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SurModics Inc. (

SRDX

)

F3Q2011 Earnings Call

August 3, 2011 5:00 pm ET

Executives

Phil Ankeny – SVP & CFO

Gary Maharaj – President & CEO

Analysts

Ross Taylor – CL King & Associates

Presentation

Operator

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Good day ladies and gentlemen, welcome to the SurModics Third Quarter 2011 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Wednesday, the 3rd of August, 2011.

I would now like to turn the conference over to Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead.

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Phil Ankeny

Thank you, Luke. Good afternoon and welcome to SurModics fiscal third quarter 2011 conference call. Thank you all for joining us today. Also with me on the call is Gary Maharaj, our Chief Executive Officer. Let me first apologize for the technical difficulties before we were able to commence our call today.

Our press release reporting quarterly results was issued earlier this afternoon and is available on our Web site at www.surmodics.com.

Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible through the Investor Relations section of the SurModics Web site, 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 2010 identifies 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.

I will begin with some highlights of our financials. For the third quarter of fiscal 2011, we reported revenue of $18 million, up 3% on a sequential basis. On a GAAP basis, diluted earnings per share was $0.22. On a non-GAAP basis assuming a normalized effective tax rate of 38%, diluted earnings per share was $0.13, and cash flow from operations was $3.8 million. Please refer to the supplemental tables in our earnings release for an explanation of our non-GAAP accounting.

Let me now provide an overview of our third-quarter results by revenue line. Royalties and license fees for the third quarter were $7.5 million, down 2% on a sequential basis.

Johnson & Johnson reported its sales of the Cypher sirolimus-eluting coronary stent were approximately $64 million in the quarter, a decrease of approximately 61% year-over-year. These sales results implied and earned royalty that is below the quarterly minimum royalty specified in our license agreement with Cordis. As a result, SurModics will receive a minimum royalty of $1 million for the quarter.

Compared with the second quarter our royalty for J&J drug delivery license was down 13% sequentially. In addition in mid-June, J&J announced that Cordis made the decision to cease production of its Cypher and Cypher Select Plus sirolimus-eluting coronary stents by the end of the calendar year. While we were disappointed by this decision we had already anticipated the eventual sunset of royalties from Cypher in our strategic and operating plans.

Importantly, J&J’s decision reinforces and validates our long-term strategy plan of focusing on our core hydrophilic technology and In Vitro Diagnostics businesses. Going forward, we expect our fiscal fourth quarter will include the $1 million minimum royalty. Beyond Q4, we expect royalties to be based on a percentage of Cypher sales, if any.

Product sales in the third quarter of 2011 were $5.8 million, up modestly on a sequential basis, but posting another all-time high for the company.

Lastly, R&D revenue in the third quarter was $4.6 million, up 15% sequentially, reflecting the strong performance of our Pharma business.

I will now shift gears and discuss results by business unit. Revenue in our Medical Device business was $9.6 million in the third quarter, down 4% sequentially.

The most significant drivers were the decrease in royalties from Cypher and lower reagent sales. However, in spite of this sequential decrease, the Medical Device business continues to be a consistent cash flow generator and a source of stability with ample growth potential.

As you will recall, we began disclosing operating profit by segment last quarter, which you will find as an additional table in today’s press release.

As has historically been the case, Medical Device was our most profitable business during the third quarter, generating an operating profit of $4.5 million. Given our core capabilities and the strength of our pipeline in this segment, we are confident that this business will remain a strong performer for us going forward.

Now let’s turn to our In Vitro Diagnostics business. We are pleased with the results of IVD, which has also been a source of stability for SurModics. Revenue in IVD was $3.4 million in the quarter, up 3% sequentially. IVD also contributed nicely to the company’s profitability, generating an operating profit of $1.4 million for the quarter.

We are pleased with the performance of this business and are excited about last week’s launch of our new Assay Diluent product. This represents our first new product introduction in our core product offerings in years and the feedback from customers has been encouraging.

Lastly, our Pharmaceuticals business generated revenue of $5 million in the third quarter, up 19% sequentially. This strong performance was primarily a result of an uptick in activity in our various customer R&D programs, both existing programs and new ones.

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