Surmodics Inc (SRDX) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the SurModics first quarter 2011 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) This conference is being recorded today, Wednesday, January 26, 2011. I would like to turn the conference over to Mr. Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Camille. Good afternoon and welcome to SurModics fiscal first quarter 2011 conference call. Thank you for joining us today. Our press release reporting quarterly results was issued earlier this afternoon and is available on our website at www.SurModics.com. Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible through 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 2010 identifies certain factors that could cause the 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.

Joining me on the call today is Gary Maharaj, our new Chief Executive Officer. As you know, Gary officially took the helm as CEO on December 27, 2010. He comes to us with 23 years experience in the medical device industry, most recently as CEO of Arizant Inc. During his tenure at Arizant, he helped refocus and refine its core business which ultimately resulted in improved operating and financial results. In fact, under Gary's leadership Arizant nearly doubled revenues to over $200 million in less than five years. Additionally Gary brings a strong background in R&D leadership to SurModics from his earlier years as the head of R&D at Arizant and in various management and research positions for the orthopedic implant and rehabilitation divisions of Smith & Nephew. As you listen to Gary's comments today, I believe the parallels between his accomplishments over his career and the opportunities here at SurModics will be quite evident. We are thrilled to have Gary on board at SurModics and excited to be able to leverage his expertise and leadership.

On today's call, and Gary will discuss his reasons for joining SurModics and provide his initial observations and a broad overview of his outlook for the Company. Afterwards I will highlight financial results and key achievements for the quarter. I will also comment on our financial outlook for fiscal 2011. And finally, we will open the call to take your questions. With that, let me turn the call over to Gary.

Thank you, Phil. It's my pleasure to join you all today for my first earnings conference call at SurModics. There are two things that I want to talk about today. First, why am I here and second, I will provide a high-level perspective of SurModics based on my initial observations.

So let's talk about why I am here. When I first became aware of the opportunity to become the CEO of SurModics, I immediately became excited at the prospect of leading the Company for several compelling reasons. I believe that the ability to improve a medical device by surface modification is an important and ever-growing need in healthcare and that SurModics has a leadership position in this technology. Furthermore, I believe that a Company with a competitive edge in cost effective and clinically relevant surface modification can have a major positive impact in healthcare. Finally, working with high impact medical technologies, seeing them help patients and in the process becoming commercially successful is personally important and rewarding to me. After further diligence and discussions with the Board and management, my interest grew because I felt a fit with the team and their keen interest in improving their financial and competitive strength of the Company. The bottom line, I saw a opportunity to build upon SurModics' leadership position, its broad technology platform and to work with its talented employees, all with the goal of having a positive impact on patient outcomes and creating value for our shareholders and customers both current and future.

Now it has been just over four weeks since I joined SurModics and while I'm still getting acclimated I've learned a great deal already from my interactions with employees and customers. My first order of business as CEO was to begin establishing trust and confidence with our employees especially given the changes in the Company during the past year. I've been impressed by not just the strength and quality of our employees but their tenacity and desire to create a better future. I believe that our employees are proud of the work they do and are loyal to this organization. Importantly, they share my sense of urgency in restoring the 30 plus year legacy of SurModics and returning our business to profitable growth. I'm enjoying working closely with them as we chart the future.

I've also had the opportunity to meet some of our customers. And as I discussed the business with them I began to see some common themes that were aligned with my own point of view. Today as we all know, our customers are faced with difficult decisions as they navigate an evolving regulatory environment, manage R&D with fewer resources and tighter budgets. Heightened competitive pressure and longer product cycle times have only compounded the situation. So to compete effectively in this environment, our customers are looking for technology solutions to differentiate their product offering and demonstrate a compelling clinical benefit. But equally important in the current economy, they need to justify the cost of product enhancements and new technology more so than ever before. This balancing act is having a profound impact on innovation as a whole for our customers and our business as a result.However, I choose to look at these challenges of our customers as actual opportunities for innovation by SurModics. I also believe that difficult periods like this allow the best companies to distance themselves from the competitors especially with innovative cost-effective new products.

