10-K
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2008
Commission file number 0-23837
SURMODICS, INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Minnesota
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41-1356149
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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9924 West
74th Street
Eden Prairie, Minnesota
(Address of Principal
Executive Offices)
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55344
(Zip Code)
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(Registrants Telephone Number, Including Area Code)
(952) 829-2700
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $0.05 par value
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the Common Stock held by
shareholders other than officers, directors or holders of more
than 5% of the outstanding stock of the registrant as of
March 31, 2008 was approximately $438 million (based
upon the closing sale price of the registrants Common
Stock on such date).
The number of shares of the registrants Common Stock
outstanding as of December 8, 2008 was 17,667,059.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement for
the Registrants 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III.
Table of
Contents
We make available, free of charge, copies of our annual report
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act on
our web site, www.surmodics.com, as soon as reasonably
practicable after filing such material electronically or
otherwise furnishing it to the SEC. We are not including the
information on our web site as a part of, or incorporating it by
reference into, our
Form 10-K.
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Overview
SurModics, Inc. (referred to as SurModics, the
Company, we, us, our
and other like terms) is a leading provider of drug delivery and
surface modification technologies to the healthcare industry.
Our mission is to exceed our customers expectations and
enhance the well-being of patients by providing the worlds
foremost, innovative drug delivery and surface modification
technologies and products. We partner with many of the
worlds leading and emerging medical device, pharmaceutical
and life science companies to develop and commercialize
innovative products designed to improve patient outcomes. Our
core offerings include: drug delivery technologies (coatings,
microparticles, and implants); surface modification coating
technologies that impart lubricity, prohealing, and
biocompatibility capabilities; and components for
in vitro diagnostic test kits and specialized
surfaces for cell culture and microarrays. Our strategy is to
build on our technical leadership in the field of drug delivery
and surface modification technologies and products, enabling us
to strengthen our position as a leading edge product development
partner to the healthcare industry.
Our drug delivery and surface modification technologies are
utilized by our customers to enable drug delivery through our
microparticle, polymer implant or device platforms, alter the
characteristics of the surfaces of devices and biological
materials (e.g., lubricity or hemocompatibility), or create new
functions for the surfaces of the devices (e.g., drug delivery
or promotion of healing). For example, our patented drug
delivery technologies can create new device capabilities by
enabling site specific, controlled release drug delivery in
cases where devices (e.g., stents) are themselves necessary to
treat a medical condition and in cases where devices serve only
as a vehicle to deliver a drug (e.g., ophthalmology implants and
drug delivery depots). Microparticles can be used to provide
sustained drug delivery, allowing patients to receive injections
at less frequent intervals (e.g., monthly instead of daily).
Similarly, our patented
PhotoLink®
technology enhances the maneuverability of dilatation catheters
and guidewires within the body by improving the lubricity of the
device surface.
We believe that site specific, localized drug delivery has the
potential to change the landscape of the current medical device
industry. Drug-eluting stents are one of the first
manifestations of how drugs and devices can be combined to
dramatically improve patient outcomes. We also believe that
significant opportunities exist for site specific drug delivery
from a wide range of other medical devices. Working with both
pharmaceutical and medical device companies, we believe we are
poised to exploit this growing market opportunity as drugs and
devices converge to create improved products and therapies.
In January 2005, we extended the application of our drug
delivery technologies beyond the cardiovascular market, where
our drug delivery polymer expertise first gained prominence,
into the ophthalmology market by acquiring all of the assets of
InnoRx, Inc., including its innovative sustained drug delivery
platform technologies used to treat a variety of serious eye
diseases. A Phase I clinical trial to demonstrate safety of the
I-vationtm
intravitreal implant in patients with diabetic macular edema
(DME) was initiated during fiscal 2005. The study was fully
enrolled in fiscal 2006 and patients completed their two-year
follow-up
during fiscal 2008. The clinical data suggest that the
I-vationtm
TA (triamcinolone acetonide) intravitreal implant is safe and
well tolerated in patients with DME. In September 2008, we
announced that Merck & Co., Inc. (Merck),
following a strategic review of its business and product
portfolio, would terminate its collaborative research and
license agreement with us covering the development and possible
commercialization of products incorporating our
I-vationtm
platform, including the
I-vationtm
TA product. Mercks termination was not related to safety
or efficacy concerns with either the
I-vationtm
platform, generally, or the
I-vationtm
TA product, specifically. We continue to believe that if future
clinical trials demonstrate longer term safety and efficacy of
this product,
I-vationtm
TA could represent a viable commercial product.
We plan to continue to invest in our technologies and products
to expand our core capabilities for ophthalmic drug delivery
platforms. We anticipate entering into one or more additional
strategic relationships to further advance these ophthalmic
technologies and products, and eventually commercialize such
technologies if they lead to viable, approved treatment
solutions.
In July 2007, we acquired Brookwood Pharmaceuticals, Inc.
(Brookwood), a leading provider of drug delivery
technology primarily to the pharmaceutical industry. This
acquisition created our Brookwood
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Pharmaceuticals business unit and greatly increased our drug
delivery capabilities in the areas of proprietary injectable
microparticles and implant technology, both of which are based
on biodegradable polymers, to provide sustained drug delivery.
Our Brookwood Pharmaceuticals customer projects target a number
of key clinical indications in the diabetes, oncology,
ophthalmology, cardiovascular, orthopedics, central nervous
system (CNS) markets, in addition to other fields. Brookwood
Pharmaceuticals generates revenue from research and development
fees, polymer sales, and royalties and license fees.
In August 2007, we acquired all of the assets of BioFX
Laboratories, Inc. (BioFX). Based in Owings Mills,
Maryland, BioFX is a leading provider of innovative reagents and
substrates for the biomedical research and medical diagnostic
markets. BioFX offers both colorimetric and chemiluminescent
substrates, as well as other products for use in
in vitro diagnostic applications. This acquisition
expanded our product offerings for customers developing
diagnostic test kits.
In November 2008, we extended our technology offerings by
acquiring a portfolio of intellectual property and collaborative
drug delivery projects from PR Pharmaceuticals, Inc., a drug
delivery company specializing in injectable, biodegradable
sustained release microparticle formulations. We believe that
this acquisition, together with our Brookwood Pharmaceuticals
business unit, strengthens our portfolio of drug delivery
technologies available to the pharmaceutical and biotechnology
industries.
We continue to commercialize our drug delivery and surface
modification technologies primarily through licensing and
royalty arrangements with medical device manufacturers.
Additionally, we continue to strengthen our ability to partner
with pharmaceutical and biotechnology companies allowing for the
integration of their proprietary drugs with our unique drug
delivery platform technologies, such as our polymer-based
microparticles and implants as well as our
I-vationtm
intravitreal implant, through similar licensing and royalty
arrangements. We believe this approach allows us to focus our
resources on the further development of our core technologies
and enables us to expand our licensing activities into new
markets.
Revenues from our licensing arrangements typically include
research and development revenues, license fees and milestone
payments, minimum royalties, and royalties based on a percentage
of licensees product sales. In addition to research and
development services, through our Brookwood Pharmaceuticals
business unit, we offer manufacturing services for clinical
trial materials as well as for commercial products. In addition
to licensing fees and research and development fees, we generate
revenue from the manufacture and sale of a variety of products.
We manufacture and sell the chemical reagents used by our
customers in coating these products. Additionally, through our
CodeLink®
microarray slide product line, which we re-acquired from GE
Healthcare in September 2008 along with the right to use the
CodeLink®
trademark, we manufacture and sell microarray slides to the
diagnostic and biomedical research markets. Furthermore, for
immunoassay diagnostic tests, we offer a line of stabilization
products used to extend the shelf life of immunoassay diagnostic
tests, substrates used to detect and signal a result in
immunoassay diagnostic tests and recombinant human antigens
through our role as exclusive North American distributor for
DIARECT AG.
For the fiscal year ending September 30, 2008, we managed
our business through the following seven technology- and
market-focused business units:
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Drug Delivery, creating and supporting site specific drug
delivery polymers and coating technologies for use in
drug/device combination products in our chosen markets, such as
drug-eluting stents for the treatment of vascular disease,
ophthalmic implants, orthopedics, urology, oncology, and wound
treatment, among others.
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Ophthalmology, developing drug delivery systems intended
to enhance performance, safety, patient convenience and patient
compliance for a variety of drugs and other bioactive agents
that are being developed by pharmaceutical and ophthalmology
companies for the treatment of serious eye diseases.
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Hydrophilic Technologies, specializing in advanced
lubricity (slippery) coatings that can enhance the function of
medical devices, facilitating and easing their placement and
maneuverability in the body.
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Regenerative Technologies, developing platforms intended
to augment or replace tissue/organ function (e.g., cell
encapsulation applications), or to modify medical devices to
facilitate tissue/organ recovery through natural repair
mechanisms (e.g., prohealing coatings).
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In Vitro Technologies, specializing in
in vitro diagnostic products and technologies for
the biomedical research and medical diagnostic markets. These
products and technologies include protein stabilization
reagents, substrates, recombinant autoimmune antigens, surface
chemistry technologies for nucleic acid and protein
immobilization, synthetic extracellular matrix (ECM) cell
culture products, and diagnostic format intellectual property.
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Orthopedics, developing innovative solutions for the
treatment of structural defects in patients using proven
SurModics technologies, and creating new technology solutions
for existing patient care needs in the orthopedics field.
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Brookwood Pharmaceuticals, specializing in proprietary
injectable microparticles and implants to provide sustained
delivery of drugs being developed by leading pharmaceutical,
biotechnology and medical device clients as well as emerging
companies. These microparticles and implants are based on
biodegradable polymers. This business also supplies
biodegradable polymers to corporate and academic customers. In
November 2008, we enhanced these offerings by acquiring a
portfolio of intellectual property and collaborative drug
delivery projects from PR Pharmaceuticals, Inc., a drug delivery
company specializing in injectable, biodegradable sustained
release formulations.
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In November 2008, we announced that we were changing our
organizational structure so that we will now be organized into
four clinically and market focused business units:
Cardiovascular, Ophthalmology, In Vitro Technologies, and
Brookwood Pharmaceuticals. We believe that this structure will
improve the visibility, marketing and adoption of our broad
array of technologies within specific markets and help our
customers in the medical device, pharmaceutical and life science
industries solve unmet clinical needs. In addition, a new
centralized research and development function has been formed to
serve the needs of our clinically and market focused business
units. Brookwood Pharmaceuticals research and development
operations will remain unchanged. Because this change occurred
in fiscal 2009, and to provide comparability of our results, we
will primarily describe our business herein as it was conducted
in fiscal 2008.
We believe we have sufficient financial resources available to
continue developing and growing our business. We intend to
continue investing in research and development to advance our
drug delivery and surface modification technologies and to
expand uses for our technology bases. In addition, we continue
to pursue access to products and technologies developed outside
the Company as appropriate to complement our internal research
and development efforts.
The Company was organized as a Minnesota corporation in June
1979 and became a public company, with shares of our common
stock becoming listed for trading on the Nasdaq market, in 1998.
Drug
Delivery and Surface Modification Markets
Medical
Device Industry
Advances in medical device technology have helped drive improved
device efficacy and patient outcomes. Pacemakers and
defibrillators have dramatically reduced deaths from cardiac
arrhythmias. Stents, particularly drug-eluting stents, have
significantly reduced the need for repeat intravascular
procedures, and they have diminished the need for more invasive
cardiac bypass surgery. Hip, knee and spine implants have
relieved pain and increased mobility. Acceptance of these and
other similar innovations by patients, physicians and insurance
companies has helped the U.S. medical device industry grow
at a faster pace than the economy as a whole. The attractiveness
of the industry has drawn intense competition among the
companies participating in this area. In an effort to improve
their existing products or develop entirely new devices, a
growing number of medical device manufacturers are exploring or
using drug delivery and surface modification technologies as
product differentiators or device enablers. In addition, the
continuing trend toward minimally invasive surgical procedures,
which often employ catheter-based delivery technologies, has
increased the demand for hydrophilic, lubricious coatings and
other technologies.
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Pharmaceutical
and Biotechnology Industries
The pharmaceutical and biotechnology industries have become
increasingly competitive as a result of the launch of new
products (many of which have limited differentiating
characteristics), patent expirations, and reimbursement
pressures. In response to these competitive pressures, companies
in these industries are continually seeking to develop new
products with improved efficacy, safety and convenience.
Reducing dosing frequency through polymer-based sustained
release systems has the opportunity to enable the development of
new drug entities, as well as to improve a broad range of drugs
developed by the pharmaceutical and biotechnology industries.
Converting a drug that must, for instance, be given daily as a
pill or injection, to one that can be administered by injection
or implant weekly, monthly or even less frequently, may have
several patient benefits. Sustained, controlled drug release has
the potential to eliminate undesirable peak and trough drug
levels in the body, which can lead to both improved drug safety
and efficacy. Additionally, fewer treatments can result in
improved patient compliance with a specified administration
schedule, thereby further enabling the drugs effect to be
optimized. Similarly, less frequent administration is typically
considered to be more convenient to the patient.
Drug delivery solutions such as those offered by SurModics also
create opportunities for local delivery of medications to sites
of disease in the body. In certain applications such as ocular,
orthopedic and pain applications, it can be beneficial to
provide a high local concentration of drug. Such local delivery
may enhance efficacy and reduce side effects by focusing the
drugs effect where it is needed and limiting the amount of
drug impacting other parts of the body.
Pharmaceutical and biotechnology companies have also found that
sustained drug delivery solutions can enhance product sales by
creating competitive advantage and extending patent protection
through the issuance of patents on controlled delivery
formulations of their drugs.
We believe the benefits of polymer-based sustained release
systems make them applicable to drugs targeting a wide range of
therapeutic fields, including ophthalmology, orthopedics,
dermatology, metabolic disease, alcoholism, central nervous
system disorders, and cardiovascular disease, among others.
Convergence
of the Medical Device, Pharmaceutical and Biotechnology
Industries
The convergence of the pharmaceutical, biotechnology and medical
device industries, often made possible by drug delivery and
surface modification technologies, presents a powerful
opportunity for major advancements in the healthcare industry.
The dramatic success of drug-eluting stents in interventional
cardiology has captured the attention of the drug and medical
device industries. We believe the benefits of combining drugs
and biologics with implantable devices are becoming increasingly
valuable in applications in cardiology, ophthalmology,
orthopedics, and other large markets.
SurModics
Drug Delivery and Surface Modification Technologies
Overview
We believe SurModics is uniquely positioned to exploit the
continuing trend of incorporating drug delivery and surface
modification technologies into the design of products such as
devices and drugs, potentially leading to more efficient and
effective products as well as creating entirely new product
applications. We have a growing portfolio of proprietary
technologies, market expertise and insight, and unique
collaborative research and development capabilities
all key ingredients to bring innovation together for the benefit
of patients, the Company, and the healthcare industry.
Coatings
for Drug Delivery and Surface Modification
Our drug delivery coating technologies allow therapeutic drugs
to be incorporated within our proprietary polymer matrices to
provide controlled, site specific release of the drug into the
surrounding environment. The release of the drug can be tuned to
elute quickly (in a few days) or slowly (ranging from several
months to over a year), illustrating the wide range of release
profiles that can be achieved with our coating systems. On a
wide range of devices, drug-eluting coatings can help improve
device performance, increase patient safety and enable
innovative new treatments. We work with companies in the
pharmaceutical, biotechnology and medical device industries to
develop specialized coatings that allow for the controlled
release of drugs from device surfaces. We see
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at least three primary areas with strong future potential:
(1) improving the function of a device which itself is
necessary to treat the medical condition; (2) enabling drug
delivery in cases where the device serves only as a vehicle to
deliver a drug to a specific site in the body; and
(3) enhancing the biocompatibility of a medical device to
ensure that it continues to function over a long period of time.
We offer customers several distinct polymer families for site
specific drug delivery. Our
Bravotm
Drug Delivery Polymer Matrix is utilized on the
CYPHER®
Sirolimus-eluting Coronary Stent from Cordis Corporation, a
subsidiary of Johnson & Johnson.
CYPHER®
is a trademark of Cordis Corporation. The Bravo polymer is a
durable coating and is also used on our
I-vationtm
intravitreal implant within our Ophthalmology business unit. In
addition, we offer several biodegradable polymer technologies
that can be used for drug delivery applications. Because some
biodegradable polymers can deliver proteins and other large
molecule therapeutic agents, they have the potential to expand
the breadth of drug delivery applications we can pursue.
Biodegradable polymers can be combined with one or more drugs
and applied to a medical device, and the drug is then released
as the polymer degrades in the body over time.
Our proprietary PhotoLink coating technology is a versatile,
easily applied, coating technology that modifies medical device
surfaces by creating covalent bonds between device surfaces and
a variety of chemical agents. PhotoLink coatings can impart many
performance enhancing characteristics, such as advanced
lubricity (slippery) and hemocompatibility (preventing clot
formation), by becoming bound onto surfaces of medical devices
or other biological materials without materially changing the
dimensions or other physical properties of devices. Our
PhotoLink technology utilizes proprietary, light activated
(photochemical) reagents, which include advanced polymers or
active biomolecules having desired surface characteristics and
an attached light reactive chemical compound (photogroup). When
the reagent is exposed to a direct light source, typically
ultraviolet light, a photochemical reaction creates a covalent
bond between the photogroup and the surface of the medical
device, thereby imparting the desired property to the surface. A
covalent bond is a very strong chemical bond that results from
the sharing of electrons between carbon atoms of the substrate
and the applied coating, making the coating very durable and
resilient.
Our proprietary PhotoLink reagents can be applied to a variety
of substrates. Our reagents are easily applied to the material
surface by dipping, spraying, roll coating, ink jetting or
brushing. We continue to expand our portfolio of proprietary
reagents for use by our customers. These reagents enable our
customers to develop novel surface features for their devices,
satisfying the expanding requirements of the healthcare
industry. We are also continually working to expand the list of
materials that are compatible with our drug delivery and surface
modification reagents. Additionally, we develop coating
processes and coating equipment to meet the device quality,
manufacturing throughput and cost requirements of our customers.
Two key differentiating characteristics of our coatings are
their flexibility and ease of use. In terms of flexibility,
coatings can be applied to many different kinds of surfaces and
can immobilize a variety of chemical, pharmaceutical and
biological agents. This flexibility allows customers to be
innovative in the design of their products without significantly
changing the dimensions or other physical properties of the
device. Additionally, the surface modification process can be
tailored to provide customers with the ability to improve the
performance of their devices by choosing the specific coating
properties desired for particular applications. Our surface
modification technologies also can be combined to deliver
multiple surface-enhancing characteristics on the same device.
In terms of ease of use, unlike competing coating processes, the
PhotoLink coating process is relatively simple and is easily
integrated into the customers manufacturing process. In
addition, it does not subject the coated products to harsh
chemical or temperature conditions, produces no hazardous
byproducts, and does not require lengthy processing or curing
time. Further, our Photolink coatings are compatible with
generally accepted sterilization processes, so the surface
attributes are not lost when the medical device is sterilized.
Systemic
and Local Drug Delivery Through Injectable Microparticles and
Implants
Through our acquisition of Brookwood in July 2007, and certain
proprietary technology from PR Pharmaceuticals, Inc. in November
2008, as well as internal development and acquisition of our
biodegradable materials, we offer customers drug delivery
systems based on polymer-based microparticles and implants.
These systems
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enable the controlled delivery of a broad variety of drugs,
ranging in size from small molecule drugs to larger molecule
drugs such as peptides and proteins. Depending on the drug and
application, our microparticles and implants can incorporate
drugs for delivery over days to weeks to months.
Brookwood Pharmaceuticals scientists have developed an extensive
body of experience, proprietary know-how and patented capability
in the field of microparticle drug delivery, working with a wide
range of drug classes. Our microparticles incorporate a
customers drug and our polymers into very small particles
that are measured in microns (1,000 microns equals one
millimeter). Using our extensive technology base, we can develop
long-acting, injectable microparticles for systemic, local, and
cellular delivery of active pharmaceutical ingredients and
vaccines. A variety of commercially viable microencapsulation
processes are used including: solvent extraction, solvent
evaporation, phase separation, fluid bed coating, and spray
drying. Based on the desired product specifications, our
scientists and engineers can select the appropriate
microencapsulation process, as well as the formulation variables
to achieve dose, duration and other product specifications.
Injectable solid implants are rod, coil or other-shaped devices
with drug dispersed throughout a polymer matrix. They are
designed to release the drug at a prescribed rate for days,
weeks, or months. This type of drug delivery dosage form is
especially suitable when efficacy is dependent on delivering a
relatively large dose of a drug over a long duration. The
polymer matrix controls the rate of release of the drug from the
implant. We are developing long-acting implants with
biodegradable and non-biodegradable polymers. One of our
biodegradable drug delivery implant systems has shape memory
properties. This capability allows the implant to be delivered
in one shape so that it can be placed through a catheter or
other delivery device, after which the implant returns to its
original shape once delivered to the desired site in the body.
Through our Brookwood Pharmaceuticals business unit, we are also
collaborating with Genzyme Pharmaceuticals, a business unit of
Genzyme Corporation, to develop novel drug delivery solutions,
with an initial focus on peptide delivery. The relationship
offers customized solutions for parenteral formulations by
combining expertise in design for peptide delivery, peptide
synthesis, and drug delivery technologies.
SurModics
Drug Delivery and Surface Modification Technologies
Clinical Benefits
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Drug Delivery. We provide drug delivery
polymer technology to enable controlled, site specific or
systemic delivery of therapeutic agents. Our proprietary polymer
reagents create coatings, microparticles and implants which
serve as reservoirs for therapeutic drugs. The drugs can then be
released on a controlled basis over days to weeks to months.
Some of our systems can release drugs for over a year. For
instance, when a drug-eluting stent is implanted into a patient,
the drug releases from the surface of the stent into the blood
vessel wall where it can act to inhibit unwanted tissue growth,
thereby reducing the occurrence of restenosis. Cordis
Corporation is currently selling throughout the world a
drug-eluting stent incorporating SurModics technology. We
have also developed the
I-vationtm
sustained drug delivery system for the treatment of serious
retinal diseases. In addition to our biodurable polymer
technologies, we offer a number of biodegradable polymer
technologies allowing us to deliver both large and small
molecule drugs and address a wide variety of applications. We
believe that we are unique in our ability to offer our medical
device, pharmaceutical and biotechnology industry customers and
their patients delivery of such a broad range of drugs through
coatings, microparticles and implants.
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Lubricity. Low friction or lubricious coatings
reduce the force and time required for insertion, navigation and
removal of devices in a variety of minimally invasive
applications. Lubricity also reduces tissue irritation and
damage caused by products such as catheters, guidewires and
endoscopy devices. Based on internal and customer evaluation,
when compared with uncoated surfaces, our PhotoLink coatings
have reduced the friction on surfaces by more than 90%,
depending on the substrate being coated.
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Prohealing. We are developing biologically
based extracellular matrix (ECM) protein coatings for use in
various applications that are designed to improve and accelerate
tissue healing of implantable medical devices through
natures own healing mechanisms. Certain ECM proteins, such
as collagen and laminin, specifically stimulate the migration
and proliferation of endothelial cells (cells that line blood
vessels) to promote healing. By covalently attaching the
appropriate ECM proteins to device surfaces utilizing the
PhotoLink coating process, the biomimetic surface can signal
endothelial cells in the blood and vascular wall
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to form a stable endothelial lining over the implant. We believe
these prohealing coatings could help prevent late stent
thrombosis.
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Hemo/biocompatibility. Hemocompatible/biocompatible
coatings help reduce adverse reactions that may be created when
a device is inserted into the body and comes in contact with
blood. Heparin has been used for decades as an injectable drug
to reduce blood clotting in patients. PhotoLink reagents can be
used to immobilize heparin on the surface of medical devices,
thereby inhibiting blood clotting on the device surface,
minimizing patient risk and enhancing the performance of the
device. We have also developed synthetic, non-biological
coatings that provide medical device surfaces with improved
blood compatibility without the use of heparin. These coatings
prevent undesirable cells and proteins that lead to clot
formation from adhering to the device surface. These coatings
may also reduce fibrous encapsulation.
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Tissue Engineering. Studies have shown that
attachment of extracellular matrix proteins and peptides onto
surfaces of implantable medical devices improves host cell
attachment, growth and subsequent tissue integration. Company
studies have shown that biomedical implants (such as vascular
grafts) coated with photoreactive collagen and other proteins
may improve attachment, cell growth and acceptance by
surrounding tissues. We have developed several coating and
matrix technologies for tissue engineering applications, such as
naturally biodegradable matrix forming polymers to provide
scaffolds for cells, proteins, and genes for a variety of
applications. For example, biocompatible coatings that form a
semipermeable barrier may be used to encapsulate transplant
cells, rendering them invisible to a patients immune
system. Accordingly, we have licensed technology to and have
made an investment in Novocell, Inc., which is pursuing a
treatment for diabetes by implanting encapsulated islet cells.
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Wettability. PhotoLink hydrophilic coatings
have been shown in internal and customer tests to accelerate
liquid flow rates on normally hydrophobic (water repelling)
materials by up to 75%. For example, some rapid point-of-care
diagnostic tests, such as home monitoring or physician
monitoring of glucose levels in diabetics, are currently done by
pricking a patients finger and placing a drop of blood
onto a polymer strip which is then inserted into a blood glucose
reader. We believe that the time it takes for the blood to flow
up the strip to provide a readout can be dramatically reduced
and the consistency can be greatly improved with the use of
PhotoLink technology.
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DNA and Protein Immobilization. Both DNA and
protein microarrays are useful tools for the pharmaceutical,
diagnostic and research industries. During a DNA gene analysis,
typically thousands of different probes need to be placed in a
pattern on a surface, called a DNA microarray. These microarrays
are used by the pharmaceutical industry to screen for new drugs,
by genome mappers to sequence human, animal or plant genomes, or
by diagnostic companies to search a patient sample for disease
causing bacteria or viruses. However, DNA does not readily
adhere to most surfaces. We have developed various surface
chemistries for both DNA and protein immobilization. In
September 2008, we re-acquired the rights to our microarray
slide product line which had previously been marketed by GE
Healthcare under the
CodeLink®
trademark. As part of this transaction, we obtained the right to
use the
CodeLink®
trademark of GE Healthcare in the sale and marketing of the
product lines we re-acquired. Protein microarrays are used as
diagnostic and research tools to determine the presence
and/or
quantity of proteins in a biological sample. The most common
type of protein microarray is the antibody microarray, where
antibodies are spotted onto a surface and used as capture
molecules for protein detection.
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SurModics
Drug Delivery and Surface Modification Technologies
Applications
The table below identifies several market segments where drug
delivery and surface modification technologies are desired to
improve and enable both existing and new medical devices and
drugs.
