Merit Medical Systems Inc (MMSI) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Merit Medical Systems third quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. And as a reminder, this conference is being recorded.

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

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. We are broadcasting from our corporate headquarters in South Jordan, Utah, and thank you for spending the time to join us. We're excited to talk to you about the third quarter and prospects for the business.

Before we do that, I'd like to turn some time over to Brian Lloyd, our General Counsel, to read our Safe Harbor provision. Brian?

Thank you, Fred. During our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical. Statements made in this call which are not purely historical, including statements regarding our operating or financial results, prospective or completed transactions, governmental or regulatory inquiries, investigations, or proceedings, are forward-looking statements and are subject to risks and uncertainties such as those described in our annual report on Form 10-K and other filings with the Securities and Exchange Commission.

We caution you that our actual results will likely differ, and may differ materially from our anticipated results. Forward-looking statements are subject to change and are not intended to be relied upon as predictions of future operating results. Any forward-looking statements made during this call are made only as of today's date, and we do not assume any obligation to update any such statements.

Although our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States, our management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. The reconciling table included in our release and discussed on this call sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Readers 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 items that may affect net income. Furthermore, these calculations may not be comparable with similarly titled measures of other companies.

Brian, thank you very much. And once again, ladies and gentlemen, thank you for joining us. I'd like to start out today by briefly discussing a matter of business that appeared late last week. As we were preparing for our regularly scheduled Board of Directors meeting and Audit Committee meeting, we had received a subpoena from the Justice Department. After meeting with the Board on Friday, we determined that it would be appropriate to make sure that that was made available to the public. And so on Friday afternoon after our Board meeting, we filed an 8-K.

Now it is self-explanatory. I cannot go into any detail other than to say that we've had certain requests that are covered about our practices and promotional and marketing materials. It is our intention to comply, and we will. And as deemed appropriate and as required by law, we will release appropriate updates as they present themselves.

Now, this is going to be a period when there is going to be a couple or two or three months before all of this information is provided, and then we'll have to wait until we get a response back from the Justice Department. That's about all I can say, and I don't want that to diminish the results of our third quarter. So let me go ahead and leave that now behind and move on to what I think is an exciting third quarter and something I'm very pleased with.

First of all, a reminder that the summer quarter is always one that we've warned about and we get nervous about for good and varied reasons. Physicians in the United States and families are on vacation. Procedures slow down. And in Europe, many countries simply shut down for a good portion of August and sometimes a portion of September.

Despite that, we were able to report revenues, as you can see, of approximately $157 million for the quarter. When adjusted for FX, and you're all aware of adjustments that we've seen the pound sterling and the euro and in the yuan, it would have added another $1 million or so in revenues. But despite that, we had what I think, and I hope that you would agree, is a tremendous quarter in our business. And we're excited about the future as well.

Now, there are other things that were going on in the quarter, because while everybody else was vacationing, we weren't. We were very much engaged after July 6 in the work that needed to be done in the transition of the DFINE medical business into Merit. And I'm pleased to report to you today that a good majority -- in fact, more than a majority, I would say 85% or so -- of the transition work that was necessary to be done has been completed.

Let me talk to you about what some of those are. In Europe, after a lengthy process of working with a Works Council and with the appropriate authorities in Germany to fill the requirements of the law, we were able to consolidate the business. We were able to move our 3PL of logistics service to our facilities in Maastricht. We were able to shut down the office, and we adjusted the workforce appropriately to meet the requirements and the numbers that we had shared with you.

We were able to meet the revenue numbers for DFINE, even during a summer quarter, and those revenues were about $7 million. And I think you will recall that as we looked at the business, we thought that we would see about $16 million in revenues for the year. And we should see that uptick on the back end of the year. The good news is the work is done, the revenues were preserved, and I'm as convinced as ever that the overall business and the opportunity is exactly what we had hoped it would be.

Now, we're just getting started. We have trained our sales force, but we will be retraining our sales force again. It simply is a process. We've also formed our IOS Division, which then takes other products at those call points. And so I think all in all, we're very pleased.

But the thing that I would like to impress upon you is the extraordinary work that was done to consolidate this business, and to do that in 90 days is an extraordinary effort by extraordinary people. And I want to really give that credit to our operations and sales and marketing staff. We're very pleased. And I think, as we now move into the future, we'll see that that product line will continue to serve the company to grow, and there are other projects that we've actually started. So we've already, to some extent, Meritized the business by making sure that R&D projects are combined and are moving forward. So we've accomplished that as well.

Let me move on, if I could, to the HeRO. As you all know, this was a transaction that took place in February, and about 90 to 120 days after that, all of that processes and manufacturing were moved to Salt Lake City. And I'm pleased to tell you that just this week, we have introduced at the CIDA meeting, which is the Controversies in Dialysis Access, we were able to introduce the Super HeRO. Briefly, what that product does is it allows us to attach our outflow cannula to other grafts, and these other grafts are ones that you can cannulate much earlier than the one that we provide in our kit.

Reports that are fresh and coming from the field this day are that we were the hit of the show. I'm sure there may have been one or two analysts that may have been there, and they can report in their writings. But we took about 80 to 85 leads in that conference, which only has about 300 to 400 of the most influential vascular surgeons, nephrologists, and interventional radiologists working with dialysis issues. That was in Austin, Texas.

