Surmodics Inc (SRDX) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the SurModics fourth quarter and year-end conference call. At this time, all participants are in a listen-only mode. Following today's 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, Thursday, October 24, 2002. I would now like to turn the conference over to Ms. Maryann Briggs. Thank you. Please go ahead.

Good afternoon. Thank you for joining us today for the SurModics conference call. With me are Dale Olseth, Chairman and Chief Executive Officer of SurModics, who will provide a short overview and highlights of the quarter and fiscal year; Jim Powell, President and Chief Operating Officer, who will discuss operating highlights as well as technical developments; and Steve Hathaway, Vice President and Chief Financial Officer, who will present a detailed financial review. After the call, we will host a question and answer session.

Before we begin, though, we must preface our comments with a Safe Harbor statement. 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 17 of the company's Fiscal 2001 Annual Report to Shareholders.

With that, I will turn the call over to Dale Olseth.

Thank you, Maryann, and good afternoon and thanks to all of you for joining us today. As you all know from the earnings release, we had a strong finish to the fiscal year. We reported record revenue, operating profits, and earnings for both the quarter and the fiscal year.

In the fourth quarter, revenue was up 28 percent, operating income increased 32 percent, and net profits rose 18 percent. We exceeded the first call analyst consensus estimates of 13 cents, with earnings of 15 cents per diluted share. We saw sequential gains in both revenues and profits each quarter during this year.

The coatings portion of our business was the primary catalyst for our record-breaking results. Royalties for the fourth quarter rose 11 percent over the prior year period; commercial development revenue more than doubled, and reagent sales, [our Chemistries], which provide an indication of future royalty trends, were more than triple the level of the fourth quarter of last year.

This quarter marked an important milestone for SurModics, as we received the first royalty payment from Cordis Corporation, a Johnson & Johnson company, following the European launch of their drug-coated stent in April. Suffice it to say, we remain positive that our future royalty prospects from Cordis [technical difficulty].

At SurModics, we take corporate responsibility, governance and ethical behavior seriously. Last week, we announced the election of two new independent members to our Board of Directors. José [Bedoya] and Jerry [Pritchard] will add valuable experience, insight, and sound judgment to our Board. José is the founder and president of [Ologics], a Colorado-based technology company that produces implantable devices to assist the severely hearing-impaired. He has extensive experience in nearly every facet of medical device manufacturing, marketing, and general management. Jerry Pritchard is President and CEO of the University of Minnesota Foundation. He has broad financial and accounting experience, from management positions at both Ford Motor Company and U.S. [Ban] Corporation. We are pleased to add these two highly qualified gentlemen to our Board and look forward to their contributions to the company. We are now back to eight directors, six of whom are independent.

Now, I'd like to turn the call over to Jim Powell, our President and Chief Operating Officer.

Thanks, Dale. We had a very busy quarter, as total commercial development revenue reached $2.4 million, a 107 percent increase over last year. Our work on Cordis' drug-coated stent once again accounted for most of this quarter's activity, as we continued to support their expanding human clinical trials around the world. Our goal is to continue to work with Cordis on their drug-coated stent program well into the future.

As most of you know, Tuesday we received good news from the FDA Advisory Panel, as they unanimously voted to recommend FDA approval of Cordis' drug-coated stent. While there appears to be some confusion in the market about how much work still needs to be completed, Cordis has already responded to the FDA deficiency letter. It still appears likely that the full FDA approval will occur in the first quarter of calendar 2003. We are going to discuss the Panel meeting in a few minutes.

While considerable excitement surrounds the expected U.S. launch of the Cordis stent, we continue to work with additional stent manufacturers. Some of this work is in the pre-licensing phase, as we test our polymer matrix with different drugs. As we previously discussed, we have signed two stent agreements. We believe more are likely as we continue to see sustained and growing interest in our drug-coating matrix. This is an area that holds strong potential for future growth.

