Travis Steed the Medical Device Analyst at Bank of America, and fortunate to have Tom Polen up next, CEO at Becton Dickinson . So welcome.
Thank you for having me.
Good. Tom, I think I just kind of wanted to start out kind of high level. I was thinking this morning kind of back at your last four years as CEO, you've gotten Alaris kind of back on the market, back to the run rate. You've done portfolio stuff that's s ecretive, the diabetes divestiture , added the Edwards Critical Care business, bought Prada. You made progress back to on the up margin progress, but the stock's still down. I think a lot of that's because the street kind of views revenue growth has slowed for the business. I just started to think about from here, how are you thinking about looking forward and creating shareholder value for Becton Dickinson at this point?
That's a great question. I'm looking forward to a great discussion here. I think maybe just step back and appreciate those comments on the journey that we've been on over the last five years, which of course was right as we had finished two large transformational acquisitions of CareFusion and Bard. I think the other things that we're proud of that we did over that time was, of course, we reinvented the quality and capabilities of the company to run what's nearly a $22 billion company this year that was falling on Alaris. We redid all of those systems to move from a syringe company to a true med tech company. As you mentioned, we've been very active on the portfolio. We doubled down on innovation, the most exciting innovation pipeline that we've ever had.
I think more recently, and we've delivered, if you look over the last five year CAGR period of time since we launched BD 2025 at least, about 5.6% CAGR, including this year on revenue on our base business. I'd say there's some, as we look at revenue growth right now, there's a cycle which highly confident that we will move out of that cycle where there's three different macro forces that are uniquely impacting BD because of our unique portfolio. You've got the dynamics of China VBP, which really started in 2023 going into 2024, we've obviously recently taken China to be basically right at high single- digit to double- digit decline this year. You've got the impact of life sciences. I think we're the only med tech company with a life science portfolio today.
Obviously, again, you go back to 2023, we were growing about 11% in biosciences that year. Last year it was flat. This year it will be down, low single- digits, low mid single- digits as that market has gone through research funding constraints. In the middle, the pharma systems business, which again had been posting 12% growth in 2022, 2023. We saw the market come down. I think we're the only med tech company with exposure in that sector. We saw the market come down last year flat, this year starting to come back up. You saw last quarter start ticking up, and we have confidence you're going to continue to see that move in a positive direction. What we're focused on is obviously navigating those periods with excellence. I think obviously we're not happy at all with Q2.
We are confident that that is a low point in the combination of things. We've got a lot of exciting actions going on, whether or not it's our focus on commercial excellence that we're driving and actions that we've taken there, extremely exciting innovation pipeline that we've been investing in and focusing our investments in area like biologic drug delivery, smart connected care, products like PureWick, our Phasix resorbable mesh and tissue reconstruction, and other areas that we're quite excited about, connected medication management. At the same time, we've been, of course, driving BD Excellence, which we just created about two years ago. The whole purpose of BD Excellence is to enable accelerated investments in R&D and in selling, which you're seeing us do this year as well while continuing to deliver strong bottom line performance.
Thank you for opening with that. I guess when you think about focused on Q2, growth was 0.9%. Originally, we were thinking 2.75%. You kind of get guidance kind of middle of the way through the quarter. We're doing investor conferences throughout the quarter. I guess, first of all, what changed? When did it change in the quarter? Why was it such a surprise kind of versus what you were thinking halfway through the quarter and towards the end of the quarter?
Yeah. Again, we're not pleased with the performance in Q2, and we've taken a number of actions related to that. I think we definitely saw mid-quarter. February is when Trump put out the reductions in NIH funding, and you saw an immediate hold on instrument spending at that time. That was right mid-quarter. We have assumed that that's going to continue for the balance of the year. At the same time, we saw China VBP also increase as economic conditions in China continue to be constrained, and you're seeing VBP move into our peripheral vascular and surgical space at a bit higher level. Those were the two major factors, China and that.
