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

Thank you, Madison. Good morning. And welcome to Surmodics fiscal 2021 fourth 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 thank you for joining us. It has been a solid quarter with significant progress on our strategic objectives.

Before providing a quick recap of our achievements in fiscal 2021, I'd like to thank our incredible team at Surmodics, despite difficult circumstances stemming from the ongoing global COVID-19 pandemic, they persevered tirelessly. Our success in fiscal 2021 is because of their sacrifices.

I'm proud to be a member of such an amazing community that you know as Surmodics. Last fiscal year, we had three primary areas of focus. The first was to continue building traction with SurVeil, marching towards PMA approval beginning with our final submission to the FDA.

The second was to accelerate the advancement of our robust product pipeline through product development, regulatory clearances and clinical evaluation. And the third was to optimize cash flow from the in vitro diagnostics and medical device coatings offerings to support our strategic growth initiatives.

We've made great strides in delivering on each of these goals. Let's begin with a summary of our full year fiscal 2021 performance. During the year, we generated $105.1 million of revenue compared to $94.9 million in fiscal 2020.

Our revenue grew 11% and was driven by solid top line performance in both our medical device and in-vitro diagnostic businesses, which grew 10% and 15% respectively.

Also, we reported GAAP diluted earnings per share of $0.30 for the full year, which benefited from an anticipated $3.6 million reimbursement associated with the CARES Act employee retention credit, which favorably impacted our earnings per share by $0.19, our full fiscal year 2021 non-GAAP earnings per share was $0.37.

Tim will provide additional details in our quarterly results, including the impact of the CARES Act on our fiscal 2021 operating performance, as well as our full year fiscal 2022 guidance. Moving on to SurVeil. As we discussed on last quarter's call, we submitted our final module of SurVeil PMA submission to the FDA on June 21.

As per the request from the FDA, this module included mortality follow-up data for patients at both two and three years from the time of treatment. Recently, we had a planned follow-up meeting with the FDA regarding our submission. The FDA is requesting additional data in order to value the product and its unique technology.

While additional data requests, including more mortality data are not surprising in and of themselves, the process of achieving clarity regarding these additional data that are needed to support the approval does take some more time.

The agency has asked us to use their recommended process to discuss the data requirements versus just providing answers to their questions as a better, more reliable way towards the PMA. We have requested accelerated turnaround times for scheduling such data discussions.

We believe that we can secure these meetings early in Q2 of fiscal 2022, given that the agency still has a further 90 days on the clock after we have discussed and submitted any additional data that require, we do not see a viable path to achieve the PMA in the first half of fiscal 2022.

In addition, we have comprehensive audit by the agency, follow manufacturing sites and audit of selected clinical sites. These are typical. And so far we have performed quite well in all of these audits. As in the past, we choose not to include regulatory related milestones in financial guidance.

However, we will clearly lay out the financial impact of such regulatory approvals for you to make your assessments. Needless to say, our goal is to secure this PMA in fiscal 2022. Moving to our Sundance below-the-knee sirolimus-coated balloon, in fiscal 2021, we completed enrollment in our SWING first-in-human clinical trial in January.

The six month patient data and follow-up visits are completed in our fourth quarter and the clinical team along with the principal investigators are presently collating the data and developing the clinical report, which we expect to complete in our first quarter. And share it with Abbott in our first quarter as well.

With respect to our AV fistula DCB Avess, during fiscal 2021, we completed design verification for the full matrix of balloon sizes for the base balloon catheter and began the process validation work on the base catheter.

Additionally, the FDA has provided some high-level feedback on requirements for Avess pivotal clinical trial and its design considerations. Our non-drug delivery portfolio consists of our Sublime radial access platform and our Pounce arterial and ReVene thrombectomy systems.

These have all made substantial progress, which I will spend a little more time than usual describing since these emerges even more exciting catalyst for the future.

Starting with Sublime, our Sublime radial access platform consists of the Sublime radial access guide sheath, the Sublime 0.014 RX PTA dilation catheter and Sublime 0.018 dilation catheter. What makes a portfolio so unique is that each of these devices are purpose-built for above and below-the-knee peripheral intervention.

And that can employ both the conventional transfemoral approach and a transradial approach. We believe that the radial access procedures offer significant benefits by improving patient comfort, reducing recovery and ambulation times and potentially lowering access site complications.

However, they do require a longer low profile devices that are robust enough to deliver from the wrist all the way to the pedal loop in the foot. Following successful evaluation of these devices, we believe the platform is uniquely positioned to lead the market for dedicated device facilitate a radial to peripheral approach.

Let’s talk about Guide Sheath, the device has been used at 45 cases among 15 peripheral interventionalists in formal clinical evaluations. The Sublime guide sheath is the only five French guide sheath available in a length up to 150 centimeters.

During evaluations, the Sublime guide sheath received excellent feedback with low-profile design, its ability to track through tortuous anatomy and its resistance of kinking when compared to alternative competitive devices.

We continue to be extremely pleased with the performance of our Sublime 0.014 PTA balloon catheter, which started clinical evaluations in Q2. Recall that the Sublime 0.014 catheter at 250 centimeters is a longest 0.014 PTA catheter in the U.S. market. On an evaluation basis, physicians have used almost 70 devices in 10 U.S.

peripheral interventional sites with remarkable success. There has been continued demand for the device beyond the initial evaluation cases and to data please that we have actually shipped commercial units to customers either through a direct sale of consignment programs at these facilities.

As we announced in our recent press release, we started a clinical evaluations of the Sublime 0.018 PTA balloon catheter in late September. The first case was performed by Dr.

Ankur Lodha at the Cardiovascular Institute of the South in Lafayette, Louisiana, to-date 22 units of these 0.014 catheters have been used at full peripheral centers throughout the U.S. It compliments our 0.014 catheter by providing larger balloon diameters, a larger guidewire lumen for physicians prefer to operate in an 0.018 platform.

While the evaluations are not complete, the feedback from our early experience is consistent with its data of its brother, the 0.014 PTA in terms of its deliverability and ability to cross difficult lesions.

