Travis Steed, the medical device analyst at Bank of America. Next up, we have BD, Tom Polen, CEO, and Vitor Roque, the newly announced CFO. I think he's been to Vegas 2 times, but this is his 1st fireside chat as CFO. Welcome.
Thank you. Thanks for having me.
Maybe since it is your first fireside chat, maybe we'll start with, you know, you're just announced permanent CFO. Just kind of love to talk about your strategy as CFO. You know, what do you think is different? What do you think is the same, you know, as we, you know, see BDX in this role?
Sure. No, thanks for the question, and thanks for having me. Very happy to be taking this new role as Chief Financial Officer in this crucial pivotal time for BD. We just closed the transaction with Life Sciences last quarter, and we couldn't be happier with the new strategy that BD is taking. From a CFO perspective, I think the philosophy here is to be making sure that we are, like, consistent and transparent. Making sure that we understand the business drivers. I actually feel that I'm very well positioned to do that, given my more than two decades with the organization. I can partner with Tom and the leadership team in order to drive that operation and unlock the growth that we are looking for while being very responsible.
That's going to translate into kind of a clear guidance and a lot of transparency on what we do. Also, I think one very important topic for me as a CFO is making sure that we take care of our capital allocation strategy. We have been very clear on our priorities are from a capital allocation, focusing on the share buybacks, maximizing the shareholder return. I think based on the share prices today, I think that's one of the priorities that we have on capital allocation. Also we continue to invest on the business, focusing on cutting acquisitions to solidify our top-line growth and taking care of our balance sheets, delivering the leverage that we have been committing to this of 2.5 times.
Those are gonna be the priorities in supporting this strategy and unlocking the growth. I would not say it's a complete transformation from what we have in the past. I think it's more sharpening our focus and making sure we can deliver the numbers that we have been promising.
I think we had dinner last night, obviously. I think, Tom, the 2 things that stood out to me at dinner was, 1, the guide that BD is executing against now and has hit the last couple of quarters on, you were responsible for that guidance. 2, you've been an operator and worked in a lot of the businesses. I don't know if you want to elaborate on those kind of 2 points.
Sure. Of course, I have been interim. I was interim as a CFO since December, but I was integral part with Tom Polen and the leadership team in terms of building the expectations for this year. Again, the objective, as I said before, is getting that consistency and transparency on where are we seeing the markets. We have the three major headwinds that we have been communicating on Alaris, vaccines in China. We wanted to make sure that we put a guidance out there that reflects the underlying performance of the business, meanwhile being very clear on how are we gonna get there. From an operational perspective, I have been with the company for 20-plus years. I have worked in multiple regions in Europe and Latin America and North America.
I have also had the chance to work in multiple businesses, even on our legacy BD Life Sciences business in biosciences, but also medication management, specimen management across the regions, and most recently, supporting segments as well as the medical segment. I feel that I'm very well positioned to drive that operational rigor that the company needs in order to drive the new BD 2025 strategy.
Okay. Cool. Tom, kind of new BD, you've been at BD a long time and kind of have a new strategy, new BD, new portfolio. Like, where do you kind of see BD at today and kind of the path forward here? Is this the portfolio, the right portfolio for BD, and, you know, what's the plan to kind of execute?
Yeah. We're extremely excited by the portfolio of new BD. We've spent the last 5 years being very active in reshaping our portfolio. Of course, starting with the separation of our diabetes care business, as that wasn't the category that we wanted to remain in. We then separated our B. Braun business on manual surgery products. Then obviously most recently, you know, really phenomenal transaction for our shareholders, separating our life science business to Waters. You just step back, you know, at the beginning of just 10 years ago, right? Our med tech business was about 60% of BD or about $4.5 billion 10 years ago. Today, that same med tech business, right, is now $19 billion. We've radically, you know, shaped that up.
