Merit Medical Systems Inc (MMSI) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to Merit Medical's Third Quarter 2011 Earnings Conference Call. (Operator instructions). I would now like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Go ahead, sir.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos with members of our general staff. We are broadcasting today from our headquarters in South Jordan, Utah, and we're delighted to have you with us and appreciate your attendance. We'll start our meeting today by having Rashelle Perry, our general counsel, read our safe harbor provisions. 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 SEC which are also available on our website.

To the extent any forward-looking statements are made in this call, such statements are made only as of today's date, and we do not assume any obligation to update any such statements. Although Merit's financial statements are prepared in accordance with accounting principles which are generally accepted in the United States of America, Merit's management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of Merit's ongoing operations, and can be useful for period-over-period comparisons of such operations. The table included in our quarterly earnings release, which will be discussed in this call, sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Investors should consider these non-GAAP measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude some, but not all items that affect net income. Additionally, these calculations may not be comparable with similarly titled measures of other companies.

Rashelle, thank you. Please take a deep breath now, that's a lot to read. Ladies and gentlemen, again, we're delighted to have you with us, and Rashelle, thank you for your reading. Let's go through some of the highlights for a moment and we'll add some color. As a reminder, I have Kent Stanger here with me, our Chief Financial Officer. All of our operating officers are here as well. So we'll be able to take your questions a little bit later on. But let's start out and discuss revenues for a moment.

As you can see, our revenues were just over $90 million. And this is a little bit better than we had anticipated, particularly in a summer quarter. As you all are aware, we generally guide about 5% below second quarter and this is primarily because of procedure counts. And so we're very, very pleased on the revenue side.

All in all, we rebounded in terms of our growth. I certainly don't want to apologize for 12% growth or 17% growth, but I think what we've demonstrated is that we've been able to maintain this year a 15% growth rate. We've had many analysts compliment us through the first couple of quarters and have indicated that this is one of the fastest growing device companies. And we think it's important.

In a few minutes I'm going to address this growth and tell you where it's coming from and why we think that it's imperative that we take advantage of the opportunities. The core business was up 15%. So while revenues were up 24%, the core business itself was up 15% and we think that that's significant.

Our non-GAAP income was up 25% for the quarter and 28% for the year. Again, we think that's significant. Some information has just developed over the last several days or few weeks and that is we've received more license approvals. And it was announced in Beijing in the last couple of weeks that they would open a tender. Let me tell you why this is significant.

Merit has invested heavily over the last several years in developing both the regulatory approvals and environment in China as well as our distribution capabilities. And we've received, through the efforts of our regulatory department, many licenses. However, you can have all the licenses you would like to have, but if you don't have the tenders and they don't present themselves, then you can't sell those products even though you have those. So Beijing normally is the starting point and then other tenders open up throughout the countries and different areas of the country.

And so we have some of our major products that are going to be part of this tender which we are now applying for. They are going to include our Concierge Guiding Catheter. Now this is, again, a big deal. Just in the last week or so we received the final documentation for our Prelude Sheaths. This is a big part of the opportunity in China. We have received our Impress Catheter, both our standard and our hydrophilic catheters. We've received many others. But these are significant opportunities and in fact, one of the things that we're discussing here at this point is the level of inventories that we will have to build over the next 90 days to make sure that we have inventory on the shelves right after the first of the year as those tenders are awarded. And they generally, by the way, are not awarded to one person or to one company, but a price is established and you get to participate. So it's essentially a gate process if you will.

We think this is a significant situation that will enhance our growth going forward. I should mention that if we take a look at our sales for the quarter, for China and for the year, for the 9 months, our China sales were up 77% over a year ago. And for the quarter, up 87%. So these are significant numbers. They are helping with gross margins, because we get those higher prices that we've talked about, and we have models going forward in other counties that we're currently expanding in. And spending money in.

I want to address if I could for a second the SG&A. We picked up a 30 or so basis points reduction in SG&A. But we continued to invest in places like Dubai where we'll be opening an office. This is just a sales office. In Moscow, in Russia where we have now people and feet on the ground. In India where rather than just hoping that the distributor does well, that we actually have people on the ground and controlling the licensing process. We're involved -- and these things can be rather lengthy, but in Brazil.

So essentially if we look at the BRIC countries, we believe that these opportunities are things that we have to spend money on now, but that the rewards in the future are going to be significant. If we take a look at our growth for the quarter in international sales, it was 36%. That's going to head north to 40% or more as the business continues to grow. And as we compare ourselves with some of our peers who have substantially lower numbers on the international, or on the international basis, we think Merit has an advantage in that the US markets are clearly slowing down.

Even though we rebounded this quarter in the US markets, if we were to look at just from the 30,000 point view, we're seeing those procedure rates go down. And in Europe, as an example, our direct sales are doing terrific, our dealers are doing fine, our OEM business is doing fine. But the lowest part of where we're seeing our business grow is in the US. So that may rebound some day, but the bottom line is the opportunity is in the rest of the world. That's where we're investing our money and it takes money and time that you have to spend. Those show up as SG&A expenses.

Let me talk about some new technologies, because one of the things that requires us to take an in process research and development expense for the quarter. And again, guys, these are how these things are accounted for, these are the rules of the game. So we acquired a novel, and by that I mean a patented and received actually patents from and notices of allowance from the patent office, a novel vena cava filter. We think this is an extraordinary market opportunity. It will take us several years to develop this product, but if you take a look at the market mix in vena cava filters where we have major players in there, there is no dominant player. So I won't go through the names of who the players are. You know who they are. Well, I will. You have people like Bard, you have people like Quarters, you have people like Cook. But there's no one that's dominating the market. It's very fragmented. And what that tells us and what we hear interventionalists tell us, is no one has come up with the perfect product. We think that we have a product here that will compete. It has terrific gross margins and we think it helps to elevate the technology in the presence of the business worldwide.

Secondly, as you all know, Merit has been very active in the sheath business. This is the vascular access business that goes into our catheter business as we report into the business units. We've acquired from the [Fashells], and that's a name that's very, very well-known throughout the world in terms of their patents and the technology that the Fashells have developed, a unique sheath capability that essentially allows us to downsize by one French size through its construction it's access into the vessel. So essentially, you can take and at the end of the day you make a smaller hole. When you make smaller holes, you can close them off easier, you have less bleeding, have less morbidity, and these things are very, very important when we're trying to move patients along. So this is a significant opportunity. We're probably about 18 months away before we actually introduce the product or so, but again, we were required to take a charge.

