Jul 29, 2010
Executives
Fred Lampropoulos – Chairman and CEO Rashelle Perry – General Counsel Kent Stanger – CFO Martin Stephens – EVP, Marketing and Sales
Analysts
Jayson Bedford – Raymond James & Associates Larry Solow – CJS Securities Shawn Fitz – Stephens Inc. James Sidoti – Sidoti & Co.
Operator
Welcome to the Merit Medical second quarter 2010 earnings conference call. During today’s presentation all parties will be in a listen-only mode.
Following the presentation, the conference will be opened for questions. (Operator Instructions) I would now like to turn the conference over to Fred Lampropoulos, Chairman and CEO.
Please go ahead sir.
Fred Lampropoulos
Good afternoon, ladies and gentlemen. We are broadcasting from South Jordan, Utah.
I want to express our appreciation for your attendance at our second quarter conference call. We would like to start our meeting by having our disclaimer being read by our in-house Counsel, Rashelle Perry.
Rashelle Perry
In the course of our discussion today, reference maybe 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 maybe 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 Securities and Exchange Commission, which are also available on our website.
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 any such statements.
Fred Lampropoulos
We are excited to talk to you about our second quarter. We hope we have explained as clearly as we can the data that’s in here but we are going to drill down and I think provide you with some data that will help you – we hope to appreciate what we think was a terrific quarter.
Let me just go through a few of the numbers. As you can all see the revenues, we are $74.9 million, 16%.
Of note is that our core growth for the second quarter as compared to the second quarter of 2009 was up 13%. Nevertheless I think we would all agree and I hope you would agree that 16% is an extraordinary quarter in terms of growth.
As we look at the earnings for the quarter, we were at $0.20 per share but it’s important that I think point out that that number is net of $697,000 of expenses which were onetime and were related to the proposed acquisition of BioSphere. Additionally there were some additional charges and expenses that we will talk about that we think enhanced the overall performance for the business.
Just as a teaser, as part of that, in the month of June, the company operated at 44.8% gross margins and had an operating profit of 15.4%. Now I will come back in a minute and talk about June because I know we are here to talk about the quarter but we want to talk about what we think is an acceleration in the business going forward and the opportunities.
You will note that in terms of gross margins, they were 43.3%, that was a sequential improvement of $110 basis points. I would like to also point out that from the fourth quarter, it was an improvement of 280 basis points and it was up 60 basis points from the third quarter of last year.
So our performance in the second quarter, in terms of gross margins was higher than both of the year ago or the fourth quarter as well as the third quarter. So it shows what we think our accelerating trends in terms of gross margins and I think another really important thing to point out is that the negative variances that were accumulated in the fourth quarter that last year because of the slowdown and carried on into the first quarter have been all resolved, they are gone and there are now positive variances on the books, we will then roll out assuming – we get the positive because we have the four-month, which we will explain or have dialog if you can decided to (inaudible) you attack on a month and drop off a month and the month that we drop off is going to be a positive variance.
So we continue to be very, very busy and in fact we had a scheduled plant shut down during the July 4th holiday and we had to modify that to make sure that we could meet the needs of our customers. So we are very, very active in that area.
If we take a look at the overall sales because I think there is some very interesting trends here as well, in the second quarter catheter sales increased 30%. The standalone devices rose 17%, inflation devices grew at 15% and we will discuss what’s going on there, we did have some contribution there both in terms of gross margin from some accelerated orders, some larger orders than we have seen in the past from Kyphon (ph).
Nevertheless the core business (inaudible) is still growing at some of the highest levels that we have seen in a number of years and we expect that that’s going to continue on because of some difficulties that our competitors are having meeting the needs of their customers. If we go to the SG&A expense, I think that’s another one because I know there is a lot of concern about that, for the second quarter it was 26.6% and most of that again was because of the cost of the pretax expenses of $1.1 million that were in BioSphere but we are also on the quarter, our SG&A expenses as compared to the previous quarter, I want to go to June, for June we are down for the June month to 23.4%.
So the other point that I want to make here is that if we take a look gross margins and if we can continue the sales trends, you will see that we are going to get operating leverage all the way down the line and we think those opportunities are in place assuming that we have the reasonable or at least the market conditions that we have seen going forward. A couple of other things that I think are important for you to know is that we have received the CE mark on our ASAP thrombus removal catheter and the product has been trialed and it’s being trialed as we speak.
I had a phone call today on a very successful use of the product in Germany and the comment that I heard from our product manager, who was there as the physician stating that they thought this product was better than the current market leader. So we are excited about the prospects, we are still in 510k process and we expect that we will introduce this product in the United States sometime in the first quarter but we expect that we would roll this product out in Europe in the next 30 days or so, and start to generate revenues from this product.
It’s a tremendous product with a terrific market opportunity. We also introduced four additional products which is again consistent with the Merit experience and that is introducing lots of new and exciting products, all of which are helping us and our efforts to take advantage of some of the opportunities.
The specific one that comes to mind is the Tram. This is a manifold which would fall in the traditional legal products but with an integral transducer.
We make that transducer, and we are the only company in the world that is vertically integrated in this particular area and we are having great success with that product. We are also pleased that the Laureate guide wire is building and growing and we expect that there is going to be dramatic growth there.
As I wrote that one sentence about current market leader, I guess I should probably say that the current market leader is a very powerful company and has had a great product. But I don’t expect that if we were talking three or four years from now that they will be the market leader.
And so, hence the word current, I hope that in the future I can talk to you about the former market leader. We had some issues, that you will see in terms of our lower tax rate for the six months and that is because of our Irish operations and more profits there that allow that at least for the first six months to have a lower tax rate.
And then, regarding the BioSphere acquisition, we still expect that that transaction will close in this quarter. So, Kent, I am going to go ahead and let you talk about DOS inventory turns, all those things that I think are very important to really look at the fundamental operation of the company internally.
So do you want to address some of those?
Kent Stanger
Thank you, Fred. I am really pleased with the balance sheet, particularly the investment, we have added a lot of new products, we have grown our sales at 16% for the last three quarters in a row, yet our inventory has remained and actually declined over those same three quarters.
So we are starting to see the cash flow effect, we were able this quarter to pay off $7 million that was on our balance sheet at the end of the year, mostly here in the second quarter and clear that debt off, which is always nice to do and the cash is starting to grow on top of that now. Another nice thing is to see the improvement sequentially in many of our income statement measurements.
