Good day, and welcome to the Surmodics Second Quarter Fiscal 2020 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Tim Arens, Vice President of Finance and Chief Financial Officer. Please go ahead..

Thank you, John. Good afternoon, and welcome to Surmodics fiscal 2020 second 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’ll also refer to non-GAAP measures because we believe they provide useful information for our investors. Today’s news release contains reconciliation tables 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 this afternoon and is available on our website at surmodics.com.

I will now turn the call over to Gary Maharaj.

Gary?.

DCB programs, thrombectomy and vascular treatment for radial access. We remain on track with respect to the strategic objectives and the time line. First, let’s discuss our SurVeil DCB. I am pleased to note that the notified body is in the latter stages of reviewing our CE Mark application.

While it’s still too early to comment on the outcome of the review process, we remain highly confident in the data and the strength of our application. As far as the TRANSCEND pivotal trial for SurVeil goals, we continue to conduct 12-month follow-up visits with patients in the TRANSCEND trial.

We have observed some delays with respect to the follow-up window depending on the site location and as a direct result of the COVID-19 impact. We are engaging with the FDA on how to best treat this delayed out-of-window and/or missing data.

The FDA clearly understands the current limitations of trial management during this pandemic including on-time follow-up and recently released a guidance document on this very topic. Nonetheless, we are working with the site research coordinators and investigators individually to maximize in window primary endpoint follow-up.

We remain confident in the amount of data we expect to have to demonstrate both the safety and efficacy of our SurVeil drug-coated balloon. With respect to the AVess, we have completed a clinical data collection of our first-in-human study as planned and a finalizing the clinical study report.

We had planned to release these data last week in a late-breaking trial presentation by Professors Andrew Holden from Auckland, New Zealand; and Professor Remon Barco from Sydney, Australia, at the well-known charing cross Symposium in London last week. Unfortunately, the symposium like all others of this type was canceled due to COVID-19.

We are looking for the appropriate forum to present these important late-breaking trial data. Now I know you’re acutely interested in the results. And what I can say at this time is that the trial was successful. It provided important safety data on AVess and provided directional data regarding efficacy of the device that was quite encouraging.

Now keep in mind, while the number of subjects were small, 12 subjects, the freedom from revascularization at six months was greater than 90%. We are excited to release these detailed first-in-human trial results of our AVess drug-coated balloon, but in the clinical form it deserves within the next six months.

Finally, on our Sundance sirolimus coated balloon for below-the-knee disease, we were poised to initiate the Sundance trial as early as March. We have already received the regulatory and ethics committee approvals and some of the relevant geographies.

However, due to COVID-19 and the sequestering of at least wonderful investigators because of the presumed contact, we had to delay. We hope there will be safe and favorable conditions by the end of Q4 to initiate the trial, but it’s quite difficult to predict when we can work with the sites to initiate the study.

While we are disappointed, we have controlled what we can and will initiate this trial as early as safely feasible. We’ll continue to make progress on our radial platform and have filed for clearance with the FDA on our .014” radial balloon catheter. This device can access the vasculature radial artery and treat below the knee lesions.

We have started work on .018” balloon catheter to treat more proximal vessels behind and above the knee via radial access. With respect the pounds.

Our unique arterial thrombectomy system, we have an active submission for the 510(k) approval with the FDA clearance and are responding to requests from the agency for more data, which requires actual for the device testing. So stay tuned.

As you can see, we haven’t focused on our key fiscal 2020 strategic objective as – even as we confront this COVID-19 pandemic. Our capital allocation strategy remains intact and we are appropriately maintaining the investments and pacing for critically strategic programs even as we ensure that we have the liquidity for the long run.

So I’ll continue to operate Surmodics. Finally, early in April, we had a realignment of executive responsibilities that will improve our execution. Teri Sides, our Chief Marketing Officer will become a Senior Vice President of Product Development and the Chief Marketing Office.

Teri has held this role successfully 14 years ago, had my last company resulting in a launch of multiple market leading products that have to date treated millions of patients. She was a founding member of our drug coated balloon program and has 26 patents issued pending and even expired, given the 28th plus years in industry.

Joe Stitch will add HR organization to his responsibilities as our Senior Vice President of IVD and HR. Joe is an amazingly culturally aligned a leading organization with several decades of leadership experience and an excellent choice for the HR position as well as we continue to build the Surmodics’ culture.

