Surmodics Inc (SRDX) 2006 Q4 法說會逐字稿

Welcome to the SurModics Fiscal Year 2006 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. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, November 1, 2006.

I would now like to turn the conference over to Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you very much, Mary. Good afternoon and welcome to SurModics' Fiscal 2006 Fourth Quarter and Full-Year Conference Call. Thanks for joining us today.

I am joined on the call by Bruce Barclay, President and Chief Executive Officer, and Lauren Miller, Vice President and Controller, who will be available for the Q&A session. Before we begin, let me remind that you some of the statements made during this call may be considered forward-looking.

The 10-K for fiscal year 2005 identify certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made during this call. The 10-K and subsequent filings are available through the Company or online.

Now, I would like to provide you with a brief overview of the topics that will be addressed today during the call. First, I will discuss the fourth quarter and full-year fiscal 2006 financial results. Bruce will then highlight operating achievements for the quarter and full year and discuss execution against our strategy and growth plan, and finally we will open up the call to your questions.

As you will note from our earnings release, we had a strong fourth quarter and record fiscal year 2006. I will start with an overview of fourth financial results and then break down the numbers by revenue components and business segments, before turning to the full-year financials. Finally, I will cover expenses and review our balance sheet and cash flow.

Starting with the fourth quarter, I'm pleased to report that SurModics achieved new revenue records in both the hydrophilic and other and In vitro operating segments. In addition, we achieved record non-Cordis revenue which was, again, greater than Cordis revenue for the tenth consecutive quarter.

Revenue in the fourth quarter was 17.6 million, a 9% increase from 16.1 million in the year-earlier period. On a GAAP basis, operating income was a 9.2 million, net income was a 6.3 million, and diluted earnings per share was $0.34. I would like to remind you that beginning with the current fiscal year, our GAAP results include the expensing of stock options as required by SFAS Number 123R. However, to provide easier comparative analysis for investors, we do present non-GAAP results excluding non-cash equity compensation items. Please see our financial tables and the footnotes provided in the press release for a detailed explanation and reconciliation of GAAP and non-GAAP figures.

Going forward, when we report our results in fiscal year 2007, we will no longer present these non-GAAP measures, excluding non-cash equity compensation. On a non-GAAP basis, SurModics achieved strong earnings this quarter. Operating income grew 15% to a record 10.3 million, from 9 million in the prior-year period. Net income increased 8% to 7 million from 6.5 million in the same period last year. Diluted earnings per share was $0.37, an increase of 9%, compared with $0.34 in the fourth quarter of fiscal 2005.

Our distinctive royalty-based business model continues to demonstrate excellent profitability, producing an operating margin of 59% and a net margin of 40% for the quarter, both on a non-GAAP basis.

Next, I will walk you through the revenue components for the quarter. Royalties and license fees were a record 13.5 million, up 8% from the year-ago quarter. These results highlight the value of our broad portfolio of royalty-generating products. Johnson & Johnson, the parent company of Cordis, reported worldwide Cypher sales of $627 million, down 4% year over year and down 10% sequentially. Nevertheless, it was a solid quarter for Cypher as J&J continues to be the worldwide market leader in drug-eluting stents with an estimated 49% market share. In the United States, market share for Cypher was 46% this quarter, up 1% sequentially from the June quarter and flat, compared with the prior year period.

Moreover, J&J's supply and development capabilities should continue to improve as a result of the additional manufacturing capacity brought online earlier this year, and by the resolution of the FDA warning letter which J&J expects by the end of the year.

The strength of our broad portfolio of royalty-generating products is readily apparent in the royalties and license fees figured, showing 8% overall growth, despite a 4% decline in Cypher royalties. SurModics non-Cordis revenue established a new record this quarter, and exceeded Cordis revenue for the 10th consecutive quarter.

Turning to other lines of revenue, research and development revenue which came in at 820,000 for the period was somewhat lower than previous quarters. For the full year, R&D revenue reached its highest level in four years, coming in at 5.7 million. We believe that the quarterly downtick in this quarter is a temporary phenomenon and that it is largely a function of timing on the various customer projects we're working on.

Typically, development program cycles include periods of intensive R&D effort, as well as temporary lulls. This is particularly true of longer-term development projects that involve lengthy, pre-clinical animal studies and human clinical trials. As a result, R&D revenue, from any given project, can be cyclical, and our aggregate R&D revenue, in any given quarter, will depend on how various customer projects fall, in terms of peak versus trough levels of effort required by our scientists and engineers. It's important to note that we have not lost any key customers, particularly, in ophthalmology and we remain happy with our R&D development pipeline.

As projects move forward to Phases requiring more intensive efforts from SurModics personnel, we expect R&D revenue to increase to more normalized levels. In addition, it's important to understand that our commitment to our internal R&D projects is in no way affected by the level of R&D revenue from customers.

