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Executives

Timothy J. Arens – Vice President of Finance and Interim Chief Financial Officer

Gary R. Maharaj – President and Chief Executive Officer

Analysts

Ross Taylor – CL King & Associates

Gregory M. Macosko – Lord Abbett

Elizabeth Lilly – GAMCO Investors

Dorsey R. Gardner – Kelso Management Company, Inc.

SurModics, Inc. (SRDX) F4Q 2011 Earnings Call November 3, 2011 5:00 AM ET

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the SurModics Fourth Quarter 2011 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. And following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, November 3, 2011.

I would now like to turn the conference over to Tim Arens, Vice President of Finance and Interim Chief Financial Officer. Please go ahead, sir.

Timothy J. Arens

Thank you, Douglas. Good afternoon and welcome to SurModics fiscal fourth quarter and full year 2011 conference call. Also with me on the call is Gary Maharaj, our Chief Executive Officer.

Our press release reporting quarterly and full year results was issued earlier this afternoon and is available on our website at surmodics.com.

Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible through the Investor Relations section of the SurModics website, where the audio recording of the webcast will also be archived for future reference.

I will remind you that some of the statements made during this call may be considered forward-looking. The 10-K for fiscal year 2010 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made during this call. The company does not undertake any duty to update any forward-looking statements as a result of new information or future events or developments.

During the call, we may include reference to financial measures, which are not calculated in accordance with generally accepted accounting principles or GAAP. These measures maybe used by management to compare the operating performance of the company over time, but they should not be consider to substitute for GAAP measures. Each of these items is described in the footnotes of the supplemental non-GAAP information that accompanied our press release this afternoon.

On today’s call, I will highlight select financials results for the quarter and year, as well as discuss our outlook for fiscal 2010. Gary will then discuss our key achievements for the year, our announcement regarding the sale of our SurModics Pharmaceuticals business to Evonik Industries, and our strategy and growth drivers moving forward. Following this discussion, we will open the call to take you questions.

Let me begin with some financial highlights. We are pleased with our fiscal 2011 performance. Our efforts to strengthen our core businesses have already began to yield positive results as we achieved record revenue in fiscal 2011 for both our hydrophilic coatings offerings as well as our in-vitro diagnostics products.

Revenue for the fourth quarter totaled $17.2 million, an increase of 10% over the $15.5 million reported in the fourth quarter of last year. This represented our first quarterly year-to-year revenue growth performance since the fiscal 2010 third quarter.

On a sequential basis, revenue was down 5% from the $18 million reported in our third quarter as weakness in pharmaceuticals more than offset gains in our medical device and in-vitro diagnostics businesses.

For the full fiscal year 2011, revenue was $67.8 million, down 3% from fiscal year 2010. On a GAAP basis, our diluted loss per share was $0.74 for the fourth quarter. For the full year, our GAAP diluted loss per share was $0.73.

During the fourth quarter, we recognized $18.9 million of special charges associated with the restructuring charge and certain asset impairment charges. In total, the net impact of these items reduced our fourth quarter GAAP EPS by $0.81.

Let me take a moment to briefly explain each item. First, we recorded a restructuring charge of $1 million or $0.04 per share related to our August strategic realignment, also we recognized asset impairment charges totaling $17.9 million or $0.77 per share as we wrote down pharma-related assets in Alabama to the fair value based on recent evaluations associated with our strategic alternatives process.

Earnings per share on a non-GAAP basis were $0.06 for the fourth quarter of fiscal 2011, a decline from the adjusted earnings per share of $0.13 earned during the third quarter. For the full year 2011, adjusted earnings per share assuming a normalized effective tax rate of 38% was $0.32, a 16% decline compared with adjusted EPS of $0.38 for the full fiscal year 2010.

We put in our press release on Tuesday; we announced that SurModics had signed a definitive agreement under which our pharmaceuticals business will be divested to Evonik Industries for $30 million in cash. The divestiture includes the entire portfolio of product and services of our pharmaceuticals business including the cGMP facility Birmingham, Alabama.

