Q1 2020 Earnings Call

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Good day and welcome to the Surmodics first quarter fiscal 2020 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Tim Aaron's Vice President of Finance and Chief Financial Officer. Please go ahead.

Thank you Todd good afternoon, and welcome to Surmodics fiscal 2021st quarter earnings call before we begin I would like to remind you that during this call. We will make forward looking statements. These forward looking statements are covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 1990.

Side and includes statements regarding surmodics future financial and operating results or other statements that are not historical facts.

Please be advised the actual results could differ materially from how stated or implied by our forward looking statements, resulting from certain risks and uncertainties, including those described in our FCC functions.

Surmodics disclaims any duty to update or revise our forward looking statements as a result of new information future events developments or otherwise.

We'll also refer to non-GAAP measures because we believe they provide useful information for investors. Today's news release contains a reconciliation table to GAAP results.

This conference call is being webcast and is accessible through the Investor Relations section of the Surmodics website, where the audio recording of the webcast will also be archive for future reference.

A press release disclosed in our quarterly results was issued this afternoon and is available on our website informatics Dotcom I will now turn the call over to Gary Maharajah, Gary. Thank you Tim Good afternoon, and thank you for joining US. We'll also solid stopped in fiscal 2020 would both total medical device an ivy businesses.

Contributing to topline growth total revenue for the quarter grew 2% to 22.6 million as compared to 22.2 million in the first quarter 2019.

We also reported diluted GAAP earnings of one penny per share a non-GAAP earnings of five Fannie depreciate into first quarter.

During the first quarter, we made important progress in each of all three major strategic objectives for fiscal 2020.

As a reminder, these all first to ensure continued success of surveil, specifically to perform high quality patient follow up for the primary endpoint analysis.

Two obtained CE, mark and to make substantial process progress towards achieving FD approval.

The second to continue to make meaningful.

Fences, and the product development and regulatory approval across our entire product pipeline.

Finally continued to optimize revenue and cash flow performance from the legacy offerings and on medical device on IBT businesses to fuel our strategic growth initiatives.

Starting with Surveil, we announced completed enrollment to fall transcend clinical study into fourth quarter last year.

The trial enrolled 446 patients across 65 global sites, and we'll evaluate the safety and efficacy of the surveil DCB compared with a commercially available DCB in treating peripheral artery disease in Appalachia.

The results from transcend will ultimately provide insight into clinically important questions regarding long term patient level data out to five years, which is especially important given the current matter considering paclitaxel containing devices.

We are committed to a robust data collection and look forward to sharing these data at the appropriate time.

In regard to a CE mark submission for Surveil, we submitted all required modules to the European notified body before the end of fiscal 2019.

However, as we previously discussed given ongoing dialogue containing pack factual quoted devices. The organization decided to temporarily call to review of CE marks for new Paclitaxel devices pending more follow up data from studies on current back to backfill devices.

We have had ongoing communications with the notified body, but do not yet have a clear line of sight on the timing and probabilities of obtaining the CE Mark.

We do however remain quite confident in the strength of our data that support the granting of a CE mark for severe.

Moving to our innovative product pipeline, which is our second strategic focus for this year.

Our pipeline stretches across three mean platforms drug coated balloons.

Thrombectomy devices to treat thrombosis in multiple vascular beds and the treatment of vascular disease via the radio Audrey.

Starting with Sundance or through Olimus based drug coated balloon for below the knee disease. We remain on track to begin enrollment into first in human study in the back half of fiscal 2020.

When the process of securing the Reg required regulatory approvals in the specific geographies, where we intend to conduct the study as a reminder, during the first quarter fiscal 2020 Sundance was granted breakthrough device designation status by the FDA.

Given the preclinical data we have generated and analyze we believe Sundance has the potential to becoming the standard of care for the treatment of critical limb ischemia.

We also recently completed enrollment in our first in human study for Vess arterial venous access drug coated balloon.

