Surmodics Inc (SRDX) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the, SurModics, Inc. Fourth Quarter and Year End 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 zero. As a reminder, this conference is being recorded today, Wednesday, October 29, 2003. I would now like to turn the conference over to Marian Briggs. Please go ahead.

Good afternoon and welcome to SurModics’ conference call. Thank you for joining us today. With me are Dale Olseth, Chairman and Chief Executive Officer of SurModics, who will provide an operations update; Phil Ankeny, SurModics’ Vice President and Chief Financial Officer, who will give an overview of the quarterly and full year financial results; and Loren Miller, Vice President and Controller, who is available for the Q&A session.

Before we begin, I must preface all comments with the 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 in our press release for the fourth quarter in 2003 fiscal year and on page 17 of the company’s Fiscal 2002 Annual Report to Shareholders.

Now I will turn the call over to Dale Olseth.

Thank you, Marian. And good afternoon and thanks to all of you for participating today. This has been a very exciting year for SurModics, and incidentally, also a turbulent day in our market – our specific market. After many years of development work with Cordis Corporation, their drug-eluting stent utilizing SurModics’ polymer matrix was finally available to cardiologists in the United States beginning last April. This was good news for our company, but even more significant, this was a tremendous medical innovation that has truly changed the standard of care for cardiac patients. Cordis recently reported that already over 200,000 patients worldwide have received the Cypher drug-eluting stent. It has been gratifying for all of us at SurModics to witness the rapid acceptance of drug-eluting stents in the medical community. We are proud to be part of such an important scientific breakthrough. I want to reiterate to all of you that SurModics continues ongoing development work with Cordis and intends to participate in their next generations of drug-eluting stents as well.

We also had a busy year on the licensing front and signed a total of 14 new licenses in fiscal ought [phonetic] 3, including five in the fourth quarter. We are delighted to have exceeded our annual goal of 10 new licenses. Moreover, I’d like to remind you that as we announced in last quarter’s earnings call, one of the new license in ought 3 is for the site-specific release of drug from the surface of a device. The application, now in the early stages of development, is not a stent and it falls completely outside of the cardiovascular market. Our drug delivery matrix is applicable across many medical specialties and we are seeing now heightened activity in [technical difficulty] such areas.

Now I’d like to say a few words about our search for a new president and chief operating officer. We do not have an announcement to make today; however, we have identified the candidate and are very close to filling this pivotal position with a skilled professional who has an ideal background. That is all we can say at this moment except to add that you will hear from us in the near future on this important subject.

From a financial performance standpoint, fiscal ought 3 was outstanding. SurModics posted sizeable gains in both revenue and earnings. We are also pleased that the hard work of our employees landed SurModics number 42 spot on the Forbes list of best small companies in America. In addition, just last week, SurModics received excellent visibility in our home state of Minnesota. We received the Tekne Award for medical tech in emerging companies. This award is given by the Minnesota High Tech Association and recognizes the contributions our employee base has made to medical science.

With that prelude, I’d like now to turn the call over to Phil Ankeny, our chief financial officer, to discuss the financial results in depth for the quarter and the full year. Phil.

Thank you, Dale. As you will note from the earnings release and Dale’s comments, we had a very strong fiscal 2003. I’ll provide details on the fourth quarter results in just a moment and then turn to the full year.

But first, I’d like to discuss a slight change in how we report the revenue lines of our income statement. Previously, we segregated our revenue into seven categories: royalties, license fees, reagents, and commercial development – these four we called codings revenue. And then three non-coding line items below that: diagnostic royalties, stabilization and slide sales and government research. Over time, our business mix has evolved significantly to the point that many of these revenue categories have become extremely small, some only a percent or two of total revenues. So at this time, we feel it no longer makes sense to call them out individually. Accordingly, we have consolidated these seven categories into three revenue lines. First, royalties and license fees includes the royalties from both the codings and diagnostic portions of our business, along with all license fee payment. Second, product sales consist of reagents sales, as well as stabilization and slide sales. And finally, development revenue combines both commercial development and optimization revenue and revenue from government research grants. We believe this approach provides a clearer picture of our revenues and consolidates individual line items that over time have basically become noise [phonetic].

Now on to the specifics for the quarter. Revenue in the fourth quarter of fiscal 2003 rose 45 percent to $12.6 million. Income from operations was $6.8 million, a 90 percent gain from the year earlier period. And net income for the quarter was $4.4 million, or $0.25 per diluted share, compared to $2.6 million, or $0.15 per diluted share a year ago.

