SEC Filing | Surmodics, Inc.

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e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 0-23837

SurModics, Inc.

(Exact name of registrant as specified in its charter)



MINNESOTA (State of incorporation)		41-1356149 (I.R.S. Employer Identification No.)

9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (952) 500-7000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares of the registrant’s Common Stock, $.05 par value per share, outstanding as of February 1, 2011 was 17,488,245.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION			3
Item 1.		Financial Statements	3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.		Controls and Procedures	21

PART II. OTHER INFORMATION
Item 1.		Legal Proceedings	22
	Item 1A.	Risk Factors	22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.		Defaults Upon Senior Securities	22
Item 4.		(Removed and Reserved)	22
Item 5.		Other Information	22
Item 6.		Exhibits	22

SIGNATURES			23

EXHIBIT INDEX TO FORM 10-Q			24
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

SurModics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


	December 31,		September 30,
	2010		2010
(in thousands, except share data)	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	14,309	$	11,391
Short-term investments		10,149		9,105
Accounts receivable, net of allowance for doubtful accounts of $350 and $461 as of December 31 and September 30, 2010, respectively		8,764		8,987
Inventories		3,111		3,047
Deferred tax asset		678		247
Prepaids and other		3,662		4,701

Total current assets	$	40,673	$	37,478


Property and equipment, net		65,043		65,395
Long-term investments		35,247		36,290
Deferred tax asset		3,443		2,606
Intangible assets , net		14,869		15,257
Goodwill		8,010		8,010
Other assets, net		5,048		5,243

Total assets	$	172,333	$	170,279


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	2,850	$	3,341
Accrued liabilities:
Compensation		1,516		930
Accrued other		1,503		1,753
Deferred revenue		1,793		562
Other current liabilities		1,474		1,061

Total current liabilities		9,136		7,647
Deferred revenue, less current portion		3,773		3,598
Other long-term liabilities		4,656		4,675

Total liabilities	$	17,565	$	15,920


Commitments and contingencies (Note 15)
Stockholders’ Equity
Series A Preferred stock- $.05 par value, 450,000 shares authorized; no shares issued and outstanding		—		—
Common stock- $.05 par value, 45,000,000 shares authorized; 17,488,634 and 17,423,601 shares issued and outstanding		874		871
Additional paid-in capital		70,672		69,702
Accumulated other comprehensive income		699		886
Retained earnings		82,523		82,900

Total stockholders’ equity		154,768		154,359


Total liabilities and stockholders’ equity	$	172,333	$	170,279

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SurModics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations


	Three Months Ended
	December 31,
	2010			2009
*(In thousands, except net (loss) income per share)*	*(Unaudited)*
Revenue
Royalties and license fees	$	7,566		$	9,198
Product sales		4,792			4,548
Research and development		2,810			3,635

Total revenue		15,168			17,381

Operating costs and expenses
Product		1,825			1,957
Customer research and development		4,731			3,323
Other research and development		2,132			4,719
Selling, general and administrative		5,214			4,614
Goodwill impairment		750			—
Restructuring charges		1,236			—

Total operating costs and expenses		15,888			14,613

(Loss) income from operations		(720	)		2,768

Other income
Investment income, net		185			297
Other income, net		36			—

Other income, net		221			297

(Loss) income before income taxes		(499	)		3,065
Income tax benefit (provision)		122			(1,148	)

Net (loss) income	$	(377	)	$	1,917


Basic net (loss) income per share	$	(0.02	)	$	0.11
Diluted net (loss) income per share	$	(0.02	)	$	0.11

Weighted average shares outstanding
Basic		17,383			17,396
Dilutive effect of outstanding stock options and non-vested stock		—			44

Diluted		17,383			17,440

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SurModics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows


	Three Months Ended
	December 31,
	2010			2009
(in thousands)	(Unaudited)
Operating Activities
Net (loss) income	$	(377	)	$	1,917
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization		1,792			1,744
Amortization of premium on investments		27			35
Stock-based compensation		974			1,535
Deferred tax		(1,142	)		2,840
Goodwill impairment charge		750			—
Excess tax benefit from stock-based compensation plans		2			38
Other		125			—
Change in operating assets and liabilities:
Accounts receivable		223			(341	)
Inventories		(64	)		(113	)
Accounts payable and accrued liabilities		428			(262	)
Income taxes		1,056			(2,501	)
Deferred revenue		1,406			3,370
Prepaids and other		75			(12	)

Net cash provided by operating activities		5,275			8,250


Investing Activities
Purchases of property and equipment		(1,393	)		(3,572	)
Purchases of available-for-sale investments		(1,412	)		(8,284	)
Sales/maturities of investments		1,200			3,970
Payments related to prior business acquisitions		(750	)		(750	)

Net cash used in investing activities		(2,355	)		(8,636	)


Financing Activities
Excess tax benefit from stock-based compensation plans		(2	)		(38	)
Issuance of common stock		—			282
Purchase of common stock to pay employee taxes		—			(365	)

Net cash used in financing activities		(2	)		(121	)

Net change in cash and cash equivalents		2,918			(507	)

Cash and Cash Equivalents
Beginning of period		11,391			11,636

End of period	$	14,309		$	11,129


Supplemental Information
Cash paid for income taxes	$	(36	)	$	809
Noncash transaction — acquisition of property, plant, and equipment on account	$	348		$	214
Noncash transaction — acquisition of intangible assets on account	$	—		$	210

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SurModics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Period Ended December 31, 2010
(Unaudited)

(1) Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments, consisting solely of normal recurring adjustments, needed to fairly present the financial results for the periods presented. These financial statements include some amounts that are based on management’s best estimates and judgments. These estimates may be adjusted as more information becomes available, and any adjustment could be significant. The impact of any change in estimates is included in the determination of earnings in the period in which the change in estimate is identified. The results of operations for the three-month period ended December 31, 2010 are not necessarily indicative of the results that may be expected for the entire 2011 fiscal year.

In accordance with the rules and regulations of the United States Securities and Exchange Commission, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the audited financial statements of the Company. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended September 30, 2010, and footnotes thereto included in the Company’s Form 10-K as filed with the United States Securities and Exchange Commission on December 14, 2010.

Subsequent events have been evaluated through the date the financial statements were issued.

(2) Key Accounting Policies

Revenue recognition

Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment has occurred or delivery has occurred if the terms specify destination; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. When there are additional performance requirements, revenue is recognized when all such requirements have been satisfied. Under revenue arrangements with multiple deliverables, the Company recognizes each separable deliverable as it is earned.

The Company’s revenue is derived from three primary sources: (1) royalties and license fees from licensing its proprietary drug delivery and surface modification technologies to customers; (2) the sale of polymers and reagent chemicals, stabilization products, antigens, substrates and microarray slides to the diagnostics and biomedical research industries; and (3) research and development fees generated on customer projects.

Royalties and licenses fees. The Company licenses technology to third parties and collects royalties. Royalty revenue is generated when a customer sells products incorporating the Company’s licensed technologies. Royalty revenue is recognized as licensees’ report it to the Company, and payment is typically submitted concurrently with the report. For stand-alone license agreements, up-front license fees are recognized over the term of the related licensing agreement. Minimum royalty fees are recognized in the period earned and collectability is reasonably assured.

Revenue related to a performance milestone is recognized upon the achievement of the milestone, as defined in the respective agreements and provided the following conditions have been met:

	•		The milestone payment is non-refundable;

	•		The milestone is achieved, involved a significant degree of risk, and was not reasonably assured at the inception of the arrangement;

	•		Accomplishment of the milestone involved substantial effort;

	•		The amount of the milestone payment is commensurate with the related effort and risk; and

	•		A reasonable amount of time passed between the initial license payment and the first and subsequent milestone payments.

If these conditions have not been met, the milestone payment is deferred and recognized over the term of the agreement.

Product sales. Product sales to third parties are recognized at the time of shipment, provided that an order has been received, the price is fixed or determinable, collectability of the resulting receivable is reasonably assured and returns can be reasonably estimated. The Company’s sales terms provide no right of return outside of the standard warranty policy. Payment terms are generally set at 30-45 days.

Research and development. The Company performs third party research and development activities, which are typically provided on a time and materials basis. Generally, revenue for research and development is recorded as performance progresses under the applicable contract.

Arrangements with multiple deliverables. In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for multiple deliverable revenue arrangements to:

	(i).		provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

	(ii).		require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and

	(iii).		eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

The Company enters into license and development arrangements that may consist of multiple deliverables that could include license to SurModics technology, research and development activities, manufacturing services, and product sales based on the needs of its customers. For example, a customer may enter into an arrangement to obtain a license to SurModics intellectual property which would also include research and development activities, and supply of products manufactured by SurModics. For these services provided, SurModics could receive upfront license fees upon signing of a contract and granting the license, fees for research and development activities as such activities are performed, milestone payments contingent upon advancement of the product through development and clinical stages to successful commercialization, fees for manufacturing services and supply of product, and royalty payments based on customer sales of product incorporating SurModics’ technology.

Under the accounting guidance, the Company is still required to evaluate each deliverable in a multiple element arrangement for separability. The Company is then required to allocate revenue to each separate deliverable using a hierarchy of VSOE, TPE, or ESP. In many instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be a result of the Company infrequently selling each element separately or having a limited history with multiple element arrangements. When VSOE cannot be established, the Company attempts to establish selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP is generally used for highly customized offerings.

The Company determines ESP for undelivered elements by considering multiple factors including, but not limited to, market conditions, competitive landscape and past pricing arrangements with similar features. The determination of ESP is made through consultation with the Company’s management, taking into consideration the marketing strategies for each business unit.

New Accounting Pronouncements

No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.

(3) Fair Value Measurements

The accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

Fair Value Hierarchy

Accounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

The Company’s Level 1 asset consists of its investment in OctoPlus, N.V. (see Note 6 for further information). The fair market value of this investment is based on the quoted price of OctoPlus shares traded on the Euronext Amsterdam Stock Exchange.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company’s Level 2 assets consist of money market funds, U.S. Treasury securities, corporate bonds, municipal bonds, U.S. agency securities, agency and municipal securities, certain asset-backed securities and mortgage-backed securities. Fair market values for these assets are based on quoted vendor prices and broker pricing where all significant inputs are observable.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The Company’s Level 3 assets include an other U.S. government agency security and two mortgage-backed securities. The fair market values of these investments were determined by broker pricing where not all significant inputs were observable.

