FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-23837
SurModics, Inc.
(Exact name of registrant as specified in its Charter)
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MINNESOTA
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41-1356149 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (952) 829-2700
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant 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
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrants common stock, $.05 par value per share, outstanding as of
January 31, 2009 was 17,421,802.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SurModics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
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December 31, |
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September 30, |
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2008 |
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2008 |
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(In thousands, except share data) |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
11,969 |
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$ |
15,376 |
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Short-term investments |
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10,310 |
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9,251 |
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Accounts receivable, net of allowance for doubtful
accounts of $101 and $135 as of December 31 and
September 30, 2008, respectively |
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11,752 |
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14,589 |
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Inventories |
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2,693 |
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2,651 |
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Deferred tax asset |
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495 |
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1,058 |
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Prepaids and other |
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1,682 |
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3,584 |
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Total current assets |
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38,901 |
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46,509 |
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Property and equipment, net |
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45,938 |
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41,897 |
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Long-term investments |
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47,596 |
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47,351 |
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Deferred tax asset |
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1,854 |
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11,099 |
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Intangible assets , net |
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19,266 |
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16,870 |
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Goodwill |
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18,055 |
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18,001 |
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Other assets, net |
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8,791 |
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9,301 |
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Total assets |
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$ |
180,401 |
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$ |
191,028 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities
Accounts payable |
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$ |
4,032 |
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$ |
3,466 |
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Accrued liabilities |
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7,137 |
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4,422 |
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Accrued income taxes payable |
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4,339 |
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Deferred revenue |
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1,136 |
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4,335 |
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Other current liabilities |
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1,028 |
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303 |
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Total current liabilities |
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17,672 |
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12,526 |
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Deferred revenue, less current portion |
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683 |
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33,243 |
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Other long-term liabilities |
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4,379 |
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3,453 |
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Total liabilities |
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22,734 |
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49,222 |
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Commitments and contingencies |
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Stockholders Equity |
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Series A Preferred stock- $.05 par value, 450,000
shares authorized; no shares issued and
outstanding |
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Common stock- $.05 par value, 45,000,000 shares
authorized; 17,503,902 and 18,030,270 shares
issued and outstanding |
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875 |
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901 |
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Additional paid-in capital |
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63,042 |
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74,573 |
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Accumulated other comprehensive income (loss) |
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226 |
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(107 |
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Retained earnings |
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93,524 |
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66,439 |
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Total stockholders equity |
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157,667 |
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141,806 |
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Total liabilities and stockholders equity |
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$ |
180,401 |
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$ |
191,028 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
3
SurModics, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
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Three Months Ended |
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December 31, |
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2008 |
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2007 |
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(In thousands, except per share data) |
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(unaudited) |
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Revenue |
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Royalties and license fees |
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$ |
47,747 |
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$ |
13,178 |
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Product sales |
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3,856 |
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5,207 |
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Research and development |
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11,6137 |
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5,444 |
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Total revenue |
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63,216 |
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23,829 |
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Operating costs and expenses
Product |
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1,515 |
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2,782 |
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Research and development |
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9,353 |
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8,727 |
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Selling, general and administrative |
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4,683 |
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4,749 |
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Purchased in-process research and development |
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3,200 |
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Restructuring charges |
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1,798 |
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Total operating costs and expenses |
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20,549 |
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16,258 |
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Income from operations |
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42,667 |
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7,571 |
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Other income (loss) |
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Investment income, net |
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734 |
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953 |
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Other income (loss), net |
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(149 |
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767 |
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Other income, net |
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585 |
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1,720 |
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Income before income taxes |
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43,252 |
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9,291 |
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Income tax provision |
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(16,167 |
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(3,645 |
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Net income |
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$ |
27,085 |
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$ |
5,646 |
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Basic net income per share |
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$ |
1.53 |
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$ |
0.31 |
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Diluted net income per share |
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$ |
1.53 |
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$ |
0.31 |
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Weighted average shares outstanding |
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Basic |
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17,683 |
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18,015 |
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Dilutive effect of outstanding stock options |
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64 |
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413 |
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Diluted |
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17,7472 |
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18,428 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
4
SurModics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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Three Months Ended |
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December 31, |
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2008 |
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2007 |
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(In thousands) |
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(unaudited) |
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Operating Activities |
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Net income |
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$ |
27,085 |
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$ |
5,646 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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1,674 |
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1,488 |
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(Gain) loss on equity method investments and sales of investments |
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201 |
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(767 |
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Amortization of premium on investments |
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35 |
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Stock-based compensation |
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1,911 |
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1,953 |
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Purchased in-process research and development |
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3,200 |
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Restructuring charges |
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1,798 |
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Deferred tax |
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9,597 |
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607 |
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Tax benefit from exercise of stock options |
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258 |
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(502 |
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Change in operating assets and liabilities: |
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Accounts receivable |
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2,837 |
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89 |
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Inventories |
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(42 |
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93 |
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Accounts payable and accrued liabilities |
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(1,607 |
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(1,731 |
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Income taxes |
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6,438 |
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(3,275 |
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Deferred revenue |
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(35,759 |
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824 |
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Prepaids and other |
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(213 |
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(10 |
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Net cash provided by operating activities |
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17,413 |
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4,415 |
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Investing Activities |
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Purchases of property and equipment |
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(4,284 |
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(1,189 |
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Purchases of available-for-sale investments |
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(9,080 |
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(4,689 |
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Sales/maturities of available-for-sale investments |
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8,522 |
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5,005 |
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Business acquisition |
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(3,352 |
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Cash restricted for land purchase |
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(1,617 |
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Other investing activities |
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(8 |
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(146 |
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Net cash used in investing activities |
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(8,202 |
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(2,636 |
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Financing Activities |
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Tax benefit from exercise of stock options |
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(258 |
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502 |
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Issuance of common stock |
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2 |
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335 |
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Purchase of common stock to pay employee taxes |
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(375 |
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(1,207 |
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Repurchase of common stock |
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(11,751 |
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Repayment of notes payable |
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(236 |
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(223 |
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Net cash used in financing activities |
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(12,618 |
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(593 |
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Net change in cash and cash equivalents |
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(3,407 |
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1,186 |
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Cash and Cash Equivalents |
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Beginning of period |
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15,376 |
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13,812 |
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End of period |
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$ |
11,969 |
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$ |
14,998 |
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Supplemental Information |
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Cash paid for income taxes |
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$ |
117 |
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$ |
6,227 |
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Noncash transaction acquisition of property, plant, and equipment on account |
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$ |
2,346 |
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$ |
204 |
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Noncash transaction accrued contingent consideration in connection with business
acquisition |
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$ |
2,218 |
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$ |
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Noncash transaction acquisition of intangible assets on account |
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$ |
841 |
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$ |
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Noncash transaction purchase of common stock |
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$ |
1,085 |
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$ |
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Noncash transaction accrued earnout payment in connection with business acquisition |
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$ |
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$ |
1,148 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
5
SurModics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Period Ended December 31, 2008
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of SurModics, Inc. and subsidiaries (the Company) have been
prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) and reflect all adjustments, consisting solely of normal recurring adjustments,
needed to fairly present the financial results for the periods presented. These financial
statements include some amounts that are based on managements best estimates and judgments. These
estimates may be adjusted as more information becomes available, and any adjustment could be
significant. The impact of any change in estimates is included in the determination of earnings in
the period in which the change in estimate is identified. The results of operations for the
three-month period ended December 31, 2008 are not necessarily indicative of the results that may
be expected for the entire 2009 fiscal year.
