Good day and welcome to the Surmodics Second Quarter Fiscal 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Tim Arens, Senior Vice President of Finance and Chief Financial Officer. Please go ahead..

Thank you, Stephanie. Good morning and welcome to Surmodics fiscal 2021 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 morning and is available on our website at surmodics.com.

I will now turn the call over to Gary Maharaj.

Gary?.

Thank you, Tim. Good morning and welcome to Surmodics’ fiscal second quarter 2021 earnings call. We had an excellent second quarter. Every cylinder was firing in the Surmodics engine. We recognized $10.8 million of revenue from the SurVeil clinical report milestone.

We saw a return to growth in our Medical Device coatings royalty portfolio and we made solid progress on the execution of our key strategic objectives during the quarter. To top it up, our IVD businesses developed -- delivered record revenue performance. My thanks go out to the entire Surmodics’team for their continued dedication.

Total revenue for the quarter increased 53% to $35 million in the second quarter of fiscal 2021, compared to $22.8 million in the prior year quarter. In our second quarter, our performance benefited from the treatment of the $15 million SurVeil clinical report milestone of which we recognized $10.8 million in Q2.

Excluding the impact of this business milestone payment, total revenue grew 6% as both our medical device and IVD businesses delivered year-over-year revenue growth. We reported diluted GAAP earnings per share of $0.58 and non-GAAP earnings per share of $0.62 in the second quarter.

During our second quarter, I was pleased with our progress in our key strategic objectives for fiscal 2021. As a reminder, they are first complete final PMA submission to the FDA for our SurVeil drug coated balloon.

Second, continue the advancement of our robust product pipeline and third, to optimize cash flow from the IVD and Medical Device businesses to fuel our strategic growth initiatives. Starting with SurVeil, as we discussed in our last earnings call, the result of the TRANSCEND study of our SurVeil drug-coated balloon were presented in January.

These data demonstrated that SurVeil was non-inferior to the IN.PACT Admiral DCB in both the primary in both the primary safety and efficacy endpoints despite the IN.PACT device having 75% more Paclitaxel on board. Our team is in the process of collecting and assembling the final data package for PMA submission.

As we have previously communicated, this includes as required by the FDA a minimum threshold of mortality followup data for patients at two and three years from the time of their treatment.

As part of our SurVeil development and distribution agreement with Abbott, in Q2 we received a $15 million milestone payment from Abbott associated with the successful completion of the clinical report that demonstrated these primary safety and efficacy endpoints in the TRANSCEND clinical study.

As previously communicated, there remains a final $30 million milestone payment upon successful PMA of SurVeil by the FDA.

Based on the timing of the last patients to be enrolled in the TRANSCEND study we are still on target to submit to the FDA for PMA in Q4 of this fiscal year and we continue to expect that we will be in a position to receive PMA by the end of calendar year 2021.

While decisions related to SurVeil's launch timing, ultimately to be made by our partner Abbott, our conversations with Abbott have led us to believe that SurVeil's commercial launch including Europe, is most likely to occur following U.S. PMA approval.

Moving to our Sundance DCB, as a reminder, enrollment was completed ahead of schedule in January for our SWING first-in-human clinical study for our Sundance below-the-knee Sirolimus-coated balloon. Several patients have completed their six months followup visits and we anticipate that the remaining followup visits will be completed by late August.

We are excited about the potential for Sundance to provide an important and effective therapy for patients suffering from critical limb threatening ischemia. With an estimated 1 million Medicare patients treated for CLI annually and very few effective treatment options and no current FDA approved drug coated balloons.

Our Sundance drug-coated balloon has the potential to be a game changer, changing therapeutic option. We look forward to sharing our six months data later in calendar year 2021. Regarding our Avess AV fistula DCB, we are completing the build out of the full matrix of balloon sizes to treat stenosed AV fistula.

Our team is now beginning to process our product validation efforts. Concurrent to these activities, we continue to assess the optimal regulatory and clinical strategy for our Avess drug-coated balloon. Next is our Sublime Radial Access platform.

Earlier this month, we announced that we successfully completed the first clinical cases using our Sublime Radial Access Guide Sheath and the Sublime Radial Access .014 RX PTA Dilatation Catheter. Since then, we have continued to receive favorable physician feedback on their experiences with the devices.

