Surmodics Inc (SRDX) 2015 Q1 法說會逐字稿

Good day and welcome to the SurModics First Quarter 2015 Conference Call. Today's conference is being recorded.

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

Thank you, Cassandra. Good afternoon, and welcome to SurModics' Fiscal 2015 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 well as a result of new information, future events, developments or otherwise.

We also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.

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. 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'll start with the financials. Revenue for the first quarter of fiscal 2015 rose to $14.2 million compared with $13.9 million in the first quarter of last year. On a GAAP basis, our diluted earnings totaled $0.27 per share compared with $0.26 per share in the year-ago period. We are pleased to note that non-GAAP earnings per share increased 19% from $0.21 per share in the prior year quarter to $0.25 per share in the first quarter of fiscal 2015.

The fiscal 2015 quarter included a $0.02 per share of income tax benefits from retroactively reinstated federal R&D tax credits. The prior quarter benefited from a $0.05 per share strategic investment gain from a clinical earn-out milestone payment as a result of the 2013 sale of Vessix Vascular to Boston Scientific.

We delivered operating income of $5 million in the first quarter of 2015, up from $4.3 million in the prior year period. Operating margin was 35% versus 31% a year ago. Operating margin benefited from improved gross margins, reduced stock-based compensation expense and lower research and development expenditures.

Turning now to our two business units. Medical Device is the larger business and contributes approximately three-quarters of our total revenue. Revenues derive from both hydrophilic coatings and device drug delivery coatings. Revenue rose to $10.6 million, increasing 1% from the year-ago period.

First quarter hydrophilic coating royalty revenue totaled $7.1 million, which is comparable to last year. Non-coronary royalties offset a decrease in coronary royalties. Key contributors to the coronary decline were decreases in average selling prices and procedure volumes in the Japanese market, lower-than-expected royalty revenue attributable to the equity of and reporting of customer royalty obligations as well as industry headwinds which we have commented on over the last year. The increase in non-coronary revenue reflects the benefits of diversifying our hydrophilic coating portfolio.

The Medical Device business also posted higher reagent product sales as well as research and development revenue. This unit generated $5.5 million of operating income in the first quarter, up 4% from a year ago. The timing of R&D expenditures contributed to this segment's gain in operating income.

For our In Vitro Diagnostics unit, first quarter fiscal 2015 revenue totaled $3.6 million, a 7% increase from the prior year quarter. IVD continues to show positive revenue growth with exceptional growth stemming from our molecular diagnostics and immunoassay reagent product lines during the quarter. Product gross margin for IVD was 66% in the first quarter compared with 60% in the prior year quarter. This increase mainly related to improved leverage resulting from stronger manufacturing volumes, lower scrap rates, and to a lesser extent, product mix.

IVD operating income increased to $1.1 million compared with $0.7 million in the first quarter of fiscal 2014. Our diagnostics operating margin for the quarter rose to 31% versus 20% in the prior year quarter, resulting from improved gross margins and operating leverage from increased sales and lower expenses.

Now I'd like to discuss our first quarter 2015 revenue summary by category. First, royalty and license fees, which are generated primarily in our Medical Device business, were $7.3 million, decreasing 3% from last year as a result of a $0.2 million decrease in license fees from the prior year and flat hydrophilic coating royalties. Second, first quarter 2015 product sales totaled $5.8 million, a gain of 8% from the year-ago period. This increase reflects higher reagent sales in both business units as well as microarray slide shipments in our In Vitro Diagnostics business. And third, R&D revenue was $1.1 million, up from $1 million a year ago.

SG&A expenses in the first quarter of fiscal 2015 were 26% of total revenue compared with 28% a year earlier. On a dollar basis, SG&A in the first quarter of 2015 was down, totaling $3.7 million versus $3.9 million a year ago. The decrease reflects nonaccrual of fiscal 2014 and 2015 performance share compensation based on current financial forecasts.

