Teleflex Incorporated (TFX) Earnings Call Transcript & Summary

Well, good morning, and welcome to the second day of the inaugural KeyBanc Life Sciences & MedTech Investor Forum. My name is Matt Mishan, our senior med tech analyst. I'm pleased to be joined today by Treasurer and VP of Investor Relations, Jake Elguicze, from Teleflex. If you have any questions, there's a Q&A box on the bottom of the screen that goes directly to me, and I'll do my best to get to those questions. And I think, with that, Jake, welcome, and thank you for joining us. Why don't you give a brief overview for -- of Teleflex for investors that may not be familiar with the company, and then we'll turn the questions from there.

Yes. Absolutely, Matt. And thanks very much for having us at the conference today. So Teleflex was founded in 1943. And up until the very beginning of 2011, it was still very much a diversified company that also contained a medical device business within it. And following the divestiture of all its non-medical businesses as well as several acquisitions of certain health care assets, Teleflex emerged as a pure-play medical device company, led by a new management team in 2011. And that new management team was really focused on a few things: accelerating our constant currency revenue growth rates; improving our gross margin through favorable product mix, as well as through a variety of manufacturing restructuring initiatives; and the improvement of our operating margin profile through several OpEx-focused restructuring initiatives. The team was also focused on continuing to transform the financial profile of Teleflex through a variety of different types of M&A. And since 2011, we've completed over 70 M&A transactions. And that includes anything from several late-stage, pre-revenue technology acquisitions; several acquisitions of our outside the U.S.-based distributor network so that we can control the sales channel better and improve our margin profile; as well as through a handful of more sizable M&A, including, more recently, the acquisitions of Vascular Solutions, NeoTract, and most recently, Z-Medica. So today, Teleflex is a diversified medical device company that's focused on a few different clinical areas: Vascular Access, Interventional Access, Interventional Urology, Anesthesia, Surgical, respiratory and the bladder management areas. And we also have an OEM business that provides products and services to other medical device companies. And really the common threads across our different strategic business units include the goals to improve patient outcomes, reduce health care costs, and generally, just try and create efficiencies for our customers. And I'd just say, lastly, as we sort of enter 2021, we're continuing our journey from that medium-growth company with margin expansion opportunities to a higher-growth company with those same margin expansion opportunities. And we're certainly committed to delivering strong and consistent values for our shareholders, customers and our employees.

Okay. All right. Excellent. So Jake, we're in an interesting time frame right now. How would you characterize the transition from like this December-January surge that we just experienced to late February-March vaccine optimism?

Yes. So great question. So I'll start by saying that, I think, back in sort of the early September time frame of 2020, we sort of almost felt like we were a bit out on an island, and that other med tech companies at that point in time, I think, were predicting a much faster recovery from COVID, quite frankly, with many of them calling for a recovery to sort of pre-COVID level constant currency revenue growth rates as early as the fourth quarter of last year. Now we were not one of those companies. And while our portfolio is not overly tied to elective or deferrable procedures, our thoughts on the pace of recovery was certainly much more cautious. Now as the second half of 2020 played out, it turned out that, I think, we were correct. COVID infection rates skyrocketed in November and December, putting pressure on med tech company performance. That said, we were able to outperform our internal expectations during Q4, and we drove very nice sequential improvements in both our gross and our operating margins, and also drove pretty significant cash flow from operations generation during the fourth quarter of the year. Now as it relates to 2021, we felt it was important to reinsert financial guidance. However, in doing so, we wanted to make sure that the financial guidance that we put out there was achievable. And in the face of what I would say as continued significant COVID headwinds, we continue to take a much more cautious approach as it relates to how we see the piece of recovery occurring during the course of 2021.

Okay. So you were one of the few companies that actually put out guidance. So where were the areas where you were cautious? I mean was it your thinking we're getting more of a 3Q recovery in the U.S. and 2Q will be slow? You think international would be behind? What were the areas where you put the most amount of conservatism in?

Sure. Absolutely. So you're right, I mean, we did take a more cautious approach to our 2021 financial guide. And what do I mean by that? Well, I mean, we're basically -- we're assuming that COVID is going to continue to be a headwind throughout the entirety of the first half of 2021. And we realized that infection rates have been, I would say, declining or stabilizing recently, and that the pace of vaccinations are obviously improving. However, when we set our financial guide for '21, we made the assumption that COVID will continue to be a significant headwind throughout the entirety of the first half of the year. Additionally, during 2020, there were actually some product categories within our portfolio that actually benefited from COVID, those being our Vascular Access -- some certain Vascular Access products and respiratory products. But when we formulated our guidance for 2021, we did not factor in any continued additional benefits continuing in those areas. So we factored in the headwinds, but we didn't necessarily factor in the tailwinds that we saw from COVID.

