Merit Medical Systems, Inc. (MMSI) Earnings Call Transcript & Summary

Okay. Good afternoon. Thanks, everybody, for joining us for our next session with Merit Medical Systems in the medtech track. I'm U.S. medical supplies and devices analyst for UBS, Matt Taylor, and I'm really pleased to be joined by 2 members of the Merit management team, Fred Lampropoulos, the Chairman and CEO; and also Raul Parra, the CFO. So thanks, guys, very much for joining the call and spending some time with us today.

Thanks for having us, Matt.

Great. So just to kick things off, I think a lot of the investors on the line are probably familiar with your story. You've got a diversified mix of businesses, some of which you've talked about are seeing some increased demand due to COVID. And obviously, with delays in elective surgeries and the likes, some pieces are going down. So I was wondering if you could start first by just level-setting and talking about some of the growth that you saw in Q1, let's say, pre-COVID. So what are the things that are driving growth in the normalized period for Merit? And what are some of the products that you're excited about?

Yes. Well, we saw -- we were actually ahead of schedule as we were going into February. And then, of course, we started seeing a pullback, of course, in China, which was essentially very, very quiet February and March. And yet with despite all of that, we were still able -- and even the last 2 weeks of March here in the United States, we were able to come out and still have a growth rate on there. Products like our IDeal, which is a vascular access product, which is one of the fastest-growing products Merit's had that we developed internally, were a big deal. Just in China, prior to the shutdown, China was very active. And the same with Europe, it was ahead of schedule. And it was just a broad base of products that came out of that. And then, of course, it slowed down. Now since that time, Matt, we've seen our critical care product line probably up close to 30%. We've seen our endoscopy business down 50%. Although very interestingly, just in the last week, and particularly on the pulmonary side, we've seen that come back, back to -- I don't want to say quite normal but we've seen that come back. And we've also seen China come back. In April, we had a record month in China, and we're seeing China strengthen as well. So -- and that's a little bit -- I'm going to let -- Raul, do you want to go ahead and weigh in on that a bit?

Yes. No, I think our OEM business was pretty strong. Our U.S. market actually was really growing nicely. ClariVein was growing at a strong bit. Endoscopy actually was actually tracking really strong through the first 2 months. And even our Cianna product lines were kind of ahead of schedule.

And Matt, we were just getting started. As you know, the release of our SCOUT product in Europe where we have the CE Mark and then everything kind of got short-circuited from there.

Great. That's a good start. So you've mentioned China, I think, supposed to be interested to hear your perspective, given you have a large business there. It's been a key focus area for you, and it sounds like you're seeing some really positive trends there. Is that record month driven by procedures or stocking or both?

Yes. Well, it's a good question and I have to answer it by both. I think that despite the fact that a lot of people thought that China just shut down, I think it shut down in terms of imports and distributors because of the lockdown. But I think there are a lot of places like Beijing and Shanghai, certainly Hong Kong, where there was still the virus showing up there but I think there were procedures being done. So I think some of this April was to fill the shelves back up because remember, our model there is Merit does clinical support, it does logistics and does all that work. But then we have a distribution network with about 250 distributors in various locations in China. I think since that time, that's still back up. We're watching the business, which seems to be doing okay. And some of our forecasters internally are talking about China reaching as much as 95% for the year, even though we were down in the months of February and March, which again that's based on a forecast. So that would imply positive growth for the year in China, which is, I mean, somewhat astounding, actually.

Right. Yes, that really is. Interesting, okay. And then you mentioned critical care. I guess I wanted to go through a few different areas of your business that you talked about on the call. Some of those areas are really seeing large increases in demand. So firstly, can you just characterize the size of your critical care business, talk about some of the key products in there? And that trend of up 30%, what's driving that?

