Surmodics Inc (SRDX) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the SurModics' Second 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 anytime during the conference, please press the "*" followed by the "0". As a reminder, this conference is being recorded today, Wednesday, April 16, 2003. I'd now like to turn the conference over to Ms. Marian Briggs. Please go ahead.

Thank you Ilene and thanks to all of you for joining us today. With me our Dale Olseth, Chairman and Chief Executive Officer of SurModics who will provide a short overview of the quarter; Aron Anderson, Director of Drug Delivery who will discuss highlights of the company's progress and drug-eluting coating development, and Loren Miller, Vice President and Controller who will present a detail financial review. Also in attendance is Lise Duran, Vice President of Product Development who will not give formal remarks but would be available to answer technical questions during the Q&A session. Before we begin, I must press with our comments with 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 identified on page 17 of the company's fiscal 2002 annual report to shareholders. Now I'll turn the call over to Dale Olseth.

Thank you, Marian. Good afternoon and thanks to all of you for participating today. As you will know from the earnings release, we had a very strong second quarter. Revenue was up 37% over the prior year period. Operating income increased 67%, and the company's net income rose 56%. We exceeded analyst's expectations for the quarter reporting 15 cents per share versus the consensus estimate of 13 cents. The coatings portion of our business was once again the primary driver of this strong performance. Royalties on the sale of coated products doubled to 4.2m. Reagent sales were also up approximately a 100% as well to nearly 2m.

Commercial development was flat for the quarter but we continued to see significant activity in this area from a number of important clients. It was a year ago that Cordis' drug-eluting stent with our coating became available for commercial sale in Europe. We anxiously await approval from the food and drug administration for Cordis to sell the stent in the US market now as well. This approval is expected soon. We are pleased to confirm what some of you may have already heard. Not only will SurModics continue ongoing developments with Cordis on the CYPHER stent, but we will also play an important role in Cordis' next generation of drug-eluting stents. These stents are expected to revolutionize cardiac treatment over the coming years by significantly reducing the rate of restenosis with a reclosure of an artery after an angioplasty procedure do generally to vessel damage. As Cordis moves closer to the U.S. launch, we are reminded once again of how exciting this is for angioplasty patients, approximately 20-30% of whom currently may have to endure subsequent procedures to correct restenosis. This phenomenon should end shortly.

Now I would like to say a few words about our CFO and COO searches. Over the recent weeks, we have been gratified by the number of inquiries we are receiving from many capable candidates for both positions. We are currently talking to the best qualified individuals and will fill both posts as soon as the right candidates are selected. We expect the CFO selection will likely proceed a COO determination. Finally, just this week, SurModics placed number 65 on the Investor's Business Daily 100, a ranking of the 100 most innovative companies in America. We are pleased to be recognized for this important contribution of our professional employee base in the corporate culture associated with this award. Now, I'd like to turn the call over to Aron Anderson who will discuss our activities in drug-eluting coatings.

Alright, thanks, Dale. Drug-eluting coatings were our primary area of activity for SurModics during the quarter with several significant advances. This included progress with our partners, the Cordis division of Johnson & Johnson, as well as with other customer focused projects and internal research and development efforts. Besides for drug-eluting stent produced by Cordis continued to show clear benefits for patients with coronary artery disease. At the recent American College of Cardiology Annual Scientific Meeting held in early April, results form several clinical trials conducted in the United States and internationally demonstrated the outstanding performance of the CYPHER stent as compared with the bare metal stent in reducing the occurrence of restenosis with benefits to patients maintained as long as three years.

The medical community has responded very favorably to the CYPHER stent. This product has been available in Europe and many international markets for a year and cardiologists in the United States are very eager to begin using the drug-eluting stent as soon as FDA approval is granted. As Dale mentioned, we expect that to occur soon. We continue to provide ongoing coating support for current and future generation products for Cordis. We are enjoying the expanded stent-coating manufacturing space afforded to us at our new facility and have dedicated staff and equipment focused entirely on the production of coated stents. During the quarter, we worked on development and testing of drug-eluting coatings with several other stent companies. Our coating technology is versatile enough to function well with a variety of drugs and the coating process is easy to adapt to a range of stent platforms. These projects with other customers are at various stages, mostly early in the development cycle and are not expected to significantly impact revenue this fiscal year.

