Q4 2022 Surmodics Inc Earnings Call
Ladies and gentlemen, thank you for your patience please remain on.
On the line your conference call will begin momentarily again, we do appreciate your patience Cleveland mean onto line your conference call will begin momentarily. Thank you.
[music].
Welcome everyone to somebody <unk> fourth quarter and fiscal year 2022 earnings call. Please.
Please note that this call is being webcast. The webcast is accessible through the Investor Relations section of be Thermotics website at www Dot from IDEXX Dotcom, we're an audio replay will be archived for future reference.
An earnings press release disclosing for modest quarterly 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 to your questions on todays call may contain forward looking statements.
These forward looking statements are covered under the safe Harbor provision of the private Securities Litigation Reform Act of 1995 and include statements regarding <unk> 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 commodity forward looking statements, resulting from certain risks and uncertainties, including those described in somebody's S. E C filings.
<unk> 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 somebody believes they provide useful information for investors. Today's earnings release contains reconciliation table to GAAP results.
I would now like to turn the call over to Mr. Gary Maharaj, Thermotics, President and Chief Executive Officer. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for joining us for our fourth quarter and fiscal year 'twenty to 'twenty two earnings calls.
Overall, it has been a solid quarter and we achieved strong revenue performance and continued progress on our strategic objectives as we closed out the year.
I'll start my remarks today with a brief review of our revenue performance for the fourth quarter and full year.
In the fourth quarter fiscal 2022, we achieved total revenue of $26 million representing growth of 8% year over year.
We were pleased to finish the year on a strong note exceeding the high end of our revenue guidance, which implied fourth quarter growth of 4% year over year.
Our total revenue growth in the fourth quarter was exclusively driven by medical device revenue, which increased 12% year over year offset slightly by a 1% decrease in in vitro diagnostics of IBD revenue.
Within our medical device business the outperformance that we saw in the fourth quarter relative to our expectations was driven by a combination of stronger than anticipated product sales, including sales of followup towns and sublime products, along with higher than anticipated license rate fee revenue related to <unk>.
The <unk> agreement.
Our strong fourth quarter revenue performance enabled us to generate total revenue of $100 million for the full year fiscal 2022 as.
As a reminder, fiscal 2021 included $11 3 million of revenue that was recognized in connection with an Abbott milestone payment.
Normalizing for this milestone payment we grew total revenue by 5% year over year in fiscal 'twenty, two driven by 6% growth in our medical device business on a normalized basis and 3% growth in our IV business.
All in all we were pleased by the solid revenue performance achieved by our team as we continue to invest in our business and position symbiotic for strong sustainable long term growth.
Tim will discuss our financial results in further detail, but first let me share an update on our recent operational progress with respect to the three strategic objectives, which have been our focus.
Beginning with our first objective to achieve pre market approval for the surveil drug coated balloon and support abbott's commercialization efforts.
As a reminder, after submitting the final module of our survey the PMA submission to the FTE on June 21 2021.
We received a request from the agency for additional data to support their review, which we discussed in our fourth quarter fiscal 2021 earnings call.
Much of this past fiscal year or regulatory and clinical teams have been focused on engaging with asti to obtain clarity on the additional data and test requested and obtaining this data by working in partnership with independent Test labs.
During the fourth quarter. Our teams continued to work diligently with our independent testing partners to Gaza disrupt visit data with our external advisors to prepare our response to the agency's comments.
As a result of our team's efforts I am pleased to report that on October 13th we submitted a complete response to Fda's comments on Elba Silvio PMA application.
Our Saville PMA submission is currently under review by the agency.
While the duration of the Fda's review processes ultimately outside of our control, we anticipate obtaining approval by the end of the second quarter of fiscal 2023 as.
As a reminder, receiving PMA approval will result in either a $30 million or $27 million milestone payment from Abbott, depending on whether the approvals received on or before December 31st 2022.
If we needed to receive PMA approval on or after June 30th 2023, the milestone payment would be $24 million.
Although we can never be certain about what action. The FDA will take regarding our application for pre market approval of surveil, we believe strongly that application and all related data supports the safety and efficacy of surveil and ultimately the approval of the product.