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Desired Surface Property and
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Market Segment Served
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Examples of Applications
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Interventional cardiology and vascular access
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Lubricity: catheters, guidewires
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Hemocompatibility: vascular stents, catheters, distal
protection devices
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Drug/biologics delivery: vascular stents, catheters
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Prohealing: vascular stents, vascular grafts
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9
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Desired Surface Property and
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Market Segment Served
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Examples of Applications
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Cardiac rhythm management
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Lubricity: pacemaker and defibrillator leads,
electrophysiology devices
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Hemocompatibility: electrophysiology devices
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Prohealing: pacemaker and defibrillator leads
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Drug/biologics delivery: pacemaker and defibrillator leads
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Cardiothoracic surgery
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Prohealing: heart valves, septal defect repair devices
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Hemocompatibility: minimally invasive bypass devices,
vascular grafts, ventricular assist devices
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In Vitro Diagnostics
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Lubricity: microfluidic devices
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Hemocompatibility: blood/glucose monitoring devices,
biosensors
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Biomolecule immobilization: DNA and protein arrays,
protein attachment to synthetic nanofibrillar extracellular
matrix for cell culture applications
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Cell culture growth and tissue integration: cell culture
products, in vitro applications using synthetic
nanofibrillar extracellular matrix to provide a more
in vivo-like surface
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Interventional neurology and neurosurgery
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Lubricity: catheters, guidewires
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Prohealing: neuroembolic devices
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Tissue engineering: aneurysm repair devices
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Urology and gynecology
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Lubricity: urinary catheters, incontinence devices,
ureteral stents, fertility devices
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Drug/biologics delivery: prostatic stents, microparticle
injections
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Tissue engineering: female sterilization devices
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Ophthalmology
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Drug/biologics delivery: sustained drug delivery implants
and microparticle injections
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Orthopedics
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Cell growth and tissue integration: bone and cartilage
growth
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Infection resistance: orthopedic and trauma implants
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Drug/biologics delivery: orthopedic and trauma implants
and microparticle injections
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Metabolic disease
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Drug/biologics delivery: microparticle injections
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Tissue engineering: cell encapsulation
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Central nervous system disorders
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Drug/biologics delivery: microparticle injections,
polymer implants
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Dermatology
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Drug/biologics delivery: polymer implants
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Tissue engineering: tissue bulking, space filling
materials
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Examples of applications for our coating technologies include
guidewires, angiography catheters, IVUS catheters, neuro
microcatheters/infusion catheters, PTCA/PTA laser and balloon
angioplasty catheters, atherectomy systems, chronic total
occlusion catheters, stent delivery catheters, cardiovascular
stents, embolic protection devices, vascular closure devices, EP
catheters, pacemaker leads, drug infusion catheters, wound
drains, ureteral stents, urological catheters and implants,
hydrocephalic shunts, ophthalmic implants, among other devices.
Beyond coatings, our drug delivery technologies have also been
applied to a wide range of drugs currently in preclinical and
clinical development.
Licensing
Arrangements
We commercialize our drug delivery and surface modification
technologies primarily through licensing arrangements with
medical device and drug manufacturers. We believe this approach
allows us to focus our
10
resources on further developing new technologies and expanding
our licensing activities. Many of our technologies have been
designed to allow manufacturers to easily implement them into
their own manufacturing processes so customers can control
production and quality internally without the need to send their
products to a contract manufacturer. Other customers,
particularly in the pharmaceutical and biotechnology industries,
prefer to outsource the manufacturing of drug delivery
formulations to partners. Accordingly, we are investing in our
Brookwood Pharmaceuticals manufacturing facility in Alabama in
order to meet the Current Good Manufacturing Practice (CGMP)
manufacturing needs of our customers.
We generate the largest portion of our revenue primarily through
licensing arrangements. Royalties and license fees represented
53.4%, 72.0% and 75.9% of our total revenue in fiscal 2008, 2007
and 2006, respectively. Revenue from these licensing
arrangements typically includes license fees and milestone
payments, minimum royalties, and royalties based on a percentage
of licensees product sales. We also generate revenue from
sales of chemical reagents to licensees for use in their coating
processes, and from polymer sales under our Lakeshore
Biomaterials brand. Our In Vitro Technologies business unit
generates revenue from: sales of stabilization products,
substrates, antigens and microarray slides to diagnostics
customers; and licensing our proprietary diagnostic formats for
use in point-of-care testing. Product sales represented 20.7%,
18.5% and 16.0% of total revenue in fiscal 2008, 2007 and 2006,
respectively. Research and development fees represented 26.0%,
9.5% and 8.2% of total revenue in fiscal 2008, 2007 and 2006,
respectively. The increase in research and development revenue
reflects the addition of our Brookwood Pharmaceuticals business
unit.
The licensing process begins with the customer specifying a
desired product feature to be created such as lubricity, drug
delivery, etc. Because each device and drug is unique, we
routinely conduct a feasibility study to qualify each new
potential product application, often generating research and
development revenue. Once the feasibility phase has been
completed in a manner satisfactory to the customer, the customer
funds a development project to optimize the formulation to meet
the customers specific technical needs. At any time prior
to commercialization, a license agreement may be executed
granting the licensee rights to use our technology. We often
support our customers by providing coating assistance for parts
required in animal tests and human clinical trials. However,
most customers perform the coating work internally once a
product has received regulatory approval and is being actively
marketed. Our Brookwood Pharmaceuticals business unit also
supports many of our drug delivery customers by manufacturing
microparticles and implants incorporating customers drugs
through preclinical and clinical trials and by providing an
option to manufacture products upon commercialization as well.
The term of a license agreement is generally for a specified
number of years or the life of our patents, whichever is longer,
although a license generally may be terminated by the licensee
for any reason upon 90 days advance written notice.
Our license agreements may include certain license fees
and/or
milestone payments. The license can be either exclusive or
nonexclusive, but a significant majority of our licensed
applications are nonexclusive, allowing us to license technology
to multiple customers. Moreover, even exclusive licenses may be
limited to a specific field of use, allowing us the
opportunity to further license technology to other customers.
The royalty rate on a substantial number of the agreements has
traditionally been in the 2% to 3% range, but there are certain
contracts with lower or higher rates. Royalty rates in certain
more recent agreements have been trending higher, especially
where the relevant SurModics technology is an enabling component
of the customers device (i.e., the device could not
perform as desired without our technology). The amount of the
license fees, milestone payments, and the royalty rate are based
on various factors, including the stage of development of the
product or technology being licensed, whether the arrangement is
exclusive or nonexclusive, the perceived value of our technology
to the customers product, size of the potential market,
and customer preferences. Most of our agreements also
incorporate a minimum royalty to be paid by the licensee. Due to
the delay in reporting sales by our licensees, royalties are
generally paid one quarter after the customers actual
product sales occur.
As of September 30, 2008, we had 103 licensed product
classes (customer products utilizing SurModics technology)
already on the market generating royalties and 105 customer
product classes incorporating our technology pending regulatory
approval. These 208 product classes are being sold or developed
by 101 licensed customers. We signed 23 new licenses in fiscal
2008, compared with 27 in fiscal 2007.
Under most of our licensing agreements, we are required to keep
the identity of our customers confidential unless they approve
such disclosure. Licensed customers who allow the use of their
name include AbbeyMoor
11
Medical, Inc., Abbott Laboratories, Ambrilia Biopharma Inc.,
Boston Scientific Corporation, CardioMind, Inc., Conor
Medsystems, LLC (a wholly owned subsidiary of
Johnson & Johnson), Cook Medical, Corning
Incorporated, Cordis Corporation (a subsidiary of
Johnson & Johnson), Devax, Inc., Edwards Lifesciences
Corporation, elbion N.V., Elixir Medical Corporation, ev3 Inc.,
FoxHollow Technologies, Inc. (a subsidiary of ev3 Inc.),
Medtronic, Inc., Novocell, Inc., Nexeon MedSystems, Inc.
(formerly Paragon Intellectual Properties, LLC), Spectranetics
Corporation, St. Jude Medical, Inc., ThermopeutiX Inc., and
Xtent, Inc., among others.
In
Vitro Products
Stabilization
Products
SurModics offers a full line of stabilization products for the
in vitro diagnostics market. These products decrease
the variability often associated with storage conditions,
thereby producing more consistent assay results. SurModics
stabilization products are ready-to-use, eliminating the
preparation time and cost of producing stabilization and
blocking reagents in house.
Substrates
Since the acquisition of BioFX in August 2007, SurModics has
provided colorimetric and chemiluminescent substrates to the
in vitro diagnostics market. A substrate is the
component of a diagnostic test kit that detects and signals that
a reaction has taken place so that a result can be recorded.
Colorimetric substrates signal a positive diagnostic result
through a color change. Chemiluminescent substrates signal a
positive diagnostic result by emitting light. We believe that
our substrates offer a high level of stability, sensitivity and
consistency.
Recombinant
Human Antigens
SurModics is the exclusive North American distributor (and
non-exclusive distributor in Japan) of DIARECT AGs line of
recombinant autoimmune antigens. Because of the lack of
high-quality antigens from natural sources, DIARECT produces
these proteins and other components using biotechnological
methods. DIARECT has strong capabilities in the bacilovirus/Sf9
expression system for autoimmune antigens as well as E. coli
systems for particular expression tasks.
Microarray
Slide Products
During fiscal 1999, we began offering microarray slide products
for use in the diagnostic and biomedical research markets.
Microarray slides are used by researchers for DNA analysis. In
September 2008, we re-acquired the rights to market our
microarray slide product line from GE Healthcare, including the
right to use the
CodeLink®
trademark in connection with these products. Previously, these
products had been marketed by GE Healthcare under the
CodeLink®
trademark.
Ultra-Webtm
Synthetic Extracellular Matrix (ECM) Cell Culture Products
The
Ultra-Webtm
Synthetic ECM product line is the result of a collaboration
between Donaldson Company, Inc. (providing the nanofiber
technology) and SurModics (providing the surface modification
technology).
Ultra-Webtm
is a trademark of Donaldson Company. In May 2006, SurModics and
Donaldson entered into a strategic marketing and distribution
agreement with Corning Incorporated, through which Corning Life
Sciences, a subsidiary of Corning Incorporated, provides
worldwide marketing and distribution of the nanofiber cell
culture products for in vitro cell culture research
and drug discovery applications. Corning Life Sciences launched
the initial
Ultra-Webtm
nanofiber cell culture products in 96 well microplate and
100mm research dish formats in April 2007.
Ultra-Webtm
Synthetic ECM is a nanofibrillar cell culture surface that
provides a biomimetic environment for more consistent and
reproducible in vivo-like cell phenotypes, leading to
more biologically accurate results. The
Ultra-Webtm
technology involves electrospinning various polymers to produce
a nanofiber material that is a defined and reproducible cell
culture surface. Modification of the nanofibers with specific
surface chemistries and functional groups can further enhance
the desired cell matrix interactions. Extensive laboratory
testing of this
12
cell culture surface has substantiated improved performance when
compared to conventional plastic and glass surface technology,
with observations of more in vivo-like cellular
morphology, organization, and activity.
Diagnostic
Royalties
We have also licensed patent rights to Abbott Laboratories
involving a format for in vitro diagnostic tests.
This format has found broad application in the area of rapid
point-of-care diagnostic testing, such as pregnancy, strep and
flu tests. In December 2008, the U.S. patents underlying
the royalty streams from Abbott Laboratories will expire.
Because net sales are reported, and royalties paid, following
the end of a calendar quarter, we anticipate that we will
continue to recognize some royalty revenue through the end of
our second quarter in fiscal 2009, however following this we
will not receive any additional diagnostic royalty revenue.
Research
and Development
Our research and development (R&D) personnel work to
enhance and expand our technology offerings in the area of drug
delivery and surface modification through internal scientific
investigation. These scientists and engineers also evaluate
external technologies in support of our business development
activities. All of these efforts are guided by the needs of the
markets in which we do business. Additionally, the R&D
staff support the sales staff and business units in performing
feasibility studies, providing technical assistance to potential
customers, optimizing the relevant technologies for specific
customer applications, supporting clinical trials, training
customers, and integrating our technologies and know-how into
customer manufacturing operations.
We work together with our customers to integrate the best
possible drug delivery and surface modification technologies
with their products, not only to meet their performance
requirements, but also to perform services quickly so that the
product may reach the market ahead of the competition. To
quickly solve problems that might arise during the development
and optimization process, we have developed extensive
capabilities in analytical chemistry and surface
characterization within our R&D organization. Our
state-of-the-art instrumentation and extensive experience allow
us to test the purity of coating reagents, to monitor the
elution rate of drug from coatings, microparticles and implants,
to measure coating thickness and smoothness, and to map the
distribution of chemicals throughout coatings, microparticles
and implants. We believe our capabilities far exceed those of
our direct competitors, and sometimes even exceed those of our
large-company customers. In order to better serve our customers,
in November 2008 we announced the creation of a new centralized
R&D function in order to serve the needs of the
Companys clinically and market focused business units. Our
Brookwood Pharmaceuticals business unit will continue to have
its own R&D operations, which will remain unchanged.
As medical products become more sophisticated and complex and as
competition increases, we believe the need for drug delivery and
surface modification will continue to grow. We intend to
continue our development efforts to expand our drug delivery and
surface modification technologies to provide additional
optimized properties to meet these needs across multiple medical
markets. In addition, we are expanding our drug delivery and
surface modification technology expertise to capture more of the
final product value. We are doing this by, in selected cases,
developing or acquiring technologies or devices to develop from
feasibility stage up to and including animal and human clinical
testing stage. There can be no assurance that we will be
successful in developing or acquiring additional technologies or
devices.
After thorough consideration of each market opportunity, our
technical strategy is to target selected formulation
characteristics for further development, to facilitate and
shorten the license cycle. We continue to perform research into
applications for future products both on our own and in
conjunction with some of our customers. Some of the R&D
projects currently in progress include additional polymer
systems for site specific and systemic drug delivery, including
microparticles and nanoparticles, including biodegradable
technologies, as well as technologies to improve
endothelialization of implantable devices and to improve
long-term blood compatibility, nanofiber cell culture
technologies and drug delivery platforms for ophthalmic
applications.
In fiscal 2008, 2007 and 2006, our R&D expense was
$40.5 million, $28.5 million and $20.4 million,
respectively. Of the above amounts, $7.9 million,
$9.2 million and $8.5 million were spent on internal
R&D in 2008, 2007 and 2006, respectively, and
$32.6 million, $19.3 million and $11.9 million
were spent on customer-sponsored R&D for which we are paid
by the customer, which includes technology optimization and
other development work
13
on customer product applications. We intend to continue
investing in R&D to advance our drug delivery and surface
modification technologies and to expand uses for our technology
bases. In addition, we continue to pursue access to products and
technologies developed outside the Company as appropriate to
complement our internal R&D efforts.
Patents
and Proprietary Rights
Patents and other forms of proprietary rights are an essential
part of the SurModics business model. We protect our extensive
portfolio of technologies through a number of United
States patents covering a variety of coatings, drug
delivery methods, reagents, and formulations, as well as
particular clinical device applications. We generally file
international patent applications in the locations matching the
major markets of our customers (primarily in North America,
Europe, and Japan) in parallel with United
States applications. In fiscal 2008, we filed 25 United
States patent applications, expanding the portfolio protection
around our current technologies as well as enabling pursuit of
new technology concepts, innovations, and directions. As of
September 30, 2008, we had 136 pending United States patent
applications, 8 of which were exclusively licensed from others,
and 237 foreign patent applications, of which 29 were
exclusively licensed from others. Likewise, as of
September 30, 2008, we owned 77 issued United States
patents, 14 of which were exclusively licensed from others, and
174 international patents, of which 42 were exclusively licensed
from others.
We also rely upon trade secrets and other unpatented proprietary
technologies. We seek to maintain the confidentiality of such
information by requiring employees, consultants and other
parties to sign confidentiality agreements and by limiting
access by parties outside the Company to such information. There
can be no assurance, however, that these measures will prevent
the unauthorized disclosure or use of this information or that
others will not be able to independently develop such
information. Additionally, there can be no assurance that any
agreements regarding confidentiality and non-disclosure will not
be breached, or, in the event of any breach, that adequate
remedies would be available to us.
Marketing
and Sales
We market our technologies and products throughout the world
using a direct sales force consisting of dedicated sales
professionals who focus on specific markets and companies. These
sales professionals work in concert with business unit personnel
to coordinate customer activities. We believe that our new
organizational structure will allow us to better understand and
meet the needs of our customers by organizing our business
around patient needs. The specialization of our sales
professionals fosters an in-depth knowledge of the issues faced
by our customers within these markets such as industry trends,
technology changes, biomaterial changes and the regulatory
environment. In addition, we enter into sales and marketing
relationships with third-parties to distribute our diagnostic
products around the world. See Note 8 to the Consolidated
Financial Statements for information regarding domestic and
foreign revenue.
In general, we license our technologies on a non-exclusive basis
to customers for use on specific products. This strategy enables
us to license our technologies to multiple customers in the same
market. We also target new product applications with existing
customers.
To support our marketing and sales activities, we publish
technical literature on our various surface modification, drug
delivery, and in vitro technologies and products. In
addition, we exhibit at major trade shows and technical
meetings, advertise in selected trade journals and through our
web site, and conduct direct mailings to appropriate target
markets.
We also offer ongoing customer service and technical support
throughout our licensees relationships with us. This
service and support may begin with a feasibility study, and also
may include additional services such as assistance in the
transfer of the technology to the licensee, further
optimization, process control and troubleshooting, preparation
of product for clinical studies, and assistance with regulatory
submissions for product approval. Most of these services are
billable to customers.
14
Acquisitions
and Investments
In order to further our strategic objectives and strengthen our
existing businesses, we intend to continue to explore
acquisitions, investments and strategic collaborations to
diversify and grow our business. As a result, we expect to make
future investments or acquisitions where we believe that we can
broaden our technology offerings and expand our sources of
revenue and the number of markets in which we participate.
Mergers and acquisitions of medical technology companies are
inherently risky and no assurance can be given that any of our
previous or future acquisitions will be successful or will not
materially adversely affect our consolidated results of
operations, financial condition, or cash flows. In fiscal 2007
SurModics acquired Brookwood and BioFX for $42.3 million and
$11.6 million, respectively. There are contingent
consideration features associated with each acquisition whereby
SurModics may be required to pay up to an additional
$22 million in cash related to Brookwood and
$11.4 million in cash related to BioFX. In fiscal 2008 both
entities achieved earnout targets resulting in additional cash
consideration paid of $2 million and $1.1 million for
Brookwood and BioFX, respectively. The additional cash
consideration was recorded as an increase to goodwill.
Following the successful completion of a milestone in May 2008,
we completed a $2.5 million equity investment in Nexeon
MedSystems, Inc. (formerly Paragon Intellectual Properties, LLC
and its subsidiary Apollo Therapeutics, LLC, which combined in
2008). This investment followed our $3.5 million equity
investment in Nexeon in fiscal 2007. The investment was made in
conjunction with our agreement with Nexeon to collaborate on the
development of a coronary stent system incorporating our
proprietary
Finaletm
prohealing coating technology. See Note 2 to the
Consolidated Financial Statements for discussion of
SurModics accounting for this investment.
In September 2008, we re-acquired the rights to directly sell
our genomics slide product line, which had previously been
marketed by GE Healthcare under the
CodeLink®
trademark. Prior to the re-acquisition, we had manufactured the
slides, which were then sold by GE Healthcare. Following the
acquisition, we believe we will capture incremental value
associated with distributing these products directly to
customers. As part of this transaction, we also acquired the
right to use the
CodeLink®
trademark in connection with these products.
In November 2008, we extended our technology offerings by
acquiring a portfolio of intellectual property and collaborative
drug delivery projects from PR Pharmaceuticals, Inc., a drug
delivery company specializing in injectable, biodegradable
sustained release formulations.
Significant
Customers
We have two customers that each provided more than 10% of our
revenue in fiscal 2008. Revenue from Johnson & Johnson
and Abbott Laboratories represented approximately 20% and 10%,
respectively, of our total revenue for the year ended
September 30, 2008. We have several products for each
generating revenue for us. The loss of one or more of our
largest customers could have a material adverse effect on our
business, financial condition, results of operations, and cash
flow as discussed in more detail below.
In September 2008, following a strategic review of its business
and product portfolio, Merck notified the Company of its intent
to terminate its collaborative research and license agreement
with us covering the development and possible commercialization
of products incorporating our
I-vationtm
platform, including the
I-vationtm
TA product. The termination is expected to be effective
December 16, 2008. The accounting treatment required by
Emerging Issues Task Force Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, has resulted in a deferred revenue
balance in connection with the Merck agreement totaling
$34.8 million as of September 30, 2008. We anticipate
that this deferred revenue will be recognized in the first
quarter of fiscal 2009. In addition, we anticipate recognizing
in the first quarter of fiscal 2009 a $9 million milestone
payment from Merck associated with the termination of the
triamcinolone acetonide development program.
Competition
The ability for drug delivery and surface modification
technologies to improve the performance of medical devices and
drugs and to enable new product categories has resulted in
increased competition in these markets. Our drug delivery and
surface modification technologies compete with technologies
developed by Alkermes, Inc., AST Products, Inc., Biocompatibles
International plc, BioSensors International Group, Ltd., DSM
Biomedical Materials B.V., Durect
15
Corporation, Hydromer, Inc., MediVas, LLC, pSivida Limited, QLT
Inc., Specialty Coating Systems, Inc., STS Biopolymers Inc., a
subsidiary of Angiotech Pharmaceuticals, Inc., and W.L.
Gore & Associates, among others. Some of these
companies offer drug delivery technologies, while others
specialize in lubricious or hemocompatible coating technology.
Some of these companies target ophthalmology applications, while
others target cardiovascular medical device applications. In
addition, due to the many product possibilities afforded by
surface modification technologies, many of the large medical
device manufacturers have developed or are engaged in efforts to
develop internal competency in the area of drug delivery and
surface modification. Some of our existing and potential
competitors (especially medical device manufacturers pursuing
coating solutions through their own research and development
efforts) have greater financial, technical and marketing
resources than we have.
We attempt to differentiate ourselves from our competitors by
providing what we believe is a high value added approach to drug
delivery and surface modification technology. We believe that
the primary factors customers consider in choosing a particular
technology include performance (e.g., flexibility, ability to
fine tune drug elution profiles, biocompatibility, etc.), ease
of manufacturing, time-to-market, intellectual property
protection, ability to produce multiple properties from a single
process, compliance with manufacturing regulations, ability to
manufacture clinical and commercial products (especially for
Brookwood Pharmaceuticals customers), customer service and total
cost of goods (including manufacturing process labor). We
believe our technologies deliver exceptional performance in
these areas, allowing us to compete favorably with respect to
these factors. We believe that the cost and time required to
obtain the necessary regulatory approvals significantly reduces
the likelihood of a customer changing the manufacturing process
it uses once a device or drug has been approved for sale.
Because a significant portion of our revenue is dependent on the
receipt of royalties based on sales of medical devices
incorporating our technologies, we are also affected by
competition within the markets for such devices. We believe that
the intense competition within the medical device market creates
opportunities for our technologies as medical device
manufacturers seek to differentiate their products through new
enhancements or to remain competitive with enhancements offered
by other manufacturers. Because we seek to license our
technologies on a non-exclusive basis, we may further benefit
from competition within the medical device markets by offering
our technologies to multiple competing manufacturers of a
device. However, competition in the medical device market could
also have an adverse effect on us. While we seek to license our
products to established manufacturers, in certain cases our
licensees may compete directly with larger, dominant
manufacturers with extensive product lines and greater sales,
marketing and distribution capabilities. We also are unable to
control other factors that may impact commercialization of
coated devices or drug products, such as regulatory approval,
marketing and sales efforts of our licensees or competitive
pricing pressures within the particular market. There can be no
assurance that products employing our technologies will be
successfully commercialized by our licensees or that such
licensees will otherwise be able to compete effectively.
Manufacturing
Historically, we have performed limited manufacturing activities
for our customers. In general, we do not coat medical devices
that are intended for commercial sale by our customers, though
we often support our customers by coating products intended for
pre-clinical and clinical development, including human clinical
trials.
Some of our customers, particularly in the pharmaceutical and
biotechnology industries, prefer to outsource the manufacturing
of drug delivery formulations to partners. Accordingly, in April
2008 we acquired, for $12.2 million, a facility in
Birmingham, Alabama with approximately 286,000 square feet
of warehouse and office space in order to upgrade our
manufacturing capabilities. We are in the process of upgrading
this facility to allow us to provide additional manufacturing
services to customers and remove risk from our customers
commercialization efforts using our technologies. We expect to
incur approximately $24.0 to $26.0 million in fiscal 2009
in additional expense related to the completion of construction,
which we expect to be completed by Fall 2009.
Currently, we also manufacture most of the reagent chemicals
used by our customers in the coating process, allowing us to
control the quality of the reagents and maintain their
proprietary nature, while providing an additional source of
revenue. Reagents are chemicals that are prepared using a
proprietary formula in relatively small batch processes (as
contrasted with commodity chemicals prepared by large continuous
methods). The reagents are sold in dry
16
form, requiring the licensee, in most cases, to simply add
water, a water/isopropyl alcohol mix, or other solvent to put
them into solution before application. We have developed
proprietary testing and quality assurance standards for
manufacturing our reagents and do not disclose the reagent
formulas or manufacturing methods.
Our Brookwood Pharmaceuticals business unit supports many drug
delivery customers by manufacturing microparticles and implants
incorporating their drugs through preclinical and clinical
trials. We also offer these customers commercial manufacturing
capabilities for products that incorporate our drug delivery
technologies, but none of our microparticle or polymer
implant-based drug delivery products have yet reached the
market. Additionally, our Brookwood Pharmaceuticals business
unit manufactures polymers for more than 100 medical device
companies, pharmaceutical companies and universities. Several of
the products that incorporate the polymers that we produce have
been commercialized.
We also manufacture our proprietary line of microarray slides
for sale under the
CodeLink®
brand. We obtained the right to use the
CodeLink®
trademark in connection with these products when we re-acquired
the rights to this product line from GE Healthcare in September
2008. Precision glass slides are cleaned and pretreated in a
multiple-step process. We apply our proprietary PhotoLink
coating in a clean room environment and test the slides to
assure they meet quality standards. The slides are then packaged
in specialized containers, sealed in moisture-proof packaging
and are marketed and sold as either blank slides or pre-arrayed
with up to 40,000 genes.
Additionally, we manufacture stabilization products employing a
three-step production process. First, component chemicals are
mixed in high purity water; next, these liquids are
sterile-filtered into specific container sizes under aseptic
conditions; and finally, the resultant finished goods are sealed
and labeled. Through a somewhat different manufacturing process,
our substrates are mixed in high purity water then sealed and
labeled, all under controlled light conditions.
We attempt to maintain multiple sources of supply for the key
raw materials used to manufacture our products. We do, however,
purchase some raw materials from single sources, but we believe
that additional sources of supply are readily available.
Further, to the extent additional sources of supply are not
readily available, we believe that we could manufacture such raw
materials.
We follow quality management procedures in accordance with
applicable regulations and guidance for the development and
manufacture of materials and pharmaceutical, device,
biotechnology or combination products that support clinical
trials and commercialization. In an effort to better meet our
customers needs in this area, our Eden Prairie, Minnesota
facility received ISO 13485:2003 and ISO 9001:2000 certification
in fiscal 2004 and has received updated certifications in each
subsequent year.
Government
Regulation
Although our drug delivery and surface modification technologies
themselves are not directly regulated by the FDA, the medical
devices, pharmaceutical and biotechnology products incorporating
our technologies are subject to FDA regulation. New medical
devices utilizing our technologies can only be marketed in the
United States after a 510(k) application has been cleared or a
pre-market approval application (PMA) has been
approved by the FDA. This process can take anywhere from three
months for a 510(k) application, to two or three years or more
for a PMA application. The burden of demonstrating to the FDA
that a new device is either substantially equivalent to a
previously marketed device (510(k) marketing clearance process),
or in the case of implantable devices, safe and effective (PMA
process), rests with our customers as the medical device
manufacturers. New pharmaceutical and biotechnology products
utilizing our technologies can only be marketed in the United
States after a New Drug Application (NDA) or Biologics License
Application (BLA) has been approved by the FDA. The burden of
obtaining FDA approval of the NDA or BLA rests with our
customers.
