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Merit Medical Systems Inc
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Good day, ladies and gentlemen, and welcome to the Merit Medical Systems Incorporated Third Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Fred Lampropoulos, Chairman and CEO. Sir, please go ahead.
Good afternoon, ladies and gentlemen, and thank you for joining with us. We are assembled at our corporate offices on a lovely fall day in Salt Lake City.
We would like to start the meeting out by having our General Counsel, Brian Lloyd discuss our Safe Harbor provision. Brian?
Thanks Fred.
During 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, and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks are discussed in our annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission available on our website. Some of these risks are identified in our press release and slide presentation distributed in connection with this call.
Any forward-looking statements made in this call are made only as of today’s date and except as required by law or regulation, we do not assume any obligation to update any such statements, whether as a result of new information, future events or otherwise. Please refer to the section of our presentation entitled Disclosure Regarding Forward-Looking Statements for important information regarding such statements.
Our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. The tables included in our release and discussed on this call set forth supplemental financial data and corresponding reconciliations to GAAP financial statements.
Please refer to the sections of our presentation entitled non-GAAP Financial Measures and Notes to non-GAAP Financial Measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider 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 some items that affect net income. Finally, these calculations may not be comparable with similarly titled measures of other companies.
Brian, thank you very much. And again ladies and gentlemen, thank you for joining us.
I think you can see by reading our report that the third quarter was in my opinion a great quarter. As you all know, summer quarters are always a little testy, they are unpredictable and has to do with a lot of factors weather, buying patterns, a lot of things that go into every year and some people will remember last year we were little slow on the revenue side. This year at least from our internal projections I think we did very, very well.
I think the interesting point to note, less one think that's one area or another that this growth which again also contributed to gross margins which I'll get to in a moment was across the board. Some of our product like our Guidewires are up 25%, our Fountain catheter these are thrombolytic catheter were up 40%. Our DualCap which is a business that we acquired of antiseptic cap well over a year ago was up over 40%. And so these are coming from all geographies and all product groups, so it's an exciting time. Our business continues to be robust and we’re quite excited about it.
Just a couple of things that I think will be of interest and then I'll turn sometime over to Raul Parra. But the core growth as you know as many of you who have followed the company for many years know I think the strength of Merit. As I point out in my comments, is really that we have this really robust research and development activity going on in a number of our facilities worldwide whether it be in France, whether it be in the Netherlands, whether it be in Ireland and a number of locations in the U.S. and Singapore. There's just a lot of activity.
And when these things come together we introduce new products. And I think really stands out is maybe one of the most differentiating features of the business. In addition to that, as you know with our acquisitions and bolt-ons those also come up to anniversary dates and almost all of those - and almost immediately after the close Merit’s starts innovating and unlock this wonderful potential that these companies have where they have for many reasons have been either stymied or less active in their research and development.
So these are things that we take pride in and I'm often asked well how you guys do this and I just given you the answer. It is that robust pipeline, it is what I call the Merit mosaic that everything we do ties in with something else and in fact connects all the way around. And then I think the continuous improvement part of our business as you can see and you'll recall from the last quarter we were up 140 basis points from the first quarter and this quarter we’re up another 90 basis points on a non-GAAP basis.
I believe Raul I’m maybe stealing a little of your thunder, but it’s that sequential improvement in gross margins that we talked about. And you’ll also recall that we said that we’d be back on the last half of the year at that 100 to 150 basis points and Raul again your almost here Raul, stay with me now. So I think the business is doing well, I’ll talk a little bit further about some more of the internal types of product issues that we think are driving the business.
But let me turn sometime over to Raul Parra, our Chief Financial Officer and just before I do that, Raul I’m going to look you straight in the eye and tell you I think you doing a terrific job. I think you're helping our business and the team you put together has been terrific and I just wanted to my express my appreciation to you personally, and I want our shareholders and investors to understand my pleasure with the work that you’re doing and your team is doing.
So with that said your speechless I think.
Yes I am, but thank you Fred. I’d like to publicly thank my team they are doing a great job and they have been amazing and they continue to deliver on daily basis, so thank you to them.
And just to highlight I guess what the quarter look like. Revenue will start there, Q3 revenue was approximately $222 million as reported a 23.6% increase over the comparable period of 2017 and a 15.4% on an organic constant currency basis.
