Surmodics Inc (SRDX) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the SurModics First Quarter of 2005 earnings conference call. (Caller Instructions)

As a reminder, this conference is being recorded today, Wednesday, January 26, 2005. I would now like to turn the conference over to Mr. Phil Ankeny. Please go ahead, sir.

Thank you, Jeff. Good afternoon and welcome to the 2005 FY first quarter conference call for SurModics. Thank you for joining us today.

This is Philip Ankeny, CFO and VP of Business Development. With me are Dale Olseth, Chairman and CEO, Bruce Barclay, President and COO, and Loren Miller, VP and Controller.

Before we begin today’s call, 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 2004 Form 10-K Annual Report.

Now I would like to provide an overview of the call. First, Dale will highlight our achievements this quarter, then I will review our financial results for the quarter, next Bruce will discuss operational highlights and our revenue growth plan and finally we, along with Loren, will open up the call to your questions.

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

Thank you, Phil and good afternoon, everyone. We appreciate all of you joining us today. I am proud to share a number of highlights from our first fiscal quarter.

* First, we again delivered record quarterly revenues, with a total of $14.1 million for the first quarter of ‘05.

* Second, I’m pleased to report that SurModics achieved R&D revenue growth for the fourth consecutive quarter. This was particularly satisfying, as these numbers were bolstered by a diverse set of customers.

* Third, SurModics realized record net income during the quarter of $5.7 million and diluted earnings per share of $0.32.

* And fourth, SurModics signed 4 new licenses in the quarter, making good progress toward our goal of 12 new licenses in FY05.

We had another quarter of record-setting financial performance. But while these numbers on their own are compelling, I would also like to highlight a few other exciting developments for the Company.

* In December, we announced our collaboration with Rubicon Medical in the development of an embolic filtration device, which represents a promising advance in interventional cardiology.

* Last week we also announced a strategic investment in OctoPlus, a Dutch drug delivery company. We are pleased to deepen our relationship with OctoPlus and believe there is tremendous potential for our collaboration efforts.

* Finally, and most significantly, we announced our acquisition of InnoRx last week. This acquisition represents a major achievement for the Company, as we strengthened our position in site-specific drug delivery. In doing so, we have an opportunity to climb the value chain and control more elements of a medical device, which we believe could ultimately result in higher royalty rates.

While Bruce and Phil will provide added detail on certain of these items that we have discussed, I want to express my excitement and confidence for the future of SurModics. These new developments have positioned our Company well for future growth. We are committed to our long-term strategy of where appropriate moving into higher margins for value projects with greater opportunities for enhanced long-term value creation.

SurModics continues to gain momentum, both from these developments and potential product pipeline expansions, as well as through our efforts to strengthen the management team, reorganize the business units, and reinforce our strong customer relationships over the past year.

We are pleased with the additions we have made to our senior management team. David Wood joined us in November as VP and General Manager of our drug delivery business unit and he has already made significant contributions.

However, as we have taken steps to develop a blueprint for future success, we have not lost focus of who we are and where we come from. SurModics remains driven by an entrepreneurial spirit, strong technical capabilities, a core set of values and an insatiable desire for innovation.

We will continue to execute our plan to build increasing value for our shareholders, customers, and business partners by capitalizing on the potential inherent within this unique Company and in so doing, improve the health of people throughout the world.

Now I’m going to ask Philip Ankeny to report on the financial for us. Phil?

Thank you, Dale.

As you will note from our press release and Dale’s comments, SurModics had another superb quarter. Revenue was $14.1 million, a new record, representing a 16% increase from $12.1 million a year ago. It’s important to recall that a year ago CYPHER was the only drug-eluting stent available in the U.S.

Income from operations was $8.6 million, a 37% increase from $6.3 million in the prior year period and net income for the quarter, also a new record, was $5.7 million or $0.32 per diluted share, compared with $4.1 million or $0.23 per diluted share a year ago. Overall, our business model continues to flourish, delivering an operating margin of 61% and a net margin of 40%.

Now I would like to drill down into the components of our total revenue for the first quarter.

Royalties and license fees were $10.1 million, up 17% from the year-ago quarter. Our results were strong across our portfolio of royalty-generating products, but I would first like to comment on the growth Cordis achieved with CYPHER, its Sirolimus-eluding stent.

