Surmodics, Inc.

Our success in fiscal 21 is because of their sacrifices. I'm proud to be a member of such an amazing community that you know at Thermonix. Last fiscal year, we had three primary areas of focus. The first was to continue building traction with Surveil, marching towards PME approval, beginning with our final submission to the FDA. The second was to accelerate the advancement of our robust product pipeline through product development, regulatory clearances, and clinical evaluation. And the third was to optimize cash flow from the in vitro diagnostics and medical device coatings offerings to support our strategic growth initiatives. We've made great strides in delivering on each of these goals. Let's begin with a summary of our full year fiscal 21 performance. During the year, we generated $105.1 million of revenue compared to $94.9 million in fiscal 20. Our revenue grew 11% and was driven by solid top-line performance in both our medical device and in vitro diagnostic businesses, which grew 10% and 15% respectively. Also, we reported GAAP diluted earnings per share of 30 cents for the full year, which benefited from an anticipated 3.6 million reimbursement associated with the CARES Act Employee Retention Credit, which favorably impacted our earnings per share by 19 cents. Our full fiscal year 2021 non-GAPS earnings per share was $0.37. Tim will provide additional details on our quarterly results, including the impact of the CARES Act on our fiscal 21 operating performance, as well as our full year fiscal 22 guidance. Moving on to Surveil. As we discussed on last quarter's call, we submitted our final module of the Surveil PMA submission to the FDA on June 21st. As per the request from the FDA, this module included mortality follow-up data for patients of both two and three years from the time of treatment. Recently, we had a planned follow-up meeting with the FDA regarding our submission. The FDA is requesting additional data in order to evaluate the product and its unique technology. While additional data requests, including more mortality data, are not surprising in and of themselves, The process of achieving clarity regarding these additional data that are needed to support the approval does take some more time. The agency has asked us to use their recommended process to discuss the data requirements versus just providing answers to their questions as a better, more reliable way towards the PMA. We have requested accelerated turnaround times for scheduling such data discussions. We believe that we can secure these meetings early in Q2 of fiscal 22. Given that the agency still has a further 90 days on the clock after we have discussed and submitted any additional data they require, we do not see a viable path to achieve the PMA in the first half of fiscal 22. In addition, we have comprehensive audits by the agency for manufacturing sites and audits of selected clinical sites. These are typical, and so far we have performed quite well in all of these audits. As in the past, we choose not to include regulatory-related milestones in financial guidance. However, we will clearly lay out the financial impact of such regulatory approvals for you to make your assessments. Needless to say, our goal is to secure this P&E in fiscal 22. Moving to our Sundance below-the-knee serolimus-coated balloon, In fiscal 21, we completed enrollment in our Swing First in Human clinical trial in January. The six-month patient data and follow-up visits were completed in our fourth quarter, and the clinical team, along with the principal investigators, are presently collating the data and developing the clinical rich report, which we expect to complete in our first quarter and the share with the doc Abbott in our first quarter as well. With respect to our AV fistula DCB, a vest, During fiscal 21, we completed design verification for the full matrix of balloon sizes for the base balloon catheter and began the process validation work on the base catheter. Additionally, the FDA has provided some high-level feedback on requirements for the Avess Pivotal Clinical Trial and its design considerations. Our non-drug delivery portfolio consists of our Sublime radial access platform and our Pounce arterial and Ravine thrombectomy systems. These have all made substantial progress, which I will spend a little more time than usual describing, since these have emerged as even more exciting catalysts for our future. Starting with Sublime. Our Sublime radial access platform consists of the Sublime radial access guide sheet, the Sublime 014-RX-PTA dilation catheter, and the Sublime 018 dilation catheter. What makes the portfolio so unique is that each of these devices are purpose-built for above and below the knee peripheral interventions, and that can employ both a conventional transfemoral approach and a transradial approach. We believe that the radial access procedures offer significant benefits by improving patient comfort, reducing recovery and ambulation times, and potentially lowering access site complications. However, they do require longer, lower profile devices that are robust enough to deliver from the wrist all the way to the pedal loop in the foot. Following successful evaluation of these devices, we believe the platform is uniquely positioned to lead the market for dedicated device that facilitate a radial to peripheral approach. Let's start with the guide sheet. The device has been used in 45 cases among 15 peripheral interventionalists in formal clinical evaluations. The sublime guide sheet is the only five French guide sheet available in a length up to 150 centimeters. During evaluations, the sublime guide sheet received excellent