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

Thanks, everyone, for attending the 43rd Annual Conference. This is the first under the TD Cowen brand. I'm Josh Jennings from the medical devices team, and we're thrilled to have Becton, Dickinson in our presence and presenting this year. We have Tom Polen, the Chairman, President and CEO of Becton Dickinson. Tom, thanks so much for attending this year, for presenting. If there's time at the end, we may have a couple of questions for you.

Sounds good. Thank you.

All right. Over to you.

Thanks, Josh. Thanks for having me. I've got a little bit of an echo here. I don't know if we can manage that. Thank you. So thank you, Josh, and it's a pleasure to be here today, and thanks to everyone for your interest in BD. Just to remind everyone, I will be making some forward-looking statements. I encourage you to read the disclaimer in today's slides and the disclosures in our SEC filings, which are available on the IR website. So as we connect today, we're approaching the halfway point of executing our BD2025 strategy. And I thought it was very important to reinforce the exciting vision we have for BD, the great momentum we have against our BD2025 goals, and the value creation we're creating. For those of you who may be new to the BD story, BD is an innovative med tech leader with approximately $19 billion in sales worldwide. For 125 years, we've been driven by our purpose of advancing the world of health. It's enabled by our customer-focused innovation, by world-class manufacturing capabilities, outstanding quality and unmatched global scale. Our associates around the world deliver a portfolio of critical products and solutions that are known as the backbone of health care. We make 37 billion devices a year and serve patients in more than 190 countries. We touch more patients than any other med tech company in the world. Our solutions are concentrated in 3 essential areas of the care continuum. Disease discovery to diagnostics, to the treatment of disease, and either through medication delivery or interventionally, we treat disease through medical devices. These 3 areas will continue to be extremely relevant to our customers as they demand new and improved solutions to address their greatest challenges. In November of 2021, we laid out our BD2025 strategy to drive strong durable growth by bringing to market bold innovative solutions that will help transform the future of health care. And we've been executing this comprehensive plan to simplify the company in order to increase shareholder value. We've made significant progress executing and delivering on our strategy. And now that we are at the halfway point, I want to reinforce the vision and the progress we've made. We've taken a series of bold actions that balances preserving our durable and strong growth profile, while pivoting us into higher growth end markets, where we can extend our leadership positions. Today, over 75% of our portfolio is in very durable markets, where we also hold a leading share. We classify this as our durable core, which has strong mid-single-digit growth profile. However, what may be underappreciated is that as a result of our strategy execution over the last several years, about 25% of our portfolio is now in high single-digit growth markets, which we classify as transformative solutions. This growing portion of our portfolio is built around 3 irreversible forces that we see reshaping health care over the next decade. These are the areas of smart connected care, including AI and robotics that are applied to transform basic health care processes, in areas like the pharmacy and the laboratory and in nursing. The second area that we're focused on in transformative solutions are technologies that enable a shift to new care settings, whether or not that's ambulatory surgery centers, the retail clinics or all the way into the home. And the third area that we're applying transformative solutions in and investing behind is applying medical technology to improve outcomes in patients with chronic disease. These are an attractive end markets and each of them are priority areas for health care with strong forward-looking growth. This formula across our durable core and an increasing mix of transformative solution results in a very strong growth profile that also preserves consistent and durable growth. For example, our expected currency-neutral total and organic base 2-year average growth profile from FY '22 and '23 at the midpoint of our guide is approximately 8% and 7%, respectively. This is tracking well above our 5.5% plus BD2025 top line growth commitment that we made at our Investor Day. We're achieving this through portfolio optimization and increased R&D productivity, where we have not only increased the percentage of our R&D investments, we've also driven better outcomes through improved milestone and launch timing achievement, demonstrating our commitment to excellence and execution. It's important to note that our targeted growth rate does not have a high dependency on larger, higher-risk programs, which is another benefit that supports a strong and durable growth profile. Another new lever that is different from BD's historical growth profile is creating value through tuck-in M&A. Over the last 3 years, we've invested $3 billion in high-growth transformative solutions that in FY '22 enhanced our organic growth profile by about 30 basis points. We expect this impact to continue to increase with an expected 50 basis points benefit in FY '23 once we anniversary our most recent acquisition of Parata Systems, which moved BD into the fast-growing pharmacy automation market, we are now a leading player. We expect this to have a compounding effect over time and continue to enhance the attractiveness of the growth profile of BD. Additionally, we have established strong integration capabilities to ensure we not only capitalize on the growth potential but that we effectively and efficiently integrate the business to support our margin and earnings growth goals. And for the 19 acquisitions that we've done over the last several years, we certainly have been executing well across the board. BD's brand has always been a company with a reliable growth profile, and that remains unchanged. So let me spend some time talking about how we're taking that to the next level. I know it's easy in the current environment that all companies are navigating to focus on overcoming micro or shorter-term issues. But it's also been never more -- it's never been more important to take a step back and look at the bigger picture, and ensure that our priorities are not just enabling short-term success, but are progressing our longer-term strategy. It's critical to balance agility and impactful responsiveness with thoughtful and intentional actions that progress long-term value. And our BD2025 strategy is critical, but it's also just one step on a path to an even more compelling BD value proposition. Beyond growth, BD2025 strategy also outlines clear plans to create value through our simplification and empower pillars, which is freeing up capacity, freeing up resources and investment to support our first pillar, which is profitable growth. And we've uniquely positioned ourselves as a company that can execute and deliver strong results and consistent results in the most complex of times. Our simplification programs have enabled us to absorb inflationary headwinds while still delivering meaningful margin improvement. We remain ahead of the goals we set out to deliver at Investor Day and achieved 50% of our margin expansion goal