We initiated an increasing number of commercial development projects during the year. At the beginning of fiscal '02, we were working on 12 non-licensed product applications in technical development. We ended the year with a record 25 non-licensed projects in commercial development. These represent clients that are funding optimization projects for their specific coating applications. Not all of these projects will ultimately result in assigned license, but many will. It gives us a good indication of the growth that should be flowing out of our development pipeline and into our licensing stream.

We are prepared to meet the demands of these new customers by utilizing additional coating suites in our new facilities in Bloomington, Minnesota. Early in fiscal 2003, SurModics will have six new suites available which are designed to handle the unique requirements of working with drug delivery coatings. As some of you are aware in July, Motorola sold their [code-links] biochip business, including our license, to Amersham plc. Through that sale, SurModics gained an excellent partner that is more focused on the genomics marketplace. We have great respect for the vision that Motorola had in this area, and we believe the Amersham partnership gives us the opportunity to both build on the existing work and establish a stronger presence in the emerging field of genomics. Initial discussions with Amersham have been very positive. Genomics continues to be a growth vehicle for our future.

Our work with Novacell on a tissue-engineering [opportunity] for treating diabetes is also progressing. This remains a long-term opportunity for SurModics. Novacell is currently conducting primate studies to test cell encapsulation techniques and to date we have been very impressed with the early results. Additional primate studies must be performed before Novacell can begin human clinical trials later in 2003.

In the fourth quarter, we signed two new small license agreements, bringing our yearly total to seven. This was short of our annual goal, but we have several potential licenses in negotiation. Already in the first week of October, we executed our first license agreement for 2003. We continue to see strong activity on the licensing front, and we expect to convert many of the developing projects to licenses in fiscal 2003. Expect to hear more details as fiscal 2003 progresses.

Now, here's Steve with the financials.

Thanks, Jim. As Dale said, we are pleased with our financial results for fiscal 2002. Revenue increased 30 percent to $29.5 million dollars, from $22.7 million dollars in fiscal 2001. Income from operations rose 42 percent, to $10.7 million dollars, with operating margins improving to 36 percent from 33 percent in 2001.

Income before the cumulative effect of a change in accounting principle increased 14 percent to $7.8 million dollars, or 44 cents per diluted share, from the $6.8 million dollars, or 38 cents per diluted share reported in fiscal 2001. Remember that our fiscal 2001 results included $1.4 million dollars more investment income than fiscal 2002. As a result, the growth in operating income in fiscal 2002 did not carry down to the bottom line.

Our work with Cordis Corporation dominated revenue growth in fiscal 2002. Cordis was SurModics' largest customer, even though royalties only began in the fourth quarter. Jim mentioned the high level of development work we performed for them this year, but we also sold Cordis significant quantities of reagent chemicals. Reagent sales increased 131 percent between years, to $6.1 million dollars.

The high margin coatings royalties rose $1.6 million dollars, or 20 percent, between years, to $9.4 million dollars in fiscal 2002. In total, we received royalties from 104 different product applications during the year, up from 91 last year. However, the 80/20 rule still applies to us. The top ten product applications accounted for 83 percent of the coatings royalties generated in fiscal 2002. We expect this percentage to climb even higher in 2003, as the Cordis royalties begin to ramp up.

You will also note that the diagnostic royalties declined 25 percent from fiscal 2001 to $2.4 million dollars. These are the royalties we collect from Abbott Laboratories for certain diagnostic patents. Two factors accounted for the decrease. First, the ongoing impact of the FDA Consent Decree continues to hold certain Abbott products off the U.S. market. Second, last year, we received significant pass-through payments from Abbott for infringement settlements with third parties related to these patents.

Total operating expenses were up 24 percent between years to $18.8 million dollars. Much of this increase occurred in research development, where expenses rose $1.7 million dollars to $9.7 million dollars, chiefly related to the addition of technical personnel and equipment to better serve our customers. Technical development expenses should continue to grow next year, especially as we make further investments in our drug delivery group to support anticipated customer needs. As you have heard, we believe drug delivery will be a major opportunity for the company.