feedback for its low-profile design, its ability to track through tortuous anatomy, and its resistance to kinking when compared to alternative competitive devices. We continue to be extremely pleased with the performance of our Sublime 014 PTA balloon catheter, which started clinical evaluations in Q2. Recall that the Sublime 014 catheter at 250 centimeters is the longest 014 PTA catheter in the U.S. market. On an evaluation basis, physicians have used almost 70 devices in 10 U.S. peripheral interventional sites with remarkable success. there has been continued demand for the device beyond the initial evaluation cases. And to date, I'm pleased that we have actually shipped commercial units to customers either through a direct sale or consignment programs at these facilities. As we announced in our recent press release, we started the clinical evaluations of the sublime 018 PTA balloon catheter in late September. The first case was performed by Dr. Ankur Lodil at the Cardiovascular Institute of the South in Lafayette, Louisiana. To date, 22 units of these 014 catheters have been used at four peripheral centers throughout the U.S. It complements our 014 catheter by providing larger balloon diameters, and larger guide wire lumen for physicians who prefer to operate on an 018 platform. While the evaluations are not complete, the feedback from our early experience is consistent with that of its brother, the 014 PTA, in terms of its deliverability and ability to cross difficult lesions. In fact, following a recent universally well-known professional interventionalists that participated in these trials, His quote was, these are the best balloons I have ever used. Not once have I failed to cross a lesion with this device. I know that this is merely anecdotal to this audience, but I can remark that this feedback makes us quite proud internally and is consistent across the sites that we have evaluated these devices. Next is our Pounce Arterial Thrombectomy Platform. In July, we received a 510K indication expansion for smaller vessels down to 3.5 millimeters, which expands the market opportunity for our pound system to treat arterial clot in some vessels below the knee. Since announcing the first successful case in June, an additional 21 pounds arterial thrombectomy procedures have been conducted in six US hospitals, all patient facilities. The device has been used in a variety of cases, ranging from relatively simple acute clot extraction to the most complex procedures dealing with mixed morphology or acute and chronic clots. Notably, pounce has been brought into complete cases involving organized clot where other devices were initially used but were unable to fully restore blood flow to the limb. In these cases, the unique design of pounds and its basket and trumpet assemblies was able to capture and remove challenging clot without the need for additional devices nor surgical intervention, thus providing a good outcome for the patient. Although the majority of pound cases have been involved in arterial interventions in the lower extremity, the device has also been used for clot retrieval in other peripheral anatomy, including the superior mesenteric artery, in the abdomen, and in each of these cases, the pounce has been able to efficiently remove the clot from the vessel and restore arterial flow without the need for aspiration or additional capital equipment. We are quite encouraged by the positive response of physicians and the care team to the simplicity and effectiveness of the pounce arterial thrombectomy device, even in the most challenging clinical situations. We have already received commercial interest from peripheral interventionists and vascular surgeons who are eager to have the device on their shelves in their facilities, primarily in the hospital setting, and have recently received our first commercial order for the Pounce arterial device. We believe it's important to facilitate continued access to the use of these devices via commercial sales to these interested facilities. As for our recently acquired Ravine mechanical thrombectomy system, we are working in a branding change to fold this into a pounce thrombectomy platform, but more on that in a later time. We're pleased to see the recent acquisitions of other suction-based and mechanical thrombectomy systems by several large strategics. This not only validates the space and our own acquisition of VTEX, but the headline numbers involved And at least one of these deals highlights the current and implied future market value of mechanical thrombectomy devices and the race towards the market for this value. We believe that our pounce arterial thrombectomy and our venous thrombectomy systems are quite well positioned for future competitiveness. We continue to target a Q2 completion of our process and manufacturing validation efforts related to the acquisition of VTEX and its ravine mechanical thrombectomy system. A note of caution here, we've been facing ongoing supply chain related issues with several key components required to build our validation devices. These shortages are not unique to our device components, but rather a part of a large scale shortage of components of these types. Any slippage in timelines for the delivery of these components could delay our Q2 target completion. However, we continue to aggressively manage our supply chain. Following validation activities, we plan to quickly initiate clinical product evaluation. These important achievements position us to execute on the meaningful opportunities in fiscal 22. These are, first, to achieve the PMA for surveil and to support our partner Abbott's commercialization efforts. Second, to become the