Embecta Corp. (EMBC) Earnings Call Transcript & Summary

Hi, everyone. My name is Caroline Borowski, and I'm a Vice President here at the JPMorgan Healthcare Investment Bank. It is my pleasure to introduce the CEO of Embecta, Dev Kurdikar.

Thank you, Caroline. It's a pleasure to be here. As Caroline said, I am the President and CEO of Embecta. And I'm pleased to be joined here today by Jake Elguicze, our Chief Financial Officer. We have Ginny Blocki, our Head of Strategy; and Pravesh Khandelwal, our Head of Investor Relations. So in the next 20 minutes or so, what I thought we would do is go through three things. First is talk a little bit about where we are, where we've come from, where we're going. Spend some time talking about the core foundation of our business, particularly talking about its durability, its resilience, its cash flow generation capabilities. And then I wanted to give you an update on some strategic initiatives that we began to pursue last year. That's our FLS language. This page tries to capture in one slide what Embecta is and it's a diabetes injection supplies leader. It's a stable, profitable business with a global presence. We are, by far, the #1 producer of injection supplies. About 30 million people around the world, we estimate, use our product at least once a year. We make 8 billion units in three facilities, and those 8 billion units go from those three facilities into over 100 countries, where 500 of our commercially focused employees work to get those products into the hands of patients working with our channel partners. We did about $1.1 billion in revenue last fiscal year. Highly profitable, as I said, 38% adjusted EBITDA margin, it's $415 million in adjusted EBITDA and $180 million plus in free cash. And we've been in this business for over 100 years. I mean, just on the data point around the durability of this business. The products that we make are best-in-class. You will see on this page the product categories that we supply to patients, pen needles, #1 globally, safety pen needles and safety insulin syringes, #1 globally and in insulin synergies, #1 globally, and you see those share positions over there. You also see some key channels and geographies. And essentially, around the world, we are in -- we have a go-to-market that's really tailored to that country. So retail pharmacy hospital in some countries. And then we also have tender markets in some emerging markets. What is perhaps not directly visible on this page is these products are medically necessary. The chronic use. They're not elective in nature. And what underpins our leadership in these product categories is the fact that we are able to manufacture the volume we talked about with high quality, these are reliable products and in spite of what has happened around the world, particularly over the last 5 years, we've been able to keep customer's shelves stocked. This is a really important demonstration of our reliability that customers really value. Those plants that I mentioned. We do have a world-class manufacturing infrastructure. We have three plants, one in Ireland, one in China, one in Holdrege where we manufacture these products at scale. We have great expertise in high volume injection molding of plastics. I mean we literally start with plastic pellets and make medical devices. We have great expertise in automated assembly because you can imagine to make billions and billions of units, you need automated assembly. And finally, we take those products and put them in retail packaging. We have hundreds of SKUs all over the world. And so we are expert at high-speed packaging as well. Given that we've been doing this for decades, our ops team has really developed deep expertise in processing of plastics. And the reason I want to bring this up is it's important not only because it really bolsters our leadership position in these devices, but this is a capability that can be extended into other medical devices. Because in addition to the equipment and operations processing, these are medical devices. So they are all being manufactured and distributed under a quality system that has been inspected dozens of times by external regulatory bodies. We are very, very proud of this. I also mentioned that we have a very stable recurring revenue base. And you will see on this page, our revenue by product family and total going back through fiscal 2020. The first thing I want to point out is, over this period, there were a lot of external dynamics. Obviously, there was the COVID 2019 pandemic. But then this was also a period where there has been adoption of pumps, particularly in the U.S. the rapid growth in GLP-1 therapies. But in spite of that, you see the stability in our product portfolio. In fact, if you look at the pen needles, our pen needles have stayed stable throughout. If you look at the safety products portfolio, that's grown at almost 5% adjusted constant CAGR over that time. Syringe has come down by approximately 5%. But that syringe decline is