Surmodics Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 6 speakers on the call.

Operator

Welcome everyone to Thermoorex Third Quarter of Fiscal Year 2023 Earnings Call. Please note that this call is being webcast. The webcast is accessible through the Investor Relations section of the Thermotix website at www. At cermodics.com, where an audio replay will be archived for future reference. An earnings press release disclosing ThermoDx quarterly results was issued earlier today and is available on the company's website as well.

Operator

Before we begin, I would like to remind everyone that remarks and responses to your questions on today's call may contain forward looking statements. These forward looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and includes statements regarding Zomotix's future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by Cermoric's forward looking statements resulting from certain risks and uncertainties, including those described in the company's SEC filings. Thermotix disclaims any duty to update or revise these forward looking statements as a result of new information, future events, developments or otherwise. This call will also include references to non GAAP measures because Thermotix believes they provide useful information for investors.

Operator

Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Mr. Gary Maharaj, Sumorik's President and Chief Executive Officer. Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome everyone to our earnings call for the Q3 of fiscal year 2023. Let me begin with a quick overview of what we plan to cover on today's call. I'll begin my remarks with a brief overview of our quarterly revenue results and the key drivers of our performance, followed by a discussion of our recent operational progress and thoughts on our outlook for the remainder of the Tim will then discuss our Q3 financial performance in detail and review our fiscal 2023 guidance, which we updated in our earnings press release today. We'll then open the call for questions. With that, let's get started with a review of our Our total revenue performance was driven by exceptionally strong growth in our Medical Device segment, which increased 100 and 3% year over year, more than offsetting a 12% decrease in revenue from our invitro diagnostics or IVT segment.

Speaker 1

Our total revenue and medical device revenue growth benefited from the achievement of FDA premarket approval for our SurVeil drug coated balloon. As a result of this achievement, we received $27,000,000 of a milestone payment during the quarter from our commercial partner Abbott, of which $24,600,000 was recognized as revenue. I'll discuss this important accomplishment in further detail later in my remarks. I'm pleased to report that we delivered strong performance during the quarter on an underlying basis as well. Excluding the PMA milestone, we achieved total revenue growth of 12% year over year, driven by the Medical Device segment Total revenue growth of 22% year over year.

Speaker 1

This impressive performance in our Medical Device segment was largely driven by product sales. The Medical Device segment product sales increased 38% year over year, fueled primarily by our sales of our Pounds and Sublime products, along with strength across our product portfolio, including sales of our Performance Coating reagents. In our IVD business, the year over year softness was driven primarily by decreased sales across our core product lines as we saw several customers taking steps to manage elevated inventory levels during the quarter. All in all, we were pleased with our revenue performance in the 3rd quarter. Shifting to an update on our recent operational highlights.

Speaker 1

During the Q3, our team made to each of these objectives, which as a reminder are: 1, to achieve FDA premarket approval or PMA for the SurVeil drug coated balloon and then support our partner Abbott as they prepare to commercialize the product. 2, to advance the initial commercialization and Coatings offerings and IVD businesses. Beginning with our first strategic objectives, securing the PMA for our SurVeil DCB. We entered the Q3 of fiscal 2023 with strong momentum on the regulatory front, having secured formal feedback from the FDA's review team that provided the additional clarity in the process and content required to successfully amend our application the PMA. As we shared via press release on March 28, we believe that additional clarity we obtained would enable us to prepare an amended PMA application for submission in Q3 and secure the PMA in the Q4 of fiscal 2023.

Speaker 1

We submitted this PMA application to the FDA in May consistent with our stated expectations. In the months leading up to and following submission, our team continued to engage with FDA's review team to discuss and clarify aspects of our submission and to facilitate their review process. On June 20, we were proud to announce the receipt of the FDA premarket approval for our SurVeil drug code Aboulou. With this approval, our SurVeil DCB may now be marketed and sold in the U. S.

Speaker 1

To physicians for percutaneous less than or equal to 180 millimeters in length in femoral and popliteal arteries, having reference vessel diameters of 4 millimeters to 7 millimeters. Securing the PMA for SurVeil represents one of the most significant achievements in our 44 year history as an organization. It will enable us to provide physicians and patients with a next generation option for the treatment of peripheral artery disease, one that leverages the culmination of our decades of expertise as an organization in developing and applying drug eluting coating technologies. The SurVeil DCB leverages our proprietary technologies and capabilities with a design that promotes more uniform drug distribution, More efficient drugs transfer to the target region, while reducing particulates in downstream emboli. This approval also represents further validation of the strong safety and efficacy profile of our SurVeil DCB and the results our 446 patient TRANSCEND clinical trial.

