Surmodics Inc (SRDX) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the SurModics first quarter 2014 earnings conference call. (Operator Instructions).

I would now like to hand the conference over to Andy LaFrence, Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Good afternoon and welcome to the SurModics fiscal 2014 first-quarter earnings call.

Before we begin, I would like to remind you that during the course of this call we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding SurModics future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements resulting from certain risks and uncertainties including those described in our SEC filings.

SurModics disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

Finally, 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. A press release disclosing our quarterly results was issued earlier this afternoon and is available on our website at www.SurModics.com.

On today's call, I will provide an overview of our financial results, highlights for the first quarter and update our outlook for the fiscal year 2014. Gary will then cover our key achievements and discuss our growth drivers and strategies. And finally, we will open the call to take your questions. I will start with the financials.

Earnings in the first quarters of fiscal 2014 and 2013 were positively impacted by gains from the Vessix Vascular strategic investment as noted in our press release.

On a GAAP basis, our diluted earnings per share decreased 10% to $0.26 per share for the first quarter compared with $0.29 per share in the year-ago period. It is important to note that on a pro forma basis, fiscal 2014 diluted earnings per share increased 17% in the current year quarter to $0.21 per share compared with $0.18 per share in the first quarter of fiscal 2013. We are pleased with this growth in earnings per share.

Revenue for the first quarter totaled $13.9 million unchanged from the first quarter of last year. I would like to remind you that this quarter we faced a very tough comparison. In the year ago period, industry growth was more robust and we posted a 16% GAAP revenue gain including a $0.6 million one-time hydrophilic royalty catch-up payment. Adjusting for this payment on a pro forma basis, revenue increased 5% in the first quarter of 2014.

In the 2014 first quarter, we delivered operating income of $4.3 million, an 11% decrease from the prior year. Operating margin was 31% compared with 35% in the prior year quarter. The current year quarter operating margin reflects increased research and development investments to support the drug coated balloon program as we have discussed in recent quarterly calls. Gary will discuss our progress on this initiative in a few moments.

Turning now to our two business units. Medical Device is the larger business and contributed approximately three quarters of our total revenue. This unit which includes revenue from both our hydrophilic coatings and device drug delivering coatings, posted revenue of $10.5 million, unchanged from the year ago period. The first quarter of fiscal 2013 included the one-time $0.6 million hydrophilic coating catch-up royalty payment that I referred to previously. Excluding this payment Medical Device revenue in the first quarter of fiscal 2014 increased 6% from the prior year period.

First quarter hydrophilic coating royalty revenue decreased 3% to $7.1 million compared with the year ago period. As mentioned in the press release, coronary sector hydrophilic coating royalty revenue increased 3% for the quarter, a nice positive after declines in the third and fourth quarters of fiscal 2013.

First quarter 2014 hydrophilic coating revenue increased 5% compared with the year ago period when adjusted for the one-time payment in fiscal 2013.

Our medical device unit generated $5.3 million of operating income in the first quarter decreasing 9% from a year ago. Medical device operating margin was impacted by higher planned drug coated balloon research and development expenditures.

For our In Vitro Diagnostic unit, first-quarter revenues totaled $3.3 million, a slight increase compared with the prior year quarter. Of note, our IVD business has generated 13 consecutive quarters of year-over-year revenue growth.

Strength in our slides, a component of our molecular diagnostic product line, as well as our BioFX branded products were offset by softness in the stabilizer and antigen lines for the quarter. We expect improved revenue growth in this business as the fiscal year progresses.

Product gross margin for IVD was 60% in the first quarter increasing from 59% in the prior year quarter. IVD operating income of $0.7 million was down marginally from the first quarter of 2013 reflecting higher operating costs and a slight increase in allocated corporate expense. Our diagnostic operating margin for the quarter was 20% compared with 23% in the prior year quarter. We expect our diagnostic operating margin to range from 20% to 29% for the full fiscal year -- excuse me -- for the fiscal year.

Now I would like to discuss our first quarter 2014 revenue summary by category. Royalty and license fees which are generated primarily from our Medical Device business unit were $7.5 million, unchanged from the year ago period as a result of the one-time $0.6 million royalty payment previously discussed. Excluding this one-time payment, royalty and license fees increased 7% in the first quarter of fiscal 2014 compared to fiscal 2013. We are especially pleased with this growth given current market conditions.

First-quarter product sales of $5.4 million were unchanged from the year ago period. The Company has generated solid growth in slides, a component of our Molecular Diagnostics business and BioFX branded products.

