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

Good afternoon. I think we'll get started. My name is Jayson Bedford. I'm one of the medical device analysts here at Raymond James. It's really our pleasure to have with us the CEO of ICU Medical here for the 41st Annual Raymond James Institutional Investors Conference. Vivek, I think you've been coming here at least 6 years with ICU and perhaps more than that with another firm. So with that, I'll hand it over to Vivek. Thanks.

Thank you, Jayson, and thanks to the folks at Raymond James for having us. I think it's my seventh or eighth year here across 2 companies. And I was thinking looking outside today, like every year, I've said, I'm going to bring my kids and spend the weekend here. My kids will get out of the house. And I've never once brought them here all these years. So that shows you what I've been capable of. Thanks for attending. We were nervous on attendance so we really do appreciate it. I'll spend a little bit of time today. And what's great about this conference for us is we meet a lot of folks who aren't in the health care industry day-to-day. We meet more generalists, which is great. And so I'll try to go at that level. And then if there's questions, I'll do it quickly. And if there's questions more specific to health care, we can come back and go through it at the end. You can read our safe harbor statement at your own leisure. We really had 3 primary things we wanted to cover today, an introduction to what is our company, what categories do we participate in. A little bit more detail about our individual businesses. And then lastly, what are the value drivers? Because fundamentally, for us, we've been on this interesting journey, which is less relevant today of integration and M&A story, but now it's very much about growing our businesses. And that's why we want to spend time on what are the components of growth and what really creates value over the long term. The simplest way to think about ICU Medical is we are a pure-play company in infusion therapy. And to think about it at a generalist level, it's the plumbing in the hospital and critical care and ICU environment around medication delivery. And if you think about that very simply, there is water IV solutions or water mixed with drugs that hang off at the bedside of a patient. That's our IV Solutions business. That water or fluid goes through a pipe. That's our consumables business. And that pipe attaches to a motor or a pump, which pulls fluid down through the pipe and into the patient, which is our IV systems business. The most valuable piece of real estate for us historically and largely continues to be the area of pipes that are closest to the patient because just like your plumbing system at home, if those pipes get stuck or blocked, bad things happen, right? And so our total business is about 40% consumables, equally split amongst our IV Solutions, the fluid and the pump business, and there's a bit of history in each of these segments. For many years, our company, ICU, was the primary pipe consumables manufacturer, and we relied on a company called Hospira to be our distribution partner, would sell our products alongside their pumps and their IV solutions. In 2017, we had, for a variety of reasons, we had to step into our customer and we became a fully integrated supplier. In each of these markets, kind of working our way down from top to bottom, we have a #1 or #2 share position. In the IV solutions market, we're the second-largest producer in the United States. It is a more mature market. It's probably $1.5 billion in market size. Our core and original business was on the pipes, the consumables, which are the needlefree connectors, the integrated IV sets. That's $1 billion market in the U.S. It's mature, but it's still developing subsegments, which create a lot of value. Adjacent to that is what we call IV oncology or closed system transfer devices. The way to think about that is just really expensive plumbing for use with hazardous drugs or dangerous drugs. And there's been a mandate for a number of years in this country and around the world to make sure that if you're spending X thousands of dollars on a drug that it's frankly delivered safely for everybody who interacts with it along the way and fully. The next business is the pump itself. We are either the #2 or #3 player in the large volume parenteral pump, depending on how you count. It is a market that is very much about taking share from the competitive environment in the United States. In certain spots of the world, it still is a growth category, but it moves us towards the most differentiated things in our portfolio where that pump, the software, which is the emerging category, the EHR interoperability, we have been one of the innovators there. That is a category that's new and being created and drives a high degree of differentiation over time and it helps us change what that business model is. And so the left side of the page is what I would call kind of most commoditized. The right side is most differentiated. And we have a couple of markets between the closed system transfer devices and the software pieces of the pump business that's really new category creation, which is the most valuable. For those of you who don't know us, just a quick snapshot. We are roughly a $4 billion enterprise value company, 2/3 to 71% of our business is in the United States. The balance is outside the United States. Just about everything we do is a single-use product, whether it's an IV solution, which inherently is a disposable or the disposables from our original consumables business or the majority of the IV systems business is a dedicated pump set disposable. With the exception of the pump itself, everything we sell is under $5. And at the end of the day, we're a