Yes. So this is about a $40 million a year business. This is a business that we bought, by the way, for about $10 million. It's in the invasive pressure monitoring. So it's a critical ICU-type product, and you can imagine, with all the COVID stuff going on, the intensive care units, as we all know, were very, very busy. I would also include CVC catheters, which are central venous catheters dropped into the right atrium. And these are catheters that are really used for massive infusions of drug as well as patient monitoring. And then aside from that, there were other products also used in the ICU are some of our products that are made in Mexico. So some of our pressure infusors, we're very, very busy. We're getting orders like for 25,000, 20,000 units at a WACC from Great Britain and other parts throughout the world and then a lot of tubing products. So these are things that we make every day. But we were getting orders for like 25,000 units. The average size of a hospital order would be 100 to 200. And these were, again, where they were having the monitors and the infusors sitting out in the hallway and then they would run these long lines into the patients so that they would -- because of the shortage of PPE, they wouldn't have to go in the room. But they could still administer drugs and measure performance of patients. So there are a lot of things. Our antiseptic caps, as you can imagine, again, when you're doing a lot of infusions, you want to make sure that you don't need introduce some other pathogens. And so those were strong. I think that -- did I cover most of it?

Yes.

So again, there's some products that we were very busy on. And then, of course, we saw the fall off in some of the other areas. But I think all in all, Matt, we didn't fall off as much as others. And I think the business is -- we're starting to see signs of things like electrophysiology products. So we mentioned the endoscopy products. We're seeing some of the things that we use in some of the most advanced procedures like the HeRO. You're seeing some of those products that are showing -- coming back, and we're seeing increases in our daily sales as we move through April and into May.

Got it. Yes, that's great to see. I mean outside -- I was just curious, as you manage the business outside of trends in China, some of these early reversion trends in the daily sales in the U.S., what are the other things that you're really tracking as an organization to understand how to forecast and run your business?

Yes. Well, they are good questions. I'll just give you a couple of thoughts and let Raul pick it up from there. But listen, it's all about matching the inputs with the outputs and trying to balance where are your orders? What do you see? And then how do you adjust your sales force? How do you adjust R&D and your production staff? And I think one of the big advantages is that we had a head start. We stubbed our toe last year. And everybody is aware of that. And so we were already in the hunker down, move products, consolidate, lower costs. We had a head start. And those are a whole bunch of areas, really kind of across the spectrum of things. And we just kept our heads down and kept moving. And so I've said this, in many ways, we will recover faster. And I think the breadth of products will be there too, simply because of the company's business and the things that we'd already done in advance of all this. Raul?

Yes. I mean I think forecasting is key right now as we look at not only the income statement but also the balance sheet, just making sure that we're trending in the right direction. So I think from my perspective, our FP&A group, myself, Fred, we're in constant contact with our sales force, hearing what they're hearing from their customers as far as when things open up, what procedures are maybe heating up. I'm constantly checking the daily sales, hour by hour, checking to see if there's any trends that look positive. Like, for example, today, Fred and I, just no less than 15 minutes ago, we're looking at the U.S. sales and noticed that it was a good number. But maybe our endoscopy was a little soft. So I mean, I think we're just trying to listen to anything we can get and then also checking our daily sales and adjusting as necessary.

Well -- and Matt, one other thing just to add to that is another fortunate part for our business, and you recall when you were here, we were talking about this. We have essentially had no interruptions in our supply chain. When this thing first started, we were hearing about a lot of people asking us about that. And I know some people have had some struggles with it. Merit is so much vertically integrated with our molding, our sensors, our extrusion, that we really haven't seen disruptions. And in fact, if anything, we've seen the opportunity to take advantage for other people that have had who can't deliver. Not a lot of it, but Merit has had minimal, if any, in terms of our supply chain.

Yes. No, I remember you had to make a lot of proactive moves to shore that up, but it seems like it's worked really well. Couple other things I wanted you to weigh in on that are part of bigger debates, if they apply to you, specifically to you. One is, in talking with hospitals, government customers, I was wondering if you thought for some of these areas that are potentially used for COVID or flu management, are you going to see customers permanently stocking more of this stuff? And how are you trying to adjust to understand how you can support customers if there is something like a second wave coming?

