Boardroom bid may prompt SurModics’ pharma sale

By Anand Basu and Shravya Jain

BANGALORE (BestGrowthStock) – A move by hedge fund Ramius to nominate three members to SurModics Inc’s (SRDX.O: ) board signals a likely proxy battle to control the struggling medical equipment maker, and the eventual sale of its pharma business or even the whole company.

SurModics, a $160 million company that specializes in drug delivery technology, has come under investor fire since its CEO Bruce Barclay resigned in June and the company posted a surprise quarterly loss and gave a disappointing outlook in November.

On November 17, Ramius said it had bought a 12 percent stake in SurModics, and the market expects firm action from a hedge fund with a reputation for overturning underperforming management.

“They know what they want, they’re going to go out for what they want and they’re not going to be quiet about it. This could be the start of the makeover,” said Avondale Partners analyst Daniel Owczarski.

In recent months, Ramius has had directors of its choice elected to the boards of both Extreme Networks Inc (EXTR.O: ) and Aviat Networks Inc (AVNW.O: ).

Ramius wants to have a say in who is CEO and would want a CEO who shares its strategy, said Owczarski.

Ramius, which has launched a hostile $164 million bid for Cypress Bioscience Inc (CYPB.O: ), declined to comment.

Rodman & Renshaw analyst Suraj Kalia said it would be interesting to see how an activist investor would seek to fix SurModics, which is R&D intensive and offers customized products.

Several analysts say the company should exit its loss-making pharmaceuticals business and focus on its core business of providing special coatings used with medical devices and in drug delivery.

SurModics has been widely criticized for spending about $150 million acquiring the pharmaceutical business in 2007 and setting up related manufacturing facilities. The company expects the business to depress its fiscal 2011 operating profit by more than $10 million.

The pharma business develops drug delivery technologies for injectable therapeutics including micro particles, nano particles and implants. Its manufacturing facilities can support client-funded product development programs.

“For the amount of cash they’re burning and the timeline it takes (to bring products to market), I’m not sure it’s worthwhile for them to invest in the pharma business anymore,” said Rodman & Renshaw’s Kalia.

The business could attract interest from the likes of Genzyme Corp (GENZ.O: ), which already has a partnership with SurModics for peptide delivery, device maker OctoPlus (OCTO.AS: ), Roche (ROG.VX: ) and Novartis (NOVN.VX: ), some analysts predicted.

SurModics could also try to sell its 90,000-acre manufacturing plant in Birmingham, Alabama for between 40 cents and a dollar (on the stock), said one analyst, who asked not to be named due to the sensitivity of the matter.

Avondale’s Daniel expects SurModics to sell some unprofitable projects within the pharmaceutical business, while keeping those they think could get them money.


But the drop in SurModics share price — down 45 percent since Barclay resigned, while the sector index (.GSPMED: ) is flat — could put the entire company in play.

“It’s certainly possible that SurModics could become a buyout target in the near future,” said Mark Hennemanof, vice president of Mairs and Power Fund, which owns 7 percent of SurModics.

“It’s trading near book value and they certainly have a lot of customers, and some of those customers are large. Someone certainly could think it’s valuable enough to take over at the depressed valuation,” he said.

Analysts cited Johnson & Johnson (JNJ.N: ), 3M Co (MMM.N: ) and medical device maker Covidien Plc (COV.N: ) as potential bidders.

(Reporting by Anand Basu and Shravya Jain in BANGALORE, Editing by Ian Geoghegan)

Boardroom bid may prompt SurModics’ pharma sale