Merit Medical Systems Inc (MMSI) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the fourth quarter and year-end 2011 results and guidance for 2012 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). I would now like to turn the conference over to Mr. Fred Lampropoulos, Chairman and CEO of Merit Medical. Please go ahead sir.

Good afternoon ladies and gentlemen. This is Fred Lampropoulos with our entire staff assembled in South Jordan, Utah. We welcome you to the call, we would like to turn some time over to Rashelle Perry, our Chief Legal Officer to read our disclaimer, 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 and unanticipated events uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements.

Many of these risks events and uncertainties and other factors are discussed in our Annual Report on Form 10-K and other reports and filings with the SEC. To the extent any forward-looking statements are made in this call, such statements made only as of today's date and we do not assume any obligation to update such statements.

Although Merit's financial statements are prepared in accordance with Accounting Principals which are Generally Accepted in the United States, Merit's management believes that certain nonGAAP 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 on 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, we found that so interesting, and thank you very much, all of the joking aside, thank you. Ladies and gentlemen, we are happy to report our full year results which resulted in record sales and record net income. And what I think overall was a very good year. Revenues up 21% for the year, and up 12% for the quarter. The significance of the fourth quarter it was a pure apples-to-apples comparison in revenues, because of the acquisition of BioSphere took place in September of the previous year, and the fourth quarter of last year was the first fully reported quarterin our statement. So I am still pleased that in the environment that we are living in that we are able to deliver to you double-digit growth on a core basis.

I would like to go over the numbers with you briefly. We talked a little bit about these net sales, I want to talk about the fourth quarter where the non-GAAP income was about $7.4 million, or $0.18 a share. On a GAAP basis it was a couple of million dollars less than that, and one of the reasons for that is an acquisition of a technology from QX Medical which is a crossing catheter, that crossing catheter is being developed and finished here in our research laboratories, and we hope to have that product on the market by the end of 2012 sometime. It depends on of course FDA issues, and so on, so forth in terms of that timing.

This is a product that competes with a number other products in the marketplace. Basically used in DPT types and below-the-knee types of procedures. It is a product that we will manufacture as a mentioned here, and we are very excited about the opportunity, but as you are aware, when you make these acquisitions, and since it is a new product from a relatively small company then we are required under GAAP rules to take that as in-process research and development in the quarter. So Kent, did you want to just quickly comment on it. Did I hit that pretty well?

Yes. Pretty well, because it is not on market, it hasn't gotten approval from any regulatory agencies. It is still in the R&D phase. So it is in-process R&D at this point.

Okay. Also, I would like to focus on our gross margins for a moment. Gross margins for the fourth quarter were at 46.3% of sales. That was up 150 basis points over the previous year's quarter, and was also and I think very significantly up sequentially from 45.4% in the third quarter, and so we delivered an improvement of 270 basis points for the year. Now much of that was to do with the BioSphere acquisition and those products that helped us get there, but I think the important thing to note is I think that is exactly what we had promised, in terms of where we thought those gross margins would be. Kent, do you want to comment on that?

Yes. I was particularly pleased with the fact that is this the first quarter we had already passed up the anniversary of purchasing BioSphere, so those sales were in both quarters comparatively as was the Chinese step we took to go more direct in China. So to have it increase of 150 basis points with those two drivers annualized into both numbers was nice numbers. Thank you very much. Another really I think exciting opportunity and something that is really starting to come our way now, still a long ways to go, but as the result of our Endotek division, where sales rose by 51% in the fourth quarter, and I believe for the year they were up let's here, about 33%. And the exciting part about that is that division is making progress a little slower than we had originally anticipated, but we have some pretty major events going on here that again will help the entire Company.

They are as follows. We have a number of new products that will be introduced one which was just introduced just in the last week. And this is our new EndoMAXX esophageal stent, and this is a product with increased radial strength, and also overcomes some the shortcomings of some previous models, and it is one of those products where we actually have had people standing in queue to buy this product. So we are excited about what that means for our esophageal business, as well as progress we are seeing with our Inflation Device systems, which is as you know Merit's sweet spot, and when I look at some of the great university hospitals, and some of the larger hospitals in the country buying and reordering this product, it really I think speaks and bodes well for this division.

Another significant factor in this business. By the time we get into late second quarter early third quarter, we will be bringing on new manufacturing capabilities that will allow us to take over $2 million o on an annual basis of cost out of this particular division. Now think about that foray second. We are talking about a division right now that I think ended up the year around $12 million give or take, and we are going to be able to take $2 million worth of the cost out, which is somewhere around $6 million of cost or so, give or take, and when you think of that is a reduction in the cost of goods by 33%. That is extraordinary and that essentially puts with that put into the business. that essentially makes the business at breakeven. Everything beyond that point now starts to turn the business into something that is going to contribute to Merit's earnings as we get into the fourth quarter of this year, and as we move into 2013. And that is a big turnaround.

That is a turnaround of somewhere around last year which was around a $3.5 million loss to a loss this year which will be a couple million dollars, and then when you put this cost and the sales which we expect to grow at 25% to 30%, it is a very exciting proposal and we have worked hard to turn this around, and as I stated initially, as we move down the road this has the opportunity to become $100 million division given the time, and from Merit's perspective, and that perspective is always an eye on the short-term to understand what is going on but always making decisions for the best long-term interest of the business.

We are starting to get more and more enthusiastic about this opportunity. Now there are a few quarters of I am going it call it a challenge, but that challenge is becoming less and less, and I want to thank Darla Gill, who took this and was one of the founders of Merit, and took this division on, and it is not much fun when you are out there and you are the only division in the Company that is underwater. She took it on and she has done a great job. Been criticized often, and I think has stuck with it, and Darla we are grateful for your efforts in this area. Let's talk about some other areas, Kent do you want to add any color to that?No. It is great to see the growth. We can see most of it is in stents, in fact most of it is in the airway stent, they grew $2.7 million, or up 37% last year. With the exit of one of our competitors that really assisted in that, but we have a whole bunch of accessories coming along, balloons, and an inflation device, and other things that are really going to help to build this business.

So it is starting to come along, if we look at our whole business, and I don't want to single out Darla, because whether it be our domestic sales, our OEM sales, our International European sales, everybody I think did a very, very good job last year. It was kind of interesting that as we look at Europe our direct sales in Europe last year with all of the commotion that was going on over there last year, we are up somewhere around 28%, Marty, I think 28% to 30% direct sales in Europe. That is exciting.

We have been there for a long time, but I think that is the largest single percentage that I have seen in years, and that had to do with some management and some leadership issues, and some additional support personnel that we put in place, but we are excited about what is going on there. Our International dealers China last year, as you all know grew from about $10 million to about $21 million, and so all-in-all as we look at the business we look at gross margins, we take a look at the products, we take a look at the distribution and the models that we have set up, I think we executed the plan to the best of our ability, and it is something that I am proud of, and whether that is recognized or not, I suppose markets are so interesting as I look at values and how I look at how other people are valued, and I always think we are undervalued, and I don't think that Merit is valued as well as it should be.

