SurModics Inc.’s (SRDX) third quarter fiscal 2011 earnings (excluding special items) of $0.13 per share beat the Zacks Consensus Estimate by $0.09 and the year-ago adjusted earnings by $0.02. The impressive year over year performance was primarily attributable to lower operating expenses.
Revenues on an adjusted basis dropped approximately 3.4% year over year to $17.9 million in the reported quarter. Revenues surpassed the Zacks Consensus Estimate of $17 million. On a sequential basis adjusted revenues increased 2.9%.
In October 2010, SurModics made certain changes to its organizational structure to reduce costs and utilize its resources more efficiently. Following the restructuring, the company now operates through three business units: Medical Devices, Pharmaceuticals and In Vitro Diagnostics.
SurModics’ reported revenues from the Medical Devices segment came at $9.6 million, down 18% year over year. Pharmaceuticals division climbed 34% from the prior year quarter to $5.0 million. Reported revenues from the In Vitro Diagnostics unit jumped 7.1% year over year to $3.4 million.
For the reported quarter, royalties and license fees accounted for approximately 41.8% of total reported revenues with product sales and research & development accounting for 32.5% and 25.7% respectively.
SurModics noted that royalties from the sales of Cypher stent (reflecting revenues from the Medical Device unit), which is marketed by the Cordis division of Johnson & Johnson (JNJ), have been on the decline due to the reduced sales of the product. According to Johnson & Johnson, global sales of Cypher during the most recent quarter were down 61% year over year. Royalty received by SurModics pertaining to the Johnson & Johnson drug delivery license decreased 13% sequentially.
We remind investors that in June 2011, Johnson & Johnson announced that it will stop manufacturing Cypher and Cypher Select Plus sirolimus-eluting coronary stents by year end. We note that sales of the product are declining due to increased competition from big players like Abbott Labs (ABT), Medtronic Inc. (MDT) and Boston Scientific Corporation (BSX).
SurModics exited the quarter with $63.2 million in cash and investments but no debt. All 5 new licensees, who signed with SurModics during the quarter, were in the Medical Devices unit. Moreover, the quarter saw the launch of 2 new customer product classes.
Fiscal 2011 Outlook
Apart from releasing financial results, SurModics raised the guidance for fiscal 2011. SurModics expects to end fiscal 2011 with revenues in the range of $65 million-$68 million (old guidance: $63 million- $65 million). Adjusted earnings per share for fiscal 2011 are projected in the range of $0.28- $0.38 (old guidance: $0.13-$0.26).
Our Recommendation
We have a long-term Neutral recommendation on the stock. SurModics carries a Zacks #4 Rank (Sell rating) in the short run.