In accordance with the rules and regulations of the United States Securities and Exchange
Commission, the Company has omitted footnote disclosures that would substantially duplicate the
disclosures contained in the audited financial statements of the Company. These unaudited condensed
consolidated financial statements should be read together with the audited consolidated financial
statements for the year ended September 30, 2008, and footnotes thereto included in the Companys
Form 10-K as filed with the United States Securities and Exchange Commission on December 15, 2008.
The Companys revenue arrangements with multiple deliverables follow the guidance contained in
Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, (EITF 00-21) with recognition of each separable deliverable as it is earned. The
Company applies EITF 00-21 to a collaborative research and license agreement (the Merck Agreement)
entered into on June 27, 2007 with Merck & Co., Inc. (Merck).
In September 2008, following a strategic review of Mercks business and product development
portfolio, Merck gave notice to the Company of Mercks intent to terminate the Merck Agreement as
well as the supply agreement entered into in June 2007. The termination was effective December 16,
2008. The Company recognized revenue in the first quarter of fiscal 2009 that previously had
been deferred and amortized under the accounting treatment required by EITF 00-21. In addition, the
Company also recognized a $9 million milestone payment from Merck associated with the termination
of the triamcinolone acetonide development program that was part of the Merck Agreement. The
revenue associated with the multiple element arrangement is not presented in the condensed
consolidated statements of income as a separate revenue line item. We have recognized the revenue
in the reported line items based on our allocation of fair value between royalties and license fees
and research and development fees. Research and development fees have been billed to Merck
following our customary practices and represent stand-alone value. The Companys recognition of
Merck revenue by category is as follows (in thousands):
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Three months ended December 31, |
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2008 |
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2007 |
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Royalties and license fees |
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$ |
37,578 |
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$ |
313 |
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Research and development |
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6,467 |
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74 |
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Total |
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$ |
44,045 |
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$ |
387 |
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(2) Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used
for measuring fair value in accordance with GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 applies to other pronouncements that require or permit fair value
measurements; it does not require any new fair value measurements. The provisions of SFAS No. 157,
as issued, were effective for SurModics on October 1, 2008. However, in February 2008, the FASB
issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (FSP FAS
157-2). FSP FAS 157-2 delays the effective date of SFAS No. 157 from fiscal 2009 to fiscal 2010
for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). Due
to the deferral, the Company has delayed the implementation of SFAS No. 157 provisions on the fair
value of goodwill, other intangible assets and nonfinancial long-lived assets. The Company adopted
SFAS No. 157 on October 1, 2008, the first day of fiscal 2009, for all financial assets and
financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). The
Company is
6
currently evaluating the potential impact of the adoption of those provisions of SFAS No. 157
for which the effective date has been delayed until fiscal year 2010 by FSP FAS 157-2 on its
consolidated financial condition and results of operations. See Note 3 for additional information
relating to the adoption of SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). 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 adoption of this statement did 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(revised 2007), 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.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 requires minority
interests to be recharacterized as noncontrolling interests and reported as a component of equity.
In addition, SFAS No. 160 requires that purchases or sales of equity interests that do not result
in a change in control be accounted for as equity transactions and, upon a loss of control,
requires the interests sold, as well as any interests retained, to be recorded at fair value with
any gain or loss recognized in earnings. SFAS No. 160 is effective for the Company in fiscal 2010,
with early adoption prohibited. The Company does not expect the adoption of SFAS No. 160 to have a
material impact on its consolidated financial statements.
In April 2008, the FASB issued FSP FAS No. 142-3 Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of intangible assets
under SFAS No. 142 Goodwill and Other Intangible Assets. FSP FAS 142-3 is intended to improve the
consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the
period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141R
and other GAAP. FSP FAS 142-3 is effective for the Company in fiscal 2010, with early adoption
prohibited. The Company does not expect the adoption of FSP FAS 142-3 to have a material impact on
its consolidated financial statements.
No other new accounting pronouncement issued or effective has had, or is expected to have, a
material impact on the Companys consolidated financial statements.
(3) Fair Value Measurements
Effective October 1, 2008, the Company adopted the provisions of SFAS No. 157 for all
financial assets and financial liabilities and for all nonfinancial assets and nonfinancial
liabilities recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). SFAS No. 157 defines fair value as the exchange price that would be received
from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements
for assets and liabilities required or permitted to be recorded at fair value, the Company
considers the principal or most advantageous market in which it would transact and also considers
assumptions that market participants would use when pricing the asset or liability, such as
inherent risk, transfer restrictions and risk of nonperformance.
Fair Value Hierarchy
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The fair value framework requires the
categorization of assets and liabilities into three levels based upon the assumptions (inputs) used
to price the assets or liabilities. SFAS No. 157 requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following categories:
Level 1 Quoted (unadjusted) prices in active markets for identical assets or liabilities.
The Companys Level 1 assets consist of money market funds and its investment in OctoPlus, N.V.
(see note 6 for further information).
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the asset or liability.
7
The Companys Level 2 assets consist of U.S. Treasury securities, corporate bonds, municipal bonds,
U.S. agency securities, agency and municipal securities, certain asset-backed securities and
mortgage-backed securities.
Level 3 Unobservable inputs to the valuation methodology that are supported by little or no
market activity and that are significant to the measurement of the fair value of the assets or
liabilities. Level 3 assets and liabilities include those whose fair value measurements are
determined using pricing models, discounted cash flow methodologies or similar valuation
techniques, as well as significant management judgment or estimation.
