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

Good afternoon, everyone...

Good afternoon, everyone. I was so excited. You go first.

I was too excited to introduce you. Welcome back, everyone, to day 3 of our 40th Annual JPMorgan Healthcare Conference. My name is Lisa Cohen. Very excited to be introducing ICU Medical to you today. Before I do, I want to note that we'll spend the latter half of this session going through Q&A. So you should see a blue button below your video, feel free to utilize that throughout, and we will address at the end. With that, I'm very excited to have Vivek Jain, CEO of ICU Medical, here with us. I know Brian Bonnell, CFO, will be joining us for Q&A. But otherwise, Vivek, I will pass it off to you. And thank you again for being here with us.

Thanks, Lisa. Thanks for having us, and congrats on the 40th conference. That's a great number. I appreciate everybody making a little bit of time for ICU Medical today. We're happy to spend 15 or 20 minutes and give you a high-level overview of what we are. And Brian will join me up here behind the desk, and we're happy to answer any questions on Q&A. ICU Medical is a focused player in the infusion therapy area. You can think about infusion therapy as the plumbing next to a patient. And if you flip to Slide 3, our first slide, that I'll outline kind of our key lines of business. The most important business we have are really IV consumables. Think about those as the plastic pipes that connect the drug to an infusion pump or an infusion pump to a patient. That's our original business and a story I'll walk through in a second. Our second most important business is our capital equipment and dedicated disposables business, which is referred to as systems. That's about 30% of our revenues. And that's the motor in that chain that takes the drug or fluid and pushes it to a patient. And the remaining 1/3 of our company are both the IV solutions, the water or the water with drugs that are flowing through the pipes and the motor, and a range of other products that we're just acquiring from our most recent acquisition of Smiths Medical. On the next slide, on Slide 4, I'll just jump right into it. It's been the hot topic, the acquisition we closed last Thursday, a little bit of the background and strategic logic as to why we did the transaction. The combination of ICU plus Smiths was really bringing about together complementary product portfolios to create a leading IV therapy company and simplify both the workflow process and the IT process for customers. It collabs logical adjacencies together and expands our available markets, and it unites 2 companies that were really subscale outside the U.S. into an integrated footprint. It also strengthens our presence as a domestic U.S.-oriented manufacturing company and most importantly, brings in some new growth vectors across classes of trade outside of the core hospital business into the alternate site channels, the pharmacy channels and ultimately, home care. And economically, we made a significant acquisition 4 years ago with the acquisition of Hospira Infusion Systems. The Smiths transaction leverages those investments and the capital we put in to integrate and build up the infrastructure to support a much larger company. In summary, we're about a $2.4 billion revenue company, about 15,000 employees globally and again, with that core focus in infusion therapy and other related critical care items. Slide 5. If there was one chart that tried to make sense of the transactions we've done over the last number of years, this is the simplest explanation. Our original business at ICU Medical was in the middle of the page, what you see in the dark blue box, called non-dedicated IV sets and accessories. We essentially sold componentry into that plumbing system, and we sold the most valuable parts of that chain, whereas if the system was blocked, patients had adverse events. With our acquisition of Hospira a number of years ago, we migrated upwards into selling the core LVP pump itself, which is the most prevalent pump in the hospital environment, as well as the dedicated sets that run through those pumps and IV solutions, which are the core base component that flows through the pump and is often combined with pharmaceuticals. What we lacked was a full range of pump modalities. The Smiths acquisition in the light blue box brings those items to us, primarily the syringe pump and ambulatory infusion pumps. And Smiths brings peripheral IV catheters, which is the last mile delivery at the bottom of the chain, all the way into the patient. Those are the items that connect to our exact IV consumables products and Smiths was the only way to get substantial share in those categories. Smiths also brought some related critical care products in the fluid warming and respiratory areas, but it really allowed us to complete the chain of infusion from drug to patients. A little bit on Slide 6 why do we do this now, for anybody who's been following us in our history. 5 years ago, 6 years ago, we were a $250 million direct sales business. ICU Medical was a little bit stuck in 2014 and '15. A management team arrived here and we started focusing on our organic growth, a little bit of warm up M&A. That culminated in what was a defensive move at the time, the acquisition of Hospira Infusion Systems to protect the business we had going through Hospira, which was our distributor. We had a reset in some of our businesses, in our IV Solutions business in 2019. We sort of got back on the horse, did some additional tuck-in M&A and found ourselves really in the middle of the pandemic, after we dealt with the first parts of the pandemic, in a place where we had the ability to handle more -- had a balance sheet that can handle more and have a team that was ready to take on the next challenge. The acquisition of Smiths or announced in the middle of last year closed last week was a very logical step in that evolution. And post the transaction closing last week, we're a company that went from a $600 million cash position on our balance sheet or so at the end of last year to about $300 million today. We have taken on some debt. So the net of those 2 numbers are about 3x lever or $1.5 billion. We have 24 million shares outstanding. Adjusted EBITDA pro forma once we get the business integrated, we'll be north of $500 million. And we believe we'll continue to be post-integration high free cash flow generator. Slide 7 is just a little bit of a snapshot. A couple of things are repetitive here on the shares