Surmodics, Inc.

Welcome to the Sermatix Second Quarter Fiscal 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Tim Ahrens, Senior Vice President of Finance and Chief Financial Officer. Please go ahead.

Thank you, Stephanie. Good morning and welcome to Sermatix Fiscal 2021 Second Quarter Earnings Call. Before we begin, I would like to remind you that during this call, we will make forward-looking statements. These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Sermotic's future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements, resulting from certain risks and uncertainties. including those described in our SEC filings. Sarmatix disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments, or otherwise. We'll also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains reconciliation tables to GAAP results. This conference call is being webcast and is accessible through the investor relations section of the Sermatix website, where the audio recording of the webcast will also be archived for future reference. A press release disclosing our quarterly results was issued this morning and is available on our website at sermatix.com. I will now turn the call over to Gary Maharaj. Gary?

Thank you, Tim. Good morning, and welcome to Sermatix's fiscal second quarter 2021 earnings call. We had an excellent second quarter. Every cylinder was firing in the semantics engine. We recognized $10.8 million of revenue from the surveilled clinical report milestone. We saw a return to growth in our medical device coatings royalty portfolio. And we made solid progress on the execution of our key strategic objectives during the quarter. To top it off, our IVD businesses developed record revenue performance. My thanks go out to the entire semantics team for their continued dedication. Total revenue for the quarter increased 53% to $35 million in the second quarter of fiscal 21, compared to $22.8 million in the prior year quarter. In our second quarter, our performance benefited from the achievement of the $15 million for the clinical report milestone, of which we recognize $10.8 million in Q2. Excluding the impact of this business milestone payment, total revenue grew 6% as both our medical device and IVD businesses delivered year-over-year revenue growth. We reported diluted GAAP earnings per share of 58 cents and non-GAAP earnings per share of 62 cents in the second quarter. During our second quarter, I was pleased with our progress on our key strategic objectives for fiscal 21. As a reminder, they are, first, complete the final PMA submission to the FDA for our surveilled drug-coded balloon. Second, continue the advancement of our robust product pipeline. And third, to optimize cash flow from the IBD and medical device businesses to fuel our strategic growth initiatives. Starting with Surveil. As we discussed in our last servings call, the results of the Transcend study of our Surveil drug-coated balloon were presented in January. These data demonstrated that Surveil was non-inferior to the Impact Admiral VCB in both the primary safety and efficacy endpoints, despite the Impact device having 75% more Paxifaxil on board. Our team is in the process of collecting and assembling the final data package for PMA submissions. As we have previously communicated, this includes, as required by the FDA, a minimum threshold of mortality follow-up data for patients at two and three years from the time of their treatment. As part of our surveil development and distribution agreement with Abbott, in Q2 we received a $15 million milestone payment from Abbott associated with successful completion of the clinical report. that demonstrated these primary safety and efficacy endpoints in the TRANSCEND clinical study. As previously communicated, there remains a final $30 million milestone payment upon successful PMA also availed by the FDA. Based on the timing of the last patient to be enrolled in the TRANSCEND study, we are still on target to submit to FDA for PMA in Q4 of this fiscal year, and we continue to expect that we'll be in a position to receive PMA by the end of calendar year 2021. While decisions related to Surveil's launch timing are ultimately to be made by our partner Abbott, our conversations with Abbott have led us to believe that Surveil's commercial launch, including Europe, is most likely to occur following U.S. PMA approval. Moving to our Sundance DCB. As a reminder, enrollment was completed ahead of schedule in January for our swing first in human clinical study for our Sundance below the knee serolimus coated balloon. Several patients have completed their six-month