Becton, Dickinson's CEO Presents at 2013 Morgan Stanley Global Healthcare Conference

Sep. 9.13 | About: Becton, Dickinson (BDX)

Becton, Dickinson and Company (NYSE:BDX)

2013 Morgan Stanley Global Healthcare Conference

September 9, 2013 13:50 pm ET

Executives

Vincent Forlenza - Chairman, President, Chief Executive Officer

Christopher Reidy - Chief Financial Officer, Executive Vice President - Administration

Linda Tharby - President, BD Medical – Diabetes Care.

Analysts

David Lewis - Morgan Stanley

David Lewis - Morgan Stanley

So, thanks all for joining us here for an afternoon session for medical devices. For those who don’t know me, my name is David Lewis. I’m the Medical Device, Director here at Morgan Stanley.

So it’s my pleasure to have with us today multiple members from Becton, Dickinson and others. And second, for those who do not know Becton, Dickinson, a global provider of medical surgical devices a lot of you know them as a leading provider of needles and surgical devices but med surgeries we should say, but they also have dominant franchises in pharmaceutical systems, diabetes care, we have one representative from diabetes care here today as well as biosciences and diagnostics, so much broader business competing in a lot of different end markets with a very strong emerging market business.

The stock actually has been a significant out-performer this year, we are going to talk about why they were able to outperform and whether that can continue. But, I want to introduce management first. We are blessed to have Vince Forlenza, CEO, Chris Reidy, who is the recently joined CFO and Linda Tharby, who is the President of BD Diabetes. So we have a lot of different people to ask questions. Always let’s try to make this as interactive as possible.

But I thought maybe, Vince, if we should start is actually, how – why did this year shape up the way that it shaped up? And I guess, the point I want to focus on is, to us there was a multiyear investment cycle that BD embarked upon obviously several years ago, I think a lot of investors this year sort of missed that investment cycle surprising to people maybe walk us through specifically what that investment cycle was and which of those benefits are we starting to see here in 2013 and what we are going to see in the future?

Vince Forlenza

Sure, David. Thanks a lot.

I think it was a very solid year for BD. But I think the foundation was really laid a couple of years ago as we started to invest really through the downturn. And investment focus was around growth and innovation, it was an operating effectiveness and also building up the talent and capability we needed to enact this strategy. So we had two years where earnings were really driven more by financial leverage and share buyback that’s – those aspects for our finances.

But this year as we came out of 2012, we are focused on improving quality of earnings. I’m really driving operating effectiveness of the company and grow simultaneously. So a number of those programs we had started a few years back has started to come to fruition.

Number one on the top-line, you saw acceleration of the top-line as we continue to improve new products as a percent of sales. I know it’s pretty much across the entire portfolio. Second, our acquisition program which has been tucking acquisitions we made some excellent progress here. We are about 2.5 years into that program. That stated to show up on – in the numbers as well.

Of course, a major driver for the company has been emerging markets. And we have been investing about $50 million to $60 million incremental dollars a year. That was going well. So we had a number of growth drivers that started to solidify.

And then our operating effectiveness program started to kick in, ReLoco-1, ReLoco-2. And that combination coming together which enabled us to back and start to show some underlying leverage on the P&L, which we had not shown in the previous two years. And I think what was really going on was that investors were really in the show-me mode in terms of, if you really have this operating model and is it going to work in this environment.

David Lewis - Morgan Stanley

And Vince, what have you see this year so far over the last several quarters would, work as well, that leads you to believe that this acceleration, this sort of 4.5%, 5% type acceleration is not one-time in nature. The growth investments you have made are more sustainable.

Vince Forlenza

Well, I think if you start to break it apart, number one in emerging markets, we continue to do well. And we think there is a long run way there. And its not just one market for us, it is multiple markets. And even as the – some of those economies have slowed down, we have seen that the governments in those areas are still investing in healthcare. It’s a tremendous need and as other programs go by the way side, they are focusing on this. So China continues to do well. The whole area of Latin America is doing well for us even as there is pressure there.

So that’s we think a long-term growth driver. We are improving our capability to drive innovation within the company and I think David, you know that we started reallocating our R&D portfolio funds a couple of years ago. And now we have probably shifted about over $100 million much more towards products that we think are totally new products away from line extension, doing maybe sustaining engineering sorts of things in a more cost effective way and freeing up the funds to do that.