As we expected, the feedback has been consistently positive with physicians commenting on the ease of use, push-ability, trackability, and lesion profitability of the products. During our last earnings call, I mentioned that we had encounters some delays in the scale of manufacturing validation also of Sublime Radial.014 Catheter.

Based on the hard work of our team, we have completed these important and necessary validations. Regarding our follow-on offering, the Sublime Radial Access .018 PTA Dilation Catheter we filed for a 510 (k) earlier this month.

As with all applications and submissions with the FDA we expect that we will have additional information to share on the clearance of this device in the coming months. The Sublime 018 Catheter will compliment our Sublime 014 Catheter allowing physicians to treat the entire limb segment via Radial Access with balloon angioplasty.

And finally, I'd like to give a brief update on our Pounce thrombectomy platform. Our teams are working diligently to complete the product and profit validations that allow us to be ready to conduct limited clinical evaluations of the product later this year.

Regarding our third strategic priority, our Medical Device and IBD business segments continue to deliver solid performance. We are seeing strong growth in uptake of our SWING [ph] coating technology which has offered advanced performing benefits, including lower particulates and best-in-class lubricity.

In addition, we were pleased to see our coating royalty revenue return to growth in Q2. In our IBD business, we continue to deliver strong operating performance driven by our focus on customer service, commercial excellence and our gold standard product performance.

Revenue from our IBD business unit was up 9% this quarter versus the prior year to a record $7.1 million, while generating excellent operating margins, but once again exceeded 50%.

These core offerings continue to be the bedrock of our operating performance funding not only the old steadily growing operations and business value, but also fueling our strategic growth initiatives.

Our strong operating performance and execution in our strategic objectives is a result of tactical perseverance, a pool of talented team members that we have continued to build on and develop behind the scenes and a rigorous process of dynamic capital allocation.

While it may be early, we have improved our competitive positioning and capability, so that when we believe the global economic future brightens in the past COVID-19 world, we can continue to accelerate the programs that build long-term shareholder value.

After living through a challenging and unpredictable period this past year, I was pleased to see our strong Q2 performance and believe that better times lie ahead. Consequently, we believe that now is an appropriate time to provide our financial outlook for the remainder of fiscal 2021, which Tim will cover in a moment.

In closing, we have delivered exceptional results in our second quarter in our IBD, and medical device businesses, and we are successfully executing on all of our strategic objectives, including our product development, clinical and regulatory efforts.

2021 is and has been on execution and I firmly believe we have a dedicated world class team at Surmodics to position us for the bright future, we have in front of us.

Tim?.

Thank you, Gary. During today's call, I will provide an overview of our second quarter operating performance and provide our outlook for the full year of fiscal 2021.

Revenue for the second quarter of fiscal 2021 increased 53% to $35 million, which includes $10.8 million of revenue recognized from the $15 million clinical report milestone under our SurVeil Distribution and Development Agreement with Abbott. This compares to $22.8 million in the prior year.

Excluding the impact of this milestone payment as Gary mentioned, our second quarter revenue grew 6%. Our Medical Device revenue increased, 71% to $27.9 million, which includes the clinical report milestone revenue. Excluding the impact from this milestone payment, second quarter Medical Device revenue grew 5% year-over-year.

Our In Vitro Diagnostics business grew 9% to a record $7.1 million, driven by broad based demand for a diagnostic test component products and development projects.

Our second quarter royalty and license fee revenue totaled $20.1 million, up to $11.8 million from the prior year period, primarily as a result of the $10.8 million impact from the $15 million milestone payment.

Licensee fee revenue under the Abbott agreement totaled $12.5 million in the second quarter of fiscal 2021 compared to $1.5 million in the prior year quarter. Royalty revenue increased 11% to $7.5 million in the second quarter compared to $6.7 million in the prior year quarter.

We saw broad based underlying growth in our royalties portfolio, including strong double-digit growth from our SWING coating. In addition, we are seeing growth from device applications that leverage our Gen 4 technology. As a result, we anticipate no further year-over-year headwind from the Gen 4 patent expiration.

And on another positive note, in Q2 we experienced the lowest impact on royalty revenue from COVID-19, since the onset of the pandemic. Product revenue of $11.8 million in the second quarter was essentially flat compared to the prior year quarter across both our Medical Device and In Vitro Diagnostics businesses.

