Welcome everyone to Surmodics Fourth Quarter and Fiscal Year 2023 Earnings Call. Please note that this call is being webcast. The webcast is accessible through the Investor Relations section of the Surmodics website at www.surmodics.com, where an audio replay will be archived for future reference.

An earnings press release disclosing Surmodics' quarterly and full year results was issued earlier today and is available on the company website as well. Before we begin, I would like to remind everyone that remarks and responses to your questions on today's call may contain 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 Surmodics' forward-looking statements, resulting from certain risks and uncertainties including those described in the company's SEC filings.

Surmodics disclaims any duty to update or revise these forward-looking statements as a result of new information, future events, developments or otherwise. This call also includes reference to non-GAAP measures because Surmodics believes they provide useful information for investors.

Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Gary Maharaj, Surmodics' President and Chief Executive Officer. Please go ahead sir..

first, to drive our near-term growth catalyst in our vascular interventions portfolio namely SurVeil, Pounce and Sublime including the launch of our Pounce venous products platform; two, to drive durable growth and cash flow generation across our core Medical Device Performance Coatings and IVD businesses; and three, to enhance our Pounce Sublime and Medical Device Performance Coatings portfolios by developing new products and line extensions to facilitate our long-term growth.

As our guidance range implies, we expect to accelerate our total revenue growth profile in fiscal 2024, driving growth of 9% or higher excluding license fee revenue related to our SurVeil DCB.

I also want to stress that cash efficiency remains a top priority for our organization despite our influx of capital and even in light of the large number of projects we have. Tim will provide more detail in his commentary.

As we pursue these three strategic objectives, we are focused on executing efficiently as possible to maintain a healthy balance sheet and position Surmodics' strong sustainable long-term growth and value creation going forward.

I'd like to thank my colleagues across the entire organization for their contributions to our success this past year and their commitment to our mission of helping humanity by improving the detection and treatment of disease. Thank you as well to our customers and shareholders for their ongoing support.

With that, I'll turn the call over to Tim Arens, our Chief Financial Officer to discuss our fourth quarter results and fiscal 2024 guidance.

Tim?.

the receipt of a $3.6 million cash tax refund from the IRS associated with the CARES Act Employee Retention Credit; capital expenditures of up to $5 million compared to $2.9 million in fiscal 2023, which includes certain investments postponed last year as part of our spending reduction plan; and payments totaling approximately $2.7 million to satisfy obligations related to previous acquisitions.

Lastly, it's 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. As Gary mentioned, despite our recent influx of capital, cash efficiency remains a top priority for the organization.

We remain focused on disciplined expense management and optimization of working capital. And importantly, our guidance assumes no further borrowings during fiscal 2024 under our credit agreement. With that operator, we would now like to open the call to questions..

[Operator Instructions] And our first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead..

Good morning. A lot to unpack in the various comments you guys just made and to limit myself to two questions. I'm going to just try to hit the high points I guess as I see them.

I'm curious, when we contemplate that Abbott has paid you approximately $100 million development fees related to SurVeil and you've just given us year one sort of guidance for SurVeil that includes the revenue you anticipate from Pounce and Sublime and SurVeil of $13.5 million, how should we think about whether this product has the potential to meet the expectations that you have for it and that your partner Abbott might have contemplated when they paid you the $100 million? Thank you..

Thanks, Brooks. First of all, it absolutely is within the confidence limits that we set for ourselves when we started this journey a long time ago. Especially, as I would add in our meetings with Abbott, it reminds me of why we always saw them as a good partner and that continues to be demonstrated in meeting with their commercial team.

The other thing is I'll just offer this and this is not an Abbott statement but the recent acquisition of CSI gives them a really nice sales footprint. And they do have the trifecta in this vessel the superficial femoral artery or the FemPop segment. They have credible stent in Supera. Now they also have the atherectomy devices that came with CSI.

And the further missing component to really compete is a drug-coated balloon with an anti-restenotic drug. So we're excited. My interactions with them have been exciting as well. And now with the sort of removal of this veil of paclitaxel causing a late mortality signal it's gone.

Just at the recent TCT and VIVA meetings that continue to present how that signal has literally died and these devices are better for patients. So all the momentum we believe is stacked positively. Now when we look at guidance I'll turn it over to Tim, the estimates we have to make and they are actuals.