That being said I will be on the road next week in New York. Kent will be here for a conference, and we have some very interesting things that we want to show you. We are going to talk about our guidance in a minute, but we want to be able to show you some of these newer products that are coming on, and kind of the transition that Merit is going through, moving again from the products which have been basically plastic, to more device-oriented products like snares, catheters, unique types of products, that have much higher gross margins. And I should also mention require more support. One of the things I think we learned and if we were to have maybe misqueued this year in any area, it was maybe our understanding of the support that it would take to support these advanced products, in terms of clinical support, of medical sales liaisons, and a number of different issues.

It is regulatory, it is also more requirements and marketing, shows and other promotional issues.

Yes. So it does take more support to these, but again we believe that as we move down the road that those investments, but I think it is important that you also know that one of the things that we are going to do is we have instructed our departments in research and in the marketing areas, and in operations areas that essentially we are going to keep our expenses flat from their existing levels.

Now we are going to spend a little bit of money which I will discuss with you in a minute in some expansion of territories and countries, but we are going to ask our staff to really do with what they have, as we then bring on these new products and these opportunities, and so if I were to look forward into this year, and again, I am already looking into 2013 and 2014, and I know that your interest today is to talk about where we have been for a few minutes, kind of where we are going to be this year, but as we start to look down the road here, and we see the opportunities, there is the belief of the Company that we are going to continue to grow I think reasonably robustly, maybe a little less this coming year than we did last year on a bigger number, but as we look into really some great new products, advanced products, in the latter part of this year, then we are going to see substantial growth I think into the mid-digits. The mid-teens, as we move into 2013. Kent, do you want to add any color to that?

Yes I would like to add a little color to the sales numbers, and just focus on those for a moment, to support the growth rate. It is a broadbased growth that goes over all our product families and groups, and for example catheters are up 24% for the year, and that is supported by a large growth like $3.6 million in new revenues in introduced receipts, 39% growth rate. Microcatheters are up 123%, and the ASAP catheter is another big contributor that is new this year. When we look at standalone devices, the [embo] was 15% growth, Laureate is a big contributor 420% growth beginning last year, it was up $2.6 million in new revenues. Maps are up 26%, manifolds 42%, Wires 21%. So we have got a lot of participation and many products growing, the Basix Inflation Device is pretty interesting. It is up 29%.

Ladies and gentlemen, I just want to point to something, we have an accountant getting excited about sales. This is a momentous time.

It is great to see across all geographies and product breadth that we are really seeing contributions there, and significant.

Thanks Kent, and then we appreciate your enthusiasm. A couple of other things that we want you to be aware of, as we mentioned in our press release we have a number of facilities that are coming online. We hope to have our new Irish facility online in the next 60 days or so, for a number of new projects and opportunities in Ireland, and we are excited about that. We have the facilities here in Salt Lake City that are under construction that we expect will be finished late this year early first quarter next year, so within about a year from now, those will be up and running and we are going to consolidate facilities that are away from this campus, into this campus, and so we hope to bring that utilization up as quickly as possible, and I can just tell you that there will be tremendous efficiencies literally.

We can take a plastic part, a molded part, you can assemble it in our automated equipment, take it onto the floor, combine it with other products, package it and send it out the door, all in essentially a straight line. And those are exciting opportunities for us to help to decrease the labor costs, and increase the efficiencies in those particular products lines. So we are looking forward to that.

I want it talk for a minute before we move on to next year, but I want to talk a little bit about something that we didn't talk about in this press release, but something that you are certainly aware of, and that is our FDA warning letter. I am sure that there will be questions. Let me just address it straight up, and that is that we received a warning letter after an inspection. There was about a four month interval between that. It was for some changes and modifications and processes, and the FDA felt like we should file another 510K. We have responded as required statutorily to the FDA, and given them a plan of action that was filed with them yesterday. It was on time, it was complete, it was concise, and I think it is a terrific plan. We will file a new 510K within about a week. So we hope by the first of March we will have this filed.

Now one might say why are we able to do that so quickly and the answer is that all of the changes that were made were processes, and these are what I consider to be minor changes, were all validated. These were all things that went through testing went through all of the things, and based on our assumptions at the time it did not require 510K, but the final say goes to the FDA. We want to be compliant with that, so we will file this, and we will file it as a special 510K, which we believe requires a statutory response in 30 days.

So that is where we are on this, we continue to ship the product, with which we think these improvements that were made make it a better product, and we continue to ship this product all over the world, except into the United States or from the United States. So we are still shipping it in Europe. That business continues to grow there. It is now starting to sell in China.

We are selling it in a number of markets, and hopefully this will be a period of time where we will have learned, we will have done the things that they have asked of us, and it will be behind us, but I think it was kind of a wake-up call and for everybody, that there is a new day, and there are new regulations, and there are new views, and we want to make sure that we are compliant with those, and I think I am speaking now not for or on behalf of the medical device industry, but we live in changing times, and we want to be able to adapt, and we shall do so according to the rules of the game. So we will answer additional questions if you want as appropriate during the Q&A period. Kent, do you want to add anything to that at all?

No.

Okay. Thank you. So I would like to talk a little bit if we could for just a minute or so, on where we are in the process of expansion. So I shared with you a moment ago that our plans are to pull the line on expenditures in, let's say engineering, operations, marketing, and so of some of those areas, while still growing the business. At the same time we believe that there are substantial opportunities in India, Brazil, Russia, the Balkan states, and China. Essentially the BRIC countries, and I think we--

And Italy.

And Italy, I am going to get to that in a second. These are on the distribution models where you will recall that what we did in China, is that we setup our own distribution system, our own warehousing, our own finance, regulatory and sales support, and I think right now we have somewhere around 30 to 35 employees in Beijing, all Chinese nationals, it was so successful that we have decided that what we are going to spend our money on this year is setting up the business in India.

So in India we have been doing business there for years and years, but essentially it has been flat. We expect to triple our business this year in India. Going from about $0.5 million to $1.5 million, but more importantly as we set this structure up similar to what we are doing in China, we expect that it will move to $5 million in revenue over the next few years, and so we are going to go from $500,000 to $5 million in India in a relatively short period of time. However, whenever you make an investment like this can it costs money, not a not of money for the return that we will have, but it is money that we are going to spend.

We are doing the very same thing in Brazil. We are doing $4 million or $5 million in Brazil now. We expect to do a lot more in Brazil and I am talking about $50 million down the road, but in order to do that we have to control the licensing process, and we believe with the market slowing down in the US, I read a report today that talked about interventional procedures being down 1% to 2%, pick a number but there are places like India, China, Russia, Eastern Europe, that are all growing very, very rapidly, and we want to make sure that we do not miss out on those opportunities, and we continue to establish our name in those locations.

So we have hired a country manager in Brazil, I think that is the only person at this point, we may have one support person, Joe, one other support person, but this will help us to control the licenses, and the processes that go on in Brazil, and in fact we have already received probably six or eight or ten Merit licenses that allows us to sell our products that heretofore we did not have. And in the Balkan states we have hired an area manager there, and also in Russia, where we think our revenues are going to grow more than double this year in Russia.

