SRDX (2020 - Q3)

Good day, and welcome to the Surmodics Third Quarter Fiscal 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Arens, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir. Tim Aren

Thank you, Dan. Good afternoon, and welcome to Surmodics fiscal 2020 third quarter earnings call. Before we begin, I would like to remind you that during this call, we will make forward-looking statements. These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Surmodics' future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements resulting from certain risks and uncertainties, including those described in our SEC filings. Surmodics disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. We'll also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains reconciliation tables to GAAP results. 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. A press release disclosing our quarterly results was issued this afternoon and is available on our website at surmodics.com. I will now turn the call over to Gary Maharaj. Gary?

Thank you, Tim. Good afternoon, and thank you for joining us. We hope you are staying safe and healthy during this challenging time. I'm quite pleased by our performance this quarter despite the difficulties posed by COVID-19. As we navigate through this pandemic, we continue our commitment to our strategic objectives for fiscal 2020, notably achieving a number of critical milestones and continuing to ensure that we remain well positioned financially. Before we dive into an update on our progress, I'll provide a summary of our top line, and Tim will also cover in more detail later. First, total revenue for the third quarter of fiscal 2020 grew by 10.4% to $26.9 million as compared to $24.3 million in the third quarter of fiscal 2019. Looking at our 2 business units. Medical Device grew 8% to $20.5 million, and In Vitro Diagnostics grew 18% to $6.4 million in the third quarter as compared with the prior year quarter. Our Medical Devices business revenue growth was positively affected by increased license fee revenue from our SurVeil drug-coated balloon agreement with Abbott Vascular, as a result of the CE Mark for our SurVeil DCB. This license fee revenue more than offset a meaningful decline in coatings royalty revenue, which resulted from the impact of COVID-19 and the expiration of our fourth generation hydrophilic coating patents. As a reminder, a key component of our Medical Device business revenue is derived from royalty revenue and therefore, dependent on our customers' sales of devices that use our technology. The procedures using our coatings and products range from urgent to elective procedures, and as a result, remain largely variable and dependent on the recovery of vascular procedures from this pandemic. Medical Device revenue in Q3 was impacted to a significant degree by coronavirus procedure deferrals. However, we were encouraged to hear the resumption of elective procedures and the easing of these restrictions in certain geographies as the third quarter progressed. Turning to our IVD business. The 18% growth we generated in Q3 over last year was a result of continued momentum in key chemical components and the DNA microarray slides, with a small positive impact from COVID-19 diagnostic and serology tests that are in development by our customers, where we are a provider of technology. Tim will discuss Q3 revenue performance in greater detail. But needless to say, we are happy to support our customers who are involved in COVID-related research that can result in better diagnostic and serology tests. Our performance in Q3 exemplifies our team's dedication to our mission in the diagnosis and treatment of disease despite the challenges brought forth by this pandemic. We're committed to making meaningful progress on our initiatives for this fiscal year. As a reminder, this year, we set out to accomplish the following: first, to ensure the continued success of our SurVeil DCB, specifically to perform high-quality patient follow-up for the primary endpoint analysis in the TRANSCEND trial, to obtain the CE Mark and to make substantial progress towards achieving FDA approval; second, to continue to make meaningful advances in product development and the regulatory approvals across our entire product pipeline; and last, to continue to optimize revenue and cash flow performance from the legacy offerings in our Medical Device and In Vitro Diagnostic businesses that fuel our strategic growth initiatives. Starting with SurVeil. As we announced early in June, we attained the CE Mark certification, achieving a major milestone in our mission to pioneer devices that improve treatment of peripheral artery disease. Although we are not forecasting revenue from the sale of SurVeil drug-coated balloon product during the remainder of this fiscal year, we understand that our partner, Abbott, is continually evaluating the appropriate timing for European launch. We are pleased to receive the $10.8 million milestone payment as a result of obtaining the CE Mark. As part of our additional goals for SurVeil, we have successfully conducted 12-month follow-up visits with more than 70% of the patients in the TRANSCEND trial. As discussed last quarter, we have observed some patients who are unable to complete their scheduled 12-month follow-up visit as a direct result of