Merit Medical Systems Inc (MMSI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical Second Quarter 2010 Earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen. We're broadcasting from South Jordan, Utah, and want to express our appreciation for your attendance at our second quarter conference call.

We'd like to start our meeting by having our disclaimer being read by our in-house counsel Rashelle Perry. Rashelle?

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 web site.

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.

Thank you, Rashelle, and, again, good afternoon, ladies and gentlemen. We are excited to talk to you about our second quarter. We hope we have explained as clearly as we can the data that's in here, but we are going to drill down and I think provide you with some data that will help you we hope to appreciate what we think was a terrific quarter. Let me just go through a few of the numbers.

As you can all see, the revenues were $74.9 million, a 16% increase. Of note is that our core growth for the second quarter as compared to the second quarter of 2009 was up 13%. Nevertheless, I think we would all agree and I hope you would agree that 16% is an extraordinary quarter in terms of growth.

As we look at the earnings for the quarter, we were at $0.20 per share. But it's important that I point out that that number is net of $697,000 of expenses, which were one-time and were related to the proposed acquisition of BioSphere. Additionally, there were some additional charges and expenses that we'll talk about that we think enhance the overall performance for the business.

Just as a teaser as part of that, in the month of June, the Company operated at 44.8% gross margins and had an operating profit of 15.4%. Now I'll come back in a minute and talk about June and I -- because I know we're here to talk about the quarter. But we want to talk about what we think is an acceleration in the business going forward and the opportunities. You will note that in terms of gross margins, they were 43.3%. That was a sequential improvement of 110 basis points. I'd like to also point out that from the fourth quarter, it was an improvement of 280 basis points and it was up 60 basis points from the third quarter of last year. So our performance in the second quarter in terms of gross margins was higher than both the year-ago or the fourth quarter as well as the fourth quarter. I think I've got that correct. The third quarter. So it shows what we think are accelerating trends in terms of gross margins. And I think another really important thing to point out is that the variances, negative variances that were accumulated in the fourth quarter that last year because of the slowdown and carried on into the first quarter have been all resolved. They're gone. And there are now positive variances on the books we'll then will roll out assuming we get the positive -- because we have that four-month model, which we will explain or have dialogue if you decide to. The net of it is is that you tack on a month and drop off a month and the month that we drop off is going to be a positive variance.

So we continue to be very, very busy. And, in fact, we had a scheduled plant shutdown during the July 4 holiday. And we had to modify that to make sure that we could meet the needs of our customers. So we're very, very active in that area.

If we take a look at the overall sales because I think there's some very interesting trends here as well. In the second quarter catheter sales increased 30%. The standalone devices rose 17%. Inflation devices grew at 15%. And we'll discuss what's going on there. We did have some contribution there, both in terms of gross margin, from some accelerated orders or some larger orders than we've seen in the past from Kyphon. Nevertheless, the core business ex that is still growing at some of the highest levels that we've seen in a number of years and we expect that that's going to continue on because of some difficulties that our competitors are having meeting the needs of their customers.

If we go to the SG&A expense, I think that's another one because I know there's a lot of concern about that. For the second quarter it was 26.6%. And most of that, again, was because of the costs of the pretax expenses of $1.1 million that were in the BioSphere. But we are also on the quarter our SG&A expenses as compared to the previous quarter, and I want to go to June, excuse me, for June were down for the June month to 23.4%. So the other point that I want to make here is that if we take a look at gross margins and if we continue the sales trend, you'll see that we're going to get operating leverage all the way down the line. And we think that that -- those opportunities are in place assuming that we have the reasonable -- or at least the market conditions that we've seen going forward.

A couple of other things that I think are important for you to know is that we've received the CE Mark on our ASAP thrombus removal catheter and the product has been trialed and is being trialed as we speak. I had a phone call today on a very successful use of the product in Germany. And the comment that I heard from our product manager who was there is the physician stating that they though this product was better than the current market leader. And so we're excited about the prospects. We're still in the 510(k) process. And we expect that we will introduce this product in the United States sometime in the first quarter, but we expect that we would roll this product out in Europe in the next 30 days or so and start to generate revenues from this product. It's a tremendous product with a terrific market opportunity.

We also introduced four additional products, which is, again, consistent with the Merit experience and that is introducing lots of new and exciting products, all of which are helping us in our efforts to take advantage of some of the opportunities. The specific one that comes to mind is the Tram. This is a manifold, which would fall in the traditional legacy products, but with an integral transducer. We make that transducer. And we're the only company in the world that is vertically integrated in this particular area and we're having great success with that product. We're also pleased that the Laureate guide wire is building and growing and we expect that there is going to be dramatic growth there. I -- as I wrote that one sentence about the current market leader, I guess I should probably say that the current market leader is a very powerful company and has had a great product. But I don't expect that if we were talking three or four years from that they'll be the market leader, and so hence the word current. I hope that in the future I can talk to you about the former market leader.

We had some issues that you'll see in terms of our lower tax rate for the six months. And that is because of our Irish operations and more profits there that allow that at least for the first six months to have a lower tax rate.

And then regarding the BioSphere acquisition, we still expect that that transaction will close in this quarter.

So, Kent, I'm going to go ahead and let you, you know, talk about DOS -- inventory turns, all those things that I think are very important to really look at the fundamental operation of the Company internally, so do you want to address some of those?

Yes, thank you, Fred. I am really pleased with the balance sheet, particularly the inventory. We've added a lot of new products. We've grown our sales at 16% for the last three quarters in a row, and yet our inventory has remained and actually declined over those same three quarters. So we're starting to see the cash flow effect. We were able this quarter to pay off the $7 million that was on our balance sheet at the end of the year, mostly here in the second quarter, and cleared that debt off, which is always nice to do. The -- and the cash is starting to grow on top of that now.

