It Succeeds By Playing Small Ball

Merit Medical Systems

South Jordan, Utah

merit.com

The latest gee-whiz technology gets most of the glory and most of the ink in the medical device world.

Behind the latest and greatest is a whole lot of essential, if mundane, stuff needed for surgical procedures.

It's a good, steady business, says Fred Lampropoulos, chief executive of Merit Medical Systems MMSI. His firm makes and sells proprietary disposable devices mostly for cardiology and radiology procedures.

"We don't hit a lot of home runs, but we hit lots of singles and once in a while stretch them into doubles," Lampropoulos said.

Those singles and doubles add up.

Merit has boosted annual sales every year since Lampropoulos co-founded the company in 1987. Revenue has risen an average of 12% each year since 1998.

The growth rate fell to 9% last year, in part because doctors cut back on stent implantation after reports questioning efficacy and safety.

Still, Merit's stock price has withstood the market's gloom. Shares hit a 21/2-year high of 17.35 on Feb.12 and are up 37% since early November.

The stock boost is partly the result of measures to improve margins, says analyst David Turkaly of Susquehanna Financial Group.

Lampropoulos brought in new managers at the end of 2006, increased automation, shifted some manufacturing to Mexico and reduced inventory.

The changes improved gross margins by 10 basis points to 38.4% in 2007. Merit shares also benefited because nervous investors see health care as a refuge, Turkaly says.

THE FINANCIALS

Merit has clawed its way back from a two-year earnings slide in 2005 and 2006. Last week it reported 2007 earnings of 55 cents a share, up 17% from the prior year. Fourth-quarter profit rose 31% to 17 cents, 2 cents above analyst views.

Sales for the quarter and year gained 7% and 9%, respectively.

A recent poll of Thomson Financial analysts pegged annual earnings at 66 cents a share in 2008.

THE COMPANY

Merit's products include inflation and stent placement devices for angioplasty, catheters and fluid dispensing systems for diagnosis and treatment. It also supplies custom-assembled kits of the gear needed to perform procedures.

Most of its products are for one-time use and cost $1 to $100, Turkaly says. "Merit is more of a supply company than a traditional device company."

Merit's own sales force and overseas distributors sell products to hospitals and clinics worldwide. Foreign sales, 30% of the total, are growing faster than U.S. sales.

The Chinese and Russian markets are major growth opportunities, Lampropoulos says.

On Dec. 13, Boston Scientific BSX sold its competing Namic unit to a private equity firm. Lampropoulos says that's good for Merit because the new owners likely will raise prices, so Merit can do likewise.

LOOKING AHEAD

Lampropoulos sounds determined that Merit will improve margins by 150 basis points a year for the next three years. "We've promised that to investors."

His goal is to double annual earnings over next three years.