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

All right. Good afternoon. I think we'll start. Again, welcome to the 42nd Annual Raymond James Institutional Investors Conference that's taking place across the globe, but not in sunny Orlando. My name is Jayson Bedford. I cover medical devices at Raymond James. It's really my pleasure to have with us today the senior management team from ICU Medical. They've been long time participants in this conference. From the company, we have the company's CEO, Vivek Jain; and the company's CFO, Brian Bonnell. So with that, I'm going to pass it over to Vivek. And I just -- Vivek just make sure you're unmuted there. I'm showing a mute, so please unmute.

Here we go. Can you hear us okay, Jayson?

I can. Can you hear me?

Perfectly.

Perfect. Super. So I think we're going to do is a hybrid format. So with that, Vivek, Brian, I'll pass it over to you guys.

Sure. Good afternoon, everybody. I hope folks aren't zoomed out after a long day of virtual meetings here. It certainly breaks our streak of many years at this company and a prior company getting to go to Florida in March. And I assume for many people, certainly like it was for me for quite a while, the last business trip I took in 2020 as things were just starting to get interesting I think this week last year. We're going to go through a couple of minutes of slides here, maybe 10 minutes, 15 minutes, and leave the balance of the time for Q&A. Our experience at this Raymond James event, which we appreciate very much being included in again, typically gives us an opportunity to talk to investors outside of traditional health care folks. And if that's the case, we thought it was worthy of few minutes to go through about a story -- the story of ICU. If you go to our first slide here, which as you'll see on the screen in a second, Slide 3. ICU Medical is a pure-play-focused company in infusion therapy. And for those of you who don't know what infusion therapy is, think about it as the plumbing next to a patient in a hospital bed; and that plumbing consists of the literal IV fluid or solutions they are given for hydration; the consumables are the pipes that carry those solutions towards them; and then the motor, the pump that pumps those solutions via the pipe into the patient. Our business started out primarily as the pipe business, what we call our Consumables business, that's 40% of our company. The pumps themselves are about 30% of our company. And the solutions or fluids are about 25% of the company. In aggregate, we're about a $1.2 billion company. And this area of infusion therapy is all we do and all of those items we just talked about are core essential products for delivering care to mainstream hospitals or outpatient surgery or home care settings. On the next slide, what you'll see is we have a very broad product offering that covers all the important areas in this infusion therapy category. And we think about these categories, some are more commoditized; some are more differentiated; and some are, frankly, emerging and new markets being created for the whole cloth. And the sort of complexity of what the commoditization goes from left to right on this page, but in the areas that have less differentiation in IV solutions or even some of the run of the mill IV sets, there are traits that make us very competitive, which is scale of our production environment, distribution of our products or access to certain classes of trade that continues to position us well in those categories. In the more differentiated areas, I'll give 2 examples here on this page. One is this area of oncology consumables, IV oncology. That's a new market that's being created, which is really providing that plumbing or those consumables we talked about between an expensive or dangerous biological drug and a patient. We're a market share leader and that's a category that's very highly valued that's being created at this moment. The same applies, if you go further right, on the pump area where a lot of new value and new white space is being created in the software area that connects the pump to the hospital EMR or more importantly, I'll talk about later in the presentation, into all the ancillary applications that hospitals are running to deliver better care, improve billing, improve the patient outcome, include nursing workflow, et cetera. And so for we sit at $1.2 billion company, we think our product offering covers all the necessary pieces for this. And in each of those spots in the U.S. market, we're either the #1 or #2 player. At the same time, we talked about the U.S. market. For a small company, we're sort of big enough to be big and small enough to be small globally. And so we compete in all the relevant geographies around the planet, all the high-value geographies around the planet on a direct basis. And we do use a series of distribution channels where the markets don't make quite as much sense to be directed. In terms of our geographic footprint, we're officially 73-27 U.S. versus OUS, but really one of our lines of business, the one on the most left-hand side of the previous page, IV Solutions, is a U.S.