The Companys Level 3 assets include a U.S. agency security, other U.S. government securities and a
corporate bond.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In instances where the inputs used to measure fair value fall into different levels of the
fair value hierarchy, the fair value measurement has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The Companys assessment
of the significance of a particular item to the fair value measurement in its entirety requires
judgment, including the consideration of inputs specific to the asset or liability. The following
table presents information about the Companys financial assets and liabilities measured at fair
value on a recurring basis as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
Total Fair |
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Value as of |
|
|
|
Instruments |
|
|
Inputs |
|
|
Inputs |
|
|
December 31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
9,507 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,507 |
|
Short-term investments |
|
|
5,108 |
|
|
|
5,202 |
|
|
|
|
|
|
|
10,310 |
|
Long-term investments |
|
|
|
|
|
|
40,402 |
|
|
|
838 |
|
|
|
41,240 |
|
Other assets |
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
16,413 |
|
|
$ |
45,604 |
|
|
$ |
838 |
|
|
$ |
62,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments disclosed in the condensed consolidated balance sheets include held-to-maturity investments totaling
$6.4 million as of December 31, 2008.
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
The following table provides a reconciliation of financial assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
Balance, September 30, 2008 |
|
$ |
264 |
|
Total realized and unrealized gains: |
|
|
|
|
Included in other comprehensive income |
|
|
25 |
|
Net settlements |
|
|
549 |
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
838 |
|
|
|
|
|
As of December 31, 2008, marketable securities measured at fair value using Level 3 inputs
were comprised of $0.8 million of U.S. government agency securities and a corporate bond within the
Companys available-for-sale investment portfolio. These securities were measured using observable
market data and Level 3 inputs due to the lack of market activity and liquidity. The fair values of
these securities were based on the Companys assessment of the underlying collateral and the
creditworthiness of the issuers of the securities.
8
Realized gains or losses included in earnings are included in other income (loss), net in the
condensed consolidated statements of income.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Companys investments in non-marketable securities of private companies are accounted for
using the cost or equity method. These investments as well as held-to-maturity securities are
measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily
impaired. In determining whether a decline in value of non-marketable equity investments in private
companies has occurred and is other-than-temporary, an assessment is made by considering available
evidence, including the general market conditions in the investees industry, the investees
product development status and subsequent rounds of financing and the related valuation and/or
SurModics participation in such financings. The Company also assesses the investees ability to
meet business milestones and the financial condition and near-term prospects of the individual
investee, including the rate at which the investee is using its cash and the investees need for
possible additional funding at a lower valuation. The valuation methodology for determining the
decline in value of non-marketable equity securities is based on inputs that require management
judgment and are Level 3 inputs.
(4) Acquisition
PR Pharmaceuticals, Inc. On November 4, 2008, the Companys Brookwood Pharmaceuticals, Inc.
subsidiary entered into an asset purchase agreement with PR Pharmaceuticals, Inc. (PR Pharma)
whereby it acquired certain contracts and assets of PR Pharma for $3.4 million consisting of $2.9
million in cash on the closing date, additional consideration of $0.3 million upon successful
achievement of specified milestones in the three months ended December 31, 2008 and $0.2 million in
transaction costs. PR Pharma is eligible to receive up to an additional $5.8 million in cash upon
the successful achievement of milestones for contract assignments and invoicing, successful
technology transfer and patent issuance. Management believes this acquisition strengthens the
Companys portfolio of drug delivery technologies for the pharmaceutical and biotechnology
industries. The purchase price was allocated to the fair value of the
intangible assets acquired,
with a liability of $2.2 million recorded for contingent consideration to be paid. The purchase
price was allocated as follows as of November 4, 2008 (in thousands):
|
|
|
|
|
Core technology |
|
$ |
1,400 |
|
Customer relationships |
|
|
900 |
|
In-process research and development |
|
|
3,200 |
|
Trade names |
|
|
20 |
|
Non-compete agreements |
|
|
50 |
|
|
|
|
|
Total purchase price |
|
$ |
5,570 |
|
|
|
|
|
The acquired developed technology is being amortized on a straight-line basis over 18 years,
customer relationships are being amortized over 9 years, and non-compete agreements are being
amortized over 2 years. The trade names have a life of less than one year and have been amortized
in the three-months ended December 31, 2008. As part of the acquisition, the Company recognized
fair value associated with in-process research and development (IPR&D) of $3.2 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 achieved
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 the Relief from Royalty
valuation method to assess the fair value of the projects with a risk adjusted discount rate of
25%. The Company determined the method 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 products.
(5) Inventories
Inventories are principally stated at the lower of cost or market using the specific
identification method and include direct labor, materials and overhead. Inventories consisted of
the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Raw materials |
|
$ |
1,273 |
|
|
$ |
1,308 |
|
Finished products |
|
|
1,420 |
|
|
|
1,343 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,693 |
|
|
$ |
2,651 |
|
|
|
|
|
|
|
|
9
(6) Other Assets
Other assets consist principally of strategic investments. The Company accounts for its
strategic investments under the cost method, except for its investments in Paragon Intellectual
Properties, LLC (Paragon), Paragons subsidiary, Apollo Therapeutics, LLC (Apollo), and
Brookwoods investment in Aeon Biosience, which are accounted for under the equity method. The
Company accounts for its investment in OctoPlus N.V. common stock as an available-for-sale
investment rather than a cost method investment following an initial public offering of OctoPlus
N.V. common stock in October 2006. Available-for-sale investments are reported at fair value with
unrealized gains and losses reported as a separate component of stockholders equity, except for
other-than-temporary impairments, which are reported as a charge to current operations, recorded in
the other income (loss) section of the condensed consolidated statements of income. 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. (Nexeon). The Company accounted
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, the Company expects to account for the investment in Nexeon under the cost
method as the Companys ownership level is less than 20%.
Other assets consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Investment in OctoPlus N.V. |
|
$ |
1,798 |
|
|
$ |
1,714 |
|
Investment in Nexeon MedSystems |
|
|
4,901 |
|
|
|
5,388 |
|
Investment in ThermopeutiX |
|
|
1,185 |
|
|
|
1,185 |
|
Investment in Novocell |
|
|
559 |
|
|
|
559 |
|
Other |
|
|
348 |
|
|
|
455 |
|
|
|
|
|
|
|
|
Other assets |
|
$ |
8,791 |
|
|
$ |
9,301 |
|
|
|
|
|
|
|
|
In the three months ended December 31, 2008 and December 2007, the Company recognized revenue
of $0.4 million and $1.0 million, respectively, from activity with companies in which it had a
strategic investment.
(7) Intangible Assets
Intangible assets consist principally of acquired patents and technology, customer
relationships, licenses, and trademarks. The Company recorded amortization expense of $830,000, and
$740,000 for the three months ended December 31, 2008 and 2007, respectively.