As a percentage of total revenue, our first quarter R&D expenses were 25% versus 27% in the year-ago period. R&D of $3.6 million for the quarter decreased 3% from last year resulting from lower R&D investments. SurModics' SurVeil Drug Coated Balloon product development expenditures for the quarter were similar to the prior year quarter. As we have said before, we expect higher research and development spending for the remainder of fiscal, 2015 consistent with our annual guidance.

Income tax expense was 29% of pretax income in the first quarter, essentially flat with the prior year period. The tax rates were impacted by retroactively reinstated federal R&D tax credits in the current quarter and the previously discussed strategic asset gain in the first quarter of fiscal 2014. We expect our income tax rate for the fiscal year to range from 33% to 35% of pretax earnings.

Looking at our balance sheet, it continues to be strong. Our cash and investments totaled $47.6 million, and we had no debt outstanding at December 31, 2014. We continue to generate solid operating cash flow. Cash flow from operations was $5.5 million for the first quarter of fiscal 2015. We invested less than $100,000 in property, plant, and equipment, and returned $20 million to our shareholders through the accelerated share repurchase program announced in November 2014.

Our current cash and investment balances, operating cash flows combined with SurModics' $20 million line of credit and $175 million shelf registration, provide appropriate capacity to support our corporate strategic growth initiatives.

We are reaffirming our previously stated guidance for fiscal 2015. We estimate revenue for fiscal 2015 to be in the range of $57 million to $60 million and GAAP diluted earnings per share to be in the range of $0.85 to $0.95. Cash flow from operating activities is expected to range between $16.5 million and $18 million, and we project capital expenditures to range between $2.2 million and $2.5 million.

The SurModics team has performed well operationally, financially, and is on pace to meet the SurModics SurVeil Drug Coated Balloon development goals for fiscal 2015. We are very pleased with the great start to the year, and now I'll ask Gary to share his perspective. Gary?

Thank you, Andy. First, let me echo Andy's sentiments of gratitude to our team members on this solid first quarter. I have previously described the desired trifecta of SurModics' performance. These are, first, revenue growth from the core businesses; second, significant operating margin and earnings; and third, continued progress in our transformative programs, such as our SurVeil Drug Coated Balloon platform. I'm pleased that we once again delivered on this trifecta in our first quarter of fiscal 2015. We continue to make meaningful progress on our strategy of transforming the company while concurrently delivering profitable growth.

First, let's discuss growth with respect to our business unit performance. Our IVD business grew 7% over the comparable quarter last year led by revenue from our molecular diagnostics microarray slides. Particularly encouraging to me is the fact that this is the third consecutive quarter of growth for the diagnostics business, and we expect to see this growth continue into the second quarter of fiscal 2015.

Our Medical Device business experienced good comparable quarter growth in reagent sales and coating services. These gains were mostly offset by lower milestone payments versus the same quarter last year. It is important to note that we saw a large number of feasibilities where Serene is the choice for new customer applications. We signed several new licensees with Serene during the quarter and now have multiple signed licenses for coronary, peripheral, neuro and structural heart applications. This differentiated technology is gaining the traction we had anticipated.

Second, let's turn to profitability. As Andy described, through both ongoing spending management and operational efficiency, we're able to generate an operating margin of 35% in the first quarter. This is excellent performance and demonstrates the strength of our business model. Yet, as I hope you recall, as we move forward from preclinical to clinical spend in our drug-coated balloon program, this margin will decrease in an intentional and predictable manner. Nonetheless, it remains our goal to continue to drive efficiencies in our business in order to create opportunities for specific value-creating investments organically in R&D and through corporate development.

Third, I want to discuss our transformative activities. We have been very active looking at opportunities to acquire transformative and complementary businesses, many of them in great detail. We have not to date found any with the timing -- either the timing or the fit with our strategy have been compelling enough for us to complete a deal yet. While we are aggressively looking, we remain disciplined in assessing the financial quality and the strategic fit of any potential deals.

