Merit Medical Systems, Inc. ($MMSI)

Travis McDougal. Travis, Martha, thanks for joining us.

Thank you.

Thanks.

So to kick off, Martha, you've been in the seat for a couple of quarters now. You've talked about transitioning the company from founder-led to founder inspired at a high level, can you talk about kind of the changes you've made so far, what you've seen in the business? What is already working better? And maybe where do you see some opportunities to continue to tweak the business to optimize it?

Yes. Thanks, Aidan, and thanks for having us here today. Yes. I mean, I think as you said, Merit Medical was run by our founder for 38 years. And so it is a bit of a transition, right, to go from a founder-led to a founder-inspired organization as we like to call it. So I think the biggest change really in terms of that is just thinking about -- I think, as you know, what it takes to build a business from start-up to $1.5 billion in revenue is different from what it takes to go from $1.5 billion beyond. And so what we're trying to think about is really around sort of the people and the processes that we need to do that to be able to scale. And so we've established 8 platform teams, and we're really asking those teams that are cross-functional and cross geographic to take ownership of kind of each particular platform, sort of like a mini business and think about all aspects of the pipeline, the go-to-market strategy, what are the international opportunities, what are the M&A opportunities, et cetera. So again, as we try to scale, you just can't have so many decisions come up to this chair. And so we're really working, I'd say, on building that out. In addition, we've added a few new resources. We're adding some internal muscle on reimbursement. So we're excited to have build -- start to build that capability more in-house. And I also just recently added an executive to work on global enterprise excellence, which again is just looking at many of our processes and ensuring that we feel very good about that foundation and the infrastructure so that we can scale from there. And then I think the only other thing I'd add just at this point is we are undergoing a very robust strategic planning process. So for those of you who follow our story, we're in the third year of what we call CGI or Continued Growth Initiatives, which were a number of financial goals that we had laid out for a 3-year period. That ends in the end of 2026. I'm pleased to say we're tracking nicely toward our CGI goals. So while we're staying focused on completing CGI, we're also undergoing a lot of work around our strategy. And so we'll share more of that toward the end of the year or early next year about kind of what's the next chapter of Merit Medical.

Okay. And obviously, part of that -- the changes you made, you changed the reporting of the business to segments. You changed to -- from endoscopy and cardiovascular to foundational and therapeutic. Why do you think that's a better way to frame the business to investors? And maybe when you came in, how did framing it that way help you learn the business?

Yes. So as I came into the business and about a year ago when I was going through the interviewing process, right, I mean, all I had was the publicly available information to try to understand the company. And frankly, I found it pretty challenging. And so as I got into the company and met and understood that we had these platforms, and it really makes sense to me because the platforms are really organized around our product groupings, which support particular physician groups as well as particular procedures. So it's very focused on the customer and thinking about what is the best things or the best products that we can offer each particular customer or procedure in each of these 8 different platforms. And so what was happening before is that our financial team would take that information and then have to do a bit of a translation for the external reporting. This way, we are very consistent with how we're reporting externally. It's very consistent with how we're viewing and running the business internally.

And when you think about foundational products, at a high level, can you talk about what foundational means to Merit?

Yes. So what foundational really means are what I generally think of as our enabling products. So -- and for those again who've been following the Merit story for a number of years, think about sort of how Merit has grown up, if you will, on syringes and inflation devices and guides and catheters and sheets, those types of products that are very, very necessary for so many medical procedures that are happening out there. But that's really how we think about our foundational products. And I think it's important to note that in the last -- over the last 3 years, the compound annual growth rate of our foundational products has been around a 6% CAGR. So still a very nice and nicely growing set of products and really important for our overall strategy.

And I think one of the things investors try to wrap their head around is kind of what drives growth in these 2 segments now. So when you think about the growth drivers in foundational, what do you ascribe those to? And you can talk about some of the procedures that your products are mostly used in that segment?

Yes. I mean, again, we are used in so many procedures that it's hard to bring them all together, right? But things like you have electrophysiology procedures, you have TAVR procedures, you have biopsy procedures. There's a pretty long list, if you will. Just think about just about anything that needs access to go perform a procedure, diagnostic procedures, those kinds of things.

So almost parallel to just general utilization as a whole. Okay. And when you think about the margin profile of that segment relative to the corporate average, is there any color you could provide on how investors think about that?

Yes. I mean that's the other nice thing is our foundational products are above our corporate average for gross margin. So another reason we like our foundational products very well.

And when we think about the go-forward strategy for that segment in terms of product development, sales force, how should we think about that fitting into the overall growth algorithm for the company?

