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SurModics Reports Record Total and Legacy Business Revenue in Second Quarter 2008

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)--April 23, 2008--SurModics, Inc. (Nasdaq: SRDX), a leading provider of surface modification and drug delivery technologies to the healthcare industry, today reported financial results for the second fiscal quarter ended March 31, 2008.

Second Quarter Highlights:

-- Record total revenue of $25.7 million, up 48% year-over-year

  • Record legacy business revenue (excluding Brookwood Pharmaceuticals and BioFX Laboratories acquisitions), up 12% year-over-year
  • Record Brookwood Pharmaceuticals revenue of $5.2 million
  • Record non-CYPHER-related revenue, up 90% year-over-year; up 34% excluding acquisitions
  • Double-digit year-over-year revenue growth in all three operating segments:
    • Drug Delivery - up 93%
    • Hydrophilic and Other - up 26%
    • In Vitro - up 19%

-- GAAP results:

  • Operating income of $7.2 million
  • Net income of $5.1 million
  • Diluted EPS of $0.28

-- Non-GAAP results (adjusting for accounting treatment of Merck agreement):

  • Adjusted total revenue of $28.5 million
  • Adjusted operating income of $9.9 million
  • Adjusted net income of $6.8 million
  • Adjusted diluted EPS of $0.37
  • Operating cash flow of $4.5 million
  • Four new licenses signed with SurModics customers
  • Four new customer products introduced
  • Repurchased $2.6 million of SurModics stock

"SurModics generated record total revenue and double-digit revenue growth in all three of our operating segments for the second consecutive quarter," said Bruce Barclay, president and CEO. "We are particularly gratified to achieve record revenue for the second consecutive quarter in our legacy business despite a 28% year-over-year decrease in Cypher stent-related revenue. Further, Brookwood Pharmaceuticals generated record revenue, and both Brookwood and BioFX again contributed to overall earnings this quarter. These results demonstrate the significant benefits of our broad and diverse technology portfolio."

"Our collaboration with Merck in ophthalmology continues to progress extremely well. In January we announced an extension of our license agreement with Merck, and we generated a record number of billable hours with Merck in the quarter. As of the end of the quarter, our total Merck deferred revenue balance had grown to $24.9 million," continued Barclay. "The achievement of three of our fiscal 2008 goals added to the highlights of our second quarter performance. First, we announced the first in-human use of the SynBiosys(TM) biodegradable polymer on our customer CardioMind's drug-eluting stent. Second, in February, Medtronic announced their U.S. launch of the Endeavor(R) Coronary Stent System which uses SurModics' hydrophilic technology. Third, we generated $15.6 million in cash from our paid development activities so far this fiscal year, already surpassing our goal of $10 million. We are making excellent progress on our strategic plan for sustainable growth, and continue to believe in our ability to achieve our fiscal 2008 company goals as well as our long-term objectives."

For the second quarter of fiscal 2008, revenue was $25.7 million, an increase of 48% from $17.4 million in the year-earlier period. Total operating expenses, including product costs, were $18.5 million, which roughly doubled from $9.3 million last year. Operating income was $7.2 million, a decrease of 11% compared with $8.1 million in the prior-year period. Net income was $5.1 million, a decrease of 10% from $5.7 million in the same period last year. Diluted net income per share was $0.28, a 10% decrease from $0.31 in the second quarter of fiscal 2007. Earnings growth did not keep pace with revenue growth primarily as a result of the accounting treatment relating to our Merck agreement, higher stock-based compensation costs associated with recent board transitions, and a changing mix of revenue sources.

For the first six months of fiscal 2008, revenue was $49.5 million, compared with $34.1 million in the year earlier period. Operating income was $14.8 million, compared with $16.2 million in the prior year period; net income was $10.8 million, compared with $11.7 million in the year earlier period; and diluted net income per share was $0.58, compared with $0.64 in the first six months of fiscal 2007.

