Andy LaFrence - VP of Finance and CFO Gary Maharaj - President and CEO.

Jan Wald - Benchmark Company Jim Sidoti - Sidoti & Company Charley Jones - Dougherty Markets.

Good day, and welcome to the SurModics’ Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Andy LaFrence, Vice President of Finance and Chief Financial Officer. Please go ahead, sir..

Thank you, Kyle. Good morning and welcome to SurModics’ 2015 fourth 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 comments 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 a result of new information, future events, developments or otherwise. We also refer to non-GAAP measures because we believe they provide useful information to 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 morning and is available on our website at www.surmodics.com.

On today’s call I’ll provide an overview of our fourth quarter results. I will not go through the results for fiscal 2015 as they are included in the table with the press release. 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, including questions regarding the quarter and full year results. I’ll start with the financials. Revenue for the fourth quarter of fiscal 2015 was $17.4 million, an increase of 13% compared with $15.3 million in the fourth quarter of last year.

Fourth quarter revenue included a $0.8 million of hydrophilic royalty revenue that was previously deferred because customer-related contingencies that were resolved during the fourth quarter. These contingent royalties related to the first three quarters of fiscal 2015.

After adjusting for these contingent royalty items, revenue increased 8% for the quarter compared to the prior year. On a GAAP basis, our diluted earnings from continued operations totaled $0.22 per share compared to $0.18 per share in the prior year quarter.

The fourth quarter fiscal 2015 earnings include a $0.04 per share benefit from the contingent royalty revenue items discussed above, offset by $0.12 per share reductions from a customer claim settlement. The year ago quarter included an $0.08 per share strategic asset impairment charge.

On a non-GAAP basis, quarterly earnings per share from continuing operations were $0.30 per share in the fourth quarter of fiscal 2015 compared to $0.26 per share last year. We delivered operating income of $4.3 million in the fourth quarter of fiscal 2015, down from $5.4 million in the prior year quarter.

Operating margin decreased from 35% to 25% in the current year. The decline in operating income and margin reflect higher revenue offset by the $2.5 million customer claim settlement and increased compensation expense. Turning now to our two business units. Medical Device had a larger revenue quarter.

It is the larger business unit contributing approximately three quarters of our total revenue. Revenues derived from both our hydrophilic coatings and device drug delivery coatings, fourth quarter revenue was $13.1 million, an increase of 17% compared to the year ago period, or 10% after adjusting for the contingent royalty items.

Fourth quarter hydrophilic coating royalty revenue totaled $8.9 million, up 13% from last year. After adjusting for contingent revenue items, hydrophilic royalty revenue increased 4% for the quarter versus a year ago. Reagent product sales growth continue for the second consecutive quarter compared with the same year quarters - prior quarters.

The Medical Device business customer research and development revenue increased $0.2 million for the quarter, with higher demand for contract coating services to support customer clinical trials in select product launches. This unit generated $4.7 million of operating income in the fourth quarter, down 24% from a year ago.

The $2.5 million customer claims settlement and higher compensation expense offset – was offset by revenue, including the contingent revenue items accounted for the decrease in operation margin. For In Vitro Diagnostics unit, fourth quarter fiscal 2015 revenue totaled $4.2 million, an increase of 3% from a year ago.

This year the IVD business unit has realized exceptional revenue growth from sales of our stabilization reagents, as well as molecular diagnostics product line. Product gross margin for IVD was 59.7% in the fourth quarter, up from 58.7% in the prior year quarter.

This increase mainly related to sales mix as reagent of product we distribute comprised a lower percentage of the current year quarter sales mix versus last year. IVD operating income was $1.3 million compared to $1.2 million in the fourth quarter of 2014.

Operating margin increased to 29.8% versus 28.7% in the prior year quarter, due to improved revenue and sales mix, as well as lower legal cost, as we resolved our previously disclosed lawsuit in July 2015 for a nominal amount. Now, I’d like to discuss our fourth quarter 2015 revenue summary by category.

First, our royalty and license fees which are generated primarily by our Medical Device business unit. This revenue category was $9.2 million, an increase of 14% last year, largely stemming from the previously discussed contingent royalty items.

Second, product sales in the fourth quarter of fiscal 2015 totaled $6.8 million, up 11% from the year ago period. This reflected higher reagent sales in our Medical Device business and to a lesser extent product shipments in our In Vitro Diagnostics business unit. And third, R&D revenue was $1.3 million, up from $1.1 million a year ago.