Yes. So again, what you really need to do is look at each one of the 8 platforms. And 2 of those 8 platforms are all foundational products, right? Our access business as well as our...

Procedural Solutions.

Thank you, Procedural Solutions. It's been a long day. Procedural Solutions business. So those 2 are comprised of solely foundational products. And then 4 of our platforms are solely therapeutic products, oncology, endoscopy, renal therapies group and cardiac therapies. And then there's 2 platforms, OEM and Vascular Intervention that have both foundational and therapeutic products within them, okay? So it's hard to say exactly. You really have to look at it, as I said, by each platform to think about where we're making the investments, where do we think the growth is coming from.

And to our understanding, you provided that when you did the 8-K when you did the resegmentation, you gave the subsegments in there, but you're not going to be reporting that on a go-forward basis. Is there any way how we could think about that intra-year if you think of that?

So right. So we provided an 8-K in April that shows the 8 segments with -- the 8 platforms, excuse me, with 4 years of history. And what we will do going forward is call out between foundational and therapeutic, again, where there are certain highlights, et cetera. I think, look, like any of these things, we will give this a shot for a while. This is how it makes sense to us. This is how we're running the business and thinking about the business. If we need to make an adjustment down the road based on feedback, we will consider that. But that's the way we're providing the information for now. And as I said, we will certainly continue to call out various growth highlights quarter-by-quarter.

Okay. Very helpful. And moving on to therapeutic. These are kind of your higher priced, more complicated products, more core to the procedure. Can you walk us through the key products in that category and the growth drivers there? I imagine that's less tacked on to general utilization then?

Yes, right. So again, as we look across the platform, so for example, in our cardiac therapies platform, I'd say our lead management business, which is primarily lead extraction is a very good. It's one of our nice drivers there. In the Endoscopy business, we added an acquisition at the end of last year, the C2 CryoBalloon, which along with our EsophyX for the cTIF procedure. And now we just launched a new esophageal stent called Resilience in early March, which is off to a very nice start. If we look at our oncology platform, we obviously just -- we had one product line there for quite some time, the SCOUT, which is a wire-free localization product for breast cancer. And we've just added then the OneMark product in the beginning of April. So we see that as having a great deal of growth in that platform going forward. So again, as you look -- and then I think on vascular intervention, embolics has been a pretty high-growth area for us, and we anticipate that continuing as well.

Okay. And we'll talk more about this later in the discussion, but you had Rhapsody therapeutics as first PMA product. Can you talk about your innovation strategy inside therapeutic and how you think about, one, PMA products and then kind of your strategy at a high level in terms of entering new markets or expanding your current markets?

Yes. I mean, so a couple of comments on Rhapsody. Again, for those who have been following the story, right, we did a little bit of a reset on Rhapsody toward the end of last year. We're guiding this year in the U.S. market to be aimed towards $7 million of U.S. revenue for Rhapsody. We continue to see -- we have outstanding clinical evidence for Rhapsody. The customer reaction to Rhapsody has been very, very good. And at the same time, I think it's fair to say we have some formidable competitors in that space, and they're doing what competitors do when they see a new product come on the market. So we're continuing the good fight there, if you will, and so far on track for that product for the fiscal year. Now having said that, again, when you talk about what products we will add to various platforms, I'd say we're looking at it 2 ways. One, we're really trying to be more proactive in sort of, again, I do a quarterly executive review of each platform and sitting with the teams and saying, tell me what's on your wish list, so to speak, right? What other products are you hearing from your customer groups all around the world, not just in the U.S., right, but all around the world where they say, I really need this or if I had this, it would make the product or the procedure easier or less expensive or less painful for a patient. Those are the kind of inputs we want to hear and then want to try to proactively think about, okay, again, it's a make versus buy. Is that something we feel like we have the technical expertise to go do, do in a timely and cost-effective manner? Or is it something where we know there's some other device out on the market that we should go look at acquiring? So that's really the way we're thinking about it, again, and we really rely on each platform to do that. Now having said that, we'll still take incoming -- we get a lot of incoming ideas and thoughts, people approaching us with assets that could be actionable, and we'll continue always to take a look at those and evaluate those as they come through.

Got it. And you said that foundational had a higher gross margin than the corporate average. Does that mean therapeutic is below corporate average?

No.

Other way around.

Yes.

But they're not as far apart as you would expect.

Sorry, did I misspeak on that? Okay. Thank you, Travis. I misspoke. So foundational is just below the corporate average, but it's not as far -- there's not as much of a gap, I think, is what Travis is saying as one would think. So yes, the therapeutic products are above the corporate average.