General administrative expenses also increased significantly to $4.8 million dollars. As we've discussed over the last several quarters, this is primarily because of the operating costs associated with the new facility purchased earlier in the year. We are not currently utilizing most of the space; therefore, the related costs are being charged to G&A. In fiscal 2003, a portion of these costs will be allocated to technical operations as we open the new lab space.

Now, let's turn to the fourth quarter. Revenue increased 28 percent to $8.7 million dollars from $6.8 million dollars in the comparable period of 2001. Our core coatings business was the main contributor. Coatings revenue rose 36 percent between years as a direct result of reagent chemical sales more than doubling and commercial development revenue more than tripling.

Also note that in the fourth quarter of last year, SurModics benefited from a $1 million dollar milestone license fee received from Motorola Life Sciences. Excluding that one-time payment, SurModics' year over year revenue growth was nearly 50 percent in the fourth quarter of this year.

Income from operations for the fourth quarter was $3.6 million dollars, up 32 percent from last year. Operating margins expanded to 41 percent. Net income for the quarter was $2.6 million dollars or 15 cents per diluted share, an 18 percent rise over the $2.2 million dollars, or 12 cents per diluted share, reported one year ago.

Our balance sheet remains strong, ending the year with $43.9 million dollars in cash and investments and no debts. The cash and investment balance is slightly lower than last year, despite major investments in several areas, including $7.1 million dollars for the new facility; $4 million dollars in investment in Novacell, and $1.8 million dollars for the purchase of the new equipment. We expect the [pace] for capital investments to pick up in fiscal 2003, as the company has just begun a $12 million dollar addition at the new facility. This addition will provide increased capacity and redundant manufacturing capabilities for our all-important reagent chemicals.

Turning to fiscal 2003, let me comment on our financial outlook. We currently expect revenue growth in excess of 25 percent with higher net income growth. As always, this outlook is contingent on the continued growth of royalty revenues and the timing of new products reaching the market.

Several factors could have an impact on fiscal 2003. First, the most significant event is the timing of the U.S. launch of Cordis' drug-coated stent. FDA approval is currently anticipated sometime in the first calendar quarter of 2002. However, SurModics receives royalties on a one-quarter lag basis. For instance, if Cordis receives approval to begin selling coated stents in the U.S. on January 1st of 2003, we would see the related royalties in the last two quarters of our fiscal 2003. If the approval occurs April 1st, we would receive royalties only in our fiscal fourth quarter. And, if approval comes somewhere in between, we would receive U.S. royalties in a portion of our third quarter and all of our fourth quarter.

Second, now that Cordis has launched the drug-coated stent, we expect to perform less coating work to support their clinical trials. Such coating work was a large factor in our fiscal 2002 revenue growth.

Third, while the quantities of reagents purchased by Cordis are expected to continue to grow, especially as they start selling stints in the U.S. market, we have committed to a reagent price reduction. As a result, we anticipate lower reagent sales next year compared to the levels experienced in the second half of fiscal 2002.

Fourth, royalty revenues should benefit from the success of the new products our clients launched in 2002, and the nine or ten new products expected to reach the market in 2003. A few of these products have the potential to be large royalty generators. Due to the timing of these introductions, we expect the second half revenue impact to be greater than the first half.

Finally, as previously stated, we are adding resources to be better prepared for future growth opportunities, especially related to drug delivery. As a result of these factors, we anticipate stronger financial performance in the second half of the year than the first half.