Now I’ll take you through the revenue components for the quarter. As announced last quarter, we are now reporting royalties of Cypher stent sales in the quarter when they occur. Royalties and license fees totaled $8.5 million, up 157 percent from the year ago quarter, the majority of it [technical difficulty] Cypher stent sales. Product sales rose 6 percent to $3 million, mostly attributable to modest growth in polymer sales to Cordis. Development revenue was $1.1 million, a 58 percent decline from the fourth quarter of fiscal 2002. We anticipated this drop. I’d like to remind you that the prior year quarter was the peak quarter for development revenue as the company was performing a large amount of coding work for Cordis in preparation for the Cypher launch.

Turning now to the full fiscal year, total revenue for fiscal 2003 was $43.2 million, a 47 percent increase over the prior year. Operating income rose to $20.6 million, up 93 percent from last year. And net income boomed [phonetic] 79 percent to $13.9 million, or $0.78 per diluted share. Royalties and license fees were the primary drivers of our strong growth for the year, more than doubling in the year to $25.8 million. Cypher stent sales contributed significantly to this increase.

As Dale mentioned earlier, we signed five new licenses in the fourth quarter for a total of 14 for the full fiscal year, tying the all time record for SurModics. We now have a total of 58 licensed customers covering 130 applications. Of these, 69 products are already on the market generating royalties to SurModics.

During fiscal year 2003, our customers launched eight products in new geographies having gained regulatory approval either for sales outside the U.S. or from the FDA for U.S. sales. We expect our customers to have approximately 10 to 12 new product for geography launches in fiscal year 2004.

Product sales totaled $11.8 million for the year, a 31 percent jump over fiscal 2002, driven by higher polymer sales to Cordis. Development revenue in fiscal 2003 decreased 30 percent from last year chiefly because, as I just described, we were performing such a large of coding work for Cordis in preparation for the Cypher stent launch last year. Although Cordis now is engaged in fewer clinical trials and we are performing less coding work on a relative basis, SurModics is still doing meaningful development related to future generations of Cordis stents. Furthermore, we are pleased with the quality and quantity of projects in the development pipeline. We currently have 30 non-licensed products in paid commercial development, up sequentially from 28 last quarter.

Our total operating expenses for fiscal 2003 rose 20 percent to $22.6 million as the company continues to invest for future growth. We made significant progress on our new manufacturing facility in fiscal 2003 and have now completed the construction phase on time and under budget. We are currently planning the migration process and anticipate that will happen over the next 12 to 24 months as customer timetables allow. Already, there are approximately 20 people working at the new site supporting our coding activity.

SurModics’ balance sheet remains strong with $97.8 million of total assets, $86.1 million in shareholders’ equity, and no debt. As of September 30th, the company had a cash and investment balance of $45.8 million. This is slightly lower than at June 30th as we have continued to invest for future growth, including the construction of our new manufacturing facility. In addition, we continue to examine our options for deploying the cash from our healthy balance sheet.

All in all, this was a very strong quarter and an excellent year for SurModics. Looking ahead to fiscal year 2004, we expect a strong first half with substantial growth in revenue and earnings on a year over year basis in the first and second quarters. Our second half results will be compared against the higher level that we achieved in the second half of this year. So, year over year comparison must be viewed in that light. Furthermore, the uncertainty surrounding when the FDA might grant approval for a competing drug-eluting stent and the subsequent competitive dynamics constrain our ability to project with any degree of certainty our results in the second half of fiscal 2004. Rest assured that we are focused on transferring the success we achieved with Cypher to other devices and applications.

That concludes our prepared comments. And now we would like to open up the call to questions. Operator.

(CALLER INSTRUCTIONS)

Our first question comes from Sam Chang with RBC Capital Market. Please go ahead.

Good afternoon. I was wondering if you might be able to comment on the news today regarding the Cypher, particularly on the issue with hypersensitivity, if you could just give me some more detail there.

Could you speak up, we can barely hear you.

Sorry about that. Can you hear me better now?

Yeah, that’s better. Thanks.

I was just wondering if you might be able to comment on the news today regarding the Cypher, particularly on the issue of hypersensitivity?

Yes, I’m going to have Loren Miller, our controller, answer that one, who has been in direct conversation with J&J here during the day. Go ahead.