Our Medical Device business reported product revenue of $5.4 million, and benefited from our recent distribution partnership with Cook Medical for our 014 and 018 PTA balloon catheters, as well as a modest increase in our coding reagents, which was offset by softness in our legacy balloon catheter sales.

Our In Vitro Diagnostics product revenue totaled $6.4 million, and was essentially flat, with increased demand for our protein stabilizers and colorimetric substrate offerings, offset by unfavorable order timing for distributed antigen products. R&D services revenue of $2.2 million was up 12% or 330,000 compared to prior year period.

As our IVD business continues to benefit from increased customer development project opportunities. This was offset in part by lower coating services demand in our Medical Device business. Product gross margins were down in the quarter at 65%, as compared to 68% in the prior year quarter.

Product gross margins were unfavorably impacted by product mix with a shift to relatively lower margin product lines. R&D expense including costs of clinical and regulatory activities was $12.9 million for the second quarter, up 8% or 940,000, as compared to the year ago period.

For both R&D expense and SG&A expense, we faced difficult comparisons to the prior year period, which did not include any expense related to incentive compensation as a result of the uncertainty related to the pandemic. Also, as expected compared to the prior year our SurVeil-related R&D costs declined, including TRANSCEND.

SG&A expense in the second quarter of fiscal 2021 was $7.9 million, an increase of $1.2 million or 17% compared to the year ago. In addition to the unfavorable comparison with respect to incentive compensation, personnel and other investments to support product development and our strategic initiatives contributed to the expected increase.

Our Medical Device business reported operating income of $8.6 million in the second quarter compared to an operating loss of $1.5 million in the year ago period.

Medical Device operating results reflect $10.8 million in license fee revenue recognized on the added milestone payment and higher royalty revenue compared to the prior year, offset by increases in R&D and SG&A expense. The IVD business grew operating income by 10% or $350,000 to $3.8 million in the second quarter.

Operating margin grew to 54%, up from the prior year quarter's 53% as we've benefited from solid top line growth and continued focus on expense management. Now turning to income taxes. We recorded income tax expense of $1.4 million in the second quarter compared to income tax benefit of $1.9 million in the prior year period.

The current quarter's tax expense reflects strong pre-tax results with the receipt of the added milestone payment. The prior year quarter's tax benefit was a result of our ability, under the Cares Act enacted in March 2020, to carry back net operating losses to higher tax rate periods.

Both periods reflect the impact of taxable income for the full year in the U.S., non-tax benefit is amortization and operating losses in Ireland. On a GAAP basis, diluted earnings per share, was $0.58 in the second quarter compared to $0.11 in the prior year quarter.

On a non-GAAP basis, diluted earnings per share was $0.62 in the second quarter, versus $0.04 in the prior year quarter. Moving to the balance sheet, we continue to have a strong cash position and no debt. In the second quarter we began with $53.9 million of cash and investments and generated $16 million of cash from operating activities.

During the quarter, we paid $650,000 for capital expenditures. As of March 31, 2021 we have cash and investments totaling $70 million. Our current cash and investment balances provide adequate capacity to support our strategic growth initiatives. Turning now to our outlook for 2021.

We expect fiscal year 2021 revenue to range from $101 million to $105 million. This outlook includes between $16.5 million and $17.5 million of license fee revenue associated with the Abbott SurVeil agreement. Our guidance reflects growth in royalty revenue of mid-to-high single digits, year-over-year.

Regarding operating expenses, we anticipate an acceleration of investments in our strategic initiatives through the remainder of the year. For the full year SG&A is expected to grow in the low double-digits and R&D spend is expected to be somewhat consistent with the prior year.

In addition, we expect the full year impact of income taxes to be neutral to $1 million of tax expense. Finally our fiscal 2021 revenue outlook excludes any revenue associated with the achievement of the final SurVeil milestone payment, SurVeil product sales or SurVeil profit sharing revenue.

We expect fiscal 2021 diluted earnings per share in the range of a loss of share of license to earnings per share of $0.20. We expect non-GAAP diluted earnings per share to range from $0.10 to $0.35. Operator, this concludes our prepared remarks. We would now like to open the call for questions..

