Thank you for having us here, Carolyn. Good to see you again.
Thank you. So why don't we just start off? It's been two years since separation now. You've said previously that you believe you'd be substantially complete with separation by the end of this fiscal year. So maybe speak to your priorities over the next six months here, and then some of your other priorities once you're past separation.
Absolutely. So, it's been a little over 2 years that we separated from our previous parent, BD, and this was a business that had been part of BD for almost 100 years. So there was clearly a lot of separation work to be done so that we could stand up ourselves as our own independent public company. We had 3 priorities that we communicated even prior to spin, right? Number 1 was maintain stability in the core business as we went through the separation. 2 is do all the separation work, and 3 is invest in growth, notably around the patch pump program, that, you know, that we were working on. So with respect to separation, I'm pleased to say that a lot of the complex projects are behind us. There were 2 that come to mind right away.
One is we have a plant in Suzhou, China. It's an important plant for us. It's one of our newest plants. That, the transfer of ownership from BD to Embecta was a multi-step process that involved registrations, quality inspections, government approvals, asset transfers, and so on and so forth. And we successfully concluded that, and while we were doing that, we implemented a brand-new ERP system over there. The second project that actually consumed a lot of cash, and I know we'll talk a little bit more about that, was as we exited from BD, we had to set up our own ERP system to cover all our customers in more than 100 markets around the world.
We had to set up our own distribution network so that we could move product from the 3 plants that we manufacture the product into more than 100 countries around the world. And then we had to set up our own shared services capabilities, right, for, for customer queries, invoicing, cash collections, and so on, again, for global deployment. We successfully did that for our U.S. and Canada business, in the November time frame of 2023, fiscal Q1 for us, and then did that for Europe, Middle East, Africa, and large parts of Asia in our fiscal Q2. And, and I'm pleased to say that those implementations went quite well.
What remains is approximately 15% of our revenue base needs to come over to these systems, which we plan to complete by early fiscal 2025, and we were able to get a short, limited extension for our TSAs from our previous parent, BD, to enable to do these implementations in the phased manner. Because some of you that have been through implementations like these or invested in companies that have been through implementations like these, you know, these are fraught with missteps, and I'm pretty proud of the team for making sure that we were able to supply our customers through all of that. So in the next, you know, less than six months that remains in this fiscal year, we want to finish the bulk of that separation work.
That will really free us up from a cash perspective for FY 25 and beyond. Simultaneously, we are in continuing dialogue with the FDA on the patch pump, and certainly as we close out 2024 and start into 2025, you know, I'm hoping to give more updates on that. But that will really set the priorities for us over the next several years. Patch pump program, thinking about how we use our capital, including the free cash that we will generate now, and that will become more apparent to investors now that some of these one-time separation costs will be behind us. And we are going to be very mindful of our leverage levels as well as, you know, thinking about how we bring our debt down and sort of think about debt repayment over the coming years as well.
Thank you. That was a great overview. So why don't we get a little bit more specific and think about the most recent fiscal quarter. You beat by about $22 million, $16 million of that was timing related, and $6 million was really better base business performance versus your internal expectations. So why don't we start there? What were your takeaways from the second fiscal quarter, and what really drove that base business in the second fiscal quarter?
Yeah. So, we had said previously that, look, this year might be a little bit lumpy because when you go through the systems and process implementations like these, obviously, both us and our customers are interested in making sure there is no interruption of product supply, right? So typically, what would happen, and we saw this in Q1 for our U.S. business as well, is there will be some buy ahead in advance of these implementations, just in case that there is a hiccup in the implementation. So we saw this in Q1. We had some buy aheads in the U.S. that unwound themselves in Q2. But then in Q2, when we did these implementations in EMEA and Asia, we had some buy ahead there as well.
And so if you think about sort of $16 million in terms of a timing benefit we got in Q2, I would say approximately $10 million of that was related to the ERP implementations and other systems implementations we were doing as customers bought ahead, and we did not have a supply disruption, right? So it's sort of a little buy ahead that benefited us in Q2. And we had a timing benefit in the U.S. as well, in advance of a price increase that we were going to do in the U.S. But both those factors contributed in total about $16 million, that we expect will unwind itself in Q3 and Q4. The other benefit we got from just a little bit doing better on our base business, underlying base business. You know, our product mix was better.