And then finally, and this was not one of these issues that was subjected to this one time charge, but we did acquire from Ash Access, we acquired the Centros Catheter. Now this is a catheter that was developed by Dr. Ash, Stephen Ash. And Dr. Ash was the primary inventor of the Ash Split Catheter which is the dominant catheter in chronic dialysis today. I can't go into the details of how it came back to them other than to say that the previous company had some issues. There was a recall that's public knowledge, there were some training issues and other things that we think we can improve upon. We think that this particular product will help to reduce recirculation issues We think it will help to reduce fibrous formations. We think that it will help to reduce the issues with central venous obstructions. We think it's a terrific product, but it has to be -- there's a few little things and little tweaks that have to be made. We're in the process of doing that, that we would hope that by the end of the first quarter, second quarter, we will reintroduce this product, possible under the Centros name. It was never sold in Europe and so we'll have the opportunity to have this product, once it goes through the approval process, to be sold worldwide.

In addition to that particular catheter, which will go immediately and has 510K and has patents, we were also able to acquire as part of this deal from Dr. Ash designs for several other catheters including a novel peritoneal dialysis catheter And Merit intends to go out over the next several years and build a major foothold in this market with these new and advancing technologies which we think are the state of the art.

So we're very excited about those types of opportunities. These go hand in hand with the internal capabilities that Merit has. And we think that the marketplace, we think that companies who can get to the market with new products and ideas while others are stumbling or trying to find their way, is an important strategic advantage. And so that gives you a little bit of color on these transactions and the charge that we took for the quarter which was required.

As you go to the GAAP side of things, you'll see that we're performing I think where we said we would. We will talk a little bit later on in the call about the numbers at least kind of where we see the revenue numbers. We'll let you guys do your formulas and that sort of thing. Now that being said, I'm going to turn some time over to Kent to talk a little bit about the financial side of things. Ken, if you would discuss the things that are regarding margins and cash and all the fun things that you stay up at night and think about.

Thank you. So first of all I'd like to just give a little more color to the revenues. It was a nice quarter in all aspects of our business, particularly the highest growing areas, for example the Endotek business that was up 39% for the quarter. And we're seeing traction there. We're seeing growth from not only some of the new stents that we're just introducing, but the [bilary] started, the big 60 inflation device is doing really well. And so there's, with the help of the airway stent that one of our friends left us from business it's helping out a lot.

But anyway, then you look down the line at some of the other growing areas, catheters are up tremendously this quarter, 34%. We're seeing a lot of growth, particularly in some of the areas where some competitors have vacated somewhat in their distribution and service. So we're seeing, as cardiology catheters grow, we're seeing a lot in Prelude catheters. And introducing guiding catheters in some of these kinds of products. Some of our new ones, too, like Aspiration Catheters, are up strongly, nearly half a million new revenues over last year. So those are helping a lot in growing our revenues. The other areas are strong, too, such as standalone up 19%. We've got new products in there like the Laureate and others.

Our kits and trays have slowed a little bit at 6% growth and our inflation devices were up 5%, but I'd like to point out that the OEM inflation device business was down, meaning that our core business in inflation devices would have been up 10% if you take that out.

So we see growth across the board, ahead of really our forecast and many of the people on the street. When you come down the line from that, you see the gross margins. The gross margins were 45.4% which were up 270 basis points compared to the prior year's third quarter that was 42.7%. And we have improved year to date, we're at 46% up over 42.7% or 330 basis points. Again, the major drivers in the improvement in gross margins is the new BioSphere business that's layered on top at high margins as well as the China change of distribution method. So we get ASP bumps and we're also getting market share gains there that Fred referred to in the 87% for the quarter growth and 77% for the year.

So those are the major factors contributing to our improvements in the year to year comparisons for gross margins.

We have seen some declines in gross margins recently from some price pressure as we've -- actually it's been our strategy to advance in some of the international markets and even domestically say in our inflation devices. We're getting a lot of market share. That's growing tremendously right now.

Let me jump in if I could just for a second. One of the things we eluded to in the call is that we saw a lot of demand and we are continuing to see that demand on some of our lower margin products. But I'll give you an example of this so we can kind of put a little flavor on it. If we take a look at some of our diagnostic catheters for the month of September we were up almost 88%. For the quarter we were up 40%. These are legacy products. But with the departure and to be very candid with you, some disappointment in that departure, customers are looking for alternatives. So the question should be asked, if -- why would you take this lower margin business? And the answer is simple. We sell a lot of higher margin products and developing breaking this, some of these barriers that have been around for 20 years is significant. So we'll be selling ASK catheters, we'll be selling inflation devices, we'll be selling lots of these other products as these traditional barriers start to break down. And these are significant numbers. We are working very hard to keep up with the demand for these numbers.

I'd also like to go over some unit sales if I could for just a second because before Kent comes back to the financial part. But I think these are significant. For the quarter, our US direct business was up 15% Now that includes the revenues that come from BioSphere. And for the nine months, that's 20%. But if we take a look now at the other areas, our OEM business is up 13.6%. When you back out kyphon and just look at that core business, it's up 26%. If we look at Endotek, as Kent mentioned, up 36% quarter, up 36% for the year. So we're seeing very nice progress there.

If we look at worldwide dealers, this is Central and South America, we're up 30% for the quarter. China I mentioned, 87%. Europe direct, this is significant. We're all watching TV, we're all waiting for this Wednesday night summit and all the things that are going on. Our sales, our direct sales in Europe are up 44% for the quarter. In the summer quarter. It's extraordinary. For the year, it's up 37%. I mean those are extraordinary numbers. And it goes to this whole issue that we're talking about and that's where we're seeing the demand.

And fortunately for Merit, we have the distribution, we have the manufacturing, and we have the product base to meet these opportunities. Dealers. So these are places like Russia, the Gulf States, eastern Europe, up 66.5% And these are not small numbers, you guys. It's gone for the year from $9.4 million to $13.3 million. So when you start adding all of these up, they're significant. And we see that those trends and believe that those trends will continue as we move forward, particularly with some of these new products and these new regulatory things. Kent, I'll let you come back to the financial side of things.

Thank you. So now as you look at the operating expenses, SG&A represents 28.4% of sales this quarter which we've talked about is equal to or similar to the year to date number of 28.5%. When we compare it to the prior year for the year to date, it's the same as for the prior year. When you compare it to last year's third quarter, it was 30.7%, but that included many one time charges for doing the BioSphere deal. And so when we take that out, it's 26.7% or 26.9% for the year to date number. So we are seeing and have seen increases, as Fred has talked about, in investments in our distribution, both in China, the BRIC countries and some others, for example Hong Kong is one we didn't mention previously. So it's -- but what I do like to point out is it's improving 30 basis points from the prior quarter sequentially.