Lastly, R&D revenue in the first quarter was $1 million, unchanged from the prior year quarter.

SG&A expenses in the first quarter of fiscal 2014 were 28% of revenue compared with 26% in the prior year quarter. SG&A expense in the first quarter of 2014 totaled $3.9 million and increased 5% from last year on a dollar basis. The $0.2 million increase reflects higher costs primarily as a result of additional stock-based compensation.

As a percentage of total revenue, first-quarter R&D expenses were 27% compared with 24% in the year ago period. R&D expenses of $3.7 million for the quarter increased 10% from last year resulting from planned investment to support our drug coated balloon development initiatives.

Income tax expense was 28.8% of pretax income for the quarter compared with 30.6% in the prior year period. The decrease in the income tax rate in the current year quarter primarily was a result of planned increased state discrete tax benefits offset by the decrease in Vessix capital gains between the periods which resulted in no income tax expense as we were able to utilize fully reserved capital loss carryforwards. For the full-year, we continue to anticipate a 31% to 33% tax rate as we said in last quarter's conference call.

Looking at our balance sheet, it continues to be strong. Our cash and investments totaled $53.1 million and we had no debt outstanding at December 31, 2013. We continue to generate solid cash flow. Cash flow from operations was $4.3 million during the first quarter of fiscal 2014. We also received $0.7 million from a milestone earn-out payment related to our strategic investment in Vessix which was sold in fiscal 2013 and we invested $0.1 million in property, plant and equipment in the first quarter of fiscal 2014.

Reflecting our commitment to enhancing shareholder value under the $20 million repurchase authorization announced in July 2013, we bought back 380,000 shares of common stock totaling $8.9 million in the first quarter fiscal of 2014. As of December 31, 2013, we had $2.6 million outstanding under the existing share repurchase authorization for future share repurchases. We completed our share repurchase authorization after quarter end in January 2014.

I now want to comment on our expectations for fiscal 2014. We are reaffirming our estimated revenue for fiscal 2014 to be in the range of $58 million to $62 million reflecting a 3% to 10% year-over-year revenue growth. We are increasing GAAP diluted earnings per share to be in the range of $0.85 to $0.97 per share to include the gain from the Vessix strategic investment.

Cash flow from operating activities is expected to range between $17.6 million and $18.6 million for fiscal 2014. We project capital expenditures for fiscal 2014 to be in the range of $2.2 million and $2.5 million. All in all, a solid quarter and a solid start to the fiscal year.

At this point I would like to turn the call to Gary for his perspective on our operations. Gary?

Thank you, Andy. Q1 was shaped by three major influences. First, as Andy noted, we are comparing quarterly revenue growth versus a strong Q1 of fiscal 2013 where we experienced a 16% year-over-year quarterly revenue gain including that one-time large catch-up payment of approximately $0.6 million.

The second effect on a pro forma basis to remove the effect of this one-time payment, SurModics posted growth in the mid-single digits. This was the high end of revenue growth experience in the specific product categories by our customer base in both medical device and immunoassay sector of our IVD business.

More important, it does not represent losing business to competitors nor an inability to capture new business. Instead it reflects, if anything, the large weighting of our current core customers and their intrinsic growth rates.

While we have both the intent and the ability to improve during the year we will nonetheless continue to face the single-digit growth rates of our customer base. This is embedded in our financial guidance for fiscal 2014.

The third effect on the quarter is that we have continued the planned investment in our drug coated balloon program. This is a significant highlight of the quarter and demonstrates our commitment to this project despite challenging core business market conditions. This core expansion initiative into drug coated balloons represents our future strategic intent to focus on mission-critical enabling technology on actual medical devices.

So against this three-part backdrop, we believe our performance during the first quarter was solid.

Andy did a good job of characterizing our business unit performance. I want to use my time to talk more about the drug coated balloon project in which I am directly involved. As a quick reminder, here is why we are pursuing this initiative.

Drug coated balloons may offer better alternatives than current therapies in areas of the vasculature where placing a stent is not ideal. The worldwide market potential for drug coated balloons is now predicted to be over $1.4 billion annually by 2020. Several first-generation products are already in the market outside of the US and several products are pursuing regulatory approval in the US currently.

I mentioned in the last call that SurModics is quote unquote -- going the extra mile and actually developing a complete product solution. That is a drug coated balloon device including the balloon catheter device itself. This is different from merely developing the coating technology without an associated device platform.