COVID-19. The TRANSCEND trial was robustly designed to accommodate a certain number of patients lost to follow-up, and we are diligently working with the FDA on a plan to account for missing or out-of-window follow-ups in the event that they are critical to the statistical power of the trial. We are tenacious in our follow-up as many patients as we possibly can collect all relevant data for successful trial of statistical analysis. Turning to our second strategic focus, our robust product pipeline. With respect to our Avess DCB, as announced last quarter, we completed data collection in our first in-human study. These results provide important safety data on Avess and directional data on the efficacy of the device. As we shared last quarter, freedom from revascularization of 6 months was greater than 90%. We're equally pleased with the first in-human trial results as we continue to seek a forum to present this important data. As many of you recall, our SurVeil drug-coated balloon agreement with Abbott Vascular includes options to negotiate further agreements for Avess and Sundance drug-coating balloon products. Abbott Vascular has informed us that it has elected to allow the option period for exclusive negotiation of distribution rights for the Avess DCB product to expire. We are excited about the possible clinical benefits that may be provided by our Avess drug-coated balloon and are currently assessing the next steps in its clinical development and future commercialization opportunities. Moving to our Sundance sirolimus-coated balloon for below-the-knee disease. We have successfully initiated the first in-human trial. It's called SWING during the third quarter and have enrolled several subjects outside of the United States. We expect to complete enrollment in this trial in the second half of fiscal '21, barring any unforeseen delays due to COVID-19. This trial is an exciting and important one for us as we test our sirolimus drug-coated balloon platform in a critical clinical application. Turning to our nondrug delivery pipeline and Pounce, our newest device as part of our unique thrombectomy platform. As a reminder, we have an active submission for 510(k) clearance with the FDA first indication, the treatment of clots and peripheral arteries. We continue to actively respond to the requirements from the agency and are targeting clearance in fiscal 2020. With respect to our radial platform, we are excited to announce that we received FDA 510(k) clearance for our Sublime 0.014" radial balloon catheter. This device can access the vasculature via the radial artery and treat below-the-knee lesions. Last year, we received 510(k) approval for the Sublime guide sheath to be used in concert with this device. Our team is continuing to make progress on developing our 0.018" peripheral balloon catheter to treat via radial access more proximal vessels behind and above the knee. As a reminder, both of these balloon catheters can be used to help patients who are suffering from peripheral artery disease in their limbs. Looking forward, we are preparing to bring both the Sublime radial 0.014" catheter and the guide sheath to healthcare settings for clinical evaluations in fiscal '21. Finally, to our product portfolio of specialty catheters, our hydrophilic PTA 0.014" and 0.018" balloon catheters, which expand our partnership with Cook Medical, have now been commercially launched in the U.S. With respect to our Telemark coronary microcatheter, we shipped initial U.S. stocking orders to our partner, Medtronic, in the first half of this fiscal year and in the third quarter, another successful achievement. We achieved a CE Mark for Telemark and have shipped initial European orders. Bearing in mind the challenges of COVID-19, both partnerships are performing to expectations and have contributed to Q3 and fiscal 2020 year-to-date product revenue. Finally, we turn to our third objective for this year, our revenue and cash flow performance to drive investments in total growth initiatives. While in many respects Q3 performance was better than anticipated, it is still too early to speak with confidence on the timing and pattern of recovery to pre-COVID performance. This is especially true given the recent resurgence of cases and with responses continuing to be dynamic and shifting across regions and certain hotspots. We continue to take steps to effectively manage our operating expenses and liquidity, while continuing to drive our objectives. Importantly, as our Q3 performance demonstrated, our focus has not wavered with respect to ensuring that we continue to invest and successfully execute on our long-term growth initiatives. In summary, our business fundamentals remain strong. We continue to make significant progress on our objectives and remain confident in our plan to deliver durable long-term growth and profitability. I want to close by thanking our team at Surmodics for their dedication throughout these challenging times. I am proud of how our team continues to deliver on our mission despite the multiple organizational, economic, healthcare and business hurdles we face with this pandemic. I'll now turn the call over to Tim to provide more details on our third quarter fiscal 2020 results, including some further perspective on the impact of the COVID-19 pandemic is having on our company results. Tim?