Speaker 1

As the 2 year results of this trial demonstrated, The SurVeil DCB achieves clinical and safety outcomes that are consistent with the market leading device. These results are despite the competitive device having 75% more paclitaxel compared to the SurVeil DCD. Given the numerous challenges that had to be navigated in order to secure this approval, including the FDA's heightened concerns about the use of paclitaxel for made possible through their years of hard work, dedication and commitment to working in partnership with the agency to satisfy their questions. With the PMA now in hand, our team has been squarely focused on supporting our commercial partner Abbott as they prepare for U. S.

Speaker 1

Commercialization. We've been actively engaged with Abbott's commercial and operations team to refine the plan for SurVeil's commercial launch. As a reminder, under the terms of our agreement, we are responsible for manufacturing and supplying Abbott with product as they commercialize the SurVeil DCD. While we are limited in terms of what we can say publicly at this time with respect to the commercialization, we expect to receive Abbott's initial stocking during the Q4 of fiscal 2023 with commercialization anticipated in fiscal 2024. We look forward to sharing more details in the future earnings call.

Speaker 1

Since receiving the PMA, our team has been focused on all the pre commercial activities to ensure our readiness to satisfy Abbott's initial stocking order as well as subsequent orders. We've started up the engine for the SurVeil DCB with successful initial test runs of our production and quality processes. With respect to raw materials, we are well positioned to support the commercial launch. From a people standpoint, Throughout this year, we have continued to retain experienced manufacturing team members focused on SurVeil production. Teams who have been responsible for building thousands of SurVeil units in recent years to satisfy the clinical and regulatory needs.

Speaker 1

We've also hired several additional team members to provide future support as we scale. In short, we are well positioned with the capacity, materials and processes in place to to meet the needs of our commercial partners. Given Abbott's commercial distribution infrastructure, their market presence and We're excited to be entering this pivotal stage of our partnership. We believe our next generation drug, Kotavelu, will complement and enhance their existing product portfolio, and we'll look forward to our continued collaboration with Abbott as we provide physicians and patients with a safe, effective and innovative solution that leverages our best in class technology to address the challenges presented by peripheral artery disease. On a related note, we were excited to see the FDA publish letter to healthcare providers on July 11 that summarize the agency's latest views about the potential risks to paclitaxel coated medical devices.

Speaker 1

As I mentioned earlier in my remarks, paclitaxel has been an area of increased focus and regulatory scrutiny for the past 5 since the FDA posted a letter to healthcare providers on January 17, 2019 sharing their concerns. The FDA follow-up letter published in July is titled paclitaxel coated devices to treat for paclitaxel coated devices. It goes on to summarize the analysis that supported this conclusion and clarify that the decision applies to for all paclitaxel coated devices. We were also pleased to see the FDA state in the letter that they will work with device manufacturers to update product labeling based on the current available data. In terms of its implications, we believe this letter provides important closure back to the concerns that were initially raised by the agency in 2019.

Speaker 1

Like other devices in the market, the product labeling for the SurVeil DCB does currently include a standard warning related to paclitaxel. The FDA noted in their July letter that they will work with device to update the product labeling based on the current data. We look forward to working with the agency to make the needed updates to our SurVeil DCB labeling and expect this to be a fairly straightforward process. Moving to our second strategic Advancing the initial commercialization of Sublime Radial and our Pounce arterial thrombectomy platforms. As I mentioned Earlier, sales of our Pounds and Sublime products were an important contributor to the 38% medical device business Product sales growth that we achieved in the Q3.

Speaker 1

From a commercial standpoint, we are pleased with execution of our direct sales team as they worked with physicians at potential new accounts to navigate our products through value analysis committees. As a result of their efforts, line platforms compared to over 170 at the end of the second quarter. And we achieved our stated for fiscal 2023 ahead of our expectations. Given that we entered fiscal 2022 with just over 100 customers, We're pleased with the strong progress made over the 1st 9 months of this fiscal year, especially considering the workforce reduction that we implemented during in the quarter. Our sales team continued to make progress in expanding our pipeline of prospective customers with a number of value analysis committees considering our products remaining in line with the March quarter, despite the growth in new customer conversions.

Speaker 1

And we remain pleased with the reordering we're seeing from In terms of the size of our team, we're pleased to see continued stability during the Q3 with 22 territory managers at quarter end with an average tenure of 13 months compared to 21 territory managers at the beginning of Q3. From a market education standpoint, we continue to make progress with respect to our Prowl registry study, which we initiated during Q3. We believe this study will further underscore the compelling therapeutic benefits of our pound's arterial thrombectomy system as used in real world settings. We are enrolling patients at 2 sites at quarter end and we continue to anticipate sharing interim data with current and prospective customers as part of our efforts Based on the progress made over the 1st 9 months of our fiscal year, We believe we are squarely in the process of graduating from initial market entry to what we referred to previously as the early at the end of the fiscal 2020 accounts at year end and generate pounds and sublime sales growth in excess of 2 50% year over year. As we continue to focus on raising awareness of the capabilities and advantages of these platforms, crossing the chasm, so to speak, by converting mainstream users as well as early adopters and facilitating strong utilization across the entire user In addition to driving adoption and commercial traction with respect to our Pounds and Sublime portfolio, we are continuing to expand this portfolio with our new product pipeline.

