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

All right. Good morning, everyone, and welcome to the 2025 Wells Fargo Healthcare Conference. This is the first fireside chat we're hosting, and I'm pleased to host the management team from Becton, Dickinson. With us, we have Tom Polen, Chairman, President and CEO and Adam Reiffe, Vice President of Investor Relations with us in the audience as well to format Q&A. [Operator Instructions] So let's jump right in. Tom, thanks for being here. Thanks for being a supporter of our conference call.

Great conference. Great to be here.

So Tom, let's just start with a big picture question or a couple. A couple of years ago, Alaris' return to market was a top priority for you. You've successfully accomplished that. Talk about your top priorities over the next 12 months as you create the new BD.

Sure. Thanks. And again, thank you for having me and thanks to everyone for kicking off the conference here. So you're right, Alaris was a key focus on getting that back to market. We're really pleased with how we not only executed the return, but how we've been executing commercially since then. We committed to upgrade the entire 2.2 million fleet of Alaris within the 3-year window. That was a commitment we made to the FDA when we returned to market. We're in the second full year now, wrapping that up, and we're very much on track to complete the upgrade within the 3-year commitment. At the same time, right, we're back to gaining share in Alaris. As I think everyone knows, prior to the ship-hold, we had a very strong trajectory of taking share. I think on the Q3 call, we highlighted a number of recent IDN wins, and we continue new wins that we're posting here in Q4 and feel really good about the momentum in that platform. We continue to innovate on that platform. We actually have a next-gen in development that we'll talk about in the future, but we really like where we're heading there. Of course, the last big thing that we were focused on that we made a commitment on in the spring was we said, come summer, we're going to announce the separation form for our Life Science business. And we're extremely pleased to have delivered on that commitment as well, having recently announced, of course, the separation the RMT, the first RMT in the history of the MedTech industry with Waters for that, a great organization, one of the fastest-growing life science companies, extremely complementary portfolio with both flow cytometry but also in the diagnostic space, I think a very meaningful value-creation opportunity for our shareholders as we look forward. And so our first when it comes to our priorities over the next 12 months, certainly, number one is completing the execution of that transaction. So -- and we can get into that, but it's very much on track to be completed in the first part of calendar '26. We have our separation teams fully up and running with their integration teams on their side. We've begun filing with the SEC, that required documentation. So everything is hitting stride on the time line just as we have committed there. Second major priority that we're focused on is executing our commercial strategy. And in Q3, we talked about incremental investments in our selling organization as well as behind new innovations in our pipeline. We can talk more about some of those. We've got a really exciting pipeline. Second focus is on optimizing the growth from those and through the commercial investments that we've been making, setting us up for FY '26 and beyond. Third priority is continuing to execute our margin expansion strategy of BD Excellence. You've seen us deliver very strong margin expansion over the last couple of years, best-in-class in industry. And you're seeing that drive strong earnings growth from margin expansion -- gross margin expansion, right? This year is no exception, right? While there's dynamics in the macro environment that we see impacting revenue a bit, we're still delivering 9.5% EPS growth at the midpoint, including absorbing tariffs, right, strong, driven by margin expansion, driven by BD Excellence. So continuing to drive that, which is enabling those investments that I described as well as well as our fourth priority, which is continuing to execute our capital allocation strategy. You heard us, we're going to have a really tremendous opportunity as we create the new BD with $4 billion of cash coming in. You heard us, we're going to have a really tremendous opportunity as we create the new BD with $4 billion of cash coming in. Of course, our shareholders will own almost 40% of the new Waters organization. BD will also receive $4 billion of cash, which we've committed to allocate at least half of that to share buybacks. So we'll be executing upon that as we enter into FY '26. But beyond that, we've also recently communicated an updated capital allocation strategy, utilizing our very strong cash flow as well with a preference in share buybacks. We recently completed the $1 billion share buyback for this year. We had indicated we were going to complete that in Q4 on the last earnings call. That has now been completed. That will bring up our total return to shareholders this year to about $2.2 billion of capital return to shareholders, about $1 billion through share buybacks, $1.2 billion through our dividend policy. So those are our focuses for the next 12 months.

That's helpful, Tom. So can you talk about the growth algorithm for the new BD? And you've talked about buybacks beyond the majority of the $4 billion cash you're going to receive being a big component of that. Why is that the right capital allocation strategy? When are you going to be in a position to talk about kind of what the EPS kind of targets are?

