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CareFusion Corporation (NYSE:CFN)

Citi 2013 Global Healthcare Conference

February 27, 2013 3:00 pm ET

Executives

Kieran T. Gallahue - Chairman and Chief Executive Officer

Jim Mazzola - Senior Vice President of Global Marketing and Communication

Analysts

Amit Bhalla - Citigroup Inc, Research Division

Amit Bhalla - Citigroup Inc, Research Division

This is Amit Bhalla from Citi's Life Science Tools and Diagnostics team and we're very happy to have with us our next presenting company, CareFusion. With us from the company are Kieran Gallahue, Chairman and CEO; and Jim Mazzola, Vice President of Investor Relations. CareFusion, for those of you who don't know, the medical device company spun out of Cardinal Health in 2009 and offers products and services within the hospital markets aimed at improving quality of care, lowering costs and improving patient safety, all themes that we've been hearing throughout the last 3 days of the conference. Before we jump into our Q&A format, Kieran, I thought it would just be helpful if you gave a couple of minutes of an overview of the company, and then we'll go from there.

Kieran T. Gallahue

Great. Well, first of all, thank you for the invitation to be here today. We really love the opportunity to come out and chat about CareFusion. As you mentioned, we're a medical technologies firm who provides both systems and hardware, as well as consumable products, which are really focused exactly as you see on the screen up there today. We are focused on both reducing the cost of health care and improving patient safety. And as we start, literally, every single large intercompany meeting, we put the and in that statement, which is the ability to reduce costs while at the same time improving the safety of care.

We have 2 basic business segments. We have the Medical Systems business and we have the Procedural Solutions business. In the Medical Systems business, we have what we call our bricks-and-mortar strategy, where we have 3 core businesses that are intertwined using a -- what we call the mortar in the foundation. Those 3 businesses are Respiratory, Infusion and Dispensing businesses. Just to kind of give you a baseline. In Dispensing, which is over a $1 billion business, we have about 70%, 7-0 percent market share in the United States. Our Infusion Systems business, which, again, is just over $1 billion, we have approximately 50% of the installed base, so 1 out of every 2 infusion systems in the United States is a CareFusion product. And we have the Respiratory business, which is a far more fragmented business, but where we have about 20% market share and we're the #2 player in the world. So very concentrated market positions on that side of our business.

On the Procedural Solutions side of the business, we're much more of a diversified into a number of products that solve needs throughout the hospitals. You'd know us as names such us ChloraPrep, V. Mueller, PleurX, so market-leading technologies that are used on a procedural basis and form the underpinnings of the company.

We have about 15,000 employees on a global basis. We have been under a process of reengineering the company, basically doing 7 years' worth of integration work over the last 2 years. And as a result, we've seen a significant expansion of our margins and at the bottom line, even though we've been in a reasonable slow growth market in the medical technologies company. We have about 80% of our revenues in the U.S. today and therefore, have significant opportunities for expansion on a global basis.

Question-and-Answer Session

Amit Bhalla - Citigroup Inc, Research Division

Well, that's great overview. I thought since you are in the midst of a lot of change at the company, what does this company look like in the next 3 years? What's different from what we're going to -- what we see today?

Kieran T. Gallahue

So let's talk about the phase of growth. We mentioned that we had spun out from Cardinal about 4 years ago. The first 2 years of that growth was something we called a standup phase, which was literally just the separation. We spent a lot of time doing that process, simply becoming a standup company, getting your own e-mail, your own financial systems. It's a very inwardly looking time in the company's history. The last 2 years began the beginning of what we call the building the foundations for growth phase, setting ourselves up for the next phase, which is the accelerated growth phase. During this building the foundations for growth phase, we have been very focused on streamlining the organization, on moving out a lot of costs that are noncustomer facing costs, about reallocating where we invest to drive costs to those areas that do matter to the customer. So increasing R&D at over 20% during that time period, moving down the cost of operation in noncustomer facing areas, where we have reduced our operating expense, all while trying to drive margin expansion. And at the same time, we reorganized the company to those 2 business segments that I mentioned before, and we did so for the very simple reason that, that is the way the customers buy products and that is the way that you feed innovation.