So we think we got a platform by which we can fund more innovation as we go forward and we are getting better at bringing it to market. If you went back several years ago, we were at about 8% of sales from new products; we are now up to about 12% and going towards 14% and then 18%.

So we see good progress on the fundamentals is what I would say. And progress on the operating effectiveness agenda.

David Lewis - Morgan Stanley

The two other under appreciated drivers, one emerging markets you have already mentioned but there is a lot of concern in the last few months are more specific in the pharmaceutical side in China, you have a 22%, 23% of emerging market but you have a very, very significant Chinese – China business. One of the earliest MedTech companies in China, now we are starting to hear the Chinese government say we are a little concerned about distribution channels. We are a little bit concerned about medical device pricing. How as, what we are hearing in China affected your business? And should we be concerned that what’s happening in China is going to affect your business?

Vince Forlenza

So there is a lot going on in China as we all know in terms of the Chinese focused on cost containment and compliance in the Chinese market. As we approached China, was not just about selling products. It was about what are some of the basic healthcare needs and how can we partner with the government.

And so we have created products specifically for the Chinese market. We have a lot of efforts in terms of transfer of clinical knowledge and not just selling products.

As you think about the more recent concerns around distribution, what the Chinese government in my understanding has been concerned about is, distributors who were – let me just call it skimming in the marketplace and rising prices.

And this is a concern that goes back a couple of years now. Now fundamentally that’s not the way we do business and we have been happy to see partners that have emerged in China that we can work with on the distribution side, who have much more of an approach than we do in terms of pricing for value in the right ways and broadening us into tier-2.

So while it’s a concern, I think that we are well positioned to actually take advantage of the problem that’s there in a very positive way.

David Lewis - Morgan Stanley

Okay. Maybe one last thing, I am going to jump over to diabetes after this but one of the big drivers this year of out performance was your surprise launch into generic injectables. No one saw it coming. It’s actually pretty crafty of you, I remember saying that, that was pretty crafty.

So you talk about this business, it’s a multi-billion dollar industry, you are talking about $100 million to $200 million opportunity defined I think by 2017. But, I guess the question is, you’ve got distribution capabilities, you have sales capabilities the $100 million, $200 million that’s kind of a small opportunity, why is the $100 million, $200 million where Becton, Dickinson stops? What gives you the insight that $100 million or $200 million is the right number by 2017. And why is that number when you think about the size of the industry and your capabilities hopefully conservative?

Vince Forlenza

So, great question. I think our concern right now is much more on the number of products we currently have in the marketplace that we are launching which is three. We are going forward 20 to 30 in the speed that we will get regulatory approval on those products. And as we get more experience, we get a broader product line out there, we will come back and update on that aspect. But, really that’s the uncertainty.

We are very excited about the initial reaction from the customer base while people are trying the product, but we’re very early on right now.

David Lewis - Morgan Stanley

Just 20 to 30 products Vince, will get you to $100 million to $200 million? Or is it that you, you discount the size of each individual product or is it really, if we get the full benefit of 20 to 30, we are going to $200 million of our own?

Vince Forlenza

Well, it all depends on as I was saying on the timing of getting those 20 to 30 out there and when they get it.

David Lewis - Morgan Stanley

Okay. And then what about larger opportunities? You have really defined the set as we are going to leverage our capabilities in generic injectables just looking at areas where we think integrated devices to benefit the physician, the patient and then the system. You stop there, I mean why you know, if Aspera and others are chasing big drugs like Copaxone and Synagis and things like that why can’t Becton, Dickinson go after those larger opportunities?

Vince Forlenza

Well, right now, we don’t have the platform to go after those larger opportunities, where this ultimately goes in the long run is certainly to be determined. Keep in mind that right now, we are just launching in the U.S. So we have a lot of work to do within the categories that we have already talked about that in terms of where we take this around as well. And that would be the first thing that we will be looking at.

David Lewis - Morgan Stanley

Okay. So Linda, we said investors Becton, Dickinson has this $1 billion diabetes business and people are like what, so you got this big business, its needles and syringes, it’s a very large franchise and actually very robust growth.