in the first year, and we're on track to achieve more than 70% of our goal by the end of this year. This is a meaningful accomplishment given the macro headwinds, and is a testament to the capabilities and commitment of our associates worldwide. Of course, the work doesn't just stop there. We've identified additional levers, which we've already initiated, and it can help continue this momentum that we've built towards delivering our margin goals while fueling growth. Examples of this include the onetime strategic portfolio exits and their benefits that we've absorbed in our financial outlook for FY '23, the Project Recode network and SKU rationalization programs and more recently, the programs that we've launched around simplifying our operating model. This is all in addition to natural leverage we will realize from our strong growth profile. Back in 2021, I said that our aim was to be best-in-class in navigating the challenging environment that we saw coming out of the pandemic, namely inflation and supply chain disruption. And today, I can confidently say that we were among the best positioned to navigate macro complexity and inflation because we acted early and we acted with speed to structurally address the headwinds. And this creates upside opportunity as inflation eventually abates. All of this supports a compelling value creation opportunity. And while we're very pleased with the progress to date, we're even more excited about the opportunities in front of us and are confident in the long-term value potential of BD. I'll now share some more detail on how we're investing behind our strategy and provide further detail on our innovation pipeline, and the multiple attractive end markets that we're focused on. We continuously invest in our portfolio through very thoughtful and purposeful choices across R&D, CapEx and M&A. We invest about 6% of sales in R&D, with 60% of our spend targeted to higher growth transformative solution markets. We deploy about $1 billion annually on CapEx, and most of these investments are focused on strategic value-creating programs that support growth, such as capacity expansion in our durable core, and acquiring key technologies to support new product development. On average, each year, we have the capacity to invest about $2 billion in tuck-in M&A to enhance our growth profile. And when we look at potential M&A, we're looking to make acquisitions in adjacent areas with high growth rates and attractive margin. This balanced approach to investment is enabling continued strong growth in our durable core while increasing the mix towards higher-growth transformative solutions. And as a result of this formula, we're making terrific progress increasing our WAMGR in both axes of our portfolio. And I'm pleased to say that we're well on track to achieve our increased WAMGR targets of about 8% in transformative solutions and about 4.4% in our durable core, which is positioning us to drive our target of consistent, durable growth of 5.5-plus percent through FY '25. Now through our R&D initiatives, we expect net incremental revenue from new products to more than double by FY '25. In FY '22, we made good progress towards our goal of increasing the incremental revenue contribution to about $1.1 billion from new products. Not only have we improved our productivity but we're also executing against key programs to significantly advance our innovation pipeline. This includes 25 new product launches last year, which reinforced many of our leadership positions, and closing out the year achieving record levels of milestones and on-time launches. 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 incremental revenue and another $20 million or more to deliver over $30 million in peak year, fifth year revenue. These new product launches will make meaningful differences in key end markets that are driving our growth and awarding us the right to win in the categories they serve. Now diving deeper into each of our segments, our Medical segment is focused on improving medication delivery across a wide range of settings, making it safer, simpler with less labor and smarter to be more cost-effective. Most of the key end markets served by our medication -- by our medical segment are Vascular Access Management, Medication Management Solutions, Pharmacy Automation and Pharma and Biotech Drug Delivery. One of the higher growth end markets we're excited about in BD Medical 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 and large fulfillment centers and increased clinical demands on pharmacists and hospital and retail settings, in addition to increased wage inflation, labor attrition and pharmacists burnouts. By automating the more routine work within a pharmacy, such as vial filling, packaging and central fill and implementing intelligent workflow solutions, pharmacists can focus more of their time on patient care, on doing things like wellness checks and medication adherence rather than standing in the back counting pills. We continue to be very pleased with both the customer response and the performance of Parata in the short time that we've been together, with growing continuing interest from our customers, and we continue to exceed our own expectations on the deal model. Within the pharmacy automation pipeline, we're very excited to drive innovation around the Parata MAX 2 system, which is an automated vial-filling solution. We're integrating pharmacy automation with our broader connected care management portfolio and see very strong momentum as we look forward. We continue our cadence of integrating pharmacy workflows through software, driving connectivity of our recent MedKeeper acquisition and the Parata Coreflex inventory management system with our BD HealthSight enterprise solution. Turning over to Life Sciences. Our BD Life Sciences segment provides solutions from discovery to sample collection and diagnosis. The end markets we serve include single cell analysis, clinical microbiology, molecular diagnostics and point of care. The $3 billion single cell analysis market is growing about 5.5%. At its core, single-cell analysis is providing a deeper understanding of the human immune system and is helping researchers and clinicians unlock its power to fight life-threatening diseases like cancer and infections like COVID-19. We serve this end market through our biosciences business with an integrated solution of cell sorting and analysis instruments, reagents and informatics that support our customers in academia, biopharma, CROs and hospitals, who work across basic research, translational research, clinical diagnostics and patient monitoring. Our robust innovation pipeline in this business builds on our established category-leading products in cell sorters, analyzers, reagents and informatics and creates a unique set of solutions that enable our customers to design, run and analyze critical and complex research experiments. In September of last year, we 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 artificial intelligence-guided fluorochrome selection to optimize spectral positioning and performance. We're very excited for the upcoming launch of the FACSDiscover S8 cell sorter with BD cell view technology in the second half of FY '23. This is the world's first spectral cell sorter that also features high throughput, real-time imaging. We're leveraging decades of leadership in cell sorting as well as first-to-world innovations that BD acquired many years ago into the FACSDiscover S8, that's going to provide an opportunity for the utility of flow cytometry to expand into entirely new areas of research