Welcome. My name is Jayson Bedford. I cover the medical device space here at Raymond James. It's really our pleasure to have with us, Chairman and CEO of ICU Medical, Vivek Jain. Vivek has been a loyal participant of the Ray J conference for many years, and for that we're appreciative, and we're also appreciative all you for showing up to our conference. Thank you. With that, I'll hand it over to Vivek.
Good afternoon. Thank you, Jason. It's a great event. I've been here many years, seen some familiar faces. Thank you to everyone in the room for making time to learn about ICU Medical today. For those of you who are new to the story, ICU Medical is a $2.1 billion medical device company focused primarily on the infusion therapy arena. Think about infusion therapy as the plumbing of the hospital, where you really see a infusion pump, which is the motor connected to a consumable, which is the pipe, which is pushing both IV fluids, IV solutions, the bag of water, and often attached to medication into a patient. Our $2.1 billion is really broken into two core segments. The largest core segment is called consumables.
Consumables are largely the pipes, those pipes that sit between the pump and a patient, or the parts and pieces that keep those pipes open right at the patient access point. The second largest segment is the systems business. That's the business of the pumps themselves. There's different types of pumps you'll hear us talk about during the day. To make it simple and to kinda keep score at home, the largest and juiciest pump market is called the LVP pump market. That's the Large Volumetric Parenteral pump market. In the United States, there's about 1.6 million of those pumps. Think about that as sort of a 1.5 pumps per every hospital bed in the U.S. The second most interesting part of the pump market is the home care or ambulatory part of that market.
For us, you'll hear us talk about that as the Smiths pumps or the CADD pump. Those are pumps that are used in both pain management in the hospital and more interestingly, in the home care environment for biologics delivery and infectives, chronic therapies, et cetera. The third part of the pump market you'll hear us talk about is the syringe pump market. That's really a hospital market for children, so pediatric pump. And those pumps sit alongside the LVPs. We have a third ancillary segment, which is called Vital Care, which are also hospital-used critical care products in the operating room or the ICU or the ED. I would call them more ancillary in nature. They're not as core to us as the consumables or systems business, and most of those came to us with the most recent acquisition of Smiths Medical.
In terms of where our $2.1 billion revenues are located, 2/3 of our business is in North America, the U.S. and Canada, and the vast majority of the profits of the company are probably in excess of that 2/3, 1/3. In terms of what we do, 87%, 88% are single-use disposable items. Most things we sell are less than $10, $12. Really, we think we're adding clinical value to the system. Only a small portion of our revenue is 12%, 13%, and hopefully growing actually, is the hardware of the pumps themselves, which are the capital sales.
In terms of just the financials, I don't know where things are today, Friday night when we left the office, it was about $150 a share, about $3.8 billion in equity value, just under $1 billion in net debt. We've been working down our leverage ratio, approximately 2.4 times levered, and enterprise of just under $5 billion. That's sort of us. Based in San Clemente, California, about 14,000 people and operate in greater than 100 countries. Before I talk more about the company itself, let me give a little bit on the IV therapy area, the industry. It's a structurally attractive industry. It's products that are absolutely clinically essential.
90% of hospital patients receive some form of IV therapy when they're in for care. There is a very sticky set of demand drivers, the greatest of which is, 1, the products are essential, as I just said, but 2, there's a huge incumbency advantage. These products are used over and over again daily. There's a ton of training, workflow, inertia, et cetera. It leads to very long product cycles, and those product cycles are supported by GPO contracts, purchasing agreements from hospitals, which also keep the products in place for a long period of time with the customer. In terms of the market structure, the market structure is very attractive, and that's a consolidated industry. In any part of this puzzle, there's only maybe 3 United States players of scale, 2 European players, and 1 Asian player.
