Merit Medical Systems Inc (MMSI) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Merit Medical Third Quarter Earning Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions (Operator Instructions)

I would now like to turn the conference over to Mr. Lampropoulos. Go ahead, sir.

Good afternoon, ladies and gentlemen. We are broadcasting from Salt Lake City where we have a fresh one inch of snow on the ground. And we're delighted and appreciative that you've taken the time to be with us. We have a legal disclaimer that our Chief Legal Officer will read, Rochelle Perry.

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 on 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 and uncertainties are discussed in our annual report and other reports and filings with the Securities and Exchange Commission available on our website. To the extent any forward-looking statements are made in this call, such statements are made only as of today's date and we do not assume any obligation to update any such statements.

Thanks, Rochelle.

Well, ladies and gentlemen, we're pleased to be able to discuss with you our third quarter results, as well as an announcement that we also made simultaneously at the market close today about an interest and opportunities with Vysera Biomedical, which we'll discuss later on our call. But over the highlights of the quarter, I think that -- I hope you're as pleased as much as we are, as an increase of 15% over the year-ago period, record earnings, which were up 17%, and normally we would see higher leverage on the earnings over the sales effort.

However, because of our investments that we're making in the Endotek division and other areas, there are some expenses in the SG&A and R&D area that were a little bit higher. But you'll also see that we're doing, I think, a terrific job in terms of our tax strategies, our manufacturing in Ireland and R&D tax credits and other things we've done to help offset our tax burden.

You'll also, and I would like to note, that in this quarter we had a FIN 48 adjustment which was a positive adjustment for us. We also took to offset that a couple of small impairment charges to kind of take care of some things on the balance sheet for the quarter. I think that you'll -- going through that you'll see that our gross margins were up 200 basis points over the year-ago quarter, up 160 basis points, which is in line with our expectations for the year. And all in all, I think that we're doing a terrific job.

If we take a look at the sales groups of our products, we see that our catheters continue to be and vascular access continue to be the star of the show, up 23%. Year-to-date they're up 22.8%, so it's consistent growth. These include all of our vascular access, our drainage catheters and the like, pericardiocentesis and so on and so forth. So we're very, very pleased with that. Even our inflation devices, when we back out the Kyphon business, we're in positive territory, with kits and trays up 13% and standalone devices at 11%.

So all in all, I'm pleased with the performance of the quarter, especially a summer quarter. The fact of the matter is we see lower procedure rates, particularly in Europe, where they shut down. And to be able to do this type of overall business in that third quarter, I hope you're as pleased as we are.

Our core business continues to be relatively strong, with our core business being somewhere around 10% growth for the quarter. So we continue to be strong in our legacy products. We have a full litany of new products. We had hoped today that we would be able to also discuss our Ireland project. I will tell you that we've had response from the FDA. We've responded back to the FDA and we hope that sometime in the very near future that we can finish up that aspect that we've talked about for a long, long time in which we would discuss that new product, which we hope will get cleared very, very soon. So all in all, I think a great quarter with great opportunities and a lot of momentum going forward.

Now for a moment, Kent, do you want to comment on any of the financial performance or ratios?

Yes, I'm real pleased with the 200 basis points improvement year to year on gross margins. I think that even though we saw a little bit of a slowdown in the gross margin sequentially, it was much less than last year. So we're maintaining 160 basis points improvement over last year. I think that's real important. And even though some of our input costs are increasing a little bit with oil and stuff going up, we've still maintained a healthy leverage, if you will, on our cost of sales.

And I think that it's also important to note the investments we're making in the future. A lot of important products that are coming out, and you can see it in our R&D expenses going up. But also, in our distribution and sales force, we've added 10 extra people, or 10 new people this year in our domestic sales force and several in the international area. On direct in some countries, we've also been able to really advance some technologies that I think are going to be very important in the future.

So as we look forward, we have received the FDA approval for our EnSnare product. I was in Ireland last week and that product is being produced and we will start shipping it to customers the first week of January. I think our staff has done a terrific job in a relatively short period of time and I think it speaks volumes to the core technologies that exist in Ireland and their ability to pick the ball up and run with it very, very quickly.

And so as we look into the first part of 2010, those product -- that product will roll out, which, by itself, will add somewhere around, I think, 80 basis points in terms of gross margin, about 80%. We believe that that business will grow beyond our expectations or at least initial expectations because of a couple of other areas in the marketplace where we will be having other people sell for us.

