Surmodics, Inc.

Welcome, everyone, to Thermotix's fourth quarter and fiscal year 2023 earnings call. Please note that this call is being webcast. The webcast is accessible through the investor relations section of the Thermotix website at www.thermotix.com, where an audio replay will be archived for future reference. An earnings press release disclosing Thermotix quarterly and full year 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 Thermotic'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 Normotic's forward-looking statements resulting from certain risks and uncertainties, including those described in the company's SEC filings. Normotic disclaims any duty to update or revise these forward-looking statements as a result of new information, future events, developments, or otherwise. This goal also includes reference to the non-GAAP measure because Normotic believes they provided useful information for investors. Today's earnings release contains reconciliation tables to gap results. I would now like to turn the call over to Gary Maharaj, Thermotics President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Welcome, everyone, to our fourth quarter and fiscal year 2023 earnings call. First, let me provide you with a brief overview of what we plan to cover today. I'll start off by discussing our financial performance for the quarter and the full year. followed by an update on our recent operational progress and thoughts on our outlook for fiscal 2024. Tim will then cover our fourth quarter financial performance in greater detail and review our fiscal 24 guidance, which we introduced in our earnings press release today. We'll then open the call for questions. With that, let's begin with the discussion of our financial performance. In the fourth quarter, we generated total revenue of $28 million, representing 8% year-over-year growth. Our revenue performance exceeded the high end of our guidance range, which implied year-over-year growth of 5% for the fourth quarter, due to strong performance in both of our business segments. Importantly, our total revenue performance in the fourth quarter was impacted by a $1 million headwind related to the year-over-year decline in the surveilled DCB license fee revenue. Excluding the surveilled DCB license revenue, we achieved total revenue growth of 12% year-over-year. Revenue from our medical device segment grew 8% year-over-year to $21 million. This again, despite the $1 million headwind from the year-over-year decline in surveilled license fee revenue. Excluding this license fee revenue, our medical device segment delivered 15% revenue growth year-over-year. fueled by increased royalties and license fee revenue from our performance coatings, product sales, including major contributions from our Pounce arterial thrombectomy platform, and R&D services revenue. We're also quite pleased to see robust contributions from our in vitro diagnostics or IVD segment as well. As we had anticipated in our last earnings call, our IVD segment returned to growth in the fourth quarter, increasing 7% year-over-year to $6.9 million, with customers returning to more normalized purchasing patterns after taking steps in recent quarters to manage COVID-era elevated inventory levels. In addition to our revenue performance in the fourth quarter, we achieved notable year-over-year improvements in our operating results. delivering adjusted EBITDA of $1.7 million, a $4.2 million improvement compared to the fourth quarter of last year. Importantly, we generated $1.3 million of cash flow from operations during the quarter as well. Now, it's important to note that our fourth quarter performance was favorably impacted by the delay of certain product development activities and investments in our commercial organizations, that we had contemplated in our full-year guidance. We did this while we focused on executing against the surveilled stocking orders, which Valen described shortly. We expect to resume these activities and investments in fiscal 2024. Our financial performance in the fourth quarter culminated in a strong year overall. We delivered total revenue of $133 million in fiscal 2023, representing growth of 33%. our fiscal 2023 revenue included $29.6 million of license fee revenue related to our surveilled DCB, including $25 million recognized in connection with our achievement of the PMA approval compared to $5.7 million in fiscal 2022. Excluding surveilled DCB license fee revenue, we grew total revenue by 9% year-over-year in fiscal 2023 driven by 14% growth in our medical device business, which more than offset a 3% decrease in our IBD business. We also closed out the year strong from a capital standpoint. Cash provided by operations in fiscal 2023 totaled $10.5 million, and we ended the year with over $45 million of cash and investments to support our future operations. Turning now to our operational progress in the fourth quarter. We are pleased to bring fiscal 2023 to a strong close by delivering on the three strategic objectives that we laid out at the beginning of the year, which, as a reminder, were as follows. First, to achieve the FDA premarket approval or PMA for our Surveil DCD and support our partner Abbott as they prepare to commercialize the product. Second, advance the initial commercialization of our POMS arterial thrombectomy and sublime radial platforms. And third, drive revenue and cash flow growth from our medical device performance codings offerings and IVD businesses. With each objective as our context, I'll discuss our progress during the fourth quarter with respect to each one, beginning with Surveil. After securing the FDA PMA for Surveil, which we announced on June 20th, our team has been intently focused on supporting Abbott, our commercial partner, as they prepare for U.S. commercialization. As we shared in our last earnings call, our top priority during the fourth quarter was to ensure we had the capacity, materials, and processes in place to manufacture and efficiently supply Abbott with product and address their anticipated demand. With respect to each of these key areas, we believe we're well positioned to support Abbott's future launch and initial commercialization of the surveilled ECB. With this as a backdrop, I'm pleased to report that we received Abbott's initial stocking order in mid-August, consistent with our stated expectations. Our team began manufacturing products through the remaining weeks of the fourth quarter, and the production process has been running smoothly. In October, we made the first of our shipments for the initial stocking order, generating our first commercial revenue related to the surveilled DCB in the first quarter of fiscal 2024. As a reminder, when shipping surveil orders to our commercial partner, we recognize two revenue streams under the terms of our agreement, an agreed upon transfer price per unit, and an estimate of the profit sharing, both of which will be reported as product revenue upon shipment