Surmodics, Inc. (NASDAQ:SRDX) Q4 2022 Earnings Conference Call November 9, 2022 10:00 AM ET
Company Participants
Gary Maharaj – CEO, President & Director
Timothy Arens – SVP, Finance & Information Technology & CFO
Conference Call Participants
Michael Petusky – Barrington Research Associates
Brooks O’Neil – Lake Street Capital Markets
James Sidoti – Sidoti & Company
Michael Matson – Needham & Company
Operator
Welcome everyone to Surmodics’ Fourth Quarter and Fiscal Year 2022 Earnings Call. Please note that this call is being webcast. The web is accessible through the Investor Relations section of the Surmodics website at www.surmodics.com where an audio replay will be archived for future reference. An earnings press release disclosing Surmodics quarterly results was issued earlier today and is available on the company’s website as well. Before we begin, I would like to remind everyone that remarks and responses to your questions on today’s call may contain 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 Surmodics forward-looking statements resulting from certain risks and uncertainties, including those described in Surmodics SEC filings. Surmodics disclaims any duty to update or revise these forward-looking statements as a result of new information, future events, developments or otherwise. This call will also include references to non-GAAP measures because Surmodics believes they provide useful information for investors. Today’s earnings release contains reconciliation tables to GAAP results.
I would now like to turn the call over to Mr. Gary Maharaj, Surmodics President and Chief Executive Officer. Please go ahead, sir.
Gary Maharaj
Thank you, operator. Good morning, everyone, and thank you for joining us for our fourth quarter and fiscal year 2022 earnings call. Overall, it has been a solid quarter, and we achieved strong revenue performance and continued progress on our strategic objectives as we closed out the year. I’ll start my remarks today with a brief review of our revenue performance for the fourth quarter and full year.
In the fourth quarter of fiscal 2022, we achieved total revenue of $26 million, representing growth of 8% year-over-year. We were pleased to finish the year on a strong note, exceeding the high end of our revenue guidance, which implied fourth quarter growth of 4% year-over-year. Our total revenue growth in the fourth quarter was exclusively driven by medical device revenue, which increased 12% year-over-year, offset slightly by a 1% decrease in — In Vitro Diagnostics or IVD revenue.
Within our Medical Device business, the outperformance that we saw in the fourth quarter relative to our expectations was driven by a combination of stronger-than-anticipated product sales, including sales of our Pounce and Sublime products, along with higher-than-anticipated license fee revenue related to our SurVeil agreement. Our strong fourth quarter revenue performance enabled us to generate total revenue of $100 million for the full year fiscal 2022.
As a reminder, fiscal 2021 included $11.3 million of revenue that was recognized in connection with an Abbott milestone payment. Normalizing for this milestone payment, we grew total revenue by 5% year-over-year in fiscal ’22, driven by 6% growth in our Medical Device business on a normalized basis and 3% growth in our IVD business. All in all, we were pleased by the solid revenue performance achieved by our team as we continue to invest in our business and position Surmodics for strong, sustainable long-term growth.
Tim will discuss our financial results in further detail. But first, let me share an update on our recent operational progress with respect to the 3 strategic objectives, which have been our focus. Beginning with our first objective, to achieve premarket approval for the SurVeil drug-coated balloon and support Abbott’s commercialization efforts. As a reminder, after submitting the final module of our SurVeil PMA submission to the FDA on June 21, 2021, we received a request from the agency for additional data to support their review, which we discussed in our fourth quarter fiscal 2021 earnings call. Much of this past fiscal year, our regulatory and clinical teams have been focused on engaging with FDA to obtain clarity on the additional data and test requests and obtaining this data by working in partnership with independent test labs.
During the fourth quarter, our teams continue to work diligently with our independent testing partners to gather this requisite data with our external advisers and to prepare our response to the agency’s comments. As a result of our team’s efforts, I am pleased to report today that on October 13, we submitted a complete response to FDA’s comments on our SurVeil PMA application. Our SurVeil PMA submission is currently under review by the agency.
