SurModics Reports Fourth Quarter and Fiscal Year 2011 Results

SurModics, Inc. (Nasdaq: SRDX), a leading provider of drug delivery and surface modification technologies to the healthcare industry, today reported financial results for the fourth quarter and fiscal year ended September 30, 2011.

Fourth Quarter Summary:

• GAAP results:
  • Revenue of $17.2 million
  • Asset impairment charge, associated with SurModics Pharmaceuticals of $17.9 million
  • Restructuring charge, associated with August 23^rd strategic realignment of $1.0 million
  • Operating loss of $17.4 million
  • Net loss of $12.9 million
  • Diluted EPS of ($0.74)
• Non-GAAP results (assuming normalized effective tax rate):
  • Adjusted net income of $1.0 million compared with Q3 adjusted net income of $2.3 million
  • Adjusted diluted EPS of $0.06 compared with Q3 adjusted diluted EPS of $0.13
• Revenue summary (GAAP):
  • Royalties and license fees of $7.8 million, up 4% sequentially
  • Product sales of $6.5 million, up 12% sequentially
  • R&D revenue of $2.8 million, down 38% sequentially
• Revenue by business unit (GAAP):
  • Medical Device -- $10.2 million, up 7% sequentially
  • Pharmaceuticals -- $3.3 million, down 35% sequentially
  • In Vitro Diagnostics -- $3.7 million, up 7% sequentially
• Operating profit (loss) by business unit (GAAP):
  • Medical Device -- $5.0 million
  • Pharmaceuticals -- ($20.4) million (includes $17.9 million asset impairment charge)
  • In Vitro Diagnostics -- $0.9 million
  • Corporate -- ($2.9) million (includes $1.0 million restructuring charge)
• Operating cash flow of $4.9 million
• Cash and investments of $68.2 million; zero debt
• 5 new licenses signed with SurModics customers
• 2 new customer product classes launched by SurModics customers

Fiscal Year 2011 Summary:

• GAAP results:
  • Revenue of $67.8 million
  • Operating loss of $17.5 million
  • Net loss of $12.8 million
  • Diluted EPS of ($0.73)
• Non-GAAP results (assuming normalized effective tax rate):
  • Adjusted revenue of $67.8 million
  • Adjusted operating income of $8.0 million
  • Adjusted net income of $5.6 million
  • Adjusted diluted EPS of $0.32
• Revenue summary (GAAP):
  • Royalties and license fees of $30.6 million, down 11% year-to-year
  • Product sales of $23.0 million, up 14% year-to-year
  • R&D revenue of $14.2 million, down 8% year-to-year
• Revenue by business unit (GAAP):
  • Medical Device -- $39.6 million, down 8% year-to-year
  • Pharmaceuticals -- $15.1 million, down 3% year-to-year
  • In Vitro Diagnostics -- $13.1 million, up 17% year-to-year
• Operating profit (loss) by business unit (GAAP):
  • Medical Device -- $19.8 million, up 2% year-to-year
  • Pharmaceuticals – ($32.5) million down 23% year-to-year
  • In Vitro Diagnostics -- $4.3 million up 29% year-to-year
  • Corporate – ($9.1) million up 12% year-to-year

"We are pleased with our fiscal 2011 performance as we have delivered performance consistent with our most recent non-GAAP guidance,” said Gary Maharaj, SurModics’ President and Chief Executive Officer. "We are already seeing benefits from our efforts to refocus on our core businesses. During the year, our Medical Device business delivered record hydrophilic royalty revenue and our In Vitro Diagnostics business generated record product revenue. Additionally, the recent sale of our Pharmaceuticals business allows us to increase our focus on growing our core business.”

Fourth Quarter Fiscal 2011:
Revenue for the fourth quarter of fiscal 2011 was $17.2 million, down 5% compared with $18.0 million in the third quarter, reflecting lower R&D revenue in our Pharmaceuticals business partially offset by growth in our Medical Device and In Vitro Diagnostics businesses.

An operating loss of $17.4 million in the fourth quarter compared with operating income of $3.4 million in the third quarter. The fourth quarter net loss was $12.9 million compared with net income of $3.8 million in the third quarter. Diluted earnings per share was a loss of ($0.74), compared with earnings per share of $0.22 in the third quarter of 2011.

Results for the fourth quarter of fiscal 2011 include a $17.9 million non-cash asset impairment charge associated with our Pharmaceuticals business and a $1.0 million restructuring charge associated with the August strategic realignment. On a non-GAAP basis, excluding these charges, adjusted diluted earnings per share was $0.06.

Fiscal 2011:
Fiscal 2011 revenue was $67.8 million, compared with fiscal 2010 revenue of $69.9 million. Fiscal 2011 and fiscal 2010 revenue included $6.7 million and $9.8 million, respectively, of revenue associated with products that Cordis, a J&J company, has indicated it will no longer manufacture by the end of calendar year 2011.

