Q3 2023 Surmodics Inc Earnings Call
[music].
Welcome everyone to somewhat ex 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 <unk> website at Www Dot <unk> Dot com.
An audio replay will be.
Oh, Hi, Paul future reference and earnings press release disclosing sell more quarterly results was issued yesterday and is available on the company's website as well.
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 90 95.
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 such forward looking statements, resulting from certain risks and uncertainties, including those described in the company'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 some IDEXX believes they provide useful information for investors.
Today's earnings release contains a reconciliation table to GAAP results.
I would now like to turn the call over to Mr. Gary Maharaj, somewhat president and Chief Executive Officer.
Please go ahead Sir.
Thank you operator, and welcome everyone to our earnings call for the third quarter 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 fault performance followed by a discussion of our recent operational progress and thoughts on our outlook for the remainder of the fiscal year.
Kim will then discuss our third quarter financial performance in detail and reveal a 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 fall revenue performance.
In the third quarter of fiscal 2023 reported total revenue of $52 $5 million representing growth of 111% on a year over year basis. Our total revenue performance was driven by exceptionally strong growth in our medical device segment, which increased 160 <unk>.
3% year over year more than offsetting a 12% decrease in revenue from our in vitro diagnostics for IV <unk> segment.
Our total revenue in medical device revenue growth benefited from the achievement of FDA pre market approval for our surveil drug coated balloon.
As a result of this achievement, we received $27 million milestone payment during the quarter from a commercial partner Abbott of which $24 6 million 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 P. M. A 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.
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 are full of pounds and supplying products along with strength across our product portfolio, including sales of our performance coating reagents.
You know IBD 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 third quarter.
Shifting to an update on our recent operational highlights during the third quarter. Our team made important progress with respect to each of our three key strategic objectives for fiscal 2023.
While continuing to advance our pipeline of vascular intervention products towards commercialization.
I'll start by discussing our recent progress with respect to each of these objectives, which as a reminder, all one.
One to achieve FDA pre market approval or PMA for the surveil drug coated balloon and then support them our partner Abbott as they prepare to commercialize the product too.
Two to advance the initial commercialization of our sublime radial in pounds, so tea real thrombectomy platforms, and three to drive revenue and cash flow growth from our medical device performance coatings offerings and IBD businesses.
Beginning with our first strategic objective securing the PMA for Surveil D C D.
We ended the food cause a fiscal 'twenty three with strong momentum on the regulatory front, having secured formal feedback from the FTE is review team that provided the additional clarity in the process and content required to successfully amend our application for the PMA.
As we shared via press release on March 28, we believe the additional clarity we obtained will enable us to prepare an amended PMA application for submission in third quarter and secure the PMA in the fourth quarter of fiscal 2023.
We submitted the PMA application to the FDA in Mi consistent with our stated expectations in the months, leading up to and following submission. Our team continues continue to engage with the FDA review team to discuss and clarify aspects of our submission and to facilitate their review process.
On June 20th we were proud to announce the receipt of the FDA pre market approval for surveil drug coated balloon.
With this approval our Saville D. C. B may now be marketed and sold in the U S to physicians for percutaneous Trans luminal angioplasty after appropriate vessel preparation of renewable always synodic lesions less than or equal to 180 millimeters in length and femoral and popliteal.
Reis, having reference vessel diameters of four to seven millimeters.
Securing the PMA for the <unk> 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 and developing and applying drug eluting coating technologies.
<unk> Leverages, our proprietary technologies and capabilities with the designed to promote more uniform drug distribution.
More efficient drugs transfer it to the target region, while reducing particularly it's been down Street M to life.
This approval also represents further validation of the strong safety and efficacy profile of also the L. D C D and the results up over 446 patient transcend clinical trial.
As the two year results of this trial demonstrated the Seville D. C. B achieved 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 survey LDC.
Given the numerous challenges that has to be navigated in order to secure this approval, including the S. D is heightened concerns about the use of paclitaxel for the treatment of peripheral artery disease. Beginning in 2019. It also represents a herculean accomplishment by our product development regulatory and clinical teams.
Made possible through the years of hard work dedication and commitment to working in partnership with 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. Commercialization, we've been actively engaged with abbott's commercial and operations team to refine the plan for <unk> commercial launch as.