In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company did not significantly change its valuation techniques from prior periods.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 (in thousands):


	Quoted Prices		Significant
	in Active Markets		Other		Significant		Total Fair
	for Identical		Observable		Unobservable		Value as of
	Instruments		Inputs		Inputs		December 31,
	(Level 1)		(Level 2)		(Level 3)		2010

Assets:
Cash equivalents	$	—	$	12,628	$	—	$	12,628
Available for sale debt securities
US government obligations		—		28,698		695		29,393
Mortgage backed securities		—		4,263		685		4,948
Municipal bonds		—		3,079		—		3,079
Asset backed securities		—		1,273		—		1,273
Corporate bonds		—		2,607		—		2,607
Other assets		2,496		—		—		2,496

Total assets measured at fair value	$	2,496	$	52,548	$	1,380	$	56,424

Short-term and long-term investments disclosed in the condensed consolidated balance sheets include held-to-maturity investments totaling $4.1 million as of December 31, 2010. Held-to-maturity investments are carried at an amortized cost.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 (in thousands):


	Quoted Prices in		Significant
	Active Markets		Other		Significant		Total Fair
	for Identical		Observable		Unobservable		Value as of
	Instruments		Inputs		Inputs		September 30,
	(Level 1)		(Level 2)		(Level 3)		2010

Assets:
Cash equivalents	$	—	$	10,128	$	—	$	10,128
Available for sale debt securities
US government obligations		—		25,626		704		26,330
Mortgage backed securities		—		4,757		69		4,826
Municipal bonds		—		3,150		—		3,150
Asset backed securities		—		1,113		—		1,113
Corporate bonds		—		5,852		—		5,852
Other assets		2,624		—		—		2,624

Total assets measured at fair value	$	2,624	$	50,626	$	773	$	54,023

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis

The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):


	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	For Three Months Ended December 31, 2010
	Available-for-Sale Debt Securities
	U.S. Government			Mortgage
	Obligations			Backed			Total
Balance, September 30, 2010	$	704		$	69		$	773
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			—			—
Total realized and unrealized gains (losses):
Included in other comprehensive (loss) income		19			(4	)		15
Purchases, issuances, sales and settlements, net		(28	)		620			592

Balance, December 31, 2010	$	695		$	685		$	1,380


	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	For Three Months Ended December 31, 2009
	Available-for-Sale Debt Securities
	U.S. Government			Mortgage
	Obligations			Backed			Total
Balance, September 30, 2009	$	1,130		$	73		$	1,203
Transfers into Level 3		—			78			78
Transfers out of Level 3		(36	)		(73	)		(109	)
Total realized and unrealized gains (losses):
Included in other comprehensive (loss) income		—			—			—
Purchases, issuances, sales and settlements, net		(92	)		(3	)		(95	)

Balance, December 31, 2009	$	1,002		$	75		$	1,077

As of December 31, 2010, marketable securities measured at fair value using Level 3 inputs was comprised of a $0.7 million U.S. government agency security and $0.7 million of mortgage-backed securities within the Company’s available-for-sale investment portfolio. These securities were measured using observable market data and Level 3 inputs as a result of the lack of market activity and liquidity. The fair value of these securities was based on the Company’s assessment of the underlying collateral and the creditworthiness of the issuer of the securities.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company’s investments in non-marketable securities of private companies are accounted for using the cost method as the Company does not exert significant influence over the investee’s operating or financial activities. These investments as well as held-to-maturity securities are measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies has occurred and is other-than-temporary, an assessment is made by considering available evidence, including the general market conditions in the investee’s industry, the investee’s product development status and subsequent rounds of financing and the related valuation and/or the Company’s participation in such financings. The Company also assesses the investee’s ability to meet business milestones and the financial condition and near-term prospects of the individual investee, including the rate at which the investee is using its cash and the investee’s need for possible additional funding at a potentially lower valuation. The valuation methodology for determining the decline in value of non-marketable equity securities is based on inputs that require management judgment and are Level 3 inputs.

(4) Investments

Investments consist principally of U.S. government and government agency obligations and mortgage-backed securities and are classified as available-for-sale or held-to-maturity at December 31 and September 30, 2010. Available-for-sale investments are reported at fair value with unrealized gains and losses net of tax excluded from operations and reported as a separate component of stockholders’ equity, except for other-than-temporary impairments, which are reported as a charge to current operations. A loss would be recognized when there is an other-than-temporary impairment in the fair value of any individual security classified as available-for-sale with the associated net unrealized loss reclassified out of accumulated other comprehensive income with a corresponding adjustment to other income (loss). This adjustment results in a new cost basis for the investment. Investments which management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. If there is an other-than-temporary impairment in the fair value of any individual security classified as held-to-maturity, the Company will write down the security to fair value with a corresponding adjustment to other income (loss). Interest on debt securities, including amortization of premiums and accretion of discounts, is included in other income (loss). Realized gains and losses from the sales of debt securities, which are included in other income (loss), are determined using the specific identification method.

The original cost, unrealized holding gains and losses, and fair value of available-for-sale investments as of December 31, 2010 and September 30, 2010 were as follows (in thousands):


	December 31, 2010
			Unrealized		Unrealized
	Original Cost		Gains		Losses			Fair Value
U.S. government obligations	$	29,153	$	284	$	(45	)	$	29,392
Mortgage-backed securities		4,855		143		(51	)		4,947
Municipal bonds		3,037		47		(5	)		3,079
Asset-backed securities		1,299		6		(32	)		1,273
Corporate bonds		2,601		11		(6	)		2,606

Total	$	40,945	$	491	$	(139	)	$	41,297


	September 30, 2010
			Unrealized		Unrealized
	Original Cost		Gains		Losses			Fair Value
U.S. government obligations	$	25,968	$	395	$	(34	)	$	26,329
Mortgage-backed securities		4,711		164		(48	)		4,827
Municipal bonds		3,079		72		—			3,151
Asset-backed securities		1,146		8		(42	)		1,112
Corporate bonds		5,828		24		—			5,852

Total	$	40,732	$	663	$	(124	)	$	41,271

The original cost and fair value of investments by contractual maturity at December 31, 2010 were as follows (in thousands):


	Amortized
	Cost		Fair Value
Debt securities due within:
One year	$	9,059	$	9,144
One to five years		26,188		26,429
Five years or more		5,698		5,726

Total	$	40,945	$	41,299

The following table summarizes sales of available-for-sale securities for the three-month period ended December 31, 2010 (in thousands):


Proceeds from sales	$	1,200
Gross realized gains	$	2
Gross realized losses	$	(2	)

At December 31, 2010, the amortized cost and fair market value of held-to-maturity debt securities was $4.1 million and $4.3 million, respectively. Investments in securities designated as held-to-maturity consist of tax-exempt municipal bonds and have maturity dates ranging between one and two years from December 31, 2010. At September 30, 2010, the amortized cost and fair market value of held-to-maturity debt securities were $4.1 million and $4.3 million, respectively.

(5) Inventories

Inventories are principally stated at the lower of cost or market using the specific identification method and include direct labor, materials and overhead. Inventories consisted of the following components (in thousands):


	December 31,		September 30,
	2010		2010
Raw materials	$	949	$	1,140
Finished products		2,162		1,907

Total	$	3,111	$	3,047

(6) Other Assets

Other assets consist principally of strategic investments as follows (in thousands):


	December 31,		September 30,
	2010		2010
Investment in OctoPlus N.V.	$	2,496	$	2,624
Investment in Nexeon MedSystems		285		285
Investment in ThermopeutiX		1,185		1,185
Investment in Novocell		559		559
Other		523		590

Other assets	$	5,048	$	5,243

The Company accounts for most of its strategic investments under the cost method. The Company accounts for its investment in OctoPlus N.V. (OctoPlus) common stock, whose shares are traded on the Euronext Amsterdam Stock Exchange, as an available-for-sale investment. Available-for-sale investments are reported at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, except for other-than-temporary impairments, which are reported as a charge to current operations, recorded in the other income (loss) section of the condensed consolidated statements of operations. The cost basis in the Company’s investment in OctoPlus is $1.7 million.

The Company recognized revenue of less than $0.1 million for each of the three-month periods ended December 31, 2010 and 2009, respectively, from activity with companies in which it had a strategic investment.

(7) Intangible Assets

Intangible assets consist principally of acquired patents and technology, customer relationships, licenses, and trademarks. The Company recorded amortization expense of $0.4 million in each of the three-month periods ended December 31, 2010 and 2009, respectively.

Intangible assets consisted of the following (in thousands):


	Useful life		December 31,			September 30,
	(in years)		2010			2010
Customer list		9 — 11	$	8,657		$	8,657
Core technology		8 — 18		8,330			8,330
Patents and other		2 — 20		2,376			2,376
Trademarks				600			600
Less accumulated amortization of intangible assets				(5,094	)		(4,706	)

Intangible assets, net			$	14,869		$	15,257

Based on the intangible assets in service as of December 31, 2010, estimated amortization expense for each of the next five fiscal years is as follows (in thousands):


Remainder of 2011	$	1,158
2012		1,544
2013		1,544
2014		1,544
2015		1,533
2016		1,395

Future amortization amounts presented above are estimates. Actual future amortization expense may be different, as a result of future acquisitions, impairments, changes in amortization periods, or other factors.

(8) Goodwill

The following table summarizes the changes in carrying amount of goodwill (in thousands):


Balance at September 30, 2010	$	8,010
Payments related to prior business acquisitions		750
Goodwill impairment		(750	)

Balance at December 31, 2010	$	8,010

Goodwill represents the excess of the cost of the acquired entities over the fair value assigned to the assets purchased and liabilities assumed in connection with the Company’s acquisitions. The carrying amount of goodwill is evaluated annually, and between annual evaluations if events occur or circumstances change indicating that the carrying amount of goodwill may be impaired.

During the Company’s fiscal 2010 annual test of goodwill impairment, the Company determined that goodwill related to the SurModics Pharmaceutical, Inc. (SurModics Pharma) reporting unit was fully impaired and a non-cash goodwill impairment charge totaling $13.8 million was recognized in the fourth quarter of fiscal 2010

In the first quarter of fiscal 2011 a milestone was achieved associated with the July 2007 acquisition of SurModics Pharma and $0.8 million of additional purchase price was recorded as an increase to goodwill. There have been no substantial changes in operating results for SurModics Pharma in fiscal 2011 and as such the Company concluded the goodwill associated with the milestone payment was fully impaired as well and a $0.8 million non-cash goodwill impairment charge was recognized in the first quarter of fiscal 2011.

(9) Revolving Credit Facility

In February 2009, the Company entered into a two-year $25.0 million unsecured revolving credit facility. Borrowings under the credit facility, if any, will bear interest at a benchmark rate plus an applicable margin based upon the Company’s funded debt to EBITDA ratio. As of December 31, 2010, the Company had no debt outstanding under the credit facility. In connection with the credit facility, the Company is required to maintain certain financial and nonfinancial covenants. The Company was not in compliance with certain covenants in fiscal 2010, however, the Company is in compliance with all covenants for the first quarter of fiscal 2011. The Company is working with the bank to obtain waivers for certain fiscal 2010 covenants and expects to complete these activities by the end of the second quarter of fiscal 2011. The Company believes that noncompliance will not cause liquidity issues given the Company’s investment holdings and cash generated by operations.

(10) Stock-based Compensation

The Company has stock-based compensation plans under which it grants stock options and restricted stock awards. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period. The Company’s stock-based compensation expenses were allocated as follows (in thousands):


	Three months ended
	December 31,
	2010		2009
Product costs	$	51	$	35
Customer research and development		94		153
Other research and development		209		615
Selling, general and administrative		620		732

Total	$	974	$	1,535

As of December 31, 2010, approximately $7.3 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 3 years. The unrecognized compensation costs above exclude $2.0 million associated with performance share awards that are currently not anticipated to be fully expensed because the performance conditions for certain award periods are not expected to be met.