On November 1st we were pleased to see the 24 months data from our surveil transcend clinical trial presented the vascular interventional advances conference also known as vivo.
These data demonstrated comparable sustained clinical outcomes between the old ECB and impact Admiral GCB cohorts through 24 months in both primary and safety efficacy endpoints.
This is despite the impact device, having 75% more paclitaxel.
In addition to our regulatory progress we are focusing on preparing to support abbott's can lose utilization of <unk>, which we continue to expect following the receipt of the PMA.
To that end the semantics on avid teams have had several meetings in recent weeks to review and discuss a variety of aspects regarding Atlas plans for U S commercialization, including launch timing and order forecast. We obviously limited in terms of what we can discuss publicly at this stage, but suffice to say we.
We remain excited about our partnership with Abbott and the prospects for U S commercialization after severe.
<unk> P M.
Turning to our second strategic objective to demonstrate the commercial viability of our sublime radial pulse arterial and venous thrombectomy platforms.
We began the early commercialization of our sublime radial and pounds arterial platforms and our limited scale in the first quarter of fiscal 2022 inch.
In tandem with building out our direct sales force, which initially included only five territory managers.
Throughout the fiscal year, we continued our work to establish onboard and train our direct sales team.
At year end, our direct sales force consisted of 27 territory managers.
In addition to establishing our direct Salesforce fiscal 2022 has largely been about building a commercial pipeline for sublime radial endpoints arterial thrombectomy platforms building. Our initial customer base is a key aspect of this process and one which requires each potential new customer to pass through several phases.
Including approval from a hospital clinics value analysis Committee.
Our stated goals in this respect and fiscal 2022 with over 100 total customers.
<unk> and supplying products, while generating modest, but meaningful and growing revenue beginning in the second half of the year in connection with increasing adoption and utilization of these products.
I'm pleased to report that we achieved both goals at year end, we had just over 100 total customers and from a revenue standpoint, we were pleased to see strong sequential sales growth in each quarter throughout fiscal 2022.
In the second half of fiscal 2022, we generated more than three times as much to blame and pounds revenue compared to the first half of the year.
In the fourth quarter, specifically, our sales organization continues to focus on building, our customer base and driving repeat orders and all existing accounts. We saw strong sequential sales growth on a quarter over quarter basis, along with continued evidence of increasing adoption as evidenced by our expanded customer base and terms.
A follow up pipeline of perspective customers, we continue to see healthy growth in the number of evaluations by hospital value analysis committees and from a utilization standpoint, approximately 80% of our customers ordered one or more times during the fourth quarter on par with the levels that we saw in the third quarter.
While we remain in the very early innings of our initial commercial efforts with an average rep tenure of seven months across our direct Salesforce. We're pleased with the progress we're seeing with the foundation that we have established to drive future growth in the years to come.
And lastly, with respect to our food strategic objective.
To drive revenue growth and optimize cash flow from our medical device coatings offerings in all of IBD businesses.
For full fiscal 2022 revenue growth from our medical device coatings offerings in our IBD business was 2% and 3% year over year, respectively.
Our medical device coatings revenue growth was consistent with a low to mid single digit range, we anticipated heading into fiscal 2022, while the growth of our IBD business came in slightly below our initial expectations for the year due to a decline in R&D services revenue IBD product sales, however increased eight.
<unk> percent year over year.
Both of our medical device coatings offerings in our IBD businesses delivered solid operating results. This past year in line with our expectations and we remain confident in their ability to continue to generate meaningful operating income.
Putting our growth initiatives in 2023.
Before I discuss our priorities for 2023 I'd like to provide a quick update on some of our recent progress related to our new product pipeline and financing strategy.
On the new products front, beginning with our Sundance Sirolimus drug coated balloon.
We were pleased to see the six month data from our 35 patients swing below the knee first in human trial presented at the amputation prevention Symposium on October 11th.
These data met the trials primary safety endpoint and no perioperative, that's no amputations at 30 days and demonstrated excellent primary patency of 88, 5% at six months.
We remain focused on identifying and evaluating potential partnership opportunities for the development and future commercialization of Sundance.
In recent months, we have received interest from a number of large medical device companies and have been engaged in discussions with several companies in connection with this process.
