Surmodics, Inc.
Q2 2011 Earnings Call Transcript

Published: 28 Apr 2011

[Operator:]

Good afternoon ladies and gentlemen, thank you for standingby. Welcome to the SurModics Second Quarter 2011 Earnings Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, April 27, 2011. At this time, I would like to turn the conference over to Phil Ankeny, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

[Phil Ankeny:]

Thank you, Vince. Good afternoon and welcome to SurModics fiscal second quarter 2011 conference call. Thanks for joining us today. Also joining me on the call today is Gary Maharaj, our Chief Executive Officer. Our press release reporting quarterly results was issued earlier this afternoon and is available on our website at www.surmodics.com. 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 be archived for future reference. I will remind you that some of the statements made during this call may be considered forward-looking. The 10-K for fiscal year 2010 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. On today’s call I will highlight select financial results and key achievements for the quarter. I will also comment on our revised guidance for fiscal 2011. Afterwards Gary will provide an update on progress towards developing the strategic plan for the business going forward. And finally we will open the call to take your questions. Let me begin with some financial highlights. For the second quarter of fiscal 2011 we were pleased to report revenue of $17.5 million which represents 15% growth on a sequential basis. On a GAAP basis diluted earnings per share was $0.14. On a non-GAAP basis, assuming a normalized effective tax rate of 38%, diluted earnings per share was $0.08. Cash flow from operations was $5.9 million. Please refer to the supplemental tables in our earnings release for an explanation of our non-GAAP accounting. As you can see in the earnings release, we delivered sequential growth in each of our revenue lines as well as in each of our three business units. This top line performance reflects improved broad based customer demand for our products and coating technologies as well as higher activity in existing and new customer R&D programs, mostly in our pharma business. As a result of our strong performance and better than expected first half results, we believe it is appropriate to update our guidance for fiscal 2011. I will discuss our revised guidance in a few minutes, but first I want to provide an overview of our second quarter results by revenue line. Royalties and license fees for the second quarter were $7.7 million up 2% on a sequential basis. Last week Johnson & Johnson reported its sales of the Cypher sirolimus-eluting coronary stent decreased 41% year-over-year which would translate to a sequential decrease of approximately 16%. We are pleased to deliver growth in total royalties and license fees in the face of the continued headwind of decreasing Cypher royalties. We are pleased with the positive results from our portfolio of hydrophilic coatings customers in the medical device space. We generated growth in total royalties from this portfolio again this quarter both on a year-over-year and sequential basis. These results reflect the many years of work we have invested in cultivating such a strong business in medical device coatings. Product sales in the second quarter were an all-time high for the company at $5.8 million up 21% sequentially. These results were driven by broad-based customer demand across a variety of our products, most notably IVD products, polymers, and coating reagents. Lastly R&D revenue in the second quarter was $4 million up 42% sequentially reflecting a significant ramp up in R&D on many of our existing customer program as well as several new programs. In fact despite the strategic alternative process we announced in December, our pharma group has signed six new customer R&D programs since the beginning of the calendar year. Reflecting the new organizational structure we announced last fall, I will now shift gears and discuss results for each of our three business units, Medical Device, In Vitro Diagnostics, and Pharmaceuticals. I will begin with our Medical Device business unit. Revenue in Medical Device was $10 million in the second quarter up 2% sequentially. As I mentioned earlier we are pleased to deliver growth in aggregate royalties and licensees driven by the strength of our royalties from hydrophilic coatings customers even as we experience the continued decrease in Cypher royalties. In addition customer demand for coating reagents and R&D from our medical device customers contributed to our improved sequential performance. We were also pleased to sign seven new licenses with medical device customers during the quarter. Also commencing with this quarter we are now disclosing operating profit by segment which you will find as an additional table in the press release. As has historically been the case, Medical Device was our most profitable business during the second quarter generating an operating profit of $4.7 million for the quarter. Given our core strength in this segment, we are confident that this business will remain a steady performer for us going forward. Now let’s turn to In Vitro Diagnostics. We were pleased with the results in our IVD business which has been a source of stability for SurModics. Today this business derives virtually all of its revenue from sales of our component IVD products. Revenue in IVD was $3.3 million in the quarter up 25% sequentially. The strength was broad-based as we have achieved growth across most of our product offerings in the IVD product portfolio. IVD is also a consistent contributor to the company's profitability, generating operating profit of $1.2 million for the quarter. Lastly, our Pharmaceuticals business generated revenue of $4.2 million in the second quarter up 56% sequentially. This strong performance was primarily the result of the uptick in activity in our various customer R&D programs, both existing programs and new ones as I mentioned earlier. The pharma business generated an operating loss for the quarter of $2.3 million. On the expense front, R&D expenses increased sequentially both in customer R&D and other R&D, the former because we are incurring more expenses to drive our customer programs which is typical in the ebb and flow of activities on customer programs. Other R&D grew sequentially mostly because of the benefit we had in the first quarter related to the therapeutic tax credit. The sequential decrease in SG&A expense principally reflects the non-recurring advisory services we incurred in the first quarter. Investment income increased sequentially as a result of gains in our investment portfolio. Non-GAAP earnings per share was $0.08 in the second quarter, up from $0.05 in the first quarter. SurModics balance sheet and operating cash flow are strong. Our cash and investment balance at the end of the second quarter totaled $60 million and we had zero debt. Operating cash flow for the second quarter was $5.9 compared with $5.3 million in the first quarter. As noted in today’s press release, the company will be restating its financial results for the first quarter of fiscal year 2011. The company previously disclosed that it expected to record a goodwill impairment charge of $4.9 million later in fiscal year 2011 triggered by an additional milestone payment in connection with the 2007 acquisition of SurModics Pharmaceuticals. The milestone was achieved. However, the company has determined that the milestone obligation and an associated goodwill impairment charge should have been reported in the first quarter rather than in the second quarter. This is purely a timing issue. The restated first quarter financial results will be summarized in an 8-K filing today and updated in detail in a forthcoming 10-Q/A filing. The bottom line impact of the restatement is that our first quarter diluted earnings per share was a loss of $0.36 as opposed to the previously reported diluted earnings per share of a loss of $0.02. Because of the magnitude of this change to our first quarter results, we have concluded that the company had a material weakness as of December 31st in internal controls related to the revenue milestone obligation in connection with the SurModics Pharma acquisition. Let me stress that this is an isolated incident, where a single control did not operate effectively and only in the first quarter. Now, let me turn to the topic of guidance. As I mentioned earlier, as a result of better than expected first half results and our expectations for the remainder of the year, we believe it is appropriate to update our full year fiscal 2011 guidance. We are adjusting our full year expected revenue to a range of $63 to $68 million, up from our previous range of $55 to $63 million. Non-GAAP diluted earnings per share is now expected to be in a range of $0.13 to $0.26, up from our previous range of a loss of $0.15 to positive earnings of $0.05. Including non-recurring or event-specific charges such as restructuring charges and goodwill impairment charges, GAAP diluted earnings per share are now expected to be in a range of a loss of $0.21 to a loss of $0.08 compared to our previous range of a loss of $0.53 to a loss of $0.33. Overall, we are pleased with the performance we delivered in the second quarter and moving forward. We remain committed to executing against our operating plan and achieving our updated guidance targets for both revenue and earnings. At this point, I would like to turn the call over to our Chief Executive Officer, Gary Maharaj.

