Has This Healthcare Device Innovator Put out the 'For Sale' Sign?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ICU Medical’s (NASDAQ: ICUI) share price jumped sharply in early May after media outlets reported potential buyer interest in the medical device specialist. The company was one of the pioneers of needle-free connector devices that attach multiple syringes to a patient’s catheter, thereby allowing healthcare workers to avoid infection-causing needlepricks. Its Clave brand of devices has a leading market share in the IV connector segment, thanks to a cozy relationship with infusion therapy giant Hospira (NYSE: HSP), and it has built an operating footprint across 50 countries. So, should investors take a position?
What’s the value?
As infections from needlepricks have grown alongside increased healthcare activity, the federal government has made healthcare worker safety a focal point. Congress passed the Needlestick Safety and Prevention Act in 2000, which required needle-safe systems at healthcare facilities and was a step up from the previous “universal precaution” standard. The Centers for Medicare and Medicaid Services brought out its own “stick” when it discontinued payments for hospital acquired infections caused by needlepricks in 2008. Both of these developments played into the hands of ICU Medical, whose products provide suitable protection against these accidental infections.
In the first six months of FY2013, ICU Medical has posted somewhat weak results, with flat revenue growth and a 7.8% decline in operating income. Unit volume growth in the company’s core infusion device segment has flatlined and its newer forays into the critical care and oncology segments have posted mixed results. In addition, ICU Medical’s profitability has been hit by the costs of maintaining a global sales force. However, the company has a $240 million cash position, and its leading market position likely holds value for a range of buyers.
Battle of the spinoffs
While ICU Medical’s cash position would be enticing to financial buyers, the most likely acquirers are strategic buyers looking for synergies. At the top of the list is Hospira, the former Abbott Labs’ unit and a leader in infusion therapy and related pharmaceuticals. The company is ICU Medical’s largest customer, accounting for over 40% of its total sales. The companies also have a relationship in the critical care segment, with a distribution agreement that runs through 2018.
In its latest fiscal year, Hospira posted relatively weak financial results, due primarily to manufacturing problems with its Symbiq infusion pumps that led to a temporary halt of product sales in the fourth quarter of 2012. For the period, the company reported flat overall sales growth and a 43.2% drop in adjusted operating income. Hospira’s profitability was hurt by the lost sales, as well as higher quality assurance costs that were required as part of the FDA’s investigations of the company’s manufacturing practices.
On the upside, Hospira continues to generate strong operating cash flow, which allows it to continue investing in both its infusion pump and generic, injectable drug businesses. The company had 108 drug launches in 2012 and has 80 drugs in its pipeline, mostly focused on the oncology and infection areas. Hospira also has made strides in its vertical integration strategy, acquiring the active pharmaceutical ingredients unit of India-based Orchid Pharmaceuticals for roughly $203 million in August 2012.
Another potential acquirer is CareFusion (NYSE: CFN), the former Cardinal Health unit and a major player in the infusion therapy business with its Alaris system. Like Hospira, CareFusion has had various manufacturing problems with its pumps, dating back to 2007, and it continues to operate under a consent decree with the FDA. CareFusion also moved strongly into ICU Medical’s IV connector business through its 2010 acquisition of competitor Medegen, the manufacturer of the MaxGuard product line.
In FY2013, CareFusion has reported modest overall sales growth, as higher sales in its disposable product segments have offset lower sales in its dispensing and infusion equipment segments. While unit volumes of infusion systems were down, the company enjoyed higher sales of its connector products. In addition, the improved pricing environment for CareFusion’s equipment sales and its renewed focus on controlling costs led to a sharp gain in its adjusted operating margin.
The bottom line
The healthcare industry’s new-found focus on cost is leading it to target single-source suppliers capable of providing diverse, quality product lines at the lowest price. With a limited product portfolio, ICU Medical likely sees a good time to sell and join forces with a larger enterprise. Since it is priced at a takeover premium, investors should take a pass on ICU Medical. However, they should put Hospira or CareFusion on their watchlist, if either one adds this innovator to their product family.
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Robert Hanley owns shares of ICU Medical. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!