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Becton, Dickinson and Company (NYSE:BDX)

June 12, 2013 5:40 pm ET

Executives

Suketu Upadhyay - Acting Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Controller

Monique Dolecki

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Good afternoon. Before we get started, we're required to make certain disclosures in public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosure relates to investment banking relationships, compensation received through 1% or more ownership. I'm prepared to read disclosures for any issuer now or at the end of this presentation if anyone would like me to. However, these disclosures are available in our most recent reports available to U.S. clients on our firm portals. In addition, updates to those disclosures are available by ticker on the firm's website at www.gs.com. In addition, disclosures applicable to research with respect to issuers, if any mentioned herein, are available through your investment representative.

So with that, I'm going to go ahead and welcome the management team from Becton, Dickinson, Suky Upadhyay, acting Chief Financial Officer; and Monique Dolecki, Vice President of Investor Relations.

And as always, this is intended to be interactive. So if you could give questions, please feel free. Just raise your hand.

Maybe -- I think a good place to start would just be to look at sort of how fiscal '13 has unfolded. Year-to-date, you've had 2 quarters that put up pretty solid growth relative to expectations and top line tracking in that kind of mid-single-digit range, which is several hundred basis points above where it has been the past couple of years. And maybe you could sort of start by talking about what you think is different in fiscal '13 versus some of the prior years and then how we should think about the outlook.

Suketu Upadhyay

Sure. Great. Thank you, David. It's a pleasure to be here. So first of all, if you think about '13, I think you've got to rewind a couple of years to understand where the company has come from to really understand where it is now and where it's going forward. So if you looked at overall med tech and market capitalizations going back to '07 to where we are maybe going up to 2012, you would have seen about 1/3 of the overall market cap decline over that period of time. And I think the challenges are quite well known, of what affected not only BD, but the entire industry around utilization, pricing pressure, reimbursement, regulatory. You could go on and on. I think it's well understood. What the management team did back then, starting as early as 2010, said, "Well, we don't expect this environment to get significantly better in the very near future. So what is it we're going to do to be able to compete in a very challenging backdrop?" And so we took a sort of 2-year very deliberate pause in investment period for the company, and we made some very tough choices. But we decided to invest very heavily against innovation. And what I mean by that is moving our profile from investing in incremental line extensions on existing portfolio and moving more into adjacencies beyond what I'll call our home court into areas that are really what we saw as megatrends over the next decade or 2 decades in the health care environment. Things like alternate sites of care, medication error, patient safety, emerging markets. So these were the trends that we saw stepping back 2 years ago and where we took a very active investment strategy against that. We also decided let's invest very heavily against efficiency programs to improve our overall cost profile as we tried and compete in a very challenging price environment. And third is around capabilities. And so during that period, we were very transparent, very deliberate with our investor base and said, "Don't expect margin expansion over the next couple of years as revenues are expected to come down in a challenging environment, but we're going to recapitalize the company, use that cash to buy back shares, which should ultimately reward the shareholders, all in the premise that we would ultimately see more stable, more diversified accelerated revenue growth with improved margin profile in '13 and beyond." And I think where we're sitting here now, after going through 2 fiscal quarters for BD, is that you're seeing that strategy actually play out from an execution standpoint. When you think about the products we've launched last year, the products that we're launching this year, the spaces that they're in, they're in actually submarkets that are growing faster than overall health care when you see our investments in emerging markets actually play out. When you look at underlying margin expansion, once you strip out the medical device tax and you actually see improvements going back as far as the last half of 2012 and continuing into '13, I think you'd say a couple of things. One, the strategy is validated. It works. But I think even more importantly is you see a management team that can execute against that strategy. So that kind of takes us to where we are today.

David H. Roman - Goldman Sachs Group Inc., Research Division

So maybe help me go through some of these new categories that you're targeting, and I think there are probably 3 or 4 that are most high profile. Let's start with BD MAX. How has the rollout gone? What's the competitive landscape look like? How are you thinking about the opportunity set there?

Suketu Upadhyay

Yes. So the rollout is going really, really well, especially as we launched our Cdiff assay. It really rounded out and completed our HAI platform, which enables us to sort of upgrade our existing customer base on our...

Monique Dolecki

Genome.