While the duration of the FDA’s review process is ultimately outside of our control, we anticipate obtaining approval by the end of the second quarter of fiscal 2023. As a reminder, receiving PMA approval will result in either a $30 million or a $27 million milestone payment from Abbott, depending on whether the approval was received on or before December 31, 2022. If we are to receive PMA approval on or after June 30, 2023, the milestone payment would be $24 million. Although we can never be certain about what action the FDA will take regarding our application for premarket approval of SurVeil. We believe strongly that application and our related data supports the safety and efficacy of SurVeil and ultimately, the approval of the product.
On November 1, we are pleased to see the 24-month data from our SurVeil TRANSCEND clinical trial presented the Vascular InterVentional Advances conference, also known as VIVA. These data demonstrate comparable sustained clinical outcomes between the SurVeil DCB and the IN.PACT Admiral DCB cohorts through 24 months in both primary and safety efficacy endpoints. This is despite the IN.PACT device having 75% more paclitaxel. In addition to our regulatory progress, we are focusing on preparing to support Abbott’s commercialization of SurVeil, which we continue to expect following the receipt of the PMA. To that end, the Surmodics and Abbott teams have had several meetings in recent weeks to review and discuss a variety of aspects regarding Abbott’s plans for U.S. commercialization, including launch timing and order forecasts. We are obviously limited in terms of what we can discuss publicly at this stage, but suffice to say, we remain excited about our partnership with Abbott and the prospects for U.S. commercialization after SurVeil receives PMA.
Turning to our second strategic objective to demonstrate the commercial viability of our Sublime radial, Pounce arterial and Pounce venous thrombectomy platforms. We began the early commercialization of our Sublime radial and Pounce arterial platforms in a limited scale in the first quarter of fiscal 2022, in tandem with building out our direct sales force, which initially included only 5 territory managers.
Throughout the fiscal year, we continued our work to establish, onboard and train our direct sales team. At the year-end, our direct sales force consisted of 27 territory managers. In addition to establishing our direct sales force, fiscal 2022 has largely been about building a commercial pipeline for Sublime radial and Pounce arterial thrombectomy platforms. Building our initial customer base is a key aspect of this process and one which requires each potential new customer to pass through several phases, including approval from a hospital or a clinic value analysis committee.
Our stated goals in this respect would end the fiscal 2022 with over 100 total customers for our Pounce and Sublime products while generating modest but meaningful and growing revenue beginning in the second half of the year in connection with increasing adoption and utilization of these products. I’m pleased to report that we achieved both goals. At year-end, we had just over 100 total customers. And from a revenue standpoint, we are pleased to see strong sequential sales growth in each quarter throughout fiscal 2022. In the second half of fiscal 2022, we generated more than 3x as much Sublime and Pounce revenue compared to the first half of the year.
In the fourth quarter, specifically, our sales organization continued to focus on building our customer base and driving repeat orders in our existing accounts. We saw strong sequential sales growth on a quarter-over-quarter basis, along with continued evidence of increasing adoption as evidenced by our expanded customer base. In terms of our pipeline of prospective customers, we continue to see healthy growth in the number of evaluations by hospital value analysis committees.
And from a utilization standpoint, approximately 80% of our customers ordered 1 or more times during the fourth quarter on par with the levels that we saw in the third quarter. While we remain in the very early innings of our initial commercial efforts with an average rep tenure of 7 months across our direct sales force, we’re pleased with the progress we’re seeing with the foundation that we have established to drive future growth in the years to come.
And lastly, with respect to our third strategic objective to drive revenue growth and optimize cash flow from our Medical Device coatings offerings and our IVD businesses. For full fiscal 2022, revenue growth from our Medical Device coatings offerings in our IVD business was 2% and 3% year-over-year, respectively. Our Medical Device coatings revenue growth was consistent with a low to mid-single-digit range we anticipated heading into fiscal 2022. While the growth of our IVD business came in slightly below our initial expectations for the year due to the decline in R&D services revenue. IVD product sales, however, increased 8% year-over-year. Both of our Medical Device coatings offerings and our IVD businesses delivered solid operating results this past year, in line with our expectations, and we remain confident in the ability to continue to generate meaningful operating income and supporting our growth initiatives in 2023.
Before I discuss our priorities for 2023, I’d like to provide a quick update on some of our recent progress related to our new product pipeline and financing strategy. On the new products front, beginning with our Sundance sirolimus drug-coated balloon. We were pleased to see the 6-month data from our 35 patients swing below-the-knee first-in-human trial presented at the Amputation Prevention Symposium on October 11. These data met the trial’s primary safety endpoint and no perioperative deaths, no amputations at 30 days and demonstrated excellent primary patency of 88.5% at 6 months.
