ICU Medical Inc (ICUI) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICU Medical, Incorporated fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. John Mills, Partner at ICR Incorporated. Sir, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the fourth quarter ended December 31, 2015.

On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. Vivek will start the call with a brief overview of our fourth-quarter results, and then Scott will discuss fourth-quarter financial performance in more detail. Finally, the Company will open up the call to your questions.

Before we begin, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the Company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be representation of future results, and are subject to risks and uncertainties.

Future results may differ materially from management's current expectations. We will refer all of you to the Company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position.

Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period.

We have included a reconciliation of these non-GAAP measures for today's release, and provide as much detail as possible on any addendums that are added back. In addition, the sales numbers that Scott will be covering, as well as the Company's financial statements, the reconciliation from GAAP to adjusted EBITDA, and adjusted EPS are available on the investors portion of the website for your review.

Now, with that, I'll turn the call over to Vivek. Please go ahead, Vivek.

Thanks, John. Good afternoon, everybody. Hopefully, our call should be shorter today. Our fourth quarter was a very active and successful quarter for our Company, and we continue to drive operating performance, value, and long-term sustainable growth.

On today's call, in addition to the financial results and more complete 2016 guidance, we wanted to provide, first, a recap of the important value-creating activities over the last 18 months and why we are positioned well in the short term; second, an update on our recent acquisition of Excelsior and the SwabCap products; third, our point of view and strategies on our large OEM customer, as well as capital deployment; and lastly, highlight how all those items collectively, along with the fundamentals of the Company, position us well for value creation in the medium and long term.

So, starting with Q4, we had previously talked about Q4 being slightly down to Q3, however, our actuals for the fourth quarter exceeded third-quarter results and our overall expectations, as we generated stronger revenue, adjusted EBITDA, and adjusted EPS than expected. In Q4, we had a little over $90 million in revenues and over $30 million in adjusted EBITDA. Reported revenue growth was just above 13% on a reported basis, and 15% on a constant-currency basis.

For the full-year 2015, we generated approximately $342 million in revenues and $114 million in adjusted EBITDA. Reported revenue growth was just over 10%, and 13% on a constant-currency basis.

We continued to have solid performance in our direct lines of infusion and oncology, which were slightly offset by critical care. In Q4, our direct operations continued to generate positive momentum with 11% growth on a reported basis, and 14% on a constant-currency basis. And for the year, direct revenue growth was 10% reported and 14% on a constant-currency basis.

Our OEM business, which did include a little OEM SwabCap revenue in Q4, increased 17% for the quarter, and 18% constant currency. For the year, our OEM business grew 11% on a reported basis, and 12% constant currency.

Before I get to the individual business segments, I want to recap the activities of the last 18 months, and illustrate why the Company is positioned well in the short term. When I reflect on the full-year 2015, I focus on the following. We essentially had $32 million of revenue growth, of which $12 million was OEM. We had $40 million of adjusted EBITDA growth, and adjusted EBITDA margins were just over 33% as compared to 20% in mid-2014. We have meaningfully improved our operating performance on our own direct operations.

From a balance sheet and activity perspective, we added $31 million in cash to our balance sheet in 2015, after using $32 million to buy the SwabCap business. We settled all previous significant arbitrations, we on-boarded the necessary commercial and technical competencies we needed, we accrued for the difficult restructuring choices on manufacturing -- Slovakia was the high hanging fruit I referenced in the past -- and that should lead to deeper profitization of our core direct business. And lastly, we signed a new Asian, multi-year distribution deal with Terumo, all while we continue to have an overcapitalized and underlevered balance sheet relative to our size.

On the calls in late 2014 and early 2015, we tried to lay out two book-end scenarios, one with revenue headwinds, improved operations, and possible capital deployment, and one with improving commercial execution, improving operational execution, and capital deployment. We feel at least for 2015 we demonstrated the ability to improve direct commercial execution and operational improvement, the items we said from the beginning that we control the most. When we combine the actions taken in 2015, along with the core fundamentals of, one, the sticky nature of our products due to our innovation and customer orientation; two, our manufacturing processes and significant historical CapEx; and three, our cash flow generation for the upcoming period, we think we are well positioned for the short term of 2016.

So, now let's turn back to the business segments in Q4 and 2015, which will help frame 2016. For the fourth quarter, our direct infusion therapy segment grew 19% on a reported basis, or 21% on a constant-currency basis. For the year, our direct infusion therapy grew [16%] reported, or 19% on a constant-currency basis. We've been closely monitoring the results of the companies that produce the devices that our products attach to, and we believe the biggest driver of this growth continues to be increased utilization, which has been supplemented by a more focused sales force.