Although it would be premature at this point to provide further details on these discussions we've been pleased with the level of interest shown in Sundance, which reflects our belief in the potential of this technology to improve the treatment of arterial blockage below the knee.
With respect to our pounds venous thrombectomy platform.
We've resolved the manufacturing delays that we discussed on our third quarter earnings call and plan to continue to conduct limited the market devaluations of the product in the second quarter of fiscal 2023.
Our aim in conducting these limited market evaluation, so new products is to gain experience across a wide variety of cases and clinical conduct conditions and evaluate the feedback from numerous physicians. The Ria will feedback obtained through these evaluations will help inform any potential design enhancements that could benefit physicians and <unk>.
<unk>, while optimizing commercial viability.
In terms of the progress made on our financing strategy on October 17th we announced that we retired our prior revolving credit facility and entered into a new five year credit agreement, providing us with access to up to $125 million in non dilutive debt financing.
As we discussed previously we believe securing this increased borrowing capacity as a responsible step given the current macro environment.
It enables <unk> to further strengthen our balance sheet as we await PMA approval for severe <unk> and ensure we have the financial flexibility to support our long term growth strategy.
Tim will provide some additional color on the agreement later in today's call.
Yeah.
Stepping back.
We brought fiscal 2022 to a strong conclusion in the fourth quarter generating solid revenue performance and continued operational progress I'd like to thank the entire <unk> team for their dedicated efforts during the past year and their contribution to our success as we continue to work to improve the lives of the patients that benefit from our <unk>.
<unk>.
As you can see from the some of the progress that have highlighted in recent months, we're not taking our foot off the gas in fiscal 2023 with respect to our three strategic objectives, which are as follows.
To achieve the PMA for surveil and support Abbott's commercialization efforts.
To advance the initial commercialization of our sublime radial is pone saw chivas thrombectomy platforms.
Turning the corner for market entry to rapid growth.
And third to drive revenue and cash flow growth from our medical device coatings offerings in IBD business.
By continuing to execute on these strategic objectives and remaining focused in our approach capital allocation, we will position <unk> to drive long term growth.
And ultimately generate enhanced future value for our shareholders.
I'll now turn the call over to Tim Arens, our Chief Financial Officer to provide more details on our fourth quarter fiscal 2022 results and fiscal 2023 guidance Tim.
Thank you Gerry total revenue for the fourth quarter of fiscal 2022 increased $2 million or 8% year over year to $26 million compared to $24 million in the prior year period.
Product revenue increased $1 9 million or 15% year over year to $14 4 million in the fourth quarter of fiscal 2022.
The year over year increase in product revenue was primarily driven by medical device product revenue, which increased $1 6 million or 26% year over year due to strong sales of our devices, including growing contributions from sales of our pumps arterial thrombectomy and sublime radial platforms.
We also saw contributions from growth in IBD product revenue, which increased 240000 or 4% year over year driven by growth across several IBD product lines, which was partly offset by unfavorable order timing for our distributed antigen products.
Royalty and license fee revenue increased 640000, or 7% year over year to $9 5 million license.
License fee revenue increased $1 million or 84% year over year related to our surveil agreement with Abbott.
Royalty revenue decreased $390000 or 5% year over year.
Royalty revenue continues to be impacted by multiple pressures on procedure volumes related to hasbro capacity constraints and customer supply chain disruptions.
R&D services revenue decreased 500019% year over year to $2 1 million.
The year over year decrease in R&D services revenue was primarily due to the completion of our customer development program and our IBD business.
Also we discussed in previous calls R&D revenue continues to be impacted by lower customer demand for our medical device coating services largely due to continued supply chain challenges related to certain customer supplied products.
Before I continue down the P&L, let me remind you that in the fourth quarter and fiscal 2021, we had a $3 $6 million benefit to operating income related to the employee retention credit or E. R. C. Clearly.
The cares Act.
This $3 6 million benefit represents a headwind to our year over year performance for the fourth quarter of fiscal 2022 impacting product gross margin.
<unk> expense and SG&A expense.
Details on the prior year benefit it can be found in our fiscal 2021 and Form 10-K.
Product gross margin in the fourth quarter of fiscal 2022 was 61% compared to 67% in the prior year period. The decrease in product gross margin was impacted by a three 7% point headwind from the prior year ERC benefit and by changes in product mix related to the.
