10-Q: Surmodics Q3 Loss Narrows Amid Merger Uncertainty

Surmodics reports a narrower quarterly net loss but faces revenue declines and ongoing FTC litigation challenging its proposed acquisition.

Summary

• Total revenue for the three months ended June 30, 2025, decreased by 3% to $29.6 million, down from $30.3 million in the prior-year quarter.
• Net loss for the three months ended June 30, 2025, improved to $(5.3) million, or $(0.37) per share, compared to a net loss of $(7.6) million, or $(0.53) per share, in the same period last year.
• For the nine months ended June 30, 2025, total revenue decreased by 6% to $87.6 million, down from $92.9 million in the prior-year period.
• Net loss for the nine months ended June 30, 2025, widened to $(14.2) million, or $(0.99) per share, compared to a net loss of $(8.1) million, or $(0.57) per share, in the same prior-year period.
• Medical Device product sales decreased 11% in the quarter and 19% for the nine months, primarily due to a $1.7 million quarterly and $6.4 million nine-month decrease in SurVeil DCB product sales as prior periods benefited from initial stocking orders.
• Product gross margin declined to 48.8% for the quarter and 50.7% for the nine months, down from 51.9% and 55.3% respectively, driven by SurVeil DCB under-absorption and production inefficiencies.
• Selling, General and Administrative (SG&A) expense increased by $1.1 million (7%) for the quarter and $5.7 million (14%) for the nine months, primarily due to $5.3 million (quarterly) and $10.1 million (nine-month) merger-related charges.
• Cash and cash equivalents decreased to $26.3 million as of June 30, 2025, from $36.1 million as of September 30, 2024.
• Cash used in operating activities increased to $(5.5) million for the nine months ended June 30, 2025, compared to $(3.4) million in the prior-year period.
• The proposed acquisition by BCE Parent, LLC for $43.00 per share in cash is facing a challenge from the U.S. Federal Trade Commission (FTC), which filed a complaint to block the merger.
• A temporary restraining order prevents the merger's consummation until November 11, 2025, or five business days after the District Court rules on the FTC's preliminary injunction motion, with a hearing scheduled for August 21, 2025.
• The company incurred $1.9 million in Cyber Incident response costs during the quarter, with $1.7 million expected to be recovered under cyber insurance.

Sentiment

Score: 3

Explanation: The sentiment is negative due to declining revenue, widening nine-month net losses, decreasing gross margins, and increased cash burn from operations. The significant uncertainty and ongoing litigation surrounding the proposed merger, which is incurring substantial costs and delaying a key strategic event, further contribute to the negative outlook. While some product lines show growth, the overall financial performance and strategic headwinds are concerning.

Positives

• Net loss for the three months ended June 30, 2025, narrowed to $(5.3) million from $(7.6) million in the prior-year quarter.
• Operating loss for the three months ended June 30, 2025, slightly improved to $(5.2) million from $(5.4) million in the prior-year quarter.
• Research and Development (R&D) expense decreased by 22% for the quarter and 13% for the nine months, partly due to a $1.1 million refund from TRANSCEND clinical trials and reduced development costs for the Pounce thrombectomy platform.
• Continued growth of the Pounce thrombectomy device platform partially offset declines in Medical Device product sales.
• In Vitro Diagnostics (IVD) segment revenue increased by 6% for the quarter and 1% for the nine months, driven by growth across all product lines, particularly distributed antigen and colorimetric substrate products.
• Performance coating royalties and license fee revenue increased by 4% for the quarter and 3% for the nine months, reflecting continued growth in customer utilization of the Serene hydrophilic coating.
• The Pounce XL Thrombectomy System received FDA 510(k) regulatory clearance in Q4 fiscal 2024 and commenced commercial launch early in Q3 fiscal 2025.
• The company expects to recover $1.7 million of the $1.9 million Cyber Incident response costs through cyber insurance.

Negatives

• Total revenue decreased by 3% for the quarter and 6% for the nine months ended June 30, 2025.
• Net loss for the nine months ended June 30, 2025, widened significantly to $(14.2) million from $(8.1) million in the prior-year period.
• Operating loss for the nine months ended June 30, 2025, widened to $(11.7) million from $(5.0) million in the prior-year period.
• Medical Device product sales decreased by 11% for the quarter and 19% for the nine months, primarily due to a $6.4 million decline in SurVeil DCB product sales for the nine-month period.
• Product gross margin decreased to 48.8% for the quarter and 50.7% for the nine months, primarily due to declining SurVeil DCB gross profit resulting from under-absorption and production inefficiencies.
• SG&A expense increased significantly due to $5.3 million in merger-related charges for the quarter and $10.1 million for the nine months.
• Cash and cash equivalents decreased by $9.8 million for the nine months ended June 30, 2025.
• Cash used in operating activities increased to $(5.5) million for the nine months ended June 30, 2025, indicating increased cash burn.
• Investment income, net, decreased by $(0.2) million for the quarter and $(0.6) million for the nine months due to lower interest rates on available-for-sale securities.
• The company expects SurVeil DCB product revenue to decline by approximately $7.5 million in fiscal 2025 from fiscal 2024 levels.
• SurVeil DCB license fee revenue is expected to decline by $3.6 million in fiscal 2025, with no further recognition after March 31, 2025, following the completion of the TRANSCEND pivotal clinical trial.

