Surmodics, Inc.

SRDX):

Phil Ankeny – SVP & CFO Bruce Barclay – President & CEO

Rick Rinkoff – Craig-Hallum Ross Taylor – CL King & Associates Ernest Andberg – Feltl & Co. Suraj Kalia – SMH Capital Daniel Owczarski – Avondale Partners

Thank you, Evans. Good afternoon and welcome to SurModics fiscal 2009 second quarter conference call.

Thank you for joining us today. Our press release reporting quarterly results was issued earlier this afternoon and is available on our website at www.surmodics.com.

Joining me on the call today is Bruce Barclay, our President and Chief Executive Officer. Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible through the Investor Relations section of the SurModics Web site, where the audio recording of the webcast will be archived for future reference.

I will remind you that some of the statements made during the call maybe considered forward-looking. The 10-K for fiscal year 2008 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made during this call.

The company does not undertake any duty to update any forward-looking statements, as a result of new information or future events or developments. On today's call, I will cover the company’s quarterly financial results.

Bruce will then highlight quarterly achievements, revenue drivers, and progress against our published fiscal 2009 company goals and finally, we will open the call to your questions. I will begin with an overview of second quarter financial results and follow that with more specific information on discreet line items.

My discussion of revenue will break it down by component and market and also review significant revenue drivers. Finally, I will cover expenses and review our balance sheet and cash flow.

Second quarter revenue was $20.9 million, compared with $25.7 million in the year earlier period. The company reported operating income up $6.2 million, compared with $7.2 million in the prior year period.

Net income was $4.2 million during the period, compared with $5.1 million in the second quarter of 2008. Diluted earnings per share were $0.24, compared with $0.28 in the prior year period.

Let me start with the review of revenue. First I will review our results across markets.

As discussed last November and consistent with our patient focus vision SurModics has reorganized into clinically and market focused business unit to improve the visibility, marketing and adoption of our broad array of technologies. In connection with these organizational changes, we are now reporting our revenue under two segments, therapeutic and diagnostic.

The diagnostic segment contains our In Vitro Technologies business unit, while the therapeutic segment consistent of a various drug deliver and surface modification technologies. To help investors understand the moving parts of our business, we provide additional disclosure by breaking out the therapeutic segment revenue into three distinct markets, Cardiovascular, Ophthalmology and Other Markets.

Revenue from SurModics Pharmaceuticals formerly Brookwood Pharmaceuticals in Alabama, is categorized into these three market areas. As you might expect, given its largely pharma and biotech customer base, a substantial amount of SurModics pharma's revenue falls into other markets, such as oncology, neurology and dermatology to name a few.

Beginning with the therapeutics segment and the cardiovascular market, revenue was $9.6 million for the quarter, a 23% decrease from $12.4 million in the second quarter of fiscal 2008. To put these results in the proper context, let me discuss the CYPHER Sirolimus-eluting Coronary Stent from Cordis Corporation, a Johnson & Johnson company.

Earlier this month, J&J reported worldwide CYPHER sales of approximately $252 million, down 37% year-over-year, as the product continues to be impacted by the U.S. market entries of Abbott Xience and Boston Scientific’s Promus drug-eluting stent.

CYPHER sales in the U.S. were $68 million, while OUS sales were 184 million.

J&J reported that it had an estimated 15% market share in the U.S. and 31% outside the U.S.

during the quarter. While competitive products have eroded CYPHER’s market share, they have also contributed to the growth and sustainability of the overall drug-eluting stent market.

This is evidenced by the increase in drug-eluting stent penetration rates this quarter, to an estimated 74% in the U.S., up from 65% just a year earlier. This trend is certainly positive for SurModics, given our continued broad-based participation in the drug-eluting stents space.

Getting back to our Cardiovascular results, while total cardiovascular revenue was down 23% year-over-year, the growth in our board portfolio of revenue stream help dampen the impact of the 37% year-over-year decrease in CYPHER sales. On a sequential basis, second quarter Cardiovascular revenue decreased 8%, compared with the first quarter of 2009, roughly in line with the 7% sequential decrease in CYPHER sales.