So, let me now share with you my initial observations about the future of SurModics that will help position this business for long-term success. I firmly believe in the thesis that sustained and profitable growth requires a well-defined and strong core as a foundation of the business. Our first task therefore it is to tightly define SurModics's core business and its boundaries in terms of our customers, products and technologies. Now, we will have to shape this based both on the areas where we have the greatest competitive advantages and the areas of highest growth potential for the Company.

Second, we are going to have to realistically assess the current strength of this core, once defined, by answering questions such as, do we have competitive advantages within the current market segments for sustained profitable growth? Are there under served segments within this core and the customers within the core that need our technology solutions? Are we going to require investment in our core technologies to strengthen our position? And is the cost and capital structure of the Company in the best position to create profitable growth based on this core? Now, this is just a flavor of questions the Board, the rest of the management team and I will need to carefully consider in the coming months to make sure we set the proper course for the Company and its return to growth.

That said, our business model is one where the growth issues are not going to be solved overnight. Our goal is to build a business that is capable of sustainable long-term profitable growth and shareholder value creation. Prior to joining SurModics, my view is that this business was just a few key decisions away from getting back on the right track. The Board and the management team have already made the first decision which is to seek strategic alternatives for the pharmaceutical business. I believe that the pharma business has sound long-term growth and profitability prospects in an appropriate strategic setting and financial structure. It is the aim of this process to unlock that value.

SurModics is ultimately a technology company whose strength is providing easy to implement technology and product solutions for specific customer needs. R&D is the critical part of our growth engine and will be a key area focused for me personally. We will need to drive a deeper level of focus on our customers problems and ensure that our R&D resources are properly deployed in solving meaningful problems in a manner that is profitable for both customers and SurModics. As a result, I will be working with our R&D teams to understand the opportunities and risks in the current portfolio of projects and to develop a plan for the future pipeline.

In summary, SurModics is at an important crossroads and I'm excited to be leading the organization and our talented team at such a critical time. By refocusing our assets within a well-defined core, we have an opportunity, an opportunity to build upon our strengths to create sustainable long-term growth and shareholder value. During the coming months I will be working diligently with the management team and the Board to develop the strategic plan and I look forward to sharing this as more details emerge. Now I would like to turn the call over to Phil for a review of our financial results. Thanks.

Thanks, Gary. I'd like to begin with some financial highlights. For the first quarter of fiscal 2011 revenue was $15.2 million, 2% lower sequentially. On a GAAP basis, diluted loss per share was $0.02. Non-GAAP diluted earnings per share was $0.05 per share. And cash flow from operations was $5.3 million. Please refer to our earnings press release including the supplemental tables for an explanation of our non-GAAP accounting.

Now, let me return to our revenue lines. Royalties and license fees for the first quarter were $7.6 million, a decrease of 5% on a sequential basis. Recently Johnson and Johnson reported that sales up the Cypher Sirolimus-eluting Coronary Stent were approximately $134 million in the quarter, down 1% sequentially and down 40% year-over-year. Product sales were $4.8 million in the quarter, up 4% sequentially. We continue to generate broad based customer demand for our component In Vitro Diagnostic products as well as polymers and coating reagents. Lastly, R&D revenue in the first quarter was $2.8 million, down 7% sequentially reflecting continued softness in the R&D standing by our customers. However, we have signed several new customer R&D programs in the past few months and they are starting to build momentum.

In October 2010, we announced a new organizational structure that reflects our three complementary but distinct business units; Medical Device, In Vitro Diagnostics and Pharmaceuticals. Accordingly, going forward we will also break out revenue by business unit. Let me start with our Medical Device business unit. Broad based demand for our coating technologies has fueled substantial licensing activity in the medical eevice space. In the past five years, SurModics has signed more than 150 license agreements and more than 90% of them have been in Medical Device. We had a strong quarter of signing new licenses in the first quarter with nine new licenses, eight of which were in Medical Device. We were also pleased to have five new product class introductions by our customers during the quarter. Our portfolio of licensed customer product opportunities both on the market and in our pipeline includes many exciting new medical device product categories including percutaneous heart valves, stent graphs, pro-healing stents and many other minimally invasive products in the coronary, peripheral and neurovascular markets. Revenue in Medical Device was $9.8 million in the first quarter essentially flat compared with the fourth quarter of fiscal 2010. Strong reagent sales were offset by a modest decrease in royalties and license fees.

