Surmodics Inc (SRDX) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the SurModics First Quarter 2007 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, the 24th of January, 2007.

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

Thank you very much, Michael. Good afternoon, and welcome to SurModics Fiscal 2007 First Quarter conference call. Thank you for joining us today. I am joined on the call by Bruce Barclay, President and Chief Executive Officer, and Loren Miller, Vice President and Controller, who will be available for the Q&A session.

Before we begin, let me remind you that some of the statements made during this call may be considered forward-looking. The 10-K for fiscal 2006 identifies 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 during today's call. First, I will cover the quarter's financial results. Bruce will then highlight quarterly operating achievements and discuss some pipeline opportunities. And, finally, we will open up the call to your questions.

I will begin with an overview of the first quarter financial results and then break down the numbers by revenue component and business segment. Finally, I will cover expenses and review our balance sheet and cash flow.

First quarter revenue was 16.7 million, a 2% increase from 16.5 million in the year earlier period. Operating income was 8.1 million, representing an operating margin of 48%. Net income was 6.0 million, and diluted earnings per share was $0.32. These results include 1.4 million of stock-based compensation charges for the first quarter of fiscal 2007, compared with 1.2 million in the year earlier period.

Prior year results also include a $465,000, or $0.02 per diluted share benefit related to the reversal of a tax reserve. There was no such benefit in the first quarter of fiscal 2007. Johnson & Johnson, the parent company of Cordis, reported worldwide Cypher sales of approximately $580 million for their fourth quarter of 2006, down 13% year-over-year, and down 8% sequentially from their third quarter.

Despite the decrease in sales, Cypher maintained a worldwide market leading position in the drug-eluting stent market with an estimated 48% market share. Cordis was also able to retain its market position in the United States with 46% share for Cypher during the quarter.

The main factor impacting quarterly results for Cypher and the rest of the drug-eluting stent market has been the issue of late stent thrombosis, which Bruce will address in his comments.

Total SurModics revenue related to Cypher decreased 20% year-over-year; however, the rest of our business was much more robust this quarter as non-Cypher-related revenue grew 23% from the year earlier period.

Now I'll review revenue components. First, royalties and license fees were 13.2 million, up 8% from the year-ago quarter. Product sales increased 16% to 2.7 million from 2.3 million in the prior year period. We recorded 0.8 million in research and development revenue for the first quarter. R&D revenue for the fourth quarter of fiscal 2006, the September quarter, was at approximately the same level, and we communicated in last quarter's earnings call that while we believe this downtick is a temporary phenomenon, we did not expect R&D revenue to rebound immediately. This issue is largely a function of timing on the various customer projects we're working on.

As we look forward to the rest of fiscal 2007, however, we are confident about the quality of our pipeline and the direction of our research and development activities. Our confidence is in part driven by new R&D agreements to carry projects forward with various ophthalmology customers. Specifically, we have recently signed new R&D agreements with various ophthalmology customers totaling more than 2.5 million, with more R&D agreements expected based on current negotiations.

We expect these agreements to begin contributing to R&D revenue in the second quarter of fiscal 2007. Based on these new and expected agreements and meaningful progress on other customer projects across the business, we expect quarterly R&D revenue to increase in the remaining quarters of fiscal 2007. In fact, our activity on R&D projects has ramped so much that we expect R&D revenue for all fiscal 2007 to approximate or possibly even exceed last year's near record R&D revenue of 5.7 million.

Next, I would like to review results across business segment lines. Revenue for in vitro technologies, or IVT, was 4.8 million for the quarter, up 61% year-over-year, and 21% sequentially. While we are very pleased with the results, we do not expect this rate of growth to continue in the near term. Nevertheless, we were gratified by the strong growth across the IVT portfolio, as we really hit on all cylinders during the quarter.

In vitro technology has enjoyed strong results in diagnostics royalties, GE slides, and the whole stabilization business including a nice contribution from the antigen products we are distributing for Diarect under the relationship announced last July.