Suketu Upadhyay

Sorry, genome platform. Yes. And so that really creates the beachhead for us now to move that product into other spaces beyond our existing customer base. So we're really excited about that. The launch is going as planned. We're working through our backlog, which is very exciting. And as I said, we continue to work on assays to round out the overall portfolio from that perspective. And I think that's going to continue to accelerate growth in MAX through '13 and beyond as the expansion of that menu and platform. So we're really excited about that.

David H. Roman - Goldman Sachs Group Inc., Research Division

And if we think about the impact that, that'll have on your business -- I mean, I thought genome was only like a $80 million business or maybe a little bit less than that. I mean, with the entire Diagnostic Systems business a little bit over $1 billion franchise, how much can BD MAX really add to that profile?

Suketu Upadhyay

We think it can be a significant game changer for us on that. So again, it's supplanting the existing genome base. But we think that our product offering, our value proposition, having an open platform that's highly automated, easy to use, very efficacious with quick turnaround times can actually expand that overall revenue base for us.

David H. Roman - Goldman Sachs Group Inc., Research Division

So its really look at the opportunities that are relative [indiscernible] top line, say, it's sort of a $330 million, $350 million revenue base, I believe. Is that the addressable market for BD MAX? What's the denominator?

Monique Dolecki

Well, if you -- if I could jump in for a second, if you look at the molecular market and it's entirety, it's about a $4 billion market. Now as you know, we're primarily concentrated on infectious disease. So that's a piece of that. But we do have plans for MAX in the future that we haven't talked about more broadly just yet. So we do think it's a pretty big opportunity for the company.

David H. Roman - Goldman Sachs Group Inc., Research Division

And then competitively, how are things unfolding with BD MAX? And how are you competing with GeneXpert and the broader [indiscernible] offerings?

Suketu Upadhyay

So right now, like I said, I think -- we think we're competing well. Our focus right now is primarily on our existing customer base and upgrading that. But we're getting very good traction, we're getting very good resonation in the marketplace. And again, we think our national expansion is going to be into those competitive spaces.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. I think the second area that's probably of interest is sort of BD Rx, which is, I think, the most that came out of the blue. Maybe sort of talk about that market opportunity, the genesis of it, where you think your core competencies are? And how do you compete with [indiscernible], Hospira [indiscernible] or big entrenched players?

Suketu Upadhyay

Sure. So the generic injectable prefilled business, the market is roughly about $1.2 billion. We've communicated externally that we're interested or primarily focusing on 4 key therapeutic areas, which make up about 70% of that overall market. And the overall market is growing well above the overall company revenue growth rate. So it's a very attractive market for us. So when we think about why we got into that market, it's really an extension, if you think about our broad portfolio of flush, so where we actually fill syringes. And then obviously, BD is world class, if not best-in-class, a high-volume, high-quality device manufacturing. And so really, the formulation was just a natural extension. We started our capability build well over 5 years ago. We built a state-of-the-art plant in Wilson, North Carolina. We built our internal capabilities around promotional selling, R&D, et cetera. And so we're really looking forward to leveraging that cost base, which has already been in our cost for the last couple of years. So as this product really starts to ramp up over the next 5 years, we think it's going to be pretty exciting.

David H. Roman - Goldman Sachs Group Inc., Research Division

And I think you've talked about a $200 million opportunity by FY '17. Any other detail you can provide on how you got to that number?

Suketu Upadhyay

Well, really looking broadly, we said we characterize that as about 20 to 30 drugs by that time. And again, depending on where those drugs are against the addressable market, that's roughly how we're sizing it and how we approach [indiscernible] that number.

David H. Roman - Goldman Sachs Group Inc., Research Division

And are you assuming that you basically get the same market share on all those different drugs? Or there are specific subcategories from a therapeutic standpoint that you're going after?

Suketu Upadhyay

Yes. So in the early days, we think the majority of that ramp is going to start to come from things like anesthesia settings and applications, as well as pain management. So those are probably the first 2 in that ramp-up profile.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. And then the third area, which isn't really -- it's not a single product but it's sort of -- I think a category that's been a focus for you is emerging markets. [indiscernible] a quarter of revenue right now. You've seen pretty stable growth over the past several quarters. One of the things that people always ask me about is what about local competition? It seems like what you do is more commodity-like in nature, at least on the Med/Surg side. So why aren't there 50 players in China doing the exact same thing? And how do you compete?

