Great. Good morning. This is Peter Harrison with Morgan Stanley's Investment Banking division. Today with me, I would like to introduce Vivek Jain from ICU Medical, Chairman and CEO. Welcome, Vivek, and thanks for joining us.
Thanks, Peter, for having us at this great event and appreciate people showing up at 7:00 A.M., New York time.
Perfect. Let's get started. Maybe let's start with the macro environment. On your Q2 call, you reiterated continued stable demand and utilization environment and status quo capital equipment market. It is different from some people we heard about ACA subsidy expirations affecting surgical volumes. That does not seem to have an effect on you guys. Do you agree that consensus continues to be healthy?
Sure. There was obviously some news last week with some of the large companies having their own specific commentary around procedure volumes. For us, our business is tied to hospital admissions, and from what we have seen, our customers are busy. Census appears pretty good. We have not seen any slowdown. To use the words we say on our call script, it is in line with the assumptions underlying our guidance, which was okay growth underlying, not spectacular in terms of market, but still positive.
The rest of this year feels better or worse, the same?
The rest of the year feels very consistent with those comments. We haven't seen any big swings in either direction.
Okay. You've obviously spent a lot of work reshaping the portfolio in recent years. You did the IV solution JV with Otsuka, SKU rationalization in Vital Care. Obviously, you did the Smiths acquisition. What is your ultimate goal in portfolio management transition? Is it to improve the WAMGR, drive faster sales growth and/or better profitability? If you had to say what inning you are in in this transformation, what inning do you feel you're in?
I don't know that it was so much transformation. I mean, for all the challenges, we look back on the last seven or eight years and said we took a $200 million direct sales parts supplier and turned it into a comprehensive integrated infusion company that's the largest set producer in the world. Our goal wasn't necessarily about improving the underlying growth rates. The first big transaction had to happen out of defense. It's been really about trying to build a coherent portfolio, things that make sense together, and trying to have the best pumps, the best consumables, the best IV solutions we can have, products that make sense together to the customer in the way the customer buys them.
Great. Maybe dive a little bit into the businesses. Let's start with IV systems. That business grew a robust 12% organic in Q2, nearly +10% in the first half. Some of that was due to installations being pulled forward from later in the year, and some was from competitive wins. What are the sustainable growth drivers into the second half of this year?
I think on our calls, we've been trying to be very transparent about the value, the drivers in the IV systems business, and there's really three and a half of them. The biggest two opportunities are on our LVP pumps, where we create value by either winning competitively or rolling over, upgrading our existing install base. Most of the growth to date over the last four quarters, five quarters, and the business has grown nicely for two and a half years in a row has been from competitive wins. Next year, it'll be a mix of both competitive and rollovers. The third way we grow value in the pump business is by refreshing our own syringe pumps. Those are the pumps that came in the last acquisition.
We have a strong market share position there, and maybe the half or half plus is how do we go deeper with the install base, re-profitize it by adding value around software or services, et cetera.
All right. Obviously, the competitive environment for LVPs has been changing of late with Alaris remediation essentially completed, Novum IQ still off the market. How is the Plum family positioned competitively, and who do you think you're taking share from?
Yeah. The math doesn't make sense, obviously. Everybody says they're winning and taking share. We have stayed away from those comments, and we have simply said it'll show up on our P&L, which we believe it's starting to. If you read our scripts prior to the latest acquisition, we said our pump business is not that big. Our LVP business reported independently, and so you could make a judgment of the size of it. Small wins make a huge difference on our income statement. I think the competitive environment is active as ever. There's plenty of opportunities out there, and there's a reasonable amount. Our install base included of old equipment in America that needs refresh and old equipment globally, and that's a good opportunity.
All right. In thinking about your pump business a little bit more granularly, when do you expect the upgrade cycle to really start? What is that opportunity for investors, units, timeline?
Normally, these devices have a 7 to 10-year life, and if we think about our own U.S. install base, which is 20%-ish of the market, we are in the very early days of refreshing that. That process is just starting. It will start in earnest next year. You have to be sensitive. It's a little bit going to a customer, just like a software vendor, and saying even though this product is still functional and we've built these things like tanks, they can pump a long time, we no longer support the software, we no longer offer spare parts, et cetera, and sort of encourage a refresh the most modern architecture.
