Surmodics Inc (SRDX) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the SurModics First Quarter of 2003 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 0. As a reminder, this conference is being recorded today, Thursday, January 16, 2003. I would now like to turn the conference over to Ms. Marian Briggs. Please go ahead, ma'am.

Thank you. Good afternoon and we appreciate you joining us today. With me are Dale Olseth, Chairman and CEO of SurModics and he'll provide a short overview and highlights of the quarter, Jim Powell, President and COO, who will discuss operating highlights and technical developments and then Steve Hathaway, VP and CFO will present a detailed financial review. Following the call we will host a question and answer session.

Before we begin, I 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 2002 Annual Report to shareholders.

Now I'll turn the call over to Dale Olseth.

And thank you, Marian. Good afternoon and thanks to all of you for participating today in our conference call. As you well know from the earnings release, we had a strong start to our fiscal year, exceeding our expectations.

First quarter revenue was plus 33% over the prior year period, operating income increased 57% and the Company's net income rose 54%. Once again the coatings portion of our business was the primary catalyst for the strong results. We achieved a 12% increase in royalty revenue from the sale of coated products. Plus, reagent sales, which provide an indication of future royalty trends, were $2.5m, an all-time quarterly record. Commercial development revenue declined for the quarter, but we continue experience significant commercial development activity from a number of important clients.

The December quarter marked the second round of royalty payments received from the sale of Cordis' drug coated stents, now available in over 40 countries worldwide. We are awaiting approval from the FDA for Cordis to market the stent in the US as well. Drug-coated stents are expected to revolutionize cardiac treatments in coming years by significantly reducing the rate of restenosis or the re-closure of an artery after an angioplasty procedure due to vessel damage. As approval for the Unites States launch draws closer, we are reminded of how exciting this can be for angioplasty patients.

Cordis has seen rapid adoption rates in countries where the stent is both available and, importantly, reimbursed. We expect similar results in the United States. Medicare reimbursement codes have been established as of April 1st, which means it will be easier for doctors and hospitals to purchase the stents for their patients, once it receives FDA approval. SurModics is pleased to play an important role in the evolving development of these drug-coated stents.

Now, I'd like to turn our call over to Jim Powell, our President and COO. Jim?

Thanks Dale. Total coatings revenue reached $6.6m this quarter, a 34% gain over the prior year period. As Dale mentioned, we saw a decline in commercial development activity, primarily because Cordis is now focusing on the launch of its drug-coated stents in the US and therefore, we are performing less coating work to support their clinical trials. I want to emphasize, though, that more than half our commercial development activity last quarter came from projects for Cordis, so the level of effort is still very significant.

As we await US approval of the Cordis stent, we continue working with other stent manufacturers. Much of this activity is in the pre-licensing phase, as we test our polymer matrix with different drugs and different stent designs. As we previously discussed, we have two stent agreements already in play. This past quarter, we performed pay development projects with four additional stent manufacturers. Most of this is early work, but we believe it is leading to sustained and growing interest in our drug-coating matrix. Furthermore, we have begun work on development projects for non-stent applications with other customers. As we've said before, drug delivery is an emerging area that holds strong potential for SurModics' growth in the future.

We are excited about the number and quality of projects we have in commercial development. Our quarter started with a record 25 non-licensed projects in paid development. We ended the quarter with 27 projects in paid development, even after converting 3 projects into signed licenses. While all these projects will not ultimately result in a signed license, many will. This activity is a good indicator of the future growth that could result from projects in our pipeline. We signed 3 new license agreements in the first quarter, one of which has the potential to be a sizable revenue generator in the future. Two of the new licenses are for lubricious applications and one is an antimicrobial application.

Our partnership with Amersham plc on genomics applications appears to be moving forward. Slide sales for the quarter were down sequentially, due to transitions from Motorola, but we expect sales to pick up considerably in the second quarter of 2003 and beyond, as the coated slide is introduced to the Amersham sales force. We have had a number of favorable discussions with Amersham about future products and growth plans and we remain encouraged about our collaboration with them.