In fiscal 2011 and 2010, Cypher based royalty and product revenue associated with our pharma drug delivery coatings and our hydrophilic coatings totaled $6.7 million and $9.8 million respectively. Our following comments include the effects of Cypher unless otherwise noted.

I’ll now turn our discussion to the sales by business unit. For the fourth quarter, total Medical Device sales, which include revenue from both our hydrophilic coatings and device drug delivery technologies were 10.2 million, up 7% sequentially from the $9.6 million reported in Q3. We did achieved record hydrophilic coating revenue of $8.8 million during the quarter representing 7% growth compared with the year ago period. Device drug delivery revenue of $1.4 million declined 4% compared with a year ago period.

Medical Device revenue for the fiscal year 2011 was $39.6 million representing an 8% decline from fiscal year 2010. Hydrophilic coating revenue up $33.6 million increased 8% from fiscal year 2010, whereas device drug delivery revenue of $6 million declined 48% compared with the prior year. Medical device generated $5 million of operating profit during the quarter and $19.8 million for the full fiscal year.

Moving on to In Vitro Diagnostics, we’re in record in-vitro diagnostics product sales of $3.6 million during the fourth quarter representing 10% sequential growth, compared with the $3.3 million reported in Q3. For the fiscal year 2011, IVD sales were $13.1 million, up 17% from fiscal year 2010. IVD generated $1 million of operating profit during the quarter and $4.3 million for the fiscal year. Solid improvement compared with fiscal 2010 results.

Moving on to Pharmaceuticals. Pharmaceuticals sales for the fourth quarter of fiscal year 2011 were $3.3 million, a 35% sequential decline from the $5 million reported in Q3, during which time we were experiencing increased R&D activity with several customers as we continue to make importance progress on those programs.

For the fiscal year 2011, pharma sales were $15.1 million, a decline of 3% from fiscal year 2010. Pharma generated a $20.4 million operating loss during the quarter or a $2.5 million operating loss if we exclude the asset impairment charge. For the year, pharma generated a $32.5 million operating loss, excluding goodwill and asset impairment charges pharma lost $9 million.

Now on to revenue summary by category. Royalties and license fees were $7.8 million, up 4% from the $7.5 million reported in Q3. For fiscal year 2011, royalty and license fees were $30.6 million down $3.7 million or 11% from fiscal year 2010. Excluding the impact of Cypher hydrophilic royalties grew 7% in fiscal 2011.

Product sales of $6.5 million set a new record in Q4 representing a 12% increase from the previous product record of $5.8 million that was recorded in the third quarter. Sequential products revenue growth was broad based and seen across all business units. For the fiscal year 2010, product sales grew 14% from fiscal year 2010.

Lastly R&D revenue in the fourth quarter was $2.8 million a decline of 38% from the $4.6 million reported in the third quarter. The decline was a result of normal absent inflows of activity in our pharma customer development programs. For the fiscal year 2011, R&D revenue declined 8% from fiscal year 2010.

Moving on to a review of our product gross margins. We generated product gross margins of 62% in the fourth quarter, compared with the 71% in the third quarter. For our fiscal year 2011, product gross margins were 64%, compared with 53% last year.

Moving on to our operating costs. SG&A a expenses in the fourth quarter of fiscal year 2011 were 32% of sales, compared with 27% of sales in the third quarter. For the full year, SG&A expenses were 30% of sales, compared with 26% of sales in fiscal year 2010. Higher variable compensation and expenses associated with our pharma strategic alternatives process increased our fiscal 2011 SG&A expense.

Other research and development expenses, which exclude customer R&D were 19% of fourth quarter sales, compared with 20% of sales in the third quarter. For the full year, other R&D expenses were 18% of sales, compared with 26% of sales in fiscal year 2010. Key contributors in our year-to-year decline in other R&D expenses included a therapeutic tax credit benefit of $827,000, our efforts to refocus on our core business and the October 2010 reduction enforced.

