Andrew LaFrence - VP of Finance and Information Systems and CFO Gary R. Maharaj - President and CEO.

James Sidoti - Sidoti & Company Michael Petusky - Barrington Research Associates Brooks O'Neil - Lake Street Capital Markets Elizabeth Lilly - GAMCO Investors Ben Haynor - Feltl and Company.

Good day and welcome to the Surmodics First Quarter 2017 Earnings Conference. 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, Ebony. Good morning and welcome to Surmodics 2017 First Quarter Earnings Call. Before we begin, I would like to remind you that during 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 a result of new information, future events, developments or otherwise. We will 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.

This conference call is being Webcast and is accessible through the Investor Relations section of the Surmodics Web-site 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 Web-site at www.surmodics.com.

On today's call, I'll provide a review of our first quarter financial results and our fiscal 2017 guidance. Gary will then provide an overview of our key achievements, provide an update on execution of our strategy and plans for fiscal 2017, and after Gary's overview, we will open up the call to take your questions.

We are pleased to report that revenue for the first quarter of fiscal 2017 rose 7.4% to $17.8 million, compared with $16.5 million in the first quarter of last year, driven by continued strength in the Medical Device segment. On a GAAP basis, our diluted earnings totaled $0.17 per share compared to $0.20 per share in the prior year quarter.

Fiscal 2017 first quarter earnings included a $0.02 per share reduction from acquisition related amortization and contingent consideration accretion expenses, offset by a euro denominated contingent consideration foreign currency transaction gain.

Prior year first quarter earnings included a similar $0.04 per share reduction for acquisition related costs as well as a $0.17 per share from Creagh Medical acquisition cost. On a non-GAAP comparative basis, quarterly earnings per share were $0.19 in the first quarter of fiscal 2017 versus $0.39 per share last year.

We delivered operating income of $3.3 million in the first quarter of fiscal 2017, down from $3.9 million in the prior year period. Operating margin decreased from 23.8% to 18.4% in the current year quarter.

The declines in operating income and margin reflect higher planned investments in research, development and other operating expenses to support our whole-product medical device strategy, including the SurVeil drug-coated balloon.

Turning now to our two business units; Medical Device rose nicely to $13.8 million, increasing 12.3% from the year ago period. The growth stemmed from product, royalties, research, development and other revenue.

Looking at specific areas within Medical Device, first quarter hydrophilic coating revenue totaled $7.4 million, down slightly from last year.

Royalty revenue was stronger than expected as our customers reported a higher mix of revenue in royalty-bearing jurisdictions outside the United States as well as products that had migrated to more advanced generations of hydrophilic coatings.

Product sales increased $0.8 million from the prior-year quarter, primarily due to increased reagent shipments and our fiscal 2016 acquisitions of Creagh Medical and NorMedix.

Medical Device customer research and development revenue rose $0.7 million for the quarter as a result of our recent acquisitions and higher demand for contract coating services to support customer clinical trials and select product launches.

This unit generated $3.7 million of operating income in the first quarter versus $3.8 million in the prior year quarter.

The Medical Device operating income was impacted by increases in planned investments related to our whole-product strategy as well as acquisition related amortization and accretion expense, partially offset by increased margin from higher revenue and reduced acquisition related costs.

For our In Vitro Diagnostics unit, first quarter fiscal 2017 rose – totaled, I should say, $4.0 million, a decrease of 6.8% from the year ago period. As you'll recall, in the prior-year quarter, we realized a 20% increase in revenue, which creates a tough comp for IVD this quarter.

First quarter fiscal 2017 IVD revenue was impacted by strong fourth quarter fiscal 2016 sales in several product categories as well as a decline from a significant microarray customer that had previously been acquired by one of its competitors. We expect a decline in revenue from this customer to continue through our third quarter.

Looking at the year, we expect fiscal 2017 IVD revenue will be comparable to the prior year. IVD operating income was $1.5 million, compared to $1.6 million in the first quarter of fiscal 2016. Operating margin decreased to 36.4% versus 38.3% in the prior-year quarter due to lower revenue.

