Surmodics Inc (SRDX) 2007 Q2 法說會逐字稿

Welcome to the SurModics second quarter 2007 earnings conference call. During today's presentation, all parties will be in a listen-only mode. [OPERATOR INSTRUCTIONS] Following the presentation, the conference will be open for questions. If you do have a question, please press the star followed by the one on your touch tone telephone. If you would like to withdraw your question, please press the star followed by the two. If you're using speaker equipment, you'll need to lift the handset before making your selection. As a reminder, this conference is being recorded today, Wednesday, April 18, 2007. I would like to turn the conference over to Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead,sir.

Good afternoon and welcome to SurModics fiscal 2007 second quarter conference call. Thank you for joining us today. I am joined on the call today 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 statements. The 10-K for fiscal year 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 on-line. Now, I would like to give you 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 discuss some product opportunities and progress against our fiscal 2007 company goals. And lastly, we will open up the call to your questions. I will begin the financial result discussion with an overview of the second quarter 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.

Second quarter revenue was $17.4 million down 2% from $17.7 million reported in the year earlier period but up 4% sequentially. Operating income decreased 10% to $8.1 million from $9.0 million in the prior year period. Net income increased nearly four-fold to $5.7 million from $1.5 million in the same period last year which included a noncash impairment loss of $4.7 million or $0.25 per diluted share, associated with our investment in NovaCell. Diluted earnings per share was $0.31 compared with $0.8 in the second quarter of fiscal 2006. These results include $1.5 million of stock-based compensation charges for the second quarter of fiscal 2007 compared with $1.6 million in the prior year period. Our distinctive royalty-based business model continues to demonstrate excellent profitability, producing an operating margin of 47% and a net margin of 33% for the quarter.

Johnson & Johnson, the parent company of Cordis Corporation reported worldwide drug eluting stent sales of approximately $530 million for their first quarter, down 27% year-over-year on an operational basis and down 9% sequentially from their fourth quarter. Despite the decrease in sales, J &J maintained its worldwide market leading position in the drug eluting stent market with an estimated 48% market share. Cordis also retained its market position in the United States with an estimated 46% share for Cypher in the quarter. The main factor impacting results for Cypher and the rest of the drug eluting stent industry continues to be overall softness in the market due to a combination of lower penetration rates and lower prices and increased competition outside the United States. Total SurModics revenue related to Cypher decreased 25% year-over-year. The magnitude of this decrease truly highlights the value of our broad portfolio of royalty-bearing products as the rest of our business continued its strong growth trend with nonCypher-related revenue growing 19% from the year earlier period. In fact, this was the 11th consecutive quarter in which we delivered growth in nonCypher revenue. On balance, the strong growth in the rest of the business, this quarter offset almost entirely the significant decline in Cypher-related revenue. And as you know, Cypher is our single largest revenue source so the decline is a very large item to offset. Looking at it sequentially, despite a 9% decrease in J&J drug eluting stent sales from the December quarter, total revenue for SurModics actually increased 4% in the March quarter.

Next, I'll review components for the quarter of our revenue streams. Royalties and license fees were $13 million, down 2% from the year ago quarter and down 1% sequentially. As nonCypher-related royalties and license fees offset almost entirely the significant decline in Cypher-related royalties and licensees. Continuing on to product sales, I am pleased to report an increase of 16% year-over-year and 24% sequentially to $3.4 million from $2.9 million in the prior year period. These strong results mark a new record for our product sales line. Growth was driven by strength across the portfolio in reagents, stabilization products, antigens and genomic slides. Turning to our final revenue line item for the second quarter of 2007, we generated $1.0 million in R&D revenue down 37% from the year-earlier period but up 20% sequentially. You'll recall that last quarter, we indicated that we expected R&D revenue to increase following two consecutive quarters of slightly lower performance related largely to the timing of our various customer projects. We continue to sign new R&D agreements including some promising projects with ophthalmology customers. Thus far in fiscal 2007, we've signed in excess of $2.5 million in R&D agreements with various ophthalmology customers. And additional projects remain in discussion. As announced last quarter, we anticipate that quarterly R&D revenue will ramp up in the second half of 2007. We expect R&D revenue for all of fiscal 2007 to approximate last year's near record R&D revenue of $5.7 million.