Year-to-date 2018 revenue was approximately $650 million as reported, a 21% increase and a 10.8% growth on an organic constant currency basis. The competitor opportunity that we had previously discussed added revenue of approximately $4 million excluding that opportunity our organic constant currency revenue was still strong for the quarter at 12% and in line with our expectations to return constant currency core growth of 10% to 11% on the previously provided guidance.
And to back up what you said earlier, some of the highlights include overall strong growth both in the U.S. and OUS with the U.S. direct team up 8%, worldwide dealers up 17%, EMEA up 22% and OEM up 31% on an organic constant currency basis, so really strong revenue growth.
Gross margin, margin for Q2 non-GAAP margin was 49.8% compared to 48.1% for the comparable period that's a 170 basis point improvement as you mentioned for the comparable period and a 90 basis improvement from Q2, 2018. Year-to-date our non-GAAP gross margin was 48.7% compared to 48.2% for the comparable period, that’s a 50 basis point improvement.
We continue to leverage our margin with improved manufacturing efficiencies, obsolescence and product mix. We expect our margin to operate in the range previously given to reach our guidance of 80 to 130 basis points. OpEx they were in line with our expectations 35% of revenue nothing significant there.
EPS, our earnings were $0.47 for Q3, 2018 compared to $0.32 for the same period in 2017. The benefit from stock option tax was $0.02 in Q3 of 2018 again our increased revenue our margin expansion and operating expense discipline continue to drive increased earnings for us, so overall really strong performance.
As we look forward just as a reminder, the remainder of the year the business continues to be strong. I like to point out that we had factored that strength into our updated guidance during our Q2 call. Given our robust business and all the discussions of headwinds taking place in the markets right now around tariffs, elections, FX and labor, we feel pretty comfortable with the middle range of our updated guidance.
Just as a reminder what that midpoint looks like it's approximate 170 million to 800 million in revenue. Core growth on a constant currency basis of 10% to 11% for the year, and EPS guidance of $1.60 to $1.70 for the year, that’s it.
Well I think Raul again by any measure I comment on that it was very pleasing and just as a reminder to everybody while all of this is going on and we’re running the business, we were also working on and finalizing the largest transaction in Merit’s history with Cianna. Now it's our expectation that sometime in November that will close and when we know when that happens in our next call, we’ll be able to kind of give you the forecast we just don't know when it is, but we think it's very likely to be in November.
I think as I mentioned, if you look at all the geographies but particularly Europe. Europe really, really did a good job this last quarter and I think the way that that business is performing Asia, Southeast Asia even the U.S. is picking up their step. So, just as we look at the business OEM is very, very strong so just kind of across the board our business is doing well.
I think do you want to just briefly talk about the tax rate because I think that's just something because we had relatively low tax rate this quarter and maybe a little color on it Raul.
Yes, so typically in Q3 we do have a lower tax rate just because some of the stuff that rolls off for FIN 48 liabilities. And then we also had the benefit on stock options which we continue to benefit from again that's a hard one for us to forecast.
And as we look forward I think for the fourth quarter we’ve tried to forecast - essentially we forecast at a rate somewhere in between 25% to 28% for the fourth quarter that’s excluding any stock option exercise benefits that we anticipate getting. We just don't know what those are and so want to make sure that people have people have arranged to work with it.
And we'd be remiss if we didn't mention that during the quarter we also did an equity raise that was about $217 million give or take that was headed by Wells Fargo and Piper and a number of people who have been involved in the Company for a very long time, so Raymond James, Canaccord, whole bunch of folks. I'm going to leave somebody out and someone's going to be mad at me. But again, I think that's important to note as well.
All-in-all the business is strong. We have a new facility under construction to give us additional capacity, that'll come on in March. The R&D pipeline is full. I made comments in the press release about the EmboCube, which we're very excited about, as well - I'm trying to think what the other one is. I probably got to look it up here.
So, the mini-stents. So that was another thing. I think that in the latter half of the year and I apologize for that hesitation but the latter half of the year if you take a look at our endoscopy business, it is done very, very well. There was a little soft the first-half. But I think with the NinePoint and with some of the new products in the focus, we've done very, very well there.
The new product pipeline is full, a bunch of products are rolling out. We expect to see some steam kind of promote as we move forward. A new inflation device, a new vascular access device, we just introduced not long ago our new Pursue microcatheters, and that is doing very well.
