Urologix Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: Urologix, Inc. (ULGX)

Urologix Inc. (NASDAQ:ULGX)

F4Q08 Earnings Call

August 28, 2008 5:00 pm ET


Stryker Warren Jr. – Chief Executive Officer

Mitchell Dann – Co-founder, Chairman, Immediate Past Interim CEO

Greg Fluet – Executive Vice President

Rebecca Weber – Director of Finance, Controller


[Ernie Enbird – Felt and Company]


Welcome to the Urologix Incorporated fiscal 2008 fourth quarter and full year earnings conference call. (Operator Instructions)

Statements made at this presentation may contain forward-looking statements that are pursuant to the safe harbor provisions of Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements due to risks and uncertainties. A detailed discussion of risks and uncertainties may be found on our most annual recent report on Form 10-K for the year ended June 30, 2007 and other documents filed with Securities and Exchange Commission.

At this time I would like to turn the call over to Mr. Stryker Warren Jr., Chief Executive Officer. Please proceed sir.

Stryker Warren Jr.

This is Stryker Warren and joining me on today’s call are Mitchell Dann, Co-founder, Chairman and Immediate Past Interim CEO; Greg Fluet, Executive Vice President and Chief Operating Officer; and Rebecca Weber, Director of Finance and Controller. Before I share my perspective on the challenges, the opportunities and our plans, I will ask Becky to review the financial results for the fourth quarter and for our fiscal year 2008.

Rebecca Weber

Thank you Stryker. As just released in our fourth quarter and fiscal year 2008 results, revenue for the fourth quarter was $3.7 million, up 18% compared to $3.1 million reported in the third quarter of fiscal 2008 but down 24% compared to the $4.8 million reported in the fourth quarter of fiscal 2007. For the year ended June 30, 2008 revenue was $14.9 million, down $6.4 million when compared to $21.3 million in fiscal 2007.

The year-over-year fourth quarter revenue decline is the result of reduced orders for procedure kits as well as a decrease in the number of procedures performed by our Urologix mobile service. Factors contributing to the decrease in the number of orders for procedure kits are a reduction in the number of accounts ordering, a reduction in the average order size, as well as our continued inability to meet customer demand for Prostaprobes.

The decrease in mobile service revenue is also due to lost accounts and a reduction in the treatment volume of some accounts, as well as the merger of accounts into third party mobile routes and the disruption in other routes from employee turnover. The fourth quarter increase in revenue over the third quarter of fiscal 2008 is a result of increased catheter sales to direct accounts and third party mobile providers, which was partially offset by a decrease in Urologix mobile service treatments.

Revenue from catheter sales to direct accounts constituted 47% of overall revenue in the fourth quarter of fiscal 2008, as compared to 39% in the previous quarter. Urologix mobile service treatment revenue constituted 42% of overall revenue in the fourth quarter fiscal 2008, compared to 54% in the third quarter of fiscal ’08 and third party mobile revenue represented approximately 10% of overall revenue in the fourth quarter of fiscal ’08 compared to 5% in the third quarter.

The net loss for the fourth quarter was $2.2 million or $0.16 for diluted share. This compares to a net loss of $2.1 million or $0.15 per diluted share in the third quarter of fiscal 2008, and a net loss of $12.1 million or $0.84 per diluted share in the fourth quarter of fiscal year ’07. The year ago quarter included a total non-cash charge of $11.2 million related to asset impairments and inventory write downs, as well as an increase in income tax expense to increase our tax valuation allowance.

The net loss in fiscal 2008 was $14.9 million or $1.04 per diluted share, which includes the net non-cash impairment charge related to the goodwill write-off of $8.6 million or $0.60 per diluted share, which was recorded in the second quarter of fiscal 2008. This compares to fiscal 2007 net loss of $13.2 million, or $0.92 per diluted share which includes the non-cash charges just mentioned and is outlined in the press release.

Gross profit for the fourth quarter of fiscal 2008 was $2 million or 55% of revenue, a 9% increase when compared to the prior quarter. The majority of the increase in the gross profit rate was the prior quarter period is due to a decrease in unabsorbed manufacturing expenses as a result of increased production, as well as a decrease in manufacturing expenses. This compares to a gross loss of $1.9 million in the fourth quarter of fiscal 2007 as a result of the non-cash long-lived asset impairment charges and inventory write downs of $4.4 million in that quarter.