Now, I will review our results across business segment lines. Revenue for the hydrophilic and other operating segment was a record $6.5 million, up 23% from the year earlier period and up 24% sequentially. This segment has the largest number of licensed customers contributing to royalty revenue. Next, revenue in our in vitro segment was $4.6 million, up 23% year-over-year but down 5% sequentially. Recall that in last quarter's conference call, we projected a sequential decline in in vitro revenue but the decrease was not as pronounced as we expected. We continue to be pleased with the broad based performance in our in vitro technologies business and lastly, the drug delivery segment generated revenue of $6.2 million in the second quarter, a 28% decrease year-over-year and 6% lower sequentially. The decrease reflects the decline in Cypher royalties of 27% year-over-year and 9% sequentially. Principally, as a result of softness in the drug eluting stent market.

For the first six months of fiscal 2007, our segment results are as follows. Drug delivery segment revenue was $12.8 million, down 24% from the prior year. Hydrophilic and other segment revenue was $11.8 million, up 13% year-over-year. In vitro segment revenue was $9.4 million, up 39% from the first six months of fiscal 2006. On the expense front, excluding product costs, total operating expenses for the second quarter were $8.2 million compared with $7.9 million during the same quarter last year. SurModics continues to manage its expenses prudently as evidence by our 12% decline in sales and marketing expenses as well as our lower G&A expenses which were down 13% year-over-year. Additionally, we continue to reap the cost saving benefits of exiting our Bloomington Contract Manufacturing Facility which we completed a year ago. We have also continued to demonstrate our commitment to R&D investment by dedicating $5.7 million to R&D during the second quarter. This is a 13% increase from the prior year period, representing 33% of total revenue. Further, R&D expense constituted 70% of total operating expenses excluding product costs. The growth in R&D expenses was primarily driven by growth in our development organization and funding our various preclinical and clinical efforts.

Let me elaborate on this last point. We are funding preclinical studies for certain of our technologies. For example, we are conducting important animal studies with various biodegradable polymers. Funding the studies helps accelerate the dialogue with customers relating to incorporating our technologies into their product pipelines. As such, we believe the investment in internally-funded R&D projects such as these preclinical studies will generate value in both the near and long-term. In addition, we continue to make excellent progress with our prohealing technology and our projects in ophthalmology and orthopedics.

Now let's move on to the balance sheet. As of March 31, SurModics had no debt and a cash and investment balance of $87.6 million. Cash flow from operations was $4.7 million in the quarter compared to $8.3 million in the second quarter of 2006. The quarter's lower cash flow principally reflects timing of income tax payments. For the first six months of fiscal 2007, cash flow from operations was $16.5 million in the quarter compared with $18.7 million in the first half of fiscal 2006. SurModics regards its cash position as a valuable asset, enabling us to pursue opportunities that support our growth strategy. We remain vigilant in identifying and evaluating new opportunities that have the potential to enhance our market positioning and deliver shareholder value.

Additionally, our strong financial position allows us to return capital to our shareholders and further enhance long-term share holder value. In September 2006, 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. I'm pleased to report that we have now completed this repurchase in full. Well ahead of our calendar -- end of calendar year 2007 goal. In total, we purchased in excess of 1 million shares of SurModics stock, retiring roughly 5% of the outstanding shares. The authorization to repurchase shares and the rapid execution of this plan reflects our belief in our technology portfolio, confidence in SurModics long-term prospects and the belief that our stock is under valued.

We're pleased with the outcome of our repurchase program and believe it has proven to be an effective way to balance our capital structure and return capital to shareholders. With that, I'll now turn the call over to Bruce.

Thanks, Phil. Thanks again to everybody for joining us today on our call. This afternoon, I will update you on several positive developments SurModics achieved during the quarter. Before I do that, I would like to comment briefly on the reduction in Cypher sales we saw again this quarter and primarily, I want to touch on the general state of the drug eluting stent market. As you know, drug eluting stent and the associated clinical data remain high profile issues, ones that appear frequently in the press as well as serving as significant topics at major scientific conferences including the American College of Cardiology Meeting, which was held last month. As a result of these issues, over the last quarter, penetration rates for drug eluting stents decreased once again. Despite this near-term setback, we remain optimistic about the future of drug eluting stents and believe penetration rates in the DES market will rebound. Drug eluting stents continue to be the therapy of choice in important segments of the market and can become the technology of choice in other segments as more supporting data is presented and as new stent technology is introduced into the market. Even with the current reduced penetration rate, it important to remember that still, approximately seven out of every ten stents implanted in the United States are drug eluting.

