Surmodics Inc (SRDX) 2002 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the SurModics second quarter earnings conference call. At this time all participants are in a listen only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder this conference is being recorded today, Tuesday, April 16th 2002.

I would now like to turn the conference over to , please go ahead ma'am.

Thank you, good afternoon and welcome to the fiscal 2002 second quarter conference call for SurModics. We appreciate you joining us today ,with me are Dale Olseth, Chairman and Chief Executive Officer of SurModics, will provide a short overview and highlight of this quarter. Jim Powell, President and Chief Operating Officer, will discuss the operating highlights and technical developments and Steve Hathaway, Vice President and Chief Financial Officer, will present a financial review of the second quarter ended March 31st, 2002, as well as an out look for the remainder of fiscal 2002. Following the call there will be questions and answers.

Before we begin, we must preface all comments with the Safe Harbor Statements. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ and factors that may cause such results to differ, are identified on page 12 of the company's 2001 annual report to share holders. Now, I am happy to turn the call over to Dale Olseth.

Thank you . Good afternoon, and thanks to all of you for joining us a half hour earlier than usual. We've had to move the call up because of a scheduling conflict. As you will know from the earnings release, we had a strong second quarter with record revenues of 7.1 million, up 31 percent from fiscal '01. Operating income increased 40 percent to 2.4 million and we exceeded the Analyst Consensus Estimates by a , with reported earnings of 10 cents per share. The coating portion of our business continues to produce strong results.

Quarterly revenues were up 51 percent from a year ago. Royalties during the quarter were 2.2 million, a 9 percent increase over the prior year, and reagent sales increased 56 percent exceeding the million dollar mark for the second quarter in a row. Commercial development was at record levels of 1.8 million, up 141 percent over the year ago period.

In case you have missed it, some exciting news was announced yesterday morning with Johnson & Johnson's announcement that it has now been approved it's stent - drug coated stent has been approved for sale in Europe. And, as you know we are providing the drug release coating for that stent. SurModics should begin receiving royalties on this product now in our September quarter, which is our fourth fiscal period. This was a tremendous quarter for our drug coated stent program, capped by yesterdays J&J announcement.

Many of you have heard the good news from the American College of Cardiology Meeting held last month in Atlanta about J&Js drug coated stent. Twelve month follow up data from the year European human clinical trials showed the same impressive results as the six month data released last September. Patients implanted with the drug coated stent experienced zero, no restenosis or re-closure of the vessel and equally important no or tissue in-growth. Similar results were seen at the 24 month period with the first patients. Both, measurements are very important because it translates into no need for follow up medical procedures. This is very good news for cardiology patients in Europe and is of course great news for our company. Now, I would like to turn the call over to Jim Powell our President, to discuss some of the operational and technical developments that occurred during this recent quarter.

Thanks Dale. We had a very active quarter in the development group and as revenues reached 1.8 million, a $1.1 million increase over the same quarter last year. Our work with J&J accounted for much of the revenue as we continued to support them by coating stents for further clinical studies throughout the world. We've mentioned before that J&J is not the only stent manufacturer we are working with. Our development work for stent manufacturer number two is progressing nicely. We continue to receive considerable interests in our stent coating but no further agreements have been signed yet. We are pleased to report that business is strong with Motorola as well.

After performing no development work for Motorola in the December quarter, we saw activity pick up to roughly the same pace as a year ago. We are in the midst of a development project that should continue for the next several months at the same level of effort. In addition, sales nearly tripled from the December quarter and Motorola continues to report increasing sales of their Biochip each month. Work with Novocell on a tissue engineering opportunity for treating diabetes also is progressing. SurModics chemists are now working closely with scientist at Novocell to refine our cell encapsulation technology on islets, the cells that produce insulin in the body.

Last week Novocell began a small study to test encapsulated islets in primates. If that study demonstrates success, they will be on track to begin human clinical trails later this year. On the operations front our drug delivery research group is now occupying their first coating operating in our facility in Bloomington, Minnesota. In addition we have completed designing plans for additional coating and we will begin remodeling as required to serve customer demand. Occupancy of the balance of the building is contingent on internal demands from other parts of our business. We signed two additional licenses both for slippery coatings, that gives us three new agreements for the year. The license remains strong both in terms of additional license prospect, included products moving to market. We continue to feel very good about future growth prospects for the coating business. Now here is Steve, with the financials.

