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00:08 Good day, and welcome to the Surmodics First Quarter Fiscal 2022 Earnings Conference Call. Today's conference is being recorded. 00:15 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..

00:25 Thank you, Casey. Good morning and welcome to Surmodics' fiscal 2022 first quarter earnings call. Before we begin, I would like to remind you that during this call, we will make forward-looking statements.

These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Surmodics' future financial and operating results or other statements that are not historical facts.

00:52 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. 01:21 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.

01:43 I will now turn the call over to Gary Maharaj.

Gary?.

01:47 Thank you, Tim. Good morning and thank you for joining us for our first quarter earnings call. We're pleased with our performance this quarter as it relates to both our financial and strategic objectives in an environment of continuing instability. 02:02 Let's begin with an update on the impact of COVID on our business.

During the past two years, the pandemic has taught us how to effectively manage uncertainty and disruptions. We continue to put these learnings to use to mitigate risks to our business. The pandemic has placed continued pressures on the global healthcare system as various disruptions emerge.

02:24 The Omicron Variant has resulted in elective procedure delays, exacerbated staffing shortages among healthcare providers, and encouraged patients to safety first on some of the procedures. In addition, limited sales rep access to Cath labs has also resulted in hospitals postponing value analysis committee meetings.

02:43 In addition, staffing shortages have impacted our suppliers, regulatory agencies and even Surmodics as our employee absence season has recently spiked above normal levels due to the virus, both in the U.S. and in Ireland.

Despite these recent and what we believe to be transient headwinds, we remain optimistic about our ability to deliver on our fiscal 2022, financial and strategic objectives. As a result, we are affirming our fiscal 2022 financial guidance, which I remind you, does not include any revenue associated with the $30 million SurVeil PMA milestone payment.

03:18 Moving on to a summary of our first quarter performance, which was in line with our expectations. Total revenue for the quarter increased 3% to $23 million in the first quarter of fiscal ‘22 compared to $22.3 million in the prior year quarter on solid performance from both our Medical Device and Vitro Diagnostics businesses.

We reported GAAP diluted loss per share of negative $0.20 and non-GAAP diluted loss per share of $0.13. Tim will provide additional detail on our quarterly results later in today's call. 03:57 During our first quarter, we continued to make progress on our key strategic objectives for the year.

And as a reminder, these are first, to achieve the PMA for SurVeil and support Abbott's commercialization efforts. Second, to become the first-line treatment for patients with our Sublime Radial platform and Pounce Arterial and venous thrombectomy platform.

Third, to drive topline revenue growth and optimize cash flow from our IVD and Medical Device coatings offerings. 04:29 Starting with SurVeil. As we discussed on last quarter's call, the FDA has asked for additional data technically called A list of deficiencies on SurVeil to support its premarket approval.

Many of these are specifically relate to preclinical data, including the impact of different sterilization doses on materials used in the final product. We have been quite busy preparing our responses to the FDA and aim to finish these before the end of our second quarter.

04:59 For several of our responses, the FDA has suggested securing a pre-submission meeting to achieve alignment on the response. While we have requested an accelerated turnaround time for scheduling these meetings, we have been informed that it will most probably take the full 10 weeks to secure the meeting.

I believe, but do not know for a fact that the agency has capacity constraints as they have marshal resources to address many of the ongoing public health issues with regard to the COVID pandemic. 05:31 On this normalized timeline, the meeting to align with the agency on data requests for the final submission is now expected at the end of April.

Regarding our clinical data from the TRANSCEND trial, we have recently completed the required two and three-year mortality of analysis of SurVeil, which successfully demonstrated no difference in mortality as compared to the control device. This further demonstrates the long-term safety of our device.

These critical analysis will be part of our PMA submission. 06:05 Our goal remains to secure the PME in fiscal ‘22 and we are confident in our data that we will receive the PMA approval.

However, given that the agency still has 90 days to respond after we submit the final responses of additional data, we believe it is more likely that this approval will occur during the second half of the calendar year 2022.

I remind you that our fiscal 2022 guidance does not include any revenue associated with the $30 million milestone payment for achieving the SurVeil FDA PMA approval. 06:39 Moving to Sundance, our below-the-knee sirolimus-coated balloon.

During the fourth quarter of fiscal ‘21, we completed the six months data follow-up visits in conjunction with our SWING first-in-human clinical trial.

Although, we have previously communicated, we expect to complete and share these data with Abbott during our first quarter, the Physician Steering Committee for the trial has advised us to conduct some additional data analysis that provide a more comprehensive view of the product performance in different categories of lesions in the enrolled subjects.

07:15 We have agreed to perform these analysis but have prioritized our clinical resources at this point to towards SurVeil and its PMA submission. Our plan is to finalize the clinical report with our clinical investigators and share it with Abbott late in our second quarter.

