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

Thank you for joining us for the Las Vegas BofA Health Care Conference, and we're welcome to join Tom Polen, Chairman and CEO at Becton, Dickinson. Thanks for joining us.

Good to be here.

So we're coming off the back of your fiscal Q2 earnings. Just kind of curious looking at the fiscal Q2, there were some puts and takes, some onetime stuff, some ongoing stuff. Just kind of curious how you saw Q2 shape up and versus kind of your expectations?

Yes. We feel really good about Q2 and the momentum that we're building as we go through the year. So as you think about Q2, we were basically right on revenue as expected. We saw a significant ramp-up in the second quarter, driven by our health care procedure-exposed businesses. Primarily if you think about volume growth, we saw very strong volume growth related to procedures across businesses like PAS or Vacutainer business, or MDS business up 6% plus in the U.S. We saw the same thing, procedures drive strong growth in our interventional businesses. And then we saw that the diversity of that portfolio be able to cover some -- what we're seeing as transitory dynamics that's affecting everyone in the industry, in the biopharma research space and in the pharma systems drug delivery space on non-biologics. Again, we saw all of that come together with basically delivering on our ramp in Q2 as expected with strong 5.7% growth. As you walk down the P&L, we saw really strong margin beat versus our expectation driven by continued momentum of BD Excellence. We've talked about that in the past. That's our approach, our business system that we use starting in operations. And we've seen strong performance in reducing our CapEx spending, reducing our inventory levels, driving continuous improvement savings, including 30% reduction in our waste, for example, and seeing that benefiting our gross margin line. And the momentum is just getting started there. We expect continued momentum from BD Excellence over the next several years on our gross margin line. As you continue to flow that down, obviously, we had a very positive EPS beat, which not only helped us raise EPS by about a full point for the year but also allowed us to derisk the second half as we think about that. So we feel really good about the second quarter. The other thing I'd say is you saw really strong free cash flow growth in the second quarter. We've been signaling that all year and it played out as expected, if not a bit better. We expect mid-teens free cash flow growth again this year. We saw the same thing last year, and we expect continued outsized growth of our free cash flow as we march free cash flow conversion back up to 90% over the next year or 2. And that's again driven in part through the BD Excellence work that we've been doing. So we feel good about where we're at.

Great. And so you got it to at least 6% revenue growth in Q2, which is implying a 9% in Q4 to hit the full year guidance. So maybe just talk through some of the key drivers on the revenue side to kind of get to that ramp to the full year.

Yes. Obviously, so the #1 factor in that, if you think about our base business performance, that guidance in the second half assumes base business performing at about 5%. And then you stack on top of the 5% the recovery of -- the partial recovery of China in the second half, where we saw value-based procurement start in the second half of last year. And so we expect to have an easier comp in China. You saw China, by the way, step up from a certain growth rate in Q1. You saw that growth rate improve in Q2. We expect to see that improve further in Q3 and Q4, which again creates positive momentum on that growth number. And then the other more significant step-up is Alaris, which you also saw us, on Q2, raise our outlook from the year. We started the year at $200 million expectation for Alaris. We then moved that up to a floor of $200 million at the end of our Q1. And then based on the momentum that we saw in Q2 and our confidence there, we raised it up to at least $300 million, goes between $300 million and $350 million, if you do the math on that one. And we can talk about that in a moment, but we feel really good about the momentum on relaunching Alaris. So just to mention, Q2 was a record quarter for us. We produced the most Alaris units in the history of the company in a given quarter in Q2, and we shipped the most units of Alaris that's ever been shipped in the history of the company, actually in the history of Alaris as it's existed even before we acquired it. That just is a huge testimony to our manufacturing organization. I think everyone looks at BD as a manufacturing powerhouse. It's a deep core competency of ours. And to be able to ramp up from a certain level 1/4 of where we've been historically to within 2/4 to ramp up to a record number is not a simple task at all. That was a question we were getting going into the year. Can you ramp up? Obviously, the fact that we did it within 6 months of clearance, I think it's just a good testament to our confidence there.

And we'll jump into Alaris in a minute but before we do, on the margin side. So Q2, a really strong margin quarter and just think about how much do you kind of derisk the second half ramp and to hit the full year margin guidance?

