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Executives

Howard Root - Chief Executive Officer

James Hennen - Chief Financial Officer

Analysts

Christopher Warren - Caris & Co.

Ernie Andberg - Feltl & Co.

Chris Welniak - Canaccord Adams

Chris Cooley - FTN Equity Capital Markets

Jeff Jonas - Gabelli & Co.

Jason Mills - Canaccord Adams

Vascular Solutions Inc. (VASC) Q3 2009 Earnings Call October 20, 2009 4:30 PM ET

Operator

Good afternoon and welcome to Vascular Solutions third quarter conference call. At this all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at the time. (Operator Instructions)

I would now like to turn the conference over to Mr. Howard Root, CEO of Vascular Solutions. Mr. Root, please go ahead.

Howard Root

Thank you. Good afternoon everyone and welcome to Vascular Solutions third quarter conference call. Joining me today is James Hennen, our Chief Financial Officer. This conference call is being webcast to the public and is completely open to members of the media. Vascular Solutions shareholders and other interested parties. After our remarks, we will open up the call to questions.

First, the necessary preamble, today’s conference call is a proprietary Vascular Solutions presentation and is being recorded by Vascular Solutions. No other recording, reproduction, transmission or distribution of today’s call is permitted without Vascular Solutions consent. This call is being audio simulcast on the internet via our company website at www.vascularsolutions.com.

A replay of the conference call will be available on the internet shortly after the call is concluded, through Tuesday, October 27. To listen to the replay, visit the Investor Relations portion of our website. Forward-looking statements made in the course of this conference call and webcast are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements can be identified by words used such as may, will, expects, continue, or other similar expressions. There are certain important factors that could cause the company’s actual results to differ materially from those anticipated by the forward-looking statements as described in our Annual Report on Form 10-K and other recent filings with the Securities and Exchange Commission.

Forward-looking statements are made based on our analysis as of today’s date and we undertake no duty to update the information provided on this call. Today, we issued our press release with results for the third quarter ended September 30. Once again in the third quarter Vascular Solutions demonstrated double digits percentage sales growth and rapid new product innovation, while at the same time adding substantially to our net income and positive cash flow.

In the third quarter, we increased our net revenue by 11% over the third quarter of 2008 to a new sales record of $17.2 million, inline with both our issued guidance and analyst estimates. With an excellent gross margin and continued strong expense management, our record sales translated into a 13% operating margin and $3.5 million in positive cash flow.

Filing future growth, we have now launched seven new products in the US since the beginning of the year, with an additional five expected to launch in the fourth quarter. As we conclude 2009, we are well on our way to our sixth consecutive year of double digit sales growth and we have clearly demonstrated the success of our business model in driving increased earnings from every incremental sale.

In this call, I will first provide an update on the components of our third quarter net revenue by product category and product innovations in each of these categories. Then I will provide guidance for net revenue for the fourth quarter of 2009 and more general guidance on sales for 2010.

Finally, James will review the financial details of the third quarter and comment further on our financial projections. Our highest sales product category in the third quarter was our hemostat products with $6.4 million in net revenue, a 10% increase from the third quarter of 2008. With the second quarter exit of one of our competitors in the hemostatic patch market, in the third quarter we were able to drive continued growth of our D-Stat Dry and Thrombix patches.

We also increased sales of our new Wrap version of the Dry, which is configured to be placed around, in-dwelling lines of catheters. In the third quarter, we recorded $153,000 in sales of ThrombiGel and Thrombi-Pad to King Pharmaceuticals under our distribution agreement, a quarterly level that we expect roughly to continue until we receive approval for the surgical indication for the ThrombiGel product.

In July, we completed the enrollment of the final patient in our ThrombiGel surgical clinical study and we have now completed the necessary 60 day follow up and expect to analyze the data and submit our PMA to the FDA by the end of December. We believe that this surgical indication will greatly expand King’s ability to sell our ThrombiGel into their targeted surgical markets, which based on current FDA review times. We are projecting to receive by the end of 2010.

In the fourth quarter, we also expect to launch the new Rad-Band, a low cost compression device for use following radial artery catheterizations, which has already received FDA clearance and also an improved version of our original D-Stat Radial. We are completing the build of launch quantities of our new Hunter biopsy marker device.

However, due to an FDA comment letter on our 510(k) submission in the third quarter, we will now need to submit additional information, which will push the launch of this device, the Hunter product, into 2010. Related to our hemostat products, we continue to await the appellate decision on our $4.5 million jury verdict for defamation against Marine Polymer Technologies, which has now been increased with interest to $5.2 million.

