Surmodics Mulls Options for its Pharmaceutical Business

It seemed like a good fit at the time: The marriage of SurModics Inc., a drug delivery technology firm, and Brookwood Pharmaceuticals Inc., a provider of polymer-based solutions to companies developing new medicines. Executives claimed the union would help diversify both businesses and create a formidable force in polymer-based drug delivery.

Those high hopes never materialized, however, thanks to a devastating recession that decimated the pharmaceutical industry over the last three years and has made cost-cutting a top priority among corporate bigwigs. Now, SurModics wants to end its marriage to Brookwood to focus on its medical device and in vitro diagnostics businesses. The Eden Prairie, Minn.-based firm has retained Piper Jaffray & Co. to help explore options, including a potential sale.

SurModics’ pharmaceutical business includes microparticle and biodegradable implant drug deliver technologies and a manufacturing facility in Birmingham, Ala., where Brookwood was based. Investors have complained about the poor performance of the pharmaceutical business and have criticized SurModics leaders for spending $150 million to acquire Brookwood and set up related manufacturing facilities. The company expects the pharmaceutical business to hurt its fiscal 2011 operating profit by more than $10 million.

“Our board is committed to enhancing shareholder value and believes that now is the right time to examine a range of strategic alternatives for our Pharmaceuticals business,” Robert C. Buhrmaster, SurModics board chairman, said in a prepared statement. “A key part of our board’s recent strategic planning review has been to assess the opportunities available to SurModics’ key businesses and the investment time horizon in which we can create shareholder value from those opportunities. Our board has determined that the best course of action is to explore alternatives for our Pharmaceuticals business so that we can dedicate more resources and efforts to pursuing growth opportunities and investments in our Medical Device and In Vitro Diagnostics businesses.”

The decision to end its allegiance to the pharmaceutical side of its business comes just two months after SurModics implemented a restructuring that reduced its workforce by 13 percent and established three separate business units: Medical Device (surface modification coating technologies and drug delivery coating technologies); In Vitro Diagnostics (component products and technologies for diagnostic test kits and biomedical research applications); and Pharmaceuticals (drug delivery technologies for injectable therapeutics, including microparticles, nanoparticles and implants).

Buhrmaster said the restructuring was designed to “drive improved profitability” and better position the company for both financial and operational success. At the time, there were no discussions about selling the pharmaceutical division. SurModics executives claimed the restructuring and cost-cutting moves would save the firm $3 million to $3.5 million annually.