Becton, Dickinson and Company (BDX) Earnings Call Transcript & Summary

Okay. Thank you, everybody. We're ready to start our next fireside chat here at the Bank of America Virtual Health Care Conference. Next up is a fireside chat with Becton, Dickinson. We're absolutely thrilled that they were able to carve out a little bit of time for us today. It's an incredibly busy time for their organization. On the line with me today, we have Tom Polen, the President and CEO. We, of course, also have Chris Reidy, Adam, Monique, a full team, full complement, and we're excited to have a discussion. And so thank you again for joining us.

It's our pleasure, Bob.

Yes. No, it's an honor to have this opportunity. And I will just sort of jump right into a pure fireside chat Q&A session here. And given the visibility of COVID-19 testing and given some of the announcements that BD has made over the last couple of weeks, I was just wondering if you wouldn't mind just starting out by commenting on the recent disclosure that you made on the antigen testing side with the Veritor platform that you have. And I know you talked about it on the call. But I was just curious, I think the main question that I'm getting from investors, and the thing that I'm trying to gauge is just how confident you are that you'll be able to bring this test to market and that the testing process will complete successfully? So maybe it's a place to start, either Tom or Chris, would love some comments on that front.

Yes. Bob, thanks for having us. Obviously, we wouldn't miss your event. And so again, thanks for having us. On the testing front. So BD MAX, of course, is -- let me just make a quick comment there. As we've shared, we're making about 1 million tests a month on BD MAX. Now on Veritor, all of those are being utilized on a global basis at this point in time. We are -- we have made some additional investments in capacity. We'll see that come on in the first part of FY '21, but that's been a great test, a very, very high-performance test. We've seen that one of the highest-performing molecular tests based on our data that's out there and great customer response. As we think about the Veritor test, so obviously, congratulations Quidel got out last week, got the approval. Our technology is -- of course, the 2 leaders in lateral flow reader based systems are Quidel and us. We have done work to develop a test on Veritor. We are testing that in clinical specimens right now. We have quite a few sites enrolled across the U.S., collecting specimens at this point, and we're actively running that on our platform. The key -- and why we were -- purposely, we don't want to put out a date on that, of course, we're running at a speed, which is vastly faster than we normally would at this point in terms of testing your first version of a test on clinical specimens. You're normally at least a year away from launch on a normal cycle. You often would go and learn something during that process, where you may need to make an adjustment to the antibody or an adjustment to the formulation. Since this is our first time testing this first version of the product with active patient samples, we're literally collecting from patients, running a molecular test and running on Veritor, doing the comparative data right now. We may learn information that requires us to change or adjust the formulation at all. We may not, we may, we don't know the answer to that, and we won't until the next couple of weeks as that testing progresses. So our ability to ultimately get an assay on Veritor, we feel confident about. It's a question of timing on that. And as we progress in our own testing with patients and understand, are there -- is there going to be a need to make adjustments to the antibody or to the chemistry, we'll keep everyone abreast. In the meanwhile, we have shared, we've already started planning for manufacturing, ramp up, not only in our own facility in Suzhou, but in 2 additional sites as well that will be incremental volume to us versus what we normally make on Veritor.

Okay. I mean is there -- sorry to push on this, but is there a way for you to express sort of relative confidence in the -- based on what you know today? Or is it really just -- we have to see how this comes out, and then you'll have further commentary?

I'd rather hold further commentary at this point in time. It's too early in the testing phase to make comments. Obviously, we had good results on bench-top testing and seeded swabs. It's -- you always need to test those in active patient samples, and there can be different results. So it's just where the science is today and where we stand in the time line, I think we should let the science work itself out.

Okay. And then just bigger picture on this antigen testing, kind of your thoughts on how to think about the trade-off between accuracy and advantages and convenience and point-of-care testing. And just curious also if the way we should be thinking about this that is, if it is -- if you're successful bringing it to market sometime relatively soon, if the sort of the average selling price per test is somewhere along the lines of where it has been for flu in that sort of $16 to $18 range?