Thank you, Gary. During today's call, I will provide an overview of our third quarter operating performance. As we communicated last quarter, due to the uncertainty created by the COVID-19 pandemic, our full year guidance is suspended. However, I will provide some commentary to help provide insight into the impact of COVID-19 on our company as we head into our fourth quarter. These comments are based on circumstances that exist today, which we acknowledge are fluid and subject to change. First, let me speak to the impacts of COVID-19 through our third quarter. During the quarter, our operating results were impacted by the coronavirus pandemic in 4 primary areas: first, our Medical Device coating royalties were impacted by the deferral of elective endovascular procedures. Second, our legacy Ireland Medical Device product revenue was impacted as certain customers reduced or pulled purchase orders. Third, Medical Device R&D revenue from coating services was moderately impacted by reductions in customer orders. Apart for royalty revenue, we have been pleased to see the resilience of our Medical Device business to the impacts of COVID-19. Product revenue from reagent manufacturing has remained steady. Finally, our In Vitro Diagnostics business has benefited from customers utilizing our chemical components as they work on COVID-related research and on antibody tests. Overall, we estimate the COVID-related impact to our third quarter revenue was in excess of $3 million. We understand procedure volume declined sharply in April, with modest recovery in May and June. While we are hopeful that our third quarter saw the peak of the coronavirus impact, the recent increase in cases and hospitalizations across several states suggests that the timing and trajectory of procedure recovery to pre-COVID levels remains uncertain and difficult to predict with confidence. Looking forward, since the end of June, within our Medical Device revenue streams, we are seeing a pickup in customer demand across several of our offerings, including our legacy Ireland balloon catheters and our coating reagents. Anecdotally, we are hearing that several of our customers have seen steady increases in procedure volume through June and into July, which may point to a sequential recovery in our Q4 royalty revenue. Moving to financial results for the quarter. Revenue for the third quarter of fiscal 2020 grew 10.4% to $26.9 million as compared with $24.3 million in the third quarter of 2019. Looking at our 2 business units. Medical Device grew 8% to $20.5 million, and In Vitro Diagnostics grew 18% to $6.4 million in the third quarter as compared with the prior year quarter. Our third quarter royalty and license fee revenue totaled $12.4 million, up $770,000 or 7% from the prior year period, as revenue recognized from the achievement of the $10.8 million SurVeil CE Mark milestone payment offset the impacts related to coronavirus procedure deferrals and the expiration of our fourth generation hydrophilic coating patents. Our SurVeil distribution and development agreement with Abbott Vascular generated revenue of $7.6 million in the third quarter, up $5.6 million compared to the year-ago period. We benefited from the recognition of $6.7 million in Abbott license fee revenue on the CE Mark milestone payment. Royalty revenue declined to $4.8 million in the third quarter as compared to $9.6 million in the prior year quarter which, I'll remind you, saw a $1 million onetime benefit related to an extension of an existing hydrophilic coating technology license. During the third quarter, we estimate that COVID-19-related procedure deferrals impacted royalty revenue in excess of $2 million, while the expiration of our fourth generation hydrophilic coating patents created an expected headwind of approximately $1.8 million compared to the prior year quarter. For the third quarter, we estimated that COVID impact to royalty revenue to be approximately 30% reduction to pre-COVID levels. As a reminder, our third quarter royalty revenue is an estimate of the royalty we will earn on our customer sales of devices utilizing our coatings during the April to June period in excess of any contractual minimums. Product sales of $12 million were a bright spot during the third quarter and increased $2.1 million or 21% compared with the