If you look at the margin in Q2, so basically, the underlying margin in Q2 is exactly at the run rate that we need to be at for the rest of the year. We had about 70 basis points of headwind from the inventory destocking, which we've signaled last year actually was going to hit us in Q1 and Q2. Just as a reminder to folks not familiar with that, many companies saw inventories increase during COVID as people were managing complex supply chains and made decisions to increase inventory levels to prevent service disruptions to customers. We made a decision, again as part of our BD Excellence strategy, that we could -- as those supply chain stabilize, you can make a decision, do you care about free cash flow the most, which gives you flexibility to do things like we -- for example, we returned over $1 billion to shareholders in the first half between our dividend and $500 million share buyback. Tuck-in M&A, having strong free cash flow, allows you to do that. We saw we could take inventories down notably at the end of last year. We did that. That obviously creates unabsorbed overhead in the manufacturing plants as you do that. That cap then rolled into Q1, Q2. It's very defined, very quantitative number that we knew going into the year and that rolled out in Q1, rolled out in Q2 exactly as expected. It's out of the system now. So as we look at Q3, Q4 in the back half and continuing that margin that we've got underlying is basically where we need to be, along with inflation that impacted and cap enrolled into Q1, Q2, we know that alleviates in the second half, too.

Great. And going back to Alaris. So you came out, you had a floor of $200 million, and post this quarter, kind of raised it to $350 million -- almost $350 million. The visibility you have in the Alaris business a couple of quarters out. And then when you think about the exit rate, we're modeling about $150 million of Alaris in Q4. It's implying you're kind of back to that $400 million run rate in 2025.

I think that's a very appropriate observation. We feel good about that being at, at least, that $400 million run rate going into '25. Just to put it in perspective, so when we -- before the ship-hold, whenever we would go into a new fiscal year, we would have about 60% of our revenues for that year already booked. Think about for Alaris, the sales cycle is about 9 months. And so as you're going into a year, you have visibility to about 60% of the revenue in a normal year. This year, because we were on ship-hold and we weren't allowed to promote or sell prior to clearance, which happened at the very end of Q4, we went into FY '24 with basically zero visibility to our revenue in '24 on Alaris, right? So we had to go literally take what's normally a 9-month sales process, accelerate that, close business, install it to be able to start recognizing revenue. And so what we saw was, and that's -- thus we said, let's start with $200 million. We then, as we went through Q1, we started seeing substantial contracting and really good progress in a much faster rate than that 9-month historical time frame. By the end of Q1, we started going into Q2 with a certain percent visibility to the rest of the year. As we ended Q2 now, we have double that rate of visibility into Q3 revenue. And we expect to exit FY '24 with close to that 60% visibility to our FY '25 revenue. Of course, contracts that we're signing today, many of them, if not most of them, not only have revenue for FY '24 but especially for the large IDNs, they have a very specific rollout strategy. If there's 20 hospitals, they may say we want 10 hospitals upgraded in FY '24. We want another 10 upgraded in FY '25. And so that gives us that multiyear visibility, that again gives us confidence as we go into the back half of this year and into next year.

When you think about the Alaris kind of you're under medical necessity for 3 years but not kind of selling $100 million a year, which implies there's some sort of backlog in this business. I'm just trying to think about your ability to capture the backlog and how likely we could see that come through in '25, '26?

Yes. As I'd say, based on the exact same dynamic that I just shared, by the end of this fiscal year, we'll have a much better sense of that as we go through. We're still in that 9-month window now of building. We had early movers and adopters who are pent up. And then we have others that are -- will be in that 6 month, 9 month. So I think we'll have a better sense by the end of this year. But we certainly feel confident in going into '25, at least at that run rate that we talked about before, and we're seeing really positive customer feedback.

Do you think the competitor's approval in their pump recently changes the dynamics at all?