Yes. Well, first of all, we are seeing, anecdotally, that customers are telling us that they got caught once kind of unprepared and they won't get caught again. So I mean, we're hearing that quite a bit. And so we are seeing stockpiling of various products, CVC catheters, pressure monitoring, swabs, media. We're seeing that kind of across the board. And that goes on top of the fact that there's still a shortage of this stuff all over the world. We're seeing it from Africa. We're seeing it from Europe. We're seeing it in the U.S. and in Asia. So no doubt that there -- people are still trying to get caught up and then trying to make sure that they don't get caught again without adequate supplies, not only of PPE but of all these critical supplies that we just talked about.

Yes. Yes. That makes sense. You mentioned the swabs, and this might be just aside question. But I thought it was interesting that you were approached to make swabs by the Governor of Utah. And so I was just hoping for a quick update on that. And is there anything else like that, that would be a business opportunity for Merit to get into in places that are in shortage?

Yes. There -- first of all, the state came to us and then other states have come to us. And first of all, I think it was a huge vote of confidence on behalf of the state of Utah. We're producing product for them as we speak. They're talking about doubling their order. I think this goes into this situation by getting prepared for the next round, should that be the case. I think that one of the things we've learned from looking at this is that there are OEM opportunities. Going back to our vertical integration, one of the very interesting areas is a shortage of vials. When everybody is grabbing them and trying to use them to be able to put these swabs, you got to have a vial. So Merit was able to produce -- or excuse me, to acquire about 1 million of them and we have those in our possession. And then we decided, well, you can have all these other things but if you don't have a vial, just a little plastic tube, then you're out of business. So what we did is we have tooled our own. We will be producing our own vials. As you know, we are vertically integrated and we will be producing our own in August. And since we're an OEM company, we'll sell them to other players that want them. And we're talking about 32 cavities and a reliable OEM business. As you know, we have about $110 million, $120 million OEM business. And so we'll use them for ourselves and we'll make them available to our customers. Those are the kinds of vertical integration things that you see, to and including the materials that are called MTM…

VTM.

VTM and UTM. These are the various types of transport media. As you will recall, Merit has a pretty big chemistry business. We have -- where we make our embolic materials. We make PVA. We make gel foam. We do those in our facilities. And so we have a lot of chemistry and we started looking at all of these things. So essentially, we'll be vertically integrated all the way into the COVID testing. Now will we go to antigens and will it go to this and will it go to that? And the answer is, I don't know. But what I do know, there's plenty of demand for this and the ability, whether it be for the regular flu or whether it be for other COVID or anything else coming down the road, fluids, transports, vials, swabs, these are going to be things and they're right in Merit's wheelhouse.

Right. Right. How material could those businesses be for you? Maybe you can just talk about some different scenarios for them.

Well, I'm just going to answer that, Matt, by saying if there's so much demand, if we can keep up with that demand, it will be material. But again, we're just ramping up right now. We're producing -- we started out at 10,000 swabs a week. We're now at 50,000. We will be at 100,000 a day within 10 days. So that's 2 million a month. That's 24 million a year, if that holds trend, and you can put a price on it and just take a look at it, and it's a significant number. But what we don't know -- and here's the other -- maybe the more important part is it's not capital-intensive. Yes, we've had to spend money on some tooling, on long-term things like the vials. But on the rest of the stuff, it's pretty standard stuff. It doesn't require huge amounts of capital to do this.

Got it. Yes, that's an important point. Okay. Well, maybe transitioning into a couple of other areas that I wanted to ask you about. Another kind of bigger picture question that relates to demand for your business for the rest of the year. On the call, you talked about this idea that when hospitals come back, a lot of the customers are very gung ho and they're saying, "Hey, we're going to be running at 125% for some period of time." And you seem to doubt that, that would occur maybe broadly. Could you talk about your thoughts on that? And -- yes.

