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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 2000
Commission file number 0-23837
SURMODICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-1356149
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices) (Zip Code)
(952) 829-2700
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.05 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required by file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by shareholders other than
officers, directors or holders of more than 5% of the outstanding stock of the
registrant as of December 15, 2000 was approximately $366.4 million (based upon
the closing sale price of the registrant's Common Stock on such date).
The number of shares of the registrant's Common Stock outstanding as of December
15, 2000 was 16,618,736.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended September 30, 2000 are incorporated by reference into
Part II.
2. Portions of the Registrant's definitive Proxy Statement for the
Registrant's 2001 Annual Meeting of Shareholders are incorporated by
reference into Part III.
PART I
ITEM 1. BUSINESS
General
SurModics, Inc. ("SurModics" or the "Company") is a leading provider of
surface modification solutions to the medical device industry. The Company's
primary focus is the commercialization of its patented PhotoLink process through
third-party licensing arrangements. PhotoLink is a versatile, easily applied,
light-activated coating technology that modifies medical device surfaces by
creating covalent bonds between those surfaces and a variety of chemical agents.
Through the PhotoLink process, these chemical agents can impart many
performance-enhancing characteristics, such as lubricity, hemocompatibility,
infection resistance and drug incorporation, onto the surface of a medical
device without materially changing the dimensions or physical properties of the
device. The Company believes that medical device manufacturers who utilize the
Company's technology are able to significantly improve the performance of their
products and, in many cases, differentiate their products in a highly
competitive marketplace.
The Company focuses on providing high value-added surface modification
solutions to a variety of medical device markets and product categories.
Examples of products in the market or under development that incorporate the
PhotoLink technology include interventional cardiology catheters, vascular
stents, interventional neurology catheters, guide wires and shunts, cardiac
rhythm management devices, and urological and gynecological devices. The surface
properties created by the PhotoLink technology have greatly reduced treatment
times in catheter-based vascular procedures and have shown the potential to
enhance the long-term performance of implantable devices by improving infection
resistance and promoting host cell attachment, growth and subsequent tissue
integration. PhotoLink also has applications in the genomics market, as the
Company produces and sells a coated glass slide used to orient DNA strands for
analysis. In fiscal 2000, this technology was licensed to Motorola on an
exclusive basis.
The Company has commercialized its PhotoLink technology through
licensing arrangements with medical device manufacturers who apply the PhotoLink
coatings to their own products. The Company believes this approach allows it to
focus its resources on further development of its technology and expansion of
its licensing activities, while leveraging the established manufacturing, sales
and marketing capabilities of its licensees. Revenues from these arrangements
include license fees, development revenue, minimum royalties, and earned
royalties based on a percentage of licensees' product sales. The Company also
manufactures and sells the chemical reagents used in the PhotoLink process. In
addition to licensing its PhotoLink technology, the Company also licenses
certain diagnostic technology to Abbott Laboratories for use with rapid
point-of-care diagnostic tests, such as pregnancy and strep tests. Finally, the
Company manufactures and sells coated glass slides to the genomics market and
offers a line of stabilization products used to extend the shelf life of
immunoassay diagnostic tests.
The Company was organized as a Minnesota corporation in June 1979 and
changed its name to SurModics, Inc. in June 1997.
Markets and Need for Surface Modification
Recent trends in healthcare toward improved patient outcomes and
reduced costs have resulted in intense competition for the development of
medical devices that demonstrate superior product performance, reduced procedure
times, improved outcomes and overall cost effectiveness. Medical device
manufacturers have attempted to address these competitive pressures by
developing innovative medical devices manufactured from a wide variety of
synthetic materials, including many new, expensive and exotic materials. In an
effort to further differentiate their products through improved product
performance, a growing number of medical device manufacturers are turning to the
emerging field of surface modification technology. Surface modification
technology enables device manufacturers to provide medical devices with desired
surface characteristics including improved lubricity, hemocompatability and
infection resistance, as well as the ability to deliver drugs and promote cell
growth and tissue integration.
Although it is an emerging field, surface modification technology has
been used to improve medical devices in many different industry segments. The
table below identifies several of these market segments and the surface
properties the Company believes are desired by each segment.