within our medical device segment. As we have shared previously, we expect to fulfill Abbott's initial stocking order through multiple shipments following that initial shipment made in October with additional shipments in the remaining months of our first fiscal quarter. In tandem with this effort, we've continued to engage with Abbott's vascular team as they plan to commercialize the product. While we are limited in terms of what we are able to communicate publicly about Abbott's commercialization plans, I'm pleased to share that we expect a commercial launch of the surveilled ECB will commence in the first half of calendar 2024. We're energized by our recent pace of progress and the prospect of bringing Surveil DCB to physicians and patients, and we're equally excited about its potential as a key growth catalyst for the following reasons. From a product standpoint, Surveil reflects our industry-leading expertise in developing drug delivery and drug coding technologies. Its patented coding technology provides unmatched uniformity and consistency of drug distribution, along with lower particulate generation and downstream emboli. Its design and features enable it to achieve therapeutic outcomes consistent with the most prominent drug-coated balloon in the market, a device which uses 75% more taclocaxel. And as the two-year results of a full 446-patient head-to-head Transcend trial have demonstrated, as we look forward to sharing the three-year results of this trial, which will be presented at the symposium on November the 15th. From a market standpoint, we believe that Surveil DCB addresses a $1 billion market opportunity in peripheral artery disease, based on the estimated 500,000 above-the-knee procedures performed in the US each year. Of these 500,000 procedures, approximately a quarter of them are currently being addressed using drug-coded balloons, which provides a significant opportunity for survey of DCB. We're also pleased to see the resolution in the marketplace about potential risks posed by Paxil-coated devices. In its letter to healthcare providers on July 11, the FDA communicated that the risk of mortality associated with these devices is no longer supported based on the totality of the available data and analyses. We believe that this may be favorable to increasing paclitaxel drug code to balloon market adoption. Importantly, the product labeling for our surveilled ECB is consistent with the FDA's updated view. Lastly, from a partnership standpoint, we believe Abbott is well positioned to take advantage of these attractive market dynamics in 2024 and the years to come. with a significant sales and marketing presence in the vascular space and a complementary suite of existing products, including stents and ortho-rectomy devices. Our Surveil DCB fills an important gap in their portfolio for peripheral artery disease, providing them with a complete and comprehensive offering for their existing and potential customers. We look forward to future progress in this market and remain committed to supporting them. Moving to our second strategic objective, advancing initial commercialization of our Pounce arterial, thrombectomy, and sublime radial platforms. We ended the fourth quarter with 23 territory managers at quarter end, compared to 22 at the beginning of the quarter. With an average rep tenure of 16 months at quarter end, our team continued to make progress through what we have referred to as the early market development stage of our commercialization effort. Specifically, we continue to lay our foundation for growth by raising awareness of our pounds and supplying products, working through the value analysis committees at new accounts, and driving repeat orders from existing customers. From a new account perspective, we expanded our base to over 235 customers at the end of fiscal 2023, compared to more than 215 at the end of the third quarter, and just over 100 at the end of fiscal 2022. From a utilization standpoint, we continue to see attractive reorder rates from our existing customers, along with a notable uptick year-over-year in average revenue per customer. And we signed our first integrated delivery network, or IDN, contract with a major health system operating across more than a dozen states for all three products. We're excited about expanded access to this contract, but provide as our reps continue to expand their pipeline of prospective customers. The feedback we've received from new and existing physician customers this past quarter clearly demonstrates the advantages of our Pounce and Sublime products, and they are resonating in the market. Many of our new users have adopted the Pounce arterial thrombectomy platform after using it during a case where other interventional products and approaches that they traditionally employ failed. This unique ability of the PALMS device to quickly and easily be deployed in situations like this, even with first-time physicians, and without the need for capital equipment and minimal need for analytic drugs, combined with the results our physicians are actually experiencing on the table, instantly helps them recognize the value it brings. Our sublime radial access platform's ability to treat patients from the wrist to the foot, reducing their length of stay, blood loss, complications, and pain, continues to build awareness among dedicated radialists across the industry. And we look forward to further penetrating this market. And lastly, from a revenue contribution standpoint, I'm pleased to report that we continued our recent momentum with quarterly pounce and sublime sales exceeding $1 million in revenue for the third consecutive quarter now. Our performance in the fourth quarter ultimately enabled us to generate growth in sales of these products in excess of 250% for the full year fiscal 2023, fueling the 22% growth in medical device segment product sales that we achieved this year. In a relatively short amount of time, small sales forces establish a solid foundation for future growth, positioning us to drive performance in the years ahead. We look forward to building on their achievements in fiscal 2024. Third, turning to our third strategic objective, which is driving revenue and cash flow from our medical device performance, coatings offerings, and IVD business. For full year 2023, our combined revenue from these two areas of our business increased 5%, near the end of our long-term goal of generating low- to mid-single-digit growth on an annualized basis. Our medical device performance coatings team delivered an exceptional year with growth of 9% in fiscal 23, driven primarily by strong sales of our performance coating reagents, coupled with higher royalty revenue from broad-based growth cross-applications as procedure volumes in the medical device industry returned to more normalized levels as compared to fiscal 22. Revenue from our IBD business decreased 3% in fiscal 2023 as customers focused on reducing safety stock levels due