For the fiscal first quarter of 2003, we anticipate year over year revenue growth in the 15 to 20 percent range, with similar net income growth. This represents a decline from the fourth quarter's revenue and earnings, primarily because we expect a reduction in clinical coating demand by Cordis that I just mentioned, as they move out of the clinical phase of their product introduction cycle. We expect this decline to be offset by higher royalty revenues in the second half of the fiscal year, after Cordis has launched the drug-coated stent onto the U.S. market. These expectations could be favorably influenced by growth of royalty revenues in the core business, timing of new products reaching the market, and demand for additional development projects.

That concludes our prepared comments, but before we turn the call over for questions, we would like to make a few comments about Tuesday's panel meeting.

Both Jim Powell and Lise Duran, our Vice President of Product Development, were in attendance. Lise has joined us today, and I would like to turn it over to them for a few comments. Jim?

Thank you. First, we believe that the panel meeting went very well, and as stated by both parties several times, Cordis is working in collaboration with the FDA to address any outstanding issues. I want to make one comment on the subject of deficiency letters.

Deficiency letters cover either major or minor issues. Minor issues mean the FDA believes the issue can be resolved by either phone, fax or email. All other issues are classified as major issues. It's very normal to get a major deficiency letter. The FDA outlined the contents of the letter, and Lise Duran is going to review this.

Thanks, Jim. In the FDA presentation, the issues were identified as non-clinical, including in vitro [elution] methodology, stability shelf life, modification to coating process, and a few clinical issues were also identified. The panel and the FDA were very complimentary about how Cordis has worked with the FDA to resolve these issues. In fact, Cordis responded very quickly, within thirty days. They got the letter September 18th, and they responded on October 21st.

That concludes our comments. Now I'd like to open up the call for questions. Stacy, please take it from here.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the 1 on your push-button phone. If you would like to decline from the polling process, press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for the first question.

Our first question comes from Mr. Steve Hamill. Please state your company name, followed by your question.

RBC Capital Markets. Good afternoon.

Hi, Steve.

Hi. Couple of questions for you. To start with, in terms of the sizable jump in the reagent revenue here this quarter, was most of that attributable to J&J Cordis, or is a significant portion of that attributable to a second manufacturer? I guess it goes for both reagents as well as the corporate R&D.

This is Steve. Most of the growth that involved reagents and the commercial development revenue was related to Cordis.

So it looks like the reagent revenue then here from Cordis in the fourth quarter had to have well exceeded your expectations; it certainly exceeded ours. And at this point, can you talk about what is kind of a normal stocking level for them, or do you believe that there will be a smooth stocking trend starting in the December quarter?

From what we've seen so far - you know, they have been purchasing reagent chemicals all year. And from our standpoint, they do not appear to be stocking these reagents. Based on the forecast we've received from them, they expect to have the same volume, if not increasing volume, as they enter the U.S. market. So we expect that quantities may even go up from here as they progress further along with the sales of the stent.

And can you give us any sense, in terms of magnitude, how large the discount is, then, that goes into effect and how soon it goes into effect?

A portion of the discount has already gone into effect. As I look at the reagent levels that we experienced in the fourth quarter, that is probably a high point; that the reagents will come down from there. I'm not sure to what extent exactly; it depends on what their volume of purchases is, but it's probably going to come back down into the range that it was in the first half of the year as opposed to the second half of the year.

Okay. And then in terms of the corporate development work that you're doing for them, I guess I had been under the impression that these were trials that might keep on going even after the initial launch; that some of this was post-marketing type of studies. Is that not the case? I mean, basically are you at the point where all the clinical trials that you were coating stents for them have come to an end or are coming to an end?

This is Jim Powell. No, we just believe the level of work is going to go down. They've stated publicly that they think this is going to be on the next several platforms, and we believe that's true. It's just that all the stuff that we did to support [Cipher] that came in over the last year, was sort of a big large bolus of clinical work for us.

Okay. So in terms of the work that was done here in the fourth quarter, I'm trying to understand a little bit why it would have shot up so much here in the fourth quarter, given the fact that their primary clinical trials were done and had been done for some time. Is this work that you do with them to prepare for the panel meeting and things like that? Can you help us understand a little bit what would have driven it so high in the fourth quarter?

