Surmodics Inc (SRDX) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the SurModics second quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, April 20, 2005. I would now like to turn the conference over to Mr. Philip Ankeny. Please go ahead, sir.

Good afternoon and welcome to the fiscal 2005 second quarter SurModics conference call. Thank you for joining us today. I am Phil Ankeny, Chief Financial Officer and Vice President of Business Development. With me today are Dale Olseth, Chairman and Chief Executive Officer; Bruce Barclay, President and Chief Operating Officer; Dave Wood, Vice President and General Manager of Drug Delivery; 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 beginning on page 14 the Company's fiscal 2004 Form 10-K annual report, and in the MD&A section of the Company's Forms 10-Q that are filed after the 10-K.

Now I would like to provide a brief overview of the contents of today's call. First, Dale will highlight quarterly achievements and key personnel changes. Then I will review our financial results for the quarter. Next, Dave will discuss opportunities in the convergence of drugs and devices within our ophthalmology business unit. Bruce will then follow with operational highlights. Finally we, along with Loren, will open up the call to your questions. Now I would like to turn things over to Dale.

Good afternoon to everyone. We appreciate all of you joining us today. I am pleased to present highlights from SurModics' fiscal year 2005 second quarter. First, I'm proud to say that revenue this quarter, totaling 15.7 million, established a new record for the Company. This quarter marks the third straight quarter of record revenue.

Second, even though Cypher stent sales were a record in the quarter, our non-Cordis revenue continues to show strong growth, as the second quarter marks the fourth consecutive quarter in which non-Cordis revenue exceeded Cordis revenue.

Third, the Company realized record net income of 5.9 million and diluted earnings per share of $0.32, excluding a onetime in-process research and development charge related to our acquisition of InnoRx in January, which Phil will discuss later in more detail.

And fourth, we signed six new licenses during the quarter, putting us in good position to reach our goal of 12 new licenses this fiscal year. Our '05 fiscal year to date count currently stands at 10.

In addition to the record-setting financial performance reported this quarter, SurModics experienced several exciting developments that I want to call to your attention. For one, in January the Company acquired the remaining interest in InnoRx, solidifying the relationship between our two companies and greatly strengthening our position in site-specific drug delivery.

The InnoRx product platform, coupled with our drug delivery polymer technology, will attack 2 of the leading causes of blindness in our country -- AMD and diabetic retinopathy. The InnoRx acquisition furthers our strategy to climb the value chain, which we believe will ultimately result in higher royalty rates.

During the quarter, we also announced key management changes. Effective on July 1, I will step down as SurModics CEO, remaining on the Board of Directors as Executive Chairman. And I'm proud to report that Bruce Barclay will assume the role of CEO.

Bruce joined the Company's in December of '03 as President and Chief Operating Officer, and has distinguished himself as an invaluable asset to this Company. His significant industry experience, strategic capabilities, high energy levels and boundless enthusiasm will carry the Company forward and help us continue to generate shareholder value. The Board and I are extremely confident that Bruce is the right individual and this is the right time to execute on our well-developed leadership succession plan.

In addition, we announced in January the appointment of Aron Anderson as Vice President and Chief Scientific Officer. Aron has done exceptional work for the Company since joining SurModics in 1991. His new responsibilities include overseeing corporate research and providing technical support to both business development efforts and intellectual property activities. This appointment fills a key strategic leadership position at SurModics.

Although the Company is evolving, our core tenets remain steadfast. We will continue to be a results-driven Company that does business the right way. Innovation thrives at SurModics as our product development capabilities grow even stronger, both in developing proprietary technology and working in collaboration with our customers.

We are committed to our long-term strategy of moving into higher margin, higher value projects that provide greater opportunities for long-term shareholder value creation.

SurModics' momentum, based on cutting-edge science, mutually beneficial partner relationships and a focused strategy, provides the blueprint for further success. The purpose that drives us beyond shareholder value is the benefit SurModics brings to doctors and their patients by improving health and the quality of life. Now I'm going to ask Phil Ankeny to report on our financials for us. Phil?