outstanding. But what's more important is on the bottom left-hand side of the page. The vast majority of our business are single-use disposable items. Most of what we sell is $10 or less. About 15% of our company is in the hardware side of the business, but all of that hardware drives dedicated disposable usage. And geographically, the one at my opening comments, we're a much more global company now than we used to be. The majority of value still comes from the U.S. markets, but we're about 60% U.S., 40% internationally. And with the acquisition of Smiths, sort of cover all key geographies globally on a direct basis. Slide 8 starts to get into kind of what are the market positions we have? Why are they valuable? And I'll talk a little bit some of the characteristics of this market in a second. But in each of those pieces of that chain that I went through, whether it's the IV solution, the pipes, the consumables that connects those solutions to the pumps, the pumps themselves, the software that surrounds the pump or the last mile into the patient, we really have a #1, 2 or 3 position in each of those categories in the U.S. market. And each of those categories has their own unique dynamics. The ones that are core and where we started our business were in the center of the page, on the IV sets and connectors markets, where we are the market share leader, and we moved left and right, up and down that chain. Page 9 talks a little bit more about the dynamics of the actual market and what's made it attractive to us and attractive to our investors. It is a deeply consolidated industry. The industry has been fraught with regulatory challenges. And while those are a burden, they are also a very strong barrier to entry for new participants and continues to accrete value to the incumbents. The manufacturing assets are all of scale, take time and years to build infrastructure at the levels we have. Absent some unique market events, most of these categories are deeply sticky with strong recurring revenues. There's some unique products we have in oncology, in some of our specialty areas that have very specific guidelines and tailwinds behind them. The markets internationally are adopting these technologies, particularly in the emerging markets, we're well positioned to take advantage of that. And we've been able to create whole cost markets historically on the consumables side, some of those oncology markets, and we want to do the same in some of the software areas. And those opportunities are emerging. So for us, we think we're the only pure-play company in this space. We have a commitment to innovation historically. We bought some assets with Hospira, where customer trust was lost, and we've been able to go out there and rebuild that trust. We've invested significant resources and capital expenditures and been a reliable manufacturer through the pandemic, and we too face challenges at the moment. We've run a company that our incentives personally are aligned with shareholders' interest. And we've improved our operations and our stability and our cash flow even through this very volatile time in the market with the pandemic. A couple of comments on sort of the Smiths transaction. What does it mean today for a customer? What does it mean in the medium term? What does it mean in the long term? I want to give a couple of examples. In the hospital markets, in the institutional markets, value is really created in a lot of the specialty arenas where reimbursement is high, preference is high and clinical relevance is high. And for us, just 3 examples of that where I think the combination can really focus together are on the oncology markets, which have been the single fastest growth item in our company, in our consumables business; in the pediatric and NICU arenas where we've had a great IV set business, but have lacked some of the capital that a syringe pump now brings us; and in the anesthesia markets, which are in the OR, very preference-oriented where we have a unique set of products now across our critical care business, our set business and some of the new pump modalities that we're acquiring. So in the hospital, this combination gives us clinical niches, clinical trenches to play in where we can continue to add value and trying to move away from some of the commodity hand-to-hand combat that has defined some of these categories. Outside of the hospital market on the next slide, Slide 11, there's also an opportunity. And so one of the attractions of the Smiths opportunity was to continue to diversify a bit outside of the hospital globally for us. And so in the U.S. market, there's a huge amount of volume that's transacting in surgery centers, long-term care, step-down facilities, et cetera. That's appealing to us. Globally, the home health care markets are developing everywhere, Western Europe, Asia, Australia and the U.S. markets. And some of the Smiths products put us squarely into the home care space. And cancer centers are growing as a class of trade outside of the 4 walls of a hospital, sometimes owned by the hospital, sometimes not. And now we have the full suite of products to participate in those markets. A specific example to dwell on would be on the next slide, on 12, and I'll go through a couple more here. One of the long-term visions of this transaction for us has been to take what we're doing inside of the hospital in infusion and connect that to the way care is being delivered in the settings outside of the hospital. And so longer term, we believe we'll be the leading company that connects LVP hospital infusion to alternate site infusion and ultimately to home care. And we believe that connection will prove valuable over time, whether it's to a pharma company that's monitoring compliance for their drugs, whether it's to a payer that's monitoring where the drug was administered and what the outcome was or where it was; or be relevant to a hospital where the actual patient-specific care is being actively monitored. Nobody can do that today. We have a good share position. We have the hardware modalities in those settings today, and it's our job to go connect them inside of an IT environment that makes sense and is valuable to the customer. That's a little bit on our IV Systems side. The next slide on 13 is just some examples on the consumables business, where the combination could be valuable to us. So on the right-hand side of this page, there's many examples where our parts and pieces can be literally attached to some of Smiths core consumables products to add more