Merit Medical Systems Inc (MMSI) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MMSI's second quarter 2012 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

And I would now like to turn the conference over to Fred Lampropoulos, Chairman and Chief Executive Officer. Please go ahead, sir.

Good afternoon ladies and gentlemen. We're delighted to be with you. We're broadcasting from Salt Lake City with members of our staff assembled here in our conference room. We appreciate you taking the time to visit with us this afternoon. We're excited to report the results of our second quarter.

First of all, I'll ask Rashelle Perry, our Chief Legal Officer, to read our Safe Harbor provision. 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 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 are discussed in our annual report on Form 10-K and other reports 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 such statements.

Although Merit's financial statements are prepared in accordance with accounting principles generally accepted in the United States, 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. 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.

Thanks Rashelle. Are you sure you got it all?

I got it all.

Alright, okay, thank you very much. Rashelle's new book, Safe Harbor, will be on bookshelves shortly. It makes for very interesting reading. Thanks Rashelle, I appreciate it.

Ladies and gentlemen, again we appreciate you being with us today as we report our second quarter. Let me go through some of the highlights of the quarter.

As you can all see, the Company grew at 10% which is right about just flat out in the middle of our overall guidance for the year which is 9% to 11% and I think that you would all agree that in light of many of the reports that have been out today and throughout the week that this is we think a very, very good performance.

I won't go, and I certainly don't mean to be, and to discredit anybody else but I think this is a terrific number. One of the things I'd like to remind everybody is that Merit has I think a very unique business in that we have a substantial international sales effort. We also have a very nice hedge in place because even thought the euro has been lower which means it costs about $1 million in revenues for the quarter, we also have the other side of that and that is the hedge that we have because we have lower costs associated with our sales force and our production that we have in Ireland. So all in all, it's a very, I think set up very, very nicely in terms of that opportunity.

There are a number of financial issues in terms of gross margins and a couple of other one time expenses we'd like to explain so Kent, I'm going to ask you if you would, keeping in mind as we go through the numbers here that we have some sequential improvements in operating profit, that shares were up because of our offering last year, and some of those issues but Kent, I'd like you to go through and kind of go through those financial numbers for us for just a second. Kent?

Just gross margins or the whole thing? Our net income for non-GAAP which is what I think most interesting was a record $8.9 million or $0.21 a share and I wanted to remind shareholders that our outstanding shares for the quarter were up 13% due to an offering and some options exercised last year. We were $8.9 million compared to $7.9 million a year ago or $0.21 a share.

Also, for the six months we were at a record $16.1 million or $0.38 a share, up over $15.8 million last year. Because of the share difference it was $0.43 a share last year.

When we get into some of the, the GAAP numbers as you're aware were $6.1 million or $0.14 a share compared to $6.9 million or $0.18 a share and for the six months was $11.8 million or $0.28 a share compared to $13.5 million or $0.37 a share. As we look at some of the major factors underneath that, the gross margins I'd like to address first. On a GAAP basis they were 46.8%, up 20 bips from a year ago at 46.6% and for the six months they were 46.5% or up 30 bips from 46.2% from the first six months of '11.

When we look at it on a non-GAAP basis the second quarter was 47.8% of sales and it was up 40 bips from last year's 47.4% and sequentially, as we look at progress during the year, in the first quarter it was 47.2% so we can see a 60 bip improvement in gross margins as we move through the year from first to second quarter this year.

Going down to the SG&A costs, they were 30.1% of sales for this year in the second quarter compared to 28.7% last year so we saw an increase as well as for the year to date, 30.5% of sales compared to 28.5%. When we take out some costs that were due to the transactions with Ostial Pro and our amortizations of intangibles we have a non-GAAP SG&A that is 28.6% of sales and it's 80 bips above last year's 27.8%, but it's down sequentially I again want to point out. It went down from the 29.7% adjusted on a non-GAAP basis last quarter, or the first quarter, so we improved it 110 basis points and I think that's significant because when you add that to a ten point improvement in R&D, when you look at it on a non-GAAP basis, our operating income was up 180 bips so we went from 12.6% operating non-GAAP basis compared to 11.8% in the first quarter. I think we've made significant progress in some of those costs.