As you will note from our release and Dale's comments, SurModics posted its third straight quarter of record revenue. Revenue was 15.7 million, representing a 23% increase from 12.7 million reported a year earlier.

During the quarter, the Company recorded a $30.3 million charge for in-process research and development in connection with our acquisition of InnoRx in January. Including this onetime non-cash charge, the Company reported a net loss of 24.4 million, or $1.34 per share.

However, excluding this charge, income from operations was a record 9.1 million, a 37% increase from 6.7 million in the prior year period. And net income for the quarter was 5.9 million, or $0.32 per diluted share, compared with 4.3 million or $0.24 per diluted share a year ago.

You will note that we have restated historical quarters beginning in the second quarter of fiscal 2004. This restatement reflects the impact of accounting for InnoRx under the equity method. Prior to completing the acquisition of InnoRx in January, the Company accounted for its investment in InnoRx under the cost method.

Our business model continues to be profitable with an operating margin of 58%, and a net margin of 38% for the quarter excluding the IP R&D charge. Further information about this charge and a reconciliation of our GAAP results, and this non-GAAP analysis, can be found in our press release.

Next I will take you through royalties and licensees. Second quarter royalties and license fees reached an all-time record of 12.3 million, up 37% from the year ago quarter. Cypher posted record sales again this quarter, which I will detail in a moment. But despite the strong growth in Cordis revenue, SurModics non-Cordis revenue exceeded (technical difficulty) for the fourth consecutive quarter.

Results were strong across SurModics' entire portfolio, underscoring the advantage of maintaining a broad range of royalty-generating products.

Moving on to Cypher, the Sirolimus-eluting coronary stent from Cordis, a Johnson & Johnson Company. Yesterday J&J announced another record quarter for Cypher, with worldwide sales of 617 million, 317 million in the United States and 300 million internationally. Also during the quarter, Cypher reached a significant milestone in February -- having treated more than 1 million patients with the device.

Cypher sales have also continued to grow internationally, particularly in Japan, where the product remains the sole player in the market. Cypher's first-quarter Japanese sales were 116 million, up 16% sequentially from 100 million the previous quarter.

We expect Cypher to retain sole control of this expanding market until the second half of 2006.

In addition, results from several important drug-eluting stent trials were presented at the American College of Cardiology Conference in March. Results from reality, the first head-to-head trial comparing Cypher to Boston Scientific's Taxus stent, showed Cypher with statistically significant superiority (technical difficulty) angiographic end points.

One significant data point to emerge out of the reality trial was the four-fold higher incidence of thrombosis in Taxus compared with Cypher, indicating there may be safety differences between the two products.

Cypher also outperformed Taxus in the SURTAX study, (technical difficulty) an independent head-to-head trial, on almost all key end points, showing statistically significant superiority in TLR, TVR and TVF (ph).

Finally, results from the ISAR-DIABETES trial, directly challenged the common perception that Taxus is superior to (technical difficulty) diabetics. In fact, the study suggested the opposite, and we believe these results could be a positive force for Cypher going forward.

Turning to product sales, total product sales were 2.3 million, a 17% decrease from the same period last year. Re-agent sales were down significantly from a year ago, because of a contractual step-down in re-agent prices to Cordis, something we have repeatedly told you about.

On a sequential basis, product sales were up 16% from the December quarter, reflecting strong growth in sales of stabilization products and genomics slides.

Now let's turn to research and development revenue. Second quarter R&D revenue was 1.1 million, up 13% from the year ago quarter. This figure is down sequentially, as we had expected, from 2 million last quarter.

One factor contributing to this sequential decline is our acquisition of InnoRx, as the deal transitioned the Company from customer to business unit.