Now, specifically -- or not specifically but a little bit more comment on that. We call on interventional radiology and cardiology and of course the GI market. But there are some vascular surgery areas where those snares are used. And Merit is also working on opportunities to make sure those products get to customers in those areas. And so when you add that on top of that with a sales force that is motivated and with the great product that that product is, it gives us a lot of momentum.

We also have several other products that will be introduced before the year end. And again, I want to kind of hold off on commenting on any of those and hope that sometime in the next couple of weeks we can have another conference call to talk about some other approvals in some of those products. And I will bundle those products in that conference call as soon as we get approval on our Irish project that we've talked about.

Now if I could, for just a minute, let me switch and go over to our agreement with Vysera and tell you why we're so excited about this. Vysera, interestingly, is a company that is a couple of football fields away from our facility in Galway, Ireland. We would not ever have known that except for the fact that because of our entry into the nonvascular stent business, we ran into these guys at a trade show several months ago.

And we found that they had a technology of being able to take an anti-reflux valve and an ability to withstand the very difficult climate that you have in the esophagus or at the GE junction and add a technology and a valve that we think is going to create tremendous opportunities to sell stents along with these valves, which help the patient not to have that acid reflux come up, which the literature is replete with the problems that that creates. And so we were able to get an exclusive right on that valve and the material technology that goes along with that.

Additionally, we believe that this material technology is sufficient and terrific, very candidly, that it has other uses that we will be doing research on that we think will give Merit a tremendous advantage over any of the competitors. I'm not aware of a single product like this or material like this on the market that can withstand those very, very difficult challenges and environments.

And lastly, as part of that deal, we've taken an equity interest in the business and I will be serving as a board member. We will start development of those products. They're a few years away. But a lot of work is already be done, but now we'll take them and incorporate those into Merit products. So essentially what it is is the three-part deal. It is the exclusive right on the valve, and we will incorporate that into our stents. We think it'll help us sell more stents and we think we'll add about $700 to the sales price of those stents.

Secondly, we believe that there are enormous opportunities as both coatings and the ability to use the material in catheters. So there's work to be done to develop that and we'll start that right away. And then finally, the equity interest, and we're involved in the business. It's nice to have it just a short distance away from our facility there. So there's going to be a very good collaborative effort to take this.

And if you take a look over the last several months of the acquisitions that we've made with the nonvascular stent business, in which we have four or five new stents under development, with the snare technology and what that represents, with new markets and opportunities for our sales force, and now with the Vysera opportunity that we've just discussed, I think what we've done is to position the Company for a future of great products with improved gross margins and opportunities as we build the business going forward.

So it's been a terrific time for us in the market conditions that exist, where those who have been prudent and have clean balance sheets can use the money they've earned to go out and to strike these deals, which we think are going to be very, very important for us going forward. In addition to that, our OEM business is doing terrific. For the nine-month period it's up about 30%. So we continue to fill that out and it won't be very long where we'll have replaced the Kyphon business, at least whatever has dropped off, as that business moves forward. And it'll continue to be a very, very important part of our business.

So all in all, a great quarter. A strong quarter, up 15%, gross margins up, earnings up, new business opportunities, and other products that are eminent in terms of the revenue stream and others that we'll be introducing. And some of those, by the way, new introductions of these products, they take time. I'm always interested, as an example, in our Prelude line, which we first introduced over five years ago. And the sales increase year-to-date is 44%. And we're talking about millions of dollars here, several million dollars of sales.

And that doesn't include the (inaudible - microphone inaccessible).

And that doesn't include the short sheath, which is in the same product line. So I'm pleased with our business and the progress we're making and the opportunities for the future.

So, Kent, do you want to weigh in on anything before --

Well, I just wanted to add also that the cash flow's been strong. We're at almost $24 million of cash from operations in the last -- in the nine-month period. And our cash balance, in spite of some of these acquisitions, is at about $7 million today. So no debt. Nice to still be able to say that.

Yes, it is. It is. So, Kent, thank you for your comments.

Let's go ahead, then, and move on. I think that pretty well does it. It's pretty straight up. And let's go ahead and open it now for questions.

All right, thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Christopher Warren with Caris & Co. Go ahead, please.

Thanks so much. Just wanted to give you guys the opportunity to update us on full year 2009 guidance or maybe in broad brush strokes to talk about 2010.

I think that we're in line with what the Street estimates are for the balance of the year. So I think that we're okay there. In terms of next year, we will -- we're putting together our budgets and putting together our forecast. We'll have a staff retreat here in Salt Lake City next year and we'll have all that stuff put together, consolidated, and we'll scratch and fight and about two or three weeks after that we'll sort out our numbers.

