Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

[Operator Instructions] Also please be advised that today's conference is being recorded. Thank you.

Good afternoon, everyone, and welcome to the 2020 Wells Fargo Virtual Healthcare Conference. I'm Shagun Singh, part of the medical device team at Wells Fargo, and I'm pleased to have Teleflex on this call with us. Joining us from the company are Liam Kelly, President and CEO; Jake Elguicze, Treasurer and VP of Investor Relations; and John Hsu, Senior Director of Investor Relations. Thank you so much for joining us today.

Thank you for having us, Shagun. It's our pleasure to be here.

Great. So let's begin with the discussion of COVID-19. Liam, the pandemic had a 20% impact to your sales in Q2, and the impact by business varied. The businesses that were most impacted by the pandemic recovered at a strong pace in Q2. So I would assume about 28%, by our math, a 28% of sales. Some recovered at a more modest pace, that's another 27%. Some saw trends worsened due to a lag effect like the OEM business, about 9% of sales. And then there were still others that saw higher demand. So that's about 36%, including your largest segment, Vascular Access. So just on a net basis, what trends are you seeing thus far in Q3 versus the 20% impact that you saw in Q2?

Yes. So the way we look at our business is very simple. 1/3 of our business has very little impact of COVID, 1/3 has a positive impact, which is largely our vascular and respiratory product portfolio and 1/3 has a negative impact which is really our interventional urology, UroLift business, our Interventional Access, our Surgical and our OEM business. And as we stated, Shagun, a few weeks ago, we were very pleased, quite frankly, with how quick our business snap back following the postponement of non-emergent procedures that began in mid-March and really lasted through much of May. Our quarter 2 results came in better than we expected internally right across our complete P&L. And while we don't want to get into too many intra-quarter specifics, these trends have continued to make progress as we've gone through the quarter. I mean, I think it's still reasonable to expect that Teleflex will report a negative as reported revenue growth rate in quarter 3 compared to the prior year, but I think going to be an improving trend. As we see in marketplace, procedures begin to come back, accelerate the comeback of these procedures. And I think we'll see an improving trend. And our expectation is that as we get into quarter 4, that improvement of that improving trend continues into the quarter 4, in line with what we saw in early July, where we saw a pretty notable, modest improvement in July right across the portfolio.

Got it. Consensus is looking for about 4% decline in Q3, is that in the ballpark? Would that be reasonable?

So I think it's reasonable to consider a decline, but obviously, I don't want to talk about intra-quarter, it's difficult for us to make that. But directionally, it's reasonable.

Okay. That's helpful. So Liam, you had previously indicated that if procedures start to come back and if there is a controlled second wave, Q4 should behave very much like the trend you saw in Q1 pre-pandemic. And I believe you did about 7.5% growth adjusted for M&A and 8.2% inclusive of it. That said, your commentary on the Q2 call was slightly more cautious. Do you think you can get to normalized growth in Q4? And what is that growth? Is it 6% to 7%, 7% to 8%? Is it something else?

So I think that as I look at our growth rate and if I try and look at our growth rate through the first half of the year and if I exclude the impact of COVID, I'm quite pleased with the result of our portfolio. We've been growing at approximately 8%. At the time of our 2Q earnings call, our caution was justified because now we've seen some spike in COVID cases in certain populated states, in particular, Florida, Texas and California. In regard to the 4Q question, the answer, unfortunately is, it depends. It depends on what we see at the end markets. It depends on the second wave, if that occurs. It depends if we see a decline in the number of new cases. And it also depends on how organized the hospital systems are. And it also depends if we have a vaccine that's being rolled out in the 4Q and we get consumer confidence in order for people to feel positive about coming back to the hospital. And I think to answer your question about what is the underlying growth? The underlying growth of our business is clearly demonstrated in the first half of the year with an 8% underlying growth. And we feel good about our underlying portfolio, but it is unprecedented times. And generally speaking, I think we feel much better about where we are now than obviously where we were back in April, in that time frame. But it does seem like a recovery to positive year-over-year growth levels for most medical device companies seems to be getting pushed from Q4 into potentially into 2021 when we get back to a more normalized level. But again, there's a lot of caveats there, Shagun. There's a lot of depends and there's a lot of uncertainty, which is obviously why many companies do not have guidance out there and Teleflex is no exception to that.

I got it. But just given the current variables, given where they stand as of today, do you -- should we expect normalized growth year-end? Or are you guiding more to 2021, just directionally?

So we don't have any guidance. So it's difficult for me to give guidance, Shagun, to a year-end number. Now there are a few anomalies about Teleflex in the fourth quarter that the investment community should feel positive about. And in that regard, I think we -- if we manage the second wave well, then I think to answer your question directly, yes, we will be in positive growth in the fourth quarter. If it is not managed well, then we won't be. If there's a strong second wave, then we won't be. But if it is managed well, there's a good potential that we will get into some sort of normalcy. And Teleflex is a little bit unique in the fourth quarter in so far is that we have 2 additional billing days.

Got it. So let's ask the audience what they think. Josh, if you could please put out the polling question. So when do you expect Teleflex to return to pre-COVID growth levels on an underlying basis? If everyone could please record their responses. By Q3 '20, by Q4, early first half of 2021, second half thereafter? [Voting]

Josh, do we have the results? Okay. 66% believe will be the first half of 2021. Liam, what do you think?