As a reminder, under the terms of our agreement we are responsible for manufacturing and supplying Abbott with product as they commercialize this will be let's see.
While we are limited in terms of what we can see publicly at this time with respect to the commercialization we expect to receive abbott's initial stocking order during the fourth quarter of fiscal 2023 with commercialization anticipated in fiscal 'twenty 'twenty four.
Look forward to sharing more details in the future earnings call.
Since receiving the <unk> team has been focused on all of the pre commercial activities to ensure our readiness to satisfy abbott's initial stocking order as well as subsequent daughters. We've started up the manufacturing engine photos of the Elisa E. With successful initial test runs of our production and quality process.
With respect to raw materials, we are well positioned to support to support the commercial launch from a people standpoint thrilled to see a we have continued to routine experienced manufacturing team members focused on surveil production.
Teams, who have been responsible for building thousands of surveil units in recent years.
Despite a clinical and regulatory needs. We have also hired several additional team members to provide future support as we scale.
In short, we are well positioned with a capacity materials and processes in place to meet the needs of our commercial partner.
Given abbott's commercial distribution infrastructure their market presence and expertise in vascular care.
Excited to be entering this pivotal stage of fault partnership.
We believe our next generation drug coated balloon 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 challenge.
As presented by peripheral artery disease.
On a related note we were excited to see the FDA published a letter to health care providers in July 11th that summarize the agency's latest views about the potential risks to paclitaxel coated medical devices as I mentioned earlier in my remarks, Paclitaxel has been an area of increased focus on the regulatory scrutiny for the past five.
Five years since the FDA posted a letter to health care providers on January 17, 2019 sharing that concerns the.
The FTC follow up letter published in July is titled Paclitaxel coated devices to treat peripheral artery disease unlikely to increase the risk of mortality. It states that the agency has reached the conclusion that the totality of available data and analyses does not support.
And excess mortality risk for Paclitaxel coated devices.
It goes on to something.
Yeah and analyses that supported this conclusion and clarify the decision applies to all paclitaxel coated devices.
We will also pleased to see the FDA states in the leather 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 let it provides important closure with respect to the concerns that were initially raised by the agency 2019 like other devices in the market the product labeling for the surveil DCD.
Does currently include a standard warning related to Paclitaxel. The FTE noted in the July letter that they will work with device manufacturers to update the product labeling based on the current data.
We look forward to working with agency to make the needed updates to also build ECB labeling and I expect this to be a fairly straightforward process.
Moving to our second strategic objective advancing the initial commercialization of sublime radial and all ponds arterial thrombectomy platforms.
As I mentioned earlier sales of fall of pounds with sublime products were an important contributor to the 38% medical device business product sales growth that we achieved in the third quarter.
From a commercial standpoint, we are pleased with execution of our direct sales team as they work with physicians that potential new accounts to navigate our products through value analysis committees.
As a result of their efforts, we continue to make progress in expanding our base of customers ending the third quarter with more than 215 customers fall a pound since the blind platforms compared to over 170 at the end of the second quarter and we achieved our stated target 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 fruits nine months of this fiscal year, especially considering the workforce reduction that we implemented during the second 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.
The growth in new customer conversions, and we remain pleased with the reordering youre seeing from existing users as well.
<unk> of the size of our team. We're pleased to see continued stability during the third quarter were 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 continued to make progress with respect to a proud registry study, which we initiated during the third quarter.
We believe this study will further underscore the compelling therapeutic benefits EF all powered soft periods thrombectomy system as he used in real world settings.
We are rolling patients at two sites at quarter end, and we continue to anticipate sharing interim data with current and prospective customers as part of our efforts to educate the market and raise awareness.
Yeah.
Based on the progress made over the first nine 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 market development stage fault commercialization effort.
As we look ahead to the remainder of fiscal 'twenty three we expect our customer base to grow to more than 250 accounts at year end and January pound since the blind sales growth in excess of 250% year over year.
As we continue to focus on the raising awareness of the capabilities and the 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 base.
In addition to driving adoption and commercial traction in respect to account pound since a blind portfolio. We are continuing to expand this portfolio with our new product pipeline I will discuss this progress on this front in a moment.
