Surmodics Inc (SRDX) 2009 Q1 法說會逐字稿

Welcome to the SurModics first quarter 2009 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions). As a reminder, this conference is being recorded, Wednesday, January 28th, 2009. I would now like to turn the conference over to Mr. Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you very much. Good afternoon and welcome to SurModics fiscal 2009 first quarter conference call. Thanks for joining us today. I'm Phil Ankeny. In our press release, reporting quarterly results was issued earlier this afternoon and is available on our website at www. SurModics.com. Joining me on the call today is Bruce Barclay, our President and Chief Executive Officer.

Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible in the investor relations section of the SurModics website where the audio recording of the webcast will also be archived for future reference. I will remind you that some of the statements made during this call may be considered forward- looking. The 10- K for fiscal year 2008 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 Company does not undertake any duty to update any forward- looking statements, as a result of new information or future events or developments. Please be advised that during the call, non- GAAP financial measures will be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available in today's earnings press release.

In today's call, I will cover the Company's quarterly financial results. Bruce will then highlight quarterly achievements and update you on pipeline opportunities. And finally, we will open the call to your questions. I will begin with an overview of the first quarter financial results then follow that with specifics on discrete line items. Next, I will discuss significant revenue drivers, and break down revenue by component and market. Finally, I will cover expenses, and review our balance sheet and cash flow.

First quarter revenue was a record $63.2 million, a significant increase from $23. 8 million in the year earlier period. Revenue from Merck had a significant impact on quarterly results as a result of the termination of our collaborative research and license agreement which became effective in mid- December. Upon termination, we recognized $34.8 million of revenue which was previously being deferred. In addition, as previously disclosed, Merck's decision to terminate the agreement triggered an additional $9 million payment to SurModics which was received and recognized in the quarter.

Moving down the income statement, the Company reported operating income of $42.7 million, compared with $7.6 million in the prior year period. Net income was $27.1 million during the period, compared with $5.6 million in the same period last year. Diluted earnings per share was $1.53, compared with $0.31 in the first quarter of fiscal 2008. These are all record figures, but again, the Merck termination was the principal driving in making them so.

In addition, included in the first quarter GAAP results, were two event specific charges. We recorded restructuring charges of $1.8 million, relating to our previously announced organizational changes and downsizing. We also recorded an in process research and development charge of $3.2 million in connection with the acquisition of Drug Delivery Technology and collaborative programs from PR Pharmaceuticals in November. Also in connection with the PR Pharmaceutical acquisition, we had amortization of intangibles of approximately $34,000. Going forward, the intangible amortization will be approximately $53,000 per quarter.

I will now provide a brief review of the quarter on a non- GAAP basis which we have often said provides a better indicator of our results. Refer to the supplement non-GAAP tables in our press release for further details. We adjust for the accounting related to Merck by backing out the amounts recognized during the quarter which had previously been deferred or $34.8 million. The $9 million milestone payment which was billed and collected in the quarter is reflected in both GAAP revenue and in the non- GAAP results. We also adjust for the event specific charges we incurred during the quarter, including the restructuring charges and the IPR&D charge for the PR Pharmaceuticals acquisition.

Taking all of this into consideration, our non- GAAP results was as follows. Total revenue was $28.4 million, compared with $25.3 million in the first quarter of fiscal 2008. Operating income was $12.9 million, compared with $9.1 million in the prior year period. Net income was $8.4 million, compared with $6.6 million a year. And diluted earns per share was $0.48, compared with $0.36 in the first quarter of fiscal 2008.

Next, let's turn to the CYPHER's Sirolimus-Eluting Coronary Stent from Cordis Corporation, a Johnson & Johnson company. Last week, J&J reported worldwide CYPHER sales of approximately $272 million, down 34% year-over-year, as the product continues to be impacted by recent US market entries of [Abbott] Designs and Boston Scientific [Promus] drug eluting stents. J&J reported it had an estimated 15% market share in the US and 32% outside the US during the quarter. Although outside the US sales of CYPHER were down 10% year-over-year on a reported basis, they were actually up 5% sequentially, again, on a reported basis.