Research and development represents 6% of sales, up from 5.3% the prior year for the quarter and it's 5.9% year to date, up 4.9%. So we are continuing to invest in research and development. We have a lot of projects going on, particularly there's focus right now because of the regulatory process for our high quality study and other products that we're trying to get into foreign countries. There's a lot of registrations going on that are included -- the costs of that are included in our research and development charges. As well as quite a bit of effort in our endoscopic business that we've mentioned already. So the other expense that we've already mentioned, Fred brought up, was the $3.4 million of one-time charges that's really a research and development cost that's in this quarter particularly that's really a one-time charge going forward which we didn't have to compare last year. So the net of that is the income from operations from a GAAP basis is $6.5 million which is up from last year's $3.4 million loss, again, that had a lot of one-time charges in it. Thereby, when you look at the non-GAAP income, I think it's maybe a better way to look in comparison is why we provide it. So it went -- it's $7.7 million is the net income or $0.18 a share compared to $6.1 million or $0.17 a share. When you adjust all those one-time things out of both periods.

And I think another thing to point out, Kent, is you have an additional 5.5 million shares, the dilution from the offering as part of that as well. So that's another factor that has to be considered is the dilution from our offering.

That's a great point. This is the first quarter that it's been fully weighted and it is, as well as there was a lot of options exercised in the summer quarter which we're towards the end of that. So now those are about another $1.7 million, so there's a most $7 million more in additional shares compared to the prior period. So even though our net income in the non-GAAP basis is up 25% or 28%, it doesn't look as much in the EPS because of the dilution.

Let me go to another issue, too, that we think plays very well going forward as it pertains to gross margin and growth. If we take a look at the sales of our HepaSphere, QuadraSphere products, these are our drug eluting spheres, essentially the oncology spheres as a part of the BioSphere, for the nine month period, they're up 53%. But to show you how this thing is moving, in the summer quarter it was up 127%. So this is the sales of our oncology embolics. We're seeing a lot of, as you know there's a disruptive factor in the marketplace. Everybody is going to try to hold onto that. But Merit is starting to make their way into this market. And we're able to do some other things like we're able to take and bundle some of our catheters, our micro catheters, along with some of these spheres. And we have an advantage that our companies simply don't have. They don't have those products. And so the ability to bundle those things together are significant opportunities for Merit.

Also, if I could point out that our micro catheter for the 9 months is up 132%. Again, extraordinary revenues and opportunities going forward for these terrific catheters that deliver these embolic. So the net of it is, ladies and gentlemen, is the business -- and this is a complicated report with a lot of moving parts, but I think all in all that we're pleased with the growth, we're pleased with the new things that are coming down the line.

I'd like to, if I could, address a new stent, the EndoMAXX, which is a new esophageal stent. We've done 13 or 14 cases just in the past week just going out with customers and some of those who are not using our device. And all of those reports for that product are significant. We've had great reception of those products. In fact, a field report yesterday, as we were putting in one in through a very tight stricture, when the physician got done with it, he said, when you release this product, I want these on the shelf.

This was a physician that we went to specifically. He was kind of a tough nut and he was kind of a Doubting Thomas and now he wants them on the shelf. So we think the EndoMAXX and then the EndoMAXX Plus, we would hope to be hearing from the FDA in the next 60 days or so as to the status of our valve esophageal stent. We believe that's a game changer. We believe it has a great opportunity, but we'll know what that regulatory path is. Our hope and desire is that it will be a 510K, we'll see how it all shakes out, but it's a significant opportunity.

We also have a new embolic that we will be introducing in the late first quarter, early second quarter next year. I'm not going to discuss anymore about that other than to say we have some other products and we've added I think the Merit touch. And we have others that we're working on that we think offer tremendous advancements in oncology and in embolic work.

So all in all, that's it. Again, there's a lot of information here, but we're generally pleased, particularly when we start taking a look at the work that's developing on the HepaSphere, QuadraSphere product. The study is moving along and we're seeing a lot of demand by the way. Another point, we received approval in Korea for the doxorubicin loaded HepaSphere. These are significant issues and these have significant margins. So this is working out.

Another thing I don't think we've pointed out, but for the quarter we had a record quarter and I think not only just for Merit, but for the BioSphere product, for the BioSphere product line. It was just slightly over $8 million. That was an all time record. And we're able to take, not only take advantage of the UFE side of it, but also a lot of focus that we're putting on the oncology side of things and for the various reasons that we've discussed with you.

Well, that's a lot of information. And I think it would be best now if we turn the time over and took questions. So, Joe, it's up to you now and we'll let you go ahead and bring the questions forward.

(Operator Instructions). Brooks West, Piper Jaffrey.

Hi. Thanks for taking the questions. Let me -- Kent, let me just start with a quick tax question. The tax rate came in about 3 or 4 basis points higher than we were modeling. Anything to call out there?

We're going to let Greg Barnett answer that.

As we look at the quarter, one of the things that we didn't get as big a benefit from the lapse in our discrete items from our tax credit. We had some prior year adjustments that we had to kind of flow through here. So we didn't get as big a benefit as we would have usually seen. And then really, year to date as you look at our tax rate, our US operations is making more income than our foreign operations which are taxed at a higher rate. Most of our foreign operations come from Ireland and so we're seeing the US be more of the income and it's bringing that effective rate up a little higher for us.

Greg, can you discuss FIN48 and any adjustment there? Because normally in the third quarter we --

Yeah, we had some of that lapse, but it kind of got offset by some true ups from the prior year. So that kind of washed.

So, guys, where should we think about that for Q4 then, the tax rate?

Q4 should be normalized in the 32% range don't you think, Greg? 33%?

32% to 33%. Probably 33% where we're probably going to be closer to.

One thing I will point out on that is that we do have a credit coming into next year that was deferred a year. So the normal FIN48 roll-off that comes when you don't have an audit, we amended our return to get a better benefit and so we delayed that one year. So next year we'll get the '07's roll out because of our amended amount. Most of that will come to us, assuming they don't audit it.

Fred, let me switch to China then. You got the tender coming. You announced back in September three products had received approval. So as we look at the revenue potential for China when that comes in Q1, how many products are you going to have available? And did you mention that you might have gotten another product recently approved?

Yeah, we did. We just received approval for our Prelude Sheaths. And that's significant. As you know, that's one of the fastest growing parts of our business, both for femoral and transradial. So that's kind of a big deal. But these are the products that we've received. Some of these by the way seem like little deals, but they're not. For instance, all of our needle line has been approved. Our Revolution, our fountain catheter which is a thrombolytic catheter. We've received a number of renewals.

We received the Impress catheters, those are big ones, both the standard ones and the hydrophilic catheters. The Concierge Guiding Catheter is one I think that is probably the most significant. I should also point out that we will be launching this catheter for the first time ever in the United States some time right after the first of the year. This is a significant deal. It's been growing very nicely in Europe, but for good and varied reasons, it was not introduced in the United States. It's now ready to do so. That's approved and it goes right hand in hand with the other cardiology products that we're selling there. We also received approval for the Laureate guide wire. So this is our hydrophilic guide wire. This is a big deal.

