While the quarter was marginally better than expected, it’s hard to imagine investors can’t see a little further into the future:
Stent Market:
• Even with improvements in other royalties almost 50% of SRDX’s still revenue comes from Cypher and related services.
• In 2007, SRDX/JNJ will lose 40%+ market share in Japan to BSX.
• By 2008 their will be 5+ players in the US and world DES market. JNJs market share will be dramatically reduced. When the JNJ’s market share is reduced from 50% to 20%, SRDX will lose 30% of top line revenue with 95%+ margins.
o JNJ will have the oldest generation stent in the US market and with nothing new possible to start trials until the FDA warning letter is resolved.
• Oh and I forgot that assumes that the price stays flat, which it will not.
o Prices will materially come down over the next few years, just use the bare metal stent market as an example when competition entered prices fell over 7%+ a year.
• The overall US DES market is already showing signs of saturation and has not materially expanded in the last 2 quarters.
• The bulls say SRDX has the hydrophilic coating on Conner, Medtronic and the new Cypher stent that will offset the share loss.
o Again incorrect – the royalty rates are not the same; in fact they are ~1/10 of what SRDX currently receives from Cypher. Cypher royalties run 1% of the stent price (in the US ~$22-24), Conner has said are paying SRDX low single digits ($2-3) for the coating. MDT and JNJ have not commented but does anyone really believe that Medtronic or JNJ is going to get a worse deal on coatings than Conner?
o If one analyst would call Conner and ask maybe they could get this right in a report - yes it’s insane to think SRDX is going to double their there current Royalty rate on Cypher because they are supplying the coating for the driver
• JNJ is working on a DES with no polymer (CONR type design)
• JNJ is also working on Bioabsorbable Stents
Other big opportunities of SRDX (notice these have not changed or materialized over the last three quarterly calls)
• Talked about opportunities in the orthopedics business but nothing materialized
• Donaldson – slow to start, will contribute a little next year but further out than everyone expects
• Novacell is a zero
• Genistein is a zero
• InnoRx – the reason why no partnership has been announced is because they cant find anyone to accept. Genetech signing on is a dream and even when they sign someone up the earliest they can have a DME product much less AMD is 2011-12.
• SRDX will milk this product for headlines, but nothing is ever going to come of it. Poserdex will have a good product in the DME market next year, SRDX is looking 4-5 years out. By then the market will be crowded and SRDX will be late to the party.
Many of their chief technical people are leaving – G&A isn’t just coming down because of the plant shut down in Bloomington
They under invest in R&D.
The other royalty line has improved as a few of the products like foxhollow have experienced large ramps in revenue, but these are slowing.
Growth in ’08-’09 will certainly be at a premium – hard to pay 25x or 10x sales for a company that could have a negative growth rate on their eps number. Peak valuation is an understatement, the stent market and everything that surrounds it can never get any better than ’06 for SRDX.
Question the unconditional love – all the analysts love the stock but have no idea where the revenue comes from or where it will come from tomorrow. They have no idea the royalty rates or even what products SRDX supplies to customers.
AI
