Becton, Dickinson and Company ($BDX)

Travis Steed, the medical device analyst at Bank of America. Next up, we have Becton, Dickinson, Tom Polen, CEO; and Vitor Roque, the newly announced CFO. I think you've been to Vegas a couple of times, but this is his first fireside chat as CFO. So welcome.

Thank you. Thanks for having me.

Maybe since it is your first fireside chat. Maybe we'll start with you just announced permanent CFO. Just kind of love to talk about your strategy as CFO. What do you think is different? What do you think is the same as we see BDX in this role?

Sure. No, thanks for the question, and thanks for having me. Very happy to be taking this new role as Chief Financial Officer in the search of pivotal time for BD. We just closed the transaction with Life Sciences last quarter, and we couldn't be happier with the new strategy that BD is taking. From a CFO perspective, I think the philosophy here is to be making sure that we are like consistent and transparent, making sure that we understand the business drivers. And I actually feel that I'm very well positioned to do that given my more than 2 decades with the organization, and I can partner with Tom and the leadership team in order to drive that operation and unlock the growth that we are looking for while being very responsible, and that's going to translate into kind of a clear guidance and a lot of transparency on what we do. Also, I think one very important topic for me as the CFO is making sure that we take care of our capital allocation strategy. We have been very clear on our priorities are from our capital allocation, focusing on the share buybacks, maximizing the shareholder return. I think based on what the share price is today, I think that's one of the priorities that we have on capital allocation. But also, we continue to invest in the business focusing on tuck-in acquisitions to solidify our top line growth and taking care of our balance sheet, delivering the leverage that we have been committing to this of 2.5x. So those are going to be the priorities and supporting the strategy and unlocking the growth. So I would not say it's a complete transformation from what we have in the past. I think it's more sharpening our focus and making sure we can deliver the numbers that we have been promising.

And I think we had dinner last night, obviously. So I think kind of the 2 things that stood out to me at dinner was, one, the guide that BD is executing against now and just hit the last couple of quarters on, you are responsible for that guidance. And then two, you've been an operator and worked in a lot of the businesses. I don't know if you want to elaborate on those kind of 2 points.

Sure. Yes. So of course, I have been an interim. I was an interim as a CFO since December, but I was integral part with Tom and the leadership team in terms of building the expectations for this year. And again, the objective, as I said before, is getting that consistency and transparency on where we see the markets. We have the 3 major like headwinds that we have been communicating on Alaris vaccines in China. So we wanted to make sure that we put a guidance out there that reflects the underlying performance of the business, meanwhile being very clear on how are we going to get there. And from an operational perspective, yes, so I have been with the company for 20-plus years. I have worked in multiple regions in Europe and Latin America and North America. I have also had the chance to work in multiple businesses, even on our legacy Life Sciences business and Biosciences, but also Medication Management, specimen management across the regions, and most recently, supporting segments as well as the medical segment. So I feel that I'm very well positioned to drive that operational rigor that the company needs in order to drive the new BD strategy.

Helpful. And Tom, kind of new BD, you've been at BD a long time and kind of have a new strategy, new BD, new portfolio. Like where do you kind of see BD today and kind of the path forward here? Is this the portfolio, the right portfolio for BD? And what's the plan to kind of execute?

