Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

All right. Well, thanks, everyone, for joining us for the virtual Barclays Healthcare Conference. I am Kristen Stewart, the medical supplies and device analyst coming to you live from my wonderful office in New York, and I am very pleased to have with us today, Teleflex's CEO; and also Jake Elguicze is the IR. So with me, first, going to turn over for some questions that I have, it's Liam Kelly, CEO, which I should have mentioned that first. And for all of you that are listening live on the webcast to make this as interactive as possible, I'm going to ask you if you have any questions you can text me or chat me those questions on Bloomberg IM. You can also e-mail me those questions through e-mail, through [email protected]. So with that, I'm going to just go through some questions that I have, Liam.

Ask your questions.

Obviously -- yes. Obviously, the big topic all around here has been coronavirus, the reason why we are virtual today. You've said that basically, the amount that you included within your guidance thus far has been a $5 million to $10 million impact. I was wondering if you could kind of talk with us just about any updated forecast you may or may not have. Or just kind of thinking, as you've seen the virus spread through different geographies, just how you're thinking about that today?

Yes, thank you. So you're correct. Yes, we have $5 million to $10 million in revenue in Q1 and an impact of $0.05 to $0.10 associated with the coronavirus. That is based on what we saw when we gave our guidance for the year, and it's included in our guidance. And it was really the impact that we saw in China. The lower end of that range would have been if China get back to normal in early March. The upper end of that range is contemplated that China gets back to normal in April. Now what we are seeing on the ground, we have 1 small manufacturing plant in China, that has been up and running now for about 10 days and running pretty well. Our office got back to pretty normal working conditions over a week ago. So yesterday week, our people went back to work in the office. And 2 weeks ago, the individuals that had left Shanghai -- so 2.5 weeks ago, in a population of 20 million people, there were only 10 million people living in Shanghai. Two weekends ago, all of those individuals returned. So now there's 19 million people. Obviously, Hubei is still in lockdown. So the travel was restricted there. But our people tell us that things are slowly starting to get back to normal in Shanghai, which is probably a good indicator for at least the Eastern seaboard, where most of our products are sold and our expectation is that as we go through the month of March that Shanghai, Beijing and large cities like that will get back to some semblance of normality. What is also, I guess, somewhat encouraging for us are that the new incidents of the virus on the websites that we monitor seems to be slowing in China and Korea. Yesterday, there were only 26 new cases in China. There were 35 new cases in South Korea. So therefore, as one would expect, like a normal flu. And this is a flu. It's just a different variant of the flu. I think that what we're seeing is it begin to act like a normal flu, and also as the containment measures are put in place by these authorities, it does seem to be having the desired effect and the number of new cases seem to be slowing, and we see that as a positive. Obviously, if we get a large number of incidents in other geographies, then we'll have to assess that. But I do also believe that health care systems in the new markets, where it's arriving in Western Europe and in the United States, are better able to cope with an outbreak such as this. If you go into any intensive care unit, if you go into a 20-bedded intensive care unit in any hospital in the United States, they will have at least 8 to 10 beds that they can put into an active isolation units very, very quickly and have the gowning protocols, et cetera. So I would envision that the ramp and the new -- number of new cases of this flu should begin to subside as we get into the warmer weather.

Great. And then just kind of keeping on the topic of fluid and dynamic situations. I know you have the sterilization issue, that was about a $7 million headwind in 4Q. You had also built in an impact in 1Q of $5 million to $7 million impact. Can you just provide us an update on that as well?

Yes, absolutely. So yes, the way our year is laid out -- I'll talk generally on the year, and then I'll talk more specifically on sterilization. So the way our year is laid out, Q1 has a few impacts in it. The one we spoke about, which is the coronavirus, $5 million to $10 million on the revenue; sterilization, which is a $5 million to $7 million impact on the top line and $0.06 on earnings in the first quarter. And then we have one less billing day in the first quarter, which would be a $9 million or so impact. And as you go through the year, what we would anticipate the investment community will see is MANTA will start to ramp, UroLift will obviously, we believe, continue doing what it will do. Our vascular business will continue to perform. Our OEM business, now with the acquisition, will continue to grow as we go through the year. And then when you get to the fourth quarter, that day or that $9 million that we would have lost in Q1, that comes back in Q4. And then additional to that, we have an additional billing day. So we have actually 2 additional billing days in the fourth quarter, which -- a day normally adds in that range of 1.3% to 1.4%. So from days alone, in the fourth quarter, you'll have 2.6%, 2.8% of growth just as a factor of the days. Then, to sterilization, we have a high degree of confidence as the last of our products now begin to move through the newly validated sterilizers that we've identified that, that will be a Q1 impact, and that we are confident that this will not creep into Q2 at this stage. So that would -- we believe will be part in Q1.