concentrated in the U.S. where there has been a steady decline in the use of insulin vials and obviously, as insulin vials are declining, the need for insulin syringes is declining. That's been a long-standing trend. And the reason vials are declining, is really pens are more easier to use than vials for patients. So there has been a transition from vials to pen. Certainly, during COVID, it disproportionately affected seniors, so patient mortality, we think had an impact as well. And certainly, as new patients are getting diagnosed and they've been trained on injecting insulin. They are being used -- they're being trained to use pens. Approximately 85% of our portfolio is pen needles and safety pen needles. And that is continuing to grow and sort of that's the takeaway here. Yes, stability in spite of external dynamics, and stability in spite of syringe decline being offset by pen needles and the safety product portfolio. We became an independent company about 4 years ago, even though we've been in business as an operating business for almost 100 years, more than 100 years. So the first phase was honestly just standing up the company. At spin, essentially, what we got were commercial people and the people in the plants, but everything else had to be set up corporate functions, HR, IT. But a lot of work and effort went into setting up our own ERP to support business in over 100 countries, our own distribution network to take those products from three plants and get them into 100 countries and all the shared services facilities. And that work is now complete, it's all done, it took a long time, it consumed hundreds of millions of dollars of cash, but it's all behind us. All TSAs and LSAs that we had have been exited. And so now we are in a very exciting phase for the company because what we are doing is pursuing initiatives that can transform this company and this phase was really marked with a big strategic shift about 14 months ago. That time, we had just actually gotten approval for an insulin infusion pump, but we terminated that program, as you know, it's a capital allocation decision. And then last year, we said the capabilities of our company are better positioned for and can be better used for transitioning ourselves into a broad-based medical supplies company. And that is sort of the stated direction that we said last year. And so now in this phase, what we are doing is, obviously, we want to continue to maintain our global leadership in our core products, but we want to expand our product portfolio. And to expand our product portfolio, we want to do it organically, and I'll talk about that. But we also want to create the flexibility to be able to do M&A. But we recognize to do that, we have to bring our net leverage down. And so we put a focus on increasing our financial flexibility. And over time, our goal still remains to transform ourselves into a broader-based medical supplies company. The three priorities that we have in this phase are obviously strengthening our core business, and part of this is refreshing our brand. The brand transition work which I'll talk about in a minute here, is well underway. We are seeking growth opportunities across market. We want to expand our product portfolio, leveraging the strengths that we have. And then we want to continue to increase our financial flexibility, and I'm going through some specific examples on each one of these in the following slides. Brand transition. So first thing I want to say is what this is not. It is not a change to the product. It is not a change to the product name. What it is, is refreshing the packaging and you will see some examples in the bottom half of the page, and it's replacing the BD name with the Embecta name. This is truly an opportunity for us to engage with our customers, patients, health care providers, channel partners to emphasize the 100-year history that we have and refresh the packaging at the same time. This is something that we actually started planning several years ago through significant market research to make sure that we understood what we needed to do to go through this brand transition without causing any significant disruption. And so that requires, obviously, as we go through this for hundreds of SKUs, aligning manufacturing, supply chain, customer communications, getting regulatory approvals as needed before we can actually start changing the delivery of our products in a different packaging. We've done that already in U.S. and Canada. And that's approximately -- U.S. and Canada is approximately 60% of our revenue and 95% of that is already converted to the Embecta brand. We have started this process in other markets outside of U.S. and Canada, and that work is underway. And you see a time line here, which essentially shows that in calendar year 2026, we intend to be materially done with brand transition in key markets. And so that's an exciting step towards, as I said, refreshing our brand. We had said about 7, 8 months ago that we wanted to develop