Let's now turn to our first quarter 2017 revenue summary by category. First, product sales totaled $7.7 million in the current quarter, up 7.2% from the year ago period. This increase was driven by Medical Device product sales including reagents and our fiscal 2016 acquisition.

Second, royalty and license fees, which are generated primarily in our Medical Device business unit, came in at $8 million, up slightly from last year. And third, research, development and other revenue which is derived from our Medical Device segment was $2.1 million, up nicely from $1.4 million a year ago.

This increase was driven by increased coating services and our fiscal 2016 acquisitions. Product gross margin for the quarter was 65.9% of product sales compared to 67.1% in the prior year quarter.

Reduction in product gross margins was largely the result of a $0.1 million loss from a damaged shipment from a vendor, partially offset by improved product mix in our Medical Device segment. As a percent of revenue, first quarter R&D expenses were 33.6% versus 22.0% in the year ago period.

R&D expense of $6 million for the quarter was up $2.3 million from last year. As we have stated, we anticipate R&D expenses to increase in the next three quarters as we accelerate our whole-product solutions strategy, including advancing our SurVeil drug-coated balloon.

SG&A expenses in the first quarter of fiscal 2017 were 27.4% of revenue versus 22.1% in the prior year period. On a dollar basis, SG&A in the first quarter of 2017 totaled $4.9 million compared with $3.6 million a year ago. The increase reflects the impact of our fiscal 2016 acquisitions and infrastructure needed to support our whole-product strategy.

During the quarter, the strong U.S. dollar resulted in a $0.7 million gain on our euro denominated contingent consideration obligation related to the Creagh Medical acquisition. This gain increased GAAP earnings by $0.05 per share. Income tax expense was 42.9% of pre-tax income in the first quarter, up from 30.3% in the prior year period.

The increase in the effective tax rate primarily resulted from non-tax benefitted amortization, accretion, foreign currency gains and operating losses in Ireland. Looking at our balance sheet, which continues to be strong, cash and investments totaled $45.1 million at the end of the quarter.

We generated cash flow from operations of $2 million during the first quarter of fiscal 2017 and invested $1.5 million in plant and equipment during that period. Our current cash and investments and operating cash flows combined with Surmodics' $3 million line of credit provide adequate capacity to support our corporate strategic growth initiatives.

As a result of strong first quarter Medical Device revenue and our increasing clarity on DCB clinical trial plans for the remainder of fiscal 2017, we are updating revenue and EPS guidance for fiscal 2017. The Company now expects GAAP revenue to range from $64 million to $68 million, up from a previous range of $63 million to $67 million.

The Company now expects diluted earnings per share loss in the range of a $0.07 loss to an $0.08 per share profit, up from a previous range of $0.15 loss to a $0.05 profit. Further, we expect non-GAAP earnings per share of $0.18 to $0.33 compared with the prior guidance of $0.15 to $0.35 per share.

Our operational and financial results from the first quarter were strong, surpassing our expectations. Thank you to the entire team in the U.S. and Ireland for your hard work and outstanding results.

Gary?.

Thank you, Andy. Let me echo Andy and say that I'm quite pleased about the team's performance in the first quarter. We demonstrated meaningful progress in each of our three major objectives for fiscal 2017. These were; to meet our overall revenue and profitability goals in our core businesses while managing the outside of the U.S.

expiration of significant royalty generating patents in our medical coatings business; second, to invest in and achieve significant milestones in our DCB programs and secure regulatory approvals in our catheter and balloon R&D pipeline; and third, to expand our operational capacity for high quality and cost-efficient manufacturing through continued investment.

For our first objective, as you heard from Andy, we grew revenue 7.4% in the first quarter versus the first quarter of last fiscal year, and achieved GAAP diluted earnings of $0.17 per share, again strong performance. Regarding our second objective, we have several aggressive milestones targeted in our drug delivery programs.

We intend to seek the regulatory approval to initiate the next clinical development phase of our SurVeil drug-coated balloon. To this end, we successfully completed the 30-day follow-up on all patients treated to date and are encouraged by the results.

