All right. Good morning. I'd like to welcome everyone to the second day of the KeyBanc Life Sciences & MedTech Investor Forum. My name is Matt Mishan. I'm our Senior MedTech Analyst. I'm pleased to be joined by ICU Medical, who's represented today by the CEO, Vivek Jain, and CFO, Brian Bonnell. Thank you guys very much for joining us. I'm gonna start us off. This is gonna be 100% Q&A, and questions can be submitted directly to me by typing into the box below the video screen. I can then kind of relay. For now, I'm gonna start off. Vivek, Brian, you know, we've been starting off these firesides with, you know, a comparison on the current environment to, like, a year ago.
For ICUI, I think I'd just be specifically interested in how much more visibility you have around this underlying performance, this year, compared to, like, a year ago.
Sure. First, Matt, thank you for arranging this for us and having us, and we appreciate KeyBanc's involvement with our company. ICU's issues last year were a combination of both macro and the transaction that we walked into. In terms of the very, you know, direct question, do we understand what's going on and what's our level of visibility? Clearly, our level of visibility has gotten better every day. I think we have an appreciation for both the operational challenges we've had, and we've worked through a lot of those, and we have an appreciation probably, I would argue, equally important of the customers that didn't stick with Smiths during some of the turbulence, and I think we're in a better place to make a concerted effort to get them back than we were a year ago.
I think a year ago, we didn't even know exactly where the bottom was. Is that what the Wall Street catch the falling knife thing is, right? I think we were obviously worried about that. I think we have found the bottom in a couple of businesses that were going backwards, and it's much more about playing offense right now.
Broadly, how would you describe the overall operating environment compared to last year, you know, freight, logistics, raw material costs, just macro?
Sure. I'll go first, then Brian can jump in. You know, for us, I think it starts with what's kind of going on at the customer level. I think our comment would be that our core customers, large hospital systems in this country, are doing okay census-wise, not worse than last year, but not materially better either. It feels pretty stable. In aggregate, probably still a little bit below peak historical levels, even if you exclude the COVID times. Now, I realize many of us have friends in the medical community who will say they're flat out as busy as they've ever been. What's hard to get a handle on is the exact available capacity in the environment they operate in.
They're very busy, but the aggregate capacity may be a little bit below historical levels. I think the macro, more stuff's going right than wrong. I'll let Brian kind of comment on some of those things.
Yeah. I think, Matt, on the macro environment items, if you compare to 2022, especially the back half of 2022, where we saw the most pressure, for areas like FX and diesel, we would say it seems to be a little bit better today, which is good, but I think we're still pretty far away from where we were two to three years ago on some of those items.
Yeah. I think, Matt, the one thing I'd say, and it's not, it's not to jump into the numbers stuff right away. A huge chunk of what we faced, for the last two years we were talking about the scripts, was increasing cost, and a significant portion of that is permanent. While a lot of things are going right, the baseline has been raised in labor costs, operational costs, not only in the U.S., but around the world.
Yes. I guess if it's steady, from a macro perspective and you're seeing some level of improvement, You only guided about three or four weeks ago. What, what was kind of your approach to setting that guidance and kind of why stick with the wide range then?
I think what we experienced last year was not enjoyable. We had never, even though we thought we performed incredibly well during 2020 and 2021 with a service level to customers, even we got knocked down on our legacy original business last year with the amount of kind of volatility in the broader world. I don't think it's 100% over. We'd rather not experience that again. We thought the safer course of action was to put a bit of a wider range out there and have the ability to handle bumps as they come or do better, right? It wasn't like we missed by 5% last year. We missed by 20 from our original expectations, right? It's pretty severe.
When you think about some of the moving pieces in that range, a lot of the headwinds we can kind of visibly track, you know, like FX and, like, raw material costs. you know, and they seem relatively okay at this point. How are you doing at recapturing some of the lost sales at Smiths? Like, that volume lever seems to be a big lever for you guys.
Sure. And we lived through some of this with our previous acquisition of Hospira we had to do. That was a very defensive thing, where there was a lot of customer losses, and through good execution and focus and differentiation we got a large volume of that business back. I think the same thing is happening here with Smiths. It's a real discussion business line by business line. Some of the categories where there is limited choice, it's obviously or where our inability to serve the customer was self-inflicted, it's easier to remedy those things faster, and I'm sure we'll get into that. Some of the quality-related issues, et cetera, that we're making progress on. Those items we can impact faster.
