SRDX Beats on EPS, Sales Slip - Analyst Blog

SurModics Inc.'s (SRDX) first quarter fiscal 2011 earnings (excluding special items) of $0.05 per share was well ahead of the break even earnings suggested by the Zacks Consensus Estimate. However, earnings fell short of the year-ago earnings of $0.11. The weak year-over-year performance in the first quarter of fiscal 2011 was attributable to lower revenues.

Revenues on an adjusted basis dropped 36.4% year over year to $15.4 million in the reported quarter. Revenues also fell short of the Zacks Consensus Estimate of $16 million. On a sequential basis adjusted revenues declined marginally by 0.6%. Reported revenues fell 2% sequentially to $15.2 million.

In October 2010, SurModics made certain changes to its organizational structure to reduce its costs and utilize its resources in a better manner. Following the restructuring, the company now operates through three business units: Medical Devices, Pharmaceuticals and In Vitro Diagnostics.

SurModics' revenues from the Medical Devices segment came in flat sequentially at $9.8 million. Pharmaceuticals division revenues fell 6% sequentially to $2.7 million. Revenues from the In Vitro Diagnostics unit declined 7% sequentially to $2.7 million.

SurModics derives a substantial majority of its drug delivery  revenue from the sales of cypher stent (reflecting revenues from the Medical Device unit), which is marketed by the Cordis division of Johnson & Johnson (JNJ). According to Johnson & Johnson, global sales of Cypher during the most recent quarter were $134 million, down 40% year over year and 1% sequentially.

For the reported quarter, royalties and license fees accounted for 50% of total reported revenues with product sales and research & development accounting for 31.6% and 18.4% respectively.

SurModics exited the quarter with $59.7 million in cash and investments but no debt.  8 of the 9 new licensees, who signed with SurModics during the quarter, were in the Medical Devices unit. Moreover, the quarter saw 5 new customer product classes. The Medical Devices segment accounted for more than 90% of license agreements inked by the company over the last 5 years (which exceed 150).

Outlook Backed

In addition to disclosing financial results, SurModics reaffirmed its fiscal 2011 projection. The company expects earnings (excluding special items) in the range of -$0.15-$0.05 per share for fiscal 2011. Revenues are expected between $55 million and $63 million. The Zacks Consensus Estimate for fiscal 2011 hints at a loss of $0.05 on revenues of $59 million.

Our Take & Recommendation

We recently upgraded SurModics to ‘Neutral' from ‘Underperform' following the efforts of the company to emerge from the below-par performances delivered over the past few quarters.

We are encouraged by the company's move to explore options regarding the Pharma unit, including its potential sale, that will enable SurModics to focus on its core business and enhance shareholder value.

The company has also brought about a change at its helm to steer it out of its underperforming state. In another move aimed at driving the company back to growth, SurModics has restructured its board. Two directors put forward by Ramius LLC (the largest stakeholder at SurModics) have joined the board.

Late last year, SurModics trimmed its work-force by 13%, apart from the organizational restructuring referred to above, to streamline operations and increase efficiency. The move is expected to result in annual savings of approximately $3 million to $3.5 million.

The company currently carries a Zacks #2 Rank (‘Buy' rating) in the short-run.

 

 
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