high-volume manufacturing company that's had the privilege of working in a lot of these health care markets where we've been able to innovate and drive better outcomes by integrating these devices together. A little bit on historically. We've gone through sort of 3 periods at the company. I joined in early '14. A number of other people from a place we worked before came in over the next number of years. And we have had sort of 3 parts to our journey. ICU was sort of a quasi-public family company in 2013. It fell on hard times because its primary distribution partner had stumbled. That was Hospira that I mentioned. And it had a Board and founder kind of associated with it that probably didn't have a great understanding of what was really driving the returns underneath the business, had overinvested in some of the wrong areas, et cetera. I joined, a group of people came, we sort of revamped the core business. We focused on our commercial execution. We started to diversify away from Hospira as a customer. When I got there, I think Hospira was probably 50% of the revenues and 95% of the profits of the company. Over the next number of years, we got it down to half-half, our valuation increased on the other hand. We also did some warm-up M&A, some smaller transactions, accretive transactions with large private companies where we split assets and put things in different places. In 2017, mid-2018, in early 2017, Hospira had been sold to Pfizer corporation out of New York. We made a deal with Pfizer and bought our business back from Pfizer to solve our customer concentration risk. We shortly after the purchase benefited from a shortage in the IV solutions area. And that allowed us to fund a pretty complicated integration. We rebased our cost position. We integrated probably 20 countries around the world. Business came with no general ledger, no IT system, no basic operational processes, and we built everything from scratch. And during that time, due to the shortage of solutions, we're able to handle a lot of things thrown at us, which is continued loss of the share in the pump business and some other areas. Fast forward a little bit more to today, we made our numbers for 22 quarters in a row. We're very good about putting cash back on our balance sheet. We hit some bumps last year as the solutions unwind happened where that market went from a shortage environment to a surplus environment. We had a massive U.S. cutover of our IT systems. We did begin and have today fully stabilized our businesses, and we continue to feel some of the legacy runoff of the pump business, which has changed today. And so really, that's the journey we've been on. A lot of stuff now at this point is behind us. And it's very much about, if you listen to our call last week, how do we grow our business. How do we improve our commercial execution. How do we grow our most differentiated stuff with the pieces on the right-hand side of that chart a few pages ago around IV consumables, closed system transfer devices, software and pumps and how do we show stability in our more commodity-oriented businesses of IV solutions. That is our short-term focus. Lastly, from an overview perspective, just how the industry works. It is a consolidated industry structure. The manufacturing assets are hard to reproduce, costs hundreds of million dollars of CapEx to walk into the U.S. IV solutions business. Certainly, dozens of millions of dollars to walk into the pump or consumables manufacturing. We are benefiting from some unique industry events that provide some tailwinds. There are recurring revenues associated with a lot of our product lines. We do have some regulatory tailwinds also in our oncology business. We've said that here for a number of years. The international opportunity continues to develop. And the move towards software and transcending the pump at some level is very much on our minds, but we need to grow share first and prove that in a real way before we spend more time talking about that. From our perspective -- that was the industry. From our perspective, we are the only pure-play company that can really connect the infusion world all the way from pharmacy to nursing. Each of the big players owns a different piece of the market that we went through in a #1 share position. We have the #1 share position in the consumables portion of the pipes. We have a lot of high-quality products, meaning our pumps that used to be the #1 market share product were mismanaged along the way, fell on regulatory problems or self-inflicted problems and lost their share position. We have had a commitment to innovation and continue to demonstrate that. We have a reasonable balance sheet. It's unusual for doing this transaction that sort of supersized us 4x. We have no debt and we have $350 million, $400-ish million of cash on the horizon, and we made significant CapEx investments into our factories. CapEx has been approaching $100 million a year for the last number of years. At the same time, we were funding a lot of this integration work. So a lot of that CapEx stuff is now moving behind us and put us in a good place in the environment with a lot of the regulatory and kind of operational challenges others have been holding. And then lastly, we believe we run a company where our incentives are very much aligned with shareholder interest. If you read our proxy, it's very self-evident about how we have compensated the team the way we think about performance, et cetera. And I think we're an outlier in that when you look at a lot of folks in the industry. Okay. A little about our businesses. I'll just go quickly through them, right? The consumables business, our largest business, is very much started and continues to be around the core needlefree connector called the MicroClave and its derivatives along the