Yes. We don't believe it. We're operating under the RS factor. That is the Raul swoosh. Some people think it's Nike's, but it really belongs to Raul. And that is, look, I think we've reached that bottom. But look, we're seeing, on a daily basis, revenues increase kind of on a daily sales basis. But we don't see this instant recovery in the third quarter like everybody else is talking about. In fact, quite to the contrary. We think this thing is going to kind of roll along here with slight improvements. And we're not even ready to say that it's going to improve in the fourth quarter. We think it's going to be a little bit longer. Our planning and our numbers are based on that. And we don't know if there'll be a resurgence in this or that. So we've sized our business for a little longer recovery maybe than most are talking about or at least that the pundits are talking about. I think that's much better for us to plan that way because we can respond if the demand is there. But what I don't want to do is take my inventory, my dollars and tie them up for things that are going to sit on the shelf. We don't want to do it that way and that's not what we're doing. Raul, do you want to add?

No. I mean I think that's it, right? I think we'll -- until we see something that factual that drives the decision, that's data-driven and can drive a different decision, that's how we're going to approach it.

But there's just a lot of -- it's going to do this and it's going to do that. Who knows what the summer does? We -- as you know, from following us for years and years, Matt, that the summer, particularly what Merit has a pretty big exposure in Europe, we always guide down when we guide 5% to 10% between the second and third quarter. Europe shuts down. They go on vacation. Well, they've been on vacation since February. So are they going to go on and take a holiday this year? I don't think so. But what will that load be? I don't know. So that's why I think we're saying they may be up there but will it be -- will it be a spike? We just don't think so. And the reasons are, we don't think they'll turn rooms as fast. We think there's cleaning. It's like -- it's not like -- I mean, I've been in labs where they're -- they've got a crew that -- one's leaving, one's coming in and the next one is getting ready. They're just trying to get as many through there. I don't think those days -- they're going to have to turn the lab but they got to clean it. They got to get it properly prepared. You've got to regain the confidence of people to go back in the hospital. And listen, we got baseball for a second. You don't take off 3 months, put a bat in your hand and step up and hit the ball. It's about timing. Physicians are the same way. It's all about their hands and their eyes. And it's going to take them a little bit of time. Their staffs, people are tired. They're going to have to reevaluate and readjust. So we think things are going to be a little different than what a lot of people are talking about there. And I think we've built our models on a little bit more conservatism than maybe others have, maybe other than Johnson & Johnson. They're -- certainly, our business didn't see the kind of response that some others have.

Right. Well, that -- I mean, I think that makes sense the way you're approaching it. It's a prudent way to run the business. But what I'm trying to understand is, given you see such a boring back in China, are you just saying that you think the U.S. could be different or you're not sure? Or are there reasons why you think it will be call it…

No, I am sure. I am sure. Listen, China is a homogeneous central government, someone telling you what to do. In the United States, we're all a bunch of separate 600 IDNs…

50 states.

50 states, 50 governors, different states of disease. In Utah…

Different hospital networks.

Different hospitals. I mean, in Utah alone, I was in Southern Utah over the weekend. And in that situation, I mean, there's flip-flop. Restaurants are open, people are moving around and you say, "Hey, guy" -- my wife and I have got masks, bubble heads on, gloves. They're saying, "What planet are you guys from?" We're saying, "Well, we're from Salt Lake City." And it's just a different world. So the United States is independent. People all have kind of their own little deal, and you can just see that across the board with governors. It's the same issue with health care. It's quite different than China, and we don't think that this is going to be the kind of rebound, if you will, that you saw in China. We don't see that at all. Raul?

I agree. I mean, I think that's why we've got -- that's why we avoid calling it a U because we just don't see it like that.

Yes. He's trying to sell that Raul swoosh. It's available for license.

That's right.

All right. All right. No, that -- I mean, that's a fair assessment. That makes a lot of sense. Okay. All right. And a couple of other things I wanted to ask you about. Well, maybe just one more on this one since it's topical and a continuation. If you do see that slower recovery in -- but improvement through the second half of the year in the U.S., so what do you think that means for 2021? Are you going to get back to what you used to think it would look like? Or is there again going to be kind of a tamping down effect on utilization?