Market Segment Served Desired Surface Property and
Examples of Applications
------------------------- -----------------------------
Interventional cardiology Lubricity: catheters, guide wires
and vascular access Hemocompatability: vascular stents, catheters, guide wires,
distal protection devices
Therapeutic drug incorporation and release: vascular stents,
catheters
Infection resistance: catheters, implantable ports
Cardiac rhythm management Lubricity: pacemaker and defibrillator leads,
electrophysiology devices
Hemocompatability: electrophysiology devices
Cardiothoracic surgery Infection resistance: heart valves
Hemocompatability: minimally invasive bypass devices, vascular
grafts, ventricular assist devices
Cell growth and tissue integration: heart valves, vascular grafts
Interventional neurology Lubricity: catheters, guide wires
and neurosurgery Infection resistance: catheters, shunts
Urology and gynecology Lubricity: urinary catheters, incontinence devices, ureteral
stents, fertility devices
Infection resistance: urinary catheters, incontinence devices,
ureteral stents, fertility devices, penile implants
Orthopedics Cell growth and tissue integration: bone and cartilage
regeneration
In addition to the above-identified market segments, the Company
believes that one of the next areas of growth for surface modification
technology will be genomics. During fiscal 1999, SurModics launched its 3D-Link
Activated Slide to the genomics market. This coated glass slide was used by
genomics researchers to prepare microarrays for DNA analysis. During fiscal
2000, SurModics formed a partnership with Motorola Life Sciences. In addition to
providing Motorola exclusive rights to the Company's genomics technology, the
agreement calls for collaborative research on further technology advances.
The PhotoLink Solution
PhotoLink is a versatile, easily applied, light-activated coating
technology that modifies medical device surfaces by creating covalent bonds
between those surfaces and a variety of chemical agents. The PhotoLink solution
to surface modification involves the utilization of proprietary, light sensitive
(photochemical) reagents. These reagents can consist of advanced polymers or
active biomolecules having desired surface characteristics and an attached
light-reactive chemical compound (photogroup). When the reagent is exposed to a
direct light source, typically ultraviolet light, a photochemical reaction
creates a covalent bond between the photogroup and the surface of the medical
device, thereby imparting the desired property to the surface. A covalent bond
is a very strong chemical bond which results from the sharing of electrons
between carbon molecules of the substrate and the applied coating.
SurModics' proprietary PhotoLink reagents work directly on most
polymer-based (e.g., plastic) and biological substrates (latex rubber,
cellulose, tissue and natural fibers). Metal and glass substrates generally
require pretreating with polymers to make a carbon-molecule available for
bonding prior to the application of the PhotoLink reagents. The reagents are
easily applied to a clean material surface by dipping, spraying, roll coating,
ink jetting or brushing. SurModics continues to develop proprietary
photochemical reagents providing new product features while expanding the number
and type of substrates on which the reagents can be applied.
The Company believes that its proprietary PhotoLink process provides
its licensees with a number of benefits.
o Flexibility. PhotoLink coatings can be applied to many
different kinds of surfaces and can immobilize a variety of
chemical, pharmaceutical and biological agents, which allows
licensees to be innovative in the design of their products
without significantly changing the dimensions or physical
properties of the device.
o Variety of Surface Properties. The PhotoLink process can be
tailored to provide SurModics' licensees with the ability to
improve the performance of their devices by choosing the
specific coating properties desired for particular
applications. The PhotoLink technology also provides the
medical device manufacturer with the ability to combine
multiple surface-enhancing characteristics on the same device.
o Ease of Use. The PhotoLink coating process is a relatively
simple process that does not require expensive special
equipment or the use of hazardous materials, and does not
subject the coated products to harsh chemical, pressure or
temperature conditions. Further, PhotoLink coatings are
compatible with all the generally accepted sterilization
processes, so the surface attributes are not lost when the
medical device is sterilized prior to usage.
Surface Properties
SurModics' PhotoLink process has been used by manufacturers of
pacemaker leads, drug infusion catheters, laser and balloon angioplasty
catheters, urinary drainage catheters, vascular closure devices, wound drains,
guide wires, stent delivery catheters, angiography catheters, ureteral stents
and hydrocephalic shunts, among other devices. The PhotoLink process can be used
to provide medical device manufacturers with the following surface properties to
improve product performance:
o Lubricity. Low friction or lubricious coatings reduce the
force and time required for insertion, navigation and removal
of devices in vascular, neurological and urogenital
applications. Lubricity also reduces tissue irritation and
damage caused by products such as catheters, guide wires and
endoscopy devices. Based on Company and licensee testing, when
compared to uncoated surfaces, the PhotoLink process has
reduced the friction on surfaces by as much as 95%, depending
on the substrate being coated.
o Hemocompatibility. Hemocompatible coatings help reduce adverse
reactions that may be created when a device is inserted into
the body and comes in contact with blood. Heparin has been
used for decades as an injectable drug to reduce blood
clotting in patients. SurModics can immobilize heparin on the
surface of medical devices thereby inhibiting blood clotting
on the device surface, minimizing patient risk and enhancing
the performance of the device. PhotoLink heparin coatings have
been shown in Company and licensee testing to reduce blood
clotting by greater than 90% compared to uncoated surfaces.
o Infection Resistance. Antimicrobial coatings are advantageous
for most implantable medical devices where risk of infection
is a concern. PhotoLink technology can apply passive coatings
which significantly reduce bacterial adhesion to the device or
active coatings incorporating antimicrobial agents which kill
bacteria around the device. Testing by the Company has
demonstrated that a PhotoLink coating can reduce the adherence
of microorganisms to biomaterial surfaces by 99% depending on
the base material of the device. In addition, when compared to
uncoated products, the PhotoLink process has been shown to
increase the uptake of antimicrobial agents applied to the
device just prior to implantation and prolong the release of
these agents.
o Drug Incorporation. PhotoLink technology can be used to create
reservoirs to entrap drugs on the surface of medical devices.
