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SurModics Reports Third Quarter 2006 Results; Record Revenue and Earnings

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)--July 19, 2006--SurModics, Inc. (Nasdaq:SRDX), a leading provider of surface modification and drug delivery technologies to the healthcare industry, today reported financial results for the third fiscal quarter ended June 30, 2006.

Third Quarter Highlights:
-------------------------

--  Record revenue of $18.1 million, up 10% year-over-year

--  Record revenue in all three operating segments

--  Record non-Cordis revenue

--  GAAP results:

    --  Record operating income of $9.5 million

    --  Record net income of $6.4 million

    --  Record diluted EPS of $0.34

--  Non-GAAP results (excluding non-cash equity compensation expense):

    --  Record operating income of $11.1 million (61% operating
        margin)

    --  Record net income of $7.4 million

    --  Record diluted EPS of $0.39

--  Five new licenses signed with SurModics customers, representing
    four of SurModics' six business units

--  Six new product classes launched by our customers

--  8th consecutive quarter of record non-GAAP net income

--  9th consecutive quarter with non-Cordis revenue exceeding Cordis
    revenue

"SurModics is pleased to report strong financial and operating results for the third quarter of fiscal year 2006, achieving record revenue and earnings," said Bruce Barclay, President and CEO. "We delivered broad-based revenue growth, setting new records in each of our three operating segments - Drug Delivery, Hydrophilic and Other, and Diagnostics and Drug Discovery. In addition to strong CYPHER sales, we also delivered record non-Cordis revenue in the quarter."

"Our exceptional team of SurModics employees once again attained several significant operating milestones during the quarter," continued Barclay. "Working in concert with the Donaldson Company, we completed a significant agreement with Corning Life Sciences to market and distribute jointly developed synthetic extracellular matrix cell culture products. Our ophthalmology division signed its first license agreement, granting Bausch & Lomb access to our Genistein technology. Moreover, we announced additional customers using our hydrophilic coating technology on their DES delivery systems. In addition, we signed an agreement to jointly develop a drug-eluting prostatic stent with AbbeyMoor Medical."

Revenue in the Hydrophilic and Other segment achieved the highest year-over-year growth rate of the company's three operating segments. "We are pleased with the results we have achieved," commented Barclay. "Our strong competitive position in the hydrophilic marketplace has allowed us to build a broad and growing base of customers currently using our advanced lubricity coating technologies to enhance their medical devices. Further, the trend toward minimally invasive procedures has increased demand for hydrophilic coatings in the marketplace, favorably positioning us for sustained success."

Revenue for the third quarter of fiscal 2006 was $18.1 million, an increase of 10% from $16.5 million in the year earlier period. On a GAAP basis, operating income was a record $9.5 million; net income was a record $6.4 million; and diluted earnings per share was a record $0.34. Results include expensing of stock options, as required by SFAS No. 123R.

On a non-GAAP basis, operating income grew 19% to a record $11.1 million, from $9.3 million in the prior-year period. The operating margin for the quarter was 61%. Net income increased 20% to a record $7.4 million, from $6.2 million in the same period last year. Diluted earnings per share was a record $0.39, an 18% increase from $0.33 in the third quarter of fiscal 2005. Non-GAAP results exclude non-cash compensation charges. Please see our financial tables and the footnotes for a detailed explanation and reconciliation of GAAP and non-GAAP figures.

For the first nine months of fiscal year 2006, revenue was a record $52.3 million, an increase of 13% from $46.3 million in the year earlier period. On a GAAP basis, operating income was $27.0 million; net income was $14.0 million; and diluted earnings per share was $0.75; these figures were all records. On a non-GAAP basis, operating income grew 15% to a record $31.4 million, from $27.3 million in the prior-year period. Net income increased 21% to a record $21.2 million, from $17.5 million in the same period last year. Diluted earnings per share was a record $1.12, an 18% increase compared with $0.95 for the first nine months of fiscal 2005. Non-GAAP results exclude non-cash compensation charges, the non-cash IPR&D charge in connection with the Company's acquisition of InnoRx, Inc. in January 2005, and a non-cash impairment loss on our investment in Novocell. Please see our financial tables and the footnotes for a detailed explanation and reconciliation of GAAP and non-GAAP figures.

