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

We have Becton, Dickinson with us for this session. Joining us from the company are the President and CEO, Tom Polen; the CFO, Chris Reidy; and Kristen Stewart, the new Senior Vice President of Strategy and Investor Relations. I'm flattered that Kristen has made our conference, her first one. So in terms of format, this will be a 30-minute fireside chat. Tom, Chris and Kristen, welcome, and thanks for joining us.

Good morning, Larry.

Good morning, Larry.

Great. So Tom, let's start at a high level. Investors are clearly interested in the recovery from COVID, the testing opportunity, Alaris and the pipeline opportunities like below the knee. But I've been -- the other question I've been getting a lot recently is, is there a structural issue here because we've seen consensus estimates come down by a considerable amount for BD over the past few years. So my question is, Tom, how confident are you that you have the right strategy? And what do you think will drive future growth?

Yes. Yes, Larry, again, thanks for having us this morning. It's great to connect again. And certainly, for myself, coming into the role about 7 months ago, I'd recognize Street expectations and our guidance have come down over the last couple of years. And I get that, that can be frustrating for everyone. Foreign exchange had been a headwind for the company. We can't blame it all on FX, 100% get that. There are a number of other challenges in the base business, right? There are DCBs, industry-wide paclitaxel concerns. Thankfully, our broader BDI portfolio helped offset some of those pressures. Then there was the Alaris ship hold. And of course, COVID-19 hit the overall industry. So yes, there's been several headwinds. And I can -- what I can say is we've been very focused and steadfast in addressing these issues. I think the other thing is we're also taking action to strengthen our processes to both prevent and better identify any potential matters that may arise in the future. The other thing is we also see the opportunity to better communicate with the investment community. And I think you're seeing us and already start to take action on that. But to your specific question, we do not feel that there's any structural or fundamental issues at BD, right? We have a very clear strategy. We can talk about that more in a bit. We're making good progress overall on that strategy. We're executing well. And so looking forward, I know FY '21 and the long-term outlook is on everyone's mind. So maybe let me just spend a few moments to provide some high-level thoughts there, Larry, if that's okay.

Sure.

If we look at -- looking ahead, first off, we think about that -- again, we're making good progress on that strategy. And we've been progressing the business, and operations are continuing to perform well in Q4. So for fiscal 2021, I'm not going to get any specific numbers or details right now. However, we recognize that it's a complex time in the industry. You've got a lot happening in the market with COVID. There's a lot of new COVID-related products that can be difficult to forecast. Overall, there's just a lot of moving pieces. And so let me break down just a couple of observations that I thought could be helpful for everyone that's watching here this morning. So first, as I've said, we're making good progress on executing our strategy and progressing our goals towards 3 goals: durable revenue growth of 5% plus on a normalized basis. The second goal, we've stated very clearly, is continuing to drive margin expansion, 10%-plus adjusted EPS growth. And the third is continuing to improve our balance sheet strength and flexibility going forward. And we're making good progress towards each of those goals. Second is, of course, we've got some exciting new product innovations, specifically the Veritor COVID assay comes to top of mind. It's something we're excited about. With that said, we recognize those types of products are pretty difficult to forecast in this environment. And we've noted that there's a wide range of Veritor estimates out there. There's some even in the $1.5 billion to $2 billion range, which seems aggressive to us given the range of variables around vaccine timing, overall testing supply versus demand over the length of 2021 and how ASPs can evolve over that point in time. And we can get more into Veritor later on. I think with that said, we remain very confident in our clinical performance. You've seen some recent -- an article published in that regard and the benefits. We continue to have very strong demand on Veritor, and our manufacturing ramp-up remains right on track. In line with our strategy, the other thing related to Veritor is we do plan to reinvest a portion of the Veritor and BD MAX COVID assay profits back into the business to drive our strategy of durable, long-term growth. So third maybe item to point out is that unlike many -- most other medtech companies, we do have a September fiscal year. And so we do not anniversary the COVID-19 headwinds until Q3 of FY '21, right? So the first half is going to be a tough compare. Taking this into account with other factors, I think it feels like some of the current Street models are more optimistic in areas specifically like MDS, for example, where we'd expect a little bit more modest growth. And then finally, infusion pumps, right, in MMS, of course, for Q1, we had a partial quarter before the ship hold, so that creates a bit more of a difficult comp. And then Q3 benefited from a bolus of medical necessity products in the U.S. and higher COVID-related sales in Europe. So hopefully, some of those comments are helpful as you think about FY '21. And maybe, Chris, I don't know if you have any other comments to add?