Wrapping up revenue line items, we are particularly pleased to report that product sales increased 35% to 3.3 million from 2.4 million in the prior-year period. These strong results were driven by growth across the board, in reagents, stabilization products, and genomic slides. Sales of reagents other Cypher showed particular strength this quarter which could be a leading indicator of future royalty, royalty flow, as customers scale up manufacturing either to support a new product launch or to meet increased product demand.

Now looking at the business along segment lines, revenue in our hydrophilic and other operating segment was a record 6.2 million this quarter, growing 19% from the year-earlier period. This segment has the broadest range of license customers contributing to royalty revenue. We continue to enjoy growth in many of the underlying products in our broad portfolio and entirely new royalty streams are being added as products get launched by our customers.

Revenue for the In vitro operating segment, which was formerly called diagnostics, grew to a record $4 million, a 17% year-over-year gain. These strong results reflect growth in royalties, genomic slides and continued strength in our stabilization business.

Finally, in the drug-delivery operating segment, revenue was 7.3 million in the fourth quarter, a 1% decrease year-over-year with growth in non-Cypher elements partially offsetting the 4% decline in Cypher royalties.

On the expense front, excluding product costs and non-cash equity compensation, total operating expenses were 6.3 million in the fourth quarter, roughly flat, compared with the year-ago quarter. G&A expenses were down 33% year-over-year, or $550,000 as we continue to reap the benefits of exiting our Bloomington contract manufacturing facility and prudently managing our expenses.

Let's now turn the full fiscal year. Total revenue for fiscal year 2006 was a record $69.9 million, a 12% increase over fiscal year 2005. On a GAAP basis, operating income was a record 36.2 million. Net income was a record 20.3 million and diluted earnings per share was a record $1.09.

SurModics achieved record operating income of $41.7 million on a non-GAAP basis which excludes non-cash equity compensation expense and a non-cash impairment loss on the Company's investment in Novocell. Non-GAAP results for fiscal 2005 exclude non-cash compensation items, the non-cash impairment charge related to the sale of the Company's contract manufacturing facility and the non-cash IP R&D charge in connection with the Company's acquisition of [Inarex]. The record operating income for fiscal 2006 represents a 15% increase from fiscal 2005. Net income grew 18% to a record 28.2 million from 24 million in the prior year. Earnings per share was a record $1.49, an increase of 16%, compared with $1.29 in fiscal 2005. For the full year, our operating margin was 60% and our net margin was 40%, again, both on a non-GAAP basis.

Let's spend a few minutes looking at fiscal 2006 revenue through a few different lenses. We set a number of new records for the year. Cordis revenue set a new record as did non-Cordis revenue. Looking at revenue components, royalties and licensees were a record 53 million, up 11% from fiscal 2005. Research and development revenue was 5.7 million in 2006, up 6%, compared with 5.4 million in fiscal 2005. Again, R&D revenue was the highest we've achieved in four years.

Product sales increased a noteworthy 19% to $11.2 million from 9.4 million in fiscal 2005. Looking at the full year in segment terms, we are pleased to have delivered record revenue in all three operating segments. Revenue in hydrophilic and others segment increased 17% year over year to 22.2 million. In vitro technologies revenue was 14.7 million in fiscal 2006, up 8% from the prior-year period and lastly, revenue for drug delivery increased 11% year over year to 32.9 million.

On the expense front, excluding product costs and non-cash equity compensation, total operating expenses were 24.9 million in fiscal 2006, a 7% increase compared with 23.2 million a year ago. G&A expenses were down 2% year over year.

We continue to demonstrate our commitment to R&D investment and to protection of our products that are innovations generated. We dedicated 4.9 million to R&D during the fourth quarter, an 8% increase from the prior-year period and representing 28% of total revenue.

Further, R&D expense constituted over three quarters of total operating expense, excluding product costs for the quarter. For the full year, R&D increased 11% to 17.9 million at 26% of revenue. Expenses from our new ophthalmology division and costs related to running the I-vation clinical trial were the primary contributors to the growth in operating expenses. In addition, the Company has incurred larger patent-related legal costs that have contributed to R&D expense. Allocating funds to patent protection is consistent with our strategy of [vigily] protecting our product innovations and technology portfolio, the foundation of our technology licensing business model.

Now, on to the balance sheet, which continues to be in excellent shape. As of September 30, SurModics had no debt and a cash and investment balance of 106.6 million, up from 73.3 million, as of September 30, 2005. Cash flow from operations was $8.2 million in the quarter, and 35.8 million for the full year.

The Company regards its cash position as a valuable asset since it enables us to aggressively pursue opportunities that support our growth strategy, enhance our market positioning, and deliver shareholder value. During fiscal year 2006, we expanded our portfolio of biodegradable polymers, licensing technology from [Inacore] and acquiring intellectual property from [Interlitics]. Further, we made an additional equity investment in OctoPlus and our business development group continues to evaluate additional opportunities to put our strong balance sheet work.

