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

All right. Welcome back. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to host this fireside chat with the management team from Becton, Dickinson. With us, we have Tom Polen, Chairman, President and CEO; and Vitor Roch, the CFO. Also in attendance, Sean Devitt and Senior Vice President of Investor Relations; and Adam Reed, Vice President of Investor Relations. Tom and Vitor, thanks so much for being here.

Great to be here.

Support of our conference for a long time. So thank you. the best conference.

Thank you. So Tom, let's start with a big picture question. Q3 was the first quarter for the new BD, and it was a good quarter, fiscal Q3, 4.4% organic growth. You had 90% of the portfolio growing high single digits. Talk about the benefits of the more focused new BD and your top priorities over the next year. Sure.

Again, thanks for having me. We've obviously been busy getting the portfolio in the position that we want, both in terms of the number of exits that we've done over the last several years, obviously, Embecta, V Mueller and then most recently in February, the separation of the Life Science business to Waters, which we think was an outstanding transaction for our shareholders. I think recently been valued at about $20 billion based on their stock price. So great and around 20x multiple as well. That left our focused portfolio that we've also spent a ton of time building over the last several years, whether or not it's the biologics business that we accelerated with a $1.2 billion investment a number of years ago to our urinary incontinence franchise to our tissue regeneration business that was built through a tuck-in M&A that we've done over the last few years, obviously, the pharmacy automation. And peripheral vascular and of course, APM, another acquisition that we've done. And so what you saw was you saw those growth platforms that we've built over the last several years, again, really firing, high single-digit, double-digit growth across essentially all of those growth platforms. They also carry a stronger margin than the average of the company. And so as those continue to accelerate and outperform the base of the company, that also has a positive gross margin benefit to us that you continue to see across the organization. At the same time, of course, we're executing our excellence unleash strategy, which is focused on bringing and executing BD Excellence across our complete commercial agenda, our innovation agenda and our operational or delivery agenda, we can get into those. But you saw the power of that strategy come through in another strong quarter after several sequential ones in a row. But you can feel in the organization, the benefits of the focus on med tech. And I think you're just seeing the start of that benefit today.

That's helpful. Do you have an Analyst Day coming up in December?

December 10. First one in a while.

Yes. Maybe love to get a preview from you of what we should expect. Feel free to share any numbers, but I know you won't. But how far out will the new LRP go? I think the last one was BD 2025. Is this going to be BD 2030?

This will be boring because there's no surprises here. We're just doing what we said. So yes, as we think about the upcoming Analyst Day, what you can expect is we will give a new updated LRP outlook. It's due for that. We'll include that in not only our revenue and which also would not be surprising. We've clearly articulated we expect to return to mid-single-digit growth after '27 as Alaris pops up. You're seeing us actually do that ex Alaris this year, and you'll see it again next year. As we look at, then we'll give margin and cash flow expectations on that. And I think what -- some of the most exciting stuff is we'll start digging into exactly what we're doing on our compete agenda, like how we're up tempoing and transforming the commercial engine of the company, bringing it to the world-class level that we have in our delivery agenda operations. I don't think anyone questions BD is world-class in the industry when it comes to operational. We're going to be the same when it comes to commercial, and we're going to be known for that, and we're very confident of that, and we're making really good progress. On the innovation, you know about a number of things that we've been doing. There's a number of things they don't know that we've been doing. So we'll unveil a number of new innovations that are in our pipeline that we think are exciting to help secure that growth LRP that we'll talk about. And then we'll dig a bit more into BD Excellence and how that really still has significant runway to continue our margin expansion strategy and the momentum that we've built over the last several years.

So just 1 or 2 questions on kind of fiscal '26 because you only have 1 quarter left. Top line implies Q4 implies a bit of a deceleration. Why is that? And what could go better than expected? And then on the margins, it actually implies a fairly big ramp in the margins. Talk about the driver of that, please.