Speaker 1

I will discuss this progress on this front in a moment. Let me give you a nugget here about Pounds and Sublime revenue. They have now contributed more than $1,000,000 of revenue per quarter for 2 consecutive quarters now. This, while small on a relative scale, is fantastic news. It demonstrates the power of and less than onetenth the size of larger medical companies.

Speaker 1

As you've heard me say in the past, the future has already been created. It's just not evenly distributed yet. Herein lies the potential of Surmodics' vascular expansion strategy. Turning to our 3rd strategic objective, driving revenue and cash flow growth from our medical device Performance Coatings Offerings and IVD Businesses. We're pleased to see revenue from Medical Device Performance Coatings offerings in our 3rd quarter increase 11 on a year over year basis, driven primarily by strong sales of Performance Coding reagents.

Speaker 1

This is moderated partially by the 12% decrease in our IBD business that I discussed earlier. The decrease does not appear to be driven by market competition, but by multiple macroeconomic factors impacting the entire IVD industry, including the decrease in demand for COVID testing products And stabilization in supply chains reducing the need for elevated safety stock. Increased 4% year over year in the Q3 consistent with our long term expectations of low to mid single digit growth generating cash flow to support our strategy. Lastly, in addition to our progress with these key objectives, We continue to advance our new product pipeline. With respect to Pounce arterial thrombectomy platform, we're continuing to enhance the capabilities of this portfolio to expand the addressable market with new product introductions and clinical indications.

Speaker 1

Most notably on June 14, we announced the receipt of FDA 10 clearance for Pounce Low Profile or LP thrombectomy system with a clinical indication for use in vessels ranging from 2 to 4 millimeters in diameter. The addition of Pounce LP will expand the range of our Pounce arterial system by providing systems to physicians with a Product designed to facilitate efficient removal of organized clots in smaller vessels such as those found in our commitment to providing patients and physicians with a comprehensive suite of mechanical thrombectomy solutions to address acute limb ischemia across the entire peripheral vasculature, helping to reduce amputations. We look forward to compensing This limited market evaluation of our Pounds LP thrombectomy system by the end of the Q1 of fiscal 2024 and entering full commercialization following its completion. With respect to our Pounds venous thrombectomy system, We continue to make progress through our limited market evaluation, which we initiated during the Q2 to collect physician feedback on the systems used across a variety of cases. Our progress was initially paced by limited product availability, but we were able to work through this constraint during the quarter and accelerate the pace of evaluations.

Speaker 1

We've been pleased to find physician users emphasizing their appreciation for the system's simplicity, Ease of use during cases and the feedback we've obtained so far has been nicely informative as we prepare for commercialization. We'll continue to progress through this limited market evaluation during the Q4 with the goal of entering commercialization in fiscal 2024. And lastly, at the end of April, we commenced limited market evaluation of our 35 Sublime radial access microcatheter. This is part of what will be the industry's first suite of talkable high performance microcatheters designed for peripheral interventions and available in both radial and transfemoral lengths. We believe these Sublime Microcasticers will enhance our existing Sublime radial access platform by empowering physicians with tools specifically designed to cross difficult lesions, helping to facilitate the adoption of peripheral treatment via a radial approach.

Speaker 1

The feedback we've obtained on the 35 microacids to date has been positive and we look forward to Initiating limited market evaluations of our 18 and 14 microcatheters, the remaining products in this microcatheter portfolio. I'm incredibly proud of our operational and financial accomplishments this past quarter. Our team drove important progress in each of our strategic objectives that we prioritize for fiscal 2023. This progress enabled us to deliver impressive Financial results, including $52,500,000 of total revenue, dollars 21,400,000 of operating income and $24,600,000 of adjusted EBITDA. Excluding the $24,600,000 of revenue related to the SurVeil PMA milestone, We delivered total revenue growth in the Q3 of 12% year over year, and we were essentially breakeven on an adjusted on an EBITDA basis.

Speaker 1

As I mentioned in our last earnings call, cash flow remains a priority for our organization. From a cash flow perspective, we generated $25,400,000 of cash during the quarter to further strengthen our balance sheet, Ending the quarter with $44,600,000 of cash and equivalents and approximately $61,000,000 in incremental debt financing available on our in credit facility. Excluding the $27,000,000 milestone payment, we were also pleased to reduce our quarterly cash burn to 1 point $6,000,000 of cash used, exceeding our stated objective of $3,500,000 to $4,400,000 of used cash for the quarter. As we continue to control our expenses and allocate capital thoughtfully following the implementation for spending reduction plan implemented earlier this year. And lastly, as we continue to advance multiple key products in our pipeline, positioning Surmodics to drive future growth and value creation through innovation in the years to come.

