Since ICU Medical Inc. on Jan. 6 closed on its $1.9 billion acquisition of the Smiths Medical business, the combination hasn’t gone as smoothly as hoped.
While the San Clemente-based supplier of infusion therapy-related medical equipment (Nasdaq: ICUI) on May 9 reported the acquisition helped boost first-quarter sales 71% to $543.1 million, it also noted “operational challenges” with the Smiths units, which makes syringe and ambulatory infusion devices, vascular access, and vital care products that are complementary to its own offerings.
“It’s been a hectic 70-or-so days since the last call as our legacy ICU businesses have continued to progress well and we’ve been consumed with trying to improve the performance of the businesses that came with Smiths Medical,” ICU Medical Chairman and Chief Executive Vivek Jain told analysts on a recent conference call.
The company is currently valued around $4.4 billion.
$2.4B Revenue Goal
Last September, ICU agreed to acquire Smiths Medical, a unit of London-based Smiths Group PLC, to help it scale globally. On a pro forma basis, ICU said the acquisition should boost its sales from $1.3 billion in 2021 to an estimated $2.4 billion this year.
The company said its legacy ICU businesses performed well last quarter, reporting $317 million in revenue, a 6% growth on a constant currency basis.
Its biggest unit, Infusion Consumables, grew 13% to $141 million.
The three Smiths units, however, contributed $214.9 million in sales, well below the $280 million to $300 million a quarter range of the past 10 years, Jain told analysts on a conference call.
Supply Chain Issues
Jain said there were three main reasons for the shortfall in sales:
• The deal closed on Jan. 6, so ICU couldn’t capture about seven days of sales, or $25 million in revenue.
• “Poor execution” in the supply chain caused about $20 million to $30 million less than targeted in the first quarter as back orders rose throughout the quarter.
“The entire supply chain has been very weak,” Jain said. “We find ourselves in this position because actions were not taken to solidify the Smiths supply chain as the volatility grew in 2021, and we walked in to find inventory down, production down and a weak fulfillment network.
“In plain English, the buffer stock got sold over the back half of last year. But we bought the business, we did the deal and it’s our problem to fix it and it starts with a high level of intensity and understanding of the end-to-end business and it fundamentally starts with being a reliable manufacturer.
“Our folks are now in charge of all these areas and bringing that focus. We have made significant progress since the last call on production output levels, particularly of the most critical and highest margin items,” he said.
• Quality-related interruptions cost about $15 million.
“When you change people and strategy so frequently it’s hard to run a consistent quality process. It is public information that Smiths received a warning letter in 2021; then with all the twists and turns of what was happening with the company they were essentially frozen,” Jain said.