The -- one -- another nice thing is to see the improvement sequentially in many of our income statement measurements. So we've mentioned some of them and that is that the gross margins are improving sequentially for the last four quarters or it's better than it has been since a year ago. And it's mostly both a mix issue with some of the new products we're bringing in, as well as efficiencies as Fred's already mentioned in being able to apply all of our overheads and to actually exceed the standards for application of overheads.

Another important thing is is that we're seeing now leverage come back into the SG&A section of our financial statements where the growth that we invested in last year, towards the last half of last year, show now we're getting a return from that in both Europe and in the US from the standpoint of the SG&A costs aren't growing now as fast as the top line, so we're starting to see leverage. In fact, if you take out those acquisition costs in the second quarter, they would nearly be flat from a year-to-year comparison. They would both be around 25%.

So we are expending increasing amounts in R&D. We are investing in new products as particularly in the stent area and in the GI business. And you -- so you'll see some of those increases. And we're investing some in that area. But that's to really bring that business in the future to profitability.

So, again, it's a great quarter. I think we have good trends and particularly when you look at within the quarter and how strong June was.

Okay, Kent, just a couple of other things that on the balance sheet that -- or -- and income statement that are important to you, the intangible amortization for the quarter, I think this is the quarter, Kent, let me make sure.

Six months.

Or six months was about $1.3 million as opposed to $865,000 for the six months last year, so there's, you know, there's almost $500,000 worth of additional expense there. So when we take, you know, the amortization, which is a noncash issue, and we take the expenses for the BioSphere transaction and look at that and some other expenses, there was an impairment fee that we took, making sure that everything is clean and we have a couple of things that we took care of in the quarter, it's even more extraordinary as we look at all of those things.

So I think we're getting back and have the momentum to move back where we all would like to see the stock -- not the stock, but I think the stock, of course, will obviously be a recipient or we hope it is from better financial performance. But as we start to look at those opportunities and operating profit and that leverage that's available and these variances that are now positive flowing in, it's just a great time for us.

And I do want to say that in terms of our sales force, our domestic sales force, our international markets, and our OEM and all of those areas that essentially all of our guys are hitting on all cylinders. You know, Kent pointed out and I'd like to just briefly discuss that in our R&D expense, we have -- we continue to invest in things that we think are going to help build the business going forward. A lot of that expense is in our Endotek division. With new stent products, there's expenses in there for this new valve technology that we are working with Vysera, and a number of disposable products that are Merit products that we expect will be introduced in the third and fourth quarter. And so those will start to help that division, which continues to be a drag. But as we turn that one around over time and then continue to move forward with our business, we think that we are absolutely poised, both in terms of capacity and with opportunity. So I'm very pleased where we are and where we're headed. I hope you are. And I think with that said, let's see, did I miss something?

Oh, yes, one other thing, very important in terms of China, we have received our [FISE], which is essentially our incorporation. We have received our SFDA approval. And there's a couple little minor things that have to be done. But within the next three weeks to month we will be operational in China. And I want to really thank the guys -- and when I say the guys and gals, this is the whole company. This took an effort from finance, this was our ops people, this was planning and Joe Wright's team and our IT. I mean, it goes across the board. Everybody was involved in getting this business to the point where now I believe that if we were to look forward a few years that it's going to be $100 million business. There's a lot of opportunity.

We've also filed for a number of new products. So for the first time in a very long time, there's a lot of new things being filed, which is going to enhance our business going forward internationally.

Kent, I'll let you comment on that.

Okay. And other thing that's interesting, we're seeing a lot of quotes and orders and contracts come in for kits and trays for that part of our business. And so we expect as the -- their inventory completes with former vendors that we're going to see an increase and an influx. And we're seeing the production of it now as part of that positive variances, so we're expecting those revenues to start flowing this next quarter and the fourth quarter and on into the next year.

So there's a lot of momentum. There's a lot of stuff in the pipeline and a lot of tired people around here who have been working very, very, very hard to take advantage of the opportunities in the marketplace.

I think, Kent, unless -- do you have anything else you'd like to share? Okay, well, so with that being said, I think it's time for our Operator to turn the time over and we'll start taking some questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions).

We'll take our first question from Jayson Bedford with Raymond James. Please go ahead.

Hi. Good afternoon, guys. And Fred, we heard about your mother and certainly our condolences go out to you and your family.

I just wanted to ask in terms of the business, looking at the revenue performance, 16% top-line growth, well above market growth rates, just wondering what is driving this growth, meaning I realize we have the segment breakout, but is it contribution from new products, is it better production from the sales force? And maybe you can comment on any type of kind of one-time/nonrecurring sources of growth in the quarter, if any.

Well, Jayson, first of all, thank you for your condolences. You know, as you are aware, my mom passed away a few days ago. And as soon as this call is over, we're going to take care of the family needs for today and tomorrow, so thank you very much for your comments.

I would like to think that in our business, you know, other than what I mentioned, that we had a good quarter with Kyphon, you know, they come and they go. They're up and they're down. And so, I mean, I don't know that that's one time. I think we're hitting on all cylinders and that is that if we take a look at our OEM business, when we take Kyphon out, it's up 25%. We take a look at our domestic sales, I think one of the things that Kent mentioned was that our kits and our packs are growing dramatically. I think we've prepared for over 20 years of filling out our product line. And there's been times when we didn't have all of the pieces. But I absolutely have no difficulty in saying that we have the best and broadest product availability of any company. And so that preparation, things like the Miser, which we introduced a couple of years ago, and the Tram, now help to fill those final holes with this broad breadth of products and tuck-ins and sheaths and needles and all of the things we've done over the years. Our sensor business is doing a tremendous job. You know, we've picked up some very key customers there on the industrial side. And so that's growing. And those aren't one-time. These are things that are going to be there for a long time. On the automotive side, that's starting to drive our sensor business, as well as the medical side and consumer. So that's very busy and going to get busier.

I think what is interesting to note is generally, you know, we would be having the discussion about lower margin products. And when you talk about the kits and the packs, you would automatically think that that's somehow in the mix would affect things. Well, it does. However, because of the operating leverage and the capacity issues and the ability to do that, you know, the bills are paid and we're getting those positive variances, which are helping us and would help us going into the future.

