Embecta Corp. ($EMBC)

Today, I'm joined by Dev Kurdikar, CEO and President of Embecta. Thanks for joining us today, Dev.

It's a pleasure to be here. Thank you for having us.

Maybe just to start out Q1 earnings last week, talking a little bit about a U.S. business reset. So the U.S. business was stable around $1 billion post spin, but you started to see some instability earlier this year and then worsening in March, leading to cutting fiscal year '26 guidance. So can you just maybe start out by walking us through what changed? How much was customer-specific share loss versus broader market softness?

Yes, happy to do so, listen. So Q1 calendar year, Q2 fiscal year, unquestionably a challenging quarter for the company, right? The U.S. business, which is approximately 50% of our global business, right, has been stable for a long period of time. And this is now our fifth year post spin, even while we've had COVID waves and inflation and disruptions, that business has been stable. But this quarter, most recent quarter that we reported, we did see some signs of some of instability. But also, we had a confluence of factors that really sort of all unfortunately came together in the quarter. So if I just sort of listing them, right? I think the one that you referred to or a couple that you referred to share loss. So with us in the U.S., our customers are certainly retailers where most patients would get their products. But the product flows through drug wholesalers. And we obviously contract with payers as well. What we saw is that with one particular retailer, we lost some share. That does not mean our products are no longer available at that retailer. But certainly, we were the #1 position, now we are the #2 position. And that impact on our revenue guide for the year, I would say, was maybe disproportionate to the volume lost, primarily because the patients that can move from our product to a competitive product, we think they are on payer plans. They're obviously reimbursed a range of products. And by definition, on those payer plans, the rebates are less than what they would be on a preferred or exclusive plan. The second factor, and I know you mentioned this, Gracia, was sort of market softness, right? So one of the things we follow, one of the lead indicators that we have, if you will, we just watch insulin pen prescriptions. And insulin pen prescriptions have been stable for a long period of time. Again, recently, we saw some early signs of insulin pen prescriptions declining with a more pronounced decline in retail. And so that was a second factor that really came to light in the quarter that really led to us rethink about how we see the rest of the year. There were some other factors like inventory, we've gone through ERP transitions, brand transitions. We don't have direct line of sight into inventory because all the product does flow through wholesalers. And so there was an adjustment we made for that. Syringe. Syringe has been in the long-term decline because patients are using pen instead of vials. And what happened actually last year was that, that decline got mitigated because a large wholesaler was buying syringes. We think to serve their customers that were compounding pharmacies. And since that business has declined, that compounding pharmacy drug business has declined, it is impacting sort of our syringe uptake. So we think syringe will just go back to its sort of long-term secular decline that's been happening for a number of years. Swabs was a decision made by us to discontinue the product globally. It was comparatively a low-margin product for us. It uses an active ingredient that we were unable to find a qualified supplier for. So we just decided to discontinue that, right? So having said all of these, these all factors sort of came together. Some of these we knew at some point might impact us, which is why we sort of started on our diversification strategy, which I'm hoping we can talk a little bit more about to make the business more resilient over time.

And maybe just to double-click on that. So you talked about it a little bit, but what's more transient versus the structural changes? And for the ones that are transient, how can you give investors' confidence that the issue is contained there?

So if you think about just various factor by factor, right? So if you take the competitive share loss, right, certainly, over the past several weeks, we've seen stability in share. Now obviously, we want to think hard about what do we want to do to win back that share. And certainly, we intend to come up with the right value propositions to try to win back that share, right? Market softness, I think that's the one that I think we still need a few more quarters of data to see where that stabilizes, right, where this insulin pen prescription stabilizes. I think syringe, as I said, will just continue down that now the previous secular decline, swabs is just out of the picture. The inventory corrections, we expect will be made during the year. Wholesalers in general are trying to be more efficient with inventory, not just for our products, but for everybody else's products as well. So I think the big ones that we are watching is uncertainty around sort of market volumes, seeing how that shapes out and then figuring out our own action plans to see how we can regain some of that share.