Suketu Upadhyay

Yes. I think the first thing is how you show up in these markets. So I'll use China as an example. And the way we present ourselves in emerging markets -- and by the way, we've been doing this for over 2 decades, so this is not something new for BD, and one of the reasons why we over index our peer group in this particular segment. One is understanding what the country needs are in developing solutions versus a product-based approach. So understanding in places like China as they expand and they build health care infrastructure, that infection control is very important to the ministries of health. Medication error is very important. Clinical lab standards and practices, these are things that they're not familiar with, and they're looking to Western companies, best-in-class companies to help them develop these processes and standards. This is one of the areas where BD quite frankly differentiates itself and creates a value proposition well above the price point of some of these local manufacturers. The other is on distribution channel. And so in order to get a very robust distribution channel through China, you need to be able to commit to those distributors your ability to generate scale, add quality at the right price points. And there's not a lot of smaller local manufacturers that can meet that sort of scale commitment. So there's a number of ways. It's really revolves around providing total solutions, understanding the health care needs, developing products for the specific market, the ability to leverage your supply chain from a distribution standpoint to create competitive advantage.

David H. Roman - Goldman Sachs Group Inc., Research Division

And to what extent does some of your -- their cost programs that you've been active the past couple of years give you some advantage in terms of having a cost structure a little bit like a local player, like being able to charge a premium for the MNT brand. Is that playing out as you have sort of expected?

Suketu Upadhyay

Absolutely. So we talked about our [indiscernible] program generating about 50 basis points of gross margin improvement year-over-year across our business. But it's more than just cost, it's about designing product, and it's a great point, David. One of the things that's done as part of that program, we've actually created a new product and a product offering called Emerald, which is a lower price point, high-quality product that enables us to penetrate into that second-tier or second segment beyond the high-value tier. So not only does it allow us, from a cost perspective, pricing flexibility on our high-end, higher-end instruments, but it's also generated new product offerings at a lower price point to penetrate new markets.

David H. Roman - Goldman Sachs Group Inc., Research Division

I want to -- let's go a little more into the [indiscernible] we want to see if there's any questions. I think there'll probably be one later, Dave. It's a full room, but [indiscernible] will have one later if kind of no one else has one.

Suketu Upadhyay

It's not planted, is it?

David H. Roman - Goldman Sachs Group Inc., Research Division

No, no, not at all. Actually, I didn't even know it was going to be in here. So maybe just start a little bit going -- I know those were sort of 3, I think, high-profile areas, but there are still probably another 70% of the business that's sort ticking along. And as you think about your growth ratio, generally speaking, whether the U.S. or Western Europe or Japan, is there any reason why there should be materially above kind of general health care consumption growth or GDP-type growth in those markets?

Suketu Upadhyay

Well, I think yes, and it comes back -- I know you talked about it from an organic perspective, but the complexion of the company, I think, has changed based on our acquisitions and the new products that we've brought to market organically as well. And I could go through all of them. We probably don't have enough time for them, but each one of them again is in one of these what I'll call fastest-growing submarkets that address these larger megatrends. So I think those are really the attributes or the products and platforms that are going to drive growth above overall GDP and health care spending.

David H. Roman - Goldman Sachs Group Inc., Research Division

And what are some of those -- the categories as sof examples?

Suketu Upadhyay

Yes. So I'll talk about -- in our diagnostic space. We think that the overall diagnostic segment is growing faster than overall health care. Right? And we think MAX is a platform that's going to help us win in that segment. You think of point of care in diagnostics, which is actually growing faster than the broader diagnostic segment, which again, as I said, is growing faster than the overall health care. So Veritor is a low-cost application where we're expanding menu, starting in respiratory moving into HAIs, which is very exciting for us. We think that's actually an application that we'll be very broadly placed across physician practices, as well as some of these medi-clinics and some of these smaller settings and alternate sites. So that's another product that we think that's going to drive top line growth. So that's in diagnostics. Another one in diagnostics is this KIESTRA Lab Automation, where -- one of the key themes in health care, if you can solve the cost problem that's out there and if you can solve the effectiveness problem that's out there, you're going to win in the long term in the health care industry. And we think Lab Automation, or KIESTRA platform, which is one of a kind, and we think one of a kind for quite some time out in the industries is actually going to be one of these big-growth drivers for us because it addresses one of these big unmet needs. So that's diagnostics. You move into medical, we continue to iterate innovation around our diabetes care segment. We're starting to look at opportunities outside of the traditional injection and needle-based applications. So that's going to generate some growth for us. Within our Medical segment, our [indiscernible] product in leveraging our overall prefilled syringes and generic injectables along with Cato, this is an entirely new channel for us, the pharmacy channel, where we can bring 3 new applications to a very important segment within the hospital setting. So this is just a few examples. Again, I think the thing you'd take away when I talk about these products is BD is not just about one product. No one product is going to make the company. No one product is going to break the company. The strength and the diversity of the portfolio from a product perspective, from an offering solutions perspective and from a geographic perspective, I think, are really what's exciting about the company.

