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

Great. Good afternoon, everybody. Thanks for joining us. Our next fireside chat is with the senior management team from Becton, Dickinson, and we are really grateful to have with us Tom Polen, President and CEO of the company; Chris Reidy, CFO; and Kristen Stewart, Senior Vice President of Strategy and IR. I'm going to give it to Kristen to go over some disclosures, and then we'll jump into it.

Thanks, Rich. Thanks, everybody, for joining us today. Just a reminder, during today's discussion, we may make some forward-looking statements, and it is possible that actual results could differ from our expectations. As we have said before, there continues to be significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. Risks, uncertainties and other factors that could cause differences can be found in our recent SEC filings, including our 2020 Form 10-K and subsequent Forms 10-Q. The statements made in this presentation were made as of the date of this event. BD undertakes no responsibility to update any such events to reflect events or circumstances occurring after such date. With that, please let me turn it over to our very gracious host, Mr. Rich Newitter.

Thanks, Kristen. Tom, I thought a good place to start. You've been at the -- in the CEO spot for about a year. What are some of the changes that you've made from a strategic or organizational perspective that you believe are most important and impactful? And maybe what's next on the agenda?

A great question, and we've been quite busy on both the strategic and organizational perspective. So obviously, with the Alaris situation happening in the first week that I took over, remediating Alaris has been the #1 priority. And we remain on track for that 510(k) submission late this quarter or early fiscal Q3 right after. So that remains on track as we communicated on our Q1 earnings, and we're very, very focused on that. I think beyond that, I came in and we had defined very clearly a strategy for the next 10 years for the company, roughly 2025, and it's focused around really doubling down our focus on growth, enabling value creation through simplifying the organization, which got very big and complex pretty quickly and has opportunities, help drive efficiencies through that and empowering our associates. And so we started with, first off, making sure that we have the right leaders because when you're driving a change in the organization, you've got to make sure that, that tone is set from the top. And so over the last year, we've taken a big focus on making sure that we have the right leaders across the organization to drive our BD 2025 strategy. And I'm really happy with the team that we have in place and how we're executing. And our focus across the organization on driving a growth mindset, we see the organization embracing that very clearly. If I were to go around or if you were to walk into our buildings and just feel the amount of focus on growth and on simplification and the momentum that we have in each of those categories, it's probably different than it was a year ago. We can talk about what we've done behind those. And so the other, maybe the enabling factor beyond our leadership team is making sure that we have the right -- strengthen our underlying financials to execute our strategy as well. When I came in, I made very clear that I want to focus on strengthening our balance sheet and improving flexibility there. And so we've gone over the last year from well into the 3s from a leverage perspective to -- as of Q1, we're at 2.5x leverage, and we feel very good at being able to remain down in the 2s from a leverage perspective. And at the same time, now we've had investment-grade credit ratings across all 3 agencies, which we're very pleased with and certainly are very committed to maintaining. So with those foundational elements in place that we put it -- made over the last 12 months, we made a lot of progress on our strategy itself, and that's driving growth, whether or not it's starting our growth and innovation fund that we fully allocated and have started seeding new R&D initiatives across every business and segment in the company. Of course, we hyper fuel that with reinvesting a portion of the Veritor proceeds, even on top of what we were originally planning to do. At the same time, the progress that we made on strengthening our balance sheet has given us the flexibility to now be much more on the offense, looking at tuck-in M&A and how that can play a role in driving our growth. You saw us in FY '19 to 0 tuck-in M&A, 6 last year, and we did 3 so far in the first quarter, and we have a very active funnel. Again, focused on driving our strategy in the spaces that we play in today with accretive growth, leveraging the assets that we have. We think there's a lot of opportunity to create shareholder value from that. We want to simplify component. We went from, at the start, as I was coming in, project ReCoDe and how we're going to simplify our processes, our architecture and our portfolio, really being a concept to now it's extremely deep into execution, right? Dedicated teams we've had in place for the full year. We do see a little bit of savings coming through this year already in ReCoDe. But again, we've reinvested some of the Veritor profits to help accelerate that as we look over the years ahead, and we're making good momentum again on our consolidation strategy of sites, our portfolio as well as simplifying our processes. So we feel really good about the momentum there. And as you go out ahead, looking ahead, we're focused on executing this strategy that we started in the last year. So focus on driving that mid-single-digit consistent durable growth portfolio. Again, we're making good progress on that. Expect to see more supplementing that through tuck-in M&A as well as starting to hear us talk more about some of the R&D programs that we started to invest in this year, continuing to drive our simplification agenda. We've looked at individual products within our portfolios, and we've begun rationalizing some of those and simplifying it. We'll continue to look at the broader portfolio of the company as we go forward into the next phase as well. And so that's -- our strategy is very clear, and we're very focused on executing it as we continue to go forward.