So, I mean I just think across the Board we're playing ball. And I think we're doing a good job. So to my staff and - they're doing a great job but I want to point out operations because we talked about the sales and all that kind of stuff. Someone's got to build this stuff and someone is going to ship it. And build it well and do it properly and all of the various issues are involved with a medical manufacturer.
Our operations group is doing a superb job. So, again, thanks to everybody on the staff side. We hope that you're pleased with the earnings side of it, look at the - just hitting the numbers and or exceeding those numbers. I can't say that we expected all of this. We always as you know guide down in the third quarter because of the summer, you never quite know but look every once in awhile you - something like this happens across the Board in all product groups and all geographies in the summer, I think that bodes well for the business going forward.
So with that being said, I think that generally covers our comments in the quarter. As a reminder, Raul and I will be here for a good hour or two following this for any clarifications on issues. And now we're pleased to take the time to answer your questions to the best of our ability.
So we'll turn the time over to our administrator and we'll start taking your calls. Thank you very much for your attendance and we'll go ahead and take the calls now.
[Operator Instructions] Our first question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.
It's Adam Maeder on for Larry. Congrats on the quarter and thanks for taking the questions. I guess I just want to start with one quick clarification on the 2018 guidance. The 870 to 880 range that does not take into account any contribution from Cianna, is that correct?
That's correct. Adam, we don't know the closing date. And so as soon as we know that we can update that for this year and so that's the reason why.
And then I want to ask about Terumo. So, I heard you call it a $4 million benefit in Q3, how are you thinking about Q4 and beyond? So just wanted to ask about your latest sneaking on the supplies disruption and any sense for when Terumo will be back at full strength or capacity? And then I have on follow-up.
Yes, it's a question of course that I get asked all the time and we try to be cautious. We know what the market opportunity is out there. We first heard June, then July, then August, then September, but the bottom line is our field intelligence, now these are from sales reps and so it's hear say and anecdotal in many ways. But is that the problems continue, they are coming some but I'm seeing reorders and new orders.
So I have not seen it go away and I think I've said in some of the - some people have asked me how long are these gone? They go on longer than you think, they're more difficult than you think, and benefit substantially into the future. And that's just the bottom line to how much and this now - but what it does is allow us to get into these accounts.
People want to do business - the other really neat thing about this, Adam, is it's not just the wires or the microcatheters, but it's torque devices, it's this it's that, it pulls a lot of other things along including our Guidewires. These are again non-Hydrophilic Guidewires.
So, it just helps us in terms of being there. And I think going back to the summer comment about our European sales force. Places still shut down but our sales force didn't shut down. And I think that's the critical issue. They were out there, they took advantage of the opportunity and then we saw that in the quarter. So, the problem is still there, it continues on. And they'll come back, it's a great company but Merit is not going away.
And then can I just maybe push to what is included in the guidance for Q4 for Terumo?
Well, I'm going to let you go ahead and comment on that Raul.
Yes, we included about $5 million in our updated guidance.
And I'm sorry to squeeze maybe one more in. Just as we start to think about 2019, what are some of the puts and takes you would call it in regards to next year? And then, I know the LRP calls for about 8% organic constant currency growth but in theory you'll have two quarters of benefit from Terumo in terms of a year-over-year comp standpoint. So, is 8% organic constant currency growth next year still a good starting point or should we be thinking about something potentially higher than that? Thanks for taking the questions.
Well, I think what we're going to - I mean if you look - listen, here you are with these numbers that came up this quarter and I'm just looking here at the organics toward 10.8. So we're running a little bit hot, which is kind of a nice thing to do and we feel very strongly about the organic business and the benefits.
I think what we'll do is we'll look at this quarter, we'll come out and give the full quarter, we'll have Cianna in there. We'll include the Terumo. We'll have another quarter of intelligence. So I think rather than - I mean other than the comment that he made - that Raul made about the $5 million, we're going to wait until February or so and then we can lay the whole plan out with another quarter of Intel. So I think that's the important thing to do and the conservative and proper thing to do as well, Adam.
Our next question comes from the line of Bruce Nudell with SunTrust Robinson Humphrey. Your line is now open.
Hi, this is [Spencer Root] on the line for Bruce Nudell. Thank you for taking my questions. So just wanted to get some modeling questions out of the way. What are your current acquisition revenue expectations for 2018 for BD, Bard, and excluding BD, Bard?
