Urologix's CEO Discusses F4Q2012 Results - Earnings Call Transcript

| About: Urologix, Inc. (ULGX)

Urologix, Inc. (NASDAQ:ULGX)

F4Q2012 Earnings Conference Call

August 23, 2012, 17:00 p.m. ET


Stryker Warren, Jr. - CEO

Brian Smrdel - CFO


Deepak Chaulagai - Dougherty & Company


Good day ladies and gentlemen and welcome to the Urologix, Inc. Fiscal Year 2012 Fourth Quarter Conference Call. My name is Keith and I’ll be your coordinator for today. At this all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s 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 the risks and uncertainties. A detailed discussion of risks and uncertainties maybe found in Urologix’s recent Annual 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 obligations to update any forward-looking statements made during the course of this call.

At this time I’ll turn the call over to Mr. Stryker Warren, Jr., Chief Executive Officer. Please go ahead, sir.

Stryker Warren, Jr.

Thank you, Keith, and good afternoon to all of those joining us today to discuss the company’s results for the fourth quarter of our fiscal year 2012. Joining 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 will begin with a summary of our fourth quarter performance and a brief review of the fiscal year 2012, which was a transformational year for the company. Brian will then review the financial results for the fourth quarter and fiscal year 2012 in detail. Finally, I intend to share an update on the progress we are making on our growth strategy described some of the near-term challenges we will be focused on, review our near-term priorities and provide color surrounding our fiscal year 2013 guidance before opening up the call for questions.

Fiscal 2012 was a transformational year for the company. The acquisition of the Prostiva RF Therapy System from Medtronic at the end of quarter one not only broadened our product portfolio but also increased our account based urologist in the U.S., our sales and marketing infrastructure and our distribution footprint and importantly our addressable patient population.

The combination of the Prostiva RF Therapy System with Cooled ThermoTherapy made Urologix the clear leader for the in-office treatment of BPH with an extended population of men whom we can effectively treat.

We have two complementary in-office technologies which combined have approximately 60% market share and both products have demonstrated durable clinical effectiveness for the treatment of BPH providing the requisite clinical validation upon which the urologist relies. Following this acquisition we set upon an effort to leverage this impressive footprint in the in-office BPH treatment market and to drive revenue growth. Specifically, our strategic marketing initiatives including our patient education seminars our think Outside the Pillbox campaign were a priority and they have showed impressive results.

In addition to increase in BHP patient awareness of our non-surgical alternatives to drugs, many urologists have expressed amazement that the patient turnout which [opens arise] to the significant unmet need amongst their patients particularly the silently suffering BHP prescription drug patient. While we are encouraged with the progress we have made since the acquisition last September, we are disappointed that our financial performance is not yet reflected what we view is a compelling growth opportunity for us in our market.

While the fourth quarter was at the low end of our expectations on the revenue line, we were pleased with the continued strong performance of our seminars again this quarter as well as the interest we saw coming out of the AUA annual meeting this past spring.

I’ll now turn the call over to Brian to discuss our fourth quarter performance in detail, then I will share my thoughts on some of the challenges we have seen to-date, some external, some internal to better explain what has happened in our business over the last several quarters. I’ll then share with you the key action plans we have in place to improve our results and I’ll update you on our progress on strategic growth initiatives specifically our patient education seminars and how we plan on leveraging these market development initiatives to drive our fiscal 2013 revenue projections and then we will open up the call to your questions. Brian?

Brian Smrdel

Thank you, Stryker. Before diving into a review of our financial results, I will provide some color on how we will talk about our financial and operating performance for the company going forward.

Historically, we have broken down our revenue performance into three buckets; Urologix direct, company-owned mobile and third-party mobile. In recent quarters, we have also disclosed revenue performance by product lines, specifically CTT and Prostiva. We will continue to describe our revenue performance in each of these categories to the first quarter of fiscal 2013, but thereafter, we will be presenting our quarterly performance in terms of how we plan, operate and evaluate the business every day, specifically we will discuss our revenue by the following channels; Urologix direct, company-owned mobile and international.