[Gary Maharaj:]

Thank you, Phil and thanks again to everybody for joining us today. Since joining SurModics four months ago, the management team and I have been focusing on three priorities. First, achieving our financial goal, second, exploring strategic alternative for our pharma business, and third, developing our strategic plan. As our second quarter results demonstrate we are well in our way toward meeting our fiscal 2011 financial plan. All three business units grew revenues sequentially even as we carefully manage expenses. I want to congratulate our teams at SurModics for delivering such a solid performance in the second quarter. Regarding the pharma business, we are making excellent progress at our review of strategic alternatives for this business, which we believe is in the best interest of all of our stakeholders. The process remains on track with our internal expectation and we continue to have meaningful conversations with a number of interested parties. We expect to conclude the process by the end of the calendar year, but we will, of course, provide updates if something developed more quickly. Let’s spend a few minutes now on the third priority that I mentioned, developing a strategic plan for the company. Our approach to the strategic plan is two-fold. First we will determine what the core business is for each business unit including Medical Device and IVD and how to drive profitable growth in that core over the near and medium term, roughly the next one to two years. Second, we will assess the opportunities to expand within this core and deliver further sustained profitable growth over the medium and long-term, over the next three to five years. This approach has several significant advantages. By its very nature the core business makes maximum use of strategic assets such as people, technology and expertise and can generate growth with the highest profitability at the lowest level of risk. As I mentioned in the last earnings call, sustained profitable growth requires a well-defined and strong core as the foundation of the business. We stress the need to tightly define the core business and its boundary in terms of customers, products, and technology. We began our strategic planning process by applying this approach to the Medical Device business. In this business, we have defined the core as follows

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Ross Taylor with CL King. Please go ahead.