Stock Option Plans

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair value of stock options granted during the three-month periods ended December 31, 2010 and 2009 was $3.91 and $8.40, respectively. The assumptions used as inputs in the model were as follows:


	Three months ended
	December 31,
	2010			2009
Risk-free interest rates		1.4	%		1.8	%
Expected life (years)		4.8			4.8
Expected volatility		44.9	%		41.4	%
Dividend yield		0			0	%

The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award. The expected life of options granted is determined based on the Company’s experience. Expected volatility is based on the Company’s stock price movement over a period approximating the expected term. Based on management’s judgment, dividend rates are expected to be zero for the expected life of the options. The Company also estimates forfeitures of options granted, which are based on historical experience.

The Company’s Incentive Stock Options (ISO) are granted at a price of at least 100% of the fair market value of the common stock of the Company on the date of the grant or 110% with respect to optionees who own more than 10% of the total combined voting power of all classes of stock. ISOs expire in seven years or upon termination of employment and are exercisable at a rate of 20% per year commencing one year after the date of grant. Nonqualified stock options are granted at fair market value on the date of grant. Nonqualified stock options expire in 7 to 10 years or upon termination of employment or service as a Board member. Nonqualified stock options granted prior to May 2008 generally become exercisable with respect to 20% of the shares on each of the first five anniversaries following the grant date, and nonqualified stock options granted subsequent to May 2008 generally become exercisable with respect to 25% on each of the first four anniversaries following the grant date.

No stock options were exercised during the three-month period ended December 31, 2010. The total pre-tax intrinsic value of options exercised during the three-month period ended December 31, 2009 was not meaningful as the Company’s stock price of $22.60 on December 31, 2009 was below the value of options exercised earlier in the quarter. The intrinsic value represents the difference between the exercise price and the fair market value of the Company’s common stock on the last day of the respective fiscal period end.

Restricted Stock Awards

The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (Restricted Stock). Under accounting guidance these shares are considered to be non-vested shares. The Restricted Stock will be released to the key employees if they are employed by the Company at the end of the vesting period. The stock-based compensation table above includes Restricted Stock expenses of $0.2 million and $0.3 million during three-month periods ended December 31, 2010 and 2009, respectively.

Performance Share Awards

The Company has entered into performance share agreements with certain key employees, covering the issuance of common stock (Performance Shares). The Performance Shares vest upon the achievement of all or a portion of certain performance objectives, which must be achieved during the performance period. Compensation is recognized in each period based on management’s best estimate of the achievement level of the grants’ specified performance objectives and the resulting vesting amounts. The Company recognized expenses of approximately $0.1 million related to Performance Shares for each of the three-month periods ended December 31, 2010 and 2009, respectively.

1999 Employee Stock Purchase Plan

Under the 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 400,000 shares of common stock. All full-time and part-time employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of December 31, 2010 and 2009, there were $0.4 million and $0.5 million of employee contributions, respectively, included in accrued liabilities in the accompanying condensed consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan for the three-month periods ended December 31, 2010 and 2009 totaled $0.1 million in each period. The stock-based compensation table above includes the Stock Purchase Plan expenses.

(11) Restructuring Charges

The Company recorded total restructuring charges of approximately $1.2 million in connection with the reorganization announced in October 2010. The charges for fiscal 2011 have been presented separately as restructuring charges in the condensed consolidated statements of operations. These pre-tax charges consisted of $1.2 million of severance pay and benefit expenses and $0.1 million of facility-related costs. The restructuring is expected to result in approximately $3.0 to $3.5 million in annualized cost savings. Cash payments associated with the fiscal 2011 restructuring event totaled $0.8 million as of December 31, 2010 leaving a balance of $0.5 million. There were also payments of $0.1 million associated with facility-related costs in the period related to the fiscal 2009 and 2010 restructuring events. The remaining balance for all restructuring charges is expected to be paid within the next 36 months. The current portion totaling $1.3 million is recorded as a current liability within other accrued liabilities and the long-term portion totaling $0.2 million is recorded as a long-term liability within other long-term liabilities within the condensed consolidated balance sheets.

The following table summarizes the restructuring accrual activity for the quarter ended December 31, 2010 (in thousands):


	Employee			Facility-
	severance and			related
	benefits			costs			Total
Balance at September 30, 2010	$	4		$	1,179		$	1,183
Accruals during the period		1,174			62			1,236
Cash payments		(805	)		(133	)		(938	)

Balance at December 31, 2010	$	373		$	1,108		$	1,481

(12) Comprehensive (Loss) Income

The components of comprehensive (loss) income are as follows (in thousands):


	Three months ended
	December 31,
	2010			2009
Net (loss) income	$	(377	)	$	1,917
Other comprehensive loss:
Unrealized holding losses on available-for-sale securities arising during the period		(187	)		(512	)
Less reclassification adjustment for realized gains included in net income, net of tax		—			—

Other comprehensive loss		(187	)		(512	)

Comprehensive (loss) income	$	(564	)	$	1,405

(13) Income Taxes

The Company recorded an income tax benefit of $0.1 million and an income tax provision of $1.1 million for the three-month periods ended December 31, 2010 and 2009, respectively, representing effective tax rates of 24.5% and 37.5%, respectively. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three-months ended December 31, 2010 reflects therapeutic grant income which is not subject to federal income tax and a discrete tax benefit discussed below. For the three-months ended December 31, 2009 the difference between the U.S. federal statutory rate and the Company’s effective tax rate reflects state income taxes.

The December adoption of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, retroactively extended the term of the federal tax credit for research activities to the beginning of calendar 2010 and extending the credit through the end of calendar 2011. The Company recognized a discrete benefit of approximately $0.1 million in the three-month period ended December 31, 2010 related to the nine-month period ended September 30, 2010. The tax credit recognized for research activities for each of the three-month periods ended December 31, 2010 and 2009, was less than $0.1 million.

The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate as of December 31, 2010 and September 30, 2010, respectively, are $2.0 million and $1.9 million. Currently, the Company does not expect the liability for unrecognized tax benefits to change significantly in the next twelve months. Interest and penalties related to the unrecognized tax benefits are recorded in income tax expense.

The Company files income tax returns, including returns for its subsidiaries, in the United States (U.S.) federal jurisdiction and in various state jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. The Internal Revenue Service has commenced an examination of the Company’s U.S. income tax return for fiscal 2009 in the first quarter of fiscal 2011. U.S. tax returns for fiscal years ended September 30, 2007 and 2008 remain subject to examination by federal tax authorities. Tax returns for state and local jurisdictions for fiscal years ended September 30, 2003 through 2009 remain subject to examination by state and local tax authorities.

(14) Operating Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company manages its revenue according to its three business units, as follows: (1) the Medical Device unit, which is comprised of surface modification coating technologies to improve access, deliverability, and predictable deployment of medical devices, as well as drug delivery coating technologies to provide site-specific drug delivery from the surface of a medical device. End markets include coronary, peripheral, and neuro-vascular, and urology, among others; (2) the Pharmaceuticals unit, which incorporates a broad range of drug delivery technologies for injectable therapeutics, including microparticles, nanoparticles, and implants addressing a range of clinical applications including ophthalmology, oncology, dermatology and neurology, among others. Based in Birmingham, Alabama, the Pharmaceuticals business includes the Company’s cGMP manufacturing facility; and (3) the In Vitro Diagnostics unit, which consists of component products and technologies for diagnostic test kits and biomedical research applications. Products include microarray slide technologies, protein stabilization reagents, substrates, and antigens.

The Company manages its expenses on a company-wide basis, as many costs and activities are shared among the business units. The focus of the business units is providing solutions to customers and maximizing financial performance over the long term. The table below presents revenue from the business units, for the three-month periods in fiscal 2011 and 2010, as follows (in thousands):


	Three months ended
	December 31,
	2010		2009
Medical Device	$	9,808	$	11,514
Pharmaceuticals		2,673		3,581
In Vitro Diagnostics		2,687		2,286

Total revenue	$	15,168	$	17,381

(15) Commitments and Contingencies

Litigation. From time to time, the Company has been, and may become, involved in various legal actions involving its operations, products and technologies, including intellectual property and employment disputes. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, which, if granted, could require significant expenditures or result in lost revenues. The Company records a liability in the consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.

InnoRx, Inc. In January 2005, the Company entered into a merger agreement whereby SurModics acquired all of the assets of InnoRx, Inc. (InnoRx), an early stage company developing drug delivery devices and therapies for the ophthalmology market. SurModics will be required to issue up to approximately 480,059 additional shares of its common stock to the stockholders of InnoRx upon the successful completion of the remaining development and commercial milestones involving InnoRx technology acquired in the transaction.

SurModics Pharmaceuticals, Inc. In July 2007, the Company acquired 100% of the capital stock of SurModics Pharmaceuticals, Inc. (SurModics Pharma) drug delivery company that provides proprietary polymer-based technologies to companies developing pharmaceutical products. The sellers of SurModics Pharma are still eligible to receive up to $15.5 million in additional consideration based on successful achievement of specific milestones through calendar 2011.

PR Pharmaceuticals, Inc. In November 2008, the Company’s subsidiary SurModics Pharma acquired certain contracts and assets of PR Pharmaceuticals, to enhance its portfolio of drug delivery technologies for the pharmaceutical and biotechnology industries. The sellers of PR Pharmaceuticals are still eligible to receive up to $3.0 million in additional consideration based on successful achievement of specific milestones for successful patent issuances and product development.

Alabama Jobs Commitment. In April 2008, the Company purchased a 286,000 square foot office and warehouse facility to support cGMP needs of customers and the anticipated growth of the SurModics Pharma business. At the same time, SurModics Pharma entered into an agreement with various governmental authorities to obtain financial incentives associated with creation of jobs in Alabama. Some of the governmental agencies have recapture rights in connection with the financial incentives if a specific number of full-time employees are not hired by June 2012, with an extension to June 2013 if circumstances or events occur that are beyond the control of SurModics Pharma or could not have been reasonably anticipated by SurModics Pharma. As of December 31, 2010, SurModics Pharma has received $1.7 million in connection with the agreement, and the Company has recorded the payment in other long-term liabilities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with both the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2010. This discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of Part I of this report.

Overview

SurModics is a leading provider of drug delivery and surface modification technologies to the healthcare industry. In October 2010, we announced a change in our organizational structure moving from a functional structure into one consisting of three business units: Medical Device, Pharmaceuticals, and In Vitro Diagnostics. We believe this structure improves the visibility, marketing and adoption of the Company’s broad array of technologies within specific markets and helps our customers in the medical device, pharmaceutical and life science industries better solve unmet clinical needs.