Further as products currently proceed to have the potential to generate lower late stent thrombosis rates reach the market, DES penetration rates should increase. SurModics has announced hydrophilic technology licensing agreements involving two of the most high profile next generation products. One of these, Methronic's endeavor present encouraging data at the recent ACC meeting, the other is Conor's CoStar stent, which will be marketed by J&J now that its acquisition of Conor Med Systems has closed. Recall that SurModics will receive a higher royalty on CoStar sales than we receive on the sale of a Cypher stent at current prices. In addition, we remain well-positioned on J&J product offerings. The Company's next generation Cypher Select Plus stent now marketed in Europe, carries two SurModics technologies on it. Accordingly, it generates two royalty streams. Our second quarter results include a substantial increase in royalties from Cypher Select Plus compared with the first quarter as Cordis' conversion to Cypher Select Plus in CE mark countries continues to progress. SurModics own research efforts are actively advancing the development of next generation solutions that help address thrombosis from medical devices including stents. We are developing three different technologies that we believe our potential solutions to thrombosis including prohealing technology, biodegradable polymers, and heparin coatings. We're currently generating revenue from customers with all three technology class.

I would like to conclude my remarks on the drug eluting stent market by reminding everyone this market continues to be an important source of current and future revenue for SurModics. Moreover, we're not solely reliant upon Cypher as our DES participation is broad and widening. To date, we have announced partnerships with seven different companies that have licensed technology from SurModics for their DES products for both stents and delivery systems. Additionally, we're engaged in paid development programs for the DES products of additional companies that are not yet licensed or announced.

With that, I would now like to review some of our nonCypher-related revenue drivers beginning with the advances we have made in ophthalmology. As a brief reminder, SurModics I-vation technology offers considerable advantages over existing therapeutic treatments to patients suffering from retinal diseases such as age-related macular degeneration or AMD and diabetic macular edema or DME. The I-vation system can deliver a variety of drugs to the back of the eye on a sustained released basis, improving patient compliance and possibly improving safety and efficacy over standard therapies. It can be implanted in a minimally invasive procedure and may be removed after the drug has been fully released or sooner in the event of complications which any procedure is susceptible to. These are all substantial, competitive advantages that address a significant unmet clinical need. We have an ongoing clinical trial with I-vation TA. A version of our implant coated with a steroid called, triamcinolone acetonide or TA. The six-month data from the Phase I study revealed an exceptional safety profile and we're highly encouraged with the trend toward positive efficacy outcomes as well. We submitted our complete phase one data package to the FDA at the end of 2006 and are planning to initiate a Phase II trial in fiscal 2007. Prospective partners are showing a strong interest in collaborating with us to take the I-vation TA product through the remaining clinical trials and ultimately commercializing the technology.

Currently, SurModics has six customer supported projects in paid development. These projects leverage our drug delivery platforms and polymer matrix technologies for sustained delivery of these companies' proprietary drugs to the back of the eye. Discussions with additional companies remain ongoing. The drugs being evaluated include both large and small molecules and encompass both our I-vation implant and other delivery systems that we are developing internally. Our potential partners recognize the value of our delivery technologies to help differentiate their drug candidates in the large and strategically important ophthalmology market. Industry experts anticipate that this sustained delivery segment for back of the eye diseases will develop into a multibillion dollar market over the next five years.

These ophthalmology products are helping drive the increase in R&D revenue we achieved this quarter. As we announced last quarter, over $2.5 million in R&D agreements are in place for commercial development work and likely substantially more if current discussions continue to go well. Our progress underscores enormous opportunity we see before us in ophthalmology and the demonstrable progress we're making with our customers. Let me take a moment to comment on a related announcement that was made in the past month. As some of you may have seen, [SiVida] announced they had licensed their drug delivery technology in ophthalmology to Pfizer. While this was not a license for our technologies for sustained drug delivery, we believe this announcement further validates the market opportunity and strong interest in sustained drug delivery for treating back of the eye diseases, particularly by large pharmaceutical and biotech companies like Pfizer. It was reported that [SiVida] [ INAUDIBLE ] License agreement has the potential to reach $165 million in milestones, not including royalties. We regularly remind our investors of SurModics business model which allows us to generate revenue long before a customer's product hits the market. Through R&D revenue and milestone payments in deals enabling technologies such as our offerings in ophthalmology, drug delivery, pro healing and the like. We believe the [SiVida] transaction further validates this type of license structure.

