Andrew LaFrence - Vice President of Finance and Chief Financial Officer Gary Maharaj - President and Chief Executive Officer.

Jan Wald - Benchmark Company Charley Jones - Dougherty Ben Haynor - Feltl and Company Jim Sidoti - Sidoti & Company Beth Lilly - GAMCO Investors.

Good day, and welcome to the SurModics' first quarter 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andy LaFrence, Vice President of Finance and Chief Financial Officer. Please go ahead, sir..

Thank you, Cassandra. Good afternoon and welcome to SurModics' fiscal 2015 first quarter earnings call. Before we begin, I would like to remind you that during the course of this call we will make forward-looking statements.

These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding SurModics' 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 our forward-looking statements resulting from certain risks and uncertainties including those described in our SEC filings.

SurModics disclaims any duty to update or revise our forward-looking statements as well as a result of new information, future events, developments or otherwise. We also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.

Finally, this conference call is being webcast and is accessible through the Investor Relations section of the SurModics website where the audio recording of the webcast will also be archived for future reference. A press release disclosing our quarterly results was issued earlier this afternoon and is available on our website at www.surmodics.com.

On today's call I will provide an overview of our financial results, Gary, will then cover our key achievements and discuss our growth drivers and strategies. Finally, we will open up the call to take your questions. I'll start with the financials.

Revenue for the first quarter of fiscal 2015 rose to $14.2 million compared with $13.9 million in the first quarter of last year. On a GAAP basis our diluted earnings totaled $0.27 per share compared with $0.26 per share in the year-ago period.

We are pleased to note that non-GAAP earnings per share increased 19% from $0.21 per share in the prior-year quarter to $0.25 per share in the first quarter of fiscal 2015. The fiscal 2015 quarter included a $0.02 per share of income tax benefits from retroactively reinstated federal R&D income tax credits.

The prior-year quarter benefited from a $0.05 per share strategic investment gain from a clinical earn-out milestone payment, as a result of the 2013 sale of Vessix Vascular to Boston Scientific. We delivered operating income of $5 million in the first quarter of 2015, up from $4.3 million in the prior-year period.

Operating margin was 35% versus 31% a year ago. Operating margin benefited from improved gross margins, reduced stock-based compensation expense and lower research and development expenditures. Turning now to our two business units. Medical Device is the larger business. It contributes approximately three-quarters of our total revenue.

Revenue is derived from both hydrophilic coatings and device drug delivery coatings. Revenue rose to $10.6 million, increasing 1% from the year-ago period. First quarter hydrophilic coating royalty revenue totaled $7.1 million, which is comparable to last year. Non-coronary royalties offset a decrease in coronary royalties.

Key contributors to the coronary decline were decreases in average selling prices in procedure volumes in the Japanese market, lower than expected royalty revenue attributable to the accuracy of and reporting of customer royalty obligations as well as industry headwinds, which we have commented on over the last year.

The increase in non-coronary revenue reflects the benefits of diversifying our hydrophilic coating portfolio. The Medical Device business also posted higher reagent product sales as well as research and development revenue. This unit generated $5.5 million of operating income in the first quarter, up 4% from a year ago.

The timing of R&D expenditures contributed to the segments gain in operating income. For In Vitro Diagnostics unit, first quarter fiscal 2015 revenue totaled $3.6 million, a 7% increase from the prior-year quarter.

IVD continues to show positive revenue growth with exceptional growth coming from our molecular diagnostics and immunoassay reagent product lines during the quarter. Product gross margin for IVD was 66% in the first quarter compared with 60% in the prior-year quarter.

This increase mainly related to improved leverage resulting from stronger manufacturing volumes, lower scrap rates and to a lesser extent product mix. IVD operating income increased to $1.1 million compared with $0.7 million in the first quarter of fiscal 2014.

Our diagnostics operating margin for the quarter rose to 31% versus 20% in the prior-year quarter, resulting from improved gross margins and operating leverage from increased sales and lower expenses. Now, I'd like to discuss our first quarter 2015 revenue summary by category.

First, royalty and license fees, which are generated primarily in our Medical Device business, were $7.3 million, decreasing 3% from last year, as result of a $0.2 million decrease in license frees from the prior year and flat hydrophilic coating royalties.

