August 6, 2007 -- As revenue linked to sales of drug-coated stents continues to decline, Eden Prairie-based SurModics Inc. announced another deal aimed at diversifying the company, which manufactures surface-modification and drug-delivery technology. SurModics will spend up to $62 million to acquire Brookwood Pharmaceuticals, an Alabama company that provides polymers to companies developing pharmaceutical products. An offshoot of the nonprofit Southern Research Institute, Brookwood has nearly 30 customer-paid development products in areas ranging from diabetes and oncology to ophthalmology.

Currently, about one third of SurModics' revenue comes from the sale of polymer technology used in the drug coating on the Cypher stent made by New Jersey-based Johnson & Johnson. While still the largest single source of sales, Cypher-related revenue was off by 31 percent during the quarter that ended in June, because of a slowdown in the stent market. Bruce Barclay, SurModics chief executive officer, said the Brookwood deal is the largest yet for the company.

"Over the last few quarters, Cypher sales have been declining, and so we considered the ability of Brookwood to generate both near-term and longer-term revenue an important part of our diversification strategy," Barclay said during a conference call with investors on Wednesday. Buying Brookwood SurModics' second key step toward diversification this summer.

In June, the company said it had reached a collaborative agreement with pharmaceutical giant Merck to develop a treatment system for serious retinal diseases. The deal gave SurModics an upfront licensing fee of $20 million, and makes the local company eligible for up to an additional $288 million in milestone payments linked to the development of a drug-delivering eye implant.

In the Brookwood deal, SurModics will pay $40 million in cash at closing and up to an additional $22 million in cash upon the successful completion of certain milestones. The acquisition is expected to be neutral to modestly accretive to SurModics' fiscal 2008 earnings, and will be significantly accretive thereafter, the company said. "I think it's a big deal," said analyst Daniel Owczarski of Soliel Securities. "In one big step, they expand their pipeline and gain access to new customers, and (Brookwood) is profitable."

Like SurModics, Brookwood generates revenue from research-and-development fees, polymer sales and royalty and milestone generating licenses. In 2006, the Alabama company had revenue of $12.7 million. Most of Brookwood's projects generate revenue in the form of research-and-development fees, since the products are not yet on the market, said Phil Ankeny, the chief financial officer at SurModics. For the fiscal year ended September 2006, SurModics had revenue of about $69.9 million. Brookwood Pharmaceuticals and its 70 employees will remain in Birmingham, Ala. Shares of SurModics closed Wednesday up $1.59, or 3.5 percent, at $47.46.

Source: St. Paul Pioneer Press
Source: Factiva