Intensive Focus Bolsters ICU

The medical supply company doesn't thrill analysts, but shares are way up thanks to its main product, an IV device. Diversification is next

ICU Medical (ICUI) has hooked up its investors. The supplier of IV connectors and other medical supplies touched a 52-week high of $46.17 on Sept. 21, and has shot up about 75% since last November. Despite this strength, analysts remain cool on the stock, but Wall Street has underestimated the company before.

The company's main product line is the Clave, a device that connects IV tubes to the bag or syringe holding the fluid. Self-sealing and needle-free, the device is designed to be easy to administer and run less of a risk of spilling blood or medical fluids. Hospira (HSP), an injectable pharmaceutical and device company that spun off from Abbott Laboratories (ABT) in 2004, is ICU's largest customer.

Through a product pipeline of drug delivery components, ICU plans to diversify its focus beyond the Clave. It recently introduced the Orbit 90, a link between patients and their insulin pumps. The device connects tubing and a needle via a spinning cap to account for normal body motion.

Though the Clave is still ICU's key product, ICU CEO George Lopez spoke enthusiastically about the company's production of customized IV kits, including one for administering chemotherapy. Designed individually with proprietary software, ICU manufactures devices with variables suited to customers' individual needs. For example, a large children's hospital might need different types of IV apparatuses than a small general facility that must cater to a wider range of patients.


  Customization is a niche for ICU to exploit. Larger competitors have "no interest in these smaller order sizes," that ICU caters to, says Daniel Owczarski, an analyst with Soleil (he does not have an investment banking relationship with the company). And making custom IV kits helps with customer retention.

The customizable IV sets fit ICU's business model of finding little areas where it can excel rather that get into bruising fights with much larger companies. "I don't believe in going into markets where there is competition," says Lopez in an interview.

Despite ICU's solid numbers, analysts say investors might have missed out on the chance for huge gains. Further tightening its relationship with Hospira, ICU in 2005 acquired the company's critical-care unit, expanding into devices like catheters and cardiac monitoring systems, and a factory in Salt Lake City. For ICU, integrating the new business involves two cost reductions: It moved manufacturing from San Clemente, Calif., to Salt Lake City, and it's now shifting some of the lower-cost assembly operations from Utah to a company facility in Mexico.


  "I know there is some degree of improvement that ICU can definitely bring [to the Hospira operation]," Owczarski says. But, he wonders, "How much of a leap is that going to be?" Rating the stock a hold, he describes his position as conservative with a willingness to be pleasantly surprised.

On Sept. 20, with ICU stock at a 52-week high, Junaid Husain, an analyst with ICU market maker Leerink Swann, upgraded the company to market perform from underperform. Integrating the Hospira unit and the "manufacturing two-step" it has set out to finish means the company has "a lot of balls in the air," he says.

For some, memories of ICU's disappointments in 2004 still haunt the company. That year, ICU took a hit after Hospira was spun off from Abbott. In the process of the deal, Hospira was looking at inventory and "one of the products they began to rationalize was Clave," Husain says.


  That year, ICU's revenue plummeted from $102.7 million to $72.7 million. Lopez concedes that 2004 was one blemish in the company's history of growth. But he boasts that the company stayed profitable in 2004. He says access to Hospira's inventory levels, and ICU's rapid turnover, will prevent another drop. "We know what their raw materials are [and] we know what their finished goods are," Lopez says.

As Hospira returned to ICU in 2005, ICU's revenues recovered. But with 70% of ICU's product sales channeled through Hospira, Husain says ICU might be too closely linked to its partner, especially following the critical-care acquisition.

Owczarski of Soleil was less concerned. Hospira, he suggests, is too dependent on ICU. "A more likely outcome is them getting together than them getting apart."

Lopez says ICU receives acquisition offers monthly. He wouldn't say if they come from Hospira. "Why wouldn't they buy us?" he quips. But then he claims: "We're really not for sale. We have the potential to grow up to be a big company."

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