These drugs can then be released from the surface on a
controlled basis by tailoring the polymers, by adjusting the
extent of crosslinking, or by using a barrier coating to
control diffusion. For example, SurModics has developed a
PhotoLink coating that would allow a coronary stent
manufacturer to incorporate a drug onto the surface of a stent
which would be released over time to reduce the incidence of
restenosis (the re-narrowing of the artery).
o Wettability. PhotoLink hydrophilic coatings have been shown in
tests by the Company and its licensees to accelerate liquid
flow rates on normally hydrophobic (water repelling) materials
by 75%. Some rapid point-of-care diagnostic tests, such as
home monitoring or physician monitoring of glucose levels in
diabetics, are currently done by pricking a patient's finger
and placing a drop of blood onto a polymer strip which is then
inserted into a blood glucose reader. The Company believes
that the time it takes for the blood to flow up the strip to
provide a readout can be dramatically reduced and the
consistency can be greatly improved with PhotoLink technology.
o Tissue Engineering. Studies have shown that attachment of
extracellular matrix proteins and peptides onto surfaces of
implantable medical devices improves host cell attachment,
growth and subsequent tissue integration. Company studies have
shown that biomedical devices (such as vascular grafts and
ocular implants) coated with photoreactive collagen and other
proteins have improved attachment, growth of cells and
acceptance by surrounding tissues. In addition, the Company is
also using its PhotoLink technology to produce
three-dimensional scaffolds to promote bone regeneration.
o Biomolecule Immobilization. During a DNA gene analysis,
typically hundreds of different probes need to be placed in a
pattern on a surface, called a DNA microarray. These
microarrays are used by the pharmaceutical industry to screen
for new drugs, by genome mappers to sequence unknown portions
of the human genome, or by diagnostic companies to search a
patient sample for disease causing bacteria or viruses.
However, DNA does not readily adhere to most surfaces. The
Company has demonstrated a versatile method for the
immobilization of DNA on various surfaces and introduced a
coated slide during fiscal 1999.
Current Licensing Arrangements
The Company has commercialized its PhotoLink technology through
licensing arrangements with medical device manufacturers who apply the PhotoLink
coatings to their own products in their own facility. The Company believes this
approach allows it to focus its resources on further developing its technology
and expanding its licensing activities, while leveraging the established
manufacturing, sales and marketing capabilities of its licensees for the
marketing of the specific medical device utilizing the PhotoLink technology. The
Company's licensing agreements are designed to allow manufacturers to
incorporate the PhotoLink process into their own manufacturing processes so they
can control production and quality without the need to send product outside
their facility.
The licensing process begins with the medical device manufacturer
specifying the surface characteristics it desires. Because each surface is
unique, the Company routinely conducts a feasibility study at no charge to the
customer to qualify each new potential product application. Once the feasibility
has been proven, the customer typically funds further development by SurModics
to optimize the coating formulation to meet the customer's technical needs. A
license agreement is then executed granting the licensee the rights to use the
technology. SurModics' technical personnel are then available to provide
assistance in the transfer of the PhotoLink technology into the licensee's
manufacturing process. Such services can include further coating optimization,
process control and trouble shooting which are billable to the licensee. The
Company also manufactures and sells the chemical reagents used by all licensees
in the PhotoLink process, thus creating another source of revenue.
The term of a license agreement is generally for a period of 15 years
or the life of SurModics' patents, whichever is longer, although an agreement
may be terminated for any reason upon prior written notice, typically required
at least 90 days before termination. The worldwide license can be either
exclusive or nonexclusive for a particular medical device, but over 90% of the
Company's licensed applications are nonexclusive. SurModics requires the payment
of a non-refundable license fee which has historically ranged from $25,000 to
$1,000,000 and quarterly "earned" royalties of 2% to 6% on the sales of products
incorporating SurModics' technology. The amount of the license fee and the
royalty rate are based on various factors including whether the arrangement is
exclusive or nonexclusive, the perceived value of the PhotoLink application to
the device and the size of the potential market. Certain nonrefundable license
and research and development fees are recoverable by the licensees as offsets
against a percentage of future earned royalties. Most of SurModics' agreements
also incorporate a minimum royalty to be paid by the licensee while the medical
devices are developed, tested and commercialized. In most cases, payment of
these minimum royalties will not commence until several months after the
execution of an agreement for a particular application. On a quarterly basis, a
client will pay the greater of earned or minimum royalties to SurModics.
Other Products
Stabilization Products
Although the primary focus of the Company is the development and
marketing of its PhotoLink technology, the Company also markets stabilization
products for use by manufacturers of immunoassay diagnostic tests. SurModics'
StabilCoat and StabilZyme Stabilizers are designed to maintain the activity of
biological components of the immunoassays, resulting in a longer shelf life.