Moving on to the balance sheet, at the end of fiscal year 2011, we had cash and investments of $68.2 million and generated operating cash flow of $20 million during fiscal 2011. Finally, I want to offer some comments regarding our revenue and earnings per share outlook for fiscal 2010. Our outlook from continuing operations on a GAAP basis excludes any revenue associated with Cypher in the pharmaceuticals business. As a reminder, we will report our fiscal 2012 pharmaceutical results as discontinued operations.

For the full year, we expect GAAP revenue from continuing operations to be in the range of $47 million to $51 million and diluted GAAP EPS from continuing operations to be in the range of $0.45 to $0.53. Our GAAP outlook reflects our estimates regarding the results of the pharmaceuticals business through the end of November. As a result of the strength and momentum we are seeing in core business, we feel that we have the right strategy in place to return SurModics to the path of sustainable profitable growth.

At this point, I would like to turn the call over to over Chief Executive Officer, Gary Maharaj. Gary?

Gary R. Maharaj

Thank you, Tim. My first goal as CEO last December as you recall was to develop a clear roadmap to return SurModics consistent and profitable long-term growth. In previous earnings call comments, I highlighted three areas of focus for 2011 that set the stage for us to achieve this long-term goal. First, achieve our fiscal 2011 financial plan. Second, complete the review of strategic alternatives for our pharma business, and third to develop a strategic plan for the business.

I'm pleased to report that we have been successful in each area. First, we have delivered against our financial commitment for the year. As you’ve heard, our full year revenue and non-GAAP earnings provided during our August earnings call. As a result of our renewed focus on the call, we delivered record quarterly and full year sales of both hydrophilic coatings and our In-Vitro Diagnostics businesses.

During the year, our hydrophilic coatings revenue increased 8% and our diagnostic revenues increased 17%. Our next priority was to conclude our review of strategic alternatives for our pharmaceuticals business by the end of the calendar year 2011. We call that the board determined in December of last year that seeking strategic alternatives to fall pharma business was necessary to unlock greater value for SurModics. We have conducted a through process resulting in the decision to sell the pharma business, which we believe is in the best interest of all stakeholders.

On Tuesday, we announced the signing of a definitive asset purchase agreement to sell SurModics Pharmaceuticals to Evonik Industries AG for $30 million in cash. In the agreement, Evonik agreed to purchase the SurModics Pharmaceuticals’ assets, including the cGMP development and manufacturing facility located in Birmingham, Alabama.

The terms of the sale also granted Evonik ownership for SurModics parenteral dosage form services and bioresorbable lactide-glycolide polymers business. To reiterate, the sale of the pharma business achieves three critical objectives for us. First, it advances our strategy to return SurModics the sustainable long-term profitability. Second, it allows us to focus our resources in the core higher margin medical device and the in-vitro diagnostics businesses.

And third, this deal creates compelling value for all of our stakeholders, including the employers of our pharma business and the Birmingham community. The $30 million gross sale price coupled with expected improved future profitability in cash flow for SurModics will significantly strengthen our financial profile. We are grateful for the hard work and accomplishments of our pharma employees, and we wish them all the best at Evonik.

Finally, our third priority was the development of a strategic plan to guide the company. Simply put, we will focus first on strengthening and growing our core businesses, and second, to explore new opportunities to expand our product offerings over the medium and long-term. This strategy as you recall is based on the principle that sustained and profitable growth requires a well-defined and strong core as a foundation for the business.

In the second quarter, we redefined our core medical device business as hydrophilic coatings that improve the performance of minimally invasive medical devices. Taking the same approach in the quarter, we define the core IVD businesses as immunoassay reagents that improve the performance of diagnostic tests.

To better focus our resources on these two core businesses, we announced a strategic realignment in August to align both our costs and operational structure to enable this new strategic plan, while maintaining our R&D. As part of this strategic alignment, we announced a reduction enforced of approximately 9% of our employees across the entire organization, and a restructuring of executive responsibilities resulting in a smaller team.

This realignment was a critical component to set the stage for our go-forward strategy and increased fragility of our business. Delivering organic sales and growth and profit earnings growth on a sustainable basis is a high priority for us.