Okay, fair enough. As you think about your portfolio, [ this pre-COVID ] pre-UroLift, I would say it's tied to higher acuity levels of the hospital needs. So stuff that's harder and harder to put off. And I think what's going to happen, unfortunately, is that due to like delays in procedures and screenings, you might actually see a higher level of acuity at a hospital like over the course of the next year. What are you kind of seeing currently in non-COVID patients?

Yes. So in certain areas, I think the answer to your question is yes. I think a good example of that is within our Interventional Access business. So as you know, many of our products that are used in these particular strategic business units are used in conjunction with TAVR procedures. And prior to COVID, I don't think any of us would have necessarily thought that TAVR -- a TAVR procedure would have been something that could have been deferred or elective. Now, I think because some patients have been unable to see their doctors and get some type of level of preventative care, when they do show up to see their physician or go to the hospital, they're in much worse condition. And generally speaking, I think that would be a positive in terms of our business and product offerings because many of them, if not most of them, tend to be used in sort of that critical care setting.

Okay. And then Europe and Latin America, I think, are completely different stories to what we're talking about in the U.S. I mean can you talk about the recovery over there? How far behind do you think they might be? And is there a situation where you kind of look at some of those countries and say, "We might not recover back to pre-COVID levels for some time?"

Sure. So look, you're correct. I mean the European and Latin American markets are still struggling quite a bit with COVID and their infection rates as well as the rollout of vaccines. So it's somewhat difficult for me to say sort of how far behind they might be as kind of compared to the U.S., just given new variants and whatnot. But what I can tell you is those markets are still struggling. However, I think it's important to keep in mind that when we provided financial guidance for 2021, we did so in late February. And as a result, we believe we've largely factored in those types of issues when we talked about our full year '21 guide as well as our expectations for the first quarter.

And in your opening couple of minutes, you mentioned 70 acquisitions that you've done since 2011, which is, basically, I think I'm probably [ running errands ] on about 50 of them. So your acquisition strategy is core to your thesis. How do you think about the balance between the cost and multiples like you're paying for these acquisitions at this point and investments in like internal R&D?

Yes. So Matt, at Teleflex, I mean, we really try and take a very balanced approach towards capital allocation. And that includes a mixture of capital that is going to be spent on internal product development efforts, capital that's going to get spent on a variety of restructuring efforts, capital that's deployed via dividends, and obviously, capital that we allocate towards a variety of different types of M&A. And that could include late-stage, pre-revenue technology acquisitions, where a company or a technology may have received or about to receive some type of regulatory approval. And then we can take that product and put it into our kind of commercial bag within our strategic business units, and then they can sell it. Another type of acquisition that we do is focused on third-party distributors. And what I mean by that is, oftentimes, we'll use -- outside of the U.S., we'll use a distributor that has its own sales force and is drive -- truly driving the end-user demand of Teleflex products. And we continue to believe that we have approximately 5% or so of our global revenue that goes through these types of distributors. And that's an opportunity, over time, quite frankly, to take some of those distributors in-house and recoup and improve the financial profile -- and recoup margin and improve our own financial profile. And then lastly, I mean, we've done a handful of those scale acquisitions that I talked about earlier. I mean they tend to be focused within our existing strategic business unit verticals. And when we do those acquisitions, we're mindful of multiples. We're very mindful of the return characteristics that they generate. And look, I think we'll continue to be very disciplined in the future when it comes to that balance of internal product development, spending, CapEx spending, restructuring spending, dividends, and then obviously, external M&A.

Shifting over to UroLift. I think -- I was trying to figure out how to ask a question that's a little bit different than you normally get. So I thought about like this, how is the DTC campaign going for urologists? When does the -- how do the urologists feel about it? Are they seeing like a pull from it? And is it driving people to -- is it driving them to add UroLift to their practices?

