Surmodics, Inc.
Q4 2008 Earnings Call Transcript

Published: 24 Nov 2008

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the SurModics fourth quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) This conference is being recorded today Wednesday November 5, 2008. I would now like to turn the conference over to Phil Ankeny. Please go ahead, sir.

[Phil Ankeny:]

Thank you, Brandy. Good afternoon and welcome to SurModics fiscal 2008 fourth quarter and full-year conference call. Thank you for joining us today. I am Phil Ankeny, Senior Vice President and Chief Financial Officer. Our press release reporting quarterly and full-year results was issued earlier this afternoon and is available on our website at www.surmodics.com. We will also be using slide to supplement comments on our call today and those are available on our website as well. Joining me on the call today is Bruce Barclay, President and Chief Executive Officer. Before we begin, it is my duty to inform you that 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. We expect the total call to last approximately an hour to an hour and half. As you can see from our Safe Harbor statement on slide two, I will remind you that some of the statements made during this call may be forward looking. The 10-K for fiscal year 2007 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made during this call. The company does not undertake any duty to update any forward-looking statements as a result of new information or future events or developments. Please be advised that during the call, non-GAAP financial measures will be used to provide information pertinent to our ongoing business performance. These measures are reconciled to the GAAP measures and are available in today’s earnings press release. At this point, I will provide a brief overview of the topics that will be addressed during today’s call. First, Bruce will make a few introductory remarks regarding our fiscal 2008 performance. Second, I will cover the fourth quarter and full-year fiscal 2008 financial results and then Bruce will return and highlight our achievements for the quarter and the year review progress against our fiscal 2008 corporate goals, offer insight into our key growth opportunities both from a near-and long-term perspective and conclude with an announcement of our fiscal 2009 goals and then lastly, we will open up the call to your questions. With that let me turn the call over to Bruce.

[Bruce Barclay:]

Thank you, Phil and thanks to everybody for joining us today. BioFX generated solid financial results and in particular excellent cash flow in fiscal 2008. As you can see on slide three, for the eleventh consecutive years since our IPO in 1998, we achieved record revenue. During this spend SurModics revenue has grown at a compounded annual rate of 26%. Our positive results in fiscal 2008 were also broad-based, as we delivered record revenue in each of our three operating segments. If you look at our non-GAAP results for the year, adjusting for the accounting treatment related to our Merck agreement, these results are even more impressive. In fiscal 2008, non-GAAP revenue was $111.2 million and again on slide four you can see our track record of a eleventh consecutive years of growth in pro forma revenue. Slide five is intended as a rough approximation of our pro forma revenue, since our founding in 1979 through fiscal 2008. If you consider our revenue over the past five years compared with our revenue growth over the prior 24-years since 1979. You can see a significant acceleration of our growth trajectory in the more recent period, as we began to unlock the company’s true potential. While we have much to be proud of in fiscal 2008, this has been a year unlike any other in our history. It has been a year of encouraging highs and disappointing lows. Great movements included successfully integrating two acquired companies Brookwood Pharmaceuticals and BioFX Laboratories, both of which generated record revenue under the SurModics banner. Two of our key technologies are SynBiosys biodegradable polymer and our Finale Prohealing Coating commenced separate first-in-human clinical trials with two different companies. We also met the vast majority of our fiscal 2008 corporate goals as first announced in November of last year and of course after partnering with Merck on our I-vation platform last year. We jointly advanced TA product into a Phase II trial and generate nearly $20 million in cash during the year. We will review these accomplishments in more detail in a few minutes. On the other hand, we also experienced notable setbacks. Merck gave notice that it is terminating the agreement with SurModics, as part of their company wide cost cutting efforts. Also while significant progress has been made, we were unable to finalize negotiations for our second ophthalmology license and also many of our licenses cut partners in the DES space made good progress and saw the success, CYPHER sales continue to erode. With all of these highs and lows it’s important to recognize that one thing has not changed about SurModics. We are a technology rich company with an incredibly talented group of committed employees and a dedicated experienced management team has more focused than ever on meeting unmet clinical needs. Moreover, we are a financially healthy company and retain significant resources. Our business is highly profitable, generate significant cash flow; we have a strong balance sheet with virtually no debt. Our technologies are incorporated into more than a 100 product class with FDA or other regulatory approval. We have a pipeline of nearly 200 projects progressing towards commercialization. We are partnered with many other world leading pharma, medical device and life science companies. The confidence we have in our business is reflected in today’s presentation. Later on in our prepared remarks, we will provide further insight into our key growth opportunities reflect the optimism we have in our business to succeed over the long-term. We’ll also review the progress we have achieved in this business over the past five years, which was the last time stock traded at the recent levels. During the course of the call, we intend to convey what we see everyday; great opportunities for our company, our people and our technologies. We believe the recent setbacks will be more than offset by near-and long-term opportunities in our pipeline and as we look forward our ability to exceed expectations in the past has become a great source of satisfaction, which we look forward to repeating. With that I’ll turn the call back to Phil.

[Phil Ankeny:]

