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

Mike Matson - Needham & Company Jim Sidoti - Sidoti & Company Brooks O'Neil - Lake Street Capital Markets Michael Petusky - Barrington Research.

Ladies and gentlemen, good day and welcome to the Surmodics Second Quarter Fiscal 2018 Earnings 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, David. Good morning and welcome to Surmodics' fiscal 2018 second 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 and result of new information, future events, developments or otherwise. We will 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.

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.

I'll now turn the call over to Gary Maharaj.

Gary?.

Thank you, Andy. Good morning and thank you for joining. During the second quarter we made excellent progress on our strategic objectives and our results reflect solid top line growth and operational performance even as we continue to invest in our new product pipeline. We're proud of the accomplishments of the Surmodics team.

Our strong performance is a result of their considerable talents and hard work. In the second quarter we generated revenue of $19.1 million and diluted GAAP earnings of $0.11 per share and we're updating our expectations for fiscal 2018 revenue to be in the range 75 million to 79 million up from the previous range of 72 million to 75 million.

Based on our strong financial performance and the signing of the Abbott transaction, we've also improved our expected diluted loss in the range of negative $0.20 and negative $0.35 per share as compared with the prior guidance of $0.45 to $0.70 per share loss.

Non-GAAP diluted loss guidance range is now negative $0.06 to negative $0.09 per share as compared with prior guidance of a loss of $0.20 to $0.05 per share.

On today's call, I'll provide an overview of our quarterly achievements and progress towards our strategic objectives and then I'll turn the call over to Andy to provide a more detailed review of our second quarter financial results and updates to our fiscal 2018 guidance. We'll then open the call to take your questions.

As you may recall in late February, we announced an agreement with Abbott for the exclusive worldwide commercialization rights for our SurVeil drug-coated balloon.

As part of the agreement, we will supply the SurVeil drug- coated balloon to Abbott and collaborate with Abbott on product development, clinical trials and regulatory activities to obtain marking approvals in the United States and Europe.

Separately, Abbott also received options to negotiate agreements for our below-the-knee AV Fistula drug-coated balloon products, which are currently in pre-clinical development.

As part of this collaboration Surmodics received an initial payment of $25 million and may receive an additional $67 million upon the successful completion of certain pre-commercialization clinical and regulatory milestones that lead to US and European approvals, more important, at a potential for post commercialization cash flows from the long term strategic relationship with Abbott.

In particular, Surmodics will realize revenue base on initial product sales to Abbott as well as a share of profits resulting from Abbott's sales to third parties.

We will continue to prioritize and support ongoing development of SurVeil drug-coated balloon with a view towards meeting the requirements of the partnership with Abbott and the transaction.

As a reminder SurVeil is built on a next generation technology which includes a proprietary drug-excipient formulation for quite durable drug-coated balloon that is manufactured using an unique process to improve the coating uniformity.

Preclinical data have shown a three to five times higher target tissue drug concentration, more evenly distributed and durable drug effect and a low incidence of downstream drug particulates as compared to earlier generation drug-coated balloons.

The design of the SurVeil drug-coated balloon reflects our industry leadership in the development of surface technology for muscular medical devices. We are excited with the Abbott partnership given their deep expertise in vascular care products and their worldwide sales and marketing strength.

During the past two months, we have begun to collaborate with Abbott team on the ongoing development for SurVeil and the partnership is going exceptionally well. Now, I'll turn to the three strategic objectives that we outlined at the beginning of the year.

As a reminder, these are to execute the TRANSCEND trial in a rigorous high quality and efficient manner to advance our R&D whole product solutions pipeline by securing regulatory clearances for at least four new products in fiscal 2018 and file for the first human use of our below-the-knee AV Fistula drug-coated balloon.

And third to finalize further delineate our commercialization strategy with potential distribution partners for proprietary products. Starting with the TRANSCEND trial, our pivotal trial for SurVeil, it progressed nicely through the quarter. We expect to have all US clinical sites up and running by the end of fiscal 2018.

We are actively getting sites up and running currently and patient enrollment is progressing as a result. As a reminder TRANSCEND is expected to enroll approximately 446 patients at up to 60 clinical sites in the United States and 18 sites in Europe.

The randomized trial will evaluate the SurVeil drug-coated balloon for treatment of peripheral artery disease in the upper leg compared to the Medtronic's In.Pact Admiral drug-coated balloon. This trial is amongst the first Level 1 study to compare next generation DCB with one that is commercially available.

In Europe we have started a process of formal submissions to the regulatory agencies for our CE Mark. However, our assumptions and timing will depend on the feedback we obtain from these initial filings especially taking into account the new and evolving regulations in the European Union.

