Surmodics, Inc.

Everyone, to Sermatix second quarter of fiscal year 2023 earnings call. Please note that this call is being webcast. The webcast is accessible through the investor relations section of the Sermatix website at www.sermatix.com, where an audio replay will be archived for future reference. An earnings press release disclosing Sermatix quarterly results was issued earlier today and is available on the company website as well. Before we begin, I would like to remind everyone that remarks and responses to your questions on today's call may contain 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 Sermatic'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 somatics forward-looking statements, resulting from certain risks and uncertainties, including those described in the company's SEC filings. Somatics claims any duty to update or revise these forward-looking statements as a result of new information, future events, developments, or otherwise. This call will also include reference to non-GAAP measures because Sarmatix believes they provide useful information for investors. Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Mr. Gary Maharaj, Sarmatix President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator, and welcome everyone to our earnings call for the second quarter of fiscal year 2023. I'll start my remarks today with a brief overview of our second quarter revenue performance. We generated total revenue of $27.2 million in the second quarter of fiscal 2023, representing growth of 4% year-over-year. Our total revenue growth was driven by our revenue in medical devices, which increased 7% year-over-year, offsetting a 2% decrease in in vitro diagnostics or IVD revenue. Looking at these two areas of our businesses more closely, in our medical device segment, our performance was almost exclusively driven by product sales, which increased 23% year over year, with significant contributions from sales of our Pounce and Sublime products, as well as from our performance coating reagents. Specifically, sales of our Pounce and Sublime products contributed more than half of the medical revised revenue product sales growth we saw in this quarter. And in our IVD segment, we were pleased with our year-over-year sales performance in the second quarter, given the prior year comparison. As a reminder, we generated record quarterly IVD revenue in the second quarter of fiscal 2022. In short, we reported solid revenue performance across the key areas of our business in the second quarter. Tim will walk through our second quarter financial performance and updated fiscal 2023 guidance in further detail. But let me now shift to an update of our recent operational performance, beginning with an update on each of our three strategic objectives for fiscal 2023. As a reminder, our strategic objectives for fiscal 2023 that we outlined at the beginning of this fiscal year are as follows. First, to achieve FDA premarket approval, or PMA, for our surveilled drug-coated balloon and then support Abbott's commercialization efforts. Second, to advance initial commercialization of our sublime radial and pounce arterial thrombectomy platforms. And third, to drive revenue and cash flow growth from our medical device coatings offerings and IVD businesses. With these three objectives in mind, I'll now discuss our project progress with respect to each. We began the second quarter having to navigate unexpected challenges along our path to securing the PMA for our surveilled drug code balloon, and ultimately made important progress that exceeded expectations we shared on our earnings call in early February. As a reminder, on January 19th, we announced that we received a letter from the FDA which indicated that our PMA application was not approvable in its current form and provided guidance on information that must be added to amend our PMA application. Information the FDA requested was within two general categories, labeling, including language revisions related to some of the devices, patient labeling, and instructions for use, and biocompatibility, including additional questions and data requests related to our non-clinical testing. While this was an unfortunate and disappointing development, we were pleased to see that the letter did not question our engineering, large animal studies, and most importantly, the human clinical data that we submitted. including the safety and efficacy data from our 446-patient Transcend clinical trial. During February and March, our regulatory and clinical teams focused on engaging with the FDA to inform our survey regulatory strategy and were able to make meaningful progress during this quarter. Our team's primary goal over this period was to obtain additional clarity on the pathway and specific requirements to address the agency's questions and data requests. in order to position us to prepare and submit an amended PMA application in an approvable form. Working closely with our external regulatory advisors, our team engaged in informal discussions with FDA representatives, then prepared a submission issues request intended to obtain formal feedback on our proposed approach for addressing items in the FDA letter from the FDA's review team. This was done via agency's Q submission process. As we shared in our last earnings call, we anticipated receiving the FDA's formal feedback on our proposed approach via this process in May based on normal timelines. With this as a backdrop, our team was ultimately able to prepare and submit our submission issue request ahead of our expectations, obtain FDA's formal written feedback and response, and then complete the submission issue meeting with the agency to discuss the details of both the request and the FDA's written feedback, all occurring before the end of our second fiscal quarter. In addition to this impressive level of interaction, we are pleased with both the level and content of the feedback obtained from the agency in response to our submission issue request. With this additional feedback, we have now have the additional clarity in the process and content required to successfully amend our PMA application. Moreover, in the FDA's written and verbal feedback on our submission issue