Some of the items where the product categories went to a legitimate competitor who's a high-quality supplier, those we still believe we have an integrated value proposition that makes sense, but it takes a little bit longer to get those back. I think what we feel good about today is it's scheduled. We know exactly where it went, and we know why it went, and we're very focused on the value prop in our message to those customers to get that business back. It's incredibly valuable. The last 10% in the factories drives a lot more than 10% of it, so valuable.
I mean, with that level of kind of visibility, you guys gave individual segment guidance for revenue growth. Why not explicitly guide to total revenue yet? Is that something you're considering moving forward?
Yeah, Matt, I think, we did give guidance on the individual segments as far as what our expectations are over the coming year. We did that because, you know, we think that, the business dynamics of each of those segments sort of, need to be taken into consideration, when thinking about the opportunity. We just thought it was more relevant to provide the transparency around what we expect from each of those businesses. From there, I mean, the total company revenue growth will be what it is. We just think that's sort of more valuable information to provide, investors and analysts.
I mean, not tongue in cheek, Matt, but I felt like people could get there. It's math, right? If we said the two differentiated segments are growing the most. On our investor presentation, you'll see the way we're gonna report into three pillars. Two of them are highly differentiated. We don't expect investors on a mid-sized company to sit around and do some of the parts analysis. I think the portion or the logic we're trying to illustrate is that the things that truly drive margin are the most differentiator are in fact growing at very acceptable rates.
Right. Fair enough. You indicated on the last call the FDA was coming back to your Minneapolis facility maybe a little bit earlier than expected. Has that visit concluded? Anything you can share on that?
That visit did conclude. It was a little bit earlier than we had originally anticipated. I think, again, we've talked about it on the scripts, right? The nature of a Warning Letter and the FDA trying to improve the situation is part and parcel of being in the business. I think we had hoped, we've made a lot of progress. We'd hoped it would be a bit later because we could demonstrate that progress even further. You could call the ultimate question, which is, can we get a full clean bill of health as soon as possible? There's no operational issue that affects our ability to serve customers from that.
It is something that everybody spends time on, and getting a clean bill of health allows us to do things like migrate systems and manufacturing plants and underlying architecture of the business a bit faster. This inspection resulted without any, I would call, material difference from where we were. It was keep working on the following items. You're making some progress, but it's a bit too early. The outcome of all that is it probably just stays open longer than we would have liked it to. Now, if we're ready, we can call and say, "Please come in and give us a thorough review," but they may say, "Oh, We were just here. We don't...
It sounds like what it does is it prevents you from doing some operational items, but it may not prevent you from returning to shipping to customers or potentially from going after new business?
Not in any different timeframe than we were already.
Okay.
Moving on. It doesn't prevent us from undertaking some of the next level integration activities. It just makes it a bit more complicated, and you have to run duplicative systems. You can't turn historical systems off at the same speed.
Okay. On the bigger infusion system segment, how would you just describe the overall health of your customers? Do the hospital systems have the bandwidth now to better implement changes that would require training or affect nursing workflow?
I think what the global hospital system and certainly the U.S. hospital system went through the last two years was unprecedented, and it was difficult for people to make proactive decisions on things that implemented nursing, which had its own set of challenges, et cetera. I think we would say that's settling down rapidly, and ultimately it comes down to the products, right? If people need, whether it's our category or anybody else's, if people need a refresh of older equipment, et cetera, that decision has to get made and prioritized. It didn't have to be prioritized because things weren't as old two or three years ago. That is changing. There's a little bit of caution on spending given reimbursements. You know, for us, the disconnect is that it's like the payers look like they're doing great, right?
That money will eventually flow downhill, reimbursements will go up, and the system will carry on and works. I don't think that's all done quite yet, right? It's still in progress.
Is your sense of the replacement cycle is delayed until some of your competitors are a little bit more whole, or is it really the marketplace is just delayed because of, you know, the last couple of years have just been so challenging?
I think it's a little bit of all of the above, it's situational depending on a customer's unique circumstance. You know, we have some situations where people say, "I need to make a decision right now," it happens over the course of a quarter or two, which is pretty fast. There's folks who say, "This is on my long-term decision tree. I just can't get to it today." I think, you know, if you listen to the transcripts of the market share leaders, et cetera, I think they're very truthful. They said a fraction of normal capital was refreshed over the last three or four years. You know, the analogy that the cars have a lot of miles on them.