And so we have to be cautious on how we make those estimates going forward. I'll turn that over to Tim to....

Thank you, Gary. Brooks, thank you for the question. I think the important thing for you and everyone to realize is the most important three words that I mentioned in guidance was "of at least" of at least $13.5 million.

The other thing I think people need to keep in mind too is we commented about Abbott's expected commercialization timing, which is the first half of calendar year 2024. Please bear in mind this is three to nine months of potential product revenue for Surmodics from Abbott's commercialization.

We'll have a lot more to say on this as we go through the fiscal year. But keep in mind this does not reflect a full 12 months of revenue from Abbott..

The last thing I'll add Brooks is Professor Schneider is presenting our three-year data at the VEITH meeting next week in New York. And I think it's worth paying attention to that. I imagine we'll send a press release summarizing that data afterwards.

But the thing you want to look for in these devices is continued durability of the signal, especially as compared to the market-leading device. And so once again, we and Abbott are the only company that has a pivotal head-to-head randomized controlled trial against the device no one else has it.

And so I think I look forward to that data being presented next week at VEITH..

That's great. I appreciate all that color. Let me ask one more. As we think about the world that you've developed here guys, you have the beginning of significant experience with a partner in Abbott with Sublime.

You also have the beginning of essentially a go-it-alone strategy with regard – I misspoke with regard to SurVeil and Abbott but you go it alone with Pounce and Sublime, I have a sense you have a deep and robust pipeline of new products.

Share with us just a little bit about how you think about going to market with some of the high-potential products that are still in your pipeline today..

Pounce Arterial, Sublime and we haven't even launched Pounce Venous yet. That's a very significant thing when you think about it. I've not kept up with it, but I don't know any products in mind maybe something in history that gets a group contract for a product that's coming.

And so that tell you the appetite and signal and our strength of our competitive position. So feel good at where we are..

Yeah. And I'll just -- I'll add one quick comment here Brooks to Gary's remarks here. I think it's important to recognize what Gary described in terms of the 2024 strategic objectives capitalizing on the near-term growth catalysts and The Vascular Interventions Portfolio. And you've heard Gary mention Pounce Venous.

There's, a few other products that we've described here that are going through limited market evaluations. We anticipate that they'll be in a position for commercialization at some point later in the fiscal year. And we -- our guidance does reflect minimal -- I should say, modest, revenue contributions from the commercialization of those products.

So again this year, we'll not be seeing a full 12 months of revenue generation from some of the catalytic products that will be coming to market from Surmodics..

Yeah. And Brooks, so last thing just to pile on, is if there is any sentiment that Tim and I are not in our legacy business our core coatings offerings and diagnostics Preside is -- the Preside coating is a remarkable achievement. It's something we've worked somewhat behind the scenes for the last two years.

New intellectual property and for many customers in that business, especially in the neurovascular segment it's unmatchable. So we're not ceding leadership, because we're focused on products. Our technology leadership is something we have drawn a line and said, we will maintain technology leadership in all things that we do.

So that's just an additional thing on Preside that's happening and even more things we're working on in the future..

Great. Thank you for all that color and I can tell you I am excited about your future..

Thank you, Brooks. We are too..

Our next question comes from Mike Petusky with Barrington Research. Please go ahead..

Hey Good morning. So Tim, just in terms of the assumption around second half -- I'm sorry first half calendar commercial launch for SurVeil obviously that's -- there's I guess 180 days range in there. And your assumption you have to be assuming something there.

I mean is it fair to say you're assuming somewhere in the middle of that time frame in terms of the $13.5 million or the part of that the $13.5 million that's the contribution from SurVeil? Are you assuming sort of just that that's commercialized for essentially the last three months of your fiscal? Can you just talk about what you're actually specifically assuming to get to the contribution you're assuming for the -- within the $13.5 million?.

Yeah. I'll say one thing and I'll turn it over to Tim for the detailed answer. One of the things in the partnership with Abbott we recognize the competitive dynamics of a launch and the things that they're trying to set up.

And so if there's any implied vagueness, it's because we want to respect our confidentiality as they really gear up for a major launch. So that explains the wide window even though we know what the window really is. We want to give them every opportunity to compete effectively with their launch planning..