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life |
|
|
December 31, |
|
|
September 30, |
|
|
|
(in years) |
|
|
2008 |
|
|
2008 |
|
Customer relationships |
|
|
9 - 11 |
|
|
$ |
8,657 |
|
|
$ |
7,340 |
|
Abbott
license |
|
|
4 |
|
|
|
|
|
|
|
7,037 |
|
Core technology |
|
|
8 - 18 |
|
|
|
8,330 |
|
|
|
6,930 |
|
Patents and other |
|
|
2 - 20 |
|
|
|
3,888 |
|
|
|
3,398 |
|
Trademarks |
|
|
|
|
|
|
580 |
|
|
|
580 |
|
Less accumulated amortization of intangible assets |
|
|
|
|
|
|
(2,189 |
) |
|
|
(8,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
$ |
19,266 |
|
|
$ |
16,870 |
|
|
|
|
|
|
|
|
|
|
|
|
The
Abbott license was fully amortized as of December 31, 2008. The
original cost and accumulated amortization have been removed from the
December 31, 2008 amounts presented.
Based on the intangible assets in service as of December 31, 2008, estimated amortization
expense for each of the next five years ending December 31 is as follows (in thousands):
|
|
|
|
|
2009 |
|
$ |
1,677 |
|
2010 |
|
|
1,672 |
|
2011 |
|
|
1,651 |
|
2012 |
|
|
1,651 |
|
2013 |
|
|
1,651 |
|
10
(8) 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. 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.
(9) Stock-based Compensation
The Company accounts for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123(R), Share Based Payment (SFAS 123(R)), which requires all
share-based payments, including grants of stock options, to be recognized in the income statement
as an operating expense, based on their fair values, over the requisite service period. The
Companys stock-based compensation expenses, included by
expense classification, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
Product |
|
$ |
24 |
|
|
$ |
24 |
|
Research and development |
|
|
909 |
|
|
|
837 |
|
Selling, general and administrative |
|
|
978 |
|
|
|
1,092 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,911 |
|
|
$ |
1,953 |
|
|
|
|
|
|
|
|
As of December 31, 2008, approximately $19.2 million of total unrecognized compensation costs
related to non-vested awards is expected to be recognized over a weighted average period of
approximately 1.8 years. The unrecognized compensation costs include $3.8 million associated with
performance share awards that are currently not anticipated to be fully expensed.
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 three months ended
December 31, 2008, and 2007 was $8.63 and $26.93, respectively. The assumptions used as inputs in
the model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
|
|
2008 |
|
2007 |
Risk-free interest rates |
|
|
2.22 |
% |
|
|
3.99 |
% |
Expected life |
|
|
4.75 |
|
|
|
6.73 |
|
Expected volatility |
|
|
37.9 |
% |
|
|
49.7 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
The risk-free interest rate assumption was based on yields for U.S. Treasury 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 over a period approximating the expected term. 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 is 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 of the Company (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. ISOs expire in seven years or upon termination of employment and are exercisable
at a rate of 20% per year commencing one year after the date of grant. Nonqualified stock options
(NQSO) are granted at fair market value on the date of grant. NQSOs expire in 7 to 10 years or
upon termination of employment or service as a Board member. Options
granted prior to May, 2008 generally become exercisable with respect
to 20% of the shares on each of the first five anniversaries
following the grant date such that the entire option is fully vested
five years after the grant date, and options granted subsequent to
May, 2008 generally become exercisable with respect to 25% on each of
the first four anniversaries following the grant date such that the
entire option is fully vested four years after the grant date.
The total pre-tax intrinsic value of options exercised during the three months ended December
31, 2008 and 2007, was $5,000 and $662,000, respectively. This intrinsic value represents the
difference between the exercise price and the fair market value of the Companys common stock on
the last day of the respective fiscal quarter end.
Restricted Stock Awards
The Company has entered into restricted stock agreements with certain key employees, covering
the issuance of Common
11
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. The stock-based compensation table above
includes Restricted Stock expenses of $661,000, and $562,000 during three months ended December 31,
2008 and 2007, respectively.
Performance Share Awards
Historically, 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 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 grants specified performance objectives and the resulting vesting
amounts. For the three months ended December 31, 2008, the Company reduced expenses by $38,000
associated with the Performance Shares granted. No expense had been recognized in the three months
ended December 31, 2007, as no grants were made. The stock-based compensation table above includes
the Performance Shares expenses.
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 December 31, 2008
and 2007, there were $561,000 and $442,000 of employee contributions, respectively, included in
accrued liabilities in the accompanying condensed consolidated balance sheets. Stock compensation
expense recognized related to the Stock Purchase Plan for three months ended December 31, 2008 and
2007 totaled $58,000 and $38,000, respectively. The stock-based compensation table above includes
the Stock Purchase Plan expenses.
(10) Restructuring Charges
In November 2008, the Company announced a functional reorganization to better serve its
customers and improve its operating performance. As a result of the reorganization, the Company
eliminated 15 positions, or approximately 5% of the Companys workforce. These employee
terminations occurred across various functions and the reorganization plan was completed by the end
of the first quarter of fiscal 2009. The Company also vacated a leased facility in Eden Prairie,
Minnesota as part of the reorganization plan.
The Company recorded total restructuring charges of approximately $1.8 million in connection
with the reorganization. These pre-tax charges consisted of $0.5 million of severance pay and
benefits expenses and $1.3 million of facility-related costs which were recorded in the first
quarter of fiscal 2009. The restructuring is expected to result in approximately $2.2 million in
annualized cost savings.
The following table summarizes the restructuring accrual activity for fiscal 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Facility- |
|
|
|
|
|
|
severance and |
|
|
related |
|
|
|
|
|
|
benefits |
|
|
costs |
|
|
Total |
|
Balance at September 30, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Accruals during the period |
|
|
523 |
|
|
|
1,275 |
|
|
|
1,798 |
|
Cash payments |
|
|
(149 |
) |
|
|
(13 |
) |
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
374 |
|
|
$ |
1,262 |
|
|
$ |
1,636 |
|
|
|
|
|
|
|
|
|
|
|
These charges above have been shown separately as restructuring charges on the condensed
consolidated statements of income. The remaining accrual as of December 31, 2008, relates to
severance benefits and facility-related costs that are expected to be paid within the next 24
months. As such, the current portion totaling $1.0 million is recorded as a current liability
within other accrued liabilities and the long-term portion totaling $0.6 million is recorded as a
long-term liability within other long-term liabilities on the condensed consolidated balance
sheets.