It's exciting to see a business that you buy and a business that you can integrate and that you can launch new products and start other products. So I think that's it's important to start out by saying that although we were able to have those revenues from those products in the quarter ongoing, that the business is secure, it's in place, it's Meritized, and will continue to be Meritized, and will continue to be a source of high margins and improved profits as we move forward.

Now, if we adjust for these businesses, then we still saw 8.9% core growth. And this is in a summer quarter. I think you would all agree that that's an extraordinary performance and a great effort in the summer.

Now, as part of that, in fairness, we continued to see revenues come in from the Cook opportunity. Our revenues were approximately $3.1 million for the quarter, a little less than the first quarter. But be reminded that in the first quarter, products were being gathered up. They were taken off the shelf, and you had to fill up those shelves. And then as they were used, people would then order. And there was a grab-fest going on when that first came out in, I think it was around April.

In the meantime, we've added additional company at our facilities, and there was some cost, as we talked about in the previous quarter. And I believe that's about 20 basis points in which we were penalized because of the lower margins for some of these catheters. That being said, the amount of comments that come from both international physicians and hospitals as well as domestic have been appreciative of Merit's efforts to make sure that they had the products to complete procedures, particularly in places like Australia and Canada, where we've recently opened up a direct presence. Certainly that was to our benefit. It's our belief that we'll continue to see revenues come from this, and we'll continue to see pull-through. And so I think that we have accomplished what needed to be done to make sure that we can serve our customers.

Now, on a non-GAAP basis, and I'll go directly to that. As you know, we had many expenses that were associated with the cost of a transaction and some of the things that needed to be done. So I'm going to turn some time over to Bernard Birkett, and Bernard, I'm going to have you go through and just for a moment, share a little bit about the DFINE transaction expenses and why you see non-GAAP at $0.26 a share, and just to make sure that we put a little clarity on that.

Thanks, Brian. Just to recap quickly on the revenues and Q3 revenue was up 15.3% on a reported basis, 16.1% on a constant currency basis. For the year, revenues were up 10.5% as reported and 11.4% on a constant currency basis. And from an earnings perspective, Q3 GAAP earnings per share was $0.02 compared to $0.11 for the same period in 2015. This is down primarily as a result of restructuring costs related to the acquisition of DFINE, Inc. And Q3 non-GAAP earnings were $0.26 per share, up 28.8% compared to $0.20 per share for the quarter ended September 30, 2015.

From a gross margin perspective, on a GAAP basis, gross margin was 43.2% compared to 43.5% in Q3 of 2015. On a non-GAAP basis, gross margin was 46.8% compared to 45.6% for Q3 in 2015. And so we continue to see improvements in gross margin and in earnings quarter on quarter as we proceed through 2016. Based on the information that we've already provided, this is consistent with our guidance.

Also, on a CapEx perspective, again we see reduction in our CapEx expenditure in Q3, so it's came in at approximately $5 million in the quarter, and that shows a reduction in CapEx quarter on quarter since Q2 of 2015.

Okay. Now, Bernard, I need to maybe have you do a little bit more color on some of the expenses that would have been included in the GAAP and non-GAAP for DFINE specifically. Could you discuss that a little bit about what some of those expenses would have been if they had been added back on the non-GAAP?

So the major expenses regarding DFINE that we have been adding back in would be reorganization costs, primarily driven by severance costs and that we have seen within the US and European businesses. We have, as Fred said, been able to accelerate the program in integrating and defining into Merit, and actually now starting to see realization of the synergies that we have forecast, and we'll see them come through in Q4. And again, this is in line with what we had said on our Q2 call of how we saw this actually playing out through Quarter 3.

I think we're slightly ahead of schedule. And again, this includes shutting down offices, moving inventory. And for instance, in Europe, we, of course, adjusted the customer service ranks because we already had those folks. We moved from a 3PL to our facilities in Maastricht. And I think, again, overall, I don't know that you could have done it any better and in such a timely manner. So all in all, I'm very, very pleased with that.

So we look at revenues, we look at our earnings, we look at our ratios, we look at our debt; we take a look at all of these factors. They all moved in the right direction in the quarter and will continue to do so.

Let me, if I could, move a little bit now onto some of the other highlights of the third quarter. During the quarter, we completed the enrollment of the EVOLVE study. Now, the EVOLVE study, if you will recall, involves an esophageal stent in which we have a specific valve in that device made of a proprietary polymer. And essentially, what this does is allow a patient, and generally a palliative patient, to be able to sleep in a prone position without feeding tubes, and they can both eat and, if necessary, regurgitate.

Now, that doesn't sound like a lot of fun, but I will tell you that the patients who have this product, in my opinion, have such an improvement in the quality of life. Now what takes place is we have to wait approximately six months, and then we will take the follow-up, which is essentially just a safety follow-up, and then we will take that data and submit it to the FDA for the approval process. So that takes time, but I think it's one of the things that helps to enhance the Endotek Division.