Our work with Novocell on a tissue engineering opportunity for treating diabetes is also progressing. Novocell is currently conducting primate studies and they hope to be in human clinical trials later in 2003. This remains a long-term opportunity for SurModics.

In summary, we are working on many projects to help drive future growth. Expect to hear more details as fiscal 2003 progresses. Now, here's Steve with the financials.

Thanks, Jim. Fiscal 2003 is off to an excellent start. Revenue increased 33% to $8m from $6.1m in fiscal 2002. Income from operations rose 57% to $2.9m and net income increased 54% to $2.2m or 12 cents per diluted share, from $1.4m or 8 cents per diluted share reported one year ago. While those numbers were not records, this marked the strongest first quarter in the Company's history. The majority of our revenue growth came from three areas, reagent sales, license fees, and diagnostic royalties.

Reagent sales rose 115% to $2.5m, a quarterly record. Once again, much of the reason for this gain was increased polymer purchases by Cordis as they prepared to launch their drug-eluting stents in the US. The higher quantities more than compensated for the discounted pricing that we provided them.

Commercial development revenue declined 29% to $1m. We anticipated this. The drop primarily stemmed from a reduction in stent coating work for Cordis' clinical trials. Even so, Cordis still represented 65% of our development revenue during the quarter. Optimization work for all other new applications for customers continues at significant levels.

License fees increased significantly to $531,000. While part of that growth was due to payments received based on achieving technical milestones, a larger portion was related to the cancellation of a license agreement. SurModics cancelled a client's exclusive license, because they were not making progress in getting the product to market. The field is now available for licensing to other device manufacturers. Under the terms of FAB 101, the remaining unamortized deferred revenue balance associated with the $500,000 up front license fee is recognized in the income. This is a one-time revenue transaction.

Diagnostic royalties increased 68% from fiscal 2002 to $863,000. These are the royalties we collect from Abbott Laboratories for certain diagnostic patents. During the quarter, we received an unexpected $265,000 pass-through payment from Abbott for several years of royalties from a third party infringing SurModics patents. We anticipate that diagnostic royalties will drop to a more normal level next quarter.

The high margin coatings royalties rose 12% between years to $2.5m. The first quarter is historically SurModics' weakest quarter for royalties, because those revenues are associated with our client sales of medical devices for the period July through September. Most device manufacturers experience a dip in sales during those summer months. The first quarter included the first full quarter of royalties from Cordis' sales of drug-coated stents, which were greater than the previous quarter.

Total operating expenses rose 22% between years to $5.2m. Much of this increase occurred in the general administrative expense category. The primary reason for the increase was costs associated with certain contract advisory services that were substantially completed during the quarter. Management expects G&A expense to revert back to a more normal level next quarter.

You will also note a $200,000 rise in investment income during the first quarter. The Company's external investment advisor generated approximately $240,000 of investment gains, as they chose to slightly reposition our bond portfolio. We still have almost $790,000 of unrealized gains in this portfolio. You should not expect such gains to be repeated next quarter.

Our balance sheet remains strong, with $45.3m in cash and investments and no debt as of December 31st. We generated $4.2m of cash from operating activities in the first quarter, more than double the level of last year. As discussed last quarter, we are using some of this cash on a $12m addition to our Bloomington facility, on which construction began in November. This addition will provide increased capacity in redundant manufacturing capabilities for our all-important reagent chemical production.

Turning to the rest of fiscal 2003, let me comment on our financial outlook. We currently expect revenue growth in excess of 25% for the year, with higher net income growth. Several factors could have an impact on fiscal 2003. First, the most significant event is the timing of the US introduction of Cordis' drug-eluting stents. Cordis management has said that the FDA approval is anticipated sometime late this quarter or early next quarter. However, I want to remind everyone that SurModics receives royalties on a one-quarter lag basis. For instance, if Cordis begins selling coated stents in the US on April 1st of 2003, we would begin to receive royalties in our fiscal fourth quarter. As a result of these royalties, we anticipate stronger financial performance in the second half of the year than the first half.

Second, as mentioned earlier, we are performing less coating work to support Cordis' clinical trials than we did in fiscal 2002. We expect our development revenue to be slightly higher in the second quarter than the first, but still well below last year.

