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

All right. Well, good morning, everybody. My name is Matt Miksic at Barclays. I cover U.S. Medical Devices. We're super pleased to have with us this morning the management team here from Becton, Dickinson. We have Chris DelOrefice, EVP and CFO; and Dave Hickey, EVP and President of Life Sciences. I wanted to first thank you both for coming. And it's my first year at this conference and it's been great so far. I wanted to take sort of like a little bit of a higher level view of the company, kind of step through what's driving the growth and what's driving the margin benefits that you've been able to deliver, in part because on the growth side, for a traditional Becton, Dickinson, I think a lot of people have been surprised, intrigued, and maybe a little skeptical that you can maintain this kind of higher tier of growth that you've started to deliver in the last couple of years. And then on the margin side, I think it's notable that in the landscape of medical device companies that are all facing headwinds and struggling to deliver some margin improvement this year, you delivered a pretty strong step-up in margins last year and a pretty strong step-up in this year on deck. So trying to get at maybe some of the drivers of those things. So maybe starting off, Chris, you talk often about these 3 pillars. And as sell-side analysts and investors, to be quite honest, a lot of times we see 3 pillars, we see a picture of a big thematic mission statement, and we kind of just move right to the next slide. But Tom and team really do refer to these things often as a construct to think about the company. And so in this case, sort of listening to you and drilling down into it, I think it's a meaningful construct to talk about. So maybe first starting with the investment profile and what is helping you sort of to drive this kind of growth? You talked about investing in R&D. Can you talk a little a little bit about how these programs that you have been investing in are tracking as a percent of sales, kind of where that goes over time just because you happen through overweight investing and higher growth R&D programs?

Yes. Perfect. Well, thanks for having us, Matt. So it's terrific to be here. Good morning, everyone. And I think I'm going to kind of pick up on, I guess, what you call maybe the pivot of BD a bit. So I think it's important to kind of anchor against the BD2025 strategy, and then I can talk about your question specifically on R&D, which is a key component of that, right? But we're almost halfway into the BD2025 time frame. As we set out that vision, we talked about transforming that growth profile, delivering this [ 5-5 ] plus. And so a very nice profile of very reliable mid-single digit [ 5-5 ] [indiscernible] but with lots of opportunities to drive the plus side equation of that. And I think what folks are starting to appreciate is, to your point, BD has always been a core player in health care, right? Our portfolio, we have critical products that are essential to care every day. We support the discovery, diagnostics, treatment of disease. And that always lends itself -- and we have strong leadership positions there, right? Deep moats, quality, strong execution. That's what most folks know. That always lends itself to a nice strong, durable, reliable growth profile that in and of itself is strong. Today, about 75% of our portfolio sort of fits that definition. What I think has been underappreciated is this pivot. We've been -- Tom, when he sent out the BD2025 vision, wanted to drive into, in essence, what would become the durable core or future durable core of health care, and we kind of call that transformative solutions. They are anchored against these 3 irreversible forces that we believe are going to shape health care. So connected care, new care settings, chronic disease, and driving solutions, innovation, products that really help improve outcomes through those irreversible forces. Again, that's about almost approaching 25% of our portfolio. And these opportunities we have on our portfolio are high single digit growers. Some are within double digits, but collectively as a portfolio we're talking about high-single digit growth. So we have been very focused on driving that through portfolio actions, both strategic portfolio actions, how we think of R&D, how we think of tuck-in M&A, which I'm sure we can talk more about, which is kind of a another new lever that BD has at its disposal. And so it's an exciting time, and what I think is really interesting is this pivot to a higher growth profile doesn't come with higher risk. It's still in these durable critical care areas where BD can have leadership positions. And we're not also -- we often get asked the R&D question. We're not dependent on these larger R&D programs that create a lot of volatility. So as I think of myself being a finance person and looking at how to make investments and triaging return versus risk, you guys think of it the same way in terms of as you think of companies. And I think you get the best of strong value proposition, coupled with a lower risk profile and you get that nice balance of durable, strong growth and actually an accelerating growth profile. So it's exciting. And like I said, we're actually doing this, right? We're halfway into this now. I think we've got enough data points where folks are starting to see this play out real time. If you look at our implied 2-year CAGR now almost 2 years into it, with last year's actuals about halfway into this year and the guide we gave, you're talking about an 8% growth profile or almost 7% on an organic basis. So even if you strip out the onetime lift from tuck-in M&A. So it's pretty compelling. On the R&D front, to your point, we've really been on a journey of increasing R&D productivity. The first thing we did is we felt like we were underinvesting in R&D, so we actually increased the amount of R&D to about 6% of sales. Everyone should understand that, that 6% is not equal across our portfolio. There's areas like Dave's area where we over-indexed. There's other areas where you maybe expect in some of our medical businesses where you don't need quite that same level. So it's not just a flat allocation. We look at where there's opportunities and the business helps drive, how to optimize that within our portfolio. So one, we increased the absolute amount. But more importantly, we've been very focused on productivity. So at Investor Day, we outlined a path where today, our contribution from R&D is worth about $800 million of incremental new product revenue on 5th year sales. So it's a forward-looking metric. It's a way to assess kind of the value of your portfolio. The goal is to more than double that by 2025, and we're already at $1.1 billion. So when you look at our portfolio from when we started our Investor Day presentation, our portfolio had 5th year incremental revenue value of about $800 million. That's already grown to $1.1 billion. And so that's helping our near-term growth rate, too, and that will continue. So -- in addition to that -- so that's kind of more of a forward view of how we're advancing our portfolio, but you have to couple with that, how are you executing against the short term. We launched 25 products last year. We had record levels of on-time milestone achievement, on-time launch achievement, and it's metrics that we look at in our monthly operating community meetings that we have all the time. So very focused on execution. And so then holistically, as you think through kind of the rhythm that will help that enhanced growth profile through 2025, we're talking about 100 new product launches over that, so roughly 25 per year on average. We do have some significant ones that can meaningfully drive growth. We have about 25 plus that are $15 million in sales or more and another 20 that are at least $30 million in sales. So we have some compelling innovation in the portfolio that we're very excited about. So again, collectively, I think that sets up the strategy, how we're thinking of growth, the R&D role, and we feel really good about how we've executed that almost halfway in.