How do you think about with that upgrade cycle, the timing of the pull-through of consumables?
Our consumables business, for the most part, where we have the pumps today already. When you talk about the upgrade cycle, there is install base, more often than not, we already have those consumables. I wouldn't want you to think that it's incremental consumables to a large degree from rollovers. We probably have those already.
Sure.
The opportunity to drive more consumables related to LVPs is more about the competitive wins, where we have a reasonable chance of getting the consumable. Our consumable market share was higher than our pump share anyway—
Right.
—historically. Consumables grows for lots of other reasons outside of the LVPs, but specific to LVPs, it's more on the competitive side.
Okay. One aspect of this business is hospital profitability headwinds from both payer mix and 340B. How could that influence the infusion pump spend, or would those pressures have to be greater to drive hospitals to alter their replacement schedules?
Hospitals have obviously been under economic pressure since certainly as long as I've been doing this, and they've been trained to behave in a certain way. I think I would say, whether it's 340B or whatever, we focus on you need these products to deliver medications. You can't deliver care without them. Nobody buys a pump voluntarily. My joke is it's teaching your mom to use a new cell phone. You only upgrade when you have to. At a certain point, these devices hit their age, they time out, the support isn't there, the parts aren't there, and refresh needs to occur, like your desktop PC or whatever it may be. That's the pump business. It's not a revenue-generating item for them.
If you look at just what's happened in the U.S. market, where the market share leaders had to remediate, et cetera, people obviously had capital available for those remediations. You need the pump.
Yep. For the syringe pump, obviously you've been in discussions with the FDA. You're making progress on the additional verification testing. You're expected to refile the 510(k) in the second half. What is your confidence level that this new filing will fully address their concerns?
I think their questions were real time, of things happening in the industry real time. We adapted quickly. We built the testing capability that was required. We re-engineered one or two things to meet their requests. I think we believe we've had six first-pass approvals or something in our systems business over the last two years. This was the first one we didn't have, which is the danger of talking about them out loud. Historically, we only talked about when you had them in hand. It's the same team that's gotten six in the last two years and a bunch historically through the regulator, and we think we have the right data in hand and the right submission strategy, et cetera. We feel confident the submission, at least for the syringe pump, will go in this year.
If it goes in this year, what's the timeline for FDA clearance in your mind?
Typically, it's a six to nine-month review cycle. Really comes down to are the items reviewed only what was the test information required or are there changes that may have happened in the industry? I think we'd be scared to handicap it one way or the other.
You see the FDA being slower, quicker than—
You know—
—historical standards?
—I am not sure folks necessarily believe this off the bat, but everything from a review has been exactly on timeline.
Great.
As responsive as they have ever been.
That is great. That is good to hear. We talked a little bit about the LVP competitive environment. Maybe spend a little bit of time on the syringe pump competitive environment. And what is the benefits of having a syringe pump with your LVP? And how do you think about the share over time?
If you just kind of unwind history a little bit, the advantage that the market share leading pump platform, where Dan Woolson, Dan, our President in the front row, and I worked for a long time, was when it came on market, there was real innovation around multiplexing and convenience of having all the pumping modalities in sort of a single software solution. The remainder of the market that was using our system or the other competitor's system, so players two and three, typically were using their LVP and either a Smiths syringe and CADD pump, which required a customer to have two separate software packages, run two separate drug libraries, have different training, et cetera.
The advantage of having syringe, which was one of the two or three core reasons why we took on the headache of the Smiths acquisition, was to have what we believed was the best motor, the best pump, the most accurate syringe, and make it simpler for customers by integrating with the same user interface, same feel, and same software package as the LVP. The multiplexed Plum, combined with an integrated software syringe, eliminated some of the historical challenges that we had on our LVP platform. Deficiencies, you might say, that we had on our LVP platform.
Okay. You did mention in passing the CADD program. When do you think you will restart development of that?