In addition, during the December quarter we had strong revenue contribution from certain other customers gearing up for their clinical trials. Occasional ebb and flow of R&D revenue is normal with our business model.

Now turning to our business segments, revenue in our drug delivery segment was 7.3 million in the second quarter, roughly flat with the prior year. (technical difficulty) Recall that it was in March of the year-ago quarter that Boston Scientific's Taxus stent received FDA approval. Growth in royalties offset the decline in re-agent sales and R&D revenue within drug delivery.

In the hydrophilic and other segment, revenue increased 40% year-over-year to 4.8 million on strong growth in both royalties and R&D revenue. Lastly, diagnostics revenue increased 81% year-over-year to 3.7 million, principally reflecting strong growth in royalties from Abbott as a result of our new agreement with them.

On the expense front, total operating expenses, exclusive of product costs, were $5.8 million in the quarter compared with 5.3 million a year ago, and up sequentially from 4.8 million in the December quarter.

We continue to invest heavily in R&D, at 25% of revenue for the quarter. Our acquisition of InnoRx had a significant impact in the second quarter, serving as a primary contributor to the sequential growth in R&D expense.

As we stated during the last call, SurModics is absorbing the operations and expenses of InnoRx, including the upcoming clinical trial. In the long-term, we intend to offset some of these expenses by signing agreements with development and distribution partners interested in the InnoRx technology.

G&A expense was also up sequentially, reflecting various compensation items, including recruiting costs.

Now let's take a look at the balance sheet, which continues to be in excellent shape. (technical difficulty) At the end of the second quarter, SurModics had a cash and investment balance of 56.7 million and no debt. We regard our cash as a significant asset, and we continue to seek ways to put our strong balance sheet to work.

During the quarter, we opportunistically leveraged our balance sheet by acquiring InnoRx, making a strategic investment in OctoPlus, and (technical difficulty) optioned (ph) for biodegradable polymer technology from Rutgers. We continue to aggressively pursue opportunities that support our growth strategy and enhance our position in the market.

Finally, the Company's cash flow is very strong, providing us the opportunity to pursue additional accretive opportunities in the future. Cash flow from operations was $2.7 million for the quarter, an increase of 143% over the previous year. Now I will turn the call over to Dave Wood, Vice President and General Manager of our Drug Delivery business unit.

SurModics is positioning itself at the forefront of the convergence of drugs and devices. We believe drug eluting stents are just the first wave of convergence products, and our ever-expanding portfolio of drug delivery technologies experienced gain during the development of Cypher. Collaborative product development approach and technical capabilities make us uniquely prepared to exploit this trend.

Customer interest has validated our focus on the convergence arena, and currently we're working on a number of new and exciting customer projects. Today however, I would like to focus closely on our own progress within the newly formed ophthalmology business unit.

After successful pre-clinical studies of the InnoRx intravitreal implant, the IND application was filed with the FDA. We have filed additional information with the FDA in preparation for commencing our human clinical trial. At this point, we are recruiting clinical trial sites and physicians to serve as investigators (technical difficulty) protocol (ph) and investigational plan under review at several institutional review boards.

Reception to the InnoRx device, which we're now calling I-Vation (ph), has been quite positive. We remain confident that we can commence the Phase I human clinical trial in the current quarter. The Phase I trial will consist of 30 patients and we expect to have approximately five sites involved in the study. Six months' safety data will be compiled and submitted to FDA to request permission to start the Phase II trial.

We are greatly encouraged by the developments we have seen with this technology, and have become increasingly confident in the market's need and potential. Discussions with potential partners are ongoing. Additionally, we believe that with Phase I clinical data in hand, our negotiating position will be enhanced.

We remain diligent in our efforts to realize the full potential of this technology. To that end, the Company is continuing to take steps to hire a general manager for this business unit. We have interviewed several highly qualified candidates, and our ultimate selection will serve to reinforce the strength of the business unit team (technical difficulty) and fulfill a strategic role for the Company.

