ICU Medical, Inc. (ICUI) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the ICU Medical Incorporated Q3 2015 Earnings Conference call. At this time automatic participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John Mills for ICR. Sir, you may begin.

Great thank you. Good afternoon everyone. Thank you for joining us today for the ICU Medical financial results for the third quarter ended September 30th, 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 third quarter results, and then Scott will discuss third quarter financial performance in more detail. Finally the company will open up the call to your questions. Before we start 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 a 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 could have a direct bearing on operating results and financial position. Please note that during today's call we will be discussing 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 provided 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 Investor portion of the website for you to review. Now with that, I will turn the call over to Vivek. Please go ahead, Vivek.

Thanks John. Good afternoon everybody. The call is probably going to be a few minutes longer today. Our third quarter was a very active quarter that continued to build on the momentum of the last few quarters, and we're working hard to continue to drive operating performance, value and long-term sustainable growth. We had previously talked about Q3 resembling an average of the first two quarters of this year from a revenue perspective. Our actuals came in above those expectations, as we generated stronger cash flow and adjusted EBITDA than was expected, as both revenue growth and the operational improvements we have been making to ICU Medical are becoming more visible. As previewed on the last call Q3 did have some adjustments with unusual net positive items which Scott will describe in his remarks. Today we will continue to provide more tangible examples versus previous calls, about what has been driving our recent performance and summarize the drivers for growth in the medium and the long term. Specifically, we will discuss the fiscal year 2015 revenue status with our direct business and our current OEM partner, provide context around our recent capital deployment in buying the swap cap product line from Excelsior Medical, discuss new customer developments and their impact on our long-term OEM business, and comment on our current margin levels and their sustainability. From a financial perspective, we will provide an update to our guidance for fiscal year 2015, and lastly like we did on our third quarter call last year, we would like to provide early soft guidance on how we are thinking about our OEM business for 2016. We finished the third quarter of 2015 with approximately $86 million in revenues, and $30 million in adjusted EBITDA. Reported revenue growth was a little over 11%, and 14% on I constant currency basis. We had good performance in our direct lines of infusion and oncology, our direct operations continued positive momentum with 13% growth on a reported basis, and 17% on a constant currency basis. It should be noted that Q3 was a slightly easier comp from fiscal year 2014. Our OEM business was a little different from our expectations, as we had growth both sequentially and year-over-year, with 7% year-over-year growth on a reported basis, and 9% constant currency. We will come back to you on the long-term trend of the OEM business later in the call, and update you on the recent developments as our OEM segment will change slightly heading into 2016. I have said on every call since I have been here at ICU, that we are a Company that's big enough to be big, and small enough to be small, where the income statement can be influenced quickly. I think the earnings leverage and cash flow generating power we have seen year-to-date, with just a little more revenue growth and being predictable in managing ourselves, illustrates this important point. Our three core value drivers continue to be intact this quarter. Our manufacturing scale in the category, and ability to improve gross margins, the sticky nature of our products as shown in the sequential quarterly results of our direct business, and our cash generating abilities. On our last call we stated our focus was shifting were the operational improvements that led to demonstrated margin expansion, to revenue growth which has to be the focus for a small company like ICU Medical. We do focus on the sequential quarter-over-quarter results as much as the year-over-year results, which I think are sometimes misleading in either direction for a small company. When we compared this quarter sequentially versus Q2, 2015 we did have good sequential growth in our direct infusion and our direct oncology business, and as we previewed on the last call, expected lower sales in Critical Care due to last quarter's Critical Care strength. Those are the items that we control the most. So let me start there with some updates into the results and activities by direct business segment, and then move on to OEM. Our direct infusion therapy segment grew 19% on a reported basis, or 23% on a constant currency basis. I believe frankly the biggest driver of this has been increased utilization. We have been closely monitoring the results of the companies that produce the devices, that our products are attached to, and it's logical