SurModics continues to expand its portfolio of pipeline projects. The company signed five new licenses in the third quarter, for a total of 16 to date in fiscal year 2006, already exceeding its goal of 15 for the fiscal year. As further evidence of the broad-based strength of our business, we signed licenses in four of our six business units. Additionally, during the quarter our customers launched 6 new product classes containing SurModics' technologies. The company has 158 potential commercial products in development, up from 118 in the prior year period, representing each of the company's four focus markets - Cardiovascular, Neurology, Ophthalmology and Orthopedics, with potential for both near-term and longer-term revenue growth.

"SurModics remains in excellent financial condition," said Phil Ankeny, Senior Vice President and Chief Financial Officer. "Our balance sheet remains strong, with a cash and investment balance of $96.7 million and no debt as of June 30, 2006. Operating cash flow for the third quarter was $8.9 million. We continue to evaluate opportunities to put our strong balance sheet to work."

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 web site, www.surmodics.com, and click on the webcast icon. A replay of the third quarter conference call will be available by dialing 800-405-2236 and entering conference call ID 11064452. The audio replay will be available beginning at 6:00 p.m. CT on Wednesday, July 19, until 6:00 p.m. CT on Wednesday, July 26.

About SurModics, Inc.

SurModics, Inc. is a leading provider of surface modification technologies in the areas of biocompatibility, site specific drug delivery, biological cell encapsulation, and medical diagnostics. SurModics partners with the world's foremost medical device, pharmaceutical and life science companies to bring innovation together for better patient outcomes. Recent collaborative efforts include the implementation of SurModics' Bravo(TM) drug delivery polymer matrix as a key component of the first-to-market drug-eluting coronary stent. SurModics is also active in the ophthalmology market with a sustained drug delivery system that is currently in human trials for treatment of retinal disease. A significant portion of SurModics' revenue is generated by royalties earned from the sale of our customers' commercial products. SurModics is headquartered in Eden Prairie, MN. More information about the company can be found at www.surmodics.com. The content of SurModics' web site is not part of this release or part of any filings the company makes with the SEC.

Safe Harbor for Forward Looking Statements

Certain statements contained in this press release may be deemed to be forward-looking statements under federal securities laws, and SurModics intends that such forward looking statements be subject to the safe harbor created thereby. SurModics does not undertake an obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

                           SurModics, Inc.
                         Statements of Income
              Reconciliation of GAAP to Non-GAAP Amounts
                (In thousands, except per share data)
                             (Unaudited)


                                               Three Months Ended
                                                  June 30, 2006
                                           ---------------------------
                                                    Adjust-    Non-
                                            GAAP(1)  ments   GAAP(2)
                                           ---------------------------

Revenue:
  Royalties and license fees                $13,948           $13,948
  Product sales                               2,659             2,659
  Research & development                      1,532             1,532
                                           ---------         ---------
     Total revenue                           18,139            18,139

Operating expenses:
  Product                                       891     (29)      862
  Research & development                      5,281    (714)    4,567
  Sales & marketing                             348     (55)      293
  General & administrative                    2,156    (808)    1,348
                                           ---------         ---------
     Total operating expenses                 8,676  (1,606)    7,070
                                           ---------         ---------
Income from operations                        9,463   1,606    11,069

Investment income                             1,102             1,102
                                           ---------         ---------
Income before income taxes                   10,565   1,606    12,171

Income tax provision                         (4,207)   (532)   (4,739)
                                           ---------         ---------
Net income                                   $6,358            $7,432
                                           =========         =========

Basic net income per share                    $0.34             $0.40
                                           =========         =========

Diluted net income per share                  $0.34             $0.39
                                           =========         =========

Weighted average shares outstanding
  Basic                                      18,570            18,570
  Diluted                                    18,725            19,013


(1) Reflects operating results in accordance with U.S. generally
    accepted accounting principles (or GAAP).
(2) Non-GAAP figures exclude non-cash compensation charges, including
    expensing of stock options as required by SFAS No. 123R, and
    related tax effect.