Inventories were only up $1.1 million which for the six month period has slowed a lot and we've seen that improve a lot in our cash flows from operations which were up $14 million or so this quarter and $21 million for the year to date.

Thanks Kent. Let me go over some other highlights of where our growth is coming from. I allude to the fact in our comments that we had sales gains in all divisions. The leader is China and many of you recall that last year we grew that business by almost 100%. For the quarter we were up 53.4%, six months we're up almost 43% over last year. China continues to be a very exciting place for us.

Our international dealers, and this is Central/South America area, is also up very strong and if we look at that, our international worldwide dealers is up 27% and up 31% for the six months.

We take a look at Endotek which is our endoscopy division and that's up 31.6% for the three month period as well. OEM was up 15% and we have a substantial improvement in domestic sales. As you recall, our first quarter was pretty quiet at 2.5% but we grew it 4.4% in the second quarter.

Our technology companies, MC Tech grew at 14% and so if you just look at our business overall, our international business clearly is driving it, our technologies companies, and we have an improving environment in the domestic market.

We've also received clearance on a couple of new products that I think will be of significance in the future. The Concierge Guiding Catheter, we received U.S. clearance. We have never had a guiding catheter in the United States. We've been selling it in some of the international markets and so we're excited about this.

Recently, just in the last week or so we received clearance for our ReSolve Biliary Drainage Catheter and the reason that is significant is we've been somewhat at a disadvantage in our drainage products in that we didn't have the full basket and this way now, we have the full capability which drives lots of different products so there will be a lot of pull-through in the future on these products.

We also have filed a 510(k) for a new snare product. One of the things that I think is very interesting about our snares is I believe, is that our snare product is up, let's see here, up about 14.5% for the year and that's pretty significant overall particularly in this marketplace. We believe that as we add this new product called the OneSnare that it's going to allow us to have substantial increases in market share at high gross margins. This product is produced in Ireland. It is sitting on the shelf. We are awaiting approval from the FDA. We'll launch it in just I think a few weeks or so or a month in the EU so it's again another exciting opportunity for us and my expectation is that as we're sitting here a year, a year and a half from now that Merit is going to be the clear market leader and have a number of advantages and this will kind of play out as we go along and we'll give you more details as this thing plays out but it's a great opportunity for Merit.

Now regarding the Laureate, we have submitted the requested new 510(k) to the FDA. We're about halfway into the cycle and fortunately for us is that in our international markets including China, it has kind of taken up the slack or has kind of now reached the level that we had before we had to pull it off the U.S. market and so we're excited about the opportunity that will exist when that product comes on the market as well as four or five new hydrophilic guidewires that will follow shortly through the regulatory cycle. Things will line up in terms of new products and opportunities for the Company going forward.

Let's see here, I want to explain for a minute these one time expenses. We did a deal about six months ago regarding a Crossing Support Catheter and this is a required payment and of course it's a one time expense and that was paid during the quarter.

Another technology that I allude to and that I'm very excited about, Merit has signed an exclusive agreement for ten years in certain nanotechnology that allows us to work with various graphs, opportunities in graphs and opportunities in covered stents. We think this is an extraordinary technology. It's exclusive to Merit and you'll be hearing a lot about this as we move forward but even though we have that ten year agreement, the accounting rules require that we take the one time expense but it's part of our overall strategy as we again continue to move from accessory products to primary use products. It's a long haul but as you look at Merit with microcatheters, with snares, with embolics, with other projects that we have, these things are all higher margin and eventually as these things roll out it will allow us to meet our intermediate term goal of 50% gross margin and then move even higher than that as that mix plays out in the future. So we're excited about that opportunity.