And then maybe on the large customer that had the share decline. So what maybe was the biggest factors in those changes? And what are you doing to sort of stabilize that count and also contain that, so it's not broader into other customers as well?

Yes. So it's one of the retailers, it's a large retailer. Every retailer has its own sort of unique dynamics, right? And they're not -- I would necessarily not call them sort of replicas of each other, right? They have different considerations, different dynamics. Some of them, we have multifaceted relationships with. In this particular case, I would say the single largest factor was price. It wasn't product quality. I should also say that we don't think the competitive landscape has changed. It's not like suddenly there's a new entrant or suddenly excess capacity. Sometimes some of those things can cause pricing dislocations. I don't think it's that. It is really a choice that a customer made to increase their purchasing of products that have lower upfront cost. We have strong relationships, like I said earlier, sort of our customers are wholesalers, payers, retailers. It's a pretty symbiotic relationships, and we maintain strong relationships with all of them. I mean if you think about our payer customer base, right, which really drives a lot of adoption of our products because we are covered in formularies, either as exclusive or preferred access in almost half of all the covered lives that we have contracts with. Most of the covered lives in the country, we have some contract with. So I think it provides sort of an interconnected system that we operate in. Now in this case, admittedly, like I said, it was a choice that a particular customer made, but we don't intend to be sort of just complacent about it. We want to think of a place where we can regain that share.

And then just on the market softness, maybe the insulin prescriptions and pen market volume trends have worsened a bit. So what do you think is driving that acceleration? Is that GLP-1 affordability, ACA disruption, or pump adoption?

Yes. So let me first sort of describe what we see, right? And we use IQVIA data for insulin pens. We look at total prescriptions as well as new prescriptions. And if you look at insulin pens in total, that has been relatively stable. And then more recently, we saw a decline. The decline was greater in long-acting than in fast-acting, right? Fast-acting insulin is used by -- it's used for mealtime insulin for multiple daily injection users. But it was greater in long-acting. It was also observed in new prescriptions. So that was insulin pens. And then if you look at insulin pens by channel, now most of insulin pens are in the retail, right, greater than 75%. Some of the remainder -- most of the remainder is in long-term care. The decline was more acute in the retail channel than in the long-term care channel. Long-term care channel is actually growing. Then when you look at the pen needle market, now the pen needle market is not like a single source of data. We get a variety of data sources that we sort of aggregate together. So it tends to be more imprecise because sometimes there are internal inconsistencies. But from the data we put together, we sort of see that the pen needle decline in retail is even greater than the decline in pens in the retail. So we ask ourselves, as we mentioned before, a long period of stability in the U.S. marketplace. So what changed in that December-ish time frame, right, or January-ish time frame? You brought up pump adoption. Pump adoption has been growing steadily, right? And certainly, I haven't seen any signs of that pump adoption is suddently now increasing at a much faster rate than before. GLP-1s. GLP-1s have been announced in January 2018, but something did change in GLP-1s, right? The products got far more affordable, particularly late last calendar year, right? So GLP-1 affordability increased. And then the other thing that happened is ACA subsidies expired. Now initially, when those subsidies expired, I know there was some press reports saying that 1 million people less had enrolled, which does not seem like a big number. But more recent press reports have said that number could be much bigger. But we know ACA subsidies expire. And as we put this all together, you could think about scenarios in which, look, if patients have lost insurance. And if they want to be on insulin, they are going to continue taking insulin, right? Because insulin prices have come down, they can go get co-pay assistance program from pharma companies, they could get older kinds of insulin, right? There are some other brands now you can get for $35 a month. But pen needles, if they don't have insurance and if they want our pen needles, that's probably going to cost them even more than insulin. So in that case, what they might want to do is shift to a lower cost. That could be a cash pay product, it could be a private label product. It could be something they buy online versus going to retail and so on and so forth, right? That might explain why pen needles decline in retail are even greater than pen decline in retail. And secondly, if you are -- if you suddenly use insurance and you are sort of going along the progression of type 2 diabetes, particularly, you may not see a doctor, you may not get on insulin at all. Now you could ask, but that's a factor that should also affect GLP-1s, except because GLP-1s have certainly become more affordable, our thesis is that maybe the penetration is happening at a faster rate for GLP-1s than it is. And so some of the data that we have seen, the new prescriptions for insulin coming down, new starts, these are just new patients starting on insulin is now coming down a little bit, but GLP-1s are increasing. These might be a couple of factors. But I think it's going to take probably a few quarters to get enough data to understand whether that was really tied to because we only have 3 months of data right now, right? And all these changes are pretty recent. So when we thought about -- when we talked about our guidance a little bit before, so when we talked about it, because some of this is so new and evolving, what we did in our guidance was assume sort of that there is -- that the conditions we saw sort of persist through the rest of the year, that the share loss is where it is now and just stays that way, that the market softness will stay that way, and that remains to be seen.

