ICU Medical Hospira Acquisition Call

Vivek Jain

Small companies have to get bigger or get consolidated in maturing markets

“ICU went through a pretty public sales process in 2013, and I believe the concentration issues was one of the key reasons it didn’t reach completion, and I think that concerned has been an issue in all strategic discussion and is the number one investor concern. Small companies either have to get bigger or get consolidated, and it’s incredibly hard for small companies to get bigger in maturing markets.”

Pfizer took $400m in stock

“Pfizer’s participation detailed on Slide 13 was a really important part of the deal to us. Pfizer accepted 3.2 million shares at approximately $125 a share as consideration and will become our largest shareholder. They will receive a board seat and have signed a voting agreement to support the Board’s decision. Doug Giordano, Senior Vice President of Worldwide Business Development for Pfizer will join our Board. Pfizer will be subject to an 18-month lock up which is correlated to successful carve-out of the business and ICU has provided incentive for an orderly disposition of the shares through an underwritten offering.”

Unusual for small supplier to buy their customer

“We like this structure because it aligns incentives and we are deeply honored to have Pfizer as a holder of ICU. We recognize the situation of a small supplier buying their customer is unusual and their willingness to believe in our team and the opportunity with these assets made this happen. From a shareholder perspective between them and our founder over 25% of our ownership is represented on the board which is a good thing.”

2017 will be bumpy

“2017 will be bumpy. There are a number of reasons and drivers for that. Timing is a huge variable; adjustments related to the transaction will be a large driver, including shorting the supply chain by net reduction of ICU sales into Hospira. The focus of 2017 will be on a more efficient use of working capital et cetera. Because all these adjustments over the first few quarters will not allow us to be as sequentially predictable as we’ve been. It will not be like ICU in the last 10 quarters.”

Predictability will be difficult to repeat

“In closing, we believe that this was a logical evolution for both businesses. We feel we’ve been able to put together a transaction that didn’t risk the enterprise and still there is real room for value creation for investors. If you are an investor that wants the predictability that ICU has offered in recent years; that will be difficult to repeat over the near-term and into the medium term.”

We may hit some bumps

“As always, I’d like to close with things are moving fast. We are trying to improve the Company with urgency and we’re trying to take responsible action and break some of the inertia that many companies in our position face. We may hit some bumps as we take on some of this action and we will overcome and emerge stronger. I really appreciate the efforts of all ICU employees and our soon to be colleagues from Hospira Infusion Systems to adapt, move forward and focus on improving results, and our company appreciates the support we received from both our customers and our shareholders.’

ICU Medical 2Q15 Earnings Call Notes

Getting closer to earning our right to deploy capital

“I feel like we are getting closer to earning our right to deploy capital and our infrastructure and operations are more ready to handle it”

It continues to be an unbelievably floppy market out there

“That said, it continues to be an unbelievably floppy market out there and it’s very hard to find the right value creating opportunity. Ideally, we would find a smaller tucking approve, we can build value and then explore a larger more global opportunity. We can’t let our cash balance to tempt us too much.”

Forecast adjusted EBITDA of 100-105m

“GAAP diluted earnings per share to be in the range of $2.63 to $2.83, compared to the previous range of $2.15 to $2.25. Adjusted diluted earnings per share to be in the range of $3.49 to $3.69 as compared to the previous range of $2.70 to $2.80. And adjusted EBITDA to be in the range of $100 million to $105 million, compared to the previous range of $84 million to $86 million.”

It’s very difficult to find anything that is value created in this market

“I think the candid answer is in this market we take either one of those scenarios, product or channel; if it drove value, it’s just very hard find things that are value created.”

ICU Medical 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

3 main value drivers outlined on last call check out favorably

“With a little bit of time now under my belt, I feel like the core value drivers are solid and largely in line with what I outlined on the last call.”

3 Value drivers are manufacturing advantage, sticky markets, good balance sheet

“First, ICU is one of the world’s most competitive manufacturer of infusion disposable products at the right quality and cost levels. With the ability to offer customization that the customer deeply values, which stem from a set of operational processes and capital investments that are difficult for others to reproduce.”

“Second, we participate in important sticky markets where macro tailwinds are pushing parts of the business forward. Examples of this are the handling of dangerous oncology drug products, where there’s an expanding need for safer medical devices to take clinicians out of harm’s way and a global recognition of patient safety in infusion therapy.”

“And lastly, we have a healthy financial profile, with good adjusted EBITDA and cash conversion and a strong balance sheet. The $20 cash per share is self-evident and growing.”

Need to clean up some operational inefficiencies

“We have inefficiencies and poor execution in spots. And I think some of these, certainly those that relate to inefficiencies in the way we run the business, with just some basic operational rigor, can be improved in the near to medium term.”

Opportunities to take out some operational complexity

“The short-term operational positive, there are things the company hasn’t done particularly well, just in the way we — the complexity we have in the way we contract, we distribute our product sometimes, the amount of people involved between our product and the end customer. There’s lots of different pieces that we can just run ourselves better on.”

Pleasantly surprised around manufacturing

” the additional surprise that I continue to like I find is really around the strength and quality of our manufacturing platforms and the efficiencies that they offer if we can drive more volume and more scale into them.”