Sure. So if I start with the revenue, I think the confidence on the full year comes with the results we have on the Q3 and the year-to-date. So we have been delivering on our commitments and exceeding. That's why we raised the guidance for the high end of the low single digits. The Q4, yes, implies a deceleration, and that's purely mechanics because of the Alaris dynamic we have that in Q4 is the highest year quarter of Alaris last year. So instead of like 100 basis points of pressure, it jumps to about 200 basis points of pressure in Q4, which actually the same number that we are expecting to have the pressure heading into next year for FY '27. So the dynamic of Alaris is what is actually declining a little bit the growth on Q4, but we feel very confident on the momentum we have. So we are expecting again, we guided the numbers in Q4, and we are expecting to be very well positioned to deliver on that. From a margin perspective, it's the ramp on the margin is there. I think there's about 300, 400 basis points of sequential ramp on the margin. Actually, we have been able to -- we have been -- we did this last year is just not transparent because we had the first quarter of tariffs impacting us and was the biggest quarter of sequentially for tariffs we had. There are a few factors that gives us confidence on the Q4 margins we have. One is we continue to overperform as Tom said, on our growth drivers. So those growth drivers have a better margin compared to the other products and those continue to perform well, and we are going to continue to see the momentum heading -- another piece, a very important piece is to be the excellence. So the way it works is like this spring time of the year is where we maximize our production for the Q4. And that varies, the favorability on the variance gets capitalized on our balance sheet and grow to the P&L in Q4. So we're going to see that favorability coming in Q4. So we have high visibility of that. So that gives us confidence on the sequential of the margin. And last but not least is the tariff situation. So as I mentioned, this first quarter year-over-year is the first time we're going to lap tariffs. So until Q3, it was like a headwind for us. because we didn't have tariffs last year on -- for the first 3 quarters. And in Q4, we're going to be lapping. And it's also sequentially is the smaller tariff number we have because we have been implementing the actions to mitigate those tariffs. So the combination of the mix be the excellence and the tariffs, just gives us confidence that we're going to deliver on the margin ramp in Q4.

That's helpful. So Tom, let's transition to the products. portfolio growing high single digits in Q3. if it was 100%, but there are 10% of the portfolio that's not. So talk about those other areas and the pathway to turning them around. .

Yes, sure. And first off, we're really pleased with how we've built the portfolio in that 90% that's performing. And the good news is really that we see -- there's 3 factors that make up that other 10% and I can walk through each of those. Two of them have, I think, clear turns coming. And the first 1 is very, very clear and well defined. That's Alaris. Obviously, we're at now record shares in Alaris. We're going to gain well over 200 basis points of share this year. We're already at that year-to-date was still a quarter to go. The dynamic there is just the comp since we've replaced 100% of the market for Alaris pumps in a 3-year cycle rather than an 8-year cycle as part of the remediation that we entered into with the FDA of bringing that product back on market. And that just creates a grow over. So it's a unique situation where there's a growover dynamic, but were actually it has nothing to do with our commercial competitiveness or the success of the business. It's continuing to actually thrive phenomenally. And so that's -- we called it, right? We said we expect 100 basis points headwind this year, and it's playing out as expected. And we said at the beginning of this year, we expect 200 basis points of headwind in '27 and we just reaffirmed in Q3, you can expect that as we think about our outlook for 2017, and that will play out. And then that goes away, right? And so as we go into that 200 basis point headwind for the company from the natural grow over laris will disappear and that will raise back up the overall growth rate of the company. So that's very clear. Second one was vaccines. Obviously, saw vaccines come down across essentially every pharma company, saw vaccine declines this year. And -- of course, the suppliers who provide them their delivery devices saw the ripple effects of that. We stated as we went into the year, what we expected that to be, and it's largely played out as we expected. This quarter, Q4 will be kind of a quarter where we lap that, and we'll start getting over that in Q1. We also said at the beginning of the year that we expect to have some better visibility by the end of the summer. Labor Day just occurred so were there at the end of the summer, I'd say what we see today from order patterns coming in from our pharma customers is that we don't see a repeat of the situation. So we see not necessarily are we assuming a hockey stick back up in the growth, but we're certainly not assuming any continued significant headwind from that as we go in to $27 million. So we feel good on that. Starting to come back. We'll take a conservative upfront and see where that goes, but we certainly don't see that being a repeated headwind that we'll be talking about in 2017. And then the last 1 is China. -- in China of the 3 factors, right, that 1 probably still has the most kind of uncertainty for all players there, given value-based procurement. I think what's most important for us is that business used to be 7% of revenue. The biggest business was, in fact, our life science business. And so with the separation of Life Sciences. That business is now down about 4% of revenue and next year, it will be in the 3s. So all right, it's just an increasingly smaller part of who BD is, we are seeing -- and we have built into kind of our outlook for '27, a similar performance as we saw this year into our numbers. But again, it's something that we expect to not really be talking about given it's just a much smaller portion of the company. So those three factors, there were about 250 basis points of headwinds in '26, which is what we called out. And then we expect, again, Alaris to increase next year as we planned. vaccines to get better in China to kind of continue to be a much smaller portion of the portfolio.