J&J, the parent company of Cordis, reported yesterday that CYPHER had worldwide sales of $561 million - $307 million in the U.S. and $254 million internationally. This total is a quarter-over-quarter increase of 28%. J&J reported that the penetration rate for drug-eluting stents in the U.S. is now estimated at approximately 80%, which is up from 53% just a year ago.

Internationally, CYPHER continues to grow, with particular progress being made in Japan where the product remains the sole player. CYPHER sales in Japan were approximately $100 million for the quarter, up 150% from $40 million last quarter when the product was first launched. We expect J&J to have sole control of this expanding market until the second half of 2006.

Turning to other lines of revenue, as expected product sales for the quarter declined 23% to $2.0 million. The decline was primarily attributable to reduced polymer sales to Cordis. As we stated last quarter, Cordis continues to improve its internal manufacturing processes, making production more efficient and thereby lowering the quantity of reagents purchased from SurModics.

In addition, our contract with Cordis calls for a pricing reduction on reagents that also contributed to the decline in reagent revenue. We expect reagent revenues to remain roughly at these lower levels for the rest of FY05.

In contrast, R&D develop revenue, which was $2.0 million for the quarter, showed a 130% improvement over the prior year period. This marks the fourth consecutive quarter that we have posted sequential growth in this key revenue category.

There are many exciting and important customer projects contributing to this growth. Cordis, of course, is among that list of customers but does not constitute a majority of R&D revenue. We believe the growth in our R&D revenue bodes well for our potential future royalty stream.

However, it is important to note the InnoRx did contribute to R&D revenue, historically. Now that we have acquired InnoRx, those associated projects will not be eligible to generate R&D revenue going forward. Accordingly, we do not expect the sequential growth trend to continue in the second quarter.

Back to total revenue and looking at it from a customer perspective, we are pleased to report that despite the strong results from Cordis, non-Cordis revenue continues to represent the majority of total revenue. In fact, first quarter FY05 marks the third consecutive quarter that non-Cordis revenue exceeded Cordis revenue, a strong indicator that our customer diversification efforts are taking root.

Turning to our big business segments, we delivered growth in all three segments this quarter --

* Revenue in our drug delivery segment was $7.1 million in the first quarter, a 3.0% increase compared with the prior year.

* Hydrophilic and other revenue increased 33% to $4.2 million on strong growth in both royalties and R&D revenue.

* Lastly, diagnostics revenue increased 36% to $2.7 million, reflecting increased royalties from Abbott as a result of our new agreement with them.

On the expense front, we continue to exert prudent expense management. Total operating expenses for the quarter, excluding product costs, were $4.8 million, down 5.0% from last year. We are poised to continue to drive additional costs out of our business going forward, but will remain committed to our investment in R&D.

First quarter R&D expense was $3.4 million, up 3.0% from $3.3 million last year. It’s also important to point out that R&D expense constitutes 70% of our budgeted operating expenses, excluding product costs. We believe R&D is vital to our future growth and we put our money where our mouth is.

A couple of things I want to note on the expense side --

* As a result of our recent acquisition, SurModics will be absorbing the operations and expenses of InnoRx and the upcoming clinical trial. We estimate these activities will add approximately $500,000 in expenses per quarter through the end of FY05. Over the long-term, we expect to seek development and distribution partners for the InnoRx technology and any commercial development revenue we negotiate can help to offset this additional expense.

* Furthermore, as you know, we are in the process of selling our Bloomington contract manufacturing facility. Assuming the facility is sold, we would be able to reduce annual operating expenses by approximately $1.0 million.

* On the accounting front, we expect to write off virtually all of the purchase price of InnoRx, as purchased in-process R&D expense. This will occur in the March quarter.

In addition, through an amendment to our diagnostic format patent license with Abbott Laboratories signed in September 2004, we made a $7.0 million commitment to purchase certain additional sublicense rights and the accompanying future royalty revenue streams.

Prior to this amendment, we were receiving only a portion of the royalties under these sublicenses. Our first quarter revenue includes additional revenue from Abbott, stemming from this transaction. Expenses for the quarter include amortization of the $7.0 million obligations. On balance, this transaction is accretive to EPS. The first $5.0 million installment was paid in November and the remaining installments are reflected as other long-term liabilities on our balance sheet.

With that, let’s take a closer look at our balance sheet. At the end of the first quarter SurModics had a cash and investment balance of $61.8 million. This is a significant asset, as we continue to look for ways to put our strong balance sheet to work.