Outside the stent arena, we are actively working with other customers on site specific drug delivery coating applications. We see great interest in the area of drug-eluting coatings and expect increased activity in this area to drive future growth. We are also currently investing in several internal research and development projects at SurModics to further extend our capabilities in drug-eluting coating. This includes broadening our understanding of the functionality of our current coatings but also developing and commercializing novel coating platforms to expand the range of drugs which can be delivered and the variety of medical products that can be served with this technology. Now, here is Loren Miller with the financials.

Thank you, Aron. As Dale said SurModics had a very strong second quarter. Revenue increased 37% to 9.7m from 7.1m in fiscal 2002. Income from operations was up 67% to 4.0m and net income rose 56% to 2.8m or 15 cents per diluted share from 1.8m or 10 cents per diluted share in the year ago quarter. For the 6-month period revenue increased 35% to 17.8m from 13.2m in the prior year. Operating income rose 63% to 6.8m and net income was up 55% to 4.9m or 28 cents per diluted share versus 3.2m or 18 cents per diluted share in the year-ago period. The majority of our second quarter revenue growth came from significant increases in royalties and reagent sales. Quarterly royalties nearly doubled to 4.2m of quarterly record. This revenue included royalties from what is earned under a new contract, which became effective on January 1, 2003 in addition to the royalties to SurModics under the previous agreement we have with Cordis. However, even if the impact of this timing were backed out of second quarter results, SurModics would still have achieved record revenue. That said, we expect royalty growth slow in the third quarter, and we would still expect to see an increase from the third quarter of last year.

Reagent sales rose 98% over the prior year to 2.4m, as in previous quarters most of the growth was increased following repurchases by Cordis, as they prepared to launch their drug-eluting stents in U.S. The higher quantities more than compensated for the discounted pricing that we provided to them. Commercial development revenue was flat for the quarter at 1.8m, but it was still one of our best quarters on record. We expect revenue from development were to decrease in future quarters as demand from Cordis declined in anticipation of the U.S. launch. However, we are still doing meaningful coating developments on future generations of coated stents in addition to the quality work on other commercial development projects that we have in process. License fees were 125,000 in the second quarter. We signed two licenses bringing the total for this year to five and both licenses that were signed were for stent delivery devices. In total, coatings revenue rose 50%, and this revenue doesn't even include the impact of the FDA approval or the -- forthcoming FDA approval of the CYPHER stent.

In other revenue categories, diagnostic royalties decreased 9% from fiscal 2002 to 606,000. As you know, these are royalties that we collect from Abbott Laboratories for certain diagnostic pattern. Operating expenses rose 22% between years to 5.8m, as the Company continues to investment for future growth. At the end of the last quarter, we completed a portion of remodeling of our Bloomington facility, which means that we are now able to take advantage of more drug-coating opportunities. We will also completing, almost complete a new manufacturing addition sometime in this fall. Our balance sheet remained strong. We generated $3.8m in cash from operations in the second quarter. As of March 31, SurModics have $46.6m in cash and investments, 84.6m in total assets, shareholder's equity of 75.7m, and no debt. Prospects for the remainder of fiscal 2003 continued to show strong growth. However, we can not provide specific earnings guidance for the remainder of fiscal 2003, because the market impact with the CYPHER stent is such a significant factor for us and much of that is not under our control.

Here are several of the considerations. First, the size of the royalties from J&J's drug-eluting stent is subject to several variables including market acceptance, product pricing, reimbursements, and competition. This launch could have a sizeable effect on SurModics' fiscal fourth quarter results, but we expect the impact to be even greater in fiscal 2004. The second quarter development revenue, which has made a significant contribution in the Company's growth in the past few years, is expected to decline a demand for coating work on Cordis' CYPHER stent falls off. This decrease in coating work combined with the current quarter impact of the previous Cordis agreement, we do go to expect that the June 2003 quarter, our revenue and earnings will be lower than the March 2003 quarter. However, the company believes that a stronger fourth quarter could develop, especially if a drug-eluting stent royalties from U.S. sales begin.