Also transformative is our SurModics SurVeil paclitaxel drug-coated balloon. This key initiative, I'm pleased to announce, is on track. Let me share some specifics with you.

We have completed all of the treatments of our GLP preclinical study in January. As you recall, we froze our product design and process design in order to initiate the GLP study in our first quarter. Our goal remains to treat the first patient before the end of the 2015 fiscal year and aggressively to finish enrollment in our first-in-human study by the end of the calendar year 2015. We're quite encouraged by the recent U.S. approvals of drug-coated balloons and anticipate that this category of devices will establish a credible and viable therapeutic domain in the treatment of peripheral artery disease.

Our goal and outlook for remainder of fiscal 2015 are unchanged. They are: to build our core revenue; to maintain a high baseline of operating income and earnings; to proactively seek the right corporate development opportunities; and finally, to invest in and perform the early clinical assessment of the SurModics SurVeil Drug Coated Balloon. We have an exciting fiscal year ahead, and we look forward to updating you on our progress during the next quarterly call in April.

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

(Operator Instructions)

And we'll take our first question from Jan Wald of Benchmark Company.

Good afternoon, everyone. It looks like a pretty good quarter for you. I guess I have a couple of questions. In the IVD business, it seems like growth has picked up and especially in molecular diagnostics. Could you talk a little bit about that and just describe why this has all of a sudden picked up or where the dynamic is coming from?

Yes, we have a couple key customers in that business that use our slides for particular assays or particular diagnostics in hospitals, and they have actually had some fairly nice traction in the last several quarters. And so really, it's on the backs of those key customers in that business. So really, as they are performing, we're seeing the uptake in the pull and the supply chain for our slides' functionality.

And I guess in the Medical Device business, a lot of the activity that you've had, or at least it seems to me, has been in earlier-stage clinical trials or earlier clinical phases. Is that moving along? Or is Serene being carried through the other (multiple speakers) --

Yes, yes, so it's a whole mix of devices at the 510(k) special applications or even European applications and CE marks. And so, they all have their own cadence. So, as you sort of mix those in, we're seeing some of those actually get commercially launched in those applicable markets over periods of time. Some of these, nonetheless, we have signed some time ago, but they're slowly getting to market.

And so, do you see a continued uptick in that component of your business?

Jan, yes, we do expect to see Serene continue to gain traction over not only this year, but particular in 2016 and 2017. As you look at our financial lines curve in 2017, in 2016 and 2017, the revenues will be very significant to SurModics.

Okay. Thank you. And I guess one last question on the drug-coated balloon. It sounds like you're on track in terms of your first-in-man and those kinds of things. In terms of -- I guess in terms of how you perceive the program going on a technical side, it seems to be going well. How about on a business side? Do you have strategic partners interested in the project? Do you foresee that the first-in-man is going to be where you're going to be able to transition to a strategic partner? Or how do you see that moving along?

We continue to have these ongoing dialogues with interested strategic partners. And not to say we've put the blinders on, but we have committed to doing the first-in-human trial on this device. Again, if any of the strategics want to preempt that process, we can always entertain that. So while we continue what I would call good conversations, we are actually just forging along to get that early safety and clinical efficacy data. I think at that point, the attention that the strategics have, they will be able to have something more palpable than preclinical results. And then that's why we're attempting to do that because that to us changes the value curve dramatically, having those early human data.

I guess I would agree with that. And I guess -- it seems to me that as you go along and you do add value to the program, do you think there comes a point where the strategics will say, Well, no, thanks, and leave you dry? Or do you think -- do you see an expression of interest on their part that's going to carry forward and make this program actually succeed for you?

The risks as we see it, and they're not in a particular order, is that the current approvals, the U.S. approvals of these products, we want to make sure -- we have no ability to influence this, but we'd like to see really good market development of drug-coated balloons as a viable therapeutic modality.