Let me give you a nuggets here about pound since the blind revenue. They have now contributed more than $1 million of revenue per quarter for two consecutive quarters now.
This while small on a relative scale its fantastic news it demonstrates the power of developing and commercializing devices that can change the standard of care.
And we're doing this with a sales team that is still in the early innings and less than 110th the size of larger medical companies as.
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 semantics as vascular intervention strategy.
Yeah.
Turning to our food strategic objective driving revenue.
And cash flow growth from our medical device performance coating offering an IBD businesses well.
We were pleased to see revenue from medical device performance coatings offerings in our third quarter increased 11% on a year over year basis.
Driven primarily by strong field performance coating reagents. 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 IBD industry.
Including the decrease in demand for Covid testing products and stabilization in supply chains, reducing the need for elevated safety stock.
You've together revenue from these categories increased 4% year over year in the third quarter 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, our thrombectomy platform, we're continuing to enhance the capabilities of this portfolio to expand the addressable market with new product introductions and clinical indications most notably on June 14th we announced the receipt of FDA five 10-K clearance for a pounds low profile or L.
P thrombectomy system with a clinical indication for use in vessels ranging from two to four millimeters in diameter.
The addition of pumps L. P will expand the range of 30 pounds arterial system by providing systems. So physicians with product designed to facilitate ease shouldn't removal organized clots and smaller vessels such as those found in the peripheral arteries below the knee.
Securing regulatory clearance for pounds out the takes us one step closer to 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 <unk>.
This limited market evaluation of our pounds L. P. Thrombectomy system by the end of the first quarter of fiscal 2024 and entering full commercialization following its completion.
With respect to our pounds Venus thrombectomy system.
We continue to make progress through a limited market evaluation, which we initiated during the second quarter to collect physician feedback on the system to use across a variety of cases.
Our progress was initially piece by limited product availability, but we were able to work through this constrained during the quarter and accelerate the pace of evaluations we've.
We've been pleased to find physician users emphasizing their appreciation for the systems simplicity ease of use during cases and the feedback we obtained so far has been nicely informative as we prepare for commercialization, we'll continue to progress through this limited market evaluation during the fourth quarter with the goal of <unk>.
During commercialization in fiscal 2024.
Okay.
And lastly at the end of April we commenced a limited market evaluation of our <unk> III five sublime radial access micro catheter.
This is part of what will be the industry's first suite of Talkable high performance micro catheters designed to peripheral interventions and available in both radio and transplant rolling.
We believe the sublime micro catheters will enhance our existing sublime radial access platform.
By empowering physicians with two specifically designed to cross difficult lesions, helping to facilitate the adoption of peripheral treatment by a radial approach. The feedback we have obtained in the old three five micro catheter to date has been positive and we look forward to initiate initiating limited market evaluation of our <unk>.
<unk> and <unk> for micro catheters, the remaining products in this micro catheter portfolio.
Yes.
I'm incredibly proud of our operational and financial accomplishments this past quarter. Our team drove important progress on each of our strategic objectives that we prioritize for fiscal 'twenty three.
This progress enabled us to deliver impressive financial results, including $52 $5 million of total revenue $21 4 million of operating income and $24 6 million of adjusted EBITDA, excluding the $24 6 million of revenue related to the survey PMA milestone.
We delivered total revenue growth in the third quarter of 12% year over year, and we were essentially breakeven on an adjusted EBITDA basis.
As I mentioned in our last earnings call cash flow remains a priority for organization.
From a cash flow perspective, we generated $25 $4 million of cash during the quarter to further strengthen our balance sheet ending the quarter with $44 $6 million of cash and equivalents and approximately $61 million in incremental debt financing available under our existing credit facility.
Excluding the $27 million milestone payment. We will also pleased to reduce our quarterly cash burn to one $6 million of cash use exceeding our stated objective of three five to $4 $4 million up used cash for the quarter as we can continue to control our expense.
<unk> and allocate capital thoughtfully following the implementation of our.
Spending reduction plan and implemented earlier this year.
And lastly, as we continue to advance multiple key products in our pipeline positioning <unk> to drive future growth and value creation through innovation in the years to come.
