Surmodics, Inc.

Welcome everyone to the Sermonix first quarter of fiscal year 2024 earnings call. Please note that this call is being webcast. The webcast is accessible through the investor relations section of the Sermonix website at www.sermonix.com, where an audio replay will be archived for future reference. An earnings press release disclosing Sermonix quarterly and full year results was issued earlier today and is available on the company website as well. Before we begin, I'd 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 Sarmatic'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 Sarmatic's forward-looking statements. resulting from certain risks and uncertainties, including those described in the company's SEC filings. Surmonix 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 Surmonix believes they provide useful information for investors. Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the conference over to Mr. Gary Maharaj, Somatics President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Welcome, everyone, to our first quarter fiscal year 2024 earnings call. Here's what we plan to cover today. I'll begin with a high-level overview of our quarterly financial performance, followed by a discussion of our recent progress from an operational standpoint and our outlook for the rest of the year. Tim will discuss our Q1 financial results in more detail and review our financial guidance for fiscal 2024, which we updated in today's earnings press release. Then we'll open the call for questions. Let's start with the discussion of our financial performance. In the first quarter, we were pleased to achieve total revenue growth of 23% year-over-year to $30.6 million. Excluding the surveilled ECB license fee revenue in both periods, which represented an approximately $300,000 headwind in the quarter, we achieved total revenue growth of 25% year-over-year. Our total revenue performance came in just above our stated range of expectations for the quarter of $29.5 to $30.5 million, which we shared in our last earnings call. Importantly, our performance was driven by impressive contributions from both of our business segments. The medical device segment grew 24% year-over-year to $23.5 million and increased 27%, including the year-over-year headwind related to the surveilled DCB license fee revenue that I just mentioned. And revenue from our in vitro diagnostics or IVD segment grew 18% year-over-year to $7 million. In our medical device segment, growth is primarily driven by record product sales, which increased 43% year-over-year, fueled by our vascular interventions device portfolio. Specifically, our Surveil drug-coated balloon and Pound's thrombectomy platform. We also saw important contributions from royalties and license fees from our performance coatings, as well as R&D services revenue. Growth in our IVD segment, which was exceptionally strong in the quarter, benefited from a combination of factors, including strong demand for select products heading into peak influenza season, the timing of orders, and a continued return of more normalized purchasing patterns from some of our customers that had taken steps last year to manage COVID-era elevated inventory levels. Lastly, We were pleased to complement our impressive revenue performance with year-over-year improvements in our operating results, delivering adjusted EBITDA of $3.9 million, a $7.2 million improvement compared to the first quarter of last year. Overall, we were quite pleased to deliver a strong start to fiscal 2024. Turning now to our operational progress in the first quarter. In addition to our financial performance, our team has been hard at work executing with respect to the three strategic objectives for fiscal 2024 that we outlined in our last earnings call. As a reminder, these objectives are, first, to capitalize on the key near-term growth catalysts in our vascular interventions portfolio, our Surveil DCB, Pound's thrombectomy, and Sublime radial access products. Second, to drive durable revenue growth and cash flow generation across our core medical device performance coatings offerings and IVD business. And third, to facilitate our long-term growth by developing and introducing new products and line extensions that will enhance our existing Pounds Sublime and medical device performance coatings portfolio. Let me walk you through our recent progress with respect to each of these objectives, beginning with our vascular interventions portfolio. As I mentioned, product revenue in our medical device segment increased 43% year over year. This impressive growth was driven primarily by sales of our Surveil DCB and Pound Strombectomy products. Most notably, we generated the first commercial revenue from our Surveil DCB, as we began shipping units in October to our commercial partner Abbott in preparation for a January launch. I'm pleased to report that the commercial manufacturing process proceeded reasonably smoothly during the first quarter, and we ultimately completed all shipments required to satisfy Abbott's initial commercial stocking order on time as planned. Drug-coated balloons, like our Surveil DCB, are some of the most difficult to manufacture with consistent quality in the interventional device segment. Our efficient and successful transition from manufacturing clinical units to commercial quantities, a process which I've previously equated to starting a diesel engine in the middle of winter, speaks to Systematics' unique technology capabilities and expertise as an organization, as well as the talent and dedication of our employees. Our surveillance operation team did an excellent job of ensuring the success of initial commercial production, and I'd like to give them a shout out in today's call to