Third, we expect the quantities of reagent chemicals purchased by Cordis to continue to grow, but we have committed to a price discount schedule. The new pricing provides increasing discounts, based on the quantities purchased each year. As a result, we anticipate lower reagent revenue each quarter as they move through the discount levels. In the first quarter, the increased quantities were sufficient to offset the lowered price. We cannot plan on that every quarter.

Fourth, royalty revenue should benefit from the success of new products launched by our clients in the last year and the 9 or 10 new products expected to reach the market in 2003. Some of these products have the potential to be large royalty generators. Due to the timing of these introductions, we expect the revenue impact to be greater in the second half of the year.

Finally, as previously stated, we are adding technical resources to be better prepared for future growth opportunities, especially related to drug delivery. Specifically related to the second quarter of fiscal 2003, management anticipates year over year revenue growth in the 20-25% range, with net income growth in the 25-30% range. The actual results may differ from these expectations because of the factors above, as well as growth of royalty revenue in the core business, timing of new products reaching the market, and demand for additional development projects.

That concludes our prepared comments. Now, we would like to open up the call to questions, operator.

Thank you, sir. Ladies and gentlemen, at this time we will begin the Q&A session. If you have a question, please press the star followed by the 1 on your pushbutton phone. If you would like to decline from the polling process, press the star followed by the 2. 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 Steve Hamill, with RBC Capital Markets. Please go ahead.

Good afternoon, gentlemen.

Steve, hi.

Hi. In terms of the reagent revenues, they were quite a bit higher than we had expected and I suspect they're even higher than you had. Have you seen J&J at all revise the purchase schedule that they provide to you, such that you think that they could continue to buy higher quantities than perhaps was expected?

Well - this is Steve - I would say that yes, we're in agreement that their purchases were higher than we originally expected this quarter, much higher and we have seen quantity forecasts from them for the remaining part of the fiscal year. There is some growth in there, but as far as going into a lot of details, we probably shouldn't cover that in this call.

Did they give you any indication as to why they would have purchased so much more now, why they appear to be expecting to purchase more in the future? Is there anything that we should be alarmed about, in terms of higher scrap rate or anything like that?

Nothing that we have knowledge of to date. We're pleased and we're actually surprised at the first quarter results from J&J. It may indicate that the [enteral] is moving up on them, but we don't know that.

Okay. And in terms of the related expenses on the product expense, conversely I was quite surprised by how low that was, particularly given the fact that we would've expected, perhaps, your overall cost of sales as a percent of revenue to go up, given the discount. Instead, it went down dramatically. Was there anything unusual here this quarter or one-time in nature?

No, nothing unusual, Steve. It was more of a mix issue, that we had significantly higher reagent sales than we did with some of our other products, between - especially in the slide sales, weren't as strong as they've been in the past. So, slide sales carry a higher cost and the mix just allowed those margins to go up much higher.

Okay. In terms of the language that you've used here and obviously you've picked your words carefully on the press releases, you said that J&J accounted for a good portion of your growth in coating royalties. Can you give us any direction as to what good means? Could we be talking about something, say perhaps more than half, less than half of your growth in coating royalties this quarter?

We are not going into any specifics there. All we can say about the royalties is that they were up from last quarter.

Okay. I suspected that would be your answer.

Uh-huh.

And in terms of the stabilization in slide revenues, you mentioned that the slides were off due to the transition. Is it safe to assume, then, that most of the change that we see quarter to quarter was associated with the slide sales, that there was no fundamental change on the stabilization reagent side of the business?

Yeah. That is correct that slides were down a little bit and stabilization continues to be pretty strong. We continue to be pleasantly surprised by this stabilization business.

Okay great. Well, I will jump back in the queue.

Thanks, Steve.

Our next question comes from Douglas Eayrs with Dougherty & Co. Please go ahead.

Great quarter again.

Thanks Douglas.

Thanks Doug.