So it's the new products. It's everything. But I don't know that there's any one-time bolus of anything other than the situation that we've talked about with the kits and the packs, because those --

And that's yet to come. We haven't seen that in the quarter yet.

And that's a good point and that's what Kent tried to say earlier is that momentum, those things are just being built and they haven't been sold yet. They -- we're filling this pipeline that is as I've mentioned before could be on a run rate $15 million to $20 million and still growing. So that's on an annualized 12-month run rate. And, again, that's a guesstimate. But nevertheless, that's where a lot of this is coming from. But this is new contracted business. This isn't a one-time shot. These are things where we have filled the gap. We're seeing -- this is a long answer, Jayson, but we're seeing the very same thing with the ability on national accounts where we have either limited business or this all of a sudden, you know, we're kind of being invited to all of the parties. And we're the first call, which is kind of nice. We've worked a long time to put ourselves in this position, so -- and we have the capacity. So, you know, all of those things are just kind of all adding up and it's just put us in a, you know, in a great place. And now we just have to just keep working, although like I said, we've worked hard and a lot of people are tired and traveling all over the world, but -- so there's a long answer to a very complex question.

Fair and that's helpful. Just on the kit and tray dynamic, you know, it's interesting, it seems like there is a nice opportunity there, yet that was actually your slowest-growing segment in the quarter. So just in terms of the timing of that opportunity, I'm guessing you kind of saw it late in the quarter. So that's something --

Oh, no, no, no. No, no, no. No. What you saw, a lot of it was some in the standalone products to kind of fill that. And you see some of that that if we're dropping off as we work our model out of that four-month drop one, add one, we're getting the positive benefits of some of the production to prepare for it that were on the front end. So we're going back. We've been seeing this going on since early February. So this isn't just something -- it's been accelerating. And so, I mean, we've bought, you know, like I mentioned I think in our last call, we bought three or four new injection molding machines and we're doing -- we're very, very busy. So this isn't just a one-month phenomenon. This is something that we've been working on and discussing in our calls for several months.

I think his point is is that it hasn't showed up a lot because [it's always grown].

Yeah, that's right. That's correct.

But yes, we saw more of it in June than we did the previous months and we expect it to be because there are contracts and they have to clear their other inventory. So you hear about them from the sales force before you get the contract, before you actually deliver the products. But it is --

That's correct. There is a lag.

-- it's -- there's -- but it's interesting to see how it's building.

And another thing, too, Jayson, that really helps with that is that not only you selling those products, but it helps you to sell your other products, your higher margin products, so whether they be vessel-sizing catheters, whether they be sheaths, whether they be snares, any of these products, we just have more of a presence. And I think that Merit is looked very candidly as being the guys that can deliver and can help people run their business. They have businesses out there and we're kind of their best partners right now.

So it's interesting, too, the list of the new customers are some of the biggest teaching centers in the country that have been more difficult to convert for us because of their desire to stay where they were and then now there's been reasons to change and so we think that'll influence a lot of products and (inaudible).

And it's -- those kits and that ability to get that presence, there's been other problems in inflation devices, so one of the things that you'll see as we get forward -- go forward is that you'll see those higher margin products like inflation devices specifically, along with a new inflation device that we're going to be introducing, are going to help us to garner more market share in a product which is essentially our highest gross margin area overall as a business segment. So those things are all working in our favor right now.

Yes, okay, that's helpful.

Just a couple of quickies and then I'll get back in the queue and let someone else ask a few. Reconciling the 13% core growth, what was EN Snare revenue in the quarter and of our math is right, Endotek was about $2.5 million?

I've got it right here. I think --

Endotek is $2.4 million and it's $1.9 million rounded off is EN Snare.

Okay, thank you.

And then could you --

By the way, there was $2 million in the quarter last year, so when you talk about a comparative for Endotek, it's kind of similar. It's up 10% by the way from a year ago.

Gotcha. And just lastly for me, in terms of new product flow, you mentioned it sounds like there's a lot in the hopper there. Could you maybe just highlight the maybe two or three products that you plan on introducing in the second half that you're most excited about?

Yes, well, the ASAP is what I think is the biggest opportunity. And I mentioned that we have two endoscopic products that work in our GI division that are great opportunities. And the other -- so those -- I'm not going to give you the name of those because it wouldn't be appropriate, but they're coming in late third and early fourth quarter, so there's two big products there. And, of course, the one that is going to have the dramatic growth is the Laureate guide wire because we've got the -- we started out with the basic part of the product line, but other sizes, like the .038, .018, and .025 are going to round that out. And I think the rewarding thing about the Laureate is I'm being told time and time again that it's the best hydrophilic guide wire on the market. And that is extraordinarily pleasing to me, you know, with the years that we've spent on developing it and putting the production capacity.

Kent, you wanted to add something?

Yeah, I think the microcatheter is another interesting opportunity, not only because it's a recent introduction that has some unique properties that differentiate it in the marketplace, but because of the focus it's going to get along with the BioSphere's closing and that product coming on.

Yes. It's a great point. So, Jayson, when you look at the BioSphere opportunity and you'll recall that I've said that I believe there are $0.50 to $0.60 of Merit products that are essentially new. And these are sheaths. This is our Maestro microcatheter. And it --

And the Laureate.

-- and the Laureate. So there's all of these products that are moving in there. And it's going to get -- we have two orders today, for instance, from two of the largest institutions in this company that -- or country that order ten each of our microcatheters. And these are 350 bucks, 400 bucks a pop. The other thing is is that we haven't really officially launched or, you know, just officially until --

This month.

