Surmodics Inc (SRDX) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the SurModics fourth quarter and full year 2004 earnings 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. [Caller Instructions] As a reminder, this conference is being recorded Wednesday, October 27th, 2004. I would now like to turn the conference over to Mr. Phil Ankeny, the Chief Financial Officer and Vice President of Business Development. Please go ahead, sir.

Thank you very much, operator. Good afternoon and welcome to the fiscal 2004 fourth quarter and full year conference call for SurModics. Thank you all for joining us today. With me are Dale Olseth, our Chairman and Chief Executive Officer, who will give a brief overview of the quarter and the full year. Then I will cover the quarterly and full year financial results. Bruce Barclay, our President and Chief Operating Officer, who will operational highlights. And Loren Miller, our 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 beginning on page 12 of the Company's fiscal 2003 form 10-K annual report and in the MD&A section of the Company's forms 10-Q filed after the 10-K. I would also like to remind you during the call we may return to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to the GAAP financial information is available in our press release, which is posted on our website. At this point, I will turn the call over to Dale Olseth.

Thanks, Phil, and good afternoon, everybody. We appreciate all of you joining us today. SurModics is pleased to announce a number of records for the fiscal fourth quarter and for the full year of fiscal '04. First, we delivered record revenue and earnings for the fourth quarter with revenue of 13.5 million and diluted EPS of 31 cents a share. Second, we achieved record revenue for the full year and, excluding the one-time impairment charge we recorded in the third quarter, we achieved record earnings for the full year as well. Revenue was a freckle under 50 million, 49.7, and diluted earnings per share was an even $1 per share. Third, we signed a record 7 new licenses in the fourth quarter, bringing the total for the full year to 17 contracts, also a record. These results continue our long tradition of delivering strong financial performance. In fact, SurModics has grown both revenue and, excluding the impairment charge, in net income every year since we became a public company in 1998.

Not coincidently, we were recently named to the Forbes Magazine annual ranking of, "the 200 Best Small Companies". This year was our highest ranking at No. 20 and our consistent strong performance enabled us to advance in the Forbes list for now five consecutive years. I want to personally thank each and every employee who has worked extremely hard this year, throughout the year, to deliver these impressive results. They deserve to be recognized for their achievements by such a prestigious organization .

We made significant strides in fiscal '04 to strengthen our senior management team. We added Bruce Barclay in December as our new President and Chief Operating Officer. Bruce was elected to our board in July. Steve Keough joined SurModics in January as Vice President and Chief Intellectual Property Counsel. Steve has since taken on additional responsibility leading our New Ventures business unit. And we announced earlier this week the appointment of David Wood as Vice President and General Manager of our Drug Delivery business unit. Let me just say a few words about David. He brings to SurModics a wonderful background in the medical device industry, having spanned 24 years compiling experience at Guidant and Eli Lilly in Indianapolis. His extensive management, product development and business development experience will strengthen the Company. That will fill out our reorganization at the general manager level, and is a most significant addition to the Company.

SurModics passed a significant milestone during the year, celebrating our 25th anniversary of the Company in June. SurModics is a company that has always strived to do things right. While we are still a small company, we have concentrated on developing the right values. We square the corners and innovation has always commanded a high emphasis within the Company. Our product development capabilities are broad and deep. Both developing our own technologies and working in collaboration with customers. Also importantly, we have a wonderful customer base. Not many companies can claim as clients the large number of significant medical device companies that SurModics now possesses as clients. Our strategy going forward leverages heavily these two key assets: strong technical capabilities and strong customer relationships. I feel very confident about our strategic plan and the growth potential inherent within these plans. With that, I'm going to turn the call back to Phil for a financial review. Phil?

Thank you, Dale. As you will note from the earnings release and Dale's comments, we had a very strong fiscal 2004. I'll start with the fourth quarter financial results and then turn to the full year. Revenue in the fourth quarter was 13.5 million, a 7% increase from 12.6 million a year ago. Income from operations was 8.3 million, a 21% increase from the prior year period. And net income for the quarter was 5.4 million, or 31 cents per diluted share, compared with 4.4 million, or 25 cents per diluted share, a year ago. Our business model continues to be a very profitable one, as we achieved record margins for the quarter, with an operating margin of 62% and a net margin of 40%.

