Merit Medical Systems, Inc. (MMSI) Q4 2011 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. Welcome to the Fourth Quarter and Year End 2011 Results and Guidance for 2012 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Fred Lampropoulos, Chairman and CEO of Merit Medical. Please go ahead, sir.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos with our entire staff assembled in South Jordan, Utah. We welcome you to the call. We'd like to turn some time over to Rashelle Perry, our Chief Legal Officer to read our disclaimer. Rashelle?

Thank you, Fred. In the course of our discussion today, reference may be made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call, which are not purely historical may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties and other factors are discussed in our annual report on Form 10-K and other reports and filings with the SEC. To the extent any forward-looking statements are made in this call, such statements are made only as of today’s date, and we do not assume any obligation to update such statements. Although Merit’s financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States, Merit’s management believes that certain non-GAAP financial measures provide investors with useful information regarding underlying business trends and performance of Merit’s ongoing operations and could be useful for period-over-period comparison to such operations. The table included in our quarterly earnings release, which will be discussed on this call sets forth supplemental financial data and corresponding reconciliation to GAAP financial statements. Investors should consider these non-GAAP measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude sum, but not all items that affect net income. Additionally, these calculations may not be comparable with similar type of measures of other companies.

Rashelle, we found that so interesting, and thank you very much, all joking aside. Thank you. Ladies and gentlemen we are happy to report our full year results, which resulted in record sales and record net income and what I think, overall, was a very good year, revenues up 21% for the year and up 12% for the quarter. The significance of the fourth quarter, it was a pure apples-to-apples comparison in revenues because of the acquisition of BioSphere took place in September of the previous year and the fourth quarter of last year was the first fully reported quarter in our statement. So I am still pleased that in the environment that we’re living in that we are able to deliver to you double-digit growth on a core basis. I would like to go over the numbers with you briefly. We talked a little bit about the net sales. I want to talk about the fourth quarter where the non-GAAP income was about $7.4 million or $0.18 a share. On a GAAP basis, it was a couple of million dollars less than that and one of the reasons for that is an acquisition of a technology from QXMédical, which is a crossing catheter. That crossing catheter is being developed and finished here in our research laboratories and we hope to have that product on the market by the end of 2012 sometime. And it depends on of course FDA issues and so on and so forth in terms of the timing. This is a product that competes with a number of other products in the marketplace basically used in DPT types, below the knee types of procedures. It’s a product that we will manufacture, as I mentioned, here and we are very excited about the opportunity. But as you are aware when you make these acquisitions, if there -- and since it’s a new product of a relatively small company, then we are required under GAAP rules to take that as in-process research and development in the quarter. So Kent, do you want to just quickly comment on that? Did I hit that pretty well?

Yes, pretty well because it is not on the market, hasn’t got approvals from any regulatory agency, it is still in the R&D phase. So it is in process R&D at this point.

Also I’d like to focus on our gross margins for a moment. Gross margins for the fourth quarter were at 46.3% of sales. That was up 150 basis points over the previous year’s quarter and it was also, I think, very significantly up sequentially from 45.4% in the third quarter and so we delivered an improvement of 270 basis points for the year. Now, much of that was to do with the BioSphere acquisition and those products that helped us get there, but I think the important thing to note is, I think that’s exactly what we had promised in terms of where we thought those gross margins would be. Kent, you want to comment on that?

Yes, I was particularly pleased in the fact that this was the first quarter where we had already passed up the anniversary of purchasing BioSphere. So those sales were in both quarters comparatively, as was the Chinese step we took to go more direct in China. So to have it increase 150 basis points with those 2 drivers annualizing with both numbers was nice numbers.

And the other really, I think, exciting opportunity and something that’s really starting to come our way now, still, a long way to go, but it’s the result of our Endotek division, where sales rose by 51% in the fourth quarter and I believe for the year, they were up, let’s see here ,about 33% and the exciting part about that is that, that division is making progress, a little slower than we had originally anticipated, but we have some pretty major events going on here that, again will help the entire company. They’re as follows: We have a number of new products that will be introduced, one which was just introduced, just in the last week and this our new EndoMAXX esophageal stent and this is a product with increased radio strength and also overcome some of the shortcomings of some previous models and it’s one of those products where we’ve actually had people standing in queue to try these products. So we are excited about what that means for our esophageal business, as well as progress we are seeing with our inflation device systems, which is as you know a Merit sweet spot. And when I look at some of the great university hospitals and some of the larger hospitals in the country buying and reordering this product, it really, I think speaks and bodes well for this division, another significant factor in this business. By the time we get into the late second quarter, early third quarter we will be bringing on new manufacturing capabilities that will allow us to take over $2 million on an annual basis of cost out of this particular division. Now think about that for a second. We are talking about a division right now that I think ended up the year at around $12 million give or take, and we are going to be able to take $2 million worth of the cost out, which is somewhere around $6 million of cost or so, give or take. And when you think of that, that is a reduction in the cost of goods by 33%. That’s extraordinary and that essentially puts -- with that put into the business, that essentially makes the business at breakeven. Everything beyond that point now starts to turn the business into something that’s going to contribute to Merit’s earnings as we get into the fourth quarter of this year and as we move into 2013. And that’s a big turnaround. That’s a turnaround of somewhere around last year, which was around a $3.5 million loss to a loss this year, which will be a couple of million dollars and then when you put this cost in the sales, which we expect to grow at 25% to 30%, it is a very exciting proposal and we worked hard to turn this around and as I stated initially as we move down the road, this has the opportunity to become a $100 million division, given the time and from Merit’s perspective. And that perspective is also as always an eye on the short term to understand what's going on but always making decisions for the best long-term interest of the business. We are starting to get more and more enthusiastic about this opportunity. Now there's a few quarters of, I am going to call it a challenge, but that challenge is becoming less and less and I want to thank Darla Gill who took this and was one of the founders of Merit, who took this division on and it’s not much fun when you are out there and you are the only division in the company that's under water. She took it on and she has done a great job, had been criticized often and I think has stuck with it and Darla, we are grateful for your efforts in this area. Let's talk about some other areas. Kent do you want to add any color to that?

No, it’s just great to see the growth. We can see most of it in stents, in fact most of it is in the airway stent. They grew 2.7 million or up 37% last year. It was at the exit of one of our competitors that really assisted in that, but we have a whole bunch of accessories coming along, I mean balloons, and the inflation device and other things that are really going to help to build this.