The organizational change resulted in the Company now presenting revenue as follows: (1) the Medical Device unit, which is comprised of surface modification coating technologies to improve access, deliverability, and predictable deployment of medical devices, as well as drug delivery coating technologies to provide site-specific drug delivery from the surface of a medical device. End markets include coronary, peripheral, and neuro-vascular, and urology, among others; (2) the Pharmaceuticals unit, which incorporates a broad range of drug delivery technologies for injectable therapeutics, including microparticles, nanoparticles, and implants addressing a range of clinical applications including ophthalmology, oncology, dermatology and neurology, among others. Based in Birmingham, Alabama, the Pharmaceuticals business includes our cGMP manufacturing facility; and (3) the In Vitro Diagnostics unit, which consists of component products and technologies for diagnostic test kits and biomedical research applications. Products include microarray slide technologies, protein stabilization reagents, substrates, and antigens.

The Company’s revenue is derived from three primary sources: (1) royalties and license fees from licensing our proprietary drug delivery and surface modification technologies to customers; the vast majority (typically in excess of 90%) of revenue in the “royalties and license fees” category is in the form of royalties; (2) the sale of polymers and reagent chemicals, stabilization products, antigens, substrates and microarray slides to the diagnostics and biomedical research industry; and (3) research and development (R&D) fees generated on customer projects. Revenue fluctuates from quarter to quarter depending on, among other factors: our customers’ success in selling products incorporating our technologies; the timing of introductions of licensed products by customers; the timing of introductions of products that compete with our customers’ products; the number and activity level associated with customer development projects; the number and terms of new license agreements that are finalized; the value of reagent chemicals and other products sold to customers; and the timing of future acquisitions we complete, if any.

On October 5, 2009, we entered into a License and Development Agreement with F. Hoffmann-La Roche, Ltd. (“Roche”) and Genentech, Inc., a wholly owned member of the Roche Group (“Genentech”). Under the terms of the agreement, Roche and Genentech will have an exclusive license to develop and commercialize a sustained drug delivery formulation of Lucentis^® (ranibizumab injection) utilizing SurModics’ proprietary biodegradable microparticles drug delivery system. We received an up-front licensing fee of $3.5 million and are eligible to receive potential payments of up to approximately $200 million in fees and milestone payments in the event of the successful development and commercialization of multiple products, as well as payment for development work done on these products. Roche and Genentech will have the right to obtain manufacturing services from SurModics. In the event a commercial product is developed, we will also receive royalties on sales of such product. During fiscal 2010 and continuing into fiscal 2011, the focus of our development activities has changed, primarily as a result of technical issues experienced in the Lucentis^® microparticle product development program. Such technical issues reflect the inherent challenges often experienced in the development of new or reformulated pharmaceutical products. We are continuing to collaborate with Genentech under our agreement on sustained drug delivery products utilizing our proprietary biodegradable microparticle drug delivery system. However, the program remains subject to a number of risks and uncertainties, including those detailed under the heading “Risk Factors” in Item 1A of the Company’s 2010 Form 10-K.

In addition, in December 2010, we announced that the Board of Directors of the Company had authorized the Company to explore strategic alternatives for our Pharmaceuticals business, including a potential sale of that business. This decision by the Board reflects our focus on returning the Company to profitable growth, and our renewed commitment to pursuing growth opportunities and investments in our Medical Device and In Vitro Diagnostics businesses. We have retained Piper Jaffray & Co. as our financial advisor in connection with this process. We have made no decision to enter into any transaction regarding the Pharmaceuticals business, and there can be no assurance that we will enter into such a transaction in the future.

Critical Accounting Policies

Critical accounting policies are those policies that require the application of management’s most challenging subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently likely to result in materially different results under different assumptions and conditions. For a detailed description of our critical accounting policies, see the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2010.

Results of Operations


	Three Months Ended
	December 31,		December 31,		Increase
*(Dollars in thousands)*	2010		2009		(Decrease)			Change
Revenue:
Medical Device	$	9,808	$	11,514	$	(1,706	)		(15	)%
Pharmaceuticals		2,673		3,581		(908	)		(25	)%
In Vitro Diagnostics		2,687		2,286		401			18	%

Total revenue	$	15,168	$	17,381	$	(2,213	)		(13	)%

Revenue. Revenue during the first quarter of fiscal 2011 was $15.2 million, a decrease of $2.2 million, or 13%, compared with the first quarter of fiscal 2010. The decrease in revenue, as detailed in the table above, is further explained in the narrative below.

Medical Device. Revenue in Medical Device was $9.8 million in the first quarter of fiscal 2011, a decrease of 15% compared with $11.5 million in the first quarter of fiscal 2010. The decrease in total revenue reflects lower royalties and licenses fees and lower R&D revenue, partially offset by higher product sales. Our royalty revenue from Cordis decreased as a result of 40% lower CYPHER^® stent sales.

Medical Device derives a substantial amount of revenue from royalties and license fees and product sales attributable to Cordis Corporation, a Johnson & Johnson company, on its CYPHER^® Sirolimus-eluting Coronary Stent. The CYPHER^® stent incorporates a proprietary SurModics polymer coating that delivers a therapeutic drug designed to reduce the occurrence of restenosis in coronary artery lesions. The CYPHER^® stent faces continuing competition from Boston Scientific, Medtronic and Abbott Laboratories. Stents from these companies compete directly with the CYPHER^® stent both domestically and internationally. For the last several years, royalty revenue and reagent product sales have decreased as a result of lower CYPHER^® stent sales. We anticipate that royalty revenue from the CYPHER^® stent is likely to decrease in fiscal 2011 and beyond as the various marketers of drug-eluting stents compete, and as others enter the marketplace. We also receive a royalty on sales of delivery systems used to deliver the Medtronic Endeavor^® and Endeavor^® Resolute drug-eluting stents. These stent delivery systems incorporate our proprietary hydrophilic technology and are sold in the United States and internationally.

Pharmaceuticals. Pharmaceuticals revenue was $2.7 million in the first quarter of fiscal 2011, a decrease of $0.9 million, or 25%, compared with the first quarter of fiscal 2010. The decrease principally reflects lower R&D revenue, as well as lower product sales. While the Pharmaceuticals business unit continues to experience softness in the R&D environment, certain R&D customers have increased activity in recent months. However, there continues to be select customers that have delayed, slowed or cancelled development projects as a result of various factors, including current economic conditions.

In Vitro Diagnostics. Revenue in In Vitro Diagnostics was $2.7 million in the first quarter of fiscal 2011, an increase of 18% compared with $2.3 million in the prior-year period. This increase was attributable to higher sales of our BioFX branded products and higher antigen sales, partially offset by lower microarray slide sales.

Product costs. Product costs were $1.8 million in the first quarter of fiscal 2011, compared with $2.0 million in the prior-year period. The $0.2 million decrease in product costs principally reflects the mix of products sold. Overall product margins averaged 62%, compared with 57% reported last year.

Customer research and development expenses. Customer research and development (“Customer R&D”) expenses were $4.7 million, an increase of 42% compared with the first quarter of fiscal 2010. The increase principally reflects the fixed overhead costs attributable to our Alabama research and development operations, including our current Good Manufacturing Practices (cGMP) manufacturing facility. Customer R&D margins were negative 68%, compared with positive 9% in the first quarter of fiscal 2010.

Other research and development expenses. Other research and development (“Other R&D”) expenses were $2.1 million for the first quarter of fiscal 2011, a decrease of 55% compared with the first quarter of fiscal 2010. The decrease is primarily a result of

therapeutic grant income recognized (which is recorded as a reduction of expenses) of approximately $0.8 million associated with awards received under the federal qualified therapeutic discovery project program and the impact of lower labor costs resulting from the October 2010 organizational changes.

Selling, general and administrative expenses. Selling, general and administrative expenses were $5.2 million for the three months ended December 31, 2010, an increase of 13% compared with $4.6 million in the prior-year period. The increase was primarily attributable to non-recurring advisory services expenses related to the 2011 Annual Meeting of shareholders and higher variable compensation costs.

Goodwill impairment charge. In the first quarter of fiscal 2011, we recorded a $0.8 million goodwill impairment charge associated with our SurModics Pharmaceuticals, Inc. (SurModics Pharma) reporting unit. A milestone was achieved during the quarter associated with the July 2007 acquisition of SurModics Pharma and $0.8 million of additional purchase price was recorded as an increase to goodwill. There have been no substantial changes in operating results for SurModics Pharma in fiscal 2011 when compared with fiscal 2010 and as such we concluded the goodwill associated with the milestone payment was fully impaired. There may be additional earn-out milestone payments in the future and if operations do not improve for the SurModics Pharma reporting unit, there could be additional goodwill impairments.

Restructuring charges. In October 2010, we announced initiatives to reduce our cost structure and renew our focus on business units to more closely match operations and cost structure with the current customer environment. As a result of the organization change, we eliminated 30 positions, or approximately 13% of our workforce. These employee terminations occurred across various functions, and the reorganization plan was completed by the end of the first quarter of fiscal 2011. The reorganization also resulted in SurModics vacating a leased production facility in Birmingham, Alabama with the production activities relocated to one of our owned facilities in Birmingham.

We recorded total restructuring charges of $1.2 million in connection with the reorganization. These pre-tax charges consisted of $1.2 million of severance pay and benefits expenses and less than $0.1 million of facility-related costs. Costs totaling $0.8 million have been paid, and we anticipate paying the remaining $0.4 million within the next twelve months.

Other income, net. Other income was $0.2 million in the first quarter of fiscal 2011, compared with $0.3 million in the first quarter of fiscal 2010. Income from investments was $0.2 million, compared with $0.3 million in the prior-year period. The decrease primarily reflects lower yields on our investment balances.

Income tax benefit (provision). The income tax provision was a benefit of $0.1 million in the first quarter of fiscal 2011, compared with an expense of $1.1 million in the first quarter of fiscal 2010. The effective tax rate was 24.5%, compared with 37.5% in the prior-year period. The reduction in effective tax rate is principally driven by therapeutic grant income in fiscal 2011, which is tax-exempt for federal purposes and the retroactive extension of the federal tax credit for research activities to January 1, 2010.

Liquidity and Capital Resources

Operating Activities. As of December 31, 2010, we had working capital of $31.5 million, of which $24.5 million consisted of cash, cash equivalents and short-term investments. Working capital increased $1.7 million from the September 30, 2010 level, driven principally by higher cash and short-term investment balances, offset by an increase in accrued compensation and deferred revenue balances. Our cash and cash equivalents, short-term and long-term investments totaled $59.7 million at December 31, 2010, an increase of $2.9 million from $56.8 million at September 30, 2010. Our investments principally consist of U.S. government and government agency obligations and investment grade, interest-bearing corporate debt securities with varying maturity dates, the majority of which are five years or less. Our policy requires that no more than 5% of investments be held in any one credit issue, excluding U.S. government and government agency obligations. The primary investment objective of the portfolio is to provide for the safety of principal and appropriate liquidity while meeting or exceeding a benchmark (Merrill Lynch 1-3 Year Government-Corporate Index) total rate of return. Management continues to direct its investment advisors to manage the investments primarily for the safety of principal for the foreseeable future as it assesses other investment opportunities and uses of its investments.

We had cash flows from operating activities of approximately $5.3 million in the first quarter of fiscal 2011, compared with $8.3 million in the first three months of fiscal 2010. The decrease compared with prior-year results primarily reflects lower operating results in fiscal 2011 as well as the fiscal 2010 receipt of a $3.5 million up-front licensing fee from Genentech associated with a license and development agreement.

