Merit Medical Systems Inc (MMSI) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Merit Medical 2006 Third Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead.

Good afternoon and evening, ladies and gentlemen. This is Fred Lampropoulos. I'm broadcasting from Amsterdam, The Netherlands, where I've been in Europe for the last two weeks. My staff is assembled in Salt Lake City, where Kent Stanger is in the Chair. We'll start our meeting today by having Rashelle Perry, our General Counsel, read our legal disclaimer. Rochelle?

Thank you, Fred. In the course of our discussion today, reference may be made to projections, anticipated events or other information, which is not purely historical. Please be aware that statements made in this call, which are not purely historical, may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties and other factors are discussed in our annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission, which are also available on our website. To the extent any forward-looking statements are made on this call, such statements are made only as of today's date, and we do not assume any obligation to update any such statements.

Rashelle, thank you. Just as a reminder, should we have any communications problem during our broadcast, Kent Stanger will pick up the conversation, and I will attempt to reconnect. Hopefully, that will not be the case, but just as a heads up.

Well ladies and gentlemen, we are delightful that you have joined us. We are happy to report our revenues for the third quarter were $46.7 million as compared to $41.2 million, an increase of 13%. You'll recall in our previous communication with you that we announced that our sales would be reduced after the third quarter slowdown, which is an annual event due to the shutdowns and vacations in Europe as well as other areas where people are taking vacations, there's a general slowdown in our industry.

We reported net earnings or net income of $3.3 million or $0.12 a share. That was a little bit ahead of what we -- I think what the Street estimates were, which I saw $0.10 and $0.11, so we're slightly ahead of that. But, I think more importantly is that after adjusting for stock option expensing, the third quarter on a year-over-year comparison was up for the first time in eight quarters, which was similar to our previous [nabs] quarter, where we had our gross margins turn. Now, gross margins for this quarter, we had indicated would be somewhere around 100 to 150 basis points less. They came in for the third quarter at 38.7. You'll recall in the first quarter, they were 37.9 and then jumped to 39.5 and pulled back a little bit in this quarter, which was anticipated. We -- you have the numbers in terms of our businesses and how they've performed.

Clearly, the catheter business will continue to grow, and we'll see an acceleration of that. We announced that in the quarter that of course, we've launched the Resolve Drainage Catheter. Let me just talk about that for a moment. This is a product that I believe is going to have a dramatic effect on our business. We have what I am told and what I have believed to be the class of the field in terms of both its abilities and capabilities and the reception certainly from the field.

We launched the product on August the 6th, right in the middle of the summer, and we've only been able to launch it in the United States. We are now sent samples to our European sales force. We will be releasing samples as we are ramping up for production. But in a matter of just a couple of months or less in the middle of the summer and really now starting to accelerate, we've opened up over 71 accounts as of today. That is, I think, extraordinary. These, as you know, it's a very high margin product for Merit. And we think that this is going to be a substantial contributor to profits and increases in gross margins as we go forward. So we're very, very excited. I believe that before the end of the year, we'll have at least 200 accounts on this particular product, and we'll continue to grow, probably for the next several years as we take a -- I think, a market leadership role in this product as we look out into the future.

The other exciting thing about this product of course is that, for every one of these that we sell, we have several new products that can go along with them and existing products, so it takes along with anywhere from $50 to $75 worth of disposables that Merit manufacturers, which we are also very pleased with. Additionally, we have been able to reach an agreement with one of our current vendors on one of our fixation devices that now allow us to take that product and attach it and make it part of our kit with our catheter. And customers will have a choice of getting a catheter with a Revolution or with a StayFix, and that will be rolling out about the first week of December.

And we, I think, really offer an exciting opportunity, and it opens up markets that Merit has never been able to sell in before. We had the exclusive rights to this product, just in the United States, but we will now have worldwide rights for this product that'll be able to be sold along with our catheters, giving us a unique choice for our customers and an opportunity to be able to bundle both convenience and these products for their use. So clearly, a huge advantage over many of our competitors.

Earlier today, I had an opportunity to visit our MCTec facility. You'll recall, this was the acquisition that Merit made from Angiotech. We were sitting in a large facility of Belden in The Netherlands and Venlaw. We were able to move that. It's up and running, and it is a beautiful facility, relatively small, but in an operation that is very, very profitable for the company. And, based on our growth plan and other issues like the reduction of royalties, or at least the elimination of that -- this division will continue to bring in increased profits as we move into 2007.

