Surmodics Q4 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Welcome everyone to Zermotix 4th Quarter and Fiscal Year 2023 Earnings Call. Please note that this call is being webcast. The webcast is accessible through the Investor Relations section of the Surmodics website at www.surmodics.com, where an audio replay will be archived for future reference. An earnings press release disclosing Thermotix Quarterly and full year results was issued earlier today and is available on the company website as well. Before we begin, I would like to remind everyone that remarks and responses Your questions on today's call may contain forward looking statements.

Operator

These forward looking statements are covered under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Terminix's future financial and operating results For other statements that are not historical facts, please be advised that actual results could differ materially from those stated or implied by Surmodics' forward looking statements resulting from certain risks and uncertainties, including those described in the company's SEC filings. Surmodics disclaims any duty to update or revise these forward looking statements as a result of new information, future events, developments or otherwise. This call also includes reference to a non GAAP measure because Neuromodix believes they provide useful information for investors. Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Gary Maharash, Surmodics' President and Chief Please go ahead, sir.

Speaker 1

Thank you, operator. Welcome everyone to our Q4 fiscal year 2023 earnings 1st, let me provide you with a brief overview of what we plan to cover today. I'll start off by discussing our financial fiscal 2024. Tim will then cover our Q4 financial performance in greater detail and review our fiscal 2024 guidance, which we introduced in our press release today. We'll then open the call for questions.

Speaker 1

With that, let's begin with a discussion of our financial performance. In the Q4, we generated total revenue of $28,000,000 representing 8% year over year growth. Our revenue performance exceeded the high end of our guidance range, which implied year over year growth of 5% for the 4th quarter due to strong performance in both of our business segments. Importantly, our total revenue performance in the 4th Quarter was impacted by a $1,000,000 headwind related to the year over year decline in the SurVeil DCB license fee revenue. Excluding the SurVeilite DCB license revenue, we achieved total revenue growth of 12% year over year.

Speaker 1

Revenue from our Medical Device segment grew 8% year over year to $21,000,000 This again from our Performance Coatings, product sales including major contributions from our Pounds arterial thrombectomy platform and R and D services revenue. We're also quite pleased to see robust contributions from our in vitro Diagnostics or IVD segment as well. As we had anticipated in our last earnings call, our IVD segment returned to growth in the 4th quarter, increasing 7% year over year to $6,900,000 with customers returning to more normalized purchasing patterns after taking steps in recent quarters to manage COVID era elevated inventory levels. In addition to our performance in the Q4, we achieved notable year over year improvements in our operating results, delivering adjusted EBITDA of $1,700,000 a $4,200,000 improvement compared to the Q4 of last year. Importantly, we generated $1,300,000 of cash flow from operations during the quarter as well.

Speaker 1

Now it's important to note that our 4th quarter organization that we had contemplated in our full year guidance. We did this while we focused on executing against the SurVeil stocking orders, which Wael will describe shortly. We expect to resume these activities and investments in fiscal 2024. Our financial performance in the 4th quarter culminated in a strong year overall. We delivered total revenue included $29,600,000 of license fee revenue related to our SurVeil DCB, including $25,000,000 recognized Excluding SurVeil DCB license fee revenue, we grew total revenue by 9% year over year in fiscal 2023, driven by 14% growth in our medical device business, which more than offset a 3% decrease in our IBD business.

Speaker 1

We also closed out the year strong from a capital standpoint. Cash provided by operations in fiscal 2023 totaled 10,500,000 And we ended the year with over $45,000,000 of cash and investments to support our future operations. Turning now to our operational progress in the 4th quarter. We are pleased to bring fiscal 2023 to a strong by delivering on the 3 strategic objectives that we laid out at the beginning of the year, which as a reminder were as follows. First, to achieve the FDA premarket approval or PMA for our SurVeil DCB and support our partner Abbott as they prepare to commercialize the product second, advance the initial commercialization of our pumps arterial thrombectomy and sublime radial platforms and third, Drive revenue and cash flow growth from our Medical Device Performance Coatings offerings and IVD businesses.

Speaker 1

With each Objective as our context, I'll discuss our progress during the Q4 with respect to each one, beginning with SurVeil. After securing the FDA PMA for SurVeil, which we announced on June 20th, our team has been intently focused on supporting Avata, our commercial partner, as they prepare for U. S. Commercialization. As we shared on our last earnings call, our top priority during the Q4 was to ensure Initial commercialization of the SurVeil DCB.

Speaker 1

With this as a backdrop, I'm pleased to report that We received Abbott's initial stocking order in mid August consistent with our stated expectations. Our team began manufacturing products through the remaining weeks for the Q4 and the production process has been running smoothly. In October, we made the first of our shipments for the initial stocking generating our 1st commercial revenue related to the SurVeil DCB in the Q1 of fiscal 20 before. As a reminder, when shipping SurVeil orders to our commercial partner, we recognize 2 revenue streams under the terms of our agreement, An agreed upon transfer price per unit and an estimate of the profit sharing, both of which will be reported as product revenue upon shipment within our Medical Device segment. As we have shared previously, we expect to fulfill Abbott's initial stocking order through multiple shipments following that initial shipment made in October with additional shipments in the remaining months of our first In tandem with this effort, we've continued to engage with Abbott's vascular team as they plan to commercialize the product.