Our second key strategic objective is to demonstrate the commercial viability of our Sublime Radial Platform and our Pounce arterial and venous thrombectomy platforms. We believe that there are several drivers necessary for us to deliver on this commercialization objective, including the distinctive attributes and advantages of these platforms.

07:51 I'll spend some time today just to reiterate these unique competitive advantages to help our investors share in my excitement about the future of these products. Our Sublime Radial Access portfolio consists of the Sublime Radial Access Guide Sheath to 0.014 PTA balloon catheter and 0.018 PTA balloon catheter.

I'm pleased to share that we have successfully completed our formal clinical evaluations and have moved into an early commercial phase with each of these products.

More than 150 Sublime platforms devices have been evaluated in approximately 40 accounts through the United States, with nearly 20 of those accounts actually having placed first-time orders for at least one of these products.

08:36 With the ramp-up of our sales team, we now have representation in each of these evaluation site areas for both the Sublime radial access platform and the Pounce arterial thrombectomy platform. This has positioned us to support the commercial use following these product evaluations.

Additionally, our sales pipeline is growing with more accounts presenting or preparing to present Sublime to their internal hospital value analysis committees for purchasing approval.

09:06 As our case experiences broadened over this past quarter, we have continued to be encouraged by the positive feedback we are receiving from physicians regarding the unique lengths, excellent deliverability, and overall performance offered by these dedicated radial devices.

As you know, the absence of appropriately sized and effective tools has been a limiting factor for the growth of radial access for peripheral interventions and our customers are genuinely excited to have these products facilitate treatment of above and below-the-knee disease by a transradial approach.

09:41 Along with the uptake, we have seen in clinical usage, we are also encouraged by the increasing activity we have seen for our products on social media as well as recent podium mentions at conferences, such as VEES and the recent ISET meeting.

In addition to the success we are having with radial access a growing number of physicians have also started using Sublime devices for crossing challenging below-the-knee lesions using several femoral and pedal access approaches with our devices.

Based on this successful clinical experience, we have broadened our marketing campaign to drive awareness for Sublime as any access device to capitalize on this larger market opportunity. 10:21 Next regarding our Pounce arterial thrombectomy platform.

The Pounce device is an intuitive and easy to use off the shelf standalone device that provides physicians with the ability to treat a wide variety of cases.

These cases can range from relatively simple acute clot extraction to the most complex procedures dealing with mixed morphology that includes both acute and chronic arterial clots, all without the need for aspiration nor additional capital equipment.

10:54 In fact Pounce has been used to complete cases involving organized clots where other devices were initially used, but could not fully restore blood flow to the limb. I'm pleased to report that approximately 40 procedures have been performed in the United States.

Of our six formerly valuation sites, three of these large hospital assist systems have officially cleared the value analysis committee approval process and have placed their first commercial order. 11:22 Looking at our overall pipeline, the Pounce arterial thrombectomy device is in the value analysis committee process in more than 15 hospitals.

This is an encouraging sign that physicians believe in the merits of this device and are willing to support the committee process to ultimately get Pounce into their Cath labs.

11:41 In contrast to the Sublime products which can be used in either the hospital or office-based Cath lab setting, the nature of acute limb ischemia generally requires thrombectomy in the hospital system, which does extend the sales cycle relative to office-based sites of care.

We continue to be extremely pleased with the feedback we are receiving from evaluating physicians which consistently indicates that the Pounce device is effective in extracting a variety of clot morphology and restoring critical blood flow to patients’ extremities without the need for aspiration or capital equipment and it's often now being referred to as their first line treatment device.

12:25 Our Pounce venous thrombectomy platform provides physicians with the ability to safely separate large and mixed morphology clots from the vein wall and rapidly extract it without removing the device from the patient.

We continue to target a Q2 completion of our Pounce venous process and manufacturing validation efforts followed in a quickly by initial clinical product evaluations. 12:49 To put it simply, we are thrilled with the physician feedback so far on the performance of our Sublime devices and our Pounce arterial devices.

We are confident that these products possess the critical driver to ensure commercial success, including differentiation from other devices in the market and an excellent value proposition to hospitals and interventionals.

13:13 Under the hood, we have assembled a seasoned commercial team with a stellar track record measured in multiple decades, a 5G experience in medical devices. This covers the gamut from product marketing, internal commercial operations to field sales and clinical acquisition at all high sites of care.

13:34 Since our November earnings call, we have added eight experienced field sales team members bringing our number total of sales professionals to 60. To a large extent, our fiscal ‘22 is about building our commercialization pipeline.

