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

Good morning, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Really happy to have Becton, Dickinson in our next session. Going to introduce Tom Polen, the CEO for a little talk, and then we'll do some Q&A afterwards. Tom?

Great. Thank you, Robbie, and it's great to be back in person. And thanks to everyone for your interest in BD. Today, I'm going to recap FY '22 and the strong momentum that we've built going into fiscal '23 as we continue to execute our BD2025 strategy. I'll emphasize our durable growth as we continue delivering category-leading products and transformative solutions that are at the forefront of modern health care. Through our R&D and M&A strategies, we are accelerating our shift into attractive and higher-growth end markets, which is increasing our WAMGR and supporting our strong growth profile. What you should take away from my presentation is that BD2025 has proven to be the right strategy. We're executing very well and have set the foundation for durable, profitable growth. I want to remind you very briefly here that I will be making some forward-looking statements, and I encourage all of you to read the disclaimer in today's slides and disclosures in our SEC filings, which are available on the IR website. For 125 years, BD has been driven by our purpose of advancing the world of health. Our solutions are concentrated in discovery and diagnosis and the treatment of disease, whether or not that's from the delivery of medications or interventionally through medical devices. We're an innovative med tech leader with approximately $19 billion in worldwide sales, and our 77,000 global associates deliver products that are often referred to as the backbone of health care. We make over 37 billion devices a year, and we serve patients in more than 190 countries, touching more patients than any other med tech company in the world. Our contributions to advancing health care are enabled by our customer-focused innovation, our world-class manufacturing capabilities, outstanding quality and our unmatched global scale. Through our BD2025 strategy, we're developing bold, innovative solutions that are transforming the future of health care. We built our 2025 strategy around 3 pillars, which are: accelerating growth, simplify the company and empower our associates. For nearly 3 years, through the execution of BD2025, we continue to accelerate durable, profitable growth with a focus on multiple attractive end markets, and I couldn't be more proud of our organization for our progress and our momentum. Our FY '22 performance reflects our strategy in action. And the dedication of our global teams who reliably served our customers, controlled costs and through foresight, focus and agility enabled our enhanced and very differentiated performance during a challenging environment. With base revenue growth of 9%, we exceeded our revenue and earnings guidance and achieved our margin expansion goals. Our strong organic growth reflects consistent growth of our durable core and accelerated investments in higher-growth transformative solutions. It also reconfirms that our BD2025 strategy is balanced, it's robust, it's resilient, even in difficult environments. At Investor Day in 2021, we outlined our plan for sustained shareholder value in 5 key areas. And execution of all of those 5 pillars is well underway and it's on track. Our simplification programs that we've talked about in the past include simplification of our manufacturing network, our portfolio and our recently initiated operating model simplification programs. We're creating a more agile and focused organization that's delivering on our margin expansion goals while continuing disciplined capital allocation strategy, and ultimately, delivering shareholder value. Now today, we're going to highlight how we're well positioned to continue to deliver our long-term revenue growth goal of 5.5%-plus. As we look at FY '23 and beyond, I've never been more excited about the future of BD. We entered FY '23 with 2 proven years of performance and momentum towards achieving our 2025 fiscal targets. This is reflected in the midpoint of our currency-neutral FY '23 guidance of 5.75% base revenue growth and double-digit EPS growth. This growth in part is driven by our shift into higher growth end markets through investments we're making both in organic R&D and in tuck-in M&A, which is systematically increasing our WAMGR across our portfolio. While we're in our quiet period and we will report our Q1 financial results in early February, I can share that we are confident in our progress towards achieving our FY '23 guidance. This is true despite the continued macro environment challenges, including those that are happening in China as a result of the most recent COVID restrictions that are impacting all companies. Our portfolio is built upon 2 axes. Our durable core, which represents just under 80% of our revenues today; and it's comprised of products and solutions that, as I mentioned before, have become known as the backbone of health care around the world. Today, more than 90% of patients admitted to a hospital are touched by those products. These are essential products like catheters, PICCs, infusion pumps, IV sets, Vacutainer tubes and hernia mesh. We're the leader in nearly every major category we serve in our durable core with about 85% recurring revenue, which reflects the strength and the quality, reliability of our supply chain and the continuous innovation that we have in products in that portfolio. This creates a very stable and resilient business