Life Sciences kind of was the same $3 billion business 10 years ago. Grew a little bit, but not tremendously. Now as you look at BD, I think also for the first time ever, and I've been with BD 25 years, the clarity of our portfolio strategy is exemplified in how we've organized our segments. Now, of course, with reporting requirements, you can see the profitability profile and the growth profile of each of those very clearly, and they're clearly distinct. Obviously, our Connected Care Business, right? We've got some phenomenal assets that we've built together there. Advanced Patient Monitoring, you saw that grow double digits in the quarter. Really phenomenal M&A deal for us. Well ahead of our deal model. Continues to have great momentum on the innovation side.
We're integrating that, you know, with our medication management solutions by bringing in EPM and connecting it with Alaris and utilizing our AI platform, Incada, to do that. You go over to our Biopharma Solutions Business. First time that's ever been a standalone focus within the company. Extremely profitable, strong growth from biologics business. Biologics, as we showed in the last earnings call, has reached 55% of revenue for our Biopharma Solutions Business. Biologics growing double digits now. In large part by GLP-1s, but also, you know, through other biologics. Our Interventional Segment, obviously, where all of our kind of physician-preferred products. Double-digit growth in PureWick. Right now, that's, you know, well over half a billion dollar platform for us.
Double-digit growth last quarter in tissue regeneration, again, becoming a greater mix within the surgery business portfolio. Our PI business doing steady, and we've announced a series of new launches there, including Revello as an early launch in Europe. You've kind of got the fourth segment, which is what BD's been historically known for, which is our medical essentials business, right. Continues to be used by 9 out of 10 patients that are entered into a hospital. Some people call it the anti-AI, you know, hedge program because it won't be impacted by AI. It's everyone that gets admitted to a hospital uses those products. 35 billion devices, 100% recurring revenue, you know, per year.
That just generates a lot of cash that we end up utilizing to invest in those other three segments that we talked about, as well as, you know, utilizing that to do other things that are value creating, like share buybacks or focused tech and M&A.
When you think about the portfolio, you've kinda called out these double-digit growth drivers, drug delivery, APM, PureWick, events, tissue regeneration. Like, what percent of your portfolio is growing double digits? What percent is growing kind of high single digits? How do you get more of the portfolio in those faster growing areas?
Yeah. I'll turn it to Vitor in a second. The good news is that, of course, those elements, they're becoming a larger portion of the company, right? Just given their scale, each of those, right, are now scaled. Like biologics is over a $1 billion-dollar business. Advanced patient monitoring is a $1 billion-dollar business. All the other ones are north of half a billion dollar businesses. If they're growing double digits, that's obviously weighting. I think the other thing that's really important to call out is each of those are accretive to the margin profile of the company. As they grow, there's also a very positive mix benefit that comes along with that versus some of the other areas.
As you think about how we break up the portfolio in terms of that, those areas, the categories that are also high single digits, you know, versus then the low single digits category, maybe, Vitor, you can share.
I think we mentioned before, like 10% of our portfolio right now is actually on that decline situation with China, Alaris, and the vaccines. I think if you break down the other 90%, I would say that about the double-digit growth at about 30% is growing at that double-digit rate, and we are investing behind those assets in order to continue to support that growth rate. We have another important piece of our businesses, around 25%-30%, also growing at solid mid-single digit growth, so 5%-6% in several other categories. We have, as Tom mentioned, our like another like 30% on medical essentials. That is more like the runway to the healthcare systems, which is more on the low single digits.
All those are on the positive side, and we are investing on maximizing the double-digit growth markets that we are playing in, but also seeing how can we elevate the mid-single digit growth to an even higher growth rate going forward.
Okay. The 10% declining, there's kind of the three discrete headwinds, China, vaccines, Alaris. Maybe kinda go through those. You always talk about your underlying growth, like 4.5%, you know, 5%, whatever. When do we start to see that to kinda show up?