Second, first quarter 2015 product sales totaled $5.8 million, a gain of 8% from the year-ago period. This increase reflects higher reagent sales in both business units as well as Microarray Slides shipments in our In Vitro Diagnostics business. And third, R&D revenue was $1.1 million, up from $1 million a year ago.

SG&A expenses in the first quarter of fiscal 2015 were 26% of total revenue compared with 28% a year earlier. On a dollar basis, SG&A in the first quarter of 2015 was down, totaling $3.7 million versus $3.9 million a year ago. The decrease reflects non-accrual of fiscal 2014 and 2015 performance share compensation based on current financial forecast.

As a percentage of total revenue, our first quarter R&D expenses were 25% versus 27% in the year-ago period. R&D of $3.6 million for the quarter decreased 3% from last year, resulting from lower R&D investments. SurModics SurVeil Drug Coated Balloon product development expenditures for the quarter were similar to the prior-year quarter.

As we have said before, we expect higher research and development spending for the remainder of fiscal 2015 consistent with our annual guidance. Income tax expense was 29% of pre-tax income in the first quarter, essentially flat with the prior-year period.

The tax rates were impacted by retroactively reinstated federal R&D tax credits in the current quarter, and the previously discussed strategic asset gain in the first quarter of fiscal 2014. We expect our income tax rate for the fiscal year to range from 33% to 35% of pre-tax earnings. Looking at our balance sheet, it continues to be strong.

Our cash and investments totaled $47.6 million and we had no debt outstanding at December 31, 2014. We continue to generate solid operating cash flow. Cash flow from operations was $5.5 million for first quarter of fiscal 2015.

We invested less than $100,000 in property, plant and equipment and returned $20 million to our shareholders through the accelerated share repurchase program announced in November 2014.

Our current cash and investment balances, operating cash flows, combined with SurModics' $20 million line of credit and $175 million shelf registration, provide appropriate capacity to support our corporate strategic initiatives. We are reaffirming our previously stated guidance for fiscal 2015.

We estimate revenue for fiscal 2015 to be in the range of $57 million to $60 million and GAAP diluted earnings per share to be in the range of $0.85 to $0.95. Cash flow from operating activities is expected to range between $16.5 million and $18 million and we project capital expenditures to range between $2.2 million and $2.5 million.

The SurModics' team has performed well operationally, financially, and is on pace to meet the SurModics' SurVeil Drug Coated Balloon development goals for fiscal 2015. We are very pleased with the great start to the year. And now, I'll ask Gary to share his perspective.

Gary?.

first, revenue growth from the core businesses; second, significant operating margin and earnings; and third, continued progress in our transformative programs such as our SurVeil Drug Coated Balloon platform. I'm pleased that we have once again delivered on this tri-factor in our first quarter of fiscal 2015.

We continue to make meaningful progress on our strategy of transforming the company, while concurrently delivering profitable growth. First, let's discuss growth, with respect to our business unit performance. Our IVD business grew 7% over the comparable quarter last year, led by revenue from our molecular diagnostics Microarray Slides.

Particularly encouraging to me is the fact that this is the third consecutive quarter of growth for the diagnostics business, and we expect to see this growth continue into the second quarter of fiscal 2015. Our Medical Device business experienced good comparable quarter growth in reagent sales and coating services.

These gains were mostly offset by lower milestone payments versus the same quarter last year. It is important to note that we saw a large number of feasibilities, where Serene is the choice for new customer application.

We signed several new licensees with Serene during the quarter and now have multiple signed licenses for coronary, peripheral, neuro and structural heart application. This differentiated technology is gaining the traction we had anticipated. Second, let's turn to profitability.

As Andy described, through both ongoing spending management and operational efficiency, we were able to generate an operating margin of 35% in the first quarter. This is excellent performance and demonstrates the strength of our business model.

Yet, as I hope you recall as we move forward from preclinical to clinical spend in our drug coated balloon program, this margin will decrease in an intentional and predictable manner.

Nonetheless, it remains our goal to continue to drive efficiencies in our business in order to create opportunities for specific value creating investments organically in R&D and through corporate development. Third, I want to discuss our transformative activities.