(11) Comprehensive Income
The components of comprehensive income are as follows (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
27,085 |
|
|
$ |
5,646 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on available for-sale-securities arising during the
period |
|
|
534 |
|
|
|
(212 |
) |
Less reclassification adjustment for realized gains included in net income, net of tax |
|
|
(201 |
) |
|
|
(563 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
333 |
|
|
|
(775 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
27,418 |
|
|
$ |
4,871 |
|
|
|
|
|
|
|
|
(12) Income Taxes
The Company recorded tax provisions of $16.2 million and $3.6 million for the three-months
ended December 31, 2008 and 2007, respectively, representing effective tax rates of 37.4% and
39.2%, respectively. The difference between the U.S. federal statutory tax rate of 35% and the
Companys effective tax rate is primarily due to state taxes.
The federal tax credit for research activities expired as of December 31, 2007. The credit for
research activities for the three-months ended December 31, 2007 has been included in the fiscal
2008 tax provision. The recently adopted Emergency Economic Stabilization Act of 2008,
retroactively extended the term of the research credit through 2009. During the three-months ended
December 31, 2008, the Company recognized a discrete benefit of approximately $120,000 related to
the nine-month period ended September 30, 2008. The tax credit for research activities for the
2009 fiscal year is expected to approximate $190,000.
The total amount of unrecognized tax benefits including interest and penalties that, if
recognized, would affect the effective tax rate as of December 31, 2008 and September 30, 2008,
respectively, are $1.5 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. Interest
and penalties related to the unrecognized tax benefits are recorded in income tax expense.
The Company files income tax returns, including returns for its subsidiaries, in the United
States federal jurisdiction and in various state jurisdictions. Uncertain tax positions are related
to tax years that remain subject to examination. With few exceptions, the Company is no longer
subject to examination by state and local tax authorities for tax returns associated with tax years
prior to fiscal year 2003.
(13) Operating Segments
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance.
SurModics manages its business on the basis of the segments noted in the table below, which
are comprised of the Companys four business units. The Company reorganized business units in
November 2008 which resulted in new operating segments which are aggregated into one reportable
segment. The Therapeutic segment contains: (1) the Cardiovascular business unit, which provides
drug delivery and surface modification technologies to customers in the cardiovascular market; (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 business unit, which
provides proprietary polymer-based technologies to companies developing improved pharmaceutical
products in the cardiovascular, ophthalmology, dermatology, oncology and other markets. Revenue results in the Therapeutic segment are presented by the clinical market
areas in which the Companys customers participate (Cardiovascular, Ophthalmology and Other
Markets). The Diagnostic operating segment contains the In Vitro Technologies 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.
Each business unit 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 financial performance over
the long term. The accounting policies for segment reporting are the same as for the Company as a
whole. The table below presents revenue from the segments, with Therapeutic broken out further by
market-focused area, for the three-month periods in fiscal 2009 and
2008, respectively (in
thousands):
13
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Therapeutic |
|
|
|
|
|
|
|
|
Cardiovascular |
|
$ |
10,403 |
|
|
$ |
12,467 |
|
Ophthalmology |
|
|
44,772 |
|
|
|
1,477 |
|
Other Markets |
|
|
3,772 |
|
|
|
4,377 |
|
|
|
|
|
|
|
|
Total Therapeutic |
|
|
58,947 |
|
|
|
18,321 |
|
Diagnostic |
|
|
4,269 |
|
|
|
5,508 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
63,216 |
|
|
$ |
23,829 |
|
|
|
|
|
|
|
|
(14) Share Repurchases
In November 2007, the Companys Board of Directors authorized the repurchase of $35.0 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. As of
September 30, 2008, the Company had $22.3 million remaining available for authorized share
repurchases. During the three months ended December 31, 2008, the Company repurchased 499,148
shares for $11.8 million at an average price of $23.54 per share, leaving $10.5 million remaining
available for future purchases under the repurchase program. In
addition, there were trades executed in December for 42,500 shares
that were settled in January 2009 which totaled approximately $1.0
million. No shares were repurchased under the
program in the three months ended December 31, 2007.
(15) Commitments and Contingencies
Litigation. From time to time, the Company may become involved in various legal actions
involving its products and technologies, including intellectual property 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, it is
possible that costs associated with them could have a material adverse impact on the Companys
consolidated earnings, financial condition or cash flows.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Understanding Our Financial Information
References in the Managements Discussion and Analysis of Financial Condition and
Results of Operations to Company, we, our, or us, refer to SurModics, Inc. together
with its consolidated subsidiaries. The following discussion and analysis provides
information management believes to be relevant to understanding the financial condition
and results of operations of SurModics, Inc. For a full understanding of financial
condition and results of operations, you should read this discussion along with
Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. In
addition, you should read this discussion along with our condensed consolidated financial
statements and related Notes thereto as of December 31, 2008.
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, Brookwood Pharmaceuticals and In Vitro Technologies. We believe
that this structure will improve the visibility, marketing and adoption of the Companys 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 the Companys
clinically and market focused business units. Brookwood Pharmaceuticals research and development
operations will remain unchanged.
The
organizational changes announced in November 2008, resulted in the Company being comprised
of new operating segments. The Therapeutic segment contains: (1) the Cardiovascular business
unit, which provides drug delivery and surface modification technologies to customers in the
cardiovascular market; (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 business
unit, which provides proprietary polymer-based technologies to companies developing improved
pharmaceutical products in the cardiovascular, ophthalmology,
dermatology, oncology and other markets. Revenue results in the Therapeutic segment are presented by the clinical
market areas in which our customers participate (Cardiovascular, Ophthalmology and Other Markets).
The Diagnostic operating segment contains the In Vitro Technologies business unit, which includes
our microarray slide technologies, 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 fiscal 2009 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, 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 licensed products by customers; the timing of introductions of products
that compete with our customers products; the number and activity level associated with customer
development projects; the number and terms of new license agreements that are finalized; the value
of reagent chemicals and other products sold to customers; and the timing of future acquisitions we
complete, if any.
For financial accounting and reporting purposes, we have treated our operating segments as one
reportable segment. We made this determination because each operating segment has similar economic
characteristics; 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.
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-vationTM
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 was effective
December 16, 2008, and the revenue deferred under the accounting treatment required by Emerging
Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, (EITF 00-21) totaling $34.8 million as of September 30, 2008, was recognized in
the first quarter of fiscal 2009. In addition, we received and recognized a $9 million milestone
payment from Merck associated with the termination of the triamcinolone acetonide development
program in the first quarter of fiscal 2009.
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, for $3.4 million, including transaction
costs, through December 31, 2008. PR Pharmaceuticals, Inc. is eligible to receive up to an
additional $5.8 million in cash upon successful achievement of specified milestones. The
proprietary technologies we acquired complement and
15
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 complement the diversified portfolio of customer projects at Brookwood and we believe will
further leverage the investment we are making in cGMP manufacturing facilities.