A symbol discussed we are raising our guidance today to reflect our impressive financial and operational performance in the third quarter as well as our updated expectations for the balance of the fiscal year.
We remain committed to perpetuating, our recent momentum and bringing fiscal 'twenty three to a strong conclusion.
I'd like to conclude my remarks today by congratulating the entire <unk> team 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 third quarter of fiscal 2023 results and updated guidance.
Thank you Gary unless noted all references to third quarter results are on a GAAP and year over year basis total revenue for the third quarter of fiscal 2023 increased $27 6 million or 111% to $52 5 million.
As Gary mentioned, our total revenue in the third quarter of this year included $24 6 million of revenue recognized from the $27 million milestone payment received for obtaining pre market approval of our surveil drug coated balloon excluding.
Excluding the impact of this milestone payment third quarter total revenue grew 12%.
Product revenue increased $1 7 million or 13% to $15 7 million in the third quarter of fiscal 2023 the.
The increase was driven by broad based product sales growth in our medical device business, which increased $2 6 million or 38% driven primarily by increased sales of our pulmonary arterial thrombectomy and sublime radial platforms as well as our performance coating reagents.
Product revenue decreased 810000 or.
Our 11% to $6 4 million. The decrease was driven primarily by several customers actively managing their inventory levels.
The IBD industry is adapting to respond to multiple macroeconomic factors, including the decrease in demand for COVID-19 testing products as well as stabilization and supply chains, which are reducing the need for elevated safety stock.
Royalty and license fee revenue increased $25 4 million or 288% to $34 2 million.
Excluding $24 6 million of license fee revenue recognized in the third quarter of fiscal 2023 from the surveil PMA milestone payment royalty and license fee revenue increased 8%.
Royalty revenue from our performance coatings increased 450000 or 6%.
We implemented during the second quarter of 2023.
SG&A expense was $12.9 million and was unchanged compared to the prior year period.
Contingent consideration gain of 830000 resulted from a non-cash fair value adjustment to acquisition related contingent consideration liabilities.
Our medical device business reported operating income of $21.8 million compared to an operating loss of seven $3 million in the prior year period the.
The year over year change reflects to $24 $6 million in the license fee revenue recognized on the survey opium a milestone payment in the third quarter.
Along with disciplined expense management broad based revenue growth and the <unk> mentioned contingent consideration game.
Our IBD business reported operating income of $2.9 million compared to $3.4 million in the prior year period IBD operating income was 44% of IP revenue compared to 46% in the prior year period.
Turning to income taxes, and the third quarter of fiscal 2023, we reported income tax expense of $13.3 million compared to an income tax benefit of $1.5 million in the prior year period.
Given the magnitude of income taxes this quarter I'd like to take a moment to outline the key drivers starting with the $2004 $6 million in revenue recognized on the PMA milestone payment and.
In the third quarter as a result of the milestone payment we shifted from a taxable loss to a taxable income physician, resulting in significant tax expense.
Also contributing to our income tax expense was recently effective IRS requirement to spread the deduction of U S. R&D extent over a five year period.
As a reminder, we are no longer recording tax benefits for deferred deductions or net operating losses as a result of having established a full valuation allowance against U S deferred tax assets at the end of fiscal 2022.
GAAP net income in the third quarter of fiscal 2023 was seven $3 million or 52 cents per diluted share compared to a net loss of $5.7 million or a loss of 41 cents per diluted share in the prior year period non-GAAP net income in the third quarter of fiscal 2023 was seven $3 million or <unk>.
82 cents per diluted share compared to non-GAAP net loss of $4.7 million or a loss of 34 cents per diluted share in the prior year period.
non-GAAP adjusted EBITDA in the third quarter of fiscal 2023 was $24 $6 million compared to adjusted EBITDA loss of $3.1 million in the prior year period ajar.
Adjusted EBITDA includes adjustments for contingent consideration gain in the third quarter of fiscal 2023 and for stock based compensation expense in both periods.
Our earnings press release includes detailed reconciliation of gap to non-GAAP measures.
Moving to the balance sheet, we began the third quarter of fiscal 2023 with $19.2 million in cash and $29 $3 million in long term debt cash.
Cash provided by operations during the third quarter was $25.9 million, reflecting the 2000 7 million PMA milestone payment from added capital expenditures totaled 470000.
