Surmodics Inc (SRDX) 2011 Q2 法說會逐字稿

Good afternoon, thank you for standing by. (Operator Instructions). Welcome to the SurModics, Inc. conference call. This conference is being recorded today, Wednesday April 27th, 2011. At this time I would like to turn the conference over to Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Vince. Good afternoon. Welcome to SurModics' fiscal second quarter 2011 conference call. Thanks for joining us today. Also joining me on the call is Gary Maharaj, our Chief Executive Officer. 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 web cast and is accessible through the Investor Relations section of the SurModics website where the audio recording of the web cast will 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 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. On today's call, I will highlight select financial results and key achievements for the quarter. I will also comment on our revised guidance for fiscal 2011. Afterwards, Gary will provide an update on progress toward developing the strategic plan for the business going forward. And finally we will open the call to take your questions.

Let me begin with some financial highlights. For the second quarter of fiscal 2011, we were pleased to report revenue of $17.5 million which represents 15% growth on a sequential basis. On a GAAP basis, diluted earnings per share was $0.14. On a non-GAAP basis assuming a normalized effective tax rate of 38%, diluted earnings per share was $0.08. And cash flow from operations was $5.9 million. Please refer to the supplemental tables in our earnings release for an explanation of our non-GAAP accounting.

As you can see in the earnings release we delivered sequential growth in each of our revenue lines as well as in each of our three business units. This top line performance reflects improved broad based customer demand for our products and coding technologies as well as higher activity in existing and new customer R&D programs, mostly in our pharma business. As a result of our strong performance and better than expected first half results, we believe it is appropriate to update our guidance for fiscal 2011. I will discuss our revised guidance in a few minutes, but first I want to provide an overview of our second quarter results by revenue line. Royalties and license fees for the second quarter were $7.7 million up 2% on a sequential basis.

Last week Johnson & Johnson reported that sales of the Cypher Sirolimus-eluting Coronary Stent decreased 41% year-over-year which would translate to a sequential decrease of approximately 16%. We are pleased to deliver growth in total royalties and license fees in the face of the continued head wind of decreasing Cypher royalties. We are pleased with the results of hydrophilic coating customers in the medical device space. We generated growth in total royalties from this portfolio again in this quarter, both on a year- over-year and sequential basis.

These results reflect the many years of work we have invested in cultivating such a strong business in medical device coatings. Product sales in the second quarter were an all-time high for the Company at $5.8 million, up 21% sequentially. These results were driven by broad-based customer demand across a variety of our products, most notably IVD products, polymers and coding reagents. Lastly R&D revenue in the second quarter was $4 million up 42% sequentially reflecting a significant ramp up in R&D activity on many of our existing customer programs as well as several new programs.

In fact, despite the strategic alternatives process we announced in December, our pharma group has signed 6 new customer R&D programs since beginning of the calendar year. Reflecting the new organizational structure we announced last fall I will now shift gears and discuss results for each of our three business units, medical device, In Vitro diagnostics and pharmaceuticals. I will begin with our medical device business unit. Revenue in medical device was $10 million in the second quarter up 2% sequentially. As I mentioned earlier, we are pleased to deliver growth in aggregate royalties and license fees driven by the strength of our royalties from hydrophilic coating customers even as we experience the continued decrease in Cypher royalties.

In addition, customer demand for coding reagents and R&D from our medical device customers contributed to our improved sequential performance. We were also pleased to sign seven new licenses with medical device customers during the quarter. Also commencing with this quarter we are now disclosing operating profit by segment, which you will find as an additional table in the press release. As has historically been the case medical device was our most profitable business during the second quarter generating an operating profit of $4.7 million for the quarter. Given our core strength in this segment we are confident that this business will remain a steady performer for us going forward. Now let's turn to In Vitro diagnostics.

We were pleased with the results of our IVD business which has been a source of stability for SurModics. Today this business derives virtually all of its revenue from sales of our component IVD products. Revenue and IVD was $3.3 million in the quarter up 25% sequentially. The strength was broad based as we have achieved growth across most of our product offerings in the IVD product portfolio. IVD is also a consistent contributor to the Company's profitability generating an operating profit of $1.2 million for the quarter. Lastly our pharmaceutical businesses generated revenue of $4.2 million in the second quarter up 56% sequentially. This strong performance was primarily a result of the up tick in activity in our various customer R&D programs, both existing programs and new ones as I mentioned earlier.

