Becton Dickinson & Company (BDX) — Q3 2019 Earnings Call Transcript

Thank you, Lori. Good morning, everyone, and thank you for joining us to review our third fiscal quarter results. As we have referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make Forward-Looking Statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our third fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. Reconciliations to the GAAP measures that include the detail of purchase accounting and other adjustments can be found in our press release and its related financial schedules and in the appendix of the investor relations slides. A copy of the release, including the financial schedules, is posted on the bd.com website. As a reminder to provide additional revenue visibility, we will speak to our fiscal 2019 third quarter revenue results and fiscal 2019 revenue guidance on a comparable currency neutral basis. The comparable basis includes BD and Bard in the current and prior year periods and excludes intercompany revenues and revenues associated with divestitures, among other adjustments. Leading the call this morning is Vince Forlenza, Chairman and Chief Executive Officer. Also joining us are Chris Reidy, Executive Vice President, Chief Financial Officer and Chief Administrative Officer; Tom Polen, President and Chief Operating Officer; Alberto Mas, Executive Vice President and President of the Medical segment; Simon Campion, Executive Vice President and President of the Interventional segment; and Patrick Kaltenbach, Executive Vice President and President of the Life Sciences segment. It is now my pleasure to turn the call over to Vince.

Thank you, Monique, and good morning, everyone. At BD, our strategy is driven by our purpose: advancing the world of health. Our results this quarter demonstrate that our strategy is working and our core remains strong. Our progress with Bard is enabling us to deliver even more impactful comprehensive solutions for our customers. Turning to Slide 5 and our third quarter highlights. Our third quarter performance was strong. Revenue growth reflects the planned back half acceleration that we have been discussing with you throughout the year. As expected, growth was broad-based, and we drove mid-single-digit growth in all three segments.

Thanks, Vince, and good morning, everyone. Moving on to Slide 7, I will review our third quarter revenue and EPS results as well as the key financial highlights. Third quarter revenues grew by 5.7% on a comparable currency neutral basis. As Vince mentioned, our strong third quarter revenue growth was broad-based and is a strong indicator of the health of the business. As we have discussed previously, there are a number of drivers across our segments that gave us confidence in our planned second half acceleration. I will provide more color on the third quarter revenue growth in a moment when I take you through the results by segment and geography. EPS is also in line with our previously communicated expectations for the quarter. Despite significant FX headwinds in the quarter, we delivered adjusted EPS of $3.08, crossing the $3 per share mark for the first time since closing the Bard acquisition. On a currency neutral basis, EPS grew 14.8%. We also continue to delever during the third quarter, paying down approximately $450 million of debt. Gross leverage was 3.7 times as of June 30, and we remain on track to achieve our commitment to delever to below three times over three years. Moving on to Slide 8. I will review our medical segment revenue growth. BD Medical’s third quarter revenues increased by 6%. As expected, performance in the medical segment was driven by continued momentum and share gains in Medication Management Solutions and strength in pharmaceutical systems. In addition, growth and medication delivery solutions normalized as anticipated and was driven by our leading vascular access portfolio, which also reflects our revenue synergy investments. Growth in Diabetes Care was aligned with our expectations, driven by strength in emerging markets.