I think then also just recognizing the recovery rate on BACTEC, which was the third part as we're back to market, that taking a bit longer, and we've assumed that's going to continue for the back half of the year.
Why was the BACTEC [guess] thing kind of surprising at that point? What was the visibility in that business there?
From that perspective, the product had just come back on the market. There's been one other situation like that that existed in the history of that market space. It was not ours. It was a competitor's who was off, had a similar length of time. When that product came back, it ran at this very specific curve, an uptake curve. We had assumed a similar uptake curve with what had happened in a very almost identical type situation, but for a different reason. In this environment with healthcare pressure, I think what we saw was healthcare practitioners stick to a reduced utilization mode. You actually saw even other peers in the space cite in their earnings that the impact of us, their customers were also actually reduced utilization. I think that that's definitely a learning.
As we look going forward, I think healthcare practitioners, their ability to change practice in this type of environment and stick with it when they see an opportunity, I think what we saw is that if there's an opportunity for them to be more efficient, they'll jump on it and stick with it much more disciplined than perhaps in the past.
The full-year [guess] guidance came down $200 million. Help us unpack how much of that was related to BACTEC versus China versus the biosciences spending, resource spending.
I haven't necessarily split those, but those are the three major factors. We've assumed China, we increased from down mid single- digits to down near double- digits for the year, high single- digits. It was mid single- digits to high single- digits, low double- digits. We've assumed that research spending will stay suppressed more in line with where it exited Q2. We haven't assumed a worsening of that environment. That's something that we watch very closely and are monitoring, but we haven't assumed a worsening of that environment. Obviously, then we've readjusted the back tech ramp in the second half.
You said you've taken some actions after Q2. Maybe talk a little bit more about those specific actions. Anything else to add on the actions that you took?
Yeah. I think so. Again, as you look back over the last many years, our revenue growth has been in that 5%-6% range consistently, actually, up until even last year was five, six, seven in the years before that. And so we've been executing in those dynamics in general on impacted market environment. I think as we saw those three factors, China VBP acceleration, life science research funding crunch, and pharma systems squeeze in that marketplace, those were three factors that as we look at it, the importance of commercial excellence becomes that much more important when you're dealing with multiple factors hitting simultaneously. And so we've done a number of things and recognizing that the marketplace can stay more volatile going forward.
We have put, for example, a central group that is focused just on looking at around the corner on those market factors outside of the business units. We actually, prior to Q2, just recently, earlier this year, brought in a new Chief Marketing Officer as part of that. We continue to double down on our R&D investments, growing R&D faster than revenue. We also continue to double down on our selling investments, growing selling also faster than revenue. That is even more pronounced in the back half of the year as we are putting more feet on the street behind key growth catalysts like PureWick, like our peripheral vascular business, like our surgery business in new categories of innovations that we have been launching.
When you think about the full-year [guess] guidance after the updated guidance, you kind of now need kind of 3% growth, Q3, 5% growth in Q4. What's the confidence that you have in hitting that second half ramp? What gives you that confidence, if you will?
Yeah. What we do assume is that pharma systems continues to move in a positive direction. We're seeing that in our orders already. You saw that in Q2. You saw a flat to negative in Q1. You saw two and a half plus. You saw it really in pharma systems. We indicated this when we gave guidance. We expect that kind of dynamic, of those three dynamics, that's the first one that's moving through the system. We have good visibility that that's moving through the system. We've hit the base, kind of the low point there. We hit that late last year, Q1, and it's starting to move up. That's one catalyst. Again, life science research spending, we've assumed to stay flat with where it's been. We don't have a worsening of that environment. Again, that's something we're watching.
We obviously had the APM acquisition annualizing in our numbers, which is about a quarter point in the back half. That had a very light September last year. That is a little bit unusually large benefit in Q4. We have the continue, obviously, the lack of the head-to-head litigation settlements that we had in Q2 and in the first half in the interventional business. As an example, if you look at UCC, it posted a low single- digit growth rate in the quarter in Q2. You take out litigation settlement, that was nearly a 10% growth going on, which has been a continuation of very strong growth in that business. Those are a number of the factors as we look at in the back half.