We are currently in discussions with the relevant regulatory agency as we propose our plans for the next clinical trial with SurVeil. We anticipate clarity in this outcome in our third fiscal quarter. In addition, we have chosen and engaged a full service contract research organization or CRO to plan and eventually conduct this major clinical trial.

Our sirolimus-based below-the-knee drug-coated balloon program continues to make progress using our own internally developed 014 balloon platform. We are conducting a major dosing study that will help determine the most appropriate drug amount that could provide optimum biological effect with maximum safety.

Looking at our non-drug delivery pipeline, we expect to submit three new product indications to regulators in the next several months. We are on plan and have completed the designs of our 014 and 018 peripheral balloon catheters incorporating our proprietary Serene hydrophilic coating.

We have also made significant progress in our microcatheter project using Surmodics' Pristyne coating, going beyond the bench-top testing and actually successfully conducting preclinical testing, where the microcatheter achieved its intended performance goals.

So we are on track on these all planned regulatory submissions and anticipate approvals, which will then help us build on our platform and accelerate growth. And finally, with respect to operational readiness in our Ballinasloe, Ireland facility, we have installed and qualified new clean rooms.

They can handle both drug delivery and non-drug delivery devices and have effectively doubled the footprint of our clean room manufacturing, giving the Company important scale and ability to quickly ramp production. We will put these new clean rooms into use in the second half of fiscal 2017.

Our progress in each of these areas continues to guide our capital allocation choices in fiscal 2017. We believe that the best way for Surmodics to maximize long-term shareholder value is to accelerate these investments in core R&D programs that will drive our strategic transformation.

We have a unique opportunity to make Surmodics more relevant to our customers by creating products of enduring, substantial and differentiated value to both clinicians and patients.

To do this, we are shifting our balance and reinvesting more of the cash flow we generate from our core business operations into executing our emerging whole-product solutions strategy. This investment is critical to our success.

Remember, our objective is to generate consistent revenue growth in the mid-teens on a constant currency basis and EBITDA margins greater than 30% within three years. We believe that fiscal 2017 is a pivotal investment year and expect to see the initial returns from our investments via revenue growth beginning in fiscal 2018.

It's an exciting time at Surmodics and we are encouraged by our strong performance and operational progress. We are executing our strategy to become a leading high-value innovator in vascular medicine.

Our acquisitions in fiscal 2017 along with Surmodics' unique drug delivery and surface technology provide us unique capabilities in the vascular device industry. We can't stress enough how important it is that we continue to invest in and lever these capabilities now for maximum market impact and to secure long-term value for our shareholders.

Rest assured that we will accomplish this in a characteristically disciplined fashion our track record demonstrates and that you have come to expect from us. Operator, this concludes our prepared remarks. We'd now like to open the call to questions..

[Operator Instructions] We'll take our first question from Jim Sidoti with Sidoti & Company. Please go ahead..

So, obviously very strong quarter on royalties, better than I had expected. You mentioned some of that was overseas royalty.

Now just confirm, will that start to slow down the next quarter as some of those patents expired in December of 2016?.

Yes, Jim, the OUS patent for our Generation 3 hydrophilic coatings expired on October 31 of 2016. And as you'll recall, we have a one quarter delay in terms of reporting from our customers. So we do expect to start seeing the impact of the OUS expiration in the upcoming quarters..

Okay.

And then SG&A spending, you mentioned some of that was because of the investments you're making in [RO] [ph], and should we expect that to stay around that $4.9 million for the rest of the year or you think that would slow down as we get towards the end of the year?.

Jim, I'll go back to our original guidance and we've guided – I'll give a couple of components there. SG&A spending we expect to be in the high, upper 20% of revenue for the year, and that's really reflective of the infrastructure we're putting together to support the whole-product solutions.

And just another reminder in terms of the R&D expense which was about 33% of revenue for the quarter, we expect that to be in the high 30s to low 40% for the entire year of revenue..

Okay.