We ended the quarter with $44 $6 million in cash and $29 $4 million in long term debt as of June 30th 2023.
Longterm that includes $5 million of borrowings under $25 million revolving credit facility and $25 million of borrowings are $100 million term loan facility.
As of June 30th 2023, we had approximately $61 million in debt capital available consisting of $50 million on our term loan availability and approximately $11 million of incremental availability on a 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 third quarter as well as our revised expectations for the remainder of fiscal 2023, we now expect fiscal 2023 total revenue to a range from $130 million to 132 <unk>.
Representing an increase of 30% to 32% over the prior year.
Excluding the estimated revenue recognized on the PMA milestone payment, we expect total revenue to range from $105 million to $107 million. This compares to our private range of $103 million to $106 million or an increase of 3% to 6% over the prior year.
We now expect fiscal 2000 twenty-three gap diluted loss per share to range from a loss of 55 two.
To a loss of 40.
Compared to our prior range of a loss of $2 32.
To a loss of $2.
non-GAAP diluted loss per share in fiscal 2023 is expected to range from a loss of 2009.
Until Avasso 14 <unk>.
Compared to our prior range of a loss of $1.98 to a loss of $1.68.
I will now share a few additional considerations for modeling purposes.
Are updated total revenue guidance reflects the following assumptions for the full fiscal year.
Revenue for our two businesses medical device and IBD is expected to be approximately 80% and 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 tacb product and our fourth quarter.
Revenue associated with our legacy medical device performance quoting offerings is expected to grow in the mid to high single digits IBD revenue is expected to decline in the low single digits.
Avid surveil license fee revenue is expected to range from 29.5 million to $30 million, which includes approximately $25 million in revenue recognized in fiscal 2023 on the $27 million PMA milestone payment.
This assumes fourth quarter revenue associated with the PMA milestone of 400000.
In the prior year total avid surveil license fee revenue was $5.7 million.
Are updated diluted loss per share guidance reflects a following full year assumptions product gross margin in the high fifties, reflecting continuing mix impact from growth in device sales during the manufacturing Scaleup days.
R&D expense in the range of $48.5 million to $49 million.
And SG&A expense of $52.5 million to $53 million.
Interest expense of approximately $3.4 million.
Finally are updated EPS guidance reflects full year tax expense of $4 million to $5 million.
This assumes a sizeable tax benefit in the fourth quarter of approximately eight $5 million to $9.5 million.
Lastly, with respect to cash utilization, we anticipate that we will finish the fiscal year with approximately $37.5 million to $38 million of cash with cash used in the fourth quarter of approximately $6 5 million to $7 million, which includes approximately $3 million an 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 second quarter and are active management of working capital.
With that operator, we would like now to open the call to questions.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone please make sure.
<unk> to allow you a signal to reach out 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 add yourself to the queue again bypassing star.
<unk>.
One moment, please while we call for questions.
Our first question is from Brooks O'neill with Lake Street Capital market. Please go ahead.
Good morning guide since I have about 10 questions I'm gonna have to cure multiple times here, but I'll try to follow your your guidance. The first question I have is how.
How do you think the F D. A declaration that there is no negative effect from Paclitaxel too.
To impact the ultimate six sets of survey.
You know, it's it's quite positive actually if you look at the <unk>.
Potential for growth of Paclitaxel devices.
It's it's.
It's not quite dependent treated at its been straightened.
Because of this 2019 Labour warning that has now been removed.
And one of the restraints was.
The marketing and commercial programs to drive market adoption will basically stunted by the Ftes labor warning and so now.
I believe all companies can get back into demonstrating what paclitaxel can do as an anti rich synodic drug on both <unk> and drug code the balloons and the digital peripheral vascular Joe. So I think it's gonna help drive the market what it means to US and you know I know Tim is closer to some of the small.
Data, but it's it has about 1 billion dollar potential for this.
And the half a million procedures per year.
But for us in particular with Abba does a commercial partner.
We have the trifecta I believe in that momentum so the timing is great.
We have it technically superior product.
And we have a clinical trial, the only clinical trial that pivotal worldwide trial of demonstrates that technical superiority.
This unwinding of the label wanting will allow for the market growth opportunity to get back into the fold.