follow-up visits and we anticipate that the remaining follow-up visits will be completed by late August. We are excited about the potential for Sundance to provide an important and effective therapy for patients suffering from critical limb-threatening ischemia. With an estimated 1 million Medicare patients treated for CLI annually and very few effective treatment options and no current FDA-approved drug-coated balloons, our Sundance drug-coated balloon has the potential to be a game-changing therapeutic option. We look forward to sharing our six-month data later in calendar year 2021. Regarding our Avess AV Fistula DCB, we are completing the build out of the full matrix of balloon sizes to treat the Nosed AV Fistulas. Our team is now beginning the process and product validation efforts. Concurrent to these activities, we continue to assess the optimal regulatory and clinical strategy for our Avess Drug-Coded Balloon. Next is our Sublime Radial Access Platform. Earlier this month, we announced that we successfully completed the first clinical cases using our sublime radial axis guide sheet and the sublime radial axis 014 RX PTA dilatation catheter. Since then, we have continued to receive favorable physician feedback on their experiences with these devices. As we expected, the feedback has been consistently positive. with physicians commenting on the ease of use, pushability, trackability, and lesion crossability of the products. During our last earnings call, I mentioned that we had encountered some delays in the scale-up manufacturing validation of our sublime 014 catheter. Based on the hard work of our team, we have completed these important and necessary validations. Regarding our follow-on offering, the sublime radial axis 018 PTA dilation catheter, We filed for a 510K earlier this month. As with all of our applications and submissions with the FDA, we expect that we will have additional information to share on the clearance of this device in the coming months. The sublime 018 catheter will complement our sublime 014 catheter, allowing physicians to treat the entire limb segment via radial access with balloon angioplasty. And finally, I'd like to give a brief update on our Pounce thrombectomy platform. Our teams are working diligently to complete the product and process validations that allow us to be ready to conduct limited clinical evaluations of the product later this year. Regarding our third strategic priority, our medical device and IVD business segments, we continue to deliver solid performance. We're seeing strong growth and uptake of our serene coating technology, which offers advanced performance benefits, including lower particulates and best-in-class lubricity. In addition, we were pleased to see our coating royalty revenue return to growth in Q2. In our IBD business, we continue to deliver strong operating performance, driven by our focus on customer service, commercial excellence, and our gold standard product performance. Revenue from our IVD business unit was up 9% this quarter versus the prior year to a record $7.1 million, while generating excellent operating margins that once again exceeded 50%. These core offerings continue to be the bedrock of our operating performance, funding not only their own steadily growing operations and business value, but also fueling our strategic growth initiatives. Our strong operating performance and execution and our strategic objectives is a result of tactical perseverance, a pool of talented team members that we have continued to build on and develop behind the scenes, and a rigorous process of dynamic capital allocation. While it may be early, we have improved our competitive positioning and the capability so that when we believe the global economic future brightens in the post-COVID world, we can continue to accelerate the programs that build long-term shareholder value. After living through a challenging and unpredictable period this past year, I was pleased to see our strong Q2 performance and believe that better times lie ahead. Consequently, we believe that now is an appropriate time to provide our financial outlook for the remainder of fiscal 2021, which Tim will cover in a moment. In closing, we have delivered exceptional results in our second quarter in our IBD and medical device businesses, and we're successfully executing on all of our strategic objectives, including our product development, clinical, and regulatory efforts. 2021 is and has been our execution, and I firmly believe we have a dedicated world-class team at Semotics to position us for the bright future we have in front of us. Tim?