In fact, following a recent – universally high known, well-known peripheral interventionalists that participated in these trials, his quote was, these are the best balloons I have ever used. Not once I say, you'll do cross the lesion with this device.

I know that this is mainly anecdotal to this audience, but I can remark that this feedback makes us quite proud internally, and it's consistent across the sites that we have evaluated these devices. Next is our Pounce arterial thrombectomy platform.

In July, we received a 510(k) indication expansion for smaller vessels down to 3.5 millimeters, which expands the market opportunity for our Pounce system to treat arterial clot in some vessels below-the-knee. Since announcing the first successful case in June, an additional 21 Pounce arterial thrombectomy procedures have been conducted in six U.S.

hospitals’ outpatient facilities. The device has been used in a variety of cases, ranging from relatively simple acute clot extraction to the most complex procedures dealing with mixed morphology or acute and chronic clots.

Notably Pounce has been brought into complete cases involving organized clot with other devices we initially use, but were unable to fully restore blood flow to the limb.

In these cases, the unique design of Pounce and as basket and trumpet assemblies was able to capture and remove challenging clot without the need for additional devices, no surgical intervention. That's providing a good outcome for the patient.

Although, the majority of Pounce cases have been involved in arterial interventions in the lower extremity, the device has also been used for clot retrieval and other peripheral anatomy, including the superior mesenteric artery in the abdomen.

And in each of these cases, the Pounce has been able to efficiently remove the clot from the vessel and restore arterial flow, without the need for aspiration or additional capital equipment.

We are quite encouraged by the positive response of physicians and the care team to the simplicity and effectiveness of the Pounce arterial thrombectomy device, even in the most challenging clinical situations.

We have already received commercial interest from peripheral interventionalists and vascular surgeons were eager to have the device on their shelves in their facilities, primarily in the hospital setting. And have recently received our commercial orders for the Pounce arterial device.

We believe it's important to facilitate continued access to the use of these devices via commercial sales through these interested facilities. As for our recently acquired ReVene mechanical thrombectomy system, we are working in a branding change to fold this into a Pounce thrombectomy platform, but more on that on a later time.

We're pleased to see the recent acquisitions of other suction based and mechanical thrombectomy systems by several large strategics.

This not only validates the space and our own acquisition of Vetex, but the headline numbers involved in at least one of these deals highlights the current and implied future market value of mechanical thrombectomy devices and the race towards the market for this value.

We believe that our Pounce arterial thrombectomy and our ReVene venous thrombectomy systems are quite well positioned for future competitiveness. We continue to target a Q2 completion of our process and manufacturing validation efforts related to the acquisition of Vetex and its ReVene mechanical thrombectomy system.

In note of caution here, we've been facing ongoing supply chain related issues with several key components required to build our validation devices. These shortages are not unique to our device components, but rather a part of a large-scale shortage of components of these types.

Any slippage in timelines for the delivery of these components could delay our Q2 target completion. However, we continue to aggressively manage our supply chain. Following validation activities, we plan to quickly initiate clinical product evaluation. These important achievements position us to execute on the meaningful opportunities in fiscal 2022.

These are first to achieve the PMA for SurVeil and to support our partner Abbott's commercialization efforts.

Second, to become the first-line treatment for patients with our Sublime radial platform and Pounce arterial and the Pounce ReVene venous thrombectomy platform for interventionalists who have access to these devices and demonstrate their commercial viability on a limited scale.

Third is to drive top line revenue growth on optimized cash flow from all IVD and medical device coatings offerings. Let's start with the first objective, which remains to obtain FDA approval for SurVeil.

As I mentioned in our follow-up meeting with FDA, typical of the pre-market approval process, we had one hour to discuss the agency's questions and request for additional data as outlined in the 90-day letter.

We will be meeting with agency in the coming months to align on the information that they require to support the approval of our PMA application. Although, we cannot be 100% sure what action the agency will ultimately take regarding the application for PMA. We believe our application and relevant data strongly support approval of the product.

However, until we complete our meetings with FDA and understand the process for any remaining data to be completed at this time, it is really difficult to estimate the specific quarter when the FDA may reach a conclusion to grant the PMA. Importantly, we’ve spoken with our commercialization partner Abbott about the FDA meeting.

Abbott has communicated that it’s developing its commercialization plans for SurVeil U.S. launch. They have also indicated that they intend to launch in the U.S. shortly following the FDA’s approval. While we’re working to secure the FDA approval as quickly as possible, we are also preparing to support Abbott’s launch in the United States.

Moving on to the second objective, demonstrating the first line benefit and early commercialization of the Sublime radial platform and the Pounce arterial and venous thrombectomy platform. This is an important next step to create solutions and improve patient outcomes.

Because of its importance, I’ll provide a little additional context and meaning behind this subjective.

Recently because of our clinical evaluation of these portfolios, there began to be a fruit in the form of both physician interest products ordering in a commercial basis, as well as commercial partnership interests from several large multi-national medical device companies.

While the interest from the industry is exciting, I’m most pleased at several of the clinics that have participated in these evaluations have ordered the product and even recently reordered the Sublime products. These orders support our view, that we’ve created something special with these products.

As to the interest from large strategics, we have decided that engaging in negotiations and signing a distribution agreement now with an established medical device partner for either platform would not have a quite significant value from these platforms. And that serves the best interests of our shareholders.

We’ve all seen a recent growth in significant value of several publicly traded medtech companies with innovative products that address large market needs. I’m confident that our Pounce and Sublime platforms have similar long-term value creation potential.

To unlock this potential, we’ll begin by building a small commercial team of highly skilled and experienced sales professionals and clinical specialists to introduce the benefits of these products and drive customer adoption in the small scale, much like the initiation of these very highly valued current companies.

These activities have that potential to demonstrate a very large and scalable future commercial value of these devices real-time in the market. I am a firm believer that the incremental investment of this approach will deliver dramatic and outsized returns for our shareholders.