He’s supported by a terrific HR team both in the U.S. and in Ireland. Charlie Olson will report directly to me as a Senior Vice President of Commercial Development for Medical Devices. Charlie has been in industry for over 25 years and held his position at Surmodics for almost 19 years.

He’s responsible for signing over 250 commercial agreements up to and including the recent Cook agreement.

And finally, this will free up Tom Greaney, our Chief Operating Officer to focus on a quite essential component of our strategy, which is to be able to scale up our products these partnership agreements in a high-quality cost efficient environment.

Tom is simply the most capable executive to lead this effort given his decades of experience in both combination products that is with drug and peripheral medical devices. And also that Nusrath Sultana will continue to lead all clinical efforts as a VP of Clinical Affairs with over 20 years of experience in this area.

I want to thank all Surmodics’ team for their contributions to supporting our customers and patients. I’m proud of all the team and our unwavering effort through these challenging times. I also want to thank you all healthcare providers, who are on the front lines for each – for us each day.

We’re deeply grateful for their service and dedication to help us in overcoming this pandemic. I’ll now turn the call over to Tim to provide more details in our second fall of fiscal 2020 results including some further perspective of an impact to the COVID-19 pandemic is having in our company financials and details with our liquidity position.

Tim?.

Thank you, Gary. During today’s call, I will provide an overview of our second quarter operating performance.

As noted in our press release issued this afternoon due to the uncertainty created by the COVID-19 pandemic, we are withdrawing our full-year guidance; however, I will provide some commentary to help provide insight into the impact of COVID-19 on our company.

These comments are based on circumstances that exist today, which we acknowledge are highly fluid and are likely to change. Revenue for the second quarter of fiscal 2020 grew slightly to $22.8 million as compared with $22.7 million in the second quarter of 2019.

Our second quarter revenue was negatively impacted by the previously communicated expiration of our fourth-generation hydrophilic coating patents as well as by the postponement of procedures as a result of COVID-19. Medical device revenues declined approximately $1 million or 6% to $16.3 million in the second quarter.

Impacting second quarter revenue was a significant reduction in royalty revenue driven both by the expiration of the fourth-generation hydrophilic coating patent and by our COVID-19 related procedure postponement.

We saw a strong performance from our in vitro diagnostic business, which delivered quarterly revenue of $6.5 million in the second quarter, a 21% increase over the prior year. Order volume from customers of our distributed antigen products, which fluctuates quarter-to-quarter grew significantly in Q2 compared to the prior year.

Additionally, we continue to see demand expansion for a microarray DNA slide products. Our second quarter royalty and license fee revenues totaled $8.2 million, down $1.7 million or 17% from the prior-year period; as I mentioned, primary impacts, where the expiration of our fourth-generation patents and COVID-related procedure postponements.

Our SurVeil distribution and development agreement with Abbott Vascular generated revenue of $1.5 million in the second quarter and was essentially flat with the year-ago period, and in line with expectations at this stage of the clinical study.

Product sales of $11.8 million during the second quarter increased $1.9 million or 19% compared with the year-ago period. Performance was broad-based and driven by increased demand from in vitro diagnostic customers as well as from our medical device customers. Both of our business segments saw double-digit product sales growth.

I want to take a moment to echo Gary’s earlier comments. As a manufacturer and supplier of critical components for diagnostic tests and medical devices, our talented and dedicated operations team continues to come to work each day to ensure the availability of our products and enabling technologies in our customer’s supply chains.

For this, we are all very much appreciative. Unlike our royalty revenue, which has been impacted by COVID-19 through the second quarter, we did not see the pandemic; unfavorably impact our product sales, which have historically been approximately 40% of our revenue.

Today, as in the past, we have visibility into the majority of our medical device and in vitro diagnostic product sales from customer purchase orders going out four to six weeks or longer. While the future is uncertain, our recent experiences seeing consistent demand for our medical device products and coating reagents.

Since March, our in vitro diagnostics business continues to manufacture and ship product to the majority of our customers in a manner consistent with the pre-COVID environment.

While it is too early to speak to future potential, we have seen increased interest in our chemical components from customers, who are involved in COVID related research programs and the development and commercialization of diagnostic tests to detect the presence of antibodies that signified the previous presence of the virus.

R&D services revenue of $2.8 million was essentially flat with the prior-year period with steady demand from our medical device coating to customers. Since March, we are seeing a pullback in customer demand for coating services related to the COVID pandemic as our customers are experiencing the effects of procedure postponements.