Yes. So just as we think about the new BD, today, the new BD, Q3, right, new BD grew about 4%. And we expect actually full year is going to be relatively similar to that for the new BD. Mid-single-digit growth profile, we're highly -- that's our outlook for the new company. And we can get into the key catalysts that we see there. We've got quite a few new innovations coming to the market. And new BD is going to be positioned in extremely attractive markets, whether or not it's biologic drug delivery, smart connected care, whether it's APM or our new AI solutions around medication management, a series of interventional spaces that we play in and are delivering very strong growth in like urinary incontinence and tissue reconstruction, et cetera. So we're really excited by the portfolio of the new BD, by our innovation pipeline of the new BD that supports that mid-single-digit growth profile. You follow down the P&L with a very strong margin expansion that we see. And as we've shared before, BD Excellence is in early innings. BD Excellence didn't exist 2.5 years ago, right? It's actually pretty phenomenal, the momentum that we're getting from that across our very large-scale manufacturing facilities of just driving Kaizen and engaging our associates in continuous improvement. I mean we're seeing waste drop by half in our plants over the last couple of years. We're seeing quality and recalls down meaningfully. We're seeing service levels now at record levels, which allows our sales team to not have to deal with back orders, but to focus on gaining share. And of course, we're seeing productivity improvements that are very meaningful, things like you're seeing our CapEx spending come down, but we're actually getting -- because of the productivity on the lines, we're producing 2.4 billion units more than we did just 2 years ago or we have the capacity to do that because of the productivity improvements on the line. So all of those things are driving margin improvement. And that flows down to strong EPS performance, high single digits, obviously, this year, very, very high single digits right on the cusp of double, and we'll see where we get in Q4, maybe we ground to that mark.

That's helpful. But the share buyback beyond the $4 billion, you're talking about using, I think, at least 50% of free cash flow going forward for share buyback, the majority. So that's -- why is that the right approach as opposed to spending more on tuck-in M&A to drive growth?

Two things. One is, first off, just at our share price today, we think we're meaningfully undervalued. And as we look at our internal plan, there's no better return than buying back our shares. We're highly confident in our plan. And again, it's a very good return for us from an investment perspective to buy back our shares and for our shareholders. So that's number one. As long as we're in and around anywhere near this space, we'll be buying back shares. Second is we've done about 22 tuck-in acquisitions over the last 5 years. And as you look at one of the things that BD is extremely good at is serial innovation. Once we bring in a technology, we do extremely well at serially innovating it. And a number of the new exciting pipeline projects that we have that we're investing behind actually are coming from tuck-ins that we've already done. So if you think about in our surgery business, for example, we bought the Tepha business, a biomaterial. We started with hernia. We then proliferated and you've seen us launch just this year, umbilical hernia, kind of rounding out those options. Next year, we're launching the first GI application with that biomaterial. We announced that we're enrolling women already for a breast indication with that biomaterial. And we have 3 or 4 additional indications that we have underway there. The same thing in APM. We bought APM just about a year ago this week. And we're now delivering new products into the pipeline, combining it with Alaris as an example. We're doing the same thing. We bought Surgiphor. We're iterating Surgiphor. Obviously, PureWick, we've got a tremendous number of new innovations in PureWick. We bought Straub Medical. We have new indications for below the knee that we're investing in behind there. And so we've built this very strong pipeline, and we want to continue to really get the value out of the tuck-ins that we've done. We will continue to do tuck-ins, right? Our team remains very active in tuck-ins. I think the point is focused tuck-ins as we continue to execute on the exciting innovation pipeline that we have today, we'll continue to supplement that with tuck-ins. I consider that inorganic R&D. We'll continue to spend north of $1 billion on R&D, which is what we do today and maximize the value that we get out of that. Again, supplementing it with tuck-ins, but with a bias towards share buybacks.

Got it. That's helpful. One of the most common questions I get on the new BD is the margin profile post-separation. Chris, your CFO, has talked about it being similar and I think he's talked about it more on the operating margin side. So the questions I've gotten from investors are, A, how do you define similar? We're assuming within 100 basis points, maybe even within 50 basis points, and this is all in after stranded costs, TSA, MSA. And then gross margin is something you haven't commented on. Is that similar as well?

Also very similar, yes.

Okay. And so it's within kind of, call it, 50 or within 100 basis points is the right way to think about it?

I'll let Chris stick to the one concept, but it's very -- it's almost on top of it, yes.

Okay. Just a question that...

I would just say on the stranded costs, as Chris mentioned, we have TSAs that will obviously transition where we'll continue to provide those services for Waters at the beginning of the separation. Those will pay off. And we've actually already stood up teams and have them actively working. I spent a chunk of time yesterday on this of eliminating stranded costs. So we're going to be extremely proactive on eliminating stranded costs as part of our separation plans.