that our growth is following theirs. This has been supplemented by renewed focus, time and seats of the sales force, and urgency to find every possible channel to sell our IV therapy products. International markets, and surprisingly Western Europe, continue to perform very well. The U.S. market continues to shift to our clear family of products, which as we mentioned on the last call, we have been focused on from an intellectual property sustainability perspective as described in our 10-K. Our oncology business in aggregate, meaning our direct and OEM oncology business combined, had growth of 20% reported, or 27% on a constant currency basis in Q3. We had previously talked about not disclosing separately our oncology segment between direct and OEM, and only did so because we believe there was a disconnect in the inventory levels, which we said should have bled out by mid-2015. We feel like we are through that disconnect now. There is good customer momentum in our oncology business as the tailwinds of increased regulatory guidelines are being adopted. Our entire sales force are trained on these products and supported by deep clinical specialists. The highlights in Q3 alongside the 20% growth, include firstly the beginning of the commercial execution around the dual source contract to serve the U.S. Oncology Network, supported by McKesson Specialty Health, with our closed system transfer devices that we described on our last call. And secondly, the move of our ChemoLock closed system transfer device, out for limited market release where we have validated the product design, and we will now begin investing in expanded production. Again we will only talk about these products with specific numbers in the future when we have a material amount of sales, but it is important to note that the new products are starting to come into the mix for medium term growth. We are seeing a good level of customer activity around these products, and customer opportunities. Early returns appear positive, but we do not expect them to be material until mid to late 2016. In our critical care segment we reported second quarter declines of minus 2% on a reported basis, or 1% on a constant currency basis. This continues to be a challenging market with limited growth, and essentially verbatim from the last quarter, I don't think this quarter's decline is reflective of a particular trend, as we had some timing in orders that just happened to make it into last quarter, while we had 1% constant currency decline, the numbers are so small, it could have easily been in the other direction. Again, we don't see the same underlying market growth or utilization trends here that we see in our other businesses. On the last call we disclosed that we finally filed a 510(k) for our new hemodynamic monitoring platform. This gives us the best chance to be at least at product parity in the segment, and equally important, relieves us of a significant R&D spend that has been going on for years. There is no additional update here as the product is under review at the FDA. Relative to the sharp declines in critical care when I arrived at ICU, this business even staying at flattish levels, helps the overall value picture, and that is our medium term expectation for this business, even with the new monitor. Our international sales increased 12% on a reported basis, and 22% on a constant currency basis, we see competition increasing here, but have been able to continue to find pockets of growth. We still have a few remaining important positions to fill. We've been focused on cleaning up our legacy distribution channels, where we either had duplicative or less productive go-to-market situations. That might cause some bumps in our international revenues on any given quarter, but it's the right long-term value creating thing to do. We are slowly starting to pick which markets to invest in more, and I wish it could be faster. It's just hard for a small company, so it takes a little bit of time. So it's good that we're seeing better utilization and achieving growth in our direct business, but that has to be taken into context with the whole picture of what is going on with our OEM business. While there have been a number of positive developments for our current OEM partner that are good for us in the medium term and long-term, including FDA approval of their infusion pumps, better execution and alignment of their value proposition, and their closed transaction with Pfizer, but what's difficult to predict is exactly when and if we will see the sustained and consistent benefits of these developments. We are down the stream with improvements in their pump business, and we continue to believe there's a lag in feeling the positive downstream effects. Just like there was a lag when they had their regulatory headwinds. If there are positive effects it will take time to realize them. In Q3 our OEM business had 7% growth reported, 9% on a constant currency basis, and was up 5.5% on a sequential basis, contrary to our previously-announced expectations. Year-to-date our OEM business has grown 9% on a reported basis, and 10% constant currency. Given these results, our guidance from the last call is proving to be too conservative for the balance of the year. At this moment, we expect the balance of this year to resemble somewhere between Q2 and Q3 of fiscal year 2015, which would imply high single digit growth for the full year for our OEM business. We