ICU Medical, Inc. (IC7.F) Earnings Call Transcript & Summary

Good afternoon, everyone. We're excited to continue our 44th Annual JPMorgan Healthcare Conference. My name is Rohin Patel. I'm associate on the healthcare team here at JPMorgan. And today, it's my pleasure to introduce ICU Bio -- ICU Medical, excuse me. And its CEO, Vivek Jain. We'll have time for Q&A at the end, where we'll be joined by Brian Bonnell, CFO. And with that, we'll hand it over to Vivek.

Thanks, Rohin. And thanks to JPMorgan for having us at this great event. I think we know a number of folks in the room, so we'll try to be informal as usual. And in the next 20 minutes or so, I think we can give you a good feel for the investment rationale into ICU Medical, our team, a number of pharma colleagues are here in the front row, has been together a long time. And our investment into the company and our time at the company speaks to our commitment to get this right. And I think we're excited today to be talking for the first time in the last number of years with many of the situational challenges that we went through with our last transaction behind us and a lot, not all, but a lot of the macro items that we face too in the market. We simplified our investor presentation. For those of you who are familiar with us, we did simplify our presentation a little bit. Hopefully, it cuts to the chase of the opportunity and illustrates our potential. We would, of course, encourage you to read our safe harbor language at your leisure, which is available on our website. And so first, let me just do a quick snapshot on ICU Medical. We are a focused player primarily in IV therapy. We report in 3 segments, which are consumables, systems and Vital Care. Consumables and systems are our core businesses. 2/3 of our revenues come from North America. I would say more than 2/3 of our profits come from North America. And almost 90% of what we do are single-use disposables that are $10 or less. So 90% -- 87% of our items are single-use disposables, the balance is capital equipment sales. In terms of financial metrics, we at the stock price a couple of days ago, we're about $3.8 billion of equity value, and there's about $1 billion of net debt, which implies trailing just over 2.5x levered. We'll talk a little bit at the end of the presentation what our goals are there and where we want to get to. For those of you who've seen us before, this chart last year would have had $300 million more in revenues on it. We consummated a joint venture for our IV Solutions business last year. We still have commercial responsibility for that business, but it's no longer included in our publicly reported results. Let me give a minute on the IV therapy industry. It's a structurally attractive industry with a lot of very, what we call, sticky demand drivers. And first and foremost, these are essential products, 90% of the folks who walk into a hospital today receive some sort of infusion therapy. There's a high -- if we spoke like consultants, we'd say there's a high incumbency or familiarity advantage where people don't want to switch products. And the products themselves have very long both life cycles in terms of the technology of the products but also have long contractual cycles where if you get a piece of business, it stays for many years in a row. The underlying market structure is attractive, and that's a very consolidated industry. There's a limited number of players that do this around the world. The regulatory barriers are very high. And sometimes people's impression of that is you can only participate at a census level, but like many markets, there's lots and lots of niches and hidden spots in this market where growth is faster than census, and that's what we look to optimize and participate in. I mean, ultimately, our role in this industry is to address the meaningful areas in infusion therapy, which are really at the confluence of safety patient -- or at the confluence of patient safety, clinical efficiency and workflow. And where those things don't go right, there's often bad outcomes for hospitals. And so if patients are safe. If care is delivered efficiently, good outcomes are happening, hospitals don't have problems. If those things aren't happening right, there's usually negative reimbursement effects, et cetera, for hospitals. We benefit -- we add value by making sure those things happen the right way for our customers. How did we get here? So 9 years ago, 8 years ago, we were a $200 million direct sales company. And our team showed up and we got to work really focused on innovation around our original core consumables business. And that set us on our journey to grow that business, and we supplemented it over the next number of years with a variety of M&A activities. We did some defensive M&A with Hospira, acquiring Hospira Infusion Systems, which was a very good transaction. We did some offensive M&A with Smiths Medical which was a strategically logical transaction, but a harder transaction execute. And we did some creative M&A in the creation of our joint venture with Otsuka Pharmaceuticals. Those deals, while all strategically logical, we had to believe we could add value through innovation. And so lots of folks have rolled up industries consolidated things, but if you're not adding value with new products, new features, making things better, making things safer, it doesn't matter what you bought. And through all the difficulties you went through the last couple of years, we remain committed to innovation throughout that journey. Okay. So kind of getting into our businesses a little bit now and then into the financials. We think each of the businesses and particularly consumables and systems are well positioned with a right to win. And so if you look at our results on our earnings calls, we published a slide that has the last 6, 7 quarters of revenue growth. Those numbers have averaged 5%, 6%, 7% in the big businesses. There's a handful of key products that you can look at under leisure in each of those sectors but we are 1 or 2 in the U.S. market. And we win because there's some synergy between the businesses