To accomplish this goal, we’ve recently added eight experienced field sales team members in addition to several marketing team members to drive our commercial efforts, awareness, adoptions and sales of our portfolio. Onboarding these individuals has recently begun to ensure where the best possible position to take advantage of these opportunities.

Importantly, we have already developed all of the internal commercial processes and systems to enable this effort along with a significant amount of team experience in serving customers directly.

To accelerate our value creation strategy in fiscal 2022, which Tim will cover in a moment, this will reflect additional SG&A investments of approximately $10 million to support initial commercializations of these platforms.

Beginning in our third fiscal quarter, we expect to see modest and meaningful growing revenue associated with the adoption of these platforms. However, we expect to see significant growth in our value for this portfolio as we gain this early commercial traction. Finally, turning to our IVD and Medical Device businesses.

Our IVD business is expected to continue to outperform the immunoassay market growth of 3%, while generating excellent operating margins.

While our medical device coatings revenue is expected to grow low to mid single digits, which is the rate in line with that of the endovascular device broader market given the recent vagaries of COVID-19’s rolling impact on interventional procedures.

I’m excited and energized by fiscal 2022, how we can help patients and care providers, what it means to our team and the large positive impact on all shareholder value. These are the right moves, we have the right talent and capabilities and the financial resources to execute on these fiscal 2022 objectives.

I’ll now turn the call over to Tim to provide more details on fourth quarter of fiscal 2021 and our outlook for fiscal 2022.

Tim?.

Thank you, Gary. During today’s call, I will provide an overview of our fourth quarter operating performance and provide our outlook for full year fiscal 2022. Revenues for the fourth quarter of fiscal 2021 grew 6% to $24 million compared to $22.5 million in the prior year quarter.

Our Medical Device business revenue grew 1% year-over-year to $17.4 million and exceeded our expectations driven by growth in both product and R&D revenue. Our In Vitro Diagnostics business grew 23% to $6.6 million. In the fourth quarter, our IVD business delivered another quarter of broad-based growth.

IVD revenue performance also benefited from a favorable comparison with respect to antigen sales. Our fourth quarter royalty and license fee revenue totaled $8.9 million, down $1 million from the same prior year period. Royalty revenue declined 7% to $7.6 million in the fourth quarter compared to $8.2 million in the prior year quarter.

As you may recall, the prior year quarter benefited from approximately $2 million associated with a true-up from our third quarter fiscal 2020 royalty revenue as the actual royalties reported by our customers during the Q3 period exceeded our estimate.

The impact of this true-up was partially offset by COVID-related impacts on procedure volumes during the prior year quarter. Setting aside of these prior year factors, once again, we saw double digit growth in royalty revenue from our next-generation Serene hydrophilic coating in the fourth quarter.

Serene royalty revenue has grown to comprise 26% of our royalty revenue as of Q4 fiscal 2021. License fee revenue under the Abbott agreement totalled $1.2 million in the fourth quarter of fiscal 2021, compared to $1.6 million in the prior year quarter.

Abbott agreement license fee revenue is recognized in line with costs incurred for the TRANSCEND clinical study, which have declined this fiscal year as expected. Product revenue increased 18% to $12.5 million in the fourth quarter, compared to $10.6 million in the prior year quarter.

In our Medical Device business product revenue grew 18% to $6.3 million compared to $5.4 million in the same prior year period. We saw another strong quarter of coating reagent sales. Additionally, we continue to see revenue growth from the new products launch through distribution partnerships that were signed in fiscal 2020.

These include our 014 and 018 old one for oh one eight Pta balloon catheter with Cook and our coronary microcatheter with Medtronic. Our In Vitro Diagnostics business reported product revenue of $6.2 million up 19% or $980,000 compared to the same prior year period.

As I mentioned a moment ago, IVD revenue benefited from an easier prior year comparison with respect to antigen products. We are pleased to see a return to growing demand for antigen products for use in auto-immune disease testing.

Growth in sales of our protein stabilization and colorimetric substrate products also contributed to a strong fourth quarter. R&D services revenue of $2.6 million was up 24% or $500,000 compared to the same prior year period. In our Medical Device business, we’ve seen an increasing customer development programs leveraging our medical coatings.

Our IVD business continues to benefit from increased customer development project opportunities for our microarray DNA slide products.

Before I move on to product gross margin and expenses, it is worth noting that we had a $3.6 million benefit to operating income this quarter related to our eligibility for the employee retention credit under the CARES Act.

This reflects anticipated reimbursement of personnel expenses we actually incurred in prior quarters providing a $460,000 benefit to gross margin, a $2.2 million benefit to R&D and a $930,000 benefit to SG&A expense. Since the beginning of COVID-19, we have not reduced U.S. head count or cut back on R&D investments.

And this CARES Act benefit reflects reimbursements of these types of expenses for companies that did not lay off employees or take PPP loans. Product gross margin in the fourth quarter of fiscal 2021 was 67% compared to 63% in the prior year quarter.

Product gross margin adjusted for the benefit of the employee retention credit was 63% and consistent with the prior year. R&D expense, including the cost of clinical and regulatory activities was $10.7 million in the fourth quarter or 45% of revenue compared to $12.8 million or 57% of revenue in the year ago period.

R&D expense adjusted for the benefit of the employee retention credit was essentially flat with the prior year period and was 54% of revenue. The fourth quarter is the first period to include R&D expense resulting from our acquisition of Vetex.

The incremental expense associated with Vetex was offset by an expected decline in our TRANSCEND clinical trial costs. SG&A expense in the fourth quarter of fiscal 2021 was $7.9 million or 33% of revenue compared to $7.3 million or 32% of revenue in the year ago period.

SG&A expense adjusted for the benefit of the employee retention credit was $8.8 million a year-over-year increase of $1.5 million and equal to 37% of revenue driven by sales and marketing activities, including new hires to support the commercialization of our Sublime and Pounce products.

Our Medical Device business reported an operating loss of $800,000 in the fourth quarter, compared to an operating loss of $1.9 million in the year ago period. Adjusted for the benefit of the employee retention credit, the Medical Device business operating loss was $3.4 million.