We have been very active looking at opportunities to acquire transformative and complementary businesses, many of them in great detail. We have not to date found any, with either the timing or the fit with our strategy, have been compelling enough for us to complete a deal yet.

While we are aggressively looking, we remain discipline in assessing the financial quality and the strategic fit of any potential deal. Also transformative is our SurModics SurVeil paclitaxel drug coated balloon. This key initiative, I am pleased to announce is on track. Let me share some specifics with you.

We have completed all of the treatments of our GLP preclinical study in January. As you recall, we froze our product design and process design in order to initiate the GLP study in our first quarter.

Our goal remains to treat the first patient before the end of the 2015 fiscal year and aggressively to finish enrollment in our first-in human study by the end of the calendar year 2015. We are quite encouraged by the recent U.S.

approvals of drug coated balloon and anticipate that this category of devices will establish a credible and viable therapeutic domain in the treatment of peripheral artery disease. Our goal and outlook for remainder of fiscal '15 aren't changed.

They are to build our core revenue, to maintain a high baseline of operating income and earnings, to proactively seek the right corporate development opportunities, and finally to invest in and perform the early clinical assessment of the SurModics SurVeil drug coated balloon.

We have an exciting fiscal year ahead and we look forward to updating you on our progress during the next quarterly call on April. Operator, this concludes our prepared remarks. We'd now like open the call for questions..

[Operator Instructions] And we will take our first question from Jan Wald of Benchmark Company..

I guess, I have a couple of questions. In the IVD business, it seems like growth has picked up and especially in the molecular diagnostics.

Could you talk a little bit about that? And just describe why this has all of a sudden picked up or where the dynamics is coming from?.

We have a couple of key customers in that business that use our slides for particular assays and particular diagnostics in hospitals. And they have actually had some fairly nice traction in the last several quarters, and so really it's on the backs of those key customers in that business.

So really, as they are performing, we are seeing uptake in the pull and the supply chain for our slides dysfunctionality..

And I guess in the Medical Device business a lot of the activities that you've tried to release, that it seems to me has been in earlier stage clinical trials are or earlier clinical phases. Is that moving along and is Serene being carried through the other --f.

Yes. So it's a whole mix of devices that are 510(k) special applications or even European applications and CE Marks and so they all have their own cadence. So as you sort of mix those in, we're seeing some of those actually get commercially launched in those applicable markets over periods of time.

Some of these, nonetheless, we have signed some time ago, but they are slowly getting to market..

And so do you see a continued uptick in that component of your business?.

Yes. We do expect to see Serene continue to gain traction over, not only this year, but particularly in '16 and '17 as you look at our natural launch curve. In '16 and '17, the revenues will be very significant to SurModics..

And I guess one last question on the drug coated balloon. It sounds like you are on track in terms on your first in man and those kinds of things. I guess in terms of how you proceed the program going on a technical side, it seems to be going well.

How about on a business side? Do you have strategic partners interested in the project, you foresee that the first in man is going to be where you're going to able to transition to a strategic partner or how do you see that moving along?.

We continue to have these ongoing dialogs with interested strategic partners. And not to say, we've put the blinders on, but we have committed to doing the first-in human trial on this device. Again, if any of the strategic wants to preempt that process, we can always entertain that.

So while we continue what I would call good conversations, we are actually just forging along to get that early safety in clinical efficacy data. I think at that point the attention that the strategics have, they will be able to have something more palatable than preclinical results.

And then that's why we're attempting to do that, because that to us changes the value curve dramatically, having those early human data..

I guess, I would agree with that. And it seems to me that as you go along and you do add value to the program, do you think there comes a point where the strategics will say, well, no thanks, and leave you dry or do you're seeing expression of interest on their part that that's going to carry forward and make this program actually succeed for you..

The risks as we see it they're not in a particular order, as that the current approvals, the U.S. approvals of these products, we want to make sure, we have no ability to influence this, but we'd like to see really good market development of drug coated balloons as a viable therapeutic modality.

That is to us a biggest needle mover for us for both from a risk and an opportunity. So as Medtronic and board developed the small kit, demonstrate the data, we believe it will become needed therapy, both from a clinical perspective, from a competitive perspective as U.S. hospitals are aggregating their purchasing power.

