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

Good morning, and welcome to the virtual fireside chat with BD's President and CEO, Tom Polen; Chris Reidy, Executive Vice President, CFO and Chief Administrative Officer, and that's a long business card; and Senior VP of IR, Monique Dolecki and members of her team. My name is Brian Weinstein, and I'm the analyst here at William Blair covering BD in certain areas within diagnostics, life science tools and medical technology for our firm. Joining me is my associate, the team's COO, if you will, Andrew Brackmann. A reminder that Team Weinstein is hosting some events along with the conference. We hosted a peloton ride yesterday morning and just finished one this morning, and are hosting another group ride for conference attendees and management teams at 4 Central tomorrow. For instructions on how to access that, you can check in with your sales rep or check out our Backstreets note from the weekend. We're also hosting a nightly recap dial-in, Team Weinstein is hosting that. That's called the Lido Lounge, named after the Lido Shuffle, the official song of Team Weinstein. That takes place tonight at 5:45 Central. And dial-in for that is in Backstreets as well as our day 1 recap note that came out this morning. Finally, before jumping on the call, the best compliance officer in the business and demand, who really is the most interesting man in the world, Mr. Michael Besenjak, has told me that I'm required to inform you that for a list of research disclosures or conflicts, please visit our website at williamblair.com. So with all of that nonsense out of the way, let's jump on in. Everybody, thank you guys so much for taking time to be with us and to do this fireside chat. I really appreciate the time.

Thanks, Brian. I love the peloton ride and all the other fun stuff you got going on there. New trends for future conferences.

Absolutely. I would love to have you join any of it.

So Tom, I mean, you've had quite an interesting kind of first handful of months in the CEO chair. I think maybe it would help if you kind of give us an idea of what it's been like to be in your seat as you guys have gone through some challenges here? And how has that potentially impacted kind of your view of the business?