Investing Activities. We invested $1.4 million in property and equipment in the first quarter of fiscal 2011, compared with $3.6 million in the prior-year period. The lower property and equipment investment in fiscal 2011 is a return to more historical investment levels. Fiscal 2010 investment reflects higher spending associated with the final phase of completion of the Birmingham, Alabama

cGMP facility. In addition, both fiscal periods included $0.8 million milestone payments associated with the SurModics Pharmaceuticals acquisition in July 2007.

Financing Activities. In November 2007, our Board of Directors authorized the repurchase of $35.0 million of the Company’s common stock in open-market transactions, private transactions, tender offers, or other transactions. The repurchase authorization does not have a fixed expiration date. No shares were repurchased during the three months ended December 31, 2010. Under the current authorization, we have $5.3 million remaining available for share repurchases at December 31, 2010.

As of December 31, 2010, the Company had no debt outstanding under our $25 million unsecured revolving credit facility. In connection with the credit facility, we are required to maintain certain financial and nonfinancial covenants. We were not in compliance with certain covenants in fiscal 2010, however, we are in compliance with all covenants for the first quarter of fiscal 2011. We are working with the bank to obtain waivers for certain fiscal 2010 covenants and expect to complete these activities by the end of the second quarter of fiscal 2011. We believe that noncompliance will not cause liquidity issues given our investment holdings and cash generated by operations.

We do not have any other credit agreements and believe that our existing cash, cash equivalents and investments, together with cash flow from operations, will provide liquidity sufficient to meet the below stated needs and fund our operations for the next twelve months. There can be no assurance, however, that SurModics’ business will continue to generate cash flows at current levels, and disruptions in financial markets may negatively impact our ability to access capital in a timely manner and on attractive terms, if at all. Our anticipated liquidity needs for the remainder of fiscal 2011 include, but are not limited to, the following: general capital expenditures in the range of $2.5 million to $4.0 million; contingent consideration payments, related to our acquisitions of SurModics Pharma (up to $4.9 million), as well as the purchase of certain assets from PR Pharmaceuticals, Inc.; and any amounts associated with the repurchase of common stock under the authorization discussed above.

Off-Balance Sheet Arrangements

As of December 31, 2010, the Company did not have any off-balance sheet arrangements with any unconsolidated entities.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include expectations concerning our growth strategy, product development programs, future cash flow and sources of funding, short-term liquidity requirements, the impact of potential lawsuits or claims, and the impact of the Cordis and Genentech agreements, as well as other significant customer agreements. Without limiting the foregoing, words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “will” and similar terminology, generally identify forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent the Company’s expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Part II, Item 1A of this Form 10-Q. We disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events or otherwise.

Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the Company’s forward-looking statements, such factors include, among others:

	•		our ability to successfully identify, negotiate, sign and close a potential strategic transaction related to our Pharmaceuticals business;

	•		the inability to realize the anticipated benefits of any potential transaction regarding our Pharmaceuticals business, if consummated, or of our other recent cost savings initiatives;

	•		the potential adverse impact to our business as a result of our announcement to pursue strategic alternatives for our Pharmaceuticals business;

	•		the Company’s reliance on a small number of significant customers, which causes our financial results and stock price to be subject to factors affecting those significant customers and their products, the timing of market introduction of their or competing products, product safety or efficacy concerns and intellectual property litigation could adversely affect our growth strategy and the royalty revenue we derive;

	•		general economic conditions which are beyond our control, including the impact of recession, business investment and changes in consumer confidence;

	•		the Company’s change in its organizational structure may not increase the number of market segments and applications that use its technologies;

	•		a decrease in the value of the Company’s cash or investment holdings could impact short-term liquidity requirements;

	•		the difficulties and uncertainties associated with the lengthy and costly new product development and foreign and domestic regulatory approval processes, such as delays, difficulties or failures in achieving acceptable clinical results or obtaining foreign or FDA marketing clearances or approvals, which may result in lost market opportunities or postpone or preclude product commercialization by licensees;

	•		the development of new products or technologies by competitors, technological obsolescence and other changes in competitive factors;

	•		the Company’s ability to successfully internally perform certain product development activities and governmental and regulatory compliance activities which the Company has not previously undertaken in any significant manner; and

	•		other factors described below in “Risk Factors” and other sections of SurModics’ Annual Report on Form 10-K, which you are encouraged to read carefully.

Many of these factors are outside the control and knowledge of the Company, and could result in increased volatility in period-to-period results. Investors are advised not to place undue reliance upon the Company’s forward-looking statements and to consult any further disclosures by the Company on this subject in its filings with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s investment policy requires the Company to invest in high credit quality issuers and limits the amount of credit exposure to any one issuer. The Company’s investments principally consist of U.S. government and government agency obligations and investment-grade, interest-bearing corporate debt securities with varying maturity dates, the majority of which are five years or less. Because of the credit criteria of the Company’s investment policies, the primary market risk associated with these investments is interest rate risk. The Company does not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates. A one percentage point increase in interest rates would result in an approximate $0.8 million decrease in the fair value of the Company’s available-for-sale and held-to-maturity securities as of December 31, 2010, but no material impact on the results of operations or cash flows. Management believes that a reasonable change in raw material prices would not have a material impact on future earnings or cash flows because the Company’s inventory exposure is not material.

Although we conduct business in foreign countries, all sales transactions are denominated in U.S. dollars. Accordingly, we do not expect to be subject to material foreign currency risk with respect to future costs or cash flows from our foreign sales. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material developments in the legal proceedings previously disclosed in the Company’s Form 10-K for the fiscal year ended September 30, 2010.

Item 1A. Risk Factors.

In our report on Form 10-K for the fiscal year ended September 30, 2010, filed with the Securities and Exchange Commission on December 14, 2010, we identify under Item 1A important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-Q.

There have been no material change in our risk factors subsequent to the filing of our Form 10-K for the fiscal year ended September 30, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit		Description
3.1		Restated Articles of Incorporation, as amended — incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 1999, SEC File No. 0-23837
3.2		Restated Bylaws of SurModics, Inc., as amended November 30, 2009 — Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, SEC File No. 0-23837
10.1*		Offer Letter dated as of December 14, 2010 (in favor of Gary R. Maharaj executed by SurModics, Inc.)**
10.2*		Severance Agreement by and between Gary R. Maharaj and SurModics, Inc. dated as of December 14, 2010**
10.3		Agreement by and among SurModics, Inc. and the Ramius Group dated as of January 5, 2011 — incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 5, 2011, SEC File No. 0-23837
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002


*		Filed herewith

**		Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


February 4, 2011	SurModics, Inc.
	By:	/s/ Philip D. Ankeny
		Philip D. Ankeny
		Senior Vice President and Chief Financial Officer (duly authorized signatory and principal financial officer)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the Quarter Ended December 31, 2010
SURMODICS, INC.


Exhibit		Description
3.1		Restated Articles of Incorporation, as amended — incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 1999, SEC File No. 0-23837
3.2		Restated Bylaws of SurModics, Inc., as amended November 30, 2009 — incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, SEC File No. 0-23837
10.1*		Offer Letter dated as of December 14, 2010 (in favor of Gary R. Maharaj executed by SurModics, Inc.)**
10.2*		Severance Agreement by and between Gary R. Maharaj and SurModics, Inc. dated as of December 14, 2010**
10.3		Agreement by and among SurModics, Inc. and the Ramius Group dated as of January 5, 2011 — incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 5, 2011, SEC File No. 0-23837
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002


*		Filed herewith

**		Management contract or compensatory plan or arrangement

exv10w1

Exhibit 10.1

December 14, 2010

CONFIDENTIAL

Mr. Gary R. Maharaj
8872 Cove Pointe Road
Eden Prairie, MN 55347

Dear Gary:

I am pleased to confirm our offer for you to join SurModics, Inc. (“SurModics,” or the “Company”) as its President and Chief Executive Officer. The terms of your employment are as follows:

1. Position and Duties.

a. Position. Your title will be President and Chief Executive Officer, reporting to SurModics’ Board of Directors (the “Board”). In addition, the Board will appoint you as a member of the Board of Directors effective as of your first day of employment with the Company. Your employment with the Company will begin on December 27, 2010.

b. Performance of Duties and Responsibilities. You will serve the Company faithfully and to the best of your ability, devoting your full working time, attention, and efforts to the business of the Company, excluding any periods of authorized vacation, sick or disability or other leave to which you are entitled. During your term of employment with the Company it will not be a violation of the foregoing commitment to the Company to fulfill any post-employment assistance obligations to your prior employer, as such obligations are referenced in the Conflict of Interest Disclosure Statement delivered pursuant to the Non-Competition, Invention, Non-Disclosure Agreement referenced in Section 8 of this offer letter. You will perform such duties and responsibilities of an executive nature or a similar nature as the Board may reasonably assign to you from time to time. You agree that you will be subject to all Company policies applicable to executive officers (as they may be amended from time to time by SurModics), SurModics’ employee handbook (the “Employee Handbook”), SurModics’ Code of Ethics and Business Conduct, and other policies in effect for salaried employees of SurModics, except as otherwise stated herein; provided that, in the event that the Employee Handbook, Code of Ethics and Business Conduct, or any of such other polices applicable to executive or salaried employees of SurModics conflict with the provisions of this offer letter, the provisions of this offer letter will govern.

2. Cash Compensation.

a. Base Salary. Your annual base salary (“Base Salary”) will be $425,000, subject to all required taxes and withholdings. Your Base Salary will be payable on a semi-monthly

Mr. Gary R. Maharaj
December 14, 2010
Page 2

basis according to SurModics’ regular payroll practices. The Base Salary shall be subject to annual review and possible adjustment by the Board, in its sole discretion.

b. Short Term Incentive Plan. You will be a participant in the Company’s annual incentive plan (the “Plan”), subject to the Plan’s terms and conditions. Awards under the Plan are based on achievement of corporate and business objectives as approved by the Board’s Organization and Compensation Committee. You will have the potential to earn a target payout of 50% of your Base Salary. The payout amounts range from 0% to 150%. For the Company’s fiscal year 2011, your incentive payout, if any, will be prorated based on the number of days that you are employed by the Company during such fiscal year. In the event of a conflict between the provisions of the Plan and the provisions of this offer letter, the provisions of this offer letter shall govern.