Thank you, Gary. During today's call, I will provide an overview of our second quarter operating performance and provide our outlook for full year fiscal 2021. Revenue for the second quarter of fiscal 2021 increased 53% to $35 million, which includes 10.8 million of revenue recognized from the 15 million clinical report milestone under our surveilled distribution and development agreement with Abbott. This compares to 22.8 million in the prior year. Excluding the impact of this milestone payment, as Gary mentioned, our second quarter revenue grew 6%. Our medical device revenue increased 71% to 27.9 million, which includes the clinical report milestone revenue. Excluding the impact from this milestone payment, second quarter medical device revenue grew 5% year over year. Our in vitro diagnostics business grew 9% to a record $7.1 million, driven by broad-based demand for our diagnostic test component products and development projects. Our second quarter royalty and license fee revenue totaled $20.1 million, up $11.8 million from the prior year period, primarily as a result of the $10.8 million impact from the $15 million milestone payment. License fee revenue under the AVID agreement totaled $12.5 million in the second quarter of fiscal 2021, compared to $1.5 million in the prior year quarter. Royalty revenue increased 11% to $7.5 million in the second quarter, compared to $6.7 million in the prior year quarter. We saw broad-based underlying growth in our royalties portfolio, including strong double-digit growth from our serene coding, In addition, we are seeing growth from device applications that leverage our Gen 4 technology. As a result, we anticipate no further year-over-year headwinds from the Gen 4 patent expiration. And on another positive note, in Q2, we experienced the lowest impact on royalty revenue from COVID-19 since the onset of the pandemic. Product revenue of $11.8 million in the second quarter was essentially flat compared to the prior year quarter across both our medical device and in vitro diagnostics businesses. Our medical device business reported product revenue of $5.4 million and benefited from our recent distribution partnership with Koch Medical for our 014 and 018 PTA balloon catheters, as well as a modest increase in our coating reagents, which was offset by softness in our legacy balloon catheter sales. Our in vitro diagnostics product revenue totaled $6.4 million and was essentially flat, with increased demand for our protein stabilizers and colorimetric substrate offerings offset by unfavorable order timing for distributed antigen products. R&D services revenue of $3.2 million was up 12%, or $330,000 compared to the prior year period. as our IVD business continues to benefit from increased customer development project opportunities. This was offset in part by lower coding services demand in our medical device business. Product gross margins were down in the quarter at 65%, as compared to 68% in the prior year quarter. Product gross margins were unfavorably impacted by product mix, with a shift to relatively lower margin product lines. R&D expense, including costs of clinical and regulatory activities, was $12.9 million for the second quarter, up 8% or $940,000 as compared to the year-ago period. For both R&D expense and SG&A expense, we faced difficult comparisons to the prior year period, which did not include any expense related to incentive compensation as a result of the uncertainty related to the pandemic. Also as expected, compared to the prior year, Our surveil-related R&D costs declined, including Transcend. SG&A expense in the second quarter of fiscal 2021 was $7.9 million, an increase of $1.2 million, or 17%, compared to the year ago. In addition to the unfavorable comparison with respect to incentive compensation, personnel and other investments to support product development and our strategic initiatives contributed to the expected increase. Our medical device business reported operating income of $8.6 million in the second quarter, compared to an operating loss of $1.5 million in the year-ago period. Medical device operating results reflect $10.8 million in license fee revenue, recognized on the Abbott milestone payment, and higher royalty revenue compared to the prior year, offset by increases in R&D and SG&A expense. The IVD business grew operating income by 10%, or $350,000, to 3.8 million in the second quarter. Operating margin grew to 54%, up from the prior year quarter's 53%, as we benefited from solid top line growth and continued focus on expense management. Now turning to income taxes. We recorded income tax expense of 1.4 million in the second quarter, compared to income tax benefit of 1.9 million in the prior year period. The current quarter's tax expense reflects strong pre-tax results with the receipt of the Abbott Milestone Payment. The prior year quarter's tax benefit was a result of our ability, under the CARES Act, enacted in March 2020, to carry back net operating losses to higher tax rate periods. Both periods reflect the impact of taxable income for the full year in the U.S., non-tax-benefited amortization, and operating losses in Ireland. On a GAAP basis, diluted earnings per share was 58 cents in the second quarter, compared to 11 cents in the prior year quarter. On a non-GAAP basis, diluted earnings per share was 62 cents in the second quarter versus 4 cents in the prior year quarter. Moving to the balance sheet, we continue to have a strong cash position and no debt. In the second quarter, we began with 53.9 million of cash in investments and generated 16 million of cash from operating activities. During the quarter, we paid $650,000 for capital expenditures. As of March 31st, 2021, we have cash and investments totaling $70 million. Our current cash and investment balances provide adequate capacity to support our strategic growth initiatives. Turning now to our outlook for 2021, we expect fiscal year 2021 revenue to range from $101 million to $105 million. This outlook includes between $16.5 million and $17.5 million of license fee revenue associated with the Abbott Surveillance Agreement. Our guidance reflects growth in royalty revenue of mid to high single digits year over year. Regarding operating expenses, we anticipate an acceleration of investment in our strategic initiatives through the remainder of the year. For the full year, SG&A is expected to grow in the low double digits, and R&D spend is expected to be somewhat consistent with the prior year. In addition, we expect the full year impact of income taxes to be neutral to $1 million of tax expense. Finally, our fiscal 2021 revenue outlook excludes any revenue associated with the achievement of the final surveil milestone payment, surveil product sales, or surveil profit sharing revenue. We expect fiscal 2021 diluted earnings per share in the range of a loss of share of $0.05 to earnings per share of $0.20. We expect non-GAAP diluted earnings per share to range from $0.10 to $0.35. Operator, this concludes our prepared remarks. We would now like to open the call to questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, you may press star 1 to ask a question. Our first question comes from Brooks O'Neill with Lake Street Capital Markets.