see our partner as holding serve in the market, and while we believe there has been utilization uptick for all market participants, and we expected inventory to get built back up in the channel as they re-enter the infusion pump market, we cannot correlate high single digit growth with what we believe is going on in the underlying infusion pump market. Please don't get me wrong. No one likes to see them growing more than we do, and we want them to win and be fully armed for market reentry, but we have been burned on this item before and so we don't want to make a mistake. We will continue to be very cautious here, and make sure that our infrastructure and operations run with our cautious view. I want to be very clear that we don't control this item, and have been trying to build a business that could create value independent of the results here. To that end, as we have said on previous calls, that strategic issue of having a single customer exposure of our size, even though they could be at a 10-year low in terms of percentage of our overall business. It is an important issue to address over time, which I consider the medium term, and that's factored into two important developments we wanted to highlight in Q3. On the previous call we said that we felt like we were getting closer to earning our right to deploy capital, and that our infrastructure and operations were more ready to handle it. And we said we desired a smaller tuck-in deal, where we could bring some value and hone our skills. We have felt like the opportunity to move forward with the acquisition of the Swab Cap product line, and the transaction structure and value itself, checked a lot of boxes for us. First for us at ICU Medical, it's always about the clinical needs and serving the customer. We believe that the cap, driven through regulation around clinical compliance, much in the same way our clave and oncology business is being driven, makes the swab cap products a natural extension to our current valve market share. We also felt the combination of price and structure met our needs. By partnering with Medline Industries, and serving as their exclusive swap cap provider for the integrated swab flush product, with a long term supply contract, it allowed us to create another OEM customer, obviously well below the scale of our current OEM customer, but it is a step in adding more large companies to that category for us. From a value perspective we believe we paid a fair value, and we have distinct ways of enhancing the business through manufacturing, sales and marketing, and product innovation, but those items take a little time, and bring a little complexity in the integration and manufacturing, cleaning up some distribution channels, et cetera. But we felt we had the exact same experience as what we have been doing here at ICU for the last few quarters. It might be a little bumpy, but we thought it was worth it from a value perspective. From a financial standpoint, we believe the transaction will offer an attractive ROIC, which we believe is the right measure. We expect it to take four quarters to get the business integrated, and we will see the benefits in 2017. From a reporting structure, direct sales of swab caps will be included is our Infusion Therapy line, and beginning next year, sales to Medline will be included is our OEM segment. That leads us to the next important development for Q3 that will benefit our OEM business in 2016 and beyond. It is a great pleasure to announce that we have entered into a long term supply agreement with the Terumo Corporation of Japan, for Japan and certain smaller Asian countries. Terumo will carry the entire ICU portfolio, including IV therapy products, oncology products, Diana, and the new addition of the swab cap product line. We obviously see Japan and Asia as a valuable growth market, and are particularly excited about oncology, as there is a sophisticated large drug market in Japan with the same emphasis on clinician and patient safety. It is important to be realistic on the near-term financial impact, and the overall size impact to ICU Medical. It will take time for our products to convert into Terumo, and in aggregate it will never be as large as our primary OEM relationship. We see it as very geographically distinct, and very complementary to our existing customers, and it brings to us another long-term oriented relationship. While we cannot disclose financial commitments, Terumo has committed over time to the majority of external purchases in this category to come from ICU Medical. We see this starting towards the middle of fiscal year 2016, and taking a number of quarters to get to scale. We will provide more color on the total opportunity later next year, and it is important to be cautious in the near-term. The transition of some existing business in the region, may cause some short-term bumpiness, but that is also absolutely the right long-term value creating thing to do. So starting in fiscal year 2016, any sales to Terumo will also be reported in our OEM segment with historical sales in the region adjusted for some better future comparisons. Now just a few comments on margin expansion. Q3's gross margin approached 54%. That is probably a bit higher than future near-term levels for a couple of reasons. First the product mix is a driver, second we are running very lean in some manufacturing areas. We have been trying to hire, and we haven't filled every open