So if you look out over the next couple of years, we will continue to invest heavily in those areas that can grow organic expansion over time. We will continue to build scale around each of the business segments that we have chosen, we'll do that both from an organic and an inorganic perspective through M&A. And we will be looking at expansion in both the relevant market in each of the quarters, as well as geographically. So what you're going to see is firming up the foundation and then growing both organically and through M&A during that time period.

Amit Bhalla - Citigroup Inc, Research Division

So in this reorganization period, you talk a lot about landing zones. And so the question for me is, what's going to be in these landing zones? Are we talking 787 Dreamliners or are you going to talk about a lot of different smaller Cessnas?

Kieran T. Gallahue

Yes. Well, I don't think we want the Dreamliner at this point.

Jim Mazzola

That's a great analogy, not one of your best.

Kieran T. Gallahue

So it -- so landing zones for innovation means both from organic and inorganic perspective, right? So a year ago -- we've acquired 7 companies over the last 2 years, as an example. But they've been smaller bolt-on acquisitions because, quite frankly, we, as an organization, needed to spend time getting the foundations of the company set so that we had the ability to take on more aggressive or larger acquisitions, or ones that were more complex in nature, right? So the landing zones mean businesses that have a solid commercial infrastructure, that have appendages within the company, that move the strategy of the business forward. Let's take some examples of that because I think everything I've just talked about is very esoteric. So in the Dispensing business, over the last couple of years, we acquired -- we're a predominantly -- we have 70% market share in the U.S. Predominantly U.S. because the product line, the technologies we had were primarily focused at the U.S -- the way that the U.S. distributes products. There's a different way of distributing products in most of Europe. They do blister packs versus [indiscernible] format. We went out in order to expand and strengthen that business segment. We bought the largest provider of dispensing equipment. And in Europe, we've integrated that business, and in doing so, we've expanded geographically, and we've expanded from a technology horizon. And we created an opportunity that we then bought a Dutch company and another appending business and wrapped it into that German firm that we acquired for Dispensing. So we're doing -- we're providing good zones, where we can either develop a product to expand our relevant market or develop products that can expand our entry into a given market segment, or we will have opportunities to acquiring products or expand our geographic reach within the 2 business segment structure that we've created. Okay. Does that make sense?

Amit Bhalla - Citigroup Inc, Research Division

Yes, absolutely.

Kieran T. Gallahue

Okay.

Amit Bhalla - Citigroup Inc, Research Division

So since the last quarter or since the quarter ended, the one piece of new news, I guess, is one of your competitors in the Infusion business had a warning letter. Take us through the impacts that will or won't have on your business in the Infusion business?

Kieran T. Gallahue

Great. Yes. So the Infusion business is a highly regulated business, and that could be good and it could be bad. The good news about it is it means that those who have the highest level of quality, both in their products and the systems around that business, have a competitive advantage because it's a very difficult market to enter and to stay competitive in. We, as I mentioned, in the United States, we have a 50% market share. That has expanded dramatically over the last couple of years to get to 50%, part of it because of the good things we're doing, part of it because periodically, some of the competitors stumble because -- particularly around this quality category. One of our primary competitors in the United States happens to be a very good company that just has run into some challenges, and they're not allowed to ship product into the United States in the foreseeable future. We don't know how long that period will be. It is very different than the circumstance we found with a competitor a couple of years ago. A couple of years ago, that competitor, which is the third of the 3 big players in the United States, that competitor literally had to take all their installed base out and replace it or have it replaced within a 2-year period. In this case, there has not been, at least at this point, there has not been an edict by the FDA that says you have to rip out the installed base. It was rather saying you can't ship new product in. And that means they can hold on to that installed base, perhaps better than the previous competitor. So it's not as much of a, let's call it, a slam-dunk opportunity as we may have seen in the past. That being said, this is now going to be almost 2 years since that competitor is able to ship a certain product that is more competitive with us in that category. So customers who may have contracted may be getting impatient. Certainly, our phone is ringing a lot more than it was 2 months ago. We're in conversations that -- with certain customers that perhaps we wouldn't have been able to have 2 months ago. So there is absolutely opportunity that's going to present itself. It would just be very difficult to put a number around that, and I did want to caution that it is not the same thing as the last competitor's.

Amit Bhalla - Citigroup Inc, Research Division

Yes. So you may not want to put a number on it, but they did, right? So they...