[Ross Taylor:]

I have a couple of questions, I think they are all financial related, but can you identify what some of the swing factors might be that might make you come in at the low end of your revenue guidance versus the high end over the balance of this year? And I’m assuming if you’re towards the high end of the revenue guidance, I mean, that’s what’s going to drive whether you are at the low or high end of the EPS guidance as well?

[Gary Maharaj:]

Yeah, good question Ross and let me attempt to frame that for you. The results on the revenue side, first of all, in our IVD business and our Medical Device business historically have been more easily predictable because of the portfolio of customers we have there being quite broad and particularly in the Medical Device business with the increasing base of royalty generating customers that we have there. But we have seen some nice upward trajectory in that portfolio of late. And so that is giving us some color to this guidance. In the Pharmaceutical business that is clearly the most volatile business in terms of ebbs and flows of activity in our R&D programs with customers and that’s we’ve seen that in past quarters as we’ve broken out those revenues from a segment base for sometime. And so that combined with capacity utilization there clearly drives some of the earnings upside that you see. We also see good opportunities for just prudent expense management that we’ve been exercising already and if we continue to be successful there, we see the ability to steer toward the higher end of the range, but that will obviously depend on the business as we see it unfolding. If I hope that helps a little bit, I give you some color on how we’re looking at that.

[Ross Taylor:]

Yes, it does. And another question is that just try to focus on In Vitro Diagnostics a little bit, can you point any factors that grow that business to perform so well in the quarter. I know, you mentioned it was very broad-based, but just how sustainable do you think these types of numbers are?

[Gary Maharaj:]

It’s a very good portfolio of component products that we sell there and the teams have been executing really well and we’ve seen some good momentum lift with our customers there. The sequential performance that you see a 25% increase sequentially is not something that I would suggest you or anyone bake into your modeling for our results going forward. But in the rough order of Q1 and Q2 in that business is the kind of performance that we think is possible on a yearly basis order of magnitude in that range.

[Ross Taylor:]

Okay. All right. I have just one other question if I’m still on. I think the loss in the Pharmaceutical business was about $2.3 million in the quarter and is that kind of a normalized level would you say at this point?

[Gary Maharaj:]

That’s getting back a little bit to some of the point I was trying to make in your question about guidance that the operating loss there will depend on capacity utilization of the fixed infrastructure we have there. And the sequential performance you saw 56% increase from the December quarter, it clearly absorbed a lot more of the overhead and expense base in that business for the quarter. As I mentioned, they have been very successful at signing new customer programs since the beginning of January and so we’re very pleased with how that group has been performing and the traction we are getting with customers, but how the workflows within quarters really depends on what those customers need in the near-term. And so, I certainly don’t see that sequential growth continuing, but the level that we’re at right now is probably much more sustainable than where were at Q1.

[Ross Taylor:]

Okay, right. That’s all very helpful. That’s all my questions now. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Ernie Andberg with Feltl and Company. Please go ahead.

[Ernie Andberg:]

Good afternoon.

[Gary Maharaj:]

Hi, Ernie.

[Ernie Andberg:]

Gary, in your comments about the strategic focus in the IVD business and the Medical Device business, particularly the hydrophilic you implied well, first you said that you would look at for applications outside the vascular space. You implied that you had identified opportunities that could be attacked? Can you go any further in discussing that at this point?

[Gary Maharaj:]

Well, first, we actually currently, as you know, have business outside of the vascular space in the Medical Device business, but they are not the magnitude of the opportunities that we would want to lay on the water front. It maybe a little premature because they have many opportunities and our team is looking at de-risking them. So, we expect the number if we are doing this right, we would expect the number to drop dramatically as we de-risk them because we want to make sure we lineup the ones that have the lowest risk with a maximum opportunity. So, it would be premature to go into much depth at this point. And also some of these things even as we go forward might be confidential in our pipeline. I do want to reinforce though that none of these growth initiatives are ones that we see consuming extra cash just squarely within what we do the talent that we have and the investment profile that’s current through the company. So, just want to reinforce that as well.