That market exists because of very high regulatory barriers, and those regulatory barriers help keep low-cost players out, ensure high quality. Also leads to lots of issues in the industry that has led to some of the challenges for us historically and the opportunities today. The regulatory environment is a key thing to understand as you evaluate our company. The other part of the market structure that is attractive, like all markets, there are high-growth niches tucked away, and our job is to exploit those niches and develop those specialty areas. We exist, and the companies exist in this category to really address the meaningful issues in the industry, and those are fundamentally around safety, workflow, and sort of the, what I would call cognitive overload of the nursing staff themselves.
We try to make the existence of delivering basic care, medication management safer and easier for our hospital customers. All of these things are different code words for safety. When you hear the word cybersecurity or interoperability or hospital-acquired infections or adverse medication events, those are all safety errors that lead to bad outcomes. Bad outcomes lead to, obviously, bad patient events, also lead to bad economics for providers. Our products fit squarely in the in the center of that discussion. What we bring to the party is global scale. We're the largest consumables producer in the world. We have a complete portfolio, which was the output of the difficult strategic choices we made in the M&A transaction I'll talk about with Smiths shortly.
We have a track record, which really is why this is an interesting time to be reflecting on an investment opportunity in ICU Medical. We have a track record of consistent innovation, we're at the moment where there's a bunch of products that are ready to come to market. How did we get here? 9 years ago, 8 years ago, our company was a $200 million parts supplier that to a distribution partner called Hospira and to the U.S. market and global market to some degree on a direct basis. We set upon a journey which led to a couple of things. It led to a series of good acquisitions, what I would call defensive, a large defensive acquisition in buying our customer, Hospira.
It led to an offensive acquisition, which strategically was logical but a lot harder to get the value out and execute until now, was the acquisition of Smiths Medical in 2022. It led to some creative M&A where we decided we weren't good at something. We made a partnership with a giant Japanese pharmaceutical company called Otsuka in IV Solutions. We took our $200 million company and scaled it up with these acquisitions. Behind or kind of supporting all of that, and we were people who came from corporate world, transactional world, we had seen the pitfalls of being a serial acquirer. We had a point of view on the products themselves and believe you had to innovate in the industry.
We approached each one of these situations, and I'll give some specific examples of how would we would add value operationally through bringing the different parts and pieces of the portfolios together and making them more valuable and better for customers. Today, across those deals, we innovated in consumables. I'll give examples of that. We innovated in the pump business. We innovated in software. We've found ourselves today with kind of the what's all the way on the right, this $2.1 billion company, complete portfolio with the most modern architecture products out there in the space. Onto our businesses, they're consumables, systems, and Vital Care. Each of the businesses we believe are well-positioned with a right to win.
Both businesses in consumables and systems, I think, we had an earnings call last week or the week before, both businesses grew 5% or better again for the year. I think consumables was 6, systems was 5. The year before, consumables was 7, consumables was 6, systems was 7, and consumables grew at that rate historically for a number of years. We have strong U.S. market positions, and if you look at the key products in each of the categories, in the consumables business, it's really those pipes I was referencing. It's called the Clave, the non-dedicated IV connectors, trach tubes, oncology connectors, the niche markets. In the systems business, it's the variety of pumps I went through, the LVP, the syringe, the ambulatory, et cetera. Why do we win, right?
We win for some of the points I made on sort of scale, but we have the best brands, the most days of patient history with our products on them in the consumables spot, and we wrap around the customer with innovation that makes their workflow easier every day. In the systems business, we completed the portfolio, the acquisition. We have a large install base, but now we've brought new technology, new software, new safety features, new workflow enhancement to the devices themselves, and essentially, we've connected all of these disparate systems into a single solution per customer. In Vital Care, we really have a solid set of brands. Again, they're probably not as attached to the first two pillars, but in their own right, these are all important categories that hospitals need to run themselves every single day.
Okay, in terms of our priorities, very simple, very straightforward. There's three things that we're focused on, that are very top of mind to us. The first is to deliver consistent core revenue growth, in our big two businesses. Second thing is to continue our innovation roadmap. A lot of people in the medical devices space talk about innovation only in terms of these home run hits. That's not the case for us. We hit a lot of singles and doubles in our consumables business. Innovation is really incremental to us. It's little product tweaks, little features, and that's gone on every single year since I've been there, and that's been the underpinning to why our consumables business, creating those niche markets, finding these little white spaces in between, has kept that business growing.