first-line treatment for patients with our sublime radial platform and Pounce arterial and the Pounce Ravine venous thrombectomy platform for interventionalists who have access to these devices and demonstrate their commercial viability on a limited scale. Third, is to drive top-line revenue growth on optimized cash flow from our IVD and medical device coatings offerings. Let's start with the first objective. which remains to obtain FDA approval for surveil. As I mentioned in our follow-up meeting with the FDA, typical of the premarket approval process, we had one hour to discuss the agency's questions and requests for additional data, as outlined in the 90-day letter. We will be meeting with the agency in the coming months to align on the information that they require to support the approval of our PMA applications. Although we cannot be 100% sure what action the agency will ultimately take regarding the application for PMA, we believe our application and relevant data strongly support approval of the product. However, until we complete our meetings with FDA and understand the process for any remaining data to be completed at this time, it is really difficult to estimate the specific quarter when the FDA may reach a conclusion to grant Importantly, we have spoken with our commercialization partner Abbott about the FDA meeting. Abbott has communicated that it is developing its commercialization plans for Surveil's U.S. launch. They have also indicated that they intend to launch in the U.S. shortly following the FDA's approval. While we are working to secure FDA approval as quickly as possible, we are also preparing to support Abbott's launch in the United States. Moving on to the second objective. demonstrating the first-line benefit and early commercialization of the subline radial platform and the pounce arterial and venous thrombectomy platforms. This is an important next step to create solutions and improve patient outcomes. Because of its importance, I'll provide a little additional context and meaning behind this objective. Recently, because of our clinical evaluation of these portfolios, they have begun to bear fruit in the form of both physician interest, product ordering on a commercial basis, as well as commercial partnership interest from several large multinational medical device companies. While the interest from the industry is exciting, I'm most pleased that several of the clinics that have participated in these evaluations have ordered the product and even recently reordered the supplying products. These orders support our view that we've created something special with these products. As to the interest from large strategics, we have decided that engaging in new negotiations and signing a distribution agreement now with an established medical device partner for either platform would not harvest quite significant value from these platforms, and that serves the best interests of our shareholders. We've all seen the recent growth and significant value of several publicly traded medtech companies with innovative products that address large market needs. I'm confident that our pounce and sublime platforms have similar long-term value creation potential. To unlock this potential, we'll begin by building a small commercial team of highly skilled and experienced sales professionals and clinical specialists to introduce the benefits of these products and drive customer adoption on a small scale. much like the initiation of these very highly valued current companies. These activities have the potential to demonstrate a very large and scalable future commercial value of these devices, real-time in the market. I am a firm believer that these incremental investments of this approach will deliver dramatic and outsized returns for our shareholders. To accomplish this goal, we recently added eight experienced field sales team members, in addition to several marketing team members to drive our commercial efforts, awareness, adoptions, and sales of our portfolio. Onboarding these individuals has recently begun to ensure we're in the best possible position to take advantage of these opportunities. Importantly, we have already developed all of the internal commercial processes and systems to enable this effort, along with a significant amount of team experience in serving customers directly. To accelerate our value creation strategy in fiscal 22, which Tim will cover in a moment, this will reflect additional SG&A investments of approximately $10 million to support initial commercializations of these platforms. Beginning in our third fiscal quarter, we expect to see modest and meaningful growing revenue associated with the adoption of these platforms. However, we expect to see significant growth in our value for this portfolio as we gain this early commercial traction. Finally, turning to our IVD and medical device businesses, our IVD business is expected to continue to outperform the immunoassay market growth of 3% while generating excellent operating margins, while our medical device coding revenue is expected to grow low to mid-single digits. which is a rate in line with that of the endovascular device broader market, given the recent vagaries of COVID-19's rolling impact on interventional procedures. I'm excited and energized by fiscal 22, how we can help patients and care providers, what it means to our team, and the large positive impact on our shareholder value. These are the right moves, we have the right talent and capabilities, and the financial resources to execute on these fiscal 22 objectives. I'll now turn the call over to Tim to provide more details on fourth quarter fiscal 21 and our outlook for fiscal 22.

