SurModics Reports Third Quarter 2008 Results

Strong Operating Cash Flow and Continued Diversification
EDEN PRAIRIE, Minn.--(Business Wire)--
SurModics, Inc. (Nasdaq: SRDX), a leading provider of surface
modification and drug delivery technologies to the healthcare
industry, today reported financial results for the third fiscal
quarter ended June 30, 2008.

Third Quarter Highlights:

-- Operating cash flow of $13.7 million

-- Total revenue of $24.3 million, up 37% year-over-year

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-- Legacy business revenue (excluding Brookwood Pharmaceuticals
and BioFX Laboratories acquisitions), up 4% year-over-year
-- Non-CYPHER-related revenue up 62% year-over-year, up 15%
excluding acquisitions
-- Double-digit year-over-year revenue growth in all three
operating segments:
-- Drug Delivery - up 85%
-- Hydrophilic and Other - up 14%
-- In Vitro - up 12%
-- Brookwood Pharmaceuticals revenue of $4.7 million and BioFX
revenue of $1.1 million
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-- GAAP results:

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-- Operating income of $7.2 million
-- Net income of $4.8 million
-- Diluted EPS of $0.26
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-- Non-GAAP results (adjusting for accounting treatment of Merck
agreement):

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-- Adjusted total revenue of $34.0 million
-- Adjusted operating income of $17.0 million
-- Adjusted net income of $10.8 million
-- Adjusted diluted EPS of $0.59
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-- Achieved four fiscal 2008 goals;

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-- Merck initiated a Phase IIb clinical trial for I-vation TA,
triggering a milestone payment from Merck to SurModics of $9
million (received in fourth quarter); achieved two fiscal
2008 goals
-- Six new licenses signed with SurModics customers; achieved
fiscal 2008 goal
-- Four new customer products launched; achieved fiscal 2008 goal
*T

-- Repurchased cumulative $11.2 million of SurModics stock fiscal
year-to-date through July

"SurModics generated strong financial results in the third
quarter, including double-digit revenue growth in all three of our
operating segments for the third consecutive quarter," said Bruce
Barclay, president and chief executive officer. "We are extremely
pleased to have achieved several more of our fiscal 2008 goals during
the quarter. In particular, three quarters into our fiscal year, we
have already surpassed our goal of signing 18 new licenses with
customers. By signing six new licenses during the quarter, our fiscal
year total is 19. We also met our goal of 10 new product launches by
our customers, with four new launches during the quarter.
Additionally, Brookwood met its goal of signing a development
agreement with a top 50 pharma company."

"In addition to these outstanding results, perhaps most
significantly, our program with Merck in ophthalmology continues to go
well, as we celebrated the one year anniversary of the companies'
License and Research Collaboration Agreement in June," continued
Barclay. "During the quarter, we achieved two of our goals in
ophthalmology when Merck initiated a Phase IIb clinical trial of the
I-vation TA intravitreal implant. This achievement, which is the
culmination of many months of hard work by the teams at Merck and
SurModics, triggered a milestone payment of $9 million from Merck to
SurModics under our agreement. Our collaboration with Merck has
generated over $38 million in total cash in its first year. As of the
end of the quarter, our total Merck deferred revenue balance had grown
to $34.6 million."

For the third quarter of fiscal 2008, revenue was $24.3 million,
an increase of 37% from $17.8 million in the year-earlier period.
Total operating expenses, including product costs, were $17.1 million,
compared with $10.2 million last year. Operating income was $7.2
million, a decrease of 4% compared with $7.5 million in the prior-year
period. Net income was $4.8 million, a 14% decrease from $5.6 million
in the same period last year. Diluted net income per share was $0.26,
a 16% decrease from $0.31 in the third quarter of fiscal 2007.
Consistent with the first two quarters of fiscal 2008, earnings growth
did not keep pace with revenue growth primarily because of the
accounting treatment relating to our Merck agreement, and a changing
mix of revenue sources.

For the first nine months of fiscal 2008, revenue was a record
$73.8 million, compared with $51.9 million in the year earlier period,
and already exceeding fiscal 2007 full-year revenue of $73.2 million.
Operating income was $21.9 million, compared with $23.7 million in the
prior year period; net income was $15.6 million, compared with $17.3
million in the year earlier period; and diluted net income per share
was $0.85, compared with $0.95 in the first nine months of fiscal
2007.