Sure. Well, I don't think anyone that was coming in, moving into February as the CEO had in their -- had what transpired, obviously, with a global health care pandemic in their 30-, 60-, 90-day plan. And certainly, that would be me included. But I couldn't be more pleased with how the organization has responded. Obviously, BD's had a vital role in the response to this pandemic, not only on the understanding how it affects the immune system with our immunology platform, right on through obviously creating new diagnostics, to building ICUs around the world to now preparing for a large-scale vaccination campaign. And so really, really proud to be leading BD at this point in time and the strategy that we outlined when I first came into the role, we've been executing the entire time as well. And then maybe I can touch base on that then, Brian. So I had outlined our strategy at a high level at JPMorgan. And of course, we pretty immediately after that took a pause in communicating that because we had to focus all of our efforts on helping the world and the company respond to the pandemic. But our execution against that strategy, as I mentioned earlier, has very much been ongoing. So as we think about what we're focused on delivering, 3 key goals that we're focused on to create long-term shareholder value. The first is to drive consistent durable revenue growth of 5% plus on a normalized basis. Second is drive continued margin expansion, 10% plus EPS growth. And the third is continue to improve our balance sheet strength and our flexibility going forward. And Brian, if we think about how we're focused on delivering those goals, there's really 5 strategies that we're focused on. And I can walk you through those briefly, and we can talk about those in more detail through the conversation. But hopefully, as I go through these, you'll see why we're confident that our underlying plans are fundamental plans are fundamental -- plans and fundamentals are going to get us to the goals I outlined. And the first one is what we've talked about quite a bit, which is innovation, right? Our first goal to drive that consistent, durable growth of 5% plus is innovation in areas where we're our strongest, where we see disproportionate new growth opportunities and that are aligned to key health care and technology trends we see, right? And we've leveraged organic innovation. We will continue to do that with collaborative R&D, licensing, tuck-in M&A to drive that. I think I've said many times, and I will continue to say it, while BD has done a number of large-scale M&A deals over the last 6 years, it is not an area of focus at all over the next few years. And I think that will become clear as I walk through the other elements of our strategy. The second main focus of our strategy to achieve the goals I outlined is driving that, again, durable, consistent growth through leveraging our global footprint. And we have an extremely expensive organization, 65,000 associates, of which 40,000 are ex U.S. 45% of our revenue is ex U.S., right? We've been driving that expansion by leveraging our channels to bring the right solutions to the right markets globally. You've seen us do that taking -- we've registered 250 new international registrations in bar products. We remain on track to deliver those $250 million in revenue synergies that we committed to at the time of that deal. We've been doing -- continuing to do tailored local innovations. A good example is, as I shared, is the DCB that we launched in Japan in Q1, which was a quarter ahead of schedule for us. It was designed just for the Japan market because our team recognized that their cardiology and nondrug-coated balloon ecosystem, 75% of it, uses this unique platform called rapid exchange, where you can rapidly exchange balloons over the wire. And so we developed the first and only rapid-exchange DCB. We launched that in Q1. And because we understood the market dynamics, in the last 7 months, we gained 50% market share in that category. And that's just an example of how we tailor our innovations to meet the local market need. Another good example is an opportunity that we accelerated during the pandemic, which is a partnership with Medcaptain to bring an infusion pump that's very specifically suited for the European market. We've already now begun shipping that to help build ICUs in Europe and we'll continue now. That will be a standard product for us as we go forward, specifically designed for the European market. So global expansion is a continued key focus for us. Our third strategy is, for us, it is -- we think about it, of course, as it helps margin but it is key to our growth as well, and that's how we leverage and invest in our extensive manufacturing and network. It's our BD production system that we use across every one of our plants in every corner of the world that drives another level of efficiency and quality that we think is a competitive advantage. And for us, particularly when it comes to the medical supply businesses, scale and cost in production really matter. They're a source of advantage both in maintaining business and growing the business. And so we continue to invest in new cutting-edge technologies in production. We invest $900 million to $1 billion a year in capital across our plants and in digitizing our supply chain. You can see how that creates growth. And if you look at -- a clear example is in our Pharmaceutical Systems business, where, in the last 3 years, we've put in $500 million of capital. It allowed us to capitalize on the fast-growing biologics segment. It allowed us now to engage and have people that are working on COVID vaccines start to put those vaccines into stability in our Hypak products. And will allow that business, which has been growing above the company average, to continue to grow above the company average in the next couple of years, right? And we're doing that -- that's part of who we are. We're doing that in vascular access. We're doing it infusion disposables. Our newest flush lines we're installing right now, new technologies that we invented 1.5x the output of products in the exact same footprint as their previous generation lines, right, creating efficiencies. So that's our third pillar. Our fourth pillar of our strategy is really focused at the next goal, which is that double-digit EPS growth. And there, our focus is on simplifying the company. And so everyone knows, we grew very rapidly, $7 billion to $17 billion in 6 years for those 2 large transformational M&A deals. We've got a lot of synergies, $650 million by the end of this year is where we'll hit. But there's still a lot of opportunity going forward for efficiencies. There's efficiency opportunities in our organization, in our business processes and digitizing and standardizing those, in our manufacturing network as well as in our SKU offering. And so we've talked in the past about project ReCoDe. That's the comprehensive internal simplification initiative that we've kicked off. It's -- we've been investing in it. We've got formal teams driving it, and we expect to deliver about $300 million in savings over the next 4 years through that program. Happy to talk about that in greater detail later on if we've got time, Brian. And then the last one is our fifth focus, which is our disciplined capital allocation and increasing flexibility on our balance sheet. And there, as we look -- we went into the year knowing this was our focus, creating teams that were driving inventory reduction, tightening accounts payable, driving cash discipline. And so first off, we've seen that some of that has paid off for us, I think, during the COVID crisis, where we were able to continue to improve our accounts payable faster, maintain our accounts receivable better and keep our inventory levels more stable despite dramatic demand fluctuations because we had already had this momentum in this area as one of our goals. I think the other thing is, as I say, increasing flexibility on our balance sheet just like -- one of the things as we come to the end of the Bard integration, we've been in 6 years -- between CareFusion and Bard, 6 years very focused on integration, and our top priority has been debt paydown. It remains a key priority for us. But what we haven't had over that period of time, BD's historic balance sheet flexibility, right? We haven't done share buybacks for 6 years. We've done limited tuck-in M&A. In fact, if you were to look at BD and Bard for the 3-year period before we came together, the company has invested about $1 billion in tuck-in M&A to support their pipelines and grow strategies. If you look at the last 3 years or roughly 2 and 2/3 years since we've come together, we've spent about half of that, about $500 million in M&A because we are prioritizing our capital to debt paydown. So as part of my focus on future capital allocation and increasing balance sheet flexibility, we've taken a number of actions already. We have changed executive comp, so ROIC is now right up there with revenue growth as the 2 big things that drive share LTI grants for executives. Again, I described some of the initiatives that we started around cash, inventory, optimizing accounts payable as well as SKU rationalization. And they're making progress despite the COVID-19 situation. And then you'll probably hear more from Chris later on. Of course, you saw us take some actions also along with this strategy, whether or not it's the temporary term loan that we took out in March, aimed at, again, increasing balance sheet flexibility in a period of extreme market volatility; or more recently, the recent equity raise, which is again aimed right at that strategy. It permanently replaced that temporary term loans and strengthens the balance sheet for future growth and to deliver on our strategy. So I think, Brian, we're very confident we have the right strategy, the right business portfolio and capabilities to succeed, as we navigate the current environment, as we think future forward but also around the next phase of our value creation.