Expected data from this study by early third quarter fiscal 2020, we will update you on the next clinical development steps for vast later in the year. After we have evaluated the results from offers a new and trial.

Our radial artery access and thrombectomy platforms also progressing nicely remain committed to accelerating development of these platforms and expect to submit for five thinkgeek clearance on at least three devices during fiscal 2020.

Starting first with pounce, all thrombectomy device, we continue to make advancements on design and feasibility.

Early feedback from physicians has been exciting in fact in early November we unveiled a device to 10 explanations of the Veeva annual conference each of whom perform plot reloads with the device in the Benchtop simulated model.

We received valuable feedback what its ease of use and ability to remove organized clot from peripheral vessels without capital equipment and with the potential for less blood loss, we continue to target regulatory clearance for pounds vital late third quarter fiscal 2020.

Turning to our radial access platform.

Received five dinky clearance for both for Blind guide sheet in fiscal 2019, and expect to receive kick off I think a clearance of our 2.5 meter length sublime or one four trends radio PT balloon catheter by the third quarter fiscal 2020.

Our 2.5 meter lengths sublime on for trend Judo PT is the first off its kind and we're currently responding to the FD as request so further data and clarification.

In addition, we continue to make substantial progress on other radial access therapeutic devices, including the all one eight trends radio pdx balloon catheter designed to treat the more proximal femoral top tier vessels and the superficial femoral artery.

These will provide complementary therapeutic devices for sublime radio guide cheap.

As you know late last year, we signed an agreement to commercialize our Telemark coronary support catheter in United States, and Europe, with a leading multinational medical device partner.

Im pleased to announce that this partner is medtronic.

While they have yet to formally launch Telemark, we believe that Medtronic is annex excellent commercialization partner who's interests are aligned with hours to provide physicians and patients innovative technologies to improve outcomes.

Regarding our third strategic priority, our medical device and I'd business segments. They continue to deliver solid performance.

While our medical device business segment faced significant headwinds this coming year due to the patent expirations of our generation for hydrophilic coating technology, while continuing to see growth an uptake of our generation five serene quoting which offers advance performance, including lower particulates and best in class Lubricity.

Net of the patent expirations, we continue to expect revenue for the medical device coatings portfolio to grow into low to mid single digits.

No I Vd business unit, we continue to outperform the immuno assay market growth rate of 3%.

Driven by our focus and customer service and support and our goal the standard products performance.

Revenue from Ivy di business unit was up 5% this quarter versus the prior year, while generating excellent operating margins. These legacy offerings will continue to provide investment funding to fuel our strategic growth initiatives.

As part of our commitment conducting rigorous clinical research to demonstrate clinical safety and efficacy feel devices, such as surveil of S. and some than drug coated balloons, we announced earlier. This week. We are pleased to have added Dr. news Russell tunnel MD to our leadership team as a vice president of clinical affairs.

This route brings more than 20 years of experience in a proven track record record of success in major interventional clinical trials the maker the ideal person to drive our clinical strategy and lead our clinical affairs team welcome dessert.

Overall, we are encouraged by our performance this quarter as we continue to enhance the foundational elements needed to drive our near and long term growth.

We are confident our efforts will help us bill highly differentiated platforms that position us to create durable value for shareholders. As we look ahead to the remainder of Twentytwenty. We're acutely aware that the paclitaxel matter will continue to influence the future of the therapeutic modality, including our own drug coated balloon applications.

Despite these headwinds our goal remains to deliver double digit revenue growth on an annual basis, which we expect will resume in fiscal 2021, and we also targeting EBITDA margins of greater than 25% beginning in fiscal 2022.

I'll now turn the call with Tim to provide more details in our first quarter fiscal 2200 results as well as our outlook for the remainder of fiscal 2020, Tim.

Thank you Gary revenue for the first quarter fiscal 2020 grew 2% to $22.6 million as compared with 22.2 million in the first quarter 2019.