Thank you, Bruce. I will begin by providing an overview of fourth quarter financial results and follow that with specifics on discrete line items. Next, I will discuss significant revenue drivers and breakdown revenue by business segment. I will also review full-year financial results and timely, I will discuss expenses and review our balance sheet and cash flow. Fourth quarter revenue was $23.2 million, a 9% increase from $21.3 million on a year-over-year basis. This total includes a record $6.4 million in revenue from Brookwood Pharmaceuticals and a record $1.3 million from BioFX Laboratories, both of which we acquired in the fourth quarter of fiscal 2007. As we’ve said before, going forward we will no longer breakout the revenue contributions from these businesses as we have now completed a full-year of operations with them as part of the overall SurModics enterprise. As you can see by these results the integration of Brookwood and BioFx has gone exceptionally well. Let me now turn back to our fourth quarter results. Moving down the income statement, the company reported operating income of $5.3 million. In non-operating activities we’ve recorded a one-time non-cash loss in our investment in OctoPlus of $4.3 million or approximately $0.24 per diluted share. As you may recall, OctoPlus is a Dutch Drug Delivery company from whom we have licensed some biodegradable polymer technology and in whom we have a strategic investment. OctoPlus has made excellent progress with their lead product Locteron, a sustained release drug formulation for the treatment of Hepatitis C. However, the market for European biotech companies has been challenging and the market value of OctoPlus has declined significantly this year. While we continue to hold our investment in OctoPlus, we believe it was prudent to take an impairment loss this quarter. Since the close of our fiscal year, OctoPlus signed a new multimillion dollar licensing deal for Locteron with their partner Biolex, which we are told as alleviated much of the financing risk the company was facing. Taking into account the impairment loss, we generated a net loss for the quarter of $0.8 million, diluted earnings per share was a loss of $0.05. I will now provide a brief review of our results on a non-GAAP basis. Adjusting for the accounting for the Merck agreement and excluding the impairment loss I just discussed. Please refer to the supplemental tables in our press release. Non-GAAP net income was $3.6 million and diluted earnings per share was $0.20. Let me comment briefly on the accounting treatment related to our Merck agreement. As we discussed in the call we hosted in September, SurModics was informed by Merck on September 16, that following a strategic review of its business and product development portfolio, Merck intends to terminate the collaborative research agreement between our companies. Under the agreement, termination takes effect 90 days after notice to terminate the contract has been provided to SurModics. Accordingly, the agreements remain in full forcing effect, until the 90 day notice period lasts in December. In the fourth quarter, we continue to recognize revenue under EITF 00-21 on the 16 year schedule we have used in the past. Revenue from Merck in the fourth quarter was $637,000 and we built an additional $769,000 to Merck in the quarter. Bringing the deferred revenue balance associated with Merck to $34.8 million. Merck’s decision to terminate the agreement also triggered an additional $9 million payment to SurModics, which will be recognized upon the effectiveness of the termination. Also in the first quarter of fiscal 2009, once this termination takes effect in December, we expect to recognize the remaining deferred revenue. Accordingly, our first quarter results likely will include the recognition of approximately $44 million in revenue from Merck in our GAAP reporting. As it has been in the case in recent quarters, our earnings growth did not keep pace with revenue growth, primarily because of the changing mix of revenue sources and the accounting treatment required under the Merck agreement. To recall that we have recognized all of the development expenses as they were incurred, even though revenues are amortized overtime. The change in revenue mix is illustrated on slide six. Shifting gears a bit, I will now discuss the CYPHER Sirolimus-eluting Coronary Stent from Cordis Corporation, a Johnson & Johnson company. As a reminder, the CYPHER Stent has been on the market in the United States for more than five years. During that period it has produced the longest term clinical data of any drug-eluting stents and has generated very strong revenue and cash flow for SurModics. J&J reported worldwide CYPHER stent sales of approximately $289 million down 23% on a reported basis year-over-year. To recall that Abbott receive approval of Xience and Boston Scientific received approval for PROMUS in July. Despite the decrease in sales J&J estimates that the CYPHER stent retained 22% market share in the United States and 30% market share outside the United States during the quarter. Encouragingly, J&J has reported that total drug-eluting stent penetration rates in the U.S. have rebounded from roughly 63% to approximately 70% versus a year ago. Later in the call, Bruce will discuss our expectations for how the recent approval of Xience and PROMUS will impact the drug-eluting stent marketing coming quarters and how SurModics is participating in promising next-generation drug-eluting stent technology in this four plus billion dollar market. As discussed last quarter, while we expect greater competition to effects results for CYPHER going forward. Recall that our agreement with J&J provides for the payment of minimum royalties as long as the agreement is in effect. In other words, even if competition shortly erode CYHPER’s market share, SurModics will continue to receive significant minimum royalties. We have long anticipated this eventual downturn in CYHPER sales and the diversification strategy we pursue to counter this eventuality is clearly then improve that is evidenced by the continued strong growth experienced by our remaining businesses. In fact in fiscal 2008, total revenue from J&J, which includes other products besides CYHPER constituted 20% of total revenue. To put this figure in perspective, please refer to slide seven. As you can see this figure is down from 33% in fiscal 2007 and 47% in fiscal 2006. You can also see that this percentage peaked in fiscal 2004 at 52%. In the four year since then our non-J&J revenue essentially the rest of our business has more than tripled growing at a 34% compound annual growth rate. Our sustainability to generate strong revenue growth despite declining contributions from CYHPER sales demonstrates the benefits achieved by the successful management of our broad and diverse portfolio technologies. Next, I will review results across business segment line. The Drug Delivery segment generated revenue of $10.5 million in the quarter, 34% increase year-over-year, but down 2% sequentially. The increase from the year earlier period reflects strong revenue growth from Brookwood, which offset the impact of the 23% year-over-year decrease in CYPHER sales. Moving onto the Hydrophilic and Other operating segment, we generated revenue of $8.2 million during the quarter up 5% year-over-year and up 4% sequentially. The strongest contributor to this increase was growth in royalties and license fees. Our continued growth in this segment illustrates the substantial customer traction that exist for SurModics technologies and the continued value of our diversified portfolio of customers and lastly, revenue for the In Vitro segment was $4.5 million down 19% year-over-year and down 20% sequentially. Growth in product sales including BioFX was not sufficient to offset the decrease in royalties from Abbott and GE Healthcare. Recall that a year ago, GE converted their license agreement to non-exclusive and accordingly the minimum royalties have decreased. Now that we have purchased the microarray business from GE, the royalty stream has stopped, while we are now able to capture more of the product margin. Now let me discuss the royalty impact of our Abbott license agreement. As you may recall, SurModics license several patents for lateral flow immunoassay technology to Abbott in 1989 that license agreement has generated a strong royalty stream for many years. In fiscal 2008, total royalty revenue related to the Abbott agreement was approximately $8.7 million. In the fourth quarter however, the amount was $1.2 million obviously much lower than the first three quarters of the year. As we have discussed in the past, the patents expire in December 2008. However, since we have report royalties on a lag, royalty revenue should continue through the second quarter of fiscal 2009. Based on these figures, investors can asses the impact of the patent expiration on fiscal 2009 results and beyond. Let’s turn now to full-year results. Total revenue for fiscal year 2008 was a record $97.1 million a 33% increase from $73.2 million in 2007. We achieved record revenue in all three operating segments for fiscal 2008. Drug Delivery segment revenue increased 66% to $43.9 million from $26.5 million. Hydrophilic and Other segment revenue increased 20% to $31.9 million from the $26.5 million in 2007 and In Vitro segment revenue was $21.2 million in fiscal 2008, up 5% from $20.2 million in 2007. On a revenue component basis, total royalties and license fees decreased less than 2% to $51.8 million from $52.7 million in fiscal 2007. Growth in royalties and license fees from the rest of our diversified portfolio nearly offset the significant impact of the 23% decrease in CYPHER sales. Product sales increased 48% to a record $20.1 million from $13.5 million in fiscal 2007. Lastly, research and development revenue more than tripled to a record $25.2 million in fiscal 2008, compared with $6.9 million in 2007. The company reported operating income of $27.3 million, net income of $14.7 million and diluted earnings per share of $0.80. Adjusting revenue for the accounting treatment of the Merck agreement and excluding the impairment loss on our investment in OctoPlus, as well as the prior years in process research and development charge in connection with our acquisition of Brookwood Pharmaceuticals. Non-GAAP results were as follows

[Bruce Barclay:]

