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

Thanks, everyone, again for joining us here at the Jefferies 2020 Virtual London Healthcare Conference. I'm Raj Denhoy with the medical device research team. Along with me today, we have Anthony Petrone and Brandon Couillard also from Jefferies. And our next presentation is from Becton, Dickinson. And from the company, we have Tom Polen, the company's CEO; Chris Reidy, the company's CFO. And we also have Kristen Stewart. And I think Kristen is going to start us off with a brief statement, and then we'll get into Q&A.

Thanks, everyone, for joining us. Just as a reminder, today's discussion may make some forward-looking statements. It is possible that actual results could differ from our expectations. In particular, there continues to be uncertainty about the duration and contemplated impact of the COVID-19 pandemic. Risks, uncertainties and other factors that could cause such differences can be found in our recent SEC filings, including our 2019 Form 10-K and subsequent Forms 10-Q. These statements that are made in today's presentations are made as of the date of the event. BD undertakes no responsibility to update any such statements to reflect these events or uncertainties occurring after today's date. With all that said, I'm going to turn it back over to you, Raj.

Great. Thanks, Kristen. So Tom, maybe we could just start at a very high level before we get into some of the detailed stuff. But it's your first year as CEO. It's been a very eventful year to say the least, the Alaris ship hold, COVID, testing coming up. Lots and lots to talk about. But maybe just some high-level thoughts you want to offer in terms of your first year on the job as CEO.

Sure. And I think that term eventful is certainly a fair term. So if you step back, the first time I actually had a chance to share my vision and strategy for the company was at JPMorgan a couple of weeks before I took over as CEO. That was the first time we began talking about the BD 2025 strategy. Of course, then a few weeks later, I took over as CEO at the very, very end of January. And by the end of that first kind of full week, we had shared the Alaris news, though certainly not what everyone would have wanted to be sharing in my first week as CEO. And that became the #1 priority, of -- resolving and remediating Alaris, getting the 510(k) and getting that fully back on the market. And we can talk about that later, but that remains very much on track with what we've been talking about. Of course, then there is a global pandemic, significant changes in patient volumes in hospitals, procedure volumes in particular. And so we've been navigating through that. Now with that said, really I could not be more pleased with the progress that we've made as an organization over the last 9 months. We've certainly rose to the occasion at BD where we had a huge role in combating COVID, whether or not it was bioscience instruments on the front line, understanding why it impacts the immune system the way it does, helping the world set up ICUs to care for patients with infusion pump platforms or whether or not in Europe or the U.S. or other geographies, ramping up production there, creating new diagnostic tests in record time for us and having now a significant role in both the molecular and of course, the antigen testing and scaling there. And now of course, what we've been scaling, what is already a very -- we run our manufacturing quite lean and efficient, but we're finding ways to make an additional 1 billion units from our current capital to further supply and help the world deliver mass vaccination campaigns. And of course, we are adding more capacity to that as well. Of course, at the same time, when I did take over, the company was being run on about 2 weeks' worth of cash, is all we had on the balance sheet as a company, have been focusing on debt pay down. And so we had some difficult decisions to make, and that included doing an equity raise to shore up that balance sheet. I think that was the right decision at that time. And we go in now, as we think about a resurgence and the years ahead, in a much stronger position. The whole time, we've also been very systematically executing our BD 2025 strategy. Obviously, as we've been focused on getting Alaris remediated and focusing on COVID diagnostics and vaccination campaigns and scaling up ICUs, I haven't had as much time to talk about our vision and strategy over the last 9 months as I would have liked to in the beginning, that it wasn't the right thing to do. But you've probably heard over the last month. You can expect to hear more. And eventually, we will have an Analyst Day when that time comes in this fiscal year for sure to get deeper into that because we've been very systematically going through making decisions around our portfolio prioritization, reprioritizing our organic portfolio. We've positioned ourself with the equity raise and actions we've taken to strengthen our balance sheet through improving focus on cash to be able to invest more in tuck-in M&A, right, over the years ahead; invest more in R&D. You've seen us start to increase R&D 8% last quarter. Expect continued growth in R&D at levels that are beyond what you had seen over the last couple of years as part of our growth strategy. And you've seen us announce Project Recode and proceed executing that quite well. That's very much on track despite the pandemic. So I think as we look right now and while the world is facing another resurgence of COVID-19, what I could say is that I feel very differently than I did at this time in March, not that long after I had come in. At that point, BD and most companies were going on the defense, thinking how they're going to manage through that. But again, thanks to the actions that we've taken over that period of time, I'd say we're now very much on the offense on that, right? As an organization, we're charting our own course forward for the next several years, and we're deciding where to place our investments to ensure long-term durable growth. We have offsets. Even if procedure volumes can come down, there's a natural hedge with Veritor and BD MAX and, of course, vaccination solutions now on the table that weren't there this time in the last resurgence. So we feel good about where we are. We feel good about the progress and look forward to talking more about our strategy.