So we are spending money in those areas so there is a short-term cost to that, but we think of course the returns off of that, not only this year but as we move down the road are going to be very dramatic, I am not going so say they are going to be exactly like China, where you double your business every year, in terms or at least go to $20 million immediately, and gain $10 million, but incrementally this International business is going to become more and more of an opportunity for Merit. We have the device packs, and these other things coming, and these things are exempt from those device taxes, and these are the places where they are growing, and these are where the opportunities are, and we probably in a very, very good position, not probably, we are in fact in a good position to go out and take advantage of that. Kent?

Well, they are definitely high growth areas for medical devices, and particularly in many of these markets we have a long ways to go on market share gain, so I think we can gain market share in a market that is growing rapidly and those two combine to be a great investment long-term.

And there have been a bunch of changes in the business so if we take a look for instance at Cordis, we take a look at some of the acquisitions that Medtronics made and some of the holes that left, there are a lot of opportunities in these International markets. I think our International sales last year were 36% or 37%. We would expect that those will move closer to 50% over the next couple of years, as we continue to invest in those markets, and build our business worldwide.

A couple of other things and then we will talk about guidance, and then we will only it up for questions. OsteoPro, this is a product that we acquired. We are out there, we have trained, and we are doing essentially a soft launch over the next couple of two to three weeks. Why we are making sure that we get our inventories built and our support in place, but what is amazing to me is every physician, every interventional cardiologist that you talk to, is relatively quick to say this is a problem.

In fact, to quote a physician yesterday, he said this will save me a stent on almost every procedure. Now that was his statement and he is a well known physician, and so what this does for Merit is to allow us to interface again with physicians, and as time goes on those become more and more of where our selling point is versus let's say the cath lab supervisor, and others who are managing labs. Now we love our cath lab supervisors, and I certainly don't want to diminish the importance and relationships we have with them, but in the long run, the relationships with the physicians I think this is also being driven by our embolic products.

We expect to have another embolic product on the market this year. We have other embolics that we are working on, and some that we are looking to license. So we think there is a lot of opportunity here, and the disruption also caused by some changes in distribution patterns, and acquisitions creating more opportunity. As an example, in the sales last year of our spheres that are drug loading, they grew last year I think it is somewhere around what this were around about 150%, 200%.

For the year yes, but that is not a good comparison, the fourth quarter was 44%. We didn't have a full year to compare it to.

Okay. So at 44% in the fourth quarter just on our drug loading embolics and our embolics for the fourth quarter were up 15%. So all-in-all I think we have the right types of products, and the right types of opportunities, but the Company is a Company in transition, and which we are really spending a lot of time on these higher margin capabilities. Now in addition to the BRIC countries I talked about we are going direct in two additional European countries this year, and that is Italy and in Norway. So as to plan essentially what we are doing, and I will be happy to argue this with you if you would like to, and that is we are spending our money on sales, and we are holding the line in the operational categories.

And that is where we think the opportunities are, so we are continuing to hire sales people, we are continuing to look at International models and continuing to move forward in terms of some more direct countries in Europe, and I believe that there is a lot of support for this historically with other companies. I really go back to Thomas Watson at IBM when everything else was going to heck, and everybody laying people off, and consolidating, he was hiring more sales people, and ultimately of course as long as you manage that, and don't let it get out of control, now we are not talking about a lot of folks. In the US we are going to hire eight new sales people this year.

We have a lot of new products, and we need to, we have got territories that are too large, and we want to be able to take advantage of that. So he have with the eight in the US, we have these countries that we are investing in, we have hired three new Endotek sales people, and we are going to go direct in Italy and in Norway. That is where we are spending our money. It is where I think we should spend our money in this is a taking Merit's full bag of products, and then go out there and make sure that we have feet on the ground, face-to-face with customers, in opportunities where we think there are a lot of voids and challenges, so we are going too to fill those voids with our products.

If you look at our catheter sales, you will see that those are up 25% last year, and those are coming directly from other competitors, who have either dropped out or had disruptions, and even though some of those are lower margins, they still help us to sell these higher margin products. Kent.

Well, I just wanted to comment on the OsteoPro, that I think it is one of the best tuck-ins that I think we have done. I think we bought it right I think what is exciting about it is that it is a unique product, it is well patented, and there is no competitor to speak of.

Yes. Well, it is a great product, and it is really fun when you sit with a physician, the light goes on immediately, and then they start to open up and tell you about how they would use it, they are selling you, and that is always a great thing with a product.

So I think that pretty well wraps up the things that I wanted to talk about in terms of the growth, the new products, all of those sort of things, and I want to move on to just very briefly now, and we will discuss this with you is our guidance for 2012. So we are going to set a range of $392 million to $402 million, which is a 9% to 12% growth factor, and we believe that based on our current understanding and the GAAP rules, that would put us in the range of $0.55 to $0.60 per share. Now that would be about a 10% increase in our GAAP net earned income over last year. However, as you all know, we had an offering last year that diluted the shares of the Company by 15%. So on a net earnings per share basis because of that dilution, we are going to with a 10% increase in income, but a 15% increase in shares then you are going to have lower earnings per share.

It is $0.01 higher.

It is $0.01.

Pretty flat.

Okay. So it is flat. And so we will continue to fight through this dilution. We think it was important that we had that money to put us in a position to take advantage of these acquisitions, and these opportunities. Kent, I am going to let you pick up and then pick it up from here and talk about the non-GAAP.

Yes. Non-GAAP is interesting, too, because this year we don't expect to have based on our model at this point, some things could come along and change that, if we have some deals that we are working on, but without those that is what we have to assume in this guidance, is that we are going to see less nonGAAP adjustments than we have had in prior years, in the past year. So our non-GAAP numbers is part of why we have lowered those numbers to $0.67 to $0.72, as a range for what our earnings will be so with the investments we are making in the sales distribution, and those things that Fred has already discussed with you, and holding those constant, we believe that non-GAAP earnings will actually be a little lower than last year, as we are investing in the future.

Okay. Now, and then finally there are numerous opportunities, as the old saying goes, we can do anything but we can't do everything. We see the industry consolidating, we see a lot of the smaller players unable to really be sustained with the sales and marketing costs and regulatory costs, and we are seeing some great ideas that show up. We are looking at them. We have a number of opportunities in front of us, and we will continue to look at these opportunities that will help us build this, and build into our strategies. Kent, you want to comment?

Yes I do want to comment for both the GAAP and non-GAAP, we have a large expense that is different this year, we have talked to previously about it, but it is a clinical trial to do the high-quality study. And that is going to be important in the future as we have discussed, for being able to really enter the market in a big way, and have data to support the sales effort as they take market share basically in this important liver trial and liver market. Cancer market. So that is going to be a higher expense it is one of the big reasons why our GAAP earnings are lower, or are only up 10%, and that doesn't come out in our calculation for the non-GAAP.

Yes. And let's just discuss it. So I think in our financials this year, Kent, we had what was it $3.5 million?

$3.5 million.