So we have met some of them and that is that the gross margins are improving sequentially for the last four quarters or better than it has been since a year ago. And it’s mostly both of mix issue with some of the new products for bringing in as well as efficiencies as Fred’s already mentioned in being able to apply our overheads and to actually exceed the standards for application of overheads.
Another important thing is that we are seeing now leverage come back into the SG&A section of our financial statements where the growth that we invested in last year towards the last half of last year show now we are getting a return from that in both Europe and in the U.S. from the standpoint of the SG&A costs are growing now as fast as the topline.
So we are starting to see leverage. In fact if you take out those acquisition costs in the second quarter, they would nearly be flat from year-to-year comparison, they would both be around 25%.
So we are spending increasing amounts in R&D, we are investing in new products as particularly in the stand area and in the G&I business and so you will see some of those increases and we are investing some in that area, but that is really bring that business in the future to profitability. So again, I think it’s a great quarter, I think we have good trends and particularly when you look at within the quarter and then how strong June was.
Fred Lampropoulos
Just a couple of other things that on the balance sheet, and income statement that are important to you. The intangible amortization for the quarter, I think this is the quarter, Kent, our six months was about $1.3 million as opposed to $865,000 for the six months last year.
So there is almost $500,000 worth of additional expense there. So, we take the amortization, which is a non-cash issue and we take the expenses for the BioSphere transaction and look at that and some other expenses, but there was an impairment fee that we took making sure that everything’s clean and we have a couple of things that we took care of in the quarter.
It’s even more extraordinary as we look at all those things. So, I think we’re getting the back and have the momentum to move back where we all would like to see the stock, not the stock but I think the stock, of course, will obviously be a recipient and we hope it is from better financial performance.
But as we start to look at those opportunities and operating profit and that leverage is available and these variances that are now positive flowing and it’s just a great time force, and I do want to say that in terms of our sales force, our domestic sales force, our international markets and our OEM and all those areas that essentially all of our guys are hitting on old cylinders. Now, Kent pointed out and I’d like to just briefly discuss that in our R&D expense, we continue investing things that we think are going to help build the business going forward.
A lot of those expenses in our Endotek division with new stent products, there’s expenses in their for this new valve technology that we’re working with Viscera (ph) and a number of disposable products that our Merit products that we expect that will be introduced in the third and fourth quarter. And so those will start to help that division, which continues to be a drag.
But as we turn that one around over time and then continue to move forward with our business, we think that we are absolutely poised both in terms of capacity and with opportunity. So, I’m very pleased where we are and where we’re headed and I hope you are and I think with that said was this – I missed something.
Yes, one other thing, very important, in terms of China. We have received our physe (ph), which is essentially our incorporation.
We’ve received our SFDA approval and there’s a couple little minor things that have to be done. But within the next three weeks to month, we will be operational in China.
And I want to really thank the guys, and when I say the guys and gals, this is the whole company. They just took an effort from finance.
This was our ops people. This was planning, and Joe Wright’s team and our IT.
I mean it goes across the board, everybody was involved in getting this business to the point where now I believe that if we would look forward a few years that it’s going to be a $100 million business. There’s a lot of opportunity.
We’ve also filed for a number of new products. So, for the first time in a very long time, there’s a lot of new things being file, which is going to enhance our business going forward internationally.
Kent, I’ll let you comment on that.
Kent Stanger
Okay. Another thing that’s interesting, we’re seeing a lot of quotes and orders and contracts come in for kits and trays, for that part of our business and so we expect as their inventory completes with former vendors that we’re going an increase and an influx and we’re seeing the production of it now as part of that positive variances.
So, we’re expecting those revenues to start flowing this next quarter and fourth quarter and going into the next year.
Fred Lampropoulos
So, there’s a lot of momentum. There’s a lot of stuff in the pipeline and a lot of tired people around here.
We’ve been working very, very, very hard to take advantage of the opportunities in the marketplace. I think Kent unless you have anything else you’d like to share?
Kent Stanger
Okay. Well, with that being said, I think it’s time for our operator to turn the time over and we’ll start taking some questions.
Operator
Thank you, Sir. (Operator Instructions) And our first question comes from the line of Jayson Bedford with Raymond James.
Please go ahead.
Jayson Bedford – Raymond James & Associates
Hi. Good afternoon, guys, and Fred, we heard about your mother and certainly our condolences go out to you and your family.
I just wanted to ask in terms of the business looking at the revenue performance 16% top line growth, well-above market growth rate, just wondering what is driving this growth – meaning I realized we have the segment breakout, but is it contribution from new products, is it better production from the sales force and maybe you can comment on any type of kind of one-time/non-recurring sources of growth in the quarter, if any.
Fred Lampropoulos
Well, Jayson, first of all, thank you for your condolences. As you are aware my mom passed away a few days ago and as soon as this call is over, we’re going to take care of the family needs for today and tomorrow.
So, thank you very much for your comments. I would like to think that in our business, other than what I mentioned that we had a good quarter with Kyphon (ph).
They come and they go. They’re up and they’re down, so I mean I don’t know that that’s one time.
I think we’re hitting on all cylinders and that is that we take a look at our OEM business when we take Kyphon (ph) out its up 25%. If we take a look at our domestic sales, I think one of the things that Kent mentioned was that our kits and our packs are growing dramatically.
I think we’ve prepared for over 20 years on selling out our product line and there’s been times when we didn’t have all the pieces. But I absolutely have no difficulty in saying that we have the baddest and broadest product availability of any company, and so that preparation, things like the Miser, which we introduced a couple of years ago and the Tram, now helped to fill those final holes with this broad breadth of products and tuck-ins and cheese (ph) and needles and all the things we’ve done over the years.
Our sensor business is doing a tremendous job. We picked up some very key customers there on the industrial side and so that’s growing and those aren’t one-time.
These are things that are going to be there for a long time. On the automotive side, that’s starting to drive our sensor businesses as well as the medical side and consumer.
So, that’s very busy and going to get busier. I think what is interesting to note is generally we would be having the discussion about lower margin products when you talk about the kits and packs, you would automatically think that somehow in the mix would affect things.
Well, it does. However, because of the operating leverage and the capacity issues and the ability to do that, the bills are paid and we’re getting those positive variances, which are helping us and will help us going into the future.
So, it’s the new products. It’s everything, but I don’t know that there’s any one-time bolus of anything other than –
Kent Stanger
(Inaudible).
Fred Lampropoulos
The situation that we’ve talked about with the kits and the packs because those have been very good –
Kent Stanger
That’s yet to come. We haven’t seen that in the quarter even.