"This quarter we are providing shareholders with a more transparent picture of ongoing operations at SurModics by presenting supplemental non-GAAP disclosure related to the Merck agreement accounting treatment," said Phil Ankeny, senior vice president and chief financial officer. "We believe that this supplemental non-GAAP disclosure complements our GAAP reporting, and allows the investment community to better understand current performance by showing what our results would have looked like had we fully recognized as revenue all of the items related to our significant collaboration with Merck, compared to amortizing the amounts, as we do under the applicable accounting treatment. Because the Merck agreement is so significant to our business, and given the effect the associated accounting has on our reported results, we are presenting this new non-GAAP disclosure to help investors understand the impact of that single agreement."

On a non-GAAP basis (adjusting for the accounting treatment of the Merck agreement), for the three-month period ended March 31, 2008, total revenue was $28.5 million, operating income was $9.9 million, net income was $6.8 million, and diluted net income per share was $0.37. On a non-GAAP basis, for the six-month period ending March 31, 2008, total revenue was $53.8 million, operating income was $19.0 million, net income was $13.3 million, and diluted net income per share was $0.72. As of March 31, 2008, the deferred revenue balance associated with the Merck agreement was $24.9 million.

SurModics' cash and investment balances totaled $80.9 million as of March 31, 2008, up from $72.5 million as of December 31, 2007. Operating cash flow for the quarter was $4.5 million, compared with $4.7 million in the prior year period. SurModics also initiated its second share repurchase program in the quarter with repurchases totaling $2.6 million.

SurModics' pipeline continues to grow. The company signed four new licenses in the second quarter, bringing the fiscal year-to-date total to 13, and has a goal of signing 18 new licenses in fiscal 2008. SurModics' customers launched four new product classes in the marketplace during the quarter, bringing the fiscal year-to-date total to six, as the company works toward its goal of 10 launches in fiscal 2008. As of March 31, 2008, SurModics' customers had 100 licensed product classes generating royalty revenue, up from 95 in the prior-year period; the total number of licensed product classes not yet launched was 103, compared with 91 in the prior-year period; and major non-licensed opportunities totaled 90, compared with 77 a year ago. In total, SurModics now has 193 potential commercial products in development.

Live Webcast

SurModics will host a webcast at 5:00 p.m. ET (4:00 p.m. CT) today to discuss the quarterly results. To access the webcast, go to the investor relations portion of the company's website at www.surmodics.com, and click on the second quarter webcast icon. If you do not have access to the Internet and want to listen to the audio by phone, dial 800-867-1054. A replay of the second quarter conference call will be available by dialing 800-405-2236 and entering conference call ID 11112931. The audio replay will be available beginning at 7:00 p.m. CT on Wednesday, April 23, until 7:00 p.m. CT on Wednesday, April 30.

About SurModics, Inc.

SurModics, Inc. is a leading provider of surface modification and drug delivery technologies to the healthcare industry. SurModics partners with the world's foremost medical device, pharmaceutical and life science companies to develop and commercialize innovative products that result in improved patient outcomes. Core offerings include: drug delivery technologies (coatings, microparticles, and implants); surface modification coating technologies that impart lubricity, prohealing, and biocompatibility capabilities; and components for in vitro diagnostic test kits and specialized surfaces for cell culture and microarrays. Collaborative efforts include a sustained drug-delivery system in human trials for treatment of retinal disease and the drug-delivery polymer matrix on the first-to-market drug-eluting coronary stent. SurModics is headquartered in Eden Prairie, Minnesota and its Brookwood Pharmaceuticals subsidiary is located in Birmingham, Alabama. For more information about the company, visit www.surmodics.com. The content of SurModics' website is not part of this release or part of any filings the company makes with the SEC.

