SurModics Inc.’s (SRDX) second quarter fiscal 2011 earnings (excluding special items) of $0.08 per share were well ahead of break-even earnings suggested by the Zacks Consensus Estimate. However, earnings fell short of the year-ago figure of $0.10. The weak year-over-year performance in the second quarter of fiscal 2011 was attributable to lower revenues.
Revenues on an adjusted basis dropped 4.9% year over year to $17.4 million in the reported quarter. Revenues, however, surpassed the Zacks Consensus Estimate of $15 million. On a sequential basis adjusted revenues increased 13%. Reported revenues increased 15% sequentially to $17.5 million.
In October 2010, SurModics made certain changes to its organizational structure to reduce costs and utilize its resources in a better manner. Following the restructuring, the company now operates through three business units: Medical Devices, Pharmaceuticals and In Vitro Diagnostics. The impressive sequential performance was driven by the strong performance at all the segments of SurModics.
SurModics’ reported revenues from the Medical Devices segment came at $10 million, up 2% sequentially. Pharmaceuticals division climbed 56% sequentially to $4.2 million. Reported revenues from the In Vitro Diagnostics unit jumped 25% sequentially to $3.3 million.
For the reported quarter, royalties and license fees accounted for 44% of total reported revenues with product sales and research & development accounting for 33.1% and 22.9% 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 41% year over year and 16% sequentially.
SurModics exited the quarter with $60.0 million in cash and investments but no debt. All 7 new licensees, who signed with SurModics during the quarter, were in the Medical Devices unit. Moreover, the quarter saw the launch of 3 new customer product classes.
Fiscal 2011 Outlook Upped
Apart from releasing financial results, SurModics also provided guidance for fiscal 2011. The impressive sequential performance prompted the company to up its fiscal 2011 projection.
SurModics expects to end fiscal 2011 with revenues in the range of $63 million-$68 million, as against the previously forecasted range of $55 million-$63 million. Adjusted earnings per share for fiscal 2011 are projected in the range of $0.13-$0.26. The company was earlier guiding towards a range of a loss of $0.15 to earnings of $0.05.
Our Take & Recommendation
Earlier in the year, we upgraded SurModics to Neutral from Underperform following the efforts of the company to emerge from the below-par performances delivered over the past few quarters. Our Neutral stance is supported by the Zacks #3 Rank (short-term Hold rating) carried by the company.
We are encouraged by SurModics' move to explore options regarding the Pharma unit, including its potential sale that will enable SurModics to focus on its core business and enhance shareholder value.
The company has also brought about a change at its helm to steer it out of underperformance. In another move aimed at driving the company back to growth, SurModics has restructured its board. Late last year, SurModics trimmed its work-force by 13%, apart from the organizational restructuring referred to above, to streamline operations and increase efficiency.
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