We look how to further progress in both the US and Europe as we move throughout the year. We continue to advance our other drug-coated balloon programs as well with the goal of commencing an early feasibility study in at least one of these programs in fiscal 2019.

We are making progress with our sirolimus-based below-the-knee DCB platform and we'll continue to work through the preclinical studies the data package, the data analysis and other things that will be used to determine our readiness for first in human clinical trial.

We remain on track with this program and expect to make continued progress through remainder fiscal 2018. We've also made progress developing all AV Fistula drug-coated balloon.

As discussed previously we have the technology we believe to address access and maintenance of Fistula patency, which are major frustrations for patients undergoing renal dialysis and that can add dramatically to the cost of care.

We're moving forward developing these preclinical data sets and will determine their feasibility to further accelerate this program later in the fiscal year. Now turning our focus to a non-drug delivery R&D pipeline, as you recall of our Telemark support microcatheter received FDA clearance in the second quarter of fiscal 2018.

Early clinician feedback from use in actual interventional procedures is quite positive. The Telemark support microcatheter has excellent cross ability for complex coronary and peripheral lesions.

This microcatheter combines Surmodics's extreme composite shaft technology with a high performance Pristyne hydrophilic coating that together provide unmatched exceptional deliverability, kink resistant and lesion crossing.

The Surmodics Pristyne hydrophilic coating offers best in class lubricity with low particulates and the Telemark microcatheter's tapered profile has a diameter ranging from 2.6 to 1.4 French for quite effective penetration of tough calcified lesions.

It has performed extremely well to date, but we will continue to develop our clinical experience to assess its performance and continue to gain valuable clinician feedback in the coming months.

As you recall in late 2017, we received both FDA clearance and CE Mark for .014” balloon catheter, which also incorporates our Serene hydrophilic coating for use in below-theknee angioplasty. Our .014” PTA balloon catheter is undergoing clinical evaluation both by Surmodics and interested strategic parties.

During the quarter we began collecting clinical user experience with the device and from these initial evaluations, clinicians have been quite impressed with the balloon catheter and the comments have been quite encouraging.

We're pleased with his initial feedback and are continuing to target revenue to be generated from this product in the late part of fiscal 2018. We continue to make measurable headway with products in developing using advanced versions of coating chemistry.

We recently announced that we received FDA 510(k) clearance for our .018” peripheral balloon catheter, which again incorporates our Serene hydrophilic. Both .014” and .018” PTA balloon catheters offer superior deliverability and lesion crossing by leveraging our advanced hydrophilic coatings for unmatched low friction and particulates.

These balloon catheters combined with our advanced processes ensure ultra low tip entry in crossing profiles, smooth an exceptional transition to improve performance.

Again, these new products demonstrate our focus on next generation devices to address the growing need for minimally invasive treatment of peripheral artery disease and we're confident that our highly deliverable low profile PTA catheters will give clinicians an effective tool for accessing and crossing the most complex peripheral lesions.

Looking ahead, we continue to work in the next wave of product innovations for which we are targeting regulatory filings and clearance in calendar 2018 and 2019. We'll discuss these R&D programs in future calls as we get closer to their regulatory filings.

It's an exciting time here at Surmodics, we are on track to become a leading and enduring medical device innovator by combining our key strategic technology assets with our medical device customer relationships to deliver to them highly innovative product solutions for vascular disease.

We're encouraged by our clinical regulatory and development achievements coupled with our ongoing top line performance and operational progress. Our long term goals of generating double digit top line growth by the end of calendar 2019 and generating EBITDA margins at or above 30% by fiscal 2021 in our sites and we believe quite attainable.

I'll now turn the call over to Andy to give more details on our second quarter fiscal 2018 results as well as our outlook through the remainder of fiscal 2018.

Andy?.

Thank you, Gary. We are pleased to report that revenue for the second quarter of fiscal 2018 was $19.1 million as compared with $17.5 million in the second quarter of last year.

We delivered an operating income of $0.5 five million in the second quarter of fiscal 2018 as compared with operating income of $1.7 million in the comparable prior year quarter. On a GAAP basis our diluted income totaled $0.11 per share in the current quarter as compared with $0.04 per share in second quarter of fiscal 2018.

On a non-GAAP basis quarterly earnings per share was $0.07 per share in the second quarter of fiscal 2018 versus $0.05 in the prior quarter.

The increase in earnings in the current quarter reflects increased revenue, contingent consideration gains and a favorable income tax benefit partially offset by previously announced increased investments in research and development expenses to support the Company's whole-product solutions strategy, including the SurVeil DCB and other proprietary products, as well as increased selling, general and administrative expenses.

