Surmodics Inc (SRDX) 2014 Q3 法說會逐字稿

Good day and welcome to the SurModics third-quarter 2014 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Andy LaFrence, Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you, Jamie. Good afternoon and welcome to SurModics fiscal 2014 third-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's 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, development, 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 third quarter, and update our outlook for fiscal year 2014. Gary will then cover our key achievements and discuss our growth drivers and strategies. Finally, we will open up the call to take your questions.

I will start with the financials. On a GAAP basis, our diluted earnings from continuing operations totaled $0.27 per share for the third quarter compared with $0.22 per share in the year-ago period. Revenue for the third quarter of fiscal 2014 totaled $14.6 million compared with $14.3 million in the third quarter of last year.

In the third quarter of 2014, we delivered operating income of $5.3 million, a 26% increase from the prior year. Operating margin was 36% compared with 30% in the prior-year quarter. Earnings per share and operating margin for the quarter reflect a positive leverage to our business from continued operating expense management and the timing of a drug coated balloon expenditures.

Turning now to our two business units. Medical device is the larger business unit and contributes approximately three-quarters of our total revenue. Revenue from this business, which is derived from both hydrophilic coatings and device drug delivery coatings, rose to $10.8 million, increasing 2% from the year-ago period.

Last year's results included a $500,000 nonrecurring license milestone payment. Without this payment, medical device revenue increased 7% in the current quarter. Nice performance from the medical device business this quarter.

Third-quarter hydrophilic coating revenue was essentially flat, at $7.2 million, compared with last year. Increases in non-coronary royalties offset a 7% decline in coronary-related royalties. The ability to offset the coronary royalty decline reflects the continued diversification of our hydrophilic royalty revenue base.

The medical device business also benefited from an increase in research and development revenue, primarily associated with contract coating services to support clinical trials and product launches. Our medical device unit generated $5.9 million of operating income in the third quarter, up 12% from a year ago. Higher revenue and the timing of our drug coated balloon research and development expenditures contributed to the segment's gains in the operating income.

For our in vitro diagnostics unit, third-quarter fiscal 2014 revenue totaled $3.8 million, a 3% increase compared with the prior-year quarter. We said in our second-quarter earnings call that we expected revenue improvement in this business in the second half of fiscal 2014, and that is what we are seeing.

Product gross margin for IVD was 62% in the third quarter compared with 60% in the prior-year quarter. IVD operating income increased 9% to $1 million compared with the third quarter of 2013. Our diagnostics operating margin for the quarter grew to 26% versus 25% in the prior-year quarter, mainly resulting from higher revenue and cost management, offset by higher professional services costs.

Now I would like to discuss our third-quarter 2014 revenue summary by category. First royalty and license fees, which are generated primarily in our medical device business unit, were $7.4 million, decreasing 6% from last year. Revenue in this category a year ago included a milestone payment from the European approval of a stent that incorporates one of SurModics's biodegradable polymer platforms.

Next, third-quarter 2014 product sales totaled $6.1 million, increased 9% from the year-ago period, reflecting higher reagent sales in our medical device business unit as well as increased substrates, antigen, and microarray slide shipments in our in vitro diagnostics business unit.

And third, R&D revenue this year was $1.2 million, an increase of 32% from the prior-year quarter. SG&A expenses in the third quarter of fiscal 2014 were 25% of revenue compared with 28% a year earlier. On a dollar basis, SG&A in the third quarter of 2014 totaled $3.6 million and decreased 11% from last year. The decline stems from Company-wide focus on expense management.

As a percentage of total revenue, third-quarter R&D expenses were 25% versus 28% in the year-ago period. R&D expenses of $3.7 million for the quarter declined 9% from last year, resulting from the timing of our drug coated balloon development initiatives. We anticipate R&D expenses to grow by 2% to 5% in fiscal 2014 compared with fiscal 2013 -- 2014 compared with fiscal 2013. This is lower than our previous assessment of a 7% to 9% increase and is a result of drug coated balloon expenditures shifting into fiscal 2015.

Income tax expense was 32% of pre-tax income in the third quarter compared with 26.2% in the prior-year period. The change in tax rates between periods is largely the result of decreased capital gains in fiscal 2014 and lower discrete tax items. For the full fiscal 2014 year, we continue to anticipate a 31% to 33% tax rate, as we stated in last quarter's conference call.