So, Chris, we're going to go ahead and just hold off a little bit on that because we're in the process of doing that work as we speak. We've been working on this transaction. Next week we have our staff retreat and we'll pull it together. And then as soon as we have that information, and including this new product I talked about, the Irish project, there are a lot of things there that will have an effect on our numbers. So it's just -- it's premature for us to discuss it now.

But, listen, when you take a look at what we're doing, you take a look at the EnSnare coming on line, you take a look at other things we've talked about, and a couple of these other issues like the Irish project coming on, it's clear to say that we're going to have, in terms of revenues, a strong year. So we'll give you the exact numbers, but we have an awful lot of stuff going forward -- going forward. So it's -- we're looking forward to it.

Just wait -- hang in there with us for a little while, while we get all the numbers massaged and get them all lined up and then we'll come forward with an official statement.

That certainly sounds good. To follow up on some of the newly acquired products, which would be your stents from Alveolus as well as the EnSnare, you gave us some good updates on EnSnare, how qualitatively are the stents being accepted in the market and how would you characterize an expected revenue ramp-up associated with them?

There's a couple of things we've done year-to-date. Remember, I think we closed on this transaction, I think it was in March. And so we've done just short of $6 million in stents for the year. That does not include the biliary, which we will introduce in January. We made some improvements. We kind of pulled back on what they -- on what Alveolus had and made the improvements. We're waiting now for regulatory approval and in January, assuming that all goes the way we think it will, then we'll be ready to go.

I think the exciting thing about the stent business is that we're in an area where, as you'll recall, Alveolus, now Endotek Merit's business, was number two in some of these areas. And the other thing that's exciting, Chris, is the physician support. We had a physician here last week in our facility who sang praises to this product and why he uses it and why he thinks it's the best on the market.

Now you add to that some improvements, some broadening of the product line, a colonic and duodenal stent that we're working on, we have trials going on in Europe of our covered biliary stent, the release of both the endoscopic and the percutaneous biliary sheath in January, and now this new valve technology, plus another stent product that we're working on. I hope that paints the picture of how excited we are about this business and the investments we're making in it.

Now, that being said, it takes time and it takes effort and we're dedicating the resources that we can to bring all this stuff to fruition. So is it a tough market? Is business tough? Yes. I mean you got to go out and fight and scrap every day. But I'll just stand on our history of taking things, working on them, improving them, and then broadening our distribution. We haven't even started in Europe, as an example, on this stent. We have several million dollars of business that they kind of let go before we bought the business.

But we've been so busy trying to concentrating on these people that we hired, on research and development activities and, candidly, opportunities are coming out of the woodwork, we have plenty to do. Now, as that starts to fold out over time, along with the snares and other products that Merit is developing, I think we're going to switch from -- not from a -- I'm proud of our legacy products. But there is a transition going on in our business that's going to move us to higher gross margins, more physician preference products that will help us worldwide.

Understood. And one last question, really directed to the legacy business. Are you finding that in this cost environment your value proposition is becoming more competitive?

Well, I think the numbers speak for themselves. When the legacy products are up 10%, people are still buying things in markets that are relatively flat. I mean if you take a look at interventional procedures, the numbers that I read, I recently read J&J's business, I think they talked about a 1% or 2% increase in stent procedures. So when we take a look at 1% or 2% and look at a 10% growth of legacy products, I think we're doing something right. We're taking market share and our competitors are taking the eye -- their eye off the ball. With our innovation, with our breadth of product mix, with our advancement of other direct countries and all this sort of thing --

(inaudible - microphone inaccessible)

-- our kits, the breadth, I just think we're hitting the ball, candidly, out of the park.

Thank you very much. Appreciate it.

Thanks, Chris. Nice to hear from you.

Thank you. Our next question comes from Jayson Bedford with Raymond James. Go ahead, please.

Good afternoon, guys. Can you hear me?

Yes, we can, Jayson. How are you?

I'm doing all right. Nursing a little bit of a cold.

Sorry to hear that. We've got a stent product if you need it.

Well, hopefully not. But just to follow on the last question, you obviously are putting up some pretty good growth, much faster than the market. And I'm just trying to figure out what do you attribute that to? Is it just kind of pure share gains on existing products or are you seeing better contribution from some of the newer products that you've launched over the last year?

Well, that's -- it's a lot of factors. Let's go through a few of them, Jayson. Again, as I mentioned, our OEM business is up 30%. And so as we take a look at other device companies that are looking for stable companies and a breadth of products, that's helpful. If we take a look at the markets this year, we're up dramatically in China. We're up in Russia. We've gone direct and we're starting to see sales, not improve, but it creates -- for instance, in Sweden is the highest growth rate in Europe in terms of our sales.