Thanks. The only thing that I would say is that, as you think about some of the observations that Tom made around '21, it obviously flow through to your FY '22 models as well. So you get to do that. So I think…

Chris, it's just a little hard to hear you. Just want to make sure everyone can hear you okay.

Okay. I can repeat that. We're -- we've got a speaker in between us here.

Yes, it may be worthwhile repeating it.

Just bear in mind that the observations that Tom made will flow through to your FY '22 models as well as you model enough of it.

Okay. Perfect. So last to unpack, Eric -- Tom, as you can imagine, maybe just on the COVID recovery. I recognize that a lot of companies don't like to give intra-quarter updates. But you gave some helpful color commentary on the fiscal Q3 call about what new trends you were seeing through, I believe, July. Any color you can share on how the recovery is progressing based on maybe some public data points that you're comfortable sharing with us today? And maybe the path to recovery, just to add on to that, kind of how you see the recovery progressing?

Yes. I'll take a shot at that, Larry. And what I would say is that we did, in fact, give a lot of color on the monthly progress, and we gave a lot of granularity in the midst of the pandemic, and that was in the absence of quarterly guidance. In the beginning of August, we obviously gave full year guidance and the fact of the fourth quarter guidance. And so as a result, we don't think it's appropriate to comment any more about monthly performance now that we have that guidance. And as Tom opened the conversation with is that I would point in the short term to the fact that we feel good about the progress the company is making in our execution and performance, and I'll leave it with that.

Okay. Perfect. So let's move on to COVID testing, which I think has been arguably the #1 topic for investors recently. Tom, you gave a lot of helpful color in your opening remarks. I mean it looks like we're going to have about 100 million tests available in September. That's what the government has said, and we're only doing maybe 20 million or so a month. So what are your thoughts on the testing, diagnostic testing, given the recent Abbott and Roche news with their own antigen tests?

Yes. Well, first off, as I said, we continue to have very strong demand for Veritor, and our manufacturing scale-up continues to be on track. And our R&D pipeline is also progressing well there, as we've talked about, work underway for a combined assay. We haven't given a time line for that, as we've shared, but it continues to progress in our pipeline. So as you think about new entrants, maybe just a comment, I would say is we're 100% supportive of more diagnostic tests coming into the marketplace. We do believe strongly that rapid antigen testing has an essential role in helping to combat COVID-19, right? And there needs to be more capacity coming in. And we do anticipate that more players will come into the marketplace and continue to do so over the next couple of months. So specifically, maybe to your question, I normally don't comment. I rarely, if ever, comment on any specific company's products. But maybe just at a macro level, what I can share is, first, we've been a leader in point-of-care respiratory testing for many years, decades. We're actually a pioneer on lateral flow technology. If you look at some of the early core patents, the [ Warfel ] patents that were in that space that were licensed, those were BD patents, right, that invented a lot of what is lateral flow technology. And the industry is, if we just step back at a high level, right, the industry, including BD, we started with manually read tests several decades ago and developed very purposely new chemistries for the assays and new instrument, the whole new generation of instruments that were meant to take assay performance to the next level. And we saw that play out, right, due to the performance benefits of those platforms and those chemistries, pretty much most respiratory infectious diseases, point-of-care testing moved to instrumented-based platforms because you've got higher. There are significant benefits on performance. And so we've always been a science and clinical evidence focused company. You saw that and how extensive and diverse our clinical trials were for the Veritor COVID-19 assay, a 21 different geographically diverse sites, routine care settings, outpatient clinics, drive-through clinic, skilled nursing facilities and we saw a very strong performance of Veritor in our clinical study. You've also seen us now start to generate what is the first comparative clinical evidence in this space. And I think you can expect we're going to continue to be focused on the science and more real-world clinical evidence going forward. And we remain very confident in the performance of Veritor in that situation.