In the past Becton, Dickinson has looked to go to adjacencies to leverage to diabetes footprint. They did that with the meter business, several years ago, not as successfully. How do you take the diabetes franchise and move into broader adjacencies and maybe before that just define for us what are the key commercial milestones for your business here, you know, this year next year.

Linda Tharby

Sure. So let me start with our core business, our core needle and syringe business. If you look globally at the diabetes population looking at the growth in that population, the biggest thing that we are trying to do is ensure compliance to therapy. It’s difficult when people go on injectable therapy.

So, over the last five years, we have been able to launch a new product every single year in our pen needle franchise and so following on the scene that Vince introduced, currently about 40% of our overall revenue base is a new product we have introduced in the needle category.

But we have a long way to go there still. So, globally short needle therapy clinically proven to be better. It’s only about 20% of our overall base today. So we will continue to focus on making it easier for the patient to comply to their therapy with our short needle.

Second, biggest driver for us is emerging markets. So we would be seeing growth upwards of 15% to 20% in emerging markets if you look at our recent study published last week now 1 and 3 patients around the globe with diabetes live in China. So a lot of work still that we see ahead of us in emerging markets.

And then finally, with the new safety legislation and the overall moment from syringe therapy to pen needle therapy, is an incredible mover for us. So, globally today about 60% of the population is still on syringe therapy, so really moving that into pen needle therapy.

So now the big challenge Vince talked about is, how do we innovate and go beyond and use this incredible base of multiple daily injectors that we have. So you may have seen some of our recent announcements with JDRS and some of these are little further out. But I will talk through several different things you would have seen there. So first of all, is taking what we have done best in world which is needle technology into the infusion space.

We think Medtronic, J&J have the pumps covered pretty well but the delivery of that insulin to the body is something that the JDRS with their artificial pancreas program are keenly interested in proving that flow. So infusion sets will be a space. Micro delivery of insulin. So taking the needle down to very, very tiny needles that actually increase the efficacy and uptake of the influence that’s another area. Continuous glucose monitoring, great new category but really missing today on some of the accuracy target, the JDRS is looking for.

And then we also continue to watch new modalities of drug delivery therapy that are emerging, so really exciting core and lots of new things coming on the adjacency side.

Vince Forlenza

I was just going to say that I think diabetes care was a good model for the company, a part of what, going back to your very first question I think that people miss was, our move into adjacencies across multiple businesses. Linda just talked about what we are doing moving into the infusion space in diabetes care. But you could see the same thing about what’s going on in form systems into the self injection market if we could go on to diabetes care and talk, I mean, not diabetes care, diagnostic systems and talk about how we’ve moved into the automation space.

So we have enlarged our market opportunities and moved into fastest spaces I think that’s one of the overall themes that people are now starting to see and we are starting to see the results of it.

What I like about that is, it’s moving us more towards complete solutions. So they are not a bunch of things that are disconnected. They actually reinforced themselves.

David Lewis - Morgan Stanley

Linda, you mentioned 60% of the world is still on syringes versus pen needles, it isn’t there a bigger disparity U.S. versus O-U.S.

Linda Tharby

Yes.

David Lewis - Morgan Stanley

I guess. Do you think is that your biggest opportunity, what is that disparity U.S./O-U.S. and how do you get after – how do you drive U.S. pen needle penetration faster?

Linda Tharby

So the rates globally, what drives the overall 60:40 globally, it’s Europe which is about 90% of pen therapy in Europe today but if we look at an emerging market, 40% from pen therapy. And the U.S. market about 45% on pen therapy. So we see a number of factors emerging over the coming years.

First of all, if you look at just practice of therapy and using a pen system is much simpler so we work very closely with our influent partners to try and convert that overall market to pen therapy.

Also we look at affordable care coming and biosimilars coming, we think the pricing of insulin will come down bringing a lot more people into the pen category. So the most aggressive movements that we see over the next five years or so will be in the U.S. market as the market moved to pen therapy. But we are also working very closely in emerging markets to drive that shift.

David Lewis - Morgan Stanley

So teasing this room, but I won’t say who it is, but this person said to me Becton, Dickinson is allergic to acquisitions, so using that as a construct, take your other big suppliers Covidian, Bard, Baxter, everyone of those companies has probably spent at least a $1 billion if not $3 billion to $4 billion in acquisitions in last three to four years.