I'll start and then turn it over to Tom. From Alaris, we have very clear view on where the Alaris is going to end up. By the end of this year, we are finalizing the remediation that we have been committed to the FDA and the agency to do. It was 3 years, that's the end of it. In 2027, we are going to hit a new run rate from a revenue perspective, which is going to be about $100 million. Of course, we're going to have a comparison to this year because that was the last upside year from the Alaris perspective. We have very clear view on that. That's going to be the last year, and that's going to solidify there. From a vaccine perspective, we call out about 25% reduction this year.
We have seen the pharma companies also suffering from that perspective. We are still not expecting necessarily the decline on the 25% continue because it will be a very dramatic situation for the healthcare system. We are working very closely with the pharma company, so we are not expecting that the level of decline, but we are still not expecting that to be like a growth driver for us in the near future. China is the one that we are still working very closely with. We are seeing what we had said before, that 80% of our portfolio is gonna go through VBP this year. That remains true. China government continues to look for other ways to contain costs, we are just monitoring this very closely. Tom.
It's very well said.
Okay. You'll likely have some visibility. Alaris you kinda have good visibility on, right?
That's based on, right. That's extremely clear visibility.
Yeah.
It's going to go to about $100 million next year, and then it'll start growing, you know, from that. That creates that 200 basis point headwind next year. You know, what's interesting is we'll be having record market share as that's happening. It's just the reality that with 60% of the market that we have, you know, normally a normal cycle is you're replacing that every 8 years or so. We just replaced it in 3 years. We replaced about 20% of the entire market every year. If you think about the competitors in that space, they're still on an 8-year replacement cycle. They collectively, across 4 competitors, have about 40%, the remaining 40% of the market. They're on an 8-year cycle, they're replacing about 5% of the market.
All other competitors combined replace about 5% of the market every year. Again, we replaced 20% ourselves. 4x what everyone else does combined, we've done every year for the last 3 years. That's just a, you know, a unique dynamic. Again, put in perspective, 5% of the market comes up for grabs every year from competition. You know, we've been very clear. In the first 6 months of this year, we've taken 1.5 points of the market share. Think about, it's about 2.5 points have come up for grabs. We've taken a large portion of that. We're gonna continue to focus. You know, our entire sales team for Alaris moved because all Alaris customers essentially have brand new pumps that are less than 3 years old.
They're not focused on defense, they're focused heavily on offense. We've got a great platform, obviously connected in with our new AI solution, and PAD creates significant benefits for our customers. You know, they're focused on helping, you know, customers advance care with Alaris.
Okay. Vaccines, you have visibility kind of in the summer when contracts come up.
That's more when the pharma company will start looking at placing their orders for next year. Again, I think as Vitor mentioned, we don't expect, and we have no signs, as we're watching that there be anywheres near another decrease like we saw this year, as that reset. What the exact level is, you know, it's too early to say that, but certainly we don't expect a repeat of this year.
Okay. China is just kind of more the uncertain factor.
I think it's just a recognition that anyone trying to peg China out, you know, a year from now, you should do so, you know, with caution. Just recognizing that the market is very dynamic and that it's continued to have a, you know, focus on cost constraints. We do know that, as we've said, 80% of our portfolio will have gone through VBP. It's very actively happening. We're seeing it play out as expected this year. We just also recognize that there's other, you know, whether or not it's DRG or other mechanisms that are in discussion that haven't been implemented yet. There's a lot of local companies and international companies lobbying against some of those, which is they've been put on pause, we want to continue to watch that play out.
Okay.
Yeah.
Full. When I think about kind of the macro, you know, ACA utilization, there's medtech investors, probably part of the reason why medtech stocks haven't worked is some worries on utilization side, and you have pretty good visibility.
Yeah.
-and in utilization. What are you seeing from the utilization standpoint?
Within our portfolio, we're seeing strong, you know, solid utilization. Obviously areas like blood collection sets, you know, are a good indicator of diagnostic testing. You compare that to the Quest Labcorp volumes. Diagnostic testing is pretty solid. That's a good indicator of just broad healthcare consumption. Products like, you know, IV sets, which we have 70%, you know, share of strong growth, right, in the U.S. You know, solid mid-single-digit, you know, 6% plus kind of growth you're seeing. Some of that's share gain, at the same time, right, it's underlying utilization. That's the first thing you normally get when you go into a hospital is an IV set, right, put into your arm, most likely a BD catheter.