Our first quarter revenue includes approximately 700000 from a onetime catch up payment for a previously under reported hydrophilic coating royalty revenue.

Looking at our two business units medical device grew 1% to $17.4 million in the first quarter.

For our in vitro diagnostics business first quarter fiscal 2020 revenue grew 5% to 5.2 million compared with a year ago period.

Within our medical device business strengthen our medical device coding offerings offset expected lower surveil license fee and milestone revenue as well as a decline in our legacy balloon catheter sales.

Our first quarter royalty and license fee revenue totaled 10.1 million.

Up slightly from the prior year period.

During the quarter, our surveil distribution and development agreement with Abbott vascular generated revenue of 1.3 million down 1.1 million from the prior year quarter.

And in line with expectations.

Growth in our medical device coatings license portfolio.

Now 1.1 million, which includes a previously mentioned 700000 onetime royalty payment offset the decline in surveil revenue for the quarter.

The expiration of our fourth generation hydrophilic coating patent had an insignificant revenue impact on the quarter as as expected.

For the full fiscal year, we continue to expect revenue headwinds from this patent expiration.

Five to 5.5 million.

Product sales of $10 million were essentially flat with a year ago period growth in coatings reagents was offset by weakness in our legacy balloon catheter products.

R&D services revenue of 2.5 million was up 4% from the prior year period was consistent demand from our medical device coatings customers.

The medical device business reported an operating loss of 423000 in the quarter compared to operating income of 357000, and a year ago period.

Medical device operating results were impacted by 1.3 million of increased operating expense, excluding product costs, reflecting continued investment in our strategic initiatives to support our future growth.

I believe revenue in the first quarter was up 229000, or 5% compared with the prior year quarter inline with expectations.

Heavily operating margin in the first quarter was 50% as compared with 49% in the prior year quarter.

Product gross margins for the quarter were 68% as compared with 64% in the prior year quarter due to favorable mix in our medical device business.

For the full fiscal year, we anticipate product gross margin percentage to be in the mid sixty's.

As a percentage of revenue first quarter fiscal 2020, R&D expenses, including cost of clinical and regulatory activities totaled 54% compared with 52% in the year ago period.

R&D expense was 12.1 million for the quarter up 656000 from the year ago period.

The increase in R&D expense was driven by increased spending on the development of our medical device pipeline, including activities to further advance our avi access and below the knee drug coated balloons.

As Gary mentioned during fiscal 2020, we expect to initiate our first in human clinical study for our Sundance below the knee sirolimus drug coated balloon and advanced development efforts on several products, including those related to our parts thrombectomy and sublime radial access platforms.

Consistent with our initial guidance, we continue to expect R&D expense to range in the mid to high Fiftys as a percentage of revenue in fiscal 2020.

SGN a expenses in the first quarter fiscal 2020 were 6.9 million or 31% of revenue.

Compared to 27% of revenue in the prior year period.

Contributing to the increase in ESG and Asia expense during the quarter or increased investments to support product pipeline development and preparation for product market evaluations.

We recorded an income tax benefit of 250000 in the first quarter as compared with an income tax benefit of 176000 in the prior year period.

Both periods reflect the impact of Nontax benefited amortization and operating losses in Ireland.

On a GAAP basis, our diluted earnings per share for one sent in the first quarter as compared with nine cents in the prior year quarter.

On a non-GAAP basis earnings per share were five cents in the first quarter fiscal 2020 versus 12 cents in the prior year quarter.

Moving to the balance sheet cash and investments totaled 48.3 million at quarter end during the quarter, we paid 3.2 million to satisfy the remaining contingent earn out obligations associated with our fiscal 2016 acquisition and Normedix as well as 1.7 million for capital expenditures.

Turning now to our outlook for 2020, we are reaffirming our fiscal 2020 guidance. We continue to expect fiscal year 2020 revenue to range from 87 to 91 million.

We expect GAAP diluted earnings per share to range from a loss of 60 cents to a loss of 30 cents per share.