Next, I would like to discuss our cell culture lab wear products. As mentioned previously, we're developing cell culture products with Donaldson Company and Corning Life Sciences. The collaboration with Donaldson combines Donaldson's nano fiber technology with SurModics surface modification technology. These extra cellular matrix products provide cell growth conditions that most closely resemble those found in the body leading to improved outcomes in cell-culture cell-based bioesassay and other in vitro cell-related applications. In May 2006, Corning Life Sciences, the market leader in plastic and glass lab wear, join the partnership to provide worldwide marketing and distribution for the expanding product line. Corning has also been instrumental in developing specific lab wear products such as the 96 Well Microplate and the 100 Millimeter Dish, essentially a petrie dish. We're extremely pleased to report that on April 12th, Corning commercially launched these initial products and more products are in the pipeline. Corning's launch initiatives include participation in two important trade shows, the American Association for Cancer Research being held from April 14th through the 18th, and the Society for Bimolecular Sciences held from April 15th through the 19th. We believe this is a significant opportunity for Corning, Donaldson and SurModics. We feel confidence in our prospects as competitors technologies are not sufficient to meet the needs of the research and pharmaceutical markets for cell culture and drug discovery applications.

Let me provide you some additional detail on what the opportunity could mean for SurModics. As we've said in the past, the existing market for lab wear is estimated at approximately $600 million. We mentioned at our annual meeting that because of the increase in technology and added value these new products bring to the customer, it is reasonable to assume a significant increase in list price compared to uncoated lab wear. Accordingly, the available market could grow substantially. We are pleased to report that Corning has set the list price on all of these products at a significant premium to uncoated lab wear. As an example, Corning has set the list price for a Polyamine Coated Ultra Web 96 Weld Microplate at $345 per case of ten units which is $34.50 for each 96 weld plate. This is a five to ten-fold increase in list price over uncoated 96 weld plates. Accordingly, we believe our assumptions about the market have the potential to play out as we projected.

I would now like to turn your attention to our product pipeline. Overall, we now have a total of 87 licensed customers, several with multiple licenses, compared with 79 in the prior year period. Currently, SurModics has 95 licensed product classes on the market generating royalty revenue compared with 82 a year ago. The total number of license products not yet launched was 91. Up from 79 in the prior year period and major non licensed opportunities stands at 77, up from 73 a year ago. In total, the Company now has 168 potential commercial products in development representing each of the Company's five focus markets. Cardiovascular, ophthalmology, orthopedics, neurology and the in vitro segment. This total is a notable gain from the 152 potential commercial products in the year-earlier period.

Before concluding, I'll take a few minutes to provide with you greater insight into the Company's outlook and the progress we have made in achieving the fiscal 2007 company goals unveiled at our annual meeting in January. To be clear this presentation is not intended to nor will it provide guidance. Instead, it should be used as a gauge in a broad sense to our progress toward implementing our strategic initiatives and managing our business and how the management team used the Company's future opportunities. Let's start with our corporate goals. We expect to launch 20 new product classes by our customers in fiscal 2007. Our customers launch six new product classes in the market place during the quarter bringing to ten, the number of launches achieved. We remain on track to meet the target by our fiscal year end. We also expect to sign 18 new licenses with our customers in 2007. During the second quarter, SurModics signed 14 new licenses with the customers for a fiscal year-to-date total of 16. This strong progress demonstrates a noteworthy commitment to SurModics technologies by our customers. In particular, we're extremely pleased with the expansion in our valued relationship with a fellow Twin Cities company, St. Jude Medical, which we announced last week. St. Jude has been a customer of SurModics for over 16 years having licensed our technology for various pacemaker, ICD and CRT leads in their cardiac rhythm management division. This new corporate technology agreement folds in St. Jude's cardiovascular division and opens up the opportunity to incorporate multiple SurModics technologies on current and future products within both divisions. We're very proud of our relationship with St. Jude Medical and we look forward to collaborating with them to accelerate the commercialization of these exciting new products.

Moving on, we presented three goals for our cardiovascular business at the meeting. Specifically, we expect to sign a customer license for a new drug eluting device, secure a paid developmental program with a customer for Eureka, which is our biodegradable polymer system and secure a paid development program with a customer for our pro healing technology during the year. With six paid development programs on pro healing in the quarter, we have already achieved the last of these goals. In regard to the others, conversations remain ongoing and we're confident in our ability to realize these objectives.