Now, as promised in our previous call, and if you looked at the Endotek in the second quarter, it was a little slow, and that was basically an OEM issue. However, I am pleased to report that for the quarter and the three months compared to last year, our sales in Endotek were up 24.3%.

Now, I believe that that's going to continue, and not only that, I believe that it's going to accelerate. And I say that because in addition to the revenues that we're seeing from our Elation balloons and our stents, our mini-stent, we believe that we're going to see substantial growth opportunities now that we have the 510 clearance for the pulmonary dilatation balloon. That's been approved, first lots are being built as we speak. And in fact, I was on the production line this morning, and they indicated that they would finish up the last three work orders for the pulmonary balloons and then those will be launched. A reminder that Merit is the leader in pulmonary stents, and to have this product, I think, is going to be an exciting opportunity for Merit.

In addition to that, we launched the basixTOUCH40. This is an inflation device that will go up to 40 atmospheres, primarily used by nephrologists and interventional radiologists to do high-pressure procedures with grafts and fistulas. And so this is a very competitive, I think best in class, and just part of our armament of our inflation device business, and we expect that we'll see growth there.

So as we look back at the quarter, I think that we had improvements in gross margins. We had, I think, a very, very exciting sales prospect. We were able, as I mentioned previously, to transfer the manufacture of the HeRO and launched new HeRO products. And we integrated the DFINE business, which is essentially complete. And we did all of this in 90 days. Listen to my staff and as to our shareholders, I will tell you that this was a Herculean effort of being able to do all of these tasks and get them accomplished in that period of time.

So as far as the business as we look forward, Merit has a number of new products that will get launched in the late fourth quarter. And I'm very excited as we look into 2017. We have the Corvocet, we have the balloons that I talked about -- not just the pulmonary balloons, but the exciting growth that we're seeing in the standard esophageal balloons. We have the SwiftNINJA. That continues to grow very strongly. This is our steerable microcatheter that is in review at the FDA, and we hope that that product will also get approved, but it's in that process.

So I think all in all, in summary, we did what we said we would do. I think we did it with precision. I think that the business is continuing down that three-year plan of improvement in revenues, in profits, gross margins, and I hope you're as pleased as I am with this quarter, and I think the prospects for the Company going forward.

So that's a lot of conversation on a lot of subjects. We thank you for your patience, and now I think what we'll do is we'll turn the time over to our administrator, and we'll go ahead and take questions.

Thank you. (Operator Instructions.) Brooks West, Piper Jaffray.

Hey, congratulations on a good quarter. I just have really two questions. Question number 1 is on gross margins. I wanted to understand the main drivers of the improvement there. Is it on the mix side? Is it on the cost side? And I was hoping you'd call out maybe two or three products that we should keep an eye on as primary positive mix drivers on the gross margin side going forward. That's question number 1.

And then question number 2, you've strung together a couple of quarters of 12%, 12%-plus operating margins. I'm wondering if that's now a safe level to think about as we model the business going forward. Thanks.

Okay, great. Thank you. I'm going to have Bernard answer the question on gross margins, and I'll come back to mix.

Hi, Brooks. Yes, both on them, we've seen a number of factors affecting the gross margin. And mix is part of it, and we see that in the growth rate of certain families of 20 basis points you're seeing on mix or the effect of the catheter business. That effect was negatively by about 20 basis points, and on the quarter, we did see a negative impact also from FX, and particularly from China and the UK, and that affected us again by about 20 basis points. So if you add that on, we would have seen a 160-basis-point improvement. And some of that also does relate to DFINE being added into the mix and that being a higher-margin product for us. And with that, that started to benefit us late, mid to late in the quarter. So mix was part of it. We're also seeing cost efficiencies coming from our facilities here in South Jordan and actually moving more product to Mexico. And that's having a greater impact as well.

So thank you, Bernard. Let me go to the products that are going to help drive the business in the future. There's five of them here that I think are very exciting for us. The biggest one is the Corvocet. We're just a week or two away from release of that product. Just about everybody we talk to -- the physicians, the almost 100 patients that we've done in 10 hospitals, and a lot of other work we've done with physicians -- is this is a best-in-class product. This is a full core biopsy product. It's a global product release, and it's one that we're all excited about here and have been for a long time. So that's one you'll hear a lot about.

The Elation balloons -- we have the pulmonary balloon now and the esophageal. And remember, there's two sets of that. There's the fixed-wire and the over-the-wire. And when we introduced the fixed-wire first, we were short of having the other side of that equation. Since we would have added that particular product, we're still literally selling them as fast as we can make them.

Now, just a little tidbit, Brooks, that's kind of interesting. Merit launched an inflation device a few years ago called the Big 60. And it's used to inflate these esophageal balloons. If we sold one balloon for each inflation device that we're already selling the business we've taken away from competitors, we'd be doing over $25 million a year on the existing volumes of syringes and balloons. And I think that's something where we have to have an install base, and you combine those two products together, it gives us a huge opportunity. And even maybe equally important is we've already taken that business away from the market leader, and that's where we're seeing this uptake on the esophageal side.

Now, with the pulmonary side, as I mentioned in my previous comments with the stents, to be able to have that stent business be the leader and then come in with this balloon product is an exciting opportunity.