Let's now turn to the nine-month results. Revenue for the first nine months of fiscal 2014 totaled $42.1 million, up 1% from last year. Revenue in fiscal 2013 included both a one-time $0.6 million catch-up royalty payment and a $0.5 million nonrecurring license milestone payment.

Excluding these two payments, revenue in the first nine months of fiscal 2014 increased 3% from the very strong prior-year period. Medical device revenue increased by 3% in the first nine months of fiscal 2014 on a GAAP basis and by 7%, excluding these two payments.

We delivered operating income of $13.1 million in the first nine months of fiscal 2014 versus the prior year's $13.2 million. Operating margin in fiscal 2014 nine months was 31% compared with 32% in the same prior-year period.

Earnings in the first nine months of fiscal 2014 and 2013 were impacted by a gain on one of SurModics's strategic investments. The Company realized a benefit of $0.7 million, or $0.05 per share, in the first nine months of fiscal 2014. This resulted from milestone payments associated with the fiscal 2013 sale of Vessix Vascular to Boston Scientific.

In the first nine months of last year, the Company recognized a gain of $1.2 million, or $0.08 per share, from the Vessix sale. Pro forma earnings per share rose to $0.69 per share in the first nine months of fiscal 2014 from $0.60 per share in the prior-year period. Schedules of pro forma adjustments are included in our third-quarter earnings release.

Looking at our balance sheet, it continues to be strong. Our cash investments totaled $57.1 million and we had no debt outstanding at June 30, 2014. We continue to generate solid operating cash flow.

Cash flow from operations was $12.5 million during the first nine months of fiscal 2014. We also received $0.7 million of milestone payments related to Vessix and we invested $1.2 million in property plant and equipment in the first nine months of fiscal 2014.

To supplement our capital resources, we earlier today filed a $175 million universal shelf registration statement on Form S-3 with the SEC. While we have no immediate plans to do so, this will allow efficient access to capital markets to support our strategic plan.

I now want to comment on our expectations for the full year. Given our strong expense management and the timing of drug coated balloon spending, we are updating our previously stated earnings per share outlook for fiscal 2014.

We are raising the low end of our estimate for diluted GAAP earnings by $0.05 per share, with updated guidance to be in the range of $0.90 to $0.97 per share. This guidance also assumes R&D investments will increase in the range of 2% to 5% in fiscal 2014.

We are reaffirming our full-year revenue guidance to be in the range of $56 million to $58.5 million and we estimate that revenue likely will be near the middle of this range. We are raising our guidance for cash flow from operating activities to be at least $19 million and capital expenditures are expected to be in the range of $2.2 million to $2.5 million.

The SurModics team has performed very well and we are pleased with the results for the third quarter of fiscal 2014. Thank you to the SurModics employees for all of their efforts.

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

Thank you, Andy. I am pleased with our operating results in this third quarter for three main reasons. First, we have continued to grow, despite some difficult market conditions for our customers in both the medical device and IVD business units. The return to revenue growth this quarter in IVD is especially notable.

Second, we generated excellent operating margins and earnings, both on an absolute and relative basis, with respect to prior quarters. Third, we were able to do all of this while investing in and making progress on one of the biggest market leads in vascular interventions -- namely, our drug coated balloon program.

I also want to recognize our entire SurModics team for their tireless dedication that delivered this trifecta of results in our third quarter.

Let me spend a little more time on the [rousand] reasons for our performance. In medical devices, we were able to mitigate the large impact of a decrease in coronary-related revenues by our portfolio of activity in other vascular anatomy.

Specifically, neurovascular products increased 6% this quarter compared with the prior-year quarter. This clearly demonstrates the importance of our ongoing diversification initiatives to reduce SurModics's dependence on cash flow stemming from percutaneous coronary interventions. Coronary revenues will always be important to us, but I am pleased that we have developed other strong sources of cash flow as well.

In diagnostics, as Andy noted, we were confident that we would see the return to growth we recorded in the fiscal third-quarter results. On the expense side, we continue to be disciplined and focused in our SG&A spending.

Let me emphasize that we are and do continue to fund major initiatives. But we have carefully prioritized the critical ones, such as investment in analytics, Lean operations, and process engineering.