The pharma business generated a operating loss for the quarter of $2.3 million. On the expense front R&D expenses increased sequentially both in customer R&D and other R&D, the former because we are incurring more expensive to drive our customer programs which is typical in the ebb and flow of activities on customer programs. Other R&D grew sequentially mostly because of the benefit we had in the first quarter related to the therapeutic tax credit. The sequential decrease in SG&A expense principally reflects the nonrecurring advisory services we incurred in the first quarter. Investment income increased sequentially as a result of gains in our investment portfolio. Non-GAAP earnings per share was $0.08 in the second quarter up from $0.05 in the first quarter. SurModics balance sheet and operating cash flow are strong. Our cash and investment balance at the end of the second quarter totaled $60 million and we had zero debt. Operating cash flow for the second quarter was $5.9 million compared with $5.3 million in the first quarter.

As noted in today's press release, the company will be restating its financial results for the first quarter of fiscal year 2011. The Company previously disclosed that it expected to record goodwill impairment charge of $4.9 million later in fiscal year 2011 triggered by a additional milestone payment in connection with the 2007 acquisition of SurModics pharmaceuticals. The milestone was achieved. However, the Company has determined the milestone obligation and an associated goodwill impairment charge should have been recorded in the first quarter rather than in the second quarter. This is purely a timing issue. The restated first quarter financial result will be summarized in an 8-K filing today and updated in detail in a forthcoming 10-Q a filing.

The bottom line impact of the restatement is that our first quarter diluted earnings share was a loss of $0.36 as opposed to the previously reported diluted earnings per share of a loss of $0.02. Because of the magnitude of this change to our first quarter results, we have concluded that the Company had a material weakness as of December 31st in internal controls related to the revenue milestone obligation in connection with the SurModics pharma acquisition. Let me stress this is an isolated incident where a single control did not operate effectively and only in the first quarter. Now, let me turn to the topic of guidance.

As I mentioned earlier, as a result of better than expected first half results and our expectations for the remainder of the year we believe it is appropriate to update our full-year fiscal 2011 guidance. We are adjusting our full year expected revenue to a range of $63 million to $68 million up from $55 million to $63 million. Non-GAAP diluted earnings per share is now expected to be in the range of $0.13 to $0.26 up from our previous range of a loss of $0.15 to positive earnings of $0.05. Including 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 $0.21 to a loss of $0.08 compared to the previous range of $0.53 to a loss of $0.33.

Overall we are pleased with the performance we delivered in the second quarter and moving forward. We remain committed to executing against our operating plan and achieving our updated guidance targets for both revenue and earnings. At this point I would like to turn the call over to our Chief Executive Officer, Gary Maharaj.

Thank you, Phil. And thanks again to everybody for joining us today. Since joining SurModics four months ago, the management team and I have been focusing on three priorities. First, achieving our financial goals. Second, exploring strategic alternatives for our pharma business, and third, developing our strategic plan. As our second quarter results demonstrates, we are well on our way to meeting our fiscal 2011 financial plan. All three business units grew revenue sequentially even as we carefully managed expenses. I want to congratulate our teams at SurModics for developing -- for delivering such a solid performance in the second quarter. Regarding the pharma business, we are making excellent progress at our review of strategic alternatives for this business.

Which we believe is in the best interest of all of our stakeholders. The process remains on track with our internal expectations, and we continue to have meaningful conversations with a number of interested parties. We expect to conclude the process by the end of the calendar year, but we will, of course, provide updates should something develop more quickly. Let's spend a few minutes now on the third priority I mentioned, developing the strategic plan for the Company. Our approach to the strategic plan is two fold.

First, we will determine what the core business is for each business unit including medical device and IVD and how to drive profitable growth in that call over the near medium term, roughly the next one to two years. Second, we will assess the opportunities to expand within this core and deliver further sustained profitable growth over the medium and long-term or the next three to five years. This approach has several significant advantages. By its very nature, the core business makes maximum use of strategic assets such as people, technology, and expertise and can generate growth with the highest profitability at the lowest level of risk.