So even though Europe has been kind of tough, we're seeing good growth in Great Britain, we're seeing good growth in Sweden and in Denmark. We've gone direct in Austria and our sales are up, I think, 100% or 150% over when we had a distributor, and we're just getting started. So you take that -- those aspects of it, you take, I think, the split bag concept where we've gone to the procedure and the interventional, you take a look at that, we're getting returns off more people selling Merit products and getting deeper into the bag.

And then again, as I mentioned earlier in the call, we have a lot of products that require a breadth of products. I'll talk about the Prelude. I talk about it a lot. It started out relatively slowly. But as we added radial procedures, one of the big growth areas worldwide are radial procedures and Merit is tearing them up in radial procedures. And I think we're going to continue to see growth there.

You take a look at the short sheet, you take a look at the marker sheet, you take a look at all that business and you have a business that's up 44% year-to-date. Our drainage catheters are up, I think, 54% over last year. So these are products you've been hearing about a long time -- for a long time, but as we have more sales time, greater breadth of that product line, we continue to see those products grow. So you guys probably get tired of hearing about these things. It's maybe not too much fun to write about a product that's five years old. But listen. It's up 44%.

Yes.

We love that kind of stuff. So it might not hit the headlines, but as we take a look at the business and look at all these factors, worldwide presence, breadth in three markets, new products, our competitors with their eyes off the ball and worrying about other things, and you take all those factors, it's -- I don't want to sound (inaudible), but it's the same old story for Merit, we just keep doing the things that created success of this company, and that's it. We're just executing.

Kent, you want to say something to that?

I mean there's another part that you haven't emphasized is the kits. I mean our trays are up 24% still year-to-year comparison, fourth year of over 20% growth. Our other manifold kits, fluid administration kits are up 11%. Those have to be market share gains again, as procedures aren't growing that fast. And then you have, of course, our new products. The probes were strong this quarter. We got those transferred here. We're manufacturing them and now we're able to hit the --

Yes, that's a great comment, Kent. Yes, there's one right there. We had the product, that little [hydromer] deal that was a million and a half bucks. The sales volume is about double. We had to take it and keep up, get out of backorder that we were in, transfer the product and build it and ship it. And we've done all those things. We're doing the same thing with the EnSnare. We're doing lots of these things, Jayson.

Here's the bottom line. This is a terrific group of people who put their hearts and soul into this business and work their -- they just work and they get things done. I mean I've got them all sitting in this room. There's 30 of them sitting here right now and they're all all-stars, all of them.

Fair enough.

Wonder how I really feel? I'm holding back, Jayson.

A couple of other questions. Kent, did you give the U.S., OUS breakout in the quarter?

No, I don't have that in front of me. We do that annually. I don't have it. I'm certain it's close to 32%, 31%, where it's been at.

Okay.

-- changed too much. We have OEM international actually has been growing faster, but then our currency has got -- has been weak this year. It's starting to turn over and help us, as going into the fourth quarter it will. So when you look in dollars, our direct sales have been slow growing and actually it's kind of flat. But anyway, you're still going to be, like, my guess is I'm pretty close it'd be 31%.

Okay. And then just on the gross margin, you kind of hit our number, but the sales were quite a bit higher than we expected. And so I'm wondering do you expect to see gross margins increase going forward from these levels?

Well, our original goal was 150 basis points. We always feel comfortable in doing that. We're three months -- I mean three quarters into the year. We're probably going to finish somewhere in the range that we're in right now. And then we'll sit down and go through our forecast and look at our mix, but our goal will be at least 150 next year.

We do have the advantage of having the EnSnare in there, which is going to add quite a bit. So as we [meld it all out], I think there's an opportunity to see a higher situation next year. But we've got to take a look at oil prices and healthcare and look at all of these issues that are coming down and we'll do our budgets. But I think that we're going to be able to stay on plan that we've kind of put together and say we're going to do 150 basis points a year until we hit 50%. That's what our goal is. And we've been --

Sure.

We've been just kind of chopping away at it.

Okay, that's helpful. And just last one for me and then I'll get back in queue. Fred, you teased us a little bit with this Ireland project. Do you expect it to contribute in the fourth quarter? And then if you could maybe just kind of prioritize the growth drivers as you see them in 2010, would this Ireland project be number one, followed by the re-launch of the biliary, followed by EnSnare, or have I got that order incorrect?