way. We've innovated here around each application area that these connectors may be used in and delivered them to the customer exactly in the format that they want to use them, and that's been unique to us. And so we can have a conversation with a hospital system or a customer about their specific workflow, their clinical preferences, their setup and can turn these types of products for them very, very consistently. And from a standardization, which leads to better outcomes, each product is used the same, feels the same, torques the same way, has the same feel in somebody's hands. And we've conserved the core technology all the way through the basic IV connector family. The way we think about this business is it really is the Kleenex. It's the brand name in the connector space. And there's more patient days in the history of mankind in our sets and connectors than any other brand. The pump business, for us, we have 2 primary modalities of pumps. And in the infusion pump business, the most valuable modality is the large volume parenteral pump, the LVP pump. That pump is a large user of disposables, dedicated pump sets that run through the pump. And we also have a PCA analgesia pump which has its own dedicated morphine and/or empty syringes. That's the hardware on the left-hand side. Our business model in the pump business is to connect those devices into the hospital via a combination of software, professional services. And because we were the small guy, a mindset of being open-minded to who we have to connect with. So a lot of the larger industry players really focused on IT supplier #1 or IT supplier #2 into the hospital environment. We had no choice but to say, we're going to connect with everybody, right? And that gave us more flexibility around the world. It also made us more kind of customer user-friendly to get the business turned around. And so there are pieces of the software business that I would call table stakes where it's just going to be the bare minimum requirement to provide the product. And there's pieces of the software development that are going to be more innovative, that people will value differently to change patient outcomes. And ultimately, I think for all the manufacturers, the notion of saying, the business isn't going to be exactly the same as it was where you buy a box and you pay with layaway on the disposables. Ultimately, it's going to be around more subscription, guaranteed uptime, the things that matter when you're buying a piece of software and the box is the kind of last-mile delivery in that equation. Our pump business is incredibly important and why we, frankly, had to do the transaction. ICU had a distribution partner in Hospira that was losing its pump share and ICU sold parts that went on every single one of those dedicated pump cassettes. And if we lost share, it means it undermined our whole manufacturing existence in our core consumables business. That's why we had to step into the transaction. We've spent the last 2.5 years getting back to the things that actually made the pump business the market share leader when it was 10 years ago. And it's fundamentally about patient safety. It's about driving better outcomes. And for us, there's a variety of external validations that we've been working really hard to get. These 4 are probably the most important. If you want to do work on it, you can find them publicly. The topic of cybersecurity, if you've read any of the articles that are on Wired or saw what happened in the U.K., it's a very, very hot topic. We have the only certification on cybersecurity from UL labs, who's trying to develop the emerging standard in this category and has partnered with the FDA on the topic. There was important guidelines issued last week from the Institute of Safe Medicine Practices (sic) [ Institute for Safe Medication Practices ], which is now part of ECRI, around the best practices for infusion delivery in the United States. And it states that use of an automated pump for secondary delivery was the most optimal way to deliver medications. Our Plum pump is the only pump that can provide automation in the secondary line. Interoperability, so the workflow to be able to connect to Epic, Cerner, all the other vendors we talked about and people satisfaction is rated by a group called KLAS. We won the best interoperable pump for the third year in a row. That happened last week. And then the ECRI Institute, which is the patient safety institute, which some of our other products maybe aren't ranked where we want them to be, on the Plum pumps, we received a 5-star safety rating. And so no single item here carries the day. It's the confluence around workflow, safety, security, reliability, FDA status, et cetera. And so there's been a lot of developments in this market lately, and our team comes from the industry where we've been in it for more than a decade and have lived through a number of these FDA challenges, and we think really have a reasonable understanding of the landscape. So that's really our 2 differentiated businesses that we are focused on growing. To talk a little bit about the value drivers in the company, the first one we talk about is oncology. And so closed system transfer device, what does that really mean? Because that's been the line within our consumables business that's been the fastest growing. It's essentially a piece of pipe and plastic that make sure when you pull a hazardous drug or you deliver a hazardous drug, no bit of vapor release happens to the patient or the clinician that's dispensing the medication. And for us, this has been a product line that's been growing anywhere from the first couple of years at 70% a year clip, settled into the high teens the last few years for us, really important in our overall company's growth picture. It's been driven largely