While these new market entrants have challenged CYPHER market share, they are also contributing to the growth of the overall drug eluting stent market as penetration increased this quarter to an estimated 73% in the United States, up from 61% just a year ago. This is positive for us, given our continued broad base participation in the drug eluting stent space, including CYPHER and other promising products. J&J also reiterated during the conference call last week that they expect to file for CE mark approval in Europe on the [Nivo soroloment] eluting coronary stent in 2009. You recall that SurModics provides the hydrophilic coating on Nivo.

I would also like to mention a recently announced positive development on the CYPHER front. Cordis had a significant win at the federal appeals court responsible for patent cases which invalidated certain claims of the [Ding] patent which was the subject of litigation between Boston Scientific and Cordis. The appeals court found that one of the key claims of the Ding patent was invalid, rendering it unenforceable against third parties. The bottom line here is that an injunction against CYPHER is now highly unlikely.

Next, I will review results across markets. As we announced in November and consistent with our patient focused vision, SurModics has reorganized in clinically and market focused business units to improve the visibility, marketing and adoption of the Company's broad array of technologies. In connection with the changes in our organizational structure, we are reevaluating our segment reporting and intend to report our revenue under two segments going forward; a therapeutic segment, and diagnostic segment. These segments underscore our focus on improving patient lives through technology and innovation.

The diagnostic segment is quite straight forward as it contains our In Vitro technologies business unit. The therapeutic segment consists of drug delivery and surface modification technologies. In order to help investors understand the moving parts of this business, we will provide additional disclosure, breaking out revenue by market within the therapeutic segment.

Accordingly, in this segment, we will break out revenue into these distinction markets; cardiovascular, ophthalmology, and other markets. We include in each of these market areas all revenue from across the enterprise, including what was formally included in our drug delivery, hydrophilic technologies, regenerative technologies and orthopedics business units. Results from Brookwood Pharmaceuticals are also classified into these three market areas.

As you might expect, given Brookwood's pharma and biotech customer base, a substantial amount of Brookwood's revenue falls into other markets, such as oncology, neurology and dermatology to name a few. In terms of specifics, cardiovascular revenue was $10.4 million for the quarter, a 16% decrease from $12.4 million in the first quarter of fiscal 2008. Growth in our broad portfolio of cardiovascular revenue stream helped dampen the impact of the 34% decrease in CYPHER sales.

Next, in ophthalmology, we generated revenue of $44.8 million on a GAAP basis, compared with $1.5 million in the first quarter of fiscal 2008. Your recall that Merck revenue in the prior year was recognized in accordance with DITF-0021. Rounding out the therapeutic segment, revenue in other markets was $3.8 million for the quarter, a 14% decrease from $4.4 million in the first quarter of fiscal 2008. Ebbs and flows of activity in some of our customer development projects,as well as some softness in product sales, contributed to the decrease which we consider near term in nature.

And lastly, revenue for our In Vitro technologies business, now reported under the diagnostics segment, was $4.3 million, down 23% from $5.5 million in the prior year. Sales of our In Vitro products were soft during the quarter. Conversations with customers revealed that the reduction in demand is related to the slowing economy, as several customers have cut back on inventory investment, and sales of their own products experienced some weakness during the quarter as well. In addition, royalties in this segment decreased, as both Abbott and GE Healthcare royalties were lower than prior year results.

As you may recall, SurModics licensed several patents for lateral flow immunoassay technology to Abbott which expired in December of 2008. As we report these royalties on a one quarter lag, royalty revenue is expected to continue to flow through the second quarter even though the patent expired in December. On a revenue component basis, royalties and license fees were $47.7 million, compared with $13.2 million in the year ago quarter. Merck was the most significant contributor to this growth in royalties and license fees which more than offset the impact of the 34% decrease in CYPHER sales.