I think from those indicators and then some of our other solutions in a world where people are looking to save money and navigate a challenging economic environment, right? Solutions like our Rowa pharmacy robotics platform or what we're seeing with Pyxis and our medication management suite, where it's helping with nursing workflow, you know, we're seeing strong demand for those types of solutions.
Okay. kind of also on the macro side, inflation, you know, you know, that's probably another factor for worry on medtech stocks. Just want to understand where you are. You talked about resins exposure. Do you have any computer chip exposure, memory exposure? how you kind of have visibility on hedges and on inflation?
Yes. Go ahead.
From a-- As we mentioned, I think the biggest topic for us that we are monitoring is the price of oil, which is connected with the resin price. The resin price, and the plastic, it's approximately 5% of our costs. I think we have been able to implement hedges along the way, which are gonna helping us this year to kind of absorb those costs and making sure that we do not get a lot of exposure. Of course, as this continued pressure on oil remains, those hedges are gonna start rolling off, then there will be pressures from a cost perspective coming from this. I think the team have been working on several levers in order to how to offset this heading into 2027. I think 2026 we feel very confident that we have everything protected.
In 2027, I think the work is right now happening already with continued to work with our ISC team, which has been proven year-over-year, the capability of delivering high productivity. We're also working very heavily on the commercial aspect with price. That's something that we have done in the COVID times, and we actually have created a very strong discipline about price execution on the marketplace, and we continue to do that, and we are gonna looking into alternatives to do. Last but not least, I think our portfolio. I think we are investing on areas of high growth but also high margins, and that should help us continue to offset those type of pressures, inflation. Inflation is real, is there, but I think we have enough levers, and we know the path.
We have done it in the past, and we're looking to continue to do that in the future.
Okay.
I think you saw us be top tier in navigating an inflationary environment last time that happened post-COVID. One of the things we said is internally, we said we're gonna act early, which we did, and that we were gonna be the best in the industry at navigating. I think we ultimately were, right? If you look at a three or a five-year basis, we were top two in med tech from both a gross margin, operating margin, you know, performance over that timeframe. That I think it was a large part due to some of the actions that we took early on during the last inflationary cycle. We're taking that exact same approach, you know, in this ecosystem.
We're not sitting around thinking that oil is going to drop or we're gonna assume it's gonna stay high, and we're gonna take actions accordingly.
Okay. There are what kind of levers to offset, let's say things do get worse, kind of your levers to kind of offset that?
I think you heard Vitor talk about, you know, a few of them. One is, again, BD Excellence has become a tremendous competitive advantage for us. We've been operating at 8% productivity last year. We're operating it again this year. We announced that was again our productivity this past quarter. That's at our top decile level for sure within this industry and most, you know, other, pretty much every other industry. That's a big competitive advantage in those types of environments. The other one is pricing, right? We flex, you know, pricing as appropriate, and we have open discussions with our customers, right? Where we have products that are primarily made of resins. We talk about those. May go up.
We actually have put in during the last inflationary cycle, we changed most of our contracts to have annual price increase clauses in them as well related to CPI. You know, we saw some numbers this morning. Obviously, CPI is up, you know, in the 3s, deeper in the 3s now. You know, we have that ability within most of our agreements. Again, we actually have time later this week after we leave the conference, you know, reviewing that with our team. You know, they've been given tasks, and we're following up with them on those actions.
Okay, that's helpful. Just in total, kind of the margin opportunity, you're at kind of 25% margins, which is your goal. You got there. Does it get harder going forward to continue to extend margins at the same rate? What are some of the levers on gross margin, R&D, SG&A to kind of get leverage?
Yeah.
In the P&L?
I can start.
Please.
