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

Thanks, everyone, for joining us today. We are so pleased to have with us again this year, team from Becton, Dickinson, Tom Polen, Chairman, Chief Executive Officer; and Chris DelOrefice, EVP and Chief Financial Officer.

So the topic, I think, since the quarter has been around the separation. And I am sure you've spent a ton of time explaining that and laying it out as I think you did pretty clearly in the materials and the presentation around the announcement. But maybe just stepping back for a sec and taking a look at: a, this is a shift from the long-term strategic plan that you talked for several years now, driving margins and optimization and performance. Maybe talk a little bit about why -- what was the impetus for the change? And what folks can expect from sort of new BD with the med tech focus going forward?

Yes. Thanks. It's great to be here. Thanks for having us. So I'd say our announcement is actually a very much a continuation of our strategy, right? Over the last many years, we've been focused on building a growth-oriented med tech company. And we've been doing exactly that. And if you look at capital allocation, whether or not it was CareFusion, Bard or essentially every other tuck-in that we did, it was driving a growth-oriented med tech business, and we can talk about that. If you actually look at the med tech side of BD, it's been growing north of 6% every year for the last 3 years, 6% last year, 6% the year before that and about 6.7%, just excluding BDB and MDS, reinforcing that point. And we can talk about some of the drivers that we're really excited about as we go forward. Of course, we also recently did the acquisition of Edwards Critical Care business, that's off to a great start, 8% growth in Q1. And that's not included in those numbers as we look at anniversarying that late in Q4. And at the same time, we've been reflecting on what the opportunity is to unlock value from life sciences, which is a fantastic business inside of BD. We've been investing in that more organically over the last many years, but one that we think is undervalued in the company and that the separation can unlock new value for the new BD as we redeploy and reinvest capital from -- or the value from the sale -- of that sale or RMT or spin.

Okay. And maybe just a follow-up on the means of separation, the mode, the pathway to separation. I'm sure you're getting a ton of questions about that. Maybe talk a little bit about what we can expect in the coming months about more color on which way you think that's going to go?

So we've shared that we expect to announce the form of the transaction this summer. And just a little background. We've also shared that we began the process of looking at our portfolio in the first half of last year in '24, working group of our Board, et cetera, and that culminated obviously any announcement that we made. As we think about the form of the transaction, maybe just another point is the discussions with interested parties did not start at our press release. It was ongoing well before that. There's a significant amount of interest in the asset that's only come up -- raised up even more after the announcement. And so all of those 3 forms, RMT, sales, spin, they all create value for our shareholders. Obviously, some can create outsized value. And typically, that's associated with where you have synergies that you can capture that as part of incremental value. And obviously, that's a sale on the spin -- a sale in a RMT, sorry. And we'll announce more as we go forward. But we, again, see significant external interest in the asset, and we're focused on maximizing shareholder value.

Okay. Another question that we get is, I mean, these are terrific sort of long-term growth businesses and part of the portfolio for a long time, but there's some argument that maybe they belong in different places where you might have different interest in different parts of these businesses. So maybe talk about your -- the possibility that we might wind up with a transaction that sends them to different locations.

Yes. We're focused on, again, maximizing shareholder value. That's certainly a possibility. There's interest in -- as you described that, there's interest in both together quite a bit. But we'll get -- as we go through our process, we're not against that concept, if we're to maximize shareholder value. But certainly, there's ease and focus for new BD to do a single transaction. But again, we're focused on maximizing shareholder value, whatever that scenario is.

Got it. So now the second part of the -- that question, sort of shifting to new BD. This does -- the separation does kind of, I'd say, unlock maybe or open up some flexibility in the way the company can invest in R&D kind of provides you with some opportunities to invest internally and strategically. Maybe talk a little bit about where you see some of those opportunities.