As I mentioned in the last earnings call, sustained profitable growth requires a well defined and strong core as a foundation of the business. We stress the need to tightly define the core business and its boundaries in terms of customers, products, and technologies. We began our strategic planning process by applying this approach to the medical device business. This business we have defined the core as follows -- hydrophilic coatings of catheter based vascular delivery systems. These eight words occur in our strategic plan in the medical device business. Since they carefully delineate the current cash flow engine of the business and our lowest risk opportunities for near term profitable growth.

It is also interesting to note that in contrast to a few years ago when royalties from Cypher were the dominant revenues streaming our medical device business, today this hydrophilic coatings core generates the majority of revenues in this business. In addition SurModics has its strongest competitive position in working with customers to developing and implement hydrophilic coatings for catheter based vascular delivery systems. The foundation of this competitive position rests on the following strengths within this core definition -- first, SurModics has excellent brand recognition and preference among a large base of customers who are leaders in the medical device industry, and we have excellent relationships with these customers.

Second, we have technical superiority of our products where we are viewed as a gold standard both in terms of (inaudible) and durability. Third, the operational efficiency and ease which our coatings technologies can be applied. Fourth, a strong regulatory track record for our platforms and chemistries. And fifth, our more strategic assets people, (inaudible) and expertise. So within this core we intend to focus on the two following items, increasing our investment in hydrophilic coatings to build upon our existing technology platform that will further differentiate these platforms and our offerings. And next, leveraging our strength of modifying surfaces for high risk applications that will create opportunity's for us to move into high potential vascular areas of the body.

Hydrophilic coatings are vital to the future of SurModics and with the strengths we bring to this medical device segment, I believe we hold some compelling, competitive advantages to generate profitable growth in the near term. The second component of our strategy relates to refocusing our product development pipeline by identifying promising new markets and product opportunity. Primarily we will be investigating the application of current core coating technology platforms to adjacent markets. In other words, outside of the vascular space. We are carefully evaluating new market opportunities and plan to narrow the possibilities in the coming months. These choices are critical in setting the direction for new cash flow streams over the medium and long-term, and as such will be investing the appropriate time and carefully balancing the technology and market risks with their attractiveness of respective opportunities.

Now, while I have described the strategic planning process for our medical device business, the same approach is being applied to our IVD business. While we are still in the early stages of the process with the IVD business, we are confident that we will be successful in finding the core, the similar fashion and further differentiating our offerings to the IVD market place, as well as identifying the correct new market segments (inaudible) going forward. Ultimately through these measures, we hope to maximize revenue growth and profitability for this business segment. And over the next quarter we will be completing the initial review of the IVD business and building upon the work we have accomplished to date. Let me conclude by saying after these first few months as CEO, I am excited by what I have seen and confident in our future.

This quarter marks strong progress toward meeting our financial plan. We are on track in our strategic (inaudible) process for the pharma business and we are diligently working through our strategic planning process and are pleased to see the plan taking shape around our core business definition. I should emphasize that we viewed this important strategic planning process as the beginning of an evolution not as final end point. We expect to be fully executing against our new plan in fiscal 2012.

However, we have already started to implement key components of the plan and will continue to do so as the year unfolds. Finally going forward our entire management team plans to execute our growth strategy with the terrific core business with a laser like focus. Since we believe from focus will come growth. We look forward to continue progress against our strategic initiatives through the second half of the year and will provide further updates as appropriate along the way. With that, I would like up open the call to any questions. Operator?

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

Hi, a couple of questions. I think they are all financial related, but can you identify what some of the swing factors might be that might make you come in at the low end of your revenue guidance versus the high end over the balance of this year? And I'm assuming if you are toward the high end of the revenue guidance, that's what is going to drive up whether you are at the low or high end of the EPS guidance as well.

Good question, Ross, and let me attempt to frame that for you. The results on the revenue side first of all on our IVD business and medical device business historically have been more easily predictable because of the portfolio of customers we have there being quite broad and particularly in the medical device business with the increasing base of royalty generating customers that we have there. But we have seen some nice upward trajectory in that portfolio of late and so that is giving us some color to this guidance.

In the pharmaceutical business, that is clearly the most volatile business in terms of ebbs and flows of activity in our R&D programs with customers, and we have seen that in past quarters as we have broken out those revenues from a segment base for some time. That combined with capacity utilization there clearly drives some of the earnings upside that you see. We also see good opportunities for just prudent expense management that we have been exercising already. And if we continue to be successful there we see the ability to steer toward the higher end of the range. That will obviously depend on the business as we see it unfolding. I hope that helps a little bit. Give you some color on how we are looking at that.