As a percentage of revenue, fourth quarter R&D expenses were 24.9% versus 26.5% in the year ago period. R&D expense of $4.3 million for the quarter increased 6% from last year, resulting from higher compensation cost. SG&A expenses in the fourth quarter of fiscal 2015 were 21.2% of revenue versus 23.2% in the prior year period.

On a dollar basis, SG&A in the fourth quarter of 2015 totaled $3.7 million compared with $3.6 million a year ago. As we previously disclosed, we settled a customer claim during the fourth quarter of fiscal 2015 for $2.5 million. Income tax expense was 33% of pretax income in the fourth quarter, down from 43% in the prior year period.

The prior year tax rate reflected the impact of $1.2 million strategic asset impairment that did not have a tax benefit due to capital loss carry forwards that carry [ph] for valuation allowance. Without this write-off, the prior year effective tax rate was34%. Looking at our balance sheet, it continues to be very strong.

Our cash and investments totaled $55.6 million and we had no debt outstanding as of September 30th, 2015. We continue to generate solid operating cash flow. Cash flow from operations of $15.1 million for fiscal 2015 was adversely impacted by the timing of customer payments.

We invested $1.9 million in property, plant and equipment and returned $20 million to our shareholders through the accelerated share repurchase program announced in November 2014. The accelerated share repurchase program was finalized in July 2015 with an incremental of 90,000 shares delivered to SurModics.

I am please to announce that the SurModics Board of Directors has approved a $20 million increase through our existing share repurchase authorization program bringing the total amount currently authorized and available under the program to an aggregate $30 million.

Over the past years, the Board has demonstrated a strong dedication to enhance shareholder value and this recent authorization is another example of that commitment.

Our current cash and investment balances, and operating cash flows, combined with SurModics $20 million line of credit and $175 million shelf registration, provide adequate capacity to support our corporate strategic growth initiatives. We estimate GAAP revenue for fiscal 2016 to be in the range of $56 million to $60 million.

Fiscal 2016 revenue anticipates the previously disclosed expiration of the US patent protecting our third generation hydrophilic coatings. We anticipate diluted GAAP earnings to be in the range of $0.70 to $0.80 per share.

The fiscal 2016 earnings per share guidance includes an increase of approximately 15% to 20% in research and development investment over fiscal 2015 levels, primarily related to drug-coated balloon activities, including paclitaxel and sirolimus applications of our drug-coated balloon platform.

We also anticipate slightly lower SG&A expenses compared to fiscal 2015 levels and a 33% to 35% income tax rate. Our earnings per share and income tax rate guidance exclude the impact of any investment gains or losses. Capital expenditures for fiscal 2016 are projected to range between $3 million and $3.5 million.

We expect our diluted shares outstanding to be approximately 13.35 million shares, excluding the impact of any share repurchases. While dependent on market conditions and business development initiatives, we may repurchase common shares under the $30 million announced repurchase authorization.

The operational financial results from the fourth quarter and the year were exceptional. This demonstrates the SurModics teams focus on our core business and execution on our business transformation strategy. Thank you to the entire SurModics team for all your efforts. And now, I'll ask Gary to share his perspective.

Gary?.

Thank you, Andy. And thank you for such thorough coverage of the data. I'd like to thank our team members for their consistently strong operating performance through fiscal 2015. They have set us up in a incredible position in 2016.

While our comments today focus on Q4 and looking ahead, it is important to note in fiscal 2015 SurModics posted solidly higher revenues, net income and earnings per share. We also set the table for ongoing success through all these development initiatives.

Our strategic tri-factor continues to be first to transform SurModics into a whole product solutions provider of medical devices by organic R&D and the corporate development initiatives. Second, to continue to generate maximum revenue growth from all core hydrophilic coatings and In Vitro Diagnostics businesses.

And finally, to continuously optimize these investments required for strategic transformation and long-term value creation with a short term generation of earnings.

I am happy to say that we have made substantial progress in our transformation agenda, in our fourth quarter of fiscal '15 as demonstrated by our recent IDE approval from the FDA for an early feasibility trial using our SurVeil drug-coated balloon.

This is a major accomplishment by our DCB team and a key milestone for the program, seeking an IDE approval by the FD for a drug coated balloon who is very first human use is intended to occur in United States is a significant undertaking.

While there maybe others who have succeeded before for us, we are not aware of any public disclosures of such an approval for a drug coated balloon using the early feasibility pathway established by the FDA.

We are diligently working on necessary manufacturing and clinical trial site preparations and we believe aggressively that we can enroll the first of 15 patients by the end of our second quarter fiscal 2016.