Next in Ophthalmology, we generated revenue of $3.7 million in the second quarter, compared with $3 million in the year ago quarter. On a sequential basis, excluding the $43.8 million of revenue that was recognized in the first quarter, as a result of the termination of the Merck agreement, Ophthalmology revenue increased significantly from approximately $1 million in the first quarter.

Our technical teams are extremely busy, working on the multiple customer projects spread across our various platforms for drug delivery in the eye. Bruce will speak more about this opportunity in a few minutes.

Rounding out the Therapeutic segment, revenue in Other Markets was $2.9 million for the quarter, compared with $4.8 million in the second quarter of fiscal 2008 and $3.8 million in the first quarter of fiscal 2009. The decrease in Other Markets revenue principally reflects lower R&D activity, on some customer projects in this area.

As we have said in the past, our work on development projects can add and flow depending on the varying customer needs relative to the projects, resulting a non-linear revenue patterns for individual projects. We remain enthusiastic about this area and do not believe that so, lower second quarter revenue, reflect any trends or are indicative of future results.

Lastly, revenue for our In Vitro Technologies business reported under the diagnostic segment was $4.7 million, compared with $5.5 million in the prior year. The decrease is driven almost entirely by lower royalty revenue.

As a reminder, the second quarter was the final period in which SurModics earned royalty revenue from the lateral flow immunoassay technology patents license to Abbott. Because those patents expired in the first quarter of fiscal 2009 and the royalty revenue earned from Abbott in the second quarter was significantly lower than the year ago quarter.

On a sequential basis diagnostic revenue increased 11%, compared with the first quarter, driven by 39% growth in product sales. As we discussed in last quarter's call, sales of our In Vitro products will weak in the first quarter, as many customers had cutback on inventory investment.

We understand this phenomenon was not unique to SurModics, while we cannot say with certainty of customers buying patents have returned entirely to normal, we were pleased with the strong results for our In Vitro products following the difficult first quarter of fiscal 2009. On a revenue component basis, royalties and license fees were $10.1 million, compared with $13.8 million in the year ago quarter.

On a sequential basis, excluding the deferred license fee revenue from Merck that was recognized in the first quarter of 2009, as well as the $9 million license fee that was received in the first quarter. Royalties and license fees were roughly flat, compared with the first quarter.

Product sales were $4.8 million, up 24% sequentially and 2% increase from $4.7 million in the second quarter of fiscal 2008. Encouragingly, many customers not just those in our diagnostic area, but more broadly across our customer base appear to largely return to more typical buying patterns.

Finally, research and development revenue was $6.1 million during the quarter, a 15% decrease from $7.2 million in the second quarter of fiscal 2008. Included in second quarter R&D revenue, is some revenue from Merck associated with our remaining activities on our ophthalmology projects with Merck.

In light of weaker spending by many companies in the current environment, including healthcare companies, we are satisfied with these results. We are continuing to see customers take a more cautious approach to R&D investment than they have in the recent past.

Selected large customers are facing more constrained budgets for R&D project and smaller customers are confronting an extremely difficult financing market. Fortunately, we are seeing some signs of improvement.

Further our broad portfolio customer projects, has allowed us to maintain strong overall R&D revenue, with the ultimate goal of helping advanced customer products to the marketplace. Next, I will turn to a review of our operating expenses.

We are devoted to maximizing profitability and optimizing our resources and have taken certain actions to reduce expenses from the first quarter to the second. Total operating expenses excluding product costs for the second quarter were $12.9 million.

We have reduced our operating expenses, excluding product costs by nearly $3.5 million or 21% compared with the year ago quarter. On a sequential basis, if you also exclude the IPR&D charge and the restructuring charges from the first quarter of fiscal 2009, we have reduced our operating expenses excluding product costs by over $1.1 million or 8%.

Building off the organizational restructuring implemented in November, which we expect to save SurModics approximately $2 million on an annualized basis, the company has implemented additional expense control measures. For example, the Senior Management Team offer to take a salary reduction that took effect this month and going forward, we will continue to manage expenses carefully.

Even though we are prudently managing expenses SurModics continues to invest significant resources in support of our technology leadership and innovation. In the second quarter, we dedicated 41% of revenue to R&D.

Overall R&D expenses of $8.5 million constituted roughly two thirds of total operating expenses excluding product cost. Our robust R&D capabilities have been further enhanced by the recent changes in our organizational structure, including the implementation of a more centralized R&D function design to improve the effectiveness of existing and new technologies across multiple clinical applications.