As we started BD 2025, the first couple years, most of our operating margin expansion came from leverage in OpEx. Then you've seen in the last 2 years, this being the 3rd, that leverage really come from gross margin. We called it beforehand. Those who have known the BD story, we said, "Get ready. You're gonna start seeing as BD Excellence starts really hitting full steam. You're gonna see operating margin expansion come from gross margin expansion." It played out exactly as we said. It's gonna continue down that path, right? We expect operating margin leverage to come primarily from gross margin. I think even this past quarter, obviously this was we didn't have tariffs in Q2 of last year, so there's a tariff headwind.
If you take tariffs out and just say, "How did BD operationally perform ex tariffs?" It was 70 basis points of gross margin expansion and 50 basis points of op margin expansion with us reinvesting, you know, into selling as part of our growth strategy in between. Again, it was coming from gross margin. Why is it coming from gross margin? It's a combination of productivity that we talked about, and it's coming from our plant consolidation strategy, right? We've talked about we've cut our manufacturing plants in the last five years in half, right? We were near 100. We're now, you know, in the 50, about 50 range, and we still have some further consolidation that would go into the 40s.
Those are projects we've been investing in over the last several years, and they're really just continuing to flow through, and those will hit the gross margin line in exclusively as well. Then obviously the mix that you touched on.
Yeah. Again, I think this year we have been talking about the 25% despite the tariff impact. We're being able to kind of deliver that. Excluding the tariff, we actually had an underlying expansion of our margins. We are monitoring the inflation, which is gonna be the next topic, heading into Tuesday. I think we have, as Tom said, the BD Excellence and the commercial execution will be the key drivers for us going forward.
When you think about this year, you know, you've had kind of low single-digit revenue growth, mid-single digit EPS growth. We've kind of already talked about low single-digit revenue growth next year. I don't think that's changing given the discrete headwinds we talked about earlier. Otherwise, the base is growing like 7%, which is not possible. Is there any factors or I guess the way to phrase it next year that why EPS would again still be in the mid-single digit growth range?
It's too early. Obviously, we're not giving guidance on 27, EPS, but what we're focused on is obviously optimizing that. More to come.
Okay.
Yeah.
All right. I had to ask.
Yeah.
The, if you go look at this year, kind of first half, second half growth, like one question we addressed and talked about last night at dinner, you know, what you see in our models, just looking last year comps looked tougher until wood steps up in the back half of the year, on an underlying basis. I just wanted to kind of address the underlying acceleration in the growth rates.
Sure. From a revenue perspective, I think we feel very good. I think we demonstrated the capacity of execution of our revenue. We overachieve our expectations in Q1 and also Q2. We see the comparisons on the back half of the year fairly similar. We know, of course, that the Alaris situation is more acute and more pronounced on the Q4, given that last year was the largest number of Q4 of Alaris for us. This year we are coming down to the end of the remediation by the end of Q4. I think if you think about our recurring business, we continue to see good progress. We share gains across businesses like in MDS and specimen management in the U.S. market. Also our capital business continues to see very strong backlog.
That gives us confidence on the back half of the year. As we said, our growth on the back half of the year is going to be similar to the first half of the year, and that gives us confidence that we can continue to deliver on that number. The comparisons are fairly easy, not easy, but similar to the first half. Q2, you can argue, because last year we actually had a tough Q2, but it was actually because of an event that happened the prior year. The baseline is fairly similar, so we feel very confident about the revenue on the back half of the year.
Okay. The same thing, we stare at our models and there's the margins going higher from Q1, Q2, Q3, Q4. I just wanna understand, like the Q4 step up looks really big.
On margins. I just want to get the confidence.
I think the margin story is very similar. We have been implementing our BD Excellence operations, so driving volumes and savings on materials and other productivity factors. We have high visibility to those because of the what we call the cap and roll, so everything gets capitalized and amortized. We have very clear visibility on when that's gonna happen. We also have the situation on tariffs that naturally because of the actions we have been taking, the dollar amount comes a little bit down and it becomes an easy comparison in Q4 because we didn't have tariffs on the first 3 quarters of the year. In Q4 actually was the highest quarter of tariffs that we have seen so far, was about $90 million last year. We see those factors.