Next, revenue in our hydrophilic and other operating segment was 5.3 million, up 2% from the year earlier period. This segment has the broadest range of licensed customers contributing to royalty revenue, and included in the royalties for this segment is a new royalty stream from Cypher Select Plus, where our hydrophilic coating is used on the delivery system. The product is still being phased into the various markets around the world, and since the conversion of Cypher Select Plus product is only partial, the royalty contribution for the first quarter was modest. In addition, lower R&D revenue in this hydrophilic and other segment cut into the growth in royalties.

Finally, the drug delivery segment generated revenue of 6.6 million in the first quarter, a 20% decrease year-over-year, and 10% lower sequentially. The decrease reflects the 14% decline in Cypher royalties as a result of lower drug-eluting stent penetration, and also lower R&D revenue compared with the year-ago period as I discussed earlier.

On the expense front, excluding product costs, total operating expenses for the first quarter were 7.5 million, compared with 7.2 million in the year-ago quarter. Most of the increase was a result of growth in stock-based compensation. Sales and marketing expenses were down 4%, and G&A expenses were down 11% year-over-year as we continue to prudently manage expenses and reap the benefits of exiting our Bloomington contract manufacturing facility.

We continue to invest heavily in R&D. In the first quarter we dedicated 31% of revenue to R&D, which is the highest percentage of revenue devoted to R&D since the first quarter of fiscal 2003. Further, R&D expense constituted 69% of total operating expenses excluding product costs. In absolute dollar terms, R&D expense remains at the relatively high levels of the recent past. Total R&D expense was 5.2 million, up 13% from the prior year quarter.

Taking into consideration SurModics' lower overall R&D revenue during the quarter, which I mentioned earlier, and bearing in mind our continued high levels of R&D expense, you can correctly infer that we have taken advantage of the temporary downtick in customer demand for R&D services to allow our scientists and engineers to work even more intensively on our internal development projects.

The results from our efforts on internal projects are encouraging. We continue to make excellent progress with our prohealing technology, our various drug delivery polymers, especially our biodegradable polymer systems, and our projects in ophthalmology and orthopedics. We hope to be able to announce some of the exciting developments in orthopedics as our customer agreements progress.

Now, on to the balance sheet. As of December 31, SurModics had no debt and a cash and investment balance of 99.6 million. Cash flow from operations was 11.8 million in the quarter, an increase of 14% compared with 10.4 million in the prior year period. Our business development pipeline continues to grow as we evaluate potentially compelling opportunities to grow our business and put our balance sheet to work. In addition, our consistent ability to generate significant cash flow enables us to continue investing in the business with the aim of driving future growth. Moreover, our strong financial position allows 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 in our history. We believe that our growth prospects are promising and our stock is under-valued, making the repurchase of common stock a highly attractive investment opportunity.

Since announcing the authorization, we have purchased 17.5 million worth of SurModics stock, buying in 533,000 shares, or roughly 3% of shares outstanding. We are pleased with our progress on this front and hope to conclude our share repurchase program by the end of calendar 2007, as previously communicated.

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

Thank you, Phil, and thanks to everyone for joining us today on the call. Before I update you on the important developments here at SurModics, I want to touch on one of the key issues impacting the drug-eluting stent market, namely, late stent thrombosis. The issue was in the press frequently during 2006, serving as a significant topic in major cardiology meetings and culminating in the FDA advisory panel last December. As most of you know, one of the main issues with late stent thrombosis stems from insufficient clinical data relating to off-label use of drug-eluting stents.

As a result, physicians now appear to be taking a more conservative approach when deciding whether to implant drug-eluting stents. This more intensive scrutiny has caused a reduction in penetration rates, which has impacted the market and obviously factored into our financial results for the quarter.

Despite this recent setback, we are still optimistic about the future of drug-eluting stents. They remain the therapy of choice in important segments of the market and can penetrate into other segments as more supporting data is presented, and as new stent technology is introduced into the market. And despite the reduced penetration rate, approximately three out of every four stents implanted in the U.S. are drug-eluting.