While this is a dramatic new endeavor for SurModics requiring substantially more investment, we are confident that this will be an important time and value accelerator for potential strategic partners. Why?

First, less backtracking will be required to validate the technology performance on a new balloon catheter platform. As a result, we believe that it enhances the overall value of our offering and more than justifies the incremental investment we must make. On the other hand, our coating technology still remains portable to any balloon catheter platform, be it peripheral or coronary.

During quarter one, we devoted substantial efforts to characterizing and developing and improving the coating process parameters on our own balloon catheter platform. This involves testing and characterization of multiple balloon catheters sizes, diameters and lengths. It also involves reproducing results at every stage in preclinical confirmatory studies so that the previously characterized coating technology continues to perform as expected.

This work will continue into Q3 and Q2 and Q3 when we aim to start a GLP safety study. We may be in a position for the first human use of this device by the end of calendar year 2014. These are aggressive but achievable targets and represent an important milestone in a major value creating program when they are achieved.

In parallel, our team has been busy determining our regulatory pathway and clinical trial strategy. We continue to work with well-known and respected clinical and scientific leaders in this particular field to fully vet our drug device combination. So far, SurModics has been extremely effective in balancing the efficiency of our investment dollars that is better value for the money spent with effectiveness which is getting results but not starving the project's acceleration.

To me this is a remarkable achievement in many respects and a tribute to our talented team that we were able to deliver excellent results of greater than 30% operating income in Q1 while funding a major potentially value creating initiative. We will continue to optimize this balance as we traverse the fiscal 2014.

So let me reiterate what I previously said. 2014 will be both a challenging and exciting year for the Company. Challenging as we face continued industry headwinds in our respective core businesses yet exciting as we work through both opportunities and the risks to put SurModics back front and center in treating a huge clinical need.

While drug coated balloons are a difficult and complex technology endeavor, it is one where we believe we can create a differentiated product and technology combination that has the potential to be the market leader with the right strategic partner and creating shareholder value.

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

(Operator Instructions). Ross Taylor, CL King.

I apologize if I missed some of this in your prepared remarks but is it fair to assume that your real preference now is to conduct the Phase I clinical trial of the drug coated balloon yourself?

That is currently being debated. We certainly are putting ourselves in a position to do that if we choose to. That is another decision that I would say has actually been crystallized yet. On the other hand if a strategic partner wants to conduct that trial, it depends on the balloon platform that they will choose whether it would be on the one we have chosen or whether they will want it on their proprietary balloon platform.

So the short answer, Ross, is we went to get the GLP started and we want to be able to freeze and validate our process and product design and put ourselves in a position to perform a first in human if at that point it creates maximum shareholder value.

Okay. How do you envision your R&D spend ramping up over the course of the fiscal year? Obviously I am guessing a little bit but your R&D spend was a little bit lower than what I had modeled in the December quarter and just kind of wondered how that might ramp up over the course of the year or maybe just any commentary as to what you think the full-year spend might be?

We project in that balance between efficiency and effectiveness in terms of driving the program and we continue to monitor that very frequently. It depends on how quickly we get into a GLP animal study and whether there is some preparatory work to perform a first in human trial. Our plans are -- what we projected for R&D spend, we are sticking to that, to the total spend that we envisioned.

Ross, good afternoon. We did if you recall back in terms of our guidance, we had indicated that we may spend up to an additional 20% in R&D this year which is about $3 million. We still affirm that we may spend up to $3 million in additional R&D this year and some of it just has to do with the timing of the experiments and the preclinical work that we are doing.

Okay. My last question, just thinking about your royalty revenue line, is there anything you have seen in the end markets maybe particularly cardiology that sort of changes your expectations or maybe makes you a little more optimistic that that market is performing better than you thought three months ago?

Well, Ross, that is something we clearly look at as we look at a number of different reports in the market trying to peel back the onion and figure out what the growth rate in coronary is. And if you think about the brackets we put the 3% to 10% growth, clearly if we have negative growth order where we are going to be at the lower end of that bracket in (multiple speakers) -- coronary yes. We will have negative, we will be at the bottom of that range at 3% and if we see more robust growth there, that will help move it to that higher end of the range. So we haven't provided any specific guidance in coronary.

What I can repeat to you is that what we are seeing in the marketplace is that it appears to be the least stabilization in the coronary market right now and we hope that continues here for the next several quarters.

Okay, that is helpful. That is all my questions. Thank you.

(Operator Instructions). Beth Lilly, GAMCO.