thank them for their efforts. In addition to our manufacturing efforts, we continue to support Albert's commercial readiness activities, such as the development of technical marketing and sales team training materials. We were also pleased to share the three-year results of our 446-patient TRANSCEND trial, which were presented at the 50th Annual Veet Symposium on November the 15th. As a reminder, this 65-site randomized controlled trial founded our surveilled DCB to be non-inferior in both safety and efficacy to the market-leading Impact Admiral DCB, which uses a 75% higher drug load of Paxotaxel. Ninety-seven percent of our patients in the trial completed their three-year follow-up, and we are pleased to see that the data continue to demonstrate sustained safety and efficacy outcomes for the low-dose surveilled ECB that are comparable to the controlled device. I'm pleased we were able to provide this compelling clinical evidence to the medical community, which supports the long-term outcomes that can be achieved with our technology. I will also add this is the only randomized controlled worldwide trial of a low-dose DCB compared to a high-dose DCB-like impact. With this recent progress as a backdrop, I'm excited to share that the Surveil DCB is now a commercial product available in the United States through Abbott. Last week at the International Symposium on Endovascular Therapy, Abbott hosted a lunch symposium featuring the Surveil DCB entitled, Drug-Coded Balloons, Time to Unveil What You're Not Seeing. Dr. Bill Gray, a key opinion leader in the field of interventional cardiology and one of the principal investigators of the Transcend pivotal trial, discussed the differentiating features of the Surveil DCB, which he highlighted in the three-year clinical data from the Transcend trial. We're excited to see the Surveil DCV positioned as the next generation of drug-coated balloons. We'll look forward to Abbott's progress and remain committed to addressing their future demand as they move through the initial months of commercialization. In addition to the commercial revenue, we recognize from the initial stocking order for our Surveil DCV Sales of our Pounce thrombectomy products also represented an important contribution to the 43% growth we achieved in the medical device segment. Sales of these products continue to track with our expectations as our direct sales team remain focused on supporting both existing and potential customers, raising awareness in the marketplace and educating the medical community. We ended the first quarter with a direct sales team consisting of 23 territory managers, which is unchanged from the end of fiscal 2023 and compares to 28 territory managers as of December 31st, 2022. Building on the progress made in fiscal 2023, our team continued to establish a foundation for future growth by developing existing accounts and expanding our active customer base. In the first quarter, we continued to be pleased that we had great customer reorder rates and saw healthy year-over-year growth in average revenue per existing customer. As part of our efforts to raise market awareness and educate prospective new users during the quarter, we sponsored two digital and print supplements in Endovascular Today, a leading industry publication with an editorial advisory board composed of the top endovascular specialists. The publication's focus is the latest technological advancements in the endovascular field. And the November issue featured a supplement on our sublime radial access platform and its impact on patients and practices. And the December issue featured a supplement on our Pounce arterial thrombectomy system. The pound supplement featured case studies and interviews with 10 physicians, including a diverse set of vascular surgeons, interventional radiologists, and interventional cardiologists. It provides clinicians with insights into how their peers are integrating pounds into their approach to treating patients with acute limb ischemia. With case studies featuring pre- and post-procedure angiograms, It also succinctly and powerfully demonstrated Pounce's ability to quickly remove multiple mixed morphology clots in a single treatment session, eliminating the need for capital equipment or aspiration and reducing reliance on lytic drugs. I encourage you to read these supplements and draw your own conclusions and develop your own view as to whether our VI products are not far and away the best in any class including products marketed by current large incumbents. You've heard me say in the past, the future has already been created. It's just not evenly distributed yet. The latter is our job to be done with the Sermatix VI portfolio. These supplements serve as an important resource to do just that, to increase awareness for potential customers and for a relatively small but talented sales team to increase their leverage. Turning to our second strategic objective, we continue to make progress in our efforts to drive durable growth and cash flow generation across our core medical device, performance coatings, and IVD businesses. Our team delivered a strong start to fiscal 2024, with revenue from these two areas growing 10% year-over-year on a combined basis, driven by growth in each business. The performance in medical device performance codings was driven by growth in royalty and license fee revenue, as well as revenue from R&D services. Our IVD sales growth was fueled by sales of our antigen and slide products and benefited from a combination of factors, as I mentioned earlier, including flu season demand, the timing of orders, and the return of more normalized customer purchasing patterns. These core businesses are tracking towards our expectations of low to mid single-digit growth