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SurModics, Inc. (

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F4Q2010 Earnings Call Transcript

November 9, 2010 5:00 pm ET

Executives

Philip Ankeny – Interim CEO, SVP and CFO

Analysts

Ross Taylor – CL King

Suraj Kalia – Rodman & Renshaw

Dorsey Gardner – Kelso Management

Richard Rinkoff – Craig-Hallum

Daniel Owczarski – Avondale Partners

Ernie Andberg – Feltl & Company

Presentation

Operator

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» SurModics, Inc.Q4 2009 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the SurModics fourth quarter 2010 earnings conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) I would now like to turn the conference over to our host, Phil Ankeny, Interim Chief Executive Officer, Senior Vice President and Chief Financial Officer. Please go ahead.

Philip Ankeny

Thank you, Alicia. Good afternoon and welcome to SurModics fiscal fourth quarter and full year 2010 conference call. Our press release reporting quarterly and full year results was issued earlier this afternoon and is available on our website 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 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 2009 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.

On today’s call, I will highlight select financial results and key achievements for the quarter and year. I will then discuss our outlook for fiscal 2010, and finally, we will open up the call to take your questions. Let me begin with some financial highlights.

For the fourth quarter of fiscal 2010, revenue was $15.5 million, 16% lower sequentially. Non-GAAP diluted loss per share was $0.05 per share. Our non-GAAP results exclude a goodwill impairment charge related to the 2007 acquisition of SurModics Pharmaceuticals of $13.8 million, asset impairment charges associated with long-lived assets of $2.6 million, and an impairment loss in connection with the company’s portfolio a strategy investment of $5.4 million. Cash flow from operations for the quarter was $5.3 million.

For fiscal year 2010, non-GAAP revenue was $73.4 million compared with $86.8 million in fiscal year 2009. As a reminder, Merck’s termination of our agreement resulted in the recognition of approximately $45 million of GAAP revenue in the first quarter of fiscal year 2009.

Excluding restructuring charges and goodwill, asset and investment impairment charges, as well as expensed IP R&D from 2009, non-GAAP diluted earnings per share was $0.39 for fiscal 2010 compared with $1.07 in fiscal 2009. And lastly, cash flow from operations for the year was $22 million compared with $31.3 million for fiscal 2009.

Please refer to the supplemental tables in our earnings release for an explanation of our non-GAAP accounting. Now let me turn to our revenue lines. Royalties and license fees for the fourth quarter were $7.9 million, a decrease of 15% on a sequential basis.

Recently, Johnson & Johnson reported the sales of the CYPHER sirolimus-eluting coronary stent were approximately $136 million in the quarter, down 19% sequentially and 36% year-over-year. However, excluding the $1.25 million in one-time license fees from our third quarter results, royalties and license fees decreased 2% sequentially in spite of the 19% decrease in CYPHER sales.

Product sales were $4.6 million in the quarter, down 20% sequentially. While our product sales were weaker in the fourth quarter, we continue to generate broad-based customer demand for our component in vitro diagnostic products, polymers, and coating reagents.

Lastly, R&D revenue in the fourth quarter was $3 million, down 14% sequentially, reflecting continued softness in R&D activity, which is a result of the normal ebbs and flows of activity in our various customer development programs. Importantly, we have not lost any significant customer programs from our portfolio of R&D program and we signed some exciting new projects during the fourth quarter.

However, bottom line, we are disappointed with our fourth quarter and fiscal year 2010 performance. While the environment remains challenging and we have been navigating several revenue transitions, we know we are capable of doing better and we are committed to doing better.

As you know, the major revenue transitions we’re working through include the cancellation of our ophthalmology program with Merck, the loss of the Abbott Diagnostics royalty stream due to patent expiration, and the continued decline in royalty revenue from J&J’s CYPHER stent. As we move forward, I can assure you of two things. One, returning our business to profitable growth is a tough priority for management and the Board. And two, we will continue to monitor the business and relentlessly execute to drive improved operating results over time.

To this end, in the midst of conducting SurModics’ annual strategic planning review, it became clear to us that we needed to right-size our cost structure to bring it more in line with customer demand and expected revenue. Accordingly, in October, we announced a 13% reduction in force, which will save us between $3.0 million and $3.5 million on an annualized basis. While difficult, we believe this decision was necessary.

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