position. Third we have been benefiting from some currency effects which might not continue, and lastly swab cap will be below the corporate average, until we integrate the manufacturing into our network. Scott will provide more details in his comments. We continue to work on the high hanging fruit, and we will talk more about the main opportunities next year. As we guided on previous calls, Q3 did have a vast majority of all sales and marketing costs in for a full quarter, including the positions that accelerate capital deployment for most of the quarter. We still have a few international sales positions to fill, and expect to have those completed by the end of this year. As we have said on previous calls, we're not trying to find any magic EBITDA percentage, and we would feel happy staying where we are right now. To try to preempt capital deployment questions, again we need some time to digest what we just did with Excelsior and swab cap, and it continues to be a frothy market out there, and it's very hard to find the right value creating opportunity, we can't let our cash balance tempt us too much. So that brings us to guidance for the balance of fiscal year 2015. Given the results year-to-date of both our direct business and our OEM outlook, we're updating our guidance. We see our direct business coming in above the high-end of our 4% to 8% previous guidance, and our OEM business coming in at the mid-to-high single digits. We are amending our revenue guidance to $335 million to $340 million, and our adjusted EBITDA guidance to $110 million to $112 million. Scott will walk you down through EPS. We recognize that the mid-point implies a slight decrease relative to Q3, but we feel it gives us the flexibility to invest, clean up some historical stuff, handle bumps in our new acquisition, and it is an improved solid base, relative to where we started and positions us well to grow into 2016. In terms of how we are thinking about our OEM business heading into 2016, just like last year we are cautious about what might happen. We described it for our legacy OEM business while there are a lot of positive developments, we cannot correlate our view of the underlying market dynamics with the high-single digit out the door growth we have seen. As a result our view at this moment just like last year, is that we expect our legacy OEM business to be down next year, and that in aggregate when adding in the new OEM customers that we just described, our entire OEM line will be roughly flat next year. And just like last year we believe we will have direct revenue growth in an amount to deliver aggregate positive topline growth, and we will give more color on that on the next call. We don't control a huge chunk of our business, and we don't want to set unrealistic expectations about it. Given that we know the items that we do control, what we have been doing in our direct business, to the potential of new products and better execution, and the additions to our OEM business that offset the risks we don't control, and the potential for capital deployment, we think we have a very good case for value creation moving forward. Even if our OEM partner revenues are flat in 2016, we believe we could still grow value, and if they turn out to be better than that for 2016, it will only be additive to our results. The last few quarters have centered on getting our foundation right, padding intensity and focus around what drives value, improving our commercial execution, investing internationally, getting the right people in the right seats, improving our cost structure, and finally, getting capital deployed and developing new customers to off to diversify our mix of revenues. Four quarters do not make a long term trend, but we are encouraged by the recent results, and are deeply focused on continual improvements throughout the company. With less than two months remaining in fiscal year 2015, we are confident that we will achieve or goal of returning EBITDA to the highest level ever achieved by this company, which was when our OEM partner was at a much higher revenue level of $132 million in 2012. We will see aggregate positive revenue growth. The team continues to be deeply focused on true free cash generation coming out of the business, and all of the other comments made on previous calls still apply. We believe this call provided a lot of incremental information, including more specific actions that are occurring to drive revenue growth, more insight on the drivers of gross margins, and the best picture for the full year on our OEM business and beyond. We have a real value creating scenario with the improving cash flow in 2015, and the medium term opportunity of 2016 and beyond. I do think we're an interesting sized company that can strategically move in a number of directions, and one of a 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 said on previous calls, there are still core areas that we need to solidify, in certain technical competencies, and keep driving continuous improvements in quality. We need to keep working those areas because they're not all to my satisfaction yet. I do file 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. We may hit some bumps as we take on some of these actions, and we will overcome them and emerge stronger. 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 have received from both our customers and our shareholders. With that I will turn it over to Scott.

