SurModics Inc (SRDX)

[Democritus_of_Abdera]

Re: Surprising Response to Yesterday’s Q2 CC/Earnings...

Skip, I too was pleasantly surprised by the marked jump in share prices today...

I had believed that the reported earnings were mediocre, ... but at least not bad. I also had a neutral feeling about the tone of the CC .... although again, I didn’t think it was bad.

I was unenthused by the earnings report largely because:

1. The FY2011 Q2 revenue ($17.4M) is essentially the same as the quarterly average of FY2010 ($17.5M) when the economy was in worse shape than now. And it is substantially below the FY2009 quarterly average of about $20M (ignoring the $63M outlier in FY2009 Q1).

2. The Royalty and Licenses Income is essentially flat qtr-to-qtr and is at the lowest value since 2003.

3. The moving average of R&D income (over 4 qtrs) is flat rather than trending up.

4. And I felt, perhaps unfairly, that the reported earnings had an undeservably positive spin as a result of the following “determination” (as detailed in the 4/27/2011 8K describing the Q2 earnings):

In connection with the preparation of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011, the Company determined that a $4.9 million milestone payment obligation related to its 2007 acquisition of SurModics Pharmaceuticals, Inc. (“ SurModics Pharmaceuticals ”), and an associated goodwill impairment charge, should have been recorded in the fiscal quarter ended December 31, 2010.... The restated financial results will include the following: operating loss of $5.6 million, compared with the previously reported operating loss of $0.7 million; net loss of $6.2 million, compared with the previously reported net loss of $0.4 million; diluted loss per share of ($0.36), compared with the previously reported diluted loss per share of ($0.02).

Without this determination,

Operating income would have been a loss of $2.9M instead of the reported gain of $2.0M.

Net Income would have been a loss of $4.3M instead of the reported gain of $2.5M (calculated by subtracting the $5.8M differential in the restated Q1 earnings).

Diluted earnings per share would have been a loss of ($0.22) instead of the reported gain of $0.14.