Introduction of new products that have yet to benefit from scale.
R&D expense, including cost of clinical and regulatory activities increased $1 5 million or 14% year over year to $12 3 million in the fourth quarter.
In addition to the ERC headwind I mentioned earlier the year over year increase in R&D expense was driven by increased product development investments in our parks and supplying product portfolios, partially offset by lower drug coated balloon spend.
SG&A expense increased $5 9 million or 75% year over year to $13 8 million in the fourth quarter of fiscal 2022.
The increase in SG&A expense was primarily driven by increased sales and marketing activities, including the expansion of our direct sales force and related investments to support the commercialization of our pumps and supplying products.
Our medical device business reported an operating loss of $6 2 million in the fourth quarter compared to $800000 loss in the prior year period the.
The year over year change was driven primarily by the aforementioned sales and marketing investments. The prior year period also includes a $2 3 million benefit related to the ERC.
Our IBD business reported operating income of $2 8 million in the fourth quarter or 43% of revenue compared to $3 4 million or 51% of revenue in the prior year period.
Prior year period included a $480000 benefit related to the ERC.
Taking into account the ERC headwind IBD income as a percentage of revenue was comparable to the prior year period.
Now turning to income taxes, we recorded income tax expense of $7 9 million in the fourth quarter of fiscal 2022 compared to income tax benefit of 270000 in the prior year period.
Tax expense for the fourth quarter included a noncash charge of $10 2 million to record a full valuation allowance against U S deferred tax assets it.
It is important to note that this charge has no impact on cash taxes.
And that the net operating losses that underlie the deferred tax assets remain available to reduce future cash tax obligations.
GAAP net loss in the fourth quarter of fiscal 2022 was $14 7 million.
Or a loss of $1 six per diluted share compared to a loss of 290000 or a loss of <unk> <unk> per diluted share in the prior year period.
non-GAAP net loss in the fourth quarter of fiscal 2022 was $3 7 million or a loss of 26 cents per diluted share compared to a loss of $1 3 million or a loss of <unk> 10 per diluted share in the prior year period.
Adjusted EBITDA loss in the fourth quarter of fiscal 2022 was $2 5 million compared to adjusted EBITDA of 510000 in the prior year period.
Our adjusted EBITDA in both periods includes an adjustment for stock based compensation expense for your reference we include a detailed reconciliation in our earnings press release.
Moving to the balance sheet in the fourth quarter, we began was $22 million of cash and investments during the fourth quarter cash used by operations was $2 5 million and capital expenditures totaled 570000.
As of September 32022, we had cash and investments totaling $19 million and the balance on our line of credit remained unchanged at $10 million.
Subsequent to the quarter end, we entered into a new five year credit agreement with mid cap financial in mid October comprised of up to $100 million in term loans and a $25 million revolving credit facility, we drew $25 million on the term loan and $5 million on the revolving credit facility at close.
These proceeds were partially used to retire prior revolving credit facility with Bridgewater bank of which $10 million was outstanding.
Upon closing our cash balance increased by $19 5 million.
Turning now to fiscal 2023 guidance, we expect fiscal 2023 revenue to range from $103 million to $107 million, representing an increase of 3% to 7% compared to the prior year.
We expect fiscal 2023, GAAP loss per diluted share to range from a loss of $2 80.
To a loss of $2 40.
non-GAAP loss per diluted share in fiscal 2023 is expected to range from a loss of $2 54.
To a loss of $2.14 our fiscal 2023 guidance excludes revenue associated with the achievement of the final surveil milestone payment upon receipt of the PMA from the FDA, which has been our practice with previous regulatory milestones and it also excludes surveil commercial.
<unk> revenue.
As Gary commented earlier, we anticipate receiving the PMA approval by the end of Q2 fiscal 2023, which will result in either a $30 million or $27 million milestone payment from Abbott.
The revenue that would be recognized in fiscal 2023, assuming that $27 million milestone payment would be approximately $25 million.
The earnings per share impact would be approximately $1.75 per share.
I'll now share a few additional considerations for modeling purposes from a macro perspective, our guidance assumes that the current environment remains consistent with fiscal 2023 with respect to the recent headwinds, including supply chain constraints and hospital staffing shortages impacting procedures.
