Surmodics, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good day and welcome to the Surmodics First Quarter Fiscal 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Tim Arens, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

[Tim Arens:]

Thank you, Stephanie. Good morning and welcome to Surmodics fiscal 2021 first quarter earnings call. Before we begin, I would like to remind you that during 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.

[Gary Maharaj:]

Thank you, Tim. Good morning and welcome to Surmodics’ fiscal first quarter 2021 earnings call. During our first quarter, I was pleased with our solid financial and operational performance, as well as the progress we made in our strategic objective. My thanks and a huge shout-out to the entire Surmodics team, their dedication, perseverance, and grit admirable by any standard. During our first quarter, we made important progress on our strategic objectives for fiscal 2021. As a reminder, they are

[Tim Arens:]

Thank you, Gary. During today's call, I will provide an overview of our first quarter operating performance. While we are not providing fiscal 2021 financial guidance at this time, I will provide comments on the revenue impacts associated with our SurVeil drug-coated balloon distribution and development agreement with Abbott Vascular. Including the revenue recognition associated with the achievement of the $15 million TRANSCEND clinical report milestone, which we expect to receive later this month. Revenue for the first quarter of fiscal 2021 declined 1% to 22.3 million, compared to 22.6 million in the prior year. Our medical device revenue declined 7% to 16.2 million as the business faced continued headwinds from the exploration of our Gen 4 coating patents and COVID-19. Our In Vitro Diagnostics business grew 17% to 6.1 million, driven by strength and demand for distributed antigen and microarray slide surface products.

[Operator:]

Thank you. Our first question comes from Mike Matson with Needham & Company.

[Mike Matson:]

Yeah. Good morning. Thanks for taking my questions. I guess I want to start with SurVeil. So, I know you gave some timing there around when you think it could be approved, but I guess my question would be, do you expect Abbott to launch this thing, kind of immediately upon approval or do you expect some kind of lag there in terms of between when it's approved and when they ultimately launch the product?

[Tim Arens:]

Yeah Mike, thanks for the question. You know, one thing to keep in mind today is, we got this trial to the podium, the results of the podium probably faster than any other trial. So, you know, the link presentation was literally just a couple of days after we had seen the breadth of the data. We have seen the high level data earlier than that. So, we have not, both we and Abbott, recent vintage digesting the results and quite pleased, both partners. And so we have not had any detailed discussion on launch timing yet. I suspect – I don't know this, but I suspect for competitive reasons, they may want to keep some of that close to . But when we have a better idea of the broad launch window, we may choose to say something at that point. But really, we haven't gotten into any detail with their commercial team.

[Mike Matson:]

Okay, thanks. And then you mentioned with the Pounce thrombectomy product that you expected to be in clinical use before the end of the fiscal year, I would assume that that's clinical use for the, sort of due diligence both on your part and potential partners part before you sign a deal, is that right? And does that mean that, you know, it would likely be fiscal 2022 before we see any kind of agreement there, distribution deal there for Pounce?

[Gary Maharaj:]

Yeah, good question. I’ll ask Tim talk to the latter of the fiscal 2022 impact, but, yeah, typically – and this is just a broad brush, personally, in the last 30 something years, I like to see at least 100 clinical uses in a broad swath of case types. And then that way, we really have shaken the product down in understanding how it's best to use what cases is most successful. And so having that data under our belt, we believe dramatically increases the book value. When we say here, we've got something we actually have data to prove it versus merely a regulatory approval, and a bunch of . So definitely, however long it takes to get that level of K’s feedback, I think that bolsters for us the value of the device dramatically. And that will lead us into, I’d say at least the first quarter of fiscal 2022 to get the K-series done.

[Mike Matson:]

Right.

[Tim Arens:]

Thank you, Gary. Yeah, Mike it's a great question. And I would guide you to fiscal 2022. That, you know, just for the benefit of folks listening on the call, this isn't unlike what we did with Telemark, and what the 014, 018 PTA balloon catheters, which ultimately found distribution agreement signed with Medtronic and Cook. So, we're taking a similar page out of the playbook.

[Mike Matson:]

Okay, thanks. And then just my final question beyond the royalty headwinds, can you just remind us, is this going to be largely through after fiscal 2021 or is that going to fiscal 2022? patent expirations?