That's a great intro. Thank you for that, Tom. You mentioned the base business or sustainable growth, how do you feel about the ability to sustain mid-single-digit growth rate going forward for the firm once normalizing for COVID?

Yes. We feel very good. And you saw the resiliency of our business in our portfolio is pretty clear in Q1 if you compare us with our peers, growing 4% in the core business is probably among the higher for core business performance within -- that's excluding Veritor, just in our underlying business. So we felt good about that. We continue to feel good about that base business, and we feel good about that base business performing as we go into FY '22. And that's supplemented again. It's not just a continuation of what we came in with a year ago. We've been actively supplementing that with commercial investments as we've reinvested some of the Veritor proceeds through our tuck-in M&A strategy as well as other aspects of driving growth there. So we feel good about that. We're in a number of attractive -- over the last 6 years, we've put the company in Life Sciences, in BD Medical and BD Interventional, into a number of attractive growth markets that we've been investing in and the best, that gives us confidence in that underlying mid-single-digit growth.

Got it. You mentioned the COVID reinvestment or the Veritor reinvestment potential. Just could you give us a sense when that spending could begin to translate into a meaningful payoff or contribution.

Sure. Why don't you just turn it over to Chris?

Sure. So let me just give you a little bit of a background on where we're spending the money. And we are taking the opportunity to reinvest those proceeds from Veritor and we're investing it across the strategy, so in growth, in simplification and the empowering area, with an emphasis on the growth. And so where we're investing using things like R&D projects, obviously, accelerating those but also go-to-market strategies, commercial strategies, and those would be the ones that you'd see beginning to pay off a little sooner. R&D takes a little bit longer to come to fruition. So we'll begin to see some of that in the tail end of '22. We'll start seeing that come in. Other areas, we've -- Tom talked about the innovation fund. We've supplemented that a little bit through the Veritor proceeds. And then on the simplification area, we're accelerating some of the ReCoDe efforts that we have and focused on -- in that area. We're also doing things like looking at our inventory levels and taking those inventory levels down, which, when you do that, you've got unabsorbed overhead that impacts you. So that's part of the investment we're making, and that will pay dividends going forward in future years in a number of ways, including cash. So these are all the kinds of things we're doing. But we would expect to see that beginning to help us. And these are all done to really enhance our ability to drive that mid-single-digit growth on a sustainable recurring basis.

And as we think of tuck-in M&A, is there a preference between the business segments that we should think about going forward?

Well, we see attractive opportunities in each of the different segments. Obviously, as we think about our tuck-in M&A strategy, we're focused on accretive deals in markets that are growing faster than the company average from that perspective and where we can leverage strength of the company, whether or not that's a commercial channel that we've invested in, we can put new products through or our manufacturing prowess and scale to bring down costs. But we're not looking at science projects, specifically, or dilutive deals. We focus on accretive from an EPS and from a revenue perspective.

And then just as we think of the R&D spend and where it's going, Chris, thank you, for a couple of the projects, but we've often thought of you as you talked about yourselves as a company singles and doubles. I guess is there anything either in the pipeline or on the -- from an R&D perspective, that you would call out that is offering better than average kind of growth opportunities?

