Surmodics Inc (SRDX) 2016 Q4 法說會逐字稿

Good day, and welcome to the Surmodics' Fourth Quarter and Fiscal Year 2016 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, Robbie. Good morning, and welcome to Surmodics' 2016 Fourth 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.

We will 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.

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 and fiscal 2017 guidance was issued earlier this morning and is available on our website at www.surmodics.com.

On today's call, I will provide an overview of our fourth quarter financial results. Gary will then cover our key achievements, provide an update on our strategy and plans for fiscal 2017. After Gary's overview, I will then provide details of our fiscal 2017 guidance and, finally, we'll open up the call to take your questions.

Let's start with our income statement. As you saw in our release, we reported a strong fourth quarter. Revenue rose 5% to $18.5 million compared with $17.4 million a year ago. Fourth quarter fiscal 2016 revenue included a $1.3 million from Surmodics' two acquisitions in fiscal 2016. For the full year, revenue increased 15% to $71.4 million, including $4.1 million from our recent acquisitions.

GAAP earnings totaled $0.20 per share in the current quarter compared with $0.10 per share in the prior year quarter. GAAP EPS were impacted by increased research and development investments, accretion and amortization expenses from the acquisitions and also included a $0.04 per share tax benefit.

We adopted ASU 2016-09 in the fourth quarter, which changes our GAAP accounting for the tax benefits from stock-based compensation. Concurrently, we also changed our tax accounting method for deducting nonqualified stock option expenses.

Prior year earnings were reduced by a $2.5 million customer claim settlement and a $1.5 million strategic asset impairment. These charges aggregated to $0.23 per share in the prior year quarter. GAAP earnings for fiscal 2016 totaled $0.76 per share compared with $0.90 per share in fiscal 2015. Non-GAAP earnings were $0.26 per share in the fourth quarter of fiscal 2016 compared with $0.34 per share in the prior year quarter. As we have previously mentioned, our non-GAAP earnings exclude, among other things, acquisition-related transaction costs; that is, integration, amortization, accretion as well as foreign currency gains and losses related to our euro-denominated Creagh Medical contingent consideration obligations. Non-GAAP earnings aggregated $1.21 per share in fiscal 2016 compared to $1.09 per share in fiscal 2015.

We delivered GAAP operating income of $4.1 million in the fourth quarter of fiscal 2016 versus $4.3 million in the prior year period. We saw increased revenue, which was offset by acquisition-related amortization, accretion as well as higher operating expenses, including stronger investment in R&D to secure future growth.

Further, the prior year operating income included the impact of the previously noted $2.5 million customer claim settlement. GAAP operating margin was 22.5% in the current year quarter compared with 24.6% a year ago.

Turning now to our two segments. Medical Device revenue is derived from our hydrophilic coatings, device drug delivery coatings and medical device products, including balloon catheters. Revenue rose to $13.7 million, increasing 4.5% from the year ago period.

Fourth quarter hydrophilic coating royalty revenue and license fees totaled $8 million, down 13% from last year. This change included approximately $1.3 million of reduced royalties from the November 2015 expiration of our U.S. patents covering our third-generation hydrophilic coatings.

Products sales increased $1.1 million or 41% to $3.7 million as a result of $0.9 million of revenue from our recent acquisitions and $0.2 million of higher reagent sales. The medical device customer research, development and other revenue rose $0.7 million to $2 million for the quarter, again, due to the fiscal 2016 acquisitions. This segment generated $4.2 million of operating income in the fourth quarter compared to $4.7 million in the prior year quarter. My previous remarks regarding consolidated operating income being impacted by higher revenue, acquisition operating expense items accounted for the change in the medical device operating income.

For In Vitro Diagnostics segment, fourth quarter fiscal 2016 revenue grew 4.9% to $4.5 million. As we have stated in the past, we expect the IVD business to achieve mid-single-digit growth long term and, as such, we do anticipate challenges in the near term to revenue growth as we compare it to double-digit gains realized in fiscal 2016. The IVD segment realized exceptional revenue growth across all of its major product lines in fiscal 2016, encompassing protein stabilizers, BioFX branded products, microarray slides and the antigens. IVD operating income increased to $1.8 million from $1.3 million in the fourth quarter of fiscal 2015. Operating margin rose to 40.8% versus 29.8% in the prior year quarter due to improved operating leverage from higher revenue and lower expenses.