[Tim Arens:]

Patent expirations, absolutely. So, I appreciate the question. The Gen 4 patent expiration, we will work our way through that this fiscal year 2021. And it will become a tailwind in 2022. Just for folks modeling purposes, as they think through the $3 million headwind that we've communicated with regard to the Gen 4 patent expiration, you know, we have realized about a $900,000 impact here this quarter. I would just say probably a simple way to think about this is the remaining 2.1 million would be pro rata over the next three quarters.

[Mike Matson:]

Okay, thank you.

[Tim Arens:]

You're welcome.

[Operator:]

Thank you. Our next question comes from Brooks O'Neil with Lake Street Capital Markets.

[Brooks O'Neil:]

Good morning, guys. Can you hear me okay?

[Tim Arens:]

Hear you loud and clear Brooks.

[Brooks O'Neil:]

Great. So, the only thing going faster than your product development efforts is the speed at which Tim reads his script on this call. So, congratulations on your progress. I have a couple questions. First, I'm just curious if the FDA shows any sensitivity to the reality that they're leaving Medtronic Admiral on the market to spread Paclitaxel, wantonly, while you have a superior product with 75%, less Paclitaxel, which seems to be something that three all doctors and investigators into a tizzy last year.

[Tim Arens:]

Yeah, you know – first of all, the IN.PACT device clinically, we've not seen any clinical outcome based safety issues. The in the data obviously a broader issue in terms of long-term mortality signals, showing up between sometime between year two and year three of the treatment, but you know my point is, less is more if you're getting the same impact, right? It's not impact, sorry, it is . So, these doses of the on these drug-coated balloons are not oncology type doses, but frankly, if it were me, if I can get the same, you know, similar outcomes with a lower dose of such a powerful drug, I think that's always better. But I’d stop showing or saying or implying that the impact device is not safe. It's just the therapeutic window of having a low dose drug, to me just makes sense to be better. And, you know, the way we think about it, too is, you know, technology development always builds on the prior generation, right. So, we're glad to see devices, like the first generation DCBs in Europe, devices like the IN.PACT Admiral, and devices come to market and even the , because then it gives us the ability to build upon their , and continue to improve the device. The FDA, usually, when I've dealt with them, you stand alone on your safety, safety is something that you can look comparatively, but their keen interest as it should be, is about your device's safety, pretty much by itself. I know I haven't answered your question, but at least give some color.

[Brooks O'Neil:]

No, no. I understand. And I appreciate all that context. It makes total sense to me. So, here's another question. I'm obviously, tremendously impressed with your pipeline of products and, and opportunities that you've laid out. And I was hoping you might handicap for us, the one or two or three that you think maybe beyond SurVeil offer the greatest long-term opportunities for Surmodics?

[Gary Maharaj:]

You know, that’s a good and a challenging question. The three platforms have different reaches and time and impact. And so, you know, the, the PMA is a long-term , as we call them, right? I mean, you have to have the patience to get through it. I think what's particularly pleasing is the base technology platform of our drug delivery, really appears to work and work well for a low dose of the drug. So, well that means that's exciting. You know, remain, one of the keeping the agency on this AV Fistula of renal dialysis. Remains one of the biggest headaches from an economic viewpoint in the United States for America, because the amount of retreatment, you need just to dialyze these patients. So, I think it helps us feel even better about our best platform. Quite excited about Sundance. Our clinical team, kudos to them. Finishing that enrollment earlier than planned and so excited to unwrap how Sundance performs in this – again, it's safety, but you get some mild indication of efficacy, especially since we're doing a follow-up angiogram on these patients. So, that'll be exciting, because the critical limb ischemia is – nothing really works. And having more devices and technologies that can actually help those patients we think, is pretty exciting. So, those are two very large addressable markets, right there. The radial access platform is a bit of a sleeper. I mean, it's a suite of products that will take some time to develop, but if you had the vision that, you know, within the next five years, let's say, I – and this is just a vision, right? Every will have better patient care, better patient satisfaction, and much better economics, if that did the majority of the procedures via radio. So, while the adoption curve may take some time, those products are about positioning for us. When that adoption does occur, we're well positioned with a suite of products to help that. And then Tom, the market has been really favorable towards thrombectomy devices. By the way, it's not why we're doing it. We think the current generation of devices continue to improve, but there's still some pretty big gaps to close in thrombectomy, notwithstanding the current devices. So, my short answer is, and it's a good thing to look at perspective of Surmodics, if we have one product of one of these products, I think people would be like, wow, you've got something special. sometimes when you have three really amazing platforms, it seems to psychologically dilute people to say, okay, they got three things so no one of them could be good. I would say, any company would give their to have one of our platforms. So, I'm excited about all three for different reasons in the portfolio.