Now I'll take you through the revenue components for the quarter. Royalties and license fees were a record 9.8 million, up 14% from the year ago quarter. These results highlight the value of our broad portfolio of royalty-generating products. We had strong growth within the portfolio and let me first comment on CYPHER, the Sirolimus-eluting stent from Cordis Corporation, a Johnson & Johnson company. J & J reported earlier this month that CYPHER had worldwide sales of 439 million, 269 million in the U.S. and 170 million internationally. In the U.S., the drug-eluting stent market continues its dramatic growth. J & J report that the penetration rate for drug-eluting stents is now 77%. Some companies and analysts believe it's over 80%. And that is up from 53% penetration back in December of 2003. The U.S. market is now at a run rate of $3 billion in annualized sales. Internationally, CYPHER continues to grow with particular contribution from Japan, where Cordis launched the product during the quarter and had $40 million in sales there. Also in the portfolio, we had a back royalty from one of our 69 license customers of approximately $1 million, covering several prior quarters of product sales; as well as a milestone payment from GE Healthcare, formerly Amersham Biosciences, of $250,000 for achieving a technical milestone.

Let's turn now to the other lines of revenue. Product sales declined 26% to 2.3 million, mostly attributable to reduced polymer sales to Cordis. We expect Cordis to continue to improve their manufacturing efficiency, potentially driving lower volumes of reagent from SurModics. In addition, our contract with Cordis calls for a price reduction on reagents beginning in 2005. Based on these two factors, we anticipate a significant reduction in reagent revenue in fiscal 2005. Research & development revenue was 1.4 million, a 37% increase from the fourth quarter of 2003. We are proud to report that R&D revenue grew sequentially again this quarter, its third consecutive quarter of sequential growth. In addition, this quarter is the highest R&D revenue we've posted since the third quarter of fiscal 2003 which, if you recall, was toward the tail end of the time when Cordis consumed much of the development business at SurModics. This R&D revenue growth is a very important trend for us and Bruce Barclay will provide greater detail on it in a few moments. Let's talk about another achievement for the quarter. We are pleased to report that non-Cordis revenue continues its sequential growth trend, just as with R&D revenue the trend for non-Cordis revenue now stands at three consecutive quarters of sequential growth.

Now looking at the business along segment lines, revenue in our Drug Delivery segment declined 14% to 5.8 million the fourth quarter, driven principally by lower reagent sales. Diagnostics revenue decreased 15% to 2.5 million, principally resulting from the contractual stepdown in minimum royalties from GE Healthcare. And, lastly, hydrophilic and other revenue increased 75% to 5.2 million on strong growth in both royalties and R&D revenue.

Turning now to the full fiscal year, total revenue for 2004 was 49.7 million, a 15% increase over the prior year. Recall that during the third quarter we recorded a one-time impairment charge of $16.5 million against our contract manufacturing facility in Bloomington, Minnesota. Including this impairment charge, operating income was 10.5 million compared with 20.6 million in the prior year. Net income was 7.4 million, or 42 cents per diluted share, compared with 13.9 million, or 78 cents per share, in fiscal 2003. If you exclude the one-time impairment charge, operating income would have been 27 million and net income would have been 17.8 million, or $1 per share.

Looking at the full year in segment terms, Drug Delivery revenue increased 27% to 25.7 million in the fiscal 2004 year. Strong growth in royalties offset decreases in reagent sales and R&D revenue. Diagnostics revenue decreased 20% to 8.5 million. Just as with the fourth quarter comparison, the principal cause was the contractual stepdown in minimum royalties from GE Healthcare. Finally, hydrophilic and other revenue increased 25% to 15.5 million, fueled by growth in all three revenue areas.