Hi, Sam, this is Loren. You’re reading the same information we are. We’ve been getting stuff on it throughout the day. When it first came out this morning, obviously we were as concerned as you are. We did have some contact with J&J and they characterized the information that came through on that FDA [indiscernible] as being old news, nothing new. They also said that the 2000 patient study that’s referred to in that particular document is not new, it’s the same study that the FDA required at the time of Cypher’s approval. And finally they said that thrombosis [indiscernible] associated with Cypher are consistent with those that were reported with the bare metal stents. So, according to [technical difficulty] Cypher – excuse me, according to Cordis, there’s no real difference between what you’re seeing with Cypher and what’s seen with the bare metal stents. In terms of the hypersensitivity, they’ve said that that is – people work through that on their own. I believe you’ve probably seen the press releases and the stuff that’s come out today and apparently, that’s much ado about nothing.

Okay. So, in terms of hypersensitivity issue, have you guys – you guys actually have data on what the percentages are as compared to maybe like metal stents or –

Well, once again, Sam, that data is really J&J’s. It’s not our data and from all the information we have says that it was much ado about nothing.

Okay. All right. Thanks, I’ll get back in a few.

Okay.

Our next question comes from Andre Gardner with Kelso Management. Please go ahead.

Hi, Andre.

Actually, this is Dorsey Gardner.

Ah, Dorsey! Hi.

The question I have Dale – very good quarter – is that are there any other products where you’ve been working with people, where you’ve licensed your technology that might have a comparable sort of market impact as the coded stent – as the Cypher. I mean, it doesn’t have to be more or, you know, exactly the same, but are there other big blockbuster products that you might have? Thanks.

Good question. We are working actively in that area and I would say of what we have done to date, there is probably only one of significant consequence that we are not permitted to disclose yet, other than it is in the field of ophthalmic, and you happen to know that business reasonably well, and we have other things under examination and study, but the – this is going to take us some time, but the ophthalmic one is signed and that will, I think, be a large, large program, but it’s going to take some time. It’s in the early stages now of development, but what – and it’s with a smaller company, but who is moving along well. And that one, if it proceeds as we see it now, that one should be a very large application.

Okay, thank you very much.

(CALLER INSTRUCTIONS)

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

Hey, Dale, how are you doing?

Hi. Yeah, we’re plugging along here today. This is a big day for us. But, boy, I’ll tell you, the market also has made this a turbulent day for us and so, we have been – we’ve got a flood of calls and we understand that, but we knew – we had no insight into this prior to this morning and – but we have been in frequent conversation with aspects of both J&J at the corporate level and at the operating level.

Well, in terms of the quarter, I thought it was a nice quarter. Is there – and we got beat up a little bit today – is there a price where you would think about potentially doing a stock buyback with the – looking at the strength of your balance sheet?

Yeah, well, we have, of course, a strong balance sheet, but that would, of course, take a long board and an active board discussion. We have not put that up on the table, but we haven’t seen our valuation come down to where it is now. But, we really have been emphasizing getting our cash [technical difficulty] in terms of strategic initiatives and we’re just now finishing a really detailed and comprehensive strategic game plan for the next five years, and that will have heavy influence of drug delivery. But if – we’re following market dynamics also, and – but our company is really doing well and we want to continue to pour the coals to – on the offense versus defense. Good question.

In terms of the stent players [indiscernible] J&J, can you refresh me on the number of other customers you’re working with in terms of drug coded stents and the number of programs you have in terms of drug coded stents at this time?

Phil, you want to take that?

Yeah. On the drugs stent, we’re – as you know, we’re working with Cypher and we’ve talked about a number of companies that we have been working on an ongoing basis with. And that work does continue. We don’t feel that it is appropriate or meaningful to really get into details around exactly who they are and what they’re doing until such time that they’re ready to go forward themselves. There are, obviously, a lot of work that needs to get done in the development as well as on the regulatory side for those various products. So, the work is ongoing, but unfortunately, our customers constrain us as to when we can say something about that.

Is the embolic protection market something that would have a great opportunity for your type of technology?

Phil, you’re the most technical here.

Embolic protection is definitely an area that we have done some work around and we do believe that it is a significant market. And so there’s some strong opportunity there. But, we have not publicly stated yet, you know, exactly what the efforts are in that arena.

And is there any updates – and I’ll jump back in cue – on the diabetes applications that you’re working on with Novacil [phonetic]?