That is, to us, the biggest needle mover for us for both from a risk and opportunity. And so, as Medtronic and Bard develop this market, demonstrates the data, we believe it will become a needed therapy both from a clinical perspective, from a competitive perspective as U.S. hospitals are aggregating their purchasing power. And even as you hear the strategics talk about becoming partners in disease state management with hospitals, the need to plug -- they can't have a gap in their therapeutic offering. And so, if DCB becomes one of those gap pluggers, we feel terrific.

As far as the strategics, whether they come to the table, they walk away, there's certainly always a risk of that. But if we have a viable product that has a demonstration of safety and then early indication of efficacy, never say never, but we think it's improbable that someone will not really take notice of that.

The third risk factor is whether they have all put their -- gotten their options before they're ready to look at us. And that also is a risk factor, but we believe the compelling preclinical data set that we have and even actually this morning, I looked at the first look at some of the GLP data and it was absolutely confirmatory of our pre-freeze, predesigned freeze data, we think puts us at an advantage compared to the products that are currently clinically available or in their own development pathway.

So we feel good about what we have. No guarantees. But we think we'll get there. (Multiple Speakers)

And we'll go next to Ben Haynor of Feltl and Company.

And we'll go next to Charley Jones of Dougherty.

Good afternoon.

Hey, Charley.

Hello, Charley.

So I guess I was hoping to jump in to hydrophilics a little bit and kind of not get granular as far as customers, obviously you can't do that, but talk a little bit about big market segments maybe coronary, non-stent coronary, and neuro. Just kind of curious if you could talk a little bit about what's happening within some of the different segments of your hydrophilic coatings so we can kind of understand how much coronary is still a drag on the growth rate.

And then you kind of opened yourself up, I felt, when you talked about your visibility into 2016 and 2017 where you talked about your Serene platform. So I was hoping maybe we could sort of chip away at whether it would be on the plus or the minus side of growth. You guys obviously have forecasted very detailed what Gen 1, Gen 4 make up of your portfolio. And I was hoping we could talk a little bit about whether or not 2016 Serene, it sounds like it's so significant potentially that maybe there's a chance that we get probably close to flat. So that's where I'll start.

Well, I'm not sure we got all those questions down, Charley, but why don't we start with the latter component there, and really talking about the Serene launch. We have not provided any guidance in terms of the numbers that are out there, in terms of whether that will -- I think the question is will that offset the third-generation technology that comes off patent starting in 2016 and then continues off patent in the 2017 second quarter in the OUS markets.

What we can tell you is that we are on plan right now in terms of our beliefs as to what we expected with the Serene launch. We continue to gain traction with not only in the funnel of opportunities of optimization when we start looking at new opportunities. That funnel is very robust right now. And the fact of the matter is that we continue to see new products come out the door all the time, and now we have, for example, as Gary said, we now have multiple licenses in every one of the strategic areas in neuro, peripheral, coronary, and structural heart area.

So we haven't provided any guidance at this point in time whether or not that will fully offset the headwinds in 2016 related to the third-generation technology. We do believe that in order to grow the business beyond hydrophilic coatings and grow the business in the aggregate, we do need to execute in the drug-coated balloon strategy, and we also need to execute on the corporate development strategy. And we're working very, very hard on those two right now. So I look at the base business as being a business -- the base hydrophilic business being a businesses that will continue to provide significant cash flows to the overall business and one that will have some significant headwinds in 2016, and we're working very hard to offset those.

In terms of particular market segments in terms of growth, we continue to see structural heart as being a significant growth, low base, but nice growth in terms of not only this year and in future years. We're well positioned in a multitude of different applications at this point in time. So that will continue to be -- for this year, it probably will be double-digit growth. Our peripheral side had strong growth this quarter, in the upper single digits area, and that was good to see. Neuro is -- growth in the quarter was not very significant in the quarter, and that tends to bounce around a little bit more. And then the coronary, as we put a little bit more detailed explanation and granularity into it, we did see some headwinds especially from the Japanese market related to ASPs as well as some usage headwinds.