Okay. That's a super comprehensive and helpful answer to get started and just may have covered already a lot of that pillar. I mean, one of the aspects of -- and I think you've described this when you talked about investing in R&D, that's basically your organic internal programs. You've been fairly acquisitive. And I would say, I mean, from a distance, less acquisitive in sort of big chunky platform ways and more acquisitive across your various business lines and visions. And so maybe, Dave, with that context, just maybe talk about in Life Sciences, what things you've -- how does some of what Chris just said translates down into Life Sciences and where the acquisition has been sort of driving or helping to drive additional growth?

Yes. That's a great question, Matt. Good morning, everybody. So I mean, if you think about Life Sciences, it's just 1 of the 3 operating segments. It's how we execute on our innovation programs. So we have a real sort of balanced focus on both organic innovation to drive growth, particularly in these transformative spaces that Chris has talked about, and we certainly see our revenue mix changing over time through BD2025 into those higher-growth spaces like point of care, like chronic disease, like smart connected care, and I'll talk about that in a second. But then there's also an inorganic piece as well. So probably one example I would call out, because we're just about a year in from that acquisition, is Cytognos. So Cytognos was a small private company out of Europe that had a very unique capability for looking at minimal residual disease in cancer. And we've now sort of acquired that and integrated that into our Biosciences business unit. So one of the things, if you think about Biosciences, it really is about the study and the analysis of cells to understand the human immune response. And one of the things that we put out there as a value proposition right at the Investor Day was that within Biosciences, being relevant and having a continuum from early discovery into diagnosis and then helping that diagnosis inform treatment and response in cancer was the value proposition. But we already had a really good portfolio in discovery and diagnosis, but we wanted that end piece of monitoring treatment. So we do a lot of work in leukemia and lymphoma, and Cytognos had got a really, really compelling platform, flow cytometry based, so it was consistent with our fields of expertise, and they had this sort of capability to look at minimal residual disease. So once somebody has been treated for cancer, you really want to know, do they have any residual disease left. So that was the big driver behind it. So now we've really stepped up our sort of relevance in that continuum of cancer diagnosis and care. And then, of course, one of the benefits that BD brings to it is, this was a small private company basically centered in Europe. We'll now look to sort of use our global footprint and scale to drive that forward. And then the one organic maybe example I will give, because one of these transformative forces that Chris talked about is what we call smart connected care. So this is the role of lab automation. It's a high-growth area. And it really is a double benefit. So we have platforms like our BD Kiestra, lab automation to fully automate and integrate clinical microbiology. We have platforms like our BD COR, which fully automates high-volume molecular and cervical cancer testing. And when you look at labs where they're faced with challenges of staff attrition, staff improvement, automation can actually help with that. But it also helps labs sort of become more efficient and process-driven and standardized at what they do. So they would be 2 examples I have.