The fourth quarter fiscal 2007 gross profit percentage was consistent with the fourth quarter fiscal 2008 when excluding the non-cash charge. Fourth quarter operating expenses totaled

$4.3 million compared to $3.6 million for the third quarter of fiscal 2008 and $5.6 million in the fourth quarter of fiscal 2007.

Fourth quarter fiscal 2007 operating expenses include, however, a $2 million non-cash asset impairment charge. Fourth quarter fiscal 2008 operating expenses include $855,000 of charges related to a $755,00 increase to our sales tax reserve as a result of new information obtained during the quarter which indicates we may have additional sales tax in some states, as well as approximately $95,000 of severance expense to a former executive.

Fiscal year 2008 operating expenses totaled $24.8 million compared to operating expenses of $16.4 million for the 2007 fiscal year. The fiscal year 2008 operating expenses include the $10.2 million goodwill impairment charge as well as approximately $1.5 million of charges related to the $755,000 increase in the sales tax reserve as mentioned, as well as approximately $520,000 of severance expense to former company executives and $272,000 of certain other unusual expenses which we do not expect to incur in the future.

Balances of cash and cash equivalents were $11 million at June 30, 2008 compared to $11.7 million at March 31, 2008 and $12.3 million at June 30, 2007. Despite the operating losses we’ve incurred, we have been able to control the amount of cash burned as a result of managing recurring expenses and improved accounts receivable collections.

Our days billed outstanding at the end of the fourth quarter was 44 days compared to 49 days at the end of the third quarter fiscal 2008 and 76 days at June 30, 2007.

I will now turn the call back to Stryker.

Stryker Warren Jr.

Joining the company on June 24 of this year, I’ve been asked what attracted me to Urologix. Firstly I’ve known the company since 1997 when I evaluated the technology with several urologists and became a customer as a third party mobile provider. In some respects I feel as though I’ve completed the circle as I am reminded my featured key customer quote and photo precede the company’s letter to shareholders exactly ten years ago. That 1998 Urologix annual report was titled “Transitions” and that letter was signed by Mitch Dann.

Secondly as I am neither new to the specialty of urology nor to the therapies available for treating benign prostatic hyperplasia or BPH, I have joined the company because of my conviction that the technology is very good and its application getting better. And the marketing and sales issues are in fact solvable.

The company’s prospects, despite the internal and external challenges, are quite promising. However, I’m new to Urologix in my capacity as Chief Executive Officer and therefore I will limit my forward-looking comments as I am still in my learning phase.

Urologix began a process to re-lay its foundation returning to a back to basics business strategy with a strong focus on the customer in the latter part of this past fiscal year. This is a restoration strategy I intend to continue and as I come up my learning curve I look forward to sharing better resolution on the strategies and tactics, on priorities and the plans we implement and on our achievements against those plans.

I do believe Urologix is a subject matter expert on the application of microwave technology for the treatment of enlarged prostates, particularly Cooled Thermo Therapy or CTT as I will refer to it in my comments. The technology continues to represent a significant advancement in BPH therapies as one of the first minimally invasive procedures to forward both the patient and the urologist with a safe, efficacious, endurable therapy importantly in a comfortable setting of a physician’s office.

Since our last earnings call Urologix has presented interim five year data on CTT at the American Urological Association’s annual meeting. Important to the urologic community is the clinical evidence to support our claims of durability. Durability data does support our belief and our position that Urologix’s CTT provides a compelling clinical and financial profile, fewer side effects, it is less costly than surgery or chronic maintenance medications for BPH, and it offers durability.

More specifically the results showed the efficacy of the CTC catheter as durable for five years and the freedom from additional minimally invasive or surgical procedures is 90%. The data from the study showed clinically significant improvement from baselines of the three major BPH evaluation criteria; urinary flow rates, symptom improvement and quality of life at the five year follow-up.

Within the minimally invasive space the important point of this differentiation and distinction from the low energy microwave competitors is that Urologix’s CTC therapy treats both the symptomatic and the obstructive components of this disease. This is dramatized by the five year symptom scores and the peak flow rates.