Q4 did start to include sales of the SwabCap product in our infusion results. We closed the acquisition in October, and have been hard at work in integration. We just began the integration process into our sales force, and are working hard to innovate in the category.

We had two assumptions at the time of the acquisition, and both were validated in the fourth quarter. First, we knew the category was becoming more clinically relevant. While we did not know the specifics at the time, an important clinical study was published in the December 2015 Journal of Infection Control and Hospital Epidemiology showing that the use of the SwabCap disinfecting cap for needle-free connector offered important clinical and economic benefits. That study was performed by clinicians at New York City's Memorial Sloan Kettering Cancer Center, and you can find a full release of it on our website.

Second, we had a rough idea at deal time, but it has now been confirmed that we received certain significant tax-related benefits in the transaction. We knew the result of this in the same quarter that we made the decision to close Slovakia would significantly drive up our GAAP reported tax rate, but the cash value of those benefits in the transactions was much more valuable than a temporary high book tax rate. As it relates to initial performance of the acquisition, it did not affect our Q4 operating earnings meaningfully, and we stand by our initial comments on its contribution in 2016.

Scott will build back up to 2016 guidance at the end, and will illustrate the small pro forma adjustment to our direct versus OEM mix historically, as we have some new customers in the OEM book of business. But we expect our direct infusion therapy business, including SwabCap, to grow approximately 10% to 15% next year.

Our oncology business in aggregate, meaning our direct and OEM oncology business combined, had growth of 19% reported, or 25% on a constant-currency basis in Q4. For the year, our total oncology segment grew 13%, or 21% on a constant-currency basis. We believe we are in the early stages of a long-term opportunity in our oncology business, and have the leading products to enable hospitals to address the increased regulatory guidelines being adopted. Our new ChemoLock product is still in the early stages of adoption, and we don't expect it to be material to our sales until late 2016. For 2016, we would expect our direct oncology segment to also grow 10% to 15%.

Turning to our critical care segment, we reported fourth-quarter declines of approximately 5% on a reported basis, and minus 4% on a constant-currency basis. The business was basically flat for the year on a constant-currency basis. As I've said all year, this market is challenging, with limited growth and tough competition. In the second half of 2015, we filed a 510(k) for our new hemodynamic monitoring platform, and following approval, we will be enabled to be more competitive with some of the other players in this space.

We continue to work with the FDA on the approval process, but it's taking longer than we would like. With this project nearing completion, we have profitized the business better, as R&D requirements have begun to go down. The significant ramp-up in R&D over the last few years at ICU was largely due to these programs. For 2016, we expect the business to be flat to down 5%.

Before we get to OEM, I wanted to make a few quick comments on the rest of the P&L, and Scott will provide more detail. Gross margins in Q4 were down 40 basis points relative to Q3, as they were impacted a little bit by the Excelsior acquisition. Once we get manufacturing integrated, we should get back to previous levels; and the next big driver, aside from volumes, is the integration of Slovakia manufacturing into the rest of our network at the end of this year benefiting 2017.

SG&A went up for the first time since I've been here. That was largely due to the acquisition of SwabCap and the TSAs resulting on the sale of part of the business to Medline, and to a lesser degree, some non-cash stock-comp expense due to our retiring Directors. We will not have these costs in 2016. Scott will explain why our GAAP tax rate was 57% in the fourth quarter, how it depressed GAAP EPS and adjusted EPS in Q4 a bit, and what the tax rate estimate will be in 2016.

Okay, so, now let's cover OEM. These results for the year ultimately turned out better than expectations all year. For the year, which is more relevant, this book of business grew 11% on a reported basis and 12% on a constant-currency basis. Our primary OEM customer was up approximately $12 million in 2015, but we continue to see a disconnect between what we believe is the actual customer utilization versus our out-the-door shipments to them.

As a result, we believe our primary customer will be down at least $10 million in 2016. Even though we continue to decrease the percent of overall revenues generated from the single OEM customer, having a single OEM customer of this size has always been an issue here, and we have said in the last few calls that it needed to get dealt with in the medium term.

As discussed on the last call, we started to make progress on this objective in 2015. The acquisition of Excelsior created a second OEM customer providing SwabCaps to Medline Industries under a long-term supply contract. The previously announced supply agreement with the Terumo Corporation of Japan added a third customer to this book of business.

Even though we expect our largest customer to be down $10 million in 2016, we expect to keep our aggregate OEM book of business flat for 2016. We expect our large customer would account for approximately 30% of 2016 revenues.