of consumables and systems. We win because we innovate, we win because we have global manufacturing scale and cost positions, we win because of brand and we win because we innovate consistently. I'll get into the more specific innovation in the systems business, but if you add up these players -- these various verticals, each one of them is one of the largest suppliers in the world in these categories. To make it really simple about the company, what are our priorities, right? How should investors judge what we're spending our time on. There's 3 things we're trying to do. We're trying to make sure that we deliver consistent core revenue growth, right, keep our commercial momentum going. We're trying to ensure that we continue to deliver innovation. And for us, that innovation has been both incremental, which is sometimes [ pod ], but has really been what's been driving our consumables business for years, and we want to deliver step change innovation, which we're doing in our Infusion Systems business. And ultimately, at the end of the day, that needs to show up on our P&L, right? And we want to show that we have financial results that provide evidence that those things are happening. So on the first one, what are we trying to do to deliver mid-single-digit growth? And how have we done that in these businesses? And first and foremost, for both consumables and systems about competitive share gains. And so I'll talk a little about in each vertical why we're getting competitive share gains. It's about creating the faster growth markets, and it is -- has been about pricing and some of the things coming over the last few years. So in consumables, we've won for really 4 or 5 clear reasons, brand, the way we deliver the product to the patient and the hospital the way we organize the product from a training perspective, by creating faster growth markets -- faster growth markets in biologics, in home infusion, et cetera, those niches are growing at attractive growth rates faster than the hospital markets. And we took a lot of pain and price and inflation here over the last number of years, and we've been very focused on getting pricing back in line to recruit that inflation. So on consumables, we've won for all of those reasons. And then if we win in systems, and I'll talk about in a second, more often than not, we win in consumables, too. And so the pumps drag some of the plastic consumables that go behind it. In the pump business in systems, we have a couple of unique things going on in the LVP pumps, which are the workhorse pumps that came from Hospira. If we win in those systems area. It helps also not only pull the consumables, the other types of pumps, which are the specialty pumps that came from Smiths, the CADD pump and the Medfusuion pump. The CADD pump and the Medfusuion pump participate in some of those faster-growing markets in home care, offsite, et cetera. So it's not only having the right product, having it in the right place where they can participate. And an advantage we finally created for ourselves is on the hardware side of the pump business. We finally have some products that are capable of driving an attractive gross margin. And so pricing matters there because we get -- we realize the value for the technology we're now offering, which wasn't necessarily the case with the historical pump platform. And so I think it's pretty clear there's a lot of drivers of our commercial momentum across our most important businesses in each of the subproduct families in those groups that were referenced on the previous page. In terms of innovation, most of our innovation dollars for the last 5 years have been in the pump business. And so we did these -- we innovated on consumables. We did these transactions. We built a full line of infusion pump devices. But until very recently, they were all running on their own IT network under their own drug libraries with their own limited connectivity. Over the last 2 or 3 years, we've got approval for a new LVP system and a new software system called LifeShield and LVP is called Plum Duo and Plum Solo, and we're currently pursuing approval for a new syringe pump and ambulatory pump that would connect to the same IT and same system. And so we've tried to deliver a simpler, more modernized format for customers, where each of these devices is the most accurate and most precise tool but try to conserve the things that make them really standard -- making them able easy to be standardized in terms of user interface, workflow, connectivity, et cetera, with a common look and feel. And so that speeds up education, training, service, et cetera, and it's the first time we get to go to market with all of this in an integrated fashion. This investment cost more than $100 million over the last couple of years. And if we talk about why it was so important and to understand why we made it, in the pump business, you really create value in 2 ways. You create value by refreshing our own installed base of existing pumps either with more valuable technology or with new software tools and other things that revalue the installed base itself or we take competitive share gains. Having the full line portfolio gives us the best opportunity to compete in the very situational things that have gone on in the pump business today with a bunch of decisions that finally were sort of in the fourth quarter of the game where customers have to make a decision on what they're going to do with infusion pumps. Longer term and the bottom point, and I'll take one little slide on futures. This business is still kind of a razor and razor blade model, and we want to migrate that more to analytics and software and very few medical device companies have been able to make transition. But as we think about it, and this is future, this isn't here today, the infusion pump is the most prevalent wireless device in the hospital probably besides the mobile devices of the staff for the hospital themselves. And these pumps are delivering critical medication every day, and that real estate is important. And over time, we see an opportunity to deepen the clinical workload. So