to lower demand across the industry for COVID testing products and the normalization of the supply chain. With that said, as we shared in our Q3 earnings call, we believe this macro-related industry headwind is largely behind us, and we are pleased to see return to growth that we anticipated in the fourth quarter, with IVD revenue increasing 7% on a year-over-year basis. In addition to delivering 5% revenue growth on a combined basis in fiscal 2023, our medical device performance, coatings offerings, and IVD businesses generated significant cash to support commercialization and enhancement of our vascular interventions portfolio. Before discussing our priorities in fiscal 2024, let me take a minute to highlight some of the recent progress with respect to our new product pipeline. Notably, our regulatory team engaged the FDA to secure the 510 clearance for the Precide solutions, our latest and most advanced hydrophilic coating technology ever created. Prezide is designed to be easily applied and covalently bonded to medical devices in the neurovascular, coronary, and peripheral vascular spaces using our patented photo-link curing processes. It's specifically formulated to provide industry-leading lubricity, reducing friction for these devices to access and navigate the most tortuous vascular pathways. These benefits will enable physicians ultimately to reach distal treatment sites and deliver improved therapeutic outcomes. Prezide is also formulated to deliver enhanced coding durability, resulting in a reduction of particulates, which will promote compliance with today's increasingly more rigorous regulatory requirements. This is a critical requirement for our customers, especially in the neuromarket segment, but there's other market segments as well. This development and regular clearance of Precide, our new coding technology, reflects our continued commitment to innovation and industry leadership in the medical device coding industry, which has been a defining area of differentiation and a core competency for semantics throughout much of our history. We were pleased to announce the commercial launch of PRESIDE in October and believe it will raise the standard of performance for hydrophilic coatings and facilitate the use and functionality of catheters across many complex applications and secure our leadership and competitive position. And lastly, with respect to our Pound's venous thrombectomy system, after working through the limited product availability we experienced in the third quarter, which paced the initial months of our limited market evaluation, we were pleased to have completed 45 cases through the end of October. The feedback we have gotten from physician users in this limited market evaluation has highlighted the device's ability to effectively address a variety of different clot morphologies, extracting these clots and utilizing its architecture of a screw to macerate acute and subacute clots And our physicians also appreciate the unique ability to adjust the diameter of the basket, allowing them to reduce the stress on the interior of the vein and avoid damage to the valves and the vein wall itself. And it also allows them to make multiple passes with a single device. This and other product feedback we've gathered to date has been invaluable, enhancing our appreciation for the device's primary clinical advantage when used in a real-world setting. and informing our approach for training new clinicians on the device to maximize its effectiveness in the multiple scenarios that they'll encounter with patients. We'll look forward to gaining insight through some additional LME cases as we prepare for commercialization in the first half of fiscal 24 on a limited basis before commencing a full launch in the second half of the year. Stepping back, fiscal 23 was a year of pivotal success in the face of major challenges. In response to a significant regulatory setback with the receipt of a not-approvable letter in the second quarter for the surveilled BCB, we quickly engaged and proactively engaged with the FDA to amend our PMA application, ultimately resubmitting and securing the PMA from the FDA ahead of our expectations. In tandem, we took important steps to control the use of capital beginning in the second quarter, executing superbly against this plan to reduce our average quarterly cash in the second half of the fiscal year. And then, despite these spending reductions, we continued to advance initial commercialization of Pounce arterial and Sublime radial products, fueling the medical device segment growth in product sales of 22% for the fiscal year. We drove strong revenue and cash flow from our medical device coatings offerings and IVD businesses on a combined basis. And lastly, we significantly enhanced our cash balance by achieving a $27 million milestone payment related to the surveilled PMA approval and raising $19.3 million in net proceeds under our new five-year credit agreement. With durable and profitable core businesses, a portfolio and pipeline of key catalysts, and more than $45 million of cash and investments to support our operations, and access to approximately $61 million in available debt capital to provide additional financial flexibility, we believe we are strategically positioned for future success. As we look ahead to fiscal 2024, our team is focused on executing the following strategic objectives. First, to drive our near-term growth catalysts in our vascular interventions portfolio, namely Surveil, Pounce, and Sublime, including the launch of our Pounce Venus product platform. Two, to drive durable growth and cash flow generation across our core medical device performance codings and IBD businesses. And three, to enhance our Pounce, Sublime, and medical device performance codings portfolios by developing new products and line extensions to facilitate our long-term growth. As our guidance range implies, we expect to accelerate our total revenue growth profile in fiscal 2024, driving growth of 9% or higher, excluding license fee revenue related to our surveilled ECB. I also want to stress that cash efficiency remains a top priority for our organization, despite our influx of capital and even in light of the large number of projects we have. Tim will provide more detail in his commentary. As we pursue these three strategic objectives, we are focused on executing efficiently as possible to maintain a healthy balance sheet and position somatics of strong, sustainable long-term growth and value creation going forward. I'd like to thank my colleagues across the entire organization for their contributions to our success this past year. and their commitment to our mission of helping humanity by improving the detection and treatment of disease. Thank you as well to our customers and shareholders for their ongoing support. With that, I'll turn the call over to Tim Ahrens, our Chief Financial Officer, to discuss our fourth quarter results and fiscal 2024 guidance. Tim?