I guess just maybe with that data, obviously, you said it's preliminary, but how are you setting up your strategy for the rest of the year to maybe be able to hit the guidance, but also maybe provide some better than expected or just position Embecta more broadly to shift into the new structural changes in the market?

Yes. So that is what -- honestly, that's a strategy we've been pursuing now for a while, right? I mean it started with the termination of our patch pump program now 18 months ago, right? And just to remind everybody, I mean, that was really sort of predicated on our thought of the GLP-1 headwinds, they're not going away anytime soon. The pump space was going to get more competitive as we've seen it has. So we terminated the patch pump program. We said, let's focus on paying down debt because that creates some financial flexibility in case we wanted to do an acquisition. And so we brought net leverage down. Then at the last -- at the Analyst Day a year ago, we said, look, we are going to pursue a diversification strategy. We were at its core right from spin really an insulin injection delivery company. And we said we need to diversify. We need to -- even within insulin injection, given that we are a premium priced product and there was going to be likely pricing pressure, we need to have some alternatives for our customers that want lower-priced products, right? So we started a program on a new pen needle. We started a program on new syringe. The new syringe actually had its first commercial sale in China. And as we get registrations and regulatory approvals, we'll expand that around the world. The new pen needle is now under regulatory review in the U.S., Brazil and for CE Mark in Europe. And again, as those approvals come in, that product will go on. We also said, look, these GLP-1s, they're going to turn generic. And because they're going to be generic forms of Ozempic and Ozempic comes co-packaged with pen needles, these generic drug companies are going to want to co-package pen needles, right? So remember, we had no real B2B channel, but we built that. And now fast forward today, of the 30 generic drug companies that we are talking to, 40% of them have chosen us as a supplier. Those that are now launched in India, majority of them come co-package with our pen needles. Two of them have gotten approved in Canada. And while we can't use company names, we are looking forward to those launches. And I read just yesterday that those launches might occur this month. In fact, the first U.S. FDA tentative approval is our partner, though that is still some years away. We think Brazil might still happen this year. China, we think, is going to likely happen next year. My point is that was a brand-new strategy. And at that time, we said, look, this could be at least $100 million opportunity. We said that a year ago. And that was predicated on a few assumptions. That was predicated on we will only count patients with type 2 diabetes indication and obesity. If anything, GLP-1 companies are pursuing additional indications. We said these drugs would only be available really with the affordability restrictions that existed a year ago. As we talked about, affordability has gotten better. And we said, listen, the U.S. really is not going to be a market for us because Novo comes co-package with their pen needles and Lilly is in an auto-injector in the U.S. But in February, Lilly launched Zepbound with a pen in the U.S., right? And as they have launched more pens, it has created more opportunity for us to have our pen needles be used for those. And so my point is that $100 million opportunity, if anything, over the last year, registering more and more real. Then came the Owen Mumford transaction, where now we are adding a bunch of medical devices that are not insulin injection delivery. Those devices are primarily sold in a handful of European countries and the U.S. And as you know, we have a global infrastructure, particularly in Latin America and Asia that's strong. And so we are looking forward to the transaction closing so that we can take those products and put it in our commercial channels hands. Additionally, now we have access to an auto-injector. I mean the company makes the auto-injector for Humira, have made. They make auto-injectors for EpiPens. They make a reusable pen injector for other applications, including, I think, growth hormones. So now we have a drug delivery franchise. And it really vastly builds out on this diversification strategy that we laid out a year ago, right? So you asked sort of the longer term. Longer term, I think of this company as, yes, core insulin injection delivery company, but then a portfolio of medical devices that is not insulin injection and then a channel to serve pharma companies where we can supply pen needles, auto-injectors, and we are developing a pen injector so that we can supply drug delivery devices to pharma companies that are looking for a partner to supply those devices, right? So it changes the profile of the company significantly. And so that's why we're so excited about the Owen Mumford transaction because it really accelerates our transformation that we began a little over a year ago.

