Teleflex (NYSE:TFX) made news last year when it began a series of divestitures aimed at eliminating its non-medical-device holdings, ditching a cargo systems business and its aerospace arm.
Days before a lengthy interview with MassDevice, Teleflex reported strong 4th-quarter and full-year results, posting profit gains of 107% and a top-line addition of 6.6% compared with Q4 2010. Profits were up 60.8% and sales rose 6.7% for the full year.
But Wall Street remained unimpressed: TFX shares dropped nearly 5% the next day and have hovered around the $59 mark ever since.
During a lengthy chat with MassDevice, Smith told us that experience has taught him to keep his focus on growing the business, rather than on The Street.
"A long time ago, I learned that that’s the best place for my mental attention and our company’s attention to be focused, rather than worry about what the day-to-day market tends to do," he said. "A lot of times these things take a little while to sort out. But over time, we’re quite comfortable that our investors will agree with and be supportive of the decisions we’re making."
Smith also delved into what attracted a onetime history major to the medical device field, why Teleflex is poised to give the big kids on the block a run for their money and what the company looks for in potential acquisitions.
MassDevice: Your resumé includes a long stint at C.R. Bard (NYSE:BCR), where you eventually rose to president & COO. What’s your educational background and how did you wind up in the device game?
Benson Smith: I went to college at Grinnell College, which is an excellent small liberal arts college. I graduated from college as a history major and, quite by accident, discovered that I had some talent to sell. That led me to think about what industries I might be most interested in. I was very much impressed with the general ethical nature of the medical device industry – this is in the very early 70’s, it was an exploding industry and looked like a great place to spend my career. And that’s exactly what it turned out to be.
MassDevice: You joined the Teleflex board in 2005 and were brought on as CEO a little over a year ago. Was the idea all along that you’d be the one to shepherd the company through the divestitures that turned it into a pure-play device maker?
BS: The decision to shed those companies was essentially made before my arrival as CEO and the process was pretty much already established. There was a clear indication that there were going to be buyers available and so they were moved into discontinued operations with my arrival.
My appointment really had more to do with the fact that, now that we were going to be operating as a pure-play medical device company, what did we need to do to really compete effectively in that space? And, personally, I had little to do with the divestitures and have been able to spend most of my first year really thinking about and working towards us as a pure-play medical device company.
MassDevice: Now that those divestitures are complete, can you give us some idea of the spaces that Teleflex plays in?
BS: We are a broadly diversified medical device manufacturer both from a geographical perspective and a product-line perspective. About 50% of our sales are in the U.S. and 50% of out sales are outside the U.S. 35% of our sales are in Europe, 15% of our sales are in what we would describe as "emerging markets."
From a product-line perspective, we operate in the critical care segment, which includes products like vascular access and urological products. We’re in the anethesia and respiratory therapy business; we have a surgical business. We provide chronic hemodialysis catheters. We are also in the OEM space and have a division that makes intra-aortic balloon pumps, which gets us into the cardiac space. So we’ve got a pretty diverse product portfolio, and we’re pretty geographically well-diverse as well.
MassDevice: That puts you in competition with some pretty big players in the device space. What’s your take on how you compete with brands and companies that may be a little bit more well-established in devices?
BS: We do have, as a result of legacy acquisitions, some really strong brand names and brand equities.
If you walk into a hospital, you might not recognize the name "Teleflex." But you’ll certainly recognize the name "Arrow," you’ll recognize the name "Weck," you’ll recognize the name "Deknatel." There’s a long history of really great brand names that we’ve been able to build on.
Our basic concept here, in establishing our business units, is around a franchise concept, which says we need to have something of substance to really identify that business, which means the product has a lead market share. So in the vascular access space, for example, we have about an 80% share position in the CVC catheter arena.
That allows us to get into the call point and build up a relationship with a customer. And it’s that exposure that then allows us to introduce either new technology or technology where we might be going against some other well-positioned competitor.
It’s a little different as you move from product area to product area and from market to market. So, for example, Bard has a dominant position in urology in this country – not so in Europe. We own the Rusch brand in Europe and we’re the market leader in Europe. Some of the things you might conclude, just by looking at the U.S. market, don’t necessarily hold true as you look at a broader international scope.
MassDevice: Looking ahead, where do you see opportunity for Teleflex, either in terms of new technologies you’re focusing on or even in terms of acquisitions that might add to your portfolio?
BS: To some extent, the opportunities that we have share some commonality with other device manufacturers. And while there’s a lot of focus on some of the challenges and pressures in the health care device space right now, the important thing for us to keep in mind – and I think others to keep in mind – is the fact that what’s really driving this is a constant, irreversible acceleration of demand for better and more health care.