Now, the PreludeEASE. This is our radial product in our ThinkRadial program. That product is going to accelerate substantially, as you're well aware of our numbers, and our place is at about 40% of the procedures in the US now are done radially. I think that's going to continue to move over the next three or four years. I think eventually we're going to end up with European-type numbers, where some places are doing 90%. But overall, I'd think of 70%.

Our competitor in the US, our primary competitor there, is doing almost $60 million a year in this one product in the US, and they really haven't had any competition. So we're excited about the entire radial product that includes EASE, our Rad Boards, our Rad Rests, and our guide catheters. So we have a full portfolio, including a compression device. This is a new name that you'll hear, the Prelude Think. Now, I'm just going to leave that one there for now.

The SwiftNINJA. We've been selling those very well in Europe. They're selling for about $1,100 to $1,200 there. And that product, and the release of that product to the US is imminent. And then we've added a couple of product line extensions in our Resolve drainage catheters. So if you look at those four or five products, those are going to be the things we're going to be talking about as we move down to the end of this year, but mostly as we start moving into 2017 -- all very exciting, high margins, high opportunities, and best in class.

Now, your question was with operating margins. Let me answer that question. I think in Bernard's comments about CapEx, we still have the past week, but I think we've been developing better and better discipline in terms of the products and our spending habits. I think as these products come on and we start to get some more absorption and higher margins, I think we're going to not only be there, but I think we're going to exceed that. So I think we have everything moving the way we want to. It's taken a bit of time to get here, but I think we've done the things that need to be done to get the kind of performance that you'd like and certainly we would all like here as well.

Perfect, guys. Thank you so much.

Jason Mills, Canaccord Genuity.

Congrats on a terrific quarter. So I wanted to stick with the gross margin conversation, Fred, and you gave some good detail there. But could you talk about your efforts globally from your manufacturing footprint standpoint? Over the course of the next couple of years, what can be done to continue to drive efficiencies and economies of scale? Maybe any specifics you're willing to give on projects you have in the works and where you are from a capacity standpoint in Mexico. And I'm sorry if I missed that. I've been jumping between a few calls this afternoon.

And ultimately, maybe give us an update on your thoughts for gross margin expansion. You've been willing to give us some guideposts for basic (inaudible) expansion. This year, guidance is in place. But maybe you could update us on your thoughts for the next couple of years.

Okay. That's a big question, but I'm happy to address it. One of the thinks that everybody is aware of, Merit went on a major expansion program, I'm going to say five years ago, and built facilities both for customer service that we built in Mexico. And let me just address Mexico for a second. One of the challenges we have had in Salt Lake City is we have a 3.25% unemployment rate. And everybody in town is fighting for the same workers. As I look now at our plans that we did in Mexico, we were able to move 15 production lines to Mexico without essentially affecting a single job in Salt Lake City. Now, that's a broad statement; I'm sure there were one or two. But there are not a lot of folks that were affected or any types of layoffs as we moved that. We simply absorbed those folks here and continued to build a new product.

For me as I see it, there's more opportunity for consolidation, and I think you can appreciate that we have to be careful about the things that we say. We don't want to alert or get people in a tizzy. But there are a lot of opportunities, and there are some more products going to Mexico from various facilities.

Here in Salt Lake City, and yes, I almost hate to have to admit this, but I will, and that is some of the projects that are big projects, some that I have talked about here, have been late. And you have the expenses of R&D, you have the expensive office space and the overhead, and those adversely affect the gross margin. As these things roll out and we start to absorb the costs with these new products, it's going to have a dramatic effect on absorption.

You take a look at the lean manufacturing that we are working at in all of the facilities -- well, let me share something on lean manufacturing. This is more anecdotal, but we had a company recently call us. They were having a problem because they got lean, but then what they did is they became emaciated, and they couldn't produce product. So now we have people calling us.

What I think in terms of where we have adequate inventory, we have adequate capacities, we have these new products that are rolling out, all of them have a high impact on the business going forward. I think that we have a number of cost reduction programs in Salt Lake City, and, of course, the plant utilization target. So I think some of the things that Bernard did when he arrived and things that we had talked about that we thought needed to be accomplished was the addition of a stronger financial team to be able to help and find information and to target. And I think that working with our COO, working with finance with these products.

But the biggest single, I think, opportunity of these new products and the absorption, and then all of the pull-through that comes through. And it even includes the Cook on that issue, too, because as I mentioned that we're going to continue to see and believe that we're going to retain a lot of that business. And you can see that these products we're talking about in many ways are going to that same customer.

And by the way, I don't want to leave out, Jason, the fact that as we talked about DFINE, so we've consolidated, we've done the things that needed to be done. It's very painful and not something that's enjoyable, but we've accomplished that. We've formed that new IOS group, and as now that training and cross-germination between the Merit team and DFINE team and these new products come forward, we haven't really seen anything in terms of the opportunities from the DFINE business. We just were able to maintain the revenues while we're going through this transition. I think that, in and of itself, was a big accomplishment.

So summary -- you've got Mexico. You've got the lean programs here. Cost-cutting. You've got absorption. And you've got acceleration of revenues to make that absorption, both in terms of margin increase as well as absorbing fixed costs. Bernard, do you want to add anything to that?