Got it. Another thing is like maybe an underappreciated part of the Merit story is, to your point earlier, kind of your exposure to those higher-growth procedures like EP and TAVR. It kind of sounds like from the answer to your previous question that the product development strategy is not really new markets, but more so adding on to the platforms you already have. Is there -- how far away from your current platform, so to speak, would you be willing to go in terms of new products? Or is it kind of strictly tangential to what you already have?

Yes. I think right now -- and again, we're undergoing our strategic planning and strategic review. So it's a little premature to say. But I can tell you right now, I do not have a big appetite to go beyond the 8 platforms. It feels like plenty for us. And there is a sort of complexity factor that comes along with it when you call on that many different customer groups and just managing the manufacturing and the quality and all the rest, certainly. So I would say right now, the goal is really to think about within each platform. And I'm pleased to say that every platform has ideas and wants that they -- things they would love to add to their portfolio. So it's not that we lack ideas anywhere. I think it's just about making smart choices that have great strategic rationale as well as meet the financial metrics that we think are critical.

Got it. And kind of going out to tangent here. you said exposure to EP. So have you seen any a large benefit from the rise of PFA in the past couple of years? And then as that market becomes more penetrated, is there any risk that you see less benefit from the increased volume of patients going to the cath lab?

Yes. I mean we have -- again, we haven't been a major player in PFA. So -- and this is part of the advantage, frankly, of being as broad as we are that there's just -- there's rarely any one procedure or one product line that's going to have a significant impact either way. We kind of like to say we're like an index fund, right? I mean we're very well diversified. And if one part dips a little bit, usually, we've got another part that's doing better.

Got it. Kind of shifting gears here to Q1 and the guide. strong beat on both top and bottom line in Q1, but didn't pass through the entire beat, kind of passed through the M&A contribution from View Point. Can you talk about what you're seeing on a business and macro level that drove that decision to not pass through the entire beat?

Well, I think that follows in lockstep with how we've guided previously. Typically, we don't really reassess our guide until the second quarter. So we know that one quarter does not a year make. And so we're not in the habit of doing that mark-to-marketing every quarter. So some prudence, especially given the macro environment, some prudence there.

Okay. In Q1, in Q4, you had flagged some one-timers like OEM, China, the new sales meeting kind of taking the sales force our of action for a little bit in the quarter. Can you talk about what you saw in Q1 that maybe outperformed your expectations or underperformed? And any kind of residuals from the supply chain dynamics with the production line transfers to Mexico?

Yes. I mean a couple of comments on that. I'd say, right? I mean we've talked about a couple. I mean, endoscopy has been off to a nice start. Cardiac Therapies is performing very nicely. Again, those platforms via Vascular Intervention had a very good first quarter as well. OEM, as you mentioned, right, was softer than we had anticipated. We had anticipated some softness, came in a bit worse than that. I think the good news is on the OEM front, we've got very good line of sight into our orders. I mean, I think, as you said, and I'll talk about U.S. OEM. For the U.S. OEM business, there was -- we did transfer some product lines from our Utah facility down to Tijuana. So a number of our customers built up a pretty significant safety stock, and bridge inventory, and it just didn't work its way down far enough for them to reorder. We're now seeing those reorders come through. We also -- things happen in the OEM business. There was an acquisition of one of our customers from a major strategic. The major strategic sometimes view their inventory management approaches differently from the start-up they've acquired. So -- and we also then -- and we don't share about our customers unless they share. So Medtronic did put out a press release about a product of ours, they'll be distributing. So we inked a very nice longer-term deal with Medtronic. So those are the things that give us the confidence as we move through the rest of the year that the OEM will bounce back. And again, we've guided to mid- to high single digits there and still anticipate that's where we'll come in.

Got it. And you talked about confidence in OEM, but in the current environment, there's obviously a lot of worries with the war, inflation and in general, just med tech environment as a whole. What gives you confidence in achieving or exceeding the full year guide given those factors?

Yes. Look, I mean, it is. It's a tough environment out there right now, and there's a lot that is out of our control. Again, I think I can still say as a newcomer, I give medical a lot of credit. The company has gone through lots of things, including COVID and other things and weathered the storms quite well. So again, I just -- I give our team lots of credit. The day you start to see things breaking out in the Middle East, for example, our teams are on it. We ordered extra resins to have more supply as an example. I mean people are thinking about this stuff. So Again, can you think about everything? Of course, not, right? I mean there could be some unexpected things that we don't know about yet. But overall, given the picture as we see it, we have confidence we can manage through it.