                           SurModics, Inc.
                         Statements of Income
              Reconciliation of GAAP to Non-GAAP Amounts
                (In thousands, except per share data)
                             (Unaudited)


                                               Three Months Ended
                                                  June 30, 2005
                                           ---------------------------
                                                    Adjust-    Non-
                                            GAAP(1)  ments   GAAP(2)
                                           ---------------------------

Revenue:
  Royalties and license fees                $12,694           $12,694
  Product sales                               2,663             2,663
  Research & development                      1,161             1,161
                                           ---------         ---------
     Total revenue                           16,518            16,518

Operating expenses:
  Product                                       743               743
  Research & development                      4,494             4,494
  Sales & marketing                             341               341
  General & administrative                    1,792    (161)    1,631
                                           ---------         ---------
     Total operating expenses                 7,370    (161)    7,209
                                           ---------         ---------
Income from operations                        9,148    (161)    9,309

Investment income                               469               469
                                           ---------         ---------
Income before income taxes                    9,617             9,778

Income tax provision                         (3,522)    (59)   (3,581)
                                           ---------         ---------
Net income                                   $6,095            $6,197
                                           =========         =========

Basic net income per share                     $.33             $0.34
                                           =========         =========

Diluted net income per share                   $.32             $0.33
                                           =========         =========

Weighted average shares outstanding
  Basic                                      18,322            18,322
  Diluted                                    18,928            18,928


(1) Reflects operating results in accordance with U.S. generally
    accepted accounting principles (or GAAP).
(2) Non-GAAP figures exclude non-cash compensation charges and related
    tax effect.



                           SurModics, Inc.
                         Statements of Income
              Reconciliation of GAAP to Non-GAAP Amounts
                (In thousands, except per share data)
                             (Unaudited)


                                                Nine Months Ended
                                                  June 30, 2006
                                           ---------------------------
                                                    Adjust-     Non-
                                            GAAP(1)  ments     GAAP(2)
                                           ---------------------------

Revenue:
  Royalties and license fees                $39,514           $39,514
  Product sales                               7,913             7,913
  Research & development                      4,884             4,884
                                           ---------          --------
     Total revenue                           52,311            52,311

Operating expenses:
  Product                                     2,441    (80)(3)  2,361
  Research & development                     14,935 (1,938)(3) 12,997
  Sales & marketing                           1,052   (133)(3)    919
  General & administrative                    6,887 (2,207)(3)  4,680
                                           ---------          --------
     Total operating expenses                25,315 (4,358)    20,957
                                           ---------          --------
Income from operations                       26,996  4,358     31,354

Investment income                             2,782             2,782
Impairment loss on investment                (4,651) 4,651 (4)      -
                                           ---------          --------
Income before income taxes                   25,127  9,009     34,136

Income tax provision                        (11,087)(1,860)(5)(12,947)
                                           ---------          --------
Net income                                  $14,040           $21,189
                                           =========          ========

Basic net income per share                    $0.76             $1.15
                                           =========          ========

Diluted net income per share                  $0.75             $1.12
                                           =========          ========

Weighted average shares outstanding
  Basic                                      18,494            18,494
  Diluted                                    18,681            18,940


(1) Reflects operating results in accordance with U.S. generally
    accepted accounting principles (or GAAP).
(2) Non-GAAP figures exclude non-cash compensation charges (including
    expensing of stock options as required by SFAS No. 123R), the
    non-cash impairment loss detailed in Note (4), and the tax items
    detailed in Note (5).
(3) Reflects non-cash compensation charges, including expensing of
    stock options as required by SFAS No. 123R.
(4) Reflects non-cash impairment loss on the Company's investment in
    Novocell, Inc.
(5) Non-GAAP results exclude a $465,000 benefit related to the
    reversal of a tax accrual resulting from settlement during the
    first quarter of a state's prior year tax returns. In addition, no
    tax benefit has been recorded for the $4.7 million non-cash
    impairment loss.