The fourth quarter includes the addition of $1.1 million in operating expenses from the Vetex acquisition of which $570,000 is intangible asset amortization. Our IVD business reported operating income of $3.4 million in the fourth quarter of fiscal 2021, compared to $2.5 million in the prior year quarter.

IVD operating income adjusted for the benefit of the employee retention credit was $2.9 million a year-over-year increase of $430,000 and equal to 44% of revenue compared to 46% of revenue in the same prior year period. The fluctuation in operating margin was a result of lower gross profit due to a shift in revenue mix. Now turning to income taxes.

We recorded income tax benefit of $270,000 in the fourth quarter of fiscal 2021 compared to income tax expense of $870,000 in the prior year period. The current quarter’s tax benefit is a result of the pre-tax loss for the fourth quarter, including the contribution of Vetex expenses.

Both periods reflect the impact of taxable income for the full year in the U.S., non-tax benefited amortization and operating losses in Ireland. On a GAAP basis, we reported a loss per share of $0.02 in the fourth quarter of fiscal 2021, compared to a loss per share of $0.22 in the prior year quarter.

On a non-GAAP basis, we reported a loss per share of $0.10 in the fourth quarter versus a loss per share of $0.18 in the prior year quarter. Non-GAAP EPS excludes a tax affected benefit to EPS of $0.19 from the employee retention credit, as well as a $0.04 impact to EPS associated with the Vetex acquisition costs. Moving to the balance sheet.

We continue to have a solid cash position. In the fourth quarter, we began with $72 million of cash and investments and generated $890,000 of cash from operating activities. During the quarter, we paid $2.4 million for capital expenditures.

We funded the July 2nd acquisition of Vetex Medical with $30 million of cash on hand and $10 million from our $25 million line of credit. As of September 30, 2021, we had cash and investments totalling $41 million and the balance in our credit line was $10 million. Turning now to our outlook for 2022.

We expect fiscal year 2022 revenue to range from $97 million to $101 million. We expect revenue from our Sublime and Pounce platforms to range from $2 million to $2.5 million. Abbott SurVeil license fee revenue is expected to range from $4.5 million to $5 million.

This compares to $16 million in fiscal 2021, which included $11.3 million in revenue recognized on the $15 million clinical report milestone payment, which was received earlier during the year.

Our fiscal 2022 outlook excludes revenue associated with the achievement of the final SurVeil milestone payment upon FDA approval, which has been our practice with previous regulatory milestones. It also excludes SurVeil product sales and SurVeil profit sharing revenue.

The potential revenue associated with the final milestone payment from Abbott would be approximately $25 million. Also our guidance does not reflect any unfavorable COVID impacts. We expect fiscal 2022 diluted GAAP EPS in the range of a loss per share of $2.05 to a loss of $1.55.

We expect non-GAAP diluted EPS in the range of a loss per share of $1.75 to a loss of $1.25. Our guidance reflects an acceleration of investment to advance our value creation strategy, which includes commercialization of our Sublime and Pounce platforms. For the full year, SG&A is expected to range in the low to mid-40s as a percentage of revenue.

Full year R&D spend is expected to be approximately 60% of revenue as we support our ReVene validation efforts and expand our thrombectomy and radial access product pipelines.

With respect to income taxes, we expect the full year impact of income taxes to range from a tax benefit of $6.7 million at the low end of the guidance range to a $4.8 million benefit at the high end of the guidance range. Operator, this concludes our prepared remarks. We would now like to open the call to questions..

All right. Thank you. [Operator Instructions] We’ll go ahead and take our first question from Brooks O’Neil with Lake Street Capital Markets. Please go ahead..

Good afternoon – good morning, everyone. And thank you for that significant update on everything. As you guys know, I’ve kind of been watching the company for 40 years, but there’s a lot for me to unpack and all you provided for us this morning. I have a few questions.

This morning, I’m not trying to get you to criticize the United States FDA, but I’m hoping you could remind me.

I think there are competitors still on the market in the area in which SurVeil is targeted that have significantly more paclitaxel than does SurVeil and probably don’t have the level of clinical validation or documentation related to mortality over a period of years that they’re now asking you to provide.

Is that a reasonable understanding of the current environment in which the world is operating?.

Yes. Brooks and the FDA could verify this. But the goalpost has shifted and they have shifted because of their concerns of the significant public health interest for long-term mortality.

So that – we were aware of that even back in January when we were ready to submit and they did make it clear, they wanted long-term – I should say 3A – up to 3A mortality data on certain cohorts of patients. And so, it’s a waterfall chart. I mean, it’s really 3A’s from the time you enroll that patient.

So there’s nothing you can do to expedite that equivalent arrows left a long time in the future, we just have to wait for them to land. And so we submitted the first cohort and we are re-cutting the data and submitting additional long-term mortality data of an additional cohort of patients, meaning just more patients. That’s what I mean.

And so, while – we don’t feel unfair because of that. I mean, it’s because of the prevailing issues of paclitaxel. The agency also does have some other questions, which are not surprising on some of the chemistry manufacturing controls, some biocompatibility and nothing with human safety data, by the way.

I will say this as we have looked and what we intending to submit and have looked at the mortality compared to our control device, which was a Medtronic impact that we have – we have no questions or issues internally. The data is solid.

However, we have to follow the FDA’s process and specifically the process of the – what the data they require both clinical and nonclinical, something called a pre-submission process, which sometimes takes a long time. We’ve asked for expedited review, but typically it’s a 70 day cycle time to get that meeting.

And so we’re still in the process of seeing a expedite that to be 30 days. So that’s the nature of where we are and the process for it. But I just want to be clear, we don’t – it’s a new era. It’s not an unfamiliar era, it’s just something we have to deal with new devices of this site..

Right. I get that. I guess, to use your analogy, I just see it like the goalpost for the competitor has not moved an inch and the goalposts for you guys, I think understandably has moved.

And so you’ve got a kick from a much farther distance just in competing inferior products allowed to stay on the market, right?.

