Bear of the Day: SurModics (SRDX)

SurModics (SRDX) is a leading provider of surface modification technologies in the areas of biocompatibility, site specific drug delivery, biological cell encapsulation, and medical diagnostics.

SurModics partners with the world's foremost medical device, pharmaceutical and life science companies to bring innovation together for better patient outcomes. Recent collaborative efforts include the implementation of SurModics' Bravo drug delivery polymer matrix as a key component of the first-to-market drug-eluting coronary stent.

SurModics is also active in the ophthalmology market with a sustained drug delivery system that is currently in human trials for treatment of retinal disease. A significant portion of SurModics' revenue is generated by royalties earned from the sale of customers' commercial products.

Why the Zacks #5 Rank Strong Sell?

The company reported its fourth quarter fiscal year 2013 results last month and the results were mixed, with weaker forward guidance the main catalyst for analysts to cut estimates and push the stock to a #5. For fiscal 2013, SurModics reported earnings of 85 cents per share, 29% higher than last year, but short of the Zacks Consensus Estimate by 2 cents.

Though SurModics reported higher-than-expected earnings in the final quarter of fiscal 2013 due to cost savings, overall revenues in fiscal 2013 climbed only 8% to $56.1 million primarily on the back of impressive hydrophilic coating royalty revenues. Revenues fell short of the Zacks Consensus Estimate of $57 million.

SurModics expects fiscal 2014 revenues in the range of $58-$62 million. Earnings are expected in the range of 80 cents-92 cents per share. The consensus prior to this announcement was 95 cents per share on revenues of $63 million for fiscal 2014. Since then, the consensus has slipped to 88 cents.

Since royalties are a major source of revenues at SurModics, any royalty-related setback like the discontinuation of a Johnson & Johnson (JNJ) stent partnership could affect the top line significantly.

Be sure to use the Zacks Rank for SurModics to let you know when the coast is clear and analysts are positive again on the company's earnings growth potential.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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