Yes, it does. another question just to try to focus on the In Vitro Diagnostics a little bit, can you point to any factors that drove that business to perform so well in the quarter? I know you mentioned it was very broad based, but how sustainable do you think these types of numbers are?

You know, it is a good portfolio of products we sell there, and the teams have been executing really well and we have seen some good momentum with our customers there. The sequential performance that you see, at 25% increase sequentially is not something I would suggest you or anyone bake into your modeling for our results going forward. But in the rough order of Q1 and Q2 in that business is the kind of performance that we think is possible on a yearly basis and order of magnitude in that range.

All right, and how about one other question if I'm still on. I think the loss in the pharmaceutical business was about $2.3 million in the quarter, and is that kind of a normalized level would you say at this point?

That's getting back a little bit to some of the points I was trying to make in your question about guidance. The operating loss there will depend on capacity utilization of the fixed infrastructure we have there, and the sequential performance you saw a 56% increase from the December quarter and clearly absorbed a lot more of the overhead and expense base in that business for the quarter. As we mentioned they have been very successful at signing new customer programs since the beginning of January and so we are very pleased with how that group has been performing and traction we are getting with customers. But how the work flows within quarters really depends on what those customers need in the near term. And so I certainly don't see that sequential growth continuing. But the level that we are at right now is probably much more sustainable than where we were at Q1.

Okay. All right that's all very helpful. That's all my questions now. Thank you.

Thank you. Our next question comes from the line of Ernie Andberg with Feltl and Company. Please go ahead.

Good afternoon.

Hi, Ernie.

Gary, you in your comments about the strategic focus and the IVD business and the medical device business, particularly the hydrophilic you implied -- well, first you said you had looked for applications outside the vascular space. You implied that you identified opportunities that could be attacked. Can you go any further in discussing that at this point?

Well, first we actually currently have business outside of the vascular space in that medical device business. But they are not the magnitude of the opportunities we would want to lay on the waterfront. It may be a little premature because there are many opportunities and our team is looking at de-risking them, so we expect the number. If we are doing it right we expect the number to drop dramatically as we de-risk them. Because we want to make sure we lineup the ones that have the lowest risk with the maximum opportunity. So it would be premature to go into much depth at this point.

Also some of these things, even as we go forward might be confidential in our pipeline. I do want to reinforce though that none of these growth initiatives are ones that we conserving with extra cash are squarely in what we do and the talent we have and the investment profile that is current with the Company. So just wanted to reinforce that as well.

Fair enough. Thank you. Two things on SurModics pharmaceuticals. Phil talked about exploring opportunities and having discussions with people, and what happens if you are not able to find someone who will want to pay you what you think the business is worth?

Given where we are in the process, we remain optimistic. The process, as I said, is meeting our expectations as we have spent several months in it right now. While you always have the probabilities of anything happening, the possibility I see of that is very small. Because we remain optimistic, if the process was not meeting our expectations we would have a different signal. But so far it absolutely has met our expectations. We believe we will see that successful conclusion before the end of the fiscal year.

End of the fiscal year? I thought Phil --

Sorry, calendar year, calendar year. Yes, calendar year.

Fair enough. Phil, for you, you have given us some new metrics on the business, will you provide some historic numbers on the operating income by the business units or do we have to wait to get that information as you report the rest of the quarters?

We will be providing some of the history at some point in the future. We don't have all of that completed at this point, but it is our goal to be able to get that out rather than just dribbling it out each quarter.

That would be helpful, thank you very much.

Absolutely.

The first question asked about the range of estimates in the second half and I think you covered that reasonably well, Phil. That does it for me. Thank you.

Okay. Thanks, Ernie.

Thank you. Our next question comes from the line of Suraj Kalia with Rodman & Renshaw . Please go ahead.