Sure. And I don’t know this for a fact, but I believe – I don’t know this, but I’ll give that qualify. But I believe the Boston Scientific Ranger device probably have to go through a similar review. But I don’t – as I said, I don’t know that for a fact. So it’s a recent vintage. The Boston Scientific the Ranger device..

Right. I know, not the market leader though. Anyway, let’s move on. So secondly, I’m curious obviously the clear conclusion from your commentary across the pipeline is right this minute, you’re not getting, they’re not seeing the value from the potential strategics. So you’re electing to go it alone.

Or do you feel competent that a, you have the capabilities to go it alone and be, that that’s likely to result in value maximization for the company from this extraordinary pipeline?.

We – and first of all, I wouldn’t want it to be felt that we have a value point from the strategics, because we’re not entering what I would call a deep negotiations where you know the value point.

That’s not the case here though, but as we look at what it takes the build really commercialization, there’s a significant value increase if you can demonstrate commercial value.

So remember in the past, it’s been, we’re trying to clinically, technically and regulatory de-risks the products, right? And here, we’re seeing a really huge return by going further and demonstrating that it has real commercial legs on it.

And some of this also came about as we were doing evaluations and physicians are saying, I’m quoting anecdotally here. So this has changed my practice. How can I order it? This happened to us a couple of years ago with our [indiscernible] and we had no way of continuing to use the device.

And once you’ve had that impact in the clinical site and they want to continue to use it as part of their practice. We told it’s quite important to be able to provide that. And as clearly, there’s anti-kickback that is low as against continuing to supply evaluation products, free of charge, so we started to sell them.

When you started to sell something, you need somebody to also manage that account. And if you have somebody to make sure you manage that customer’s account, you also have a field asset that can actually get more business. So this is very recently in the last, maybe six weeks. Some of it probably started in Q4.

But a lot of the onboarding or the hiring we do is actually in our Q1. We have just decided to hire a small eight team of sales people who have significant experience, so some of these people have been in thousands of venous thrombectomy cases, not tens.

So the idea then Brooks is, if you can demonstrate commercial viability in a small scale, keep in mind, the strategics also see that the future is not as already been created as just not equally distributed.

So when they see the commercial value versus them trying to build a commercial value, the value back to us and our shareholders is significantly more. I’ve had this discussion with very high level executives at interested strategics, and then they also get it.

The multiple and return is significantly higher than just we got an approval or clearance now it’s yours, what you’re willing to pay for it..

Absolutely makes total sense. And again, I appreciate all the color. I don’t think I heard you say anything about how Sundance is coming along..

Yes. So Sundance in fact at 8 or 9 o’clock on Monday night I sat through with the clinical team the review – the case review with the principal investigators and steering committees, professor Varcoe in Sydney and professor Holden in New Zealand, hence the late night, and then Dr. Schneider in Honolulu.

And so they were going through the case reviews both safety and efficacy. So I believe from what I understand from our clinical team, we’ll wrap up that clinical study report sometime in mid December, but I just sat through it, just to listen for myself..

Sure. Absolutely. Well, congratulations on all the progress. I can’t wait for the future..

Thanks, Brooks..

Thank you, Brooks..

[Operator Instructions] We’ll go ahead and take our next question from Mike Matson with Needham and Company..

Yes. Good morning. Thanks for taking my questions. So I want to ask about this change in direction here of building a sales force, selling the products directly to the customers. It’s a pretty big change from this whole product solution strategy where you were going to partner and have the bigger company distribute the products.

So I think I understand where you’re coming from, but I guess, the cynical view would be like, hey, you’re not able to find a company is willing to pay for these things or want to share in the economics with you. And we’ve seen in thrombectomy area in particular, as you mentioned a couple acquisitions with Abbott buying Loch and Boston buying Devoro.

So, I guess, maybe just talk more about this change in direction here in terms of....

Yes. Thanks Mike. First of all, Mike, this change in direction is not because of strategics and the value we’re seeing. We’re actually holding them off. We’re actually telling them repeatedly, we’re not interested. I mean, there is interest – there’s even interest in our recent Vetex’s acquisition.

And as you brought up the strategic acquisition of these other mechanical thrombectomy platforms, which by the way are not that far ahead of us. We’re in the $300 plus million, at least the one that’s publicly known, right, $400 million. And we acquired Vetex for $39 million upfront and the $7 million potential earnouts.

The Vetex product has both the U.S. FDA clearance and a CE mark and keep that in mind. And so when we look at that device, I mean, it was jokingly told we can flip that acquisition and make a couple hundred million. We’re not interested in flipping it or under-serving our shareholders by taking crumbs.

And when I say crumbs, crumbs might be significant in the past, but these portfolio devices, Sublime, and both Pounce arterial and the ReVene thrombectomy system, their value, and this is what I want to get across. Not with the tens of millions. There were hundreds of millions.

And so if we choose to sign a deal in the pharma category we’re leaving a lot on the table. And so that’s – it’s not a change in direction to say, we’re going to compete with our customers. It’s a change in direction to say, how do we get the deserved value for shareholders of what I consider the best products in this category.

And so we’re inside seeing the clinical evaluations and this is not from friends and family. These are from doctors in Sioux Falls, South Dakota, who would pick up our device before they would pick up another thrombectomy device.

And so as we see that, we believe it’s important to say, get this popcorn stand going, serve the customers who actually are asking us to buy it. We were trying to sell it to them. They’re saying, you’ve changed my practice, we need to buy this, you need to continue to use this product in our practice.

And so by supporting this product continuing to use, not letting the product go cold, hiring a very small – as I said, best-in-class sales team. We think that’s worth an investment versus a wholesale change in strategy.

So someday when we have 50 to 100 accounts that are continuing to use these devices as they every day device that will mean significant value for our shareholders and also potentially put strategics on the line..

All right, I guess, but – so is the end game then spoke to, ultimately sign some kind of a deal with a bigger company to distribute the products.