And the other factor we noted in our prepared remarks was that from time to time, we do have customers that have questions about the reporting and the reporting process. And we've seen this historically where I think in the first quarter of 2014, we saw a customer actually pay us a significant amount, a $570,000 one-time payment. But we have those things from time to time, and more of those tended to impact the coronary space this quarter than have historically. It's nothing out of the usual 110 licenses that we have in place right now.

So hopefully, that provides the color that you're looking for. And maybe I'll pause now and see if there's any follow-up.

I'll add one thing in there. Correct me if I'm wrong, but peripheral is catching up with coronary as a big (multiple speakers) --

It actually exceeded coronary --

That's why I didn't want to say -- I wasn't sure (multiple speakers) --

Yes, yes, so coronary was about 35% of our total hydrophilic coatings, and peripheral was greater than that this last quarter.

And when we think --

Then --

Go ahead.

Go ahead.

(Multiple Speakers)

I was going to say when we say peripheral, we mean below the leg, below the waist. We're not (multiple speakers) --

Below the leg. As well as -- peripheral really is anything that's not structural, heart, coronary, or neuro.

Right. Okay. Well, some of us call it neuro, too. Okay. What are you going to say, Gary?

That's right, nothing above the carotids. And then that being said, the lines get smeared a little bit as we have multiple customers who both have, as an example, a neuro guidewire using a peripheral (multiple speakers) --

So we're doing this to the best of our ability, and we don't have that visibility into everything. But -- so just take it with a fuzzy line because they could be using the same type of guideline in multiple and anatomical locations.

That's a very good point Gary mentioned. It's especially -- you see a little bit in neuro, but especially in the peripheral space, you're seeing multiple applications and multiple -- we may coat it because the original license was a coronary application, and they may be used in the peripheral. And we've seen more and more of that these days.

If I may, I just have one more kind of follow-up on this, and I think you guys gave a lot of great detail on the balloon. It sounds like it's looking great. But on the, I guess, a little bit more on Serene. I hear what you're saying. It sounds like you're trying to be conservative. You're saying [this straight up] to understand that you need growth from other areas of your business over the longer term. But I am trying to understand if Serene, as you are having these conversations with customers, whether or not -- it actually may be a little bit bigger as you move out several years because of the value that you're able to bring customers and maybe bring customers that have had in-house coatings in the past. And I'll leave it there. Thanks.

Yes. Oh I'm sorry. I thought you're ending with a statement, sorry.

Yes -- no, I'm ending it with a question. I mean can Serene be -- I mean, I think the question is, are you being somewhat conservative on Serene? Or could it be actually bigger than your overall portfolio right now as a result of in-house coatings and being able to offer a better coating that more people want? Or is this a business that we should think of as flat over the long term?

I believe two things. One is Serene will eventually over time replace all of our earlier generation coatings just because it's superior in many respects across multiple platforms. The issue is over what period of time. I also think Serene is one of the keys in the lock to in-house coatings, and we've had some recent success, small success in getting, winning the spec against some of the in-house coatings.

The question, Charley, is whether -- over what period of time so that you can get what the gradient of that line is. Is Serene, by itself, going to get us to potential double-digit growth in the next three years? I would say that's a highly unlikely thing. However, as more products come to market with it, the launch curve of those products is what's really going to be impacting our growth rate.

So Resolute Onyx, for example, got CE mark at the last quarter. I think we mentioned that Serene is on that. I'd be very happy if we could (inaudible) Resolute Onyx from getting its approval, of course, but -- and then have a good competitive slope in the stent market as well.

So those are the dynamics. If we sound conservative because some of it we're not quite in control of.