$40 million to $42 million is our updated guidance that we gave. And then another $20 million to $22 million on the other.
Okay. And full year FX impact?
We had somewhere around $7 million to $9 million range.
And can you just provide an update on the manufacturing transition of BD, Bard products to your facilities? And I believe you previously commented that there were automation opportunities there?
Yes, I think first of all we are on schedule - actually ahead of schedule. We just received approval from BSI to the broadening of the scope of our facility. So we have all of the regulatory requirements to produce there. We actually will start I think in the next week or so, we'll start the first phase of production. So we're starting that up and then I think we're going to go probably - I'm going to say early third quarter of next year. I'm sorry, March.
And so - anyway it's moving along as expected better than expected and to the automation issue. And again, I want to be careful on how I phrase this but we have - we purchased new CNC equipment, we purchased new updated I think more efficient equipment.
So, I think one of the big opportunities - and I don't want to call it a surprise but one of the things I think we've done is we think that our output and our costs are going to be coming in a little bit better than maybe we expected because of the efficiency of the equipment that we've purchased and the training that we've done.
Our next question comes from Jason Mills with Canaccord Genuity. Your line is now open.
Hi, good afternoon, Fed and Raul, it's Cecilia on for Jason. And I just wanted to ask, I guess Cianna was fabulous acquisition, but as you’re looking forward what do you focused on the M&A front what you’re seeing on the market right now and just your thoughts about balancing topline growth and margin expansion when your guys touching acquisition prospects?
Listen, the business the industry continues to consolidate. I think the key and the critical issue for Merit is always something that fits the Merit mosaic. But after complement our business that has to be scalable and has to contribute has to do all the things whether you at the BD or the Cianna’s deal or any of our deals, it has to fit that model and the discipline that goes along with that model. So I think those are the things that we would look for.
As I mentioned in my meetings and on this call today, we’re seeing one or two things almost every day most of them just get passed, but there are opportunities out there. We will continue to look at those and look at the scalability of our overall business and if it fits, it meets the profile financially and as can be absorbed by our sales force we’re going to look at these things. So we continue to be a buyer for the right businesses that meet those profiles.
And then just one question we hear a lot from investors is around free cash flow conversion. I was just wondering if you could comment on improvements or progress or focus within your company right now on driving improvement. And thank you for taking my question.
Cecilia it’s a good question and one that we do get asked but I would like to remind everybody that I think our overall growth this year is going to be better than 20%. That means our business under the rule 72 is going to double in three and a half years if you were able to keep up with that growth rate. Now that does include of course some acquisitions. We’ve started to run into a little issues in terms of capacity we have plenty capacity in Mexico, but we’re running out a little bit of capacity here.
So we started a new facility here near the Salt Lake or on the Salt Lake campus it is a different type of construction we’re talking about $9 million. And remember we have the issues that have to go to finish up the automation, the things that go into Mexico plus additional automation products that are growing dramatically. So as we look at CapEx we’ve talked about in the past few years we've been at 30 to 35 with the acquisition we’re going to be closer to 50 to 55 this year.
I think as we’re looking the next year we’re going to have a little bit higher because of the projects and other things that we're doing. So but we understand the issue, but we also are a growth company and we have to fund that growth and it takes capital to do so. Now that being said Mr. Parra your thoughts.
Yes I think you said it perfectly. We are working on our working capital to trying to find efficiencies there. So overall I think it's an increased focus for us - below expenses I think we’re trying to be smarter on how we do our buildings and other than that I think Fred covered everything.
Our next question comes from Matthew O’Brien with Piper Jaffray. Your line is now open.
Three questions from me, just Fred am I doing the math right I think you had mentioned the Terumo as being something around $0.5 billion on an annual basis something along those lines. So that means in the quarter it was about $125 million opportunity and you captured 4 million so about 3% share is that math about right. And then as we think forward is this in an area that you capturing more and more percent share of that its possible even as they get back on the market, should it accelerate or is this about the level we should expect going forward?
Let me talk words from that top number I think - Matt excuse from that top number. So the market that we see for their products is somewhere around $750 million. We see of all the product lines, this is microcatheters, hydrophilic catheters, Guidewires and so on and so forth. They indicated in their press release that they thought that they would lose about $100 million of revenues.