Kieran T. Gallahue

They did for themselves, which some of it may be applicable to us, some of it maybe to them, some of it, to hold on to their base, they may give away price. Remember, that there's a lot of transactional bundling that our competitors do with water and with other things, that they may look to hold on to their base. So their loss is not necessarily directly attributable to our gain.

Jim Mazzola

And there was a loss in their particular fiscal year as well on it. And so remember, customers may choose to hold on to those pumps. As Keiran said, they're not going to be pulled out of the market, in which case they probably...

Kieran T. Gallahue

It could be delayed revenue.

Jim Mazzola

Yes. It could be delayed, exactly right. It could be an opportunity for us, but could be delayed revenue.

Kieran T. Gallahue

So what we're trying to do is be cautious, but we are certainly optimistic. It is a -- it is not a bad thing for us. It is a very good thing for us, but it is -- they're a good company and they'll do the right things.

Amit Bhalla - Citigroup Inc, Research Division

Okay. So I wanted to just jump back to the M&A component for a second. On your last call, you talked about $2 billion over the next 3 years that you're going to deploy between buybacks and deals, and that's kind of a 50-50 split. If you look at that, the accretive or the deal component of it and you split between scale, geographic expansion and portfolio expansion, is that also even across those 3 areas in deal flow?

Kieran T. Gallahue

Yes. Well, first of all, I want to caution that we said it was $1 billion M&A, $1 billion buybacks, use this as placeholders. And really, what we're trying to project is that we have a goal over that 3-year period of growing our cash EPS line by 12% to 14% per annum, right? So a CAGR of 12% to 14% over that time period. And what we were trying to articulate is that, look, this is a dynamic market out there today, and there's going to be some markets growing faster, plenty of markets that are under difficult positions. We are a business that generates a lot of cash, we've got a very strong balance sheet, we can put that balance sheet to work, and there are many ways that we can create a valuable company under various scenarios, right? So that was the general reason why we provided that reverse waterfall chart. Among that is capital utilization, and there's -- the 3 classic ways of deploying that capital would be M&A, buybacks and dividends. For us, the dividends was less interesting than the buybacks and M&A, at least at this point it is. And one of the reasons is because on the buyback side you have flexibility, right? And as we all know, M&A is notoriously hard to predict, unless you want to dramatically overpay and take any assets that come along, right? So if you want to be disciplined, it's very hard to predict the timing of that. And we didn't want to back ourselves into a corner to say we're going to do absolutely x amount in this short period of time, whatever that is, because we want the ability to expand beyond that if there are appropriate targets. We want the ability to compress below that if there are targets, and either one we will flex on the buyback side of the equation, else we will deploy more capital than the $2 billion, okay? So all of those things are possible. So it's not evenly divided. Now to your question on the uses and is it -- how do we divide that between the alternatives. Those landing zones that we talked about, the Med Systems and the Procedural Solutions segments, we have opportunities in both sides of the business to grow. Technically, from acquiring in technology, from expanding the relevant market that we're in, or expanding, for instance, on the Med Systems side into new bricks or new businesses that take advantage of the mortar or the connectivity that we've created throughout those businesses. On the Procedural Solutions side, we're organized around 3 basic call points: vascular access, interventional radiology and the operating room. In many of those businesses, we are subscale, right? So we have the opportunity to buy scale within each of those businesses, sometimes within the United States, certainly on an international basis. Finally, when you look at us, remember that we have a capital -- or the reality of our capital is it's not evenly spread throughout the globe, all right? So we've got about $1.5 billion in o U.S. cash, we have about $1.2 billion in debt in the U.S., with about $300 million or so in cash in the U.S. We generate cash on basically about a 50-50 in the U.S. and o-U.S. basis. The U.S. cash can be deployed without penalty into buybacks or M&A. Outside the United States, if you're going to bring that back for use in buybacks or other uses such as dividends, you would have to pay the tax or the toll once you brought it in. So clearly, from an opportunity perspective, since only 20% of our business is outside the U.S., from where the cash exists, deploying that o U.S. capital is something of significant interest to us.