So it’s starting to come along but if we look at our whole business, and I just still want to single out Darla, because whether it be our domestic sales, our OEM sales, our international European sales, everybody I think did a very, very good job last year. It was kind of interesting that as we look at Europe, our direct sales in Europe last year with all the commotion that was going over there last year, we were up somewhere around 28% or more I think 28% to 30% direct sales in Europe. That's exciting, and we've been there for a long time but I think that's the largest single percentage that I have seen in years and that had to do with some management and some leadership issues and some additional support personnel that we put in place, but we are excited about what’s going on there. Our international viewers, China, last year as you all know grew from about $10 million to about $21 million and so all in all, as we look at the business, we look at gross margins, we take a look at the products, we take look at the distribution and the models that we’ve set up, I think we executed the plan to the best of our ability and it’s something that we are proud of. And whether that’s recognized or not, I suppose markets are so interesting, as I look at values and how other people value, and I always think we are undervalued. And I don’t think that Merit is valued as well as it should be. That being said, I’ll be on the road next week in New York. Kent will be here for a conference and we have some very interesting things that we want to show you. We’re going to talk about our guidance in a minute. But we want to maybe be able to show you some of these new products that are coming on and kind of the transition that Merit is going through, moving again from the products, which have been basically plastic to more device-oriented products like snares, catheters, unique types of products that have much higher gross margins, and I should also mention require more support. One of the things I think we learned, and if we were to have maybe miscued this year in any area it was maybe our understanding of the support that it would take to support these advanced products, in terms of our clinical support, of medical sales liaisons and a number of different issues.

It’s regulatory, it’s also in more requirements in marketing, shows and other promotional issues.

Yes so it does take more to support these, but again we believe that as we move down the road that bodes investments. But I think it’s important that you also know that one of the things that we are going to do is we have instructed our departments in research and the marketing areas and in the operations areas that essentially we are going to keep our expenses flat from their existing levels. Now we are going to spend a little bit of money, which I will discuss with you in a minute, in some expansion of territories and countries. But we are going to ask our staff to really do with what they have as we then bring on these new products and these opportunities. So if I were to look forward into this year and again, I am already looking into 2013 and 2014, and I know that your interest today is to talk about where we have been for a few minutes, kind of where we are going to be this year. But as we start to look down the road here and we see the opportunities, there is the belief of the company that we are going to continue to grow, I think reasonably robustly, maybe a little less this coming year than we did last year on a bigger number. But as we look into really some great new products, advanced products in the latter part of this year, then we are going to see substantial growth I think into the mid-digits, the mid-teens as we move into 2013. Kent, do you want to add any color to that?

Yes I would like to add a little color to the sales numbers and just focus on those for a moment to support the growth rate. It’s a broad based growth that goes over all our products families and groups and for example catheters are up 24% for the year and that’s supported by a large growth like 3.6 million in new revenues and introduce receipts, 39% growth rate. Microcatheter is up 123% and the ASAP catheter is another big contributor that’s new this year. When we look at standalone they had 15% growth, we’re already at the big contributor of 420% growth the beginning of last year, coupled with 2.6 million in new revenues. Maps are up 26%, manifolds 42%, wires 21%. So we’ve got a lot of participation in many products growing. The Basix Inflation Device is pretty interesting. It’s up about 29% as all those products.

Yes ladies and gentlemen, I just want to point out something. We have an accountant getting excited about sales. This is a momentous time.

I mean, it’s great to see across all geographies and product breadths that we’re really seeing contributions there. They are significant.

And we appreciate your enthusiasm. And a couple of other things that we want you to be aware of, as we mentioned in our press release, we have a number of facilities that are coming on line. We hope to have our new Irish facility online in the next 60 days or so for a number of new projects and opportunities in Ireland. And we’re excited about that. We have the facilities here in Salt Lake City. They are under construction that we expect that will be finished late this year, early first quarter next year. So, within about a year from now, those will be up and running and we’re going to consolidate facilities that are away from this campus into this campus and so we hope to bring that utilization up as quickly as possible. And I can just tell you that were will be tremendous efficiencies. Literally, we can take a plastic part, a molded part, you can assemble it in our automated equipment, take it on to the floor, combine it with other products, package it and send it out of the door all in essentially a straight line. And those were exciting opportunities for us to help to decrease the labor costs and increase the efficiencies in those particular product lines, so we’re looking forward to that. I want to talk for a minute before we move on to next year a little bit. I want to talk a little bit about something that didn’t talk about in this press release but something that you are surely aware of and that is our FDA warning letter. I am sure that there would be questions, let me just address it straight up and that is that we received a warning letter after an inspection. There was about a 4-month interval between that. It was for some changes and modifications in processes and the FDA felt like we should file another 510-K .We have responded as required statutory to the FDA and given them a plan of action that was filed with them yesterday. It was on time, it was complete, it was concise and I think it is a terrific plan. We will file a new 510-K within about a week, so we hope by the 1st of March we will have this filed. Now one might say, why are we able to do that so quickly and the answer is that all of the changes that were made were processes, and these are what I consider to be minor changes, were all validated. These were all things that went through testing and went through all the things and based on our assumptions at the time it did not require a 510-K, but the final say goes to the FDA. We want to be compliant with that so we will file this and file this as a special 510-K, which we believe requires a statutory response in 30 days, so that’s where we are on this. We are continuing to ship the product with, which we think these improvements that were made make it a better product and we continue to ship this product all over the world except into the United States or from the United States. So we are still shipping it in Europe. That business continues to grow there. It’s now starting to sell in China. We are selling at -- in a number of markets and hopefully this will be a period of time where we will have learned, we will have done the things that where they have asked of us and it will be behind us. But I think it is kind of a wake-up call and for everybody there is a new day and there are new regulations and there are new views and we want to make sure that we are complying with those and I think I am speaking now as not for on behalf of the medical device industry, but we live in changing times and we want to be able to adapt and we shall do so according to the rules of the game. So we will answer additional questions if you want as appropriate during the Q&A period. Kent do you want to add anything to that at all?

No.

So I would like to talk a little bit if we could for just a minute or so on where we are in the process of expansion. So I shared with you a moment ago that our plans are to hold line on expenditures in, let’s say engineering operations, marketing and some of those areas while still growing the business. At the same time, we believe that there are substantial opportunities in India, Brazil, Russia, the Balkan States and China, essentially the BRIC countries. And I think, these are on the distribution models where you’ll recall that what we did in China is that we set up our own distribution system, our own warehousing, our own finance regulatory and sales support and I think right now we have somewhere around 30 to 35 employees in Beijing, all Chinese nationals. I mean it was so successful that we’ve decided that we’re going to spend our money on this year is setting up the business in India. So in India, we’ve been doing business there for years and years. But essentially it’s been flat. We expect to triple our business this year in India going from about $0.5 million to $1.5 million, but more importantly as we set this structure up, similar to what we are doing in China, we expect that it will move to $5 million in revenue over the next few years. And so we’re going to go from $500,000 to $5 million in India in a relatively short period of time. However, whenever you make an investment like this, it costs money. Not a lot of money for the return that we’ll have, but it is money that we’re going to spend. We are doing a very same thing in Brazil. We are doing $4 million, $5 million in Brazil now. We expect to do a lot more in Brazil and I am talking about $50 million down the road. But in order to do that we have to control the licensing process and we believe with the markets slowing down in the U.S. -- I read a report today that talked about interventional procedures being down 1% to 2%, pick a number, but there are places like India, China, Russia, Eastern Europe that are all growing very, very rapidly and we want to make sure that we do not miss out on those opportunities and that we continue to establish our name in those locations. So we have hired a Country Manager in Brazil. I think that’s the only person at this point who may have 1 support person, Joe? One other support person, but this will help us to control the licenses and the processes that go on in Brazil and in fact, we have already received probably 6, or 8 or 10 Merit licenses that allow us to sell our products that heretofore we did not have. And in the Balkan States we’ve hired an Area Manager there and also in Russia where we think our revenues are going to grow and more than double this year in Russia. So we are spending money in those areas. So there is a short-term cost to that, but we think of course the returns off that in the -- not only this year but as we move down the road are going to be very dramatic. I am not going to say they are being exactly like China where you double your business every year in terms -- or at least go to $20 million immediately and gain $10 million. But incrementally, this international business is going to become more and more of an opportunity for Merit. The device tax and these other things coming and these things are exempt from those device taxes and these are places where they are growing and these are where the opportunities are and we are probably in a very, very good position -- not probably we are in fact in a good position to go out and take advantage of that. Kent?