Tim? Thank you, Gary. During today's call, I will provide an overview of our fourth quarter operating performance and provide our outlook for full year fiscal 2022. Revenue for the fourth quarter of fiscal 2021 grew 6% to $24 million, compared to $22.5 million in the prior year quarter. Our medical device business revenue grew 1% year-over-year to $17.4 million and exceeded our expectations, driven by growth in both product and R&D revenue. Our in vitro diagnostics business grew 23% to $6.6 million. In the fourth quarter, our IBD business delivered another quarter of broad-based growth. IBD revenue performance also benefited from a favorable comparison with respect to antigen sales. Our fourth quarter royalty and license fee revenue totaled $8.9 million, down $1 million from the same prior year period. Royalty revenue declined 7% to $7.6 million in the fourth quarter, compared to $8.2 million in the prior year quarter. As you may recall, the prior year quarter benefited from approximately $2 million associated with a true-up from our third quarter fiscal 2020 royalty revenue as the actual royalties reported by our customers during the Q3 period exceeded our estimate. The impact of this true-up was partially offset by COVID-related impacts on procedure volumes during the prior year quarter. Setting aside these prior year factors, once again, we saw double-digit growth in royalty revenue from our next generation, Serene Hydrophilic Coating, in the fourth quarter. Serene royalty revenue has grown to comprise 26% of our royalty revenue as of Q4 fiscal 2021. License fee revenue under the AVID agreement totaled $1.2 million in the fourth quarter of fiscal 2021, compared to $1.6 million in the prior year quarter. AVID agreement license fee revenue is recognized in line with costs incurred for the transient clinical study, which have declined this fiscal year as expected. Product revenue increased 18% to $12.5 million in the fourth quarter, compared to $10.6 million in the prior year quarter. In our medical device business, product revenue grew 18% to $6.3 million, compared to $5.4 million in the same prior year period. We saw another strong quarter of coating reagent sales. Additionally, we continue to see revenue growth from the new products launched through distribution partnerships that were signed in fiscal 2020 These include our 014 and 018 PTA bloom catheters with Cook and our coronary microcatheter with Medtronic. Our in vitro diagnostics business reported product revenue of $6.2 million, up 19% or $980,000 compared to the same prior year period. As I mentioned a moment ago, IBD revenue benefited from an easier prior year comparison with respect to antigen products. We are pleased to see a return to growing demand for our antigen products for use in autoimmune disease testing. Growth and sales of our protein stabilization and colorimetric substrate products also contributed to a strong fourth quarter. R&D services revenue of $2.6 million was up 24% or $500,000 compared to the same prior year period. In our medical device business, we've seen an increase in customer development programs leveraging our medical coding. Our IBD business continues to benefit from increased customer development project opportunities for our microarray DNA slide products. Before I move on to product gross margin and expenses, it is worth noting that we had a $3.6 million benefit to operating income this quarter related to our eligibility for the employee retention credit under the CARES Act. This reflects anticipated reimbursement of personnel expenses we actually incurred in prior quarters, providing a $460,000 benefit to gross margin, a $2.2 million benefit to R&D, and a $930,000 benefit to SG&A expense. Since the beginning of COVID-19, we have not reduced US headcount or cut back on R&D investments, and this CARES Act benefit reflects reimbursements of these types of expenses for companies that did not lay off employees or take PPP loans. Product gross margin in the fourth quarter of fiscal 2021 was 67% compared to 63% in the prior year quarter. Product gross margin adjusted for the benefit of the employee retention credit was 63% and consistent with the prior year. R&D expense, including the cost of clinical and regulatory activities, was $10.7 million in the fourth quarter, or 45% of revenue. compared to $12.8 million, or 57% of revenue, in the year-ago period. R&D expense adjusted for the benefit of the employee retention credit was essentially flat with the prior year period and was 54% of revenue. The fourth quarter is the first period to include R&D expense resulting from our acquisition of VTEX. The incremental expense associated with VTEX was offset by an expected decline in our transcend clinical trial costs. SG&A