CONFIDENTIAL – NOT FOR REDISTRIBUTIONfilename 1 Anne Brader, Beth Witt, Kristi Moline Quanzhen (Jin) Lu, Ray Littlefield SurModics BUSN625 - Managerial.

CONFIDENTIAL – NOT FOR REDISTRIBUTIONfilename 1

Anne Brader, Beth Witt, Kristi Moline

Quanzhen (Jin) Lu, Ray Littlefield

SurModics

BUSN625 - Managerial Finance

Professor: Shawn Sauve


Executive Summary- Ray

The purpose of this presentation is to evaluate the business, strategy, financial strengths, and future potential of a medical device company called SurModics.

We will weigh their business model today including how they fit in their market, their competition, business drivers, and recent financial results.

Then we will look into their future strategy including growth plans and associated risks. How they intend to overcome those risks, and what the return on investment should be expected. This assessment will lead to the development of a Pro Forma for potential results over the next three years.

Finally, we will offer a handful of conclusions, recommendations, and thoughts for them to consider as they continue to move forward in the pursuit of their mission.


Business Today – History Overview- Beth

SurModics strives to improve patient lives and support customers objectives through technology innovation:1.Servicing Medical Device customers.2.In-Vitro Diagnostic Customers


Business Today – Financial Summary- Anne

Selected Financial Data(In thousands)

Quarterly Results Annual Results6/30/2014 3/31/2014 12/31/2013 9/30/2013 9/30/2012 9/30/2011 9/30/2010

Income StatementRevenue:

Royalties and license fees $ 7,385 $ 7,329 $ 7,465 $ 29,774 $ 27,445 $ 30,385 $ 34,277

Product sales 6,067 5,165 5,400 22,506 20,742 20,150 20,184

Research and development 1,164 1,110 1,018 3,852 3,741 2,221 15,437

Total revenue 14,616 13,604 13,883 56,132 51,928 52,756 69,898 Operating costs and expenses:

Research and development 3,655 4,134 3,699 15,079 14,143 14,005 36,063

Operating income from continuing operations 5,333 3,480 4,329 18,820 16,342 15,523 (14,053)Gross operating margin 36.5% 25.6% 31.2% 33.5% 31.5% 29.4% -20.1%

Balance Sheet

Cash and cash equivalents 39,729 8,444 10,516 15,495 15,540 23,217 11,391

Available-for-sale securities 17,379 42,819 42,630 42,609 42,550 41,950 41,271

Held-to-maturity securities - - - - - 3,030 4,124

Cash and securities 57,108 51,263 53,146 58,104 58,090 68,197 56,786

Total Liabilities 6,046 5,049 6,108 8,106 9,331 17,318 15,920

Total Stockholders Equity 94,671 90,633 88,948 93,817 94,988 145,336 154,359 Cash FlowNet cash provided by operating activities from continuing operations

12,466 5,936 4,250 17,781 17,626 22,900 22,008


Business Today – Competition / Macro-Influence- Kristi

Competition

• Currently service half of the top ten Global In Vitro Diagnostic Companies

• Competitors include Myriad Genetics Inc, and Celldex Therepeutics Inc.

• Threat of new entrants is low given strict regulations, high R&D costs and high start-up costs

Macro-Influence

• Government regulations - drive cost / limit number of competitors

• Healthcare reform - more insured possibly impact number of consumers receiving diagnostic services

• Inflation – may impact cost of supplies


Business Today – Key Business Drivers- Jin

• Marketing

– A strong supporter of professional, scientific, and local community organizations.

– Long-Term Growth / outperforming market

• Human resources

– Employees able to use skills with equal opportunity

– Culture of collaboration

• Operations

– Two core businesses include: Medical Device and In Vitro Diagnostics (IVD)

– Differentiated products through focused research


Financial Plan – Business Strategy- Ray

• Mission: Exceed customer expectations and enhance the well being of patients by providing the world’s foremost, innovative surface modification technologies and in vitro diagnostic chemical components.

• Strategy: To partner with the worlds leading and emerging medical device, diagnostic and life science companies to develop and commercialize innovative products designed to improve lives by enabling the detection and treatment of disease.

– Differentiated product offering with acquisition of device companies

– Expand reach geographically in the body (surgical balloon technology)

– Expand reach geographically from a world footprint


Financial Plan – Key Assumptions- Ray

• Medical device industry will continue to grow.

• The need for better lubrication on devices will continue to increase.

• The necessity for better balloon technology to replace coronary stints will increase.

• That funding for medical procedures will be available. They were negatively impacted by the 2008 recession.

• That companies working in similar technologies will be available for acquisition to grow SurModics diversity of product offerings.