Well, I can talk about our business. We have 10 products that we launched in January that never really got launched, and we have 10 more that are in our R&D offer. Even though we've kind of compressed our R&D schedule and our expenses there, we have plenty of products. So I think that with our legacy products and this, I don't have any doubt that in 2021, that there'll be plenty of opportunity and growth for Merit. I'm really not concerned. The question is, does it happen in the first quarter? Do we start to see a turn? If we buy -- our theory of slow really throughout the year and then we start to see some improvement, it all depends, Matt, on do we get a vaccine? Do we see a resurgence? Do we see this or see that? But I think something is different, and that is we're seeing that hospitals that we're talking to, administrators are talking about how they'll have certain hospitals in their system that will always be doing elective procedures. They'll have others that might be isolated to COVID if it resurges, so that they'll -- I mean, they didn't have time to think about these things. Remember, we had ships in the harbors. We had the hospitals in the fields. We had all this stuff going on. We didn't see that large of a demand, and they shut those down. But it did strangle hospitals. And I think that everybody now is starting to talk about or has been talking about how they would do it differently. And I think those plans will be in place. So even if it resurges, I think we'll see a different plan, and we will not see the kind of slowness that we saw in 2020. So yes, I think we will see it. And then the big question for Merit is, how much growth will we see with the new products and our availability? And while I'm on that, you didn't ask the question, but I think we're really reevaluating our entire business model, how we approach customers. We've been very effective in having 100 physicians, 150 physicians taught by a physician teaching how you do a peritoneal dialysis case percutaneously or how you do vascular access, how you do this. And we're starting to believe that we're more effective in training and meeting and moving things down the road than we would be by spending a lot of money with a lot of travel, with trade shows. So my general gut is, without going into a lot of details, we feel like that there's an opportunity here that there's going to be big changes in how companies or at least how Merit markets their products at less cost and being more effective. So I think those are the other things that we're looking at is how do we perfect this. We're doing them now. We're doing 2 or 3 of these a week with physicians. Now one might say, "Well, they have plenty of time." Well, they do. But they don't want to go off to some place and spend the time and the money either. And we want to make sure that we can be the most effective in training and teaching, answering questions. So I think there's going to be a new way of doing business. You're hearing about it. We're doing it today. We're doing it right as we speak. But there'll be a lot more of this in our area as well.

Yes. Yes, that's a great point. I mean, I'm curious, when you look forward at the savings that you could drive from those kind of virtual trainings, could you characterize what percentage of the virtual trainings do you think -- of the training, sorry, that you think you could be done virtually? And what would still have to be done in person? I would think you'd be in a great position to answer that kind of a question as a physician, too.

Well, listen, I'm a person-to-person guy. I like face-to-face stuff. But as an example, even if we're talking about today, I think if Merit did kind of switch it over, if we did a Investor Day, we did it once a year and then we did investor conferences like this, I mean, think about how more efficient Raul and I are being today and you are when we can be here, still get our message across, not eliminate the face-to-face because that's important to look at energy and body language and demeanor, all those things are important. But I just think that there's a lot of savings. Again, I think about all the money we spend going to a trade show for people that we can do more like about continuing education. There's a way to do these things that are benefits without trying to compete with the agenda at, let's say, the SIR meeting or at the CIRSE meeting or whatever one we're going to…

There's a bunch of other…

With a lot of other people competing, I think when we saw this with, again, the PD catheters, 150 physicians. Now were they all interested in buying our product? No. But listen, we had 20 phone calls, and you take 20 out of 150 and you turn those into customers, and they're calling and we, in fact, did do that, that's pretty -- that's better than the leads that we get at a trade show at a lot less cost. So I just think that, again, we're looking at these -- and not just looking at them, we're actually constructing scenarios that will allow us to go beta test them. And I think it's going to be a different world going forward for us and for other companies that are progressive in their thinking.

Yes. Well, that could be like one silver lining from all of this, I think.

Yes. Agree.