So is that ten products, Fred, that you have --

Yeah, I'm looking here -- 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10. Yeah, it's pretty close, yeah, 10, 11, 12 actually. New products that have not been on it in the past, yeah.

What do you think the incremental revenue opportunity might look like?

Not to dodge the question, but I've got people on the ground in Korea, Japan, and China this week. So Joe Wright and his guys are over there. They're firming up their forecasts. We're having a forecasting and budgeting meeting in the next week. I've looked at the preliminary numbers and I'm satisfied, but I think with some of these new ones that just came in, that we would see more today than we would had two weeks ago. So we're not prepared to -- it's not going to grow at 100%. We're not going to go from $20 million to $40 million, but we are going to see significant growth there. And these products and the effort, it takes a lot of time, Brooks, to get these things done, a lot of effort. We've spent that money. Now it's time for us to reap the harvest.

So we expect that we'll see significant growth in Japan and I'll firm those numbers up once I have a buy in and an agreement with the management team here in the next couple of weeks. But it's significant.

Okay, thanks for that. And then maybe last question on gross margin or a couple questions on gross margins. A little softer again than what we had modeled. And Kent, anything stand out at you? Any one time things stand out at you there with gross margins? And how should we think about gross margins for the rest of the year?

There's a small one time thing you'll see that's carrying over from the BioSphere which is -- it's small but it's $97,000 in the marked up inventory that will finish out in the fourth quarter at about $76 million or something and it will be done. So that's all there is in the really one-time charges. The rest of it is just an interesting fluid mix environment and we've just had a big boost in some of the products we named that have changed a little bit in the gross margin percentages in the mix and some pricing issues. So there's nothing major here.

I will point out, some people are concerned about the inventory. I just spent quite a bit of time analyzing that. The finished goods are not up significantly. In fact they were only up I think it was 6% on finished goods. So you can see for the year, nine months. So it's not nearly as much as what our sales growth is. So I'm not concerned about those. We have been making moves and changes in some of our production, the ebbs and flows on it and the variances and things in Ireland right now. But I don't think there's anything significant I can point out to it.

Brooks, let me add some color there and that is in our first quarter we had this terrific 17% growth. And it softened a little bit in the second quarter and I think maybe there were some people that thought maybe the party was over and they were wrong. It rebounded back to 15% and that's a terrific number. I would ay the same thing about gross margins. Yes, it was a little soft in this quarter, however, we are essential on our goal for the year. So the goals that we set forth as a management team that we talked to you about early in the year and that we've set forth with our board, we're essentially at that level. So I wouldn't discount or sell Merit short in the ability to deliver both the revenues or the margins and profits that we have talked about.

One other point that we're -- I don't know if we mentioned, we're moving our diagnostic catheters to Mexico to lower the costs there and you should see an improvement in the beginning of next year in that process as we move that product line there.

Thanks, and let me sneak one more in and then I'll jump back in line. Are you seeing gross margins for the BioSphere product hold in? And I'm especially curious about the Asian sales. And then secondly, Fred, as you layer on all this international revenue and again, especially with the Asian revenue, is that margin coming in on revenue at a higher than corporate average? Or is that actually coming in below corporate average.

That's a lot of stuff. Let me see if I can go back to the first part. On the Asian stuff, I'm going to have to get back to you because I don't have it in front of me. I will tell you that from the model that we had a couple of years ago to where we became the master distributor, if you will, that our margins are higher. So that's a significant contributor.

When it goes to the BioSphere product, with this increased volume, we're maintaining, we're increasing our gross margins. So we're not seeing any deterioration in those margins in terms of our overall business. With the opportunity that we see of that business and the disruption that's out there, when you have a product that's over 90% gross margin, it doesn't take a whole lot of that to have some impact. And we expect that we'll see that as we move forward. But again, that's a terrific product and we're starting to get a lot of traction on our HepaSphere, QuadraSphere product line, particularly in the US. So these are significant opportunities with significant margin enhancement prospects. So I hope that answers.

On the other ones, in terms of the layering part, it's just something I'm going to have to go do some research and get back to you on.

Good. That's very helpful. Thanks, guys.

China is helping. It is helping. We are leveraging it. It's above our corporate.

I'm sorry, China is above our corporate average, so that is helping.

Great. Thank you.

Larry Solow, CJS Securities.

Good afternoon. It sounds like some of the gross margin pressure, it's pretty modest anyhow, is sort of a high class problem. And it looks like you're just, like you said, expanding in some lower margin areas, but you're getting big orders and those are sort of gateways into other products. Is that a good assessment?

That's absolutely correct.

And as you look out, do you think just in terms of modeling, would you think this can continue? I mean do you think it gets -- or is it sort of an offset as some of your higher margin products pick up the pace, too?

Well I think the higher margin products will pick up the pace. So things like the concierge, links like the ASAP, our guide wires, hydrophilic guide wires, the inflation devices. All of these things kind of go along with it. But there was this -- there wasn't just someone leaving the market. There was a huge change in their sales force out there. So when those guys leave, customers want to have someone to talk to and that's one of the advantages that Merit has had with its stability for year and years is we're reliable. Again, that's a big advantage over a lot of these other guys where it's a swinging door with people in and out. So that's an advantage for us and people want to do business with us. It's a great problem to have.

Right, and you actually had an acceleration in growth. I mean sequentially you grew 15%, organically last quarter 12%. So that's pretty impressive. And clearly like the catheter market, I imagine a lot of that is just from low hanging fruit from the competitors departing. Do you think that that has a lot of legs to it or is something that -- I mean is there a lot of market share up for grabs still?

Yeah, Merit is a relatively small player in these markets. So yeah, I think there is a lot. But again, when we work with our sales guys and counsel them and say, okay, guys, we'll take some of this business, which they're happy to have, the sales guys. You know how they are. But we say, look, we want the inflation device business, we want the haemostatic business, we want the guide business. So we kind of hold their feet to the fire. It's not just go sell whatever you want. It's we need this mix and this blend. And so we think that we'll see the benefits of that.

And again, goodness gracious, we're talking about 15% growth, we're talking about a plan that's been put in place for years, one that we're executing on. And I hope that investors just don't take their eye off the ball about how this business is doing, how it's generating cash, how it's growing, and the opportunities. I had someone, Larry, say to me recently, I think you're growing too fast. And I said, well what would you want me to do? Go tell my guys not to sell anything, take a couple of months off? You've got to make hay when the sun is shining. And when you build those relationships -- and some of these are accounts that we haven't been able to get into for years. And they've wanted to do business, now they have a reason to do business.

