability. The Prostiva RF Therapy is radio frequency also done in the urologist’s office. And it too preserves the urethra in the treatment which is important to the healing process as well as overall patient comfort. Safe, efficacious and durable.

When one looks more closely at the Urologix Cooled ThermoTherapy, this is a treatment catheter that leads to customization of the therapy given the size, choices of the microwave antenna. So one can customize for the patient based upon prosthetic urethra length and then further customize in terms of the treatment algorithm, in terms of power and duration of the treatment, making it a highly customizable clinical intervention for the urologist. 90% freedom from any additional procedure at five years, whether a surgical procedure or another minimally invasive. This kind of durability data sets the company well apart from its competition. Over 67% of the patients at five years, free from any medical therapy.

In terms of the heating pattern, we are targeting the transition zone, or the lateral lobes. It’s a very targeted energy pattern as is shown in this schematic. We are anchoring the catheter with location balloon in the bladder. The microwave antenna sits in the prosthetic urethra. It’s radiative heating with conductive cooling as we are circulating chilled sterile water through the lumens of that catheter. Again, one of the hallmarks of this is very high energy but with preservation of the urethra.

The RF system Prostiva, it’s 510(k) cleared. It’s the only trans-urethral needle oblation device. In the U.S., again durable. It’s safe and efficacious. This provides the urologist with direct visualization in that hand piece. There is a telescope that can either provide direct visualization or be connected to a camera and in a video tower. This is also highly customizable therapy in terms of depth of penetration of the needles as well as number of sticks and the placement of those lesions.

To look at the follicle ablation that occurs with this device. This depicts the needles being inserted through the urethra into the transition zone. 115 degrees Celsius, and the urologist is able to literally visualize the necrosis as it occurs. The lesion takes about two minutes and twenty seconds per stick. I mentioned the complementary nature of the two technologies. This is an attempt to depict, both based upon FDA labeling as well as the anatomical presentation. While we believe that combining these two technologies is such a powerful and compelling means to become the single for the urologist within office treatment for BPH.

Urologix is approved up to glands of 100 grams with no lower limit. Grams of cubic centimeter is the measurement of prostate size. Prostiva is labeled up to 50 grams. As you look to the right on this slide, you will see some anatomical presentations for which Prostiva is particularly well suited and not so well is CTT. Asymmetrical glands, if you look at that gland you will think back to the preferential heating pattern of CTT and recognize that’s not an ideal anatomy.

Short lobes, we are only with the CTT technology, approved and labeled to 2.5 centimeters in terms of prosthetic urethra length. Prostiva can treat shorter urethras than that. And then in addition to those two lateral lobes many men have a median lobe. These are differing in terms of size and presentation, but Prostiva is considered with the exception of what's known as the protruding median lobe, to be the treatment of choice for that. So when you look at the combination of these two technologies, and this is really the main thesis of our sales effort, is to penetrate more deeply into the existing book of business because when you combine the two books of business, presently, there is only a 6% overlap between the two therapies. So significant opportunity to build out the single source thesis and we believe, permit the urologist to do something very very dramatic in the office.

So our major competition is not surgery but it’s drugs. And drugs have been glamorized up until about a year and half ago when Flomax went generic. I think everyone who has spend any time watching sports realized the demographic there was one where the alpha-blockers, Flomax in particular, chose to do the majority of their spend. This is a slide to dramatize, that if you look at the right hand side of this slide, for the symptomatic relief, and this is AUA Symptom Score, our two technologies improve symptoms much more significantly than drugs. It takes four points or more of symptomatic improvement for a patient to notice the improvement. And you can see that drugs, especially the mono-therapies, are not very effective in that regard. It’s not uncommon to see Flomax or an alpha-blocker combined with a 5-alpha-reductase inhibitor, the most common one being Avodart in combination therapy.

Avodart is a hormonal interruption process, metabolic pathway for testosterone. And tamsulosin of Flomax is a smooth muscle relaxant. This is particularly for bladder neck and Avodart is intended to actually diminish the size of the gland. We would submit that these two in-office minimally invasive therapies are far superior to oral medication.