Yes. Maybe just to follow up on that, like why was Owen Mumford the right transaction right now? And how have you set yourself up for -- to really capitalize on the synergies that it's going to provide for you guys and maybe what risks in integration exists today?

Yes. Yes. So a lot of factors sort of came together, right? So number one, I go back to if we hadn't terminated the patch program when we did and paid down that debt, that created the ability to do the transaction at all because obviously, when we spun off, we had a lot of debt that we've been sort of paying down, right? Secondly, as you think about sort of -- I say, the 3 things need to come together, right, actionability, affordability and strategic fit. Strategic fit, we just talked about. Owen Mumford was clearly a company that we have been watching, and it was great timing for us that it became actionable when it did. And the affordability piece, we have been paying down debt, so we could actually get it financed for this month when it closes. Now we were also able to structure the transaction in such a way that $100 million is upfront, but $50 million is really contingent on hitting the milestones associated with the new product, which we'll be happy to pay, right? Because it is really going to build out our B2B franchise, it's going to inflect some growth in the company. So that's why we are so excited about it. If you think about the synergies, right, that we can get from this transaction, clearly, I talked about we could take the medical device portfolio and globalize it. We put it in the hands of our commercial people around the world. That was not -- is not in our model really. But we are looking forward to doing that and capturing those revenue synergies. If you go sort of to the manufacturing cost, we have 3 plants. They have 2 plants in U.K. and 1 in Malaysia. That over time, allows us the opportunity to do some manufacturing network optimization and our company is a world-class manufacturing operation, right? But we really didn't factor in any manufacturing cost synergies in the modeling that we did. R&D, look, they're well known, particularly in the drug delivery space for their R&D expertise. Some of these auto-injectors I mentioned, these are bespoke auto-injectors that were developed for pharmaceutical companies. The auto-injector, Aidaptus, for which the contingent payments are based on. I mean that's a novel auto-injector that I think affords pharma companies with a lot of flexibility with respect to their manufacturing without really giving up on any of the patient-centric features that pharma companies want, right? And then on the OpEx side, we just dialed in a modest amount of OpEx synergies. So what we need to do, get right about it is, obviously, we don't want to disrupt the innovation that's going on. So we really want to protect their R&D, but we certainly want to globalize medical devices. We want to look for these manufacturing synergies and over time, sort of get them in. And then on the OpEx side, we'll take a look to see because they have commercial infrastructure is concentrated in a few countries, but it's also the same countries we are present in. And certainly, a lot of the back office that we can rationalize. Not to mention some of the savings we can get by consolidating some of the logistics suppliers and our distribution network and so on and so forth. So very excited about the transaction.

Maybe just now we're a year past Investor Day, like you gave an LRP, obviously, a little preliminary to change that LRP. But how should we think about maybe 2027 and especially now that you've made that acquisition and things have changed in the business. So what's the right framework to think about Embecta growth in the medium and long term now?

