SurModics Inc (SRDX)

[Democritus_of_Abdera]

Re termination of MRK collaboration...

According to Bruce Barclay, MRK’s decision to discontinue the collaboration “...was prompted by a strategic review of its business and product development portfolio. While we cannot speak for Merck, it is our understanding that this decision reflects the company’s reassessment of its original aspirations to strategically invest in the back-of-the-eye diseases, which was the focus of our collaboration agreement as you know. What is very clear, however, is that Merck’s decision was not based on concerns about safety, efficacy or performance of the I-vation TA product, the the I-vation platform or any of SurModics’ other sustained drug delivery systems.” .... Later, in the question and answer session, Paul Lopez added: “All I know is that from this end in our development teams that we delivered upon the expectations that the groups from both companies agreed to.”

Although MRK has given notice, the actual termination event will not occur until 90 days have passed. At that time MRK will actually forfeit its rights to the I-vation TA platform and SRDX will be free to do with it what it pleases. Also, once the agreement is formally terminated all of the deferred revenue that had resulted from the MRK relationship will be recognized. This is basically a bookkeeping issue since SRDX has had use of the cash even though the revenue was deferred.

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SRDX’s assessment that this termination was due to a change in MRK’s overall ophthalmology plans rather than a specific issue related to SRDX or the I-vation platform rings true to me for the following reasons:

1. The first sign of trouble was suspension of enrollment into the Phase IIb clinical trial MRK and SRDX were sponsoring regarding the I-vation platform (see #msg-31339576) ... This termination was precipitated by publication of clinical trial data generated by the National Eye Institute demonstrating that triamcinolone acetate alone probably would not be sufficient to compete with Lucentis/Avastin (see #msg-31339719).

2. MRK went to the extent of terminating the relationship with SRDX rather than “letting it sit idle”. Letting the program sit idle would have hindered SRDX facilitation of competitor initiatives.

3. In terminating the relationship, MRK also abandoned the announced development of a second family of compounds using SRDX delivery technology.

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SRDX’s positive framing of the MRK collaboration:

1. In any event SRDX generated at least $47M in license fees, milestone payments and R&D revenue.

2. The data that was generated during the collaboration confirmed the safety of the I-vation TA platform and facilitated further product development useful to SRDX.

3. SRDX’s ability to structure agreements with new and prospective customers is now enhanced by MRK’s decision aince they will no longer be restricted from partnering on certain compounds or platforms that had previously been secured by MRK.

4. The SRDX team established strong relationships with MRK colleagues.

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In my mind, the biggest hit to SRDX relates to the investment in a manufacturing facility in Birmingham (see #msg-28740378). The driving rationale for this investment was to expand SRDX’s business model to include final drug delivery product manufacturing capability for pharmaceutical customers. Termination of the MRK agreement points to the risks associated with this strategy (i.e. being left high and dry with a large capital investment).

A second issue relates to continuation of the I-vation clinical trials... SRDX might need to pick up these costs now that MRK has left the scene.