beyond immunology. The FACSDiscover S8 cell sorter combined with our reagents and integrated software solutions enables an entirely new level of biological depth of speed, ease of use and solution integration for our customers. Finally, turning 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, treating oncology, incontinence and advanced repair and tissue reconstruction. The peripheral vascular disease end market is a $5 billion space that's growing about 6%. Building on our established leadership position in peripheral vascular with a comprehensive set of solutions in arterial, venous and renal disease, we've recently expanded our portfolio in the venous disease market. There are roughly 10 million cases of venous disease each year, and thromboembolitic conditions account for 1 in 4 deaths worldwide. Last year, we relaunched our venous Venovo stent, and launched it for the first time in China. We also launched the Aspirex thrombectomy device, which was acquired through our acquisition of Straub Medical. We also continue to drive market penetration with Venclose which is a radio frequency ablation product we acquired last year. This was our first offering to address chronic venous insufficiency, which is currently the largest global market in venous space that we're just getting into now. In the long term, we have exciting organic investments to continue to expand our leadership position in arterial disease. Some key examples include our sirolimus DCB program, where we have continued enrollment in our first in-human trial; and our new low-profile arterial stent graft, which is tracking to start enrollment in an IDE trial later in the second half of this calendar year. Before I share some highlights of our portfolio progression, let me just take a moment to discuss Alaris, which remains our #1 priority as a company. We're making good progress and continue to have very productive discussions with the FDA. While we don't comment on the status of the review or approval timing, we continue to take the necessary steps to provide the required regulatory information and support our customers upon clearance, and we remain confident that we will get clearance and we will get Alaris back to market. To date in FY '23, we have had 9 new product launches already, which are systematically increasing the WAMGR across our portfolio and supporting our growth profile. Just this past quarter, within our Medical segment, we launched PosiFlush SafeScrub. PosiFlush is a prefilled flush syringe with an integrated disinfection cap, which is designed to simplify nursing workflow and enhance compliance with infection prevention guidelines. It's a really good example of how we're driving continuous improvement that extends our leadership in our durable core and within the broader $9 billion Vascular Access Management market. Within Life Sciences, we're continuing to expand our menu offerings on BD MAX. And last month, we received emergency use authorization for our BD MAX respiratory viral panel. This panel detects COVID-19, Flu A, Flu B and RSV in a single test. And it's an ideal solution for endemic respiratory testing. We see this as the go-to panel for respiratory symptoms like flu or COVID as we go forward. This aligns to our strategy to accelerate our growth in the $4 billion molecular diagnostics end market that's growing about 9%. And within the peripheral vascular disease end market, we continue to make progress on our strategy to globalize the Bard and BD Interventional portfolio with the recent launch of our Venovo venous stent in China. It's the first stent in this market specifically designed for iliofemoral venous disease. Furthermore, we continued strong achievement of critical milestones in the last quarter. In our Medical segment, this included our new PowerMidline catheter, which was given clearance by the Chinese regulatory agency, NMPA. We saw pictures this morning of it actually being used in the first patient in China over the last 24 hours. This was designed by our R&D center in China for China, and is our first midline in this geography and offers up to 30 days of continuous venous access while reducing patient complications. We're pleased to announce that we launched PowerMidline late last month and are excited about the opportunity it creates to help develop a new category for vascular access in China. We also continue to progress our strategy in blood collection at the point of care within our Life Sciences segment. Point of care is one of the faster-growing categories in diagnostics today that we believe will accelerate its diagnostic testing migrates to new and more convenient care settings such as retail clinics and pharmacies and even the potential of collecting your own blood at home one day. Our BD MiniDraw capillary blood collection system is a disruptive innovation that enables collection of a high-quality blood sample without a venipuncture and is designed to provide a better patient experience across the broad range of care settings. We remain on track to file our 510(k) submission for MiniDraw by the second half of FY '23. And within Interventional, we achieved a significant milestone this past quarter completing safety testing for our multi-modality vacuum-assisted biopsy system. And we're on track for FDA submission and launch in FY '24. The BD Multi-Modality VAB device is expected to be the first vacuum-assisted biopsy system designed to work across all 3 imaging modalities of ultrasound, CT and MRI, allowing customers to not have to need individual, totally separate systems for each of those imaging modalities, but rather be able to standardize on one BD piece of capital equipment, standardized consumables, and simplify physician and nurse training as they only have to learn one device going forward. These launches and milestones are good examples of how we're strengthening our position in attractive end markets across our portfolio. In summary, we have a strong framework which is already yielding strong results. Through our BD2025 strategy, we are demonstrating a powerful combination of innovation, and strong execution. We also have the talent, the vision and momentum to continue delivering consistent durable performance. As we move through the back half of FY '25 -- 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 with a formula that is reliable, resilient and impactful in both normalized and challenging environments as you've seen us execute over the last several years. First, we have a consistent and durable growth profile. Our leading solutions have been known as the backbone of health care and deliver an 85% recurring revenue stream. Second, we're enhancing our leadership positions through very purposeful, strategic investments in higher-growth markets, through both R&D and tuck-in M&A increasing the WAMGR of our portfolio. Third, we're improving our margin profile through growth, enhanced simplification programs and ongoing supply chain excellence. Fourth, we have increased capacity to deploy capital and are committed to remaining disciplined in maintaining a strong and flexible balance sheet. And all of this adds up to a compelling financial profile with targeted base revenue growth of 5.5% plus and double-digit EPS growth. I'm proud of our progress and momentum and I've never been more excited about the future and our pipeline. Our associates are bringing our strategy to life as we operate as a more agile, innovative med tech leader. Thank you for your continued interest in BD. And Josh, unless we have any time, we'd be happy to take any questions that you or others have. Thanks.