Amit Bhalla - Citigroup Inc, Research Division

Got it. If there are any questions in the audience, just raise your hand. We'll make sure we'll get you a mic. One of the things that was interesting on this last quarter's conference call was the discussion around the Pyxis ES platform. It had an impact on your base business, but it looks like, in the coming quarters, you are going to see an uptick. I just wanted to understand a little bit more about the confidence you have that the customers are truly delayed versus having constraints around their own capital?

Kieran T. Gallahue

So yes, good question. I think -- let's remember the Pyxis business, a good 70%-plus of that business is leasing business. So from the customer perspective, that's an operating cost line. It's not necessarily a capital acquisition or capital usage, all right? And so what we tend to do in those areas is we tend to upgrade by rolling through a lease, right, with some delta in that lease payment schedule based on if they're expanding, what it is that they're doing or how competitive the situation is, so it can go up or it can go down. So it frequently is in a different bucket. It may still have to go to a capital appropriation committee within the hospital, but it's frequently in a different bucket on where they look at it financially. We feel comfortable with where they are because the costumers, quite frankly, have expressed interest in the ES line. I'm going to go back and explain a little bit about this to the audience in a moment, but they've expressed interest in it. And what they've done is, is they've extended out their leases. So from our perspective, it's not a terrible thing, right? I mean, all that's happened is now they're leasing from us from our -- on the old generation for a longer period of time. By the way, that's a very profitable business to extend out, all right? And they are teeing themselves up for the next generation. I could tell you what hasn't happened is we haven't lost those customers to competitors, all right? So they're not rolling into somebody else. So what is this that we're talking about, for those of you are less familiar with it? The Pyxis business or the Dispensing business. The last 20 years, we, again, we have about 70% of the market in that business. The last 20 years has been really the same technology foundation. And what's happened over time is there's been incremental improvements in functionality of that technology over time. So depending on the customer, either by when they acquired that technology or what they chose to have as part of functionality, there is different degrees of functionality that they have in their institution. Now we're releasing the ES. This ES is the first major platform change since the beginning of this business 20 years ago, all right? Totally underwrites -- the software changes it, and it's much, much more effective for multi-hospital systems, where they're trying to manage their operations in a cost-effective way across a broader supply chain, right? Really powerful stuff. As we release it, the first thing we released was the core functionality. Then in several months, we're adding additional functionality and by the time we get to August or September, we have basically all the functionality that anybody would have bought in the installed base, okay? So some of these customers are saying, "Hey, I have things like barcode scanning. The release that you have today doesn't have that. I know it's coming in several months. I'm going to wait for that because I don't want to take a step backwards before I move forward, right?" When you switch your smartphones, if you have an app that you use all the time, when you get your new smartphone, you don't want to give up on that app if you can get full usage within 3 months. So that's basically what they've told us is, "We want to wait for that." It actually works well with us, other than this short-term book. It doesn't affect the cash flows at all. It's just because of the -- because we record it as a capital lease, there's some timing in the revenue that you recognize, not in the cash flows that are associated with this. So we're very comfortable with the sell [ph] .

Amit Bhalla - Citigroup Inc, Research Division

Okay. And in some of the leases that were extended, roughly what type of period of extension...?

Kieran T. Gallahue

Some of it you're just moving month-to-month. You basically just keep rolling. Yes. Without replacing it, it's a pretty darn profitable business.

Amit Bhalla - Citigroup Inc, Research Division

Got it. Okay. So also on -- I wanted to talk a little bit about the Infection Prevention business. It looked like the overseas component of Infection Prevention was pretty strong recently. Can you talk about what's been driving that? I know you've mentioned MaxGuard as part of the reason, but underlying it, what's all of a sudden driving Infection Prevention overseas?

Kieran T. Gallahue

Well, let's talk in general. We've got -- we've been building our business on a the Procedural Solutions side of the business in general, right? And from an international perspective, we've been growing it really from the whole business. While we reorganize the company to the 2 business segments, we also created what we call our international commercial operations. And a big part of that was to generate some level of coherence to our distribution strategies throughout the globe. And in some cases, that means we've gone direct, where we used be indirect. In some cases, we've gone indirect, where we used to be direct. An example is in certain countries in Ventilation we were under scale, so we went to an indirect model because we get better access. But in certain areas like interventional specialties, interventional specialties we acquired Fote [ph] . So we acquired a distributor, U.K. Medical. And we got the bump in margin. There's some benefit that we saw in the revenue line, obviously, as well when you move forward in the channel. So we've seen that we balanced that a bit. We've started to move, in particular, ChloraPrep has some early entry points. It's really not all that material yet though, to be frank. We've seen some continued good growth in the U.K., but we put the early stages of commercial release in place in Italy and Germany and France and -- but we're still really in the KOL development. And that's not the primary driver, okay? So we've had multiple elements here that are affecting that business.