We expect penetration rates in the drug-eluting stent market to rebound over time, especially as products currently perceive to have the potential for lower stent thrombosis rates like Medtronic endeavor or Conor CoStar hit the market in the U.S. and Europe, respectively. These launches will further benefit us since both Medtronic and Conor are SurModics customers.

In addition, J&J announced yesterday the cancellation of their Cypher NXT stent program. We believe this announcement is a positive for SurModics. You may recall that NXT used the Guidant delivery system without our hydrophilic coating. J&J disclosed during their Medical Device and Diagnostics Analyst Day in September of last year that the generation of Cypher following NXT is Cypher Elite. Cypher Elite is the U.S. counterpart of Cypher Select Plus now marketed in Europe. As you know, Cypher Select Plus has two SurModics technologies on it and, accordingly, we receive two royalty streams. Again, we view J&J's announcement yesterday as a positive for SurModics.

In addition, J&J continues to be the only drug-eluting stent available in Japan, the second largest single country market in the world. Boston Scientific's Taxus stent is expected to be the second product approved in Japan, but as Boston Scientific disclosed earlier this month that the product is expected to receive approval in the second half of 2007, as opposed to their previous guidance of the middle of 2007.

Inside SurModics, we continue to advance our development of next generation solutions to help address the issue of late-stent thrombosis. SurModics is actively developing three different technologies we believe are potential solutions to the thrombosis issue including prohealing technology, biodegradable polymers, and heparin coatings.

The drug-eluting stent market continues to be an important source of current and future revenue for SurModics. However, we are not solely reliant on Cypher, and our penetration in this arena continues to broaden. Today we are participating in multiple ways and with multiple partners in the overall drug-eluting stent market. We have announced partnerships with seven different companies that licensed technology from SurModics for their drug-eluting stent products, both for their stents and delivery systems. Additionally, we are engaged in paid development programs for drug-eluting stents from other companies that are not yet licensed.

I'd like to conclude my remarks on the DES market by discussing the potential positive impact on our business from J&J's announced acquisition of Conor Medsystems. As a brief recap, in January 2006, SurModics announced that it had licensed its advanced hydrophilic polymer technology to provide the lubricious coating on the delivery system of Conor's second generation CoStar stent system, a cobalt chromium paclitaxel-eluting stent. Conor has been very positive and very public about the benefit our hydrophilic coating has had on their delivery system. Conor disclosed in November that they expected to launch in Europe a version of the CoStar with SurModics hydrophilic technology coating on the delivery system within a few months. Accordingly, that launch could happen this quarter, depending, of course, on J&J's influence over the launch once they close the transaction.

On the competitive front, for those physicians who prefer the drug paclitaxel, Conor's DES offers an alternative to Boston Scientific's Taxus drug-eluting stent. As we receive no revenue from the Taxus product today, SurModics will benefit to the extent that Conor CoStar stent gains share from Taxus. Once J&J controls Conor, and while we have no direct knowledge of their marketing plans, we would expect some focus on Taxus' stronghold accounts to convert them to CoStar accounts.

If J&J is successful in these conversions, it would clearly benefit SurModics. The other cases where a CoStar sale might cannibalize the Cypher sale, SurModics would also benefit as we actually receive a higher royalty on CoStar sales than we do on the sale on the Cypher at current prices. Thus, in either scenario, SurModics would benefit from this acquisition.

Despite experiencing notable headwinds during the first fiscal quarter, namely, the controversy around late stent thrombosis in the drug-eluting stent marketplace and lower R&D revenues compared to historical levels, we believe our results speak to the benefit of our broad-based portfolio. Importantly, this was the eleventh consecutive quarter in which non-Cordis revenue exceeded Cordis revenue.

A closer look at these results reveals that while Cypher-related revenue came in 20% below the year earlier period, non-Cypher revenue increased 23%, compared with the first quarter of fiscal 2006.