It is important to remember that regardless of precise timing of the FDA approval for CYPHER, this product will accelerate SurModics revenues and earnings for the foreseeable future. And finally, we are continuing to add technical recourses to better prepare for future growth, especially related to drug delivery opportunities as Aron described. This concludes the prepared comments. Now we'd like to open the call to everyone for questions. Operator.

Thank you Sir. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, pleas press the "*", followed by the "1" on your push-button phone. If you would like to decline from the polling process, press the "*", followed by the "2". If you are using speaker equipment, you will need to lift the handset before pressing the number. One moment please, for the first question. Our first question comes from Steve Hamill with RBC Capital Markets. Please go ahead.

Hi guys, this is actually Bill Quirk for Steve Hamill. Couple of questions for you. First, I was wondering if you could talk a little bit more about this new agreement with Cordis. You've mentioned that it might be able to actually -- it sounds though that should CYPHER get approved here soon, it might actually impact your fourth quarter revenues. Excuse me, can we just I guess keep the topic to the new agreement for now.

Okay, so your question is on the new agreement?

Correct.

The answer of your question is, the new agreement isn't what's going to impact the fourth quarter. It's the fact that we had a previous agreement that we had some royalties due from that agreement that ended in December 31 of 2002. That's what impacted the third quarter.

Right, no, no I understand that. But if we take a look at the royalty number itself. You know, clearly this was, I think, well in excess of what ourselves as well as the rest of the street was looking for. And, it's part of this -- it would seem that part of this is a catch up. I mean, can you talk about with the royalty calculation change with this new agreement, better I can touch on that please?

It's expand, like I said, the new agreement isn't a change. It's the fact that we had royalty revenue from both the new agreement and a little bit leftover from the prior agreement that was terminated at December. The impact of that was approximately $0.5m.

Okay, and then secondly, can you talk a little bit about some additional granularity on the commercial development numbers. Sequentially, it was quite a jump, obviously year-over-year was relatively flat. Was this largely due to J&J or is the big sequential leap here is from some development dollars from some other manufacturers.

No, like we said, its essentially related to J&J. And that's why we expect as a -- as we anticipate the approval that they are going to need less and less coating work from us for clinical trials, and that's why we expect this revenue to decrease in the next quarter.

Thanks guys. I'll get back in queue.

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

Hi Jayson.

Hi guys. Congratulations, nice quarter. Just a follow-on on that royalty revenue number. Can you, will there be -- I know J&J's help. But besides J&J was there one product or a group of products that really lead to your performance on that line item in the quarter?

Well, I addition to that, there was an increase in some minimum royalties from other licensees.

Okay, and can you give us ex-J&J. Can you give us an idea to the royalty revenue growth year-over-year?

At this point, we are not leaving out the stent royalties.

Okay, then secondly, just on the stabilization line time. Has Amersham given you a feel for the demand they are seeing and what are your expectations for that line item going forward?

At this point, based on some information we've heard, I would say that recent history is a good predictor of the future. There are some individuals here who can speak to the relationship and some on recent developments, but in terms of revenue in the next -- for the balance of the fiscal year, I would say that recent results are a pretty good indication.

Lisa, do you want to add to that?

Well, we have some very good discussions with Amersham and in the process of talking about future projects. They have recently launched a new product. They've launched a 20 K chip. So, we should see some benefits of that reaching the market place as well.

Okay, superb. And then just finally, have you guys seen an increase in reagent demand in April?

April is off to a pretty good start.

Okay great.

Its -- again it's largely Cordis, and we continue to be -- we have heavy activity with Cordis in pretty much all aspects of the company. So, things have not slowed down there, but we're really ready for the launch.

Okay. And then, I just have actually one more quick question. Given your expansion in capacity, have you guys been more aggressive in going after a new business?