The oral argument was heard by the first circuit of the US Court of Appeals in Boston on February 4. Once the appeals court issues its decision, the only remaining steps would be a possible petition for rehearing by the entire panel of the first circuit and a potential writ of appeal to the U.S. Supreme Court. Only after all the appeals are exhausted will we record any resulting gain in our projections of net income or cash flow.

We continue to be highly confident in a favorable decision on the entire award, including interest, but given the delay by the appeals court, we do not expect to receive the judgment, if affirmed, until 2010. Our second highest sales product category was our extraction catheters. In the third quarter, we recorded net sales of $4.2 million with the Pronto catheters, an increase of 8% over the third quarter of 2008.

Sales of our new LP or low profile, version of the Pronto continued to increase and in the third quarter constituted 23% of our extraction catheter sales, with sales of the LP increasing by 8% sequentially from the second quarter. Expected to drive future sales growth in extraction catheters, in development we have a new V4 version of the Pronto and improved versions of our Pronto 035 and Pronto short catheters.

All of which we expect to bring to market in the first half of 2010 with substantial performance and cost advantages over our current versions that we think will accelerate our sales growth in the extraction catheter category. Our third highest sales product category was our vein products, principally the Vari-Lase products for the treatment of varicose veins, which recorded $2.8 million in net sales, a 15% increase over the third quarter of 2008.

Our sales force has done an excellent job in maintaining and growing our market share, in spite of increasing price competition by some of our laser competitors. We also have two new versions of Vari-Lase fibers is scheduled for launch in the fourth quarter and an improved and lower-cost Vari-Lase console scheduled for launch at the beginning of 2010 to continue to differentiate ourselves on a clinical and value basis.

Regarding our vein products, in the third quarter AngioDynamics initiated a lawsuit against Vascular Solutions concerning our Bright Tip fiber based on two AngioDynamics patents, both of which were issued to AngioDynamics after we launched the Bright Tip fiber and one of which wasn’t filed until after AngioDynamics had received and reviewed our Bright Tip fiber.

We believe that or both of these patents are invalid due to substantial prior art that was never provided to the patent office and as a result, we are preparing a re-exam request on both patents to be filed soon with the Patent Office. We believe the re-exam process will take approximately 3 years for the Patent Office to resolve, during which time we believe it is likely that this litigation will be placed on hold by the court.

As a result and subject to the obvious uncertainties of litigation, we do not expect any substantial expense associated with this litigation during the next three years. Sales of our access products were $1.8 million in the third quarter, an increase of 13% over the third quarter of 2008. Part of the sales growth resulted from growing sales of our new GrebSet access product, which increased by 9% sequentially in the third quarter and we believe is now gaining substantial repeat usage in interventional radiology.

In the third quarter, we also increased sales of Zerusa’s Guardian hemostatic valve by 15% sequentially over the second quarter. In October, the FDA cleared Zerusa’s 510(k) application for the new Guardian II version that we expect to launch next week. We believe that this new Guardian II version, particularly when combined with the Flamingo inflation device that we distribute for Pursue Medical, will substantially increase sales of access products in 2010.

In September, we also received FDA clearance and we launched our new piggyback wire converter, which adds another clinically unique niche product to our access products portfolio. Sales of our specialty catheters were $1.5 million in the third quarter, an increase of 30% from the third quarter of 2008. Sales of our Minnie support catheter, which we launched in the first quarter, increased 14% sequentially in the third quarter and are now beginning to grow rapidly as we work our way through the hospital purchasing committees.

In September, we received CE mark guidance and have now launched our new GuideLiner catheter in European markets, with excellent clinical response from initial cases. We expect to receive 510(k) clearance and launch the GuideLiner in the U.S. during the fourth quarter. We believe that the GuideLiner has substantial sales potential and could grow in sales to be roughly equivalent to sales of our Pronto V3 over a period of time. We are very excited about the potential for the GuideLiner.

License and collaboration revenue was $411,000 in the third quarter, reflecting King’s payments for the clinical development work on the Thrombi-Gel and our continuing license revenue. Concerning R&D, we have now launched in the U.S. a total of seven new products in 2009, with five additional new products expected to be launched before the end of the year.

While these products, other than the Minnie catheter, have not been material to our 2009 revenue, due to it being on their first partial year on the market. We believe that we have refilled our pipeline and we will generate material and growing revenue from these two wells new products starting in 2010.

Looking further out, we continue to have a full pipeline of additional new product ideas and we believe that our clinical niche strategy, focused on products that can deliver between $1 million and $10 million in annual revenue, can continue to drive our sales growth and profitability well beyond our $100 million annual sales goal. At the same time, we are actively working on larger market products, starting with the Magna Sealing device.