CADD has not stopped, it just is lower priority. There is a finite amount of testing resources we had to address some of these questions. Medfusion in the NICU, in the hospital is a more acute issue, is an older product. We had to get that done first. CADD is happening as we speak, but it is only getting a fraction of the lab capacity, not all of it, so it will be a couple of months behind Medfusion.
Do you have a sense of the work that is needed to get it from here to clearance and the timeline?
In a strange way, the requests on CADD was almost less than the requests on Medfusion. There just are not as many sets you use on CADD as there are with syringes, and therefore, the testing volume is not quite as dramatic on CADD as it is on Medfusion. I think we have a good sense of what needs to get done.
Is that timeline for Medfusion a good proxy precedent for where you think CADD will land?
I think we would probably pause on answering that right now until we see the response to our Medfusion filing.
Sure. Let's wrap up on this part of the business with the software platform, LifeShield. How does this stack up versus the competition? How do you drive utilization?
Yeah. The software offering is intended to be an enterprise-wide offering. We were limited in scale a little bit with our historical offerings at the size of IDN, the simplicity that it could run with IDN. You could do it, but it required extra work. Having a full kind of enterprise cloud-based system, the ability for customers to immediately update their drug libraries across a huge multi-state IDN, across all different pumping modalities in a matter of minutes is a real advantage versus running two separate pump platforms, two separate software systems.
Sure.
There's lots of other features and analytics and things people will pay for, but the safety aspect of Medfusion and interoperability, which has really become table stakes, is what we've focused on making sure both pumps have and look and feel the exact same way.
Are you charging for that today?
We've always charged for software. I think the $64,000 question is there enough value in the LifeShield offering that we can illustrate and demonstrate that to our existing install base and try to re-profitize that a bit. Because at some level, while the period-to-period revenues are great for the next few years on the rollover of the existing install base, we're already getting those dedicated sets. That's not necessarily so NPV creating, right? The 10 years you get of a dedicated set. We'd love to re-profitize the software if we can prove there's enough value to customers there.
Okay. Before we move on to consumables, I think the Otsuka JV you did was a very interesting transaction. It has led to some investor questions about what it means for the future, and how does it look. Maybe talk a little bit and describe that JV and the benefits that ICU gets from it.
Again, back to a coherent portfolio. IV solutions, IV consumables, and IV systems are a coherent portfolio, but we believe we had a better right to win where we could innovate in IV pumps and IV consumables. We didn't have the same drug expertise in IV solutions. We were very lucky to find a partner who is one of the two largest producers of these items on the planet. Otsuka dominates Asia in these products and was looking for a way into the U.S. market. They have all the innovation in, what I would call for the U.S. market, next-gen IV solution bags. In the rest of the market globe, it is already the standard, which is DEHP, PVC-free IV bags, which is the elimination of certain plasticizers, which are becoming laws in states here.
Otsuka, to us, brought three things. They brought that technology, the know-how. They are bringing their skills in automation, and they're ultimately bringing their capital. I think that was something we didn't have the capital to invest at that scale. We didn't have the tech on the production side, and we didn't have the experience in the product categories. For us, it's coherent in that we need to still sell it and price it to our customers, and we will do that. But we found a better partner to help us make.
On the capital side, wasn't there just a big investment in Texas of late?
There was. We broke ground three weeks ago in Texas on the first new IV solutions factory in this country in maybe from scratch for 30 or 40 years, $500 million and more to come. The shovel's already in the ground competing against data center people, et cetera, and contractors. People lay concrete, put up a shell, et cetera.
Right. That's great. Why don't we pivot to your second business, the consumables business. It did return to mid-single-digit growth, organic growth. How sustainable is that growth momentum into 2000, second half 2026 and onwards?
If you look at our financial statements, you would see that the consumables business has grown 5%, 6%, 7% a year for six years in a row. So that means since 2020, since maybe towards the end of COVID in 2021. We believe that growth is sustainable. There are three or four important drivers to that growth. One is one you already mentioned, which is if we win a competitive pump, gives us a chance of getting those consumables. I would argue the more valuable one historically has been we've created these niche new markets, right? We find new clinical applications that are high value, and sort of in the trenches, and that's whether it's around oncology or dialysis or subcutaneous, where we're not necessarily the first player there, but we need to prove our worth. There are new categories we're creating in the consumables business.