<unk>.
Our fiscal 2023 total revenue guidance assumes revenue for our two businesses medical device and IBD.
<unk> to be approximately 73% and 27% of revenue respectively.
Product revenue is expected to be approximately 58% of total revenue driven in part by contributions from sales of our sublime radial and <unk> thrombectomy platforms as we continue to drive increased adoption and utilization.
Revenue associated with our legacy medical device coatings offerings, and IBD businesses are expected to grow modestly.
Abbott Surveil license fee revenue is expected to range from $3 5 million to $4 million. This compares to $5.
$5 7 million in fiscal 2022.
In terms of expenses, our fiscal 2023 guidance reflects product gross margin contraction of several hundred basis points, driven primarily by product mix and inflationary pressures.
We expect operating expenses, excluding product costs to grow in the low to mid teens, driven primarily by a full year expense associated with the fiscal 2022, new hires and investments to support our growth initiatives.
With regard to R&D expense, we anticipate quarterly spend of 12 $5 million to $13 million.
SG&A expense is expected to grow approximately 500000 sequentially each quarter throughout the year.
Related to our recent financing and interest expense is expected to be $3 4 million.
With respect to tax we expect to have minimal tax expense during the year as a result of the establishment of the full valuation reserve against our deferred tax assets. This means our earnings per share will not include tax benefits on net operating losses.
Lastly, with respect to our revenue growth in the first quarter of fiscal 2023, we expect first quarter revenue to decrease in the high single digits.
Order over quarter sequential basis.
We expect revenue growth to increase on a quarter over quarter basis, beginning in the second quarter and continuing for the remainder of fiscal 2023.
With that operator, we would now like to open the call for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
We do ask that you limit yourself to one question and one follow up if you would like to ask additional questions. We invite you to ask yourself because the queue again by pressing star one.
Okay.
Okay.
And our first question will come from.
Mike Perkowski with Barrington Research. Please state your question.
Hey, good morning, So I guess.
On the pouncing sublime contribution obviously.
Improvement from first half second half I think you said it was three times.
It sounds sounds good but.
It's sort of a meaningless as a standalone statement my view because if it's if it's $10000 going to 30000 not not so impressive if it's 1 billion going to $3 million, which I'm sure. It's not I'm sure. The truth is somewhere in between those two ranges.
It's more meaningful and I guess my question is when given how much of cash flows and the income statement, you're giving up for this investment in sales.
When might you guys start to disclose what you are actually generating in those platforms.
Mike. Thank you for the question. It's a question that I think is an important one and it's one that we're sure others are thinking about.
The way that Gary and I think about this this past year and currently today, we're in a in a position where we're actually focused more on making sure that were built.
Building out the customer pipeline scene.
<unk> repeat orders and.
<unk> seen increasing utilization amongst our customer base and that those are the measures and the metrics that we believe we will get to the output that you are asking for which is what can we expect in revenue.
We're not looking to put too fine of a point on it other than to say that a significant portion of the growth for fiscal 'twenty three with regard to our revenue and our product revenue in particular is expected to come from pumps and <unk> will have more to say on it as we go through the next couple of quarters.
It's really these initial measures.
Which really are the drivers for the performance that we anticipate and expect to see over the course of the fiscal year.
And Mike it's early innings for us and so we don't want this young business that we whipsawed around by changes.
A couple of hundred thousand dollars and as I had said I think in the last earnings call right.
Right around the end of the first half of the year.
We will have an average rep tenure for about a year, there and at that point things start going from a little more stability predictability and getting away as you mentioned from the law of small numbers Needless to say, we're quite excited with the growth, we're seeing and as the base of that growth.
Increases, but the actual growth.
Quarter over quarter continues to surge the numbers get bigger pretty quickly. So I would say, it's too early to call right now to share at this level, but as we get through the less of the year, we may change that approach.
Can you share.
Sort of the total rep count of disappointing and sort of you know the associated annualized cost of that.
Perhaps as it stands today.
Yes.
Yes.
It was what we said was we ended the year as of the end of September was 27.
District managers territory managers now I will point out that one of the things that our guidance does contemplate as we will have several opportunistic hires during the year, primarily not exclusively in the back half of the year.