Next let's turn to In Vitro Diagnostics. Our IVD business represents another source of stability and growth potential. Today this business derives virtually all of its revenue from sales of our component IVD products. Revenue in the In Vitro Diagnostic business unit was $2.7 million in the quarter, down 7% sequentially. This decrease was not unexpected and mostly reflects timing of customer orders. We are pleased with the broad-based customer interest in our product portfolio and we are gearing up for some new product introductions later in the year.

Lastly, our Pharmaceuticals business generated revenue of $2.7 million in the first quarter, down 6% sequentially. Results for this business continue to be impacted by the challenging R&D environment. As I mentioned earlier, we have signed several new customer R&D programs in the past few months and we look forward to the favorable impact that these programs may have on R&D revenue in the future. In addition, as we disclosed in December, our Board reached a decision to explore strategic alternatives for our Pharmaceuticals business and we have retained Piper Jaffrey and Company as our financial advisor in connection with the process.

On the expense front, R&D expenses for the quarter were favorably impacted by therapeutic tax credits we earned of approximately $800,000 or roughly $0.03 per share. SG&A expenses included approximately $0.5 million in expenses for certain nonrecurring advisory services. Both of these items have been excluded from our non-GAAP earnings per share numbers, which as we stated earlier came in at $0.05 per share for the first quarter. This compares sequentially to a non-GAAP loss in the fourth quarter of $0.05.

With respect to our full year 2011 guidance, we expect to generate revenue in a range of $55 million to $63 million and non-GAAP diluted earnings per share ranging from a loss of $0.15 per share to positive earnings of $0.05 per share. Including anticipated nonrecurring or event specific charges such as restructuring charges and goodwill impairment charges, GAAP diluted earnings per share are expected to be in a range of a loss of $0.53 to a loss of $0.33. Our performance in the first quarter was as expected and we reaffirmed the guidance the Company provided in November 2010.

Moving forward, we are committed to driving improved results and staying on pace to fulfill our fiscal 2011 projections. Our Medical Device and In Vitro Diagnostic businesses continue to be steady performers both from a revenue and cash flow perspective. We remain excited about the long-term potential of this Company. Our balance sheet is strong and provides the Company ample financial flexibility. Our cash and investments at the end of the first quarter totaled $59.7 million.

Lastly, before we open up the call to your questions, I'd like to ask -- to briefly discuss the agreement we reached with Ramius, LLC. As most of you are aware, during the first quarter we began discussions with our largest shareholder and reached an agreement regarding director nominations for the 2011 Annual Meeting of Shareholders and other matters. As a result of that agreement we welcomed two members, Jeffrey Smith and Dr. David Dantzker to our Board of Directors. Additionally we announced that John Meslow and Ken Keller will retire from the Board effective at the conclusion of the 2011 Annual Meeting. On behalf of the Board, the management team and the entire Company, I would like to thank John and Ken for their many years of dedicated service to SurModics.

Operator, that concludes our prepared remarks. We would now like to open the call to questions.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions) One moment please. And our first question is from the line of Ross Taylor with CL King. Please go ahead.

Hello, just two or three questions. First of all, with regards to the strategic alternatives for the Pharma business, can you give us any update in terms of how far you've gotten down that process or anything you have learned at this point in time?

Ross, this is Phil, I'll just give you a brief update. There's really not a lot we can share at this point. The process has been initiated very well with our investment bankers, and we've been pleased with how the process is unfolding, but it's really too early to give any indications on where we are and exactly how much time we expect it to take.