Thank you. [Operator Instructions] Our first question comes from Brooks O'Neil - Lake Street Capital Markets..

Hey, good morning guys, congratulations on the great quarter. I had a little trouble dialing in this morning, because I think somebody might have given me the wrong phone number, but I got that figured out..

Thank you, Brooks and glad you are able to join us..

So couple of questions, I know it is pretty early with regard to some of the pipeline projects, but can you comment at all on any of them about any interest you're seeing, from potential partners, up and down the line?.

Right, thanks Brooks. You know, as we said we have been intentionally shy in terms of meeting and talking with partners and sometimes with you. When we talk to them would acknowledge that, because we really wanted to develop the clinical key series of the breadth of cases in the first 50 to 100 cases with this.

We are aware of interest, but as I've told our team, the real value creation here is us understanding the value of what we have from the clinical feedback and so far that's been going well.

The other thing Brooks is as you know, having done this for 33 years, we like to do really shake out every nuance of the product, the good and the not so good as well, and so that gives us an ability to address any feedback that comes up from product improvement or how it usability.

So really have the blinders on in driving that, but as I'm aware, there is external interest, but for now we are intentionally trying to avoid those conversations..

Yep, that makes sense to me. Thank you for that. I'm curious, I think I heard Tim say in his prepared remarks that the R&D spending is likely to stay relatively flat.

I assume that the dollar terms, show as the revenue growth begins to accelerate most likely in fiscal 2022, I'm just checking to see if I'm right in believing that your dollar stayed relatively flat, but the percentage of revenue spent is likely to begin to fall, is that the right way to think about it?.

That's right, Brooks. I'll just give you a little color here. You know, clearly this fiscal year compared to fiscal 2020, we expect that our R&D revenue will be somewhat flat and if you take a look at Q1, it was really kind of a low water point here in recent quarters and kind of how we're thinking about Q3 and Q4.

There is a lot of work to do as Gary has been describing with these three platforms, and we will allocate capital to them appropriately. They are all extremely value creating or have the potential to be extremely value creating. So I will answer the question in terms of 2022.

We absolutely think as a percentage of revenue R&D spent well look like its declining just from a percentage perspective, but as it pertains to the aggregate dollar amounts, it's probably a little difficult for me to give you a whole lot of clarity on that. And the primary factors are with regard to any pivotal studies with Avess and Sundance.

So stay tuned on that. There's still some thinking and potential negotiations that need to be done on those fronts, but thinking through this at the rate of maybe $50-ish million a year, is probably not a bad way to think about it with perhaps some growth on top of that based upon clinical studies..

Okay that's great, that's very helpful. I'll just ask one more.

If I remember correctly, you had retirement of your Senior Manager in Ireland, and as I think about what I hope will be a ramp up in manufacturing activity for you guys, how do you feel about your team and your capability on the manufacturing side? Thank you very much again, congratulations on a terrific quarter..

Thanks Brooks and that actually is an excellent, and often unasked question.

Behind the scenes we have been developing, I don't want to say bench strings [ph] but really that's what it is, behind the executive, we have really incredible depth charts in the company here, and that's what specific intent in the areas of succession planning at all levels.

And so, our new executive manager in Ireland has been training for this position for many years and really the best news is he's jumped in without skipping a beat. And even Tom, who left the company would agree with that as well. Tom continues to be a mentor for this person, but not a skip in the beat.

The Irish team is very well served with de medical [ph] comments over there..

Great, thank you very much..

Thank you, Brooks..

Thank you. Our next question comes from Mike Matson with Needham & Company..

Hi, good morning. Thank you for taking my questions. I just wanted to reconfirm something you said, the timing on SurVeil, so that you're expecting to submit the P [ph] at the final part of the modules or whatever in the fiscal fourth quarter and you said, you expect to receive approval by the end of calendar 2021.

Did I hear that correctly?.

Yes, yes..

Okay. All right, and then just wanted to see what you're hearing from the clinicians that you talked to you about the TRANSCEND results. We've spoken to a few cardiologists that do peripheral [ph] procedures and it seems honestly it's been kind of lukewarm.