Well, they are definitely high growth areas for medical devices and then particularly in many of these markets, we have a lot of ways to go on market share gain. So I think we can gain market share in the market that’s growing rapidly and those 2 combined could be a great investment long-term.

And there have been a bunch of changes in the business. So if we take a look for instance at the quarters, we take a look at some of the acquisitions that Medtronic’s made and some of the holes that left, there are a lot of opportunities in these international markets. I think our international sales last year were 36% or 37%. We would expect that those will move closer to 50% over the next couple of years as we continue to invest in those markets and build our business worldwide. A couple of other things and then we’ll talk about guidance and then we’ll open up to questions. OsteoPro; this is a product that we acquired, we are out there, we claimed and we’re doing essentially a soft launch over the next couple of 2 to 3 weeks while we’re making sure that we get our inventories built and our support in place, but what's amazing to me is every physician, every interventional cardiologist that you talk to is relatively quick to say this is a problem. In fact to quote a physician yesterday, he said this will save me a stent on almost every procedure. Now that was his statement and he is a well known physician. And so what this does for Merit is to allow us to interface again with physicians and as time goes on, those become more and more of where our selling point is versus, let’s say the CathLab supervisor and others who are managing labs. Now, we love our CathLab supervisors and I certainly don’t want to diminish the importance in the relationships we have with them. In the long run, the relationships with the physicians -- I think this is also being driven by our embolic products. We expect to have another embolic product on the market this year and we have other embolics that we are working on and some that we are looking to license. So we think there is a lot of opportunity here and the disruption also caused by some changes in distribution patterns and acquisitions are creating more opportunity. As an example, in the sales last year of our peers that are drug loading. They drew last year, I think it’s somewhere around -- what were they Kent, about 150%, 200%?

For the year, yes, but it’s not a good comparison. The fourth quarter was 44% and we didn’t have a full year to compare to.

So the 44% in the fourth quarter just on our drug loading embolics and our embolics for the fourth quarter were up 15%. So all in all, I think we have the right types of products and the right types of opportunities, but the company is a company in transition and which we are really spending a lot of time on these higher margins capabilities. Now in addition to the BRIC countries I talked about, we are going direct in 2 additional European countries this year and that is Italy and in Norway. So as to plan, essentially what we are doing, and I will be happy to argue this with you if you’d like to and that is we’re spending our money on sales and we are holding the line in the operational categories. And that’s where we think the opportunities are, so we are continuing to hire sales people and we are continuing to look at international models and continuing to move forward in terms of some more direct countries in Europe. And I believe that there is a lot of support for this historically with the other companies. I really go back to Thomas Watson at IBM. When everything else was going to heck and everybody laying people off and consolidating, he was hiring more sales people. And ultimately of course as long as you manage that and don't let it get out of control, now we are not talking about a lot of folks. In the U.S. we are going to hire 8 new sales people this year. We have a lot of new products and we need to -- and we've got territories that are too large and we want to be able to take advantage of that. So we have the 8 in the U.S., we have these countries that we are investing in, we've hired 3 new Endotek sales people and we are going to go direct in Italy and in Norway. That's where we are spending our money. It’s where I think we should spend our money and that is taking Merit’s full bag of products and then go out there and make sure that we have feet on the ground, face to face with the customers and in opportunities where we think there are a lot of voids and challenges. So we are going to fill those voids with our products and if you look at our catheter sales you will see that those were up 25% last year and those are coming directly from other competitors who have either dropped out or had disruptions and even though some of those are lower margins, they still help us to sell these higher margin products. Kent?

Well I just wanted to comment on the OsteoPro that I think it’s one of the best tuck-ins I think we've done. I think we bought it right. I think because it’s a unique product, it’s well patented and there's no competitor to speak of.

Yes well it is a great product, and it’s really fun when you sit with a physician, the light goes on immediately and then they start to open up and tell you about how they would use it, they are selling you and that's always a great thing with a product. So I think that pretty well wraps up the things that I wanted to talk about in terms of the growth, the new products, all of those sorts of things and I want to move on to just very briefly now and we will discuss this with you is our guidance for 2012. So we are going to set a range of $392 million to $402 million which is a 9% to 12% growth factor and we believe that based on our current understanding of the GAAP rules that, that would put us in the range of $0.55 to $0.60 per share. Now that would be about a $0.10 if I got this, or 10% increase in our GAAP net income over last year. However, as you all know, we had an offering last year that diluted the shares of the company by 15%. So on a net earnings per share basis because of that dilution, we’re going to, with a 10% increase in income, but a 15% increase in shares, then you are going to have lower earnings per share. You want to pick this up?

It’s $0.01 higher.

It’s $0.01.

So it’s pretty flat.

Okay, so it’s flat. And so we’ll continue to fight dilution. We think it was important that we have that money to put us in the position to take advantage of these acquisitions and these opportunities. Kent I am going to let you pick up and then pick it up for me in terms of about the non-GAAP.

Yes, the non-GAAP is interesting too because this year we don’t expect to have, based on our model at this point that -- some things could come along and change that if we have some deals that we are working on, but without those and that’s what we have to assume in this guidance, is that we are going to see less non-GAAP adjustments than we have had in prior years -- in the past year. So our non-GAAP numbers is a part of why we’ve lowered those numbers to $0.67 to $0.72. It was a range for what our earnings will be. So with the investments we’re making in the sales distribution and those things that Fred has already discussed with you and holding those constant we believe that non-GAAP earnings will actually be a little lower than last year as we are investing in the future. Okay?

And then finally there are numerous opportunities. As the old saying goes, we can do anything but we can’t do everything. We see the industry consolidating. We see a lot of the smaller players unable to really be sustained with the sales and marketing costs and regulatory costs and we are seeing some great ideas that show up. We are looking at them. We have a number of opportunities in front of us and we will continue to look at these opportunities that will help us to build us and build into our strategy. So, Kent you want to comment on that?

Yes, I do want to comment on for both the GAAP and non-GAAP, we have a large expense that is different this year. We have talked to you previously about it, but it’s a clinical trial to do the high quality study and that’s going to be important in the future as we have discussed for being able to really enter the market in a big way and have data to support the sales effort as we take market share basically in this important liver trial and liver market, cancer market. So that is going to be a higher expense. It is one of the big reasons why our GAAP earnings are lower, I mean or only up 10% and that doesn’t come out in our calculations for the non-GAAP.

Yes and let’s just discuss it. So I think in our financials this year, Kent we have what is it, 3.5?

$3.5 million.