And I guess, how does that sit with the salespeople? I mean, if they’re being called to sell this product for six months or 12 months or whatever, and then it’s going to get taken away from them at some point.

I mean, how is that going to work?.

So again, we’re starting with a very small sales team and we are taking one step at a time into that future. We’re not – I don’t want to suggest that we’re going to flip this in six months time and get money for it.

I think as we continue to see how these devices play out in the market, rather than hiring 100 sales people upfront and saying, you’re plunging into the deep end, that’s not Tim and my style, we’ll grow as we go. So as we see how we perform with the sales of these products, we reserve the right to keep going.

If the success breeds success, we can – in terms of our investment, continue to not get too far ahead of ourselves. So you don’t hire a bunch of sales people and completely blow up the P&L. But you hire sufficient to demonstrate it. And as you see how that’s going, you can hire more to continue to fulfill that need.

And I think that’s a very disciplined approach. What I will say though is, in any part of the company, any part of Surmodics and the divisions, if there’s strategic interests and the value significant for our shareholders followership we will certainly pick up the phone..

Yes. Okay. And then, question for Tim. So the revenue guidance, and I understand you’re excluding the milestone, which makes sense. But it’s really not up from where you ended 2021. But I understand 2021 had some kind of one-time stuff in there too.

So, can you help us with the math in terms of like, what’s a true apples to apples comparison to the guidance, the revenue range you’ve given for 2022 like how much growth does that sort of imply. Is there a way to even do that math or....

Yes, absolutely. Mike, it’s a really great question. Thank you for asking that. And I think I’ll just highlight my comments with regard to the guidance reflects SurVeil revenue of about $4.5 million to $5 million for the year. Remember in 2021, we generated $16 million.

So if you compare our guidance, we’re talking a $97 million to $101 million compared to $105 million, you can basically, if you want to normalize for SurVeil, you could back out $11 million from the $105 million. And it will give you a sense that you’re right around $90-ish million.

And so in essence, we’re growing mid single digits on the Diagnostic and Coatings business for the most part, plus we introduced about $2 million to $2.5 million of revenue associated with a Pounce and Sublime. So it’s really looking like solid growth in fiscal 2021 on the legacy businesses.

And just for those of you who are modeling, I’ll give you a little bit more insight. I anticipate that every quarter of fiscal 2022, we will see year-on-year revenue growth with the exception of Q2, which is a period I’ll remind folks when we receive the written clinical report milestone payment.

And if you normalize for that, we’ll see a modest growth a real slim growth in Q2. So there will be growth in every quarter that’s the expectation. Hopefully that helps with the question and happy to go into a little bit more detail if you’d like..

Yes. And Mike just getting back to premise. I think the difference with Surmodics is we’ve sort of undressing ourselves in as a public company. And if you look at the companies that have significant valuations, they all started at a place similar to this. It’s just they didn’t do it as a public company.

And so I just want to remind everybody, if you want to create significant value in terms of billions of dollars of market cap. At some point, you have to think through how to get there. Ideally you can do it as a private company, and then when you spring loaded the pump, then you go public.

But we’re doing it in a very disciplined fashion as a public enterprise where we’re sharing publicly more than clearly would share public. So I would keep that in mind, in terms of the significant ramp in shareholder value that’s possible because of this..

Yes. Okay. And then, just on the – back to the thrombectomy product so – or any of them for that matter. But how do you – how would you capture the value? I mean, short of just selling it, which I don’t think you would do.

I mean, selling the asset or the business product would you expect some more – are you hoping for something more like the Abbott SurVeil agreement where you just get more of a lump sum upfront just to get access to the product and then ongoing share revenue in profits?.

That’s a good question. There’s a whole gamut of how we can extract the value. I think for us as a public company, the issue is you want ongoing commercial revenue streams.

The down strokes are great, and they replenish our balanced street, but any type of thing we do would have to have significant ongoing revenue streams, including our own revenue streams from our own direct sales team. So that’s a clear thing.

But the headline numbers, however, the revenue streams come through, again, we’re not seeing – we’re trying to raise our shareholders sites here. We’re not seeing in the tens of millions.

Abbott was good that we have received almost $61 million from that so far, clearly the PMA program that consumes a lot, even as it’s bringing in a lot and being self-funding. But we’re talking about value above that type of value for our shareholders. So the DCB, we love that deal and it’s significant.

But thrombectomy and the radial access platforms we believe at least as significant and I don’t say that lightly..

Yes. Okay. Got it. Thanks..

All right. We can go ahead and take our next question from Jim Sidoti with Sidoti & Company..

Hi, good morning. And thanks for taking the questions. You guys have said a lot, I just want to be clear on a couple of things. First, even though that the additional data requested, do you still think there's the opportunity to win that FDA approval for SurVeil in fiscal 2022.

Is that correct?.

I believe there is. Yes. The issue with agency and I say this as a critique, they have a process and from a sponsor side, it does feel painfully slow, in terms of turnaround time, but that is the process.

When you submit all of this, you get one hour for the meeting to cover everything and nothing by the time, you’ve introductions back and forth 50 minutes. So you really cannot do the arm wrestling on the data. And what specifically they're looking for, you're really covering higher ground.

So the meetings to cover the actual data are the ones that you have to get into the process and the – you can either answer it yourself and take a risk and say, well, this is what we think, or the agency has encouraged us to use this pre-submission process, which unfortunately has its own cadence.

So that – my concerns are more of a process time than data. And keep in mind, as a sponsor, you know much more what your technology and the clinical data than the agency does. So it's, how do you present and relate that I’m not concerned with that. I'm actually concerned with process time..

Okay.

And Tim, you indicated that if the approval does come in fiscal 2022, that would add about $25 million to the top line, what would the impact of that approval beyond on EPS or in your case a loss per share?.

Yes. Thank you for the question. Clearly, it will depend on the tax rate and all of that, but assuming a tax rate of about 21%, we'd probably be looking around $1.40..

Okay. And then with regards to the salespeople you hired, I assume it's a handful at first. Could potentially those sales people move to other products, assuming that you signed a distribution deal for the product they sell. And right now you have a fairly full pipeline.