People seem really entrenched with the Bard and the Tronic balloons and kind of same things like well unless it is really superior to the products that are out there, it is going to be tough to switch. It is going to be tough for me to go to the back committee to really kind of lobby to get this thing into the hospital, et cetera.

So I am just curious what you're hearing there? How do you think the product will be kind of marketed to address those issues?.

Sure, sure. Foot fall and that is completely unsurprising to us. And that is the power of having strategic partners such as Abbott who clearly to me best-in-class in terms of clinical marketing where we have, so that has not even started yet.

So, normally, what I call clinical inertia is there and Mike as you know there is always a gap between knowledge and practice in medicine, and so until we start the education and forming of these physicians and such fairly straightforward marketing issue.

The other thing I would say it would be more difficult for SurVeil alone to do that, but with our partner Abbott, you're selling at all levels, you're doing selling at the group contract level, at IBM level, at the C-suite, at the physician level and at the value analysis committees.

And so we don't foresee the expected inertia as an issue whatsoever. It's just the wall you lean against and I can predict that our partner Abbott is ready for that conversation..

Okay thanks and then just on the SWING trial for Sundance.

So what is the endpoint of that trial? I know it's a first-in-human and then what do you need to see there to progress to the pivotal trial?.

Right, well it's really nice with in human trials, which is a it's a safety study, I mean we're looking for 30-day followup and making sure even at the six month followup how these patients are doing, as you know, it's critical and threatening ischemia and so there's so many comorbidities with these patients.

The other thing we are looking for is, and this is more on a secondary basis is the agency of the vessel, and we're actually doing an additional step where we're actually doing a follow up angiogram, so that we can look at late lumen loss off the fibular artery itself.

And what that gives us is, duplex is really a binary thing opened or closed with the PSER device ratio is less than 2.5 or whatever we set. But with late lumen loss we can actually measure the best and then we can look for the actual size of the vessel compared to the reference dam.

So prior to treatment and the nice thing about that is, even with a subset of 35 patients, it's a continuous variable and actual numbers with decimal points behind it versus a binary variable.

And so it gives us much better statistical confidence with those, but again it really is a safety study with what we call a nice indication of efficacy and that indication allows you to make some assumptions of the effect size of the device, the power of future pivotal.

So, in TRANSCEND as we recall, we only have 13 patients so the 35 patients here are really looking forward to..

Okay.

All right, a couple and then just on talent, when would you expect to start working on additional indications for that product? Would you start that before you get a distribution here and placed with arterial indication or would you wait till you get to that point and start to generate some sales from the product?.

You know, in the modern era, it's like app updates on your iPhone. Version 1.5 is already in development version two is already in development. So we take a very parallel approach to this. And in fact, what we're prepared for is any feedback we receive in Version 1 is going to be cloud into 1.5 and then Version 2.

And the reason we use those, that nomenclature is what will require re-regulatory filing and so if there's a lot of regulatory, if the regulatory requirements are filed we might bundle that into Version 2. So that's, that's ongoing right now.

And Mike, I just wanted to make sure just on the FDA PMA, the fine print there as you know well, is we are targeting and expect to get it by the end of the fiscal year, but as with anything regulatory and especially PMAs, a lot of that is in the hands of how the data review proceeds with FDA, just to add that note..

And let me just offer a little more color. Mike, thank you for the questions are thoughtful and with regard to Ponce [ph] and cloud removal, Gary's comments, his response is really in regard to arterial [ph].

You had asked a question also with regard to how are we thinking and framing that maybe other indications that can leverage our patent portfolio and the technology.

And all I can really share at this moment is, the team has really done a thorough identification of what the problems are with other indications and kind of what value proposition might need to look like and have begun to think through kind of some of the design requirements, et cetera.

So we're informing ourselves in terms of what needs to be done to be able to create a technology that can be effective, and then trying to make sure that we can leverage that insight and understanding with the technology that we have or what do we need to do to complement it.

So stay tuned on that, but I would like to go back to your question or your comment with regard to some of the clinician feedback that you received.

And look, Gary and I aren’t in a position to speak for Abbott, but what I will tell you is that there is clearly from what we're hearing higher market sensitivity with regard to drug dose and coating formulations, that bodes very well for Cymatics our technology and I think it could bode very well for Abbott in marketing the technology.