To ensure good comparisons going forward, we are going to publish a pro forma of historical results, which is basically moving the geography that will be covered by Terumo into our OEM line historically. Scott will go into more detail, but it's basically a $6 million adjustment out of direct and into OEM historically. Going forward, we will not break out our OEM business by market segment or new customer results. At a high level, we don't control this line, and we've been focused on the controllable aspects of our Business, which is our direct operations, seeking new corporate customers, and capital deployment.

In a world of status quo, where everything stays the same with our large OEM customer through the end of the contract in December 2018, our medium-term model has been, first, assuming our direct business could grow mid-single digits over the period; second, that we could find at least one $25 million revenue M&A opportunity every 18 months; and Terumo would come online and be possibly $15 million to $20 million in the 2018 time frame. That would add roughly $100 million of new revenues, and make our largest customer roughly 20% of the Company at the end of 2018. And we would still be a Company with hundreds of millions of dollars of capital and leverage capacity on our balance sheet to create value and make the right choices.

Now, we suspect the question on people's minds is: Will the status quo continue, given the uncertainty around our large customer? Let me first reiterate the facts, and then our current thinking.

First, we have a contract that lasts another three years, and we intend to honor it. Second, and most importantly, we believe customers are being well served with excellent products and unique value propositions that we both offer to different customer segments. The only party that really wins in any sort of customer disruption is competitors.

Over the past 18 months, you've seen this team create a track record of generating solutions and results that are beneficial to our shareholders, customers and partners by getting our foundation right and driving operational improvements in our Business. Controlling what we can control has been the important driver for optionality. Hopefully, that helps explain how we think about the situation, and why we are not going to prematurely react.

We believe market share moves very slowly in this industry. We have unique products, great continuing cash flow generation to offer many shots on goal for value creation and protection for shareholders.

On capital deployment broadly, nothing is really new. We are digesting Excelsior. This was a perfect acquisition for us, and our team has performed very well with the initial integration, but we need time before we deploy additional capital. We are always looking for the right vale-creating opportunity, but we can't let our cash balance tempt us too much.

To summarize the 2016 guidance at the mid-points -- and then Scott will go into more detail with the ranges -- we see roughly $20 million of direct revenue growth and our OEM business is flat for a total of approximately $360 million in revenues. We believe that we will drop through $125 million of adjusted EBITDA; CapEx will tick up a little as we move Slovakia, and we were below historic levels last year; and we expect through operational growth and working capital improvements that free cash flow will be approximately $70 million.

As we have said from the beginning, cash conversions are what we focus on. We feel a goal of $125 million of adjusted EBITDA and free cash flow of $70 million delivers solid adjusted EBITDA and cash growth, while allowing the necessary investments to continue to perform in our direct business over the medium term.

We do see the year 2016 building a little differently than 2015, as we think the potential drop-off from our large OEM customer will be more felt towards the end of the year, and as a result, the quarters will be more balanced across the year. We have a real value-creating scenario with the improvements across the Company from medium-term opportunities of 2016 and beyond.

I do think we are an interesting-sized Company that can strategically move in a number of directions, and frankly, one of an increasingly limited number of smaller med tech companies that can compete globally. Things are moving fast, we're trying to improve the Company with urgency, but I wanted to remind everyone, as I have said on previous calls, that there will be bumps in the road as we are still a small Company, but we will overcome them and emerge stronger.

We have solidified the Company in certain technical competencies, and we need to keep driving continuous improvements in quality. I do feel the Company is healthier and hungrier than we have been in many years. We are trying to take responsible action and break some of the inertia that many companies in our position face. I really appreciate the efforts of all ICU employees to adapt, move forward, and focus on improving results, and our Company appreciates the support we've received from both our customers and our shareholders.

With that, I'll turn it over to Scott.

Thanks, Vivek.

As Vivek already mentioned, on our fourth-quarter and full-year results, we're above our expectations as we achieved gains in both our direct and OEM channels, driven by both growth in our infusion and oncology segments, and our gross margins, as well as adjusted EBITDA, was stronger than expected.

So, now on to our results. Total revenues for the fourth quarter increased 13% as reported, or 15% on a constant-currency basis to $90 million compared to $80 million in the fourth quarter of 2014.

GAAP net income for the fourth quarter was $5.5 million, or $0.33 per diluted share, as compared to GAAP net income of $7.4 million, or $0.46 per diluted share last year. This decrease of approximately 26% was driven by approximately $8 million of restructuring expenses related to our plant closure in Slovakia, as well as approximately $1 million related to the two transactions around Excelsior.