We are very pleased with the progress we made during the second quarter in strengthening the technical management team. With the completion of the InnoRx acquisition in January, we announced the appointment of Signe Varner as the Director of Research and Development within the ophthalmology business unit. Dr. Varner played a key role, along with Dr. Eugene de Juan, in the invention and development of the intravitreal implant technology for InnoRx. She will guide the integration efforts, manage our clinical trial (ph) (technical difficulty) preparations (ph), and lead the development of new products. Also in the second quarter, Brian Robie (ph) joined the Company as Director of Commercial Drug Delivery. Most recently, Brian was employed by Guidant Corporation as a product development manager. Prior to Guidant, Brian was employed for 15 years by Southwest Research Institute, where he led the development of a wide variety of contract medical device product development programs. In addition to Brian's medical device project management experience, Brian also brings extensive experience working closely with customers throughout the product development process.

We look forward to the contribution and Brian will make to the exciting opportunities in ophthalmology and drug delivery. The strong leaders in these key roles will continue to fortify the strength and depth of our technical organization.

After nearly 6 months with the Company, I am even more convinced today that the opportunities for SurModics, created by the convergence of drugs and devices, are vast. And I personally have an enormous amount of excitement and passion to pursue those opportunities. I will now turn the call over to Bruce.

Thanks, Dave, and thanks to all of you for joining us this afternoon on the call. I would like to start my comments today by congratulating everyone on the SurModics team for another strong quarter and record-setting financial performance.

In my remarks today, I will highlight some of our second-quarter achievements that have furthered our goals of strengthening customer relationships, improving our pipeline, and increasing our ability to exploit the convergence of drugs and devices.

First on biodegradable polymers. During the second quarter, we demonstrated our commitment to this leading-edge proprietary technology by obtaining an option to acquire an exclusive license from Rutgers University for two classes of biodegradable polymers for use in ophthalmology.

These polymers, intended for use in site-specific drug delivery, have the ability to be combined with one or more drugs and to be applied to a medical device or administered alone, yet degrade in the body naturally over time.

By combining these polymer families with the drug delivery technologies acquired from InnoRx, we expect to be able to deliver a wide range of drugs and other bioactive agents to the eye, treating such serious conditions as age-related macular degeneration and diabetic macular edema, two of the leading causes of blindness today in adults. These diseases to represent a market opportunity projected to reach between $2.5 to $7 billion a year within the next six years.

SurModics now has seven distinct families of polymers available for use in site-specific drug delivery for the eye. The two polymer classes from Rutgers join two biodegradable polymer families licensed from OctoPlus, and three others that SurModics produced internally.

In another exciting technical development, SurModics participated in a joint study to investigate our heparin coating technology on drug eluting stents. A recurring issue with drug eluting stents is clotting of blood on the stent, either uniform of the subacute thrombosis, or SAT, or late stent thrombosis.

Heparin is a-non thrombogenic agent that can help reduce thrombus, or clotting, on the surface of medical devices. Working in concert with Dr. Rob Schwartz here in Minneapolis at the Minnesota Cardiovascular Research Institute, we were able to show dramatic reduction in clot formations when using SurModics' heparin coating on drug eluting stents.

These data were presented in March at the CRT meeting in Washington D.C. As drug eluting stent companies work to improve their products over time, we believe this technology could play a significant role.

Beyond additions to our technology, SurModics has also experienced growth in licensing. As you have already heard, during the second quarter we signed six new licenses, to bring our 2005 total to 10. This positions us well ahead of our normal run rate toward our stated goal of 12 new licenses for the fiscal year.

Also, during the quarter our customers launched two new products in the marketplace, bringing the fiscal year to date total to 6, well on our way to our stated goal of 10 for this fiscal year. So as of March 31, we now have a total of 82 coated products on the market generating royalty revenue, compared with 72 in the prior year period.