Thanks Jim. Revenue for the second quarter for the fiscal 2002 increased 31 percent to $7.1 million from $5.4 million in fiscal 2001. The 51 percent increase in coatings revenue was primarily due to drug delivery. A significant portion of the 141 percent increase in commercial development revenue was stent coating work for Johnson & Johnson's. We continue to coat stents for their use in various human clinical trials. In addition, we sell them a range of chemicals used in their manufacturing process. Now we are eagerly awaiting the final revenue component from our business model, royalties from their sale of drug coated stents.

Coating royalties increased 9 percent to $2.2 million. This growth would been even greater expect for a calculation error made by a point which overstated the royalty payments over the last four quarters by approximately $150,000. This one time adjustment was recorded in the second quarter. On our last conference call, we expressed concern about the impact of Medtronic AVE to use a rapid exchange delivery system to deliver stent in the U.S. The second quarter royalties were impacted but not as significantly as we originally projected. The royalties declined from the first quarter, but they were flat with last year.

Also included in the second quarter of royalties were the step-up in the minimum royalties for Motorola Life Sciences. Achieved a 56 percent increase in the reagent sales was due to purchases by J&J as they continue to coat stents in-house. Their reagent purchases were at about the same level as the first quarter. They are now are our largest purchaser of reagents. Due to their volume we are scaling up our production capabilities.

Upon acceptance of the scaled up material, it is likely that we agree to a reduction in the reagent pricing. The exact amount of the decline depends on the final pricing and the quantities J&J requires in the future. Remember, however, that any pricing adjustment will be more than offset by royalties received from them beginning in the September quarter.

The two new licenses were both additional applications with existing clients for new coatings. In addition, we received a $250,000 payment from an existing client related to a completed technical milestone. Due to the adoption of last year, license revenues should be fairly steady for the foreseeable future at about $75,000 per quarter. In general, under this new policy, most license fees are over 15 years or more. On the last to a milestone payment for specific technical achievements.

Diagnostic royalties from Abbott decreased 24 percent for three years. We did receive most of the missing third party royalty payments mentioned in the last quarter. However, last years royalties included a $180,000, one time settlement payment from a third party infringing these patents. To the best of our knowledge, Abbott is now expecting final FDA approval to resume manufacturing of the diagnostic Test Kits for the sale in U.S. by the end of May. This approval could have a positive impact on SurModics future diagnostic royalties. and coated slide products also produced solid returns.

While the growth only shows a 6 percent increase over last year, the revenue more than doubled for the December quarter to a new quarterly record. As expected, the slide sales to Motorola did bounce back to historical levels. We expect slide sales to be at similar levels for the rest of 2002. All operating expenses rose 26 percent over the second quarter of last level.

We are investing in the business and this leads to higher profit. The two biggest components were an increase in the compensation and benefits and in an increase in facility costs. Most of the new in the research and developmental organization during the second half of last year to support current and potential clients in drug delivery. They are also expanding efforts in other segments of our technology such as genomics, cell encapsulation, and antimicrobial coatings. Also, the facility costs relate to the fixed cost of owning the research building we purchased last quarter.

We expect to a gradual transition our operations in to this space when appropriate, but until we do, the building expenses are being charged to the G&A category. We currently anticipate expenses for the rest of fiscal 2002 will be on the same general range as the second quarter. The net result of the above was a 40 percent increase in operating income to $2.4 million, and operating margins of 44 percent. As had been the case all year, net income was relatively flat with last year due to a $350,000 reduction in investment income. This represents a decrease of more than one cent per share after taxes. Investment income should be at similar levels for the balance of the fiscal year.

At quarter end, we had a clean balance sheet with almost $37 million of cash and investments and no debt. This represents an increase of $2 million in cash and investment since December 31st. Management continues to expect the level of growth to be in the 20 to 25 percent range for fiscal year 2002. Operating income growth should exceed that rate. However, net interim growth will be somewhat flat due to the decrease in income outlined earlier.

The most significant factor in our future guidance is the success of J&Js European market launch of the drug coated stent. Its release should have a impact on the 4th quarter and an even greater impact on fiscal 2003. However, there are many very variables in determining how successful the product will be. We do not control most of those factors. Therefore, it is difficult for us to estimate future royalties until we begin to receive accurate market data. The potential of the drug coated stent market for SurModics is large. It should allow us to deliver a growing high margin recurring revenue stream for many years to come. Our challenge is to effectively employ the resultant cash in more high growth opportunities for the future.

That concludes our prepared comments, now we would like to open up to call to questions, operator?

