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

Amazing. Thank you so much and welcome, everyone. Before we start, I get the fun disclosures, morganstanley.com/researchdisclosures. I'm just timing this right down, go there. I'm sure you all will, or you can reach out to your MS sales rep. Patrick Wood, U.S. med tech team. And welcome, everyone. Big thank you, of course, the entire BD team. Obviously, we've got Chris, we've got Mike, and we got Dave across the Head of Medical segment, across Life Sciences and of course, as CFO. Thank you so much for joining us and agreeing to do this.

Well, we'll we kick off with, how about 2024 margins? You guys are running a little bit ahead, I would say. See how the year closes, but maybe where you were hoping to be on the margin structure side of things. How are you thinking about the interplay between reinvestment and margins going forward?

Yes, yes. No, I appreciate the question. Thanks for having us. Good morning, everyone. So yes, I guess, one, stepping back a couple of years ago, we outlined our BD2025 strategy. Really, the core of the formula, right, at the end of the day was we declared that we see ourselves as a durable 5.5%-plus on the top line. We've been really focused on driving the plus side of that, right? Our 2-year growth rate, organic, is about 7%, so delivering strong results there. And then we wanted to deliver double digits or, call it, 10% FXN on the bottom line. That's kind of the formula we drive to. As part of that, we made a commitment on margins to -- we actually increased the commitment, by the way, versus our first Investor Day. So we were tracking ahead of it. We actually increased it once, but the goal is to get to 25% by 2025. We've had 2 strong years of execution, and that execution is showing up both in top line and on bottom line. So to your point, we're 70% towards our margin goal 2 years in as we think of sort of how we would exit this year. So really strong performance. That's on top of, obviously, an extremely complex macro environment. Inflation -- 2-year inflation has been over 200 basis points of outsized inflation. So we're delivering that while also solving for the inflationary dynamics. As you think of the balance, it gets us to a point where you need roughly, call it, 50 to 75 basis points of margin improvement over the next 2 years consecutively. I would point back to the former. The way we always think of it is it's a nice place to be tracking ahead. One is if you can continue to deliver on the plus side of the 5.5% on growth, you get natural leverage that just drops by maintaining your kind of cost structure being very disciplined from that standpoint. So we'll look to continue to do that. Plus we have a strong pipeline of initiatives that are actually well under the execution and they start delivering more value. Project RECODE is a good example where the front-end work is largely done in many areas. We're going to keep doing that through this time period, but you start getting outsized benefit. So we have a strong portfolio of initiatives that are actually already committed that you'll actually have a natural efficiency. The key to drive the plus side of the growth, which I'll go back to those, just to make sure, 2 things. One, you're driving simplification to create capacity to reinvest in growth and to also be able to manage headwinds. Things happen every year, puts and takes. What we've been trying to do is being committed to be the company that can be that steady ship, deliver strong performance while navigating both of those. So the margin becomes kind of the moderator to that equation on the top and bottom line. And certainly -- and these guys can share some examples. There's plenty of opportunities for investment to come my way. The way I would frame it at the higher level is continuing to drive organic growth in R&D. Obviously, those, by definition, have a little bit of a longer-term payback. I think we have strong go-to-market opportunities. Digital is a key area. There's an anchor against kind of those 3 irreversible forces we're focused on: connected care, new care settings, chronic disease. We have a strong portfolio of products that at the end of the day, they bring solutions that simplify things, make them safer and simpler in the health care system. So I think there's a lot of growth opportunities there. And we'll continue to actually invest in our capabilities that will actually further drive the flywheel simplification. So manufacturing excellence is an example, where we're rolling out Kaizen capabilities and a mindset throughout our manufacturing organization so to keep that momentum going. So that's the way we think of it as a bigger picture.

I guess, Dave and Michael, if you can think of, I don't know, 1 or 2 pet projects, they don't even have to be the biggest ones, but things that you're kind of excited about yourselves within the businesses.