Congratulations, a couple things. You know, with a couple of these stent manufactures having recent news releases, they talked about how important the polymer coating is to the overall clinical outcome. And in the chief study, the cook didn't use a polymer and then their data wasn't what [Gyden] wanted. So, along that regard, do you have any timeframe on how you'll disclose to the public your future - your additional stent relationships? You have one additional license agreement now, with an undisclosed partner, and then you're working with a couple other ones. What's kind of your process or when would you make that information available to --

Jim?

Okay.

Well, Douglas, we are in fact trying to get approval to release the name of the second stent partner. We don't have it yet, but it's at least in our plan to do that. And as we sign more, I'm not sure, it's going to be a matter of what the third and fourth stent partners' preferences are, in terms of releasing who they are. So, we're in the position now of, trying to at least disclose who they are to give you guys a better idea of what's going on here, but we just can't yet.

Okay. Then along another line, the -- I know when you signed last summer, Dale had mentioned that you had signed a new contract or an agreement with Lake Regions Manufacturing, which is a contract manufacturer of guide wires. And you'd indicated that that could develop into a pretty nice relationship, too. Do you have any update on that or kind of what your thought is with that relationship?

Its relationship is great. We're - things are progressing. They -- I believe we think there might be a product on the market this mid-year, mid-2003.

Doug, I'll echo what I said a year ago or whenever you've quoted me from. This is a very, very fine company and we think this could -- this has the potential to be a meaningful relationship for us. And so we are pleased with what we're seeing there and they have a wonderful reputation, so we'll keep you posted on this one.

Okay.

Thanks, Doug.

Good and then jumping to Amersham quick, there were two things I just wanted to touch base with on that. I know that there was a milestone, potential milestone payment there, on some part of it with the relation to Motorola and I just wondered if you had a comment on the status of when that might occur. And then secondly, just can you talk a little bit about their effort? They seem to be -- I know when they had an analyst meeting in November in London, this was one of the areas that they talked and spent some time on to the analysts that were in attendance was the CodeLink micro array chips. And if you could just talk a little bit about their progress or what you've seen? I know Jim touched on it a little bit earlier, but --

Well, let me take the first part of that and then I'll turn it over to Jim. As far as the milestone, we are currently in discussions with them about the milestone. The original milestone was set up under the Motorola ownership of this contract and we're talking to Amersham about how do we convert the milestone to something that really interests them. So, that is something that is, right now, up in the air as to what it is and we'll let you know as soon as we know more about the status of that milestone.

Okay.

Jim?

And then on the -- your question was on their plan?

It's kind of how aggressive do you think they are and how much of, I mean -- do you see a change in the way they're approaching this effort with the CodeLink, versus the way Motorola was approaching it?

Yes. Well first of all, they have 1200 sales people, so that is always going to be a positive factor. Two, they've made the decision to, contrary to the way Motorola was approaching the business, they're going to sell blank slides. Motorola had no plans to sell blank slides and then, so they've already announced that they're going to do that. We're in almost constant contact with them now and we're getting to know each other and like each other and so, I -- were you at that conference?

I was not.

Okay.

Unfortunately.

Okay.

Our budget was a little tight this fall, but --

All right. Okay, well I --

Jumping back to the blank slides, that basically opens up another segment of the market, right, for the researchers that'll be using this.

Correct.

That's another side of the market versus kind of the pre-design slides that the researchers would purchase, is that correct?

That's correct.

Okay. And do you know what the break is at about 50/50? Do you think, in the commercial end of researchers buying the blank slides versus the pre-designed slides or --?

It's -- no, there's -- I think there's more -- well, are you talking about in numbers of slides, not dollars?

Right.

There's probably a lot more blank slides purchased than --

But it's a different price point.

Oh, it's much different.

Much different.

It's different.

I mean, a blank slide is $10-15 each, you know.

Uh-huh.

Pre-rates array is several hundreds of thousands of dollars.

Okay. Okay, I'll jump back in queue, thanks.

Okay.

Thanks.

Thank you.

Our next question comes from Jason Bedford with Adams, Harkness, & Hill. Please go ahead.

Good afternoon, guys.

Hi.

Hi.

Congratulations on a nice quarter. In your guidance of 25% top line growth, what are your own internal assumptions for the timing of the approval for Cipher?