Adjusted diluted EPS for the fourth quarter were $0.96 compared to $0.68 last year, an increase of 41%. Fourth-quarter adjusted EBITDA increased by 38% to $30 million compared to $22 million last year. Increases in both adjusted diluted EPS and adjusted EBITDA were primarily due to positive top-line growth and improved gross margin.

Now let me discuss our fourth-quarter revenue performance by direct and OEM, as well as by market segment. As always, we also have these results posted on our website. Direct sales totaled $58 million or 65% of total revenue, while OEM totaled $32 million.

For the fourth quarter, sales in infusion therapy were $66 million, an increase of 17% as reported, and 19% on a constant-currency basis, and represented 73% of our total sales. Direct infusion therapy sales were $38 million, an increase of 19% as reported, and 21% on a constant-currency basis. Sales in oncology were $11 million, an increase of 19% as reported, and 25% on a constant-currency basis, and represented 12% of revenue. And as expected, sales in critical care were $13 million, which is a decrease of 5% as reported, and a decrease of 4% on a constant-currency basis, and represented 14% of our sales.

Our fourth-quarter sales for domestic and international were as follows. Domestic sales were $66 million, an increase of 21% from the fourth quarter of the same period last year. Due to the strong dollar in the fourth quarter of 2015, overall international sales were negatively impacted by approximately $2 million. International sales decreased 3% to $24 million as reported, however, revenue increased 3% on a constant-currency basis to $26 million.

Our gross margin for the fourth quarter was 53.4% compared to 49.7% last year. And the increase in gross margin was primarily due to favorable customer and product mix, operational efficiencies, and favorable foreign exchange rates on our operation expenses due to a decline in the exchange rate of the Mexican peso to the US dollar.

SG&A expenses decreased over 50 basis points to 24.9% as a percent of revenue due to lower sales promotion and legal expenses. However, costs were up on a sequential basis due to transition costs associated with Excelsior, and the retirement of two of our Directors. We expect the transition costs to start decreasing after Q1. Our research and development expenses decreased 20% year over year to $4 million, and this decrease in R&D was primarily from lower R&D project expenses related to the development of Cogent, our hemodynamic monitor for critical care.

Also in the fourth quarter, we accrued one-time expenses of approximately $4 million related to the previously announced planned shutdown of our factory in Slovakia, and approximately $1 million of transaction costs related to the acquisition and partial sale of Excelsior. In addition, we had a one-time expense of approximately $4 million related to the impairment or the fair market write-down of our factory building in Slovakia, for which the accrued impairment is not subject to any tax benefits.

Our annual tax rate was approximately 35%, as compared to a tax rate for the quarter of 57%. The increase to the fourth-quarter tax rate was principally attributed to the four decisions that occurred in the quarter, which included: the cost associated with the shutdown of our Slovakia facility; and the write-down of our factory building that provided no tax rate benefit; the direct tax impact of the disallowance of various transactional expenses related to the acquisition and partial sale of Excelsior; and indirect tax impact limiting certain manufacturing tax credits as part of the Excelsior transaction.

Now, while our GAAP tax rate of 57% was unusual, please note: Some of the tax attributes assumed in the Excelsior acquisition were realized in the fourth quarter, and our annual cash tax rate was approximately 21%. For 2016, we expect our tax rate to be between 32% and 33%, being higher in the first half of the year.

Now moving on to our balance sheet and cash flow, as of the end of December, our balance sheet remained very strong and with no debt. We generated $12 million of operating cash flow during the quarter, and ended the year with cash, cash equivalents and investment securities of $377 million. This equates to approximately $24 per outstanding common share. And over the course of the year, we generated $114 million of adjusted EBITDA and $45 million of free cash flow.

Now turning to our FY16 guidance, as Vivek already mentioned, going forward we will begin to report our revenue, the Terumo-related geographies in Asia, and SwabCap sales to Medline in our OEM business, and no longer in direct. In 2015, there was approximately $6 million of direct revenue that, under this reclassification, would be reported as OEM going forward.

In 2015, we reported $136 million for direct infusion. Under this reclassification, revenue would have been $131 million. We expect our direct infusion therapy business, including SwabCap direct sales, to grow approximately 10% to 15% over last year.

In 2015, we reported $28 million for direct oncology. Under this reclassification, revenue would have been $27 million. We expect our direct oncology business to grow approximately 10% to 15% over last year. And we expect our critical care business to be flat to down around $2 million.

I recognize this is a minor adjustment, but we wanted to make sure everyone could model accurate historical comparisons. Going forward, we intend to provide market segment guidance for our direct business, which we control, and an aggregate OEM guidance number.