So that will be an opportunity over time because when you say the similar operating margin, that includes the stranded costs. So as you eliminate the stranded costs, obviously, it improves the margin profile.

Right. The faster you eliminate those, the better you get the ramp, yes.

Let me transition to kind of the current business. And a more short-term oriented question, which is kind of the acceleration implied in the Q4 guidance going from 3% organic to 5% organic. Talk about the drivers of that and your level of confidence, please?

Yes. So obviously, you saw us have a meaningful acceleration Q2 to Q3 as we shared, driven by pretty much strength across the portfolio, as we mentioned. You saw very strong growth in BD Interventional. We expect that strength in Interventional to continue. You saw double-digit growth in UCC. You saw strong mid-single-digit growth in the rest of the businesses, overall Interventional, very strong mid-single digit, almost high single-digit profile. We expect that to continue. We expect continuation in our medical businesses. You saw mid-single-digit strong performance in MMS, driven by Alaris as well as Pharmacy Automation, dispensing, very strong order book coming in, in Q3. That's continuing in Q4. We expect that will continue, solid performance there. As well as Pharm Systems, you saw an acceleration as we expected in the back half of the year. We always mentioned that can be lumpy, but we certainly expect positive growth in Pharm Systems in the quarter. I think the 2 big things as we look at what are accelerating, it really comes down to 2 items. APM becomes organic. And so you saw us post a very strong, I think, about a 13% growth in APM in Q3. APM is doing extremely well. We're really pleased with the integration and how that's gone. We've been very purposeful in keeping them focused as an independent business, because their strategy is working. And we're just supercharging the strategy by putting more investment in selling. We're putting more investment in R&D than they had within Edwards for the whole reason why Edwards says recognized, right, this could get more focused attention and investment if it was part of a different company. And we're doing exactly that, which is part of our investment thesis, and it's working. And so that growth will become organic. The second thing is essentially the run rate that we had for BACTEC, we assume that we would -- we need about 85% of the historical run rate of BACTEC before the ship-hold happened or before the supply shortage happened for Q4. We exited that at Q3, so we were already at that run rate. That needs to continue. It is continuing. We're seeing solid performance in BACTEC so far in the quarter, but that is also a lift because there's an easy comparison versus prior year when there was a supply issue.

Any way to quantify the benefit from APM becoming organic...

Those are over a point by themselves, right? The combination of those 2 is over a point.

Got it. That's helpful. And this year, you're seeing a 175 basis point headwind from 3 items: China, Pharm Systems, some of the issues within that business on anticoagulants, I think, and then Biosciences. Talk about how much -- what kind of recovery you expect in Q4 and beyond in those 3 areas, please?

Yes, absolutely. And those are 3 macro, right, secular issues that you see across the peer groups in all 3 of those sectors. So in Biosciences, obviously, we're in the process of separating that with Waters. And we -- the good positive thing is we saw about 200 basis points of sequential growth improvement in that business, Q2 to Q3, we expect to continue to see sequential improvements as we think about that going into '26 and beyond, but that will obviously transition into Waters, and they're going to do a phenomenal job. It's a great business. We have a very strong win rate. It's really around market recovery in the research spending sector. You actually saw us talk about that all of our clinical reagent. The reagent business actually grew mid-single digits last quarter. It's really that research sector and the timing of the recovery. And so that's -- again, that's going to do great in Waters' hands. Pharm Systems, we indicated that -- and you saw that across the sector, right? You saw destocking happening, essentially every peer experienced that. And I think most peers said we expect to see recovery beginning in the back half of our fiscal '26. And we saw that. We posted nearly a 4.8% growth rate in Q3, which was a meaningful acceleration. Again, that business, if you look back over 10 years, it's never a linear business. And if you look back before the ship-hold or before the slowdown in that market, the destocking, that business was growing double digits for 3, 4 years in a row. And since we launched BD 2025, that business has grown $800 million. It's a phenomenal business. So -- but it always had some lumpiness to it. We expect that will continue, though, in a very positive direction as we head into '26. So we feel good about that. And then China, VoBP. So you're seeing VoBP go through our -- the legacy Bard business today, primarily within the surgery and the Peripheral Intervention business and a bit in our PICC business, which came from Bard. We expect that will have completed by the end of '26. So we do expect China to decline high single digits this year. We expect it will continue to decline mid- to high single digits next year and then stabilize thereafter. By the end of next year, and we spend a lot of time going into granular detail on this, 90% of BD's portfolio -- new BD's portfolio will have gone through VBP by the end of next year. And so that's what gives us confidence in the stability. And we have seen that when product categories go through VBP, we then see more stabilized growth because what is happening, like last quarter, we had negative growth in China. It was more low to mid-single-digit negative growth in China last quarter in Q3. Volumes grew double digits. So we're seeing strong share maintenance. We're seeing strong volume growth. It's that pricing from the bidding processes that are happening there through value-based procurement. But then once those prices come down, that volume then lifts sales. And we're seeing that again in the categories that have gone through that.