In particular, there are three areas of focus within business development --

* First, we were interested in intellectual property that we can license of acquire, like the agreement we struck with OctoPlus in June of last year.

* Second, our strategic investments, such as the investments we have made in Novocell and now OctoPlus.

* And third, we will pursue strategic acquisitions like the InnoRx deal.

Of course, any opportunities that have been or will be pursued must support our growth strategy and long-term objectives and make sound financial sense.

I will now turn the call over to Bruce Barclay.

Thanks, Dale. Our organization is to focus on revenue growth and toward that end, we are actively implementing our seven-point growth plan discussed last October.

Specific goals put in place to further that plan are to further grow our strong customer relationships, improve our pipeline and strengthen our ability to exploit the convergence of drugs and devices. The results from the first quarter in our recent announcements demonstrate our progress and exemplify how we see our business growing and evolving.

First I’d like to address the market for drug-eluting stents.

CYPHER is gaining share in the U.S. as inventory levels have improved. The international market for drug-eluting stents is still exhibiting robust growth and as Phil mentioned, the December quarter marked record sales for CYPHER worldwide and a substantial quarter-over-quarter increase in sales.

J&J reported yesterday that Cordis’ share in the U.S. drug-eluting stent market was 38% for the quarter, the highest market share since Boston Scientific launched it’s TAXUS stent.

Another development that we believe will have positive impact on the DES marketplace in general and SurModics specifically is the pending acquisition of Guidant by J&J.

Their combined press release announcing the deal stated that, “This business combination can utilize Cordis’ experience in drug development, coating technology, and polymers with Guidant’s strength in stent platforms and delivery systems to create superior products”.

In addition, one of the analysts wrote, “J&J will be able to create the ideal product, Sirolimus, on Guidant’s Vision stent and delivery system, along with an already proven polymer, making it, in our minds, the lead product on the market come 2007-2008.”

We think this bodes very well for us, since J&J’s reference in their press release to polymer is, of course, the SurModics polymer.

Although CYPHER remains a vital part of our business, as Dale commented previously, we are all proud to report our fourth consecutive quarter of increased R&D revenue, an indicator of the substantial project activity within SurModics. We believe this demonstrates the relevance of our technologies and our ability to gain additional traction with our customers through our development capabilities and broad and expanding product portfolio.

To this end, during the first quarter we signed 4 new licenses and are making good progress toward our goal of 12 new licenses for FY05. In addition, customers launched 4 new products in the quarter, well on our way to our goal in FY05 of 10 new product launches. As of December 31, we have a total of 80 coated products generating royalty revenue from customers, compared with 70 in the prior year total.

While the total number of licensed products not yet launched was 63, unchanged from a year ago, major non-licensed opportunities increased to 68 from 33 a year ago. In total, the Company now has 131 potential customer products in development, with opportunities in each of the Company’s four focus markets.

Now for some additional color on our customers and strategic partners.

We announced last week our EU 3 million strategic investment in OctoPlus. Since June, when we first signed a licensing agreement with the company, we have been highly impressed with the company’s technology. This new opportunity has given us the chance to deepen our existing relationship and collaborate with OctoPlus to leverage technology platforms across multiple product opportunities and partners.

OctoPlus has a strong pipeline of potential new products under development and its focus on systematic drug delivery offers a compelling and complimentary value proposition to SurModics’ focus on site-specific drug delivery.

CABG Medical is developing a novel device for the treatment of coronary artery disease that incorporates SurModics’ technologies. We believe that these opportunities offer exciting avenues for future growth and fit nicely into our strategic plan.

Now I’d like to review our growth plan in even more detail. Our seven-point growth plan is working and the acquisition of InnoRx executes on six of the seven growth strategies.

* Our first strategy point is to exploit the convergence of drugs and devices. This idea of convergence is a major trend within which we believe drug-eluting stents in the coronary arteries represents only the first of many opportunities.

Through the experience we gained during the development of CYPHER and with our broad portfolio of technologies, we believe we are uniquely positioned to exploit this convergence trend. We continue to have multiple programs in drug-eluting stents and interest has never been stronger.

The InnoRx intravitreal implant consists of the drug triamcinolone and SurModics’ Bravo drug delivery polymer mixed together and coated onto a tiny intravitreal implant. The device could replace the current therapeutic treatment, which requires multiple injections every 1 to 3 months by providing long-term, controlled drug release. This advance could improve patient compliance, reduce side effects, and increase efficacy.