[Brooks O'Neil:]

That's really helpful, Gary. I really appreciate that. So, let me ask one last question. So, I know I'm not asking you to agree with this or disagree with this, but my own personal view is that as SurVeil gets launched and some of these other things get launched, that the revenue growth rate is going to accelerate dramatically at Surmodics. So, my question is, philosophically as that happens, should we expect you to continue to invest 30%, 40%, 50% of revenue in R&D or do you think the R&D levels will either stay flat or begin to shrink as some of these things come through the pipeline? Thank you very much for taking my questions.

[Gary Maharaj:]

Sure. You know, the way I look at the percentage of a – is a derivative of what work needs to be done in product development. And right now, because the high revenue ramp hasn't started in some of these pipeline activities. So, I would expect it to go down just because the absolute number of things we can work on is not infinite, obviously. And so therefore, that ratio of that percentage clearly would go down. But I want to bring back to one thing, if we have an opportunity to start on other aspects of those platforms, or I should say, if we have an opportunity to accelerate with our experience in some of these platforms, we wouldn't hold back because of a ratio or percentage number. Tim will release the funds can do it. But I don't see anything of that quite frankly. It'd be very hard for us to maintain that rate with the revenue we expect. Tim?

[Tim Arens:]

Yeah, Brooks, it’s a great question. And Gary is precisely right on this one. You know, look, we will, excuse me here, we will continue to fund the appropriate opportunities. And, you know, what really increases the percentage of the R&D spend, compared to revenue is the funding of pivotal clinical studies that we've seen for SurVeil. You know, there's potential and our future where we may be funding pivotal studies for Avess and for Sundance. That yet remains to be determined, but remember, in the case of SurVeil, we found ourselves in a position where we're able to secure significant upfront license fees and milestone payments for the technology. And that makes good business sense. You know, Gary and I pre-pandemic had established, kind of a point of view in terms of what investors could expect longer-term. And we commented on an EBITDA margin of 25% or greater. And I think we've commented on that beginning in fiscal 2022. You know, we haven't changed that perspective. Clearly the pandemic, you know, creates a little bit of fogginess with regard to that, but I think, you know, what folks can expect from us is that we're going to be delivering double-digit top line revenue growth over time. And we're going to be expanding the margins. We think, you know, these technologies, high value technologies and products, and, you know, expanding margins can lead to significant long-term shareholder value creation, and we'll fund those things that we think believe provides the greatest opportunity to help us with that endeavor.

[Brooks O'Neil:]

Absolutely makes sense. Will you send us a copy of your prepared remarks, so we know what the is that?

[Tim Arens:]

Absolutely.

[Brooks O'Neil:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jim Sidoti with Sidoti & Company.

[Jim Sidoti:]

Hi, good morning. Can you hear me?

[Tim Arens:]

Hear you loud and clear, Jim.

[Jim Sidoti:]

Great, thank you. So, it's been about two years since the meta-analysis from Dr. Konstantinos came out and kind of turn the world upside down for you guys. I mean, looking back now, do you think that this is actually going to be a positive for you going forward because of the data that you presented last month?

[Gary Maharaj:]

You know, the safety issues really demo long-term versus just more drug and even without the the data and the concerns of the long-term mortality, we still believe less is more when it comes to powerful drugs, right, like . But as far as the safety issues, I think you all saw that the FDA, the data was published earlier this year, and you know, the they looked at the two, I think the average follow-up was 2.49 years on that trial. And really, the hazard ratio, the difference between non-drug and drug, didn't show any statistical significance. And the FDA actually responded publicly the letter to the editor in the New England Journal. I think it was early January to that publication responded to that. And as far as the the FDA was pretty clear, they said a couple things. One is, current products going through the approval process will have to bring long-term data, as an example. But they also said they will be looking to carefully monitoring the data as these data, the vintage of the data gets from 2.5 years to 3.5 years. I believe that data, I don't know that will demonstrate no, no statistically different signals, and will give the FDA an ability to unwind this process. Because the signal seems to show up between years two and three, I believe that he is looking for data that's now beyond three years to demonstrate that these devices are safe. So, as far as being a benefit in the marketplace, I think we have that with or without the facts of actual debate, but it ends up being the psychology in the mind of the customer, who are the treating physicians of whether less is more because of the . Does it make any sense?