In your history, even going back 20 years I’m not sure we actually get to $1 billion a number.

Vince Forlenza

We can almost get there.

David Lewis - Morgan Stanley

But you are counting on those hands. But the point being you have 90% of your cash trapped overseas, you have 2/3rds of your cash generation, generator overseas largely because you have this big emerging market business. It seems to be getting to a point where don’t you have to start thinking about O-U.S. acquisitions or acquisitions in general as a way of generating investor growth. I mean, your peers are doing it, you are not. When is that start becoming a problem, should we expect acquisitions to pick-up?

Vince Forlenza

Well, I think there were multiple solutions to where the cash is, certainly when we look at acquisitions, number one, if they are offshore that is beneficial to us, but your other strategies around offshore cash. So that’s not the only way you saw that problem.

Thinking about - I think that you – we look at acquisitions more in the strategic context. We had done very few David, if we went over the last 10 years. We have done more plug-ins over the last two years than we had done in the previous 10. And we have been working to build up our capabilities in that area, whether it’s in the area of identification and creating a broader pipeline, or the actual deal pieces of it and integration.

So I think, we feel better about where we are in terms of acquisitions and our capabilities to do them going forward.

David Lewis - Morgan Stanley

Okay. Chris maybe I don’t want to give you too many softballs, here but you haven’t been coming along but I think given when appreciate you came from a very large business and you joining in this large business, you have been a CFO for a lot of time. Maybe just share with some people, what attracted you to Becton, Dickinson and what did you see in your very short tenure with the company.

Chris Reidy

Sure, David. A couple of things I think when you look at the financial model of Becton, Dickinson as compared to my prior company is ADP. It is – in many ways it is very similar, kind of mid-single digit revenue growth, 50% basis points in margin improvement, solid dividend payout ratio and sure buybacks and similar kind of acquisition. A number of acquisitions and accelerating acquisitions, I think.

What attracted me the most is the couple of things, the people, great team, the people that certainly high on my list. But I also got a sense of – a new sense of innovation and you talked about the acquisitions. I think in fact, we have done a lot more recently is indicative of where the company is going. And the potential growth.

And so that’s one, but even just the internal innovation some of us have been focused on over the last few years. You really got a sense of a company that isn’t the sleepy giant, but one that’s becoming more innovative. And beginning more focused on driving growth – in top-line growth and that’s the model that I was used to and that was a big part of what drove me here.

David Lewis - Morgan Stanley

Any questions for Vince, Chris or Linda? Otherwise, I will keep thundering away, which is fine. European safety, so I think people who know BD know that in the prior decade U.S. safety with a significant driver of both growth and profitability we have been awaiting for years for this European safety initiative and the EU sponsored initiative to go through. Now that that’s beginning to happen – the funny thing is, even prior

to that initiative we were still seeing European safety outpace the U.S., so you were getting to growth, so the questioning from investors is now that’s upon us, do we actually see a growth acceleration or do we see a longer continuation of the trends we are still already seeing.

Vince Forlenza

Well, we did see an acceleration last quarter, right, so we went up from that 6% to 10%. So there is some indication that it is going to go somewhat fast. We have to see how that plays out. It’s not the same country-by-country. Now most of the European countries now enacted a legislation it’s a pretty clear path with the exception of Italy. Some of the Eastern European countries are also there. But that doesn’t mean that they all implemented at the same rates. So we are not going to see the kind of step change that we saw in the U.S. where you had OSHA enforcing this and what not.

So, we have to see what happens over the next couple of quarters. So we might see an up tick while we got one quarter right now that indicates that is a possibility.

David Lewis - Morgan Stanley

Okay. So a lot of people look at Becton, Dickinson and one of the push backs is, just a commoditized needle company. If we talk about a lot of growth areas today, typically realize there are probably some more diversified company than you may have thought. But, if you think about just your med-surg business -- if you are going to go after commoditized needle company, there was a segment of your business is commoditized needles, maybe talk about that business which is not a insignificant piece of your business, its probably 23%, 25% of the company depending on how you define it.

Vince Forlenza

Yes.

David Lewis - Morgan Stanley

How does that business fare in a world of reform price pressures, hospitals have no money, how do you derive growth in that business going forward?