We will also introduce several new products in the fourth quarter, and so we should see the long range of new products and broad depth of new products that Merit has introduced over the last year to continue as we move forward. I think that the rest of the statement speaks for itself in terms of the -- some of the numbers in terms of the leverage we're getting off the gross margin line, and we'll go ahead and take questions to that in just a few minutes.

And then one last thing, which I think was a new opportunity for us, we were asked by a major firm in the United States on this trip to visit and make financial presentations like we would in New York and other places in the country. It was the first time we have done that. Last Friday, I had the opportunity to meet with several major healthcare and growth fund managers in London. We were very, very well received and we may return -- be returning again in the next month or two, because there was just so much demand for our time that we could really only fill -- and we -- I visited with 10 different institutions on that day. So there is a lot of interest there, and I think it opens up new opportunities for the companies and new potential shareholders. They were excited about the growth story, about the breadth of the product and the progress that we've made over the last several months.

So I think that pretty well covers it. I want to just look through here and see if there's anything else that I wanted to touch on. But I think that's about it for now. I think we'll go ahead and turn time over for questions, and I'll go ahead and direct those questions to members of my staff. So ladies and gentlemen, we'll turn the time over for your questions. And operator, if you're there -- and I hope you are -- if you want to come on in here and pick it up, we'll go ahead and let you do that.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Matthew Scalo with Canaccord Adams. Please go ahead.

Hey, guys. Congratulations on a good quarter here.

Thanks, Matt.

It must be a little late for you there, Fred, so I'll ask just a couple of quick questions here. As far as utilization of the facilities, would you mind walking me through again - I mean, first, were there any facilities that, let's just say, on average utilization, less than 60%, number one. Number two, maybe you can just walk through the portfolio of facilities right now and --

Yes.

-- sort of identify which ones need improvement, which ones are exceeding your expectations?

Yes. Let's go through and I'll start -- let's start at Mother Merit in South Jordan. As you know, we expanded and added, I think, somewhere around 180,000 square feet, moved the injection molding into a new facility. And we are remodeling the old molding area into a new clean room. We also have additional room down at our initial facilities in the mid valley area and have clean room space available there. So we have plenty of room in Salt Lake and plenty of expansion capability in molding. I would say that we have 10 years with the capability there. Now that has to do with the space and also cavitation. I had someone actually scold me saying, "Well, you actually built too much." But the last time we built it, I think we planned for three years, and we were able to go about 12 years, 12 years before we had to expand. So we have plenty of space in the Salt Lake City area.

If we move over to Richmond, we have plenty of room there. We have 100,000 square feet. We're only utilizing probably 50% or less, maybe a third of the clean room, but a good portion of the warehouse, so I would put the overall utilization at 50%. In Ireland, we built 40,000 square feet. Up to the very recent future, we had about 10,000 square feet of clean room, which was completed and ready to roll. I will tell you that we have now committed the entire Irish facility to a new technology project. And so although it's still empty as we speak today, if you would have asked me the same question in about six months, I would say that is totally filled up. Now it is in fact, been segregated and set aside for the purpose of this new projects, which we're not going to discuss on this call or into the near future, but nevertheless, that space is committed.

So we're going to be -- have plenty of room for expansion of our business in Ireland, but at least in terms of committed space, we've committed that 10,000 to this new project. We then moved to Venlaw, The Netherlands. That's the -- a small manufacturer where we do the wire coating. We just moved in there out of -- it was part of a deal that we move that, and it's in 10,000 square foot facility, and we have plenty of capacity there. Which now takes us to Angleton, Texas, and it is the area that we're most concerned about. It's also in the fastest growing area. What we've done in that in that particular situation however is, we're discontinuing some product lines that have relatively low sales and are not meaningful to us and looking to utilize that space. But it is an issue that we have to deal with.

Now, we had talked about the possibility of leasing a larger facility that's in that area, but we have determined not to do that, and we are going to utilize that space or utilize vacant space in other Merit facilities to absorb the take-up from the expansion of our products, which we think is going to be substantial. So, we may have to move some of those operations to other locations. But, since we have that space, we should be able to do that quite readily.