Good afternoon. So could you, I just want to take a step back. You spoke at a high level in terms of the drug coated opportunities so will you walk us through again kind of the decision tree and the timing? And then just to tag onto Ross's question in terms of progressing with Phase I clinical trials, what will cause you to decide to go ahead with that on your own?

So some data was shown on our drug delivery at the TCT in October of 2013 and that was a dosing study we had done to select optimum dose and we were certainly excited by that data relative to some of the products going through US regulatory approval currently.

After the dosing study, you really then -- if you are going to use your own balloon platform, there is a substantial amount of work that the device itself brings which means you have to do all what we call a verification validation of the device with this technology. So currently what we are doing is we want to make sure we keep that drug signal, that great drug signal, transferred to the tissue at each step of the way while we develop a fully manufacturable and scalable version with this particular device. That is what we were doing in Q1 and continue to do in Q2.

The big decision then is when we feel we have enough statistics to freeze both the product design, the coating technology and the process design because thereafter changing any parameters becomes very difficult because you already started the big spend on GLP animal studies and potentially in the future, first in human implantation.

So you really have to have all of your ducks in a row to freeze that and feel very confident of what you have before the biggest spending really scales up. And that is what Q2 and Q3 we intend to be at a point where we can freeze that to move on to the next step.

The largest spending certainly comes with a much larger animal GLP type preclinical study and then the decision then is whether to fund a first in human study -- SurModics is not in the business of funding pivotal trials obviously -- but whether or not that will help a strategic partner or partners who we are talking to or whether they would prefer to take it over from there. So while we are putting ourselves in a position to do that if we think it creates outsized returns for our shareholders, it doesn't necessarily mean that we have to do it.

So we have budgeted our R&D to be in a position to do that, at least start that in this fiscal year. The way it looks right now with maybe really in this calendar year we may have to do that. So you have to think of where the budget crosses in terms of fiscal versus calendar year. This is really the detail work.

So is it fair to say that at the same time that you're going through this process in terms of gathering the data, you are also potentially talking about with partners about them doing the clinical, the Phase I of the clinicals?

Yes, we have and I can't be too specific but we have multiple interested parties that we are talking to, each with slightly different what their desires would be. And the real big anchors here or the direction indicators here is that speed to get a US ID -- this is from a strategic standpoint -- speed to get approval very quickly or the desire to use their current peripheral balloon platform and reduce some of the work we have done on the new balloon platform. And I can't comment which direction that would go but that would be a very critical thing depending on the strategic point of view.

So none the less, we are continuing to stay close of (inaudible) strategics to stay close to where we are right on this program so there aren't any surprises along the way.

If I could just ask one other question. So let's suppose that they decide not to use your balloon but they use your coating on their balloon. Would they have to go back through clinical trials because it is a different --?

Yes, so the GLP animal study at least for the US regulatory approval and certainly if any human trial is done in a different balloon platform, there will be some degree of backtracking to demonstrate the safety and efficacy because that is why call it a drug device combination. So to change a device you certainly have to relook at what needs to be demonstrated from a safety profile at that point. So the short answer is yes.

Okay, okay.

We will be making a decision to go forward without having -- whether that is the right move for were SurModics, its shareholders and the strategic.

Okay. Then just so I want to be perfectly clear, so at the end of your calendar 2014, there is the potential to be -- your first human implantation?

I was considering what I should -- that is an aggressive target but our team feels that is doable. It is pretty aggressive but again doable. I wouldn't say it if I didn't think it was in the realm of probability.

Okay, terrific. Very helpful. Thank you very much.

Charley Jones, Barrington.

Good afternoon, everybody. Thanks for taking my questions, Gary and Andy. Beth was kind of going at some of the same directions, the questions that I had but I'm going to ask maybe variations of them and a couple of others.

I guess to orient me, would you say you are kind of status quo with where you were a couple of months ago when we talked or have you kind of accelerated some of your plans? I just want to understand that base.

On the drug coated balloons?

Yes.

I think we have much more clarity what needs to be done. The issue is that once you put a device into the mix, the amount of work to be done becomes substantially more because then we are acting as a device company. So yes, but the clarity it is much improved.

So I guess one thing I am confused about is a little bit -- I think it is your commentary around testing the balloon itself because I guess I thought this was a workhorse balloon which to me meant it is already used, it is kind of a more of a commodity product or somebody is out there making an extra balloon for somebody else and they don't have enough, something like that and this would already be approved.