On a non-GAAP basis (adjusting revenue for the accounting
treatment of the Merck agreement), for the three-month period ended
June 30, 2008, total revenue was $34.0 million, operating income was
$17.0 million, net income was $10.8 million, and diluted net income
per share was $0.59. On a non-GAAP basis, for the nine-month period
ending June 30, 2008, total revenue was $87.8 million, operating
income was $36.0 million, net income was $24.1 million, and diluted
net income per share was $1.31. On a non-GAAP basis, for the
three-month period ended June 30, 2007, total revenue was $37.8
million, operating income was $27.5 million, net income was $18.4
million, and diluted net income per share was $1.02. On a non-GAAP
basis, for the nine-month period ending June 30, 2007, total revenue
was $71.9 million, operating income was $43.7 million, net income was
$29.8 million, and diluted net income per share was $1.64.

SurModics' pipeline of customer projects continues to grow. As of
June 30, 2008, SurModics' customers had 102 licensed product classes
generating royalty revenue, up from 98 in the prior-year period; the
total number of licensed product classes not yet launched was 105,
compared with 93 in the prior-year period; and major non-licensed
opportunities totaled 98, compared with 74 a year ago. In total,
SurModics now has 203 potential commercial products in development.

SurModics' cash and investment balances totaled $70.0 million as
of June 30, 2008. Operating cash flow for the quarter was $13.7
million, compared with $7.1 million in the prior year period. These
figures do not include the $9 million milestone payment from Merck,
which was received in the fourth quarter.

"SurModics' cash position and cash flow generation remain robust,"
said Phil Ankeny, senior vice president and chief financial officer.
"We continue to be active in the deployment of capital with a goal of
enhancing shareholder value. We are pleased to have purchased over $11
million of stock in the share repurchase program announced this past
November. We also have been making investments in our facilities to
provide cGMP manufacturing capabilities in support of our customers.
Despite having deployed over $23 million in these initiatives in
fiscal 2008, our cash and investment balance remains strong, at
approximately $70 million. Finally, SurModics continually reviews
business development opportunities that can support our growth
strategy, enhance our market positioning and add shareholder value."

Live Webcast

SurModics will host a webcast at 5:00 p.m. ET (4:00 p.m. CT) today
to discuss the quarterly results. To access the webcast, go to the
investor relations portion of the company's website at
www.surmodics.com, and click on the third quarter webcast icon. If you
do not have access to the Internet and want to listen to the audio by
phone, dial 800-240-8926. A replay of the third quarter conference
call will be available by dialing 800-405-2236 and entering conference
call ID 11116707. The audio replay will be available beginning at 7:00
p.m. CT on Wednesday, July 23, until 7:00 p.m. CT on Wednesday, July
30.

About SurModics, Inc.

SurModics, Inc. is a leading provider of surface modification and
drug delivery technologies to the healthcare industry. SurModics
partners with the world's foremost medical device, pharmaceutical and
life science companies to develop and commercialize innovative
products that result in improved patient outcomes. Core offerings
include: drug delivery technologies (coatings, microparticles, and
implants); surface modification coating technologies that impart
lubricity, prohealing, and biocompatibility capabilities; and
components for in vitro diagnostic test kits and specialized surfaces
for cell culture and microarrays. Collaborative efforts include a
sustained drug-delivery system in human trials for treatment of
retinal disease and the drug-delivery polymer matrix on the
first-to-market drug-eluting coronary stent. SurModics is
headquartered in Eden Prairie, Minnesota and its Brookwood
Pharmaceuticals subsidiary is located in Birmingham, Alabama. For more
information about the company, visit www.surmodics.com. The content of
SurModics' website is not part of this release or part of any filings
the company makes with the SEC.

Safe Harbor for Forward-Looking Statements

This press release contains forward-looking statements. Statements
that are not historical or current facts, including statements about
beliefs and expectations, such as, statements about our ability to
achieve our fiscal 2008 corporate goals and long-term objectives and
statements regarding our pipeline, are forward-looking statements.
Forward-looking statements involve inherent risks and uncertainties,
and important factors could cause actual results to differ materially
from those anticipated, including the following: (1) realizing the
full potential benefits of the company's agreement with Merck requires
the development of new products and applications of technology; (2)
costs or difficulties relating to the integration of the businesses of
Brookwood Pharmaceuticals and BioFX Laboratories with SurModics'
business may be greater than expected and may adversely affect the
company's results of operations and financial condition; (3) our
reliance on third parties, developments in the regulatory environment,
as well as market and general economic conditions, may adversely
affect our business operations and profitability and our ability to
achieve our fiscal 2008 corporate goals and to realize the potential
of our pipeline; (4) failure to obtain intellectual property rights
protecting our proprietary technologies, or the expiration or loss of
such rights, could have a material adverse effect on our business,
financial condition and results of operations; and (5) other factors
identified under "Risk Factors" in Part I, Item 1A of our Annual
Report on Form 10-K for the fiscal year ended September 30, 2007, and
updated in our subsequent reports filed with the SEC. These reports
are available in the Investors section of our website at
www.surmodics.com and at the SEC website at www.sec.gov.
Forward-looking statements speak only as of the date they are made,
and we undertake no obligation to update them in light of new
information or future events.

