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

Hi, everyone. Thanks for joining us today. My name is Lili Lozada. I'm part of the med tech equity research team here at JPMorgan, and it's my pleasure to introduce ICU Medical CEO, Vivek Jain.

Good afternoon, everybody. I want to say thank you for the introduction and our inclusion in this great conference. I'll make the same joke that I make the last -- made the last 2 years, which is when you've spent more than half of your years in earth attending this event, it's kind of amazing and I see people in the back of the room who have been here far longer than I have. So it's good to see a lot of familiar faces. Thank you for your interest in ICU Medical. We want to do a couple of things today quickly, really first, to people who are new to the story, give an introduction. What are we? Why do we exist? What markets do we participate in? Why do we have the right to win? How does our industry structure work? A little bit on our businesses at a high level on the most differentiated businesses we have, why do they compete well? How are they positioned? And then really, what all of us care about collectively? What are the core value drivers that can deliver growth in the business and create value for employees, customers, shareholders, et cetera? So at a very high level, we are a focused infusion therapy company. And so what that means is we provide all the components to effectively deliver drugs from a hardware IV Solutions and IV consumables perspective. So if you think about that at a very basic level, we participate in the plumbing in a critical care environment. We make the water, we make the pipes, and we make the motor that delivers either IV fluids or fluids mixed with drugs into a patient. In each of these markets, we have a strong position, which we'll talk about in a second. And for us, they're sort of ranked there on the left side of the page, most important to least important. And so consumables is the core of our history and our original business at ICU Medical. It's where we make the majority of our cash returns and it's where the majority of our innovation was driven historically. And it's the reason we find ourselves here today where we had to step into a distributor we had for our consumables business that made us a much larger company. This page goes through a little bit of our markets and our competitive positioning. And really what matters just as much is the underlying characteristics of the market. And so kind of moving left to right from the top of that infusion chain down. In the IV Solutions category, we're the #2 player in the United States. In the consumables space, which is the combination of IV sets, IV connectors, IV oncology, closed system transfer devices, we're the #1 player in the United States. In infusion pumps, the motors, depending on how you count, we're the #2 player. We have a little bit more outside of the hospital, one of the competitors a little bit more inside the hospital. And in the emerging category of software, we're the #2 player. We have a strong lineage here. We're actually innovator and the company we bought lost its way a little bit. We're getting back to being the innovator in that area. And each of those categories has different dynamics in terms of their growth rate, how they function relative to the competitive set. And what's important to us is that there are large pockets in this puzzle that are new categories that are still being created. And so the oncology market, which is just a fancy way of saying expensive plumbing for hazardous, dangerous drugs or the software category around pumps, are emerging markets that will be hundreds of millions of dollars that have yet to be converted. So there's headroom for us to go down. And some of the things we spent a lot of time talking about over the last 2 years, IV Solutions, et cetera, the commodity-oriented products, there isn't the same headroom, but they're mature markets that once kind of normalize from a production and demand standpoint should be stable and well performing, well behaving. A quick snapshot on our financials. The point on the left is really -- we have a relatively for -- well, the things we've been through, we have a relatively clean balance sheet, still no debt, a couple of hundred million dollars of cash. Most of our business, most of our value is in the U.S. Though, for a company of our size, we have a large proportion outside the U.S., about $350 million of business. Most things we sell are under $5. We're off people's radar screens. And the vast majority of our business is single-use disposables. And so even in our pump business, the business itself from a revenue perspective, largely runs on single-use dedicated disposables through an infusion pump. And so hardware is a very small portion of our business relative to single-use items. If you're new to the story, it's been kind of an interesting journey. This is a chart of our EBITDA. We haven't given EPS guidance for '19 over the last 5 years, but essentially, our EBITDA and our EPS sort of nearly quadrupled over a 4-, 5-year period. Our shares outstanding went up 17% and our cash balance remained the same. And so we did a number of things that created some value. It's interesting, anecdotally and historically, but it's -- we'll get to why does it matter and what happens from here? The first part of the act was sort of from 2014 to 2016. ICU was a quasi. It was a public company, but it was essentially a family company at some level. And there was a base amount of work needed to kind of get back to solid commercial execution, diversify our customer base away from a single customer, we had Hospira. And we undertook some commercial execution, and we undertook some warm up M&A on smaller deals just to start the wheels