These products offer SurModics' customers the benefit of product differentiation
and improvement while providing the ultimate end users the benefit of a faster
test with fewer steps and fewer errors.
Diagnostic Formats
SurModics has also licensed a format for in vitro diagnostic tests
developed during the early years of the Company. This format has found broad
application in the expanding area of rapid point-of-care diagnostic testing,
such as pregnancy and strep tests, and generated $2.9 million of royalty revenue
to the Company in fiscal 2000 pursuant to a license agreement with Abbott
Laboratories. Although this revenue is expected to grow in the future with the
increased sales of licensed products, limited additional SurModics-funded
research and development is being undertaken in this area.
Industrial Applications
While it is not the Company's primary focus, the Company occasionally
pursues industrial applications for its PhotoLink technology. The Company only
pursues those applications that are perceived to be high value applications in a
market that is not considered to be price sensitive. To date, revenue associated
with industrial applications has been immaterial and is not expected to be
significant in the foreseeable future.
Research and Development
SurModics' research and development personnel support the sales and
marketing staff in performing feasibility studies, providing technical
assistance to potential licensees, optimizing the coating methodologies for
specific licensee applications, assisting in training licensees and integrating
the Company's technology and know-how into licensee manufacturing processes. In
addition, these personnel work to enhance and expand the PhotoLink technology
through the development of new reagents and new applications.
As medical devices become more sophisticated and complex, the Company
believes the need for optimized surface properties will grow. The Company
intends to continue its development efforts to expand its PhotoLink technology
to provide additional optimized surface properties to meet these needs. The
Company's technical strategy is to target selected coating characteristics for
further development, in order to facilitate and shorten the license cycle. The
Company continues to perform research into applications for future products both
on its own and in conjunction with some of its licensees. Some of the research
and development projects currently being worked on include coatings for
site-specific drug release, bone and cartilage repair, enhanced tissue growth,
long-term blood compatibility and DNA immobilization methods. In addition to
expanding the number of medical applications that may use PhotoLink technology,
the Company is working on improving the coating process for metals, developing a
process for coating the interior diameter of medical devices and expanding the
portfolio of PhotoLink reagents.
The technical staff of the Company consists of 78 employees, including
ten with Ph.D. degrees, six with Masters degrees and 50 with Bachelor degrees,
with expertise in chemistry, biomedical engineering, biology, microbiology, cell
biology and biochemistry. The technical staff is organized into five areas of
specialization: hydrophilicity, microbiology, hemocompatibility, biochemistry
and tissue engineering. In addition, a chemistry group supports the synthesis of
new reagents needed by the other five groups.
In fiscal 1999 and 2000, the Company's research and development
expenses were $5.2 million and $6.8 million, respectively. The Company's
research and development efforts are often funded by commercial licensees and
government agencies. Such research and development revenues were approximately
$2.0 million in both years.
Since its founding, the Company has actively participated in the
federal government's Small Business Innovative Research ("SBIR") program to fund
development efforts. Since 1979, 141 research contracts resulting in revenues of
over $26.0 million have been awarded to SurModics, primarily under the SBIR
program. Grant proposals are generally directed toward the commercial strategies
of the Company. The Company retains commercial rights to discoveries and
technologies resulting from the research and development efforts funded by these
grants. Where possible, licensees' products or substrates are used when
performing research under the grant; thus the results are often directly
applicable to SurModics' licensees. Grant funding has also allowed SurModics to
maintain a larger and more technologically diverse employee base than would
otherwise be possible.
Patents and Proprietary Rights
The Company has taken steps intended to protect PhotoLink related
inventions through a series of patents covering a variety of coating methods,
reagents and formulations, as well as particular medical device applications,
based on or employing the Company's proprietary photoreactive chemistry. The
patents related to the PhotoLink technology include 21 issued U.S. patents, 18
pending U.S. patent applications, 41 issued foreign patents, and 71 pending
foreign patent applications. The Company generally files international patent
applications in parallel with its U.S. applications primarily in Australia,
Canada, Europe, Japan, and Mexico. In addition to the patents related to the
PhotoLink technology, SurModics has seven issued U.S. patents, 22 issued foreign
patents and three pending foreign patent applications related to its diagnostic
technology. There can be no assurance that any of the pending patent
applications will be allowed.
The Company also relies heavily upon trade secrets and unpatented
proprietary technology. The Company seeks to maintain the confidentiality of
such information by requiring employees, consultants and other parties to sign
confidentiality agreements and by limiting access by parties outside the Company
to such information. The Company also does not divulge the detailed chemical
structure of its reagent chemical to anyone, including clients. There can be no
assurance, however, that these measures will prevent the unauthorized disclosure
or use of this information or that others will not be able to independently
develop such information. Additionally, there can be no assurance that any
agreements regarding confidentiality and non-disclosure will not be breached,
or, in the event of any breach, that adequate remedies would be available to the
Company.