$3.5 million, which of expense in that area. Now I had some investors say to me, do you really need to do the trial? But let me tell you what our take on this is. We could stop the trial or never have started the trial and over time with the disruption in the marketplace and the things that are going on, we could probably grow this business to about $10 million and that’s a 90% gross margin business. It’s a nice little piece of change. On the other hand, with the trial and candidly with the support of many physicians who appreciate, and some who have said this is a landmark trial, we believe that we can grow that business in the range of $30 million to $40 million a year or more. There is a precedent for that. The market for these -- because cancer is growing. It is not declining. In fact, there was a study that came out and talked about Hep C recently, which was kind of the -- a part of this whole deal and how -- what an epidemic that has become. In fact it is killing more people than HIV. So this was a study, or some information we read just this week. So, the question is, is if you can grow a business from to $30 million or $40 million, let’s just take $30 million, and you’re going to spend $10 million to do that over 3 years versus being able to get $10 million. We believe that, that money spend, along with the pull-through -- we can’t discuss microcatheters, guide wires and the relationships we have that pull through all of our products, we believe that that investment, which is a current expense is well worth what we believe is a long-term opportunity for a substantial increase in gross margins and profitability. That’s the decision we’ve made. We sit around and ask ourselves are we doing the right thing. We sat with our sales people. We said guys, tell me the numbers. Let’s look at the expense. Let’s look at these things and we’ve concluded that we should not only proceed, but that it’s the important part of our strategy for the company. When it’s all said and done, we believe that we will be the only company that has an indication for use of a loadable sphere with Doxorubicin. That’s significant, nobody else will have that. So that continues to be our focus and our rationale behind that expense but that’s more money than we spent last year. It’s a current charge, but we think that it is right type of investment to make for the future. So let’s summarize if we could then our guidance and that is that in terms of gross margins, we expect that this next year we would hope to add about a 150 basis points to our gross margin and you know we are starting to inch up towards that 50%. That is at least our short term goal now over the next couple of years to get there. The GAAP and non-GAAP is printed and available to you. You can see where the SG&A is and the R&D, which we are holding. In this you have, and we are using our model, an interest cost of about $1.1 million, an effective tax rate of 33% in our models. So Kent do you want to add anything more before we open up the lines?

Yes just a general statement on the range of SG&A, it’s 30% to 31%. R&D is going to be in the range -- that’s the standard R&D without the trial, of 6% to 6.5% and the clinical trial is again about a [ph] percent or so of the cost of sales. Also we do have a known cost of $1 million for in-process R&D that we are going to be paying later this year that we should probably put in the models too that’ll be a -- it’s a non-GAAP expense, one-time type expense, but it is in our GAAP numbers. So there is an additional R&D cost.

Yes okay. Alright then. Thank you Kent. Okay well I think it is time we open up the lines now and take your calls. So operator we are ready to turn the time over to you and let you queue them up.

[Operator Instructions] Our first question comes from the line of Larry Solow with CJS Securities..

I was wondering if you guys could maybe just frame sort of the higher expenses. I get the R&D piece of it. Curious though, if I just plug in 30% of sales, basically your SG&A is going to go up roughly $20 million or so give or take. Anyway to sort of put in buckets whatever number you want to use on a percentage basis, how much is going into these different countries in terms of long-term investments and how much more is just in general marketing and current stuff?

Kent, you want to answer that?

Yes, that's really spread over a lot of areas. We’re going to -- what we’re going to add to and where we are at year end is $2.5 million in the U.S. and Italy is another $1 million and Brazil, and you can go down the list of $1 million to $0.5 million for each of these countries and you will get to numbers that are 7.5 million or more million above the levels we are running at right now. So when you take where we’re at now, it’s $115 million or so and so you are getting up into the $120 million like you talked about.

Larry, one of the other things that we find with these, for instance with the embolic products, there are shows like the ECIO, there are shows like the [indiscernible], European shows, there's the SIR meeting, which is the Society for Interventional Radiology, which is coming up in March, there's the GEST meeting, which is the Global Embolization meeting in New York and man I could go on and on. And these shows are very, very important because all the key opinion leaders are there. One of the other areas, and it’s been a little bit, I would say, somewhat of a bitter pill for us because we’ve been so conservative on this in the past. But the problem is, is all of our competitors are there. And if you don’t show up and you don’t support those shows, and so there is a cost to doing that. And I think that’s one of the things that -- PCR would be another one in Paris. So there are these shows that really require presence. It costs money to do them and it’s part of this -- just another one of the factors that go into this in addition to the headcounts that are going into this areas. Now on another side of this, I think it’s important to note that we look at these budgets but as we go along we don’t fly blindly. We go through, we see how we’re performing and these -- our sales guys get a certain amount of dollars that they can spend in their strategy but they have to deliver against those and we look at them and they’re likely to be spread out over the year. So we essentially take the full expansion and show it to you for a year but if we hired all the people that everybody has put in that we essentially have said that we’ll put in the budget. Most of them, you wouldn’t even have them even all lined up until probably October of next year or later on this year. So we kind of load them up but the fact of the matter is they kind of get spread out during the year and we monitor how we are doing along the line and if we get out of sync anywhere along the line then we go ahead and adjust. So we’re pretty nimble. But where we really feel strongly, like for instance you’ve got 3 sales people in the Endotek area. So here is a division that’s losing money right now. Here is a division that because of some ability that we have to, with our new vendor to take out a couple of million dollars in the cost of goods of that division, help to essentially bring it to breakeven. So one might say, well then if you can bring it to breakeven why would you hire 3 new salespeople? And the answer is, we have 4 or 5 new products, it takes about 6 months to train somebody and get them up to snuff, or longer, and we only have 14 salespeople covering the entire country and so we have to mete this out at some level so that we can continue to grow and take advantage of the opportunities. Now some might challenge that judgment and say well, get all the products out and then train them and then you can argue the opportunity cost. But I think that’s the best way that we can go about answering your question.

And then yes, just a follow up to that. So you talk about all this hiring, is this something that will continue? I mean, I know this is sort of repeatable question, we sort of gabble with it every year, for several years. However, you’re targeting 30% of sales for ‘12 and I understand you sort of investing ahead of a lot of multiple product releases. So it always seems like a high class problem but looking out over 13 and 14 and, without getting into exact numbers, would you expect -- would you target SG&A has to begin to come down and when can we start seeing some leverage in the business?

I think where we’re going to see the leverage, it’s a very good question. It’s one we get asked all the time. If you take a look at leases, we have looked at and modeled out some of our competitors that, I will talk about Angio and I will talk about Baxter solutions and others. You will see that they run at around 28% to 30%, in that range. But they don’t have the international markets that we have. Now, I am not trying to disparage them in any way. I am just trying to explain that in these international issues, and with this product range and with our growth rates. If you take a look at where we were growing, we think that these expenditures are justified. At the same time we understand that in order to add value and to increase stock prices, you have to show this leverage. We understand that. And some of you might say, well they say that, but they don’t really understand it, but here is where the leverage really comes. It comes in the ability not just between the lines but on an earnings per share basis is our ability to grow the business and increase these gross margins. In all of the products that we’re talking about, we’re putting all of our emphasis, you see products that range up in the 60%, 70%, 80% range and we’ve already seen over the last couple of years that we’ve brought things on like the Snare and these types of products or like BioSphere and these have been acquisitions but even some of Merit’s internal products where these are adding to our gross margins.