The third is we get price a little bit. This year was a year off price, and price will start to come back.
Yeah.
Fourth, that business still is globalizing to the extent pumps are not used in certain geographies. You do not use really a needle-free connector until you are running a pump. So places that are moving more to pumps, we get to participate.
Maybe let us dive into price a little bit. How does that factor into the growth outlook? Do you think you will continue to be able to take prices going forward or at least offset inflation headwinds? Or do you need to wait for GPO contract renewals?
I think the new wild card in this, the word tariffs, is in this equation somewhere too, right? We took a lot of inflation on our P&L in the two years after the acquisition in early 2022. So 2022 and 2023, maybe a little bit of 2024, we had a ton of inflation come our way. We had a set of new GPO contracts going in 2025. They had price increases. They did not recoup the inflation we took historically. We still have not gotten that back. We do now have some escalators in our contracts going forward. I would have thought maybe they cover inflation. What you read in the newspaper changes every single day. The bigger issue is whether you call tariffs inflation or price or whatever, that makes recouping all of it very difficult.
Right. Maybe moving on to Vital Care. That business, it was negative in the first half, but you expect it to be stable in the second half. Does that mean flat in second half or similar decline as in first half? How do you think about the relationship?
I think we meant a little bit the way we used to talk about IV solutions. We said ± $70 million a quarter or so might imply a little bit down year-over-year. We have gotten out of some, via divestiture, some non-profitable lines that maybe improves the organic reported number. But I think the more important item for us is we are making the best cash returns we have made on Vital Care, even if it is a little less strategic than the rest of the portfolio. We have been running it for cash, and I think we have done a good job.
That is great. From the SKU rationalization you have done, how do you think about the right underlying growth cadence longer term for this business? Does it remain a drag on your business, or do you think it helps drive the WAMGR and the growth of the company?
I do think Vital Care will be dilutive to overall corporate growth, if the other businesses continue to put up the numbers they put up—
Yes.
—which we believe they will, right? There's no way Vital Care is going to grow at the mid-single digit range. So over time, it's a strategic question we need to address, but if we're maximizing cash returns, the rest of the businesses are doing sort of better than our guidance was for this year, it's not a pressing problem on us right now.
One theme we continue to see in med tech is obviously, and you've been a player on this, is portfolio rationalization. You've been pursuing both operational and strategic opportunities in Vital Care. On the last call, you talked about improvement in cash flow in the business. The question, I guess, is do you need to do something with that business? How do you think about that business going forward in the overall portfolio for ICU Medical?
Again, I think it is, if you believe in the circle of what we do and where we think we have portfolio coherence, Vital Care's a little bit on the outside of that, right? There's no mystery around that. If the opportunity came to monetize those in the right way, we would do it. We've tried. It takes two to tango. We haven't had that opportunity, and I think we're not willing to sacrifice cash earnings in the name of a little bit of growth rate improvement, right?
Right.
We don't want to be up here talking about dilution or stranded costs or things like that. It has to make economic sense. The thing we've learned, whether it was Hospira or Smiths, Otsuka, all of it, the right things happen. Sometimes it just takes some time, and you got to wait.
Right.
We are in that moment.
Helpful. One theme we have seen at this conference continues to be a transition from hospitals to ASCs. How do you think about your role in ASCs? Do you have a higher or lower share in ASCs, and where are you best positioned in your mind?
It is a great question, and one we are focused on. We do not necessarily see for a hospital where they may send our products out to. Intuitively, we feel like our share is lower in ASCs, certainly because we measure it by some of the freestanding ones and some of the public operators. We are not where we should be. So it is absolutely an area of commercial focus and a desire to grow. I do not think even if care is accelerating there, our growth has been better in the hospital, from what we can see at least. So it completely makes sense that we need to be focused on that.
Do you have the portfolio to win in the ASC today, or?
100%.
Yeah. Maybe talk about a little bit your 2026 guidance. It assumes stable macroeconomic environment with inflation at current levels. Oil price is kind of the same, current.
What day was that?