[Ernie Andberg:]

Okay, fair enough. Thank you. Two things on SurModics Pharmaceuticals, Phil talked about exploring opportunities and having discussions with people and what happens if you are not able to find someone who will want to pay you what you think the businesses were?

[Gary Maharaj:]

Yeah, given where we are in the process, we remain optimistic. I mean, the process as I said is meeting our expectations as we spent several months in it right now. So, while you always have the probabilities of anything happening that the possibility I see of that is very small and because we remain optimistic, if the process was not meeting our expectations we would have a very different signal, but so far it absolutely has met our expectations. And we believe we’d see that successful conclusion before the end of the fiscal year.

[Ernie Andberg:]

End of the fiscal year, I thought, Phil is…

[Gary Maharaj:]

Sorry, calendar year, calendar year.

[Ernie Andberg:]

Calendar year.

[Gary Maharaj:]

Calendar year, yes, calendar year.

[Ernie Andberg:]

Okay, fair enough.

[Gary Maharaj:]

Yeah.

[Ernie Andberg:]

Phil for you, you’ve given us some new metrics on the business. Will you provide some historic numbers on the operating income by the business units or do we have to wait to get that information as you report the rest of the quarters?

[Phil Ankeny:]

We will be providing some of the history at some point in the future. We don't have all of that completed at this point. But it’s our goal to be able to get that out rather than just giving it out each quarter.

[Ernie Andberg:]

Thank you. That would be helpful. Thank you very much.

[Phil Ankeny:]

Well, absolutely.

[Ernie Andberg:]

The first question here asked about the range of estimates in the second half and I hit, I think you have covered that reasonably well, Phil. That does it for me, thank you.

[Phil Ankeny:]

Okay, thanks, Ernie.

[Operator:]

Thank you. Our next question comes from the line of Suraj Kalia with Rodman & Renshaw. Please go ahead.

[Suraj Kalia:]

Hey, good afternoon guys.

[Phil Ankeny:]

Hi, Suraj.

[Suraj Kalia:]

So, Gary, let me look at the numbers and vis-à-vis the qualitative aspects. You just said in your prepared remarks you are satisfied with the pharma divestiture process so far. I mean we obviously understand it takes time. But if I look at the quarter Gary about a 1.5 million jump in revenue sequentially is from the pharma business. So part of me says the Medical Device business is flat, it has been flat for three quarters almost, at least that we can tell. And you also mentioned that you were confident in the business prospects. If I strip out pharma because that’s going to be divested, unless the plan has changed, the core business, am I reading it wrong, is still – I’m not seeing what is the next big thing or what’s giving so much confidence on the core business? Sorry a long question, but hopefully you get that justified.

[Gary Maharaj:]

Yeah, you to keep in mind in the Medical Device business we are facing the headwinds of the dramatic drop in Cypher royalties. And so that has a sequential drop. Eventually we will hit the minimum revenue from that business which will help stem that tight. But the underlying medical device coatings business continues to grow. And Suraj I look at the company, let’s imagine as you are trying to state without pharma is being a part of the business. Profitability of the company is much different. It’s a very different look at the business. And our core Medical Device business even as it grows it’s very highly profitable in that segment. So the Cypher headwinds depress some of the growth that’s occurring in that business and I expect to see that stabilize within the next several quarters. It’s hard to grow when your facing a known and predictable decline that you are facing, but hydrophilic coatings which is actually not -- hydrophilic coatings is a core, Cypher actually we are not counting that as the core business when we talk about the capabilities for growth and profitability. I was specifically leaving that part out.

[Suraj Kalia:]

Great. So, Gary just to continue on that point and forgive me, I don't mean to harp on this, just trying to get a better understanding. You have the liberty of a strategic or having a new perspective on this, when you talk about business confidence, I mean we are looking at the med tech landscape. We could see the headwinds coming. Whichever way you want to slice or dice it, there are headwinds coming. I’m just trying to get a better perspective ex-pharma, when you look at the core business, specifically devices, I’m not asking for specifics, but are you looking at hey, you know what in the next year or so, we might be looking at a major contract sign on? Are you looking at bumping up the average royalty rates for the new licenses signed on, because the metrics when taken in totality at least per my math do not add up with the licenses signed versus revenues being flat in the device segment versus headwinds of the macro landscape, again, if you can, to whatever extent you can shed some additional color would be appreciated?