                           SurModics, Inc.
                       Statements of Operations
              Reconciliation of GAAP to Non-GAAP Amounts
                (In thousands, except per share data)
                             (Unaudited)


                                               Nine Months Ended
                                                 June 30, 2005
                                          ----------------------------
                                                   Adjust-      Non-
                                           GAAP(1)  ments     GAAP(2)
                                          ----------------------------

Revenue:
  Royalties and license fees               $35,052            $35,052
  Product sales                              6,984              6,984
  Research & development                     4,255              4,255
                                          ---------           --------
     Total revenue                          46,291             46,291

Operating expenses:
  Product                                    2,092              2,092
  Research & development                    11,739             11,739
  Sales & marketing                            909                909
  General & administrative                   4,635    (405)(3)  4,230
  Purchased in-process R&D                  30,277 (30,277)(4)      -
                                          ---------           --------
     Total operating expenses               49,652 (30,682)    18,970
                                          ---------           --------
Income (loss) from operations               (3,361) 30,682     27,321

Investment income                              756                756
                                          ---------           --------
Income (loss) before income taxes           (2,605) 30,682     28,077

Income tax provision                       (10,433)   (153)   (10,586)
                                          ---------           --------
Net income (loss)                         ($13,038)           $17,491
                                          =========           ========

Basic net income (loss) per share            ($.72)             $0.97
                                          =========           ========

Diluted net income (loss) per share          ($.72)             $0.95
                                          =========           ========

Weighted average shares outstanding
  Basic                                     18,008             18,008
  Diluted                                   18,008             18,461


(1) Reflects operating results in accordance with U.S. generally
    accepted accounting principles (or GAAP).
(2) Non-GAAP figures exclude non-cash compensation charges and the
    non-cash IPR&D charge detailed in Note (4).
(3) Reflects non-cash compensation charges.
(4) Reflects non-cash IPR&D charge in connection with the Company's
    acquisition of InnoRx, Inc. in January 2005.



                           SurModics, Inc.
                       Condensed Balance Sheets
                            (In thousands)


                                               June 30,  September 30,
                                                 2006         2005
                                             ----------- ------------
Assets                                         (Unaudited)
------

Current assets:
  Cash & investments                            $50,596      $24,445
  Accounts receivable                            11,863       10,996
  Inventories                                     1,115        1,091
  Other current assets                            2,079        5,072
                                             ----------- ------------
     Total current assets                        65,653       41,604

Property & equipment, net                        11,776       14,832
Long-term investments                            46,095       48,874
Other assets                                     20,877       18,915

                                             ----------- ------------
     Total assets                              $144,401     $124,225
                                             =========== ============

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

Total current liabilities                        $5,613       $5,123

Other liabilities                                 2,582        3,521

Total stockholders' equity                      136,206      115,581

                                             ----------- ------------
  Total liabilities & stockholders' equity     $144,401     $124,225
                                             =========== ============

Certain information in this financial release may be considered
non-GAAP Financial Information as contemplated by SEC Regulation G.
Accordingly, we are providing the preceding tables, which
reconcile results to their corresponding GAAP based operating results
presented under our Statements of Income and Statements of Operations.

Management believes the presentation of these non-GAAP financial
results, in connection with the results of the fiscal quarter ended
June 30, 2006, provide useful information to investors regarding our
results of operations, as these non-GAAP financial measures allow
investors to better evaluate ongoing business performance and factors
that influenced performance during the period under report, including
when comparing against prior periods. Management also uses these
non-GAAP measures internally to monitor performance of the business.
These non-GAAP financial measures should be considered in addition
to, and not a substitute for, financial measures prepared in
accordance with GAAP.

CONTACT:
SurModics, Inc. Phil Ankeny,
952-829-2700

SOURCE: SurModics, Inc.