market-appropriate pen needles and syringes. Look, we understand that the products that we went through, they are full-featured products. In most markets around the world, we command a premium for these products. But there are markets that need more affordable products, still want reliability and quality, but they are not necessarily looking for the full set of features our products have. And so we are designing products to meet those local market needs. On the right-hand side of this page, you will see where the market opportunity lies. You have syringes, left bar, 1.2 billion units or more, pen needles, 1.5 billion units or so. And you see the regions where we think that there is an addressable market that we can go after. Now a lot has been accomplished on the development of both these projects. We've completed the product design. So we know what we want to build. We've expect the manufacturing equipment. We've ordered it, we've received it, and it's been installed. What is now happening is that we are going through the validation or manufacturing validation. And this is a process where, obviously, you're confirming process controls you're confirming that the products that are going to be manufactured for commercial sale on these lines are going to meet regulatory requirements and are going to meet our own internal product requirements. So we're very excited about the progress that's been done here. We expect to launch near to midterm in markets that are shown here where our share is less than 5%. That's an important thing to note as well because what we are going after here is incremental volume. But we want to sell this with Embecta's brand so that patients that will use this product can still expect the same level of quality that our brand symbolizes around the world. We've also talked about GLP-1 opportunities that could drive more than $100 million in revenue by 2033. And I want to talk a little bit more about this. But let me start by just sort of framing what GLP-1 does for our business, right? Diabetes is a progressive disease. The beta sales continue to degrade over time. And we believe that GLP-1s are most effective when there is actually insulin present in the human body. GLP-1s are delivered to patients in vials, which need syringes, pen injectors, which need pen needles and auto-injectors and auto-injectors, we don't play in. The generic GLP that most generic drug companies are after is obviously a generic version of Ozempic. Ozempic is delivered in a pen co-packaged with pen needles. And so what generic drug companies that want to enter the generic GLP market want to do is they want to replicate the packaging of Ozempic. And that's where we come in as a supplier of pen needles. Now they follow a very structured cycle. You'll see that on the top part of the page. The way our discussions progress is, obviously, they reach out to us. We are well known all around the world. I'll reach out to our local team members around the world. You start having some discussions, you sign an NDA, you start exchanging documents around product specs and on quality, around some manufacturing processes. Sometimes they'll order some pen needles and actually do their own testing and then they'll select a vendor. And once they select a vendor or a supplier, then we start contract negotiations and then execute the contract. I'm happy to say of the 30-plus potential partners that are in various stages of the cycle, more than 1/3 of them have already selected us as a supplier, and they are in the contract negotiation stage or they have signed contracts. Some of them have actually placed purchase orders with us. We shipped some product last year. We know we are in multiple regulatory submissions. And all of this gives us confidence that the generic GLP-1 opportunity is real. And based on what we hear from them as well as, obviously, what's reported in the press, we anticipate that Brazil, Canada, China and India, may see generic GLP-1 launches in calendar year 2026. And obviously, emerging markets will come after that U.S. and Europe in the 2031, 2032 time frame. Now in addition to the generic GLP-1 opportunity, there is obviously branded GLP-1s that are delivered in pens, but don't co-packaged with pen needles. And as the availability of that has expanded we've made small packs available. And together, that's a $100 million-plus opportunity for us. In addition, what is very exciting and is a recent development is that we have now been in discussions with branded pharmaceutical companies who are looking at pen injectors as a delivery form for some of the drugs in development and are looking for pen needle suppliers as well. Different ball game, right? These drugs are in development. They've got to go through clinical trials and they got to pass. In addition to the fact that this is a $100 million plus opportunity, what this is really building out for us and strategically, why this is so important, is that it's setting us up with a channel to be a B2B partner to pharma