Had we experienced these challenges in the DES market a year or two ago, the adverse impact on our results would have been even more pronounced as our revenue at the time was not as well diversified as it is today. Our efforts to diversify our revenue stream have helped to insulate us from short-term issues and deliver growth albeit at a lower level than we are accustomed. More importantly, we remain pleased with our progress executing our strategic plan and the level of innovation taking place at SurModics as we broaden and deepen our pipeline, add successful partnerships, and focus on market demands centered around unmet clinical needs. We are confident that SurModics is well positioned to achieve its long-term goals.

Now, I'd like to review some of our non-Cypher-related revenue drivers beginning with ophthalmology. First, let's discuss some specifics on SurModics sustained release I-vation drug delivery system. As a brief reminder, the I-vation technology offers considerable advantages over existing therapeutic treatments to patients suffering from age-related macular degeneration, or AMD, and diabetic macular edema, or DME.

The drug delivery system can deliver a variety of different 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, which any procedure is susceptible to. These are all significant competitive advantages.

In fiscal 2006, we completed a Phase I study for I-vation TA, a version of our implant coated with a steroid called triamcinolone acetonide, or TA. The six-month follow-up revealed an exceptional safety profile, and we are highly encouraged with the trend toward positive efficacy outcomes as well.

One hundred percent of the patients at six months had their vision improved or stay the same, with no continued deterioration in visual acuity. In recent developments, we submitted our complete Phase I data package to the FDA at the end of 2006. Significantly, we are planning to initiate a Phase II trial in fiscal 2007. I am also pleased to report that prospective partners continue to show interest in collaborating with us to carry the I-vation TA product forward through the remaining clinical trial and ultimately commercialize the technology.

The ophthalmology division has been very busy discussing potential partnerships with companies developing drugs aimed at various ophthalmic applications. Our current and prospective partners have been impressed by the drug delivery potential of our intravitreal implant and the depth of our expertise and capabilities in the site-specific delivery drug arena.

Further, they recognize the value of our delivery technology to help differentiate their drug candidates in the large and strategically important ophthalmology market, which industry experts anticipate will develop into a multi-billion dollar market over the next five years.

Interest in partnering with SurModics is very strong and existing customers have leveraged our technology and expertise to move to the next phases of their respective development programs. Currently, in ophthalmology, SurModics has multiple active projects and discussions backed by strong customer interest. Further, as Phil mentioned earlier, we have a backlog of recently signed R&D agreements with ophthalmology customers in excess of $2.5 million, and we expect this number to grow in fiscal 2007.

I will provide a more detailed update of this important area of our ophthalmology business at our annual meeting next Monday.

Next, I'd like to discuss the advantages we have made in the cell culture products that are being jointly developed by SurModics, the Donaldson Company, and Corning Life Sciences. As we have discussed previously, this collaboration was initially launched in May 2005, and combines Donaldson's nanofiber technology with SurModics' surface modification technology. Our extracellular matrix, or ECM products, provide cell growth conditions that more closely resemble those found in the body leading to improved outcomes in cell culture, cell-based bio assays, and other in vitro cell-related applications.

In May 2006, we announced the Corning Life Sciences would provide worldwide marketing and distribution for the expanding product line. Importantly, Corning will help develop products for the key high throughput screening segment. This agreement enables us to take advantage of Corning's market leading position in plastic and glass labwear to address cell culture and drug discovery applications. We are confident in this technology and together with our partners are actively striving to capitalize on the full potential of this platform technology.

We will be featuring our joint product development of these cell culture products at our annual meeting next Monday, January 29, when we welcome Mr. Michael McFarland, Business Technology Director of Corning Life Sciences, to speak. The event will provide investors with the opportunity to learn more about these exciting products and the market opportunities they offer. We hope to see as many of our shareholders at the meeting as possible, but if not, please tune in to the Webcast.