Thanks, Vivek. As Vivek already mentioned, our third quarter were above our expectations. As we achieved gains in both our direct and OEM sales channels for both our infusion and oncology market segments. Total revenues increased 11% as reported, or 14% on a constant currency basis, to $86 million in the third quarter, compared to $77 million in the third quarter of 2014. GAAP net income for the third quarter was $16 million, or $0.98 per diluted share, as compared to GAAP net income of $6 million, or $0.42 per diluted share last year. An increase of 153%. Adjusted diluted EPS for the third quarter were $1.00, compared to $0.66 last year, an increase of 51%. The increase in adjusted EPS was primarily due to positive top-line growth, improved gross margin, and decreased SG&A expenses. Third quarter adjusted EBITDA increased 57% to $30 million, compared to just $19 million last year. This increase was due to the same growth drivers. Now, let me discuss our third quarter revenue performance by market segment, and you can also view our detailed market segments in our earnings press release. For the third quarter sales in Infusion Therapy were $62 million, an increase of 13% as reported, and 15% on a constant currency basis, and represented 72% of our total sales. Direct infusion therapy sales were $34 million, an increase of 19% as reported, and 23% on a constant currency basis. Global OEM Infusion Therapy sales were $28 million, an increase of 6% as reported, and 7% on a constant currency basis. Sales in oncology were $11 million, an increase of 20% as reported, and 27% on a constant currency basis. And represented 13% of revenue. Sales in our critical care were $13 million, which is a decrease of 2% as reported, and primarily flat on a constant currency basis, represented 15% of our sales. Our third quarter sales for domestic and international were as follows. Domestic sales were $60 million, an increase of 11% from the third quarter of the same period last year, due to a 15% increase in direct sales, and a 6% increase in OEM. Due to the strong dollar in the third quarter of 2015 overall international sales were negatively impacted by approximately $2 million. International sales increased 12% as reported, and 22% on a constant currency basis to $26 million. Our gross margin for the third quarter was 53.8%, compared to 49.2% 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 operations expenses, due to the decline in the average exchange rate of the Mexican Peso to the U.S. dollar. SG&A expenses decreased 7%, which was primarily due to our restructuring last year of the sales organization and lower legal costs, which were partially offset by higher noncash stock incentive compensation costs. Our research and development expenses decreased 16% 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 our new hemodynamic monitor for critical care. Also in the third quarter an arbitrator ruled on a breach of service complaint claim between us and a subcontractor, awarding us $8.8 million. Our legal counsel representatives in this matter with a contingency fee agreement. We recorded a settlement award net of legal contingency fees and costs of $5.3 million. Additionally we had a gain on sales of some non-business-related real estate in San Clemente. As a result we had a total of $6.3 million in one-time gains. On our Q1 call we said we had shots on goal to recoup most of our earlier arbitration loss, and this is what we were thinking about. We also had restructuring and strategic transaction expenses of $3.4 million in the third quarter, compared to $2.8 million last year. The single largest expense of $1.8 million is related to a separation agreement with Dr. George Lopez, our Founder, and a continuing member of our Board of Directors. And the balance related to expenses associated with Excelsior, and some small expenses related to restructuring. Our tax rate for the third quarter was 35%, following a second quarter of only 34%. We expect the rate of approximately 34% to continue for the fourth quarter. Now moving on to our balance sheet and cash flow. As of the end of September our balance sheet remained very strong, and with no debt. We generated $17 million of operating cash flow during the quarter, and increased our cash, cash equivalents, and investment securities by $27 million to $394 million. This equates to approximately $25 per outstanding share. This year we expected $50 million of free cash flow, which would have put us at approximately $395 million by the end of the year. We will end this year within shouting distance of $380 million, and we bought a business for approximately $33 million. Given the results of our business year-to-date, we are updating our full 2015 guidance. For the year of 2015 we now expect revenue to be in the range of $335 million to $340 million, compared to the previous range of $325 million to $330 million. We expect our direct business to grow slightly above the high-end of our previous guidance of 4% to 8%, and our OEM business to increase in the mid-to-high single digits. GAAP diluted earnings per share to be in the range of $3.13 to $3.21, compared to the previous range of $2.63 to $2.83; adjusted diluted earnings per share to be in the range of $3.88 to $3.96, as compared to the previous range of $3.49 to $3.69; and adjusted EBITDA to be in the range of $110 million to $112 million, compared to the previous range of $100 million to $105 million. As Vivek mentioned, the management team and ICU Medical employees have been working hard to transform the company, which has set us up for an even better 2016 and beyond. Now we look forward to keeping everyone updated on our next quarter's earnings call. With that, I would like to turn the call over for any questions.