Yeah. Moving daily. We had not seen gross margins materially affected by the higher oil prices in the first half. How do we think about that going forward?
The guidance, we have finally been consistent again for the last two or three years the way we were from 2014 to 2019. Then we took a two or three year time out from that. We said we can do better than our original guidance this year based on fuel remaining where it was, 80-ish or something, no incremental tariffs, and kind of currency in line. The currency and tariffs have been a big headwind. For the most part, since that call, currency appears to have remained in line. Our sensitivity to oil is not nearly as much as it used to be. Our IV solutions business, which you had a lot of transportation, was much heavier tied to that. There is a lag time. So even though there has been a swing, that is not so much on our minds.
The wild card is a little bit, does something change on the tariff front? We don't know any more than you do. The tariff favorability relative to what we thought earlier in the year to date helped offset some of the fuel increases. If there's a major change there, that would be different than our expectations. That's not to throw a bucket of cold water on it. We still feel very good about it, but the crazy part is we're only talking about the macro items, nothing about the underlying business.
Right. I think I know the answer, but if I think about tariffs, FX, oil, of those three, what keeps you up most at night?
Tariffs.
Tariffs. I was right on my—
50% of earnings
—information, yeah. All right. What are the key puts and takes that investors should consider for revenue growth and margin improvement moving into 2027? How do things like price, pump replacement cycle, and obviously new product approvals factor into that outlook?
Yeah. I think we've demonstrated over the last two and a half years, in the spring of 2024, we said, "Okay, we're under-earning. Profitability needs to get in line." From that day, I think there's been, we have a one-slide supplement to the quarterly earnings. We've seen quarterly revenue growth 5%, 6%, 7% in the big two businesses. We don't believe there's any reason for that to stop because we haven't even started the rollover of the pump platform. We haven't started the syringe rollovers. It may not be perfect for a quarter, but those things will happen. They have to happen because those devices are old. As long as census in the U.S. is stable and we continue to create these niche markets, there's no reason consumables should vary from the course it's been on. Then it's really a question, okay, do we maximize profitability?
We squeeze out 20 points-ish of EBITDA on 41 and change of gross margin, right? We run a lean company. Our SG&A hasn't really changed for many years, and it won't change going forward. So it's all about the gross margin line for us, which is a function of price, delivering the manufacturing savings, integrations that we've been working on. Those come with bumps. We're dealing with a little bit of those now, but if places go away, costs go down, and that has happened. For me, we've said publicly our target gross margin pre-tariffs was 45%, going to 43% without, and we should be exiting there at the end of next year. That shows we have some confidence in a gross margin ramp between now and then.
What is the ongoing leverage opportunity? You've talked about capturing two more points. Where can you go from there? Any more upside after that, or how do you think about the puts in play?
Again, we certainly did not look like a normal medical device companies in the mid-30s.
Yeah.
Solutions played a big role in that. That changed, the operational stuff changed. I think the next wave of margin improvements was the multi-year journey is again about two things. There is still more opportunities on the consult. We have changed the manufacturing pretty dramatically. There is more opportunities if we were willing to do that. But ultimately, it is about mix and price of what we are carrying on the new hardware and the overall consumables mix in the company.
All right. Think a little about cap allocation. You are expected to reach your two turns leverage by the end of the year. How does that impact you? You have obviously been an acquirer of assets over time, moving the portfolio. How does your capital allocation strategy change once you hit that long-sought after two times leverage target?
I think we say it on the call script. I think for the difficulties we had in 2022 and 2023, and early in the first quarter of 2024 at least, we did not skimp on R&D at all. Yeah, the pumps may take a little bit longer to get the syringe done, but all the other products got out there, and there is a bunch more to come, including on the consumable side. So we think we have enough R&D innovation in-house. We do not need to do a lot of external. We had to do a lot. It is a crazy story where we started to where we are today, but we have a lot of organic innovation, and so finally, discussion for us shifts to capital return. I do not know what the Fed is going to do.
We kind of thought, hey, if stock price was lower and rates were lower, you would buy back as many shares as you could. If rates are high and stock price is high, there's Ryan's created, I'm sure he has some AI grid that tells him what to do.