Turning now to our two business units, Medical device reported revenue of $14.1 million, an increase of 41.3 million as compared with the year ago period. Looking at the specific areas within Medical device, second quarter royalty and license fee revenue totaled $8.4 million, increasing $1.1 million from the comparable prior quarter.

The increase in royalty and license fee revenue reflects strength in our hydrophilic coatings royalties as well as $0.5 million of license fee income recognized from our recently announced Abbott relationship. Products sales increased $0.5 million from the comparable prior quarter due to increased Medical device sales.

Medical device customer research and development revenue decreased $0.3 million in the current quarter as compared with the second quarter of fiscal 2017. This unit generated $0.2 million of operating income in the second quarter versus operating income of $1.5 million in the prior year quarter.

Reduction in the medical device operating income change was impacted by our whole product solution strategy R&D investments, $1 million customer claim accrual and $0.5 million of Abbott related transaction costs, which were partially offset by the benefits from increased revenue and $2.2 million contingent consideration gain.

For our vitro diagnostic segment, second quarter fiscal 2018 revenue, which consists of product sales totaled $5 million as compared with $4.8 million in the comparable prior year period, an increase of 4.8%. IVD revenue in the current year second quarter reflects strong growth in BioFX Substrates and Microarray Slides.

IVD operating income was $2.4 million in the current quarter as compared with $2.2 million in the second quarter of fiscal 2017.

Operating margin as a percentage of revenue in the second quarter of 2018 increased to 48.4% versus 46.8% in a comparable prior year quarter due to improved gross margins from a combination of higher volumes, reduced scrap rates and a more favorable product mix.

Product gross margins for the quarter were 66.5% of product sales as compared with 67.7% in the prior year quarter.

The current year period gross margins benefited from the aforementioned favorable IVD results, which were more than offset by lower medical device products gross margins associated with our Irish facility infrastructure and scale up cost in anticipation of future growth.

As a percent of revenue second quarter fiscal 2018 R&D expenses were 56.5% versus 46.9% in the comparable year ago period. R&D expense of $10.8 million for the current quarter was up $ 2.6 million from the second quarter of fiscal 2017.

As we have stated before, we anticipate R&D expense will increase in fiscal 2018 as we accelerate our whole product solutions strategy investments including advancing our SurVeil drug-coated balloon human clinical trials.

Further as Gary noted, we will continue to prioritize and support the ongoing development of the SurVeil DCB to meet the requirements of the Abbott transaction. We continue to forecasts R&D expenses in the range of 55% to 605% of our fiscal 2018 revenue.

SG&A expenses in the second quarter of fiscal 2018 were 33.8% of revenue versus 29% in the prior year period. On a dollar basis SG&A expenses in the second quarter of fiscal 2018 totaled $6.4 million as compared with 5.1 million a year ago.

The increase in SG&A expenses reflects the accrual of $1 million in connection with a customer claim of overpaid realities due to their in accurate royalty reporting.

Additionally SG&A expenses in the second quarter include $0.5 million of costs associated with the Abbott transaction and stock based compensation expenses for the current quarter increased $0.2 million as compared with the same fiscal 2017 quarter.

During the quarter the US dollar continued to weaken as compared with euro, as a result we realized $0.3 million of foreign exchange loss on our year denominated continued consideration obligation related to the Creagh Medical acquisition.

We also record $2..2 million gain as we marked our contingent consideration obligations to fair value based on the expected achievement of milestones. We recorded an income tax benefit of $1.2 million in the second quarter of fiscal 2018 as compared with income tax provision of $1.1 million in the prior year quarter.

Both periods reflect the impact of non-tax benefit and amortization, accretion, contingent consideration gains, foreign currency losses and operating losses in Ireland.

We realized that it may be difficult to model our income tax expense for fiscal 2018 given the moving pieces from tax reform and the impact from the non-tax benefited items, therefore we are providing income tax expense guidance for fiscal 2018 and a dollar range of $0.5 million to $1 million.

Looking at our balance sheet, which continues to be strong, cash and investments, totaled $70.3 million at quarter end. We generated cash from operating activities of $27.4 million in the first six months of fiscal 2018. Our cash and investment balances and operating cash flows were positively impacted by the $25 million Abbott license payment.

We invested $4 million dollars in plant and equipment during the first six months of fiscal 2018. We expect to invest approximately $10 million in plant and equipment in fiscal 2018. Our current cash and investment balances and operating cash flows provide adequate capacity to support our corporate strategic growth initiatives.

