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SurModics Inc. Reports Operating Results (10-Q)

February 09, 2009 | About:
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SurModics Inc. (SRDX) filed Quarterly Report for the period ended 2008-12-31.

SurModics Inc. is a leading provider of surface modification technologies in the areas of biocompatibility site specific drug delivery biological cell encapsulation and medical diagnostics. SurModics partners with the world's foremost medical device pharmaceutical and life science companies to bring innovation together for better patient outcomes. Recent collaborative efforts include the implementation of SurModics' Bravo drug delivery polymer matrix as a key component of the first-to-market drug-eluting coronary stent. SurModics is also active in the ophthalmology market with a sustained drug delivery system that is currently in human trials for treatment of retinal disease. A significant portion of SurModics' revenue is generated by royalties earned from the sale of our customers' commercial products. SurModics Inc. has a market cap of $350.34 million; its shares were traded at around $19.09 with a P/E ratio of 16.3 and P/S ratio of 3.61. SurModics Inc. had an annual average earning growth of 41.3% over the past 10 years.

Highlight of Business Operations:

Therapeutic. Revenue in the Therapeutic segment was $58.9 million in the first quarter of fiscal 2009, a 222% increase compared with $18.3 million in the prior-year period. The increase in total revenue reflects the recognition of revenue of approximately $34.8 million that had previously been deferred, associated with the Merck collaborative research and license agreement and recognition of a $9 million milestone payment received from Merck in the first quarter of fiscal 2009 associated with the termination of the triamcinolone acetonide development program. The Merck agreement was terminated effective in the first quarter of fiscal 2009. Excluding these significant event-specific items, revenue decreased $3.2 million or 17%. Therapeutic revenue is further characterized by the market-focused areas detailed above.

We recorded total restructuring charges of approximately $1.8 million in connection with the reorganization. These pre-tax charges consisted of $0.5 million of severance pay and benefits expenses and $1.3 million of facility-related costs. The restructuring is expected to result in $2.2 million in annualized cost savings. We anticipate the majority of the costs to be paid in the next twenty four months.

Other income, net. Other income was $0.6 million in the first quarter of fiscal 2009, compared with $1.7 million in the first quarter of fiscal 2008. Income from investments was $0.7 million, compared with $1.0 million in the prior-year period. The decrease primarily reflects lower investment balances and lower yields generated from our investment portfolio as interest rates declined over the past twelve months. We also recognized our pro rata net loss on our equity method investments partially offset by $0.3 million of gains on our investment portfolio in fiscal 2009. In fiscal 2008, other income reflected a $0.9 million gain on our investment in ForSight Newco II, which was acquired by QLT Inc. in October 2007. Partially offsetting this gain was our pro rata net loss on our equity method investments.

As of December 31, 2008, the Company had working capital of $21.2 million. Working capital decreased $12.7 million from the September 30, 2008 level driven principally by higher accrued income taxes payable, lower deferred revenue as the contract with Merck was terminated, lower cash balances and lower accounts receivable. Our cash, cash equivalents and short-term and long-term investments totaled $69.9 million at December 31, 2008, a slight decrease from $72.0 million at September 30, 2008. The Companys investments principally consist of U.S. government and government agency obligations and investment grade, interest-bearing corporate debt securities with varying maturity dates, the majority of which are five years or less. The Companys policy requires that no more than 5% of investments be held in any one credit issue, excluding U.S. government and government agency obligations. The primary investment objective of the portfolio is to provide for the safety of principal and appropriate liquidity while meeting or exceeding a benchmark (Merrill Lynch 1-3 Year Government-Corporate Index) total rate of return. Management plans to continue to direct its investment advisors to manage the Companys investments primarily for the safety of principal for the foreseeable future as it assesses other investment opportunities and uses of its investments.

In November 2007, our Board of Directors authorized the repurchase of $35.0 million of the Companys common stock in open-market transactions, private transactions, tender offers, or other transactions. The repurchase authorization does not have a fixed expiration date. During the three months ended December 31, 2008, the Company repurchased 499,148 shares for $11.8 million at an average price of $23.54 per share, leaving $10.5 million remaining available for future purchases under the repurchase program. In addition, there were trades executed in December for 42,500 shares that were settled in January 2009 which totaled approximately $1.0 million.

As of December 31, 2008, we had no debt, nor did we have any material credit agreements established. We believe that our existing cash, cash equivalents and investments, together with cash flow from operations, will provide liquidity sufficient to meet our liquidity needs for the next twelve months. Nevertheless, we may enter into credit arrangements from time to time when we consider market conditions to be favorable. Our remaining anticipated liquidity needs for fiscal 2009 include but are not limited to the following: capital expenditures related to our Alabama facilities in the range of $22 million to $24 million; general capital expenditures in the range of $1.5 million to $5.5 million; contingent consideration payments associated with our fiscal 2009 acquisition of certain assets from PR Pharmaceuticals, Inc. in the range of $1.5 million to $2.5 million; contingent consideration payments related to our fiscal 2007 acquisitions of Brookwood Pharmaceuticals, Inc. and BioFX Laboratories, Inc. in the range of $3 million to $5 million; and any amounts associated with the repurchase of common stock under the authorization discussed above.

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