Yes. We're extremely excited by the portfolio of new BD. We spent the last 5 years kind of reshaping -- being very, very active in reshaping our portfolio, of course, starting with the separation of our Diabetes Care business as that wasn't the category that we wanted to remain in. We then separated our V. Mueller business on manual surgery products. And then obviously, most recently, a really phenomenal transaction for our shareholders, separating our Life Science business to Waters. If you just step back at the beginning of just 10 years ago, right, our MedTech business was about 60% of BD or about $4.5 billion 10 years ago. And today, that same MedTech business, right, is now $19 billion. So we've radically shaped that up. Life Sciences kind of was the same $3 billion business 10 years ago, grew a little bit, but not tremendously. And so now as you look at BD, I think also for the first time ever, and I've been with BD 25 years, the clarity of our portfolio strategy is exemplified in how we've organized our segments. And now, of course, with reporting requirements, you can see the profitability profile and the growth profile of each of those very clearly. And they're clearly distinct. So obviously, our Connected Care business, right, we've got some phenomenal assets that we've built together there. Advanced patient monitoring, you saw that grow double digits in the quarter. Really phenomenal M&A deal for us, well ahead of our deal model, continues to have great momentum on the innovation side. Now we're integrating that with our Medication Management Solutions by bringing APM, connecting it with Alaris and utilizing our AI platform and [indiscernible] to do that. If you go over to our Biopharma Solutions business. First time that's ever been a stand-alone focus within the company. Again, extremely profitable, strong growth from a Biologics business. Now Biologics, as we shared on the last earnings call, has reached 55% of revenue for our Biopharma Solutions business. Again, Biologics growing double digits now, driven in large part by GLP-1s, but also through other Biologics. We have our Interventional segment, obviously, where all of our kind of physician preferred products sit, and double-digit growth in PureWick right now. That's well over $0.5 billion platform for us. Double-digit growth last quarter in tissue regeneration, again, becoming a greater mix within the surgery business portfolio. And then our PI business doing steady, and we've announced a series of new launches there, including Revello as an early launch in Europe. And then you've kind of got the fourth segment, which is what BD has been historically known for, which is our Medical Essentials business, right? It continues to be used by 9 out of 10 patients that are entered into a hospital, kind of the -- some people call it the anti-AI hedge program because it just -- it won't be impacted by AI. It's everyone that gets admitted to a hospital uses those products. 35 billion devices, 100% recurring revenue per year, and that just generates a lot of cash that we end up utilizing to invest in those other 3 segments that we talked about as well as utilizing that to do other things that are value creating like share buybacks or focused tuck-in M&A.

When you think about the portfolio, some -- you've kind of called out these double-digit growth drivers, drug delivery, APM, PureWick, advanced tissue regeneration. Like what percent of your portfolio is growing double digits? What percent is growing kind of high single digits? And how do you get more of the portfolio in those faster-growing areas?

I'll turn it to Vitor in a second. But the good news is that, of course, those elements, they're becoming a larger portion of the company, right? And just given their scale, each of those, right, are now scaled like Biologics is over $1 billion business. Advanced patient monitoring is a $1 billion business. All the other ones are north of $0.5 billion businesses. And so as they're growing double digits, that's obviously weighting. I think the other thing that's really important to call out is each of those are accretive to the margin profile of the company. And so as they grow, there's also a very positive mix benefit that comes along with that versus some of the other areas. As you think about how we break up the portfolio in terms of those areas, the categories are also high single digits versus then the low single-digit category, maybe Vitor, you can share.

Yes. No, I think we mentioned before like 10% of our portfolio right now is actually on that decline situation with China, Alaris and the vaccines. But I think if you break down the other 90%, I would say that about the double-digit growth at about 30% is growing at that double-digit rate, and we are investing behind those assets in order to continue to support that growth rate. We have another important piece of our business is around 25% to 30%, also growing at solid mid-single-digit growth, so 5% to 6% in several other categories. And we have, as Tom mentioned, our -- like another like 30% on Medical Essentials that is more like the run rate of the health care systems, which is more on the low single digits. So all those are on the positive side, but -- and we are investing on maximizing the double-digit growth markets that we are playing in, but also seeing how can we elevate the mid-single-digit growth to an even higher growth rate going forward.

Okay. And the 10% that's declining, there's kind of the 3 discrete headwinds, China, vaccines, Alaris, maybe kind of go through those. When do we actually see -- you always talk about your underlying growth like 4.5%, 5%, whatever. When do we start to see that to kind of show up?