In this particular case, we estimate it was four we think it will be five, I think there was a number that came out somewhere in the press that said there was a market opportunity for Merit from $25 million to $50 million over 12 month period.
I think those numbers are reasonable numbers in terms of what Merit will get out of this. And I also believe it’s a longer term opportunity. I think it allows Merit to show their wares and include things that Terumo doesn't have.
Things like the new Pursue microcatheters the Ninja. Some of our torque devices Guidewires so it helps us to just have a broader view, and I think very candidly greater appreciation from our customers for the things that we can provide. In some cases before you just couldn't get an audience even though we were buying some of our other products and placing devices in this and that. So I think it gives us more opportunity and it just like the Cook deal I like to go back to Cook.
Cook is a great company, Terumo was a great company they had a problem there was an opportunity. I think we were conservative in our numbers as it started remember the numbers we talked about were in the summer that’s still a very big deal. And so I would expect it in the fourth quarter and the first quarter we’ll continue to see this improve. I think I can say that with relative confidence at this point based on the intelligence in the ground that I have today.
Now everybody thought that whole thing would be over on the Cook catheters. Well this also plays into that product line because there are catheters and hydrophilic catheters and if we look at for instances our Impress Catheters for the year, we're talking about a 21% increase. And on the hydrophilic side which includes some of the product a 37% increase year-to-date. So, this party not over by a long haul, and they're looking for very candidly customers are looking for a backup source.
One other point on this, in the past a lot of people have been drinking Kool-Aid in terms of single source. But if we look at last summer and look at saline from my provider if you go take a look at the Cook situation, you go take a look at the Terumo and there will be others. I think maybe one of the biggest benefits is the issue of single source from a hospital to drive compliance and pricing those days are over because it’s just not smart.
If I only had a single supplier for a product or from component, I have my board and everybody else and my shareholders all over me, so I have backups. But the hospitals have done something different over the last four or five years and those days are done. So I think they’re rising up, they are seeing that they have to have alternatives I think that’s mainly the biggest long-term benefit from this.
Is that Merit has a bigger audience, and an audience that will listen and these are products. So that's a long treat us almost on why I think this is a long-term opportunity to answer your question.
So just to clear up the guidance a little bit too for Q4 at the midpoint of the range and if take out the extra $1 million sequentially from Terumo, it's only about $4 million increase sequentially given all the strength that you’re seeing, given we saw this time last year that would be a little bit of slow down sequentially. And I know last year was actually a pretty big Q4 from Q3.
So is there anything in there specifically to point to that you're trying to account for or is it just a layer of conservatism in there?
Well I think there is FX so we have to think about that has been - something we’re concerned about. I think we are in fact trying to be conservative. We don’t want to make something we can’t hear or something changes, we want to allow ourselves some room. So I think we’re being conservative and I think we have to take into account the FX issues.
And then finally this one for Raul, the gross margin was obviously quite strong in the quarter great to see on a year-over-year basis. Can you talk a little bit about some of the different factors that drove that higher and then with the new facility are we’re going to have any kind of headwind for a couple of quarters on the gross margin line that we should account for?
No, we factored that into our updated guidance. You know factors I think it's a same story we continue to drive manufacturing efficiencies. Our obsolescence was pretty good this quarter and as we continue to focus on making sure we keep that in line. And then really our sales departments driving that product mix that we needed, overall I think those three factors and the release of new products is really helping.
Our next question comes from Jayson Bedford with Raymond James. Your line is now open.
Just a couple of follow-ups there. Raul maybe you can comment on what gross margin looks like or your expectation is for the fourth quarter just given the strength you're in the third quarter?
We don’t give quarterly guidance, but I think we did hit on our updated guidance that we had given and we said we’d be in that range. So I think somewhere - we gave you the range I guess its somewhere in that ballpark.
Good boy Raul, well done.
Okay.
And probably I think that helps you. I think you know these - you have this quarter, I think we have those efficiencies there we did a nice job. But you'll recall that we said that in the last half of the year we would operate on the basis of 100 to 150, and we gave that updated guidance, and I think we're in that.
Maybe this will help you a little bit. I think the second half essentially what we said is that we would be operating in the 49.7 to 50.8 range. And then our updated guidance included gross margins of 48.9 to 49.4 for the year. So hopefully that helps narrow it down for you.
And in terms of the Terumo benefit here, is the $5 million in Terumo you mentioned in fourth quarter or is that $5 million part of the annual guide of 870 to 880?