Thank you, Gary. Unless noted, all references to fourth quarter results are in a gap in year-over-year basis. Total revenue for the fourth quarter of fiscal 2023 increased $2 million or 8% to $28 million. Excluding surveilled DCV license fee revenue, total revenue increased $3 million or 12% to $26.9 million. Our earnings press release includes detailed reconciliations of total revenue excluding surveilled DCV license fee revenue. Product revenue increased $1 million or 7% to $15.4 million. Medical device product revenue increased 570,000, or 7%, to 8.5 million, driven primarily by increased sales of our Pounce Thrombectomy device platform, as well as our performance coating reagents. This growth was offset in part by a decrease in proprietary specialty catheter product sales due to the completion of a customer development program. IBD product revenue increased 400,000, or 6%, to 6.8 million, Our diagnostics business benefited from strength in our microarray slide and antigen offerings. Royalty and license fee revenue increased $540,000 or 6% to $10.1 million. Royalty and license fee revenue from our performance coatings increased $1.5 million or 21% to $9 million compared to the prior year period. The fourth quarter benefited from improved U.S. procedure volumes. In addition, we continue to see growth from customer devices using our serene coding, as well as growth from recent customer product launches. Surveil drug-coded balloon license fee revenue declined 1 million, or 48%, to 1.1 million, corresponding with the decrease in Transcend clinical trial costs. R&D services revenue increased 470,000, or 23%, to 2.6 million. The increase was primarily due to higher customer demand for 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 was 54.2% compared to 61.1% in the prior year period. As we discussed on last quarter's call, the decrease was expected and was driven by the adverse mix impact from increased device product sales, which have lowered product gross margins from underabsorption and production inefficiencies, including expiration of inventory associated with low production volumes during the scale-up phase following our initial commercialization. R&D expense, including costs related to clinical and regulatory activities, decreased 2.6 million, or 21%, to 9.7 million, reflecting the benefits of the spending reduction plan we implemented during the second quarter of fiscal 2023. R&D expenditures were favorable to our expectations as a result of timing for certain projects in our pipeline. SG&A expense decreased $1 million, or 7%, due to lower direct sales headcount compared to the prior year period related to the aforementioned spending reduction plan. SG&A expenditures were favorable to our expectations as a result of the timing of investments in our commercial organization. Our medical device business reported an operating loss of $2.4 million, compared to $6.2 million in the prior year period, reflecting our disciplined expense management, favorability in timing of operating expenditures, and broad-based revenue growth. Our IBD business reported operating income of $3.2 million, or 46% of IBD revenue. compared to $2.8 million or 43% of revenue in the prior year period, reflecting our return to revenue growth this quarter. Turning to income taxes, we reported an income tax benefit of $9.5 million compared to an income tax expense of $7.9 million in the prior year period. As we discussed on last quarter's call, the substantial tax benefit was expected and offset the substantial tax expense recorded in the third quarter of fiscal 23 as a result of the $27 million surveilled PMA milestone. As a result, the $7.9 million tax expense in the fourth quarter of fiscal 2022 included a non-cash charge of $10.2 million to establish a full valuation allowance against U.S. deferred tax assets. GAAP net income was $6.7 million or 47 cents per diluted share, compared to a net loss of 14.7 million, or a loss of $1.06 per diluted share in the prior year period. Non-GAAP net income was 7.5 million, or 53 cents per diluted share, compared to non-GAAP net loss of 3.7 million, or a loss of 26 cents per diluted share in the prior year period. Non-GAAP adjusted EBITDA was 1.7 million, compared to adjusted EBITDA loss of $2.5 million in the prior year period. Adjusted EBITDA includes 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 fourth quarter of fiscal 2023 with $44.6 million in cash and $29.4 million in long-term debt. Cash provided by operations during the fourth quarter was $1.3 million, and capital expenditures totaled $750,000. As of September 30, 2023, we had $45.54 million in cash and investments, $29.4 million in long-term debt, and approximately $61 million in additional borrowing capacity under our existing credit agreement. Turning now to fiscal 2024 guidance. We expect fiscal 2024 total revenue to range from $116 to $121 million, representing a decrease of 13% to 9%. Excluding surveilled DCV license fee revenue, we expect revenue to range from $112 to $117 million, representing an increase of 9% to 14%. Surveilled DCV license fee revenue is expected to be approximately $4 million in fiscal 2024. This compares to $29.6 million received or earned in fiscal 2023. We expect fiscal 2024 GAAP loss per diluted share to range from a loss of $1.55 to a loss of $1.20. Non-GAAP loss per diluted share is expected to range from a loss of $1.32 to a loss of 97 cents per share. I'll now share a few additional considerations for modeling purposes. With respect to our fiscal 2024 total revenue guidance, product revenue is expected to be approximately 60% of total revenue, driven largely by contributions from our product growth catalysts. Specifically, we expect combined product revenue from our surveil, pounce, and supply products of at least $13.5 million. Our guidance includes surveil DCB product sales to add it for the initial stocking order in the first quarter of fiscal 2024, and subsequent orders throughout the remainder of the year. Note, surveilled DCB product revenue consists of revenue from both the transfer price and estimated profit sharing, the two revenue streams under our development and distribution agreement with Abbott. Revenue associated with our medical device performance coatings offerings and IVD business is expected to grow on the low to mid-single digits, from the $88.3 million of combined revenue generated in fiscal 2023. Our fiscal 2024 diluted loss per share guidance reflects the following full-year assumptions. Product gross margin is expected to be in the mid-50s. We expect operating expenses, excluding product costs, to be flat to slightly down. We expect R&D expense to range from $43 to $44 million, represented representing a decrease of 8% to 6%. We expect SG&A expense to range from 54 to 55 million, representing an increase of 4% to 6% as we invest in our commercial organization. Interest expense is expected to be approximately 3.5 million, consistent with the prior year. Finally, our EPS guidance reflects full-year tax expense of 1.5 to 2.5 million, With respect to our revenue growth in the first quarter of fiscal 2024, we expect first quarter total revenue to range from approximately $29.5 to $30.5 million, representing an increase of approximately 18% to 22%. Lastly, with respect to cash utilization, at the end of fiscal 2023, we had $45.4 million of cash in investments. which included 3.9 million of available for securities. In fiscal 2024, we expect to finish the fiscal year with approximately 27 to 31 million of cash and investments. Let me take a minute to walk through what this means for our anticipated cash use in fiscal 2024 compared to 2023. In fiscal 2023, our cash and investments increased by 26 million year over year. Importantly, This $26 million increase included an influx of cash from both the milestone payment for obtaining surveilled PMA approval, as well as the net proceeds drawn from our term loan and revolving credit facility. Setting aside the $27 million from the surveilled PMA milestone payment and the $19.3 million in net proceeds from our mid-cap credit agreement, cash and investments decreased approximately $20 million in fiscal 2023. By comparison, in fiscal 2024, we expect a year-over-year decrease in cash and investments to range from approximately $18 to $14 million, reflecting an improvement in the use of cash and investments of approximately $2 to $6 million compared to the $20 million in fiscal 2023 that I just mentioned. Our expectations for cash use in fiscal 2024 reflect the following assumptions. the receipt of a $3.6 million cash tax refund from the IRS associated with the CARES Act employee retention credit, capital expenditures of up to $5 million compared to $2.9 million in fiscal 2023, which includes certain investments postponed last year as part of our spending reduction plan, and payments totaling approximately $2.7 million to satisfy obligations related to previous acquisitions. Lastly, it's important to note that our first quarter historically requires a higher use of cash to fund our working capital needs, such as our annual employee bonus payments and our annual prepaid insurance premiums. As Gary mentioned, despite our recent influx of capital, cash efficiency remains a top priority for the organization. We remain focused on disciplined expense management and optimization of working capital. And importantly, our guidance assumes no further borrowings during fiscal 2024 under our credit agreement. With that, operator, we would now like to open the call to questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star one. And our first question comes from Brooks O'Neill with Lake Street Capital Markets. Please go ahead.