Vince Forlenza

So David they have been enacting a strategy over let’s say about the last 18 months to go beyond just a needle and syringes and the catheters. They have done a great job on the catheter piece of the business in differentiating it. And they continue to differentiate and come out with new products in that piece. But if you step back and look at kind of in the course of safety piece has helped them quite bit internationally as we are talking about. But, they are not moving much more towards assured medication safety. Think about some of the acquisitions that we have done in that space of course, PhaSeal which was Carmel Pharma growing quite nicely, it is a differentiated product.

(inaudible) which is a medication error prevention device also would be differentiated and Cato which is software for the pharmacies. So, they’re broadening their footprint within that space and starting to sell a complete solution. So, it’s a very different approach, while the protected core with things like Emerald Syringe and move into a more different tiers of emerging markets with that and that’s why we’re the seeing the growth start to pickup, it is those pieces coming together quite nicely.

David Lewis - Morgan Stanley

Okay. So, talk about headwinds today, couple of the tailwinds you people are focused on are actually in diagnostics. People are worried about interval extension in your ThinPrep business; they’re worried about increasing price commoditization in gonorrhea and Chlamydia. So, take that diagnostics franchise where we’ve invested significantly in the last four or five years, how do you think about the growth and how concerned should we about ThinPrep and GC pricing?

Vince Forlenza

So, with the new guidelines that have gone into effect moving towards three years and what not we certainly saw an acceleration of that impact during this year. And we don’t expect that that’s going to change much looking forward to 2014. What that business has been able to do quite well is to grow rapidly x U.S.

And so I think we’re in a period of time for maybe the next couple of years here. We’re going to continue to see that soft demand. Now, what do we have to do in addition to growing our footprint internationally what’s been growing double-digits is really product innovation it’s number one. Totalys, which is a whole front-end automation system, it’s in the range of $250,000 of placement which will integrate on sample processing both from the HPV side and the Pap’s side, so that’s number one.

Number two is the launch of the HPV test in Europe doesn’t help us in the U.S. but does prove out the quality of that test and we will start to develop the support for that scientifically around the globe then we have to bring it back to the U.S. So it’s going to be something we do have to manage in the short run in the U.S. as we grow more aggressively in the rest of the world.

David Lewis - Morgan Stanley

So, when you think of these puts and takes in diagnostics in this year you are expecting something close to the 5% ThinPrep and GC pressure on one hand we also have MAX and KIESTRA on the other hand. So, how you think about the gives and takes there, is that 5% a good number for investors should be thinking about actually an argument you could make that if some tailwinds fade I’m sorry headwinds fade into next year and you start getting KIESTRA and MAX in the four bovir launch laboratory also did mention could help us well.

Vince Forlenza

Yes, laboratory as well.

David Lewis - Morgan Stanley

10 diagnostics growth rates accelerate.

Vince Forlenza

So, I think those two elements that you’re talking about in terms of tailwinds and headwinds are fairly close in that business. So, we’ll have to see how that shakes up as we get into 2014 maybe little bit more in the pressure side in the short run but something we can manage there.

David Lewis - Morgan Stanley

Okay. Any questions for –

Question-and-Answer Session

Unidentified Analyst

Yes.

David Lewis - Morgan Stanley

I can repeat it or I will have to.

Unidentified Analyst

Just quick question on your syringe business. So, what do you think about people like Gerresheimer emerging as a second supplier to customers in this industry and are they your threats or how do you think about them?

Vince Forlenza

Well, Gerresheimer you’re talking about the glass syringe business our Pharmaceutical Systems business has been a supplier a second supplier for many years right now. So, we haven’t seen any kind of significant change in that competitive dynamic. Now, what we are excited about is we’re launching a whole series of new products both in the core piece for different segments of that industry with improved performance characteristics for example for like biological drugs. And has better economics per account for the pharmaceutical companies as they raise filling speeds and what not.

So, we think we’re on an innovation pathway not just to compete with Gerresheimer but anybody else in this space while we move into self injection so I feel quite good about that business.

David Lewis - Morgan Stanley

Any questions?

Unidentified Analyst

Okay. Can you talk about new product fill in the biosciences area that’s been an area that has lagged in terms of funding?

Vince Forlenza

Yes.

Unidentified Analyst

So, we want to see how you reaccelerate that business going forward?