Yes, absolutely. So obviously, Veritor would be probably like the home run of the medtech industry. There's not -- that was 6 months after launch, it's already at $1 billion, right? So that's not very common. And we obviously have more that we're investing in behind Veritor given that we went from 25,000 reader placements to over 70,000 today. It's a global platform today. It wasn't at the start of a pandemic. We've discussed before, we have our flu-COVID combination assay well into development, and we'll look forward to sharing if we have a news on that when we do launch it. We think that will be kind of the go-to assay in the future once we get past the vaccination campaign. If you have those types of symptoms, you're really want to know, is it flu or is it COVID? And same thing on MAX, right? Big surge in MAX, big increase in MAX placements. And for both MAX and Veritor, we've taken some of those Veritor profits, and we've reinvested in many that will now come out over the next several years and be applicable to that larger installed base we have. I think if you just step back, Rich, is -- you look at where we're investing, we're a big company with diversity across. That's one of our strengths, but we certainly recognize, it can be hard as people look at it. There's no just one product as you said. But as we think about the themes that we're investing in, right, there's really 3 themes. One is that we're really combining AI, robotics and informatics to help improve care processes, right? And you've seen us do that very clearly in our medication management business. You've seen us do that with our Kiestra platform and automating the microbiology laboratory and AI reading plates and our software system Synapsys connecting that data. You'll now see us starting to do that within our BDI business, right? So 2 products that we're launching this year would be our Arctic Sun, the next-generation of that for temperature management, which is connected through our HealthSight portal, and it's fully interoperable with the electronic medical record; or our smart Foley catheter, the Sensica automated urine output system, again, leveraging that analytics platform that we have in 70% of all U.S. hospitals. Because of our MMS business, we're leveraging that capability to bring new innovations in BDI. And there's many more of those types of smart automation type solutions across each segment. Second major area that we're investing in is really around bringing solutions to market that help drive the care shift from the hospitals into the non-acute settings or even into the home. And so a number of different things that we're investing in there that are doing really well for us or that we're launching. A product that we've just launched and is doing extremely well would be our PureWick DryDoc product. This is taking the success of PureWick, which is now bigger than Lutonix for the BDI business. And it's grew up in the hospital space. We now have a bedside version of that, which allows people to manage incontinence in the home, and that product is doing, again, extremely well and fits into enabling the care shift from the hospital to the home. And we're looking at some of the investments in new products we have coming out in our self-injection business, pharm systems, one of the top growing businesses in the company for the last several years. We don't expect that trend to change as we think about that business growth going forward. You've seen us making investments in there. But we've got a series of our Libertas platform, our Intevia platform and our wearable injector, all coming out, which helps patients inject themselves with medication rather than need to go to a clinician for that. So those are -- and then, of course, Veritor is -- we plan to bring that to the home. You saw us make an announcement, well not that long ago, in a partnership with Scanwell to bring Veritor into the home. We've been signaling for a while. We're exploring it. Certainly, we're beyond exploring it, and it's very actively in development at this point. And then the last piece that we're investing in is advancing chronic disease management. And a lot of that is within the BDI business. It's pretty intuitive. Their products are helping to address chronic disease, peripheral vascular disease, renal disease, other conditions. But we even are driving the strategy across other segments, including like our BD core that's launching in Life Sciences and our HPV Onclarity assay is a great example of a much bigger than a single product, we think, gets us into the high throughput molecular space with a very differentiated assay for HPV, not only primary screening, which will be 1 of the only 2 companies in the U.S. with a primary screening claim, but being able to do co-testing as well.

Got it. Transitioning to Veritor, that's clearly one of the key innovation areas. Investors, about 3 months ago, largely thought the Veritor number was going to be conservative. There could be up to $1 billion of cushion to your revenues. Should investors now think of that number as more reasonable, not so much conservative? I'm just curious to get your thoughts on the update that you tried in your most recent quarterly report.

Yes. I think from the very start we got this question, right? Is this is a conservative number? And we use the term prudent. We always thought it was a very prudent number. And honestly, the market is playing out very much in line with how we had envisioned right from the very start. You recall, when we launched Veritor in July, we talked very openly that we believe that COVID diagnostic revenue will be weighted to the first half of the year, first half of the fiscal year. And that once vaccine started, and I think we very specifically said that in January and February, that as that rolled out, there was less certainty around how testing would evolve then. And so again, it was more to take -- it was appropriate to take a more prudent position given the uncertainties in that. And so it's played out exactly as planned. We also said at that point, as we were -- when we launched, as we were building our capacity to being $20 on ASP, and then we would expect that to come down over time. You saw us announce that in Q1 as we expected. And we've always said we expect that COVID testing could end up -- would make sense for it to be at flu-like Veritor pricing over the long term, which is in the $9 to $12 range. So we still see those comments that we made back in the summer as still being on the trajectory that we saw happening. So we think that the $1 billion to the $1.5 billion that we gave and that we updated, obviously, after winning almost a $700 million number in Q1, we had said it would be on the higher side of that. No change in that for the year. And obviously, we're engaged in -- as the market is shifting from symptomatic patient testing to more of non-traditional testing, we're in very active discussions with people who are focused in that area.

Tom, we heard from Quidel this week for the first time that they have excess inventory on their rapid antigen tests. There's some noise in there. It could be whether -- what's the supply-demand dynamics, not to say. But are you seeing demand for Veritor wane at all? Or do you think you can sell all the volumes of tests that you make for the foreseeable future?