that delivers durable and consistent growth. And secondly, we have our transformative solutions, which represent about a little over 20% of our revenues today, which are growing high single digits. These transformative solutions align to irreversible forces that we see reinventing the future of health care and are driving a step change in our customers' abilities to improve patient outcomes. We're enabling smart connected care through AI, through informatics and robotic solutions that are transforming fundamental health care processes, tools and treatments. We're focused very particularly in the areas of pharmacy and laboratory automation, medication management and nursing productivity. As care increasingly moves to new settings, such as surgery and ambulatory centers, retail clinics and into the home, we're enabling that shift with solutions that are tailored to improve outcomes, lower costs and more directly empower patients in these settings. And finally, we're applying our advanced device technology and we're developing new solutions that address chronic disease outcomes, which represent one of the most significant health care and financial challenges to face societies in the 21st century. We bring this portfolio strategy to life through very thoughtful and purposeful choices in our investments across R&D, CapEx and M&A. We invest about 6% of our revenue in R&D with about 60% of that spend targeted to higher-growth transformative solutions. We deploy about $1 billion a year in CapEx, and most of those investments are focused on strategic, value-creating programs that support growth, such as capacity expansion in our durable core. We're acquiring key technologies that support new product development. And each year, we have the capacity to invest about $2 billion in tuck-in M&A to enhance our growth profile. Our FY '22 acquisition of Parata Systems is a great example of a recent tuck-in acquisition to move BD into the fast-growing pharmacy automation market, where we're now a leading player. This balanced approach to investment is enabling continued strong growth in our durable core while increasing the mix towards higher-growth, transformative solutions markets. As a result of this, in FY '22, we made terrific progress, increasing our WAMGR in both axes of this portfolio. We are well on track to achieve our increased WAMGR targets of about 8% in transformative solutions and about 4.4% in our durable core, positioning us to drive our target of consistent, durable growth of 5.5%-plus through FY '25. Now R&D continues to be a key enabler of our growth, and we continue to expect net incremental revenue from new products to more than double by FY '25. In FY '22, we made great progress towards that goal, increasing the incremental revenue contribution to about $1.1 billion. Not only have we improved our productivity, we're also executing very well against key programs that significantly advance our innovation program. Last year, we had 25 new product launches that reinforce many of our leadership positions. Today, we have, what I believe, is the strongest pipeline in our company's history, delivering more impactful products for our customers on time and faster than ever before. Our pipeline includes over 100 launches expected by FY '25 with multiple compelling high-growth opportunities. Of these launches, we expect 25 or more will have the potential to generate over $50 million in fifth year sales, incremental. And then we have another $20 million that could deliver an incremental $30 million over the same 5-year period post launch. Next, I'll highlight a few key end markets that are driving our growth in some of the exciting products in our pipeline. Our BD Medical segment is focused on improving medication delivery across a wide range of settings, making it safer, making it simpler, which leads to less labor; and making it smarter, which helps make it more cost-effective. And some of the key end markets served by medical are vascular access management, medication management solutions, pharmacy automation and pharma and biotech drug delivery. One of those higher-growth end markets that we're really excited about is pharmacy automation. It's a $1 billion space that's growing about 10% as macro trends across the industry are driving growing demand for automation solutions. These trends include the centralization of pharmacy services in large fulfillment centers and increased clinical demands on pharmacists and hospital and retail settings in addition to increased wage inflation, labor attrition and pharmacist burnout. And so by automating the more routine work within a pharmacy, such as vial filling or packaging and central fill and implementing intelligent workflow solutions, we're enabling pharmacists to focus more of their time on patient care on doing things like wellness checks and medication adherence rather than sitting in the back counting pills. We've been very pleased with our customer response and the performance of Parata in the short time that we've been together with growth continuing to meet and exceed our expectations. Within the pharmacy automation pipeline, we're really excited to drive the innovation around our Parata Max 2 automated vial-filling solution, which integrates pharmacy automation with our broader connected management portfolio. We're going to continue our cadence of integrating pharmacy workflows through software, driving connectivity of our new MedKeeper acquisition and the Parata Coreflex inventory management system with our BD HealthSight enterprise solution. Moving on to Life Sciences. Our Life Sciences segment