Speaker 1

As Sim will discuss, we are raising our guidance today to reflect our impressive financial and operational performance in the Q3 as well as our updated expectations for the balance of the fiscal year. We remain committed to perpetuating our recent momentum I'm bringing fiscal 'twenty three to a strong conclusion. I'd like to conclude my remarks today by congratulating the entire Surmodics on the many achievements made during this past quarter that would not have been possible without their hard work and dedication. With that, I'll now turn the call over to Tim Arens, our Chief Financial Officer, to discuss our Q3 fiscal 2023 results and updated guidance. Tim?

Speaker 1

Thank you, Gary. Unless noted, all references to 3rd quarter results are on a GAAP and year over year basis. Total revenue for the Q3 of 2023 increased $27,600,000 or 111 percent to $52,500,000 As Gary mentioned, Our total revenue in the Q3 of this year included $24,600,000 of revenue recognized from the $27,000,000 milestone payment received for obtaining premarket approval of our SurVeil drug coated balloon. Excluding the impact of this milestone payment, 3rd quarter total revenue grew 12%. Product revenue increased $1,700,000 or 13 percent to $15,700,000 in the Q3 of fiscal 2023.

Speaker 1

The increase was driven by broad based product sales growth in our medical device business, which increased $2,600,000 or 38%, driven primarily increased sales of our pumps arterial thrombectomy and Sublime radial platforms as well as our performance co coating reagents. IVD product revenue decreased $810,000 or 11 percent to $6,400,000 The decrease was driven primarily by several customers actively managing their inventory levels. The IVD industry is adapting to respond to multiple macroeconomic factors, including the decrease in demand for COVID testing products as well as stabilization in supply chains, which are reducing the need for elevated safety stock. Royalty and license fee revenue increased $25,400,000 or 2.88 percent to 34,200,000 Excluding $24,600,000 of license fee revenue recognized in the Q3 of fiscal 2023 from the SurVeil PMA milestone payment, royalty and license Revenue increased 8%. Royalty revenue from our Performance Coatings increased $450,000 or 6%.

Speaker 1

R and D services revenue increased $520,000 or 24 percent to 2,700,000 The increase was primarily due to higher customer demand for our Performance Coatings services in our Medical Device business, which was impacted in the prior Quarter fiscal 2023 was 55.8% compared to 63.1% in the prior year period. The decline in product gross margin was driven by the adverse mix impact from increased device product sales, which R and D expense, including costs related to clinical and regulatory activities, decreased $1,700,000 or 13% to $11,200,000 in the Q3 of fiscal 2023. The decrease in R and D expense reflects the benefits from the spending reduction plan implemented during the Q2 of 2023. SG and A expense was $12,900,000 and was unchanged compared to the prior year period. Contingent consideration gain of $830,000 resulted from a non cash fair value adjustment to acquisition related contingent consideration Our Medical Device business reported operating income of 21,800,000 compared to an operating loss of $7,300,000 in the prior year period.

Speaker 1

The year over year change reflects $24,600,000 in license fee revenue recognized on the SurVeil PMA milestone payment in the 3rd quarter. Along with disciplined expense management, broad based revenue growth and the aforementioned contingent consideration gain. Our IVD business reported operating income of $2,900,000 compared to $3,400,000 in the prior year period. IVD operating income was 44 In the Q3 of fiscal 2023, we reported income tax expense of $13,300,000 compared to an I'll outline the key drivers, starting with the $24,600,000 in revenue recognized on the PMA milestone payment. In the 3rd quarter, As a result of the milestone payment, we shifted from a taxable loss to a taxable income position, resulting in significant tax expense.

Speaker 1

Also contributing to our income tax expense was a recently effective IRS requirement to spread the deduction of U. S. R and D expense over a 5 year period. As a reminder, we are no longer recording tax benefits for deferred deductions or net operating as a result of having established a full valuation allowance against U. S.

Speaker 1

Deferred tax assets at the end of fiscal 2022. GAAP net income in the Q3 of fiscal 2023 was $7,300,000 or $0.52 per diluted share compared to a net loss of $5,700,000 or a loss of $0.41 per diluted share in the prior year period. Non GAAP net income in fiscal 2023 was $7,300,000 or $0.52 per diluted share compared to non GAAP net loss of $4,700,000 or a loss of $0.34 per diluted share in the prior year period. Non GAAP adjusted EBITDA in the Q3 of fiscal 2023 was $24,600,000 compared to adjusted EBITDA loss of $3,100,000 in the prior year period. Adjusted EBITDA includes adjustments for contingent consideration gained in the Q3 of fiscal 2023 and for stock based compensation expense in both periods.