by a regulation called USP <800>. That regulation was adopted on a state-by-state basis, has been pushed out in certain states. We didn't really feel the material impact of this. Our challenge here has been we've been backed up a little bit on production constraints because 2 years ago we didn't know whether we were going to buy our distributor or get fired from our distributor. It was difficult to make the capital choices into the plants. It was clear what happened and we made the right choices since then. For us, the differentiator around this oncology segment isn't just our legacy and history of selling products that attached on the floor to the patient in the nursing area. For us, it's about adding value to the drug earlier in its life in the hospital environment. And so whether that's through automation, pharmacy-oriented products around closed systems or connecting those closed systems to the actual pump set itself and making sure the entire story of safety and closed medication delivery happens in the environment, they're all important as it relates to improving efficacy or maximizing profitability or delivering more safety in the care environment. So kind of big growth driver #1 in our biggest business is oncology. The second growth driver in our biggest business is there are a bunch of niche areas inside that consumables business that have the unique opportunity for growth. And we made an acquisition last fall, was a different kind of acquisition for us and a more growth-oriented acquisition of a company called Pursuit Vascular. Pursuit participates in the dialysis connector area. We had a very nice dialysis connector business. We lost our way of it, got usurped on the technology or some IP a decade ago and took us a while to get them there. But it gives us an opportunity not only get our business back, but to continue to grow in the category as dialysis and whether it's HD as currently envisioned or what the product does today or maybe what PD will need for a cap or even the application of some of these technologies that we acquired into our core consumables business. The combination of this plus our SwabCap product plus some of our catheters, we call a little specialty bucket, that's another area of growth within our consumables business. I think that we were -- so that's consumables. Let's move to the other differentiator, the pump business. For a long time, we were incredibly reticent to talk about growth in our pump business until we were certain that we're able to stabilize the core book of business. For many years or a decade, 7 years, again, 7 years on here, share went in the wrong way for the legacy Hospira pumps. They used to be the #1 market share player with 35%. They had a ton of FDA issues across the pump portfolio, were subject to an import ban, unable to bring the pumps to the market. Most of that market share went to the competitor that I worked at, at the time. And they had to remove products from the market. Hospira took those actions, come out with a bunch of pricing decisions and other things on the IV solutions business that really led to their near demise and frankly, what I call, our bailout to try to turn it around. We picked up the business in '17 and started to fight, kind of added some strategic clarity on where we wanted to invest. We understood what our value prop was commercially, and we got the right people because we came from the industry around the business. We had still tinkered with that a little bit, but got the right people around the business. And on our call the other day or at the previous conference in January, we said the words out loud where we think we've actually started to take some competitive market share. And we think there's other drivers, whether it's around the specialty nature of some of the pumps in oncology or just some of the things happen in the market that we feel the best about this business than we have in a long time. If you go back and correlate those 4 points I made on safety, cybersecurity, et cetera, interoperability, and contrast that with some of the things going out there, we think, even though our portfolio could use a few gaps to be filled, we're very well positioned in this business. The area of great heartburn for us for last year, but was the kind of a gold mine in the years prior to that was our IV Solutions business. We had a ton of positive variance with the shortages. We buy the business, the market went short, we ramped up production massively. We had a ton of positive variance, which drove earnings in '17 and '18, was very, very helpful to funding our whole integration. We wouldn't be having the cash position we have or have been able to undertake what we did from a systems integration perspective without this. That flipped in '18 when the market moved from shortage to surplus. We quickly unwound production that led to massive negative variance, which hurt us from an earnings perspective. Last year, we're still working through those issues, both in the supply chain and the production environment itself. And we had to intervene pretty hard last year. It's amazing the country went, at least for us, where people were calling our cell phones to get allocated IV solutions to where we're destroying product outside the factory in the course of a year. And I think that at least taught the customer base and taught the market about the value of some stability and some normalcy that existed for many years and gone away from over the last 5 or 6 years. Today, what we feel is, when we bought the business, Hospira had been fired from 9 out of the 10 largest health care systems in the country. And today, almost half of them are back with us. We feel like we have more units committed under contract than we did when we bought the business. It is at a lower price, but we're