Speaker 1

While we are limited in terms of what we are able to communicate publicly about Abbott's commercialization plans, I'm pleased to share that we expect a commercial and the prospect of bringing SurVeil BCB to physicians and patients, and we're equally excited about its potential as a key growth catalyst for the following reasons. From a product standpoint, SurVeil reflects our industry leading expertise in developing drug delivery and drug coating technologies. Its patented coating technology provides unmatched uniformity and consistency of drug distribution along with lower particulate with the most prominent drug coated balloon in the market, a device which uses 75% more tachlacastole And as the 2 year results of our 4 46 patient head to head TRANSCEND trial have demonstrated. As we look forward to Sharing the 3 year results of this trial, which will be presented at this symposium on November 15th. From a market standpoint, We believe that SurVeil DCB addresses a $1,000,000,000 market opportunity in peripheral artery disease based on the estimated 500,000 above the knee procedures performed in the U.

Speaker 1

S. Each year. Of these 500,000 procedures approximately a quarter of and are currently being addressed using drug coated balloons, which provides a significant opportunity for SurVeil's DCB. We're also pleased to see the resolution in the marketplace about potential risks posed by paclitaxel coated devices. In its letter to healthcare providers at July 11, the FDA communicated that the risk of mortality associated with these devices and is no longer supported based on the totality of the available data and analyses.

Speaker 1

We believe that this may be favorable to increasing cactotaxel drug code to balloon market adoption. Importantly, the product labeling for our SurVeil DCB It's consistent with the FDA's updated view. Lastly, from a partnership standpoint, we believe Abbott is well positioned to take advantage of these a complementary suite of existing products, including stents and artherectomy devices. Our SurVeil DCB fills an important gap in their portfolio for peripheral artery disease, providing them with a complete and comprehensive offering for the existing and potential customers. We look forward to future progress in this market and remain committed to supporting them.

Speaker 1

Moving to our second strategic objective, advancing Initial commercialization of our pound's arterial thrombectomy and sublime radial platforms. We ended the 4th quarter with 23 territory managers at quarter end compared to 22 at the beginning of the quarter. With an average rep tenure of 16 months at quarter end, our team continued to make progress through what we have referred to as the early market development for pounds and supplying products, working through the value analysis committees at new accounts and driving repeat orders from Existing customers. From a new account perspective, we expanded our base to over 235 customers at the end of fiscal 2023 compared to more than 215 at the end of the 3rd quarter and just over 100 at the end of fiscal 2022. From a utilization standpoint, we continue to see attractive reorder rates from our existing customers along with a notable uptick And we signed our 1st integrated delivery network or IDN contract with a major health system operating across more than a dozen states for all three products.

Speaker 1

We're excited about the expanded access to this contract we'll provide as our reps continue to expand their pipeline of prospective customers. The feedback we've received from new and existing physician customers this past quarter clearly demonstrates the advantages of our Pounds and Sublime products Many of our new users have adopted the Pounds arterial thrombectomy platform after using it during a case with Other interventional products and approaches that they traditionally employ fails. This unique ability of the Palms device to Quickly and easily be deployed in situations like this even with first time physicians and without the need for on the table instantly helps them recognize the value it brings. Likewise, All Sublime radial access platforms ability to treat patients from the wrist to the foot, reducing their length And lastly, from a revenue contribution standpoint, I'm pleased to report that we continued our recent momentum With cordly Pounds and Sublime sales exceeding $1,000,000 in revenue for the 3rd consecutive quarter now. Our performance in the 4th quarter ultimately enabled us to generate growth in sales of these products in excess of 2 50% for the full year fiscal 2023, Fueling the 22% growth in Medical Device segment product sales that we achieved this year.

Speaker 1

In a relatively short amount of time, Our small sales force has established a solid foundation for future growth, positioning us to drive performance in the years ahead. We look forward to building on their achievements in fiscal 2024. 3rd, turning to our 3rd strategic objective, which is driving revenue and cash flow from our Medical Device Performance Coatings offerings and IVD business. For full year 2023, our combined revenue from these two areas of our business increased 5%, near the end of our long term goal of generating low to mid single digit growth on an annualized basis. Our Medical Device Performance Coatings team delivered an exceptional year with growth of 9% in fiscal 2023, driven primarily by Strong sales of our Performance Coating reagents coupled with higher royalty revenue from broad based growth across applications as procedure volumes in the medical device industry returned to more normalized levels as compared to fiscal 22.

Speaker 1

Revenue from our IVD business decreased 3% in fiscal 2023 as customers focus Reducing safety stock levels due to lower demand across the industry for COVID testing products and the normalization of the supply chains. With that As we shared in our Q3 earnings call, we believe this macro related industry headwind is largely behind us and we are pleased to see return to growth that we anticipated in 4th quarter with IVD revenue increasing 7% on a year over year basis. In addition to delivering 5% revenue growth A combined basis in fiscal 2023, our Medical Device Performance Coatings offerings and IVD businesses Generated significant cash to support commercialization and enhancement of our vascular interventions portfolio. Before discussing our priorities in fiscal 2024, let me take a minute to highlight some of the recent progress with respect to our new product pipeline. Notably, our regulatory team engaged the FDA to secure the 510 Thank you, Clarence, for the Preside Solutions, our latest and most advanced hydrophilic coating technology ever created.