While the total number of licensed products not yet launched was 64, up from 63 year ago, major non-license opportunities stood at 52, compared with 57 a year ago. In total, the Company now has 116 potential commercial products in development, with exciting opportunities in each of our distinct business (technical difficulty).

Now for some additional color on some of our customers and strategic partners. In December we announced our work with Rubicon optimizing the PhotoLink coating to meet the requirements of the Rubicon filter that they have developed. The company recently announced that the device received the CE Mark, and has been cleared for commercialization in Europe for three indications -- saphenous vein grafts, native coronary arteries and carotid arteries -- in three sizes, 4, 5, and 6 mm in diameter.

In addition, Boston Scientific exercised an option to acquire the remainder of the company. SurModics continues to maintain a close working relationship with Rubicon and looks forward to the prospect of future product development with this strong partner.

Another customer relationship became publicly known by the customer a couple weeks ago. In the process of preparing to go public, Ev3 filed in their S-1 document the fact that they were a partner with us on some of their technologies.

And lastly, NovaCell, our partner in the diabetes arena that we discussed in the past, recently received an equity investment from Johnson & Johnson. We view J&J's investment in NovaCell as a strong endorsement of the technology, and we remain excited about the company's potential. NovaCell is to on track for commencing the human clinical trial in the first half of this year.

SurModics continues to focus and implement our 7 point revenue growth plan. We believe our recent InnoRx acquisition will position us well in growing field of ophthalmology. We remain opportunistic in our focus markets, with an emphasis on execution. We have many reasons to be optimistic about SurModics' future, and are encouraged by our achievement to date.

When we talk to you again in July to review the fiscal third quarter results, Dale will have passed the baton to me to assume the CEO position. I am truly honored to be taking over the leadership of SurModics at this exciting time in our history.

I am very grateful for the opportunity to lead this great Company, one that is dedicated to enhancing the well-being of patients by providing to our customers the world's foremost innovative service (ph) (technical difficulty) modification and drug delivery technologies and products. Together with our strong management team and dedicated employees, we will build on the legacy of integrity, service and innovation that Dale has created.

My priorities will continue to center around driving our growth strategy, and given our growing portfolio of technologies and our strong customer relationships, I cannot be more excited about the future and the opportunities that lie ahead for SurModics.

That concludes our prepared remarks for this afternoon. Now we would like to open up the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Richard Rinkoff with Craig-Hallum.

A couple of questions with regard to InnoRx or I-Vation now. Do you expect to start human clinicals in the next two months, then go 60 days for safety trials, and then you think you're going to be in a stronger position to negotiate with partners, is that what you said?

Just to correct something, Rick, what we said was it is a 6 month follow-up. So we collect the data for all 30 patients at the end of 6 months, submit that to FDA, and then we will ask them, based upon that data and obviously assuming it turns out the way we expect it to, for permission to start the Phase II.

Okay. So that was 6 months, not 60 days?

Yes, that's correct. When we talked with potential customers about that technology and how we do that, I think really remains open depending upon frankly when we think we can strike the best deal based upon what we know at the time.

It is our belief, and certainly Dr. de Juan's belief, that the data that is going to be generated in this Phase I is going to be positive, both in terms of safety -- and we will have some information on efficacy as well, but it will be early.

So the expectation, as we commented in the prepared remarks, is that with that data in hand we should be able to strike a good bargain. We believe that -- we also may conclude at the end of that time period it might be better off to continue to invest and continue to process with FDA.

Again, when we exactly consummate the transaction with a distributor or someone to finish the development is really very dependent upon the data and our interest in continuing the investment.

You say in the press release that interest in the acquired technology platforms remains very strong. Are there ophthalmic drug companies coming to you now who want to sign a licensing agreement of some form, and you're saying wait, wait, wait? Or are they just kind of watching?

We are in active conversations with more than one company. I'm sure you appreciate the sensitivity of some of those conversations but --. (multiple speakers)

Are they -- do they also want to see the safety information, or are they trying to lock it up now?

