Becton, Dickinson and Company ($BDX)

Good morning. Thanks very much for joining us. Very pleased today to have with us Tom Polen from Becton, Dickinson. Thanks so much. My name is Matt Miksic. I cover medical devices here at Barclays.

So the first question is probably has to be, I guess, what's happened in the last week or so, implications for oil, exposure to Middle East. So maybe if you could sort of step into those 2 issues, folks are trying to get their arms around what all this might mean to Becton.

For us, we really see no impact for this year. I think kind of the days of oil and resins being closely tied, it's not the same. The other thing is since we've been implementing BD Excellence, and if you remember, we put in some hedging strategies around currency, we also put in much more aggressive hedging strategies around oil, our resin prices. So we're highly hedged from a resin perspective. And even if oil were to stay at or slightly above where it is today, it's very low single-digit millions of dollars, which is basically nothing for BD in the fiscal year. So we'll continue to monitor, obviously, for future years as we see where this heads, but for FY '26, we don't see any impact for that at all.

Okay. That's -- and maybe just maybe draw some comparisons if this were to play out for a longer period of time. I guess, as of yesterday afternoon, it felt like it was going to end quickly. And then as of this morning, there's some questions again. But if this were to go on for higher for longer, how might this be similar or different to sort of last time we have to deal with elevated.

I think the other thing that is very different. I'm heading out to the business roundtable after this, and we've got a lot of folks, which I'm looking forward to understanding where this is heading as we'll be in D.C. But the other thing is we have, again, through BD Excellence and the work that we've done over the last couple of years, if you go back 3 years ago, we would have been primarily just sole-sourced for a number of our resins. So think about Vacutainer tubes and syringes, et cetera, we would flush we'd be sole-sourced across that. That's not the case. Like today, we have 3 different vendors for Vacutainer tubes. And that was a significant cost savings. But what that also creates is when there's variances and you can actually, again, now have a much better leverage point from negotiation to optimize costs. So we're in a much better spot than we've been historically where it's been a sole-source resin supplier versus where we are today. Again, we hedge more than 50% of our resins are hedged. So that's allowing us, again, to not see an impact in FY '26. That's not the case of where we were a number of years ago. And I think, obviously, beyond oil, we've done the same thing from a currency perspective, and we talked about how we did that a few years ago. BD historically, prior to 3 years ago, never hedged currencies ever on the income statement. There's some balance sheet hedging, but never that would impact the income statement. And so that's something that we've matured into quite sophisticatedly over the last couple of years as well.

Yes. I think a welcome change. I think that's something that's been a debate for years. Is it a good idea? Is there economic value? So you've started to enter that end of the pool, which is great.

Stability, right? If it's with the new BD, that stability through different cycles, that's why we really want to make sure that we deliver.

And then just in terms of timing, these are resin providers. So I would imagine there's like a -- there's a turns element of production on that for them and then there's a turns element production for you, which kind of...

With 120 days of finished goods, plus then you have -- again, we have silos full of resins at our factories, which have additional raw material. And then you've got obviously the hedging that takes place. And so all of that, that's why, as I mentioned, there's really no impact at all in FY '26.

And for the most dependent products on resin, I think what we saw last time was you were in that sort of end of the spectrum of medical devices and MedTech where given there's 2 suppliers maybe of syringes or whatever the product is, that you were able to pass through some of the price increases to the extent that they were elevated and prolonged. So not that we're there yet, but that's...

It's always a lever, and we certainly have done that in the past.

Okay. So I wanted to -- and then just lastly, just on Middle East as a percentage of your business or exposure, is that sub-5%, sub-2%. What would you describe?

2%, within that 2% range. And it's actually been a good growth contributor for us over time, and we're still deeply engaged with markets there. I was just in Riyadh in the last month or 2. But certainly, for right now, that's obviously paused. And we're continuing to get product flow into the region, et cetera. We have a very sophisticated supply chain throughout Europe and the Middle East, but that's -- obviously, we're very focused on continuing to support the health care system there as they're going through a very challenging time.

Okay. So obviously, absent the events of the last week or so, it's been a super busy year at BD. So congrats on the -- sort of the partnership and the divestiture, call it. So maybe you've highlighted a few sort of key strategies. So I wanted to talk about -- I won't go through what you've described as your connected devices and lower-cost convenience settings, and growth technologies kind of being paraphrasing the 3 elements of your strategy. But maybe on smart connected, maybe talk a little bit about what the opportunity is there. You've obviously been in connected devices for a while in terms of infusion pumps. And now with the Edwards patient monitoring critical care business, you're also kind of on that side. Maybe talk about the opportunity for infusion systems and Smart Care?