Those activities that lead to customer purchases and is an essential catalyst for driving our value-creating goal of delivering consistent double-digit revenue growth beginning in fiscal 2023.

14:00 Securing new accounts is a multi-step process that includes product valuations for physician acceptance followed by consideration approval from a hospital or clinic's value analysis committee.

Although, we are early in these processes, I am pleased with the initial process to build this pipeline despite the challenges presented by the COVID pandemic, I discussed earlier. We are the healthiest of an early pipeline of accounts in various steps of the process.

14:26 As I mentioned during November’s call, we expect to see modest but meaningful and growing revenue associated with the adoption, utilization and sales of these products beginning in our third fiscal quarter.

We have already received initial orders from a handful of accounts, and while immaterial to our first quarter financial results demonstrates initial steps on this journey to create meaningful value from these platforms. 14:53 Turning to our third strategic objective, driving growth in our IVD and medical device businesses.

While our IVD business delivered somewhat flat revenue performance in the first quarters, the numbers don't tell the complete story. Our chemical component offerings delivered double-digit growth over the year-ago period. And I expect our IVD business will return to growth beginning in the second quarter.

15:18 Our Medical Device business has provided solid mid-single digit revenue growth this quarter, driven by strong coatings and product sales. We have high expectations for the company this year and we believe that delivering our long-term goal start with executing our fiscal 2022 strategic objectives.

This year's focus is to put ourselves in a position to provide this consistent and robust revenue growth. We're pleased with the progress during our first quarter and look forward to sharing progress on our value-creating initiatives throughout the year.

15:51 I'll now turn the call over to Tim to provide more details on our first quarter of fiscal ‘22 results.

Tim?.

15:57 Thank you, Gary. During today's call, I will provide an overview of our first quarter operating performance as well as an update on our fiscal 2022 financial guidance and liquidity position. I think it is helpful to begin with a summary of the current macro environment and what we are experiencing. 16:15 Beginning with Surmodics.

While, we were able to avoid shutting down any of our manufacturing and production activities, we recently experienced the highest level of employee absenteeism since the beginning of the pandemic, approximately one in 10 of our employees reported a COVID infection during the month of January.

16:35 At the same time, many hospitals have enacted changes as a result of the recent increase in COVID cases, which include limited or restricted access to sales professionals, including our own as well as the postponement of value analysis committee meetings.

16:52 In addition, the surge in COVID hospitalizations and staffing shortages has resulted in many hospitals deferring elective procedures. We estimate that more than half of our royalty revenues associated with devices utilized in elective or moderately urgent endovascular procedures, the procedures that are often deferred.

17:11 Finally, let me provide some perspective on supply chain pressures. Our operations team has done an excellent job of managing our supply chain to date and like other companies, we are dealing with an elevated risk of raw material supply shortages.

Despite these headwinds, we continue to manage what we can control, including our operating expenses that support our strategic initiatives. 17:34 Turning to revenue. For the first quarter of fiscal 2022, revenue grew 3% to $23 million, compared to $22.3 million in the prior-year quarter.

Our Medical Device business revenue grew 4% year-over-year to $16.9 million, driven by strong product sales, which offset lower than expected royalty revenue. 17:56 Our In Vitro Diagnostics business revenue was essentially flat at $6.1 million and faced a difficult microarray slide revenue comparison.

Nevertheless, the IVD business experienced solid growth in stabilization and colorimetric substrate products, offset by an expected decline in the slide product revenue. 18:19 Our first quarter royalty and license fee revenue totaled $8.1 million, down $1.2 million from the same prior-year period.

Royalty revenue declined 13% to $6.9 million in the first quarter compared to a more difficult comparison of $7.9 million in the prior year quarter. There are two main factors impacting our current royalty performance, both of which we believe to be transitory.

18:42 First, let me remind you that we are required to estimate our royalty revenue for each period. For example, our first quarter fiscal 2022 royalty revenue is an estimate of the royalty we will earn on our customer sales of devices utilizing our coatings during the October to December 2021 period.

19:03 Our year-ago royalty revenue included a favorable true-up of approximately 800,000, as a result of stronger than anticipated customer reported royalties relative to our estimate, whereas a current period customer reported royalties were consistent with our estimate, this is the first factor.

19:23 The second factor pertains to our royalty revenue estimate for Q1 fiscal 2022. We expect that many of the macro environmental forces that are described earlier had an unfavorable impact on procedures and on our royalty revenue during the period ending December 2021.

While the current environment is challenging forecast, we expect that our royalty revenue should return to growth over the remainder of the year as the current COVID wave subsides. 19:52 License fee revenue under the Abbott agreement totaled $1.2 million in the first quarter of fiscal 2022 and was down slightly compared to the prior year quarter.