We remain focused on identifying and evaluating potential partnership opportunities for the development and future commercialization of Sundance. In recent months, we have received interest from a number of large medical device companies and have been engaged in discussions with several companies in connection with this process. Although it would be premature at this point to provide further details on these discussions, we have been pleased with the level of interest shown in Sundance, which reflects our belief in the potential of this technology to improve the treatment of arterial blockage below-the-knee.
With respect to our Pounce venous thrombectomy platform. We’ve resolved the manufacturing delays that we discussed on our third quarter earnings call and plan to continue to conduct limited market evaluations of the product in the second quarter of fiscal 2023. Our aim in conducting this limited market evaluation for new products is to gain experience across a wide variety of cases and clinical conditions and evaluate the feedback from numerous physicians. The real-world feedback obtained through these evaluations will help inform any potential design enhancements that could benefit physicians and patients while optimizing commercial viability.
In terms of the progress made in our financing strategy, on October 17, we announced that we retired our prior revolving credit facility and entered into a new 5-year credit agreement, providing us with access to up to $125 million in non-dilutive debt financing. As we discussed previously, we believe securing this increased borrowing capacity is a responsible step given the current macro environment. It enables Surmodics to further strengthen our balance sheet as we await PMA approval for SurVeil and ensure we have the financial flexibility to support our long-term growth strategy. Tim will provide some additional color on agreement later in today’s call.
Stepping back, we brought fiscal 2022 to a strong conclusion in the fourth quarter, generating solid revenue performance and continued operational progress. I’d like to thank the entire Surmodics team for their dedicated efforts during the past year and their contributions to our success as we continue to work to improve the lives of the patients that benefit from our technologies.
As you can see from — some of the progress that I’ve highlighted in recent months, we’re not taking our foot off the gas in fiscal 2023 with respect to our 3 strategic objectives, which are as follows: first, to achieve the PMA for SurVeil and support Abbott’s commercialization efforts; second, to advance the initial commercialization of our Sublime radial and Pounce arterial thrombectomy platforms, turning the corner from market entry to rapid growth. And third, to drive revenue and cash flow growth from our Medical Device coatings offerings and IVD business. By continuing to execute on these strategic objectives and remaining focused on our approach to capital allocation, we will position Surmodics to drive long-term growth and ultimately, generate enhanced future value for our shareholders.
I’ll now turn the call over to Tim Arens, our Chief Financial Officer, to provide more details on our fourth quarter fiscal 2022 results and fiscal 2023 guidance. Tim?
Timothy Arens
Thank you, Gary. Total revenue for the fourth quarter of fiscal 2022 increased $2 million or 8% year-over-year to $26 million compared to $24 million in the prior year period. Product revenue increased $1.9 million or 15% year-over-year to $14.4 million in the fourth quarter of fiscal 2022. The year-over-year increase in product revenue was primarily driven by medical device product revenue, which increased $1.6 million or 26% year-over-year due to strong sales of our devices, including growing contributions from sales of our Pounce arterial thrombectomy and Sublime radial platforms. We also saw contributions from growth in IVD product revenue, which increased $240,000 or 4% year-over-year, driven by growth across several IVD product lines, which was partly offset by unfavorable order timing for distributed antigen products.
Royalty and license fee revenue increased $640,000 or 7% year-over-year to $9.5 million. License fee revenue increased $1 million or 84% year-over-year related to our SurVeil agreement with Abbott. Royalty revenue decreased $390,000 or 5% year-over-year. Royalty revenue continues to be impacted by multiple pressures on procedure volumes related to hospital capacity constraints and customer supply chain disruptions. R&D services revenue decreased $500,000 or 19% year-over-year to $2.1 million. The year-over-year decrease in R&D services revenue was primarily due to the completion of a customer development program in our IVD business.
Also, we discussed in previous calls, R&D revenue continues to be impacted by lower customer demand for our medical device coating services, largely due to continued supply chain challenges related to certain customer supply products. Before I continue down the P&L, let me remind you that in the fourth quarter of fiscal 2021, we had a $3.6 million benefit to operating income related to the employee retention credit or ERC, through the CARES Act. This $3.6 million benefit represents a headwind to our year-over-year performance for the fourth quarter of fiscal 2022, impacting product gross margin, R&D expense and SG&A expense.