request, we're pleased to see that the additional clarification requested by the FDA to amend our PMA application was focused on existing biocompatibility studies that we have previously completed, as well as revisions to our proposed labeling. Based on this feedback, we do not currently anticipate the need for additional biocompatibility studies. With this additional clarity, our team has been focused on preparing our amended PMA applications, which we expect to submit during our fiscal third quarter. Looking ahead, the FDA guides to a 180-day period to review and render a decision on an amended PMA. While the process and timing of the FDA's review is ultimately under their purview, we are currently anticipating the receipt of premarket approval in the fourth quarter of fiscal 23, and we'll look forward to providing future updates on our progress. Turning to our second strategic objective, advancing the initial commercialization of our pounce radial and pounce arterial thrombectomy platforms. From a market education standpoint, During the second quarter, our team continued to leverage the two dedicated supplements that were recently published in Endovascular Today to raise awareness and educate prospective customers. As a reminder, these publications articulated the capabilities and advantages of our Pounce arterial thrombectomy and Sublime Radial in terms of their simplicity, efficiency, and potentially life-saving benefits they bring to endovascular procedures. relative to the existing devices and procedures on the market, and regardless of whether these procedures are performed at hospitals, ASCs, or office-based labs. Throughout the second quarter, we continue to see evidence that these recent publications, along with our product awareness initiatives, are resonating with prospective customers. From a commercial standpoint, as I mentioned earlier, we saw impressive contributions from direct sales of these products during the second quarter, fueling more than half of our medical device product sales growth year-over-year in this period. Our direct sales team continues to make impressive headway in driving adoption of these technologies and expanding our base of clinical users, in part by helping prospective customers navigate the value analysis committee process with their respective institutions. We succeeded in expanding our customer base to over 170 total customers for Pounce and Sublime platforms, compared to more than 135 at the end of the first quarter, and just over 100 at the end of fiscal 2022. Given the strong sequential growth in new accounts we've seen in fiscal 23 to date, it's important to note that our pipeline of prospective customers has continued to increase sequentially as well. In the second quarter, the number of value analysis committees evaluating our products saw modest sequential quarterly growth, despite the recent reduction in the number of territory managers in the field. And we remain pleased with our customer reorder rate, which continues to track in line with our expectations for fiscal 23. While we are still in the early innings of our commercial efforts for Pounce and Sublime, with an average tenure now of 12 months, across our team of 21 territory managers, we're excited by the recent progress made and the resulting contributions to our revenue growth in this second quarter. Based on our recent progress, we continue to see significant growth and contribution potential from our Pounce Arterial and Sublime Radial platforms, and we remain on track to drive growth in combined sales from these platforms for approximately 300% year over year for the full fiscal year 23 as we begin to move from initial market entry into the early stage of market development on our commercialization efforts. Subsequent to quarter end, we will also please announce the beginning of patient enrollment in Prowl, a new U.S. registry study. The Prowl Registry is designed to enroll up to 500 patients across 30 sites, collecting real-world efficacy and safety outcomes for our Pounce arterial thrombectomy system when used in a variety of endovascular interventions for the non-surgical removal of clots in the peripheral arterial vasculature. When a patient's peripheral artery becomes blocked, the clot needs to be addressed as quickly and as effectively as possible to prevent limb loss and patient mortality due to acute limb ischemia. With this in mind, our Pounce arterial thrombectomy system was designed to consistently remove clots in a single treatment session while also reducing the need for thrombolytic jobs and subsequent ICU stays. We believe the Prowell registry will continue to highlight these compelling therapeutic benefits along with strong safety profile off of our Pounce technology. And as this registry progresses, we'll look forward to sharing the interim data with clinicians to support our market education and awareness initiatives. Now, with respect to our third strategic objective, to drive revenue and cash flow growth from our medical device performance, coding offerings, and IVD businesses. Revenue from our medical device performance coding offerings. increased 3% year-over-year, more than offsetting the 2% decrease that we saw in our IBD business, and the performance of our core businesses overall exceeded our expectations. As I mentioned earlier, we were pleased with the year-over-year sales performance in our IBD business against a challenging year-over-year comparison as our IBD business generated all-time record quarterly revenue in the second quarter of fiscal 2022. In addition to the revenue performance in the quarter, these businesses continue to generate significant cash flow to support our other strategic growth initiatives. In addition to our continued progress with respect to these three strategic objectives, early during the second quarter, we implemented a spending reduction plan to preserve capital in response to the delay in our anticipated surveilled PMA timing. As I discussed in detail on our last earnings call, This spending reduction plan was implemented after careful evaluation and was designed to reduce our planned cash use by approximately $10 to $11 million for the remainder of fiscal 2023 prior to the