The medical device business reported an operating loss of $1.5 million in the second quarter compared to an operating loss of $23,000 in the year-ago period.

Medical device operating results were unfavorably impacted by the declining current quarter revenue of $650,000 favorable adjustment in the claim reserve in the prior year and a $300,000 prior-year contingent consideration gain.

Medical device operating expenses excluding product costs had a neutral impact on the quarter with an increase in SG&A expense offset by a decline in R&D expense, which was primarily related to the reduced clinical study costs. IVD revenue of $6.5 million in the second quarter was up $1.1 million or 21% compared with the prior-year quarter.

performance was broad-based and as previously mentioned, benefited from sales growth of our distributed antigen products and DNA slide products. IVD operating margin in the second quarter was 53% as compared with 54% in the prior-year quarter. Operating margin was impacted by a shift in revenue mix, toward products with relatively lower gross margins.

Product gross margins were down slightly in the quarter at 68%, as compared with 68.7% in the prior-year quarter as improvements in our medical device product gross margin were offset by the impact of unfavorable product mix within our IVD business.

Before I comment on the second quarter operating expenses, let me share our thinking on how we are responding to the current environment. Our leadership team is continually assessing controllable discretionary spend with an eye toward operating expense and cash management.

As a result, we have implemented several cost-saving measures including delaying certain capital investment and hiring as well as reducing discretionary operating expenses were possible without sacrificing investments in our key strategic initiatives.

as a percentage of revenue, second quarter fiscal 2020 R&D expenses including costs of clinical and regulatory activities totaled 52% compared with 60% in the year-ago period. R&D expense was $11.9 million for the quarter down $1.6 million from the year-ago period.

The decline in R&D expense was driven by declining current year TRANSCEND and other clinical study costs as well as prior your activities to establish SurVeil commercial production capacity.

As Gary mentioned, during the remainder of fiscal 2020, we continue to work towards initiating our first-in-human clinical study of our Sundance below-the-knee sirolimus drug-coated balloon and advanced development efforts on several products related to our Pounce thrombectomy and Sublime radial access platforms.

SG&A expenses in the second quarter of fiscal 2020 were $6.7 million or 30% of revenue compared to 22% of revenue in the prior-year period. SG&A expense was impacted by prior-year $650,000 reduction to expense for a claim that was settled in the period for less than the amount we had reserved.

personnel and other investments to support product pipeline development and preparation for product market evaluations also contributed to the increase. Now turning into income taxes, we recorded an income tax benefit of $1.9 million in the second quarter as compared with an income tax benefit of 162,000 in the prior-year period.

The current year tax benefit was a result of our ability under the CARES Act. The CARES Act net operating losses to periods, where the statutory tax rate was 35% versus our current tax rate of 21%. Both periods reflect the impact of non-tax benefited amortization and operating losses in Ireland.

on a GAAP basis, our diluted earnings per share were $0.11 in the second quarter as compared with $0.09 in the prior-year quarter. On a non-GAAP basis, our earnings per share were $0.04 in the second quarter of fiscal 2020 versus $0.07 in the prior-year quarter.

non-GAAP EPS was reduced by $0.13 per discrete tax benefit, recognized under the CARES act for the carryback of those net operating losses. Moving to the balance sheet. We continue to have a strong cash position and no debt.

In the second quarter, we began with $48.3 million of cash in short-term investments and generated $2.2 million of cash from operating activities. during the quarter, we paid $1 million for an installment obligation associated with our fiscal 2018 in Embolitech asset acquisition as well as 600,000 for capital expenditures.

As of March 31, 2020, we had cash in short-term investments total in $48.4 million. We are taking a thoughtful and disciplined approach to manage our balance sheet and protect our liquidity as we navigate the uncertainty surrounding the COVID pandemic.

Early on in the COVID outbreak, our business units decided to increase their inventory levels to ensure we are protected in the event of supply chain disruptions. From a liquidity perspective, we are prudently managing our $33 million bond portfolio.

during our third quarter, over 50% of the portfolio matures and will roll into cash and money market accounts, with the remainder, maturing over the subsequent nine months.

Overall, we are in a solid financial position and believe our expense and cash management discipline, and our focus on cash flow and liquidity will serve us well in these uncertain times. Operator, this concludes our prepared remarks. We’d now like to open the call to questions..

[Operator Instructions] And our first question comes from Brooks O’Neil with Lake Street Capital Markets..