In the third quarter, we completed initial animal studies with the Magna Seal with good results and we moved into production tooling for the initial units. We are now planning our first-in-man clinical study for the Magna Seal, which we project to conduct sometime during the first half of 2010 in Germany.

While we are not projecting international revenue for the Magna Seal during 2010, we are very encouraged by the potential of this product in the $500 million existing sealing device market. Beyond the Magna Seal, we continue our discussions with an international manufacturer of an existing interventional cardiology product that addresses a substantial market, whereby we could become their U.S. distributor. However, nothing has been completed on this project at this time.

We also continue to plan the next generation development of our Acolysis therapeutic ultrasound device, which addresses the substantial market for peripheral atherectomy, and we expect to enter active development in 2010. All three of these products would fit within the focus of our existing sales force by being sold to our existing customer base.

Turning to future sales guidance, in the fourth quarter we expect to achieve continued double digit percentage sales growth year-over-year, with a range of between $17.9 million and $18.3 million in net revenue. Reaching this level would result in at least $68 million in 2009 net revenue, exceeding our annual 2009 sales guidance and a 12% growth over 2008.

Looking into 2010, we are just beginning our budgeting process and will provide more specific guidance in our fourth quarter conference call, but at this time, we clearly believe that we will continue our performance from the last six years and grow sales by between 11% and 13% over 2009’s levels, with net income accelerating by an even higher percentage.

Now I’ll turn the call over to James to review the details of our third quarter financial results and the rest of our financial projections.

James Hennen

As Howard described, net revenue for the third quarter was $17.2 million, an increase of 11% of net revenue of $15.5 million in the third quarter of 2008. U.S. net revenue represented $15.1 million or 87%, of third quarter revenue, an increase by 12% from the third quarter of 2008, while international revenue of $2.1 million increased by 7%. Our product gross margin for the third quarter was 66%, consistent with the 66% in the year ago quarter.

Looking forward, based upon projected product sales mix, we expect to maintain our product gross margin at between 65% and 66% in the fourth quarter of 2009. Concerning overall expenses, we increased our operating margin to 13% in the third quarter, compared to 11% in the year-ago quarter, reflecting the power of our business model to drive increasing profits from each additional sale.

Sales and marketing expenses were $5.3 million, or 31% of revenue in the third quarter, compared to $5.1 million or 33% of revenue in the year ago quarter. We continue to gain leverage in our sales and marketing expenses as our sales grow. At the end of the third quarter, we had a total of 87 field sales and sales management employees in the U.S., essentially constant since the start of 2008.

We do not expect to add significant headcount to our field sales organization in the remainder of 2009, and as a result, we estimate sales and marketing expenses will decrease to approximately 29% to 31% of revenue by the end of this year. U.S. product sales generated per U.S. field sales employee was $183,000 in the third quarter, or $732,000 annualized. We continued to believe that we can grow this annualized number to well over $1 million per field employee with our current and planned new products.

Research and development expenses for the third quarter were $2 million, or 11.5% of revenue, compared to $1.5 million, or 10% of revenue in the year ago quarter. The increase was primarily the result of several of our projects moving through design testing simultaneously. We project R&D spending to remain at this level in the fourth quarter of 2009, as we launch the products.

General and administrative expenses were $1.2 million in the third quarter, or 7% of revenue, compared to $1 million, or 7% of revenue in the year ago quarter. We project G&A expenses will decrease to approximately 6% of revenue for the fourth quarter of 2009. Clinical and regulatory expenses in the third quarter were $713,000, or 4% of revenue, compared to $792,000, or 5% of revenue in the year ago period. We project clinical and regulatory expenses will continue to be approximately 4% to 5% of revenue for the fourth quarter of 2009.

Interest income was $5,000 for the third quarter, as we yielded a return of 15 basis points on our cash. We anticipate a similar rate of return in the fourth quarter of 2009, as interest rates are projected to remain at historic levels. Interest expense was $9,000 for the third quarter, relating to bank fees for the continuation of our $10 million line of credit. We repaid the outstanding balance on an equipment line of credit in the second quarter of 2008, and as a result continue to have no debt on our balance sheet.

Income tax expense increased to $746,000 for the third quarter on income before tax of $2,177,000, reflecting an effective income tax rate of 34%. For the third quarter of 2008, income tax expense was $22,000, reflected only the alternative minimum tax since we utilized our net operating loss carry forwards to offset our quarterly income tax expense until the fourth quarter of 2008, when we capitalized our NOLs as required by GAAP. We project an effective income tax rate of 37% for the remainder of 2009, but continue to expect our NOLs to offset essentially all of our income tax expense for the next several years on a cash basis.

