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

If you recall, Tom, we met actually last December. I brought a group out. And I was really impressed with your commentary about Project Recode and some of the specifics around your plans after the cost inventory, improve margins in the process. And you indicated that you're making sort of steady progress. I've just been curious, has this extraordinary time led to more opportunity to accelerate or to expand? Could there be upside to Project Recode as we're currently understanding it? How are you thinking about the longer term?

It's going really well with Project Recode. I don't think we want to call upside yet, but we're very much on track with what we committed. So we shared there's really 3 major elements to it. One is network architecture, that's very much in line. We haven't accelerated that necessarily. Those are complex plant integrations. They're very much on track and they're fully funded and being executed. The portfolio simplification, simplifying our portfolio so that we can focus on driving sales in the most important products for customers and getting rid of some of the older ones that happen to take up more sustained engineering costs, regulatory requirements, take up inventory levels, et cetera, we've definitely accelerated that work due to COVID. It's actually a combination of EUMDR is a nice catalyst for that as well as having time with COVID, the marketing teams, in particular, across all 9 of our businesses, have dedicated resource driving that initiative. And then the third element of business process certainly has been continuing forward through COVID as well.

Fair enough. One thing I -- you know that I've been interested in is looking beyond COVID, looking beyond this period, and I think both for Becton and others, what a normalized growth environment might look like. And you've talked about Becton 2025. How -- either one of you, how should we be thinking about your thinking there? And how would you have us frame normal growth top and bottom line margins? What are your aspirational goals? And how is that how is that concept evolving again as these months go on?

We've talked about that many times. Maybe, Chris, do you want to take that?

Sure. So I would say, I'd point to, Rick, one of the reasons why we gave some sense of 2022 on the earnings call was to demonstrate that the base business is still solid and strong and growing. And so what we had said in 2022 was that base business would be able to grow mid-single digits. And that's before you take into consideration Alaris coming back. And obviously, that's a variable as to when it would come back in 2022. So taking that out of the equation, we think that the base business can grow that way. Now what happens to Veritor is another variable that we'll have to wait and see as how that develops. But we wanted to give a sense that the underlying business is strong. And I think that's an indication to the years beyond in '23, '24 and '25 that we can grow that base business in that ballpark. So that's one of the indications we want to give. So that's kind of how we're thinking about the underlying business. When you take out Veritor and Alaris coming back and all that kind of stuff, the underlying business is still strong.

And Rick, maybe just a bit more context is, of course, with the Bard acquisition, we shifted the growth rate of BD's underlying markets. So today, excluding kind of what's happening with the pandemic, markets are growing at about 4%, right? And that's higher than it was before BD and Bard came together. Of course, we had a strong pipeline coming into the pandemic. And as you know, we started the Growth and Innovation Fund, which is further accelerating investments in R&D. In addition to what we were already planning to invest in the Growth and Innovation Fund, we're using Veritor proceeds to further invest behind innovation. That's adding into the Growth and Innovation Fund beyond what we had planned at the beginning of the year. And then we've also shared, as part of our focus on strengthening our balance sheet and improving financial flexibility, part of the reason for that -- and our efforts around cash that I talked about are -- we are increasing our work on what I'll call inorganic innovation, tuck-in M&A. And you've seen us we did 6 tuck-in deals last year even in the middle of kind of the pandemic in the transition. That's actually the highest number we had done in the last 10 years from that perspective. And those are products that will drive growth in the future. We talked about some of those like point-of-care molecular platform or atherectomy, thrombectomy that we've gotten into or new digital solutions in our UCC business, creating smart Foley catheters. But we're continuing that work. You actually saw as already announce one acquisition in Q1 already of an alternate site software -- cloud-based software. It's a leading platform for moving Pyxis into the higher growth nonacute segment. That's very much in line with the strategy that we've been talking about around moving to where the care is heading outside of the hospital. And so we expect to continue to see those type of tuck-in acquisitions that are driving growth aligned with our strategy. And I think that combination of higher levels of R&D investment and then the robust pipeline we already have, combined with an increasing level of tuck-in M&A on top of solid growth markets that we already are playing in, give us that confidence around that mid-single-digit growth. And as Chris mentioned, we feel good about that for '22. And we would layer on top of that anything with Alaris coming back. Obviously, we would expect that to be incremental to that base of run rate.

Just to pick up on that, Tom, one of the questions I want to ask you is this -- you've mentioned several times, and I think appropriately so, highlighting the pace of M&A since the start of the year. It's exciting. And that incremental tuck-in mindset, I think, is a good one. Is that pace -- are we likely to see that continue at the same kind of pace? Do you feel like the opportunities are there and we should imagine a pipeline? And do you have -- are you satisfied? This is one of the questions I want to squeeze in. I'm squeezing it in here. Do you feel like you have the right team of folks around you now to drive that process because that's a -- I feel like that's a change from maybe the BD of the past, that kind of outward not-invented-here mindset.