-only business. And without that, we're closer to 2/3 U.S., 1/3 OUS, which is good for a company of our size. A quick snapshot of the financials on the next page. For about a $4 billion enterprise value company, we are a bit unusual. We have almost 10% of our market cap in cash, no leverage on the business. And what we sell are really disposables. Those disposables are either independent disposables not correlated with a piece of equipment, which is our Consumables business or even our Solutions business. And then inside of our infusion systems, our pump business, the majority of that business is dedicated disposables tied to the motors, the pumps that I talked about. Everything we sell with the exception of those pumps is $10 or less. Again, a part and parcel of delivering care in the hospital setting. A little bit of history on us on the next slide for folks who are new to the story. This team has been in place -- we've worked together for 10, 11, 12 years across a couple of companies. We all came together at ICU in the 2014, 2015 time frame. We've had a couple of parts of the journey. The first few years, we're really improving our own organic execution, commercial execution. We did a little bit of warm-up M&A. And in 2017, we closed on a very large acquisition of our primary distribution customer, which was a company called Hospira, that at the time was owned by Pfizer. And we took a portion of that business back directly. We spent the next number of years integrating it. We had a bit of a boon and then famine in our IV Solutions business, where we had excess sales due to some market reasons and that we had a lot of those excess sales go away. We had to reset things a bit in 2019. And then we got back on our horse and got the business stabilized and again started to deploy some capital to the Pursuit Vascular acquisition in 2019. And we find ourselves today with a much more predictable set of businesses. Our integration is finished. Our restructuring costs have come down and we have the ability to use that balance sheet we talked about and handle more in the future. In terms of big picture, before we talk about our individual product lines on the industry, industry structure matters a lot. This is an industry that has a very consolidated footprint, high regulatory barriers, CapEx of scale required to be in the manufacturing business. There are some tailwinds in our favor and there are some opportunities around the planet. Our positioning within that industry structure is we are the only pure-play-focused company. Our job, our role is to over-serve the customer, to be more nimble, to be more committed to innovation, to put our money where our mouth is in CapEx and production supply, and to run ourselves with a set of incentives that are deeply aligned with shareholder interest and to keep being the trusted partner in this category for our customers. Very quickly just to go through a page or 2 in each of our businesses, our most important cash flow-generating, highest margin business, low capital consumption is our original business of Consumables. It's almost a $500 million segment for us. There are a number of sub-businesses in that segment. The IV therapy portion is kind of the, back to the page that laid out the different product categories, a little bit more of the run of the mill or commoditized portion of the portfolio in certain spots. It has some differentiation in it also on the needle-free connectors and custom sets. And then we have 2 other categories that we call specialty devices and oncology. And those are 2 of the categories where markets are being created from a whole cloth because those products improve clinical outcomes or improve workflow or add value to the system. Those 2 pieces on the right, frankly, can drive growth for the entire segment. Last year in 2020, the left-hand side of the page here, the IV therapy portion struggled as admissions were lower, particularly in U.S. hospitals. As that gets back to normal and the specialty devices in oncology continue to grow, we think this segment is well positioned for 2021 and beyond. A little bit on our pumps. The pump is the backbone of the system. It's really -- it's the motor that pulls everything together. We differentiate our pump business based on a number of key features. Those features are largely around safety and security, clinical leadership, safety leadership and cybersecurity leadership. Like many categories, the person -- we're the #2 player here and the #1 player has a large portion of the market. The #2 player needs to behave a little bit differently, broaden our willingness to connect with all related applications and really overemphasize quality, safety, reliability. We're the only infusion pump with a UL Cybersecurity rating. We are the beneficiary of a number of important medical association guidelines on proper and safe infusions. And we've received the highest ratings from both KLAS and ECRI on interoperability and safety. Those features allow us to participate in the pump market that has its own unique dynamics going on with a product that used to be the #1 market share product but lost its way a little bit, and we've recemented over the last number of years. The next slide is a little bit of data. It's been hard to dissect from our numbers the exact performance of our pump business. There are 2 primary product families here. One is the LVP pump, which I just talked about, our Plum family of pumps. That's where the emphasis and effort is, that's the lion's share of the market from a dollar