Let me just assure you that sheaths, the higher margin products, all of these things will come into place and follow. We're building the business and clearly if you compare us with other folks, particularly at the level of business and the volume that we're doing, we're making an impact and our customers appreciate it. So it's -- we don't mind a little bit of the slower margin, but again, the higher stuff will come along with it and the growth will be there. At the end of the day when it all filters out, the company will continue to grow, continue to make more money, and continue to build its reputation and enhance these pretty aggressive plans that we have. We've been putting them into effect over the last couple of years. If we stop those things just for the sake of making more money, it would be a huge mistake.

Right. Okay. And then just on the SG&A side, and I realize you're spending good investments, actually you had a little leverage this quarter sequentially -- looking out, and again, I'm not thinking that you're going to stop the se investments, but do start to get to a point where you start, especially with China, turning the corner now and profitable and growing fast. Do you see picking up some leverage o this line as you look out finishing off this year and more particularly in '12 and '13?

Larry, one of the things that some of our products requires a presence in the marketplace. As an example, we're over at [CRSA] in Europe. It costs a lot of money. We'll be down at the TCT in a couple of weeks where we're selling our snares, where we're selling lots of our products, ASAPs and all these other types of products. The money that we spend to develop the markets for the embolic products, the oncology products. We're spending more money because it's required. But if you compare that with some of our peer companies, you'll find that we're actually at or below what they're spending for their SG&A.

So I wish I could tell you that we're going to stop spending. But we're going to continue investing. What I will say is this. We met here today and we talked about should we be going to these meetings? And are we getting the return on investment? For instance, we're at a meeting this week in Honolulu. I don't have 20 people there, I have 4, manning a booth, meeting with customers, and taking breaks to go to lunch. And yet when I talked to them today, this is the [CHEST] meeting which is for our stents. They're saying -- in fact, I'll tell you what, I'm going to read it to you because this is a text that came in from our vice president or the president of the division. And this is what she said. "Fred, the booth was completely slammed today. A lot of interest in the AeroStent, Aero sizer, the Big60. I can't talk to you right now, I'm too busy". Wow. That's her text.

But I've only got four people there. But we sat down before we went and said, look, these things cost a lot of money, do we even want to be there? We said we'll scale it down, we'll make sure that it's reasonable. And I probably understaffed it. But she said that yesterday they had more interest and more leads than they had for the entire show last year in one day. So those are the kinds of value decisions that you have to make. But what we are trying to do is to make sure that our folks are thinking about it. It's not, hey let's everybody go to the TCT or everybody go to Europe or go to this or that. We watch it and we watch it carefully. We have to see those returns. But if you look at the numbers, look at Europe dealers, look at Europe direct. Those monies and those dollars that we're spending in Europe, look at the sales of the embolic. The sales numbers are there. If they're not there, it's a different story. You cut those things out quickly. So we have our hands on the yoke and we lean it and our angle of attack at all times. I'm talking pilot talk now, but that's what we do.

Okay, fair enough. Just a couple -- do you happen to have -- did you give the US sales growth number in the quarter?

Yes, if we include the Sphere products for the quarter, we're up 14.9%. Let's strip out those things and I think we're at about 7.3% year to date. So it actually improved from the second quarter. But I'll tell you what -- and it's great, 7.3% is great, but if we didn't have those international sales, if we hadn't made these investments in the past, it would be a little different outcome.

Absolutely. Okay. Great. Thanks a lot.

Jayson Bedford, Raymond James.

Good afternoon. Can you hear me okay?

We can hear you fine, Jayson.

Okay, great. Just in terms of BioSphere business, it was a little stronger than expected. Can you just give us a revenue level on the oncology side? What was oncology's UFE?

Yeah, we can. We did about $8 million for the quarter, as Kent and I talked about it. For the three months for September we were at about $900,000 for the three months, is that right, Kent?

Yes.

And for the nine months we were about $1.9 million. But to give you an example from where it was a year ago, I think -- it was up 376 to 853 and we expect this to continue to accelerate pretty dramatically.

Okay. So you grew the UFE business year over year as well, is that right? On a normalized basis if you kind of assume a full quarter of BioSphere?

Kent, do you have that? I don't have it right in front of me.

I can figure that out right here by backing out that number, but I think so.

So why don't you go and ask me another question while he's got his calculator out here so we can answer that? Jayson, if you have another question?

Yes, QuadraSphere in China, when do you expect to sell that?

That's a really good question. As I mentioned, we did get approval with our drug loaded sphere in Korea. That's a significant market. We're waiting for the renewal by the way of the Embosphere which will be Merit's license. And it's still in the regulatory process. I'd like to think within the next year. But it gets put in the queue over there and you just do the work. So it may be another year or so on that one. I wish it were sooner.

Okay. And then the level of sales in China, I apologize if this is in the release or if you mentioned it, but how big was China in the quarter?

China in the quarter represented sales of a little over $5 million, almost $5.1 million, up from $2.7 million a year ago.

Gotcha.

To answer your first question, if I take the partial period for just the Embosphere for last year and I take it by the ratio of the days we had it, then we were up about 12%. So it was just a little over $6 million if you take the $1.3 million for the 90 day period. Not annualize it, quartertize it or whatever you want to call it.

Jayson, you remember that we owned it for a better part of the quarter last year because we closed, was it on the 10th or the 20th?

The 10th.

The 10th of September. So we didn't have a full quarter.

We had it 20 days.

We had it 20 days in the quarter last year.

So it's up over last year's average daily sales. That's a better way to say it. The Embosphere was higher by 12% in this quarter versus the average daily sales of when we had it last year.

Gotcha. Last couple here. You've eluded a couple of times on the call here to disruption in the market. And just based on your past experiences, how sticky do you think this new revenue is?

Well, I'll give an example on the -- if we go for a second to the stents, it's real stick because the competitor hasn't come back into the marketplace and people who have used our product liked it better than the one they were buying anyway. And so that's sticky. On this other thing, these guys who have left a portion of the market, there are a lot of people mad at them. And so I think it's very sticky. There's another part of this, too. A lot of this stuff is not just the US. But it's also in Brazil, it's also in Russia. And right now we're only getting essentially the wholesale part of this.

Another advantage that will enhance gross margins is you'll see the same thing happen here that you saw happen in China. Once these models come to Merit direct, it won't be going at wholesale, it will be going essentially at retail. So that's another reason why, even though we have a little lower price on it now, you will see the same phenomena down the road that you've seen in China which is it's above the corporate average. So that's another reason why we think not only do we want to have our products there where we can sell other products, but we know that it's going to get a stepped up basis, if you will, down the road in higher gross margin and higher sales prices as we execute over the next year, two years these new models that have been very successful for us in Russia already and successful in China. So we're talking about Dubai, we're talking about the Balkan states where we're opening a sales office. We're talking about Brazil, we're talking about India. So all these places over time, and Russia, are going to be going from essentially wholesale to a stepped up quasi retail. And so the question was asked before, do we want the business? And the answer is, of course we do. It helps to cover overheads and we see higher prices and access for our other products.