Overall, we expect our direct revenue to increase 6% to 11%, and OEM, which now includes revenue in Asia and SwabCaps to Medline, to be flat, and total revenue to be in the range of $355 million to $365 million. We expect adjusted diluted earnings per share to be in the range of $4.34 to $4.46, and adjusted EBITDA to be in the range of $123 million to $127 million.

This year, we plan to spend approximately $20 million on CapEx, more than we did last year, which includes an expansion to our manufacturing facility in Mexico. We expect to generate $70 million of free cash flow, which includes a portion of the tax benefits from the purchase of Excelsior.

As Vivek mentioned, the management team and ICU Medical employees have been working hard to transform the Company, which has set us up for a good 2016 and beyond. Now we look forward to keeping everyone updated on our next quarter's earnings call.

And with that, I would like to turn the call over for any questions.

(Operator Instructions)

Thom Gunderson with Piper Jaffray.

Good afternoon, everybody.

So, Vivek, you mentioned the OEM supplier and the contract good till December 2018, and you plan to stay with the contract. Still it generates a lot of interest from your investors. And so could you just recap a little bit on the contract and how it changed, if at all, when it went from Hospira as a independent to Pfizer-owned? And, second, if Pfizer were to divest -- and as far as I can tell this is a single journalist saying maybe they will, maybe they won't -- if they were to divest before 2018, does the contract stay whole?

Sure. Hey, Thom, it's nice to hear from you.

I think, like all companies we, too, do not want to comment on rumors and don't necessarily believe everything we read on single-story articles either. The contract survives a change in control. And so the contract transferred seamlessly from Abbott to a new company, and then from a new company to Pfizer and the same would happen here. The provisions around it are no different.

As we think about the situation, what we really want is a committed customer. More than anything else, we want somebody who deeply cares about growing market share in the category and is willing to allocate capital and time and energy to win. And if the business stays in, we hope that they want to do that; and if they chose not to, then it finds a home with really someone who does. That's a great thing for ICU if that happens. We fully plan on honoring the contract, but we think we're deeply correlated at the customer level, and we think we have a great value proposition to customers and it's very sticky, and we've seen that competitively. And I have personal experience to that with other product lines I've managed. It is hard to displace this market share, and so I think we have a lot of aligned interests in making sure customers are treated well here.

Thanks. And then maybe, Vivek, maybe you could comment a little bit on international markets. We are always at the mercy of the latest news items and the strong dollar seems to be upsetting some with regard to being able to sell in international markets. Can you comment a little bit about what you see in 2016 going forward for ICU?

I think it's a great question.

That was the one reported number I felt like this quarter, people, you might ask, why was international growth a little bit lower than it was, frankly. And I wanted to explain that a bit, which was, when Scott talks about our international versus domestic, that includes also our OEM business; it's the aggregate of the two. So the number we really look at is direct international. And so direct international for us continued to be very good, our international OEM business was down a little bit.

We, as I said on previous calls, the competitive set is changing globally. We feel pretty good about where we are, and I think one of the hidden benefits here at ICU -- one is, obviously on the manufacturing and the currency tailwinds we have on peso versus dollar. The other positive thing is, we sell dollars in most of the rest of the world to our distribution customers, and we don't really have that currency exposure. That said, those customers, after many years of currency going the wrong way here, are feeling pressure, and so we want to make sure they're successful, but we don't feel end-market pain because of currency, or P&L pain because of currency, frankly.

Got it. And then last, just on a smaller note -- the medical device tax -- I assume that is included in your guidance, but is that anything that changed your way of how you look at 2016? Or are you reinvesting, letting it float to the bottom line, too small to matter?

It is super small for us. I think it's a transient thing, obviously, and we stand by what we've talked about before, which is, we feel like whether it's 33% or 34% -- whatever the adjusted EBITDA margins are for us, we feel pretty good about it. We care a lot more about, can we reinvest in the business for growth? We're not trying to perfect margin, so we didn't take it to the bottom line. We assumed it was going to get absorbed and invested in R&D people, our technical people, our salespeople or something that can move the top line over time. But that's just where we are right now and what we have to keep doing.

Got it, that's it for me. Thanks.

Nice to hear from you.

Thank you. Our next question comes from Jayson Bedford with Raymond James. Your line is open.

Good afternoon, and thanks for taking the questions.

A few -- just on 2016, the EBITDA guidance was a little stronger than we expected, so I wanted to ask you about gross margin. You mentioned in the quarter it was impacted by the Excelsior integration, so two questions: what is the assumption for gross margin in 2016? And then, second, what's left on the Excelsior integration and what do you still need to do?

Okay, do you want to go through your full list, Jayson, or do you want to tackle that one first?