The revenue continues to improve on the areas we are investing on because we are putting sales force behind like APM, which is high growth, high margins. Also in surgery, advanced tissue regeneration, which is also high growth, high margin.
Yeah.
Peripheral interventional also drives significant above company average margins. Those are actually the sales forces gaining productivity as we go through, which is gonna give us confidence from increasing margin from a mix perspective and the productivity that we have seen our plants already operating are gonna generate the P&L impact heading into the Q4 numbers.
It's fair to say that, as Vitor said, essentially the $90 million in Q4 of last year, it's going to be a lower because of all the offsetting.
Yes.
Actions that we've done. We'll have a favorable number in Q4 for tariffs year-over-year because of all those offsetting actions that we've taken.
Yeah. Last but not least, I think if you see our revenue sequential, our revenue is actually higher on the back half of the year compared to the first half of the year. Our expenses are actually pretty steady with Q4 coming a little bit down, which is part of the execution of the $200 million cost out program that we have already implemented. It's already well underway. We have already $150 million in motion, and that's expenses as they exit the organization in the back half of the year. We see the benefit on the operating margin as well. It's a combination of the productivity of the clients, our higher operating expenses, efficiency and the leverage from the revenue perspective.
Okay, that's helpful. Another factor I wanted to make sure we addressed is the ChloraPrep triple. I think that's like a $480 million product. Is that right?
Well, we said it's about 3% of revenue.
Okay.
Two and a half of U.S. ChloraPrep of total BD revenue.
Yes. Okay. just there's a 3-week ship hold, kind of the confidence that with the warning letter out there that that, you know, comes back on the market.
Yeah. As we said, pending the testing, you know, we're quite confident. We haven't stopped making ChloraPrep, right? There's never been a pause in our manufacturing. It's safe. There's no patient issues, no safety signals at all. We stand by the safety of the product. It's obviously our one large pharmaceutical manufacturing plant that's considered a pharmaceutical as a skin cleansing agent. Essentially what we're doing is we're doing the exact same testing that we do for product that we ship to Europe. The exact same product is made on the exact same lines, gets a label for Europe. We typically do an additional testing loop on that product post terminal sterilization, and we're adding in that same testing loop on U.S. product.
That product is the exact same product that we have been testing that goes to Europe, that we haven't had any issues with. That's kind of why we, you know, adding in that same testing that's always gone well, it's already been started. We continue to manufacture the product and as soon as that testing would be completed, we'd resume shipping each of those batches. Those shipments don't go to the end user for the most part, right? It's filling shelves at the distributor as well. We're not expecting end user back orders at this time. It would be refilling shelves at our distributors.
Yeah. That's what's going to be from our revenue. What gives us confidence on the revenue is exactly what Tom just mentioned. We have inventories on the channel with distributors. Those are gonna continue to feed the hospital for utilization. Once we start releasing the product after the testing, that is a very well-known test that we have high confidence on. We are gonna start shipping back to distributors to replenish that inventory. We do not see right now the revenue impact from it.
It's an extremely important product, obviously. We take it very seriously. It's used in about 95% of all U.S. surgeries.
Do you see the risk of FDA saying, "Hey, you can't ship this or restart that in three weeks?
This was a completely voluntary, you know, action upon our part. We did that completely on our own, our quality department took that action with no request from the FDA.
Okay. Then, one last question. PowerPort. PowerPort litigation. You won the first trial. I don't know if there's anything you wanted to say on that before we close.
Again, we'll fight that litigation vigorously. That's, you know, that product's been on the market for 40 or 50 years, has helped, you know, tens or hundreds of thousands of cancer patients, you know, navigate very safely. It's a safe and effective product. That's what the jury obviously found. It's well designed and again, and has a decades, many decades of success.
Great. Well, thanks a lot. We're out of time.
Thank you.
Thank you.
Thank you.