Lastly, to take both the commercial momentum and the innovation and finally, after a pretty tough 2.5-year period, post the transaction of Smiths to have that show up on the P&L. That needs to show up in improving gross margins. Ultimately, for many years of my time there, free cash flow, net income were pretty close. We got away from that. The goal is to get back to that, get the balance sheet leverage where we want it to be, and have the ability to use that free cash and drive more value for shareholders. Why do we have commercial momentum in each of the big two businesses? In our consumables business, it's because of some clinical studies we've had with the Clave that show better outcomes for hospitals that run our products.
Better outcomes mean less infections, mean less reimbursement hits. We win because if we win in one of the areas, it usually drags the other. If we have a chance to win in the systems business, because some of the things that are going on in the LVP pump market, usually when we win the LVP pumps, we drag the consumables along with it. We win in consumables because we create the niche markets. We win in consumables because we wrap around the customer and we innovate. Some of the markets in consumables, in particular the biologics market and the home infusion market, are growing faster than the acute care markets, and we're creating new products that address those categories.
Tracheostomy, which is while it's not an infusion consumable, is a deeply customized chronic condition, chronic care product that has a lot of underlying market growth. Pricing in both businesses is important to us. We absorbed a lot of pain in inflation from 2020 - 2023- 2024. We still haven't offset that despite the improvements we've had and we're very focused on getting that price back. In systems where we have new technologies rolling out, we're trying to make sure that the value of those devices is in line with the price we're charging for it. There's a bunch of drivers that should ensure continued revenue growth and continued commercial momentum from where we are today, and that was reflected in the guidance we provided two weeks ago.
You know, over the last several years, the majority of our innovation efforts have been really centered around the pump business. The hardware is more expensive to develop. After we brought together the various infusion system platforms from Hospira, which gave us that Plum 360, the LVP pump, the workhorse pump, and Smiths, which gave us the niche pumps, the specialty ones, the Medfusion and CADD, these were all kind of market... Certainly, the Smiths products were market share leading, and the Hospira product was very well known. We've been hard at work in integrating all of these into a modernized device format that frankly looks and feels like a phone, and that operates with a single software solution connecting all of these different devices. Historically, each of these devices, they all had good market share.
They were each managed by separate software, had their own workflows, had different user interfaces. The products that we're pending approval now for Medfusion and CADD at the FDA bring all of the devices to a common user interface, common screen. The criticism of our devices, even though they had high market share, was that any customer was required to run two separate software solutions, two separate drug libraries, two separate sets of training for different nursing. It is all one now, when approved. That was the advantage the market share leader had. We now believe we're in a position where we have that in our offering, and we have the right tool for the right job. Each device has its own features, benefits, merits, more accurate, safer, better cybersecurity, whatever.
That makes training easier, speeds up biomed service time, drives standardization, ultimately adds more safety to the equation. Then there's a lot of unique features happening in the LVP market that make the opportunity particularly robust right now. Why did we do that? This investment on the pump side probably cost us over $100 million over the last four years, five years. It's important to understand why we made it. Value's really created in two, three ways in the pump business. The first way is upgrading our own install base. We have hundreds of thousands of devices out there in the United States which are getting older. Those will require refresh. They have a nine to 10-year useful life.
We want to ensure that the devices we can replace them in the market with are carrying an appropriate amount of technology and positive margin to enhance our, not only our revenue line, but the margins awake. Ultimately, we want to profitize that install base by better software offerings, et cetera, and the proof will be in that over the next couple of years. The second reason we win is we create value in the pump business by winning competitive share gains. That's what most of the energy in the middle bar has been on here over the last two years, and that's what most of our growth that you see in our published numbers has been from competitive share gains.