And OsteoPro is another one.

And OsteoPro is another one. That’s about an 80% gross margin product. So, where we leverage the whole thing to get down to that bottom line where it’s just an earnings per share capability is to grow that top line, increase those gross margins while trying to hold the line on, let’s say, research and development, sales and marketing. So, essentially, this year, our R&D wanted more money. We said no. Marketing wanted more money and we said no. But on the sales side, I said yes. So, I am the guy that you can look at. You can disagree with me. But as I indicated, I think if we put the sales guys in place, then what it’s going to allow us to do is to grow in the mid-teens when you’ll see that the industry -- and as you have the tax come on board and all of these headwinds that are coming from the medical device industry, we’re going to have to fight through these things next year. And if you’re not investing in these areas now, or you’re pulling back, then I think other companies, if they haven’t made the appropriate investments, are going to be having a lot of difficulty in trying to show top-line growth because they’re not going to have the horses or the products as they try to make up that. I think we can blow through that and that’s really what I am planning for, is to say if I invest this now as I see those other costs on line, I am going to be able to blow through them with the momentum and the opportunities with these new products we have. That’s my plan. So your comments are fair and I appreciate them but I hope that you will consider kind of our strategy for the next 2 to 3 years.

Absolutely. I think as a long-term strategy, I agree with you 100%. Just 2 quick to follow with and I’ll move on, just on the gross profit and the margin expectations. So the 150 increase, is that offer the GAAP number or the non-GAAP number? It seems like the non-GAAP number was more like a 47 and the GAAP was 46 in ’11, right? Give or take.

Yes. That’s because -- if you take the amortization out of it, and we haven’t been reporting it, but I can report those numbers for you if you’d like. Not with the GAAP number although it should translate in both of them as far as the change. In other words, the increase of $150 in the range would be in both numbers this current year.

Right. You’ll still have this amortization coming through anyhow.

Yes we will. In fact, it will increase so that Osteo Solutions is going to add. We haven’t finished the evaluation so far. We just got it done less than a month ago or around a month ago. So we are still going through the calculations of those. But we’re estimating something like $1million or more in amortization split between the various categories.

That all gives 6% to 6.5% plus the $3.5 million. Correct.

Yes that is right.

Our next question comes from the line of James Sidoti with Sidoti & Co.

Let’s talk a little bit about the facilities that you figure expanding now. When do they come online and how much more capital expense do you think you need to put into those?

Okay, let's talk about Europe, this is Ireland ,and that will come online sometime around the end of the first quarter or early second quarter of this year. So that's heading this way shortly. The Salt Lake facility, which is the big one is going to be online in sometime in the early first quarter of next year. The other facility is a facility in Texas and let me kind of go behind the rationale on the Texas one. And by the way, on the Ireland, it’s just simply expansion. About 35% of Merit’s revenues come from products produced in Ireland. They are swamped. They need more space. If we look at Salt Lake City, you will recall that we have a $14 million EDA that we lose if we don't build. That goes as a reduction of cost channel -- as to the incremental property tax, it goes in the cost basis of the project. But we are still at 50,000 square feet or 80,000 square feet, 5 miles from here and 50,000 square feet, 2 miles from here, of facilities where we’re running back and forth, that we will look to consolidate in this particular facility and we think we will be more efficient in doing that. Just those 2 facilities alone, and plus we don’t have any office space, we don’t have -- we are really as we have planned over the years Jim, we’ve planed for about 5 years and we've built these other facilities about 5 years ago. Let me move to Texas. We got hit with Hurricane Ike. It hit us about 5 years ago, blew the top off our building and almost put us out of business on those products, which are a very important part of our growth. We moved part of those products to Salt Lake City, but we are sitting in a stripped shopping center built in the late 1950s, early ‘60s. And I wouldn’t want to be on the call when something comes up the Gulf and blows it down next year. We’ve dodged a couple of bullets down there. We decided we need to move in inland, we needed to go with a tilt up and we will be moving our catheter manufacturing. If you look at our catheters, on our charts here and our numbers you’ll see that that’s one of the fastest growing areas of our business. These are advanced catheters as well. These are guide catheters, micro catheters and so on and so forth. That will come online probably either very, very late this year or early next year. So you’re not going to see a lot of expense this year that are coming into these things. But in the meantime, I believe that we are going to have essentially a blow-out year as we start to come into the last half of this year to next year with these products that we have. We’re also bringing in house, Jim, to build these facilities, some manufacturing that we are having done in other locations. I won’t go into those specifically, but there is a number of areas where Merit has worked on and we think we can build those products here particularly if we have the facilities to do so. Kent you want to talk about the capital?

Yes we expect to spend in facility expenditures this year cash flow wise about $30 million. Roughly $30 million to $35 million will go out to finish those projects. A little bit will hang over into ’13, retentions and the last straggling invoices and stuff from those -- from Texas and from the Salt Lake project. And that will complete all of those that we’ve talked about.

And that $30 million’s down from I would assume about $48 million in 2011?

No, ‘11 we were -- we spent, well it was about $30 million. Between $30 million and $35 million this year as well on facilities.

But the bottom line is, by the time we get through this year most of those expenditures will be completed. Our EBITDA this year, I think on the trailing 12 is about 61.5 or 61.2 and then it will be nice to be able to start generate cash flow to pay off this debt unless an opportunity comes along and we still have plenty of facility left already in place as we stated. So from a financial point of view we had plenty of operating margin.

You spent $37 million so far this year through the first 9 months.

Well, that would include equipment too, though. You are looking at all the CapEx?

Right.

Yes so when you look at the whole thing, it’s like 59 yes, so you have got 28, 20-ish and kind of million in equipment and then you have another $35 million or $37 million or so in the building stuff we have spent.

So that $20 million is kind of your steady-state level?

Yes it’ll be -- it was like $18 million the year before and $16 million the year before that. So it’s been ticking up a little bit, but that’s our core. It’s new product, it’s new tooling, it’s capacity increases in specific product line.

Automation.

It’s automation and cost savings programs that we bring in new capacities in tooling and other areas.

So 2012 will be another higher than normal year because of the buildings but then you think you would come back to that $40 million level or so in 2013?

Yes and I expect as we grow it will keep ticking up. When I did a model for the bank I said it would be 20 this year. We’re really close. I said, 22 next year and I said 24 the year after. That’s kind of my guess to how that will go.

Yes in terms of the overall capital that will reduce substantially and we’ll be okay for 3 or 4 years and we hopefully have the same problem 4 years from now.

Yes certainly, I could comment, we plan these for 5-year intervals and we have been able to do that. We double our company in about 5 years. That’s what our growth rate’s been and we do vertically manufacture most of our products. So we have to provide space for the storage of the inventory, the production of the product as well as the administration, sales, marketing and research and development. So we think in 5 years there will be time for more, some place in the world, more facilities.

So you should generate term free cash this year. Maybe not what you did in 2010, but you should have some free cash flow in 2012?

Not after all the building cost. My definition of free cash flow is after CapEx it wouldn’t be. We wouldn’t have any.