And then finally, we'll be operational, fully operational with a new technology company in Ireland in our new facility. These are hypotubes. These are devices and platforms that are used for all balloons, for wires that are used to measure pressure. We're already in the business but much of that has been farmed out to others and we will have a full capability to produce all these products in-house in our Irish facility and we will be online sometime in the first quarter.

This is another exciting and in some ways, a little bit of a diversification. We have felt and I have expressed many times to you that we have I think a unique business in that we have direct hospital sales but we also have an OEM business which helps to offset other costs and create sales and candidly, higher gross margins than our corporate average and then we have the technology companies which is coatings and our sensor company and we believe that having this triad of different products and then the different divisions within the medical device area being endoscopy, radiology, and cardiology that helps to spread our business in areas that have been very healthy and where other companies would like to source capabilities from us that don't compete with our direct sales force.

So that will start to play out, be more reinforced going forward into the future and something that we look forward to executing on and reporting back to you.

And then last but not least are the issues regarding our high quality study. As many of you know, we had some problems sourcing Doxorubicin. There has been a shortage. We have solved that problem and we expect that that study will move on. There are patients that are enrolled. There are hospitals. Essentially all have passed through the IRB process and now it's really the training and getting this study moving forward.

And then we also talk about an IDE that we have filed and we expect to have a response shortly from the FDA regarding PAE or Prostate Artery Embolization for BPH. We think this is a topic of a lot of discussion. We have filed for that study and it, like many of our products like the UFE procedures, allows not only this large potential market but the use of not only the embolics but all the procedure parts of the business, the catheters and so on and so forth.

And so all in all, we feel very, very good about our business. Again, I would caution that we're always, as exciting as this is, as we're entering into the summer quarter you never quite know what happens. You've got people going on vacation in Europe and you've got the Olympics and you've got this and you've got that but we're not changing what our goals are for the year. We just like to caution everybody every year that we're heading into what generally for medical device companies is kind of the slower part of the year and it starts to accelerate in the fourth quarter.

I think all in all, if you take a look at the groups of product you'll see that catheter sales are strong. You'll see that standalone devices are doing fine. Endotek, we talked about that. The business is doing fine. All medical devices are going to have some challenges as we move into next year with the various pronouncements under the various healthcare laws but at the same time, whenever you see those kinds of situations you also see great opportunities that present themselves and I think Merit is positioned with a healthy business, a worldwide business.

I had someone say to me, if I can bang the drum just for a moment, how much they appreciate the fact that we were wise to look at this international piece. I was talking just today with our new Manager of our Gulf States and he was expressing to me all of the opportunities that exist in the Emirates, in Saudi Arabia, in Qatar and many of the Gulf States. We have boots on the ground. We have the regulatory approvals and we have manufacturing capabilities as well as distribution right there so we're excited and continue to be excited about the Company, about the opportunities. There are other opportunities out there as we continue to talk and we continue to see many opportunities that we look at and see if we can find the ones that would fit. Particularly if we take a look at our embolics and take a look at the biosphere business and again if we look at that for the year we're up 11% and that's a business and I'm excited about it.

I think that covers it. Good quarter, I want to express my appreciation to the staff and I think we'll go ahead and turn the time over now to our Operator and go ahead and answer your questions to the best of our ability.

Thank you sir. Ladies and gentlemen we will now begin the question and answer session. (Operator Instructions)

And our first question comes from the line of Larry Solow with CJS Securities. Please go ahead.

Hi, this is actually Arnie Ursaner backing up Larry Solow, CJS Securities. I guess my question is a little more longer term. You obviously highlighted your revenue growth and have for years.

You've done a great job focusing on R&D and new products. Last year you built out your sales force and international distribution capabilities. You've incurred a lot of expense. When will we see the operating leverage that's embedded in this? You mentioned the 100 points this quarter sequentially but you've made massive investments in growing the company. At what point do these new salespeople and distribution capabilities leverage to much higher returns?

This might be the toughest question of the day in that the opportunities come up. We've seen again what's happened in China. We are going through, for instance in Brazil, in India, in the Gulf States, in Russia and Eastern Europe, those resources are on the ground. We hired the MSLs and more of the technical folks and clinical folks last year and we've hired some more direct salespeople in the United States because some of the territories were too big.