Hey, good afternoon, guys. Gary, let me look at the numbers and vis--vis the qualitative aspects. You just said in your prepared remarks you are satisfied with the pharma divestiture process so far. We obviously understand it takes time, but if I look at the quarter about a $1.5 million jump in revenue sequentially is from the pharma business. So part of me says the medical device business is flat. It has been flat for three quarters almost, at least that we can tell. And you also mentioned you were confident in the business prospects. If I strip out pharma, because that is going to be divested unless the plan has changed, the core business, am I reading it wrong, is still -- I am not seeing what is the next big thing and what is giving so much confidence on the core business? Sorry a long question, but hopefully you get the gist of

Keep in mind in the medical device business we are facing the head winds of the dramatic drop in Cypher royalties. And so that has a sequential drop. Eventually we will hit the minimum revenue from that business which will help stem that tide. But the underling medical device coating business continues to grow. I look at the Company -- let's imagine without pharma being a part of the business. Profitability of the Company is much different. A very different look at the business. And our core medical device business, even as it grows is very highly profitable in that business. So the Cypher head winds depress some of the growth that is occurring in that business, and I expect to see that stabilize within the next several quarters. It is hard to grow when you are facing a known and predictable decline that you are facing. But hydrophilic coatings which is actually not -- hydrophilic coatings is a core Cypher actually is we are not counting that as the core business, when we talk about the capabilities for growth and profitability. I was specifically leaving that part out.

Right. So, Gary, just to comment on that point and forgive me I don't mean to harp on this just trying to get a better understanding, you have the liberty of -- having a new perspective on this, when you talk about business confidence, we are looking at the med tech landscape. We can see the head winds coming. Which ever way you want to slice and dice it there are head winds coming, I am just trying to get a better perspective ex pharma. When you look at the core business, specifically devices, I am not asking for specifics, but are you looking at, hey, in the next year or so we might be looking at a major contract sign on, are you looking at bumping up the average royalty rates for the new license has signed on? Because the metrics when taken in totality, at least per my math, do not add up with the licenses sign verses revenues being flat in the device segment verses head winds of the macro landscape. To whatever extent you can shed some additional color would be appreciated.

There is two things. We have had a lot of focus in our pharmaceutical business. And in fact our core hydrophilic coatings business has continued to grow with increased focus on that business. And especially -- part of our strategic plan is within segments of catheter-based vascular delivery systems. Each word in there weighs a ton. So specifically in those areas we intend to focus on the areas that are predicted to grow rapidly in certain aspects of the cardiovascular and neurovascular space. And with that focus what we have seen in this quarter we believe we have opportunities because the one thing that struck me since I have joined the business is incredible brand recognition of SurModics as a coatings delivery in the vascular space partner, and in fact many of our customers when they are developing new products turn to us first. And we imagine there will be substantial developments in these sub segments in the coming year or two. So we intend to capture that growth as these areas are poised to grow rapidly.

Okay. Phil, again to the extent that you can share your guidance of $63 million to $68 million or whatever, I am taking ball parks, medical devices and even if I zoomed flat line, you are talking at least $40 million. If something goes wrong it is at least $40 million. Let's say IVD is annualised at $10 million. So pharma, you are looking at roughly between $13 million and $15 million annualised. Is that a fair assessment on our part, or when you are looking at -- even though you haven't broken out the numbers, but looking at the strategic break outs between these divisions you are really focusing on some pharma if it happens it happens, not great. I am just trying to get the different buckets of this guidance.

We are not prepared to give guidance by segment, but your math there was probably giving not enough credit to IVD because you were annualize that at $10 million whereas if you annualised it today you are going to be more like $12 million based on the recent quarter. And I'm not saying that's the number, just saying your annualization math is just slightly off.

And where does the head count, Gary, from when you joined, to let's say -- how should we look at it at the end of fiscal let's say 2011 if we want to pick that number? Thanks for taking my questions.

I am sorry. The question was?

The head count. You came in and you are obviously re-aligning. I heard de-risking. This is probably the first call where I have heard de-risking has been emphasized quite a bit. Part of the de-risking in my vocabulary is really getting rid of waste or whatever, and I am just trying to understand where does the head count when you join versus how should we look on it in the fiscal year?

Our head count will be -- as we look at opportunities we will certainly consider adding head count, but for now we have the talent we need to grow the business. I have been scrutinizing of any head count additions as anyone in our team can tell you over the last three to four months, as we look at growing this business in the future, we have got really an incredibly talented team of people that I intend to help out teams refocus and reallocate on the projects that have the best economic legs. I am certainly satisfied with it.

Fair enough. Thanks, guys.

Thank you. (Operator Instructions). The next question is from the line of Beth Lilly with Gable Asset Management. Please go ahead.

Good afternoon.

