Surmodics, Inc.

Welcome, everyone, to Sermonix's second quarter of fiscal year 2024 earnings call. Please note that this call is being webcast. The webcast is accessible through 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 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. It includes statements regarding Sermonic'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 Sermatix forward-looking statements, resulting from certain risks and uncertainties, including those described in the company's SEC filings. Sermatix 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 Thermotics believes they provide useful information for investors. Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Mr. Gary Maharaj, Thermotics President and Chief Executive Officer. Please go ahead, sir.

Thank you, Kat, and welcome everyone to our second quarter fiscal year 2024 earnings call. Let me provide you with a brief overview of what we plan to cover today. I will review our quarterly financial performance at a high level and discuss the operational progress we've made with respect to our key strategic objectives for fiscal 2024. Tim will then walk through our financial results in further detail and review our financial guidance, which we updated in our earnings press release earlier this morning. I'll then share some concluding thoughts on our outlook before opening the call for questions. With that as a backdrop, let's begin with a review of our quarterly financial results. Our team achieved impressive revenue performance in our second fiscal quarter, culminating in total revenue growth of 18% year-over-year to $32 million. We grew 19%, excluding license fee revenue related to our surveilled drug-coated balloon, which represented a headwind of approximately 240,000 year-over-year. Our team's performance handily exceeded our expectations for the quarter, coming in $2.5 million above the range of expectations that we shared in our last earnings call. Looking at the revenue year over year performance of our two business segments, revenue from our in vitro diagnostics, or IVD segment, decreased 5% to $7.1 million, which was consistent with our expectations given the high comparable of the prior year quarter. Our revenue growth in the second quarter was exclusively driven by the medical device segment revenue, which increased 26% to $24.8 million, and 29% excluding the headwind I mentioned related to the surveilled ECB licensee revenue. Within our medical device segment, our year-over-year performance was fueled primarily by product sales, which increased by 40% year-over-year. That's 4-0, generating $3.2 million of growth. I'm pleased to report that nearly all of the $3.2 million in medical device product sales growth was driven by sales of our vascular interventions portfolio, which includes our Surveil DCB, Pounds thrombectomy, and Sublime radial access products. We were pleased with the performance of each of these three product platforms that I'll discuss in detail later. We also saw impressive contributions from royalties and license fee revenue related to our medical device performance coatings, which increased 27% year-over-year, generating $2.2 million of growth, driven in part by $1.4 million in catch-up payments reported to us by our customers. Importantly, Both of these areas of our medical device segment exceeded our expectations, driving the $2.5 million of total revenue outperformance that we saw relative to our stated range of expectations for the quarter. In addition to our strong revenue performance, we achieved notable year-over-year improvements in our profitability profile, including an $8 million improvement from a GAAP net loss to GAAP net income and a $6.3 million increase in our adjusted EBITDA. And we generated significantly $7.4 million in cash flow from operations in the quarter to further strengthen our balance sheet. Our cash flow performance exceeded our expectations this quarter, driven in part by the royalty catch-up payments I just mentioned, as well as a $3.4 million cash tax refund that we secured from the IRS during the second quarter, which Tim will discuss. All in all, we were quite pleased with our second quarter financial results across the board. Shifting to a discussion of our recent operational performance, I'm excited to report that our team's achievements in recent months enabled us to deliver strong progress with respect to each of our three stated strategic objectives for fiscal 24. Let's begin with our first objective, to capitalize on the key near-term growth catalysts in our vascular interventions portfolio by facilitating the adoption and utilization of our surveilled DCB, pounce thrombectomy, and sublime radial access products. Our success with respect to this initiative is reflected in part by the strong product revenue growth in the medical device segment. As I mentioned earlier, growth and sales of these products fueled the 40% increase in product revenue and accounted for nearly all of the 3.2 million of product sales growth in the segment. Most notably, we saw consistent demand for our Surveil drug-coated balloon from our commercial partner Abbott, following the initial stocking order placed in our fiscal first quarter. As we shared on our last earnings call, we were pleased to see Abbott initiate the commercialization of our Surveil DCB in late January. As their team has progressed through the initial months of commercialization, we have been focused on satisfying their demand for product and providing technical information to support their sales, marketing, and clinical training activities. Since the fulfillment of the initial Surveil stocking order during the first quarter, We have received orders and updated forecasts from Abbott on a monthly basis, and our team has been continuously building and shipping products to meet these monthly orders. From