-- really July 1 on the Laureate and we haven't even launched it in Europe. And so we've been making sure -- in fact, one of the things we did is we started expanding clean rooms and capabilities and equipment because if we hadn't've slowed down a little bit, we wouldn't be able to keep up with the demand. And so we have expanded our capacities already, both in -- with all of the various parts of it. And we'll be rolling it out even further. So it's going to become -- as I've mentioned to you before many times, we thought it was a maybe a $30 million opportunity annually going out several years from now. I now believe that it's a $50 million to $70 million opportunity for Merit and it's a workhorse product that's used every day that drags along with it lots of other products. So we're excited about all of those areas. And there's more behind that. There's valve stent products. There's other stent products. We've started on a vascular stent product. There's other devices in research and development. So there's lots of stuff. The pipeline is full. And we'll give you more color on the names as we release them. Our competitors are on the call, too, and we don't want them to get too comfortable or start developing strategies.

Thanks Jayson. Is there anybody there?

Yes. Our next question --

Oh, here we go.

-- comes from the line of Larry Solow with CJS Securities. Please go ahead.

Hi. Good afternoon.

Hi Larry.

Could you clarify the competitive issues without naming the actual competitors? Are there actually separate issues for the custom kits and the inflationary devices? Or is that the same competitor?

It's the same competitor. It's a company that's well known. It's the company that we set out to emulate. They've had some struggles. And we've had the opportunity to have a full line. And I think as people -- customers have looked at that we have hundreds of products that meet their needs instead of the basic stuff that's been around for a long time, we have just a much broader product offering. And more importantly is the reliability. You know, Merit has stepped up to the plate. And when people had difficulty treating patients, Merit had product there overnight. And so that's one of it.

They also, this company also produced an inflation device for a large medical device company. And there have been struggles there and backorders. So we're picking up that business as well. But it all kind of comes from that one source of difficulty.

I would like to point out that this business that we're talking about isn't a one-time bolus. This is now business that Merit has contracted. And that's very, very important. So it's not just something that's going to come and then go back out the door. This is business that Merit has contracted and in some cases for several years.

And I'm assuming that you're talking as if you've already been producing it, but not actually recording it in revenues, but it apparently probably is benefitting your gross margin? Is it -- do you expect gross margins to continue to sequentially rise? Or was there potentially a little bit of extra juice this quarter because of that?

Yes. Well, let me go back and say that we have been producing the product and it is generating revenues. And we have been filling on a standalone basis rather than the kit through the standalone, so they would literally have to drop these products into the sterile area and assemble them so that they could treat their patients. So we have been benefitting from some of that all the way along and that's part of what's in this quarter. Now going forward, it'll just go into the system and it'll just roll out, you know, every week, every day, every two weeks, you know, depending on their order patterns. And -- but part of that production is coming onboard. But remember, what we're dropping down on the gross margin side is stuff that we were producing four months ago. I mean, this goes back to the question of -- that came earlier and that was are you just now seeing it, the positive variances that are dropping down are for things we were doing four months ago. And the positive variance we produced last month will roll out three months from now. So --

So each month --

-- that momentum, there's something each month and they're all positive going forward where we had that drag, you know, it's I think ironic when we go back and look at that fourth quarter of last year when things had slowed down. We were making sure that we were managing and doing what a business ought to do and that is not throwing a bunch of money on the shelf, but keeping the cash, and we ratcheted our production to meet the demand. Well, you had those three months or so and those rolled out negatively and then all of a sudden starting in January we started seeing these trends in production started moving forward. By the time we got to February, we started producing these and -- but we were still dropping off those three or four. And yet we still improved sequentially from the fourth quarter.

And gotten better.

Pretty substantially.

It's not until the second quarter did they turn to positive variances. And that's what he's saying. And to answer your question, Larry, we're -- this isn't a one-time thing or a bolus that came along. I think it's just a trend. These kits that we've been building will be continuing. In other words, they're a -- where everything we do is disposable, they're under contract, they're estimated to use a certain amount each month and we'll rebuild them again as they layer on going forward, so.

But it's not just the kids. It -- the question was asked earlier, you know, we're seeing an OEM, we're seeing it in sensors, we're seeing it in our direct sales force in Europe, so on that part, we're seeing -- I think we're up 20% as an example in our direct sales in Europe. So it's kind of across the board, you know, for varied reasons, not just this one issue. It's coming from lots of areas. Merit has a very broad breadth of products opportunities.

Okay. And just looking at the inflation devices and it sounds like things are clearly improving there. Is there any way to break out what you do think was sort of an acceleration of orders or maybe just from Kyphon itself or --

Yes, we can --

Yes, we can do that. Kent, do you want to just --

Yes, the underlying was 5% without that --

Okay.

And that grew at 69% compared to a year ago, so there was some big orders that came through. And they are uneven in their order pattern. So we benefited this quarter. So it was, you know, it was up $1.5 million over last year for the quarter. And yet it's only $700,000 for the year, so.

Okay. And then China obviously the progression is nice. Any way you can sort of walk us through I think on other calls you've stated that you think that the actual sales number would just double immediately just because you'll get a much higher price. Is that, you know, a fair statement?

Yes, well, what we're essentially doing is eliminating the importer. And essentially what you're doing is if you had a product that was $30 that you were selling to a dealer, they would end up selling it to their sub-distributor for about $60, okay? Now you have got to take although away from that delta, you've got the expenses of the office, you've got your own transportation, and you've got all of that sort of stuff, too. So it's not a doubling of income. It is a doubling of income --

It's of revenue.

-- it is a doubling of revenue. And then you're going to have some expenses. But those expenses, I think the big advantage for us in China is we're only selling about 20% of our products there. And so we're going through the process of now registering our -- for instance, our introducer sheaths, the Prelude. We're going to have great opportunities in the Prelude over there, millions of dollars of sales. But it's just now in the process of getting registration, so it's -- what we're doing is just simply taking out the middleman and making sure that there's a business model going forward that allows us to be able to have the full spectrum of Merit products. And that's why I think I can say with reasonable confidence that over the next several years in the largest population in the world and with the growth that we're seeing just in their general economy, it is the largest single opportunity on the planet. And we're -- we've positioned ourselves with a lot of expense. For instance, in the quarter, we had I think it was $187,000 or a couple of hundred thousand dollars worth of expense to set the office up in the quarter without any income. So we've got the expenses there and yet we're still able to I think generate the kinds of performance that we've talked about. Once that goes the other direction, you're going to see higher revenues, you're going to see higher margins, and you're going to see operating leverage. So that in and of itself is a great opportunity.