Let's review some quick metrics for the full fiscal year. Again, excluding the one-time charge, our operating margin works out to 54%. Our net margin was 36% and return on equity was 20%. Cash flow from operations for the year was 26.5 million; and for the fourth quarter, it was 16.4 million. On the expense front, SurModics continues to exert fiscal discipline by continually looking for ways to improve our efficiency. I'm happy to note that operating expenses for the fourth quarter were down 13% to $4.4 million. Expenses also declined 10% sequentially from the third quarter and they are down to the lowest level in two years. Despite the reduction in total operating expenses, investment in R&D continues unabated. Fourth quarter R&D expense was essentially flat at 3.1 million in both this year and the prior year. For the full year, R&D expense increased 7% to 12.6 million at 25% of revenue. We are also making incremental investments in sales and marketing. As the number of products and technologies under the SurModics umbrella increases, we need more people to distribute them. We are hiring more sales people. We've added one in Minnesota and one in California in the past few months alone. We are increasing our sales presence in Europe through our relationship with JVS that we announced in July, and we are continually evaluating new geographies.

Now, on to the balance sheet. It continues to be in excellent shape. As of September 30th, we had a cash and investment balance of $63.3 million, and no debt. The Company continues to have an active business development pipeline, as we evaluate opportunities to put our strong balance sheet to work. Fundamentally, we look at three general types of opportunities. First, intellectual property that we can license or acquire. Our arrangement with OctoPlus to gain access to biodegradable polymer technologies is a perfect example. Second, strategic investments, we have already made two strategic investments, one is Novocell and the second is InnoRX. And third, M&A. Any business development transaction we undertake must support our strategic objectives. The transactions could take many forms. Some may add purely technology. Others might open up new markets to SurModics. Some could generate revenue immediately. Others may take longer. Bruce will discuss our growth strategies in more detail shortly.

Leveraging our strong balance sheet, business development supports those strategies. Rest assured, any action we take on this front will be responsible and any transaction will be based on our high confidence that it will more than pay for itself. At this point, I'd like to turn the call over to Bruce Barclay.

Thanks, Phil, and thanks to everyone for joining us this afternoon. My comments today will cover two broad topics, a retrospective review of fiscal year 2004 and some commentary on fiscal '05. Looking at the past year, there's been a tremendous amount of change at SurModics. A year ago, the Company had just completed it's new five-year strategic plan. I was brought on in December and we've been implementing the strategic plan and making changes throughout the year. A core tenet of the strategic plan is to focus on delivering to our customers proprietary, value-added technologies, whether developed internally or accessed externally. Our reorganization and our new product announcements are examples of this tenet. Another part of the strategic plan is to deemphasize contract manufacturing. Accordingly, as we've mentioned, we have put our Bloomington, Minnesota contract manufacturing facility up for sale. We have a number of discussions already underway, but we know and understand that any real estate transaction may be a slow process.

Another change was the reorganization announced in March and our new business unit structure, which resulted from that reorganization is far exceeding our own expectations. First, it has reenergized the sense of entrepreneurialism that had made SurModics so successful during our early history. Part of the reason we have been successful for so many years is our ability to harbor a small company mentality that evokes industry-leading innovation. Second, it has allowed to us focus on key initiatives. Each business unit has passion for developing technologies that are highly valued by our customers. This structure allows them to prioritize their efforts in the areas that they see as most promising within their specific discipline. Third, it has increased accountability. Each business unit has its own distinct P&L. This provides them the freedom to make decisions but holds them accountable for delivering results. Lastly, the business unit structure has instilled a greater sense of urgency and a stronger results orientation within the organization.

During fiscal '04, we added new products and capabilities to better support our customers. Our passion for innovation has allowed us to announce the availability of four new polymer technologies for prolonged site-specific drug delivery, giving us the ability to formulate both large and small molecule drugs, whether hydrophilic or hydrophobic in nature. We have developed new stabilization products, new slide technology for our Diagnostics and Drug Discovery unit. We continue to expand the technical arsenal in Regenerative Technologies and Hydrophilic Technologies business units. And we received ISO certification in July to provide even greater service to our customers. The employees have worked very hard to improve the quantity and quality of our pipeline. We signed seven new licenses in the fourth quarter alone and that's a record. So for the full year, we signed a record 17 new licenses, well ahead of our goal of 12. Drug delivery, regenerative technologies, and hydrophilic technologies are all represented in this mix of new licenses for the year. We now have a total of 69 customers, up from 59 last year. Our customers have a total of 77 different products already on the market, generating royalties to SurModics; up from 69 products a year ago.