Could you move those salespeople off of product A and move it to product B, should you sign a deal with one of the major distributors?.

Yes. One of the things I'll say is, the team that we have built here have spent decades in the direct business model. They have spent literally decades in the cath lab and representing these products.

So their interest in coming to us, right, I don't know if you know this, but it's a very competitive environment to hire sales people, all of the growing mid-cap companies that have high valuations. It's really a competition out there for sales people. The fact that we can in such short order get, I call them the best of the best.

And in a sales model, we don't compromise. We get the best of the best was because of the significant potential base, so in any one of these products.

So first thing to be clear is I would say those people will be well taken care of whatever the value creation activities, they will be well-rewarded, not exploited and will have a great career here at Surmodics. The second thing though, is as we look at that, we have a very strong pipeline.

I don't want to give too much shading on our pulmonary embolism or the filling out of the pipeline in our Sublime platforms and even where we are already going into Gen 2 of the Vetex device, but the pipeline is significant in terms of what we have.

So we're not a one leg, it's two, depending on just a SurVeil or just a Sublime or just Pounce arterial or just Pounce venous, we'll have multiple legs on this tool, and that's exciting..

And Jim, it's Tim. Let me just give you a few more things to consider as well, as Gary has highlighted with the addition of the reps, these are very talented individuals who have a long history of success. There's a reason why they joined the Surmodics team. And you can imagine it's the products, right. They're going to do everything they can.

They're excited, they're hungry. I've spent some time with them here recently.

They're not going to give us the opportunity to find a partner because they're going to make hay with the technologies that we have, but it's important I think for folks on the call to appreciate that Gary and I view this as synergistic, meaning we're not looking at having to build two sales forces for Sublime and Pounce.

We believe we can leverage the same sales force for both technologies and products. So, that gives you a little bit more perspective than color. I do think there's a fair number of questions rightfully about our transformation and the change that we're enacting.

I think it's probably helpful for folks to realize and appreciate that this is a very thoughtful decision, and clearly we do appreciate that growth valuation multiples are significant. We also – you have to understand that over the last year plus we've acquired a lot of learnings from going out and doing product clinical evaluations.

We've had to build the infrastructure to be able to support evaluations. We've had to do with onesy, twosy. It's taken time. There's a lot of synergies that you capture by putting more energy and effort into this, and you can move faster and get to market faster.

But there's a lot more control that we have, launch time and control, the amount of focus and attention that we can control and provide to the products versus somebody else. There is influence on future product improvements that only we can collect by being close to the physicians and understanding the use of our technologies.

There was just, like I said, a lot of synergies from what we've built, and it's a very thoughtful decision, and we've got a sales force here, a small sales force that is Gary likes to say, he thinks they're going to punch their weight..

And Tim, I'll add to that. The leaders, we have hired as well. People who have done this for decades successfully at top companies. So it's not Tim and Gary trying to build a sales force, sales leadership, and marketing leadership people who have known nothing else, about this business model.

So it's not – while it may seem odd for Surmodics is not for our team, it's actually the water they've always swam in for several decades and are very excited about..

And then the last one for me, do you think you have enough cash on hand to support the initiative right now, or at some point, do you think you're going to have to go back and generate – raise some more capital?.

Yes. Great question. Absolutely. Jim, I'll just provide a little bit more color on this question. It's one that I was anticipating rightfully. We ended fiscal 2021 with about $40 million, $41 million of cash on the balance sheet. Clearly you can tell by the guidance here that we will be utilizing cash on the balance sheet.

Gary call it as dynamic 204 growth and that's what we'll be doing. But if you think about kind of the guidance range, we could be looking at cash use. We probably could be looking at $15 million to about $24 million of cash as we exit fiscal 2022. I think we'll probably be closer to $20 million. This does not reflect the milestone payment from Abbott.

I don't – from what I see today and how we're thinking about things, it's always difficult to know kind of what the liquidity will look like going into 2023 and beyond. I think Gary's view of will grow as we go or go as we grow.

We'll be very mindful about liquidity and we'll probably have more to say on that in the future, but right now I don't really see any challenges for 2022, and I'm not seeing them right now for 2023 either..

So it sounds like if you do get that milestone payment, you're going to end fiscal 2022 right around where you started?.

I think we'd probably end higher..

Right. Okay..

It'd be about $10 million higher..

Okay. All right. Thank you..

You're welcome..

All right, we'll go ahead and take our next question from Mike Petusky with Barrington Research..

Hey, good morning.

So just on – and you may have mentioned this, I missed it, but on the Sublime and Pounce, when do you expect that revenue to start?.

As I said, literally in the past couple of weeks, we have hired people and I think we on-boarded them just a couple – a week ago or two weeks ago maybe, they're all here for the training and the product training. So as the first premise is to support the accounts that are ordering and make sure we have a continuous flow of product.

There's a whole cascade of things here. So from all manufacturing and supply chain systems. We can't have account go live as a commercial customer and not have the manufacturing product to supply them.

So we're being very methodical, I think really we'll see Q2 – we'll have Sublime is ahead of Pounce right now because internally we have these plans where we don't like to ship any fruit. That's totally green. So we're still conducting evaluations with Pounce, but if the early evaluators want to order it, of course we'll facilitate that.

I think it will shift into full commercial gear with the fewer Pounce, maybe in the second quarter, late in the second quarter – third quarter, Tim is giving me the signal here, but Sublime, the product 0.014 and the guide sheath, those are ready to roll. So we'll start commercializing those now..

I'll provide a little more color for you as well, Mike, and for others, we have maybe about two dozen or so accounts that have been evaluating our Sublime products as well as Pounce.

And as Gary rightfully mentioned, those will be the accounts that we're initially engaging with in terms of stocking and selling product to, there is a process of signing agreements and contracts with accounts. It takes some time.

And certainly, there's a little bit of a difference in terms of the process with regard to an office based lab versus a hospital setting. Hospital settings, you're going usually through a value analysis committee, which can take months to a quarter or longer.