Hey, good morning, guys. Congratulations on the great quarter. I had a little trouble dialing in this morning because I think somebody might have given me the wrong phone number, but I got that figured out.

Thank you, Brooks, and glad you were able to join us. Right.

So a couple questions. I know it's pretty early with regard to some of the pipeline projects, but can you comment at all in any of them about any interest you're seeing, you know, from potential partners up and down the line?

Right. Thanks, Brooks. You know, as we said, we have been intentionally shy in terms of meeting and talking with partners, and some of them, if you would have talked to them, would acknowledge that, because we really want to develop the clinical case series, the breadth of cases in the first 50 to 100 cases with this. We are aware of interest, but as I've told our team, the real value creation here is us understanding the value of what we have from the clinical feedback. And so far, that's been going well. The other thing, Brooks, as you know, and having done this for 33 years, we like to do, really shake out every nuance of the product, the good and the not so good as well. And so that gives us an ability to address any feedback that comes up from product improvement or how it usability. So really we're still really have the blinders on and driving that. But as I'm aware there, there is external interest, but we, um, For now, we're intentionally trying to avoid those conversations.

Yep, that makes sense to me. Thank you for that. I'm curious. I think I heard Tim say in his prepared remarks that the R&D spending is likely to stay relatively flat. I assume that's in dollar terms. So as the revenue growth begins to accelerate, most likely in fiscal 2022, I'm just checking to see if I'm right in believing that your dollar is relative flat, but the percentage of revenue spent is likely to begin to fall. Is that the right way to think about it?

That's right, Brooks. I'll just give you a little color here. Clearly, this fiscal year compared to fiscal 2020, we expect that our R&D revenue will be somewhat flat And if you take a look at Q1, it was really kind of a low water point here in recent quarters and kind of how we're thinking about Q3 and Q4. There is a lot of work to do, as Gary has been describing with these three platforms, and we will allocate capital to them appropriately. They're all extremely value creating or have the potential to be extremely value creating. So I will answer the question in terms of 2022 We absolutely think as a percentage of revenue, R&D spend will look like it's declining just from a percentage perspective. But as it pertains to the aggregate dollar amounts, it's probably a little difficult for me to give you a whole lot of clarity on that. And the primary factors are with regard to any pivotal studies with Avess and Sundance. So stay tuned on that. There's still some thinking and potential negotiations that need to be done on those fronts. But, you know, thinking through this at the rate of maybe 50-ish million a year is probably not a bad way to think about it, with perhaps some growth on top of that based upon clinical studies.

Okay, that's great. That's very helpful. I'll just ask one more. If I remember correctly, you had a retirement of your senior manager in Ireland, and as I think about what I hope will be a ramp-up in manufacturing activity for you guys. How do you feel about your team and your capability on the manufacturing side? Thank you very much again. Congratulations on a terrific quarter.

Thanks, Brooks. And that actually is an excellent and often unasked question. Behind the scenes, we have been developing our I don't want to say bench strength, but really that's what it is, behind the executive team. We have really an incredible depth shot in the company here, and that's with specific intent in areas of succession planning at all levels. And so our new executive manager in Ireland has been training for this position for many years, and really the best news is he's He's jumped in without skipping a beat. And even Tom, who left the company, would agree with that as well. Tom continues to be a mentor for this person. But not a skip in the beat at all. An Irish team is very well served with Damien Kilcommons, who's over there. Great. Thank you very much. Thank you, Brooks.

Thank you. Our next question comes from Mike Mattson with Needham & Company.

Hi, good morning. Thanks for taking my questions. I just wanted to reconfirm something you said. The timing on surveil, so you're expecting to submit the final part of the modules or whatever in the fiscal fourth quarter, and you said you expect to receive approval by the end of calendar 21. Did I hear that correctly? Yes, yes. Okay. All right. And then just wanted to see what you're hearing from the clinicians that you talk to about the transcend results. You know, we've spoken to a few, you know, cardiologists that do a lot of peripheral procedures and, you know, it seems honestly, it's been kind of lukewarm, you know, people seem really entrenched with the Bard and Medtronic balloons and, you know, kind of saying things like, well, unless it's really superior to the products that are out there, it's going to be tough to switch. It's going to be tough for me to go to the VAC committee to really, kind of lobby to get this thing into the hospital, et cetera. So just curious what you're hearing there and how you think the product will be kind of marketed to address those issues.