That's a great overview and a lot for us to follow-up on here with additional questions here in a moment. I mean what we hear from people is has BD changed in some way, right? Over the last 12 to 18 months, has there been a change. And it sounds like you are very focused on the core of what you guys do well and expanding upon that and investing to drive faster growth. So I'm guessing your answer to has BD changed, your answer -- I'm going to put words in your mouth here intentionally, but your answer would be, yes, changed incrementally for the better as we kind of highlight those 5 different areas that you just went over.

Yes. I think you have great words there, Brian. Fully agree. And maybe just a little bit more color. Certainly, we recognize it's been a bumpy ride for investors since particularly Bard, right? There were headwinds in FX, significant headwinds in FX, the DCB market situation, the Chinese government volume-based tendering process and Alaris, right? That's a lot that happened in those last 2 years. Many of those macro factors, obviously, one of those something that we fully own. But I would say that as we think about going forward, we're very confident in our strategy. We're very confident in -- our long-term objective has not changed. And if you think about the other question that we get in that same context, Brian, is how do we think about Bard and the goals, and has that shifted BD's strategy at all? And I would just say the basis upon which we did the Bard deal, we still continue to believe is a very strong strategic fit. Advanced our leadership in core markets like vascular access. It's made, again, where people recognize BD for these very strong positions in markets where we have a disproportionate advantage. We took that to another level in vascular access now, right, with PX midline, peripheral catheters, Bard gave us that. It broadened our infection prevention solutions now across not only surgical site infections with ChloraPrep through catheter-related infections with -- and right on through urology-related catheter infections. Well, now we have the broadest range of solutions to go to customers and help them prevent infections in a hospital. And it gave us access the several new, durable high-growth markets where they're the leader, right? That was why we were interested in Bard, because they had some of those characteristics of BD, that they were the leader in the spaces that they participate in. So again, my #1 goal is to create long-term value for shareholders, and we're very focused on sticking to that formula and getting back to consistent, durable revenue growth and earnings growth backed with that balance sheet flexibility. We could talk about that more in detail.