We're pursuing a lot of new business, and a lot of that is coming to us in the stent arena, and that activity continues to grow. And so, we're -- our pipeline is very active.

Okay great. Thanks guys.

Good bye.

Our next question comes from Tony Green with Craig-Hallum. Please go ahead.

Good afternoon. I missed what Aron said on the J&J follow-on stent programs. Did you assign a timeline as to when you would expect an impact from the new stents that they're developing with you?

Aron?

Well, I didn't state anything specifically. I don't know if, Loren, if you have any?

Right now the only thing we're going on is what they've said publicly in terms of when they would released. And we haven't attached any financial terms to those.

Okay, so probably nothing in your fiscal '04 then from those follow-on programs?

This is Dale -- if that develops, it probably is going to evolve. But what is significant to us is that they, in effect, have stated now publicly that future generations are going to be in our camp for a good period of time.

Okay.

That will evolve, but we're not going to hear much there until the CYPHER is launched and in place.

Sure. Is there -- are there any formal ties to the follow-on programs to the actual approval as far as timing? Will they wait to get going on those other projects before they -- until they see how the adoption is for CYPHER or are those wheels already in motion?

They've been in motion here for quite a while, but you know they're -- when you've got something of this consequence, they're already into the follow-on generations, and we have done work with them on this now for quite a period of time. And I think the definitions of that and the time table will evolve now once the CYPHER is launched. And we would expect that this will be of consequence once it gets moving.

Okay. And then jumping over to the cash flow statements, can you assign some dollars to the CAPEX that you have, that you spent actually last quarter in your new facility, and then do you have any forecasts for spending on your Bloomington plant?

Those forecasts have been changed from what we published in the annual report. So, we still look to spend approximately $12.4m on the manufacturing facility. And I believe we expended approximately 3.5m in the current quarter on the progress that we've made so far.

Okay great. Thank you very much, and nice job.

Thanks Tony.

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

Hello, great quarter.

How are you?

Good. Just a couple of areas I wanted to ask you about. On the financial, the research and development line jumped just a little bit, not too much, to 2.9m, and do you expect it to run around that level in the next couple of quarters? Or in the first quarter it was around 2.7, you know, it was a little bit lower. Do you expect it to be kind of flat or keep creeping may be a couple of 100,000 a quarter, each quarter over the next -- as we go through the rest of this fiscal year?

A lot of the increase you're seeing there is related to the cost of the new facility coming on.

Okay.

And I suspect that it's going to be at around this level for the balance of the year. And then obviously once we take on or move into that new facility, you'll see that increase. But right now, I would say this looks pretty solid for the rest of the year.

Okay. And then on the G&A line, I just wondered it totaled 1.5m in the quarter that ended March, was there any kind of onetime like severance type payments in that too or was that -- is that kind of just a normalized run rate that's again rising a little bit overtime as we move forward?

No, it had nothing to do with severance agreements, but there was some residual contract negotiation fees in that number, and we expect those to follow up now for the balance of the year.

Got it. And then, what else -- I was just going to ask, this is two questions for Dale here. One; Dale, last week, Johnson & Johnson had a very interesting announcement. They announced that they're going to do a head to head study against Boston Scientific's Texas stent, which is interesting for a products that's doing well for them and taking off, I mean that don't have to spend money on that. So, how do you interrupt that announcement? And do you benefit some from that clinical trial too? I think they are talking in excess of 1,000 patients for that study?

Well, to-date, we have -- I think first of all, it's an interesting strategic development. And, I think it is strategic. We would read into it this that they have very strong confidence in the clinical performance of their stent program, and they are prepared to take on, in effect, Boston Scientific belly-to-belly. And they're going to pay for this. They are going to do in Europe, it's our understanding, and 500 of those patients will be -- will receive the Boston Sci stent, and 500 the Cordis stent. And I think they are going to -- they are going at their, I think, competitor that they feel is further along than anybody else, and I think they are showing confidence that they have in their judgment, a better performing stent in clinical arena. Aron, do you want to add to that?

