SurModics Inc (SRDX)

[DewDiligence]

Re: Five questions

>1. Is SRDX "required" to amortize income from MRK over time while they expense costs to achieve that income in the present quarter?<

Under GAAP, the only absolute requirement is that an up-front payment or lump sum for which SRDX does not need to perform any service must be amortized over the expected life of the collaboration. This applies to the $20M SRDX received when the collaboration was announced in June 2007 and it presumably applies to the undisclosed license fee for the second compound.

GAAP permits but does not require amortization for milestone payments and ongoing reimbursed R&D. Thus, SRDX made a deliberate decision to amortization these amounts. Once an accounting treatment is selected for these payments, it can’t be changed without undertaking very messy re-statements, so we may assume that the accounting treatment we see now is what we will see later.

>2. Will any future deal involving I-vation be handled in the same manner?<

Yes—see above.

>3. Why wasn't the Cypher deal handled in the same way?<

The Cypher collaboration is much simpler than the MRK collaboration; for instance, it does not include any milestone payments.

>4. Didn't management see that the stock price would be hammered by anyone with a short term outlook.<

Presumably they did; however, SRDX has historically avoided catering to the whims of Wall Street and short-term issues in general. (E.g. they do not give earnings guidance.)

Although the accounting treatment may affect the share price in the short run, it has absolutely no effect on the underlying value of the business.

>5. DEW ..what did "Hmmm" mean in post 1806?<

It meant that I was expecting an announcement of a second collaboration, as discussed in prior posts. I mused that SRDX may have chosen the accounting treatment everyone complains about because it is by far the best accounting treatment for masking the precise nature of the payments received from MRK.

Regards, Dew