Another 64 license products have not yet been launched, up from 61 last year. And the number of major non-licensed opportunities under development, which we define as products that have the potential to generate $100,000 or more in annual royalty revenue, rose to 73 at year end, up substantially from 24 a year ago. Our customers continue to perform very well. Dale and Phil already discussed the overall strength of the quarter and Phil mentioned that our non-Cordis revenue has continued its sequential growth trend. Our customers launched 4 new products during the fourth quarter, bringing the total to 11 for the year, exceeding our goal of 10 new products launched in fiscal '04. Also during the quarter, one of our customers filed with the SEC for an anticipated initial public offering of their stock. Fox Hollow Technologies uses our PhotoLink lubricious coding on their atherectomy catheter system, which removes plaque buildup from inside peripheral arteries. We are very pleased to be associated with Fox Hollow.

At this point, I'd like to turn to a discussion of our revenue growth strategy going forward. There are seven components to that strategy, all designed to help us grow revenue in both the near and distant future. First, exploit the convergence of drugs and devices. This convergence is a major trend that we believe drug-eluting stents in the coronary arteries are just the first of a significant wave of combination products. And with our ever expanding portfolio of drug delivery technologies, our experience gained during the development of CYPHER, and our collaborative product development approach and technical capabilities; we believe we are uniquely positioned to exploit this convergence trend.

Second, enhancements to our business model. We love our business model, but we believe we can make it even better. We already command attractive royalty rates for the value-added technologies we bring to customers. But we think we can do better. By capturing more elements of the value chain, meaning controlling more than one element of a medical device than just the polymer itself, we could command even higher royalty rates going forward. Putting the balance sheet to work could help us accomplish this objective. We are a very good product development company. Given that, we could take on more risk, perhaps funding more of the development or even the early clinical trials of given projects. Another benefit of getting more involved in a development process would be to have better control over the development time line. However, we will not compete with our customers by creating a distribution system on our own. If we were to control several elements of the device, or even the device itself, we would likely partner with a company that has distribution capabilities at some point. By carefully selecting these opportunities, we believe that this approach could dramatically increase royalties to SurModics in the future.

Third, expand technology offerings. I already stated that one of SurModics's core strengths is its ability to develop internally, or access on the outside, new technologies and to collaborate with customers to integrate that technology on their products. Ultimately allowing them to improve the performance and differentiation of their products. The more offerings we can make available to our customers, the more valuable we are as a partner. We've already demonstrated our ability to execute on this growth strategy, announcing the four new polymers we have earlier this year. Furthermore, we continue to invest heavily internally with approximately 40 development projects across the organization that will be funded in fiscal 2005 by SurModics, not our customers. Just to be clear, these projects are not included in any of the pipeline statistics we gave you.

The fourth growth strategy, leverage our technology in the new market. SurModics has a strong track record here. As you know, one of our core technologies is PhotoLink and its first application was in lubricious hydrophilic coatings. We've since expanded that technology to include hemocompatible coatings, genomic slides and cell encapsulation coatings. The extensions of the PhotoLink technology have taken us beyond cardiovascular into neurology, diabetes, and genomics. On the drug delivery front, we have taken the core technology developed for drug-eluting stents and applied it in opthalmology through our work with InnoRX. We intend to continue this strong track record going forward.

Fifth, portfolio management, we continue to expand the portfolio of customer projects at SurModics and we think of it as a portfolio and we manage it as a portfolio. The new business unit organization helps us manage the sheer volume of work, dedicating technical resources to each business unit, eliminates the problem of having key resources diverted to other projects. Since our technical resources are finite, we know that we can't accept just any customer project, so we are very disciplined about project selection methodology. We believe the work we have done on this front has improved the quality of the projects in our portfolio. The number of major opportunities in our pipeline continues to grow, ending the year at 73, as I mentioned earlier. The last point about portfolio management is that we are working on a lot more than just the next big thing. Since CYPHER is such a big component of SurModics business, some might be tempted to just swing for the fences to produce only an encore to CYPHER, but nothing else. We choose not to take that approach. We manage the portfolio to include a lot of solid doubles, triples and home runs, in addition to what we believe are some very significant potential grand slams. Several potentially as big, if not bigger for us, than CYPHER itself.

