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From the Survey: SurModics, Inc.
SurModics Inc. (SRDX) has had a storied history since its founding in 1979. The stock’s price has certainly seen it peaks and troughs; its saw considerable runups before the Internet bubble burst and the financial crisis hit (approaching $60 a share each time). More recently, it has been recovering since bottoming in price in 2010, benefiting from a broad and diverse portfolio of offerings.
SurModics was initially named BioMetrics Systems, Inc or BSI. In 1987, it moved into the surface modification and immobilization business with its PhotoLink brand. Ten years later, it switched to its current name to reflect its new focus. The company made an initial public offering of its shares in 1998, raising $15.5 million by issuing 4.6 million common shares. In 2007, the company broadened the portfolio of its second-biggest segment, In Vitro Diagnostics, with the purchase of BioFX Laboratories, a developer, manufacturer and marketer of substrates and reagants.
How does SurModics make money? Royalties are the biggest source of revenues, which are generated when a customer sells products incorporating certain of SurModics’ technologies. This is also a potential threat, as the company is heavily reliant on third parties.
The company’s reliance on third-party products can be a considerable detriment to business. In 2011, medical device maker Cordis announced the cessation of the manufacture of its trademark Cypher stents, which hurt business results at SurModics considerably. Since then, however, the company’s profits have recovered thanks to other products.
SurModics’ largest segment, Medical Devices, primarily offers surface modification and drug delivery technologies for use with medical devices. Surface modification entails changing the exteriors of medical devices to more desirable states. For example, surfaces can be made hydrophilic (attracted to water) or hydrophobic (repelled by water). SurModics’ Medical Devices segment offers lubricious, hemocompatible, and drug delivery coatings. Two of the lubricious coatings are branded PhotoLink and Serene.
As we mentioned earlier, PhotoLink technology began to be used by the company in 1987 and is still utilized to modify the surfaces of medical devices by covalently coupling lubricious coatings with device substrates. The bond is activated by light, and the technology is flexible and works on nearly on all substrates.
In 2013, the company launched its next-generation hydrophilic coating platform under the trade name Serene, previously called Gen 5. Serene delivers a low-friction coating and will be used in a wide variety of substrates. These include substrates with coronary, peripheral, neurovascular and structural heart applications.
Meanwhile, In Vitro Diagnostics offerings are primarily for testing and research. The company provides a wide variety of products, including protein stabilizers and blockers, reagants, antigens and antibodies.
SurModics recently launched a new line of In Vitro Diagnostic products, StabiliZyme, which are protein-free stabilizers. The company asserts that these products are designed to preserve the conformation of proteins (like enzymes, antibodies, and antigens) in their native folded state while in solution.
Both segments are doing well, and SurModics continues to invest in new offerings. Another target of ongoing investment is drug-coated balloon technology. SurModics increased investment here by $600,000 in the first quarter of 2014. Apparently, the addressable market for the product, estimated at over one billion dollars, has considerable potential.
This is currently a small-cap stock, valued at over $400 million of late. The price-to-earnings ratio was recently reported at about 22x. Share net in 2013 totaled almost a dollar, about 70% higher from the prior-year level. For more information, investors should reference our quarterly reports on SurModics in the Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.