year-ago period. Our In Vitro Diagnostics business saw double-digit growth as it also did last quarter. Our third quarter IVD performance was broad-based as we saw expanding demand across our product portfolio. Our growth was also impacted modestly by demand for our chemical components to support COVID research and serology tests. In our Medical Device business, we saw revenue generated from our recent distribution partnerships for our Telemark and 0.014" and 0.018" balloon catheters more than offset COVID-related declines in our legacy Ireland balloon catheter products. Through the third quarter, we have shipped the majority of initial orders to support the launch of these recently commercialized products. R&D services revenue of $2.5 million was down $350,000 as compared with the prior year period. Our coating services customers have reduced their demand in response to the COVID pandemic. The Medical Device business reported operating income of $530,000 in the third quarter compared to operating income of $750,000 in the year-ago period, which benefited from the previously mentioned onetime coating license extension. Medical Device operating results benefited from increased revenue which was offset by operating expenses, which increased $650,000 and higher product costs as compared to the same prior year period. IVD revenue of $6.4 million in the third quarter was $1 million or 18% compared with the prior year quarter. Third quarter growth was driven by continued demand for our microarray DNA slide products as well as by growth of our protein stabilizers and BioFx substrate products. During the quarter, our growth was partially benefited from COVID research in antibody tests. Strong revenue growth and improving product gross margins drove IVD operating margin expansion in the third quarter to 51% as compared with 46% in the prior year quarter. Product gross margins were down in the quarter at 63% as compared with 66% in the prior year quarter. Product gross margins were primarily impacted by an unfavorable shift in our Medical Device product mix. This decrease was offset in part by the favorable impact of product gross margins from In Vitro Diagnostics, driven by both product mix and leverage on higher revenue volume. R&D expense, including cost of clinical and regulatory activities, was 50% of revenue for the third quarter as compared with 55% in the year-ago period. R&D expense was $13.3 million for the quarter and was essentially flat with the year-ago period. In the third quarter, clinical study costs declined for TRANSCEND and other clinical studies offsetting increased product development investments and costs associated with the initiation of our first in-human clinical study for our Sundance below-the-knee sirolimus drug-coated balloon. SG&A expenses in the third quarter of fiscal 2020 were $7.4 million or 28% of revenue compared to 24% of revenue in the prior year period. SG&A expenses increased 25% compared with the year-ago period. Personnel and other investments to support product development and our strategic initiatives contributed to the expected increase. Now turning to income taxes. We recorded income tax benefit of $1.2 million in the third quarter as compared with an income tax benefit of $260,000 in the prior year period. Both periods reflect the impact of nontax benefited amortization and operating losses in Ireland. On a GAAP basis, our diluted earnings per share were $0.18 in the third quarter as compared with $0.11 in the prior year quarter. On a non-GAAP basis, our earnings per share were $0.21 in the third quarter of fiscal 2020 versus $0.15 in the prior year quarter. Moving to the balance sheet. We continue to have a strong cash position and no debt. In the third quarter, we began with $48.4 million of cash and short-term investments and generated $11.4 million of cash from operating activities. During the quarter, we received the previously mentioned $10.8 million Abbott milestone payment and we also paid approximately $300,000 for capital expenditures. As of June 30, 2020, we had cash and short-term investments totaling $60.6 million. From a liquidity perspective, we are in a solid financial position for both our near-term and future needs. Operator, this concludes our prepared remarks. We would now like to open the call to questions.