We expect these changes to improve the return on R&D investments, as we can now more easily allocate resources to selected opportunities across the company. Compared to historical levels, our R&D expenses were 18% lower than the year ago quarter and 9% lower sequentially compared with the first quarter.

SG&A expenses were 4.4 million, a 27% decrease compared with the year ago quarter and 6% lower sequentially compared with the first quarter. Now let's turn to our strong balance sheet, which provides an important competitive advantage for SurModics in these difficult economic times.

As of March 31st, SurModics had a cash and investments balance totaling 58.9 million and zero debt. Cash from operations was 16.9 million for the first six months of fiscal 2009 compared with 8.9 million in the first six months of fiscal 2008.

For the second quarter, operating cash flow was negative 550,000 compared with positive 4.5 million in the year ago quarter. A few factors combined to make operating cash flow slightly negative for the quarter.

Primary among them is the fact that the second quarter is routinely our lowest operating cash flow quarter, as we make two estimated tax payments in January and March during the period compared with one payment in other quarter. Additionally, our first quarter operating cash flow was higher than typical as a result of the cash infusion of $9 million from Merck and while the associated taxes were accrued for P&L purposes in the first quarter, the cash taxes were not paid until the second quarter.

The final contributing factor related to accounts receivable which was a $1.1 million use of cash in the second quarter after been at $2.8 million source of cash in the first quarter. We anticipate a return to positive quarterly operating cash flow for the upcoming quarters.

Our strong financial position has allowed us to remain active in the deployment of capital. Our goal is to enhance shareholder value through the prudent balancing of share repurchase as well as business development and facilities related investments.

In the second quarter, we repurchased approximately $2.2 million of SurModics stock. Since the November 2007 announcement of our second share repurchase program through March 31st of 2009, we have purchased over 900,000 shares and it has been approximately 27.7 million.

We have approximately 7.3 million remaining under this second $35 million authorization. In February, SurModics further boosted its financial flexibility by finalizing a credit agreement with Wells Fargo that extends the company up to $25 million under an unsecured revolving credit facility for period of two years.

Our profitable business model and healthy financial position allowed us to take advantage of the current low interest rate environment and lock in favorable terms. This new credit line enhances our liquidity position and provides additional flexibility in this uncertain environment.

The company had no balance outstanding under the agreement as of March 31st and does not have any immediate plans to carry a balance. The decision to put in place the line of credit was by no means a reflection of any concerns we have about the company or our prospects, rather we view the credit facility as a prudent tool to leverage in any economic environment, particularly the current one.

And the ability to lock in favorable terms was attractive, especially since not all companies are afforded that luxury. With that, I will now turn the call over to Bruce.

Thanks, Phil and thanks to everyone for joining us on the call this afternoon. My comments today will briefly highlight quarterly achievements, industry and customer trends, SurModics positioning and outlook and conclude with a review of progress against our published fiscal 2009 goals.

SurModics is pleased to deliver solid financial results for the second quarter. Company also made notable progress during the period towards meeting our fiscal 2009 goals.

This progress was particularly evident in the areas of newly signed license agreements and customer product launches. Our second quarter results are especially gratifying coming on the heels of soft product sales in the first quarter, which were impacted by the difficult economic environment.

Product sales increased 24% on a sequential basis compared with the first quarter. While the market conditions remain challenging, we believe the company's unique technologies and strong financial condition position us favorably for both the near and long term.

SurModics portfolio of stable recurring revenue products and projects continues to demonstrate its significant value, despite the realities associated with the one-time charges and other events such as determination of the Merck agreement, the expiration of our diagnostic patents and with that the Abbott royalty stream and declining royalties from CYPHER. Against this back drop, the company's numerous advantages can sometimes be unsecured.

Among the most prominent of these advantages is our participation with healthcare customers in multiple large markets where our technology is used to create sophisticated diagnostic tools and to solve a variety of unmet clinical needs, many in areas that are not elective such as cardiovascular, ophthalmology, oncology, and the alike. Additionally, our enabling portfolio of technologies is benefited by the demographics of healthcare, including the rapid expansion of the over 60 population.