Let me now turn your attention to the product pipeline. Overall, we now have a total of 85 licensed customers, several with multiple licenses, compared with 76 in the prior year period. Currently, SurModics has 89 licensed product classes on the market generating royalty revenue compared with 80 a year ago. The total number of licensed products not yet launched was 80, up from 74 in the first quarter of fiscal 2006. Major non-licensed opportunities as of December 31 stood at 80, up 19% from 70 -- sorry, from 67 a year ago.

In total, the Company now has 160 potential commercial products in development representing each of the Company's four focused markets: cardiovascular, ophthalmology, orthopedics, and neurology. This total is a noteworthy gain from the 141 potential commercial products in the year earlier period.

Our customers launched four new products in the marketplace during the quarter, bringing to 14 the number of launches achieved toward our goal of 30 launches between April 2006 and September 2007.

Lastly, SurModics signed two new license agreements during the period. Our goal is to sign 18 customer licenses in fiscal 2007, and we remain confident in our ability to achieve that objective given the current number of active negotiations ongoing at this time.

Operator, that concludes our prepared remarks. Now, we'd like to open up the call to questions.

Certainly. Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question is coming from Daniel Owczarski with Belmont Harbor Capital. Please go ahead.

Yes, thanks. Hi, Bruce; hi, Phil. You talked about the 2.5 million in R&D targeting ophthalmology. Could you give us a little more background as far as, are these new customers, are they existing customers, continuations of programs, or different new programs? Has anybody stopped their lab studies and walked away? Any other details you can provide?

Sure, Dan, I'd be happy to, this is Bruce. These are a combination of new customers with drugs of their own that they would like to have us formulate and then they will conduct testing -- animal testing on those formulations. Then there are also continuation projects. So, part of the reason why we had mentioned there was a lull in the last six-month window or so is that some of our early customers had done similar evaluation or formulation work with us, put them in animals. Those animals were "cooking," as I like to say -- in other words, implants were in the animals. They've now been explanted and the data was reviewed. They liked the outcomes and now they're going into the next phase of study.

So, we were very encouraged by that, obviously. We're also very encouraged by the fact that a number of new customers have come to the table as well. So, as I said, we will give a little more color on this at the annual meeting on Monday.

I think your other question was --

Has anybody -- have you lost any customers in R&D?

Yes, and the answer to that is no.

Okay. And then without your -- any clinical trials going on right now, is that I-vation program still dilutive given that you've got the 2.5 million coming in, or could you give us any idea of what you're spending on that program in the R&D expense line?

I don't know if I have it broken out. Obviously, if you've seen over the last few quarters, R&D expense has been going up, and I would say certainly a lot of that is in the ophthalmology sector. Not just on the expensive supporting customer projects, but we're doing a lot of internal development as well. Some of that is the clinical trial, and the clinical trial expenses do continue even though we're collecting data because we are obligated to follow those patients for a certain period of time. So, I don't know that I can break it out right now, Dan, but certainly a big part of the increase in R&D is directed to ophthalmology, but not exclusively.

Although there is what you called like a lull, it's still probably dilutive, should we assume?

I don't know. I don't have that in front of me, I'm sorry.

All right. And then switching to stents, you talked about the Cypher Elite. What's going to be -- what needs to be done from a regulatory perspective to get that product on the market? Are there lots of new trials that have to be done, or is there a timetable that J&J has suggested?

You know, I don't have any new information I can share publicly, Dan, other than the fact that the slide that they put up during their MDD conference last September had a filing date of 2007 for the Elite. Whether that changes because NXT has now canceled, I don't know the answer to that. They had 2006 as the filing date for NXT, and so I, again, can't speak publicly as to that other than what I have in front of me here from their last analyst call.

Okay. And last, Phil, about the stock repurchase, do you have a timetable when that next phase would start?

We don't have any timetable that we're prepared to talk about. We'll continue to monitor things as we roll forward. We know that we have the remaining authorization and, as we did before, we'll monitor the situation to see whether stock is trading and see whether that would be something appropriate to do or not.

Okay. Have you bought any shares in 2007, or was this all completed last year, at December '06?

The 17.5 million was all completed during the December quarter, and we have not purchased any stock in 2007, because in fact we've been in a blackout period until after earnings are announced and the annual meeting is completed.