Yes. I mean I'll go first. So good morning, everybody, Dave Hickey, Head of Life Sciences. And I think I'd look at it in 2 frames, Patrick. I think of what are some of the landmark projects that we have just commercialized or just launched that is sort of the sources of growth for the segment today. So I think you've heard us reference this super cycle of innovation in Biosciences. In fact, just last week, we had a great session with the President of Biosciences and the Head of R&D, Steve and Eric, respectively, where we talked about 3 new platforms both on the clinical diagnostics side, where now you've got the only sample-to-answer, walk-away consolidated platform for HIV and leukemia and lymphoma testing; a step-up in our presence and relevance in single-cell multiomics with the launch of Rhapsody HT Xpress; and then obviously, the flagship launch of the FACSDiscover S8, which is a very new high-end sorter that brings new-to-world really research capabilities to start discovery and initiate translational research. So that's on the Biosciences side. On the IDS side, the diagnostic side, the growth is really -- one of the growth drivers is our molecular platform. So obviously, with the recent approvals of BD COR, the high-volume molecular platform in the U.S., the BD MAX and obviously, which saw a 60% installed base growth through COVID and how we're now leveraging that BD MAX to put new regular IVD tests onto that. They're big drivers of growth in terms of the segment today. And then if I just look forward to what's tomorrow, a couple of things we've talked about. We are under FDA review for a very unique and novel platform to collect capillary blood for people that have got sort of venipuncture phobia, so to speak. And that will really give access in retail decentralized settings. That's the BD MiniDraw. And then also, we're very vested in maximizing our HPV franchise. So obviously, we've got very specific claims around human papillomavirus as the new standard of care for cervical cancer. But the work that we're doing in genotyping there and also the work that we're doing to enable self-collection where we're already up and running with self-collection for people and females that sort of want to maybe take samples in the privacy and at the time in their own home. And then again, we'll be working towards an FDA submission here before the end of the calendar year.

Sure. So for Medical, there's a lot that I'm excited about, whether it's in farm systems or wearables program for long-term drug delivery for patients; or in MDS, where we have one-stick hospital stay and improving the quality of life for patients that are in the hospital so they can sleep through the night. But probably the thing that is most relevant in a near term and has the most impact given the state of health care right now is our connected bed management strategy in MMS. So there, the concept is that you have medication being stored in a Pyxis cabinet. You've got the electronic medical record of the hospital. We've got software that then connects our transactions that are occurring in the pharmacy to the cabinet at the point-of-care, up through to the infusion pump, which was recently cleared by the FDA. And so that the nurse at the point-of-care, instead of having to manually program, now has the ability to just automatically confirm the physician order and infuse the patient. And all that data then flows back to then replenish for inventory, give incredible data analytics to the hospital about patient acuity, physician efficiency in terms of inventory management, diversion and controlled substance management. So the ability to connect all that data to the hospital and improve both patient safety, clinician efficiency and the cost efficiency of the health care system, that's the part where I'm really excited because there's both very immediate near-term benefits. But as a platform for innovation, customers come to us with interesting ideas, and we can very rapidly innovate on the software platform to pilot it, test it and then refine it. So that's probably what makes me most excited.

Then inevitably, the Alaris question, I guess, for Mike and Chris. How has reception been? I know it's still fairly early, but of the return of the market and maybe unfair question. But is $200 million still the right number for next year?

Yes. I mean it's still the right number. The reception has been really positive. The other day we got clearance. We published a press release. Customers were sort of calling us and congratulating us and pleased to hear that the product that they had been using for the last 3.5 years and relying on during COVID and a number of health care crises was now cleared for use. They were excited to learn and they wanted to learn, set up time to learn about the -- what's new in the product, the clinical workflow improvements, the cybersecurity improvements, the patient safety improvements. So we've contacted 100% of our customers at this point. I'd say they fall -- there's 3 buckets. I'd say this is a hypothesis kind of going in as we have these conversations with the customers. There's a group that's at sort of I want to be first. They're the ones that called us, the ones that scheduled meetings immediately. They want to refresh their fleet right away. And these are archetypes. I wouldn't say there's any real hard core market research analytics around it. The second group, they're probably a little bit more complex. They've got an Epic upgrade or a Cerner upgrade. They want to get this on the road map for them. And so they probably also have multiple hospitals, maybe with a lot of different ages of pumps and things like that. So they may have some that are going to be field-remediated by our staff and some that will be purchased and replaced. And then there's probably a group that's saying, I actually don't want to be first. I have a complex issue. I've got some other things on my plate, and can we schedule for this? And let's make sure that we line everything up. I can get the labor in place. I can get my capital appropriations in place, things like that. So there's probably like 3 archetypes like that, that are coming through. They've had 3.5 years, and the customers have stayed with us. And our posture towards it is that we really, really appreciate that, and we're going to take care of our customers. So we're looking to make sure that we engage them, we explain the advantages. We're really excited about helping with cybersecurity. We know that that's a key issue. That's what we've been hearing a lot. We're also hearing a lot about how beneficial interoperability for the Alaris and that ability to passively automate and document all the steps that a clinician would have to do at the bedside with the pump, now that's all automated. That was really beneficial during COVID. And with labor shortages and nurse staffing and things like that, a lot of our customers want to sort of convert to that. That takes a little bit longer and a little bit longer plan. It takes about 9 months to do an implementation there. So we want to make sure we plan that effectively.