Thank you. [Operator Instructions]. And our first question comes from Thomas Gunderson from Piper Jaffray. Your line is now open.

Hi, good evening. This is actually Kyle on for Tom. So perhaps I will start with a more general question, and ask a couple of specific business line questions. So starting on the recent letter that several Senators sent to the FTC, urging a look into the alleged saline solution price increases following the shortage, in particular it looks like they're focusing on practices that award customers for buying bundles of products, as opposed to just saline solution alone. Can you give us your thoughts on this, and how ICU might be affected by any potential actions taken by FTC?

Yes. I'm glad you saw it. It's a complex issue and I'll try to answer it shortly. It's something we've thought about a lot for a long time. I'm glad you saw it. I have watched the IV solutions market for a while, and even the generic drug markets, and both have obviously suffered from various shortages at different times. And I think we have thought to be clear, that this IV solutions market has really been a mispriced product over years, where it was subsidized through co-mingling with other categories. We have no problems with a manufacturer seeking to get value in line with price, as these products have major regulatory and manufacturing versants that need to get justified, and we think that producers should make a fair margin. But what we do have a problem with, and what we are paying attention to, is kind of using pricing or through tying that was designed to eliminate product choice, and that affects patient safety or affects overall costs. And we think that our products, the ICU products are as close to an industry standard as you can have, and as a result of some of these behaviors that are referenced in those letters, customers haven't been able to get offered the lowest cost product, the most clinically relevant product, and more importantly, they had their ability to make the choices in the name of patient safety kind of curtailed by those tactics. So for us without trying to overly analyze it, what we care about is we care about choice and driving standards across the industry. We want to make so sure that providers care, have access to the best technology at the lowest price. We care less about whether we supply our product directly or on an OEM basis, but we do care a lot about whether a customer can really evaluate our products on their own merit, and if that choice prevails. I think these letters began to ask some really important questions about whether lower cost newer technology is being blocked, by those of an interest in preserving an old system. So all-in-all we don't know how it's going to go, but we think it's good for ICU Medical that these questions are being asked.

Okay. Thanks. And then I appreciate the additional color and expectations on Hospira. Now that it's been acquired, can you tell us how that transition has gone, any sort of change in the business or preliminary discussions on potentially extending the contract down the road?

Yes. I mean I think all we know right now is what the other, what we see in their orders, and what we see in the sales tracings that they provide to us of end-user demand, and we said we think they're holding serve, meaning their revenues to the end customers seem like they're holding steady. But as we think about the long-term, the other two players in the pump market, which affects a portion of our sales are both, very successful publicly reporting companies, and they both recently reported very strong growth in their infusion pump segments. And I think, if we add up the pieces we just can't see the industry growing at the rate that the two folks said they were growing at so, it's got to be coming from somewhere, and that's why we're being more cautious on it. That's really the dynamic that's going on, meaning the sales we had to our OEM partner, doesn't necessarily match up with what we think customers are using out there.