$3.5 million of expense in that area. Now I had some investors say to me do you really need to do the trial. Well, let me tell you what our take on this is. We could stop the trial or never have started the trial, and over time with a disruption in the marketplace, and the things that are going on we could probably grow this business to about $10 million, and that is 90% gross margin business. It is a nice little piece of change. On the other hand, with the trial and candidly with the support of many physicians, who appreciate and some who have said this us a landmark trial, we believe that we can grow that business to in the range of $30 million to $40 million a year, or more. There is precedent for that. The market for this cancer is growing, it is not declining. In fact, there was a study that came out and talked about Hep C recently, which is kind of a part of this whole deal, and how what an epidemic that has become. In fact, it is a killing more people than HIV.

So this was a study, some information we read just this week. So the question is, is if you can grow a business from $30 million to $40 million, let's just take 30 and you are going to spend $10 million to do that over three years, versus being able to get $10 million we believe that money spent along with the pull through Kent discussed, microcatheters, guidewires, and the relationships we have that pull through all of our products, we believe that investment which is a current expense. is well worth what we believe is a long-term opportunity for a substantial increase in gross margins and profitability. And that is the decision we have made, we sit around and ask ourselves, are we doing the right thing. We sat with our sales people, we said guys tell me the numbers, let's look at the expense, let's look at these things, and we have concluded that we should not only proceed, but that it is an important part of our strategy for the Company.

When it is all said and done, we believe that we will be the only company that has an indication for use of a loadable sphere with Doxorubicin. That is significant. Nobody else will have that. So that continues to be our focus, and our rationale behind that expense, but that is more money than we spent last year. It is a current charge, but we think that it is the right type of investment to make for the future.

So let's summarize if we could then our guidance, and that is that in terms of gross margins we expect that this next year we would hope to add about 150 basis points to our gross margin, and we are starting to inch up towards that 50%. That is at least our short-term goal now over the next couple of years to get there. The GAAP and non-GAAP is printed and available to you. You can see where the SG&A is and the R&D which we are holding. In this, you have and we are using in our mode, an interest cost of about $1.1 million,an effective tax rate of 33% in our model. So, Kent do you want to add anything more before we open up the line?

Yes. Just a general statement on the range of SG&A is 30% to 31%. R&D is going to be in the range, the standard R&D without the trial of 6% to 6.5%, and the clinical trial is again about 1% or so of the cost of sales. Also we do a have a known cost of $1 million for in-process R&D that we are going to be paying later this year, but we should probably put in the models, too. That will be it is a non-GAAP expense one-time type expense, but it is in our GAAP numbers as additional R&D cost.

Yes. Okay. Alrightthen. Thank you, Kent. Okay. Well, I think it is time we open up the lines now and take your calls. So operator we will go ahead and turn the time over to you, and let you queue them up.

Alright, thank you sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Larry Solow with CJS Securities. Please go ahead.

Hi. Good afternoon. I was wondering if you guys could just maybe better frame sort of the higher expenses?I get the R&D piece of it. Curious if I just plug in 30% of sales, basically your SG&A is going to go up roughly $20 million or so give or take. Any way to sort of put in buckets, or whatever number you want to use on a percentage basis, how much is going into these different countries, towards the long-term investments and how much more is just in general marketing and current stuff?

Kent you want to answer that?

Yes. That is really spread over a lot of areas. We are going to add to where we are at year-end is $2.5 million in the US, and Italy is another $1 million, and Brazil, and you can go down the list of $1 million to $1.5 million for each of these countries.

Right.

And you will get to numbers that are $7.5 millionor more above the levels that we are running at right now, so when you take where we are at now, it is $115 million or so, and so you are getting up into the 120s like you talked about.

Larry one of the other things that we find with these, for instance with the embolic products, there are shows like the ECIO, there are shows like the [Searcy], these are European shows, there is the SIR Meeting, which is the Society for Interventional Radiology, which is coming up in March, there is the GUEST meeting, which is the Global Embolization Meeting in New York in May, I could go on and on.

Okay.

And these shows are very, very important to have, because all the key opinion leaders are there. So one the other areas, and it's been a little bit I am going to say a bitter pill for us, because we have been so conservative on this in the past, but the problem is that all of our competitors are there, and if you don't show up, and you don't support those shows, and so there is a cost to doing that, and I think that is one of the things that a PCR would be another one in Paris. So there are these shows that really require presence it costs money to do them, and it is part of this, just another one of the factors that go into this in addition to the headcounts that are going into these areas.

Now on another side of this I think it is important to note that we look at these budgets, but as we go along we don't fly blindly. We go through with we see how we are perform in, and our sales guys get a certain amount of dollars that they can spend and they strategise, but they have to deliver against those, and we look at them, and they are likely to be spread out over the year, so we essentially take the full expansion show it to you for a year, but if we hired all of the people that everybody has put in, that we essentially have said that we will put in the budget, most of them you wouldn't even have them even all lined up until probably October of next year, or later on this year, so we kind of load them up, but the fact of the matter is they kind of get spread out during the year, and we monitor how we are doing along the line, if we get out of sync anywhere along the line, then we go ahead and adjust, so we are pretty nimble, but where we really feel strongly, like for instance you have got three sales people in the Endotek area.

So here is a division that is losing money right now, here is a division that because of some ability that we have to with our new vendor to take a couple of million dollars in the cost of goods of that division, helped essentially bring it to breakeven, so one might say well, then if you can bring to breakeven, why would you hire three new sales people, and the answer is we have four or five new products, it takes about six months to train somebody and get them up to snuff or longer, and we only have 14 sales people covering the entire country, and so we have to meat this out at some level, so that we can continue to grow and take advantage of the opportunities. Now some might challenge that judgment, and say well, get all of the products out and then train them and then you can argue the opportunity cost, but I think that is the best way that we can go about answering your question.

And then just a follow-up to that. So in terms of all of this hiring, is this something that will continue? I mean I know this repeat question sort of gabble with every year, or last several years at least, but you are talking 30% of sales for 2012, and I understand you are sort of investing ahead of a lot of multiple product releases, so it only seems like a high class problem, but looking out over in 2013 and 2014, and without getting into exact numbers would you expect, do you target SG&A to begin to come down, and when can we start seeing some leverage in the business?

Yes. I think where we are going to see the leverage and it is a very good question. It is one we get asked all the time, if you take a look at least as we have looked at and modeled out some of our competitors, that I will talk about angio, and I will talk about Vascular Solutions, and others, you will see that they have run at around 28% to 30% in that range, but they don't have the International markets that we have. Now I am not trying to disparage them in any way. I am just trying to explain in these International issues, and with these product ranges with our growth rate if you take a look at where we are growing, we think that these expenditures are justified.

At the same time we understand that in order to add value and to increase stock prices you have to show this leverage. We understand that, some of you might say well they say that but they don't really understand it. Here is where the leverage really comes. It comes in the ability not just between the lines, but on an earnings-per-share basis is our ability to grow the business and increase these gross margins. In all of the products that we are talking about where we are putting all of our emphasis, you see products that range up in the 60%, 70%, 80% range, and we have already seen over the last couple of years, that we have brought things on like the snare, and these type of products, or like BioSphere, and these have been acquisitions, but even some of Merit's internal products, where these are adding to our gross margins.

OsteoPro is another one.