And then maybe just to step back to what you brought up upfront. We have been very active in transforming the company through the first phase of our strategy, which we've just completed, right? BD 2025, just ended at the start of -- at the end of last fiscal year, and we're on to the next. And we really are pleased with how we've set up the organization for the next phase and long-term growth. As you said, we've done significant transformation, 3 major divestitures over that period of time, the separation of the Diabetes Care business, the separation of our V. Mueller business, selling that in Surgical Instruments. And then obviously, most recently, right? The RMT with Waters of our $3.2 billion Life Sciences business. And that was a great transaction, I think, for both parties and really excited for where that's going to head. And obviously, our shareholders will own about a little under 40% of that new entity as it goes forward. At the same time, we've built very systematically a number of entirely new growth platforms that didn't really exist at the start of BD 2025, So we have now the world's largest biologic drug delivery business, over half of our Pharma Systems business, Catalyzed by GLP-1s, that business growing double digits. Tissue reconstruction, we had a hernia business, but we didn't have a regenerative medicine business, which is what we have today and a really exciting platform. Again, an acquisition that we did early in BD 2025 that we've spawned half a dozen products off of and have probably nearly a dozen products in the pipeline off of that. The connected care business, right? We're now the world leader in pharmacy automation, a $700 million business, heading towards a $1 billion advanced robotics running pharmacies. I was in Europe all last week, really, really heightened interest there as people are focused on how do they transform their cost structure and pharmacy robotics definitely play a very important role. And then in the broader medication management connected care business, we'll get to what you described. We've also built a urinary incontinence business that's at scale heading towards $1 billion by 2030. We've built a very strong peripheral vascular business that we're going to continue to double down on. And we've not only supplemented that heavily with tuck-in M&A, so we've done 3 very large non-strategic exits. We've done about 20 strategic tuck-ins, building these growth platforms, and we're investing, obviously, in those as we go forward, both organically and inorganically. As we go back to the connected care strategy, so we're in an exceptionally unique position in what we've built. And you'll continue to see us even through the balance of this year, announce new innovations that we're coming out with has been in our pipeline, but we haven't shared quite yet. And so what we've assembled very purposely, very proactively is the ability of the only company that actually has all the understanding of our software and the pharmacy that is managing the inventory of the drugs that then compounds the drugs using our Pyxis prep that then moves them up to the floor. Any drug that a nurse administers to the patient, the vast majority of those go through our Pyxis cabinet. And they're looking at a screen and determining what the patient needs and then we're giving them those drugs out of the cabinets. And then we're infusing those, and we actually have a line in -- with our catheter and our IV set going to our pump in the majority of patients in hospitals today. And now we have connected to those patients, a monitoring system that's understanding what is the physiological response of these drugs that the patient is getting. And are they where we want them to be. And so as you think about AI and technologies, the ability to integrate, the physiological response of a patient to the medications that they're getting and closing that loop is something that our customers get exceptionally excited about, you and I today, your body is not waiting for you to go to 180 over some other number, blood pressure and just hang out there for 10 minutes and then swoop you back into 120 over 80, it doesn't do that. On a microsecond basis, your body is making adjustments. That doesn't happen when you're sick, if you're in an ICU, you swing up at some point when you swing up so far, the alarms will go off, the nurse will come in. They'll look, they'll start trying to change the infusion rates, give you more fluids, maybe give you a vasopressor, et cetera. And then we'll try to swing you back into the range and then you'll swing back out. And that's completely unhealthy for your body. It causes organ damage, it extends length of stay. And there's no reason for it, the pump can do that on its own in the future. And you can do many other things that we've been doing quite a bit of work on. And we will be integrating, and we shared that, obviously, at the time of the acquisition, the APM technology with our infusion technology, and we'll be making more announcements on that as we go through this year and into early next year.

And the timeline for that, I mean, imagine there's -- that is a new category. And I know it's hard to resist the urge to kind of make the comparison to insulin pumps and closing the loop for patients who are looking for time and range over a 10, 20, 30, 40-year period on their lives, and you're kind of talking about time and range for other kinds of metrics in...

The indication is way broader, beyond insulin in the [indiscernible] setting.

Of course. No, this will be anything, but the concept being the same, if you don't want to wait for something bad to happen in intervene.

We shared at the time of the acquisition, the first step will be integrating the monitor into the Alaris pump. The Alaris has modules that snap on. We've shared that we're working on that, and we'll look forward to obviously communicating updates on that...

And then the next step would be sort of...

The algorithms.

And a conversation with regulatory and so on to begin to...

We have.

Okay. Great. That's exciting. All right. And then -- so that's -- and also, you mentioned the divestitures and the tuck-ins, but one of the divestiture acquisitions Bard really brought in, and we talked a fair amount about this when we relaunched here at Barclays is just the capabilities on the M&A front. So maybe with all the focus on the sort of, call it, a divestiture of the Diagnostics and Biosciences business, flow cytometry business, the spotlight has maybe taken off of the activity level in tuck-in. But maybe talk a little bit about what that activity level looks like, the ways you're augmenting your internal organic R&D with opportunities.