companies for drug delivery products. And this ties into what we said we want it to be. We didn't want to be just an injection delivery company. We wanted to be a drug delivery company. Obviously, we can leverage our own manufacturing and channel capabilities for growth. I've already talked about manufacturing capabilities. But we have a very unique channel right? We can get products into the hands of patients and consumers around the world. And our patients, people with diabetes are essentially managing chronic diseases at home. So it sort of strategically also fits in with what we are trying to do: chronic care drug delivery. The products, obviously, that are most suitable for us are high volume, plastic base, low ASP, medically necessary and require a quality system that allows patients to have confidence in the products. Let me talk about a couple of initiatives from a margin standpoint. We make about 80% of our revenue in 7 markets, and you see them listed here. And so the other 20% comes from this long tail. And this sort of tail existed because obviously, when we were part of BD, they had larger presence in all of these markets. And so we were one of the product families that got sold along with other BD products. As we were going through stand up, we wanted to maintain status quo. We just wanted to sort of clone and go. But now that I said we are operationally independent, I think it behooves us to say, does this kind of profile makes sense? Is this an opportunity to just exit certain markets? Or will we change our go to market, use one master distributor that can then sub-distribute the products. But also given that we are getting close to launching the new pen needle new syringes to ask ourselves, can we improve our revenue and our margin position in some of these markets with those new products rather than continuing to sell our premium products. And so obviously, this is an analysis that we want to go through. We want to go through it thoughtfully. We don't want to just rush into it. But we think that changes in here can improve our margin profile. The pointy end of our products is the cannula. It's the single largest category of raw material spend. We get all our cannulas sources from BD. It was a 10-year agreement at spin, so goes until 2032. There is a process where we can ramp down, there is ample capacity. A previous parent -- I totally believe is the single largest cannula manufacturer in the world and great quality of product. But at the same time, as an independent company, I think it again behooves us to say, do you want to continue to be sole sourced? Is it a risk mitigation move to think about alternate suppliers? Secondly, could you improve the economics of this because this is the single largest category of raw material spend by looking at alternative suppliers. So that work is well underway as well. It started a couple of years ago. We have time. The current contract goes until 2032. But we think, over time, reducing risk, supply risk as well as introducing an alternative supplier to potentially improve economics are both sensible things to do for us as a business. Let me talk about our capital allocation priorities. First is debt paydown. At spin, we had $1.65 billion in gross debt. Last year, with our change in strategy termination of the patch pump we said, "Look, we need to bring our net leverage down." And we made significant strides last year. We paid down almost $185 million of debt during fiscal 2025. Our net leverage, which was almost 4x at the beginning of fiscal 2025 became under 3x at the end of fiscal 2025. We pay a dividend, right? So there is a return of capital to shareholders. But what we want to do here by bringing our net leverage down is increase our own capacity to do opportunistic M&A. Because remember, I said one of the things we need to do is expand our product portfolio. I talked about organically how we can do it. But certainly, adding products through inorganic means will accelerate the process and accelerate our transformation. So to close, just wanted to cap sort of what you heard today, right? This is a resilient geographically diversified base business, strong free cash flow. There were a number of growth initiatives that we had highlighted at our Analyst Day in May. Significant progress made on each one of those. We're continuing to pay down debt. That will create some balance sheet flexibility for us. And then fundamentally, this phase that we are in the seed growth is an exciting phase because what we want to do here over the next 24 months or so, is really bring to life our transformation. By making progress on each one of these vectors and some potentially opportunistic M&A, we really changed the profile of this company from being simply a diabetes injection company to a broader-based medical supplies company and a drug delivery company. And that's super exciting to all of us. So with that, I'm going to close. Thank you for your time and attention. And I'm going to turn it over to Carolyn.