Resulting GAAP net income for the third quarter was $1.4 million, or $0.09 per fully diluted share, compared to net income of $1.7 million, or $0.11 per share in the third quarter of 2008. To reflect an appropriate comparison on a fully taxed basis, net income for the third quarter of 2008 would have been $0.07 per fully diluted share, which results in a 32% growth in earnings in the third quarter of 2009, compared to the year ago quarter.

Net income for the third quarter of 2009, includes $407,000 of non-cash stock-based compensation, or $268,000 after tax, which represents $0.02 per share, as well as $746,000 of non-cash income tax expense, which represents $0.05 per share. Regarding the balance sheet, we ended the third quarter with $14.1 million in cash with a positive operating cash flow of $3.2 million in the third quarter.

During the third quarter, we incurred $402,000 of capital expenditures, with total capital expenditures for the entire 2009, still expected to be approximately $1.1 million. We expect our inventory levels to continue to increase with our expected increase in revenue, end 2009 at approximately $10.3 million. Our days inventory on hand at September 30, 2009, was 159, compared to 162 at the end of 2008.

Our days sales outstanding was 48 at September 30, 2009, compared to 52 at the end of 2008, and we did not have any material bad debt write-offs in the third quarter of 2009. Overall, we expect to continue to improve our cash position end 2009 with approximately $17.4 million in cash and no debt. This projection does not include any proceeds from the Marine Polymer verdict of $5.250 million including continuing interest. We continue to believe that our current working capital of $29.9 million is sufficient to fund all of our foreseeable operating requirements.

GAAP calculation of our weighted-average fully diluted shares was $16.5 million in the third quarter. We expect our 2009 weighted-average fully diluted shares to increase to $16.7 million by the end of this year. We currently have 16.4 million shares outstanding with 17.5 million shares fully diluted on a share count basis.

Regarding future guidance, net income in the fourth quarter of 2009 on a fully taxed basis is expected to be between $0.09 and $0.11 per fully diluted share. Based on achieving the top end results of earnings in the third quarter, we now expect to be in the upper half of our previous guidance for net income per diluted share of between $0.30 and $0.34 on a fully taxed basis for the entire year.

Finally, looking longer term, we are reaffirming our more general expense targets. We continue to believe that we can achieve an operating margin of at least 20% on net revenue at the $100 million annualized sales rate. At that sales level, we target our product gross margin to be approximately 65% to 66% on a blended rate. Research and development expenses to be 10%, clinical and regulatory expenses to be 4%, general and administrative expenses to be 6%, with sales and marketing expenses to be 25%.

With that, I will turn the conference call back to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christopher Warren - Caris & Co.

Christopher Warren - Caris & Co.

Just wanted to drill in on fourth quarter guidance a bit, I noticed it looks like the street’s $18.5 million on the top line. You’re guiding, it seems a little bit below that. Does your guidance reflect any incremental hesitation or any change in the market environment from three months ago?

Howard Root

No, it doesn’t. Here’s what happened this year. We’re hitting our annual guidance and we give annual guidance in the quarter ahead all the time. We substantially exceeded it, I think, in the second quarter…

James Hennen

The second quarter and fourth quarter numbers were never adjusted by the analysts.

Howard Root

So what happened is I think the analysts back loaded a lot of the growth. We got the growth earlier than they were projecting, but consistent with what we were seeing, and so we’re kind of where we thought we’re going to be. So it’s not anything about our business or our products that’s causing the analysts to be higher than what we’re projecting in the fourth quarter.

Christopher Warren - Caris & Co.

Understood, and just as a follow-up to that, just looking at the strong performance of the D-Stat family this quarter, any reason to think that next quarter, on a sequential basis, there would be much deviation from the number and performance you put up this time around?

Howard Root

No. I mean, the third quarter, keep in mind, is our summer months, generally. So that’s the slowest in terms of some of the procedures now. More on the Vari-Lase side than on the cath lab procedures, but there’s a little bit of that as well in the diagnostic area. So we think the fourth quarter will certainly be above the third quarter in terms of the hemostat products, and the D-Stat Dry in particular.

Operator

Your next question comes from Ernie Andberg - Feltl & Co.

Ernie Andberg - Feltl & Co.

The only line item that looks high relative to my expectations is in the R&D line and, James; you made some comments there. What products are really driving that and where do you think that heads in 2010? Does it stay up at the 10% or 11% level? That’s what I’m searching for.

Howard Root

The R&D is the one item that we can decide what we want to do as much as we want to do it, and this year we were really pushing to get a lot of new products out with 12 new products launched, and I think that sets us up well, and as we’re kind of continuing to hit our number and grow, I don’t want to limit our innovation by saying, let’s not get on these new products.