Well, I can tell you it wasn't for panel use. But I don't really know that I can comment on exactly what it was, other than to support next generation stints. Is that correct, Lise?

That's correct.

Well, I did see -- I'll add to that, because I did see a public list at one point in time here, after even the U.S. trials were out, from the standpoint of there was a whole list of – I don't know, 12 or 15 different studies that were being done by J&J around the world, on different stent sizes, different indications, different geographies, that sort of thing. So there was a lot of ongoing work like that, and some of that will continue on. We just don't think it's going to continue on at the same level we've seen over the last couple of quarters.

Okay. Going to the other parts of the business, in terms of new license fees, did you have any other licensees bring a product to market this quarter?

Just one.

One? Okay. And the guidance you're giving for next year is that you think that another 9 to 10 products will come to market in '03, is that correct?

Correct.

Okay. And then in terms of Amersham and your discussions with them, do you have any sense at this point as to whether or not they plan to increase corporate R&D spending levels versus what you have done historically with Motorola?

No. I don't believe they're going to increase the past level – over the past level at Motorola. Unless you know something different, Lise –

-- At this point [indiscernible].

We just met with them recently and I wasn't involved, so maybe I shouldn't try and answer this. But I don't think the development levels you'll see go up, but we have very positive impressions from them on the level of sales of product. So.

Lise, do you want to add to that, because they were here this week?

Well, we've had very positive discussions with them, but they are still in the process of getting to understand their new business, and so at this point in time, we don't know what the level of activity is going to be over the course of the next year.

They still have a commitment under the contract to fund at least a certain level, and then it's just a question of whether they will fund beyond that level.

Okay, great. Thank you.

Thank you.

Hi guys. Can you hear me?

Yeah, Jim.

Congratulations on just a great quarter.

Thank you.

I’m sorry -- I screwed up already. I’m with Morgan Keegan & Company. A couple of things here real quick. What’s the next generation of drug-coated stents? And I know it’s probably not a great question because we really haven’t gotten to this generation yet, but the next generation -- is it multiple drugs on the same stent, or what would you guys view as the next generation of drug coated stents?

It could be multiple drugs on a stent. You know, the next generation for us, over the next year, I hope, is multiple-stent customers with the same technologies. You’re asking a three of four-year-out question? Is that what you’re really getting at?

It’s a question I get all the time, which is, What’s next for SurModics? And my answer, typically, is that it would be multiple drugs on a [bare] metal stent, or maybe a stent that would actually break down within the body and disappear after providing support for six to nine months. I just wanted to know if you have any color on what the next generation could be?

Well, all of those are possible next generations that you mentioned. I wouldn’t characterize them as next generations. Those are more like the Star Trek way out, I would think. I think what will happen is, multiple companies will get stents with a single drug on the market, like the Cordis stent. That will sort itself out, then they’ll start seeing if they can improve over 3% re-stenosis rate. And it might be multiple drugs from one stent; it might be just different drugs. It could be dissolvable stents. There would be a lot of ways to address that. But I’ll just stop there.

Jim, this is Dale Olseth. That’s a very tough question, because it’s very early for us and we really have difficulty responding to that, because most of our stuff is under high proprietary confidential agreements and we can’t give any indication what the specifics are, other than we’re interested in this – in this following generations. But it’s brand new. It’s a brand new product and there’s a lot of studying going on right now in the market. And we hope to have our stuff involved in whatever they’re doing. But, it’s probably too early for us to see that.

It probably maybe wasn’t a fair question. Is the visibility of the clinical results regarding the drug-coated stent, is that producing more companies, for other medical devices, whether it’s orthopedics to heart valves to whatever, to come to your door? Is that a catalyst for other medical device companies to explore coating their device and it doesn’t have to be a stent, and it doesn’t have to be a slippery coating either?