Let's tackle that one and then we can -- I'll ask --

What is it, Scott, answer first on the gross margin and I'll get to integration.

So it was only 40 basis points in the fourth quarter. Obviously, once we get Excelsior fully integrated towards the latter part of the year, that will help. We don't see much change overall in our gross margins year over year.

So, Jayson, the two points, just building back to EBITDA there. There will be a little bit of improvement, as Scott said, once we get Excelsior in. So what's left for Excelsior, again, is we have to get the manufacturing into our network; it is not in our network and it won't be until, really, the end of this year, towards the end of this year. When that happens, we get some pickup on that -- the typical synergies that we model into a transaction. And so that helps.

And then the other thing, on EBITDA, I think Scott was trying to talk about Cogent a little bit on the critical care side. As that rolls off, that was consuming a real significant amount of R&D dollars. We're doing everything we want to do in R&D on our infusion and oncology businesses and we just don't need to spend as much. So that will come down a little bit, too, which helps build up to that EBITDA. It's coming from other areas of the P&L next year, but not at all at the expense of the future.

Okay. And just, Slovakia -- the benefit from lower overhead -- is that more of a 2017 benefit than a 2016?

Absolutely. It's going to take the balance of 2016 to get it in here.

We've said we get our money back in two years, which can give you some idea of, relative to capital we have to put up to do this, what is it worth to us. I don't think -- again, we're not chasing it for 2016; it is the right thing to do. You also have to make sure it happens the right way, so we're being mindful of that. But I think if we can get Excelsior in, get Slovakia into our network, and keep delivering what we're -- from a growth perspective, with OEM at least staying flat over the period, meaning next year too, we should see margin improvements in 2017.

That's helpful. Just on OEM, can you talk about the timing of Terumo and when they will roll in? And then, is there any redundant revenue in Japan or Asia that will be cannibalized as Terumo comes on?

What we're doing with the adjustment that we talked about, that $6 million adjustment, we're essentially taking what we sell in the geographies covered by Terumo and pushing it out of direct and into OEM. So I don't think it would be cannibalized, so to speak. We are converting those distributors to Terumo today, so they're walking in to those customers as if it was their business any day now, frankly.

In terms of real impact, in terms of growth relative to where the historical numbers were -- that won't start phasing in until the end of this year. Again, we are not hyper-concerned with Terumo on a month-to-month basis; we're very concerned how big could this be in late 2017 or into 2018? And on the model we are building around an OEM basis, we set a number that we expect there for 2018 -- that certainly is our target.

Okay, and then maybe I'll just ask one last one and then jump back in the queue.

Your direct IV therapy was strong -- I want to say it was up 21%. You cited increased utilization, but I'm guessing there's probably a little bit more to that. So is there any anything else you can give us, whether it be new markets -- I'm guessing there's some share gains, just better execution. Can you just give us a little bit more color on what looks like a pretty strong acceleration throughout the year in direct IV therapy?

I think we've been focused on everywhere we can sell our products. We made a number of changes on the sales side and we are 18 months into that. I think we've got people who are getting their sea legs underneath them. That's all good stuff. On a contracting level, we have been trying to upgrade what we're doing. I don't think there's any one deal to talk about; there's a lot of little things, and I think just more people doing their job in the right way. And we see volumes as pretty good, frankly. And so I've been very interested in just the earnings reports, which all look pretty good to me over the last couple of weeks here, and utilization numbers that people are talking about versus what people seem to be predicting. So we haven't seen any change on our end.

That's helpful. Thanks, guys.

Chris Lewis with ROTH Capital Partners.

Thanks for taking the questions.

I wanted to start on OEM. You talked about the main partner being down about $10 million, I think, this year versus 2015. Vivek, maybe you can just elaborate on how you came to that outlook, what type of visibility you feel you have on that today?

Sure.

I study just with Scott and the management team here. We study what we are provided: end-user demand reports from our partner on what actually makes it to a customer. And over a long period of time, what leaves the dock and goes to them should match up with what's happening at the end customer. And for a couple of quarters in a row, we've seen demand at the end customer as flat, which, frankly, given what was going on in 2014 or 2013 and early 2015 is great, which means we believe they're holding their market share and can move up from here, which is really good for us. But we don't see end-user demand growth and our out-the-door fulfillments have been growing. And we estimate the gap between what's really needed to serve the customer versus what's been ordered as that amount that forecasts should be coming down in our estimation. That's how we calculate it.

Nice. And then on the Critical Care monitor, I think you talked about that maybe taking a little longer than expected to get through the FDA process. Maybe you can just elaborate on that and provide any updated timing expectations for approval with that product?