And would -- just to clarify, without, you know, increasing penetration, just on the same amount of sales, I realize you -- basically your selling price will double. Will that be sort of like a pretty immediate thing? In other words, once that office opens in say September, would you have to go out and get, you know, new contracts, new pricing on a case-by-case basis?

Yes, it's going to be a transition. You can't just unplug one and have the other one plug in. There's going to be some inventory, there's going to be some overhang, there's going to be this. So it's going to be a transition process. I would guesstimate that within six to nine months that revenue would then show the double.

Gotcha.

But in the meantime, you're going to get additional revenues that you wouldn't've gotten at all because of other opportunities and broader coverage and our ability now to work with different buying groups and distributor groups that we have been limited with heretofore. So --

As an example, our manager over there was saying that of the ten biggest hospitals, we really only have good representation in two of them, so (inaudible) --

Yes, well, in Beijing.

Yes, the Beijing area. So we've got eight more. And he's right there, so those kind of opportunities we think are on above if we just converted everything over that was already through the middle guy.

Well, and if you take our market share in inflation devices or kits and some of those products, with -- and inflation devices is 50% and we only have 20 there right now in terms of just the percentage, and I know this is a little farfetched, but it shows you what the opportunity can be.

Right. And is it fair to say your guidance is remaining unchanged, I mean, for the year or --

Yes. You know, we don't -- we forecast once a year. And we don't -- we're going into a summer season, which is always unpredictable. And so we don't throw the numbers around. I mean, I guess I will say that, I mean, we've given the range. And if you take a look at what the estimates are based on that range, you can extract the numbers and see that for the six months we're ahead of that, clearly. And we hope that trend continues. It would be terrific. We've talked to you about the momentum. I guess I would say what happens sometimes is people get too far in front of us and maybe we should talk more. But it's just so difficult trying to handicap and talk about this and talk about that. It's difficult to do. So we just kind of stick with it, here's the forecast and then the numbers will speak for themselves and you guys can do the analysis and make your own decisions.

Got it. Right. Well, thanks for taking my questions and we look forward to seeing you guys at our conference next month. Thanks a lot.

Yes, Kent will be there, so we'll look forward to seeing you guys --

Yes, excellent. Absolutely. Thank you.

-- up in White Plains. Thank you.

Great. Thanks a lot.

And our next question comes from the line of Shawn Fitz with Stephens, Incorporated. Please go ahead.

Fred, Kent, good afternoon. Thanks for giving me some time here.

Thanks Shawn. It's good to hear from you.

So, Fred, just maybe as we think about some of the new customers you guys are adding and you've indicated that these are really Tier 1 type of accounts, could you maybe just see if you could give us some sense of a couple of items as it relates to new customers? Is there any way to think about the magnitude of revenue that you all are acquiring in these new customers on kind of an annual basis? So if we're thinking about maybe in 2011, what kind of revenue could you guys be getting from these new customers? And then maybe just give us some sense as to how sticky these relationships are as well.

Yes, well, first of all, I think that we -- as we look at the opportunities here, these in many cases are customers that we've already been doing business with to some extent. We have some business. You know, we know what all of the flagship names are. There's Mass General, there's Mayo, there's Duke, there's Vanderbilt, there's Saint Luke's in Milwaukee, there's Tucson Medical Center, there's a whole bunch of just -- Intermountain Healthcare. I could go on and on with flagship names in this country. And those would be relatively good reference points, UMASS Medical Center. There are a lot of these great, great places. And that would be kind of a good reference point from there.

I think I've indicated in this discussion that our general guesstimate right now is that there's about $15 million to $20 million worth of run rate business. Now that's not going to happen this year, but -- and you're only going to get part of that next year. But it's accelerating. There's still new business going on and it hasn't changed. We're seeing, you know, you might get a little bit of an ebb and then all of a sudden the next day you get four or five new accounts that pop in. I was talking to one sales rep or I got an email on Friday when they had five new accounts that they thought they could convert in one territory. Remember, we have 60 territories. So, I mean, that's pretty significant. This is just one and the customers, so these are -- this is business we don't have. So there's a lot of that opportunity. And then when you come out with products like the ASAP or you have things like the Laureate, you have things like the Maestro, you have things like the Finale, all of these things just, again, enhance Merit's position with all of the products we have. That's the great thing is we're looking at some products that are legacy products that are growing at 25% and 30%. These are legacy products, been around a long time, so I think that presence out there, Shawn, just gives us an awful lot of momentum going forward.

Marty, do you want to comment on any of this and just kind of what you're seeing in the field or Monroe, our Vice President of Sales and our Executive Vice President -- do you guys want to comment at all? They're all looking at me with fear in their eyes right now, but --

Well, I'll just say that we're just seeing a general enthusiasm for Merit Medical. I think our capacity to respond when other companies are in trouble to help solve problems in hospitals endears us to the staff and to the people there and allows us more opportunities in the hospitals. I think we're -- we've continued to add sales reps while other companies have been cutting staff. And I think we're on a continual growth plane because of the quality products that we have and the well-trained reps that we have in those accounts.

And he's being humble when he's saying that. I'm just --

I didn't talk about the sales management

Oh, yes, okay, okay. All right. I hope, Shawn, that that answers your question.

Yes, that's great. Thanks Fred. And then just as we think about the market, it's like you all had a very impressive quarter on the gross margin side and then an even more impressive June showing as well. And I know that's being driven by new products and positive variance. I guess just as we start to think about gross margin of your business, Fred, could you just kind of talk around maybe what we should be thinking in terms of what the gross margin capabilities or possibilities are for core Merit Medical?