Thank you, Chris. Turning to Slide 19 in our planned product launches by segment. As we had been discussing with you, we have a very robust pipeline across the Company. There are a number of things we are excited about. I will touch on just a few recent launches here. Starting with the BD medical segments. In May, we launched the BD Pyxis ES System version 1.6, which brings software enhancements achieved through upgrades to the core ES software, as well as through system integration of three technologies: BD Pyxis ES Refrigerator, BD Pyxis Track and Deliver, and BD HealthSight Data Manager. These enhancements improve clinical workflow efficiency, pharmacy flexibility, and end-to-end medication safety. Regarding our health site platform, feedback from customers continues to be very positive, and we are gaining traction across our applications. Before we move on to our Life Science segment, I would like to discuss the Type 2 insulin Patch Pump. As we discussed on our call last quarter, the feedback we received from the FDA was more comprehensive than we had anticipated. Based on this feedback and given the intricacies of this product category, we have decided to withdraw our FDA application and have engaged a third-party R&D partner with expertise in this space while we work through our strategic options. As a result, our previous timeline has been extended, and we will provide you with additional information as we make progress. Moving on to the BD Life Science segment. We are excited by the recent launch of BD COR, our new high throughput molecular diagnostics platform aimed at providing automation of molecular testing in core and other large centralized labs. Early customer interest and placement of our BD COR units are exceeding our expectations. We also continue to see strong growth on the BD MAX platform supported by the commercial success of recently introduced assays such as the BT MAX Vaginal Panel, as well as our Enteric Panel suite.

Hey, good morning everybody.

Good morning, Kristen.

So I guess, just want to kind of start off with just kind of longer term expectations. I can appreciate that you guys probably don't want to give any specific color around 2020 and guidance in that respect. But having into the call, I think 2020 outlook was definitely one of investors' top concerns, and given the update on Lutonix below the knee and it not being approvable, I think that is only going to increase the concerns on the street. So I was wondering if you could just maybe help provide your thoughts on puts and takes for how we should think about fiscal year 2020. I know that you had talked about the deal model being in kind of mid-teens growth. Obviously, there have been some changes with the Lutonix, but also Gore royalty. How should we think about that in the year ahead and the puts and takes? Thanks.

So Kristen, thanks very much for the question. I have to say we are not surprised to get the question on surprises; you have to write off if that. But let's get it on the table. We are making good progress, and 2020 is what I want you to know and everyone to know. We are making good progress on the budget. We are a little early on; we are not finished yet. But knowing that we had a Gore royalty going away, we started this process earlier. And I feel really good about the process that we are running and the progress we are making there. So with that, I'm going to turn it over to Chris; he is going to give you a little more detail. We are not going to completely guide today, but we will give you a good sense of the progress we are making.

Sure. Thanks, Vince, and good morning, Kristen. You know you are right; it's too early to give a level of precision to guidance for the next year. There will be some things that we are watching. But what I would say is that the message essentially remains the same as last quarter with the one exception being BTK. But if you think about it on the revenue side, we still expect to drive 5% to 6% growth for 2020, despite the DCB status quo and the BTK delay. So we will still be able to drive that 5% to 6%. And then on EPS, at worst, the BTK impact, even if we don't have it for the full year, is about 1%. And we would intend to mitigate as much of that as possible. A little bit of pressure on FX, but we will watch that. But despite all of this, barring anything that unforeseen changes from here, we are very confident in our ability to deliver double-digit earnings growth next year. Where we are in that double-digit will depend on things that transpire between the next couple of months. So, but we feel good with that floor of double digits. And we will see where BTK plays out, where FX goes. But everything else is pretty consistent with what we have said before.

So all in all, good progress, and maybe I will just ask Simon to comment. Simon, you know, you are having some really good performance on some new products that give us this confidence on the 5% to 6%. So maybe you want to talk about some of the other products that are offsetting some of these things in the DCB area.

Sure, Vince. So I think Chris already on the statements mentioned Venovo and Covera and WavelinQ within the PI business. And I'm sure you will have seen the recent announcement on kidney disease, which will only serve to help the visibility of this ailment. And another great quarter in end-stage renal disease domestically and internationally. I think also very significantly to the BDI segment, is our performance globally, as we begin to leverage the scale of BD, particularly in areas where Bard was only condensing its investment profile. So, for example, biosurgery and infection prevention in Europe had a tremendous quarter. And that was driven by the investments that we made as part of the acquisition. Urology continues to perform exceptionally well, driven by home care internationally and new products domestically. We foresee that great progress continuing in all three businesses within BDI.