The intravitreal implant is yet another example of a drug combined with a device, the convergence trend we see benefiting our strategic position.

* Second, we are working to enhance our business model. While our current business model is a great asset, we believe we can make it even better by extending new, value-added technologies to multiple customers. We are working to capture more elements of the value chain, meaning controlling more than one element of the medical device. We believe this approach has the potential to dramatically increase SurModics’ royalty rates in the future.

InnoRx represents a strong opportunity in this growth element because the acquisition positions SurModics to focus investment at the early stage of device development. We believe that when we identify a company to market and sell the device to physicians we will be able to command a higher royalty rate and better financial terms than those currently achieved by supplying only the biomaterial on the customer’s products.

The intravitreal implant fits perfectly into SurModics’ existing business model of licensing its technology to multiple customers that gives us more components of value.

* Third, we are constantly looking for ways to expand our technology offerings. One of SurModics’ core strengths is its ability to development internally or access externally new technologies and collaborate with customers to integrate those technologies on their products. The more offerings we can make available to our customers, the more valuable we believe we will be as a partner to them.

Obviously the InnoRx acquisition gives us the opportunity to potentially meet an outstanding clinical need in various therapies in the eye. But what I’m even more excited about is the possibility of using the implant as a platform for as sustained delivery of a variety of different drugs from many different companies.

This idea of a platform is a significant benefit of the deal. Numerous drug companies could work with us to deliver their drugs on a sustained release basis. In fact, there are roughly 15 companies with drugs currently under development targeting AMD and DME, both retinal diseases of the eye.

And depending upon the chemical structure of the drug, we could offer them any number of our polymers to best meet their needs. With our broad existing and growing set of polymer matrices, combined with a range of drugs numerous potential collaborations are possible.

* Fourth is leveraging our technology in a new market. SurModics has a very strong track record here. As you know, we have expanded technologies into new markets and are currently looking for ways to leverage our expertise further into our four focus markets.

SurModics’ acquisition of InnoRx extends our reach into the large and rapidly expanding ophthalmology arena, a market that represents a projected $2.5 to $7.0 billion opportunity within six years and that’s just for the two indications we are initially targeting in the back of the eye.

* Fifth is portfolio management. We continue to expand the portfolio of customer projects at SurModics, but remain disciplined in our project selection methodology. The number of major opportunities in our pipeline is growing, but we remain committed to managing a strong portfolio of single, doubles, triples, home runs, and in some cases grand slams.

In addition to the intravitreal implant, SurModics is also acquiring a second drug delivery platform from InnoRx. While not as far along in development as the intravitreal implant, it offers customers a second technology for delivering drugs to the back of the eye.

In addition, SurModics is acquiring rights to two pharmaceutical compounds, which Dr. Eugene De Juan, Jr., retinal surgeon and founder and Chairman of InnoRx, have been working on for years. Through testing, these compounds have been shown to assist patients with back of the eye diseases. In fact, the FDA has already approved one of these drugs for Phase I clinical trials.

* The sixth initiative, expanding distribution capabilities, has us actively evaluating continued investment in distribution resources, especially in international markets.

* The seventh initiative of our plan, that is putting our balance sheet to work, was covered by Phil earlier on the call and the InnoRx acquisition clearly demonstrates execution of that initiative.

In summary, SurModics has a strong business model and we are benefiting from the convergence of drugs and devices and from the momentum built since we announced our business reorganization and revenue growth plan last year.

As we look for ways to leverage our capabilities in each of our focus markets, our eye will be on continued execution. We have many reasons to be optimistic about SurModics’ future and are encouraged by our achievements to date.

That concludes our prepared remarks. We’d now like to open up the call to your questions, operator.

Thank you, sir. (Caller Instructions). Richard Rinkoff with Craig-Hallum.

Thank you. Phil, I wanted to clear up a couple of things from your comments. One, the Abbott royalty, where does that show up on the income statement? Is that under royalties or is that under product sales or is it R&D?

The $7.0 million transaction we did and signed on September 30th shows up as royalties, so it would be on the royalties and license fees line.

And where does the amortization show up?

The amortization is in R&D costs.

R&D costs. So if your R&D costs went up roughly $300,000 from the previous quarter, that suggests that it’s basically the reason for it. Is that right?

Yes. That’s an approximation of the -- it’s a straight line amortization over 4 years.

