Merit Medical Systems, Inc.

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Merit Medical Systems, Inc.

1600 West Merit Parkway
South Jordan, Utah 84095
U.S.A.
(801) 253-1600
Fax: (801) 253-1651
Web site: http://www.merit.com

Public Company
Incorporated: 1987
Employees: 956
Sales: $68.4 million (1998)
Stock Exchanges: NASDAQ
NAIC: 339112 Surgical & Medical Instrument Manufacturing; 339113 Surgical Appliance & Supplies Manufacturing

Merit Medical Systems, Inc. designs, manufactures, and sells disposable medical equipment used in diagnosing and treating cardiovascular disease. Billing itself as the world’s leading producer of angioplasty inflation devices that open blocked arteries, Merit sells over 750 products approved by the Food and Drug Administration, including disposable syringes, catheters, guide wires, pressure monitoring items, needles, and products to safely handle blood wastes from angiography. The company’s 72-percent-owned subsidiary, Sentir, Inc., produces silicon sensors, and that company’s injection molding equipment is also used by Merit to manufacture items for non-competing medical device companies, including C. R. Bard, Baxter Healthcare, Boston Scientific, B. Braun, Medtronic, and SciMed Life. Although Merit sells its products primarily to American hospitals, the company also has customers in over 60 countries. In addition to its main office and manufacturing plant in South Jordan, Utah, a suburb of Salt Lake City, it also operates manufacturing plants in Galway, Ireland, and Angleton, Texas, as well as a distribution center in Maastricht, The Netherlands. A young company, Merit has grown rapidly, with over 50 patents and three acquisitions under its belt in 1999.

Getting Started in the 1980s

Merit Medical Systems was founded by Fred P. Lampropoulos and Kent W. Stanger. Lampropoulos had grown up in Salt Lake City and eventually worked for stock brokerage firms, including Dean Witter, helping corporations raise capital. One of the companies he helped was Salt Lake City’s Utah Medical Products, and he eventually became that company’s chairman and chief executive officer, where he served from 1983 to 1987.

During this time, Utah Medical Products was a relatively small firm with one product and about $8 million in annual sales. There, Lampropoulos met Stanger, an accountant from Bountiful, Utah, who had previously been employed as the controller at American Laser. In June 1987 Lampropoulos and Stanger left Utah Medical Products to found their own company, incorporating Merit Medical Systems under Utah laws. Lampropoulos became Merit Medical’s president/CEO and board chairman, while Stanger was the new company’s chief financial officer and secretary-treasurer. In 1999 both founders remained in those positions at Merit Medical.

Two others also left Utah Medical Products to help start Merit Medical. Darla R. Gill, who had served as a manager at Utah Medical from 1984 to 1988, became a vice-president and director of Merit Medical in early 1988. She left the company in 1993 to start her own firm, Salt Lake City’s Momentum Medical Corporation, which was engaged in the manufacture of home health products. William Padilla, another early leader, had worked for Utah Medical from 1985 to 1987, when he left to become a Merit Medical director and vice-president in charge of the firm’s injection molding operations.

The groundwork for Merit Medical’s line of business had been laid by pioneering medical efforts in the 1960s and 1970s. In 1967, Rene Favaloro had developed a treatment for blocked arteries through bypass surgery. Ten years later, Andreas R. Gruentzig invented angioplasty as an alternative to bypass surgery. This development opened a market for such products as tubing and inflation products used in heart surgeries.

In May 1988 Merit Medical began selling control syringes, its first products. In November 1989 it introduced its IntelliSystem inflation devices. Two years later it began offering Medallion specialty syringes, Sherlock high pressure tubing, and its Monarch, Basix, and Limited inflation products.

Demand for the company’s products proved high, and Merit Medical quickly gained about a 50 percent share of the world market for inflation products designed to help diagnose and treat cardiovascular disease caused by blocked arteries (atherosclerosis) from the buildup of cholesterol and plaque. Such blockages annually caused about 1.5 million heart attacks, as well as an estimated 500,000 strokes resulting in brain damage.

Merit Medical’s initial business plan outlined the values and strategies needed to reach its technical, manufacturing, distribution, financial, and personnel goals. From the beginning, the company focused on building strong long-term relationships among its management and workers. Toward that end, a work atmosphere was developed in which open communication was encouraged between all levels of employees. Perks like reserved parking spaces for upper management were done away with, as the only special parking permits available were for car pooling vehicles.

