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

Great. Good morning. This is Peter Harrison from Morgan Stanley's Investment Banking division. Today with me, I'd like to introduce Vivek Jain from ICU Medical, Chairman and CEO. Welcome, Vivek, and thanks for joining us.

Thanks, Peter, for having us at this great event. I appreciate people showing up at 7:00 a.m. New York time.

Perfect. Let's get started. Maybe let's start with the macro environment. On your Q2 call, you reiterated continued stable demand and utilization environment and status quo capital equipment market. It's different from some people we heard about ACA subsidy expirations affecting surgical volumes. That does not seem to have an effect on you guys. Do you agree that consensus continues to be healthy?

Sure. I mean, there was obviously some news last week with some of the large companies having their own specific commentary around procedure volumes. For us, our business is tied to hospital admissions. And from what we've seen, our customers are busy, census appears pretty good. We haven't seen any slowdown. It's, to use the words we said in our call script, it's in line with the assumptions underlying our guidance, which was okay growth underlying, not spectacular in terms of markets, but still positive.

And the rest of this year feels better, worse, the same?

Rest of the year feels very consistent with those comments. We haven't seen any big swings in either direction.

Okay. You've obviously spent a lot of work reshaping the portfolio in recent years. You did the IV Solutions JV with Otsuka, SKU rationalization in Vital Care. Obviously, you did the Smiths acquisition. What is your ultimate goal in portfolio management transition? Is it to improve the WAMGR, drive faster sales growth and/or better profitability? And if you had to say what inning you are in, in this transformation, what inning do you feel you're in?

I don't know that it was so much transformation. I mean, we -- for all the challenges, we look back on the last 7 or 8 years and said we took a $200 million direct sales parts supplier and turned it into a comprehensive integrated infusion company. That's the largest set producer in the world. Our goal wasn't necessarily about improving the underlying growth rates. We -- the first transaction had -- the first big transaction had to happen out of defense. It's been really about trying to build a coherent portfolio, things that make sense together and trying to have the best pumps, the best consumables, the best IV solutions we can have, products that make sense together to the customer in the way the customer buys them.

Great. Maybe dive a little bit into the businesses. Let's start with IV Systems. That business grew a robust 12% organic in Q2, nearly plus 10% in the first half. Some of that was due to installations being pulled forward from later in the year and some was from competitive wins. What are the sustainable growth drivers into the second half of this year?

I think on our calls, we've been trying to be very transparent about the value, the drivers in the IV Systems business. And there's really 3, 3.5 of them. The biggest 2 opportunities are on our LVP pumps where we create value by either winning competitively or rolling over, upgrading our existing installed base. Most of the growth to date over the last 4 quarters, 5 quarters, and the business has grown nicely for 2.5 years in a row, has been from competitive wins. Next year, it will be a mix of both competitive and rollovers. The third way we grow value in the pump business is by refreshing our own syringe pumps. Those are the pumps that came in the last acquisition. We have a strong market share position there. And maybe the half or half-plus is how do we go deeper with the installed base, reprofitize it by adding value around software, services, et cetera.

All right. I mean, obviously, the competitive environment for LVPs has been changing of late with Alaris remediation essentially completed, Novum IQ still off the market. How is the Plum family positioned competitively? And who do you think you're taking share from?

I think we've been very -- everybody in these calls is the math doesn't make sense. Obviously, everybody says they're winning and taking share. We have stayed away from those comments, and we have simply said it will show up on our P&L, which we believe it's starting to. And if you read our scripts prior to the latest acquisition, our pump is not that big. Our LVP business reported independently, and so you could make a judgment of the size of it. So small wins make a huge difference on our income statement. I think the competitive environment is active as ever. There's plenty of opportunities out there, and there's a reasonable amount -- our installed base included -- old equipment in America that needs refresh and old equipment globally, that's a good opportunity.

All right. And thinking about your pump business a little bit more granularly, when do you expect the upgrade cycle to really start? And what is that opportunity for investors, units, timeline?

Normally, these devices have a 7- to 10-year life. And if we think about our own U.S. installed base, which is 20-ish percent of the market, we are in the very early days of refreshing that. That process is just starting. It will start in earnest next year. You have to be sensitive. It's a little bit like going to a customer, just like a software vendor and saying, even though this product is still functional and we built these things like tanks, they can pump a long time. We no longer support the software. We no longer offer spare parts, et cetera, and sort of encourage a refresh to a modern architecture.

And how do you think about with that upgrade cycle, the timing of the pull-through of consumables?

Our consumables business, for the most part, where we have the pumps today already, so when you talk about the upgrade cycle to the installed base, more often than not, we already have those consumables. So I wouldn't want you to think that it's incremental consumables to a large degree from rollovers. We probably have those already. The opportunity to drive more consumables related to LVPs is more about the competitive wins where we have a reasonable chance of getting the consumable. I mean, our consumable market share was higher than our pump share anyway, right, historically. And consumables growth for lots of other reasons outside of the LVPs, but specific to LVPs, it's more on the competitive side.

Okay. One aspect of this business is hospital profitability headwinds from both payer mix and 340B. How could that influence the infusion pump spend? Or would those pressures have to be greater to drive hospitals to alter their replacement schedules?

I mean, hospitals have obviously been under economic pressure since certainly as long as I've been doing this, and they've been trained to behave in a certain way. I think I would say whether it's 340B or whatever, we -- we don't -- we focus on you need these products to deliver medications. You can't deliver care without them. Nobody buys a pump voluntarily. My joke is it's like teaching your mom to use a new cell phone, right? You only upgrade when you have to. And at a certain point, these devices hit their age, they time out, the support isn't there, the parts aren't there and refresh needs to occur like your desktop PC or whatever it may be. And if you look at just what's happened in the U.S. market where the market share leaders had to remediate, et cetera, people obviously had capital available for those remediations. You need the pump.

For the syringe pump, obviously, you've been in discussions with the FDA. You're making progress on the additional verification testing. You expected to refile the 510(k) in the second half. What is your confidence level that this new filing will fully address their concerns?