perspective. There are some non-LVP products we participate in. We entered this business in 2017 carrying some baggage of losses on the LVP side. We also had some of the non-LVP products go backwards. But what you'll see in 2020 over 2019 is, after a number of years of heavy investment, the LVP started to grow again. The non-LVP products continued to shrink, but the business is finally back, playing a little bit more offense on much more solid footing. And this chart sort of explains the questions that I'm sure we'll have around share gains and how those flow through the economics of the business. The last slide on pumps is longer term, the pump business will change to being a more software-driven business. Our R&D dollars go largely on the software development side. And the future vision of this business needs to transition from just being a simple hardware sale where there's an annuity of dedicated disposables, it needs to be a hardware sale that has a series of attached modules on different software applications as well as dedicated disposables as long as those products add value and, again, improve safety, improve workflow, improve billing, et cetera. Last segment. I know I'm going fast. I want to make sure we have time for Q&A. When we had to reset our earnings expectations in 2019 after many years of consistency, it was a difficult thing for us. And it was largely due to the volatility we experienced in the IV Solutions segment. This is -- these are the -- IV Solutions is the fluids that flow through the pumps. We said in the middle of 2019, this would be about an $80 million a quarter business for us that gave us the ability to hold on to what we had resigning and recontract our business. We did that. And finally, over the last 6 quarters, we've been able to show a high amount of stability. The little bit of flip-flopping between Q1 and Q2 2020 was really the onset of COVID really March of last year, a year ago, drove a lot of that $91 million in Q1 2020 and that went away as admissions went away in Q2 2020. But other than that, it's been a very stable business over the last 1.5 years. And the focus here has been to separate from Pfizer from a production perspective, but also to start to get some new products into the market here, which we've got in some of the PVC-free products and some of the transfer devices coming. So we feel on much better footing in the Solutions business. From a revenue perspective, on our website, you can look at this chart at your leisure. We did try to illustrate where COVID hurt us in 2020 and where COVID was a positive for us in 2020. All in all, I think our view today was COVID was probably net neutral to us in 2020 on revenues where we've got more sales in the Infusion Systems category and less sales in Infusion Consumables. And as a result, our margins were hurt a little bit and then we did have a departure up from earnings. The net impact of earnings was probably $5 million to $10 million from COVID if we add it all up from sales of less consumables, currency and some of the incremental expenses. The $64,000 question for this year is when do volumes return to normal. We felt things getting closer to normal in Q4. It felt closer to normal because there was a lot of COVID utilization in the hospitals. That continued through January, starting to slow down a little bit. And we, at the moment, have priced into our guidance that things won't return to normal really until the middle of this year. I preempted a little bit of what I said on the next slide here, which is our 2021 outlook. But in aggregate, the COVID assumption, as I just mentioned, Consumables we think gets back to being what it was, a mid- single-digit growth business. There's a couple of growth drivers between oncology and specialty. The Systems business could be up or down a little bit depending on number of pieces of the business that we won, what's their exact installation. And Solutions remains a stable business at $80 million a quarter. From an earnings and cash flow perspective, we think our adjusted EBITDA, which is a number we focus on, and free cash flow in the $245 million to $265 million range. We had a very good year of free cash flow in 2020. We cleaned up a lot of things on the working capital side. It probably won't be as good as it was in 2020, but certainly, our target of $100 million of free cash flow still continues going forward. And then lastly, our view of creating value. We talked about the industry structure. We talked about us. We have to grow the differentiated lines of the IV Consumables products and the pump LVP Plum products. We have to continue to be stable in the Solutions business. We have to get the number of the new products we've talked about into the market. We have to keep working on our gross margins and production environment to improve our supply chain costs. Keep focused on working capital, et cetera, to improve free cash flow generation. And ultimately, it's a hard thing to say in this market, when the time is right to figure out probably to use our balance sheet and our unlevered existence to deploy capital successfully. So that's a very quick 10 minutes or so, 15 minutes overview on ICU. And with that, we'll turn it over to Jayson to run a group discussion, and Brian and I are happy to answer anything. Thank you for the interest in our company.