Yes. No, that's great. Those are great high-level overview comments and certainly should help give investors confidence in kind of what you guys are trying to achieve over the longer term. To talk about a couple of more kind of near-term items, though, I need to get these in because I know people want to hear kind of what you guys are thinking about some more near-term things as well. So in particular, the uncertainty around Alaris. And you just mentioned that was the kind of the one non-macro factor that you guys kind of fully own here. But certainly, the pump space has a long history, including CareFusion, with some FDA issues. So kind of concerns around those are not totally unfounded in our view. But what can you tell us about the situation and the confidence you have on the timing for resolution and the steps that you need to take now in light of the 483 you received and any other communications that you've had with FDA.

Sure. It's a good question, Brian. So first off, let me just comment on, of course, we've been continuing to ship Alaris under medical necessity. And we've had -- I'm really proud of our team and how we supported customers around the world in that platform. We rely on it. Again, 70% of all health care institutions in the U.S. utilize Alaris. And we saw about 1,000 health care systems in the U.S. over the last couple of months add to their Alaris fleets to help set up new ICUs to help treat patients with COVID 19. We ended up shipping additional Alaris instruments to add to our current customers' fleets, 1,000 different institutions added to their fleet. So I think that also speaks to the durability there. As we think about the 510(k), obviously, we've taken that extremely seriously, it goes without saying. What we're looking at doing and what we are doing in the 510(k) is the product has had improvements made over time and whether or not it was -- since launch, whether or not they were under Cardinal or CareFusion or now BD, those improvements haven't had the right update that needed to get made into the 510(k) filing. And so we need to take all those into account and provide a single updated 510(k) that takes into account all of those improvements. We're very confident that we have the right resources, the right plan, the right team. We've got over 150 people now working full time on that. That dedicated team is executing well against our internal plans and milestones. We're very pleased with the progress that they're making. And I'd say we're also very confident that we've got our arms around what we need to execute and the things that are in our control. Our collaboration with the FDA has been very constructive. We've built in the loops of feedback into our internal processes. So we've had -- I think I've mentioned before, we've had, to date, 3 very productive pre-submission meetings with the FDA. What happens there is we would share, for example, here's what we're planning specifically to do for human factor testing as an example. We're going to have 100 clinicians, do this type of work of testing, and this is exactly the way the protocol is going to get set up. Here's the data we're going to generate, this is our plan and the FDA would give us feedback, yes, that's the type of data we would expect. And what it -- or you should adjust this or that, and we get that understood before we actually do the testing. So those really are helpful in making sure that we get alignment with the FDA expectations and help reduce the risk of additional information requests once the submission goes in. So really pleased with the collaboration level happening there. And we understand certainly that everyone is looking to understand the timing of submission. We've shared in the past that the reason we had indicated that we would be past Q4 was strictly due to the human factor testing not being able to access in a clinical setting large groups of clinicians in the middle of a pandemic, and also people are supposed to be isolated. So we pushed that by that period of time. I would say, at this point, we are -- being able to start scheduling some of that testing. We're seeing that open up and our ability to do human factor testing is now visible. So we'll give an update in August on our earnings call. The other reason that we wanted to do it in August is the majority of our testing is expected to be done by then. So if we don't have anything that's come up in our testing to date, things are progressing well. If anything did come up, we would know by the August date to be able to share the final update at that point in time. So more to come, but we will have much more clarity on the submission timing by our August earnings call, but things are progressing for our schedule and are executing well.

That's great. That's a good update, and we look forward to hearing what you have to say in August. As far as kind of more recent trends go, on your call in early May, you provided a detailed view into business trends in April. But can you offer any insights around May and early June and the trends that you're seeing around the world in various businesses?

Sure. I'll turn it over to Chris to answer that and walk you through what we saw in May.