Yes. We would expect on the pricing, that's certainly where the reimbursement would likely fall is similar to flu on that. We have no other data that -- other than that. Certainly, you hear governments around the world, and we get a lot of interest from employers who really see a point-of-care antibody or antigen test, sorry, as the key product to start opening up businesses and societies in broader ways. Certainly, there are different types of tests where the acuity of getting an answer is more important than others. One would argue that antibody tests, understanding someone's built immunity, obviously, that today is being run on very large, high throughput, bulk reagent-driven, centralized laboratory systems where the turnaround time is still going to be 1 to 2 days with specimen transport and then getting the samples -- the results back out to patients. It's probably not as acute. You need to know that information as it is if someone actually has an active infection and they're walking into the building, which is where we get people wanting to understand the -- do they have the antigen, i.e., do they have an active viral infection as fast as possible. And that's where the rapid antigen tests in the lateral flow format. Yes, they will not be as sensitive as the high-performing molecular tests, just like they are the same as when flu is done in that format, but the convenience of how it can be done not only in physician offices very easily, but even on a mobile basis in a clear-waved format, that benefit of being able to disperse the technology and the testing right to the point-of-care in 10 minutes which will be by far the fastest test of any test that can be done, has a lot of advantage in the purpose of -- as I described it.

Okay. That's helpful. Let me move on to one other quick topic that is sort of front and center with BD. Because it seems pretty clear that if the pharmaceutical world is successful in developing a vaccine for COVID-19, that BD will play a very central role in the distribution and delivery of that vaccine. And so I've been getting a lot of questions on just how do we frame that kind of for BD as an opportunity for next year or whenever we might see a vaccine. So I'm just curious if maybe you could give us some rough guidepost for understanding that in terms of once you have the capacity to manufacture sort of the price per dose anyway that BD would realize. Just maybe some things to help us think about what that might look like for BD.

Sure. So we are the world leader when it comes to syringes and drug delivery devices. We make over 6 billion needles and 6 billion syringes a year on a global scale, so almost 1 per human on the planet. When we think about additional capacity and the work that we're doing with governments around the world, we already have received a number of large stocking orders from certain countries, and we are in the process of filling those. We are in active discussions with many other countries around having large stocking orders placed. So those will take some time, and the good news is, and we've been in touch with a lot of the vaccine manufacturer CEOs and teams also in understanding their timing. The good news is -- good news, bad news, the vaccine is not likely to be available in the next couple of months. There's still going to be some time for that, which gives us time to start building syringe inventory that you wouldn't be able to build 1 billion syringes in a month, for example, that capacity doesn't exist. But you could build 1 billion syringes over the next 12 months, for example, which would be in time for a likely available vaccine. So we're again working with governments around the world on that. I would say, from a -- what is the opportunity size? Think about syringes are very economically -- they're probably one of the best buys in health care, one would think, for the science that goes into those. There are about $0.15 for syringe used to deliver a vaccination, and that's a dose sparing syringe. We have special syringes that have less dead space that require less vaccine to be drawn into the syringe and less residual volume so that you can get more doses out of the same multi-dose vial. We think that will be an important technology in a pandemic like this where you want to maximize the doses. Let's say, $0.15. So there's a, let's say, over a 12- to 18-month window, 1 billion unit additional opportunity times $0.15, so you're looking at about $150 million opportunity size. They're just a range.

Yes. No, that's incredibly helpful. And obviously, we'll all be watching that very closely. So one other topic that obviously is getting a lot of attention is on your pumps and set business on the Alaris side and the things that you disclosed on the call there. So Tom, maybe to start from a big picture perspective, just your confidence in that process and a resolution in the time lines that you guys have talked about. And I realized you made an update on the last call. But just wanted to kind of gauge your confidence, Tom. And then the specific follow-up I would ask, because it does seem like right now under kind of emergency conditions that most every pump request you get is sort of an emergency in a COVID environment. And I just want to know, is that a fair way of thinking about it?