Sixth, expand distribution capabilities. As we expand the portfolio of technologies, we need and can justify investing in more people to distribute those technologies around the world. Phil has already touched on how we are building our distribution capabilities.

Seventh and finally, putting the balance sheet to work. Here again, Phil covered this strategy element in his remarks. We believe these seven revenue growth initiatives will allow us to continue to build our company over time. Our objective is to create significant shareholder value over the long-term. Looking specifically at 2005, our operating plan has already been approved by the board of directors. The board has also approved a bonus plan tied to corporate and business unit-specific goals, each including both financial and non-financial goals. In fiscal 2005, some of the non-financial goals include, that we expect to sign at least 12 new licenses in the year, and that our customers are expected to launch at least 10 new products during the year.

Now I'll turn my attention to the drug-eluting stent market. The market for drug-eluting stents, as Phil mentioned earlier, is still exhibiting robust growth. Roughly four out of every five stents implanted in the U.S. today has a drug delivery coating. Cordis gained share this quarter, claiming 36% of the U.S. market, up from 30% in the June quarter. J & J stated in their most recent earnings call that Cordis share in the U.S. was 38% exiting the quarter. J & J also said that they are experiencing substantial back order, yet are making progress on their ability to supply the market. They said they expect to have a substantial increase in output by the end of October and they expect to be able to supply the market demand by the end of November. The co-promotion deal with Guidant continues to add muscle, roughly doubling the size of sales force promoting CYPHER.

In addition, the Guidant relationship appears to be opening up some compelling opportunities as well. In Guidant's most recent conference call, they indicated that in approximately 225 Guidant friendly accounts that have unconstrained CYPHER inventory, they have in excess of 70% market share. Guidant, like J & J, has also indicated that there is a good opportunity to grow CYPHER share with increased supply. Internationally, CYPHER had a strong quarter, growing to 170 million in sales, up from 120 million in the June quarter. Penetration overseas has been slower and, therefore, represents considerable growth potential. Excluding Japan, J & J estimates CYPHER's share outside the U.S. at 50% in the September quarter. In a very exciting development, Cordis launched CYPHER in Japan midway through our fourth quarter, delivering $40 million in sales for them. And these results were generated without the benefit of the higher reimbursement rate, which goes into effect this month.

Japan is a very significant market for stents, in fact, it's the second largest market in the world. J & J reported that drug-eluting stents have already achieved 65% penetration in Japan. Perhaps most significantly, Cordis is expected to be the only drug-eluting stent in Japan for some time to come. Boston Scientific pushed out the timing of their expected approval to the second half of 2006. So J & J could have 100% share in Japan for all of our fiscal year 2005 and potentially all, or a significant portion, of our fiscal year 2006 as well. In sum, J & J reported that on a sequential basis, CYPHER performance significantly improved. That happened in every region in the world, in the U.S., in Europe, and in Asia. We are very encouraged by these positive results. The medical community is also witnessing a continuing flow of very favorable clinical data for CYPHER, including some data providing direct comparisons to the other drug-eluting stent on the market today.

On a drug-eluting extent technology front, let me remind everyone of several key facts about the SurModics polymer, all of which clearly differentiate our technology from competing polymers. First, it releases 100% of the drug. Second, it releases drug over two to three months and not days. Third, our polymer does not have any issues of incompatibility with balloon materials. Fourth, SurModics has the only licensable polymer with an FDA master file in clinical history in over 1 million patients. Finally, SurModics is qualified as a critical component supplier by all major device companies. We think these are very formidable advantages as we work with our current and future customers. Our work with InnoRX and Novocell continues to move forward.