In terms of a percentage and I don't know that I want to use that but I will say that we are substantially -- not going to reduce -- but we're not going to spend a whole lot more money. I won't say that we aren't going to hire more people because we are but we don't have these massive expansion programs on the burner other than the ones that we've talked to you about.

Now, they'll take time. We talk about China today. We went up to ten. I think that took us five years and then it took us one to go to 20 and this year we may get as high as 30. I think the forecast is 20 but it looks like 30 or better. They don't all go smoothly but the people are on the ground and we do not have the propensity to spend more until they start to pay off. Then we have this huge bowl of these new products, some of these lines that are now being filled out so I think it's time for Merit to digest and particularly, I think there is another thing that makes us somewhat cautionary in terms of these additional marketing expenses and that is you've got this tax that's going to come in place next year. Our preliminary estimate is that's going to cost us $4 million, $4.5 million or some number that we're still trying to work out. We recognize that that headwind is out there and we want to kind of, I think the point you're trying to make and maybe the question, if I can put words in your mouth, is are you going to kind of slow it down and work on getting those returns and the answer is yes, it's time to do that. We're in that mode of thinking.

Let me perhaps ask it more specifically. Your spending on SG&A and R&D are 35% of revenues now. 18 months from now, what do you see that number being?

I actually hope it will be less as a percentage of sales. I mean, if we're going to get operating leverage it has to be.

Can I add that if the gross margins improve you can get operating margin leverage even without increasing that percentage. If we can't decline or reduce that as a percentage of sales which we've seen sequentially as you mentioned, then that will even enhance that and improve so as you see, we've got some -- if you look at it on a non-GAAP basis we had a 10% top line growth rate but we had a 13% bottom line on a non-GAAP basis.

But I think your observation, is there more operating leverage opportunity and the answer is of course there is. It will be up to us to make sure that we manage that and still try to balance but listen, if there is a criticism of this Company, I don't think you can criticize the top line. We've delivered on the gross margins although there is more room there and we can do better there and we will do better there. One thing just to remind everybody, we have a couple million dollars in costs coming out next year because of our stent manufacturing and that is 50 basis points into next year's numbers but the real issue is this SG&A side. That's where the criticism comes. That's what you're asking and that is what's going to help us to make more money and that's what is going to help our stock to move higher. We know that.

My second question is a very specific one related to R&D expense. You probably have been slowing down some of your expense because of the shortage of the cancer drug, Doxorubicin. Now that that's back should we assume your R&D expense will also go back up?

We said that we were going to spend somewhere around I think it was $1 million the first year, $3 million, $3 million and then maybe $2 million or some number like that and the answer is as that study starts to progress down the road that we're going to spend more money on that study which will be then classified into the R&D so when I make my comments I'm taking some of that out because of that study.

Now, there is another side to that and that is that those studies, we just got approval in South Korea. We're seeing and have other opportunities in China which is the largest market in the world. We're seeing sales dramatically increase in a number of areas throughout for the product with very, very high gross margin so there are two sides to this and we believe and I believe that they will more than offset that in gross margin and sales and profits and margins so that's that top side that Kent is talking about.

The answer to your question is the expense is there. We still believe it's the right thing to do and let's talk about the outcome. At the end of the day when it's done we hope that we will then be the only company that has an indication of use for this product for the treatment of HCC and we think that is significant.

Thank you.

Our next question comes from the line of Thom Gunderson with Piper Jaffray. Please go ahead.

Maybe I could just start with some simple numbers. Maybe you said it and I missed it but on overall revenues, Kent, can you split that between U.S. and OUS for the quarter?

Yes we can. I can tell you that it was 60 -- I'm rounding off here -- $64 million and $37 million for domestic and then international or in other words, 37% of our revenues came from international and 63%, domestic.

And that 37% is constant currency?