Yes, it was third and fourth.
Okay. So $5 million for third and fourth, $4 million of that was recognized in the third quarter?
That's right. Again, we don't have the ability and we see the orders and there's a lot of demand but we just - we wanted to make sure we were conservative.
And I think, Jayson, we're not seeing the orders fall off. So we're seeing reorders and then we're also seeing the new business. So that momentum is I feel comfortable with that. But there could be more than that, I don't see any less than that. But we'll see how it shakes.
Okay. Yes, I think there was just a little confusion around $4 million in third quarter and then an incremental $5 million in the fourth and. So the implied organic growth in the fourth quarter is about 10%, is that correct?
Yes, maybe a little bit higher.
Our next question comes from Jim Sidoti with Sidoti & Company. Your line is now open.
So, in the quarter you said there were about $16 million in sales of acquired products. Can you just remind what's in there besides the Becton, Dickinson products for this quarter?
Yes, we did a deal on some balloons. I think it was call [Firstcall], isn't that the name of the business?
DirectACCESS.
DirectACCESS. So, there's some balloons in for that. What else?
ITL.
ITL, which was down in Australia.
A little bit of Laurane, NinePoint. Really, NinePoint and BD are the two big ones.
Okay. Because when you did the BD deal, you said I think was really was what $46 million on an annual basis, it seems like you're running ahead of that, is that correct?
So, our original guidance included $37 million to $44 million in BD for 2018. And then our updated guidance included $40 million to $43 million.
Right, but that was just for this year. On annual basis I thought you were around $46 million?
That was the top side of the range. I think the thing that's important here is it's exceeding our expectations and would be numbers there.
That was what I was trying to get out. On the organic growth you had 28% growth with the CRM business, 44% growth with the endoscopy business. Is that all new products?
No, I mean, there are things in the endoscopy side, there are things like our balloons, the elation balloons continue to go over nicely, there were some business in there from NinePoint, and so there's some of that. I think when you go take a look at some of the area and other areas - what was the other you mentioned, Jim? I'm sorry, that was the endoscopy.
The timeless business, the CRM business.
Well listen, it's Transseptal Needles, it's many of the Worley system, which is the coronary sinus guides, the sheets, that's the hearts band. So I mean, and again, that was in the summer. These have nothing to do with Terumo. These are just products that we have a long runway on. And then that would be the snap, this is our valve peelable shape. So, business is robust.
And then last two from me. Since you completed the stack offering by the third of the way through the quarter, can you just give me what's for full quarter what the share count interest expense should be?
Share count interest expense will be about $1.5 million is what we say about the interest expense for the quarter.
And how about the share count for the fourth quarter?
So, for the fourth quarter it'll be fully in there, so it'll be 4 million shares.
Of additional 4 million on top of the…
We have about 2.7 million shares in Q3.
2.7 in the third and 4 million in the fourth.
[Operator Instructions] Our next question comes from the line of Mike Matson with Needham & Company. Your line is now open.
I just wanted to start with a couple of things kind of macro things. So, first currencies have kind of been moving, the dollars strengthen on so. Is that something you expect to be a headwind in the remainder of the year and then 2019 either from a top or bottom line perspective?
Yes, and that's why we mentioned that - we felt comfortable with the updated guidance of kind of being in the middle there just because we are expecting those headwinds. We saw about $1.4 million impact on our reported revenues for Q3. And as you look at the rates right now they're well, the dollar is getting stronger.
So it's going to impact us in the Q4, but again, we anticipated that when we updated our guidance and so I think we're - we feel pretty comfortable with the guidance we gave.
Mike, just on another note, one of the advantages of a stronger dollar is as we take a look at the euro we're seeing a weaker euro and we have manufacturing - substantial amount of manufacturing in Ireland, and operating expenses. And those will be lower. But we still have those headwinds. But we have almost partially hedged on the natural hedge. So that's two sides silver linings so to speak
And I guess the other thing is, I think some of your debt is kind of variable floating rate. So the interest rates have gone up, the spin going up. So I mean it's that something that could be a little bit of a headwind for 2019 as well or…?
Well, we have a hedge in place and so we've got coverage there. Right now we're about 80% hedge because of the payment we did with the offering. So, we talk effective interest rate right now, 3.15 - 3.25. So, I mean it's still well within - I mean I think a very good rate. We're actually I think maybe even at treasury level on that.