Sure, sure. First of all, that is completely unsurprising to us, and that is the power of having strategic partners such as Abbott, who clearly to me are best in class in terms of clinical marketing where we have. So that has not even – So normally, what I call clinical inertia is there. And in my casino, there's always a gap between knowledge and practice in medicine. And so until we start the education and forming of these physicians, it's a fairly straightforward marketing issue. The other thing, I would say it would be more difficult for somatics alone to do that, but with our partner Abbott, you're selling at all levels. You're selling at the group contract level, at the IDN level, at the C-suite, at the physician level, and at the value analysis committees. We don't foresee the expected inertia as an issue whatsoever. It's just the wall you lean against and And I can predict that our partner, Abbott, is ready for that conversation.

Okay, thanks. And then just on the SWING trial for Sundance, so what is the endpoint of that trial? I know it's a first in human. And then, you know, what do you need to see there to progress to the pivotal trial?

Right. Well, it really, as these first inhuman trials go, it's a safety study. We're looking for 30-day follow-up and making sure, even at the six-month follow-up, all these patients are doing, as you know, it's critical in threatening ischemia, and so there's so many comorbidities with these patients. The other thing we're all looking for is, and this is more on a secondary basis, is the patency of the vessel And we're actually doing an additional step where we're actually doing a follow-up angiogram so that we can look at late lumen loss of the tibial artery itself. And what that gives us is, you know, duplex is really a binary thing. Open or close of the PSVR, the velocity ratio is less than 2.5 or whatever we set. But with late lumen loss, we can actually measure the vessel. And we can look for the actual size of the vessel compared to the reference diameter prior to treatment. And the nice thing about that is even with a subset of 35 patients, it's a continuous variable. It's an actual number with decimal points behind it versus a binary variable. And so it gives us much better statistical confidence with those. But again, it really is a safety study with what we call a nice indication of efficacy. And that indication allows you to make some assumptions of the effect size of the device, the power of Future Pivotal. So in Transcend, as you recall, we only have 13 patients. So the 35 patients here, we're really looking forward to.

Okay. All right. That's helpful. And then just on counts, when would you expect to start working on additional indications for that product? Would you... start that before you get a distribution deal in place for the arterial indication, or would you wait until you get to that point and start to generate some sales from the product? Right.

You know, in the modern era, it's like app updates on your iPhone. Version 1.5 is already in development. Version 2 is already in development. So we take a very parallel approach to this. And, in fact, what we're prepared for is any feedback we receive in version 1. is going to be plowed into 1.5 and then version 2. And the reason we use that nomenclature is what will require re-regulatory filing. And so if there's a lot of regulatory requirements to file, we might bundle that in a version 2. So that's ongoing. right now. And Mike, I just wanted to make sure just on the FDA, PMA, the fine print there, as you know well, is we're targeting and expect to get it by the end of the fiscal year. But as with anything regulatory, and especially PMAs, a lot of that is in the hands of how the data review proceeds with FDA. Just to add that note.

And let me just offer a little more color. Mike, thank you for the questions. You're thoughtful and With regard to pounce and clot removal, Gary's comment, his response is really in regard to arterial. You had asked the question also with regard to how are we thinking and framing up maybe other indications that could leverage our patent portfolio and the technology. And all I can really share at this moment is the team has really done a thorough identification of what the problems are. with other indications and kind of what a value proposition might need to look like and have begun to think through kind of some of the design requirements, etc. So we're informing ourselves in terms of what needs to be done to be able to create a technology that can be effective and then trying to make sure that we can leverage that insight and understanding what the technology that we have or what do we need to do to complement it. So stay tuned on that, but I would like to go back to your question or your comment with regard to some of the clinician feedback that you received. And look, Gary and I aren't in a position to speak for Abbott, but what I will tell you is that there is clearly, from what we're hearing, higher market sensitivity with regard to drug dose and coding formulations. That bodes very well for Sermatix technology, and I think it could bode very well for Abbott in marketing the technology. I think there is also a real key thing to understand, and that is Abbott has a very complementary bag of product offerings that are used in conjunction with a drug-coated balloon. And so I wouldn't underestimate the power that Abbott has from a marketing perspective, but also just from a portfolio perspective to ensure that there's going to be traction with Surveil once it's launched. So we're all excited, and we're anticipating great things. And we'll stay tuned until the launch begins.