So I'll start, and I'll turn it over to Tom. So from Alaris, we have a very clear view on the Alaris is going to end up. So by the end of this year, we are finalizing the remediation that we have been committed to the FDA and the agency to do it. It was a 3 years. So that's the end of it. In '27, we are going to hit a new run rate from a revenue perspective, which is going to be about $100 million. But of course, we're going to have a comparison to this year because that was the last upside year from the Alaris perspective. But we have a very clear view on that. That's going to be the last year, and that's going to solidify there. From a vaccine perspective, we called out about 25% reduction this year. We have seen the pharma companies also suffering from that perspective. We are clearly not expecting necessarily the decline of the 25% continue because it will be a very dramatic situation for the health care system. So -- but we are working very closely with the pharma companies. So we are not expecting that the level of decline, but we are still not expecting that to be like a growth driver for us in the near future. And China is the one that we are still working very closely with. We are seeing what we have said before that 80% of our portfolio is going to go through VBP this year. That remains true. But China continues -- China government continues to look for other ways to contain costs, and we are just monitoring this very closely. Tom.

It's very well said.

Okay. So you'll likely have some visibility. Alaris, you kind of have good visibility on, right?

[indiscernible] That's extremely clear visibility. It's just it's going to go to about $100 million next year, and then it will start growing from that. So that creates a 200 basis point headwind next year. What's interesting is we'll be having record market share as that's happening. It's just the reality that with 60% of the market that we have, normally -- a normal cycle is you're replacing that every 8 years or so. We just replaced it in 3 years. So we replaced about 20% of the entire market every year. If you think about the competitors in that space, they're still on an 8-year replacement cycle. They collectively across 4 competitors have about 40%, the remaining 40% of the market. And so they're on an 8-year cycle. So they're replacing about 5% of the market. All other competitors combined replace about 5% of the market every year. Again, we replaced 20% ourselves. So 4x what everyone else does combined, we've done every year for the last 3 years. And that's just a unique dynamic. Again, put in perspective, 5% of the market comes up for grabs every year from competition. We've been very clear in the first 6 months of this year, we've taken 1.5 points of the market share, right? So think about -- it's about 2.5 points have come up for grabs. We've taken a large portion of that. We're going to continue to focus. Our entire sales team for Alaris has moved because all Alaris customers essentially have brand-new pumps that are less than 3 years old. So they're not focused on defense. They're focused heavily on offense. And we've got a great platform, obviously, connected in with our new AI solution and [ product ] creates significant benefits for our customers, and they're focused on helping customers advance care with Alaris.

Okay. And then vaccines, do you have visibility kind of the summer when contracts come up?

That's more when the pharma company will start looking at placing their orders for next year. And so again, I think as Vitor mentioned, we don't expect and we have no signs as we're watching that there will be anywhere near another decrease like we saw this year as that reset. What the exact level is, we can't. it's too early to say that. But certainly, we don't expect a repeat of this year.

Okay. And then China is just kind of more of the uncertain factor.

I think it's just a recognition that anyone trying to peg China out a year from now, you should do so with caution, just recognizing that the market is very dynamic and that it's continued to have a focus on cost constraints. We do know that, as we've said, 80% of our portfolio will have gone through VBP. It's very actively happening. We're seeing it play out as expected this year. We just also recognize that there's other -- whether or not it's DRG or other mechanisms that are in discussion that haven't been implemented yet. There's a lot of local companies and international companies lobbying against some of those, which is they've been put on pause, but we want to continue to watch that play out.

Okay. That's helpful. And then when I think about kind of the macro ACA utilization, there's med tech investors probably part of the reason why MedTech stocks haven't worked is some worries on utilization. And you have pretty good visibility and utilization. So what are you seeing from a utilization standpoint, you think?