Yes, it is. And that’s pretty much all I can tell you, if you’re going to ask what the device is because it's -- I’m not going to tell you. But we’re getting more interest in other than just stents for drug delivery. And, it's very interesting interest.

And, lastly, right now, are you getting royalties on -- is it 65 different products?

Well, we are actually getting royalties on 104 products. That includes some that are just paying minimum royalties. There are 65 products on the market, and the remaining 39 are just paying minimum royalties.

But all 65 are exceeding minimum?

No, not necessarily.

Okay, I’m going to jump back into the queue. Thanks a lot guys. Great quarter.

All right. Thanks.

Thank you. Our next question comes from Mr. Douglas Eayrs. Please state your company name, followed by your question.

Dougherty & Company. Great year.

Thank you.

Good job. I was just going to ask you real quick -- some areas. You didn’t break out – you’re not going to plan on breaking out the stent royalties specifically on a quarterly basis, right? That’s just going to be rolled in with your general royalties?

You are correct. We’re just going to roll those in with our coatings royalties.

Okay. And I think you said that this was such a strong quarter -- you said only the first quarter would be sequentially down just because of the strength of this quarter and the overshoot on the commercial development, I think it was – yes, the reagent sales, too, overshot. And then -- so you think the first quarter will be down and then from the second quarter on, it kind of depends on the timing of the US FDA approval on the Cipher stent, right? I mean that’s going to drive the second, third and fourth quarters?

Well, I wouldn’t include the second quarter into that analysis because there’s very little possibility we’re going to receive [multiple speakers] --

That's right.

-- in that second quarter because of that one quarter lag time, but clearly the second half. So the first two quarters will be, you know, the tougher quarters and we will be receiving increasing royalties from J&J European and international sales.

I think they said, a couple of days ago, I can’t remember – that they’re approved now in 50 countries? Something like that, 40 or 50 countries?

I saw the 50 -- I haven’t verified that but someone did have 50 countries. The last I saw it was 40, but I did see a number of 50’s.

Okay. And, then, I think you had said that because of your work to get into the new facility and build-out there, you're going to -- I can’t remember how you covered that in the conference call, but what you said was that the R & D will start to pick up a little bit as we move through the year, I think, too, right?

Are you talking about the R & D expense?

Yes, the expense line.

Yes. We will have, with the new coating suites that we are building-out, or pretty much done with, down in the new facility, that cost will add to the R&D expense next year. So we’ll see a little bit of reduction in G&A as we move some of those costs over to R&D as those rooms are occupied.

In addition, we’re adding people and are going to be doing more development work, especially around drug delivery.

And, I think you’d said that right now you have license agreements with two companies in the coronary stent area and then you were working on – there were two that were kind of in the pre-licensing R&D type work. Is that still the same?

We actually – it’s still the same. We actually have a couple of more companies that are also in discussion with us. So the activity continues to expand from what we’ve seen in prior quarters. We still only have the two that are signed agreements, but we strongly believe that others will be coming.

Okay, great. Thank you.

Thank you. Our next question comes from Mr. Steve [Leesey]. Please state your company name, followed by your question.

Yes, hi. It’s Millennium. I just had two quick questions. One, were you guys involved in helping Cordis respond to the deficiency letter from the FDA with respect to anything in the coating? And the second question is, it seems to me that the Cordis has stated that they had a little bit of a problem servicing the whole market at the beginning of the launch, and if they were to have that issue with manufacturing, I would think they’d be running to run at full capacity right now to get up a stockpile of stent before the launch. So, I’m not quite sure why they would not be purchasing reagents from you in your first fiscal quarter, given that with the potential delay with the FDA and their questions, you’d have time to build up a stockpile so they would need to purchase from you.

Let me interrupt you for just a second, Steve, because you may have misunderstood something. I don’t think we said they’re not going to be purchasing reagents.

