Surmodics, Inc.

Welcome everyone to Sermodics third 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 Sermodics website at www.sermodics.com where an audio replay will be archived for future reference. An earnings press release disclosing Sermodics quarterly results was issued earlier today and is available on the company's 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 Zermattic'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 CERMORIX forward-looking statements resulting from certain risks and uncertainties, including those described in the company's SEC filings. CERMORIX disclaims 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 references to non-GAAP measures because SOMERIX 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, SOMERIX President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and welcome everyone to our earnings call for the third quarter of fiscal year 2023. Let me begin with a quick overview of what we plan to cover on today's call. I'll begin my remarks with a brief overview of our quarterly revenue results and the key drivers of our performance, followed by a discussion of our recent operational progress and thoughts on our outlook for the remainder of the fiscal year. Tim will then discuss our third quarter financial performance in detail and review our fiscal 2023 guidance, which we updated in our earnings press release today. We'll then open the call for questions. With that, let's get started with a review of our revenue performance. In the third quarter of fiscal 2023, we reported total revenue of $52.5 million, representing growth of 111% on a year-over-year basis. Our total revenue performance was driven by exceptionally strong growth in our medical device segment, which increased 163% year-over-year, more than offsetting a 12% decrease in revenue from our in vitro diagnostics, or IVD, segment. Our total revenue and medical device revenue growth benefited from the achievement of FDA pre-market approval for our surveilled rock-coated balloons. As a result of this achievement, we received $27 million of a milestone payment during the quarter from our commercial partner, Abbott, of which $24.6 million was recognized as revenue. I'll discuss this important accomplishment in further detail later in my remarks. I'm pleased to report that we delivered strong performance during the quarter on an underlying basis as well. Excluding the PMA milestone, we achieved total revenue growth of 12% year-over-year, driven by the medical device segment total revenue growth of 22% year-over-year. This impressive performance in our medical device segment was largely driven by product sales. The medical device segment product sales increased 38% year-over-year, fueled primarily by our sales of our Pounce and Sublime products. along with strength across our product portfolio, including sales of our performance coating reagents. In our IBD business, the year-over-year softness was driven primarily by decreased sales across our core product lines, as we saw several customers taking steps to manage elevated inventory levels during the quarter. All in all, we were pleased with our revenue performance in the third quarter. Shifting to an update on our recent operational highlights. During the third quarter, our team made important progress with respect to each of our three key strategic objectives for fiscal 2023, while continuing to advance our pipeline of vascular intervention products towards commercialization. I'll start by discussing our recent progress with respect to each of these objectives, which as a reminder are, one, to achieve FDA premarket approval of PMA for the surveilled drug-coated balloon, and then support our partner, Abbott, as they prepare to commercialize the product. Two, to advance the initial commercialization of our sublime radial and pounce arterial thrombectomy platforms. And three, to drive revenue and cash flow growth from our medical device performance coatings offerings and IVD businesses. beginning with our first strategic objective, securing the PMA for our surveilled ECB. We entered the third quarter of fiscal 23 with strong momentum on the regulatory front, having secured formal feedback from the FDA's review team that provided the additional clarity in the process and content required to successfully amend our application for the PMA. As we shared via press release on March 28th, We believe the additional clarity we obtained would enable us to prepare an amended PMA application for submission in the third quarter and secure the PMA in the fourth quarter of fiscal 2023. We submitted this PMA application to the FDA in May, consistent with our stated expectations. In the months leading up to and following submission, our team continued to engage with the FDA's review team to discuss and clarify aspects of our submission and to facilitate their review process. On June 20th, we were proud to announce a receipt of the FDA pre-market approval for Surveil Drug Code Blue. With this approval, our Surveil DCB may now be marketed and sold in the U.S. to physicians for percutaneous transluminal angioplasty after appropriate vessel preparation of de novo or resynodic lesions less than or equal to 180 millimeters in length, in femoral and popliteal arteries, having reference vessel diameters of four to seven millimeters. Securing the PMA for surveil represents one of the most significant achievements in our 44-year history as an organization. It will enable us to provide physicians and patients with a next-generation option for the treatment of peripheral artery disease, one that leverages the culmination of our decades of expertise as an organization in developing and applying drug-eluting coding technologies. The Surveil DCB leverages our proprietary technologies and capabilities with a design that promotes more uniform drug distribution, more