[Operator Instructions] We'll take our first question in queue, comes from Jim Sidoti, Sidoti & Company.

Can you hear me?

Jim, we hear you well.

All right. Great, great. Glad everybody's well there. I just want to be clear, the $10.8 million payment from Abbott, was that recorded as $10.8 million in the quarter or something less than that into -- on the income statement?

Yes. It's recorded less on the income statement. We recorded $6.7 million of the $10.8 million on the Q3 income statement.

Okay. And then the rest will be spread out over the next couple of quarters?

Yes. It will go out through the 5-year follow-up period of the TRANSCEND study. So it will be treated in the same manner that the upfront license fee is being treated as well as the first milestone payment, the completion of the 446 patient enrollment in the study.

And has Abbott indicated to you when they plan to launch the device in Europe?

As a partner, they're assessing the situation with the COVID pandemic and also, as you know, the paclitaxel issue. One thing to keep in mind, Jim, is the TRANSCEND data could be seen as right around the corner potentially later in this calendar year. So in terms of marketing against a very crowded European field that may be a relevant data set that they may need as well. So we'll continue to work with them. Our job is to make sure we're able to supply them on the decision to go with a full launch.

Okay. And you indicated that because the COVID, follow-up has become a little more challenging. Do you think that delays the release of this data?

Well, we've been in continuous discussions with the FDA, and the agency has been eminently practical about this. Clearly, the cohort of patients we're treating are also the cohort of patients who suffer much worse consequences of catching COVID. So there's been -- in some of the cases, there's been a reluctance to go into the hospital or the clinic. And in some cases, the hospital clinic was not able to accommodate them within window. So yes, so we have lost some, but we're continuing to follow. As I said, I think we're over 70% of the entire cohort that have had an in-window follow-up. It's the remainder of that 30%, we're doing everything we can, including the ones that we still have left within window, and that will be through the middle of September. So, there is a possibility we may wait for some late comers out of window. Just because in discussions with the agency, they're going to look at the completed cases, those are the ones that are done according to protocol, but they're also interested as we are in the totality of the data. So the question is if there are some straggling cases that have come in outside of September, October or November. We'll have to make that decision as we go forward. We don't envision that right now, but it's not out of the realm of possibility. Nonetheless, the work to lock the database, clean it and all that stuff is ongoing. So we're not waiting for everything to line up to do that. The team will be actively scrubbing and locking, so that if we do wait for some late follow-up, it's not as much on the critical path.

Okay. And with regards to Sublime, now you have the balloon and the guide sheath approved, I assume that those will go to the same partner?

Yes. Well, first, we want to do -- we started in a bit wrong side, right? We have the guide to be able to access the guide sheaths. And in many respects, it's a road to nowhere because our guide sheath, I believe we still have the smallest sheath compatible in the 5-French version that's on the market or that has clearance. And now we have -- I think our team fact-checked this simply the longest balloon that's ever been created. This is a 2.5 meter working length device. As I always joke, we could treat people of Tim's height with it. It's a long, long balloon obviously. So, now we have the sort of critical mass, complementary devices to evaluate them. It's no sense of like evaluating the sheath without a therapeutic device. And without a therapeutic device -- without the sheath, the therapeutic device wouldn't have as many legs. So the first step as usual is we want to make sure that those devices perform clinically as expected. And we're going to take our time to do that because they're quite unique devices, and it's a quite unique approach for radial to the periphery. So partners may be interested at this time, but we want to get our -- this part of the job done first before we talk to them about it.

Okay. And then, last one for me on Avess. It sounds like since Abbott passed, you'll look for other options. Is one of those options to start the trial on your own?

Yes. So recall during the contract negotiations with SurVeil, Abbott had wanted to have the value of an option. And we -- so in negotiation, there was some value assigned to the option, and they got the option. I would characterize it as allowing the option to expire is not unexpected from our viewpoint. Keep in mind, again, the TRANSCEND study results are probably a few months off, right? 3 to 5 months, let's say, off. And if -- it's the same technology in a vest that's in SurVeil. imagine if it's a comparison with Medtronic, and Medtronic has good results in the AV space. So you could see if the TRANSCEND data looks good, favorable for SurVeil with respect to Medtronic, you could somehow translate that to different vascular that of AV. It's not identical. It's not totally scientific, but you can make a much less risky bet of that point. And so I think at that time, we will continue just as we did in SurVeil, the clinical and product development behind Avess. We have to fill out the matrix. There's big balloon diameters and substance. There's a lot of work to do before we contemplate doing the next stage of clinical. And by the time we finish that work, we'll also have the TRANSCEND data available. I think that will help us understand the value -- the residual risk and the value of what we have to base the next clinical development. But as usual, when we believe in something, partners may come, partners may go, but as we continue to fill this out, we believe it could create more value for a better deal down the road.

Okay. And I guess I do have one more. The In Vitro Diagnostics business, it sounds like you saw actually uptick in that business because of COVID. Is that a trend you expect to continue through the rest of fiscal...

Yes. I'll let Tim talk to that. But we want to be very careful about -- I mean, that was a nice small benefit, I mean, intrinsic momentum. The businesses has really drove it. But it's really hard to predict in early research stage. Tim, you want to add?

Absolutely, Jim. It's a very good question. And so just to remind folks, IVD, the Diagnostics business grew 18% to about $1 million year-on-year. And just on that growth, we're talking a pretty modest amount of that growth, well less than 50% and probably maybe, say, you wouldn't be wrong thinking it might be closer to the 25% of that growth was coming from COVID-related activities. As Gary mentioned, it's way too early. I mean we have multiple partners that are working on things. And you just don't know how long it will take to get into markets and get adoption but we're pleased with what we're seeing. And clearly, at this point here, we're happy to provide our customers who are working on COVID-related activities with our chemical components to help them develop the best possible serology tests and help us with the pandemic.

We'll take our next question in queue, comes from Brooks O'Neil, Lake Street Capital Markets.