Marketing and Sales
The Company markets its PhotoLink technology throughout the world using
a direct sales force consisting of three licensing managers who focus on
specific markets such as cardiology, neurology, urology and orthopedic products.
This specialization fosters an in-depth knowledge of the issues faced by
SurModics' licensees within these markets such as technology changes,
biomaterial changes and the regulatory environment.
Because the sales cycle can take several months from feasibility
demonstration to the execution of a license agreement, the Company focuses its
sales efforts on potential licensees with established market positions rather
than those with only development stage products which may never come to market.
Generally, the PhotoLink technology is licensed on a nonexclusive basis to
medical device manufacturers for use on specific products. This strategy enables
the Company to license the PhotoLink technology to multiple licensees in the
same market. SurModics also targets selling new applications to existing
licensees. The Company believes the sales cycle is much faster in these
situations because the licensee is already familiar with the technology and the
general terms of the license have already been negotiated.
As part of its marketing strategy, the Company publishes technical
literature on each surface capability of the PhotoLink technology (i.e.,
lubricity, hemocompatibility, etc.). In addition, the Company participates at
major trade shows and technical meetings, advertises in trade journals and
through its website, and conducts direct mailings to appropriate target markets.
The Company also offers ongoing customer service and technical support
throughout a licensee's relationship with SurModics. This service and support
begins with a coating feasibility study at no charge to the licensee and also
includes additional services such as assistance in the transfer of the
technology to the licensee, further coating optimization, process control and
trouble shooting, and assistance with FDA submissions for coated product
approval. Certain of these services are billable to the client.
Competition
Competition in the medical device industry has resulted in an increase
in competition in the surface modification market. The Company's PhotoLink
technology competes with technologies developed by Carmeda (a division of Norsk
Hydro, Inc.), Specialty Coatings Systems, Spire Corporation and STS Biopolymers
Inc., among others. In addition, many medical device manufacturers have
developed or are engaged in efforts to develop surface modification technologies
for use on their own products. Most competitors marketing surface modification
to the outside marketplace are divisions of organizations with businesses in
addition to surface modification. Overall, the Company believes the worldwide
market is very fragmented with no competitor marketing to third parties having
more than a 10% market share. Some of the Company's existing and potential
competitors (especially medical device manufacturers pursuing coating solutions
through their own research and development efforts) have substantially greater
financial, technical and marketing resources than the Company.
SurModics attempts to differentiate itself from its competition by
providing what it believes is a high value-added solution to surface
modification. The Company believes that the primary factors customers consider
in choosing a particular surface modification technology are performance, ease
of manufacturing, ability to produce multiple properties from a single process,
compliance with manufacturing regulations, customer service and pricing. The
Company believes that its PhotoLink process competes favorably with respect to
these factors, enabling it to charge a premium price. The Company believes that
the cost and time required to obtain the necessary regulatory approvals
significantly reduces the likelihood of a manufacturer changing the coating
process it uses once a device has been approved for sale.
Because a significant portion of the Company's revenue is dependent on
the receipt of royalties based on sales of medical devices incorporating
PhotoLink coatings, the Company is also affected by competition within the
markets for such devices. The Company believes that the intense competition
within the medical device markets creates opportunities for the Company's
coating technology as medical device manufacturers seek to differentiate their
products through new enhancements or to remain competitive with enhancements
offered by other manufacturers. Because the Company seeks to license its
technology on a non-exclusive basis, the Company may further benefit from
competition within the medical device markets by offering its PhotoLink
technology to multiple competing manufacturers of a device. However, competition
in the medical device markets could also have an adverse effect on the Company.
While the Company seeks to license its products to established manufacturers, in
certain cases the Company's licensees may compete directly with larger, dominant
manufacturers with extensive product lines and greater sales, marketing and
distribution capabilities. The Company also is unable to control other factors
that may impact commercialization of PhotoLink-coated devices, such as the
marketing and sales efforts of its licensees or competitive pricing pressures
within the particular device market. There can be no assurance that products
coated with the PhotoLink technology will be successfully commercialized by the
Company's licensees or that such licensees will otherwise be able to effectively
compete.
The primary competition for SurModics' stabilization products is its
customers' internally developed formulations. The consolidation of the
diagnostic industry increases the availability of internally developed
stabilizers to the market. There are several direct competitors that have
recently emerged, of which Pierce Medical Products, Inc. is the largest. The
Company believes that quick market penetration is the best strategy for
addressing these threats. As in the coating market, the Company also believes
that once its stabilization products are accepted in an FDA-approved diagnostic
test, the likelihood of change is reduced because of the cost and time required
to qualify a new component. SurModics' marketing strategy for its stabilization
products is to develop a strong market presence by offering superior product
performance and technical service.