value, differentiate those categories on the core catheter markets, et cetera. That's a new opportunity for us in a way of getting back some of the share that Smiths had lost historically. And there's examples of the intersection of our innovation in the pharmacy markets where we can use some of those technologies to add value to the very disposable markets in the pump segment that Smiths had. So some of the oncology-oriented pumps, we have tools and products that enable you to fill them faster, better, more accurately, more efficiently, et cetera. And we look to be bringing a number of those items to market quickly. So those are 4 or 5 examples as to why we've undertaken the work of this transaction. Aside from the financial stuff we talked about upfront, the balance sheet, et cetera, those are the product-specific areas that make sense to customers that we want to bring to market. I wanted to close with a little bit on just what -- it's a very fluid situation out there, what's happening in the current environment and try to give a little bit of context that over the last 24, 36 months, as the pandemic started. What was positive, what was negative and where we're headed and then talk a little about '22 and beyond. In the current market environment, when the pandemic started in 2020, we benefited from what I would call surge ordering, particularly on the hardware side of our business. But we had a huge negative in a reduction of elective procedures, hospital census coming out. And we had a huge negative in terms of the absorption in our factories where we have very volatile production environment. And we had a positive lower discretionary spending. That speaking generally settled out, those issues settled out in 2021 as volumes came back. So the first item there is there was a rebound in census that made our factories more predictable, et cetera. But 2021 brought some new challenges, and that was in the form of what everybody has been talking about on supply chain constraints and disruptions. It brought real inflation to us. This is something we hadn't experienced before, a lot in the back half of the year. And it also led to volatility in the mix at our customers where they were prioritizing COVID patients, which had some knock-on effects to -- positive to consumables, maybe less to hardware, led to some delays in getting some of our hardware implemented. As we enter 2022, there's a new set of challenges. And so in the midst of that in '20 and '21, we believe we've had attractive share gains in both our systems and consumables business, and the economic power of those consumables flowing through started to show itself last year and even in the face of inflation and the other challenges will show itself in 2022. Obviously, it's a very hot topic daily right now with what's going on at our hospital customers with staffing and shortages, fatigue, exhaustion, et cetera. That leads to some delays in decision-making. Inflation will roll over into this year, the labor impacts, we believe to be permanent. We're budgeting that our freight and raw materials, inflation will continue, and it's a little bit of a hope that those mitigate through the balance of the year. And certainly, given the tightness of the supply chain, I think all manufacturers are going to see increases in factory volumes and absorption to the extent we can manage the current labor environment. But that is additive to our overall production mix, particularly when our highest margin, most valuable products are growing the fastest in our book. For this year and beyond, we've got a lot of work to do, obviously, with the transaction closing last week and starting our journey together as a new company twice the size, again, which is experience we've had before. The first question I think we've been getting asked is how are we going to report going forward. At the moment, our view is to keep the revenue lines of legacy ICU and what we're acquiring separate. And so we would like it to be clear of what's going on in our core consumables and our core IV systems market, and to allow for a little bit of time of cleanup of the asset we just purchased before consolidating it from a revenue perspective. From an earnings perspective, we do need to consolidate things because we're seeking synergies and the systems and underlying architecture of the business does become mingle. Longer term, once we have Smiths revenues based at a level where we feel things are stable and predictable, we will consolidate them into our segments. From a market perspective, a lot of these categories we are in continue to remain short. That will be a benefit to some of our businesses. It will be a negative in other parts of our businesses. Some of the guidelines out there are going to help us from a tailwind perspective in oncology and some new European guidelines in some of the dialysis markets. Longer term, there is value being organically created in these markets from these categories broadening to software, broadening their use case into the home care market. And the regulatory barriers are going up, product approval cycles are getting longer. All of those things, we believe, accrete value to the existing incumbents. And lastly, from what does that mean for us as a company, how do we create value for shareholders in the context of an uncertain market? We've become a bit of a self-help story with this transaction and we need to focus on our continued execution of our stand-alone legacy ICU business in consumables and pumps as we begin to integrate and ramp up our acquisition. We believe, even in the face of some volatile revenue challenges, environment, various things coming at us, we still can create value both from growth in our own business and the realization of synergies. And longer term, we believe these products make sense together, that we can solidify and improve revenues of the company we just bought, just like we did for Hospira Infusion Systems. We believe we can innovate to create more value in these categories and create new markets from [indiscernible]. And lastly, we think there may be opportunities with certain decisions on assets that can improve our balance sheet and allow us to think differently going forward about returning capital to shareholders and other items in a way that we did do historically. So I'll pause there. That's about half our time. I appreciate the interest in ICU Medical very much. Brian is going to join me on camera here. We're happy to open it up for Q&A. And Lisa, I'll flip it back to you. Thanks.