Let me now outline the key initiatives that are underway to increase our sales growth in the fiscal year 2012, and beyond. The first key initiative is complete; we have made the leadership and structural changes necessary to align our resources with our strategy. Second, as I’ve said before, R&D is the heart of value creation and organic growth for SurModics. We have both changed the architecture for our R&D portfolio and reset the priorities to ensure we optimize long-term returns with acceptable risk.

We are being very careful to invest appropriate amount of diligence to technically and financially de-risking our portfolio of R&D ideas and experiments before committing complete funding to full fledged projects. My initial impressions in finding, suggest that we have significant growth opportunities in our R&D portfolio, and our core businesses.

With respect to medical device, our core initiatives to expand our leadership in hydrophilic coatings are to capture the market for high growth potential segment such as, percutaneous valve replacement, ischemic and hemorrhagic stroke, and peripheral vascular market. We will also increase our activities with the emerging medical device companies working on innovative technologies as they require hydrophilic coatings as well. We will also increase our partnership and activities in emerging markets.

Finally, we will drive the adoption of our next generation of hydrophilic coatings. As I’ve previously described, our next generation hydrophilic coatings platform provides a compelling value proposition. While we are not yet complete our data suggests that we have eliminated a trade-off between lubricity and durability. And this new platform is expected to set the standard as best-in-class lubricity and durability performance for our customers.

We believe that this new platform will expand our market opportunity by enabling us to capture share from alternative coatings processes used by device manufacturers, since it will provide improved performance. We anticipate introducing this new platform to customers in early calendar year 2012. As far as expanding within the core, we have several ongoing R&D experiments and we also have one key project underway that will expand about core offerings. This project as you recall is to develop a new drug delivery platform for drug coated balloon products. Our early results remain promising both to us and our perspective customers.

Moving on to our in-vitro diagnostics business, we are focused on several key initiatives designed to accelerate organic sales growth again within our goal. First, we are developing and launching new IVD products. We've already launched two new core diagnostic products in 2011 fourth quarter, and we expect to launch several more during fiscal 2012.

We have reorganized our sales function to increase our focus on diagnostic kit manufacturers, and we've increased our marketing activities to drive awareness and preference for our products, including the launch of an updated website and e-commerce site before calendar year end.

Finally, we are expanding our presence in emerging growth markets. During the past year, we have significantly grown our U.S. diagnostic kit manufacturer customer base. In addition, these same customers continue to develop and launch new diagnostic kits using our products.

So in summary, we are excited about the future about our opportunities going forward. This new structure and our strategic initiatives benefit our employees, our customers and our shareholders alike. I believe that the renewed focus and corporate agility intrinsic to SurModics will over the long-term drive sustainable double-digit sales growth and profitable earning growth.

Operator, that concludes our prepared remarks, we’d like to turn the call over to questions at this point.

Question-and-Answer Section

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Your first comes from the line of Ross Taylor with CL King & Associates. Please go ahead.

Ross Taylor – CL King & Associates

Hi, I’m assuming a couple of modeling questions, and I don't know if you can be that specific or not. But can you give any sort of rough your guidepost to help us estimate, what G&A and R&D expense might be next year, now that pharma is going to be going?

Timothy J. Arens

So the process has come, and the way that is, we’ll be looking to reduce the SG&A expense on a normalized basis, meaning that you look at the SG&A expense as a percentage of revenue, if you normalize by taking out the effects of Cypher from our 2011 results. I would be looking at SG&A declining as a percentage of sales in 2012 versus 2011.

As I think about R&D, as Gary has mentioned, it's a big focus for our company, and we will be looking to continue to invest appropriately in R&D, and I would expect that R&D expense as a percentage of sales using the same approach will be somewhat similar to 2011 or maybe perhaps slightly higher. You must also remember that, regarding R&D, we also benefited from the therapeutic tax credit of 827,000 in 2011. We are not modeling that benefit, which would have been a reduction in R&D going forward. So that benefit won't be there for us in 2012 for our guidance.