The challenging economic environment has had an impact on our business and may
continue to have an impact going forward. In this environment, we have experienced lower product sales as a result of reductions by some
of our customers in the level of inventory that they maintain; reduced investment in research and development by certain customers; and in
certain
cases lower sales of licensed products which generate royalties for us. We continue to evaluate the changing market conditions and
are attempting to mitigate the effects these factors have on us and our strategy. As conditions evolve, we will continue to optimize our
strategy and plans to support our vision and long-term growth objectives.
Critical Accounting Policies
Critical accounting policies are those policies that require the application of managements
most challenging subjective or complex judgment, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in subsequent periods.
Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to
result in materially different results under different assumptions and conditions. For a detailed
description of our critical accounting policies, see the notes to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended September 30, 2008.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
Increase |
|
|
|
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
% Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Therapeutic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular |
|
$ |
10,403 |
|
|
$ |
12,467 |
|
|
$ |
(2,064 |
) |
|
|
(17 |
)% |
Ophthalmology |
|
|
44,772 |
|
|
|
1,477 |
|
|
|
43,295 |
|
|
|
2,931 |
% |
Other Markets |
|
|
3,772 |
|
|
|
4,377 |
|
|
|
(605 |
) |
|
|
(14 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Therapeutic |
|
|
58,947 |
|
|
|
18,321 |
|
|
|
40,626 |
|
|
|
222 |
% |
Diagnostic |
|
|
4,269 |
|
|
|
5,508 |
|
|
|
(1,239 |
) |
|
|
(22 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
63,216 |
|
|
$ |
23,829 |
|
|
$ |
39,387 |
|
|
|
165 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue during the first quarter of fiscal 2009 was $63.2 million, an increase of
$39.4 million or 165% compared with the first quarter of fiscal 2008. The increase in Therapeutic
segment revenue more than offset the decrease in the Diagnostic segment, as detailed in the table
above and further explained in the narrative below.
Therapeutic. Revenue in the Therapeutic segment was $58.9 million in the first quarter of
fiscal 2009, a 222% increase compared with $18.3 million in the prior-year period. The increase in
total revenue reflects the recognition of revenue of approximately $34.8 million that had
previously been deferred, associated with the Merck collaborative research and license agreement
and recognition of a $9 million milestone payment received from
Merck in the first quarter of fiscal 2009
associated with the termination of the triamcinolone acetonide development program. The
Merck agreement was terminated effective in the first quarter of
fiscal 2009. Excluding these significant event-specific items, revenue decreased $3.2 million or
17%. Therapeutic revenue is further characterized by the market-focused areas detailed above.
Cardiovascular derives a substantial amount of revenue from royalties and license fees and
product sales attributable to Cordis Corporation, a Johnson & Johnson company, on its
CYPHER® Sirolimus-eluting Coronary Stent. The CYPHER® stent incorporates a
proprietary SurModics polymer coating that delivers a therapeutic drug designed to reduce the
occurrence of restenosis in coronary artery lesions.
Cardiovascular revenue decreased $2.1 million, or 17%, in the first quarter of fiscal 2009,
compared with the first quarter of fiscal 2008, with the decrease principally in royalties and
license fees and product sales. Our royalty revenue from Cordis decreased as a result of 34% lower
CYPHER® sales.
The CYPHER® stent, from which we derive a substantial amount of our Therapeutic
revenue, faces continuing competition from Boston Scientific, Medtronic and Abbott. These stents
compete directly with the CYPHER® stent both domestically and internationally. We also
receive a royalty on the Medtronic Endeavor® drug-eluting stent. 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 as the result of lower
CYPHER®
stent sales reflecting 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 compete in the marketplace and as others enter the
marketplace.
Ophthalmology revenue increased $43.3 million, or 2,931%, in the first quarter of fiscal 2009,
compared with the first quarter
16
of fiscal 2008. The significant increase relates to the recognition of previously deferred
revenue associated with the terminated agreement with Merck.
Ophthalmology revenue, excluding the Merck event-specific items in the first quarter of fiscal
2009 and amortization of revenue in the first quarter of fiscal 2008, decreased by approximately
$0.1 million or 10%, principally as a result of lower royalties and license fees.
Other Markets revenue decreased $0.6 million, or 14%, in the first quarter of fiscal 2009,
compared with the first quarter of fiscal 2008. Lower product sales and royalties and license fees
were the main contributors to the decrease. Other Markets revenue is derived from more than 50
customers.
Diagnostic. Revenue in the Diagnostic segment was $4.3 million in the first quarter of fiscal
2009, a decrease of 22% compared with $5.5 million in the prior-year period. This decrease was
attributable to lower royalties and license fees as well as lower product sales in the first
quarter of fiscal 2009, as a result of reduced inventory investment
by certain customers. Diagnostic derives a
significant percentage of revenue from Abbott Laboratories. Royalty revenue generated under our
diagnostic format patent license agreement with Abbott Laboratories (the Abbott Agreement)
declined approximately 12% compared with the three-months ended December 31, 2007 and is expected
to cease following the expiration of the licensed patents, which occurred in December 2008.
Consistent with our revenue recognition practices, royalty revenue is recognized as licensees
report it to us, which typically occurs on a quarter lag basis. Accordingly, we may record royalty
revenues generated under the Abbott Agreement beyond the expiration of the patents. Royalty revenue
from GE Healthcare was eliminated in the three-months ended December 31, 2008, following our
re-acquiring the CodeLink® microarray slide product line from GE Healthcare in September 2008.
Product costs. Product costs were $1.5 million in the first quarter of fiscal 2009, compared
with $2.8 million in the prior-year period. The $1.3 million decrease in product costs principally
reflects lower product sales, as well as the inclusion in fiscal 2008 of out-of-pocket expenses
incurred in connection with our Merck projects, for which we were reimbursed. Overall product
margins averaged 61%, compared with 47% reported last year. The increase in product margins
reflects the exclusion of out-of-pocket expenses associated with our Merck projects in fiscal 2009.
Fiscal 2008 product margins, excluding the out-of-pocket expenses, were approximately 62% and
are comparable with fiscal 2009 product margins.
Research and development expenses. Research and development expenses were $9.4 million for the
first quarter, an increase of 7% compared with the first quarter of fiscal 2008. The increase
principally reflects the addition of out-of-pocket expenses incurred in connection with the close out
of our Merck projects in fiscal 2009, higher compensation expenses and higher costs related to our
internal development projects. In addition, the research and development expenses for our Brookwood
Pharmaceuticals business unit are a higher percentage of that units total revenue than for our
other business units.