Okay and your comments about R&D revenue, they were up big time in the quarter. Did you say that they would not increase by the same amount going forward? Or did you say that they would be flat going forward?

We would suggest that they would be not growing sequentially going forward and beyond that don’t have full visibility yet.

Not growing sequentially means flat?

It means flat to down, correct.

Flat to down. Okay. Did you receive any revenue in any form from OctoPlus during the quarter?

We did receive some, yes. Not from OctoPlus but as a result of the OctoPlus technologies, yes. We are working with partners on that technology.

Okay and one more question here on the product revenue side. I had anticipated a dramatic fall off in revenue, much worse than the number that you actually reported. So your comment is the reagent revenue would be flat? That refers to J&J’s reagent revenue or does that -- the whole category will be flat, the whole product sale category will be flat?

The forward-looking statements we made last quarter were suggesting that, in particular, the reagent revenue would have a substantial decline. Because that’s only one of the three components of product sales, we’re trying not to suggest that the overall product sales would be -- and it depends on your definition of the word “significant”, but the overall mix of reagents and the fall off in there obviously tends to dampen it on the total product sales line.

So the inference is that the other two components of product sales might, in fact, grow for the rest of the year.

Yes. That’s a fair statement.

Okay, so $2.0 million will be the low point for the year?

It’s a roughly flat to a potential growth trend. Its going to depend on a lot of factors in there, but what we didn’t want to leave any expectation is that there would be significant growth there. But it really depends on a number of factors and J&J’s reagent revenue being one significant piece of that.

Great. Thank you.

Jason Bedford with Adams, Harkness, & Hill.

Hi and good afternoon, gentlemen, just a few quick questions.

Sure.

Just following on the last question, are there any other additional price reductions on the reagent side to J&J or were they started, I guess, in this first quarter?

No. That’s all we anticipate.

Okay and then just looking at the non-Cordis revenue, do you expect it to grow at this rate, going forward, that it did in this first quarter?

At this point, it was not sequential growth. It is, in all three quarters, consecutively of where non-Cordis revenue does exceed Cordis revenue, but the actual trend going forward, we -- it’ll kind of depend on the actual quarter.

And the encouraging part, for me - and this is Bruce - is that non-Cordis revenue continues to be more than half of our revenue and as you’ve seen, more than half of our revenue, not because of Cordis, is going down. Cordis is actually going up, so from my perspective, it’s a tremendous sign and we would expect that more than half of the revenue going forward for the rest of the year would continue to be non-Cordis.

Okay, that’s helpful and then you alluded to InnoRx contributing to R&D revenue that wouldn’t continue going forward, given the acquisition. How much did InnoRx contribute to R&D revenue in the past?

Jason, we’re not going to break that out precisely. It was definitely in the range where it becomes a factor, but it’s not something that we’re going to break out.

Okay. That’s fair. And then I guess you know you guys have done a great job getting leverage from this model in terms of the top line growth, with little expense growth. I’m just wondering, in terms of your sales force, have you added to that? Are you seeing a lot more interest coming to you guys or are you guys being more aggressive in going after that business?

That’s a good question. It’s something we constantly evaluate and I would say from my perspective it started back when we reorganized the Company and I say that, because it changed the way we sell products as a Company.

Not only is the sales force responsible for the sales process, which is what is was before the reorganization, after reorganization the business units became much more active in the customer interface process and the general managers spend a fair amount of their time out on the road, out on the phone, in a variety of different ways in front of the customers, driving new business. So we have added people in the sales force. We’ve added someone in California who is doing an exceptional job.

We’ve gotten much more activity from our general managers and we have done more outside the U.S. We’ve got a relationship in Europe, which we’re currently evaluating right now, whether that’s generating enough business for us to actually put somebody full time in Europe, over there to sort of support that effort. And I think, as we’ve said before, we’re actively looking at Japan as well and potentially putting some resource there, whether it be direct or through a distributor.

So there is a lot of activity on the sales side, but the year-over-year comparisons on the sales line make some people nervous, but they don’t make me nervous at all, because I feel like we’re being very productive in a variety of different ways. And it’s one of those things that if we continue to think investment will help us I will be the first to pull the trigger.

That’s fair and then just lastly, Bruce, maybe if you can comment on where you’re seeing the most activity, whether it be ophthalmology, neurology, orthopedics?

