SurModics Cut to Neutral

We have recently downgraded SurModics Inc. ( SRDX - Analyst Report ) to Neutral from Outperform with a target price of $16.00.

In November 2011, Surmodics sold the assets of the Pharmaceuticals division to Germany’s Evonik Industries AG for $30 million cash. The deal enables the company to focus extensively on its Medical Device and In Vitro Diagnostics units and also strengthens its balance sheet. Even though we are positive on SurModics’ move to sell its Pharmaceuticals unit we prefer to adopt a wait-and-see stance until the move yields the desired results.

We are also concerned about factors such as partner Johnson & Johnson’s ( JNJ - Analyst Report ) decision to stop manufacturing Cypher and Cypher Select Plus sirolimus-eluting coronary stents. SurModics received royalties on sales of the product. Setbacks of similar nature will negatively impact SurModics stock price.

We remind investors that SurModics has taken a number of steps following its disappointing showing in fiscal 2010. In August 2011, with a view to optimizing its resources and maximizing long-term growth potential, SurModics announced that it will its trim work-force by 9%. Earlier in October 2010, SurModics trimmed its work-force by 13% and made certain changes to its organizational structure.

Moreover, following the disappointing performance in fiscal 2010, SurModics revamped its board of directors and also brought about a change at its helm, with the appointment of a new CEO, Gary R. Maharaj. We note that Maharaj is the former President and CEO of Arizant Inc., which was sold to 3M Company ( MMM - Analyst Report ) in October 2010. However, if the moves fail to deliver the desired results then the stock will be negatively impacted.

In view of the above uncertainties, we see limited upside potential for the stock from current levels. Consequently we have reverted to a Neutral stance on SurModics.