And even as you hear the strategics talk about becoming partners in disease state management with hospitals, they need to plug, they can't have a gap in the therapeutic offering. And so if DCB becomes one of those gap pluggers we feel terrific.

As far as a strategics, whether they come to the table, they walk away, there's certainly always a risk of that, but if we have a viable product that has a demonstration of safety and then early indication of efficacy, never say never, but we think it's improbable that someone will not really take notice of that.

The third risk factor is whether they have all gotten their options before they are ready to look at us.

And that also is a risk factor, but we believe the compelling preclinical dataset that we have, and even actually this morning I looked at the first look at some of the GLP data and it was absolutely confirmatory of our pre-freezed, pre-design freeze data, we think puts us in an advantage compared to the products that are currently clinically available in their own development pathway.

So we feel good about what we have. No guarantees, before we will get it..

And we'll go next to Charley Jones of Dougherty..

So I guess, I was hoping to jump into hydrophilic a little bit and kind of not get granular, as far as customers obviously you can't do that, but talk a little bit about big market segments, maybe coronary, non-stent coronary and neuro.

Just kind of curious if you could talk a little bit about what's happening within some of the different segments of your hydrophilic coatings, so we can kind of understand how much coronary is still a drag on, on the growth rate.

And then you kind of open yourself up, I feel like, when you talked about your visibility into '16 and '17, when you talk about your Serene platform, so I was hoping there we could sort of tick away whether it would be on the plus or the minus side of growth.

I know you guys obviously have forecasted very detailed, gen 1, gen 4 makeup of your portfolio. And I was hoping if you could talk a little bit about whether or not 16 Serene, sounds it's so significant potentially that maybe there's a chance that we get by close to flat..

Well, I'm not sure I got all the questions down, Charley, but why don't we start with the lateral component there, and really talking about the Serene launch.

We have not provided any guidance in terms of the numbers that are out there in terms of whether that will -- I think the question is will that offset the third-generation technology, as that comes our patent starting in '16 and then continues our patent in the '17 second quarter in the outside o U.S. markets.

What we can tell you is that we are on plan right now in terms of our beliefs as to what we expected with the Serene launch. We continue to gain traction with not only in the funnel of opportunities of optimization, will we start looking at new opportunities, that funnel is very robust right now.

And the fact of the matter is that we continue to see new products come up the door all the time and now we have, for example, as Gary said, we now have multiple licenses in every one of the strategic areas in neuro, peripheral, coronary and structural heart area.

So we haven't provided any guidance at this point in time, whether or not that will fully offset the headwinds in '16 related to the third-generation technology.

We do believe that in order to grow the business beyond hydrophilic coatings and grow the business in [indiscernible] we do need to execute in the drug coated balloon strategy, and we also need to execute on the corporate development strategy and we're working very, very hard on those two right now.

So I look at the base businesses being in business, the base hydrophilic business being in business that will continue to provide significant cash flows to the overall business and one that will have some significant headwinds in '16 and we're working very hard to offset those.

In terms of particular market segments, in terms of growth, we continue to see structural heart as being a significant growth low base, but nice growth in terms of not only this year and in future years. We're well-positioned in a multitude of different applications at this point in time.

So that will continue to be, for this year, clearly it would be double-digit growth. Our peripheral side had strong this quarter in the upper-single digits area and that was good to see. Neuro has growth in the quarter, it was not very significant in the quarter and that tends to bounce around a little bit more.

And then the coronary, as we put a little bit more detailed explanation and granularity into it, we did see some headwinds, especially from the Japanese market related to ESPs as well as some usage headwinds.

And the other factor we noted in our prepared remarks was that from time-to-time we do have customers that have questions about the reporting and the reporting process.

And we've seen this historically where I think in first quarter of '14, we saw a customer actually paying some significant amount, $570,000 one-time payment, but we have those things from time-to-time and more of those tending to impact the coronary space this quarter than have historically.

It's nothing on the usual with the 110 licenses that we have in place right now. So hopefully, that provides the color that you're looking for. And maybe I'll pause now and see if there's any follow-up..

And I'll add one thing in it. Correct me, if I'm wrong, but peripheral is catching up with coronary as a big --.

It actually exceeded coronary [multiple speakers]. So coronary was about 35% of our total hydrophilic coatings and peripheral was greater than that this last quarter..