No, I think you've covered it pretty well. The biggest thing that we focus our operations team on is really helping those guys identify targets, cost reduction targets, targets that we want to see generated from the manufacturing programs, and to really build that into our gross margin forecast and that people understand the impact that they have and how they can influence that number. And that's what we've really been working hard on for the last 12 months. And that will be factored into our 2017 numbers.

So, Jason, and finally to your last part of your question about, well, where do you go from here? And we've said at the beginning of the year that we'd grow drove between 100 and 150 basis points for the year. I think I'm going to feel very comfortable just staying there and making sure expectations are properly in check. And then, of course, our job here will be to try to do better than that. But I think some of the factors that we mentioned give us the tools for that opportunity.

Okay, that's wonderful detail. I wanted to just put a finer point on a couple of things in a follow-up here. To drive on a pro forma basis, just the low end of that is 100 basis points, it would imply pro forma gross margins tick up about 40 to 50 basis points in the fourth quarter. What is your level of comfort with that? And then next year, you've talked about at least 100 basis points, and you've given us some things that could actually drive it better than that. I think the street is generally right around 100 basis points or a little bit below 100 basis points. But is that a level that should be in models and you aspire to more, or could you comment on that finer point?

Yes, I think those models are fine. Certainly, we aspire to more. I mean, I think even in this quarter, I think we beat what I think other expectations are. That will continue to be our effort, is to -- I keep things properly aligned, and then our job is to meet expectations. So I think it's okay where it is right now, and we're not prepared at this point to start moving numbers around at all.

But now remember, again, I think the other thing that we've said several times, I'll say it one more time -- this was a summer quarter. This was a quarter in which we were integrating really two businesses. One of them was substantial and was global. And then to be able to get the revenue base and do all this other work, in my opinion, was extraordinary for a summer quarter. You know how summer quarters are and how we usually guide lower. So I think, all in all, I'm satisfied. And then we'll just have to now bring this ball over the line and then get ready to play the Super Bowl in 2017.

Great, okay. And then just as a follow-up for me, as we think about the revenue line, and you've given us a lot of detail there, the one line, and I may have missed this, and I apologize. Inflation devices, it seems about last year, the comp is very, very low. Could we be expecting an inflation, a similar sequential run rate that we've seen this year? And I guess overall, as you look at some of the proposed new business that's growing well, standalone devices, another mid-teens growth quarter, but a little difficult comp in the fourth quarter. How would you have us think about growth in the standalone devices? And I'm thinking about it ex-DFINE, by the way. How would you have us think about it in the fourth quarter?

Well, again, I think we're going to stick with the numbers that we have. We have a couple of other products that are being introduced that we have not talked about that are incremental. I think -- do you want to comment, Bernard?

Yes, the standalone is probably low-teens growth. If you exclude DFINE and HeRO, if you back those two out, you're going to see probably close to 13% growth in the third quarter. We would expect to see that continue.

So in that standalone basis, Jason, some of the products that you have in there are snares, just a little bit of color on that. Our EN Snare, for the year, has grown at 17%. And that's an exciting prospect, but in the third quarter, it grew at almost 40%. If you take a look at our RAD products, these are associated with our radio programs. Those grew substantially. Again, I can take the HeRO out, but I hope we get some credit for the launch of the Super HeRO. That's something that we did, and that will be incremental.

Another one that's very exciting, and again, these are these little, esoteric products, but I think they go to answer your question. You take a look at our ONE Snare. This is a product that -- and Merit's the only company that has a three-loop snare and a one-loop snare. Last quarter, or for the summer quarter, that business was up 37%. So there are a lot of things going on internally in a number of existing -- for instance, the ONE Snare has been out there for probably two years. But these internal products that we develop and release are continuing to grow in double digits. And I think you'd agree that some of these products, at 36% to 37% and 80% gross margins, are the kind of things that are going to help to drive gross margins, revenues and for us to be able to meet the objectives that we've set. I hope that answers your question.

Yes, that makes sense. One last one, and I'll get back into the queue, I promise. The Cook -- and sorry if I missed it -- the Cook Medical recall, you said contributed a little over $3 million. I'm wondering if you could comment on what you're seeing in the field to be able to retain that in 4Q, and then maybe into 2017.

And then you mentioned some of the accelerated growth rates in snares and some of these other products. Are you getting business outside of just catheter products that you're supplying customers that Cook can't? Are you getting these customers to order other products in your portfolio? Thanks, Fred.

So let me go to Canada and let me go to Australia for starters, because those were the startup businesses. The ability to go in and to serve your customers' needs and give them products when they were literally taking patients off the table, that's a nice thing to be able to do, and we made those priorities because of the distances in the startups. And we're getting a lot of business in Canada, a lot of business and a lot of pull-through from those catheters.

When you start taking a look at the whole Cook, it's my belief that in talking to a physician last week, who was talking about our marker band catheters. This physician said, "Listen, we've been using these catheters. They're great catheters. I intend to continue to order those catheters." I can only take that at its face value. I didn't solicit the comment; it was one that was made directly to me.