Matt, I think that covers in detail the answer to your question.

It does --

We also have -- we're going to move out some of our inventory in Angleton to make room for production to allocate that for space. That'll help too.

And that inventory move happens by year-end? Or is that a longer --?

Yes, when needed. It'll be some time around then. It'll either be to another Merit facility, or a rented space down in Texas to make room for -- expansion of our extrusion capability.

Yes. And Matt, actually it would be best for us to move it out of Texas because of the inventory tax, and that's been part of our plan for some time. So, it's likely that'll move and then just be at our central distribution center in Salt Lake City is probably the most likely scenario. So --

Okay, great. That's terrific detail here. Are you guys still above break-even at that Richmond facility?

We were profitable, and I'm just trying to -- I'm trying to pull these numbers. But I think the best way to answer this is that that business continues to grow, that we are at the break-even point. In fact, I've had I think, one or two months of profits in that particular area, and we expect that that will continue to improve as we go down the road.

Okay. Just two more questions actually, just as far as MCTec's contribution to the quarter, certainly growth in this standalone segment exceeded our expectations. Can we contribute some of that to MCTec, or --?

Well you know what's interesting about that Matt is, there probably wasn't any at all. In fact, it was probably a negative to us in the quarter in terms of our earnings and the contribution to sales because we actually had to kind of -- we shut the plant down, and we move it over about a six or eight-week period. And we had sold product to customers and so, both from an earning point of view because we were shut down and didn't absorb and have those expenses and the fact that we weren't generating sales in those particular month or two, so that was actually in the -- as you look at it individually, was a negative.

But if you're looking at the big picture, it was absorbed up by the rest of the business. So what you're seeing in the standalone is other businesses. And despite the fact that we'd moved that, it was relatively immaterial in the big picture of things. But things would have been better had we not had that disruption. But now we're there. It was kind of a blip, but that wasn't the reason why we saw the increase in the standalones.

So does MCTec then begin to contribute I guess in the fourth quarter going forward, or are we talking an early '07 type?

Oh, no, no, no. It's profitable -- it was profitable last month, and it continues to be profitable. It was just that we had to shut it down for that little period. And the way that that all happened, when we bought this business, it had been in many, many years in a facility that was part of Belden Wire and part of the Philips group, so it was in this big building and it's now in a Merit standalone building where we -- it's much better. The employees are thrilled to death.

And I have to tell you, I walked in and -- to that facility today, and several of the other management players have been there in the last couple of weeks. And it is -- it's a standing-tall, looking good in the Merit manner. I mean, I was so impressed with the cleanliness, the orderliness. And, it will continue, but it was profitable in September. It'll continue to be profitable and contribute going forward. But during this quarter, there was actually a negative effect because of the shutdown and the move, but I think they executed it almost to precision.

Okay. And then just --

[inaudible - cross talk]

Sorry Bud, or Kent?

Yes. I was just going to help, we had a slow month like in August, and we had some losses and things. That's what Fred's talking about while it was shut down, but I don't think we affected any of our customers. Some of them ordered ahead, and some of them now are ordering. And we -- and so we've been able to keep that up through management of extra inventory. So for the quarter, we shipped -- it was about a third of the growth for that standalone group, because we had none of that revenue last year. So all of that revenue comparatively, is an increase. And it represents about a third of the growth of the standalone business.

Okay. And then I guess last question, did you exit the quarter with a gross margin above 40%?

No. And I'll tell you why I can answer that. We were in September, which had lower production days and a holiday. And so you're not going to get the application that you would normally get. It's like the lowest number of sales days and production days of the year.

Okay.

So we were not at that point in September. But that would be the same for any business, because you don't produce as much. You don't sell as much. I think we had 19 or 20 days versus the average is 22, so you lose almost 10% of your production and you sales in that one month. So, the answer to your question is no, but for those reasons, which I spelled out.

Okay. Thank you very much for your time guys.

You bet.

Congratulations.

[OPERATOR INSTRUCTIONS] Our next question comes from Arnie Kaufman with Brean Murray & Co. Please go ahead.

Thank you. Hi, Fred. Hi, Kent.

Hi Arnie, how are you?

Good, good.

Good.

That was a good bunch of questions on the last -- from Matt - you answered a lot of them. No, that was great, it saves me a lot of time.

Great.