Okay, great. Thank you.

Thank you. As a quick reminder, if you'd like to ask a question, you may press star 1 now. Our next question comes from Jim Sidoti with Sidoti & Company.

Hi, good morning. Can you hear me? We hear you loud and clear, Jim. Great, great. Yeah, I just want to say for all the south side, we're glad that Brooks was able to get that number straightened out and get on the call. But anyway, the questions I had related to your performance, you have three products in the pipeline, you know, and it's kind of neat that we're able to talk about things beyond Surveil, that there is a future beyond that and that you're coming to the close of that. But if you look at the three products beyond Surveil, the below the knee balloon, the AV access balloon, and then the thrombectomy device, Can you just kind of give us a sense of those three? What's the biggest opportunity and what's the nearest term opportunity?

Tim will talk about the addressable markets and stuff beyond that. But just keep in mind there's also the Sublime Radio Access platform. So it's really that in addition to the three you mentioned.

Okay.

I think it's a really great question. Now, You know, we haven't really given a lot of perspective here in terms of the Avess and Sundance, and I'll just start there. Our teams are evaluating and assessing the regulatory and clinical approach. You know, folks may have seen some recent data that's been published, two-year data, on one of the balloons. I believe it's a Medtronic balloon. The data looks really good. You know, we're very optimistic about what we have with regard to Avess. It's a large market opportunity in terms of the overall number of patients that require some help with the stenosis graft. And we think that drug coated balloons are going to have a pretty big future to play in that space. Sundance is really exciting below the knee. There is no option. We've heard the news with regard to BARD and the panel decision not to grant them approval to move forward with marketing the device. We're hearing that others have dropped out of the market or the space on development efforts. There's still a road to climb here, but we are pretty optimistic in these early stages here with regard to Sundance. We'll know a whole lot more later in the fall. By the end of the calendar year here, we expect to be in a position to share the data on the first in human study, but that could be game changing. That could be a significant opportunity where there could be high penetration with a drug-coated balloon to treat critical limb ischemia. And depending on what might happen with our partner Abbott, it might just help support and, quite frankly, strengthen the drug-coated balloon portfolio, having both something to treat lesions above the knee as well as below the knee. But that will take a bit longer. From a study perspective, we've seen that the AVEST studies or AV-AXIS studies tend to be conducted a little bit faster. And so we'll have to just wait and see. But if things go really well, we have a couple of tigers, if you will, in the portfolio that we expect over the next several years can generate revenue, whether it's in the form of license fees and milestones initially and product and perhaps maybe some other form, maybe profit sharing in the future, yet to be determined, but super excited. Okay.

And, you know, just on the, since the radial thrombectomy is well characterized in people, it's sort of the star of the market in terms of excitement and value from thrombectomy. And so we look at arterial. Clearly, we do have venous and pulmonary embolism on tap. And as Tim alluded to earlier, we try to give a protective space for the development teams Within concept development, a lot of companies rush to what we call solution space very quickly. We love to stay painfully in what we call problem definition space. And what I can say is that in problem definition space, there are key holes in the performance of all of the current devices. And for somatics to take on a project, we clearly want to address those issues before we come up with concepts and IP associated with it. But sublime, the radial continues to be a sleeper in this market, just because the total addressable market is really pending on OBLs. And as OBLs continue, office-based labs continue to grow, but I may have said it in the last sitting calls, what you have to believe is, given the profound potential clinical outcome benefits to those patients, some really dramatic fixed asset cash flow and profits that accrue to the OBLs. Are they able to conduct more procedures because of radial access at the end of the day? And then a really dramatic, and this is often misunderstood, of patient satisfaction. The physicians I have talked to who have used our devices believe that products like these are going to make them win because it's better for the patient and It's more satisfying for the patient. And their office-based labs, once they cover those fixed asset utilization with a couple of extra procedures you can get from radial access because of the discharge time being much shorter, is pretty much all free cash flow. So it's one of those things where the market is not developed yet, but we are positioning ourselves because... Our thesis is that cannot help but grow because it's solving three critical issues in U.S. healthcare today. At the same time, I frankly don't know of another product platform that actually can accomplish that. So we're excited about that opportunity as well.