David H. Roman - Goldman Sachs Group Inc., Research Division

And one of the things that you haven't touched on yet is bioscience -- I think now 2 quarters, and you've been considerably better than where you had initially targeted growth for that business. And that's in spite of what appears to be a relatively constrained NIH funding environment. What's supporting the type of growth that you're seeing in that U.S. segment year-to-date?

Suketu Upadhyay

Yes. So first, I think it's relatively favorable comps versus last year. So we had a very challenging '11 and '12 based on the first jolts of sequestration and NIH funding cuts. But since then, I think what we're hearing from our customer base is they've had time to react to rationalize their cost base, to refocus their efforts and restructure themselves quite frankly to get back into their capital spending environment, which there's been a little bit of pent-up demand. And we're seeing that favorably played through in the first 2 quarters. Now we're cautiously optimistic on the full year, but we still do think that there's some uncertainty there in the back of the year around this business. But we've seen some good positive signs so far.

David H. Roman - Goldman Sachs Group Inc., Research Division

And I think if you segment your bioscience business, you used to say, I think, something like 35%, clinical; 50%, government, academic labs; and then 15% pharma biotech. Is that still kind of roughly correct?

Monique Dolecki

Yes.

Suketu Upadhyay

There might be slight tails off of that, but I think, broadly, that's the right percentage.

David H. Roman - Goldman Sachs Group Inc., Research Division

And are there significant variances in trends across each of those categories?

Suketu Upadhyay

We continue to see -- last year, we saw really a dampening across all those segments. And where we're really seeing the resurgence is probably in the clinical and research setting. We're still seeing a little bit softness in the biotech and pharma setting, but we'll -- that's the smallest of the 3 that we just talked about. The other area in biosciences that we're really seeing some resurgence this year is around our reagent business. So we recently made an acquisition around Sirigen, which I think creates some really nice differentiation for us in the marketplace. We've gone through and initiated some new promotional strategies in that space, and we see ourselves getting back some shares that we lost over '10 and '11 in that business. So I feel really good about that.

David H. Roman - Goldman Sachs Group Inc., Research Division

And just from your view, what's your [indiscernible] mix right now between instruments and reagents?

Monique Dolecki

It's almost 50-50.

Suketu Upadhyay

Going to say roughly 50-50.

Monique Dolecki

In biosciences.

David H. Roman - Goldman Sachs Group Inc., Research Division

And let's switch gears -- the P&L for a second, but let's see if there are any questions before we do that. I think I promised [indiscernible] not planted.

Suketu Upadhyay

You are right. You are right.

Unknown Analyst

A general question on the [indiscernible] diagnostics business. There's some news last week with a couple of company, with one larger competitor of yours working on a big contract with major reference lab work and without being specific to that, I'd be curious to know how you're looking with your really ship with their major customers in that marketplace, what you think you're positioning was to be competitive with all the testing products here in those categories?

Suketu Upadhyay

Yes. So referring back to that specific event, the first thing I would say is that we've been a long-time partner of that company for quite some time. I think they would say where a high-quality vendor and that offers very good offering in a very competitive price. So we were disappointed by that. But again, it comes back to that comment I made around should and that specific event is specifically a material cost of $8 million revenue base, and it comes back to the diversity of portfolio. But I talked a little bit about our diagnostics business and the new product offerings that we got there, the menu expansion that we're addressing, our expertise in HAI as well as women's health care. I think it sets us up very nicely to continue to compete and succeed in that marketplace. So we don't see this one event as a game changer or necessarily a recent or triggering event to change the strategy in any way.

David H. Roman - Goldman Sachs Group Inc., Research Division

Actually, before I talk dollars and cents, maybe we spend a second on I think there were a few onetime factors that negatively affected impacted the second fiscal quarter and there was I think it is in diabetes and maybe just remind people sort of if we do tease the impact in the growth rate in the second quarter?