When we do a little bit better on product mix of pen needle versus syringes, we benefit at the top line and at the margin line actually, so that helps. Geographic benefit was a little bit better than we thought it would be as well. And so that underlying benefit is essentially what we rolled into increasing our guidance for the full year.
Perfect. Great summary. So for the second quarter, again, that was the $6 million better base business. You also raised or updated guidance to reflect additional favorability in the back half of the year. So can you talk to first your guidance for the year, which is now, I believe, flat to down 0.5%? What's included at the high end, low end there, just your overall puts and takes as you think about 2024.
Yeah, happy to. So really, the big driver at the low end is contract manufacturing revenue. So this is us as Embecta, doing some contract manufacturing for BD, and this was always known to be transient. And as BD has been insourcing those products, our contract manufacturing revenue has been going down. So the -0.5% is essentially the impact of contract manufacturing changes year-over-year. And our base business, if you will, being stable. The high end of 0% or flat is essentially the base business doing a little bit better, primarily driven a little bit by pricing that compensates for the decline in contract manufacturing revenue.
And then within the year, if you look at sort of first half versus second half dynamics, the dynamics are a little different because of the timing benefits that I talked about in Q2. So if you look at the first half of the year, you know, we did about 2.2% in sort of constant currency growth in the first half, largely driven by volume, right? A little bit by pricing, that both of them sort of offset the reduction in contract manufacturing revenue. In the second half of the year, that volume uplift that we saw from the first half, in the first half will go away because that is timing related. Contract manufacturing might get a little bit worse, and pricing might get a little bit better.
So those—that's how sort of the individual components between first half and second year, second half break out, to give us the, the full year guidance that we laid out.
Perfect. I think we've covered, you know, the quarter and the guide, great. So why don't we move on to overall market dynamics? Can you talk a little bit about your outlook on growth for the core injection business, both in the U.S. and internationally, and how you think about both price and volume that you were just speaking to, contributing to, I guess, the guidance you already mentioned? But so for your overall just growth outlook, U.S. versus international core injection business, the puts and takes there.
Yeah. So the heuristic sort of I carry in my mind with respect to growth in the core injection business globally, right? I mean, I look at sort of three archetypes of the market. One is the U.S., which sort of stands apart, contributes a little bit more than half of our revenue. Then you have emerging markets at the other end, where, you know, there is significant growth in the number of people with diabetes and people using insulin to manage their diabetes. And then you have the other developed markets, think largely, you know, Western Europe, that sort of sit somewhere in the middle, right? And for the U.S., you know, U.S., there have been a lot of factors that have impacted sort of insulin usage over the last several years. Certainly, GLP-1s has been one of them.
There was sort of disruption during the COVID years that I think we are still seeing the effects of pump adoption as what I'll call high volume users of injections, particularly in Type 1, have moved to pumps. But taking all of that into account, certainly through the end of FY 2023, what we saw in the U.S. is, you know, slight volume declines over a multi-year period, -1%, -2%, but offset by price, so U.S. business remaining flat. In the emerging market end of the spectrum, you know, what we see is certainly underlying volume growth, as well as our ability to take price. So our emerging markets' contribution to our overall revenue has steadily increased over time. And then the other developed markets sort of sit somewhere in between those two, right? And it really depends upon market by market.
I mean, largely speaking, you know, the way we think about it is certainly in the developed markets, notably in the U.S., what we've seen so far with GLP-1s, and remember, Ozempic was launched in 2018 in the U.S., that there is a delay in insulinization, but under the... not an elimination of insulinization. So that can cause a dip as people start insulin a little bit later. And then, look, it remains to be seen whether people live longer, so the net usage of insulin remains the same, right? Because we are still fairly early in that. I think in emerging markets, it's a strength of our company. For a company of our size, we have incredible emerging markets infrastructure.
We have a plant in China, Suzhou, that I spoke of, that makes products for China, as well as export to other emerging markets in Asia, right? So we have local supply over there, which is a huge benefit for us. And I think more than half of our commercial workforce around the world is actually in emerging markets. So I feel like we are well situated to take advantage, if you will, of the growth in the diabetes population in the emerging markets. With respect to price versus volume, obviously, the trends I was talking about are largely volume-based. Look, we are in more than 100 markets around the world, so obviously, you know, there are always contracts that are coming up for renewal. I think what you've seen in the past is an ability for us to modestly take price.