Okay. And then an exciting new agreement with Terumo. How long will that agreement be for, and can you talk a bit more about how long you think it will take for sales it to become material?

Sure. We're not going to disclose the length of the contract, but I mean if you have done business with companies like that, they don't sign up for quick flips. I think it's a serious long term commitment. I think it will take three or four quarters at least to get up and running with them, and that's okay, right? Because it's here for a long time. And it is nowhere near the size of our current OEM partner. Please do not take it in a wrong way. Scott can talk to you about that more. But it's a really good thing, and we're very proud of it, this company, and we're really honored to have them, we're really honored.

All right. Great. That's it for me. Thanks.

Thank you.

Thank you. Our next question comes from Larry Solow from CJS Securities. Your line is now open.

Great. Thanks. Good afternoon. Just to piggyback on the Terumo question, are they selling other products, other connected products today, competing products in oncology, or what is this replacing something, or this will be a new market for them, or any color on that would be great?

I think you can look up what they sell in their own catalogs. They're all public, Larry. I mean they sell a hybrid of their own self manufactured price. They source things from multiple people. I think it's more of a call of what they're trying to standardize around, than anything else.

Okay. So this will back more of their, this will be the predominant connector that they sell, and other of your products or will it be part of a bundle?

I think they will have some things they do on their own and some things that come from us.

Okay.

For a while some things that come from other people, right, until we transition it.

Right, and the three to four quarters ramp starts in mid-2016, or not to put on an exact timeline on it, or is that going to actually start ramping in Q4?

I think we won't see any impact of this on our income statement until the middle of next year at the earliest.

Got it. Okay. Got you. Okay. Obviously, the direct sales are 17% FX are fabulous, and you spoke of utilization of IV therapy, and obviously hospital utilizations are much improved, patient volumes much improved, how much of the macro environment, is it all macro, mostly predominately macro, or is it some of your improved execution, finding new channels, any way to sort of bucket that? It a 50/50 type thing? I realize it's a hard question to answer exactly, but just trying to gauge what's the primary driver, or are they both sort of equal drivers?

I think I probably three equal drivers. One is utilization, right?

Right.

And you can look at our products view on to other people's catheters, and you can look at the people that produce those, and what they reported as results.

Right.

The second is focus. We have been talking about for a couple of quarters, right. Every channel we can sell our products into we have been working hard to sell into, and I would say some of that stuff was more one time in it, there was some low hanging fruit on the revenue side, too, where we just weren't focused. We got focused on it, and that's why the step-up this year might seem so large. I don't think we'll be at that flip, those opportunities aren't open space next year. And the third is, I think we got back to doing what we're really good at, unique items, really meeting customer needs. We don't talk with customization anymore, but we deliver products to the customer in a way is that really responsive, and I think we have an advantage in doing that. We started to really focus on that again. And I think that space continues to be open for us, even with the pressures from the big companies, and some of the stuff that the previous question was addressing.

And when you look at Hospira keeping up with the market, not taking share maybe losing share, but if the utilization and all these positive, stable, macros are still growing, don't they actually still grow a little bit, or is it sort of the market growth offset by some share?

Yes. That's it. The latter. I think we're planning on the latter, what you just said.

Okay.

It might be the former of what you said, but we're certainly planning on the latter.

Got it. Got you. And just on the direct piece, and I realize it's, as you look out long-term and not asking for a specific guidance, and I don't think maybe the numbers are not quite sustainable, but is there something that you think you can still grow in the mid-to-high single digits on the IV therapy side, just on your direct business?

I think, let us talk in February.

Yes. That's fine.

That's what we want to do ,and I think we'll be just like we're cautious on the OEM side, and we're trying to talk early about it, which I hope people appreciate, and there are different point of view here whether it's the right thing to do or not, but that's what I really believe.

Right.

We're doing our work and talk about it when we feel like we have solid footing with the numbers.