Product revenue increased 22% to $12.3 million in the first quarter compared to $10.1 million in the prior-year quarter. In our Medical Device business product revenue grew 49% or $2.2 million to $6.08 million on increased demand for both the coating reagents and medical devices, both of which exceeded our expectations.

20:25 We delivered record coating reagent revenue performance during the quarter. Additionally, our Medical Device product revenue narrowly missed delivering record revenue and benefited from increased sales of our partnered products, including those to Medtronic and Cook, as well as from our initial Pounce and Sublime commercialization efforts.

20:45 We continue to expect to deliver double-digit medical device product revenue growth throughout the remainder of the year, driven in part by our Pounce and Sublime commercialization efforts later in the year.

Our In Vitro Diagnostics business reported product revenue of $5.6 million and was essentially flat compared to the same prior-year period. We delivered another quarter of solid year-over-year growth in sales of our protein stabilization and colorimetric substrate products.

This was offset by lower revenue from our slide products compared to the prior-year period revenue, which was a record. We expect IVD product revenue growth in the low to mid-single digits for the full year.

21:25 R&D services revenue of $2.6 million was down 11% or $300,000 compared to the same prior year period, driven by lower customer demand for Medical Device coating services due in part to supply chain challenges related to customer supply components. R&D services revenue in our IVD business was down slightly compared to the year ago period.

21:51 Product gross margin in the first quarter of fiscal 2022 was 64% compared to 63% in the prior year quarter. As both our Medical Device and IVD businesses delivered improved product gross margins from the year ago period. Favorable impacts from leverage on volume were partially offset by unfavorable impacts from product mix.

22:14 R&D expense including cost of clinical and regulatory activities was $11.7 million in the first quarter, or 51% of revenue compared to $10.9 million or 49% of revenue in the year-ago period.

Driving this increase was the investment to support our Pounce venous thrombectomy device commercial readiness activities, including our process and manufacturing validation activities.

22:38 While our team continues as always to exercise disciplined expense management, we expect that our quarterly R&D spend will increase several million from Q1 levels as we continue to accelerate our Pounce venous commercial readiness activities as well as our Pounce and Sublime product development initiatives over the remainder of the year.

22:59 SG&A expense in the first quarter of fiscal 2022 was $9.2 million or 40% of revenue compared to $7 million or 32% of revenue in the year ago period. The increase in SG&A expens is related to sales and marketing activities, including new hires to support the commercialization of our Sublime and Pounce products.

As a reminder, for the full year, SG&A is expected to range in the mid-40s as a percentage of revenue. 23:27 Our Medical Device business reported an operating loss of $3.8 million in the first quarter compared to an operating loss of $590,000 in the year-ago period.

The first quarter includes the addition of $1.1 million in expenses from the Vetex acquisition of which $550,000 is intangible asset amortization. 23:50 Our IVD business reported operating income of $3.2 million in the first quarter of fiscal 2022 and was consistent with the prior year quarter.

Our Q1 fiscal 2022 IVD operating income was equal to approximately 52% of revenue. 24:06 Now turning to income taxes. We recorded an income tax benefit of $710,000 in the first quarter of fiscal 2022 compared to income tax expense of $170,000 in the year ago period.

The current quarter's tax benefit is a result of the pre-tax loss for the first quarter. On a GAAP basis, we reported a loss per share of $0.20 in the first quarter of fiscal 2022 compared to a loss per share of $0.02 in the prior year quarter.

On a non-GAAP basis, we reported a loss per share of $0.13 in the first quarter versus earnings per share of $0.02 in the prior year quarter. 24:46 Moving to the balance sheet. In the first quarter, we began with $41 million of cash and investments.

During the first quarter, cash used by operations was $7 million and capital expenditures totaled $780,000. As of December 31, 2021, we had cash and investments totaling $32 million and the balance in our line of credit remained unchanged at $10 million related to the funding of the July 2021 Vetex acquisition.

25:15 It is important to note that our first quarter historically requires a higher use of cash to fund our working capital needs such as our annual employee bonus payments and our annual prepaid insurance premiums.

We anticipate that we will finish the year with approximately $20 million of cash, which does not include the potential receipt of the $30 million SurVeil milestone payment. 25:35 Turning now to our outlook for 2022.

As Gary mentioned, we are reaffirming our fiscal 2022 guidance, which assumes that current COVID and macro environmental impacts become a tailwind in the coming months. We expect fiscal year 2022 revenue to range from $97 million to $101 million. 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 $1.25. 26:13 Operator, this concludes our prepared remarks. We would now like to open the call to questions..

26:21 Thank you. [Operator Instructions] And we will take our first question from Brooks O'Neil with Lake Street Capital Markets..