Yeah. And thank you, Mike, it's a very appropriate question.

And as Gary kind of got in front of my answer here I'm limited in terms of what I can specifically say with regard to Abbott, but I can provide some color and think for folks to probably appreciate is that, the first half of the year will reflect the stocking order that we are -- we've been manufacturing and sending to Abbott.

And so clearly, the second half of the year is going to be more influenced by Abbott reorders, once they're in the market, and have commercialized the technology in the product. So I think that's probably the extent of context that, I can provide today..

Could I just ask are you assuming any profit share dollars in -- within whatever contribution you're assuming in the $13.5 million?.

We will and they're very modest. We'll need some time. Obviously, it is an estimation. It's a judgment and just to probably provide a little clarity for folks, we will need to make assumptions with regard to the units that we ship to Abbott, how many will actually be sold. How many will be used for promotional activities, how much will be expired.

We'll have to make assumptions with regard to their selling price. So there is a bit of a number of variables that we need to estimate. And as you can imagine, we'll learn more about how to think about these variables once Abbott estimates, but know that it's a modest portion of that $13.5 million that I described..

Yes. Refining -- first year, we'll refine that model but you can imagine the first year predictability without those assumptions and history of those assumptions being validated it's going to be challenging for us..

All right. But there is some estimate of that. I'm assuming that's like on a 90-day trail.

Is that right?.

So we'll make the estimate at the time we ship product to Abbott, but there will be a true-up to think of how Surmodics actually goes about estimating our royalty revenue then we collect the actual royalty payments and there is a true-up or an adjustment based upon our estimate versus what we receive. That will happen over time with Abbott as well..

90 days or further out from that?.

It will be quarterly..

Okay. All right. And then last question I've stretched the boundary of two questions, but let me just ask the last question.

I guess in terms of the sales effort on Pounce and Sublime Gary, do you expect that now that you guys are in a better situation in terms of sort of the outlook for the future and sort of the vision there and frankly the balance sheet does more investment in the sales team there makes sense at this point? Thanks..

If we didn't have -- the short answer is yes, but it will be grow as we go. So in other words as we start generating returns from that business we'll be investing it in that business.

We have drawn a line on what we should be investing on a go-forward basis to show our cash -- so pay attention to our cash forecast, right? Usually, it's revenue and earnings but cash is an appropriate throttle limiter for where the company is right now.

Could we go faster? I believe so, but we don't want to become a balance sheet story as a public company in this macroeconomic condition. So we'll grow as we go. We're not going to double the size of the sales force I can tell you that. But we will be selectively adding.

Another key thing is, when we do launch the Pounce Venous right we'll have to be interpreting whether we can go faster again in a very disciplined fashion with some more feet on the street.

The one thing we have to say is as you get GPO contracts which is -- I don't know how to emphasize this which is remarkable for a company at this stage, right? Now in GPO contracts and IDN contracts you have to demonstrate penetration in that contract. So now you're covering an extra 100 hospitals.

And so we will be doing an analysis of where the heat maps are to seed our territory managers and field clinical specialists, but we can't over accelerate there. That's the big discipline we have to put in place this year..

Can I just ask a quick follow-up and this is sort of a big picture longer term? I mean, if we're having this conversation three years from now and Venous has obviously been commercialized at that point for two-plus years, I mean, it is possible that there could be a doubling of the sales force isn't it at that point?.

I mean, typically – yes, I mean, to really compete well you eventually need a minimum of 50 people, right? You can go up from there. But getting to that 50 and making sure you have the -- we want to be on the conservative side of sales capacity utilization, right? You always continue to grow always fund that.

And we also have to look at our sources and uses of cash and our debt levels and our senior debt repayment level. So a lot of things come into play there. But yes three years from now you would -- to be able to support that market growth you have to have a critical mass to play in that market effectively.

So -- and big thing for us continues to be as we model is what we call the territory managers' contribution margin. We look at gross margin from a territory offsetting selling costs in that territory.

So it's not an operating margin thing, but it's a gross margin which basically tells us gross margin is paying for the selling efforts and selling expenses. And so that's a nice way to look at how we will look at scaling up over time..

Okay. Very good. Well congratulations, obviously 2023, a huge pivotal year. Congratulations. Thanks...