So a few follow-up questions. That's super helpful. So the 250 basis point headwind from those 3 in 26, that should be less 7, primarily because of the farm systems piece.

Well, you have pharma systems getting better, but you have a layer similar because Alaris goes to .

And China, the decline -- you give the numbers, it's about a 10% decline in the last few quarters. Is that BBP -- and why does it continue to decline at such a rate? .

Yes. So what you have is -- so the majority of the portfolio has gone through VBP. What you're continuing to see is provinces, amalgamate and do additional BBP, right? So if one province did this then now groups of provinces will do those, and then they'll start pegging off and the starting point is the lowest price province that exists. So that still is occurring in a number of areas. We've actually made some continued ever since the start to adjust our operating expense base in China to take it down proportionate as the revenue has come down. We've continued to do that. We've added some new capabilities in our commercial team. We've executed well through the VBP, but it's a very challenging environment. And I think we've got a great for FY '27 as we did this year, but it's a situation that still not stable overall for China. I think that's true of the overall China market.

You companies that said when they expect to be through the BP, I guess is there a point at which China flattens out or grows again?

I think there will be. I think one of the things that we've learned is until that happens, I'm not going to peg exactly a date as to when that's going to be. I think China is still just, frankly, the ability to predict exactly what the Chinese government is going to do you saw, for example, we're not in the space at all, but in diagnostics, right? It wasn't VBP, suddenly get into DRG and grouping of products. There's many different mechanisms that people can do to manage price, and the government has a very specific agenda to drive health care costs down so that they can redirect that funding to other areas of expenditure within society. And so I think until we just see the stabilization. And there's -- if I talk to our team, I'll be there again in December, was there not too long ago. We have our own view as to when that could happen, but I think the thing that I've learned from spending a lot of time in China over a long period of time is, let's start seeing the signs in the marketplace before I peg and share something on that. Otherwise, let's recognize that it's our obligation to navigate it as best as we can in influence. We spent a lot of time with the government helping to make sure that people understand the quality importance because many of these specs don't even have -- or the tenders don't have quality specifications built into them. And so we've had some success in that. But that's -- obviously, we focus on the controllables and what we can control and influencing that. and then making sure that we're building the prudent guidance into our numbers so that we can consistently deliver on what we say.

And on Alaris, I think the guidance implies about $100 million in sales next year but you've been doing well. You've been taking share. I think the perception is that's probably a floor, a little conservative given that you're taking share. Is that fair? How do you do better, I guess.