It is a value equation. There potentially is interest in a transaction without the data, but we're not sure that the value we could derive from that would be as significant as if we waited. So we will see.

So in other words, that is your decision not to sign something right now?

I would say that is fair.

And when you are talking with multiple potential partners, do they all understand that it would be a nonexclusive? And how do they feel about that?

They understand our strong preference that it be nonexclusive. That's correct. At the same time, there -- it is a value proposition. If the value was significant enough, we would consider something broader than nonexclusive.

And keep in mind it doesn't have to be exclusive relative to the platform and all of its potential applications. We could divide the platform itself up into a lot of different segments, and some of those segments could be exclusive. The product that is in FDA could be exclusive and other things could be nonexclusive.

That, to me, is one of the great things about what we acquired. There's so many potential variations of the transactions with more than one partner that I think it bodes well for being able to maximize the revenue from those, so -- different ways of cutting the pie, I guess.

Do these partners have approved drugs on the market now that are treating AMD and DME?

I can't answer that. There are many of those out there, so I shouldn't answer that.

And is there a preference towards one market versus the other AMD versus DME, or are there other applications as well?

I would say that there is interest in both back of the eye and front of the eye. We have conversations going on with -- on both, front of the eye being glaucoma.

And how much did InnoRx pay SurModics in R&D revenues in previous quarters, so therefore that money is now not there anymore?

That's correct. This quarter would be the first quarter when we did not book any revenue from InnoRx because of the acquisition. We're not breaking out the precise amount in the prior quarter, but it is safe to say that the sequential decline in R&D revenue that you see in aggregate is definitely influenced by the loss of InnoRx. But it is certainly not anything approaching majority or anything like that. It is just a factor.

Jayson Bedford with Adams Harkness.

A few quick questions. Just to follow on the last one, the clinical trial that you'll start this quarter, that is for the DME indication, correct?

That's correct. (technical difficulty)

Will you look to partner for the AMD, or will you start a clinical trial on your own?

Our plan right now is we will start it ourselves. But, again, that could change tomorrow depending upon a variety of factors. But the plan right now is when we're ready we will do it ourselves.

And Bruce, any idea as to when you'll be ready?

Probably too early to say right now.

Just on the other drug delivery coatings that you have acquired and that you have in the portfolio right now, can you just give us an update as to where those are in terms of animal clinicals, human clinicals and any potential applications that you may give us a little more color on?

Sure, I'd be happy to. Let me make sure I'm clear. This is reference to the Rutgers technology?

It's the Rutgers and the other technologies that you have. I think you have Encore and Accolade; I know obviously Bravo is already implemented, but I'm just wondering -- the broad spectrum of drug delivery technologies you have there, in terms of stages of development and applications, where are we?

Sure. And obviously I'm not going to be able to be real specific in terms of partner activity, but I can say generally that the two classes of polymers that we acquired from Rutgers, we referenced in the press release that at least one of those classes -- and the second one is similar structurally, is in products today that are being sold in the orthopedics market. So there are data out there in humans on those products for that application.

Secondly, that same class of polymer is being developed by REVA Company, which has been invested in by Boston Scientific for biodegradable polymers in the vascular space. So that in part answers why our license is limited to ophthalmology.

So one of the benefits we saw from that technology was that there are lots of existing data already in animals, and as I said, some in humans that give us confidence that at least toxicity won't be an issue going forward as we look at it for the eye.

OctoPlus, somewhat of the same answer, both PolyActive and OCTODEX are either part of existing products in orthopedics or are pretty far down the development pathway with clinical trial products that OctoPlus has in development right now. So again, part of the benefit of us acquiring those technologies was the current data that existed.

Let's see. Encore is still very early in terms of data generation. Bravo, as you said, is Cypher. And then PhotoLink also is a drug delivery polymer, and as you know there are lots and lots of data on PhotoLink and the vascular system in humans.