Sure. No, I think that detail really kind of helps me think about it and it helps all of us think about it, and clearly, Serene sounds like it's doing very well. So congratulations to that. I'll talk to you later.

(Operator Instructions) And we'll go next to Ben Haynor of Feltl and Company.

Good afternoon, gentlemen. Can you hear me?

Yes. Hi, Ben.

Hey, Ben.

Just with regard to the strong performance in IVD and your revenue guidance. Has anything changed with the expectations of mix between devices in IVD as a result of that? Or is this kind of what you expected?

Ben, it really is within our range of expectations. We're right in the middle of those ranges right now for both these businesses. So it hasn't changed our mix. You saw clearly that IVD, we've got a percentage or 2 stronger than the overall mix this quarter. We would hope that given the prior year second quarter that IVD will have a really strong second quarter as Gary said in his remarks.

So I think IVD in the near term looks like a very strong growth business. It will, I think, slow down once we have higher comps later in the year. But right now, that will continue to be -- overall, we view that in the long-term basis to be a low single-digit growth business, and that market has not changed.

Yes, that market [has] -- and the other thing, Ben, is last year, as we recall, I think it was our Q1, Q2 especially that we saw some what we thought of inventory rebalancing from some of our key customers. And a business of that size, a couple hundred thousand dollars of revenue being put out actually does affect it. What we didn't know is eventually, dynamics of inventory balancing catch up and you get back to a steady state in terms of the uptake. What we didn't know is how much would it get back to previous levels. And so, the last three quarters in a row and this quarter especially, we've seen a nice reuptake as well. We're still carefully watching that, right, not intending to over project that into the future. And we think Q2 is going to be, as we said in the prepared remarks, looking good. But it's really -- the real natural level of market uptake of these products, what does it bounce back to.

So we're very comfortable with our overall revenue range.

Yes, yes.

All right. That makes sense. And then with regard to the geography for the clinical side on the SurVeil platform, have you made the decision there? And if not, what might go into that decision?

We have not made a decision. We have a strong preference which I wouldn't -- I'm not in the position to share it today. We do have a strong preference. But part of it is an accelerated time line. And we like to initiate that clinical, as I said, this fiscal year.

What I will say is that we want this to be a very high branded solid debut. So we -- wherever we do it will be a recognized Centers of Excellence and recognized clinicians conducting the trials and certainly very well recognized trial designers. So the geography is a fallout on who's actually going to be treating the patients, and that will depend on the regulatory pathway and the time element required. But we do have a preference, I hope to share more in the next quarter's earnings call.

Okay. That's helpful. And then it sounds like you're seeing some pretty strong interest in Serene. Anything new and exciting on some of the other areas, hemocompatibility, anti-infective, et cetera, relative to historical levels?

Yes, our R&D pipeline is robust. We have another clinical Scientific Advisory Board meeting, unfortunately, in Super Bowl Sunday at the [ISAT] meeting. But we are -- I know; so we are trying to get these key clinicians together. But in our experimental portfolio, we have some really cool things. As I said before, we'll keep working with sirolimus or rapamycin as even a next-generation advanced drug-coated balloon for different anatomical treatment. And so, that is trailing our paclitaxel program, and we continue to invest and see good data on that.

And then also, we are working with some, what we consider some unique molecules that bring both hemocompatibility and lubricity and low particulates. And some of those are -- we actually want to keep our own product portfolio because we believe it can provide compelling advantages when placed on some fairly simple products. And so that, we may want to choose to keep it home, develop the device that goes with it and then license those devices as more 510(k) applications. So there's a lot going on in the R&D pipeline beyond drug-coated balloon.

Very interesting. That's all I have. Thank you very much, gentlemen.

Thanks.

Thanks, Ben.

And we'll go next to Jim Sidoti of Sidoti & Company.

Good afternoon. Can you hear me?

Yes. Hi, Jim.

Hi, Jim.