In support of our customers regulatory filings, we
maintain various confidential Drug Master Files, Device Master
Files and Veterinary Master Files with the FDA and with other
regulatory agencies outside the U.S. regarding the nature,
chemical structure and biocompatibility of our reagents.
Although our licensees do not have direct access to these files,
they may, with our permission, reference these files in their
various regulatory submissions to these agencies. This approach
allows regulatory agencies to understand in confidence the
details of our technologies without us having to share this
highly confidential information with our customers.
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U.S. legislation allows companies, prior to obtaining FDA
clearance or approval to market a medical product in the U.S.,
to manufacture medical products in the U.S. and export them
for sale in international markets. This generally allows us to
realize earned royalties sooner. However, sales of medical
products outside the U.S. are subject to international
requirements that vary from country to country. The time
required to obtain approval for sale internationally may be
longer or shorter than that required by the FDA.
SurModics is currently conducting a Phase I safety trial for our
I-vationtm
implant. The study is being conducted at four clinical sites
under an IND according to Good Clinical Practices. We completed
enrollment of the Phase I trial in fiscal 2006, and we are
currently conducting
follow-up
monitoring of the patients for three years.
Employees
As of December 1, 2008, we had 254 employees, of whom
189 were engaged in product development, quality, or
manufacturing positions, with the remainder in sales, marketing,
or administrative positions. Post-graduate degrees are held by
57 of our employees, 30 of whom hold Ph.D. degrees. We are not a
party to any collective bargaining agreements, and we believe
that our employee relations are good.
We believe that our future success will depend in part on our
ability to attract and retain qualified technical, management
and marketing personnel. Such experienced personnel are in high
demand, and we must compete for their services with other firms
that may be able to offer more favorable benefits.
Forward-Looking
Statements
Certain statements contained in this
Form 10-K,
in the Companys annual report to shareholders or in other
reports of the Company and other written and oral statements
made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered
forward-looking statements that provide current
expectations or forecasts of future events. These
forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Such statements can be identified by the use of
terminology such as anticipate, believe,
could, estimate, expect,
forecast, intend, may,
plan, possible, project,
will and similar words or expressions. Any statement
that is not a historical fact, including estimates, projections,
future trends and the outcome of events that have not yet
occurred, are forward-looking statements. The Companys
forward-looking statements generally relate to its growth
strategy, financial prospects, product development programs,
sales efforts, and the impact of the Cordis and Merck
agreements, as well as other significant customer agreements.
You should carefully consider forward-looking statements and
understand that such statements involve a variety of risks and
uncertainties, known and unknown, and may be affected by
inaccurate assumptions. Consequently, no forward-looking
statement can be guaranteed and actual results may vary
materially. The Company undertakes no obligation to update any
forward-looking statement.
Although it is not possible to create a comprehensive list of
all factors that may cause actual results to differ from the
Companys forward-looking statements, such factors include,
among others:
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the Companys significant reliance on its relationship with
Cordis, which causes our financial results and stock price to be
subject to factors affecting Cordis and its
CYPHER®
stent program, including among others, the rate of market
penetration by Cordis, the timing of market introduction of
competing products, product safety or efficacy concerns and
intellectual property litigation the outcome of which could
adversely affect the royalty revenue we derive based on the
sales of licensed products.
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General economic conditions we are subject to which are beyond
our control, including the impact of recession, business
investment and changes in consumer confidence;
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frequent intellectual property litigation in the medical device
industry that may directly or indirectly adversely affect our
customers ability to market their products incorporating
our technologies;
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our ability to protect our own intellectual property;
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healthcare reform efforts and reimbursement rates for medical
device products that may adversely affect our customers
ability to cost-effectively market and sell devices
incorporating our technologies;
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the Companys ability to attract new licensees and to enter
into agreements for additional product applications with
existing licensees, the willingness of potential licensees to
sign license agreements under the terms offered by the Company,
changes in the development and marketing priorities of our
licensees and development partners and the Companys
ability to maintain satisfactory relationships with its
licensees;
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the Companys ability to increase the number of market
segments and applications that use its technologies through its
sales and marketing and research and development efforts;
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the Companys ability to facilitate the creation of new
market segments and applications that incorporate its
technologies through strategic investment and research and
development support;
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market acceptance of products sold by customers incorporating
our technologies and the timing of new product introductions by
licensees;
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market acceptance of products sold by customers
competitors and the timing and pricing of new product
introductions by customers competitors;
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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;
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efficacy or safety concerns with respect to products marketed by
us and our licensees, whether scientifically justified or not,
that may lead to product recalls, withdrawals or declining sales;
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the ability to secure raw materials for reagents the Company
sells;
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the Companys ability to successfully manage clinical
trials and related foreign and domestic regulatory processes for
the
I-vationtm
intravitreal implant or other products under development by the
Company, whether delays, difficulties or failures in achieving
acceptable clinical results or obtaining foreign or FDA
marketing clearances or approvals postpone or preclude product
commercialization of the intravitreal implant or other products,
and whether the intravitreal implant and any other products
remain viable commercial prospects;
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product liability claims not covered by insurance;
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the development of new products or technologies by competitors,
technological obsolescence and other changes in competitive
factors;
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the trend of consolidation in the medical device industry,
resulting in more significant, complex and long term contracts
than in the past and potentially greater pricing pressures;
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the Companys ability to identify suitable businesses to
acquire or with whom to form strategic relationships to expand
its technology development and commercialization, its ability to
successfully integrate the operations of companies it may
acquire from time to time and its ability to create synergies
from acquisitions and other strategic relationships;
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the Companys 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;
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acts of God or terrorism which impact the Companys
personnel or facilities; and
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other factors described below in Risk Factors.
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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 Companys forward-looking
statements and to consult any further disclosures by the Company
on this subject in its filings with the Securities and Exchange
Commission. Many of the factors identified above are discussed
in more detail below under Risk Factors.
19
RISKS
RELATING TO OUR BUSINESS, STRATEGY AND INDUSTRY
We are
subject to changes in general economic conditions that are
beyond our control including recession and declining consumer
confidence.
During periods of economic slowdown or recession, such as the
United States and world economies are currently experiencing,
many of our customers are forced to delay or terminate some of
their product development plans. Because we rely on licensing
and commercialization of our technology by third parties, we may
be severely impacted by the decreasing research and development
budgets of our customers. In addition, in an environment of
decreasing research and development spending, sales of our In
Vitro Technologies products involved in research may similarly
suffer as a result of the decreased research and development
activity. Although we attempt to manage these risks, any
sustained period of decreased research and development spending
by our customers and potential customers could adversely affect
our financial position, liquidity, and results of operations.
The
loss of, or significant reduction in business from, one or more
of our major customers could significantly reduce our revenue,
earnings or other operating results.
We have two customers that each provided 10% or more of our
revenue in fiscal 2008. Revenue from Johnson & Johnson
and Abbott Laboratories represented approximately 20% and 10%,
respectively, of our total revenue for the year ended
September 30, 2008. The loss of one or more of our largest
customers, or reductions in business from them, could have a
material adverse effect on our business, financial condition,
results of operations, and cash flow. For example, on
September 16, 2008, we were informed by Merck that they
intended to terminate their collaboration with us on the
development and commercialization of our
I-vationtm
intravitreal implant in combination with triamcinolone acetonide
and certain proprietary Merck compounds. There can be no
assurance that revenue from any customer will continue at their
historical levels. If we cannot broaden our customer base, we
will continue to depend on a small number of customers for a
significant portion of our revenue.
The
long-term success of our business may suffer if we are unable to
expand our licensing base to reduce our reliance upon several
major customers.
A significant portion of our revenue is derived from a
relatively small number of customer products. We intend to
continue pursuing a strategy of licensing our technologies to a
diversified base of medical device and drug manufacturers and
other customers, thereby expanding the licensing base for our
technologies. Success will depend, in part, on our ability to
attract new licensees, to enter into agreements for additional
applications with existing licensees and to develop and market
new applications. There can be no assurance that we will be able
to identify, develop and adapt our technologies for new
applications in a timely and cost effective manner; that new
license agreements will be executed on terms favorable to us;
that new applications will be accepted by customers in our
target markets; or that products incorporating newly licensed
technology, including new applications, will gain regulatory
approval, be commercialized or gain market acceptance. Delays or
failures in these efforts could have an adverse effect on our
business, financial condition and results of operations.
Drug
delivery and surface modification are competitive markets and
carry the risk of technological obsolescence.
We operate in a competitive and evolving field and new
developments are expected to continue at a rapid pace. Our
success depends, in part, upon our ability to maintain a
competitive position in the development of technologies and
products in the field of drug delivery and surface modification.
Our drug delivery and surface modification technologies compete
with technologies developed by Alkermes, Inc., AST Products,
Inc., Biocompatibles International plc, BioSensors International
Group, Ltd., DSM Biomedical Materials B.V., Durect Corporation,
Hydromer, Inc., MediVas, LLC, pSivida Limited, QLT Inc.,
Specialty Coating Systems, Inc., STS Biopolymers Inc., a
subsidiary of Angiotech Pharmaceuticals, Inc., and W.L.
Gore & Associates, among others. In addition, many
medical device manufacturers have developed, or are engaged in
efforts to develop, drug delivery or surface modification
technologies for use on their own devices. Some of our existing
and potential competitors (especially medical device
manufacturers pursuing coating solutions through their own
research and development efforts) have
20
greater financial and technical resources and production and
marketing capabilities than us. Competitors may succeed in
developing competing technologies or obtaining governmental
approval for products before us. Products incorporating our
competitors technologies may gain market acceptance more
rapidly than products using ours. Developments by competitors
may render our existing and potential products noncompetitive or
obsolete. Furthermore, there can be no assurance that new
products or technologies developed by others, or the emergence
of new industry standards, will not render our products or
technologies or licensees products incorporating our
technologies noncompetitive or obsolete. Any new technologies
that make our drug delivery or surface modification technologies
less competitive or obsolete would have a material adverse
effect on our business, financial condition and results of
operations.
Failure
to identify strategic investment and acquisition opportunities
may limit our growth.
An important part of our growth in the future may involve
strategic investments and the acquisition of complementary
businesses or technologies. Our identification of suitable
investment opportunities and acquisition candidates involves
risks inherent in assessing the technology, value, strengths,
weaknesses, overall risks and profitability, if any, of
investment and acquisition candidates. We may not be able to
identify suitable investment and acquisition candidates. If we
do not make suitable investments and acquisitions, we may find
it more difficult to realize our growth objectives.
The
acquisitions that we have made, or any future acquisitions that
we undertake could be difficult to integrate, disrupt our
business, dilute shareholder value, or harm our operating
results.
Since June 30, 2007, we have completed four acquisitions,
including Brookwood Pharmaceuticals, Inc., the largest
acquisition in our history. In addition, we may continue to make
more strategic investments or acquire complementary businesses,
technologies, or products if we identify suitable investment or
acquisition candidates. The process of integrating acquired
businesses into our operations poses numerous risks, including:
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an inability to assimilate acquired operations, personnel,
technology, information systems, and internal control systems
and products;
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diversion of managements attention, including the need to
manage several remote locations with a limited management team;
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difficulties and uncertainties in transitioning the customers or
other business relationships from the acquired entity to
us; and
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the loss of key employees of acquired companies.
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In addition, future acquisitions by us may be dilutive to our
shareholders, and cause large one-time expenses or create
goodwill or other intangible assets that could result in
significant asset impairment charges in the future. Strategic
investments may result in impairment charges if the value of any
such investment declines significantly. In addition, if we
acquire entities that have not yet commercialized products but
rather are developing technologies for future commercialization,
our earnings per share may fluctuate as we expend significant
funds for continued research and development efforts for
acquired technology necessary to commercialize such technology.
We cannot guarantee that we will be able to successfully
complete any investments or acquisitions or that we will realize
any anticipated benefits from investments or acquisitions that
we complete.
Research
and development of new technologies may adversely affect our
operating results.
The success of our business depends on a number of factors,
including our continued research and development of new
technologies for future commercialization. In researching and
developing such new technologies, we may incur significant
expenses that may adversely affect our operating results,
including our profitability. Additionally, these activities are
subject to risks of failure that are inherent in the development
of new medical technologies and as a result, may never result in
commercially viable technologies.
21
Our
failure to expand our management systems and controls to support
anticipated growth or integrate acquisitions could seriously
harm our operating results and business.
Our operations are expanding, and we expect this trend to
continue as we execute our business strategy. Executing our
business strategy has placed significant demands on management
and our administrative, development, operational, information
technology, manufacturing, financial and personnel resources.
Accordingly, our future operating results will depend on the
ability of our officers and other key employees to continue to
implement and improve our operational, development, customer
support and financial control systems, and effectively expand,
train and manage our employee base. Otherwise, we may not be
able to manage our growth successfully.
We
recognize revenue in accordance with various complex accounting
standards, and changes in circumstances or interpretations may
lead to accounting adjustments.
Our revenue recognition policies involve application of various
complex accounting standards, including SEC Staff Accounting
Bulletin No. 104, or SAB 104, and Emerging Issues
Task Force Issue
No. 00-21
titled, Revenue Arrangements with Multiple
Deliverables. Our compliance with such accounting
standards often involves managements judgment regarding
whether the criteria set forth in the standards have been met
such that we can recognize as revenue the amounts that we
receive as payment for our products or services. We base our
judgments on assumptions that we believe to be reasonable under
the circumstances. However, these judgments, or the assumptions
underlying them, may change over time. In addition, the
Securities and Exchange Commission or the Financial Accounting
Standards Board may issue new positions or revised guidance on
the treatment of complex accounting matters. Changes in
circumstances or third-party guidance could cause our judgments
to change with respect to our interpretations of these complex
standards, and transactions recorded, including revenue
recognized, for one or more prior reporting periods, which could
be adversely affected.
RISKS
RELATING TO OUR OPERATIONS AND RELIANCE ON THIRD
PARTIES
We
rely on third parties to market, distribute and sell the
products incorporating our technologies, and those third parties
may not perform or agreements with those parties could be
terminated.
A principal element of our business strategy is to enter into
licensing arrangements with medical device, pharmaceutical, and
biotechnology companies that manufacture products incorporating
our technologies. For the fiscal years ended September 30,
2008, 2007 and 2006, we derived approximately 53%, 72% and 76%
of our revenue, respectively, from royalties and license fees.
Although we do market certain diagnostic products and reagents,
we do not currently market, distribute or sell our own medical
devices or pharmaceutical compounds, nor do we intend to do so
in the foreseeable future. Thus, our prospects are greatly
dependent on the receipt of royalties from licensees of our
technologies. The amount and timing of such royalties are, in
turn, dependent on the ability of our licensees to gain
successful regulatory approval for, market and sell products
incorporating our technologies. Failure of certain licensees to
gain regulatory approval or market acceptance for such products
could have a material adverse effect on our business, financial
condition and results of operations.
Our customers market and sell (and most manufacture) the
products incorporating our licensed technologies. If one or more
of our licensees fail to pursue the development or marketing of
these products as planned, our revenue and profits may not reach
our expectations, or may decline. For example, as discussed
previously, on September 16, 2008, Merck informed us that
they intend to terminate their collaboration with us on the
development and commercialization of our
I-vationtm
intravitreal implant in combination with triamcinolone acetonide
and certain proprietary Merck compounds following a strategic
review of its business and product development portfolio.
Additionally, our ability to generate positive operating results
in connection with the achievement of development or
commercialization milestones may also suffer. We do not control
the timing and other aspects of the development or
commercialization of products incorporating our licensed
technologies because our customers may have priorities that
differ from ours or their development or marketing efforts may
be unsuccessful, resulting in delayed or discontinued products.
Hence, the amount and timing of royalty payments received by us
will fluctuate, and such fluctuations could have a material
adverse effect on our business, financial condition and results
of operations.
Under our standard license agreements, licensees can terminate
the license for any reason upon 90 days prior written
notice. Existing and potential licensees have no obligation to
deal exclusively with us in obtaining drug
22
delivery or surface modification technologies and may pursue
parallel development or licensing of competing technological
solutions on their own or with third parties. A decision by a
licensee to terminate its relationship with us could materially
adversely affect our business, financial condition and results
of operations.
We
have limited or no redundancy in our manufacturing facilities,
and we may lose revenue and be unable to maintain our customer
relationships if we lose our production capacity.
We manufacture all of the products we sell in our existing
production labs in our Eden Prairie, Minnesota, Birmingham,
Alabama, and Owings Mills, Maryland facilities. If our existing
production facilities become incapable of manufacturing products
for any reason, we may be unable to meet production
requirements, we may lose revenue and we may not be able to
maintain our relationships with our customers, including certain
of our licensees. In particular, because most of our customers
use these reagents to create royalty-bearing products, failure
by us to deliver products, including polymers and reagents,
could result in decreased royalty revenue, as well as decreased
revenue from the sale of products. Without our existing
production facilities, we would have no other means of
manufacturing products until we were able to restore the
manufacturing capability at a particular facility or develop an
alternative manufacturing facility. Although we carry business
interruption insurance to cover lost revenue and profits in an
amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption
insurance would not compensate us for the loss of opportunity
and potential adverse impact on relations with our existing
customers resulting from our inability to produce products for
them.
We
have limited experience manufacturing pharmaceutical products
for commercial sale and use, and we may be subject to adverse
consequences if we fail to comply with applicable
regulations.
Under the terms of certain of our licensing agreements, we may
elect to manufacture pharmaceutical or biotechnology products
for existing or future licensees under appropriate
circumstances. In addition, certain potential customers may
require that we be responsible for the manufacture of
pharmaceutical or biotechnology products in order to enter into
licensing agreements with us. The manufacture of pharmaceutical
or biotechnology products can be an expensive, time consuming,
and complex process. Further, any manufacturer of pharmaceutical
and biotechnology products is subject to applicable Current Good
Manufacturing Practice (CGMP) regulations as prescribed by the
FDA or other rules and regulations prescribed by foreign
regulatory authorities. In order to fulfill any manufacturing
commitments we may have in the future, we will need to make
investments in our operations to add CGMP manufacturing
capacity. Although we have purchased a facility in Alabama and
are in the process of upgrading it, there is no guarantee that
the upgrades will be completed and validated according to our
schedule, budget or at all. We may be unable to maintain our
facilities in compliance with CGMP or other applicable
regulatory standards. Such a failure to comply with CGMP could
result in significant time delays or inability to obtain (and
maintain) marketing approval for any future products that we may
be required to manufacture, which may result in financial
penalties under the terms of license agreements, as well as
damage our relationships with our customers in the future.
Furthermore, we may be subject to sanctions, including temporary
or permanent suspension of operations, product recalls and
marketing restrictions, if we fail to comply with the laws and
regulations pertaining to our business.
We may
face product liability claims related to participation in
clinical trials, the use or misuse of our products or the
manufacture and supply of pharmaceutical products.
The development and sale of medical devices and component
products involves an inherent risk of product liability claims.
Although we expect that devices incorporating our technologies
will be manufactured by others and sold under their own labels,
and in most cases our customer agreements provide
indemnification against such claims, there can be no guarantee
that we will not become involved in the manufacture and supply
of commercial quantities of products to licensees, that product
liability claims will not be filed against us for such devices,
or that such manufacturers will not seek indemnification or
other relief from us for any such claims. Any product liability
claims, with or without merit, could result in costly
litigation, reduced sales, significant liabilities and diversion
of our managements time, attention and resources. We have
obtained a level of liability insurance coverage that we believe
is adequate in scope and coverage given our current stage of
development, however we cannot be sure that our product
liability insurance coverage is adequate or that it will
continue to be available to us on acceptable terms,
23
if at all. Furthermore, we do not expect to be able to obtain
insurance covering our costs and losses as a result of any
recall of products or devices incorporating our technologies
because of alleged defects, whether such recall is instituted by
us, a customer, or is required by a regulatory agency. A product
liability claim, recall or other claim with respect to uninsured
liabilities or for amounts in excess of insured liabilities
could have a material adverse effect on our business, financial
condition and results of operations.
Our
revenue will be harmed if we cannot purchase sufficient reagent
components we use in our manufacture of reagents.
We currently purchase some of the components we use to
manufacture reagents from sole suppliers. If any of our sole
suppliers becomes unwilling to supply components to us, incurs
an interruption in its production or is otherwise unable to
provide us with sufficient material to manufacture our reagents,
we will experience production interruptions. If we lose our sole
supplier of any particular reagent component or are otherwise
unable to procure all components required for our reagent
manufacturing for an extended period of time, we may lose the
ability to manufacture the reagents our customers require to
commercialize our technology. This could result in lost
royalties and product sales, which would harm our financial
results. Adding suppliers to our approved vendor list may
require significant time and resources since we typically
thoroughly review a suppliers business and operations to
become comfortable with the quality and integrity of the
materials we purchase for use with our technology, including
reviewing a suppliers manufacturing processes and
evaluating the suitability of materials and packaging procedures
the supplier uses. We routinely attempt to maintain multiple
suppliers of each of our significant materials, so we have
alternative suppliers if necessary. However, if the number of
suppliers of a material is reduced, or if we are otherwise
unable to obtain our material requirements on a timely basis and
on favorable terms, our operations may be harmed.
We are
dependent upon key personnel and may not be able to attract
qualified personnel in the future.
Our success is dependent upon our ability to retain and attract
highly qualified management and technical personnel. We face
intense competition for such qualified personnel. We do not
maintain key person insurance, nor do we have employment
agreements with any of our employees, except for certain of our
executive officers. Although we have non-compete agreements with
most employees, there can be no assurance that such agreements
will be enforceable or that they will serve to keep employees
working for us. The loss of the services of one or more key
employees or the failure to attract and retain additional
qualified personnel could have a material adverse effect on our
business, financial condition and results of operations.
RISKS
RELATING TO OUR INTELLECTUAL PROPERTY
If we
cannot adequately protect our technologies and proprietary
information, we may be unable to sustain a competitive
advantage.
Our success depends, in large part, on our ability to obtain and
maintain patents, operate without infringing on the proprietary
rights of third parties and protect our proprietary rights
against infringement by third parties. We have been granted
U.S. and foreign patents and have U.S. and foreign
patent applications pending related to our proprietary
technologies. There can be no assurance that any pending patent
application will be approved, that we will develop additional
proprietary technologies that are patentable, that any patents
issued will provide us with competitive advantages or will not
be challenged or invalidated by third parties, or that the
patents of others will not prevent the commercialization of
products incorporating our technologies. Furthermore, there can
be no assurance that others will not independently develop
similar technologies, duplicate any of our technologies or
design around our patents.
We may
become involved in expensive and unpredictable patent litigation
or other intellectual property proceedings which could result in
liability for damages, or impair our development and
commercialization efforts.
Our commercial success also will depend, in part, on our ability
to avoid infringing patent or other intellectual property rights
of third parties. There has been substantial litigation
regarding patent and other intellectual property
24
rights in the medical device and pharmaceutical industries, and
intellectual property litigation may be used against us as a
means of gaining a competitive advantage. Intellectual property
litigation is complex, time consuming and expensive, and the
outcome of such litigation is difficult to predict. If we were
found to be infringing any third party patent or other
intellectual property right, we could be required to pay
significant damages, alter our products or processes, obtain
licenses from others, which we may not be able to do on
commercially reasonable terms, if at all, or cease
commercialization of our products and processes. Any of these
outcomes could have a material adverse effect on our business,
financial condition and results of operations.
Patent litigation or U.S. Patent and Trademark Office
interference proceedings may also be necessary to enforce any
patents issued or licensed to us or to determine the scope and
validity of third party proprietary rights. These activities
could result in substantial cost to us, even if the eventual
outcome is favorable to us. An adverse outcome of any such
litigation or interference proceeding could subject us to
significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease
using our technology. Any action to defend or prosecute
intellectual property would be costly and result in significant
diversion of the efforts of our management and technical
personnel, regardless of outcome, and could have a material
adverse effect on our business, financial condition and results
of operations.
If we
are unable to keep our trade secrets confidential, our
technology and proprietary information may be used by others to
compete against us.
We rely significantly upon proprietary technology, information,
processes and know-how that are not subject to patent
protection. We seek to protect this information through trade
secret or confidentiality agreements with our employees,
consultants, potential licensees, or other parties as well as
through other security measures. There can be no assurance that
these agreements or any security measure will provide meaningful
protection for our unpatented proprietary information. In
addition, our trade secrets may otherwise become known or be
independently developed by competitors.
If we
or any of our licensees breach any of the agreements under which
we have in-licensed intellectual property from others, we could
be deprived of important intellectual property rights and future
revenue.
We are a party to various agreements through which we have
in-licensed or otherwise acquired from third parties rights to
certain technologies that are important to our business. In
exchange for the rights granted to us under these agreements, we
agree to meet certain research, development, commercialization,
sublicensing, royalty, indemnification, insurance, and other
obligations. If we or one of our licensees fails to comply with
these obligations set forth in the relevant agreement through
which we have acquired rights, we may be unable to effectively
use, license, or otherwise exploit the relevant intellectual
property rights and may be deprived of current or future
revenues that are associated with such intellectual property.
RISKS
RELATING TO CLINICAL AND REGULATORY MATTERS
Products
incorporating our technologies are subject to continuing
regulations and extensive approval or clearance processes. If
our licensees are unable to obtain or maintain the necessary
regulatory approvals or clearances for such products, then our
licensees will not be able to commercialize those products on a
timely basis, if at all.
Medical devices, biotechnology products or pharmaceutical
products incorporating the technologies are subject to
regulation by the FDA and other regulatory authorities. In order
to obtain regulatory approval for products incorporating our
technologies, extensive preclinical studies as well as clinical
trials in humans may be required. Clinical development,
including preclinical testing, is a long, expensive and
uncertain process. The burden of securing regulatory approval
for these products typically rests with our licensees, the
medical device or pharmaceutical manufacturers. However, we have
prepared Drug Master Files and Device Master Files which may be
accessed by the FDA and other regulatory authorities to assist
them in their review of the applications filed by our licensees.
The process of obtaining FDA and other required regulatory
approvals is expensive and time-consuming. Historically, most
medical devices incorporating our technologies have been subject
to the FDAs 510(k) marketing
25
approval process, which typically lasts from six to nine months.
Supplemental or full PMA reviews require a significantly longer
period, delaying commercialization. By contrast, pharmaceutical
products incorporating our technologies are subject to the
FDAs NDA process which typically takes a number of years
to complete. Additionally, biotechnology products incorporating
our technologies are subject to the FDAs BLA process,
which also typically takes a number of years to complete. In
addition, sales of medical devices and pharmaceutical or
biotechnology products outside the U.S. are subject to
international regulatory requirements that vary from country to
country. The time required to obtain approval for sale
internationally may be longer or shorter than that required for
FDA approval.
There can be no assurance that our licensees will be able to
obtain regulatory approval for their products on a timely basis,
or at all. Regulatory approvals, if granted, may include
significant limitations on the indicated uses for which the
product may be marketed. In addition, product approval could be
withdrawn for failure to comply with regulatory standards or the
occurrence of unforeseen problems following initial marketing.
Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay regulatory
approval of products incorporating our technologies or subject
us to additional regulation. Failure or delay of our licensees
in obtaining FDA and other necessary regulatory approval or
clearance or the loss of previously obtained approvals could
have a material adverse effect on our business, financial
condition and results of operations.
We may
face liability if we mishandle or improperly dispose of the
hazardous materials used in some of our research, development
and manufacturing processes.
Our research, development and manufacturing activities sometimes
involve the controlled use of various hazardous materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be
completely eliminated. While we currently maintain insurance in
amounts that we believe are appropriate in light of the risk of
accident, we could be held liable for any damages that might
result from any such event. Any such liability could exceed our
insurance and available resources and could have a material
adverse effect on our business, financial condition and results
of operations.
Additionally, certain of our activities are regulated by federal
and state agencies in addition to the FDA. For example,
activities in connection with disposal of certain chemical waste
are subject to regulation by the U.S. Environmental
Protection Agency. Some of our reagent chemicals must be
registered with the agency with basic information filed related
to toxicity during the manufacturing process as well as the
toxicity of the final product. Failure to comply with existing
or future regulatory requirements could have a material adverse
effect on our business, financial condition and results of
operations.
RISKS
RELATING TO OUR SECURITIES
Our
stock price has been volatile and may continue to be
volatile.
The trading price of our common stock has been, and is likely to
continue to be, highly volatile, in large part attributable to
developments and circumstances related to factors identified in
Forward-Looking Statements and Risk
Factors. The market value of your investment in our common
stock may rise or fall sharply at any time because of this
volatility, and also because of significant short positions
taken by investors from time to time in our stock. In the fiscal
year ended September 30, 2008, the closing sale price for
our common stock ranged from $28.05 to $56.09 per share. As of
December 8, 2008, the last reported sale price of our stock
was $23.54 per share. The market prices for securities of
medical technology, drug delivery and biotechnology companies
historically have been highly volatile, and the market has
experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
26
Our principal operations are located in Eden Prairie, a suburb
of Minneapolis, Minnesota, where we own a building that has
approximately 64,000 square feet of space. We also lease
another facility in Eden Prairie which contains approximately
73,000 square feet. In November 2008, we announced the
consolidation of all of our Eden Prairie personnel into our
owned facility as part of our reorganization efforts. We
estimate this consolidation will be substantially complete by
the end of December 2008. We also own an undeveloped parcel of
land adjacent to our principal facility, which we intend to use
to accommodate our growth needs.
In addition to our Eden Prairie facilities, we also own and
lease facilities in Birmingham, Alabama in connection with our
Brookwood Pharmaceuticals operations. The facility which we
acquired in the Brookwood acquisition consists of approximately
33,000 square feet. In April 2008, we acquired a second building
in Birmingham, Alabama that has approximately
286,000 square feet of warehouse and office space in order
to upgrade our manufacturing capabilities. We also lease an
approximately 14,000 square foot facility in Birmingham
which contains two cleanroom suites primarily used for the
manufacture of drug products and a separate facility in
Birmingham containing approximately 4,500 square feet of
warehouse space. We also lease facilities in Owings Mills,
Maryland in connection with our BioFX operations and lease
office space in Irvine, California for use by our Ophthalmology
business unit.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS.
|
See Note 6 to the Consolidated Financial Statements for
information regarding commitments and contingencies.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
There were no matters submitted to a vote of security holders
during the fourth quarter of fiscal 2008.
EXECUTIVE
OFFICERS OF THE REGISTRANT
As of December 12, 2008, the names, ages and positions of
the Companys executive officers are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Bruce J Barclay
|
|
|
52
|
|
|
President and Chief Executive Officer
|
Aron B. Anderson, Ph.D.
|
|
|
45
|
|
|
Vice President and Chief Scientific Officer
|
Philip D. Ankeny
|
|
|
45
|
|
|
Senior Vice President and Chief Financial Officer
|
Douglas P. Astry
|
|
|
56
|
|
|
General Manager, In Vitro Technologies
|
Lise W. Duran, Ph.D.
|
|
|
53
|
|
|
Vice President of Research
|
Paul A. Lopez
|
|
|
52
|
|
|
Vice President and President Ophthalmology Division
|
Charles W. Olson
|
|
|
44
|
|
|
Vice President and General Manager Cardiovascular
|
Bryan K. Phillips
|
|
|
37
|
|
|
Vice President, General Counsel and Secretary
|
Brian L. Robey
|
|
|
45
|
|
|
Vice President of Product Development and Operations
|
Michael J. Shoup
|
|
|
48
|
|
|
Vice President of Quality, Regulatory and Clinical Affairs
|
Arthur J. Tipton, Ph.D.
|
|
|
51
|
|
|
Vice President, and President of Brookwood Pharmaceuticals
|
Jan M. Webster
|
|
|
49
|
|
|
Vice President of Human Resources
|
Bruce J Barclay joined the Company as its President and
Chief Operating Officer in December 2003. He became a director
of the Company in July 2004 and Chief Executive Officer of the
Company in July 2005. Mr. Barclay has more than
30 years of experience in the health care industry. Prior
to joining SurModics, he served as President and Chief Executive
Officer of Vascular Architects, Inc., a medical device company
that developed, manufactured and sold products to treat
peripheral vascular disease, from 2000 to 2003. Prior to
Vascular Architects, he served at Guidant Corporation, most
recently as an officer and Senior Vice President from 1998 to
2000. Previously, he was a Vice President of Guidants
Interventional Cardiology division with responsibility for
27
the law division, a new therapies technical development team and
business development, charged with the acquisition of new
products and technologies for the division. Mr. Barclay
also has considerable experience in the pharmaceutical area
serving in several positions at Eli Lilly and Company.
Mr. Barclay received a B.S. in chemistry and a B.A. in
biology from Purdue University in 1980 and a J.D. from the
Indiana University School of Law in 1984. He is also a
registered patent attorney.
Aron B. Anderson, Ph.D., joined the Company as an
Associate Scientist in 1991. In 1994, he was named Director,
Hemocompatibility R&D, in 2001, named Director, Drug
Delivery, and in January 2005, Vice President and Chief
Scientific Officer. Dr. Anderson serves on the Board of
Directors of University Enterprise Laboratories, a partnership
between the University of Minnesota and the city of St. Paul
that functions as a technology company incubator.
Dr. Anderson received a B.S. in Chemical Engineering from
the University of Minnesota in 1985, and received an M.S. in
1987 and Ph.D. in 1991, both in Chemical Engineering, from
Stanford University.
Philip D. Ankeny joined the Company as its Vice President
and Chief Financial Officer in April 2003 with the additional
responsibilities of Vice President, Business Development added
in April 2004. He was promoted to Senior Vice President and
Chief Financial Officer in May 2006. Prior to joining SurModics,
he served as Chief Financial Officer for Cognicity, Inc. from
1999 to 2002. Prior to that, Mr. Ankeny served as a Partner
at Sherpa Partners, LLC, a venture capital and venture
development firm, from 1998 to 1999. He also spent five years in
investment banking with Robertson Stephens and Morgan Stanley.
In addition, his operating experience includes over five years
with IBM and Shiva in sales, marketing and business development
roles. Mr. Ankeny also serves on the Board of Directors of
Innovex, Inc., which designs and manufactures flexible circuit
interconnect solutions to original equipment manufacturers in
the electronics industry. Mr. Ankeny received an A.B.
degree in economics and engineering from Dartmouth College in
1985 and an M.B.A. from Harvard Business School in 1989.
Douglas P. Astry joined the Company in June 2003 as
Manager, Array Business, and was promoted to General Manager,
Diagnostics and Drug Discovery (now known as In Vitro
Technologies) in April 2004. Prior to joining SurModics, from
2002 to 2003, he was Vice President of Marketing and Business
Development at HTS Biosystems, and from 1980 through 2001, he
held various research and business management positions at 3M,
most recently Business Development Manager of 3Ms
Bioanalytical Technologies Group. Mr. Astry received his
B.A. degree in Biology from Williams College in 1974, an M.S. in
Physiology from the University of Connecticut in 1980, and an
M.B.A. from the University of Minnesota in 1987.
Lise W. Duran, Ph.D., came to SurModics in 1990,
serving as a senior microbiologist and was promoted in 1992 to
Director of Microbiology. She was promoted to Vice President of
Product Development in 1998. Dr. Duran became Vice
President and General Manager of the Regenerative Technologies
business unit in April 2004. In November 2008 following the
change in our organizational structure, Dr. Duran was named
Vice President Research. From 1988 to 1990,
Dr. Duran served as a Study Director for Microbiological
Associates, Inc., in the Biotechnology Services Division. She
also did a research fellowship in Immunology at the Mayo Clinic
and was a postdoctoral associate in Laboratory Medicine and
Pathology at the University of Minnesota. Dr. Duran
received her B.S. in microbiology from the University of
Maryland in 1977 and a Ph.D. in cellular immunology from the
Uniformed Services University of the Health Sciences in 1984.
Paul A. Lopez joined the Company in July 2005 as Vice
President and President of the Companys Ophthalmology
business unit. Before joining SurModics, Mr. Lopez was
President and CEO of Valley Forge Pharmaceuticals, an early
stage pharmaceutical company from March 2001 to July 2005. Prior
to Valley Forge, Mr. Lopez served in various senior level
positions at Bausch & Lomb, including President, North
America Surgical; Vice President, Commercial Operations,
Americas and Asia Pacific Regions; and Vice President, Business
Integration from January 1999 to March 2001. Mr. Lopez has
also held roles at Monsanto Company, Pharmacia and Upjohn, Inc.
and Iolab Corporation. Mr. Lopez serves on the Board of
Directors of Alliance Medical Products, a private company
located in Irvine, California. Mr. Lopez received a B.S. in
Business Administration from California State University, Long
Beach in 1979 and an M.B.A. from California State Polytechnic
University in 1984.
Charles W. Olson joined the Company in July 2001 as
Market Development Manager, was promoted in December 2002 to
Director, Business Development, named General Manager of the
Hydrophilic Technologies business unit in April 2004, and
promoted to Vice President and General Manager, Hydrophilic
Technologies in October 2004. In April 2005, the position of
Vice President, Sales was added to his responsibilities. In
November 2008 following the change in our organizational
structure, Mr. Olson was named Vice President of our
28
Cardiovascular business unit. Prior to joining SurModics,
Mr. Olson was employed as General Manager at Minnesota
Extrusion from 1998 to 2001 and at Lake Region Manufacturing in
project management and technical sales from 1993 to 1998.
Mr. Olson received a B.S. degree in Marketing from Winona
State University in 1987.
Bryan K. Phillips joined the Company in July 2005 as
Patent Counsel and Assistant General Counsel. In January 2006,
Mr. Phillips was appointed Corporate Secretary, and he was
promoted to Deputy General Counsel in October 2007, and was
promoted to his current role as Vice President, General Counsel
and Corporate Secretary in September 2008. Prior to joining
SurModics, from 2001 to 2005, Mr. Phillips served as patent
counsel at Guidant Corporations Cardiac Rhythm Management
Group where he was responsible for developing and implementing
intellectual property strategies and also for supporting the
companys business development function. He also practiced
law at the Minneapolis-based law firm of Merchant &
Gould P.C. Mr. Phillips received a B.S. degree in
Mechanical Engineering from the University of Kansas in 1993 and
a law degree from the University of Minnesota Law School in
1999. He is admitted to the Minnesota State Bar association and
is registered to practice before the United States Patent and
Trademark Office.
Brian L. Robey joined the Company in March 2005 as Senior
Director, Commercial Development for Drug Delivery and was
promoted to Vice President and General Manager, Drug Delivery in
May 2006. In November 2008 following the change in our
organizational structure, Mr. Robey was named Vice
President of Product Development and Operations. Mr. Robey
has nearly 20 years of research and development and
management experience in the medical device industry. Most
recently, he was Manager, Product Development at Guidant
Corporation in the Cardiac Rhythm Management Division from 2002
to 2005. Prior to Guidant, Mr. Robey was employed at
Southwest Research Institute in San Antonio, Texas from
1987 to 2002, where he held engineering and project management
positions of increasing responsibility with his last role as
Manager of the Bioengineering Section. Mr. Robey received
B.S. and M.S. degrees in biomedical engineering from Louisiana
Tech University in 1985 and 1987, respectively, and an M.B.A.
from the University of Texas at San Antonio in 2000.
Michael J. Shoup joined the Company in March 2006 as Vice
President of Quality, Regulatory and Clinical Affairs and
assumed additional responsibilities for analytical and
characterization sciences in January 2007. Mr. Shoup has
over 20 years of experience in quality assurance and
manufacturing, including over 15 years in the medical
device industry. Before joining SurModics, he was Director of
Quality and Design Assurance for St. Jude Medicals Cardiac
Surgery Division from 2005 to 2006 and held various positions at
Acorn Cardiovascular from 1998 to 2005, most recently as
Director of Operations. Mikes employment history also
includes Integ (1994 1998), SciMed Life Systems, now
part of Boston Scientific (1990 1994) and Minco
Products (1983 1990). He teaches in the area of
medical device design and manufacturing at the University of St.
Thomas as an adjunct professor in the School of Engineering and
is a regular lecturer for the Center of Business Excellence.
Mr. Shoup received a B.S. in mechanical engineering from
the University of Minnesota in 1982 and earned an M.B.A. with a
manufacturing systems concentration from the University of St.
Thomas in 1995.
Arthur J. Tipton, Ph.D., became Vice President,
SurModics and President, Brookwood Pharmaceuticals, coincident
with the acquisition of Brookwood by SurModics in July 2007.
Dr. Tipton joined Southern Research Institute in 2004 as
Vice President of Pharmaceutical Formulations and then became
President and CEO of Brookwood Pharmaceuticals, when it was
launched as a new company based on Southern Research
Institutes pharmaceutical formulations business in January
2005. Prior to joining Southern Research Institute,
Dr. Tipton served as Executive Vice President at Durect
Corporation from 2001 to 2004. Dr. Tipton also held a
variety of positions at Southern BioSystems (now part of
Durect), including Vice President and Chief Scientific Officer,
where he led all efforts on biodegradable technology from 1993
to 2001. Dr. Tipton was with Atrix Laboratories (now part
of QLT Inc.) from 1988 to 1993. He currently serves on the
Boards of the Biotechnology Association of Alabama and the
Controlled Release Society. Dr. Tipton earned a B.S. in
Chemistry from Spring Hill College in 1980 and a Ph.D. in
Polymer Science and Engineering from the University of
Massachusetts, Amherst in 1987.
Jan M. Webster joined the Company as Vice President of
Human Resources in January of 2006. Ms. Webster came to
SurModics with over 20 years of experience in the
healthcare industry. From 1987 through 2005, she held various
human resources and management positions at St. Jude Medical,
Inc., most recently as Director of Human Resources for the
Cardiac Surgery division. From 1984 to 1987, she served in
several human resources roles for Fairview Health Services.
Ms. Webster received a bachelors degree in business
administration from Minnesota State University, Mankato in 1981
and earned an M.A. in human resources and industrial relations
from the University of Minnesota in 2006.
The executive officers of the Company are elected by and serve
at the discretion of the Board of Directors.
29
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Our stock is traded on the Nasdaq Global Select Market under the
symbol SRDX. The table below sets forth the range of
high and low closing sale prices, by quarter, for our Common
Stock, as reported by Nasdaq, in each of the last two fiscal
years.
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
September 30, 2008
|
|
|
45.06
|
|
|
|
28.05
|
|
June 30, 2008
|
|
|
47.88
|
|
|
|
42.00
|
|
March 31, 2008
|
|
|
55.40
|
|
|
|
38.17
|
|
December 31, 2007
|
|
|
56.09
|
|
|
|
48.35
|
|
September 30, 2007
|
|
|
52.68
|
|
|
|
44.72
|
|
June 30, 2007
|
|
|
50.00
|
|
|
|
35.30
|
|
March 31, 2007
|
|
|
38.49
|
|
|
|
31.11
|
|
December 31, 2006
|
|
|
35.38
|
|
|
|
31.10
|
|
Our transfer agent is:
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, New York 10038
(800) 937-5449
According to the records of our transfer agent, as of
December 8, 2008, there were 284 holders of record of our
Common Stock and approximately 13,826 beneficial owners of
shares registered in nominee or street name.
We have never paid any cash dividends on our Common Stock and do
not anticipate doing so in the foreseeable future.
The following table presents information with respect to
purchases of common stock of the Company made during the three
months ended September 30, 2008, by the Company or on
behalf of the Company or any affiliated purchaser of
the Company, as defined in
Rule 10b-18(a)(3)
under the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar Maximum
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
Shares That
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
May Yet be
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Plans or
|
|
|
Plans or
|
|
Period
|
|
Purchased(1)
|
|
|
per Share(1)
|
|
|
Programs
|
|
|
Programs(2)
|
|
7/1/08 7/31/08
|
|
|
153,277
|
|
|
$
|
43.17
|
|
|
|
105,000
|
|
|
$
|
23,781,637
|
|
8/1/08 8/31/08
|
|
|
35,400
|
|
|
$
|
40.95
|
|
|
|
35,400
|
|
|
$
|
22,332,097
|
|
9/1/08 9/30/08
|
|
|
26,730
|
|
|
$
|
37.50
|
|
|
|
0
|
|
|
$
|
22,332,097
|
|
Total
|
|
|
215,407
|
|
|
$
|
42.10
|
|
|
|
140,400
|
|
|
$
|
22,332,097
|
|
|
|
|
(1) |
|
The purchases in this column include (i) shares repurchased as
part of our publicly announced program,
(ii) 30,619 shares that were repurchased by the
Company to pay the exercise price and/or to satisfy tax
withholding obligations in connection with so-called stock
swap exercises related to the vesting of employee stock
options or restricted stock awards, and (iii) and
40,388 shares that had previously been issued to former
stockholders of InnoRx, Inc. |
|
(2) |
|
On November 15, 2007, our Board of Directors announced the
authorization of the repurchase of $35 million of our
outstanding common stock. As of September 30, 2008, we have
repurchased 297,900 shares at an average price of $42.52
per share. Under the current authorization, the Company has
$22.3 million available for authorized share repurchases as
of September 30, 2008. The repurchase authorization does
not have an expiration date. |
30
Stock
Performance Chart
The following chart compares the cumulative total shareholder
return on the Companys Common Stock with the cumulative
total return on the Nasdaq Stock Market and the Nasdaq Medical
Industry Index (Medical Devices, Instruments and Supplies). The
comparison assumes $100 was invested on September 30, 2003
and assumes reinvestment of dividends.
31
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
The data presented below as of and for the fiscal years ended
September 30, 2008, 2007 and 2006 are derived from our
audited consolidated financial statements included elsewhere in
this report. The financial data as of and for the fiscal years
ended September 30, 2005 and 2004 are derived from our
audited financial statements that are not included in this
report. The information set forth below should be read in
conjunction with the Companys consolidated financial
statements and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained
in Item 7 of this report and our consolidated financial
statements and related notes beginning on
page F-1
and other financial information included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousand, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
97,051
|
|
|
$
|
73,164
|
|
|
$
|
69,884
|
|
|
$
|
62,381
|
|
|
$
|
49,738
|
|
Operating income
|
|
|
27,261
|
|
|
|
9,899
|
|
|
|
36,163
|
|
|
|
2,985
|
|
|
|
10,474
|
|
Net income (loss)
|
|
|
14,739
|
|
|
|
3,347
|
|
|
|
20,334
|
|
|
|
(8,246
|
)
|
|
|
7,242
|
|
Diluted net income (loss) per share
|
|
|
0.80
|
|
|
|
0.18
|
|
|
|
1.09
|
|
|
|
(0.45
|
)
|
|
|
0.41
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,376
|
|
|
$
|
13,812
|
|
|
$
|
3,751
|
|
|
$
|
3,921
|
|
|
$
|
2,709
|
|
Short-term and long-term investments
|
|
|
56,602
|
|
|
|
56,413
|
|
|
|
102,820
|
|
|
|
69,398
|
|
|
|
60,594
|
|
Total assets
|
|
|
191,028
|
|
|
|
171,331
|
|
|
|
157,402
|
|
|
|
124,225
|
|
|
|
109,587
|
|
Retained earnings
|
|
|
66,439
|
|
|
|
51,620
|
|
|
|
48,273
|
|
|
|
27,914
|
|
|
|
36,161
|
|
Total stockholders equity
|
|
|
141,806
|
|
|
|
130,922
|
|
|
|
145,203
|
|
|
|
115,581
|
|
|
|
94,310
|
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The following discussion and analysis of our financial
condition, results of operations and trends for the future
should be read together with Selected Financial Data
and our audited consolidated financial statements and related
notes appearing elsewhere in this report. Any discussion and
analysis regarding trends in our future financial condition and
results of operations are forward-looking statements that
involve risks, uncertainties and assumptions, as more fully
identified in Forward-Looking Statements and
Risk Factors. Our actual future financial condition
and results of operations may differ materially from those
anticipated in the forward-looking statements.
Overview
SurModics is a leading provider of drug delivery and surface
modification technologies to the healthcare industry. In
November 2008, we announced that we were changing our
organizational structure so that we will now be organized into
four clinically and market focused business units:
Cardiovascular, Ophthalmology, In Vitro Technologies, and
Brookwood Pharmaceuticals. We believe that this structure will
improve the visibility, marketing and adoption of the
Companys broad array of technologies within specific
markets and help its customers in the medical device,
pharmaceutical and life science industries solve unmet clinical
needs. In addition, a new centralized research and development
function has been formed to serve the needs of the
Companys clinically and market focused business units.
Brookwood Pharmaceuticals research and development
operations will remain unchanged. Because this change occurred
in fiscal 2009 and is not useful in explaining our fiscal 2008
results, we will primarily describe our business below as it
operated in fiscal 2008.
Until November 2008, the Company was organized into three
operating segments composed of seven technology-centered and
industry-focused business units. The Drug Delivery
operating segment contains: (1) the Drug Delivery business
unit, which was responsible for technologies dedicated to
site-specific delivery of drugs; (2) the Ophthalmology
business unit, which was dedicated to the advancement of
treatments for eye diseases, such as age-related macular
degeneration (AMD) and diabetic macular edema (DME), two of the
leading causes of blindness; and (3) the Brookwood
Pharmaceuticals unit, which provides proprietary polymer-based
32
technologies to companies developing improved pharmaceutical
products. The Hydrophilic and Other operating
segment consisted of three business units: (1) the
Hydrophilic Technologies business unit, which focused on
enhancing medical devices with advanced lubricious coatings that
facilitate their placement and maneuverability in the body;
(2) the Regenerative Technologies business unit, which
developed platforms intended to augment or replace tissue/organ
function (e.g., cell encapsulation applications), or to modify
medical devices to facilitate tissue/organ recovery through
natural repair mechanisms (e.g., hemo/biocompatible or
prohealing coatings); and (3) the Orthopedics business
unit, which was committed to innovative solutions for
orthopedics patients using proven SurModics technologies, and
creating new technology solutions to existing patient care gaps
in the orthopedics field. The In Vitro operating
segment contains the In Vitro Technologies business unit, which
includes our microarray slide products, our stabilization
products, antigens and substrates for immunoassay diagnostic
tests, our in vitro diagnostic format technology and
our synthetic ECM cell culture products.
Revenue in each of our operating segments in fiscal 2008 is
derived from three primary sources: (1) royalties and
license fees from licensing our patented drug delivery and
surface modification technologies and in vitro
diagnostic formats 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 and substrates and microarray slides to the diagnostics
and biomedical research industry; and (3) research and
development fees generated on customer projects. Revenue should
be expected to fluctuate from quarter to quarter depending on,
among other factors: our customers success in selling
products incorporating our technologies; the timing of
introductions of coated 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 licensees; and the timing of future
acquisitions we complete, if any.
For financial accounting and reporting purposes, we have treated
our three operating segments as one reportable segment. We made
this determination because a significant percentage of our
employees provide support services (including research and
development) to each operating segment; technology and products
from each operating segment are marketed to the same or similar
customers; each operating segment uses the same sales and
marketing resources; and each operating segment operates in the
same regulatory environment. We will be reviewing our segment
reporting for fiscal 2009 as a result of the changes to our
organizational structure in November 2008.
In June 2007, we signed a collaborative research and license
agreement with Merck & Co., Inc. (Merck)
to pursue the joint development and commercialization of the
I-vation sustained drug delivery system with triamcinolone
acetonide and other products that combine Merck proprietary drug
compounds with the I-vation system for the treatment of serious
retinal diseases. Under the terms of our agreement with Merck,
we received an up-front license fee of $20 million and had
the potential to receive up to an additional $288 million
in fees and development milestones associated with the
successful product development and attainment of appropriate
U.S. and EU regulatory approvals for these new combination
products.
In September 2008, Merck gave notice that it was terminating the
collaborative research and license agreement, as well as the
supply agreement entered into in June 2007, following a
strategic review of Mercks business and product
development portfolio. The termination is expected to be
effective December 16, 2008. We anticipate that the revenue
deferred under the accounting treatment required by Emerging
Issues Task Force Issue (EITF)
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, totaling $34.8 million as of
September 30, 2008, will be recognized in the first quarter
of fiscal 2009. In addition, we anticipate recognizing a
$9 million milestone payment from Merck associated with the
termination of the triamcinolone acetonide development program.
This program terminated 30 days following the notice given
in September 2008.
In July 2007, we acquired Brookwood Pharmaceuticals, Inc.
(Brookwood) by paying cash to Southern Research
Institute, which owned the capital stock of Brookwood. Brookwood
is a drug delivery company based in Birmingham, Alabama that
provides its proprietary polymer-based technologies to companies
developing improved pharmaceutical products. Brookwood is a
wholly owned subsidiary of SurModics and is reported as part of
our Drug Delivery operating segment. Our consolidated financial
statements have included the operating results of Brookwood
since the date of the acquisition.
33
In August 2007, we acquired all of the assets of BioFX
Laboratories, Inc. (BioFX) by paying cash to BioFX
stockholders. Based in Owings Mills, Maryland, BioFX is a
leading provider of innovative reagents and substrates for the
biomedical research and medical diagnostic markets. BioFX is a
wholly owned subsidiary of SurModics and is reported as part of
our In Vitro operating segment. Our consolidated financial
statements have included the operating results of BioFX since
the date of the acquisition.
In November 2008, we acquired a portfolio of intellectual
property and collaborative drug delivery projects from PR
Pharmaceuticals, Inc., a drug delivery company specializing in
injectable, biodegradable sustained release formulations. The
proprietary technologies we acquired complement and enhance the
existing portfolio of drug delivery capabilities available from
SurModics and Brookwood by providing a broader toolkit for
protein delivery and the ability to use smaller gauge needles
for microparticle injections. In addition, the multiple customer
development programs we assumed complemented the diversified
portfolio of customer projects at Brookwood and we believe will
further leverage the investment we are making in cGMP
manufacturing facilities.
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations is based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements is based
in part on the application of significant accounting policies,
many of which require management to make estimates and
assumptions (see Note 2 to the consolidated financial
statements). Actual results may differ from these estimates
under different assumptions or conditions and could materially
impact our results of operations. We believe the following are
critical areas in the application of our accounting policies
that currently affect our financial condition and results of
operations.