efficient drug transfer to the target region, while reducing particulates and downstream emboli. This approval also represents further validation of the strong safety and efficacy profile of our Surveil DCB and the results of our 446 patients transcend clinical trial. As the two-year results of this trial demonstrated, the Surveil DCB achieves clinical and safety outcomes that are consistent with the market-leading device. These results are despite the competitive device having 75% more paclitaxel compared to the Surveil DCB. Given the numerous challenges that had to be navigated in order to secure this approval, including the FDA's heightened concerns about the use of Paclitaxel for the treatment of peripheral artery disease beginning in 2019, it also represents a Herculean accomplishment by our product development, regulatory, and clinical teams, made possible through their years of hard work, dedication, and commitment to working in partnership with the agency to satisfy their questions. With the PMA now in hand, our team has been squarely focused on supporting our commercial partner, Abbott, as they prepare for U.S. commercialization. We've been actively engaged with Abbott's commercial and operations team to refine the plan for Surveil's commercial launch. As a reminder, under the terms of our agreement, we are responsible for manufacturing and supplying Abbott with product as they commercialize the Surveil DCD. While we are limited in terms of what we can say publicly at this time, with respect to the commercialization, we expect to receive Abbott's initial stocking order during the fourth quarter of fiscal 2023, with commercialization anticipated in fiscal 2024. Look forward to sharing more details in a future earnings call. Since receiving the PMA, our team has been focused on all the pre-commercial activities to ensure our readiness to satisfy Abbott's initial stocking order, as well as subsequent orders. We've started up the manufacturing engine for the Surveil DCB with successful initial test runs of our production and quality processes. With respect to raw materials, we are well positioned to support the commercial launch. From a people standpoint, throughout this year, we have continued to retain experienced manufacturing team members focused on Surveil production. teams who have been responsible for building thousands of surveilled units in recent years to satisfy the clinical and regulatory needs. We've also hired several additional team members to provide future support as we scale. In short, we are well positioned with the capacity, materials, and processes in place to meet the needs of our commercial partners. Given Abbott's commercial distribution infrastructure, their market presence and expertise in vascular care We're excited to be entering this pivotal stage of our partnership. We believe our next-generation drug, Coda Blue, will complement and enhance their existing product portfolio and will look forward to our continued collaboration with Abbott as we provide physicians and patients with a safe, effective, and innovative solution that leverages our best-in-class technology to address the challenges presented by peripheral artery disease. On a related note, we were excited to see the FDA publish a letter to healthcare providers on July 11th that summarized the agency's latest views about a potential risk to Paclitaxel-coated medical devices. As I mentioned earlier in my remarks, Paclitaxel has been an area of increased focus in regulatory scrutiny for the past five years, since the FDA posted a letter to healthcare providers on January 17th, 2019, sharing their concerns. The FDA follow-up letter published in July is titled, Patritaxel-Coated Devices to Treat Peripheral Artery Disease, Unlikely to Increase the Risk of Mortality. It states that the agency has reached a conclusion that the totality of available data and analyses does not support an excess mortality risk for patritaxel-coated devices. It goes on to say, and analyses that supported this conclusion and clarified that the decision applies to all Paxil-Paxil coated devices. We were also pleased to see the FDA state in the letter that they will work with device manufacturers to update product labeling based on the current available data. In terms of its implications, we believe this letter provides important closure with respect to the concerns that were initially raised by the agency in 2019. Like other devices in the market, the product labeling for Surveil DCB does currently include a standard warning related to Paxil-Taxil. The FDA noted in a July letter that it will work with device manufacturers to update the product labeling based on the current data. We look forward to working with the agency to make the needed updates to our Surveil DCB labeling, and I expect this to be a fairly straightforward process. Moving to our second strategic objective, advancing the initial commercialization of sublime radial and our pounce arterial thrombectomy platforms. As I mentioned earlier, sales of our pounce and sublime products were an important contributor to the 38% medical device business product sales growth that we achieved in the third quarter. From a commercial standpoint, we are pleased with execution of our direct sales team as they worked with physicians at potential new accounts to navigate our products through value analysis committees. As a result of their efforts, we continue to make progress in expanding our base of customers, ending the third quarter with more than 215 customers for our pounce and sublime platforms, compared to over 170 at the end of the second quarter. And we achieved our stated target for fiscal 2023 ahead of our expectations. Given that we entered fiscal 2022 with just over 100 customers, We're pleased with the strong progress made over the first nine months of this fiscal