Yes. So as you look at how we've organized the new BD into 4 specific segments, maybe if I just walk through those, we can talk about some of those opportunities that we're really excited about. First off, just given the context of today's environment, I think it's important to start with our Medical Essentials business, right? It's a business that, as you look at periods of economic uncertainty, it's really thrived. I think BD is traditionally -- when the risk of a recession or economic slowdown comes up, BD is typically top 2 or so performers in those environments. And that's because of that durability of our Medical Essentials business, right? No matter what type of care people need, they need BD, right? 90% plus of anyone having any medical procedure will be touched by a BD device. And those procedures can change in different economic climates, but all of them need BD. As you think about the other businesses, which are even higher growth, start with Connected Care, we're really excited about the next generation Pyxis, it's launching later this year, very much on track combined with our first AI platform that cuts across all of the BD systems, and we'll be announcing more details on that. But it's a new system that BD Pyxis Pro will be the first platform to leverage that new AI platform that eventually all BD systems will be tapped into. Obviously, the APM business, we're excited about. Off to a great start on integration, a number of new exciting launches taking place there. And we view that as not just a one-off acquisition of Edwards Critical Care business, but a new growth platform for us to invest in, into adjacent spaces in the future. As we look at our biopharma solutions business, we couldn't be more excited about the opportunities ahead there. We've built over the last 5 years, the world's largest drug delivery company for biologics. If you just look back to when we started BD 2025, we've grown that business more than $800 million. And the vast majority of that has been in biologics, which we said is now more than $1 billion business for us. By the way, when we say biologics, we exclude vaccines, which many companies do combine. GLP-1s are the main driver of that category. There's others as well, but we couldn't be more excited also by the pipeline that we have GLP-1s, not only GLP-1s that are on market today, but we have quite a healthy mix of new GLP-1s coming to market that we may read about as well as we now have over 40 GLP-1 biosimilars signed in our devices, both our auto-injectors and pens as well as our prefilled syringes. So a great growth trajectory there, also wearables, our new Libertas platform and Evolve platforms. As you look at new therapies that are going to not be delivered in infusion centers, but delivered in the comfort of one's home, delivered by the patient themselves. Those 2 platforms ideally fit with that new -- those new classes of molecules coming to market. And we've got the first molecules in clinical studies or clinical trials already away for Libertas moving forward. And then finally, if we look at our Interventional segment, that's been growing in that 6%, 7% range since we -- essentially since we bought Bard. We see continued strong growth there with a number of exciting platforms. So PureWick, we've talked about being a $1 billion opportunity by 2030, certainly well on its way, big trial underway right now for at-home reimbursement. That really unlocks -- we have great business at home, but it can be many times larger with the support of reimbursement. We have the first mobile PureWick launching later this year for people who are wheelchair bound. And then we have essentially every year thereafter new launches coming there. On the surgery side, our acquisition of Tepha, which is for P4HB, it's a biomaterial that essentially allows tissue reconstruction and the biomaterial is fully absorbed and disappears within about 18 months. We now are up to 7-year data showing -- it's just as good as plastic mesh in repairing abdominal issues. And we've basically been serially innovating to replace plastic mesh. We have other solutions coming with that, including we started to enroll first patients for breast cancer indications or breast indication. And the first one there is for the use in preventing basically a side effect of implants. And then we have 2 other ones that we expect to be starting enrollment and moving forward here in the next year or so. So really exciting opportunities within the surgery and other near adjacent spaces. And finally, in the peripheral vascular space and PI, that business has been growing high single digits for us. We've got a number of new exciting launches coming in that next year. And we see -- overall, if you look at interventional, we see a lot of opportunities from a continued tuck-in M&A strategy that was core to Bard's success. It's been core to our continued success since we've bought them. We certainly see that as a high-margin, high-growth platform that we'll continue to invest disproportionately in the new BD as well.

Okay. And thinking about the flexibility that the separation provides in the P&L and maybe talking about some of the margin expansion and improvements in cash flows that have been part of your execution over the last year or 2. What incremental do you feel like you're going to -- where you're going to apply some of those resources? Is it to accelerate some of the programs you talked about, Tom? Is it to bring up the size or scope of M&A given the sort of capacity and sort of casual bandwidth experience maybe that you've gained?