The operating loss for fiscal 2011 was $17.5 million compared with an operating loss of $14.1 million in the prior year. The full-year net loss was $12.8 million compared with $21.1 million in fiscal 2010. Diluted net loss per share was ($0.73), compared with diluted net loss per share of ($1.21) last year.

On a non-GAAP basis, for fiscal 2011, excluding restructuring charges, goodwill and asset impairment charges and certain other adjustments, adjusted total revenue was $67.8 million and adjusted operating income was $8.0 million. Assuming a normalized effective tax rate of 38%, adjusted net income was $5.6 million, and adjusted diluted net income per share was $0.32.

SurModics’ cash and investment balance totaled $68.2 million as of September 30, 2011, with no debt. Operating cash flow for the fourth quarter was $4.9 million, compared with $5.3 million in the fourth quarter of fiscal 2010. For fiscal year 2011, operating cash flow was $20.0 million, compared with $22.0 million in fiscal year 2010.

"While we have faced a number of challenges and undergone important changes over the past twelve months, we are proud of our entire team for committing to our new vision, executing successfully against our strategic objectives , and in turn, achieving our financial targets in fiscal 2011,” added Maharaj. "Looking ahead, we are excited about the opportunities provided by our two core businesses as well as our new approach to our R&D portfolio, which remains a critical component for driving growth at SurModics. We believe the newly focused and highly efficient structure of our Company will, over the long term, drive sustainable, double digit organic sales growth and profitable earnings growth.”

Outlook
SurModics’ estimates are based on actual results for 2011, management’s current belief about business trends, the impact of the Cordis Cypher decision and general economic uncertainties. Our outlook from continuing operations on a GAAP basis excludes any revenue associated with Cypher and the Pharmaceuticals business. As a reminder we will report our fiscal 2012 Pharmaceuticals results as discontinued operations. For the full year, SurModics expects GAAP revenue from continuing operations to be in the range of $47 to $51 million and diluted GAAP EPS from continuing operations to be in the range of $0.45 to $0.53 per share.

Live Webcast
SurModics will host a webcast at 5:00 p.m. ET (4:00 p.m. CT) today to discuss the quarterly and full year results. To access the webcast, go to the investor relations portion of the Company’s website at www.surmodics.com, and click on the webcast icon. A replay of the fourth quarter conference call will be available by dialing 800-406-7325 and entering conference call ID 4485778. The audio replay will be available beginning at 7:00 p.m. CT on Thursday, November 3, until 7:00 p.m. CT on Thursday, November 10.

About SurModics, Inc.
SurModics’ vision is to extend and improve the lives of patients through technology innovation. The Company partners with the world’s foremost medical device, pharmaceutical and life science companies to develop and commercialize innovative products that result in improved diagnosis and treatment for patients. Core offerings include: drug delivery technologies (coatings, microparticles, nanoparticles, and implants); surface modification coating technologies that impart lubricity, prohealing, and biocompatibility capabilities; and components for in vitro diagnostic test kits and specialized surfaces for cell culture and microarrays. SurModics is headquartered in Eden Prairie, Minnesota and its SurModics Pharmaceuticals subsidiary is located in Birmingham, Alabama. For more information about the Company, visit www.surmodics.com. The content of SurModics’ website is not part of this release or part of any filings the Company makes with the SEC.

Safe Harbor for Forward-Looking Statements
This press release contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations regarding our ability to return to sustainable, long-term profitability, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including (1) our ability to timely satisfy the closing conditions in our asset purchase agreement with Evonik Industries AG relative to the sale of our Pharmaceuticals business; (2) our reliance on third parties (including our customers and licensees) and their failure to successfully develop, obtain regulatory approval for, market and sell products incorporating our technologies may adversely affect our business operations, our ability to realize the full potential of our pipeline, and our ability to achieve our corporate goals; and (3) the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, and updated in our subsequent reports filed with the SEC. These reports are available in the Investors section of our website at www.surmodics.com and at the SEC website at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Use of Non-GAAP Financial Information
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, SurModics is reporting non-GAAP financial results including non-GAAP revenue, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per share. We believe that these non-GAAP measures provide meaningful insight into our operating performance excluding certain event-specific charges, and provide an alternative perspective of our results of operations. We use non-GAAP measures, including those set forth in this release, to assess our operating performance and to determine payout under our executive compensation programs. We believe that presentation of certain non-GAAP measures allows investors to review our results of operations from the same perspective as management and our board of directors and facilitates comparisons of our current results of operations. The method we use to produce non-GAAP results is not in accordance with GAAP and may differ from the methods used by other companies. Non-GAAP results should not be regarded as a substitute for corresponding GAAP measures but instead should be utilized as a supplemental measure of operating performance in evaluating our business. Non-GAAP measures do have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. As such, these non-GAAP measures presented should be viewed in conjunction with both our financial statements prepared in accordance with GAAP and the reconciliation of the supplemental non-GAAP financial measures to the comparable GAAP results provided for the specific periods presented, which are attached to this release.