It's where we want to start the year at. And I think the reality is just from a market perspective, right? We have 60% market share. You've got 3 other players that divyup the remain 40%. We just replaced the market in 3 years. So we just moved 20% of the market per year. We upped it ourselves. That's our comp. If you look at the remaining 40%, that's still on the normal 8- to 10-year replacement cycle. So you're looking at 4% to 5% of the total market coming up for grabs every year. That's true this year. And so if we took 200 basis points of share this quarter -- year-to-date, that means we took almost half of all the competitive business that became available for conversion. That's a pretty good win rate, I think anyone would say. We expect to continue that. But it's still -- just to put it in perspective, if we take half of the business that becomes available from competition every year it's 2.5 points of share versus what we've just been upgrading, which is 20 points of the marketplace from a comp perspective. So could there be some opportunity? Yes, I think there also can be some opportunity on the pull-through of the sets because the sets don't have the comp dynamic, right? The sets never had a drop. They just continue and nor do they ever have a peak. They just consume in the more pumping the marketplace, the more sets that you have, they're higher margin than the pump revenue. So that's a positive. And obviously, the more share that we gain, the more all through, we're going to have on those sets.

And then last one on the headwinds you talked about on Farm systems, mid-single-digit growth, I think, that was historically like a high single-digit growth business. I think you -- I just can't remember you've given color on the vaccines, maybe 30% of the portfolio. My question is, based on what you told us, which sounded positive, how should we think about farm systems growth going forward? .

Yes. No, we're not going to guide a business unit for 2027.

Can you get back to the high single-digit .

Yes, I think long term, that it's a -- let's call it an accretive business to BD long term. We even said last quarter, the business grew in the teens ex vaccines, right? Continued very strong double-digit growth in biologics well past -- way past 20% growth in GLP-1s. So continued strong performance there, strong pipeline. We've got presence in the right molecule mix that we want. So more to come there, but...

Well, let me -- so you said vaccines won't be headwind, something along those lines, right, going forward next year. So if it's mid-teens, ex the vaccines, you don't want people to extrapolate, oh, this is going to be mid-teens. SP999 Yes, that's a quarter, right? .

That quarter I was commenting -- so we think that's we don't want to comment to say that, but I think it will get back to -- what it doesn't mean that vaccines are going to be accretive, right? So I said we don't expect it to be a significant headwind. Let's assume vaccines are neutral kind of -- so you go from a minus 20 some to a neutral. That's a big jump in a year. I think we want to be prudent on how we think about vaccines for next year. vaccines is something that there's a lot of dynamics that impact that, both seasonal intensity, geopolitical dynamics, obviously, had a big role in vaccines this year. But what we can say is that the order patterns from our pharma customers are coming in much more solid this year, early still, but are not showing the types of signs that we saw going into the back end of Q4 last year.

And similar to just complement similar to China, Vaccines is becoming a smaller part of the business as well. So we came from like $450 million towards $300 million of revenue. in total. So it's becoming a smaller part of the business. We are having good signs that we are not going to see a headwind of the same magnitude, but it's becoming a smaller part of the business as well.

That's helpful. Tom, I wanted to ask about the growth drivers. A bunch of questions here. But maybe talk about the ones you're most excited about, the ones that are driving the most growth, please? .