As a result of revenue performance in the first six months of fiscal 2018 and to reflect the impact of the Abbott transaction, we have increased our fiscal 2018 revenue and earnings performance guidance.

We expect fiscal 2018 revenue to range from $75 million to $79 million, up from the previous expectations in the range of $72 million to $75 million. We expect diluted loss to range between $0.20 to $0.35 per share as compared with the prior guidance of $0.45 to $0.70 per share.

Non-GAAP diluted loss earnings per share guidance is now in the range of a loss of $0.06 per share to earnings of $0.09 per share as compared with the prior guidance of a loss of $0.20 per share to earnings of $0.05 per share. Gary and I are pleased with the performance of the entire Surmodics team in our fiscal second quarter.

Thank you for your hard work and outstanding results. Operator, this concludes our prepared remarks and we'd now like to open the call to questions..

Thank you. Ladies and gentlemen at this time the floor is open for your questions. [Operator Instructions] Our first question comes from Mike Mattson with Needham & Company..

Hi, thanks for taking our questions. I guess I just wanted to start with the Abbott deal. I was wondering if you could give us any additional insight into the financial aspects of the deal.

You mentioned you're going to get paid for initial supply of the balloons and there's some profit sharing, but can you just walk us through this because this is pretty critical to the growth outlook for the company? Thanks..

Mike, thank you for the questions. There is - a number of different revenue streams are being generated from the Abbott a transaction.

Obviously the first one that we started recognizing revenue this quarter is the $25 million upfront payment, which we recognize as we incur costs to complete our first deliverable in the contract and you'll note from the balance sheet we have about $12 million dollars in current deferred income that's been classed as current about $12 million that is long term, so if you look at that over the next 12 months we anticipate, our current estimates would suggest $12 million of income between now and the second quarter of fiscal 2019.

Related to other milestones we are working through the carrying for those, as you might recall that the accounting changes as of October 1, 2018, so beginning of fiscal 2019 for us.

And we are working through with our orders how the additional $67 million of revenue will be recorded, but we dot anticipate recording any revenue for that in the 2018 period.

What we can tell you is that we have stacked up our team to make sure that we are focused on meeting those milestones over the next several years and that is a period of time which we expect to achieve the $67 million of milestones - earning those milestones..

Yeah, and I just want to emphasize something Andy said there, given for our shareholders the milestones based revenues of the further 67, within Surmodics we've gone through and really scrubbed our capital allocation to ensure that we are actually allocating the right resources and the right investment towards that because that clearly from a shareholder point of view, we want to go get those milestones.

While we haven't disclosed the actual detailed nature, you can imagine they deal with clinical progress, the clinical performance and on European and US regulatory approvals.

So as you look at those, those are the buckets of which those things will be paid upon and over a period of time leading up to the PMA approval in the US, so hope that helps, sort of bracket it a little more..

And, then answer to the two components of the earning stream that we have is that we have not disclosed - either the transfer price that we will receive based upon manufacturing the balloons and those balloons will be manufactured both in the US and in Ireland as well as the profit sharing split.

But what I can tell you is that we truly believe that this is a partnership, and we're we are not a cost plus manufacturer to our partner Abbott and they recognize the value that we are providing to them. And that we've expected to start earnings from revenues later in the latter part fiscal 2019 from year up.

Again that's dependent upon what Gary noted in his prepared remarks on the feedback we received from the authorities there regarding the regulatory path and then we still are looking at a 2021 launch in the US..

Okay, thanks, that was very helpful. And I guess just to be clear, once the balloon is launched, you will get - you will be reselling that to Abbott at some sort of transfer price, so you'll get revenue from that and then you'll also get some profit sharing.

Will the profit sharing from an accounting stand point be recorded as revenue as well or?.

That's correct, so we'll be recording product sales and then the profit sharing will also be recorded most likely will be recorded I think in the royalty and license fee line part of our revenue line..

Okay, thanks. Alright and then you made some comments on Telemark, it sounds like it's being well received, but you also mentioned that you are going to continue to do some more clinical trials.

But I guess using it in and proceed as to your feedback for another few months, so I mean is that kind of consistent with your plan or does that mean that you have delayed it a little bit in terms of win you signed some kind of got an agreement?.

No, it's consistent, when I look at - I think one of the devices that the ASAHI Caravel, and I am trying to check my memory here. I believe they got clearance in January of '16 may be, but they didn't actually and it's their product with their sales force. But they didn't actually launch it until mid-summer or June.

And so that is not a typical - and in fact - meaning, getting clinical feedback, getting manufacturing readiness, when you get clearances of these products it's also not that you can typically turn the switch and make 5,000 of them as well. So we're making sure that our automated breathing machines and all those things can actually deal with it.