Selling, general and administrative expenses. Selling, general and administrative expenses
were $4.7 million for the three months ended December 31, 2008, which were flat with the prior-year
period. Our headcount was flat in both periods and lower outside service costs were offset
by higher facilities expenses.
Purchased in-process research and development. In November 2008, we acquired certain assets
comprised of intellectual property and collaborative programs from PR Pharmaceuticals, Inc. The
fair value of $3.2 million associated with the in-process research and development intangible asset
was determined by management and recognized as an expense in the three-months ended December 31,
2008.
Restructuring charges. In November 2008, we announced a functional reorganization to better
serve our customers and improve our operating performance. As a result of the reorganization, we
eliminated 15 positions, or approximately 5% of our workforce. These employee terminations occurred
across various functions, and the reorganization plan was completed by the end of the first quarter
of fiscal 2009. The reorganization also resulted in our vacating a leased office facility in Eden
Prairie, Minnesota.
We recorded total restructuring charges of approximately $1.8 million in connection with the
reorganization. These pre-tax charges consisted of $0.5 million of severance pay and benefits
expenses and $1.3 million of facility-related costs. The restructuring is expected to result in
$2.2 million in annualized cost savings. We anticipate the majority of the costs to be paid in the
next twenty four months.
17
Other income, net. Other income was $0.6 million in the first quarter of fiscal 2009, compared
with $1.7 million in the first quarter of fiscal 2008. Income from investments was $0.7 million,
compared with $1.0 million in the prior-year period. The decrease primarily reflects lower
investment balances and lower yields generated from our investment portfolio as interest rates
declined over the past twelve months. We also recognized our pro rata net loss on our equity method
investments partially offset by $0.3 million of gains on our investment portfolio in fiscal 2009.
In fiscal 2008, other income reflected a $0.9 million gain on our investment in ForSight Newco II,
which was acquired by QLT Inc. in October 2007. Partially offsetting this gain was our pro rata net
loss on our equity method investments.
Income tax expense. The income tax provision was $16.2 million in the first quarter of fiscal
2009, compared with $3.6 million in the prior-year period. The effective tax rate was 37.4%,
compared with 39.2% in the prior-year period. This decrease is primarily attributable to
differences related to state tax exposures and stock options.
Liquidity and Capital Resources
As of December 31, 2008, the Company had working capital of $21.2 million. Working capital
decreased $12.7 million from the September 30, 2008 level driven principally by higher accrued
income taxes payable, lower deferred revenue as the contract with Merck was terminated, lower cash
balances and lower accounts receivable. Our cash, cash equivalents and short-term and long-term
investments totaled $69.9 million at December 31, 2008, a slight decrease from $72.0 million at
September 30, 2008. 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.
We had cash flows from operating activities of approximately $17.4 million in the first three
months of fiscal 2009, compared with $4.4 million in the first three months of fiscal 2008. The
increase compared with prior-year results primarily reflects receipt
of a $9 million milestone payment from Merck and timing of current-year tax payments as compared with the first quarter of fiscal 2008.
In November 2007, our Board of Directors authorized the repurchase of $35.0 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 the three
months ended December 31, 2008, the Company repurchased 499,148 shares for $11.8 million at an
average price of $23.54 per share, leaving $10.5 million remaining available for future purchases
under the repurchase program. In addition, there were trades executed
in December for 42,500 shares that were settled in January 2009 which
totaled approximately $1.0 million.
As of December 31, 2008, we had no debt, nor did we have any material credit agreements
established. We believe that our existing cash, cash equivalents and investments, together with
cash flow from operations, will provide liquidity sufficient to meet
our liquidity needs for the next twelve
months. Nevertheless, we may enter into credit arrangements from time to time when we consider
market conditions to be favorable. Our remaining anticipated liquidity needs for fiscal 2009
include but are not limited to the following: capital expenditures related to our Alabama
facilities in the range of $22 million to $24 million; general capital expenditures in the range of
$1.5 million to $5.5 million; contingent consideration payments associated with our fiscal 2009
acquisition of certain assets from PR Pharmaceuticals, Inc. in the range of $1.5 million to $2.5
million; contingent consideration payments related to our fiscal 2007 acquisitions of Brookwood
Pharmaceuticals, Inc. and BioFX Laboratories, Inc. in the range of $3
million to $5 million; and any amounts associated with the repurchase
of common stock under the authorization discussed above.
As of December 31, 2008, the Company did not have any off-balance sheet arrangements with any
unconsolidated entities.
Forward-Looking Statements
Certain statements contained in this report 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 our growth strategy, financial prospects, product
development programs, sales efforts, sufficiency of capital resources, the impact of the Cordis
agreement and 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
18
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:
|
|
|
the Companys significant reliance on our 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; |
|
|
|
|
general economic conditions we are subject to which are beyond our control,
including the impact of recession, business investment and changes in consumer
confidence; |
|
|
|
|
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; |
|
|
|
|
our ability to protect our own intellectual property; |
|
|
|
|
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; |
|
|
|
|
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 our licensees; |
|
|
|
|
the Companys ability to increase the number of market segments and
applications that use our technologies through our sales and marketing and
research and development efforts; |
|
|
|
|
the Companys ability to facilitate the creation of new market segments and
applications that incorporate our technologies through strategic investment and
research and development support; |
|
|
|
|
market acceptance of products sold by customers incorporating our technologies
and the timing of new product introductions by licensees; |
|
|
|
|
market acceptance of products sold by our customers competitors and the timing
and pricing of new product introductions by customers competitors; |
|
|
|
|
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; |
|
|
|
|
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; |
|
|
|
|
the ability to secure raw materials for reagents the Company sells; |
|
|
|
|
the Companys ability to successfully manage clinical trials and related
foreign and domestic regulatory processes for the I-vation TM
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; |
19
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|
the Companys ability to identify suitable businesses to acquire or with whom
to form strategic relationships to expand our technology development and
commercialization, our ability to successfully integrate the operations of
companies it may acquire from time to time and our ability to create synergies
from acquisitions and other strategic relationships; |
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|
the Companys ability to successfully perform internally 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 in the Risk Factors and other sections of SurModics
Annual Report on Form 10-K, which you are encouraged to read carefully. |
Many of these factors are outside the control and knowledge of the Company, and could result
in increased volatility in period-to-period results. Investors are advised not to place undue
reliance upon the Companys forward-looking statements and to consult any further disclosures by
the Company on this subject in our filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys investment policy requires the Company to invest in 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. The Company does not use derivative
financial instruments to manage interest rate risk or to speculate on future changes in interest
rates. A one percentage point increase in interest rates would result in an approximate $921,000
decrease in the fair value of the Companys available-for-sale and held-to-maturity securities as
of December 31, 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, all sales transactions are denominated in
U.S. dollars. Accordingly, we do not expect to be subject to material foreign currency risk with
respect to future costs or cash flows from our foreign sales. To date, we have not entered into any
foreign currency forward exchange contracts or other derivative financial instruments to hedge the
effects of adverse fluctuations in foreign currency exchange.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation under
the supervision and with the participation of the 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, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the Exchange Act), pursuant to Rule13a-15(b) of the Exchange
Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective as of such time.