Mm-hmm.
That's the opportunity for all market participants.
Just taking a step back, why has it been so challenging when you think about, you know, the market share leader, you guys with Smiths and, you know, Novum with Baxter, why is it so challenging with the FDA and getting pumps through the FDA approval process?
Well, I think the high regulatory barriers are what makes the market valuable. I don't wanna get confused on that, right? That's a good thing, not a bad thing. It means a patient's safety has to be delivered. I think the challenge, and this goes back, you know, we've been in this thing for 14, 15 years now. If you go back to the interventions in 2009, 2010 timeframe, and then all the way through 2014 or 2015, when everybody went through their phases, it was because it was a recognition that these devices are the last mile of delivering medications to a patient. That's a important piece of real estate, and if something goes wrong there, bad things happen.
There was also an increasing acknowledgement that these are electromechanical devices that are networked and connect to a broader architecture, and everybody's sort of learning on the job on that topic about the vulnerabilities, et cetera. To me, it feels very logical that a machine that delivers something that can save your life or, cause harm is deeply regulated. We think that's a good thing.
One of your top priorities with Smiths was clearly their CADD ambulatory pump. Could you contrast the size of that pump portfolio to your LVP base? How important was that getting that right for the customers first?
Two parts to that question. Market size, I would say ballpark in terms of revenues and value, the CADD franchise is probably two-thirds or something of the size of our LVP.
Mm-hmm
... business. In terms of units, meaning devices delivering drugs, pumping out there, probably also about two-thirds of our install base. It's a lower value absolute market than the LVP market.
Mm-hmm.
For us, it's very significant, and it sits with a very high market share position at the intersection of home care, ambulatory care, and complicated oncology or anti-infective drugs. That market is growing with better underlying trends than what's going on in the hospital. An important aspect of the transaction was to participate in that portion of medication delivery outside of the hospital. The burden on us is to innovate and connect those devices to what's going on in the hospital, so you can really see what's happening with a patient all the way through. So we think that real estate in home infusion, et cetera, is very valuable. We have a high share level there. We need to figure out how to continue to build value around that position.
What is your broader, like ICU strategy outside the hospital look like? I mean, obviously everyone wants to connect devices outside the hospital, but, like, how do you go about that? Who do you work with? you know, does it require like a footprint outside the hospital for yourselves? Do you work with the DMEs? How are you thinking about going about an out-of-hospital strategy?
I mean, if you look at our total revenues today...
Mm-hmm
... probably somewhere in the 15% range of the company is what we would consider alternate site.
Yeah.
I would say, on average, the economic contribution of that is probably better than the rest of the business because it's logical. You have a more direct reimbursement, you have a smaller fragmented customer base, et cetera, the different level of aggregation. So it's a, it's a juicy market to call on. I think the first item for us is that we have to get kind of through the various quality steps we're working on. Then ultimately innovate, and that innovation starts with what's in the device itself. The device carries a radio and is wireless in a hospital environment. It's not necessarily the case in the home care environment.
On the development roadmap is what's the right connectivity framework for that device in that environment, and what data does it need to be aggregated with? We have a point of view on that, but I would say that's kind of a two or three -year journey from where we are today, rather than making sure we get the basics done. Right. That was so important last year because we entered life without an adequate amount of dedicated disposables. You can't use a pump if you don't have a dedicated pump set, and there's some patient on the other end of that who needs treatment.
Yeah.
Whose treatment may get interrupted. That's an unacceptable situation if you're in the infusion business. That's why we deployed so much capital and effort to remediating that. We're very, very healthy today on the dedicated pump sets. That gives us the right to go sell capital again. We didn't sell a lot of capital because no one's gonna buy a pump if you can't give me the razor blade to use it with.
Okay. I wanna switch over to consumables. It's your largest segment. You guided to mid-single-digit growth for 2023. I wanted to attack the consumables in like a three-part question. I'm sorry for a multi-part question, but I think it just makes sense to ask it like this. How do you think? Question one: How do you think revenue was impacted in 2022 by supply chain constraints? Question two: Is the 2022 base of Vascular Access sales from Smiths fairly low? Three, were there any specific pull forwards or stocking events that create a headwind for 2023?
Okay. Why don't we do those in reverse? You wanna do the last one first?