a manufacturing standpoint, I'm pleased with our successful transition to a steady state of operations following the initial stocking order. As I've said before, drug-coated balloons are some of the most difficult interventional devices to make in the industry, and we take pride in our ability to efficiently manufacture the surveilled ECB to an exacting standard. While our commercial partner remains in the first few months of commercialization, the initial feedback garnered from physician users has been positive. Based on this feedback, we believe Surveil's ability to achieve uniform, targeted transfer and retention of Paclitaxel at the treatment area with a highly deliverable balloon platform and ultimately achieve clinical outcomes consistent with the market-leading Impact Admiral device which carries a 75% higher drug load of this cytotoxic drug. This represents a compelling clinical advantage for physicians seeking to optimize treatment of peripheral artery disease. Our Transcend randomized controlled trial, which demonstrated the excellent safety and effectiveness of our surveilled DCB at 12, 24, and 36 months post-procedure, represents important clinical evidence for the Abbott team that can leverage these to articulate the compelling advantages while engaging potential physician users. We look forward to Abbott's continued efforts in the market as they work to facilitate adoption of the Surveil DCB by raising awareness among key accounts, education, and navigating the approval and contracting process associated with each account. Aside from the strong demand for our Surveil DCB from our commercial partner, Direct sales of our pounce thrombectomy products were the most important driver of the 40% or $3.2 million of product sales growth we achieved in medical device segment in the second quarter. The size of our direct sales team has remained consistent throughout the first half of the year with 23 territory managers at the end of the second quarter. As a result of our team's efforts to develop existing accounts, expand our active customer base, Our Pounce from Bectomy and Sublime Radial Access products both continued to gain traction in the marketplace. Sales of both products exceeded our expectations during the quarter, driven by strong commercial uptake from new and existing customers. Specifically, we saw strong growth in both of our active customer base and in the average revenue per existing customer. In addition, we also saw contributions from our new products, which I'll discuss now. In addition to driving adoption and utilization of our existing pounds and sublime products, our team continued to advance the limited market valuations for new additions to our vascular interventions portfolio, including both pounds venous for the venous vasculature and pounds low-profile for the arterial vasculature. These efforts enabled us to achieve considerable progress with respect to our second strategic objective for fiscal 24, which is to facilitate our long-term growth by developing and introducing new products and line extensions to enhance our existing Pounce, Sublime, and medical device performance codings portfolio. Let's begin with an update on Pounce Venus. During our second quarter, we completed our limited market evaluation, or LME, for the Pounce Venus device. Pons Venus is a 10 French mechanical thrombectomy system designed for mechanical declotting in the peripheral vasculature without the need for capital equipment. During the LME, we were able to evaluate clinical performance in over 75 Venus procedures, representing a considerable variety of clinical cases across a broad range of clot morphologies and with a large number of physician operators. Pound's venous has been used throughout the peripheral anatomy, ranging from iliac, iliofemoral, femoral popliteal, and subclavian veins. The device's low profile has enabled flexibility in access sites, ranging from popliteal, internal jugular, brachial veins, to as far as the patient's cough. Clinically, the dual action design of Pound's venous has shown the ability to remove large volumes of acute and subacute thrombus via its Archimedes screw technology, while the device's basket is designed to remove chronic clot. Physician feedback has been invaluable as we work to better understand a broad array of clinical user and product dynamics. Our LME physician users have highlighted some key differentiating features which make this product unique in the venous thrombectomy space. The device's dynamically adjustable basket automatically adapts to changes in vessel size while applying consistent radial force, even within smaller vessels. Given the goal of minimizing vessel trauma, physicians have appreciated the ability to expand and retract the basket to spot treat only the areas of need versus repeatedly dragging a mechanical device through the entire vascular chair between every pass. Pounds can be re-sheeted, re-advanced, and deployed within the clot region if the physician desires. And the basket is retracted during removal in non-target treatment zones. In addition to this positive feedback, on March 4th, we were pleased to see the publication of a multi-center study in the Journal of Vascular Surgery by Dr. Stephen Black et al., which evaluated the safety and performance of pound-senus in 19 patients with acute iliofemoral deep vein thrombosis. The study met its primary endpoint of complete or near-complete thrombus removal achieved in all patients with a median treatment time of 23 minutes. All safety endpoints were achieved as well with no major bleeding nor device-related events. Based on these findings, the researchers concluded that Pound's venous is both safe and effective for the removal of thrombus in patients with acute iliofemoral deep vein thrombosis. While our FDA 510 clearance for Pound's venous currently does