Right, okay. And just actually one more for me. Fred, can you comment on traction with the ASAP catheter? I always thought that was a nice, big market opportunity, but it didn't seem to get much airplay on the call here.

Yeah. We're right now -- if you take a look at the ASAP, we have done over $1 million. We introduced it in May. It's coming along.

Almost $500,000 for the quarter, too.

And it was $500,000 for the quarter. So that would be a couple of million dollars. I mean I could go through some other things. We didn't hit them all, but let me give you a couple of others for you to chew on. Our sheath business, our radial sheath business, what some would consider a legacy product, up 41% for the year. For the quarter up 50%. If we go to even our radiology catheters, things like our -- let me just go here and find it -- let me talk about our Impress catheter right up here -- we are up 36% for the year.

So many of these -- I could go through and give you a bunch of these things that are going very, very well, Jayson. We have lots of products up in the 20s. So we didn't hit them all, but there's a whole bunch of them. I'll give you one. This guide catheter that we're talking about that we're just going to introduce into the US, for the year, without the US, without China, up 27%. So I can give you a whole bunch of them. I've got a list of them. So when we're done, we'll talk about ASAP, Laureate, the Impress, we'll talk to you about all kinds of products to and including things like some of our legacy products. A simple diagnostic guide wire, up 25%, made in Ireland. So I mean you can go almost -- you get that 15% from a lot of these things growing and doing very well. So there's a whole bunch of them, Jayson. I didn't mean to not -- it was just an issue of time. There's a whole bunch of them we can talk about.

Okay, that's fair. That's helpful. I'll get back in queue and let someone else jump in. Thanks.

Shawn Bevec, SIG.

Thank you, guys. What was the cash from ops and the free cash flow for the quarter?

It was -- the cash from operations was a record. We were at $28.5 million basically for the year to date. If you subtract that $13.5 million or so, $13.6 million year to date, so it was over $14 million for the quarter alone. So that was the strongest report we ever had, I'm glad you asked me. I had forgotten to mention that.

And then the free cash flow? I know you guys have seem pretty big investments over the next several quarters with some facility build out.

Yes, we spent probably $25 million I believe in the quarter on the facilities that you're referring to. Oh, that's year to date, $25 million year to date. So yeah, there's -- so we spent it all basically on facilities.

But if I could just jump in there, one of the things we're doing is that we're consolidating for instance about 85,000 square feet here in Salt Lake City that's about ten miles away. We're consolidating into our new facility here. We're expanding our facilities in Ireland where we're adding 75,000 square feet. That's about a $15 million or so project that will be up and running in February for some of the products that we're talking about today that we need to have better growth capabilities. So we do have a lot of those capital projects. So we're spending a lot of this money Once we get done with this, hopefully we'll be able to slow down and then we'll have the capacity in place.

And if I could, and I'm sorry to embellish this, but 5, 6, 7 years ago when we built our molding facility, it could hold 64 machines. And I got quite a bit of heat for that saying, well why didn't you do half of that and do it later on? Had we done that, we wouldn't have been able to keep up with this growth. We're right now approaching probably 56 machines or so or 58 machines in there. But the important part is we can -- we'll have the capacity because we can go to capitation. And then with this new facility, we can move some of the insert molders out of there. So the investments we made before will help to leverage our business and our growth going forward. So we do have a lot of capital projects so there's no doubt to that.

Do you guys still have -- you have an open revolver that you can tap?

Absolutely, yeah. It's still mostly there. You saw the balance at the quarter was only $5 million, we still have $120 we can draw on it. And the banks offered us even another $100 million if we wanted it.

So we have $125 million in place, yes.

Okay. And then I just wanted to see if you guys had any thoughts on potential contributions from the acquired technology and products that you discussed earlier in the call.

Well the Centros catheter will be introduced in the late first quarter. And again, going back to the answer or to the comments I made, we're going through that forecasting part of it. But I think that it has the opportunity, along with other things coming down the pike, to build this dialysis, this chronic dialysis and peritoneal dialysis business. So not a huge contribution from that, not a huge contribution from the sheath business, because that's going to be down the road, a year down the road. And the vena cava filters two or three years down the road. So not a whole lot. The Centros will give us some revenues next year starting from both the legacy business that's in place. After November 28th, the prior distributor for the product can no longer sell it, so we'll immediately start to pick up some of those revenues. But we think that the product, I think, and Dr. Steve Ash thinks it's the best chronic dialysis catheter in the world. So we're going to go out and show people why we think it is.

What were those sales running at for Centros?

There about a half a million dollars or so. They weren't paying much attention to it. There's a long story here but it involves another company and I would prefer not to comment on their issues. There's plenty out there for them.

And then lastly, turning back to the gross margins, I guess the pressure in the quarter versus like our estimates and I guess some of the other street models, you mentioned price pressure and it sounds like mix from the lower cost catheter sales. Where have you seen the price pressure? And can you talk a little bit more about that?

Yeah. You've heard us discuss some of the things that we're doing in Russia, in the Gulf States and in the Balkans. And to and including there's a couple of other places where some lower cost inflation devices and those sorts of things, we decided that we didn't want them to get a hold into those market which we're expanding. So we went out there and were very aggressive to make sure we established what we think is a much better product and a quality product. But we had to meet some of those demands and they were going at essentially wholesale. So they were sold to distributors. And so they have to have a lower price so that when they get marked up that they're competing with these other products. We think what that does is that that slows down their ability to get into those marketplace that we'll be expanding with a more direct model. Kent?

The strategy is definitely working because those product lines in the quarter, the basic inflation device, was up 36% over the prior year and at 31% year to date. So we're gaining market share in these markets and selling more products considerably over a year ago even though we gave up a little bit in price than we did from the prior quarter.

Yeah, and if I could, we have a couple of enhancements or product price cost reduction benefits. One that will save us over $1 a unit in costs And Neal, how many of these are we selling a year, inflation devices? Ballpark. 90,000 a month. So there's over $1 million in savings from a new cost savings aspect, Shawn. And I can tell you that we have another product line that recently, that we're in the process of reducing and that one will bring over $2 million. So we have $3 million worth of identified cost savings moving into, as we move into next year. And it won't be for the whole year, but part of they year which is 100 basis points or so in gross margins just with legacy products. But with the cost reductions that we've put in place, over $3 million.

Okay.

And I think it goes to another question. We set a goal this year of having cost savings, and we do this every year. In fact it's part of our compensation package, of over $5 million. If we hit and finish the things that we think we will have by the end of the year, the cost savings going forward will represent over $9 million of cost savings. That's significant. That's the best we've ever done. And again, that's stuff that we'll see going forward, but that's 300 basis points or so, a little less than 300 basis points on sales. Now we won't get all of that in the first year, but it does help to reduce our costs and make us more competitive.