Two factors contributed to lower R&D expenses [Ben] predicted and compared with fiscal 2013. First, recall that our restructuring in the fourth quarter of fiscal 2013 resulted in an annualized R&D expense reduction of approximately $800,000. Second, since we are not gearing up for first-in-human clinical trial for our drug coated balloon program until calendar year 2015, some of the larger anticipated expenditures will be pushed into fiscal 2015.

That leads me to the update on our DCB program. We continue to make very solid progress in both the process control parameters and drug delivery confirmation on our whole product solution. While there's still much to be done, we are on track for the activities that I outlined in the second-quarter call.

These are: first, to freeze the design, the formulation, and the process specifications in our fiscal fourth quarter. Second, to start a GLP safety study by the end of calendar year 2014. And third, to initiate a first-in-human clinical trial in the first half of calendar year 2015.

We recently confirmed in a critical preclinical study that the biological effects of our drug transfer from our device appears to be significantly favorable as compared to our benchmarks. This is both important and good for several reasons.

First, it reconfirms our technology capability, especially after multiple changes to our manufacturing process, which improved the production on scalability. I speak for our entire team when I say we remain personally excited, yet patient and disciplined with our progress in developing this next generation of drug coated balloons.

We face a very large market opportunity here. And although DCB -- drug coated balloons -- is a difficult and complex technology endeavor, it remains one where we believe we can create most value with the most clinically relevant and cost-effective product and technology combination. We believe it has the potential to be the market leader with the right strategic partner.

Turning now to corporate development. Let me reiterate that our ongoing cadence of activities continue to mature. We are actively seeking out and engaging the best acquisition opportunities that fit both our strategy for core business growth and core expansion.

While there is nothing more to report at this point, it remains one of SurModics's top priorities. I have said previously that 2014 is both a challenging and exciting year for the Company.

Challenging -- as we described, we continue to experience industry headwinds in our respective core businesses. But exciting as we continue to work through both the opportunities and the risks to put SurModics back front and center in providing a solution to a huge clinical need with our drug coated balloon program.

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

(Operator Instructions) Ross Taylor, CL King.

I just have a couple of questions. First one -- I think you may have reviewed this some, but if -- so I apologize if it is repetitive. But your R&D expense sounds like being pushed out into 2015 to some extent. What exactly is delaying or causing the DCB project to be pushed back just a little bit? I don't know if you can go over some of those factors again.

Sure. We put an aggressive plan into place that I call a green light plan -- that you had to hit all the green lights to be able to move. And we felt confident in that.

What happened is as we -- so we have a core technology platform and then we had to put it on our own balloon catheter. And that required a lot of validation, a lot of process improvement, and manufacturing changes to actually see this thing as buildable at scale.

And so they involve quite a lot of manufacturing changes. But each manufacturing change you make, you have to make sure you don't lose the drug signal. So you may change something that improves the process from a time, speed, cost, and variability, but each one of those, then, you do a drug uptake study and see what has done to your drug signal.

So you don't want improve the process and lose the signal. So many of those we made and they all had very different impacts on the drug signals. Some were very low, some were moderate. And so we worked our way back to what I call the optimum, where we had a scalable, manufacturable device with the drug signal that we believe would be a third-generation technology.

I believe if we were going after what I would say the current benchmarks that we have been using, some of those IDE studies that - or just completed. We could have -- we confirmed then moved on quicker, but our target was to be demonstratively better in the amount of tissue uptake of the drug and the biological effect.

So that probably impacted us in the last two quarters, I would say. Which is why I reference this recent confirmatory study, which showed us that we can actually thread the needle and get both process improvements with the drug signal that we had become accustomed to. Our current scalability and just what we make is certainly in the tens of thousands. So it is not a small scale process that we have been designed so far.

Okay. That helped. And with regards to the hydrophilic revenues and 7% growth in the non-coronary sector, is there anything unusual that helped that out in the quarter and is that something that is a normalized or sustainable growth for the non-coronary hydrophilic?

Ross, this is Andy. Let's talk about maybe coronary a little bit. Coronary did see some ASD erosion from our customers and that was really the driver to that 7% decrement.

In terms of highlights, in terms of trends in the neuro or the structured hard space, structured heart continues to be growing at double digits and the neuro, we have had just one quarter that it has been rather significant. So I don't think we have a trend there yet, but it is something that we will continue to monitor.