Revenue recognition. In accordance with SEC
Staff Accounting Bulletin (SAB) No. 104, 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. However, when
there are additional performance requirements, revenue is
recognized when such requirements have been satisfied. Royalty
revenue is generated when a licensed customer sells products
incorporating our technologies. Royalty revenue is recognized as
our licensees report it to us, and payment is typically
submitted concurrently with a quarterly report. Revenue related
to a performance milestone is recognized upon achievement of the
milestone and meeting specific revenue recognition criteria. We
recognize initial license fees over the term of the related
agreement. Minimum royalty fees are recognized in the period
earned. 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. Our sales terms provide no right of return outside of
our standard warranty policy. Payment terms are generally set at
30-45 days.
Generally, revenue for research and development is recorded as
performance progresses under the applicable contract. When we
have revenue arrangements with multiple deliverables, we comply
with EITF
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, and recognize each element as it is earned.
Costs related to products delivered are recognized in the period
revenue is recognized except for services related to the Merck
agreement, which are recognized as incurred. Customer advances
are accounted for as a liability until all criteria for revenue
recognition have been met.
Valuation of long-lived assets. We
periodically evaluate whether events and circumstances have
occurred that may affect the estimated useful life or the
recoverability of the remaining balance of long-lived assets,
such as property and equipment. If such events or circumstances
were to indicate that the carrying amount of these assets would
not be recoverable, we would estimate the future cash flows
expected to result from the use of the assets and their eventual
disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) or other measure of
fair value were less than the carrying amount of the assets, we
would recognize an impairment charge.
Goodwill. 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 Companys acquisitions. Goodwill is not amortized
but is subject, at a minimum, to annual tests for impairment in
accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
Under certain situations, interim
34
impairment tests may be required if events occur or
circumstances change indicating that the carrying amount of
goodwill may be impaired.
Evaluating goodwill for impairment involves the determination of
the fair value of our reporting units in which we have recorded
goodwill. A reporting unit is a component of an operating
segment for which discrete financial information is available
and reviewed by management on a regular basis. SurModics has
determined that its reporting units are its Brookwood business
unit, a component of the Drug Delivery operating segment, and
the In Vitro operating segment.
We performed our annual impairment test of goodwill in the
fourth quarter of fiscal 2008 and did not record an impairment
charge. In evaluating whether goodwill was impaired, we compared
the fair value of reporting units to which goodwill is assigned
to their carrying value (step one of the impairment test). In
calculating fair value, we used a valuation technique based on
multiples of revenue and book value for comparable companies
since the technique is consistent with the objective of
measuring fair value. The comparison companies selected have
operations comparable to each of the SurModics reporting units
for which indefinite-lived assets were being evaluated.
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 September 30,
2008. Our investment policy calls for no more than 5% of
investments be held in any one credit issue, excluding
U.S. government and government agency obligations.
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 and result in a new
cost basis for the investment in accordance with Statement of
Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Our
evaluation of the available-for-sale investments resulted in
loss recognition of $4.3 million related to our investment
in OctoPlus N.V. (included in Other Assets in the Consolidated
Balance Sheet) in fiscal 2008, as we determined the loss to be
an other-than-temporary impairment based on a significant
decline in the stock price. The impairment of the OctoPlus N.V.
investment has resulted in a new cost basis. 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.
Income tax accruals and valuation
allowances. When preparing the Consolidated
Financial Statements, we are required to estimate the income
taxes in each of the jurisdictions in which we operate. This
process involves estimating the actual current tax obligations
based on expected income, statutory tax rates and tax planning
opportunities in the various jurisdictions. In the event there
is a significant unusual or one-time item recognized in the
results of operations, the tax attributable to that item would
be separately calculated and recorded in the period the unusual
or one-time item occurred. Tax law requires certain items to be
included in our tax return at different times than the items are
reflected in our results of operations. As a result, the annual
effective tax rate reflected in our results of operations is
different than that reported on our tax return (i.e., our cash
tax rate). Some of these differences are permanent, such as
expenses that are not deductible in our tax return, and some are
temporary differences that will reverse over time, such as
depreciation expense on capital assets. These temporary
differences result in deferred tax assets and liabilities, which
are included in our Consolidated Balance Sheets. Deferred tax
assets generally represent items that can be used as a tax
deduction or credit in our tax return in future years for which
we have already recorded the expense in our Consolidated
Statements of Income. We must assess the likelihood that our
deferred tax assets will be recovered from future taxable
income, and to the extent we believe that recovery is not
likely, we must establish a valuation allowance against those
deferred tax assets. Deferred tax liabilities generally
represent items for which we have already taken a deduction in
our tax return, but we have not yet recognized the items as
expense in our results of operations. Significant judgment is
required in evaluating our tax positions, and in determining our
provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our
deferred tax assets. We had total deferred tax assets in excess
of total deferred tax liabilities of $12.2 million as of
September 30, 2008 and $7.0 million as of
September 30, 2007, including valuation allowances of
$3.4 million as of September 30, 2008 and
$1.8 million as
35
of September 30, 2007. The valuation allowances related to
impairment losses on investments and were recorded because the
Company does not currently foresee future capital gains within
the allowable carry-forward and carry-back periods to offset
these capital losses when they are recognized. As such, no tax
benefit has been recorded in the Consolidated Statements of
Income.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109, on October 1, 2007. The new standard
defines the threshold for recognizing the benefits of tax return
positions in the financial statements as
more-likely-than-not to be sustained by the taxing
authorities based solely on the technical merits of the
position. If the recognition threshold is met, the tax benefit
is measured and recognized as the largest amount of tax benefit
that, in our judgment, is greater than 50 percent likely to
be realized. The total gross amount of unrecognized tax benefits
as of September 30, 2008 was $1.5 million, excluding
accrued interest and penalties. $1.3 million of these tax
benefits would affect our effective tax rate if recognized.
Interest and penalties recorded for uncertain tax positions are
included in our income tax provision. As of September 30,
2008, $0.4 million of interest and penalties was accrued,
excluding the tax benefits of deductible interest. Fiscal years
2005, 2006 and 2007 remain subject to examination by federal tax
authorities. Tax returns for state and local jurisdictions for
fiscal years 2003 through 2007 remain subject to examination by
state and local tax authorities. In the event that we have
determined not to file tax returns with a particular state or
local jurisdiction, all years remain subject to examination by
the tax authorities. The ultimate outcome of tax matters may
differ from our estimates and assumptions. Unfavorable
settlement of any particular issue would require the use of cash
and could result in increased income tax expense. Favorable
resolution could result in reduced income tax expense. Within
the next 12 months, we do not expect that our unrecognized
tax benefits will change significantly. See Note 5 to the
Consolidated Financial Statements for further information
regarding the impact of adopting this new standard as well as
changes in unrecognized tax benefits during fiscal 2008.
Results
of Operations
Years
Ended September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery
|
|
$
|
43,938
|
|
|
$
|
26,488
|
|
|
$
|
17,450
|
|
|
|
66
|
%
|
Hydrophilic and Other
|
|
|
31,864
|
|
|
|
26,493
|
|
|
|
5,371
|
|
|
|
20
|
%
|
In Vitro
|
|
|
21,249
|
|
|
|
20,183
|
|
|
|
1,066
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
97,051
|
|
|
$
|
73,164
|
|
|
$
|
23,887
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Fiscal 2008 revenue was
$97.1 million, an increase of $23.9 million or 33%
from fiscal 2007. We experienced growth in all three operating
segments, as detailed in the table above and further explained
in the narrative below.
Drug Delivery. Revenue in the Drug Delivery
segment increased 66% to $43.9 million in fiscal 2008. The
increase in total revenue reflects a significant increase in
research and development fees, which was partially offset by an
8% decrease in royalties and license fees related to drug
delivery and ophthalmology projects. Brookwood contributed
$20.6 million and $2.4 million in revenue for fiscal
2008 and 2007, respectively. Fiscal 2007 results included
Brookwood for only two months, as the acquisition closed on
July 31, 2007.
Drug Delivery derives a substantial portion of its revenue from
royalties and license fees and product sales attributable to
Cordis Corporation, a subsidiary of Johnson & Johnson,
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 decrease in Drug Delivery royalties and license fees
principally reflects a 19% decrease in royalty revenue from
Cordis as a result of lower
CYPHER®
sales, partially offset by an increase in royalties and license
fees from ophthalmology customers, as well as an increase in
research and development fees from drug delivery and
ophthalmology customers. We received $11 million in license
fees from Merck in association with the collaborative
36
research and license agreement we signed in fiscal 2007.
However, we recognized as revenue only a small portion of these
fees, as well as the initial $20 million license fee from
Merck paid in fiscal 2007, as we are amortizing these amounts
over the estimated economic life of the technology we licensed
to Merck. Fiscal 2008 sales of reagent chemicals (chemicals that
we manufacture and sell to licensees for coating their medical
devices) to Cordis decreased significantly compared with the
prior year.
The
CYPHER®
stent, from which we derive a substantial amount of our Drug
Delivery revenue, faces continuing competition from drug-eluting
stents manufactured by Boston Scientific, Medtronic and Abbott.
These stents compete directly with the
CYPHER®
stent both domestically and internationally. The Company also
receives a royalty on the Medtronic
Endeavor®
drug-eluting stent, but the associated royalty revenue is
reflected in the Hydrophilic and Other segment. In addition to
competition among the various players, the total size of the
drug-eluting stent market has decreased significantly in the
past two years as a result of concerns about product safety,
mostly related to potential clotting associated with stents.
Therefore, future royalty and reagent sales revenue could
decrease due to lower
CYPHER®
stent sales as a result of the overall market contraction and
the ongoing and expected future competition. We anticipate that
quarterly royalty revenue from the
CYPHER®
stent may be volatile throughout fiscal 2009 and beyond as the
various marketers of drug-eluting stents continue competing in
the marketplace and as others enter the marketplace.
The inclusion of Brookwood, which contributed to Drug Delivery
revenue for only two months in fiscal 2007, impacted the overall
revenue and revenue mix in fiscal 2008, as a substantial
majority of Brookwoods revenue is comprised of research
and development fees. Our research and development revenue
increased 344% to $22.0 million in fiscal 2008 and it
constituted a majority of total Drug Delivery revenue.
In September 2008, following a strategic review of its business
and product development portfolio, Merck gave notice that it was
terminating the collaborative research and license agreement as
well as the supply agreement entered into in June 2007. The
termination is expected to be effective December 16, 2008.
We anticipate that the revenue deferred under the accounting
treatment required by Emerging Issues Task Force Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, totaling $34.8 million as of
September 30, 2008, will be recognized in the first quarter
of fiscal 2009. In addition, we anticipate recognizing a
$9 million milestone payment from Merck associated with the
termination of the triamcinolone acetonide development program.
This program terminated 30 days following the notice given
in September 2008.
Hydrophilic and Other. Hydrophilic and Other
revenue increased 20% to $31.9 million, primarily as a
result of 21% growth in royalties and license fees and 60%
growth in research and development fees. In contrast to our Drug
Delivery segment, where a significant percentage of revenue is
attributable to Cordis, there are several dozen licensees and an
even larger number of coated products generating royalties in
our Hydrophilic and Other segment. The growth in royalties
principally reflects increased sales of coated products already
on the market, and to a lesser extent newly introduced licensed
products.
In Vitro. Revenue in the In Vitro segment
increased 5% to $21.2 million. The increase was mainly
attributable to increased product sales, principally as a result
of the addition of $4.6 million of BioFX products sold
during the year as compared with BioFX product sales of
$0.5 million in fiscal 2007. Operating results of BioFX
have been included in the Companys consolidated financial
statements since August 14, 2007. The product sales
increase was substantially offset by a 27% decrease in royalties
and license fees. Royalties and license fees likely will
decrease in fiscal 2009. In Vitro derives a significant
percentage of its revenue from GE Healthcare and Abbott
Laboratories. Royalty revenue generated under our diagnostic
format patent license agreement with Abbott Laboratories (the
Abbott Agreement) is expected to cease following the
expiration of the licensed patents in December 2008. Consistent
with our revenue recognition practices, royalty revenue is
recognized as licensees report it to us, which typically occurs
one quarter following the sales of the licensees products.
Accordingly, we expect royalties generated under the Abbott
Agreement to extend into the second quarter of fiscal 2009.
Royalty revenue from GE Healthcare decreased 76% in fiscal 2008
compared with fiscal 2007 as a result of the transition to a
non-exclusive license in January 2008. We re-acquired the
CodeLink®
microarray slide product line from GE Healthcare in September
2008. This will eliminate future royalty revenue from this
customer for these products.
Product costs. Product costs were
$8.5 million in fiscal 2008, a 52% increase from the prior
year. Overall product margins averaged 58%, compared with 59%
reported last year. The slight decrease in product margins
37
reflects the mix of products sold in the period (in particular,
some of our microarray slides and Brookwood polymer products
carry lower margins than our reagent and stabilization products).
Research and development expenses. Research
and development (R&D) expenses were
$40.5 million, an increase of 42% compared with fiscal
2007. The increase principally reflects the addition of
Brookwood and BioFX to our operations, which together incurred
total R&D expenses of $13.9 million in fiscal 2008
compared with $2.0 million for fiscal 2007. Fiscal 2007
amounts include Brookwood and BioFX from their respective
acquisition dates through September 30, 2007. In addition
compensation expenses have increased as we have added personnel
to support customer and internal development projects. As of
September 30, 2008, our R&D headcount has increased by
15 or 9%, growing from 159 employees to 174, compared with
September 30, 2007. We have also incurred higher costs
related to our internal development projects, and
$1.6 million of out-of-pocket expenses were incurred in
connection with our Merck projects, for which we are reimbursed.
Selling, general and administrative
expenses. Selling, general and administrative
(SG&A) expenses were $20.8 million, an increase of 53%
compared with fiscal 2007. The increase principally reflects the
addition of Brookwood and BioFX to our operations, which
together incurred total SG&A expenses of $4.9 million
in fiscal 2008 compared with $0.7 million in fiscal 2007.
Fiscal 2007 amounts include Brookwood and BioFX from their
respective acquisition dates through September 30, 2007.
Our SG&A stock-based compensation costs were
$0.7 million higher in fiscal 2008 principally associated
with second quarter transitions on our Board of Directors.
Other income (loss), net. Other loss was
$0.4 million in fiscal 2008, compared with income of
$4.8 million in fiscal 2007. The fiscal 2008 loss primarily
reflects a $4.3 million impairment loss on our investment
in OctoPlus N.V., which we recorded in the fourth quarter of
fiscal 2008, based on a significant decline in the stock price.
Income from investments was $3.3 million in fiscal 2008,
compared with $4.8 million in fiscal 2007. The decrease
primarily reflects lower investment balances and lower yields
generated from our investment portfolio as interest rates
declined over the past twelve months, as well as the early
repayment of a note receivable associated with the fiscal 2005
sale of our contract manufacturing facility located in
Bloomington, Minnesota.
Income tax expense. The income tax provision
was $12.2 million in fiscal 2008, compared with
$11.3 million in fiscal 2007. The effective tax rate in
fiscal 2008 was 45.2%. Excluding the impact of the
$4.3 million impairment loss in fiscal 2008 (since the
Company does not currently foresee offsetting capital gains that
could offset this capital loss, no tax benefit has been
recorded), the effective tax rate was 38.9%. The effective tax
rate in fiscal 2007 was 77.2%. Excluding the impact of the
non-tax deductible purchased in-process research and development
charges, the fiscal 2007 effective rate was 37.4%. The increase
in the effective tax rate, adjusted for the one-time items
noted, reflects an increase in state tax contingency reserves in
fiscal 2008 and a release of federal tax reserves in fiscal 2007.
Years
Ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Increase
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery
|
|
$
|
26,488
|
|
|
$
|
32,918
|
|
|
$
|
(6,430
|
)
|
|
|
(20
|
)%
|
Hydrophilic and Other
|
|
|
26,493
|
|
|
|
22,233
|
|
|
|
4,260
|
|
|
|
19
|
%
|
In Vitro
|
|
|
20,183
|
|
|
|
14,733
|
|
|
|
5,450
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,164
|
|
|
$
|
69,884
|
|
|
$
|
3,280
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Fiscal 2007 revenue was
$73.2 million, an increase of $3.3 million or 5% from
fiscal 2006. A decrease in Drug Delivery operating segment
revenue was more than offset by growth in the Hydrophilic and
Other and In Vitro operating segments, as detailed in the table
above and further explained in the narrative below.
Drug Delivery. Revenue in the Drug Delivery
segment decreased 20% to $26.5 million in fiscal 2007. The
decrease in total revenue reflects a significant decrease in
royalties and license fees, which was partially offset by an
increase in research and development revenue related to drug
delivery and ophthalmology projects and the addition of
$2.4 million in revenue from Brookwood.
38
Drug Delivery derives a substantial portion of its revenue from
royalties and license fees and product sales attributable to
Cordis Corporation, a subsidiary of Johnson & Johnson,
on its
CYPHER®
Sirolimus-eluting Coronary Stent. The decrease in drug delivery
royalties and license fees principally reflects decreased
royalty revenue from Cordis as a result of lower
CYPHER®
sales. Partially offsetting the decrease attributable to
CYPHER®
was an increase in royalties and license fees from ophthalmology
customers, as well as an increase in research and development
fees from drug delivery and ophthalmology customers. We received
a $20 million license fee from Merck in association with
the collaborative research and license agreement that we signed
in fiscal 2007. However we recognized as revenue only a small
portion of this fee, and are amortizing the remaining amounts
over the estimated economic life of the technology we licensed
to Merck. As a result of Mercks September 2008 notice of
termination, we anticipate recognizing these amounts in the
first quarter of fiscal 2009. Fiscal 2007 sales of reagent
chemicals (chemicals that we manufacture and sell to licensees
for coating their medical devices) to Cordis decreased slightly
when compared with the prior year.
Hydrophilic and Other. Hydrophilic and Other
revenue increased 19% to $26.5 million, primarily as a
result of 27% growth in royalties and license fees and 13%
growth in reagent sales, partially offset by a 19% decrease in
research and development revenue. In contrast to our Drug
Delivery segment, where a significant percentage of revenue is
attributable to Cordis, there are several dozen licensees and an
even larger number of coated products generating royalties in
our Hydrophilic and Other segment. The growth in royalties
principally reflects increased sales of coated products already
on the market, and to a lesser extent newly introduced licensed
products.
In Vitro. Revenue in the In Vitro segment
increased 37% to $20.2 million. Over 60% of the increase
was attributable to increased royalties and license fees. The
balance of the growth resulted from growth in sales of our
stabilization products, antigens and substrates used by
diagnostic kit manufacturers in immunoassay diagnostic tests. We
began selling recombinant autoimmune antigens in the first
quarter of fiscal 2007, and sales of BioFX products following
the acquisition of BioFX in August 2007 contributed
$0.5 million of product sales to our results.
Product costs. Product costs were
$5.6 million in fiscal 2007, a 64% increase from the prior
year. Overall product margins averaged 59%, compared with 70%
reported in fiscal 2006. The decrease in product margins
reflects the mix of products sold in the period (in particular,
some of our stabilization and antigen products, genomics slides
and Brookwood polymer products carry lower margins than our
reagent products) and higher depreciation costs on the
manufacturing space at our Eden Prairie facility.
Research and development expenses. Research
and development expenses were $28.5 million, an increase of
40% compared with fiscal 2006. The increase principally reflects
the addition of Brookwood and BioFX to our operations, higher
compensation expenses as we have added personnel to support
customer projects and internal development projects, increased
incentive and stock-based compensation, and higher costs related
to our internal development projects.
Selling, general and administrative
expenses. Selling, general and administrative
expenses were $13.6 million, an increase of 37% compared
with fiscal 2006. The increase principally reflects the addition
of Brookwood and BioFX to our operations, higher compensation
expenses, and increased incentive and stock-based compensation.
Purchased in-process research and
development. In July 2007, we acquired all of the
assets of Brookwood. Results in the fourth quarter of fiscal
2007 include an in-process research and development charge of
$15.6 million related to the Brookwood acquisition. The
fair value of the in-process research and development was
determined by management.
Other income (loss), net. Other income was
$4.8 million in fiscal 2007, compared with a loss of
$0.6 million in fiscal 2006. The fiscal 2006 loss primarily
reflects a $4.7 million impairment loss on our investment
in Novocell, which we recorded in the second quarter of fiscal
2006. Income from investments was $4.8 million in fiscal
2007, compared with $4.1 million in fiscal 2006. The
increase reflects higher yields generated from our investment
portfolio.
Income tax expense. The income tax provision
was $11.3 million in fiscal 2007 compared with
$15.2 million in fiscal 2006. The effective tax rate in
fiscal 2007 was 77.2%. Excluding the impact of the non-tax
deductible purchased in-process research and development
charges, the fiscal 2007 effective rate was 37.4%. Excluding the
impact of the $4.7 million impairment loss in fiscal 2006
(since the Company does not currently foresee offsetting
39
capital gains that could offset this capital loss, no tax
benefit has been recorded), the effective tax rate was 38.2% in
fiscal 2006.
Liquidity
and Capital Resources
As of September 30, 2008, the Company had working capital
of $34.3 million, of which $24.6 million consisted of
cash, cash equivalents and short-term investments. Working
capital increased $6.2 million from the September 30,
2007 level driven principally by lower accrued income taxes
payable. Our cash, cash equivalents and short-term and long-term
investments totaled $72.0 million at September 30,
2008, a slight increase from $70.2 million at
September 30, 2007. The Companys 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. The Companys
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 plans to continue to direct its
investment advisors to manage the Companys investments
primarily for the safety of principal for the foreseeable future
as it assesses other investment opportunities and uses of its
investments.
The Company had positive cash flows from operating activities of
approximately $39.8 million in fiscal 2008, compared with
$50.7 million in fiscal 2007. The following table depicts
our cash flows from operations for each of fiscal 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net income
|
|
$
|
14,739
|
|
|
$
|
3,347
|
|
Depreciation and amortization
|
|
|
6,071
|
|
|
|
4,214
|
|
Stock-based compensation
|
|
|
9,652
|
|
|
|
10,312
|
|
Purchased in-process research and development
|
|
|
|
|
|
|
15,573
|
|
Impairment loss on investment
|
|
|
4,314
|
|
|
|
|
|
Net other operating activities
|
|
|
(3,938
|
)
|
|
|
(11,004
|
)
|
Net change in deferred revenue
|
|
|
11,452
|
|
|
|
19,166
|
|
Net change in other operating assets and liabilities
|
|
|
(2,468
|
)
|
|
|
9,107
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
39,822
|
|
|
$
|
50,715
|
|
|
|
|
|
|
|
|
|
|
While net income in fiscal 2008 increased compared with fiscal
2007, there was a reduction of cash provided by operating
activities. License fees and milestone payments received from
Merck in fiscal 2008 totaled $11 million while in fiscal
2007 we received a $20 million up-front license fee from
Merck. The decline in cash flow from Merck as well as lower
CYPHER®
stent royalties contributed significantly to the decline in cash
provided by operating activities in fiscal 2008.
We conduct a significant majority of our operations at our Eden
Prairie, Minnesota headquarters and at our Brookwood subsidiary
located in Birmingham, Alabama. In addition to our Eden Prairie
and Birmingham locations, we lease approximately
3,000 square feet of commercial office space in Irvine,
California, where our Ophthalmology business unit conducts a
portion of its operations, and approximately 73,000 square
feet of office and warehouse space in Eden Prairie. In November
2008, we announced the consolidation of all of our Eden Prairie
personnel into our owned facility as part of our reorganization
efforts. We estimate this consolidation will be substantially
complete by the end of December 2008. In April 2008 we purchased
a building for $12.2 million which has approximately
286,000 square feet of office and warehouse space and is
located near our present location in Birmingham, Alabama. The
warehouse portion of this building is being renovated to support
the development and CGMP manufacturing needs of our customers.
40
In September 2004, we made a commitment to purchase for
$7 million certain additional sublicense rights and the
accompanying future royalty revenue streams under certain
sublicenses through an amendment to our diagnostic format patent
license with Abbott Laboratories. Prior to such amendment, we
were receiving only a portion of the royalties under such
sublicenses. The first $5 million installment was paid in
November 2004. We made an additional $1 million installment
payment in June 2007 and the remaining $1 million
installment was paid in June 2008.
In January 2005, we made an equity investment of approximately
$3.9 million in OctoPlus N.V., a company based in the
Netherlands active in the development of pharmaceutical
formulations incorporating novel biodegradable polymers. In May
2006, we made an additional investment of approximately
$160,000. In October 2006, we made an additional investment of
$1.9 million, bringing our total investment to
$6.0 million, representing an ownership interest of less
than 10%. Also in October 2006, OctoPlus N.V. common stock began
trading on an international exchange following an initial public
offering of its common stock. With a readily determinable fair
market value, the Company treats the investment in OctoPlus N.V.
as an available-for-sale investment rather than a cost method
investment. In fiscal 2008 we incurred an impairment loss of
$4.3 million on our investment in OctoPlus N.V. based on
the decline in fair value of the common stock. Our new cost
basis in the investment is $1.7 million.
In January 2005, we entered into a merger agreement whereby
SurModics acquired all of the assets of InnoRx, Inc. by paying
approximately $4.1 million in cash and issuing
600,064 shares of SurModics common stock to InnoRx
stockholders, and agreeing to issue up to an additional
600,068 shares if certain development and commercial
milestones are met. As of September 30, 2008, we issued
120,009 shares of SurModics common stock to the
shareholders of InnoRx upon the successful completion of two
milestones. Upon the successful completion of the remaining
development and commercial milestones involving InnoRx
technology acquired in the transaction, we will be required to
issue up to approximately 480,059 additional shares of our
common stock to the stockholders of InnoRx.
In July 2007, we made equity investments in Paragon Intellectual
Properties, LLC (Paragon) and Apollo Therapeutics,
LLC (Apollo), a Paragon subsidiary. The Paragon and
Apollo investments totaled $3.5 million. SurModics made an
additional equity investment totaling $2.5 million, based
upon successful completion of specified development milestones,
in the third quarter of fiscal 2008. Our investment in Paragon
represents an ownership interest of approximately 5% and the
investment in Apollo represents an ownership interest of 20%. We
account for our investments in Paragon and Apollo under the
equity method. In October 2008, Paragon announced that it had
restructured, moving from a limited liability company with seven
subsidiaries to a single
C-corporation
named Nexeon MedSystems, Inc. We will continue to account for
our investment in Paragon and Apollo under the equity method in
the first quarter of fiscal 2009, as both entities report
results to us on a one-quarter lag. Commencing with the second
quarter of fiscal 2009 we expect to account for our investment
in Nexeon under the cost method as our ownership is less than
20%.
In July 2007, we entered into a stock purchase agreement with
Southern Research Institute whereby we acquired 100% of the
capital stock of Brookwood Pharmaceuticals, Inc.
(Brookwood) for $40 million in cash on the
closing date, and up to an additional $22 million in cash
upon the successful achievement of specified milestones. In the
second quarter of fiscal 2008, a milestone was achieved and
$2 million of additional purchase price was recorded as an
increase to goodwill. Based in Birmingham, Alabama, Brookwood
specializes in proprietary injectable microparticles and
implants to provide sustained delivery of drugs being developed
by leading pharmaceutical, biotechnology and medical device
clients as well as emerging companies. This acquisition has
helped us broaden our technology offerings to our customers,
diversify the range of markets in which we participate, expand
our customer base, and enhance our pipeline of potential revenue
generating opportunities. See Note 3 to the consolidated
financial statements for further information.