3. Equity Awards.

a. Stock Options. You will be granted a 7-year non-qualified stock option to purchase shares of the Company’s common stock having a value of $325,000 (as determined using the Black-Scholes valuation methodology). The options will be granted on your first day of employment with the Company (the “Grant Date”) and will have an exercise price equal to the fair market value of the Company’s common stock on the Grant Date. The options will vest 25% per year beginning on the first anniversary of the Grant Date provided that you remain an employee of the Company at that time. Subject to the provisions of this offer letter and the Severance Agreement, the options will be granted in accordance with the SurModics 2009 Equity Incentive Plan, or any successor plan (the “Equity Plan”) and subject to the terms and conditions of a definitive Stock Option Agreement to be entered into between you and the Company, which shall be consistent with the provisions of this offer letter and the Severance Agreement.

b. Performance Shares. You will be granted a performance share award under the Company’s fiscal 2011 officer performance share plan (the “2011 Performance Share Plan”), the target number of shares provided in such award having a value equal to $325,000 (based on the fair market value of the Company’s common stock on the date of grant). The performance share award will be granted on the Grant Date. Vesting under the 2011 Performance Share Plan will be determined over a three-year period (i.e., our fiscal years 2011 through 2013) based on the achievement of corporate financial objectives as approved by the Board’s Organization and Compensation Committee. The number of shares vesting under the plan can range from 0% to 200% of the target number of shares. The performance share award shall be pursuant to SurModics’ Equity Plan and subject to the terms and conditions of a definitive Performance Share Award Agreement to be entered into between you and SurModics, which shall be consistent with the provisions of this offer letter and the Severance Agreement.

c. Initial Restricted Stock Grant. In addition to the equity awards noted above, SurModics will grant you additional restricted shares of the Company’s common stock with a value equal to $250,000 (based on the fair market value of the Company’s common stock on the Grant Date). The restricted stock award will be granted on the Grant Date. The shares will vest (i.e. the restrictions will lapse) as follows: one-half (1/2) of the restricted shares (rounded down

Mr. Gary R. Maharaj
December 14, 2010
Page 3

to the nearest full share) shall become vested on the Grant Date and the remaining restricted shares shall become vested on the first anniversary of the Grant Date provided that you remain an employee of the Company at that time. Subject to the provisions of this offer letter and the Severance Agreement, the restricted stock awards shall be pursuant to SurModics’ Equity Plan and subject to the terms and conditions of a definitive Restricted Stock Agreement to be entered into between you and SurModics, which shall be consistent with the provisions of this offer letter and the Severance Agreement.

d. Limit on Right to Cancel. SurModics shall have the right, in accordance with the provisions of Section 13 of the Equity Plan existing on the date hereof (excluding Sections 13(a)(4) and 13(a)(7) thereof) to cancel all or a portion of the stock awards granted under this Section 3.

4. Employee Benefits. In addition to the Company plans and programs described in Sections 2 and 3 of this offer letter, you will also be eligible to participate in all other employee benefit plans and programs generally available to employees of SurModics to the extent that you meet the eligibility requirements for each such other individual plan or program. Your participation in any such other plan or program will be subject to the provisions, rules, and regulations of, or applicable to, such other plan or program, and SurModics provides no assurance as to the adoption or continuation of any such other employee benefit plan or program. In addition, if you are required to elect COBRA coverage with your prior employer in order to maintain your health benefits from the date of your separation of employment with your prior employer to the date your health benefits with SurModics begin, the Company will reimburse you for any costs actually incurred by you for any such COBRA coverage.

5. Expenses. The Company will reimburse you for all reasonable and necessary out-of-pocket business, travel, and entertainment expenses incurred by you in the performance of your duties and responsibilities to the Company, subject to the Company’s normal policies and procedures for expense verification and documentation.

6. Paid Time Off. You will receive four (4) weeks of paid time off (“PTO”) in addition to regular Company holidays. The accrual and usage of PTO is subject to the provisions set forth in the Employee Handbook.

7. Severance Benefits. In addition to the benefits outlined in this offer letter, the Company will provide you with the severance benefits as set forth in the Severance Agreement attached hereto as Exhibit A.

8. Non-Competition, Invention, Non-Disclosure Agreement. Like all Company employees, you will be required, as a condition of your employment with the Company, to sign the Company’s standard Non-Competition, Invention, Non-Disclosure Agreement, a copy of which is attached hereto as Exhibit B.

9. Absence of Employment Restrictions. You hereby represent and warrant to the Company that, to the best of your knowledge, neither the execution and delivery of this offer letter, nor the performance of the duties described herein violates or will violate the provisions of

Mr. Gary R. Maharaj
December 14, 2010
Page 4

any other agreement to which you are a party or by which you are bound, or any other legal obligations you have, including any written agreements you have with any prior employer, including, but not limited to, the agreements you have listed on the Conflict of Interest Disclosure Statement delivered pursuant to the Non-Competition, Invention, Non-Disclosure Agreement referenced in Section 8 of this offer letter.

10. Employment Relationship/Severance. Your employment with the Company will be “at will,” meaning that either you or the Company may terminate your employment at any time and for any reason, with or without Cause, including as a result of your death or disability. Any contrary representations that may have been made to you are superseded by the terms set forth in this offer letter. The reason for and timing of your termination will determine the amount of post-termination benefits, if any, as provided in Exhibit A.

11. Liquidated Damages. In the event the Company rescinds, revokes or otherwise terminates this offer letter prior to December 27, 2010 due to no fault of your own, the Company agrees to pay you as liquidated damages an amount equal to $250,000.00, which you agree is the sole remedy available to you in this event. For the avoidance of doubt, in the event you receive the liquidated damages payment described in this paragraph, the Company is under no further legal obligation to employ you or to provide you with any further payment, benefits or relief of any kind.

12. Attorneys’ Fees. The Company agrees to reimburse you for attorneys’ fees actually incurred by you with Moss & Barnett, P.A. in connection with negotiating this offer letter and the Exhibits referenced herein up to a total of $10,000.00.

13. Miscellaneous.

a. Tax Withholding. The Company will withhold from any amounts payable to you such federal, state and local income and employment taxes as the Company shall determine are required pursuant to any applicable law or regulation or are otherwise authorized by you in writing to be withheld.

b. Section 409A. This offer letter and the Severance Agreement is intended to provide for severance benefits that are not deferred compensation subject to the requirements of Code Sections 409A(a)(2), (3), or (4). To the extent any severance benefits under this offer letter and the Severance Agreement are made in accordance with the offer letter or the Severance Agreement and are subject to the requirements of Code Sections 409A(a)(2), (3), or (4), this offer letter and the Severance Agreement are intended to satisfy such requirements, including current and future guidance and regulations interpreting such provisions, and should be interpreted accordingly.

c. Governing Law. All matters relating to the interpretation, construction, application, validity, and enforcement of this offer letter will be governed by the laws of the State of Minnesota without giving effect to any choice or conflict of law provision or rule,

Mr. Gary R. Maharaj
December 14, 2010
Page 5

whether of the State of Minnesota or any other jurisdiction, that would cause the application of laws of any jurisdiction other than the State of Minnesota.

d. Jurisdiction and Venue. You and the Company consent to jurisdiction of the courts of the State of Minnesota and/or the United States District Court, District of Minnesota, for the purpose of resolving all issues of law, equity, or fact arising out of or in connection with this offer letter. Any action involving claims of a breach of the matters set forth herein must be brought in such courts. Each party consents to personal jurisdiction over such party in the state and/or federal courts of Minnesota and hereby waives any defense of lack of personal jurisdiction. Venue, for the purpose of all such suits, will be in Hennepin County, State of Minnesota.

e. Entire Agreement. This offer letter, along with the Exhibits referenced herein or attached hereto, constitutes the entire understandings and agreements between you and the Company with regard to the subject matter hereof, including payments and benefits upon a termination of your employment or other separation from service with the Company. This offer letter, along with the Exhibits referenced herein or attached hereto, supersedes and renders null and void all prior agreements, offer letters, plans, programs or other undertakings between the parties with regard to the subject matter hereof (other than those specifically referenced herein), whether written or oral.

* * * * * * *

Gary, we hope that you will accept our offer to join the Company. Please indicate your acceptance of this offer by signing both copies of this offer letter and returning one original to me. The other original of the offer letter is for your files. Please, also sign the two copies of each of (a) Severance Agreement, and (b) Non-Competition, Invention, Non-Disclosure Agreement, and return one of each with the offer letter in the enclosed envelope.

Very truly yours,

SURMODICS, INC.

/s/ Robert C. Buhrmaster

Robert C. Buhrmaster
Chairman of the Board

I have read and accept this employment offer in accordance with the terms as outlined in this letter.



	/s/ Gary Maharaj	12/14/2010

Gary Maharaj	Signature	Date

Mr. Gary R. Maharaj
December 14, 2010
Page 6

Enclosures

Exhibit A: Severance Agreement
Exhibit B: Non-Competition, Invention, Non-Disclosure Agreement

exv10w2

Exhibit 10.2

SEVERANCE AGREEMENT


Parties:		SurModics, Inc. (“Company”) 9924 West 74th Street Eden Prairie, MN 55344-3523

		Gary R. Maharaj (“Executive”)

		8872 Cove Pointe Road Eden Prairie, MN 55347

Date:		December 14, 2010

RECITALS:

A.		Executive has agreed to become President and Chief Executive Officer of the Company and a member of the Board of Directors of the Company pursuant to the terms and conditions of that certain Offer Letter dated as of the date hereof.

B.		The parties further recognize that it is in the best interests of the Company to protect confidential, proprietary, and trade secret information of the Company, to prevent unfair competition by former executives of the Company following separation of their employment with the Company, and to secure cooperation from former executives with respect to matters related to their employment with the Company.

C.		The parties further recognize that it is in the best interests of the Company and its stockholders to provide certain benefits payable upon a termination of Executive’s employment following a Change of Control or upon a termination of Executive’s employment Without Cause or For Good Reason.

AGREEMENTS:

Definitions. When the following terms are used herein with initial capital letters, they shall have the following meanings:

(a)

“Cause” shall mean termination of Executive’s employment by the Company resulting from conduct by Executive constituting (i) a felony involving moral turpitude under either federal law or the law of the state of the Company’s incorporation, or (ii) Executive’s willful failure to fulfill his employment duties with the Company; provided, however, that for purposes of this clause (ii), an act or failure to act by Executive shall not be “willful” unless it is done, or omitted to be done, in bad faith and

			without any reasonable belief that Executive’s action or omission was in the best interests of the Company. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of a committee thereof, or based upon advice of counsel to the Company (which shall include the Company’s Vice President and General Counsel) shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company.

	(b)		“Change of Control” shall mean any one or more of the following events occurring after the date of this Agreement:

	(1)		The purchase or other acquisition by any one person, or more than one person acting as a group, of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total combined value or total combined voting power of all classes of stock issued by the Company; provided, however, that if any one person or more than one person acting as a group is considered to own more than 50% of the total combined value or total combined voting power of such stock, the acquisition of additional stock by the same person or persons shall not be considered a Change of Control;

	(2)		A merger or consolidation to which the Company is a party if the individuals and entities who were shareholders of the Company immediately prior to the effective date of such merger or consolidation have, immediately following the effective date of such merger or consolidation, beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power of all classes of securities issued by the surviving entity for the election of directors of the surviving corporation;

	(3)		Any one person, or more than one person acting as a group, acquires or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons, direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of stock of the Company constituting thirty-five percent (35%) or more of the total combined voting power of all classes of stock issued by the Company;

	(4)		The purchase or other acquisition by any one person, or more than one person acting as a group, of substantially all of the total gross value of the assets of the Company during the twelve-month period ending on the date of the most recent purchase or other acquisition by such person or persons. For purposes of this Section 2(b)(4), “gross value” means the value of the assets of the Company or the

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			value of the assets being disposed of, as the case may be, determined without regard to any liabilities associated with such assets;

	(5)		A change in the composition of the Board of the Company at any time during any consecutive twelve (12) month period such that the “Continuity Directors” cease for any reason to constitute at least a fifty percent (50%) majority of the Board. For purposes of this event, “Continuity Directors” means those members of the Board who either:

	(A)		were directors at the beginning of such consecutive twelve (12) month period; or

	(B)		were elected or appointed by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board of Directors.