Great. So Brian, yes. So we were actually very pleased with what we saw in terms of direction in May. As you mentioned, we gave a lot of detail in April. We gave a lot of the trends that we have been seeing. What we're very pleased to see is that the elective procedures were coming back in our Interventional segment. And we also saw in the life science segment, a couple of things. One, research was coming back in Biosciences, and so that was a positive. And we're also seeing the COVID-related testing, particularly related to BD MAX, was positive as well. So going through a little bit segment by segment. As I mentioned, Interventional is very encouraging. The elective procedure is built throughout the month of May. So certainly, the end of May was better in terms of the sequential comeback than early May, for example. And that goes up to June. That continues into the first week of June that we're looking at. So elective procedures are coming back nicely. If you think about -- when you talk to -- we talk to our customers, some of those hospitals were only just starting elective surgeries towards the end of May, some of them are starting in the beginning of June. So I think it's trending very nicely. We also see, as I've mentioned, the -- in our unique view of the health care ecosystem, we see diagnostic screening requests ahead of elective procedures ramping up as well. So all signs are pointing to elective procedures in Interventional coming back. And we also mentioned that we're seeing requests from our customers to have our sales force come in and meet with customers, and that's another leading indicator. So very positive from that standpoint. Life Sciences, as I mentioned, we did see a sequential improvement in lab testing and research began to improve. Diagnostic Systems, for example, we saw a sequential increase in the COVID testing, as I mentioned, around BD MAX. Now in other areas such as Preanalytical Systems, the non-COVID testing, the routine stuff such as Vacutainer, that is not coming back as quickly. So we saw that in May, and we'll watch that as we go forward. In Biosciences, as I mentioned, we did see a bit of a recovery in May compared to April, and look for that to continue as well. And moving into the Medical segment, Pharm Systems and Diabetes Care are right on track. They really aren't that impacted by COVID. So they're right where we would expect them to be. In MMS, as we said on the April call, the April volume of Alaris pumps was very strong with $70 million. You think about what you were reading about in the paper with field hospitals being set up, et cetera, that was a big pop in the month of April. If you think about in the beginning of this year, we were talking about Alaris pump sales being in the $400 million kind of range for a year, you can see that $70 million in a month is significant. So we expected to see that come down in May. It did come down by about $50 million. We were still selling medical necessity of about $20 million in May. But as expected, it did come down. No field hospitals are being set up or whatever. But those that are out there, that bodes well for the future. As with pumps being out there, there'll be set sales, et cetera, but it played out as we expected. And then in MDS, we did see a rebalancing of distributor inventory levels in May. And when you think about it, as the COVID population was leaving the hospital, non-COVID routine kind of testing patients were not really coming back in strong. And I think the hospitals and the distributors took the opportunity to reset the inventory levels that they had ramped up significantly in March and then we're seeing that adjustment in May. So all in all in, May and April were pretty much in line when you net all those things out once you adjust for that $50 million of change in MMS. We did also mention that in -- when you look at the regions, China, we see that as a leading indicator for the other geographies. We're watching that closely. And we have seen increased activity in hospital volumes in China. Sequentially, it's up from April to May. It's still 25% below pre-COVID expectations, so we still got a ways to go, but we see that incrementally changing in May and that we would expect it to get incrementally better in June as well. So obviously, still a very fluid situation. We're trying to give as much color as we can. We're optimistic as we see signs of recovery, particularly in the elective surgery area, and we'll certainly keep people updated as we move forward.

That was a great detailed overview of what you're seeing. Thank you for all that detail. We only have a couple of minutes left here. And as a diagnostics analyst, I feel compelled to ask you about your diagnostic offering as it relates to COVID-19. But specifically, I want to focus on antigen and how you guys are moving forward for Veritor and Veritor Plus there. You guys had to change the antibody pair. Can you just kind of let us know kind of how that process is going? But I'm also curious about what you're hearing about in terms of demand for antigen testing and where that demand is likely to fall. Kind of as you think about all the different tests that are out there, obviously, you have molecular tests in the market, some talk about sequencing-based tests in the market, where do you see antigen testing fall? And what kind of demand are you hearing about? And how is your program progressing?