Risks

• Risks related to the consummation of the merger, including potential failure to secure regulatory approvals (HSR Act), other closing conditions not being satisfied, or Parent's financing not becoming available.
• Significant limitations on remedies in the Merger Agreement may limit or prevent the company from enforcing Parent's obligations or recovering damages for breach.
• Potential negative effects if the Merger Agreement is terminated, including stock price decline, payment of a $20.4 million termination fee to Parent, or a chilling effect on alternative transactions.
• Disruption to business, operations, and stock price due to the announcement or pendency of the merger.
• Adverse effects on the company's ability to retain or recruit key employees due to merger uncertainty.
• Adverse effects on business relationships (customers, suppliers) due to the merger.
• Diversion of management's or employees' attention from other important matters due to the merger.
• Limitations placed on the company's ability to operate its business, return capital to shareholders, or engage in alternative transactions by the Merger Agreement.
• Nature, cost, and outcome of pending and future litigation and other legal proceedings, including those related to the merger.
• Ongoing operating losses, interest expense, and failure to generate cash flows from operations, which could impact expected expenditures and investments.
• Reliance on a small number of significant customers (Abbott, Medtronic), making financial results vulnerable to factors affecting these customers.
• Ability to successfully manufacture SurVeil DCB products at commercial volumes.
• Ability to successfully develop, obtain and maintain regulatory approval for, commercialize, and manufacture other DCB products.
• General economic conditions beyond control, such as recessions, inflation, rising interest rates, and customer M&A, which could negatively impact business.
• Ability to successfully and profitably commercialize vascular intervention products, including Pounce Venous Thrombectomy System, through direct salesforce or otherwise.
• Ability to comply with terms of secured revolving credit facility and secured term loan facilities.
• Difficulties and uncertainties associated with lengthy and costly new product development and regulatory approval processes, potentially leading to lost market opportunities or delayed commercialization.
• Effectiveness of operating expenses incurred for new technology and product development and commercialization.
• Ability to successfully perform product development activities and governmental/regulatory compliance activities, where the company lacks extensive experience.
• Impairment of goodwill and intangible assets or establishment of reserves against other assets.
• Changing conditions and uncertainty in global markets, including tariffs, sanctions, and trade actions.
• Ongoing impacts of the cyber incident experienced on June 5, 2025, including adequacy of processes during disruption, management diversion, potential litigation, changes in customer behavior, and regulatory scrutiny.
• Vulnerability of IT systems to future cyber incidents, attacks, or disruptions, potentially compromising information, exposing to liability, and damaging reputation.
• Impact of interest rate fluctuations on results of operations and cash flows, particularly for floating-rate debt not covered by swaps.
• Potential impact of changes in raw material prices.
• Impact of currency fluctuations, especially with Euro-denominated manufacturing operations and SurVeil DCB transfer prices.

Future Outlook

The company anticipates SG&A and R&D expenses will remain significant in fiscal 2025, primarily due to merger-related charges and continued investment in medical device sales and product development, including the Pounce and Sublime platforms. Product revenue for SurVeil DCB products is expected to decline by approximately $7.5 million in fiscal 2025 from fiscal 2024 levels, and this decrease is not expected to be fully offset by increases from the Pounce thrombectomy device platform. SurVeil DCB license fee revenue is expected to decline by $3.6 million in fiscal 2025, with no further recognition after March 31, 2025. Product gross profit and margin are expected to decline for the remainder of fiscal 2025 due to the expected decline in SurVeil DCB product revenue, leading to under-absorption and production inefficiencies. The company believes existing cash, cash equivalents, available-for-sale investments, cash flow from operations, and the revolving credit facility will provide sufficient liquidity for fiscal 2025. Beyond fiscal 2025, cash requirements depend on market introduction and acceptance of medical device products, investment in commercialization, and potential future corporate transactions. The company may seek additional liquidity and capital resources, including borrowing, debt or equity financing, or corporate transactions. The impact of the newly enacted One Big Beautiful Bill Act (OBBBA) on consolidated financial statements is currently being assessed.

Management Comments

• Our strategy of developing our own medical device products has increased, and will continue to increase, our relevance in the medical device industry.
• This strategy is key to our future growth and profitability, providing us with the opportunity to capture more revenue and operating margin with vascular intervention device products than we would by licensing our device-enabling technologies.
• We continue to evaluate our strategy for further clinical investment in the Sundance DCB based on the experience we have gained from the PMA application process for the SurVeil DCB and market interest.
• We believe that the ease of use, intuitive design, and performance of our thrombectomy systems make these products attractive first-line treatment options for interventionalists.
• We proactively manage our access to capital to support liquidity and continued growth.
• There can be no assurance, however, that our business will continue to generate cash flows at historic levels.
• We cannot accurately predict our long-term cash requirements at this time.
• There can be no assurance that such transactions (additional sources of liquidity and capital resources) will be available to us on favorable terms, if at all.