I wouldn't necessarily say every quarter, but most quarters. I mean, I even sort of commented on the first half of the year, we were able to get some price. And, you know, I wouldn't want to comment on future pricing actions, but, but certainly it is our intent to optimize price as, as we go along, as we go along here.
Thank you. Can you speak a little bit more into what underpins Embecta's ability to take premium pricing? How is Embecta competitively differentiated? How easy and/or challenging would it be for a competitor to take your place?
Yeah. So look, we're very, very well positioned in the injection devices space, right? So several things come to mind. We've been in this business; this year, it's 100 years. We've been making insulin injection devices for 100 years. That gives us brand recognition that is incredibly hard for somebody to replicate. If you are a patient who's taking insulin and injecting yourself with insulin, the reliability for devices, the name recognition associated with our devices... Look, managing diabetes is already a pretty complex juggling act. There isn't a huge reason for a patient to change their pen needle if they have a regimen that works for them.
Customers that have been working with us for a long period of time are genuinely impressed, I think I would say, by our ability to provide reliability of supply. You know, people with diabetes, when they walk into a pharmacy, they often buy things besides just insulin and insulin injections, right? Having pen needles so that they can take their insulin injection is a really important part of what pharmacies at the retail level try to do. And what we've demonstrated, including over the last, call it three, four years, with COVID and supply chain disruptions, it's our ability to keep shelves stocked at those pharmacy levels. And so I think you take a 100-year history, you take that with brand recognition, our ability to keep delivering product, you add to that the innovations that we've made that have now become standard.
I mean, the pen needle standard sort of length is now 4 mm. We were the ones who sort of introduced that. There are product features that we have that most competitors don't have, that allow for less variability in injection depth, which is a key contributor to how efficacious the insulin can be absorbed in the body. I mean, these are factors that I think are really hard for competitors to copy. And then finally, the capacity that we have, right? I mean, we are the largest manufacturers, by far, of insulin injection devices, right? We make 7.5 billion-8 billion devices a year at scale, every one of which enters the human body. And so the quality that we bring to this is incredibly hard for somebody to copy.
You know, if necessary, we can dial up the volume in our existing plants. Our ops team, even after being in this business for decades, finds a way to drive productivity improvements year-over-year. Candidly, that's been one of the reasons why the guidance that we have out in the public domain for this year, 2024, is actually better than what we said FY 2024 would be prior to spin, in spite of absorbing probably 500 basis points of inflation, right? And that's driven by productivity improvements that our plant does. So for all those reasons, I think, you know, we are very well positioned to maintain our leadership position in insulin injection devices, you know, for years to come.
So let's flip to the other side of the coin and talk about volume, which you already just started to get into a little bit. Can you break out what % of your volume is Type 1 users, Type 2 multiple daily injection, Type 2 basal users today, and where do you expect that mix to go with time, whatever timeframe you think-
Yeah
... is most appropriate?
So, first thing I would sort of want to state right off the bat is, we don't get individual patient information, right? So if one of you goes into a pharmacy and gets a box of pen needles, we as the manufacturer, don't know whether you're buying it because you're Type 1, whether you're Type 2 basal, whether you're Type 2 multiple daily injections, or frankly, whether you're buying it for Type, for GLP-1s. We don't know. So what we do instead of that, is we say, "Let's look at the population," right?
And if you look at the U.S., there's about 7 million insulin injection users in the U.S., approximately 1 million that are Type 1, 6 million that are Type 2, and those 6 million, it's 2.5 million is multiple daily injections, and 3.5 is probably basal. If you look at it on a global basis, there's probably 9-10 million Type 1-... somewhere between 55-60 Type 2, and that Type 2 population is split almost equally between basal and multiple daily injections. So then what we do is say, okay, if you put aside reuse rate, and there is reuse of our pen needles that occurs.