Our ability to generate significant cash flow enables us to continue to invest in the business to drive future growth. While it also enables us to return capital to our shareholders and further enhance long-term shareholder value. In September, SurModics' Board of Directors authorized the repurchase of up to $35 million of the Company's outstanding common stock, the first share repurchase by SurModics in its history. We believe that our growth prospects are substantial and our stock is undervalued making the repurchase of a common stock a highly attractive investment opportunity. Since the time we announced the authorization, we have been in our customer blackout period. Accordingly, we have not repurchased any shares. Going forward, we will evaluate various means of repurchasing stock when and if market conditions warrant, consistent with the legal and regulatory requirements affecting such purchases.

With that, I will now turn the call over to Bruce.

Thank you, Phil, and let me extend my thanks to everyone, as well, for joining us today on the call. Today, I will highlight our operating achievements for the quarter and full year and update you on our progress toward implementing our strategy and our growth plan. Let me start by saying that in fiscal year 2006, I am confident that we have again, strengthened our position as experts in the development and application of biomaterials, surface modification and drug-delivery technologies. This improved position was made possible by the dedication and hard work of our talented employees and I want to recognize and thank them for their efforts today.

As Phil mentioned, SurModics achieved record revenue and earnings in fiscal 2006. This represents our ninth consecutive year of record revenue since our IPO in 1998 and since that time, revenue has grown at a rate of 28% compounded annually. These strong results were driven by record revenue in all three of our operating segments, as well as records in both Cordis and non-Cordis revenue. In spite of these records in fiscal year 2006, I am not satisfied. I believe our promising opportunities provide us with potential to achieve more rapid growth over time.

As many of you remember, two years ago, we articulated a new strategy and seven-point revenue growth plan with the goal of achieving sustainable, profitable growth. Since outlining our objectives, we have been focused on the execution of that strategy and our results to-date have been excellent.

One of the most important aspects of our strategy is to climb the value chain, essentially offering customers more elements of the final product, not a single component, with more data supporting its utility, which should allow us to enhance the royalty rates and other licensing terms that SurModics can earn on future product offerings. For example, we believe that our offerings in the ophthalmology field will enable us to climb the value chain. Meaningful progress on this front is being achieved with our I-vation technology.

As a brief reminder, the I-vation intro-vitrial implant is a drug-delivery system that can delivery a variety of drugs to the back of the eye on a sustained-release basis. It can be implanted in a minimally-invasive procedure and may be removed once the drug has been fully released or in the event of complications. These are all significant, competitive advantages. I-vation combines device technology with one of our drug-delivery polymers to attack two of the leading causes of blindness: age-related macular degeneration or AMD and diabetic macular edema or DME, a market projected to be--to reach $2.5 billion to $7 billion.

In fiscal 2006, we completed enrollment of the first clinical trial with our first product, a Phase-I study in patients with DME, using I-vation TA, a version of our implanted coil with a steroid called triamcinolone acetonide or TA. We are very pleased with the results from the six-month follow-up. The safety profile of our I-vation implant was exceptional and we are highly encouraged with the trend toward positive efficacy outcomes as well, as 100% of the patients with the implant maintained or improved their vision.

Taking into account the very strong results recorded in the Phase-I trial, we actively considering the range of options available to us. We expect to file our complete Phase-I data package with the FDA soon. Once the FDA has had a chance to review the data, we will discuss potential next steps, including a Phase-I trial or a combination Phase-II, III trial and we will identify specifics of the protocol such as endpoints, patient numbers, number of clinical centers and the length of follow-up required.

Today, we have prospective customers who have expressed interest in partnering with us to carry the product forward through the remaining clinical trials and ultimately, commercialize the technology. In addition, we continue to have significant interest from multiple potential partners wanting to deliver their proprietary drug compounds from our platform. We believe our decision to manage and fund the highly-successful Phase-I clinical trial, coupled with the fact that SurModics owns both the implant and the polymer will enable us to climb the value chain and receive favorable financial terms when license agreements are ultimately negotiated.

Another area in which SurModics has made substantial progress has been our technology partnership with Donaldson. The collaboration combines Donaldson's nanofibers with SurModics' surface modification technology. The resulting Ultraweb synthetic ECM products, including some introduced just eight months after the collaboration was announced, provides in vitro cell growth conditions that more closely resemble those found in the body. This technology offers the promise of improved outcomes in cell culture, cell-based bio [unintelligible] and other In vitro, cell-related applications.