I think it's on us. Candidly, I think we are still a little thin resource-wise in having enough hands on deck to respond timely, et cetera. And there is nothing unique about the dialogue with them and they are, frankly, asking all the right and very fair questions. We just don't have as many resources on it right now and so it's going to take a little bit longer. There's not much else to it than that. We wanted out as soon as possible. We were shooting for approval at the end of the year. It's sitting there; it might take a couple of turns with them. I'm a little bit reticent to put out a date just because things seem to go slower with this program than we would like.

And then for oncology, you mentioned ChemoLock being a bigger contributor the back half of this year. How is that launch going at this point relative to expectations? And how should we think about the contribution there?

Our number that we said for our direct oncology growth includes what we think ChemoLock will do. I think for us, we're focused on just as many trials and customer events we can get going. We are just slowly ramping up to production, we're not really there yet. So I don't think it's all that meaningful P&L-wise, even in the growth number for the first or second quarters of the year, but I hope by Q4 we can be talking about it, saying it's contributing a healthier amount of our quarter-over-quarter growth. I don't know, I think when ICU got burned historically making a lot of promises on new products and perfecting it to a single quarter. I think the product is in its final form now which is great, production process is in its final form, tools are in its final form, all the right things are happening.

Okay, thanks for the time.

Larry Solow with CJS Securities.

Great, thanks. Most of my questions have been answered, just a few follow-ups.

Just on the ChemoLock, because you just had a question on that -- so it sounds like you're hopeful that you get some contributions by the end of the year, but perhaps there's not much built into that 10% to 15% oncology expectation for growth. Is that fair to say?

I would say there's not a ton built into that. I would say there's not a ton.

Okay. Back to direct infusion sales, obviously, 21% growth in the quarter, 19% for the year, so things actually even accelerated a little bit. It's probably hard to break it up, to bucket it, but would you say it seems like a combination of the two, but more just strong end markets and customers doing well? Or is that sales force realignment, increased focus, perhaps part of that? But maybe as you go forward, does that sales focus take more of a leading stance in getting growth? Or has some of the lower-hanging fruit already been pulled, or how do you look at that as you look out into 2016 and beyond?

Two things -- it's a great question.

The first is, there was SwabCap started to roll in, in Q4, so that added a little bit. That's why those numbers look so good for Q4. We should be transparent about that. The second issue is -- I think I've said it before, as we got going here at ICU there was a bunch of stuff on the operational improvement side, that was job number one. There was some low hanging fruit, there was some high hanging fruit. I think there was a bunch of low hanging fruit on the revenue side, too, where we just treated customers or distributors poorly or in a disorganized way, and we fixed a lot of those items. And those went on to the Board and that helped a lot. I think the next level is higher-hanging, and we should still fight hard to go get it, but I don't think the conversion speed is going to be quite as what we had in 2015. So I think all the right things are happening, but we're just being appropriately cautious on it.

And the SwabCap -- for the 10% to 15% in 2016, I think you said earlier, $18 million to $20 million in total revenues from that company. So if I'm not mistaken, it's more than 2/3 direct and like $5 million or so is going to OEM? Is that a ballpark?

Ballpark. You might be off a little bit.

Okay. And then just translating that into the OEM forecast, is the $10 million loss from Hospira, that's offset by what you're getting from Excelsior and then the transition of the $6 million from direct to OEM, is that right?

No, because that's exactly what we didn't want --

Okay, so that's not a fair way--

.I don't think that's a fair way to look at it. I think you have to take the historical sales that are now flipping to Terumo out of your base year. I don't think you can just say, oh, the incremental's here because we still were selling in the region before. So we're going back and adjusting what was indirect and OEM as if it was there historically, which actually ups our OEM for 2015. And we're saying, with the primary customer down we'll still say flat to that 2015 or through growth from Terumo over the historical baseline and what SwabCap brings.

Essentially, the $10 million is Excelsior and is being made up by the $10 million drop from Pfizer-Hospira is made up from Excelsior and Terumo?

I guess that's a fancy way of saying it or a less fancy way of saying it. 1/3 of the business that we don't control, we're trying to fill the bucket with new customers.

Got you. So you do have a little contribution from Terumo, really, is my question in 2016, obviously, the back half?

Yes, exactly, back half

Got it. And the Hospira or Pfizer-Hospira, just to clarify -- you had said you expect performance to sequentially go down a little bit, I guess, as they draw down inventories through the year?

Again, I think it takes people time to realize sometimes there is a disconnect between the end-user demand and the inventory levels, all that kind of stuff. And given how much extra we think is out there, we suspect it might take another quarter or two. I think we are very accurate in this before. We talked about it with chemo and the OEM disconnect not clearing out midsummer last year. I think it has happened the way we said it would, and I think we feel same way about what's going on here.

