A $1.5 billion medical device firm, Teleflex was once a diversified industrial company with a long history of involvement in the medical device sector. In the first week of December 2011, the company divested its last non-medical business and became a pure-play device company. Last year, the company’s constant currency revenues increased by approximately 4% and the firm introduced more than 20 products. The firm was able to achieve this increase, in part, by raising prices in a number of areas, which is not insignificant, considering the price pressures in the healthcare sector as a whole.
In this interview, Benson Smith, chairman of the board, president and CEO of the firm provides insight into the company’s success and its strategies for acquisition and expanding its business in emerging markets. Smith also shares his analysis of how healthcare reform will affect the device industry at large.
Q: I’ve heard a lot about cost pressures in the device market lately. How has Teleflex been able to raise or maintain prices in this tough pricing environment?
A: First of all, I would say that the price pressures are absolutely real and they are global. On the one hand, there is an escalating demand for healthcare services. That is true in all of the former industrialized countries as we think about them where it is principally driven by the Baby Boomer phenomenon. There is also a tremendous increase in demand for healthcare services in the developing countries. China, India and Brazil are probably the best examples. All of that increased demand is putting pressure on systems in terms of how they are going to be able to afford to pay for this increased demand. In turn, that is putting pressure on the systems—everything from what doctors get reimbursed for to how hospitals get paid. That is translating down to healthcare device companies, for sure. The large picture is that device companies have generally not been a factor having much to do with healthcare inflation. The healthcare inflation related to devices has averaged about 1% per year over the last 20 years. If you compare that to the general inflation rate for healthcare, it barely is a significant factor. Nevertheless, like any industry, suppliers stand out there as a potential target for reduced costs, and suppliers are feeling it.
"We have taken a systematic approach to pricing over the last year."
Teleflex is in somewhat of a unique position, I think, in the sense that some of the products and categories in which we supply products have more immunity than others. Compared to a knee replacement, for example, where the cost of an implant itself is a very substantial part of the procedure, in most cases, our products are much less visible as part of the overall procedure. So, if there is a $10,000 procedure and our product costs $200, even if the hospital got it for free, it is not going to make much of a difference in terms of the profitability of the procedure to the hospital.
Secondly, we have taken a systematic approach to pricing over the last year and have identified some areas where we haven’t been as disciplined in the past so that we can, in fact, price our products more appropriately in the marketplace.
The third area is that we continually need to look forward to find the right value proposition for to the hospital. Some products that we manufacture, for example, although they might be more expensive than some competitive alternatives, have a much greater impact on reducing costs in the hospital setting. So, a peripherally inserted central catheter (PICC) with an antimicrobial coating might cost more than a PICC catheter without one. But, the advantage to the hospitals is that it reduces the likelihood of a patient having an infection. And now hospitals have to pay the cost of treating infection themselves. So we need to make sure that we are pricing the right value proposition for the hospital and just being alert to those situations where they exist.
The other issue is that not all geographies are equal. There are significant pricing pressures in Europe right now. Certainly, there is pricing pressure in the United States. But many of the developing countries in Asia don’t have that same pressure, which provides some pricing improvement opportunities for us.
Q: How has Teleflex been able to meet the needs of hospitals, which have been facing a fair amount of turmoil lately? Also, can you tell me about the company’s expanded interaction with group purchasing organizations (GPOs)?
"We have really ramped up our efforts in the last several years to understand the particular needs and requirements of GPOs."
A: GPOs in the United States have been an increasingly important mechanism since the implementation of diagnosis-related groups. They have increased their presence and their importance in the whole supply chain and product decision-making process. Generally, the premise is that if a number of hospitals band together and negotiate with the manufacturers through a GPO, they are will get more favorable pricing than if they try to do these negotiations individually. It also, in many cases, eliminates some costs, because their purchasing people don’t need to be involved in every negotiation as part of their daily regimen. From a manufacturing standpoint, there are also some savings because the process of negotiating single-hospital contracts over and over again every year consumes a lot of sales time. So there are some definite savings that are introduced into the equation as a result of the involvement of GPOs.
Fortunately, Teleflex is of a size and a scope that we are important vendor for GPOs. We have several of number-one or number-two share positions in the markets we serve, and that makes us an ideal partner for GPOs. We have really ramped up our efforts in the last several years to understand the particular needs and requirements of GPOs, and we have experienced a fair amount of success in that area. For example, in 2011, we won 37 awards—27 of those were essentially renewals for product categories that we had. But 10 were brand new categories for us. So it is an important part of the hospital decision-making process and has been favorable for us.
Q: One of the main drivers of your revenue growth was new product introductions. I understand that the company’s R&D spending increased by 14% in 2011. Could you share your vision for how your firm approaches R&D and new product development? In particular, how does the Idea Generator Procedure fit into that and what role do acquisitions play?
A: In terms of R&D on a broad-based level, if we think about any segment of the marketplace, it is driven by technical advancement. We have seen enormous advances in the past 20 years: whether it is the size of the mobile phone that you are carrying or even the fact that you have a phone you can carry around with you, or the fact that we can get 150 channels broadcast into our home versus three black-and-white channels that we had when I was a kid. Another example is the delivery of music moving from LP to tape to CD to being downloaded online. There have been tremendous technology advancements in our world, specifically in the waymedicine is delivered, how diagnoses are made, how treatments are determined and the therapies that are available to people.