The question I do have is, looking here now, it looks like the catheter sales were up nicely. Am I correct?

That's correct, yes.

What would you attribute that to, because I know the Resolve really just was -- just came out like you said, basically in August? Is there something else in there?

Well, there are several things that are in that area.

Yes.

Our MAK product, which is our micro puncture, which has been a huge success for us, our SMAK, our Impress catheter has been there, we've seen a lot of relative strength in our cardiac catheters, and then the Resolve. And you wouldn't see much of the Resolve in here, because we were really were just launching it through that stuff. And you'll see a bunch of that in the fourth quarter, so I expect that in the fourth quarter that this is going to continue to grow. So I think most of this is a reflection of our Micro access, Micropuncture -- Micropuncture, excuse me, Micro access kits, our MAK kits and our SMAK, which is a stiffened version for vascular access. So I think that's probably where this -- where most of this comes from. Kent, do you want to comment on that?

Yes. That was the largest contributor, Fred, and second to it was the Prelude, so it's in that category.

Yes. Thank you. Thank you. Yes, that's another business that continues to grow. And I should add on that Arnie, that in the Prelude, that we have the 23 centimeter. We have micro brands. We have radial artery. We have a whole bunch more, and I think that that particular business is really going to accelerate as we go into '07, because we'll have the full breadth of products coming out in the fourth quarter and the first quarter. So it's going to -- we added the [4 French] earlier. We have a new version of the longer version that's used that's coming here in about two or three weeks. It's ready to roll. So, you're going to see this particular area.

And, I think that there's an other important point, and I'm sorry to ramble on, but one of the things we talked about earlier was about some of the constraints that we have in Texas, but these vascular access products that are part of this group are manufactured in Salt Lake City. So, I don't want people to be overly concerned about our ability to produce and meet market demand. We do have demands on us, but some of these products are produced in our facilities in Salt Lake.

Right, okay. No, when I saw the -- especially being the third quarter, I thought it was nice to see that taking off like that, the increase. We -- another question just regarding guidance, you're maintaining I guess the same what you --?

Yes. It's getting too late in the year --

Yes.

-- and we've just felt that we certainly didn't want to do anything last quarter, because it was the summer quarter. And it's -- we wouldn't want to do anything there, and I think we were able to pretty well, I think, indicate where we thought our business would be. And in the fourth quarter, it just doesn't make a whole lot of sense to do that. Now, I think we are going to see acceleration in these catheters, and we're really excited about the future. But I don't think we're going to go out and do that. It's just we're just going to let the number be where they are, and then sometime in late January or as soon as we can, probably before we release our financial numbers for the quarter, we'll come out and start talking about guidance in terms of revenues for next year.

Okay. And if I recall, you had said that you were projecting for this quarter gross margins sequentially down, I think you said about 150 basis points?

That's correct, yes.

Right. You want to give --?

We came in -- we did a little better than that.

Yes. No, definitely you did. You want to give us a little insight to what you think in the fourth quarter?

Well Arnie, the thing I best say about the fourth quarter, it's always an interesting quarter. I will say that last year, the fourth quarter was down. You get -- we do a plant shutdown for a couple of weeks, and you have those, for people to take the holidays, and that does some -- have some affect. But on the other side of it, we have this acceleration of our products, and really the enthusiasm from our sales force. So that's one of the reasons why I think, we don't want to change the numbers. But I think our statement stands generally that we think that as we move into 2007 and with this contribution and absorptions.

But you also have -- you have all this stuff floating around. That's why we just think we're going to stick by our original numbers. We'll stand by our statements that we believe that the company will continue to uptrend on gross margins, and that we've got some -- just some wonderful products here that -- I had a call from my regional manager the other day on the East Coast -- one of my regional managers 00 who's saying that the enthusiasm that's existent in the sales force is substantial because of these new products. It's fun when products and you walked in ahead to a doctor like the Resolve and they just look at it and say, "Where have you guys been all my life?" and, that kind of thing, so we're going to hold pat.

Okay. And one last question, you had mentioned about the products that you have in development, I know you don't talk much about that, I was just wondering, can you give me or us an idea as far as you talk about improving gross margins, a range of what you're looking at on new products as far as gross margins? How you -- give us an idea?