Thank you, gentlemen.

James Sidoti, Sidoti & Company.

Can you hear me, Fred?

Yes, we can, Jimmy. How are you doing?

Great. Well if sales are correlating to how fast you're talking, business is booming.

Am I talking too fast?

Can you just -- one more time on the -- you had 34% increase in catheter sales. Is that new products, existing products? Can you just break that down a little.

Yes. Let's see, first of all I think it was more than 34% -- I think it was more than 34%. 34.3%. I'm just having fun with you.

I used to be an engineer, so I'm not as fast as some of you guys.

I was having too much fun trying to be a clown, so Kent --

Well I mean there's some new ones. We had product line expansions in the Prelude area that are growing quickly. We have the ASAP which is brand new this year. We didn't have revenues last year in that one. Let me think what else is brand new, I'm probably forgetting something.

Okay, ask me another question I can talk fast on, Jim.

All right. Just remember, I used to be an engineer so I'm not as fast as some of you guys, all right? Capacity. Is that going to be an issue at this point or do you think that new capacity will be online in time to meet demand?

Yes, I am not going to have a problem with capacity. I would say that on the office side of things, we're kind of busting at the seams here and that will help that. But in terms of production capacity, I've got plenty of capacity with the new facilities in Ireland, I've got new capacity that I'm bringing online in our catheter business down in Texas. We have more capacity here. So I think what we're doing is we're putting it in place in advance of the need, but with this growth we're seeing, it's a good thing we're doing it or we would have big time problems. So I think we're in front of it.

A couple of other products that aren't brand new this year, so it wasn't easy to pick out, but they are new in our definition of the first two years would be the Maestro and it's really gotten a boost with the embolic, with the Valve One Step and it's going to have more because it had a pause for awhile and it's kicking up again. So we've got some other things in there that are relatively new and still going to have a growth to it as you look forward.

Okay, and then finally the vena cava filter that you took the in process charges for, is that an approved device with sales now?

No. It's a product that we acquired the rights from a physician who is an interventionalist. And it's a product that's going to take another couple of years, two or three years, to develop. But again, the opportunity there is a rather large market and we think that based on the project and our belief and the belief of our advisors, that this should be best in class. If we're right, you could be adding $20 million, $30 million, $40 million, 50 million a year or more in revenues at very high margins. If we're wrong, it's a $1 million charge that we just took. And some ongoing R&D spend. But what I'm saying is, the risk/reward ratio here is weighed very heavily in our favor.

But, Jim, I think it's another part of a very important question. And that is, that as this business grows, in order to build it to $1 billion, we're going to have to add these kinds of products that are higher risk, take longer to develop, and have longer regulatory trails.

But they do have higher margins.

But they do have higher margins and all those things that Kent loves. So we're just trying to keep Kent happy.

All right. Now the regulatory pathway, is it 510K or is this a PMA product?

It is a 510K with a study. And you're probably talking about 500 to 1,000 patients and -- 300 to 500 patients and the costs associated with that. But again, we won't go there unless --

And it isn't as expensive as the HiQuality trial per patient either. It's a different kind of trial.

That's correct. It's not a two arm, double blind, all that. So to Kent's point, not as expensive as the HiQuality study that we're doing on our HepaSphere.

Okay, and then my last question is related to that study. Are you full into that study at this point? Or do you think enrollment accelerates over the next couple of quarters?

Enrollment is accelerating. We added two new hospitals this last week. We had a little of a summer hiatus. We are treating patients and the study is moving down the road as planned.

So do you see a significant pickup in R&D from where you were this quarter or is it pretty minimal?

As we move forward, as that picks up, there is going to be that expense associated with the trial, yes.

Okay, so that's going to pick up as well.

Yes, and we'll get more into that when we give you guidance, but yes.

However, again, going back to the sales of product worldwide and the other approvals, we're also seeing that that's ticking up pretty dramatically in front of this trial. But this is outside the US and in the US. So we do have something to offset it, too.

Greg Macosko, Lord Abbett.

Yes, thank you. First I want to express my disappointment that China won't grow 100%, Fred.

You know, Greg, I work out here every day and I just can't make the mark for you. But I do like your bow ties.

Yeah. Well, let's talk a little bit about R&D. Would it be fair to say, Kent, that the 6% this quarter probably is going to creep up given the acquisitions, the asset acquisitions, the Ash and the other things that you've done there. Is that a fair point?

Greg, I'm going to quickly answer part of that. The Ash product line is an existing product with a couple of minor modifications. It's not going to require essentially any additional costs to us. The other products that we're developing are things that will get into the queue and will be part of that 6%. So we're not going to hire a whole bunch of new guys. There are some other projects that are coming off and going into production, so these will go in that queue. So these, the new ones, will be pretty well within the standard that we've talked about. Other than the expense associated with the vena cave filter that will require the studies and some of those things. But the sheaths and the chronic dialysis will be part of the -- they'll fit into the pipeline in the existing cost structure.

So as we already said, the trial will kick it up significantly next year and we'll get into more exactly when we're going through that process a bit. But it will be higher next year.

But I want to point something out.

That is kind of a one time --

All right.

It will never get there, Greg, unless our testing, our animal testing, of all those things, indicate that it meets the performance standards and the criteria that help us to be a market leader. If it doesn't get it there, you'll see the expense and we'll kill it.

Okay, could we talk about -- just so I understand what you were saying about the inventories -- I mean they are pretty, not down, but pretty good relative to your sales growth. You are comfortable in terms of your end products there that that won't impact end market sales?

I'm not sure what you mean by end market sales. I think we're doing a good job of providing the product on time to our customers and our safety stocks and production levels. I believe we have good controls on what's being built and that's why I pointed out that even though the inventory is up $6 million, less than half of that has to do with finished goods. And so the other parts of it are growing numbers for the products that are on the water between facilities. It's also in the WIP, it's also in the raw materials. So we're making strategic decisions at times to buy resins for a year's supply because we're changing and they're discontinuing We have to qualify them. Or sometimes it's just to make sure we have the on hand stock that our supply isn't disrupted.

Greg, I think that's a good part of that, but to answer your question, we're comfortable with our inventory levels. We get a daily report on any products that are backordered. We take a look at those numbers and even with this growth, we're staying at essentially the sale levels, customer service levels that we've been at, that seem to be in order to satisfy the requirements of our customers. And that is, we have to be able to ship these products overnight. And even if you take something like our embolics, you order them today, they're expensive, they could be $1,600. You could have a micro catheter that's $300 or $400. And hospitals don't let them sit on the shelf. They order them and they have to go tomorrow.