Also need to drive better operational processes around sales and marketing

“jumping back a little bit to something more on the negative side is just the core operational processes and the core accountability around sales and marketing, execution and performance. We have great people with deep customer relationships. But as you grow up a little bit, the company needs to run them in a bit formal — more formal manner and keep rejuvenating things a little bit, developing marketing programs. So we got away from that. And that’s an area I’m spending a lot of my time too, because that ultimately is how you drive the top line.”

How he’s thinking about acquisitions

“I think about deals in kind of 2 dimensions, right, both up and down the staircase a little bit. And I think it’s very easy to imagine a scenario where we would spend a little bit of capital to possibly forward-integrate into our distribution channels and control how to get closer to the customer in some of these spots globally. And those are not big things. So they’re small things, but they’re very logical if a small company tries to grow. And then there’s larger or midsize, or whatever the right word is for opportunities. And I think that we have to be very cautious for the same reasons we talk about on our last call, this company doesn’t have a ton of infrastructure to handle that kind of work. And in some regards, we would have to probably look at things that are even more freestanding businesses. But it scares me to go to too far away from what is our core today of really manufacturing, while being a great OEM supplier, being a great direct sales company in certain markets around these devices. So 2 steps away, I feel like we may not bring a lot of value to the equation. So we’re going to be patient and disciplined about that.”

ICU Medical 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

New CEO from Carefusion

“I joined ICU Medical last week as the new CEO. Most recently, I was at the CareFusion Corporation, leading 1 of their 2 operating divisions and have responsibility for the majority of the disposable products there with over $1.3 billion in revenues across a variety of business units. ”

Three areas of opportunity

“3 basic reasons why I thought ICU represented such a good long-term opportunity. First, there are a set of deep core competencies here. ICU Medical is one of the world’s most competitive manufacturer of these products. We’re able to deliver these products to our channel partners and our direct customers at the highest quality and produced them at the most competitive prices. We’ve also become the clear leader in the ability to offer customization that the customer deeply values, and that stems from a set of operational processes that are very difficult for anybody else to reproduce. High quality, competitive production cost and customization comes from years of deep focus in this category, as well as real commitment of hundreds of millions of dollars of capital investment over the years into our manufacturing platforms.”

“The second thing I’d like was that there were a set of macro tailwinds pushing parts of the business forward in certain very important areas. The first is around oncology and the handling of dangerous drug products where there’s an expanding need for safer medical devices and to take clinicians out of harm’s way. The other is the global recognition of patient safety and diligence towards choosing products, which meet a higher standard of clinical performance.”

“Lastly, there’s an attractive financial profile here, and that’s the third reason I was compelled for the opportunity. With almost $20 a share in cash and investments, and albeit a bit bumpy, there’s an underlying set of cash flows that has been reasonably banded. I’m deeply focused on our EBITDA and our operating cash flows, which are due to an entrenched set of customers, where switching costs and training, excluding some unique events, keeps coming in”

Issues with channel partners are temporal

“We have world-class channel partners that we rely on to serve customers, and it’s important to recognize that there’s been some amount of volatility in that marketplace. I view the issues going on in U.S. infusion as temporal. They will get resolved and I’m confident our partners are doing everything they can to win. But the short-term impacts of the issues are real, and it’s important to be realistic about the impact on our P&L.”

Work needs to be done to get the house in order before they can make any acquisitions

“Inorganically, yes, I do think down the road, that hopefully, we’re lucky enough and have the credibility to undertake those activities. I would say, after 5 days of being here, the company is relatively immature in some of the areas and having the ability to absorb something else right now. And so what Scott talked about in renovating a bit is getting some of those things in order. I don’t think there’s going to be some rush to deploy capital here. I think it’s much more about just getting the basics in order for the near term.”

Take time to think before tinkering with the sales force

“I mean, I think this company was built off the back of really good innovation and really passionate sales and marketing, really committed sales and marketing. And I’m going to be very careful tinkering with it, I have experience along those lines, and I want to take a little bit of time and be prudent around that.”

Have to focus on growth

“I mean, I think this company was built off the back of really good innovation and really passionate sales and marketing, really committed sales and marketing. And I’m going to be very careful tinkering with it, I have experience along those lines, and I want to take a little bit of time and be prudent around that.”

Not talking about non-competes

“I would prefer, Jayson, not to talk about those on the call. I think — I don’t think this is the right forum for that.”

Need to institutionalize the process

” I think going forward, we’re going to need a little bit more processed, a little bit more institutionalization of things. I want to be careful, we are not talking about a large amount of money. There’s very small dollars, again, on the small income statement, nor are we talking about putting in any sort of corporate expense, it’s investment that I know we need to block that will drive revenue down the road.”

Acquisitions make more sense than buybacks

“we’re going to have responsible capital deployment I think for a small company, it is more value creating to find growth than to be doing never-ending buybacks”

Looking at divestitures too

“I have a lot of experience in divestitures also, given some of the things that I’ve been associated with. I feel like it’s very hard for small companies to get smaller immediately. So again, just like I don’t think we’d rush into deploying capital, I don’t think we’re going to rush into any decisions about removal of businesses”

Complementary categories out there

“I think there are absolutely categories that may not be the ones we’re in today, but its something where our core skills around manufacturing and design, et cetera, play an important role. I’d rather get not be very clear on that. I think some of those could be very unique to us. But there’s definitely ones out there at sizes that make sense for a company like ours.”