And then the last question, below the operating line, you had a pretty significant gain in investment income, can you just remind me what that was?.

Jim, that was related to the Creagh Medical acquisition. We have up to €12 million contingent consideration obligation that's payable in December of 2018. And given the fact that the U.S. dollar strengthened against the euro during the quarter, we actually had a gain of about $670,000 or so, or about $0.05 per share.

We're not guiding any future gains or losses on that obligation, and those all will get run through our non-GAAP disclosures in terms of earnings as well as EPS. But that is specifically related to that obligation related to the Creagh acquisition..

Okay, so that's different from the contingent consideration or accretion that's reported above the…?.

That's correct. There's actually a couple of pieces there related to the contingent consideration. One is a continual accretion of the underlying obligation based upon the time value of money and the second is the marking the market based upon the change in the U.S. dollar to the euro..

I understand. Okay, thank you. And now on the progress with the SurVeil, you said you hired a CRO and you're in discussions with the FDA. So I guess I'm a little confused.

What does the CRO do now, are they participating in the discussions?.

To be clear, I said we're in discussions with the relevant regulatory agency, I didn't specify the FDA. But what a full contract CRO does, I mean depending on the scale of a clinical, it could be anywhere depending on what we get approval to, but it could be anywhere up to 65 clinical sites. So CRO actually helps with the clinical trial design.

They are study monitors, are the ones that manage and monitor the sites and ensure the data integrity and the streaming to the core labs. And so, Surmodics clearly doesn't have that in-house capability to run a major clinical. So, the CRO actually runs the clinical for us. And that's also good because it's hands-off in terms of the data.

So, you have to hire a CRO at our scale and that's a major – but we're still in a contracting process with them, but I should say we have chosen them and have started working with them on the trial design already..

Okay. And based on your guidance, I mean it seems like earnings are going to be down pretty significantly the next couple of quarters.

So I assume that that means payments related – charges related to the trial are going to continue to go up as we get through the fiscal year?.

Jim, if you think about it, first quarter R&D expense being at 33.6% of revenue and needing to get up to the high 30s to low 40s in terms of overall expenditure as a percent of revenue, that's going to drive a significant amount of incremental spend, planned spend that we have related to R&D.

So, yes, we will expect to see that impact earnings in the latter half of the year..

All right, thank you..

[Operator Instructions] We'll take our next question from Mike Petusky with Barrington Research. Please go ahead..

I guess, Gary, on the new product submissions, what's your current thinking in terms of timetable for actual, and I think some of this is not completely in your hands, but in terms of your goals for product launches at this point?.

First of all, the submissions is the one thing we're in control of when we finish the validation and verification of these designs, and the idea then is to submit it – we have to make some choices of European CE Mark and 510(k) U.S. FDA clearances, but the submission to the approval could be as much as four to five months.

So we'd like to get them in early so we can actually secure approvals and readiness for fiscal 2018 revenue.

The step after approval, which we are running in parallel, is working with strategic customers who have holes in their current product portfolio, who need these products, and there are several strategics in each of these categories that we would want to then be able to provide these products so that the strategics become in essence our distributor of these products on a worldwide basis.

And so that concurrent step post approval is to get uptake from the strategics. And the third part of that is, in our Ballinasloe, our Irish facility, is to have validated the production processes for these so that we can make them in a cost-efficient high quality manufacturing environment.

So there's three things going on at once, get secured regulatory clearances or approvals, start working with the relevant strategics to stimulate their interest and fill their pipeline where they need it, and third, really get these products being cranked out in our high-quality manufacturing systems..

So in fiscal 2018, I mean how many products would you anticipate at this point actually being commercially launched?.

Three. We have two balloon catheters in them. But also keep in mind that pipeline building and investments continue. So we are already working on product approvals that we're going to be submitting in fiscal 2018 this year. So there's a lot going on in R&D, but the three that are ready for primetime will be ready for launch in fiscal 2018..

Okay, all right. And then Andy, I guess I'm struggling on the tax piece.