In August 2007, we entered into a stock purchase agreement to
acquire 100% of the capital stock of BioFX Laboratories, Inc.
(BioFX) for $11.3 million in cash on the
closing date, and up to an additional $11.4 million in cash
upon the successful achievement of specified milestones. In the
first quarter of fiscal 2008, a milestone was achieved and
$1.1 million of additional purchase price was recorded as
an increase to goodwill. Based in Owings Mills, Maryland, BioFX
is a leading manufacturer of substrates, a critical component of
diagnostic test kits used to
41
detect and signal that a certain reaction has taken place. The
acquisition of BioFX has broadened our product portfolio in the
in vitro diagnostics market. See Note 3 to the
consolidated financial statements for further information.
In August 2008, we purchased approximately five acres of
undeveloped land adjacent to our headquarters in Eden Prairie,
Minnesota for approximately $3.6 million, including a
$100,000 non-refundable deposit paid to the seller in August
2007.
In October 2007, QLT Inc. acquired ForSight Newco II
(ForSight), a company with drug delivery technology
for ophthalmology. SurModics held a small equity stake in
ForSight, for which we received an initial payment of
approximately $977,000 in cash in October 2007 and a second
payment, from an escrow account, of approximately $36,000 in
cash in April 2008, which have been recorded as other income in
fiscal 2008. We received an additional payment of approximately
$36,000 in cash in October 2008 as proceeds were released from
an escrow account. Additionally, we may receive future payments
associated with the successful attainment of certain clinical
development, and commercialization milestones for products
developed by QLT that incorporate the technology acquired from
ForSight.
In November 2007, our Board of Directors authorized the
repurchase of up to $35 million of the Companys
common stock in open-market transactions, private transactions,
tender offers, or other transactions. The repurchase
authorization does not have a fixed expiration date. During
fiscal 2008, we purchased 297,900 shares of common stock
for $12.7 million at an average price of $42.52 per share.
Under the current authorization, the Company has
$22.3 million remaining available for authorized share
repurchases as of September 30, 2008.
As of September 30, 2008, we had $236,000 of short-term
debt in connection with our Brookwood subsidiary, which was paid
off in November 2008. We do not have any other credit agreements
although we periodically review accessibility to credit
facilities. We 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
for our operations for the next twelve months. There can be no
assurance, however, that the Companys business will
continue to generate cash flows at current levels, and the
current disruption in the global financial markets may
negatively impact the Companys ability to access the
capital markets under current and future sources of financing in
a timely manner and on attractive terms. Our anticipated
liquidity needs for fiscal 2009 include but are not limited to
the following: capital expenditures related to the recently
acquired Alabama facility in the range of $24 million to
$26 million; general capital expenditures in the range of
$3 million to $7 million; contingent consideration
payments associated with our November 2008 acquisition of
certain assets from PR Pharmaceuticals in the range of
$3 million to $6 million; contingent consideration
payments related to our acquisitions of Brookwood and BioFX; and
any amounts associated with the repurchase of common stock under
the authorization discussed above.
Off-Balance
Sheet Arrangements
As of September 30, 2008, the Company did not have any
off-balance sheet arrangements with any unconsolidated entities.
Contractual
Obligations
Presented below is a summary of contractual obligations and
other minimum commercial commitments. See Note 6 to the
consolidated financial statements for additional information
regarding the below obligations and commitments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
More than
|
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Operating leases
|
|
$
|
3,116
|
|
|
$
|
1,260
|
|
|
$
|
1,567
|
|
|
$
|
256
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our only material lease commitment relates to a leased facility
in Eden Prairie, Minnesota near our Minnesota headquarters.
42
New
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 157, Fair Value
Measurements. This statement establishes a consistent framework
for measuring fair value and expands disclosures on fair value
measurements. SFAS No. 157 is effective for the
Company in fiscal 2009. The Company has not determined the
impact that the adoption of this statement will have on its
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to choose
to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be reported in earnings.
SFAS No. 159 is effective for the Company in fiscal
2009. The Company has determined that the adoption of this
statement will not have a material effect on the Companys
consolidated financial statements as the Company has elected not
to account for any additional financial assets or financial
liabilities at fair value.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS No. 141(R)),
which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the
recognition and measurement of goodwill acquired in a business
combination. SFAS No. 141(R) is effective for the
Company in fiscal 2010. Earlier adoption is prohibited and once
adopted SFAS No. 141(R) will impact recognition and
measurement of future business combinations.
No other new accounting pronouncement issued or effective has
had, or is expected to have, a material impact on the
Companys consolidated financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
The Companys investment policy requires investments with
high credit quality issuers and limits the amount of credit
exposure to any one issuer. The Companys 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 Companys investment policies, the primary
market risk associated with these investments is interest rate
risk. SurModics 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 $951,000 decrease in the
fair value of the Companys available-for-sale and
held-to-maturity securities as of September 30, 2008, 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 Companys inventory exposure is not
material.
Although we conduct business in foreign countries, our
international operations consist primarily of sales of reagent
and stabilization chemicals. Additionally, 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 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
The consolidated balance sheets as of September 30, 2008
and 2007 and the consolidated statements of income,
stockholders equity and cash flows for each of the three
years in the period ended September 30, 2008, together with
Report of Independent Registered Public Accounting Firm and
related footnotes (including selected unaudited quarterly
financial data) begin on
page F-1
of this
Form 10-K.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
43
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
|
|
1.
|
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 Companys management, including the
Companys Chief Executive Officer and Chief Financial
Officer regarding the effectiveness of the design and operation
of the Companys 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
Companys 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 rules of the Securities Exchange
Commission.
|
|
2.
|
Internal
Control over Financial Reporting.
|
(a) Managements Report on Internal Control Over
Financial Reporting. Management is responsible
for establishing and maintaining adequate internal control over
financial reporting for the Company. Management conducted an
evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that the
Companys internal control over financial reporting was
effective as of September 30, 2008. Deloitte &
Touche LLP, the registered public accounting firm that audited
the financial statements included in this Annual Report on Form
10-K, has
issued the attestation report below regarding the Companys
internal control over financial reporting.
(b) Attestation Report of the Independent Registered
Public Accounting Firm.
44
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SurModics, Inc.
Eden Prairie, Minnesota
We have audited the internal control over financial reporting of
SurModics, Inc. and subsidiaries (the Company) as of
September 30, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel 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. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 30, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
September 30, 2008 of the Company and our report dated
December 8, 2008 expressed an unqualified opinion on those
financial statements.
As discussed in Note 5 to the consolidated financial
statements, on October 1, 2007, the Company adopted
Statement of Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 8, 2008
45
|
|
3.
|
Changes
in Internal Controls.
|
There were no changes in the Companys internal control
over financial reporting that occurred during the period covered
by this report that have materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
All information required to be disclosed in a report on
Form 8-K
during the fourth quarter of the year covered by this
Form 10-K
has been reported.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
The information required by Item 10 relating to directors,
our audit committee, the nature of changes, if any, to
procedures by which our shareholders may recommend nominees for
directors, codes of ethics and compliance with
Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the sections entitled
Election of Directors, Section 16(a)
Beneficial Ownership Reporting Compliance and
Corporate Governance Code of Ethics and
Business Conduct, which appear in the Companys
definitive Proxy Statement for its 2009 Annual Meeting of
Shareholders. The information required by Item 10 relating
to executive officers appears in Part I of this
Form 10-K.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
The information required by Item 11 is incorporated herein
by reference to the sections entitled Executive
Compensation and Other Information, Compensation
Discussion and Analysis, Director Compensation for
Fiscal 2008, Compensation Committee Report and
Corporate Governance Committee and Board
Meetings, which appear in the Companys definitive
Proxy Statement for its 2009 Annual Meeting of Shareholders.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
The information required by Item 12 is incorporated herein
by reference to the sections entitled Principal
Shareholders and Management Shareholdings,
which appear in the Companys definitive Proxy Statement
for its 2009 Annual Meeting of Shareholders.
Equity
Compensation Plan Information
The following table provides information related to the
Companys equity compensation plans in effect as of
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Future Issuance Under
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Equity Compensation
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity compensation plans approved by shareholders
|
|
|
1,908,067
|
(1)
|
|
$
|
34.43
|
(1)
|
|
|
315,486
|
(2)
|
Equity compensation plans not approved by shareholders
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,908,067
|
|
|
$
|
34.43
|
|
|
|
315,486
|
|
|
|
|
(1) |
|
Excludes shares that may be issued under the Companys 1999
Employee Stock Purchase Plan. |
|
(2) |
|
Includes 238,564 shares available for future issuance under
the amended and restated 2003 Equity Incentive Plan and
76,922 shares available under the 1999 Employee Stock
Purchase Plan. |
46
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
|
The information required by Item 13 is incorporated herein
by reference to the sections entitled Corporate
Governance Related Person Transaction Approval
Policy and Corporate Governance Majority
of Independent Directors; Committees of Independent
Directors, which appear in the Companys definitive
Proxy Statement for its 2009 Annual Meeting of Shareholders.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The information required by Item 14 is incorporated herein
by reference to the section entitled Independent
Registered Public Accounting Firm, which appears in the
Companys definitive Proxy Statement for its 2009 Annual
Meeting of Shareholders.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a) 1. Financial Statements
The following statements are included in this report on the
pages indicated:
|
|
|
|
|
Page (s)
|
|
|
|
F-1
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6-F-23
|
2. Financial Statement Schedules. All
schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
other than the ones listed above are not required under the
related instructions or are not applicable, and, therefore, have
been omitted.
3. Listing of Exhibits. The exhibits
which are filed with this report or which are incorporated
herein by reference are set forth in the Exhibit Index
following the signature page.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SURMODICS, INC.
(Registrant)
Bruce J Barclay
Chief Executive Officer
Dated: December 12, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant, in the capacities, and on the dates
indicated.
(Power of
Attorney)
Each person whose signature appears below authorizes BRUCE J
BARCLAY and PHILIP D. ANKENY, and constitutes and appoints said
persons as his or her true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and
resubstitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any or all amendments
to this Annual Report on
Form 10-K
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, authorizing said persons and granting unto
said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Bruce
J Barclay
Bruce
J Barclay
|
|
President and Chief Executive Officer (principal executive
officer)
|
|
December 12, 2008
|
|
|
|
|
|
/s/ Philip
D. Ankeny
Philip
D. Ankeny
|
|
Senior Vice President and
Chief Financial Officer
(principal financial officer)
|
|
December 12, 2008
|
|
|
|
|
|
/s/ Mark
A. Lehman
Mark
A. Lehman
|
|
Corporate Controller
(principal accounting officer)
|
|
December 12, 2008
|
|
|
|
|
|
/s/ José
H. Bedoya
José
H. Bedoya
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
/s/ John
W. Benson
John
W. Benson
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
/s/ Robert
C. Buhrmaster
Robert
C. Buhrmaster
|
|
Director
|
|
December 12, 2008
|
48
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gerald
B. Fischer
Gerald
B. Fischer
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
/s/ Kenneth
H. Keller
Kenneth
H. Keller
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
/s/ Susan
E. Knight
Susan
E. Knight
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
/s/ Kendrick
B. Melrose
Kendrick
B. Melrose
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
/s/ John
A. Meslow
John
A. Meslow
|
|
Director
|
|
December 12, 2008
|
49
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX
TO
FORM 10-K
For the
Fiscal Year Ended September 30, 2008
SURMODICS,
INC.
|
|
|
|
|
Exhibit
|
|
|
|
|
2
|
.1
|
|
Agreement of Merger, dated January 18, 2005, with InnoRx,
Inc. incorporated by reference to Exhibit 2.1
to the Companys Current Report on
Form 8-K
dated January 18, 2005, SEC File
No. 0-23837.
|
|
2
|
.2
|
|
Stock Purchase Agreement, dated July 31, 2007, between
SurModics, Inc. and Southern Research Institute.
incorporated by reference to Exhibit 2.1 to the
Companys Current Report on
Form 8-K
dated July 31, 2007, SEC File
No. 0-23837.
|
|
3
|
.1
|
|
Restated Articles of Incorporation, as amended
incorporated by reference to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-QSB
for the quarter ended December 31, 1999, SEC File
No. 0-23837.
|
|
3
|
.2
|
|
Restated Bylaws incorporated by reference to
Exhibit 3.2 of the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2007, SEC File
No. 0-23837.
|
|
4
|
|
|
Rights Agreement, dated as of April 5, 1999, between the
Company and Firstar Bank Milwaukee, NA., as Rights Agent,
including as: Exhibit A Statement of Designation of
Series A Preferred Stock of the Company; Exhibit B
Summary of Rights to Purchase Shares of Series A Preferred
Stock; and Exhibit C Form of Right Certificate
incorporated by reference to Exhibit 1 to the
Companys Registration of Securities on
Form 8-A,
SEC File
No. 0-23837.
|
|
10
|
.1*
|
|
Companys Incentive 1997 Stock Option Plan, including
specimen of Incentive Stock Option Agreement
incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
form SB-2,
Reg.
No. 333-43217.
|
|
10
|
.2*
|
|
Form of Restricted Stock Agreement under 1997 Plan
incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on
form SB-2,
Reg.
No. 333-43217.
|
|
10
|
.3*
|
|
Form of Non-qualified Stock Option Agreement under 1997
Plan incorporated by reference to Exhibit 10.5
to the Companys Registration Statement on
form SB-2,
Reg.
No. 333-43217.
|
|
10
|
.4
|
|
Adjusted License Agreement by and between the Company and Cordis
Corporation effective as of January 1, 2003
incorporated by reference to Exhibit 10.11 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2002, SEC File
No. 0-23837.
|
|
10
|
.5
|
|
Reagent Supply Agreement by and between the Company and Cordis
Corporation effective as of January 1, 2003
incorporated by reference to Exhibit 10.12 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2002, SEC File
No. 0-23837.
|
|
10
|
.6*
|
|
Form of officer acceptance regarding
employment/compensation incorporated by reference to
Exhibit 10.9 to the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2005, SEC File
No. 0-23837.
|
|
10
|
.7*
|
|
2003 Equity Incentive Plan (as amended and restated
December 13, 2005) (adopted December 13, 2005 by the
board of directors and approved by the shareholders on
January 30, 2006) incorporated by reference to
Exhibit 10.1 to the Companys
Form 8-K
filed February 3, 2006, SEC File
No. 0-23837.
|
|
10
|
.8*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Nonqualified
Stock Option Agreement incorporated by reference to
Exhibit 99.1 to the Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.9*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Incentive
Stock Option Agreement incorporated by reference to
Exhibit 99.2 to the Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.10*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted
Stock Agreement incorporated by reference to
Exhibit 99.3 to the Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.11*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Performance
Share Award Agreement incorporated by reference to
Exhibit 99.4 to the Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
50
|
|
|
|
|
Exhibit
|
|
|
|
|
10
|
.12*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Performance
Unit Award (cash settled) Agreement incorporated by
reference to Exhibit 99.5 to the Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.13*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Restricted
Stock Unit Agreement incorporated by reference to
Exhibit 99.6 to the Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.14*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Stock
Appreciation Rights (cash settled) Agreement
incorporated by reference to Exhibit 99.7 to the
Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.15*
|
|
Form of SurModics, Inc. 2003 Equity Incentive Plan Stock
Appreciation Rights (stock settled) Agreement
incorporated by reference to Exhibit 99.8 to the
Companys
8-K filed
March 20, 2006, SEC File
No. 0-23837.
|
|
10
|
.16*
|
|
Change in Control Agreement with Bruce J Barclay, dated
April 19, 2006 incorporated by reference to
Exhibit 99.1 to the Companys
Form 8-K
filed April 25, 2006, SEC File
No. 0-23837.
|
|
10
|
.17*
|
|
Change in Control Agreement with Philip D. Ankeny, dated
April 19, 2006 incorporated by reference to
Exhibit 99.2 to the Companys
Form 8-K
filed April 25, 2006, SEC File
No. 0-23837.
|
|
10
|
.18
|
|
The Companys Board Compensation Policy, Amended and
Restated in its entirety as of May 19, 2008.**
|
|
10
|
.19*
|
|
Change in Control Agreement with Paul A. Lopez, dated
November 15, 2006 incorporated by reference to
Exhibit 10.27 to the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2006, SEC File
No. 0-23837.
|
|
10
|
.20*
|
|
Description of certain retirement benefits for Dale R.
Olseth incorporated by reference to
Exhibit 10.28 to the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2006, SEC File
No. 0-23837.
|
|
10
|
.21+
|
|
Exclusive License and Research Collaboration Agreement with
Merck & Co., Inc. dated June 26, 2007
incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007, SEC File
No. 0-23837.
|
|
10
|
.22+
|
|
Supply Agreement with Merck & Co., Inc. dated
June 26, 2007 incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007, SEC File
No. 0-23837.
|
|
10
|
.23*
|
|
Employment Agreement of Arthur J. Tipton, Ph.D., dated
July 31, 2007 incorporated by reference to
Exhibit 10.27 to the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
10
|
.24
|
|
Purchase Agreement with Vest Mykyng LLC, dated August 24,
2007 incorporated by reference to Exhibit 10.28
to the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
10
|
.25
|
|
Real Estate Purchase and Sale Agreement dated March 11,
2008 by and between Belk, Inc. and Brookwood Pharmaceuticals,
Inc. incorporated by reference to Exhibit 10.1
to the Companys Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2008, SEC File
No. 0-23837.
|
|
21
|
|
|
Subsidiaries of the Registrant.**
|
|
23
|
|
|
Consent of Deloitte & Touche LLP.**
|
|
24
|
|
|
Power of Attorney (included on signature page of this
Form 10-K).**
|
|
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.**
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
|
** |
|
Filed herewith |
|
+ |
|
Confidential treatment requested as to portions of the exhibit.
Confidential portions omitted and provided separately to the
Securities and Exchange Commission. |
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SurModics, Inc.
Eden Prairie, Minnesota
We have audited the accompanying consolidated balance sheets of
SurModics, Inc. and subsidiaries (the Company) as of
September 30, 2008 and 2007, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
September 30, 2008. These financial statements and
financial statement schedules are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
SurModics, Inc. and subsidiaries as of September 30, 2008
and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
September 30, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated December 8, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
As discussed in Note 5 to the consolidated financial
statements, on October 1, 2007, the Company adopted
Statement of Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 8, 2008
F-1
SurModics,
Inc. and Subsidiaries
Consolidated
Balance Sheets
As of
September 30
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,376
|
|
|
$
|
13,812
|
|
Short-term investments
|
|
|
9,251
|
|
|
|
12,496
|
|
Accounts receivable, net of allowance for doubtful accounts of
$135 and $40 as of September 30, 2008 and 2007, respectively
|
|
|
14,589
|
|
|
|
16,138
|
|
Inventories
|
|
|
2,651
|
|
|
|
2,497
|
|
Deferred tax asset
|
|
|
1,058
|
|
|
|
1,116
|
|
Prepaids and other
|
|
|
3,584
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
46,509
|
|
|
|
47,895
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
41,897
|
|
|
|
19,738
|
|
Long-term investments
|
|
|
47,351
|
|
|
|
43,917
|
|
Deferred tax asset
|
|
|
11,099
|
|
|
|
5,908
|
|
Intangible assets, net
|
|
|
16,870
|
|
|
|
18,399
|
|
Goodwill
|
|
|
18,001
|
|
|
|
15,686
|
|
Other assets, net
|
|
|
9,301
|
|
|
|
19,788
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
191,028
|
|
|
$
|
171,331
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,466
|
|
|
$
|
2,541
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
3,015
|
|
|
|
3,137
|
|
Accrued income taxes payable
|
|
|
|
|
|
|
6,227
|
|
Accrued other
|
|
|
1,407
|
|
|
|
1,050
|
|
Deferred revenue
|
|
|
4,335
|
|
|
|
5,586
|
|
Other current liabilities
|
|
|
303
|
|
|
|
1,311
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
12,526
|
|
|
|
19,852
|
|
Deferred revenue, less current portion
|
|
|
33,243
|
|
|
|
20,305
|
|
Other long-term liabilities
|
|
|
3,453
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
49,222
|
|
|
|
40,409
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
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; 18,030,270 and
18,164,980 shares issued and outstanding
|
|
|
901
|
|
|
|
909
|
|
Additional paid-in capital
|
|
|
74,573
|
|
|
|
76,670
|
|
Accumulated other comprehensive income (loss)
|
|
|
(107
|
)
|
|
|
1,723
|
|
Retained earnings
|
|
|
66,439
|
|
|
|
51,620
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
141,806
|
|
|
|
130,922
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
191,028
|
|
|
$
|
171,331
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
SurModics,
Inc. and Subsidiaries
Consolidated
Statements of Income
For the
Years Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except net
|
|
|
|
income per share)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties and license fees
|
|
$
|
51,788
|
|
|
$
|
52,679
|
|
|
$
|
53,008
|
|
Product sales
|
|
|
20,052
|
|
|
|
13,543
|
|
|
|
11,172
|
|
Research and development
|
|
|
25,211
|
|
|
|
6,942
|
|
|
|
5,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
97,051
|
|
|
|
73,164
|
|
|
|
69,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
8,476
|
|
|
|
5,584
|
|
|
|
3,399
|
|
Research and development
|
|
|
40,498
|
|
|
|
28,465
|
|
|
|
20,391
|
|
Selling, general and administrative
|
|
|
20,816
|
|
|
|
13,643
|
|
|
|
9,931
|
|
Purchased in-process research and development
|
|
|
|
|
|
|
15,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
69,790
|
|
|
|
63,265
|
|
|
|
33,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
27,261
|
|
|
|
9,899
|
|
|
|
36,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net
|
|
|
3,329
|
|
|
|
4,844
|
|
|
|
4,210
|
|
Impairment loss on investment
|
|
|
(4,314
|
)
|
|
|
|
|
|
|
(4,651
|
)
|
Other income (loss), net
|
|
|
616
|
|
|
|
(75
|
)
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
|
(369
|
)
|
|
|
4,769
|
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
26,892
|
|
|
|
14,668
|
|
|
|
35,565
|
|
Income Tax Provision
|
|
|
(12,153
|
)
|
|
|
(11,321
|
)
|
|
|
(15,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
14,739
|
|
|
$
|
3,347
|
|
|
$
|
20,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.82
|
|
|
$
|
0.19
|
|
|
$
|
1.10
|
|
Diluted net income per share
|
|
$
|
0.80
|
|
|
$
|
0.18
|
|
|
$
|
1.09
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,026
|
|
|
|
18,033
|
|
|
|
18,527
|
|
Dilutive effect of outstanding stock options
|
|
|
304
|
|
|
|
184
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
18,330
|
|
|
|
18,217
|
|
|
|
18,719
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SurModics,
Inc. and Subsidiaries
Consolidated
Statements of Stockholders Equity
For the
Years Ended September 30, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance September 30, 2005
|
|
|
18,536
|
|
|
$
|
927
|
|
|
$
|
89,721
|
|
|
$
|
(2,621
|
)
|
|
$
|
(360
|
)
|
|
$
|
27,914
|
|
|
$
|
115,581
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,334
|
|
|
|
20,334
|
|
Unrealized holding losses on available-for- sale securities
arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
(31
|
)
|
Add reclassification for losses included in net income, net of
tax benefit of $59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
75
|
|
|
|
4
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399
|
|
Common stock options exercised, net
|
|
|
169
|
|
|
|
8
|
|
|
|
2,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,862
|
|
Purchase of common stock to pay employee taxes
|
|
|
50
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
5,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,526
|
|
Accounting change due to adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(2,461
|
)
|
|
|
2,621
|
|
|
|
|
|
|
|
25
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2006
|
|
|
18,830
|
|
|
|
942
|
|
|
|
96,281
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
48,273
|
|
|
|
145,203
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,347
|
|
|
|
3,347
|
|
Unrealized holding gains on available-for-sale securities
arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,999
|
|
|
|
|
|
|
|
1,999
|
|
Add reclassification for losses included in net income, net of
tax benefit of $10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
14
|
|
|
|
1
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
Common stock repurchased
|
|
|
(1,008
|
)
|
|
|
(50
|
)
|
|
|
(34,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,030
|
)
|
Common stock options exercised, net
|
|
|
217
|
|
|
|
11
|
|
|
|
4,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,789
|
|
Purchase of common stock to pay employee taxes
|
|
|
112
|
|
|
|
5
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374
|
)
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
10,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,312
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2007
|
|
|
18,165
|
|
|
|
909
|
|
|
|
76,670
|
|
|
|
|
|
|
|
1,723
|
|
|
|
51,620
|
|
|
|
130,922
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,739
|
|
|
|
14,739
|
|
Unrealized holding losses on available-for-sale securities
arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,882
|
)
|
|
|
|
|
|
|
(5,882
|
)
|
Add reclassification for losses included in net income, net of
tax provision of $167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,052
|
|
|
|
|
|
|
|
4,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
16
|
|
|
|
1
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
517
|
|
Common stock repurchased
|
|
|
(342
|
)
|
|
|
(17
|
)
|
|
|
(13,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,971
|
)
|
Common stock options exercised, net
|
|
|
114
|
|
|
|
4
|
|
|
|
2,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,518
|
|
Purchase of common stock to pay employee taxes
|
|
|
77
|
|
|
|
4
|
|
|
|
(1,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,674
|
)
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,081
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
9,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,652
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(228
|
)
|
Accounting change due to adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2008
|
|
|
18,030
|
|
|
$
|
901
|
|
|
$
|
74,573
|
|
|
$
|
|
|
|
$
|
(107
|
)
|
|
$
|
66,439
|
|
|
$
|
141,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SurModics,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For the
Years Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,739
|
|
|
$
|
3,347
|
|
|
$
|
20,334
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,071
|
|
|
|
4,214
|
|
|
|
3,710
|
|
Loss on equity method investments and sales of investments
|
|
|
415
|
|
|
|
75
|
|
|
|
157
|
|
Amortization of (discount) premium on investments
|
|
|
70
|
|
|
|
(1,388
|
)
|
|
|
(1,534
|
)
|
Impairment loss on investment
|
|
|
4,314
|
|
|
|
|
|
|
|
4,651
|
|
Stock-based compensation
|
|
|
9,652
|
|
|
|
10,312
|
|
|
|
5,711
|
|
Purchased in-process research and development
|
|
|
|
|
|
|
15,573
|
|
|
|
|
|
Deferred tax
|
|
|
(3,428
|
)
|
|
|
(9,434
|
)
|
|
|
(2,134
|
)
|
Tax benefit from exercise of stock options
|
|
|
(1,081
|
)
|
|
|
(466
|
)
|
|
|
(249
|
)
|
Loss (gain) on disposals of property and equipment
|
|
|
78
|
|
|
|
379
|
|
|
|
(169
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,548
|
|
|
|
1,940
|
|
|
|
(3,497
|
)
|
Inventories
|
|
|
(154
|
)
|
|
|
(850
|
)
|
|
|
139
|
|
Accounts payable and accrued liabilities
|
|
|
(264
|
)
|
|
|
2,594
|
|
|
|
(532
|
)
|
Income taxes
|
|
|
(5,003
|
)
|
|
|
5,501
|
|
|
|
5,799
|
|
Deferred revenue
|
|
|
11,452
|
|
|
|
19,166
|
|
|
|
2,489
|
|
Prepaids and other
|
|
|
1,413
|
|
|
|
(248
|
)
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
39,822
|
|
|
|
50,715
|
|
|
|
35,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(23,866
|
)
|
|
|
(3,626
|
)
|
|
|
(5,857
|
)
|
Sales of property and equipment
|
|
|
32
|
|
|
|
37
|
|
|
|
238
|
|
Purchases of available-for-sale investments
|
|
|
(22,857
|
)
|
|
|
(136,498
|
)
|
|
|
(193,966
|
)
|
Sales/maturities of available-for-sale investments
|
|
|
29,258
|
|
|
|
185,075
|
|
|
|
161,778
|
|
Purchases of held-to-maturity investments
|
|
|
(6,485
|
)
|
|
|
|
|
|
|
|
|
Investment in other strategic assets
|
|
|
(2,562
|
)
|
|
|
(5,749
|
)
|
|
|
(160
|
)
|
Purchase of licenses and patents
|
|
|
(2,452
|
)
|
|
|
(1,355
|
)
|
|
|
(1,592
|
)
|
Acquisitions, net of cash acquired
|
|
|
(3,219
|
)
|
|
|
(49,112
|
)
|
|
|
|
|
Repayment of notes receivable
|
|
|
5,870
|
|
|
|
530
|
|
|
|
600
|
|
Other investing activities
|
|
|
(228
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(26,509
|
)
|
|
|
(10,963
|
)
|
|
|
(38,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
1,081
|
|
|
|
466
|
|
|
|
249
|
|
Issuance of common stock
|
|
|
3,037
|
|
|
|
5,247
|
|
|
|
3,261
|
|
Repurchase of common stock
|
|
|
(13,971
|
)
|
|
|
(35,030
|
)
|
|
|
|
|
Issuance of common stock to pay employee taxes
|
|
|
(1,674
|
)
|
|
|
(374
|
)
|
|
|
|
|
Repayment of notes payable
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(11,749
|
)
|
|
|
(29,691
|
)
|
|
|
3,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
1,564
|
|
|
|
10,061
|
|
|
|
(170
|
)
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
13,812
|
|
|
|
3,751
|
|
|
|
3,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
15,376
|
|
|
$
|
13,812
|
|
|
$
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
21,058
|
|
|
$
|
14,930
|
|
|
$
|
11,338
|
|
Noncash proceeds from sale of property
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,655
|
|
Noncash transaction acquisition of property, plant,
and equipment on account
|
|
$
|
1,745
|
|
|
$
|
252
|
|
|
$
|
989
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
SurModics, Inc. (the Company) develops, manufactures and markets
innovative drug delivery and surface modification technologies
for the healthcare industry. The Companys revenue is
derived from three primary sources: (1) royalties and
license fees from licensing its patented drug delivery and
surface modification technologies and in vitro
diagnostic formats to customers; (2) the sale of
polymers and reagent chemicals to licensees; substrates,
antigens and stabilization products to the diagnostics industry;
microarray slides to the diagnostic and biomedical research
markets; and synthetic ECM products to the cell culture market;
and (3) research and development fees generated on projects
for customers.