No, we expect -- in the first quarter, we expect the reagent purchases to be the same, if not increased in quantities, as they gear up their manufacturing. The primary impacter in the first quarter is the fact that we will not be doing as much coating work for Cordis to support their clinical trials.

Just to reiterate, they’re doing the coating for the manufacturing of the product for sale. We’re helping support them with coatings for their clinical trials.

I see. So you do no coating at all, for the commercial use?

That’s correct.

And then your earlier question – Dale Olseth. We would speculate that it is highly unlikely that we would be called upon to assist Cordis in the FDA matters. In general, when the FDA’s involved, they don’t want other companies involved. And so, if that would happen, we would surely be as helpful and supportive as we could, but I think it’s unlikely that an outside party would be called in, directly or indirectly, to deal with the deficiency letter.

Okay. Thanks very much.

Thank you. Our next question comes from Mr. Matthew [Booten]. Please state your company name followed by your question.

Argus Partners. I was wondering, there’s some speculation as to the timing of the Cipher launch, and I think there was – up until the panel meeting there was speculation it could occur some time in – approval could be in December, as early as December. What are your thoughts on the timing for FDA approval after attending the panel meeting?

You want us to be the speculator. Jim, you – [indiscernible] – are now closest to --

Okay, since I was there. It’s unknown. They got a letter from the FDA in September addressing four areas. They responded to that letter in four weeks. The FDA hadn’t had time to review it. They certainly seemed, and both said they worked very well together and expeditiously, to get this approval done -- that’s from both parties, FDA and Cordis -- and we don’t know what was said in the letter. So, I have no idea if they could get approval by December. If -- and besides, it’s a couple of months' difference.

And as it relates to the guidance you provided, if approval were to occur some time in December and sales were to occur, how would that change your –?

Well, obviously, earlier approval is better from our standpoint. That’s obvious point number one. Number two is, it’s not only the timing of the approval, but it is the penetration rate that they get from U.S. physicians.

From everything, all the meetings we’ve attended, U.S. Physician Group is very excited about getting their hands on the drug-coated stent. We anticipate a much higher penetration than Europe but we don’t know the final answer. And that’s the difficulty we have in trying to decide what is our revenue going to be like the last half of the year.

Now the good news in the U.S., is the fact that the U.S. already has the reimbursement established as of April 1st, which has been the significant problem in Europe to date. So with that reimbursement and with the doctors being a little bit more aggressive, we expect a much larger penetration. But time will tell when this occurs.

So, in order to achieve greater than 25% top line growth for next year, what kind of assumptions are you making for this second half of the year, in terms of penetration?

I cannot go into those at this time. Whatever I say is going to be wrong. And that’s why we’re staying away from any guesses on the market. We have several analysts out there, both covering us and covering J&J, who have gone out and given their guidance and their estimates. But we will keep you posted as we get additional information from J&J and more becomes known about this. But right now it is just – it is so unclear around this launch, and this launch will have such a significant impact on our numbers, that we just have to stay away from any specific guidance.

This is Dale Olseth again. I’ll add to that. This is a very tough question for us because what comes in now on royalties, that comes in at a very high gross margin level and so the sooner we get it -- and when it comes it’s going to have meaningful -- and we underline meaningful -- impact on our bottom line performance for the company going forward because of the size of the market and how and where it’s priced. But this is very large gross margin, and so the impact at the bottom line is just profound as it evolves. And that’s why there’s been so much interest in how this program is accepted by the medical profession. And whatever happens there, it’s going to piggyback. We just hang on for dear life, because of the high gross margins. And as soon as we know when acceptance of the program is received, we’ll get that out, because it’s a big impacter.

Thank you.

Thank you. We have a follow-up question from Mr. Steve Hamill. Please go ahead sir.

A couple of follow-ups. Can you give us an idea of what your slide growth was like this quarter, Steve?