expense in the fourth quarter of fiscal 2021 was $7.9 million or 33% of revenue, compared to $7.3 million or 32% of revenue in the year-ago period. SG&A expense adjusted for the benefit of the employee retention credit was $8.8 million, a year-over-year increase of $1.5 million, and equal to 37% of revenue, driven by sales and marketing activities, including new hires to support the commercialization of our Sublime and Pounce products. Our medical device business reported an operating loss of $800,000 in the fourth quarter, compared to an operating loss of $1.9 million in the year-ago period. Adjusted for the benefit of the employee retention credit, the medical device business operating loss was $3.4 million, The fourth quarter includes the addition of $1.1 million in operating expenses from the VTEX acquisition, of which $570,000 is intangible asset amortization. Our IBD business reported operating income of $3.4 million in the fourth quarter of fiscal 2021, compared to $2.5 million in the prior year quarter IVD operating income adjusted for the benefit of the employee retention credit was $2.9 million, a year-over-year increase of $430,000 and equal to 44% of revenue, compared to 46% of revenue in the same prior year period. The fluctuation in operating margin was a result of lower gross profit due to a shift in revenue mix. Now turning to income taxes, we recorded income tax benefit of $270,000 in the fourth quarter of fiscal 2021, compared to income tax expense of $870,000 in the prior year period. The current quarter's tax benefit is a result of the pre-tax loss for the fourth quarter, including the contribution of V-tax expenses. 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, we reported a loss per share of 2 cents in the fourth quarter of fiscal 2021 compared to a loss per share of 22 cents in the prior year quarter. On a non-GAAP basis, we reported a loss per share of 10 cents in the fourth quarter versus a loss per share of 18 cents in the prior year quarter. Non-GAAP EPS excludes a tax-affected benefit to EPS of 19 cents from the employee retention credit, as well as a $0.04 impact to EPS associated with the VTEX acquisition costs. Moving to the balance sheet, we continue to have a solid cash position. In the fourth quarter, we began with $72 million of cash in investments and generated $890,000 of cash from operating activities. During the quarter, we paid $2.4 million for capital expenditures. We funded the July 2nd acquisition of VTEX Medical with $30 million of cash on hand and $10 million from our $25 million line of credit. As of September 30th, 2021, we had cash and investments totaling $41 million and the balance in our credit line was $10 million. Turning now to our outlook for 2022. We expect fiscal year 2022 revenue to range from $97 million to $101 million. We expect revenue from our Sublime and Pounce platforms to range from $2 million to $2.5 million. Abbott Surveil license fee revenue is expected to range from $4.5 million to $5 million. This compares to $16 million in fiscal 2021, which included $11.3 million in revenue recognized on the $15 million clinical report milestone payment, which was received earlier during the year. Our fiscal 2022 outlook excludes revenue associated with the achievement of the final surveil milestone payment upon FDA approval, which has been our practice with previous regulatory milestones. It also excludes surveil product sales and surveil profit sharing revenue. The potential revenue associated with the final milestone payment from Abbott would be approximately $25 million. Also, our guidance does not reflect any unfavorable COVID impacts. We expect fiscal 2022 diluted GAAP EPS in the range of a loss per share of $2.05 to a loss of $1.55. We expect non-GAAP diluted EPS in the range of a loss per share of $1.75 to a loss of $1.25. Our guidance reflects an acceleration of investment to advance our value creation strategy, which includes commercialization of our sublime and pounce platforms. For the full year, SG&A is expected to range in the low to mid 40s as a percentage of revenue. Full year R&D spend is expected to be approximately 60% of revenue as we support our ravine validation efforts and expand our thrombectomy and radial access product pipelines. With respect to income taxes, we expect the full year impact of income taxes to range from a tax benefit of $6.7 million at the low end of the guidance range to a 4.8 million benefit at the high end of the guidance range. Operator, this concludes our prepared remarks. We would now like to open the call to questions.

All right, thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll go ahead and take our first question from Brooks O'Neill with Lake Street Capital Markets. Please go ahead.