Product sales were $3.9 million, a 26% decrease from $5.2 million in the first quarter of fiscal 2008. As I mentioned earlier, sales of our In Vitro products have been impacted by the difficult economic environment. Reagent and polymer sales were similarly affected for some of our customers.

Lastly, research and development revenue was $11.6 million during the quarter, compared with $5.4 million in the first quarter of fiscal 2008. On a non-GAAP basis, R&D revenue for the for the first quarter of 2009 was $5.4 million which is flat with the prior year if you exclude Merck. We are satisfied with this outcome in light of the current environment. Presently, we are seeing some customers taking a more cautious approach to R&D investment than they have in the recent past. Some large customers are facing more constrained budgets for R&D projects, and not all project are getting funded.

Merck was a perfect example of how even highly promising projects are vulnerable in this challenging environment. Our smaller customers are witnessing an extremely difficult financing market, and those that have only limited cash are being resourceful in finding ways to make the cash go further. Fortunately, our broad portfolio of customer projects has allowed us to continue to drive strong R&D revenue with the ultimate and more important goal of helping advance customers' products to the marketplace.

Next, I will will turn to a review of operating expenses. SurModics ongoing efforts to maximum profitability and optimize its resources led us to change our organizational structure and eliminate approximately 5% of our workforce. This resulted in restructuring charges of $1.8 million during the first quarter which consisted of $0.5 million of severance related costs and $1.3 million charge in connection with the consolidation of our Minnesota facilities.

We had previously occupied a leased facility near our headquarters and the recent headcount reduction has allowed us to consolidate all Minnesota personnel into our headquarters. In connection with these initiatives, SurModics expects to save approximately $2 million on an annualized basis. However, only a fraction of this benefit was realized in the first quarter, given the timing of the announcement.

In the first quarter of 2009, R&D expense was $9.4 million, constituting 67% of total operating expenses, excluding product costs and the event specific charges as SurModics continues to invest in support of our technology leadership and innovation. The recent changes in our organizational structure include implementing a more centralized R&D function, designed to enhance the effectiveness of existing and new technologies across multiple clinical applications. We expect these changes to improve the return on our R&D investments, as we can now more easily allocate resources to the right opportunities across the Company including Alabama, California, and Minnesota.

SG&A expense was $4.7 million in the quarter, roughly flat compared with last year. Lastly, effective tax rate for the quarter was approximately 37.4%. We believe that approximately 37.5% is a reasonable rate to use in modeling results for the balance of the fiscal year.

Now, let's turn to the balance sheet which remains healthy and a source of significant strength and stability in these difficult economic times. As of December 31, SurModics had a cash and investment balance totaling $69.9 million and no debt. Cash flow from operations was $17.4 million in the quarter, compared with $4.4 million in the year ago quarter. The increase in operating cash flow principally reflects the $9 million milestone payment for Merck and tax payments in the first quarter of fiscal 2009, relative to the first quarter of fiscal 2008.

We continue to put our strong balance sheet to productive use and remain active in the deployment of capital with the goal of enhancing shareholder value. Towards this end, we have been quite active in our share repurchase program. In the first quarter, we purchased approximately 540,000 shares of SurModics stock for $12.8 million and average price of $23.70 per share. Since the November 2007 announcement of our second share repurchase program through the first quarter of fiscal 2009, we have purchased over 800,000 shares and spent approximately $25.5 million. As of December 31st, we had approximately $9.5 million remaining under our $35 million authorization. In addition, SurModics remains active in business development, including the November asset acquisition from PR pharmaceuticals which Bruce will touch on momentarily.

Quick word on the high level outlook we provided in our year-end conference call in November. As a reminder, we articulated an expectation of roughly flat revenue and diluted earnings per share on a non- GAAP basis compared with fiscal 2008 non-GAAP results. This high level outlook assumed a continued decline in CYPHER royalties and the discontinuation of the Abbott royalty stream beginning in the third quarter.