Basis
of Presentation
The consolidated financial statements include all accounts and
wholly-owned subsidiaries, and have been prepared in accordance
with accounting principles generally accepted in the United
States of America. All significant inter-company transactions
have been eliminated.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Cash
and Cash Equivalents
Cash and cash equivalents consist principally of money market
instruments with original maturities of three months or less and
are stated at cost which approximates fair value.
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
September 30, 2008. There were no investments classified as
held-to-maturity at September 30, 2007. 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.
F-6
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The original cost, unrealized holding gains and losses, and fair
value of available-for-sale investments as of September 30 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Original Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
U.S. government obligations
|
|
$
|
18,440
|
|
|
$
|
91
|
|
|
$
|
(87
|
)
|
|
$
|
18,444
|
|
Mortgage-backed securities
|
|
|
10,147
|
|
|
|
46
|
|
|
|
(179
|
)
|
|
|
10,014
|
|
Municipal bonds
|
|
|
11,022
|
|
|
|
153
|
|
|
|
(3
|
)
|
|
|
11,172
|
|
Asset-backed securities
|
|
|
6,193
|
|
|
|
2
|
|
|
|
(171
|
)
|
|
|
6,024
|
|
Corporate bonds
|
|
|
4,582
|
|
|
|
8
|
|
|
|
(33
|
)
|
|
|
4,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,384
|
|
|
$
|
300
|
|
|
$
|
(473
|
)
|
|
$
|
50,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Original Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
U.S. government obligations
|
|
$
|
19,744
|
|
|
$
|
101
|
|
|
$
|
(65
|
)
|
|
$
|
19,780
|
|
Mortgage-backed securities
|
|
|
14,814
|
|
|
|
83
|
|
|
|
(56
|
)
|
|
|
14,841
|
|
Municipal bonds
|
|
|
11,985
|
|
|
|
49
|
|
|
|
(36
|
)
|
|
|
11,998
|
|
Asset-backed securities
|
|
|
8,899
|
|
|
|
14
|
|
|
|
(39
|
)
|
|
|
8,874
|
|
Corporate bonds
|
|
|
915
|
|
|
|
5
|
|
|
|
0
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,357
|
|
|
$
|
252
|
|
|
$
|
(196
|
)
|
|
$
|
56,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The original cost and fair value of investments by contractual
maturity at September 30, 2008 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Original Cost
|
|
|
Fair Value
|
|
|
Debt securities due within:
|
|
|
|
|
|
|
|
|
One year
|
|
$
|
9,261
|
|
|
$
|
9,250
|
|
One to five years
|
|
|
31,909
|
|
|
|
31,865
|
|
Five years or more
|
|
|
9,214
|
|
|
|
9,096
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,384
|
|
|
$
|
50,211
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes sales of available-for-sale
securities for the years ended September 30, 2008, 2007 and
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Proceeds from sales
|
|
$
|
29,258
|
|
|
$
|
185,075
|
|
|
$
|
161,778
|
|
Gross realized gains
|
|
$
|
454
|
|
|
$
|
7
|
|
|
$
|
24
|
|
Gross realized losses
|
|
$
|
(26
|
)
|
|
$
|
(34
|
)
|
|
$
|
(181
|
)
|
At September 30, 2008, the amortized cost and fair market
value of held-to-maturity debt securities was $6.4 million
and $6.3 million, respectively. Investments in securities
designated as held-to-maturity consist of tax-exempt municipal
bonds and have maturity dates ranging between one and five years
from September 30, 2008.
F-7
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
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 as of September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
1,308
|
|
|
$
|
1,241
|
|
Finished products
|
|
|
1,343
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,651
|
|
|
$
|
2,497
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment are stated at cost and are depreciated
using the straight-line method over 3 to 32 years, the
estimated useful lives of the assets. The Company recorded
depreciation expense of $3.1 million, $2.2 million and
$2.0 million for the years ended September 30, 2008,
2007 and 2006, respectively.
The September 30, 2008 and 2007 balances in
construction-in-progress
include the cost of enhancing the capabilities of the
Companys Eden Prairie, Minnesota and Birmingham, Alabama
facilities. As assets are placed in service,
construction-in-progress
is transferred to the specific property and equipment categories
and depreciated over the estimated useful lives of the assets.
In April 2008, the Company acquired a 286,000 square foot
facility situated on 42 acres located in Birmingham,
Alabama for $12.2 million. The Company plans to remodel the
existing facility to accommodate research and development,
clinical manufacturing and commercial manufacturing of drug
delivery products for pharmaceutical and biotechnology
customers. The building is currently classified in
construction-in-progress
until renovation and remodeling is completed. The value of the
land associated with the purchase is classified as part of the
total land carrying value.
In August 2008, the Company also acquired approximately five
acres of undeveloped land adjacent to its headquarters in Eden
Prairie, Minnesota for approximately $3.6 million. The
value of the land purchase is classified as part of the total
land carrying value.
Property and equipment consisted of the following components as
of September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
$
|
7,409
|
|
|
$
|
1,699
|
|
Laboratory fixtures and equipment
|
|
|
3 to 10
|
|
|
|
15,767
|
|
|
|
13,673
|
|
Building and improvements
|
|
|
3 to 32
|
|
|
|
15,025
|
|
|
|
14,920
|
|
Office furniture and equipment
|
|
|
3 to 10
|
|
|
|
4,156
|
|
|
|
3,940
|
|
Construction-in-progress
|
|
|
|
|
|
|
16,931
|
|
|
|
1,244
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(17,391
|
)
|
|
|
(15,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
41,897
|
|
|
$
|
19,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
Other assets consist principally of strategic investments and a
note receivable. In fiscal 2008, the balance in other assets
decreased primarily as a result of repayment of the note
receivable and a write-down in the value of the Companys
investment in OctoPlus N.V., offset by an increase in the
Companys investment in Nexeon MedSystems, Inc., formerly
Paragon Intellectual Properties, LLC.
F-8
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In January 2005, the Company made an equity investment of
approximately $3.9 million in OctoPlus N.V., a privately
owned company based in the Netherlands active in the development
of pharmaceutical formulations incorporating novel biodegradable
polymers. In May 2006, the Company made an additional investment
of $160,000. As of September 30, 2006 the $4.1 million
investment, which was accounted for under the cost method,
represented an ownership interest of less than 20%. In October
2006, the Company made an additional investment of
$1.9 million in OctoPlus N.V.. Also in October 2006,
OctoPlus N.V. common stock began trading on an international
exchange following an initial public offering of its common
stock. With a readily determinable fair market value, the
Company now treats the investment in OctoPlus N.V. as an
available-for-sale investment rather than a cost method
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 Consolidated Statements of Income, and result in
a new cost basis for the investment. As of September 30,
2008, the investment in OctoPlus N.V. represents an ownership
interest of less than 10%. The Company recognized in fiscal 2008
an impairment loss on the investment totaling $4.3 million
based on a significant decline in the stock price of Octoplus
N.V. as a result of current market conditions. The new cost
basis in OctoPlus N.V. is $1.7 million which is also the
fair value of the investment. The Company recorded no realized
gain or loss related to this investment in fiscal 2007.
In May 2005, the Company invested $1.0 million in
ThermopeutiX, an early stage company developing novel medical
devices for the treatment of vascular and neurovascular
diseases, including stroke. In addition to the investment,
SurModics has licensed its hydrophilic and hemocompatible
coating technologies to ThermopeutiX for use with its devices.
In fiscal 2007, the Company invested an additional $185,000 in
ThermopeutiX. The Companys investment in ThermopeutiX,
which is accounted for under the cost method, represents an
ownership interest of less than 20%.
In September 2005, the Company entered into an agreement to sell
a contract manufacturing facility and 27 acres of land
located in Bloomington, Minnesota. The terms of the sale
agreement included a $100,000 cash down payment and a note
receivable of $6.9 million, which was collateralized by the
property. The terms of the note called for monthly installment
payments of principal and interest at 6% with the remaining
amount due and payable in September 2010. On January 14,
2008, the outstanding balance (including principal and accrued
interest) of $5.8 million was repaid to the Company in its
entirety.
The Company has invested a total of $5.2 million in
Novocell, Inc., a privately-held Irvine, California-based
biotechnology firm that is developing a unique treatment for
diabetes using coated islet cells, the cells that produce
insulin in the human body. In fiscal 2006, the Company
determined its investment in Novocell was impaired and that the
impairment was other-than-temporary. Accordingly, the Company
recorded an impairment loss of $4.7 million. The balance of
the investment, $559,000, which is accounted for under the cost
method, represents less than a 5% ownership interest.
In July 2007, the Company made equity investments in Paragon
Intellectual Properties, LLC (Paragon) and Apollo
Therapeutics, LLC (Apollo), a Paragon subsidiary.
The Paragon and Apollo investments totaled $3.5 million.
SurModics made an additional equity investment totaling
$2.5 million, based upon successful completion of specified
development milestones, in the third quarter of fiscal 2008. The
investment in Paragon represents an ownership interest of
approximately 5% and the investment in Apollo represents an
ownership interest of 20%. In addition to the investments, the
Company has licensed its
Finaletm
prohealing coating technology and provides development services
on a time and materials basis to Apollo. The Company accounts
for the investments in Paragon and Apollo under the equity
method. In October 2008, Paragon announced that it had
restructured, moving from a limited liability company with seven
subsidiaries to a single C-corporation named Nexeon MedSystems,
Inc. SurModics will continue to account for the investments in
Paragon and Apollo under the equity method in the first quarter
of fiscal 2009, as both entities report results to us on a
one-quarter lag. Commencing with the second quarter of fiscal
2009, SurModics expects to account for the investment in Nexeon
under the cost method as the Companys ownership level is
less than 20%.
F-9
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Other assets consisted of the following components as of
September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Investment in OctoPlus N.V.
|
|
$
|
1,714
|
|
|
$
|
8,762
|
|
Long-term portion of note receivable
|
|
|
|
|
|
|
5,158
|
|
Investment in Paragon and subsidiary
|
|
|
5,388
|
|
|
|
3,632
|
|
Investment in ThermopeutiX
|
|
|
1,185
|
|
|
|
1,185
|
|
Investment in Novocell
|
|
|
559
|
|
|
|
559
|
|
Other
|
|
|
455
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
$
|
9,301
|
|
|
$
|
19,788
|
|
|
|
|
|
|
|
|
|
|
In the years ended September 30, 2008, 2007 and 2006, the
Company recognized revenue of $4,118,000, $909,000 and $399,000,
respectively, from activity with companies in which it had a
strategic investment.
Intangible
Assets
Intangible assets consist principally of acquired patents and
core technology, customer relationships, licenses, and
trademarks. The Company recorded amortization expense of
$3.0 million, $2.0 million, and $1.7 million for
the years ended September 30, 2008, 2007 and 2006,
respectively.
In September 2004, the Company made a commitment to purchase for
$7 million certain additional sublicense rights and the
accompanying future royalty revenue streams under certain
sublicenses through an amendment to the Companys
diagnostic format patent license with Abbott Laboratories. Prior
to such amendment, the Company was receiving only a portion of
the royalties under such sublicenses. The first $5 million
installment was paid in fiscal 2005, an additional
$1 million installment was paid in fiscal 2007 and the
remaining $1 million installment was paid in fiscal 2008.
In fiscal 2007, the Company acquired Brookwood Pharmaceuticals,
Inc. and BioFX Laboratories, Inc., which resulted in an increase
to intangible assets. See Note 3 for further information
regarding the acquisitions.
Intangible assets consisted of the following as of September 30
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
Customer list
|
|
|
9-11
|
|
|
$
|
7,340
|
|
|
$
|
7,340
|
|
Abbott license
|
|
|
4
|
|
|
|
7,037
|
|
|
|
7,037
|
|
Core technology
|
|
|
8-18
|
|
|
|
6,930
|
|
|
|
6,933
|
|
Patents and other
|
|
|
7-20
|
|
|
|
3,398
|
|
|
|
1,988
|
|
Trademarks
|
|
|
|
|
|
|
580
|
|
|
|
580
|
|
Less accumulated amortization
|
|
|
|
|
|
|
(8,415
|
)
|
|
|
(5,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
$
|
16,870
|
|
|
$
|
18,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the intangible assets in service as of
September 30, 2008, estimated amortization expense for the
next five fiscal years is as follows (in thousands):
|
|
|
|
|
2009
|
|
$
|
1,796
|
|
2010
|
|
|
1,378
|
|
2011
|
|
|
1,378
|
|
2012
|
|
|
1,378
|
|
2013
|
|
|
1,378
|
|
F-10
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Goodwill
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 Companys
acquisitions (described in Note 3). 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.
Impairment
of Long-Lived Assets
The Company periodically evaluates whether events and
circumstances have occurred that may affect the estimated useful
life or the recoverability of the remaining balance of
long-lived assets, such as property and equipment and
investments. If such events or circumstances were to indicate
that the carrying amount of these assets would not be
recoverable, the Company would estimate the future cash flows
expected to result from the use of the assets and their eventual
disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) or other measure of
fair value were less than the carrying amount of the assets, the
Company would recognize an impairment loss reducing the carrying
value to fair market value.
Revenue
Recognition
In accordance with SEC Staff Accounting Bulletin
(SAB) No. 104, 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.
However, when there are additional performance requirements,
revenue is recognized when all such requirements have been
satisfied. Under revenue arrangements with multiple
deliverables, the Company utilizes Emerging Issues Task Force
Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables,
(EITF 00-21)
and recognizes each separable deliverable as it is earned.
Revenue is derived from three primary sources:
(1) royalties and license fees from licensing patented drug
delivery and surface modification technologies and
in vitro diagnostic formats 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.
Taxes collected from customers and remitted to governmental
authorities are excluded from revenue and amounted to $309,000,
$170,000 and $81,000 for the years ended September 30,
2008, 2007 and 2006, respectively.
Royalties & License Fees. The
Company licenses technology to third parties and collects
royalties. Royalty revenue is generated when a customer sells
products incorporating the Companys licensed technologies.
Royalty revenue is recognized as licensees report it to the
Company, and payment is typically submitted concurrently with
the report. Generally, license fees are recognized as revenue
when the Company receives payment and the contract price is
fixed or determinable. 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.
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, involves a significant degree of
risk, and was not reasonably assured at the inception of the
arrangement.
|
|
|
|
Accomplishment of the milestone involves substantial effort.
|
|
|
|
The amount of the milestone payment is commensurate with the
related effort and risk.
|
F-11
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
A reasonable amount of time passes 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 Companys
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. Arrangements such as license and
development agreements are analyzed to determine whether the
deliverables, which often include a license and performance
obligations such as research and development, can be separated
or whether they must be accounted for as a single unit of
accounting in accordance with
EITF 00-21.
The Company recognizes up-front license payments under these
agreements as revenue upon delivery of the license only if the
license has stand-alone value and the fair value of the
undelivered performance obligations can be determined. If the
fair value of the undelivered performance obligations can be
determined, such obligations would then be accounted for
separately. If the license is considered to either (i) not
have stand-alone value or (ii) have stand-alone value but
the fair value of any of the undelivered performance obligations
cannot be determined, the arrangement would then be accounted
for as a single unit of accounting, and the license payments and
payments for performance obligations would be recognized as
revenue over the estimated period of when the performance
obligations are performed, or the economic life of the
technology licensed to the customer. When the Company determines
that an arrangement should be accounted for as a single unit of
accounting, it recognizes the related revenue based on a
time-based accounting model. Revenue associated with
arrangements with multiple deliverables totaled
$4.2 million and $0.3 million in fiscal 2008 and 2007,
respectively.
Merck Agreement. On June 27, 2007 the
Company announced a license and research collaboration agreement
with Merck & Co., Inc. (Merck). The
agreement calls for SurModics and Merck to pursue the joint
development and commercialization of SurModics I-vation
sustained drug delivery system with TA (triamcinolone
acetonide), and other products combining certain of Mercks
proprietary drug compounds and the I-vation system for the
treatment of serious retinal diseases. Under the terms of the
agreement, Merck will lead and fund development and
commercialization activities. SurModics received an up-front
license fee of $20 million in fiscal 2007 and additional
license fees totaling $11 million in fiscal 2008. In
addition, the Company is paid for its activities in researching
and developing the combination products. Research and
development fees totaling $5.8 million were billed in
fiscal 2008. The Company has recognized out-of-pocket
reimbursements, totaling $1.6 million in fiscal 2008, as
revenue in the period as the related costs are incurred as
commensurate value is transferred to Merck in exchange for the
reimbursement received.
The Company is recognizing revenue from the up-front license
fee, additional license fees and research and development fees
over the economic life of the technology licensed to Merck,
which is 16 years. As of September 30, 2008 and 2007,
$34.8 million and $20.6 million, respectively, of
license fees and research and development fees remained in
deferred revenue.
In September 2008, following a strategic review of Mercks
business and product development portfolio, Merck gave notice to
SurModics of its intent to terminate the collaborative research
and license agreement as well as the supply agreement entered
into in June 2007. The termination is expected to be effective
December 16, 2008. The Company anticipates that the revenue
deferred under the accounting treatment required by
EITF 00-21
totaling $34.8 million as of September 30, 2008, will
be recognized in the first quarter of fiscal 2009; however,
there is no certainty that the contract will terminate at that
time. In addition, the Company anticipates recognizing a
$9 million
F-12
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
milestone payment from Merck associated with the termination of
the triamcinolone acetonide development program. This program
terminated 30 days following the notice given in September
2008 and this revenue also is expected to be recognized in the
first quarter of fiscal 2009 following effectiveness of
Mercks termination.
Deferred
Revenue
Amounts received prior to satisfying the above revenue
recognition criteria are recorded as deferred revenue in the
accompanying consolidated balance sheets, with deferred revenue
to be recognized beyond one year being classified as non-current
deferred revenue. As of September 30, 2008 and 2007, the
Company recorded deferred revenue of $37.6 million and
$25.9 million, respectively.
Costs related to products and services delivered are recognized
in the period revenue is recognized except for services related
to the Merck agreement, which are recognized as incurred.
Customer advances are accounted for as a liability until all
criteria for revenue recognition have been met.
Research
and Development
Research and development costs are expensed as incurred. Some
research and development costs are related to third party
contracts, and the related revenue is recognized as described in
Revenue Recognition above.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Ultimate results could
differ from those estimates.
New
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value
Measurements. This statement establishes a consistent framework
for measuring fair value and expands disclosures on fair value
measurements. SFAS No. 157 is effective for the
Company in fiscal 2009. FASB Staff Position
No. FAS 157-2
provides a deferral of SFAS No. 157 provisions for
non-financial assets and liabilities until fiscal 2010. The
Company is currently evaluating the impact the adoption of this
statement will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to choose
to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be reported in earnings.
SFAS No. 159 is effective for the Company in fiscal
2009. The Company has determined that the adoption of this
statement will not have a material effect on the Companys
consolidated financial statements as the Company has elected not
to account for any additional financial assets or financial
liabilities at fair value.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS No. 141(R)),
which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the
recognition and measurement of goodwill acquired in a business
combination. SFAS No. 141(R) is effective for the
Company in fiscal 2010. Earlier adoption is prohibited and, once
adopted, SFAS No. 141(R) will impact recognition and
measurement of future business combinations.
No other new accounting pronouncement issued or effective has
had, or is expected to have, a material impact on the
Companys consolidated financial statements.
F-13
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Brookwood Pharmaceuticals, Inc. On
July 31, 2007, the Company entered into a stock purchase
agreement with Southern Research Institute (SRI)
whereby it acquired 100% of the capital stock of Brookwood
Pharmaceuticals, Inc. (Brookwood) held by SRI for
$42.3 million consisting of $40 million in cash on the
closing date and $2.3 million in transaction costs. SRI
could receive up to an additional $22 million in cash upon
the successful achievement of specified milestones. In the
second quarter of fiscal 2008, a milestone was achieved and
$2 million of additional purchase price was recorded as an
increase to goodwill. Brookwood is a drug delivery company based
in Birmingham, Alabama that provides proprietary polymer-based
technologies to companies developing pharmaceutical products.
Brookwood, a wholly owned subsidiary of SurModics, operates as a
separate business unit within the Drug Delivery operating
segment. Management believes this acquisition strengthens
SurModics portfolio of drug delivery technologies for the
pharmaceutical and biotechnology industries in particular.
Operating results of Brookwood have been included in the
Companys consolidated financial statements since
August 1, 2007.
The purchase price was allocated to the fair value of the net
tangible and intangible assets acquired and liabilities assumed,
with the excess purchase price over fair value allocated to
goodwill. The purchase price was allocated as follows as of
July 31, 2007 (in thousands):
|
|
|
|
|
Net working capital
|
|
$
|
5,348
|
|
Property and equipment
|
|
|
7,300
|
|
Core technology
|
|
|
6,400
|
|
Customer relationships
|
|
|
2,900
|
|
Other assets and liabilities, net
|
|
|
(4,182
|
)
|
In-process research and development
|
|
|
15,706
|
|
Goodwill
|
|
|
8,839
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
42,311
|
|
|
|
|
|
|
The acquired developed technology is amortized on a
straight-line basis over 18 years, and customer
relationships are amortized over 11 years. The weighted
average life of the developed technology and customer
relationships is 15.8 years. Goodwill resulting from this
transaction is not deductible for tax purposes.
As part of the acquisition, the Company recognized in-process
research and development (IPR&D) of $15.7 million. The
IPR&D was expensed on the date of acquisition and relates
to polymer-based drug delivery systems. The value assigned to
IPR&D is related to projects for which the related products
have not received commercial feasibility and have no future
alternative use. The amount of purchase price allocated to
IPR&D was based on estimating the future cash flows of each
project and discounting the net cash flows back to their present
values. The discount rate used was determined at the time of
acquisition in accordance with accepted valuation methods. These
methodologies include consideration of the risk of the project
not achieving commercial feasibility. The research efforts
ranged from 5% to 50% complete at the date of acquisition. The
Company used a combination of the Relief from Royalty and Excess
Earnings valuation methods to assess the fair value of the
projects with a risk adjusted discount rate of 18%. The Company
determined a combination of the two methods was appropriate
based on the nature of the projects and future cash flow
streams. The research and development work performed is billed
to customers, in most cases, using standard commercial billing
rates which include a reasonable markup. Accordingly, the
Company has no fixed cost obligations to carry projects forward.
There have been no significant changes to the development plans
for the acquired incomplete projects. Significant net cash
inflows would commence with the launches of the projects or
products.
BioFX Laboratories, Inc. On August 13,
2007, the Company acquired 100% of the capital stock of BioFX
Laboratories, Inc. (BioFX), a provider of substrates
to the in vitro diagnostics industry, for
$11.6 million, $11.3 million of which was in cash to
the sellers and $300,000 in transaction costs. The Company is
also required to pay up to an additional $11.4 million in
cash upon the successful achievement of specified revenue
targets. In the
F-14
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
first quarter of fiscal 2008, a milestone was achieved and
$1.1 million of additional purchase price was recorded as
an increase to goodwill. BioFX is a wholly owned subsidiary of
SurModics, and operates within the In Vitro Technologies
business unit within the In Vitro operating segment. Management
believes the acquisition enhances the Companys
technological position in the in vitro diagnostics
market. Operating results of BioFX have been included in the
Companys consolidated financial statements since
August 14, 2007.
The purchase price was allocated to the fair value of the net
tangible and intangible assets acquired and liabilities assumed,
with the excess purchase price over fair value allocated to
goodwill. The purchase price was allocated as follows as of
August 13, 2007 (in thousands):
|
|
|
|
|
Net working capital
|
|
$
|
1,182
|
|
Property and equipment
|
|
|
155
|
|
Trademarks and trade name
|
|
|
580
|
|
Core technology
|
|
|
530
|
|
Customer relationships
|
|
|
4,440
|
|
Other assets and liabilities, net
|
|
|
(2,134
|
)
|
Goodwill
|
|
|
6,847
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
11,600
|
|
|
|
|
|
|
The acquired core technology is amortized on a straight-line
basis over 8 years, customer relationships are amortized
over 9 years and trademarks and trade name are
indefinite-lived assets and are not amortized. The weighted
average life of the core technology and customer relationships
is 10.3 years. Goodwill resulting from this transaction is
not deductible for tax purposes.
The following unaudited pro forma consolidated condensed
financial results of operations for the fiscal years 2007 and
2006, are presented as if the acquisitions had been completed at
the beginning of each period presented
( in thousands ).
