On Aug 21, we maintained our Neutral recommendation on
). SurModics reported in-line earnings in the third quarter of
fiscal 2013 (ended Jun 30, 2013).
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Why the Reiteration?
On Jul 31, SurModics reported 22% higher earnings in the third
quarter of fiscal 2013 than a year ago. The year-over-year growth
was primarily attributable to higher revenues.
Revenues climbed 2% year over year to $14.3 million. Increased
sales of vitro diagnostics offerings and hydrophilic coatings
were the primary reasons behind the year-over-year improvement.
Until fiscal 2011, the company operated through three business
units: Medical Devices, Pharmaceuticals and In Vitro Diagnostics.
However, in Nov 2011, SurModics sold the assets of the
Pharmaceuticals division to Germany's Evonik Industries AG for
$30 million. From the first quarter of fiscal 2012, SurModics
started reporting through two divisions - Medical Devices and In
SurModics expects its In Vitro Diagnostic unit and hydrophilic
coatings (of the Medical Devices segment) to continue performing
well. Revenues from the In Vitro Diagnostic unit in the third
quarter of fiscal 2013 were higher than a year ago. Segmental
growth (the eleventh consecutive quarter of growth) was driven by
strong sales of the company's stabilizer and antigen products.
Revenues from hydrophilic coating climbed 4% to $7.3 million in
the third quarter of fiscal 2013. The third quarter of fiscal
2013 witnessed impressive hydrophilic royalty growth in the key
sub-units of the medical device segment - neurovascular,
peripheral, and transcatheter heart valve replacement.
We are positive on the steps taken by SurModics to increase
efficiencies, including trimming its workforce and appointing a
new Chief Executive Officer. Moreover, the company's initiative
to sell its Pharmaceutical unit to focus on its core business is
a prudent move. In Dec 2012, SurModics appointed Andy LaFrence as
its new chief financial officer and Vice President of finance.
The appointment of LaFrence is expected to be beneficial to
SurModics since he is vastly experienced in finance and capital
However, since royalties are a major source of revenues at
SurModics, any royalty related setback will affect the top line,
such as the discontinuation of
Johnson & Johnson
) Cypher stent. We believe that the stock is fairly valued at
current levels with limited scope for upside.
Other Stocks to Consider
While we prefer to remain on the sidelines on SurModics, other
stocks operating in the same field which are worth considering
). While Hospira carries a Zacks Rank #2 (Buy), Alere carries a
Zacks Rank #1 (Strong Buy).