Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Merit Medical Systems Inc (MMSI, Financial) reported total revenue of $338 million in Q2, up 5.6% year over year on a GAAP basis and 6.6% on a constant currency basis.
- The company achieved a record free cash flow of nearly $58 million in Q2 and more than $82 million in the first half of 2024, representing a fivefold increase year over year.
- Non-GAAP gross profit and operating profit grew by 6% and 11% respectively, resulting in year-over-year margin expansion by approximately 15 basis points and 92 basis points.
- Merit Medical Systems Inc (MMSI) announced multiple regulatory clearances and commercial launches, including FDA 510(k) clearance for the Siege vascular plug and the Bearing nsPVA Express prefilled syringe.
- The acquisition of EndoGastric Solutions is expected to contribute $13 million to $15 million in sales in the second half of 2024 and be accretive to the company's multi-year growth profile.
Negative Points
- Sales of OEM products were softer than expected, with only a 5% year-over-year increase in Q2, which was below growth expectations.
- Despite better-than-expected results, the company continues to face pricing headwinds in China due to volume-based purchasing tenders.
- The company did not provide a specific timeline for FDA approval of the WRAPSODY Arteriovenous Access Efficacy (WAVE) pivotal study, creating uncertainty around its market entry.
- Operating expenses increased by 3% year over year, driven by a 2% increase in SG&A expenses and a 7% increase in R&D expenses.
- The acquisition of EndoGastric Solutions, while strategically beneficial, will be modestly dilutive to the company's full-year 2024 non-GAAP profitability due to the partial year contribution and lower interest income on cash balances used for the purchase.
Q & A Highlights
Q: Congrats on another solid quarter here. I wanted to start first with guidance. It looks like you're flowing through mostly that 2Q overage here, not much change in the implied outlook for the second half of the year. Is there any incremental caution you have with respect to pieces of your business? And within that conversation, maybe discuss more specifically your China assumptions within your overall guidance ranges?
A: Yes, you're right, Jason. We're flowing through that first half increase. We beat by about $7 million on the high end of our guidance. We're optimistic about how the business is doing, especially with strong US and international growth. China did better than anticipated, and we continue to see that. So generally speaking, we're pretty excited about how the first half went and the back half is looking strong.
Q: Just if you can specify what China is within your updated guide versus where it was previously? And then on the gross margin line, considering this was the toughest year-over-year comp, how are you thinking about the gross margin trend line from here?
A: For China, our international sales were up 4% year on year and 3.8% on an organic constant currency basis, exceeding the high end of our growth expectations. China sales decreased 5% year over year, better than the low 20% decline our guidance had assumed. On gross margin, we don't comment specifically, but we did say at the beginning of the year that most of the operating margin improvement would come from gross margin. We're happy with the way gross margin is performing.
Q: On the EndoGastric Solutions acquisition, are you going to be combining the sales teams and having both groups of people selling all the endoscopy products? Or will you maintain a specialist sales force?
A: We've been looking for assets in the GI business for a long time. We found something that fits well, allowing us to combine sales forces. For the balance of this year, there's training, and we kept the sales team and some technical and clinical people. We'll combine those with our existing Endotek products. We expect to train and cross-train all the AGS salespeople and our current Endotek sales force.
Q: Have you seen any impact on the cardiac business from the rapid uptake of PFA ablation?
A: No, we have not seen any impact. Our tools are generally applicable to both RF ablation and PFA procedures. Our products complement these procedures rather than take away from them.
Q: How do you expect to compete with core MBD in the stent graft space, especially considering price as a key component?
A: We believe we have superior technology. The uptake on the product has been positive, and we continue to track well in those markets. We are confident in the viability of this technology and its performance capabilities.
Q: How are you thinking about the likelihood of obtaining a transitional pass-through payment (TPT) for WRAPSODY? Does this mean you'll have to price it at a significant premium?
A: We do have breakthrough status on this product, which speaks to its potential. Our primary focus is on getting the PMA approved. Once we get closer and understand the FDA's position, we'll discuss pricing and other details.
Q: Can you talk more about the revenue growth profile of the EndoGastric Solutions products and opportunities for cross-sell?
A: For this year, we're expecting $13 million to $15 million in revenue for the back half of the year. The endoscopy team is excited about the products and the scale we can achieve with cross-selling. We'll provide more details in our 2025 guidance in February.
Q: How should we be thinking about the use of free cash flow looking forward?
A: Our operations group has done a great job managing inventory growth, which has significantly improved our free cash flow. We expect strong free cash flow generation for the back half of the year and believe we are in a good position to hit our CGI program target of a minimum of $400 million in free cash flow.
Q: Can you provide an update on the expected timing around FDA approval for WRAPSODY?
A: The PMA submission is in the FDA's hands now. We've completed the submission on time, and we are prepared for the various aspects of a PMA. We will respond to the FDA as needed and await their decision.
Q: On the EndoGastric Solutions acquisition, is there an international angle to the strategy, or is it mostly U.S. driven?
A: It is mostly U.S. driven, but they do have sales coming out of Europe and the Middle East. We think we can add to that and will be pursuing those growth opportunities wisely and methodically.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