Good morning. A lot to unpack in the various comments you guys just made. And to limit myself to two questions, I'm going to just try to hit the high points, I guess, as I see them. I'm curious, when we contemplate that Abbott has paid you approximately $100 million development fees related to surveil, and you've just given us year one sort of guidance for surveil that includes the revenue you anticipate from Pounce and Sublime and surveil of $13.5 million. How should we think about whether this product has the potential to meet the expectations that you have for it and that your partner Abbott might have contemplated when they paid you the $100 million? Thank you.

Thanks, Brooks. It absolutely is within the confidence limits that we set for ourselves when we started this journey a long time ago. Especially as I would add, in all meetings with Abbott, it reminds me of why we always saw them as a good partner, and that continues to be demonstrated in meeting with their commercial team. The other thing is, I'll just offer this, and this is not an Abbott statement, but the recent acquisition of CSI gives them a really nice sales footprint. And they do have the trifecta in this vessel, in the superficial femoral artery of the fempop segment. They have credible stent in supera. Now they also have the arthrectomy devices that came with CSI. And the third and missing component to really compete is a drug-coated balloon with an anti-arisonotic drug. So we're excited. My interactions with them have been exciting as well. And now with the sort of removal of this veil of pac-to-paxil causing a late-mortality signal, it's gone. You know, just for the recent ECT and VIVA meetings, it continues to present how that signal has literally died, and these devices are better for patients. So all the momentum, we believe, is stacked positively. Now, when we look at guidance, I'll turn it over to Tim. You know, there are estimates we have to make and there are actuals. And so we have to be cautious in how we make those estimates going forward. But I'll turn that over to Tim to get some color.

Thank you, Gary. Brooks, thank you for the question. I think the important thing for you and everyone to realize is the most important three words that I mentioned in guidance was of at least $13.5 million. The other thing I think people need to keep in mind, too, is we commented about Abbott's expected commercialization timing, which is the first half of calendar year 2024. Please bear in mind this is three to nine months of potential product revenue for ceramics from Abbott's commercialization. We'll have a lot more to say on this as we go through the fiscal year, but keep in mind this does not reflect a full 12 months of revenue from Abbott.

The last thing I'll add, Brooks, is Professor Schneider is presenting our three-year data at the VICE meeting next week in New York, and I think it's worth paying attention to that. I imagine we'll send a press release summarizing that data afterwards, but the thing you want to look for in these devices is continued durability of the signal, especially as compared to the market-leading device, and so Once again, we and Abbott are the only company that has a pivotal head-to-head randomized control trial against this device. No one else has it. And so I look forward to that data being presented next week. I'll be there.

That's great. I appreciate all that, Keller. Let me ask one more. As we think about the world that you've developed here, guys, You have the beginning of significant experience with a partner in Abbott with Sublime. You also have the beginning of essentially a go-it-alone strategy with regard to Surveil and Abbott. But you go it alone with Pounce and Sublime. I have a sense you have a deep and robust pipeline of new products. Share with us just a little bit about how you think about going to market with some of the high potential products that are still in your pipeline today.