Starting with the smallest channel total company sales, international sales. The addition of Prostiva last September included international distribution operations in select countries from which we began recognizing revenue in the second quarter of fiscal year 2012. Despite representing only [4 to 5%] of our total company sales on an annualized basis, these distribution operations occur outside of primary market the U.S. and separate discussion of fundamental each quarter. Similarly, our third-party mobile operation also represents a small portion of total company sales, approximately 10% of fiscal year 2012 sales and while we are committed to our third-party mobile partners in many cases we do not have the amount of direct contact with the customer, the urologist practices, we would have in our Urologix direct channel.

The Urologix direct channel which represents the remaining 85% of our total company sales. This channel is our direct urologist business and includes sales of both technologies CTT and Prostiva to urologist accounts that operate installed control units as well as urologist accounts that are served by our Urologix mobile services team. [As the phase] of Urologix, our sales organizations daily contact with these urologists supported by a product portfolio of safe and effective treatment options and marketing tools such as our patient education seminars represents the key driver of growth for the company.

In terms of scale, Urologix’s direct sales were comprised of roughly one-third CTT, one-third Prostiva and one-third mobile services in fiscal year 2012. Going forward, we plan on focusing our discussion of results on the key drivers of growth in our business, our Urologix direct sales rather than detailing the performance of individual product technologies. Our focus is on serving and growing, the market for in-office BPH procedures. We market and sell in-office technologies for the treatment of BPH, we intend to grow the in-office procedure market for our customers regardless of whether they choose one or both of our technologies and our reporting will follow accordingly going forward.

Turning to our review of our fourth quarter performance. Revenue for the fourth quarter of fiscal 2012 was 4.5 million up 54% year-over-year and down 5% sequentially. Revenue growth on a year-over-year basis was driven primarily by the growth in our Urologix direct channel which includes the contribution of Prostiva RF Therapy product revenue for the third full fiscal quarter following the acquisition of the exclusive license for that product line on September 6, 2011.

Fourth quarter revenue performance on sequential basis was slightly weaker than our initial expectations due to weaker sales in both the Urologix direct channel and the third-party mobile channel and to a lesser extent in our international channel.

Regarding our international channel performance, the fourth quarter represented the second full quarter with European distribution capabilities for our Prostiva line. Continued uncertainty in European markets pressured sequential revenue growth in the fourth quarter; we continue to expect our OUS distribution platform to total company growth going forward.

Gross profit for the fourth quarter of fiscal year 2012 was $2.3 million, or 50.6% of revenue, compared to $1.3 million, or 43%, in the fourth quarter of fiscal year 2011. The increase in gross profit compared to the prior year was impacted by an accounting adjustment made in the fourth quarter of fiscal year 2011 to correct over-capitalized manufacturing variances of approximately $158,000. This adjustment negatively impacted fourth quarter fiscal year 2011 gross margin by 540 basis points. Gross margin for the fourth quarter of fiscal year 2012 was flat compared to the third quarter of fiscal year 2012. Gross margin for the fourth quarter was impacted by non-cash items related to Prostiva purchase accounting which lowered gross margin by 110 basis points.

Total operating expense of 3.4 million in the fourth quarter of fiscal year 2012 increased 30.9% year-over-year driven primarily by the expansion of the direct sales force that occurred with the acquisition of the Prostiva product line. Total operating expense increased 3.8% on a sequential basis from incremental investment in sales and marketing due primarily to expenses related to the AUA annual meeting this quarter compared to the third quarter of fiscal year 2012. A gain of $172,000 related to the change in the fair value of the contingent consideration for the Prostiva business was reported in operating expense for the fourth quarter of fiscal year 2012.

For the fourth quarter of fiscal year 2012, Urologix reported a net loss of $1.2 million or $0.08 per diluted share compared to a net loss of $1.3 million or $0.09 per diluted share in the fourth quarter of fiscal year 2011. The net loss in the fourth quarter of fiscal year 2012 was adversely affected by $205,000 of non-cash imputed interest expense on deferred acquisition payments.

Turning to our review of the fiscal 2012 period ended June 30, 2012. Revenues totaled $17 million, an increase of 35.4% compared to revenues of $12.6 million in fiscal year 2011.