Thanks, Vivek. And congratulations again to you and the team on the closing of Smiths, very exciting. Kicking off our Q&A. Given the significant investment in ICU expansion over the last 2 years, should we expect a more moderate hardware and CapEx environment over the next 2 years?

I think, for us -- I'll go first and let Brian answer. Our own CapEx has been coming down for the last 2 or 3 years as our integration -- we spent a ton of integration, that came down. And as a result, our own free cash flow went up. And so I was going faster on the slides. But even in the midst of that 2020 and 2021 volatility, we had record cash flow in the history of our existence. Going forward, legacy ICU may not necessarily continue to go down, but flatten out a bit. And again, a portion of our own CapEx is revenue generating where we front capital in some of the international markets, in the business model. But we will need to allocate capital both through the remediation and the integration of Smiths. That's not a single bolus of capital at the moment. That will be over the next number of years, consistently as part of our deal model.

Great. And how a COVID-driven resurgence in ICU census impact 2022 activities, product mix and revenue?

Super hard to say. Right now, our customers are flat out busy and short staffed. What's really hard to tell for us is the growth we've experienced, if you think about in consumables or our dedicated pump sets. We can map that growth to customers for some number, 95%, 96%, 97%, but there's some gap between what we think people should be using and what they're ordering at the moment. And we can't tell if that's just because of the instability in the supply chain, people or wholesalers hitting the panic button on ordering. There has been no let down through Q4 of last year, and there's been no let down through this year. How it looks in August or September is really hard for us to say. In our own budgeting, when we deliver guidance, we're trying to figure out what's the real baseline exiting last year, what's rolling over wins that we know are getting implemented and what's normal market growth and leaving it at that and not making any assumption of broader return to normal because nobody has known what that actually means.

Understood. And can you give us a little bit of a time line expectation on when Smiths might be fully integrated?

It's similar to Hospira. It's a multiyear exercise. So I think the things that impact short-term synergies on costs, et cetera, we'll do those things as fast as we can mechanically do them. The big game is fixing the revenue side of the equation and building trust with customers and integrating production environments, that's a multiyear journey.

And within the same vein, I would love to just talk a little bit more about the priorities for the Smiths acquisition.

I'll talk about the product and business side, maybe Brian can talk about the financials. On the business side of it, just run ourselves well, right? We have a company that's falling down in its execution towards customers. And we've, generally speaking, even though we have our own challenges in the current environment, we've done okay with that. And we need to get out there and deliver for customers operationally, as I mean running a good supply chain, running good production environment, overserving where we can. In the most short term, that is the #1 priority. And that sits alongside, I guess, incorporated in that is making sure the business is healthy from a quality and regulatory and systems perspective because if you're not healthy there, you can't serve customers well. And so those things from my end are related to products the commercial execution. Maybe Brian, do you want to comment a little bit on any of the financial metrics.