Suketu Upadhyay

Yes. So second quarter growth was I think low 4%, 4.1%. We had acquisition contribution about 100 basis points in that quarter. So organically, it was 3 1, which I think if the lower growth rates we have in the last 5, 6 quarters. To your point, we had a lot of timing issues in the U.S. specifically, one around diabetes care with some inventory correction with some of our vendors. Our pharma systems vendor is very lumpy to begin with. It's based on very large pharmaceutical biotech orders and something we anticipate and predicted. But on the second quarter, we saw much lower quarter. We expect that to come back in Q3 and Q4. We saw some timing issues in our PAS business as well. Again, all of these were characterizing as timing. We have confidence that all that's coming back in the full year. In fact, we have so much confidence that we actually raised the top end of our revenue guidance. So again, we feel relatively comfortable where we are.

David H. Roman - Goldman Sachs Group Inc., Research Division

And on -- you just referenced raising the top end of your guidance. Are you confident that you're sort of seeing come back in the fourth quarter earnings or you're still kind of set of hoping that it will come back.

Suketu Upadhyay

So I won't give a view into that because it will start to understood of Q3, but we're just as confident in Q3 as the rest of the year back in the May call.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. Maybe turning to the P&L. You references earlier that you went through a period of significant reinvestment whether that was comping R&D and SG&A in emerging markets, development while at the same time spending to improve your cost structure and making some pretty significant investments. Where are we in that spending cycle? And when do we start to see some positive returns?

Suketu Upadhyay

Yes. I think from an investment cycle standpoint, David, we've talked about -- Vince and I, quite explicitly for the last 18 months or so around 50 basis points of operating margin improvement year-over-year. Now the primary source of that margin improvement is going to come from gross margin. And the reason why is because we're going to continue to invest from a SSG&A standpoint against -- and from an R&D standpoint against all the many opportunities we have across our 3 segments. So we're going to continue to invest incrementally against emerging markets. We're going to continue to invest incrementally and capabilities around the health economics, outcomes, research around marketing capabilities from an R&D perspective, we're going to invest pretty heavily against continuing to round out that portfolio and in diagnostics, as well as injectables. So there's a lot of areas to invest against, and I guess the key point is we do expect to continue to drive operating margin expansion, that's primarily going to come through from gross margin will continue to invest against these opportunities.

David H. Roman - Goldman Sachs Group Inc., Research Division

I want to push you on gross margins for a second.

Suketu Upadhyay

Sure.

David H. Roman - Goldman Sachs Group Inc., Research Division

At least as far back as I have in the spread sheet gross margin, your gross margin is in 51.5% on average. Some quarters higher, some quarters it's a bit lower but it's bounce around that 51.5%, 51.7% range. As I look forward, it seems like the natural pressures around pricing and mix are actually negative. So why would the gross margin go up in that environment?

Suketu Upadhyay

I think there's 2 primary reasons if you're trying to compare the future with the past. So one is our poll ReLoCo initiative, which we introduced ReLoCo I back in 2012. We now expanded that the ReLoCo 2 and 2013. Those are coming out of the investment phase and starting to turn accretive to the tune of about $40 million to $50 million in 2013, and we expect that profile might be slight tilt up and down in that to continue into '14 and beyond. So that's one and a major initiative around there. It's been very successful. The two is I talked a little bit about the acquisitions we've made, the products that we've launched through on R&D perspective. And one of the objectives is not only to meet those overall megatrends I've talked about, top line perspective, but there also investing in products that had a margin profile that's better than the overall company average. So as those begin to roll out, as those begin to take scale -- scale, excuse me, in tandem with our overall ReLoCo initiative, we expect our margin profile to improve.

David H. Roman - Goldman Sachs Group Inc., Research Division

And it's the right way to rank your gross margins by BioSciences, diagnostic, medical in that order?

Suketu Upadhyay

I think so.

David H. Roman - Goldman Sachs Group Inc., Research Division

And if we actually go one step further than that, I assume that Diagnostic Systems is higher than PAS.

Unknown Executive

Yes.

David H. Roman - Goldman Sachs Group Inc., Research Division

PAS is more medical-type business and then BDRX, how does that rank relative to corporate average?

Suketu Upadhyay

Yes. So what we talk about is by the time when we get to considerable scale or a decent run rate by 2017, we said margin profile for that business, gross margin profile should replicate the overall company average, if not slightly better.