And the second part of the question in terms of.
We're anniversarying obviously in 2023.
Full year hiring of people, we brought on a different vintages during fiscal 2022 right.
I might just guide you to take a look at the income statement in the earnings release and take a look at the comparison between the 2021 and 2022 at quarter end, you'll notice that there has been an.
An increase in SG&A.
And that SG&A increases approximately $5 million year over year.
It's a great place to start you can imagine that is a good portion of the year on year increase is associated with all the activities, including the territory managers. The sales force. If you will that gives you some perspective in terms of where we're at we did highlight how we are thinking about growth going forward in terms of SG&A of 500000.
On a sequential basis per quarter.
It's really to support marketing activities as well as SG&A across the company.
It's not necessarily supporting increased head count at this point.
Okay and then.
Going over to surveil sort of base I guess on your most recent interactions with FDA I mean.
Do you feel less confidence sort of in the time table that you're hoping for meeting end of Q2 than maybe you did three to six months ago or about the same confidence level.
And I know this has been pushed out multiple times, but.
I guess, what would you Gary would you be willing to comment just sort of based on the most recent.
Interaction I mean, your confidence level on that time timetable.
Yes, I am quite confident.
Three key reasons, we the totality of our data is impeccably strong and we repeated.
Many numerous preclinical clinical because the clinical data has been presented and it looks that looks awesome and so the totality of that data that.
The submissions.
The response alone was almost 5000 pages to give you an idea of the types of data, we submit and so.
So I'm confident of that data the transcend data.
Look I wish I could sum my chest and say this is the best run trial in this in this field of drug coated balloons, the first and only and only I want to emphasize pivotal randomized level III evidence of a head to head trial, bringing that home through the Paclitaxel issue and the Covid was.
Phenomenal and the data looks phenomenal as we've seen in the presentation last week by Dr. Rosenfield of vivo and then the quality of our response, we left no stone unturned. So.
What I'll say in terms of the timing by the end of the quarter is not synonymous with the end of the quarter. So we wanted to make sure given the timing of the FDA and the fact that the clock does stop for questions. We wanted to be sure to guide our investments appropriately nothing has changed in that regard for me. However.
Okay, I really appreciate that last sentence or two of clarification, Okay, Alright, and then.
Tim I, just want to make sure for modeling purposes. If one were to assume that that March quarter, the end of <unk>.
Fiscal Q2, you guys get the regulatory.
Yes get the regulatory clearance if you get that then the revenue recognition associated with that in that quarter would be $25 million would be less than that yes.
Yes, it will be a little bit less than that but not much and the remainder of the 25 will flow through in Q3 and Q4.
I would comment just a little lighter than the 25.
Perfect Alright, thanks, guys really appreciate it.
Thanks Mitra.
Our next question comes from.
Oh now from Lake Street Capital. Please state your question.
Yes, good morning, guys. So.
If I'm listening correctly, and perhaps I missed this in past calls but.
Sounds to me like you're committed to pound since the blind.
Pursuing.
Internally as opposed to where the partner.
Over the long term you mentioned I think years going forward.
So a can.
Can you just describe what it is that.
Has led to that decision.
And then maybe can you help us think about the future.
As it relates to the pipeline and how you are thinking about.
Either internal commercialization partnerships. Thank you.
Thanks Brooks.
I'll say, it's all along to them Google has always been value creation. We're in the very early innings here again with seven seven average months of Rep tenure right now what we are focused on is building that revenue base building secure and stable and growing revenues. These devices.
And what's a very tight.
Sales team.
That's what fiscal 'twenty threes about failure I don't want to talk about the long term guidance fiscal 'twenty, four but leaving fiscal 'twenty three I expect that we will see.
The run rate of revenue that business to be quite.
Quite satisfactory to US and then we will take it from there I don't want to speculate or I shouldn't say speculate I don't want to.
Give a long term view of that in these very early innings right now, let's just get through 'twenty three and we will update you as we go forward on that for now we're really excited where we're going we're really excited to see that growth in the hospitals and the value analysis getting through the value analysis committees and we see <unk>.
<unk> something that has some large enduring value for our shareholders.