provides solutions from discovery to sample collection and diagnosis. We serve very dynamic end markets like single cell analysis, clinical microbiology, molecular diagnostics and point-of-care. Just to highlight one of those areas, the $3 billion single-cell analysis market is growing about 5.5%. At its core, single-cell analysis is driving a deeper understanding of the human immune system, and it's helping researchers and clinicians unlock its power to fight life-threatening diseases like cancer and infections, including COVID-19. We serve this end market through our Biosciences business, which has an integrated solution of self-sorting and analysis instruments, reagents and informatics to support our customers in academia, biopharma and reference labs and in hospitals. Our robust innovation pipeline builds on our established category-leading products and cell sorters, analyzers, reagents, informatics, and creates a unique set of solutions that enable our customers to design, to run and analyze critical and complex research experiments. We very recently launched the BD Research Cloud, which is the industry's first cloud-based workflow optimization tool for flow cytometry. And we continue to launch new BD Horizon, RealBlue and RealYellow reagents that feature next-generation BD dye technology and utilize AI-guided fluorochrome selection to optimize the spectral positioning and performance within research studies. We're extremely excited for the upcoming launch of our FACSDiscover S8 cell sorter with BD CellView technology in the second half of FY '23. This time last year, this product was featured on the cover of Science Magazine and is the world's first spectral cell sorter that also features high-throughput, real-time imaging. We're leveraging decades of leadership experience in cell sorting to bring forth first-to-world innovations. And the FACSDiscover S8 will provide an opportunity for the utility of flow cytometry to expand into entirely new areas beyond immunology. The Discover S8 cell sorter, combined with our reagents and integrated software solutions, enables an entirely new level of biological depth of speed, of ease of use and solution integration for our customers. We move over to our Interventional segment. There, we're transforming health care with solutions for chronic disease management. We serve end markets that dramatically improve people's lives, such as peripheral vascular disease, oncology, incontinence and advanced tissue repair and reconstruction. Today, I'm going to focus on our -- on the $5 billion peripheral vascular disease market. It's a space that's growing about 6%. And building on our leadership position in peripheral vascular where we have a comprehensive set of solutions in arterial, venous and renal disease, we've recently expanded our portfolio in the rapidly expanding venous disease market. Venous disease is a very significant problem with roughly 10 million cases a year and thromboembolytic conditions accounting for 1 in 4 deaths worldwide. In the second half of last year, FY '22, we relaunched our venous Venovo stent, and we launched it for the first time in China. We also launched the Aspirex thrombectomy device, which was acquired through the Straub acquisition. Last year, we also acquired Venclose and continue to drive market penetration with that platform. This radiofrequency ablation technology is our first offering to address chronic venous insufficiency, which is currently the largest global market in the venous space. As we look ahead over the longer term, we have exciting organic investments to continue to expand our leadership position in arterial disease. A couple of key examples include our new sirolimus DCB program, where we've continued enrollment in our first-in-human trial; and our new low-profile stent graft, which is tracking to start enrollment in an IDE trial later in the second half of this calendar year. So what does all of this add up to? The future has never been brighter for BD. We've demonstrated a powerful combination of innovation and strong execution and have the talent, the vision and the momentum to continue delivering robust performance. As we move through the back half of BD2025, you can expect to see continued relentless focus on execution of our strategy. We're well positioned to drive profitable growth and create long-term value. And our form is simple, it's reliable and it's impactful. First, we have consistent, durable growth profile. Our leading solutions deliver an 85% recurring revenue stream. Second, we are enhancing our leadership positions through very purposeful, strategic investments in higher-growth markets through both R&D and tuck-in M&A, increasing our WAMGR across our portfolio. Third, we're improving our margin profile through growth, through enhancing simplification programs and ongoing supply chain excellence. Fourth, we have increased capacity to deploy capital and are committed to remaining disciplined in that and maintaining a strong and flexible balance sheet. All of that adds up to a very compelling financial profile with targeted base revenue growth of 5.5%-plus and double-digit EPS growth. Again, I'm very proud of our progress and our momentum, and I've never been more excited about the future and about our pipeline. Our associates are bringing our strategy to life as we operate as a more agile, innovative med tech leader. So thank you for your continued interest, and I look forward to providing our Q1 results on our February 2 earnings call. I think Chris is going to join me on stage, and we'll look forward to taking questions, Robbie. Thank you.