Great, great. Maybe before we get to some of the specifics on testing and the business and things, there was also some news yesterday of a management change. Patrick Kaltenbach, President of Life Sciences, is leaving. John DeFord is sticking around though a bit longer. So maybe is there anything you want to share in terms of that change and what's happening?

Sure. I always try to talk John into staying longer. This wasn't the tactic I was planning on using, but we can't be happier to have John staying on for a couple of other quarters. So no, nothing more than what we shared in the 8-K. It's a personal decision for Patrick. It's been tough for him with his entire family and kids in Europe, unable to see them, obviously, because of COVID travel restrictions. I think it's important for them to get back. He's got a good opportunity he's going to go after there. He had approached me about interest in the CPO role to start, so we'll just refocus on John's backfill as we think about that going forward. We've got time. And we've got a really strong leader coming into life sciences in Dave Hickey, who's been leading -- all of BD's COVID response on the diagnostic side has been led by Dave. And we're really excited to have him there. So we won't miss a beat, full steam ahead. And we're excited about the leaders we've got in place.

Very good. So maybe we could just dive right into the COVID testing. So clearly, a massive headwind -- excuse me, tailwind for you and others. This year, you gave guidance, $1 billion to $1.5 billion for Veritor and another $400 million for BD MAX. But if you think about where testing has gone even over the last few weeks, we're up to about 1.6 million tests today, and that's just on the PCR side. What do you think about those numbers currently, right? Is there potential upside there? And how does your ability to add capacity factor into that?

Yes. So we feel good about those numbers. Of course, we just gave them a couple of weeks ago. We feel the $1 billion, $1.5 billion certainly are the right numbers. And capacity, particularly in the first half of the year, does dictate how much opportunity there is above those numbers. So as we have shared, we've got the 8 million tests per month really through the first quarter that -- if you just do the math with that $20 ASP, that's kind of a first quarter in that 480 range based on capacity. And then the second quarter we said we'll get another tranche of capacity, going to up to 12 million tests a month in March. So that's at the very end of Q2. So I think the real question becomes, right, the durability of testing in the back half of the year, and that's something that we just don't have visibility to. That's why we didn't think it was prudent to over-forecast what's going to happen that far out with timing of vaccines. As we all know, that changes on a daily basis. I think there were some more positive news on that this morning around performance of the Pfizer vaccine. So we'll see where that goes. That could create an opportunity in the back half if testing were to stay elevated, but that's still to be determined. A number of different factors can influence that.

Right, right. It's, I think, an important question though. And I know you don't really want to go there too deeply right now, but as you think about the back end of this, right, the tail on testing, what are your current thoughts at a very high level? I know you don't want to give specifics about how long testing can last and what that downturn is going to look like or that downward slope. Is it dramatic call-off post vaccines. Or do you think we'll see something more gradual?