OsteoPro is another one, that is about an 80% gross margin product. So where we leverage the whole thing to get down to that bottom line, where it is an earnings per share capability is to grow that top line, increase those gross margins, while trying to hold the line, on let's say research and development and sales and marketing. So essentially this year R&D wanted more money and we said no. Marketing wanted more money. We said no. But on the sales side I said yes.

So I am the guy that you can look at, you can disagree with me, but as I indicated I think if we put the sales guys in place, that what it is going to allow us to do is to grow in the mid-teens, when you will see that the industry and as you have the tax come onboard, and all of these headwinds that are coming for the medical device industry, we are going to have to fight through these things next year. And if you are not investing in these areas now, or you are pulling back and then I think other companies if they haven't made the appropriate investments are going to be having a lot of difficulty in trying to show top line growth, because they are not going to have the horses or the products, as they try to make up that. I think we can blow through that, and that is really what I am planning for, is to say if I invest this now as I see those other costs online, I am going to be able blow through them with the momentum and the opportunities with these new products we have. That is my plan. So your comments are fair, and I appreciate them, but I hope that you will consider kind of our strategy for the next two to three years.

Absolutely. I mean I think as a long-term strategy, I agree with it 100%. Just two quick follow-ups, and then I will move on. Just on the gross profit on the margin expectations sort of the 150 bip increase, is that off of the GAAP number or the non-GAAP number? Is it a non-GAAP number is more like 47, and the GAAP was 46 in 2011, right give or take?

Yes. If you take the amortization out of it and we haven't been reporting that, but I can report those numbers for you if you would like, that was a GAAP number, although it should translate in both of them as far as the change. In other words.

Right.

The increase of 150 in the range would be in both numbers as far as their delta. (multiple speakers).

Right. You will still have amortization coming through anyhow next year?

Yes we will. In fact it will increase a little bit, in fact OsteoSolutions is going to add, we haven't finish the valuation, it is so fresh we just got it done less than a month ago, or about a month ago, so we are still going through the calculations of those, but we are something like $1 million more in amortization split between the various categories.

Got you. Then R&D is 6% to 6.5% plus the $3.5 million correct?

That is right.

Okay. Great. Thanks.

Okay. Thanks Larry.

Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please go ahead.

Good afternoon. Can you hear me?

We can, James.

How are you today?

We are doing fine.

Alright. Let's talk a little bit about the facilities that you said you are expanding now. When do they come online, and how much more capital expense do you think you need to put into those?

Let's talk about Europe. This is Ireland and that will come online sometime around the end of the first quarter, early second quarter of this year. So that is heading this way shortly. The Salt Lake facility which is the big one, is going to be online and some time in the early first quarter of next year. The other facility is a facility in Texas, and let me kind of go behind the rationale on the Texas one. By the way, on the Ireland, it is just simply expansion about 35% of Merit's revenues come from products produced in Ireland. They are swamped. They need more space.

If we look at Salt Lake City, you will recall that we have a $14 million EDA that we lose if we don't build. That goes as a reduction of costs as to the incremental property tax. It goes into the cost basis of the project, but we are still at 50,000 square feet or 80,000 square feet, five miles from here, and 50,000 square feet two miles from here, facilities where we are running back and forth, that we will look to consolidate in this particular facility. And we think we will be more efficient in doing that. Just those two facilities alone, and plus we don't have any office space, we don't as we have planned over the years, Jim, we have planned for about five years and we have built these other facilities about five years ago.

Let me move to Texas. We got hit with Hurricane Ike. It hit us about five years ago, blew the top off our building it almost put us out of business on those products, which are a very important part of our growth. We moved part of those products to Salt Lake City, but we are sitting in a strip shopping center built in the late 1950s/early 1960s. And I want to be on the call when something comes up the Gulf, and blows it down next year. We have dodged a couple of bullets down there.

We decided we need to move it inland, we needed to go with a tilt up, and we will be moving our catheter manufacturing if you look at our catheters on our charts here, and you will see that's one of the fastest growing areas of our business. These are advanced catheters as well. These are guide catheters, microcatheters, and so on, and so forth. That will come online probably either very, very late this year, or early next year. So you are going to see a lot of expense this year coming into these things, but in the mean time, I believe that we are going to have essentially a blow out year as we start to come into the last half of this year to next year with these products that we have. We are also bringing in-house, Jim, to fill these facilities some manufacturing that we are having done in other locations. I won't go into those specifically, but there are a number of areas where Merit has work done, and we think we can build those products here, particularly if we have the facilities to do so. Kent you want to talk about the capital?

Yes. We expect to spend in facility expenditures this year, cash flow wise about $30 million, roughly $30 million to $35 million where we go out to finish those projects, a little bit will hang over into 2013 retentions and the last straggling invoices and stuff from those, from Texas and from the Salt Lake project, and that will complete them all of those that we have talked about.

And that $30 million is now from I assume about $48 million in 2011?

No. 2011 we spent well, it was about $30 million to $35 million this year as well on facilities.

The bottom line is by the time we get through this year, most of those expenditures will be completed, our EBITDA this year I think is about 61.5 or 61.2, and then it will be nice to be able to start to generate cash flow to pay off this debt, unless an opportunity comes along, and we still have plenty of facility left already in place as we speak, so from a financial point of view we have plenty of operating room.

Alright. You have spent $37 million so far this year through the first nine months?

Well, that would include equipment, too, though. Are you looking at all CapEx?

Right.

Yes. So when you look at the whole thing it's like 59, yes. So you have got $28 million, $20-ish kind of million in equipment, and then you have another $35 million or $37 million or so in the building stuff we have spent.

Okay. So that $20 million is kind of your steady state level?

Yes. It will be yes it was like $18 million the year before and $16 million the year before that, so it has been ticking up a little bit, but that is our core maintenance, it is new products, it is new tooling, it is capacity increases in specific product lines.

Automation.

It is automation and cost savings programs that we bring in new capacities in tooling and other areas.

Okay. So 2012 will be another higher than normal year because of the new buildings, but then you think you come back to that $20 million level or so in 2013?

Yes and I expect as we grow it will keep ticking up. When I did a model for the bank I said it would be $20 million this year, I said $22 million the next year and I said $24 million the year after. That is kind of my guess as to how that will fill out.

In terms of the overall capital it will reduce substantially, and we will be okay for three or four years, and we hope we have the same problem four years from now.

From your comment we plan these for five year intervals, and we have been able to do that, we double our Company in about five years. That is what our growth rate has been, and we do vertically manufacture most of our products, so we have to provide space for the storage of the inventory, the production of the products, as well as the administration sales marketing and research and development. So we think in five years there will be time for more, someplace in the world more facilities.

Okay. So you should generate some free cash this year, maybe not what you did in 2010, but you should have some free cash flow in 2012?

Not after all of the building costs. My definition of free cash flow is after CapEx it wouldn't be. We wouldn't have any.

So you would have another year with no, okay.

Yes where we have to borrow some, yes.

Okay. So any future acquisitions that you do in 2012 would come off the line of credit?

That is correct.

And how large is that line right now?

We have $125 million in place as we speak, of which we have used about $40 million, so we have about $85 million available. In addition to that we have looked at an opportunity not long ago in which we went to the bank and just said what would you do on this deal, and they offered us another $125 million.

It was a firm commitment in three days.