No, that's just adjusted. You get another $1 million if you wanted to change constant currency (inaudible) the euro. We'd be at a million higher.

Okay, thanks and then on, Fred, last quarter you mentioned I think your sales guy was there and said that if felt like overall, procedures were down in the U.S. How did it feel in Q2 and going into July?

We've got Marty Stephens and Monroe May here. Marty, I'll let you address that. What are you seeing in terms of procedures in the U.S?

We still see a decline in procedures. Most of the companies here that are in our space as you see reporting, they're also indicating that. I've heard -- well, you can read the ranges but despite the declining procedure count, as you can see the U.S. sales are actually growing at double the rate in the second quarter that they did in the first quarter and actually we expect that that will continue to get better as we get later in the year.

Tom, I will mention that I was talking to a cardiologist last night who is in one of the top ten hospitals in the country in terms of interventional procedures and his comments to me were that procedures in the business was flat. That's one hospital but it's a pretty high profile place.

And then Fred, maybe on an even higher altitude scale, you guys have a lot of OEM business and you have insights into what a lot of other manufacturers are doing. Looking forward to the rest of the year and maybe into '13, how is it feeling out there?

Thom, it's a really good observation in terms of what we get to see. That business is up 15% year to date and we continue to see companies out there that don't want to go out and tool various types of capabilities. We continue to have a very strong advertising program so the OEM business still feels very, very strong. Again, I would remind everybody that as you move into the third quarter it's a little slower than normal but overall, it feels very strong.

In terms of the business we also see huge opportunities for growth in Europe so it's still -- and we have some accounts and some issues that are talking about $1 million or $2 million worth of parts and you start taking a look at those kinds of volumes over the year and they're pretty significant so it still feels fine.

Now, that being said, we continue to see the side where we have an OEM customer that buys inflation devices from us and that's kind of volatile and up and down so my comments and the 15% I'm talking about are x that OEM customer but the rest of the business which I think represents about $50 million or $55 million, $60 million so it feels fine. In fact, if anything I think that it feels like it's going to get stronger and that we're going to see companies less likely to go tool and come to a company like Merit and for us, we get about 55% or so of gross margin on our OEM business so it's a great business for us and I think helps to balance our overall performance as a Company.

Thanks and you've mentioned China a couple times and the 53.4% increase, what were Chinese revenues in Q2?

$7.7 million.

And that's where the $30 million comes from for the year?

Yes, it could (cross talk). It's on pace to do something like that.

That's kind of where we think it's going to be. That's quite a bit higher than we originally had forecast but -- and some of those products, going to China is, I've mentioned on previous calls, over the last year, 18 months, we've probably received I don't know, 16, 20 new licenses over there. Some of those products are just starting to ramp up. We're selling our wires, our Laureate wires in China. That's starting to ramp. A number of our infusion catheters, a number of other products that are starting to ramp. We're excited about the opportunities in China.

And then just last question, a quick one, since you mentioned Laureate and the 510(k), when did that go in?

It went in about a month ago and we were 30 days into the cycle I think it was so we expect to have a response back in about 30 days give or take. Is that right, Stephanie, give or take? Okay, so the end of August we should have a response back from them and we will respond to either whatever questions they have or they could be satisfied, I don't know. We'll just have to see where it goes from there.

But in the meantime as I mentioned, that slack that was created has now been made up in the international markets, in China and other places so I think it will be a nice addition to get that back on board.

(Operator Instructions)

And we have a question from the line of Jim Sidoti with Sidoti & Company. Please go ahead.

A couple quick questions, I just want to go over just the basics. First, on the previous call I think you were looking for EPS at around $0.60 for the year. I assume you're still around that number?

Yes, we haven't changed any forecast or anything like that, Jim. We're still on track.

Alright, that's what I thought. I just wanted to make sure. And the $2 million charge in the quarter, that was about $0.03 to your bottom line?

Let's see, you would tax that up at $2 million. Let's take 35%. That's about right, yes, probably around $0.03.

Okay and then the med device tax, I assume some of the OEM stuff isn't taxable. That's why it works out to about $0.07 for the year?