Additionally, the current economic environment has presented us with new headwinds. Recent headlines confirm that even healthcare companies are cutting back. Credit is in short supply, and potential changes in healthcare legislation are being proposed.

In sum, these are highly uncertain times and this uncertainty could impact our customers decision-making process, including the products they buy, the projects they continue to fund or new ones they might approve. Many companies view R&D projects as discretionary items. It might also have an impact on sales of our customers' products upon which we receive royalties. We still believe we can achieve the outlook we provided on our year-end conference call. However, there is no doubt that some of the fundamentals in the broader economy and even the healthcare industry have deteriorated since our call in early November. This level of uncertainty has added risk to the environment for everyone, and SurModics is no exception.

On the positive side, we continue to see growth in many parts of our business including ophthalmology and other markets where our Brookwood business has a number of exciting growth opportunities. We also have added new opportunities with our recent PR Pharma acquisition. Even though there was little topline impact from PR Pharma in the first quarter, we expect it to contribute to the growth of our business this year. And our cardiovascular franchise remains very healthy. As an example, the number of customers using our technology for stents now extend into the double digits.

On the expense front, our recent restructuring has allowed us to trim approximately $2 million in annual expenses which only partially benefited the first quarter's results. And our share repurchase activity improves earnings per share as share count has been reduced. With that, I will now turn the call over to Bruce.

Thank you, Phil, and welcome everyone to the call. My comments today will briefly highlight quarterly achievements, review some of our key opportunities, and bring you up-to-date on the product pipeline and our progress against fiscal 2009 goals. First, a word about the quarter.

While we're pleased to announce a record quarter, we acknowledge it was the cancellation of the Merck agreement that made it so. Looking at the quarter on a non-GAAP basis, receiving $9 million in cash from Merck in this economy was definitely a positive event. However, we understand that absent the Merck payment, it was a down quarter.

Product sales were soft, and our R&D revenue engine has not yet replaced the build activity we previously were doing for Merck. However, the first quarter results in no way diminish optimism or excitement about SurModics future. And management team and employees are committed to returning to growth. In addition, we believe SurModics business models strike an excellent balance between safety and growth, especially over the long-term. We participate with our customers in many large markets in healthcare where our technology is used to create sophisticated diagnostic tools and solve a variety of unmet clinical needs. The demographics of healthcare with strong growth in the over-60 population helped drive the opportunities wee see.

Further, within healthcare, we are very well-diversified. In fact, we view the diversification of our portfolio as a significant asset, as we offer both diagnostic and therapeutic solutions with nearly 300 products and projects spanning multiple technologies in more than ten different clinical areas. Additionally, we believe we have a highly profitable business model. While many companies our size are struggling to survive in the currents environment, we have a solid foundation and a long history of delivering positive earnings and cash flow. On the -- our strong balance sheet with no debt is the result of a disciplined approach to capital allocation which creates a margin of safety today that many other companies do not enjoy and allows us to pursue value enhancing opportunities such as share buy backs, business development opportunities and facility investments.

We believe our growth prospects were enhanced by our recent reorganization into clinically and market focused business units, and by centralizing our R&D function within our legacy business. These changes will enable us to better understand and help solve the needs of patients within specific clinical indications, and more effectively leverage existing and new technologies across multiple clinical applications. Going forward, SurModics will have four business units; cardiovascular, ophthalmology, In Vitro technology, and Brookwood Pharmaceuticals.

Importantly, the new cardiovascular business unit will be responsible for marketing all of the Company's drug delivery, hydrophilic and regenerative technologies to cardiovascular customers. I want to emphasize that while the drug delivery hydrophilic technologies, regenerative technologies and orthopedics are no longer organized as business units, we remain committed to these areas of opportunity and technologies that address them. Coded and drug eluting stents remain an important opportunity for us. As you may recall, one of our fiscal 2008 highlights was the successful initiation of the first in-human trials of the [Nexeon protects] coronary stent system.