So, you would have another year with no -- okay.

Yes, we’re going to have to borrow some, yes.

So any future acquisitions that you do in ’12 would come off a line of credit?

That’s correct.

And how large is that line right now?

We have $125 million in place as we speak, of which we’ve used about $40 million. So we have about $85 million available. In addition to that, we looked at an opportunity not long ago in which we went to the bank and just said what would you do on this deal and they offered another $125 million.

It was a firm commitment in 3 days.

It was a firm commitment in 3 days. We didn’t do the deal but so, but we are very bankable.

And then, how much more can you handle right now? I mean, between building the direct sales forces, expanding capacity, are you really in a position where you can handle another large acquisition over the next 9 to 12 months?

It’s funny you should ask that, Jim, because I am looking over my entire staff is sitting here. We’ve got 30 people sitting in here and they all are smiling at me right now, saying what is he going to say. And the answer, I tell you, one of the most difficult ones we did was BioSphere and that was because it was a different type of sale. Even though it was at the same point of sale, it required a whole new set of skills. It depends on the type of business and it depends on locations or facilities. And if we were going to do something like for the OsteoPro or the Snare, I think those are things that -- tuck-in type things are very easy for us to do. When I say easy, these guys work hard, but they are very successful and are pretty well versed and I even have my COO over there and he is kind of laughing at me right now. So we have to pace the unit but we put them through regular calisthenics and they are pretty good. If it was a larger one, we have to make those assessments and look at those things. Are there larger opportunities out there? Yes there are. So we have to measure it up, we have to run it by everybody, is this something we are capable of doing? And this window of opportunity that I have been talking about for the last couple of years isn’t going to be open forever. But I think over the next couple of years, at least 2 more years, especially as the device tax and some of these headwinds that are coming in next year, I think this may be the most opportune time. So we have to be selective, but there are going to be some great opportunities here Jim, and I think we just have to be wise in our selection.

If I look back, you did $0.63 in EPS in 2009 and you will do about $0.60 or so this year and it sounds like you want to continue to make investments. At what point do you think you really will start to see the leverage in the business? So still 3 or 4 years from now?

I think the answer to that is that we see this year -- if this staff will hold on to their expenditures and they will and we start to move and bring these products online, if we --see there, that's one of the staff, they just kind of went to bunk on that phone, but we are probably going to be here in this 30%, 28%. The big key for us is, to move this gross margin line, is going to be biggest effect because as you move these advanced products down the road Jim, it’s pretty hard to say that you are going to -- you can't sell them without those capabilities of having that support in place. So anyway we know what we need to do, but at the same time we are always pulled entirely as to where you make those investments and you want me to make more money, I can make a lot more money. I can start cutting staff, I can cut a bunch of things, Jim, I can be a hero. I mean for about a year. Then I am going to be a bum. So right now I will be a bum, but I will be a hero 6 or 9 or 12 months from now. They’re going to say I am the only guy in town that's growing, my gross margins are growing, we are holding the line on those other things. You’re going to love me again.

Our next question comes from the line of Jayson Bedford with Raymond James.

I guess Fred when do you expect to get a return on this investment in terms of kind of the various initiatives in Brazil, India? Do you expect kind of a bang in 2012 or the real return from the top line perspective is more 2013 or 2014?

I’ll tell you what, I am going to put somebody on the spot. I could give you my answer, but they are sitting in the room. So Mr. Wright, these are your investments, these are your requests, you are now sitting on the hot seat.

I think in India we will see an immediate top line return in 2012, Brazil, it will take a little bit longer, probably more into 2013.

As I mentioned during the call, Jim, we expect that we’re going to more than triple our sales this year in India and that we think over the next couple of years beyond this that business will grow up to better than $5 million. This is from $500,000 to $5 million in let’s say 3 years, maybe it’s 3.5 years, but those are pretty significant, and one thing about India, you don’t have the high expenses like you do in Brazil. So we chose that one. We’re up and running. We’ve got a guy that’s working for us over there with experience from Smiths Medical and Boston Scientific. He has done this before and we’re actually already starting to see those returns. I would expect by the time we get in through the first quarter, early second quarter, we’ll already have surpassed the amount of sales that we had last year. So that will move pretty quickly. Brazil takes a little bit more time. It will be a little bit more like China, you got the registrations, but the positive thing about Brazil is that we already have 8 or 10 products that have been approved, but I will tell you that in many way Brazil is, see how am I going to say this? A little averse to imports. We’re doing $5 million there, but there are a lot barriers out there. The only way you can break them down is with a presence. I can tell you that we won’t grow the business in India, we won’t grow the business in Brazil, we won’t grow the business in some of these other locations if we don’t make these investments. It will just be the same. If you take a look at India, it’s been flat for the last 3 years. So a relatively small investment I think can yield a very, very high return.

And I guess in terms of doing it all at once versus a little more methodically, are these all -- I realize obviously you want to be everywhere, but are these all the countries that you want to be direct in or is there going to be another tranche in 2013 and 2014?

Well first of all I think we are doing it methodically, not all at once. We’ve planned it out. We’ve looked at the numbers. We’ve gone through, I mean it’s not just thrown up on the wall. We’ve spent a lot of time looking at this and looking at the numbers, looking at the challenges in these markets and if you take a look at where the growth is, I mean, we all read the same journals. We all know where the growth is in the world. We know what’s happening in the U.S. market. We see those opportunities and again let’s just review what we are talking about here. So in India, we are talking about a country manager, we are talking about 2 or 3 salespeople. And we are talking about $30,000 to $40,000 a year, am I right?

Yes even a little lower.

Maybe even a little lower. I think you said 25, but I just -- and so you’re talking about that in an office. So you are talking about a situation where you are going to spend maybe a quarter of a million dollars. Let me just look at it here, Kent just handed it to me. So in India we are going to spend $482,000 overall for transporting product there, a small warehouse there, setting up the sales people. But we are going to get $1.5 million in revenues and in that same group, well then it is going to grow with very little increase in cost the following year to $3 million. Now Jayson, if you could spend a $0.5 million dollars to get $3 million worth of revenues or have to do nothing and be flat, what would you do?

No, I understand that. I guess then it begs the question, your SG&A is going from let’s call it 28% to 30% which is, let’s call it…

It’s at 29% and went to 30%. It’s up 1%.

Okay. And just sort of clarify, that 30% is a GAAP number?

Yes.

Okay, 29 to 30. Let’s call it an additional $7 million to $8 million in, maybe it’s a little less than that but where are all the incremental costs coming from then, if it’s not from India?

Well, I will go through it with you, okay? Let me just give you a few of these just to give you an idea where we’re stressing. So, we’re going to pay -- spend out -- we’ll round it off to $500,000 in India. We’re going to say it’s about $1.1 million in Brazil, which is one of the largest opportunities in the world. In Norway, $198,000, in Sweden, $195 million and we could pull that one out, but then $195 million to add another sales person there and with 3 sales people we added in Endotek, about $260,000 there. But the big cost comes in the U.S. where we’re spending about $2.5 million to hire 8 more sales people and the reason that we did that is that as we looked at the sales territories, we simply found that we had some territories that were just simply too large and not producing because you had 1 person covering a large geographical area. Martin, do you want to go ahead and jump in on this because I want to put you on the hot seat now. These were your recommendations. But kind of tell us what are your thoughts are on the U.S. sales force.