Yes. So I think the short answer is that the UroLift DTC campaign, whether it's from a urologist standpoint or a company perspective, is actually going quite well. And just as a background for investors, I mean, we started to do direct-to-consumer advertising associated with UroLift product a few years ago. And at that point in time, we did so via targeted radio campaigns as well as social media outreach and efforts. Once we felt like we had enough of the U.S.-based urologists trained on UroLift product and familiar with how to do the procedure, during 2020, that's when we began to do that piloted national direct-to-consumer TV campaign. And the reception from the campaign has been good. It's been high. We have very, very strong website traffic and call center volume, indicating strong lead generation. And again, while it's still, I would say, relatively early days, we anticipate that the national DTC program is going to continue to build awareness of UroLift and the significant features and benefits that it offers as compared to more ablative, tissue-destructive procedures that are out there. So we continue to anticipate that DTC is going to be a multiyear catalyst for UroLift, for the urology community itself, for patients and for Teleflex.

Regarding the DTC campaign, if I'm not mistaken, sort of totals into that fourth quarter, like September, October time frame of last year was that when the investment spend really started to kick in. How long does it take from initial advertisement to when those patients show up for a consultation to when they actually do the surgery at the back? What does that time line look like?

Sure. So it's difficult to say exactly, and the reason is that there are certain HIPAA requirements that sort of prevent us from seeing all of that kind of end data. What we can see is the number of website traffic that's getting generated and the number of patients that are then trying to find a urologist via our website. Now once they then go and get consults from a -- into the urologist, we don't have that end-user data that then tells us, because of HIPAA, which ones of them actually got a procedure done.

Yes. Okay. But the urologists, you -- well, can you talk to the -- I'm assuming you guys talk to the urologists, and you can have a conversation and they can -- and they -- and that's only, yes, like when somebody comes in, it's good without actually having to -- I guess it's qualitative data rather than quantitative data.

Yes. I mean, I think the inflow that we're getting from the urologists is that they're seeing an influx of patients that they tell us that are coming directly associated with the DTC campaign, absolutely.

All right. Outstanding, I'd say. And then UroLift also has some catalysts internationally coming up this year. Where does it stand as a percentage of revenue for the UroLift at this point? And just can you walk through some of the catalysts here that you see through 2021?

Yes, sure. So during 2020, still, approximately 95% of UroLift revenue continue to be generated within the United States and about 5% outside of the U.S., and that was roughly split 50-50 between Europe and Asia. Moving forward, I think we continue to believe that the U.S. market is going to be the largest near-term market opportunity. However, we're very, very encouraged about things like the Japanese market, as we think that we're going to receive reimbursement for UroLift in that market, hopefully, by the third quarter of this year. We anticipate a very immaterial amount of revenue for Japan in 2021, with 2022 to be the year where we start to actually build that initial market presence. And I would say, just, look, given your experience in the industry, med tech launches in Japan tend to go slowly at first, but it's also one of the most profitable and largest markets globally. And an important thing to remember is that when we have reimbursement, we'll get it from a single payer. And we're not going to have to go out and -- like we did in the United States, and spend years and years trying to gain reimbursement from all the different private payers and whatnot. So that's a good thing for Japan. And we estimate that Japan is going to be somewhere between $1 billion to $2 billion addressable market opportunity, and it's going to be a meaningful catalyst for, really, the next several years. So that's really the next kind of big focus for us internationally.

Okay. And then there's always a focus around what competitive technologies are out there. Just kind of competitively, what's the moat around UroLift?

Yes. Great question. So I mean it's our belief that we're actually continuing to put distance between ourselves and competitive technologies. And that's really for a variety of reasons. I mean, first, UroLift simply offers just a better clinical outcome than ablative, tissue-destructive technologies that are out there, and whether that's because of lower risk of sexual dysfunction and reduce catheterization rates, better IPSS scores, et cetera. Second, I think we have excellent product and method IP that lasts until about 2033. And we're already looking at ways that -- how can we extend that further. Third, we have dedicated CPT codes that specifically mention the UroLift product, making it impossible for competitors to then latch on to those CPT codes. Another item is we're generating an extensive library of clinical data. So when coupled with our DTC efforts, that really leads us to think that UroLift is going to become viewed as a real first-line treatment option to deal with BPH, even bypassing that initial use of pharmaceuticals at some point in the future. So -- and I guess I'd end by just saying, look, we're launching the next-generation UroLift product now within the U.S. So that is going to also help increase our overall company margins. So for all of those reasons, I think we remain very, very enthusiastic about the UroLift opportunity.

Okay. Switching over to MANTA. Can you talk about MANTA expectations for 2021? Not necessarily the dollar amount, and really, I think that's a little bit too specific. It's more how you see like adoption moving -- the adoption curve moving forward in those procedures now that you may actually be able to get into those labs and/or train.