Maybe we could kick it off. Becton, Dickinson spans a lot of different markets, a very global company. Would love to hear what you're seeing globally in terms of health care trends, return to hospital patient volumes. And also, you do touch on the capital equipment space. So what you're seeing in terms of capital equipment?

Sure. I could start on that. Certainly, we're seeing the continued rebound post COVID. We've seen that here in the U.S., obviously, faster outside of the hospital, little slower inside the hospital, both continuing progress. On the capital side, we're not seeing any change from a capital demand perspective. I think, certainly, for us, a lot of our capital are direct solutions to many of the challenges that are putting economic pressure on health systems, right? So if you think about laboratory automation, you can run a microbiology lab with 2/3 less staff when you deploy our capital. If you think about pharmacy automation, right, it's replacing increasingly expensive labor or difficult-to-find labor. So we're seeing tremendous double-digit demand for pharmacy automation. So I think in part, we may be not seeing those types of impacts maybe others have commented on just because of the nature of our products and the role that they play in improving outcomes -- economic outcomes for our customers. I think in China, China has been -- China always amazes me. We certainly saw huge COVID wave still moving through China. But the resiliency of our organization there, we see absentee in our plants go up, wave go through and then drop right back down and being able to prevent stock-outs of products. Truly just -- I can't comment enough on the quality of our China organization and the performance of China. I think us, like most companies I mentioned, everyone will see some impact of that in the past, but we're navigating that very well. Last year, of course, we delivered double-digit growth in China despite the lockdowns in Shanghai, which again, I think, reflects the strength of our team there. Any other comments Del?

I just want to remind folks that our portfolio is pretty durable on 2 fronts. 85% of it is recurring revenue base. So we're not as impacted by these larger capital installs. And to Tom's point, our capital that is being acquired, it's directly affecting one of the key opportunities in the market now around labor shortages, cost of labor, those elements. I would also add, I feel like we've kind of moved into this new norm, right? We kind of keep looking back pre-COVID. And I think things are relatively stable is what we're seeing. You're actually more seeing the dynamic of the hospital system, this labor issue and then reacting to that, where do they have shortages. Again, the nice thing about the BD portfolio is we're providing care in the most critical areas, right? So as they're prioritizing patient need, BD is always at the forefront of any procedure being given. We're less exposed to, what I would call, elective, deferrable type of procedures.

Does that comment hold in China today as well where there's a really dynamic situation?

Yes. I mean, maybe anchoring against what happened last year just as an optic, I mean, we were a consistent double-digit grower. We were impacted and everyone else , in call it, our fiscal Q3, but we still grew and it was close to flat. In particular, our BDI business posted strong growth in China. We had talked about that. So we'll comment on Q1 as we go through this. I think you're going to see a broad marker impact that everyone's signaled, but BD does have a durable business, and we still feel good about our total growth rate for the year.

And we had made a comment in our '21 Analyst Day presentation that we saw China growing at or near double digits through BD2025, and there's nothing changed in there.

Great. So Becton has actually done a really good job standing out amongst peers over the past year or so through these difficult cost environments and supply environments. So 2-part question here. One, what has enabled you to do that as an organization? And then second, is there anything we should be looking out for on that front as it relates to Becton, Dickinson in the coming year?

I can start with -- start on that. Again, huge kudos to our team. I think we had the foresight to look around the corner a bit. And very early on in the pandemic, we declared there's going to be a few things that no one on the planet is going to avoid, and that's going to be inflation. No one's going to avoid supply chain challenges. But -- so under that premise, kind of no one's going to avoid them, we want to be the best in med tech in navigating them. And we declared that very publicly. We declared it inside, and we set out to do that. And so we started very early on doing prebuys of things like computer chips is why we've been able to continue to deliver our instruments, whether or not it's infusion pumps or flow cytometers, et cetera, throughout the last several years. We did prebuys of things like resins, et cetera, to make sure that we had those materials. We have extremely robust planning process, things like when hurricanes start coming up or when there was the railroad strike. We own our own railroad spurs off of the main railroad. And so our systems, as soon as we see a risk, we'll start prebuying and just parking extra railroad cars on our own spurs. And in an event that something happens on the strike, we can keep running our plants for a month-plus because we have our own things just parked sitting there waiting. These are the types of systems and processes that we've built over the last couple of years, which have helped us be robust and continue to deliver strong performance over that period of time. We did have benefits where others couldn't provide. We were able to step in for our customers and be known for reliability of supply. We picked up some business during that process. But it really comes down to looking around the corner and then executing well against that. Again, as I mentioned, at the heart of the company, we're an innovation and a manufacturing company, and I think that strength in manufacturing has served us well in these times.