in that. From 2017 to 2018, we stepped into our customer, Hospira. So a company called Pfizer bought Hospira, decided that this line of business was not core to them. 1.5 years after their purchase, we bought the business from Pfizer. Hospira represented 1/3 of the revenues of ICU Medical and probably 50% of the profits and so we had to essentially step into -- the analogy I use, we were making brake pads for the car company. The car company was going to go out of business, we were going to suffer, right? And the only way to do that was to step into it. We, as a team, came out of the infusion industry, came out of the market share leader in pumps, so we felt some degree of confidence that we understood the circumstance. We got incredibly lucky with some tailwinds, and there's some bad things that happened in -- from an environmental perspective in Puerto Rico and other spots, led to a national shortage in IV Solutions. We had bought the business, holding hundreds of millions of dollars of inventory. We flipped that inventory into cash, and it gave us a reason to have a decent customer dialogue. We rebased our cost position. We started to integrate 20, 30 different countries around the world. And we felt continued losses from the actions that had been undertaken at Hospira many years prior. The most recent period, it flipped on us a bit, and we made our numbers for 21 quarters in a row. And for the first time last summer, we had to change our expectations. And the IV Solutions environment had flipped from a shortage environment to a surplus environment. And we always knew it was going to happen, but it flipped to a surplus environment even resulting in demand below levels prior to the shortage, which surprised us. We undertook a massive U.S. cutover. So the M&A deals, lots of legacy IT systems, ERP, et cetera, we actually integrated all of it into a single global instance of an underlying system. We began to stabilize our business, and we continue to feel some of the tail of the losses along the way, but it's been an interesting ride. And as much as last year was difficult, we reflect on and say relative to where we started and the uncertainty we had around our customer risk, the ability to mitigate that in the way we did, we feel good about it, and value was created. Our challenge now is to prove that we can grow the businesses we have and continue to allocate capital responsibly. From an industry perspective, and then I'll kind of stop the industry -- stop the overview portion on this. Industry structure, some of this is repetitive, very consolidated industry structure, hard-to-reproduce manufacturing assets. Most people don't want to move these categories. So the market share is very sticky. There are some regulatory tailwinds in oncology. Closed system transfer devices have a mandate to be used, it's called USP <800>. There is a conversion to pumps in some of the international markets, and there is an emerging software opportunity on the pump side. And so it's a new category creation in software, closed system transfer devices, new value creation in certain geographies around the world. From a company perspective, we are the only pure-play infusion therapy company. We hold the #1 global market share in consumables, which is a very high-margin portion of the infusion area. We have a number of products that Hospira -- that we acquired from Hospira; the pumps, in particular, that used to be the #1 market share leading product that lost their way. We have a commitment to innovation. We have not skimped on a dollar of R&D since the day we bought the business. We have a clean balance sheet. We've made CapEx investments. We're deeply vertically integrated. And we have been -- if you read our proxy, we have a set of incentives and compensation structures aligned with shareholder interest. And so that's the story of who we are, how we got here, what markets that we play in. A little bit on our businesses, and I'll talk primarily about the consumables business and the pump business. Our consumables business is really all about brand, safety, portfolio breadth and having the right product for the right clinical use case. And so ICU was an innovator here with the original MicroClave or Clave family of products. And we conserve that core technology, the way it feels and is used by a clinician or nurse and applied it to each clinical setting, whether it was the NICU or the PICU or CC or whatever it may be. And we took those key components and integrated them into sets to use cases that lined up well with the way the customer or the hospital wanted to run their practice. That led to our market share position we have today. It took 15 years to get. The vast majority of nurses in this country and around the world are trained on our products. And the brand and the supply and reliability kind of speak for themselves. That's why we exist. And it's been a share position that our competitors who have different share positions in -- on the bookends of the category have tried to take. We worked at the -- our team worked at one of the primary competitors, tried for years to take this share and was unable to, right? So it's something we believe in from our manufacturing cost, quality, safety, brand, regulatory, et cetera. Our pump business, which we call IV systems, is really about our Plum 360 pumps; that is the vast majority of our system's sales. There are multiple pump modalities in a given hospital. The most valuable from an economic perspective is the LVP or the large volume parenteral pumps. The Plum pumps, invented by Abbott originally, became Hospira, became Pfizer, became us, were #1 share infusion pump in the country for many years. Hospira was the innovator on IT. And the things on the right-hand side of the page, which really matter, interoperability, the