not include a specific clinical indication for the treatment of deep vein thrombosis, we are pleased to see the results of the study. More broadly, the study in our LME further demonstrated countenance is safe and effective for removing a variety of different types of thrombus, including chronic clots, in a single treatment session, one that can enable physicians to enhance their efficiency and versatility while minimizing vessel trauma during use. The device's low-profile dual-action technology combined with the physician-controllable basket, ease of use, and incredibly low learning curve are likely to be key drivers of product adoption. Like the rest of the Pounds thrombectomy platform, Pounds Venous also provides additional compelling advantages for physicians, and that requires no capital equipment and helps to minimize the need for overnight thrombolytic therapy. On the heels of this important progress, we are excited to announce in our earnings release this morning that Pounds Venous has now transitioned to a full commercial launch in March. Given the attractive features and advantages I just outlined, our team is energized and ready to bring this new treatment option to our physician customers, providing with a new tool to enhance the capabilities and outcomes for these patients. Turning to our Pounce low-profile thrombectomy system. As a reminder, Pounce low-profile, or LP, features the same mechanism of action as our original Pounce mid-profile thrombectomy systems. PounceLP expands the capabilities of our existing offering with a specific clinical indication to treat smaller diameter peripheral arterial vessels ranging from two to four millimeters, such as those found below the knee. On our earnings call in February, I mentioned that the clinical outcomes and feedback from our initial 10 LME cases had been overwhelmingly positive. I'm now pleased to report that the LME continued to surpass our expectations but simply impressive clinical and product performance as we progressed through the quarter, and we were equally pleased with the strong positive feedback we obtained. As a reminder, vasculature below the knee tends to be narrow and delicate. Physicians currently have really limited options for removing clot and debris in below-the-knee vessels. which greatly heightens the level of concern for embolic events that can occur during any endovascular procedure. While a hospitalized treatment likely will include overnight thrombolytical therapy, and it may have some usefulness in treating soft acute clots, it's a costly option. Thrombolytic therapy is also often contraindicated in patients with elevated risk of bleeding. Similarly, the performance of aspiration-based technology is quite limited, given that aspiration can be less effective, especially in these smaller diameter, harder to reach vessels. In addition, aspiration technology runs the risk of inadvertently driving clots further down the vessel, further complicating the procedure. The stakes are quite high, and vascular interventionists often have struggled to address harder subacute and chronic clots in this area without resorting to open surgery. Performing surgery on tibial arteries is typically quite challenging and often sees it as an approach to avoid for patients in poor health. With this in mind, a single session on the table endovascular approach like Pounce LP can completely transform how below the knee and small arterial vessel clot is viewed and treated. I'd like to repeat that. It can completely transform how below the knee vessels are treated. But this is a backdrop. It's difficult to overstate the level of positive feedback that Pounce LP has received from physicians involved in our LME. In contrast to the challenges I just described with expensive overnight thrombolytic therapy, aspiration and open surgery, our early physician users have found that Pounce LP can be deployed past clots all the way down into the ankle with relative ease. Pounds LP's baskets are then expanded and the devices retracted to quickly pull out clots, regardless of their morphology, restoring fluid to the patient's limb, with the entire process taking just a few minutes. In view of the success of these cases and the consistency of the feedback received, I'm excited to announce today that we have also initiated the full commercial Pounds to Pounds LP, which began in April. We're looking forward to providing physicians this new non-surgical solution that fills an important critical gap in existing thrombectomy toolkits. In addition to this progress with respect to our thrombectomy platform, we continue to be pleased with the market's response to preside the latest and most advanced hydrophilic coding technology in our medical device performance coding business. As we discussed in detail on our last coding school, Prezide hydrophilic coatings impact both industry-leading lubricity and enhance coating durability to coated devices. After securing early 510 clearances and initiating the commercial launch of Prezide hydrophilic coatings during our first quarter, we have seen significant interest from both new and existing customers interested in integrating Prezide into their next generation of neurovascular coronary and peripheral vascular devices. Per our typical process, we are actively working with our customers to conduct feasibility studies for each device and the coating application so they can proceed to securing necessary regulatory approvals. With both our Prezide and Serene hydrophilic coatings on the market, we will continue to enhance and strengthen our position as the industry-leading provider of performance coating technologies. Lastly, we continue to deliver on our third and final strategic objective by driving durable revenue growth and cash flow generation across our core medical device performance coatings offerings and IVD