Can you just speak to what your expectations are for effective tax rate for the remainder of this year, and then if you have a thought about how that might change into the next fiscal year?.

Mike, the effective tax rate as a percentage is really a tough one to articulate given that you've got a number of moving factors here, including the fact that we have a number of non-deductible expenses, which is amortization and accretion.

For example, this quarter we ended up having the gain on – the foreign currency translation gain related to the Creagh Medical obligation we have out there and that's not tax effected, and then we have losses in Ireland. And so we can't really predict the FX gains or losses that are out there.

We do have a pretty good understanding of what the amortization and accretion should be based upon no changes in assumptions and also what the Ireland piece is going to be.

But the way we think about that, we don't think about in terms of percentages, we actually think about it in terms of dollars, just given that it's really tough and given that we are in a wild situation in Ireland right now.

So the guidance that we would give today would be that we expect our tax expense to be between $3 million and $4 million for fiscal 2017, and obviously that will fluctuate based upon how we perform on the top line for the rest of the year..

Okay, and that's $3 million or $4 million inclusive of what you're just reporting, in other words an incremental $2 million to $3 million, $2 million or so approximately?.

That's correct. That's inclusive of the Q1 reported numbers..

Okay, all right, very good. Thanks guys..

We'll take our next question from Brooks O'Neil with Lake Street Capital Markets. Please go ahead..

I just was hoping you might be willing to talk a little bit about your assessment of the DCB market right now and how you view the overall market growth, the competitive picture, and maybe most importantly, just talk a little bit about how you see your product fitting into the competitive picture over the next year or two?.

Certainly. Thanks, Brooks, and by the way, welcome to the call. I don't think you and I have talked on the call before. So, welcome. I came back from the Leipzig Interventional Conference last week in Germany, the LINC meeting. I'm very excited.

I mean there was still a huge buzz about drug-coated balloons, especially as you see now moving beyond the superficial femoral artery. There seems to be getting some traction below the knee and Bard Lutonix released their first ever data on AV fistula treatment with drug-coated balloons and AV access, and showed some pretty good results.

I mean the patency with the AV fistulas was 61% and the plain old balloons were less than 50%, 49% I believe. So, in terms of the current market and the future expansion, I think the confidence is growing in drug-coated balloons, and that's a positive thing for us as we also look to expand into below-the-knee and our own AV access products.

So we called our Irish team, we already have an AV access balloon on the U.S. market, and so we now have a drug carrier for our drugs. So, the short answer is, confidence is high. As far as the SFA market goes, clearly there's a plethora of clinicals going on now. I think you all heard after the J.P.

Morgan Conference about some scientific is getting ready to start their clinical even as the Stellarex Spectranetics device is expected to get, hopefully get their PMA approval shortly this year. So, the SFA market is intensifying.

One thing to note is that the three-year outcome data as we have seen these devices being used over a period of years, the patency, which is a very important measure, is dropping.

And I think even in the Admiral IN.PACT Medtronic Study, I think the three-year patency rates are of the order of 69% perhaps now, which is still way better than balloons, but the question of who will win this market long-term will come down to long-term data that demonstrate a continued effect of the drug in the three to four-year timeframe.

So, short answer is, we're happy to participate, we love to see the devices get approved, and we believe we have a much more advanced generation device compared to those in the market, but we have to demonstrate that in a clinical. So, that's our next step..

So that's really helpful. I appreciate all that data.

So you would say that the secret sauce, if I'm understanding it correctly, is the ability to keep the drug in place in the artery and have it remain effective over a long period of time, or how would you think about that, and is that a function of the drug or is it more a function of the way you deliver the drug to the site?.

There's so many opinions even by the people who know more than I do in their specific drug-delivery field of what's the mechanism and how it works. But clearly, from a marketplace point of view, being very efficient with the drug transfer, in other words, not having to use a lot of drug to get the drug into the tissue is very critical.

I continue to believe cost of goods and manufacturing yield, which is not very often talked about, is incredibly critical as prices are very nice now in the US$1,400 to US$1,500 range in United States, but some day with competition and more players in the market, those prices will come down.

