ICU Medical Inc. is finally shaking it up.
The San Clemente medical device maker has added products during the past few years in a bid to reduce its dependence on dominant customer Hospira Inc.
ICU makes needleless connectors and other devices used to deliver intravenous fluids and drugs. It also makes products for delivering powerful cancer drugs.
Its devices, including the Clave needleless connector and the Tego,a catheter protector,are designed to guard medical workers from needles and toxic chemicals.
Hospira has been a key ICU customer for 15 years, going back to Hospira’s days as part of Abbott Laboratories. ICU historically has derived about 65% of its $200 million-plus in annual sales from Hospira.
“The stock market (and) our investors perceived the company as being vulnerable if too much of your sales are with one company,” said George Lopez, ICU’s founder and chief executive. “I recognized that you had to diversify to decrease your risk somewhat.”
The company’s latest diversification effort came earlier this month, when it spent $35 million to buy a critical care product line from Hospira. The line includes patient monitors inserted via catheters and products used in internal X-rays of blood vessels and organs.
ICU will be selling the products itself instead of through Hospira, which is based in suburban Chicago.
With the new deal, ICU expects its dependence on Hospira to eventually drop to 40% to 45% of its revenue, according to Lopez.
In addition, ICU also is making and selling more custom IV sets, which Lopez said now account for a third of the company’s sales.
It’s also expanding into what Lopez calls “empty markets,” such as protecting healthcare workers from cancer drugs.
This marks an about-face for the company, which previously grew on the back of one product.
In 2002, Lopez brushed off concerns about ICU’s reliance on one product,the Clave needleless intravenous connection system,saying “diversification doesn’t help a company.”
The Clave now accounts for about 40% of ICU’s revenue.
ICU’s shift has generally pleased Wall Street. The device maker’s shares are up 20% since the start of the year, outpacing the Standard & Poor’s 500 index, which is up 4% in the same time frame.
ICU has “several promising irons in the fire,” said Stephen Simpson, an analyst with Minneapolis-based Northland Securities Inc., in a research report.
Those irons, Simpson said, included turning critical care around, maintaining Clave’s momentum, building its cancer products to their “full potential,” expanding direct sales and growing in Europe.
The company counted a market value of about $585 million last week. Institutional investors hold less than 80% of its shares, while Lopez owns about 23% of the company, according to ICU’s most recent ownership details filed with the Securities and Exchange Commission.
In the second quarter, ICU’s profit was up 20% to $5.7 million, beating analysts’ expectations. Revenue grew 10% to $53.4 million.
ICU’s coffers are full of cash,$145 million worth as of June 30,and the company has no long-term debt.
ICU used some of that cash to buy the critical care line, Lopez said.
The company’s decision is a shift from 2008, when officials hinted that it could possibly get out of critical care after some struggles.
Instead, it was Hospira that got out of the business as part of a previously announced restructuring.
Analyst David Bachman of Longbow Research in Cleveland praised the deal in a research note, saying it’s to Hospira’s long-term benefit.
“Critical care products are among those targeted by (the restructuring) initiative as more costly to produce and do not fit with (Hospira’s new) strategic focus,” said Bachman, who follows Hospira but not ICU.
Lopez says the buy will help ICU beat incoming competitors.
B. Braun Medical Inc., a division of Germany’s B. Braun Melsungen AG with about 1,400 Orange County workers, Becton Dickinson & Co. of Franklin Lakes, N.J., and Baxter International Inc. of suburban Chicago also make products that reduce needle stick injuries and accidental infection in healthcare workers.
But Lopez insists that ICU has few competitors because it tends to pick markets that aren’t necessarily served by other companies.
“Empty markets allow you to be a success,” Lopez said. “Where there’s money, there’s profits, and competitors will come.”
An example of ICU’s empty-market strategy came when Lopez introduced cancer treatment products such as the Genie, which gets chemotherapy medicines out of their bottles safely, and the Spiros, an intravenous connector for chemotherapy.
The idea for cancer treatment products came from Lopez’s wife, Diana, who died of breast cancer in 2006. Her nurses complained of a metallic taste in their mouths from handling chemotherapy drugs, which gave Lopez the idea for the safeguards.
ICU also has made inroads into getting its products to customers through hospital purchasing groups. It signed a multiyear contract in 2008 with Premier Inc., a company with offices in San Diego and Charlotte, N.C., that buys devices and other supplies for more than 2,000 hospitals.
ICU employs 1,829 people in total, including 100 in its corporate headquarters on Calle Amanecer.
It has a plant in Ensenada and will build a $14 million plant in Slovakia that’s set to open during the third quarter of 2010 and produce custom IV sets for the global market. International sales made up about 18% of ICU’s second-quarter revenue.
ICU also is planning to hire 25 salespeople for its critical care division, Lopez said.