Okay. My two other questions are financial related. The royalty revenue ticked down just a little bit sequentially, and I wondered if there is any one product or milestone payments that are resulting in that sequential decline, or is it really just more a matter of soft industry environment causing your portfolio of royalty generating products to soften? And the second question is, on the R&D expense line, it looks like if I adjust for that R&D tax credit, your R&D spend was about $8 million in the quarter, is that probably a reasonable run rate to use for the rest of the year?

So, your first question related to the sequential royalties and license fees and essentially it's pretty typical that from Q4 to Q1 we do experience some modest decrease in the royalty line and that is really related to some of our agreements that have some tearing in them that we see the impact of on a sequential basis Q4 to Q1. We discussed in the past that our hydrophilic portfolio has actually been increasing nicely on a year-over-year basis, and typically sequentially as well. This is the one quarter of the year where we tend to experience sequential modest decrease, but again, we are up on a year-over-year basis in the hydrophilic royalties so we are not at all concerned about the trend and pleased to see continued strength in that portfolio. As it relates to the R&D expenses, Ross, I think the way you laid it out is a fair way to contemplate it because of the R&D therapeutic tax credits we did earn.

Okay. Assuming about $8 million in expense is going forward, I know you don't always like to get much of the way of guidance but is that a reasonable expectation, then, for the balance of the year?

Yes, it's a reasonable neighborhood. It obviously depends on any expenses we need to incur on behalf of customers to continue to drive their programs, but in terms of a neighborhood, yes.

Okay, alright. That's all I have at the moment. Thank you.

Okay. Thanks, Ross.

Thank you. And our next question is from the line of Ernie Andberg with Feltl and Co. Please go ahead.

Hello, Phil.

Hello, Ernie.

I'm doing some back of the math envelope here, so bear with me. But, you said in the release and in your comments you were about a positive $0.09 non-GAAP. If you are maintaining or minus $0.15 to plus $0.05 non-GAAP, that suggests you are expecting a breakeven to a loss for the rest of the fiscal year? Is that the implication? Is that what you're really saying?

Our guidance is intended to be full-year guidance and not so much a quarterly view of the world. Given the uncertainty we continue to see in the balance of the fiscal year, we don't see a reason to be changing our full-year guidance, so that is essentially the answer. It's not directly intended to tell you what the other quarters are.

Okay. Your comments seem to suggest, Phil, that you might start to see an improvement in that license and royalties line over the balance of the year if the contracts you signed come through on a reasonable basis. Is that what you are suggesting?

Well, the specific piece that I was speaking to was the hydrophilic portfolio.

Just hydrophilic as opposed to the whole seven eight?

Correct because there's other components in there. Clearly Cypher is one component that is challenging to predict, obviously, and has continued to experience year-over-year as well as sequential decreases in sales, and so it will just depend on how that unfolds. And then, the other component is the license fee line that tends to fluctuate, depending on the quarter and which of our customers achieve milestones or licensee payments.

Okay. With no change in the guidance in what was it, $2.7 million of Pharma related revenue, if memory serves me right you suggest on your last call you expect about a $5 million loss in that business this year. Is my memory right and are you still in that range?

Actually, the operating loss that we discussed in the fourth quarter call, in terms of our expectations for Pharma, was north of $10 million and we are not changing our view on that in this point in time.

Thank you for correcting me. I will get back in line.

Thank you, Ernie.

Thank you.(Operator Instructions)And our next question is from the line of Suraj Kalia with Rodman & Renshaw. Please go ahead.

Good evening, gentlemen. Gary, congratulations on joining SurModics and wish you the very best in terms of navigating the headwinds with the landscape.

Thank you.

And I do appreciate your honest assessment on this call. Very much appreciate it.Gary, specifically a question for you. And I know there are some things you can't say and you shouldn't say and I can appreciate that, but you and I both know, I mean we all know, that industry wide structural headwinds, SurModics has some really core competencies which are the best in the industry. Based on what you have seen so far in the month or so that you have been there, how do you see over the next couple of years in terms of capitalizing on this opportunity, essentially reducing lumpiness, but what you have let's realize an ROI on that? How do you see it? Can you shed some additional color on what you're looking at? We know about trans capital valves, we know about mitro -- I mean some of the programs that have been talked about.We also know some of the companies that SurModics is working and these are long-term programs and I more interested in the next two year -- six to eight quarter timeframe.