It was a firm commitment in three days. We don't do the deal but we have, we are very bankable.

Alright. And then how much more can you handle right now? I mean between the building the direct sales forces, expanded capacity, are you really in a position where you can handle another large acquisition over the next nine to 12 months?

It is funny you should ask that, Jim, because I am looking over my entire staff that is sitting, I have got 30 people sitting in here, and they all are smiling at me right now, saying what is he going to say, and the answer, I will tell you one of the most difficult ones we did was BioSphere, and that was because it was a different type of sale even though it was at the same point of sale, it required a whole new set of skills. It depends on the type of business and it depends on locations or facilities.

I mean if we were going to do something like the OsteoPro or the snare, I think those are things that tuck-in type things that are very easy for us to do. When I say easy, these guys work hard, but they are very successful, and we are pretty well-versed. I have my COO over there, and he is kind of laughing at me right now. So we have to pace the unit, but we put them through regular calisthenics, and they are pretty good. It was a larger one we have to make those assessments, and look at those things, are from larger opportunities out there? Yes there are.

So we have to measure it up, we have to run it by everybody is this something we are capable of doing, and this window of opportunity that I have been talking about for the last couple of years isn't going to be open forever, but I think over the next couple of years, at least two more years, especially the device tax, and some of these headwinds that are coming at you next year, I think in may be the most opportune time, so we have to be selective, but there are going to be some great opportunities here, Jim, and I think he just have to be wise in our selection.

Alright. If I look back to you did $0.63 of EPS in 2009, and you will do about $0.60 or so this year, and it sounds like you want to continue to make investments. At what points do you really think you will start to see the leverage in the business? Are we still three or four years from now or--?

Let's see. I think the answer to that is that as we see this year, if this staff will hold on to their expenditures, and they will, and we start to move and bring these products online, if we see that is one of the staff. They just kind of went kabunk on that phone, but we are probably going to be here in this 30%, 28%, the big key for us is to move this gross margin line is going to be the biggest effect, because as you move these advanced products down the road, Jim, it is pretty hard to say that, you can't sell them without those capabilities of having that support in place.

So anyway we know what we need to do, but at the same time we are always pulled and tugged as to where you make those investments, and you want me to make more money, I can make a lot more money. I can start cutting staff, I can cut a bunch of things, Jim, and I can be a hero, I mean for about a year. Then I am going to be a bum. So right now I will be a bum, but I will be a hero six or nine or 12 months from now, as you are saying I am the only guy in town that is growing, my gross margins are growing, we are holding the line on those other things, and you are going to love me again.

Alright. Fred, I still love you now, just so you know.

I am coming to town, Jimmy.

Alright.

Next question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Hi. Good evening. Thanks for the question. I guess, Fred, when do you expect to get a return on this investment, in terms of kind of the various initiatives in Brazil, India, do you expect kind of a bang in 2012, or the real return from a top line perspective is more 2013, 2014?

I will tell you what. I'm going to put somebody on the spot, I could give you my answer, but they are sitting in the room so,Mr. Wright, these are your investments, these are your requests. You are now sitting on the hot seat.

I think in India we will see an immediate top line return in 2012. Brazil it will take a little bit longer,probably more into 2013.

So as I mentioned during the call, Jim, we expect that we're going to more than triple our sales this year in India, and that we think over the next couple of years beyond this, that business will grow to better than $5 million. This is from $500,000 to $5 million in let's say three years. Maybe it is 3.5 years, but those are pretty significant. And one thing about India, you don't have the high expenses like you do in Brazil. So we chose that one we are up and running we have got a guy that is working for us over there with experience from Smith's Medical and Boston Scientific. He has done this before, and we are actually already starting to see those returns. I expect by the time we get through the first quarter/early second quarter we will already have surpassed the amount of sales that we had last year. So that will move pretty quickly.

Brazil takes a little bit more time. It will be a little bit more like China. You have got theregistrations, but the positive thing about Brazil is that we already have eight or ten products that have been approved, but I will tell you that in many ways Brazil is,how am I going to say this,a little adverse to imports. We are doing $5 million there, but there are a lot of barriers out there. The only way you can break them down is with a presence. I can tell you that we won't grow the business in India, won't grow the business in Brazil, won't grow the business in some of these other locations, if we don't make these investments. It will just be the same. If you take a look at India it has been flat for the last three years, so a relatively small investment I think can yield a very, very high return.

And I guess in terms of doing it all at once versus a little more methodically, are these all I realize obviously you want to be everywhere, but are these all the countries that you want to be direct in, or is there going to be another traunch in 2013 and 2014?

Well first of all I think we are doing it methodically , not all at once, and we have planned it out, we have looked at the numbers, we have gone through I mean it is not just thrown up on the wall. We spent a lot of time looking at this and looking at the numbers, looking at the challenges in these markets, and if you take a look at where the growth is, I mean we all read the same journals, we all know where the growth is in the world, we know what is happening in the US market. We see those opportunities, and again, let's just review what we are talking about here. So in India we are talking about a country manager, we are talking about two or three sales people and we are talking about $30,000 to $40,000 a year. Am I

Maybe even a little lower.

Maybe even a little lower. I think you said 25, and so you are talking about that in offers. So you are talking about a situation where you are going to spend maybe $0.25 million, let me just look at it here. Kent just handed it to me. So in India we are going to spent $482,000 overall for transporting product there, a small warehouse there, setting up the sales people, but we are going to get $1.5 million in revenues, and then that same group then is going to grow with very little increase in costs the following year to $3 million. Now, Jayson, if you could spend a $0.5 million to get $3 million worth of revenues, or have it do nothing and be flat what would you do?

No. I understand that. I guess then it begs the question, your SG&A is going from let's call it 28% to 30%, which is let's call it --

29.

Sorry?

I was just saying it is 29% to 30%. It is up 1%.

Okay just sort of clarify that 30% is a GAAP number?

Yes.

Okay. Okay. 29 to 30. Let's call it an additional $7 million, $8 million maybe it is a little less than that, but where are all the incremental costing coming from then if it is not from India?

I will go through it with you, okay let me just give you a few of these, just to give you an idea of where we stand. So we are going to pay spend, I will round it off here to $500,000 in India, we are going to say it's about $1.1 million in Brazil, which is one of the largest opportunities in the world, in Norway $198,000, in Sweden $195,000, we could pull that one out, but then with $195,000 to add another salesperson there, and with the three sales people we have handed in Endotek about $260,000 there, but the big costs comes in the US where we are spending about $2.5 million, to hire eight more sales people, and the reason that we did that, is that we looked at the sales territories, we simply found that we had some territories that were just simply too large, and not producing because you had one person covering a large geographical area. Marty do you want to go ahead and jump in on this, because I want to put you on the hot seat now, these were your recommendations, but kind of tell us what your thoughts are on this US sales force?

