I'm Jon Young, and I'm the senior MedTech analyst here at Canaccord Genuity. Welcome to our 44th Annual Global Growth conference. I'm happy to introduce Merit Medical. With us is Raul Parra, the CFO, and Joe Wright, President. He'll do a brief presentation, then we'll move into fireside chat. Thanks.
Thanks, Jon. First of all, thank you, John, for the invite. I appreciate it. This is always a fun conference with a really solid schedule. So appreciate the invite and, you know, brought Joe along here and give you guys a good, good perspective of who he is and, you know, as in his new role as president. So thank you guys for attending. I know it's lunchtime. You guys are probably tired, so I'll make it quick and, you know, painless. So I'm gonna cover every single detailed income statement line item, you know, in detail. Put you right to sleep.
I use this one as kind of a landing page, you know, just as a, you know, to throw it out there that if you're ever in the Salt Lake area, give us a call. We'd be more than happy to give you a tour. I think it really gives you a good perspective of who Merit is. It's an impressive, you know, corporate site. We're not in some, you know, strip mall, some small mom-and-pop, you know, shop. It's a legit medical device company that's a global in nature, and I'll cover some of our stats here, but I use this page as a formal, you know, announcement to.
You know, hit me up if you're in the, in the Valley, if you like skiing, and we can give you a quick tour. Merit was founded in 1997. Headquarters is in South Jordan, Utah, which you just saw. Our initial public offering was in 1990, and we raised a total of $2 million. You know, now we're sitting here, you know, close to $5 billion, you know, in market cap. You know, you fast-forward 37 years later, everything we've done has been essentially homegrown, with a mix of acquisitions in there, and we're gonna approach, you know, this year, just north of $1.3 billion. Last year, we did just north of $1.2 billion and 9% organic constant currency growth. We've got almost 7,000 employees worldwide.
I'll show you a little bit of our global footprint here in a minute, in our distribution channels. But eight R&D facilities, manufacturing across the globe, vertically integrated in just about everything that we do. It really came in handy during the COVID and supply chain issues, where if we could source raw materials, we could deliver to our customers, and I think it really set us apart, the last couple of years, being able to deliver products when it was a very challenging environment to do so. I said we're global in nature. Roughly 57% of our business is in the U.S., the other portion is OUS , and a pretty balanced, you know, portfolio at that.
We have a large, pretty large portfolio, you know, almost, you know, 16,000 SKUs, over 280 proprietary medical product categories. So. Where does that growth come from? I think that's the hardest thing to understand about us, all right? We've got a I talked about us having a kind of a really broad product portfolio with a lot of SKUs, and I think, as you do your research on us, the number one question I usually get is, you know: "Can you point me to the one or two products that are delivering that growth?" I talked about, you know, doing 9% organic constant currency last year.
I think that 9% is really, if you look back over the last 10 years, it's pretty consistent with what our growth has been on an organic basis. So again, we're known as a really good grower, and I think, as I get later into the slide deck, we've also really focused on profitability and free cash flow generation, which I think has really distinguished us, you know, over the last, you know, 3-4 years, that we've been focused on that. When you look at our portfolio, it's broken up into two segments, cardiovascular, which is about 97% of our portfolio, and then, endoscopy, which is about 3%.
Now, these numbers are pre-acquisition of EGS, so you'll have a slight change in these numbers. EGS, which is an acquisition we did, will more than double, or essentially double the revenue in our endoscopy segment. So I'll touch a little bit on that. Getting back to our cardiovascular segment, most of our focus is within our peripheral intervention portfolio, followed by CI, or Cardiac Intervention, and CPS, which is kind of a smaller business and really kind of custom procedural solutions and packs that we don't really focus on too much. And then there's our OEM division, which is around 13% of our portfolio, which is essentially the.
You know, our OEM business is kind of misunderstood sometimes. It's really we're selling capacity. So anything that's in our product bag that doesn't directly compete with our sales force, we're able to sell to competitive or other medical device companies. And you name them. You know, if you threw out a name, I'd say, "Yeah, they're probably our customer." Global reach, I talked about, so this is how we sell: direct to hospitals. You know, I won't spend too much time here, but you can take a good look at it. Essentially, we use, you know, if we're enough scale, we sell direct with our direct sales force. It's over 600 people, including clinicians.