Next, let's discuss our very busy ophthalmology division. Our goals include signing our first customer license using SurModics implant technology, initiating our Phase II clinical trial in the U.S. for I-vation TA, developing a new platform other than I-vation TA for sustained drug delivery and securing multiple paid programs with customers for drug delivery including at least one for a delivery of a large molecule. We've already achieved the last of these two goals and will be presenting the new delivery platform we developed at the [Arvo] retinal specialist meeting, next month. We believe we're on track to meet the remaining goals outlined above in fiscal 2007.

As for SurModics other objectives for orthopedics, before we close the fiscal year 2007, we intend to partner with a major orthopedics company. Such an agreement would be the first for SurModics in this large new market for us. We continue to have active dialogue with multiple parties interested in our orthopedics technologies and product offerings. We're making progress with our trauma wounds phazer product as well. Although SurModics has not yet filed an application with the FDA for product approval, we continue to make nice progress on the development of that product. We expect to provide updates as the year unfolds.

Finally, for in vitro technologies, our 2007 goal was to facilitate Corning Life Scientists launch of the first cell culture lab wear product developed with Donaldson and SurModics. As discussed previously, we achieved this goal last week when Corning brought to market the initial four new cell culture lab wear products. Although it is too early to provide financial results, we can tell you that the reception these products received during the beta testing from academic research institutions and corporate R&D facilities has been very positive. We're optimistic about the potential of this novel technology. We'll continue to review our progress against these goals each quarter to help investors track our progress throughout fiscal 2007. The accomplishment of these milestones has, in our opinion, the potential to create significant value for SurModics and our shareholders. In conclusion, SurModics is a well-diversified company with multiple high-value opportunities in front of us. These future value drivers include new customer products and licenses, new SurModics technologies and new market applications such as ophthalmology and orthopedics. Our efforts to diversify our revenue streams prove particularly valuable again this quarter as we were able to grow total revenue on a sequential basis despite a 9% decrease in sales of the Company's single largest revenue generator. We also remind investors that we had multiple ways to generate value from the very large DES market, both announced and unannounced. We look forward to updating you on the results in the future. Steven, that concludes our prepared remarks, now we would like to open up the call to address any questions.

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, if you have a question, press the star followed by the one on your touch touch tone phone. If you would like to withdraw your question, press the star followed by the two. If you're using speaker equipment, you'll need to lift the handset before making your selection. One moment for the first question. Our first question comes from Stephan Ogilvie ThinkEquity.

Question on the Corning. First off, have you already seen some revenue from that as they build inventory and then where is that revenue going to show up in your revenue breakdown and could you make speak to the profitability of that to help us understand how to look forward to that?

Yes Steve, we have a modest amount of revenue in the quarter from Corning. It does show up in the product sales line but it is really kind of almost the de minimis category at this point. As they sell products, that's when the sort of revenue sharing agreement kicks in and so that would flow through in product sales as we roll forward in future quarters. As to the profitability of this business, we're not able to actually give specifics, unfortunately, on our agreements with both Corning and Donaldson. We don't have permission to do so. The guidance we can give at this point though is really just that if you were to compare it to a typical royalty deal, it is much higher way to participate in the revenue and profitability of a product. So, that's about all we can say at this point.

Ok, great. And then looking at the quarter, there is a significant shift in kind of the revenue mix to product sales from royalties. Nevertheless, the expenses didn't really have a shift in the same sort of correlation. Could you maybe explain -- I know you talk about R&D expenses a little and the three clinical trials. Is there any correlation with the high product sales and the R&D or is that R&D really just going for more future business and it is unrelated to any revenue in the quarter?

Yes, the way our product assess in the cost for those show up is only going to be in the cost line, the product cost line. That really is the cost of goods, if you will, on the various products that are included in product sales. And so R&D expenses and G&A and sales and marketing are all related to the rest of the business. Obviously some of the R&D expenses are associated with the various products that we're developing but they're not really manufacturing costs that would normally get included in a COGs calculation.

This quarter's R&D spend a lumpy quarter or is this something we should look forward going forward on an absolute basis?