Thank you. So maybe we can start with, you've been public for a few years now. When you step back, what feels most different about Embecta today versus right after the spin?

Yes. It's only 4 years ago, but it seems like a lifetime ago because I still recall in April of 2022, when we were spun off, I mean, we were faced with some pretty significant challenges. We were still in the midst of COVID, the Ukraine war had just started, inflation spiked beyond initial expectations. I'd say we had this $1.65 billion in gross debt, well, 60% of that was floating. Interest expense actually rose significantly, that consumed a lot of cash. And we only had a finite amount of time to do all the standard work. And so I'm very proud of the fact that over that time period, our team delivered on all our standard projects, highly complex projects and executed really, really well. I think what feels most different today is that the energy and the effort and the capital that we are expanding is no more on just securing the foundation. Now it's more on how do we grow the business. And that is tremendously exciting for us, for the whole team, and we look forward to sort of showing the fruits of that over the next few years.

Great. And maybe we can talk about some China dynamics. What's the latest? And what's the clearest signal that you're watching to gauge stabilization or improvement?

Yes. Look, 5 years for me with this business in February, China, all -- most of that period has been a stable, growing business for us. I mean, we have a great team there. Our commercial team is strong. Our manufacturing plant, one of the plants I showed you is one of our newest plant. China sort of sits in our Greater China region, which includes Mainland China, Taiwan and Hong Kong, that's about 10% in total of our revenue. We don't break out Mainland China separately. And we sell to three national distributors who actually prepay us before they receive the goods. And then they sell to 200 Tier 2 distributors that then get the product into various pharmacies. What we saw in fiscal 2025 amidst the evolving geopolitical landscape was there was a marked shift in preference for local Chinese companies. Not just locally manufactured products because we locally manufacture products, but local Chinese brands. Now look, local Chinese brands, we've competed against forever in China so it's not new. But there was a dramatic shift in preference. Price competition intensified as well because we are premium priced and while there always has been a gap between our pricing and competitive pricing, that gap increased as competitors drop some pricing. With that happening, our distributors that buy our product, started reducing their inventory. That impacted us in 2025. In fact, that was almost a 2-point decline for the total company year-over-year in '25 versus 24, just the step down in China. Now we took some actions to address some of those dynamics. We reorganized our sales force, started focusing on some key accounts. We started working with a contract sales organization to increase our coverage. We actually, as part of our contingency planning, if you will, had a low-cost product at the ready at our plant, and we were able to quickly introduce that. It's at a very different price point than our premium product. and it is more suitable to compete head-to-head with some of the local Chinese brands. Now we are doing this with care. We don't want to cannibalize our own product. So we are using a different channel, a different set of customers that we will offer this to. It will take us a few more quarters to see stability before I can sort of comment on, have we reached a stable point there. So it will take us a few more quarters. But look, over the long term, I still remain confident that China is a great opportunity for us. First of all, the market continues to grow there in mid-single digits. I talked about our infrastructure there, commercial manufacturing. The market-appropriate pen needle I talked about is actually being developed in China. It's going to get manufactured in our China plant. Now Chinese approval takes a little long. And so it will be some time before that product actually hits patients, customer's shelves, but it is the right product for that market. And then finally, I also talked about GLP-1 opportunities, and there are companies, Chinese companies that want to enter the generic GLP-1 market, not just in China but have global aspirations and we want to work with them as well. So for all those reasons, I believe China continues to be an attractive place for us to be. Certainly, the step down in '25 versus '24 was unfortunate. When we guided for 2026 at our call in November, we did indicate that we still would see some headwind in '26 versus '25, but to a much lesser extent than we saw in the prior year.

So pen needles continue to show resilience despite GLP-1s and pumps. Can you talk a little bit about what's really driving that stability?

Yes. Look, I mean, our pen needle business is incredibly resolute. First of all, again, just to stress a few points. These are medically necessary products. I mean we are the unrivaled leader in this business. But I think it's important to sort of think about this geographically as well, right? I mean take Type 1 patients, they're approximately 10 million globally, only 1.5 million are in the U.S. and pump adoption in GLP-1 is still pretty much a U.S. phenomenon. If you think about Type 2 patients that use insulin, that's about 60 million to 70 million here only, about 7 million to 8 million are in the U.S. the rest are outside the U.S. So first of all, I think the understanding -- the fact that we are a geographically diverse company, where -- and we have strength in emerging markets where there are a disproportionate number of patients sort of puts our product usage in perspective. Secondly, and as I mentioned before, GLP-1's most effective when actually there is insulin in the body. In fact, some of the data we've seen, there is a lot of concomitant use of GLP-1s with pen needles. Thirdly, I mean, look, the insurance rate on Type 2 are still increasing. Obviously, GLP-1 is not indicated for Type 1, Type 2 is growing. And there are affordability constraints around the use of these products outside the U.S. So I think for all those reasons, our pen needles continue to strength. Maybe one final point, particularly as it relates to the U.S. One of the indicators we track is just what's happening with TRx, total prescriptions for insulin. And within that number, you can actually tease out what's happening for insulin vials versus what's happening for insulin pens. Insulin vials have been declining steadily. I talked about that. That impacts our syringe volume in the U.S. But insulin pens have been stable all throughout this period. again, sort of showing the underlying resilience and the durability of that portfolio. And frankly, over the past few quarters, NRx, which is new prescriptions for insulin pens have been showing a slight positive trend. And so again, just exemplifying the resilience of this product portfolio.

So market appropriate products sounds simple, but execution matters. What gives you confidence you can win in those segments?

