Merit Medical Systems Inc (MMSI) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to Merit Medical' s fourth quarter and year-end 2010 earnings conference call. During today's presentation, all parties will be in a listen only mode. (Operator Instructions)I would now like to turn the conference over to Mr. Fred Lampropoulos.

Good afternoon, ladies and gentlemen. We are broadcasting from Salt Lake City. With me today are Kent Stanger, our Chief Financial Officer and Rashelle Perry, our Chief Legal Officer, and members of our general staff. We appreciate you taking the time today and look forward to having a dialogue with you regarding our business. I'm going to ask Rashelle Perry is she would please read our Safe Harbor provision, Rashelle?

Thank you. In the course of our discussion today reference maybe 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 event, 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 10K and other reports and filings with the Securities and Exchange Commission also available on our website. To the extent any forward-looking statement 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.

Rashelle, thank you very much. Ladies and gentlemen, again, welcome to the call. I'm just getting over a cold, and so if you hear someone barking, it's me. I'll try to not irritate to you too much with it, and thank you for your understanding.

We have done several things in this approach, which is different from the past. Just to alert you that we have done a lot of GAAP and non-GAAP comparisons. The reason for that is because of the large transactions that have not existed in marriage history in the past and this particular year we had three transactions that Merit has anticipated in the last 18 months or so.

That being Alveolus, the EN Snare and of course the acquisition of BioSphere that add a lot of different color to the results. We thought it appropriate, to add some comparisons so that investors can look at a number of items including cash flow and some of these other adjustments and entries that are coming into the picture. In fact, I think it would be fair to say that many of our shareholders or potential shareholders have asked that we look at this format, and we spent some time doing it. To any extent that we fall short on this, we apologize in advance. And we, of course, Kent and I will be willing to take calls following this meeting to discuss things with you that are appropriate in terms of disclosure and the content of the results. Kent would you like to comment at all just briefly on this?

Yes. Well it's the first quarter -- full quarter we've operated the new BioSphere business so there's significant or material issues that are different that we are trying to highlight, so that people understand what you're trying to make a comparison to a prior period, there are these significant differences that we wanted to point out and highlight so they could be better compared and understood.

Thanks Kent for that and let's go ahead and start with the full year. Talk about our fourth quarter and finish up 2010 before of course we move on to our guidance for 2011. As you can see, for the fourth quarter, we had record revenues of what -- $81.2 million, that's a 20% increase over last year. In that number, it includes of course a first quarter of BioSphere at and of course our EN Snare. Now the EN Snare transaction, of course, is something that we have been selling all year long. Nevertheless, we thought it appropriate to go in and to add that. If you take a look at the quarter, and the year, we had approximately $9 million of revenue that came from the BioSphere transaction at $7.5 million and the EN Snare which came in at $1.5 million , which represented 13.3% of growth. Our core business grew at 7%. And for the year, and I always think it's -- a quarter is -- there is stuff that falls out and stuff that falls in, but for the year I think it's more appropriate that we had a total of 15% growth and from that BioSphere was $9 million and EN Snare product which we have for the full year was $16.7, excuse me -- $6.7 million. And our core business for the year was $9.2 million core growth and $6.1 from the acquisition,

One comment on that. That EN Snare $6.7 million is the increase over the royalties we received the prior year.

Thank you Kent.

The total -- the total sales were actually $7.7 million.

Thank you Kent. I appreciate that. Cause I know that what we had talked about that being in the $8 million range. And by the way, I should just go back to that, because I think originally in our financial model we said that we would do $5.7 million and that we would grow it at 8%, and clearly we exceeded that number for the year.

Another exciting part of our business for the quarter was the increase in gross margins for the fourth quarter, which were 44.8%, comes out to 430 basis points from the year ago period. Now in fairness, you'll all recall that in the fourth quarter of 2009 we had a slowdown in production and so it's a little -- skewed.

It's an easy comparison.

It's an easy -- yes, there you go. It's an easy comparison But if we look at the year, then we will look at an increase of about 100 basis points I think overall for the year, and this isn't a year when we had a lot of increasing input costs and so on and so forth. But I think our internal goal was to add 100 basis points to our gross margin's, and I think we did that. The encouraging part is where we see the business going forward. And for gross margin. For years, I have talked to all of you about an intermediate term goal of having 50% gross margin. And with this acquisition, and moving down the road, that goal is now closer than it has been in the past. And attainable in a shorter period of time. So I think additions like our Laureate, the BioSphere product lines, the Maestro and the EN Snare are those high gross margin products and as those continue to get pulled through, which I will discuss with you in a moment, those are going to add and we are going to continue to see our gross margins continue to increase. There's another factor that's increasing gross margins, and it has to do with our business in China.

Now as you all are aware, we've talked about the fact that we've essentially taken out the import side of that and we are now taking those products in moving those into China directly. And just as a point of interest, after expenses, and after we have paid for Merit, in other words, if we were to look at it like Merit was still selling the product to a distributor, paying our expenses, we are averaging for the first few months of doing that four or five months, about $150,000 or so in increased profits. And that is growing monthly.

And so we believe that our China business has a great future and opportunity. I have two members of my staff, Stephanie Erskine and Joe Wright who have just returned today from China, and they are exhausted. I'm looking at them and they are beat. One of the members said that they have been up the last 30 hours. The exciting part is that we are finalizing, or coming down the stretch, in terms of approvals for many, many existing Merit products that have never been sold in China before. So the infrastructure is in place, the sales force is in place, and now we will have these new approvals. And these things will improve things like the ASAP, our Laureates, all of our radiology products, just a slew of new products that represent probably 80% more products opportunities. We are excited about the future in China. Kent, do you want to comment?

I only wanted to add to that the gross margin's were actually better in the fourth quarter when you consider the one-time expenses that were included by the acquisition accounting having to step up the value of the inventory. So when you look at that, the fourth quarter was 46.7% when you eliminate those one time charges. And they were up 620 basis points from the prior year. And for the year, it was 43.9%, up 160.