Either modified direct, so that would be either direct with a distributor involved, or through distributors. Here's our global reach. As you can see, we've got manufacturing and distribution centers all over the world, along with our R&D facilities, which are generally tied to our manufacturing sites. But again, it helps. You know, we've got this global infrastructure that probably a lot of companies our size don't have, so we've made those historical investments, and we can really leverage this footprint and these investments that we've made over time. Here's some of our direct markets. Again, won't read through these, but you can take a quick look at them.
On top of having a pretty robust R&D pipeline, and, you know, we also use tuck-ins and acquisitions to fuel our growth or fill, you know, voids in our portfolio. We've been pretty acquisitive, you know, for a long time now. I think we did take a little break there in between 2020 and 2023. We did do two transactions, and we'll touch base. I'll give you guys a little more detail on that AngioDynamics and Bluegrass acquisition, and then just lately, this stops in 2023, but in the current year, we also did an acquisition for our endoscopy segment, which I talked about earlier in Endotek. So why the AngioDynamics products and the Bluegrass products? We're gonna get into it.
I'm sure Jon's gonna ask about WRAPSODY, so we won't dive too much into that. I do have a little slide just to kind of, you know, tease it, but, you know, we wanted to set up a sales force that that could sell the the WRAPSODY product in the U.S., and we also wanted to do it in a way that didn't take us, you know, backwards from a P&L standpoint. And so we acquired these products, you know, you know, we acquired the revenue and then used that revenue to to spend, you know, to build an additional sales force. So we we essentially acquired revenue. No people came with that transaction.
We've been building out that sales force since last year, and when we do the U.S. launch of the WRAPSODY, we'll be prepared to do that. They're currently in training and getting prepared for that launch. EGS is our latest transaction. We're gonna touch. You know, I'm sure John's got a couple questions on that, so I won't touch too much on it, but I think just you know, just to highlight a couple of things that I think are important. First of all, we've been looking for an asset in our endoscopy segment for quite a long time. It was really hard to find something that fit financially within the goals that we had set.
And also, we were, you know, that were in the same call point, as our current sales force, and so this will nearly double or add 50% more salespeople to our, to our endoscopy segment and nearly double the revenue. And it'll be fully, you know, a, accretive, one year past, you know, integration. In WRAPSODY, it's our first homegrown PMA-type product. We submitted our PMA at the end of the second quarter. We'll be releasing some of the data here over the next couple of months, at CIRSE and CiDA, one in September and one in October. John does have a little marketing template that tells you, you know, how you're able to access those. So if any of you are interested, it's in.
You know, obviously, CIRSE is in Europe. You can either, a, fly to Europe and, you know, have cup of coffee with Joe, or you can dial in, you know, as you see fit. There is one that's free, and then there's one that's, I think, a paid screening, and you can do the playback also. So we'll touch base on a little bit about. We're really, really excited about this. Merit, like I said earlier, doesn't have kind of home run-type products. We hit a lot of singles and doubles with our product introductions, and we think this is kind of a at a different scale, and can't wait to share what we think the market opportunity is, in our go-to market strategy.
Just, I'll, I'll finish, you know, I promised I wouldn't give you a bunch of, you know, numbers, and so I'm not going to do that, but I, I will just highlight a couple of things that we've done. Just, you know, we just finished our Foundations for Growth program. It was a three-year LRP. We delivered, you know, about 400 basis points of operating margin improvement, almost a 9% CAGR in revenue, and then, $300 million in free cash flow. That sets us up for our next LRP, which is called Continued Growth Initiatives, which we're, you know, gonna focus around 5%-7% CAGR, you know, through 2026, operating margins of 20%-22% and a minimum of $400 million in free cash flow.
So, you know, we're off to a good start. I won't go through all this, detail here, but, you know, you can just look at the earnings per share growth, for, the quarter and also for year to date, and I, I think it's pretty impressive. We delivered almost $58 million in free cash flow in the second quarter, which is a really strong start to our goal of $130 million or minimum of $130 million, and we're year to date, I think we were at, $83 million . So I'm gonna stop here. I'll leave you with this highlight of investment opportunities.