(6)

A change in the composition of the Board of the Company at any time from the date of this Agreement through the 2012 annual meeting of the shareholders of the Company (anticipated to be held in or around January or February of 2012) such that the “Continuity Directors” cease for any reason to constitute at least a fifty percent (50%) majority of the Board. For purposes of this event, “Continuity Directors” means those members of the Board who either:

	(A)		were directors on the date of this Agreement; or

	(B)		were elected or appointed by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board of Directors.

			In all cases, the determination of whether a Change of Control has occurred shall be made in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.

	(c)		“Change of Control Termination” shall mean that any of the following events occurring upon or within twelve (12) months after a Change of Control:

	(1)		The termination of the Executive’s employment by the Company for any reason other than Cause; or

	(2)		The termination of employment with the Company by Executive for Good Reason. Such termination shall be accomplished by, and

-3-

effective upon, Executive giving written notice to the Company of his decision to terminate.

			For purposes of Section 3, with respect to the timing of payments thereunder, “Change of Control Termination” shall mean the date of the Executive’s Termination Date.

	(d)		“Code” shall mean the Internal Revenue Code of 1986, as amended.

	(e)		“Disability” means the inability of Executive to perform on a full-time basis the duties and responsibilities of Executive’s employment with the Company by reason of Executive’s illness or other physical or mental impairment or condition, if such inability continues for an uninterrupted period of 120 days or more during any 180-day period. A period of inability is “uninterrupted” unless and until Executive returns to full-time work for a continuous period of at least 30 days.

	(f)		“Earned Compensation” means all base salary, paid time off, and all other amounts to which Executive may be entitled to receive under any employee benefit plan maintained by the Company that have been earned but not paid to Executive as of his Termination Date.

	(g)		“Good Reason” shall mean Executive has provided written notice to the Company within 90 days following the occurrence of any of the following events, which notice describes the event giving rise to the resignation, and the Company has not cured the event within 30 days after receiving such notice from Executive:

	(1)		the assignment of Executive without Executive’s consent to a position with material responsibilities or duties of a lesser status or degree than the position of Chief Executive Officer of the Company;

	(2)		the relocation of Executive’s principal office for Company business, without Executive’s consent, to a location more than 50 miles outside the Executive’s work location as of the effective date of the Executive’s employment with the Company; or

	(3)		a material reduction, in the aggregate, in base salary, variable pay opportunities or the employee benefits to which Executive is entitled to participate in irrespective of any standard waiting periods with respect to the same, unless such material reduction is generally applicable to all officers of the Company; or

	(4)		a material breach of this Agreement by the Company.

-4-

			Termination for “Good Reason” shall not include Executive’s death or a termination for any reason other than one of the events specified in clauses (1) through (4) of this Section 1(g).

	(h)		“Termination Date” shall mean the date upon which Executive’s “separation from service” with the Company within the meaning of Section 409A(a)(2)(A)(i) of the Code (with “Company” for purposes of this paragraph to include any business entity that is treated as a single employer with the Company under the rules of Section 414(b) and (c) of the Code).

Term of Agreement. Except as otherwise provided herein, this Agreement shall commence on the date executed by the parties and shall continue in effect until the date on which Executive’s employment with the Company terminates for any reason whatsoever. Any rights and obligations accruing upon or prior to the termination or expiration of this Agreement shall survive to the extent necessary to enforce such rights and obligations.

Compensation and Benefits Following a Change of Control Termination. Subject to the limitations contained in this Agreement, upon a Change of Control Termination, Executive shall be entitled to all of the following compensation and benefits:

(a)

Within five (5) business days after a Change of Control Termination, the Company shall pay to Executive:

	(1)		All of the Executive’s Earned Compensation (subject to any distribution requirements contained in any employee benefit plan with respect to benefits payable under that plan) ; and

	(2)		A severance payment equal to two and one-half (2¹/2) times the average annual cash compensation paid to Executive by the Company (or any predecessor entity or related entity) and includible in Executive’s gross income for federal income tax purposes during the Executive’s three most recent taxable years in effect immediately prior to such Termination (or, if Executive’s employment is for less than three years, the average annual cash compensation paid to Executive during the period of his employment with Company). For purposes of this paragraph, “annual cash compensation” shall mean the Executive’s annual base salary and cash bonuses. Further, for purposes of this paragraph, “predecessor entity” and “related entity” shall have the meaning set forth in Section 280G of the Internal Revenue Code of 1986, as amended, and the regulations issued thereunder.

(b)

The Company shall continue to provide Executive, at Company’s expense, with coverage under its life, health, or dental benefit plans at a level

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			comparable to the benefits which Executive was receiving or entitled to receive immediately prior to the Change of Control Termination or, if greater, at a level comparable to the benefits which Executive was receiving immediately prior to the event which constituted Good Reason. Such coverage shall continue for eighteen (18) months following such Change of Control Termination or, if earlier, until Executive is eligible to be covered for such benefits through his employment with another employer. The Company may, in its sole discretion, provide such coverage through the purchase of individual insurance contracts for Executive.

	(c)		All outstanding Options or Stock Appreciation Rights shall become immediately exercisable, and the risks of forfeiture on any outstanding Restricted Stock Awards or Restricted Stock Unit Awards shall immediately lapse. For purposes of this Agreement, “Option,” “Stock Appreciation Rights,” “Restricted Stock Awards” and “Restricted Stock Unit Awards” shall have the meaning set forth in the SurModics, Inc. 2009 Equity Incentive Plan, or any successor plan.

	(d)		All shares or units subject to all outstanding Performance Shares shall become immediately vested and payable at the target performance objectives set forth in said Performance Shares. For purposes of this Agreement, “Performance Shares” shall have the meaning set forth in the SurModics, Inc. 2009 Equity Incentive Plan, or any successor plan.

	(e)		The definition of “Cause” providing for forfeiture under any outstanding Options, Restricted Stock Award or Performance Shares granted as of the first day of the Executive’s employment with the Company shall be the definition of “Cause” set forth in this Agreement. For purposes of this Agreement, “Options,” “Restricted Stock Award” and “Performance Shares” shall have the meaning set forth in the SurModics, Inc. 2009 Equity Incentive Plan, or any successor plan.

	(f)		For clarity, in the event of a Change of Control Termination, Executive shall be entitled to only the compensation and benefits described in Section 3.

Compensation and Benefits Following a Termination Without Cause or for Good Reason. If, prior to the expiration of this Agreement, the Executive’s employment with the Company is terminated (other than as a result of a Change of Control Termination): (i) by the Company for any reason other than for Cause; or (ii) by Executive for Good Reason, then, following the Executive’s Termination Date and in addition to payment of the Executive’s Earned Compensation (subject to any distribution requirements contained in any employee benefit plan with respect to benefits payable under that plan), the Company will:

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	(a)		Pay to Executive severance pay in an amount equal to Executive’s then-current annual base salary, payable in equal installments on the Company’s regular payroll schedule over a 12-month period following the Termination Date. Provided, however, if Executive’s employment with the Company is terminated by the Company for any reason other than for Cause, and if Executive becomes entitled to receive severance under this Section 4, then the Company shall extend the base salary payments under this Section 4(a) for any additional period, not to exceed 12 additional months, that Executive demonstrates Executive is unable to secure subsequent employment primarily because of Executive’s obligations under the Non-Competition, Invention, and Non-Disclosure Agreement executed by Executive on the date of this Agreement (provided that such demonstration shall not require Executive to violate any confidentiality or similar restrictions to which Executive is subject). Executive shall provide such documentation as reasonably requested by the Company to demonstrate that Executive is diligently seeking alternate employment and that alternative employment is not available because of the Non-Competition, Invention, and Non-Disclosure Agreement. In the event that a court of competent jurisdiction determines that Executive has materially breached any of the provisions of this Agreement or of the Non-Competition, Invention, and Non-Disclosure Agreement, the Company shall be entitled to immediately cease all payments under this Section 4(a).

	(b)		Continue to provide Executive, at Company’s expense, with coverage under its life, health, or dental benefit plans at a level comparable to the benefits which Executive was receiving or entitled to receive immediately prior to date on which the Executive’s employment with the Company is terminated (other than as a result of a Change of Control Termination) (i) by the Company for any reason other than for Cause; or (ii) by Executive for Good Reason. Such coverage shall continue for eighteen (18) months following such Change of Control Termination or, if earlier, until Executive is eligible to be covered for such benefits through his employment with another employer. The Company may, in its sole discretion, provide such coverage through the purchase of individual insurance contracts for Executive. Provided, however, if Executive’s employment with the Company is terminated by the Company for any reason other than for Cause, and if Executive becomes entitled to receive Company paid benefits under this Section 4(b), then the Company shall extend the coverage provided under this Section 4(b) for any additional period, not to exceed 6 additional months, that Executive demonstrates Executive is unable to secure subsequent employment primarily because of Executive’s obligations under the Non-Competition, Invention, and Non-Disclosure Agreement executed by Executive on the date of this Agreement (provided that such demonstration shall not require Executive to violate any confidentiality or similar restrictions to which Executive is subject). Executive shall provide such documentation as reasonably requested by the Company to demonstrate that Executive is diligently

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			seeking alternate employment and that alternative employment is not available because of the Non-Competition, Invention, and Non-Disclosure Agreement. In the event that a court of competent jurisdiction determines that Executive has materially breached any of the provisions of this Agreement or of the Non-Competition, Invention, and Non-Disclosure Agreement, the Company shall be entitled to immediately cease all payments under this Section 4(b).

	(c)		The risks of forfeiture on any outstanding Restricted Stock Awards granted as a result of and as of the first day of the Executive’s employment with the Company shall immediately lapse. For purposes of this Agreement, “Restricted Stock Awards” shall have the meaning set forth in the SurModics, Inc. 2009 Equity Incentive Plan, or any successor plan.

	(d)		The definition of “Cause” providing for forfeiture under any outstanding Options, Restricted Stock Award or Performance Shares granted as of the first day of the Executive’s employment with the Company shall be the definition of “Cause” set forth in this Agreement. For purposes of this Agreement, “Options,” “Restricted Stock Award” and “Performance Shares” shall have the meaning set forth in the SurModics, Inc. 2009 Equity Incentive Plan, or any successor plan.

Other Termination. If, during the term of this Agreement, Executive’s employment with the Company is terminated (other than as a result of a Change of Control Termination) by reason of: (i) Executive’s resignation for any reason other than Good Reason; (ii) termination of Executive’s employment by the Company for Cause; or (iii) Executive’s death or Disability, then the Company sole obligation under this Agreement will be to pay to Executive, or Executive’s beneficiary or estate, as the case may be, the Earned Compensation. The definition of “Cause” providing for forfeiture under any outstanding Options, Restricted Stock Award or Performance Shares granted as of the first day of the Executive’s employment with the Company shall be the definition of “Cause” set forth in this Agreement. For purposes of this Agreement, “Options,” “Restricted Stock Award” and “Performance Shares” shall have the meaning set forth in the SurModics, Inc. 2009 Equity Incentive Plan, or any successor plan.