Sure. We do feel like -- so we've actually made some significant progress in developing our business development capabilities, both at the company level but also a number of new leaders in each of the businesses with dedicated M&A resources now at the business unit levels, which we didn't have in all cases historically. I'd say, obviously, Bard brought to us a very strong mindset around using tuck-in M&A and their approach to then bring those technologies in-house and iterate them. I think John DeFord was always well versed in saying 70%-plus of Bard's innovation pipeline came through tuck-in M&A that then they would do an amazing job at serially iterating. Might take Lutonix and then make a variety of different applications for the technology, different sizes, different locations. AVs, obviously, typical lower vascular uses, et cetera. So that's -- in that same spirit, we're accelerating those efforts inside of BD. And yes, we did spend quite a bit of time in FY '20 building those capabilities, building our funnel. And so we did come into '21 with a strong, robust funnel and we continue to be very active in that space. Only things, though, very much align with our strategy. The other thing we did in FY '20 as I was coming into the role is we took time to really step back and look at all the different markets that we played in today as well as those near adjacent spaces and which ones were the spaces where we believe that we can have a disproportionate competitive advantage, which markets were aligned with future health care trends. We're going to be growing above our market average. And so we prioritize each of those markets, those that we're going to be doubling down on both organically and inorganically, those that were kind of holding the fort on and those that we're de-investing from. And we've been reallocating both our organic pipeline, but also our efforts inorganically right in line with that work that we've done.

That's exciting to hear. One thing I wanted to touch on today, maybe hoping to tempt you to expand on your comments on Alaris. I know -- Tom, I understand your reticence to say too much. But on the fourth quarter call, you emphasized your increased confidence in you're submitting in late fiscal second quarter or early third quarter. Any color on what's giving you that confidence briefly? But I thought one thing maybe that hasn't been explored is what's -- once it's approved from a demand sales action relaunch of Alaris or whatever the right words are, help us think about the impact, the contribution theoretically when that day, hopefully soon that happy day comes, how we should think about the relaunch of Alaris.

Sure. So as you mentioned and I said that I was even more confident in our submission timing for Q2, early Q3. I made that comment in on our last earnings call and certainly that remains very much the case. It's the reason why, obviously, we had another quarter of progressing our testing as planned, another quarter of dialogue with the FDA and feedback on our protocols, of which we've gotten all of that feedback. We had all that feedback at the time of the last earnings call. And so that's what gives us even greater confidence around that submission timing. In terms of when we do get Alaris back fully into the marketplace. So first off, we had commented that we don't expect any revenue from incremental revenue beyond what we're already providing for medical necessity, which will continue, of course, particularly with the pandemic, that will continue. And as we shared before, we placed over Alarises in over 1,000 hospitals, for example, in FY '20. We added to their fleet, particularly because of the COVID pandemic. And we would expect that we'll continue to add to their fleet in FY '21 but at a certain level. So we don't have a return -- a 510(k) approved version of Alaris returning in FY '21. We look towards '22 for that. The timing we'll confirm as -- once we get past the submission, we get a better sense of how it's progressing through the FDA. In terms of what do we think about in terms of pent-up demand, that will be an open question that, I think, let us get further through '21 to better understand. And the reasons for that, there could be variables. So last year in Q3, we did see a big peak in medical necessity orders because of the level of COVID. Obviously, that gave over 1,000 hospitals across the U.S. kind of a refresh in a way of some of their fleet. They have quite a few new Alaris units within their system. Depending on what happens as this peak occurs and as we go through '21 could have an influence in how many new pumps are added into the system in '21. Once we get past, I'd say, particularly this winter season, we'll have a better sense of how we think about '22 perhaps, particularly after the 510(k) approval.

Rick, it's Kristen. I'll chime in here. But I think we also had mentioned on our earnings call that, at this stage, we don't think it would be prudent to model kind of that one-for-one return of demand or a big bolus immediately upon clearance. As Tom said, we have been shipping under medical necessity. And it also is unclear where hospitals' CapEx help may be at the time of our Alaris clearance as well.

Very helpful. And maybe just -- we only have a couple of minutes left. But there has been an election. I think the outcome is clear. We'll see. But just at a high level for you, Tom, any implications that we should be thinking about for Becton? And maybe, Chris, to drag you in a little bit, should we be concerned about anything on the financial side related to tax rates or regulation or anything -- any early thoughts, positive or negative, either of you have that you want to share?

Yes. First off, obviously, probably the presidential election is one piece. The other one is who controls the Senate. At this point, it looks like 2 different parties may control the White House and Congress. That's still obviously to be determined and more to be understood as Georgia comes in the coming months. But assuming it is a split White House and Congress, I think that there may not be significant changes related to the number of the markets and the policies that we watch in particular. Most importantly, though, I think our policy priorities don't change at all, and that's around being able to bring innovative new medical technologies to market. That doesn't change regardless of who's in the White House or who controls Congress. And we're going to continue to be a key partner to the government's response to the pandemic as we are today.

So Rick, to your question regarding tax rate, obviously, that's something we would watch. But if you think back to the last change of administration, what was said on the campaign trial was very different than what actually got enacted. So it's hard to look at that now. And again, very, very much a factor is who controls the Senate. So that's something to watch out for, but probably not something that will have an impact in the immediate future.

Okay. Listen, on that note, thank you so much for taking the time. Really appreciate it. And thanks to you both, and thank you for joining the Stifel conference. Have a great day, guys.

Thank you, Rick, as always.

Always a pleasure.

Always a pleasure. Bye.