Within our portfolio, we're seeing strong solid utilization. Obviously, areas like blood collection sets are a good indicator of diagnostic testing. You compare that to the Quest, LabCorp volumes. Diagnostic testing is pretty solid. And that's a good indicator of just broad health care consumption. Products like IV sets, which we have 70% share of, strong growth, right, in the U.S., solid mid-single-digit, 6% plus kind of growth you're seeing. Some of that share gain. But at the same time, it's underlying utilization. That's the first thing you normally get when you go into a hospital with an IV set put into your arm, most likely a BD catheter. So I think for those indicators. And then some of our other solutions in a world where people are looking to save money and navigate a challenging economic environment, right solutions like our Rowa pharmacy robotics platform or what we're seeing with Pyxis and our Medication Management suite where it's helping with nursing workflow, we're seeing strong demand for those types of solutions.

Okay. And then kind of also on the macro side, inflation, that's probably another factor for worry on MedTech stocks. So I just want to understand where you are. You talked about resins exposure. Do you have any computer chip exposure, memory exposure? And then how you kind of have visibility on hedges and on inflation?

Go ahead.

Yes. So from a -- as we mentioned, I think the biggest topic for us that we are monitoring is the price of oil, which is connected with the resin price. The resin price in the plastic is approximately 5% of our cost, and I think we have been able to implement hedges along the way, which are going to help us this year to kind of absorb those costs and making sure that we do not get a lot of exposure. But of course, as this continued pressure on oil remains, those hedges are going to start rolling off and there will be pressures from a cost perspective coming from this. But I think the team has been working on several levers in order to help to offset this heading into '27. In '26, we feel very confident that we have everything protected. But in '27, I think the work is right now happening already. We've continued to work with our ISC team, which has been proven year-over-year the capability of delivering high productivity. We're also working very heavily on the commercial aspect with price. That's something that we have done in the COVID times, and we actually have created a very strong discipline about price execution in the marketplace, and we continue to do that, and we are going to looking into alternatives to do. And last but not least, I think our portfolio, I think we are investing on areas of high growth but also high margins, and that should help us continue to offset those type of pressures inflation. So inflation is real is there, but I think we have enough levers and we know the path. We have done it in the past, and we are looking to continue to do that in the future.

And I think you saw us be top tier in navigating inflationary environment last time that happened post COVID. But one of the things we said is internally, we said we're going to act early, which we did and that we were going to be the best in the industry at navigating. And I think we ultimately were, right? If you look at a 3- or 5-year basis, we were top 2 in med tech from both gross margin and operating margin performance over that time frame. And that I think it was a large part due to some of the actions that we took early on during the last inflationary cycle. And so we're taking that exact same approach in this ecosystem. We're not sitting around thinking that oil is going to drop. We're going to assume it's going to stay high, and we're going to take actions accordingly.

And what kind of levers to offset, let's say, things do get worse, kind of your levers to kind of offset that?

I think you heard Vitor talk about a few of them. One is, again, BD Excellence has become a tremendous competitive advantage for us. We've been operating at 8% productivity last year. We're operating it again this year. We announced that was again our productivity this past quarter. But that's at our top decile level for sure within this industry and most other -- pretty much every other industry. So that's a big competitive advantage in those types of environments. The other one is pricing, right? We flex pricing as appropriate, and we have open discussions with our customers, right, where we have products that are primarily made of resins. We talk about that those may go up. And we actually have put in during the last inflationary cycle, we changed most of our contracts to have annual price increase clauses in them as well related to CPI. We saw some numbers this morning. Obviously, CPI is up in the 3s, deeper in the 3s now. And so we have that ability within most of our agreements. And again, we actually have time later this week after we leave the conference reviewing that with our team. So they've been given tasks, and we're following up with them on those actions.

Okay. That's helpful. And just in total, kind of the margin opportunity, at kind of 25% margins, which is your goal you guys there. Does it get harder going forward to continue to expand margins at the same rate? What are some of the levers on gross margin, R&D, SG&A to kind of get leverage in the P&L?