26:45 Good morning, guys and thanks for all the color. Congratulations on a solid quarter. I have a couple of questions.

I'll start off by recognizing that you provide annual guidance not quarterly guidance, but based on your comments, Tim, in particular, would it be reasonable to expect 2Q results to be particularly revenue, I guess lower than results you achieved in 1Q, given the continued headwinds you see out there in the marketplace?.

27:20 No, Brooks. Thanks for the question.

I will tell you, probably a greater influence on our Q2 fiscal results for the period of January through March is going to be that -- the prior year period we recognized a significant portion of the milestone payment that we received for the written clinical report submitted to Abbott, that's going to be the biggest factor.

In fact, I think we had discussed this on the previous earnings call, I expect and continue to expect that every quarter, we'll see year-on-year revenue growth compared to the prior year, with the exception of Q2, as a result of that milestone payment that was received a year ago.

28:00 I will say that we are anticipating that there could be some impact from the macro environmental of environment including COVID perhaps some continued supply chain pressures, but that doesn't make me change our annual guidance and how we're thinking about that over the course of the year..

28:18 Sure. Okay. That's great. Thank you very much. Question for Gary obviously, appreciate all your comments about the pipeline and the success you're having with Sublime and Pounce et cetera.

Has the success you're having in any way changed your long-term thinking about whether it will be more appropriate for you to go-to-market yourself without a partner for some of those products or do you still sort of have the longer-term vision that a lot of these products will be partnered with the strategy that's already got an established sales and commercialization organization?.

29:03 Yeah. Brooks through the years, I lost the early results we're getting, but I've learned not to celebrate them fist pump in the real early market.

Really, I'm a big believer in the crossing the chasm concept where you get early adopters and that's great -- the real validation will come into the mainstream market and what I particularly like about our results is that we're getting some large hospital systems, which I would not have predicted, you pick up this early in terms of value analysis.

I mean that that is a war out there. So physician use of our product and clearly our excellent field sales team that we've hired are really getting these earlier than I have got predicted.

But I will say my caution is too early to tell the number of salespeople we have hired and who attracted to what we have from some other companies, it's a very competitive market to get salespeople, really coming to us based on the merits of the product and the strategy.

And so while too early to call, I'll just say, I feel really good where we're at in the early market, stay tuned..

30:22 Perfect. Yeah. I will stay tuned for sure. Last question for me, if I was remembering correctly and I clearly might not be -- I had some sense that you were hopeful that would SurVeil with additional time to collect additional data that you might have powered the trial sufficiently to demonstrate superiority versus the Abbott product.

Would you say the ultimate status right now does not give you enough data to make a claim or?.

31:01 Non-inferiority and superiority testing a quite involved. So the way you have to do statistically is, you have to run a non-inferiority assessment first. If you demonstrated a non-inferiority, then you can do a test for superiority both on the safety and efficacy. Those test for superiority were not valid.

So the product we can clearly claim eventually, when we have PMA approval, it is clinically non-inferior at both safety and efficacy. A superiority test that this level of the trial would require a lot more patients and just was not economically feasible, but we didn’t run it subsequent to the non-inferiority. Yeah..

31:47 Okay. And then I guess I have one follow-up on that is, do you think like as you ultimately commercialize this product, you might be able to collect additional data that might give you the opportunity to review that claim again? [Multiple Speakers].

32:08 Yeah. In the U.S. and the EU Registry the PMCF will be able to collect additional data. To really get a superiority claim, you have to really almost do a trial for the clinical -- inclusion and exclusion criteria and I’m oversimplifying it there. In the post-markets, you're really looking at real world clinical effectiveness.

In a clinical trial, you are looking for efficacy, which is sort of defining the control of the clinical conditions. So our partner Abbott may choose to engage in more work, but I don't really see superiority being a trial to be designed.

One thing I will say is, remember I may have said this in the past pharmacologically if you have a product that uses a lower dose of a known cytotoxic agent like Paclitaxel in the clinical noninferiority.

To me that is a superior product because you will now broaden the therapeutic threshold of getting similar effects with a lower dose of a drug with no side effects. And that's really important.

The parting else is we don’t see a commercial success be dependent on a superiority trail [Technical Difficulty] to actually have a follow up on the Abbott to drive commercial success at the ground level..

33:38 Great, thank you very much and congratulations. Keep up the great work..

33:45 Thank you..

33:49 We'll take our next question from David Saxon with Needham..

33:55 Hi, Gary and Tim. Good morning, and thanks for taking the questions. My first question is just on Sundance. Yeah. I guess, why are they asking for additional analysis. I mean it seems like that could mean the results weren't great or maybe not as good as expected.

So is that a fair assumption or are there other factors at play?.