So, we want them targeted around 10%, but if we go to 12% to 14%, I’m not going to be upset at that, as long as we get products launched out the back end and continue to drive our growth. So it’s completely controllable by us. The third quarter and James, you can jump in here. On the third quarter expenses, it’s really, because we’re moving a lot of these products through at the same time with our qualification tests.

James Hennen

Yes, it’s the GuideLiner in particular is one we launched. We got CE Mark approval for it and expect to launch in the U.S. in the fourth quarter, but looking in the 2010, Ernie, to answer your question, on a general basis I’d say 10 percentage is what we’re targeting, maybe higher in the first quarter as we continue the effect of launching the products. We expect to launch this similar number of products next year. So R&D will be right around that 10% mark.

Ernie Andberg - Feltl & Co.

How many products did you say for next year, James?

James Hennen

A similar level.

Operator

Your next question comes from Chris Welniak - Canaccord Adams.

Chris Welniak - Canaccord Adams

Can you remind us of what the products, the five products we should expect for the fourth quarter, the names of them just…?

Howard Root

I’ll go through, the one we launched in the third quarter. We had launched six through the first half of the year. We launched the Piggyback wire converter in the third quarter and we have the GuideLiner, which we launched in Europe and are now getting ready, hopefully, to get FDA approval and launch that in the U.S. and then the other products, there was a new fiber in the Vari-Lase line, there’s the Rad-Band, which is a radial sealing device or compression device after radial procedures.

There’s the trainer on sheathless catheter and the gator clip-seal plug. Those are the gator in an access product; the drainer is especially concerning and the only one, we had originally thought we’d would launch 13, and the only one that we’re not launching this year at this time that we know about is the Hunter, because we did get an FDA comment letter and that’s going to require some more testing and push that Hunter biopsy marker out to 2010.

Chris Welniak - Canaccord Adams

The FDA is always good for things like that, right?

Howard Root

They’ve been good to us up till now. There’s always a little bit of stuff in here. When you get a standard 510(k), they’re still good, and there are some excellent reviewers at the FDA, but it’s uneven. When you get something that’s a little bit different, they’re certainly being a little bit hesitant now about giving you a quick sign-off and approval, but I can’t complain about if we get 12 products through the FDA this year, I’m not going to be the one complaining about the FDA.

Chris Welniak - Canaccord Adams

No, no, absolutely. I just wanted to confirm, was your previous guidance that you had put out on the second quarter call, was it for full-year sales of $67 million to $70 million?

James Hennen

That is correct. $67 million to $70 million was our annual guidance.

Chris Welniak - Canaccord Adams

So now, you’re expecting a little bit less than that. Is that correct?

Howard Root

No, we’re expecting a minimum $68 million for the year, if you do the math.

Chris Welniak - Canaccord Adams

So you’re not, in effect, lowering the top end?

James Hennen

Correct, that is correct. No, we’re expecting if you add the guidance we gave in the fourth quarter, it would be a range of $68.1 million to $68.5 million for the entire year. So we gave guidance of $67 million to $70 million.

Chris Welniak - Canaccord Adams

So the $68.5 million is lower, it is in effect, lowering the top end of the guidance, right?

Howard Root

No, it’s coming in at the midpoint of the guidance. You have $67 million and $70 million; if we come in at $68.5 million, I don’t want to get to where we’re trying to predict the last dollar of the sales figure. So I think that’s right where we want to be.

Operator

Your next question comes from Chris Cooley - FTN Equity Capital Markets.

Chris Cooley - FTN Equity Capital Markets

Just two quick questions, if I may. Could you remind us, Howard, about what type of ramp is most philosophal, when we think about the GuideLiner here in the States and outside of the U.S. You’ve highlighted that could be a potential kind of transformational product for you.

Help us think about maybe some metrics that we can use to kind of monitor that progress. Then, I apologize. I came in a little bit late. You mentioned the Hunter going to 2010, just for clarification, you still anticipate five new products here in the fourth calendar quarter, correct?

Howard Root

Yes, the second half of that. We had projected 13 products for the year. Now, the Hunter is being pushed out to 2010 due to the FDA comment letter, so that would leave 12 products that we expect to launch this year. We’ve launched seven of those already. We have five more that we expect to launch in the fourth quarter here.

On your other comment on the GuideLiner, good question. When you’re launching a new product, there’s a lot of uncertainties about what it’s going to do. I can tell you, just by the comments I put in the script here, I’m very excited with the first cases that we’ve had done internationally since we launched it, but that’s a handful. Five, 10, 20 cases, that type of thing, but it’s a very interesting clinical niche, nothing like a product out there, for a relatively small, but still potentially a $20 million market segment of interventional cardiology.