Well, and then too, when you normalize Q1 growth for the different elements that we saw, so OEM and our DualCap divestiture, foundational growth was about 5.5% and you do the same on the therapeutic side, it is about 12%. So for us, going forward, that gives us confidence that the growth was pretty healthy when you normalize it for the long. What we view as onetime events.

Okay. And we think about Q2, I think the guide came in modestly below what the Street was expecting. Can you walk us through the drivers of the quarter-over-quarter and year-over-year step down at the midpoint? And then in the context of that, how are you thinking about confidence in achieving the year-end '26 CGI goal?

Yes. So sequentially, if you were to look at it, again, the tariff -- there's tariffs that are hung up on our balance sheet. So about 70-ish or 75 basis points of tariff overhang from sequentially when you look at it, that's a part of it. There's some timing of some operating expenses. And then I think that's kind of -- that's the sequential view of life.

And when you think about the margin guidance, how comfortable are you with that if freight resins and tariffs remain where they are today? Are you assuming any normalization? Or are you assuming everything stays steady where it is today?

Yes. If we look forward, we -- our history and guidance is to lay out things that we believe are realistic and achievable. So we feel like we're in a good shape.

Okay. Kind of shifting gears, I know we said we're going to talk about Rhapsody a bit more. It's your first in-house PMA product, kind of first platform product, so to speak. What has Rhapsody taught the organization about competing in these more complex categories and kind of the muscles you need to flex to get that to market?

Yes. So the answer is a good number of things. And again, this is why I'm so excited about our platform approach because when you have a whole team, again, with all the functions sitting around the table with regulatory, with quality, with reimbursement, with clinical, with operations, sitting there with marketing and R&D. And when you start to think about that next generation of a product or a continuation of a platform, very early on as you think about what is your -- what is the clinical strategy, right, not only to achieve approval in various countries around the world, but to also, if necessary, do clinical work that will impact reimbursement going forward. So that is, I think, one of the biggest learnings that we've had, and that's why this focus on these platform groups makes so much sense to me. And again, to have the inputs from our global colleagues as well so that we're really considering the most important markets and where we think this product makes the most sense for us to sell, so we make the right investments. So I think, again, and adding sort of in-house reimbursement muscle is really important. As I said, that was someone I added, I think, the first week on the job and we'll likely be adding to that. I think those are some of the lessons on -- and I think the other one is we may or may not talk about all this stuff until we absolutely have to.

I think that's fair. There's been some proposed changes to kind of the FDA CMS approval process that might allow new products to get coverage decisions quicker if they're breakthrough. Anything there that affects your innovation plans?

No. I mean, again, we'll have to look at those on a case-by-case basis. Many of our products, right, are kind of already -- you know what the reimbursement will be. So again, we'll look at it case by case as it comes along.

Okay. In terms of the Rhapsody, you did a kind of commercial reset. As you talked about earlier, the clinical data is demonstrably better than the peers. It seems like pricing was the biggest headwind. You did a commercial reset, opened up the doors on pricing a little bit. Can you talk about what you're seeing on the ground today in response to those pricing changes and how that compares to maybe the initial launch?

Yes. I mean I think the good news is for the initial launch, right, before the kind of reset, we definitely had reps walking into accounts and the accounts just said, I can't talk to you. Your price is just way too high. Depending on the site of service, right? I mean we do have the NTAP for the hospital, and so we've maintained a nice price in the hospital setting. The majority of the procedures are not done in a hospital setting. So that's where the real, if you will, sort of battleground is. So we did open up those pricing corridors much, much wider, which again, has been a good opportunity for our reps to get in there. We're still at a gross margin that we're comfortable with given that. So again, of course, you want to be smart about pricing decisions. And as I mentioned earlier, we're seeing, I think, a pretty -- a competitive response. We've seen some added reps and junior reps be added to some of our competitors' accounts. They're doing what anyone would do. I think that's a real compliment to our team for how fantastic the product is. So we'll continue battling it out.

Okay. Great. Kind of shifting gears to something more recent. You acquired View Point Medical in April. Can you talk about the strategic gap you're trying to fill with that acquisition and how that fits in with your current SCOUT product?