Now I'd like to discuss our fourth quarter fiscal 2016 revenue summary by category. First, product sales in the first quarter -- in the fourth quarter of fiscal 2016 rose to $8.1 million, up 18.8% from the year-ago period. This increase reflects the previously noted increases in reagent and acquisition-related product revenue in our Medical Device segment as well as higher sales in our In Vitro Diagnostics business.

Second, our royalty and license fees, which are generated primarily in our Medical Device segment. This revenue category totaled $8 million, down 13.1% from last year due to the previously mentioned patent expiration. We expect the U.S. patent expiration impact to grow in the upcoming quarters as customers have largely depleted their inventories that were produced prior to the expiration of the U.S. patent, and as they also -- as we also realize the effect of the October 2016 patent expiration in countries outside of the United States. We are working hard to fill this gap.

Our third revenue category is revenue and development and other. This area increased to $2 million, up from $1.3 million a year ago due to our recent acquisitions.

Product gross margins were 65.1% of product revenue in the current year quarter, up from 62.2% in the year ago period. Product gross margin benefited from improved product mix in our core businesses, partly offset by margins from our recent acquisitions. We expect product gross margins to decrease slightly in fiscal 2017 as we ramp up manufacturing in our Irish facility. It will take a couple of years to realize optimal leverage in this facility as we execute our whole-product solutions strategy.

As a percent of revenue, fourth quarter R&D expenses were 29.2% versus 24.9% in the year-ago period. On the dollar basis, R&D expenses of $5.3 million increased from $4.3 million from last year, reflecting investments in our whole-product solutions strategy.

SG&A expenses in the fourth quarter of fiscal 2016 were 27.7% of revenue versus 20.3% in the prior year period. On a dollar basis, SG&A in the fourth quarter of fiscal 2016 totaled $5 million compared with $3.5 million a year ago. The dollar increase includes, among other items, $0.5 million from our fiscal 2016 acquisitions and $0.6 million from higher stock-based compensation related to fiscal 2016 performance.

Income tax expense was 35.5% of pretax income in the fourth quarter compared with income tax expense of 51% a year ago. The decrease in the effective tax rate in the fourth quarter of fiscal 2016 was a result of benefits from accounting changes for stock-based compensation, offset by increases from nondeductible acquisition-related costs, including amortization, contingent consideration, accretion expense and related foreign currency losses. As a reminder, the fiscal 2015 fourth quarter tax rate included the impact from a $1.5 million strategic asset impairment loss, which was not tax benefited.

Our cash and investments totaled $46.9 million as of September 30, 2016. We recently further supplemented our strong balance sheet as we complete a new three-year $30 million line of credit agreement as well as an additional $5 million multicurrency overdraft facility in Ireland. During fiscal 2016, we generated $25.2 million of cash from operating activities. Further, adjusted earnings before interest, tax, depreciation and amortization or EBITDA, aggregated $26.5 million in fiscal 2016.

Our capital allocation included $25.9 million of investment for acquisitions in fiscal 2016 as well as $8.2 million for plant and equipment, including the acquisition of the Creagh Medical facility in Ireland. Our current cash and investment balances and cash flows from operations combined with Surmodics $30 million line of credit provide adequate capacity to support a corporate strategic growth initiatives.

The entire Surmodics team continues to perform exceptionally well, and results for fiscal '16 were truly extraordinary. Thank you to the team in both Ireland and the U.S. for the hard work and outstanding results.

And now I'll turn it over to Gary. Gary?

Thank you, Andy. I'm delighted with our Surmodics team's performance in the fourth quarter. We delivered all aspects of our strategic trifecta, both the fourth quarter and the full fiscal year 2016.

At the beginning of fiscal '16, we set out to accomplish three major goals. These were to manage and meet our growth and profitability objectives in a difficult year given the U.S. expiration of our significant royalty-generating patents in our medical coatings business. Number two, to get our SurVeil drug-coated balloon into an early feasibility study. And third, to acquire the device development and manufacturing capabilities that would accelerate our transformation from a technology enabler into a whole-product solutions provider. I am pleased at both our efforts and the results for each of these three goals.

As you've heard from Andy, we grew revenue 15% plus in fiscal 2016. And our non-GAAP EPS rose to $1.21 from $1.09. We have successfully completed an interim look at the data from our SurVeil early feasibility study, and we acquired two world-class companies that have already made a significant impact in our strategic transformation. Thanks to our entirety of employees and my colleagues in the management team for such outstanding performance.

