ICU Gains on Wall Street, Tussles With B. Braun
By VITA REED
San Clemente-based medical device maker ICU Medical Inc. isn’t the biggest player in its market by any stretch. But it has won over Wall Street with an emphasis on speed and an adherence to its core product.
In fact, George Lopez, ICU’s founder and chief executive, brushes off concerns about his company’s reliance on one product, the Clave needleless intravenous connection system. The device is used to administer drugs to patients and accounts for about 75% of ICU’s roughly $60 million in yearly sales.
“Diversification doesn’t help a company,” said Lopez, who invented the Clave.
To emphasize his point, Lopez cites a book called “Profit From the Core: Growth Strategy in an Era of Turbulence.” Based on a Bain & Co. study, the book promotes the idea that prolonged growth is most profitably achieved by focusing on a single core business.
ICU’s stock has steadily climbed in the past year. In January 2001, shares of the device maker were trading at around 25. At recent check, ICU shares were in the high 40s.
Last week, the company counted a market value of more than $400 million. Institutional investors hold about 75% of ICU’s shares, according to Francis O’Brien, its chief financial officer. Lopez owns about a quarter.
For the nine months ended Sept. 30, ICU’s sales were up 22% to $48.2 million. Its net income was up 33% to $10.6 million.
ICU also counts a sizable chunk of cash: $68 million as of Sept. 30. The company isn’t actively pursuing acquisitions at this time, O’Brien said.
ICU’s products are designed to reduce the risk of needle stick injuries and accidental infection in healthcare workers. The company’s rivals include Becton, Dickinson & Co. of Franklin Lakes, N.J., and Baxter International Inc. of suburban Chicago.
While ICU is the little guy on the block, the company benefits from distribution pacts with Abbott Laboratories Inc. of suburban Chicago and B. Braun Medical Inc., part of Germany’s B. Braun Melsungen AG.
And analysts believe ICU’s niche in safe intravenous connectors could fuel further growth.
“They’ve shown quite consistent revenue growth,” said Bruce Cranna, an analyst with ABN AMRO in Boston.
The company is benefiting from “safe-needle hoopla,” Cranna said. “All their products are needle-free.”
As for ICU’s management, Cranna said he is “an unabashed bull.”
“The management has strong personalities,” he said. “But at the end of the day, they’re getting the job done.”
ICU’s emphasis on fast product turnover and low inventory helps drive growth and its outlook on Wall Street, Cranna said.
“This is not an Enron,” he said. “There is no funky bookkeeping there,what you see is what you get.”
Analyst Shawn Dixon at H & R; Block Financial Advisors in Detroit is more measured about ICU. Specifically, Dixon said she is concerned about charges raised by ICU that B. Braun had “been breaking a contract, promoting their product over ICU’s.”
ICU’s most pervasive risk factor is that it relies on Abbott and B. Braun for a good deal of its sales, according to Dixon.
“Their products are competitive. My concerns are with the customer concentration,” she said.
ICU is in litigation with B. Braun, O’Brien said. One situation “surrounds the interpretation of the contract and whether they violated it. We think they violated it; they say they didn’t.”
The other situation regards patent infringement allegations, he said.
“Obviously, this doesn’t improve our relationship with B. Braun,” O’Brien said.
But O’Brien also said that many customers who want the Clave in their facilities “will either buy it from Braun or through other channels.”
Officials at B. Braun Medical in suburban Philadelphia didn’t re-turn calls for comment late last week.
As for the production of Claves and other ICU devices, speed and efficiency are the key, Lopez said. Orders can be filled in 72 hours, because of a combination of “computer power,” such as the Internet, and automated production, he said.
“We’ve used technology to be a more efficient company,” Lopez said.
Large device makers such as Abbott often take around 20 weeks to fill custom orders, he said.
Besides Abbott and B. Braun, ICU also sells its devices to hospital systems and surgical centers, among others. ICU also has patent protection. Some of the company’s patents are good until 2005, others through 2017, according to H & R; Block.
ICU employs about 235 people in the U.S., including around 200 in its corporate headquarters and manufacturing complex on Calle Amanecer. The company employs another 225 workers at a plant in Ensenada.
Subsidiaries include Budget Medical Products, which makes custom IV sets that incorporate the Clave system, and Setfinder.com, used to sell IV sets online. Setfinder.com has grown from about $10,000 a month in revenue to about $160,000 a month in about a year, Lopez said.
ICU relies heavily on robotic equipment to make the plastic parts of its devices and to assemble them. The company produces 24 hours a day, seven days a week,sometimes with no one around, a situation called “lights-out,” according to Kevin Hanly, the company’s director of operations.
Last year, ICU felt the squeeze of rising energy costs, but such concerns have cooled today. The device maker is replacing hydraulic-powered machines with electric-powered ones, Hanly said.
“It saves us 30% on our electric bills,” Hanly said.
ICU is in the service area of San Diego Gas & Electric Co., rather than Southern California Edison.
Lopez, a physician, founded what eventually became ICU in 1984 after the death of a heart patient.
When calling the patient’s widow to inform her of his death, he noticed how the telephone’s cord locked into the headset and hit upon an idea to create an intravenous system because of it. That product, the Click Lock, locked a hypodermic needle into an intravenous line.
ICU ran into difficult times in the late-1980s after Lopez left the device maker in the hands of a professional management team. The rough stuff culminated with a Chapter 11 reorganization, but Lopez said he eventually was able to save the company through a combination of negotiating with creditors, laying off employees and filing a lawsuit against venture capitalists.
Dr. George Lopez prefers to focus on his company’s culture rather than numbers.
“If you want to get into why the company’s successful, talk to the employees,” said ICU Medical Inc.’s chief executive and founder. “Talk to Jim Reitz, our HR guy, because he’ll talk about why we’re so productive.”
ICU has little turnover, according to Lopez. He said he’s only had to let one worker go within the past six years.
The device maker places a great deal of emphasis on employee teams to set goals and solve problems.
“The company’s run absolutely, consistently by teams,” Lopez said. “We’ve had 2,700 teams at last count,teams decide everything.”
While ICU officials encourage collective decision making, workers must meet goals by a certain time in order to earn bonuses and other rewards, Reitz said.
And performance matters, Lopez said.
“We are extreme capitalists,we don’t believe in communism. We don’t believe in dividing things equal,” he said.
Lopez’ background definitely factors into how ICU operates, according to Reitz: “He’s a medical doctor, unlike (heads of) other companies.”
Reitz contends that Lopez can have a different philosophy because the chief executive doesn’t have “20, 30 years” of experience within a conventional corporate structure.
,Vita Reed