Got it. Okay. Just switching real quickly to oncology, it sounds like things you have sort of flushed out the inventory on the OEM side, and I think going forward it seems like you're pretty confident this business will return to its, double-digit growth is a loose term, but hopefully that's a sustainable number, whether it's 10 or 30 I'm not asking, but is that fair to say that it sustain onto grow to double-digits?

I think it's fair to say it can sustain ably grow in the double-digits, but there's a real big difference between 10 and 30.

Absolutely. Right.

We believe that. We believe that's in oncology.

Right. Okay. Great.

Thanks.

Thank you. [Operator Instructions]. Our next question comes from Jayson Bedford from Raymond James. Your line is now open.

Good afternoon. Thanks for taking the questions, guys. Congratulations on the Terumo agreement. Just wondering how much revenue do you do in Japan right now?

I'm looking at Scott, Jayson. I think when we recast the numbers we'll put out there then. We just don't want to call it out right now. It's not humongous.

Yes. You will see that when we recast the numbers as Vivek mentioned.

Okay. But I'm guessing it's small?

It's -- well you will see it when we.

Not enough would be the answer.

Yes. Never enough.

Okay. I guess in terms of your OEM comments for next year, are you still expecting an $18 million to $20 million from swab cap next year?

We still are, yes. That's what we said when we did the deal a couple of weeks ago, but some of that will be direct, and some of that will be OEM, right? And we're kind of working through that right now, as we figure out the distribution channels.

Okay. Okay. Because I was just thinking in terms of not all of that goes into the OEM buckets?

No, no. The minority goes into the OEM bucket.

Okay.

Just to Medline.

The minority goes.

Yes.

Okay. And in oncology you mentioned kind of the beginning of the commercial execution, I think it was the language you used with respect to McKesson. What inning are we in terms of adoption, and when will they be fully up to speed from a conversion standpoint?

I think on the last call we said we got a dual source award, and I think the thing that's changed is now we've been able to talk to those customers. That's just starting, I don't know if we were in an inning yet. We're at an anthem. We're still at the anthem, but they are just one customer, even if we got all of them, that's still not our ambition, we still have to fight and compete to get that business in the market. They're only one of piece of what can be a really interesting market.

Understood. So it's fair to assume they didn't have a material contribution in the quarter, though?

Yes. I think that's an okay assumption.

Actually, we didn't record it. The transaction finalized in October.

No, no. He is talking about…

McKesson.

Nothing material.

No.

Okay. And then just on ChemoLock just it sounds like I think you used the words full launch now. I imagine the process is you convert the current ChemoClave customers hopefully at a bit higher price point, but do you view it more as a driver of new customer growth, this product?

Yes. I mean, and I don't think it's exactly the ChemoClave situation that you described there. So what's happened is we had a product out in the market to make sure the design and specs were what we should they should be, we iterated, it's been a long iteration since I got here, but I think we have locked down a design, and now we're moving it into production. That will take some more time, but we're talking about it with more confidence than we used to talk about it, I mean we think it will make some impact at some point in next year. The goal of that product is not to cannibalize our existing business, or anybody else's existing business. The goal of that product is to convert unconverted market into using a closed system. Independent of where price would be, the bigger opportunity is getting people who aren't using these important technologies today to adopt them. That's more valuable to us.

Right. Okay. And then just lastly from me, you mentioned a couple times kind of cleaning up the legacy channels internationally. Did that have a negative impact in the third quarter at all?

Not really. It might in the next quarter or two, as we transition some of the stuff in Asia.

Okay. Fair enough. Thank you.

Thanks Jayson.

Thank you. I'm showing no further questions from our phone lines. I would now like to turn the conference call back over to John Mills for any closing remarks.

Great. Thank you everyone for your time today, and we look forward to updating everyone on our business when we report our fourth quarter results, which will be in February of 2016. Thank you again, and have a great day.