Finally, we expect non-GAAP diluted earnings per share to range from a loss of 44 cents to a loss of 14 cents per share for fiscal 2020.

Todd. This concludes our prepared remarks, we would now like to open the call to questions.

Thank you if you would like to ask your question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from David Saxon of Needham and company.

Hi, Good afternoon, Gary and Tim Thanks for taking my question.

I'll start with I guess, the partnership with Medtronic I'm just wondering if you could talk about how their sales force is being incentivized when they're planning on launching and and I guess the cadence.

Of ordering.

You are assuming into guidance.

David Thank you for the question. This is Tim Yes, just a few things here in terms of how things are going with Medtronic, what I can say as we've already shipped several orders both in Q1 in Q2 and the expectation is that we would expect over the next several months.

It's likely there will be launching telemark.

And.

Thank you had also asked how the ongoing orders would be rolling out I.

I think I'd just point back to the guidance in the comment that we provided previously and our October earnings call, which was we were not distinguishing across the various partnered products, meaning the all one for the on 80 table and Kathy and that Telemark.

Coronary support catheter.

What we said previously and we continue to look at it from this perspective.

Our revenue that we expect from these products should range somewhere between half a million to a million in fiscal 2020 for each of the three products.

Okay. That's helpful.

And then I guess.

So on the notified body in Europe, I think there there was something that they were going to move to the continental Europe given Brexit.

Any update there and maybe what that means for.

Potential CE Mark for survey.

And any other or any other developments kind of in that dialogue rather than what you said in the prepared remarks.

There are no there's no updates the give clarity on the probability and so thats why we can't really say much because I want to we want to say anything we want to make sure it impacts the probability of gathering it but however.

The notified body has gotten that.

Registration on the on on the Continental Europe sites. So that is that is not an issue for us and we're working with multiple bodies on this and multiple channels of communication that.

Hi.

Given the timing of these things.

I I hope, but I can't commit by the next earnings call. We would have much more clarity on the possibly not necessary and approval, but clearly working through the process and ensuring that we get.

What I would consider fair shaken a fair review.

Great. Thanks, guys.

Thanks, Thank you David.

Thank you won't take our next question from Jim Sidoti of Sidoti and company.

Good afternoon, and can you hear me.

Harry Harry just fine Jim.

Right right.

So with regards from the mud Czarnik agreement is it exclusively for Telemark.

Do they get too right of first refusal for other devices or look on the development as well. Thank you for the question. Jim. This is specifically for Telemark there are no rights to other technologies or options to other technologies.

All right and.

Good.

64000, all questions relating to the CE approval can you can you just give me.

Any indication how often you are in touch with.

Those folks at that regulatory agency.

I mean, it's something that you work on a on a weekly basis are you kind of in our wait and see mode now until you get back from the.

No I would say the the touch points.

In the last four weeks of being at least.

Maybe a half a dozen touchpoints communication, so a weekly not a bad way to think about this.

Okay and as far as you know they are they are continuing to.

To improve other devices with this coding.

Well the initial thing was devices that already have a CE mark as long as they are not asking for.

Line extensions that had longer balloons, all increased total drug content, they will find doing that.

And so those those I believe ugly I can't speak to those because I haven't seen anyone's guess CE mark since but I know off a couple that all going through just from all our industry contacts but.

So, but I will say, we we are having discussion these are not.

I wouldn't call them, one sided or sort of.

Closed door type things, where there is no door, but we continue to work through what that process is so that we have again, we believe in our data we want to make sure the data that we do have.

We believe meets expectations and the requirements, but we want to make sure that that that's also agreed upon before going any further steps.

And just to be clear in the us. The FDA has continued to improve margins there with the coding.

We have seen the recent Medtronic E V get through I'm I'm not sure when I know the Boston range at some point, maybe getting approval.

So but.

Back to the European notified body at what we want to be able to communicate as something when we have a.