In May of 2006, we announced that Corning Life Sciences would provide worldwide marketing and distribution for the expanding product line. The new agreement enables us to take advantage of Corning's market-leading position in plastic and glass lab ware to pursue cell culture and drug-discovery applications. We believe this agreement will help accelerate the market adoption and penetration of these revolutionary products and thereby assist us in capitalizing on the full potential of this platform technology. Product development activities are going well and of course, we will update you on a launch date when there is additional news to report.

Another central element of our growth strategy is our emphasis on broader revenue diversification. Cypher achieved record sales, again, in fiscal 2006 and while we are very happy to be associated with the success of this product, we continue to aggressively pursue opportunities that will result in a further diversification of our revenue sources. One measure of that diversification effort is the declining percentage of total revenue attributable to Cordis since 2004.

In fiscal 2004, Cordis represented 52% of revenue. In fiscal 2005, that percentage decreased to 46%. In fiscal 2006, the percentage increased slightly to 47%, however, the total revenue from Cordis has grown thanks to the broad base of business we have cultivated across the entire organization, not just in cardiovascular but also in the endovascular and neurovascular businesses. If you were to single revenue solely attributable to Cypher, which includes royalties, reagents, and R&D revenue on Cypher-related projects, then the trend of declining percentage continues this year, again, in spite of record sales from Cypher in fiscal 2006.

In fact, the percentage has declined steadily from the first quarter through the fourth quarter of fiscal 2006. In short, our non-Cypher business is strong. We are pleased with the results we have achieved in our efforts to continue to diversify our revenue and we are rapidly growing other pieces of our business. Our strategy of developing innovations that facilitate the increasing convergence of drugs and devices has helped us drive greater revenue diversification. Building upon our successful collaboration with Cordis, we have developed further advances in drug-eluting stent technology that have allowed us to participate in multiple ways and with multiple partners in the overall drug-eluting stent market.

Currently, we have three business units serving this field: drug-delivery, regenerative technologies and hydrophilic technology. Our drug delivery business unit offers polymer systems to provide site-specific controlled-release drug delivery. Our hydrophilic technologies offers advanced lubricity, hydrophilic codings on drug-eluting stent delivery catheters and the regenerative technologies business unit is developing anti-thrombotic and pro-heating technologies, which could play a significant role in future generation of drug-eluting stents.

Let's see how we participate in each of those three categories. Turning first to drug-delivery polymers, in addition to Cypher, we have also developed and acquired both durable and biodegradable polymers suitable for delivering controlled release of large and small molecules from stents, including the ability to deliver multiple drugs from the same stent. We have disclosed relationships with both X-Cell Medical and CardioMind who are utilizing our drug-delivery polymer technologies for DES. Other companies are in evaluation Phase with our polymers.

Looking next to hydrophilic technologies, I'm pleased to report that this business unit has penetrated the $5.5 billion DES market quite well. We have disclosed five customers that have licensed SurModics' hydrophilic coding technology on the delivery system for their DES platforms. During fiscal 2006, we publicly announced hydrophilic technology licensing agreements with MedTronic on Endeavor, Conner MedSystems on their second-generation CoStar, drug-eluting stent, E-Vacs, Xtent and most recently, Cordis on their Cypher Select Plus. As a reminder, the Cypher Select Plus is a highly-deliverable device featuring SurModics' highly-lubricious coding, coupled with a flexible stent design and a short tip. Cordis launched the product in Europe in late September with full-market launch in countries recognizing CE Mark anticipated by the end of this calendar year. It's important to note that this new hydrophilic coding on Cypher Select Plus will be in addition to the drug delivery polymer. So we will receive royalties for the two SurModics components of the device.

On another front, unfortunately, Abbott Vascular, with whom we had announced a license agreement, recently discontinued their program for the development of Zomax. But again, still more companies are evaluating our hydrophilic coding technology for their DES delivery systems that we have not yet announced.

Lastly, our regenerative technologies business unit is working to develop next generation solutions to address late stent thrombosis. Thrombosis or clotting remains a significant challenge for both bare metal stents and drug-eluting stents and is an issue for which the medical community and the device industry is actively seeing solutions. SurModics offers three different technologies. We believe our potential solutions, including Heparin codings, biodegradable polymers and most recently, our pro-healing technology which I'll describe in greater detail.

Again, customer evaluations are ongoing in this category. Incomplete or delayed re-growth of healthy endothelial cells following placement of drug-eluting stents may be a factor in late thrombosis. Our partner, Dr. Stuart Williams and his staff at the University of Arizona have identified certain extra-cellular matrix proteins that encourage the healing process following stenting by fostering the re-establishment of an endothelial cell layer in the blood vessel.

Using our PhotoLink technology, SurModics can attach those ECM proteins to the stent. As we reported in a presentation at the TCP conference last week, animal studies we recently sponsored have shown that this technology has successfully produced endothelial cell growth, even as little as one or two weeks after implantation. We believe the growth of endothelial cell tissue after stent implantation, whether it be drug-eluting or bare metal stents, could help prevent late stent thrombosis.