businesses. Revenue from these two areas of our business increased 80% year-over-year on a combined basis. This performance is driven by strong growth in medical device performance coatings where we saw a lot of royalty and license fee revenue that exceeded our expectations, benefiting from the $1.4 million in catch-up payments reported by our customers and continued growth in customer utilization of our serene hydrophilic coatings. This performance more than offset the performance in our diagnostics business, where we saw revenue decrease 5% against our largest fiscal quarter of 2023. driven primarily by lower sales of substrate products. As I mentioned earlier, the performance of IVD business was consistent with our expectations for the quarter. Incremental revenue generated by these two core businesses on a combined basis yielded significant contributions to our adjusted EBITDA growth on a year-over-year basis, enhancing our profitability profile. So stepping back. We're quite proud of our recent pace of execution in fiscal 2024. This has translated to strong financial performance in the first half of the year and meaningful progress with respect to all of our stated objectives. Looking at our year-over-year results in the first half of our fiscal year, our team's execution has enabled us to achieve product sales growth of 41% in our medical device segment. In combination with a strong contribution from our core businesses, This performance accelerated our total revenue growth to 20% on a year-over-year basis in the first half of fiscal 24, 22% growth excluding the survey licensee revenue. In combination with our continued focus on controlling our expenses, our strong revenue performance enabled us to achieve significant year-over-year enhancements to our profitability profiles. In the first half of fiscal 2024, we were essentially breakeven on a GAAP net income basis. We generated $8.7 million of adjusted EBITDA and reported $1.4 million in cash used in operating activities. With $41 million in cash and investments in our balance sheet and access to approximately $65 million of additional debt capital at quarter end, We are well capitalized to support our operations and future growth objectives. Lastly, let me thank every Sermotics team member for what you have made possible in the first half of this fiscal year. The commercialization of four major new products to date, our Surveil DCB, Pounce Venus, Pounce LP, and our Prezide coatings. It is your dedication, perseverance, and belief that makes a difference in our lives of patients with a commercial availability of these innovative devices and technologies. We look forward to capitalizing on these important growth catalysts as we tap into significant incremental opportunity that they collectively address. With that said, I'll turn it over to Tim. I know you've been excited to wait for what Tim has to say here. He will discuss our second quarter financial results of fiscal 24 guidance in detail.

Tim? Thank you, Gary. Unless noted, all references to second quarter results are on a gap in year-over-year basis. Total revenue for the second quarter of fiscal 2024 increased $4.8 million, or 18% to $32 million. Excluding surveilled DCV license fee revenue, total revenue increased $5 million, or 19% to $30.9 million. Our earnings press release includes detailed reconciliations of total revenue excluding surveilled DCB license fee revenue. Product revenue increased 2.7 million or 18% to 18.1 million. Medical device product revenue increased 3.2 million or 40% to 11.1 million, the second consecutive quarter of 40% or higher growth in our medical device business. Medical device product revenue growth was primarily driven by monthly shipments of our surveilled drug-coated balloon to Abbott and increased sales of our pounced thrombectomy device platform. IBD product revenue decreased 440,000, or 6%, to 7 million, primarily driven by lower sales of our substrate products. We were pleased with this performance as the prior year quarter was the highest revenue quarter during fiscal 2023 for our IBD business. Royalty and license fee revenue increased $2 million, or 21%, to $11.4 million. Performance coding royalty and license fee revenue increased $2.2 million, or 27%, to $10.3 million. Royalty revenue benefited from $1.4 million in catch-up payments in the normal course of our customers reporting sales-based royalties. Royalty revenue growth was also driven by customer reported royalties in excess of estimated royalty, as well as continued growth in customer utilization of our serine hydrophilic coating. Surveil DCV license fee revenue decreased 240,000, or 18%, to 1.1 million, corresponding to the decrease in transient clinical study costs incurred. R&D services revenue was 2.4 million, and was consistent with the prior year period. Moving down the P&L, product gross margin was 60.8% compared to 62.6% in the prior year period. As we shared last quarter, sales of our near-term growth catalysts, our surveilled drug-coated balloon, pounce, and sublime products are increasing as a proportion 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. R&D expense decreased 2.7 million, or 21%, to 10.2 million. This was primarily driven by lower surveilled DCB-related costs, the timing of development and commercialization of our thrombectomy devices, and the benefits from the spending reduction plan we implemented during the second quarter of fiscal 2023. SG&A expense increased 130,000, or 1%, to $13.1 million. Lastly, in the prior year quarter, we reported $1.3 million in severance-related restructuring expense from the workforce restructuring implemented last year. We were pleased to generate GAAP operating income in both our medical device and IBD businesses during the quarter. Our medical device business reported operating income of $300,000, compared to a loss