Hey. So on the IVD business, did you benefit at all from the flu season this winter?

Our general manager set me straight a few weeks ago when I had the flu. And I was trying to do a hydraulics of a 1 to 1. The flu has been really bad and therefore, ergo, it must be back in our business. And he set me straight that while it has an impact, it's not a first-order impact. It's a second decimal point impact. So it does impact us because we are used on some flu panels, but it's not the major driver that we noticed in this past quarter.

All right. And can you give us any more color or guidance regarding the timing of the trial and when we should start to factor in the expenses? Is that a second or third quarter event or --?

Yes, I'll put some color around that, Jim. If we think about the GLP study which we talked about being $1 million, $1.5 million, that clearly will hit this last quarter and in the second and third quarter. The actual ramp-up of the first-in-human study, that actually starts really in the third quarter that there's ramp-up activities. Our goal is to have it completed, or started I should say, by the end of September. So the third and fourth quarter, we'll have some impact. But then that impact will really roll into 2016. So that $3 million to $5 million will start to be spent in Q3 and in Q4 and then the remainder of it through fiscal 2016.

All right. And a lot of the other names in this space have been hurt by currency and the big shifts over the past few weeks even. How are you affected by the rising dollar?

We don't have a lot of transparency to that because our customers actually report to us in dollars, but there is obviously some conversion. So we would see some indirect impact to the business. If you look at, I think, our disclosure, I think 23% or 24% of our overall revenues are OUS. So we'll have some impact on the business, but most of our sales in the diagnostics area are dollar-based sales. And where we'll have more of impact will more likely to be in the Medical Device area as they convert sales into royalty payments. But we really haven't seen a lot of transparency in that area at this point in time.

Keep in mind, we're also a quarter behind in terms of reporting. So we may start to see a little bit of that on the next quarter or two. But it's not -- we don't have total exposure to foreign currencies at this point.

It's a percentage of a small delta.

That's right.

Of a delta, small percentage of the delta for currency, so.

So it's not enough obviously to make any changes to your guidance?

No, it is not. And that's the best way to describe it. We feel very comfortable with our current revenue guidance and earnings guidance.

All right, thank you.

And we'll take our final question from Beth Lilly of GAMCO Investors.

Good afternoon.

Hi, Beth.

Hello, Beth.

I wanted to ask a couple questions. First one is, you completed the $20 million share, $20 million accelerated share repurchase. What was the average price you paid?

Well, right now the way that ASR works is that we have received 758,000 shares in the first closing of the ASR, and that's based upon $16 million of that $20 million. The second closing of the ASR happens after the investment bank has actually repurchased the shorted shares. And that will not occur until sometime until later, in the second quarter, more likely in the third or fourth quarter.

So in terms of what we've bought right now is right, it was $20.10 I think is -- $21.10 a share is what we've paid for the 758,000 shares. And the remaining shares will be based upon the average VWAP price over the period in which we're actually reacquiring the shorted shares in the market. Right now, that's somewhere around 140,000 to 150,000 incremental shares that we may receive. But that's all dependent upon our price during the remaining period at the forward contracts outstanding.

Okay. Okay, great. And then the other thing I wanted to just drill down a little bit, and I know we've spent a lot of time talking about this. But so the timing in terms of the first-in-human clinical, so that's going to start in the third quarter, right?

There will be a ramp-up in terms of getting the --.

There's a lot of activities before --.

A lot of activities before that happens.

(Multiple Speakers)

That's our target, Beth, yes, to get that first patient started in the third quarter -- sorry, the fourth quarter -- well, September, sorry.

The September quarter to be clear.

Yes.

So help us understand then the spending. So you're going to have the GLP activities that are going to be $1 million to $1.5 million, and then you've got the first-in-human and you said -- so a total of those two this year will be $3 million to $5 million. Is that right?