But in the interim, we believe the clinical feedback helps our shareholders get a better deal with the strategic because then we have data.

The spec sheet that I read out part of within the call here, while interesting and then we are excited about it, it's actually in the hands of clinicians and very tough lesions and in the hands of certain key opinion leaders.

If they believe this tool is actually helping them that helps the strategic who may be over shouldering with us in the cat lab, so then make the case and then we believe we'll lead to a better deal.

So we are being very patient in - to exaggerate to make the point, instead of signing a deal early let's sign the right deal later with the data that we need to demonstrate that value the product..

Okay, alright, that makes sense. And then just with regard to the potential distribution agreements for Telemark and some of the other 510 (k) products.

I mean - are these going to follow a kind of somewhat template to this SurVeil deal with Abbott or I mean - SurVeil is just kind of a unique situation given the potential market opportunities and so forth.

In other words should we expect any kind of cash payments within these products or is it mainly just going to be just you supply the product and then you can get - they purchase it at some kind of transfer price I guess?.

Well, I wouldn't comment on the forms of the deal just because in terms of negotiating with our strategic partners. But keep in mind SurVeil is a PME product, so it's a very high investment in the tens of millions. And so the nature of these deals will be different in magnitude and probably in form as well.

But clearly these are not trivial products we are developing. But, in the 510 (k) of regulatory clearances the investments required is an order magnitude less than SurVeil..

Okay, it's great..

Go ahead, sorry go ahead..

No, no I was just saying that's my last question, but if you want to continue to add something it's fine..

Well clearly we do want a partnership with strategic, the products of ours - our regulatory filings and applications and so that part of the deal will not change. These are Surmodics's products that we - helping our strategic partners like putting it in their bags and so that part will be consistent..

Alright, thanks a lot, appreciate it..

Thanks Mike..

Our next question comes from Jim Sidoti with Sidoti & Company..

Good morning, can you hear me?.

Hi, Jim..

Hi, Andy, can you just clear up what you said about recognizing the revenue from Abbott. I believe you said you recognized 0.5 million in the quarter that ended in March.

Is that correct?.

That is correct, Jim. And we'll be recognizing that revenue over the clinical trial period. And all the costs associated with contra including those post clearance - we still have a couple of year tail behind that, but the majority of that revenue will be over the period between now and 2021..

Okay, so for the one month you had the deal in place, you recognized 0.5 million, so should we assume 1.5 million per quarter.

Because then you also said that you have 12 million in deferred revenue, in near term deferred revenue, which would work out to more like 3 million a quarter?.

Yeah, I think with the guidance we have for fiscal 2018 Jim, we are looking at $3 million to $4 million of revenue associated with Abbott. And then the remainder would be fiscal 2019..

So that's 3 million to 4 million per quarter?.

No, 3 million to 4 million in total for fiscal 2018..

Okay, 3 million to 4 million for fiscal 2018. And that's for the remaining portion of fiscal '18..

That's correct and I will tell you that that is dependent upon the clinical costs associated with the European trial because that will not be falling on until we hear it back from our regulators there, so that estimate may change, but our current estimate is in that $3 million to $4 million range..

Okay, and then we should assume for fiscal '19, it would be double that, because you'd have the full year worth of the revenue?.

Well, we anticipate that given our balance sheet classification is current through March 31, is that we couldn't have - we could have up to $8 million of revenue in the first half of fiscal '19 given the fact that if we have add three to four this year and then we have remaining component of that 12 million in the first half of '19 and obviously it will be more revenue recognized in the latter half of '19 associated with the arrangement, but we are not providing further guidance on that at this point..

Okay, alright and then in the quarter even without that 0.5 million of revenue that you recognized from Abbott, your royalty number was up from a year ago.

Should we assume that the bulk of the royalty rate declined, now the anniversary and that's no longer a headwind?.

Yeah, in the mid - as you talked about actually back in December that we expected about $2.5 million to $3.5 million royalty headwind and about two thirds of that would be in the first half of the year. And what we are looking at now is more of the $2.5 million to $3 million royalty headwind.

So I think we are in a position where it's getting less and less material for the financial statements and to the royalty line. I would also tell you that we've seen strong performance in - we've seen from many of our customers in terms of their performance or there's been I think some uptick related to the FX rate out there for us.

So there have been a number of factors that have driven high recordings to better performance. So we again expect the headwind to be 2.5 million to 3 million, but as you start to look at the revenue for this year, we wouldn't expect there to be diminished headwind in second half of the year..

Okay and then in the quarter the contingent consideration income you recognized, is that because one of your acquisitions failed to hit the milestone?.