Yes. And we have about $700,000 worth of expense that will flow through the balance of the year, and that is about another $200,000 for inventory from BioSphere that will hit our February statement, and that will be $400,000 in the first quarter. And then after that, about $300,000 of whip that will work through the balance of the year. And so we are going to see increases in gross margins as Kent just pointed out, as those particular expenses flowed through the income statement. Couple of other things of interest that I'd like to point out to you is interest expense. You can see that we had a rather large interest expense, $451,000 for the quarter, almost $600,000 for the year and that's compared to $6,000 and $28,000. So those are the expenses that are associated with the acquisition of BioSphere.

Couple of other points, and then we will get onto the guidance. Many of you are going to be concerned about the SG&A expense. And I'd like to talk to briefly about that. We close the transaction with BioSphere in September. In fact, September 10. And in the balance of the year, there were a lot of expenses that are associated with trade shows, duplication, training, and when we did tons and tons of training. Both of the BioSphere sales force that we kept and the Merit sales force who had to learn a lot about the products that are very, very critical. And so we had that duplication.

I've had an opportunity to look at some of my competitors, and as I look at my competitors, and you guys knew -- if we were look at a couple of small companies, based in let's say the Minneapolis area, and let's say upstate New York, you would see that their SG&A expenses are in the 28% to 30% range, and you'd see that their R&D for both of those companies are about in the 10% range. Merit is just slightly over 5% on the R&D line, and a little bit higher for the quarter because of that, but for the year, a little bit below that. Now the next comment, that would be appropriate as well, they get higher gross margins, and I would say that is correct, but at least based on my calculations, our growth rates and our after-tax returns are, I think, superior. So we will address more as we go into the guidance how we are going to fine-tune our business going forward.

And then one last item, is I would like to talk about our tax rate. Oftentimes, that is dismissed as a one-time event or quirk or this or that. For Merit, it is not. If we take a look at some of our competitors, they will have somewhere about 10% of their revenues for some overseas. Merit is approaching almost 40% of revenues that are overseas revenues. And we've also had a strategy both in where we are located, and where we have invested. For instance, in the state of Utah. We have a we think, and what I've read recently and reported in some of the financial magazines, is the most aggressive research and development tax- in the country. This is a tax credit. That's something that we can attribute to our staff and the work that we did in the state to bring that about. It's not by accident.

If we take a look at Ireland, with a 12.5% tax rate, where our Laureate guide wire, where our EN Snare, where many of our inflation devices and our high margin products like hemostasis valves are produced, this is a strategy that we have worked on for 15 years. And so, these are important things, and should not be ignored. Again, most of the time we talk about revenues and gross margins and then just kind of ignore this tax rate, but I think when you compare Merit and the things that we have done, that will give us a long-term lower tax rate, because of the things that investments and strategies we have employed , I think it's a big deal, and I want to make sure that you pay attention to it. Because we believe that that is strategy and something that's going to help us over time.

We employed this year a -- in this presentation a GAAP and non-GAAP, and again the purpose for that is because of those huge increases that we have seen because of these transactions, and things that are non-taxed type of transactions, and so I think what we all want to look at is that the earning power of the Company as well. So Kent, I am going to have you discuss the non-gap for last year that we have presented, and kind of go through that for the benefit of our

Thank you, yes. So we felt that it was a important that, again for comparison purposes and to understand the core part of the business that we would first take out or adjust, and we have described it in various areas both for net income, for cost of sales section and for the SG&A and maybe it's easier for all of you if you can follow along if you have the chance to look to look at the non- GAAP adjustments. It is in a table. We tried to reconcile it for you so would be straightforward. But I think that everyone would agree that to make that comparison, we need to remove or add back the costs that are one-time that are involved with the acquisition and restructuring of the BioSphere business which is mostly severance costs.

We also have the step up of inventory that we talked about. That's another almost $1.6 million in the quarter , and $1.7 million for the year that needed to be added back. And then there is an impairment that we have to take account for of $8.3 million and add that amount back. And then we also took the amortization and we did that because it's so much -- it's increased so much and it's so significant of a change, and it's non-cash in nature. That we felt that it more fairly showed the representation -- represented the operational ability of the Company and the operation we are running at right now.

So when you get to the bottom line of that, we believe the adjusted non-GAAP earnings-per-share compared to last year are $0.23 for the quarter, compared to $0.19 a year ago making is consistent adjustments in both periods. So that's a 22% increase in that performance and bottom line-- and then when you look at it for the year, it's $0.87 this year compared to $0.85 per last year. So, I believe that -- and we want to do this consistently going forward and show the changes and we talk about our guidance for next year, we will point out what those will be for next

Thanks Kent. Just a couple of other issues and we then we can get moving on. And that is, you'll see that our inventories increased pretty dramatically during the year, and part of that was of course the BioSphere transaction, the launching of the EN Snare, the ASAP aspiration catheter and the Maestro hydrophilic guide wire. We also saw during the year that we had an opportunity for kits and trays that we shared with you in the past and of course we built inventory for that. There were also several times during the year when we had shortages of material. Or where we were notified they were going to discontinue materials, and so we bought in some cases a years supply so that we made sure that we can meet the needs of our customers and while we are qualifying other materials.

So there's a lot of factors there and of course we'll address questions that you might have. I think, with that being said, that we should move on to next year, and talk to you about that, except for one final thing I just saw here, and that is DSOs. Yes, we do read the postings on the Internet, some of which are true and fair and we accept those criticisms, some which are not. And the particular one that is not, is a criticism about our DOSs. Now we have hospitals on the East Coast, some of which pay in 180 days. We have international dealers, some of which pay a 90 days or 120 days, and yet our overall average is 42 days, days outstanding. It was a criticism of Merit, the problem and mistake they made is they did not add in the revenues, I think it was, and so they took a smaller number and took a higher DOS and it was just bad math and candidly bad reporting. Kent do you want to just comment on that, 'cause I have had some of you call and asked about it. That is why I want to --

Well when you look at the end of a quarter, the third quarter we had 20 days of sales, but they threw -- but we purchased the entire balance of Accounts Receivable. If you don't understand that, calculate for the full year, then you'd don't weight properly the relationship between the balance and the receivables and the sales for the period that created them.

Okay. All right. So let's move on to instead of now a history class, let's move on and talk about the world as we see it going forward. Our estimates on revenues. Now going forward would be in the range of $341 million to $350 million. That's an increase of 15% to 18%, compared to the revenues of $296.8 million for this year. No we also estimate that apt and extraordinary transactions, and that is something we don't know about today, that GAAP earnings for 2011 will be in the range of $0.88 to $0.92 compared to GAAP earnings per share of $0.43 for the calendar year. Now remember, we have to go in and take out the transaction one-time fees, the impairments and so on and so forth.