for the full year of fiscal 2024. Note, however, that the performance of these core businesses was an important contributor to the adjusted EBITDA profitability that we achieved in the first quarter. And lastly, with respect to our third strategic objective, We continue to lay the foundation for our future long-term growth by advancing our pipeline of new products and line extensions, with notable progress on multiple fronts. In our medical device performance coatings business, we secured the first 510 clearance and initiated a commercial launch of our Preside line of hydrophilic coatings. The most advanced hydrophilic coating our team has ever developed, and I believe that the world has ever seen. As I discussed in detail in our last earnings call, Prezide is specifically formulated with a next-generation neurovascular, coronary, and peripheral vascular devices in mind. It is designed to provide both enhanced coding durability and industry-leading lubricity, enabling coded devices to reach distal treatment sites across challenging coronary lesions and chronic total occlusions, all with minimal particulate generation. By addressing these specific needs, Prezide complements and enhances our existing portfolio, including our serine hydrophilic coating, and facilitates improved treatment outcomes. And furthermore, reinforces our position as the market leader and provider of performance coating technologies for years to come. In the months following the commercial launch of Prezide, we've been pleased with the level of interest we're seeing from both new customers and existing customers. most notably in the neurovascular segment of the market. We look forward to supporting the efforts as the Integrate preside into the next generation devices and pursue regulatory clearance. In our vascular interventions portfolio, we continue to make strides in the limited market evaluation of our Pounce venous thrombectomy system. Physician feedback from the LME continues to highlight the product's flexibility when it comes to treating different clot morphologies and its atraumatic design, which enables clinicians to make multiple passes with a single device while minimizing stress or damage to the vein. In our most recent LME, we had completed just under 60 cases at the end of the quarter and compared to just under 40 as of September 30th. Looking ahead, our team remains focused on gathering additional physician feedback as we complete the remaining cases in this LME and prepare for commercialization on a limited basis before initiating our full commercial launch in the second half of fiscal 2024. This past week, we were also pleased to announce the successful early clinical use of our low-profile Pounce arterial thrombectomy system. otherwise known as Pounce Arterial LP, in tandem with initiating our limited market evaluation of the product. As a reminder, our Pounce Arterial Thrombectomy System is designed to remove acute to chronic thrombi and emboli in peripheral arteries throughout the body in vessels ranging from 3.5 to 6 millimeters in diameter. By comparison, Pounce LP is cleared for use in vessels ranging from 2.0 to 4 millimeters in diameter, which extends the treatment range of our Pounce Arterial portfolio to include smaller diameter vessels, such as those found below the knee and potentially all the way to the ankle. Pounce Arterial LP represents a promising enhancement to our product offering, as it is extremely difficult for clinicians to remove thrombi and emboli from vessels below the knee with the currently available technologies on the market. Many interventions will tell you the prospect of losing a piece of embolus, a plaque downstream into the tibials, during an endovascular procedure is a major concern. Surgery would be likely the most course of action to address issues in this region, and it's not always a viable option. With this in mind, Pounce Arterial LP has the potential to be a game changer. providing clinicians with an ideal non-surgical solution below the knee in an area that I believe is not well served because of the limitations of the current technology marketed by incumbents. Clinical outcomes and feedback from the initial 10 plus cases has been overwhelmingly positive, and I stress that. And we look forward to gaining additional insight as we continue to progress through the limited market evaluations in Q2. In summary, we're pleased to kick off the new fiscal year with considerable progress across each of the three strategic objectives that we committed to for Twisco 2024. Our team's performance with respect to these objectives enabled us to deliver impressive revenue growth in both of our segments, coupled with considerable year-over-year improvements in our profitability profile, while also enhancing our strategic position in the markets we serve. Our guidance, which we are raising today, reflects the financial and operating performance we achieved in the first quarter, as well as our continued confidence in the ability to accelerate our revenue growth profile in fiscal 24, with growth of 10% or higher, excluding license fee revenue related to our surveilled ECB. We look forward to building on these accomplishments as we progress through the fiscal year, while continuing to focus on cash efficiency preserving and allocating capital strategically in order to achieve strong, sustainable growth and value creation on a long-term basis. I'd like to thank our entire team for their contributions this past quarter and their commitment to advancing leadership in the markets we serve, as well as our customers and stakeholders for their ongoing supports of Thermotics in our mission. Tim will now review our first quarter financial results and fiscal 24 guidance in greater detail. Tim?