Speaker 1

Our earnings press release includes detailed reconciliations of GAAP to non GAAP measures. Moving to the balance sheet. We began the Q3 of fiscal 2023 with $19,200,000 in cash and $29,300,000 in long term debt. Cash provided by operations during the Q3 was $25,900,000 reflecting the $27,000,000 PMA milestone payment from Abbott. Capital expenditures totaled $470,000 We ended the quarter with $44,600,000 in cash and $29,400,000 in long term debt as of June 30, 2023.

Speaker 1

Long term debt includes $5,000,000 in borrowings under $25,000,000 revolving And $25,000,000 in borrowings on our $100,000,000 term loan facility. As of June 30, 2023, We had approximately $61,000,000 in debt capital available, consisting of $50,000,000 on our term loan availability And approximately $11,000,000 of incremental availability on our revolving credit facility, which is subject to borrowing base requirements. Turning now to fiscal 2023 guidance. We updated our fiscal 2023 revenue guidance today to reflect our performance in the Q3 as well as our revised expectations for the remainder of fiscal 2023. We now expect fiscal 2023 total revenue to range from $130,000,000 to $132,000,000 representing an increase of 30% to 32% over the prior year.

Speaker 1

Excluding the estimated revenue recognized on the PMA milestone payment, we expect total revenue to range from $105,000,000 to $107,000,000 This compares to our prior range of $103,000,000 to $106,000,000 or an increase of 3% to 6% over the prior year. We now expect fiscal 2023 GAAP diluted loss per share to range from a loss of $0.55 to a loss of $0.40 compared to our prior range of a loss of $2.30 to a loss of $2 Non GAAP diluted Our updated total revenue guidance reflects the following assumptions for the full fiscal year. Revenue for our 2 businesses, Medical Device and IVD is expected to be approximately 80% 20% of revenue, respectively. Product revenue is expected to be approximately 46% of total revenue. Our guidance for product revenue does not include any sales of the SurVeil DCB product in our Q4.

Speaker 1

Revenue associated with our legacy medical device performance Avid SurVeil license fee revenue is expected to range from $29,500,000 to $30,000,000 which includes approximately 25,000,000 revenue recognized in fiscal 2023 on the $27,000,000 PMA milestone payment. This assumes 4th quarter revenue associated with the CMA milestone of $400,000 In the prior year, total Avid SurVeil license fee revenue was 5,700,000 Our updated diluted loss per share guidance reflects the following full year assumptions. Product gross margin in the high 50s, reflecting continuing mix impact from growth in device sales during the manufacturing scale up phase. R and D expense in the range $48,500,000 to $49,000,000 and SG and A expense of $52,500,000 to 53,000,000 Interest expense of approximately $3,400,000 Finally, our updated EPS guidance reflects full year tax of $4,000,000 to $5,000,000 This assumes a sizable tax benefit in the 4th quarter of approximately 8.5 to $9,500,000 Lastly, with respect to cash utilization, we anticipate that we will finish the fiscal year with approximately $37,500,000 to $38,000,000 of cash, with cash used in the Q4 of approximately $6,500,000 to 7,000,000 which includes approximately $3,000,000 in estimated cash tax obligations as a result of the PMA milestone payment. This reflects our disciplined expense management, the spending reduction plan implemented in the Q2 and our active management of working capital.

Speaker 1

With that, operator, we would like now to open the call to questions.

Operator

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

Speaker 2

ahead. Good morning, guys. Since I have about 10 questions, I'm going to have to queue up multiple times here, but I'll try to follow Your guidance. The first question I have is, how do you think the FDA declaration That there is no negative effect from paclitaxel to impact the ultimate success of SurVeil.

Speaker 1

It's quite positive actually. If you look at the Potential for growth of paclitaxel devices, it's not quite penetrated and it's Been restrained because of this 2019 labor warning that's now been removed. And one of the restraints was the marketing and commercial programs to drive market adoption We're basically stunted by the FDA's label warning. And so now, I believe all companies Can get back into demonstrating what paclitaxel can do as an anti restenotic drug on both stents and drug coated balloons in the So peripheral vasculature. So I think it's going to help drive the market.

Speaker 1

What it means to us and I know Tim is closer to some of Market data, but it is about $1,000,000,000 potential for this and 500,000 procedures per year. But for us, In particular with Abbott as a commercial partner, we have the trifecta I believe and that momentum. So the timing is great. We have a technically superior product and we have a clinical trial, the only clinical trial that Pivotal worldwide trial that demonstrates that technical superiority. This unwinding of the label warning will allow for the market Growth opportunity to get back into full bore.

Speaker 1

And then we have the commercial strength of Abbott Vascular. They're really well known for their ability to move the market in terms of Drug eluding devices. So that trifecta, we believe, it's going to give us a multiplicative impact as we grow. Now we'll Stay tuned and we'll tell you more about that and what it means for fiscal 2024. But the wins the trade wins are blowing favorably because of it.