And non-GAAP earnings, we would expect to be in the range of $1 to $1.04, and that's excluding the remaining inventory step up from the BioSphere acquisition. And that would be an increase of 15% to 20% over the non-GAAP earnings of $0.87 for 2010. And in looking at the core business, we would expect that Merits core business will be in the range of $311 million of $317 million, and that BioSphere would be in the range of $30 million to $33 million giving you the range we just discussed. Our core business would be in the range of 8% to 10%, and the additional growth overall which was a range of 15% to 18% includes the BioSphere, but remember, we didn't take it out until September of last year.

We believe that these are conservative, but as I mentioned to my staff before this call started, we have a lot of work to do to run the business. It's a complex business. Lot's of things going on worldwide, but yet a lot of opportunities. I don't know that I -- I think I say this every time we have a call, but there are a lot of opportunities in the BRIC countries, there are a lot of opportunities in our core businesses, we have a unique business, in that ,as an example our sensor business, which kind of gets stuck down in various areas of the Company, to give you an example. That business year-over-year in January, now January does not year make, was up 150% over last year. And we are talking about hundreds of thousands of dollars of sales here. So this isn't just a few dollars.

So we have a lot of our businesses starting to hit their stride, and if we execute, and if we take advantage of what we see as did substantial disruption in the marketplace, there's a lot of things going on out there that you have been reading about this week that very candidly play into our hand. I will discuss some of those if you'd like to me on the question-and-answer, but there are a lot of things going on, a lot of businesses that are restructuring and changing, and if you'd like me to, I will go ahead and talk about how we believe that Merit will benefit from those in the Q&A period. So Kent, is there anything else you would like to add?

Yes. I'd like to just say as an overview looking back at this transaction, it's been a very much part of our business in the last few months, I'm excited about the potential it has. And I'm seeing a lot of excitement in the sales force and relationship building with physicians and in the marketplace where having this higher technology of the Embolics and how it's pulling through some of our new catheters and the information that we are receiving from the marketplace and the acceptance that our sales people are having in the cath labs and radiology suites, is I think, impressive and encouraging for the future growth of the business, and we see it accelerating our first few weeks of business in this year, in the 2011 year. So the BioSphere's add a lot of energy to our overall business.

Yes. I think, Kent, you and I had this conversation before, and we talked about the fact that it is in fact well above the base of [25.7] growing at 8% or 10% that would've worked out to be [28.3] I think. There's even more potential, but again, it's all about execution, and I will say that one of the reasons why the SG&A expenses are going to be higher than we had anticipated is because this opportunity is higher than we had anticipated, and the reality of having the high-quality study approved. When we did the transaction, most of my advisors told me that they didn't think that would ever come to be, and the pundits were wrong. The bottom line to that is that it creates a great opportunity for Merit, a recent study that I looked at by one of the larger investment banks and research houses indicated that they thought the HCC market alone in the next 4 to 5 years would have compounded growth in the 30% plus range and be a market of $275 million.

Now that is not my number, but I can flat out tell you I'm going to get a piece of that and I'm going to get a pretty big piece of that. So that those kinds of opportunities are out there, and so we are investing in some of the areas that helped to support that. These people would be like MSLs, these are medical sales liaisons in clinical people and clinical data and support, so we are investing those issues because we believe that it will pay dividends. We are also doing some other things that have not been done in the past. And that is with BioSphere, and that is that we are investing in several studies that have to do with BPH, with of various sizes of our QuatraSphere, HepaSphere and of course the high-quality study in and of itself.

The business is dynamic, it's moving, and it's very, very exciting. I also need to point out that in addition to just the studies and the products that we have talked about, is that we have been successful in launching worldwide our Laureate guide wire. We have quadrupled our capacity. In fact as we started launching that out we quickly realized that we didn't have enough capacity. So over the last four months of last year, we have built additional clean rooms, bought additional equipment, we're qualifying that, and just a few weeks ago we launched the product in Europe and with all of our worldwide dealers.

And literally, this is one of those great stories, we are selling them right now as fast as we can make them, and hopefully now with this new volume coming on worldwide, these capacity arrangements that we have made will help to take that product to what I believe is going to be a $50 million to $70 million opportunity over the next several years. So have great opportunities, great products, a lot of hard-working people, I'm looking at 20 people sitting in my room, maybe 25 of my staff who are the finest in the world. These are airborne rangers, every single one of them. And I want to express my appreciation to all of you guys for all the work you do. That being said, Kent do you have anything else, are you -- okay. We've got our flack jackets, our helmets, operator we will go ahead and turn the time over to those who would like to ask questions.

(Operator Instructions) Our first question is from the line of Larry Solow with CJS Securities. Please go ahead.

Thanks, good afternoon guys.

Hi.

Thank you for doing the pro forma non-GAAP, I think it's very helpful. The first question, actually maybe Kent, in terms of the gross margin this quarter, if you strip out the inventory write off, was close to 47%, is that number a sustainable number that you will build on going forward?

Yes, I think we can be in that range, and we are trying to be conservative in going forward with cost increases and so forth. We do believe, depending on the mix, it could even get higher than that. But we are going to be In the ranges of 46% to 47% I suppose this year. We put in more in our model more closer to 46.2% I believe is what it was -- so it's something that we believe once we clear out this inventory, you're going to see it be going forward in that kind of a range.

And just to go back on that issue of inventory, remember that's that step-up that is required under GAAP rules with the inventory that existed, and so that will wash through here, most of it by the end of this quarter. And then about $300,000 through the balance of the year, so kind of the balance is in the noise and 80% of it is gone after this quarter.

I guess the balance is just the purchase accounting, that will continue --

Right. There are two elements of it, there is the finished goods which is nearly completed and will be substantially in the first quarter, if not completely. But there's a work in process that will take most of the year, it's only $300,000 so a few thousand a year going to trickle -- per month I mean is going to trickle through as that gets used up and turned into finished goods. So it had a markup or a step up value, a small amount.