Manufacturing
In accordance with its licensing strategy, the Company does not perform
the actual coating of its licensees' medical devices, nor does it manufacture
any of these devices. The Company has, however, adopted a strategy of developing
and manufacturing the reagents itself, allowing it to maintain the quality of
the reagents and their proprietary nature, while providing an additional source
of revenue. PhotoLink reagents are specialty photoreactive chemicals that are
prepared using a proprietary formula in small batch processes (as contrasted
with commodity chemicals prepared by large continuous methods). Generally, all
PhotoLink reagents share a similar production process: a water soluble polymer
is synthesized in a glass reactor; reactive photochemical groups are attached to
the polymer; the solution is purified and freeze-dried, thus removing the water
and creating a solid; and the PhotoLink reagents are packaged in standard
quantities in light- and moisture-proof packaging. The reagents are sold dry,
requiring the licensee, in most cases, to simply add water or a water and
isopropyl alcohol mix before application. The Company has developed proprietary
testing and quality assurance standards for manufacturing the reagents and does
not disclose the reagent formulas or manufacturing methods. Although licensees
may purchase the requisite chemical reagents from any source, all have elected
to purchase them from the Company.
The Company also manufactures its 3D-Link Activated Slides. Standard
glass slides are cleaned and pretreated in a multiple-step process. The Company
applies its proprietary PhotoLink coating in a clean room environment, tests the
slides to assure they meet quality standards, and in the final step, packages 25
slides in a box and seals it in moisture-proof packaging.
Finally, the Company also produces its stabilization products. These
products are a group of sterile-filtered liquids that generally share a
three-step production process. A standard recipe of chemicals is mixed in high
purity water, these liquids are sterile-filtered into specific container sizes
under aseptic conditions, and the resultant finished goods are bottled and
labeled.
The Company maintains multiple sources of supply for the key raw
materials used to manufacture its products. The Company does, however, purchase
some raw materials from single sources, but it believes that additional sources
of supply are readily available.
Although not required to follow Good Manufacturing Practice quality
procedures, SurModics does follow such procedures in part to respond to requests
of licensees to establish compliance with their criteria. The Company has not
yet sought ISO 9001 certification but may do so in the future.
Government Regulation
Although PhotoLink technology itself is not directly regulated by the
FDA, the medical devices incorporating this technology are subject to FDA
regulation. The burden of demonstrating safety and efficacy of such medical
devices, the ultimate criteria applied by the FDA, rests with the Company's
licensees (the medical device manufacturers). Medical products incorporating the
PhotoLink technology may generally be marketed only after 510(k) or PMA
applications have been submitted and approved by the FDA, which process can take
anywhere from six months for a 510(k) application, to two or three years for a
PMA application. These applications are prepared by the manufacturer and contain
results of extensive laboratory toxicity, mutagenicity and clinical evaluations
on animals and humans conducted by the manufacturer.
The Company maintains confidential Device Master Files at the FDA
regarding the nature, chemical structure and biocompatibility of the PhotoLink
reagents. Although the Company's licensees do not have access to these files,
the licensees may, with the permission of the Company, reference these files in
any medical device submission to the FDA. This process allows the FDA to
understand in confidence the details of the PhotoLink technology without the
Company having to share this highly confidential information with its licensees.
Recent U.S. legislation allows device manufacturers, prior to obtaining
FDA approval to market a medical device in the U.S., to manufacture the device
in the U.S. and export it for sale in international markets, which generally
allows SurModics to realize earned royalties sooner. However, sales of medical
devices outside the U.S. are subject to international requirements that vary
from country to country. The time required to obtain approval for sale
internationally may be longer or shorter than that required by the FDA.
Employees
As of December 1, 2000, SurModics had 118 employees of whom 78 were
engaged in development or manufacturing positions, with the remainder in sales,
marketing, quality or administrative positions. Of SurModics' employees, 11 hold
Ph.D. degrees and 13 hold Masters degrees. The Company is not a party to any
collective bargaining agreements and believes that its employee relations are
good.
Management believes that the future success of the Company will depend
in part on its ability to attract and retain qualified technical, management and
marketing personnel. Such experienced personnel are in high demand, and the
Company must compete for their services with other firms which may be able to
offer more favorable benefits.
ITEM 2. PROPERTIES
In May 1999, SurModics purchased the land and building it currently
occupies in Eden Prairie, Minnesota for approximately $3.2 million. The purchase
of the building was internally funded and remains unencumbered. The building has
approximately 64,000 square feet of space. The Company occupies approximately
57,000 square feet and rents the remaining 7,000 square feet to one tenant. The
Company believes that projected capacity of the manufacturing area is adequate
to service the needs of its licensees for the foreseeable future. However, the
Company is beginning to explore the need for a redundant manufacturing facility
as part of its disaster recovery planning.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to nor is any of its property subject to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Use of Proceeds for the period ending September 30, 2000.
(1) Effective Date: March 3, 1998
SEC File Number: 333-43217
(2) Offering Date: March 3, 1998
(4)(i) The offering has terminated; all securities registered were sold.