Sure. So this is in our oncology platform. And the best way to think about it is each year in the United States, there are 1.6 million biopsies done of people who see something -- once they see something on a mammogram that doesn't look good. So of those 1.6 million biopsies that are done, the Scout is really the premium product, which is the product we've had in our portfolio. And so -- and first of all, I should just say all these are done at time of biopsy, which really does mean there's one less step, and it's a wireless -- both technologies are wireless. So it's taking away one additional step, which is a very sort of anxiety-inducing step for many women before they have their surgery. But if you go to the 1.6 million biopsies, generally, about 300,000 of them are cases where the physician is very sure it's a very suspicious-looking lesion. That's where they tend to use the SCOUT, which is the premium product. For the other 1 million to 1.3 million biopsies, they aren't always so sure, and so they don't necessarily want to use the premium product. This is where the OneMark will fit in, okay? So -- and the real difference in many cases will come down to physician preference because the Scout technology that we've had before uses RADAR and so you listen for the sound. The OneMark uses ultrasound, so it's visual. So some physicians just prefer one over the other. But it really gives us, as I call it, sort of the better and the best offerings in this area of wire-free localization. So we're super excited because we're basically expanding the market 3 to 4x. So we're thrilled about it, and our commercial teams are taking a very targeted approach on the accounts where they plan to go pursue the market. We get asked a lot, do we think there could be a little cannibalization. We modeled some into our modeling just to make sure. But I've got to tell you, there's so much opportunity for places that aren't using any time of biopsy wireless technology, wire-free technology. So we feel very good about the opportunity to truly expand this market.

It sounds like it can kind of open up the OUS opportunity as well and sites that are more cost sensitive.

Absolutely. So yes, it's a great product. There have been plenty of markets internationally where they've just said, the SCOUT is a price point that's too high for us. So this will give us that opportunity. We don't yet have CE Mark. So we'll start, obviously, in the countries that are more consistent with FDA approvals.

Got it. And asking everyone's favorite question on M&A. Obviously, M&A has been a big part of Merit's growth algorithm recently and capital allocation strategy. So going forward, should we look at more deals like View Point where it's kind of adjacent, maybe a tiered product offering with something you already have in your portfolio? Or is this something that we could see an earlier acquisition where you have to kind of ramp it a little bit more where they can't just fit right in and plug and play?

Yes. Again, I mean, it will depend. I mean we're going to -- each platform is a little bit different. But suffice it to say, I mean, in general, we'll continue to look for tuck-ins, again, by platform, could be a foundational product, could be more on the therapeutic side. We will continue to look at both. But again, just in thinking with each customer group, what are the right procedures, how can we make the procedures better for the patient, better outcomes, easier for the physician to perform.

And you've said this multiple times, but nothing transformational.

Nothing transformational.

Okay. Obviously, you've had a very impressive track record in the past couple of years of margin expansion. To your point earlier, we're kind of hitting the end of CGI, and you're on track for that. When we think about steady-state margins for the business, how should we think about that going forward?

Well, again, I mean, we're not going to jump the gun on post CGI by any means. But I think, look, if you look back in the 6 years, right, where there's been foundations for growth followed by the CGI programs, that's been some pretty incredible margin expansion. So I think it's unrealistic for people to think we would do a repeat of something kind of at that rate and with that level of improvement because, again, we want to continue to invest in the business certainly and grow the top line. So we'll stay focused on it, but not ready to talk about any details.

Got it. Asked it maybe a different way. When you think about incremental margin improvement from here, where is that most likely to come from? Are we looking at mix, portfolio actions? I know we've talked about throwing the kitchen sink care gross margins a couple of times. Like how should we think about where that improvement could come from?

Yes. I mean, again, we really do. We look at all the opportunities. I mean, I think it's about 5 years ago, the company added formal pricing expertise to the company. They've done a lot of great work, and we'll continue to look at that team to do more. We will continue to look at short-term cost improvement opportunities in operations as well as, frankly, longer-term footprint. We need to start thinking about where do we want to be longer term. Are we looking at mix? Absolutely. Are we looking across the portfolio as part of the strategic plan at potential some additional pruning or possibly divesting as we did like with the DualCap. There could be other product lines and product families where we just say this doesn't make sense anymore strategically. So yes, we'll continue to look at all those options.

I know we're out of time, but Martha, anything you think the Street is underappreciating that you want to get out there with the time we have left?

Look, I mean, look, Merit Medical is a company that hits singles and doubles, right? And I think we are well diversified. You heard me mention before, we're kind of like an index fund that way. We're very excited about the future of Merit Medical. It's a very passionate team. And I think the other great thing is we can see some very nice growth without having to go out and even do any more acquisitions, right? So we will only do ones that we think are really strategic and make financial sense for the company. But we will continue to look at ways to continue to grow our top line in a very profitable way.

Great. Thank you for joining us today, and thank you, everyone, in the audience.

Thanks very much.