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the SurModics second quarter earnings conference call. At this time all participants are in a listen only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder this conference is being recorded today, Tuesday, April 16th 2002.

I would now like to turn the conference over to , please go ahead ma'am.

Thank you, good afternoon and welcome to the fiscal 2002 second quarter conference call for SurModics. We appreciate you joining us today ,with me are Dale Olseth, Chairman and Chief Executive Officer of SurModics, will provide a short overview and highlight of this quarter. Jim Powell, President and Chief Operating Officer, will discuss the operating highlights and technical developments and Steve Hathaway, Vice President and Chief Financial Officer, will present a financial review of the second quarter ended March 31st, 2002, as well as an out look for the remainder of fiscal 2002. Following the call there will be questions and answers.

Before we begin, we must preface all comments with the Safe Harbor Statements. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ and factors that may cause such results to differ, are identified on page 12 of the company's 2001 annual report to share holders. Now, I am happy to turn the call over to Dale Olseth.

Thank you . Good afternoon, and thanks to all of you for joining us a half hour earlier than usual. We've had to move the call up because of a scheduling conflict. As you will know from the earnings release, we had a strong second quarter with record revenues of 7.1 million, up 31 percent from fiscal '01. Operating income increased 40 percent to 2.4 million and we exceeded the Analyst Consensus Estimates by a , with reported earnings of 10 cents per share. The coating portion of our business continues to produce strong results.

Quarterly revenues were up 51 percent from a year ago. Royalties during the quarter were 2.2 million, a 9 percent increase over the prior year, and reagent sales increased 56 percent exceeding the million dollar mark for the second quarter in a row. Commercial development was at record levels of 1.8 million, up 141 percent over the year ago period.

In case you have missed it, some exciting news was announced yesterday morning with Johnson & Johnson's announcement that it has now been approved it's stent - drug coated stent has been approved for sale in Europe. And, as you know we are providing the drug release coating for that stent. SurModics should begin receiving royalties on this product now in our September quarter, which is our fourth fiscal period. This was a tremendous quarter for our drug coated stent program, capped by yesterdays J&J announcement.

Many of you have heard the good news from the American College of Cardiology Meeting held last month in Atlanta about J&Js drug coated stent. Twelve month follow up data from the year European human clinical trials showed the same impressive results as the six month data released last September. Patients implanted with the drug coated stent experienced zero, no restenosis or re-closure of the vessel and equally important no or tissue in-growth. Similar results were seen at the 24 month period with the first patients. Both, measurements are very important because it translates into no need for follow up medical procedures. This is very good news for cardiology patients in Europe and is of course great news for our company. Now, I would like to turn the call over to Jim Powell our President, to discuss some of the operational and technical developments that occurred during this recent quarter.

Thanks Dale. We had a very active quarter in the development group and as revenues reached 1.8 million, a $1.1 million increase over the same quarter last year. Our work with J&J accounted for much of the revenue as we continued to support them by coating stents for further clinical studies throughout the world. We've mentioned before that J&J is not the only stent manufacturer we are working with. Our development work for stent manufacturer number two is progressing nicely. We continue to receive considerable interests in our stent coating but no further agreements have been signed yet. We are pleased to report that business is strong with Motorola as well.

After performing no development work for Motorola in the December quarter, we saw activity pick up to roughly the same pace as a year ago. We are in the midst of a development project that should continue for the next several months at the same level of effort. In addition, sales nearly tripled from the December quarter and Motorola continues to report increasing sales of their Biochip each month. Work with Novocell on a tissue engineering opportunity for treating diabetes also is progressing. SurModics chemists are now working closely with scientist at Novocell to refine our cell encapsulation technology on islets, the cells that produce insulin in the body.

Last week Novocell began a small study to test encapsulated islets in primates. If that study demonstrates success, they will be on track to begin human clinical trails later this year. On the operations front our drug delivery research group is now occupying their first coating operating in our facility in Bloomington, Minnesota. In addition we have completed designing plans for additional coating and we will begin remodeling as required to serve customer demand. Occupancy of the balance of the building is contingent on internal demands from other parts of our business. We signed two additional licenses both for slippery coatings, that gives us three new agreements for the year. The license remains strong both in terms of additional license prospect, included products moving to market. We continue to feel very good about future growth prospects for the coating business. Now here is Steve, with the financials.