Another key aspect of our strategy is leveraging our expertise in the convergence area to penetrate new markets. In particular, we have extended our reach to address the site-specific drug-delivery needs of our partners in ophthalmology as mentioned earlier, urology, orthopedics and potentially, oncology markets. Public announcements on this topic include the granting to Bausch & Lomb of an exclusive license to patents relating to the use of Genistein in the treatment and prevention of retinal diseases.

Next, let me turn to Novocell. The Company presented preliminary data from its Phase-I to proof-of-principal clinical trial for encapsulated primary human eyelet allographs in June. The results showed the first two partially-implanted patients exhibiting early evidence of encapsulated eyelet function reduced dependence on insulin and a significant reduction in hyper and hypoglycemic episodes. With these encouraging results in hand, Novocell is focusing on the stem cell research. In fact, Novocell just announced, two weeks ago, the development of a process that efficiently converts human embryonic stem cells into insulin-producing pancreatic endocrine cells. Once they have achieved sufficient insulin production from those cells, they plan to encapsulate them using our license technology and move forward into animal studies and clinical trials. Given the vast potential of the diabetes market, we continue to regard this as an attractive albeit longer-term opportunity.

Let me next look to the product pipeline. As we've said in the past, SurModics manages this pipeline as a portfolio, but importantly, one that continues to grow in size. The pipeline includes some products with extremely large revenue potential and others that while important to us, are more modest. Further, we have selected products that may generate revenue in the near-term and others that are immediate or longer-term in nature. It is our belief that the balance we have fostered in our portfolio has benefited the Company by reducing the volatility of our revenue streams. Overall, we have a total of 83 licensed customers, several with multiple licenses, compared with 76 customers in the prior-year period. Currently, SurModics has 83 licensed product classes on the market generating royalty revenue, compared with 80 a year ago, with some very minor products having been discontinued or licenses cancelled by our customers.

The total number of licensed products not yet launched is 84, up 17% from 72 in the fourth fiscal quarter of 2005. Major non-license opportunities as of September 30 stood at 69, up 64 a year ago. In total, the Company now has 153 potential commercial products in development, up 13% from 136 in the year-earlier period. Additionally, our customers launched four new products during the quarter, bringing our 2006 total of new products to 15, eclipsing our goal for the year of 12.

Going forward, customers expect to commercialize approximately 20 new product classes by the end of our fiscal year 2007. This represents a potentially significant increase in the number of royalty-generating products. These products will join the other SurModics products already on the market. Further, the 20 new product classes should not cannibalize existing SurModics technology, but rather offer incremental revenue-generating opportunities.

Let's now turn to licensing efforts, a key input to growing our pipeline of royalty-generating opportunities. We had another terrific quarter, signing five new licenses with our customers bringing the year-to-date total to our record 21 and topping our goal of 15 for the year. We are particularly gratified by the broad-base success in our licensing activity. As new license agreements were signed throwing the year in five of our six distinct business units. For 2007, our goal is to sign 18 new licenses with our customers.

Before concluding, I want to take a moment to talk about the recent transition on our Board of Directors. As previously announced, Dale Olseth retired from SurModics as Executive Chairman of the Board on July 30. I would like to express the gratitude of the SurModics family to Dale for his 20 years of leadership of our Company. Without the tireless efforts of Dale in raising early capital, recruiting such an effective Board of Directors and providing strategic insight and direction, SurModics would not be the success it has become today. Everyone at SurModics has been touched by his warmth, charm, sense of humor and above all, leadership. We are very pleased that Dale will continue to serve on the Board both senior management and the Board greatly value his guidance and wisdom.

Ken Melrose was elected Chairman of the Board, effective August 1. Ken has a long history with SurModics, having been a director of the Company since 1988. We are delighted that the Board has elected such a capable, thoughtful and professional individual as Ken to serve as Chairman. As many of you know, he has a long and distinguished career as the Chairman and Chief Executive Officer of the Toro Company for many years. Ken presided over a period of tremendous diversification and growth at Toro and I am confident that we can learn much from Ken in his new role.

In closing, SurModics continues to demonstrate leadership and expertise in the development of biomaterials, surface modification and drug-delivery technologies. Those attributes enables us to exploit the opportunities presented by the convergence of drugs and devices. Importantly, we are successfully executing on our strategy and revenue growth plans and we have consistently delivered strong financial performance. We realize that SurModics' is [guide] for what we do, not just for what we say. Together, with our dedicated employees, we will work to continue delivering results that our investors have come to expect from us and more. I am excited about the future and confident that we continue to deliver sustainable, long-term shareholder value for our investors.

Mary, that concludes our prepared remarks. We'd now like to open up the call to any questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment please for the first question.

And our first question comes from Ross Taylor with CL King. Please go ahead.