Okay. That helped. And final question just relates to the shelf. I guess I see that $175 million and it seems like a pretty large amount. Is it applying something of all of that size, the acquisitions, something that's feasible in the next couple of years? Or how much realistically could you eventually draw down and how could you use that, I guess, us a better way to ask the question?

Yes. Well, it is prudent for a company of our size and our position, as we look at our strategy, and as Gary has elaborated on that in his presentation -- to have a shelf registration, it is just good financial governance.

And the size of the shelf is very consistent with what we see with other companies. We did quite a bit of benchmarking. So we feel very comfortable with the size of it, and at this point, we are not going to make any further comments. It is out there so that we can use it when it makes sense to use it.

Okay. All right. Thanks very much.

Charley Jones, Barrington Research.

Good afternoon. Just sticking with that thought, though, maybe for a second, because in the last couple of conference calls, we have been talking pretty openly about you guys turning over a lot of different names on the BD side.

So I'm just curious whether not there are some things that have been percolating to the top or falling out. And maybe you just kind of characterize what you guys are seeing out there and if you started to think about whether or not you want something with EBITDA or whether or not you want more of a technology for your DEB, or your thoughts on IVD.

You have talked a little bit about in the past and I am sure you are not going to be able to share a lot with us, but updated thoughts would be helpful.

Well, that was a pretty broad question, Charley. Let me just maybe start with where we are at with corporate development. As Gary referred to in his materials, that process continues to mature and it is one where we continue to look at a number of different companies and the hoppers is one that continues to give -- be filled with new opportunities.

So we are getting more refined and more focused in that area. But really, quite frankly, at this point in time, there is nothing more to report in terms of the development, other than that we are looking for companies that will have -- be accretive in the near term. And we are looking for companies with revenues at this point in time and ones that will, as we have talked about, that will expand our reach not only geographically in the body, expand our reach in terms of our core, and also expand our reach geographically from a world footprint.

So we continue to have that sort of focus in there. And also looking at capabilities and enhancements, such as product development and manufacturing enhancements as well. As we try to get closer, our strategy is to get closer to the device itself to leverage our royalty model. In terms of any other corporate development activities, such as IVD, there is nothing that's on the table right now.

No. I would say our focus has been -- we looked at both industries, but I think our -- we spend most of the time on the medical device side, because that we believe is more important for us to look for the scale and strategic fit at this point.

Yes.

I would be curious -- and maybe one more thought on this topic -- whether are not you guys have looked at your ability to source your product, if you wanted to go lower end on where you could take hydrophilic or whether or not you do feel like manufacturing capabilities could be a key strategic priority.

I think we -- the strategy that we are looking for, just to get closer to the device with both drug coated balloon, is a great example. Technology content on a device that gives you a much more differentiated product.

I think, eventually -- we are certainly not a Six Sigma world-class manufacturing shop, but eventually, our customers will need products like these made in very low-cost manufacturing environments. And so what our attack right now is to design the product so the architecture of the product is intrinsically low-cost.

I think over at the medium and longer term, we're going to be looking at manufacturing. I think our big -- what is in front of us right now are technology in combination with devices. That's more in our immediate present.

Maybe one more for me. Kind of a two-parter. Are the same players that were at the table for DEB still there from last quarter? I think you gave an update last quarter; it was pretty much the same. And maybe you can give us an update on Gen 5 and how you are doing on the in-house coding side.

Yes. We remain in conversations with multiple interested parties. And we are actually in an ongoing dialogue continuously with many of these parties. My feeling is while those are good conversations to keep going, I like to see SurModics get on and do the first-in-human and actually drive the product to demonstrate some of the clinical effectiveness. If strategics are interested in making a deal right now, we would certainly entertain that, but we have been pretty clear on what our strategy is.

Yes, you don't want to be rude while you are telling them to wait, basically.

Oh no, no, no, no. Yes. And then Gen 5, again, I don't think we have disclosed what percentage, but I would just say the vast majority of the feasibilities in our pipeline are Gen 5.

And those that are not are just ones that have aged, that were probably in the pipeline even before Gen 5. So we continue to do a lot of work with customers on their next-generation devices with Gen 5. And pretty successful. We have quite a lot of activity.

Were you going to say something, Andy?

(multiple speakers) pay almost too much.

Sorry, what? Did you have something, Andy?

No.

Okay, all right. Thanks a lot, guys. Appreciate it.

Ben Haynor, Feltl and Company.