Okay. That's helpful. When do you think about the margins in the back half? In this last quarter, you actually did a great job holding the margins. How should we think about the second half? Margin ramp, especially calling out more investments in R&D and selling.
Yeah. I think what's exciting, one of the things, many things exciting about what's going on in the company is that journey that we started two years ago with BD Excellence. Again, the purpose of BD Excellence is to accelerate investment in selling and innovation. If you look at BD historically, compared to other med tech companies, gross margin has been towards the lower end of peer groups. A lot of that's because of the portfolio that we have from a large medical essentials portfolio. Op margins are very competitive in the peer group, obviously. That's because we are very tight, best in class, top quartile G&A and efficient on selling and innovation, efficient and effective.
As we think about wanting to continue to invest smartly in selling and in innovation, the number one way for us to do that is through driving gross margin, which is a really healthy thing to do. I mean, obviously, any type of margin that you want to get, you want to get gross margin. You're seeing we're up 190 basis points, for example, in the quarter on gross margin. We called that last year, expect to see that's four quarters in a row of strong gross margin expansion driven by BD Excellence. Our whole strategy with that is to use that gross margin expansion, be able to invest at an accelerated way in selling and in innovation to drive revenue growth, still deliver strong EPS growth, not by through pure cost focus, but through gross margin enhancement. That's what you saw in the quarter.
It was a great actually kind of flow through the P&L. It was literally all very strong leverage coming from gross margin with heightened investment in selling and R&D. We've got great momentum, a long runway ahead still on BD Excellence. We use that to fuel growth. We call that internally, we refer that to our flywheel. Our flywheel is focused on driving gross margins to fuel R&D and selling investments, to fuel revenue growth, which is that flywheel that we have.
You assumed $90 million on tariffs, kind of 25% of earnings. How does the China news over the weekend, the mitigation of the trade deal there, kind of impact your thinking on tariffs at this point?
It's certainly a positive. It's great news. We've been spending a lot of time on that topic, lobbying both in D.C., I'll be there again Thursday, as well as in China on those same discussions. For this year, modest, relatively minor, just given the timing of our fiscal year, it has some favorability, but smaller, just given the cap and roll of manufacturing, etc. As we think about next year, much more meaningful in terms of a benefit if that were to hold as we go forward. I know we've had investors looking at, can I annualize the 90, multiply that times four. Obviously, with this news, that would be way overstated to where we would actually be. More to come on that.
I think what we said is as we have gotten questions on 2026 from our earnings call, the one thing that I said on our earnings call and in the post calls was the one thing I am positive of is it will change. Obviously, a week later, it actually changed, and I'm sure it will change further. As we approach, we're also taking quite a few actions, which were not contemplated as we get into our 2026 outlook. We're taking a lot of actions around changing suppliers, around changing sourcing of products. For example, we had shared some examples where China sources all of the vacuum tubes from our plant in South Carolina. We're moving for them to source from our Plymouth, U.K. facility. They source all of their flush product from our Nebraska facility. We just opened up a brand new flush plant this year in China.
We're accelerating sourcing from that plant to avoid tariffs. All that work continues. I think the news this week doesn't change any of the actions that we're taking to mitigate tariffs. It's still a positive thing to do. We've got dedicated teams still executing those plans aggressively every day.
If you take the 20% annualized to dollar . How much of that was China in total? Just kind of levels out kind of the impact.
We said that it was the number one element is China. As you think about, maybe I can give some broad color, within the U.S., about 80%+ of our revenue from the U.S. either comes from product manufactured in the U.S. or is tariff exempt in the U.S. through North American agreements, et cetera, or other exemptions like Nairobi Protocol, et cetera. The number one area of tariffs is actually we are a very large, we are the largest manufacturer of medical devices in the U.S. We are the largest manufacturer of medical devices in the world by quite a large margin. We make 40 billion medical devices a year. We have nearly 30 manufacturing plants here in America. We export a lot of those around the world, including to China.