Fred Lampropoulos
And that’s a good point, and that’s what Kent tried to say earlier is that momentum, those things are just being built and they haven’t been sold yet.
Kent Stanger
Yes.
Fred Lampropoulos
We’re filling this pipeline that is as I’d mentioned the fork could be on a run rate $15 to 20 million and still growing. So, that’s on an annualized 12-month run rate and again, that’s a guesstimate.
But nevertheless that’s where a lot of this is coming from, but this is new contracted business. This isn’t a one-time shot.
These are things where we had filled the gap. We’re seeing – this is a long answer Jayson, but we’re seeing the very same thing with the ability on national accounts where we had either limited business or this all of a sudden.
We’re kind of being invited to all the parties and we’re the first call, which is kind of nice. We’ve worked a long time to put ourselves in this position, and we have the capacity.
So, all of those things are just kind of all adding up and it just puts us in a great place and now, we just have to just keep working although like I said, we’ve worked hard and a lot of people are tired and traveling all over the world. So, there’s a long answer to a very complex question.
Jayson Bedford – Raymond James & Associates
Fair and that’s helpful. Just on the kit and trade dynamic, it’s interesting it seems like there is a nice opportunity there yet that was actually your slowest growing segment in the quarter.
So, just in terms of the timing of that opportunity, I’m guessing you kind of thought late in the quarter, so that’s something you should –
Fred Lampropoulos
No, no, no. No, no, no.
What you saw, a lot of it was some in the standalone products.
Jayson Bedford – Raymond James & Associates
Okay.
Fred Lampropoulos
To kind of fill that and you see some of that if we’re dropping of as we work our model out of that four-month drop one add one, we’re getting the positive benefits of some of the production to prepare for it that we’re on the front end. So, we’re going back.
We’ve been seeing this going on since early February.
Jayson Bedford – Raymond James & Associates
Okay.
Fred Lampropoulos
So, this isn’t just something. It’s been accelerating.
So, I mean we’ve bought – like I mentioned I think on our last call, we bought three or four new injection molding machines and we’re doing – we’re very, very busy. So, this isn’t just a one-month phenomenon.
This is something that we’ve been working on and discussing in our calls for several months.
Kent Stanger
Hey, I think he’s point is that it hasn’t showed up a lot because it slowly growing.
Fred Lampropoulos
No, that’s right. That’s correct.
Jayson Bedford – Raymond James & Associates
Yes, we saw more of it in June than we did the previous months and we expect to be because they’re contracts and they have to clear their other inventory. So, you hear about them from the sales force, before you get the contract, before you actually deliver the product.
Fred Lampropoulos
That’s correct.
Jayson Bedford – Raymond James & Associates
There’s a lag, but it’s interesting to see how it’s building
Fred Lampropoulos
And another thing to Jayson that really helps with that is that not only you’re selling those products, but it helps you to sell your other products, your higher margin products. So, whether the vessel (ph) sizing cappers, whether they be cheese (ph), whether they snares, any of these products, we just have more of a presence and I think that Merit has looked very candidly as being the guys that can deliver and can help people run their business.
Their business is up then we’re kind of their best partners right now.
Jayson Bedford – Raymond James & Associates
It’s interesting to that the list of the new customers are some of the biggest teaching centers in the country that have been more difficult to convert for us because of their desire to stay where they were and then now, there’s been reasons to change and so we think that will influence a lot of product and post-op.
Fred Lampropoulos
And it’s those kits and that ability to get that present. There’s been other problems in inflation devices, so one of the things that you’ll see as we go forward is that you’ll see those higher margin products like inflation devices specifically along with a new inflation device that we’re going to be introducing or going to help us garner more market share in a product, which is essentially our highest gross margin area overall as a business segment.
So, those things were all working in our favor right now.
Jayson Bedford – Raymond James & Associates
Yes. Okay, that’s helpful.
Just a couple of quick even then I’ll get back in the queue and let someone else ask a few. Reconciling the 13% core growth, what was EN Snare revenue in the quarter and if our mass is right Endotek was about $2.5 million.
Fred Lampropoulos
I’ve got it right here. I think –
Kent Stanger
86 (ph) 2.4 and its 1.9 rounded of as EN Snare.
Jayson Bedford – Raymond James & Associates
Okay, thank you. And then could you maybe –
Kent Stanger
By the way, there was 2 million in the quarter last year. So, when you talk about comparative for Endotek, it’s kind of similar.
Jayson Bedford – Raymond James & Associates
Right.
Kent Stanger
It’s out 10%, by the way, from a year ago.
Jayson Bedford – Raymond James & Associates
Got you. And just lastly for me, in terms of new product flow you mentioned it sounds like there’s a lot in the hopper there.
Could you maybe just highlight the maybe two or three products that you plan on introducing on the second half that you’re most excited about.
Fred Lampropoulos
Now, with the ASAP is, what I think is the biggest opportunity and I mentioned that we have two endoscopic products that work in our GI division that are great opportunities and the other one, so I’m not going to give you the names of those because it wouldn’t be appropriate. But they’re coming in late third and early fourth quarter, so there are two big products there.
Of course, the one that is going to have a dramatic growth is the Laureate Guide Wire because we’ve got the – we started out with the basic part of the product line, but other sizes like the .038, .018, and .025 are going to round that out and I think the rewarding thing about the Laureate is I’m being told time and time again that it’s the best hydrophilic guide wire on the market and that is extraordinarily pleasing to me, with the years that we spend on developing it and putting the production capacity. Kent, you want to add something?
Kent Stanger
Yes. I think the microcathether –
Fred Lampropoulos
Yes.
Kent Stanger
Is another interesting opportunity, not only because its’ a recent introduction that has some unique properties to differentiate it in the marketplace. But because of the focus that’s going to get along with the BioSphere’s closing.
Fred Lampropoulos
Yes.
Kent Stanger
And that product coming on.
Fred Lampropoulos
It’s a great point. So, Jayson, when you look at the BioSphere opportunity and you recall that I’ve said that I believe there are 0.50 to 0.60 Merit products that are essentially new.
These are sheets (ph). These are microcatheter and …
Kent Stanger
Laureate.
Fred Lampropoulos
And the Laureate. So, there are all these products that are moving in there and it’s going to get – we have two orders today for instance.