Speaker 1

PREZYDE is designed to be easily applied and covalently bonded to medical devices in the neurovascular coronary and peripheral vascular spaces using our patented photo link curing processes. It's specifically formulated to provide industry leading lubricity, Reducing friction for these devices to access and navigate the most torturous vascular pathways. These benefits will enable physicians to to deliver enhanced coating durability, resulting in a reduction of particulates, which will promote compliance especially in the neuro market segment, but as other market segments as well. This development and regulatory clearance of Preside, our new coating Technology reflects our continued commitment to innovation and industry leadership in the medical device coatings industry, which has been a defining area of differentiation and a core competency for Surmodics throughout much of our history. We are pleased to announce the commercial launch of Preziide in October and believe it will raise the standard of performance for hydrophilic coatings We facilitate the use and functionality of catheters across many complex applications and secure our leadership and competitive position.

Speaker 2

And lastly, with respect to

Speaker 1

our POND'S venous thrombectomy system, after working through the limited product availability we experienced in the 3rd quarter, which paces the initial months of our limited market evaluation. We are pleased to have completed 45 cases through the end of The feedback we have gathered from physician users in this limited market evaluation has highlighted the device's ability to effectively address a variety of different clot morphologies. Extracting these clots and Utilizing its architecture of a screw to macerate acute and subacute clots and our physicians Also appreciate the unique ability to adjust the diameter of the basket, allowing them to reduce the stress on the interior of the vein and avoid damage to the valves and the vein wall itself, and it also allows them to make multiple passes with a single device. This and other product feedback we've gathered to date has been invaluable enhancing our appreciation for the device's primary clinical advantage when used in a real world setting and informing our approach for training new clinicians on the device to maximize its effectiveness in the multiple scenarios that they'll encounter with patients. We look forward to gaining insight through some additional LME cases as we prepare for commercialization in the first half of fiscal twenty twenty four on a limited basis before commencing a full launch in the second half of the year.

Speaker 1

Setting back, fiscal 'twenty three was a year of pivotal success in the face of major challenges. The response to a significant regulatory setback With the receipt of a not approvable letter in the Q2 for the SurVeil DCB, we quickly engage and proactively engage with the FDA to amend our PMA application, Ultimately resubmitting and securing the PME from the FDA ahead of our expectations. In tandem, we took Important steps to control the use of capital beginning in the second quarter, executing superbly against this plan to reduce our average quarterly cash in in the second half of the fiscal year. And then despite these spending reductions, we continue to advance initial commercialization of Pounce Arterial And Sublime Radial Products, fueling the Medical Device segment growth in product sales of 22% for the fiscal year. And We drove strong revenue and cash flow from our Medical Device Coatings offerings and IVD businesses on a combined basis.

Speaker 1

And lastly, we significantly enhanced our cash balance by achieving a $27,000,000 milestone payment related to the SurVeil PMA approval and raising $19,300,000 in net proceeds on our new 5 year credit agreement. With durable and profitable core businesses, a portfolio and pipeline of key catalysts and more than $45,000,000 of cash and investments to support our operations and Access to approximately $61,000,000 in available debt capital to provide additional financial flexibility, we believe we are strategically positioned for future success. As we look at As we look ahead to fiscal 2024, our team is focused on executing the following strategic objectives. First, to drive our near term growth catalyst in our vascular interventions portfolio, namely SurVeil, Pounce and Sublime, including to the launch of our Pounce Venus products platform 2, to drive durable growth and cash flow generation across our core Medical Device Performance Coatings and IBD businesses and 3, to enhance our pound, sublime and medical device performance coatings portfolios by developing new products and line extensions to facilitate our long term growth. As our guidance range implies, we expect to accelerate our total revenue growth profile in fiscal 2024, Driving growth of 9% or higher, excluding license fee revenue related to our SurVeil DTE.

Speaker 1

I also want to stress that cash efficiency remains a top priority for our organization Despite our influx of capital and even in light of the large number of projects we have, Tim will provide more detail in his commentary. As we pursue these three strategic objectives, we are focused on executing efficiently as possible to maintain a healthy balance sheet and position Simodix for strong, sustainable long term growth and value creation going forward. I'd like to thank my colleagues across The entire organization for their contributions to our success this past year and their commitment to our mission of helping humanity by improving the detection and treatment of disease. Thank you as well to our customers and shareholders for their ongoing support. With that, I'll turn the call over to Tim Arens, our Chief Financial Officer, to discuss our Q4 results and fiscal 2024 guidance.

Speaker 1

Tim?

Speaker 2

Thank you, Gary. Unless noted, all references to 4th quarter results are on a GAAP and year over year basis. Total revenue for Q4 of fiscal 2023 increased $2,000,000 or 8 percent to $28,000,000 Excluding SurVeil DCB license Total revenue increased $3,000,000 or 12 percent to $26,900,000 Our earnings press $1,000,000 or 7 percent to $15,400,000 Medical device product revenue increased $570,000 or 7 to $8,500,000 driven primarily by increased sales of our Pounce Thrombectomy device platform as well as our Performance Coating reagents. This growth was offset in part by a decrease in proprietary specialty catheter product sales due to the completion of a customer development program. IBD product revenue increased $400,000 or 6 percent to $6,800,000 Our diagnostics business benefited from strength in our microarray slide and antigen offerings.

Speaker 2

Royalty and license fee revenue Increased $540,000 or 6 percent to $10,100,000 Royalty and license fee revenue from our Performance Coatings increased $1,500,000 or 21 percent to $9,000,000 compared to the prior year period. The Q4 benefited from improved U. S. Procedure volumes. In addition, we continue to see growth from customer devices in our Serene coating as well as growth from recent customer product launches.