Importantly, the potentially growth in drug delivery remains strong, we have a technology and expertise to help meet this growing demand. Company continues to execute against our long-term strategy and invest in R&D that will foster future growth.

We are implementing our strategies to build an enduring great company by capitalizing on multiple revenue generating opportunities as described in the following six areas. First, one of the unique characteristics of our business is our ability to maintain active and ongoing relationships with a diversified set of customers and to partner in a range of markets and clinical applications.

In the second quarter, we generated revenue from 12 different clinical and marketing areas, demonstrating the breadth of our capability. SurModics is further differentiated from competitors by our proven innovative technology and successful FDA track record, which has enabled multiple customers to successfully develop and commercialize new products.

We believe our broad portfolio of technologies and the deep capabilities of our exceptional employees will allow us to continue to add new customer projects. Two, another important differentiator from our competitors is the steady recurring source of revenue drive from our Hydrophilic and In Vitro businesses that serve as the backbone for our consistent ongoing financial performance.

Our strategy is to protect and enhance our core businesses to sustain and expand these revenue streams. Three, beyond these steady recurring performers, we have a number of very interesting opportunities in our pipeline who's outcomes both timing and magnitude can be more difficult to predict with certainty but which have the potential to become extremely valuable.

Among them is Ophthalmology related technologies, we continue to add new Ophthalmology projects and are making excellent progress in our partner supported product development programs for both back-of-the-eye and front-of-the-eye diseases with both large and small molecule drugs. Today we have more paid customer projects in our Ophthalmology pipeline than we have ever had in our history.

On last quarter's earnings call, we mention that we had signed one of the largest R&D agreements in our recent history with an Ophthalmology customer. Work on that program is progressing as anticipated and we are currently negotiating a significant extension to that R&D contract which we expect will also be in the millions of dollars.

In addition, our Ophthalmology group will have a strong presence again this year at the upcoming ARVO Meeting, being held May 3rd to May 7th in Fort Lauderdale, Florida. SurModics continues to make significant progress with our drug delivery systems for Ophthalmology, as demonstrated by the results from our ongoing development programs, we will be presenting at the ARVO Meeting.

We are especially excited about that Dr. Pravin Dugel will be delivering a podium presentation featuring the I-vation TA 36 months clinical results from the Phase I safety and preliminary efficacy trail which is a very significant milestone for us and our company.

In addition to Dr. Dugel's podium presentation on these clinical results, SurModics will be featuring three other areas of research at the post of sessions.

Number four, our SurModics Pharmaceutical business, is pursing a number of exciting growth opportunities, and our team in Alabama remains busy and is producing encouraging results. We are especially pleased that SurModics Pharmaceuticals generated our first license fee revenue during the second quarter, demonstrating good progress toward our business model.

Further, the PR Pharma acquisition opens new doors. We are pleased to report that the customer projects acquired from PR Pharma are integrating well and the transfer is complete.

These projects generated a four quarter of revenue in the second quarter. Five, our Cardiovascular franchise remains healthy.

An important part of this business lies in coated and drug-eluting stents. Our portfolio of licensed stent related customer product opportunities both on the market and current pipeline products, numbers in double-digits.

Products that currently contribute to royalty revenue include both CYPHER and Medtronic Endeavor Drug-Eluting Stent. In a positive recent development, Medtronic received regulatory approval in Japan for Endeavor and they expect to launch the product next month following reimbursement approval.

In January, we signed a second license with Nexeon MedSystems to collaborate on the development of a FINALE coated stent system to treat renal artery disease. Separately, Nexeon continues to make good progress in their European clinical trial, evaluating the FINALE coated coronary stent system as an alternative to drug-eluting stents.

Another positive development was XTENT's recent receipt of a CE Mark for their drug-eluting stent, which is capable of delivering multiple custom link stents to treat lesions and numerous vessels with a single delivery system. We call that XTENT stent delivery system incorporates SurModics hydrophilic coating as well.

One final note on stents, J&J's next generation drug-eluting stent product, the NEVO Sirolimus-eluting Coronary Stent, which incorporates SurModics hydrophilic coating technology on the delivery system, is also making good progress and quarter is continues to be enthusiastic about the product. Six month data for NEVO will be presented at the EuroPCR conference in May and results from this trial are expected to support the CE Mark approval in Europe and other countries that accept CE Mark designation.