Ross Taylor – CL King & Associates

Okay. All right, that's helpful. And did I also catch in your prepared remarks that you would be reporting the loss that’s associated with the pharmaceutical business within your P&L through the end of November, is that correct? That’s not going to be classified as a discontinued operation?

Gary R. Maharaj

No. That is correct. As you know, our fiscal year end September, so October and November results performance will be reported as discontinued operations.

Ross Taylor – CL King & Associates

Okay. Okay. And my last just has to do with some of your product development efforts, I mean, things like the next generation hydrophilic coating and some of your other initiatives. I mean when would you expect that might be able to cause some improvement or acceleration in Europe, royalty revenue line?

Gary R. Maharaj

So the next-generation technologies, since it’s a completely new generation, we are dotting our eyes twice on this one. We expect to have customers doing feasibility with those in early calendar 2012. And then it becomes the time kind of the rate of adoption and trialing going through the feasibility period. So I expect you will see some impact in 2012 time period. It’s hard to predict the actual rate of adoption at this point, needless to say we are excited.

On the things like the drug coated balloon, those are actually long-term projects, we have a lot of excitement from perspective customers of ours looking at our early results on that, but certainly that would, those royalties are really what would drive the majority of our cash flows given the regulatory timelines required, that would be a longer term outlook on things like drug coated balloons.

Ross Taylor – CL King & Associates

Okay. That's all very helpful. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Gregory Macosko with Lord Abbett. Please go ahead.

Gregory M. Macosko – Lord Abbett

Yes, thank you. Just with regard to the last question, regarding the new generation platform on the coated products, coatings. Are you looking for a totally new platforms and new products or will you talk with your existing customers about using the new product for an existing product?

Gary R. Maharaj

Yeah, this is our new platform is applicable to pretty much all of our vascular delivery products. And so – on the other hand, so that, that certainly is a right for change in that area, on the other hand what we may see is adoption from customers who currently don't use our current generation of hydrophilic coatings. And also, what we refer to as in-house coatings. These are some of the larger companies that prefer to do the in-house coating themselves with their technologies.

We believe our technology offer some compelling advantages to these customers that we don't currently have. So it will both be a replacement platform for our generation of customers, but potentially growth for customers who see the benefits, who are not current customers but who see the benefits of using this on their devices.

Gregory M. Macosko – Lord Abbett

In your release, you mentioned licenses signed with customers, were those existing customers or new customers and are those in the coatings area?

Timothy J. Arens

Gregory, this is Tim. We don't provide specific detail or comments regarding the customers. Those do in fact all pertain to our hydrophilic coatings platform, so those customers who are looking to utilize our lubricious coating on variety of different products.

Gary R. Maharaj

Best way to think about it, one major customer will have several different devices. So even if they sign a new license, it could be for a totally different line of devices, which is why we don't disclose that identity or mix.

Gregory M. Macosko – Lord Abbett

I'm not asking identity, but have you asked, have you gotten new customers or new someone that isn’t currently a customer?

Gary R. Maharaj

That's right, we do add new customers and that is correct, yes.

Gregory M. Macosko – Lord Abbett

And the same question with regard to the product classes, is that in IVD, the two new customer?

Gary R. Maharaj

As far as the new product classes they again pertain to our medical device business.

Gregory M. Macosko – Lord Abbett

Okay.

Timothy J. Arens

And I just want to be clear, you said something just to be clear from the nomenclature, a new license could be with an existing customer, just covering a different product.

Gregory M. Macosko – Lord Abbett

I understand that. Okay. And then with regard to the R&D from your comment that it, it sounds like most of the R&D will be spent in the med devices as opposed to the IVD or how do you expect that split, is it relative to the rough sales?

Timothy J. Arens

Yeah, so basically, what we are providing as a percentage of sales pertains to the total R&D spend against total sales. Gregory, what I will tell you is that, the IVD R&D expense, it probably is helpful appreciate that it's a much faster process to bring a new IVD product to commercialization state, and therefore, you can reasonably assume that the cost to get a R&D project through completion will be less for the diagnostics business. We do not however provide specific detail around the split of the R&D between the two business units.