Vince Forlenza

Sure. So there is two pieces for that there is some immediate product launches that are coming out number one is the FACSPresto that’s more of an emerging market product that’s for CD4 testing and taking it out to more remote locations there is a big focus by the NGOs to do that so we’re excited about that product launch. In a developed world there is the X-20 which is a replacement for the LSR analyzer that also brings new capability and enables more complicated experiments while reducing the complexity of doing those experiments.

And lastly on the reagent side, we have Sirigen which is a whole series of dyes new dyes with brightness that is 10 times what we’ve been selling than anybody else in the marketplace is been doing. So, we think we can drive a lot of applications with those new dyes. Those were all short term things right now for the business, they don’t dramatically change the growth rate but they do solidify it.

In the longer run you’re talking about moving into new application such as looking at RNA within the cell not just measuring on the surface of the cell and working with the NGS companies on applications of flow to next generation sequencing. So, we do see opportunities emerging to broaden the footprint but that’s going to take a couple of years.

Unidentified Analyst

In the pen needle therapy opportunity you have, it seems that the opportunity is more of a go-to-market issue as opposed to innovation issue. Can you speak to that in terms of what are the critical milestones you have to check off it to make that consider?

Vince Forlenza

Well, Linda can talk to that but I think both of us would say it’s both an innovation opportunity within pen needles and to go-to-market in terms of I think what you’re saying is from a geographic standpoint around the world in building up the emerging market piece. Linda?

Linda Tharby

Yes. Just to comment on the innovation side, I think to stay away from being a commodity player what we’ve really focused on is the science behind injection therapy. So, few years ago everybody believed that if my body mass index was recourse with Type 2 patients is much higher I need a longer length needle, will be these clinical science prove that in conjunction with our shorter needle therapy you can move to a needle that it’s about 80% smaller and actually deliver the insulin to the right space.

So, our innovation pipeline is really focused on solving society’s unmet needs. Can I get the patient to comply easier, can I have an injection experience that’s much easier to do. So, you’ve seen us do a whole series of innovation which has allowed us to not only grow our share position globally but also take small increments in terms of our pricing, as governments are willing to pay for things that they see affects clinical outcome.

And then on the other side you’re absolutely right on the go-to-market side for us. We look at where the next wave of therapy is launching GLP-1s for example has a huge area of growth for us. And then in emerging markets we look at where reimbursement trends are going and we’re actually trying to influence those. So, you see both sides of that needle therapy and over time we believe the injectable patients will still continue to be the most considerable over the coming ten year horizon.

Unidentified Analyst

Just one other question if possible. Across the entire enterprise of BD, what is kind of the opportunities to grow services revenues across the business that would seem the more you wrap it around to protect margins and move yourself further up through chain.

Vince Forlenza

So, services as it kind of a separate business model it’s not really a big focus for us at the time being. I mean there is some service opportunities in biosciences around our instruments and what not but it’s not that large not that significant it’s really more complete product solutions and service solutions right now.

David Lewis - Morgan Stanley

We’ll make this last question.

Unidentified Analyst

Yes. So, to the earlier questions around M&A, the balance sheet is very strong, most of your cash is overseas. Do you see ability to lever up the balance sheet to pursue M&A and how does that relate to the debt rating that you want to maintain. And Chris came from a company that had a very strong balance sheet, where you almost didn’t have to think about the cost debt. How are you looking at the balance sheet for BDX and relative to my first question around M&A?

Vince Forlenza

So, on your first part of your question, we see continuing to drive our plug-in acquisition strategy as we talked about and we also see the possibility kind of potentially moving up to size of some of those deals because we know we’d have plenty of balance sheet capacity, and you might want to comment on that?

Chris Reidy

Yes, I think we have a very strong solid An investment grade with a flexibility to maneuver with bigger acquisitions if we needed to. So, the good news is strong balance sheet, lot of ability to lever that if necessary, all comes down to a strategic fit.

Vince Forlenza

And we’ve been really focused on maintaining our – we’re happy with our rating the way it is right now.

Chris Reidy

All Right.

David Lewis - Morgan Stanley

With that we’re out of time. Of course the next year’s your earnings guidance, you have to wait unfortunately. Thank you, Vince.

Vince Forlenza

Thanks, yes.

Linda Tharby

Thank you.

Vince Forlenza

Okay. Thanks a lot.

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