I can start and then -- so as we started BD 2025, the first couple of years, most of our operating margin expansion came from leverage in OpEx. And then you've seen in the last 2 years, this being the third, that leverage really come from gross margin. And we called it beforehand to those who have known the BD story, we said, get ready, you're going to start seeing as BD Excellence starts really hitting full steam, you're going to see operating margin expansion come from gross margin expansion. It played out exactly as we said. It's going to continue down that path, right? We expect operating margin leverage to come primarily from gross margin. I think even this past quarter, obviously, this was -- we didn't have tariffs in Q2 of last year. So there's a tariff headwind. But if you take tariffs out and just say how did BD operationally perform ex tariffs, it was 70 basis points of gross margin expansion and 50 basis points of op margin expansion with us reinvesting into selling as part of our growth strategy in between. But again, it was coming from gross margin. Why is it coming from gross margin? It's a combination of productivity that we talked about, and it's coming from our plant consolidation strategy, right? We've talked about we've cut our manufacturing plants in the last 5 years in half, right? We were near 100. We're now in the 50 -- about 50 range, and we still have some further consolidation that will go into the 40s. Those are projects we've been investing in over the last several years, and they're really just continuing to flow through, and those will hit the gross margin line exclusively as well. And then obviously, the mix that Vitor will talk.

Yes. And again, I think this year, we have been talking about the 25% despite the tariff impact. So we've been able to kind of deliver that. So excluding the tariff, we actually had an underlying expansion of our margins. We are monitoring the inflation, which is going to be the next topic heading into. But I think we have, as Tom said, the BD excellence and the commercial execution will be the key drivers for us going forward.

Okay. And when you think about this year, you've had kind of low single-digit revenue growth, mid-single-digit EPS growth. And we've kind of already kind of talked about low single-digit revenue growth next year. I don't think that's changing given the discrete headwinds we talked about earlier. Otherwise, the base is growing like 7%, which is not possible. Should we kind of -- is there any factors, I guess, the way to phrase it next year that why EPS wouldn't still be in the mid-single-digit growth range?

It's too early. Actually, we're not giving guidance on '27 EPS, but we're focused on obviously optimizing that, more to come.

Okay. All right. I had to ask. if you go look at this year, kind of first half, second half growth, like one question we addressed and talked about last night at dinner, what we see in our models, just looking at last year, comps look tougher and so what steps up in the back half of the year on an underlying basis. And so I just wanted to kind of address the underlying acceleration in the growth rates.

Sure. So from a revenue perspective, I think we feel very good. I think we demonstrated the capacity of execution of our revenue. So we overachieved our expectations in Q1 and also Q2. We see the comparisons on the back half of the year fairly similar. We know, of course, that the Alaris situation is more acute and more pronounced on the Q4, given that last year was the largest number of Q4 of Alaris for us. And this year, we are coming down to the end of the remediation by the end of Q4. But I think if you think about our recurring business, we continue to see good progress with share gains across businesses like in MDS and specimen management in the U.S. market. And also our capital business continues to see very strong backlog. That gives us confidence on the back half of the year. So as we said, our growth in the back half of the year is going to be similar to the first half of the year, and that gives us confidence that we can continue to deliver on that number. The comparisons are fairly easy -- not easy, but similar to the first half. Q2, you can argue because last year, we actually had a tough Q2, but it was actually because of an event that happened in the prior year. But the baseline is fairly similar. So we feel very confident about the revenue in the back half of the year.

Okay. And the same thing, we shared our models and there's the margins going higher from Q1, 2, 3, 4. I just want to understand like the Q4 step-up looks really big on margins. So I just want to get the confidence.