Gregory M. Macosko – Lord Abbett

Understand. Okay. And then with regard, or do you continue to focus on the R&D dollars, I mean, obviously they're volatile there, but is that a key part of the hydrophilic wins?

Timothy J. Arens

Do you mean R&D revenues?

Gregory M. Macosko – Lord Abbett

Yeah, the R&D revenues, yes, I am sorry?

Timothy J. Arens

So the best way to think about that is thinking about it from a business model perspective. What we do in terms of the activities that generate customer R&D revenue in our medical device business, as we said it pertains to hydrophilic. We do that work with really a singular goal of helping the customer get their products to market with our hydrophilic coating, so that we can then enter and generate royalty revenue. That’s what keeps us excited. That’s what the business model and all that supporting activities are intended to do.

So what we do when we work with customers, we’ll look at really what customer needs are and you will find that with many customers you’re going, there might be several products that they’ve already launched using our technology, so what we might be receiving in terms of customer R&D revenue might be different for that particular customer than for someone else, who were not customer familiar with their products or their substrates, so I wouldn’t look at that as an indicator, a leading indicator at this point.

Gregory M. Macosko – Lord Abbett

Okay and then with regard to the licenses and having arrangements with those customers, is it fair to say that those are customers that pretty much don’t have internal capabilities or are you basically, would you say that you’re penetrating just as well customers that have internal capabilities are doing coatings?

Timothy J. Arens

Yes, it really works this way, we have a strong value proposition that really if a customer has a product where they don’t need the value proposition that we offer they may use their in-house coating. So we do have customers who use in-house coatings, but also use SurModics coatings and what we consider to be more high value applications, where there is more torturous anatomy, it’s a longer length to get to the anatomical location, that’s where we really play. And that’s where we offer a tremendous amount of value versus other coatings.

Gary R. Maharaj

I think Greg, we work with all types of customers until we can dial in the type of coating services, the type of feasibilities they need depending not only in the internal capabilities, but they speed to market requirements if they are at capacity internally.

Gregory M. Macosko – Lord Abbett

Right, okay but perhaps you can see what I’m asking that do you feel that your proposition relative to the customers you work with, does that maybe they’re invest, I mean they have cost issues, maybe they are investing less in those internal capabilities and looking more to people like you to supply that coating technology is that, do you feel that trend happening just like in the CRO business running else?

Gary R. Maharaj

Certainly we recapture our fair share of new coating requirement devices and it really comes down to the in-house coatings where those have been continuously in-house for major customers, those we don’t necessarily have visibility on continuously, but the majority of our customers come to us because of our technical capability, which supplements their own.

Timothy J. Arens

And Rich, another point I’ll make is Greg, just to kind of help you appreciate that we don’t view our technology as a commodity and what you’ll find often times with the in-house coatings and what applications they are used in might be deemed to be more commodity based type applications. So again, our value proposition really aligns well with high value medical device applications.

Gregory M. Macosko – Lord Abbett

Okay and then finally, with regard to the cash, it looks like you’ll have between $5 and $6 a share of cash…

Operator

(Operator Instructions) Our next question comes from the line of Beth Lilly with GAMCO Investors. Please go ahead.

Elizabeth Lilly – GAMCO Investors

Good afternoon Gary and Tim.

Timothy J. Arens

Hi, Beth. How are you?

Gary R. Maharaj

Hi, Beth.

Elizabeth Lilly – GAMCO Investors

Just great, how are you doing?

Timothy J. Arens

I’m doing great.

Gary R. Maharaj

Hey, Beth before your question I just want to make sure that Douglas understands that for some reason Gregory was cutoff of his question.

Operator

I do apologize for that, I’m sorry there was a little bit of a computer glitch.

Gary R. Maharaj

So, Beth I apologize for that interruption, please go forward with your question.

Elizabeth Lilly – GAMCO Investors

Okay. A couple of clarification, so the $30 million in cash that you’re receiving for the sale of Pharmaceutical, which by the way congratulations for completing that before the end of the year.