But if you put aside reuse rate and you just do some math around, listen, if you're a Type 1 user, maybe you're taking 4 injections a day or 4.5 injections a day on average. If you're a Type 2 basal, obviously, it's 1 injection a day. If you're a Type 2 multiple daily injections, so let's say you're taking 3.5 injections a day, and you just sort of map out, you know, what does the, what does the injection curve look like between Type 1, Type 2, multiple daily injection, and Type 2 basal? You essentially come up with approximately, and these are really rough numbers, like 25% of injections, not injection devices, injections, is probably Type 1, 50% is Type 2 MDI, and 25% is Type 2 basal. That's sort of how it breaks out.
Look, how it's going to change into the future, that's really hard at this point to answer, right? I think we still need to study what's gonna happen with GLP-1s over time. So I'm sort of hesitant to go too far out. All I'll say is insulin's been around for 100 years. Mechanistically, we don't see insulin going away because GLP-1s, certainly from everything we have studied, don't eliminate the need for insulin. There is no mechanistic sort of mechanism of action that would lead you to believe that they can stop the degradation of pancreatic cells that you need to make insulin. And we still don't know how much of the delay that it causes is already in the baseline versus yet to come, right?
All counteracted by people with obesity who might start taking GLP-1s in the coming, you know, decade, that might use pen needles for that purpose. So that's why I'm sort of a little reticent, if you will, to get too far out ahead of myself with respect to what that breakdown will be in the coming years.
The reuse rates that you spoke to, what impact could a reduction in needle reuse rates have on your business?
I mean, pretty significant, right? Because you take a country like the U.S., well reimbursed. We have payer coverage that exceeds 95%, right? But still, we believe reuse rate in the U.S. is somewhere between 2-3. So each pen needle is used 2-3 times. They're easily available, right? So this is a matter of habit. If you go to cash pay economies, let's say in Asia, in emerging markets, that reuse rate can be 8-9. You go to a country like Japan, that reuse rate is much less than 2, because people tend to be fairly disciplined with respect to, "Look, this is a one-time use," right? So, so first of all, I just want everybody to appreciate that the reuse rate is very different by geography.
An overall reduction, even a small reduction in the reuse rate, can certainly have a pretty significant impact on our business. But I also recognize that you're essentially trying to get human behavior to change. And look, a paradox of the quality that I spoke about earlier is the fact that our products are of such high quality that the needle does not dull if you inject yourself more than once with it, right? So that's sort of a paradoxical element of the quality of our products, right? You get a good injection experience, even if you're using it for the second time.
Now, obviously, there are a lot of risks associated with reuse, so we try to educate patients on the risks of reuse, infection, you know, the thickening of the skin that can happen, that makes the absorption of insulin and the efficacy of insulin sort of, you know, mitigates it somewhat. So we have efforts, everything from digital marketing in the U.S. to patient education, e-education efforts outside, but we recognize that it's going to take time for these reuse rates to gradually come down, which is what certainly our desire is.
Perfect. We are getting down to, oh, six minutes here. Perfect. I thought it was lower than that. You had spoken to at one point, talking about piloting refill prompts at pharmacies and also implementing some digital marketing to help bring down those reuse rates. How are those pilot programs going, and do you have any plans to roll those out at a greater scale?
Yeah. Look, the pilot programs are going quite well. I mean, again, you're talking about millions and billions of units being sold, billions actually in the U.S., right? And you're trying to pick out probably small differences. So separating signal from noise takes a lot of time. The early indicators are that it's going well, but we are balancing that, you know, making massive investments in that. And hopefully, Carolyn, we can talk a little bit about sort of capital allocation and how we're thinking about that going forward as well, versus what we might want to do with the patch pump, versus certainly we are increasing our focus on, you know, being mindful of our leverage ratio and debt paydowns as well. So the pilot programs are going well.
I think it remains to be seen what is the right time to sort of expand them, vis-à-vis the other investment opportunities we might have.
Perfect. One more question for you on volumes, and then we're gonna switch over, as you said, to capital allocation. On the T2 basal patients, what's your current outlook on weekly insulins? If, you know, specifically maybe for the U.S. business and then also internationally as well, but just what, what's your outlook there?