So thanks, Simon. The bottom line of what Simon is saying is we are right on the deal models and mixing new products is a little different. We didn't expect the DCB situation. But as Simon just detailed for you, there are a whole series of other new products, including in urology that are performing quite well. So that is enabling us to hold that guidance range. So thanks, Kristen, for the question. We appreciate it.

Good morning, just two quick ones for me. One for Chris and one for Simon. Chris, just thinking about the fourth quarter. You obviously maintain 25%, 26% margins, but it sort of implies 28% fourth-quarter margins to get to the midpoint. So should we think about the low end of the range for the year on margins and how do you get that 2.5 point step up? And same question on growth. Chris, you talked about acceleration into the fourth quarter. But it's a pretty significant momentum step up into the fourth quarter just to get to the low end of the five to six. So maybe your confidence top and bottom for the fourth quarter? And just a quick one for Simon. Post the panel and now with the BTK update, have you made any commercial decisions about the DCB commercial organization in terms of size and whether it's right size to the opportunity, and then the level of growth? Thanks so much guys.

Sure, I will start. So clearly, we have been saying that revenue is going to accelerate in the second half of the year. You saw that starting to happen in Q3, and we see that accelerating even further in Q4. Again, it's the continuous strength in UCC and surgery, the MMS momentum that we have. MDS is accelerating and strong growth in biosciences and DS, which is essentially across the business. So we have strong confidence in that. And then on operating margins, we do see acceleration in the operating margins in the fourth quarter. Don't forget we don't have the FX drag that goes away in the quarter. We continue to see revenue synergies, cost synergies, and continuous improvement continuing to build. And again, FX abates there. So we have a lot of confidence in being able to get solidly within that 25% to 26% range that we gave guidance on.

Hi, David, it's Simon. So certainly we have been preparing for all eventualities with respect to the DCBs and BTK as well. While we won't provide you any details here, I think it's important to recognize that the territory managers, for example, wouldn't prefer intervention that business, they sell far more than DCBs. And we have seen your positive uptake in stents and other areas. So to begin to affect those, I think would be not a great move. But obviously, as part of this process, we have sought to offset as much of this as possible without impacting the commercial performance of the organizations.

And we are still waiting to see where the FDA comes out, the course on labeling changes and it’s the letter to physicians. So we will stay tuned for how that works out. Thanks for the question.

Yes, thank you and good morning.

Good morning, Bob.

Just a lot of questions one could ask. But I can't help but just one more on paclitaxel. Just curious if you could elaborate, just in however you can on kind of what you heard from the FDA after the panel meeting. Do you have a sense at this point, whether you think you might need a whole new trial or just longer-term data or any incremental senses as to what you heard from there would be helpful.

You are asking on BTK.

Yes.

On BTK, well, Bob, it's Simon. I don't think we would provide the specific information here. We did provide the six-month data and interim 12-month data in the PMA that we filed. And we continue to cooperate and work with FDA as we work through this. But to provide any specifics about it, I think would confer a competitive advantage on others, and I'm low to do that. So it remains a very active PMA; our teams are collaborating with the FDA, and we expect to have face-to-face meetings here in the not too distant future.

To really nail down what that data requirement will be. And we have more data to bring to the table too. So we continue to work on it. Thanks for the question, Bob.

Great. Thanks for taking the question. I was hoping you could talk about your strategy around M&A in general. You are down at three, seven times leverage; we saw you not wait until you got all the way to your target last time with the Bard deal. Just how you are thinking about where to add, what to add valuations in the space? And then also, if you could just touch on maybe your thoughts on M&A specifically in diabetes. This is an area, I think back to the last Analysts Day. There was a long list of product innovations you were hoping to bring to market. I don't think it probably turned out as positive as you hoped. Just your thoughts on diabetes and your plans for the future there? Thanks a lot.