Use of Non-GAAP Financial Information

In addition to reporting financial results in accordance with
generally accepted accounting principles, or GAAP, SurModics is
reporting non-GAAP financial results including non-GAAP revenue,
non-GAAP net income and non-GAAP diluted net income per share. We
believe that these non-GAAP measures provide meaningful insight into
our operating performance as it relates to our Merck agreement
accounting treatment and provide an alternative perspective of our
results of operations. We use these non-GAAP measures to assess our
operating performance and to determine payout under our executive
compensation programs. We believe that presentation of these non-GAAP
measures allows investors to review our results of operations from the
same perspective as management and our board of directors. We believe
these non-GAAP measures facilitate investors' analysis and comparisons
of our current results of operations and provide insight into the
prospects of our future performance. We also believe that the non-GAAP
measures are useful to investors because they provide supplemental
information that research analysts frequently use. The method we use
to produce non-GAAP results is not in accordance with GAAP and may
differ from the methods used by other companies. These non-GAAP
results should not be regarded as a substitute for corresponding GAAP
measures but instead should be utilized as a supplemental measure of
operating performance in evaluating our business. Non-GAAP measures do
have limitations in that they do not reflect certain items that may
have a material impact upon our reported financial results. As such,
these non-GAAP measures should be viewed in conjunction with both our
financial statements prepared in accordance with GAAP and the
reconciliation of the supplemental non-GAAP financial measures to the
comparable GAAP results provided for each period presented, which are
attached to this release.

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SurModics, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)

Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -------------------
2008 2007 2008 2007
------------------- -------------------
(Unaudited) (Unaudited)
Revenue:
Royalties and license fees $13,587 $13,416 $40,574 $39,664
Product sales 4,447 2,947 14,354 9,054
Research & development 6,242 1,399 18,884 3,147
--------- --------- --------- ---------
Total revenue 24,276 17,762 73,812 51,865

Operating expenses:
Product costs 1,773 1,217 5,902 3,396
Research & development 10,511 6,200 30,415 17,124
Selling, general &
administrative 4,808 2,827 15,559 7,633
--------- --------- --------- ---------
Total operating expenses 17,092 10,244 51,876 28,153
--------- --------- --------- ---------
Income from operations 7,184 7,518 21,936 23,712

Investment income 626 1,201 3,530 3,702
--------- --------- --------- ---------
Income before income taxes 7,810 8,719 25,466 27,414

Income tax provision (3,010) (3,132) (9,913) (10,161)

--------- --------- --------- ---------
Net income $4,800 $5,587 $15,553 $17,253
========= ========= ========= =========

Basic net income per share $0.27 $0.31 $0.86 $0.95
========= ========= ========= =========

Diluted net income per share $0.26 $0.31 $0.85 $0.95
========= ========= ========= =========

Weighted average shares
outstanding
Basic 18,073 17,815 18,058 18,116
Diluted 18,322 17,968 18,373 18,249
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SurModics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)

June 30, September 30,
2008 2007
------------- -------------
Assets (Unaudited)
------------------------------------------

Current assets:
Cash & investments $24,271 $26,308
Accounts receivable 24,736 16,138
Inventories 2,973 2,497
Other current assets 2,926 2,952
------------- -------------
Total current assets 54,906 47,895

Property & equipment, net 34,461 19,738
Restricted cash 1,640 --
Long-term investments 45,748 43,917
Other assets 58,498 59,781

------------- -------------
Total assets $195,253 $171,331
============= =============

Liabilities & Stockholders' Equity
------------------------------------------

Current liabilities(a) $7,257 $14,266

Deferred revenue (current
and long-term) 39,277 25,891

Other liabilities 3,281 252

Total stockholders' equity 145,438 130,922

------------- -------------
Total liabilities & stockholders' equity $195,253 $171,331
============= =============
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(a) Current liabilities exclude current portion of deferred
revenue.