And then just question on Cianna deals. So what is the real call point, I mean who are the physicians who are using those products and then which of your sales forces would be selling those products once you close the deal?
So one of the things that we did, Mike, is that we capped essentially their entire sales force, they are selling to surgeons and they are specialty breast surgeons that do just those types of procedures and radiologists. But those radiologist and these breast surgeons are also using biopsy devices.
So they use many of our products and they'll use more of our products in the future. But that’s sales force and then we will go ahead and enhance that with additional hires that will put in the wrong end our model.
So I think some of the things we've learned from just from history is, we didn't want to destroy what we think is a very, very important team with a lot of momentum. So we've kept it in place. Now we have a different senior management but I think one of the other things has been very I think pleasing to me is the number of letters. I probably receive 15 or 20 letters from the sales force saying how excited they are to be part of the Merit team, they're looking forward to this and that.
And so yes - I've haven't had that in the past, you get one or two here and there. But essentially I've had almost everybody on that sales team, send me a note and share with me their excitement and they're looking forward to being part of Merit. So we're excited about that opportunity.
And then just one final question, just wondering if some of the growth acceleration that we're seeing here, I mean you're mentioning in one of the prior questions - Transseptal Needles and things like that which kind of made me think about some of the structural heart procedures, TAVR and Watchman and things like that. I mean is that - and then complex PCI as well, radial, these kind of secular growth trends within the cardiology space - how much of your business you think is exposed to those trends and is that kind of helping with your growth?
Let me start with the radial side of it. Merit has been a big proponent and one of the leaders very candidly in the adoption of what I call the radial revolution. You may recall five years ago it was maybe 5%. It's in excess of 50% in the United States and I feel that in the next four or five years will be operating at levels that you see in Europe and in Asia.
These are 70%, in some places it's high as 90%. It's bonafide cost savings and just anecdotally I was talking to a friend of mine not long ago, he pointed to me a little nick in his - and it looked like a little needle prick. And he had had a radial procedure and he said to me "You know Fred, why don't you get in this business?" I went and I had a stent put in and I had a band aid put on this and this is like a piece of cake.
Now this is from somebody out there and I said "Well, you know we're actually kind of one of the leaders in this area." So we've been very active in that area and that is one of the areas that you're seeing rolling that is like the prelude sync. This is one of our closure devices. We have new catheters coming up, the longer lengths for radial. We have new sheet. So that's a big part of it.
Now let's go over to the CRM side. We have two pieces of that business and that is that we sell through our direct sales force but we're also a major provider on an OEM basis. And you recall, Mike, from our conversations that Merit has about $100 million OEM business. So we provide products to St. Jude, we provide products to Medtronics, we provide products to, see who else we have, Biotronic, Boston.
So, we have distributors the work force on that side and then we also sell the products direct. And it's just - so we're not doing structural heart but we're providing products that physicians use for their armament of the products and tools that they use in those procedures. And all those things are growing very nicely for Merit.
Our next question comes from Mike Petusky with Barrington Research. Your line is now open.
Couple of questions. I guess, Raul, it seems like a number of companies are sort of struggling to dial in the effective tax rate as you kind of look forward and actually if you could repeat what you said as far as expectation for Q4 but as you look forward beyond Q4, I mean, do you expect that maybe the effective tax rate actually ends up being maybe a couple 100 basis points lower than maybe you had thought previously or are you able to dial that in or are you still kind of working through that?
I think we're still kind of working through it. There's just a lot of guidance that continues to come out on the tax reform, and so it's - I think that's why you're seeing a lot of people struggle with it because things are just changing on a daily basis. And obviously stock options, I can't anticipate when we're going to be in a blackout or what's going to happen or if people are going to elect to exercise.
And so I think you have add two variables and it is kind of a hard number to forecast. I know that excluding some of these items we're pretty close to the range that we had given but maybe a little bit lower than expected.
And then what did you - I'm sorry, what did you say for Q4 the expectation?
25% to 28%.
And then do you by any chance have CapEx, DNA, and stock comp that you could share?
So, $15 million is depreciation amortization. And stock comp was 1.7.
And the CapEx you may have mentioned earlier, I didn't catch up.
CapEx was 15.5.
