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Urologix, Inc. (NASDAQ:ULGX)

F3Q2012 Results Earnings Call

April 26, 2012 5:00 PM ET

Executives

Stryker Warren, Jr. – Chief Executive Officer

Brian Smrdel – Chief Financial Officer

Greg Fluet – Executive Vice President and COO

Analysts

Jeff Adams – Private Investor

Deepak Chaulagai – Dougherty & Company

Larry Haimovitch – HMTC

Operator

Good day, ladies and gentlemen. And welcome to the Urologix Incorporated Fiscal Year 2012 Third Quarter Conference Call. My name is Bill, and I will 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 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 maybe found in Urologix’s recent report on Form 10-K for the year ended 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 will turn over the call to Mr. Stryker Warren, Jr., Chief Executive Officer. Please proceed, sir.

Stryker Warren, Jr.

Thank you. Good afternoon to all those joining us today to discuss the company’s results for the third quarter of fiscal year 2012. With me are Brian Smrdel, the company’s Chief Financial Officer; and Greg Fluet, the company’s Executive Vice President and Chief Operating Officer.

Today's call we’ll begin with the summary of our third quarter performance, the second full quarter as the new Urologix. Brian will then review the financial results for the third fiscal quarter in detail. Finally, I will share an update on the progress we are making on our growth strategy, provide color surrounding our revised fiscal year 2012 guidance and review our near-term priorities, before opening up the call for questions.

The third quarter this fiscal year was generally positive with sequential topline growth in the second full quarter of operations as the new Urologix. For the third quarter is historically our most difficult of the fiscal year, we posted sequential growth in the period for the first time in five years, both of our product lines this quarter contributed to this growth and the results support are compelling long-term growth story.

Specifically, the combination of the Prostiva RF Therapy System with our Cooled ThermoTherapy technology has made Urologix the clear leader for the in-office treatment of BPH with an expanded population of men whom we can effectively treat.

We have two complimentary in-office technologies which combined have more than 50% market share. Both products have demonstrated durable clinical effectiveness for the treatment of BPH and we have a focus sales strategy to drive financial and operating performance fueled by market development initiatives and patient education programs.

This quarter we posted improving margins and positive operating cash flow and we continue to see encouraging results from our patient education initiatives each of which we will detail in a few moments.

Despite many highlights from the third quarter, we also faced challenges that pressured results in the period. It impacted our expectations for topline performance over the balance of this fiscal year.

As noted in our press release this afternoon, we have lowered our fiscal year 2012 revenue guidance to a range of $17 million to $17.5 million from the previous guidance range of $18 million to $20 million introduced at the time of the Prostiva transaction last fall.

The primary driver of our tempered guidance expectations for the balance of the fiscal year is slower than anticipated recovery and the recently acquired Prostiva business. We knew this was a business under pressure in recent years when we acquire the license last fall, and while we feel confident in the technology and the business has stabilized, the process of reinvigorating the Prostiva line has been challenging.

We also experienced dislocation in the sales force in one region which impacted our sales in the quarter. For the sales positions have been filled it will take time for those individual to reach full productivity. Importantly, while Prostiva revenue has been slower than originally anticipated, we fully expect our continued focus and support of this product line to achieve appreciable growth.

Before turning the call over to Brian for deeper dive into third quarter results, I want to step back briefly to discuss the [fardel] market opportunity for the company over next few years and reiterate a key message for the new Urologix story.

Our market is changing. We are uniquely positioned to capitalize on the opportunities to grow with our target market by increasing patient awareness of non-surgical alternative BPH drugs, by hiding urologist recognition of BPH patient interest in in-office BPH therapies, by improving patient outcomes and by enhancing the productivity of urology practices.

Urologix's product serves the BPH treatment market, a segment of the urology marketplace with favorable growth characteristics. The addressable patient population is both large and growing, comprised of aging men with lower urinary tract symptoms caused by a progressive condition which left untreated could cause serious health issues.

Urologist, the company's target customers and their patients are increasingly questioning the merits of chronic medication for BPH in light of the marginal benefit and growing evidence of risks associated with long-term drug management.

The company is demonstrating that when patients are made aware of Urologix's in-office treatment options, many are seeking to avoid drugs in favor of a more definitive therapy, and the competitive landscape in the in-office treatment space is changing with a large medical device company [Halton Distribution] of the low energy microwave treatment device.

We are focus on this opportunity to further consolidate a position as the leader in the in-office treatment of BPH. Simply stated we continue to see opportunities for growth. Our technologies are safe, effective and durable, we treat a large and growing patient population, and we are targeting a group of physicians who are increasingly aware of their patient desire and clinical need for a change in the treatment paradigm, each of these will benefit our company's future growth.