Recent clinical data on long-term results of second generation drug coated balloons continue to indicate a strong benefit to patients with femoropopliteal disease.

We believe that SurModics SurVeil is a third generation DCB technology since our preclinical data demonstrates significantly higher drug transfer and improved biological effect versus currently tested and marketed devices, including a very high manufacturing consistency off the drug delivery coating, both along the balloon and from balloon to balloon.

Let me turn now to our strategic priorities to lay them out for you in fiscal 2016. In this fiscal year, we intend to dramatically accelerate our transformation and investment to become an innovative medical device solution provider to our customers. This will be accomplished in the following three ways.

First, we intend to make significant progress on SurModics SurVeil by demonstrating its clinical, safety, and preliminary efficacy. Our goal is to initiate and complete to early feasibility study in fiscal 2016 and start the traditional feasibility study in calendar 2016.

Second, we intend to acquire and integrate the strategic assets and capabilities that we believe are necessary to become a world class medical device innovator, developer and the manufacturer We have technology content and are looking to fill out two of the key attributes.

First, independent of innovative device design and development and lien automated and integrated manufacturing. We're looking for very specific capabilities and continue to hold a very high standard for strategic fit versus a purely revenue or financially base deal. Third, we will further develop and enhance the value of our R&D pipeline.

Our pipeline investment in medical devices has two components in fiscal 2016. The first component is our DCB platform which continues to be a major source of investment, including using different drugs and different types of devices.

These drugs such as sirolimus are being used to target other vascular anatomies, which could include below the knee balloon catheters which are specifically designed for these applications. We actually believe that we may be only technology platform that shows some of those with both classes of sirolimus and paclitaxel drugs.

For olimus [ph] it is much more difficult to obtain sufficient tissue retention in drug coated balloons versus stents.

If through our pre clinical research and development experimentation we are able to demonstrate that we have the ability to have sufficient drug up tick and residence over a long period of time at [sirolimus, we believe that this will represent a distinct competitive advantage in offering multiple drugs for different anatomical. targets.

We intend to continue this investment in parallel with our SurVeil DCB activities. It is an important component of our pipeline. The second component of our R&D pipeline is our intention to invest in medical device development, which uses other technology platforms in early experimentation.

And that these require a mainly 5510(k) type regulatory clearances. Our aim in fiscal 2016 is to complete early development with such devices, so that we can actually gain regulatory clearances in fiscal 2017. We will of course continue to focus on core businesses of medical coatings in In Vitro Diagnostics.

We intend to have accelerate the adoption Serene and ensure that its advantages of low particulates with lubricity, becomes the new standard for all devices that use a hydrophilic coating.

In In Vitro Diagnostics we plan to continue our focus on our world class protein stabilizers and substrates and continue to develop new products specific to the most challenging diagnostic test. In summary, fiscal 2016 will be an exciting investment transformative year for SurModics. Operator, this concludes our prepared remarks.

We'd like to open the call for questions now..

Thank you. [Operator Instructions] We'll take our first question from Jan Wald with Benchmark Company..

Good morning, everyone. And congratulations on the quarter. It looks really nice. I guess, Gary, you mentioned in other technology platforms, with the 510(k) type of regulatory pathway. Could you talk about what kinds of products you're talking about here, are they catheters or they – what kinds of products would put into that into….

Absolutely. Well, first it has to use some of our technology content and our R&D team continues to innovate with new molecules and improved chemistries that can go on devices.

So as an example, chronic total occlusions continue to be a major clinical problem in terms of getting through CTOs and we believe some of these new chemistries are on the right devices.

These devices can include support catheters, access catheters sheets with our chemistry can actually have what we call some white spaces in the portfolios of our current customers that we can still with both the device and the chemistry content with a regulatory approval. So that’s the challenge right there and aim..

Okay.

And I guess, how do you come into accelerated adoption of Serene, is it going to be through clinical studies or more feet on the streets or what's the approach you can take for that?.

The acceleration is really because of we have some transparency into our early feasibility –the feasibility that our customers are conducting with us and more and more them are recognizing two things, one that Serene actually works to enhance lubricity and reduce particulates.

But also that there continues to be a fair amount of regulatory scrutiny of the total amount of particulates coming off of devices in general in the vascular system.

And so, given that is – that continues to be very high under regulatory radar, we are putting Serene as also one of the ways that we can actually lower the regulatory burden of propofol [ph] customers as they submit their data packets for regulatory approval.