So, with regards to timing, you know, I know you're hesitant to give long-term guidance, but would you be surprised if one or two of these products was a significant contributor to revenue by, let's say, fiscal 2023 or 2024?

Absolutely. Absolutely. Well, quite frankly, Jim, we're hoping for more than one. Let me replace the word hope with expecting.

Yeah, and the binding issue for semantics right now, at least for us in an investor point of view, is getting those points on the board. I think sometimes what we don't articulate or doesn't get across is it's almost too much to say one company has, I think I said it last time, if we were a company with only one of these platforms, I think investors would read us better. But counterintuitive, because we have four exciting areas that we're working on and the three product platforms that work, it almost seems like you manage to discount all of them versus additively look at all of them. But really putting points on the board as we get these things out in terms of revenue and EBITDA growth is really what we're after.

All right. And then just one last one on the quarter that just ended. Tim, you said the IVD business had about six and a half million sales, you know, flat a year ago. But then on the release, you reported there was about seven million of revenue from that business. So is there royalty revenue coming in from that business?

I might be misunderstanding the question, Jim, but Let me attempt to answer here what I think you're asking. If I referred to the IVD revenue as being $6.5 million, that was an error. The IVD revenue was $7.1 million and grew about 9%. So if I did make a reference to $6.5 million, I'm going to be honest with you, I'm not sure what that was intended to do.

All right. Maybe I misheard that then. And of that $7 million, is that... Is that boosted by COVID testing, or is that all your core business?

No, it's predominantly core business. I think we've talked here over the last few quarters. We have a couple of customers who have leveraged some of our chemical components for serology tests. But we're not seeing, unfortunately, a big uptake in terms of serology tests, probably for a number of reasons. So the impact on the quarter has been de minimis.

Okay, thank you. You're welcome.

Thank you. Again, that's our one to ask a question. Our next question comes from Mike Putzke with Barrington Research.

Hey, good morning, guys. Great result. Hey, so let's stick with IVD. You know, it's not talked about very often, but, Gary, I'm just wondering, I mean, when you look at that business, you know, if you looked at it as a standalone asset, I mean, you've got nice top-line growth. You've got 50% op margins. I mean... what's that asset worth standalone in your view? I mean, have you guys assessed that or do you have anything you can say around that?

Yeah, I'll, Tim will answer some of the granularity there. We keep, always keep, just to keep aligned some of the parts type analysis of the portfolios and the business, operating businesses we have. And The IVD business on an EBITDA basis has continued to grow remarkably, and we believe it will continue to grow like that in the future on an EBITDA basis. And so the factor is the multiple on that has actually changed, Tim, I think positively in the last year in the diagnostic space. So it's whatever range you put on the multiple of EBITDA of that business. But the short answer is handsome growth in that business value-wise.

Mike, Joe and the diagnostics team, great, solid team, have really done a lot here with this business over the past several years. You've seen... Revenue continually coming in in the mid to high single digits. When we first started talking a little bit more about operating margins with the segment, we were below 40%. I don't know, Gary, if it was eight years ago or so, but here we are, 54% for the quarter. We continue to probably achieve a 50% or higher operating margin more often than not. And so if you just frame it up, you know, I think the revenue is, you know, we could be looking at, you know, 26 or higher revenue in terms of millions of dollars in 2021. You know, you know what the operating margin is, 50-ish percent.

Not capital intensive.

Not capital intensive at all. Almost all of that's dropping straight down to EBITDA. It's not unlikely to think that your EBITDA dollars in terms of a range is probably going to be somewhere in the teens. mid-teens in the millions, and we've seen multiples range from 13 to 18x. It's a wonderful gem of a business, and it continues to increase in value each year. So I'll let you do the math. I think some of you have done the math and have kind of indicated that it's pretty valuable.

I think we like the question because behind the scenes, because we don't trump up these businesses, their value has grown substantially. And it's not for sale.

Okay. Fair enough. Okay, so I wanted to just, for my own clarity, maybe everybody else knows this, but for my own clarity, the $30 million that's still on the table from Abbott related to surveil and regulatory clearance, is all that associated with regulatory clearance or is part of that related to the filing and then you know, when you get the first part of that, the revenue recognition, how much of that 30 is likely to be recognized either in the quarter or right in the next quarter, you know, sort of after you achieve the milestone?