Yep.
It should go back, whatever's kind of the most EPS efficient. Obviously, it depends on what your time horizon is, et cetera. That's why we say in the script, it's a thinly traded stock. We know the power of buyback. Getting it two times the old-fashioned way has been a tough slog, right? But we're there.
If you think about priorities, it's organic, number one, buybacks, return on capital, number two, depending on where the stock price is, then M&A, or how do you think about—
It's 100% the right batting order.
—that board?
Yep.
On FX, going back to one of those three concerns we talked about, how big is that headwind to earnings versus your prior guidance, given the moves in the colón and the Fed, so on?
I think in the call script, we just try to reference it to put it in some context relative to what we thought we would earn when we did the transaction. Year-over-year, FX is okay. It is minor, right, of its quarterly impact right now and going forward. I think what has been very challenging for us is we went all in. CAFTA, the Central America Free Trade Agreement, was resigned in the fall of 2024. We went all in on that, moved our pumps that we acquired into Costa Rica. Two things happened that have kind of undermined some of our synergy case in that the Costa Rican colón has gone over the last four years from 650 to 450, which is because of all the foreign direct investment.
That is a pretty big swing if you have a $100 million-ish dominated cost, and Costa Rica has a 12.5% tariff.
Right.
If we add up tariffs plus the change of just the Costa Rican colón and the Japanese yen, where we had a $100 million commercial business, it is $100 million of earnings value to us over a four-year period. Every night when we go to bed and say, "Where did our margin go?" We try to piece it together. You could see a lot went to those places.
Going back to the organic investment, as you start seeing improved gross margin and SG&A leverage, how do you think about the right R&D as a percent of sales? You are currently at 4%. Is that the right level as investors think about modeling you, lower, higher?
I do not think we have ever been believers that there was some magic percentage, right? Capital equipment businesses typically require a bigger percentage. Disposables businesses usually need a little bit less. I think we are spending $85 million, $90-ish million right now. We think that is sort of $80 million - $90 million. I think that is sort of the right range.
Right.
Get a lot of value from that.
On buyback, how do you and Brian think about your preference for just kind of standard consistent buybacks versus something more opportunistic with an ASR, for example?
I think in the buyback discussion, we are no different than the audience in this room. We want to maximize. Situationally, I don't think it's like we're coming into a bolus of cash. It's just going to be normal operations. I don't think there's some ASR triggering event, and obviously you have less price flexibility if that happens. Let's cross that bridge once we get to 2x. We still have to do the first hurdle before we have such deep thoughts.
Taking a little bit of time, but you're getting there. So these questions will become more prevalent as you get there.
Yeah.
On getting there, you did not increase the 2026 free cash flow guidance, even with $20 million of tariff refunds coming in 2Q. Why did you not? Is there something else that we should be thinking about to offset that benefit?
No, I just don't think we're focused on that level of precision.
Okay. From an M&A perspective, you think about that second or third allocation. Are there areas in your business that you think you have holes, or are you very happy with the portfolio you've created with the recent transactions?
I think we are happy with the portfolio we've created. We pride ourselves on being the innovator in some of these little spots in consumables. Occasionally, there's like the Pursuit Vascular. There are some spots we had to go external for, and there might be one or two of those. We haven't spent a lot of time thinking about it. There are big staircase adjacencies to the product categories that we're in, but we've spent zero time thinking about any of those.
We talked a lot about the, I guess, the cost aspect, FX, tariffs, et cetera, oil. On the revenue side, what kind of keeps you up at night?
I think the products offer a great value proposition to hospitals around the world. The only thing I think we are concerned about there is if there is some change in census. Again, we haven't seen any.
Yep.
There's no reason employment is in a terrific spot, et cetera. I think it's, again, a macro item that concerns us more than anything about our own business.
Yeah, and you can't control that, whether it's good or bad.
Got to keep winning.
Great. We have about a minute left. Any questions for the audience? Any closing remarks, Vivek?
No. Thanks again for having us. Thanks for the interest in the early hours of the day here for ICU Medical, and we look forward to meeting you on the one-on-one schedule.
Great.
Thanks very much.
Thanks very much.