The brief update on Novacil hasn’t really changed much. They have been – they completed some animal studies – preliminary animal studies earlier this year – and they’re moving forward with definitive preclinical animal trial which is going to be in baboons and that will start this fall eminently. And then with that study, they plan to negotiate with the FDA for a human trial next year.

Okay, great. I’m going to jump back in cue. Thanks, guys.

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

Thank you. Good afternoon. I understand that you’re only giving as much guidance as you’re comfortable with, but can you help us understand your thought process as to when you might reinstate that guidance? Are you waiting for taxes launched two quarters out during the freedom to announce details on a new application or, please let us inside your head a little bit and give us an idea of how patient investors should be on hearing some guidance.

Yeah. We will – you know, we’re wrestling with guidance and I think the foundation of that has to really be where we can put credibility into that process in terms of having reliability and because of the magnitude and size of the J&J stent program for us, which, incidentally most, not all, but most of it deals with 100 percent gross margin, that any really deviation from – and it has such impact and it can be very misleading unless we get enough experience and right now they sit with essentially little competition, but as that time passes, if as the agency moves, then we’ll have more experience and we will reinstate what you’re describing as guidance as soon as we can put what we would deem to be integrity into the process in terms of communicating, you know, hopefully, meaningful knowledge to you versus terrifically broad speculation and we don’t feel comfortable being in the speculating business or stock market. And as soon as we can – we are so dependent right now on the progress or lack thereof of the Cypher stent that it dominates our numbers.

Great. I understand. Thank you.

Thank you.

Our next question comes from Chris Basutti with Eagle Asset Management. Please go ahead.

Good afternoon. I have a couple of questions. First of all, could you update us on the status of your search for a new COO, and then I had a couple of other questions that relate –

Let me take that one first. We did cover that in the script in that we have – we’re in the final process of that selection. We do have a candidate identified and we’re close to making an announcement there. We have to wait – he has to give notice and, but the person is – has been identified and we’re very close and I suspect we’ll be able to make an announcement on that very shortly.

Okay. Second question is I didn’t – I either missed or I didn’t hear you articulate at this point what the actual count is of stent manufacturers that you have officially signed up in addition to J&J to license your technology and the number of stent projects that you’re working on with other individual companies from a development point of view.

Loren?

Hi, Chris. In terms of signed up with licenses, that number has not changed.

Which is one.

Well, I believe we stated it’s J&J plus one other historically. So we’ve got two that are licensed and are working with four right now.

Okay. Last question is, as the stent – if stents start to move towards bio-absorbable stents, is your platform able to address that technology?

Phil, if you want to take that.

The whole arena of bio-absorbable polymers and their role in stents is something that is very squarely on our radar screen. So we are evaluating the technology and its role in both our product family as well as that of our customers and so, we believe that it’s definitely high on the list of items in our radar screen and so we definitely have some things that we might be saying over the next year or so.

Okay. Thank you.

Our next question comes from Ryan Rauch with SunTrust Robinson Humphrey. Please go ahead.

Hi, guys. Just a couple of quick questions and sorry I jumped on a little bit late. Can you provide us any further insight with respect to some of the future initiatives? I’m sure it’s probably been asked, but I might have missed it, as far as the drug delivery of the second drug-eluting stent and any others that are of importance that could drive revenues going forward?

Yeah, we did get that question earlier and the only thing now – and we’ve got a lot of stuff that’s under study and development now in the drug stent area, beyond stents. But the one that we have signed that is of consequence is in the area of ophthalmic, and that is a signed agreement, it’s relatively early in development, but it will – if it proceeds as we anticipate, it will be of consequence in our judgment. But we’re spending a lot of resource now and time on the identification of drug delivery opportunities over time and we’ve just now are completing a major five year strategic outlook and initiatives and drug delivery will be high up on that pole.

Okay, and sorry to ask a redundant question. Two quick things then, what was your cash flow from operations in the quarter and what should we look at for gross margins going forward?

Loren.

The cash flow in the quarter was approximately $12.9 million, I would say. For the full year, the cash from ops is $19.2 million.

And here you’re looking at product margins or overall margins? More specifically – overall, but more specifically – we’d like a little bit more detail on product margins if we could.