Details on the prior year benefit can be found in our fiscal 2021 Form 10-K. Product gross margin in the fourth quarter of fiscal 2022 was 61% compared to 67% in the prior year period. The decrease in product gross margin was impacted by a 3.7%-point headwind from the prior year ERC benefit and by changes in product mix related to the introduction of new products that have yet to benefit from scale. R&D expense, including cost of clinical and regulatory activities, increased $1.5 million or 14% year-over-year to $12.3 million in the fourth quarter. In addition to the ERC headwind, I mentioned earlier, the year-over-year increase in R&D expense was driven by increased product development investments in our Pounce and Sublime product portfolios, partially offset by lower drug-coated balloon spend.
SG&A expense increased $5.9 million or 75% year-over-year to $13.8 million in the fourth quarter of fiscal 2022. The increase in SG&A expense was primarily driven by increased sales and marketing activities, including the expansion of our direct sales force and related investments to support the commercialization of our Pounce and Sublime products. Our Medical Device business reported an operating loss of $6.2 million in the fourth quarter compared to $800,000 loss in the prior year period. The year-over-year change was driven primarily by the aforementioned sales and marketing investments. The prior year period also includes a $2.3 million benefit related to the ERC. Our IVD business reported operating income of $2.8 million in the fourth quarter or 43% of revenue compared to $3.4 million or 51% of revenue in the prior year period. The prior year period included a $480,000 benefit related to the ERC. Taking into account the ERC headwind, IVD income as a percentage of revenue was comparable to the prior year period.
Now turning to income taxes. We recorded income tax expense of $7.9 million in the fourth quarter of fiscal 2022 compared to income tax benefit of $270,000 in the prior year period. Tax expense for the fourth quarter included a noncash charge of $10.2 million to record a full valuation allowance against U.S. deferred tax assets. It is important to note that this charge has no impact on cash taxes and that the net operating losses that underlie the deferred tax assets remain available to reduce future cash tax obligations. GAAP net loss in the fourth quarter of fiscal 2022 was $14.7 million or a loss of $1.06 per diluted share compared to a loss of $290,000 or a loss of $0.02 per diluted share in the prior year period.
Non-GAAP net loss in the fourth quarter of fiscal 2022 was $3.7 million or a loss of $0.26 per diluted share compared to a loss of $1.3 million or a loss of $0.10 per diluted share in the prior year period. Adjusted EBITDA loss in the fourth quarter of fiscal 2022 was $2.5 million compared to adjusted EBITDA of $510,000 in the prior year period. Now our adjusted EBITDA in both periods includes an adjustment for stock-based compensation expense. For your reference, we include a detailed reconciliation in our earnings press release.
Moving to the balance sheet. In the fourth quarter, we began with $22 million of cash and investments. During the fourth quarter, cash used by operations was $2.5 million, and capital expenditures totaled $570,000. As of September 30, 2022, we had cash and investments totaling $19 million, and the balance in our line of credit remained unchanged at $10 million. Subsequent to the quarter end, we entered into a new 5-year credit agreement with MidCap Financial in mid-October, comprised of up to $100 million in term loans and a $25 million revolving credit facility. We drew $25 million on the term loan and $5 million on the revolving credit facility at close. These proceeds were partially used to retire our prior revolving credit facility with Bridgewater Bank, of which $10 million was outstanding. Upon closing, our cash balance increased by $19.5 million.
Turning now to fiscal 2023 guidance. We expect fiscal 2023 revenue to range from $103 million to $107 million, representing an increase of 3% to 7% compared to the prior year. We expect fiscal 2023 GAAP loss per diluted share to range from a loss of $2.80 to a loss of $2.40. Non-GAAP loss per diluted share in fiscal 2023 is expected to range from a loss of $2.54 to a loss of $2.14. Our fiscal 2023 guidance excludes revenue associated with the achievement of the final SurVeil milestone payment upon receipt of the PMA from the FDA, which has been our practice with previous regulatory milestones, and it also excludes SurVeil commercialization revenue. As Gary commented earlier, we anticipate receiving the PMA approval by the end of Q2 fiscal 2023, which will result in either a $30 million or $27 million milestone payment from Abbott. The revenue that would be recognized in fiscal 2023, assuming a $27 million milestone payment would be approximately $25 million, and the earnings per share impact would be approximately $1.75 per share.