When we say peripheral, we mean below the leg, below the waist..

Peripheral really is anything that's not structural heart, coronary or neuro..

Well, some of its called neuro too. Well, you want to say Gary..

And then, that being said, deadlines gets smeared a little bit as we have from multiple customers who both have, as an example, a neuro guidewire using a peripheral [indiscernible] application.

So we're doing to the best of our ability and we don't have that visibility into everything, but so just take it with a fuzzy line, because they could be using the same type of guidewire in multiple and atomic location..

That's a very good point Gary mentioned, especially we see a little bit in the neuro, but especially in the peripheral space you're seeing multiple applications, and we may coat it because of original license was coronary application and they maybe used in the peripheral and we're seeing more and more of that these days..

And maybe I just have a maybe one more kind of a follow-up on this, and I think you guys gave a lot of great detail on the balloon and it sounds like it's looking great. But I guess, a little bit more on Serene.

I hear what you're saying, it sounds like you're trying to be conservative, you're saying straight up to understand that you need growth from all areas of your business over the longer-term.

But I am trying to understand that Serene, as you are having these conversations with customers, whether or not it actually maybe a little bit bigger as you move out several years, because of the value that you're able to bring customers and maybe bring customers that have had in-house coatings in the past..

That's what Charley was ending with a statement..

No. I am ending with a question. I think the question is, are you being somewhat conservative on Serene or could it be actually bigger than your overall portfolio right now as a result of in-house coatings and being able to offer a better coating that more people want or is this a business that we should think of as flat over the longer-term..

I believe two things. One is Serene will eventually over time replace all of our earlier generation coatings, just because it's superior in many respect across multiple platforms. The issue is over what period of time.

I also think Serene is one of the keys in the lock to in-house coatings and we've had recent success, small success in winning this spec against some of the in-house coatings.

The question Charley is over what period of time, so that you can get what ingredient of that line is, is Serene by itself is going to get us to potential double-digit growth in the next three years. I would say that's a highly unlikely thing.

However, as more products come to market with it, the launch curve of those products is what's really going to be impacting out of rate. So Resolute Onyx for example got CE Mark at the last quarter, I think we mentioned that. Serene is on that.

I'd be very happy the quicker the Resolute Onyx can get its approval of course, and then have a good competitive slope in the Stent market as well. So those are the dynamics. If we sound conservative because some of it, we're not quite in control of..

And we'll go next to then Ben Haynor of Feltl and Company..

Just with regard to the strong performance in IVD and your revenue guidance.

Has anything changed with the expectations of mix between devices in IVD as a result of that? Or is this kind of what you expected?.

Ben, it really is within our range of expectations. We're right in the middle of those ranges right now for both of these businesses. So it hasn't changed our mix. We saw clearly that IVD got a percentage or two stronger than the overall mix this quarter.

We would hope that given the prior year second quarter that IVD will have a very strong second quarter as Gary said in his remarks. So I think IVD in the near-term looks like a very strong growth business. I think slowdown once we have higher comps later in the year.

But right now that will continue to be, overall we view that in the long-term basis to be a low-single digit growth business and that market has not changed. And the other thing Ben, last year as we recall in our, I think it was our Q1, Q2 especially that we saw some what we thought of inventory rebalancing from some of our key customers.

I know the business of that size $200,000 of revenue being put out actually does affect it What we didn't know is, eventually dynamics of inventory balancing catch up and you get back to steady state in terms of the uptake. What we didn't know is how much would it get back to previous levels.

And so the last three quarters in a row and this quarter especially we've seen a nice reuptake as well. We're still carefully watching that not intending to over project that into the future.

We think Q2 is going to be as we said in the prepared remarks looking good, but it's really the real natural level of market uptake of these products, what does it bounce back to. So we're very comfortable with our overall revenue range..

And then with regard to the geography for the clinicals on SurVeil platform, have you made the decision there, and if not what might go in to that decision?.

We have not made decision. We have a strong preference, which I'm not in the position to share today. We do have a strong preference. But part of it is an accelerated timeline. And we like to initiate as clinically as I said this fiscal year.

What I will say is that we want this to be a very high branded SurVeil debut, so whatever we do it will be a recognized center of excellence and recognized clinicians conducting the trial and certainly a very well recognized trial design.