Amit Bhalla - Citigroup Inc, Research Division

Okay. So not an underlying market demand change but more of a structural change on your part?

Kieran T. Gallahue

Yes. I would say so.

Amit Bhalla - Citigroup Inc, Research Division

Okay. And you talked also about examples -- you've talked about increased coordination across your business segments. Can you give some examples of how that's translating into faster revenue growth for your product lines?

Kieran T. Gallahue

Yes. So I'll give you an example. I mean, a good example would be the Respiratory business, right? So Ventilation is a business technology that hasn't really changed in 20 years, right? As a result, the industry structure in Ventilation is a little bit less attractive than it is, say, in Infusion, right? So you have multiple players that have 15% to 25% share in Ventilation. But part of the reason is because everybody has viewed that business as a way to keep people breathing, right? That was simply the way that they look at it. We took a leader -- it actually was an external guy who was a CEO [ph] with a small HIS company that came into our Pyxis business. And then we put him in to lead the Respiratory business, didn't know a darn think about respiratory. But all the people that he worked for did. And he turned that business on the head to that I suggested, right? And he said, "Look. Let's use this as a way to get people out of the hospital more quickly." So he conceptualized an idea of leveraging the coordination engine, which was originally developed for Pyxis and that we used for our Alaris, right? So this is a translator, a data translator that gets put into these -- in the hospitals, right, as part of their information system, and the knowledge portal, which was originally developed as a back-end data mining exercise in those other 2 businesses. He said, "Let's use that core capability and refocus a part of it on some capabilities around Respiratory management," where we look at the weaning process for patients on ventilation and look at how we can grab data from the clinical information system, we can grab data from the monitors, from our ventilators and from other electronic medical records within the institution. Let's put it in a single place so you can view that, and you could look at Dr. A versus Dr. B and see that Dr. A's protocols allows you to get patients out more quickly than Doctor B. Let's then coordinate those sedation vacations and, et cetera, right? We went -- because that's an unregulated activity, what I just talked about. We went from concept to beta sites in 9 months, right? And we're beginning to start to see the traction of that. Now why do I bring that up as an example? I bring it up because if you're clearly just a ventilation company, developing that coordination engine, developing that knowledge portal just for the ventilation business would be damn expensive, right? But we're able to leverage the work that we've done in other parts and simply change the app, if you will, and be able to apply to it to Respiratory and in a much more cost-effective way than virtually anybody I know that can do that. And be able to apply it in a tight time frame. Why does that make sense? Because Ventilation, you go into any hospital, they'll have 3 of these guys' ventilators, 3 of those guys' ventilators, the NICU is different than the ICU, et cetera. Now we're in conversations with these hospitals about fleet-wide conversions. Nobody ever had conversations about fleet-wide conversions before, right? So and we've yet to see all the benefit of that come through.

Jim Mazzola

Actually, just to add on to that. In the area of medication management, another area where we can have a cross opportunity among our businesses, the footprint we have with Pyxis and Infusion and clinical expertise we have around that, that actually ties in nicely with the theme of your conference around the value imperative, which is customers asking us to come in and help them understand how they can become more efficient in medication management and become safer. And we've got that expertise. We're piloting a program now where we can go in and have those conversations. And ultimately, it's not about selling, it's about helping the hospital be more effective. But we're seeing that it obviously pulls through our products as well.

Amit Bhalla - Citigroup Inc, Research Division

So part of these changes that are taking place inside the company tie directly to the increases in R&D that you're investing. So it's product development, R&D type spend. How much is there in terms of an increase on spend in R&D on driving actual clinical evidence to also take to the hospital and to convince them to buy your products?