Fred, maybe you can as a generalist, I do cover a good amount of health care companies but, more of a generalist, maybe you could educate me a little bit more on some of the disruptions that you mentioned, and how that would help you guys?

Yes, some of this is that in the press, I will use -- I will discuss that, one of the big four recently this week talked about a reorganization, this is on the wires, it's on Reuters, it's been discussed about, whenever you have disruption like that and sales force and then the whole loyalty issue that goes with that sales force and that customer, it creates opportunity. Now this isn't just anecdotal. We are seeing it. We are selling catheters and we will have opportunities in 4 or 5 of our product groups just simply because of that change. And it's worldwide. The Company is changing in Europe, we had a call out from one of our distributors today in Europe for large sums of catheters and other products simply because -- I don't want to go through the details, but clearly, either relationships or supplies are being disrupted, and those are opportunities for a company like Merit.

We take a look and we've talked about this, we are very aware of the BTT biocompatibles transaction, and also aware of the whole NGO dynamics part of that. That has yet to play out, but it's creating some opportunities for Merit in the marketplace. And then some other issues that may or may not be apparent to you, but there is some product shortages by some of our competitors, and products that we can deliver and so we are supplying those, and there is numbers thing -- I don't know that I've ever seen so much disruption, reorganization and these sorts of things, and they just flat out spell opportunity. And there are more than just the three or four that I just mentioned just now. So there are some big ones out there, and hopefully Merit will have the opportunity to fill the gaps in those disruptions.

Got you, and without mentioning any names, but our friends who are spun off from Boston Scientific a couple years ago, that have been having some issues, are they still having issues as well?

You know, I think that they have improved, and that we are not seeing the opportunities or at least the disruption we saw there last year. The ones I'm talking about are new and candidly larger.

Got you. Then last question if I may, just in terms of the liver cancer trial, has that already started, any way you could quantify what the cost will be over the run of the study, or maybe in this year at least?

Yes. We believe that the study is going to take three years.

Right.

This year there's going to be about $5 million worth of expense. Now, that being said, that's a higher number than we had talked about before, because I think in our pro forma we had talked about $3 million for the study. But then there is all the other support that needs to be in place, and we are spending some additional SG&A dollars because of these higher dollars that we are seeing in the revenue line, above where we had originally projected at 28 three, so those are pretty significant numbers, we think there's opportunities, and it goes to also what we think is an upcoming disruption. We want to make sure that we are prepared, we are seeing momentum, we are seeing momentum in Europe by the way, Russia, China, and we also we're also having other conversations with larger international bio pharma companies who have an interest. And we have discussed that back in the bio compatible, excuse me, the BioSphere days, and some of those discussions are still ongoing. So there are lots of opportunities, but in order to have the ability to perform on those, we have to have some structure. So that's why we are willing to invest a little heavily in those areas for products that have very, very high margins. Kent?

Yes. I mean, in that cost when you talk about $5 million, we're really talking about several other studies besides the main one that we've talked about and planned on for that $3 million number. That really hasn't changed too much. The total cost is $6 million. We have added some other data acquiring studies to help us develop some other products in the market. So that's what part of what that extra is, and part of that extra we have thrown in there existing support that was already in the research and development dollars.

Got it.

So, so it was already there, they were running it about 10% we haven't changed that significantly. Those are all -- it's all included in that, so you look at the total R&D budget and it really has increased about $3 million we talked about, in regards to that one study.

And I think I mentioned that our SG&A number in our model for next year's 28%.

28%. Got it. Thanks a lot guys. I appreciate it.

Thanks very much. You bet.

And our next question is from the line Tim Lee with Piper Jaffray. Please go ahead.

Good afternoon and thanks for taking the question.

You bet. Tim, how are you?

Doing great.

Good.

In terms of your sales outlook for 2011, what's the difference between a $340 -- $341 million year and a $350 million year? Is it better patient flow? Is it more uptake in China? Is it greater competitive disruption? What are some of the key swing factors we should be looking for in 2011?

Good question and I appreciate it. I don't think it has to do with any of those variables, with China or procedures. Listen, they all affect our business. I think the more important things are issues like the ASAP Catheter. Our catheter in Europe, which is being sold is the best catheter on the market. It's as simple as that. This is what my customers are telling me, I am replacing people there in the marketplace, and the problem is it's not approved in the United States yet. We thought it would be approved a long time ago, the FDA is being a challenge. And so that's not approved. So when that comes online, is a big issue.

The issue of the ability to totally ramp-up and meet the demand for our Laureate guide wire is another issue. And then -- and by that I mean we've got the equipment, we've got the buildings, you have to go through and do your quals, you've got to do all the things that have to be done to be able take advantage of the opportunities. And that's why that will be a product for years which will be an opportunity for us. So it's how fast can we get the new equipment up, it's in place, but it has to be qual'd and takes time to go through those issues.

The other one is new products. You know, we haven't talked about those, but Merit is still in that mode where we introduce maybe 10 new products this year and the ability to get those introduced and to get the approvals on them, and so those variables are somewhat in our control to do our work, but where we have agencies and other things, so it's more those things, Tim, than it is other factors, but we just think it's kind of nice to have a range. Last year, for instance, our range was $283 to $291. That was our range that we gave in our guidance for our core business and we came in at $288 million. So we did a pretty good job of doing that.

Yes. Yes.

So I think it's to give us a little bit of room, not just have one data point, but say, look, there are several factors but most of these are within our control. In terms of getting our work done and getting submitted, and then there are those other factors. I think we are giving ourselves some room for those, and I should say clearly, we are trying to make sure that we can meet or exceed these numbers. So our goal will be to beat all these. But we believe that this is a range and a something we can present to you that we feel confident that can be accomplished.

Got it, fair enough. And then just two more quick ones here. First on BioSphere, now that's been under your belt now for a little over a quarter, any surprises, both on the positive or the negative side?

Yes.

(Laughs) Any clarification on what they may be?

Listen, Tim, if you buy a new house or an older house or whatever it is and you go in there, they're always a few surprises. You didn't look in every closet, you didn't go down in the basement, you didn't do this. So there are always going to be issues on tax, did they do everything that they were supposed to, this, that, so on and so forth, how about their inventories, what about their sales force, what about some of their other products, of course there are all those issues.