So having a really efficient manufacturing process where you have the margin and the quality for the staying power in this market is going to be very important. And certainly as you said, getting the drug to deliver to the tissue, getting it to stick around to have a prolonged biological effect while staying away from toxic effects is critical.

I don't know if anyone understands the real long-term mechanisms of this. We understand it on stents, and I think that body of knowledge is now being created in the drug-coated balloon market, but clearly people would love to see five-year, really good five-year data with high data integrity to see what's going on with these patients..

All right, that's very helpful. Thank you very much..

We'll take our next question from Beth Lilly with GAMCO Investors. Please go ahead..

So I wanted to just drill down a little bit more in terms of the CRO and next steps in terms of the development. So, you now are confident enough with the results that you have engaged a CRO to help design a trial.

Is that correct?.

Yes..

Okay.

So, can you walk us through with the timing in that and what other data you need to submit to the FDA in the whole process to get the approval, just what's the timing with everything now?.

To submit to the appropriate regulatory agency, and you have multiple worldwide regulatory agencies as you can imagine, but clearly the next step typically is to do a traditional feasibility study in the range of 100, maybe probably a little more patients, and why sponsors do that is to certainly look for any safety, other safety signals they've missed in a broader patient population and/or to understand the effectiveness of the product so they can design a trial.

For us, that's one viable step.

The other step is somewhat unprecedented, is to go into a major clinical and carefully ensure that you're monitoring, A, patient safety in the early stages of enrollment, try to do it as much real-time as possible, but also you have to make assumptions on the effectiveness of your product to design the statistical power of the trial.

We believe we have seen with the Stellarex ILLUMENATE Trial, there have now been three RCTs in the U.S. that really demonstrate the effectiveness of drug-coated balloon. So, we have to choose which of those pathways, a traditional feasibility or going straight to a major pivotal.

Now, as much as we want to choose whatever we believe the optimum is, the respective regulatory agency has to agree with that, agree with the trial design and agree with the safety monitoring.

And so, that is the stage we're in right now where we are working through the issues to be able to secure the regulatory go-ahead to start the next level of clinical trials for the product.

That timing, in terms of regulatory filings and discussions, it's always hard to accurately predict, but we believe that we will have an answer in our third quarter from the regulatory agency..

Okay.

And then from there, once the regulatory agencies, they come back with their recommendation, from there then the CRO will then help you to take either the feasibility study path or the pivotal path, correct?.

Yes, the CRO then, and they will engage even before that because you could imagine if you're doing a major clinical, it could be 60, 65 sites, all right, then some in the U.S., some outside of the U.S., and you have to contract with those sites, you have to set up the trial, you have this breathtaking amount of work to be done to be able to start getting enroll the patients and to be able to complete enrollment as quickly as possible.

The machine then takes over really in an effective manner getting these trial sites up and running..

Okay.

Last question along those lines, so in terms of the increase in R&D spending this year, was this hiring of the full-service CRO factored into that guidance?.

Yes, it was factored in the guidance..

Okay, all right. Those were all my questions. Thanks much..

Our next question comes from Ben Haynor with Feltl and Company. Please go ahead..

Just wanted to kind of focus a little bit more on the 510(k) product, I was wondering if you could kind of discuss some of the performance characteristics of not only the balloons but also the microcatheter.

I believe you mentioned the microcatheter specifically being able to do collateral retrograde and could you talk a little bit about where that might be important as well?.

I would say on the collateral retrograde, that's my wish-list that I've told our R&D team. But that being said, I believe that will be one of the attributes. That has to be determined. So let's start with the balloon catheters.

014 and 018 really relates to the size or the gauge of the guidewire that these balloon catheters travel over, and the 018 really you want to get deeper below behind the knee, and 035 really gets you to the superficial-femoral artery and a little deeper down.

But really more and more people are using the 018 guidewires for both the SFA treatment and to get behind the popliteal vessels which are just further south. The 014 which is a much thinner guidewire, as the title says, and that really is to get deeper into the below-the-knee vessels.