I hope that we are demonstrating to you that we can execute the strategic trifecta that I have described in our previous calls; namely, to drive execution in both our strategic transformation and operationally in our core businesses, while continuously optimizing and balancing the appropriate allocation of capital.

To go a little deeper and provide additional context, I want to touch on several 2016 milestones that have set us up for growth and success going forward.

First, our integration of Creagh Medical in Ballinasloe, Ireland and NorMedix in Plymouth, Minnesota is complete. We are collaborating and operating as one company. Now to be sure, there are still certain systems and processes that operate independently for the different sites, but our internal structure and external approach to the customer are both clear and consistent. We are where we need to be on this metric.

Second, with respect our SurVeil early feasibility study, the clinical data thus far shows the positive results we expected and that the feedback on the device itself was quite positive. We are both pleased and encouraged by the device's clinical performance. Our sirolimus-based, below-the-knee, drug-coated balloon program continues to make progress as planned using our own internally developed 014 balloon platform for below-the-knee application.

Third, we accelerated the development of our non-drug delivery pipeline. We have completed the initial designs of our proprietary 014 and 018 peripheral balloon catheters with our Serene hydrophilic coating on board. Although much work remains to test, finalize and verify the design and performance specifications, we are confident that these platforms will be competitive in the peripheral balloon market. Moreover, we have finished the proof of concept and design in the area of microcatheters using Surmodics's most advanced coating that you have heard me refer to before as the Whiskey but now -- we have now formally branded as Pristyne.

While still quite early, I've been impressed with these initial designs and their bench-top performance. Remember, less than one year ago, the development of any of these products would not have been possible at Surmodics. The flywheel in the new Surmodics is rapidly gaining momentum. Our progress in each of these areas guides our capital allocation choices as we look forward to fiscal 2017 and beyond. We believe that the best way for Surmodics to maximize long-term shareholder value is to accelerate these investments in the core R&D programs that will drive our strategic transformation. We have a unique opportunity here to create products of enduring and a substantial value to both clinicians and patients. In order to do this, we have to shift our balance and reinvest more of the cash flow we generate from core business operations into the emerging transformational businesses that we are creating.

Against that backdrop, here are our overall transmission goals for fiscal '17 involving these three main areas, drug delivery devices, catheter and balloon platforms and, finally, operational and manufacturing readiness to fulfill high-quality production of all these devices. Let's look at each of these in turn.

Our drug delivery portfolio consists of three programs currently. Our SurVeil DCB intended for femoropopliteal disease, which is an early clinical evaluation; our below-the-knee device, which is in mid-clinical evaluation -- preclinical evaluation; and finally, our AV fistula program, which is now starting up. We intend to initiate clinical trials for the SurVeil DCB that we believe will contribute to receiving an eventual U.S. PMA approval and European CE mark.

The viability of DCB as a therapeutic modality to treat peripheral disease continues to gain traction. As you know, the market size here is estimated at greater than $1 billion in the United States alone. We believe that even with the solid performance of the current generation of devices, there is room for improvement in the long-term patency across multiple lesion types. Our investment here is intended to generate clinical results that demonstrate both the continued safety and efficacy of the SurVeil DCB and that can be used for both regulatory approvals and reimbursement.

Next, we intend to complete both the preclinical development of our below-the-knee, drug-coated balloon using sirolimus and the approval process to initiate the first-in-human clinical trial. Below-the-knee disease remains difficult to treat and has a substantial negative impact on patients' quality of life and mortality. We intend to fast track this program, so they can move into clinical evaluation quickly. Note that the development also includes creating our own balloon platform using the capabilities of our Irish balloon design team in conjunction with our Minnesota-based drug delivery team.

Finally, we'll also explore development of an AV fistula drug-coated balloon. We have the technology to address access and maintain fistula patency, which are major frustrations for patients undergoing renal dialysis and that can add dramatically to the cost of care.

Our non-drug delivery catheter and balloon platforms use the technology synergies and capabilities from all three integrated companies. We intend to complete the development of our 014 and 018 peripheral balloon catheters, then file for and receive regulatory clearances. We believe that our proprietary balloons with the Surmodics coating technology will offer distinct advantages to our strategic customers needing to update the peripheral product lines for better balloon performance.