Safe Harbor for Forward-Looking Statements

This press release contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, such as, statements about our ability to achieve our fiscal 2008 corporate goals and long-term objectives and statements regarding our pipeline, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following: (1) realizing the full potential benefits of the company's agreement with Merck requires the development of new products and applications of technology; (2) costs or difficulties relating to the integration of the businesses of Brookwood Pharmaceuticals and BioFX Laboratories with SurModics' business may be greater than expected and may adversely affect the company's results of operations and financial condition; (3) our reliance on third parties, developments in the regulatory environment, as well as market and general economic conditions, may adversely affect our business operations and profitability and our ability to achieve our fiscal 2008 corporate goals and to realize the potential of our pipeline; (4) failure to obtain intellectual property rights protecting our proprietary technologies, or the expiration or loss of such rights, could have a material adverse effect on our business, financial condition and results of operations; and (5) other factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2007, and updated in our subsequent reports filed with the SEC. These reports are available in the Investors section of our website at www.surmodics.com and at the SEC website at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Use of Non-GAAP Financial Information

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, SurModics is reporting non-GAAP financial results including non-GAAP revenue, non-GAAP net income and non-GAAP diluted net income per share. We believe that these non-GAAP measures provide meaningful insight into our operating performance as it relates to our Merck agreement accounting treatment and provide an alternative perspective of our results of operations. We use these non-GAAP measures to assess our operating performance and presentation of these non-GAAP measures allows investors to review our results of operations from the same perspective as management and our board of directors. We believe these non-GAAP measures facilitate investors' analysis and comparisons of our current results of operations and provide insight into the prospects of our future performance. We also believe that the non-GAAP measures are useful to investors because they provide supplemental information that research analysts frequently use. The method we use to produce non-GAAP results is not in accordance with GAAP and may differ from the methods used by other companies. These non-GAAP results should not be regarded as a substitute for corresponding GAAP measures but instead should be utilized as a supplemental measure of operating performance in evaluating our business. Non-GAAP measures do have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. As such, these non-GAAP measures should be viewed in conjunction with both our financial statements prepared in accordance with GAAP and the reconciliation of the supplemental non-GAAP financial measures to the comparable GAAP results provided for each period presented, which are attached to this release.

                   SurModics, Inc. and Subsidiaries
             Condensed Consolidated Statements of Income
                (In thousands, except per share data)

                                  Three Months Ended Six Months Ended
                                      March 31,          March 31,
                                  ------------------ -----------------
                                    2008      2007     2008     2007
                                  ------------------ -----------------
                                     (Unaudited)        (Unaudited)
Revenue:
  Royalties and license fees       $13,809  $13,028  $26,987  $26,247
  Product sales                      4,700    3,381    9,907    6,107
  Research & development             7,198      953   12,642    1,748
                                  --------- -------- -------- --------
     Total revenue                  25,707   17,362   49,536   34,102

Operating expenses:
  Product costs                      2,154    1,092    4,129    2,179
  Research & development            10,370    5,717   19,903   10,924
  Selling, general &
   administrative                    6,002    2,468   10,751    4,805
                                  --------- -------- -------- --------
     Total operating expenses       18,526    9,277   34,783   17,908
                                  --------- -------- -------- --------
Income from operations               7,181    8,085   14,753   16,194

Investment income                    1,184    1,172    2,904    2,501
                                  --------- -------- -------- --------
Income before income taxes           8,365    9,257   17,657   18,695

Income tax provision                (3,258)  (3,582)  (6,903)  (7,029)
                                  --------- -------- -------- --------
Net income                         $ 5,107  $ 5,675  $10,754  $11,666
                                  ========= ======== ======== ========

Basic net income per share         $  0.28  $  0.31  $  0.60  $  0.64
                                  ========= ======== ======== ========

Diluted net income per share       $  0.28  $  0.31  $  0.58  $  0.64
                                  ========= ======== ======== ========

Weighted average shares
 outstanding
  Basic                             18,102   18,017   18,055   18,232
  Diluted                           18,428   18,133   18,421   18,342
                   SurModics, Inc. and Subsidiaries
                Condensed Consolidated Balance Sheets
                            (In thousands)