Yes. We actually have tremendous potential we believe still in the United States. We did an analysis of the sales force, and found out when you stratify based on procedure counts, and sales territories, there was little or no differentiation between the total sales and the sales territory, with a third the number of opportunities than the larger territories, which tells me that we actually have capacity if we have the financial resources to almost double our sales force. So what the intent was, is to just kind of do a manageable number. We had eight or ten sales territories that were significantly large, so we decided to try and take about seven or eight of those this year, and grow into those. So we believe that there is still significant opportunity in the United States. If you have looked at all at the US growth rate, we ended up last year growth in the United States of about 7.7%, 7.2% which is more than nearly double any of our competitors, and so we just think that we are taking market share, we have got great products, and there is tremendous opportunity for Merit in the United States.

That was Marty Stephens who runs our US and European direct, and the previous speaker was Joe Wright who has our Pacific International sales.

Okay. Sounds good. Just is last one for me, guys. Fred, you mentioned exiting 2012 with some great momentum, and some new products, and I guess besides Osteo Pro and then crossing catheter, what else are the key products that will give you that momentum?

We have the EndoMAXX which I mentioned earlier, which is our new esophageal stent. We are our EndoMAXX Plus, which is our valved esophageal stent, of which there is really no competitor. We have the new Concierge guide catheter. Now we have been selling our guide catheter outside the US. The patents have expired in the US, and so Merit will be launching a product that we believe, and our physicians who have trialed the product believe and have told us, is equivalent to the other major players in the market. We believe that has substantial opportunity in this guide product.

Things like the OsteoPro, and those sort of things all go together along with that. We also have the Centros dialysis catheter. Now this is a product that we purchased from Stephen Ash. The product was a previously sold by Angio Dynamics. They had some problems with the product. We have made some improvements in the product. I held it in my hand yesterday. We are going to be launching that product on essentially a soft launch in the next 60 days or so, is that right guys.

30 days.

In the next 30 days. We believe that the Centros catheter is the best chronic dialysis catheter in the world. But we think there were a bunch of misqueues before, and we believe if properly trained, and with some of the improvements that we have made, it has significant opportunity to reduce a central vein stenosis, and to stay and have a longer longevity, because of the way that it is designed and placed, it minimizes fibrous sheathing, and these are important issues by one of the world's great well-known nephrologists. I just spent a week with him, and not only do I believe what he is saying, but I believe in this product, and I think Merit is going to do it right, and I think that is a significant product building momentum. Another one that we have, and I think we are going to be talking about this next week, but we have the one snare and so, Jayson, what we have done is that Merit has an end snare, it is a wonderful product, but there is actually a need for a single looped snare.

The problem is that our competitor who has now run out of the patent time, so it is off patent, not a problem for us but what they have done is to create an opportunity for us, is they have not improved that product to the best of my knowledge for a very long time, and there are deficiencies, so in the next 90 days or so, or sometime after we get FDA approval, we are going to introduce another new snare product, and we think that is going to take us to over 50% market share, and these are products that share 80% gross margins, and we are going to be a one-stop shop for snares. Nobody else has that, and there is a lot of momentum there.

Our new Elation dilatation balloons. These are balloons that go along with our Big60 that go right to our EndoMAXX, and right to our strength in this division that is growing at 25%, 30%, 35% and our customers are for an alternative to the market leader, in fact with our inflation device, we are taking business away from them every day. How much more do you want? I have got four or five more, if you want me to go through them.

No that is fine. Thanks.

So I have got nine or ten exciting 65%, 70%, 80% gross margin advanced products including the OsteoPro, and a bunch of other products that are coming out, so I am not going to talk about some of them today, but these are exciting products, and one of the things that we will be showing next week at the show, and that we will be down here to show at your conference, is you will see by looking at some of the things that we will show at these presentations, these products that I am talking about, and you will kind of see the transformation that the Company is going through, in terms of a manifold which has been our bread and butter and inflation device, and then you look at these more advanced products, that command higher prices and higher gross margins, because they are much more complicated products, and I think you will see that. We will be able to show you will see with your eyes, and we will be there to show it to you in just a few weeks. Oh, one other one, Jayson while I am at it. We expect and we filed for approval of our smaller 30 to 60 HepaSpheres. This will help us to compete, and to be able to drive further down into a vessel, and tumors to deliver both bland and otherwise. So this is another new product that I believe that we are expecting to come out with.

End of March.

In the first quarter of this year. So that is another new product that is coming, and then last but not least, and I won't disclose the actual product, but Merit has a new embolic that we believe that will also come this year, that will compete and help us to build our embolic business. So we have another new embolic, and we will discuss the actual nature of what that does, and how it fits in the plan later on in the year. We don't want to tip our competitors off quite yet on that one.

Right. Thank you.

Alright. Thanks..

(Operator Instructions). Our next question comes from the line of Ross Taylor with CL King. Please go ahead.

Hi. My question relates to some of the SG&A spend also, and I think you mentioned in your earlier remarks that some of these specialized products that you have entered into over the last year or two require more SG&A support than maybe you thought. I mean I think I understood you to say that anyway, and I just wanted to know some the added SG&A spend in 2012 is some of that going to support the BioSphere products and maybe some of these other products that you have acquired in the last quarter or so?

Yes. I don't know if there is a we will lot other than the cost the study to support that. There were a few but not much in that area. I think it mostly is the expansion of the sales force to make sure that we can grow the business in the future. Remember now last year in the US I mean short of the BioSphere guys, I don't think we expand the sales force in the US last year at all, so short of a couple of guys that came from the BioSphere, which was actually the year before.

But they didn't have a full weight, so this year they got loaded up the full weight, and of course they will be next year.

So we didn't add anybody, and so you keep stacking on the products if you don't spread out the territories, and do those sort of things, it's going to affect your growth down the road, and so that is where we are planning on spending our money.

Okay. And then just two quick final questions. You had really good growth in the BioSphere products in the quarter I just wondered if there is anything you did to drive that acceleration in Q4, and these products like the OsteoPro and the crossing catheter, can you give any rough parameters in terms of what kind of revenues they could do in 2012 and maybe 2013?

Yes. Let me if to the question of the BioSphere. We grew at about 15% you will recall, Ross, that on December 31st of this year Angio Dynamics lost their distribution rights to the BTG.

Yes.

In some ways they went out and there was some filling up of the pipeline, and that sort of thing. I just think that it was , we are seeing growth, and we are seeing customers that are coming to us on some of our for instance, our QuadraSphere, which is the loadable embolic, both for the use for bland and otherwise, so we are seeing that is seeing substantial growth, and we believe that it will continue to see substantial growth. The OsteoPro again is a product that has a little longer sales cycle, because what you have to do is get in front of the physician on that one.

But on every case we were in Indianapolis I think it was late last week I wasn't there, but our sales force there walked in, sat down, presented it to the staff, and got an order for $4,000 or $5,000 there, so we have our internal numbers on that particular product, but what we prefer to do is as we come through the end of the first quarter, it is built into these numbers for this year, in our forecast but conservatively so, in terms of that one product. There is one other product I haven't mentioned today to go back to Jayson's question, but to answer partially yours, and that is, we have another hemostatic patch, in which we have a product that gives us better than 50% in which we are selling and we are opening new accounts with that business, and we also see a lot of opportunity for that hemostatic patch internationally.