Thank you, Phil. Let me start by reminding everyone, why we’re so optimistic about SurModics ability to provide sustainable growth over the long-term. Now refer you to slide 13. First, we have a unique and evolving business model with proven ability to both grow and diversify our revenue. Second, we also can drive value from solving customer problems in many different ways there by creating multiple revenue generating opportunities and finally we have a track record to strong financial results and effective capital allocation. We’ll talk about our growth opportunities today. Before I discuss 2009 and beyond, I want to reflect on the accomplishments we achieved this past year, a broken down our fiscal 2008 accomplishment into financial and non-financial metrics. First, Phil as already highlighted our financial results, which are summarized on slide 14, so I won’t dwell on this here. We achieved record revenue for the eleventh consecutive year even only $3.2 million from Merck was recorded its GAAP revenue for the year. Our non-CYHPER business continues to grow up 58% year-over-year. We achieved record revenue in all three operating segments and we generate strong cash flow in pro forma earnings. Looking at our non-financial results, you can see on slide 15 then we had a very productive year in many parts of our company; we’ll review these shortly, if you want to congratulate and thank our exceptional employees for all their hard work in fiscal 2008. We want to focus today on the significant growth opportunities we seen in our business going forward, but in particular over the next couple of years. These opportunities are listed on slide 16 and include Brookwood Pharmaceuticals, Ophthalmology, drug-eluting stents, Hydrophilic and Other surface modified technologies or In Vitro business and our growing in diverse pipeline as well as the investments we are making to develop and acquire new technologies for the benefit of our customers. Let me address few of these growth opportunities over the next few slides. I’ll start by reviewing a few opportunities representing our Drug Delivery operating segment. This business delivered recorded revenue of $43.9 million in fiscal 2008 generating impressive growth since 2004 as shown on slide 17. Moving on to strong foundation, our ability to drive drug delivery growth as in great enhance by Brookwood Pharmaceuticals, which provides proprietary sites specific and systematic drug delivery solutions to company’s developing improved pharmaceutical products, as well as access to many new large markets. Brookwood, which we acquired in August 2007, generated record revenue in fiscal 2008 highlighting the continued strong customer interest in its technology. Revenue has been driven by customers supported R&D, product manufacturing, clinical trials and polymer sales. Moreover as customer projects move along in this development cycle they remain significant potential from royalties and license fees, which we expect to realize within the next 12 to 24 months. Brookwood’s track record of generating strong growth is impressive and will be an engine for growth going forward. For example in fiscal 2008 Brookwood generated $20.5 million and grew 35% compared to Brookwood's full-year fiscal 2007 results. If you go back, when it was first spin-off as a standalone company from SRI as you can see on slide 18, Brookwood has grown its revenue from $6.1 million in fiscal ‘05 to $20.5 million in fiscal 2008. This represent the compound annual growth rate of 49%, while Brookwood’s current revenue base does not yet include any royalties, once it does we believe the true value of this business will be realized. The integration of Brookwood in the SurModics has gone well. Our technical teams are driving excellent synergies by combining the two bodies of technology. The combination of Brookwood microparticle technology with SurModics polymers provide the broad array of drug delivery technologies and capabilities to solve virtually any polymer base need required by our customers. This is important because the systemic Drug Delivery and pharma markets are larger than IVUS base coatings market. We can now address the needs of a larger and almost entirely new customer base. For example, as we gain more exposure to markets such as oncology, central nervous system disorders and diabetes, we are positioning our company to take a leadership role in market opportunities previously unavailable to SurModics. In 2008, Brookwood signed a new development agreement with a top 50 pharma company for a product in the oncology space. Also encouraging our developments relating to Brookwood’s license customer Ambrilia Biopharma, which has announced positive results for its Phase III study of a proprietary formulation of Octreotide to treat acromegaly our market estimated at approximately $1 billion. Ambrilia plans submit an application to the FDA by the end of 2008 with a goal of approval and commercialization in the U.S. by at the end of 2009. If its timetable tracks to plan royalty could flow Brookwood as early as fiscal 2010. Beyond Ambrilia, Brookwood have multiple later stage opportunities including Plantival [ph], which is conducting clinical trials for multiple indications including a Phase III trial for one. We expect to sign license agreements with additional Brookwood customers going forward and it is the case for SurModics legacy business potential license fees could be structured to include milestone payments in advance with royalties. This is one of the significant advantages of our business model. The final point I would like to make on our Brookwood business relate to the press release we issued just yesterday. We are very pleased to have acquired important proprietary drug delivery technologies in collaborative customer programs from PR Pharmaceuticals and the benefits of the deal are summarized on slide 19. The proprietary technologies we acquired have broad applicability and address key needs, enabling the delivery of injectable drugs, including proteins, with micropartciles through smaller diameter needles compared to competing technologies. The use of smaller diameter needles for microparticle injection is particularly relevant in ophthalmology. Also the use of smaller needles is an advantage in many other applications requiring subcutaneous or intra-muscular injections, and in particular where patient self-administration is desired. Proteins and other large molecule therapeutics are of strategic interest to many biotechnology and pharmaceutical companies, but pose significant challenges for drug delivery. The PR Pharma technologies will complement those of SurModics and our Brookwood business unit and broaden the overall technology portfolio for the benefit of current and future customers. We expect to immediately generate revenue from this acquisition in three ways; first, new customer projects that are being transferred from PR Pharma to us. Second, by supporting PR Pharma directly on their exciting new sustained release basal insulin product know as InsuLAR and third by applying PR Pharma’s proprietary technology to existing and new customer projects at Brookwood, especially where these projects can benefit from either from even smaller needles sizes for injection. We expect this transaction to be accretive in fiscal 2009, excluding any one-time charges in connection with the transaction. Moving on to other near-term opportunities; I want to highlight our ophthalmology business, which continues to be an important driver of revenue diversification strategy. SurModics scientists and engineers are busy on ophthalmology development projects with numerous customers for back-of-the-eye and front-of-the-eye diseases. These projects leverage our multiple drug delivery platforms and polymer matrix technologies as depicted on slide 20, for sustained delivery of customers’ proprietary drugs to the eye including both large and small molecule compounds. The stronger customer demand for our research and development services reinforces the opportunity we see in sustained drug delivery applications in ophthalmology. As you know, we’ve recently announced one of our ophthalmology partners Merck gave notice of its intent to discontinue its license and research collaboration agreement with SurModics. It’s important to note that Merck’s decision to discontinue the program was prompted by a strategic review of its business and its recent earnings release Merck announced the company’s more than 10% of its global workforce and selected projects as part of a broad-based restructuring effort. Unfortunately, we’re impacted by that strategic decision. Importantly, Merck’s decision was not based upon concerns about safety, efficacy or performance of the I-vation TA product, the I-vation platform or any of SurModics other sustained drug delivery systems. In fact the clinical data generate to-date for the I-vation TA product strongly support it safety and more generally that of the I-vation sustained delivery platform. Dr. Pravin Dugel presented our two year Phase I clinical trial data, for this product at the American Society of Retina Specialists Meeting last month and those conclusions are presented on slide 21. As you can see, our Phase I study has demonstrated an excellent safety profile in a sustained clinical effect. While we were disappointed with Merck’s decision, the collaboration