The opportunity, once you get this competitive position, it often drags the consumables, it may drag the solutions, and you have that piece of business for 8- 10 years, plus software, plus spare parts, plus service, et cetera. There's a razor-razor blade model around the dedicated sets. There's the benefit to ICU Medical, which is consumables. Long term, there's an opportunity to profitize all of this with better software, et cetera. We don't show a lot of futures slide, and this is the only one I'll show. I would just make a comment. The pump is probably the most present wireless device in the hospital besides the mobile devices of the staff themselves. Every patient has one of these pumps delivering critical medications next to them. We do see that real estate as important.
Over time, we see the opportunity to automate more of these clinical workflows. That's, that's not like a fancy AI story. It's just basic common sense of linking the things together to drive to a better patient outcome. It's kind of a stepped approach. Historically, this just required data sharing between the different devices in a EHR. That, that's kind of table stakes that's happening now, and our devices will all connect on a single software solution to the CHR, the EHR. There's a bunch of functionality that make it easier for customers. Where's my stuff, the location services, how much did it get used, reporting, billing around the EHR, what analytics can drive a nurse behavior, et cetera. There's some specialty apps and a software we've embedded on that.
Ultimately, some of the other examples are around and the kinda the medium term is how do these devices become part of kind of a integrated decision support offering and tool? Some examples could be the CADD pump. The pump all the way on the right is the leading pump in home care. How do we connect that pump to people's homes, and does that generate information during the infusion event that a drug company would be happy to pay for, a payer would, hospital system wanting to know, did my drug get used? Was the clinical outcome what we expected? Or examples in the hospital where a ventilator or a therapeutic device, alongside monitoring if we're delivering a sedative, patient's falling into respiratory distress. If you could monitor that, it displays on.
If you could monitor that via diagnostic pulse ox, something displayed on the monitor if the patient's under distress kicks off the pump, right? Things that are happening with human intervention today need to become automated, and there's lots of examples of that. The regulatory environment is actually getting formalized in a very constructive way around that. I think those are the things, those are the features we wanna build in software and ultimately try to balance the value between the business of pumps, which is so much razor and razor blade set to these other features that can be built into the, into the offering. Innovation in the consumables area is much more incremental. It's really intended to do two things. It's intended to improve patient safety and clinician safety and add efficiency to how fast people can work.
At its real core, the relationship between ICU Medical, Abbott, what became Hospira was because of the Clave and the ability to access infusion lines. Keep them essentially closed. Once you open these systems, it's really bad. Our innovation in consumables is taking what came from either Hospira, the infusion bags, which is now part of our JV, or the CADD cassette, which runs in the CADD pump, or the Plum cassette, or even the chemo products we had, and attaching our parts and pieces to each one of those delivery formats to ensure that systems can stay close. That's safety. You don't have to break the circuit to mix a drug, to deliver a drug, to clear an airline alarm, et cetera. That's what we spend our time on in consumables.
2 more slides and I'll wrap it up, Jayson. Financial profile, in the darkest days, post-acquisition, post-inflation, oil prices, whatever it may have been at the time, which aren't relevant anymore given the creation of the solutions JV, our gross margins hit the low of 34%. We said we were under-earning by 500 basis points. I actually should have opened with that. Our goal was to get back to 40. We created the IV solutions joint V, that joint venture that moved the target up to 45. We provided guidance saying we'd be exiting this year north of 41 with the goal of getting to the 43 exiting next year. The 43 for us is a revised 45 because we are currently absorbing 2 points of tariff expense.
The middle bucket is basically saying there's a few levers to improve free cash flow. What else can we do on tariffs? Our current tariff bill is $40 million-$50 million this year. We've been spending a lot of cash below the line on quality remediation and plant integration. That work is largely going to finish by the end of Q2 this year. If gross margins are going up, below the line cash is going down, free cash flow can improve. We have the optionality of some of the pieces. It's no secret some of the pieces that are more ancillary to the portfolio, if we could monetize them, we would. Through all the journey of even difficult gross margin results, we didn't skimp on CapEx, we didn't skimp on the factories, we didn't skimp on R&D, right?