That trial continues to enroll patients in Europe and the preliminaries look encourages. Yesterday, we were pleased to announce the signing of a second license agreement with Nexeon to collaborate on the development of a novel stent system for the treatment of renal artery disease, a disease of the peripheral vasculature. This new stent system incorporates SurModics proprietary FINALE coating [probilene] technology and Nexeon's [Bear Meadow ] Kodiak peripheral stent. Ophthalmology and Brookwood are also strong opportunities for us, and we'll provide a more detailed update on both at our annual meeting next week.

During the quarter, we also added an important components to our drug delivery business through the acquisition of proprietary drug delivery technologies and collaborative customer programs from PR Pharmaceuticals. These technologies enabled the delivery of injectable drugs, including proteins with micro particles to smaller diameter needles compared to competing technologies. PR Pharmaceutical technologies are synergistic to the SurModics and Brookwood technology bases. I'm pleased to report that the technology transfer is proceeding according to plan and the collaborative programs utilizing the technologies are integrating well.

Beyond our multiple growth drivers, SurModics has a broad portfolio of opportunities that enables us to continue to diversify our revenue streams and deliver solid growth long term. We regard our business as a portfolio of opportunities with more than 100 -- with approximately 100 licensed products, generating royalties of nearly 200 projects in our pipeline not yet on the market. As of December 31st, we had a total of 104 licensed customers; several with multiple licenses, compared with 100 in the prior year period. SurModics customers had 99 licensed product classes on the market generating royalty revenues, compared with 100 a year ago.

Total number of license products not yet launched was 107, up from 105 in the prior year period. And major non-licensed opportunities stood at 87, compared with 93 a year ago. In total, the Company had 194 potential commercial products in development as of December 31st. The magnitude of our R&D work we are doing on behalf of our customers is a testament to the value they place on our capabilities, in addition to demonstrating the significant potential value we see in our pipeline.

Looking forward, particularly in this challenging economic environment, we believe our portfolio of technologies and the deep capabilities of employees will allow us to continue to add new customer opportunities. And so many technologies are already well-known in the development community, and especially by the FDA. Customers find that they can reduce risk in their programs by choosing a SurModics technology over many alternatives. And of course, we continue to add to our portfolio of technologies which allows customers to develop multiple generations of products leveraging SurModics.

At this point, I'll touch on SurModics fiscal 2009 objectives. As it's still early in the year, reportable progress is limited. To view the 2009 objectives in their entirety, please see our shareholder letter which you received in the mail recently and it can also be found on our website. As in previous years, these objectives are designed to offer insight into how we manage our business, and provide a view of the Company's future opportunities. These goals are aspirational in nature only, as often we don't control the timing of all aspects related to our customer objectives.

This year, we articulated a goal of signing 18 new licenses in fiscal 2009. I'm pleased to report that SurModics had a terrific quarter on this front, as we added 8 new license agreements with our customers. We have already met one of our fiscal 2009 goals with the signing of a new customer license, using SurModics drug delivery technology outside of ophthalmology. We are very pleased to have reached an agreement with this customer for an exciting application of our technology in the cardiovascular space.

We look forward to sharing more details with you about this potentially significant product in the future as the program unfolds. As another goal, we expect our customers to launch ten new product classes in fiscal 2009. In the first quarter, customers launched two new product classes into the marketplace. On the whole, we believe we are on track to achieve the rest of our fiscal 2009 goals.

Before concluding, I want to take a moment to welcome a new member to our Board of Directors. Mary Brainerd was nominated in November and will join the Board on February 2nd, the date of our annual meeting of shareholders. Mary, as you know, is the President and Chief Executive Officer of Health Partners, a family of nonprofit healthcare organizations headquartered here in Minneapolis and brings significant healthcare experience to her new role. We're very much looking forward to her many contributions to our company and to the Board of Directors. I also look forward to providing more of an update on our company at next Monday's annual meeting of shareholders which I hope you will attend or listen in via the webcast.