The way I look at it is, if you are doing a missionary sale, there’s going to be some starting and then some little bit more seeding, and then there is a little bit of a wild fire before it becomes commonly accepted, kind of the hockey-stick approach. This is not a transformational product. This isn’t a $100 million product. This is more like a $15 million to $20 million product.

I think at full implementation, which I would say is three to four years out, but the launch ramp rate, if we did $1 million in the first year, we should certainly do that. If we do $2 million, that’s doing pretty well. That’s a wide range, but that’s kind of it depends on everything as it launches and gets more experience throughout the U.S.

Operator

Your next question comes from Christopher Warren - Caris & Co.

Christopher Warren - Caris & Co.

More of a strategic question, there are rumblings the FDA could be getting more stringent on product approvals, particularly the 510(k) that are sort of central to the way you guys execute your business model. Would you agree with that assessment and if so, how do you think it impacts the launch cadence in the years to come?

James Hennen

Great question, that is one of the talks out there and I’m on the Board of the Medical Device Manufacturers Association. We’re just out at DC and had a lunch meeting with the new head of the Office of Device Examination, CDRH, who is the one who sets the guidance and reviews all the reviewers on our 510(k) and PMAS and here is kind of what the new administration or relatively new administration, in their guidance and some changeover in the leadership of the CDRH.

What they’re saying is, if you have a 510(k) that’s trying to get a relatively new indication, using a predicate device that’s fairly far removed from what you are doing. They’re going to take a hard look at that. They don’t like this, right now, creeping instrumentalism where you start with one product and through four or five predicate devices, you end up with something that’s an implantable that really shouldn’t belong in a PMA category.

That’s where they’re devoting their attention. On the other hand, if there’s a new generation of an existing product, which clearly is in the 510(k), that should be business as usual, and there’s been no fundamental change on the FDA’s part, what they interpret a 510(k) to be, but 510(k)’s, PMAs have a lot of gray area, so there’s always a potential to incrementally go one way or another.

As far as it affects our products, our products are generally, I won’t say exclusively, but at least 75% of them are really standard predicate devices. The Minnie support catheter is just like another support catheter, like another support catheter that clearly is a 510(k) with known performance characteristics. Even the GuideLiner is like a guide catheter, and so it really isn’t something where we’re trying to stretch the envelope.

The only one that comes in a little bit more complicated is the Hunter, which is a little bit of a new thing, a little bit of a new area, and in that, I have to tell you, we have a great FDA reviewer. We’ve done a good job reviewing it, but has some comments that came back that made us do some more testing, and I think that testing will prove that it’s approvable as a 510(k) and we’ll launch it in the first half of 2010.

So I don’t think it’s a fundamental switch. I think if you’re on the edges of the 510(k), it is an important thing, but where we are with our strategy, our clinical niche strategy. I think we’re in a pretty safe zone as far as the FDA changes that I’ve currently heard impacting our business.

Christopher Warren - Caris & Co.

Just as a follow-up, you guys have done a great job over the years executing on the $1 million to $10 million incremental revenue product opportunities. Certainly that seems like it’s what’s driving 2009; probably that’s what drives 2010. At what point do you have to move to bigger market opportunities to generate the sort of 10% to 13% growth that you presently think is likely for 2010?

Howard Root

As far as when we have to do it, I don’t think we have to do it until we’re well beyond $100 million, more like $150 million to $200 million. As far as when we will do it’s a different question though, because I wasn’t going to advance these more doubles and homerun swings until I knew we’re on solid ground financially and profitably and now that we’re at that point, and subject to the FDA reform legislation coming down, which may make me kind of pullback a little bit on R&D programs or somewhat more, depending on what they get in as a sales tax on medical devices.

We’ve got the ability to go in and really push some of these new cutting edge devices for larger market opportunities and I think by 2011, certainly by 2012, we should see material revenue from the Magna Seal, maybe even another one of these products, and certainly Magna Seal in international markets, not U.S., but international alone is $100 million potential for sealing devices, and we could be there, getting a good chunk of that in 2011.

So, I don’t think we have to do it. I think we can continue to develop 10 to 15 new products a year and drive this. Again, the second year of a launch is when you get the real revenue growth. It’s not the first year of launching that’s going to be material growth. So next year is setting up very nice for us with these 12 products that we expect to have launched in 2009. I think the same thing could happen in ‘11 and ‘12, and still hit that double-digit percentage sales growth.