Understood. Some of this will fall out of how we define the core in terms of the boundaries. As you know, the Medical Device space is pretty broad. As I've looked at what SurModics' core technologies are, I see some broad applicability that are not necessarily only in the [trans cad] type space -- the ability to change, to modify a surface has a ubiquitous use, I think, in healthcare. And some of those uses are not necessarily two to three year time to fruition. Now, I can't speak more than that because it has to sort of fall out of how we define the core because chasing other market segments, I'm a little wary of that too early because we need to understand what do we know and what value we are bringing to the table. Minimally invasive, as we know, is a big trend. Hospital acquired infections are a big trend. So, without limiting it, I think the trick will be to find easy uses for current core technologies that are able to generate medium term cash flows versus purely (inaudible), which many of them have a longer timeline because of the regulations involved. That's as much as I feel comfortable saying, not because I'm holding back but just because I want to get our team a chance to go through this process and really shake it loose and see what we come up with as far as within the core and the segments we can go to. I've been pleasantly surprised what we have in R&D from a capabilities viewpoint of the technology and the customer focus that the team has had. And I've been very surprised at the sheer number of customers we already have. SurModics technology is everywhere, I can't say everywhere, but more than meets the eye having joined -- having been inside the Company now. Suraj, is that enough of an answer for you?

Fair enough. I can appreciate that. Gary, again, would it be a fair question to ask you, you've looked at it from a bird's eye view just within a month or so. Our impression is the average royalty rate in the device business for what SurModics signs the licenses is going down. Please correct me if I'm wrong and if not, again, from what you have learned within the short timeframe, is there something specifically that stood out to you that says you know what guys we have to rectify this and get back. Because you are right, SurModics is everywhere given the customer depth and breadth. The question is what is the ROI per license? And it has been what 100 plus customers now and you can see the revenue profile.

Royalty rates may go down if you are not bringing anything new to the table, and you're probably expanding the customer base. It's like pricing, if you're not bringing any more value, prices do tend to go down. The trick for SurModics is, this is a technology company, is what else do we have in our pipeline is going to bring incremental value in terms of something that is clinically relevant for our customers. I'm actually am a little -- I'm cautiously optimistic and the cautious part is really based on how we invest in it, not cautious about technology. The technology we have can -- that we have in our [harbor] -- can bring additional value beyond what we have in our hydrophilic business at this point and that's going to be critical.

And, Suraj, to specifically address your question about, are the royalty rates going down for our agreements, the answer is no. We've been very stable. Depending on the technology -- they are different depending on the technology but we've been able to more than hold our own and in fact generally do better as we've been rolling forward.

One last question for you, Phil. Forgive me, I'm brain dead jumping between all the conference calls, so just remind me, in terms of SG&A, obviously I look at your EPS guidance, is the $5 million, $5.5 million a range approximately reasonable to look throughout the year? I'm just trying to reconcile this SG&A level with the revenues. I'm not asking for guidance, I'm just trying to understand the key things that will drive your EPS guidance.

Our SG&A was artificially high this quarter because of the advisory services we incurred. And so, its run rate would be south of $5 million but not as low as $4 million in all likelihood.

Not as low as 4 million, you said?

Right, so it's probably somewhere between $4.5 million and $5 million.

And finally, Phil, in terms of let's say you'll sell the Pharma business, I don't know, in March, for whatever, about $2 a share -- whatever you get. Should we expect additional repurchases or is it you'll want to hold off at this stage?

That's a great question, Suraj, and that is clearly something we will be planning to discuss with the Board as the process unfolds and we find out exactly what the alternatives that are available and whether there's cash proceeds that we can then decide what the best use of really is for this Company. And that's very much tied in to how the Board is looking at things and how Gary is looking at coming to the Company with a fresh perspective and working with the management team and the Board to assess what are the best uses of capital going forward, what is the strategic direction, and once those are set, what's the best use of capital to align with that strategic direction.

