We continue to have a Neutral recommendation on SurModics Inc. (SRDX) with a target price of $11.00.
We are encouraged by the efforts made by SurModics to streamline its operations and improve efficiencies. We are positive about its move to explore options regarding the Pharma unit, including its potential sale, as the move will enable it to focus on its core business and enhance shareholder value. The company has revamped its board of directors and also brought about a change at its helm, with the appointment of a new CEO, to attain its objectives.
Moreover, SurModics’ strategy to sign deals with leading companies is encouraging. The license agreement with Edge Therapeutics was signed late last year for the development of sustained-release neurological product. The agreement makes SurModics eligible to receive licensing fees and milestone payments in the event of the successful development and commercialization of the product. Furthermore, the licensing deal with Clinuvel Pharmaceuticals, inked in 2010, also pleases us. The deal allows SurModics pharmaceuticals unit to license some of its biodegradable polymer implant technology to the Melbourne-based company. We are also encouraged by the company’s agreement with NuPathe Inc., entered into in late 2009, to develop novel long-acting treatments for Parkinson's disease. Such agreements should bring in additional revenues for the company.
Additionally, SurModics’ financial position is quite strong. At the end of the third quarter of fiscal 2011, the company had cash and investments totaling $63.2 million with no debt burden. It generated operating cash flow of $3.8 million in the third quarter of fiscal 2011. Moreover, during fiscal 2010, SurModics repurchased stock worth approximately $2 million. We believe the strong cash position augurs well for further acquisitions in addition to investing in current business and rewarding shareholders in the form of share repurchase.
However, in June 2011, SurModics received a blow when partner Johnson & Johnson (JNJ) announced 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. Setbacks of similar nature will negatively impact SurModics stock price.
Further, in June 2007, SurModics signed a collaborative research and license agreement with Merck and Co. Inc. (MRK) for the development and commercialization of the I-vation sustained drug delivery system for the treatment of serious retinal diseases. However, in September 2008, Merck decided to discontinue the collaboration. Although Merck’s decision was made following a strategic review of its business and product development portfolio and was not related to the safety or effectiveness of any of SurModics drug delivery systems, we remain concerned about the company’s current partnership programs. The termination of such important partnership agreements has the potential to impact the stock adversely.
SurModics has taken measures such as work-force reduction, change in management and operating segments to streamline operations and improve efficiencies. If the moves fail to deliver the desired results, then the stock will be negatively impacted.
Given these headwinds, we believe that SurModics’ current valuation adequately reflects its fairly balanced risk/reward profile. We see limited upside from current levels and consequently have a Neutral stance on the stock in the long-run. The stock carries a Zacks #3 Rank (Hold rating) in the short-run.
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
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SURMODICS (SRDX): Free Stock Analysis Report
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