Good noon, guys. It sounds like you’re managing well in this uncertain environment. So congratulations on that. Thank you..

Thank you, Brooks..

I have a few questions. So first, I was just curious if you could share with us what your device revenue would have been without the postponements? And maybe a little bit broader, can you just help us – I know you have a lot of different customers, and I assume they be leave differently up and down the line.

But what in general are you seeing from your device customers in terms of their behavior now? And maybe just wouldn’t be one more related to this, and then I have a bunch more, but would you expect to see a bounce back in revenue when these postponable procedures begin to be done again in the health care marketplace?.

Brooks, I’ll take the last part of the question, and Tim has some really well-developed analysis of the fruit spot. We have heard and seen that the fourth calendar quarter could be a time of bounce back and tend to procedures depending on the type of procedures, but it’s really difficult for us to predict.

We have an aggregate portfolio in coronary, peripheral, structural heart and neurovascular procedures in the vascular space, at least. So we simply don’t know. There’s so-called of V-shaped recovery. They talk about a U-shaped recovery.

If anything – we have to be prepared for U-shaped, the lopsided U-shape recovery whether you know may not still be as good as it is today. But we also have to prepare with our customers as a critical supplier for a rebound where we know the core flat-footed in inventory.

One of our larger customers are – they’ve shifted from like, my gosh, Surmodics, because of shorter supply, and we’ll take whatever you can send to recognizing their liquidity management that high inventory levels may not be in their best interest from a working capital viewpoint.

And so it’s a dynamic thing where we don’t know because of the uncertainty, but we have to be prepared to get back up to sustainable inventory levels very quickly. It’s a challenge. I’ll tell you that. Our working capital needs, Tim manages really well.

But we’re lucky where we can quickly convert from – in many respects, at least in the reagent areas, from raw materials to reagents. The buy side is not as quick of a conversion. And so we’re watching that dynamic. We’ll prepare for the worst, but have plans that we’re not caught off-guard at things if a V-shaped recovery does happen.

I know I’d answer on the question….

It's very helpful. I appreciate the color..

Thank you, Brooks, for the questions. So you had a couple of questions in there. One of them was what type of revenue impact are we seeing on our Med Device business as it pertains to COVID-19 for Q1. And what I’ll tell you is it’s all in the royalty revenue stream. So we’re really not seeing much of an impact here as it pertains to the product revenue.

You saw in Q2, we saw revenue growth of 20% in the product sales and we saw double-digit revenue growth, both within the Diagnostics as well as within our Med Device business. I will just say that we do have calls on a weekly basis with the teams to get an update in terms of where PLs are standing and what we’re hearing from customers.

Generally speaking, what we’re hearing and what we’re seeing from a PL perspective is what we’ve anticipated and expected. That being said, we fully appreciate that as the postponed procedures continue, there – our customers are likely building inventory.

And at some point, we’ll probably reach that level where they may be looking to order fewer reagents and products from us as they work through their inventory. But it’s too difficult for us to get a read on that. And we’re not getting clarity from the customers at this point yet, but we’re staying on top of that.

I will say that in terms of the impact on our royalty revenue, it’s a little bit hard to parse apart the decline in the royalty revenue from the quarter as it pertains to the patent exploration and COVID. As you can imagine, these are interrelated and married.

But I’d say probably the way we think about it, our expectation is it’s probably about 50% related to the COVID impact, as a result of the declines in the procedures that we saw really coming online in March, really substantially. You had asked what types of behaviors we’re seeing from the customers.

And I kind of gave you a little bit of heads up on that. We’re seeing just – at this point, what I would consider to be expected PLs from our customers. We have through April, for the most part, seeing expected PLs come through from the customers.

But again, we’ll have to see how that plays out in the coming months as inventory may become a concern for our customers..

Absolutely. That’s all extremely helpful. Let me shift gears I was pleasantly surprised to hear. It sounds like some progress on SurVeil in the EU.

I’m just curious, number one, do you expect any milestone payments related to anything happening in the EU on that product? And two, can you just sort of share with us without being specific on the time line, when it might happen, but sort of what’s the sequence of events post regulatory approval for that product in the EU, assuming you get it?.

Sure. So first of all, as you know, with regulatory punditry, it’s really hard to predict. But we have been working interactively with the notified body. They did pick up the file in our second quarter again, and we’ve been moving through interactively.