Gross profit for fiscal year 2012 was 8.4 million, or 49.2% of revenue. Gross margin declined 280 basis points year-over-year driven primarily by the addition of the Prostiva business to the product mix. The impact of non-cash expenses this fiscal year related to Prostiva purchase accounting negatively impacted gross margin by approximately 140 basis points. Total operating expense of $12.5 million increased 22% year-over-year primarily as a result of the previously stated investment in sales and marketing.

The company reported a net loss of $4.7 million, or $0.32 per diluted share, for fiscal year 2012, compared to a net loss of $3.7 million, or $0.26 per diluted share, in the prior fiscal year period.

Turning to the balance sheet. The cash and cash equivalents were $1.9 million at June 30, 2012 consistent with the prior quarter. The company generated 42,000 of cash flow in the fourth fiscal quarter ended June 30, 2012 compared to cash utilization of 729,000 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 were approximately 1.7 million of Prostiva products received during the fourth quarter of fiscal year 2012 and 3.8 million for the year-to-date period were deferred as a result of 270 day payment terms.

As noted in the press release, we successfully completed a secondary offering that contributed an additional $3.8 million in net proceeds to our cash balances. The proceeds from this offering with the additional liquidity of $2 million line of credit with Silicon Valley bank has improved our balance sheet condition and will allow us to continue to invest in our strategic growth initiatives. This transaction also helped us regain compliance with NASDAQ’s minimum shareholders equity requirement of $2.5 million.

Finally, as noted in our press release today, we are introducing our fiscal year 2013 revenue guidance range of approximately 17.5 to $19 million or an increase of 3 to 12% year-over-year.

I’ll now turn the call back to Stryker.

Stryker Warren, Jr.

Thank you, Brian. Fourth quarter performance was at the low end of our guidance and is attributable to three factors; two internal and one external. With respect to the internal challenges impacting our fiscal year 2012 results, the first and largest impact continues to be the underperformance of the Prostiva product line.

As we communicated last quarter, this business has yet to demonstrate a meaningful recovery relative to our expectations when we acquired the business last September. We knew this was a business under pressure in recent years when we acquired the license last fall, and while we feel confident in the technology, the process of reinvigorating the Prostiva line continues to be challenging. And while the business is largely stabilized it is done so at a level substantially lower than the prior year.

Many Prostiva customers who ordered in the prior fiscal year before our acquisition are not yet active customers of Urologix. Our field checks with these customers report they have inventory under their shelves that pre-date our acquisition.

I’m pleased to report that we continue to be successful in reactivating accounts this past quarter, but as these customers who worked through their inventory and joined the active account base, they have done so at a lower ordering rate than anticipated. These are significant headwinds for our sales team.

The second internal challenge impacting results is the resolution sales force disruption in one of our three sales regions in the U.S., where we had significant turnover in both leadership and sales representatives earlier this year. We are very pleased with the progress made by the new regional director who started last quarter and the team continues to improve its productivity, although as we’ve communicated last quarter, we expect these new sales reps to take a minimum about six to nine months to become fully productive.

We are focused on improving our internal issues over the near-term. The sales organization has the right leadership in place to lead our sales force to increase in productivity in fiscal year 2013 and we believe the worst of the regional sales dislocation is behind us. The Prostiva business is largely stabilized and while the ordering volumes for many of these accounts are below our original expectations, we are forecasting higher contribution to our top line results as our sales force converts more of the inactive Prostiva accounts to newly active accounts in fiscal year 2013 versus the prior year.

Turning to the external challenge that continues to pressure our financial results. The in-office procedure market continue to be affected by the lower patient visit trends in the United States and abroad over the past 2 to 3 years. We continue to hear anecdotal evidence of the general slowness in elective procedures and these trends are supported by third-party market data which reports the deceleration in minimal invasive BPH procedures in recent years. Some of this is certainly macro related; some is likely the continued resilience and reliance on the first line drug therapy treatment for many patients. We believe that both of these headwinds can diminish and we continue to be encouraged by both the favorable competitive dynamics we see in the landscape of the in-office BPH treatment market and the opportunity for Urologix’s technologies that treat this clinical need going forward.