That we believe is a very profound thing we are offering our customers, which is an enhanced data package that helps them through the regulatory clearances..

Okay. And then I guess one last question, on SurVeil, you said that the traditional feasibility study if you will would probably begin in your fiscal 2017….

Calendar, to the traditional side of calendar, is..

Calendar 2017, okay. I am sorry..

2016..

2016. Okay..

Yes..

Is that something that we should – I mean, those expense list, we put that our model or is that – do you think there will be transferred….

Yes.

In gene P [ph] go back to some of the dialogue I had in the script, we do expect R&D to be up somewhere between 15% to 20% for the year, and that would encapsulate those costs for that program to get through at least initiation of the first-in-human, and if you think about calendar '16 you're looking at, near the end of our fiscal '16, early fiscal '17, but those costs are embedded in our guidance..

Right. The preparatory work will have to be done in fiscal '16. And keep in mind even as we treat 15 patients in the early feasibility, the follow up patients goes on for three years. So those costs we actually keep rolling out over the next couple of years..

Just to make sure there is no plan to take this through feasibility into pivotal?.

That’s not our plan, no. That’s fairly large undertaking from an investment..

Okay. Thank you very much..

We'll take our next question from Jim Sidoti with Sidoti & Company ..

Morning.

Can you hear me?.

Yes..

Hi, Jim..

Great.

Can you let us know how many new contracts you signed for Serene in the quarter and what the total was for the year?.

Yes. In total for the quarter we signed I think – I think we signed three products and I think majority of those had - were for Serene and for the year it’s over 10, yes.

I can tell you that – a little bit more granular in terms of new products that were launched, there were three new products that were launched this quarter and I think they have been close to 9 and have been launched for the year and majority of those have had Serene in them..

The launches are ones that impact the all this….

Right, right. So those are ones in one year or two. As you recall, the pipeline can take six to 48 months, so we really focused more on the ones that actually we have launched in the quarter..

Okay. All right.

And then I just want to be clear, the $800,000 incremental royalty revenue and the $2.5 million charge, was that related to the same settlement?.

No, partially, so the $2.5 million settlement was related to one customer and as we reported in our call that we would recognize about, I think was $535,000 incremental revenue in fiscal 2015 related to that customer.

Now not all of that was in our pro forma and the $800,000 because a portion of that was related to prior – was related to the current quarter that fourth quarter. so the total between the two customers that we had with contingent revenues was $800,000. So portion of that Jim related to the customer claim..

Okay. All right. Thank you..

Yes..

[Operator Instructions] I'll now take our next question from Charley Jones with Dougherty Markets..

Good morning..

Morning..

Good morning, Charley..

I was curious if you could help us out a little down the revenue side, if you take the top and the bottom end of the range, what do you think the factors are there for you that drive that the most?.

Yes. I'll walk through that. If think them on a revenue for fiscal 2015, that $61.9 million, we talked about previously that we had about $600,000 related to a customer, a couple of quarters ago that had made a one time payment, catch up payment. So that was about $600,000.

We also had a first generation royalty expired in June of '14 and the year-over-year lapse on that would be about $0.5 million going into '16.

And then we think about the third generation royalties and we talked about a $11 million of our revenues are coming from those royalty payments and given that that patent expired in the US last week, that we anticipate that we'll have a lapse of revenue associated with that.

So if you think about the $11 million in approximately a quarter of that will go away during this year and in fiscal 2017 as its beyond their royalty license bearing period. That would be about $3 million or so and the impact this year will probably be between that and also the step down could between $3 million and $4 million.

Now we believe that we've been appropriately conservative in those numbers, because one impact of those numbers is how much part is in the channel at the time of the expiration of the patents, because we get royalties on those as well.

But we have no idea of knowing those amounts Charley until we start seeing some of those reports coming in in the second and third quarter of fiscal 2016..

So getting towards 60 oppose to 56 is more a function you think of gen three [ph] or is it a function of your customers or IVD or all of them?.

Yes, IVD as we talked about in the past is, you know, we view that as a mid single digit growth business and obviously they have much tougher comps they are coming up with this next year. We still think that’s a mid single digit growth business for us.

And so with that growth we think we'll continue on that rate and then we continue to believe that there will be underlying growth in Serene, as well as growth in the reagent sales.

But really what the driver here is for fiscal 2016 is going to be the TL-3 the third generation and how much of that is actually going to be in the channel at the time of that expiration of the patent and the reporting on that and that will be largely reflected in starting the second quarter and we'll see more of that in the third quarter..