Yes. Yes. Well, I'll touch on that one. So a couple of things. One, you see us driving significant margin improvement, most notably in gross margin. It started at the back end of last year. This year, we had a 370 basis point improvement in gross margin. It's driven by -- we're very early innings here, but our BD Excellence system across BD, that's manufacturing. We're rolling it out in commercial and R&D as well. But just significant progress there. The principle of BD Excellence is driving kind of a 0 waste mindset optimizing the throughput and max potential of our manufacturing lines. We're still very early innings there. So not only is that an exciting time now, but as you think of kind of our next BD 2030, you should expect to see that continued momentum of driving margin improvement that will meaningfully drive earnings, cash flow through 2030, mostly driven by gross margin. But I think importantly, to your question, and you see us doing that this year actually, in Q1, we're taking that benefit and we're over investing in R&D. We're actually driving R&D investment above sales growth. So we're deleveraging R&D. And we're very targeted in commercial go-to-market and selling driving outsized investment there. I think when you look across our portfolio, interventional is an area that's differentially getting those investments. We see that as a high-growth space that we want to continue to invest in, both organically and inorganically. I think from an M&A standpoint as well, you'll -- we see a ton of opportunity as well. In interventional, Tom kind of gave some examples of platforms, both in surgery, our urinary incontinence franchise, peripheral vascular disease are areas and examples where we'll continue to invest. You saw us also this year with the acquisition of APM, which we said was accretive across the board, a nice contributor to growth. Pro forma growth in the quarter was 8%. Again, we've actually added investment above what they were doing in selling and R&D driving closed-loop innovation program in R&D with our Alaris infusion pump. So I think that gives you some examples. And basically, the spirit of this is new BD has a much more focused med tech growth profile. The impact of BD Excellence is going to differentially impact BD. That's where you still have a lot of our core large manufacturing. So it's actually sort of accretive to the benefit that you would expect to get out of BD excellence as a nice mid-single-digit growth profile. But importantly, with that targeted capital allocation we're not done with that growth profile. We're going to continue to add both through organic prioritization and inorganic investment, continue to drive that growth profile up.

And I think with the margin expansion that Chris talked about, we're in early innings there. BD Excellence, we just started in the last 2 years. And to think about how we scaled that is, I could be more proud of the team and we started with just teaching the organization about the Kaizen principles of -- which are behind BD excellence. Obviously, we also started our manufacturing network consolidation strategy as part of ReCoDe, which has now come together under this, but we did 250 Kaizen as part of BD Excellence in year 1. We did 500 last year. We're going to do a 1,000-plus this year. We already did more than 250 just in Q1 and expect as we get into our BD 2030 strategy, et cetera, we'll start putting out long-term margin targets on the gross margin side, just given our focus there. And the runway that we see left, right? And then the ability, as Chris described, to reinvest a portion of that in accelerating organic revenue growth, more again, outsized selling investment to drive revenue growth, that's really part of our flywheel strategy as we look ahead. And in a more concentrated focused new BD, we see a lot of opportunity for significant value.

Great. No, that's exciting. So we have 9 minutes left. I'd encourage anyone who has a burning question to put up their hand and jump in. But we wouldn't be covering the current market environment, the first 50 days of the new administration, if we didn't touch on some of the questions that have come out of that, including the potential impact of changes in Medicaid funding potentially changes in staffing at health agencies. In what ways can you talk about things like hospital -- risk to hospital budgets, maybe risk to access, how you're looking at them now. I'll leave kind of tariffs off the table because they've kind of been on and off, and we think they're on, but maybe just to focus on those 2.

Yes. As I mentioned, I'll be flying to D.C. again tonight. We have been spending a bit more time there than usual lately. But -- so we'll know more. But maybe just if I step back at a macro perspective. So a few of the things that we're watching, obviously, research spending, particularly with the current BD structure is something we watch closely. Obviously, the news from reduced NIH investments to something that caught customers and researchers gave them pause to look at what the implications are for them. That's something we watch very closely, both in the U.S. as well as in Europe, any implications of increased military spending and how government priorities may change related to health care and/or research, I think that's something that just one needs to watch as we go forward. And then obviously, China as well and the recovery timing of that, specifically, again, recovery in the research sector, which you've seen depressed research spending in China as well. So research globally is something that we monitor, the dynamics that are going on. In terms of health care investment in Medicare, Medicaid cuts, it's still early for that, too, right? It's not as definitive in terms of specific timing or scale, et cetera. So I think that's something everyone is watching, but more to be determined. And I think many of our solutions as we look at particularly our Connected Care segment, right, take our -- one of our great growth platforms that we've built here over the last several years, our pharmacy robotics business or even our medication management, connected care portfolio. It's really one of the best applications actually, I think, the largest -- the second largest robotics business, I believe, in med tech now, our pharmacy robotics business, but it's one that's purely focused on efficiency, right, helping people navigate cost-constrained environment with less labor and improving outcomes at the same time. There's other robotics that are obviously more focused on clinical outcome improvement, whether or not they improve efficiency is a separate topic. As we think about connected care and automation, there's a big, big focus on efficiency improvements as part of ours, which fits in well in a difficult environment.

Got it. Okay. So maybe then circling back on some of the opportunities for investment and growth. You'd mentioned AI often. You just mentioned this platform that some equipment just plugging into now. I'd like to talk a little bit more about what you can tell us about how AI is integrating either in a business line or across the backbone of businesses. And then in the time we have left, I'd love to understand a little bit more about sort of like the milestones and pathway to this Alaris APM integration that you've referenced a couple of times since the transaction.