Meeting Goals and Facing Litigation in the Early 1990s

The company’s initial business plan also stated that it would not rely on venture capitalists but would as quickly as possible become a public corporation. By 1990 the firm’s annual sales had reached $4.4 million, up from $1.4 million the year before. Moreover, Merit had by 1990 reported a net income ($140,987), after three years of losses. In 1991, Merit Medical was able to go public. Its initial public offering (IPO) under the NASDAQ ticker MMSI raised $6 million, shares having been offered at $4 each.

Another original goal was to become a vertically integrated company that handled its own product design, manufacturing, marketing, and distribution. Again, the company was able to reach this goal quickly, replacing its initial dealer network with its own direct sales force in the United States in 1990. Merit’s sales force—which by 1992 included 27 direct salespersons, including regional and national managers:—was thoroughly trained in the uses of Merit’s product line. Having its own sales personnel helped the company increase its sales and profit margins and improve communication with its customers. At the same time, feedback from cardiologists and radiologists helped the company refine its products and develop new ones.

Merit also intended early on to sell its products overseas. Initially, this goal was addressed through independent dealers, primarily in Japan, Canada, and Germany. Sales in those three nations accounted for about ten percent of the company’s total sales in 1991. Soon, the firm had hired its own international sales director to work with dealers, as well as to expand the company’s presence in New Zealand, Australia, Brazil, Switzerland, Mexico, and the United Kingdom. In 1994 the World Trade Association of Utah recognized the young company’s progress in this area by naming it the International Company of the Year. Moreover, Merit made Inc. magazine’s list of the 100 fastest growing companies.

Merit’s product development was enhanced by the September 1991 formation of Sentir, Inc., founded by Fred Lampropoulos and headquartered in Santa Clara, California. According to the company prospectus, Sentir was created “to develop micro-machining technology and to develop and market silicon sensors, including sensors which are similar to those presently purchased by the Company.” Sentir supplied Merit with the product, representing an important step towards Merit’s vertical integration. In 1994 Merit Medical purchased 72 percent of Sentir for $177,000, Lampropoulos’ entire interest in Sentir.

Merit’s rapid growth in the early 1990s required new facilities. Initially its offices and manufacturing were based in several small buildings in an industrial park at 79 West 4500 South in Murray, a Salt Lake City suburb. By the summer of 1992 the company employed 237 individuals and leased about 44,000 square feet in Murray. In the mid-1990s the company moved its operations to a new site on 45 acres in South Jordan, Utah. That was adequate for awhile, but later in the decade Merit again leased some of its original properties in Murray to handle its expansion.

The company’s expansion was not without its challenges. In the early 1990s, Utah Medical Products sued Merit, alleging that the upstart company had stolen patented technology for use in their IntelliSystem and Monarch angioplasty inflation devices. In 1992 Merit and Utah Medical settled this matter out of court, with Merit receiving a nonexclusive license to Utah Medical Products’ angioplasty patents, in exchange for paying a one-time licensing fee of $600,000. Merit also agreed to pay Utah Medical a 5.75 percent continuing royalty, not to exceed $450,000, on annual sales of products using the protected patents. This litigation cost Merit Medical an estimated $520,000 in legal fees.

Then, in 1994, Merit stockholder David D. Bennett filed another lawsuit over the origins of Merit Medical. Maintaining that he represented other stockholders in this class action suit, Bennett charged Merit and its founder Fred Lampropoulos with committing fraud in the company’s initial stock prospectus, which claimed that no Merit products competed with those of Utah Medical Products at the time. According to Bennett, the 1992 settlement between the two firms proved that Merit Medical “owed its entire corporate existence to cannibalizing Utah Medical personnel, customers and technology.” As a result Merit’s stock price declined from nearly $32 to less than $6 per share. Merit won this contest in 1998 when the court decided to dismiss the case and granted Merit a summary judgment. However, Bennett would continue to appeal the decision.

Enhancing Facilities and Product Lines

In early 1995 Merit Medical opened a new facility in Galway, Ireland, to expand the firm’s manufacturing, distribution, and research capabilities. In 1997 Merit Medical acquired Universal Medical Instrument Corporation, a small New York firm that produced vascular access items. With this acquisition and its own research capabilities, the company was able to introduce a new line of angiographic needles, specialty guide wires, and a thrombolytic catheter.