seeking stability here. And we have the lowest percentage of noncommitted business. That was business that was just made -- normal business without a long-term contract that was made in the channel and a lot of that went away, either back to our competitors who are now able to supply or because of pricing dynamics outside of the hospital committed business. But we feel and we've said in our last few calls in the last couple of quarters we've seen some stability, had a pretty predictable run rate here. And our basic formula for the company is, can we have stability here? Can we grow our 2 differentiated lines? Can we supplement with a little bit of M&A? And does that formula work to be a decent grower over time? Last value driver for us is we do think about health care outside of just the acute care hospital in the U.S. Obviously, 30% of our business is international. We're probably a little too international for a company our size because the cost to maintain the infrastructure, in the pumps, in all the geographies is expensive, but it's valuable real estate because our share positions are high in the countries we participate in. We also think about care outside the U.S. hospital and a good amount of sales for us is in the non-acute channels, whether it's before the hospital or after the hospital. And we think about each of our products participating in each of those classes of trade effectively and we believe that trend is going to continue. All of these companies in the supply side, like I said, are going to grow at these rates. The truth is there's not that much hospital bed growth, right? So you better find it in each class of trade and wherever care is being delivered. We acknowledge that and want to go participate in that. And so I would just close with a little bit of a repeat of some of the points I made before. It is a consolidated industry structure. The manufacturing assets are hard to reproduce. There are some tailwind things going on, both from a regulatory perspective and industry. We do have a high degree of recurring revenues. We suffered last year from a lot of things going backwards. If we can just have those recurring revenues, have the growth rate and stop the things going backwards, the formula looks better in a number of our businesses. There is international opportunity. Even though the markets are a little bit fragmented, you can still create value in some spaces. And this software opportunity in pumps is emerging for us. It's new. For us, we think we're one of a few pure-play companies. Many midsized device companies, not that many left, many of them have carved out -- what's different about us, many of them carved out a niche in one unique category the big guy doesn't play in or another. We have to take on the big guys in some of the categories, but we believe we have enough breadth to do that, enough competitiveness that even the customers are rallying around that. In the very valuable pipe segment, which is the juiciest disposable margin piece of it, we have the #1 share position. We believe in our product quality and our FDA position. When we bought the business, Hospira had years of warning letters and FDA open actions. We have 0 FDA actions today, 0 open warning letters, 0 recall actions on the pump business around the world. We have a commitment to innovation. We have a conservative balance sheet. We can handle the bombs that can get thrown at you from a regulatory perspective. Not easy to undermine in the customer's eyes, right, with our financial stability for all that we've done. We've put a ton of CapEx into our business, growth CapEx, vertical integration CapEx to not be relying on outside people for sterilization, parts, supply chain, et cetera. We believe in that. And we believe our incentives when you read our proxy are aligned with those of our investors. And so our view of value creation, grow our differentiated businesses, find stability in IV Solutions, optimize our supply chain and get back some of the costs that hurt us last year. We generated lots of cash until last year. We didn't generate a lot of free cash or any free cash flow last year. That was very painful. Get back to doing that again. And maybe if we're lucky, deploy a little bit of capital successfully on top. So that's the story of ICU Medical. Thanks, Ray J, again for inviting us and thanks for your interest in the company.

Vivek, I think we have time for maybe one question. We have about 2 minutes here. Can I just ask you -- and maybe if you can repeat the questions on the mic. You talked about international expansion as a vehicle for growth. I haven't heard you talk about international expansion in a while. Can you just maybe expand on that and what's the pathway?

Sure. With the Hospira transaction, we picked up direct operations in most of Europe where we didn't have necessarily direct operations before and so rounded out sort of Spain, Italy, France, U.K., Germany, et cetera. We picked up most of Latin America, and we picked up the high-value geographies in Asia and Australia. And so that, for us, most of the world's valued infusion comes out of 10 countries. And now in each one of those 10 countries, we have a fully integrated direct operation selling all the differentiated products. And I think we just never had that position before with the same team, stability in each of the markets. And on some of these categories, on the connectors, on the oncology products, those things are just scratching the surface in some of those markets. So now if you have full channel, we bought our distributor in certain countries, right? If we own the product margin top to bottom, we control the marketing, we think the best opportunity that there has been in front of us.

We'll have the breakout downstairs in Palazzo D. Thanks, Vivek.

Thanks, folks.