I'm not sure what the -- you know our answer on the timing of the approval for Cipher is we don't know when the FDA is going to come out. I would say in our own internal projections for this next quarter, we don't have any, other than the normal European, because the approval this quarter really would impact the third quarter and not the second quarter.

Sure.

So, in the second quarter, on that specific guidance, there is no additional revenue other than what we're getting from the worldwide sales.

Okay and then, just given the expansion in capacity in Minnesota, have you been more aggressive in going after new business and has the sales force effort been increased?

Yes. We are able to respond much better now to all the drug delivery inquiries that we've been getting and now we're able to start development projects that we couldn't do in the past because of capacity issues.

And then finally, has J&J Cordis thought about using you guys to coat the stents for commercial use and can you give us a sense of the financial impact of that type of scenario for you guys?

We can't discuss what they've thought, so we just can't really tell you anything about that. What we've said in the past is we're doing clinical coatings. That's our expertise.

Okay and then finally, just a quick question for Steve. How much was the one-time increase in the G&A expense in the quarter?

We haven't given the specific dollar, but it was pretty high percentage of the growth in G&A this quarter.

Okay. Super, thanks, guys.

Uh-huh.

Our next question comes from James Terwilliger with Morgan Keegan. Please go ahead.

Hi guys, can you hear me?

Just fine, Jim, thanks.

Yes.

Yes.

Congratulations on a nice quarter. A quick question, question number one, have you ever had any significant clinical problems with your polymer coatings in other clinical applications? And more specifically, applications where the device is inserted into the body for an extended period of time?

Are you specifically talking about the drug delivery coating?

Yes.

Actually, I think the answer's the same on it, whether it's drug delivery or our PhotoLink, but the answer is no. We've never had any problems with the coatings.

So in terms of doing clinical studies with other - not J&J - with other players, you've never really experienced any significant clinical issues with your coating technology?

Correct.

Okay. And during the clinical studies with J&J, you coated some of the stents for them, is that correct?

We coated all the stents for them during the clinical studies.

What were the main problems or issues that you faced when you were coating the coated stents for J&J, and I'm trying to get an aspect of what J&J -- and again, I know you can't tell me what J&J has experienced. But what did you experience as a significant limitation when you were doing this type of manufacturing and supporting them in their clinical trials?

Jim?

Well, James, we can't go into that, because it's specific to Cordis and we just don't talk about our projects with our customers. Just in general, we had a lot of work to do in a very short amount of time, so we were working very hard, so.

Tell me, in a general sense, any manufacturing issues you had, not specific to any particular company, but just overall in terms of coating devices, to deliver a drug, what type of manufacturing issues did you face?

I would say more of our problems were just trying to meet their timetable and their demand of turning things around very quickly, but we were able to achieve that.

Yeah and we started out with a very manual process, when they were first getting their good results and so, going from a very manual process to a somewhat automated process was quite a challenge and, essentially, over night, so --

But we were able to improve and we're much better at coating that we were when we were when we first started this process.

Yes.

So maybe, I mean, more just customer expectations in terms of time, in terms of actually coating the device, you could work, no significant issues and you could work through the majority of the issues? Is that fair?

Yes.

That's fair.

Steve, very quickly, regarding the Abbott Labs piece of the business, the $265,000?

Yes.

We should probably have this type of revenue stream going back to more historical levels, correct? I mean, you have no ability to time this type of payment or predict it either, I should say?

Yes. That is correct that it was more or less a one-time payment, but we've been getting those periodically. And even this payment that we received on a sort of surprise basis, there are some ongoing royalties each quarter as -- but they're smaller than this total payment, but there is a pickup in the royalty stream as a result of this customer. So, we saw some of these a couple years ago. We didn't see many of these adjustments last year and now we already have one this year, so they come and go. But I would plan on pretty much steady states of where it's been historically.

I mean, without this payment, you still had some nice growth in this business.

It was up a little bit over last year, correct, but it's been in that, I'd say in general, the Abbott royalties have been in the $500,000, $600,000 range, the normal royalties for the last couple of years.

Okay. And in terms of the $340,000 on the deferred revenue, that all came in the licensing fees, correct?

Correct.