The total of the two is $4.5 million to $6.5 million. And within our guidance that overall R&D would be up 5% to 7% for the year, that contains both of those activities of the GLP study as well as the first-in-human activities.

Got it.

The thing that could change the rate of spending is, and we would actually like this, is whether we can increase the rate of enrollment. And so there's a formula for the rate of enrollment we expect in the clinical which would, during the clinical, which sort of paces your rate of spending. If we can increase the rate of enrollment, it could change. If the rate of enrollment is a little slow, that could change it as well. So that's how we -- that's why Andy's coming up with that bandwidth of numbers. It's both where we conduct it and the rate of enrollment and the number of patients.

So if you think about the first quarter, Beth, we were down 3% in R&D spend. R&D spend will ramp up significantly over the next three quarters as we continue down this path.

Got it. Okay. So let's fast-forward then to you've spent this money. You've enrolled the patient in first-in-human clinical. Can you kind of help us then, what are the next data points that happen from there?

Yes, well depending on where we conduct the clinical, the requirements are slightly different. What typically will happen is that you have a 30-day safety follow-up and certainly in different geographic markets, a six-month follow-up which might be either ultrasonic or angiographic follow-up. And those actually give you the data which tells you whether it is -- the patency rates of the vessels or late lumen loss if you do it angiographically. So that six-month follow-up is something that people really key off.

What I want to remind people is first-in-human is not a definitive efficacy study. So what you end up getting is certainly safety and a mild indication of efficacy. In other words, does the thing work but you can't really have enough statistics, the power; otherwise you'd be treating hundreds of patients. So if you take a patient -- a clinical study size of 60 to 80 patients, that's what we will be doing, and the six-month follow-up really is a critical component of that.

Okay. Then you get the six-month data. And then does that data then get published? Do you talk about that data publicly?

Yes, we would like to. We haven't worked that out with our principal investigator yet, talking more with him this weekend. But yes, so we believe it would be a publishable study. And the only reason it may choose not to be published is if there's a strategic that would like it not to be. But I think our indication is to have that study published.

Okay. So we'll have a sense then, Gary, so maybe by --.

In 2016.

Yes, May, would you say, May 2016? Sooner than that?

Just projecting wildly, I would -- that would be a nice target for us. It'd be by the summer of 2016 is what our internal target is. The next steps would be for someone to really prepare a U.S. IDE filing package to start the U.S. pivotal study, and that really remains the big market.

Okay. So just so, and I don't mean to beat a dead horse, but I just want to make sure I understand the timing of this. So you get the first-in-human data, you talk about it the summer of 2016, then what's the next step after that? Assuming you don't have a strategic?

Assuming we don't have -- assuming the worst case, no --.

Worst case.

Yes, we feel very compelled -- there are two things to think of. By the summer of 2016, and that's just to be clear, the reason I'm saying summer, it's six months after the last patient has followed up that you'll be completed. And then you have six to eight weeks for all the data analysis.

This should end as what is the state of the DCB market. Have Bard and Medtronic, with their products and whoever else has entered the market, have they created a viable therapeutic modality? And our early answer is yes. Many members of our Scientific Advisory Board are current DCB users, and they see the benefit in the superficial femoral artery. And so, assuming a healthy and robust need there, we are confident that the strategics cannot have a major gap in their portfolio in what could be a very important growth market for peripheral artery disease. And so, that's around the sweet spot for timing of where a potential license deal may occur or monetization may occur or whatever the method.

Got it. Okay. That's very helpful. Okay, good. Thank you very much.

Welcome.

And that concludes today's question-and-answer session. At this time, I would like to turn the conference back to management today for any additional or closing remarks.

Thank you, all, for your healthy questions. As we close, I want to emphasize that fiscal 2015 continues to represent an exciting opportunity for SurModics, to continue our profitable growth even during a challenging market and even while we increase our investment and opportunity for transformation. Thank you, everyone.

This does conclude today's conference. We thank you for your participation. You may now disconnect.