(4)(ii) Managing Underwriter: John G. Kinnard and
Company, Incorporated
(4)(iii) Title of Securities: Common Stock
(4)(iv) Amount Registered: 4,600,000
Aggregate Offering Price: $17,250,000
Amount Sold: 4,600,000
Aggregate Offering Price Sold: $17,250,000
(4)(v) Underwriting Discounts and Commissions $ 1,293,750
Other Expenses $ 435,148
Total Expenses $ 1,728,898
All the above items represented direct or indirect payments to others.
(4)(vi) Net Offering Proceeds $15,521,102
(4)(vii) Use of Net Offering Proceeds:
Research and development $ 2,610,000
Sales and marketing $ 1,536,000
Administration $ 192,000
Building and equipment upgrades $ 8,095,000
Patent protection $ 270,000
Working capital and general corporate
purposes $ 1,041,000
Money market funds $ 1,777,102
All the above items represented direct or indirect payments
to others.
(b) The information required by Item 5 relating to the Company's Common
Stock and other shareholder matters is incorporated herein by reference to the
section entitled "Stock Listing and Price History" which appears in the
Company's 2000 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five
fiscal years ended September 30 is derived from our audited financial
statements. The financial data set forth below should be read in conjunction
with the Company's consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
contained in Item 7.
Fiscal Year
------------------------------------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Total revenues $18,279 $13,494 $9,779 $ 7,583 $ 6,183
Operating income (loss) 5,333 2,419 948 37 (415)
Net income (loss) 4,240 4,360* 1,637 236 (194)
Diluted net income (loss) per share .25 .27* .12 .02 (.02)
Balance Sheet Data:
Cash and short-term investments $17,357 $5,922 $4,870 $ 1,948 $ 3,845
Total assets 50,749 31,958 24,305 6,450 6,046
Retained earnings (accumulated deficit) 2,077 (2,163) (6,523) (8,160) (8,395)
Total stockholders' equity 48,303 29,719 22,698 5,102 4,740
* Net income for the twelve months ended September 30, 1999 includes the
reversal of an income tax valuation reserve totaling $2,074,000. To make the
results comparable between years, excluding the income tax reversal would result
in net income of $2,286,000 and diluted earnings per share of $0.14.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The Section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2000 Annual Report to Shareholders
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investment portfolio consists of U.S government and
government agency obligations and investment grade, interest bearing corporate
debt securities with varying maturity dates, the majority of which are five
years or less. The Company estimates that a 10% increase in interest rates would
result in an approximate $380,000 decrease in the fair value of the its
available-for sale securities as of September 30, 2000, but no material impact
on the results of operations or cash flows.
Although the Company conducts business in foreign countries, its
international operations consist primarily of sales of reagent and stabilization
chemicals. Additionally, all sales transactions are in U.S. dollars.
Accordingly, SurModics does not expect to be subject to material foreign
currency risk with respect to future costs or cash flows from our foreign sales.
To date, the Company has not entered into any foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The balance sheets as of September 30, 2000 and 1999 and the statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended September 30, 2000 together with the Report of Independent
Public Accountants contained on pages 14 through 26 of the Company's Annual
Report to Shareholders for the year ended September 30, 2000 are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Position
- ---- --- --------
Dale R. Olseth 70 Chairman and Chief Executive Officer
James C. Powell 51 President and Chief Operating Officer
Stephen C. Hathaway 45 Vice President and Chief Financial Officer
Patrick E. Guire, Ph.D. 64 Senior Vice President of Research and
Chief Scientific Officer
Walter H. Diers Jr. 49 Vice President of Corporate Development
Marie J. Versen 39 Vice President of Quality Management and
Regulatory Compliance
Dale R. Olseth joined the Company in 1986 as its President, Chief
Executive Officer and a director of the Company and has served as Chairman since
1988. Mr. Olseth also serves on the Board of Directors of The Toro Company. He
served as Chairman or President and Chief Executive Officer of Medtronic, Inc.
from 1976 to 1986. From 1971 to 1976, Mr. Olseth served as President and Chief
Executive Officer of Tonka Corporation. Mr. Olseth received a B.B.A. degree from
the University of Minnesota in 1952 and an M.B.A. degree from Dartmouth College
in 1956.
James C. Powell joined the Company in 1987. He became Vice President of
Technical Operations in 1992 and was elected President and Chief Operating
Officer in 1998. He was employed at Precision-Cosmet Company, Inc., a
manufacturer of contact and intraocular lenses, from 1978 until he joined
SurModics. Mr. Powell received a B.S. degree in wood sciences from Texas A&M
University in 1972 and an M.S. degree in polymer science in 1975 from the
University of Washington.
Stephen C. Hathaway joined the Company as its Vice President and Chief
Financial Officer in September 1996. Prior to joining SurModics, he served as
Director of Finance for Ceridian Employer Services, Ceridian Corporation from
1995 to 1996. Prior to that, Mr. Hathaway was Vice President - Finance &
Operations for Wilson Learning Corporation from 1988 to 1995. He also spent ten
years with Arthur Andersen LLP. Mr. Hathaway received a B.S. degree in
accounting from Miami University in 1977 and became a Certified Public
Accountant in 1980.