Remember that the second generation Conor Medsystems product produces a royalty favorable for SurModics compared to the first generation CYPHER product. Outside of drug-eluting stents, but within cardiovascular, we are both working with and in advance discussion with, a number of companies developing exciting new products, such as minimally invasive heart valves, stent grafts for peripheral applications and drug-eluting of balloons, where our technologies and capabilities are particularly relevant and valued.

And six, finally in addition to the multiple growth drivers I have just mentioned SurModics had a broad portfolio of opportunities, enables us to continue to diversify our revenue streams and to deliver solid growth long-term. We regard our business as a portfolio of opportunities, with more than 100 licensed products generating royalties and nearly 200 projects in our pipeline not hit on the market.

As of March 31, we had total of 103 licensed customers, several with multiple licenses, up from 97 a year ago. SurModics' customers had 102 licensed product classes on the market generating royalty revenue compared with 100 a year ago.

The total number of license products not yet launched was 106, up from 103 a year ago. Major non-license opportunities stood at 92 on March 31st, compared with 90, a year ago.

In total, the company has 198 potential commercial products and development. Switching gears, the changes to our organizational structure and our cost cutting initiatives, undertaken in the first quarter of fiscal 2009.

I have already begun to yield positive results from both financial and operational standpoints. We have made additional cost structure adjustments, as we vigorously focused on managing cost to improve operating efficiency and to boost our profitability going forward.

As Phil mentioned, we have reduced our operating expense, excluding product costs, 21% year-over-year and 8% sequentially. SurModics is leveraging its financial strength to generate shareholder value, in a variety of ways.

Our number one priority, is maintaining the financial flexibility necessary to withstand, whatever difficult market conditions arise. We maintain several other areas of focus.

This includes our continued investment in the development and cGMP manufacturing facility in Alabama, which is currently tracking to our timeline and budget. We also remain opportunistic on the business development front, as we considered new opportunities that are emerging as a result of the currently challenging environment.

Finally, we will continue to execute our share repurchase program in appropriate. With that review of our business and our revenue drivers, I want to revisit the high level outlook for fiscal 2009, we provided in our yearend conference call, in early November 2008.

As a reminder at that time, we articulated an expectation of roughly flat revenue and diluted EPS on a non-GAAP basis compared with the fiscal 2008 non-GAAP results. This high level outlook assumed a continued decline in CYPHER royalties and the discontinuation of the Abbott royalty stream beginning in the fiscal third quarter.

As the year has progressed, our expectations continue to be adversely influenced by the difficult economic environment, which has impacted our customer’s decision making process, on the products they buy, the projects they fund, new projects they might approve and the sales of their own products, which impacted royalty revenue we receive. In January, when we discussed our first quarter results, I indicated that selected fundamentals had deteriorated appreciably since our November call.

While we have seen pockets of recovery and there was relative strength in our second quarter results, the environment remains challenging and the near-term visibility is limited in some areas. Despite this difficult climate, we still see potential path that could allow us to reach the fiscal 2009 outlook, we provided in November.

We continue to work with numerous significant customers on projects in cardiovascular, ophthalmology and other markets that have the potential to generate R&D fees, as well as license fees and milestone of a magnitude that would meaningfully impact our full year fiscal 2009 results. However, predicting the timing of all of these events is more difficult.

While we are comfortable with the company’s healthy outlook overall and our long-term growth potential, our ability to achieve specific financial results in a narrow timeframe is less certain. Today, based on these factors and how are year is tracking, we are less optimistic of achieving the revenue goal, we articulated in November, but our disciplined expense management allows us to be more optimistic about the potential to achieve results, close to our EPS outlook.

Finally, I will touch on SurModics fiscal 2009 goals. There only midway through the year and several of these goals are designed to measure a full year's activity.

The view are published fiscal 2009 goals in the entirety, please visit our website. As in previous years, these objectives are designed to offer insight and to how we manage our business and to provide a view of the company's future opportunities.

The goals are aspirational in nature only, as we often don’t control the timing of all aspects related to our customer objectives. This year we articulate a goal of signing 18 new licenses with our customers.