restructuring charges. The spending reduction plan included a workforce restructuring to streamline and refocus the teams in several areas of our business. It also features several additional cash-saving measures, namely, a reduction in our planned capital expenditures, a reduction of our hiring plan for fiscal 2023, and a refocusing of our investments in product development to prioritize progress primarily in our nearer-term commercialization opportunities, including our Pounce arterial and Pounce venous thrombectomy systems, as well as our Sublime radial product platforms. As a result of the spending reduction plan and keeping in mind our guidance expectations for the full year, we continue to expect our quarterly cash use in the third and fourth quarters of fiscal 2023 to be approximately $3.5 to $4 million each quarter. I want to emphasize cash flow remains an important priority for our organization. We remain committed to reducing our use of cash over time through a combination of disciplined expense management, as evidenced by the implementation of our spending reduction plan, along with a continued focus and execution with respect to our strategic priorities, which we believe represents the best path to driving enhanced, sustainable long-term value and growth. Before I turn the call over to Tim, I'd also like to provide a quick update on some of our recent progress related to our new product pipeline. From a new product perspective, our team continues to advance our existing pipeline of products within the Pounce and Sublime platforms with the goal of expanding and enhancing this portfolio managed by our direct sales force. In the second quarter, we began limited market evaluations for our Pounce venous thrombectomy system. We are excited to continue this effort and to obtain and evaluate real-world feedback from numerous physicians across a wide variety of therapeutic cases. With respect to our sublime radial platform, last week we were pleased to announce that we have also commenced limited market evaluations for our sublime radial access microcatheter. This device is part of what will be the industry's first suite of talkable, high-performance peripheral microcatheters available in both radial and the transfemoral lengths. Talkable microcatheters have been an important innovation in complex coronary artery disease, enabling clinicians to cross difficult lesions and overcome some of the most challenging cases. We are excited by the potential to bring this level of innovation and performance to the peripheral intervention community with a suite of microcatheter products designed to provide clinicians with torque control, push transmission, and deliverability to distal target lesions in the periphery from any access site. Our sublime micro catheter portfolio will also include 014, 018, and 035 micro catheters, which can be telescoped through the 035 micro catheter to provide additional backup support when navigating extreme tortuosity or heavily stenosed lesions. We'll look forward to gaining important physician feedback on these devices and progressing towards the limited market introduction of these remaining products in the portfolio over the coming months. And lastly, with respect to our Pounce arterial thrombectomy system, it is important to bear in mind that we estimate the U.S. market for peripheral arterial occlusions to represent an approximately $800 million market opportunity for somatics. We believe our pons arterial thrombectomy system is uniquely positioned to penetrate this market, given multiple factors, including its advantages for the treatment of acute limbish chemo, the procedural results it continues to demonstrate, as well as its limited commercial competition at present. In addition to our commercial and market development efforts, from a pipeline perspective, we are focused on further enhancing this Pounce arterial system by expanding our existing clinical indications and the new development of new products to add to this portfolio, including Pounce LP, Pounce Low Profile, Pounce XL, and towards establishing Pounce arterial as the preferred solution for cases across the entire lower limb vasculature. So stepping back, I'm incredibly proud of our team's performance, focus, and execution during the second quarter. Together, we navigated a challenging environment which saw us quickly respond to the FDA's letter related to our PMA application for surveil and implement difficult but important actions to reduce our planned use of cash through the remainder of fiscal 2023. We did so while delivering solid commercial performance. And with respect to our vascular intervention, performance coatings, and IVD products. And we continue to advance our pipeline of new products towards commercial introduction, including our Surveil drug-coated balloon, Pounce venous thrombectomy device, and new products within our Pounce arterial and subline platform. As a result of these efforts, we believe we are well-positioned to drive strong commercial and operational progress as we enter the second half of fiscal 23. Our core businesses, including our medical device performance coatings offerings and our IVD businesses, are generating significant cash flow. The initial commercialization of Pounce Arterial and Sublime radio platforms is yielding significant contributions to our revenue growth as we drive progress in these large and under-penetrated markets. Our product pipeline of innovative vascular intervention devices, including our Surveil DCB and pound Venus rhombectomy device represent important future catalysts with the potential to further accelerate our future growth and financial performance. We remain committed to demonstrating prudent expense management and disciplined capital allocation as we pursue long-term revenue growth and value creation. And lastly, we remain well capitalized. With $19 billion of cash in our balance sheet, a quarter end, and access to approximately $61 million in incremental debt financing under our existing credit facility. With that, I'll now turn the call over to Tim Ahrens, our Chief Financial Officer, to discuss our second quarter fiscal 23 results and updated guidance for fiscal 23. Tim? Thank you, Gary.