year, especially considering the workforce reduction that we implemented during the second quarter. Our sales team continued to make progress in expanding our pipeline of prospective customers with a number of value analysis committees, considering our products remaining in line with the March quarter, despite the growth in new customer conversions. And we remain pleased with the reordering we're seeing from existing users as well. In terms of the size of our team, we're pleased to see continued stability during the third quarter with 22 territory managers at quarter end, with an average tenure of 13 months, compared to 21 territory managers at the beginning of Q3. From a market education standpoint, we continue to make progress with respect to our Prowl Registry study, which we initiated during the third quarter. We believe the study will further underscore the compelling therapeutic benefits of our Pounce arterial thrombectomy system as used in real-world settings. We are enrolling patients at two sites at quarter end, and we continue to anticipate sharing interim data with current and prospective customers as part of our efforts to educate the market and raise awareness. Based on the progress made over the first nine months of our fiscal year, we believe we are squarely in the process of graduating from initial market entry to what we referred to previously as the early market development stage for our commercialization effort. As we look ahead to the remainder of fiscal 23, we expect our customer base to grow to more than 250 accounts at year end and generate pounds in sublime sales growth in excess of 250% year over year. as we continue to focus on the raising awareness of the capabilities and advantages of these platforms, crossing the chasm, so to speak, by converting mainstream users as well as early adopters, and facilitating strong utilization across the entire user base. In addition to driving adoption and commercial traction with respect to our Pounce and Sublime portfolio, we are continuing to expand this portfolio with our new product pipeline. I will discuss this progress on this front in a moment. Let me give you a nugget here about Pounce and Sublime Revenue. They have now contributed more than $1 million of revenue per quarter for two consecutive quarters now. This, while small on a relative scale, is fantastic news. It demonstrates the power of developing and commercializing devices that can change the standard of care and We're doing this with a sales team that is still in the early innings and less than one-tenth the size of larger medical companies. As you've heard me say in the past, the future has already been created. It's just not evenly distributed yet. Herein lies the potential of Somatics' vascular intervention strategy. Turning to our third strategic objective, driving revenue growth. and cash flow growth from our medical device performance coding offerings and IBD businesses. We're pleased to see revenue from medical device performance coding offerings in our third quarter increase 11% on a year-over-year basis, driven primarily by strong sales of performance coding reagents. This is moderated partially by the 12% decrease in our IBD business that I discussed earlier. The decrease does not appear to be driven by market competition, but by multiple macroeconomic factors impacting the entire IVD industry, including the decrease in demand for COVID testing products and stabilization in supply chains, reducing the need for elevated safety stock. Viewed together, revenue from these categories increased 4% year-over-year in the third quarter, consistent with our long-term expectations of low- to mid-single-digit growth, generating cash flow to support our strategy. Lastly, in addition to our progress with these key objectives, we continue to advance our new product pipeline. With respect to Pounce's arterial thrombectomy platform, we're continuing to enhance the capabilities of this portfolio to expand the addressable market with new product introductions and clinical indications. Most notably, on June 14th, we announced a receipt of FDA 510K clearance for Pounce's low-profile or LP thrombectomy system with a clinical indication for use in vessels ranging from 2 to 4 millimeters in diameter. The addition of Pounce LP will expand the range of the Pounce arterial system by providing physicians with a product designed to facilitate efficient removal of organized clots in smaller vessels, such as those found in the peripheral arteries below the knee. Securing regulatory clearance for Pounce-LP takes us one step closer to our commitment to providing patients and physicians with a comprehensive suite of mechanical thrombectomy solutions to address acute limb ischemia across the entire peripheral vasculature, helping to reduce amputations. We look forward to compensating this limited market evaluation of our Pounce-LP thrombectomy system by the end of the first quarter of fiscal 2024. and entering full commercialization following its completion. With respect to our Pound's venous thrombectomy system, we continue to make progress through our limited market evaluation, which we initiated during the second quarter to collect physician feedback on the systems used across a variety of cases. Our progress was initially paced by limited product availability, but we were able to work through this constraint during the quarter and accelerate the pace of evaluations. We've been pleased to find physician users emphasizing their appreciation for the system's simplicity, ease of use during cases, and the feedback we've obtained so far has been nicely informative as we prepare for commercialization. We'll continue to progress through this limited market evaluation during the fourth quarter with the goal of entering commercialization in fiscal 2024. And lastly, at the end of April, we commence