• Financial assumptions – Reviewed with Pro Forma


Financial Plan – Growth Plans- Beth

Growth Opportunities for Medical Devices:

1. Neurovascular

2. Transcatheter heart valve repair and replacement

3. Peripheral Vascular

SurModics Expansion Will Focus On:

1. Acquisition and expanding market with complimentary medical devices

2. Maintain Status as Market Leader in Hydrophilic Partnering

3. Increase Investment in Device Coatings

4. Increase Investment in Uncoated Devices


Financial Plan – Funding Required- Anne

• Funding required

– Research and development

– Acquisitions

• Sources & applications

– $175M in additional common stock

– $20M line of credit


Financial Plan - Risks- Kristi

• Financial

• Operational

• Resource-related

• Reputational


ROI on Marketing is not a significant part of business

ROI on Operations will be in expanded capacity to develop new products and develop into new geographic markets

ROI on HR will be focused around adding staff with intellectual capital to develop new products

Financial Plan – Expected ROI- Jin


Financial Plan – Pro Forma Summary- Anne

SurModicsIncome Statement

(In thousands)2014 2015 2016

Revenue:Royalties and license fees 29,572$ 29,868$ 30,166$ Product sales 22,176 22,398 22,622 Research and development 4,389 4,433 4,478

Total revenue 56,137 56,699 57,266 Operating costs and expenses:

Product costs 7,649 7,726 7,803 Research and development 17,317 17,471 16,625 Selling, general and administrative 15,648 15,804 15,963

Total operating expenses 40,615 41,001 40,391 Operating income (loss) 15,523 15,698 16,875 Income tax provision 5,122 5,180 5,569 Net income (loss) 10,400$ 10,518$ 11,306$

ProForma


Financial Plan – Balance Sheet- Anne

SurModicsBalance Sheet

(In thousands)2014 2015 2016

ASSETSCurrent Assets:

Cash and cash equivalents 41,168$ 40,840$ 40,221$ Available-for-sale securities 882 882 882 Accounts receivable, net of allowance for doubtful accounts 6,211 7,453 8,944 Inventories 3,480 4,176 5,011 Deferred tax assets 321 321 321 Prepaids and other 2,062 2,474 2,969 Current assets of discontinued operations - - -

Total Current Assets 54,124 56,147 58,348 Property and equipment, net 15,252 18,302 21,963 Available-for-sale securities 16,497 16,497 16,497 Deferred tax assets 6,392 6,392 6,392 Intangible assets, net 4,697 7,045 8,454 Goodwill 10,413 13,537 17,598 Other assets, net 3,166 3,166 3,166

Total Assets 110,540$ 121,086$ 132,417$

ProForma


Financial Plan – Liabilities & Equity- Anne

LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:

Accounts payable 1,400$ 1,414 1,425 Accrued liabilities:

Compensation 1,756 1,765 1,774 Accrued other 844 848 852 Deferred revenue 41 41 41 Restructuring and other current liabilities - - - Current liabilities of discontinued operations - - -

Total Current Liabilities 4,041 4,068 4,093 Deferred revenue, less current portion 149 150 150 Other long-term liabilities 1,779 1,779 1,779

Total Liabilities 5,969 5,997 6,022 Stockholders Equity:

Common stock 680 680 680 Additional paid-in capital 2,419 2,419 2,419 Accumulated other comprehensive income 36 36 36 Retained earnings 101,436 111,954 123,260

Total Stockholders Equity 104,571 115,089 126,395 Total Liabilities and Stockholders Equity 110,540$ 121,086$ 132,417$


Conclusion / Recommendations- Kristi

• Conclusion

– Good investment opportunity with the new balloon technology preparing for clinical trials

– No debt / Tons of cash

• Potential takeover target

– Looking at companies to acquire

– Aging population is contributing to current growth.

• Recommendations

– Continue to find solutions for this specific medical niche

– Seek suitable niche for the next generation of patients & procedures

– Maintain fiduciary responsibility and financial health


Project Learning's- Jin

• Pro Forma – how complex building a Pro Forma is: Built on assumptions

• Financial Statements tell a good story about how a company grows

• Planning as a team results in good balance of effort and quick results

• WebEx is very effective for group projects

• Team helping to provide information and collaboration of ideas for specific slides


Appendices- Anne

Selected Financial Data(In thousands)

6/30/2014 3/31/2014 12/31/2013 9/30/2013 9/30/2012 9/30/2011Income Statement

Revenue:Royalties and license fees 7,385$ 7,329$ 7,465$ 29,774$ 27,445$ 30,385$ Product sales 6,067 5,165 5,400 22,506 20,742 20,150 Research and development 1,164 1,110 1,018 3,852 3,741 2,221

Total revenue 14,616 13,604 13,883 56,132 51,928 52,756 Operating costs and expenses:

Research and development 3,655 4,134 3,699 15,079 14,143 14,005 Operating income from continuing operations 5,333 3,480 4,329 18,820 16,342 15,523 Gross operating margin 36.5% 25.6% 31.2% 33.5% 31.5% 29.4%

Balance SheetCash and cash equivalents 39,729 8,444 10,516 15,495 15,540 23,217 Available-for-sale securities 17,379 42,819 42,630 42,609 42,550 41,950 Held-to-maturity securities - - - - - 3,030

Cash and securities 57,108 51,263 53,146 58,104 58,090 68,197 Total Liabilities 6,046 5,049 6,108 8,106 9,331 17,318 Total Stockholders Equity 94,671 90,633 88,948 93,817 94,988 145,336

Cash FlowNet cash provided by operating activities from continuing operations

12,466 5,936 4,250 17,781 17,626 22,900

Quarterly Results Annual Results

SurModics Financial Data•Income Statement•Balance Sheet•Cash Flow•Select Financial Data

•For best viewing – right click and select “Worksheet Object / Open”

CONFIDENTIAL – NOT FOR REDISTRIBUTIONfilename 1 Anne Brader, Beth Witt, Kristi Moline Quanzhen (Jin) Lu, Ray Littlefield SurModics BUSN625 - Managerial.

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