Good afternoon, gentlemen. Andy, I know you kind of addressed this a little bit in the prepared remarks, but I just wanted be sure that you have seen the reorder patterns return to normal in IVD.

Yes, we anticipated last quarter that we would continue -- that we would see growth in the second half of the year and we have continued to see that growth. I don't think it's (multiple speakers) back to [previous] levels, but (technical difficulty).

Okay, great. Sure. And then, one for Gary. I think you mentioned last quarter that Serene was selected by a customer who had its own in-house coding. Have you seen any additional interest from that customer or, I guess, for that matter any other customers that might fit the same profile?

Yes, it is almost like a salmon fish swimming upstream. That was a very good one to have and we are proud that they gave our technology a fair chance to demonstrate that it was indeed better. I think customers like this then have to digest it, get it into practice, get some of these products launched, and remain close to them on some of their high volume products.

In many respects, these high volume products that are locked in at some of these customers really depends on their product's lifecycle. When is the next generation of that product going to be launched. And so that remains our opportunity, but nothing of that scale, I would say, on that horizon yet.

Okay. That's helpful. And then lastly, any chance you can quantify how much better the drug coated balloon is relative to the benchmark you mentioned earlier?

Andy is nodding his head at me here. It is very hard, so you know, in a healthy vessel, even having a multiple -- like multiple -- multiple acts, let's say, of more tissue concentration. It feels good. It really comes down to whether that drug is now having a biological effect.

So you could have two to three times the drug there, but versus is the drug taking a biological action in that tissue. And our most recent study demonstrated both. I think what we are happy with is that to be able to see more drug in the tissue at a 2 microgram per milliliter squared loading.

And as we look at certain leader - the forerunners to us -- the Baud product and the Medtronic product. Medtronic has 3 micrograms. Baud has 2 micrograms. And you could start trying to triangulate your preclinical data very loosely. So into what we are seeing in the 12-month data set of the follow-up on these patients.

And so it give us a great indication that if at 2 micrograms, we can be delivering more drug safely than a product that has 3 micrograms, then we feel really good because it's -- never say never, but then we would feel very confident and the strategic would feel very confident in taking on a clinical with some direction of where that patient data would land. So that's how I would characterize it.

Okay. That's actually very helpful. That is all I have. Thank you very much.

Erica Layon, Benchmark.

We would definitely like to say that we like the fact that you are taking this step-by-step. Even though it might take a little bit longer, it just may keep changing, validate it -- you guys could get yourself in a world of trouble if you didn't. So we understand that it can take a little longer that way.

We are curious if we could get some sort of an idea as to how long you will expect it will take from when you do reach that lock, which we know you can't predict, because anything between here could give you some wildcards. Once it gets to the lock, how long will it take to the GLP safety study? And then once you have that study, how long it will take to get to the first-in-human?

Oh, here I see until -- so once we freeze -- and I don't want to use too much technical jargon here -- but we go from what I call a divergent project, where we are still collecting information.

Once we lock down, we go into convergent mode, which is still a lot of work, but it is more deterministic. And then we have things like real time aging shelf-life, sterilization, the whole gamut of device and drug technology related to dos that we have.

We believe if we can freeze in the fourth quarter, our fiscal fourth-quarter, we will be able to at least get the GLP animal study initiated in the calendar fourth quarter. Now the clinical initiation really depends on the geography of where we decide to do our first-in-human clinical.

And so we are still considering the pros and cons of conducting a clinical in different parts of the world. But right now, timing is that could take place -- first patient could be in by the first half of calendar 2015. As you recall, I said that --

Okay. And that would be if it --

Yes, go ahead.

Oh, sorry, no, you go ahead.

I was going to say and a GLP animal study typically is anywhere from 90 to 180 days, and in some cases up to 200 days, to get the drug to completely disappear and demonstrate the safety. So getting the GLP animal study is a very critical one for us.

Absolutely. And then the timing on the first-in-human is going to depend a lot on those geographies, which makes sense. And hopefully you make a choice that is smart long term, not just to make people happy in the short term.

Yes. I keep -- again, I would say we are trying to develop a third-generation platform here. And we are very happy that the current second-generation products, as they move through and get approval, we would certainly like to improve on the capabilities that they have demonstrated.