a limited market evaluation of our O35 sublime radial access microcatheter. This is part of what will be the industry's first suite of talkable, high-performance microcatheters designed for peripheral interventions and available in both radial and transfemoral lengths. We believe these sublime microcatheters will enhance our existing sublime radial access platform by empowering physicians with tools specifically designed to cross difficult lesions, helping to facilitate the adoption of peripheral treatment via a radial approach. The feedback we've obtained on the O3-5 microcatheters to date has been positive, and we look forward to initiating limited market evaluations of our O1-8 and O1-4 microcatheters, the remaining products in this microcatheter portfolio. I'm incredibly proud of our operational financial accomplishments this past quarter. Our team drove important progress on each of our strategic objectives that we prioritized for fiscal 23. This progress enabled us to deliver impressive financial results, including $52.5 million of total revenue, $21.4 million of operating income, and $24.6 million of adjusted EBITDA. Excluding the $24.6 million of revenue related to the surveilled PMA milestone, we delivered total revenue growth in the third quarter of 12% year-over-year, and we were essentially breakeven on an adjusted EBITDA basis. As I mentioned in our last earnings call, cash flow remains a priority for our organization. From a cash flow perspective, we generated $25.4 million of cash during the quarter to further strengthen our balance sheet, ending the quarter with $44.6 million of cash and equivalents and approximately $61 million in incremental debt financing available under our existing credit facility. Excluding the $27 million milestone payment, we were also pleased to reduce our quarterly cash burden to $1.6 million of cash use, exceeding our stated objective of $3.5 to $4.4 million of use cash for the quarter, as we continue to control our expenses and allocate capital thoughtfully following the implementation of our spending reduction plan implemented earlier this year. And lastly, as we continue to advance multiple key products in our pipeline, positioning semantics to drive future growth and value creation through innovation in the years to come. As Sim will discuss, we are raising our guidance today to reflect our impressive financial and operational performance in the third quarter, as well as our updated expectations for the balance of the fiscal year. We remain committed to perpetuating our recent momentum and bringing fiscal 23 to a strong conclusion. I'd like to conclude my remarks today by congratulating the entire Simotics team on the many achievements made during this past quarter. That would not have been possible without their hard work and dedication. With that, I'll now turn the call over to Tim Ahrens, our Chief Financial Officer, to discuss our third quarter fiscal 2023 results and updated guidance. Tim?

Thank you, Gary. Unless noted, all references to third quarter results are in a gap in year-over-year basis. Total revenue for the third quarter of fiscal 2023 increased $27.6 million or 111% to $52.5 million. As Gary mentioned, our total revenue in the third quarter of this year included $24.6 million of revenue recognized from the $27 million milestone payment received for obtaining premarket approval of our surveilled drug-coated balloon. Excluding the impact of this milestone payment, Third quarter total revenue grew 12%. Product revenue increased $1.7 million, or 13%, to $15.7 million in the third quarter of fiscal 2023. The increase was driven by broad-based product sales growth in our medical device business, which increased $2.6 million, or 38%, driven primarily by increased sales of our pounce arterial thrombectomy and sublime radial platforms, as well as our performance coating reagents. IVD product revenue decreased 810,000, or 11%, to 6.4 million. The decrease was driven primarily by several customers actively managing their inventory levels. The IVD industry is adapting to respond to multiple macroeconomic factors, including the decrease in demand for COVID testing products, as well as stabilization in supply chains, which are reducing the need for elevated safety stock. Royalty and license fee revenue increased $25.4 million, or 288%, to $34.2 million. Excluding $24.6 million of license fee revenue recognized in the third quarter of fiscal 2023 from the surveilled PMA milestone payment, royalty and license fee revenue increased 8%. Royalty revenue from our performance codings increased $450,000, or 6%. R&D services revenue increased $520,000, or 24%, to $2.7 million. The increase was primarily due to higher customer demand for our performance coding services in our medical device business, which was impacted in the prior year period by our customer supply chain challenges. Moving down to P&L. Product gross margin in the third quarter of fiscal 2023 was 55.8%, compared to 63.1% in the prior year period. The decline in product gross margin was driven by the adverse mix impact from increased device product sales, which have lower product gross margins due to low production volumes during the scale-up phase following initial commercialization. R&D expense, including costs related to clinical and regulatory activities, decreased $1.7 million, or 13%, to $11.2 million in the third quarter of fiscal 2023. The decrease in R&D expense reflects the benefits from the spending reduction plan we implemented during the second quarter of 2023. SG&A expense was $12.9 million and was unchanged compared to the prior year period. Contingent consideration gain of $830,000 resulted from a non-cash fair value adjustment to acquisition-related contingent consideration liabilities. Our medical device business reported operating income of $21.8 million compared to an