of $7.1 million in the prior year period, primarily reflecting our strong revenue growth and lower R&D expenses. Two items I discussed earlier, the $1.4 million in royalty revenue catch-up payments, recognized as quarter, and the $1.3 million restructuring expense in the prior year, provided tailwinds to our performance as well. Our IBD business reported operating income of $3.4 million, or 47% of IBD revenue. compared to $3.6 million, or 49% of IBD revenue in the prior year period, reflecting the decrease in IBD revenue. Turning to income taxes, we reported income tax benefit of $80,000 compared to income tax expense of $370,000 in the prior year period. GAAP net income was $250,000, or $0.02 per diluted share, compared to a net loss of $7.7 million, or a loss of $0.55 per diluted share in the prior year period. Non-GAAP net income was $1.1 million or $0.07 per diluted share compared to a net loss of $5.6 million or a loss of $0.40 per diluted share in the prior year period. Non-GAAP adjusted EBITDA was $4.8 million compared to adjusted EBITDA loss of $1.5 million in the prior year period. Our earnings press release includes detailed reconciliations of GAAP to non-GAAP measures. Moving to the balance sheet, during the second quarter, we reported cash provided by operating activities of $7.4 million and capital expenditures of $1.3 million. Cash provided by operating activities in the second quarter benefited from the receipt of a $3.4 million cash tax refund from the IRS associated with the CARES Act Employee Retention Credit which we have discussed in our prior earnings calls and which we were pleased to receive during this period. We ended the second quarter with $40.9 million in total cash and cash equivalents and investments and available for security investments, an increase of $5.8 million during the quarter. Long-term debt of $29.5 million was unchanged during the quarter. At quarter end, we had access to approximately $65 million in additional borrowing capacity under our existing credit agreement. Turning now to fiscal 2024 guidance, which we updated in our earnings release today to reflect both our outperformance in the second quarter, as well as our improved outlook for the remainder of fiscal 2024. We now expect fiscal 2024 total revenue to range from $122 to $124 million, representing a decrease of 8% to 6%. Excluding surveilled GCB license fee revenue, we expect revenue to range from $118 to $120 million, representing an increase of 15% to 17%. This compares to our prior range of $113 to $117 million, or an increase of 10% to 14% over the prior year. Surveilled DCV licensee 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 90 cents to a loss of 70 cents. compared to our prior range of a loss of $1.40 to a loss of $1.10. Non-GAAP loss per diluted share is expected to range from a loss of 67 to 47 cents per share, compared to our prior range of a loss of $1.17 to a loss of 87 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 now expect combined product revenue from our Surveil, Pounce, and Sublime products of at least $15.5 million, an increase from the $14 million we communicated last quarter. Revenue associated with our medical device performance coding 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 assumptions for the full fiscal year. Product gross margin is expected to be in the mid to high 50s. We expect operating expenses excluding product costs to decrease in the mid single digits. We expect R&D expense to range from 39.5 to 40.5 million, representing a decrease of 15% to 13%. We expect SG&A expense to range from 53 to 54 million, representing an increase of 2% to 4% 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 3.5 to 4.5 million. With respect to our revenue growth in the third quarter, we expect third quarter total revenue to range from approximately 29.5 to 30.5 million, representing a decrease of approximately 44% to 42%. Excluding surveilled drug-coded balloon license fee revenue, we expect third quarter revenue to range from $28.5 to $29.5 million, representing an increase of 7% to 11%. As a reminder, in the third quarter of fiscal 2023, we recognized $25.9 million of surveilled drug-coded balloon license fee revenue, the majority of which was related to the PMA milestone payment achieved in the period. Lastly, with respect to cash utilization, At the end of fiscal 2023, we had $45.4 million of cash and investments, which included $3.9 million of available for sale securities. We now expect to finish fiscal 2024 with approximately $35 to $38 million in cash and investments, representing a year-over-year decrease of $10 to $7 million. Our updated expectation represents an improvement of $6 to $7 million compared to the expectation shared on our first quarter earnings call, driven by improved operating performance. As we have discussed in detail on recent earnings calls during fiscal 2023, cash and investments increased $26 million, reflecting an influx of cash from the $27 million milestone payment upon receiving PMA for the surveilled drug code balloon. as well as $19.3 million in net debt proceeds from our term loan and revolving credit facility. Setting aside these items, cash and investments decreased by approximately $20 million in fiscal 2023. With this in mind, our updated expectations for fiscal 2024 year in cash and investments reflects an improvement in cash use of $10 to $13 million compared to the $20 million in fiscal 2023 I just mentioned. Our expectations for fiscal 2024 year-end cash and investments continue to reflect the following assumptions. 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 $2.7 million to satisfy obligations related to previous acquisitions, of which $930,000 was paid during the second quarter. 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, I'll turn the call back to Gary for closing remarks.