Kieran T. Gallahue

There's certainly a portion of it. But to be frank, the mass of what we did in the early days, so in the first 1.5 year, was to look for the longest lead time items, which tends to be the development of big replacement systems. So in particular, in the Respiratory and the Infusion side, where there had not been a technology change for a period of time, and get those projects staffed, get them moving and get the clock ticking, right? Because those tend to take 5 years, 3 to 5 years really for those things to come out. So that's point one.

Amit Bhalla - Citigroup Inc, Research Division

And Pyxis ES is an example?

Kieran T. Gallahue

Well, that was an example of where it was already moving. So we had to bring it across the finish line. We did up the spend. But on a percentage basis, it wasn't nearly as much as those other 2 businesses that were nowhere before we kicked that off. So that's point one. But there is an increased emphasis on the clinical spend side. A lot of that is going to come on the PS side of the business, and so it's going to be coordinated with technology development on that side. So last year, we were more in the infancy of getting together and coordinating that side of the business. We were able to move more quickly on the MS side. The Procedural Solutions side, we hired the leader, we began the coordination process, we kicked it off. Those technologies inevitably have a much bigger clinical component to them, and particularly around the claims construction side. So you'll see, on that side, a significant portion is related to clinical side. We don't release the numbers but...

Amit Bhalla - Citigroup Inc, Research Division

So just on a percentage basis, is it fair to think that in your R&D, 70% is going to these product iterations and maybe 30% to clinical, or is it even skewed even further?

Kieran T. Gallahue

I'd skew it even further with the one caveat that I've put in. If you're doing that beta test or you're doing clinical studies associated with it that's not claim construction oriented, I'd put that in basic R&D spend. Okay?

Amit Bhalla - Citigroup Inc, Research Division

Okay. Okay, fair enough. We got a question here?

Unknown Analyst

Can you talk to me a little bit about the long-term growth drivers. I mean, with possible CapEx budgets being constrained, the procedural volumes are low, I. mean, if my memory serves me correct, like 1% to 3% top line growth constant currency is the target. Where do you see growth accelerating in that top line? Is it through coming out with these new product launches potentially? Is it geographic expansion? Is it continual optimization of the portfolio and continuing to take advantage there? How do you drive that top line and accelerate it through [indiscernible]?

Jim Mazzola

So all of the above on those plus the expansion of relevant market, okay? So what I mean by that is -- a good example is in Dispensing. Historically, Dispensing was basically the ATM machine for medications. They'd shoot me if they heard me say that, but that's basically what it is. What has expanded though, is now we're into multiple parts of the hospital, where it has moved much more into holistic medication management. And we've done that, for instance, last year through the acquisition of Phacts, which has to do with inventory management across complex systems, right? So that's moved us back. We still play very a little role in the IV room. We have room to improve that. We've already created greater visibility to the entire distribution system within the hospital, all of which gives us the opportunity for expansion. So those are areas where we expand the relevant market from simply being a box that has ways of distributing or protecting meditations that are being dispensed to actually and truly managing inventory across the system. One of the things to reflect upon -- I probably should have mentioned this in the beginning, one of the harder jobs right now in this country is going to be a hospital CEO, right? I mean, they've got to balance different business models. They've got to strip out 15% to 25% of their costs, right? They have no clue how to do that at this point. But they know they got to go after cost number 2, right, so after buildings and all that stuff, they've got human capital and then they've got medication, which is spend, which is the third biggest spend, right? So you take those, that's where we are in the center of variability, to use their people more efficiently, to be able to do it in a way that allows them to reduce the opportunity for error and for infection rates. That's what we do, right? That is what we do. So the example of that, that Jim gave before, we can now go from the pharmacist right through to the bedside, connect them informatically, so that a nurse, instead of having to grab a bag and make 22 keystrokes of inputting information on infusion rates and what's this drug, where it is automatically preprogrammed, she's got key 3 to 5 keystrokes and they're confirmatory keystrokes. That's really critical when that nurse used to take care of 4 patients, and now she has to take care of 6 patients. So those are the kinds of opportunities to expand our relevance, and in there we capture value. And yes, there's geographic expansion. We've only got 20% of our business outside the U.S. That is a massive opportunity. Europe as slow growth as it is, is a developing market for us. Funny to say, right? We are playing a much lesser role in those markets. Some of that we'll be able to do organically with our current products, some of that we're going to be able to do organically with the portfolio that we're increasing through R&D, and some of it we're going to do in a very chunky way by acquiring products and/or technologies and/or distribution capabilities into those markets. All of those things are on the table and, in fact, each of them you've seen us execute on in a smaller way over the last 2 years, and we now have the capability to exercise that in a bigger way as we move forward because of the phase that we're at in our development.