agreement was highly beneficial to SurModics from both a financial and technology development perspective. In finishing the note, that our stock prices substantially lower today, than it was before we signed and announced our agreement with Merck in June, 2007. This pullback has occurred even though no one can dispute that our company is much better off having signed that agreement and generate significant financial rewards. As well as furthering development of our technology over the past 16 months. For example, with the money derived from operating cash flow in for Merck, we acquired two revenue and profit generating companies in Brookwood and BioFX, both of which will great promise for the future. We also completed two asset acquisitions, including proprietary intellectual property and collaborative drug delivery projects from PR Pharma and the CodeLink microarray business from GE Healthcare. In addition, we have repurchased our stock in the open market and invested in facilities to support the continued growth of our business. Lastly, our technology and capabilities have grown substantially. Particularly, as it relates to our ability to deliver large molecules over an extended period of time. From a competitive standpoint, this makes us unique as does the experience we gain and initiating a Phase II clinical trial with FDA. Our agreement with Merck illustrated an important aspect of our business model. The ability to generate substantial amounts of cash even before our commercial product reaches the market. As a result of our Merck agreement, we generated over $47 million in cash within approximately 60 months. Our team has discussed what we’ve learned from this situation and the most valuable lesson is that even large companies need to revisit their priorities on occasion. Even when you done everything right and the technology is developing according to plan, decisions such as the one made by Merck are not uncommon, particularly in today’s difficult economic environment. One conclusion you might draw is that should shy away from doing business with companies like this. However, our conclusion was just the opposite; we need more or large company partners and multiple large customer opportunity. Developing these relationships is exactly what we’re trying to do with Brookwood and its pharma customers and with our ophthalmology business as further supported by the new customers we are inheriting with PR Pharma transaction. Multiple shots on goal further protect our downside and provide greater upside for the benefit of our shareholders. We remained committed too and confident in the future of ophthalmology. We continue to have numerous customer development programs in ophthalmology evaluating several different drug delivery platforms including I-vation, microparticles and biodegradable implants. We made some strong progress in each. We believe ophthalmology will remain a strong contributor to SurModics revenue diversification in years to come. Not to be forgotten our efforts in orthopedic continue to show promise as well. We remain active in this market and are progressing customer supported drug delivery projects with multiple orthopedics companies. Moving on the DES market remains an important area for us. As you can see on slide 22 we have three different types of technology the partner with companies in this space and all offer good way to participate in an existent four plus billion market. As you saw last week we announced the license with our tenth company in the DES space Elixir Medical for use of our Hydrophilic coating technology on their stent delivery system. Elixir has generated a lot of excitement within interventional cardiology as it is developing of variety of experimental drug-eluting and fully biodegradable stent and as multiple clinical trails underway. Our royalty rate with Elixir like many of our DES partners is higher than the royalty rate we have on CYHPER for the drug release polymer. There were many highlights we achieved in DES in fiscal 2008 and a few have listed on slide 23. We are trying to launch the Endeavour DES in the U.S. satisfying one of our cardiovascular objectives. CardioMind initiated a first-in-human clinical trial with a next-generation drug-eluting device incorporating SurModics technology. This goal have achieved with the SynBiosys biodegradable drug delivery polymer system. In addition we are pleased within September Nexeon Medsystems formerly Paragon and IP successfully initiated a first-in-human trials for their PROTEX coronary stent system. Dr. Mark Bates interventional cardiologist and founder of Nexeon presented the exciting data on their PROTEX prohealing coronary stent and CCT a few weeks ago. Lastly we have other DES partnered projects in the pipeline which we have not yet disclosed which give us further optimism about this opportunity. As I mentioned earlier CYPHER results have already been significantly impacted by the recent entries of Xience and Promus in the U.S. as part of our strategic outlook, we expect our revenue related to DES to bottom in 2009 and increase thereafter. We call that we participate in DES with drug delivery polymers, Hydrophilic coatings and various technologies to address thrombosis and restenosis such as prohealing. In addition while we have been realistic in our estimates regarding CYPHER going forward. We look forward to working with Cordis on future products including CYPHER for which they have published an anticipated TMA filing date in 2010 enable which with an anticipated CE Mark filings expected in 2009 and the TMA filing in 2011 both of these products contained technologies license from SurModics. Taking into account all these customer activities, we believe that the best dates for DES revenue are actually in front us as we expect to exceed our historic revenue peak from DES sources which was achieved in fiscal 2006 within the next five years and as a result of our increased diversification and customers in DES and better financial terms with several customers. Our Hydrophilic and other operating segments continuous to quietly generate exceptional results and this robust business segment offers exciting potential for us going forward. As you can see from slide 24, this business has delivered exceptional growth in the over the last five years in fact more than doubling in this period. As our first-in-class technology coupled with our outstanding service and our preferred equipment provider Ultra-Web technology captured new customer business. We continue to see this business growing well into the future. Turning now to our In Vitro business segment, as you can see on slide 25, our revenue growth in this operating segment has been strong over the past five years increasing two and half sold in this time. We have made meaningful progress in advancing our technology platforms for In Vitro diagnostics. The diagnostic product business represents an important growth opportunity as well as hedge to SurModics therapeutic focused businesses. Over the past three years we have successfully executed our strategy to significantly broaden our offering to In Vitro diagnostic customers. As a reminder the first step in this process was to sign a distribution agreement with DIARECT which we did in July 2006. That enabled us to leverage our sales force and provide both protein stabilizer and antigen components with diagnostic test. In August 2007, we acquired BioFX adding strong product line colorimetric and chemiluminescent substrates which has enabled SurModics to simultaneously market three key components of diagnostic test kit. This positions us leader in space with one of the broadest offerings in the industry. Our recent acquisition of the CodeLink microarray business from GE Healthcare has had a greater debt to our offerings by allowing us to capture the margin that GE was previously receiving has a distributor of this technology, generate new customers and create new products leveraging our core technology. Finally, sales of Cell Culture Products development contract with Donaldson and Corning continue grow obvious slowly and Corning continues to support and believe in potential for these products. Beyond some of the highlight opportunities I just mentioned. We have a whole host of opportunities that continue to diversify our revenue streams and present solid growth potential. With regard through our business strategy, with regard our business as a portfolio of opportunities with more than 100 license products generating royalties and nearly 200 projects in our pipeline not yet on the market, as a significant driver of future value. On September 30, we had a total of 111 license customers, several it multiple licenses, compared with 92 in the prior year period. As shown on slide 26, our customers launched to 11 product classes in fiscal 2008 exceeding our goal of 10 and 61 product classes over the past five year more than any other five year period in our history. SurModics had 103 of license product classes on the market generating royalty revenue, compared with 100 a year ago. Our pipeline still show significant potential as slide 27 illustrates. The total number of license products not yet launched for the 105, up from 94 in the prior year period. Major non-license opportunities stood 88, compared with 75 a year ago. In total the company had 193 commercial products and development. As these numbers