You know, we're obviously a global player in the medical device industry, have a significant R&D pipeline, strong portfolio, direct sales force across, you know, a lot of channels, as you saw, in our global manufacturing footprint. And we add, you know, fuel to that fire with M&A activity as we see fit. So that's it.
Yeah.
Great. Well, thank you very much, Raul.
Yeah.
Thanks, Joe, for joining us, too.
Sure.
Great to have you here, too, with us. Maybe we could start just on the Q2 guidance, the guidance you gave on the Q2 call. You lifted both top line and bottom line guidance for the fiscal year. Updated guidance calls for 6.4%-7.8% year-over-year constant currency growth, and adjusted EPS $0.77-$0.82. You know, as we sit here in August, can you talk about the momentum that you had in the first half, what you're seeing today in the market that gave you the confidence to raise?
Yeah, I'll have Joe kind of cover the sales. But, you know, I think, you know, there's just been a lot of momentum at Merit, you know, over the last few years, and I think we're leveraging that. I think, you know, the growth, although it's a little bit slower than what we did last year, I think there's about $15 million of SKU rationalization that's come out of that, that we haven't really adjusted for. So you'll need to consider that as you look at the growth rates.
So, I mean, overall, I thought it was a solid execution, you know, from not only from our sales guys, but our operation guys and the rest of our executive team as they looked at, you know, holding the line on their budgets. And so I think overall, really strong start. Don't really see any reason why we can't hold that momentum. But I think, as you know, Jon, from a guidance perspective, you know, we tend to be more on the conservative side, and we did pass through the kind of the beats in the first half, and then essentially kind of held the line for the second half of the year as we normally do. Joe, you wanna hit on anything?
No, strong, broad-based, broad-based growth across all of our business segments, geographical diversity. We anticipated a little headwind in China. The VBP impact was in line with our expectations, but what was a nice surprise was the strong underlying unit demand. So we outperformed from that standpoint, at least vs our expectations, so.
And maybe actually to double-click on China now, if we can. I mean, most MedTech companies out there have actually lowered guidance in China.
Right.
Just based on what's going on in that market today. So I would love to hear from you, Joe, what you're seeing today, maybe what's making your business more defensible there? You know, contrasting some of these other companies, if you're playing separate or different markets. I would just love to hear that essentially, because it seems like Merit's a bit of an outlier, where you guys are still seeing, you know, continued strength in that market.
Yeah.
Outside of VBP.
Yeah, listen, we started in China in 2010. Our same general manager manages the business today, so he's been with us a long time. So I think the management stability has helped. VBP is a challenge. Some are getting hit a little bit earlier. Ours is, you know, we, we've been hit for a couple of years, and certainly in the second quarter. That will continue through the back half and into 2025, just due to the cadence of the, the products that will come under tender. But yeah, I think we have a established sales channel, and we've been able to leverage that, and we've benefited from strong. We're a strong market share player in some of the key markets, and that's held up and driven a lot of demand.
On the free cash flow, you know, a little bit over $80 million year to date, which is, you know, fantastic, and you deserve credit for that. But can you just talk about the current thoughts on the use of cash, especially in light of some of the recent M&A that you highlighted in the presentation, and you have a strong balance sheet post the recent convert, too. Just how you're thinking about prioritizing cash.
Yeah, I mean, I think you know, as an executive team, we kind of elected to go out and do the convert, you know, really as an opportunistic event. You know, as we looked out, you know, we looked at the interest rates and what they were doing. I think there was a strong belief by many that there would be a lot of interest rate cuts in the current year. As we looked at it, we didn't really think that would, you know, happen, just given the inflationary environment that we were seeing and how slower we thought that, you know, that would decelerate. And so I think, you know, luckily, we're proving that, you know, kind of, kind of to be right. You know, I think people were expecting three to four, maybe even five cuts in the current year.
Maybe it looks like we'll get 1 or 2 this year, possibly. So really, as we looked at our interest rate, we knew we could lock in at a, you know, at a 3% rate with the convert, whereas our variable debt could have approached, you know, 7-8%, depending on what the rates did. So for us, it was really strictly opportunistic. So we did take opportunity to raise, you know, almost $750 million there. And then, as you mentioned, Jon, we continue to generate really strong free cash flow. And so really, you know, I think it's set us up to be, you know, prepared for M&A activity that may come our way.