But clearly, with what we saw in the fourth quarter and what we expect going forward, it actually is exceeding our expectations, so when you take all the things I just said, all the good things are is that our sales force is enthused, the revenues are there, the study has been approved, and maybe the most important thing of all, and I talked about this early on. And that's the pull through. That's those physician relationships, some of the other companies that I mentioned earlier have done a better job in the past of presenting data and having better jobs of creating physician relationships. Merit is in that transition period. But I'll give an example of a recent visit that I made to a large hospital. In which I was welcomed, that they appreciate our products, they appreciate the work that we are doing to bring patients to them, driving patients that help to build their business. And that's something that not all companies do.

They sell, they take, you know here you go, give me that, so you give a product and you get paid for it. But we are building practices. Not just on UFB but on other areas of the products that we can do to build practices. So that I think has been what I had hoped for, what we had discussed, but I'm getting calls from physicians, I have more physicians coming to Salt Lake City and maybe more importantly than what I'm seeing, is what my salespeople are seeing. An example, in a large eastern city, one of my sales reps has been trying to get an audience with a physician for five years. With some of the work on some of the products that we have, the physician called him. And now these guys fish together. This is in four months. We have been trying for five years. That relationships are all about what drives any business. I don't care what it is.

Got it.

So that is the positive the reception of our product. But now in order to do this, we've got to fill the gaps that were not filled previously. There are certain things that BioSphere couldn't do because of the lack of capital. And these are some of these studies, these are the BPH studies, some smaller HepaSphere studies and the high-quality studies, but those become very, very important in terms of our reputation and how Merit is viewed in the marketplace. Kent?

Yes. I want to add something to that. I think that -- there's more data -- I've been pleasantly surprised by the data that we are able to now acquire that would back up the superiority I suppose of our product in the marketplace. Therefore, I think there is a greater potential for market share gains than maybe we realized. In particular in areas like BPH and NHCC both I think. And so, that market -- those two markets seem to be, have more potential than maybe we valued when we first bought it.

And just one last comment, and then we will move onto your next question, Tim. For instance, everybody is aware of the UFB business. It's a large part of our revenue base from BioSphere. What a lot of people don't know, and haven't discussed in the past is that -- Embospheres are used for lots of embolization procedures besides those procedures. Our relationships and our product base, our micro catheters, vascular access and other products, are things that we can combine, and since we have the presence in the sales force, we are going to sell more of those products that we are not focused on by the previous sales force simply because they could only do so many certain things. We have the ability, not just to focus on the IR dock that is doing for instance UFE -- but the other one is doing more and more chemo embolizations and that sort of thing. So we have a different capability that we bring to the party, and some of the decisions we made in the past on micro catheters and some of those things play right into this momentum that we are seeing.

Got it, very helpful. And then just one last quick one, thanks a bunch for the full year non-GAAP EPS for 2010, do you happen to have off hand the quarterly (inaudible) for 2010 so we have a better sense of how we should think about the 2011 outlook on a quarterly basis?

Would you repeat your question? I was barking while--.

Oh sorry. Do have a non-GAAP EP -- quarterly EPS for 2010, so we have a reference for quarter over quarter gains in 2011?

Oh, no I don't go -- you're saying go back and do it historically. I could do that for you, we've done it. No, I don't have that right now.

We just have the fourth quarter and we have it going forward.

We have the year and the fourth, of course we gave it to you in the --.

But Tim we will go back and we will do the work and we will shoot it off to you. These are not secrets, these are just extractions.

That'd be great, thank you.

We'll do that and provide it. Thank you.

Good idea.

Thank you.

Thank you and our next question is from the line of Drew Jones with Stephens. Please go ahead.

Thanks. Hey guys, how are you doing?

Good, Drew.

Couple questions on BioSphere. First just thinking about HCC contribution. How is that trajectory, what does that trajectory look like since you have the IDE approval late last year? And what is the assumption for HCC revenue contribution in the $30 million to $33 million in guidance?

Okay. First of all, let me remind everybody that the HepaSphere Quadra Sphere, that's Europe and the US, is approved in Europe with Dr. [Rubensin] and not approved in the United States, which is the purpose of doing the study. The goal being to have a on-brand indication and the only one in the marketplace. That's the goal. Almost all the growth that we are talking to you about is coming from our Embosphere and some of our international issues going on in Russia, China, Italy, and other places with the HCC product. So we have not put a lot of this range of $30 million to $33 million on that, because we are not out promoting or selling this product off brand. However, you are going to get people that call us and physicians have the choice of whether to use the product or not. And in those cases, we will do the things that we can do legally. So, we are not going to address, promote or otherwise try to build up this HCC thing other than the opportunities that we are seeing in Europe. I will give you one example. I think this will go to the issue. And that is in Russia, we have an opportunity in Russia and Eastern Europe where we are seeing our business, by the time we are through, just with this -- since we've owned the business in four months, is two or three times what it was the year before with BioSphere. And that has to do with our presence in Europe, the fact that we have a sales force, customer service. So most of the stuff you're going to see is going to be international, and some of what I will call a halo effect but those physicians who are acquiring and what we can do legally.

We are not out there promoting it off brand, and we will go through with the study, but I will say this. That if the results come out as I think they will, and this is a very complex study, then I think there are huge opportunities for this product going forward in the United States, particularly as the only on-brand indicated product.

And so it's taken a lot of work, and I want to commend the BioSphere people. I've made what may sound like criticisms, they were not meant to be as much as they were the limitations of any small company. We simply bring something to the party that benefits their product and those fine folks, many of whom we kept, and then our strengths. A lot of this does not take into account huge amounts of this, if you take a look as an example. In the fourth quarter, we did $7.5 million worth of BioSphere. If you just annualize that, that's $30 million. If we get a little bit of a kick on that, 10%, you are at $33 . So it doesn't take a whole lot just based on the momentum we have right

Okay, and when we think about that some $7.5 million you guys did in the fourth quarter, is it safe to assume that is still the BioSphere reps doing the heavy lifting and we are not getting the benefit from improved distribution just yet?

Yes, I think that part of it. Some of those reps are doing the lifting, but when I was talking about Europe, that's coming from Merit's international department and European department. And I think our sales guys are in fact opening up UFD accounts and building that practice. Let me just say that clearly there is the legacy business and supporting the various programs and things and having really the cream of the crop from the BioSphere side is helping that. But I don't want to take anything away from Merit sales force, because they are out there creating new opportunities and new business, and remember when I talked about taste procedures, which is where we -- we have more of a presence and relationship with some of those guys than let's say the BioSphere, so it's a combination.