Well we evaluate the contingent consideration milestones every quarter. So you've seen in the past we had mostly gains associated with that, so it's our - there's a number of different milestones that are operationally focused and those are also revenue focused.

So as we calibrate the future revenues associated with the transactions as well as the milestones indeed we achieved, those probabilities can change as we looked at those milestones, we believe that they change. And that's one of the reasons why we had contingent consideration embedded in the transaction.

So what I would tell you is that both these acquisitions are really focused on our whole product solution strategy and executing that strategy and that the milestones were a combination of revenues being generated from new products as well as historical legacy businesses that we had.

And that we feel very good about those two acquisitions and what they do in to contribute in the integration in those businesses together..

Okay, so we shouldn't assume anything negative about those acquisitions just because you've recognized its revenue?.

That is correct and if you think about for the full year, we would anticipate that we would have approximately $900 million worth of gain. We will have accretion expense in the second half of the year but in terms of modeling for the total fiscal year, it should be somewhere right around a gain of $1 million..

Okay, and then the tax benefit in the quarter is that related to the contingent consideration income or was that related to tax reform or just can you tell us what that can be?.

Yeah Jim, there are so many moving pieces on that and what it really has to do with is the projection of the income and where we are at.

As we call at the end of the year, we were really close to an EBITDA neutral position and you start thinking about whether we got to have profits in carry bags and still it's getting very complex and that's why we just gave a number of the– for the entire year half a million to 1 million, because you can see things kind of go back and forth in the quarter.

So, I would just focus on the total numbers because again there is a lot of moving pieces there..

Okay, and then last thing, I believe the cash balance now is around 70 million is that correct?.

That is correct..

Any plans to buy back shares?.

If we think about capital allocation, our first and primary focus is to invest on a whole product solutions strategy and to make sure that we are given the proper attention. And as Gary mentioned a few minutes ago, first and foremost is making sure that we've got adequate attention to meet the obligations under the Abbott transaction.

We've also talked about completing our plant and equipment, that's where we have $10 million of CapEx this year and then includes our facility; we are moving our former premises facility the leased ones out.

We are moving that to a new facility where we are in complex of our whole product solutions, capital development technology and eventually are with drug delivery will be. So that will be a separate facility from hydrophilic coatings and IVD facility. So that is really I would say our second component capital allocation.

Our third component then Jim would be focused on any incremental products or R&D - excuse me business development opportunities out there. We continue to focus on looking for new products that either can put it in to the facility in Ireland or new products that we continue to develop. So business development will be our third.

And I would say our fourth and last would be share repurchases, which I do not have on the radar at this point in time. So if you think about our added shares for the year we are looking at somewhere like 13.4 million or 13.6 million, which does not contemplate in repurchases of shares..

Alright, that's a lot of cash; you better keep your eye on, Gary..

We keep an eye on each other..

Thank you..

Thanks Jim..

Our next question comes from Brooks O'Neil with Lake Street Capital Markets..

Good morning, I was hoping you might just elaborate a little bit on the level of involvement you have seen from Abbott in product development and testing.

Is it in your view significant involvement from them or they just kind of monitoring what you guys are doing?.

I'll tell you it is, it hits the mark for me in terms of the appropriate level of involvement. I am on the –one of the operating committees dealing with things like the clinical of regulatory issues. And, I've been impressed that the Abbott, very high level team has been here post the deal and I've been impressed with first of all their knowledge.

They'll run many, many more clinical's than we hope to and so it's really been very collaborative in their sharing of the knowledge and giving us suggestions and helping guide us through some fairly complex pathways. So my short answer and I'm not actually gushing about it, it's been what I hoped for, a very collaborative environment..

That sounds good, could you Gary also talk just a little bit about any reaction you've seen from any of your other existing customers related to the deal with Abbott, their involvement, what's going on out there with big products and small products etcetera?.

Yeah, you now I had - I think our business development team will probably see more of that. I have not heard much of it. All our customers, we serve them so well in our legacy businesses that my hope is that that dilutes any reaction towards what we are doing. This was - we didn't - anyone had the opportunity to come for SurVeil and negotiate a deal.

So it wasn't like we kept people out of it and so I haven't any blow back and I don't think Andy, I'll turn it over to you..

Yeah Brooks what I'll tell you is that the cadence of, for example new license seen in hydrophilic coatings business continues to be on a normal cadence.

And so there is no external signals that would cause us any concern and I think clearly one of the things we are doing is, we talked about the physical separation of that business away from the hydrophilic coatings. We strongly believe that we have appropriate controls in place to make sure there's not any cross contamination between the two.