Yes. Okay. So we'll start -- I think as you look at our journey, I think our first AI application was FDA approved more than 5 years ago, right, which was really the first one that BD had cleared was on Kiestra, which is using AI to read petri dishes, right? And it actually have 510(k) clearances where microbiologists are not involved at all in the decision process. It says, is this test positive or negative and then actually discards the samples, if they're negative and reports the results out. So that was our first application. We then used it as part of our medication management strategy and a partnership with Microsoft several years ago to start looking at helping customers understand where narcotic diversion could be happening in hospitals. And that has been quite a successful platform. Obviously, the advanced patient monitoring business has a phenomenal team around data analytics and AI. And they are on multiple different platforms now with AI-enabled hardware, consumables, with the software that are helping to predict, for example, in the future that someone's blood pressure may precipitously drop 15 minutes from now before it happens, so that intervention can be done. Maybe I'll pivot to then the opportunities that we see with Alaris and that combined. One of the things that brought us to Edwards Critical Care was as we spend time with our customers on the infusion side, and we asked them, what would be your dream scenario, if you could add additional features from an infusion platform? What is it that no one offers that is game changing in your mind? And one of the things that they mentioned is interconnected hemodynamic monitoring. If you're not familiar with it, hemodynamic monitoring is monitoring someone, essentially their blood pressure in a very fine -- very specific detailed way. And after surgery, particularly heart surgery, but many types of surgeries, you can have big swings, right, going 280. And that's just damaging your kidneys, your other organs, it's not good for your body. There's major implications of that. And today, the way it works is it would be essentially like giving you a thermometer and saying, keep this room plus or minus 0.1 of a degree, and there's the thermostat on the wall. Just keep staring at the thermometer and keep adjusting the thermostat. That's how it works in ICU today, right? They look at the Edwards monitor and then they adjust the infusion pump because hemodynamic is pressure of fluid going in, more or less fluid. So you need to change flow rates and medications that are constricting or expanding one's vessels, and that's how they manage it. And there's no need for that, right? Today, we don't do that with a thermometer. You just set the temperature and it manages itself. That's the vision with the combination of the Edwards monitor and our infusion pump platform. And we've actually already formed a -- we have a core team that's working with already have prototypes of that. it will take -- we're not sharing the time on that yet, but I couldn't be more excited by the early momentum. I've never seen an R&D team gets stood up prototyping and as focused as this team, considering we're just over a quarter really into the post close, Q1 was our first one. So more to come, think about as we get towards the next Analyst Day, which we'll reschedule towards the end of this fiscal year going into next. We'll share more at that point in time. And then on the broader AI side. So as I mentioned, we have individual platforms, products that have been using AI. The launch of the Pyxis Pro and the platform that we'll be launching there will be the first AI platform that will be standardized, more of an umbrella platform that BD devices will feed into that essentially becomes very much ChatGPT-ish when you see the demonstrations of it, where you can just randomly ask any question you want using any of the data that we have access to across any BD platforms. It will graph. It will chart. It will answer your questions, things around how do I reduce -- where is my greatest waste happening in medications? Which of my nurses are overriding the alarm systems or the safety systems of the pump most frequently that I should give additional training to? Where are my drugs being stored in the hospital or which of my hospitals have this drug that could be in a shortage. It's utilizing AI to really help improve the lives of clinicians and those people managing medications and/or the clinical outcomes of patients with medication.

That's great. And all of that makes a ton of sense. The amount of sort of system data, hospital data, device data that you have access to, it seems like it puts you in a great place to start kind of turning that back around. Maybe in the 30 seconds that we have left here, just anything that you feel is -- you would like to wrap up with here in terms of the environment, the positioning of the business here and what to think about going forward?

Yes. Maybe first just on the environment. I think where there's been times of uncertainty or challenging environments, it's been times where BD has thrived. And that's definitely proven if you look back at points in time, we've done very well. There's a near-term catalyst opportunity in the stock as we think about unlocking value from the separation that we're really excited about. And as we've discussed, we've been very focused on transforming the new BD into a growth-oriented med tech company which you can see in our underlying performance over the last several years. And we could be more excited about the opportunities for new BD as we look ahead post separation, and we look forward to announcing more details on that this summer.

Sounds good. Thanks so much for joining, Tom.

Thank you. Thanks for having.

Thanks, everyone.