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Pro forma revenue
|
|
$
|
89,708
|
|
|
$
|
84,738
|
|
Pro forma income from operations
|
|
$
|
28,034
|
|
|
$
|
37,393
|
|
Pro forma net income
|
|
$
|
17,735
|
|
|
$
|
18,377
|
|
Pro forma basic earnings per share
|
|
$
|
0.98
|
|
|
$
|
0.99
|
|
Pro forma diluted earnings per shares
|
|
$
|
0.98
|
|
|
$
|
0.98
|
|
InnoRx,
Inc.
In January 2005, the Company entered into a merger agreement
whereby SurModics acquired all of the assets of InnoRx, Inc., an
early stage company developing drug delivery devices and
therapies for the ophthalmology market, by paying approximately
$4.1 million in cash, issuing 600,064 shares of
SurModics common stock to InnoRx stockholders, and agreeing to
issue up to an additional 600,068 shares if certain
development and commercial milestones are met. In July 2005, the
Company issued 60,002 shares of SurModics common
stock to the shareholders of InnoRx upon the successful
completion of the first milestone involving the InnoRx
technology acquired in the purchase of InnoRx. In March 2006,
the Company issued an additional 60,007 shares as a result
of completion of the second milestone. Upon the successful
completion of the remaining development and commercial
milestones involving InnoRx technology acquired in the
transaction, SurModics will be required to issue up to
approximately 480,059 additional shares of its common stock to
the stockholders of InnoRx.
F-15
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Effective October 1, 2005, the Company adopted Statement of
Financial Accounting Standards No. 123(R), Share
Based Payment (SFAS 123(R)), which
requires all share-based payments to be recognized as an
operating expense, based on their fair values, over the
requisite service period. The Companys stock-based
compensation expenses for the years ended September 30 were
allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Product
|
|
$
|
161
|
|
|
$
|
96
|
|
|
$
|
91
|
|
Research and development
|
|
|
3,793
|
|
|
|
5,188
|
|
|
|
2,620
|
|
Selling, general and administrative
|
|
|
5,698
|
|
|
|
5,028
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,652
|
|
|
$
|
10,312
|
|
|
$
|
5,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, approximately $17.4 million
of total unrecognized compensation costs related to non-vested
awards is expected to be recognized over a weighted average
period of approximately 2.0 years.
Stock
Option Plans
The Company uses the Black-Scholes option pricing model to
determine the weighted average fair value of options. The
weighted average fair value of options granted during fiscal
2008, 2007 and 2006 was $14.85, $17.42, and $16.58,
respectively. The assumptions used as inputs in the model for
the years ended September 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rates
|
|
|
2.80
|
%
|
|
|
4.50
|
%
|
|
|
4.70
|
%
|
Expected life
|
|
|
4.6 years
|
|
|
|
5.4 years
|
|
|
|
4.8 years
|
|
Expected volatility
|
|
|
37
|
%
|
|
|
45
|
%
|
|
|
46
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The risk-free interest rate assumption was based on the
U.S. Treasurys 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 Companys experience. Expected
volatility is based on the Companys stock price movement.
Based on managements 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 Companys Incentive Stock Options (ISO) are
granted at a price of at least 100% of the fair market value of
the Common Stock 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. Options 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. Options expire in 7 to 10 years or upon
termination of employment or service as a Board member. Board
member options are 20% immediately vested with the remainder
exercisable at rates of 20% per year commencing one year after
date of grant. Employee options are exercisable at rates of 20%
per year from date of grant, or ranging from 20% to 33% per year
commencing one year after the date of grant depending on the
particular award granted. The Company has authorized
2,400,000 shares for grant under the 2003 Equity Incentive
Plan (the 2003 Plan), of which 239,000 remain
available for future awards. As of September 30, 2008, the
aggregate intrinsic value of the option shares outstanding and
option shares exercisable was $3.1 million and
$2.5 million, respectively. At September 30, 2008, the
average remaining contractual life of options outstanding and
options exercisable was 4.5 and 3.5 years, respectively.
The intrinsic value of options exercised during fiscal 2008,
2007 and 2006 was $2.9 million, $4.4 million and
$3.6 million, respectively.
F-16
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at September 30, 2006
|
|
|
1,510,780
|
|
|
$
|
29.69
|
|
Granted
|
|
|
166,400
|
|
|
|
37.85
|
|
Exercised
|
|
|
(253,060
|
)
|
|
|
25.82
|
|
Forfeited
|
|
|
(22,700
|
)
|
|
|
33.71
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
|
1,401,420
|
|
|
|
31.29
|
|
Granted
|
|
|
392,917
|
|
|
|
41.86
|
|
Exercised
|
|
|
(163,297
|
)
|
|
|
27.45
|
|
Forfeited
|
|
|
(108,250
|
)
|
|
|
33.59
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
1,522,790
|
|
|
$
|
34.26
|
|
Exercisable at September 30, 2008
|
|
|
681,063
|
|
|
$
|
30.23
|
|
Restricted
Stock Awards
The Company has entered into restricted stock agreements with
certain key employees, covering the issuance of Common Stock
(Restricted Stock). Under SFAS 123(R), 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. Compensation
has been recognized for the estimated fair value of the 157,129
common shares and is being charged to income over the vesting
term. Stock compensation expense recognized related to these
awards totaled $2.2 million, $1.2 million and $879,000
during fiscal 2008, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Grant Price
|
|
|
Balance at September 30, 2006
|
|
|
153,000
|
|
|
$
|
32.14
|
|
Granted
|
|
|
83,027
|
|
|
|
42.07
|
|
Vested
|
|
|
(24,836
|
)
|
|
|
37.87
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
34.56
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
206,191
|
|
|
|
35.89
|
|
Granted
|
|
|
12,383
|
|
|
|
42.18
|
|
Vested
|
|
|
(40,336
|
)
|
|
|
38.76
|
|
Forfeited
|
|
|
(21,109
|
)
|
|
|
32.83
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
157,129
|
|
|
$
|
36.06
|
|
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
managements best estimate of the achievement level of the
specified performance objectives and the resulting vesting
amounts. Compensation expense of $1.9 million has been
recognized in fiscal 2008 associated with the fair value of
30,552 one-year Performance Shares and with the estimated fair
value of 30,552 three-year Performance Shares awarded in May
2008 and 7,600 Performance Shares that vested for certain
individuals that met various performance objectives. The Company
recorded compensation expense of $4.8 million in fiscal
2007 related to 132,375 Performance Shares and the Company
recorded compensation expense of $764,000 in fiscal 2006 related
to 21,000 Performance Shares.
F-17
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
1999
Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (Stock
Purchase Plan), the Company is authorized to issue up to
200,000 shares of Common Stock. All full-time and part-time
employees can choose to have up to 10% of their annual
compensation withheld to purchase the Companys Common
Stock at purchase prices defined within the provisions of the
Stock Purchase Plan. As of September 30, 2008 and 2007,
there was $355,000 and $311,000 of employee contributions,
respectively, included in accrued liabilities in the
accompanying consolidated balance sheets. Stock compensation
expense recognized related to the Stock Purchase Plan totaled
$199,000, $156,000 and $162,000 during fiscal 2008, 2007 and
2006, respectively.
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes
(SFAS 109). Under the asset and liability
method prescribed in SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is provided when it
is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of
deferred tax assets depends on the generation of future taxable
income during the period in which related temporary differences
become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and
tax planning strategies in this assessment. Deferred tax assets
and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date of such change.
Income taxes in the accompanying consolidated statements of
income for the years ended September 30 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
13,534
|
|
|
$
|
19,069
|
|
|
$
|
14,701
|
|
State and foreign
|
|
|
1,516
|
|
|
|
1,732
|
|
|
|
1,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
15,050
|
|
|
|
20,801
|
|
|
|
16,202
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,832
|
)
|
|
|
(8,573
|
)
|
|
|
(774
|
)
|
State
|
|
|
(65
|
)
|
|
|
(907
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred benefit
|
|
|
(2,897
|
)
|
|
|
(9,480
|
)
|
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
12,153
|
|
|
$
|
11,321
|
|
|
$
|
15,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The reconciliation of the difference between amounts calculated
at the statutory federal tax rate and the Companys
effective tax rate is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount at statutory federal income tax rate
|
|
$
|
9,387
|
|
|
$
|
5,067
|
|
|
$
|
12,440
|
|
Change due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
715
|
|
|
|
736
|
|
|
|
720
|
|
Other
|
|
|
223
|
|
|
|
(241
|
)
|
|
|
(102
|
)
|
Stock-based compensation
|
|
|
239
|
|
|
|
262
|
|
|
|
365
|
|
Valuation allowance
|
|
|
1,589
|
|
|
|
|
|
|
|
1,808
|
|
Write-off of in-process research and development
|
|
|
|
|
|
|
5,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
12,153
|
|
|
$
|
11,321
|
|
|
$
|
15,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred income taxes consisted of the
following as of September 30 and result from differences in the
recognition of transactions for income tax and financial
reporting purposes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Depreciable assets
|
|
$
|
(4,325
|
)
|
|
$
|
(4,279
|
)
|
Deferred revenue
|
|
|
11,005
|
|
|
|
8,163
|
|
Accruals and reserves
|
|
|
523
|
|
|
|
296
|
|
Stock options
|
|
|
4,397
|
|
|
|
3,938
|
|
Impaired asset
|
|
|
3,318
|
|
|
|
1,733
|
|
Unrealized gains (losses) on investments
|
|
|
66
|
|
|
|
(1,067
|
)
|
Other
|
|
|
571
|
|
|
|
48
|
|
Valuation allowance
|
|
|
(3,398
|
)
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
12,157
|
|
|
|
7,024
|
|
Less current deferred tax asset
|
|
|
(1,058
|
)
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax asset
|
|
$
|
11,099
|
|
|
$
|
5,908
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2008, the Company recorded a $1.6 million
valuation allowance against the potential capital loss created
by the impairment of the Companys investment in OctoPlus
N.V. (see Note 2). In fiscal 2006, the Company recorded a
$1.8 million valuation allowance against the potential
capital loss created by the impairment of the Companys
investment in Novocell (see Note 2). The valuation
allowances were recorded because the Company does not currently
foresee future capital gains within the allowable carry forward
and carry back periods to offset these capital losses when they
were recognized. As such, no tax benefit has been recorded in
the consolidated statements of operations.
The Company adopted the provisions of FASB Interpretation
No. 48 (FIN 48) Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement
No. 109, on October 1, 2007. Upon adoption of
FIN 48, the Company recorded a net $80,000 benefit related
to taxes, which was recorded as an increase to the
October 1, 2007 beginning retained earnings balance.
Unrecognized tax benefits are the differences between a tax
position taken, or expected to be taken in a tax return, and the
benefit recognized for accounting purposes pursuant to
FIN 48. A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Balance at October 1, 2007
|
|
$
|
1,120
|
|
Additions for tax positions for prior years
|
|
|
194
|
|
Additions for tax positions for current year
|
|
|
237
|
|
Settlements with taxing authorities
|
|
|
|
|
Lapse of the statute of limitations
|
|
|
(11
|
)
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
1,540
|
|
|
|
|
|
|
F-19
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The total amount of unrecognized tax benefits including interest
and penalties that, if recognized, would affect the effective
tax rate as of October 1, 2007 and September 30, 2008,
respectively, are $1.1 million and $1.3 million.
Currently, the Company does not expect the liability for
unrecognized tax benefits to change significantly in the next
twelve months with the above balances classified in long-term
liabilities. Interest and penalties related to unrecognized tax
benefits are recorded in income tax expense. As of
October 1, 2007, and September 30, 2008, respectively,
a gross balance of $436,000 and $397,000 for interest and
penalties has been accrued related to the unrecognized tax
benefits balance.
The Company files 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. As of the date of the adoption of FIN 48,
U.S. tax returns for fiscal years ended September 30,
2005, 2006, and 2007 remained subject to examination by federal
tax authorities. Tax returns for state and local jurisdictions
for fiscal years ended September 30, 2003 through 2007
remain subject to examination by state and local tax authorities.
|
|
6.
|
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 Companys 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. In
accordance with SFAS No. 5, Accounting for
Contingencies, 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. While it is not
possible to predict the outcome for most of the actions
discussed below and the Company believes that it has meritorious
defenses against these matters, it is possible that costs
associated with them could have a material adverse impact on the
Companys consolidated earnings, financial condition or
cash flows.
On June 18, 2007, the Company was named as an involuntary
plaintiff in patent litigation between Abbott Laboratories
(Abbott) and Church & Dwight, Inc.
(Church & Dwight). In the litigation,
Abbott is alleging that certain of Church &
Dwights products utilizing lateral flow technology for
diagnostic purposes infringe upon certain of the Companys
patents that have been exclusively licensed to Abbott under the
terms of a license agreement between the Company and Abbott
dated May 30, 1989, as amended and restated (the
License Agreement). The suit was filed in the
U.S. District Court for the Northern District of Illinois
seeking a finding of infringement, monetary damages and
injunctive relief. Pursuant to the terms of the License
Agreement, Abbott is responsible for reimbursing the Company for
at least a portion of its costs and fees incurred in connection
with the suit. A trial has not yet been scheduled.
Alabama Jobs Commitment. In April 2008, the
Company purchased a 286,000 square foot office and
warehouse facility to support CGMP (Current Good Manufacturing
Practice) manufacturing needs of customers and the anticipated
growth of the Brookwood business. At the same time, Brookwood
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 the number
of full-time employees are not generated by June 2012, with an
extension to June 2013 if circumstances or events occur that are
beyond the control of Brookwood or could not have been
reasonably anticipated by Brookwood. As of September 30,
2008 Brookwood has received $1.5 million in connection with
the agreement, and the Company has recorded the payment in other
long-term liabilities.
F-20
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Operating Leases. The Company leases certain
facilities under noncancelable operating lease agreements. Rent
expense for the years ended September 30, 2008, 2007 and
2006 was $773,000, $140,000 and $77,000, respectively. Annual
commitments pursuant to operating lease agreements are as
follows:
|
|
|
|
|
Year Ending September 30,
|
|
|
|
|
2009
|
|
$
|
1,260,000
|
|
2010
|
|
|
1,252,000
|
|
2011
|
|
|
315,000
|
|
2012
|
|
|
125,000
|
|
2013
|
|
|
131,000
|
|
Thereafter
|
|
|
33,000
|
|
|
|
|
|
|
Total Minimum Lease Payments
|
|
$
|
3,116,000
|
|
|
|
|
|
|
|
|
7.
|
Defined
Contribution Plans
|
The Company has 401(k) retirement and savings plans for the
benefit of qualifying employees. The Company matches 50% of each
dollar of the first 6% of the tax deferral elected by each
employee. Company contributions totaling $539,000, $356,000 and
$263,000 have been charged to income for the years ended
September 30, 2008, 2007 and 2006, respectively. The
expense increase in fiscal 2008 reflects the addition of
employees eligible for this benefit as a result of the Brookwood
acquisition.
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. In November 2008, the Company
announced it was changing its operational structure so that the
Company will now be organized into four clinically and market
focused business units: Cardiovascular, Ophthalmology, In Vitro
Technologies, and Brookwood Pharmaceuticals. The Company
believes that this structure will improve the visibility,
marketing and adoption of the Companys broad array of
technologies within specific markets and help its customers in
the medical device, pharmaceutical and life science industries
solve unmet clinical needs. In addition, a new centralized
research and development function has been formed to serve the
needs of the Companys clinically and market focused
business units. Brookwood Pharmaceuticals research and
development operations will remain unchanged.
Prior to November 2008, SurModics managed its business on the
basis of the operating segments noted in the table below, which
were comprised of the Companys seven business units. For
the periods ending September 30, 2008, 2007 and 2006, the
three operating segments are aggregated into one reportable
segment. The Drug Delivery operating segment
contains: (1) the Drug Delivery business unit, which is
responsible for technologies dedicated to site specific delivery
of drugs; (2) the Ophthalmology business unit, which is
dedicated to the advancement of treatments for eye diseases,
such as age-related macular degeneration (AMD) and diabetic
macular edema (DME), two of the leading causes of blindness; and
(3) the Brookwood Pharmaceuticals unit, which provides
proprietary polymer-based technologies to companies developing
improved pharmaceutical products. The Hydrophilic and
Other operating segment consists of three business units:
(1) the Hydrophilic Technologies business unit, which
focuses on enhancing medical devices with advanced lubricious
coatings that facilitate their placement and maneuverability in
the body; (2) the Regenerative Technologies business unit,
which is developing platforms intended to augment or replace
tissue/organ function (e.g., cell encapsulation applications),
or to modify medical devices to facilitate tissue/organ recovery
through natural repair mechanisms (e.g., hemo/biocompatible or
prohealing coatings); and (3) the Orthopedics business
unit, which is committed to innovative solutions for orthopedics
patients using proven SurModics technologies, and creating new
technology solutions to existing patient care gaps in the
orthopedics field. The In Vitro operating segment
contains the In Vitro Technologies
F-21
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
business unit, which includes the Companys microarray
slide technologies, stabilization products, antigens and
substrates for immunoassay diagnostics tests, its
in vitro diagnostic format technology and its
synthetic ECM cell culture products. See Note 9 for
discussion about changes to the Companys operating
segments in fiscal 2009.
Each operating segment has similar economic characteristics,
technology, manufacturing processes, customers, regulatory
environments, and shared infrastructures. 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 revenue over the long-term. The accounting policies
for segment reporting are the same as for the Company as a
whole. Revenue for each operating segment for the years ended
September 30 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Delivery
|
|
$
|
43,939
|
|
|
$
|
26,488
|
|
|
$
|
32,918
|
|
Hydrophilic and Other
|
|
|
31,864
|
|
|
|
26,493
|
|
|
|
22,233
|
|
In Vitro
|
|
|
21,248
|
|
|
|
20,183
|
|
|
|
14,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
97,051
|
|
|
$
|
73,164
|
|
|
$
|
69,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major
Customers
Revenue from customers that equaled or exceeded 10% of total
revenue was as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Johnson & Johnson
|
|
|
20
|
%
|
|
|
33
|
%
|
|
|
47
|
%
|
Abbott Laboratories
|
|
|
10
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
The revenue from each of the customers listed is derived from
all three primary sources: licensing, product sales, and
research and development.
Geographic
Revenue
Geographic revenue was as follows for the years ended September
30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic
|
|
|
79
|
%
|
|
|
81
|
%
|
|
|
84
|
%
|
Foreign
|
|
|
21
|
%
|
|
|
19
|
%
|
|
|
16
|
%
|
In November 2008, Brookwood acquired a portfolio of intellectual
property and collaborative drug delivery projects of PR
Pharmaceuticals, Inc. for approximately $3 million in cash.
The agreement also provides for contingent payments of up to an
additional $6 million based on achievement of certain
future events.
In November 2008, the Company announced changes to its
organizational structure to improve the Companys ability
to meet the growing needs of its customers while more
effectively managing its operations and cost structure. In
connection with the changes, the Company reduced its workforce
by approximately five percent or approximately
15 employees. The Company expects to record a charge in the
range of approximately $1.5 million to $2.3 million
for severance and other costs related to the workforce reduction
as well as costs associated with facilities consolidation. The
Company estimates annual cost savings of approximately
$2 million once the reorganization is fully implemented.
The changes to the Companys business unit structure could
have potential impact on operating segment data effective with
the first quarter of fiscal 2009. Any changes in operating
segments would include restatement of prior period data to
conform with the current reporting structure.
F-22
SurModics,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In November and December 2008 (through December 8, 2008),
the Company repurchased 396,348 shares of common stock for
$9.2 million at an average price of $23.23.
|
|
10.
|
Quarterly
Financial Data (Unaudited)
|
The following is a summary of the unaudited quarterly results
for the years ended September 30, 2008, 2007 and 2006
(in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
23,829
|
|
|
$
|
25,707
|
|
|
$
|
24,276
|
|
|
$
|
23,239
|
|
Income from operations
|
|
|
7,571
|
|
|
|
7,181
|
|
|
|
7,184
|
|
|
|
5,325
|
|
Net income (loss)
|
|
|
5,646
|
|
|
|
5,107
|
|
|
|
4,800
|
|
|
|
(814
|
)
|
Net income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.31
|
|
|
|
0.28
|
|
|
|
0.27
|
|
|
|
(0.05
|
)
|
Diluted
|
|
|
0.31
|
|
|
|
0.28
|
|
|
|
0.26
|
|
|
|
(0.05
|
)
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,740
|
|
|
$
|
17,362
|
|
|
$
|
17,762
|
|
|
$
|
21,300
|
|
Income (loss) from operations
|
|
|
8,109
|
|
|
|
8,085
|
|
|
|
7,518
|
|
|
|
(13,813
|
)
|
Net income (loss)
|
|
|
5,992
|
|
|
|
5,675
|
|
|
|
5,587
|
|
|
|
(13,907
|
)
|
Net income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.32
|
|
|
|
0.31
|
|
|
|
0.31
|
|
|
|
(0.78
|
)
|
Diluted
|
|
|
0.32
|
|
|
|
0.31
|
|
|
|
0.31
|
|
|
|
(0.78
|
)
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,465
|
|
|
$
|
17,707
|
|
|
$
|
18,139
|
|
|
$
|
17,573
|
|
Income from operations
|
|
|
8,580
|
|
|
|
8,953
|
|
|
|
9,463
|
|
|
|
9,167
|
|
Net income
|
|
|
6,218
|
|
|
|
1,465
|
|
|
|
6,358
|
|
|
|
6,293
|
|
Net income per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.34
|
|
|
|
0.08
|
|
|
|
0.34
|
|
|
|
0.34
|
|
Diluted
|
|
|
0.33
|
|
|
|
0.08
|
|
|
|
0.34
|
|
|
|
0.34
|
|
|
|
|
(1) |
|
The sum of the quarterly earnings per share may not equal the
annual earnings per share due to changes in the average shares
outstanding. |
In the fourth quarter of fiscal 2008, the Company recorded a
$4.3 million non-cash impairment loss on its investment in
OctoPlus, N.V.
In the fourth quarter of fiscal 2007, the Company recorded a
$15.6 million charge for in-process research and
development acquired in connection with the purchase of
Brookwood Pharmaceuticals, Inc.
In the second quarter of fiscal 2006, the Company recorded a
$4.7 million non-cash impairment loss on its investment in
Novocell, Inc.
F-23
EX-10.18
|
|
|
|
|
|
|
|
(As amended through May 19, 2008) |
Exhibit 10.18
BOARD COMPENSATION POLICY
SurModics, Inc.
Compensation for Non-employee Chairman of the Board
Non-employee directors holding the position of Chairman of the Board shall receive an annual
retainer of $100,000 payable quarterly at the end of each calendar quarter. If, for any reason,
the Chairman does not serve for the entire calendar quarter, the Chairman shall be entitled to a
pro rata portion of that quarterly payment.
In November of each year, the non-employee Chairman shall be granted a nonqualified stock option
for 10,000 shares of the Companys common stock regardless of such Chairmans tenure of service as
a director to the Company.
The Chairman shall not be eligible to receive any of the meeting fees set forth below or any other
additional compensation for attendance at meetings of the Board or any of the Boards committees.
Compensation for Non-employee Directors
Non-employee directors shall receive an annual retainer of $10,000 ($12,000 for Committee Chairs),
payable quarterly at the end of each calendar quarter. If, for any reason, the director does not
serve for the entire calendar quarter, the director shall be entitled to a pro rata portion of that
quarterly payment.
Non-employee directors shall also receive $1,000 for each formal Board meeting attended and $500
for each formal Committee meeting attended. All such fees shall be payable quarterly at the end of
each calendar quarter.
When a non-employee director is first elected to the Board, such director shall be granted a
nonqualified stock option for 10,000 shares of the Companys common stock. In November of each
year, each non-employee director shall be granted a nonqualified stock option for 5,000 shares of
the Companys common stock; provided, however, that in the first year of service on the Board, such
director shall only be entitled to a pro rata portion of such annual option grant.
All such 10,000-share and 5,000-share options (including those granted a non-employee Chairman and
to non-employee directors) shall be granted under the Companys 2003 Equity Incentive Plan, shall
have a ten-year term, and shall have an exercise price equal to the fair market value of the
Companys common stock on the date of grant. Such options shall be immediately vested for 20% of
the shares on the date of grant, shall vest with respect to 20% of the shares on the next four
anniversaries of the date of grant, and shall be subject to such other terms and conditions set
forth in the individual option agreements. In the event the directors service on the Board
terminates for any reason other than disability or death, (a) any unvested portion of such options
shall expire and be cancelled, and (b) the director shall be entitled to exercise any vested
portion of such options for up to three months after the date of such termination of service, but
not later than the date the option expires. Upon the directors termination of service, the Board,
in its sole discretion, may accelerate
the vesting of all or any portion of the unvested portion of such options taking into consideration
SurModics, Inc.
Board Compensation Policy Continued
Page 2 of 2
such directors tenure of service or other similar factors. In the event that the directors
service on the Board terminates as a result of a disability or death, (i) all outstanding unvested
options will vest in full on the date that the directors service ceases by reason of such
disability or death, and (ii) the directors guardian or legal representative may exercise the
options not later than the earlier of the date the options expire or one year after the date that
the directors service ceases by reason of such disability or death.
EX-21
Exhibit 21
SUBSIDIARIES
|
|
|
Name |
|
State of incorporation |
BioFX Laboratories, Inc.
|
|
Maryland |
Brookwood Pharmaceuticals, Inc.
|
|
Delaware |
EX-23
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-123524 on Form S-3
and Registration Statement Nos. 333-104258, 333-64171, 333-64173, 333-79741, 333-54266 and
333-123521 on Form S-8 of our reports dated December 8, 2008, relating to the consolidated
financial statements of SurModics, Inc., which report expresses an unqualified opinion and includes
an explanatory paragraph relating to SurModics, Inc.s adoption of Statement of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, and the effectiveness of SurModics, Inc.s internal
control over financial reporting, appearing in the Annual Report on Form 10-K of SurModics, Inc.
for the year ended September 30, 2008.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 8, 2008
EX-31.1
Exhibit 31.1
CERTIFICATIONS
I, Bruce J Barclay, certify that:
1. |
|
I have reviewed this Annual Report on Form 10-K 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 registrants 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 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 registrants 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 registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. |
|
The registrants other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants 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 registrants
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 registrants internal control over financial reporting.
Date:
December 12, 2008
|
|
|
|
|
|
|
|
|
/s/ Bruce J Barclay
|
|
|
Bruce J Barclay |
|
|
President and Chief Executive Officer |
|
|
EX-31.2
Exhibit 31.2
CERTIFICATIONS
I, Philip D. Ankeny, certify that:
1. |
|
I have reviewed this Annual Report on Form 10-K 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 registrants 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 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 registrants 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 registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. |
|
The registrants other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of
registrants 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 registrants
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 registrants internal control over financial reporting.
Date:
December 12, 2008
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/s/ Philip D. Ankeny
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Philip D. Ankeny |
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Senior Vice President and |
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Chief Financial Officer |
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EX-32.1
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 Annual Report of SurModics, Inc. (the Company) on Form 10-K for
the year ended September 30, 2008 as filed with the Securities and Exchange Commission (the
Report), I, Bruce J Barclay, 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.
Date:
December 12, 2008
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/s/ Bruce J Barclay
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Bruce J Barclay |
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President and |
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Chief Executive Officer |
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EX-32.2
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 Annual Report of SurModics, Inc. (the Company) on Form 10-K for
the year ended September 30, 2008 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.
Date:
December 12, 2008
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/s/ Philip D. Ankeny
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Philip D. Ankeny |
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Senior Vice President and |
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Chief Financial Officer |
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