Okay, great. Thank you.

Thanks, Dan.

All right, thank you. Paul Kenworthy, please go ahead with your question.

Well, congratulations, Bruce and Phil, on particularly the 23% increase in non-Cordis business. My question is, what kind of revenue do you expect in the infection-fighting coatings, and I suppose that's a lot in the orthopedic area.

That is one of our areas of interest in the orthopedic area. It's a large market, it's a technology application that is -- are markets that we think are logical extensions for our current line of technology. We're also happy to be able to say that in the first quarter we actually were able to generate our first paid R&D from orthopedics, although a small amount, obviously, but it was a nice sign because whenever customers vote with their dollars, that's an important thing to us.

So, good interest there from the conversations we have in the orthopedic arena, and certainly infectious coatings is one area. Drug delivery generally is another area that we think would apply there. We can't comment specifically on revenue projections relative to that specific application, but I can tell you it is of high interest to us and, again, customer interest has been good as well.

Okay, thank you.

Thank you.

Thanks, Paul.

Richard Rinkoff of Craig-Hallum. Please go ahead with your question.

Thank you. A couple of quick questions. You said that Cypher revenue is down 20%, I suppose that was year-over-year?

Yes, that's year-over-year for total Cypher-related revenue.

Okay. And if you look at Cypher revenue to J&J, it was down 13%, so what else are you throwing in that?

The other items that we generate revenue from the Cypher program include reagents, which is the dry form polymers that we sell to them so they can then coat the devices. And the other revenue line is R&D revenue related to other Cypher programs.

Okay. In terms of your Phase II, you're going to start a Phase II trial this year. Is that with your own TA project, or are you only going to do a Phase II with some other company's drugs in partnership with them?

That's for our TA product, the product that we carried through Phase I.

It was my impression that that was not your first choice, that you preferred to have a partner put their drug in some kind of a trial. Is this a change?

No, it's not a change; it's -- what we've said all along is we're pursuing simultaneous paths: one on the TA product, which is what we're doing, and then secondly with multiple applications of the technology and customer's own specific or proprietary drugs, and we are pursuing both paths right now.

If you pursued it with another company's drug, would that go back to Phase I, or could they piggyback and start right off with the Phase II?

That's a good question. I think it would depend upon the drug. The drug we're using in our Phase I, now Phase II, is a steroid. But I think the assumption we would make out of the box is that would probably start with a Phase I, but I don't know that for sure.

Okay. And would that ramp-up your R&D expense later this fiscal year, to do this trial?

It will if we continue to do it on our own. I mean, I think maybe where you're going with the question is, would we be interested in partnering with our own TA product with a customer, and the answer is yes, we would, and we have had conversations to that effect.

What would the customer bring to the table given the TA is readily available and the other part of the equation is totally SurModics?

What would the customer bring to the table? An interest in getting into the ophthalmology drug delivery market, and this is a terrific product to get into that market with, because we've got a nice head start with it. It does not preclude their ability to iterate future generations with their own drug, or this same product for other applications. So, it's a very nice product, we think, to get them into the segment.

You mentioned that in the drug-eluting stent area, you have paid development programs with others that aren't licensed. Any hints at what those programs are about?

Just more of what we've already talked about, between drug delivery polymers for releasing a drug, the prohealing technologies, which we believe are potentially very useful in the late stent thrombosis, and then slippery coatings for delivery systems. We have active interest and activity in all three of those areas right now with unlicensed customers.

Do you have multiple interest in the prohealing?

We do.

Multiple paid interest?

One in particular I know we do. Is it multiple, I don't know that for sure, Rick.

Okay. Should we infer that J&J is the one that's paying?

I can't comment on who the partner is, as much as I would like to.

Okay. When are we likely to hear more about orthopedics?

That's a good question, because we actually have some technology on our own that we have developed which is a standalone product, so we want to ensure that we've got our IP sewed up on that, and potentially we can talk about that one sooner. In other words, there's not a customer telling us not to.