So far, I would say, with our team and I’m on a lot of those calls as well, we believe we have successfully answered all of the clinical questions. There may be a few more. I doubt it, but I can’t say for sure. And I think the steps within these notified bodies that goes through a higher level review before ultimate issuance of the CE Mark.

So if a CE Mark is issued, we have to clearly provide evidence of that and it’s pretty straightforward to our commercialized vision partners Abbott. And there will be a milestone that we would receive as a result of that. Tim, I don’t believe we have declared how much it is, but these are not insignificant.

As you recall, our completion milestone for completing enrollment was $10 million last August. So it’s of that type, I will say. And also the EBITDA and rev rec impacts that we’ll have. Subsequent to that in this environment and with our partner Abbott, it’s exceedingly difficult to plan the ID launch time.

I mean, in Europe right now, it surely doesn’t look like a good time. In addition, Surmodics still has to have some time to be able to fulfill manufacturing the product scale. So we’ll stay tune, we’ll update you more on that as those things become imminent. But Europe is very – it’s a difficult market right now with the fairly the COVID environment.

We still have ongoing as you know the paclitaxel debate and ultimately when we have our trial results, it could give our partner Abbott a lot more marketing cloud with the TRANSCEND study to be actually co-build a market.

So we’ll that and reserve, I think the first thing, we want to make sure, let’s make sure we’re able to do whatever we can to achieve that CE Mark. I know there was a question about the MDR. And Tim, I think they have pushed out MDR – voted on it. But we’re not depending on that. That is outside of the fall window.

We hope that we can get the CE Mark within our fiscal year..

Okay. Thanks a lot. I’m going to [indiscernible] with that, unless someone else ask some questions. Thank you so much and I just hope things continue to go well for you. Thank you..

Thanks. Thanks, Brooks..

And our next question comes from Jim Sidoti of Sidoti & Company..

Good afternoon.

Can you hear me?.

Hear you, Jim..

Great. Just kind of following up where you just left off with the CE Mark. Does the recent approval from Medtronic for their balloon.

Does that have any sway at all with the CE people, when they see that? Does that help them make them at all feel more comfortable with the paclitaxel devices?.

Which DCB were you talking about, Avess DCB..

There’s an impact….

Yes. So yes, they’ve had – I believe they have had CE Mark for some time. They’ve got FDA, PMA approval. Yes, go ahead..

They got the FDA approval after all the controversy.

So does that have any sway at all with the CE people?.

No. No. No. We – the European authorities have their own particular requirements. Clearly, I think if anything, it clearly helps in the U.S. PMA process for paclitaxel device and Medtronic clearly had the data to back it up. So no, I think the way I would look at it is the notified body was able, despite the paclitaxel issue.

And you – I can’t say much more about this, but you could imagine our urging that we believe it’s the right thing to review the file. They picked it up earlier this year to start the review process. And so that’s why we’re moving as quickly as we can through it. So, but we are in the latter stages.

It’s still hard to know, you never know where these things. So I’ll put on until when we get it to my – imagine, we’ll issue a press release about time. So stay tuned..

So COVID hasn’t delayed that. They are still working on that approval and….

Yes, I’ll tell you, I know what I know to leave review and he lives in Milan and being on the phone with them. Last time, I spoke with him, he had been locked up in his apartment for over four weeks. And I basically said to him, good, now he can get out. They have not slowed down because of COVID-19. Now they were working remotely..

Okay.

And then with the radial access balloon should we assume since the other balloons went to cook that they will have first right of refusal for the radial access balloon as well?.

No, these – because they are very substantially different. That doesn’t mean cook wouldn’t have an interest. As well as our little companies, it’s hard to tell until we actually get more clinical data on the device off the – we get clearance.

But these are recalled 2.5 meter long devices that can go from your wrist all the way to a big tool pretty much. And so they assuming we get the clearance for this, it’ll be the first device like it actually in the world. So we’ll see who the interested parties are at that time..

Okay. And then….

I will say, I’ll say one thing, we’re very pleased with Cook, we have significant relationships in industry and Cook has always been an excellent, a longstanding partner for us. So that’s a very good thing for those devices..

And was there any upfront payment from cook or is that deal structure so that you get a percentage of sales or royalties once the product hits the market?.

Thank you for the question, Jim. Very, very similar structure to what we communicated previously with Telemark. No upfront, no milestone payment, no royalty, we manufactured the product and then we saw at the Cook. We will show up in product revenue in the future. And by the way, we’re quite happy to get the CE Mark for Telemark.