That’s occurring in the industrialized countries because of the Baby Boomer phenomenon. It’s occurring in the developing countries or emerging markets because of an increased middle class and higher and higher expectations for availability and access to health care.
It’s those tremendous growth pressures that are actually causing hospital systems and government systems to figure out how they’re going to pay for it. And yes, that’s putting some pressure on the system, but the real drive of that pressure comes from just an accelerating demand, which is not going to go away over the next several decades.
Teleflex also shares some other common areas. Obviously, China is a big area of growth for all of us. Brazil is a big area of growth for all of us, so being well-positioned in those markets, with an effective sales channel, is important.
For Teleflex, one of its unique characteristics is that we’ve been operating on a global basis, more so that some of our competitors who might have 70% of their sales in the U.S. So we’re well-positioned to take advantage of that
When you look at our product base, we think there’s some unique things that apply to that base. We’re not in the category of a hip or a knee or even a pacemaker, where the device itself is such a large component of the procedural cost. Our products tend to be a much more moderate portion of the procedure. In a $10,000 procedure, our catheter may cost $200. If we gave it to the hospital for free, it’s not going to substantially change their margin on it. So we do have some insulation from pricing pressures that are a little different than some of our other competitors.
All that being said, though, this is an industry that tremendously depends on technology advances. Just think about what’s happened to your cell phone or your television or even your car. They don’t look anything like what we had 20 or 30 years ago, or even in the last 10 years or so. The same thing is true in health care. It’s just a little less visible to the everyday consumer, because you don’t run into the hospital on a routine basis. So advances in technology, better ways to treat patients, better clinical outcomes are key ingredients. Add to that the fact that a better outcome coupled with a lower cost to the hospital starts to get you into the real sweet spot of where we think the competition is going to come from.
When we look at those segments where we’re either number 1 or number 2 share and have a strong position to begin with, we’re really focusing in on what do we need to do to make that outcome better – what do we need to do to reduce costs to the hospital? That’s where most of our investment in R&D goes. And I would translate that right into what our acquisitions strategy is. A lot of it is based on early-stage technology. When we see those things align, that piques our interest in trying to acquire that technology quite a bit.
MassDevice: You guys have been really active in inking group purchasing organization deals and you’re also renewing deals. With the high-touch, direct-to-physician sales model you alluded to earlier coming under pressure, I’m wondering if you’re going to apply lessons learned from your GPO business to other accounts.
BS: It’s absolutely correct that we have paid a lot of attention to improving our relationships with GPOs. That is one area where Teleflex’s size and depth of portfolio has been invaluable, because we’re in there every week with another contract negotiation. By way of example, in 2011 we won 37 awards, and that included 10 brand-new awards. We’ve been able to leverage our existing relationships with these groups in ways that that have gotten us some new awards. It’s really tough to go in, if you’re kind of a one-product player, and establish any kind of long-term relationship with a group when that contract might not be up for 3 years.
Usually, most of these contracts in the U.S. continue to be dual-source contracts, so that means that after we’ve got the contracts, we have to do our job, and go in and convince the clinician and the hospital that our value proposition or clinical solution is better for them, is better for their patients than what the competitor might have.
And generally the competitor has a pretty good story to tell too, so we still have to rely on those elements of getting the clinicians in the hospital to want to use our products.
What we have seen is more of a shift towards clinical education, towards providing nursing personnel with better information about overall procedural concerns that often extend beyond just the use of the product. That’s also been a valuable ally for us, in terms of winning support in those accounts.
As to your third question, is that same strategy applied to non-group hospitals? And the answer’s yes. A lot of these non-group hospitals are independent health networks, they’re pretty sophisticated customers to begin with, and so the same kinds of things apply: Improved outcomes, better cost vouchers, highly reliable supplier – those all become important considerations in their purchases as well.
Group purchasing organizations have provided a lot of mutual savings on both sides of the fence. Individual hospitals don’t have to negotiate for every single product that they buy and have that come up every year for another negotiation. They can rely on the group to negotiate on a lot of those pricing agreements for them. And those pricing agreements tend to be better than what the hospital can negotiate themselves.
It also means that, from our perspective, we don’t have to go in and negotiate with each hospital on an individual basis. It gives us kind of uniform pricing across the marketplace so we can instead focus our attention really on the clinical support to our product line. While there are some companies who wish there weren’t groups out there, we see them as a positive force in health care today and we’ve got quite a good relationship with those customers.
MassDevice: Turning to your 4th-quarter and 2011 earnings results, which were quite good, but your stock took a little bit of a drop on Wall Street. I have to guess that that’s got to be frustrating. How do you personally handle the vagaries of the stock market, when you’ve worked so hard to generate these results, you present them and it’s not what Wall Street expected so the share price goes down for whatever reason?