I will now turn the call over to Brian to review the third quarter’s financial results. Brian?

Brian Smrdel

Thank you, Stryker. Revenue for the third quarter of fiscal 2012 was $4.7 million, up 59% year-over-year and up 2%, sequentially. Revenue growth on a year-over-year basis was driven primarily by the contribution of Prostiva RF therapy product revenue for the second full fiscal quarter, following the acquisition of the exclusive license of that product line on September 6, 2011.

The sequential increase in total company revenue was driven primarily by 4.6% increase in sales of the Prostiva RF Therapy product line. The company’s Cooled ThermoTherapy base business posted positive growth of 1.1% year-over-year and was stable on a sequential basis. We are encouraged by the measured improvements we are seeing in our core CTT business.

Despite the encouraging sequential growth in sales, third quarter domestic revenue performance was impacted from sales force disruption in one of our three U.S. regions, offsetting the topline impact from this region of the U.S. was solid mid single-digit sequential growth in our other two regions domestically, as well as a notable contribution from our Prostiva operations outside the US.

The third quarter marked the first full quarter with European distribution capability in all targeted countries. We are pleased with our new relationships abroad, operating in three main territories and we look forward to continue contribution from these European markets in the future.

Gross profit for the third quarter of fiscal 2012 was $2.4 million or 50.7% of revenue compared to $2.3 million or 49.2% of revenue in the prior quarter and $1.6 million or 54.1% of revenue last year. Gross margin for the third quarter of 2012 was lower than the prior year quarter due to the 46% gross margin on the Prostiva product line, which included 62,000 of non-cash charges or 1.3% of revenue primarily for the amortization of intangible assets.

Gross margin for the third quarter of fiscal year 2012 improved 151 basis points sequentially due primarily to the impact of higher production volumes in the period to match increasing sales demand. Operating expense totaled $3.2 million, up 22% year-over-year and down less than 1% sequentially.

The $576,000 increase year-over-year was primarily driven by the additional expense from our expanded sales force following the Prostiva acquisition. Beginning this quarter, we will report the component parts of our operating expense in greater detail on our income statement in an effort to better reflect the underlying drivers of expense in the business.

The largest item of expense for the company is sales and marketing expense, which was $1.9 million in the third quarter, up 1.1% sequentially. The net loss for the third quarter was $969,000 or $0.07 per diluted share compared to a net loss of $983,000 or $0.07 per diluted share last year. The net loss compared to the prior year includes $169,000 of non-cash imputed interest expense related to the purchase accounting.

Turning to the balance sheet, cash and cash equivalents were $1.9 million at March 31, 2012 compared to $1.6 million at December 31, 2011 and $3.1 million at the end of our prior fiscal year on June 30, 2011. The company generated $285,000 of cash in the third fiscal quarter ended March 31, 2012 compared to cash utilization of $498,000 in the same period last year.

The cash performance is a result in part of beneficial payment terms on Prostiva product inventory and the timing of royalty payments. Payments for approximately $700,000 of Prostiva product purchased during the third quarter fiscal year 2012 and $2.1 million for the year- to-date period, we’re deferred as a result of 270 day terms negotiated as part of the license agreement.

I’ll now turn the call back to Stryker.

Stryker Warren, Jr.

Thank you, Brian. I will now share an update on the progress that we have made on multiyear growth strategy we detailed for you earlier this year. Following the successful integration of Prostiva into Urologix, we’re focusing intently on leveraging our leading market share position, our expanded sales organization and our innovative market development in patient education programs to drive topline growth.

Turning now to each of the key drivers of this revenue growth, first, the BPH treatment market landscape is changing. An estimated 4 million men in the U.S. are in some form of chronic drug therapy for symptoms related to BPH. This large patient population is not new but growing awareness of their dissatisfaction with the results provided by chronic medical therapy certainly is new.

It will drive growth opportunities for Urologix. Supporting these changing dynamics in our target patient population, the urologist community appears to be increasingly aware of their patient’s desire for Urologix's in-office therapies as an alternative to the numerous potential ramifications associated with chronic drug therapy.

Clinical research published over the last 12 months, some of which has been publicized in the lay press has prompted many patients to question their urologists about the risk reward profile of drug therapy. Urologix's in-office nonsurgical procedures are the logical next step for these patients.

Physicians appreciate the strong safety profile and clinical efficacy of our products. The reimbursement is good and the return per unit of physician time is compelling. Our message is drug therapy is not the answer. Drugs treat the symptoms and not the problem. Conversely, our procedures are a proven long-term in-office solution to treat BPH.