Sure. So for those who might not necessarily be familiar with MANTA, it's our large bore closure device, and there's nothing quite like it on the market today. It has the ability to close a larger hole that occurs in a patient when a patient has a TAVR procedure done or some -- or an EVAR procedure performed. And historically, clinicians would need to use some type of multiple small bore closure devices to kind of seal a larger-sized hole. So we think that this really meets an unmet market need. We continue to estimate that this is a $200 million to $300 million market opportunity for us. And when we started the full market launch last January, things were actually going very, very well with the adoption of the product. Now obviously, then COVID hit, which caused a pretty significant slowdown in the adoption of this new product, as TAVR procedures were now considered deferrable. The second and third quarters of the year were difficult to gain traction and gain access into those accounts, into those TAVR centers. Now by the fourth quarter of the year, we generated about $5 million of revenue globally. So as we thought about our 2021 financial guidance, we said that assuming, basically, just that the annualization of that $5 million would continue. So we're only counting on around $20 million or roughly 8% of the market penetration. So sort of coming back to one of your first questions about potential areas of conservatism, I think this could potentially be another area of conservatism, but we'll have to see how the year plays out.

Okay. And then you have a sales force in this area. And I think one of the new products you were talking about at JPMorgan was the Wattson and introducing that in the 3Q time frame. Kind of what does that do to the call point? I mean, I think the call -- I think what you can do is once you have a couple of products, it becomes a broader call point for it.

Yes. And generally speaking, I mean, that's what we're trying to do throughout a lot of our different strategic business units, right? It's trying to say, "We have an access. We have a call point. Let's provide more products into that call point and give our sales reps more to sell when they're seeing people." So that's the strategy, whether or not it's our Interventional business. That's a strategy for our Vascular Access business. I think, eventually, it will become the strategy for our Interventional Urology business. I mean, right now, the market opportunity is just so large with UroLift domestically and internationally. But at some point, could I see us wanting to continue to sort of add more into that area? Yes, certainly.

Okay. And Wattson is in -- was this in the flesh like -- MANTA is a closure device. Wattson is an -- is it an [ interventional ] device? It's...

Correct. That's correct. So it a product that's going to help facilitate certain interventional procedures, absolutely. It's a guidewire.

Yes. So like revenue per procedure. It's like...

Yes.

Okay. Despite the positive trends for MANTA, the area that I thought wasn't coming back as quickly for you guys was the broader Interventional segment. Can you talk through some of the headwinds there? And I'm specifically interested in the trajectory of GuideLiner and -- which was a key product that you acquired from Vascular Solutions. And has that slowed from competition with Medtronic from Telescope?

Yes. Yes, absolutely. Great question. So I mean, look, as we entered COVID and elective procedures were no longer allowed to be performed, I think, quite frankly, the one area of our business that we would have normally not considered to be susceptible to an elective procedure slowdown would have been our Interventional Access segment. And maybe we're sort of getting into semantics here, but I think -- our thought was that TAVR and other interventional procedures can be deferred for a certain period of time, but they're eventually going to get done. However, if they get treated for too long, it's going to really lead to some pretty serious adverse events for patients. Now I would just point out that, in addition to some of the COVID headwinds that we saw affect this business in 2020, during the second half of the year, we had a voluntary product recall for one of our products that's going to be out of the market until about the third quarter of this year. And additionally, we completed some distributor conversions within Japan, and that also caused some temporary revenue headwinds. So once things normalize for COVID, I think we have a high degree of confidence that this Interventional Access segment is going to rebound. And that it's capable of very, very strong revenue growth rates in the future. As it relates to your question on GuideLiner and competition, so the GuideLiner catheter really kind of revolutionized this whole concept of guide extension and creating really new possibilities within the area of interventional cardiology. So now we're on our third-generation device. I think we faced competition in the past here for quite some time. And the latest product is now, obviously, Medtronic's Telescope product. What we've seen in the past is that clinicians are certainly willing to try competitor products, but oftentimes, they come back to using the GuideLiner product. So to answer your question, is our GuideLiner facing some near-term pressure from competition? I think the answer is yes. I'd also point out that we're -- we currently have a lawsuit in process against Medtronic, as it's our belief that they infringed on those patents.

Okay. And there's a history of infringement there where you end up doing it, where you end up getting a license from a competitive product.

Yes. There has been times where we've worked out royalty structures with other companies.