Amit Bhalla - Citigroup Inc, Research Division

So clearly, the portfolio is not optimized to the point of what you'd like. There's a lot of opportunity to still come, but when you think about portfolio optimization, what about the other side of the equation, which is divestitures of businesses? Is that -- is there opportunity for that? I know there's a variety of operating margin products in the business today. How do you think about that?

Kieran T. Gallahue

There is. So we sold, what, 4 businesses over the last 24 months or so. So we were very much into the optimization of businesses, where we think we're the better owner and we think we can grow those businesses and we can do so profitably. We're reasonably comfortable with the portfolio that we have today and are investing in each of those businesses. I will say, though, that periodically, we will dispassionately and with full review, based on organic development and inorganic development, we will continue to review that portfolio. And there is -- quite likely, there might be optimization, that happens over time. So we're comfortable with where we're at, but I'm sure, over time, there will be opportunities for pruning.

Unknown Analyst

Could you just speak quickly about the pricing that you expect in Medical Systems and Procedural Solutions, whether that differs a lot between the different areas or whether you see it being fairly constant across the business?

Kieran T. Gallahue

It's varied by the business segment. There are certain businesses, Infusion is a good example, where this year we've seen an uptick in pricing, but that's really based on the fact that last year was a very low base year comp, where we had some special things going on in there. We've seen a number of our businesses where it's been relatively steady, and those areas that are most commodity-like would be the ones that are most subject to pricing pressure.

Unknown Analyst

How would you think about pricing going forward to the next 3 years?

Kieran T. Gallahue

I don't think it's going to vary greatly from what I -- from those categories that I just stated.

Unknown Analyst

So some up a bit, some down a bit, but overall, fairly flat?

Kieran T. Gallahue

Overall fairly constant, yes. We always build in the concept that we'll have about 1% to 2% overall price compression on a blended basis per annum. And we look to overcome that through our cost reductions.

Unknown Analyst

And are there still plenty of cost reductions out there when you...? Okay.

Kieran T. Gallahue

Yes, yes. I can go through them, I'm sensitive to the briefly request.

Amit Bhalla - Citigroup Inc, Research Division

So also, in thinking about margins, I'm also wondering about what room is there left is in the tax rate?

Kieran T. Gallahue

Tax rate, that bounces around a bit. It's basically because we have 2 big buckets of income. We have -- even though we're 80-20 in our revenues inside the U.S. versus outside, because of the nature of some of these business and where the intellectual property is domiciled, we're much more balanced than that from an income perspective. And our tax rate in the o U.S. side, in particular, that's associated with our Swiss subsidiary, is much lower than the U.S. And so we're somewhat sensitive to mix on a geographic and even on a product category basis to that. And that's why you see our tax rate sometimes can move a couple of points even with very little top line shift in revenues. So we think that there's room for optimization over time. So -- and we continue to work on that optimization, and in particular, both organically with the mix we have today, as well as opportunities on the M&A front that we think that might be tax effective acquisitions.

Amit Bhalla - Citigroup Inc, Research Division

Okay. And from a macro perspective at -- in the first 2 months of the year, are you seeing anything different from an in-patient volume perspective? We know acute care takes -- is having much more priority in the health care system, but I'm wondering from a patient volume perspective, are there any changes you're seeing out there?

Kieran T. Gallahue

No. It's been reasonably consistent. Obviously, there was some uptick associated with the flu. We get a little bit of a bump from that, but not overly material. But I'd say, other than that, for the businesses that we're in, right, as you know that varies by micro segment, for the businesses we're in, we've seen consistency. We haven't seen a big change up or down.

Amit Bhalla - Citigroup Inc, Research Division

Okay. Any last questions in the audience? And so with that, we'll end this session. And I want to say thanks again, Kieran, thanks, Jim, for coming to the conference.

Kieran T. Gallahue

Great. Well, thanks very much. I appreciate the effort.

Jim Mazzola

Thanks, Amit. I appreciate it.

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