Surmodics, Inc. (NASDAQ:SRDX) Q2 2020 Earnings Conference Call April 29, 2020 5:00 PM ET Company Participants Tim Arens – Vice President-Finance and Chief Financial Officer Gary Maharaj – Chief Executive Officer Conference Call Participants Brooks O'Neil – Lake Street Capital Markets Jim Sidoti – Sidoti & Company Mike Matson – Needham & Co Mike Petusky – Barrington Research Operator Good day, and welcome to the Surmodics Second Quarter Fiscal 2020 Earnings Conference Call. TodayÂ's conference is being recor ...

Financial Data and Key Metrics Changes - Total revenue for Q1 2020 grew 2% to $22.6 million compared to $22.2 million in Q1 2019 [4][20] - Diluted GAAP earnings were $0.01 per share, while non-GAAP earnings were $0.05 per share in Q1 2020 [4][27] - Medical Device revenue grew 1% to $17.4 million, while In Vitro Diagnostics (IVD) revenue increased 5% to $5.2 million [20][21] Business Line Data and Key Metrics Changes - Medical Device coatings revenue was slightly up, offsetting lower SurVeil license fee and milestone revenue, which decreased by $1.1 million to $1.3 million [21][22] - IVD business unit revenue was up 5% compared to the prior year, outperforming the immunoassay market growth rate of 3% [17][24] Market Data and Key Metrics Changes - The Medical Device business segment is expected to face headwinds due to patent expirations, with anticipated revenue declines of $5 million to $5.5 million for the full fiscal year [22][24] - IVD operating margin improved to 50% from 49% in the prior year quarter, with product gross margins increasing to 68% from 64% [24] Company Strategy and Development Direction - The company aims to ensure the success of SurVeil, advance product development across its pipeline, and optimize revenue from legacy offerings to fuel growth initiatives [5][6] - The innovative product pipeline includes drug-coated balloons and thrombectomy devices, with significant progress expected in clinical studies and regulatory approvals [11][12] Management's Comments on Operating Environment and Future Outlook - Management remains confident in achieving double-digit revenue growth annually, despite challenges related to paclitaxel matters affecting the therapeutic modality [19][20] - The company is committed to rigorous clinical research to demonstrate the safety and efficacy of its devices, with a focus on enhancing foundational elements for long-term growth [18][19] Other Important Information - The company added Dr. Nusrat Sultana as Vice President of Clinical Affairs to drive clinical strategy and support product development [18] - Cash and investments totaled $48.3 million at the end of the quarter, with significant payments made for contingent earn-out obligations and capital expenditures [27] Q&A Session Summary Question: Update on the partnership with Medtronic - The company has shipped several orders and expects Medtronic to launch Telemark in the coming months, with revenue expectations of $0.5 million to $1 million for each of the partnered products [31][33] Question: CE Mark submission status - There are no updates on the CE Mark for SurVeil, but the notified body has registered in Continental Europe, and ongoing communications are taking place [34][35] Question: SG&A expense increase - The increase in SG&A expenses is attributed to headcount additions for clinical support and product pipeline development [43][44] Question: Impact of Coronavirus - Management does not expect any impact on the IVD business and has not heard of negative impacts on the Medical Devices segment [47][48] Question: SurVeil milestones and CE Mark implications - The most likely milestone for fiscal 2020 is the attainment of the CE Mark, with no additional milestones communicated at this time [51][52] Question: R&D capital allocation changes - The company will be more thoughtful in capital allocation due to delays in CE Mark approvals, but R&D guidance remains unchanged [61][64]