Speaker 2

SurVeil drug coated balloon license fee revenue declined $1,000,000 or 40 R and D services revenue increased $470,000 or 23 percent to 2,600,000 The increase was primarily due to higher customer demand for Performance Coatings Services in our Medical Device business, which was impacted in the prior year period by our customers' supply chain challenges. Moving down the P and L. Product gross margin was 54.2% compared to 61.1 percent in the prior year period. As we discussed on last quarter's call, the decrease was expected Production and Inefficiencies, including exploration of inventory associated with low production volumes during the scale up phase following our initial commercialization. R and D expense, including costs related to clinical and regulatory activities, decreased $2,600,000 21% to $9,700,000 reflecting the benefits of the spending reduction plan we implemented during the Q2 of fiscal 2023.

Speaker 2

R and D expenditures were favorable to our expectations as a result of timing for certain projects in our pipeline. SG and A expense decreased $1,000,000 or 7% due to lower direct sales headcount compared to the prior year period related to the aforementioned SG and A expenditures were favorable to our expectations as a result of the timing of investments in our commercial organization. Our Medical Device business reported an operating loss of $2,400,000 compared to $6,200,000 in the prior year period, reflecting our disciplined expense management, favorability and timing of operating expenditures and broad based revenue growth. Our IBD business reported operating income of $3,200,000 or 46 percent of IBD revenue compared to $2,800,000 or 43 of revenue in the prior year period, reflecting our return to revenue growth this quarter. Turning to income taxes.

Speaker 2

We reported an income tax benefit of $9,500,000 compared to an income tax expense of $7,900,000 in the prior year period. As we discussed on last quarter's call, the substantial tax benefit was expected and offset the substantial tax expense recorded in the Q3 of fiscal 2023 as a result of the 27,000,000 dollar surveyor PMA milestone. As a result, the $7,900,000 tax expense in the Q4 of fiscal 2022 Included a non cash charge of $10,200,000 to establish a full valuation allowance against U. S. Deferred tax assets.

Speaker 2

GAAP net income was $6,700,000 or $0.47 per diluted share compared to a net loss of $14,700,000 or a loss of $1.06 per diluted share in the prior year period. Non GAAP net income was $7,500,000 or $0.53 per diluted share compared to non GAAP net loss of 3,700,000 includes adjustments for stock based compensation expense in both periods. Our earnings press release includes detailed reconciliations of GAAP to non GAAP measures. Moving to the balance sheet. We began the Q4 of fiscal 2023 with $44,600,000 in And $29,400,000 in long term debt.

Speaker 2

Cash provided by operations during the Q4 was 1 point expenditures totaled $750,000 As of September 30, 2023, we had $45,540,000 in cash and investments, $29,400,000 in long term debt and approximately $61,000,000 in additional borrowing capacity under our existing credit agreement. Turning now to fiscal 2024 guidance. We expect fiscal 2024 total revenue to range from $116,000,000 to $121,000,000 representing a decrease of 13% to 9%. Excluding SurVeil DCD license fee revenue, we expect revenue to range from $112,000,000 to $117,000,000 representing of 9% to 14%. SurVeil DCB license fee revenue is expected to be approximately $4,000,000 in fiscal 2024.

Speaker 2

This compares to $29,600,000 received or earned in fiscal 2023. We expect fiscal 2024 GAAP loss per diluted share to range from a loss of $1.55 to a loss of 1 point to $1.20 Non GAAP loss per diluted share is expected to range from a loss of $1.32 to a loss of $0.97 per share. I'll now share a few additional considerations for modeling purposes. With respect to our fiscal 2024 total revenue guidance, Product revenue is expected to be approximately 60% of total revenue, driven largely by contributions from our product growth Specifically, we expect combined product revenue from our SurVeil, Pounce and Sublime products of at least 13,500,000 Our guidance includes SurVeil DCB product sales to Abbott for the initial stocking order in the Q1 of fiscal 2024 and subsequent orders throughout the remainder of the year. Note, SurVeil DCB product revenue consists of revenue from both the transfer price and estimated profit sharing, the 2 revenue streams under our development and distribution agreement with Abbott.

Speaker 2

Revenue associated with our Medical Device Performance Coatings offerings and IVD business is expected to grow in the low to mid single digits We expect operating expenses excluding product costs to be flat to slightly down. We expect R and D expense to range from $43,000,000 to $44,000,000 representing a decrease of 8% to 6%. We expect SG and A expense to range from $54,000,000 to $55,000,000 representing an increase of 4% 6% as we invest in our commercial organization. Interest expense is expected to be approximately $3,500,000 consistent with the prior year. Finally, our EPS guidance reflects full year tax expense of 1 point $5,000,000 to $2,500,000 With respect to our revenue growth in the Q1 of fiscal 20 1st quarter total revenue to range from approximately $29,500,000 to $30,500,000 representing an increase of approximately 18% to 22%.

Speaker 2

Lastly, with respect to cash utilization, at At the end of fiscal 2023, we had $45,400,000 of cash and investments, which included $3,900,000 of available for securities. In fiscal 2024, we expect to finish the fiscal year with approximately $27,000,000 to $31,000,000 of cash and investments. Let me take a minute In fiscal 2023, our cash and investments increased by $26,000,000 year over year. Importantly, this $26,000,000 increase drawn from our term loan and revolving credit facility. Setting aside the $27,000,000 from the SurVeil PMA milestone payment And the $19,300,000 in net proceeds from our MidCap credit agreement, cash and investments decreased approximately $20,000,000 fiscal 2023.