Speaker 1

Gary, I would just add for Brooks and others benefit, we have heard from several physicians that there are still hospitals and accounts that have

Speaker 2

restricted the use of paclitaxel devices.

Speaker 1

So, those in accounts that have restricted the use of paclitaxel devices. So obviously with the FDA changing its position, those restrictions should be lifted Should have a greater opportunity in terms of addressing the need to treat patients who are suffering from peripheral vascular So we'll be looking closely to the data on this over the following for the next couple of quarters. So stay tuned.

Speaker 2

Great. At the risk of being accused of cheating, I'm going to combine questions 23 and just ask you, can you tell us The key steps and timing that you need to take to prepare for Abbott's launch of the product and then Can you help us begin to think about the impact of SurVeil on Surmodics results in fiscal 2024?

Operator

Thanks a

Speaker 1

Sure. Sure. And Tim is really connected to our operational. So I'll turn part of that over to him, activities with our pre commercial activities with Abbott. But really the first thing was to secure materials and we're in good shape.

Speaker 1

It might have increased our inventory balances a little Much especially paclitaxel is not an inexpensive drug to acquire. But on the raw materials and supply chain side, We're secure and we're prepared for whatever Abbott has in their plans. The second thing you've heard me talk about the cold start of a diesel engine in winter. And so we have started that up. We're able to retain most of the team members despite The reduction in force we had earlier this year and then we've hired some more people so that we have the ability for future scale here as well.

Speaker 1

So that's been going well. It takes a while to fulfill these orders, but I'll pass it on to Tim. Thank you, Gary. Well said. Brooks, I think the key takeaway for us is that we will be prepared.

Speaker 1

We have the people, materials and equipment to support Notably, our manufacturing team has built thousands and thousands of SurVeil units over the years to satisfy our clinical, Regulatory and development efforts. So we've got a lot of experience. We have the experienced team here. They've been in place for years. And we've actually have started and have done test manufacturing runs just to ensure that we're ready.

Speaker 1

I think there is still work to be done more on the administrative front, but we're waiting for the Abbott PO and then we'll start manufacturing product. And the second part was what do we expect, I guess? Yes, we'll ask you to stay tuned. We have not yet Received the final PO, but what we have discussed in the past, we had talked, I think, previously that Abbott had shared In terms of their forecast, they've done so again. We like what we're seeing.

Speaker 1

We'll have more to say on this topic probably as early as Q4.

Speaker 2

Thank you, guys, and congratulations. I couldn't be more excited about the future.

Speaker 1

Thank you, Brooks.

Operator

Thank you. Our next question comes from the line of Mike Matson with Needham and Company. Please go ahead.

Speaker 3

Yes, thanks. Just a few more on SurVeil. So I guess just starting with The DCB market, can you remind us where pricing is? I'm not asking where Abbott's going to price their product, but I You can remember that the DCBs when they launch were kind of in the $1200 range, if I'm remembering correctly, but I think it's come down quite a bit. Do you have a feel for where just kind of the typical pricing is these days?

Speaker 1

It's a great question, Mike. And What I can tell you is looking at the IMS data, industry data, these are sales into hospital accounts. We still see list prices around 14 $1500 per device. As you can imagine, every manufacturer is probably having some discounts relative to their products. So I can't really speak to what the pricing, the ultimate pricing is, but the list price has remained constant over the last several years.

Speaker 3

Okay, thanks. And then can you just remind us about what you've said about the economics of the Abbott deal? I know you haven't given Specific numbers, but it's kind of convoluted, I guess, in the way that it works from what I remember. And then is it would it be Crazy to assume that Surmodics might be capturing roughly 50% of the kind of end market price In terms of value that you're getting?

Speaker 1

So I'll walk through great question. Appreciate the question. I know this is a topic on many people's minds. The economics really, I think probably the best way to describe it is that Surmodics will receive 2 revenue streams. The first revenue stream will be for the product shipped to Abbott and we call that a transfer price and we'll recognize that Revenue the moment the product is shipped out of our docs.

Speaker 1

And then the second piece is what we call profit And the profit sharing, obviously, there is a formula. It works somewhat like this. I think we've articulated this a bit in the past, but Abbott will back out the transfer price and they'll have a gross margin. I think we can appreciate how to get to gross margin. They also can deduct is what I would consider a typical multinational strategic sales and selling expense percentage from the revenue.

Speaker 1

And so then basically what remains is what we call the profit pool and we've characterized this in the past that It's not quite fifty-fifty, but it's close. And so I would say in terms of thinking about what percentage The revenue on the sale price of SurVeil, the 50% might be high, But I think we've highlighted in the past that from a whole product solutions or a partnered product solutions perspective, Surmodics is approaching that 50% level. We'll talk more about this, I'm sure, as we kind of get past the initial commercialization, but it is very attractive.

