We are reverting to a Neutral recommendation on
) from Outperform as we believe that the stock is fairly valued
at current levels. Our target price is $27.00. The stock carries
a Zacks Rank #3 (Hold) in the short run.
Why the Downgrade?
In Jan 2013, SurModics came out with decent numbers for the first
quarter of fiscal 2013 (ended Dec 31, 2012). The company's first
quarter fiscal 2013 adjusted earnings of 22 cents per share beat
the Zacks Consensus Estimate by 4 cents, driven by higher
revenues. Adjusted revenues climbed 18.1% year over year to $13.8
million. Increased sales of vitro diagnostics offerings and
hydrophilic coatings were the primary reasons behind the
We note that SurModics has taken a number of steps to improve
efficiency following its disappointing performance in fiscal
2010. The company trimmed its workforce and made certain changes
to its organizational structure.
Moreover, following the disappointing performance in fiscal 2010,
SurModics revamped its board of directors and brought about a
change at its helm, with the appointment of Gary R. Maharaj as
We are positive on the sale of SurModics' Pharmaceuticals unit in
2011 as this has allowed the company to focus on its core
However, since royalties are a major source of revenues at
SurModics, any royalty-related setback will affect the top line.
Johnson & Johnson
) decision to stop manufacturing Cypher and Cypher Select Plus
sirolimus-eluting coronary stents, from which SurModics earned
royalties, affected the latter's top line. Setbacks of a similar
nature will negatively impact SurModics' stock price in the
While encouraged by the steps taken by the company to revive
itself, we see limited upside potential for the stock from
current levels and hence downgrade the stock to Neutral.
Other Stocks to Consider
Players in the Medical Devices market, of which SurModics is a
part, such as
Edwards Lifesciences Corporation
) are well placed and worth considering. Both these companies
carry a Zacks Rank #2 (Buy).
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