[Jim Sidoti:]

Yeah, yeah, I agree. Then you commented that the royalty revenue is off in the December quarter, in-part due to the slowdown in procedures. I know it's still early in the March quarter, but now that the vaccine is out and in case you seem to be on the downswing, have you heard any anecdotal data that procedures have started to come back?

[Tim Arens:]

So Jim, we’re actually not hearing a whole lot right now, in terms of any significant changes from what's happened here in December. We're going to stay tuned, obviously, it's pretty important, but it just tells you the nature of this virus. It seems like, sometimes we might have it under control, and then all of a sudden, we get these spikes, and it can influence the ability to perform procedures and treat these patients. You know, some of the things that we have heard, are that, you know, certain regions of the country tend to be more impacted than others. You know, I guess, like the rest of the world we’re all waiting to see kind of the effect of the vaccinations and how it can help economies recover, and as well as, you know, allow patients to seek treatment and then be in a position to be treated by their physicians in the proper care setting. So, we'll be talking more about this, unfortunately, I think as we go through the year.

[Jim Sidoti:]

Okay. And then, on the income statement, SG&A was actually down from the December quarter, pretty much flat from year-over-year. I was a little bit surprised by that. I thought that you'd increase spending, is that's something that you expect to happen in the back half of fiscal 2021?

[Gary Maharaj:]

Yeah. I think there are clearly a couple of things that impacted the SG&A spend here in Q1. Notably, it was more on the comp side of things. And so in timing of some of the hiring activities, I would expect that we'll probably, you know, kind of ramp up here Q3 and Q4, perhaps a bit here in Q2. I would remind folks that back in November, highlighted that we expected somewhere in the low-double-digit expense growth on the SG&A line. I wouldn't walk that back quite yet. I think it will be somewhere around there. So, that's where I would guide you.

[Jim Sidoti:]

Okay. And then, last one for me. It was another very strong quarter for the IVD business, is that due to COVID testing and is that sustainable?

[Tim Arens:]

It actually is not as a result of serology tests or COVID testing. And, you know, I think Gary and I have been, you know, pretty vocal over the last few years about what a gem of a business that is and how it's been out punching its way growing at a multiple to the market, you know, the market for amino acids grow about 3% annually. You know, you'll notice that the IVD business throughout the course of, you know, rolling four quarters are going to have a couple of quarters that are exceptionally strong. And then a couple of quarters that perhaps are more modest. I will guide you and continue to guide you until otherwise, that you know, it's a business that we expect mid-to-high single-digit revenue growth.

[Jim Sidoti:]

Okay. All right. That's it for me. Thank you.

[Tim Arens:]

Thank you, Jim.

[Operator:]

Thank you. Our next question comes from Mike Petusky with Barrington Research.

[Mike Petusky:]

Hi guys. Good morning. Can you speak to just what you see as, sort of the – and I don't know if it's the right way to address this as, you know, sort of total addressable market or like some kind of term like true market opportunity. But when you think about what you guys are trying to do in radial access and thrombectomy, I mean, is there a way to size up what you guys feel are the opportunities for both of those platforms? Thanks.

[Tim Arens:]

Absolutely. Why don't we start with Pounce and arterial, you know, the way to think about this market here is to think about the number of patients that present with class and are treated either medically or with endovascular procedures. And I think in the U.S., it's approaching 200,000 patients annually. And from what I understand, on the endovascular side, there's probably somewhere around about 100,000 cases in which patients are treated either with catheter directed thrombolysis or with a mechanical or aspiration type technology to remove the clots. And these devices range anywhere from maybe 1,700 to about, you know, 3,000, I think, somewhere around the 2,500 range is probably not a bad way to think about it. So, you know, that gets you to a total addressable market, of about, you know, $400 million on a global basis. So, I'm giving you some numbers that are U.S. and just an essence multiplying by two to get to a global view. So, it's a very interesting and a market that we view as being sizable and having the potential to grow because of penetration and bringing new technologies to the market. So, one that's very exciting. I'll tell you that with regard to other clot removal technologies, notably for deep vein thrombosis or pulmonary embolism, you'll find that you know, the market has much higher selling prices for those devices, anywhere from $6,000 to $11,000. And you'll see in terms of the number of cases, it's – they can be larger than what you'll find on the arterial side. So, really strong addressable markets in other indications and we like what we see what the addressable market with regard to arterial clots. So, Mike, moving on to a radial access, you know, there's over 600,000, almost 650,000 cases that are performed annually, above the knee, where an 0.35 or an 018 PTA balloon catheter are often used. In the vast majority of these cases, they're done, they're conducted using a femoral access approach. Going radial is a very small penetrated opportunity today. You're looking probably low single digits in terms of penetration. I'll remind folks that on the coronary side, it's about of cases in the U.S. today to treat coronary vascular disease are done through radial access approach. So, the thinking here, there's a lot of advantages, as Gary was describing, there is patient safety, less loss of blood, lower rate of infection. For the patient, it's more comfortable procedures, they get discharged earlier, they get to go home quicker. For the healthcare setting, it's better economically, especially in an setting, they can get the patients through the procedure and get them discharged and continue to treat additional patients. So, there's benefits all around. And we're in the early age – extended innings of this baseball game, if you will. So, it's quite attractive. As Gary mentioned, it's probably a little bit longer term, it's going to be probably five years to build out that penetration, and will require additional devices to really be able to capture more penetration. So, those are things that we're working through at Surmodics, but both markets are quite attractive and quite large.