Separately, we do have customer projects, coatings of customers' own orthopedic devices which obviously then would be subject to kind of our normal mode of operating the business, which means getting their permission to do that. But we announced the formation of the very small business unit over a -- a little over a year ago, and in that time we've done a lot of good work in terms of educating ourselves on the opportunity, and having good conversations with a lot of companies both large and small, and there's definite interest there. And it is my hope that we can start talking about that in the very near future.

And what's the lag time between talking about and actually booking royalty income?

It depends. There are conceivably some products that could get to the market in the more near term than far term -- in distant term, but, again, we'll maybe save that until we actually talk about specific application. Again, I would say, like all of our business and our business model, royalties are wonderful and we pursue them aggressively, but we can also generate revenue well in advance of that through R&D developments, polymer sales, milestones and license fees, which we would, of course, try to get.

Okay. One last question. Milestones, since you bring it up. As far as I know, you have not booked significant milestone payments for some time. Why is that and what's likely to change that?

Rick, it's really a function of the customer agreements and the progress they make, and so some of our customer agreements do incorporate those into the structure. They tend to be the agreements that are either exclusive or -- and/or involved in what we call enabling technology. And so those agreements are ones that tend to contemplate that structure as the customer negotiates what that looks like. So, the timing of it really is a function of the customer progress on their programs and when we're signing them up.

Thank you.

Does that help?

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is coming from Ross Taylor with CL King. Please go ahead.

Hi, just two or three quick questions. First, with regards to the potential for doing a Phase II trial with triamcinolone, can you give us any ideas what that trial design might look like? Part of the reason for asking the question is I'm just trying to make some rough estimates as to how much that trial might cost.

We have made a request to the FDA of a particular trial design. What we have decided is that we would not comment specifically on that until we hear back from FDA and get some clarity on their position. So, I guess I would like to defer that until we get better clarity in terms of specifics on the trial.

Okay. And second question related to ophthalmology, can you comment at all whether any of your R&D projects or working with -- are you working with both small molecule drugs and large molecule drugs? Can you comment at all on that?

Yes, we can. We are working with both small and large molecules.

Okay. And third question, the tax rate in the quarter was just a little bit lower than I would have expected. Is that the rate we can expect for the rest of this year?

No, I would continue to assume a rate slightly north of 38%, 38.5%. As you probably recall, in the recent environment, we can't just smooth variances through the tax rate and just have everything run into a balance sheet account. There are discrete items that hit our tax progression each quarter, and depending on whether they're up or down, they will influence the rate up or down in the given quarter. And we've -- if you look back over several quarters, we've had it move in both directions in the past several quarters. So, this happened to be one of the quarters where we had a slightly lower effective rate. But going forward, I would continue to model around a mid-38 kind of a tax rate.

Okay, thanks.

Thank you.

All right, thank you. Lastly, we have a follow-up from Dan Owczarski. Please go ahead.

Yeah, just real quick on the IVT business. Phil, you mentioned that it's up 61%, probably can't sustain that growth rate, but was there any kind of one-time items going on there to get to the 4.8 million, or is that 4.8 million almost like a baseline that you can grow from?

You know, we had nothing material in there that was particularly driving that. It was really -- there was a lot of broad-based elements to that number. I think going forward I would suggest that it could be a little bit lighter, very, very near term, but there's a lot of products that we're layering into that business unit, and so there could be potential growth over time continuing as those products continue to gain traction in the market.

Okay, thank you.

Thanks, Dan.

Thank you, management. There are no further questions. Please continue with any closing comments.

Great. Thanks, Michael. We want to thank everybody again for participating in this quarter's conference call. We look forward to speaking with you again at our annual meeting next Monday, and in April, when we announce our second quarter results. Thank you again.

Thank you. Ladies and gentlemen, this does conclude the SurModics First Quarter 2007 Earnings conference call. You may now disconnect. Thank you for using ACT Conferencing. Have a very pleasant evening.