We’re seeing it in all the business units. We can tell you we have a very strong vascular business, a lot of activity in ophthalmology, especially after the announcement last week. I was on the phone yesterday, in fact, with potential partners, so I am hopeful that in the not-too-distant future we’ll be able to talk about some relationships there. But vascular is still most of our business and that’s where I would expect to be over the near-term.

Hey, great, thanks. I’ll get back into queue.

Thanks for the call.

James Terwilliger, Morgan Keegan & Co.

Hey guys, can you hear me?

Yes.

Hey, great quarter, guys. A couple things -- and I’ve been jumping in and out of a couple different calls, so I apologize if you’ve covered some of this. Were there any milestone payments in this quarter?

No.

Nothing material that appeared this quarter.

Were there any back due royalties that hit during the quarter?

No.

Same answer.

All right, excellent and in terms of Phil, I think you had talked about the R&D revenue kind of being flat to down. Is that correct, for the rest of FY05, possibly at this level?

Yes.

And then did you say similar comments in terms of the product sales as well?

Yes. I’d say product sales are probably in that roughly flat type of profile.

Okay, great and in terms of the InnoRx acquisition, which I think is a great deal, I was going to incorporate at this time those assumptions into my model and I believe you said about $500,000 in terms of expenses per quarter. Where’s the bulk of that going to fall at? Is it going to be in the R&D line or the G&A line or how should I divide that up?

That’ll principally be in R&D.

Over 50%, I mean, 75% of that?

Yes, probably.

Put it all in there.

Put it all in R&D.

Put in all in R&D?

Yes.

All right, guys. I’m going to jump back in queue. Fantastic quarter, though, excellent bottom line number.

Thanks for the call.

Thanks, James.

Michael Bossman (ph), the Peninsula Capital.

Hi guys, a great quarter, really impressive. Bruce, I was wondering if you can comment on any opportunity --

Can you speak louder?

Can you speak up just a little bit, Michael?

Yes, can you hear me now?

Yes, thank you.

Okay. Bruce, I was wondering if you could comment a little bit on the Japan market outside of the CYPHER. Are you seeing any other opportunities out there for different product applications?

Yes, absolutely and we are very lowly penetrated in the Japanese market. We do have a couple of customers there outside of Japan, but from my experience in the device business I know there’s a lot more opportunity there that we need to access. And so I particularly and I know my head of sales and marketing is very actively looking for some help over there to get access to those customers and to get them on our technology, which I think we can do.

Great.

It’s the second largest market in the vascular space outside the U.S. and it’s a tremendous opportunity.

Good and actually, Bruce, staying on that point, I wanted to kind of just ask about the CYPHER sales in Japan. One of the big reasons why the market share in the U.S. fell off was the supply issues, to the U.S. physicians and we could almost assume that that’s probably not going to happen over there. So would you see, maybe, the sales being more stable over in the Japanese market, not losing so much market share?

I can’t speak to that. Those are good questions. I think I would recommend those be asked of J&J, Cordis folks more specifically.

Okay, fair enough. And then can you also just comment on -- I know the last caller asked briefly about it, but what are some of the trends that you’re seeing in the R&D development line? Are you seeing more catheter type applications entering the market that are maybe replacing some drug treatments or can you talk a little bit about the landscape there?

You know, because of our agreements with our customers, we can’t get specific in that area. I think the one trend that we mentioned, which is very relevant to me since I joined the Company is that most of that revenue today comes from non-Cordis applications, even though we have numerous Cordis projects in-house.

So, to me, again, when you try to diversify, you don’t want to do it by reducing what you have but growing other opportunities, first point. Second point is I can speak to one, which has become public, through their going public, with is CABG Medical. They had publicly announced that we are working with them on their technology and that’s an active project here so I can speak to that.

Great, well, excellent quarter, guys. Thanks a lot.

Thank you. Thanks for the call.

Thanks, Mike.

Siraj Kalia, Northland Securities.

Gentlemen, congratulations on an excellent quarter.

Thank you.

Bruce, I got a couple of questions for you. I think that most of the guys have already asked some of the questions I wanted to ask, but my first question is in terms of non-Cordis revenues. If you look at the number of licenses that you all totally have and the non-Cordis revenues, just from my understanding and perspective, do you all internally have some metric about what kind of projects you all select in terms of giving a license?