I am pleased to report that SurModics had another strong quarter on this front, as we added six new license agreements with customers, bringing our fiscal year-to-date total to 14. We have also already met one of our fiscal 2009 goals with the signing of a new customer license using SurModics drug delivery technology outside of ophthalmology or rather in the cardiovascular space.

Additionally, we continue to make progress toward our objectives of signing an ophthalmology license and to customer license is relating to our SurModics pharmaceuticals technology. Another goal was our expectation that SurModics customer would launch 10 new product classes in fiscal 2009.

Our customers delivered a strong quarter with customers launching five new product classes in the marketplace increasing our fiscal 2009 total to seven. We are pleased with the progress made against our ambitious fiscal 2009 goals, and believe we are on-track to achieve our remaining goals by the end of our fiscal year.

In closing, SurModics continues to demonstrate leadership and expertise in the application of biomaterials to the healthcare industry, where the ultimate benefit of patients around the world. Our financial position remains healthy, which reports us the flexibility and the ability to meet a variety of challenges and capitalize on opportunities, as they present themselves.

I am excited about our future and confident that we continue o deliver sustainable long-term shareholder value for our investors. Operator that concludes our prepared remarks, we'd now like to open up the call to any questions, that there maybe.

Well, congratulations on a better quarter than one before that. I had a couple of questions here, first of all you said the R&D includes a little bit of Merck.

Could you tell us how much that was and why you’re being so forth coming could you tell us what Abbott was in the quarter?

Yes. Rick, the Merck component was about a $1.2 million and on the Abbott front, we are not prepared to disclose that number, but we did articulate that it was down, down from a year ago.

What was in the year ago?

Well, the year ago we gave the full year number.

Was it less than Merck this quarter?

Not prepared to answer at that level.

Okay. You talked about your big ophthalmology contract and then I believe you used the words extending the relation and what words did you use and what should we infer from that?

I've already put my script away, Rick. So, I don’t remember exactly the words I used other than.

Well, give us a new word.

Other than as we mentioned in the last conference call we find a very significant agreement with the customer in a million of dollars for development activities and the team is very, very busy implementing those activities and doing a very nice job. In the course of that, this customer wants additional work and we are in the process of negotiating and we expect to be finalizing here in the not too distant future.

Additional R&D contract for additional work again is expected to be in the millions of dollars.

Okay. So they are expanding the agreement.

They are not just extending it and maybe that was a misinterpretation I had. On that front ophthalmology was $3.7 million about how of it might have been in that customer?

Getting back to expanding versus extending, I am not sure that I understand the difference other than, I am sure you understand the development programs the companies have began with In Vitro and animal and move forward. So, it's more like that, more long just extending the development process.

If you want to call that expanding, that's fine.

Okay.

And you second question was around ophthalmology, I am sorry, I think I cut you off.

You report $3.7 million in the quarter, how much of it came from that one customer?

I don't have that number in front of me.

Was it a material amount you believe or was it just one of many customers in that number?

Well, again, we've got several customers more than we've ever had in our history. We have contracts with those companies that many of which are in excess of $1 million a piece.

How they play out overtime is very dependent upon the program and specific request that they have. So I can’t – I guess without having those numbers in front of me I don’t – I can’t tell exactly how much played out by customer in this quarter.

Okay. And one more question.

Sure.

In the script that you no longer have, did you talk about minimally invasive heart valves or something in that nature?

I pulled the script back. I did talk about that.

Okay. Is that transcatheter heart valves that we're talking about?

There are, yes, minimally invasive valve replacements, so using many of the techniques that those of you who got to play with cardiovascular space would know about using those techniques, avoiding open heart surgery.

And what would SurModics be adding to those products?

Well, potentially a few things. We could be adding drug delivery technologies, we could be adding technologies like our FINALE for healing, coating, which is designed to minimize the impact of a foreign body within the body, and then of course, because it's minimally invasive our hydrophilic coating on delivery system.

So, I can't be specific at this point, I would say that we have a variety of technologies in play there.

Okay. And one more last question.

There aren't products like that on the market now? Are you in any of them, or are these all development contracts you're talking about?

We've not been authorized to talk about who in particular we're working with at this point.

But should we infer that some of the products are already being marketed and paying you royalties, or that's still yet to come maybe?