So we have got a full line of products and there was one I missed. Oh, the crossing catheter is not going to be released until probably late third/early fourth, so it would be premature for me to discuss it, but there is a market out in the in the US of about $20 million, and Merit is going to go out and get their share just like we did the ASAP and other products, our goal is always to be at least 20% to 25% market share, but that will take a couple years to do, so it will be insignificant this year. Next year as we move into it, we hope that we will start to have that impact in a product that with we think could bring $4 million or $5 million, maybe as much as $10 million worldwide over the first five years of the product. I think there is another important thing here Ross, and that is that these things are advanced catheters. These are not $8 diagnostic catheters. These are $250, these are $850, these are $450 type of devices, and then, or like a microcatheter. Our microcatheters last year grew at 150% I think it was, and these are catheters that sell for $350. So I think those types of things, and those kinds of products are the once that we want to concentrate on going

Okay. That is all my questions. Thank you.

Thank you.

Thank you, sir.

(Operator Instructions). At this time, we have one more question it comes from the line of Brooks West with Piper Jaffray. Please go ahead.

Hi, guys. Can you hear me?

Yes we can Brooks. How are you.

Good, Fred. Thanks. A couple things. Kent gross margins you said you had 270 basis points of improvement in 2011. What kind of improvement should we see in 2012, and then should we think of kind of annual cadence of improvement over time?

Yes we have been long-term committing 150 a year average, and of course with BioSphere we kicked that over almost double, but this year we are talking another 150 we think we can do that through a combination of product mix from these higher margins products Fred has just been talking about, as well as cost savings programs that we set goals for, we have another goal this year for $5 million that can flow through, and our last year we hit almost $8 million in those savings, and they will stagger in at different times as far as their real benefits coming through the inventory, but those are the ways we are going to fight the headwinds of any cost increases, and other things coming, so the net of that is we are predicting somewhere out 150 range as far as the bips improvement in gross margins.

Okay, and then BioSphere you said grew 15% in the quarter. How big is that business now and should that be able to grow another 15% next year?

It ended the year at $31.2 million.

And the answer to your question is yes we believe it will grow at least another 15% or more this year.

Okay.

Probably likely to grow closer to 20%.

Okay then last one for me. Kent, I think you made a comment that your China business had doubled to about $20 million, and just wanted to get an idea of what that business could be in 2012, and then also if there is any update on kind of product approval cadence and where we are with tenders?

Yes, Ross let me pick that up. I think our forecast this year is around $25 million, which is about a 20% increase, and you go from a 100% to 20%, why. Part of the problem is that we had approved probably 15 products, maybe 20 products. The problem is the government has not opened the tender. This was supposed to be done last August, and here it is now February, and so we are still selling in some places outside Beijing. For instance we are selling Laureate guidewires in China now. And so the real push will come when that tender is released, and most of these are the interventional radiology products. However, we are going to have to file things like the OsteoPro.

The Concierge by the way, our guiding catheter should enjoy a lot of opportunity and that is approved. So when I talked to the sales manager and I kind of pushed him last week, he said my forecast is 25, I might be able to do 27.5, but the real opportunity there to push that above 30 is going to be when we get at that tender, and for us to plan on that and fall short is not what we want to do. So there is upside there but it all depends on when this tender is released, here is kind of the interesting part. You spend all of this money that we are spending in SG&A and regulatory, and all of this stuff for to get these licenses, and then you sit there, and you can't do very much until they actually open the gate. That being said, that beats the heck of not having a license at all.

Yes. At least we are at the gate,.

At least we are at the gate. Yes. So there is some upside potential there, if those get freed up.

Great. Alright. Thanks, guys.

Yes. Hey, just for the benefit of the group and Joe if I am wrong on this one jump in, but I think one the other things that we did is late last year in the last half of last year we went direct in Hong Kong, and we hired I think two or three people there, two, and we have a warehouse there that is with a third-party, and last month we were breakeven in that operation after about four or five months. So this is another example where you had kind of that initial expense, but now where we believe that as what business starts to grow, we will have reached that breakeven point in four or five and from this point forward as we see growth there, and of which almost all of our products are approved in Hong Kong. Then we should start to see the benefits. So there is a five months or six months investment and a lot of Joe's time, to go out and develop that and hire the people and spend the time, but in terms of the return on that investment it is going to beat the heck out of where we were before, where we were essentially at $150,000 a year in revenues for a number of years. I think in this particular case we will be $2 million to $3 million, $4 million, $5 million in Hong Kong in the next two or three years. So when you start taking a look at the contributions of those profits and what it means, it did take the investment it was a relatively short-term situation, but one that is going to be I think very, very promising for the future. So that is just for the benefit of the group.

Our next question comes from the line of Chris Cooley with Stephens. Please go ahead.

Thank you. I appreciate you taking the question. I just wanted to follow back up. I heard you say earlier to a prior questioner, you didn't expect to see positive free cash for this year when you adjusted out for the various capital expenditures, and I realize it is a huge year here, in the current year 2012, but when you think about the business longer-term, what level of cash generation do you think about off of the existing model, when you think about the 2013 period and beyond, and clearly you had to have some cash flow projections when you were discussing like the bank lines earlier in the call?I am just kind of curious what kind of cash generation you assumed off of the current model?Thanks.

Yes. And I haven't modeling in any detail 2013 or beyond, but I can tell you that with the facility completions, then the cash flow will free up, and we will be able to start paying down some of the debt, or at least it is available for investment. So our EBITDA is increasing, the cash flow from operations I expect will, it was in the $34 million to $35 million range this year, and I expect it to increase more into 2013 as our profits increase, and the CapEx expenditures normalize, so how much of that will be that be, I can start guessing. It is going to be $15 million to $20 million I would think above what our CapEx expenditures are.

Thank you so much.

Operations might be 40, yes. So I think that is where 20 comes. Okay.

Alright. Okay. Anything further?

At this time there are no further questions, I will turn the conference back over to management for any closing remarks. Please go ahead.

Well, ladies and gentlemen, we know that there were a lot of calls today and a lot of the activity, and we appreciate you taking the time to join us for a few minutes, and we appreciate your comments, they were good questions, they were tough questions, and I am I sure that over the next several hours this evening, we will be spending time talking to a number of you, so please feel free to call us, Kent will be here and I will be here to answer your questions. We appreciate your continued interest in the Company. I would like to remind everybody that as we looked at last year, we exceeded our goals in terms of the top line. We met our gross margins. We I think actually exceeded in earnings around the top end of the range there, and we think it is appropriate that we are reasonably conservative, or try to paint the picture so that we have an opportunity to do that again.

Now that being said we have got a lot of things going, we are making a lot of the investments, but let me, I can tell you on behalf of this staff, that we are committed to work hard and do the things correctly, if we do something that is wrong, if this isn't about it is my way or the highway. If something doesn't work we will adjust quickly, but I think we are on the right path to help to sustain the growth in which, as you guys look at 2013, and you see these headwinds and this consolidation, the folks that have the horses and the momentum, are the guys that are going to win the race, and that is our goal is to continue to build this Company, and march toward that $1 billion number. So we appreciate your interest, we thank you for your time, and we will go ahead and sign off from Salt Lake City. Wishing you a good evening. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. ACT would like to thank you for your participation, have a pleasant day, you may now disconnect.