Importantly we are not standing still as our market changes, we believe we have identified ineffective market development program, our patient education seminars to both raise awareness in the neurologist community and drive procedure volume.

Before I discuss our strategic initiatives, let me reiterate why we are enthusiastic about our target market. First, the in-office BPH treatment market serves a large and growing patient population. An estimated 4 million men in the United States are in some form of chronic drug therapy for symptoms associated with BPH. Secondly, that patient population is increasingly dissatisfied with the current first line treatment and our primary competitor [MedicalTherapy].

We believe Urologix’s in-office technologies are well positioned to treat this clinical need as our target patient populations dissatisfaction grows, we expect the urologist, they increasingly hear is patients desire for alternative solutions without the negatives associated with chronic drug therapy, the sweet spot for Urologix’s in-office therapies.

Urologix’s in-office non-surgical procedures with the logical next step for these patients, physicians appreciate the strong safety profile and clinical efficacy of our products, the current reimbursement is good, the return per unit of physician time is compelling and these technologies provide a very compelling cost effective solution for the treatment of BPH. Our message continues to be simply this: drug therapy is not the answer; drugs treat the symptoms but not the problem. Urologix’s procedures are proven long-term in-office solutions to treat BPH.

So, our market is changing as I’ve said we are not standing still, we believe we have an effective tool to drive increasing awareness in the urologist community and near-term procedure volume growth with our patient education seminars and to think Outside the Pillbox campaign. These seminars are proven to expand penetration within our urologist customer accounts representing a proxy for market growth overall with an average of more than 20% growth in revenue per quarter in accounts that have hosted seminars.

With almost a year of seminar date in hand; we continue to believe there are programs that are gaining traction in raising awareness amongst urologist and patients. The evidence increasingly supports our belief that when provided a fair and balanced list of treatment options including drugs, in-office therapies and operating room based surgical procedures; patients are choosing Urologix’s in-office solutions and validating our place in the BPH treatment paradigm.

For the urologist, the significant patient interest in in-office procedures include a satisfaction with current drug regimes has their attention. These market development efforts are working. The seminar performance we have seen to-date shows proof of the substantial unmet clinical need that exist in our market. Seminar performance this quarter continues to show that the utilization uptick is both consistent and sustainable. The challenge continues to be the limited exposure to our total account base near for the limited impact relative to our total company revenue. We have successfully completed seminars in approximately 10% of our account base thus far and we expect a similar penetration rate in fiscal year 2013.

Finally as indicated in our press release, we are introducing fiscal year 2013 revenue guidance of between 17.5 and $19 million. The key drivers of revenue growth year-over-year include expanding the number of accountings, conducting patient seminars; secondly, developing and retaining a best-in-class clinical sales organization with productivity; and finally targeting the acquisition of new accounts from both inactive Prostiva accounts and from share gains from competitors. We believe this guidance is appropriate considering the challenging market environment for in-office procedures.

As communicated in prior quarters, we remain intently focused on leveraging our leading market share position, our expanded sales organization and our innovative market development in patient education programs to dive top line growth. Fiscal 2012 was a transformational year for the company and we have successes to leverage. We completed a sizeable acquisition and integrated the product and manufacturing infrastructure. We have substantial changes and improvements in our sales force. We strengthened the balance sheet with equity financing transaction and we initiated market development activities to drive procedure growth in an otherwise difficult operating environment. We accomplished considerable amount this year and while we are not satisfied with our revenue growth over the past 12 months, we believe we are better positioned today that any in point in the company’s history and look forward to improving performance in the future. We appreciate the time and continued interest in our company.

With that I’ll open the call to your questions.

Question-and-Answer Session


(Operator Instructions) And your first question is from the line of Deepak Chaulagai with Dougherty & Company. Please go ahead.

Deepak Chaulagai - Dougherty & Company

First off, what was the Prostiva revenue during the quarter just to start off the discussion?

Brian Smrdel

$1.7 million.