                                             March 31,   September 30,
                                                2008         2007
                                            ------------ -------------
Assets                                             (Unaudited)
-------------------------------------------

Current assets:
 Cash & investments                             $ 37,829      $ 26,308
 Accounts receivable                              17,821        16,138
 Inventories                                       2,591         2,497
 Other current assets                              6,354         2,952
                                            ------------ -------------
  Total current assets                            64,595        47,895

Property & equipment, net                         20,934        19,738
Restricted cash                                    1,630            --
Long-term investments                             43,089        43,917
Other assets                                      54,789        59,781

                                            ------------ -------------
 Total assets                                   $185,037      $171,331
                                            ============ =============

Liabilities & Stockholders' Equity
-------------------------------------------

Current liabilities(a)                          $ 12,061      $ 14,266

Deferred revenue (current and long-term)          28,114        25,891

Other liabilities                                  1,597           252

Total stockholders' equity                       143,265       130,922

                                            ------------ -------------
 Total liabilities & stockholders' equity       $185,037      $171,331
                                            ============ =============

(a) Current liabilities exclude current portion of deferred revenue.

                   SurModics, Inc. and Subsidiaries
           Condensed Consolidated Statements of Cash Flows
                            (In thousands)

                                                     Six Months Ended
                                                        March 31,
                                                    ------------------
                                                      2008     2007
                                                    ------------------
                                                       (Unaudited)

Operating Activities
 Net income                                         $10,754  $ 11,666
 Depreciation and amortization                        2,993     1,960
 Stock-based compensation                             5,351     2,870
 Net other operating activities                      (2,727)   (1,069)
 Change in operating assets and liabilities:
   Accounts receivable                               (1,683)    4,613
   Accounts payable and accrued liabilities              31    (1,102)
   Income taxes                                      (7,603)   (2,349)
   Deferred revenue                                   1,988       375
   Net change in other operating assets and
    liabilities                                        (160)     (510)
                                                    -------- ---------
  Net cash provided by operating activities           8,944    16,454
                                                    -------- ---------

Investing Activities
 Net purchases of property and equipment             (2,030)   (1,610)
 Cash restricted for land purchase                   (1,630)       --
 Collection of notes receivable                       5,870       261
 Net other investing activities                       3,440    20,311
                                                    -------- ---------
  Net cash provided by investing activities           5,650    18,962
                                                    -------- ---------

Financing Activities
 Issuance of common stock                             1,848     2,063
 Purchase of common stock to fund employee taxes     (1,450)     (178)
 Repurchase of common stock                          (2,601)  (35,030)
 Net other financing activities                         543        --
                                                    -------- ---------
  Net cash used in financing activities              (1,660)  (33,145)
                                                    -------- ---------

Net change in cash and cash equivalents              12,934     2,271

Cash and Cash Equivalents
 Beginning of period                                 13,812     3,751
                                                    -------- ---------
 End of period                                      $26,746  $  6,022
                                                    ======== =========
                   SurModics, Inc. and Subsidiaries
                  Supplemental Non-GAAP Information
              For the Three Months Ended March 31, 2008
                (in thousands, except per share data)

                             (Unaudited)

                            Merck Agreement Adjustments
                            ---------------------------
                                                             Adjusted
                As Reported  Revenue          Billed         Non-GAAP
                 GAAP (1)   Recognized       Activity          (2)
                ----------- ----------     ------------     ----------

Revenue:
  Royalties and
   license fees $    13,809   ($406)   (3) $      2,000 (4) $   15,403
  Product sales       4,700                                      4,700
  Research and
   development        7,198    (667)   (3)        1,837 (4)      8,368
                ----------- ----------     ------------     ----------
       Total
        revenue $    25,707 ($1,073)       $      3,837     $   28,471
                =========== ==========     ============     ==========

Income from
 operations     $     7,181 ($1,073)       $      3,837     $    9,945
                =========== ==========     ============     ==========