Again, I'm not in any way trying to say (inaudible) Cook. They're a great company, and like all these companies that you follow and that we're aware of, everybody falls on some form of misfortune some time. But I think our presence there, I think the HeRO -- now, think about this. You have snares and you have the HeRO and you've got the catheters. You've got the marker band catheters. You've got the non-vascular access catheters. You have all of these things, and then add on top of it some of the training programs we're doing for interventional radiologists in regards to radio procedures. Add all of that up together, and it's a nice formula. It's a really nice situation.

So my expectation is that we'll continue to keep that business, we'll continue to get more pull-through, and that we'll retain a good portion of that business. Cook is trying to. They're making statements about some other catheters they have, and I even heard somebody say that they got back 50% of their business. Well, but they didn't get back 50% of our business. We built it up to $3.6 million. We came in the December quarter at $2.1 million.

The other thing I'm seeing, Jason, is initially there were these large bundles that were ordered and went into US hospitals. But where I'm seeing a lot of this now is, very candidly, we're getting a ton of business out of China, we're getting a ton of business out of Japan, we're getting a lot of things in the UAE and other parts of Russia and Eastern Europe. So it started out in the US, and then now it's moved out to these other areas, where we're starting to see some of the volumes that we saw, and these are initial orders. So we're going to keep the business. We are getting the pull-through. And I think that pretty well covers it.

Thanks, Fred.

Jayson Bedford, Raymond James.

Just a couple of quick ones. I hate to go back to gross margin here, but when do you start to see the impact of moving the HeRO graft manufacturing in-house?

Yes, that's a good question. So one of the things that, when we modeled and we purchased that business, we modeled at around 55% gross margin. As part of the transfer, making sure that we could get our manufacturing up and running here, we built bridge inventory. I believe when I talked to our good friend in the back of the room, that we will finish up that inventory in the next 30 days or less. Is that fair?

(inaudible ? microphone inaccessible)

So in the next 30 to 60 days, we will have used up all of that higher cost -- and remember, that's pretty high cost, because we gave incentives for people to stay there. It was a much higher cost. What we found out is that when we brought it here, put it into a production system with Neil Peterson, who oversees our manufacturing and our engineering, and Ron Frost, our COO, we essentially doubled the throughput. And so we're now estimating that those revenues are going to be about 70% -- margin, excuse me -- gross margins at 70%. You add onto that now the Super HeRO, and there are some common pieces there.

So if we were to say at mid-October that it's essentially 30 to 60 days, you'll see a little teeny bit probably in the fourth quarter. But for all intents and purposes, Jayson, the first things that go out in Q1 are going to have those higher margins on them. And we're also seeing some momentum in the business as well. So we think it's a great product.

So let me answer your next question.

Yes, that's helpful. Thanks. In terms of the DFINE integration, I think, Fred, you mentioned 85% complete. What still needs to be done?

Yes, it's a good question. So what we did is we've shut down the European operation. I think we have about five or six of the 37 folks, so that's a big deal. We put and moved customer service, and we moved the inventories that were at a third party out there. What we have here is some wrap-up. It's HR, it's some accounting things and audits that had to be completed. There's facilities, and of course, we're keeping some R&D people. But do you want to maybe, a little bit more on that?

Yes, it's primarily wrapping up the facilities, Jayson, in Germany. We have reached an agreement there. We are looking at what we're doing with the facility in San Jose and pulling that together. And there are some car leaks and some other operation leaks that need to be taken care of. But essentially, all of the work regarding personnel has been done. That was the biggest piece of the equation for us. Some of those costs will run into the fourth quarter, but we're actually ahead of where we had forecast on that. So just some of those non-personnel-related items need to be wrapped up in the fourth quarter.

And Jayce, we had our OICs out on TDY for civilians. That's officer in charge and temporary duty, where we had folks from Salt Lake City that were there on the ground in place, running the businesses. They have now all been recalled. They're back on post, and I think that speaks to the issue of having those issues substantially complete. It's just a few other things that we need to wrap up. But the management, the sales, all those things, have been completed. So there's not much left to do but a few little housecleaning details to wrap this up.

Okay. And then I know it's early, but have you seen any of the potential pull-through benefits associated with this deal?

I would say no. I would say we have not at this point. And what we did is we wanted to stabilize and make sure we retained their revenues; we wanted to get the business pieces done. We had an initial sales training -- and remember, the sales force now consists of half Merit people and half DFINE in this OIS division. So we'll continue to have our sales meetings at year end and planning for next year. There will be more training.

But what we are seeing is that we're starting to see signs of our people picking up business on the DFINE side. I saw a couple of accounts today. And then we're seeing some of the DFINE people were picking up some of the Merit business. It's starting. That will accelerate.

And by the way, just because you gave me this opportunity, these are great products. This was a company that, you can go through structural issues, you can talk about all these things, but the products themselves are great products. I had a physician here the other day. We were chatting about this stuff, and he just looked me in the eye and he said, "Fred, you need to understand the quality of these products and why we use them." And we knew that, but it's really nice to have that reinforced, and I believe it will prove as that accelerates.