David H. Roman - Goldman Sachs Group Inc., Research Division

And then on the operating margin side, I understand that you just can't -- there's no free lunch. You just can't cut and G&A, but you actually boosted that number quite a bit. You've seen some revenue return, but it's just a new level of spending that's needed to generate this type of top line growth that it just cost more to generate an incremental dollar sales of your revenue base?

Suketu Upadhyay

I wouldn't necessarily say set a new normal. I think you've seen our profile for '13 and at least for the next 12 to 18 months. And one of the ways we look at this, we're launching these new products organically, as well as these acquisition, the 6 acquisitions we've done. We don't think now is the time coming off or 2-year investment period to be sort of penny-wise price-foolish on all of these new and exciting product offerings that they've got for the marketplace. So yes, we don't see ourselves backing off of that in the very near future, but to say that, that is the new norm for perpetuity, I wouldn't go that far either.

David H. Roman - Goldman Sachs Group Inc., Research Division

But I think there's some other onetime stuff running through SG&A. There's the EVEREST SAP implementation. When does that start to roll off?

Suketu Upadhyay

Yes, so we said 2013 would be our peak year for our EVEREST program. This year, incrementally, I think it was $10 million. And we were talking about is we don't see it as a major headwind or tailwind going into '14 and beyond at least from a P&L perspective, because you moved out of capitalization into amortization, so those expenses kick in. You will see a slight cash benefit though, because as you move from capital expense amortization, you got less drag on cash.

David H. Roman - Goldman Sachs Group Inc., Research Division

And if you look at the cash flow profile, you haven't grown operating cash flow. It's been pretty steady at $1.7 billion level, but you've grown net income a little bit over this time period. How much of a drag is things like the SAP implementation on cash flow? And can you get back to a point where operating cash flow growth grow somewhere close to net income?

Suketu Upadhyay

Yes, I think moving beyond EVEREST moving beyond some of the pension funding that we've been over the last couple of years, we actually move into this point there were actually growing operating cash flow at our about the same level as operating income.

David H. Roman - Goldman Sachs Group Inc., Research Division

Operating, okay. And is there any Internet efforts that you can undertake to improve working cash flow, whether it's metrics or moderating CapEx spending, where you made investments?

Suketu Upadhyay

Yes. So I think the keys to the cash flow best one I've already talked about is gross margin, right? So that improvement falling all the way through. I think if you look at our overall tax rate, we've improved our tax rate by about 400 basis points over the last 4 years. And while it might not be that aggressive going forward, we continue to expect to see some improvement in tax rates going forward. So that will take you through net income. And then from a cash flow perspective, absolutely working capital, we've had to build up some inventories around some of these new product that we launched as we get to scale and as we start to get more market penetration, we think that working capital will start to be an improvement in overall cash flow going forward. CapEx, I think with overall unit volume growing at 5% to 6%, this probably going to be a need for additional CapEx as we go forward.

And then we have been telling investors to think about that is you should expect to see more of that capital outside of the U.S. versus in the U.S.

David H. Roman - Goldman Sachs Group Inc., Research Division

I think we have a question over here.

Suketu Upadhyay

Sure.

Unknown Analyst

On the volume and pricing trends in Western Europe, volume trends and pricing, obviously, they've been a bit soft there, not just for you but for your peers also, but just your thoughts on that going forward.

Suketu Upadhyay

Yes. So I won't talk about specific pricing erosion in Europe. Broadly, this year, we're talking about 50 basis points for the company. I say Western Europe or Europe is going to over-index that 50 basis points in place like emerging markets were going to under index like 50 basis points. There's a couple of fairly acute areas where we are very cautious on, specifically the southern regions of Europe, where we're seeing higher price erosion. But overall, I think some of our strategies to combat that, again, always comes back to sort of these markets that we're playing in from a safety perspective, from a medication error perspective 2 areas that are very highly valued in the European health care system a couple of areas where we're actually seeing some pretty good growth, which helps offset some of the pricing erosion.

David H. Roman - Goldman Sachs Group Inc., Research Division

And I think a popular topic on cash flows, U.S., o U.S., filing, obviously, you're well over 1/2 revenue coming outside of the United States. Can you just maybe remind people where your cash sits right now and where cash is generated?