Because I’m sure you come across a ton of opportunities, but you have to be discrete about which ones to pursue and what is going to be accretive to SurModics. But can you set some color about how you’ll make a selection process about the non-Cordis opportunities that come, revenues for the non-Cordis license, whatever for that matter.

Yes. Thank you for the question. That’s a great question. We definitely have a process internally where we look at the financial metrics for any opportunity that comes across the table. And there are hurdle rates associated with those and we do say no quite often, because we think that some opportunities just fall below the hurdle rate based upon other things we’ve got in front of us.

I will also say we look at the customer involved. We have a number of customers both large, medium and small. Large companies were more likely to take something that may be at or below the hurdle rate just because of the relationship and the other opportunities that we’ve got in front of us with them. But that is a factor.

But it’s a constant evaluation to make sure that what we’re doing brings the highest value for what we expect the payback to be and as I say, there is a fairly rigorous process in-house to look at that.

One other question, Bruce. In the last quarter’s conference call also you mentioned, if I remember right, capturing more of the value chain.

Yes.

And you mentioned the same now. Is it fair for me to construe that SurModics is going to be looking at opportunities where it literally manufactures and distributes medical devices also? There was a comment in last quarter’s conference call about the distribution chain and here with the InnoRx acquisition you guys are literally making, or so-called, the implantable coil. Is there going to be a shift in your licensing strategy to also manufacturing now?

There will not be a shift in manufacturing. We continue to de-emphasize manufacturing on a contract basis. We do it in cases that will help the customer get their product to the market sooner so that we can generate royalties more quickly.

But it’s my belief and the belief of the management team here that we have so many other opportunities which are a higher potential return for us than contract manufacturing where we’re not as expertise, that is not a good use of our assets. So we are continuing to de-emphasize manufacturing and that’s in part what led to the decision to sell the River Bluff property.

What we mean by climbing the value chain is if you look at the value that our polymer technologies bring to many products, I believe that we are absolutely enabling to those future products. And if you look at the products involved, the importance of the polymer, our ability to development products and our ability to partner with companies on the distribution side, it’s I think somewhat of an easy conclusion to draw that need to be capturing more of the final product value.

So whether that means we become more than a single component in the product, maybe two or three components in the product, maybe become the product itself, that’s where I see us heading more toward without leaving behind what got us here, which is a very, very strong polymer capability.

We won’t manufacture product for customer absent a very compelling need to do that and we will not sell products directly to the customers as well, because to me that’s not our expertise. We have numerous customers that are much, much better at that long-term than us and who are, in my opinion, have a strong interest for new products.

And so, what we’re trying to do here is maintain what’s best in our business model, improve upon it by capturing more of the final product value where our technology is enabling, but leave to those people that are better than us the distribution of the products.

Hey, congratulations again on the quarter and congratulations, also, on the InnoRx acquisition.

Good. Thank you very much for the call.

Thanks, Siraj.

Ryan Rauch, SunTrust Robinson Humphrey.

Yes, good afternoon, just two quick follow-ups and I’m sorry, I missed the first part of the call. Did you give the actual revenue from Abbott in the quarter and was that equated to an EPS and how we should look at that going forward?

We did not, Ryan. We mentioned it was accretive. The deal was accretive to us, immediately, but we didn’t break it out.

Would any of -- I guess you prefer not to?

That’s correct.

Okay and then your SG&A seemed a little light compared to sort of looking out over the past four quarters. Is that sort of the fair run rate we should look at going forward, with a little uptick from your recent acquisition? Or how should we look at that line?

The uptick you referenced from InnoRx would be largely concentrated in R&D. But we have been consistently saying that there will be modest investment in sales and marketing and potentially some modest additions in G&A, although the large offset to a lot of this could be if and when we succeed in selling the Bloomington facility.

Okay. Thanks a lot.

Sure.

Thank you and at this time, I show no further questions. I’d like to turn the conference back over to Mr. Dale Olseth for any closing comments.

We would like to thank all of you again for participating in this quarter’s conference call. SurModics has had a strong first quarter and an exciting start to our FY05. We are gaining momentum, both operationally and strategically and are well positioned for future growth.

We look forward to speaking with you again on January 31, which is our annual meeting and in April, which will be our second quarter results. On that, we will stand adjourned and again, we thank you.

Ladies and gentlemen, this concludes the SurModics First Quarter 2005 earnings conference call. If you would 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 11022149 followed by the # sign. Once again, thank you for participating in today’s conference. At this time, you may now disconnect. 14