Net income      $     5,107   ($655)   (5) $      2,343 (5) $    6,795
                =========== ==========     ============     ==========

Diluted net
 income per
 share (6)      $      0.28                                 $     0.37
                ===========                                 ==========


                Balance at                                  Balance at
                 Dec. 31,    Revenue          Billed        March 31,
                   2007     Recognized       Activity          2008
                ----------- ----------     ------------     ----------
Merck deferred
 revenue (7)    $    22,113 ($1,073)       $      3,837     $   24,877
                =========== ==========     ============     ==========


(1)  Reflects operating results in accordance with U.S. generally
      accepted accounting principles (GAAP).
(2)  Adjusted Non-GAAP amounts exclude the revenue recognized in the
      period associated with the Merck agreement under GAAP and
      include amounts billed associated with the Merck agreement.
(3)  Reflects recognition of revenue for the Merck agreement in
      accordance with GAAP for the period presented.
(4)  Reflects amounts billed under the Merck agreement for the period
      presented.
(5)  Reflects the after tax impact of the adjustments utilizing the
      Company's effective tax rate for the period presented.
(6)  Diluted net income per share is calculated using the diluted
      weighted average shares outstanding for the period presented.
(7)  Reflects the activity for the period presented in the deferred
      revenue balance sheet account associated with the Merck
      agreement.
                   SurModics, Inc. and Subsidiaries
                  Supplemental Non-GAAP Information
               For the Six Months Ended March 31, 2008
                (in thousands, except per share data)

                             (Unaudited)

                            Merck Agreement Adjustments
                            ---------------------------
                                                             Adjusted
                As Reported  Revenue          Billed         Non-GAAP
                 GAAP (1)   Recognized       Activity          (2)
                ----------- ----------     ------------     ----------

Revenue:
  Royalties
   and license
   fees         $    26,987   ($719)   (3) $      2,000 (4) $   28,268
  Product
   sales              9,907                                      9,907
  Research
   and
   development       12,642    (740)   (3)        3,712 (4)     15,614
                ----------- ----------     ------------     ----------
      Total
       revenue  $    49,536 ($1,459)       $      5,712     $   53,789
                =========== ==========     ============     ==========

Income from
 operations     $    14,753 ($1,459)       $      5,712     $   19,006
                =========== ==========     ============     ==========


Net income      $    10,754   ($889)   (5) $      3,479 (5) $   13,344
                =========== ==========     ============     ==========

Diluted net
 income per
 share (6)      $      0.58                                 $     0.72
                ===========                                 ==========


                Balance at                                  Balance at
                 Sept. 30,   Revenue          Billed        March 31,
                   2007     Recognized       Activity          2008
                ----------- ----------     ------------     ----------
Merck deferred
 revenue (7)    $    20,624 ($1,459)       $      5,712     $   24,877
                =========== ==========     ============     ==========


(1)  Reflects operating results in accordance with U.S. generally
      accepted accounting principles (GAAP).
(2)  Adjusted Non-GAAP amounts exclude the revenue recognized in the
      period associated with the Merck agreement under GAAP and
      include amounts billed associated with the Merck agreement.
(3)  Reflects recognition of revenue for the Merck agreement in
      accordance with GAAP for the period presented.
(4)  Reflects amounts billed under the Merck agreement for the period
      presented.
(5)  Reflects the after tax impact of the adjustments utilizing the
      Company's effective tax rate for the period presented.
(6)  Diluted net income per share is calculated using the diluted
      weighted average shares outstanding for the period presented.
(7)  Reflects the activity for the period presented in the deferred
      revenue balance sheet account associated with the Merck
      agreement.

CONTACT: SurModics, Inc.
Maggie Knack, 952-829-2700
Director, Investor Relations
or
Phil Ankeny, 952-829-2700
Senior Vice President and Chief Financial Officer
SOURCE: SurModics, Inc.