We are downgrading SurModics (SRDX) to Neutral from Outperform following its setback, when partner Johnson & Johnson (JNJ) announced in June 2011 that it will stop manufacturing Cypher and Cypher Select Plus sirolimus-eluting coronary stents by year-end.
SurModics receives royalties on sales of the product. The news impacted SurModics’ shares negatively. We too have slashed our earnings estimate for fiscal 2012 by $0.08 per share. However, management at SurModics is not too perturbed by the recent development since royalties from the sales of Cypher stent have been on the decline due to reduced sales of the product.
Sales of the product have been on the decline due to increased completion from players like Abbott Labs (ABT), Medtronic Inc. (MDT) and Boston Scientific Corporation (BSX). Global sales of Cypher during the most recent quarter were down 41% year over year and 16% sequentially.
We note that the company has taken certain measures such as work-force reduction, change in management and operating segments, following disappointing performances in the last few quarters.
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.
Furthermore, the decision of SurModics to explore options regarding its Pharma unit, including its potential sale, is aimed at focusing on the company’s core business. SurModics also revamped its board of directors and also brought about a change at the helm, with the appointment of a new CEO.
However, if the moves fail to deliver the desired results then the stock will be negatively impacted. Consequently, we prefer to remain on the sidelines until these efforts start showing results.