It is a little bit lumpy. We wouldn't expect the animal studies and some of the preparations for the clinical trial to pan out going forward. The one thing that would definitely affect the forward quarters in R&D revenue of course, is the Phase II trial in the I-vation TA product of that kicks in much more significantly once it is really up and running. The preparations for that tend to be a little more modest in terms of how they impact expenses. So, I would say that we've definitely got some more expenses flowing through R&D related to some of the preclinical studies.

One last modeling type thing and then I have one more other question. On the investment income line, kind of depending on when you did your stock buyback, will this kind of be the bottom of investment income? Or should we expect next quarter to be lower?

We would say probably be somewhat consistent with this quarter.

Ok. And then lastly, you did the buyback already. Even though you had until the end of the year. Kind of looking at the DES market knowing that Cypher is declining, you have competitors getting approvals in Europe and Japan, what was the impetus to do the entire stock buyback this quarter rather than throughout the year when might have further negative news in the DES category?

It is really a function of a lot of pieces there, Steve. You know, we look at, you know, we know that we're probably not going to be able to time the market perfectly. In terms of picking the bottom. We just don't have that flexibility, particularly when we structure these as the 10B51 programs where the buying is not in our control. And you know, we're looking at really the long-term prospect of the business and other things that we see maturing as we roll forward across the business. It is not just about stents.

Ok, great. I'll get back in queue. Thanks, guys.

Our next question is from Richard Rinkoff with Craig-Hallum. Please go ahead.

First question, a clarification of something I think Bruce said a few minutes ago. He talked faster than I could write. One of your goals for the year was to have a license for a new drug-eluting device and you said you were confident and this is the part I want to clarify. Six pro healing projects underway or what did you say there?

Yes, what I said was -- actually, those are two different things, Rick. The goal I had mentioned regarding a drug eluting device, in the cardiovascular space, we do have a number of projects internally that we're working on there. We do think we'll be able to complete and announce that goal hopefully this year. That is separate from pro healing which is not drug eluting. That's a separate activity that's going on inside the Company.

Ok. So, am I correct in that you have six pro healing projects or is it six unrelated to the pro healing?

That's correct. We have six pro healing prongs.

Ok. But they're not in -- they're not drug eluting but they could be on drug-eluting products?

They could be on drug-eluting projects. Maybe the other clarifying comment I could make is we also mentioned we had six paid projects in the ophthalmology space as well so those are a separate six from the six pro healing projects, if you will.

Six of one, half a dozen of the other.

There you go.

The previous question about R&D expense being lumpy. When are you going to start the I-vation Phase II trials and when would the spending start for that?

We have not finalized our discussions with FDA at this point. So, I can't give you a precise date. We had hoped to be able to do that by now. But we can't do that. We're still expecting to be able to start it by the end of this fiscal year. There are a lot of activities that go into starting a trial and a number of those can go on while we're still discussing with FDA but until we get that completed, I can't be more precise than that at this point. Obviously there is customer interest as well in that technology so anything that a customer -- that signs up to that might want to do differently would impact the goal but at least we're looking at it right now as that's our project. We're going to carry it forward.

In the past, Phil, you have given us some kind of gentlemen guidance as to what product revenue might look like going forward. Could you do that again for us, please?

I would probably be less precise on any gentle guidance this quarter because of the impact of Corning and their launch but not really knowing exactly what that's going to look like yet. If you compared some of the existing line items in product sales that would exclude that I would say order at magnitude, it would be -- that continued at least roughly at these levels.

Roughly at the $3.4 million a quarter level excluding Corning, is that what you said?

Yes, that's what I said.

Ok. What was the outstanding share count at year end, not the average but the absolute number?

At quarter end, you mean?

Right.

You have that number, Lauren? We have that number here, Rick. Let us look and keep asking questions.

That's enough for me. Thanks.

Ok, so we have it here. It is 17.944 million shares at the end of Q2. Fiscal Q2.

Thank you.

Thank you.

Our next question comes from Dan Owczarski with Belmont Harbor Research. Please go ahead.

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

Hi, Dan.

Bruce, you started talking about the ARVO conference coming up. Could you give us anymore details about what we would see there that maybe is new. You talked about a delivery technology. Is this the subretinal program or could you give us any other tidbits on what we should be looking for?