34:20 So the steering Surmodics is a sponsor, the Steering Committee many respects, they are the trialist. And so when we have these meetings, they want to see different looks. I would say that the real issue here is we had patients enrolled, who did not fit the enrollment criteria as designed in the trial.

So that point, you have two choices, you have as treated group, which is what you report in the successful analysis plan, but if I'm making up a hypothetical example here. 34:55 If you enrolled a patient that had severe diseases, we out of bounds in terms of whether that patient would be accepted into the trial.

You could have potentially skewed your data. So simply put the Steering Committee has asked to say, we'd also like to see the analysis of the protocol results, meaning, it's a protocol was adhered to in all of these sites and the patients were enrolled according to the trial design.

35:32 What did those data look like? That being said, we don't see, first of all, we'll make sure there's no safety issue hit if it’s all, it's a safety trial, right. First-in-humans are really safety trials. So we don't see a safety issue.

It's a question of, on per protocol basis what it looks like? And this is valuable for us and it will also be valuable when we send this, I believe I don't know this, but the potential partner Abbott, will also be saying, hey, can you give us just a look at the data, so since they have a very short window, we thought that [indiscernible] of the data from a clinical science viewpoint.

So really that's what it is. 36:03 The other issue is, we -- our clinical team were running final analysis for the FDA right now both the up-to-date data, which I actually saw last night, and also two-year trial data. And so over with a limited team, I've given them the guidance the priority SurVeil.

There is no, nothing breeding down on Sundance (ph) at this point but SurVeil is a -- every day is the cost of delay for the company. And so that's our internal decision we made that would have slowed this down a little bit. But I think it's a healthy thing to look at.

I actually met in person with some of the investigators and Steering Committee members at ISET Meeting and we're all quite aligned on this. 36:52 Final thing, I'll say is, as we look at the lining of this DDOs, I want to know how we perform against other devices below-the-knee. And I'll just tell you everybody does it a different way.

So trying to get okay, how do we compare to the other devices so that report of this data. Very few and you'll hear a lot of discussion about some of these new Board devices, especially aligned those space devices. I don't know if any of them measured late lumen loss. We go back into the patient's, previous trials out.

And you actually measure that vessel and geographically with another invasive procedures. So we went in distance and as I hear a lot of podium presentations with other devices. I'd ask them for the late lumen loss data which is non-existent. We have that..

37:46 Okay. That's all super helpful. Second question is just on SurVeil.

I just want to make sure I understand kind of the cadence and so you're expecting to meet with the FDA in late April for a kind of a pre-submission meeting and then after that, you submit the data, and then the 90-day clock starts, is that right? 38:08 And then I'll just sneak a third one for Tim.

I understand that year-on-year growth expectations for the rest of the year despite the macro issues. It sounds like you could still grow sequentially in the fiscal second quarter from the fiscal first quarter. Am I kind of piecing the pieces together correctly on that? Thanks so much for taking the questions..

38:34 Sure. No problem. So here is how the timeline lays out in broad terms. If the FDA is saying 10 weeks, let me just say this first. We could just hit the send button. When we have finished with -- will be finishing in the month of February with our responses. And you could just hit the send button until FDA.

We heard you that you want to talk before we send in the final book on send, we're not going to do that, right. They have asked for alignment that some of this and that’s that we believe in that as well.

39:08 The issue is from the time we have finished these responses, and then -- you don't ask for the meeting while is still developing the response, right.

You have to have -- these are specific alignment question, so you can't bluff it and say, hey, in December, we won the meeting and count the 10 weeks and you really know , you don't have the detail up what the is about. So let's say we finished in February, 10 weeks is end of April. So that's how we're modeling that out.

And then clearly, we are going to try to get this meeting earlier, but the initial discussions with the agency they've come back and said, sorry, 10 weeks. 39:52 The second thing is, if at that point, we get perfect alignment, then you have a 90-day clock. Now the 90-day clock could stop again.

So when we think of, let's say, April, I mean this thing is submitted in May, then you have May, June, July probably slip into August, that's a Q4, which we believe is the early opportunity to get this, right. Not the risk-adjusted opportunity with the early opportunity.

If at this in April, they say, we are likely to do more, some more bench-top chemistry testing or maybe some small mammal testing.

The issue we're facing and the reason Tim and I are talking about the calendar year is the, to get a test lab to do a chemistry test for you and we can do some of those internally but 4 GLP-type stuff usually go external so this data is not, it's pristine data.

40:50 We're hearing up three to four months appealing to get in queue to conduct the tests, that's an issue that somewhat out of our control. Un the similar vein, if we have to do a preclinical small mammal-ed model testing to true up any data they want to see after this meeting. Getting animals is not as easy.