So overall, we think we have a very mature and a very robust portfolio of drug delivery polymers. And what is important to us is when a customer comes in, regardless of their application, regardless of the size of their drug or the hydrophylicity or the phobicity of the drug, we should have something that could help solve their need.

And given that combination of polymers, our ability to coat frankly just about anything, and then our development expertise in-house, we think we are extremely capable partner for companies coming in.

With the I-Vation product you are using the Bravo, correct?

Yes.

I just have a few financial questions. Besides the increase in J&J-related royalties stemming from Cypher, what really drove other royalty revenue in the quarter? I know there's two new products that probably hit the model this quarter, but what were the real growth drivers there?

If you take a look at the segment numbers, you'll see that the drug delivery segment was flat year-over-year, roughly. So it was revenue and royalty growth there, partially offset by lower R&D revenue and re-agent revenue.

If you look at hydrophilic that revenue (ph) (technical difficulty) is quite strong, and royalty growth is a big part of that. And then within the diagnostic segment, that is 81% growth year-over-year; royalties are a big component of that, the key driver there.

A couple of quick questions on that. So in terms of the increase royalty from Abbott, was that fully reflected last quarter, or is this the first full quarter of that increased royalty from Abbott?

No, that was reflected last quarter as well. The deal was signed on September 30.

And then how much of drug delivery revenue does J&J account for?

They are obviously a vast majority of the royalty revenue, and within re-agent they are also a big component of that. Within R&D, they are substantially less than a majority.

I'm just looking at -- you said flat drug delivery year-over-year.

So if you -- within drug delivery, obviously there's all three lines of revenue -- royalties, re-agents, and then R&D revenue. And so if you look at the two second quarter last year versus second quarter this year, even though J&J was 100% of the market in the U.S. for most of that quarter until Taxus came on the market, because of growth in the market and internationally, they are up sequentially -- or not -- up year-over-year (multiple speakers) total royalty.

And then obviously you've got the re-agent piece that has come off because of the pricing adjustment in the contract. And then in terms of R&D revenue, we were at a higher level of R&D revenue from Cordis a year ago.

That's helpful. Thanks guys. I appreciate it.

Suraj Kalia from Northland Securities.

Congratulations on a great quarter. Bruce, I've just got three main questions. The first question on the I-Vation product, help me understand --.

Can you speak up, it is coming -- it's very low here.

Can you hear me now?

Yes. That's better.

The I-Vation product from InnoRx -- Bruce, help me understand the timeline on this. In terms of approved drugs, using an approved drug and the fastest route, especially given the FDA's playing defense nowadays with all the blow-ups in drug safety, would it be fair for me to assume that that would be the fastest route for you all, hence your potential partners are pretty much going to be the guys with approved drugs for AMD and DME? Or are you all adopting an approach with new drugs and potentially a longer clinical trial?

I think that is one of the great things about the platform is that certainly right out of the chute -- and I agree with your comment, which is it makes sense to think about currently approved drugs and the potential for the system to enhance the performance of those compounds.

Longer-term, as new drugs are developed and/or new compounds come into consideration, I think the platform is well positioned to accommodate those over a long period of time. So we actually see significant legs for the platform as new drugs become available.

So your initial partners are -- when you talk about going into Phase I clinical trials in a 6-month time period, that would be -- is it fair to me to assume with approved drugs on the market?

I wouldn't say that -- I wouldn't say yes to the exclusion of the possibility that there may be new drugs, but it's certainly a very logical starting point.

This is Phil, I'm going to jump in for just a quick second on this topic as well. Part of our model is that the big driver for SurModics of course is the royalties that flow once a product is on the market. And we get a sliver of the sales based on a royalty model.

But along the way, we can generate R&D revenue as companies bring projects to us, and those can be either with approved drugs or ones that are not approved, because everybody recognizes in this market that how you deliver the drug is a big deal. And having to inject it via an injection into the eye every four to six weeks is just very suboptimal. So a lot of these companies are recognizing this and are aggressively seeking out drug delivery platforms that address that shortfall.