Right. EZPlaz, I think, is a very exciting product. And in addition to the military channel, I think there's going to be a use case for emergency vehicles, ERs. Could you kind of walk through what that case is? The military just makes a total sense, but like for the ERs and for the emergency vehicles, what's the value proposition there?

Yes, absolutely. And so EZPlaz is the name of our freeze-dried plasma product. And today, we estimate that there's approximately -- or let's just say, somewhere around 137 million visits to the ER in the U.S. on an annual basis. And in many cases, there's minimal plasma availability in certain, what we would kind of consider, challenging environments. So the pre-hospital setting, the sort of remote or rural hospital setting, and then obviously, I think you mentioned the military, the battlefield setting. Oftentimes, the issue is, is that there's traumatic hemorrhage injuries that are going to require some type of plasma transfusions to really help stop life-threatening bleeding. The FDA and the Department of Defense launched a joint program to expedite medical products intended to save the lives of U.S. military personnel. That included our freeze-dried plasma product. So Teleflex has been partnering with the DoD through an accelerated regulatory pathway. And we recently submitted our Biologics License Application, or BLA, to the FDA in late January of this year. So at this point, we've provided everything that we can. And we hope that the product is going to be approved, hopefully, sometime later this year. And we continue to estimate that this is a $100 million market opportunity, with about $75 million of that focused on sort of that civilian nonmilitary setting and about $25 million focused within the military. We have an immaterial amount of revenue assumed for EZPlaz in our 2021 guide, but we certainly think that this is going to be a nice driver to revenue growth and margins in the future.

Okay. And in the last couple of minutes we have, I have a couple of questions I'm going to try and squeeze in. Just first, the value proposition for Z-Medica, the acquisition you just made. What does it do? And who can it displace in emergency medicine?

Yes, sure. So we're really excited about this acquisition. We sort of consider it a very kind of Teleflex-esque-type acquisition and sort of point people to an acquisition that we did in 2013 called Vidacare with the EZ-IO product. That product and that TAM was around a $250 million TAM at the time that we acquired it. And the revenue base of Vidacare products look around, let's call it, that $60 million mark, had gross margins of 80-plus percent. Now -- and we've been able to grow that double digits almost every year since we've owned it and maintained the margin profile. The Z-Medica products, again, we would estimate it's a much larger TAM, somewhere around a $600 million TAM, with the opportunity through label expansion to hopefully increase that. We -- it's been -- we estimate that this year, it will be somewhere between $60 million and $70 million in revenue. It has 80-plus percent gross margins. And it has operating margins today that are accretive to Teleflex operating margins, with the opportunity to drive some synergies and take that even higher in the future. So these products -- there's a QuikClot hemostatic products, and they generally provide better and faster bleeding control in scenarios that occur from like traumatic injuries, gunshot wounds or severe lacerations. And they help not only to absorb the blood, but also to accelerate that clotting. And they're used to control bleeding, whether it's in the military setting, whether it's in the pre-hospital or hospital setting. They started to be used in the military and has been the U.S. Department of Defense's hemostatic dressing of choice, I would say, since 2008. And it's expanded, obviously, into other areas. But it has a proprietary hemostatic technology consisting of a -- what's called a nonwoven material that's impregnated with something called the kaolin. And when the kaolin contacts the blood, it activates and it accelerates the body's natural clotting cascade. So including something like this into our business that already has touch points in the emergency medicine area and the military, it's going to be a nice fit for us.

Okay. And this is something in an emergency -- in the emergency medicine range would go up against a J&J?

Potentially, yes. I mean, I think that it shouldn't be noticed -- just that the QuikClot Control+, it isn't exactly a direct competitor with J&J. It's indicated for severe -- our product is indicated for severe organ space bleeding, whereas, I think, the J&J product is positioned for more mild and moderate bleeding, but...

Okay. Understood. And then just last question from the queue was any update on the DOJ investigation with UroLift?

So the short answer is no. We provided the DOJ everything that they had asked for, and there's no update. And if we have an update, we'll certainly let you on.

Okay. And you are going to have an Investor Day sometime in the back half of the year?

We are, yes. The idea right now is that we would have an Investor Day sometime in the fall. And at that point in time, we'd look to share sort of that multiyear financial outlook.

And since I didn't get to any margin or free cash flow questions, I'm going to save them all for the Investor Day.

Sounds good.

And we end here from that. All right, Jake, thank you very much.

Great. Thanks very much for having us. Be safe.

All right. Bye-bye.