Okay

Of all those factors.

And then last one I will jump off of, quickly on China. Can you give us a breakdown of volume versus revenue growth year-over-year, and when do you expect for volumes to return to that normalized run-rate pre-distributor change or distribution change I should say?

I don't have those numbers in front of me, Drew, I'm happy to share with, I'll go through -- Joe Wright is here, we will go through and then look at those numbers, but again, I think the key is again to remember that we are getting higher margins, we are making more money after the expenses, and that we continue to invest in China, particularly with getting the 80% of our products, I will give you one. Let's talk about our vascular sheathes. We hope that by the early fourth quarter, that we will have those approved, we think that the business out of that could be several million dollars a year. I'm going to say this to you, you can test me, it can increase that business in China by 25% to 30% in the first year. That's how significant that one product is. So, I will get the rest of the information, and we will have that ready for you, Joe do you have anything? I know his eyes are open, but his mouth is not moving. Drew, we will get that back to you.

Thanks guys.

Okay. Thank you

Thank you. And our next question is from the line of Jayson Bedford with Raymond James. Please go ahead.

Hi, good afternoon, guys.

Hi Jayson, how are you?

Doing well thanks. A couple questions for you. Where are the gross margins tracking on BioSphere? Maybe in the fourth quarter, just trying to calculate the gross margin in the base business?

Kent?

I can give you a good idea from our -- the base, the (inaudible) and overhead are slightly above 80% on average for that group of products. And again, if you're talking non-GAAP, you're there. If you talk GAAP, you have to throw in to the amortization of intangibles that go with the acquisition and are about 10% more of your cost. You are in the low 80s, if you're talking non-GAAP without the amortization and you are in the low 70s with it. In the GAAP format.

And Jayson, just to take that, not to start promoting HepaSpheres and Quadra Spheres but those have higher margins and we would expect that over time, that, that margin will move up because of the mix down the road. Not today, again I don't want to sound -- talk out of both sides of my mouth, saying we are not promoting but it is a higher margin product and a higher sales product. That could have a pretty dramatic effect on gross margins.

Okay, and the 46.5% gross margin in 2011 that you talked about earlier, that includes amortization?

The 46.5% --.

is a GAAP number.

is a GAAP number.

Got you.

Our non-GAAP I don't have in front of me, but the non-GAAP of course would be higher. And you get some of the amortization that goes both in the -- goes above the line and some of it of course goes below the line.

Right.

It hits both places. On a GAAP basis.

In terms of the, just switching gears a little bit, the ENDOTEK division. Fred you said you had your flack jacket on, so I'll ask. When do think that will be profitable? And then what are you doing from a cost side to improve margins within the division?

It's a great question, and it's a fair question. Listen, we said, when we bought the business that we thought that we would be cash flow positive in 2011, and we were wrong. We ended up taking, of course, an impairment, which was really more of a structural thing than anything. The bottom line is, is that we are seeing the biliary catheters starting to sell, I will say this, that there is a great opportunity that has presented itself, and I expect that we -- we have an opportunity on our tracheal bronchial stents, to really see a substantial opportunity there in the very near future.

In terms of research and development, we have new pulmonary balloons, we have esophageal balloons, we have a new inflation device, we have a new 3-IN-ONE unidentified device that we are working on plus several wires that we will have in R&D. So we are building the divisional out. In terms of cost structure and what we are doing, we have gone to our vendors and -- as you will recall, all of the processes for this product are essentially done out of house. So we have looked at the opportunities of bringing the construction of the delivery system and those sorts of things in house, however, I believe that how it will ultimate work out, it looks like that our supplier that does that work for us would -- is going to give us a discount, and we've targeted by the way a discount in the range of 20% to 30%. To reduce the cost of those products in house.

So we've done a lot of work, we have made trips to Europe, we have had conference calls, we have had visitors, to all the primary vendors since the first of the year, and we expect that when we are all said and done, we will have 20% to 30% discount on all of those products, which will improve our margins. If we don't get those, and I believe that we will, we will consider bringing those capabilities in-house. We do extrusion, we do assembly, we do lots of those things. And can we do these things? Of course we can. We have other fish to fry and I prefer to work with our existing vendors, but I have to have lower costs. We have been very active in trying to bring those costs down, and we should start to see -- very candidly I have one proposal in, I should have the other one within the week, and they should be 20% to 30% is what I expect that those costs will come down. Making us very much more competitive. Kent?

I think another part of that business that is I think important when you look at the performances that we have -- we are investing a lot in R&D in the last 12 months and a lot of products are coming along. Some of them are slower, they almost always seem to be slower than you would like them to be, but there's investment there, and there's the opportunity for other -- stents with valves, for balloons, for inflation devices and a lot of things that are progressing and are coming along, which will, later, we expect give us revenues to start to return on that investment. But for now, it's an investment phase in that part of the business.

Okay sounds good. On BioSphere, obviously you guys have done a lot here, in the first 6 - 8 months that you've had them. But in terms of integration, what's left to integrate? What is left to do?

Good question. We've got the manufacturing integrated, the sales and marketing is an ongoing issue because there is lots of cross training, I mean the guys that have been in the BioSphere side of it know their products. Our guys need to learn those better, and the guys that we hire from BioSphere need to learn our products better. So it is going to be an ongoing effort. The trials and the support of customers is going to be very, very important.

One of the strengths that I think we bring to the party is that I will give an example. We had our national sales meeting a couple of weeks ago, and we had an account that had to be in service and we had somebody there the whole week. In the past, they may have had one person that could do that. Maybe two. Or maybe their leadership could have done that. Now we have four or five people that are available to do that. These MSLs and these clinical specialists, they can do that. Which helped to drive those revenues of those higher margin products. It's just growing of the business, making sure that the duplications for instance, going to the [SER] meeting, going to the [CERSO] meeting, these are the big international meetings to make sure that we keep our expenses down and that we don't have too many people and too much cost. Last year, we essentially running everything together because we didn't have time when we closed in September for some of those critical shows. Those are things that are important.

