We have recently upgraded our recommendation on SurModics (SRDX) to Neutral. During the first quarter of 2010, the company’s earnings per share (EPS) came in at 24 cents, surpassing the Zacks Consensus Estimate by 5 cents. Although revenues of $21 million were down 26% from the year-ago period, it was primarily due to the termination of the company’s agreement with Merck (MRK) in September 2008. 

SurModics derives a substantial portion of its drug delivery revenue from the Cypher stent, which is marketed by Johnson & Johnson’s (JNJ) Cordis division. Despite severe competition in the stent market, revenues from the cardiovascular segment during the quarter recorded a 9% sequential growth. This segment accounted for 62% of total revenues.
 
In addition, we are pleased to note that the overall drug-eluting stent penetration rates in the US have increased to 77% from 73% in the year-ago period. During the first quarter of 2010, ophthalmology segment revenues came in at $2.5 million, up 35% sequentially. We believe the company’s agreement with Genentech/Roche (RHHBY), entered in 2009, will boost revenues for this segment in the forthcoming period. The agreement further provides Roche/Genentech with opportunities to develop additional compounds for the treatment of ophthalmic diseases. 

Following the termination of its agreement with Merck, SurModics has witnessed a steep decline in contribution from the ophthalmology segment. In order to revive this area, the company has been pursuing ophthalmology projects with other big pharmaceutical players. It expects this segment to contribute significantly to the top line in the forthcoming quarters.
 
We are also impressed with the strong financial position of SurModics. At the end of fiscal 2009, the company had cash and investments totaling $47.9 million without a debt burden. Moreover, following the completion of the new cGMP manufacturing facility in Alabama, a major portion of the capital investment has been done. This facility should contribute to the top line from the second quarter onwards.
Read the full analyst report on “SRDX”
Read the full analyst report on “MRK”
Read the full analyst report on “JNJ”
Read the full analyst report on “RHHBY”
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