Better as the team into probability I had one one of the conjecture and have it be interpreted one way or novel, but I can say, we're working through this.

When a probability looked like we feel better I think we will we will see something of that point.

And then.

With regard to kill the performance in the quarter.

And there was up about a million dollars is that similarly.

The folks that you added for clinical support or are you got more.

Or you can just stay where did that what are the majority of $8 million compared to a year ago.

So.

It really if you think about it it does include headcount to support.

Some of the activities that we've described previously including clinical evaluations and it's it looks like it's up.

Significantly from the prior year quarter up about a million dollars, but if you go back and take a look at Q4 I think we came in around 7.2 million. So from a sequential perspective were down just a little bit but as we've said.

Back in October at the last call you can kind of expect that on an annualized basis, we'd be looking at.

That $7.2 billion over four quarters. So it gives you a sense of how as gene is going to be coming through for the year, which would probably put us in about a low thirtys as a percentage of revenue, but yes, we're making those investments and and we're excited about getting the product out to get some evaluations and making sure that the team is helping us as we.

Think through from a product development perspective, the features and benefits the attributes that we need to make sure that we have best in class technology innovative technology to help support improved outcomes. So so I'm sure we'll talk a little bit more about that over the next couple of calls, but I think that kind of frame. It up for how you should be thinking about 2020 Onest DNA.

Okay, so roughly around that 7 million per quarter.

A number.

Hey, you won't be far off using that as a as a as guidance.

Okay, and then last one for me I mean, do you expect any impact positive or negative.

From the Corona virus down does that help the RBC business doesn't slow procedures in some areas.

It is a great question one that we had asked the general manager of the business unit earlier in the weak and expectation as this is going to have no impact on the IBT business.

Okay and on the.

Medical devices, and if you would think that no negative impact.

We're not hearing of any.

Okay. Thank you.

Thank you Jim.

[noise]. Thank you we'll take our next question from Frank Tacking of Lake Street capital markets.

Hey, guys and Tim Thanks for taking my questions just got a couple of for you here today.

Starting off with surveillance curious if there is any U.S. surveil milestones expected. This year and then as a two parter could you also touch on what could happen to surveil milestones. If we did have some positive progress in that you.

Yeah.

Frank Great question. Thank you I think Gary mentioned on the last earnings call that there was a milestone associated with the CE Mark.

Receipt, we have not communicated any of the additional milestones that might be earned as a result of the progress with the of the development activities on surveil.

So, we'll just asking to stay tuned on that but but I will tell you simply this set in terms of the potential for milestone payments in fiscal year 2020, I'd say the most likely.

Possible milestone wouldn't be in fact, attaining that CE mark.

Okay that makes sense and then taking a step back on the Medtronic agreement because you just walked through the mechanics that agreement.

Sure it pretty straightforward as characterize this in the past its really it a supply and distribution agreement. So Medtronic is it partner, we manufacture telemark and we ship it to Medtronic, we satisfied fulfill their orders appeals that they submit and as you can imagine will we receive a transfer price.

Or product sales for each unit that we ship and there are no license fees or milestones I think we may have talked about that on the last call as well.

So that could basically it's pretty straightforward, we manufactured product we ship it and voice it and recognize the revenue.

Great that's going out thanks, guys.

Thank you thank you Frank.

Thank you we'll take our next question from Mike, but to ski Barrington Research.

Hi, guys good evening.

Couple of questions on the Telemark did I hear you say that you don't expect <unk> commercial launch for the next several months.

Set or did I Miss here.

You've heard that right and I would probably characterize that more as a probably a more robust launch I know that they're preparing and so I don't have full details in terms of what that will look like but I would suspect that it's not uncommon to to bring it out to a couple of select accounts, Mike but in terms of a fall launch.

Such we'll just have to wait and we'll let medtronic comment on that.

Okay. So I just want to understand the orders that you ship have you.

You have to wait.

But to recognize that revenue was there some of that revenue already been recognized.

