ABT - Sizing Up Surmodics Inc.

2023-10-09 06:43:40 ET

Summary

• The stock of Surmodics, a medical device concern, has shot up some 75% since its lows in late May.
• Newfound love for the shares seems to have been triggered by a couple of key product approvals in June of this year.
• Can the good times continue? An analysis follows below.

Cutting out bad habits is far more effective than cutting out organs. " - Herbert M. Shelton

Today, we put medical device concern Surmodics, Inc. ( SRDX ) in the spotlight for the first time. It has been a notable year for the company and the stock started to reverse its roughly year and a half slide in recent months. Can the rebound continue? An analysis follows below.

Company Overview:

This small medical device maker is headquartered just outside of Minneapolis, MN and operates through two main divisions: Medical Device and In Vitro Diagnostics. Surmodics provides performance coating technologies for intravascular medical devices, and chemical and biological components for in vitro diagnostic immunoassay tests and microarrays. The stock currently trades just above $31.00 a share and sports an approximate market capitalization of just south of $450 million.

In late June, the company got a shot in the arm as the FDA approved its SurVeil drug-coated balloon or DCB for use in patients with peripheral artery disease. This device has had the CE Mark in Europe for some three years it should be noted. Approval netted Surmodics a $27 million payout from Abbott ( ABT ) who entered into a license agreement with Surmodics back in 2018. The healthcare giant has owned the exclusive global commercialization rights for the SurVeil DCB since that deal was inked.

The approval netted an upgrade for the stock from Needham from Hold to Buy. It should be noted that the FDA initially declined to approve this device early this year, which resulted in management laying off approximately one out of every eight employees at the company.

Around the same time as the SurVeil DCB getting green lighted, the company got an additional approval for its Pounce LP Thrombectomy system. This will increase the potential population this clot removal system can be applied to.

Second Quarter Results:

Surmodics reported its second quarter numbers on August 2nd. The company delivered a GAAP profit of 52 cents a share on an over 110% increase in sales to $52.5 million. However, $24.6 million of those sales came from recognition of the payment from Abbott in connection with the approval of SurVeil DCB in the States.

Normalized sales came in at $27.9 million, compared with $24.9 million in the same period a year ago. The company saw 22% growth from its Medical Device business to $15.7 million. This overcame a 12% year-over-year decrease in revenue to $6.4 million from their in-Vitro Diagnostics or IVD segment. Medical Device revenue increases were due primarily to increased sales of the Pounce arterial thrombectomy product and performance coating reagents. Royalty and license fee revenue accounted for the rest of overall sales.

Excluding the $27 million payout, management now expects between $105 million and $107 million of sales in FY2023. This is a slight boost from previous guidance and up from just under $100 million worth of revenues in FY2022.

Analyst Commentary & Balance Sheet:

Since late June, Barrington ($69 price target), Lake Street ($75 price target) and Needham ($36 price target) have all reissued Buy ratings on the stock.

There has been no insider activity in this stock so far in 2023. Just over one percent of the outstanding float is currently held short. The company ended the second quarter with just under $45 million of cash and marketable securities on its balance after Surmodics posted a GAAP net loss of $5.7 million. The company has drawn down some $30 million off existing credit facilities and has up to another $100 million of similar debt financing available to it through the end of 2024 provided it meets certain conditions.

Verdict:

Surmodics lost 95 cents a share on just under $100 million worth of sales in FY2022. The current analyst firm consensus has losses falling to just over 20 cents a share in FY2023 on revenues just north of $130 million (including the $27 million payment from Abbott). The three analyst firms that cover the company and have offered up estimates for FY2024 have losses moving up to between 66 cents and $1.58 a share on sales of roughly $110 million to $130 million.

Approval of SurVeil DCB was a nice win for Surmodics after a setback with the FDA earlier in the year. Commercialization will begin in 2024 as the device is marketed and distributed by Abbott.

Surmodics has made some nice progress over the past couple of months. However, this seems reflected by the 75% surge in the share price since their recent lows from late May. The company appears years away from profitability, not an attractive feature in the current uncertain market climate. Therefore, this story is one I will probably revisit late in 2024 or early 2025 to see how the new approvals are spurring sales traction. Until then, I have no investment recommendation around this stock, however.

Let food be thy medicine and medicine be thy food ." - Hippocrates

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