So I think we are sure of customers that there are no significant issues out there..

Yeah, and if anything, Abbott has a reputation for having really high standards on products that they look at and acquire. So if anything is credentialized, Surmodics technology content to our further strategic partners.

So even if you look at the things like the Telemark and the .014” or 0.18” balloons, I think if anything it - our strategic partners - it's not like where did Surmodics come out of the weeds they have these premium offerings all of a sudden.

I think it's actually alluded to more for our customers to take a deeper longer look at the technologies we are offering. So I think it's been positive if anything..

It's great, would you comment at all about their real interest in the BTK and the AV Fistula products. They seem pretty genuinely interested in those as well..

Yes, yes and I think - I can't speak for how they blow the portfolio, but you can imagine if you are big strategic and you have a powerful portfolio, the landscape up the superficial favor or reserve is a good place to start below-the-knees still a remarkably unsolved problem from an interventional vascular medicine program.

And we all know the issues with AV Fistulas and the cost and the inconvenience of these patients. So that's not surprising.

From their view point they would love to see clinical data and I think their interest is if they see earlier clinical data and at the time they see that data, their portfolio interests is still in these products, they'd like the opportunity to negotiate first.

So clearly those two products are very interesting to many strategic, but we gave Abbott first in line on that and we thought that was appropriate given the partnership we had with SurVeil..

True, that makes lot of sense.

Last thing I'm curious about, obviously I don't expect you identify the strategic interested in the smaller products in the 510 (k) products, but could you just comment about whether you're seeing in your mind the level of interest you expected and I'm guessing we're talking people beyond Abbott as you think about finding distribution partners for those products is that true?.

Yes, you see these companies would be - not excluding Abbott, but certainly beyond Abbott as well, and this - who are interested.

These products, the .014”, .018”, I consider them and I may bias , the world's best .014”, .018” balloons and I think the Telemark microcatheter clearly is a cut above this - almost a new category where we can do with the Pristyne coating on it and the extreme technology.

But these products also fill gaps, the balloons especially fill gaps in different strategic portfolio.

So it's not only a question of the product performance, but what's the gap in that, so if you are strategic and you have a reasonably good .018” balloon even though ours might be incrementally better in the hands of a clinician, the need may not be as much.

But, if you are strategic that either doesn't have a .018” balloon or your .018” balloon sucks, you might want to look at ours longer and harder, so it's more than just a product if .018” balloon doesn't perform as well, let's put it that way. You may want to take a long hard look at that.

So, product performance is important, but the strategic fit given the gaps strategic has is actually quite important and who's coming to the table..

That all make sense to me, I would just say, I think you guys are doing a great job of spending the money, I hope you'll continue to spend the money and I'm looking forward to the future..

Well, thank you, thank you Brooks. Appreciate the comment..

Our next question comes from Mike Petusky with Barrington Research..

Hey good morning guys..

Good morning Mike..

Hey, good morning guys..

Good morning, Mike..

Congratulations on all the progress. So I guess on just going back to the below-the-knee and AV Fistula, you guys have indicated in the past, data is going to determine how we kind of move those ahead in terms of the timeline and how we invest in those initiatives, I guess.

Does Abbott's view on the potential success upside of each of those efforts, does that matter or are you taking any - are they giving you any feedback or are you taking any of that into account in terms of how you might look forward?.

I'll say right now speaking for the partnership I can't speak in any great detail on their view. But from the partnership view point all eyes are on SurVeil and things like the CE Mark and the TRANSCEND enrollment, that's really the prime focus now for the partnership.

I think as we move through those early stages, clearly we'll be working with them in terms of what type of clinical data will be important for them to maximize the interest. So what I wouldn't want Surmodics to do is, independently go over on their first in human trial and see - and secondary end points don't match up with what they wanted to see.

So I think in the preclinical data set, that's ours to really run through, we'll clearly share that with them but in terms of the regulatory and the first in human strategy that partnership will really work together on that because at the end of the day we want to be able to demonstrate data that's compelling to them and potentially all the strategic partners of Abbott has a portfolio decision that they're not interested later..

Yeah, that's really helpful. And then just jumping over to the 510 (k) products and this question of partnership, I think you sort of put some level of timeline around generally when partnerships maybe struck.

If I'm wrong on this, you feel free to correct me, but I think that you previously said maybe six to 12 months after regulatory clearance would be a reasonable timeframe for partnerships to be struck, I mean is that still your view?.

Yes, so that's our view. Our R&D and marketing team wouldn't probably appreciate me seeing that. But you want to get to me a minimum of 100 clinical uses of the product for feedback. I would say more is better, but I would say about 100 uses. You've got what I call a stable database of - you're hearing the good, the bad and if there's any ugly, right.