Okay. So we're coming up on like about 10 or 11 minutes left. And before we maybe pivot over into sort of simplification and some of the margin programs, I'd love to get your sense of and sort of translation of digital health and connected care against almost anything to anybody, just depending on how you want to define it. But how -- and I guess how do you look at that? How like diffuse is that across the different platforms and businesses that you have? And if you look at your flow of sort of business development and strategic investment, where does that fit in terms of priorities and assets that you're looking at or acquiring?

Yes, it's a great question. Certainly, as we look at M&A or any investments we're making, we do look at those 3 irreversible forces. Connected care is certainly one of them. The simplest way to maybe think of it, there's obviously sort of standard products that perform a function, right? It's the intersection of products performing functions, technology that can drive -- obtain data from those functions that they perform, create insights leveraging AI, leveraging informatics, and a strong connection into workflow dynamics as well, right? So like actually understanding not just what the product is doing through the patient lens, but how they're interacting with the health care system itself, and collectively thinking of those through the lens then of can we enhance outcomes, can we enhance productivity in the health care system, et cetera. So there's a lot of different ways to get at that combination of what products do, technology, the interface of those. That's how we think of it. We do have them across our portfolio, things in development, things that are in the market. One of an interesting example is a diversion technology platform we have in our MMS business, right. So you have the interface of controlled drug substance and delivery of medication through our Pyxis systems. We have a technology that sits in the cloud that can do a combination of inventory flow management, so it helps with the inventory flow side, but more importantly, tracks kind of products from beginning to end of the life cycle and can create kind of algorithms based on the data around risk factors that they see play out, right? Is the dosing protocols being applied properly underdosing, overdosing, create all these learning triggers that can then go back to the health care system to be investigated and ensure there's not issues with diversion or misuse or things like that, that can actually lead to a better application of medication. So it's a really neat platform that takes technology and interfaces with a product platform as well and offers value much beyond just what those 2 things do individually. I think that's a great example. We have in other parts of our business. I think Dave can talk about Life Sciences as well.

So I mean, I already talked about Kiestra, which is the connectivity in the clinical laboratory to just automate things. I think where I would sort of maybe elaborate is also the role and the importance of artificial intelligence, right? So the way when we get all these data and data insights and some of the technologies you deploy, you can do things now quicker than perhaps a technician can in a clinical lab. So if you think about, let's say, the prescribing of antibiotics when somebody has got a severe infection, imagine being able to do that 1 or 2 days earlier than the traditional manual routines today. It all feeds really nicely into improving this clinical outcome story. So yes, it's connected care, but the AI on how you inform clinical insights is really important.

And I think the thing that's interesting is when you go back to where I started, the breadth and depth of the BD portfolio and how many things we touch in the health care system, across that care continuum, it really does uniquely position us to sort of connect those dots that I think is pretty unique to us.

Sure. No, it's -- you've been -- like the culture and the platforms of the business already had a fair amount of kind of IT/software management capabilities, and so being able to layer these things in organically is one. And then I think some of the things we've seen from BD and others that have been successful is sort of finding what problems are your hospital and clinical customers trying to solve, and then sort of snapping those on and having a lot of platforms to do that is a good place to be.

Especially in this environment, right? More so than ever, the health care system needs relief in terms of cost-effective solutions, et cetera, itself.

Right. So speaking of pressures and headwinds and search for relief, maybe talk a little bit about -- let's go to the second pillar, which is simplification here. And I can tell already by looking at the clock, we're not getting to the third pillar, but we'll do our best. So as I mentioned, one of the things that, when we launched in October and thought about BD and launching in December, was this kind of thematic of discontinuous tailwinds. And without your long-term simplification programs, had you been hit by all the inflationary forces that everyone else was hit by, you would have been in reaction mode, as it turns out, you were already kind of in proaction mode. And so that appears from the outside to me anyway to put you in a more advantageous position as you're dealing like everybody else with these headwinds. So maybe talk a little bit about what kinds of margin improvement sort of stands out in the current environment? And what helps you get to this math of sort of a 300 basis point headwind, but, call it, at least 100 basis point margin improvement in your current fiscal year?