Yeah. I was just going to add one thing maybe to give a little more detail. They had stated publicly that they wanted to compare the influence of restenosis with stents in more difficult cases because they think that their stent will shine under those conditions and more difficult and in longer lesion and narrower vessels because they think they will be able to show superiority in those cases and that's out of -- that was a quote from them out of one of their press releases.

Okay. And then the second thing, Dale, I was just going to ask you. When you look for your new Chief Operating Officer, do you look for a person that maybe has more expertise in biomaterials and chemistry and things like this, or do you -- are you looking for someone maybe that has more business experience and worked inside of other medical device companies, or are you looking for kind of a combination person?

That's a good question. And its one that we are devoting a lot of thought and time to. Surely the finalist will have to be very strong technical. And that's a broad statement but -- because we are evolving into an increasingly broad technical company in a number of areas. And business is the game. So, I would think we're going to need a strong business person; and most important, leaders -- leadership. And we have -- this one is under a formal search process now, and we're seeing for -- we're still a pretty small company. But we're seeing some very strong prospects who have demonstrated serious interest, and some of them from bigger companies and some of them are from very big companies. So, I think we'll be bringing closure on that as quick as we can. We're seeing high quality candidates.

Great. Thank you.

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

Hi Dale, can you here me.

Yes speak up.

Okay, thank you. One, very nice quarter; two, did any of your strategic partners launched any new products this quarter in the United States? I mean besides of the J&J what we are looking for on daily basis?

Loren do you want to?

We did have some licensees that went from market but they -- I think what you are looking for is did they have any impact on the earnings this quarter. And no, nothing significant.

Did anything receive FDA approval that was launched. I'm trying to get a grasp of the core business without J&J.

I believe two items did -- two licensees did.

Okay, and besides the J&J drug coated stent, what is the product pipeline look like for the second half of fiscal 2003? What type of clinical applications are you looking for? What type of coatings, properties, and what type of markets, again I don't want -- I know you have to respect your customers, but at the same time, can you provide any color on what we could see at the second half of '03.

Lisa, do you want a take a stab at that?

Well, I think we are continuing on expanding in the markets that we currently have. We're generating a lot of interest in our hemocompatible coating that seems to be something that we have been working on for a large amount that really taking on and seeing a lot of interest and we are expanding that program in variety of areas.

Okay, I've got another question Dale for you. Do you have any concerns about J&J's manufacturing capabilities? I am under the impression they have about 45,000-50,000 stents ready to launch depending on the labeling. I even heard the number that there has been about 30,000, no way to quantify these procedures that have been delayed, waiting for the drug coated stent. I thought J&J would have a little bit more of a backlog on these stents come out of the gate. Do you have any concerns about J&J's manufacturing ability?

Well, I think J&J has always been a strong marketing company and highly decentralized and they have and were, we have been staying very close to them because ours is a different game and here we hear a lot of rumors. We don't want to speculate on that. But our -- I think that they had a very good conference call yesterday, and I think they are in a high state of readiness now. And they didn't talk about some things that -- Aron you were on that conference call.

Yeah, it sounds like you might have listened in to some of the conference call as well. But they did mentioned that on their conference call that two of the three manufacturing facilities are already approved by the FDA, and the third will be approved in a very near future according to them. And they mentioned that they should have enough units in inventory to meet demand after FDA approval. And they felt that their manufacturing facilities could support certainly full conversion to a CYPHER stent by the end of the year. So it sounded like they were in pretty good control of that. But, again, you know, that's certainly a question for them to answer as well.

Alright, one other question. How is the work in the diabetes sector coming? Is there a strategic partner where you are working with?. Focusing on diabetes, do you have any update in that area?

Lisa do you want to?

Things continue to progress. They are currently in a market right now. They continue to do their annual study. So, we see that everything is progressing according to the schedule.

And one last question. I get an -- I know lot of people I have asked this. Did the royalty rate at all changed in the new J&J contract? Another reagent pricing did, but was there any significant change to the royalty rate?

No change.