Thanks. That helps. I was hoping a few questions on some of these other topics, you had a lot going on today. So these little products that you are putting through, I guess these are products that – or maybe they are not little, that in the past you would have just partnered.

But maybe you are using as stepping towards, or just kind of figuring how to work through this process a little bit more completely and start to develop that capability before you make an acquisition or are these completely new and different types of products that others don’t really have that you couldn’t just put your coatings on their products? And where are you getting these products, I mean, now you're extruding them that sounds like, so I am curious where they are coming from?.

Sure. So the second part of the pipeline just for the intent is to balance our portfolio. We have a fee PMA type things going on.

Certainly we wouldn’t be doing the pivotal, but in terms of getting 510(K) clearances, we see an opportunity with some of our new chemistries that we have that actually as we have done our own data package testing of the currently marketed products, our new chemistries on these products actually enhance performance dramatically.

Now when you think of SurModics our customers wanting to technically and clinically but also regulatory de-risk things, we believe we can put those on some of advanced castes [ph] of these designs and actually get a product that has improved device design by itself and then you put our technology and events like the a non-linear battery effect that we can see.

So we can – if we can get those design – of designs frozen and then file for the 510(K) then we can offer our products what we believe are going to be new benchmarks in some of these products.

In terms of, I think you're think your question is heading towards, do we have the R&D capability for the device design part of that, the short answer is we have the initial component of that, but as we look and contemplate acquisitions, that is going to be a critical competency gap still for us and we see it actually to be able to innovate under device itself.

So big role in that..

It sounds like you have a couple of co-products that you work through, but you want to make it more robust and that’s what we're doing with an acquisition maybe I am misunderstanding.

But I am still wondering where these where the extruding capabilities are coming from if your – if someone else is making this product for you, or if you making and if you are simply designing it, I mean, [indiscernible] FDA so you obviously have a physical product?.

Exactly, just to note Charley you're seeing extruding in capabilities I am not, but certainly if catheters base type stuff you'll have to have capabilities like that. Clearly there are partners who can do this.

But also remember our focus of M&A is to bring that in house and also have the ability to manufacture it because part of our strategy depends on having a margin that can actually be attractive to both us and a strategic as we try to supply that product and license it to them.

So the M&A continues to be a real big pivot pole of this strategy, if we are not able to execute this M&A in the way we think, then certainly our things could take a little bit of longer if having to do it just from an OEM partner view point..

So these products that you are putting through the FDA right now, you kind of being elusive, a little bit on purpose, right, its….

No, no, just to be clear. I think the timing I should clear up. We're doing the product development of those products in fiscal '16, so that we can file and seek for approval in fiscal 2017. Start to finish on our 510(k) type product, I think are good benchmark, a rapid benchmark is about 18 months start to finish on that.

So clearly we have nothing in front of the agency right now from a 510(k) view point. But that’s – the aim is to have that developed frozen and hopefully some of that even filed in fiscal '16, so we can get approvals in fiscal '17..

Great.

On the balloon programs that you have going on, could you breakdown the R&D growth a little bit for us and talk about the olimus program and if that’s observing a lot of the growth or its more in the paclitaxe, the olimus program comes well during the years?.

I'll give you broad overview and keep - remember its sort of a like a reloptions [ph] analysis because we don’t get a good preclinical data from olimus then we're going to stop. So when we think about olimus program I would think about $1 million this year would be an investment in general.

Now again its, you scale, you go from data to data and if the data doesn’t look good and doesn’t look we can get in olimus, we're going to spend up to that amount, but if the data does look good, we will accelerate into the next phase. So $1 million is not a bad ballpark to consider for that..

I guess the real question is, does the olimus get accelerated in a way because you've already done so much on paclitaxe or should we think about the past year or two in paclitaxe and think of similar timeline for the olimus program? And where are you at your balloon acquisition there?.

Yes.

So two things, one, our FDA IDE approval for the early feasibility, if we use the same excipient and processing platform and keep in mind working with agency and seeking such an approval, we're doing things, I won't call them backwards, but we are frontloading all of the chemistry manufacturing control components, which actually helps a strategic who wants to file for the pivotal.

Meaning a lot of the tough questions from the agency we have done a nice job working through that with them.

So the benefit of that data package that we submitted and we do have an IDE approval for first-in-human or with feasibility, if we leverage that benefit of the bio compatibility, the manufacturing the processing and chemistry, then that will actually we believe help olimus program.

Now it is a different drugs and it’s a different drug device combination, but in a sense the agency would have seen many of the similar chemistries already. So that we believe can help olimus program.