Hi, I have a couple questions. First of all, regarding the hydrophilic coding revenue, I wonder if you can comment at all as to what products might have drove the sequential increase there and also, I just wanted to clarify to make sure that there weren't any revenues from the Cypher Select in the current quarter results.

On hydrophilic revenue, first of all, it's extremely broad-based. As you probably know, that is the most broad-based portion of our revenue stream with dozens of licensees contributing to the revenue each quarter and so we kind of get a two-pronged effect contributing to the growth.

One is just underlying growth in each of the licensees on a lot of the underlying products themselves. Secondly, it's just new license streams that come in there. Notable ones that clearly are helping us [that you]--people that know we're associated with that have been showing nice growth in the market would include Fox Hollow, Medtronics Endeavor stent, and another, a broad variety of other ones.

Cypher Select Plus just got launched in the very tail end of the quarter and so that was not a material factor in this quarter's results.

Okay and a couple other questions. Regarding the Corning/Donaldson partnership, I mean, can you elaborate at all there on potential timing of when the product launch might be?

They have not yet publicly announced when they're going to launch the product. They intend to do--there's a cell biology meeting in December where they will have some customer interaction with the device but that will not be the actual launch. We continue to be encouraged that it is a launch that will happen soon. Given the fact that there isn't any FDA approval, the development activities continued to go well and I had the opportunity to spend a day in Corning New York to visit with the people involved, the team and I can tell you, they are very excited about the product, fully behind it and are spending the right amount of time to get it completed.

So no date at this point. We hope to be able to announce that in the near future but not--I have no more specifics at this point.

Okay and just two other questions. First, looking out to 2007, the 20 new products that you mentioned your partners might add, is there any way you can quantify what they might add to revenues and also, just looking at 2007, the tax rate the last two quarters has been just under about 40% and is that kind of the rate we might expect in 2007?

I'll speak to the 20 products. This is a continual update of the announcement we made a couple quarters ago of expecting 30 new product classes from our customers over the 18-month period from April of '06 until the end of September of '07. So the customers have done about ten so far. We expect to do about 20 more. And what we've said all along is that, really, across the board, we've mentioned our association with Conner, for example, and it is our hope if that [beat] the timelines that they've announced, that that would be one of the products but beyond that, we really haven't gotten permission to talk publicly about individual products.

Again, I would just say that we expect all these to be incremental. We don't expect a significant cannibalization.

Okay. Yeah, just a last question regarding the tax rate for '07. I know you don't like to make forecasts or anything but it's kind of that 40% level about what we should expect?

We'd expect it to be a little under that. Probably a GAAP rate would be somewhere in the low 38 somewhere.

Okay. Okay, great. Thanks very much.

Thanks, Ross.

Thank you. Our next question comes from Richard Rinkoff with Craig-Hallum. Please go ahead.

Thank you, a couple of questions. Did you guys actually almost provide guidance when you suggested that your R&D revenues would trend up from the most recent level? I'll start there.

Our policy on providing--on not providing guidance hasn't changed. What I think we're trying to emphasize is that--and this is especially true in the last quarter where our commercial development activities trended down a little bit is that we continued to expect to invest heavily in R&D in 2007 and the exact numbers, obviously, we wont' know until we've accomplished it but I can tell you that we have a lot of exciting technologies that we're investing in, a lot of customer interest and that we expect to continue to fund.

You expect the customers to continue to fund. Is that what you meant?

No, I think either one. I think we'll either have customers fund some of that or we'll have--we'll fund them ourselves. It'll just depend upon the technology.

So did I hear either you or Phil correctly during the other part of the conversation that you expect the R&D number to bounce back to more normal levels?

The revenue number?

Right, the revenue number.

We do. We didn't really put a timeframe on it. Based upon what we know now, this Q1 may again be a little soft and again, we don't know exactly at this point, only being a month into it but where we stand with that is we have not lost any meaningful customers in the development activities there simply at a phase where either animals are cooking with the products and/or they're developing--they're evaluating results from the work that we've done to this point and that's just a timing issue with the customer.

And the flip side revolves around product sales, 3.3 million a quarter. Did I correctly infer that that number should continue at that rate or if not better going forward?

This was a pretty strong quarter. You know, I wouldn’t encourage people to think that that number should continue that rate of growth.

Well, rate of growth is one thing but absolute numbers is what we're looking at.

You know we're not going to give precise guidance there. We're very pleased with the strength of the product business across the board but like anything, there's some cyclicality to business.

Mm-hmm. On the royalty line outside of Cypher, could you refresh us as to what the seasonality of that is because I known that was an issue a year ago?

Specifically, in this quarter, there really weren't any really significant seasonal effects there. There are some tiering events that will kind of work their way through as the year progresses and so you know we have some elements there that have been helping us a little bit. And so those are, if anything, were a little bit on the favorable side, on some of those, but the exact magnitudes, we really don't know until we see how the next quarter unfolds.