Also, we plan to finish developing our first catheter innovation, an advanced microcatheter with the Pristyne, previously known as Whiskey onboard, and then file for and receive regulatory clearances. Our aim with this project is to design a versatile microcatheter that can be used for both coronary and peripheral applications, with a leading combination of low-crossing profile, high pushability and superior coating technology that allows it to provide catheter access and crossing in extremely complex lesions. Competition in this area is limited and the need is mounting. And we believe that we can set a new performance standard for products of this type.

And finally, with respect to operational readiness, we will complete the build-out of our facility in Ireland to manufacture both drug delivery and nondrug delivery devices at the appropriate scale. While developing new products is exciting, we intend to ensure that we can manufacture these devices in a world-class, cost-efficient, high-quality production system. We are doubling our factory footprint in Ireland to have the capacity we need.

As I indicated, successfully achieving these objectives will require substantial investment in fiscal 2017. We have a clear view of the investments required with one exception; that is, the first goal involving SurVeil DCB's clinical continuation. The reason is the scale of the clinical required for the SurVeil drug-coated balloon will depend on our discussions with the relevant regulatory bodies, both in United States and Europe. We have already started a dialogue with regulators and intend to have more clarity on this in our second quarter. The variable elements hinge on the trial designs, the number of patients we need to enroll and the calendarizing of cost that will impact fiscal 2017, which is then based on how rapidly we are able to gain IDE approvals to start the trial. Andy will give you more financial specifics on this in a moment.

I want to emphasize we must continue to develop and grow Surmodics's core Medical Device coatings business and the diagnostics reagents business. We are confident that net of the patent expirations, the intrinsic growth of both of these businesses is in the mid-single-digits with greater than 30% operating margins. We have strong leaders and teams in place. I want to assure you we are not taking our eye off the ball as -- even as we seize the opportunity to be transformational.

Our longer-term goals for Surmodics have not changed. Our objective is to generate consistent revenue growth in the mid-teens on a constant currency basis and EBITDA margins greater than 30% within three years. We believe that fiscal '17 is a pivotal investment year and expect to see the initial returns via revenue growth from our investments beginning in fiscal '18.

We know we can make Surmodics into a leading, high-value innovator in vascular medicine. Our acquisitions in fiscal '16, along with Surmodics's differentiated drug delivery and service technology, have provided us unique capabilities at any scale in this vascular industry. And we must invest in and leverage these capabilities now for maximum market impact and to secure long-term value for our shareholders. The required investments will be applied in a characteristically disciplined fashion as our track record demonstrates and that you have come to expect from us.

Now I'll turn it over to Andy to provide our fiscal 2017 guidance. Andy?

Thank you, Gary. The company estimates GAAP revenue for fiscal 2017 to be in the range of $63 million to $67 million. This revenue guidance anticipates a $6 million to $7 million decline in hydrophilic royalty revenues in fiscal 2017 resulting from the expiration of the patents governing our third-generation hydrophilic coatings. Surmodics anticipates diluted GAAP earnings to be in the range of a $0.15 loss per share to a $0.05 earnings per share. The non-GAAP earnings range is expected to be a $0.15 to $0.35 per share profit. The company's earnings per share guidance includes the following, an increase of approximately 50% in research and development investment over fiscal 2016 levels, primarily to accelerate whole-product solutions development initiatives. This investment in growth will likely be more heavily weighted in the second half of fiscal 2017 and reflects the expected continued funding of clinical development for the SurVeil drug-coated balloon, above-the-knee technology. Surmodics expects to gain clarity on its regulatory strategy for SurVeil's clinical pathway in the next two quarters. A positive outcome from this clinical direction may result in an opportunity to invest an additional $2 million in research and development above the level included in today's earnings guidance.

SG&A expenses will range from 28% to 29% of revenue. Amortization from acquisitions and accretion expense will be approximately $2.4 million and $2 million, respectively. Income tax expense is expected to be between $2 million and $3 million.

Surmodics GAAP earnings per share guidance excludes the impact of gains and losses from strategic investments and foreign currency translation adjustments related to the company's euro-denominated contingent consideration arising from the fiscal 2016 Creagh Medical acquisition.

Capital expenditures for fiscal 2017 are projected to range between $7 million and $8 million versus $8.2 million in fiscal 2016. The outlook assumes $13.5 million diluted shares outstanding. While dependent on market conditions and corporate development initiatives, the company may buy back common shares under its $30 million repurchase authorization. The guidance excludes any shares Surmodics may repurchase.