I think that's a pretty small world you're talking about there, so we really can't comment Rick.

Alright. Thanks.

Good try, though.

Hi. I might just start with a couple of questions related to the model of your future quarters.

But your R&D revenue and expense line excluding what you had some marked this quarter, are those kind of good benchmarks, uses your base for the next several quarters?

We don't really project on our revenue line item basis, but I think the general level of activity we have right now, we do see as generally speaking, sustainable. But I wouldn’t give you a lot more precision than that.

Okay. And how about on the expense side.

I mean occasionally you have been more open to projecting there but this quarter’s expense number for R&D. a good base line to use for the next several quarters?

I'd say on the R&D side it would probably be flat and modestly up going forward and SG&A would probably be flat to modestly down.

Okay, okay. And you mentioned that your senior management has been taking a fair reduction in salary.

Is that going to be offset it all by possible potential increases in incentive compensation or potentially some more stock base compensation?

No its not.

Okay. And two other questions, I missed the beginning of your call and I just wondered if you talked about what's your hydrophilic revenues were in the quarter and whether they were up or down versus the prior year just any specific you can give on hydrophilic?

See we’ve not broken that out as a component. The portfolio continues to perform quite well.

Clearly there is some that are visible and people know discreet line items and so some products are struggling in the marketplace and our royalties are affected by that but the continued growth of the portfolio as well as growth of some of the underlying products does continue to generate strong results for the hydrophilic portfolio.

Okay. And my last question relates to ophthalmology and I don’t know if you can answer this.

But your time has progressed over the last two years or so and you've added more R&D customers there. Has there been any change in the, your kind of mix or focus of these customers?

They are still largely concentrated back of the eye, are you seeing more customers focused on one of the eye diseases as time is going on?

Okay, alright, that's helpful, thanks very much.

Thanks for the call.

Good afternoon, I was not on the beginning part of the call and so I apologize if I ask something you covered. Did you quantify the billions of dollars of revenue you call sizable on the ophthalmology contract; either the one existing or the one that could get signed or is it simply undefined millions of dollars?

We did not define it, only it’s confidential under the contract. My comments are really around both the original contract and then the extension we’re in discussion with now; just to give you a sense of order of magnitude.

Ultimately, you’ll see those dollars roll up into the R&D revenue line with the other work that we’re working but we did not quantify one of those.

Okay, fair enough, that’s it for me now. Thank you.

Thank you.

Good afternoon gentlemen. Congratulations on a nice quarter.

Thanks, Suraj.

Bruce, Phil just a comment first before I go into my questions, at least from my side. Very few executives I've seen have taken pay cuts in Medtech industry.

So, I commend you guys for taking that step especially after the Merck debacle I really commend you guys for that. On the BD opportunities, Phil, maybe you can help us out here, are these early stage, mid stage, are these Medtech focused, are these pharma focused.

How – can you shed some color there?

No, I really can't give you a lot of color on what we're looking at because its all confidential things and they may or may not get done. But I would say that this environment certainly is presenting a number of very interesting and compelling potentially compelling opportunities for us across the spectrum of the kinds of things we look for in business development opportunities.

And those as we've discussed in the past do run the gamut of technologies that we can either license in or acquire strategic investments in companies, as well as potentially M&A types of things that make sense for the business. And so we do see a lot of interesting things out there but beyond that I really can't give a lot of color just given the confidential nature of those discussions.

Let me reverse it, put it a little differently, Phil, when Bruce mentioned about the financial outlook for the remaining of the fiscal year, does that incorporate any potential targets you're all have already scoped out and maybe you're all in advanced negotiation or would that be sort a of gravy, once you guys acquired some company or some product and then we would have to revisit numbers?

The discussion about any outlook was absent any business development acquired revenue if you will, from an acquisition.

And, Bruce, in terms of the outlook that you all have presented for the remaining, considering the environment, this is still pretty decent outlook, but could you shed some more color at what specifically are you seeing softness, and is it primarily new projects and hence the R&D line item is getting hit. Is it you all see sales more getting hit and hence the royalty line item would be softer.

What do you see for the remaining part of the year?