in our paid R&D for the full-year suggest the magnitude of R&D work, we were doing on the half of customers with the testament to the value that they place on our capabilities. In addition to demonstrating the significant potential value we see in our robust pipeline and again looking at the impressive five year trend. Our pipeline opportunities have more than doubled in the last five years. Turning to licenses; in fiscal 2008 we signed 23 new agreements exceeding our goal of 18 for the year. As you can see on slide 28, over the past five years we have signed 108 new license agreements, again more than any other five year period in our history. Finally, we generate significant customer interest has resulted our commitment to and continued investment and creating new technologies from our R&D efforts. SurModics has long articulated and execute the strategy of accelerating our technology leadership and broadening our platforms. Over the past year, we have made significant progress in both of these areas and are gratified to see the fruits of our efforts positively impact results. We spend a record $40.5 million in R&D in fiscal 2008 or nearly 42% of revenue and in the process continue to generate proprietary technology from internal projects and customer supported projects. As slide 29 illustrates this investment has grown steadily overtime. There are a number of exciting areas we are investing in and slide 30 lists about a few. These areas of research represent topics of interest to our customers and other thought leaders. We believe pursuing technology to address these markets has the potential to keep us at the forefront of the use of biomaterials in healthcare for a long time to come. Now review of the final results of our progress against our fiscal 2008 goals, which were unveiled at our Investor Day last November. On slide 31 through 37, we list our 15 goals and again through the hard work of our employees, we have achieved 13 of them in the year. I’ve already touched on many of these goals so, I won’t repeat them here. Our ability to achieve these milestones has in my opinion favorably positioned the company to create significant value for SurModics and our shareholders. While we were not able to sign and announce our second ophthalmology license as hoped. Our work with multiple paying customers in this important area continues. As discussed in the past, the decision and timing associated with entering into a license agreement with another company for use of our technology is based on when the customer chooses to move forward. Some do so really on for they have committed a lot of time and money for the technology with us and when the risk of ultimate success is greater, but the license churns are typically lower and others preferred rate until they have advanced further into development process, reducing risk and gaining further comfort that our technologies will increase their chances of ultimate success. The cost of weighting and reducing risk with that the eventual license churns typically will be higher. In the complex drug development programs of the kind we’re involved with our customers, the preclinical development activities can take years. At the moment, we have multiple customers who would be further advanced in technology and pay more later. While there are no guarantees and signs, if we are successful in our efforts and certainly our track record suggest we will be, ultimately we will be rewarded. As we run this business for the long-term perspective, we are perfectly content to continue developing this technology with our partners and generate even stronger long-term rewards. We’re pleased to share with you today some perspective on our financial performance over the next five years and providing that perspective on our financial performance, we will confine our commentary to non-GAAP measures of revenue and earnings, which adjust for agreements with EITF 00-21 implication as you saw with Merck, as well as any one-time charges in connection with acquisitions as that impairments and alike. As we have articulated in the past, we expect fiscal 2009, to oppose from challenges from a growth perspective for SurModics. New competition to CYHPER could increase pressure on our royalty stream from CYHPER. Debt coming expiration of our diagnostics pattern under the Abbott agreement will result in a decrease in that royalty steam in fiscal 2009 and no revenue beyond fiscal 2009. We expect termination of our Merck agreement certainly has an impact on our outlook in 2009 as well. Lastly, now that we have pasted the anniversaries of our acquisitions of Brookwood and BioFX, our year-over-year comparables will no longer get any lift from those acquisitions. In fact in all this into our analysis in particularly inline with difficult economic environment, we expect fiscal 2009 revenue in EPS again on a non-GAAP basis to be roughly flat compared with fiscal 2008. GAAP revenue and GAAP EPS, we look for to the substantially higher given the expected acceleration of deferred revenue from Merck and this will further standout since the expense from Merck with account for previously when it will incur. Beyond fiscal 2009 however, we see strong long-term growth potential for the many of reasons we articulated this afternoon. Let me walk you through few of the key assumptions underlying our objectives. We assume continued growth in our Brookwood Pharmaceuticals business. In yesterdays announcements of additional technology in customers from PR Pharma provide even more confidence in the growth of this business going forward. Our Ophthalmology business remains an important growth driver. Importantly and looking at our pipeline for Brookwood and Ophthalmology, we have significantly risk adjusted potential revenue associated with the early stage project to account from higher risk completion. On the DES front again we’ve believe the best years are ahead of us, not behind us as we expect to exceed our prior peak and annual DES revenue within the next five years. In addition, we assume positive organic growth in our core businesses such as Hydrophilic Technologies or In Vitro business have strong prospectus were increasing sales of the growing way of products. Finally, our diverse pipeline coupled with our continued investments in R&D gives us great optimism. This also important to highlight the fact that our assumptions do not reflect extraordinary circumstances such as a long-term protracted recessionary economic environment, or a major overhaul of U.S. Health Care System. Obviously, significant change to the regulatory environment reimbursement rates and alike, would significantly impact company’s business models through the healthcare space. A sustained recessionary environment could similarly impact our customers and our business. We strive for high-quality growth over the long-term, as we take advantage of new market opportunities in cardiovascular, ophthalmology, systemic drug delivery and In Vitro diagnostics among the others. Our financial objectives also contemplate our continued focus on improving operating leverage while at the same time continuing to invest in our infrastructure and internal technologies. In addition, we believe our revenue mix will trend in more profitable direction overtime. In summary, we believe our growth prospects remained strong and we have taken important steps toward building an enduring great company. At this point I will conclude the SurModics fiscal 2009 objectives. As in previous years, these goals are designed to offer insight and then how we manage our business and to provide a review of the company’s future opportunities. These goals are apparitional in nature as we often don’t control all the timing with our customer depending goals. Looking first to slide 39, we expect to sign 18 new licenses with customers and we expect our customers to launch 10 new product classes in fiscal 2009. Finally, we would expect to return at least one-third of our operating cash flow to shareholders. We remained committed to our share repurchase program and at recent prices and with our strong balance sheet I expect as to aggressively purchase shares when we can. On slide 40, you identified four additional in fiscal 2009 goals. First, to sign a new customer license with SurModics drug delivery technology within ophthalmology. Second, sign a new customer license using SurModics drug delivery technology outside of ophthalmology. We expect our Brookwood business unit to sign two customer licenses in fiscal 2009 and lastly, we expect to initiate a human clinical trial for a product using SurModics drug delivery technology by one of our customers. In closing, SurModics continues to demonstrate leadership and expertise in the application of biomaterials to the healthcare industries for the ultimate benefit of patients around the world. Those attributes enabled us exploit the opportunities presented by the convergence of drug and devices. Importantly, we are successfully executing on our strategy to expand our platform and technology leadership and further diversify our revenue streams, well at the same time consistently delivering strong financial performance and excited about our future in confident that we can deliver sustainable long-term shareholder value for our customers. Operator that concludes my prepared remarks, we’d now like to open the call to any questions.