So as (technical difficulty) the technology might not be next year, it is going to be however many -- however long FDA requires that they run the trials. But we can generate revenue, and depending on the deals it can be significant R&D revenue along the way.

Understood. Second question I have is -- and you all may or might not share this -- FoxHollow, what are your royalty rates on FoxHollow? Is it fair to me to assume somewhere between 1 and 3%?

We have not disclosed those.

And the last question I have is, Phil, you mentioned data presented at the ACC. And the question I have is, I wanted to get you guys' opinion. The reality on the SURTAX data -- I have talked to a ton of cardiologists who suggest that it was pretty much a wash.

And ISAR-DIABETES data was definitely, like Phil mentioned, interesting especially from a diabetics and longer bifurcated lesion perspective. Can you give me a favor of what your thought process (technical difficulty) to whatever extent you can?

The (technical difficulty) sold (ph) reasonably well, and Abbott seems rerunning pretty fast on its Zomax stent and Conrolds (ph) is gearing up in India this summer. So help me understand what you all are seeing in terms of the drug eluting stent market, especially as they constitute a significant part of your royalties.

We see this being a 2-horse race for a long time. I think the data we have is no different than the data you have that has been published; a lot of different forms, both -- in the United States, the last data I've seen is the second or the third product may be in the market in 2007, late 2006, potentially. And for us that is a long time away.

Secondly, based upon the results that just came out yesterday, this market annualized is $5.2 billion worldwide. That is a huge market, and there are very few products and probably none in the medical device space, that have been able to demonstrate such rapid penetration and acceptance by the physician community as these two products have. So we are very happy to be one of those two products, and frankly we think for a long time to come, and especially in the U.S., it is going to be a 2-horse race.

Relative to clinical data that came out at ACC, I think what we read and what we hear, and we talk to people as well, it is the body of data. There are lots of different trials and lots of different data points from specific trials that get discussed, but I would say over the course of the last -- even a couple of years, the body of data seems to be suggesting that there may be an advantage with the Cypher product. And we certainly haven't seen anything different.

The survey that came from Lehman Brothers that was, I thought, very well done, looking at 130 I think approximately different physicians, asking them relative to safety and efficacy, pre-ACC and post-ACC, definitely seemed to suggest that they were influenced by what came out at ACC. So we are very happy with the way the product is performing and are very happy to be associated with that product right now.

Obviously, we're not sitting on our laurels. As we have said, our non-Cordis revenue continues to be greater than half compared to our Cordis revenue, even though Cordis and Cypher continue to do very well in the marketplace.

We are, I think, extremely busy here, lots of activity going on and we think with some of the things we have talked about today, good optimism for the future.

Thanks guys. Congratulations again on a great quarter.

(OPERATOR INSTRUCTIONS). At this time, I show no further questions. I would like to turn the conference over to Mr. Dale Olseth for any concluding comments.

We want to thank you for participating in the (technical difficulty) -- which I think is probably number 40 of our conference calls since we came public. And I want to say to the audience today that in high likelihood, this will be probably my last participation because Bruce will take over the Company here from a CEO standpoint shortly, and my involvement will be at the Board level. And so I suspect that I will not be -- it will be operator aiding management and I want to say a special thank you to all of you.

This is a very special Company and we have been public now since 1998. And we are working for the shareholders here and we expect to continue to move this very interesting Company forward. And on I think -- (indiscernible) number 40, I want to say I'll see you later. So on that we will stand adjourned. Thank you.

Ladies and gentlemen, this concludes the SurModics second quarter 2005 earnings conference. If you would like to listen to the replay of today's conference, you may dial 303.590.3000 or 1.800.405.2236 and you'll need to enter the access code of 1102.7932 followed by the pound sign. Once again, thank you for participating in today's conference and at this time you may now disconnect.