Speaker 3

Okay. Thanks. That was helpful. And then when you report your 4th I understand you're not including any kind of SurVeil revenue in your guidance now. But when you report your Q4, is it safe to assume that you're going to factor Something into the 2024 guidance, some assumption around SurVeil revenue in your revenue guidance and earnings guidance or

Speaker 1

Yes. Mike, another great question. Yes, that is the expectation. Gary and I will have more color and context to provide on SurVeil Probably during our November earnings call.

Speaker 3

Okay, got it. All right. And then just Unrelated to devices or SurVeil, on the IVD business, just the declines, it's a little concerning, I guess, is I mean, how long do you think this is going to last? Is this kind of a going to be like a 4 quarter kind of a That last 12 months and then you kind of lap it and it starts to grow again or something like that?

Speaker 1

Yes. Tim and I were out at the ACC meeting with Joe, our President of that business last week. And if you look, Mike, at the and I don't think you tracked the IVD industry, but Yes. It's been whipsawed around, and the idea was whipsawed around a lot because of COVID. Now We are a smoothing function on that because we had quite a few reagents and stuff with in COVID.

Speaker 1

And so we didn't get WIP sort around as much. And 12% is not as much as a lot of the rest of the industry. So What we've heard is that the industry hopes to lap that comparable. We don't have enough detailed analysis to know specifically for IBD business how that lapping is going to work. But We do understand that there were a lot of customers who had geared up for a lot of reagents with high expectations and they just have to work through that inventory.

Speaker 1

Tim, I know you have some color as well. Yes. Thank you, Gary. Mike, I think it's really important to recognize that Our IVD business has gone through kind of a soft period here over the last several quarters. If you consider and contemplate the guidance that we provide The percentage of our revenue that's being generated by IBD, you'll come to the conclusion that IBD is going to be returning to growth in our Q4.

Speaker 1

We're starting to see some of the customers who have delayed or slowed their purchases. We're seeing some of those come back online. I think we feel pretty confident that this is not going to persist much longer. That's not to say that there couldn't still be some general softness on the business, but we like where we sit today and we'll have more to say about these macro impacts here in a couple of months.

Speaker 3

Okay, got it. So you're kind of already like a you feel like you're kind of already several quarters into this slowdown? Yes.

Speaker 1

Yes. And again, the entire industry has in these types of regions have gone through this in a bigger fashion.

Speaker 3

Okay, got it. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Petusky with Barrington Research. Please go ahead.

Speaker 4

Hey, good morning guys. So Tim, I guess I wanted to ask on the Initial stocking order, you will be able to recognize revenues in Q4 from that initial stocking order. It sounds like you just said that, correct?

Speaker 1

No, that is incorrect. The stocking order so Mike, just to be clear, let's rewind a bit. We will not recognize revenue on the stocking order until the product leaves our dock. And so you can infer from my comments here that we do not anticipate that we'll be shipping product before the end of September. Just to be clear, The receipt of an Abbott TO to manufacture SurVeil is a distinct part of the process.

Speaker 1

Another distinct part of the process This is when Abbott wants to receive the product shipment. So Abbott gets to decide when they want to receive the shipment. And as you can imagine, it probably has something to do with when they're thinking about the launch. I will also just let folks know there's 20 some SKUs. And so it's yet to be determined, are we shipping all the SKUs simultaneously or does Abbott want to receive certain SKUs?

Speaker 1

So We'll have a lot more. It's exciting, but we're in a position here of having received the PMA and working with Avid on commercialization, and we'll have a lot more And remember the initial stocking order, we have up to 120 days and we might use all of that to produce that product available to be shipped. So it takes us a couple of months, so up

Speaker 4

Real quick on the side of Sublime and Pounds. Gary, you sort of Laid out that, hey, the progress we've made, dollars 1,000,000 revenue each of the past two quarters we've made with Small sales team, a fraction of the size of some competitors out there, given that you now have some breathing room in terms Cash and likely over the next 12 months or so cash generation. I mean, does it make sense to look towards Expanding that team and sort of really putting some muscle to that effort.

Speaker 1

Yes. And I'm glad you picked up on that. And the reason I said it is A lot of investors have said, we have no idea of the scale of this. Percentages don't mean a whole lot. So I wanted to at least let a little bit out that These products are generating over $1,000,000 per quarter and we expect that to grow.

Speaker 1

There are a couple of things. One, we do have to remain disciplined in our allocation of capital. That being said, as these products get more traction of value analysis committees and up to and including group Contracts, when you have those needs that are pent up from customers, we're going to strategically Increase the size of where our the territories where we can have territory managers. Right now, we're constrained. But as we look into what we're doing in fiscal 2024, we'll strategically do it.