[Operator:]

(Operator instructions) And our first question comes from the line of Ross Taylor with C.L. King; please go ahead.

[Ross Taylor:]

Hi, I’ve got a couple of questions. I’ll try to keep them brief. First of all, why did the Abbott revenues dropped so sharply during the quarter? I just wonder, is there was any kind of explanation for that and also I think you’ve said that the royalty revenues from Abbott were $8.7 million through the first three quarters of the fiscal year and I just wondered that, all of that in the filling with the way when those patents expire or just part of it?

[Phil Ankeny:]

Thanks for your question Ross. Let me try to address that, first of all just the numbers $8.7 million is the full-year number.

[Ross Taylor:]

Okay.

[Phil Ankeny:]

So, the $1.2 million was just that the fourth quarter portion of that and so, obviously first three quarters were much stronger. Probably, the biggest factor impacting the result in the fourth quarter are seasonality where you’re starting to see summer months, the flu and strep business that is a winter picking kind of product line and that’s in place for some of the sublicenses that are there, but more particularly there were some adjustments that one of the sublicenses was taking again some previous result and so that was the most significant component that we saw there.

[Ross Taylor:]

Okay and it’s also part of my question was, in my understanding was not all of those Abbott royalties are going to go away when the patents expire in December or you ultimately expecting all of those essential go away after fiscal ’09?

[Phil Ankeny:]

So, the timing will go somewhat like this, where the patents expire in December and so sales of customers product that are transacted before December are royalty bearing and so we will have royalty revenue from Abbott in the first quarter and then again in the second quarter of fiscal ’09. There is a chance with some principle beyond that, but that’s not guarantee just because we don’t know when the report those royalties to us.

[Ross Taylor:]

Okay.

[Phil Ankeny:]

And then the other reminder, of course is that there is amortization in of the actual Abbott acquisition deal that we did several years ago, and that will actually be included in Q1 results, but stops with the patent expirations. So, there will not be any amortization charge in the second quarter.

[Ross Taylor:]

Okay.

[Phil Ankeny:]

The last point that I would make is, what you will see in our 10-K ultimately is that as you know, we typically disclose any 10% or north of 10% customers and so J&J is in that and Abbott is in that. Last year Abbott was 16% and this year that will be 10% and so, if you do that math, there is obviously other revenue from other Abbott products, mostly in the Abbott Vascular arena that do generate revenues for SurModics. What I was highlighting was exclusively the diagnostics royalties that are included In Vitro segment.

[Ross Taylor:]

Okay that helped a lot and also with regards to the GE product that you bought back in recently, you can very quickly ramp those up so that you are you’re your revenue and income level that equal to where it was for those products when GE was marketing them?

[Bruce Barclay:]

While we certainly hope to, we’re not at liberty to day to be that specific, but remember these are products that we have great familiarity with going back to 1999. We’ve made for a long time, we got back certain rights a couple of years ago when they converted from exclusive to a non-exclusive and frankly we think that the team we have internally coupled with the additional products that we sell to that industry can do a better job of detailing those form return. So we’re very optimistic about what we can do with those products and getting them back in the bed so to speak and capture that margin and maybe then capture some new customers as well. So with all the respect of GE were the business that somewhat, I think increasingly given less and less attention to and we will certainly change that.

[Ross Taylor:]

Okay and last question on Brookwood obviously they’ve had impressive revenue growth this year in the last couple of years, but is there anything more you can tell us just, maybe give us some increased confidence or visibility that some other products in the pipeline, could be material royalty generators several years down the road?

[Phil Ankeny:]

We can’t be that specific yet other than just to say that, revenue they have generate to this point and profit they’ve generate to this point as outcome without royalties or license fees or milestones to speak out. So, this is the business that on its own as generated a lot of interest grew a variety of different customers of all sizes in terms of R&D dollars and again as we committed in the prepared remarks eventually the follows products get commercialized. I need to take a license under Brookwood technology patents we’ll now have. So, as we said customers refer to take a really license as a latter license. The bottom line is they need to take a license at some point. In that business, what we’re seeing is many preferred to take it after they’ve generate some good clinical data that’s fine, but again that typical results in a higher sort of license in terms and it benefit taken before. So, I think the things to watch in that business are growing revenue trends and the fact that commercial R&D line in particular has been robust and we expect there to be good R&D dollar in 2009 as well.

[Ross Taylor:]

Okay, that’s all of my questions. Thank you.

[Phil Ankeny:]

Good. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Charley Jones with Barrington Research; please go ahead.

[Charley Jones:]

Hi, thanks for taking my questions. So, in other words Abbott was paying you too much in prior quarters and neither catching up, is that right?

[Bruce Barclay:]

Well, it just in accounting adjustment for some product. So, yes there was a true up that was in one of the customers under Abbott rollout, but the bigger fact is probably the seasonality.

[Charley Jones:]

Can you tell us with the total Abbot numbers going to be in your 10-K?

[Phil Ankeny:]

They are 10%, I don’t have the total figure, but so that be around 9, 7 [ph]

[Charley Jones:]

So, I thought when we talked last quarter or couple of quarters ago, you would said that, this Abbott piece that’s going away was less than half. So, it’s actually much closer to the whole amount. Is that correct?

[Phil Ankeny:]

No, we’ve not said how much it was of the total loan in the favorable larger single piece.

[Charley Jones:]

Can you describe the sales process for the immunoassay business and need to add any sales people there or we need to shift resources, so that keep are available on a sales capacity for those products or is that more of a pool demand?

[Phil Ankeny:]

No, we have an exceptional inside capability in the sales organization, which we’ve added to over the last few years and we have got both domestic coverage and some international coverage as well. We’ve got distributors, the products outside the U.S. to some extent it’s fairly broad based and it’s something we are going to watch, if we need additional support we will certainly consider that. Again I would tell you that, because we are broadening the bag of products to somewhat the same customer base – in theory at some point history breaks down, but in theory, you shouldn’t need additional people to cover those same customers or same group of customers. At some point you will and frank to that’s a good problem to have. So, we are watching closely and adjust accordingly, but at least for now we believe we’ve got the right mix of capability in-house and again we have had just exceptional work by our in-house team.

[Charley Jones:]

Can you give us a rough estimate of the GE royalty stream and how much you think this will generate in product revenue?

[Phil Ankeny:]

I don’t have that on top of my head.

[Bruce Barclay:]

Yes there – so, what we were receiving from GE was two revenue streams, that the royalty stream as well as the product sales where we were selling the product to them and they were in turn reselling that to their customers. So, the only piece that we are capping into now is that product piece where we are eliminating a distribution layer, but the royalties obviously have gone away in that list and the impact in the In Vitro, but nowhere near the impact of the Abbott launch.

[Charley Jones:]

Was there a partial quarter or was there a full quarter impact? When did this remind as when this agreement ended? How many months you recognized revenue for from GE in your royalties?

[Bruce Barclay:]

We have some partial royalties in Q4, but most of the quarter was without.

[Charley Jones:]

Okay. I guess one of my final questions is well actually before that what was the dollar amount in the bonuses that were pain in ’07 and in ’08? Or will be pain in ’08? How much have you actually recognized as an expense in 2008?