Yes. I think we've shared this on the last earnings call, obviously, a couple of weeks ago, which is that, at this point versus if I look back a quarter ago, definitely have more confidence there will still be some level of testing in '22. That wasn't as clear if you step back a couple of months. I'd say just the fact that we know that the pandemic is going to be continuing, unfortunately, into the winter into '21. We all see the data around willingness to get a vaccine. Obviously, even once a vaccine becomes available, it's not as though everyone is going to be able to be immunized in a bolus. And there's quite a large portion of the population who's not willing to be immunized given, I mean, a vaccine at this point in time. So I think all of that fares into how long testing will continue into '22. I think some of the nontraditional uses for the tests as well, whether or not they're antigen or PCR testing as you think about airports, cruise lines, et cetera, utilizing testing for screening and to opening up the economy, and we have people using our technology certainly in those applications, those will create -- again, as you've got a variation in who's getting immunized, once you start that, the question of when you stop it is a pretty tricky question, right? When do you stop doing that? When do people say, "Okay, we're used to getting tested going on to a plane. Now it's -- we're comfortable to stop that?" I think that creates a further tail that probably goes into '22 as well. The extent of how big that number is going into '22, I don't think anyone knows the answer to that. But the likelihood that there is some continued testing, I think, is certainly higher than it was a couple of quarters ago.

I'd feel a bit [ rinsed ] if I didn't ask about this, but there was some interesting tweets from Elon Musk a couple of days ago relative to your test in particular. I'm not sure if there's anything you want to comment on that, but it did catch some people's attention.

Yes. Happy to comment on that. We -- obviously, the Veritor test worked exactly as it was planned in terms of it delivered a positive result in 15 minutes for asymptomatic patient. And if you look at the CDC guidelines, they specify that if asymptomatic patient receives a positive result from an antigen test, they should immediately isolate and seek guidance from their health care provider. That's our claim. The first test that was run, it is definitive from that perspective and appropriately diagnosed Mr. Musk in about 2 days before a PCR test was able to. So I think that's all we'd say. We're very confident in the performance of our test.

Tom, just one quick question to follow up on testing here. As the first round of vaccines sort of roll through, do you think there'll be a one-for-one test on the vaccines? And so the vaccine companies have talked about 2.5 billion units being available in the first round by mid-2021. And so I think it strikes us that there should -- could be some level of testing even with the first round of vaccine rollout. So just maybe some quick thoughts there.

In terms of just antigen and molecular testing?

Yes, correct. In other words, if you receive a vaccine, will you have to be tested post getting the vaccine just to make sure you haven't -- you're not sick?

Yes. I haven't heard specifically how much the role that testing will play for -- obviously, there's been discussions around the antibody testing, which we're not -- that's not a focus of ours. The role of actually detecting the virus post vaccination, that's an area that's still to play out.

So maybe we could segue a bit away from testing to the base -- the rest of the business. And I know you get asked this a lot. I think you were just even asked 2 days ago about how the base business is faring. You just reported a couple of days before that. But obviously, with COVID surging around the world, have you seen anything at this point you want to call out? Or is there any change in tone in procedure volumes or anything you're hearing from the market this time?

We just shared our guidance for the year a couple of weeks ago, so no updates there. But let me turn it over to Chris.

So I would just address, Raj, your question around the base business. And as we looked at last year, we came in at flat for the year in revenue growth. And if you peel that back a little bit, there's 2 major items there. There was the COVID headwinds, which was about 670 basis points of headwind. And that was offset by the COVID testing, Veritor and MAX, a few other things or benefits that we got from COVID of about 340. So if you net those, there was about 330 basis point drag. On top of that, we had the tough compare for Alaris because of the ship hold, and that was another 200-plus points. So if you just add back that COVID piece and the Alaris piece, we're up in that mid-single digits. That's why we're very confident that, that base business is, on an underlying basis, still very strong. And we gave a little bit of an indication as to how we feel about '22, saying that we expect that base business to grow mid-single digits in '22. And then on top of that, if Alaris comes back, that would be on top of the mid-single digits depending on when in the year it comes back, and that's hard to predict. So we want to give some sense of the strength of the base business. Obviously, the other point of '22 is the question you raised, which is how much Veritor and COVID-related testing will be. But you have to step back and think about the fact it's very difficult to give guidance in this period for a year anyway. We did that -- we felt comfortable doing that because we do have that natural hedge of Veritor. And we did say, as a reminder, that we're not expecting any major shutdowns, and our guidance doesn't contemplate that. But we also said that the hospital systems are responding well to the resurgences, much better prepared than they were back last year. And so we'll monitor that. But we do feel good about the fact that we have a more natural hedge this year with the COVID-related testing.