The number one source of products that we sell in China are our U.S. manufacturing plants. Therefore, when it was 125% tariffs on those goods, that was the single largest source of our tariff exposure as we go into 2026. This news certainly improves that in a meaningful way. We will share updates as we get towards 2026 on the actual number. It is certainly a positive, a meaningful positive over the last week. The other actions we are continuing to take will be positives as well.
Okay. Anything structurally you're changing in the business like firm because of the tariffs? Like these things, like if you're supply chain things or structurally?
We always are. The answer is yes in a way. I just shared some examples of how we're changing sourcing patterns across that. We had already looked at, for example, Flush [guess]. We started that investment over four years ago, recognizing that we wanted to move Flush [guess] into China for local sourcing. That is an investment we made four years ago that just happens to be well timed with this tariff situation. That is part of the strategic planning that we do, particularly for our high volume products where we're making billions of them a year. We very often have local manufacturing. Vacuum tubes for Europe, we make in Europe. Vacuum tubes for the U.S., we make in the U.S., Syringes for the U.S., we make almost all of our syringes for the U.S. in the U.S., Catheters for the U.S., we make in the U.S.
Catheters for Europe, we make in Europe. We have that network. When it comes to smaller volume products, many of the ones in BD Interventional, for example, high value, small volume, those tend to be more consolidated single source locations. That has always been part of our strategy. I think it is a strength, certainly, as you look at our ability to rapidly deploy to other sites for our high volume consumables. We are probably in a unique position to do that within the industry.
There's some concern that with all the inflation, you're going to, with the tariffs, you're going to get some secondary inflation and kind of move into a different inflationary environment. How are you thinking about BD's ability? You said it's got a great job in the last inflationary environment. Is your ability in teams in place to raise pricing and kind of mitigate inflation going forward if we move into another environment like that?
Yes. Obviously, BD is one of the companies that we're very transparent in our pricing. We share that quarterly where we're at. If you go back and look, you'll see BD historically, pre-pandemic, was generally minus 50 beeps [guess] , minus 40 beeps [guess] , maybe in a great year flat pre-pandemic. If you open up our annual reports and look, you'll see that notably changed just after the pandemic as the inflation started happening as I was CEO. That's not by accident. I ended up, I put in capabilities in the organization, just like we have a law department and we have a regulatory department and we have a quality department. We have a pricing department. It's a function in BD, just like any other function.
Every business unit has pricing experts, the company has pricing experts, and we have an IT system that those pricing experts use called the Novel. That allowed us to help partially offset some of the dynamics from inflation. Again, we're very proud of the work that we did navigating that. That work combined with BD Excellence and other cost programs that we had from manufacturing and changing sourcing allowed us to, of course, we've improved operating margins over 550 basis points over the last several years since we launched BD 2025. That's been part of our ability to do that. That will be a lever as we look going forward. We take that prudently. We recognize the challenges of our customers. We always first seek to offset through sourcing changes, through BD Excellence.
Price, obviously, is kind of the third lever that we do pull in that.
I wanted to ask, switch gears to the life sciences separation. Maybe give us an update on how that's progressing. There's been a lot of changes in the macro environment. Valuations have changed and growth outlooks have changed and they continue to change. There's a lot of volatility, which maybe from the outside, seems like it could slow things down a little bit. It seems like it hasn't. I was just curious why not and where things stand.
I think these are amazing assets. Our bioscience business, you may have seen there's a launch this morning. We actually put out a press release for the A8 first -in -world analyzer that uses our CellView technology and Spectral FX. Great quote and background from leading researchers at Memorial Sloan Kettering in that announcement around how it's enabling to do things that they just were never able to do when it comes to cancer research and discover new things. It's truly a breakthrough technology. We are clearly the world leader in flow cytometry by a strong margin. We obviously invented the whole category with researchers at Stanford, which is why we're still based very close to Stanford.