Yes, I would be happy to. It is a big meeting for us. It has a number of the -- not only companies but also physicians that are involved in research, involving treating back of the eye diseases. So, we will be there in mass. We have five different posters that will be presented during the ARVO meeting. They relate to some of our biodegradable technologies that we have developed for delivering drugs from implants. They relate to one of our new implants we call subretinal device which actually allows you to deliver less drug closer to the retina than the current device that we have or that others are developing and you'll see some data on that as well. Then, we'll update everyone on the status of the clinical results from our Phase I clinical trial with I-vation TA in diabetic macular edema patients. I believe that that will be the nine-month clinical data that will be released at that time. So, a total of five different abstracts and those are generally the topics.

Ok. And then of the 14 new licenses, are we talking about a single customer or are they spread around? Are you getting new customers with those? And with the St. Jude agreement, that you just announced would that be part of the 14 new ones? Can you give us any other color there?

It was multiple companies, multiple new companies as well. More than one of those agreements was with St. Jude because of the -- frankly, the breadth of their interest in using the technology across a variety of different divisions and products. And you know, I think all -- very interesting projects for us. Very interesting projects for us. [inaudible] I would tell you that some were early in the development process to at least one license which was to a company with product containing our coating already in inventory so we would expect that one to be launched here very quickly. So, as we said in the past, customers come to us in various times during the licensing process and at least in one case, they came to us pretty late but we're happy they came.

Ok. And then moving to stents, is there any Conor royalties or revenue in the quarter here?

No. They have not converted that product yet to the version of the product that has our hydrophilic coating on it in Europe.

Any timetable, have they said when you would expect that? When we should expect it?

Nothing specific that we can pass on. We can tell you that the folks here at SurModics that are most directly involved with their technology folks in Ireland where that coating occurs for the European market are being asked to become much more active in getting products ready to launch. We've got tech support people here who are quite involved with reagent characterization and other activities that are required to launch a product. So, while I can't speak to timing, I can tell you that they are -- their technical folks are asking our technical folks to step up the activity which we view as a positive sign. It is very similar to the type of activities that we saw right before Cordis launched their Cypher Select Plus in Europe. That to me is encouraging but I will not and cannot speculate on timing of release of the product.

Has J&J talked about -- have they talked recently about any plans to bring Cypher Select Plus into the U.S.?

I've not seen anything public. And I believe their discussions of their pipeline have suggested that that specific product would actually not be coming to the United States. What they -- the last time they updated the pipeline was at their analyst day I believe it was in September when they said the next product to hit the United States was going to be Cypher NXT. Since that presentation, they've announced that that product has been cancelled and so the next product would really be Cypher Elite. Exactly what the time line is for that, we have not heard.

Ok. All right. Thank you.

Thank you.

Thanks, Dan.

Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you're using speaker equipment, you'll need to lift the handset before making your selection. Our next question is from Steve Ogilvie from ThinkEquity. Go ahead.

Just a follow-up on the [SiVida] announcement that you commented on. It was an exclusive deal with Pfizer and obviously the $165 million is a pretty large number. Granted it is over a number of years. But is that a type of deal we could anticipate you announcing or because it is exclusive, that's not an announcement we should be waiting for?

I don't want to comment on the direct terms in that deal relative to terms we may or may not be able to generate on our side. I think what we found encouraging was that it was very validating to what we're seeing in our development pipeline and in the discussions we're having on the business side which is that there are a lot of companies with a lot of interest in sustained delivery for the back of the eye. And not all small companies, there are large companies with that level of interest as well and that's a very significant transaction for that company and so the ability to generate that amount of milestone revenue over the course of years but still apart from royalties we found to be very significant and similar to what we talk about. I think it is -- what it says is that one technology in terms of [Si Vida] is off the market now or off the table now and so other companies that we know have interest can't turn to them because it is exclusive. So, again, we think that that all bodes well for us. But I really can't speak to the applicability of those terms specifically to anything we may or may not be able to negotiate.

Ok. And then I don't know if I missed this but did you say what percent of total revenue came from Cordis?

We did not. If you did your simple math on looking at the drug delivery segment which is obviously the closest approximation to where the lion's share of Cypher comes in, that was 36% of total revenue for the quarter.

Can you say whether or not the -- I assume it declined as a percent of total, the Cordis revenue.

Absolutely.

That's it. Thanks.

Ok, thanks, Steve.

Management, I would like to turn the conference back over to you for any additional comments.

Great, thanks, Steve. We want to thank everybody again for participating in this quarter's conference call. We look forward to speaking with you again in July when we announce our third quarter results. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.