CE Mark seem to be few and far between even for non-drug delivery devices. So getting that for our partner Medtronic and Telemark is also a good thing that we accomplish a score..

Okay. And then know last couple from me. If you listen to Medtronic’s calls, their guidance for endovascular procedures was pretty wide. Can you give us any sense what you think procedures that your devices are used in or are going to be down over the next six months? I mean, their guidance was the only way from 20% to 60%..

Yes. What I can give generally, and Tim has more of the detail. Tim – eight years ago, we were very highly coronary focused, right. And neither Tim, no, I liked that, coronary with the dog when it comes to the ASPs and stuff.

So we intentionally with our team, including Charlie Olson the team tried to get a much better distribution and the portfolio, so coronary at one time was almost 50% of our royalties.

So right now Tim will have the data, but it’s much more evenly distributed between coronary peripheral – and structural heart, right, structural heart is also in there as well.

It’s – I’m telling you, I have two kids who doctors and one’s a cardiologist and it just, some of that makes no sense, because if you’re having a semi heart attack, I don’t know, in some cases the thing your thrombolytics, but it’s just take the patient into the cath lab.

But what’s mystifying to us is, strokes and heart attacks and not the elective, right. The acute emerging phenomenon you need to treat those patients will hearing in some respects it’s anecdotal, so I don’t really can’t rely on it that they’re not seeing a whole lot of strokes come out of that.

Like what happened to those patients? Are they not coming in, are they – it’s sort of mystifying peripheral. We do know those except for critical limb salvage, critical limb ischemia, a lot of peripheral procedures have been pushed out. I don’t think those remain elective for long. We just don’t know what we call the rebound effect.

And as we’ve heard, I think Boston announced today as well, Zimmer – there might be some rebound effect in the calendar fourth quarter. But simply, I hate to say, the uncertainty is really the definition or what we just don’t know apart from the anecdotes we’re hearing..

Okay. And then just the last thing to me is a comment that I always make to Tim before we hang up is that you should go back and thank the IVD guys every day, because they generate the cash that funds your development on the other businesses. So, it seems like they did it again, this quarter..

Well, Jim, I can guarantee you that they’re members of the IVD team, who are listening to that call, and I can assure you they – that as much as they may hear appreciation from me, they’re probably going to enjoy hearing it from you a little more..

Yes. IVD is always with Robin, Phil or Batman. So every now, and then Robin comes in. We really like what they’ve done..

All right. Thank you..

Thank you, Jim..

[Operator Instructions] Our next question comes from Mike Matson with Needham & Co..

Hi. thanks for taking my question. So, I guess I just want to try to summarize what you’re saying about the COVID-19 impact here. So, I’m going to kind of rattle off what I think, I heard you say and let me know if it’s right or not. So, it sounds like the impact is really more in the medical device business.

and then in terms of the other way you categorize your revenue, it’s mainly in the royalty in license fee line and maybe, a little bit in the R&D line, but the product sales, you don’t – at least right now, you don’t really see that being affected much.

Is that a better assessment?.

That is a really fair assessment. That’s exactly what we were intending to articulate with regard to the Q2 results..

Mike, I’ll just add a little bit of color. I think as we think through what’s happening or what’s happened since the end of March, I would expect that we’ll see our royalty revenue have an additional impact at least during our Q3 and likely Q4 as these procedures.

And I think Jim did a nice job of framing up the question in terms of the procedure postponements and what he’s hearing from Medtronic as well as other med tech firms and if we’ve been paying attention to what healthcare systems have been saying, all of this anecdotal information suggests that there is a significant decline and many different types of endovascular procedures that benefit from a coated device.

We just don’t have 100% direct visibility into what’s going on. It’s always a bit of a delay for us. As you know, our business model is one, where our customers actually sell product and then the period following – the quarter following their sales, they actually provide us with the royalty reports and the royalty payments.

So, we always have a little bit of a lag, so we’re not looking at it from real time. So, we’re keenly and acutely paying attention to what others are saying.

So, as far as some of the R&D revenue, you did hear me correctly on the call with my prepared remarks, we are seeing a pullback in some of our coated services activities that are absolutely tied back to postponement of procedures and we don’t have any visibility as to when that might come back on.

But the product revenue has been amazingly strong in Q2, and through the month of April, we’re tracking with regard to the expectations and in some cases maybe a little bit stronger in certain areas. But I would – I caution our team, and I would caution others to think that that, that will continue at some point.