Yes. Thanks, Vivek. That was a nice overview here. So let's just dive into a handful of questions that I have. Maybe just to start on kind of your last comment. The Hospira restructuring/integration is largely complete. You had a comment in the deck that talked about an ability to handle more. So how much in terms of revenue can the current infrastructure support? And kind of what level of revenue would you be comfortable in taking on?

I think you're asking that question of a team of people who came from a Fortune 20 company and spent a lot of time splitting into 2 and then bought a $1 billion revenue company on top of their only $300 million business. So we've experienced lots of different things. I think we have the benefit post this integration of running a true single instance of an ERP system with 4 very distinct and clean manufacturing sites. And we could really flex up substantially from where we are today if we wanted to. I don't think we'd want to say a specific number, but I think we certainly have the ability to do a lot more than we're doing today.

Okay. So it's not limitless, obviously, but you have the capacity/infrastructure in place to support a much bigger business if the opportunity arises?

Yes, correct.

So a couple of the other comments you made during the presentation. Oncology, certainly that's benefiting from a nice regulatory tailwind here to safety devices. Can you just frame the U.S. opportunity in terms of penetration? Where are we today? Where can it go? And you also had a number in the deck there of $300 million. I was a little unclear as to, is that the market today or that's where it's going? Any little -- any framework on that would be helpful.

Sure. I think our view -- and again there's really -- we and another market participant hold the best share positions here, and we're both public about our size of it. We're probably in the more conservative end. The $300 million was our assessment of the U.S. market opportunity and the global opportunity is probably equal to that. I think our view is that the market is 60-ish plus or minus percent converted already. And so for folks who are new to this, there are individual state mandates that for certain drugs that are hazardous or dangerous, they need special handling from the time they're prepared in a pharmacy to the time they're given to a patient. And we provide those handling systems. Today, if the market was $300 million and it's 60-ish percent converted, we think there's another $120 million or so of available market in the U.S. and probably an equivalent number to that OUS. And it was a business for many years that grew at double digits. There was a slowdown in cancer diagnosis. Certainly in the U.S. in 2020, the growth rate declined dramatically during Q2 and Q3. It's still not back to historical levels, but we're paying very close attention to the diagnostics companies, the lab companies to see what everybody starts speaking from the same book on screening activity.

Vivek, your share in oncology, do you feel like it's stable?

I feel like -- we think it's very stable. We think we're the market share leader.

And then if it's 60% converted today, how long does it take to get to near full conversion?

Well, if the growth rates were a bit lower than historical levels, certainly would imply there's somewhere between another 2 to 4 years of growth there. And again, we -- if you read the available documents, we may be on the lower end of our estimate. For us, it's about increasing the application -- the total addressable market by features and integration of the product into other modalities.

Right. But I would assume come, let's call it, second half of this year, you're not only getting the tailwind of procedures coming back, specifically within oncology, but also you have this tailwind, too. So the growth there, I would imagine, could be fairly robust.

I think given what we all lived through for the last 4, 6 quarters, Jayson, I think we'd say we hope you're right. We've probably been a tad more cautious than that in our guidance.

That's fair, that's fair. International opportunity for oncology. I think you recently mentioned new opportunities in Asia. Can you just elaborate around that?

I'm not sure where we mentioned that, but the one -- there's 2 areas we should highlight in Asia. For us, one is, a number of years ago, we signed on with a large distribution partner, established medical device player in Japan. It's taken a number of years, but that's really finally coming through fruition for us in oncology. And the Japanese market is very valuable. Reimbursement is very attractive there and market acceptance is high. So for us, that is one, very important opportunity for us in Asia. Second market is Taiwan where we've stepped into our distributor and has given us kind of more of a full top to bottom and ownership of the situation. That's also an important area for us in Asia. And then obviously, the thing I'm not speaking about is China. We believe there is a long-term market, but it's more early days for us figuring out what's the right way to access and go-to-market there.

Okay. And the Taiwanese distributor, was that just oncology or is that more across the portfolio?

That was just oncology.

Okay, okay. Maybe those were the 2 you were alluding to, okay. On LVP pumps, you talked about 100 basis points of share gains in 2019 and a bit more than that in 2020. Given the competitive dynamics, can we assume that you expect to gain share again in 2021?

Yes. I think we feel cautiously optimistic about what's available in front of us. And we think the product has been -- things move slowly in pumps and things were even slower because of the COVID environment. I think we feel like we finally had consistency for 18, 24 months at the right places with the right conversations. And it suits us well for a right -- it suits us well for right now. And I think if you look at our -- I think one of the slides I was flying through in the deck there, Page 11, showed the actual math on the LVP pump business. We probably had -- we had a $44 million improvement in LVP 2020 over 2019. And we said in our call, we had about $25 million or so to $30 million of government surge, COVID ordering. That would still leave a delta of $19 million of improvement. One point of market share, ballpark is equal to $8 million of annual set sales. Some of that growth came from international -- the remaining $19 million came from international and maybe a little bit more hardware, but the numbers kind of tie out definitely.