Slide growth was pretty flat with last quarter. I think, while it was a good quarter overall, it was tied up in this Motorola /Amersham purchase, so I don’t think – there’s some difficulty keeping our eyes on the growth. We do expect that to pick up next year with Amersham. The early indications are that -- they will be selling not only more of their biochips, but also more of our slides, is the early indication.

And does it sound like, from the early indications that they intend to continue to source their slides from you rather than bring it in-house?

That’s what we believe, unless you heard anything different yesterday.

And we continue to believe that. We haven’t heard anything differently.

And this is a major expansion of, in effect, the marketing penetration vis a vis Motorola, and they’ve got hundreds and hundreds more salesmen in the field. So, if that proves out, it’s going to be -- over a period of time it will be a bigger impact.

As we try to figure out what’s happening with the Abbott royalties -- you know, that continues to be a little bit of a disappointment, it seems like, in terms of how that’s coming along, in particular this quarter. Do you think that the $548,000 we saw here in the fourth quarter is representative of future levels?

More than likely, yes. We do get a little bump – there’s a little seasonality bump to this, because one of the projects that they do cover is also strep test. It’s primarily a pregnancy and strep test. We do get a little seasonality where the six months over the winter months, you get a little higher revenue from those strep tests. But, you know, until there is some resolution to the FDA issues they have, we don’t see this as a tremendous growth vehicle.

Okay, and last, then, in terms of the commercial R&D work for J&J. Could you give us an idea – again there, you’ve made it clear it’s going down pretty substantially starting in the December quarter. Should we be thinking about levels back to where it was, say, early this year, or in 2001? Or just -- can you help us put some sort of framework around the magnitude?

Our best guess is, it probably will come back to levels more like early this year. So that’s growth over where it was last year, but to that level to where we were early this year. And, you know, ongoing, it’s going to move around a little bit, depending on what projects and what studies they choose to go into. But right now, for what we see in the foreseeable future, it’s not going to be quite as active as it was last year.

For J&J.

Yeah, for --

Or Cordis.

Or Cordis.

But there is a possibility of getting additional stent coating work in this year. And I would -- well, let me retract that -- not possibility – the probability is that we will be doing more coating work on stents all year long.

But it sounds like you don’t think it can come quite fast enough to offset the near-term drop?

Probably not. Not in the first quarter. I mean we are doing work. We’re doing work for others; we just don’t see the big jump to offset what we think we’re going to be losing through Cordis.

Any updates in terms of timing, as to when your second stent licensee may start to approach human clinical trials and would you still announce who it is at that point?

We have no idea when they would start human clinical trials, and no, we have no plans to announce them until they’re ready to be announced. It may be once they start human clinical trials, they say, we want to get announced, because the world isn’t that good in terms of keeping secrets. But there’s no plans to announce anything quite yet.

And, of the 25 non-licensed [film] and projects you’ve got going on right now, can you give us a sense of how many of those are stent-related at this point?

Four or five, I believe. That’s just off the top of my head; I don’t have an accounting in front of me. Do you, Steve?

Jim’s guess was pretty good, of doing work for about four or five stent companies at this point in time, that are not licensed. For some it’s early, but they all have very good possibilities going forward.

All right. Great, Thank you.

Steve, you’ve got good questions.

Thanks, Dale.

You bet.

At this time, I’d like to turn the conference back to Mr. Dale Olseth. Please go ahead, sir.

It's Dale Olseth again. Thanks to all of you for participating in our year-end conference call. We are pleased with the record-making, record-breaking, revenue and profits for the year. This was a very fine year for our company and we have significant momentum continuing as we now enter fiscal ’03 and beyond. We look forward to updating you in January on our progress on the first quarter of fiscal ’03. Again, a special thank you for being with us today.

Ladies and gentlemen, this concludes the SurModics Fourth Quarter and Year-End Conference Call. If you would like to listen to a reply of today’s conference, please dial (303) 590-3000 or (800) 405-2236. Thank you. You may now disconnect.