I’ll now share a few additional considerations for modeling purposes. From a macro perspective, our guidance assumes that the current environment remains consistent with fiscal 2023 with respect to the recent headwinds, including supply chain constraints and hospital staffing shortages impacting procedures. Our fiscal 2023 total revenue guidance assumes revenue for our 2 businesses, Medical Device and IVD, expected to be approximately 73% and 27% of revenue, respectively. Product revenue is expected to be approximately 58% of total revenue, driven in part by contributions from sales of our Sublime radial and Pounce arterial thrombectomy platforms as we continue to drive increased adoption and utilization. Revenue associated with our legacy Medical Device coatings offerings and IVD businesses are expected to grow modestly.
Abbott SurVeil license fee revenue is expected to range from $3.5 million to $4 million. This compares to $5.7 million in fiscal 2022. In terms of expenses, our fiscal 2023 guidance reflects product gross margin contraction of several hundred basis points, driven primarily by product mix and inflationary pressures. We expect operating expenses, excluding product costs, to grow in the low to mid-teens, driven primarily by a full year expense associated with the fiscal 2022 new hires and investments to support our growth initiatives.
With regard to R&D expense, we anticipate quarterly spend of $12.5 million to $13 million. SG&A expense is expected to grow approximately $500,000 sequentially each quarter throughout the year. Related to our recent financing, interest expense is expected to be $3.4 million. With respect to tax, we expect to have minimal tax expense during the year as a result of the establishment of the full valuation reserve against our deferred tax assets. This means our earnings per share will not include tax benefits on net operating losses. Lastly, with respect to our revenue growth in the first quarter of fiscal 2023, we expect first quarter revenue to decrease in the high single digits on a quarter-over-quarter sequential basis. We expect revenue growth to increase on a quarter-over-quarter basis beginning in the second quarter and continuing for the remainder of fiscal 2023. With that, operator, we would now like to open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question will come from Mike Petusky with Barrington Research.
Michael Petusky
So I guess on the Pounce and Sublime contribution. Obviously, the improvement from first half to second half, I think you said it was 3x. — sounds good, but it’s sort of meaningless as a stand-alone statement, in my view because if it’s $10,000 going to $30,000, not so impressive, if it’s $1 million going to $3 million, which I’m sure it’s not. I’m sure the truth is somewhere between those 2 ranges. It’s more meaningful. And I guess my question is, when — given how much of cash flows and the income statement you’re giving up for this investment in sales, when might you guys start to disclose what you’re actually generating in those platforms.
Timothy Arens
Yes, Mike, thank you for the question. It’s a question that I think is an important one, and it’s one that we’re sure others are thinking about. I think the way that Gary and I think about this, this past year and currently today, we’re in a position where we’re actually focused more on making sure that we’re building out the customer pipeline, seeing repeat orders and seeing increasing utilization amongst our customer base. And those are the measures and the metrics that we believe will get to the output that you’re asking for, which is what can we expect in revenue. We are not looking to put too fine of a point on it other than to say that a significant portion of the growth for fiscal ’23 with regards to our revenue and our product revenue, in particular, is expected to come from Pounce and Sublime. We’ll have more to say on it as we go through the next couple of quarters. But it’s really these initial measures, which really are the drivers for the performance that we anticipate and expect to see over the course of the fiscal year.
Gary Maharaj
And Mike, it’s early innings for us. And so we don’t want this young business that we would sell around by changes of a couple of hundred thousand dollars. And as I had said, I think in the last earnings call, right around the end of the first half of the year, we will have an average rep tenure for about a year there. And at that point, things start going from a little more stability, predictability and getting away, as you mentioned, from the law of small numbers. Needless to say, we’re quite excited with the growth we’re seeing. And as the base of that growth increases, but the actual growth quarter-over-quarter continues to surge, the numbers get bigger up pretty quickly. So I would say it’s too early to call right now or to share at this level. But as we get through the last of the year, we may change that approach.
Michael Petusky
Can you share sort of the total rep count at this point and sort of the associated annualized cost of that group of reps as it stands today?