Great. All right. Just moving to UroLift. That has been a great acquisition for you. Last quarter was just phenomenal growth. I think there was a little bit of concern, I guess, if you will, or maybe a disappointment, I guess, just with respect to the guidance level for 2020. You finished 2019 with total UroLift sales up almost 48% on a constant currency basis. For 2020, you guided to be least 25% growth. So still very robust, but clearly, not quite as good as 2019. I was just curious, just maybe walk us through how you're thinking about that. Clearly, I would say, there's a little bit of probably conservatism looking back on how you've guided previous years. You started off 2019 with at least 30%. Obviously, you did much better than that. How do you just think about UroLift as you're moving forward, obviously, moving into different types of patients -- I'm sorry, physician groups, just kind of thinking through, obviously, law of large numbers and things like that? Maybe just help us think through how you've expressed guidance this year?

Yes. And let me start by saying, we couldn't be happier with the way that this product and this acquisition has gone for us. And I think, in our hands, we've been able to accelerate the growth of the UroLift product. And what was really encouraging about 2019 was that the growth actually ramped as we went through the year. We began at around 40% in Q1, then went to 42%, then went to 50% and then went to 54% in Q4, culminating in a 48% growth, as you outlined. And I'm not saying what happened last year is going to happen this year, but if you look at what happened last year, we've always been relatively conservative right out of the gate, as you alluded to. We began with guidance of 30%. Halfway through the year, then we took it up to 40%. And then, we finished out the year growing at 48%. We've always been relatively cautious right out of the gate. Just as you move from the early adopter to the fast follower, we always look at that adoption curve as potentially being a little bit harder to bring the clinicians on board. Now we have all of the requirements for the fast follower. So we have the real-world clinical data. We have our -- the real-world data that's actually better than the pivotal trial. So the fast follower will know that the real-world outcomes, the catheterization rates for our product are actually only 10% of patients as compared to the pivotal trial, which is up to 20%, 0 sexual dysfunction, immediate outcomes, IPSS scores in the real world comparable to our pivotal trial. And I think that's really powerful for these fast followers. We also have a national coverage. So we have over 300 million lives covered. So the fast follower can feel confident that they will get there. And I think the other thing the fast follower is looking for is almost to feel like they're getting left behind. And I spent a week on the road with urologists in the first quarter, and I was really encouraged to see when I was in Chicago, a billboard sign of urologists actually advertising the UroLift, differentiating themselves from other urologists. And I think that type of an environment will really help. What's really assisted in driving that growth has been our direct-to-consumer and obviously the sales reps that we added in Q1. We added 20 reps in Q1 of '19, and it takes a period of time for a rep to become productive and to drive revenue. And our initial thinking was to do 12 DTCs. We actually ended up doing 18 regional DTCs and we also believe that, that helped. And we did announce on the call that we anticipate beginning a nationwide direct-to-consumer, direct marketing campaign because our market research tells us that of the men that have BPH, only 6% of them are aware of the UroLift product being in existence, and we think it's incumbent on us to make men aware of this solution for BPH. A minimally invasive solution. You can come in on a Friday, a 1-hour long procedure, no sexual dysfunction, you won't have to wear a catheter and you'll get immediate relief, and you can be back sitting at your desk in your normal working environment on Monday morning, no bleeding and absolute relief of to your symptoms, and no side effects of taking the pills. So look, we've always been a little bit cautious as we move from the early adopter to fast follower. So -- but we have all the metrics, we believe, in place to be successful with this product and to continue to make the UroLift the standard of care.

And I think you've kind of characterized in terms of the number of physicians that you have trained. I think you've -- just want to make sure I understand those numbers, where are you today? And I guess where do you think you'll end up at the end of 2020 and maybe put that into perspective in terms of the number of total urologists in the United States?

Yes, absolutely. So in Q4, we did approximately $90 million. At the end of the year, we had 2,500 out of the 12,000 urologists in the United States trained. We would anticipate training another 500 urologists in this year 2020. And if you take that run rate of $90 million, just flat line, that's a run rate of about $360 million on a pro rata basis with 1/5 of the urologists trained. And that's why we continue to be so excited about this product, Kristen, because we have a mass -- significant opportunity in front of us to continue to grow this by growing utilization in the urologists we've trained, bring on new urologists every year, and at the same time, we have a very wide mass behind us. A fast follower that would come into this space, we believe it would take them 8 to 10 years to get to where we are today.