this will be a stepped approach. These pumps today do what used to be kind of higher end stuff is now table stakes basic bidirectional connectivity with data, populating an EMR, EHR, et cetera. Over time, we want to add that more connectivity to home care with the CADD pumps at home. Over time, we want to see is there more decision support that can be offered with ventilators, anesthesia equipment, et cetera. How do we get more into the clinical workflows around that. And then the holy grail is these closed loops that people talk about that take a long time to materialize, but there will be a time and place for that. And so I think we have some very clear opportunities there. And fundamentally, they're back to the same drivers we've talked about on that slide, which is how do we add more safety to the system, right? These are all just different words for safety. In the consumables area, we hint around on our earnings call, we have innovation going on there. We were trying to figure out how to just make it really clear what our consumables innovation is. And our consumables innovation is predicated on 2 things. And this business, again, has grown 5%, 6%, 7% a year for more than half a decade. Our innovation here is centered on improving patient or clinician safety and it's making clinical efficacy or workflows easier. And so that's -- on the safety side, that's using up your medication. It's minimizing hazardous drug exposure, it's reducing infection risks, reducing ripping out catheters, et cetera. On the clinical side, it's driving standardization. And really, it's about closing the open holes in the infusion system. And so it's taking the legacy parts and pieces of ICU Medical and attaching them everywhere it makes sense to system or make management of adverse events easier within that system. And that can be a dedicated pump set cartridge. That's the original genesis of the Abbott ICU Medical historical relationship 30 years ago, that bottom left picture to taking those parts and pieces and putting them on what was a Smiths ambulatory dedicated set, Hospira infusion bag, a closed system catheter everywhere we can add the value and drive standardization we're trying to do in infusion consumables, and this now is over a $1 billion business for us. Okay. A little bit on financials, and then I'll wrap it up. In the darkest day -- so all these things need to make their way on to the P&L. In the darkest days post last acquisition, I think we hit 34% or 35% gross margins. We said we were underearning at that time probably 500 basis points, and we should be a 40% gross margin company. We then created the joint venture with Otsuka Pharma that raised that 40% target to 45% in our mind. So that was a 500 basis point improvement with the solutions JV. With tariffs, there's a 200 basis point hit to that target, so that's kind of adjusted for tariffs to be at the 43% range. At our most recent quarter, it was 41%. And so we still think we have 200 basis or so to go of gross margin improvements. The second point is we need to get back to our historical expectations of free cash flow versus net income. And there's lots of areas of improvement for free cash flow. Tariffs are a huge area of cash consumption at the moment. We have spent a lot of money on restructuring costs that should be decreasing. We have spent a lot of money on quality remediation. It should be decreasing. And all of that leads to gross margin expansion. The bottom part of this middle slide basically is saying if we've made all of that innovation, we may have some assets we are interested in divesting. We didn't skimp on innovation or CapEx. We don't need to do a lot of external M&A we're close to achieving our target leverage, which is on the right-hand side of the slide. And if we achieve our target leverage, which is about half a turn away from where we are right now, the goal on a thinly traded security, where we protected the share base is to return to shareholders after the work of putting all of these assets together. And so I think we have a very clear view in our mind what the capital allocation plan for the company should be. And I think we're very close to achieving it. And it's admittedly, it took us longer than we expected and wanted to get here, but we're here now with the products about to turn the corner on some of these items. So in summary, why invest in ICU Medical. I think we're at an inflection point of new product cycles on the pump side, consistent innovation on consumables. Improving financials and then a couple of wildcards that may or may not happen, specifically the product cycles that I talked about really Plum Duo Plum Solo, the Medfusuion 5000 syringe loss launch software opportunity, consistent consumables growth. We're exiting this period of difficult merger integrations. We've improving gross and operating margins. The synergies are being realized. And so that it's -- sometimes it's a scary word, but we absolutely are seeing situations where we walked into a customer that we picked up from the last acquisition, selling them ambulatory pumps or syringe pumps and then be able to convert that customer into an LVP full-line account and vice versa. That's very valuable. We're bringing those quality issues to resolution. Cash flow has been improving. If you've been seeing our results, EPS has been growing. Our costs don't really change that much. And so there's a lot of leverage on revenue growth. Debt levels are getting where they need to be, lower cash consumed below the line. I know a lot of people don't pay -- we pay a lot of attention to what gets thrown below the line because it's real cash, it can pay off real debt. And then there's some optionality on what do we do on capital allocation and/or capital return if something is to be monetized. We're close on target leverage and tariffs, obviously, are a wild card with what's going on out there. So it's an interesting time for the company. We think we're at a very, very close moment to realize the potential of all the things we put together and happy to answer any questions, and thanks for your interest in ICU Medical.

