What happened

Shares of Merit Medical Systems (NASDAQ:MMSI), a medical device company focused on disposable items, are sinking after the company reported earnings results for the third quarter. Investors unhappy with an earnings miss and lowered forward expectations have knocked the stock down by 31.3% as of 1:10 p.m. EDT on Thursday.

So what

Merit Medical's third-quarter earnings report was full of disappointment. The company reported $0.28 per share in adjusted earnings, which was 40% less than the previous-year period and 38% less than consensus estimates.

Frustrated person looking at a sinking stock chart.

Image source: Getty Images.

A slower-than-expected quarter caused Merit Medical to lower expectations for 2019. In February, the company was expecting adjusted earnings to fall between $1.97 and $2.08 per share. Three months ago, the company cut that estimate to a range between $1.74 and $1.97, and today, its adjusted earnings estimate was lowered even further to a range between $1.40 and $1.46 per share.

Last year, the company acquired Cianna Medical for $135 million up front plus up to $65 million in potential milestone payments. Merit's new portfolio of breast cancer-related products was expected to increase the company's adjusted gross profit margin significantly. Instead, the company just told investors to expect its gross profit margin to slide from 48.9% last year to a range between 48.4% and 48.7%.

Merit Medical Systems also withdrew 2020 guidance that the company reaffirmed just three months ago.

Now what

Sales, general, and administrative expenses surged 31% year over year to $86.9 million in the third quarter, which led to a $2.8 million operating loss. The company has already let go of 2% of its workforce, which should help operations turn profitable again.

Unfortunately, the extra debt Merit took on to acquire Cianna Medical and other businesses raised its interest expenses 47% year over year to $3.4 million in the third quarter.

Perhaps this healthcare stock can recover, but dramatic overestimations in 2019 aren't a great sign. You probably don't want to try catching this falling knife until there have been some changes in the executive suite.