Gary Maharaj
Yes. I — what we said was we ended the year as of the end of September with 27 district managers, territory managers. Now I will point out that one of the things that our guidance does contemplate is we will have several opportunistic hires during the year, primarily, not exclusively in the back half of the year. And the second part of the question in terms of — we’re anniversarying obviously, in 2023, the full year of hiring of people we brought on in different vintages during fiscal 2022.
Timothy Arens
Right. I might just guide you to take a look at the income statement in the earnings release and take a look at the comparison between the 2021 and 2022 quarter end, you’ll notice that there has been an increase in SG&A. And that SG&A increases approximately $5 million year-over-year. It’s a great place to start. You can imagine that a good portion of the year-on-year increase is associated with all the activities, including the territory managers, the sales force, if you will, that gives you some perspective in terms of where we’re at. We did highlight how we’re thinking about growth going forward in terms of SG&A, about $500,000 on a sequential basis per quarter. It’s really to support marketing activities as well as SG&A across the company. It’s not necessarily supporting increased headcount at this point.
Michael Petusky
Okay. And then going over to SurVeil, sort of based, I guess, on your most recent interactions with FDA, I mean, do you feel less confident sort of in the timetable that you’re hoping for, meaning end of Q2 than maybe you did 3 to 6 months ago or about the same confidence level? And I know this has been pushed out multiple times. But I guess would you — Gary, would you be willing to comment just sort of based on the most recent interaction, I mean, your confidence level on that timetable.
Gary Maharaj
Yes. I am quite confident, 3 key reasons. We — the totality of our data is impeccably strong, and we repeated many numerous preclinical — not clinical because the clinical data has been presented in the oxtaluxosen. And so the totality of that data that the submissions — the response alone was almost 5,000 pages. So to give you an idea of the types of data we submit. And so, so I’m confident in that data. The TRANSCEND data I mean, look, I wish I could thump my chest and say this is the best run trial in this field of drug-coated balloons.
The first and only — and only I want to emphasize, pivotal randomized Level 3 evidence of a head-to-head trial, bringing that home through the paclitaxel issue and the COVID that was phenomenal and the data looks phenomenal as we’ve seen in the presentation last week by Dr. Rosenfield of VIVA. And then the quality for response. We left no stone unturned. So what I’ll say in terms of the timing by the end of the quarter is not synonymous with the end of the quarter. So we wanted to make sure, given the timing of the FDA and the fact that the clock does stop for questions, we want to be sure to guide our investors appropriately. Nothing has changed in that regard for me, however.
Michael Petusky
Okay. I really appreciate that last sentence or 2 of clarification. That’s right. And then just, Tim, I just want to make sure for modeling purposes, if one were to assume that, that March quarter, the end of fiscal Q2, you guys get the regulatory or get the regulatory clearance. If you get that, then the revenue recognition associated with that in that quarter would be $25 million or would be less than that?
Timothy Arens
Yes, it will be a little bit less than that, but not much. And the remainder of the $25 million will flow through in Q3 and Q4. So I would comment just a little lighter than the $25 million.
Operator
Our next question comes from Brooks O’Neil from Lake Street Capital.
Brooks O’Neil
So if I’m listening correctly, and perhaps I missed this in past calls, but it sounds to me like you’re committed to Pounce and Sublime pursuing internally as opposed to with the partner. Over the long term, you mentioned, I think, years going forward. So a, can you just describe what it is that has led to that decision? And then maybe, b, can you help us think about the future as it relates to the pipeline and how you are thinking about either internal commercialization partnerships?
Gary Maharaj
Thanks, Brooks. What I’ll say is our long-term goal has always been value creation. We’re in the very early innings here, again, with 7 average months of rep tenure. Right now, what we are focused on is building that revenue base, building secure and stable and growing revenue base devices and with a very tight sales team. That’s what fiscal ’23 is about. Sorry, I don’t want to talk about the long-term guidance fiscal ’24. But leaving fiscal ’23, I expect that we’ll see the run rate of revenue at business to be quite satisfactory to us.
And then we’ll take it from there. I don’t want to speculate or I shouldn’t say speculate. I don’t want to give a long-term view of that in these very early innings right now. Let’s just get through 2023, and we’ll update you as we go forward on that. For now, we’re really excited where we’re going. We’re really excited to see that growth in the hospitals and value analysis, getting through to the value analysis committees. And we see building something that has some large enduring value for our shareholders.