Financial Data and Key Metrics Changes - Total revenue for Q4 2019 grew 34% to $30.8 million compared to $23 million in Q4 2018 [9][35] - Diluted GAAP earnings were $0.26 per share, while non-GAAP earnings were $0.37 per share in Q4 2019, compared to a loss of $0.13 per share in Q4 2018 [50] - Operating cash flow for Q4 was $12.5 million, contributing to a total of $8 million for fiscal 2019 [51] Business Line Data and Key Metrics Changes - Medical Device revenue increased by 46% to $24.8 million in Q4 2019, driven by strong growth in royalty and license fee revenue [36][37] - In Vitro Diagnostics (IVD) revenue totaled $6 million, down slightly from the previous year, impacted by lower sales of distributed antigen products [41] - R&D services revenue increased by 52% to $3.2 million, reflecting higher demand from coatings customers [39] Market Data and Key Metrics Changes - The Medical Device coatings portfolio continued to grow in the low to mid-single digits, despite challenges from patent expirations [34] - The IVD business unit outperformed the immunoassay market growth of 3%, generating excellent operating margins [34] Company Strategy and Development Direction - The company aims to ensure the success of SurVeil and continue advancing product development and regulatory approvals across its pipeline [12][13] - Strategic objectives for fiscal 2020 include optimizing revenue and cash flow from legacy businesses while advancing new product initiatives [14][22] - The company is focused on building a complete line of radial access products and enhancing its thrombectomy platform [30][32] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the ongoing challenges posed by the paclitaxel debate but expressed confidence in the data supporting their products [11][20] - The company expects fiscal 2020 revenue to range from $87 million to $91 million, excluding potential revenue from SurVeil until more clarity is achieved [52][54] - Management anticipates a diluted loss per share in the range of $0.60 to $0.30 for fiscal 2020, reflecting the impact of patent expirations and other factors [55] Other Important Information - The company has submitted all required modules for CE Mark approval for SurVeil but faces delays due to the ongoing paclitaxel debate [19][20] - The company has received Breakthrough Device Designation status from the FDA for Sundance, indicating potential for significant future growth [26] Q&A Session Summary Question: Clarification on guidance and anticipated payments for Sundance - Management clarified that there are no anticipated license fees or milestone payments associated with the Sundance drug-coated balloon in fiscal 2020 [60][61] Question: Impact of patent expirations on revenue - Management confirmed that the royalty headwind from the expiration of the fourth-generation hydrophilic coating patents is expected to be about $5 million to $5.5 million in fiscal 2020 [67][68] Question: CE Mark approval process and potential alternatives - Management indicated that the notified body has paused the review of new CE Marks for paclitaxel devices, and they are exploring options to address this issue [81][82] Question: Details on milestone payments related to Abbott SurVeil - Management stated that over 50% of the $25 million milestone payment from Abbott has been recognized, with the remaining amount to be recognized over the next 60 months [149]

Financial Data and Key Metrics Changes - Revenue for Q3 2019 was $24.3 million, a 9% increase from $22.2 million in Q3 2018 [31] - Diluted GAAP earnings were $0.11 per share, compared to a loss of $0.20 per share in the prior year [41] - Non-GAAP earnings per share were $0.15, down from $0.27 in the prior year [42] - The company raised its full-year revenue guidance to a range of $92 million to $94 million, up from $88.5 million to $91.5 million [43] Business Line Data and Key Metrics Changes - The medical device business unit generated $18.9 million in revenue, a 13% increase year-over-year [32] - In-vitro diagnostics (IVD) revenue totaled $5.4 million, down 2% compared to the prior year [34] - Royalty and license fee revenue in the medical device segment was $11.6 million, up $2 million from the prior year [32] - R&D services revenue increased by 31% to $2.9 million [33] Market Data and Key Metrics Changes - The medical device business grew 13% despite a tough comparison quarter [28] - IVD business is expected to see modest mid-single-digit growth, while the medical device business anticipates double-digit growth [29] Company Strategy and Development Direction - The company aims to ensure the success of the SurVeil program and complete patient enrollment in the TRANSCEND study [9] - Focus on advancing drug-coated balloon programs and non-drug delivery device portfolio [9] - Plans to commercialize up to 15 innovative technologies over the next five years [22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in sustainable growth and the ability to navigate challenges [6] - The company is optimistic about completing the TRANSCEND trial enrollment by the end of Q4 fiscal 2019 [15] - Management noted the importance of quality-of-life impacts for patients in the