So where we've been guiding folks to think about revenue generation, it will become more meaningful on Q3 and Q4. We have some revenue that's reflected already in the Q4 financial statements. It's very de minimis but we're seeing more and more POs entails today.

But again, these are very modest as we initiate our efforts and we do have pretty strong expectations here for Q3 and Q4..

Yes. And we do – maybe I said this earlier, we're not having to build infrastructure and shipping and receiving and billing and compliance programs. All those things already exist. So it's not like we're doing post with notes that try to support these accounts.

We do have fully developed backend systems that are staffed by people who grew up in these businesses and the front end system as well. So it's not like we're a mom-and-pop shop trying to sell. We actually have these developed already..

Got you. So Gary, you've commented on this a few different ways, but I just want to see if I can dial it in even further. And I understand I'm asking a little bit to look into a crystal ball, but based on the questions from FDA, the issues that you're dealing with and sort of the bigger macro backdrop for paclitaxel.

Do you think it's more probable than not that you get regulatory clearance this year? And I understand this is speculation on your part, and you’ll characterize it that way, but I'm just curious, do you think it's more probable than not that's something happens 12 month?.

Yes. And of course, I again speak for the FDA, but from my viewpoint, this is an absolutely approvable product. I'll give you one little more insight, just a little bit. One of the issues that's come up is the sterilization those for commercial product versus when you do a clinical trial, it's like pizza boxes going through the sterilize.

When you do a commercial product, it's a big shipping cost, right. And so one has a slightly different dose, things of that nature and how they affect the biocompatibility, the manufacturing, the controls, the clinical data has not so far been in question. And we run a very tight trial. We completed our pre-authorization inspection.

The FDA was onsite here and [indiscernible] for six days, recently it’s called the PAI. And I don't notice for a fact, but the FDA wouldn't be going through the trouble of having auditor's go out to clinical sites to the company and the manufacturing sites.

If this was not an approvable product, that's my assumption, but I'll just say we had not a single finding in our operational systems and manufacturing systems under a very thorough pre-authorization inspection that went on for, I believe it was six days onsite. So that's why I'm confident.

The thing is – you all know, Tim and I are quite conservative. We don't like to count the chickens before they hatch. And so therefore guidance, we take it out of guidance. When we look at cash management, we even put the blinders on and take that out of cash management. So when good things happen, it's always an upswing versus a surprise.

And so for me, it's really when. I'd like to get it in the second quarter, but given that there are 90 days left on the clock and the clock could stop at any time, right.

If they're 90 days left on the clock and we don't get these meetings until early in the second quarter, and then you have to potentially show the data or do whatever you have to turn the crank. I can't see a way where we can get it with 90 days left on the clock in the second quarter. And so that's a painful issue for me. That's the issue..

Okay. All right. And just going back to the shift in strategy and how best to I guess capture the value of Sublime and thrombectomy platforms.

When you think about sort of proving these products commercially, I mean, is there a level of revenues or on a – sort of on a timeline where you say, hey, these products in these categories are sort of proven commercially, I mean, is there a sort of targets there in general that would be deemed by potential partners as, yes, you've proven that..

Yes. And having done this many years in the past as well, you have to be careful with what I call slashing the pan revenue that comes early, the early adopters. And we're very methodical about that. Early adopters will adopt and buy very quickly.

You really haven't created significant value until you get into the mainstream market, the early majority and the late majority. And these are people who are a little more skeptical, but when they are convinced, it really is repeat business.

And so when we look at it, it's not just showing we have six early adopters who would early adopt anything, right. It's really showing the big accounts and how the growth. We believe rate of revenue growth is significant. And we believe that is clearly not in the teens. We believe that's in the 20%, 30% and 40% rate of growth.

And so if you think of a territory as a little homogenous parts of the U.S. map and that territory can grow that quickly, that really imputes the value for us. I think the other thing we're seeing with these devices and it’s a hallmark of Surmodics is the utter simplicity for very complex procedures.

So we have had physicians in Sioux Falls, South Dakota that will never pick up one of the high-end devices, you hear quite a lot about, never, okay. Pick up this device and treat a 30 centimeter clot in a patients. And so when we think of Duluth, Minnesota; Billings, Montana; Mobile, Alabama, right.

What are these physicians using, there's a lot of press being given to academic institutions and where there's a rep in every case, every single time, 50th case, or perhaps our devices we believe not only have great clinical outcomes for the patient, but they are almost ridiculously easy to use.

And now you can treat a patient with acute limb ischemia with this tracking them to a major institution and using a $12,000 device. So that gets us really excited in what I call democratizing access to healthcare, where the person in Sioux Falls can pick it up and treat that patient versus sending in an ambulance transferred to Twin Cities.

And so but keep in mind, the rate of growth is a significant part of it for us as well. These are premium priced products..

Sure. Got you. And last one for Tim. Tim, given the relative importance of Sublime and Pounce, might there be a point, where you guys would start sort of disclosing quarterly revenue either in the way you report or just sort of verbally on conference calls, that sort of thing.

I mean, where you essentially say, hey, look, this is what Sublime business, what Pounce product did, how are you going to sort of talk about that or disclose that going forward?.

Yes. So we did create expectations for the quarter or for the year, excuse me, Mike, we will be providing updates as we go through the year. And Gary and I both believe we're making significant investments to support the value creation thesis here. And that value creation story is really driven by these three platforms.

So we will be providing more context around how we think about guidance as well as the actual performance as we go through the year and beyond..

When it gets to a material level, could it possibly be it’s own categories or category?.

I would absolutely think that's probably more likely than not..

Got it. All right. Thanks guys..

Thank you, Mike..

All right. It appears there are no further questions at this time. I'd like to turn the conference back to speakers for any additional or closing remarks..

Thank you. I hope you can hear the excitement about where we're heading in fiscal 2022. I want to close by expressing our appreciation to our team for the incredible dedication and support this past year and going through all future fiscal 2022. Stay safe everyone until next time. Thank you..

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