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. The Company is in the
process of integrating the accounting system used by BioFX Laboratories, Inc. into SurModics
corporate accounting platform. Management does not currently believe that this implementation will
adversely affect the Companys internal control over financial reporting.
20
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments in the legal proceedings previously disclosed in the
Companys Form 10-K for the fiscal year ended September 30, 2008.
Item 1A. Risk Factors.
There have been no material changes from risk factors as previously disclosed in the Companys
Form 10-K for the fiscal year ended September 30, 2008 in response to Item 1A to Part I of Form
10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of common stock of the
Company made during the three months ended December 31, 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.
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(c) |
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(d) |
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Total Number |
|
Dollar |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Value of |
|
|
|
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Purchased |
|
Shares that |
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|
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 |
|
Programs |
|
Programs(2) |
|
10/01/08 10/31/08 |
|
|
0 |
|
|
NA |
|
|
0 |
|
|
$ |
22,332,097 |
|
11/01/08 11/30/08 |
|
|
327,067 |
|
|
$ |
23.72 |
|
|
|
315,800 |
|
|
$ |
14,846,048 |
|
12/01/08 12/31/08 |
|
|
188,253 |
|
|
$ |
23.20 |
|
|
|
183,348 |
|
|
$ |
10,581,415 |
|
|
Total |
|
|
515,320 |
|
|
$ |
23.53 |
|
|
|
499,148 |
|
|
$ |
10,581,415 |
|
|
|
|
|
(1) |
|
The purchases in this column included shares repurchased as part of our publicly announced
program and in addition include 16,172 shares that were repurchased by the Company to satisfy
tax withholding obligations in connection with so-called stock swap exercises related to the
vesting of restricted stock awards or performance share awards. |
|
(2) |
|
On November 15, 2007, our Board of Directors announced the authorization of the repurchase of
$35 million of outstanding common stock. As of December 31, 2008, we have repurchased a
cumulative 797,048 shares at an average price of $30.64 per share. Under the current
authorization the Company has $10.5 million available for authorized share repurchases as of
December 31, 2008, and such authorization has no expiration
date. In addition, there were trades executed in December for 42,500
shares that were settled in January 2009 which totaled approximately
$1.0 million. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Companys security holders during the period
covered by this Report on Form 10-Q; however, set forth below is information concerning matters
submitted to a vote of the Companys security holders at the recent annual meeting of shareholders:
|
(a) |
|
The Company held its Annual Meeting of Shareholders on February 2, 2009. |
|
|
(b) |
|
Proxies were solicited pursuant to Regulation 14A under
the Securities Act of 1934. The shareholders voted on three matters: (i) to set the
number of directors at ten (10), (ii) to elect Class I
directors; and (iii) to ratify the appointment of Deloitte & Touche
LLP as SurModics independent registered public accounting firm. The shareholders approved all matters by the following votes: |
21
|
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|
|
|
|
|
|
Votes |
|
Votes |
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Broker |
|
|
Votes For |
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Against |
|
Abstained |
|
Non-Votes |
(i) Set the number of directors at ten (10)
|
|
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14,809,427 |
|
|
|
177,763 |
|
|
|
20,692 |
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|
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(ii) Elect
Class I directors
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|
|
Votes |
|
Broker |
|
|
Votes For |
|
Withheld |
|
Non-Votes |
Bruce J Barclay |
|
|
14,519,387 |
|
|
|
488,495 |
|
|
|
|
|
Jose H. Bedoya |
|
|
14,745,744 |
|
|
|
262,138 |
|
|
|
|
|
John A. Meslow |
|
|
11,887,040 |
|
|
|
3,120,842 |
|
|
|
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|
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(iii) |
|
Ratify the appointment of Deloitte & Touche LLP as SurModics independent registered public accounting firm |
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|
|
|
|
|
|
|
|
Votes |
|
Votes |
|
Broker |
|
|
Votes For |
|
Against |
|
Abstained |
|
Non-Votes |
|
|
|
14,922,601 |
|
|
|
71,827 |
|
|
|
13,454 |
|
|
|
|
|
Item 5. Other Information.
None.
Item 6. Exhibits.
|
|
|
Exhibit |
|
Description |
3.1
|
|
Restated Articles of Incorporation, as amended incorporated by reference to Exhibit 3.1 of
the 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. |
|
|
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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 |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
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February 9, 2009 |
SurModics, Inc.
|
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|
By: |
/s/ Philip D. Ankeny
|
|
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|
Philip D. Ankeny |
|
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|
Senior Vice President and
Chief Financial Officer |
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|
23
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the Quarter Ended December 31, 2008
SURMODICS, INC.
|
|
|
Exhibit |
|
Description |
3.1
|
|
Restated Articles of Incorporation, as amended incorporated by reference to Exhibit 3.1 of
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. |
|
|
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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 |
24
exv31w1
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002
I, Bruce J Barclay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The 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 we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the 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.
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Dated: February 9, 2009
|
|
Signature:
|
|
/s/ Bruce J Barclay |
|
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|
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|
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|
|
|
|
|
Bruce J Barclay |
|
|
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|
President and
Chief Executive Officer |
|
|
EX-31.2
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002
I, Philip D. Ankeny, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The 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 we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the 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.
|
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|
Dated: February 9, 2009
|
|
Signature:
|
|
/s/ Philip D. Ankeny |
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip D. Ankeny |
|
|
|
|
|
|
Senior Vice President and
Chief Financial Officer |
|
|
exv32w1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SurModics, Inc. (the Company) on Form 10-Q for
the quarter ended December 31, 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.
Dated: February 9, 2009
|
|
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|
|
|
|
|
|
|
|
/s/ Bruce J Barclay |
|
|
|
|
|
|
|
|
|
Bruce J Barclay |
|
|
|
|
President and
Chief Executive Officer |
|
|
exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SurModics, Inc. (the Company) on Form 10-Q for
the quarter ended December 31, 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.
Dated: February 9, 2009
|
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|
|
|
|
|
|
/s/ Philip D. Ankeny |
|
|
|
|
|
|
|
|
|
Philip D. Ankeny |
|
|
|
|
Senior Vice President and
Chief Financial Officer |
|
|