Yeah. I mean, as it relates to, you know, was there any pull forwards or stocking events at the end of 2022, I would say no. We certainly didn't do anything that would contribute to that. I mean, I think we said on our last call that Q4, the dynamics where it started slow ended, and it ended much stronger in December. To the extent that the distributors are doing, you know, are increasing stocking levels or anything like that, I suppose there could be a little bit. I would say nothing worth calling out from our standpoint that would have a meaningful impact on 2023.
Mm-hmm.
No, I think when we reflect on our time here and, like, the report card, which is measured in different ways, obviously, one aspect in that report card is, has our core business accreted value? If we went back five or six years and looked at our consumables business, this is a legacy ICU business; it's compounded at a very nice rate, you know, 7% or 8% a year for six, seven years in a row, and that business is, you know, near $600 million. It's more than doubled. That has come with a combination of innovation, execution, a little bit of luck, et cetera. When we reflect on last year, even in the face of a couple of supply chain issues, it did well.
The supply chain issues in our legacy consumables business last year were more around our oncology business than our IV therapy. There's a little bit in IV therapy, but in oncology, we were really constrained from a production capacity standpoint. Those are decisions we made in 2018 and 2019 to bring on new capacity. It took longer to get the capacity, the machines in, validated, et cetera, with everything going on in the world last year. That's all behind us now. That doesn't mean it's gonna snap back to its double-digit growth instantaneously as it did for a few years, because we had a few losses along the way.
There were people we couldn't serve. We first got to dig our way out of that hole, which is happening right now, and then have the next layer of customers come into the book. On legacy consumables to the first part of this question, a little bit of revenue constraints in oncology. Nowhere else really. Then the toughest question is the second one, which is, where is Smiths Vascular Access?
Mm-hmm.
Really hard to tease apart the numbers because that line of all the legacy Smiths Medical business is probably the most influenced by COVID. Smiths Medical was one of the main providers of vaccine syringes, which were in and out of that line for the last two years.
Mm-hmm.
,We're very focused on deconstructing that line into its component parts, which are really PIVC catheters versus injection syringes versus blood collection and kind of ancillary devices. I would say on the PIVC portion, I do believe we are close to the bottom of the losses, and we understand where they are. It's harder to know about the other two bits of Vascular Access because there's so much in and out. Big picture, the math on consumables goes something like legacy ICU continuing to grow. The other business that was in the consumable segment is the tracheostomy business, growing and Vascular Access, trying to be more cautious and saying flat to down, possibly a little bit, and the net number being the number we provided in the guidance.
I think that's fair. The Vascular Access piece, if you're able to get your arms around that, you potentially have a little bit more upside on that piece, while the other stuff is holding fairly steady.
I mean, I think that's right. On the scripts, we try to say exactly what we believe on it, right? We believe in that market. Those products literally connect to our core business, where we're the number one market share player. We have a right to be in that category. We have a right to talk about that category with customers; it's just about execution. The first part of execution was being able to supply enough. Smiths fallen down on that and disappointed customers. We are 100% back there, it's just about commercial execution at this point. It takes time because people got put through the wringer and chose to leave. I think they'd like to see a little time under our belt, just like investors.
You want to see a little time under our belt and sustainability before you make.
Have those customers fully moved away from Smiths or dual sourced? They're looking at you and they come and you guys go in and have a big conversation with the hospital, and they say, "Thank God you guys took this thing over. We're so happy you guys are now running this. We feel, we feel like we're gonna give you the opportunity down the road"?
Certainly. I mean, I think that's a little bit like Hospira. It's the same situation, right? Which is, the market needed this. The same words we close every script with, these are essential items that people don't wanna switch.
Mm-hmm.
The customer recognizes there needs to be choice in the market. We play an important and valuable role with products that we're really differentiated and preferred. I do think it's situational, the first part of that comment. Some folks did go dual source, some folks went all the way and left. It's situational customer. All we can do is show up and be reliable and offer value and clinical support and bring focus there.
For IV Solutions, I'm trying to figure out the best way to ask this question. I think I came up with it. Is there anything positive you'd like to say about the IV Solutions business?
I mean, we have 1,500 teammates.
Mm-hmm
... working hard every day-
Yep
... to make something that this country needs to run itself in hospitals.
Mm-hmm.
I think the industry, us included, has done a bad job of getting value or price or whatever your word, price in line with value.
Mm-hmm.
The essential nature of these things, I think hasn't necessarily been recognized, and it's incumbent on us to make that more clear. No, no one likes that conversation.
Mm-hmm.