Well, clearly, the EnSnare that has $6 million or $8 million out there is going to be the driver. We have some additional channels that that's going to go into, plus we're going to be able to take and almost triple the sales force that previously had that product in an area that we're very familiar with in interventional radiology. So that's going to be the big star next year. The great thing is it's being produced in Ireland. Again, have about an 80% gross margin. So that's going to be the star. And again, that'll start rolling out in January.

If we take a look at the Ireland project, I think, and I've said this before, that it has the potential to be a $30 million product. Now, is that going to take five years? Is it going to take eight years? Is it going to take three years? We have to roll it out, we have to broaden the offering, and what we're doing now is we're producing the product in Ireland today. We're going to go out and spend a little bit of time in the fourth quarter making sure that we're right with customers and making sure we have all the salient little points of what we think is better performance than the competitive products. And then we'll train everybody in early January when we'll start to have some inventory. We'll have done all our homework and we'll roll the product out.

So I think it would be irresponsible for me to say that this -- none of our products have ever gone straight up. They're -- we're kind of the -- they -- Steady Eddie. That's probably the best. Is it going to go from zero to $10 million the first year? No. Could it go from zero to $5 million? Yes, it could. Could it go from $5 million to $10 million? Yes. Could it go from $10 million to $20 million? Yes. So, Jayson, it's going to be that kind of just -- we go to work, we make the calls, we put our boots on in the morning and we go do our work.

But when you add that on the EnSnare, when you add it on the other new products, some of which are $300, $500 products with higher gross margins than our corporate average, and you put all that together with the sales force, the clinical, you take the stent business and what we're doing and the hard work we're putting in there and add it all in, I think what you're seeing is a transformation of this company in which the legacy products are very important to us. Our customers know who we are.

And so I would say, to answer your question, EnSnare would be the first one. I would say that our stents will clearly be -- actually, if you take a look at dollar volume for the year, the stents are going to do well. The EnSnare is going to do well. We have several little legacy -- I've got a couple of products, Jayson, that if I talk to you about them you might go back, get in bed and go to sleep early tonight. But if you turn around and wake up three or four years from now, you might find out they're doing $10 million or $20 million a pop. But if I talk to you about them today, they would bore you to death.

Now, me, on the other hand, I can hardly contain myself. And that is because these are things that we've improved upon that the competitors have forgot about. And as we add them to the rest of the stuff, I mean we've just got somebody out there standing, we're just going to -- just going to put one on the chops. Boom, down they go and we pick this or that. I mean it's just the way we are. There's a lot of these little things that I don't think are -- have this sizzle, sometimes, that you guys like to look for.

We're just steady Eddie, Plain Jane, however you want to say it. But when you take a look at the history and what we're doing that adds a little bit more flavor, listen, 15% for the quarter is not too bad. So there you go. That's -- as you can see, I'm just slightly enthused.

That's helpful. I do need some help in getting to sleep. But I'll let someone else jump in queue. Thanks.

Touche.

Thank you. Our next question comes from James Sidoti, Sidoti Company. Go ahead, please.

Good afternoon, Fred. Can you hear me?

I can, Jim. How are you?

Very good. A little confused on the guidance. I believe your guidance for the year was 77 to 79.

Yes.

And you've done 61 so far.

Yes.

And the fourth quarter's typically your best revenue quarter.

Jim, you know we give guidance once a year. Unless there's some significant thing, we're not changing it. But we'll give you next year's guidance. You guys can do your stuff based on the numbers, but we just can't do that.

Okay. I just want to make sure there's no, like, extra R&D, operating expenses you're expecting in the fourth quarter.

I'm not spending anything extra other than the things that we're already doing.

Okay.

(inaudible - microphone inaccessible) percentages go up is what we're saying, we're investing at a higher rate, particularly in stents and the new catheter we haven't talked about here today.

Yes. But in some ways, since we're now producing -- like, for instance, the EnSnare that started out as R&D and that's going to go into inventory and actually reduce the R&D cost. Plus there are some other things to offset R&D. So there are no surprises that I'm aware of or that I see today. Just the momentum that we have, the products that we have and just a great business. So I'm sorry if I confused you. it's just that we don't go out, other than what we're talking to you about momentum, you guys have to draw the numbers out and then we'll give you next year's numbers as quickly as we can.

Okay. Now, on the EnSnare, how should we think about that in terms of the timing of the contribution? When do you -- when do you expect that to start to add to your top line significantly or materially?

It will be released January 2nd or 3rd, whatever that first day is, it'll be available for sale. We'll deliver it to customers on that day. I think there will be a little bit of lag in the first quarter because they'll be using up the inventory that they have that may have crossed over. So there may be a little bit of that. But it'll be a contributor to full year.