Yes, good question. So as you mentioned, we did give an update on the earnings call. Really no updates to provide since then, right? We continue, as we had shared then, have allocated significant amount of human and financial resources to ensure that we get that filing done as fast as possible, but at the highest quality. What's most important is we get it done right. And that once we submit it, that it has all the proper information and data so that it can go through the FDA as fast as possible for an approval, and that's what we're focused on. We mentioned on the call, of course, some level of delay associated with -- primarily the delay in human factor testing. It requires about 120 clinicians to interact with the pump in clinical settings as part of the testing. That is -- we're working on finding some alternatives to that, depending on how long those limitations and health care provider access exist. But that's been the main driver of that. In terms of your question on emergency use or medical necessity. You're right, we are getting -- the majority of the requests that we're getting for Alaris are associated with expansion of pump fleets associated with using that for COVID-19, mostly building ICUs, could be building other hospital beds. We still go through the exact same medical necessity process, which is very rigorous. It's led exclusively by our medical team. We do review those with the FDA. There are still ones that we reject now that are not associated with that. But you're right, the vast majority, by, far are associated with COVID-19 and therefore, fit the medical necessity profile.

Okay. And just to clarify your comment on the call because I know there were some differences between net and gross. I think you did say in the month of April, you did sort of $70 million gross of pump sales under those conditions. Is that correct?

Yes. So let me give you some clarity on that. So the $70 million is a net number, but the way to think about that is about $70 million, again, of U.S. pump sales. About $10 million of ex U.S., so total $80 million, offset by $10 million decrease in Pyxis and Rowa installations. So the $70 million number is pretty good measure in any event, but that's a little bit more clarity on the breakout.

Great, that's helpful. And just maybe one other question along those lines about some of the disclosures on the call. I think you suggested that COVID was roughly in the -- I think in the month of April, like maybe 12 points of headwind, but that was just related to the impact of COVID. And then obviously, we'd make an assumption of what the normal growth rate of the business was and that was kind of where you were trending for total company in the month of April. And we appreciated those details. The math suggested to me that perhaps total company was down in the high single-digit range in the month of April. But also just wanted to kind of confirm that I heard you correctly on those numbers.

Yes. So it's rare that we actually give that kind of information on a month and growth rates are difficult because if you look at prior year month, it's not really at all that indicative. But you're right, we did say that the impact of COVID had a net impact of $170 million. And again, that's the $240 million offset by the $70 million of upside from medical necessity on Alaris, as I, went through. The impact of that would be about 12%. And so I think you have that information correct.

Great. And then just on -- obviously, there's portions of your business, some of the legacy Bard businesses that are struggling as all elective procedures are. I mean obviously, you guys have a phenomenal vantage point to opine from, given all the different geographies that you touch. And I know it's a difficult question, and there's a lot of uncertainties. But a lot of medical device companies sort of hopefully put out the suggestion that by calendar fourth quarter, we could return to something resembling normal demand for elective procedures. And I just wanted to kind of get your sense, either to John or Chris or anybody, is that like from your perspective and what you're seeing right now and the uncertainties in the world, is that a reasonable base case to think about? Just would love to get your views on that.

Yes. I'll take that. This is Chris. And I think we're too early in the process to really come to an answer on that. We gave that a great deal of thought and thinking through whether we were in a position to give guidance. And frankly, we also thought long and hard about whether we could give guidance for the third quarter. And May is a pivotal month to give us some indication of the flow, of the return of elective procedures and all of the other variables that we laid out on the call. So projecting out into the fourth quarter, you would certainly hope so. I would say that we certainly hope to see that recover. But it's really too soon to call that at the pace at which it's going to return. Again, the variables don't only include the hospitals being focused on going back to elective surgeries, but also includes the patients and whether the patients are interested in going back and what time frame that they're interested to go back in. So we really feel like we're at a stage of the curve where it's too early to call that, even for the month of May. So we'll stay tuned and hopefully May gives us some indication of where that's heading.

Makes perfect sense. One other thing I'd love to kind of get your views on, thinking a little bit longer-term in terms of earnings power of the company on the other side of this. So 2 kind of questions, I guess. One is, are there things that we should be thinking about, swing factors as it relates to the -- thinking about the earnings power of the company in the next fiscal year? Obviously not asking for specific guidance, but just big swing factor things that we should consider. And one other thing I would argue or ask about is like if you kind of get back to sort of a normal level of revenue, is there a reason why you wouldn't be back to a normal level of operating profit margin? Just trying to see if there's any sort of residual things that may linger here and see if we can get some comments about just major swing factors to consider?