And Brooks I know they did ask a question about the pipeline.
I think it's probably important to just spend a little bit of time, but we don't want to signal too much but as you can imagine there are several products that are in development, both with sublime and parts, we've communicated a bit moron.
We have talked Gary talked a little bit about the <unk> technology, and where we're at with that that will be an important contributor.
And I think we've talked previously about moving from BNS and the pulmonary embolism with pounds.
So there's some really exciting differentiated novel technologies that really address.
And problems in large addressable markets, we're super excited about them and we think thats going to be part of the calculus for our future.
Okay.
Thank you guys is it more likely youll partner down the road or do you think.
Do you see.
Pipeline device a corridor.
For the pipeline devices.
You know you never want to say no. You also have to look at each opportunity, but our incredibly strong bias is this is going to be in the hands of our commercial team and of our direct sales organization to build that market.
Okay. Good thank you.
Sure.
Our next question will come from Jim Sidoti with Sidoti <unk> Company. Please state your question.
Hi, good morning, and thanks for taking the questions.
So can.
Can you talk a little bit about what's the impact on the income statement will be once once the drug coated balloons approved.
That would be on the revenue line the gross margin line and the operating income line.
It's a great great question, Jim and there is probably two ways to answer it one is post commercialization, which I'll tell you we'll hold off on sharing anything in terms of our thoughts that on that topic until we're further along here and have received.
<unk> approval and we have received.
Commitments binding commitments on Pls from Abbott.
But suffice it to say, we're really excited about what we've seen with Abbott forecast for launching and beyond.
In terms of how to model the milestone payment as I've described if you assume a $27 million milestone payment.
Recognizing the vast majority of that little less than $25 million in Q2, and Q3 and Q4 will have modest amount.
And then I mentioned also in my prepared remarks, we're looking at about $1 75 of EPS in the vast majority of that would be hitting in Q2, our fiscal Q2. So that should give you a little bit of perspective on how to think about the financial impact.
On a gross margin, that's just going to drop straight down to gross margin. When you think about operating income, it's going to drop straight down to operating income.
Okay, but my question really was it related to bio it's okay, but it was too.
Future sales and I know you don't want them too quantitative about it but on a qualitative basis.
Average sells the product well that resulted in increased revenue for you on the product sales.
And then what would be the impact on gross margin and I think they have a profit sharing agreement with them. So how will that be reflected on the income statement exactly so the way we've talked about this previously is to think about the product revenue is going to be hitting the product revenue line, but also the profit sharing will also hit the product revenue line.
And so you can imagine on the profit sharing there really arent product costs.
We'll just say longer term on scale I would expect that we would be med tech like in terms of what you would expect from the margin.
On both the revenue and the profit sharing and for those of you, who probably want a little bit more clarity on how Gary and I think about med tech like.
I think 60% or greater.
Okay.
And then.
The guidance you gave for.
For R&D it sounds like it's going to be flat to up maybe $1 million or two.
Fiscal 2023.
What does that spend on is that on the radio.
Pounds or is that more on the drug coated balloon or the drug coated charted bogey, yes, we'll see we'll see a bit of a decline on the drug coated balloon spend in fiscal 'twenty, three which is going to be offset.
Some of the product development activities, both with regard to pounce VNS parts in general and of course the blind.
We also have a few things that we're thinking about here with regard to our post market studies.
We will have more to say on that in the future in the coming quarters.
But our guidance does reflect some activities with regard to that.
Okay, and then last one from me on the tax rate, what if and when.
No.
The devices approved revenues coming in you do start to hit profitability.
We go back to a normal tax rate at that point.
Being able to start.
I think some of these deferred tax assets, we have a pretty.
Pretty minimal tax rate initially will.
We'll be able to use our net operating losses to offset.
The benefit that we anticipate receiving from the milestone payment from Abbott.
And that's why you heard me mention that we will have minimum minimal tax expense in the year.
Thats really whats driving that and of course Youre, absolutely correct as we find ourselves and progress towards profitability will start returning reverting back to a normal tax rate. So it is for us in the U S. It's about 21%.
Okay alright, thank you.
Thank you Jim.
Again, ladies and gentlemen, if you would like to enter the queue for questions. Please.
One on your telephone keypad at this time.