Now remember, this is an all-star, best-of-class product. This isn't a me-too, gee, it's okay. This is a proven, been in the market for several years, it's the best-of-class. So it's got tremendous capabilities and opportunities, particularly when we take a sales force that is more than double in the United States, of which the previous sales group had. And we're direct in more countries in Europe with a broader bag and the international opportunities, plus -- and maybe I'm not saying this quite as clear, we have a couple of other distribution channels that the previous company did not have that are in areas that Merit's not calling on.

Now, they're not material enough to discuss or to come out. But I can say this. There are a couple of those that could add $0.5 million each. So there's a possibility in some of these new channels of maybe $1 million. That's not material. It's not a big deal. But when you take a look at that $1 million on top of the $6 million or $8 million, you're talking about 10% to 15% right from the get-go, plus everything else that we do. So that's a big, big player for next year's opportunities for the Company going forward.

Plus we will be starting a couple of other snare type products. We can build a snare as anybody on the planet right now, today, in Ireland. We're doing it. I was there last week. I saw it. It's terrific.

I'm glad you're not too excited about the EnSnare prospects.

Trying to hold back, Jim.

All right. And then you said a little bit about the project in Ireland and now you have this new agreement for the valves for the stents. Should we expect that R&D spending is going to have to go up to support some of these projects in 2010?

I think that if we take a look, we're going to budget somewhere around 5% for the year is what we're going to do. So I think from where we are year-to-date, Kent, where are we year-to-date here?

Year-to-date we're 4.4% and we were 4.9% for the quarter.

Yes, so we're 4.9% for the quarter, 4.4% for the year. So I would say that it's going to be like the expenditure was this quarter, so pretty close to 5% should cover the cost of the projects that we have in the works.

Okay. All right, how about in the sales and marketing side? Do you expect any -- are any of these projects going to require new salespeople or will you be able to use your existing sales force?

I think we'll be able to use our existing sales force. Again, we have the OEM guys that are out there that are now covering both Europe, where we have direct salespeople, we have all of those things in place. So we will add some salespeople, but as a percentage of sales, I don't see that it'll be going up.

Okay. All right, thank you very much, Fred.

Thanks, Jim.

Thank you. Our next question comes from James Terwilliger with Duncan Williams. Go ahead, please.

Hey, guys, how you doing?

Good, Jim. How are you?

Good. Nice quarter. I got a couple of quick questions. Some of them have already been answered. Kent, the first one I have for you. And you talked about this briefly but I've been jumping on different calls. Talk to me a little bit about the decline in the tax rate. I believe it's because of your Ireland facility. It's clearly going in the right direction. And what should we be modeling for a tax rate going forward?

First of all, I've got to make sure you understand this is an unusual quarter because it's once a year we get to roll off our reserves that were no longer needed for '05 now. So we don't -- that's lower but it's also lower than last year, which we had similar situation. And why is that lower? Well, we've had a new tax credit in Ireland for research and development that we were able to put into this quarter. It helped us a lot. We also have an R&D credit in the state of Utah which is stronger this year than it has been last year.

But we're seeing improved or lower taxes in overall rate because of those items. We are also -- you're right-on in the sense that Ireland's becoming financially stronger this year than it has in past years. And we expect that trend to continue because of the things Fred's been talking about. The EnSnare and the other project we haven't fully disclosed is Ireland income and therefore it will be sheltered somewhat because of a lower tax rate.

So it is part of our strategy. It's a long term strategy we're affecting. And we should see a trend, not dramatic but gradually improving tax rate, if Obama doesn't submarine us somehow.

Well, (inaudible) moving in the right direction. So you did a great job on that. I got another quick question for you, then I'm going to switch to Fred. The inventory level came in at about $48 million. And at the end of 2008, I think you closed at about $38 million. Do you have any comments on inventories or is just this a natural build when you look at the acquired products and the number of new products that you're going to be launching in 2010 and just higher inventories to support the growth in your business? Would you just comment a little bit on the inventory level?

The inventory levels are a little high. There's some reasons for that. One is some of that's inventory we've acquired. So when you acquire in the probes and in the stents, we've bought inventory, we've brought in raw materials, we have some work in process, those kinds of things have increased it. We also spent some money this year reducing risk for some of our vendors. So we brought in extra materials for vendors that either had financial problems or were changing materials and resins and things. So we stocked up.

We had a few other materials we went higher in because we were able to actually save money. But it shows up on the balance sheet as higher inventories because we were able to stock large orders in our own -- we had room to store it and lower the price per unit. So some of those things have added extra to it.