From two of the largest institutions in this company that our country that ordered 10 each of our microcatheters and these are 350 to 400 a pop. The other thing is we haven’t really officially launched or just officially until –
Kent Stanger
This month,
Fred Lampropoulos
Really July 1st on the Laureate and we haven’t even launch it in Europe, and so we’ve been making sure – in fact, one of the things we did is we started expanding clean rooms and capabilities and equipment because if we hadn’t slow down a little bit, we would be able to keep up with the demand and so, we’ve expanded our capacities already with all the various parts of it and we’ll be rolling it out even further. So, it’s going to become as I’d mention to you before many times.
We thought it was maybe a $30 million opportunity annually going out several years from now. I now believe that it’s a $50 to 70 million opportunity for Merit and it’s a workhorse product to choose everyday and it drags along with it lots of other products.
So, we’re excited about all those areas and there’s more behind that. There’s valve stent products, there’s other stent products.
We’ve started on a vascular stent product, just other devices and research and development. So, there’s lots of stuff.
The pipeline is full.
Jayson Bedford – Raymond James & Associates
Yes.
Fred Lampropoulos
And we’ll give you more color on the names as we release them.
Jayson Bedford – Raymond James & Associates
That’s all right.
Fred Lampropoulos
Our competitors are on the call too, and we don’t want them to get too comfortable or start developing strategies. Thanks, Jayson.
Jayson Bedford – Raymond James & Associates
Thank you.
Fred Lampropoulos
Anybody there?
Operator
Yes. Our next question comes from the line of –
Fred Lampropoulos
Here we go.
Operator
Larry Solow (ph) with CJS Securities. Please go ahead.
Larry Solow – CJS Securities
Hi. Good afternoon.
Fred Lampropoulos
Hi, Larry.
Larry Solow – CJS Securities
Could you clarify the competitive issues without naming the actual competitors? Are there actually separate issues for the custom kit and the inflation devices or is that the same competitor?
Fred Lampropoulos
It’s the same competitor.
Kent Stanger
(Inaudible).
Fred Lampropoulos
It’s a company that’s well-known. It’s the company that we setup to emulate.
They’ve had some struggles.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
And we’ve had the opportunity to have a full line and I think as people, customers have looked at that we have 100 of products that meet their needs instead of basic stuff that’s been around for a long time, we have just a much broader product offering, and more importantly is the reliability. Merit has stepped up to the plate and when people had difficulty treating patients, Merit had product their overnight and so that’s one of it.
This company also produced an inflation device for a large medical device company.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
And they’ve been struggles there in back order.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
So, we’re picking up that business as well, but it’s all kind of comes from that one source of difficulty. I would like to point out that this business that we’re talking about isn’t a one-time bolus.
This is now business that Merit has contracted.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
And that’s very, very important. So, it’s not just something that’s going to come and then go back out the door.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
This is business that Merit has contracted in some cases for several years.
Larry Solow – CJS Securities
And something that you’re talking about if you ordered them producing it, but not actually recording in revenues, but is apparently, probably is benefiting your gross margin. Do you expect gross margins to continue to sequentially rise or was there potentially a little bit of extra juice this quarter because of that?
Fred Lampropoulos
Yes. Let me go back and say that we have been producing the product and it is generating revenues.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
And we have been filling on a standalone basis rather than the kit through the standalone.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
So, they would literally have to drop these products into the sterile area and assemble them, so that they could treat their patients. So, we have been benefiting from some of that all the way along.
And that’s part of what’s in this quarter. Going forward, it will just be going into the system and it will just roll out every week, every day, every two weeks, depending on their order patterns.
But part of that production is coming on board. But remember what we’re dropping down on the gross margin side is stuff that we’re producing four months ago.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
All right. This goes back to the question that came earlier and that was are you just now seeing it, the positive variances that are dropping down are for things we were doing four months ago.
And the positive variance we’ve produced last month will rollout three months from now.
Kent Stanger
Some this month.
Fred Lampropoulos
So, that moment. There’s something each month and they’re all positive going forward where we have that drag.
It’s I think ironic when we go back and look at that fourth quarter of last year when things had slowed down. We were making sure that we were managing and doing what a business ought to do and that is not throwing a bunch of money on the shelf, but keeping the cash and we ratcheted our production to meet the demand.
Well, you had those three months or so and those rollout negatively, then all of a sudden starting in January, we started seeing these trends and production started moving forward by the time we got to February, we started producing this and but we were still dropping of those three or four.
Kent Stanger
And yet, yes.
Fred Lampropoulos
And yet we still improve sequentially.
Kent Stanger
(Inaudible).
Fred Lampropoulos
From the fourth quarter, pretty substantially.
Kent Stanger
It’s not until the second quarter that they turned to positive variances.
Larry Solow – CJS Securities
Yes.
Kent Stanger
And that’s what he’s saying. He’s saying – and to answer your question.
This isn’t a one-time thing or a bolus that came along. I think it’s just a trend.
These kits that we’ve been building will be continuing in other words, where everything we do is disposable, but under the contract they are estimated to use certain amount each month and we’ll rebuild them again.
Larry Solow – CJS Securities
Right.
Kent Stanger
As they layer on going forward so.
Fred Lampropoulos
But it’s not just the kits, is the question was asked earlier. We’re seeing an OEM.
We’re seeing in sensors (ph). We’re seeing it in our direct sales force in Europe.
So, on that product we’re seeing, I think we’re up 20% as an example in our direct sales in Europe.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
So, it’s kind of across the board and for varied reasons not just this one issue. It’s coming from lots of various – Merit has very broad breadth of product opportunities.
Larry Solow – CJS Securities
Okay and to look at the inflation devices and sounds like things are clearly improving there. Is there any way to breakout what you do think was sort of an acceleration or orders or maybe just from Kyphon (ph) itself?
Kent Stanger
Yes, we can do that.
Fred Lampropoulos
Yes, we can do that. Kent, you want to just to?
Kent Stanger
Yes, the underlying was 5% without that.
Larry Solow – CJS Securities
Okay.
Kent Stanger
And that grew at 69% compared to a year ago, so there were some big orders that came through and there are uneven in their order pattern.
Larry Solow – CJS Securities
Right.
Kent Stanger
So, we benefited this quarter. So, it was up 1.5 million over last year for the quarter.
Larry Solow – CJS Securities
Okay.
Kent Stanger
And yet it’s only 700 for the year so.
Larry Solow – CJS Securities
Okay and then China obviously is progression is nice. Anywhere you can sort of walk us through?
I think another call you’ve stated that you think the actual sales numbers should double immediately just because you’ll get a much higher price. Is that there statement?
Kent Stanger
(Inaudible).