Does tiering become a negative trend in Q1 December quarter?

Yeah, that would be the next--this first quarter of fiscal '07, we do have at least one tiering event that works against us sequentially but it will--the magnitude again, really depends on the customers' results.

Okay and one more financial question. Could you please create for me an adjusted non-GAAP number and I'll define it as forget about the write-off or the impairment but take--add back in the--let me start again. If you take your GAAP number and adjust it simply for the impairment charge, what is the earnings per share come out for the year?

You add in--the charge for Novocell was about $0.25, so you'd add that to your $1.09 and--

Okay, $1.34. Great, thank you.

Thanks, Rick.

And your next question comes from Steve Ogilvy with ThinkEquity. Please go ahead.

Hey guys, could you maybe kind of break down what expenses were shed in this quarter for G&A and how much is that is sustainable going forward?

On the G&A front, a lot of it is related to the elimination of the Bloomington facility and so we've got things like certainly some depreciation but more importantly, utilities, building maintenance, things like that that now that we have sold that facility, we just don't incur any longer. Those would be the most significant items that are affecting G&A there.

Okay, and then another question. Just wondering if you could comment on the revenue coming from products that isn't Cypher, just the nature of it and any dynamics or color you can provide on that.

There's several items that come from Cordis that is not the--are you asking about other than the Cypher royalty piece?

Yes.

Okay, so specifically, with respect to Cypher, they contribute on all three line items of the consolidated PNL, so the royalties, also product sales by the reagents that they buy to support the coding of Cypher and then third is R&D revenue in support of future generation products that our people do work on their projects.

So that's all related to Cypher. They also are a customer of ours on a consolidated basis, most of it through the hydrophilic business unit with a lot of different products that they have within--across their whole Cordis franchise, endovascular, neurovascular and cardiovascular, with different products that are coded with our hydrophilic codings.

And maybe this is more specific than you want to get but if 47% of your revenue or about 32.8 million came from Cordis, I mean, can you give us a feel for how much of that is unrelated to Cypher in any way? Is it a very small amount or is it maybe a third of that number?

No, Cypher is going to be the biggest component of that, the substantial majority. The other ones are becoming--they've been growing which is why when you look at the comparisons of the three years of the--just looking at total Cordis revenue and then the declining percentage, the other elements of the business were enough to actually influence that so that it's flat on a year-over-year basis, the percentage that comes from Cordis but Cypher piece continued its decline as the percentage of total revenue and that's--so it is becoming a nicer piece of business but it's not a huge number, as you can see.

Okay and then just to better understand. You know, a lot of companies are talking about the [durable] polymers and the problems with late-stent thrombosis. Is that something you're already seeing in your R&D or is that more of something that's just in talks at the announcements that were made by some of the big players at TCT?

We have more than one feasibility programs ongoing with non-durable polymers in the DES area, if that's your question.

And then with the pro-healing, is that something that's already under way, animal [study hedging]?

Yes, there is.

Okay, I'll stop there. Thanks.

Thank you.

Thank you. Our next question comes from Dan Owczarski with Belmont Harbor Capital. Please go ahead.

Yes, thanks. Hi, Bruce. Hi, Phil.

Hi.

Phil, you may have mentioned this but in the product sales, did you get to see any bump from Cypher Select Plus sales of reagents to Cordis from that for that product?

On the reagent front, they are a customer, as I said just a moment ago, across many, many products, so they have continued to buy reagents and we just don't know what gets specifically attributed to Cypher Select Plus. So that's really up to them to manage that inventory. And so we're not--we just don't have visibility on that.

In terms of the royalty piece, it was not a material factor this quarter.

Okay and then could you--I was writing--I missed the growth rate for--you broke down by product line. It was at 6.2 for hydrophilic this quarter and what the growth rate was, the percentage, year over year.

Actually, the hydrophilic year-over-year was 19%.

Okay, now is that rate sustainable or does that start to plateau? Are you dependent upon coding new products or are there still a bunch of existing products out there that are un-coded that you can continue to grow through that way?

Again, we're not at liberty to give guidance specifically within some of these items but this is one of the areas where we continue to benefit from this great trend toward minimally-invasive devices across the board and so we are seeing a tremendous up-swell of customers who come to us knowing that they need hydrophilic codings to make their product successful. And so we see a lot of good opportunity on that front. Also, remember that there are a number of drug-eluting stent customers that have yet to come to market and those are clearly in the go-forward numbers.

Now, was there any data presented by X-Cell Medical at TCT? Have they set a timetable for European launch and then how should we think of them as being different from what the University of Arizona is trying to do or that technology that you have access to?