We down sized the facility in Rockland. We cut it in half. So I think those are the critical issues. I think it's just the ongoing now support of the business Jayson, there aren't any big issues. Over in France, we put -- we have leadership in place, we have R&D projects in place, and we've done all those sorts of things. There is some work that needs to be done in the support of dealers and hospitals in Europe. So, very interesting, just to point this out.

In looking at the Quadra Sphere / HepaSphere, Quadra Sphere in the US, HepaShere in the United States, approved in Europe, off brand in the US if it's used by somebody, not promoted by us, but still doctors can do what they want. 90% of the sales are in the US and only 10% in Europe. So for me, that tells me that, that there's this huge opportunity to sell the product in Europe, but I have to support and put infrastructure in place that these guys didn't have in place. So we will have to do that, because I would like to see substantial increases in the places where I'm approved to sell. By the way, these are small numbers. We're talking about a couple of $2 or $3 million worth of revenues from this area. What I like to see over time, if we're looking out here five years from now, I'd like to see it be $30 million, $40 million, $50 million or more. And I think it has that potential with the kinds of margins that Kent talked about.

Okay, fair enough. Thanks guys. I'll jump back in queue, let someone else have a shot.

Thanks, Jayson.

Thank you. And our next question is from the line of James Sidoti with Sidoti and Company. Please go ahead.

Good afternoon. Can you hear me?

We can Jimmy. How are you?

Good, good. You and my Mom are the only two people that call me Jimmy, Fred. But that's all right. Couple things. Want to make sure I heard you right, you're--.

Jim, you're the only guy that called me Freddy. Let's get that all out on the table. It's that Mediterranean thing, Jim.

When you were giving the sales number before, I just want to make sure I heard you right. You said the BioSphere aired at about $7.5 million?

For the fourth quarter, yes.

And $9 million for the year.

And $9 million for the year.

$9 million for the year. Okay, and the charges remaining for inventory step up in 2011, you said that's about $700,000? Is that a pre-tax or after-tax?

Pre-tax.

Okay, so it's $700,000 pre-tax.

And better than 50%, 60% of that will come out of the first quarter. Cause that's the finished goods part and then the whip will work out through balance of the year as we turn the inventory.

(multiple speakers) Finished goods should turn out of there right away

You are talking a couple pennies though, sounds like.

Yes. One and half.

Okay, and then what do you assuming for interest expense in 2011? It came in a little lower then I was expecting for this quarter.

Yes, I mean, we're not -- there's an uncertainty, of course, about interest rates going up. We have locked $55 million of it, and our assumption is it's going to be $1.8 million, maybe $2 million somewhere in that range. We fixed over half of it so it won't -- doesn't have interest rate risk but the other part does.

And that's the half that I think, again to go on to that, we paid -- remember we came in at about one and one quarter, one and three eighths is where we were, we actually stepped it up and then hedged the $55 million at about two --

(inaudible) 2.72 per the whole cost of that locked in, for five years.

For five years and if we look at, for instance, the 30 year treasury, which bumped up to 5 -- what 525, being able to do that at 275 and have it locked is a pretty significant issue.

The guys -- they sent me a note a couple days ago, it's worth $1.75 million to us if we wanted to sell it. It's really at historical, almost lower than it ever has been, and we got it locked then.

And that differential is the savings that we have locked in. And so the thinking is, that as we produce cash flow and pay that off, that, that's a number that will be comfortable for us in terms of our overall exposure over time. So we hope that will be a hedge that will cover that -- and by the way credit can't with not only looking at that, but convincing me and then convincing our Board, that we would hedge that and as it all turns out it was absolutely the right thing to do.

Okay great. And then as far as the debt pay down goes, it looks like you already paid $6 or $7 million down this quarter?

By the end of the year we had paid that down. Through superior cash management and stuff. Now we are going to start borrowing some extra maybe because these buildings have started going and stuff so you know that.

We have some facilities under construction here, and again in Ireland, we have 75,000 square feet under construction there which is to house expansion of businesses that could be housed there and the expansion of our Laureate and other undisclosed product lines at this time.

Okay, but you still expect to end the year with a lower debt balance than you started for 2011?

No, I wouldn't say that.

Do you think you would be about level?

We are going to probably spend most of our free cash flow on those facilities. The cash flow from operations. A lot of it will go there.

But Jim, it does raise another point, and I think it's one I'd like to just briefly address, and that is several years ago when we built the new buildings here, we built some pretty good-sized buildings then we didn't have much to fill them so we had a lot of cost without the efficiency. One of the things we have here is we have about 135,000 square feet or thereabouts of facilities that are in our neighborhood that we could move in there from day one, and that's today. And this is still two years down the road. Even though we will have capacity, we have stuff that will go in there right away.

The other thing is that we have a $14 million EDA, economic development area around this facility for incremental increases in personal property tax that go against the infrastructure and reduced the price of the building. We wanted to make sure that we didn't lose that, because that has a certain life on that. As we look at these facilities, we one, have them essentially 50% leased today, and then we have the opportunity to pull that $14 million out and then to have other opportunities for growth as the Company moves forward. We are excited about the facilities, and I will tell you that we are cramped out here.

One of the other areas that was interesting, several years ago I get beat up from time to time and I do take names and numbers, but one of them was when we were building our molding area. Well because of the growth of our vascular access business and insert molding business, our OEM business, this thing is filling up. Now we still have capacity over there, but three or four years from now, we won't. And so having these other facilities gives us the opportunity to make sure that we continue to grow and meet the demand of the substantial growth. We see substantial growth, Jim, it has to do with our sensor business, our wire business, our device business, our OEM business, our embolic business, there is so much going on out here and so much opportunity, it's at higher margins. It's extraordinary.

So Kent, you think CapEx spending could ramp up to maybe $30 million to $40 million this year?

Yes, we are somewhere in those ranges because of the facilities added to the customary expenditures we normally have, yes.

All right. Well Fred, hopefully this time you build things big enough.

Yes, this is a big building we are building here. Generally we build for five-year plan and that's about how long ago we finished our other building. It's going as planned pretty well. Now you hope it will be another five years that would last.

All right , last question, is what are you doing for tax rate in

Well we are thinking 31%.

Okay.

Kind of a number, it's close to what it was this year too.

Okay. All right great, thank you.