Yes. A lot of them. APM, right? It's been a fantastic acquisition for us. That business fits really well inside of BD. You can see since we've acquired it for AdWorks, which is a great organization, and did great things with it, but we've been able to accelerate the performance, both on the revenue and the margin perspective. So we'll be coming up on the 3-year anniversary very soon. we'll have expanded gross margins by about 1,000 basis points on gross by applying BD excellence there, right? That's something we do exceptionally well as operational excellence. And so we applied that in the factories at APM, and we've been able to increase gross margins by about 1,000 basis points. On the revenue side, that traditionally was a high mid-single kind of low -- high single-digit growth business, and you've seen that posting double-digit growth here for quite a few quarters in a row. We still would call that long term, more of a high single-digit growth business. But the more the story is we've been investing in sales force expansion. We expanded our U.S. sales team by 15% and this year. We also put more money in the R&D pipeline, right? They were trading off against high margin, high-growth cardiac heart valves, et cetera. that business inside of BD, high single-digit growth. We've been able to expand margins, and we'll put more money in that every day of the week from an R&D perspective and a selling perspective, and that's exactly what we've been doing, and you're seeing that pay off. So we see an exciting pipeline ahead. You recall the reason that we -- one of the reasons that we acquired that business was to combine it with our Alaris platform as well. And so we've been hard at work. I think the first week the announcement, I said that we had already immediately put R&D dollars into that project. So stay tuned at the Analyst Day to see more on what we've been up to over the last several years. We've got some pretty exciting new innovations coming on that one. Other areas, PureWick. I think we had shared a number of years ago that we expect that business to be a $1 billion growth platform by 2030. I think we're up to 40-some consecutive quarters of that growing double digits. It's well past the halfway mark mark towards $1 billion by 2030, very much on track to hit it by 2030, if not a bit sooner. And there, again, we'll show more at Analyst Day. But we continue to expand outside of the hospital. We also announced building a new VA sales force this year. Again, in perspective going into '26, we put about $40 million of incremental selling investment beyond what we would normally do into a number of areas, including APM into UCC and into surgery, which I can talk about in a moment. But that new VA sales channel that we built at the start of this year, they're already well over $1 million run rate a month platform that they've built the VA fully reimburses PureWick for veterans at home, and we see a significant runway there. We see other groups begin to reimburse PureWick at home based on some studies that we've recently published, and so we see more opportunities there. We have mobile PureWick launching, which we'll share more details of. This is a wearable PureWick, which will be the first one. We have it for at home. We have it for a hospital. We have it for people in wheelchairs. Now we'll have it something like in a Fannie pack that you can just walk around the conference. And you actually can never leave the meeting, so you can just stay in the meetings all day and he's feeling we'll have that coming very shortly and then we have one in the works for patients with cognitive disabilities as well too, which is very specific needs that they have. So more of the story, there's a long runway there. I think maybe I'll share 1 more of the many different growth drivers, and I won't talk about all of them but regenerative media is another one, right? So if you step back at the beginning of the BD 2025 journey, we bought a company called IFA and TFO was really a material science company that had a material called P4 HP. And it's an amazing product that is -- we grow it with E.coli, and we saw it into threads this material. And ultimately, then we started using it for hernia mesh and to replace plastic mesh in biodegrades in 18 months and it leads our abdominal wall stronger than it was before. And we're now up to 8-year data that says the recurrence rate of a hernia with this material that disappears in 18 months, is the -- is just as good as if you had a plastic mesh in your body for the rest of your life. So more of the story is you should get our Phase 6 mesh, not plastic mesh in your body for the rest of your life. And now we've started with new and that we expanded into other hernia indications. This is a higher price, higher margin product, highly differentiated. Ex U.S., we now have indications for plastic surgery. So we see people as their GLP-1 weight loss and they're getting skin tucks and removals and chin lists and arm lists and breastless. This is being used significantly there. That was another one of the investments we made at the start of FY '26 was expanding our plastic surgery sales team in Latin America specifically Brazil and across Europe, where we have those indications, and we're seeing great progress there. We're now taking it into other areas outside of plastic surgery and outside of abdominal reconstruction. We launched peristomal hernia coming up in FY '27, which will be the first kind of new innovation in that area of high unmet need. And we have at least 3 clinical trials underway for getting into the breast space in a number of different indications as well, too. So a lot of exciting opportunities there. And we have earlier-stage things where we're looking at everything from skin substitutes to other broader reconstruction using that same biomaterial. So we've actually been able to bioengineer it actually degreed not just in 18 months, but we can make a degrade in 24 months and 36 months and 12 months if we want, which has allowed us to start opening up these other ones that didn't exist when we acquired the company. So some exciting times ahead in surgery.