So I would say that the swing factors are all the things that we've talked about that make it so difficult to give guidance this year. And so those are the major ones. All the items that I was laying out in terms of how quickly elective procedures come back, how quickly acute and non-acute testing comes back that's non-COVID related. What happens to the research facilities, how do folks think about capital installations and what happens there. So those are the immediate questions for this year. So it's hard to think forward to next year and give any sense of that. Having said all of that, we feel really good about the underlying performance of the business, the strength of the business. And I think we're well positioned for the future to grow and to continue to grow. And the diversity of the portfolio has never been more evident than what we went through with the April results. You see upsides from Alaris and some of the COVID-related testing and offsetting some of the impact of the elective procedures, et cetera. So I think we're well positioned, going forward. I think a lot of the impact that we talked through in terms of the drop-through, the 75 basis points, that's partly because the margins of the businesses that affected are so rich. And when they come back, I would expect them to continue to be rich, but it's all a matter of them coming back. I don't think anything significantly changed. There is certainly some smaller additional costs in terms of facility cleaning and PPE and stuff like that, but that's likely to be offset in the longer run by more efficiencies that we are able to drive. And so I don't think anything inherently changes in the profile going forward.

One of the things that we did talk about on the earnings call, Bob, and we actually talked about quite a bit internally is, earlier, when -- during the transition, I shared our strategy, our 2025 vision, with a focus on growth simplification and empowering. Obviously, we're continuing. We shared a number of examples of 9 launches in the last quarter. For example, we're continuing to invest in R&D just like we have. We continue to do strategic, accretive tuck-in acquisitions. We shared a number of those, including a new thrombectomy, atherectomy device that we're launching in the U.S. and leveraging our channel, ex U.S. for a future point-of-care, molecular platform that we acquired as well as a licensing deal for a pump in Europe, a next-generation pump in Europe, which we're in the process of launching. On simplification, back to your point on leverage, we've been not only continuing those initiatives, but we've been doubling down on some of them. So during this window, we've been, with a big focus on cash, we've been doubling down on our inventory positions and making sure that we're -- how we're thinking about SKU rationalization and reducing our inventory levels during this window, reducing the complexity of our portfolio. We're continuing still to advance our architecture and network strategy and simplifying that. We're continuing to make those investments this year, and we'll be continuing to make those next year. That's all in our capital plan. While we did reduce capital spending this year, we did maintain those investments in -- that are related to our simplification strategy this year as well. So no change in that macro strategy that we outlined before.

Okay. And then I appreciate the color you said earlier. And maybe one other way of asking a similar question is just if we think about the way you guys viewed your growth opportunities from a revenue perspective before COVID. And now we consider that with COVID, you've got some clear incremental opportunities, whether it relates to vaccine or testing. And then you've got some incremental headwinds. But as you think about kind of next year and beyond, given all the ways the health care ecosystem could change as a result of COVID, does your view on the growth outlook for the business differ? Do you still feel like that 5% to 6% is a good way to think about the growth opportunity for the company on the other side of this? Or could it be a little greater? Or might it be a little worse just because of maybe some greater global pricing pressure or something like that. Just would love to get your opinion on that kind of that macro question.

Yes. I think it's too early to think that far out. The timing is still the biggest issue. I think inherently, that 5% to 6% is still a strong foundation that we're comfortable with. With the various swing factors that you talked about, when that happens, when we get back to normal, we didn't even mention the economy and where that goes, the timing is more of the issue. But fundamentally, the foundation is as solid as it was before we went to this patch with COVID. So more to come on that, and we feel good about the underlying business.