I think we ordered rabbits in November and we got them on January 11th. So because of those time based delay versus content -- data content delays, this could slip into our first quarter or the end of the calendar year quarter. So that gives you an idea of it. I'll turn it over to Tim for the other part..

41:35 All right. David, thank you for the question. Yes. We do in fact expect notwithstanding any of the macro environmental impacts accelerating to see sequential revenue growth in Q2 versus Q1. And I'll go so far as to say, we're confident assuming that the current wave subsides and is no longer a headwind that we should see that with each quarter..

42:02 Great. Thanks so many guys..

42:04 Thanks..

42:05 Your next question comes from Mike Petusky with Barrington Research..

42:10 Hey. Good morning. A couple of questions. So Gary, with the initial and I understand your language on early adopters and caution about reading too much into that, but given the fact that you did sort of say, hey, we're talking to some significant hospital systems and all that.

I mean is there any chance that it would make sense to go a little bit deeper in terms of your investment in your sales and commercial team?.

42:41 Yeah. So we have and Tim, I think I’ll lead out in the first quarter call, the amount of investment in the SG&A basis we're putting in probably tens or millions tens. And we believe based on the potential returns and value creation of this, it's a -- we think it's a great investment to make. So within that construct yes, we are continuing.

We talk about sales, but the organization has to have with infrastructure of internal capabilities, shipping, receiving complaints marketing qualities, all of those things processes have already been built. So I would say, if we are starting this from scratch. You will see a higher number.

But as we've been [indiscernible] this out in terms of the company readiness. 43:26 I'm pleased to say, we have a foundation for the salesforce to be successful. So it really comes down to the commercial organization.

And I'll tell you, we are -- here is the decision, as I thought it would be much more difficult to compete for salespeople, I could share my bias now, like I don't think we can get to 10 or 12 as we have done so brilliantly, but as we are able to get them if we are able to recruit talented A-players we will keep going, but we're not, we're going to stay within the confines of the plan of how much internally, we've decided we want to get too, but as we're getting them, I don't see a reason to say no to a talented person on the street.

No, that does not indicate that we get 40 people sending resumes, we're going to hire them, it's bracketed by our choice of the investment we decided to make. They get that as discipline, but opportunity..

44:33 So it's, it sounds like there is some flexibility in terms of sort of how you invest that incremental I guess $10 million and maybe some of that ends up going a little bit more into hiring additional salespeople.

I mean is that essentially what you're communicating?.

44:50 Yeah. Just one factor that so we have to have the sales -- Tim has the sophisticated sales utilization capacity models. We’re matching them right now to Sublime and Pounce arterial.

Now as we get the Sublime venous product up and running and you all know how I like to see the 50 to 100 cases that can change the capacity curve because it doesn't sound like a lot of products we have compared to a big company, but these products require dedicated time and effort.

So the Pounce venous system as that comes online in Q3 and Q4 that could shift up the capacity curve a little bit, if we get wonderful initial results, it may not bring in revenue in fiscal ‘22. But we have to set up the company for growth in fiscal ‘23, so you could see some, some nuanced incremental in the fourth quarter.

I mean material to the fiscal year expenses but that's where we might have some flexibility..

45:56 Got you. And then just, I think I understand this, but I just -- Tim, I just want to confirm. So I think you said, hey, we expect to be down to approximately $20 million in cash and investments at the end of the year, which seems -- would seem to imply about $4 million cash burn a quarter on average.

Is that what you were essentially saying?.

46:19 That's right. It could be less than that. We do think that the higher end of the range would probably be closer to finishing with around $24 million, so it could be that $3 million to $4 million range..

46:30 Okay. But….

46:32 That's on average [indiscernible]..

46:34 Right.

And then that doesn't include though the $30 million milestones of which like something like, isn’t that something like 24, 25 would be like immediately cash in, if you got the [indiscernible]?.

46:47 Yeah. All of that will be cash in. But [Multiple Speakers] be recognized as revenue in the P&L, but the full $30 million will be on the balance sheet..

46:56 Okay. Great. All right. That's all I've got. Thanks, guys..

47:00 Great. Thanks, Mike..

47:03 We'll take our next question from Jim Sidoti with Sidoti and Company..

47:09 Hi. Good morning. Thanks for taking the questions.

First one, how long do you think it will take Abbott to launch the product SurVeil once approval is received?.

47:22 That's a good question. There is several options there. As I may have said in previous calls, you called starting a diesel engine, right in the winter with a drug delivery production or a combination product device.

So from the time, we get a binding order, the way it works is they will give us an indication in months in advance so that we can get the supply chain prepared. But from the time we have a binding order to really jumpstart the manufacturing engines. It's about what in -- through four months and we'll try to beat that.