So the geography is a fall out from who is actually going to be treating the patients and that will depend on the regulatory pathway and required and the time element required. But we do have a preference I hope to share more in the next quarters call..

And then it sounds like you're seeing some pretty strong interest in Serene.

Anything new and exciting on some of the other areas, hemocompatibility, et cetera relative to historical levels?.

Yes. R&D pipeline is a robust. We have another clinical Scientific Advisory Board Meeting, unfortunately in Super Bowl Sunday at the ISAT meeting. So we think we can get these key clinicians together, but in our experimental portfolio we have some really cool things.

As I said before, we keep working with sirolimus or rapamycin as even a next generation events, drug coated balloon for different anatomical treatment. And so that is trialing our paclitaxel program and we continue to invest and seek good data on that.

And then also we are working with some, what we consider some unique molecules that that bring both hemocompatibility and lubricity and low particulates. And we actually want to keep our own product portfolio, because we believe they can provide compelling advantages when placed on some fairly simple products.

And so that we may wanted to choose to keep it home, develop the device that goes with it and then license those devices as more 510(k) applications. So there is a lot going on in the R&D pipeline beyond drug-coated balloon..

And we'll go next to Jim Sidoti of Sidoti & Company..

On the IVD business, did you benefited off in the flu season this winter?.

Our General Manager set me straight a few weeks ago, when I had the flu. And I was trying to do hydraulics of a one-to-one that flu has been really bad, and therefore it must be backing our business, and he set me straight at it. Well, it has an impact. It's not a first-order impact, it's a second decimal point impact.

So it does impact us, because we are used on some flu panels. But it's not the major driver that we noticed in this past quarter..

And can you give us any more color or guidance regarding the timing of the trial and when we should start to factor in the expenses.

Is that a second or third quarter event?.

I'll put some color around that, Jim. If we think about that GLP study, which we've talked about being a $1.5 million that clearly will hit this last quarter and the second and third quarter. The actually ramp of the first-in-human study actually starts really in the third quarter, that there is ramp up activities.

Our goal is to have it completed or started, I should say, by the end of September. So the third and fourth quarter will have some impact, but then that impact will roll in the '16. So the $3 million to $5 million will start to be spent in Q3 and in Q4, and then the remainder of it through fiscal '16..

A lot of the other names in this space have been heard by the big shifts over the past few weeks even.

How are you affected by the rising dollar?.

We don't have a lot of transparency into that, because our customers actually report to us in dollar, but there is obviously some conversion. So we would see some indirect impact to the business. If you look at I think our disclosure, I think 23% or 24% of our overall revenues are o U.S.

So we'll have some impact on the business, but most of our sales in the diagnostics area are dollar based sales. And where we'll have more of an impact will more likely be in the Medical Device area as it convert sales into royalty payments. But we really haven't seen a lot of transparency in that area at this point in time.

Keep in mind, we're also a quarter behind in terms of reporting. So we may start to see a little bit of that in the next quarter or two. But we don't have total exposure to foreign currency at this point..

It's a percentage of a small delta, core percentage of the delta..

So it's not enough obviously to make any changes to your guidance?.

No, it is not. That's the best way to describe it. And we feel very comfortable with our current revenue guidance and earnings guidance..

And we'll take our final question from Beth Lilly of GAMCO Investors..

I wanted to ask a couple of questions. First one is, you completed the $20 million accelerated share repurchase.

What was the average price you paid?.

Well, right now, the way that ASR works is that we have received 758,000 shares in the first closing on the ASR. Next is based upon a $16 million of that $20 million.

The second closing of the ASR happens after the investment bank has actually repurchased the shortage shares, and that will not occur until some time into later in the second quarter and more likely in the third or fourth quarter.

So in terms of what we've bought right, it was $20.10, I think it's $21.10 a share is what we've paid for the 758,000 shares. And the remaining shares will be based upon the average VWAP price over the period, and once we actually reacquiring the shortage shares in the market.

Right now, that's somewhere around 140,000 to 150,000 incremental shares that we may receive, but that's all dependent upon our price during the remaining period that the forward contracts outstanding..

And then the other thing I wanted do just drill down a little bit, and I know we've spend a lot of time talking about this.