Now, you take that on top of the momentum, the Cook, all of the new products, all of these sorts of things that we have, that's a pretty nice lineup. I don't know how you could pencil in -- I mean, we've got everything, and there's no excuses, there are none. We have everything we need to play ball here. So it's really all on us, and we're the guys. So I'm looking forward to future reports, Jayson.

Okay, that sounds good. I'll let someone else jump in queue. Thanks.

Jim Sidoti, Sidoti and Company.

I just wanted to just confirm a couple of things. You reiterated your EPS guidance in the press release. Should we assume that the sales guide that you gave last quarter is also intact?

That's correct.

Okay. And then just to go over the numbers, you said it was about 8.9% organic growth, so that puts the prime revenue at just under $9 million. Is that right?

No. In the third quarter, we did about $7 million. In the fourth quarter, it should be about $9 million, so that will accelerate. Because remember, there was about $16 million that we felt that we would capture to the balance of the year to fit our program. And incidentally, think about it for a second, Jim. You've got a business that you buy, salespeople leave, you've got the disruption, you're shutting down, and you can maintain those revenues. Oh, you're including the HeRO?

He's including the HeRO in that number for the Q3.

In the fourth quarter? Oh, in the third. Okay, I'm sorry, okay. Yes, HeRO in there, I'm sorry.

So the combination of the HeRO and DFINE was $9 million or so.

There you go. Okay, I'm sorry.

Okay, all right, yes, that makes sense. Okay. Can you just give us an update? Is the Mexico plant, is that fully up and running at this point?

Oh, yes, Mexico's been running for 18 months. I'll tell you some of the really blessings of Mexico. First of all, the people that work there are hard-working, wonderful human beings. The great part, Jim, is our turnover rate. Think about this -- a new business establishing down there with a lot of device companies. We have a turnover rate that's less than 1%. I can't think of anything happening better to Merit than having made the decision to get that business up and running.

And again, there are cost benefits; of course there are. However, the more important thing is the availability of labor and then being able to retain those people. And we've done it, I think, with good management techniques in terms of how we take care of people, how we feed people, how -- we even have an air-conditioned warehouse. Those things may sound a little trite, but they're not. And they've made a huge difference. And in Mexico, the company to work for in Tijuana is Merit Medical.

Okay. In terms of the Cook business, you said you think you can retain a good piece of that. Have you been able to introduce some of your other products to the customers that you were able to get because of the Cook recall?

Yes, I think -- listen, I don't think there's any question that when you can grow in a summer quarter on your core business, and drive that business, that we're getting pull-through. It's coming through in vascular access, needles. We've introduced a new inflation device into the interventional business there.

And incidentally, just to comment on one of the other questions about inflation devices, cardiology procedures are somewhat flat. The radial procedures are improving. But we never include our inflation devices in the endoscopy business in the inflation device numbers. We throw them into that area or throw them into the endoscopy business. And so that's something that we don't ever put upstairs in that other product, and that product is, for the sake of discussion, is up almost 15%. So we're continuing to sell those inflation devices as well as the balloons and the other things. So again, as I look at the business, Jim, overall, it's very healthy. We're getting pull-through. We're solving problems for customers. And we have this big pipeline of new products. And I --

And then --

Go ahead. Go ahead, Jim. I'm sorry.

Sorry, sorry. The last question is everything seems to be going in the right direction. The one area where you had a down year, or a down quarter year over year is embolization devices. Can you just give us an update, what's going on with that? I know you had some clinical trials going on for those, and do you expect that to rebound in the fourth quarter and into 2017?

So the biggest factor on the embolization side of the business was the reduction in orders that we got coming out of Nippon Kayaku out of Japan. So they filled their shelves, so we saw the big numbers there. And then now what they're doing is they're -- I guess I'll say they're coming to reality -- they're managing their inventory. So that's the biggest single issue there.

And the other thing, too, is that all of our salespeople were really working on maintaining this business from the DFINE. So there's all that training, people out in the field, people maintaining the business, and that was our priority. That's where we spent our time.

Okay, all right. So you would expect that that gets to a more normalized growth rate over the next quarter or two?

Yes, and there's one other factor that will help that business, and that is we have a couple of new products that are in the pipeline, so that will be one thing. And then maybe the more important thing is the SwiftNINJA. I don't think anybody really understands the impact of this product. I tried to state that, but remember, this is a steerable microcatheter. And listen, when you can sell a product for $1,200 in Europe, and we expect and we hope -- I'll just say I hope -- I hope that we'll have that product approved here in the next couple of weeks. It's a big deal, and what do they put through those? The answer is embolic materials. So it's a big, big factor for us to have that present and to work with interventional radiologists. It will help that substantially. That's the pull-through that I think, with a number of products, that will certainly pull through embolics.

And are you coming to the close for any of the clinical trials for that product line?

No, well, you know, Jim, for good and varied reasons, I'm not going to comment on that. We have a clinical trial out there, but there's other things that we're working on, and I'm just not going to answer that right now other than to say that that is an active trial. It's not under any scrutiny or anything like that, but I'm just going to hold back on that, and it has nothing to do with any of that stuff at DOJ. But there is an opportunity out there that, at the appropriate time, we'll discuss on the trial.

All right, thank you.