Both have good reimbursement. There is nothing a urologist can do in his or her office, the per unit of time is better reimbursed in this and there is broad coverage with private payers. So if you look at the value proposition for patient provider and payer. Safe, efficacious and durable for the patient, no risk of general anesthesia as there is with surgery. For the physician it’s a very efficient way to approach this disease state and for the payer far less expensive then chronic maintenance medication or surgery.

When one looks at the size of the market, it is large and it is growing. About 750,000 men present annually with clinically significant BPH. That number is growing about 2% a year with the aging of the baby boomers. And it’s a very very underpenetrated market. As I mentioned earlier, BPH is the most frequently diagnosed urological problem in aging men.

So how are the therapies categorized. Well, first of all, there is the watchful waiting, about 6 million men find the symptomology to be tolerable and therefore are seeing a clinician but choosing to do nothing beyond paying attention to symptomology and the progression of the disease. About 10% annually chose drug therapy and they become part of a prevalent population of approximately 4 million men taking medication.

Finally there’s what we consider to be the decisive therapy group, where approximately 180,000 procedure were done a year. 140,000 being surgical, 40,000 being minimally invasive. An area that we believe has enormous potential to grow. If you look at the cascade of men and breakdown to various patient cohorts and particularly look at the bull’s eye for Urologix. About 11 million men have symptoms of bother due to BPH, as I mentioned 6 million are watchful waiting, 4 million on oral medical therapy. But there are 320,000 men that fail annually, and that’s due to lack of efficacy and or side effects and or the cost of this chronic medical therapy.

For surgery about 140,000 men are treated. This is either with a trans-urethral section using a electrocautery loop or one of the several lasers that’s available, either being used in the hospital operating room or in ambulatory surgery center. Make no mistake, surgery is effective and durable but 60% of men have no interest in a surgical intervention. There is general anesthesia risk and there are many side effects associated with surgery and there are many sexual side effects associated with it.

Chronic medical therapy, as I said has been glamorized, and I think this society is (want) to take oral medication for most maladies. Easy to use, high awareness, great amount of direct to consumer advertising to promote it. But while drugs may be the first choice in treatment often, they are certainly not the last. Drugs do not halt (rush) of the disease and interestingly enough, when surveyed, 48% of men taking BPH medication said that they did not feel clinically better at a significant level. Side effects are not infrequent and interestingly enough co-morbid with BPH is frequently erectile dysfunction. And the drugs treating BPH not uncommonly worsen ED, lower libido, and because from a molecular standpoint the alpha-blockers are anti-hypertensives by way or legacy, it’s not uncommon that men complained about ortho-static hypertension and decrease mental acuity and just lower levels of energy.

Major issue is obviously compliance, and chronic maintenance medication is not inexpensive despite the fact that many of these drugs have gone generic. So what's changing regarding the oral therapy landscape. First of all with Flomax going generic there is less spend on advertising and that has become very very apparent. The pharmaceutical companies are dramatically reducing their sales forces. The ability to get into the urologists office is becoming more challenging. And patients and urologists are both beginning to ask the question about risk reward for medical therapy. And we think that this is presenting the beginning of a tailwind for Urologix.

So some of the questions about drug management. When I say that 48% of men thought they were getting no better, interestingly 84% of them remain on the medication. The only conclusion is men believe that if I don’t take the medication, I will become worse. 79% who has side effects or an adverse event remained on the drugs. A study that was shared at this year’s AUA, the 2011 AUA, came out of UC, San Diego, looking at men that have been on chronic maintenance medication for BPH, and what was begin pointed out was the longer that the patient’s on meds, the greater the likelihood that the degree -- the disease progression can become significant because, remember, if there is no cure for the disease and you are providing symptomatic relief, can the patient recognize if he is getting into trouble in what is being seen as more bladder involvement, bladder decompensation as well as a higher rate of kidney involvement and that’s a growing concern in the urologic community.

Kevin McVary from Northwestern was quoted in press release following this study being discussed with the AUA as suggesting, oral therapies for BPH are a common first line treatment that can be effective in many men. However, it is imperative that patients be treated properly if the drugs aren’t working.