Thanks Jim. Revenue for the second quarter for the fiscal 2002 increased 31 percent to $7.1 million from $5.4 million in fiscal 2001. The 51 percent increase in coatings revenue was primarily due to drug delivery. A significant portion of the 141 percent increase in commercial development revenue was stent coating work for Johnson & Johnson's. We continue to coat stents for their use in various human clinical trials. In addition, we sell them a range of chemicals used in their manufacturing process. Now we are eagerly awaiting the final revenue component from our business model, royalties from their sale of drug coated stents.

Coating royalties increased 9 percent to $2.2 million. This growth would been even greater expect for a calculation error made by a point which overstated the royalty payments over the last four quarters by approximately $150,000. This one time adjustment was recorded in the second quarter. On our last conference call, we expressed concern about the impact of Medtronic AVE to use a rapid exchange delivery system to deliver stent in the U.S. The second quarter royalties were impacted but not as significantly as we originally projected. The royalties declined from the first quarter, but they were flat with last year.

Also included in the second quarter of royalties were the step-up in the minimum royalties for Motorola Life Sciences. Achieved a 56 percent increase in the reagent sales was due to purchases by J&J as they continue to coat stents in-house. Their reagent purchases were at about the same level as the first quarter. They are now are our largest purchaser of reagents. Due to their volume we are scaling up our production capabilities.

Upon acceptance of the scaled up material, it is likely that we agree to a reduction in the reagent pricing. The exact amount of the decline depends on the final pricing and the quantities J&J requires in the future. Remember, however, that any pricing adjustment will be more than offset by royalties received from them beginning in the September quarter.

The two new licenses were both additional applications with existing clients for new coatings. In addition, we received a $250,000 payment from an existing client related to a completed technical milestone. Due to the adoption of last year, license revenues should be fairly steady for the foreseeable future at about $75,000 per quarter. In general, under this new policy, most license fees are over 15 years or more. On the last to a milestone payment for specific technical achievements.

Diagnostic royalties from Abbott decreased 24 percent for three years. We did receive most of the missing third party royalty payments mentioned in the last quarter. However, last years royalties included a $180,000, one time settlement payment from a third party infringing these patents. To the best of our knowledge, Abbott is now expecting final FDA approval to resume manufacturing of the diagnostic Test Kits for the sale in U.S. by the end of May. This approval could have a positive impact on SurModics future diagnostic royalties. and coated slide products also produced solid returns.

While the growth only shows a 6 percent increase over last year, the revenue more than doubled for the December quarter to a new quarterly record. As expected, the slide sales to Motorola did bounce back to historical levels. We expect slide sales to be at similar levels for the rest of 2002. All operating expenses rose 26 percent over the second quarter of last level.

We are investing in the business and this leads to higher profit. The two biggest components were an increase in the compensation and benefits and in an increase in facility costs. Most of the new in the research and developmental organization during the second half of last year to support current and potential clients in drug delivery. They are also expanding efforts in other segments of our technology such as genomics, cell encapsulation, and antimicrobial coatings. Also, the facility costs relate to the fixed cost of owning the research building we purchased last quarter.

We expect to a gradual transition our operations in to this space when appropriate, but until we do, the building expenses are being charged to the G&A category. We currently anticipate expenses for the rest of fiscal 2002 will be on the same general range as the second quarter. The net result of the above was a 40 percent increase in operating income to $2.4 million, and operating margins of 44 percent. As had been the case all year, net income was relatively flat with last year due to a $350,000 reduction in investment income. This represents a decrease of more than one cent per share after taxes. Investment income should be at similar levels for the balance of the fiscal year.

At quarter end, we had a clean balance sheet with almost $37 million of cash and investments and no debt. This represents an increase of $2 million in cash and investment since December 31st. Management continues to expect the level of growth to be in the 20 to 25 percent range for fiscal year 2002. Operating income growth should exceed that rate. However, net interim growth will be somewhat flat due to the decrease in income outlined earlier.

The most significant factor in our future guidance is the success of J&Js European market launch of the drug coated stent. Its release should have a impact on the 4th quarter and an even greater impact on fiscal 2003. However, there are many very variables in determining how successful the product will be. We do not control most of those factors. Therefore, it is difficult for us to estimate future royalties until we begin to receive accurate market data. The potential of the drug coated stent market for SurModics is large. It should allow us to deliver a growing high margin recurring revenue stream for many years to come. Our challenge is to effectively employ the resultant cash in more high growth opportunities for the future.

That concludes our prepared comments, now we would like to open up to call to questions, operator?