Well Arnie, our business has various aspects of it. And some things are 40% and some are 50%, and every once in a while you have something that pops in like this [PAK] business, which we thought was strategic and we still believe that that's one of the things, but in terms of our view at looking at products, we look at it at a -- 65% is our goal to look at those kind of products so that we can help to move - I mean, if we don't have those goals, then we're not going to be take these 40% margins and move them ultimately to 50%. I will tell you that our drainage catheter and that particular aspect of it is going to be 60%-plus, 65%. And now that we can add both the StayFix and the Revolution as part of that overall bundling, we're going to see the profitability there and that being sold.

So, we know -- we understand and know what it's going to take to move these margins from - I mean, if we're going to get them ultimately to 50% or at 150 basis points a year or better, you have to have a bunch of business up there at the high end to pull it up. So that's what we look at. But we also have to look at the overall business and competition and positioning and all that sort of stuff, but that's our goal.

Okay. Okay, thanks a lot guys.

Good, nice to hear your voice Arnie.

Okay.

Our next question comes from Ross Taylor with C.L. King. Please go ahead.

Hi. I have three or four questions, which I'll just list quickly. First one is, I don't know if you can quantify at all how much impact the Richmond facility and the procedure [pack-tray] business had on the gross margins. I think you've done that in quarters past. I was just wondering if you could give us some guidance there?

Yes. We can do that. I'm going to go ahead and let Kent answer it. But Kent, I'll let you go ahead and answer that in terms of our script and the information on, I think it's B down there. So, do you want to go ahead and answer that?

Yes, it is. We're -- if we're talking from quarter to quarter, the comparison now is becoming minimal because we've had it in both years. But if you're talking about what would our margins be without that business, and I assume that was your question --

Yes.

-- then for the quarter, it would have been 1.7 or 170 basis points higher if we had -- if you take that part of the business out.

Okay.

For the year-to-date or nine months, it's 1.9%.

Okay.

Which would put us with -- at gross margins at almost 41%, 40.6% or something like that would have been the margins without that. But as that continue to improve and these other products come on line, we'll be fine.

Okay.

It's interesting that it's stayed amazingly consistent because as the margins improve, so does the weight or the product mix issue grows too. So it kind of stayed in step a little bit.

Okay. And speaking of new products, I don't know if you can tell us at all Fred, some hints as to what some of the new products might be, maybe more specifics on the timing and --

Yes well, there are several new products that I will discuss. In terms of the Resolve catheter, I've been mentioning this one where we're able to take it and make it a multi-pack by combining the various fixation devices, whether we want to have that. The advantage that that has is really the agreement that we've reached to be able to now sell that in countries all over the world, where in the past, we've been limited to selling one of those fixation devices just in the US.

The 23 centimeter, the longer introducer sheath, which is absolutely necessary and particularly used in interventional radiology procedures will roll out some time in the next couple of weeks. The product has actually gone to the sterilizer. We have to do some final testing and sign off meetings and then it's ready to roll. It's significant because it goes hand in hand with our drainage catheters, our Impress, our Revolution. So it's at that same point of sale. So that's another one.

The ShortStop Advantage, which is a patented safety product, will roll out. We have a new needle. A needle may sound very, very esoteric, a very small deal. But we have a new technology with our needles, and we believe we have very, very high hopes that we're going to become a major player. Candidly, we've had an average needle in the past, but that new product's going to roll out. The Impress 4 French -- excuse me, 5 French flush catheter is going to roll out in the quarter, and that helps us now to combine it with the selective catheters, which means it's going to be much easier for our sales guys. And then some time next year, we'll have the 4 French selective and flush, but having the flush to go along with the other catheter is a neat opportunity and will help us to put those together.

I'm trying to think off-hand, Kent, did I miss anything for this next quarter?

Is there some more Preludes coming?

There is. Oh, oh, oh, you know? I forgot a couple. I'm sorry. Thanks, Ken. On the drainage catheter, there's a couple of other versions that are coming and these are significant. We're always -- as you can tell, we're very, very enthused about this drainage catheter, but we're also going to have marker band catheters. And this is significant because many of our competitors, and there are five or six competitors, but only a couple of them offer the marker bands, and they're the two market leaders. The other three kind of new guys and smaller companies don't have these -- this technology. It's patented, gives us a new advantage, adds about another $10 to $15 per unit, and then also will be the same technology we use in our Biliary version, which will come out in the first quarter of next year.