Yes, we actually have tremendous potential we believe still in the United States. We did an analysis of the sales force and found out when you stratify based on procedure counts and sales territories, there was little or no differentiation between the total sales and the sales territory with 1/3 the size the number of opportunities in the larger territories, which tells me that we actually have capacity if we have the financial resources to almost double our sales force. So what the intent was, was to just kind of do a manageable number. We had 8 or 10 sales territories that were significantly large. So we decided to try and take about 7 or 8 of those this year and grow into those. So but we believe that there is still significant opportunity in the United States. If you look at all of the U.S. growth rate, we ended up last year growth in United States of about 7.7, 7.2% which is more than nearly double any of our competitors and so we just think that we are taking market share, we’ve got great products and there is tremendous opportunity for Merit in the United States.

So that was Marty Stephens, who runs our U.S. and European Direct and the previous speaker was Joe Wright who has our Pacific Rim and international sales.

Just last one from me, guys. Fred you mentioned exiting 2012 with some great momentum and some new products and I guess besides OsteoPro and the crossing catheter and what else are the key products that will give you that momentum?

So we have the EndoMAXX, which I mentioned earlier which is our new esophageal stent. We have our EndoMAXX Plus, which is our valved esophageal stent of which there is really no competitor. We have the new Concierge Guide Catheter. Now we have been selling our guide catheter outside the U.S. The patents have expired in the U.S. and so Merit will be launching a product that we believe, and our physicians who have trialed the product believe and have told us, is equivalent to the other major players in the market. We believe that that has substantial opportunity in this guide product and the things like the OsteoPro and those sorts of things all go together along with that. We also have the Centros Dialysis Catheter. Now this is a product that we purchased from Steve Nash. The product was previously sold by AngioDynamics. They had some problems with the product, we've made some improvements in the product. I held it in my hand yesterday. We are going to be launching that product and essentially a soft launch in the next 60 days or so, is that right guys?

The next 30 days.

In the next 30 days. We believe that the Centros catheter is the best chronic dialysis catheter in the world but we think there were a bunch of miscues before and we believe if properly trained and with some of the improvements that we've made, it has significant opportunity to reduce central vein stenosis and stay in that longevity because the way that it is designed and placed, it minimizes fiber sheathing. And these are important issues by one of the world’s great well known nephrologists. I just spent a week with him and not only do I believe what he is saying but I believe in this product and I think Merit’s going to do it right and I think that's a significant product building momentum. Another one that we have and I think we are going to be talking about this next week but we have the One Snare and so, Jayson what we've done is that Merit has a EN Snare, it’s a wonderful product but there's actually a need for a single-loop snare. The problem is that our competitor who has now run out of patent time, so it is off patent, has made not a problem for us but that's a down the street opportunity for us, as they have not improved that product to the best of my knowledge for a very long time and there are deficiencies. So in the next 90 days or so or some time after we get FDA approval we are going to introduce another new snare product and we think that that's going to take us to over 50% market share and these are products that share 80% gross margin and we’re going to be a one-stop shop for snares. Nobody else has that and there is a lot of momentum there. Our new dilatation balloons. These are balloons that go along with our big 60, they go right to our EndoMAXX and right to our strength in distribution that’s growing at 25%, 30%, 35% and our customers are looking for an alternative to the market leader. In fact with our inflation device we are taking business away from them every day. How much more do you want? I got 4 or 5 more if you want me to go through them.

No, that’s fine. Thanks.

So I’ve got 9 or 10 exciting 65%, 70%, 80% gross margin advanced products including the OsteoPro and a bunch of other products that are coming out. So I am not going to talk about some of them but these are exciting products and one of the things that we will be showing next week at the shows and will be down here to show at your conference, is you’ll see by looking at some of the things that we’ll show at thee presentations, these products that I’m talking about -- and you will kind see the transformation that the company is going through. In terms of a manifold, which has been our bread and butter, an inflation device and then you’ll look at these more advanced products that command higher prices and higher gross margins. Because they are much more complicated products. And I think you’ll see that and we’ll be able to show it. You’ll be able see it with our eyes and we’ll be there to show it to you in a just few weeks. One other one. We expect and we’ve filed for a approval of our smaller 30 to 60 HepaSpheres. This will help us to compete and be able to drive further down into a vessel and tumors to deliver – both bland [ph] and otherwise. So this is another new product that I believe that we’re expecting to come out with in the first quarter of this year. So that’s another new product that is coming. And then last but not least and I won’t disclose the actual product, but Merit has a new embolic that we believe that will also come this year. That will compete and help us to build our embolic business. So we have another new embolic and we will discuss the actual nature of what that does and how it fits in the plan later on in the year. We don’t want to tip our competitors up quite yet on that one.

[Operator Instructions] Our next question comes from the line of Ross Taylor with C.L. King.

My question related to some of the SG&A spend also and I think you mentioned in your earlier remarks that some of these specialized products that you have entered into over the last year or 2 require more SG&A support than maybe you thought. I mean, I think I understood you to say that anyway and I just want to know some of the added SG&A spend in 2012, is some of that going to support the BioSphere products or maybe some of these other products, which you acquired in the last quarter or so?

Yes I don’t know if there is a whole lot other than the cost of the study to support that. There were a few but not much in that area. I think it mostly is the expansion of the sales force to make sure that we can grow the business in the future. Remember now last year in the U.S., I mean short of the BioSphere guys, I don’t think we expanded the sales force in the U.S. last year at all. So short of a couple of guys that came from the BioSphere, which was actually the year before, right? Last year…

But they didn’t have a full weight but this year they got loaded up for full weight and of course there will be mix.

So we didn’t add anybody and so you keep stacking on the products, if you don’t spread out the territories and do those sorts of things, it’s going to affect your growth down the road and so that’s where we are planning on spending our money.

Okay. And then just 2 quick final questions. You had really good growth in the BioSphere products in the quarter. I just wondered if there is anything you did to drive that acceleration in Q4 and the products like the OsteoPro and the crossing catheter, can you give any rough parameters in terms of what kind of revenues they can do in 2012 and maybe 2013?

