“SurModics achieved record revenue and earnings for the first quarter of fiscal 2009, driven primarily by the recognition of previously deferred revenue, which was triggered by Merck’s termination of the collaborative research agreement,” said Bruce Barclay, president and chief executive officer. “Merck’s decision to terminate the agreement was based on its company-wide restructuring initiative aimed at reducing costs, not because of any concerns about the safety or efficacy of the product and technology licensed from SurModics. Merck’s termination resulted in the recognition of $34.8 million of revenue, which was previously being deferred. In addition, as previously disclosed, Merck’s decision triggered an additional $9 million payment to SurModics, which was received and recognized in the quarter. Looking at non-GAAP results, which we have often said provide a better indicator of our results, we delivered a solid quarter with excellent cash flow. While SurModics was adversely impacted by the difficult economic environment, we believe we are better positioned than most companies to withstand these forces and to ultimately thrive in the long-term.”
“In addition, we met one of our corporate goals during the quarter by signing a license agreement with a new customer using our drug delivery technology outside of the ophthalmology space. We believe we are on track to achieve our remaining fiscal 2009 company goals,” continued Barclay. “In particular, we are making excellent progress in our partner-supported product development programs. In ophthalmology, SurModics’ scientists continue to work on development projects with numerous customers for back-of-the-eye and front-of-the-eye diseases. These projects leverage our multiple drug delivery platforms and polymer matrix technologies for sustained delivery of customers’ proprietary drugs to the eye, including both large and small molecule compounds. Encouragingly, we continue to help our customers advance toward the next stages of their respective programs.”
“Furthermore, we are making excellent progress integrating the proprietary drug delivery technologies and collaborative programs we acquired from PR Pharmaceuticals,” added Barclay. “While there was little top-line impact in the first quarter from these new collaborative programs, we believe the PR Pharma acquisition will benefit our business both in the current year and beyond as customer projects utilize these innovative technologies.”
Operating income was $42.7 million, compared with $7.6 million in the prior-year period. Net income was $27.1 million, compared with $5.6 million in the same period last year.
Included in the results for the first quarter of fiscal 2009 were three event-specific items. First, in connection with Merck’s termination of its agreement with SurModics, the Company recognized $34.8 million of previously deferred revenue in the quarter. Second, our operating expenses included restructuring charges of $1.8 million in connection with the organizational changes we announced in November 2008. And third, SurModics recorded a $3.2 million charge for purchased in-process research and development related to the acquisition of drug delivery technology and collaborative programs from PR Pharmaceuticals. Excluding these event-specific charges and adjusting revenue for the accounting treatment of the Merck agreement, non-GAAP results were as follows. Total revenue was $28.4 million, compared with $25.3 million in the first quarter of fiscal 2008; operating income was $12.9 million, compared with $9.1 million in the prior year period; net income was $8.4 million, compared with $6.6 million a year ago; and diluted earnings per share was $0.48, compared with $0.36 in the first quarter of fiscal 2008.
SurModics’ pipeline continues to represent significant potential. The Company added eight new licenses in the first quarter, against its goal of signing 18 new licenses in fiscal 2009. SurModics’ customers launched 2 new product classes in the marketplace during the quarter, as the Company works toward its goal of 10 launches in fiscal 2009. As of December 31, 2008, SurModics’ customers had 99 licensed product classes generating royalty revenue, compared with 100 in the prior-year period; the total number of licensed product classes not yet launched was 107, up from 105 in the prior-year period; and major non-licensed opportunities totaled 87, compared with 93 a year ago. In total, SurModics now has a portfolio of 194 potential commercial products in development diversified across multiple clinical indications and technology platforms.
SurModics’ cash and investment balance totaled $69.9 million as of December 31, 2008, with no debt. Operating cash flow for the quarter was $17.4 million, compared with $4.4 million in the first quarter of fiscal 2008. The increase in operating cash flow principally reflects the $9 million milestone payment from Merck and timing of tax payments in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008.
“SurModics continues to be in excellent financial health,” said Phil Ankeny, senior vice president and chief financial officer. “With strong operating cash flow, a healthy balance sheet and no debt, we continue to demonstrate disciplined deployment of capital with a goal of enhancing shareholder value, principally in the areas of share repurchase, business development and facilities-related investments. Following on the heels of our $35 million share repurchase completed in fiscal 2007, we repurchased approximately $25.5 million of our stock in fiscal 2008 and in the first quarter of fiscal 2009 under our subsequent Board authorization. As of December 31, 2008, we had a remaining authorization of $9.5 million. Additionally, we are making excellent progress on our new development and cGMP manufacturing facility in Alabama, which is vital to support our continued growth. Finally, SurModics will continue to review business development opportunities that can support our growth strategy, and add shareholder value, as demonstrated in the quarter by the PR Pharmaceuticals acquisition, which added an important new dimension to our drug delivery capabilities.”