[Phil Ankeny:]

Sure. Well, there’s two things. We have had a lot of focus on our pharmaceutical business over last several years in the company. And in fact our core hydrophilic coatings business has continued to grow with increased focus on that business and especially as we – part of our strategic plan is within the segment up catheter-based vascular delivery systems and those each would weighs a ton. So specifically in those areas, we intend to focus on the areas that are predicted to grow rapidly in certain aspects of the cardiovascular, neurovascular space. And what that focus what we have seen in this quarter we believe we have opportunities because the one thing that struck me since I’ve joined the business is incredible brand recognition of SurModics as a coatings delivery in the vascular space partner. And in fact many of our customers when they are developing new products turned to us first and we imagined there will be substantial developments in these sub-segments in the coming year or two. And so we intend to capture that growth as these areas are poised to grow rapidly.

[Suraj Kalia:]

Okay. Phil, again to the extent that you can share your guidance of 63 to 68 or whatever, I’m just taking ballparks here right. Medical Devices, let’s see even if I assume flat-lined, it’s you’re talking at least 40 million until unless something goes wrong, it’s at least 40 million, let’s say IVDs annualized is about 10 million. So pharma, you are looking at roughly between 13 and let’s say 15 million annualized. Is that a fair assessment on our part or when you all are looking at even though you all haven’t broken out the numbers, but you all are looking at the strategic breakouts between these three divisions, you are really focusing on some pharma if it happens, happens not great. I’m just trying to get the different buckets of this guidance?

[Phil Ankeny:]

Yeah, we’re not prepared to give guidance by segment, but your math there was probably giving not enough credit to IVD, because you were annualizing that at 10 million whereas if you annualize it today you are going to be more like 12 based on the recent quarter. So and I’m not saying that’s the number, I’m just saying your annualization math is just slightly on.

[Suraj Kalia:]

Okay. And where does the head count Gary from when you joined to let’s say how should we look at it at the end of fiscal, let’s say, ‘11 if we want to pick that number? Thanks for taking my questions.

[Gary Maharaj:]

Sorry, Suraj the question was….

[Suraj Kalia:]

The head count, I mean, you came in, you’ve obviously realigning, I’ve heard derisking, this is the probably the first call I’ve heard where derisking has been emphasized quite a bit. Yeah, part of that derisking in my vocabulary is really getting rid of ways to whatever and I’m just trying to understand where does the head count when you joined versus and how should we look up on it down the fiscal year?

[Gary Maharaj:]

Our head count will be as we look at opportunities we will certainly consider adding head count, but for now we have the talent we need to grow the business. I have certainly been very scrutinizing of any head count additions as anyone our team could tell you over the last three to four months, but as we look at growing this business in the future we’ve got really an incredibly talented team of people that I intend to help our team’s refocus and reallocate on the projects that have the best economic lags. And so inside the SurModics currently, I see as I’m certainly satisfied with it.

[Suraj Kalia:]

Fair enough. Thanks guys.

[Gary Maharaj:]

Yeah, thank you.

[Operator:]

Thank you. (Operator Instructions) Our next question is from the line of Beth Lilly with Gabelli Asset Management. Please go ahead.

[Beth Lilly:]

Good afternoon.

[Phil Ankeny:]

Hi, Beth.

[Gary Maharaj:]

Hi, Beth.

[Beth Lilly:]

I had a couple of question, one is can you – I might have missed this, but can you help me understand why you are increasing the outlook for the year? Why you pumped up your revenue expectations?

[Phil Ankeny:]

Well, right now we’re tracking quite well. First half revenue is just under 33 million and based on where we were with the previous guidance we were starting to feel that we were doing well within that range, in fact looking beyond the range and even more so in the case of EPS. And so we wanted to make sure that the market had a more current view of what we see as the opportunity and what we think we can deliver.

[Beth Lilly:]

I guess what I'm trying to drill down to, Phil, is which business is tracking above your expectations?

[Phil Ankeny:]

All of them.

[Beth Lilly:]

Okay. And when you say all of them are you including Pharmaceuticals?

[Phil Ankeny:]

Yes.

[Beth Lilly:]

Okay. And would you say that it’s the result of the environment, the overall better environment for your product or is it a result of, maybe the work that Gary and the company being reinvigorated?