These are segments, frankly, that years ago, we used to participate in. I mean, actually at spin, we actually stepped out of some tender markets in a lot of these markets are tender markets, particularly Latin America because we didn't want to chase price now. And our idea then was and it's coming to fruition now was -- look, the products we have are not the best products for these markets. So let's step out of it and reenter with the market -- with the products that we believe will be right and we are there now. Look, what gives me confidence is we understand the market dynamics because we used to be in that market. From an R&D and manufacturing perspective, I don't think there is anybody that has more capability than us to develop these products. I mean, we know these products inside out. And in fact, that's exemplified by just how rapidly our teams have made progress on this. And so with the channel knowledge that we have, the distribution network that we have, with the R&D and the manufacturing capabilities that we have, I do believe that we are in a position to reenter those markets, and over time, grow our share. It's all going to be incremental. I want to stress the fact that these are not -- these new products we are developing are not for global distribution. They are meant for targeted markets and targeted segments. And obviously, you can control that with respect to where you register these products and where do you supply them and which are the channel partners that you use and they have some clarity in channels that you use for the premium product versus those that you use for these lower-priced products.

And so you've been transparent that cannula costs have pressured margins. How should investors think about that headwind going forward? And when can we expect alternative suppliers to get onboarded.

Why don't you take that, Jake?

Yes, sure. So for those of you who don't know, the cannula is the needle. I think Dev went through that during the part of the presentation. Right now, we source 100% of that product from our former parent. They're a fantastic supplier, great quality product. However, if you step back and think about what our margins were pre-spin at the gross margin line, they were about 67%. Our margins in 2025 were just under 64%. The single biggest driver of that margin compression during the post-spin period has been all associated with increased cannula cost. So despite BD being a fantastic supplier, I think for a couple of different reasons, it really makes sense for us to look at onboarding an alternate supplier or suppliers. We're always going to purchase product from BD. But I think certainly, from a risk mitigation standpoint, it really makes a lot of sense for us to evaluate alternate suppliers. And then hopefully, I think from a cost standpoint, to introduce some additional price tension in terms of the cost of the product that we end up sourcing from BD. So in terms of our long-range plan, we have put out some financial objectives through 2028 last May at our Analyst Day that essentially called for our adjusted operating margins to be in that kind of 28% to 30% range. And we factored in any of the additional costs that we thought would occur in terms of additional markups through that time. We also factored in, in terms of our free cash flow estimates, what it would take in order to kind of build out some additional testing equipment as we onboard some of these alternate suppliers. So I feel like our -- from a financial standpoint, we sort of built in the additional expenses that we would expect to occur. But during -- through that 2028 time frame, we didn't build in any potential cost reduction efforts, if you will, from the lower costs associated with cannula. So we would expect that to occur hopefully shortly thereafter.

And maybe just one more question. How do you balance continued debt reduction with M&A and strategic initiatives? At what leverage levels do you get comfortable and start looking at other options? And if you were to pursue M&A, what type of deal makes the most sense for you?

So maybe I'll kick it off and then let Jake talk about sort of leverage and so on. Look, the #1 priority for us is to return the company to sustainable revenue growth. So M&A that we'd be looking for would have to do that. We want to do it in an area of chronic care drug delivery where we can leverage our manufacturing competencies and start leveraging this B2B channel that we are developing and over time, bolster it, right? I mean that's strategically what we want to do but let me turn it over to Jake to talk about leverage.

Yes. I think really the hallmarks of this business, if you think back to what this business looked like even pre-spin, essentially, it was a very, very profitable high cash flow generative business. It was just one that was flat for a long, long period of time. And post-spin, our leverage levels were high. We needed to use a lot of cash to stand up and separate and beginning in 2025, as Dev mentioned earlier, our leverage levels were around 4x by the end of 2025, they were below 3x and by the end of this year, they'll be somewhere in the low to mid-2x range. So depending on the type of M&A, the size of M&A, how much EBITDA would come along with it, what the synergy opportunities could be, we're ready operationally to do M&A now.

So that concludes our session for today. Thank you so much.

Thank you, Caroline for hosting us.