Timothy Arens
Brooks, I know they did ask a question about the pipeline — and I think it’s probably important to just spend a little bit of time, but we don’t want to signal too much. But as you can imagine, there are several products that are in development, both with Sublime. And Pounce, we’ve communicated a bit more on. We have talked — Gary talked a little bit about the Pounce venous technology and where we’re at with that, that will be an important contributor. And I think we’ve talked previously about moving from venous into pulmonary embolism with Pounce. So there’s some really exciting differentiated novel technologies that really address important problems in large addressable markets. We’re super excited about them. And we think that’s going to be part of the calculus for our future.
Brooks O’Neil
And do you think you guys — is it more likely you’ll partner down the road? Or do you — do you see — pipeline…
Gary Maharaj
For the pipeline devices, you never want to say no. You always have to look at each opportunity, but our incredibly strong bias is this is going to be in the hands of our commercial team and our direct sales organization to build that market.
Operator
Our next question comes from James Sidoti with Sidoti & Company.
James Sidoti
So can you talk a little bit about what the impact on the income statement will be once the drug-coated balloon is approved, what impact will be on the revenue line, the gross margin line and the operating income in?
Timothy Arens
It’s a great question, Jim. And there’s probably 2 ways to answer it. One is post commercialization, which I’ll tell you, we’ll hold off on sharing anything in terms of our thoughts on that topic until we’re further along here and have received PMA approval, and we have received commitments, binding commitments on POs from Abbott. But suffice it to say, we’re really excited about what we’ve seen with the Abbott forecast for launching and beyond.
In terms of how to model the milestone payment, as I’ve described, if you assume a $27 million milestone payment, we’ll be recognizing the vast majority of that, a little less than $25 million in Q2 and Q3 and Q4 will have a modest amount. And then I mentioned also in my prepared remarks, be looking at about $1.75 of EPS. And the vast majority of that would be hitting in Q2 or fiscal Q2. So that should give you a little bit of perspective on how to think about the financial impact. On a gross margin, that’s just going to drop straight down to gross margin. When you think about operating income, it’s going to drop straight down to operating income.
James Sidoti
Okay. My question really wasn’t related to mile copayment least future sales. And I know you don’t want to be too quantitative about it, but on a qualitative basis, when Abbott sells the product, will that result in increased revenue for you on the product sales line? And then what would be the impact on gross margin? And I think you have a profit-sharing agreement with them. So how will that be reflected on the income statement?
Timothy Arens
Exactly. So the way we’ve talked about this previously, is to think about the product revenue that’s going to be hitting the product revenue line, but also the profit sharing will also hit the product revenue line. And so you can imagine on the profit sharing there really aren’t product costs. We’ll just say longer term, on scale, I would expect that we would be medtech-like in terms of what you would expect from the margin on both the revenue and the profit sharing. And for those of you who probably want a little bit more clarity on how Gary and I think about medtech-like, I think 60% or greater.
James Sidoti
Okay. And then the guidance you gave for R&D, it sounds like it’s going to be flat to up maybe $1 million or $2 million in fiscal 2022. What is that spend on? Is that on the radial and the Pounce? Or is that more on the drug-coated balloon or the drug-coated chart in the business?
Timothy Arens
Yes. We’ll see a bit of a decline on the drug-coated balloon spend in fiscal ’23, which is going to be offset some of the product development activities both with regard to Pounce venous, Pounce in general and, of course, Sublime. We also have a few things that we’re thinking about here with regard to post-market studies. We’ll have more to say on that in the future, in the coming quarters. But our guidance does reflect some activities with regard to that.
James Sidoti
Okay. And then last one for me. On the tax rate, if and when — the device has improved revenues coming in, you do start to hit profitability? Will you go back to a normal tax rate at that point? Or will you be able to start collecting some of these deferred tax assets, we have a pretty minimal tax rate initially?
Timothy Arens
Yes. We’ll be able to use our net operating losses to offset the benefit that we anticipate receiving from the milestone payment from Abbott. That’s why you heard me mention that we’ll have minimal tax expense in the year. That’s really what’s driving that. And of course, you’re absolutely correct. As we find ourselves and progress towards profitability, we’ll start returning, reverting back to a normal tax rate, which is for us in the U.S., it’s about 21%.