So I think that the investment communities, crystal ball is equally as good as Liam Kelly's crystal ball, quite frankly. I mean, I have a lot of sympathy for the investment community because there's so much uncertainty out there and is very difficult. I think you had 66% in the first half. I think, as I'm looking at it today as most med-tech CEOs are looking at it today. That now seems more reasonable that we're going to get to more normalized levels in the first half of 2021. And I think investors are aligning to that based on your survey. I think that it is very dependent on the second wave as to when that occurs and when we get back to normalcy. What we're seeing in the marketplace today, and this is a broad statement and not specific to any business unit, but we're seeing procedures in that 90%, 95% and moving in a more positive direction, but we need that to get to the 100% back to where it was pre-COVID. And I do think that it's going to take until -- into 2021 for that to occur.

Liam, any comments on new patient flow trends in Q3 and how that's shaking out?

Yes. So there's a mix of patients that are likely to get procedures done, and there are a smaller number that will look to delay their procedures. In a survey that we did with our Interventional Urology customers for the UroLift, 85% of patients would consider getting the procedure done in this calendar year with 15% postponing it. So I think that -- and confidence in that patient population would be reinforced by a vaccine being available and consider that this is a minimally invasive procedure. You don't wear a catheter, no sexual dysfunction. So clearly, it's one of those procedures that I would feel that patients should feel confident about. It's a 1-hour procedure. It can be done in all 3 sites of service. If you don't feel comfortable in the hospital, you can go to the ASC or the outpatient. And then on the more general population, based on conversations I'm having with hospital administrators and CEOs, we're encouraged that they seem to be building in surge capacity for the ICU. In case there is a second wave, they have protocols in place. They have identified how to manage the patients a little bit better. In the first wave, we were intubating these patients very early in their treatment, whereas now the wisdom seems to be to use high flow oxygen. And that limits the time to stay in the intensive care. So we need to see those elective procedures continue to ramp as we go through Q3 into Q4. And I would like to see additional capacity come into the system. Most likely, I think it will come in, in Q1 because there is a little bit of a backlog of procedures that have not been completed in Q2, that need to be caught up at some stage. So I would like to hope that, that will come in Q1 or Q2 next year.

That's really helpful. Let's touch on the DOJ investigation, even though we understand that what you can say is probably limited at this time. So on the Q2 call, you said that the DOJ had opened an investigation under the civil False Claims Act with respect to NeoTract's operations broadly in addition to an ongoing customer investigation. What can you tell us with respect to the scope of the investigation? Is it limited to the time period before the acquisition? Or is it broader than that?

So yes, you're correct. Our subsidiary, NeoTract, which as we all know, is where the UroLift product is used to treat BPH. They received a civil investigation demand from the Department of Justice, and that was really seeking information as it related to a 1 specific patient. We obviously cooperated with the department, and we provided some information. We submitted some additional information to them in June. We met with them in July. And that's when they advised us that they were going to expand the investigation into NeoTract operations more broadly. We maintain the very strong policies and procedures, and we promote a very compliant way of doing business. We've been in business for 75 years. This is the first time we've ever had any involvement with the Department of Justice. And the current investigation is really focused on that 1 customer, and the Department of Justice has spent some time looking at one particular rebate program that we had in place in the early days of the UroLift product. The UroLift product was -- had reimbursement that would make the procedure a profitable procedure for a clinician, if they use 4 implants. But if it was medically necessary for demand because they had a large prostate to receive an additional 1 or 2 implants, that would not be covered under the Medicare and Medicaid reimbursement. So we put a rebate program in place to make sure the demand got what was medically necessary for them. And that rebate program was put in place in 2015, 2016, and it was completed in 2017, early 2018 because the CMS reimbursement for additional implants came into being. So that rebate program was, we believe, compliant to safe harbor and all legislation and hasn't been in effect since early 2018.

That's really helpful. Liam, you did indicate on the prior call that you do not anticipate a commercial impact. But can you help us understand that a little bit more? What gives you the confidence around that, especially given that the investigation is in the initial stages, I think you gave some important data point in terms of the timing of the rebate program. But the outcomes can vary in terms of the time it takes to settle, the amount of payout. Perhaps how you sell the product, maybe you can comment on that and even how customers utilize it. So can you just help us understand or provide broader thoughts on how to best handicap the risk around this investigation?

Yes, Shagun. To be honest, it's quite difficult to handicap the risk. But generally, these investigations can take a couple of years to reach their conclusion. If they continue to move in that direction. And obviously, the amounts can vary from 0 to whatever in the millions, if a company is found to be doing anything inappropriate. We don't believe we've done anything inappropriate. And given how early it is in the investigation, we cannot provide much clarity on timing or potential resolution. I would expect that most of our communication over the next number of months will be focused on that single customer. And from a reimbursement standpoint, we are confident that our strategy remains intact. And also, I would ask the investment community to make note of the fact that the preliminary physician scheduled for 2021, keeps the rates in the office pretty much unchanged, while proposed rates in the ASC and the hospital are modestly increased and this is an annual review, and we've seen incremental increases in every time since it's been reviewed. And from a commercial standpoint, we continue to execute, I mean, against a tremendous addressable market. We've treated 200,000 men out of 12 million in the United States. And let's never lose sight of the fact this product improves outcomes for men. This product makes men's lives better. And this product allows men to live a full life with their BPH treatment and our symptom relief. And it does good in the community and in society, and it's got a bolus of clinical evidence to support it. Over a multiyear period, it's got great patient outcomes. And I think those are some of the gating factors that will be considered as we have our conversations with the authorities in relation to this product. This product is doing good for society. It's doing good for men. It's giving great clinical outcomes, and it's very well supported by both the clinician community and also by men themselves electing to have this procedure done.