Yes. I think just to step back a bit, we've absolutely developed a very strong track record on M&A, both on the divestiture side, I think everyone would view our RMT, the first-ever RMT in MedTech as a major success, in a very challenging window of life sciences industry overall. I think that showed the capabilities of our team. At the same time, the acquisitions that we've done, including the most recent APM, which is well ahead of our deal model. It's going exceptionally well, grew nearly 10% last year. We'll grow high-single-digits again this year. We've been integrating. We've been very prudent and thoughtful on the types of acquisitions that we've done. As I described before, many of the key growth drivers, including in peripheral vascular, in the surgery business, TFA, even our recent -- you saw us make some announcements on Surgiphor. These are just great examples of tuck-ins that we've done, TFA, tuck-in that we did, probably launched 4 or 5 new products off of that. We've got a very strong pipeline of, as I mentioned, probably near 10 different iterations that are coming after that. And so we do really, really well with those. So we will continue to do tuck-in M&A. Now that we also just completed the APM was 1.5 years ago, not that long ago for a $4.2 billion acquisition. Obviously, we've been busy doing the RMT. We will continue to do a balanced capital allocation strategy, which is what we've communicated very clearly for new BD, which is a heightened mix of share buybacks continuing our strong dividend policy and -- but continuing also to do tuck-in M&A, focused tuck-in M&A that accelerates our growth, high-growth spaces, high-margin spaces that are accretive. That's where we're focused. And we have a strong track record of those, and we'll be continuing those.

And then the margin structure, obviously, the RMT, the 2 businesses that you moved into that partnership were among the higher spend in sort of R&D and sort of that process has unleashed a fair amount of internal R&D. Maybe talk about the way you expect to -- the obvious question is how much of that comes through and how much of that finds a home in projects and programs elsewhere in the P&L?

Well, we let that flow with those businesses. We didn't restock up from the just overall R&D number. What we did do, though, is we reallocated about $50 million of corporate R&D spend into the businesses, and we did that at the start of this year. And we talked about a number of the spaces. We put that into regenerative medicine. We put it into new adjacent spaces for PureWick as an example. We put more money into APM. And so you're seeing us invest more into actual R&D projects in those high-growth spaces. We put some more into the biologic-drug-delivery space. So we'll continue to look at doing that, but we always look first at our existing portfolio and spend as a company and how we reallocate that into productive R&D spend at the project level.

So a couple of things before we get to the last couple of minutes here, I'd be remiss not to -- not to sort of ask about China, given the challenges in sort of predicting which way that's going to go and when it might inflect or stabilize. Maybe talk a little bit about how you're thinking about that business now and what you've learned over the past couple of years and how you're thinking about it differently now?

Yes. Obviously, we've shared that value-based procurement, obviously, particularly going through some of the Bard portfolio, surgery and PI primarily. And so we expect that still to have gone through about 80% of our portfolio by the end of the fiscal year. We've shared that. We feel that headwind this year. On a positive side, new BD, China will be about 4% of our revenue this year, which is down from about 7% over a couple of years before. That's a combination of just the impact of VBP, but also the fact that Life Sciences was our largest segment in China. So now with that separation, that actually further derisks China as part of our overall portfolio. So we're continuing to invest in the opportunities where they exist, but I'd say we're taking a prudent approach to China, just given there is still broader long-term uncertainty around that market.

And then a couple of the other questions that I get often is around Alaris and pumps. A lot of excitement or anticipation around the approval that came a fairly robust success in kind of coming back to the market, I almost said roaring back to the market, but now sort of moderating some of those expectations in terms of what could share gains be? What should margin contribution look like? What's the right way to think about Alaris going forward aside from the connected strategy you mentioned?

Yes. No, we couldn't be more pleased with the relaunch of Alaris and how that went. First off, we certainly are exceeding the commitments that we made to the FDA around upgrading within that 3-year period. Extremely challenging to do as you think about upgrading 60% of the market in a 3-year window, that's 20% of the market every year. Just put in comparison, you've got roughly 3 other players with another 40% still on an 8-year replacement cycle. So all competitors combined upgrade about 5% of the market a year, and we did 20%, 4x all competitors combined for the last 3 years. So the scale and what our manufacturing team did was just outstanding and our service organization. As we're coming to the end of that upgrade process, obviously, that creates a natural grow over because you would have never normally upgraded your entire base in a 3-year window. And that was obviously part of the commitments to the FDA. And that creates a grow over this year and will create the grow over next year that's very defined. At the same time, it's a situation where that grow-over creates a revenue headwind, but we're actually going to continue to hit peak market shares at every step along the way. And this past quarter, we shared Q1 was another like record quarter for us in terms of competitive share gain. We gained about 1 point of share just in the first quarter. Even when Alaris was hitting full stride before the ship hold, it was 1 to 2 points of share a year. And so to have that in the first quarter, we have a very strong funnel of competitive business. I think what you're seeing is our sales team has been exceptionally busy just upgrading our base, upgrading 60% of the base. That's coming to an end, the vast majority of our customers are either upgraded or have already been contractually committed to upgrade. And so it's a service organization execution topic, not a sales execution topic. And so our sales team has pivoted heavily to competitive share focus because that's really the only opportunity for them to go after. And so I think that bodes well for the next several years of share focus for us because that's all we're going to be -- that's all we have to focus on.