And then I guess just a last question, Fred, as you kind of look at the next couple of years in terms of internal R&D, I mean, are there things that you guys are working on in terms of product launches or potential product launches over the next say 12 to 24 months that you feel, hey this could be a real needle mover, this could be a game changer. Are there things like that in the pipeline are they more of a incremental nature? Thanks.
Well, I think we have a number of products that in a very active R&D pipeline, Michael. I think we have 64 R&D projects. And as you'll recall our research and development goes on in Ireland and goes on in Texas and Pennsylvania and Salt Lake City and in number of - in Texas number locations, and that's full. I think the one that we've talked about at conferences and that we're very excited about is the Rhapsody.
This is a new stent product, vascular stent. I think we're going to conduct our first in man in the next few weeks or within a month in Europe. And then we'll go through the process in Europe of getting the CE Mark and then of course we are then also going to have to conduct a PMA in the United States.
So we’re going talk more formally about this as we have our conversations in February. We start to talk about the contribution we should have a better feel about when this will roll out in Europe, but it's probably and listen we worked on it for five years and part of this transition of going from accessories to primary and therapeutic products and disease states is they take more time and more money. That being said there also greater reward so Merit is still committed to that transition but it’s going to take place over many, many years.
So there are several products that are part of even that product line that will go on for 20 years. So there's a lot of stuff that's the one that's coming right away first in man which essentially is safety study and then CE Mark approval that we will file for and away we go. So that’s the one that I’m most excited but listen all these things all led up. I think Mike we had someone say to me recently I've never really understood your business you have all of these pieces.
And then of course then the situation develops with Terumo and we say we have this, this, this, this and this, five or six or seven or 10 products that address the shortage or complement users. And all of a sudden now people start to understand the business that all these little things, these little pieces to this puzzle. The Merit mosaic starts to come into focus to say, okay now I understand who you compete with but if I just talk to you about microcatheter you might not too excited.
But out here whether it Pursue, Maestro or SwiftNINJA we’re developing a leadership position in microcatheters that are very nice product. So a lot of things coming which has been we built this business on that tradition core growth R&D and then the right types of additions and bolt-ons to our business.
And I'm not showing any further questions in queue at this time. I'd like to turn the call back to Mr. Lampropoulos for closing remarks.
Well thank you very much. So ladies and gentlemen it’s a busy day, a lot of calls out there, and a lot of activity and we want to thank you for taking the time out to call in and ask your questions. As I mentioned Raul and I will be here for the next couple of hours, we’ll do our best to clarify. We will not offer any new or inappropriate. So don't ask us those kinds of questions the things that are appropriate will be happy to answer.
Listen we have a great business, we have a global business, we have a business that has products that in geographic regions, in Europe, in United States, Central South America. We have the right products we have new products coming. We have infrastructure we've got distribution, we’ve got the things that we need to build this business. So I think we're doing what we said we would do grow that topline, grow those margins. No one mentioned on this call, the discipline of the expenses.
I'm proud of that, I'm proud of the team that we put together that helps us and how our guys have really had that discipline to stay in line and what that means is as we’re going to see better margins, better profits. And we spell that out in a plan for the last four years and we hit those numbers. And so I think we're very excited about the opportunity, we’re excited about getting Becton Dickinson move and the opportunities in here. One of the thing we have is we have going back to one of the previous questions.
We have four new improved best-in-class biopsy devices. So as I mentioned we don't just buy something isn’t this wonderful, we buy it and we improve it and we had some really exciting things in the biopsy market that I think are going to enhance our market share and it’s a big market out there.
So, we’re just getting started on these things. So business is in good shape and one other thing on the capacity. We have one building but as Raul mentioned we're using new tilt up, it's about half the cost like our corporate headquarters facility that you guys have seen.
So I think we’re trying to be more thoughtful and more prudent on our CapEx but at the same time we are not going to fall into this trap of. You can't do this and you shouldn’t do that and you can't build the business and your CapEx because we have to invest. We have to allocate our capital to the things that will grow the business and help to improve profits and margins over the future we’re committed to doing that.
So thank you again we’ll look forward to giving you our year-end results and then in February to spell out our plan which I think you’ll find very intriguing. We’ll look forward to do that at the appropriate time. We’re going to sign off wishing you all the very best from Salt Lake City, wishing you a good evening and all best wishes to the Boston Red Sox to sweep it in four games. Good evening.
Ladies and gentlemen, thank you for participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.