Does that make sense? Thank you for the question. The 30 million, there's really a bright line on this one. It's pretty clear. PMA approval, FDA PMA approval, one thing. And so upon receipt of the approval, there's a $30 million milestone payment that will be received. If you take a look in the investor deck, and I think we're going to be posting the updated deck here probably later today or tomorrow, so stay tuned. But if you look at the investor deck, you'll see we have a slide in there that kind of helps folks appreciate how to contemplate how these milestone and license fee payments are recognized. I think for the full year 2021, it's about 76%, 77% somewhere in there. So, for example, the $15 million, we'd be recognizing a good chunk of that, the $10.8 million right away here in Q2. But for the full year, you just can take $15 million and multiply it by 75%, 76%, 77%. That will tell you the range. It's going to be a little bit higher for PMA for the $30 million because we expect that we'll have incurred more of the costs. associated with the Transcend study. And that milestone payment, Gary, we expect, you know, we'll be able to achieve that PMA approval here by the end of the calendar year. So, you know, it would probably be maybe somewhere closer to 80%. But, yeah, I would expect it would be north of 76%, 77%. But, you know, probably not a bad way to think about it. 80% could be conservative.

Okay. So 80% of the 30 could be recognized immediately.

Yeah, immediately. Okay.

And then just one more question. So, you know, $70 million, you know, between cash and available for sale securities, I mean, $70 million, I think that's the most sort of cash or equivalents that you guys have had in a while. Does that change your way of thinking about capital allocation at all? Does it make you want to go deeper in some R&D spend? Or, you know, can you just talk about if that changes anything in terms of your thinking around capital allocation? Thanks.

Yeah. You know, and you recall this time last year, we and everyone were prioritizing liquidity and having healthy balance sheets. I think for us, you know, we continue to look at our balance sheet as a dynamic tool for growth, as I said in the past, to assist a static indicator of performance. So using that balance sheet is always something we consider how to dynamically allocate capital and grow the business eventually. You know, coming out of this, what we hope is a post-COVID world with a rebound in economic metrics, we also always have a healthy corporate development initiative. We don't talk much about it, but we're always, Tim and the team, we're always sifting. And to find great technologies, great things that complement where we're going, intellectual property. So That will always be in play for the balance sheet is there, but then the capital allocation will turn over to them as well. Yeah.

No, it's a really great question, and it's a fair question. You know, we're fairly fortunate to be in a position with $70 million of cash and investments on the balance sheet. And, boy, if you would have asked Gary and I about a year ago if we would have thought that it would have looked like this, I think both of us would have said too much uncertainty to call it. We were aiming for it, but we couldn't call it. Capital allocation, Sermotics has a history here of share repurchases. We do have an authorization in place. It always comes down to whether or not we think that we can utilize the cash that we have to further enhance and grow the shareholder value creation. So not signaling that we would be doing a share repurchase, but You know, as we kind of continue to look out over the next few years and continue to be in a position where we could grow the cash balance, that certainly could be on the table. You know, our team is pretty well set in terms of the activities that we are engaging on to help to grow the business. And, you know, I made a comment earlier in the call with regard to the potential of clinical studies to support, you know, approvals for some real important products in our portfolio, namely Avast and Sundance. It's possible that you could be seeing capital allocated to support pivotal studies, especially if we think that there could be a really nice and solid investment creation thesis behind doing that. And Gary highlighted something. It's taken us five years or so to kind of build this strategy, the transformation. We continue to execute on it. We're looking to put more points on the board. But we got to today by doing some pretty strategic work. I would say somewhat modest-sized transactions relative to what our market cap is. I would expect that if we're going to be opportunistic, if there are things that really can help support the value creation that we have in front of us and complement these platforms that we're driving, don't be surprised if we do something like that. The one thing I will say is Gary's pretty clear in terms of capital allocation and return on invested capital. We won't do anything that we don't think has real strong likelihood of succeeding and is highly complementary to what we're doing. The vision, the mission is really clear around here, and you won't see us going off after things that are shiny. We'll be sticking closer to the netting around here.

Very good. Thanks, guys.

Thank you, Mike.

Thank you. There are no additional questions at this time.

Well, thank you all for joining our second fiscal quarter earnings call, and everyone have a good day. Thanks.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.