That is a little less visible to people in the common marketplace because we are not exposed to it every day. But, by the same token, the degree to which innovation is important if you are a mobile phone company or a TV manufacturer, it is absolutely critically important for a medical device manufacturer.
"The Holy Grail has shifted from simply better medicine to better medicine that takes cost out of the system."
The challenges right now in healthcare relate to not only the way we treat more people, but the way we treat them more effectively, and the way we pay for it. And so in the environment that we are in now, the Holy Grail has shifted from simply better medicine to better medicine that takes cost out of the system. That is kind of the sweet spot for us as we evaluate different kinds of technological opportunities. We ask: Will this in fact result in a better clinical outcome; does it have the potential to make the procedure more efficient; can it reduce the time that the patient is in the hospital; and can it reduce the likelihood of an infection? A positive response to any of those questions can be important cost reducers for the hospital.
The second area really relates to the acquisition strategy. And I would say that one of the things that Teleflex has done well over its 75-year history is to acquire companies on a primarily financial basis. They understood what the revenue stream is, understood what the earnings were, and understood how we to create synergies....Teleflex did generally financially driven acquisitions of standing companies that had been in business for some period of time.
Now that we have shifted gears into a pure-play medical device company, the nature of acquisitions and what we look at has changed significantly. Yes, there are some larger bolt-on acquisitions that will remain part of any company’s growth. But more and more of our business development effort is focused on what I am going to describe as technology acquisitions. These are companies that probably haven’t gotten to the market yet. Or they are companies that have just recently gotten to the market. What we are really buying is not an existing revenue stream but an opportunity to bring out something that is much better than what the marketplace is exposed to now.
VasoNova is a really good example of that kind of acquisition strategy. They had just received a 510(k) clearance but really had no sales when we acquired them. We think that is a very exciting technology. It is disruptive to the status quo; it changes the way hospitals can do a procedure. It eliminates the need for an x-ray. It has some really good clinical benefits. With those kinds of acquisitions, you don’t rely so much on a financial analysis. You really have to rely on your closeness to the marketplace, your understanding of what advances are being made in that particular area and make your best guess in terms of the marketability of that idea.
|The Vasonova technology facilitates venous catheter navigation and confirmation of placement of peripherally inserted central catheters and central venous catheters in the lower one third of the superior vena cava.|
In response to your question about why we have an idea generator on our website, many of these ideas emerge from physicians. Some ideas come to us as improvements to a device that they see could be made when they are in a procedure. Some of them are modest; some of them are breakthroughs. Many of these physicians don’t have a good idea ofhow to go about the process of talking to a manufacturer to commercialize an idea. This is one way to create an outreach program to get people to communicate with us about an idea that they have.
Q: How important are emerging markets for Teleflex both now and going forward?
A: They are important for everyone in the medical device arena. We have emerging middle classes in China, India, Brazil and throughout the Asia Pacific Rim. The growth rates in those markets are as much as ten times what the growth rates are in the very developed countries. They are an important part of any medical device company’s product portfolio.
Q: What kind of influence do you think healthcare reform will have on Teleflex and the U.S. device industry in general?
A: From a strictly competitive stance, in terms of how we stand against our peers, it is not going to have a big effect. We are all going to have to operate in whatever environment unfolds. I think it is fair to say that there is complexity in the healthcare legislation right now and rulemaking needs to take place.. Most healthcare companies are trying to be as alert as they possibly can to what those actual rules are. We are trying to have as much of a voice as we can in pointing out what the unintended consequences might be.
At this point, our strategy is to be as prepared as we can for what we think is likely to happen and as responsive as we can be to make adjustments as it moves further down the path.
Q: Is there anything else you would like to highlight that I might not have asked about?
"In a very difficult macro environment where most healthcare device companies have seen slower revenues, particularly in the United States, [Teleflex has] been able to accelerate [its] revenue growth."
A: The unique aspects of Teleflex and some of the things that distinguish us from some of our peers right now are that, in a very difficult macro environment where most healthcare device companies have seen slower revenues, particularly in the United States, we have been able to accelerate our revenue growth. So we are quite optimistic that there are some characteristics that have enabled us to grow revenue in some of these markets that have been much more challenging for some of our competitors. We have emerged from this transition from an industrial conglomerate to a medical device company with a strong balance sheet, and that gives us the flexibility to add to our product pipeline through potential technology acquisitions. I think it is very important to keep your product line current and to participate in that whole new wave of technology.
Most medical device companies don’t actually do their own primary research. Most of it comes from acquisitions. So we are in, I think, a unique position.
Lastly, our general diversity, the mix of our products, the way our products are used in a hospital and our global footprint provide some immunity to the pressures that other healthcare companies are feeling now..
While other companies are talking about being able to hold operating margins steady, we actually see several years of operating margin expansion ahead of us and potential to expand our operating income line faster than our revenue growth.
From my perspective, that is an exciting part of the Teleflex story and one of the big reasons I wanted to take this job in the first place.
Brian is the editor-at-large at UBM Canon's medical group. Follow him on Twitter at @brian_buntz.