Thanks Jimmy.

Thank you. And our next question is from the line of Ross Taylor with CL King and Associates.

Hi, I think almost everything I wanted to ask has been answered but just two left. First, with EN Snare, I think in the beginning of the call I heard a figure of about $1.5 million referenced for Q4 revenues, is that the actual Q4 revenue or is that the increase from last year given that there were some royalty payments last year?

That's the Delta. The actual revenues were just under $2 million for the quarter, and $7.7 million for the year.

And last question relates to--

Ross, just before you leave that one, did you want to ask me about our new Snare product, our new family of Snares that will be out later this year?

I did, yes.

Okay. We believe that we are the market leader in snares, there are others, lots of great companies out there, we have at least one other new snare product, that will be out by year-end, and we have recently filed patent applications for at least seven additional snare products. We expect a bright future of these products going forward. I won't go into the specifics of the features of the snare that will be this year, but it's a significant opportunity for Merit and one of the areas in the new product development that will be very exciting and we hope to introduce this year.

Okay. That sounds good. And my last questions relate to ENDOTEK. Can you disclose what its revenues were in Q4 just an approximate number and I'm not sure if you answered in response to one of the earlier questions, whether you thought it would be profitable on an operating basis in 2011 --

The fourth quarter over just a little over $2 million for that business. And your question is whether it would be profitable this year in '11 and the answer would be no.

We don't believe that we will be profitable this year. However, there are some pretty significant events going on in this space, plus we have a number of new products, 4 or 5 new products that will -- some of which have just recently been introduced and others that will be introduced during the year. So we are not giving up on the GI space we believe that there is opportunity of this to be one of the future growth drivers in Merit. I think I'm right. I'm going to make myself right. Until I find out if any situation if I'm wrong. By that I mean I'm going to work very, very hard to make this business successful, and I believe that we will.

Okay. It's all I have, thanks for much.

Thanks very much Ross.

Thank you. And our final question is from the line of Larry Solow. Please go ahead.

Just a quick follow-up on the Laureate guide wire. Can you quantify or give us a ballpark of what you think capacity you can build that up to by year-end? Clearly, sort of high-class problem now, I guess whatever your manufacturing will be able to sell, do you have a target of what you will be able to manufacture on an annual basis in dollar value?

Yes, for competitive reasons, I would just say that the business, let me just look at this here, the number that we have is relatively small in our forecast.

Okay.

Relatively small. And it's one of those things that if we are able to execute, we could increase our number in the forecast by 50%, maybe by 100%. It's in the millions, it's not in the hundreds of thousands, there's several million dollars here, but there is a lot of opportunity on the upside. It's a great product, and it is now launched worldwide, and we are working two shifts and landing -- or starting a third shift and then with the new facilities coming online in the next 30 to 60 days that are built out and equipment being qualified, we are going to quadruple that capacity.

And then we have another 75,000 square feet, and Larry, just one of the things that is fun is that here's this 75,000 square foot facility in Ireland under construction that will be finished by the end of this year. And about 90 days, by the end of the second quarter, I'm going to have to decide how much of that I'm going to commit to the production of this product. Initially, we thought we could build it all in one place, and if I were a betting man, I would say that I'm going to have to take 25% to 50% of the manufacturing space and dedicate it to this product. That's what I believe. Certainly that's what I hope for. There may be different opinions. At the end of the day it doesn't really matter, here's what does matter, is it's a terrific product, it's having great success, against a great competitor, and a market leader that's been entrenched for over 20 years. We believe that we have a better product, and our physicians tell us we have a better product. It's a great opportunity for this company, but it's very underscored in this forecast.

Got it. Do you happen to have the CapEx for the quarter or the year number? Whichever. I could just back my way into the quarter.

It was $23 million for the year.

$23 million, okay.

I just looked at that.

So it's like $7 million in a quarter or something.

Yes I have to deduct it from the third quarter to give you that.

We will do some work on that we've had a couple questions on CapEx. As Kent mentioned we have these facilities under construction, we have ongoing projects and new project development, so we will do a little but more work on that and we will be able to get back to you on that one, Larry.

Sounds good, thanks again.

Okay. Thank you, Sir.

Thank you. And that does conclude that question-and-answer session. I would now like to turn the call back over to management for closing remarks.

First of all, ladies and gentlemen, thank you very much for the questions, again, we hope that what we have done is to present this in a manner that is understandable in a very complex business. I didn't mention that we did have about $1 million -- was this for the year or for the quarter, Greg, in terms of FX effect that was actually negative, about $1 million of revenues negative for FX effect, so we did a pretty good job of hedging that, we have a natural hedging

I was going to say the costs were also affected more than that in a positive sense, so it actually improved our gross margin a little bit.

Yes. It's a complex business, and we want to make sure that everybody gets to look at it for what it is, we are going to have higher CapEx, we are going to have higher interest expense. But we're also going to have a lot higher gross margins and revenues. And a lot more opportunity over and above that. We have challenges, we have some things that aren't performing the way that we'd like, and we will focus on those because we believe that those are opportunities for us and hopefully we'll be able to put a little color on that at the end of the first quarters. A few more issues reveal themselves and we can talk more openly about some opportunities in those areas.

We appreciate your support, we appreciate the good questions, we have several healthcare conferences coming up in Orlando and in New York, and in Orange County. And so we look forward to being out there with these forecasts and you've helped us today by asking some tough questions that will make sure that we have the answers for. So again, thank you very much, for your interest, it's an exciting time here. We are excited, as is the staff, I'm looking at them, they're a little worn out, but we are excited about the opportunity. In closing, let me once again ask our counsel Rashelle Perry to make one closing comment.

Earlier in the call we referred to information and web postings. Although we commented on that particular posting, we do not make a practice of following all postings and we disclaim any obligation to comment on or correct any future postings.

Don't you just love these guys? We do, we just love the lawyers. Okay, Rashelle. Thank you very much, I hope you're happy, and ladies and gentlemen, I thank you again for putting up with us and we appreciate it, we will be available for calls for the next hour or so, Kent and I will be here, thank you very much and we will now sign off from Salt Lake City. Wishing you a very good evening, good night.

Ladies and gentlemen this concludes Merit Medical's fourth quarter and year-end 2010 earnings conference call. You may now disconnect.