One should expect that there could be inventory management on the part of customers and even hospitals, which could have an impact in terms of our royalty revenue and reagent sales as well, too early to call it..

Okay. Thanks.

And then just – but from timing standpoint then if your customers are seeing the big impact in their June quarters on the – does that mean then the year that would pull through to your September quarter or would that even in June?.

No. There’s two things to really contemplate here and be mindful of. One is we will estimate what the royalty payments will be that we’re required to do that under the accounting standards. So, we’ll be making our best and most informed estimate in terms of what the royalty revenue will look like during this period of April through June.

However the cash, the cash flow that comes from the royalty payment will be in our Q4 for this period. So, sales that our customers make for April through June, the remittance of the royalty payments would occur July through September..

Okay, all right.

And then just on the diagnostics business, I mean you saw 21% growth this quarter, that’s pretty strong, but it sounds like that really, you don’t think there was any benefit in there yet from many COVID-19 related testing?.

Yes, it’s pretty, I would – if I would characterize it, I would say it would be modest at best. Clearly, there is more interest that we’ve seen in April from customers that are working on COVID research as well as customers that are working on manufacturing antibody tests.

So that will be something that we hope to be able to communicate a little bit more in the next earnings call, but we do have a nice business with our DNA slides that are used for flu testing.

And I think many people might recall in February and March, there was a lot of discussion with regard to what the symptoms of COVID-19 look like and very similar to the flu, and there wasn’t a COVID test. So, what folks were doing, we’re actually going to get flu tests to determine whether or not, they didn’t have COVID-19.

So, they could rule out COVID-19 if they in fact had the flu. So that could have had a bit of an impact in the quarter, the Q2 results as it pertained to our DNA slides..

Okay. All right and then just a couple of product questions. So, the thrombectomy product, you may have announced this previously, maybe, I just missed it on an earlier call, but it sounds like you said you had submitted your 510(k) for that, then the FDA came back and had some questions. You have to do some more testing or something.

Is that right?.

Yes. We submitted for it and we submitted some potentially broader indications for it. And what the team has gone to do, a product like that, this is a pretty doggone unique product for that indication. No capital equipment, very little blood loss and it’s really under-table’ solution.

So, the FDA wants to assure that they have some additional data, which is not trivial. It’s not hot to get, but it just takes time when you have to go back and potentially, do another animal study and generate data. So that’s where that team is right now.

We are hoping to resubmit that data as early, it may slip into the fourth quarter, but it’d be great to get it back to them with the third quarter..

Okay. All right.

And then the Sundance first-in-human trial that you said you expect to – at this point, you’re now expecting to start that in the fourth quarter?.

Well, we don’t know. I mean, we were disappointed, we had – we have teed up to initiate the trial, not in all sites, but you get both the local, the regulatory approval and the ethics committee approvals. And one of my investigators exposed the COVID and that was a site we were kicking off first.

So, we had to delay that, and that was March 15 actually. and now in some of these European countries and also some of the Asia-Pac countries, where we have the trial sites. It’s now where it’s really difficult to get patients in for this. So, they even do the site initiation with this.

So, the thing we’re contemplating is what we – what we don’t want to do is start the study, because we said, we were going to start it to everyone investors and it doesn’t really help. What would you really want to do is finish the study, right? And so you’re starting the study is synonymous with finishing the studying, it’s good.

but starting to study doesn’t really do you anything and the trial goes cold. So, you started, you got one patient and then you wait three months for the next one. We don’t want that. We want to have momentum when we start. We want to make sure the sites are ready and they have identifiable subjects to fit this protocol.

So, the delays really depend on what we hear from the seven sites. If it doesn’t make sense to start, we wouldn’t start it. We wouldn’t start at one site and all the other six dead in the water. Yes..

Yes. Got it. All right. Well, thank you. Appreciate it. That’s all I have for now..

Thank you, Mike..

And our next question comes from Mike Petusky with Barrington Research..

Hey, guys. Good evening. A couple of questions.

Hey Gary, I thought I caught that you said that you guys had already had a written out pandemic response plan in place, I guess a, is that true? And then b, if it is you know, when was that? When was that first written?.

I’m embarrassed. I should have known, we had – we have a business continuity plan and we added a – what’s called contend to pandemic preparedness..

All right..