Unless noted, all references to second quarter results are on a gap and year-over-year basis. Total revenue for the second quarter of fiscal 2023 increased $1.1 million, or 4%, to $27.2 million, compared to $26.1 million in the prior year period. Product revenue increased $1.4 million, or 10%, to $15.4 million in the second quarter of fiscal 23. The increase in product revenue was driven by medical device product revenue, which increased $1.5 million, or 23%, due to increased sales of our device product. including significant contributions from our Pounce arterial thrombectomy and Sublime radio platforms, as well as increased sales of our performance coating reagents. IBD product revenue decreased 1%, driven in part by active management of inventory levels by certain customers. Our IBD business saw a decrease in sales of protein stabilization products, which was partly offset by growth in sales of microarray slide products. and favorable order timing for distributed antigen products. Royalty and license fee revenue decreased $420,000, or 4% to $9.4 million. Royalty revenue from our performance codings decreased $290,000, or 3%. The prior year quarter provides a challenging comparable as the period benefited from stronger than expected customer reported royalties relative to our estimates. License fee revenue decreased 130,000 or 9% due to the timing of revenue recognition from our surveil agreement with Abbott. R&D revenue increased 120,000 or 5% to 2.4 million. The increase in R&D services revenue was primarily due to higher customer demand for performance coding services in our medical device business, which was impacted in the prior year by our customer supply chain challenges. Product gross margin in the second quarter of fiscal 2023 was 62.6% compared to 63.4% in the prior year period. Product gross margin was adversely impacted relative to the prior year by certain manufacturing inefficiencies associated with ramp up of production of new products, which was partially offset by the favorable impact of product mix. R&D expense, including costs of clinical and regulatory activities, decreased 790,000, or 6%, to $12.9 million in the second quarter of fiscal 2023. The decrease in R&D expense reflects the initial benefits from the spending reduction plan implemented during the second quarter of 2023. SG&A expense increased $1.9 million, or 17%, to $13 million in the second quarter of fiscal 2023. primarily driven by a year-over-year increase in headcount related to the expansion of our direct sales force in fiscal 2022 and related investments to support the commercialization of our pounce and sublime products. We reported $1.3 million in restructuring expense in the second quarter of fiscal 2023 for severance-related costs related to the workforce restructuring implemented during the quarter as part of our spending reduction plan. The majority of these costs were paid during the quarter, Our medical device business reported an operating loss of 7.1 million in the second quarter of fiscal 2023, compared to a loss of 5.6 million in the prior year period. The change in operating loss was driven primarily by the aforementioned investment in our direct sales force, as well as by the 1.3 million in restructuring expense recorded in the second quarter. Our IBD business reported operating income of 3.6 million in the second quarter of fiscal 2023, compared to 3.7 million in the prior year period. IVD operating income was 49% of IVD revenue in both periods. Turning to income taxes. In the second quarter of fiscal 2023, we reported income tax expense of 370,000 compared to income tax benefit of 920,000 in the prior year period. As a reminder, we are no longer recording tax benefits on U.S. net operating losses as a result of having established a full valuation allowance against U.S. deferred tax assets at the end of fiscal 2022. Gap net loss in the second quarter of fiscal 2023 was $7.7 million, or a loss of 55 cents per diluted share, compared to a loss of $4.1 million, or a loss of 29 cents per diluted share in the prior year period. Non-gap net loss in the second quarter of fiscal 2023 was $5.6 million, or a loss of 40 cents per diluted share compared to a loss of 3.1 million or a loss of 22 cents per diluted share in the prior year period. Non-GAAP adjusted EBITDA loss in the second quarter of fiscal 2023 was 1.5 million compared to adjusted EBITDA loss of 860,000 in the prior year