Suketu Upadhyay

Yes. So I think a 50% of cash is outside U.S. And then from a generation standpoint, about 3/4 of our cash generated outside the U.S. And about 1/4 of that is generated within the U.S. But the way I tell people to think about that is between cash flow generated in the U.S., plus some very active legal entity structure and dividend structure is -- allows the capacity we need for overall dividend program that we've got in place, as well as our share buyback strategy.

David H. Roman - Goldman Sachs Group Inc., Research Division

You don't have to -- you're not borrowing on your cash return dividend?

Suketu Upadhyay

That's correct.

David H. Roman - Goldman Sachs Group Inc., Research Division

And I think the S&P, one of the ratings recently put your credit on watch. Can you just talk about the dialogue with them? Do you care if your investment grade really from an equity standpoint, and how do you sort of see that playing out?

Suketu Upadhyay

Yes, so we're always very careful with our investment grade. I was talking about one of our investors last night, and they, at the point, I think very distinctly, nobody cares about investment grade until you need it, right? And so with a very disciplined approach, we take that very seriously, investment grade. So our conversations with the rating agencies are always evolving. We've gone through 2 downgrades last year, but it's primarily as expected, and as we sort of advice our investor base, because of the debt we took on the recapitalization in '11 and '12 and return of cash to shareholders. So it's all delivered within the strategy. It still gives us a very nice credit rating of A and allows us ample access and the capital markets for strategic means.

David H. Roman - Goldman Sachs Group Inc., Research Division

And would you expect to see any major deviation from your capital allocation plans? I think you've been running the buyback at $500 million to $600 million, the dividend payout ratio through the 30-ish percent range. Is that kind of -- is that a good framework for you to sustainable basis?

Suketu Upadhyay

I think so. If you sort of go beyond the anomaly of '11 and '12, again where we took about $3 billion of debt and returned cash back to shareholders, prior to that, we were somewhere in around the 70% to 80% of free cash flow return to shareholders. That's the sort of the profile we think about going forward.

David H. Roman - Goldman Sachs Group Inc., Research Division

And then the last on the M&A, and I know the kind of company was fairly conservative and with respect to things like dilution, return on invested capital. But it actually all of the that you've done some fair amount of M&A over the past years. Why not take a bigger shot on goal?

Suketu Upadhyay

I think our strategy has really played out fairly well for us and complement our internal organic pipeline. It complements our existing capabilities. There is a $100 million to $300 million sweet spot on existing adjacencies is how we think about it. It's how we performed in the past, how we think about it going forward. From a transformational deal right now, we don't see the right opportunity that sort of fits all of our key metrics.

David H. Roman - Goldman Sachs Group Inc., Research Division

And maybe just for perspective, just remind people what your key metrics are?

Suketu Upadhyay

Sure. So qualitatively, we look for deals generally that are not call some bioscience projects. We look at things that are established or soon-to-be established end markets that has either existing positive cash flows or soon to be positive cash flows. We look for things that do we understand the business? Can we explain it to our Board of Directors in 5 minutes? One of our qualitative tests are do we have somebody at our business who can now are on that business? That's proof point around in of the markets, we know the customers. It's the natural adjacency to where we play. So those are just some of the qualitative measures. And then again, always lining up to the megatrends that we see in the industry, does it address one of those megatrends? That's qualitatively. Financially, so we first have to get through those folks before we start to the financially at these deals. We look for GAAP and cash accretion within 2 years. Will afford on ROIC profile of that cost of capital accretive within 3 years. Now that could tilt a little bit more, the bit less depending on the strategic and financial measure, but those are broadly some of the financial metrics that we look at.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. We've got the last 30 seconds now, I'll leave that to you. Scott had a nice move into the isolated period of year-to-date, but as you are having conversation with investors, you have your internal dialogue, what do you think is the biggest thing is that people are missing about the story that you really like to get across to them?

Suketu Upadhyay

Yes, I think that's the story of investing around innovation. I think people see BD as sleepy low-growth category business. And when you actually start to peel it back and look at the product offerings that we brought and the solutions we brought to the marketplace, you can see that's really addressing what we'll call the next decade of health care trends, and that we are introducing new products and capabilities in subsegment that are growing much faster than the traditional health care environment.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. Well, with that, Suky, I want to thank you, again for attending the conference and I think with you again next year.

Suketu Upadhyay

Thank you, David.

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Source: Becton, Dickinson and Company Presents at Goldman Sachs 34th Annual Global Healthcare Conference, Jun-12-2013 02:40 PM
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