I think that if we take a look at the fact that we have the international markets, we have the OEM, we have the technology companies, I think we'll be -- I don't even want to say it's reasonable because I think it's unreasonable but it is the law but I think that we're in reasonably good shape in terms of having it not being as much as maybe some others. What are you going to do, Jim? There's an election coming, Jim.

There is? I wish I was sure of some other things as sure as I am that I know who you're going to vote for.

Correct.

On the Irish facility it sounds like you're ready to start that up in the current quarter. Is that right?

That's correct. We've moved people in. We're doing some manufacturing there. We'll start to ramp it up throughout the balance of the year.

Now how does that affect your gross margin?

You're going to have to depreciate it. It's a good question. You're going to have to depreciate it and our job is going to be to go ahead and make sure that we produce out of there to offset the startup costs, that depreciation cost. As we've added facilities, Jim, in the past and added capacity, these things don't sit around vacant for very long and one of the things I alluded to in the press release is, and if I could I'm going to again bang the drum for a minute.

Last year we introduced the Blue Diamond. We introduced the Big 60. We have a new inflation device called the Basic Touch. We have a new hemostatic valve. These are all high margin products. They are franchised products and these are all going to be built to reach the hemostatic valve. It's going to be built in Ireland. The new snare is being built in Ireland. We have products coming through there that are going to I think help hopefully offset.

One other point, that business, if you talk to our General Manager and you can't but I talk to him everyday. He talks about how busy they are so you look at our snares, inflation devices, you take a look at our hemostatic valves, many of our OEM products and remember, we're getting this performance with really our Laureate only operating at about 50% of what we could so that's been an expense and now we're going to fill that back up.

Our diagnostic is basically (inaudible).

So the bottom line is, Jim, I believe that we're going to offset that depreciation expense with just the growth of the new products and the Laureate coming back online. That's what I believe the outcome will be.

But could there be just for a quarter or two, a little bit of a backwards move on the gross margin?

I'm not going to say that but what I will say is that you're going to have that expense. I mean, it's clearly going to be there as we bring this online but to say that we're going to be back on the gross margins on the quarter, I'm not going to say that.

Okay, alright, great. I think that's it for me for now. Thank you.

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

A few revenue questions, your jump in biosphere sales, where are you seeing the strength? Is it on the women's health side or more on the oncology side?

We're kind of seeing it across the board. We're seeing it also in worldwide markets so some of it is the geography part of it and coming from all sections so it's kind of across the board.

I would say that the strongest one of the two is the (inaudible). It's the cancer stuff.

And then Endotek growth, is it largely new product driven or are you seeing pull-through with other products and kind of expectation on breakeven on that business?

The growth is coming from our new EndoMAXX stent, the Big 60, and some of the other accessories. If we take it back out, the inter-company interest expense for the quarter lost about $140,000. If we take a look at the $140,000 and then back out a couple of million dollars that will come out of cost because of the lower cost of the stents and by the way you'll recall that we've taken out almost one-third of our cost of goods for a stent, one-third of the cost of goods -- significant. That would be almost $500,000 a quarter so that's -- another positive side of this is that we move into next year, that's going to go from a loss of $140,000 hopefully into a position that you could be making $250,000 or $300,000, $400,000.

And then we have a bunch of new products that are coming to market on top of that so that thing which has been -- you know, I got beat up but we haven't given up and it's going to become a significant contributor to Merit's revenues and Merit's profits and gross margins next year -- substantial. We could end up instead of losing $1.5 million like we did the first six months last year, we could make $1.5 million and that's a pretty significant swing.

Just one more, in terms of the tenders in Beijing, I'm guessing you haven't really benefited from that just yet. Is that fair?

You know what's interesting about the tenders, it was much ado about nothing. They never really did it. They talked about it. Business is moving along. The new products are being sold and it just kind of vanished -- it may come back -- so it's been to our advantage but in the meantime, there were people waiting on Beijing and they waited in Shanghai and Guangzhou and other places. They just aren't buying the products and they kind of just said well, to heck with that, we have patients to treat so it just kind of went away.