I think there is also a real key thing to understand and that is Abbott has a very complementary bag of product offerings that are used in conjunction with the drug-coated balloon.

And so, I won't underestimate the power that Abbott has from a marketing perspective, but also just from a portfolio perspective to ensure that there's going to be traction with SurVeil once it is launched. So we're all excited, and we're anticipating great things, and we'll stay tuned until the launch begins..

Okay, great thank you..

Thank you. [Operator Instructions] Our next question comes from Jim Sidoti with Sidoti & Company..

Hi good morning.

Can you hear me?.

We can hear you loud and clear, Jim..

Great, great. Yes, I just want to say for all the sales side we're glad that Brooks was able to get that number straightened out and get on the call. But anyway, the questions I had related to performance.

You have three products in the pipeline and it is kind of neat that we're able to talk about things beyond SurVeil, that there is a future beyond that and that you're coming to the close of that.

But if you look at the three products beyond SurVeil, below-the-knee balloon, the AV access balloon and then the thrombectomy device, can you just kind of give us a sense on of those three what should the biggest opportunity and what is the nearest term opportunity?.

Tim will talk about the addressable markets and stuff beyond that, but just keep in mind there's also the Sublime Radial Access platform. So it's really that in addition to the three you mentioned..

Okay..

Yes, and I think it's a really great question now. We haven't really given a lot of perspective here in terms of Avess and Sundance and I'll start there. Our teams are evaluating and assessing the regulatory and clinical approach.

Folks may have seen some recent data that's been published, two-year data on one of the balloons that we've had to Medtronic balloon, the data looks really good. We're very optimistic about what we have with regard to Avess.

It's a large market opportunity in terms of the overall number of patients that require some help with a Stenosed graph, and we think the drug coated balloons are going to have a pretty big future to play in there in that space. Sundance is really exciting below-the-knee. There is no option.

We've heard the news with regard to Bard, and the panel decision not to grant them approval to move forward with marketing the device. We're hearing that others have dropped out of the market or the space and development efforts.

There is still real decline here, but we are pretty optimistic and these are early stages here with regard to Sundance, we’ll know a lot more later in the fall, by the end of the calendar year here, we expect to be in a position to share the data on the first-in human study, but that could be game changing, that could be a significant opportunity where there could be high penetration with the drug coated balloon to treat critical limb ischemia and depending on what might happen with our partner Abbott, it might just help support and quite frankly strengthen the drug coated balloon portfolio having brought something to treat regions above-the-knee as well as below-the-knee, but that will take a bit longer.

From a study perspective we have seen that the Avess studies or AV access studies tend to be conducted a little bit faster and so, we'll have to just wait and see.

But if things go really well, we have a couple of tires, if you will, in the portfolio that we expect over the next several years can generate revenue whether it’s in the former license fees and milestones initially and products and perhaps maybe some other form, maybe profiteering in the future, yet to be determined, but super excited..

And just on the since thrombectomy is well characterized in people, it's sort of the star of the market in terms of excitement and value from thrombectomy. And so, we look at arterial. Clearly, we do have venous and pulmonary embolism on top.

And as Tim alluded to earlier, we try to give a protective space for the development teams within concept development. A lot of companies rush to what we call solution space very quickly.

We love to say painfully in what we call problem definition space, and what I can say is that in problem definition speeds there are key holes in the performance of all of the current devices. And for Surmodics to take on a project, we clearly want to address those issues before we come up with concepts and idea associated with it.

But Sublime, the radial is- continues to be a sleeper in this market, just because the total addressable market is really depending on OBLs and as OBLS continue after people have continue to grow, but as man started in the last really close. What you have to believe is given the, and profound potential clinical outcome benefits for those patients.

Some really dramatic fixed asset cash flow and nonprofit that accrue it to the OBLs that they able to conduct more procedures because of radial access at the end of the day. And then a really dramatic and this is often misunderstood of patient satisfaction, the position I have physicians.

I have talked to have utility devices believe that products like these are going to make them win because it’s valid for the patient, it’s more satisfying for the patient and their office-based labs once we cover those fixed assets utilization with a couple of extra procedures you can get from radial access because of the discharge time being much shorter is pretty all free cash flow.

So it's one of those things where the market is not developed yet, but we are positioning ourselves because our thesis is that cannot help, but will, because it's solving three critical issues in U.S. healthcare today.