Thanks Mike..

Thank you..

Our next question comes from Jim Sidoti with Sidoti & Company. Please go ahead. .

Hi. Good morning. Thanks for taking the questions. Just to follow up on the sales force.

Can you tell us what number, or how many sales folks you had at the end of the fiscal year?.

I think we have it in the remarks. I think it's 2023, Jim..

You ended with 2023. Okay. And so it sounds like you might add a few as the conditions determine now, but you're not expanding it in a big way in fiscal 2024..

Not at this point. As I said, we will selectively seed. We have an incredible sales organization. And so when we're adding we're looking for really first top-tier talent, and top-tier talent that's willing to stretch. Our competitors have salespeople for like five accounts, right? We have salespeople for 50 to 100.

So they have to be able to stretch and they have to come from a great pedigree of success. So we want to keep getting the top-tier talent and seeding them. We'll add as we grow, but again not intending to double it.

And the big thing is when we do launch Pounce Venous and we feel the uptake of that product, we may decide to add some more but that's later in the year and clearly within the constraints of what we're saying in our cash guidance..

Okay. All right. Now switching over to Abbott.

Can you just lay out what are the milestones that have to happen for Abbott to launch the device? And is there a chance it gets pushed out, a little longer? Or maybe is there a chance that it happens, a little bit sooner than you indicated so far?.

Yes. And again, I'll repeat what I just said. Some of the bandwidth we have given the launch there with Abbott is, respecting the confidentiality of the contract of when they launch.

But as you can imagine, they're professionals at this type of launch and they're doing all of the appropriate preparation of the ground fertilization and the appropriate seeding, because I suspect when they go they really go with a very specific launch plan and trajectory.

So, really our job is to help them with technical information that they are able to use to train their team and to make sure we have high-quality product delivered on time to their docks. That's really, our role in it..

Yes. I would say Jim, too we're confident in the time frame that Abbott provided in the first half of calendar year 2024. And you can imagine there could be reasons, why they would get out earlier. And you can also imagine that there are reasons, why maybe they would kind of move that more towards the second half of that time horizon.

So, we'll just ask you to stay tuned. There will be more on that. I'm sure everyone will see it when Abbott launches it. And we're here to help support and make sure they have what they need from us, so that they can effectively get out into the market with SurVeil..

Yes. Basically, we can't talk about it. That's the [indiscernible].

All right, all right.

Can you talk about whether it's strictly limited to the US or if it will be launched worldwide?.

Yes, we can certainly address that question. I think we've described this over the last several quarters. They are going out US. So what we've described in our guidance, what we're talking about in terms of the launch all pertain to the US, market. We have nothing to add OUS at this point Jim..

Okay. And then in terms of Surmodics, income statement, if you look your R&D expense topped out around $50 million in fiscal 2022. It ended this year around $46 million $47 million. You expect it to tick down to closer to $44 million next year.

Do you think it will continue to remain around these levels maybe come down a little bit? Or are there any major projects, you expect to invest in in the next couple of years?.

We do have to our R&D is really focused on winning in the market segments we have identified. And that does include the Venous market. And keep in mind we're entering several huge markets this year. I mean the Pounce -- the venous market is larger than the arterial market as a generalized statement.

And so to compete with the big guys there and their products, we have to maintain some level of R&D to continue to win and launch those products. We do have some early-stage programs that we're looking at. So some of them involve more venous we've got the venous segment and pulmonary embolism.

And actively, the one thing I would say, is you'll see next week at the VEITH meeting again Professor, Ramon Varcoe is presenting our two-year data on Sundance Sirolimus BTK. Now Professor Varcoe presented the LIFE-BTK trial data, two weeks ago at the TCT meeting in San Francisco, which is an absorbable stent eluting an olimus drug.

And so when you look at our two-year data and I encourage we will send a press release on that, what I hope is recognized is that we do actually have incredible drug delivery technology in Surmodics.

Our issue again is one of being cash constrained to get ready for an IDE much less to run a pivotal trial, we will be actively looking for partnership opportunities to help us with that. We can't go that alone as much as you stay tuned for the data being presented.

Again, this is a two-year data right? Stay tuned for what our two-year data looks like with any of the BTK device that's been done. So have to be really disciplined. Wish we have the capital but have to maintain that in the public markets..