Thanks, Tom. Maybe just to start on pricing investment, I think on the modeling, 3% pricing tailwinds in the quarter. And I wanted to just better understand the positive pricing dynamics. It's a differentiated piece of an effective story relative to other med tech companies clearly. We think it supplies as low-priced items without much price sensitivity to capture price. We talked how sustainable do you think this pricing in -- maybe if we could talk about the different kind of successes in the different buckets and where your wins are in the supply side on the transformation solutions side or durable care product lines.

Sure. So pricing is something that BD has always had a focus on. And historically, pre-pandemic, pre-inflation kind of rise, BD has always looked at being pretty good in pricing at flat pricing historically, while med tech overall had been down, let's say, 2 or 3 points. We -- as we saw, as I mentioned before, when the pandemic struck, we made some -- our own vision of what -- how the future is going to evolve and the future that we saw evolving over the next several years when we made these decisions in FY, early 2021, right in the early stages of the pandemic as we thought that this would be leading to supply chain disruption and inflation over time. And so we acted early on both of those areas, securing raw materials early. It's why we we're able to navigate, for example, the chip shortages pretty well with no significant backorders as a result of that because of some of the early stockpiling that we did. We also took action to beef up our pricing capabilities and build a pricing function. It's just like our other functions, like regulatory or R&D. We have a pricing function at BD that focuses on -- and that's something that we've really beefed up as we saw that the trends coming in inflation. And so I think as we look ahead, we've built durable pricing capabilities that will benefit us beyond kind of a peak inflation window that we're still in today. So we see us doing better than we have historically on pricing. I would say we're not pricing specifically just to get a net benefit out of it today, we are passing through the impacts of inflation, portion of those impacts, right? The first thing that we always talk about with our customers is that we're taking our own actions first, slimming out -- slimming down our own organization. We've nearly doubled the amount of continuous improvement coming from Kaizen and lean activities within our manufacturing plants. We've nearly doubled that productivity of those activities since the pandemic struck, again, first seeking to offset cost increases ourselves. But when we can't do that, and you can't do that when resins double or when energy goes up in your European plants certain levels or other raw materials go up at rates that haven't been seen in the last 40 years, we do pass through price. And we've -- pricing isn't isolated to just one portion of our business. Every business unit, every region is taking pricing action. That includes China, Asia, Latin America, emerging markets and the U.S. and Europe. So there's been -- the only other thing I'd mention is that we do view ourselves and our role and it's part of our purpose as being a steward of health care affordability. And something we're really proud of, right? We have -- if you think -- take about a syringe, it's been $0.10 for a syringe for 40 years because of what BD has been able to do to continuously offset cost increases over that period of time. It's hard to name another product in any of our lives that you can literally buy the same price 40 years ago up until more recently. Now those products like that, they had a higher percent increase on them more recently because $0.02 on a syringe is a 20% increase, right? But with that said -- so those are some of the areas, there are some, I'll call it, products that are less than $0.25. And BD is also a company that has a number of products that are less than $0.25, a syringe of Accutane or tube of flush, they're all less than $0.25. So on a percent basis, you see those going up more in the double-digit range, while other higher price products, of course, would be on the lower end on a percent basis.