Sure. Great question. I was figuring there's no way we can get it without some diagnostic questions here from Brian. So I've got it in here at the end. Real quick, before I hit Veritor, which I'll get to, just a quick comment on MAX. MAX, as everyone knows, we've ramped up supply of both the instruments and the COVID tests. I think there's some -- even after COVID passes us, having that larger installed base on MAX, we're going to end FY '20 with a larger installed base on MAX than we ever imagined because we've tripled the production during this COVID and we're selling every MAX instrument we can make. We would expect -- although there'll be some longer-term implications of that as well as those new users of MAX will ultimately transition from COVID testing to using some of the other variety of tests that we offer on there, right, for GI infections or respiratory infections or vaginitis, STDs, et cetera. But we're making a little under $1 million a month now on MAX. Again, we sell every test we can make. We're adding an additional 900,000 tests a month. I shared before that was going to happen at the end of calendar '20, early '21. We're now confident that that's going live in Q1 '21. Team's running a little bit ahead of schedule there, and so we're almost going to have double our MAX capacity going -- in Q1 '21. So we'll continue to keep everyone updated. On Veritor, as you know, we've got 27,000 placements of instruments out there already today. On the time line, what I would say is we've got our best team on it. We've got some of the best experts in the industry that we've brought in, working with our team 24/7 on this program. That includes some BD retirees who were the godfathers of Veritor, built in the first place, that have come back and are working hand-in-hand on this. But like I said, we've evaluated hundreds of antibody combinations. You probably know there's 2 antibodies you need for a lateral flow test, one is the capture antibody and the other one is the detector antibody and they form a sandwich around the virus. One holds the virus in place, one then comes along and attaches a probe to it so you can see it. So we've been analyzing the best antibody combinations. Again, we screened lots of them. We've got some very -- some that are looking very positively. And we are proceeding at the same time in collecting specimens, we've set up over 30 collection sites across the country. As you know, the FDA requires 30 positive specimens now going forward, we're almost at -- or essentially we'll be there this week on having those specimens collected and frozen and ready to go for when our assay is locked down and allow us to move through that clinical trial in quite a timely manner. So again, there's a lot of stakeholders on this. To answer to your question, who's interested in this test? Governments are highly interested in this test. In the developed markets, I think employers are very interested in this test. The opportunity for a true 10-minute test at a cost point that's certainly less than half of molecular testing on a platform that's -- as you know, Veritor is handheld and completing mobile, you can walk around with it and do testing anywhere. You can do it in -- if they give you one, you could test yourself in your car. Is -- that is a different -- enables different dynamics that people are thinking about how they could use that for testing patients asymptomatically or even whether or not it's on-label or off-label. I think that there are people thinking about if the technology existed and how -- of course, Quidel has offered that now, how they could use that to help reopen the economy and keep it open, particularly in a second wave. So more to come there. For us, we're not going to provide specific timing on that launch until our final assay is locked down, the clinical data is in hand and our EUA is submitted, but you guys will be the first to know when that happens. The only other comment I'd mention is I think there's no -- that there's significant challenges with COVID in the emerging markets and developing world, and molecular has really not been an applicable technology at all for those geographies. This, I think, really becomes the first technology that potentially can have widespread applications in helping support patients in the emerging markets as well. So our first launch market certainly will be the U.S. followed by Europe and a number of other companies -- countries around the world. But at the same time, there is significant interest in getting this type of technology into the emerging markets as well.

Great. That's great to hear, and I look forward to getting an update on the progress that you're making there. 30 minutes always flies by in these things. I wish we had another 30 minutes or more to go into all the stuff that you talked about. But I think we're going to have to leave it there. Thank you so much for taking time and going through the story and addressing these issues that the company has faced. And it sounds like you guys have your arms around most of the stuff, and we look forward to an update, I guess, in August on the status of the business and your outlook going forward. Thanks, guys.

Very good. Thank you, Brian, as always.

Take care.

Thanks a lot, Brian. It's always a pleasure.

Bye, guys.