And someone might say that the timing for you is good given some of the competitive...

It's all offense, no defense. Everyone has brand-new Alaris pumps. So it's not a defense game there. It's an offense game.

Yes. Yes. And your largest competitor is in a little bit of a sort of a -- I don't want to say terribly difficult situation, but it's a ship hold and it's -- there's...

We know that situation better than anyone.

Yes, I'm sure. I'm trying to describe it delicately. But no, that's -- and then maybe talk a little bit about the pull-through. Like this is -- you've upgraded and returned a lot of pumps to the market from a margin contribution standpoint. Does the consumable side, the side of that business stand to.

The consumables are higher margin than the capital. If you place the capital upfront, it's a bit of a lower margin than the consumable stream, which you're on now consumable stream for, call it, 8 to 10 years, which is the life of the pump at that higher margin profile. So yes, we would expect that to build over time as share continues to expand.

Okay. So one -- just a question about the guide this year before we wrap up is the sort of low-single-digit growth with some, I'd say, maybe conservatism and caution built in around some of the decel is assumed in Alaris and continued pressure off a smaller base in China, maybe pharma systems, in vaccines. So maybe what in that -- what can push that higher this year? What -- I understand, given the last couple of years, in particular, the desire to start this in a conservative baseline, but what are some of the things you're excited about that could potentially push you to the higher end of your range?

And so as you just described, we obviously put out a prudent guide, mid, low-single-digits guide. That assumes the 90% of the company growing strong mid-single-digits about 4.5% plus and 10% of the portfolio, which is the categories you described, Alaris, vaccines and pharma systems in China, growing less and pulling that down by about 250 basis points, those represent is what we communicated at the start. You can kind of do the math, right, to get to that solid mid-single-digits for the 90% of the portfolio. And that includes a lot of areas growing high-single- and double-digits. So as we think about where that incremental growth opportunity comes from, it's from those high-single-digit, double-digit growth areas. Biologic drug delivery continues to grow double digits for us. Obviously, GLP-1s continue to expand. APM continues to -- with the launch of Stream, which has the opportunity now to move from an $80,000 monitor to something that's a fraction of the cost that can democratize access to hemodynamic monitoring across not just the ICU, but the general wards for high-risk patients, that's a new opportunity that we've just expanded the sales force and are investing behind. PureWick continues to now grow very strong double digits. And we now have reimbursement in the Veterans Administration. We've put more salespeople focused in there to get veterans access to the technology. That's actually running ahead of our plans today. So it's off to a great start. It's another category that we certainly see opportunity in. Continuing in Alaris for sure, and Pyxis Pro, which is the first new Pyxis in essentially 20 years of a cabinet. I think we shared that 80-plus percent of our initial wins in the first quarter were all competitive wins in that space, and we expect that to continue to be a very strong competitive gain platform for us, which designed to be that. It's getting very positive customer feedback, integrated with our BD Incada AI platform, which will continue to roll in Alaris and APM and our pharmacy robotics will all be under that AI umbrella, that creates, again, a flywheel effect to pull through that portfolio. So we've got quite a few growth levers that we've been investing behind. And we've talked about, we've put money behind those going into this year as well. We expanded our APM U.S. sales team by 15%. We expanded our PI sales team by 15%. We put more money behind the PureWick launch in the veterans this year. Surgery, that's another area of great momentum that we have is that regenerative medicine business. We have claims in Europe now for plastic surgery reconstruction and breast reconstruction using our GalaFLEX, which is one of the TFA products that we had acquired a couple of years ago. And so as people are getting GLP-1 surgeries, skin -- needing chin lifts, breast lifts, triceps lift. That's all being done with our GalaFLEX resorbable mesh that disappears in 18 months and leaves everything kind of held up there. And so we put more feet on the street in Brazil across Europe. And again, that's going very well. So a number of different growth drivers that we're investing in that could provide those opportunities.

Okay. So I think with that, we're just a touch over here. We should probably call it. But thanks so much, Tom, for...

Yes. Great seeing you. Thank you. Thanks, everyone.