Yes. And do you think that this is a procedure that it's applicable to all the urologists? Or do you think that -- what do you see as the addressable population of urologists that should be doing this because usually it's like the 80-20 rule? Or what do you think is really the target market for the urologist population?

Absolutely. So our original thinking when we got the UroLift into our portfolio was that it was all about the 6,000 urologists that saw the majority of BPH patients. As we continue to do our analysis in order to try and focus our sales force, we broke down the urologists based on the number of unique BPH patients they see every month into 8 different deciles. But -- and what we found was that regardless of whether you see -- the average urologists will see 75 unique BPH patients a month. But regardless of whether you see 50 or you see 150 unique BPH patients, our champions can come from all of those different practices of urologists. So it truly is every 1 of the 12,000 urologists has the opportunity to be a champion, and a champion in our world is somebody that does 6 procedures or more every month. And so therefore, we will truly train all of the 12,000 urologists because all of the 12,000 urologists have the potential to bring this game-changing procedure to help men that are suffering with BPH.

Okay. So it sounds like a lot of runway for growth?

Absolutely.

Perfect. All right. Why don't we shift a little bit to Japan, speaking of runways for growth, and just kind of the international markets, maybe more broadly. What are you thinking in terms of the time lines for Japanese market, visibility on reimbursement there? Just kind of talk to me about when we'll get some more data points to really have a good sense for what the ramp-up might look like for that market?

Absolutely. So the U.S. market, if we take the drug dropout category, is that 1.5 million men, that is approximately a $6 billion market. Then, if you look at the Japanese market and the cohort of patients, the percentage that are in each of the categories whether it's watchful waiting, taking the pill, drug dropout or invasive procedures, is very similar. So sizing that market, it's about a $2 billion market compared to $6 billion in the United States. We have already received the Shonin. We would anticipate getting the reimbursement later this year, and we would also anticipate be generating -- to be generating revenue in 2021. This was not in our original LRP. When we laid out our LRP, our expectation was that we would not be generating revenue in Japan until 2022. So that was part of our decision to pull forward some of the investments into Japan into 2019, and we are currently doing market development work in Japan, working with key opinion leaders, identifying the urologists that really are the thought leaders in the area of BPH. Just wanted to add one comment with regard to the UroLift in North America, if I may. Just also wanted to point out that we have not seen, with the coronavirus, any slowdown in UroLift procedures in North America. And so far, it hasn't been impacted by the spread of the coronavirus. So just thought that might be an important point for our investors to be aware of.

Thank you for that. Yes. Okay. And then I guess just in terms of the reimbursement, with Japan, that I think will be tied to UroLift 2. Is that correct? So you feel good about the level of reimbursement that you'll be receiving in Japan?

Yes. It is UroLift 2. You're correct. And therefore, we believe that we will get a favorable reimbursement decision from the Japanese authority, just based on the methodology that they use to determine reimbursement. And once we get the UL2 launched in the United States, we should get our 510(k) sometime during quarter 2 and be in the market thereafter, we would anticipate then that getting that product into the hands of the urologists in Japan to -- in order to assist in getting the reimbursement, I think, will be a good step forward. So yes, we're really positive on the Japanese market. And I think that for 2020, the majority of the growth from UroLift will again continue to come within the United States. In 2021, you'll see Japan start to come in. Later in 2021, we should see France. And sometime in 2022, we would envision that China would -- we would get registered in China sometime in 2022. And places like Brazil, Chile, you would expect then Italy and Spain and other European countries to start to kick in and be an accelerator to the growth of the product.

Okay. Perfect. And then the other -- I guess, other opportunities for growth that are often talked around in the investment community, one would be MANTA as well. Can you maybe just share the latest thinking on MANTA? I know that you've talked about capturing about 4% of the market share last year, and you've launched now fully commercially. Why do you think you can only get to about 8% of the market? I'm kind of surprised that that's only the target as you move from a limited launch to a full commercial launch.

Yes. I think building a business in -- building a medical device product in a marketplace, I've often described that to compound interest, you have to build the base business and then you continue to add on top of that. And even if you look at the way UroLift ramped, it went from $5 million to $16 million to $50 million. And then it wasn't until you had the base in $50 million that you got the compounding effect, for your base is growing and then as you pull in new customers, then it starts to accelerate. I know in every economics 101 class, we teach students that you've got an x-axis or y-axis, and everything is in a straight line, in demand and supply. In real life, everything is an S-curve. You have to build that base first and then you get the compounding impact on top of that. Now in our limited launch in the United States, but more so in the development of the European market, we've already gotten to 4% penetration. We've generated around $11 million in revenue last year with this product. And we would anticipate now going to full launch that we would, thereby, convert a total of 8% of the global market and the global market as we've estimated at the midpoint is around $250 million. As we go and ramp, obviously, we'll update the investment community. We're very excited by the product. Our price discovery went very well. Our discovery on the training methodology went very well. And we now know how to price it, how to train the interventional cardiologists to do this procedure. And 2 months into our full launch, I couldn't be happier with how it's going. There's broad acceptance for the product. It's being adopted in the larger TAVR and EVAR centers. And even at the lowest end of our price discovery, it is still very much accretive to our long-term gross margin goals.