I think we've gotten smarter in how we look at that picture. And so it should tail off at the end of the year. The other guys come online; there might be a little bit of a gap in there, but that's why it will be much more balanced over the full year. I think we feel pretty good about what we -- putting outside the direct, which the numbers speak for themselves, we feel pretty good about the strategy we've been trying to run, and we tried to illustrate in my comments there that there is a formula here to keep a little bit capital deployment, hopefully, what is reasonable mid-single-digit growth kind of assumption over the long term, to keep building around, and see where all that is going on out there falls.

Right, okay. And just on oncology -- and I know this is a much longer term and hopefully we are in the early stages of a nice growth trajectory. Any update on, it's probably early, anything anecdotally about this agreement you had with McKesson and the US oncology network? Is that doing anything?

Everything -- we said 10% to 15% growth on a direct basis there. Everything that we've talked about is factored into it. Those examples, we're not going to talk about any customer situation. Similarly, those examples just say there's momentum in the markets, we're positioned well, and when these conversion markets start to happen, they last for a while. We are very pleased about that It's super competitive, don't get me wrong, but at least it has less players floating around than the big infusion markets.

Right. And just last, on the operating expenses, the SG&A was little higher than expected, but you had outlined why that was. R&D, I thought, was going to maybe drop a little bit more than it did. Did it not because the critical care piece is still -- you are still putting more a little more money into that than you thought? Or maybe I was off in my assumptions that it would drop a little bit (inaudible)

With all due respect, Larry, I don't know what your particular (multiple speakers).

I thought it was going to go more like a $13 million, $14 million full-year run rate. Is that --

I think we spent what we felt like we needed to spend. We didn't really think about it -- very, again, really think about it that much. SG&A was, when we sold the portion of the business back to Medline, they act as a contract manufacturer for us until we get the products into our own network and there's costs associated with that. That's why, obviously, I'm hypersensitive to SG&A. That went up and then the Company did the right thing, some directors retired, it created space, which was really terrific of them, and that also led to some increased costs. But, again, all the right things to do.

Absolutely. Great, thank you, I appreciate it.

(Operator Instructions)

Mitra Ramgopal with Sidoti.

Good afternoon. Just a couple of quick questions. Vivek, I was just wondering, on the critical care segment, I know you expect it to be flat to maybe down a little in 2016. In terms of just trying to get that business turned around, is it pretty much just waiting for the FDA approval on the new hemodynamic system? Or any other things you can do?

We've done a lot. It takes longer to show itself here and it's harder. We have retooled what we're doing from a marketing and sales perspective. We've done all the basic stuff of digging through where have we been mispricing products or not having value aligned with price in certain categories. We have been focused on our manufacturing of certain disposables -- can we improve the margins? We started with philosophy of, can we stop losing money here; and I think we've certainly got to that point and then some. But it's going to be -- like the IV business, it's going to be about revenue growth, and that's what we need to focus on. It is not credible for us to say that we can be deeply competitive on the revenue side until we get the new piece of hardware out there. And that is what we are focused on.

Okay, no, thanks. And then quickly on acquisitions -- I know you're limited on how much can say -- but I think you mentioned something in the vicinity of $25 million annual revenue would work, like what we saw with Excelsior. Would that span all the three segments, or are you particularly focused on any area? I don't know if you can give any color on anything in terms of focusing more on product versus distribution, et cetera?

I said, look, what if we could do one Excelsior every 18 months, which there's not a lot of science behind that, other than it seems like it should be doable for a company our size. And if we were able to do two of those, plus what we have in organic growth plus new customers, that builds around a lot of the current situation that we have.

I don't know that we would -- I think I said on previous calls, we get scared better than anyone, it is not in your knitting when you don't bring some value to the party. But if it's a good situation and it's innovative, and is growing, and we think we can add value to it, even if it's not something -- you said has to be one of the three. It doesn't have to be. I think it's unlikely if it were outside one of those three, but I would never want to constrain us to saying it, because it's a pretty narrow pickings in some of the areas in our three.

Okay, thanks, great.

Thank you; and I'm showing no further questions at this time, and I would like to turn the conference back over to Vivek Jain for any closing remarks.

I would just like to thank everybody for their interest in support of the Company. We felt 2015 was a great year for the Company, a lot of improvements went on and I hope investors see that with our careful use of capital, our respect for the P&L, and the amount of earnings we've been able to drive. So we look forward to keeping everybody up to date and we'll talk to you soon, after Q1. Thanks, bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.