Yes. I think what we've said previously, just around synergies related to transactions, we expect $50 million over the course of 3 years. Some of that will come immediately, whereas works related to some of the operations integration might take a little bit longer. Ultimately, once we do get fully integrated, we've said that we expect EBITDA to be in excess of $500 million. And that should drive at least $13 of earnings per share.

Yes. We'd love to talk a little bit more about the long-term opportunity there and as well as the short-term economic impacts.

I mean I think the long-term opportunity is moving in each of these categories. The biggest market opportunities on that slide of the available segments we play in, as defined today, are really in the IV systems, in the pump category and in consumables and oncology categories. Our view is, in the consumables and oncology category, we're the largest player. And in the pump category in the U.S., we're the second largest player by installed base. And monetizing and profitizing those is important to us to continue to grow those. Equally as important is to create these new markets and adjacencies, right, that really have demonstrable value to the customer. Some of those things I was flipping through fast in home care and alternate site and IT solutions that bridge those areas, about some of the automation tools and adding value to the people who prepare drugs and drug mixtures. It does -- the transaction, even for the challenges and the cleanup that has to happen, it changes our value of our addressable markets, and it increases the amount of new markets we can create to go play in by connecting some of these things. The economics, I think, Brian kind of got to in the last back half of the last question.

Yes. Separately from Smiths, is there anything else that you might touch on with regards to your base business? Any highlights coming out of end of '21? What you expect over the next year?

I mean I think we felt our base business performed well last year. For 18 months, 2 years, we've been talking about showing that we can grow our most differentiated businesses, which was consumables and systems. I believe we did that in consumables. And if you've got to look a little bit more under the hood in systems because there's some noncore products that were leaving that revenue line. But the core LVP business grew substantially. And in the solutions business, we're executing okay. The production environment is hard right now. But the net-net of those 3 comments was a company that grew revenues '21 over '20 and continues to believe that we can grow revenues, independent of the transaction, '22 over '21 and profits in the face of all this inflation stuff.

Another question from the audience. Now that Baxter has acquired Hillrom, how do you think that will change the competitive landscape?

I'm not sure we would say it necessarily changes so much for us. I think there are spots in the market we'd like to play, in that we try to outline the presentation that are maybe outside of some of the mainstream hospital areas where we think we can create some value. I don't know what there would specifically the competition we have there, which is fair and robust is going to continue independent of that acquisition. Obviously, the big guys get bigger with more scale to the customers, not clear if the customer always loves that, and it's our job to be differentiated.

And have you been able to take advantage of the shortage issues that are impacting Baxter and other competitors?

Yes. I'm not sure we want to talk about any one competitor's shortage issues. I would say we, too, have on some of the most commodity-oriented items, it's hard for everyone right now, right, filling the factories in the midst of the pandemic and with a volatile labor mix is challenging. And so where we have excess capacity, and we're in great shape on the pump business and most of the consumables, we certainly are making sure we can serve customers very well. On some of the other items, we're probably very similar to competitors where it's a tough environment right now.

Shifting gears a little, could you give us a sense of the relative age of the infusion pump installed base relative to history?

U.S., I guess, I would say -- I assume that's a U.S.-oriented question, super hard to answer internationally. In the U.S. in a normal year, 1/7, 1/8 of the LVP, that's only a subset of the U.S. installed base, devices come up for renewal. I guess -- my view is I don't believe that, that amount of the market was renewed over the last 2 years, 2.5 years, mostly due to the pandemic and then more specifically due to individual companies participation. So that's interesting, right? That's interesting for all participants saying there are items that are older rather than newer out there. But I think we have to be realistic about the current environment and the challenges a lot of health systems are facing and their ability to deal with change right now. So there should be plenty -- I mean the direct gets really to ICU. There should be plenty for us to feed on relative to the smallness of our business, but it doesn't mean that there's necessarily be a windfall event for any one player.

Well, unless there are any further questions from the audience, I'll just save it back. And Brian, thank you so much for taking the time and being here with us today.

Thank you for having us. Thanks to JPMorgan. It's a great event, and we've had an excellent turnout, and everybody has been super responsive and interested. We appreciate it very much.

Thanks so much.