Okay. I guess, last few minutes, I want to kind of turn to margins on that topic. One of the things that, I guess, investors have looked at is kind of on the LRP. I think there is full appreciation that you're absolutely going to hit your top line goals. But on the margin side, I think people struggle a little bit to see you hitting, maybe, the operating margin goals. I think you've expressed that you think you can get both on the gross margin and operating side. I think people think that the gross margin is maybe a little bit more achievable. Can you maybe just walk us through the confidence on both gross and operating margin? And how you can get there? And what gives you the confidence to get on both metrics?

Yes, absolutely. So when we laid out our 3-year plan in May of 2018, we laid out these goals. And I can tell you as I sit here right now, I feel really confident on getting to the 60% to 61% gross margin and getting to 30% plus on the OP margin. What gives me the confidence in doing that? Well, if you look at 2019, we expanded gross margins faster than OP margins. So we expanded gross margins by about 1% and at the midpoint of our guidance for this year, we anticipate expanding OP -- gross margins by 1% and OP margins by the midpoint, around 1.7%. The 2019, we did have a negative impact from tariffs and also from FX. I mean FX took away about 35 basis points in OP margin expansion on its own. And in all candor and transparency when we built that plan, we obviously had built in a certain amount of buffer. So some of our buffer on the OP margin has for sure gone away with those 2 items. On the positive side of the ledger, I don't think FX is going to be the negative impact. Some of the investments we pulled forward were onetime in nature and are now in our run rate. And I think -- especially on the OP margin line, I think, the investment community will feel much more confident in our ability to get there as they see us ramp as we go through the year. We'll probably start in the mid-20s or there about 24%, 25% right out of the gate. But then we'll ramp as we go through the year in the OP margin. And as we exit, I think the investment community should feel a lot more confident in our ability to get to that 30% plus. And where is the growth in OP margin coming from? Well, 2/3 of it is coming from mix, and then 1/3 is coming from operational efficiency and our restructuring programs. We had a $25 million to $35 million of restructuring programs built into our 3-year plan, and we have a high degree of confidence in realizing them. And obviously, the mix is tied to your opening comment that our revenue is doing better than we expected. But it's not just about revenue doing better than we expected, it's revenue in specific areas doing better than we expected. So with the UroLift, with interventional access, with vascular, with Asia, which are all accretive to our gross margins, and then as you drop to the OP margin line, as I said, the investments that we made are largely done and -- in our run rate and are pretty much -- largely onetime in nature and the right thing to do for the business. And then as you -- you'll get leverage within your income statement just from the accelerated growth in UroLift and not having to invest as much. And then as you fast forward into 2021, obviously, we have another couple of restructuring programs hitting in '21, and you'll have the UroLift 2, which will expand our margins in the mid-70s to the high 70s. And that will, again, drop down to our OP margin line. So that's why we have a high degree of confidence in getting to those long-range plans. And the acquisition that we did in our OEM business also helps us get there, that's a 40%-plus OP margin business.

Perfect. All right. So I guess in closing, it sounds like you still feel good about those LRP plans and the ability to achieve those.

Yes, we do. We feel the revenue number is doing better than our expectation. And we still, as I said, feel confident on the 60% to 61% and the 30%-plus on the OP margin. And I think also, we've done better on the interest line, and I think we'll do better than the plan we laid out for our tax rate. So again, from an earnings per share perspective, the company we have built and the company we are building is, if we can grow on an as-reported basis at 7% on the top, our expectation is that our -- the investment community will get a 14% return, doubling down in our income statement as we go through it. And I -- and we believe that's a pretty attractive asset in today's world.

Yes. Indeed it is. All right. Well, with that, I think we are out of time. So I want to thank you, Liam, and Jake, for your time this morning, and thank everyone for listening in via the webcast. Thank you for your patience and understanding and work with us on turning this quickly over last minute to a virtual form. So appreciate it. And thank you, and we will be in touch soon. Hopefully, in person.

Thank you, Kristen.

Thank you very much. Hope everyone has a great rest of the day.