So the timing in terms of the first-in-human clinical, so that's going to start in the third quarter, right?.

There will be a ramp up in terms of getting a lot of activities before that happens..

That's all our target there, to get that first patient started in the third quarter. Sorry, in the fourth quarter. Yes, September. Sorry..

The September quarter to be clear..

So help us understand than the spending.

So you're going to have the GLP activities that are going to be $1 million to $1.5 million and then you've got first-in-human and you said, so total of those two this year will be $3 million to $5 million, is that right?.

The total of the two is $4.5 million to $6.5 million and within our guidance that overall R&D would be up 5% to 7% for the year. That contains both of those activities of the GLP study as well as the first-in-human activities..

The thing that could change the rate of spending is, and we would actually like this is, is whether we could increase the rate of enrollment. And so there is a formula for the rate of enrollment we expect in the clinical, which would during the clinical it sort of pieces your rate of spending.

If we can increase the rate of enrollment that could change it or if the rate of enrollment is a little slower that could change it as well. So that's why Andy is coming up with that bandwidth of numbers. It's both where we conducted and the rate of enrollment and the number of patients.

So if you think about the first quarter, Beth, we were down 3% in R&D spend. R&D spend will ramp up significantly over the next three quarters, as we continue down this path..

So let's fast forward then to, you've spent this money, you've enrolled the patient in first-in-human clinical.

Can you kind of help us then what are the next data points that happen from there?.

Well, depending on where we conduct the clinical, the requirements are slightly different. What typically would happen is that you have a 30-day safety follow-up, and certainly in different geographic markets a six month follow-up, which might be either ultrasonic or angiographic follow-up.

And those actually give you the data, it tells you whether it is the patency rates of the vessels or late lumen loss, if you do the angiographically. So that six month follow-up is something that keep it really key off. What I want to remind people is, first-in-human is not a definitive efficacy study.

So clearly what you end up getting is certainly the safety and a mild indication of efficacy. There is a thin work, but you can't really have enough statistics, the power of likely be treating hundreds of patients.

So if you take a patient, a clinical study size of 60 to 80 patients, that's what we'll be doing and the six month follow-up really is a critical component of that..

Then you get the six month data. And then does that data then get published.

Do you talk about that data publicly?.

Yes. We would like to. We haven't worked that out with our principal investor here yet, talking more often this weekend, but yes we believe it would be a publishable study. And the only reason it may choose not to be published, is if there is a strategic that would like it not to be, but I think our indication is to have that study published..

So we'll have a sense then, Gary, so maybe by, yes, May would you say? May 2016, similar than that?.

Projecting wildly that would be a nice target for us. It'd be by the summer of 2016 is what our internal target is. The next steps would be for someone to really prepare a U.S. IDE filing package to start the U.S. pivotal study. And that really remains the big markets..

Just so, and I don't mean to beat a dead horse, but I just want to make sure I understand the timing of this. So you get the first-in-human data, you talk about it at the summer of 2016.

Then what's the next step after that, assuming you don't have a strategic?.

Assuming the worse case. We feel very compelled. There are two things to think of, by the summer of 2016, and Beth just to be clear, the reason I'm saying summer its six months after the last patient is followed out, that should be completed. And then you have six to eight weeks for all the data analysis.

The issue then is what is the state of the DCB market, have bought Medtronic with their products and whoever else has entered the market, have they created a viable therapeutic modality? And then, our early answer is, yes. Many members of our scientific advisory board are current DCB users and they see demand of it in the superficial femoral artery.

And so assuming a healthy and robust need there, we are confident that a strategic cannot have immediate gap in their portfolio, in what could be a very important growth market for peripheral artery disease. And so that's around a sweet spot for timing of where our potential license deal may occur or monetization may occur or whatever the method..

And that concludes today's question-and-answer session. At this time, I would like to turn the conference back to management today for any additional or closing remarks. End of Q&A.

Thank you all for your healthy questions. And as we close, I want to emphasize that fiscal 2015 continues to represent an exciting opportunity for SurModics, to continue our profitable growth even during a challenging market, and even while we increase our investments and opportunity for transformation. Thank you everyone..

This does conclude today's conference. We thank you for your participation. You may now disconnect..