All right. So it sounds like you're going to continue to invest in R&D, but it doesn't sound like you're going to get back to the fiscal 2022 level..

Jim, I think what we're providing the guidance here for fiscal 2024 and you noted the reduction in R&D spend over the last few years there's clearly investments in certain platforms and other platforms are seeing a deceleration in spend notably SurVeil, which has been less than -- certainly not fully offset by increase in other platforms.

But yes I think we like the trend and we like the investments that we're making and what we think the long-term value creation can be from those investments. Not a whole lot to add for 2025 or later. But I'd say you're probably right to think about the trend..

Yes. And one thing Jim is R&D includes clinical right? And so we have the PROWL registry you have to commit to those registries and the PROWL registry is going just fine which is for the Pounce Arterial.

And eventually when we do launch the Pounce Venous product line to get the claim expansion to DVT versus removing clot will require at a minimum registry or very small single arms. So that's more out in the 2025 time frame..

There's puts and calls Jim..

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

Yes. I wanted to ask one on POUNCE versus Sublime. Just reading between the line, but some of the comments it sounds like Pounce is kind of the bigger growth driver there than Sublime.

Is that right? I know you're not going to break out the sales or anything, but can you just qualitatively comment on how the two are doing relative to each other?.

It has been Mike and one of the reasons for that remember in the whole debacle with the PMA not-approvable letter the VI commercial team took the largest hit in the company.

We had to unfortunately reduce the size of the sales team by a lot right? And so -- and what we had to do at that point because we have to make sure we got to hit our revenue plan the incentives for the sales team when you look at a $4,00-plus product in Pounce versus several hundred dollar product in Sublime catheters we were compelled to redirect the team that we've had towards making sure we're able to hit that revenue.

With the new commission plan that goes out -- that went out in October we have now put Sublime back in its rightful place. So there was a specific conscious decision at that point. What I would say is that the addressable market for Pounce Arterial is bigger than it is currently for radial devices.

And remember radial is also an adoption curve not just a competitive winker. What I've told our sales team though is we'll do well in thrombectomy. I have no doubt. But their grandchildren will remember them for Sublime right because that is changing the face of healthcare towards the positive.

I don't know a single other product and again it's early innings that has better patient outcomes right much better health care economics and a huge impact on patient satisfaction. Hitting that trifecta we're patient with it but for the moment, yes, the high ASP of things like Pounce Arterial are outpacing Sublime.

And that's okay by the way for us right now..

Yes. Okay. And then just on the Preside coating I mean is that I know you're continually iterating on those offerings.

So I mean is this something that could have any sort of impact on the growth? Or is it more just kind of incremental?.

And you know how that business runs like -- the cycle time so we just got the first FDA clearance. I don't think we mentioned that, but we do have an FDA clearance of the first device for Preside. And so what that sets the stage is -- I'm generalizing a little bit here so the chemistry is on file with the FDA of having seen it now.

And it gives our customers an opportunity to leverage that knowledge and working knowledge of that dossier on file with the FDA. The time cycle is you've got to get customers who're interested help them through their development and their regulatory offerings right effort to get clearance for these devices.

And only then do we see the royalty when these devices hit the market. So a longer offering, but it's significant because we're talking about royalty cash flow here. So I wouldn't expect Tim in our guidance we've put anything for fiscal 2024 for any royalty things there unless people get approvals pretty quickly..

Yes. There really isn't. It's look to be clear Preside is something that is highly complementary to our Serene coating which has really been growing well over these last few years. And we continue to expect it to grow well.

I think we've commented previously that there are 60-plus customer opportunities where we get to dial in our chemistry with our customers' devices. This just -- Preside gives us an opportunity to really claim certain application spaces.

I think going distal in the neural crossing really challenging lesions like total chronic occlusions it really gives us an advantage with this coating relative to even some of our internal coatings, but more importantly to competitive coatings.

And I think that's why the team has really been focusing on this Preside coding over the last few years is to meet some of the needs where quite frankly we felt that we could provide some additional performance enhancements. So as Gary mentioned it will probably be a few years to grow the trees, but we're planting the seeds today..

Okay. All right. Got it. Thank you..

Thank you. And that concludes our conference call for today. Thank you for your participation and you may disconnect at any time..