And when you start getting into 010 and 018 type balloon platforms, the deliverability, the crossing profile and the hydrophilic coating become very, very important because you're crossing difficult lesions, you're crossing calcified lesions, you're crossing long deceased lesions.

So, our view on those is, really nice tight tracked crossing profile, really good hydrophilic coating that also is not minimizing the particulates coming from some of these coatings, and the ability to expand these balloons to appropriate working pressures for both below-the-knee and popliteal.

So those – we have a large database on how everybody in the market performs. Maybe I should say, not technically everybody, but the major players, and we believe these devices will win on deliverability, balloon expansion, the trackability, the key performance features that clinicians look for.

On the microcatheter, there are a couple of products of that currently on the market. I think a couple of them are mainly the Japanese type manufacturers. They've had a big head-start in these microcatheters.

And the trick there is, you have a microcatheter that has a certain length and a certain port of entry, it could be femoral, it could be radial, who knows, it could even be potentially pedal, depending on the [developer's] [ph] choice.

But they start off already slender and then they taper down to a 2 French shaft at closer to end there, which is 0.62 millimeters.

So, the technology to create this thread-like device that is tapering and has different flexibilities all the way down to the tip is easier said than done, and where that helps you is crossing difficult lesions and collateral retrograde is a specific way instead of doing pedal access and coming up the leg.

You can probably take a detour in the collateral vessel and not have this create another access point to the patient. So, very few products are able to do that and we believe our microcatheter with the Pristyne coating will cross the difficult lesions but actually has the length to be able to have access from any point of entry.

So, I would say, it was my wish-list thing that I know the R&D team is really diligently working on that and I've seen them be very successful in the preclinical data so far..

Okay, great. That's very helpful. And it sounds like you've already been engaged in some discussions with potential strategic licensors.

Can you talk about the appetite there and anything, any color that you could provide would be great?.

Yes, I would say the balloons are better, but I would say they are what I'd call evolutionary better, meaning they actually perform better than the devices we have tested. And so, there is interest from the strategics who do need better performing balloons to compete.

I believe, I don't have all the data to back this up, but my belief is the microcatheter is substantially new-to-the-world better device and there are a lot of strategics who would want to have a particular type of microcatheter like this. We just have to work out who we believe would be the best partner.

And of course they would be looking to say, hey, do you have the approval? It makes no sense going too far in a relationship until the approval is secured. So that's a process we are actually engaged in over the next quarter, quarter and a half..

Okay, great. And then lastly for me, it sounds like we should before too long hear about some more 510(k) products.

Do you think that will be disclosed this fiscal year? And then I think you started out with the goal of one here, it looks like we're going to get three this year or early in your fiscal 2018, but it also sounds like the development is going really well on the R&D side.

So, could we see that one per year wind up being two per year or even three per year?.

So the R&D team is right outside the door waiting to beat me up if I give too many answers here. I would say, they are clearly already working. You know how it's designed, we have the early-stage feasibility, and so we're already working on things we'd like to key up to submit in fiscal 2018.

I think we'd probably message that in our fourth quarter earnings call when we have better clarity, because you could be working on five things, only of which two or three might become viable to meet the specifications we're looking at. But our intent is to have at least two new approvals per year, hopefully more..

And Ben, if I could just put a little clarity, going back to a couple of quarters ago when we talked about the investment thesis for these acquisitions and we talked about there being 12 to 15 proprietary products over a five year period.

So that cadence is two to three products a year and we did talk about one product initially getting approval for launch in fiscal 2018, and you're right that we actually have three. So the cadence going forward would be somewhere in the two to three new products a year..

Okay, that's very helpful. Thank you very much, gentlemen..

There are no further telephone questions at this time. I'd like to turn the conference back over to management for any additional or closing remarks..

Thank you for all of your questions. We are pleased with our first quarter results and our progress on our whole-product solutions strategy continues to accelerate. I look forward to speaking with you on our second quarter earnings call. Good day everybody..

This concludes today's call. Thank you for your participation. You may now disconnect..