ability to connect the pump to the pharmacy to an EMR, which is sort of table stakes, the ability to drive better outcomes, better safety and better medication utilization via the data you're getting out of that is going to be the value over time. And the business model needs to migrate from what it is today: selling a box, getting paid on layaway, essentially through a set of disposables, to selling subscriptions and selling software when those products make their way into the market. Like any hardware market, it needs to evolve from the current model. And there's a deep wrap or just like there is for any other market of professional services and clinical integration that sits around. And so the infrastructure and the barriers to entry for somebody to walk into the pump business, new entrance is very, very difficult. The reason the product was #1 was along the themes of really value in safety and security, value in interoperability, value in safety, patient safety and cybersecurity. And the company lost its way from marketing around these concepts. And now there's been a number of independent external validation of -- external validations of the 360 that speak to exactly these issues. And so the #1 hottest topic right now is cybersecurity and the standard is UL 2900. The Plum 360 is the only infusion pump that's UL 2900 certified. ISMP, the Institute for Safe Medicine Practice -- Safe Medicine Practices, just talked about the right guidelines for a smart IV technology. The Plum 360 fits squarely in that with the ability to manage air-in-line alarms, concurrent delivery, secondary delivery. KLAS, which is a rating agency that's used a lot in imaging and other areas, ranked the Plum 360 as the #1 interoperable pump. And ECRI, a safety agency, ranked it as a 5-star safety rating, which is the highest of all infusion pump vendors. And so as much as market share has been lost over the number of years for Hospira, it's taken us 2 years or 3 years to get back to having these validations and time and seat and sales at the customer site explaining the value of the technology, and we're starting to see progress. So that's a little bit of why we exist, what's the basis of competition. And then I wanted to talk about what are the specific value drivers that from an investor perspective are interesting to believe that we can grow the company. The first one I want to talk about are these closed system transfer devices or oncology. And the simplest way to think about this is more expensive plumbing that sits between hazardous or dangerous drugs. This market was nonexistent in 2007. It's approaching $100 million of business for us. And the growth rate over the last year or 2, since we launched the ChemoLock product, has really been accelerating. So the core business today is really around these single-use plastic items that help you prepare a drug either at the bedside or at the pharmacy to make sure that not a single drop is vaporized in the air, inhaled, spilled on a patient, spilled on the clinician. Over time, the value driver for this segment is to expand from the plastic parts into an integrated offering that adds value to that drug the minute it enters the hospital environment. And so for us, that means adding these components to an automated system in the pharmacy to help preparation of the drugs, tracking, tracing of the drugs, validation of the right mix, and connecting it all the way through the pump set on the floor to make sure the system is closed throughout its entire delivery process, right? That's a message around safety. That's a message around workflow, that's a message around drug utilization, that's a message around efficiency. And so this is all in the context of that driver of USP <800>, which is the guideline out there saying that hospitals need to use closed system transfer devices. This market is probably 60% converted today. It's a multi-hundred million dollar market with 2 main players. We believe we have the preferred product. So there's still a lot of whole cloth of new market creation to follow. Second important value driver for us in our consumables business. We have a basket of products that we sort of call specialty consumables, which are niche applications around the core. In November, we acquired a company called Pursuit Vascular. We had some products but not necessarily the right products in the dialysis arena. Pursuit Vascular was a product that got us into a better position on serving large dialysis operators who needed catheter maintenance done at a better level than the product we offer was doing. We acquired Pursuit. It's one example, the SwabCap products of family -- the SwabCap product line and others in the specialty consumables bucket. I would think about this as the -- first, there's oncology in our consumables, and the second is the specialty consumables, which is the niche basket. Those 2 businesses drive above-market growth. And then combined with the rest of the portfolio, help us get back -- help us help our consumables segment get back to what normal growth was for many years prior to 2019. Third value driver in our mind is stopping the bleeding, stabilizing and growing the pump installed base. This chart is essentially why ICU had to buy our customer Hospira. Our customer lost 50% of their market share over a 7- or 8-year period. All of that value accreted to what is now the #1 market share player competitor. And the drivers of that decline were really around bad manufacturing, bad quality systems and then -- and not a deep understanding of the commercial landscape. None of them were about the product not functioning well. None of them was that the product not being liked in the clinical setting. We buy the business in 2017. We start fighting, holding our share, getting the external validation. And