Finally, the competitive market dynamics for in-office therapies continue to favor our company as Boston scientific has announced they will halt whole distribution of the low-energy Prolieve device as of June 30, 2012. These market dynamics combined with our significant market share will allow us to more effectively educate both patients and physicians on the proven long-term clinical benefits of our two leading in-office technologies and increase their access to our cool thermal therapy and Prostiva product lines.

To that end, we recall that our primary tools in driving near-term procedure volume or our patient education and market development programs. With another quarter, our seminar activity experienced, the data continues to demonstrate that our programs are gaining traction in raising awareness amongst urologist and patients.

The evidence increasingly supports our belief that we’re provided a fair and balanced list of treatment options including drugs in office therapies in operating room-based surgical procedures. Patients who are choosing the Urologix in-office solutions invalidating our place in the BPH treatment paradigm.

Our think Outside the Pillbox seminars has been well attended and resulted in strong pull through to procedures in urology practices of both different size and diverse geographies around the country. For the urologist, this significant patient interest in in-office procedures and clear dissatisfaction with current drug regimens has their attention.

These market development efforts are working. Seminar performance this quarter continues to show that the utilization uptick is both consistent and sustainable as we've been seeing year-over-year increases in practice revenue of 20 plus percent in the quarters following the seminar.

Importantly, we are seeing compelling returns from our investments in market development in patient education thus far. And we plan to continue investing in these efforts.

We look forward to introducing the new Urologix story, the largest gathering of urological community at the Annual American Urological Association meeting in Atlanta this May. We have a much larger presence planned at this year’s meeting and we are excited to show participants how the new Urologix serves in the expanded patient population with two safe, effective and durable in-office treatment options.

Our (inaudible) in technology hall will offer practitioners real-time demos, and hands on experience with our two technologies and we plan on using this meeting to showcase our market-leading position and our sustainable platform. In closing, the third quarter performance was generally positive. And we remain encouraged by the continued traction we’re seeing in our market development initiatives. The new Urologix organization is positioned to take advantage of the changing dynamics in the BPH market.

While challenges in the quarter and with the timing for the turnaround in the Prostiva RF product line drove a revision to our fiscal year expectations. We are confident. We have a proven market development tool in our patient education seminar program.

But our overall business is stabilized and we have the right sales and marketing infrastructure to drive revenue growth in the future. We’re proud of the organizations progress today, but we know we can accomplish far more and we look forward to update you on our continued progress next quarter.

We appreciate the time and continued interest in our company. And with that, I'm pleased to open the call up to take your questions.

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator Instructions) And our first question comes from the line of [Jeff Adams, Private Investor]. Please proceed.

Jeff Adams – Private Investor

Yeah. My question is, your current ratio now is negative for the first time. I know your cash flow is positive this quarter, just because of the deferred payments. What’s going to happen in six months when these bills are due to -- even if you continue to lose money each quarter?

Stryker Warren, Jr.

Thanks for the question. We -- as we’ve showed in the past, our evaluating funding opportunities as well as being very thoughtful about expense management and are looking very carefully at the options. We have every intention of protecting this franchise interacting accordingly.

Jeff Adams – Private Investor

Okay. Thank you.

Operator

Thank you very much, sir. (Operator Instructions) Our next question comes from the line of Deepak Chaulagai of Dougherty & Company. Please proceed.

Deepak Chaulagai – Dougherty & Company

Good afternoon, Stryker. How are you?

Stryker Warren, Jr.

Hi, Deepak. Fine.

Deepak Chaulagai – Dougherty & Company

That’s good. I just have a quick question on the Prostiva line business. Could you just -- sort of detail what cause the in slower than expected turnaround? What’s causing I should say and what are some of other things is that you’re doing to from that business?

Stryker Warren, Jr.

Well, there are two things that I think are most directly impacting where we are versus where we expected to be. And one has been disruption that we mentioned in one reach. But there has also been a case of a fairly large book of business that has taken us longer to get reinvigorated than we had originally anticipated in terms of our ability through our field force to accomplish that integration transition and to stimulate, what we think is some three significant unmet need.

Deepak Chaulagai – Dougherty & Company

And so, the positive integration to the Urologix platform, has that not complete yet, is -- when you see integration could you just expand on that a little bit?

Stryker Warren, Jr.

Deepak, let me ask Greg, who has led the integration process to speak to that question.

Deepak Chaulagai – Dougherty & Company

Sure.

Greg Fluet

Hi, Deepak.

Deepak Chaulagai – Dougherty & Company

Hi.

Greg Fluet

So there is really in primary cases with the integration, one is the integration to the sales and marketing team through the initial transition of the distribution and sales of the product line and that’s all been completed. We have Prostiva on our mobile events. Our sales representatives have been trained in the Prostiva technology and likewise, the sales representatives from Medtronic that came over have been trend in our Cooled ThermoTherapy product.