And do you feel like you're having success, one of the big topics of interest investors in 2023 for the whole medical devices sector primarily is just the ability to stabilize prices has been a secular headwind that you guys have in place because of the efforts on portfolio probably you just discussed that. And you mentioned, are you seeing some price improvement or stabilization and how should we be thinking about that business specific.

Interventional prices are positive in the Interventional segment, for sure. As I mentioned, all 3 segments. There's not a wide differentiation across those from our pricing capabilities and impacts. So we are seeing that there. And I would just say that we've also learned -- remember, there had not been something that when you're doing pricing in this market, it's important to realize that most of your associates have never been through a cycle where there's been inflation, right? Most folks just based on the working ages, median working ages, they were in high school the last time. The majority of our organization that's in management positions, 40 years ago, may have been in high school, which was when there is inflation. And so it's a big culture change to create and new learnings to be had in doing that. And so because it had been 40 years, a lot of the industry had moved to, do contracts really need clauses to be able to raise prices in the middle of them? Well, pricing and input costs have been relatively flat for 40 years. So a lot of those practices had I'd say, gone by the wayside, we've brought all of those best practices back in. So all new agreements, for example, have CPI clauses built into them, have the ability to raise price proportionate to our cost inputs that are happening. So again, just another example of something more structural that we've put in place as a result of the environment that we've been in over the last couple of years.

Excellent. Thank you, Tom. I think we ran out of time here. We appreciate you participating in the Cowen Health Conference. It was really impressive.

Thanks, everyone. Appreciate it. Have a great rest of your week.