In 1998 Merit Medical introduced three significant products with considerable financial potential. First was the Tomcat guide wire, which guided a balloon angioplasty catheter through a blood vessel and then penetrated the blocked heart artery. Second, a new Fountain Infusion Catheter was introduced for use by doctors in delivering clot-dissolving drugs to peripheral arteries and veins, thus restoring normal circulation. Third was the Squirt Infusion System, which resembled a squirt gun.

Used with the Fountain catheters, the Squirt Infusion System allowed a doctor to use just one hand to pump drugs into the patient, thus freeing up his other hand to guide the position of the catheter. Moreover, doctors could also use the Squirt technology to irrigate wounds resulting from bites, knives, ulcers, burns, and other causes. Since it involved no needles or catheters, this system proved less frightening to children, who made up about 30 percent of the estimated ten million persons a year who sought help for skin injuries.

The trademarked Squirt system marked Merit Medical Systems’ initial entry into hospital emergency rooms. However, President/CEO Fred Lampropoulos was quick to point out in a press release that“There are other, secondary markets to which the Squirt Wound Irrigation System could be marketed, including urgent care facilities, burn units, nursing homes, long-term care facilities, family practice, pediatrics, internal medicine, the operation room and orthopedics.”

With such successful products on the market, Merit worked to consolidate some of its manufacturing operations, closing its New York plant and transferring its guide wire and catheter production to Salt Lake City and Ireland. These moves saved the company about $250,000 annually. At the same time, Merit improved its European distribution by moving customer service and warehousing from Ireland to Maastricht, The Netherlands, which decreased shipping time overseas and also provided more space for production in Ireland.

The Late 1990s and Beyond

In 1998, Merit recorded the highest sales and net income figures in its history. Sales reached $68.4 million, up from $60.6 million in 1997, while net income reached $2.5 million after a slump to $797,532 the year before. Merit’s finances continued to grow in the first half of 1999. At the end of its second quarter ending June 30, 1999, the company reported quarterly revenues of $19 million, up from $18 million the previous year, and a net income increase of 28 percent over the second quarter of 1998.

During this time, Merit signed contracts with two corporate purchasers. In 1998 Tenet Healthcare Corporation, based in Santa Barbara, California, signed a national contract giving its network of hospitals access to Merit systems. Then in 1999 Merit signed a three-year deal with the Mid-Atlantic Group Network of Shared Services Inc. (MAGNET) based in Mechan-icsburg, Pennsylvania. MAGNET included eight group purchasing organizations; Merit Medical expected to receive about $10 million in annual sales from the MAGNET contract.

Moreover, in July 1999 Merit announced a plan to purchase Mallinckrodt’s Angleton, Texas, plant, which manufactured catheters used in cardiology and radiology. Merit expected this acquisition to add about $10 million in annual revenue and provide additional capability needed to prepare for a challenging future.

In a December 1998 interview in the Wall Street Corporate Reporter, Lampropoulos explained his optimism about Merit Medical’s future. He noted that given Utah’s concentration of medical device companies, the company benefitted from “a good availability of mechanical and electrical engineers”;—a crucial factor in the firm’s research and development. New products, such as very small catheters used in the hands and feet, were in the development stages at Merit.

In pitching Merit as a good investment opportunity, Lampropoulos gave a thumbnail sketch of Merit’s position in the industry: “we have proven we can develop all of the appropriate aspects of a business including new products, their manufacture and distribution. We have built a critical mass so that we go forward, we will have the economies of scale that pertain to gross margins and pre-tax and after-tax profits. We have put core technologies into place that we can then build new products onto.” At the same time, Merit did face competition from rivals that were larger and had more resources, including Maxxim Medical, Pfizer, and St. Jude Medical.

At the end of the decade, analysts were cautiously optimistic about Merit Medical’s future. While some noted that Merit’s effort to focus on higher margin, primary care products sold to its current customers would result in increased sales, others pointed out that much of the company’s business remained concentrated in low-margin, price-sensitive items. In any case, the huge demand for diagnostic and therapeutic procedures to help patients with heart disease and other cardiovascular problems continued to fuel the need for Merit Medical Systems’ products.