Yes, sure. And happy to answer the question. First, just a little bit of a correction. We did hit our deleverage target on the CareFusion deal before we did the Bard deal. And listen, you are very politic in the way you have rest of the question. So no problem at all. But anyway, so we are really focused on meeting our leverage target as we go forward. Now, what we have been saying and remain committed to is that must-do plug-in M&A is an important part of the strategy. And as we put the deal model together, we made allowance for that, and you have seen us do stuff like WavelinQ because it's an important part of the growth strategy. You should expect, over the next year, that we will continue doing that as we move forward towards deleveraging and getting down below three times. And then, as we look forward, we have tremendous capability in terms of our ability to do M&A. But we are not a serial acquirer; we are a strategically driven company. And you should expect us to be thinking about plugging M&A and then looking at the dividends and share repurchase as we move forward. So, Chris, anything else you want to add to that?

I would just point you back to the presentation I made at your conference back in January, Robbie, where we talked about future cash flow considerations and the bottom line of that is we throw up a lot of cash. We happen to be using it to pay down $6 billion of debt, but at the same time, when that is done, which is within the next year, we will have a lot of cash to allocate. And we started getting some sense of that; we will be talking more about that as we move on. But again, it gets back to what Vince said; we are not going to let it build up in the balance sheet; we are going to be more active in tuck-in M&A on a strategic level across the whole portfolio and likely to start going back to share buybacks once we start building up the cash balances and have gotten down to that three times leverage. And we made that correction because we are very proud of the fact that we live up to our commitments. We committed that we would get down to three times leverage in the CareFusion deal, and we did that before moving into the Bard transaction, and we are going to get down to three times leverage this time as well.

So, as Chris said, plug-in M&A across the entire portfolio could include diabetes, obviously, any other business here. In the short run, we remain committed to the Patch Pump. You heard the comment that we have taken on a development partner for doing that, and we will continue to work on that as the number one priority as well as investing in the core of that business where we see some nice opportunities. But thanks for the question.

Hey guys, thanks for taking my question. I have a housekeeping question first. One on in Q4, the implied at the lower end of the 5% or 6% of the annual rate, and you are going to place Q4 at 6% organic; where is the acceleration coming from, just given the tougher comps, if you can walk us through that? And the second on 3Q, the MDR regulation, incremental cost, is that sort of an ongoing implementation cost, or are we annualizing during the Q4? Thank you.

Yes. So it was a little hard to hear you, Vijay, but at the same time, I think I got it. You were looking for a little bit more on Q4 revenue, and we are not talking about accelerating much more from the five to seven. It's a little bit; and, I went through before where we are seeing strength in some of the new products that we have brought to market. Venovo to Covera, WavelinQ are very helpful, continued strength in UCC. We are seeing great momentum in MMS, as you saw from the results this quarter. MDS is accelerating as we expected it to, and we see strong growth in biosciences and diagnostic systems. Don't forget, we have some revenue synergies that kick in towards the back end of this year, particularly in the fourth quarter. So that is where we are seeing it come from. And I think, I talked about the margins, gross profit. As I mentioned in my prepared remarks, we saw some one-time kind of timing items that go away in the fourth quarter and rebound. Not to mention FX, not being a headwind, both on gross profit and operating margin. We see continuous improvement and synergies ramping. So we are very comfortable with the direction and very similar message to what I said last quarter; you saw that moving that direction in the third quarter, and we expect that to continue in the fourth quarter.

So Vijay, the only thing I would add to that is the emerging markets growth is going to continue to be strong. I mentioned already that in China, we were double-digits; we expect to be double-digits for the rest of the year. We have a great business there, a great team there, and a strong partnership with the Ministry of Health. That is all going extremely well. We don't expect this environment with tariffs on retail products and stuff to be impacting that business. So we expect that to do double-digits for the entire year. And feel good about that. We feel good about the rest of Asia. And of course, EMEA, you saw it was very strong this quarter. We expect that to continue too. So there are a lot of drivers both in the business side and from the geography side.