I think when you were talking about Pharm Systems and the growth, you might have said fiscal '26, I think you meant fiscal '25 in terms of...

Well, I just mean that we expect continued momentum into '26, the recovery of that space.

Got it. That's helpful. One follow-up question on Alaris. I guess one of your competitors has a voluntary pause on their new pump. I think you said you're in year 2 of remediation. Is Alaris still accretive to your growth? And how is this -- the competitor issues potentially benefiting you?

Yes. Look, we don't comment on specific competitors. And -- but we do recognize that we're here to support customers in need. I mean it's a serious issue that's being faced there. And obviously, Alaris has a very strong track record, extremely strong preference by clinicians and nurses, very strong iteration from an innovation perspective. We've now submitted twice to the FDA for new innovations, some of which have already launched now since we got the initial 510(k), and that's something we're going to continue to do as we look forward. So yes, we have a lot of active discussions with customers. As we mentioned, we signed quite a few in Q3, some meaningful contracts. We're continuing to do that in Q4, and we're just going to focus on keep chopping wood, continue to execute as we do. And we're maybe in that same category, we're extremely excited by the new Pyxis launch and Pyxis Pro, which is the first new Pyxis platform, I think certainly ever since we bought CareFusion in 2014 and for a while since they had owned it. And so this is the first AI-enabled Pyxis. It's a new system, holds 30% to 40% more drugs in the exact same space than our current version and the competition, which means nursing stock-outs happen a lot less, meaning that nurse can get the drug when they need it rather than hunting for it, big productivity improvement. But most transformational, it's AI-enabled. And we have a large language model that we partner with Amazon and a third party on called BD An ka taa, which we're unveiling and now have installed at a number of sites. And what this allows one to do is it starts with Pyxis data, but we're going to be plugging all the data from our APM instruments, all of the Alaris instruments, all of our software in the central pharmacy, like Pyxis Logistics and our compounding platform and utilizing all of that data to optimize the cost and safety and quality of the end-to-end medication management process. And we're seeing phenomenal feedback from customers because what the AI is allowing them to do is just gain data immediately. It's basically ChatGPT for medication management. So you can just say, An ka taa, please describe to me which words are stocking out of medications at what frequencies and how should I change my Pyxis refill. It will immediately pull up all the analysis, put charts out just like ChatGPT and tell you, please tell me which nurses in my hospital are most likely to be diverting narcotics. And it will tell you and then tell you exactly why, right? What recommendations would you have to reduce my inventory levels to improve my cash flow, which medications are overstocked. They'll tell you all of that information. You can just open query just like you would with ChatGPT on all data from BD instruments in the future. So we're seeing a lot of excitement from customers, and that just shows the power our discussions with customers as they see that, they recognize that how do I put more and more platforms into that AI system because the more BD platforms you have, the more powerful it becomes. So we're really excited about that. Again, it's launching on Pyxis, but we'll be adding all of our platforms in the future.

Is there any way to frame the financial opportunity for BD for Pyxis Pro, any broad strokes you can share?

Yes. So first off, Pyxis overall, it also has had -- it has lumpiness in that market. And I think you see us and really one main competitor in that space, we're going into a large open contract period. So there's a cycle coming up actually in '26, '27, '28, where there's a larger-than-normal amount of both our competitive business that comes up available. And so it's not by accident that we're launching a really breakthrough new platform in that exact phase. So we think there's opportunities from a share perspective. There's a value capture on upcharging for software, which is part of our model as well as well as for the new instrument. And so those are kind of the 3 main categories that we see. And then on the third one is obviously the power of An ka taa and pulling through more and more BD products, right? Because again, the more value that you have, An ka taa becomes more and more powerful. If you use our software that's managing inventory in the central pharmacy, it knows what's there. If you're using our software that's compounding medications, it has the data from that. If you're using Alaris, it knows what's being infused into the patient. If you have the data from our APM systems, you know how the patient is responding to the medications that's being infused into them, obviously, and you know what's available to the nurses and what's happening to how nurses are engaging with those medications with our Pyxis. And suddenly, you have an end-to-end view from the inventory through how actually patients are responding to those medications at the end of the day. There's no one else on the planet that has that data set, which is extremely unique. And so again, applying AI now to that, we're really excited by and that, I think, provides us opportunities more of a portfolio play from a share perspective.