Fred Lampropoulos
Well, what we’re essentially doing is eliminating the importer.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
And essentially what you’re doing is if you had a product that was $30.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
That you were selling to a dealer, they would end up (inaudible) to their sub-distributor for about $60, okay. Now, you’ve got to take although away from that delta, you’ve got the expenses of the office, you’ve got your own transportation and you’ve got all that sort of stuff too.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
So, it’s not a doubling of –
Kent Stanger
Income.
Fred Lampropoulos
Of income.
Kent Stanger
It is revenue.
Fred Lampropoulos
It is a doubling of revenue.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
And then you’re going to have some expenses, but those expenses – I think the big advantage for us in China is we’re only selling about 20% of our products there.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
And so we’re going through the process of now registering (inaudible) or introduce your sheets, the prelude. We’re going to have great opportunities in the prelude over there, millions of dollars of sales.
But it’s just now in the process of getting registration, so what we’re going is just simply taking out the middle man and making sure that there’s a business model going forward that allows us to be able to have the full spectrum of Merit products and that’s why I think and say with reasonable confidence that over the next several years in the largest population in the world and with the growth that we’re seeing just in their general economy, it is the largest single opportunity on the planet and we’ve positioned ourselves with a lot of expense. For instance, in the quarter, we had I think was $187,000 or a couple of hundred thousand dollars worth of expense to set the office up in the quarter without any income.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
So, we’ve got the expenses here and yet we’re still able to I think generate the kinds of performance that we’ve talked about. Once that goes the other direction, you’re going to see higher revenues, you’re going to see higher margins and you’re going to see operating leverage.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
So, that in itself is a great opportunity.
Larry Solow – CJS Securities
And just to clarify, without increasing penetration just on the same amount of sales, I realized basically your selling price will double. Will that be sort of like a pre-immediate thing?
Kent Stanger
Yes, it is.
Larry Solow – CJS Securities
In other words, one satellite opens and say September would you have to go out and do contracts, new pricing on a case by case basis.
Fred Lampropoulos
Yes. It’s going to be a transition.
You can’t just unplug one and have the other one plug in.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
There’s going to be some inventory. There’s going to be over hang, there’s going to be this – so, it’s going to be a transition process.
I would guesstimate that within six to nine months that revenue would then show the double.
Kent Stanger
Yes.
Larry Solow – CJS Securities
Got you.
Fred Lampropoulos
But in the meantime, you’re going to get additional revenues that you wouldn’t have gotten at all because other opportunities and broader coverage and our ability now to work with different buying groups and distributor groups that we have been limited with here before. So –
Kent Stanger
For example our manager over there was saying that as the 10 biggest hospitals, we’re really going to have good representations in two of them.
Fred Lampropoulos
Yes. Well, in Beijing, (inaudible).
Kent Stanger
Yes, in the Beijing area. So, we’ve got eight more and he’s right there.
So, those kinds of opportunities we think are on above if we just converted everything over that was already through the middle guy.
Fred Lampropoulos
If you take our market share and inflation devices or kits in some of those products which inflation device is just 50% and we only have 20 there right now, in terms of just the percentage and I know this is a little far fetch but it shows you what the opportunity can be.
Larry Solow – CJS Securities
And is it fair to say you’re guidance is remaining unchanged, I mean for the year or?
Fred Lampropoulos
Yes. We don’t – we forecast once a year.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
We don’t – we’re going into a summer season, which is always unpredictable.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
And so we don’t throw the members around.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
I guess I will say that we’ve given the range.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
And if you take a look at what the estimates are based on that range, you can extract the numbers and see that for the six months we’re ahead of that, clearly.
Larry Solow – CJS Securities
Right. Right.
Fred Lampropoulos
And we hope that kind continues would be terrific. We’ve talked to you about the momentum.
Larry Solow – CJS Securities
Yes.
Fred Lampropoulos
I guess I would say what happens sometimes is people get too far in front of us and maybe we should talk more, but it’s just so difficult trying to handicap and talk about this and talk about that.
Larry Solow – CJS Securities
Right.
Fred Lampropoulos
It’s difficult to do. So, we just kind of stick with it.
Here’s the forecast and the numbers will stay to themselves and you guys can do the analysis and make your own decisions.
Larry Solow – CJS Securities
Got it. Well, thanks for taking my questions and we look forward to seeing you guys at our conference next month.
Fred Lampropoulos
Yes.
Kent Stanger
Yes.
Fred Lampropoulos
Kent will be there. So, we look forward to seeing you guys, definitely in –
Larry Solow – CJS Securities
Absolutely. Thank you.
Fred Lampropoulos
In White Plains. Thank you.
Larry Solow – CJS Securities
All right. Thanks a lot.
Operator
Our next question comes from the line of Shawn Fitz with Stephens Incorporated. Please go ahead.
Shawn Fitz – Stephens Inc.
Fred, Kent, good afternoon. Thanks for giving me some time here.
Fred Lampropoulos
Thanks, Shawn.
Kent Stanger
Yes.
Fred Lampropoulos
It’s good to hear from you.
Shawn Fitz – Stephens Inc.
So, Fred, just maybe as we think about some of the new customers, you guys are adding and you’ve indicated that these are really tier one type of accounts. Could you maybe just see if you could give us some sense of a couple of items as it relates to new customers?
Is there any way to think about the magnitude of revenue that you all are acquiring in this new customers on kind of an annual basis. So, for thinking about maybe in 2011, what kind of revenue could you guys be getting from these new customers and then maybe just give us some sense as to how sticky these relationships are as well.
Fred Lampropoulos
Yes. Well, first of all, I think that as we look at the opportunities here, this in many cases are customers that we’ve already been doing business with to some extent.
We have some business. We know what all the flagship names are.
There’s Mass General. There’s Mail (ph).
There’s Duke. There’s Vanderbilt (ph).
There’s Saint Luke’s in Milwaukee. There’s Tucson Medical Center.
There’s a whole bunch of just inner mountain healthcare. I could go on and on with flagship names in this country and those would be relatively good reference point, UMass Medical Center.
There are a lot of these great, great places and that would be kind of a good reference point from there. I think I’ve indicated in this discussion that our general guesstimate right now is that there’s about $15 to 20 million worth of run rate business.
Remember, that’s not going to happen this year, but you’re only going to get part of that next year, but it’s accelerating. There’s still new business going on and it hasn’t changed.
We’re seeing, you might get a little bit of an (inaudible) but sometimes the next you get four or five new accounts that pop in. I was talking to one sales rep, we got an email on Friday, where they had five new accounts that they thought they could convert in one territory.