Speaker 2

By comparison, in fiscal 2024, we expect a year over year decrease in cash and investments to range from approximately $18,000,000 to $14,000,000 reflecting an improvement in the use of cash and investments of approximately $2,000,000 to 6 Expectations for cash use in fiscal 2024 reflect the following assumptions. The receipt of a 3 point Capital expenditures of up to $5,000,000 compared to $2,900,000 in fiscal 2023, which includes certain investments postponed last year part of our spending reduction plan and payments totaling approximately $2,700,000 to satisfy obligations related to previous acquisitions. Lastly, it's important to note that our Q1 historically requires a higher use of cash to fund our working capital needs, such as our annual employee bonus payments and our annual prepaid insurance premiums. As Gary mentioned, Despite our recent influx of capital, cash efficiency remains a top priority for the organization. We remain focused on disciplined expense management and optimizing optimization of working capital.

Speaker 2

And importantly, our guidance assumes No further borrowings during fiscal 2024 under our credit agreement. With that, operator, we would now like to open the call to questions.

Operator

Thank We do ask that you limit yourself to one question and one follow-up. And our first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Speaker 3

Good morning. A lot to unpack in the various comments you guys just made and to limit myself to Two questions. I'm going to just try to hit the high points, I guess, as I see them. I'm curious When we contemplate that Abbott has paid you approximately $100,000,000 development These related to SurVeil and you've just given us year 1 sort of guidance For SurVeil, that includes the revenue you anticipate from Pounce and Sublime and SurVeil of $13,500,000 How should we think about whether this product has the potential to meet the expectations that you have for it And that your partner Abbott might have contemplated when they paid you the $100,000,000 Thank you.

Speaker 1

Thanks, Brooks. First of all, it's absolutely is within the confidence limits that we set for We started this journey a long time ago. Especially as I would add in our meetings with Abbott, It reminds me of why we always saw them as a good partner and that continues to be demonstrated in meeting with their Commercial team, the other thing is, I'll just offer this and this is not an Abbott statement, but the recent acquisition CSI gives them a really nice sales footprint and they do have the trifecta in this vessel in superficial femoral artery in the fempop segment. They have incredible stent in Supero. Now they also have the arthrectomy devices that came in CSI.

Speaker 1

And The 3rd and missing component to really compete is a drug coated balloon with an antiarisonotic drug. So we're excited. My interactions with them have been exciting as well. And now with the sort of removal of this veil of paclitaxel causing a late mortality signal, it's gone. Just at a recent ECT and VIVA meetings, it continue to present how That signal has literally died and these devices are better for patients.

Speaker 1

So all the momentum we believe is stacked positively. Now when we look at guidance, I'll do it over to Tim, there are estimates we have to make and there are actuals. And so we have to Be cautious in how we make those estimates going forward. I'll turn that over to Tim to give some color.

Speaker 2

Thank you, Gary. Brooks, thank you for the question. I think The important thing for you and everyone to realize is the most important three words that I mentioned in guidance was of at At least $13,500,000 The other thing I think people need to keep in mind too is we commented about Abbott's We have a question and answer session. Please bear in mind this is 3 to 9 months of potential product revenue for Surmodics from Abbott's commercialization. We'll have a lot more I'll say on this as we go through the fiscal year, but keep in mind this does not reflect a full 12 months of revenue from Abbott.

Speaker 1

The last thing I'll add, Brooks, is Professor Schneider is presenting our 3 year data Summarizing that data afterwards, but the thing you want to look for in these devices is continued durability of the signal, especially as compared to the market leading device. And so once again, we at Abbott are the only company that has a pivotal Head to Head randomized controlled trial against this device. No one else has it. And so I think I look forward to that data being presented next week. I'll be there.

Speaker 3

That's great. I appreciate all that color. Let me ask one more. As we think about the world that You've developed here guys, you have the beginning of significant experience With a partner in Abbott with Sublime, you also have the beginning of essentially a go it alone Strategy with regard I misspoke, with regard to SurVeil and Abbott, but You go it alone with Pounds and Sublime. I have a sense you have a deep and robust pipeline of new products.

Speaker 3

Bear with us just a little bit about how you think about going to market with some of the high potential products That are still in your pipeline today?

Speaker 1

Absolutely. We to compete In markets, especially in the thrombectomy market, you can't do just the minimum to get the first product Iteration out, you have to have the follow on products. And as I said, we got FDA clearance on the pound's Low profile, which will allow us to go down close to the ankles. And so we have other parts of these product expansions. What we're seeing is, you've heard me say the future has already been created.

Speaker 1

It's not evenly distributed. What I mean by that is, We're not losing, right? We have 20 something salespeople versus in some cases 3 50, almost 400 or just to say we did average of 10 times our sales force. On the piecewise basis, We're winning. And I would suggest without hyperbole, we're winning every time.

Speaker 1

And that's an important thing as we build out this Now clearly, we have to be cash efficient. And I recognize that this company had the size of the sales force The strategics, for example, we'll be talking about greater than $100,000,000 of revenue ex air, right, just on these product lines. But we intend to go and grow as we go and use our cash efficiently, continue to win and continue to supplement that. So Believe that is a very key strategy. When it comes to drug coated balloons, the competition and the need for a partner like And Abbott really is across multiple product lines, across multiple group contracts and such.