Okay, thanks a lot guys. And again congratulations on a nice quarter. Thank you.

Thanks.

Our next question comes from Blake Goodner with Berger Capital Please go ahead.

Yes, I was just trying to understand the royalty line a little bit better. You said that the catch up from the old J&J agreement benefited the quarter by about $500,000. So if I back that out, I get a royalty amount of about 3.7m and that's still up a significant amount both year-over-year and sequentially and given that that the CYPHER launches - the CYPHER hasn't launched in the U.S. yet. I am just trying to understand what caused that dramatic increase if 500,000 was the only element of the catch up?

Well, there was in addition to well the thing that you mentioned, we did have an increase in some minimum royalties - fairly significant increase in minimum royalties from some of our other licenses fees.

Okay. And then, I guess, my other question would be with respect to the third quarter I understand I guess the revenues will be down and EPS down somewhat, but historically you haven't given some sort of range year-over-year and since the U.S. CYPHER launch wouldn't impact the third quarter, I am just wondering if you could provide a little more granularity in terms of what the year-over-year revenue increase and EPS increase might look like for the third quarter?

At this point, I think we are going to stick with the guidance that we have out there with respect to Q3, with the softness where we anticipate in commercial development revenue as it is tied to Cordis, J &J. We just see that it is sequentially going to be down.

Okay. And on the reagent side, the direction of reagent sale, I guess, in the first quarter was about 2.5m, this quarter was about 2m, and you made a comment that the volume would offset the price sequence, so should we view that as -- and what should the direction of reagents be sequentially, should it be up sequentially?

Based on the forecast we are getting from J&J and Cordis, I would say that the current quarter is fairly good indicator of the next two quarters with the reagent sales.

Okay. Great, that's helpful. Last question is just, you know, in the past year, so you talked a lot about the second stent partner that obviously, for confidentiality reasons you couldn't disclose? Can you disclose that partner as now and if can't disclose then could you at least give us some sense for when that partner would start to generate meaningful revenues?

Yes. We don't have permission yet on disclosing that and as soon as we get that we will announce it but as of this state, we are not able to do that. We believe there is -- we have closed on a couple three others, it was stent arena that couldn't get signed here in near term.

Okay, thanks.

Okay.

Thanks Blake.

Ladies and gentlemen if there are any additional questions please press the "*" followed the "1" at this time. As a reminder if you are using speaker equipment, you will need to put the handset before pressing the numbers. Our next question comes from Tony Green with Craig-Hallum. Please go ahead.

Well again, just a follow-up question to Doug Eayrs' question on the executive search. Can you help us understand the thought process behind selecting the CFO ahead of the COO?

There isn't any particular strategy on that. It is just that we had seen a tremendous number of candidates in the CFO arena, and so the availability has been the issue and when we find the right person we are going to move on it and while the other is the COO is a broader search and that's going to take more time, so that's the only reason.

Okay, Dale do you care to comment on the speculation about your own retirement, you know, there is word going around is the Chief Operating Officer is somebody that it will have ...

The sources of that have never called me, they will talk to me, so I am hearing that. No, I will -- I don't have any immediate retirement plans, in fact, I would suspect that the board will want me to stay involved here a period of time, as we bring a COO in and that would -- that candidate and see surely would have and should have the potential to climb to the COO stall within a relatively short period of time, and I think that's the wishes and feelings of the board at this juncture, but I hadn't kicked out of this until I have -- if they are in my head, I haven't gotten [inaudible], but the -- and I think it's logical because here I've been a CEO now for I think this is year 33, and when we find the right person here then you will not see me to fight anybody who -- we need, we need new leadership now and that's what we're going to go after. But I will probably and that's the wishes of the Board that I will probably stay as a Chair for a period of time, but I don't commit that [inaudible].

Okay, that answers my question. Thank you.

Alright.

Our next question comes from Kris Bessony with Healthcare Investment Advisors. Please go ahead.

Congratulations on a great quarter. I was wondering if you could comment on issues that were brought up by Johnson & Johnson regarding the shelf life of the stents which you are coating, and whether in tests that you've done with your polymer whether shelf life is really an issue or not?