Deepak Chaulagai - Dougherty & Company

So, is it flat sequentially? And Stryker you talked about accounts that still had Prostiva products in their inventory. What gives you confidence that if they haven’t used it so far throughout, if they’ve had in their inventory product to your acquisition, what gives you confidence that you could penetrate those accounts, I guess that was number three of your strategic initiatives account penetration of inactive Prostiva accounts.

Stryker Warren, Jr.

Deepak, they have inventory that they are using it and we will likely provide them more inventory, but the usage rates as I indicated will likely be lower than what our expectations were originally. But this is not inventory that’s growing sale, they are working through that inventory, the channel had more in it than we anticipated and it's taking longer for that to be used.

Deepak Chaulagai - Dougherty & Company

And you talked about your seminars think Outside the Pillbox campaign. So, all of that 10% account penetration with those seminars, did that all happened this fiscal year or is that accumulation over time?

Stryker Warren, Jr.

We piloted the program in the fourth quarter of the previous fiscal year, but essentially all of it and especially with what we had redesigned and formalized as the seminar excellence program occurred in fiscal year 2012.

Deepak Chaulagai - Dougherty & Company

And so you think you will be able to penetrate in the additional 10% in this fiscal year. When should we start or expect to see impact from that marketing initiative?

Stryker Warren, Jr.

We do believe that we can penetrate an additional 10% and I’d expect that on a quarterly basis that we will see results that are attributable to seminars, now what I can do is predict how the entire year will unfold, but certainly there is interest and there is the expectation, the program has been set in place with incentives to along with them for the sales force to be very aggressive in terms of the seminar program.

Deepak Chaulagai - Dougherty & Company

And then on your CTT business is there anything that you are doing in addition to your marketing initiatives to jump start that side of the business or any update there would be helpful?

Stryker Warren, Jr.

Well, certainly what we have done in the past has been to attempt to penetrate to the fullest extent the accounts in our active account base as well as regaining those that have been inactive. What we will do on a go forward basis is also move in to and acquire strategy and that would be to take additional share and that would be to be introducing one or the other or both of the technologies into those accounts. So, there is a sales initiative underway that certainly I think can have an impact on both products.

Deepak Chaulagai - Dougherty & Company

And so for that you would be hiding additional, increasing your sales force, I believe you add about 22 reps at the end of last quarter. So, should we expect a significant increase in that number going forward?

Stryker Warren, Jr.

No, we see capacity in the sales force that we currently have and a large part of those based upon the regional leadership that we now have in place.

Deepak Chaulagai - Dougherty & Company

And then last on the sales force, so that one region where you had sales force disruption, you initiated it's largely behind you, is there anything yet that you need to accomplish there so that the sales force there is on their way to productivity?

Stryker Warren, Jr.

Well, I think it's a maturation process, we have introduced a new training program in the last six months and the new territory sales representatives that were hired were the first beneficiaries of that new training program. And what we are attempting to do is abbreviate the learning curve and increase productivity on what have been historical timelines, but (inaudible) we continue to believe that it will be six to nine months before reps to come into the company are as productive as we would hope and expect them to be. So, reps are in place, they have been trained, we are encouraged by the leadership in that region as well as the early returns, but I think the maturation process is a very real issue in a device sales force.

Deepak Chaulagai - Dougherty & Company

So, we should see impact in the second half of this fiscal year. And what percentage of revenue are we, I forgot to quantify, what percentage of your overall revenue would that be impacting?

Stryker Warren, Jr.

Well, it's one of the three regions domestically and it's probably slightly over a third of the domestic revenue.

Deepak Chaulagai - Dougherty & Company

And six to nine months that means second half of this fiscal year?

Stryker Warren, Jr.



(Operator Instructions) Alright, it looks like no one else is queuing up, so I’ll go and turn the call back over to Mr. Stryker Warren, Jr.

Stryker Warren, Jr.

Keith, thank you. To everyone on the call on behalf of the Board of Directors, senior leadership and all of Urologix employees, I thank you again, our loyal shareholders for your continued interest in the company. We look forward to updating you on our progress at our next quarterly conference call, until then good day and good health.


Ladies and gentlemen that will conclude today’s conference. Thank you very much for joining us, you may now disconnect and have a great day.

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