Remember, we have 60 territories. So, I mean that’s pretty significant.
This is just one and the customers are – and this is business we don’t have. So, there’s a lot of that opportunity and then when you come out with products like ASAP or you have things like the Laureate, you have things like the Maestro, things like the Finale, all of these things just again enhance Merit’s position with all of the products we have.
That’s the great things. We’re looking at some products that are legacy products that are growing at 25 and 30%.
These are legacy products, been around a long time. So, I think that presence out there, Shawn, just gives us an awful lot of momentum going forward.
Marty, do you want to comment on any of these and just kind of what you’re seeing in the field on Monroe. Our Vice President of Sales and our Executive President, do you guys want to comment at all?
They’re all looking at me with fear in their eyes right now, but –
Martin Stephens
I’ll just say that we’re just seeing a general enthusiasm for Merit Medical. I think our capacity drives to respond when other companies are in trouble to help solve problems in hospitals, endears us to the staff and to the people there and allows us more opportunity in the hospitals.
I think we’ve continued to add sales reps while other companies have been cutting staff and I think we’re on a continued growth plane because of the quality products that we have and the well-trained reps that we have in those accounts.
Fred Lampropoulos
He’s being humble when he’s saying that. I’m just –
Martin Stephens
I didn’t talk about the sales management.
Fred Lampropoulos
Yes, Okay. Okay.
All right. I hope Shawn that that answers your questions.
Shawn Fitz – Stephens Inc.
As we think about the margin side, you all had a very impressive quarter on the gross margin side and even more impressive June showing as well. I know that’s been driven by new products and variance.
I guess just we start to think about gross margin of your business, could you just kind of talk around maybe what we should be thinking in terms of what the gross margin capabilities or possibilities are for core?
Fred Lampropoulos
I have always said that our goal, at least on the intermediate term was to get to 50% and we discussed in some previous calls that the BioSphere opportunity would add a couple of hundred basis points and actually 400 if you take a look and put the intangibles, I know that doesn’t count. So if you are looking at the capability, if you take 43.3 and you had couple of hundred basis points, it’s 45.3 and then you add in some of these other higher margin products that are coming down the pipe, and then you get the absorption issues even though you have those lower mix products, it puts us well on our way to hit the 50% goal in the next two to three years.
So I am talking 2011, 12 and 13. So that’s still our goal.
We have been working on that since we were at the point where we are at I think 38.3, 38.4 a few years ago and we believe that we have the ability. Now we hedged a little bit this year on our gross margins from the 150, which we had promised in previous years because we missed a little bit in that fourth quarter and we wanted to give ourselves a little room.
But with what’s going on and should these trends continue, we are going to feel very comfortable about our opportunities with gross margins and then you add on the BioSphere opportunity and all of those products, which we say go – that get added on to that, they are all very high margin products. Then you take a look at these new Endotek products are all high margin products.
So there is a lot of opportunity here for expansion of gross margins and so I tend to look at it more in where we are going to be three years from now and we should be able to add 500 basis points, 600 basis points, that’s going to put us right up in our goal. And then the operating leverage that you can see, as we talk below the line, there is significant opportunity for profit expansion, operating profits, and we know what that all means.
That’s what business is, our business to do is to serve and to get return for the shareholders and we think that we are on the cost (ph) of great times.
Shawn Fitz – Stephens Inc.
And last question, just as we think about all the opportunities before you and all the momentum you have in your business really on the revenue side, the margin side, and the operating leverage side, how should we be thinking about your capacity or manufacturing capacity or any kind of constraints as we think about the next 24 to 36 months here?
Fred Lampropoulos
That’s a great question. If we take a look at one of the challenges that you have is that to fill the pipeline of products from our vendors, we have actually I think done a terrific job, but I will say that there has been some pulling and tugging, a lots of meetings and planning and dialog to make sure that those things come along.
And so far, they have done very nicely. At Merit we have done that by shifting and by facilities and by injection molding and we have hired 175 people this year.
So we have been able to handle all of that so far. So far so well.
I mean there is always challenges with that but we feel reasonably comfortable with that now. That being said there is some things that we need to do and we discussed a little bit about this in our last call and I think it’s important to just to refresh everybody’s memory.
We have received approval for a facility and construction of a facility in Ireland. We expect to start construction of that facility, which would be 60,000 square feet and this is for an expansion of our guide wire (inaudible) products and our Laureate as well as the footprint to be able to start up our pack business without have the overhead drag.
Other than the amortization of the building, we have everything in place there. All the management is in place, so we don’t have to start up a new business.
Now that’s about 12 to 18 months away, so we are going to see that sometime start to come online in 2012. So that’s, we are planning for the future, we’ve opened up our 50,000 square-foot facility in here, in Salt Lake City, just a mile down the road from our plant, where we’ve transferred the (inaudible) part of our business from Texas.
Now that duplication has had an expense to it, but we think we can operate at lower cost here, we think we can have less – a better R&D coordination. And so, we’ve had that expansion of capacity.
And then, we would hope to sometime in the next 90 days start a new facility here in Salt Lake City. Actually, when I say Salt Lake, I mean South Jordan.
And one of the things that’s important for us is to consolidate our facility and move out of our 45th South, where we started and where we’ve been for a long time, because we’re so busy, we’re running things back and forth, it’s very inefficient and we have to remember a $14 million EDA that helps to fund that construction and we think it will be more efficient. So we’re planning and already have in place all these plants for capacity.
We’re going to be able to do this as we mentioned on our call when we talked about BioSphere and to pay off the debt in BioSphere and pay that off by 2013, I believe – 2014, fund all of the growth, maintenance, the facilities going forward out of operations and the loan initially to fund the acquisition. So we’re generating a lot of cash to go forward to do all those things and that’s the same plan that we’ve discussed previously, but it’s all just coming right down the road, and we’re making sure that we’re in front of it to take advantage, because we’re starting to see – you’re starting to see a little pressure on the clean rooms and we have new products that are coming in there, part of what we did on our research and development.
You recall a few years ago, we went to the pilot plant approach, where we have the R&D facilities that are responsible for not only designing but developing these new products and automating them and we just had a major transfer of our appraisal chief line which has been in that R&D plant now to that new facility about a mile away from Merit, thereby leaving more room for a number of these new products that we’ve built in that pilot plan for future growth. So I think we’re hitting on all cylinders.
There’s problems and hiccups and this and that, but all-in-all, we’re operating exactly as we had planned. Kent, do you have a comment?