Okay. And then there's obviously a lot of puts and takes for next year for growth. You've got some of the bolt-on deals that drop through into organic. You've got less of an impact from some of the business exits and things like that, but there's pricing. How should we begin to think about that sort of a process? Is that 6% to 7% number too aggressive? Or anything to help with the framework of thinking about next year?

Yes. Yes. No. So we -- last earnings call, we kind of outlined a frame for '24. First, I would -- all the way back right, like 5.5%-plus is sort of the target commitment. We've definitely been trying to drive the plus side of things. Like I said before, we've been doing that. Our organic growth rate has been 7%, our 2-year average. But that said, every year is a little bit different. There's always dynamics. But we've systemically been driving enhancement to our WAMGR at the end of the day, right? And that's what you see coming out in this growth profile. So whether it be through what we've done from an organic R&D, increasing the productivity out of R&D, the amount of R&D dollars that are earmarked towards transformative solutions now 60%, we have a strong rhythm of new product launches expected. We had about 100 through this time frame. Almost half of those were $30 million or more, and half of that were actually $50 million more incremental sales opportunities. So really good progress there. Tuck-in M&A has been an important part of our growth. I think that's a new lever within BD. It's actually contributing about 30 basis points to our results year-to-date this year. That's after anniversarying these acquisitions. So after they're -- they've gone through their first 12-month cycle. So we're going to continue to drive that. I do think it's important to know -- so what we're doing is we've enhanced our growth profile, but you still get that reliability and durability that comes with BD. And that comes because we have really strong leadership positions where we've established strong capability in a little bit more mature category. So I -- you get a little bit of this balance of stable with the outsized growth. There's -- so as we think of next year, what I outlined basically was, I know it's a little complex because there's all these dynamics still, whether it be COVID. But we did talk about with Alaris that we see next year being about 6% base growth. Now there is COVID-only revenue that we have. There'll be a small adjustment for that. We expect that to be not material next year. It already ratcheted back significantly this year. So there's about a 30-basis point adjustment for that. So whether we want to just put that all in one bucket now and call it base, right, it gets you to closer to that 5.7% growth, which is, again, very strong. But really, the underlying base is 6%. We also did, as part of our simplify efforts and are driving our kind of portfolio strategy, we did divest the surgical instrumentation platform. So there'll be an inorganic adjustment on top of that that's worth about 75 basis points or roughly 3/4 of sales that comes out. But again, that doesn't affect our organic underlying results. Importantly, on the bottom line, we're still targeting that about 10% FXN. We'll see where currency goes and we'll update where the quarter is. And that does include then absorbing kind of the COVID-only reduced revenue and the divestiture really. So when you think of kind of the base, I know we don't look at sort of EPS that way, it's actually stronger than 10%. So we think that's a good formula for next year for where we are. We got a couple of months, obviously, to refine plans and we're focused on continuing to execute against the things that will keep that momentum going.

And then there was a little bit of volatility maybe last week around some potentially misinterpretations around comments on China. I'm just curious, how are you feeling about the anticorruption measures? Are you hearing anything from the field? Just any commentary on that would be helpful.