There could be some risk we take either Surmodics potentially Abbott to the partnership. The issue that constrains Surmodics is that there has to be a certain shelf life left on the product by the time of delivery.

48:17 So the nuance is, if you can make a bet of when exactly, you will get the FDA approval and how much shelf life has to be on the product by the time we deliver it. If we build product now, it may not meet the shelf life requirement. Let's say, if we get approval in October.

So we don't want to take that within a scrap -- the scrap launch (ph) a lot of product. So think of it as its four-months window from the time of approval to when the product could be commercially available. It could be less, but that is up to our partner, and our discussions at the time of commercialization..

48:55 And then, can you just remind us, once it is approved, how will you recognize revenue will be product sales and royalties, a combination and are you prepared to give us any sense on what you think that will be initially?.

49:10 I like the question, Jim, and obviously, we can’t provide a whole lot of context in detail. I'll just kind of remind you some of the remarks that we've made publicly in the past. And I'll just start by saying that, yes, we will be recognizing product revenue.

As you can imagine, once the binding PO is manufactured and shipped, we will recognize that revenue. The other part is not so much of royalty, it's really the profit sharing.

And the profit sharing will be some -- we will have to kind of estimate it just like we do with our royalty revenue and then we collect it period after the period ends or the quarter ends. And we'll have more to say on kind of how that will be classified, but it's more likely to be classified from what we're learning as the product revenue.

So it will be on the product line that may change, but that's kind of where we're thinking today. 50:04 And in terms of kind of the economics how this all works. I think we've provided a little bit of detail on this in the past. It's really going to be dependent upon the geography, right.

So the profit-sharing component, a higher price or higher market selling price is going to result in more favorable profit sharing and Surmodics receives not quite half of the profit sharing.

As you can imagine, it's pretty close but it's not quite half, and we feel very comfortable with the product revenue in terms of what that looks like in terms of what our product costs are as well. But we'll talk more about that once we actually have Abbott commercialized and we start to report numbers. I think we'll be in a position to share more.

50:48 The final comment is, we had seen previously Abbott's initial stocking order forecast, which was non-binding, but we liked what we saw. And so, we'll look forward to sharing more with you, when we have more to share. This product has the real potential [indiscernible] a number one product in the market.

It is the only product that has a head-to-head trial against the market leader. There is no other product that has done a worldwide pivotal. And so in terms of compelling clinical data and in the hands of a partner like Abbott, I don't see any reason what can eventually be the number one product. So that's [indiscernible]..

51:35 All right then you talked a lot about the impacts from COVID. Can you just break it down between U.S.

and Europe? Are you seeing it about the same in both regions, or is one region ahead of the other in terms of recovering?.

51:51 Jim, I like the question and it's unfortunately one that we don't have probably as much visibility as our customers have. Our sales force is clearly a U.S.-based centric organization.

But what I've heard and read from other international companies that have reported, there clearly seems to be a bigger impact from the December and January period in the U.S. than outside of the U.S., but I don't know what the impact has been.

I'm not sure that I’ve been paying attention is closely with regard to kind of what the financial impact is breaking it out by geographic region. But it has had an impact..

52:28 Yeah. We're being resourceful about it. I've heard of some of our sales team members dropping the product off for the hospital not being able to get in, the physician then takes it and then the salesperson goes back into the car and starts the Zoom call and guides their physician through the product. So we're doing what we can in the interim..

52:49 And then the last one for me, I think you mentioned that the product sales of the coating materials was a record this quarter, or up pretty substantially this quarter.

What do we read into that?.

53:06 Yeah. Thank you for the question. It was a record and I read into it.

First of all, few things, if you take a look at kind of historically Q1 tends to be a bit of -- when I would compare the both sides, in terms of products revenues for the coatings business and we saw that last year, so it could be easier comp, but I will say that we have been trending higher with product revenue and there could be some folks that maybe you're carrying a bit more inventory just to be prepared in the event that there might be some supply chain challenges.

But our team actually isn't thinking that that's a significant portion of the increase. It's more modest in nature and we're seeing it based upon the forecast, as well as the POs that we're receiving from our customers. 53:59 We're seeing what we've seen just with the trajectory that we've seen over the last six months or excuse me, six quarters.

So it gives us confidence that what we're seeing is going to continue in the near term, but we don't believe at this point, there is a significant amount of the revenue coming from customers stockpiling inventory..

54:23 All right. Thank you..

54:25 You're welcome..

54:28 [Operator Instructions] It appears we have no further questions at this time. I would like to turn the conference back to Gary Maharaj for any additional or closing remarks..

54:47 Thank you, everyone and thank you for joining our first quarter earnings call. I wish everyone a good day..

54:58 And that concludes today's presentation. Thank you for your participation. You may now disconnect..