Kent Stanger
Yes, I think I do want to say that for the existing product lines, we have most of the capacity can be increased through the second shift, that’s not an easy thing to do and not something that we do lightly. But if it does, if we do have, if the demands there and we see we can go into the second shift on most of our product lines to pickup that demand.
So the new facility we’re talking about was really for new products and for shifting around for efficiencies as Fred talked about, and for the future, which is a couple of years away really to be in operation.
Fred Lampropoulos
Yes. That’s at least 2.5 years by the time we get everything set and done and move.
But it’s something we feel like we need to do and take advantage of a tax benefits we have in place as well as what I think will be substantial efficiencies. We’re doing a lot of driving back and forth and that’s just it can’t be efficient.
Shawn Fitz – Stephens Inc
Okay. Fred and Kent, thanks for the time.
Fred Lampropoulos
You’re welcome. Thank you, Shawn.
Operator
Thank you. (Operator Instructions).
Our next question comes from the line of James Sidoti with Sidoti & Co. Please go ahead.
James Sidoti – Sidoti & Co.
Good afternoon, Fred. Good morning, Kent.
Can you hear me?
Kent Stanger
Yes.
Fred Lampropoulos
We can Jim. Thank you.
James Sidoti – Sidoti & Co.
Just it sounds like the core businesses is doing well. But could you just remind me when you think the timing of the BioSphere – closing of the BioSphere deal will be?
And can you just run through the expenses relating to the closing and maybe in quarter after the closing?
Fred Lampropoulos
Yes. We believe that the BioSphere acquisition will close in the third quarter.
We continue to believe that the initial numbers that we gave you in terms of the severance and the one-time costs and those things are still in line. But I think the question is a very good one and timely, and that we have to remember that we are going to have those one-time expenses they’re going to pop-up in the third quarter and fourth quarter.
I think the important issues to look out are going to be the overall revenue line in the gross margins and we hope that those one-time expenses which we simply have to report and can no longer capitalize, we’ll just simply be there and you’ll analyze. We tried to in this quarter by the way to point out those costs.
Part of that was for a fairness opinion and other legal expenses that hit us in this quarter and that was $697,000 after-tax. So if you gross that up, it’s almost $1 million.
Kent Stanger
$1.1 million.
Fred Lampropoulos
$1.1 million. Had that not hit in this quarter that would had been about another $0.03 or $0.04 a share.
So I think those are things we were trying to point out that when you back those things out and take a look at what the real earning power and production power of the company is right now that there were lot of good things. But again, as a reminder to everybody, this transaction is going to be here and you are going to have those expenses but you guys all know that, we have talked about it, and we believe again, from this side of the table, very excited about this opportunity and believe that it fits perfectly into our strategy and we have a lot of I think interesting opportunities and ideas.
So we think that under this umbrella, with this technology and the other products that we have and the plan that we have put together and it’s going to very, very effective.
James Sidoti – Sidoti & Co.
Could you quickly go through what you think those charges are, the same as you did after you closed the deal, have you updated anything?
Fred Lampropoulos
We are seeing a little bit of shift, the restructuring charges are dropping a little bit, we are keeping more of the sales force, it’s probably closer to $4 million and (inaudible) $5 million. I think that’s about the only change I have really seen in it.
We are still going to have another million or so in what I call closing cost, that has to do with bankers and non-attorneys and stuff.
Kent Stanger
And then you are going to have the severance.
Fred Lampropoulos
Severance is in the $4 million range, is my estimate currently. They could change a little bit, two things are influx as you go through but that’s a closer estimate I would say.
James Sidoti – Sidoti & Co.
Okay, those charges will in the quarter you close the deal or will that be a few weeks later?
Fred Lampropoulos
We think that most of will be in the third quarter but there could be some tail-on expenses that’s part of the deal in the fourth quarter I expect. There will be some in the quarter (inaudible) clean up as we go for few things on the legal side and accounting side and just the things that you have to do.
James Sidoti – Sidoti & Co.
Okay, and your revenue expectations BioSphere, have they changed at all since you did the last call?
Fred Lampropoulos
Yes, it would be inappropriate for us to discuss anything about BioSphere other than the closing time. Other than to say what I have said, we are excited about the transaction on this side, we have not lost our enthusiasm.
I think we as a company Merit now is excited as ever about this transaction because of all the things we have talked about. The geographical opportunities, our China offices, very important for this growth, the new products that are complementary and a broader footprint and presence in interventional radiology to sell lots of our products and to be able to bundle things together.
So our view has not changed at all, if anything we have enhanced, what we think is our opportunity but it would be inappropriate for me to comment on their side of the things until we get the transaction closed.
James Sidoti – Sidoti & Co.
Okay, and then on Endotek, you said the sales of (inaudible) 10%. Now have you hit the target you had in mind as far as number of sales people for (inaudible) are you still adding people?
Fred Lampropoulos
No, what we have done is we actually have a number of vacancies that have popped up. Nevertheless we have still hit those numbers.
We have these exciting new products and a number of new disposable products. But before we start to fill the holes back in, which we are actually lower expense because – we will go through that process pretty quickly.
I would say over the next 90 days we will start filling in the one set pulled off a little bit. So we will probably see lower expense that we have anticipated in the third quarter but we have to staff up.
We thought it would be better for us to get all these products and make sure that when they go out they are full armed and they have got their arrows and their quiver and that we think will have the performance of the whole division. And by the way, I might just say, I have not given up nor has my view changed on the opportunity in that GI market.
It will be $100 million division but it would take anything else to stay persistence and vision and investment.
James Sidoti – Sidoti & Co.
You said the (inaudible) sales were about 1.9 million in the quarter, is that grouped in catheters?
Kent Stanger
No, it’s in standalone.
Fred Lampropoulos
Yes, we still grew 30% over the catheter area.
James Sidoti – Sidoti & Co.
So what was the big winner there, was there any one big winner or were there kind of –
Fred Lampropoulos
Let’s see here, we are looking – go ahead, Kent, fire away.
Kent Stanger
The largest in that group is the short sheet, two together about $800,000 growth and they are growing at 50% each one of those.
Fred Lampropoulos
We talked about the sheets a numbers of years ago and was kind of whole harm (ph), last month we did over a million dollars in the month and three years from now we will be doing 2 million a month. So it’s just one of those things that everybody kind of ignored except for us and we think it’s a great business and a great opportunity.
The short sheet, for the year, is up how much, Kent?
Kent Stanger
53%.
Fred Lampropoulos
53%.
Kent Stanger
And (inaudible) 50%.