At the same time, I don’t know, I frankly don't know of another product platform that actually can accomplish that, so we’re excited about that opportunity as well..

So, and with regard to timing I know you’re hesitant to give long-term guidance, but would you be surprised if one or two of these products was a significant contributor to revenue by let’s say fiscal 2023 or 2024?.

Absolutely, absolutely. And what we’re quite frankly, we’re hoping for more than one..

Yes..

And let me replace the work hope with expecting..

And the binding issue for Surmodics right now from at least from an investment point of view is, getting those points on the board, I think sometimes what we don't articulate or doesn’t get across is, it's almost too much to say one company has, this was -- I think I said it the last time, with you are a company with only one of these platforms.

I think investors would read it better, but comprehensive you did because we have four exciting areas that we are working on and the three product platforms that would -- it almost seems like it is a discount all of them with this additively look at all of them, but really putting points on the bond as we get these things in terms of revenue and EBITDA growth is really what we’re after..

Right and then just one last one on the quarter that just ended. Tim you said the IVD business had about $6.5 million in sales, flat a year ago. But then on the release you reported there was about $7 million of revenue from that business.

So is there royalty revenue coming in from that business?.

I might be misunderstanding the question Jim, but let me attempt to answer here what I think you're asking. If I refer to the IVD revenue as being 6.5 million, the IVD revenue was 7.1 million and grew about 9%. So if I did make a reference to 6.5 million I'm going to be honest with you, I'm not sure that was intended to do..

All right, maybe I misheard that then.

And of that $7 million is that boosted by COVID testing or is that all your core business?.

Now it is predominantly COVID and as you know, I think we've talked her over the last few quarters, we have a couple of customers who leveraged some of her chemical components and for serology tests. But we're not seeing unfortunately a big uptake in terms of serology tests probably for a number of reasons.

So the impact on the quarter has been de minimus..

Okay great, thank you..

You are welcome..

[Operator Instructions] Our next question comes from Mike Petusky with Barrington Research..

Hey, good morning guys, great result. Hey so let's stick with IVD. It is not talked about very often, I am just wondering, I mean when you look at that business, if you looked at it as a standalone asset, I mean you've got nice top line growth. You've got 50% up margins, I mean what's that asset worse standalone in your view.

Have you guys assessed that or do you have anything you can say around that?.

Yes, Tim will answer some of the granularity there. We keep all the key, just to keep aligned some of the parts like analysis of the portfolios and the business, operating businesses we have.

And the IVD business on an EBITDA basis has continued to grow remarkably and we believe that it will grow, continue to grow like that into the future on an EBITDA basis. And so the factor is the multiple on that has actually changed Tim I think positively in the last year in the diagnostics space.

So it is whatever range you put on the multiple of EBITDA of that business, but the short answer is handsome growth in that business..

Mike it just Joe and the diagnostics team, great solid team have really done a lot here with this business over the past several years. You've seen revenue continually coming in, in the mid-to-high single digits when we first started talking a little bit more about operating with the same, we're below 40%.

And I thought, Gary, those eight years ago or so, but here we are 54% for the quarter. We've continued to probably achieve 50% or higher operating margins more often than not. And so, if you just frame it up, I think revenues is, we could be looking at 26 or higher revenue in terms of millions of dollars in 2021.

You know with the operating margin it is 50%. My capital intensions at all, all most all of that sharp and straight down to EBITDA. It is not unlikely to think that your EBITDA dollars in terms of a range is probably going to be somewhere in the teams, midteens in the millions and we've seen multiples range from 13 to 18x.

It is a wonderful gem of a business and it continues to increase in value each year. So I'll let you do the math and I think some of you have done the math and have kind of indicated that it is pretty valuable. I think we like the question, because behind the scenes we could not trump up these businesses. The value has grown substantially..

And it is not to fail..

Fair enough.

Okay, so I wanted to just from my own clarity, maybe everybody else knows this, but for my own clarity, the 30 million that's still on the table from Abbott related to SurVeil and regulatory clearance, is all that associated with regulatory clearance or as part of that related to the filing? And then, when you get the first part of that, the revenue recognition, how much of that $30 million is likely to be recognized, either in the quarter or right in the next quarter, sort of after you achieve the milestone.