Gregory Macosko, Montrose Advisors.

I guess I have to pose my question on gross margin. Everybody else has, and the one thing I wondered about was Canada and Australia. I know that you've gone direct there. And you were profitable, you said, last quarter in Australia and Canada, and (inaudible) Canada. What do you see with regard to the gross margin improvement with regard to those two going direct?

We are making more money -- we get higher prices in those locations for our products, on what I'll call our more advanced products. Kits, fluid administration, that sort of things, are about like they are in the US. But all of our other products are higher margins and higher prices than we get in other locations. Surprisingly, the prices that we get in Canada are higher than they are in the US on most of our products up there. So that, it continues. We still have some wind-down over the next 60 days with our former distributor. So when we worked a deal, we took a portion of the products. But anything that they had that was on national contracts, we continued to supply them, and those are at lower margins. So it's wholesale versus retail.

That's all going to come to an end here in the next 60 days or so, and so we're going to see additional margin improvement and revenue improvement there.

The only factor about -- and I think this is important to discuss -- in order to get product to Australia, it's a long ways. And when you have to get all of these products that we sent down there and still maintain a competitive posture with what they were paying -- and I think that's another thing, Greg, that I didn't mention. When this stuff with Cook happened, we did not go in and raise prices. We didn't want to gouge the customers. We essentially said, "We will meet what you're paying." And I think that was the right approach, but it takes a lot of money to get those products there, and they had to have them. So one of those things is we'll see a pretty big decrease in expenses because we're able to get things on the water and get them there in a period of time instead of all of this rush. So we should see lower costs, and then we'll see continued growth.

We've had the sales guys here this week from Canada -- in fact, I think they're still here -- from Canada and Australia. We've gone through their sales numbers for next year and their forecasts, and we feel quite comfortable. And again, you'll see that both in terms of gross and sales and in gross margins. So I think we're very satisfied with what we've accomplished there. And the timing couldn't have been better. You couldn't write a script. You had the products and the issues. We had a distributor partner down there that got bought out by Teleflex. And it all worked out. And even Bernard, even Bernard, good old Mr. Birkett here, who was kind of like, "I don't know if we ought to do this, and maybe can you slow it down?" and this and that. What do you think now, Mr. Birkett?

Great idea.

What a great idea!

(inaudible).

I hope that answers your question.

Yes, it sounds like those gross margins will kick in really nicely in 2017. And then just the last question with regard to TOUCH40, the inflation device. I believe that was launched in the quarter or last quarter. And how's that coming? And that's probably -- you were optimistic about it.

Yes, well, listen, if one thing that Merit is, as you know, is the global leader in inflation devices. And procedures change. The biggest issue is that when you're doing declots and you have to do a PTA for these patients, they require higher pressure, and they have higher-pressure balloons. Merit had a 35-atmosphere, but some of the larger balloons are rated at 40 atmospheres. We had a competitor that came out with a 40-atmosphere, and we were able to respond to it. And we actually already had it in the mill. So there was a little bit that's lost, I would say, in the second quarter, maybe the first and second -- just a little bit, not a lot -- and then I think the bottom line is people prefer the basixTOUCH, and certainly, the higher pressure.

Incidentally, just so I can say this so my competitors to hear it, we have the capability to go up to 55 or 60. So in our technology and the things we've qualified, as higher pressures are needed, we already have that capability in-house. So hopefully, that will discourage our competitors. But we're set and we're ready to go. The higher the need, we have that capability that's already proven. So that will be a little tip for my competitors -- we're already there.

All right, good. Thanks very much, Fred.

Thank you, and that concludes our question-and-answer session for today. I would like to turn the conference back over to Mr. Lampropoulos for any closing comments.

Well, again, everybody, we had a lot of folks on the phone today. I think it was 120, and I want to thank you for taking the time. And I know that there are a lot of calls that you're jumping back and forth.

The business is strong. We have some issues that we'll have to deal with, and we'll keep you briefed on those. We have a great product pipeline. We have plenty of capacity and plenty of opportunity. So I think that we've delivered on our promises. Our debt ratios are appropriate, our ability to run the business. And again, I hate to keep banging this drum, but our operational and engineering folks and R&D folks did a great job of transitioning this business. Now the fun will be as that starts to grow. Again, all we are trying to do is to maintain those revenues, and we did that. And now I think we'll see the benefits and we've started some R&D projects already. So they haven't done anything for a long time at DFINE, and Merit, just like we did when we bought Alveolus, just like we did at Thomas, just like we did at BioSphere, and now here at DFINE, we get in and Meritize these businesses -- oh, and I should say Malvern at Thomas Medical. But we invest and we build for the future and we improve the products.

So again, I've had three physicians here in the facility today, and I just have to tell you, this is a statement from one of them. And I think there were several people in the room when they said to me, "The thing that's great about Merit is you guys build the best products." Now, what else can you say? That is about as, from a customer and from a physician, that's the highest compliment.

So again, we appreciate your time. Bernard and I will be here for the next couple of hours if there's any other questions that we can answer that are appropriate to do so. And again, thank you. Best wishes. We'll look forward to talking to you again soon. Goodnight from Salt Lake City.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a great day.