Whoever, people recognize that is something even in a dynamic environment where there's depressed research spending today, the use of that technology to discover new things in cancer and immunotherapies and new spaces, that is a one-of-a-kind unique asset. There's a high degree of interest. The same thing in our diagnostic space. There's really just a few, two real companies in the microbiology sector, which we're a leader in, with a great growth platform in both BD MAX and BD COR as we look forward. Good interest. We're in the middle of that process moving through and remain on track as we've shared before with a target to announce something this summer on the final form of the transaction.
Okay. So the timeline is announcement this summer. That's not changed.
That's not changed.
Okay. How are you thinking about the different options you kind of laid out, Cell versus RMT versus Spin? And would you consider taking the business in two pieces or does it need to be kind of one whole piece?
Yeah. We're obviously focused on what creates the most shareholder value. I think what we said before is that those are obviously the three theoretical options that exist. Two of those options obviously have the benefits of synergies in them, RMTs and sales, which can give outsized value creation versus a Spin which does not have those. Just recognizing that as an opportunity for outsized value creation. Again, we're in the middle of a process, so I do not want to say anything more, but we're continuing to proceed.
Okay. Strategically, when you think about kind of the medical device business or what you may call remain COR [guess], what do you think the growth outlook is of that business kind of post the separation and what kind of gives you the confidence that that growth is durable?
Yeah. So it's been, of course, it's never not been mid-single digit. Last year, that business was about 6%. It was in that 5%-6% range every year for the last five years. Even this year, inclusive of the pressure from China and inclusive of the recovery still underway in pharma systems, it's still mid-single digit growth business, even this year with our updated guide, the remain COR [guess] BD. So that's, I think if you just say what's the factual basis of the performance of that, that's where it is. That's also the area where we see BD Excellence having the biggest impact from a gross margin expansion and the ability to reinvest that in selling and R&D. So there's a really nice formula in the remain COR [guess] business. That's, of course, because that's where the scaled manufacturing is that you get that leverage as we deploy BD Excellence.
There is a lot of exciting things going on in that business. Of course, it is a 90% consumable business with strong recurring revenue. It is a business that has wide moats in the market spaces in which we compete. We are number one in north of 90%-95% of the spaces in which we compete. Those moats are based upon significant manufacturing scale, often five-plus times the size of the number two competitor and the cost advantage and quality advantages that that comes with. Innovation and early market leadership advantages there. We are really excited about the pipelines.
I think if you look across those businesses, whether or not you're talking about urinary incontinence, where we're the leader kind of with Foleys and we're reinventing the whole category with PureWick, which has been a phenomenal growth driver, or hernia in surgery and how we're reinventing that whole category now, leading the way to use resorbable mesh and nothing left behind. Utilizing that same material for biosurgery to how we're continuing to reinvent medication management with our new AI platform that will be coming out later this year with the launch of Pyxis Pro, with the first Pyxis hardware, I think 30 years since it's certainly since we've bought it, and I think even before CareFusion and maybe before it spun out of Cardinal. We're really excited by that coming. That's true across the board. I just shared a few examples.
As a market leader, we consistently innovate, expand into near adjacencies in our spaces. That creates those wide moats that creates that durable business profile. We are really excited about the trajectory of the new BD.
Okay. How do you think about deploying capital kind of post-separation in new BD, both internally, what businesses are going to get capital, are you going to be investing in more growth, and then also kind of external capital deployment through acquisitions?
Yeah. I think if you look at BD, because we may be a little different than other companies within med tech, in a way, BD is, of course, given our scale from a manufacturing perspective, we're almost like a healthcare industrials company in a way. We behave that way when it comes to capital deployment. I think one of the things that I'm really proud of is the consistency and discipline that our team has when it comes to capital deployment. We have very rigorous models that we use when we look at deals. They're standardized. Only our corporate team does those models so that they're not variable by business unit. We have very specific scorecards that we look at.