I think for us, you know, we're not in a hurry to do anything or feeling pressured to do something. I think, organically, we're a strong grower. So that allows us to be patient, and find the right assets that fit within what we're trying to do at Merit, and also just be cautious about what's going on there. Right now, I think you're in an environment that's, there's a ton of assets out there, right? And that's a good thing and a bad thing. You know, there's a reason there's a lot of assets out there. That's because they're having a hard time, you know, finding the capital that they need in this current environment.
I think you have to be cautious, you have to be patient, and luckily for us, we can do both because we don't need acquisitions, you know, to grow.
Yeah. Maybe we could turn to the most recent acquisition, EGS.
Yep.
You know, really, your past M&A, as of recently, is more the cardiovascular segment. This is really the first in the endos segment for you. Can you just talk about the rationale behind it? Yeah.
What you saw there you wanted to leverage and start building that business up?
Yeah. It's been a small division for us for many years. We've been looking for an asset to add to this division for many years. And the reason for that is we felt strongly that we had, what I'll call, capacity in the sales force. Simply put, that means they could sell more products if they had them. And when we looked at EGS, it. They had a sales force. It's after the integration period, it'll be accretive to grow, accretive to operating margin. So we looked at this as an opportunity to combine sales forces. So we're using the rest of this year to cross-train on the portfolios, and we'll have 50% more sales heads in the field selling both portfolios.
We looked at it as one that met our financial metrics and also helped us accomplish a strategic goal of adding to that portfolio.
Do you still see more opportunity to add into that sales force, especially given the addition to add more device or, you know, products to the bag there? Or do you think this will be a focus of continued M&A?
Yeah, I mean, we'll evaluate opportunities in that space regularly. I don't think this means we stop looking at deals in that space. But again, we've set the bar pretty high as far as what metrics it has to pass in order to be seriously considered by us, so it remains to be seen if something like that will pop up again.
Great
in that sector at least.
Then on the acquisition itself, too, are you moving the device production in-house? I know usually that's kind of the Merit way to do it, and.
Yeah.
Just progress and timelines on that.
Yeah. So, the product is currently manufactured in Redmond, Washington, outside of Seattle. We have someone on the ground there leading the transfer project. We will train Salt Lake City-based operator supervisors over the next six months, and we expect to have it completely transferred by the end of the year, possibly sooner.
And any gross margin impacts from that, Raul, that-
I mean, it's got a stronger gross margin than our corporate average, so it'll help. I mean, I think, you know, once fully integrated, and again, once we get kind of, you know, closer to that year period, it'll be accretive to, you know, to essentially every line item within our P&L.
Great. And you were right, I definitely was going to ask on WRAPSODY. So maybe we turn to that. Just, you know, it's been a focus area, and it's your first PMA product, and I kind of want to start there. You know, what drove the rationale change from Merit to go from usually a 510(k) focus to a PMA focus product? And do you think that's also, like, the future for Merit to the. Do you have an R&D pipeline? Are there more PMA products in that pipeline?
Yeah, I think it's a great way to go, you know, so that.
Yeah. No, we are definitely considering follow-on PMA products. We don't look to be a one-hit wonder in the therapeutic space. So, the reason we wanted to get into this therapeutic area, we had a technology that we thought could be applied in this particular sector. We talked to physicians about some of the challenges they have with these end-stage renal patients, and, you know, the engineers came back with a product plan that we thought was exciting and doable. So we, you know, we jumped in. We're gonna be selective. We can't afford to do multiple PMA products simultaneously, but we'll be selective. We'll pick areas where we think we can. We have a differentiating technology. And, yeah, I would say we're definitely interested in, and planning for more.
Great. Then the PMA, the final module submitted to the FDA, end of Q2, I know you're waiting for FDA questions, was the last update that we've heard. Anything additional since then?
Nothing additional. Right. I mean, I think it's a process. They have 180 days, you know, or it typically takes 180 days for this type of device. You know, I always call it FDA days, because they can clock, you know, stop and start the clock as, as they see fit. So, you know, for us, you know, there's other things that we, we also have to focus on. So, you know, we're gonna work on reimbursement while we're, you know, waiting on, on those, on those questions. There's training that's going on for our sales force. There's data release, you know, not to, you know, I mean, so, so there's gonna be, you know, CIRSE , you know, that's gonna happen that I talked about in September.