I don't know if I can give you that level of color just because that’s confidential to us and our internal planning documentation. I think the point is just reflective of the fact that, we do see our way to getting to those numbers, but given the reduced timeframe and the increased uncertainty, we want to make sure, we are clear upfront that, at least on the revenue line, there is more uncertainty, I'd say.

Again on the EPS line, roughly flat still feels like it's doable to us, based upon, where we are six months in the year. That could change of course depending upon the environment and customers.

We did try to highlight in the prepared remarks some of the areas, where we are seeing some pullback relative to, especially our smaller companies that, as you can imagine are having a little more difficult to getting financed, if they needed it, going forward. So, we've taken a more conservative view of those numbers over the next six months, but that’s probably as much details I can give you, beyond what I mentioned in the prepared remarks.

Fair enough and last question, Phil, the $1.2 million Merck revenues in the R&D line item, is it fair to say, this is pretty much hit the last sub line item, if I may that would be contributed to Merck?

We believe so, yes. That’s probably a fair way to look at.

A couple of questions on the pharmaceutical division, there used to be a nice chart that you guys supply talking about some of the pharmaceutical partners and what stage of development, some of the project we are in and even some rough ideas on, where they were focusing. I was just curious as to whether there was any update, as to the later stage projects, that your partners are working on, with that Brookwood division if there was a Phase III or Phase II that were moving forward.

Any updates on the later stage or any milestones in the near-term for that division?

Dan, they do continue to make progress with the number of their customers, who are in the later stages. I think the environment is one of uncertain, because some of these companies are smaller and need to secure financing to move to the next steps in some of their programs, but they do have been making nice clinical progress and so those prospects continue to look good, as long as they continue to secure adequate financing to roll the projects forward, and so they are making nice progress on the technical front and the clinical front, but probably can't give a lot more color because certain things need to happen over time, of course to allow these to move to commercial stage, where they would be generating royalties for us.

Does that impact your potential to do manufacturing down in Birmingham or are you still getting some interest there as far as interested parties wanting bids or anything like that?

No, we are getting a lot of interest from companies. We're in discussions with some now.

We also have companies today that we are doing commercial manufacturing or more accurately clinical manufacturing in our existing clean rooms and the other two facilities we have there. So, it is, the story isn’t completed, but it's to a point now, we can actually walk customers through it and show them, where their particular project would be and how would move through the facility and I can tell you that the people are extremely impressed with what we're putting together down there.

So, we do have customers today and it would be our intent to add to that, in the near future.

Okay and then just one last quickie. So, with the $1.2 million on Merck, and you said that would be about it, what was that for?

I missed your commentary on what that specifically that was related to?

It's that final activities that our teams did supporting their projects and so it was concluded during the quarter.

Bruce, you or Phil talked about the NEVO project with J&J, and made a comment that the license, I don't remember what you said; revenue or royalty would be comparable to the original CYPHER?

Yes.

Does that mean in terms of rate or in terms of absolute dollars flowing to you, a better royalty on potentially lower sales?

It means our royalty rate, Erne, we don't, we are in a position to know the success or not of the product ultimately, but the royalty rate that gets multiplied times to the net sales that are generated by the customer.

Right.

Is higher.

Okay. Phil could you help everyone listening how you’re defining your score card pro forma, you’re including the Merck milestone in this years revenue?

Yes, that would include the $9 million milestone we received in the first quarter.

Okay, when you are talking about pro forma, are you pro forming last year at all?

Yes, the pro forma that we are comparing to for last year would be the supplemental non-GAAP table, that we included in our fourth quarter earnings press release and that did the math on how the Merck revenue was accounted for and so while the first quarter had the recognition of a bunch of deferred revenue that related to the Merck agreement in their, effectively that's not cash. That was cash received in prior period and so we are not including that in what we were defined as the non-GAAP revenue and right corresponding earnings for fiscal 2009, but since the $9 million worth net cash received in the year, that we do include.

Are you pro forming anything in '08 fiscal year from Merck, where is it the $95 million you're talking about?

No, if you hold up that last quarter earnings press release, you’d see it. It was about $111 million in non-GAAP revenue and about a $1.51 in non-GAAP earnings per share.

Great, thanks very much. I want to thank everybody again for participating in this quarter's conference call.

We look forward to speaking with you again for our third quarter call in July.