James, another thing. We're doing over-water shipments and in order to do that, there's a longer lead time of about 30 days but at about a tenth of the cost. And so we had to build inventories for that as well so that we could put that into the pipeline to make sure that those still moved smoothly. So that was an increase to get that inventory.

And again, yes, our analysis was that the carrying costs of the inventory versus the savings, which are like for an air shipment of $25,000 for each of those shipments a week versus a $5,000 shipment, it's a pretty dramatic savings. And so but that requires that you plan that inventory in the pipeline. So that's another part of it.

Yes, it is.

Thanks for that. Fred, you had talked about the over-water shipments and the distribution costs and, Kent, you had talked about the resin. So that's a great answer on higher inventory levels.

One more for you.

Okay.

A little bit more inventory than we should have. So after we throw all the smoke out there, we're probably a little heavier than we should be. However, as we come into the balance of the year, remember we shut down the last week or 10 days of the year for our employees and that'll be absorbed and used up as we get to the year-end number. So that's another reason or another factor that you'll see. And it should, I'm going to say, equalize to a more normal number than we'd normally see I think by the end of the year.

You will see it drop, I believe, for the fourth quarter.

But I'm going -- not that I want to participate in answering my question, but you just went through the slow seasonality period as well, so [inaudible] should pick up a little bit. But that's a great answer.

Fred, I'm going to switch to you very quick. I look at your company and I look for a very exciting 2010. And my question is you've got a number of acquired products, you're taking market share, you've got a number of product launches. So -- and your R&D is moving in the right direction. You're investing in R&D to launch these products and develop products. What is your visibility in terms of the sales force and the hiring plans in 2010 to support this growing franchise? And also, how do you manage this growing franchise going into 2010?

Let me go to the management issue. First of all, when we manage or we set apart the Endotek division, we appointed Darla Gale as President of that division. Darla was one of the founders of the company and she's managing that sales force. So that is not being -- that doesn't encumber the existing sales force. We have a vice president in charge of the European sales that oversees that area. We've -- and I don't see that there's any burden on that. They seem to be doing a fine job in being able to manage it.

We will hire some more salespeople. We have very few people leave, but when they do, we look at transferring the full bag and then dividing the territory and setting it up into a procedure and interventional area. We've also got the OEM business that we've hired more people and now we've got one fulltime person in Europe. We could probably use another.

But as a percentage of sales, I think we'll be able to stay right into those percentages and discipline ourselves to make sure that we get the revenues and the maximum amount out of our sales force. I think they do a terrific job overall. I think we can manage it and have the discipline.

If the question is are we going to see a dramatic spike to support these, I need to see evidence that the product is selling, particularly -- I mean if we were a startup company, a lot of people would go out and hire a bunch of people and hope sales catch up. I view it a little bit differently. We already have the base. I need to see that the existing sales force is selling the new products. And then that's what drives -- if I see that I need to put more attention on that and I see that it's growing, then I'll invest there.

But I'm not just going to go out and hire 15 or 20 new salespeople and hope they do it. But we're going to stick pretty close to -- and have the discipline into our model.

Is your --- do you have the manufacture -- do you have to make any significant investments in manufacturing facilities or expand manufacturing going into 2010?

Well, we already have done some of that that are already in the numbers this year, or at least when I say in the numbers there are decisions we've made. We've expanded our facility down in Richmond, which has grown from really less than $1 million to about $25 million annualized this year. And we ran out of space on warehousing because of the bulk that's required in that business. This is the pack business.

So about two months ago, I think I've discussed this previously, we leased a 35,000 square foot facility that'll come on line in January. In Salt Lake City we recently leased a 53,000 square foot facility in which we have free rent covered up until about the end of the year and which we are moving some products from what we think are higher cost areas into a more significant, lower cost and higher research and development area.

So but I don't think those are significant or material. If the question is -- and I think this is what you're asking, do you see Merit building a 300,000 square foot facility in Salt Lake or building someplace else, the answer is we're looking at where we need to be in low cost environments with the possibility of moving the business that we have at a contract manufacturer in Mexico to a Merit owned facility because we're nervous about some of these areas and the long term aspects of them. So we are looking at those areas but we haven't made any decisions or commitments in any of those areas.

We're also looking at the possibility of consolidating some of our Utah facilities. We have a facility that's about 80,000 square feet, or something like that, where we started and we have to ship products back and forth and we have a $14 million economic development area here that offsets future taxes. And so we're looking does this make sense. So we are going through the process of saying what do we need if we were to look out five years from today and what are the facilities we need to accommodate that growth. We're always in the midst of that.

