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.