[Mike Petusky:]

Okay, and these are my words, not your words, but it's not unreasonable to think that incremental revenues from both of these platforms could start as early as fiscal 2022, correct?

[Tim Arens:]

That's how we're thinking about it, Mike. I would say those are our words.

[Mike Petusky:]

Okay. And then I may have missed this, or you may not have spoken to it, but is there any commercial progress to relate in terms of the, you know, some of the earliest 510(k) approvals? I guess I'm talking mostly about, you know, the balloon catheters and Telemark, I mean, is there anything to say there in terms of actual revenue generation or any progress you can talk about there?

[Tim Arens:]

Absolutely, in my prepared remarks, which notably, has been maybe I spoke a little too quickly, so it might have been missed. But I did call out within the product revenue, one of the drivers in the Med Device business was, in fact, the sales of our 014, 018 PTA balloon catheters to Cook. Both Cook and Medtronic are still in the process of bringing those products to market. And we like what we're seeing. I'll tell you that back in about a year ago, at this time, I think we kind of commented that the expectation for the first full-year of launch could be somewhere between per product. You know, unfortunately, we saw ourselves in the midst of a pandemic is that your customers are looking to launch products. I would probably suggest that it's probably not a bad idea to look at the potential for this fiscal year as being somewhat similar to what I previously commented. I do see, however longer-term that these products could be looking at somewhere between maybe 1 million and 1.5 million or maybe north depending on the products in terms of revenue to Surmodics on an annual basis. So again, we need a little bit more time and traction with regard to the partnerships to get a better perspective in terms of how longer-term and how sticky the performance will remain, but we like what we see today.

[Mike Petusky:]

Okay, great. And then was there any temptation on your guys part to, to try to put some guidance out there given that, you know, there's definitely a feeling that, you know, between the vaccine and cases falling off, and maybe this is more understandable, going forward and more of a positive outlook? Is there any chance, I guess, say next conference call will you guys say, hey, we sort of got our arms around what we think is the lay of the land here, and, you know, we're going to initiate sort of more formal guidance?

[Tim Arens:]

That would be ideal, Mike. You know, I certainly can't promise anything, but what I will tell you is, I believe that we provided some pretty clear color in terms of how to think about the business both from a royalty perspective, as well as a survey license fee revenue that we recognize each quarter, and also on expenses. So, I think there's enough color on the expense side and then some of the larger revenue streams to help folks appreciate and understand how to think about the business this fiscal year, but like you, I certainly hope that we'll be in a position here to provide guidance at some point in fiscal 2021.

[Gary Maharaj:]

And, you know, for us, usually, when you have multiple revenue streams, it gives you a smoothing function to provide guidance. In Surmodics’ case, our revenue streams are so distinct that they don't smooth each other, they actually increase the variability. So that's one of the reasons we chose not to give guidance, but our buyers would be when Tim and I have the clarity to provide it.

[Mike Petusky:]

Fair enough. All right. Well, guys, congratulations on all the progress. Thanks.

[Tim Arens:]

Thank you, Mike.

[Operator:]

Thank you. There are no additional questions at this time. I'd like to now turn it back to our presenters for closing remarks.

[Gary Maharaj:]

Well, thank you and thanks for joining us on our first quarter earnings call and please stay safe everyone and until the next time, thank you.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.