context of regulatory discussions [50] Other Important Information - The company completed preclinical studies for the Sundance drug-coated balloon and is targeting regulatory approval for a first-in-human trial by the end of fiscal 2019 [20] - An agreement was signed with a leading multinational medical device partner for the Telemark coronary support catheter [26] Q&A Session Summary Question: What is the expected outcome from the FDA regarding paclitaxel devices? - Management believes the FDA will consider quality-of-life impacts and may provide recommendations that could help the market recover [57] Question: Can you provide details on the Telemark agreement? - The agreement is a distribution agreement where Surmodics will manufacture the product and receive a transfer price [61] Question: What is the expected revenue from SurVeil? - Revenue from SurVeil is expected to be between $7.5 million to $8 million for the year, with additional revenue recognized upon trial completion [78]

Financial Data and Key Metrics Changes - Total revenue for Q2 2019 grew 19% to $22.7 million compared to $19.1 million in Q2 2018, marking four consecutive quarters of double-digit revenue growth [29] - GAAP diluted earnings were $0.09 per share, down from $0.11 per share in Q2 2018, while non-GAAP earnings remained at $0.07 per share for both periods [39] - The company updated its full-year revenue guidance to $88.5 million to $91.5 million, down from previous expectations of $94 million to $97 million [41][42] Business Line Data and Key Metrics Changes - The Medical Device segment reported a 23% revenue growth, increasing to $17.3 million, while the In Vitro Diagnostics (IVD) segment revenue was $5.4 million, up 7% [29][27] - Royalty and license fee revenue in the Medical Device segment totaled $9.9 million, up $1.5 million from the prior year [30] - Product sales increased by 24%, benefiting from recent product launches in Ireland [31] Market Data and Key Metrics Changes - IVD revenue growth of 7.4% outperformed the immunoassay market growth rates of 2% to 3% [27] - The company noted that the recent FDA communication regarding paclitaxel-coated devices has created uncertainty in the market, impacting enrollment rates in clinical studies [9][10] Company Strategy and Development Direction - The company aims to transform into a complete provider of full product solutions, focusing on the success of SurVeil and advancing its drug-coated balloon pipeline [6][13] - Surmodics plans to commercialize up to 15 innovative technologies over the next five years, targeting unmet clinical needs and expanding its addressable market [21] - The company is committed to maintaining strong performance in its Medical Device and IVD businesses while navigating regulatory challenges [28] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving double-digit revenue growth despite uncertainties surrounding paclitaxel-coated devices [11][28] - The company is closely monitoring enrollment rates in the TRANSCEND trial and has adjusted its financial guidance accordingly [10][42] - Management emphasized the importance of patient safety and welfare in response to FDA recommendations [10] Other Important Information - The company received FDA 510(k) approval for its Sublime guide sheath, enhancing its product offerings for radial access [7][23] - The TRANSCEND trial is over 75% enrolled, but recent FDA communications have impacted enrollment rates [9][16] Q&A Session Summary Question: What do you expect the FDA panel to ask about? - Management speculated that the FDA panel may inquire about the signal of mortality associated with paclitaxel and the implications for clinical practices [46][48] Question: Is there a risk that the trial could slow down further? - Management acknowledged the uncertainties but emphasized their commitment to achieving the milestone and balancing risks in their guidance [52][53] Question: What is the impact of the controversy on the addressable market for drug-coated balloons? - Management indicated that estimates of market impact vary widely, with some institutions suggesting a potential reduction in usage [57][58] Question: How is Abbott responding to the current situation? - Management noted that Abbott has been supportive and engaged, emphasizing the importance of the therapeutic modality [61][62] Question: Is there potential to use different drugs with the SurVeil technology? - Management stated that while it is a possibility, it would require significant time and careful evaluation due to the complexities involved [63][64]