Okay. Phil, I lied, cross margins, should we still look upon them in the 80% plus range?

So you're looking at a blended margin for the whole business. If you carve out just the margin for the products, this recent quarter, our product gross margin is more in the 62% range. Somewhere in the high 50s to low 60s is generally a decent neighborhood to think about for product gross margins.

Fair enough. Thanks gentlemen.

Thank you.And our next question is from the line of Beth Lily with Gabelli Fund. Please go ahead.

Good afternoon Phil and Gary. I have several questions. Gary, can we just step back a minute, and you talked about tightly defining the core business is really critical in terms of defining a strategy, let's take a step back even before defining what it is, can you, in a minute, define for us what the core business is?

You look at the markets and the segments SurModics as a company plays in, it is easier said than done. You can define it perhaps from a business specific viewpoint. What I will say is that SurModics has some chemistry and formulation capabilities that have applicability in different markets. Beyond that, in terms of the customers and the products, the baseline is really the technology. If I had to really give my assessment of the core, it would be defining it more currently based on the technologies. That's not adequate to really build the business, though, because you got to know what customers and market segments and perhaps channels that you play in but I'm zeroing in very early on what is the secret sauce at SurModics that we do that can impact our product lines from the chemistry and formulations that we have? And to be honest, I am still in discovery mode. I don't want to overstate what I think until I more deeply embed myself with some of the brilliant scientists and engineers that we have here. I will have more to share about that on the next call. Needless to say I will start off defining it from a technology viewpoint.

Okay. Next question is that --you talked about -- one of the questions is, is there going to be a required investment to strengthen the core business? When you talk about investment, are you talking about multi million dollar type of investment, are you talking about hiring more salespeople, more engineers, can you give us a sense?

You are asking the exact questions we need to ask. I'm glad that you're asking that because ifit were simple at this point we would already be there. And since I don't know the level of investment, it will depend on how -- well, first we've got to get to defining that core, then part two, as I said earlier, was the step of realistically assessing where we are strong, where we are not, and whether we can get to the growth potential that we desire. Whether that is in the channel, whether that's in the technology, and how much, I really can't address right now, but to give you some satisfaction, those exactly are the questions we need to ask. I'm sorry, I wish I could tell you more at this point, but the process is exactly what you are describing.

It's trying to figure out where do we want to be and what does it take to be there?

Absolutely, and the investments have to be balanced to get a smooth stream of cash flows as well. So it's not just a couple of big ones, obviously.

Okay. Does SurModics, let's just assume for argument sake you get out of the Pharmaceutical business, does SurModics have the right cost structure going forward to support the level of business, or do you anticipate you can take out cost or how do you think about the overall cost structure of the corporation ex Pharmaceutical?

Right now on a macro level, and I'll let Phil comment on some of the details, we have two profitable businesses and one that is currently unprofitable and that is the Pharmaceutical business. So, as far as whatever tweaking we may have to do in the businesses, I don't see that as being a lot because the businesses are generating cash and are profitable. The question comes down to growth. So, the unprofitability of SurModics as a whole has more to do with where the Pharmaceutical business is at this point.

Okay. Phil, did you want to add anything?

No, I think that's the right way to look at it. And, again, I think it all ties back to, ultimately, the strategic direction that Gary leads us toward in working with the rest of the management team and the Board.

Okay. My final question is about $60 million of cash on the balance sheet and potentially more that will come in from the sale of Pharma, how do you think about the allocation of the cash on the balance sheet as well as the overall allocation of cash flow?

Generally, the three areas that we have talked about with the Board as areas that warrant potential investment of capital are in the areas of share repurchase, returning capital to shareholders. Secondly is corporate development through M&A or other investments in technology or other companies that can bring complementary things that support our strategy. And then third is capital investments in the business through historically we've invested in the facility in Alabama but then there's obviously a maintenance level of CapEx that we typically invest in the business each year. It's really those three we look at and then it's ultimately a question of the balancing of those and exactly where we fall on the balance depends on where we are strategically, where we are in the cycle relative to things and obviously where the stock is relative to our views of its value.