[Gary Maharaj:]

I can answer that. I think in the case of the company, I think, it’s due to our employees and the teams. It was very difficult in our pharma business after we made that announcement, the thing that we – it would be difficult to sing more contracts. But because of the capabilities of the facility and the team down there many of those that were in the pipeline successfully signed and in fact have re-upped even in this last few month period because of successful development by our pharma team. The same goes for IVD business. We have become part of more kits of the components, components have become part of more kits. We have seen some reordering, I would believe, of some customers restocking in the last quarter. But the best thing I’d say our teams are executing. They seeded the capability of this company and they want to get back to the winning ways. I don’t know if that answers your question, but it’s certainly something I have felt since I have joined.

[Beth Lilly:]

The second question is and I want to just applaud you for breaking out the divisions in terms of the operating margins and the operating profits from the different businesses. It’s very helpful, extremely helpful. Can you, you look at the businesses and the number, on a percentage of revenues basis it jumped around a lot. But if we look at like for example Medical Device on a six-month basis, the operating margin is 49% and on a three-month basis it’s 47%. So, let’s take 47%, is it fair to say that the operating sustainability of that business, the margin that I can use going forward would be kind of mid 40s?

[Gary Maharaj:]

Yeah, I think that’s a reasonable neighborhood. It depends a little bit on mix of our revenue in that business depending on reagents and R&D revenue as well as the royalties piece. And so it does vary from quarter-to-quarter in that mix and so that will drive it, but your neighborhood, I think, is one that we’d be comfortable with.

[Phil Ankeny:]

We certainly want to keep it above 40. If there are some capacity based capital investments you might see a small step decrease as we, when utilization back up. And then in the last answer I forgot to mention our Medical Device team, on the last quarter team that there was, there wasn’t a week that we weren’t signing a new licenses and royalties and so tribute to them as well. But certainly we want to keep it above the 40% mark.

[Beth Lilly:]

Okay. And what about on IVD, the number as a percentage of revenue jumped up this quarter, but it seems to be, let’s say, the mid 20s, would that be a fair assumption to make for that business, mid 20%?

[Phil Ankeny:]

Again that one because of how smaller group that is it will fluctuate more. And so yeah we had pretty strong revenue growth this quarter and so it will depend again a little bit on mix and what not. But your neighborhood is reasonable.

[Beth Lilly:]

Okay. And so the reason was also strong this quarter one the revenues were strong, but two was it a mix issue that did higher margin mix?

[Phil Ankeny:]

It mostly just the revenue increase relative to not a lot of additional expense other than the COGS.

[Beth Lilly:]

Okay. All right and then my last question is, if you look at the first quarter the revenue in the quarter from Medical Device lets call $10 million to make easy math. What percent of that $10 million is Cypher related or it comes from Cypher.

[Gary Maharaj:]

We don’t break that out and J&J won’t let us disclose exactly what the percentages. But the royalty percentage a lot of people on the street have modeled in the neighborhood of 1% on their sales and so if you backed in to what their, their numbers would suggest it. I wanted to say its around $113 million if you do that 41% year-over-year decrease it gets you to about that number and so if you use 1% of that, that’s what you say would becoming from the Cypher royalty.

[Beth Lilly:]

So, the math is $1 million or so.

[Gary Maharaj:]

Right.

[Phil Ankeny:]

Or so.

[Beth Lilly:]

Yeah, okay. Great and then I just want to be clear on this. So you have the strategic alternative plan will is on track and you will have some resolution by the end of your fiscal year correct?

[Gary Maharaj:]

I misspoke, at the end of the calendar year.

[Beth Lilly:]

The end of the calendar year, meaning December?

[Gary Maharaj:]

Yes.

[Beth Lilly:]

Got it. All right just wanted to be clear on that. All right perfect. Thanks so much.

[Gary Maharaj:]

Thank you.

[Phil Ankeny:]

Thanks Beth.

[Operator:]

Thank you. And gentlemen at this time, I am showing no further questions I will turn it back to you for any closing comments.

[Gary Maharaj:]

Thank you. I wanted to thank everyone again today for participating in this quarter conference call and we will look forward to speaking with you on our third quarter conference earnings call in July. Thanks, everybody.

[Operator:]

Thank you, sir. Ladies and gentlemen, this does conclude the SurModics second quarter 2011 earnings conference call. Thank you very much for your participation. You may now disconnect.