I think just for clarity, I would add two other points, Vijay. We do expect lower interest to be about 450 million, as we mentioned in our prepared remarks. And then I would expect the tax to be closer to the middle of the range. There are a lot of intricacies in tax, but you saw it was lower in this quarter at 12.8%. That will rebound upwards in the fourth quarter, putting us right towards the middle of the guidance range that we gave.

Thanks for the question.

Good morning, thanks for taking the question. Just one on Lutonix, one on China. So on Lutonix there have been a lot of questions on BTK. But my question is on the current indications and kind of what you are seeing since the FDA panel and your expectation once the updated FDA guidance comes out? And just Vince, I heard your comments on China and your confidence there. But we are getting questions from investors about potential backlash in China against U.S. products given all the rhetoric here. Maybe you could help us understand why you are confident in that growth continuing and why some of this noise won't have any impact domestically? Thanks for taking the question.

Yes, sure. I will handle that. And then Simon can handle the intricacies of what is going on with DCBs. So on China, as I was mentioning just a minute ago, our experience through this whole situation with what is going on with trade has been that they have been keeping very separate what is happening in healthcare versus what is happening on the trade side. And I think that reflects, number one, a strategic priority to continue to develop the healthcare system in this environment. And that is what we hear from the Ministry of Health, and in fact, more recently over the past six months. We have had conversations, where they have explicitly told us that. So that is the first part of it. The second part of it is, we had our team in here and the China Healthcare System is now better funded than it was a year ago or three years ago. And so there is some positive momentum going on in China as the rest of the economy slows down that I think is important to them. And then thirdly, we are really well positioned with the portfolio and the organizations that we have in China, and it's not just the fact of our commercial organization. But it's what we do in terms of investing in China. We have four plants in China; we continue to invest behind that; we continue to invest in innovation for China as well. And I know Tom is excited about the portfolio; he has been working very closely with John DeFord and our team in Asia. So, we have built a partnership over 25 years there. And so we do think that different aspects of the environment will be difficult, and we are ready for that. But we also expect that with what we have done to fully invest in China, and not just a commercial organization, we are very, very well positioned there. And that is what we hear, and Tom has got another one or two things he would like to add.

Larry, this is Tom, good morning. Maybe just one small thing to add to Vince's good overview there is that those investments that we have made over the last 25 years, particularly in localized, highly automated manufacturing, today the majority of the high-volume disposable medical devices that we sell in China, we make in China locally. So we are actually importing a relatively low percentage, particularly of our high-volume disposable devices, where there can be local competition; we are actually behaving as a local in that. Employing local associates, acquiring raw materials locally, etc., and engaging in those local communities. So much more on some of the unique areas where there is not local competition. In areas such as BD, BDS, etc., or BDI, where we would be doing importing, and we are actually moving somewhat of that manufacturing into China as well.

Yes. Okay, so Simon on DCBs and the intricacies there.

So good morning, Larry. It's Simon. So, I think, as you obviously know, the panel happened in June and I think industry really did put the best foot forward here, and in a collaborative nature. I think many of the main physicians that spoke were speaking on behalf of the role of paclitaxel, not only within PAD, but also these are paclitaxel in other areas and not seeing a signal associated with that. And everyone continues to work with FDA as they look to refine their Dear Doctor letter. What we have seen is approximately a 50% reduction; I think we communicated that on the last call; it has remained at about that point in the last quarter, and barring any unforeseen upsides, I think we should expect that to continue as we roll forward here. But once again, DCBs are just about 1% of the total BDX business, as Chris has spoken to and I have spoken to with new products in PI with new products in surgery that are just launched and with the outstanding performance and funnel within urology. I think we are well placed to offset as much of the headwinds as we can moving forward.

Sure, thanks, Simon.

Great. Thanks, good morning everyone.

Hey Bill.