Our next question comes from Mike Matson with Needham and company. Please state your question.
Yes. Thanks.
I wanted to start with the pounds. So.
On the venous side my understanding is that you probably need to do trials to get a DVT or PE indication.
Do you have any plans to do that and do you have any if so do you have any feel for like how much those trials would cost and how long they would take.
Yes. So the first the first idea with Pons Venus is to complete the limited market evaluation and those products are coming off the manufacturing line in <unk>.
In January so that we can get back in.
Reinitiate that limited market evaluation subsequent to that to go from.
Claim of clearing clot in a vain.
Two treating deep vein thrombosis in.
In the past, it's not been an IDE study, but currently there is a very strong indication that you have to do some sort of IDE study.
Very early indications is premature to speculate on the cost, but I would say that's in the.
Probably 100, maybe up to 150 patient type of.
Study two.
To be done so that will give you an idea I don't want to speculate on the cost of that now it is not a required requirement to enter the market, but in the medium term et cetera.
Our requirement to be able to be more competitive so I hope that answers that question there.
Yeah. It does thank you.
And then I.
I guess for for Sundance.
It's good to hear that you've got some potential interested partners but.
What do you want from a partnership and how it sort of be structured ideally.
How similar or would it be or different from surveil. The surveil agreement with Abbott I guess yeah.
Yes.
We clearly first of all Lisa two different archetypes of products below the knee versus SFA product and the real issue for US is we would like to see something for the company and our shareholders represents the risk we took and the investment we put into it because.
That is a high risk now there is risk in conducting getting an IV and conducting a pivotal trial.
No.
Nick.
I have not seen any anti risk synodic device.
Really meet primary endpoints, especially paclitaxel devices have not been successful below the knee is one other company has just started enrolling in that pivotal trial. So what we'd like to see as we would like to have a big brother her big sister to help us both conduct that trial and defray the expenses of that trial.
10% to 20000 devices, you have to build to conduct the trial and get ready for <unk>, So what Tim and I would prefer as we'd like to see as a small public company. Some form of revenue recognition as we go we don't want to be the bank and.
And take all the risk in that way.
It really is I don't want to speculate on how that looks versus the Abbott trial. Because this is a this is a clean sheet I'll put it that way and the very large strategics were dealing with.
Clearly have a view of what they like is just marrying up to our view.
So just to sum up it's valuable do have created already this future value, but future investment to be created and <unk> to be able to aggregate some of that value as we go forward for our shareholders will open.
Really wide range of proposals and that's what we've asked the strategics, we don't want to negotiate against ourselves. So we like to hear from them for the publicly I prefer to keep that ourselves a little tighter at this point.
Okay. Thanks, and then finally just.
Tim I don't know if youre willing to give us some kind of forecast for cash use next year, but I mean that EPS net number and I understand that you've got I'm talking excluding this potential milestone obviously, but.
The EPS number looks pretty negative so I'm assuming that.
Again without the milestone payment that there is a fairly high cap rate of cash consumption. During 'twenty three is that right or.
Let me walk you through that thank you for the question I was glad to hear somebody asset.
If you think about 'twenty, two we've probably consumed about $22 million of cash I think.
Use of cash to fund operations was right around $17 million I will I would guide folks to think that it's going to probably be somewhat similar a little bit north.
The use of cash to support the operating activities, but then you'll have to put another $3 $4 million associated with the interest expense associated with the credit facility on top of that and so that would get you probably somewhere.
<unk> 20 $22 million to $24 million.
We do have an earn out payment of about $1 million that will occur in 'twenty three.
And I think we could be looking at.
Somewhere maybe a doubling of the Capex that we've spent here in 'twenty, two which was a little north of $3 5 million.
You need to do some some investments here to support the coatings and diagnostics capacity.
Replace certain equipment. So net net I think youre, probably looking at around 30 ish million of cash use in fiscal 'twenty three based upon this guidance.
So that's really helped adding yes, yes it.
It does not include the surveil milestone payments or any subsequent.
Financial impacts from commercialization of surveil.
Okay, Yeah, Yeah got it thank you.
Yeah.
We are currently seeing no remaining questions at this time that does conclude our teleconference for today. Thank you for your participation.
Yes.
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