Yes, we're really excited about simplified. By the way, it's obviously -- part of it is about getting to just healthy, continuous, consistent margin profile. But with that also comes freeing up capacity in many ways, whether it be freeing up resources, freeing up share of mind and capacity of those resources, cost benefits that can be used to reinvest and sort of fuel growth, right? So you get into this sort of flywheel. So it has many benefits. When we embarked on our Investor Day goals, inflation has kind of just started. And yes, we had some of those things in process, but there's also been a significant inflection up that I don't think anyone contemplated. So it will tie a little bit into -- I know we won't have time to talk kind of about the empowerment side of the pillar, but we were both proactive and strategic in terms of how to think of the simplification part of the BD strategy. But at the same time, I think just what we've done from an organization culture standpoint, on empowerment, and agility, and be able to be very responsive within that framework and adjust accordingly has been very strong. So really proud of what everyone's done there. The simplification, so it's funny, it starts with growth. First of all, we've been very active in just how we're growing, right, thinking of portfolio dynamics and where we drive our growth. That includes even actions that -- we took a pretty bold action this year given our strong growth profile just to exit some products. This has nothing to do with our simplification program. It's kind of onetime in nature, products that have really low GPs relative to the base. And those kind of things in your business, there's costs to go with them, regulatory costs, legal costs, they take up capacity in the plant. It adds up. And so it frees up capacity for higher growth areas. We took bold actions like that. We have Project Recode SKU rationalization, which we're well on the way. We're about halfway through that in 2022, exiting about 2,500 SKUs. The SKU rationalization is different. These are highly transferable from a revenue standpoint. It's just getting more efficient with your portfolio. Instead of having 3,000 SKUs to serve patients, can you do it with half of the SKUs and you remove complexity of packaging configurations and different size put-ups and colors. It's amazing when you start unpacking that how much complexity that creates. Network simplification. We just launched our third kind of pillar, which was operating model simplification, which gets more about how the organization operates and gets a bit of that empowerment pillar. So to your point, the good news is, we delivered in 2022, got us halfway to our goal. We execute this year, we'll be about 70% on our way. And our margin in Q1 was actually very strong. We contemplated we have a peak of inflation flowing through at over 350 basis points of inflation that is in Q1 and yet we had a very strong margin profile. So that leaves us an opportunity as we think of the back half. I mean we're basically ahead if you just sort of kind of straight-line the math. It affords us the opportunity to have excess levers to reinvest, continue to support that growth side of the equation and feel really good about what we're doing there.

That's great. So maybe the last question here that we've got. You talked a little bit about your -- so I'd be remiss if I didn't just get a quick take on sort of China. I think a lot of people see that as a sort of a sunsetting issue that was big in Q4 into calendar Q1. I guess just Mike or Dave, rather your quick take on where you're at with that impact.

Yes. So I mean, I think on a full year basis for China for Life Sciences, we anticipate minimal impact when you look at the timing of the full year. As we talked in our Q1 earnings release, there was some softness because of the lockdown in Q1. But actually, when you look at, let's say, the Bioscience business, which is predominantly research, that still got a really good momentum because people were still doing research in the country to even sort of understand the sort of the viruses and things like that. On the clinical side, that's where a little bit of the softness was on the diagnostic side. But that is actually now starting to come back. We're seeing the tenders. We talk to that team a lot, as you can imagine. But when we start to see the tender velocity, et cetera, on a full year basis, we see minimal impact.

Okay. And then maybe just with the very short period of time that we have, M&A activity, BD activity, I mean, business development, not Becton, Dickinson, I guess. But -- yes, that was one of the things we highlighted is just with the Bard integration and some of -- we'd prefer to as like kind of Bard DNA now inside of BD, it's clearly been part of a lift in M&A activity. Just at a high level, is that a pace that you kind of expect to continue here in '23 and '24? Maybe talk a little bit about that.

That's a great question. And it's interesting. You mentioned CareFusion, Bard, obviously, 2 big kind of more transformative type deals. That's not part of our strategy. But if you go pre those dates, the biggest deal we had done was $300 million. It wasn't a core part of what BD's growth profile was going back to this inflection and even a stronger growth profile, but still durable. M&A, we've talked about $1.5 billion to $2 billion of capital per year that should be available. We want to deploy it against tuck-in M&A. A portion of it will be against a combination of these smaller tuck-ins that are almost substitutes to supplement your organic R&D portfolio, like we did. The first $1.5 billion of this $3 billion that we spent over the past like 2-plus years was the smaller ones. And then we did Parata, which was bigger, but still tuck-in in nature and came with a very strong double-digit growth profile, more an immediate benefit. The nice thing what you're seeing is in the BD growth profile. Once you anniversary these, they're adding to our growth, right? So last year it was 20 basis points. We're at about 30 basis points now. Once we anniversary Parata, you've got about 50 basis points of growth that's additive. So again, it's part of that plus equation on the [ 5-5 ]. And I think as we're in the early days of this with BD, to your point, so obviously, we got to keep executing against the business. The one thing we do as a team is to have a very disciplined approach about capital allocation. You have to earn the right for us to invest in you by performing against your base, but those dollars should be available to help that growth profile.

Excellent. That's probably a good place to stop since we're out of time. So thank you guys.

I appreciate it. Thank you so much.

Thank you.