And in terms of G&A going forward, sequentially this should decrease, is that fair?

Yes. That is true. This is - I would look at that G&A increase as essentially a one-time blip up and then come back down to a more normal basis.

How many products do you guys have on the market right now that you're collecting royalties from?

Well, you have two different questions in what you just asked. From the standpoint we are collecting royalties, when you look at both our earned and minimum royalties, we're collecting royalties on over 100 product applications right now. But of those, 66 are currently on the market. The rest are just paying minimum.

Okay and let's see here. Do you have a total rate now you're working with 4 different potential stent players, including Johnson & Johnson?

It was 4 unlicensed stent players.

Plus the 2 licensed.

Plus the 2 licensed stent players.

So is that --?

Six total.

Six total.

And I think that's the last question and thank you very much for your time. Steve, do you have any cash flow numbers for the quarter?

Just what I referenced on the $4.2m of operating cash. We did have about, coming off that, we had about $3m of capital expenditures and that's the only other significant item.

That's the other significant item. Most of this is going to be the R&D facilities?

Yeah, between -- yeah. The facility down in Bloomington and some capital equipment, that sort of thing, but yeah, there's about $3m of capital.

All right, guys, thanks a lot and congratulations on a good quarter. Thank you.

Thank you.

How's the baby?

She's great.

Yeah?

She's beautiful. I'll send you a picture.

Yeah.

Take care, guys. Thank you.

You bet.

Our next question comes from Blake Goodner [ph] with Bridger Capital. Please go ahead.

Hey guys, just a couple questions. First off, in the 10-K you disclosed the renegotiated J&J contract. So, I was just curious if you perhaps could provide any color, with respect to why that contract was renegotiated, if there were any changes to the royalty, the reagent pricing, specifically in that contract, or in terms of the timing of payments?

The short answer, Blake, is no. Both parties felt there was a need to make some changes in the contract and we did.

This is Dale. This agreement was originally signed in '96, I believe, so there was some stuff that we wanted to update and bring it up to the present time. But there was nothing of consequence, in terms of any changes in what I call the core agreement and that is it's really to prepare us for a lot bigger program than when we signed that in '96, so that's the primary reason.

Okay, so there were no changes to the royalty arrangement?

No. No.

Okay great and my second question, I think I missed this, someone else may have asked, but originally there was the thought, through the Motorola arrangement, that you'd be receiving a $1m milestone sometime in fiscal '03. Is that $1m milestone included in the greater than 25% revenue guidance or is that sort of on hold, given that you're in discussion with Amersham?

I would say that number one, it's on hold. We're not -- well, on hold isn't the right word. We are in discussions with Amersham about what that's going to be and then we'll decide when that's going to be. I would say that, given what we know today about expectations, I would say that we can do the 25% without that $1m in there.

Okay great and my last question is just, simply, with respect to the J&J/Cipher launch. I mean, last conference call you helped us sort of understand the nature of the deficiency letter, at least as well as you guys understood it. I guess I'm wondering, with respect to the deficiency letter, is J&J doing any more work on the stent in order to sort of allow the FDA to gain greater comfort? I guess I'm just -- the reagent growth that you showed in the quarter was so strong. I'm just wondering whether or not J&J is actually doing some more work to expedite the approval process or if all the work that they're doing through the purchase of reagents is really just to scale up for the launch?

We can only guess and that's mainly a question for Cordis, not us. But I don't think I -- I don't see any logic of increased reagent consumption with addressing the issues the FDA had. I can't see how you would link those.

Okay great, well thanks so much.

Sure.

You bet. Thank you.

Our next question comes from Steve Lisi [ph] with Millennium. Please go ahead.

Yeah, hi, all my questions have been answered. I just want to clarify one thing, the renegotiation with J&J on the contract. So, that's monetarily neutral to both sides, I guess, to you, so that you're not making any more money or any less money than what you had signed in 1996?

The financial terms were essentially the same.

Okay. So, I'm not really sure, I don't understand what would've been changed in the contract. They're saying like you're going to give us -- you're not going to be scaling up for us, we're going to do it ourselves? I mean, was that part of the original agreement? Did they need to change it because J&J is going to do all the manufacturing themselves now? I mean what -- if no money is changing hands, why would you renegotiate?