Absolutely. You know, we compete, you know, in markets, especially in the thrombectomy market. You can't... do just the minimum to get the first product iteration out. You have to have the follow-on products. And as I said, we got FDA clearance on the pounds low profile, which will allow us to go down close to the ankles. And so we have other parts of these product expansions. What we're seeing is, you know, you've heard me say the future has already been created. It's not evenly distributed. What I mean by that is we're not losing anything. Right, we have 20 something sales people versus, in some cases, 350, almost 400, or just to say we did average of 10 times our sales force. On the piecewise basis, we're winning, and I would suggest without hyperbole, we're winning every time. And that's an important thing as we build out this market. Now, clearly we have to be cash efficient. And I recognize if this company had the size of the sales forces, the strategics, for example, we'll be talking about greater than $100 million of revenue, right, just on these product lines. But we intend to go and grow as we go and use our cash efficiently, continue to win and continue to supplement that. So I believe that is a very key strategy. When it comes to drug-coded balloons, The competition and the need for a partner like an Abbott really is across multiple product lines, across multiple group contracts and such, and that's something we don't have to compete in an already existing market like drug-coated balloons. I will say, just getting the first group contract under our belt, which is more than 100 hospitals, it's remarkable to me that we were able to get a group contract for all three product lines, you know, Pounce, Sartorial, Sublime, and we haven't even launched Pounce Venus yet. That's a very significant thing when you think about it. I've not kept up with it, but I don't know any products in my 30-something year history that gets a group contract for a product that's coming. And so that tells you the appetite and signal and our strength of our competitive position.

feel good of where we are. Yeah, and I'll just, I'll add one quick comment here, Brooks, to Gary's remarks here. I think it's important to recognize what Gary described in terms of the 24 strategic objectives, capitalizing, and then your term growth catalysts in the vascular interventions portfolio. And you've heard Gary mention Pounce Venus. There's a few other products that we've described here that are going through limited market evaluations. You know, we anticipate that they'll be in a position for commercialization some point later in the fiscal year. And our guidance does reflect minimal, I should say modest, revenue contributions from the commercialization of those products. So, again, this year it will not be seeing a full 12 months of revenue generation from some of the catalytic products that will be coming to market from Sermotics.

Yeah. And, Brooke, so... Last thing, not to pile on, is if there was any sentiment that Tim and I are not in our legacy business, our core coatings, offerings, and diagnostics, Prezide Coating is a remarkable achievement. It's something we've worked somewhat behind the scenes for the last two years. New intellectual property, and for many customers in that business, especially in the neurovascular segment, it's unmatchable. So we're not ceding leadership because we're focused on products. Our technology leadership is something we have drawn a line and said we will maintain technology leadership in all things that we do. So that's just an additional thing on preside that's happening and even more things we're working on in the future.

Great. Thank you for all that color. And I can tell you I am excited about your future.

Thank you, Brooks.

We are, too.

Our next question comes from Mike Petoskey with Barrington Research. Please go ahead.

Good morning. So, Tim, just in terms of the assumption around second half, I'm sorry, first half calendar commercial launch for surveil, obviously that's, you know, there's, I guess, 180 days range in there. And your assumption, you have to be assuming something there. I mean, is it fair to say you're assuming somewhere in the middle of that time frame in terms of the 13.5 or the part of that, the 13.5 that's a contribution from surveil? Are you assuming sort of just that that's commercialized for essentially the last three months of your fiscal? Can you just talk about what you're actually – specifically assuming to get to the contribution you're assuming for the, you know, within the 13.5?

I'll say one thing and then turn it over to Tim for the detailed answer. You know, one of the things in the partnership with Abbott, we recognize the competitive dynamics of a launch and the things that they're trying to set up. And so if there's any implied vagueness, it's because we want to respect that confidentiality as they really gear up for a major launch. So that explains the wide window, even though we may know what the window really is, we want to give them every opportunity to compete effectively with their launch planning.

Yeah, thank you, Mike. It's a very appropriate question, and as Gary kind of got in front of my answer here, I'm limited in terms of what I can specifically say with regard to Abbott, but I can provide some color. And the thing for folks to probably appreciate is that the first half of the year, will reflect the stocking order that we've been manufacturing and sending to Abbott. And so clearly the second half of the year is going to be more influenced by Abbott reorders once they're in the market and have commercialized the technology and the products. So I think that's probably the extent of context that I can provide today.

Could I just ask, are you assuming any profit share dollars within whatever contribution you're assuming in the 13.5?

We will, and they're very modest. We'll need some time. Obviously, it is an estimation. It's a judgment. And just to probably provide a little clarity for folks, we will need to make assumptions with regard to the units that we ship to Abbott, how many will actually be sold. How many will be used for promotional activities? How much will be expired? We'll have to make assumptions with regard to their selling price. So there is a bit of a number of variables that we need to estimate. And as you can imagine, we'll learn more about how to think about these variables once Abbott estimates. But know that it's a modest portion of that $13.5 million that I described.

Yeah, you know, refining the first year will refine that model, but you can imagine the first year predictability without those assumptions and a history of those assumptions being validated. It's going to be challenging for us.

All right, but there is some estimate of that. I'm assuming that's like on a 90-day trail. Is that right?

So we'll make the estimate at the time we ship product to Abbott but there will be a true-up. Think of how Sermotics actually goes about estimating our royalty revenue. Then we collect the actual royalty payments and there is a true-up or an adjustment based upon our estimate versus what we received. That will happen over time with AVID as well.

Like 90 days or farther out than that?

It will be quarterly.

All right, and then last question. I've stretched the boundary of two questions, but let me just ask the last question. I guess in terms of the sales effort on Pounce and Sublime, Gary, do you expect that now that you guys are in a better situation in terms of sort of the outlook for the future and sort of the vision there and, frankly, the balance sheet, does more investment in the sales team there make sense at this point? Thanks.