Good. Now with regard to the receivables, receivables didn't go up much at all and yet your international sales are growing a lot. I would expect those to go up.

Yes, I was really pleased we had our DSOs was down to 41 days which is about the best we've ever had. So our collections efforts I guess you could say, are excellent. Part of it, too, is like in China, that's actually paid in advance, so as our sales go up there, it doesn't affect our receivables.

You think you can maintain it though, Kent?

Maintain that level of 41 days? I think that's probably a good blip. It will probably go back to 42 or 43 which is more what I expect. But it won't be significant.

Okay, and then finally with regard to your discussion earlier about the traditional barriers falling, the gateways, what are we talking about here? Does that mean that you're able with some lower priced products or pricing some of the products down a little bit you're able to enter new accounts and then from there you'll grow? Give me some color there.

Well to give you an example there's a large hospital in New York, one of the largest in the world, who has been a user of these products for years. There's a change in the marketplace. Our sales guy has been in there. We get little bits and pieces. But all of a sudden the wall comes down, they don't want to do business with some of these other companies or they're excited about a product we have, and we get access to it. And then once we have and develop that and we deliver -- by the way, this very same hospital that we're talking about was a hospital that a year ago couldn't get various type of fluid delivery products and Merit came to the rescue. Well what follows from that? That is ASAP catheters, radial sheath products, hydrophilic guide wires. So this is part of I think, Greg, what's growing the business is that the traditional companies aren't paying attention to the areas of business that we're in.

So that's -- but that's a new account or maybe an existing account but a different product line?

yes, some of them are new. I mean I had one the other day with a sales guy who said I haven't ever been able -- it's been a long step account, I could never get in this account. All of a sudden they're calling me. And they get in there and they say, well gee, I didn't know you guys had this. I didn't know you had that. And next thing you know, you've got five docs in the hallway and it's like being in a candy store. It's a wonderful situation for us. And it's from the missed cues and the inattention of some of our competitors to their customers.

Okay, and lastly, Fred, I expect a copy of your expense report to Honolulu. Thanks.

I'll give it to you right now. I didn't go. And Greg, I actually think you complimented us two times. I don't know if they were -- I'm actually thinking this could be a first. He's tough. Greg, hopefully we'll see you in New York some time soon. Okay, let's -- anybody else?

Ross Taylor, C.L. King.

Just two short questions. I apologize if these were asked earlier. I missed parts of the call. But you mentioned some of the price pressures and I missed whether the US market was involved. And any price pressures in some of your product lines. And then second question is, I'm sure the amounts were small, but did you disclose how much you paid for the vena cava filter and the Ash catheter?

Let me go through and talk about the price pressures. We're not seeing a whole lot of price pressure in the US other than some of these lower products you see on catheters, the new ones that we saw that growth in diagnostic catheters. So that's essentially where the market is. Not as much in terms of price pressure. These price pressures that we're talking about are decisions that we're making to enter the market on a wholesale basis in various international markets to make sure that we establish and keep out competitor products that would be coming. So they're kind of a self --

They're capturing markets.

Yes, they're capturing market share. Kent pointed out the basics, it was the primary things. The sales were up 36% So we made a conscious effort to enter these markets to make sure that we were competitive with some of these lower prices And very candidly what I think are lower quality products. But to make sure that we establish -- these are things that we've self imposed ourselves to capture market share and to make sure that we establish and maintain our presence

Now the other part of the question I missed, so give me the last part of it.

I just wondered if you disclosed the purchase prices of the vena cava filter or the Ash catheter.

In the -- we didn't disclose that, but I'm happy to discuss it with you. In the quarter, as part of this expense, it was about a $1 million charge for the in process research and development for the vena cava filter. If we proceed, and this is at Merit's option, to various benchmarks along the way which include animal studies, human studies, submission to FDA and market release, there could be a payment if we do that in this product, of another $4 million over the next three or four years if we hit those benchmarks. If Merit decides, at its sole option, to move forward. If we see that it would be either too expensive, if we decide to sell it, we own all the intellectual property. So that's where we are on that. On the Ash deal --

You might just clarify, even if we don't spend any more money, we already own the patents.

So we own all the patents and all the intellectual property That came with the deal. In the Ash deal, I don't think we've disclosed that.

Then there's Fashell.

Fashell was about $1 million -- $2 million. That was because of an accrual down the road, so it was $1 million now and even though we're not paying it now, as we introduce that product, there will be another $ million. But we think that that marketplace, which we think has a product that is better, we have exclusive licenses on that technology and we also have the right of any future improvements or inventions from the Fashells come to Merit. So we have an exclusive on that and it was a couple of million dollars so that's about $3 million or so of the $3.4 million of the accrual, the one time R&D expense that we took.

Okay, that helps. Thanks very much.

Thank you very much. At this time I show no questions in the queue. Please continue with any closing remarks.

Okay, you were breaking up a little bit, but I think what you said is that's the end of the questions. Is that correct?

That is correct. You may proceed with any closing remarks.

So let me just say that first of all we appreciate the interest in the company. I have to say that I'm very pleased with our growth. We have a strategy, we have a plan. We believe that our international plan is solid. We have the experience of doing it. We have a full pipeline of new products and we have some game changers in that pipeline. We are putting some capacity in place for future growth and I think all in all that I'm pleased with both the growth, the new products, and candidly the folks that are sitting in this room. People are doing a very good job. We're engaged in a lot of opportunity.

I think that on the oncology side, there's a lot of opportunity there as we now come to the end of this year and that disruptive process, what we believe is a disruptive situation, starts to play out. Now we're already seeing it and that's part of what's driving some of that increase there.

So I think everything is in place for the company to continue to grow, for us to expand our gross margins. We look at things, as we pointed out in the call about cost reductions. We take a look at where we're investing our money. We take a look at new products and new opportunities and marketplaces. So we're doing what I think we've done well for many years. Is there room for improvement? Of course. Can we do a better job? Of course. We're trying to me wise in terms of where we spend our money and we have to make sure that we're getting the kinds of returns to continue to make those investments. If they're not there, then we don't do them. So it's not our way or the highway. It's can we continue to grow the business and do the things that will build this company into a premier business? I believe it is.

That goal of 50% gross margins, we haven't lost sight of that. We've come a long ways over the last several years. And a reminder that we're essentially on or at or above if you take a look at our revenues. I think we had talked about in the $3.41 to $3.50 -- looks like we're going to be up in that $3.60 range. So all in all, I think we're doing the things that we should be doing and we'll continue to work and to serve our shareholders to the best of our ability. We thank you again for your interest. We'll go ahead and sign off now from Salt Lake City wishing you a good evening and good night.

Ladies and gentlemen, this concludes the Merit Medical Third Quarter 2011 earnings conference call. You may now disconnect.