Fred Lampropoulos
So, that’s pretty tricky (ph), wait until we get into China and I will show you some growth.
Kent Stanger
You are seeing big growth in the diagnostic catheter, the cardiology catheters were up 32%, that’s all.
Fred Lampropoulos
Micro catheters were up 25%, impress catheters, radiology catheters were up, how much?
Kent Stanger
40%.
Fred Lampropoulos
Up 40%. Now this is a diagnostic catheter, been around for a long time and yet our presence in these labs, it’s just what I have been talk to, gives the catheter that’s up 40%, it’s the presence and also this is – I see all the sales management guys kind of grinning and saying, Okay, you can say it.
It’s the sales management, it’s focus products, it’s bundling, it’s all of these things put together but it talks about the capabilities that the company has and the ability to bundle and that presence and how much I think our customers appreciate us and how much we appreciate the opportunities that they have give us.
Kent Stanger
And let me give some more examples, just listing down here, One Step Centesis is about 34, the (inaudible) is up 34, the guide catheters are up 78 and mini access kits, I mean you can keep going down through these – the resolve catheter is up 57%, almost everything is rising, that’s how you get 30% for the group.
James Sidoti – Sidoti & Co.
I mean obviously the market’s growth really no way near that, so do you think you are winning share across the board or how do explain that?
Fred Lampropoulos
There you go, I mean where else is it coming from? Sure, I mean some guys don’t pay attention this stuff, this is our bread and butter, we pay a lot of attention to it.
Kent Stanger
That’s a lot of newer products in this group.
Fred Lampropoulos
I will give you, our One Step Centesis catheter that’s developed, it’s patented, we are the only guys that have it, our customers love it.
Kent Stanger
Mack and smack, we are growing at 29% and 30%.
Fred Lampropoulos
So, it’s the presence, it’s the breadth, it’s all those things. I mean is that great?
Kent Stanger
These are the newest best things out there. Right now they mostly have been out there just last five years or last one year, some of them, so they are the best products out there, the breadth is getting there, our reputation is better, the sales force is getting better trained in the area, we are just making –
Fred Lampropoulos
I mean what a company.
Operator
The next question comes from the line of Larry Solow with CJS Securities.
Larry Solow – CJS Securities
Just a quick follow-up on the Laureate guide wire, I know Terumo, not to mention, I believe they have like a $200 million in annual sales, so why cut yourself short if you think you eventually are going to be the market leader, could it be –
Fred Lampropoulos
Yes, I just love to underpromise and perform (ph).
Larry Solow – CJS Securities
I mean in all seriousness, could it potentially – the share to market that’s growing, $100 million in no timeframe.
Fred Lampropoulos
Listen, they have a broad footprint and they have long head start and they are well entrenched in many of these areas. But the thing I am seeing is that their customers are becoming our customers and they like the performance of our wire better.
I got to tell you about this, this is good, I am glad you raised it. I got an email from a physician, and our paraphrase it, but he said, you know, you demonstrated it to me, and I thought, oh, yeah, boy, here they are again, I have seen five or six or seven of these things and there is the gold standard out there, I use it in this case today and congratulations, you have done it.
And the guy took the time to write me a letter and tell me that. Now there you go.
Now that being said, it’s difficult to build, it requires attention to detail, it’s complex and we just have to make sure that we just keep our (inaudible). I don’t want to just say, oh, here we go, we are going to take over the world.
Larry Solow – CJS Securities
Last question, on the SG&A, Kent, you can better answer this, but just if I kind of do the math, it looks like if I back out that onetime acquisition, it was about acquisition related expenses, about 25% of sales and you were talking June was only 23%. I mean do you think this trend, are we trending back down or do you still think kind of 25%, 26% number is good for the foreseeable future at least?
Fred Lampropoulos
It’s trending down because sales are growing faster than the expenses but we are going to go through this acquisition transformation again. So we got to be careful that we don’t get ahead of ourselves on that either.
Larry Solow – CJS Securities
Independent of the acquisition I would say.
Fred Lampropoulos
I think generally if those sales numbers can say up into the levels that we are talking about, you will see those kinds, want to take those expenses out, it will stay there or as a percentage of sales probably even have a better improvement going forward. The important thing is it as a percentage of sales, the key word being sales.
Operator
(Operator Instructions) We have a follow-up question from the line of James Sidoti.
James Sidoti – Sidoti & Co.
What do you estimate the impress’s R&D charge (inaudible)?
Kent Stanger
Impress’ R&D, we have a very little of that that we are going to have to expand. So there is not going to be a lot of one time charges in that areas.
James Sidoti – Sidoti & Co.
So, you don’t think that will be material?
Kent Stanger
No.
James Sidoti – Sidoti & Co.
And then you guys on the last call, you talked about starting a trial for (inaudible), will that start right away or do you think that’s more 2011?
Fred Lampropoulos
We are in the process, right now those discussions or those things are being done by BioSphere and I will simply say from Merit side that we expect to be very aggressive in the various trials and opportunities, all of which we outlined and estimates and expenses in our initial call. So we are full steam ahead on this side but we can’t comment on what’s actually going on on that side because it’s not appropriate for me to do so.
Other than Merit’s view is that our plan hasn’t changed.
Operator
And there are no further questions in queue. I would like to turn the call back over to management for closing remarks.
Fred Lampropoulos
Well, ladies and gentlemen, thank you very much for your time. It’s exciting to talk about the business and the opportunities are here and I hope that we have exceeded your expectations in this quarter.
It’s a great business with great opportunities, a broad breadth of what we can say there and I believe our customers are also telling us the best product in the world. We have great products and a lot of great things in the pipeline.
We will look forward to reporting to you in the third quarter and we will get this BioSphere deal closed up and then we can talk a lot more about some of the other opportunities that we see out there and that we think will enhance the business, both in terms of its gross margins, its operating profits and a larger worldwide footprint and by that I mean simply the things like China and the opportunities that present themselves going forward. Before we close, I again would like to thank the staff.
We are sitting in my office, there is 25 or so people in here and none of this could be done without the hard work, I know a lot of people say this stuff, but these people work hard, they have done a terrific job and I want to publicly acknowledge their sacrifices and their skills, getting all the work done. So that being said, ladies and gentlemen, again, thank you for your time and we will sign off from Salt Lake, City, wishing you a very good evening and good night.
Operator
Ladies and gentleman, this concludes the Merit Medical second quarter 2010 earnings conference call. Thank you for your participation and you may now disconnect.
Operator