But these marker bands will come out. It's significant, because it -- on some of these -- these companies, the smaller companies, I don't want to mention them by name, but you guys know who they are, they don't have some of these technologies and these things, so it's going to really allow us to go in there and do some damage and then allow us to stand shoulder-to-shoulder with the big guys who really haven't made any improvements in their product in 15 or 20 years. And so we're very, very enthused about the opportunity that exists for Merit to become the market leader in this area.

I think that pretty well does it about things that I at least want to talk about in this particular call.

Okay. And just one last question, I don't know if you can talk about what your competitors are up to in terms of competitive behavior. I think you've said in the past that Boston seems a little distracted with all the things that they have on their plate, but just what the competitive environment's like?

Yes. Well, there's a lot of stuff going on in this area. I was reading the message boards, or at least the news boards is a better way to put it today, listening about some unsuccessful stent issues and then two or three companies that are in the stent area and some of their promising stuff. And so, we think that Boston is, there's no question that they're distracted, and they're working very hard to solve their problems, but it allows Merit to be there and to solve problems today and to really show that there's a difference between our companies. One does a certain business and another one has to deal with, like Merit deals with the day-to-day issues of making sure they can deliver numerous products and procedures. So clearly, that's something that's to our advantage.

The other guys in bringing in other stent players will help to disrupt the market, and we think that for our Inflation Device and our hemostasias valve business, that it will help us there. And at the end of the day, Ross, I think what it really means is, there's all of this turmoil in the marketplace between all of these companies, drug alludings, bare stents, mergers, acquisitions, and people really look to Merit as we're kind of a stabilizing and calming force in terms of we're there. We're steady. We solve their problems. And, I think many of these customers just kind of get tired of all of this other stuff that's going on. And so, I think we develop those relationships.

There's another thing that happens, and I had this happen with one of my sales guys. He walked into an account where there's been some disruption with [Turillo], and my guy walked into an account the other day. They hadn't seen one of the sales people for two years and they just said, "Well, let me try the product." They said, "This is as good as better, but I -- gee, he --." Our sales guys had just been there maybe a month before, and he came back and said, "This is the kind of stuff I want. This is the kind of service I need." And so, we're going out there taking a lot of this business by default. People just aren't selling and servicing their customers. And one of the new trends they say, service is the new business of the millennium, which is an amazing thing. It's always been that way. But, I think that we have those kinds of issues where we have the products.

Now, we have our own problems and difficulties and things like all companies do. But all in all, I think that there's so much disruption on the other side of things that people appreciate the fact that Merit has stability, brings up new ideas and solves problems and is engaged in their problems and solving them every day.

Okay, great. That's excellent, thanks very much.

All right, thanks Ross.

Our next question comes from Ken Grossman with Capital Management. Please go ahead.

Fred, Kent, how are you guys doing?

Good

Good Ken, how are you?

Good, good job.

Thank you.

Just a quick question, it appears that the success of the drainage catheter is -- has been quite -- the marketplace has been quite receptive to it. And you guys have -- are excited about it and to some extent, maybe surprised by its acceptance in the marketplace. And, I was just wondering whether or not the -- in your guidance if you, for the quarter, for the fourth quarter, if you had any of that success at all in your guidance? Or, is there something else offsetting the success of the drainage catheter that would make you hold to the current quarter's guidance?

Well I'd indicated earlier Ken, that we are in fact hold the current quarter guidance and stick within our range, both for earnings and for our 185 to 189 range. So we're going to stick with that. I don't know that there's necessarily offsetting them than -- other than just our ability to execute. Businesses are all about execution. So -- and I don't know that we're surprised about this product. I think, very candidly, it took us a long time, several years to get this product right. I think for us, it's a relief that we really met the customers' needs and that it is being well accepted. And candidly, it's kind of the first really I think major improvement in terms of flow, size and comfort for patients.

And then the other side of it of course is, as I mentioned earlier, we have all the other parts, connectors, bags, fixation devices and all those sorts of things that go with it, so -- which are all very innovative. So we're -- we just have neat stuff. I had one -- another story, Ken. I'm sorry to linger -- to kind of ramble on here but another [sidle]. This guy walks into an account the other day because they were trialing a product in cardiology, wandered on down to CT. The guy said, "Well, let me see what you have." And, he ended up getting six different line items, all at basically our retail prices. And the guy just said, "I love these things. Where have you been?" And, "I don't see this from the other companies." So --

So basically, Fred, the drainage catheter is going as expected? Is that what you're saying?