Speaker 1

I want to stop short of saying we're going hog wild and just adding Dozens of territory managers. We have a very, very sharp small team now. And what we're looking for are really A players who are hungry who can really do justice to the quality and And you've heard me wax poetic, where I go to conferences and people say these products have never been had not been created yet. And so not a single product in our vascular interventions portfolio exists outside of Simontics. And that's a very important thing.

Speaker 1

So to answer your question, we'll have a little more color in our Q4, but it's a Strategic dosing and adding caliber high caliber salespeople, not necessarily we're doubling sales force in the next 3 months. There's a limit to how much we can reasonably staff support with the high quality of service that our Sales team does as well. So, we'll add a few, but can't get over the cash barrel too much.

Speaker 4

All right. Very good. Thank you.

Operator

Thank you. Our next question comes from the line of Jim Sidoti with Sidoti and Company. Please go ahead.

Speaker 5

Good morning and thanks for taking the questions. Gary, how many sales folks does Abbott have that will focus on SurVeil?

Speaker 1

It's a good question. I don't know the answer, but it's the Abbott Vascular sales force, Tim. I don't want to guess. It's going to be 100. I remember, Jim, when we inked the agreement with Abbott, we had all that information and data.

Speaker 1

And honestly, I have not Look at that. Well, what's changed is the acquisition of CSI, who had several 100 with those with coronary and peripheral. So it's large and I would say it's Probably as you think through large medtech competitors in this space, I would say Abbott's size of their sales force is probably Well on the dartboard with everyone. Yes. And look, what I like about the setup so I would say, Brooks, the question is Clearly, it matches any of the large strategics.

Speaker 1

And with the acquisition of CSI, I expect that what's nice about it is, at In my opinion, I'm not speaking on behalf of Abbott here, but in my opinion, Abbott has an incredible stent in Supero. I mean, you need a trifecta for this Right. You need a stent, you need arthrectomy and to prep the vessel and you need a drug coated balloon. And What I'm excited about is that vascular division has all 3 in the arsenal now and they're formidable sales and marketing organization. So I feel really good about that.

Speaker 5

And how do you feel about your capacity? Do you think you need to add to ramp up to Abbott's demand? Or do you think that you have Enough folks and equipment on hand to meet Abbott demand.

Speaker 1

So Tim and our operations team have been really carefully As I said, we put to bed the raw materials component. Don't want any oopsies there. But Tim, if you want to chat, we have multiple shifts we can go to and That's right. I think I've addressed this. We're ready, Jim.

Speaker 1

I think we're ready to support Abbott's commercialization and what their needs are What we expect there needs to be over the next 12 plus months, not only from an equipment perspective, but also from a personnel perspective and raw materials perspective. We're looking forward to the possibility of a future where we're going to be constrained and we have to think differently about people and equipment in space. But I think at least for the next 12 plus months, we should be in good shape. And keep in mind one thing I may have said in the past, but We have proprietary manufacturing technology. I don't know if anybody else has, but I know we have it, which where we use robotic automation To quote the drugs on these devices.

Speaker 1

These are not trivial low tech components. So in all of this time, We had a mind to when we do have to manufacture, these are robotically controlled machines that actually coat the drug on the product. So Those manufacturing cells have a lot of scale potential.

Speaker 5

And then Tim, can you just talk a little bit about taxes? Why are you going to get the refund in the 4th quarter? Is the $2,000,000 payment, is that all you need to pay On the milestone payment and when do you think you'll be in a position where you'll be paying cash taxes? Do you think that will happen in fiscal 2024, fiscal 2025?

Speaker 1

I'll hold off on the second part of your question, Jim. We still need to do the work to think through fiscal 2024 and create our plan, and We'll have a lot more to say about guidance in November. But yes, you're right, the tax bill, the cash tax payment that will be sent to the IRS, I believe it's September 15th will be approximately $3,000,000 And it's really it's for the entire business, but here in Q3 and then we're going to revert to a tax benefit in the 4th quarter. That's because we're back in an operating loss position. And you can view the guidance and you'll recognize that we'll be in an operating loss position.

Speaker 1

We'll have a tax benefit. That's probably going to put us in a position where it's going to be weird that you don't see it very often, but we're going to be in a position where I expect that we'll even have favorable or positive EPS, GAAP EPS and non GAAP EPS. But if you combine the 2 and the IRS and from a tax perspective, you don't smooth this stuff. But You combine Q3 and Q4, yes, you actually have about a $4,000,000 tax expense. And unfortunately, it just makes it really lumpy.

Speaker 1

And that's probably the best way to describe it. We'll get through the lumpiness here and we'll have about a $3,000,000 tax payment, As I mentioned, so cash is really the thing we're paying attention to here.

Speaker 5

Got it. All right. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. Ladies and gentlemen, as there are no further questions, That concludes our conference for today. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Surmodics Q3 2023
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