And [have gotten] to be very powerful. And at this point, it seems that we should expect that while you are still talking to those partners, most likely you are going to come to any sort of agreement if you do, once you reach the first-in-human. Because you are probably looking at certain economic factors at this point that they will probably want to wait until after they have data. Would that be correct?

Yes. It is hard to predict because of the competition that our customers are in. Each of these partners have different risk profiles of when they are added. So it is really hard for me to predict when that could happen, but what we have said is and we are sticking to -- we want to demonstrate the clinical efficacy of the product.

And that is what we are funding and that is where we are going. If someone wants to preempt or look at having some form of a partnership before that, we are certainly happy to entertain that.

But from a modeling standpoint, we are -- our resource allocation model is to go all the way through FEM. Yes.

Okay. Thank you. That's very helpful. Thanks so much for answering my questions.

(Operator Instructions) Beth Lilly, GAMCO Investors.

Good afternoon. I wanted to tag on to that -- to the last question, which is can you talk about the different expenses in terms of all these different decision points with the DCB. So you have got the freeze and then the clinicals and then the first-in-human. How -- can you break it down, the costs, for each piece?

I will give you a light version of that when we talk about our 2000 -- fiscal 2015 plan. You will hear a little more about that. But in broad-brush terms, GLP animal study is $1.5 million, in broad-brush terms. So not specific, just our product because depending on the amount of time the drug takes to disappear, you could be running it a little longer.

For a first-in-human trial of the type and power of the device that we're looking at, and giving some range because it could be conducted in different parts of the world, it's $3 million to $5 million, all in. And so that will give you an idea of how these things get staged.

Now they don't all impact a single calendar year. Some of them, the patient follow-up, for example, goes on for several years. It will be -- some of it will be spread out over multiple fiscal years.

Okay. So we are talking about a total spend, if you go all the way through the first-in-human to -- from $4.5 million to $6.5 million.

As a range. There's other expenses there, like you have to test thousands of catheters to perform the verification validation of the device and the sterility. And so there's other costs included in that. But you are not far off the ballpark there.

Okay. And just so we can be clear, taking it all the way through clinical trials is a very costly process. Are you thinking today that you are going to -- you would like to partner or you actually thinking maybe you want to go all the way through the clinical trial process?

Some of it depends on the sort of structure of the deal and the value curve at different time, at different types of programs like this. So in preclinical, there is a certain value curve that is assigned to a preclinical product.

When you have early human data, it is a different valuation that you get. And then certainly if you go all the way to the pivotal, which is $100 million plus and we have been told -- and that certainly is not -- I just want to be cautious. That is not SurModics's gig.

And so what we -- what we are looking at is what is the optimum point in that value curve to monetize a program like DCB. In our viewpoint, demonstrating the safety and effectiveness data in this small first-in-human trial appears to be the best.

That's SurModics's point of view. For strategic or a customer wants to say look, we will pay up because we want to get this program early. We want to get into US IDE pivotal studies early. Then we will look at the value curve that they propose and see if it meets our return criteria for a program like this.

Well, we are certainly -- and I don't want to submit or suggest that we are being arrogant anyway -- but it is hard for our team internally if we don't have a clear direction after we are going to do this trial. But we are open and as I said, we continue to talk to strategic. That valuation at any point in time is a negotiation with that strategic partner.

Does their interest -- have you found that the interest has increased as you go further down this path?

The interest has increased, yes. I believe -- and this is opinion more than fact -- I believe the interest has increased because of the recent clinical data as demonstrated by the Medtronic balloon. Certainly the FDA panel -- review advisory panel review of the Baud balloon.

And I think some strategics are seeing that in the battle for the SFA, that drug coated balloons have a real place in treating [thyropoplatil] disease and so that is certainly increased the interest.

The second thing is as we continue to refine this product on a balloon platform, we certainly have a plethora of data that we can show at a high level to strategic. I think it was either Ben or Ross that asked earlier, where are you compared to the current products - that is a pretty compelling chart to show.

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

And it appears there are no further questions at this time. I would like to turn the conference back to management for any additional or closing remarks.

First of all, thank you all for your questions. As we close, I want to emphasize that fiscal 2014 continues to represent an exciting opportunity for SurModics. To continue our profitable growth, even during challenging market conditions, and yet while we increase our investment and opportunity for co-expansions. We look forward to updating you in our full fiscal-year 2014 performance and highlights in several months. Thank you, everyone.

And that concludes today's conference. Thank you for your participation.