So for us it's important to - if there's any ugly, we address those issue then we either improve the product design, but so far no ugly by the way.

But clearly we want to be able to demonstrate to these strategies and keep in mind some of the strategics are doing - will be doing their own independent analysis, where we're not in the cat lab with the doctors that they know who'll be using it.

So I want to be painfully patient with it and I don't want to say one's covering for the other, but what I hope is given the nature of the Abbott deal and the patients or our investors kind of went through all this to be able to get to that point.

In a similar vein so that the patients say we want to develop good deals for our customers and it might be exclusively [ph] patient to wait three to four quarters for a deal in the 510 (k) product, but we believe it will be worth it in the long run and so that's - it's the same genre of thinking..

Okay, alright, great. So I and I may have missed this close, but momentarily distracted from the call. I heard you guys say that you'd have the US clinical sites up and running by the end of fiscal '18, but I did not hear if you mentioned how many are up and running now or patient number in terms of enrollment.

Did you guys give any of that or could you?.

No, we typically and it's not typically even in history to give enrollment data. I will tell you, we probably have - hope the preclinical team will be mad at me even saying this, but half of the sites are up and running, so we're on track to get the rest up and running.

I think what's - by the time we said at the end of the fiscal year, we've also selected the majority of the European sites, I was in Charring Cross in London last week with our clinical team and I'll tell you the investigators there are quite excited to get going and so those sites - in Europe, to get sites up and running you also have to do with in country specific regulatory approvals and so those may take a little bit longer.

I hope by the end of the fiscal year, in Germany it takes a lot longer to get sites up and running, but the German sites usually very nice enrollment, so they're worth the wait. But the US sites clearly were on track.

I think what struck me is, every site is they're contracting, they're budgeting and we've actually stashed up internally as an example, hiring contractor utilities because it's not trivial, the business side of getting the site up and running is what struck me of how untrivial that is.

So we're pleased with that progress by the end of the fiscal year. If we hit that I'll be happy..

Okay, great. And then just last one, I think probably a number of investors and analysts are interested in some of the details and I understand you've given this is more - in terms of the Abbott, this partnership is not cost plus and you've given some helpful detail around this.

But is there a point at which you say, okay, we're kind of open up the come on or we're going to give you everything in terms of - so you can really model this as opposed sort of get that out.

I mean is there a timeframe or kind of regulatory clearances or milestones where you say, okay, we're going to give these guys sort of what they want in terms of detail around this agreement..

Right, two things, Andy is still explaining to me also some of the new revenue conditions and that we will be under starting October 1 and so that's one issue of how you recognize revenue.

What I can say is, if you think of the pathway to US approval of the 2021 (k) and then think of that 67 million as being captured by that bucket, we can't speak about whether you're straight line that because these can be lumpy or different according to the revenue recognition standards at that point.

But if you think about enrollment of SurVeil it's critical, if you think about achieving a CE Mark, if you think about getting the US approval, so on a broad basis you can contemplate what those milestones might be, not the amounts, but that 67 million will incorporate all of those type of activities.

The recognition of that is a little more complicated than I should be seeing in terms of how we look at that..

And a little bit color on that Mike is that right we as we go through the analysis and we also talked to our external advisors. The big four accounting firms all have different perspectives on the concept of when do you get to a point with milestones if revenue cannot be reversed.

And then you have to meet that threshold in order to start recognizing revenue and while generally these milestones as Gary has talked about in the past are related to development milestones that could be things like enrollment and achievement of approvals in the like.

That Nabulus of reversal of revenue is one that I actually think the big four is talking here in the next month or two to get some concurrence in terms of their judgments around that.

So and that trying to be opaque here about, we're just don't know, but what I can tell you is that the majority of that $92 million including the 25 probably we've received will be recognized during the period through FDA approval and that we do anticipate that we'll get to those milestones based upon the actions we've taken this quarter to allocate capital to make sure that we've all the swim lines that we need filled for those positions.

So it is in our view point an opportunity to earn revenue and just not milestones but it's an important part of our shareholder value in the near term as we then get to the back end, which we're very excited about, which is going to be both the product sales and the profit splits..

Okay, alright. Very good, thanks guys. Really appreciate it..

Thanks Mike..

At this time we have no further questions. I'd like to turn it back to management for closing comments..

Well, thank you for all of your questions. We enjoyed answering them. We're pleased with our second quarter results and progress on our whole product solution strategy and we look forward to speaking with you on our third quarter earnings call. Thanks everyone..

Ladies and gentlemen that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us this morning..