I'm going to try to ask as many questions as Jim did, see if I can get answers there. But my first one is, you talked quite a bit about the patent expiration on Gen 4. And just curious if you could share with us sort of your outlook for that business going forward? And how you stand with Gen 5? And what's going on there and whatnot?

Sure. It's a great question. Brooks, we've characterized Gen 4 previously, in fact, back in November as we're entering into fiscal 2020 kind of what we expected the impact to be. And at that point, we highlighted a $5 million to $5.5 million headwind. And I'll tell you, we continue to think that's the case. So I would suspect that Q4 is probably going to be slightly larger headwind than what we saw here in Q3, the $1.8 million. And then I did articulate previously that with regard to fiscal 2021, we'll continue to see some impact from patent expirations. But it will probably be about half of the amount that we're anticipating here for fiscal 2020. So somewhere $2.5 million to $3 million is probably what one should probably think the impact will be in fiscal 2021. Gen 5 actually was probably the best performing of our hydrophilic coating generations. It came in flat for the quarter. Unfortunately, other generations were impacted not only by COVID, which I think overall reduced our portfolio by about 30% versus what we would have seen without it. So we're pleased with Gen 5. And I think once we get out of this environment with COVID, we're going to see some robust growth from Gen 5.

Great. And then Jim asked you about the Avess product. I'm not sure I understand sort of what the commercial outlook is for Sundance. So could you just talk a little bit about that?

Yes. We were really pleased to get that trial up and running and start enrolling patients. I guess I could say this, now, we had hoped -- we actually had a teed-up for March. And then some of the Western European countries that we're about to start on actually had really massive COVID, including one of the principal investigators at the sequester. So by the time she was able to get back, we couldn't really start the trial. So it was a really spectacular execution on our team to get it started in -- at least in Western Europe. We have 7 sites that we are targeting to get this trial enrolling. And this is on our 0.014" below-the-knee platform where we're using sirolimus with the similar technology and the excipient that we use. So we're quite excited about this because it will tell us how well this device and the technology itself can perform. The idea is to be able to finish enrolling this trial sometime into fiscal '21. And it's a 6-month follow-up. So then we'll be able to, after that follow up, assess the viability of that device. The -- it's really a safety study, but it will get some directional efficacy data as well. Abbott also has the option right remaining with respect to the Sundance product as well. So -- but we don't know -- I don't believe there's any U.S.-approved BTK device at this point. But keep in mind, we also got the breakthrough technology designation from the FDA of this product. I thought it was last year, we're able to get that. So quite excited, but the job is to really enroll this trial with high quality even in the light of COVID and follow-up those patients within the next year.

Great. And then my last one, I was only joking about Jim. My last question is, obviously, you're spending 50% plus of revenue on R&D today. And it's very tremendous fruit. We're really excited about it. But I'm curious if you could share sort of your early thinking about how you might handle the R&D spending as we get into that period where the revenue growth starts to take off as some of these whole products launch.

Sure. Tim can comment a little bit more on the details. But when we talk about our R&D right now, it's really -- we're doing pipeline development. And pipeline development means you have to have a pipeline, intrinsic value of what we have with that pipeline. So we're still building a pipeline, and we're not in steady state or what I call product development yet. And that steady state really comes by where the returns from things coming out of the pipeline start offsetting the investments going into the pipeline. Right now, that is completely out of balance because we have to invest in the pipeline for a long-term future. The other thing to consider is that the combination products like DCB and Avess are pretty heavy hitter, right? So we're committed to SurVeil until we see this data. The TRANSCEND data will also help us how to think about Avess. And then we have, in the next 6-plus quarters, we'll see how Sundance does. So really, if you're in for this, you have to be in for that time period. The non-drug products like the Sublime and Pounce, thrombectomy and stuff like that, those will start returning probably earlier than the second two DCBs. So sometime in the '23 to '24 period -- I would say, hopefully closer to '23, you'll start to see what I call dynamic equilibrium where the investments in the pipeline are now being somewhat offset by the returns from them. I want to be clear, our R&D as a 50% of revenue is not going to be like that forever. But the thing we want to make sure is we wanted there because the denominator of revenue is going up. So that's what's really going to change that ratio.