period. Adjusted EBITDA includes an adjustment for restructuring expense in the second quarter of fiscal 2023 and adjustments for stock-based compensation expense in both periods. Our earnings press release includes detailed reconciliations of GAAP to non-GAAP measures. Moving to the balance sheet, we began the second quarter of fiscal 2023 with $26.4 million in cash and $29.5 million in long-term debt. Cash used by operations during the second quarter was $5.8 million, and capital expenditures totaled $720,000. As of March 31, 2023, we ended the quarter with $19.2 million in cash and $29.3 million in long-term debt. Long-term debt includes $5 million in borrowings on our $25 million revolving credit facility and $25 million in borrowings on our $100 million term loan facility. As of March 31, 2023, we have approximately $61 million in debt capital available, consisting of $50 million on our term loan availability, and $11 million of incremental availability in our revolving credit facility, which is subject to borrowing base requirements. Finally, a housekeeping note. We have a $200 million shelf registration statement in place, which is set to expire in May. As a part of good corporate governance, we plan to file a replacement form S3 with the SEC to keep this shelf registration active. Turning now to fiscal 2023 guidance. We have updated our fiscal 2023 revenue guidance to reflect our performance in the second quarter, as well as our revised expectations for the remainder of fiscal 2023. We now expect fiscal 2023 total revenue to range from 103 million to 106 million, representing an increase of 3% to 6% compared to the prior year. Compared to our prior range of 102 million to 106 million, or an increase of 2 percent to 6 percent compared to the prior year. We now expect fiscal 2023 GAAP loss per diluted share to range from a loss of $2.30 to a loss of $2 compared to our prior range of a loss of $2.40 to a loss of $2. Non-GAAP loss per diluted share in fiscal 2023 is expected to range from a loss of $1.98 to $1.68 per share. compared to our prior range of a loss of $2.09 to a loss of $1.69 per share. As a reminder, our guidance excludes revenue associated with a potential future added milestone payment on receipt of the PMA from the FDA, which has been our practice with previous regulatory milestones. I'll now share a few additional considerations for modeling purposes. Our fiscal 2023 total revenue guidance assumes revenue for our two businesses, medical device and IVD, is expected to be approximately 73% and 27% of revenue, respectively. Product revenue is expected to be approximately 58% of total revenue. Revenue associated with our legacy medical device coding offerings and IVD business is expected to grow modestly. Abbott surveilled license fee revenues expected to range from $4 million to $4.5 million. This compares to $5.7 million in fiscal 2022. Turning to the rest of the P&L, our updated fiscal 2023 guidance reflects the following expectations. Product gross margins are expected to be in the mid-50s for the remainder of fiscal 2023. In the second half of fiscal 2023, we expect higher absorption of fixed overhead costs and costs of sales, as commercialized products are allocated an increased share of overhead expenses due to reductions to drug-coded wound production. With regard to operating expenses, we expect rest-of-year quarterly expense of $12 million to $12.5 million in R&D expense and $13 million to $13.5 million in SG&A expense. Interest expense is expected to be $3.4 million for the full year, and we expect a nominal amount of tax expense for the full year. Lastly, with respect to our fiscal 2023 cash utilization, we anticipate that we will finish a year with approximately $11 million to $13 million in cash. We expect our cash use for full fiscal year 2023 to be approximately $26 million, which consists of the total change in cash, excluding the net proceeds from long-term debt in the first quarter of $19.3 million, Further, we expect our Q3 and Q4 cash use to be approximately $3.5 to $4 million each quarter. This reflects our recently implemented spending reduction plan and active management of working capital. We expect to continually evaluate and assess capital allocation decisions throughout the year to ensure effective and efficient use of our cash and resources to support our business needs. With that, operator, we would now like to open the call to questions.