Yes. Well, I've always said, Shawn, that our goal at least on the intermediate term was to get to 50%. And we discussed in some previous calls that the BioSphere opportunity would add a couple of hundred basis points and actually 400 if you take a look and put the intangibles. I know that doesn't count, but -- so if you're looking at the capability, you take 43.3% and you add a couple hundred basis points, it's 45.3%. And then you add in some of these other higher margin products that are coming down the pike, and then you get the absorption issues even though you have those lower mix products, it puts us well on our way to hit the 50% goal in the next two to three years. So I'm talking 2011, 2012, and 2013. So that's still our goal. We've been working that since we were at the point where we were at (38 I think point 3 or point 4) a few years ago and we believe that we have the ability. Now we hedged a little bit this year on our gross margins from the (150), which we had promised in previous years, because we missed a little bit in that fourth quarter and we wanted to give ourselves a little room. But with what's going on and should these trends continue, we are going to feel very comfortable about our opportunities with gross margins. And then you add on the BioSphere opportunity and all of those products, which we say go, you know, that get added onto that, they're all very high margin products. Then you take a look at these new Endotek products that are all high margin products. So there's a lot of opportunity here for expansion of gross margins. And so I tend to look at it more in, you know, where are we going to be three years from now and we should be able to add 500 basis points, 600 basis points. That's going to put us right up at our goal. And then the operating leverage that you can see as we talk about below the line, there is significant opportunity for profit expansion, operating profits, and we know what that all means. That's what businesses are in business to do is to serve and to get returns for their shareholders. And we think that we're on the cusp of great times.

Okay. And last question here, Fred and Kent, just as we think about, you know, all of the opportunities before you and all of the momentum you have in your business really on the revenue side, the margin side, and the operating leverage side, how should we be thinking about you all's capacity or manufacturing capacity or any kind of constraints as we think about the next, you know, 24 to 36 months here?

That's a great question. If we take a look at one of the challenges that you have is that to fill the pipeline of products from our vendors, we've actually I think done a terrific job, but I will say that there's been some pulling and tugging and lots of meetings and planning and dialogue to make sure that those things come on. And so far they have done very nicely. At Merit, we have done that by shifting and by facilities and by injection molding and we've hired 175 people this year. So we've been able to handle all of that so far. So so far, so well. I mean, there's always challenges with that. But we feel reasonably comfortable with that. Now that being said, there are some things that we need to do. And we discussed a little bit about this in our last call and I think it's important to just to refresh everybody's memory.

We've received approval for a facility and construction of a facility in Ireland. We expect to start construction of that facility, which would be 60,000 square feet. And this is for an expansion of our guide wire nitinol products and our Laureate, as well as the footprint to be able to start up our pack business without having the overhead drag. Other than the amortization of the building, we have everything in place there. All of the management is in place, so we don't have to start up a new business. So that's about 12 to 18 months away, so we're going to see that some time start to come online in 2012. So that's -- we're planning for the future. We've opened up our 50,000-square foot facility here in Salt Lake City or just a mile down the road from our plant where we've transferred the vascular access part of our business from Texas. Now that duplication has had an expense to it, but we think we can operate at lower cost here. We think we can have less -- a better R&D coordination. And so we've had that expansion of capacity. And then we would hope to sometime in the next 90 days start a new facility here in Salt Lake City. Or when I say Salt Lake I mean South Jordan. And one of the things that's important for us is to consolidate our facility and move out of our 45th South, where we started and where we've been for a long time, because we're so busy, we're running things back and forth, it's very inefficient, and we have, remember, a $14 million EDA that helps to fund that construction. And we think it'll be more efficient. So we're planning and already have in place all of these plans for capacity.

We're going to be able to do this as we mentioned on our call when we talked about BioSphere and to pay off the debt in BioSphere and pay that off by 2013 I believe, '14, fund all of the growth, maintenance, the facilities going forward out of operations and the loan initially to fund the acquisitions. So we're generating a lot of cash to go forward to do all of those things. And that's the same plan that we have discussed previously. But it's all just coming right down the road and we're making sure that we're in front of it to take advantage. But there's -- we're starting to see, you know, you're starting to see a little pressure on the clean rooms and we have new products that are coming in there. You know, part of what we did on our research and development, you will recall a few years ago we went to the pilot plant approach where we have the R&D facilities that are responsible for not only designing, but developing these new products and automating them. And we just had a major transfer of our Prelude sheath line, which has been in that R&D pilot plant now to that new facility about a mile away from Merit, thereby leaving more room for a number of these new products to be built in that pilot plant for future growth.

So I think we're hitting on all cylinders. There's problems and hiccups and this and that, but all in all, we're operating exactly as we had planned.

Kent, you have a comment?

Yes, I think -- I do want to say that for the exist product lines, we have most of capacity can be increased through a second shift. That's not an easy thing to do and not something that we do lightly. But it does -- we do have it. If the demand's there and we see it, we can go into a second shift on most of our product lines to pick up that demand. So the new facility we're talking about is really for new products and for shifting around for efficiencies as Fred talked about and for the future, which is a couple of years away really to be in operation.

Yes, that's at least two and a half years by the time we get everything said and done and moved.

But it's something we feel like we need to do and take advantage of, the tax benefits we have in place, as well as what I think will be substantial efficiencies. We're doing a lot of driving back and forth and that just can't be efficient.

Okay, Fred and Kent, thanks for the time.

You're welcome. Thank you, Shawn.

Thank you. (Operator Instructions).

And our next question comes from the line of James Sidoti with Sidoti & Company. Please go ahead.

Good afternoon, Fred, good afternoon, Kent. Can you hear me?

Yeah.

We can, Jim. Thank you.

All right, just it sounds like the core business is doing well, but could you just remind me when you think the timing of the BioSphere -- the closing of the BioSphere deal will be and can you just run through the expenses related to the closing and maybe one quarter after the closing?