I don't know what it takes -- Phil, what does it take to run the business? How much cash does it take to run the business?

The business is cash flowing.

So in essence, you won't lose money-- let's suppose you break even this year so that excess cash will only continue to build.

Yes, and as we talked about in the fourth quarter call it's our expectation we will have positive operating cash flow for the year so, absolutely.

Okay. In essence, you maybe want to keep some of that cash on the balance sheet, but my sense is, is that -- would you say that, Gary, one of your priorities -- in terms of all these other things you have talked about, the strategic priorities of the Company, one of the priorities is to figure out the best way to redeploy that cash on the balance sheet?

The capital structure of the company is critical. I came from a private equity highly leveraged world so I have a healthy respect for purity in the balance sheet. But, the answer is absolutely yes.

Alright. You didn't list that is one of your priorities, so I was just curious if that is the priority.

I think one is the capital cost and structure of the Company poised to take advantage of the strategy. You're right.That is on the table.Part of our strategy.

Okay. Thank you very much. I appreciate all your time.

Thanks for your questions, Beth.

Thank you and our next question is from the line of Daniel Owczarski with Avondale Partners. Please go ahead.

Yes, thanks. Hello Gary, hello Phil. Can you talk about the In Vitro Diagnostics business? Is that considered core right now or could that be evaluated, and what are the pros and cons of that business and keeping that business as it is today?,

When I look at the IVD business, first of all, the products we have there are marquee products and they are very differentiated. As I looked at the connection, and this is a very early look, the connection is really at a root technology level on formulation and chemistry, such as our photo link process and some of those products, which is applied also in the Medical Device business. Is there a connection via technology to the core? Yes. Are there connections by the market segments and customers? Certainly there are different segments that we are operating in there. The question is, does the strength of that connection to the core give us leverage in the operating advantage in the business? The business is solid and stable and cash flowing and one of the things we have to address is can we get this business to grow if it is within the boundaries of the core? That business is certainly not hurting the company, but providing some stability as we go through the strategic planning process.

And Phil, you mentioned a couple of new product introductions, is there anything you can add there?

I'm sorry, what was your question? Is there anything what?

That you can add as far as what you referred to new products in In Vitro Diagnostics, any color you can add as to what that would be?

We are not prepared to give the details of the products yet, other than to let you know they are in the queue and so we are making great progress on them and they will be coming out later in the year, probably second half of the fiscal year.There are some products we are really excited about and absolutely they help the growth profile of the business.

So we should be thinking there are more additives to the product line or more enhancements to the product line?

They are not new categories, they are within the product families we have, but significant enhancements to capabilities our customers want to leverage.

Okay. Switching to be R&D revenue generating projects, and I think Gary may have mentioned this, are you starting to be more selective in some of those projects that you take on, or is it any kind of projects that can bring in revenue are welcome at this time, or is there any change of focus in what is stopping and we look at what you are doing there?

Not every dollar spent in R&D creates the same long-term potential. There's a very capable pipeline embedded in it. What I believe is, where we get through the strategic planning process, we are going to have to apply, to test the strategic fit to what we are doing in R&D because then we would have developed a strategic plan and decided not to follow it. I think that will come out of it later. With that said, I haven't seen anything in the R&D pipeline is wildly off target in terms of what the Company needs to be doing. I hope that helps answer it.

Okay, thank you.

At this time, I would like to turn the call back over to Mr. Maharaj for closing remarks.

Thank you. Listen, I wanted to thank everyone for participating in this quarter's conference call. I hope you can join us at our Annual Meeting which is February 7 in Minneapolis. I'm looking forward to speaking with you in our second-quarter earnings call in April. Thanks everybody.

Ladies and Gentlemen, this concludes the SurModics First Quarter 2011 Earnings Conference Call. You may now disconnect.