Gary R. Maharaj

Thank you.

Elizabeth Lilly – GAMCO Investors

Is that after-tax, there is no taxes paid on that, is that correct?

Gary R. Maharaj

That’s the way because we’re thinking about that Beth, it is an asset purchase agreement that we signed and so there will be, there is really no tax associated with in fact we’ll receive a tax benefit associated with the accident impairment that we took here in the Q4 related to the write down of Pharmaceutical assets.

Elizabeth Lilly – GAMCO Investors

So that was my next question, which is do you still going forward then as we, is a modeling question are there, will you have a reduced tax rate or it was there in NOL or how do we treat your taxes going forward?

Timothy J. Arens

So the way that we think about it here Beth is, it’s not going to change the tax rate, but the taxes that we would have relative to our continuing operations, we would retain, we would preserve our cash, we wouldn’t detain that.

Elizabeth Lilly – GAMCO Investors

Okay, so for example…

Timothy J. Arens

Yes, we do have a deferred tax benefit off of that it’s an asset.

Elizabeth Lilly – GAMCO Investors

Right. So for your estimate this year going forward, you’re estimating earnings per share of 40, I don’t have anything in front of me, but let’s take the mid range $0.48, $0.49, that’s not a tax number event?

Gary R. Maharaj

No, that does reflect taxes Beth, so the tax what you’re really asking about is our cash flow?

Elizabeth Lilly – GAMCO Investors

Yes.

Gary R. Maharaj

And so we will have from an income statement perspective, it will look like there is tax. All right so the earnings per share will reflect the tax rate, however in terms of the uses of cash, we won’t be using cash to take that?

Elizabeth Lilly – GAMCO Investors

Got it, okay. So if I take the $68 million in your balance sheet today, and then I add the $30 million from the sale of Pharma that gets you $98 million in cash and that $5.60 a share, and in essence that half your stock price today. Can you talk about we’ve talked about this in the past, but now that you’ve sold Pharma it’s a more pressing issue, can you talk about the priorities in that cash and where you, where do you think the highest and best uses are…

Timothy J. Arens

Certainly Beth, we have a strong balance sheet including the cash proceeds from the sale of Pharma as a strategic asset in this macroeconomic condition. The board is continuing to have discussion in the best uses of cash, what I can say is that I want to address make sure everybody is short at any use of cash will both be disciplined. We’re focused on creating value for our shareholders, and it will be done in a very disciplined manner. I wanted to be clear that (inaudible) it’s not burning a hole in our pocket to just build, deployed or buy something or use it in an undisciplined fashion. So we are having that discussion at the board level right now and stay tuned at something that is very important for us to deploy, but it has to be a disciplined manner, it has to be behind our strategic plan.

Elizabeth Lilly – GAMCO Investors

Yeah. Is there a share repurchase program in place?

Gary R. Maharaj

Yes, there is Beth, it is in the 10-K and the amount of authorization is $5.3 million.

Elizabeth Lilly – GAMCO Investors

$5.3 million?

Gary R. Maharaj

That’s correct, $5.3 million.

Elizabeth Lilly – GAMCO Investors

Okay. right. That’s all thanks. Can I ask one more question?

Gary R. Maharaj

Yes.

Elizabeth Lilly – GAMCO Investors

You know Gary, you say in the press release that your goal is to get the company growing at a double-digit organic growth rate, so as you look at the base of the business today, now that Cypher is not in there any more and Pharma is out, that $45 million to $51 million that you are estimating for 2012, is that, do you believe that going forward of that base you are going to be able to grow double-digit organically?

Gary R. Maharaj

As you know, I’m not looking to provide too much long-term guidance of course here, but delivering double-digit earnings growth over the next several years is a high priority for us. Just to put a finer point of the near term, if you exclude Cypher, we’re a different company without Cypher. So we do have an overhang right now because of the year-over-year comparison going forward, but if you exclude Cypher and looking at both of these business, our fiscal 2012 EPS outlook provide 12% to 35% EPS growth.