Yes. We believe that the BioSphere acquisition will close in the third quarter. We continue to believe that the initial numbers that we gave you in terms of the severance and the one-time costs and those things are still in line. But I think the question is a very good one and timely, in that we have to remember that we are going to have those one-time expenses that are going to pop up in the third quarter and fourth quarter. I think the important issues to look at are going to be the overall revenue line and the gross margins. And we hope that those one-time expenses, which we simply have to report and can no longer capitalize will just simply be there and you'll analyze it. We tried to in this quarter, by the way, to point out the -- those costs. A part of that was for a fairness opinion and other legal expenses that hit us in this quarter. And that was $697,000 after tax. So if you gross that out, it's almost $1 million.

$1.1 million.

$1.1 million. Had that not hit in this quarter, that would've been about another $0.03 or $0.04 a share. So I think those are the things that we were trying to point out that when you back those things out and take a look at what the real earning power and production power of the company is right now that there were a lot of good things.

But, again, as a reminder to everybody, this transaction is going to be here and you are going to have those expenses. But you guys all know that. We've talked about it. And we believe, again, we are from this side of the table very excited about this opportunity and believe that it fits perfectly into our strategy and we have a lot of I think interesting opportunities and ideas. So we think that under this umbrella with this technology and the other products that we have and the plan that we've put together that it's going to be very, very effective.

So, okay, do you think -- could you quickly go through what you think those charges are? Are they, you know, is it the same as you did after you closed the deal? Have you updated anything?

No, it's -- we're seeing a little bit of shifts now. The restructuring charges are dropping a little bit. We're keeping more of the sales force. It's probably closer to $4 million than the conservative $5 million. I think that's about the only change I've really seen. And we're still going to have another $1 million or so in what I call closing costs that have to do with bankers and on and on and attorneys and stuff to wrap up.

And then you're going to have the severance?

And the severance is in the $4 million range.

In the $4 million, yes.

Is my estimate currently. And it could change a little bit, too. Things are in flux as you go through it. But it's -- that's a closer estimate I would say.

Okay. And the -- those charges will be in the quarter you close the deal or will that be a few weeks later?

We think that most of it will be in the third quarter, but there could be some, you know, tail-on expenses as part of the deal in the fourth quarter I expect. There will be some.

There will be some in the quarter.

We're going to have to clean up and sweep up a few things on the legal side and the accounting side and, you know, just the things that you have to do.

Okay. And your revenue expectation for Biosphere, have they changed at all since you did the last call?

Yes, you know, it would be inappropriate for us to discuss anything about BioSphere other than the closing time other than to say what I've said. We're excited about the transaction on this side. We have not lost our enthusiasm. I think we as a company, Merit now, is as excited as ever about this transaction because of all of the things we've talked about -- the geographical opportunities, our China office is very important for this growth, the new products that are complementary, and a broader footprint and presence in interventional radiology to sell lots of our products and to be able to bundle things together. So our view has not changed at all. If anything, we have enhanced what we think is our opportunity, but it would be inappropriate for me to comment on their side of the thing until we get the transaction closed.

Okay. And then on Endotek, you said the sales for that division were up 10%?

Yes.

Now have you hit the target you had in mind as far as number of salespeople for that division or are you still adding people?

No. No. No. What we've done is we actually have a number of vacancies that have popped up. Nevertheless, we have still hit those numbers. We have these exciting new products and a number of new disposable products. But before we start to fill the holes back in, which will actually lower expense because we're not -- but we'll go through that process pretty quickly.

I would say over the next 90 days, we will start filling in the ones that pulled off a little bit. So we'll probably see lower expense than we would've anticipated in the third quarter. But we have to staff it up.

But we thought it'd be better for us to get all of these products and make sure that when they go out, they're fully armed and they've got their arrows in their quiver. And that we think will help the performance of the whole division. And by the way, Jim, I should just say I've not given up, nor has my view changed on the opportunity in that GI market. It'll be $100 million division. But it's like anything else. It just takes persistence and vision and investment, yes. Kent said investment, but --

Okay. And then just my last question is kind of a housekeeping question. You said the EN Snare sales were about $1.9 million in the quarter.

That's correct.

Now is that grouped in catheters?

No.

No. It's in standalone.

It's in standalone.

That's in standalone, okay.

Yeah, we still grew 30% over in the catheter area.

So what was the big winner there? Was it -- was there any one big winner or was it just a combination?

Well, let's see here. There's -- let -- we're looking at --

(Inaudible—multiple speakers).

-- okay, go ahead, Kent, go ahead. Fire away.

Yes, the largest in that group is the short sheath and the Prelude. Those two together are about $800,000 growth and they're growing at 50%, each one of those.

So this goes back to -- Jim, we talked about these sheaths a number of years ago and it was kind of ho hum. And last month we did over $1 million in the month. And three years from now we'll be doing $2 million a month. So it's just one of those things that everybody kind of ignored except for us. And we think it's a great business and a great opportunity. The short sheath for the year is up how much, Kent?

53%.

53%.

And the regular one's up 50%.

And, yes. So that's pretty terrific. And wait till we get into China. Then we'll show you some growth.

Perfect.

You're seeing big growth in the diagnostic catheters -- or the cardiology catheters are up 32% and that's all --

Marker band catheters are up 25%, Impress catheters, you know, radiology catheters are up how much, Kent?

Radiology, where is it?

Impress. Impress.

Yes, let me find it. Right there. 40%.

Up 40%. Now this is a diagnostic catheter, been around for a long time, and yet our presence in these labs -- is just what I've been talking to. Here's a catheter that's up 40%.

It's the presence and also this is -- I see all of the sales management guys kind of grinning and saying okay, you can say it. It's the sales management. It's focused products. It's bundling. It's all of these things put together. But it talks about the capabilities, Jim, that the Company has and the ability to bundle and that presence and how much I think our customers appreciate us and how much we appreciate the opportunities that they've given us.

