8-K: Surmodics Reports Mixed Q3 Results Amidst Pending Acquisition by GTCR

Surmodics reported a decrease in total revenue due to a significant drop in license fee revenue, but saw growth in other areas, while also announcing a pending acquisition by GTCR.

Summary

• Surmodics announced its financial results for the third quarter of fiscal year 2024, which ended on June 30, 2024.
• Total revenue was $30.3 million, a 42% decrease compared to $52.5 million in the same period last year, which included a $24.6 million license fee from the SurVeil drug-coated balloon (DCB).
• Excluding the SurVeil DCB license fee revenue, total revenue increased by 10% year-over-year to $29.2 million.
• The company reported a GAAP net loss of $7.6 million, compared to a net income of $7.3 million in the prior-year period.
• Adjusted EBITDA was $1.6 million, significantly down from $24.6 million in the same quarter of the previous year.
• Medical Device revenue decreased by 49% to $23.4 million, but excluding SurVeil DCB license fees, it increased by 10% to $22.2 million.
• In Vitro Diagnostics (IVD) revenue increased by 8% to $7.0 million.
• Product gross profit increased by 4% to $9.1 million, but product gross margin decreased to 51.9% from 55.8%.
• Operating costs and expenses increased by 13% to $27.3 million, primarily due to $2.9 million in merger-related charges.
• Surmodics is being acquired by GTCR for $43.00 per share in cash, representing an approximate equity value of $627 million.
• A special shareholder meeting to vote on the merger is scheduled for August 13, 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there is positive growth in some areas, the overall financial results are worse than the previous year, and the company is being acquired. The acquisition premium is a positive, but the underlying performance is mixed.

Positives

• Total revenue, excluding the SurVeil DCB license fee, increased by 10% year-over-year.
• Medical Device revenue, excluding SurVeil DCB license fees, also increased by 10%.
• Medical Device product sales saw a 15% increase, driven by SurVeil DCB and Pounce thrombectomy products.
• Medical Device performance coating royalties and license fee revenue grew by 13%.
• In Vitro Diagnostics (IVD) revenue increased by 8%.
• Surmodics secured a group purchasing agreement with Premier, Inc. for thrombectomy products.
• The company is being acquired at a 41.1% premium to its recent trading price.

Negatives

• Total revenue decreased by 42% due to a significant drop in SurVeil DCB license fee revenue.
• GAAP net loss was $7.6 million, a significant swing from a $7.3 million profit in the same quarter last year.
• Adjusted EBITDA decreased significantly to $1.6 million from $24.6 million in the prior-year period.
• Product gross margin decreased to 51.9% from 55.8%.
• Operating costs and expenses increased by 13%, primarily due to merger-related charges.
• The company is suspending its previously issued financial guidance for fiscal 2024 due to the pending acquisition.

Risks

• The pending acquisition by GTCR is subject to customary closing conditions, including shareholder and regulatory approvals.
• There is a risk that the merger may not be completed within the anticipated timeframe or at all.
• The company's stock price may decline significantly if the merger is not completed.
• The company may be required to pay a termination fee of $20.38 million if the merger agreement is terminated under certain circumstances.
• The announcement of the merger may disrupt the company's business, operating results, and stock price.
• The company's ability to retain or recruit key employees may be adversely affected by the merger.
• There are risks associated with the commercialization of SurVeil DCB and other proprietary products.
• The company relies on third parties for the development, approval, marketing, and sale of products incorporating its technologies.
• There are potential adverse market conditions and impacts on cash flows.
• Supply chain constraints could impact the company's ability to produce and commercialize products.

Future Outlook

Surmodics has suspended its previously issued financial guidance for fiscal 2024 due to the pending acquisition by GTCR. The company will become privately held upon completion of the transaction.

Management Comments

• Our teams focus and execution in the third quarter enabled us to deliver total revenue results consistent with the expectations shared on our most recent earnings call, benefiting from strength across multiple areas of our business, said Gary Maharaj, President and CEO of Surmodics, Inc.
• Specifically, we saw strong contributions from growth in both Medical Device product revenue driven primarily by demand for our SurVeil DCB and Pounce thrombectomy products and performance coating royalties and license fees, along with broad-based growth in sales of our In Vitro Diagnostics products as well.

Industry Context

The medical device industry is seeing increased consolidation, as evidenced by Surmodics' acquisition by GTCR. The company's focus on thrombectomy and drug-coated balloon technologies aligns with current trends in vascular intervention. The group purchasing agreement with Premier, Inc. is a positive development for market access.

Comparison to Industry Standards

• Surmodics' revenue decline due to the absence of a large license fee is not uncommon in the medical device sector, where milestone payments can cause significant fluctuations in quarterly results.
• Companies like Medtronic and Boston Scientific, which also operate in the medical device space, often experience similar variations in revenue due to product approvals and licensing agreements.
• The 10% growth in revenue excluding the license fee is a positive sign, indicating underlying strength in the core business, which is comparable to growth rates seen in other mid-sized medical device companies.
• The decrease in gross margin due to increased sales of newer products is a common challenge for companies scaling up production, similar to what other companies experience when launching new devices.
• The acquisition by GTCR is part of a broader trend of private equity firms investing in the healthcare sector, which is also seen with other companies in the medical device and diagnostics space.

Stakeholder Impact

• Shareholders will receive $43.00 per share in cash upon completion of the acquisition.
• Employees may experience changes due to the acquisition and transition to a private company.
• Customers and suppliers may see changes in business relationships due to the acquisition.
• Creditors may be impacted by the change in ownership and financing structure.

Next Steps

• Surmodics shareholders will vote on the proposed merger with GTCR on August 13, 2024.
• The company will work to complete the acquisition by GTCR, subject to customary closing conditions.
• Surmodics will transition to a privately held company upon completion of the acquisition.

Key Dates

Keywords

Surmodics, GTCR, acquisition, medical devices, in vitro diagnostics, SurVeil DCB, thrombectomy, revenue, EBITDA, financial results, merger