[Phil Ankeny:]

I don’t have that number in front of me.

[Bruce Barclay:]

The cash referrals are significantly lower than they were in ’07, because the expected payouts under the incentive compensation plan the cash portion are not at the higher levels of achievement as they were in ’07. I don’t have the dollars in front of me that were…

[Charley Jones:]

I think it was something like $8 million in ’08 in ’07, is that right? And you’re booking $2 million to quarter I thought in the first three quarters?

[Bruce Barclay:]

If you look at stock-based compensation that was $10.3 million in ’07 and $9.7 million in ’08 and that if you recall that with the $1.3 million sort of catch-up charge if you will or one-time charge, that was related to some of the transitions on our Board of Directors.

[Charley Jones:]

So, I guess one of my major issues here is that you guys were talking about your stock price being down and how you don’t understand that given all the good things that have happened with Merck and I guess I have obviously I don’t think that takes into account anything about valuation across the market and healthcare or the market, and number two I guess I struggle to understand, how bonuses could be paid when you’d paid bonuses in the prior year on a Merck agreement that was cancelled?

[Bruce Barclay:]

Well, I mean I guess part of that answer relative to Merck is, you either base compensation upon GAAP results or non-GAAP results, but you’ve got to give credit to the employees and the team involved at one of those junctions or not. So, (inaudible) correctly in my opinion that’s you’re baseless incentive comp on the non-GAAP results because as you’ve seen the GAAP results in Q1 or you will see in GAAP results in Q1 are going to be substantial, but no one can justify paying a bonus based upon substantial GAAP results that resulted from a termination of a Merck agreement. So, in one aspect it’s got to be based upon some consistent due or either GAAP or non-GAAP. Secondly, our bonus, our incentive plan is the major portion of the compensation for the officer committee. Our base salaries are very low compared to the market and we’ll show that in the data in our fiscal 2008 proxy statement. So, we based incentive comp on financial result and non-financial results and we think that there are number of very positive financial results that has come out in the fiscal 2008, but by no means that we are paying a bonus anywhere near in 2008, what we paid in 2007 because again the Merck agreement was recognized mostly in 2007 and then we haven’t achieved our goals in fiscal 2008.

[Charley Jones:]

Well, I guess this is right to understand because you guys have been recognizing them quarterly over the last three quarter and that we’ve really didn’t see a decrease in the fourth quarter SG&A, which means you didn’t do any catch-up to take back any of the bonus received is already reserve for?

[Bruce Barclay:]

Couple of comments there; Charley, first of all just to understand the way the Merck accounting is treated for incentive compensation purposes. In fiscal ’07, the org and comp committee elected to consider the $20 million as part of the calculation. Any amortization of that $20 million upfront license fee that happened during the year gets backed out for calculations of the ’08 Pro Forma revenue and so, it’s only the cash that is brought in the door that is part of the calculation.

[Charley Jones:]

Okay so to end that line of question I just have really one more. You talked in your financial goals for 2009 is having one goal, a one ophthalmology contract and yet you’re hoping for two in 2008, which means you’re now just looking for the one from 2008 or that one was cancelled and you have an additional one. So, I guess I would thought we would have seen at least two goals of at least two ophthalmology programs. Can you tell us whether or not conversations have ended with somebody who is closed or have been extended to a point where you don’t see it in the next 12 months for somebody that you thought was close?

[Bruce Barclay:]

No, just to correct that, ’08 goals you’ll see them most of that on the slides. We have one a goal for one additional ophthalmology license not two and yes, we still have customers in-house that are doing work with us today that would like to continue to do the R&D work and we’ll see when the license in discussions finalize, but as we said in the prepared remarks, eventually we’re going to need to take a license and if they choose to do it later, ultimately that set will fall.

[Charley Jones:]

I thought there were two licenses and one of them was the small particles that Merck had actually agreed to early on the year and there was a second one as well, but so I still don’t understand did you have somebody who is closed at the end that your thought was going to come in positively sometime in September, October, November that is dropped out?

[Bruce Barclay:]

Yes, we’ve had more than one that was closed and I can’t talk in detail beyond that, but they haven’t dropped out.

[Charley Jones:]

That they have not dropped out. Okay and can we confirm whether is it to back of the eye or front of the eye, agreement that you’re looking for one of each?

[Bruce Barclay:]

No, we can’t.

[Charley Jones:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from the line of Aaron Lindberg with William Smith and Company. Please go ahead.

[Aaron Lindberg:]

Thank you. Is advancing I-vation was out of partner an option?

[Bruce Barclay:]

Advancing I-vation TA was out of partner.

[Aaron Lindberg:]

TAM?

[Bruce Barclay:]

Yes, it is an option its not and we haven’t finalized that discussion internally yet. Not a highly profitable one, but as we haven’t made the final decision internal yet.

[Aaron Lindberg:]

Okay and then is the drop in major non-license opportunities related solely the Merck or are there other ones that have dropped-off there, last quarter it was 98 now to 88?

[Phil Ankeny:]

Its not just Merck it’s your normal as in flow that happens were we have influxes of project that come in and then some of that for a lot of different reasons let not to move forward.

[Aaron Lindberg:]

Was Merck a substantial component of that at all or they just a capital?

[Bruce Barclay:]

Well, actually in that bucket I don’t think Merck was in that because you are talking about non-license projects

[Aaron Lindberg:]

Okay, since they took a license they weren’t fallen and they are even under some of others that were come down with Merck propriety things?

[Philip Ankeny:]

Right, yes that’s not uncommon so that bucket to mix I means its earlier technologies customers, come and go for a variety of reasons

[Aaron Lindberg:]

No I understand that they may go down as things move to the pipeline as they move from non-license to license as well it just seem like a bit of a big drop in the quarter that haven’t been addressed so I just want to make sure there is not other things going on that we are not understanding?

[Philip Ankeny:]

Nothing at the moment.

[Aaron Lindberg:]

How long does the minimum royalty with J&J last? I know you’ve made a comment that its going through the end of the agreement, is there a specific timeframe that set upon the agreement now? And if they terminate early did they have to make a lump sum payment what does that look like?

[Philip Ankeny:]

The details of agreement are confidential but they will pay a minimum royalty as long as they need a license to the patents and only the license to the patents as long as they’re commercializing products using the technology some place in the world which is a long time from what we have been told, so we expect the minimum royalties to be in placed for sometime

[Operator:]

Thank you our next question comes from the line of Richard Rinkoff with Craig-Hallum

[Richard Rinkoff:]

You guys I think have actually given guidance for fiscal year ’09 and it’s for a flat revenue and flat earnings, but could you please confirm which revenue and which earnings numbers are you talking about is it $97 million is it a $111 million? I will start with that.

[Philip Ankeny:]

Yes, it continued to non-GAAP. So, those were the $111 million and I don’t have the…

[Richard Rinkoff:]

So, a $111 million of revenue okay and in terms of earnings is it $0.80 is $1.51 is it $1.05 what is that?