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

(Operator Instructions) And we'll take our first question from Jim Sidoti with Sidoti & Company. Please go ahead.

Just want to get a sense where you are with your thinking in developing a strategic partner for SurVeil. Do you think you want to wait until you get further along in the trials before you go that route? Or would you entertain offers at this point?

The two things that have impacted that, one is we continue to have discussions with strategics and multiple strategics. Also looking at the interim report on the patients we have treated. Certainly, we have gotten -- I can't comment, first of all, too much on the actual data, both for -- it's on -- both on currently open IDE in front of the FDA and also for publication rights. But what I can say is looking at that interim data has been very encouraging to us. Clearly, it's a limited set of patients, but it compels us to continue going even as we continue talking to the strategics.

What I don't want for Surmodics is to hit the pause button and then be in a situation where we're trying to negotiate with strategics, the eventual partnership. So we're happy to keep going. And the next step is to further develop that clinical pathway.

And can you just remind me how many patients are in the current phase of this trial? And what the number of patients would be in the next phase?

Sure. With the U.S. FDA, we got approval for up to 15 patients. And that doesn't mean you treat 15 patients, you have -- you can go up to 15 patients. We have 11 patients treated now. But more importantly, we're keeping the IDE open. Having the benefit of an open U.S. IDE, investigational device exemption, is very important as we continue our discussions with the U.S. FDA.

We'll take our next question from Ben Haynor with Feltl and Company. Please go ahead.

First for me, am I understanding correctly that you have three whole products in development, the two peripheral balloon catheters and then the microcatheter as well? Or am I misunderstanding that?

No, no. We have three of them in development at different stages. But they -- what I can say is that they have passed the initial [must of] knowing that they are viable, relevant, not early-stage hope and prayer.

And the other thing I would add there, Ben, is that the -- we also integrate all three of the companies' technologies, so that -- as we mentioned, the 014 and 018 are going to be driven by the balloon technology in Ireland and the other catheter-based technology innovation of not only the Plymouth technology but (inaudible) technology as well. So we have been able to integrate in this product development life cycle all of the companies' technologies.

Okay. That's very helpful. And then can you talk a little bit about the Serene single-coat offering that you just had the press release on? How much of the market does that open up for firms that have now the dual-coat capability?

Yes. It's part of -- part of it is the Serene -- first-generation Serene, I should say, is a double-coat process. And while the cycle time is competitive with the previous hydrophilic coating processes, some customers would much prefer with their current capital equipment to use the single-coat Serene. Single-coat Serene is a lot more challenging because we want to keep lubricity and reduce particulates at the same time. So our technical team is able to achieve a really good compromise to get to some customers who want a single-coat process. A lot of this has to deal with both coronary and peripheral balloons, where a single coat might actually be better for those devices in the manufacturing process. So it opens up a nice market opportunity for people to further adopt Serene on devices like that.

I don't want to comment on how much it is because it's not a typical market thing where some customers just have a preference versus the devices that can be used on. Serene can be used on all devices, but single coat is just more optimum for certain customers, and they are large customers.

It appears we have no further questions at this time. I will turn our program back over to our presenters for any additional -- actually, we do have a question from Elizabeth Lilly with GAMCO Investors. Please go ahead.

I just -- I want to make sure I understand exactly. Gary, can you repeat your 2017 goals? You talked about three of them. Can you repeat them for me briefly?

And that -- it's three big buckets. One is the drug delivery portfolio, which are all the PMA-type products, drug-coated balloons primarily. And the second bucket is really the non-drug delivery portfolio, which are typically 510(k) type devices. And then the third one was operational readiness, primarily in Ireland, so that we can build these in a cost-efficient, high-quality production system.

So the first, in the drug coat -- the drug delivery portfolio, it's really continuing the clinical development pathway of SurVeil. So the next step is really both for -- with us and U.S. and European regulatory bodies to determine what the next steps are to continue that. As I said, we don't want to hit the pause button because once you get to 15 patients, you're done. And so we're maintaining an open IDE and having discussions with the U.S. FDA and the European regulators as to what next steps are open to us that can generate data, that can help a strategic get U.S. and CE mark approval. So that's a big one and that's the one that Andy and I are saying our guidance incorporates that. But if we are in some way successful, we may have an opportunity to spend an up to an additional $2 million later in the year in that clinical.