Operator
[Operator Instructions]. Our next question comes from Mike Matson with Needham & Company.
Michael Matson
Yes. So I guess I want to start with the Pounce. So on the venous side, my understanding is that you probably need to do trials to get a DVT and/or PE indication. Do you have any plans to do that? And do you have any — if so, do you have any feel for like how much those trials would cost and how long they would take?
Gary Maharaj
Yes. So the first idea with Pounce venous is to complete the limited market evaluation, and those products are coming off the manufacturing line in January so that we can get back in the and reinitiate that limited market evaluation. Subsequent to that, to go from a claim of clearing clot in the vein to treating vivid thrombosis. In the past, it’s not been an IDE study, but currently, there’s a very strong indication that you have to do some sort of IDE study. Very early indications, it’s premature to speculate on the cost. But I would say that’s in the probably 100 — maybe up to 150 patients type of study to be done. So that’ll give you an idea. I don’t want to speculate on the cost of that. Now it’s not a requirement to enter the market. But in the medium term, it’s sort of a requirement to be able to be more competitive. So I hope that answers that question there.
Michael Matson
Yes, it does. And then I guess for Sundance, it’s good to hear that you’ve got some potential interested partners. But what do you want from a partnership? And how would it sort of be structured ideally? And how similar would it be or different from the SurVeil agreement with Abbott, I guess?
Gary Maharaj
Yes. We clearly — first of all, these are 2 different market type of products below-the-knee versus SFA product. And the real issue for us is we’d like to see something for the company and our shareholders. It represents the risk we took and the investment we put into it because that is a high risk. Now there is risk in conducting getting an IDE and conducting a pivotal trial. As you know, Mike, I’ve not seen any anti restenosis device really meet primary endpoints, especially paclitaxel devices have not been successful below the knee. It is one of the companies that just started enrolling in the pivotal trial. So what we’d like to see is we would like to have a big brother or big sister to help us both conduct that trial and defray the expenses of that trial. The 10,000 to 20,000 devices you have to build to conduct a trial and get ready for an IDE. So what Tim and I would prefer is we’d like to see as a small public company, some form of revenue recognition as we go. We don’t want to be the bank and take all the risks in that way.
It really is I don’t want to speculate of how that looks versus the Abbott Trial because this is a clean sheet. I’ll put it that way. And the very large strategics we’re dealing with clearly have a view of what they like is just marrying up to our view. So just to sum up, it’s value we’ve created already this future value but future investment to be created and Surmodics wants to be able to aggregate some of that value as we go for our shareholders. We’re open to a fairly wide range of proposals, and that’s what we’ve asked the strategics. We don’t want to negotiate against ourselves. So we like to hear from them first so publicly, I prefer to keep that to ourselves a little tighter at this point.
Michael Matson
Okay. And then finally, just, Tim, I don’t know if you’re willing to give us some kind of forecast for cash use next year, but I mean that EPS net number, and I understand that you’ve got — I’m talking excluding this potential milestone, obviously. But the EPS net number looks pretty negative. So I’m assuming that, again, without the milestone payment that there’s a fairly high rate of cash consumption during ’23. Is that right or…
Timothy Arens
Let me walk you through that. Thank you for the question. I was glad to hear somebody ask that. If you think about ’22, we probably consumed about $22 million of cash. I think use of cash to fund operations was right around $17 million. I would guide folks to think that it’s going to probably be somewhat similar, a little bit north on the use of cash to support the operating activities. But then you’ll have to put another $3.4 million associated with the interest expense associated with the credit facility on top of that.
And so that would get you probably somewhere to $22 million to $24 million. We do have an earn-out payment of about $1 million that will occur in ’23. And I think we could be looking at somewhere maybe a doubling of the CapEx that we’ve spent here in ’22, which was a little north of $3.5 million. We need to do some investments here to support the coatings and diagnostics capacity and replace certain equipment. So net-net, I think you’re probably looking around $30-ish million of cash use in fiscal ’23 based upon this guidance. — it does not include the SurVeil milestone payment or any subsequent financial impacts from commercialization of SurVeil.
Operator
We are currently seeing no remaining questions at this time. That does conclude our teleconference for today. Thank you for your participation.
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