You know, if we didn't have the short answer is yes, but it'll be go as we go. So in other words, as we start generating returns from that business, we'll be investing it in that business. We have drawn a line on what we should be investing on a go forward basis. So pay attention to our cash forecast, right? Usually it's its revenue and earnings, but cash is a appropriate throttle limiter for where the company is right now. Could we go faster? I believe so, but we don't want to become a balance sheet story as a public company in this macroeconomic condition. So we'll grow as we go. We're not going to double the size of Salesforce, I can tell you that, but we will be selectively adding Another key thing is when we do launch the Pounce Venus, right, we'll have to be interpreting whether we can go faster, again, in a very disciplined fashion, with some more feet on the street. The one thing we have to face as you get GPO contracts, which is, I don't know how to emphasize this, which is remarkable for a company at this stage, right, now in GPO contracts and IDN contracts, you have to demonstrate penetration in that contract. So now we're covering our extra 100 hospitals, and so we will be doing an analysis of where the heat maps are to seed our territory managers and field clinical specialists. But we can't over-accelerate there. That's the big discipline we have to put in places here.

Can I just ask a quick follow-up? And this is sort of a big picture longer term. I mean, if we're having this conversation three years from now and Venus has obviously been commercialized at that point for two-plus years, I mean, it is possible that it could be a doubling of the sales force, isn't it, at that point?

I mean, typically, yeah. I mean, to really compete well, you eventually need a minimum of 50 people, right? Okay. You can go up from there, but getting to that 50 and making sure you have the ... We want to be on the conservative side of sales capacity utilization. You always continue to grow. You can always fund that. We also have to look at our sources and uses of cash and our debt levels and our senior debt repayment levels. A lot of things come into play there, but Yeah, three years from now, to be able to support that market growth, you'd have to have a critical mass to play in that market effectively. So, you know, and, you know, big thing for us continues to be as we model is what we call the territory manager's contribution margin. In other words, we look at gross margin from a territory offsetting selling costs in that territory. So it's not an operating margin. margin thing, but it's a gross margin, which basically tells us gross margin is paying for the selling efforts and selling expenses. And so that's a nice way to look at how we will look at scaling up over time.

Okay, very good. Well, congratulations. Obviously, a 23, a huge pivotal year. Congratulations. Thanks. Thank you.

Our next question comes from Jean Sidoti with Sidoti and Company. Please go ahead.

Hi. Good morning. Thanks for taking the questions. Just to follow up on the Salesforce, just it says what number or how many sales folks you had at the end of the fiscal year?

I think we have it in the remarks. I think it's 23, Jim. You ended with 23. Okay.

And so it sounds like you might add a few as the conditions determine now, but you're not expanding it in a big way in fiscal 2024.

Not at this point. As I said, we will selectively seed. We have an incredible sales organization. And so when we're adding, we're looking for really first top-tier talent and top-tier talent that's willing to stretch, you know, Our competitors have sales people for like five accounts, right? We have sales people for 50 to 100. So they have to be able to stretch and they have to come from a great pedigree of success. So we want to keep getting the top tier talent and seeding them. We'll add as we grow, but again, not intending to double it. And the big thing is when we do launch upon Venus and we feel the uptake of that product, we may decide to add some more. But that's later in the year and clearly within the constraints of what we're seeing in our cash guidance.

Okay. All right. Now switching over to Abbott. Can you just lay out, you know, what are the milestones that have to happen for Abbott to launch the device? And, you know, is there a chance it gets canceled? pushed out a little longer or maybe is there a chance that it happens a little sooner than you indicated so far?

Yeah. And again, I'll repeat what I just said. Some of the bandwidth we have to give in the launch there with Abbott is our respecting their confidentiality of the contract of when they launch. But as you can imagine, they're professionals at this type of launch and they're doing all of the appropriate Preparation of the ground, fertilization, and the appropriate seeding, because I suspect when they go, they really go with a very specific launch plan and trajectory. So really our job is to help them with technical information that they are able to use to train their team and to make sure we have high-quality product delivered on time to their docs. That's really our role in it.

Yeah, I would say, Jim, too, we're confident in the timeframe that Abbott provided, meaning the first half of calendar year 2024. And you can imagine there could be reasons why they would get out earlier. And you can also imagine that there are reasons why maybe they would kind of move that more towards the second half of that time horizon. So, you know, we'll just ask you to stay tuned. There will be more on that. I'm sure everyone will see it when Abbott launches it. And we're here to help support and make sure they have what they need from us so that they can effectively get out into the market with Surveil. Basically, what we're saying is we can't talk about it.

That's the cut to the chase. All right. Can you talk about whether it's strictly limited to the U.S. or if it will be launched worldwide?

Yeah, we can certainly address that question. I think we've described this over the last several quarters. They are going out U.S., So what we've described in our guidance and what we're talking about in terms of the launch all pertain to the U.S. market. We've nothing to add OUS at this point, Jim.

Okay. And then in terms of semantics income statement, if you look, R&D expense topped out around $50 million in fiscal 2022. It ended this year around $1. 46, 47 million, you expect it to tick down to, you know, closer to 44 million next year. Do you think it'll continue to remain around these levels, maybe come down a little bit, or are there any major projects you expect to invest in in the next couple years?