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SurModics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
June 30,
-----------------
2008 2007
-----------------
(Unaudited)

Operating Activities
Net income $15,553 $17,253
Depreciation and amortization 4,501 2,923
Stock-based compensation 7,181 5,035
Net other operating activities (5,981) (1,061)
Change in operating assets and liabilities:
Accounts receivable (8,598) 4,033
Accounts payable and accrued liabilities (369) (701)
Income taxes (3,945) (2,393)
Deferred revenue 13,151 (683)
Net change in other operating assets and
liabilities 1,107 (809)
-------- --------
Net cash provided by operating activities 22,600 23,597
-------- --------

Investing Activities
Net purchases of property and equipment (16,849) (2,018)
Cash restricted for land purchase (1,640) --
Collection of notes receivable 5,870 395
Net other investing activities (5,590) 10,866
-------- --------
Net cash (used in) provided by investing
activities (18,209) 9,243
-------- --------

Financing Activities
Issuance of common stock 2,955 2,554
Purchase of common stock to fund employee taxes (1,495) (155)
Repurchase of common stock (6,717) (35,030)
Net other financing activities 713 --
-------- --------
Net cash used in financing activities (4,544) (32,631)
-------- --------

Net change in cash and cash equivalents (153) 209

Cash and Cash Equivalents
Beginning of period 13,812 3,751
-------- --------
End of period $13,659 $3,960
======== ========
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SurModics, Inc. and Subsidiaries
Supplemental Non-GAAP Information
For the Three Months Ended June 30, 2008
(in thousands, except per share data)

(Unaudited)

Merck Agreement
Adjustments
------------------------
As Adjusted
Reported Revenue Billed Non-GAAP
GAAP (1) Recognized Activity (2)
--------- ----------- --------- --------

Revenue:
Royalties and license
fees $13,587 ($906) (3) $9,000 (4) $21,681
Product sales 4,447 4,447
Research and
development 6,242 (180) (3) 1,855 (4) 7,917
--------- ----------- --------- --------
Total revenue $24,276 ($1,086) $10,855 $34,045
========= =========== ========= ========

Income from operations $7,184 ($1,086) $10,855 $16,953
========= =========== ========= ========

Net income $4,800 ($667) (5) $6,671 (5) $10,804
========= =========== ========= ========

Diluted net income per
share (6) $0.26 $0.59
========= ========

Balance Balance
at at
March 31, Revenue Billed June 30,
2008 Recognized Activity 2008
--------- ----------- --------- --------
Merck deferred revenue
(7) $24,877 ($1,086) $10,855 $34,646
========= =========== ========= ========

*T

(1) Reflects operating results in accordance with U.S. generally
accepted accounting principles (GAAP).

(2) Adjusted Non-GAAP amounts exclude the revenue recognized in
the period associated with the Merck agreement under GAAP and include
amounts billed associated with the Merck agreement.

(3) Reflects recognition of revenue for the Merck agreement in
accordance with GAAP for the period presented.

(4) Reflects amounts billed under the Merck agreement for the
period presented.

(5) Reflects the after tax impact of the adjustments utilizing the
Company's effective tax rate for the period presented.

(6) Diluted net income per share is calculated using the diluted
weighted average shares outstanding for the period presented.

(7) Reflects the activity for the period presented in the deferred
revenue balance sheet account associated with the Merck agreement.

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SurModics, Inc. and Subsidiaries
Supplemental Non-GAAP Information
For the Three Months Ended June 30, 2007
(in thousands, except per share data)

(Unaudited)

Merck Agreement
Adjustments
------------------------
As Adjusted
Reported Revenue Billed Non-GAAP
GAAP (1) Recognized Activity (2)
--------- ----------- --------- --------

Revenue:
Royalties and license
fees $13,416 $-- (3) $20,000 (4) $33,416
Product sales 2,947 2,947
Research and
development 1,399 -- (3) -- (4) 1,399
--------- ----------- --------- --------
Total revenue $17,762 $-- $20,000 $37,762
========= =========== ========= ========

Income from operations $7,518 $-- $20,000 $27,518
========= =========== ========= ========

Net income $5,587 $-- (5) $12,816 (5) $18,403
========= =========== ========= ========

Diluted net income per
share (6) $0.31 $1.02
========= ========

Balance Balance
at at
March 31, Revenue Billed June 30,
2007 Recognized Activity 2007
--------- ----------- --------- --------
Merck deferred revenue
(7) $-- $-- $20,000 $20,000
========= =========== ========= ========

*T

(1) Reflects operating results in accordance with U.S. generally
accepted accounting principles (GAAP).

(2) Adjusted Non-GAAP amounts exclude the revenue recognized in
the period associated with the Merck agreement under GAAP and include
amounts billed associated with the Merck agreement.