There's [CiDA] that's happening in October. You know, there's gonna be kind of a wave, you know-
Mm-hmm
Of information that's gonna happen here over the next period of time. And as we get closer to the PMA approval, then I think we'll be in a much better spot to, you know, kind of give you guys what everybody's asking for, is, you know, you know, what's the market look like for you guys? You know, what type of growth are you experiencing, and or are you expecting? But you know, we're, we're cautious about, you know, sharing that because, you know, there is essentially kind of three different paths from a reimbursement standpoint that we're working through right now. And so, you know, we wanna make sure we kind of understand what that's gonna look like, 'cause that will then feed what our go-to strategy is and also what the market opportunity is.
So one of those paths, I'm assuming, is NTAP. Have you examined it? Are you thinking that's the pathway you'll choose or.
Yeah. There, listen, there could be three outcomes here. One is we just sell under the existing code, which is not a terrible scenario for us, honestly. We've modeled that out and think we can work under that condition. Second, would be an NTAP pass-through payment. Third would be a new code based on the novel cell-impermeable feature. But those are decisions we don't get to make. We'll submit the data, make our arguments, and see where it comes out.
Mm-hmm.
But we plan for all three scenarios.
Got it. And you've been very vocal about the quality of the clinical data here, and, you know, as investors look to the data releases in September and October, what should we be looking for? And also, you know, as you think of the field and the call point you're servicing with this product, is that a very data-driven call point? Do you think the physicians there are gonna be, you know, changing their standard of care today to this, you know, given the data?
Yeah, I'll let Joe take that. But just, you know, maybe for those of you that aren't familiar with the story, you know, we introduced a CGI, which is a three-year LRP. We did exclude the launch of the U.S., you know, WRAPSODY or sorry, the launch of the WRAPSODY in the U.S. from our CGI program, right? So we've kind of de-risked that program 'cause you don't know, again, when the approval is gonna happen. Just as a FYI.
Yeah. I mean, some physicians clearly buy on data, you know, and those are the ones that attend conferences like where we're presenting. They're more academic-driven. They, they care and look about the data, wanna provide best clinical outcome to the patients. We hope all physicians are like that. Some are driven in part by economics, that's part of the equation, and some are driven by relationships they have with industry partners. So, yeah, we feel strongly that we're gonna have a compelling story here. The reason we started with the sales force last year was make sure we could develop those relationships with key physicians before we were there with the PMA. So, I think we'll be able to compete on all, but we're gonna be going up against formidable, well-established competitors, and we'll see how it goes.
Maybe just one last one on the P&L, since you're here, Raul, and we want to put people. Exactly, yeah. Just gross margin has been a really strong point of leverage for Merit. You know, even when I went to Salt Lake to the facility, I was very impressed by the level of automation there.
Yeah.
I was honestly not expecting that. Can you just talk about just the long-term gross margin goals of the company and, and what are the drivers of that beyond the automation you guys have been clearly focused on?
Yeah, I mean, look, I've been pretty open about what it takes to move the gross margin, right? I mean, I think it really takes, you know, every lever. I mean, I think you got to throw a lot at it, just given the environment that we're in. So we have a focus on the sales side, you know, as far as sales mix, you know, SKU rationalization, pricing being, you know. And then, once you start looking at operations, you know, you start looking at all the efficiency levers. You know, can we move stuff to lower-cost areas? What's our shipping and logistics look like? Can we, you know, find leverage there?
And I think that's really why we've had such a, you know, good results here over the last few years, is because it is all kind of incumbency, right? I mean, typically, historically, I think we would have focused on one lever or two, and it's, it becomes really hard because what ends up happening is you get leakage, right? And you just never make the movements that you need to. And so I think one of the things that we learned under FFG is if we take just a, you know, we throw the kitchen sink at it, we know some things will slip, some things will do better, but at the end of the day, we can kind of move the needle in a significant way. So yeah, there's more to be had.
Our CGI program, when you look at the operating margin expansion, a significant portion of that is driven by, on the low end, driven by our gross margin. And then, you know, as you get to the higher end of the operating margin range, you know, you're doing a little bit more incremental gross margin, and then you're also leveraging operating expenses, so.
Great. Earl, Joe, thanks .