Maybe I can start off with the first question. So big picture wise, do you feel the company is out of the woods with -- on the challenges, so to speak, from the Smiths Medical acquisition? And if so, what would be the proof of that?

I mean I think we've just spent the last 20 minutes trying to make a case for we're getting out of the woods. We're almost out the woods. It's not fully there. I think there are -- in terms of the things that are still behind us, while we believe we have satisfied all the requirements for the warning letters that were received by Smiths and then us subsequent to the acquisition. We don't have them lifted yet. So that needs to get done. It's not a commercial impediment nor is it so much of an economic impediment anymore, but it is a bit of a black cloud we would like removed and maybe affect some things on the strategic side. I think that's one remaining item and we need to sort of fully finish the IT integrations for the rest of the world. That hasn't been done yet. But operationally, I think most items are out. And then I don't know what you call tariffs, tariffs are more macro item from this year, but that's something that's consuming us too, but it wasn't necessarily related to the transaction. The transaction-related things outside of what I mentioned, I think we're mostly clear.

Maybe I'll ask another one. What does ICU Medical believe it can grow market growth rates?

Yes. I think ICU Medical has demonstrated for at least the last 7 or 8 quarters that we've been growing above whatever people call normal hospital census. And in the presentation, we were trying to say in all markets, there's growth. You may have to create them, you have to find them, right, but there are pockets of every market that are moving faster. And to make sure our portfolio is adding value in those areas. And so if we pick some spots in the consumables business, there are spots with dialysis or home care or oncology that are growing faster, and we have healthy portions of our portfolio there. In the pump business, there are ambulatory infusion in other areas of software that's going faster. We're either there or trying to get our portfolio [ there ]. And then we have some very -- that's what we're supposed to do every day. And then our situation is unique because a lot of weird stuff happened the IV solutions and IV consumables business that has led to some changes, and there's a lot of things going on in the pump business on top of that. And so yes, there's baseline growth. We should do better because we're taking share. We should do better because we are trying to tilt our portfolio growth areas. And then there's these kind of unique macro things that happen in each one of those segments.

Okay. If we don't have any more questions from the audience, I think we can wrap up the session. Thank you very much for...

Thanks, Rohin for having us. I appreciate it. We'll hanging around. We've got time. Obviously, We'll hang around if anybody has anything you want ask privately, feel free to grab us. Thanks very much for the interest, folks.

Thank you.