Thank you, Gary. Unless noted, all references to first quarter results are in a gap in year-on-year basis. Total revenue for the first quarter of fiscal 2024 increased $5.6 million, or 23% to $30.6 million. Excluding surveilled GCB license fee revenue, total revenue increased $5.9 million, or 25% to $29.6 million. Our earnings press release includes detailed reconciliations of total revenue excluding surveilled DCV license fee revenue. Product revenue increased $4.6 million, or 32%, to $18.8 million. Medical device product revenue increased $3.6 million, or 43%, to $12 million, a record for our medical device business. Product revenue growth was primarily driven by our fulfillment of the initial surveilled DCV stocking order from AVID, as well as increased sales of our pounce thrombectomy device platform. As a reminder, product revenue from sales of our surveilled DCB consists of revenue from both the contractual transfer price and estimated profit sharing, the two revenue streams under our development and distribution agreement with Abbott. IVD product revenue increased 1 million, or 17%, to 6.9 million. Our diagnostics business benefited from strength in our antigen and microarray slide offerings and benefited from a combination of factors Gary mentioned earlier, including flu season demand, timing of orders, and the return of more normalized customer purchasing patterns from some of our customers that had taken steps last year to manage COVID-era-related elevated inventory levels. Royalty and license fee revenue increased $410,000, or 5%, to $9.2 million. Performance coating royalty and license fee revenue increased $740,000, or 10%, to $8.2 million, driven by customer utilization of our serene coating and benefiting from a relatively easy comparison in the prior year period. Surveil drug coated balloon license fee revenue decreased $330,000, or 25%, to $1 million. corresponding to the decrease in transient clinical trial costs incurred. R&D services revenue increased 610,000, or 32%, to 2.5 million. The increase was primarily due to increased 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 the P&L. Product gross margin was 53.2% compared to 63% in the prior year period. Several factors contributed to the adverse mix impact to product gross margin relative to the prior year quarter. Importantly, sales of our near-term growth catalysts, our surveilled drug code balloon, pounce, and sublime products are increasing as a portion of total company product sales. These device products are not yet at scale, and product gross margins are impacted by the associated underabsorption and production inefficiencies. IBD product sales also contributed to the adverse mix impact this quarter, with increased sales of our distributed antigen products that carry a lower margin profile. In addition, absorption of fixed overhead costs had an unfavorable impact this quarter relative to the prior year due to a timing-related decrease in production volumes. R&D expense, including costs related to clinical and regulatory activities, decreased 4.1 million, or 32%, to 8.7 million, reflecting lower surveilled DCB clinical costs, the timing of certain projects in our pipeline, and the benefits from the spending reduction plan we implemented during the second quarter of fiscal 2023. SG&A expense decreased 700,000, or 5%, to 12.5 million, due to the lower headcount in our commercial organization compared to the prior year period related to the aforementioned spending reduction plan, as well as the timing of investments in our commercial organization. Our medical device business reported an operating loss of $220,000 compared to $7.2 million in the prior year period, which reflects operating expense savings from the restructuring and workforce reduction implemented in the second quarter of fiscal 2023 and lower surveilled VCB clinical expenses, favorability and timing of operating expenditures in the first quarter, and broad-based revenue growth. Our IBD business reported operating income of 3.1 million, or 45% of IBD revenue, compared to 2.9 million, or 50% of IBD revenue in the prior year period. This reflects leverage on product sales growth, partially offset by the adverse mix impact to product gross profit of increased distributed antigen sales. Turning to income taxes, we reported income tax expense of 60,000 compared to an income tax benefit of 170,000 in the prior year period. GAAP net loss was 790,000 or a loss of six cents per diluted share compared to a net loss of 7.8 million or a loss of 56 cents per diluted share in the prior year period. Non-GAAP net income was essentially