Okay. Were you able to place -- all this share gain -- I guess I'm just -- all this -- the share gain that you entered 2020 with, were you able to implement all of those pumps in 2020?

Mostly, certainly more than 80%, 85%, a few things lagged.

Okay. I think you've noted that liquidity is not a constraint right now for hospitals. And fears around COVID-related volumes, I feel like are coming down. So what's the biggest constraint to further market share gains here in 2021?

I think the biggest -- we've been around this pump thing for a long time. The biggest challenge is just inertia, right? It's a big undertaking to switch. And there's a lot of training, IT commitments, workflow changes that have to happen for hospitals. And certainly during the midst of COVID, folks didn't want to go out there and do that unless they had to, right, take it on with their nursing staff or biomed staff or IT staff. And so normally, when you have the kind of market environment that's going on now, you would see more switching, but with the inertia of -- and COVID together was a bit -- and we did well, it could have been even better, was a bit slower. Nobody wants the world to open up until people be vaccinated and the hospitals up for business worse than we do, right? I think we feel, to the extent we can get out there and stay on point and stay in the picture we've been making, we're well suited for 2021.

Has the environment -- has the selling environment improved? Meaning if you look at, I mean, your conversations with hospitals, prospective customers in the fall versus the conversations you're having today, has there been an improvement?

It's been a bit of a wave. Just the last year -- back to your conference last year to today, it was very, very slow in April, May, June of last year. It got a lot more active in July, end of July, August, September, October. Slowed again in November, December with kind of the surge, certainly in the U.S. market, and kind of fall -- started to fall a little bit again in January and February picking up. And so today, we probably -- we said it on the call last week, maybe 35% -- 30%, 35% of our sales calls are live again on site, people at facilities. That's better than it's been at any point in the last year.

And to get that 30% to 35% to 80%, 90%, is it just a function of the world being fully reopened, everyone's vaccinated? Or can you see that coming a little bit earlier?

The 85% or 90%, at that level, I think we would -- I'm looking at Brian. I think we would say that, that's a full vaccine deployment world to that level. That's still ways away.

Okay. Do you expect -- I kind of asked this question earlier, different years, but do you expect all of the 100-plus basis points of share gain you picked up in '20 to be implemented in 2021 or does that spill over into '22?

I mean we're trying our best to get it implemented this year, right? People do make a decision. They want to get on with life. They want to do things. They want to get the training done. I think the challenge is -- for us, the math on our pump business for the year was making an assumption about what we could get installed and deployed. Making an assumption on the pump business also suffered from lower admissions, right, because there's less dedicated set utilization that -- in a normal world, even if it comes in the summer, that starts to come back a little bit. And does the comment of those 2 things allow us to jump over this $25 million to $30 million of government and surge we had? It's close. It could be a little down, it could be a little up was kind of our calculation at the moment.

Okay.

Back to the guidance we had.

You alluded to it earlier in the prepared slide deck. Just your view on pump differentiation, features, benefits that you're emphasizing with hospitals. And do you feel like that's resonating? Clearly, you're picking up a bit of share, but do you feel like you're before your time? What needs to happen here for folks to fully appreciate your differentiation?

I mean I think the themes that were on our slide are the themes we really have consistently messaged and illustrated with evidence of clinical support and independent rankings over the last 2.5 years. And so for us, it is all -- first and foremost, all about patient safety, right? The reduction of adverse events. And patient safety takes a lot of different forms. Patient safety takes the form of workflow around the pump that you can remove air and lines and all the benefits of the cassette, which are about that -- the guideline on automated secondary delivery. For us, patient safety is about cybersecurity, protection of information, billing, et cetera. We're the only pump with that rating. For us, patient safety is around clinician safety and the integration with some of the CSTDs and other disposals we talked about. And then it's about getting these rankings like we did in ECRI, right, the only pump with a 5-star safety rating. It's not -- no one of those items, not a single of those items unilaterally makes a purchase decision go your way. It's really about the slow march of getting all of those items checked and then calling on the customer with consistency and building reference accounts, et cetera. And that's what's been happening over the last 2 years.