Okay, what is the approximate or what was the approximate run rate for the Laureate in the U.S?

What was the run rate? Can you clarify what you're asking?

Jayson, we're all going to be guessing around the table and I don't have the number but we will call you back and give you the run rate. So that I understand, you're talking before it got pulled back or are you talking about the run rate now?

I mean, going into 2012 you expected to be selling Laureate in the U.S. How much did you expect to sell on a rough basis here so when we looked at --

It was about $5 million to $7 million is kind of what we were looking at for a run rate and by the way, I think that's a good point. You take the currency and pull $1 million out and then you take out for the first six months, $3.5 million. That's $4.5 million of potential revenue that we could have had that would have been very nice but we didn't. But we still hit that 10% so I think these are all positive things and things that should come online in the future. We've done it without it and we're fortunate to be able to do that. When we add it on there then, that will be nice. It will be very pleasing to have that back online. Remember, this was -- never mind, I've said enough.

Okay and just on the benefit on the cost side from fluctuations in FX, did you see more of a benefit from the euro or the Mexican peso because I think you do have a manufacturing center in --

No, the Mexican peso -- sorry -- the Mexican peso is fixed in dollars for us. It can affect us as we go forward and negotiate new pricing but it's not immediate so there was nary $1 million in cost of sales reduction due to the facilities and so forth in Ireland and France on manufacturing cost of sales and then there is additional cost savings in SG&A as well so it's almost exactly the same as the sales dropped $1 million and so did the cost of sales.

(Operator Instructions)

We have a question from the line of Ross Taylor with CL King and Associates. Please go ahead.

Just a couple of simple questions, I just wanted to focus on the U.S. for a minute. Your growth accelerated a little bit in Q2 from Q1 and it sounds like in response to an earlier question you expect growth to accelerate a little bit more in the second half. What's driving that exactly? Is it new products, bringing things like the Laureate back to the market? Just wanted to ask that to start off.

First of all, the Laureate is not back in the market but it will drive it in the second half assuming that that gets put back in place in the second half.

Whenever you start out the first part of the year you always kind of get that lag that comes into January. It seems like it's very slow for the first couple of weeks and so I think that's part of what's going on. Plus we've just seen that procedures seemed to have slowed down. Almost everybody we talked to say they're flat to down. I think the numbers, if you take a look at other players, would seem to suggest that.

I think to go to your question of what will improve it, it will be new products but I think the other thing that we're doing is I think it really comes down to management. Our guys are spending more time training, making sure that they're focusing correctly. We have more clinical people so I think a lot of it is just the internal part of sales and I think they kind of got a punch in the gut in the first quarter and I will tell you, I'm looking at these guys square in the eye here and they don't like it. For many years, they kind of drove it and all these other guys were kind of in the back. These guys are very competitive guys and I can just see it right now, they're saying, they're king of looking at me saying well, you haven't seen anything yet and I'll say to you guys, well, bring it on and let's see what you can do. But I don't think they like it so I think a lot of them just focused, and particularly the management team, and going down to the regional managers, the clinical people and candidly, account management. I think that's the other thing is that we're looking at the kinds of services and the breadth of what we can bring to our accounts.

We have a lot of products, a lot of opportunities, and I expect that these guys will kind of pick it up as we go into the second half as well.

Those new salespeople that we hired earlier in the year are going to get better as time goes on too.

Yes, that's another point. We did hire some more folks and they go through that same training cycle that's usually six to 12 months and some of those are going to be coming on and you'll see some improvements there as well.

Okay good and the prostate study that you all mentioned, I suspect at least initially you're going to start off with a pretty small study but should we be factoring any material increases into our R&D expense assumptions related to this?

There's going to be a cost over the period of about $1 million to $1.5 dollars. It's relatively inexpensive for what the opportunity is so that's expense but it pretty well fills and fills in with where our overall expense lines are, the expenses there. There are some other things that we'll forego, some other things that we'll pull back in to make sure that we can fit that into our budgetary numbers.