Okay. We have just a couple of minutes. Let me ask you 2 more questions. One is just on the pipeline. Could you talk about any areas that could be negatively impacted by the COVID-19 disruption? Or are there any ones that could be positively impacted?

Well, I don't see anything that's going to be negatively impacted by COVID other than the access, that sort of thing. And I think I've addressed that a little bit with how we might reach customers. On the big side, on the big win side, as you know, in the next 2 weeks, we will be hearing from Europe on the Rhapsody, which we think is a significant product, and we will also submit our IDE. We've been working with the FDA for months and months, and we're now ready to submit the IDE for -- and which we have, I think, approximately 35 hospitals or so that we have arranged with to be able to conduct that trial. I will say this that on the first-in-man, we did 46 patients, I think 50 stents or something like that. I think 2/3 are better, closer to 75% have been longer than 6 months. And then 1/3 to 1/2 are almost approaching the point where they've had over 1 year with a 97% patency, primary patency. Those are numbers that are compelling. So now we might not get it. But if we do, that helps us in Canada, that helps us in Europe, clearly, New Zealand and places like that. And as you know, we have breakthrough technology designations. So we're very, very excited about the Rhapsody. We have a number of electrophysiology products, as those come back on. I mean, if they come back in, like we think they will, then those -- that's going to be a very positive -- that's a double-digit grower. Just as a business, electrophysiology, those guys have been shut down. You take a look at vascular access. You take a look at a number of products that Merit has. So we're kind of loaded up. One of the things we'll have to look at is with 10 last year and 10 this year, new products, we've got to be able to get them to the market or it doesn't make sense for me to keep R&D-ing things and building models for the future until I can sell my inventory on the lot. So I think we'll take and adapt the business based on what we're seeing and how the uptake is. But on the Rhapsody, absolutely compelling data. And as we do the pivotal trial, become more apparent that this is not just another covered stent.

Right. Right. Well, I think we'll wrap there. The last one I wanted to ask you was on Rhapsody. You covered a part of it. Just wanted you to expand on that answer a little bit. You said it could be the most exciting product you've ever had. So what makes you say that? And maybe talk about the opportunity for it more broadly as it gets into other geographies, too.

Well, remember, it's not just geographies. And when I speak to it, I'm glad to be asked that, Matt, is that when we look at this area, this initial approval is for the outflow circuits for graft and fistula patients as well as the central veins. So that's the initial ones. But if you take a look at the iliacs and other areas, those markets are huge. We decided to come in. I mean, this is billion-dollar markets. And so I think as we look at the technology and what it means for the company and how we've developed it and all vertically integrated, all made right here on campus in Salt Lake City, the market potential is larger than anything that we've ever done before. So I think as we look at it is that the expanded capabilities over time will be something -- this will be a product we'll still be talking about 5 years from now in broader indications. And then you have the global aspects to that as well. So that's what we're excited about is what it means in the whole endovascular area for Merit. And there's -- we have a pathway for numerous products in numerous markets. This is the first stop. So I think with the results that we've seen, again, it is just first-in-man, but it was so compelling. Remember, we got turned down the first time we submitted this because we didn't have any data. We went back to BSI with the first-in-man results, which were so compelling. They were not forced, but they had to go and revisit it. And hopefully, we'll get a positive result here in the next couple of weeks and then we'll start that program in Europe. And remember, these patients are the very same patients that with COVID and other complications, the area that they talked about the most are dialysis patients and the risks that are associated with those guys. So having vascular access, having flow without clots, I mean, we've been reading a lot about thrombosis and clots, is significant. And patients with this technology, in my view, would be better off than the standard POBA and other types of interventions.

Right. Right. Exciting stuff. Thanks, Frank -- Fred, sorry. Thanks for…

Don't call me Frank.

I won't. I won't. I don't want you to use your black belt on me anymore.

No, I won't. I won't. But I do have a sword by me. So nice to be with you, Ralph. Thank you very much.

You too. Thanks, guys. Take care.

Take it easy. Bye-bye.