Full bore and then we have the commercial strength of Abbott vascular, they're really well known.
For the ability to move the market.
Tombs of.
Drug Eluting devices, so that trifecta, we believe but it's good to give us a multiplicative impact as we will.
We will stay tuned and we'll tell you more about that and what it means fiscal 2004, but.
The wins the trade winds up blowing favorably because of it Gary I would just add or Brooks and other benefits. We have heard from several physicians that there are still hospitals and accounts that have restricted the use of paclitaxel devices. So obviously with the FDA changing its position those restrictions should be lifted and should have.
Greater opportunity in terms of addressing.
The need to treat patients who are suffering from peripheral vascular disease with the drug code of loans. So we'll be looking closely the the data on on this over the following for the next couple of quarters. So stay tuned.
Great at the risk of being accused of cheating I'm gonna combining pushes two and three 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 <unk> resolve this bill 24. Thanks, a lot sure sure Tim is really <unk>.
<unk> to all operational solitude and part of that over to him activities precommercial activities with Abbott, but really the first thing was to kill materials and we're in good shape.
I have been crew step inventory balances a little much, especially paclitaxel is not an inexpensive drug to acquire but the raw materials and supply chain side with secure and we're prepared for whatever Abbott has in their plans. The second thing you heard me talk about a cold start of a diesel engine in winter.
And so we have started that up we are we able to retain most of the team members. Despite the reduction in force. We had earlier this year and then woof hire some more people so that we have the ability.
For future scale here as well, so that's been going well.
It takes a while to fulfill these orders that'll pass it on to that thank you Gary Wells said Brooks I think the key takeaway for US is that we will be prepared we have the people materials and equipment to support Abbott's commercial launch.
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 restarted and have done tests manufacturing runs.
Just to ensure that we're ready and there is still work to be done more on the administrative front.
But we're waiting for the <unk> and then we'll start manufacturing product and the second part was what do we expect I guess.
Yeah, well ask you to stay tuned we have not yet received the final appeal.
But what we have discussed in the past we've talked I think previously that Abbott had shared purse.
Perspective in terms of their forecast they've done so again, we like what we're seeing will have more to say on this topic, probably as early as Q4.
Thank you guys and congratulations I couldn't be bored decided about the future.
Thank you Brooks.
Thank you.
Our next question comes from the line of my Medicine with Needham and company. Please go ahead.
Yeah. Thanks, just a few more on the survey also.
I guess, just starting with the D. C. B market can you remind us where pricing is I'm not asking work habits gonna price their product, but I seem to remember that the D. C. P. S. When we watch we're kind of in the 12.
1200 dollar range from remembering correctly, but I think it's come down quite a bit do you ever feel so we're just kind of a typical pricing is these days.
It is a great question, Mike and but I can tell you is looking at the IMF data industry data. These are sales into hospital accounts, we still see list prices around 14 to $1500 per device.
As you can imagine every manufacturer is probably having some discounts.
Elective 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.
Okay. Thanks, and then.
Can you just remind us about what you said about the economics of the Appetito. Although you have given specific numbers, but it's kind of convoluted I guess in the way that it works from what I remember and then it would it be.
Crazy too.
Soon but.
<unk> might be capturing roughly 50% of the market price in terms of the value that you're getting.
So I'll I'll walk through great. Great question I. 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 <unk> will receive two revenue streams. The first revenue stream will be for the product shipped to Abbott and we call that a transfer pricing.
We will recognize that revenue at the moment the product is shipped out of our docks and then the second piece is what we call profit sharing and the profit sharing obviously, there's a formula one it works somewhat like this I think we've articulated this a bit in the past, but add it will back out the trash.
<unk> price and they'll have a gross margin.
We can appreciate how to get to gross margin. They also can deduct.
What I would consider it a typical multi.
Multinational strategic sale.
Sales and selling expense percentage from the revenue.
And so then basically what remains is what we call the profit pool and we'd characterize us in the past that it's not quite 50 50, but it's close.
And so I would say in terms of thinking about what percentage of the revenue the sale price of.
Surveil it.
50% might be high, but I think we've highlighted in the past that from a whole product solutions are partnered product solutions perspective, <unk> approaching that 50% level. We'll we'll talk more about this I'm sure is we kind of get past the initial commercialization, but it is very attractive.