Operator

Your next question comes from Jeff Jonas - Gabelli & Co.

Jeff Jonas - Gabelli & Co.

Last quarter, you made some comments about potential uses of cash, and that continues to just grow on the balance sheet. So I wondered if you’d revisited that at all with the board?

Howard Root

We revisited with some of the market analysts, who were telling us what investors wanted as much as anything else as to what we should be doing with the company as we grow cash. I think, what I was saying is, once we get to a certain point, if our stock price doesn’t reflect it, there’s a lot of things we could do to bring value to the shareholders, and that’s a 100% positive way to run the business the way Vascular Solutions has always been run.

We will take a look at everything that’s possible to increase the value to the shareholders. The stock has responded pretty nicely in the last quarter. I still think we’re not completely valued for what we have, when you we look at our ratios and our multiples in free cash flow, but it’s coming into the right direction. Certainly, I want to first invest in our growth and if I can do that and get good returns, that’s great. We’re already doing it. If I got excess cash from that, I would love to build up some so that we could do some acquisitions, not next year or the year after, maybe the year after that.

If there’s stock price is repressed in it and it’s just not reflecting our true value, we will look at potential stock buybacks or potential dividends, especially if we get windfalls like the potential Marine Polymer $5.2 million, but at this point, we’re comfortable building our treasury. Certainly, we have no debt. We don’t intend to get into debt. To build it to the potential acquisition is the next stage of our growth as a company and that’s our current plan, but that is impacted by what goes on in the marketplace, and it always is viewed from the perspective of what’s going to bring the best value to the shareholders.

Jeff Jonas - Gabelli & Co.

Then just one other question, do you have any sense on when negotiations with that distribution opportunity will wind down, because again that’s been kind of lingering for two or three quarters here?

Howard Root

Yes, it’s one of the things that, I won’t call it wind down. It’s one of the things I can’t announce anything until it’s done. It’s not done right now, but it’s still something we’re discussing and working on, and it’s an exciting product for us, but it’s not anything that I’m saying is definitely going to happen or probably going to happen. It’s just one of the things I want everyone to be aware of that we’re looking at in order to get another big product into the company, which would be very favorable, I think, to our long term growth.

Jeff Jonas - Gabelli & Co.

Are there any smaller distribution negotiations ongoing?

Howard Root

We always have discussions on those. The Guardian II is a next-generation, but I think that’s a great distributive product for us. The Flamingo has done well. The Snares, I think the Micro Elite Snare and the Expro Elite Snare that we distribute for Radius Medical out of Boston are great products, we’re doing a very nice job with the Micro Snare. I think the Expro Elite Snare we can push harder.

We’re looking at some other products that they might potentially have and there’s some guidewires that we distribute, as well, and we’re always looking for new clinical niche guidewires, not ones to go into bundling packages for the cath lab, but ones that doctors pull off the shelf once a day or once a week, and those are great opportunities for us with clinically unique areas. Lake Region is a good partner for us. They’ve acquired another partner with us out of Ireland at the same time, and so we’ve got a lot of different irons in the fire, but nothing else to announce right now.

Operator

Your next question comes from Chris Cooley - FTN Equity Capital Markets.

Chris Cooley - FTN Equity Capital Markets

Just two quick follow-ups, James, maybe could you remind us what you kind of view the maintenance CapEx run rate going forward, as we think about 2010 and beyond? Then, secondly, when you just look at your hemostatic products, we’ve seen some of the larger coronary players report softness in that market in terms of PCI volumes, and also seen some pricing. Kind of can you walk us through, maybe either Howard or James, what’s baked into your assumptions for the market and pricing, as we think about the hemostatic space between now and calendar year end?

James Hennen

I’ll start with the CapEx question. We’ve been running the last three years at about $1 million a year in CapEx, but going into 2010, we may in which making some margin improvements and bringing some things in-house as far as more manufacturing capabilities. So we haven’t given guidance on 2010, but it may be more than that general $1 million, maybe $1.5 million type range, so nothing a substantially increase over $1 million run rate. So that’s where we expect it to be.

Howard Root

In terms of the market, in PCI volumes I mean I’ve been aware of the big companies in our space, with Saint Jude and Boston Scientific yesterday and their comments. The nice thing about our business strategy is we’re not dependent on market growth in order for us to be successful.

So, playing in the clinical niches, which sometimes we got abused for saying that we’re a small product company, now it’s really a plus, because we can go out there and develop new things, which aren’t material increases and most of the times actually decreases in the budget and even if the number of procedures don’t go up, they just shift to the next technology and being a clinically differentiated company plays well there.