In closing, our company remains financially healthy with a solid balance sheet and strong cash generating ability which we view as a true competitive advantage. We're also well-diversified across the healthcare sector which has historically held up better than others during a recessionary periods. SurModics has demonstrated a history of growing and diversifying revenues, especially important in the current environment. Lastly, we have a number of exciting growth opportunities ahead of us as a result of our deep commitment to addressing significant unmet clinical needs through our enabling technologies that extend and improve the lives of patients around the world. Operator, that concludes my prepared remarks. We would now like to open up the call to any questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Ross Taylor with CL King. Please go ahead.

Hi. Got a couple of questions. First, I wonder if within either royalty revenues or your diagnostic revenues, how much you can -- give any information about how much you are getting from the Abbott royalties that expired in December.

We're not breaking that number out, as we said. The number was down year-over-year. It definitely had an impact on the results, but it's not our intent to break those out.

By any chance, can you say anything about how it was sequentially versus the September quarter?

Sequentially, it was up.

Okay. Another question would be you said you still thought there was a reasonable chance to get your earnings guidance for the year. What would have to change versus the current quarter to make it more likely you could actually achieve that guidance? It looks like both -- your revenues would have to improve pretty materially from this quarter to get to that guidance.

We see several positive indicators for the rest of the year. Phil touched on them I think nicely in his prepared remarks. We see potential growth in our Brookwood business on the organic basis, and also with the PR Pharma technology that we acquired in the quarter. We had very small amount of customer projects that were transferred over from PR Pharma, hitting the topline in Q1. We expect that to hit in mass in Q2 and beyond.

We also have a number of activities going on within the ophthalmology space. In particular, we signed one of the largest R&D agreements in our recent history-- in ophthalmology in the last quarter, even though the license has not yet been signed by that particular customer. We have a number of customers still working in that space, paying us to do the work. We're very much -- very optimistic about that going forward.

Okay. That helps. Thanks very much.

Sure. Thank you.

Thank you, sir. The next question comes from the line of Richard Rinkoff with Craig-Hallum. Please go ahead.

Thanks. A couple of micro questions. On that ophthalmology agreement you just signed, was that a license -- was that a R&D agreement? And was there any of that in the quarter that we just saw?

Yes, Rich, it was an R&D agreement. There was some in the quarter. Not -- by no means the majority.

Should we expect R&D sequentially to move higher?

There's factors on both sides. The agreement is there and we expect to increase the ramp on that particular project in Q2 here. We've also -- in talking to several customers here over the last few days and weeks, we are experiencing a little bit of the new year, new budget kinds of scenario, if you will. We'll see how long that plays out.

Too early in the quarter to put any value on that. Again, PR Pharma, I would say, most of that will flow into the R&D line. On the other hand, Phil said it well, R&D projects can be somewhat discretionary. And depending on the customer, can be subject to reduction if a particular customer has an issue for whatever reason within their particular business. Little bit of pro and con, but I would say, we're optimistic about the R&D volume for the rest of the year.

You said that you're on track you believe today to hit the rest of your goals for the year. One of them is signing an ophthalmology license agreement. Can you give us anymore color? Is the agreement that you just signed in first place to sign that license agreement?

I really can't give any more color than that, other than we've had customers who -- the one particular we talked about last year, who have decided to spend more money on R&D to continue to generate results before they enter into the -- what we think would be the final license negotiation for rights going forward. I can't say anything more than that, other than there's lots of activity in ophthalmology. This recent agreement helped up substantially. But there are other companies as well that are paying R&D fees that we're also talking to about when the right time would be for the license discussions. In fact, the number of customers we're supporting in ophthalmology continues to grow. That business is very healthy.

On the expense side, you said that the reductions were not fully felt in the quarter. Can you give us some idea of what the expense lines will look like for the rest of the year?

We're still sorting through that. I would say that rolling forward, expect some modest decrease in each of the R&D and SG&A lines. But in aggregate, as we said, we see a couple of million dollars of expense saved, but it's pretty well-balanced between the three quarters there that remain.