So our strategy to drive the top line and bottom line. We have expanded our product offering. And as I mentioned you see the complementary nature from a labeling and an anatomical presentation standpoint. This is resonating very significantly in the market, albeit the integration of the sales force was completed and the training for cross-selling was completed in early October. So we are very much in the early innings but very encouraged by the early returns.

As I mentioned, an expanded customer base. Urologix has grown through this license agreement with the acquisition to acquire by 60%, and as I said there was only 6% overlap in the customer base with the two technologies. It’s our strategy to penetrate the existing book of business to a greater extant till we believe that that can and will be done. We will also put the put the Prostiva product on our company owned mobile vans which is a capital equipment in the disposable end of the urologist office with a technician and we expect to overtime certainly expand the number of accounts using both technologies.

So if you look at the sales force post the transaction, we have 22 direct sales reps. The 12 of the application specialists are technicians that go into the urologist’s office and work under the aegis of the urologist when they are treating. This is a very significant part of our consultative sale and is really expensive than complementary. To the 22 direct sales reps we also have a regional component in inside sales specialists.

We are very much of the belief that there’s been a significant investment that has been made and will continues to be made in distribution infrastructure and we see a great opportunity for market development to grow the business as we take full advantage of these combined technologies. There are about 3000 general urology office practices in the U.S., comprised of about 10,000 general urologists. Urologix has approximately 25% of that base in its combined book of business.

One of the things that we are concentrating on very very significantly is that in BPH it’s not uncommon if the urologist talks about a variety of options but does not advocate for one therapy. And what our thesis has been all along is there are many men that are silently suffering on oral medication, unaware of a non-surgical alternative. And what we have done is decided to democratize the treatment algorithm by introducing a very sophisticated patient education campaign where we are using the urologist’s electronic medical record, doing an ICD-9 isolation of patients by the 600 Series which is BPH, mailing to those patients directly. And the response has been very very significant.

Again, in the early innings of this marketing campaign that is very obvious to the urologist that the patients are looking for non-surgical alternatives and the conversion rate has been very very encouraging in that regard. Simply put, there are a high percentage of the patients that are taking oral medication, that are dissatisfied and are looking for a non-surgical alternative.

In terms of the management team, joining me today is the company's COO, Greg Fluet. We also have at the executive level some very experienced individuals. The latest addition that was announced back in June was, Lisa Ackermann, who comes from 12 years of Ethicon Endo. She has very significant and reverent experience in terms of market development and brings a significant marketing background with her as well as a deep, deep understanding of consultative selling and sales competency. She was directly involved in the (inaudible) with Ethicon Endo, and when one examines that as well as the market development opportunity for Urologix, you will see some dramatic similarities and relevance.

In terms of summary of financials. We recently reported our Q1 financial, this is a short period for the consolidation of Prositva revenue. About three weeks of the quarter. We shared with the Street guidance as I mentioned, $18 million to $20 million for fiscal year 12. And one of things that you will see in terms of gross margins is about 450 basis points of depression there that’s a result of fourth quarter and first quarter cash up on under absorption in manufacturing. This is a very volume dependent kind of business and we would expect gross margins to very quickly return to 50% or in excess thereof.

This portrays revenue over the last four quarters, and you can see the turn that has taken place with some seasonality but also with Prostiva’s addition. And in terms of the balance sheet we have recently filed our 10-Q and there is significant detail in that regarding the Prostiva transaction. And much of what you see on the balance sheet is related to both the purchase accounting associated with that as well as some of the deferred obligations we have. It’s very accretive deal from our perspective in terms of cash preservation. And one that we thing bodes very very well for the company in terms of its financial picture going forward.

With that I would like to thank you for your attention. It’s been a pleasure to introduce what we consider to be the new Urologix and I would be very inviting of questions for Greg or me.

Question-and-Answer Session

Karen Koski - Lazard Capital Markets

Any question?

Unidentified Participant

(Question Inaudible)

Stryker Warren, Jr.