Yes. Yes, I think it is. I think the biggest challenge we have, Ken, is -- what a problem, is the ability that we're going to have to meet demand. I mean, we're really hustling to ramp up production and to be able to produce the demand. I will tell you that from our original time that we looked at this thing, both our market share projections and where we're going to be ramping to are substantially ahead of where we originally thought. So I think it's probably fair to say that it is exceeding what our expectations are.

And we're hearing things. We haven't been able to launch the product to our distributors. Interesting enough, we have at least projected or initiated orders from two of our distributors, which were more than 50% of what our entire forecast was initially. So that kind of tells you the kind of demand that we have for the product. And we have to be able to ramp it up. So the big challenge we'll have is executing and making sure we can meet this demand.

The -- in Q4, is -- will you be fully ramped for the product? Or --?

No.

is that going to take --?

No, no, no, no, no. Ramped? When you say fully ramped, I mean, we'll be able I hope --

[inaudible - cross talk] production.

Yes. No, we will not be fully ramped in the fourth quarter. And -- but remember, there's some times in some of these areas where there are some regulatory issues and some of these things are going to take time to kind of fill in and be approved. So we have some, I'm going to call it lenience, in that particular area. But no, we're not going to be in the fourth quarter at the ability. But there's some time here where you have to go demonstrate the product, so there is a selling cycle here. But despite that, I still believe that we'll have 200 domestic accounts by the end of the year. And maybe 200 -- it's a pretty big deal, Ken.

And here's the other good thing. We're already seeing reorders. We've already launched it. We had to demonstrate it and get them out. They had to get rid of the stuff on the shelf, and they've used ours. And we've -- we're already starting to see reorders. And that's really the proof in the pudding, is not just filling a pipeline, but seeing that the customers really want to buy the product and they come back for more.

Great. Thanks, good job.

Thanks, Ken.

Management, at this time, there are no further questions. I would like turn back the conference over to you for any concluding remarks.

Well ladies and gentlemen, it is quarter to twelve here, and I know that it's late in the United States. I'm looking forward to getting on a plane in the morning and coming home. There's a lot of opportunity in this company. The key issue for us will be to continue to execute, control our inventories, make sure that we can become more efficient. But, we believe that we have things in place that will help us to do that. And, we really look forward not only talking to you about the success as we move forward, but improving numbers as we go forward and having the opportunity to really have Merit become a premier growth stock once again and -- both on that top line and being able to bring home the bacon, so to speak, on the bottom line.

So we're excited about the products, the technology. We're very excited about the things that you don't know about in terms of some of the new, exciting technologies that are going to have a major impact to meet or exceed the kinds of issues that we have with the Resolve. And so, we think that there are a lot of good days ahead for Merit. It, of course, takes time and patience and execution, and we'll need to continue to improve. But all in all, I'm excited about where we're heading, and we appreciate your patience with us and your support. Kent, would you like to add anything?

No, I mean, I agree with everything you said. I wanted to point out one thing we missed. I was pleased to see the leverage we started to get with our sales force as far as costs or percentage of sales. And that was nice to see that improvement, getting some leverage in our SG&A costs.

Right.

And I think we're well positioned. We've spent a lot of effort in research and development. First it started a couple of years ago in the way we reformatted it, and that's brought a pipeline of products that's now really flowing out and starting to make a difference, and it will make a bigger difference in the future than it has so far. And then when you look at the capacity increases that we've invested in, and it's not just facilities, it's people. We've had to invest in, the increases in wages and so forth to try and attract and retain them.

But the point is, is that those investments should increase our capacity to build the new products we've researched. And then when you look at the sales force that we've set up and added to, and those people are now trained, I think they really can be productive. And so, I think we've got the pieces in place to see our continued double-digit growth and then some leverage, because much of that's fixed.

Okay. Well then, Kent, thank you for your comments. We'll go ahead then at this time, and ladies and gentlemen, we'll sign off. We'll look forward to reporting to you our successes in the future. We again, appreciate your support and wish you all the very best. Good night.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.