Excise Tax Limitation.

(a)

Notwithstanding anything contained in this Agreement to the contrary, in the event that the benefits provided by this Agreement, together with all other payments and the value of any benefits received or to be received by Executive (“Payments”), constitute “parachute payments” within the meaning of Section 280G of the Code, and, but for this Section 6, would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then:

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	(1)		In the event that the Payments arise out of a Change of Control that occurs on or before the first anniversary of this Agreement, and any such payment would constitute an “excess parachute payment” as defined in Code Section 280G, Executive shall receive a “tax gross-up” payment sufficient to pay the initial excise tax applicable to such excess parachute payment (but excluding the income and excise taxes, if any, applicable to the tax gross-up payment). Such additional cash payment shall be made no earlier than the date that is six months and one day after the Change of Control Termination and no later than December 31 of the calendar year after the year in which Executive remits the related taxes.

	(2)		In the event that the Payments arise out of a Change of Control that occurs following the first anniversary of this Agreement, the Payments shall be made to Executive either (i) in full or (ii) as to such lesser amount as would result in no portion of the Payments being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. The Company shall reduce or eliminate the Payments by first reducing or eliminating cash payments and then by reducing those payments or benefits which are not payable in cash, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the determination made in accordance with the following sentence. The determination as to whether any such decrease in the payments or benefits is necessary must be made, at the Company’s expense, in good faith by legal counsel or a certified public accountant selected by the Company and reasonably acceptable to the Executive, and such determination will be conclusive and binding upon the Executive and the Company.

Post-Termination Obligations and Conditions.

	(a)		In the event of termination of Executive’s employment, the sole obligation of the Company under this Agreement will be its obligation to make the payments called for by Sections 3 — 6 hereof, as the case may be, and the Company will have no other obligation to Executive or to Executive’s beneficiary or estate.

	(b)		Notwithstanding the foregoing provisions of Sections 3 and 4, the Company will not be obligated to make any payments to Executive under Sections 3 and 4 unless: (i) Executive has signed a release of claims in favor of the Company and its affiliates and related entities, and their directors, officers, insurers, employees and agents, provided such release

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			shall not require Executive to release claims Executive may have for indemnification from the Company or rights of Executive under this Agreeement; (ii) all applicable rescission periods provided by law for releases of claims shall have expired and Executive shall have signed and not rescinded the release of claims; and (iii) Executive is in strict compliance with the terms of this Agreement as of the dates of such payments.

	(c)		Immediately upon termination of Executive’s employment with the Company for any reason, Executive will resign all positions then held as a director or officer of the Company and of affiliated entity of the Company.

	(d)		Upon termination of Executive’s employment with the Company, Executive shall promptly deliver to the Company any and all Company records and any and all Company property in Executive’s possession or under Executive’s control, including, without limitation, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes, source codes, data, tables or calculations and all copies thereof, documents that in whole or in part contain any trade secrets or confidential, proprietary or other secret information of the Company and all copies thereof, and keys, access cards, access codes, passwords, credit cards, personal computers, telephones, and other electronic equipment belonging to the Company.

	(e)		Following termination of Executive’s employment with the Company for any reason, Executive will, upon reasonable request of the Company or its designee, cooperate with the Company in connection with the transition of Executive’s duties and responsibilities for the Company; consult with the Company regarding business matters that Executive was directly and substantially involved with while employed by the Company; and be reasonably available, with or without subpoena, to be interviewed, review documents or things, give depositions, testify, or engage in other reasonable activities in connection with any litigation or investigation, with respect to matters that Executive then has or may have knowledge of by virtue of Executive’s employment by or service to the Company or any related entity; provided, however, that: (i) the Company shall not unreasonably request such cooperation of Executive; (ii) the Company shall reimburse Executive or pay directly any reasonable expenses actually incurred in connection with such cooperation and assistance by Executive; (iii) Executive shall not be required to assist or cooperate with the Company to the extent such assistance or cooperation would prevent Executive from performing, or would materially interfere with Executive’s performance of, the duties or responsibilities of his then-current occupation; and (iv) following the date that is twelve (12) months following the Executive’s Termination Date, the Company shall either be making payments to Executive under Section 4(a) of this Agreement or

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			shall provide reasonable compensation to the Executive for Executive’s cooperation and assistance.

	(f)		Executive will not at any time disparage, defame, or besmirch the reputation, character, image, products, or services of the Company or any of its affiliates, or the reputation or character of any of its current or former directors, officers, employees, or agents; provided that nothing in this Section 7(f) is intended to prevent or interfere with Executive making any required or reasonable communications with, or providing information to, any governmental, law enforcement, or stock exchange agency or representative, or in connection with any governmental investigation, court, administrative or arbitration proceeding.

	(g)		The Company will not at any time disparage, defame, or besmirch the reputation, character or image of Executive; provided that nothing in this Section 7(g) is intended to prevent or interfere with the Company making any required or reasonable communications with, or providing information to, any governmental, law enforcement, or stock exchange agency or representative, or in connection with any governmental investigation, court, administrative or arbitration proceeding.

Compliance With Code Section 409A.

	(a)		The parties intend that the payments described in Sections 3(a)(2), 4(a) and 4(c) of this Agreement shall be excluded from deferred compensation as a “short-term deferral” under Treas. Reg. § 1.409A-1(b)(4). The parties intend that the continuation of health and dental benefits described in Sections 3(b) and 4(b) shall be excluded from deferred compensation pursuant to the medical benefits exception for separation pay plans under Treas. Reg. § 1.409A-1(b)(9)(v)(B).

	(b)		The parties intend that the continuation of life and disability insurance benefits described in Sections 3(b) and 4(b) shall be excluded from deferred compensation as separation pay due to an involuntary separation from service under Treas. Reg. § 1.409A-1(b)(9)(iii), and the amounts payable for such continuation of life and disability insurance coverage shall not exceed two times the lesser of (x) Executive’s annualized compensation based on the annual rate of pay for services to the Company for the calendar year prior to the calendar year in which the Change of Control Termination occurs (adjusted for any increase during the year that was expected to continue indefinitely if Executive had not separated from service) or (y) the compensation limit under Section 401(a)(17) of the Code for the year in which the Change of Control Termination occurs. Further, in no event shall the benefits described in Section 3(b) extend beyond December 31st of the second calendar year following the calendar year in which the Change of Control Termination occurs.

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	(c)		Notwithstanding the foregoing, if any of the payments described in Sections 3 and 4 above are subject to the requirements of Code Section 409A and the Company determines that Executive is a “specified employee” as defined in Code Section 409A as of the Executive’s Termination Date, such payments shall not be paid or commence earlier than the date that is six months after the Termination Date, but shall be paid or commence during the calendar year following the year in which the Termination Date occurs and within 30 days of the earliest possible date permitted under Code Section 409A.

	(d)		The Company agrees to indemnify and reimburse Executive for any tax and interest imposed on Executive under Code Section 409A if any of the payments described in Sections 3 and 4 above are treated as non-qualified deferred compensation under Code Section 409A that does not comply with Code Section 409A(a)(2) — (4). Such reimbursement shall be grossed-up to take into consideration the federal and state income, employment, and unemployment taxes, and Code Section 409A interest and penalty on this reimbursement amount so that the Executive’s after-tax net cash from the payments described in Sections 3 and 4 equals the amount that Executive would have received had the penalty and interest under Code Section 409A not been assessed on the Executive.

Withholding Taxes. The Company shall be entitled to deduct from all payments or benefits provided for under this Agreement any federal, state or local income and employment-related taxes required by law to be withheld with respect to such payments or benefits.

10.

Successors and Assigns. This Agreement shall inure to the benefit of and shall be enforceable by Executive, his heirs and the personal representative of his estate, and shall be binding upon and inure to the benefit of the Company and its successors and assigns. The Company will require the transferee of any sale of all or substantially all of the business and assets of the Company or the survivor of any merger, consolidation or other transaction expressly to agree to honor this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement if no such event had taken place. Failure of the Company to obtain such agreement before the effective date of such event shall be a breach of this Agreement within the meaning of Section 1(g)(4) of this Agreement.

11.

Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective

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		only upon receipt. All notices to the Company shall be directed to the attention of the Board of Directors of the Company.

12.		Captions. The headings or captions set forth in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement.

13.		Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.

14.		Construction. Wherever possible, each term and provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any term or provision of this Agreement is invalid or unenforceable under applicable law, (a) the remaining terms and provisions shall be unimpaired, and (b) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the unenforceable term or provision.

15.		Amendment; Waivers. This Agreement may not be modified, amended, waived or discharged in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. Notwithstanding anything in this Agreement to the contrary, the Company expressly reserves the right to amend this Agreement without Executive’s consent to the extent necessary or desirable to comply with Code Section 409A, and the regulations, notices and other guidance of general applicability issued thereunder, provided that no such amendment may reduce the amount of any benefits payable to Executive without Executive’s consent.

16.		Entire Agreement. This Agreement supersedes all prior or contemporaneous negotiations, commitments, agreements (written or oral) and writings between the Company and Executive with respect to the subject matter hereof, including but not limited to any negotiations, commitments, agreements or writings relating to any severance benefits payable to Executive, and constitutes the entire agreement and understanding between the parties hereto. All such other negotiations, commitments, agreements and writings will have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing will have no further rights or obligations thereunder.

17.		Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

18.		Arbitration. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith

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effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Hennepin County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. Unless otherwise ordered by the arbitrator, the parties shall share equally in the payment of the fees and expenses of the arbitrator. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of the prevailing party’s costs and fees, including the arbitrator’s fees, and expenses, and the prevailing party’s travel expenses, out-of-pocket expenses and reasonable attorneys’ fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin County, Minnesota.

[Signatures appear on the following page(s).]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.


	SURMODICS, INC.
	By:	/s/ Robert C. Buhrmaster
		Robert C. Buhrmaster
		Chairman of the Board


	/s/ Gary R. Maharaj
	Gary R. Maharaj

exv31w1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002

I, Gary R. Maharaj, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Dated: February 4, 2011	Signature:	/s/ Gary R. Maharaj
		Gary R. Maharaj
		President and Chief Executive Officer

exv31w2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002

I, Philip D. Ankeny, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Dated: February 4, 2011	Signature:	/s/ Philip D. Ankeny
		Philip D. Ankeny
		Senior Vice President and Chief Financial Officer

exv32w1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SurModics, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Gary R. Maharaj, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: February 4, 2011	Signature:	/s/ Gary R. Maharaj
		Gary R. Maharaj
		President and Chief Executive Officer

exv32w2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SurModics, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Philip D. Ankeny, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: February 4, 2011	Signature:	/s/ Philip D. Ankeny
		Philip D. Ankeny
		Senior Vice President and Chief Financial Officer

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