Speaker 1

And That's something we don't have to compete in an already existing market like drug coated balloons. I will say Just getting the 1st group contract under our belt, which is more than 100 hospitals, it's remarkable to me that we were able to get a group contract For all three product lines, pounds, arterial, sublime, we haven't even launched pounds, Venus yet. That's a very significant thing when you think about it, I've not kept up with it, but I don't know any products in my 30 something year history that Gets a group contract for a product that's coming. And so that tells you the appetite and signal And our strength of our competitive position. So feel good to where we are.

Speaker 2

Yes. And I'll just I'll add one quick comment here, Brooks, To Gary's remarks here, I think it's important to recognize what Gary described in terms of the 24 strategic objectives Capitalizing on the near term growth catalysts in the vascular interventions portfolio. And you've heard Gary mention Pounce Venus. There's a few other And we our guidance does reflect minimal, I should say, modest revenue contributions from the commercialization of those products. So again, this year we'll not be seeing a full 12 months of revenue generation from some of the catalytic

Speaker 1

In our legacy business, our core coatings offerings and diagnostics, The Preside coding is a remarkable achievement. It's something we've worked somewhat behind the scenes for the last 2 years. New intellectual property and for many customers in that business, especially in the neurovascular segment, It's unmatchable. So we're not seeding leadership because we're focused on products. Our technology leadership It's something we have drawn a line and said we will maintain technology leadership in all things that we do.

Speaker 1

So that's just an additional thing on Preside that that's happening and even more things we're working on in the future.

Speaker 3

Great. Thank you for all that color. And I can tell you I am excited about your future.

Speaker 2

Thank you, Brooks. We are too.

Operator

And our next question comes from Mike Petusky with Barrington Research. Please go ahead.

Speaker 4

Good morning. So Tim, just in terms of the assumption around second half I'm sorry, first half Calendar commercial launch for SurVeil, obviously, that's there's, I guess, 180 days range in there. And your assumption, you have to be assuming something there. I mean, is it fair to say you're assuming somewhere in the middle of That time frame in terms of the 13.5 percent or the part of that, the 13.5 percent that's a contribution from SurVeil? Are you assuming Sort of just that that's commercialized for essentially the last 3 months of your fiscal.

Speaker 4

Can you just talk about what you're actually Specifically assuming to get to the contribution you're assuming for the within the 13.5? Yes.

Speaker 1

I'll say one thing and then turn it over to Tim for the detailed So one of the things in the partnership with Abbott, we recognize the competitive dynamics of a launch and the things that they're trying to set up. And so if there's any implied vagueness is because we want to respect that confidentiality as they really gear up for a major Launch. So that explains the wide window even though we may know what the window really is. We want to give them every opportunity to compete effectively with their launch planning. Yes.

Speaker 1

Thank you, Mike. It's a very appropriate question. And As Gary kind

Speaker 2

of got in front of my answer here, I'm limited in terms of what I can specifically say with regard to Abbott, but I can provide some color. And thing for folks to probably appreciate is that the first half of the year will reflect The stocking order that we've been manufacturing and sending to Abbott. And so clearly, the second half of the year is going Be more influenced by Abbott reorders once they're in the market and have commercialized the technology and the product. So I think that's probably the extent of context that I can provide today.

Speaker 4

Could I just ask, are you Assuming any profit share dollars in within whatever contribution you're assuming in the 13.5

Speaker 2

We will and they're very modest. We'll need some time. Obviously, it is an estimation. It's a judgment. And just to probably provide a little clarity for folks, we will need to make assumptions with regard to the units that Shipped to Abbott, how many will actually be sold?

Speaker 2

How many will be used for promotional activities? How much will be expired? We'll have to make assumptions with regard to So there is a bit of a number of variables that we need to estimate. And as you can imagine, we'll learn more about how to Think about these variables once Abbott estimates, but know that it's a modest A portion of that $13,500,000 that I described?

Speaker 1

Yes. Refining the 1st year we'll refine that model, but you can imagine the 1st year predictability Those assumptions and the history of those assumptions being validated, it's going to be challenging for us.

Speaker 4

All right. But there is some estimate of that. I'm assuming that's like on a 90 day trail. Is that right?

Speaker 2

So we'll make the estimate at the time we ship product to Abbott, but there will be a true up. Think of how Surmodics actually goes about estimating our royalty revenue then we collect the actual royalty payments and there is a true up or an adjustment based upon Our estimate versus what we received that will happen over time with Abbott as well.

Speaker 4

90 days or farther out than that?

Speaker 2

It will be quarterly.

Speaker 1

Okay. All

Speaker 4

right. And then last question. I've stretched the boundary of 2 questions, Let me just ask the last question. I guess in terms of the sales effort on Pounce and Sublime, Gary, do you Now that you guys are in a better situation in terms of sort of the The outlook for the future and sort of the vision there and frankly the balance sheet is does more investment And the sales team there makes sense at this point. Thanks.

Speaker 1

If we didn't have The short answer is yes, but it will be go as we go. So in other words, as we start generating Returns from that business will be investing it in that business. We have drawn a line on what we should be investing on a go So, I'll pay attention to our cash forecast, right? Usually, it's revenue and earnings, but cash is a appropriate throttle limit for where the company is right now. Could we go faster?