InnoRX, with whom we are co-developing a treatment for retinal disease continues to do extremely well. The company expects to file an investigational new drug, or IND, application with the U.S. Food and Drug Administration by the end of calendar year 2004. As a reminder, the InnoRX technology represents a potential platform technology for the prolonged site-specific delivery of different drugs to the back of the eye. Novocell, our partner in the diabetes arena, filed an IND application with the FDA on April 30th and is currently preparing for a Phase I/II clinical trial of encapsulated human insulin-producing cells into diabetic patients. They expect to begin these trials in the first half of 2005. The two primary activities required to be ready to begin the trials are to complete and validate a GMP manufacturing facility, which is in process now; and, secondly, to furnish the FDA with a certificate of analysis on the final clinical trial products.

On the business front, in August, Novocell completed a merger with CyThera, a company focused on human stem cell development. The reason for the merger was to give Novocell significant expertise and resources to develop an unlimited supply of insulin-producing cells from stem cells in order to treat millions of diabetic patients, instead of just a few thousand each year with cells from organ donors. In connection with the merger, Novocell raised $10 million to fund the first phase of clinical trials and the stem cell development program.

Changing subjects, the realities of our business model and the dynamic markets in which our customers compete make it difficult for SurModics to continue-- to provide quarterly guidance. Nevertheless, we are committed to working extremely hard to create long-term value for our shareholders. We have many reasons to be optimistic about SurModics' future. We are now executing on our strategic plan with our newly organized business units. We remain focused on capitalizing on the significant opportunities before us in the cardiovascular, opthalmic, orthopedic and neurology markets. And as we've said today, we are very encouraged by the positive trends affecting both our Cordis and non-Cordis revenue streams as we enter the new fiscal year. 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 question and answer session. [Caller Instructions] First question comes from Richard Rinkoff with Craig-Hallum. Please go ahead.

Thank you. A couple of questions. Is there any-- is there any other royalty payer who is not paid up their royalties?

We have that under investigation right now. There is potentially at least one, yes.

And is it on the magnitude of the one that you just admitted to?

I'd prefer not to quantify at this point. It's still under active evaluation.

Okay. In terms of the J & J product sales, should we infer that they dropped to roughly half a million dollars from the June quarter to September?

We're looking. Just a second. In the quarter for product sales, recall you've got three components of that and they fall across different-- different business unit segments. So you actually have reagent sales, which come from the various--the various business units. There's stabilization sales, which are the products that we sell to diagnostic test kit manufacturers to stabilize proteins in their test kits and then the genomic slides that are sold to GE Healthcare. So all three of those are components of the product sales. But during the quarter, yes, we did experience significant decline, but your order of magnitude is a little light.

A little light. So in other words, the rest of the product sales were up more than the total went down, okay. What kind of a run rate--a quarterly or annual run rate should we think about for that product's category in light of your comment on J & J next year?

At this point, we're not going to give specific guidance, as to, you know, how, you know, what our run rate might look like because there are many, many components to that. You know, the characterization as to significant decline is what we expect from the, the contract with Cordis. You know, it's definitely a significant double-digit percentage and that's about as far as I'd like to go with that at this time.

Okay. On the expense side, the G&A was down significantly. Is that the building, or is there other stuff in there and how sustainable is that?

On the G&A front, there are two critical components of that that drove the decline. One is a little bit on depreciation, although that does hit R&D as well, but you've got legal being down significantly and, you know, in addition across the Company we do have, you know, just a lower head count today than we had one year ago.

Should we assume that the expense run rate of a little over 5 million per quarter is a fair assessment going forward?

I think it's, it's probably a little light going forward, but it won't be substantially greater than that.

Okay, and last question, are there any other major milestone payments that are coming up in the next year, comparable to the GE?

Loren?

There's one installment left on the GE/Amersham-- there's a $250,000 milestone remaining. And if we were to achieve that, it would be towards the end of fiscal '05, but I wouldn't necessarily build that into any models yet. But there was one remaining for 250.

Okay. Thank you.

Thank you.

Thank you.

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

Hi, guys, this is Peter in for Jayson.

Hello, Peter.

Hi, guys. I noticed that sales and marketing was lower than what we had expected at least. Could you tell us what the dynamics were there and what we could expect going forward?