There were data presented by X-Cell Medical and I can't speak to all of what was presented. I know they presented data on their first-generation device and that is not the device that I understand that they'll carry forward and that's not confidential, that has been disclosed. Unique thing about X-Cell is they are using the same polymer that is in the Cypher drug-eluting stent and yet they are positioning themselves as a very safe product, in terms of the potential absence of stent thrombosis.

So what their plans are, beyond that, I don't know that those have been specifically disclosed. And then your second question on--

Yeah, I mean, I guess I think of X-Cell Medical--should we think of them as having some kind of pro-healing, trying to encourage the endothelial growth. Are they coming at it the same way that the technology, the pro-healing technology that you're working on?

Yeah, their position is a little different. It's not currently using pro-healing technology. It's using a different drug. So the drug they've chosen is a drug called Estrodiol which is very well known and the theory is that it is something that doesn't delay the new cell growth the way that other drugs may and so it's, for lack of a better term, a little more friendly to the vessel.

Okay and then Phil, you said that you have not bought any stock back yet. When would you be able to start doing that?

Our customary black-out period continues through this earnings call and then plus a couple of days, so we're really looking at out into next week when we're at liberty to begin considering stock repurchases.

Great, thank you.

Thank you.

Thanks, Dan.

Thank you. [OPERATOR INSTRUCTIONS] And our next question is a follow-up from Steve Ogilvy. Please go ahead.

Hey, I just wanted to get your perspective, with all the concerns and press about late-stage thrombosis, if you think there's correlation between the type of polymer or maybe the amount of polymer or durable or do you think that there's something else going on there? From where you sit, how do you think the polymer is correlated to the late-stage thrombosis issue?

That's probably a long answer. It was, as you know, Steve, topic of a lot of discussion last week at TCT and the--much of what I understand and listen to, in terms of presentations, is that late-stent thrombosis is very much a multi-factorial issue, whether it's delayed healing because of the drug or stent design, delivery techniques, the absence of [IVAs] and the delivery process, potentially the polymer, etc., etc., etc., the use of Plavix, aspirin, as anti-coagulants and there was a lot of data presented and I'll leave it to the listener to interpret that as they would.

Our view all along on this has been, especially relative to Cypher, it's been in two million patients and--in excess of two million patients and frankly, ahs been very, very successful. The re-intervention rate is about half as often as bare metal stents. There appears to be no difference, in terms of safety, if you measure safety, in terms of death and myocardial infarction, compared to bare metal tents. But it's certainly something that many people believe and I think industry is trying to eliminate entirely which I think is the right approach.

So from SurModics' perspective, our role in this is to provide as many different approaches to solving that as we can, either internally developed or externally acquired and so if you believe it's using a durable polymer of a different form, a durable polymer with a thinner layer, a durable polymer with a different drug. If you'd like to use a biodegradable polymer, that's certainly available as well. If you'd like to use Heparin, if you'd like to use pro-healing, we offer those technologies as well. We have the ability, I think, through what we offer plus our applications expertise to help customers in a variety of different ways, looking at trying to minimize or eliminate late-stent thrombosis.

So that's maybe the short answer of it all but again, I think, last week, there was a lot of good discussion around where we are with late-stent thrombosis. At the end of the day, in the United States, four out of five stents implanted are still drug-eluting stents and I don't know that, at least from our perspective, we expect that to change any.

And then just a quick follow-up to that, I mean, the regulatory path [unintelligible] for an iteration on a drug-eluting stent is very long. With your master files at the FDA and all the clinical experience that's out there, do you see anything in the future that would somehow shorten the time to market for an iteration on a drug-eluting stent?

Oh, that's an expertise that I don't have. I think any--you can imagine anything that's going to involve a long-term implantable like a drug-eluting stent is going to require extensive clinical trials, probably large trials and extensive trials, in terms of follow-up, which means longer regulatory pathways. So it's hard to imagine a lot of things going through quickly, so I think that says a lot for the existing products that we have either today or soon to be on the market with our DES customers.

I think, in terms of our business model, the nice thing we offer with biodegradable polymers and our pro-healing technology is that we can actually generate revenue and potentially meaningful revenue long before products hit the market commercially by getting license fees, milestone payments, minimum royalties before commercialization hits. So I think, from our perspective, we are uniquely positioned to protect what's there and also maybe benefit in the short term, from the technologies we have to offer.

Okay, thank you.

Thank you.

Thank you, Steve.

Thank you, management. At this time, I'll turn it back to you for any closing comments you may have.

Thank you, Mary. We want to, again, thank everyone for participating today in conference call. We are pleased to have again delivered strong financial and operating results for the quarter and record results for fiscal year 2006. We look forward to speaking with you again when we announce our first quarter results in January. In addition, we look forward to seeing all of you who wish to attend our annual meeting, which will be held here in Minneapolis on January 20, 2007. Thank you, again.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We thank you, again, for your participation and at this time, you may disconnect.