We do have to, R&D's really focused on winning in the market segments we have identified, and that does include the Venus market, and You know, keep in mind we're entering several huge markets this year. I mean, the Venus market is larger than the arterial market in a generalized statement. And so to compete with the big guys there and their products, we have to maintain some level of R&D to continue to win and launch those products. We do have some early stage programs that we're looking at. Some of them involve more Venus of the Venus segment than pulmonary embolism. And actively, the one thing I'll say is you'll see next week, at the VEEPS meeting again, Professor Ramon Barco is presenting our two-year data on Sundance serolimus BTK. Now, Professor Barco presented the LIFE-BTK trial data two weeks ago at the TCT meeting in San Francisco, which is an absorbable stent diluting an olimus drug. And so when you look at our two-year data, and I encourage you, we'll send a press release on that, what I hope is recognized is that we do actually have incredible drug delivery technology and semantics. Our issue, again, is one of being cash constrained. You know, to get ready for an IDE, much less to run a pivotal trial, we will be actively looking for partnership opportunities to help us with that. We can't go that alone, as much as you stay tuned for the data being presented. Again, this is two-year data, right? Stay tuned for what our two-year data looks like with any of the BTK device that's been done. So, have to be really disciplined, wish we had the capital, but have to maintain that in the public markets.

All right, so it sounds like, you know, you're going to continue to invest in R&D, but it doesn't sound like you're going to get back to the fiscal 2022 level.

Yeah, Jim, I think, you know, we're providing the guidance here for fiscal 2024. And you noted the reduction in R&D spend over the last few years. And, you know, there's clearly investments in certain platforms and other platforms are seeing a deceleration in spend, notably Surveil. which has been less than, certainly not fully offset by increased spend in other platforms. But yeah, I think we like the trend and we like the investment that we're making and what we think the long-term value creation can be from those investments. Not a whole lot to add for 25 or later, but I'd say you're probably right to think about the trend.

Yeah. And one thing, Jim, is Remember, R&D includes clinical, right? And so we have the Prowl registry. You have to commit to those registries, and the Prowl registry is going just fine. This is for the Pounce arterial. And eventually, when we do launch the Pounce venous product line, to get the claim expansion to DVT versus removing clot will require either minimum registry or a very small single-arm study. So that's more out than the 25 sign for India Plus.

There's puts and calls, Jim.

Thank you. And our next question comes from Mike Madsen with Needham & Company. Please go ahead.

Yeah, thanks. I wanted to ask one on, you know, Pounce versus Sublime. Just reading between the lines of some of the comments, it sounds like Pounce is, kind of a bigger growth driver there than Sublime. Is that right? I know you're not going to break out the sales or anything, but can you just qualitatively comment on how the two are doing relative to each other?

It has been, Mike, and one of the reasons for that, remembering the whole debacle with the PME not approvable, letter, the VI commercial team took the largest hit in the company. We had to, unfortunately, reduce the size of the sales team by a lot, right? And what we had to do at that point, because we had to make sure we hit our revenue plan, the incentives for the sales team, when you look at a $4,000-plus product in pounds versus several hundred dollar product in sublime catheters, we were compelled to redirect the team that we had towards making sure we were able to hit that revenue. With the new commission plan that went out in October, we have now put sublime back in its rightful place. So there was a specific conscious decision at that point. What I would say is that the addressable market supports arterial, is bigger than it is currently for radial devices. And remember, radial is also an adoption curve, not just a competitive win curve. What I've told our sales team, though, is we'll do well in thrombectomy, I have no doubt, but their grandchildren will remember them for some life, right? Because that is changing the face of healthcare towards the positive. I don't know a single other product, and again, it's early innings, that has better patient outcomes, right, much better healthcare economics, and a huge impact on patient satisfaction. Hitting that trifecta, we're patient with it, but for the moment, yes, the high ASP of things like Pounce Arterial are outpacing Sublime. And that's okay, by the way, for us right now.

Yeah, okay. And then just on the Persag coding, I mean, I know you're continually iterating on those offering. So, I mean, is this something that could have any sort of impact on the growth or is it more just kind of incremental?

And you know how that business runs, like the cycle time. So we just got the first FDA clearance. I don't think we mentioned that, but we do have an FDA clearance of the first device for Prezide. And so what that sets the stage is, I'm generalizing a little bit here. So the chemistry is on file with the FDA of having seen it now. And it gives our customers an opportunity to leverage that knowledge and working knowledge of that dossier on file with the FDA. The time cycle is, you know, you've got to get customers who are interested, help them through their development and their regulatory offerings, right, effort to get clearance for these devices. And only then do we see the royalty when these devices hit the market. So it's a longer offering, but it's significant because we're talking about royalty cash flow here. So I wouldn't expect, Tim, in our guidance, we put anything for fiscal 24 for any royalty things there, unless people get approvals pretty quickly.

Yeah, there really isn't. To be clear, preside is something that is highly complementary to our serene coding, which has really been growing well over these last few years, and we continue to expect it to grow well. I think we've commented previously that there are 60-plus customer opportunities where we get to dial in our chemistry with our customers' devices. This just, per se, gives us an opportunity to really claim certain application spaces. I think going distal in the neural, crossing really challenging lesions like total chronic occlusions, it really gives us an advantage with this coding relative to even some of our internal codings, but more importantly to competitive codings. And I think that's why the team has really been focusing on this Precide coding over the last few years is to meet some of the needs where, quite frankly, we felt that we could provide some additional performance enhancement. So, as Gary mentioned, it will probably be a few years to grow the trees, but we're planting the seeds today.

Okay. All right. Got it. Thank you.

Thank you. And that concludes our conference call for today. Thank you for your participation, and you may disconnect at any time.