So but no major, other than the two I mentioned, which are relatively small, no major commitments do we see into these other facilities. If we decide and make a decision that we have to do something like that, then we will discuss it openly and talk to you about the effect that it may have going forward. But again, if we take something out of Mexico and put it into an other low cost environment or take something from our Salt Lake and consolidate it, it's -- they're not empty buildings. Whatever we do will have a tax reason and an efficiency reason or a cost reason for us to make those decisions.

All right, great. Great quarter and thanks for your time, gentlemen.

Thanks, James.

Thank you. Our next question comes from Ross Taylor with CL King. Go ahead, please.

Hi. I just have two short questions. First, I joined the call late and I just wondered if you had disclosed the revenues that you all got from the Alveolus product this quarter.

I don't know that we did specifically, but I'm happy to tell you what it is. In the quarter it was about $2.7 million.

Okay, great.

And it's about $5.5 million for -- $5.6 million for the year.

Okay, great. And second and final question is just on the EnSnare device. Obviously it's a first-in-class product. Do you think it can benefit any of the other products in your portfolio, pull any sales along from some of the other products in your portfolio once you begin selling it?

Ross, I do. And the reason that I say that is that I'll give you a prime example. I was visiting with a physician here in Salt Lake City that runs an imaging lab. He is using a competitive product. I went down and talked to him and he said the problem I've had is I've never had anybody call on me. So here's someone where we do a lot of business now, but no one's ever called on him on this product. And if it's right here in our backyard and one of our customers, again, I don't want to -- I'm not trying to dis the former guys, but no one called on him. So he hasn't had a chance to use it.

Well, there's going to be a lot of opportunities. When we have the breadth of product that we have, with all those forces out there, we're going to go out and we're going to take a lot of business away just because of our presence. And if you look at our business, it really is an issue of consolidating for our customers. We take lots of things away from other people because we're there and we candidly have better products.

So I do think that there'll be a lot of pull that'll come from this product and other products Merit has because we have a history of doing that. And to go to the point, if you look at the legacy growth and take a look at the market growth, we're pulling it already. So you bring a best-of-class product, it just pulls more. So I think it gives us a tremendous opportunity.

Okay, that's great. Thanks very much.

Thank you. At this time I show no further questions. I'd like to turn the call back to management.

Well, ladies and gentlemen, good quarter. We have these meetings to talk about looking back and we need to do that to report. We've got a lot of exciting things looking forward. We've got these technologies if you look at where we and the things that we've been able to accomplish this year in terms of some of these outside technologies.

But what you don't see is a lot of the stuff that we're developing internally, these other great products go along with it. We're excited about these other things because they're new and they're exciting for us. But we have other things here that are just as exciting that will help to enhance our position in the marketplace. We've got a committed team. I think we have a sound plan. We'll be developing our plan for next year. Our facilities are doing just terrific.

One thing I didn't mention in this call at all, and these are the things that kind of get tucked into the numbers, but one of our divisions, our MC Tech division, sitting over in [Benlaw] in the Netherlands, their sales are up 50% this year. 50%.

(inaudible - microphone inaccessible)

Yes. And so we have some great technologies. We're now in the process of bringing on our own sensor capabilities. We have a sensor company. We're going to be folding in over the next year over 70,000 sensors a month that we'll produce here for our own products as we go down the road. So we have -- I mean, guys, can you imagine we have a wafer fab. We have coating capabilities. We have extrusion capabilities. We have materials capabilities. We have a sales force. We've got facilities, we've got a clean balance sheet, we've got great opportunities.

And I think that as we go down the road here, we'll just simply see that the investments that we've made, the strategy that we've developed, the focus that we have, and candidly the energy, the energy of a lot of people, including everybody that's sitting in this room in Salt Lake City, is what's going to take this company and continue to propel it forward and to meet its destiny. We're excited about it. I think you can tell that.

We appreciate your support. We look forward to reporting continued improvement in our results. And again, we'll also be talking about a couple of other projects as soon as we get the final word. I had hoped that we'd have it for today's meeting. But we'll be back to talk to you about that in the next couple of weeks, or at least as soon as we receive word from the FDA. We think that it is imminent. But until it's in my hand, we're kind of locked into this mode.

So thank you again for your continued support. We'll be out on the road visiting with accounts. We'll be out in several trade shows, or at least financial conferences in the next few weeks telling our story and I think presenting a great opportunity for those investors that look at companies like Merit.

So again, thank you very much. We'll sign off and wish you a good evening from Salt Lake City. Good night.

Ladies and gentlemen, this concludes the Merit Medical third quarter earnings conference call. You may now disconnect. Thank you for listening to the conference.