Okay. From an internal perspective, when are you expecting the LVP market leader to come back to the market in an unconstrained manner?

We think everybody is being very transparent about what's going on. And so I don't think there's very many secrets out there. I think our view is towards the end of this year, they could be roughly back on the market.

Okay. So towards the end of this calendar year is your expectation?

Fourth quarter of this calendar year.

Yes, okay. That's fair. I did have a question just on procedure volumes. If I look at your fourth quarter results, it looked like dedicated sets were strong. Is this a function of a more normalized procedure environment or just better utilization of newer pumps you have out there?

I think what happened in the fourth quarter was actually -- the fourth quarter felt more normal in general, but the underlying mix was different than normal, meaning there was a high amount of COVID utilization in ICUs that kind of filled the bucket of the decline from normal procedure volumes. I think we probably benefited from that a little bit. And in our own guidance for this year, we assume that those people right around now or maybe even a couple of weeks ago, starting to come out of the system, and they won't be replaced with normal procedures and admissions for some number of months. I don't think Q4 was increased utilization of the pumps we sold. There's only so much you can use it if somebody is occupying that bed. It was much more about just the overall number of beds that were filled. There was probably a little bit more COVID in Q4 than there was certainly in Q3.

Okay, okay. Margins, it looks like consensus is assuming less than 100 basis points of year-over-year EBITDA margin expansion. What drives upside to this? And can you talk about opportunity/avenues for gross margin expansion?

Do you want to do that one, Brian?

Yes.

Brian has been biting his tongue over here for 38 minutes.

When you look at gross margins on a year-over-year basis, Jayson, what you're seeing there is you're seeing some natural upside as our consumables volumes approach sort of more normal levels at some point in 2021. And so while mix was -- while consumables mix was a negative to us in 2020, it should give us a little bit of a benefit in 2021. Offsetting that though is, within Infusion Systems, to the extent we install more hardware, especially competitive conversion installations that would -- that does pressure margins in the near term, but then also provides us with a higher installed base to actually see some margin expansion in the out years as the dedicated sets follow-on. So to the second part of your question, the things that should drive margin expansion longer term is: One, better mix because our highest growth business is also our highest margin; two, kind of the longer-term benefits you get from having a bigger installed base within infusion systems; and then three, kind of just leveraging our existing infrastructure, including our plants, and just getting more volumes going through them.

Okay. That's fair enough and helpful. I guess, just we have last couple of minutes here. Vivek, on the call last week, you mentioned being prepared for whatever realignments or opportunities arise. And I guess you're sitting obviously on a lot of cash. Can you expand on the comments you made? And do you think this COVID-19 dynamic will produce M&A opportunities that didn't exist pre-COVID?

While cash is a large portion or an unusual portion for a device company of our market cap, it's not a lot of cash in the big game, right, when we see kind of the liquidity numbers in the markets and people raising in stacks, all sorts of other things. The cash we have isn't that much. But what changes things ultimately is the appetite and growth opportunity available with the end customer, right? We're trying to create these new categories where innovation matters on oncology, on software, on some things around the pump or some of these alternative care settings. If there's not as much growth as people seek in some of the core hospital markets, in normal industries, that forces people to find other ways to create value. And certainly, at the long end of an expansion cycle, it doesn't seem like our end customers with hospitals are growing quite at the same rate or bounce back that everybody thinks is going to happen in the rest of areas of the economy. And so it's a question to us is does that change people's decision-making on what businesses they can really win and in which ones they can just kind of pass time in. And we certainly -- and our experience has been, at these moments of the cycle, people do think constructively about things like that and we do, too.

So to summarize that, there's the potential for dislocation and you're ready? Is that fair?

Yes, yes.

Guys, were bumping up against our allotted time. So I certainly appreciate the time today, Vivek and Brian. Good luck. Look forward to the next few quarters, few years. Thank you.

Thank you, everyone, for your interest. And Jayson, to you and the Raymond James team, thanks so much for inviting us, including us in coverage and support. We appreciate it.

Thank you.