As we said earlier, the original agreement was struck in 1996, long before the market place really knew how successful this was going to be and the breadth of it and things like that. So, it also covered our PhotoLink technology, which they're not using, so --

And if you look at any one of our standard agreements, you know our standard master license agreements are 35 pages long and most of it is non-financial related and there are a lot of things in the contract beyond the financial numbers. So, there were a lot of things that could have, that did change through this process.

Okay. Thank you.

Sure.

Our next question comes from Chris Sasuni [ph] with Healthcare Investment Advisors. Please go ahead.

Yes, great quarter. I have two questions for you. If you look at your coating technology for drug-eluting stents, can you comment how your coating polymer differs from that that might be used by other manufacturers? For example, Medtronic is working with Abbott right now. I presume that they have their own proprietary technology or is that yours?

We haven't disclosed who our other customers are. So, I can't really answer that question.

Okay. So, if you just look at your competitors on coatings, just what's already publicly know, can you describe, qualitatively, how your polymer differs from competitors' polymers, for coating purposes.

First of all, there isn't a lot known about what the polymer systems specifically are for the other stent companies, but we do know our own polymer system very well. What I can tell you about our system is that it is a system that allows us to change the release rate to a certain degree and dial it in, so to speak, for different drugs. It's not compatible with every drug, but it's compatible with a lot more drugs than we thought it was going to be compatible with. So, we're very pleased with its performance and it survives the tough environment of application of the actual coating, the crimping of the stent onto the catheter, the sterilization and packaging, and then the deployment. Those are some tough assignments for a polymer system and ours survive that very well and performs and gives the customer the ability to tweak the release rate or us to do the release rate tweaking during development.

Is that based on pore size, or is it based on -- or does this degrade?

No. It's based on -- our polymer system is a blend of polymers.

Okay.

And we can change the ratio of polymers to effect different drug delivery rates.

Okay.

And Chris, I heard you say degrade. The polymer itself does not degrade in the body. It stays there.

Okay. The second question I had is what is the status of your goal of finishing at least 6 new suites to expand the production capacity of drug-eluting stents?

Those are being qualified as we speak by our facilities people. So, the construction is finished, we're making sure they're clean and that they stay clean and that's our stuff, and then we will slowly start moving work into them.

Okay. If you look at all of the other applications that you're currently pursuing with new customers or perhaps some even with existing customers, where there's just a certain adoption rate, are there any applications that you are currently working with or on? That you believe could exceed the potential of what exists with drug-eluting stents?

Well, it depends on over what timeframe?

Let's say over the next 3 years.

Drug-eluting stents are going to be a tough act to follow for the next 3 years.

So, I would say, if you look at the things that we're working on right now, you know obviously we're very excited about the Novocell project and if that works, that is huge potential.

Uh-huh.

We also have one of the non-stent drug delivery applications in-house that also looks like it has a very large market potential. Again, if they work, but both of those are very big, but nothing, as Jim said, it's nothing as immediate as what the drug-eluting stent with J&J is going to be. Both of those things will be added on in future years, so we're pretty excited about a couple applications for the future.

Okay. Thank you very much.

Sure.

Thank you, Chris.

There are no further questions at this time. Mr. Olseth, please continue.

Thanks to all of you for participating in our afternoon conference call. We're pleased to report another strong financial quarter. We are looking forward now to the US launch of the Cordis stent. In addition, we are preparing for our annual shareholder's meeting, which will be held here at Minneapolis later this month, on Monday, January 27th. Any of those who can join us, join us for that and again, we thank you for participating in this conference today. This was a very large turnout. I think a record for us. So, we hope to bring you another quarter here 3 months from now. Thank you.

Ladies and gentlemen, this concludes the SurModics First Quarter of 2003 conference call. If you would like to listen to a replay of today's conference call, you may dial 1-800-405-2236 and enter the access number of 518963. Once again, if you would like to listen to a replay of today's conference, you may dial 1-800-405-2236 and enter the access number of 518963. Thank you for participating. You may now disconnect.