Well in terms of the shelf life issues it with finished coated product, I don't believe it's a shelf life issue with our polymers, and so because it's an issue or the issue surrounds the coated product, I think that's really something that needs to be brought up with Cordis, with J&J. There's not anything quantitative or specific that we can answer for you on that.

Okay. Also I wanted to better understand the total number of stent manufacturers that have been signed up. At this point, it's officially two with another three that are close. Is that correct?

Yeah, we have two signed agreements and we've got four or five others that we've working on, and how soon they sign or if they sign is conjectural from our standpoint. But there is plenty of activity in the arena.

I thought you said earlier though that there were three that are pretty close?

No, I didn't say three. I said there is a couple that I think are -- that could sign here within a period of time. It's hard for us to predict that. And we've been working [inaudible] the flow and the number of candidates that we're seeing.

Okay.

But the timing of them because agreements -- are some -- in our case not many go quick, they usually take longer than we would like. So, we have two that are firm and four or five that we've been working on now actively.

Okay. When J&J undertakes this reality trial which is the head-to-head trial with [Boston] Scientific, are you going to be doing the coatings for the stents in that trial?

We have done all the clinical stents to-date, and I don't think we've had a conversation with them on this as yet to my knowledge. But it would probably -- if history repeats itself, they'll probably come here for us to do those.

I think they're planning on starting that trial in May from what I saw in the press releases, which would suggest to me that stents may already be on the shelf, but I'm not certain about that, not a question [inaudible].

Okay. And then, you mentioned that you were doing work on new coating platforms if you will. How long will it be before there is visibility that you're ready to commercialize a new and improved polymer system for drug-eluting devices?

Well, I guess that's a little bit conjectural. As I mentioned in my portion of the remarks, we have a number of projects going on simultaneously where we're developing new coating technologies. But those are at the research and development level, and I think it's a little bit hard to predict that. We're trying to broaden our capabilities so that we can work with a wider variety of drugs and to be able to apply coatings to a broader variety of devices. So, it's hard to put an exact date on that right now.

Just one final question, Dale, you've been in this business a very long time and it seems to me that word of interesting [inflexion] point in the evolution of the medical device industry. I can't imagine that over the coming years that most medical device manufacturers whether they're developing disposable or implantable medical devices, aren't going to seriously consider either surface modification or drug elution to improve the functionality of their devices. Are you -- is that in part what's driving the level of activity that you have with various customers?

I don't want to say yes, in the -- we are really of course with the Cordis situation or opportunity -- we have had to devote considerable resource and time on that opportunity, which has been now with is for a number of years. But now as that has moved toward commercialization that we are devoting now and will devote more activity and resource into identifying other applications for site-specific drug delivery. And to date, we are seeing some interesting things come; but this is coming to us, versus we going having the initiative and going out and finding those applications. But I think it's -- if something works in the heart it's probably going to work elsewhere in the body. Aron do you want to...

Well initially the first interest we saw was all focused in the stents area and I think that was because of the success that we were having on the Cordis product. But now that's broadening and we are seeing applications that go beyond the stents and go beyond the stents and go beyond cardiovascular applications. And so we expect that to continue; we think we are still early in that expansion of the field.

Thank you.

You're welcome.

We could...

Mr. Olseth, there are no further questions at this time; please continue with your closing remarks.

Okay and again, thank you all for participating in this conference call this afternoon. And we are pleased that we could again deliver a fine quarter, and we are excited about the balance of this year. But we also know the launch must go forward, and a lot of our future now for this next couple of three years ties to a successful launch of [inaudible] and again thanks for joining us today.

Ladies and gentlemen this concludes the SurModics second quarter of 2003 conference call. If you would like to listen to a replay of today's conference, you may dial 1800-405-2236, and enter the access number of 533-085. Once again if you would like to listen to replay of today's conference, you may dial 1800-405-2236 or you may dial 303-590-3000 and enter the access number of 533-085. Thank you for participating you may now disconnect.