In terms of pricing, we always focus on that being flat, but we don’t have price increases. In the patch market, I think we have bought a couple of new product launches a year or two ago or new product free samples a year ago and I think we’ve won that game. We’ve got the clinical data on our side.

We can show the benefit of our product and we’ve got approved indications, which a lot of these patches just don’t have. So I think you’ve seen in the last two quarters resumption on that area and I think keeping a steady price, not falling victim to the low cost patches that don’t have the data, has done us well.

In terms of long-term market, I am still optimistic about our strategy and I’m optimistic about the healthcare system. I need to get a little bit of certainty in terms of the healthcare reform and what’s going to go on as a general matter, a global matter, but as far as it affects Vascular Solutions that really like this space we are in because in a turbulent world, certainly start ups are going to have a hard time with it, anyone trying to replicate what we’re doing is going to have a hard time doing it and the big companies are having a hard time to find growth.

So we are in the perfect middle ground where we can still grow double digits with products that don’t demand an increase in the market and we have a wide-ranging international market open to us that we can expand into 2010 and beyond as well. I pay attention to what’s going on in the market, but it doesn’t affect us day-to-day, and I’m glad we are in that space because it’s not all roses out there for the overall healthcare system in the U.S.

Operator

Your final question comes from Jason Mills - Canaccord Adams.

Jason Mills - Canaccord Adams

Actually, Howard, I’m glad for your last point. I wanted to ask you about the proposed medical device tax. It seems like you are in a great position to talk to all of us about it with a greater level of detail than many of us have?

Howard Root

I just yesterday, I testified at Representative Paulson’s hearing on the effect of the medical device sales tax on the medical device industry and it went on for 5 to 10 minutes I’m not going to do the same thing here. I think on a lot of levels it’s a wrong-headed approach and I think there’s a lot of Bipartisan support to getting it out of the legislation.

In Minnesota, our Senator Klobuchar and Senator Franken both have come out in support of removing it. Representative Paulson, our representative, is also there. Senator Franken and Senator Klobuchar are Democrats.

Representative Paulson is a Republican; so they are not agreeing on this issue, but the idea of putting a separate sales tax on medical devices, something that we want to increase our innovation, increase our employment, and increase the clinical outcomes, is just in say to my thinking. So I am thinking we are going to work through at minimum, I think there going to work some small company exemption out of it.

So its not going to have as much of in fact Vascular Solutions as it otherwise would have, I mean if they impose it on the full length of the 3% of sales tax, that would a $1.5 million on Vascular Solutions and that $1.5 million sales tax of not to be deductible on our income tax to be defectively after take income tax on the sales tax, but I think vise are as per barrel and will get that either eliminated or substantially reduce for the healthcare reform legislation in acted in December likewise and that’s where pushing forces part of DMA and pushed for also as well as just on behalf of that solutions.

Jason Mills - Canaccord Adams

Then, just to follow up in terms of going back to I think it was a question that Ernie had asked, and I missed the answer. How many products do you have scheduled for release next year? How many are you also looking at 10ish for next year?

Howard Root

Yes, we are kind of scaling back from telling everyone what our R&D projects are I used to do that a couple of years ago and some of my Board members asked me why are you telling all the competition about what all your development programs are and I didn’t have a good answer. So I’m not going to describe in detail the names or the products, but we do expect to continue this.

There’s no reason why 2009 would be considered an aberration. We’re going to launch, we think, 12 products. We may not do that number that seemed to maybe a couple high, but certainly we should be shooting for more than five, more likely 10, and it depends on 10 products aren’t always equal we would be get five great products and that could be more than the 10 products or 12 products that we are going to launch this year.

That kind of innovation, that 5 to 10 products a year, certainly we should be able to do for a long time coming. We have a full pipeline it’s not like there’s not enough ideas out there, docs keep coming to us with they want this and they want that, and all relatively small products that most companies won’t even bother developing.

So there’s almost a limitless supply of ideas, and we’ve just got to work it through our system and get them launched in an efficient and economic and a predictable pattern. I think we will do that. So if I was looking at it and put out a projection, I think we should be around 10 new products next year. Some of those may be generational improvements on existing products, like the Pronto V4, but they will expand the market for that considerably, if we can get better performance and cost improvements on that device.

Operator

Gentlemen, there are no further questions. I will turn the conference back to you for closing remarks.

Howard Root

I want to thank everyone for participating on the call. I’m very excited about what we were able to accomplish in the third quarter and I look forward to continuing this progress in Q4 and into 2010. Thank you.

Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation in Vascular Solutions third quarter conference. You may now disconnect.

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Source: Vascular Solutions Inc. Q3 2009 Earnings Call Transcript
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