I am particularly pleased to know of a urologist who, when faced with prescribing therapy for himself for his own BPH, he chose our therapy, Urologix’s Cool Thermo Therapy. This is not the first time this has occurred.

However, the operating results over the last year for Urologix are not reflective of this strong value proposition. As a part of the back to basics strategy initiated in the third quarter and throughout the fourth quarter, the sales staff targeted accounts lost to competitors; accounts who would benefit from additional clinical support initiatives; accounts with whom the company could co-market CTT; and accounts considered primary targets for the promotion of the new CTC advanced catheter.

The sales effort has been a traditional prospecting qualification, closure training and implementation process. Rekindling relationships with historical users has been a priority. The mobile business which has been growing or at least stable was down this past quarter. In part, this is related to merging one of our mobile routes into a third party mobile. This segment is being redressed through dedicated management resources and an increased focus on customer service, particularly flexible but structured scheduling of our mobile services and operating efficiencies.

Of significance to the end of the third quarter, the company received FDA approval of CTC Advance, the next generation of our Cooled Thermo Therapy line. We continued to introduce the CTC Advance catheter which works with both the Cool Wave and Targis control units. Responding to feedback we received from urologists during pre-launch patient treatments, we emphasize its ease of use and improved patient comfort as it is 72% more flexible in the treatment area and provides 50% more cooled surface area below the treatment area.

Building upon our early successes in competitive conversions, Urologix is continued to target accounts that have been using other microwave devices. Part of the sales initiative has been to highlight the differences between high and low energy microwave therapies and to promote the benefits of the CTC Advance catheter. Urologix’s high energy platform treats the disease. The low energy competitors are only indicated for symptomatic relief.

Organizationally the company has been addressing and continues to address its manpower requirements in sales; the number of salespeople, the mix of independents who direct reps and the requisite sales skills. I anticipate fluctuations in sales for some period as we hire, train and load balance the field force. We are also in the midst of transition in management ranks, a transition I consider both necessary and appropriate for the longer term.

Our greatest challenge remains our direct competitors have much larger distribution organizations. We must increase the frequency of account calls, both prospects, incurred customers, recover our significant lost accounts and continue to demonstrate evidence of the superior outcomes of Urologix’s CTT.

And we must continue to seek means to insure the BPH patient is referred to the urologist as soon as feasible by the primary care physician. An issue that is receiving considerable attention is the proposed 2009 Medicare Physician Fees Schedule. We are dealing with proposed reductions in reimbursement albeit we currently lack clarity on the exact amount because of variables in the formula used that have not yet been established.

As with any medical device company, we have an active reimbursement strategy and have retained consultative experts to assist and we have been participants during the comment period. In my brief tenure, several points have been brought home to me. The fundamental technology of Urologix is sound and the five year durability data is compelling. And the R&D efforts continue to demonstrate to the market both commitment to urologists and patient is evidenced by the CTC Advance catheter.

However I also believe that the company must better articulate and demonstrate its value proposition to the urologist and patient, particularly durability in comparison to other therapies. The company must demonstrate improved patient comfort during and after the treatment. The company must be more visible in the urologist’s office, more so as a clinical consultant and an episodic order taker.

The company must increase the penetration of its mobile business as it provides a low entry cost to the urologist but at the same time establishes meaningful switching costs. And the company must continue to increase its operating efficiencies.

Currently my principal focus is sales. My definition of driving sales begins with a single word, driving. And therefore my initial impressions result from riding with my sales force and its management across three states and five metropolitan areas where I met with key customers, prospects and one of our competitor’s largest clients; conversing with key opinion leading urologists at a recent Best Practices Meeting; comparing patient education, patient protocols with a nurse in the Midwest who’s treated over 1,000 patients with our technology; meeting with two of our largest third party mobiles and recruiting urologists for R&D activities.

Although my tenure has been short the landscape is becoming much clearer to me. Organizationally top down, an emphasis through deeds rather than words is key. An emphasis on patient comfort is key. And overall a more relationship driven consultative approach to the urologist and the urologist office is key.