Hi, Beth.

Hi, Beth.

I had a couple questions. One is, can you -- I might have missed it, but can you help me understand why the increase in the outlook for the year? Why you bumped up your revenue expectations?

Well, right now we are tracking quite well. First half revenue is just under $33 million and based on where we were with the previous guidance, we were starting to feel that we were doing well within that range. And in fact looking beyond the range and even more so in the case of bps. And so we wanted to make sure that the market had a more current view of what we see as the opportunity and what we see we think we can deliver.

I guess what I'm trying to drill down to is which business is tracking above your expectations?

All of them.

Okay. And when you say all of them are you including pharmaceuticals?

Yes.

And would you say that it is a result of the environment, the overall better environment for your product or is it a result of maybe the work that Gary and the Company being re-envigorated?

I can answer that. I think in the case of the Company it is due to our employees and the teams. It was very difficult in our pharma business after we made that announcement to think it would be difficult to sign more contracts, but because of the capabilities of the facility and the team down there, many of those that were in the pipeline successfully signed and have re-upped even in this last few month period because of successful development by our pharma team. The same for our IVD business. We become part of more (inaudible) of our components -- components have become part of more -- we have seen more ordering I believe from customers restocking in the last quarter. But the best I can say is our teams are executing they see the capability of this Company, and they want to get back to the winning ways. I don't know if this answers your question ,but it is something I have felt since I have joined.

The second question is and I want to just applaud you for breaking out the divisions in terms of the operating margins and the operating profits from the different businesses. It is very helpful, extremely helpful. As you look at the businesses on the percentage of revenue it jumps around a lot, but if we look at like for example medical device on a six-month basis, the operating margin is 49% and on a three-month basis it is 47%. So let's take 47%. Is it fair to say that the operating sustainability of that business the margin I can use going forward would be kind of mid 40s?

Yeah, I think That's a reasonable are neighborhood. It depends a little bit on mix of our revenue in that business depending on reagents in R&D revenue as well as the royalties piece. So it does vary from quarter to quarter in that mix, and so that drives it but your neighborhood I think that is one that would be comfortable with.

We certainly want to keep it above 40%. If there is some capacity based capital investment we might see a small step as we bring utilization back up. And the last answer I forgot to mention our medical device team the last quarter it seemed there wasn't a week that we weren't signing a new licenses and royalties. So a tribute to them as well. Certainly want to keep it above the 40% mark.

Okay. And what about an IVD? That number as a percentage of revenue jumped up this quarter, but it seems to be let's say the mid20s. Is this a fair assumption to make for that business? Mid 20%?

That one because of how small a group that is, it will fluctuate more and so we had pretty strong revenue growth this quarter and so it will depend again on mix and what not, but your neighborhood seems reasonable.

Okay. And so the reason it was so strong this quarter was, one, the revenues were strong but, two, was it a mix issue, the higher margin mix?

It is mostly just the revenue increase relative to not a lot of additional expense other than the cogs.

Okay. All right and then my last question is, if you look at the first quarter, the revenue in the quarter for medical device of let's call it $10 million for easy math. What percent of that $10 million is Cypher related or comes from Cypher?

We don't break that out and J&J won't let us disclose exactly what the percentage is the royalty percentage. A lot of people on the street have modeled in the neighborhood of 1% on their sales. So if you backed into what their numbers would suggest they were 100 and -- I want to say it is around $113 million if you do that 41% year- over- year decrease it gets you to about that number. So if you use 1% of that, that's what you would say is coming from the Cypher royalty.

So the math is $1 million or so?

Right.

Okay.

Or so.

Okay. Great. And I just want to be clear on this. You will have the strategic alternative plan is on track and you will have some resolution by the end of your fiscal year, correct?

I miss spoke. End of the calendar year.

End of calendar year meaning December?

Yes.

Just wanted to be clear on that. All right, perfect. Thanks so much.

Thanks, Beth.

Thank you. And, gentlemen, at this time I am showing no further questions. I will turn it back to you for any closing comments.

Thank you. I want to thank everyone again today for participating in this quarter conference call. We look forward to speaking with you on our third quarter conference earnings call in July. Thanks, everybody.

Thank you, sir. Ladies and gentlemen this does conclude the SurModics second quarter 2011 earnings conference call. Thank you very much for your participation. You may now disconnect.