break-even, and consequently, non-GAAP EPS was zero, compared to non-GAAP net loss of 7 million, or a loss of 50 cents per diluted share in the prior year period. Non-GAAP adjusted EBITDA was 3.9 million, compared to adjusted EBITDA loss of 3.3 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 first quarter with $45.4 million in total cash and cash equivalents and investments in available for sale securities, and ended the quarter with $35.2 million in cash and investments. Total cash used in the first quarter, or the decrease in cash and investments, was $10.2 million. As we shared on our last earnings call, our first quarter historically requires a higher use of cash to fund our working capital needs, such as annual employee bonus payments and annual prepaid insurance premiums. During the first quarter, we reported cash use in operating activities of $8.8 million and capital expenditures of $720,000. Long-term debt was unchanged during the first quarter at $29.4 million. As of the end of the first quarter, we had access to approximately $64 million in additional borrowing capacity under our existing credit agreement. Turning now to fiscal 2024 guidance. We updated our fiscal 2024 revenue guidance today to reflect our performance in the first quarter, as well as our revised expectations for the remainder of fiscal 2024. We now expect fiscal 2024 total revenue to range from 117 to 121 million, representing a decrease of 12% to 9%. Excluding surveilled DCD license fee revenue, we expect revenue to range from 113 to 117 million, representing an increase of 10% to 14%. This compares to our prior range of 112 to 117 million, or an increase of 9% to 14% over the prior year. Surveil DCV license fee revenue is expected to be approximately $4 million in fiscal 2024, compared to $29.6 million in fiscal 2023. We now expect fiscal 2024 GAAP loss per diluted share to range from a loss of $1.40 to a loss of $1.10. compared to our prior range of a loss of $1.55 to a loss of $1.20 per share. Non-GAAP loss per diluted share is expected to range from a loss of $1.17 to a loss of $0.87 compared to our prior range of a loss of $1.32 to a loss of $0.97 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 now expect combined product revenue from our surveil, pounds, and sublime products of at least 14 million, an increase from the 13.5 million we communicated last quarter. Revenue associated with our medical device performance coding offerings and IVD business is expected to grow in 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 decrease in the low to mid single digits. We expect R&D expense to range from $40 to $41 million, representing a decrease of 14% to 12%. 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 organizations. 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 $2 to $3 million. With respect to our revenue growth in the second quarter, we expect second quarter total revenue to range from approximately $28.5 to $29.5 million, representing an increase of approximately 5% to 8%. 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 sale securities. In fiscal 2024, we expect to finish the fiscal year with approximately $28 to $32 million of cash in investments. Let me take a moment 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 included an influx of cash from both the milestone payment for obtaining surveilled PMA approval, as well as debt proceeds drawn from our term loan and revolving credit facility. As we discussed on last quarter's call, when we set aside the 27 million from the surveilled PMA milestone payment, and the $19.3 million in net debt proceeds, cash and investments decreased by approximately $20 million for fiscal 2023. By comparison, in fiscal 2024, we expect the year-over-year decrease in cash and investments to range from approximately $17 to $13 million, reflecting an improvement in total cash used of approximately $3 to $7 million compared to the $20 million in fiscal 2023. As a reminder, our expectations for cash use in fiscal 2024 reflect the following assumptions. The receipt of a $3.4 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 a part of our spending reduction plan. and payments totaling approximately $2.7 million to satisfy obligations related to previous acquisitions. As Gary mentioned, cash efficiency continues to be a top priority for our organization in fiscal 2024. We remain focused on disciplined expense management and optimization of working capital. And importantly, our fiscal 2024 guidance continues to assume no borrowings under our credit agreement. With that, Operator would now like to open the call to questions.