Yes. So I guess a couple of things. One, I would -- make 2 -- a few macro comments. One, again, BD, what we've done over the past 2 years is deliver this performance in very uncertain challenging macro backdrop, right, which included multiple factors, whether it be procedural dynamics, inflationary pressures. There's been pressure in China throughout the past 2 years, whether it be how they've navigated COVID and restrictions, whether it be port congestion. Through all those dynamics, we faced into sort of reality. And I think having kind of awareness and realistic posture about dynamics that play out in the market and then approach it with a growth mindset to lead through that. So we've been outperforming in that market. It's only about 7% of our sales, to put it in context. So -- and actually, there's been a lot of questions. I think a new question that emerged was sort of capital versus consumables. We don't have a big capital installed base, they're way under-indexes against BD. BD actually at a total level, only has about 15% of capital as part of our revenue model. So 85% of it is recurring revenue. China way under-indexes versus that metric. So one, think of BD is kind of -- we're a big business, managing puts and takes. But that's how we think of FY '24, and that's been our mindset throughout. Again, the reality is, I think, it would be -- there's been dynamics there. There's been dynamics in Eastern Europe. There's still inflationary dynamics, right? When we set up next year, we look at all these things and make sure that we're as best prepared to navigate what could change in that environment. We still have inflationary pressures. They've moderated, right, but they're still above normal levels. And we've contemplated that as well. I think on the positive, procedures, BD has been less exposed to procedure -- big procedure fluctuations. But you're seeing the health care system in the U.S. certainly basically sort of back to normal, right? So there's puts and takes as we look at the macro environment. That discussion is really more about total macro. And we're going to keep watching how China plays out. Again, I think a counterbalance to -- it's clear there's dynamics playing there that happened maybe more to like a micro level, right, how they're managing their GDP dynamics, et cetera. The reality is there's a ton of unmet need there from a health care standpoint. So I think the counterbalance is that they're always going to want to make sure they don't create an unintentional situation of patient backlogs and not supporting their citizens. And at the end of the day, we're well positioned to capitalize on opportunities in China. We certainly see it as a long-term opportunity. We have a strong kind of local capability, whether it be manufacturing, go-to-market, innovation. We've got a strong rhythm of innovation in that market. But what we've done is we've derisked the rest of our book of business. We're not dependent on China from a finished goods, manufacturing standpoint. We're not sourcing there for the rest of our business. So it's contained -- it's contemplated in how we're thinking of things on a go-forward basis. I'd just, again, share the '24 outlook that's unchanged through our lens. We'll continue to watch it and, of course, monitor and just make sure that we're performing a leading performance within the environment that exists there is the way I -- it's always been our posture.

I remember last time I came out to see you was the day of the select data. And now obviously, GLP-1s have cured every issue in health care so that's good news. But within that context, like where -- there are some aspects of your business that are potentially affected by one way or the other. I mean to pick out one like Pharmaceutical Systems potentially, I mean, it was 13 quarters of double-digit growth?

14.

14, there you go...

Who's counting?

Presumably, there was some contributing factor within that. But for overall BD and PS included, how should we think about the impact of GLP-1s?

Do you want me to take it, Chris?

Oh, no -- yes, go...

Yes, so we have some exposure to GLP-1s. I mean our Pharmaceutical Systems business, we make primary container closure devices for drugs that are in a prefillable syringe. We sell the prefillable syringe to pharma companies. They fill it and they provide it to their customers. Our capacity to serve that segment of the market is about 6x the nearest competitor. And the technology that we've developed over time is pretty well suited and has really been designed to support the advent of biologic drugs that provide for more targeted therapy. So the innovations that are actually enabled through the BDB business, in Dave's area, around identifying specific receptors and cell surface is sort of the molecular biology of life that then the pharma companies develop targets to address particular cancers or Alzheimer's targets or, in this case, diabetes targets and GLP-1s, those particular receptors. Those molecules then get developed into a therapeutic, and they get put into a primary container closure device, which we provide. So we have had some of that. Most of the GLP-1s come through pens or auto injectors. They're in a ready-to-use format for customers. We have a nice pen business, a little less on the auto-injector business. But inside those plastic housings and the devices with the springs and everything to make the drug kind of shoot into the body is a glass syringe. And so we have a portion of that. But we're not particularly beholden to only GLP-1s. So there's a broad range of biologics, more drugs coming to the FDA for approval through the drug-device combination pathway or biologics in nature as opposed to small molecules, things like that. So that has been a positive. The other positive has been vaccinations. If you think during COVID, vaccinations into a ready-to-use format, that's been -- we've been able to help supply the market and help with that response. And then there were particular drugs that were used during COVID, anticoagulants low molecular heparin, they come in a ready-to-use format. They've always been used to help whenever somebody is in the ICU, and they may be at risk of stroke or they may be at risk of pulmonary ebolism or some other circulatory system disease or comorbidity. And particularly with the manifestation of COVID, it was one of the therapies that was used to help protect those patients. So we're seeing a sort of a resetting of that particular market. So different dynamics. So GLP-1 is definitely going up, positive. And I think a long-term positive trend is the clinical data continues to come out. And then I think some of the other ones are more of a reset. So I think there's a little bit of both of those. And then long term, the move for quality of life moving from drugs kind of coming from vials to prefills are going directly into a prefilled device. But going to -- for more long-term wear, wear at home. That's what I mentioned about, that's also exciting is the wearables, on-body injectors, things like that, that would allow patients instead of having to go, get back on a bus, go back to an infusion center, spend a day in a chair getting their drugs and medication, they would be able to take and take one of those products, put it on as a wearable and have that administration at home. So we feel really good about that. Our Libertas device is available for clinical trials. We have a number of clinical partners there, and we feel really good about that innovation.