[Philip Ankeny:]

It will be the pro forma number $1.51.

[Richard Rinkoff:]

$1.51 in earnings and okay and that excludes what, how is non-GAAP different from GAAP in ‘09 other than $44 million that Merck’s going to pay you?

[Phil Ankeny:]

That would be the biggest difference and then it would be any sorts of adjustments if there are acquisitions with IPR&D charges or asset impairment things like that.

[Bruce Barclay:]

So just to be clear $1.51 includes the cost of stock-based compensation and then includes amortization and all acquisitions that we now about at the moment. However, it would exclude a cost for the PR acquisition so, I have that accurate.

[Phil Ankeny:]

That sounds correct, yes.

[Richard Rinkoff:]

Okay, alright. What you anticipate capital spending in ’09?

[Phil Ankeny:]

We’re still revisiting the total figure, the biggest investment we’re making of course is in the Birmingham, Alabama manufacturing facility and we are still looking at, how much of that will be in ’09 item as opposed to filling into 2010. Right now, but probably bracket that between $20 million and $30 million in ’09.

[Richard Rinkoff:]

Okay and on the PR Pharmaceutical transaction, what exactly are you buying at rapid press release, but are you buying something that looks like? I think let me get the terminology here, are you buying prophase by any chance?

[Bruce Barclays:]

Yes, prophase and I think they also call the small particle technology for these, but we’re buying assets, we are not buying the business. It’s an asset deal including patents and patent applications. Customer projects and then and an agreement with PR Pharma, it actually do paid R&D work for the rental our product including than a license back to them under what is be your own patents.

[Richard Rinkoff:]

How much revenue was likely to come from this transaction?

[Bruce Barclays:]

It will be revenue in fiscal 2009 we haven’t specified that yet publicly, Rick and again we will be accretive excluding the deal costs.

[Richard Rinkoff:]

But, it’s in your $111 million?

[Bruce Barclays:]

It is that have been.

[Richard Rinkoff:]

If I go to PR Pharmaceuticals website and I look at prophase, which is what we now decided is part of what you are buying. So, as prophase is a delivery technology specifically designed for control releasing frequently injected and often unstable therapeutic proteins at peptides. So, these ducktails in my mind at least with all of the other types of work you’ve done in – for back of the eye diseases. Does this kind of give you all of the technologies that you would need to sign someone like at Genentech or any of the other guys? Or is there some more stuff out there that you need?

[Bruce Barclay:]

It’s like a lot of technologies there are pros and cons to everything. We actually have developed internal technologies; Brookwood has technologies that can formulate peptides and proteins larger molecule benefits and detriments to all of those technologies depending upon the application, depending upon the peptide or protein. So, I guess I can’t tell off the top of my head how many different protein or large molecular technologies there are our there. But this is more in from PR Pharma that’s different than the one we have internally and it potentially has some benefits, but the once we have internally do not, but I can’t speak the specific customers other than to say this is very consistent with what we try to do with polymers. For example, we have a variety of different polymer in-house that can formulate large and smaller molecules, but by continuing to add to that bag it just gives you added flexibility depending upon what the individual customers need maybe.

[Richard Rinkoff:]

Okay, one more I want to go back to the numbers for a moment. For you too go from $97 million to $111 million. You are not going to have Merck to help you that’s the assumption. So that’s $40 million of growth and we know that CYHPER is going to go down and Abbott it’s going to go down and so are you suggesting that all other parts of that business are going to grow more than $14 million in ’09?

[Bruce Barclay:]

That’s true, where does the 14 come from?

[Richard Rinkoff:]

You reported revenue this year of $97 million on a GAAP basis.

[Bruce Barclay:]

You just taken the GAAP?

[Richard Rinkoff:]

Right, yes but and the difference between $97 million and $111 million was Merck, right?

[Phil Ankeny:]

Yes. Mostly I think its all yes.

[Richard Rinkoff:]

So, let’s just say its $14 million of difference. You’re projecting another $111 million year excluding any Merck payments, right?

[Bruce Barclay:]

Approximately. We’ve approximated that its roughly flat revenue and EPS and (inaudible) of those in the business.

[Richard Rinkoff:]

Okay approximately and we know that CYHPER is down and Abbott is down. So, what you are saying is that you expect to make up at least $14 million of growth from the business. Is that, am I reaching the correct the right conclusion?

[Bruce Barclay:]

Yes, I know that’s right, but again I can’t breakout what those pieces are other than just to say that was a bit of the focus of the prepared remarks. So, several things that are working at our direction, including the acquisition that we made with GE and PR Pharm.

[Richard Rinkoff:]

Right and there were no acquisitions baked into their forecast?

[Bruce Barclay:]

No, that’s correct. You are right.

[Richard Rinkoff:]

Right. Thank you very much.

[Bruce Barclay:]

Okay, thank you.

[Phil Ankeny:]

Thanks Rick.

[Operator:]

Thank you. Our next question comes from the line of Daniel Owczarski – Avondale Partners; please go ahead.

[Scott Freeman:]

Good evening gentlemen. It’s Scott Freeman in for Daniel Owczarski. I’ve got a question as it relates to the Brookwood built out. Do you have any update and as far as how that’s going or what your status is there and what would your first manufacturing contract there would obedience with our product?

[Bruce Barclay:]

No, actually we have a few of that could be first, so I can’t specify what those are although certainly PR Pharma and InsuLAR is one of the likely products that would be manufacture. Now that facility continues to go well has been managed extremely well by very capable team down in Birmingham, to very large project for us obviously, but as Phil said, customers continues to be quite interested in that and we expect to – and we are continue to be and we are still on time and within budget.

[Scott Freeman:]

Do you [ph] on this, what that timeline if again for completion?

[Bruce Barclay:]

Yes its I think that the first expected milestone is in our third quarter fiscal year of 2009 and then we’ve got some validation in some other qualification activities that are required to get it up to speed, it actually put products into it. So, likely the first products wouldn’t go again until our fiscal 2010, early in our fiscal 2010.

[Scott Freeman:]

Shifting focus for a moment, in your prepared remarks, on CYPHER you would mention that CYPHER sales were obviously drifting lower and when you push in closer to your minimum royalty payment there? Have you reach that threshold, any color you can give us on that?

[Bruce Barclay:]

Really can’t, the minimum royalty payment is confidential. What we said is, within the $1 million on an annual basis beyond that. If CYPHER’s going down in theory it’s getting closer, but we can’t really talk about the quantification of that.

[Scott Freeman:]

Thank you and I’ll jump back in the queue.

[Operator:]

Thank you and at this time, there are no further questions. I will now turn it back to management for any closing remarks.

[Bruce Barclay:]

Okay, thank you operator very much. We want to thank everybody again for participating in our conference call and we look forward to speaking with you, when we announce our first quarter results in January of 2009. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes the SurModics fourth quarter 2008 earnings conference call. You may now disconnect.