For comparison, in fiscal 2011, our core businesses, again, excluding Cypher delivered about 30% EPS growth. So the first thing for me is, we have to get out from this Cypher overhang and I’d like to say our company is a different company without Cypher, not worse, but different and so if you use that as a true base I’m confident that we can deliver double-digit growth rate.

Elizabeth Lilly – GAMCO Investors

Okay. So I take Cypher out and I start with this $45 million to $51 million...

Gary R. Maharaj

Without the overhang.

Elizabeth Lilly – GAMCO Investors

Yeah, without the overhang, and you believe you can grow that number double-digit?

Timothy J. Arens

That’s a high priority for us. So there is really two things here Beth; one is revenue and the other is earnings per share, and Gary did a nice job addressing the earnings per share. The guidance that we provided from a revenue perspective for our continuing operations also provides us with that opportunity. Again, looking at excluding Cypher from the 2011 results and continuing operations in 2012 the upper end of that range gets us there.

Gary R. Maharaj

And Beth, the keyword is sustainable. So, certainly hitting it in one accounting period is one thing, but our intention is to really to build on that and hit that sustainable part.

Elizabeth Lilly – GAMCO Investors

Okay. That’s great. Thank you very much.

Timothy J. Arens

Thanks, Beth.

Operator

Our next question is from the line of Dorsey Gardner with Kelso Management. Please go ahead.

Dorsey R. Gardner – Kelso Management Company, Inc.

Thanks for taking my questions. Those of us who’ve been in the stock for a long time would might really appreciate your consideration of intellectual auction to still got some of that liquidity you have, but last thing we want obviously and you’ve touched on it, I feel you are obviously aware of it is, to have a another acquisition, which doesn’t payoff or what have you, but the other concern is that the company might be a target for some other company to buy them with their own P&L with your own cash and the longer you have that cash, the more attractive you are going to be to somebody who might want to buy you, and I’ve on the stock for over 20 years and it look likes things could become interesting again, it had wonderful management back Dale also was there and you got all track, but if things are turning up, why don’t you make a major investment in the company is what you know the best and provide more upside for those of us who are long-term investors?

Timothy J. Arens

I certainly hear you Dorsey, that is something that the Board understand that position very well and they certainly we understand the other points that you made as well. And that’s exactly what we’ll be doing over the next several months to make sure that one position such as yours are well heard and well added and that we when we do take some action it would be decisive, but strategic as well. So I completely hear you, exactly.

Dorsey R. Gardner – Kelso Management Company, Inc.

Okay, I’d like to add, I think you are doing a wonderful job.

Timothy J. Arens

Thank you.

Gary R. Maharaj

Thank you.

Operator

Thank you. Next question is a follow-up from Gregory Macosko with Lord Abbett. Go ahead.

Timothy J. Arens

Greg, we apologize, you seem to have gotten cut off last time.

Gregory M. Macosko – Lord Abbett

No, Beth covered my question pretty well, but I’ll follow up on it just a tiny bit because I was going to ask about the cash. When is the – I believe you have not been in the market to buy stock in a number of years, or when is the – I assume you are out of the market because you were marketing the pharmaceutical division, when is the last time you were active?

Timothy J. Arens

Last time Greg – this is Tim, was 2010. I think it was $2 million that we used to repurchase our shares.

Gregory M. Macosko – Lord Abbett

Okay. And then understand there is nothing at this point that other than desire that would restrict you from pursuing that buyback?

Timothy J. Arens

Gregory, if I understand your question correctly, we do have over $5 million of authorization remaining, there is nothing that would restrict us from utilizing that other than been in a blackout period.

Operator

Ladies and gentlemen, that is all the time we have for questions at this time. I’d like to turn the call back over to management for closing remarks.

Gary R. Maharaj

Well, I want to thank everyone again today for participating in this quarter’s conference call and we look forward to providing further updates on next quarter’s call. Thank you everybody.

Operator

Thank you, ladies and gentlemen, that does conclude our conference. We’d like to thank you for your participation, and you may now disconnect.

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