Yes. I just -- I think it's 2 things. We did benefit from the early work that we've done in terms of BD2025. One, the accelerating growth rate, having strong growth profile gives you flexibility as you think about how to drive growth in a supply-constrained environment, driving mix, creating value for your customers, new product launches. So having an outsized growth profile certainly was helpful. There was a lot of focus on the organization. We've been very transparent about, one, our purpose, the organization rallying against that; and our goals as it relates to BD2025, what do we need to do; simplify, we have set the path for that ahead of some of these macro dynamics, but we took an opportunity to really lean in and accelerate our simplify agenda and actually add to it. All of those things kind of compounded and created a really healthy dynamic. We went as far to even think about how we measure ourselves internally and shift from just driving top line growth but focused on profitable growth. We knew inflation was going to be a big headwind, and it drives a very different behavior internally when you're talking to your sales team. It's not just about growth and top line, it's actually how we grow. So there's a lot of little things that we did. We're going to continue to be proactive. I think the one thing that's been unique is we've had a posture of assume the worst, create multiple levers that we have at our disposal to be able to react to the uncertainty that's happening in the marketplace and have a place to kind of pivot and be able to make trade-offs within our P&L.

Tom, one of the questions I get from investors a lot is you have 3 seemingly different businesses at Becton, Dickinson. What ties it all together? What's the core competency that you have? And maybe I'll ask a follow-up on that after.

Sure. So they're actually highly related, right? It's actually the health care process is BD. We diagnose disease and then we treat disease. And the way you treat disease is you deliver medications, which we have in large, that's our Medical segment. And the other way you treat disease is with devices itself, which is our Interventional segment. And so that's BD in the heart of it. Of course, what we apply across those segments are that manufacturing scale and capabilities to be excellent at producing all 3 of those segments. We're a large-scale manufacturer, but we're leveraging our capabilities and procurement and logistics and manufacturing to be excellent and produce very, very high levels of quality. We leverage our global footprint across all 3 of those, serving over 190 countries around the world. And we leverage expertise in R&D. We have a number of centers of excellence, as an example, that all 3 of those segments tap into. So you think about digital and where the world's been going there, every single 1 of our 8 businesses across the company have active digital AI automation programs underway, and all of them are tapping into the BD Center of Excellence, where we have over 2,500 software engineers and data scientists working across the organization. We have centers of excellence in many other areas as well, in instrument design, in reagent design, in animal testing for clinical studies, et cetera, that are leveraged across all of our different businesses. And we're seeing -- ultimately, when we go to our customers and we talk to them about our range of solutions, I end up -- and I often talk about our pipeline. I'd say, it's pretty even the reaction when I talk to health care system CEOs. There's high interest in what we're doing in diagnostics, let's say, how we're going to enable blood testing to shift into the home or the retail setting, how we're going to enable diagnostics to ship into the home. They want to know how can we help deliver medications in those new care settings, how can we help treat chronic diseases in those care settings. It's the issues, how are we going to diagnose patients better, how are we going to deliver medication safer and more effective in new settings, how are we going to help improve the burden of chronic disease in a greater way. These are the issues that health care systems are facing, and this is where BD is very relevant today and increasingly so as we look forward.

So one area Becton, Dickinson has stood out from competitors, especially over the past year, has been on pricing. You've always been probably the best in the med tech sector, flattish pricing year-over-year. We've seen that tick up a little bit over the past year. I guess, what's enabling you to be able to take price? And how sustainable is this ability?

Sure. So our price is the last lever that we look at. We've been very rigorous in terms of driving our own continuous improvement up in our plants as we've seen the increase in inflation that's impacted almost every company around the world. First, we look internal and we say, how can we offset that. We've been extremely responsible steward of health care. If you think about a syringe, we sold a syringe for $0.10 forty years ago. Up until last year, we still sold a syringe for $0.10. There's not many products on the planet that you could buy today at the same price that you bought it 40 years ago. I think that's just a representation. The same thing is true for Vacutainer tubes, flush, et cetera. We've been extremely fortunately to be able to deliver continuous improvement savings that have offset the impacts of inflation for decades. And so in this environment where inflation went up at a hyper level for a period of time, we spent quite a bit communicating with our customers how, first, we offset a significant portion of that actually a higher portion than we ever have in the history of the company. And then we did have to pass through a portion of that to our customers so that we can continue to invest as we look forward. And so it's being transparent. It was being proactive. I think we were the first company out having those discussions and being transparent, again, looking around the corner. And our intention is, certainly, there's capabilities that we've built there. But again, we remain strong stewards of health care cost controls and effectiveness as well.

Great. I would just add as you have those discussions and engage, of course, supporting customers, right, reliable supply, the investments we're making in inventory, the investments we're making in capacity and making sure they have a holistic understanding and we're delivering on their product needs. At the end of the day, if they can't deliver for the patient, that's most important for all of us. So it's all part of the equation.