There is continuing integration work going on per the transition plan in the agreements. The transition over above the manufacturing supply chain as well as the regulatory legislation and that’s all on track. So there is an element to it from the sales and distribution standpoint that’s complete and then an ongoing operation transition that’s schedule to occur over this first year of the agreement.

And then regarding the turnaround in the Prostiva business, the business was a decline business. And we knew that it would take some efforts to turn it around, and we try to growth path, that has taken little longer than we expected. Some of that is -- because there were number of customers that had ordered and doing due to the ordering patterns. They have not comeback online and work through the inventory we have on hands.

And so that’s one -- we were expecting a number of those customers to come back on over the next couple of quarter, but that part of the turnaround is inhibited the rebound in the business.

Deepak Chaulagai – Dougherty & Company

That’s very helpful color and I appreciate that. So if you just think it’s back end look at a big picture view, looks like it’s a $0.5 million lower guidance in your anticipated in the grand scheme of things. If you have opportunity that you outline Stryker are real, it looks like very good -- pretty good opportunity in front of you, once you have both the Prostiva and CTT business on the platform and sales force is fully trained and fully productive.

Stryker Warren Jr.

I agree with that and certainly in a variety of ways for we are seeing evidence of that it just not apparent companywide at this point.

Deepak Chaulagai – Dougherty & Company

So my last question I guess would be on CTT side, does that business on it’s own growing or would that, sort of, follow the pattern of when you have the both the products completely integrated?

Greg Fluet

Yeah. The CTT business, this is Greg, Deepak. So the Cooled ThermoTherapy business that was really stable from Q2 to Q3, we grew very slightly in that’s, and so that was encouraging as this quarter is typically been seasonally and more challenging quarter with the reset and patient copays and deductables at the beginning of the year even with in the medicare program.

So we saw relative strength in the Cooled ThermoTherapy business compared to prior years on a sequential basis. And then year-over-year it did also slightly increase as well. So, we view that as a measured improvement in the Cooled ThermoTherapy business.

Deepak Chaulagai – Dougherty & Company

Thank you for taking my questions. We’ll look forward to progress once you have the Prostiva product fully integrated.

Greg Fluet

Great. Thank you.

Operator

Thank you very much, sir. (Operator Instructions) Our next question comes from the line of Larry Haimovitch of HMTC. Please proceed.

Larry Haimovitch – HMTC

Good afternoon, gentlemen.

Stryker Warren, Jr.

Larry.

Larry Haimovitch – HMTC

Stryker, I didn’t catch the whole call. I wondering did you and you I mentioned that Boston is leaving the market, do you have any sense of how that will impact you obviously, it’s positive? But do you expect that some people will want replace their -- their Boston products with yours or it was just the ability to gain more market share over time as new customers come into the business?

Stryker Warren, Jr.

We know many of those customers, Larry, and are pursuing them actively as you may recall two years ago, because of the recall, we had very good visibility into never those accounts and their utilization patterns. So we are actively pursuing those. I can’t tell you ultimately where we will land in terms of total market share as a result of that. But we are certainly seeing some encouraging activity in the field presently.

As you know, there are several alternatives that a Urologix can turn to, there are three microwave devices and the one RF Therapy device, we happen to have the two devices that we believe for the most efficacious and I think the urologist are certainly recognizing the high energy microwave is that anti-agents and when we talk about the new Urologix much of changing the discussion with the urologist is aim to taking advantage of the efficacy into ability data we published a year ago, which really dramatizes the capabilities to Cooled ThermoTherapy, all that to say that we are very actively pursuing that business more familiar with the number of those customers and the early returns are encouraging. The effective end of life, Larry is June 30 of this year.

Larry Haimovitch – HMTC

That’s great. While, on a personal note, I’m going to be at AT&T Park tomorrow night. I hope you didn’t come up this season to catch again.

Stryker Warren, Jr.

Thank you.

Larry Haimovitch – HMTC

Okay. Thanks very much.

Operator

Thank you very much, sir. (Operator Instructions) At this time gentlemen we have no further questions in queue.

Stryker Warren, Jr.

Thank you very much, Bill, and to everyone on the call, on behalf the Board of Director, Senior Management and all Urologix’s employees, I thank our loyal shareholders for your continued interest in Urologix and we look forward to updating you on our progress, on our fourth quarter conference call and until then good day and good health.

Operator

Thank you very much, sir and thank you, ladies and gentlemen for your participation in today’s conference call. This concludes your presentation for today. You may now disconnect. Have a good day.

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