Industry Context

The medical device industry, particularly vascular intervention, continues to see innovation in drug-coated balloons and thrombectomy systems. Surmodics' focus on proprietary device development, leveraging its coating expertise, aligns with a trend towards integrated solutions and higher-margin product offerings. However, the competitive landscape, regulatory hurdles (as evidenced by the FTC's challenge to the merger), and the need for significant R&D investment remain key industry characteristics. The decline in SurVeil DCB sales, despite FDA approval, highlights the challenges of commercialization and market adoption, even with a major distribution partner like Abbott. The growth in Pounce thrombectomy and IVD product lines indicates demand in those specific niches, but overall industry conditions, including customer inventory management and broader economic factors, can impact performance.

Comparison to Industry Standards

• The decline in SurVeil DCB product sales by $6.4 million for the nine-month period, following an initial stocking order, suggests a slower-than-expected market uptake or competitive pressures compared to other drug-coated balloons in the peripheral arterial disease (PAD) market. Specific comparable companies or products are not detailed in the filing to provide a direct benchmark.
• The decrease in product gross margin from 55.3% to 50.7% for the nine-month period, attributed to under-absorption and production inefficiencies related to SurVeil DCB, indicates challenges in scaling production profitably, which can be common for new medical device launches but warrants close monitoring against industry peers.
• The continued growth of the Pounce thrombectomy device platform and IVD product sales suggests competitive performance in these specific segments, though no specific market share or growth rate benchmarks are provided for direct comparison to competitors like Penumbra or Inari Medical in the thrombectomy space, or larger IVD players.
• The significant increase in SG&A expenses due to merger-related charges is a specific cost burden related to the acquisition attempt, not a reflection of operational efficiency compared to industry standards. Such costs are typical during M&A processes, but their magnitude relative to revenue is notable given the ongoing litigation.

Legal Proceedings

• U.S. Federal Trade Commission (FTC) administrative complaint and federal court action seeking to block the merger with BCE Parent, LLC, alleging it may substantially lessen competition in the outsourced hydrophilic coatings market.
• A temporary restraining order is in effect, preventing the merger's consummation until November 11, 2025, or five business days after the District Court rules on the FTC's motion for a preliminary injunction.
• A hearing on the Federal Complaint is scheduled to begin on August 21, 2025.

Stakeholder Impact

• **Shareholders:** Significant uncertainty regarding the proposed $43.00 per share acquisition due to FTC litigation, potentially impacting share price volatility and the realization of the merger premium. Ongoing losses and cash burn could erode shareholder value if the merger fails.
• **Employees:** Potential adverse effects on the company's ability to retain or recruit key employees due to the prolonged uncertainty surrounding the merger.
• **Customers:** No material interruption to customer orders or product shipments reported due to the cyber incident, but ongoing risks include potential changes in customer behavior and regulatory scrutiny. Active management of inventory levels by certain customers has impacted product sales.
• **Suppliers:** Business relationships with suppliers could be adversely affected by the merger's pendency or termination.
• **Creditors:** The company's ability to comply with the terms of its secured revolving credit facility and secured term loan facilities is a risk, though current liquidity is deemed sufficient for fiscal 2025. The interest rate swap mitigates some floating rate risk on debt.

Next Steps

• Continue to assess the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements.
• Attend the hearing on the Federal Complaint regarding the merger, scheduled to begin on August 21, 2025.
• Monitor the outcome of the FTC litigation regarding the merger.
• Evaluate strategy for further clinical investment in the Sundance DCB.
• Continue commercialization efforts for the Pounce thrombectomy and Sublime radial access platforms.
• Manage inventory levels and production efficiencies, particularly for SurVeil DCB, to mitigate declining gross profit and margin.
• Potentially seek additional sources of liquidity and capital resources beyond fiscal 2025, including through borrowing, debt or equity financing or corporate transactions.

Key Dates

Recommendation

The company's financial performance shows concerning trends with declining revenue and widening net losses over the nine-month period, coupled with decreasing gross margins. The proposed acquisition, which has been a significant factor in the stock's valuation, is now highly uncertain and delayed due to a direct challenge from the FTC, introducing substantial regulatory and execution risk. The ongoing merger-related costs are also a drain on profitability. While some product platforms show growth, the overall financial deterioration and the major strategic uncertainty surrounding the merger make the stock a high-risk investment with limited clear upside in the near term. A seasoned investor would likely divest to avoid further exposure to these significant headwinds and the potential for the merger to collapse.

Keywords

Medical Devices, In Vitro Diagnostics, SEC Filing, 10-Q, Financial Results, Merger Agreement, FTC Litigation, SurVeil DCB, Pounce Thrombectomy, Sublime Radial Access, Hydrophilic Coatings, Drug-Coated Balloon, Vascular Intervention, Cybersecurity Incident, Earnings Report, SRDX