Does that make sense?.

Yes, thank you for the question. The $30 million is, there's really a bright line on this one. It's pretty clear, PMA approval, FDA PMA approval, one thing, and so upon receipt of the approval theirs is a $30 million milestone payment that will be received.

If you take a look in the investor deck, and I think we're going to be posting the updated deck probably later today or tomorrow, so stay tuned. But if you look at the investor deck, you'll see we have a slide in there that kind of helps folks appreciate how to contemplate, how these milestone and license fee payments are recognized.

I think for the full year 2021 it's about 76%, 77% somewhere in there. So for example the $15 million we would be recognizing a good chunk of that, the $10.8 million right away here in Q2, but for the full year you just can take $50 million and multiply it by 75%, 76%, 77% they will tell you the range.

It is going to be a little bit higher because for PMA for the $30 million, because we expect that we'll have incurred more of the costs associated with the TRANSCEND study and that milestone payment Gary, we expect we will be able to achieve that PMA approval here by the end of the calendar year.

So, probably, maybe somewhere closer to 80%, but yes, I would expect it would be north of 76%, 77%, but another bad way to think about it 80% could be conservative..

Okay so 80% of the 30 could be recognized immediately..

Yes immediately..

I mean, just one more question. So you know $70 million between cash and available for sale securities. I mean $70 million, I think that's the most sort of cash or equivalent that you guys have had in a while.

Does that change your way of thinking about capital allocation at all, does it make you want to go deeper and some R&D spend or can you just talk about if that's changes anything in terms of your thinking around the capital allocation? Thanks..

Yes, when you recall the slide last year where we and as everyone who prioritizing liquidity and having healthy balance sheets. I think for us, we continue to look at our balance sheet as a dynamic tool for growth, as I said in the past versus a static indicator of performance.

So, using that balance sheet is always something we consider how to dynamically allocate capital and grow the business, eventually. Coming out of this, what we hope is a post-COVID world with rebound and economic metrics.

We are also always have a healthy corporate development, initially, we don't talk much about it, but we'll always, Tim and the team were always sifting and to find great technologies, great things that compliment where we're going in our intellectual property.

So that will always be in play for the balance sheet is there, but then the capital allocation will deal with them as well. Now it's a really great question and it's a fair question.

We're really fortunate to be in a position with $70 million of cash and investments on the balance sheet and well if you were to ask Gary and I about a year ago if we would have thought that it would have looked like this I think both of us would have said too much uncertainty to call it, but we're aiming for it but capital allocation, Surmodics has a history here of share repurchases.

We do have an authorization in place, it always comes down to whether or not we think that you know we can we can utilize the cash and that we have to further enhance and grow shareholder value creation.

So it not signaling that we would be doing a share repurchase, but as we kind of continue to look out over the next few years and continue to be in a position where we could grow the cash balance, that certainly could be on the table. Our team is pretty well set in terms of the activities that we are engaging on to help to grow the business.

And I made a comment earlier in the call with regard to the potential of clinical studies to support approvals for some real important products in our portfolio, namely Avess and Sundance.

It's possible that you could be seeing capital allocated to support pivotal studies, especially if we think that there could be a really nice and solid investment creation pieces behind doing that.

And Gary and I highlighted something, you know, it's taken us five years or so to kind of build on this strategy the transformation we continue to execute on it. We're looking to put more points on the board, but we got to today by doing some pretty strategic, I would say somewhat modest sized transactions relative to what our market cap is.

I would expect that if there is, we're going to be opportunistic. If there are things that really can help support the value creation that we have in front of us and complement these platforms that we're driving, don't be surprised if we do something like that.

So, you know the one thing that I will say is, Gary is pretty clear in terms of capital allocation and return on invested capital. We won't do anything that we don't think has real strong likelihood of succeeding and is highly complementary to what we're doing.

The vision and the mission is really clear around here and you won't see us going off after things that are shiny. We'll be sticking closer to the netting around here..

Very good, thanks guys..

Thank you, Mike..

Thank you. There are no additional questions at this time..

Well, thank you all for joining our second fiscal quarter earnings call and everyone have a good day. Thanks..

Thank you ladies and gentlemen. This concludes today's presentation. You may now disconnect..