You know, we buy recombinant drugs for prices I don't understand, and we will fight to the death over $2 versus $2.15.
Mm-hmm.
That doesn't make a ton of sense to me, right? At the same conversation of something that's made onshore in the United States with a need for safety and reliability in that category due to all the historical shortages. I believe today it will correct itself, but it takes a little bit of time to make that happen. To me, the positive is we have a solid market share position in a core category with a good market structure. Logic should prevail.
Okay, excellent. You talked about contracting, at an earlier investor presentation. Just how should investors think about the risk and the timing of larger contract renewals for you guys?
I mean, I think the majority of industry participants have been pretty clear that there's an important set of GPO contracts that come up for renewal towards the end of next year and into early 25. I certainly think we know what our job is, and it's finding that balancing act with customers to, again, articulate our value, offer them value, and figure out how to put all the puzzle pieces together there. I guess how investors should think about it, I mean, we certainly would be obviously very disappointed with what's gone if you've read a newspaper for the last two years, right? Prices should have been going down. Our costs are materially up, and we need to make sure that that's recognized.
Okay. You have an IT implementation, I think, coming up over the next couple of months. Are you ready to go with that? Do you have enough inventory to avoid disruption to the commercial organization if something were to go wrong?
Yeah. Matt, I think on the IT integration, it's really a two-step process. This will happen over time. What we have coming up this year in the summer is phase I, which is really about getting off of the TSAs that we currently have in place with Smiths Group, and basically operating the Smiths Medical IT systems ourselves. You know, that's more of a lift and shift effort. I would say, I wouldn't say it's certainly no risk, 'cause there's a ton of work involved with that, but I don't think that there's a lot of risk associated with that. Phase II is bringing together the legacy ICU and legacy Smiths Medical systems for the combined company. That's something that will take time and not actually happen this year.
It will take place over the course of future years. The good news is, while there tends to be a little bit more risk for that type of work, we're not under any sort of time restrictions in order to get that done like we were for Hospira. We feel like that's under our control and really no particular concerns around that.
Yeah. I mean, this is one of these things you certainly don't wanna spike the ball on, but if you reflect on the Hospira cutover, which was a world in which Pfizer gave us no systems, and we had to migrate everything on the same day around the world, I think that was hardly noticed by in our results or by investors when that migration happened in the fall of 2018. This one isn't, as Brian just said, it doesn't have that same amount. We can choose to go slower. We can choose to go country by country. We can... Our inventory positions as reflected on our balance sheet are very different than they were a year ago.
All right. We're running close on time. I did wanna ask about portfolio rationalization, and how you're thinking about that through kinda 2023, and if there's opportunities to realize a reasonable amount of value for assets that might not be, like, considered, you know, core.
Yeah. I mean, I think everybody has the opportunity to maximize value when the businesses are running well. It's hard to separate things when you don't run your own IT system. The separation is an important aspect, and operational performance is the most important aspect. For us, it's about solving the quality journey, showing improving operations, and then deciding what's really core and what may be on the periphery of that.
Okay.
I don't think we feel like we have to do anything. It's very opportunistic, and if the right opportunistic things happen, we'll make the right decisions like we feel we normally do.
lastly, Smiths recently registered to sell 2.5 million share stake. Just what are you able to share around potential timing and how those shares may eventually come to market?
We experienced this with Pfizer. Pfizer was our largest shareholder after the Hospira transaction. I think Pfizer chose a path where they only registered when they sold their shares.
Yeah.
It was a different format. We had a obligation here to register Smiths share, I think, starting six months or something after we did the deal. They are subject to the same board representation. They're subject to the same insider restrictions that I am or Brian is or anybody else in the company is. That creates very narrow windows. I don't certainly want to speak for them, but I believe they are a sophisticated, rational actor that should preserve all of their optionality. They have a vested interest both in the earn-out still exists for them for a number of years to hold half their position. The illiquidity, for lack of a better words, of our security is no secret, right?
I suspect, if you look at the backgrounds of the folks who run that place, they have deep experience with public securities. They know how to do the right thing. We're not too worked up about it.
Okay. All right. Excellent. With that, we're out of time. Vivek, Brian, thank you very much.
Thanks, Matt. Thanks for the interest and support and for anybody participating online. Thanks for your interest in ICU Medical. We appreciate it very much. Feel free to follow up with Matt or us with any questions you may have.
Yep. Thanks, Matt.
Thanks.