Speaker 1

I believe so, but we don't want to become a balance sheet Story as a public company in this macroeconomic condition. So we'll grow as we go. We're not going to double the size of the sales force, I can tell you that, but we will be selectively adding. Another key thing is when we do launch the Palms Venus, right, we'll have to be interpreting whether we can go faster again in a very fashion with some more feet on the street. The one thing we have to face as you get GPO contracts which is I don't want to emphasize this, which is remarkable for a company at this stage, right?

Speaker 1

Now in GPO contracts And IDN contracts, you have to demonstrate penetration in that contract. So now we're covering our extra 100 hospitals. And so we will be doing an analysis of where the heat maps are to seed our territory managers and field clinical specialists. But We can't over accelerate there. That's the big discipline we have to put in place this year.

Speaker 1

Can I just ask

Speaker 4

a quick follow-up and this is Sort of a big picture longer term? I mean, if we're having this conversation 3 years from now and Venus has Obviously, been commercialized at that point for 2 plus years. I mean, it is possible that it could be a doubling of the Salesforce, isn't it at that point?

Speaker 1

I mean, it's typical yes. I mean, to really compete well, you eventually need a minimum of 50 Right. You can go up from there. But getting to that 50 and making sure you have the we want to be On the conservative side of sales capacity utilization, right? You always continue to grow.

Speaker 1

You can always fund that. We also have to look at our sources and uses of cash and our debt levels and our senior debt repayment level. So a lot of things come into play there. But yes, 3 years Now you would to be able to support that market growth, you'd have to have a critical mass To play in that market effectively. So and big thing for us Continues to be as we model is what we call the territory managers' contribution margin.

Speaker 1

In other words, we look at gross margin from a territory offsetting selling costs in that territory. So it's not an operating margin thing, but it's a gross margin, which basically tells us gross margin is paying for The selling efforts and selling expenses. And so that's a nice way to look at how we will look at scaling up over time.

Speaker 4

Okay, very good. Well, congratulations, obviously, 2023, a huge pivotal year. Congratulations. Thanks.

Speaker 1

Thank you. Thank you.

Operator

Our next question comes from Jim Sidoti with Sidoti and Company. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking the questions. Just to follow-up on the sales force. Just It says what number or how many sales folks you had at the end of the fiscal year?

Speaker 2

20 Yes. I think we have it in the remarks. I think it's 23, Jim.

Speaker 5

You ended with 23. Okay. And so it sounds like you might add a few as the conditions determine now, but you're not expanding it In a big way in fiscal 2024?

Speaker 1

Not at this point. As I said, we will selectively Seed, we have an incredible sales organization. And so when we're adding, we're looking for really 1st top tier talent and top tier talent that's willing to stretch. Our competitors have Salespeople for like 5 accounts, right? We have salespeople for 50 to 100.

Speaker 1

So they have to be able to stretch They have to come from a great pedigree of success. So we want to keep getting the top tier talent and seeding them. We'll add as we grow, but again, not intending to double it. And the big thing is when we do launch EPON Spenus We feel the uptake of that product. We may decide to add some more, but that's later in the year and clearly within the constraints of what we're seeing in our cash guidance.

Speaker 5

Okay. All right. Now switching over to Abbott. Can you just lay out what are the milestones that have to happen for Abbott to launch the device? And is there a chance it gets Pushed out a little longer?

Speaker 5

Or maybe is there a chance that it happens a little sooner than you indicated so far?

Speaker 1

Yes. And again, I'll repeat what I just said. Some of the bandwidth we have given the launch there with Abbott is Oh, respecting their confidentiality of the contract of when they launch. But as you can imagine, They're professionals at this type of launch and they are doing all of the appropriate preparation of the ground, fertilization and the Because I suspect when they go, they really go with a very specific launch plan and trajectory. So Really our job is to help them with technical information that they are able to use to train their team and to make sure we have high quality That's delivered on time to their docs.

Speaker 1

That's really our role in it. Yes.

Speaker 2

I would say Jim too, we're confident in the timeframe that Abbott provided in the first half of calendar year twenty twenty four. And you can imagine there could be reasons why they would get out earlier and you can also imagine that there are reasons why maybe they would kind of move that more towards the second half of that Horizon. So we'll just ask you to stay tuned. There will be more on that. I'm sure everyone will see it when Abbott And we're here to help support and make sure they have what they need from us so that they can effectively get out into the market with SurVeil.

Speaker 2

Yes.

Speaker 1

Basically, what we're saying is we can't talk about it. That's the best of the chance. All

Speaker 5

right. Can you talk about whether it's Strictly limited to the U. S. Or if it will be launched worldwide?

Speaker 2

Yes, we can certainly address that question. I think we've described this Over the last several quarters, they are going out U. S. So what we described in our guidance What we're talking about in terms of the launch all pertain to the U. S.

Speaker 2

Market. We've nothing to add OUS at this point, Jim.

Speaker 5

Okay. And then in terms of Simontics income statement, if you look, R and D expense topped out around $50,000,000 in fiscal 2022, ended this year around $46,000,000 $47,000,000 you expect it to tick down to closer to $44,000,000 next year. Do you think it will continue to remain around these levels, maybe come down a little bit? Or are there any major projects you expect to invest In the next couple of years?