Yes. And Bob, I think just some of the things that we look at very closely, and we're considering as we think about different scenarios that could unfold, certainly, while elective procedures are -- we're starting to see some early signs of those beginning, particularly in certain areas of the country, part of the south, for example, is starting faster than other areas as one example. And we're seeing that too globally in many areas. There is a lot of discussion around a second peak potentially in the fall. And so right, you start thinking about, okay, are you modeling '21 and thinking about that it's going to be back to a focus on those COVID essential products, are the elective procedures going to stay at a heightened level in a second peak or will they not? Will they be somewhere between where they are now and where they could get to, but they would still recede as not all patients would still be comfortable going out for elective procedures even if there were greater levels of testing, screening, et cetera, and then the unemployment rates and what that means. If you look historically back on overall health care demand, those are factors that obviously will have a role on what '21 looks like. Not specific -- those are not specific at all to BD, those are general to the industry for sure. But I think us and probably most of our peers would be looking at those. I would say that maybe just, to your really good question, there are some structural things that we do believe will manifest itself on the other side of COVID, no matter what kind of interim scenario plays out between now and when an effective vaccine is administered broadly to society. And that is trends that we've already begun investing in and have been for a while. Point-of-care testing has been a trend. It will continue to accelerate, right? Retail pharmacy and the transition of those into health care settings and the use of mail order in that, certainly, we will see continue to accelerate. We've been investing now for quite some time. You're familiar with our Rowa Pharmacy automation. We think those types of solutions will be of interest. Our Rowa dose, actually, it's interesting, the number of calls we're getting now because mail order pharmacy is way up around the world, right? That's something that has been a trend. But it just got a giant shot in the arm because people don't want to go to the pharmacy anymore and pick up their prescriptions, those pill packs that we make with our Rowa dose system, are pretty convenient in that mail order format. Technology, be it ambulatory infusion technologies, be it what I mentioned already in point of care, and other solutions that we see as the ecosystem changes, less focus in the hospitals and more on outpatients will certainly be a continued trend in when we're investing. And consolidation, things like Kiestra, opportunity to consolidate laboratories into larger COEs will help fuel growth for products like Kiestra, or our new BD Core, high throughput molecular system. I think the other thing that we're thinking about is, right, med tech, overall, as an industry, it does have a relatively, I'd say, stable over the last several decades go-to-market model, which is primarily feet on the street going in, talking to clinicians in large numbers with many, many different sales teams and each company representing individual products. And essentially, the whole industry has gone to telesales for the last several months. People are doubling down on how they're using digital, et cetera. Our industry, in general, has lagged utilizing more of the digital tools, even telephonic tools and has relied much more on that in-person sales relationship. We do think that, and we look at how can the industry structurally change on a more permanent basis. Will clinicians and health care providers be receptive to those large numbers of people engaging with them on such a day-to-day basis as it has happened historically? Or is there an opportunity to transform? That is something else that we think maybe a structural change in med tech on the other side of COVID.

Great. And then just 2 last quick ones before we have to close. I'd love to get your quick updated views on the guidance you gave earlier in the year on some of the China price cuts that you were seeing. Is that environment? And from what you know right now, stable? Are you still comfortable with that guidance that you gave previously? And then just -- you mentioned it quickly on the call, but kind of where are we on the regulatory process with below-the-knee? And I will conclude.

I'll take below-the-knee and then turn it to Chris to wrap up on the financial question. So below-the-knee, we did what we said, which was we submitted our BT application to the FDA in late April. We think it could take the FDA up to about 6 months to respond. And not appropriate since it is an active PMA reviewed for us to give any other specific information. But I will say we utilized data from several different sources at different endpoints. And overall, we continue to believe very strongly that below-the-knee continues to be a space which has limited solutions for patients. Amputations are a significant issue in these spaces. And that our BTK product does result in less interventions for patients and is safe. So we'll see where that comes out in terms of an approval, but it's now in the next phase of continued review.

And on your question on China, Bob, the -- what we saw in the second quarter played out exactly as we expect, which was the initial takedown of inventories by distributors in preparation for the volume-based processes to come. And so we did see that, just what we expected to. We do expect that the guidance that we gave earlier this year will still play out as expected on the volume base and so, really, no change and update on that front. It's looking consistent with what we thought.

Terrific. Well, you guys have been great to participate in this conference especially, again, I know how involved you are in this battle with COVID. So we really appreciate the time, and good luck with everything. Thanks for participating, and that ends the fireside chat for this afternoon. Thank you very much for being here.

Thank you, Bob.

Thank you, Bob.

Thank you. Okay.