And you sort of dust off these things, I think we have to make some adaptations to it. but we – I mean, no pandemic is a boilerplate document going to serve you well. but at least it calls for the appointment of a pandemic – Chief Pandemic Officer, someone to quarterback this and run with it at multiple sites.

So that’s when we’re using our pandemic team, which is really the executive team and some of our senior managers and directors. We meet probably four times a week, used to be every day, but if nothing has changed between Monday and Tuesday, we’ll have the meeting on Wednesday every morning at 10:00.

And there’s quite a lot of things we’ve been rolling out to ensure that the health and safety of all onsite teams. So yes..

Okay..

What’s the need to develop the plan? So, I can’t take any question..

Okay, okay. and then I guess in terms of, and maybe, I missed this if you commented on this, but in terms of sort of R&D and sort of the 510(k) longer-term outlook there, are you guys – obviously, said you’re pulling back on discretionary, on hiring some capital projects.

but in terms of your R&D related to 510(k), are you guys sort of pulling back or pushing out expenses to the right on that or are you just sort of business as usual there?.

No. So, our capital allocation strategy and we talk about this, and we keep refining it as more data emerges and this pandemic takes of course, is really one – is companies, who would say our strategic plan is our strategic plan, damn the torpedoes, we’re moving ahead.

We don’t think it’s that, because you now have to balance the preservation of liquidity. and so if you could do them both independently, then we’ll be preceding full steam ahead. The question is given uncertainty; we don’t think we can do them both.

And so instead of – we’re not cutting back R&A, I think we’re narrowing the focus on the things that really matter. Things that can wait, we are allowing them to wait. But things that really have to move quickly ahead like some of our retail products we – those are not changing at all. Now, there is some delay.

We would stay at home or order both in the U.S. and in Ireland. And so it taught to run all the projects as planned. I’ll give you an example; animal labs, so preclinical studies, I mean a lot of that equipment has been requested appropriately so for human use. given this dynamic, so it’s not easy to get time or anytime an animal have to keep going.

So, while we didn’t intentionally delay cash expenditures, there’s also a resulting delay in cash expenditures, because things can’t move as fast. So, I don’t know if that gives you an idea, but will not wholesale pressing the brakes on our strategic initiatives. But we’re being more methodical, where we put the cash, allocate the cash..

Okay. So, let me just follow up and see if I can dial it in a little bit for myself on that. So, it’s not like you’ve promised exactly. But generally speaking, I think the view is that you guys are going to try to get two or three or four of these products through regulatory approval every year over the next three, four, five years.

Is it possible that somewhere, six, 12, 18 months down, there’s essentially a gap, because of this period of time, where you guys – you couldn’t push forward a couple of projects that maybe you would hope to..

In terms of a steady stream, I would say I hope to not see an interruption in the steady stream. I think the cycle between the steady stream might increase..

Okay..

So, if we wanted to have full products per year, it’s not like we’ll have four this year and maybe, not next year, it might string out to be three..

Yes. Okay..

That’s how we’re thinking about it..

All right, perfect. And then just one for Tim real quick. Tim, I think last quarter, you guys had said, just in terms of your expectations commercially for the Telemark and the .014”, .018” balloon catheters that may be in aggregate, something like $2 million to $3 million would hit in fiscal 2020.

Is that still ballpark-ish about your expectation?.

Yes. The expectations really don’t exist, Mike. That’s the challenge of the environment. I think I made a comment that we have POs that typically go out four to six weeks or longer, which clearly doesn’t get us to the end of the year. I’ll tell you that we’re hopeful that we might see that, but I don’t have assurance that we will..

Yes. Yes. Just on the pandemic plan, it was just informed that we put the pandemic plan together for each one and one in the year 2010. and I was here, so now I get to take the credit even though I didn’t know about it..

Gary, I’ll make sure I spell your name right in the report..

Okay..

and just one last question.

Tim, did you say a $1.5 million associated with Abbott this quarter in terms of rev?.

I did, yes. $1.5 million? That’s correct..

Yes. Okay. Thanks, guys. Appreciate it..

Thank you, Mike..

That concludes today’s question-and-answer session. Mr. Maharaj, I would – at this time, I would like to turn the conference back to you for any additional or closing remarks..

Well, I have to say I’m proud of our team, our employees, and especially that we continue to make progress slowly, albeit, on our key strategic initiatives and I want to say thank you for everyone today. Stay safe everyone and be well. Thanks..

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