So I think the margin story is, I think, is very similar. So we have in implementing our BD Excellence operations, so driving volumes and savings on materials and other productivity factors. We have high visibility to those because of the what we call the cap and roll, so everything gets capitalized and amortized. So we have very clear visibility on when that's going to happen. We also have the situation on tariffs that naturally because of the actions we have been taking, the dollar amount comes a little bit down, and it becomes an easy comparison in Q4 because we didn't have tariffs on the first 3 quarters of the year and Q4 actually was the highest quarter of tariffs that we have seen so far was about $90 million last year. So we see those factors. So the revenue continues to improve on the areas we are investing on because we are putting sales force behind like APM, which is high growth, high margins, also in surgery, advanced tissue regeneration, which is also a high growth, high margin. Peripheral interventional also drive significant above company average margins. So those are actually the sales force is gaining productivity as we go through, which is going to give us confidence from increasing margin from a mix perspective and the productivity that we have seen in our plants already operating are going to generate the P&L impact heading into the Q4 number.

And fair to say that as Vitor said, essentially the $90 million in Q4 of last year, it's going to be lower because of all the offsetting actions that we've done. We have a favorable number in Q4 for tariffs year-on-year because of all those offsetting actions that we've taken.

Yes. And last but not least, I think if you see our revenue sequential, our revenue is actually higher on the back half of the year compared to the first half of the year. And our expenses are actually pretty steady with Q4 coming a little bit down. which is part of the execution of the $200 million cost-out program that we have already implemented. It's already well underway. We have already $150 million in motion. And that expenses as they exit the organization in the back half of the year, we see the benefit on the operating margin as well. So it's a combination of the productivity of the plants, our higher operating expenses efficiency and the leverage from the revenue perspective.

Okay. That's helpful. And then another factor I wanted to make sure we addressed is the ChloraPrep ship hold. I think that's like a $480 million product. Is that right?

Well we said it's about 3% of revenue. 3.5% of U.S. U.S. ChloraPrep of total BD revenue.

Yes. Okay. And there's a 3-week ship hold, kind of the confidence that with the warning letter out there that, that comes back on the market...

Yes. As we said, pending the testing, we're quite confident. The -- we haven't stopped making ChloraPrep, right? So there's never been a pause in our manufacturing. It's safe. There's no patient issues, no safety signals at all. We stand by the safety of the product. It's obviously our one large pharmaceutical manufacturing plant that's considered a pharmaceutical as a skin cleansing agent. The -- essentially, what we're doing is we're doing the exact same testing that we do for a product that we ship to Europe. So the exact same product is made on the exact same lines, gets a label for Europe. We typically do an additional testing loop on that product post terminal sterilization, and we're adding in that same testing loop on U.S. product. Again, and that product is the exact same product that we have been testing that goes to Europe that we haven't had any issues with. So that's kind of why we're adding in that same testing that's always gone well that's already been started. Again, we continue to manufacture the product. And as soon as that testing would be completed, we resume shipping each of those batches. Those shipments don't go to the end user for the most part, right? So it's filling shelves at the distributor as well. So we're not expecting end user back orders at this time, it will be refilling shelves at our distributors.

Yes. And that's what's going to do from our revenue, what gives us confidence on the revenue is exactly what Tom just mentioned. We have inventories on the channel with distributors. Those are going to continue to feed the hospitals for utilization. And once we start releasing the product after the testing that is a very well-known test that we have high confidence on we are going to start shipping back to distributors to replenish that inventory. So we do not see right now the revenue impact.

It's an extremely important product, obviously, that we take very seriously. It's used in about 95% of all U.S. surgeries.

Do you really see the risk of FDA saying, "Hey, you can't ship this or restart that in 3 weeks."?

This was a completely voluntary action upon our part. So we did that completely on our own quality department took that action with no request from the FDA.

Okay. And then one last question, PowerPort litigation, you won the first trial I don't know if there's anything you wanted to say on that before we close.

Again, we'll fight that litigation vigorously. That product has been on the market for 40 or 50 years. It's helped tens or hundreds of thousands of cancer patients navigate very safely. It's a safe and effective product. That's what the jury obviously found. It's well designed and again, has decades -- many, many decades of success. So...

Great. Well, thanks a lot. I think we're out of time.

Thank you.

Thank you.

Thank you.