But the actual hurdle for the olimus program is, can you get enough drug into that tissue for 28, 45, 60 days, olimus is more difficult and that’s the real hurdle for it..

So are you in talks [ph] right now?.

Yes..

Okay. All right, I'll run off for a minute. If you [indiscernible] I may have a few more. But I don’t if anybody else is on the line.

So going on, I'd be curious whether or not you have any plans to deliver drug to the vessel wall with anything else other than a balloon? And whether or not some of these other programs in you know, in some of the areas whether it’s cardiovascular or whether it’s in liver area, whether or not you got some opportunities in 2016 to make some investments?.

Certainly with our excipient program we have the ability – I've described the platform is anything that requires a short term contact with tissue to be able to deliver a drug, that’s on a broad category how we consider these excipient's that we are doing research on.

As far as various anatomical targets, we have nothing seriously ongoing in non-vascular systems at this point, that’s not to say couldn’t change, but we have our hands full with the vascular anatomies in front of us and the investment required to do those adequately.

So the platform and the IP we have filed we are confident and that will be there for our tissue anatomies, but for now we're sticking to vascular..

And then just real quick on financials, Andy, I as working through the model, I was curious if you tax rate is going to be little bit lower next year or if the $0.70 to $0.80 is really is just kind of captured in the difference in the revenue line and is there cost of good sold its going to be somewhat similar next year, that’s it from me thanks guys..

Yes. couple of good questions there. Charley, and the tax rate we expect to be similar and within that range of $0.70 to $0.80 a share whether encapsulate any R&D tax credits if they are enacted, and that’s embedded in the rate right now.

And if you look at margins, you look at them being similar to where they were this year, we were at the year at about 60 basis points, up from last year at 65.4% gross margins and you should expect us to generally be in the 64% and 66%, environment has to do with mix, related to as we commented in the quarter, antigens which is product to be distribute has a lower margin and that would have some impact on the mix for the year, but all things been class, be in the 64% to 66% range would be reasonable estimate..

Glad you guys are the making the investments, nice quarter..

Thanks..

Thank you..

We'll take our next question from Beth Lee [ph] with Gamco Investors..

Good morning..

Good morning, Beth..

I wanted to just drill down, excuse me, little bit more about the acquisition strategy, I know we've talked about it, can you just I am little bit confused Gary can you reiterate and explain to us a little bit further about what you're looking acquire?.

Sure. Beth, I call that three legs too, and typically a three legs to usually have two legs and you are adding one. SurModics has one very strong leg and we want to add two. So we have really incredible technology content, not just drug delivery but new chemistry that go on surfaces that could make our devices even perform better.

So we have that strong leg. The second leg we want to add is really to have our own independent device design capability. So from balloons to catheters, certainly we would like to have that so that we can improve not just the technology content, but the device itself. And so that’s a big part of our M&A strategy.

The third leg on the stool which is also part of our M&A strategy is our future business model is going to require manufacturing capabilities that have - what I call two components, one is very high quality systems standard of manufacturing, but also the ability to make these products at substantially low cost.

So we can't stop at the innovation and say we're better, there has to be enough margin to go around for SurModics and for the strategic we intend to provide these customers for. So our M&A strategies looking for those two legs, device design and manufacturing and even better if it comes in one company that’s even sweeter spot for us.

We have looked at over 100 companies in the last two years and we don’t discuss anything that’s eminent we certainly have been very, very active in that and we feel very confident in that space..

Okay.

So the device design make sense, but the manufacturing capabilities so you mean the manufacturing capabilities of the device?.

So we want to provide whole product solution to our customers, I'll take to it to the extreme just to make an example, is any reasons SurModics can't provide a product that’s regulatory cleared or approved, and finish sterilized label than packaged and all customers we just ship it to them to be able to do that and do at a proper margin requires us to have a good manufacturing competency the board applied the technology content into manufacture device, yes..

Okay. Great. All right. I turning to quit off I think those were all my question – everything else is been answered. Okay, great. Thank you very much..

Thanks, Beth..

Thanks..

[Operator Instructions] We'll turn the call back over to management for any additional or closing remarks..

Thank you. Well, thanks to all of your questions. We are pleased with our fiscal 2015 performance and a solid fiscal 2016 with a right move that can accelerate our transformation towards delivering whole product solutions. This ensures that SurModics is relevant to our valued customers well into the future.

I believe it’s the best way to build long-term shareholder value. Thank you everyone..

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