So that's helpful. I mean just to cut to the chase, you threw out some Street numbers that you, I think, you thought were too high for Veritor, maybe $2 billion or so. I mean I think you have, off the top of my head, about $3 billion in capacity total with Veritor and MAX in fiscal 2021. We used the kind of -- the ASPs you've provided. But the Street seems to be coming in at about $1 billion for Veritor, $300 million for MAX in fiscal 2021. Are you willing to kind of say, if you think those are, I guess, feel a little bit more realistic than some of the estimates you put out that you mentioned earlier?

Now I'll turn it to Chris.

Yes. I think the takeaway, Larry, what Tom opened with is the fact that, obviously, forecasting is very difficult. It's a very dynamic environment. The point that we made is we felt that the Street consensus is very dispersed. And the point we wanted to make is we felt that those analysts -- we're not going to talk about specific analysts and specific models. We're not going to get into the details of numbers right yet, but we did want to make a point that the [ outer center ] of that $1.5 billion to $2 billion range or, in some cases, $2 billion plus, we think that that's a little too aggressive. And we think it would be more prudent, given the dynamics of the situation, to not be in that high level. And we just want to kind of give that indication.

Chris, those numbers, was that Veritor only or your combined Veritor, MAX?

Veritor only…

I'm sorry, Veritor…

Veritor only. Okay. Sorry, there's a lag, and I keep speaking both here. I apologize. Veritor only, got it. Okay. All right. Any comments on the durability of testing? Do you think testing could be a longer-term opportunity even once vaccines hopefully come out?

Yes. And certainly, we're hopeful that vaccines are developed. We certainly -- I'll read the same on how they're progressing. And at the same time, we do believe that there will be some COVID-19 testing is likely to continue. Of course, at what level it's going to continue after the vaccine, but that gets highly speculative at this point for fiscal 2022, in particular. So I think what's probably fair to say is FY 2022, as a fair assumption, may not be at the same level as '21. Beyond that, I think it's premature to speculate.

Yes. And I heard you say today, just want to make sure I heard it correctly, that we know the margins are quite attractive on the COVID testing. But it sounds like today, you'll consider reinvesting some of the potential upside from that. I heard -- did I hear you correctly on that earlier?

Yes, you did. And I think just -- maybe just to go back to our strategy and what I talked about. Our first pillar of our strategy, that durable 5%-plus, long-term growth element, part of that gets to also getting back to investing in R&D. And one of the areas that, for example, that we've recently done is established a growth fund, looking at reinvesting a portion of the profits from Veritor and MAX back into the business. And so I'd actually called up John DeFord, who I know you know well, our Chief Technology Officer for the company, and said, John, how do we invest these -- some of these incremental profits in the right way? And he came up with this growth fund program, which is very similar to what was done at Bard. And so we've got all the businesses across the company have actually submitted ideas, could be completely new product development opportunities, could be an unfunded line extension that has significant incremental revenue opportunities or it could be a commercial program to accelerate product adoption in a certain area. And so those submissions are actually all coming in right now. This week, they're actually all due. And we'll be making investments and trade-offs and putting investments behind those biggest opportunities. Of course, if you look back over the last 5 or 6 years, when we've been in an integration phase, right, of CareFusion and Bard, our R&D has been relatively flat. And so what I think you'll see is those investments reflected in R&D growth that's higher than what you've seen over the last 5 or 6 years and is in line with our strategy of driving that durable 5%-plus revenue growth as well.

Okay. I'm sure John was thrilled to get that call from you. Some people look forward to hearing kind of the outcome of that exercise.