we finally got to a place in -- towards the end of '18, early '19, we felt like the share losses had stabilized. And I have a joke a little bit. Everybody who asks -- who knows us is -- all the infusion companies say they've been taking share. And we said, "Well, we haven't been taking any share." I was like, no, we're all winners. We're going to say we're taking share, too, right? We think we took 1 point of competitive market share last year in the channel. We haven't implemented it yet, so you won't see it in our P&L. 90% of what's reported in our Infusion Systems business is our LVP business. There's 10% that some of the smaller products where we have some different challenges going on. We don't know if there'll be enough growth in the LVP installs to offset some of that, but fundamentally from an intrinsic value perspective, the #1 value thing we can do is to grow consumables. The second most valuable thing we can do is to grow our pump share. Those 2 things represent $800 million of our company. They're the most differentiated items we have, as we showed earlier. Next one from a value driver perspective is there's been a ton of volatility in IV Solutions. And I think the short story today is we believe it's stabilized. We see good behavior from all market participants. We see everybody having kind of learned what's normalcy in this market. And from our standpoint, what happened is we bought the business in early '17, shortage hit 6 or 7 months after we own the business. We had an unbelievable amount of positive momentum behind us because we were outselling our production levels. And we were hustling up production every day that led to a lot of positive variance for 1.5 year period. As the situation changed, it changed very quickly. And all of a sudden, we were underselling our production levels. And it's a fixed cost manufacturing business. And to take action on that, you have to intervene and that intervention leads to a lot of negative variance that now burdens P&L, and that's what we talked about last summer in our revision. We absorbed a lot of hits in that negative variance time period where we had to adjust our production. We had to -- we went from a position in this country where you couldn't buy the product in the open market to all manufacturers destroying inventory. We addressed some of the negative cost absorption, then we absorbed some of the commitments that were residual to Pfizer ramping up when we did the deal originally. If that's all kind of in the rearview mirror, what do we believe today? We believe that what we talked about in our guidance is accurate and that the business is more stable. We believe we hold the highest quality customer book we've ever held. We have more committed units under contract than we had when we bought the business, but at a lower ASP. And we have the lowest percentage of noncommitted, which is normal business, just buy/sell business that we've ever had, down to mid-single digits. And so that gives us a feeling of stability here. And so our formula is if this portion of the line can stay stable, and we talked about what we can do in LVP and consumables, that's sort of the formula for the company. Last value driver is care is being delivered more than just the hospital. And so ambulatory settings, surgery [ centerings ], post-acute, each one of them has its own unique actions. One of the things we learned at Cardinal, where we started CareFusion, et cetera, was maximize the value of each class of trade. And we believe we have a product set that's broad enough, robust enough to penetrate each one of these areas. And you can't sit here -- and the disconnect I have is every one of these companies at this meeting, presents and says, "Well, I'm going to grow 5%, 6% to 7%", right? You go to these big hospital systems, right? They're on their own track and don't have time to spend with them, but they're all saying, "I've got to cost down the environment next year", right? And so how does that all hang together over a long period of time? Again, we -- most of what we sell is very low price. But it's not just the hospital environment you can count on over the long term, right? And so we're thinking about that strategically. So I'll close with, I mean, the value drivers have been the same for 2 or 3 years. We've talked about here as it relates to the industry, good industry structure, hard-to-replicate manufacturing assets, regulatory guidelines in our favor, some international stuff in our favor, new category creation on software. For us, there's not a lot of pure-play companies. The customer understands the value of a focused player. We hold the #1 market share. Each of the competitors owns the #1 spot in one of the subverticals; the one we hold is very valuable. A clean balance sheet that we know how to deploy, and we've made a lot of our CapEx investments. We need to get back to our regular free cash flow generation. And so from our standpoint, we need to re-earn our right to deploy capital. We need to prove that we can grow our differentiated businesses in IV consumables and the LVP pumps. We need to find stability in our IV Solutions line. We have to get our costs in line and our supply chain and manufacturing plans for the revised view of production on solutions. We got to get back to free cash flow generation. We put a lot of cash in our balance sheet. We quadrupled the size of our business, have no debt and have the same amount of cash we started with, because of what we were able to generate. We need to get back to that. And we need to deploy capital successfully, which we have a track record of being able to do. So with that, we'll pause and go to a breakout. Thanks very much on a Wednesday afternoon. Hope you have a very good conference, and thanks for your interest in ICU Medical.