We put everything back in. We still feel we can get to our target gross margins, ex tariffs. We still think free cash flow will improve a lot. Ultimately, it's about the right-hand side here, which is if we think we have organic innovation, we don't have to do that much M&A. We're not that far away from getting leverage to 2 times on a thinly traded security. We'd like to return that capital to shareholders. We think we have enough stuff organically inside to do that. That's sort of the 1 financial slide, and I'll just wrap it up with in terms of why invest, why have you made time here today, which I appreciate, why invest in ICU.
We have a bunch of new product cycles coming that sit on top of what's a pretty good recurring revenue base year in and year out. Products getting launched at the FDA today, software opportunity, et cetera. Feels like we're very, very close to coming out of the journey of the Smiths Medical integration. We actually thought we were there last year, kind of at least relative to earnings guidance, et cetera. Tariffs changed that a little bit, when I was reflecting on what I said at this meeting last year. That period is exiting now, improving margins, et cetera. Cash flow and EPS should improve as a result. Reduced cash below the line, and then if we can monetize some assets, and start to return capital, and these tariffs are a wild card.
All in all, we think we're at an inflection point of new product cycles, improving financials, and some optionality to do smart things for shareholders after a difficult 2 years. We appreciate the interest and happy to answer any questions.
Yeah.
Thanks very much.
Thank you, Vivek. We have time for a few questions here. I guess maybe just to start, you mentioned incremental innovation a couple times. Certainly it probably relates to the consumables, but on the pump side, do you view that Duo Solo as incremental?
No, I.
Cause I guess I view it a little differently.
Yeah. I'm sorry. I should have answered that. I didn't want anybody to have the perception in our consumables business, a $10 million opportunity, even in our $1 billion business, is great. We would fund that. That would be incremental innovation. It's only 1% revenues, but we do it very efficiently, it makes a difference. The pump projects are large turnkey projects. The consumables products are more incremental.
As we think of just on the LVP side, average age of the fleet today, when can we expect to see the replacement cycle start or kick in? Just relative pricing as you introduce the.
Yeah
... the new products.
The current market share product we hold is called the Plum 360. That was launched by Hospira in 2016, so the oldest devices are now 10 years old. There was a bolus at that 2016, 2017 time, and there was a bolus during COVID, so I'd say the average age of the device is 6, 7 years if you get to the median of the book. I think in 2027 we would start to see the replacement cycle accelerate, and that's your question. That's when it should show up in the financials. We think the new device carries not only a better technology package, but is worthy of both a higher software subscription fee and higher upfront costs for the capital.
On the consumable side, vascular access seems like it's a bit of a lagger relative to the rest, meaning all of the other items or buckets within consumables are growing high single. It's not growing there. What can you do in vascular access to improve the growth profile there?
I mean, we've faced a few challenge. Vascular access is about 25-ish% of the billion-dollar consumable segment. Jayson's referencing on the earnings call for the year, we were very transparent on the other three pieces growing very nicely and vascular access not, and the whole segment still grew 6%. We have to, one, be a reliable producer, so we've had some operational challenges on the production side. In that particular market, the underlying market structure is different. You have a very vibrant, healthy competitor, the customers had a choice. We have to get our house in order production-wise. Two, we have to innovate, which we have been doing, which is what are the new products and feature sets that can come out there?
Three, we have to economically bundle and correlate the products to what's going on in infusion 'cause it's a very natural adjacency.
We've got a minute left here. The 200 basis points of Op margin expansion, how visible is that and how much of it's in your control?
Yeah. This is the difference between the 41 and 43, essentially. I don't know that we have it perfected, but some half to two-thirds is under our control, which is really about factory integrations, finishing the closing of the European factories, some of the stuff in the U.S., and the logistics consolidation. I don't know that I'd say 100% of it, but 60%, 75%.
I think that's it. We have a breakout downstairs in Amarante 1, so please join us there.
Thanks very much, folks.