Okay. Thanks, I'll spell as helpful.
And then when you report your fourth I understand you're not including any kind of Seville revenue in your guidance now, but when you report your fourth quarter.
Is it safe to assume that you're gonna.
Factor something in the 24 guidance sullen assumption around surveil revenue and your revenue gotten some unintended sir.
Yeah. My <unk>. Another great question, Yes that is the expectation Gary and I will have more color in context to provide an surveil probably during our November earnings call.
Okay got it alright, and then just.
Unrelated to devices or some <unk> on the Ied business, just the declines a little concerning I guess is.
How long do you think this is gonna last is just kind of it's.
Gonna be like a four quarter.
Kind of a step down in the last 12 months and then you kind of laugh at it starts to grow again or something like that.
Yeah, Tim and I will do the C. C meeting with Joe our president of that business last week, and if you look Mike <unk> don't think attract IBD industry, but.
It's been whipsawed around and the idea was whipsawed around a lot because of Covid now.
We are smoothing function on that because we had quite a few regions and stuff with.
Covid, so we didn't get with soda around as much and 12% does not as much as a lot of the rest of the industry. So so what we've heard is that the industry hopes the 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 we do understand that there were a lot of customers who had geared up for a lottery agents for the high expectations and they just have to work through that inventory Tim I know you have some color as well. Thank you Gary like that I think it's really important to recognize that.
At our IBD business has gone through kind of a soft period here over the last several quarters. If you consider and contemplate the guidance that we've provided in the percentage of our revenue that's being generated by IBD, you'll you'll come to the conclusion that IBD is going to be returning to growth in our fourth quarter, we're starting to see some of the customer.
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 we like we were we set today and we will have more to say about these macro on.
Tax here in a couple of months.
Okay got it so you're kind of already like you feel like your cup or a couple of quarters into the slowdown, yes, yeah and getting the diet industry has.
These types of Regents have gone through this.
And a bigger fashion.
Okay got it thank you.
Thank you.
Our next question comes from the line of Mike <unk> with Barrington Research. Please go ahead.
Good morning, guys. So I guess I wanted to ask on the initial stocking order you will be able to recognize revenues in queue for from that initial stock anywhere. It sounds like you just said that correct.
No that is incorrect.
I can order so it might just to be clear, let's let's let's rewind a bit we will not recognize revenue on the stock in order until the product leaves are dark.
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 is just to be clear.
The receipt of an added teal to manufacturers surveil is a distinct part of the process. Another distinct part of the process is one added wants to receive the product shipment. So advocates 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 skews and so it's yet to be determined are we shipping all the skills simultaneously or does added want to receive certain skews. So we'll have a lot more it's exciting but we're we're in a position here of having received the TMA and working with <unk>.
Commercialization and we'll have a lot more information over the coming quarters in an email 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 to four months.
So actually cool.
<unk> saw the engine and make sure we can deliver that product with an E.
Alright, and then just shifting real quick on on on the side of alignment pounds Gary's sort of.
Laid out that Hey, you know.
The progress we've made a million dollars revenue each of the past two quarters, we've made with.
Small sales team you know a fraction of the size of some competitors out there given that you now have some breathing room in terms of cash and likely over the next 12 months or so cash generation I mean does it make sense to you know look towards expanding that team and and sort of really putting some muffled.
That effort.
Yeah, and I'm glad you picked up on that and the reason I said it is a loss of Investor says we have no idea.
The scale of this percentages don't mean, a whole lot. So I wanted to at least let a little bit of that.
These products are generating over a million dollars per quarter <unk>.
And we expect that.
Grill.
There are a couple of things one we do have to remain disciplined 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.
When you have those needs that a pent up from customers within the strategically.
Increase the size of well with the territories, where we can have territory manages right now will constrain, but as we look into what we're doing in fiscal twenty-four with strategically do it I wanted to stop short of saying, we're going hog wild and just adding.
Thousands of territory manages we have a very very sharp small T now and what we're looking for a really a play a zoo a hungry who can really do justice to the quality and caliber of these products and and you've heard me wax poetic.