So I want to understand that because I have the same question really as Beth, I am wondering if you go through this GLP study and then somebody else wants to put it on their balloon platform, do you go back -- do they go back and do the GLP or is that covered? I understand Phase I you're going to have to go back but GLP, is that a start over as well?

First of all, a disclaimer I would hesitate to act as the regulatory expert on the call. Typically you would have to do some form of backtracking. You would be then on the hook to demonstrate to the Agency whether or not what you have is equivalent to the changes you have made and so it depends on the type of changes. If it is a wholesale new device, the chances are you may have to do a lot of backtracking.

Right, so even though a device out there has been used for years in the peripheral, if you were to put a coating on that kind of starts at square one on GLP regardless of prior approvals?

Exactly because the intention of this device is not a primary dilation balloon in fact to deliver our drug.

And I'm curious when you talk to partners out there, are they thinking that hey, I can just stick this coating on my old balloon, it is a great balloon etc.? Or do you know something and they understand it that shape of the balloon kind of impacts how the drug stays on or whatever and so there would need to be variations to prior balloons?

No, we believe what we have is very portable given the unique way we prepare the balloon. So as I said, we actually have done quite a few different types of balloon in the statistics of this project. As I said some coronary sizes, peripheral sizes and so we are confident that it is portable. The question for anyone trying to get to a competitive market in the next couple of years is what is the value of time versus getting to the asset? By the way, the balloon we have chosen is not -- I wouldn't call it a commodity. It is a workhorse excellent balloon. It does not have clearance in the United States. So some of the data we have to show is also making sure that the range of balloon sizes and the intended use and the diameters we have to check all of those boxes. So it is a fairly large matrix on just the balloon itself.

But on the question of portability, our technology is completely portable. It is whether the time to do that becomes the best interest of the strategic. If they are anchored on using their balloon versus anchored on getting an IDE approval in the US quickly, that is a decision they will have to make and either way we believe we can get it done.

You may not want to comment on this but I guess to me all of this kind of signals that your lead interested party does not have their own balloon. Your second or third interested party may have a balloon and you can get more value out of somebody that doesn't have a balloon but you can't get the deal done as quickly as somebody that already has a balloon and maybe take it on.

So to me that seems how it is setting up and you kind of have an idea of who you want to work with if you can get your balloon to work and you will get more value for that. It is pretty logical but can you just say if that is reasonable?

My logic would be I can't comment too deeply but my logic would be for us, the incremental investment in a device platform versus a coating technology and taking it a bit further than SurModics has taken things in the past, has an outsized return for our shareholders. We actually -- if potential strategics either don't have or not have, I think where we are being --I won't characterize it as bullheaded because we think it is in the best interest of our shareholders to say let's put it on the device and then we actually have an opportunity to generate if we choose, some human data. And the returns after the GLP after clarity in a regulatory pathway or even as much as a first in human are quite outsized for the investments that we are putting into it. Even recognizing we are taking that investment in a difficult market condition year, we still think that is the right thing to do.

I would add to that, Gary, that if you think about using our combo platform that we have, it is going to cut off maybe 6 plus months in terms of getting to market. So while a company could have their own platform that they want to use, they could maybe use -- since our technology is portable on the second-generation -- so this is all about giving more shots on goal a speed to market.

Great. That is very helpful, Andy. Just a few more here. I guess I am wondering if there is something that you guys have learned about paclitaxel versus a Limus drug that makes paclitaxel more attractive on a balloon than Limus whereas Limus drugs have been to my opinion found more attractive on a drug eluting stent probably because it helps induce endothlization opposed to stop proliferation. But I am curious if there is any sort of connection there of why you go with paclitaxel and then curious if sirolimus is an opportunity and whether or not you can make a crystalline structure of it?

First entry was paclitaxel and again, we don't necessarily believe there is a class effect of paclitaxel. It will need to be proven in the clinicals but we believe that they will better and not as good. And we intend to be on the better side in terms of a differentiated paclitaxel product.

We also have a sirolimus program. As I think I have said in the past, our drug delivery of this particular program is really a platform for us and so paclitaxel is the first drug that we are using and in fact the most difficult application of our platform is pulse (inaudible) blood flow in vascular which is the drug coated balloon but this platform allows us to get excipient immediate drug delivery into we believe a host of tissues. And it has the ability to play well with other drugs such as a Limus version and SurModics certainly has quite a lot of history with knowledge and experience with Limus. And so our Limus program all not as far advanced as the paclitaxel, we've got to get one done first -- is certainly part of our current R&D investment and we feel good about that.