Yeah. So first of all, obviously, it's not been launched in the U.S. so far, though no product, my understanding is, has been approved in Switzerland and Canada. Now, we do anticipate that it'll get approved in Europe and then later on come to the U.S., right? So, you know, what I'm about to say is a little bit of conjecture on my part with respect to what are the factors one would take into account as one tries to anticipate what that impact might be. I think the number one factor that comes into my mind is cost, right?
How much is the cost of a weekly insulin going to be, given how long and hard the patient community and advocacy groups fought to bring the price of insulin down in the U.S. over the last couple of years, coupled with the potential efficacy, benefit or non-benefit of weekly versus daily, right? I think from the results we've seen, most of these trials are non-inferiority trials. And so I think there's that cost-benefit trade-off that has to be made here. Secondly, given that the weekly insulin, both Novo and then, you know, Lilly's, I think just today announced phase III data on their weekly insulin. Again, non-inferiority trial. I think these are the same companies that are leading the GLP-1 drive, right?
So I think it remains to be seen what the promotional focus is going to be. Type 2 basal users are often seen by primary care physicians, which is also where, you know, for obesity, GLP-1s, that's where people are going to be seen. So promotional focus is going to matter, right? Whether given the race to establish a leadership position in GLP-1s, you know, what these companies decide to do, of how much time they want to spend on driving GLP-1s versus shifting people from daily basal insulin to weekly insulin, right? Especially if there isn't a big premium that they're going to get for doing so. Type 2 basals, type 2 users are often seen by primary care physicians, right? I mean, you start off with your annual physical, you see your A1C level rising, your prediabetes.
The doctor is going to tell you diet and exercise. If it rises to the diabetes level, right, so 6.5, you know, doctor's going to talk to you about potentially oral drugs and then insulin, but it's going to be basal insulin. You know, dosing of insulin by primary care physicians is, I mean, it's a little tense for primary care physicians, right? Because obviously with hypoglycemia, you can have severe side effects of too much insulin. So I think it remains to be seen how quickly primary care physicians will adopt weekly insulin, especially if there is no efficacy benefit, if there is a big cost and there is no promotional focus. If you're a Type 2 multiple daily injection user, you know, from a convenience benefit, you're not going to get a lot of the convenience benefit, right?
Because you're taking multiple daily injections a day. So I think all these factors will need to be taken into account. You know, is this simply a convenience play, especially if the cost and if the cost is against it and efficacy is sort of similar. Given that there is no real-world data yet, you know, I think it remains to be seen what the impact is, but the considerations I laid out are the ones certainly we think about as we think about what the impact of weekly insulins might be. And by the way, sorry, one last comment. Outside, in the emerging markets, which is where growth—I mean, look, those folks over there are simply trying to get their hands on insulin, right? So weekly insulin is not a near-term thing for them.
Perfect. So, we've got about a minute and a half left here. So free cash flow generation, we started out this morning talking about your separation activities.
Yeah.
Can you remind us what's left from a separation activity standpoint for 2024? How are you thinking about free cash flow? What's the profile of this business for 2024 thereafter, and also, how should we think about debt paydown?
Yeah. So I'm going to try to put a lot here in the one minute I have left, right? So a couple of data points to consider. When we spun off on April 1, 2022, we had approximately $300 million on our balance sheet, cash. FY, end of FY 2024, we've said that we expect to have approximately the same, maybe slightly higher, right? In between, we will have accomplished most of the high-cost separation projects, which is the ERP deployment, distribution, shared service center. This year, fiscal 2024, we think one-time cash usage for those activities is approximately $180 million-$190 million.
Last year was $145 million, and then if you add on what we spent in the second half of FY 2022, you're going to end up with costs in the $400 million range. That got used while our cash balance stayed the same. So that gives you a sense of the underlying sort of cash generative capability of the company. Going forward, we want to be really mindful of our debt level here. Our leverage is 3.8 at the end of Q2. We are contemplating debt paydowns and sort of bringing that debt down over time, because this free cash is now going to become available to use. While still balancing, we want to be thoughtful and measured on our Patch pump program as well.
But certainly, managing leverage, thinking about debt paydown is going to be an important consideration going forward now that the separation activities, certainly by the end of FY 2024, will be largely behind us.
All right. We are officially at zero. Dev, thanks so much for the time this morning.
Thank you. Appreciate your attention. Yeah.