The question is, is the lexicon non-surgical and minimally invasive. Those are somewhat interchanged. We think of minimally invasive as being these two technologies being used in the office. And when you watch the procedure you would certainly say this is minimally invasive surgery, whether it’s laser or an electro cutting loop, is not. And that’s a surgical procedure. Many people refer to minimally invasive as a non-surgical alternative. So I apologize if there has been any confusion in lexicon, but we see them as being synonymous.

Karen Koski - Lazard Capital Markets

You mentioned that you were very comfortable with the cost your products and the reimbursement. Do you see a potential to raise the cost and expand your margins that way?

Stryker Warren, Jr.

Question about pricing leverage. And let me start by saying that about 70% of the patients that are treated are Medicare beneficiaries. So we are impacted to some extent by the pressures associated with Medicare reimbursement. Having said that we have a very active reimbursement strategy. And one of the things that we are working very diligently at reviewing and discussing, is comparative effectiveness and the clinical and economic virtues of this therapy in comparison to both drugs and surgery. So well, I would not suggest the company will be successful in increasing the reimbursement. We are spending time to dramatize the significant value proposition that exists with the technology.

It’s well reimbursement and commercial payers and it had a history of good reimbursement. And I would be remiss not to say that we like all other procedures that are reimbursed by Medicare see annual pressure associated with reimbursement in that regard. As well as cost shifting to the beneficiary where we are not immune to increasing deductable or other obligations and how that impacts the decision making process. Partly because this is somewhat of a more discretionary procedure for some than others and consequently I think we are more economically sensitive as well as in terms of the mix of reimbursement.

Karen Koski - Lazard Capital Markets

And is the treatment landscape the same outside the U.S. as in the U.S.?

Stryker Warren, Jr.

The question was, is the treatment landscape the same outside versus inside. I am going to ask Greg Fluet who heads business development and was responsible for the Prostiva transaction, to discuss that both as it relates to CTT as well as Prostiva on the international stage.

Gregory Fluet

Our focus right now is primarily on the U.S. market, given the under-penetration that exists for procedures in the U.S. And a large opportunity presents for Urologix in Europe. There is some use of minimally invasive technology but there is not broad reimbursement for those. So that’s obviously a challenge for adoption. Outside the U.S., primarily it’s treated surgically or in some countries the drug use is prevalent as well.

Karen Koski - Lazard Capital Markets

Okay.

Unidentified Participant

(Question Inaudible)

Stryker Warren, Jr.

The question was, I am on oral medication -- and I am hoping this is not a HIPAA violation in answering your question. But the answer is you would need to be worked up by your urologist because there are some contraindications with both Prostiva and CTT, but the vast majority of patients are candidates for one or the other of these two therapies. Yes.

Karen Koski - Lazard Capital Markets

Just one more question in front.

Unidentified Participant

(Question Inaudible)

Stryker Warren, Jr.

The question was, our Think Outside the Pillbox! Campaign, what is the intent of that and how does it work? If you have been in a physician’s office recently, I think that they always are intending to do the right thing in terms of diagnostics and therapeutics but they are very pressed for time. And the sharing of information can become a real challenge in relating to inform and consent with a patient. That being said, many patients are on drugs and many of them are unwilling to talk about the short comings of drugs or they don’t recognize the shortcomings of drugs. So what we said to the urologist is, let us help you bring patients into a setting where you can devote an hour to simply talking about this disease state. They way we identify those patients is not advertising. We are going to the patient panel of that physician. Almost everyone today has an electronic medical record, so by diagnostic code you can identify those patients. Do mailing lists, invite them out and the recipient of that mailing is receiving it from his own urologist. The response rate has been very very high. The conversations, very very spirited. And it’s become very obvious to us as we thought was the case but especially revealing to the urologist that there patients do not understand what their treatment options are, especially as it related to a minimally invasive or non-surgical alternative to drugs. Very very important part of our growth strategy.

Karen Koski - Lazard Capital Markets

Okay. I think we are out of time.

Stryker Warren, Jr.

Thank you very much.

Karen Koski - Lazard Capital Markets

Thank you.

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