And then just one more on the (multiple speakers).

Hopefully a strategic has to choose (multiple speakers).

Great. I guess just real quick on TCV, if you have any comments, Andy, about anything related to the lawsuit great. I'm guessing you don't. But I am wondering, I know you can't tell us how many programs you have in the US, that makes it too obvious. I know you can't say how many the programs you have commercial but I'm wondering if semantics can help here and you can tell how many companies you are working with on the TCV program that are in clinicals around the world?

On which program?

On a transcatheter valve hydrophilic coating program.

More than one. We have not publicly talked about how many companies we are working right now. We continue to go back to the same language we have used in the past, Charley, that we think in the long term, we are well-positioned in this space in the structured heart area and beyond that, we really haven't commented on any specific projects other than we know that we are on the SAPIEN -- the Edwards system.

Charley, I know it seems like a cop out, our hands are tied and we can't afford to -- our customers trust us but it is more than one.

Maybe I will last just one more just on the basic business. The next couple of quarters, is there anything unusual about patent cliff or anything that we should be thinking of here? Any cadence to the quarters that we should be knowledgeable. I don't if you have looked at the street numbers, I am sure you have.

Getting Serene across the goal line continues, we didn't get much highlights of that but the majority of our very intense and large number of feasibilities using the Serene platform and so I think Andy has said in the past, the financial impact of those getting across to regulatory and getting into the market is what will affect us in 2015.

So as far as our growth strategy of getting Serene adopted, that is going very well. It is the core market of the current base customers. I will turn it over to Andy here.

As I look in the next couple of quarters, things that kind of stand out, I mean we go back to last year and think about in our diagnostics business, Q2 was pretty strong, it is a pretty strong flu season and that flu season based upon the latest data seems to be waning at this point in time. So I would not expect that part of our diagnostics business to be as strong but we do expect antigens and other manufactured products to continue to have some strength.

And the only other thing I can think about in the second quarter, Charley, is that we did have a discrete tax benefit from the research and development activity that Obama had passed in January of 2013 and believe that was about $0.02 a share impact on the tax rate for Q2. But other than that, I don't see anything on the horizon that we haven't talked about or haven't pro forma-ed out.

On a broader response to that question though is that in our 10-K we did comment about the patent cliff that is coming up in 2015 and 2016 both domestically and internationally related to our Generation 3 technology which is about $5.5 million of our 2013 revenue. We will continue to retain the majority of that revenue as we have -- the royalty rates decline to a knowhow rate. But as Gary mentioned, we are working that very hard with the Serene launch to mitigate the impact of that change.

A good fraction of those customers who are adopting Serene are that third-generation right now (multiple speakers).

So you feel like a decent amount of that $5.5 million might be obsolete by that point or will they still have an older version but they will have an outdated version as well?

We can't comment on the fraction but even the fraction that will be going to a step down -- there is a fraction that might be going to a step down, but then there is a fraction that is on a completely different platform called Serene. We continue to have that more feasibilities come in of that nature even before 2015. The issue is they also have to get across -- remember we are trying to intercept our customers' product lifecycle so when they have the new version of this product, that Serene is on that. And so that is really the gating item.

So I am a little bit confused, sorry, I'm going to ask this anyway. I understand that you get a step down, it is less than the majority of the revenue, more than the majority is going away because the step down -- I thought it was 50 but it is 30 it sounds like. So that is obviously more than half but then you in addition to that are going to have some customers that you don't have step off because they are on a new program so to me that means that you would probably keep close to half of this business in 2015?

Let me respond on the financial piece here. In the $5.5 million, we will retain the majority of that revenue without any change or conversion to Serene. We are working very hard though to convert those customers to Serene because that is better for them, much better.

Okay, I am with you. So it is an old neuro platform hopefully from the old Boston boys? Alright, guys. Thank you. Thank you for all of the questions, hopefully no one else is in queue.

There are no questions at this time. Please continue with any closing statements.

Let me reiterate that fiscal 2014 represents an exciting opportunity for SurModics to continue are profitable growth even during a challenging market and especially while we increase our investment in opportunity for core expansion.

I want to thank everyone again for participating in this quarter's conference call and I hope you can join us next Tuesday, February 4, for the webcast of our annual shareholder meeting. Thank you, everyone.

Ladies and gentlemen, that does conclude the SurModics first quarter 2014 earnings conference. Thank you again for your participation. You may now disconnect.