A couple of questions for Chris. Just, can you maybe just elaborate on the lower interest expense? It doesn't look like it should be additive to earnings for the full-year, so I'm just trying to figure out where the offset is, just given that the overall earnings guidance didn't change? And then secondly, would you care to elaborate on, I guess, the durability of the BD MAX growth? You have seen several very strong quarters now. Thank you.

Sure. So you already saw some of the interest reduction in the third quarter. And that was actually used to offset the additional pressure we saw, about $0.05 of pressure more than we expected to in FX. We thought it would be about $0.20; it was more like $0.25 of pressure. So you have already seen some of that, and that is why I pointed you to the fact that the tax rate goes back up in the fourth quarter to get to the middle of the range for the year. It's now 13.3 year-to-date through the third quarter, and we expect it to be closer to 15% for the year. So obviously, that is an offset that you see, and it was much lower. So when you put all that together and you model, I think you get back to right where we are. And there is no question that the FX has put pressure; it was real in the third quarter. But we are holding our range for the year despite that pressure.

Let me comment quickly on the BD MAX. And as we said in the quarters before, we saw growth north of 20%, and again, this quarter it was north of 20%, and it's driven by the strong access we have to the Enteric Panel to NDP Panel, etc. So we are pretty confident that this has a long runway, building out more panels on BD MAX. And, again, there is strong demand, and we have pretty high growth in the business.

Patrick, anything you want to add on BD COR? I mentioned it as one of the new product launches; maybe a little more color on that.

Yes, so we just launched BD COR in Europe. And we are really, really happy with the initial demand we are seeing and interest we are seeing from our customers in Europe. It's still early days because we have just one assay so far on it, but we are building out the panel. And we think we have a very competitive platform on hand that will drive the future growth within our business here. And we will have the same as I said; we have from BD MAX report and BD COR build out a complete platform approach. So we can cover both the acute and the core lab. So it has a very strong driver for business.

Okay, thanks, Patrick.

Hi, good morning. Thanks for taking the questions. Just two questions. First on the peripheral business, just in terms of attempting to leverage the salesforce even more on the DCB pullback. I was wondering about your views on the need for an atherectomy platform. I think prior to the acquisition, there were rumblings that Bard had a system in development in the pipeline and just wanted to hear if that is still the case within Bard's pipeline? And secondarily, just wanted to hear some of the thoughts on the hernia business; Phasix seems to be doing very well. There is some controversy around synthetic non-receivable mesh. And just wanted to hear your views on the market and in Phasix's positioning? Thanks for taking the questions.

So it's Simon here. I wouldn't comment specifically on what is in our NPD funnel until we are ready to actually give a commercial launch date. As you know, PI plays in every category within the PAD space, with the exception of atherectomy. So it's obviously something we keep a close eye on internally and externally. But company further on that I wouldn't do so. And then with respect to hernia, at long last, I can stop referring to the hurricane because Q3 was the last comp against the hurricane that happened actually two years ago. So we had a very strong underlying quarter in Q3. We continue to grow above the market, and your Phasix performance with our context of Bard's business continues to do really well. We have just released three-year data on Phasix, which continues to do really well. We just released another version of Phasix, as Vince mentioned, Phasix ST OVHR, which incorporates a new positioning system. And that is off to a great start. And again, we just recently released a new articulating fixation system that thus far has got tremendous feedback from our customers. So hernia continues to do very well, and we continue to look for other ways that we can leverage that sales team that we have domestically and internationally. So we should expect to see that continue in that vein.

Okay Josh, thanks for those questions.

Okay. So let me wrap this up. A couple of thoughts: our revenues were strong across all the businesses and regions in line with the second half plan acceleration; we are very excited about that. We expect our momentum to continue and have reaffirmed our fiscal year 2019 revenue and EPS guidance. And as we approach the final year at the Bard deal model, I'm confident that we will continue to deliver on our commitments and create more value for our customers, patients, and our shareholders. Once again, thank you for your questions. We look forward to updating you again around this exciting business that we have built. Thanks very much.

Thanks, everyone.