With product margins specifically you’re probably going to see those stabilize now where there at. And maybe even start to drift down slightly. The total mix of products is made up of stabilization, reagent sales and the DNA slides. The slides and the stabilization products don’t make up as great of a overall percentage of the sales, but as we see J&J purchase more reagent, we expect that the overall revenue from them will decrease slightly. And we expect them to be more efficient. So, I don’t think you’re going to see anymore growth in the margins on product sales. They are – I think – what are they at right now? In excess of, I think it was 70 percent, so there’s probably not much upside to that.

Okay. Thanks a lot. Have a nice afternoon.

Our next question comes from Kent Holden with Gagnost Securities. Please go ahead.

Yeah, good afternoon, gentlemen. Can you break out the revenue from J&J either for the quarter or for the full year?

No. We cannot break that out. Our program with J&J is contractual and we have to follow their lead on any and all things dealing with margins and contribution.

Aren’t you required –

We will be providing more disclosure on that when we file our K A and our annual report, but we don’t have that right now. So you will see J&J’s total revenue broken out in terms of percentage.

Okay, thank you.

Yep.

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

Hey, guys. I just had a quick question. On the royalty line, it sounds like you guys have some good momentum sign ups, new customers, but I guess, just wondering, with respect to the non-J&J royalties, did those increase sequentially in the quarter? It just looks to me like we know – we can sort of get a sense approximately of how big the J&J Cypher payments were. I just want to understand if the royalties continue to increase sequentially from your non-J&J customers.

The one thing I will say, Blake, is if you recall last quarter, we did have a million dollar – nearly a million dollar past royalty payment that was combined with approximate half a million dollar of milestone payment. Those two are kind of one-time events, so that might be what’s tripping you up there.

Okay. And then I guess a second question would be, the remaining portion of the milestone from Amersham [phonetic], did you record that in this quarter?

No. No additional milestone payments from Amersham.

So that’s about another 250 left? $250,000 or something like that?

I believe you’re going to see a half a million yet.

Okay. And then I guess, I know you’re having a tough time giving fiscal 04 guidance, but – just can you help us out directionally for the first quarter? I mean there’s not going to be any stent competition in the first quarter and I guess I’m just wondering directionally if you can help me out with the product sales and the commercial development. I mean, the last couple of quarters it looks like reagents have continued to kind of track inline and commercial development’s been down a little bit as you guys suggested. I’m just wondering if you can help me out for the first quarter there?

I would suspect that you would see that the most recent trends on product sales to be pretty much stable. I don’t suspect you’re going to see a lot of change there. And I wouldn’t expect commercial development to bounce back yet. We still expect that to be down a little bit year over year.

Okay. So that would be pretty much consequentially then?

Yeah, I think you could probably say that.

Okay, great. Okay, well thanks so much.

(CALLER INSTRUCTIONS)

Our next question comes from Sam Chang with RBC Capital Market.

Hi, just to get a better understanding of how things are going currently, can you comment a little bit on how Cypher sales are tracking the current quarter? J&J alluded to potentially some lingering supply issues.

We can barely hear you.

Sorry about that again. Is that better?

Yes.

Okay, just wondering if you might be able to comment on how Cypher is doing in the most current quarter? J&J alluded to some lingering supply issues back in the September quarter, can you just comment on how the December quarter is going so far?

We don’t know. They don’t share that information with us.

Okay, can you provide me with some anecdotal information on where you’ve been carrying [phonetic] from starting the supply issues?

To be honest, we typically hear it from you folks in between quarters. So we would rely on you for that to be honest. We track along with reagent sales and things like that, but that certainly has no real direct relationship necessarily to any supposed supplier problems that they may or may not be having. The last we heard was the same that you heard and that was that they’re back to having being able to fulfill our orders within a very short period of time and their hot [phonetic] allocation and things like that. But just like I said, that’s public information and we don’t get anything different.

Okay, great. Thanks.

Thanks, Sam.

Mr. Olseth, there is no further question, please continue.

The – we want to thank you again for participating in our conference call. We were pleased to report another excellent year and are excited about the prospects in fiscal ought 4 and beyond, especially in sight specific drug delivery. We look forward to speaking with all of you again in January with our first quarter results. Thank you.

Ladies and gentlemen, this concludes the SurModics’ Fourth Quarter and Year-End 2003 Conference Call. 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 555935. Once again, if you would like to listen to a replay of today’s conference, you may dial 1-800-405-2236, or you may dial 303-590-3000 and enter the access number of 555935. Thank you for participating. You may now disconnect. 1