Patrick E. Guire, Ph.D. is a co-founder of the Company and has served
as Senior Vice President of Research and Chief Scientific Officer and a director
since 1980. Dr. Guire is responsible for the research affairs of the Company.
Prior to founding SurModics, Dr. Guire was employed by Kallestad Laboratories,
Inc. as a senior scientist from 1978 to 1979 and was a researcher at the Midwest
Research Institute, Inc. in Kansas City, Missouri from 1972 to 1978. He received
a B.S. degree in Chemistry from the University of Arkansas, Fayetteville in 1958
and a Ph.D. in biochemistry from the University of Illinois in 1963.
Walter H. Diers, Jr. joined the Company in 1988 and currently serves as
Vice President of Corporate Development. He served as a consultant to several
small, high technology companies from 1984 until he joined SurModics. Prior to
that, he was the Controller of the Laserdyne division of Data Card Corporation.
Mr. Diers received a B.S. degree in economics and a B.S. degree in business in
1977 and an M.B.A. degree in finance in 1979 from the University of Minnesota.
Marie J. Versen joined the Company in 1987, and in 1996 became its Vice
President of Quality Management and Regulatory Compliance. She was previously
employed at Precision-Cosmet Company, Inc. from 1983 to 1986. Ms. Versen
received a B.S. degree in chemical engineering from the University of Minnesota
in 1983.
The executive officers of the Company are elected by and serve at the
discretion of the Board of Directors.
The information required by Item 9 relating to directors and compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein
by reference to the sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" which appear in the Company's
definitive proxy statement for its 2001 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the sections entitled "Principal Shareholders" and Management Shareholdings"
which appear in the Company's definitive Proxy Statement for its 2001 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its 2001 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on the page following signatures.
(b) Reports on Form 8-K. A report on Form 8-K was filed
on July 12, 2000 reporting under Item 5 the issuance
of a press release announcing the Company's licensing
agreement with Motorola, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SURMODICS, INC.
("Registrant")
Dated: December 22, 2000 By: /s/ Dale R. Olseth
Dale R. Olseth
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant, in the capacities, and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints DALE
R. OLSETH and STEPHEN C. HATHAWAY as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
/s/ Dale R. Olseth Chairman, Chief Executive December 22, 2000
Dale R. Olseth Officer and Director (Chief
Executive Officer)
/s/ Stephen C. Hathaway Vice President and Chief December 22, 2000
Stephen C. Hathaway Financial Officer
(Chief Financial and
Accounting Officer)
/s/ Donald S. Fredrickson Director December 18, 2000
Donald S. Fredrickson, M.D.
/s/ James J Grierson Director December 18, 2000
James J. Grierson
/s/ Patrick E. Guire Director December 22, 2000
Patrick E. Guire
/s/ Kenneth H. Keller Director December 19, 2000
Kenneth H. Keller
/s/ David A. Koch Director December 20, 2000
David A. Koch
/s/ Kendrick B. Melrose Director December 19, 2000
Kendrick B. Melrose
/s/ John A. Meslow Director December 19, 2000
John A. Meslow
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-K
For the Fiscal Year Ended September 30, 2000
SURMODICS, INC.
Exhibit
3.1 Restated Articles of Incorporation, as amended--incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 1999, SEC. File No. 0-23837
3.2 Bylaws, as amended to date--incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1998, SEC. File No. 0-23837.
10.1* Company's Incentive 1987 Stock Option Plan, including specimen of
Incentive Stock Option Agreement--incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on form SB-2, Reg. No.
333-43217
10.2* Company's Incentive 1997 Stock Option Plan, including specimen of
Incentive Stock Option Agreement--incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on form SB-2, Reg. No.
333-43217
10.3* Form of Restricted Stock Agreement--incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on form SB-2, Reg.
No. 333-43217
10.4* Form of Non-qualified Stock Option Agreement--incorporated by reference
to Exhibit 10.5 to the Company's Registration Statement on form SB-2,
Reg. No. 333-43217
10.5 Form of License Agreement--incorporated by reference to Exhibit 10.6 to
the Company's Registration Statement on form SB-2, Reg. No. 333-43217
10.6 License Agreement with Abbott Laboratories dated November 20, 1990, as
amended--incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on form SB-2, Reg. No. 333-43217
10.7 Purchase and Sale Agreement dated March 31, 1999 between the Company
and Prairie View Jack Ltd.--incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1999, SEC. File No. 0-23837.
10.8* SurModics, Inc. Executive Income Continuation Plan--incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1999, SEC. File No. 0-23837.
13 Portions of Annual Report to Shareholders for the fiscal year ended
September 30, 2000 incorporated by reference in this Form 10-K.
23 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page of this Form 10-K).
27 Financial Data Schedule
- ----------------
*Management contract or compensatory plan or arrangement