Zacks_Analysts' Blog : Setback for SurModics - Analyst Blog

SurModics Inc. (SRDX) received a blow when Cordis Corporation, a division of Johnson & Johnson (JNJ), announced that it will stop manufacturing Cypher and Cypher Select Plus sirolimus-eluting coronary stents by year end.

The news impacted shares of SurModics negatively. SurModics receives royalties from Johnson & Johnson on sales of the product.

However, management at SurModics is not too perturbed by the recent development since royalties from the sales of Cypher stent (reflecting revenues from the Medical Device unit at SurModics) have been on the decline due to reduced sales of the product.

Sales of the product have been on the decline due to increased completion from big players like Abbott Labs (ABT), Medtronic Inc. (MDT) and Boston Scientific Corporation (BSX). The exit of Johnson & Johnson from the stent market should enable the competitors to gain further market share. We believe that revenues from hydrophilic coatings, which are on the rise, should compensate the loss of revenues from the Cypher stent. According to Johnson & Johnson, global sales of Cypher during the most recent quarter were down 41% year over year and 16% sequentially.

Our Take & Recommendation

Even though Johnson & Johnson’s decision to stop manufacturing the Cypher stent is a blow to SurModics, we believe the impact of the blow will not be very severe as loss of revenues are unlikely to be of a high magnitude (since sales of the product have already been declining).

We believe that investors should be more concerned about the outcome of the measures taken by SurModics to revive itself (work-force reduction, change in management and operating segments), rather than on the loss of Cypher stent revenues. We believe that the current price represents an attractive entry point for long-term investors. Consequently, we maintain our long-term Outperform recommendation on the stock. SurModics carries a Zacks #1 Rank (‘Strong Buy’ rating) in the short run.