(3) Reflects recognition of revenue for the Merck agreement in
accordance with GAAP for the period presented.

(4) Reflects amounts billed under the Merck agreement for the
period presented.

(5) Reflects the after tax impact of the adjustments utilizing the
Company's effective tax rate for the period presented.

(6) Diluted net income per share is calculated using the diluted
weighted average shares outstanding for the period presented.

(7) Reflects the activity for the period presented in the deferred
revenue balance sheet account associated with the Merck agreement.

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SurModics, Inc. and Subsidiaries
Supplemental Non-GAAP Information
For the Nine Months Ended June 30, 2008
(in thousands, except per share data)

(Unaudited)

Merck Agreement
Adjustments
-----------------------
As Adjusted
Reported Revenue Billed Non-GAAP
GAAP (1) Recognized Activity (2)
--------- ----------- --------- --------

Revenue:
Royalties and license
fees $40,574 ($1,625)(3) $11,000(4) $49,949
Product sales 14,354 14,354
Research and
development 18,884 (920)(3) 5,567(4) 23,531
--------- ----------- --------- --------
Total revenue $73,812 ($2,545) $16,567 $87,834
========= =========== ========= ========

Income from operations $21,936 ($2,545) $16,567 $35,958
========= =========== ========= ========

Net income $15,553 ($1,554)(5) $10,118(5) $24,117
========= =========== ========= ========

Diluted net income per
share (6) $0.85 $1.31
========= ========

Balance Balance
at at
Sept. 30, Revenue Billed June 30,
2007 Recognized Activity 2008
--------- ----------- --------- --------
Merck deferred revenue
(7) $20,624 ($2,545) $16,567 $34,646
========= =========== ========= ========

*T

(1) Reflects operating results in accordance with U.S. generally
accepted accounting principles (GAAP).

(2) Adjusted Non-GAAP amounts exclude the revenue recognized in
the period associated with the Merck agreement under GAAP and include
amounts billed associated with the Merck agreement.

(3) Reflects recognition of revenue for the Merck agreement in
accordance with GAAP for the period presented.

(4) Reflects amounts billed under the Merck agreement for the
period presented.

(5) Reflects the after tax impact of the adjustments utilizing the
Company's effective tax rate for the period presented.

(6) Diluted net income per share is calculated using the diluted
weighted average shares outstanding for the period presented.

(7) Reflects the activity for the period presented in the deferred
revenue balance sheet account associated with the Merck agreement.

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SurModics, Inc. and Subsidiaries
Supplemental Non-GAAP Information
For the Nine Months Ended June 30, 2007
(in thousands, except per share data)

(Unaudited)

Merck Agreement
Adjustments
-----------------------
As Adjusted
Reported Revenue Billed Non-GAAP
GAAP (1) Recognized Activity (2)
--------- ----------- --------- --------

Revenue:
Royalties and license
fees $39,664 $--(3) $20,000(4) $59,664
Product sales 9,054 9,054
Research and
development 3,147 --(3) --(4) 3,147
--------- ----------- --------- --------
Total revenue $51,865 $-- $20,000 $71,865
========= =========== ========= ========

Income from operations $23,712 $-- $20,000 $43,712
========= =========== ========= ========

Net income $17,253 $--(5) $12,587(5) $29,840
========= =========== ========= ========

Diluted net income per
share (6) $0.95 $1.64
========= ========

Balance Balance
at at
Sept. 30, Revenue Billed June 30,
2006 Recognized Activity 2007
--------- ----------- --------- --------
Merck deferred revenue
(7) $-- $-- $20,000 $20,000
========= =========== ========= ========

*T

(1) Reflects operating results in accordance with U.S. generally
accepted accounting principles (GAAP).

(2) Adjusted Non-GAAP amounts exclude the revenue recognized in
the period associated with the Merck agreement under GAAP and include
amounts billed associated with the Merck agreement.

(3) Reflects recognition of revenue for the Merck agreement in
accordance with GAAP for the period presented.

(4) Reflects amounts billed under the Merck agreement for the
period presented.

(5) Reflects the after tax impact of the adjustments utilizing the
Company's effective tax rate for the period presented.

(6) Diluted net income per share is calculated using the diluted
weighted average shares outstanding for the period presented.

(7) Reflects the activity for the period presented in the deferred
revenue balance sheet account associated with the Merck agreement.

SurModics, Inc.
Phil Ankeny, (952) 829-2700
Senior Vice President and Chief Financial Officer

Copyright Business Wire 2008