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SurModics, Inc. (SRDX)

F3Q12 (Qtr End 06/30/2012) Earnings Call

August 1, 2012 5:00 pm ET

Executives

Tim Arens - VP and Interim CFO

Gary Maharaj - CEO

Analyst

Ross Taylor - C.L. King

Beth Lilly - GAMCO Investors

Gregory Macosko - Lord Abbett

Jeffrey Warshauer - Sidoti & Company

Presentation

Operator

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Welcome to the SurModics third quarter 2012 earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Tim Arens, Vice President and Interim Chief Financial Officer.

Tim Arens

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Good afternoon. And welcome to SurModics' fiscal 2012 third quarter earnings call. Also with me on the call is Gary Maharaj, our Chief Executive Officer.

Our press release reporting our full third quarter results was issued earlier this afternoon and is available on our website at surmodics.com. Also issued earlier this afternoon was our press release announcement plan to launch a tender offer to purchase up to $55 million of SurModics common stock. Details related to the tender offer will be set forth in our offer to purchase, which will be filed with the Securities and Exchange Commission.

Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible through the Investor Relation section of the SurModics' website, where the audio recording of the webcast will also be archived for future reference.

I will remind you that some of the statements made during this call may be considered forward-looking. The 10-K for fiscal year 2011 identified certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made during this call. The company does not undertake any duty to update any forward-looking statements as a result of new information or future events or developments.

On today's call, I will provide an overview of our financial results, highlights for the quarter and an update outlook for fiscal 2012. Gary will then discuss our key achievements for the quarter and provide an update on our growth drivers and strategies, including additional detail on our plans to launch a tender offer to purchase up to $55 million of our common stock. Following this discussion, we will open the call to take your questions.

Unless otherwise noted, third quarter financial results discussed today exclude the $112,000 third quarter loss associated with discontinued operations. Thus, the financial information that I discuss relates to our continuing operations and as in many cases on a non-GAAP basis.

As in past quarter's, I'll provide insights and performance comparisons, excluding the financial impact related to the discontinuation of Cordis' Cypher and Cypher Select Plus drug-eluting stents.

You will recall that in prior periods, we have generated both product and royalty revenue based on sales of these Cordis products, which have incorporated our proprietary drug delivery and hydrophilic coating technologies.

Our earnings announcement issued earlier this afternoon provide supplemental non-GAAP financial information that adjust for Cypher and certain events specific charges. We believe that these adjustments provide meaningful insight into our core operating performance in an alternative perspective of our operating results.

It is worth noting, that beginning with Q1 of fiscal 2013, the discontinuation of these Cordis products will no longer have a meaningful impact on our comparative numbers.

Our financial performance excluding Cypher resulted in strong revenue growth, while our core business has generated record operating income during the quarter. Revenue for the third quarter totaled $14 million, which is up 7% from the $13 million reported in the third quarter of last year.

On a comparative basis, our third quarter revenue growth, when adjusting for the net change of $1.1 million in revenue associated with Cypher increased 17% from the year ago period. We delivered solid bottomline results during the quarter with operating income of $4.8 million.

On a non-GAAP basis operating income was $4.6 million, up 55% from the prior year. Non-GAAP operating margin was 33%, up 800 basis points compared with the prior year period, driven by the strength of the Cordis revenue performance.

On a GAAP basis, our diluted earnings per share was $0.18 for the third quarter compared to diluted earnings per share of $0.17 from the year ago period. Excluding the impact of Cypher non-GAAP diluted earnings per share in the third quarter grew 42%, and was $0.17 compared to non-GAAP diluted earnings per share of $0.12 from the year ago period.

I will now turn our discussion to performance by business unit. For the third quarter, Medical Device sales, which include revenue from both our hydrophilic coatings and device drug delivery technologies totaled $10.3 million, up 7% from the $9.6 million reported in the year ago period. Excluding Cypher, Medical Device revenue grew 22%.

Third quarter results include hydrophilic coatings revenue of $10 million, which was up 18% compared with the year ago period. Hydrophilic coatings revenue growth was broad based with strong growth in each of our revenue lines.

Notably, we continue to see strong growth in our research and development revenue, which nearly doubled from the year ago period. Driving this performance was an increase in the number of Medical Device customers, leveraging our coating services to support their pre-clinical, clinical and commercial activities.

These research and development activities may lead to future royalty revenue. We continue to see strong double-digit royalty revenue growth in key Medical Device market segments, including neurovascular, peripheral and transcatheter heart valve repair and replacement.

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