And then maybe switching a little bit into some of the Life Sciences stuff, Dave. Firstly, I guess, curious about microbiology. It doesn't get a lot of questions necessarily, but actually, there's quite a lot of technological potential change over time happening there. I think you guys have still got a partnership with Accelerate. But, also just there's NGS, there's a lot of different moving parts there. How are you viewing that market long term? And any potential changes in technology?

Yes. Thanks, Patrick. I mean, if you think about it, the core essence of microbiology is this looking for infectious disease, right? So if you look -- it really is the core of the microbiology lab. So if any of us have an infection, what we really want to know is what is causing the infection and then more -- and then equally importantly, what was the right antibiotic to sort of treat it. And actually, if you take a step back, and to your point about it not being discussed a lot, there is a big global issue around antimicrobial resistance. And if you think about it today, either directly related resistance deaths or sort of -- and/or deaths related to resistant infection is about 5 million deaths a year right now globally. There was a review commissioned actually by the U.K. a couple of years ago that suggested without improvements in diagnostics, without improvement in pharmaceuticals and antibiotics, AMR, so antimicrobial resistance, could be one of the world's biggest killers by 2050 with about 10 million people per year dying. So innovation in this space is really important. And if you think about it, today's microbiology typically takes about 3 to 4 days from somebody sending a sample to the lab and getting a result. Do I have an infection, yes or no, and what is the right antibiotic. Now we've made some improvements. So if I think about the acquisition that we did with BD Kiestra that now automates -- fully automates and standardizes the clinical lab. So it also ties very nicely into BD's connected care strategy. That has got that time frame down from about 3 days to about 1.5 days. You look at something like Accelerate and the partnership we have there, which is a rapid susceptibility platform, where for certain clinical use cases like sepsis, you can now get an antibiotic insight within 5 hours. So every day, bit by bit, we're shortening that time to the clinical insight. And then, yes, there are what we call hunting grounds where there are technologies that we are looking at, whether that is sequencing, whether that is predictive susceptibility, screening using AI, that's just an area that we continue to look at. But if we are collectively as an industry going to fight antimicrobial resistance, technology advancements in infectious disease and susceptibility testing are going to be really important.

And then Biosciences as a whole, you obviously have a wide selection, different customers. But some of them are on the sort of biotechy, academic side. And there's always a hoopla made -- like NIH funding and stuff like that, and there's the biotech funding. What are you hearing from your customers at the moment?

Yes. So I mean, Patrick, it's an area that we continue to watch. I mean the good thing about Biosciences for us is we continue to grow above category, right? So we've said that the category -- it's about a $3 billion space. The category itself is mid-single digits. We're exceeding that. We're #1 or #2 in the areas that we play in. Obviously, a lot of the instrument acquisition is capital. But I think the nice flexibility that we have as BD is there's also a lot of dies and antibodies and reagents that we sell around that. So we have demonstrated a lot of sort of flexibility in terms of the way we think about capital acquisition. And then to build upon Mike's point when he was answering the GLP-1 topic is a lot of where the Bioscience platforms go is very early discovery. So when you think about -- and particularly in this quest for getting better at cancer therapy, cancer diagnostics, immuno-oncology. We just actually recently sort of press released a collaboration with Navigate BioPharma on CDx. And the goal here is how do we get away from these historical treatments of chemotherapy, radiotherapy, which is typically slash and burn the cells and be much more targeted in cancer diagnostics. So the fact that we're seeing much of our research application be so early stage, right now, we're not really seeing any remarkable difference on the business performance.

I mean you've timed that perfectly. Chris, Dave, Mike, thank you so much for joining us. Really appreciate it.

Thank you.

Thank you, Patrick.

Appreciate it. Thanks, everyone. Take care.