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Surmodics (SRDX) Beats on Earnings in Q1, Guidance Solid

Zacks

Surmodics, Inc. SRDX reported adjusted earnings of 10 cents per share in first-quarter fiscal 2018, lower than the year-ago figure of 19 cents. The Zacks Consensus Estimate was a loss of 5 cents.

Revenues in the quarter fell 4.2% to $17 million, missing the Zacks Consensus Estimate of $18 million.

The stock has a Zacks Rank #3 (Hold).

Segment Analysis


Surmodics reports revenues under two segments — Medical Device and In Vitro Diagnostics (IVD).

Medical Device

In the reported quarter, sales declined 7.2% to $12.8 million due to lower hydrophilic royalty revenues. Royalty and license fee revenues totaled $7.1 million, down $0.9 million year over year.

Per management, the decline in royalty and license fee revenues was caused by lower royalties resulting from expirations of patents in the third-generation hydrophilic coatings.

This unit generated a $0.4-million operating loss in the reported quarter, comparing unfavorably with operating income of $3.7 million in the year-ago quarter. Operating income in the segment was affected by planned increased investments related to Surmodics’ whole product solution strategy, reductions in royalty revenues as well as a $0.7-million increase in contingent consideration expense.

IVD

In the quarter under review, sales increased 5.9% to $4.2 million. The upside came on the back of strong growth and stabilization across BioFX, microarray and antigen product sales.

IVD operating income was $1.7 million in the current quarter compared with $1.5 million in the first quarter of fiscal 2017.

Surmodics, Inc. Price, Consensus and EPS Surprise

Margin Details

Product gross margins contracted 160 basis points (bps) in the first quarter to 64.3% of product sales compared with 65.9% in the year-ago period. Margins in the quarter suffered from expenses in the Irish facility infrastructure and lower Medical-Device product gross margins.

First quarter of fiscal 2018 R&D expenses were 46% of net sales, higher than 33.6% of net sales in the year-ago quarter. The company anticipates R&D expense to increase in fiscal 2018, thanks to the company’s whole product solution strategy investments, advancing the TRANSCEND drug coater balloon human clinical trial, preclinical work on below-the-knee platform and AV fistula drug-coated balloon projects.

SG&A expenses in the first quarter of fiscal 2018 were 30.5% of revenues, expanding 310 bps year over year.

Balance Sheet and Cash Flow

At the end of the first quarter, the company had $46.7 million in cash and investments. Surmodics generated cash from operating activities of $0.6 million. The company invested $1.3 million in plant and equipment.

Guidance

Surmodics continues to expect fiscal year 2018 revenues in the range of $72-$75 million.

The company expects fiscal 2018 earnings per share between negative 20 cents and 5 cents, compared with the previous estimate of a adjusted loss of 16-41 cents.

Bottom Line

Surmodics ended first-quarter fiscal 2018 on a favorable note, courtesy of solid performance in the In Vitro Diagnostics segment. The segment has been gaining grounds on the back of strong growth and stabilization across BioFX, microarray and antigen product sales. Surmodics issued a solid guidance for fiscal 2018. The company's solid initiatives to strengthen research and development programs hold promise.

The company witnessed significantly high operating losses, specifically in Ireland. Product sales declined substantially owing to shipment issues, particularly in the Medical Device segment. Further, foreign-exchange woes related to the Creagh Medical buyout have been a major dampener. Surmodics’ drug-coated balloons face stiff competition in niche space. The company’s margins are expected to be under pressure, thanks to expenses in the Irish facility infrastructure and lower Medical-Device product gross margins.

Key Picks

A few better-ranked stocks that reported solid results this earnings season are PetMed Express PETS, PerkinElmer PKI and Becton, Dickinson and Company BDX. While PetMed sports a Zacks Rank #1 (Strong Buy), PerkinElmer and Becton, Dickinson carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported third-quarter fiscal 2018 results. Adjusted earnings per share were 44 cents, up 88.3% from the prior-year quarter. Revenues rose 13.7% on a year-over-year basis to $60.1 million.

PerkinElmer reported fourth-quarter 2017 adjusted earnings per share of 97 cents. Adjusted revenues were approximately $641.6 million, up from $567 million in the year-ago quarter.

Becton, Dickinson reported first-quarter 2018 adjusted earnings per share of $2.48, up 3.9% at constant currency. Revenues totaled $3.08 billion, up 3.7% at constant currency.

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