Sure. I would take the second part of that first, which I would expect that to increase somewhat going forward. We are continuing to make investments in distribution capabilities and that's where, for the most part, you would see those expenses show up. In terms of the reduction year-over-year, it's actually attributable to several things. Largely related to the reorganization structure. A lot of the sales and marketing responsibilities, while they reside in sales and marketing, they also were transposed to the business units as well. One of the benefits of the business unit structure is that they do become much more customer-interactive and so that's-- that's a piece of it. Another piece of it is we have had some reduction in head count year-over-year, which effects that as well, but today we feel like we're extremely well staffed there; and we are, as we said, actively looking to add more opportunistically where it makes sense.

Okay. Could you also update us on the discussions with potential players for the use of the Encore technology?

You know, there are discussions ongoing. I can't give any details on that right now, but since we made the announcement of the availability of that polymer and the availability, ability for SurModics to work with companies in the rapalog area with that polymer, there have been active discussions and I can't quantify those or say any more detail at this point.

Okay. And on the OctoPlus, are you still receiving R&D revenues?

OctoPlus is actually a license that we took from them, so we don't receive royalty from them. Actually I now know what you're asking. When we announced the availability of that, we also announced a development partner, and the answer is yes.

Okay. All right. Thank you very much.

Thanks, Peter.

Thank you. [Caller Instructions]

I think we'll--

Our next question comes from Jack Robinson with Winslow Management. Please go ahead.

Gentlemen, wonderful progress. Could you expand on how Novocell and InnoRX are doing as companies--

Speak up, Jack, we're having trouble hearing you.

Okay.

That's better.

Could you expand a little bit on how Novocell and InnoRX are doing? I believe they're both development stage companies. Development stage companies have lots of ups and downs, and needs for capital. Can you give us some sense of what is happening in those two investments?

Sure. Let me start with InnoRX. We've got some ability to talk a little bit more about InnoRX because of the agreement and the relationship there, and I touched a little bit on it in my prepared remarks, but they continue to do exceedingly well. We are actively, at this point, as we speak, coding parts for them for the imminent clinical trial. They expect to file the IND with FDA following a very productive pre-IND meeting with FDA and are still encouraged by the ability to begin clinical trials either late this year or very early next year. So the opportunity with InnoRX continues to excite us a lot and we believe that the news that has, you know, hit the marketplace relative to the opportunity in the back of the eye is one that is ripe for a company like ours; and with the ability to deliver drugs in a sustained release manner over a long period of time.

Novocell, we really probably can't say much more than what we've said in our prepared remarks other than that they've had, you know, they've been very,very focused on identifying the partner and the funding, which I mentioned in my prepared remarks. And I think that's a very, very encouraging sign for them as a small company. Beyond that, I don't know that I can say much more than that other than we're very happy to be a part of that program.

Thanks. I'd like to ask one additional question, if I might. Bruce, you gave a good discussion of what's going on in the stent market. It would seem to me that J & J and Boston Scientific, and surely Guidant and others, are either working on new stents or second generation stents. Do you have any sense of timing from your perspective on when we might see some announcements along those lines from-- not asking specifically, but just generally.

You know, I don't. I can't really comment on that beyond what's already in the public marketplace. I think the best approach would be to direct those questions to them. They-- to some extent have been fairly public with some of their programs at least and the timing around those. And, you know, our observation of that from a public comment standpoint is they-- it's a very dynamic market. Timing changes frequently and I think my best advice is to direct those questions to them.

Thanks.

Thank you. At this time, we have no further questions. I'd like to turn the conference over to Mr. Dale Olseth for any concluding comments.

We want to adjourn our meeting and we want to thank you again for participating in this year end conference call. SurModics has had a strong fourth quarter and a good fiscal year and we believe we are making the right moves, both operationally and strategically. We look forward to speaking with you again in January with our first quarter. There is a lot of momentum at work here in SurModics, and on that, we'll stand adjourned. Thank you.

Ladies and gentlemen, this concludes the SurModics fourth quarter and full year 2004 earnings conference call. If you'd like to listen to the replay of today's conference, please dial 303-590-3000, or 1-800-405-2236 and you will need to enter the access code of 11012343 followed by the pound sign. Once again, thank you for participating in today's conference. At this time, you may now disconnect.