We feel really confident in our platform. I'd say a couple of things that we look at around Alaris. So number one, it remains the only platform that actually has all modalities for patients, right? There's no other system that can do large volume infusion, injection, and pain management unless you think about the buttons, right, that you press to manage pain in a hospital all in 1 user interface. We remain the only system there. We remain significantly differentiated when it comes to interoperability, i.e., connecting an infusion pump to electronic medical record in a bidirectional interface. We have over 700 sites across the U.S. Our expectation is actually just in Q1, we installed more new interoperability sites in -- I'm sorry, in the first half, than all of the rest of the market has done in the history -- in their history combined. Just what we installed in the first half interoperability than everyone else combined. That's a deep competency and expertise. It's not easy to do, and that's something we've built over years. The third thing is we now have over 1,000 HealthSight accounts throughout the U.S. And remember, we take a very unique approach to medication management. When I say very unique, we're the only ones who take this approach to medication management, which is really taking our manufacturing expertise and mindset and looking at the process of delivering medications in the hospital as a process, right? So the process of building inventory and buying drugs and putting -- storing them in the pharmacy to compounding them safely in the pharmacy and moving them up to the ward into our Pyxis cabinets and making sure that the right drugs are available for the right patients at the right time for nurses, right on through to administering those to the patients on the pump. That's a process that you look to make sure the drugs are always available, that you're not stock-lossing drugs, that you're not having too much inventory and using too much of your cash flow in a hospital. Improving nursing efficiency, making sure that nurses are being compliant on protocols, not overriding guardrails, not diverting narcotics by any clinicians. Our HealthSight platform sits across all of those different pieces of the puzzle that we own across that end-to-end workflow. And what we allow hospitals to do is actually improve that end-to-end process. And that's right, those 1,000 and fast growing number of hospitals who use HealthSight today, they clearly believe in the power of connected medication management. And we're just getting started with many more things coming out that as we innovate on each of the different feeds into that data set, it makes the whole collective entity stronger.

That's helpful. On Pharm Systems, that's a business that has been putting up double-digit growth. Just starting to think through the GLP-1s, other biologics, you've got the capacity, 5 to 6x some of your competitors, the durability of that double-digit growth and some of the drivers behind that?

Yes, sure. So put it in perspective, when we started -- a little before we started BD 2025, go back to FY '19 when I took over. Pharm Systems was a $1.4 billion business. It's now slightly over $2.2 billion, so we grew at over $800 million since FY '19. It's been a really positive success for us. You've also seen us invest $1.2 billion in capacity to help fuel that. You have seen over the last quarter and this quarter, you see it across essentially every other player in the marketplace, some destocking that's happening in the non-biologics space. We've shared very clearly our biologics business continues to grow right at about that double-digit growth level in biologics as there's some destocking in Low Molecular Weight Heparin in the vaccine space. With that, as we look at that going forward, we certainly see that being an accretive growth driver to the company, I'd say high single digits, low double digit growth over the long term. A couple of things there. We certainly see biologics, not only GLP-1s, which we have a critical role in, but new drugs, for [ all-timers ], et cetera, are going to continue to fuel growth in those categories and not just in the prefilled syringe space, which we participate in, but we're really excited about a number of the new wearable platforms that we have as well as our self-injection devices. So for example, some of the early GLP-1s that are coming in auto-injectors and pens, we already have a number of deals that they'll be going into other devices. As you look at the new classes of [ all-timer ] drugs, for example, that are coming out in the future, you'll see those types of drugs start going into devices like our wearable Libertas platform, which is essentially a wearable auto-injector. Auto-injectors, say, for GLP-1s are good if you want to inject something in a couple of seconds, like 2.5 ml of a not thick drug, you can do that very quickly. Many of the new drugs, like in the [ all-timer ] class, are thick and they could be 5 mls or 10 mls. And so you really get into, do I need to infuse the patient and bring them in? Or is there a device that can be a wearable that can allow that patient to infuse themselves over 10 minutes or 15 minutes? That's exactly where Libertas comes in. It's a 5 to 10 ml injection volume designed for viscous drugs. And so that's something we're really excited about. We start shipping that for clinical studies within the next couple of months here. And then our Evolve platform, which is similar, but it's an electromechanical device that's filled by the physician, attached to the patient, they can go home. And for example, something like the biosimilar EPOs that are coming out soon. Those would go into that device and at a preset time period, for example, for EPOs, it's 24 hours after they leave the doctor's office. The device that the patient is -- already has affixed to them leaving will just auto-inject them 24 hours later so they never need to come back to the doctor's again. So we're excited about that momentum, which is, again, just catalysts for that business that are really positive over the long term.