Yes. Let me provide a little bit more context and color for you as well, Brooks. I think it's a little bit probably early and premature to fully appreciate what the clinical study funding might be and who it might be coming from as it pertains to our below-the-knee drug-coated balloon as well as the AV access drug-coated balloon. But what I would tell you is even if Surmodics were to fund pivotal studies for both of those technologies, I don't see our overall aggregate dollar spend being much different than what we've spent last year or perhaps even this year, which is, to remind you, somewhere in that low 50s kind of range. If we're not funding that, and it's going to be significantly lower. And I'll -- just to put it in context. I think last year, we spent -- it could have been somewhere right around $11 million, maybe a little bit north of $11 million on TRANSCEND and the AV first in-human studies. So it gives you a little sense of the context of what we're spending annually on that. And put it into context here, if you think about the remaining spend for TRANSCEND, it's coming down, like, I think this year, it's maybe going to be $7 million-ish relative to what we spent last year. So as you kind of go through the gestation period of these clinical studies, you actually do see lower spend. But it depends on when the other things are going to be coming online. But without providing any long-term guidance, I just want to frame up, I think it would be -- there would have to be something extraordinary in terms of interest and excitement for us to go above the kind of level that we've been spending over the last two years. And as Gary was describing as the revenue streams come online, you're going to be looking at R&D as a percentage of revenue, it's going to be dropping significantly from where we're at. I would probably direct you to think back to the pre whole-product solutions there where we're spending somewhere around 30%, 35% on R&D as a percentage of revenue. So probably not a bad place to think longer term. But when we have a few more things solidified, we'll be able to provide a lot more clarity and color for you.

[Operator Instructions] We'll make our -- next question in queue comes from Mike Matson, Needham.

It's David on for Mike. And I guess I'll see how many questions I can ask. I'm just kidding. No, but I've been hopping between calls, so I apologize if you got any of this in your scripts. But I guess just on -- first on the IVD business. Understand that it's between 20% and -- 25% and 50% is from COVID-related project. But if those do really take off, do you have any capacity constraints at all?

Yes. No, it's something that we talked about a lot around here. I mean if it really, really took off, it would be a good problem to have, but one that I think we could probably solve but we do have capacity, and we can always look at adding shifts or lines. So at the present time, I feel we've got that covered. And I think our team wouldn't be overly shy about having to tackle that "problem," if it were to take off, and we had an opportunity to provide a lot of chemical components to support these tests.

Okay. I appreciate that color. And then just on the thrombectomy project. I forget the name of it now. But I think it will be an arterial indication. Is that right? And then can you talk about the pathway to other indications and making it a venous product? I'll just leave at it there.

Sure. We -- yes, it is going to be initially an arterial indication that's called Pounce. And we're in front of the agency right now. Quite a lot of learning in the arterial indication with the back and forth with the FDA. So that will be very helpful as we choose the next indication. I think the first thing is Pounce, as we get it out there, devices like this, as you well know, are heavy hitters. I mean if there's complete therapeutic solutions that we're providing here, so we want to make sure the concept works well. We're very confident it will work well on arterial. The issue of where we go next. In fact, we've been discussing that. Clearly, the venous indication is on adjacency, you can go from arteries to veins and then there's PE and stroke. I highly doubt we'll go straight into stroke. That's a pretty a longer-term potentially PMA type. And we've got our hands full of fair amount of PMA-type devices right now. But clearly, between DVT and PE, we believe it has legs. We've got to decide where is the best, not just market opportunity, but one of the things we want to optimize is the learnings from the arterial may play easy into the venous side. It's very different. Veins move around. They're soft, the blood flowing, I will say in the wrong direction, but blood's flowing in back to the heart and lungs. So the extensibility of the platform, what we learn from our arterial experience and the market size. So it's a multifactorial thing. It's -- this just use market size to determine these, but I think we want to move quickly into the next indication. So I get one vote on the team, but my vote would be get to the indication that's easiest to extend and get into play. So I know I haven't answered your question, but I think it's going to come down between venous and PE.

This concludes the Q&A. I will now turn it over to management for any closing remarks.

Thank you. We want to close by expressing our sincere appreciation to those on the front line who remain dedicated to supporting patients and to keeping our communities running. Please stay safe, and everyone be well until our next quarter earnings call. Thanks, everybody.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.