When I go to conferences and people see these products have never been have not been created yet and so not a single product vascular and dimensions portfolio exists outside of semiotics and that's a very important thing so.
I'd say quest he will have a little more color in the queue for but it's a strategic dosing and adding caliber high caliber salespeople not necessarily doubling the sales force in the next three months, there's a limit to how much we can.
Reasonably staff support with the high quality of service at all currencies seem does as well so.
Add a few but.
Can't get over the cash barrel too much.
Alright, very good thank you.
Thank you.
Our next question comes from the line of Jim Fidelity Fidelity and company. Please go ahead.
Good morning, and thanks for taking my questions Gary how many sales folks cause avid have that will focus on <unk>.
This is a good question I don't know the answer.
But it's the abbot vascular sales force, Tim either I don't want a guess, it's gotta be no punishment I remember when we the agreement with add that we had we had all that information and data and honestly I have not looked at that well what's changes the acquisition of CSI, who had several hundred but those'll coronary and peripheral so.
Large and I would say, it's probably as you think through large med tech competitors in this space I would say abbott's size of their sales force is probably well on a dart board with everyone, Yeah and look what what I like about the setup. So I would say books. The question is.
Clearly matches any of the large strategics and with acquisition of CSI expect that you know what what's nice about it is at least in my opinion I'm not speaking on behalf of that with you, but in my opinion advertise an incredible.
<unk> I mean, you you need to try effective for this vast alright, you need to spend.
You need arthrectomy and to prepare the vessel and you need a drug coated balloon and.
I'm excited about as as the vascular Division has all three in the afternoon now and then and there are formidable sales and marketing organization. So feel really good about that.
Okay, and how do you feel about your capacity do you think you need to add to ramp up to abitz demand or do you think that you have enough no folks and equipment on hand to me that but to the moon.
Septimate operations team have been really carefully monitoring that as I said, we put to bed. The raw materials components don't want any oops. He's there with him if you're on the chat <unk> I'm going to be a smoke with shifts we can go to and stuff. That's right I've I think I've address just we're ready Jim I think we're ready to support abbott's commercialization and what their needs.
Or 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 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 and space, but I think at least for the next.
<unk> plus months, we should be in good shape and keep in mind, one thing I may have said that in the past but.
We have proprietary manufacturing technology, but I don't know if anybody else has but I know, we have it which way we use robotic automation cold the drugs on these devices. These are not.
Trivial a low tech components, so and all of this time, we had a mind to when we do have the manufacturer neither robotically controlled machines that actually actually caught the drug on the product. So those manufacturing sales have a lot of skill potential.
Alright, and then can you just talk a little bit about taxes. You why are you gonna get the refund in the fourth quarter is is between million dollar payment is that all you need to pay on the milestone payment and when do you think you'll be you know in a position where you'll be paying cash taxes, you think that'll happen in fiscal 2024 fiscal too.
<unk>.
I'll hold off on the second part of your question, Jim We still need to do the work to think through fiscal 2004 and create our plan and we'll have a lot more to say about guidance and November but yes, you're right. The tax bill the cash tax payment that will be sent to the I R. S. I believe it's September 15th.
<unk> will be approximately $3 million and it's really it's fourth.
The entire business, but obviously driven by the surveil milestone payment. It's it's it is a little wacky that we have a huge tax expense here in Q3, and then we're going to revert to a tax benefit in the fourth quarter. That's because we're back in an operating loss position and you can do the guidance and you'll recognize that word will be in an operating loss.
Physician, we will have a tax benefit that's probably going to put us in a position where it's going to be where you don't see it very often but we're gonna be in a position where I expect that will even have neighbor bullard positive ETS gap ETS and not yet yes.
If you combine the two and the I R S and from a tax perspective, you don't smooth this stuff, but you can buy Q3 and Q4, yeah. He actually have about a a 4 million dollar tax expense and unfortunately, it just makes it really lumpy.
And that's probably the best way to describe it will get through the Lumpiness here and we'll have we'll have about a 3 million dollar tax payment as I mentioned, so cash is really the thing we're paying attention to here.
Got it alright, thank you.
You're welcome.
Thank you.
Ladies and gentlemen have said no further questions that concludes our conference for today. Thank you for your participation you may now disconnect your lines.
[music].