Okay and last question is I just wondered if you could give any color on the status or progress of the Ostial Pro, what's happening there?

The Ostial Pro is a great product. It has great gross margins and I think probably one of the great things about it, if you take a look at what it does. I was talking to a cardiologist in Florida the other day who called me and said he was doing a case and he explained to me how he used it and how it improved his ability to deliver the stent to a patient and he said, and now I'm going to take this and I'm going to make sure all the other guys have an opportunity to do this because this is an important product to make sure that we serve our patients properly.

The other thing that it does is part of this concept that I talked about earlier where we're moving from these accessories to primary use. This allows us to get in front of the physician. This is the same guy that is going to -- or gal -- that in future is going to buy our Vena Cava Filters. They're buying our guidewires. They're buying sheaths. They're buying things from us that technicians and cath lab supervisors don't buy, physicians' preference items.

I can tell you I've probably heard 30 stories about accounts or physicians that we haven't been able to get contact with or this and that and this is a door opener so I would say all in all that it's doing fine. We have not even introduced it yet in Europe or other parts of the world. Marty, do you want to comment on it at all? You're the guy that's out there selling this thing.

It's a technical sale. It's a little bit different, like Fred said, than our typical accessories that we've had and so the uptake takes a little longer. You have to be face to face with physicians, be in specific cases with them and so it takes a little longer but we are seeing growth and we think it's going to be a long term winner for the Company.

And you know, Ross, one of the things that one of the sales guys said is that I've been trying to talk to them about fluid administration for a number of years, couldn't get anywhere and he went in and did a case with a physician and the guy was saying well, how come you're not doing some of this stuff and he turned to his staff -- this is the physician now -- and said hey, I want to look at these guys' stuff. Make sure you get them in here. That's worth a lot.

So, the product is great. It opens a lot of doors. It's got great gross margins. It's a longer sales cycle because these things, remember, only are represented in 7% of the cases for cardiology. With that being said, we're there. That's part of the reason why that sales force expansion was to make sure that we could have smaller sales territories. That was part of it. There are other reasons.

So all in all, I'm satisfied with it and it allows us, it kind of puts Merit on the map, not that our other things don't but it's kind of a big deal.

Thank you and at this time I am showing no further questions in my queue. You may continue.

Ladies and gentlemen, thank you for your questions. Kent and I will be available for the next couple of hours to answer questions and to clarify for you. We want you to know that we understand the task. At the same time, we want to make sure that you understand and I think you can sense that we continue to have enthusiasm about our business and the opportunities for worldwide business and in fact, more so than ever as I take a look at my competitors and I take a look at how Merit is positioned, it gives me a great hope for the future for the opportunities for this Company. Our goal is to reach $1 billion and to get better than 50% and to get operating margins at 15% to 18%. All of those are goals and we've worked hard to put the mechanisms, the structure, the facilities, and the worldwide footprint to put those in place. Now those are all bold. Those take a lot of work. I'm looking at my staff out here. They look like they need to go home and get some sleep but the point is is that we're committed to deliver. We're working hard. We're not perfect. We'll make some mistakes but we set out some things that we wanted to do this year. I think to this point we've done exactly what we said we were going to do.

We look forward to reporting in the future. We have a number of conferences coming up here as we roll into late August and September and then into the fall and we'll look forward to reporting. We'll be able to, hopefully by that time add some clarity on a number of these 510(k)s, new product rollout strategies that I think are going to be something that you're going to I think have great interest in as well as some of the other business and structural issues like the nanotechnology, like the hypotube business and some of those areas as well as our geographic expansion.

We continue to be committed to the business and we know what we need to do. We thank you again for your interest. We'll be available and we'll look forward to your calls and we wish you a good evening, signing off from Salt Lake City and a very good evening to you. Good night.

Ladies and gentlemen this does conclude our conference for today. We thank you for your participation and at this time you may now disconnect.