Let me give you some more examples. I'll just list them down here. The One-Step Centesis is up 34%, the Fountain's up 34%, the guide catheters are up 78%, the Mini Access kits, I mean, you can keep going down through these, the ReSolve catheter is up 57%. Almost everything is rising at -- that's how you get 30% for the group.

All right. I mean, and -- I mean, obviously the market's growth rates are nowhere near that. So I -- do you think you're winning share across the board or, I mean, how do you explain that?

Well yes, I mean, there you go, Jim, I mean, where else is it coming from? Sure. I mean, you know, some guys don't pay attention to this stuff. This is our bread and butter. We pay a lot of attention to it.

Well, there's a lot of newer products in this group.

Well, I'll give you -- our One Step Centesis catheter -- that's the valves, it's patented, we're the only guys that have it, our customers love it. I mean --

And MAK and S-MAK are growing at 29% and 30% each.

Yes, so it's just -- it's the presence, it's the breadth, it's the -- it's all of those things. I mean, isn't it great, Jim?

And generally, Jim, these are the newest, best things out there, okay. So right now they're -- they've mostly been introduced in the last five years or the last one year, I mean, some of them, and so they're the best products out there, the (inaudible) getting there. Our reputation is better, the sales force is getting better trained in the area. We're just making inroads.

I mean, what a country. What a country.

All right, thank you. Thank you, guys.

Thank you, Jim.

Thank you. And our next question comes from the line -- it's a follow-up from the line of Larry Solow with CJS Securities. Please go ahead.

Yes, Fred, just a quick follow-up on the Laureate guide wire.

Yes.

I know Terumo has -- not to mention names, but I believe they have like $200 million in annual sales. Why cut yourself short? You know, if you think you're eventually going to be the market leader, couldn't it be --

Yes, well, I just love to under-promise and over-perform. That's just the kind of guy I am.

No, but, I mean, in all seriousness, couldn't it potentially -- even if it's share of the market that's growing, you know, $100 million in, you know, no time frame, but --

Well, they -- listen, they have a broad footprint and they have along head start and they're well entrenched in many of these areas. But the thing that I'm seeing is that our customers -- their customers are becoming our customers. And they like the performance of our wire better.

And no one has been able -- you know, I got to tell you about this. This is a good one. I'm glad you raised this. I got an email from a physician. And I'll paraphrase it, but he said, you know, you demonstrated it to me and I thought oh, yes, boy, here they are again, I've seen five or six or seven of these things. And, you know, there's the gold standard out there. I used it in this case today, and congratulations, you've done it. And the guy took the time to write me a letter and tell me that. Now there you go.

Now that being said, it's been -- it's difficult to build. It requires attention to detail. It's complex. And we just have to make sure that we just keep our senses about us. I don't -- you know, I don't want to just say oh, here we go, we're going to take over the world.

Right, understood, no -- better off being conservative. I figured I would just put that out there. I mean, your numbers are fine.

Just last question, on the SG&A, Kent, maybe you can better answer this, but just if I kind of do the math, it looks like if I back out the one-time acquisition, it was about -- acquisition-related expenses, it was about 25% of sales and --

Right.

-- you're talking June was only 23%. I mean, do you think this trend, are we trending back down? Or do you still think kind of a 25%, 26% number is good in the -- for the next foreseeable future at least?

Well, it's trending down because sales are growing faster than the expenses, but we're going to go through this acquisition transformation again. So we've got to be careful that we don't get ahead of ourselves on that either.

Right. Just sort of independent of the acquisition I would say, just in your --

I think generally if those sales numbers can stay up into the levels that we were talking about at June, just you'll see those kinds of once you take those expenses out, it'll stay there or as a percentage of sales probably even have a better improvement going forward.

Right. Right. Okay.

But the important thing is as a percentage of sales, the key word being sales.

Right. Fair enough. Thanks again.

Thank you. (Operator Instructions). We have a follow-up question from the line of James Sidoti. Please go ahead.

Hi Kent. Just one more. Did you -- what do you estimate the in-process R&D charge (inaudible)?

The in-process R&D? We have very little of that that we're going to have to expense. So there's not going to be a lot of one-time charges in that area.

Okay, so you don't think that'll be material?

No.

And then you guys on the last call you talked about starting a trial for hepatic cancer. Will that start right away or do you think that's more 2011?

We're in the process. Right now those discussions and those things are being done by BioSphere. And I will simply say from Merit's side that we expect to be very aggressive in the various trials and opportunities, all of which we outlined in our estimates and expenses in our initial call. So, no, we're full steam ahead on this side, but we can't comment on what's actually going on on that side because it's not appropriate for me to do so, other than Merit's view is that our plan hasn't changed.

Okay, all right, thank you.

Okay.

And there are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Well, ladies and gentlemen, thank you very much for your time. It's exciting to talk about the business and the opportunities that are here. And I hope that we have exceeded your expectations in this quarter. Now it's a great business with great opportunities, a broad breath of what we consider and I believe our customers are also telling us the best products in the world. We have great products and a lot of great things in the pipeline.

We will look forward to reporting to you in the third quarter, and we'll get this BioSphere deal closed up, and then we can talk a lot more about some of the other opportunities that we see out there and that we think will enhance the business, both in terms of its gross margins, its operating profits, and a larger worldwide footprint. And by that, I mean, simply the things like China and the opportunities that present themselves going forward.

Before we close, I again would like to thank this staff. We're sitting in my office. There's 25 or so people in here. And none of this could be done without their hard work. You know, I know a lot of people say this stuff, but these people work hard. They've done a terrific job. And I want to publicly acknowledge their sacrifices and their skills in getting all of the work done. So that being said, ladies and gentlemen, we again thank you for your time, and we'll sign off from Salt Lake City wishing you a very good evening and good night.

And, Ladies and gentlemen, this concludes the Merit Medical Second Quarter 2010 Earnings conference call. Thank you for your participation and you may now disconnect.