We will cultivate our third party mobile relationships. We will continue to conduct then publish critical studies to support our durability. We will attempt to insure more timely primary care referrals of the BPH patient to the urologist. We will complete the build out of the senior management team and sales force. And we will assiduously promote the advantages of Cool Thermo Therapy, Urologix’s Cool Thermo Therapy and the CTC Advance catheter.

Simply put, it is about sales. The senior management of Urologix are focused on several areas with the expectation these contribute to long term shareholder value; sales, operational efficiencies and the organizational chart.

I thank our shareholders for their support and patience and in particular I express my gratitude for the stewardship of Mitch Dann as interim CEO from the end of February through late June and now in his role as Chairman of the Board. He began laying of an appropriate foundation, which he shared as a back to basics initiative in the third quarter. That blueprint has been passed and the restoration process continues.

I will now do my best to answer any questions that you might have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from [Ernie Enbird – Felt and Company].

Ernie Enbird – Felt and Company

You talk about a focus on driving sales. Does that mean that the operating expense lines are sort of where you expect them to be? And improvements in the cash burn or operating cash burn will come from the higher sales?

Stryker Warren Jr.

Ernie I think what you’re asking about are prospective revenues and I am not prepared to discuss any forward-looking financials or strategic activities. I would be delighted, however, to address what I mean by driving sales in an operational sense if that’s helpful.

Ernie Enbird – Felt and Company


Stryker Warren Jr.

We as a company I think have in the past not focused as much attention as we can on fundamental product knowledge and particularly comparatively to our competitors. In driving sales, I believe that there are several things that will permit us to do that in a far different way than we have in the past. Part of that is a philosophical shift on the part of management. Part of it is our being the beneficiaries of some work that far pre-dates our arrival. Let me be specific.

First of all I think and I believe that we can drive sales off the five year data that’s recently been published. This is unlike anything any of our competitors have. We have a new catheter, which in terms of ease of use and patient comfort, I think, is very, very significant and the early returns are demonstrating that.

We expect for this sales force to as rapidly as we can effect the change, to turn into a consultative sales force. In the past and I think historical figures have demonstrated this, this has been viewed as a transactional sales process. We believe it’s a relationship driven business. We will drive sales through relationships.

We’ll drive sales through a depth of clinical understanding that this sales force will demonstrate, that the application specialists on our mobile routes will substantiate, and that our clinical specialists will complement and supplement in their training and their account call responsibilities.

Ernie Enbird – Felt and Company

How do you characterize where your sales force is right now in terms of do you have full coverage around the country? Do you have the people that can do the kind of selling that you’re talking about right here?

Stryker Warren Jr.

That’s a great question. We are confident that we have the geographical coverage and that’s a combination, as you know Ernie, of both direct reps and independent sales reps. What we’re in the midst of now is a training program around clinical awareness and around the differentiable pieces of our approach versus our competitors, particularly in such issues as high energy and the ability to treat the obstructive aspect of the disease.

For competitive reasons I would love to be able to tell you exactly how many people we have and where they are, but I will not do that. What I will commit to is this sales force is well on its way through a learning curve with the assistance of some very significant internal science and clinical expertise at selling at a much different level than it has in the past.

Ernie Enbird – Felt and Company

Just back on the costs versus sales volume, I wasn’t asking you necessarily to make a forecast on where you think sales are going but you probably lost on a stated basis a little under $1.5 million after you weed out the unusual expenses in Q4. And that puts your total expenses just under

$3.5 million. Is that a kind of expense level that you think is go forward or are you looking for additional cost savings as opposed to you focusing on driving sales higher?

Stryker Warren Jr.

There are two components that I would speak to in a qualitative fashion. First of all, Greg Fluet has joined this organization as the Chief Operating Officer and is looking daily at the manufacturing process, cost of manufacturing, all of the expenses associated with that. So on that component there is a new resource that’s been introduced into the company which I am very, very pleased with.

We are looking at all expenses across the company; that includes the sales force as well as marketing, G&A as well. And I cannot tell you now where I expect things to be in six months, but what I can commit to you is that on the production side we are looking very, very carefully on a daily basis and with respect to SG&A its receiving the same amount of attention.


And at this time there are no additional questions.

Stryker Warren Jr.

Thank you very much for your interest in Urologix. We look forward to re-introducing the company to you at our next quarterly earnings call and again thank you very much.

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