The other ones in the drug-coated balloon segment that continued below-the-knee development platform. We have settled on sirolimus. We believe it's a better drug for the lower vasculature. It's cleaner. It's less toxic. And we actually have, as far as I know, the only ability to use multiple drugs given our excipient technology. So we need to make rapid progress in the below-the-knee sirolimus program to be able to get into the clinic. Now when we get into the clinic, obviously, I would like it to be in calendar 2017, but it depends on the progress in our preclinical evaluation.

The third component of that is the AV fistula, which requires a balloon technology and a drug for AV access, which, as many of you know, there's more balloons -- peripheral balloons using AV access than just about anywhere else. And so it's a big problem and we're in the early stages of that. For the non-drug delivery programs, we have these three devices on tap. I think Ben was asking earlier, the 014 below-the-knee peripheral balloon and 018 balloon as well that gets into the SFA and behind the popliteals. And those have -- those are not drug delivery. They're peripheral balloons intended for our strategic customers in a very competitive peripheral balloon market. And those will be using our optimized Serene formulations as well.

The third 510(k) we intend to file and receive is the -- is a really unique microcatheter that can access and cross really difficult lesions. You can go retrograde, antegrade probably. I don't want to give the claim set now, but probably even a collateral, retrograde-type access in these lesions. And there are just a few products on the market and it's a very wide-open market. And that microcatheter will have PRISTYNE onboard, which we've dropped the term Whiskey, which is our internal codename, have the PRISTYNE hydrophilic coating onboard, which is our most advanced of all coatings.

And then the final part is to make sure that our Irish production facility, the property plant equipment, people training, we're doubling our footprint there so that we can actually build all of these products in that system. So that's it in a nutshell, sorry.

And we'll take a follow-up question from Jim Sidoti. Please go ahead.

Just another follow-up on the strategic partner. At some point, when you are ready to sign up a strategic partner, should we assume that the trial cost would then go on to their income statement and that they will start paying for that?

For confidentiality, the discussions with different strategic partners, I'll be purposefully vague. It depends. Some of them clearly have the clinical capability to just take it on. One of the considerations is as we get into the clinical, we are hiring the clinical capability to make the progress we need, both internal and external resources. So the thought is if a clinical partner has their own internal capability, we may have to find a way for that transition.

The second thing is if -- the second thing is it can be also a potential shared cost. It's not a binary thing where they can take it all on. Some of them may choose to share the cost. But keep in mind, the more we invest, the more the return on that investment. That doesn't change. So if Surmodics invests another $1 million, for our shareholders, we don't want, of course, $1 million back. And so it's a consideration that as we invest, we expect to recoup higher returns from that investment, either in the form of the type of monetization or the type of royalties in the market.

So, Jim, it actually depends on the strategic partners and they each have their own optimum.

Okay. And then just kind of a bookkeeping question for Andy. The contingent consideration income, is that a noncash expense? And does that [mean] future payouts to Creagh Medical and NorMedix? Or what is that?

The accretion expense is really taking the fair value on the first day of the accounting from the business combination. And it's an interest type of calculation to account for the time value of money to get it to the ultimate payout value on the day of the various payments in NorMedix and to Creagh.

So there are two components to that, Jim. One is the potential $7 million of contingent liabilities related to NorMedix. And then we also have another EUR12 million associated with the payments to Creagh. And those payments are going to be in the fourth calendar quarter of 2018.

So this is just -- so as you go through and do these calculations. There's two components. One is this time value of money accretion. And then if any of the enrolling variables change in terms of the probability related to achieving those goals or the timing of achieving those goals and those contingent milestone goals, that will also result in a fair value change in the financials. So the guidance we've given in terms of $2 million of contingent consideration expense for fiscal 2017 contemplates just the ongoing accretion of those balances to the ultimate expected payouts.

So at this point, that's a noncash expense, but should they hit their goal, that would a cash expense.

Yes, it is. Yes, it is. Yes, that's correct.

And we have no further questions at this time. So I will now turn the program back over to our presenters for any additional or closing remarks.

Well, thank you for all for your questions. And to reiterate, we are pleased with our recent acquisitions, the progress of our integration efforts and our financial performance in fiscal 2016. And we are on track in fiscal 2017 to accelerate our strategy to delivering whole product solutions to our customers. I look forward to speaking with you on our first quarter earnings call. Thanks, everyone.

And this does conclude today's program. Thank you for your participation. You may now disconnect.