Speaker 1

We do have to our R and D is really focused on winning in the market Segments we have identified and that does include the Venus market. And keep in mind we're entering Several huge markets this year. I mean the venous market is larger than the arterial market in generalized statement. And so to compete with the big guys there and their products, we have to maintain some level of R and D to We do have some early stage programs that we're looking at. So some of them involve more venous And actively, the one thing I'll say is you'll See you next week.

Speaker 1

At the Veith meeting again, Professor Ramon Varco is presenting our 2 year data on Sundance's psoralmus BTK. Now Professor Barcode presented the Life BTK trial data 2 weeks ago at the TCT meeting in San Francisco, which is an abdurable stent, including an olimus drug. And so When you look at our 2 year data, and I encourage you, we'll send a press release on that. What I hope is recognized is that we do actually have Incredible drug delivery technology in Simontics. Our issue again is one of being cash constrained.

Speaker 1

To get ready for an IDE Much less to run a pivotal trial, we will be actively looking for partnership opportunities to help us with We can't call that alone as much as you stay tuned for the data being presented. Again, this is 2 year data, right? Stay tuned for what our 2 year data looks like with any of the BTK device that's been done. So have to be really disciplined, wish we had the capital, but have to maintain that in the public markets.

Speaker 5

All right. So it sounds like you're going to continue to invest in R and D, but it doesn't sound like you're going to get back to the fiscal 2022 level?

Speaker 2

Yes. Jim, I think we're providing the guidance here for fiscal 2024. And You noted the reduction in R and D spend over the last few years. And there's clearly investments in Certain platforms and other platforms are seeing a deceleration in spend, notably SurVeil, Which has been less than certainly not fully offset by increased spend in other platforms. But yes, I think we like the trend and We like the investments that we're making and what we think the long term value creation can be from those investments.

Speaker 2

Not a whole lot to add for 'twenty five Or later, but I'd say you're probably right to think about the trend. Yes.

Speaker 1

And one thing, Jim, is No, R and D includes clinical, right? And so we have the PRAL registry. You have to commit to those registries. And the PRAL registry It's going just fine. This is for the Ponce Arterial.

Speaker 1

And eventually, when we do launch the Ponce Venus product line, to get So that's more out in the 25% timeframe plus. There

Operator

Our next question comes from Mike Madsen with Needham and Company. Please go ahead.

Speaker 6

Yes, thanks. I wanted to ask one on Pounce versus Sublime. Just reading between the lines of some of the Comments, it sounds like Pounce is kind of the bigger growth driver there than Sublime. Is that right? I know you're not going to break out the sales or anything, but can you just qualitatively comment on how the 2

Speaker 1

are doing relative to each other? It has been Mike and one of the reasons for that, remember in the whole debacle with the PMA not approvable The VI commercial team took the largest hit in the company. We had to unfortunately reduce Size of the sales team is by a lot, right? And so and what we had to do at that point because We had to make sure we got hit our revenue plan, the incentives for the sales team when you look at a $4,000 plus product In pounds versus several $100 product in Sublime Catheters, we were compelled to redirect the So there was a specific conscious decision at that point. What I would say is that the addressable market for is bigger than it is currently for radial devices.

Speaker 1

And remember, radial is also an adoption curve, not Just a competitive win curve. What I've told our sales team though is, we'll do well and turn back to me. I have no doubt. But their grandchildren will remember them for Sublime, right? Because that is changing the face of healthcare Hope to what's the positive.

Speaker 1

I don't know a single other product and again it's early innings that has better patient outcomes, Right. Much better healthcare economics and a huge impact on patient satisfaction. Hitting that trifecta, we're patient with it. But for the moment, yes, the high ASP of things like, pounds arterial outpacing Sublime. And that's okay, by the way, us right now.

Speaker 6

Yes. Okay. And then just on the Perzad coating, I mean, is that I know you're continually iterating on those Offering. So I mean is this something that could have any sort of impact on the growth? Or is it more just kind of incremental?

Speaker 1

And you know how that business runs like the cycle time. So we just got the 1st FDA clearance. I don't think we I'm generalizing a little bit here. So the chemistry is on file with the FDA of having seen it now and it gives an opportunity to leverage that knowledge and working knowledge of that dossier on file at the FDA. The time cycle is you've got to get customers who are interested, help them through their development And their regulatory offerings, right, effort to get clearance for these devices and only then do we see the royalty when these devices hit the market.

Speaker 1

So it's A longer offering, but it's significant because we're talking about royalty cash flow here. So I wouldn't expect, Tim, in our guidance, we put anything for fiscal 2024 for any royalty things there unless people get approvals pretty soon.

Speaker 2

Yes. There really isn't. To be clear, Precise is something that is highly complementary to our Serene coating, which has really been growing well over these last few years and we continue to expect it to grow well. I think we've commented previously that there are 60 plus Customer Opportunities where we get to dial in our chemistry with our customers' devices. This just, Preside, gives us an opportunity to Really claim certain application spaces.

Speaker 2

I think going distal in the neural crossing really challenging In lesions like total chronic conclusions, it really gives us an advantage with this coating relative to even some of our But more importantly to competitive coatings. And I think that's why the team has really been focusing on this preside coating over the last few years To meet some of the needs where quite frankly we felt that we could provide some additional performance enhancements. So As Gary mentioned, it will probably be a few years to grow the trees, but we're planting the seeds today.

Speaker 6

Okay. All right. Got it. Thank you.

Operator

Thank you. And that concludes our conference call for today. Thank you for your participation and you may disconnect at any time.

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Earnings Conference Call
Surmodics Q4 2023
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