BS: There’s all kind of reasons that stock tends to go up or stock tends to go down. I certainly don’t want to give you the impression that we’re not concerned about investor reactions to what we’re doing in the longer focus point – we are. We take our responsibility to our investors really seriously. But our day-to-day focus here is really, are we doing the right things to grow our business? Are we doing the right things to develop our customers into advocates? Are we investing money in the right areas for the future?
A long time ago, I learned that that’s the best place for my mental attention and our company’s attention to be focused, rather than worry about what the day-to-day market tends to do. A lot of times these things take a little while to sort out. But over time, we’re quite comfortable that our investors will agree with and be supportive of the decisions we’re making.
MassDevice: With the medical device tax coming up pretty fast – slated to hit next year – what steps is Teleflex taking to deal with that burden?
BS: Well, certainly 1 approach we have to this is – if you want to look at it as making the field muddier, which is the view some people might have, it’s going to be muddier for all of us. So from a competitive standpoint, it’s not going to hurt us more than it’s going to hurt one of our competitors.
So we just kind of look at it in 1 framework, in terms of being prepared to be able to respond to it, but this isn’t going to be a competitive game changer for us or for anyone. So it doesn’t have a material impact in our strategy for better medicine or reducing costs. Clearly, we’re doing everything we can to be able to plan on what the implementation for this is. There’s still a lot of vagaries in the rule-making process. There’s still an opportunity for dialogue, I think, in trying to get some better perspective on those things. It might have some unintended consequences. So we’re working through the appropriate industry representations to be able to at least make those viewpoints known.
And lastly, we’re prepared to deal with it when it happens. It’s certainly not going to be a surprise to anyone and so we’d be a little remiss to hold off planning what we’re going to do about it.
MassDevice: Have you done any back-of-the-envelope calculations on what the hit for Teleflex might be?
BS: Yeah, $15 million is the back-of-the-envelope calculations. It’s actually the front-of-a-notepad calculation.
MassDevice: On the regulatory front, it’s no secret that uncertainty is the word of the day. How do you at Teleflex approach the regulatory process, when it comes to trying to get a new product onto the U.S. market?
BS: So I would describe this as something that actually is now a strength for Teleflex. We acquired Arrow in 2007 and immediately – two weeks after we acquired them – were hit with a corporate warning letter. While that was painful to go through at the time, has caused us to sharply improve our compliance and our new product submission process, to the point that I think we’re well-prepared to deal with this environment.
And it’s not just in the U.S. The Chinese equivalent of the FDA is ratcheting up their expectations all the time.
One of our businesses that we’re in is the OEM business and that has increasingly moved toward not just applying an OEM product to a customer but taking it through the whole regulatory process as well.
It certainly is a challenging environment for many companies, but I think that’s 1 of the areas where we’re really well-prepared to compete.
MassDevice: What’s your take on how the system might be improved in the U.S.?
BS: That’s a complex question. I think that the thing we always find the easiest to deal with is, the more knowledgeable the reviewer is about the particular clinical problem, the issues that you face, the more reasonable the whole process becomes.
To the extent that there’s turnover, to the extent that there’s a series of new reviewers in those roles at the FDA, that tends to make that process a little bit more complicated. I had the pleasure of having a very small dinner with the head of the FDA’s device center [Dr. Jeffrey Shuren], and I believe he’s very well cognizant of those issues and is taking steps to improve that.
On the other side of the equation, I would say, is that companies really need to be well-prepared and have thought out what the approval process needs to be and what data is going to be necessary, et cetera, and really have a direct, open relationship with the FDA and establish trust and credibility over time.
The circumstances of every health care device company are in some ways similar and in some ways quite unique. I think the similarities are that, again, there is going to be a strong demand for increased health care and improved health care over the next 3 decades, it’s going to be unstoppable. That is going to create some pressures in how we pay for it that companies need to respond to.
Some of the areas that I think are different for Teleflex and advantageous to Teleflex are that we do have a pretty diverse portfolio that isn’t in that realm of being the most driving component of the procedure, so we’ve got some insulation there. We happen to be in franchises that have some good room for technology improvement, so we’re excited about that. And we have a strong balance sheet to be able to bring in those technology acquisitions earlier in the stage. So we’re well positioned to be able to take advantage of that.
And lastly, I think that we have all that excitement and enthusiasm that comes from being a new company – even though, technically, we’re not a new company. It sure feels like 1 when you walk through the corridors around here. So when we talk about things like margin expansion and improving our operating income and the opportunities that that has for us, we generally have a pretty receptive ear to making those changes instead of, "Oh, this is how we’ve always done stuff." The fact that Teleflex is kind of reborn, in a sense, as a new company, our timing couldn’t be better.