Yes. So look, I mean, realistically and candidly, right, obviously, we need to take a new look at the LRP, right, given that -- given what we're going through this year, right? But there are a few things we want to do. First, like I said, we want to execute on 2026. We want to see where some of these big drivers, particularly market softness in insulin pens where that settles, get our action plans together to win back some of that competitive share, we want to do that. We want to close the transaction. We want to sort of absorb Owen Mumford, right, integrate these companies. We want to globalize the medical device, and we really want to make sure that we do what we can to support the auto-injector development. We finished '26. We set the guide for '27. We do all of this work. I think in late calendar year 2027, here's what we hope to be at, right? We hope that the B2B pen needle franchise has advanced. And certainly, that trajectory becomes clear as more generic launches take place. The new pen needle, new syringes, which are sort of in the very early stages right now, getting regulatory approval, certainly, we have a much better sense of where we're going to launch them and when. Medical devices from Owen Mumford have been globalized, right? And we will have a much finer sense of what sort of the overall growth algorithm for the company looks like because really, our goal is that the aspirational profile of the company is now becoming real. Because, yes, while you still have insulin injection delivery, you now have medical devices that treat or are used by patients other than those with diabetes. And you have now a channel into pharma companies selling drug delivery devices, certainly an auto-injector, a pen injector and pen needles and a pen injector that's in development right now that is advanced enough that we can begin to have serious conversations with pharma companies that are looking for a pen injector as part of their development programs for new drugs.

Makes a lot of sense. I guess just even despite the reset in the U.S. this year, you are still expecting meaningful free cash flow and debt repayment. So just what kind of gives you the confidence in the cash flow durability? And then for those may be less familiar with how attractive your free cash flow can be. Can you just walk us through that?

Yes, yes. So look, even after the reset, we said base number is sort of like $100 million free cash this year, right? And by the way, I should also talk a little bit about maybe the change in capital allocation that we did this year, right? So we reduced our dividend to be $0.15 a share a quarter down to $0.01. And really, that was sort of a couple of ideas here, right? One is, given our valuation, we thought that would be a worthwhile option to pursue share buybacks. So we got a $100 million share authorization from the Board, a 3-year authorization from the Board. But what it really allows us to do over time is to deploy that free cash in the most meaningful way in, sort of, the real time, right, whether it be share buybacks or debt paydown. And currently, certainly, our thought is those are going to be the 2 primary sources of free cash. The free cash that we mentioned for this year 2026, that's after about $40 million in onetime costs, $30 million for brand transition, which is still on track to be substantially done by the end of this calendar year. So some of that might bleed over. Owen Mumford integration will take some cash next year, particularly systems integration. Those tend to be the pricy part of these integrations, right, as you meld these ERP systems together. And then depending upon what happens with the auto-injector platform, obviously, the contingency payments that might need some of that free cash as well that we need to make. So -- but there are puts and takes, right? We'll be -- we added about $30 million for 4 months' worth of Owen Mumford revenue. Next year, if you just annualize that, that's $90 million worth. Certainly, we'll -- as I said, we'll look to globalize some of the medical devices and see what extra revenue can we get. I mean, GLP-1 B2B revenue next year, as I said, should be more than this year. New pen needles, new syringes should be accretive next year again versus this year, just given we're in the ramp-up phase. So while we don't want to give -- certainly don't want to give guidance for fiscal 2027 as people think about free cash for next year, those are sort of the puts and takes that one should think about how does $100 million this year, what could that be next year?

With the last minute, maybe I wanted to give you opportunity to talk on anything that you wanted to mention today that we haven't gotten to so far.

Yes. Look, so we just finished the 4-year mark, right? We started off as a core insulin injection delivery company, spent a lot of time and effort, as you know, just standing up the company. ERP systems, distribution systems, payroll systems, even finding new office space in dozens of cities around the world, right? And then like I said, 18 months ago, we said, listen, we need to diversify both our product portfolio and customer base. And that is exactly what we have been doing. Unquestionably, the most recent quarter was a difficult one, but it's not causing us to deviate from our strategy. We still believe that's the right strategy. And in fact, the work that we've done over the last 12 months, 18 months really has prepared us to the point where we are today with the Owen Mumford acquisition closing and really looking forward to see what we can do with that acquisition to accelerate our transformation.

Okay. Well, thank you so much.

Thank you. Thank you for having us. Appreciate it.