Some of it has been recognized in Q1 and also will be in Q2.

So just to be clear the the probably once we manufacture and ship the product we recognize the revenue Okay and then on the on the 001 for one eight ptca balloon catheters.

Yeah.

You still.

So you're guiding to.

Revenue roughly in line with the.

Telemark Sanmina is the timing on commercialization.

Those products.

You know roughly the same the next several months or would you, possibly expect those to actually be commercialized.

Yeah, I think I'm hopeful that when we get to the next earnings call, we'll be able to talk a little bit more about the partner and what's going on with the old one for a one eight I would tell you that probably not far off and the way that you're thinking about it and the way you pose the question.

Okay.

The fact that you haven't announced the heart or I mean should I take from that that it can't be Medtronic.

Yeah, I would I would tell you that there was another question that was asked earlier on the call as to whether or not Medtronic had rights to any other products and and the answer was now so I'll, let you read into two it on a little bit more [laughter].

Okay fair enough.

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Just a quick question in terms of sort of the hold up with the CE Mark has that changed your thinking in terms of.

How you allocate capital to R&D projects are in fiscal 20 or or beyond.

You guys.

Change your thinking at all in terms of allocation of R&D dollars.

You know for the the drug delivery programs I mean, the European Union clearly is a significant market up.

Clearly all commercialization partner, that's a commitment we made as part of this.

Partnership together.

As far as the non drug delivery devices. The short answer is no. He has to be a little more thoughtful.

Because it in the non drug delivery domain, it's taking a quite a long time to get the CE mark as well.

And so when you look at that any substance teaching sources of revenue and the effort involved.

And this is my opinion, you know, even though the U.S. SDN effect and keep program can take a couple of trends we started recognizing that we're getting fast in key approvals I.

I don't want to Jinx, it was faster than CE marks and that's because of some bottleneck issues and clearly some of the MD. Our standards are going to be in place here in may of 2020. So.

And our pipeline.

[noise] analysis does come into play because if it takes a year and a half to get the CE Mark.

For a market that's 20% the size of the U.S. market.

We do have to fine tune that them decide where to allocate the capital.

Is there's going to change the fact that we don't have devices for our partners in the European Union I don't think so long term, it's just the timing of cash flow and clearly the CE. Mark also has an impact on other geographies that use the CE mark to ease their regulatory to get their regulatory approvals in their geography. So short answer is.

It it may change all mines on a pipeline product.

But what the real impact is it's going to take longer.

And just to add a little bit more color, Mike and could be perfectly clear.

It Gary's response in terms of the allocation of capital is is accurate. It does not mean that were changing guidance with regard to R&D spend that was already as determined at the time, we issued guidance back in October.

And I'll just remind you the folks on the call here that the of the guidance for R&D is maybe about $3 million less than what we spent in 2019 and that's by design, mainly I think I mentioned previously that the result of the transcend study costs are coming down, but we're starting.

To see incremental expenses, what Sundance and of course of bass I'd just sent some of the development activities, but I'll just remind you that as part of the guidance, we did not reflect in the guidance any.

The axis.

Our clinical.

Funding and that was primarily because I think as we've mentioned previously the the first in human clinical data coming from the the initial study will be available sometime here in our third quarter and at that point, we'll have a conversation or expect to have a conversation with our our partner Abbott about their interest in.

The technology. So it's really not doesn't have anything to do with the CE, marking its more about whether or not.

We would be negotiating with a partner with regard to who wouldn't be funding. The study. So just wanted to make sure we're putting a little bit finer point on it. So that you understand what's in and out with regard to the R&D guidance for the year.

Terrific. Thank you.

Thank you at this time, we have no further questions in queue I'd like to turn it back to Gary Maharajas for closing remarks.

Well listen thank you, everyone and to have a great meeting a evening until next of quarterly update.

Right.

Thank you ladies and gentlemen, this concludes todays call you may now disconnect.

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