We do deals that give strong returns on capital, advance our strategic position and growth, but we're not doing part of our algorithm is not going out and doing I've made it very clear. I'm not doing large transformational M&A. We're not going and we've not been chasing doing 20% billion dollar growth things that are going to be highly dilutive to EPS. Either that's not what we've done. We've done really great assets. I think the Edwards acquisition very recently is a great example of that. That's a great 6%-7% growth business, market leader in its space, 90% category share. New technologies with AI continuing to drive its margin profile up, immediately accretive to revenue growth, immediately accretive to gross margin, immediately accretive to EPS, immediately accretive to op margin, strong double- digit ROIC profile.
We've had a number of investors say that looks like it's probably one of the best financial deals in the last five years in med tech. I think it is. Many of our deals have fit that profile. It's been prudent deployment of capital in that way, continuing to keep BD's durable growth profile while also keeping that earnings cash flow profile as well that we have. Again, it's not in a we're not seeking to do large disruptive things that are in the pursuit of a stepwise change to high single- digit growth. That's not our agenda.
How are you thinking about the balance sheet kind of post-separation? Is there still kind of want to be in that two and a half times leverage or thinking of changing?
Obviously, it'll depend upon the form of the transaction. At this share price, obviously, we'd share buybacks as well too. It's a great value. Hard to beat that from a return perspective. That'll all depend on the form of the transaction. More to come there. We're happy at two and a half. We would obviously look to maintain that and continue to delever over time. Again, we'll look at the form of that transaction.
Okay. Perfect. Kind of one other question I had on kind of the remain COR [guess]. You've talked a lot about as total BD, you've got a lot of margin expansion opportunity, especially the gross margin line. How much of that was in life sciences versus remain COR [guess]? Is there still a lot of margin expansion in the remain COR [guess] business left kind of post-separation?
The majority of the margin expansion is in remain COR [guess] or is in new BD. That's, again, the large scale manufacturer. Just to put it in perspective, as we've been driving, and let me just step back a little bit. When we started BD Excellence about two years ago, we did a number of structural changes that we haven't talked about that much. As an example, we took all of our manufacturing from our businesses and we centralized it. As we think about BD Excellence, we want the business presidents focused on selling, innovating on that side. All of our manufacturing reports up to a central group that also has a central BD Excellence team so that there's driving that one person central, all the business unit manufacturing reports to, and they drive all those systems and processes.
They wake up every day doing that while the businesses are driving deep insights into the market, driving their innovation agenda, driving the commercial. That has really allowed us to accelerate that BD Excellence deployment and that focus. As we look at it, the productivity improvements we're seeing on the line since we started just in the last two years and with the same capital that we had two years ago, if you look at the same lines, the top 150 lines, today we're making 2.4 billion more units on those lines with zero additional capital investment. We've obviously put other lines in over that time. That's $2.4 million more units that we're selling, not dollars, but units that we're selling, getting more value out of that capital, as an example.
We can deploy that, any capital savings that we get because we do not need a new line for that, to other purposes. Obviously, we are still investing heavily in many areas. Biologic drug delivery is a great area that we have been investing heavily in capital to help fuel our growth in GLP-1s, which has been a big positive for us over the last several years and will continue to be as we are growing double- digits there. Overall, BD Excellence is driving 30% improved safety rates, 35% better quality metrics from non-conformances, improvements dramatically in OEE productivity, revenue per associate in our manufacturing plants, all up in very strong double- digits, which all comes together to drive that margin expansion at the gross margin level, which ends up, again, allowing us to reinvest that money in selling, in innovation, fuel the flywheel, and still deliver strong EPS performance.
Great. Thank you. I think we're out of time. Thanks for joining us.
Okay. Thank you. Great seeing you.