operating loss of $7.3 million in the prior year period. The year-over-year change reflects the $24.6 million in license fee revenue recognized on the Surveil PMA milestone payment in the third quarter. Along with disciplined expense management, broad-based revenue growth, and the aforementioned contingent consideration gain. Our IVD business reported operating income of $2.9 million compared to $3.4 million in the prior year period. IVD operating income was 44% of IVD revenue compared to 46% in the prior year period. Turning to income taxes. In the third quarter of fiscal 2023, we reported income tax expense of $13.3 million compared to an income tax benefit of 1.5 million in the prior year period. Given the magnitude of income taxes this quarter, I'd like to take a moment to outline the key drivers, starting with the 24.6 million in revenue recognized on the PMA milestone payment. In the third quarter, as a result of the milestone payment, We shifted from a taxable loss to a taxable income position, resulting in significant tax expense. Also contributing to our income tax expense was a recently effective IRS requirement to spread the deduction of U.S. R&D expense over a five-year period. As a reminder, we are no longer recording tax benefits for deferred deductions or 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. GAAP net income in the third quarter of fiscal 2023 was $7.3 million, or 52 cents per diluted share, compared to a net loss of $5.7 million, or a loss of 41 cents per diluted share in the prior year period. Non-GAAP net income in the third quarter of fiscal 2023 was $7.3 million, or 52 cents per diluted share. compared to non-GAAP net loss of 4.7 million or a loss of 34 cents per diluted share in the prior year period. Non-GAAP adjusted EBITDA in the third quarter of fiscal 2023 was 24.6 million compared to adjusted EBITDA loss of 3.1 million in the prior year period. Adjusted EBITDA includes adjustments for contingent consideration gain in the third quarter of fiscal 2023 and 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 third quarter of fiscal 2023 with $19.2 million in cash and $29.3 million in long-term debt. Cash provided by operations during the third quarter was $25.9 million, reflecting the $27 million PMA milestone payment from AVID. Capital expenditures totaled $470,000. We ended the quarter with $44.6 million in cash and $29.4 million in long-term debt as of June 30, 2023. 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 June 30, 2023, we had approximately $61 million in debt capital available, consisting of $50 million on our term loan availability and approximately $11 million of incremental availability on our revolving credit facility, which is subject to borrowing-based requirements. Turning now to fiscal 2023 guidance, we updated our fiscal 2023 revenue guidance today to reflect our performance in the third quarter. as well as our revised expectations for the remainder of fiscal 2023. We now expect fiscal 2023 total revenue to range from $130 million to $132 million, representing an increase of 30% to 32% over the prior year. Excluding the estimated revenue recognized on the PMA milestone payment, we expect total revenue to range from $105 million to $107 million, This compares to our prior range of $103 million to $106 million, or an increase of 3% to 6% over the prior year. We now expect fiscal 2023 GAAP diluted loss per share to range from a loss of $0.55 to a loss of $0.40, compared to our prior range of a loss of $2.30 to a loss of $2. Non-GAAP diluted loss per share in fiscal 2023 is expected to range from a loss of $0.29 to a loss of $0.14. compared to our prior range of a loss of $1.98 to a loss of $1.68. I'll now share a few additional considerations for modeling purposes. Our updated total revenue guidance reflects the following assumptions for the full fiscal year. Revenue for our two businesses, medical device and IVD, is expected to be approximately 80% and 20% of revenue, respectively. Product revenue is expected to be approximately 46% of total revenue. Our guidance for product revenue does not include any sales of the surveilled DCV product in our fourth quarter. Revenue associated with our legacy medical device performance coding offerings is expected to grow in the mid to high single digits. IBD revenue is expected to decline in the low single digits. AVID surveil license fee revenue is expected to range from $29.5 million to $30 million, which includes approximately $25 million in revenue recognized in fiscal 2023 on the $27 million PMA milestone payment. This assumes fourth quarter revenue associated with the PMA milestone of $400,000. In the prior year, total AVID surveil license fee revenue was $5.7 million. Our updated diluted loss per share guidance reflects the following full year assumptions. Product gross margin in the high 50s reflecting continuing mix impact from growth in device sales during the manufacturing scale-up phase. R&D expense in the range of 48.5 million to 49 million. And SG&A expense of 52.5 million to 53 million. Interest expense of approximately 3.4 million Finally, our updated EPS guidance reflects full-year tax expense of $4 to $5 million. This assumes a sizable tax benefit in the fourth quarter of approximately $8.5 to $9.5 million. Lastly, with respect to cash utilization, we anticipate that we will finish the fiscal year with approximately $37.5 million to $38 million of cash. with cash use in the fourth quarter of approximately $6.5 million to $7 million, which includes approximately $3 million in estimated cash tax obligations as a result of the PMA milestone payment. This reflects our disciplined expense management, the spending reduction plan implemented in the second quarter, and our active management of working capital. With that, operator, we would like now to open the call to questions.