Yes let me go to the question on the BioSphere. We grew at about 15%. You’ll recall, Ross, that on December 31 of this year, AngioDynamics lost their distribution rights to the BTG. And in some ways they went out and there was some pruning up of the pipeline and that sort of thing. I just think that it was, we are seeing growth and we are seeing customers that are coming to us on some of our, for instance, our QuadraSphere, which is the loadable embolic, mostly used for bland and otherwise. So, we’re seeing that, that is seeing substantial growth and we believe that it will continue to see substantial growth. The OsteoPro, again, is a product that’s had a little longer sale cycle, because what you have to do is, you have to get in front of the physician on that one. But on every case -- we were in Indianapolis, I think it was late last week, I wasn’t there but our sales force there walked in, sat down, presented it to the staff and got an order for $4,000, $5,000 there. So, we have our internal numbers on that particular product but what we prefer to do is as we come to the end of the first quarter, it’s built into these numbers for this year in our forecast but conservatively so in terms of that one product. And one other product I haven’t mentioned today, to go back to Jayson’s question but to answer partially yours and that is we have another haemostatic patch in which we have a product that gives us better than 50%, which we are selling and opening new accounts in that business and we also see a lot of opportunity for that haemostatic patch internationally. So we have got a full line of products and there was one I missed. The crossing catheter is not going to be released until probably late 3rd early 4th, so it will be premature for me to discuss it but there is a market out here in the U.S. about $20 million and Merit is going to go out and get their share just like we did with the ASAP and other products and our goal is always to be at least 20% to 25% market share, so but that will take a couple of years to do. So it will be insignificant this year. Next year as we move into it we hope that it will start to have that impact in a product that we think could bring $4 million or $5 million, maybe as much as $10 million worldwide over the first 5 years of the product. But I think there’s another important thing here, Ross, and that these things are advanced catheters. These are not $8 diagnostic catheters. These are $250, these are $850, these are $450 type of devices and then -- or like a microcatheter, our microcatheters last year grew at 150% I think it was and these are catheters that sell for $350. So I think those types of things and those kinds of products are the ones that we want to concentrate going forward.

[Operator Instructions] At this time we have one more question. And our next question comes from the line of Brooks West with Piper Jaffray.

A couple of things Kent, gross margins, you said you had 270 basis points of improvement in ’11, what kind of improvement should we see in ’12 and then should we think of kind of an annual cadence of improvement over time?

Yes we've been long-term committing 150 a year average and of course with BioSphere we kicked that over to almost double, but this year we’re talking another 150. We think we can do that through a combination of product mix from the entire margin of products Fred’s been just talking about, as well as cost savings programs that we set goals for. We another goal this year for $5 million that can flow through. And in our last year we hit almost $8 million in those savings and they are staggering at different times as far as their real benefits come in through the inventory. But those are the ways we are going to fight the headwinds of any cost increases and other things coming, so the net of that is we are predicting somewhere in the 150 range as far as the bps improvement in gross margins.

And then BioSphere you said grew 15% in the quarter, how big is that business now and should that be able to grow another 15% next year?

It ended the year at $31.2 million.

And to answer the question is, yes, we believe that it will grow at least another 15% or more this year, probably likely to grow closer to 20%.

And then last one from me, Kent I think you made a comment that your China business had doubled to about $20 million, and just wanted to get an idea what that business could be in ’12 and also if there is any update on kind of product built in to your [ph] tenders?

Yes Ross, let me pick that up. I think our forecast this year is around $25 million, which is about a 20% increase and when you go from 100% to 20% light. Well part of the problem is that we have approved probably 15 products, maybe 20 products. The problem is the government has not opened the tender. This was supposed to be done last August and here it is now February. And so we are still selling in some places outside Beijing. For instance we’re selling Laureate guide wires in China now. And so the real push will come when that tender is released and most of these are the interventional radiology products. However, we are going to have to file things like the OsteoPro. The Concierge, by the way, our guiding catheter, should enjoy a lot of opportunity and that’s approved. So when I talked to the sales manager and I kind of pushed him last week, he said my forecast is 25, I might be able to do 27.5, but the real opportunity there to push that above 30 is going to be when we get that tender and for us to plan on that and fall short is not what we want to do. So there is upside there, but it all depends on when this tender is released. And here is kind of the interesting part. You spend all of this money that we’re spending in SG&A and regulatory and all this stuff to get these licenses and then you sit there and you can’t do it very much until they actually open the gate. That being said, that beats the heck out of not having the license at all.

At least we’re at the gate.

At least we’re at the gate. So there is some upside potential there if those get freed up. Just for the benefit of the group, and Joe if I am wrong on this one jump in, but I think one of the other things that we did is late last year, in the last half of last year we went direct in Hong Kong. And we hired I think 2 or 3 people there and we have a warehouse there that’s with a third party and last month we were breakeven in that operation after about 4, 5 months. So this is another example where you had kind of that initial expense, but now where we believe that as that business starts to grow, we will have reached that breakeven point in 4 or 5 months and from this point forward, as we see growth there in which almost all of our products are approved in Hong Kong then we should start to see the benefits. So there is a 5 month or 6 month investment and a lot of Joe’s time to go out and develop that and hire the people and spend the time. But in terms of the return on that investment, it’s going to beat the heck out of where we were before, where we were essentially at $150,000 a year in revenues for a number of years. I think in this particular case, we will be $2 million, to $3 million, $4 million , $5 million in Hong Kong in the next 2 to 3 years. So we have started to take a look at the contributions of those profits and what it means. It did take the investment. It was a relatively short-term situation but one that’s going to be, I think very, very promising for the future. So that’s just for the benefit of the group.

Our next question comes from the line of Chris Cooley with Stephens.

I just want to follow back up on, I heard you say earlier to [indiscernible] you didn’t expect to see positive free cash flow this year when you adjusted out for the capital expenditures and now you have this unique year here in the current particularly [ph] ’12, but if you think about the business longer term, what level of cash generation do you think about off of the listed [ph] model? When you think about the 2013 period and beyond you clearly had some cash flow projections and you were discussing like the bank line earlier in the call. Just kind of curious what kind of cash generation do you see off the current model? Thanks.

Yes and I haven’t modeled in any details for ’13 and beyond, but I can tell you that with the facility completion, then the cash flow will free up and we’ll be able to start paying down some of the debt or at least it’s available for investment. So our EBITDA is increasing. The cash flow from operations I expect will. It was in the 34 million, 35 million range this year, and I expect it to increase more into ’13 as our profits increase and the CapEx expenditures were normalized. So how much would that be, I can start guessing. It’s going to be, you know, 15 million, 20 million I would think above what our CapEx expenditures are. [indiscernible] Operations might be 40, yes, so that’s where 20 comes.

Okay. Anything to add further?

At this time, there are no further questions. I will turn the conference back over to management for any closing remarks.

Well, ladies and gentlemen, we know there were a lot of calls today and a lot of activity and we appreciate you taking the time to join us for a few minutes and we appreciate your comments. There were good questions, there were tough questions and I am sure that over the next several hours this evening, we will be spending time talking to a number of you. So please feel free to call us; Kent will be here and I will be here to answer your questions. We appreciate your continued interest in the company. I would like to remind everybody that as we looked at last year, we exceeded our goals in terms of the top line. We met our gross margins. We, I think, actually exceeded in earnings around the top end of the range there and we think it’s appropriate that we are reasonably conservative or try to paint the picture so that we have an opportunity to do that again. Now that being said, we’ve got a lot of things going. We are making a lot of investments, but let me, I can tell you on behalf of the staff that we’re committed to work hard and do the things correctly. If we do something that’s wrong, this isn’t about it’s my way or the highway. If something doesn’t work, we’ll adjust quickly. But I think we’re on the right path to help to sustain the growth in which, as you guys look at 2013 and you see these headwinds and this consolidation, the folks that have the horses and the momentum are the guys that are going to win the race and that’s our goal is to continue to build this company and march towards that $1 billion number. So [Technical Difficulty]

ACT would like to thank you for your participation. Have a pleasant day. You may now disconnect.