$2 million less than what you budgeted, but we don't know what you originally budgeted.

And since I'm saying that we didn't -- if you look at the current quarter, there wasn't a tremendous impact there. It should trend down from there. The couple million is probably spread more through the backhalf of the year -- or back three quarter of a year.

Do you envision making additional expense reductions?

No. Not at this point. I would say, obviously it's something we'll keep a close eye on, but we continue to manage the business very well in terms of our discretionary spending in the things you would imagine, R&D and travel, and those types of things. We'll continue to keep a close eye on that.

One more macro question. If you take more GAAP which is what all of the expectations did -- all of the consensus expectations, you basically get about $19.5 million. Let's call it $20 million, multiply by 40, you get $80 million. Add Merck, and you get $89 million. Your guidance was $111 million so do you still really believe you can make up that difference between now and the end of September?

We've done the same math, Rich, and we're still standing by what Phil said in his prepared remarks. Again, not to repeat everything he said, there is clearly more risk than when we said that originally three months ago because of the economy. Having talked with several customers and understanding what they're going through and they're particular issues -- we continue to see -- we continue to stand by what we said in the prepared remarks.

Thank you.

Thank you.

Thank you, sir. Our next question comes from the line of Daniel Owczarski with Avondale Partners. Please go ahead.

Good afternoon. Can you talk a little bit about what's going on at the facility -- where the build out of Brookwood, as far as is that still on track? Do you take your foot off the gas there a little bit? Or how does all these big economic changes impact your build out there?

That is still on track. I think the comments we made in our 10-K still stand which is that we expect to spend between $20 million and $25 million in fiscal 2009 on that building. We don't expect it to come up until the fall of 2009 calendar which would be Q1 of fiscal 2010. We continue to have strong customer interest in, not only the expanded space, but also this expanded ability to manufacture projects on a [CGMB] basis, either for late stage clinical trials or for commercial capabilities. We continue to see that being an important part of our business long-term and it is continuing on.

Okay. As far as the number of projects that they're working on, is that number still consistent? Or are people dropping off there? I think you talked about some of the smaller customers strapped for cash. What about Brookwood's pipeline? Or partnership pipeline?

They have had a couple of drop offs -- some of the the smaller ones. We don't know whether that's temporary or longer term. At the same time, as you've seen from the R&D number, we've had more revenues from some of the larger ones to help offset that. It's something that we're watching closely and talking with our customers. The conversations we've had with customers we've had over the last several weeks, their long-term plans are not changing. They continue to see significant upside in formulating new drugs, especially drugs that are coming off patent in the next three to five years in better sustained delivery vehicles. We think Brookwood offers a tremendous opportunity for that. That's been our long-term premise all along for the business and we are sticking by that.

Okay. Then last, on drug eluting stents. I think you mentioned maybe double-digit project there. Are those timelines being stretched out now that the FDA -- is the FDA asking for more data or making things a little bit more difficult that those projects are slower to come to -- into development.

I would say, I'm not that close to that to know it precisely, Dan, relative to the FDA. We -- for a lot of our customers in the DES space, we've done work with them and then we somewhat step out. And they continue to process from there. Given the fact that we have as many customers as we do, we've said previously that in most but not all of those, we have better financial terms than what we had with CYPHER and continues to be a large market with penetration rates increasing here in the US at least. We continue to see good upside in that business. Certainly, FDA is an issue for our customers. Funding for our smaller customers is also an issue that they need to deal with. But again, we continue to be optimistic with what's going on there.

Okay. Thank you.

Thanks for the call. Thank you, sir. Mr. Barclay, there are no further questions. Please continue with any closing remarks.

Thanks, operator. We want to thank you again for participating in this quarter's call. We look forward to speaking with you again at our annual meeting next Monday, February 2nd, and then in April when we announce our second quarter results. Thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the SurModics first quarter 2009 earnings conference call. You may now disconnect. Thank you for using AT&T conferencing and have a pleasant day.