Hi. Good afternoon, everyone. My name is Kristen Stewart. I'm the Medical Device Analyst here at C.L. King. I'm very pleased to be joined by Dev Kurdikar, Embecta's President and CEO, and Pravesh Khandelwal, VP of IR. This will be a moderated Q&A session. If you'd like to ask a question, please type it into the box on your screen, and it'll send it over to me. With that, let's begin. Dev, I'd love to start with the most recent news, clearance of your open loop pump. I was wondering if you could start by just describing the pump and its most differentiating features.
Happy to do it, Kristen, but first, just let me say thank you for including us, and a pleasure to be seeing you here again and having this discussion. With respect to the pump, obviously very excited about clearance. As you know, the BD had been working on the pump in the past. It was something that we had said was one of our three priorities when we spun, and so we're very happy to have that clearance. A few things, though, I just want to note right at the outset. The product that we are ultimately after, the goal, is a closed- loop pump.
But given the complexities involved in bringing a whole AID to market, especially for us entering the space for the first time, we wanted to de-risk our path, and so we really focused on getting the open loop approved. So the clearance that you mentioned is obviously for the open loop pump. Some of the distinguishing features of this pump are obviously it's a fully disposable pump. It doesn't have a reusable component. It's controlled with a wireless controller. It's indicated for both Type 1 and Type 2, but importantly, we designed it with the needs of T2 users in mind, and so an example of that is that it's got a 300 unit capacity in the reservoir.
This is relevant because a Type 2 user typically needs about 100 units of insulin a day, and so obviously, having a 300 unit insulin reservoir means you can wear it for three days, which is what the indicated wear time is. You need fewer pump changes, less pumps to carry, obviously have sustainability advantages as well, and because we designed it with Type 2 users in mind, we believe that simplification of the technology is probably going to help in adoption, so for example, we have fewer basal settings, again, reducing complexity. We've tried to simplify the user interface, so overall, Kristen, what I would say is, obviously there are some easy-to-see factors, like the insulin unit capacity in the reservoir, and there are some things that we think can help adoption by just making the technology simpler to use.
Okay, and you mentioned... I think you'd mentioned that the approval was for a six-month shelf life product, which seems short. Can you just talk a little bit about your plans for expanding that?
Absolutely. And, so again, as part of the submission to the FDA, what you have to do is you have to take your devices, your pumps, you have to age them for a certain amount of time, and then do some testing, and then submit that data to the FDA. And again, because we want to de-risk our development path here, we submitted data on devices that have been aged about six months. So that's where the quote, unquote, "six-month shelf life" comes from. Obviously, from a supply chain optimization perspective, you know, what we would be looking for is 12-1 8 months, and what that essentially means is that you just have to let those devices age for a longer period of time, do that testing, and then you can have a longer shelf life, and that's exactly the work that's ongoing.
It's what I would call mostly time and distance work. You just need to let some time go on, do some more testing, and so that's the work that we are currently doing, Kristen.
Okay, and the approval came with a locked-down Bluetooth controller. What does it take to move to a bring your own device sort of process? Is that lengthy, or is that something we should anticipate to occur in the near term?
Yeah, it's something that we are working on, right? I wouldn't give you a specific timeline, but let me talk about the work that needs to happen, right? So obviously, right now, you control the device through a phone, except it's a locked-down phone, right? It's an Android phone, and what we want to do is allow people to use an app, either on iOS or on Android, and so we are certainly well past sort of evaluating of the work. There's significant development and validation work to be done. So, for example, we would need to do human factors studies on the app and the whole integrated system. We would want to make sure that the system is appropriately hardened from a cybersecurity perspective, given that it's going to work on people's personal phones, and it will involve a regulatory submission.
So in terms of timeline, I mean, this is not something that can happen immediately in a period of a few months. You know, I would think this is more like a year-and-a-half, sort of timeline to get to a BYOD. But look, we are in the early phases, and as we go along the path, we can certainly provide more color around how long that's taking.
Okay, so are you planning on commercializing the open loop pump, or will you just wait until you have all these features in hand or wait until you have the closed -loop pump? How should we just think about the opportunity there going forward?
Yeah. So to answer your question directly, we are not considering a full-scale commercial launch of the open loop, and then now let me explain sort of what it is that we are after, right? At the outset, I said, listen, what we are after is a closed -loop device, so we are continuing to make the investments necessary to advance that, right? Human factor studies, more validation work, and most notably, a clinical trial, which I hope we'll talk about as well. So all of those investments will go on. In addition, we want to make some enhancements to our product, even for the open loop, extending shelf life, bring your own device, or a couple that we talked about.
But we are also considering some things that I think eventually improve the commercial viability of the product by decreasing the cost of the wireless controller, given that we have 300 unit reservoir capacity, we want to explore potentially getting extended wear times on the device, which will have significance from a payer perspective as well. And then, you know, we always keep sort of our capital structure in mind as well, right? As you know, we spun off with significant leverage and debt, and we are very mindful of that.
We want to start paying down debt in perhaps more than just the mandatory debt paydowns that we've had to do now that a significant use of cash, which was in separation, which I hope we'll talk about as well, is sort of behind us, so we want to pay that down. So we are trying to make all these trade-offs, Kristen, right? Commercial spend on pump, R&D spend on development, further development or enhancing the open loop, as well as doing the closed loop work. Infrastructure spend, that's going to be needed for a pump, right? Whether it's been technical support or customer support or setting up distribution and logistics.
So with all of those sort of things in mind and trying to balance all of this, the one thing I'll say we are not contemplating doing right now is a full-on, you know, commercial launch of the open loop. Will we do some measured testing, or use with a limited patient population? Potentially, and we'll talk more about this, you know, when we have an Analyst Day in December, as we refine our plans for 2025 and beyond.
Okay, there's a lot to kind of unpack there and kind of dive into. Maybe we could start, you'd mentioned the clinical trials and what those look like for the number of patients and the time that you'll have to follow them and the costs. How should we think about all of that?
Yeah. So again, as part of our de-risking strategy, the one thing that we have now is obviously we have a pump that's 510(k) cleared. And I want to say that the pump, sort of the hardware, software elements, the hardware elements of the pump are the same ones for the open loop as closed-l oop, right? So you got a 510(k) cleared device. We need an algorithm, and you know, we've signed up with Tidepool that's got a 510(k) cleared algorithm for Type 1, but we want to use it for also Type 2. Then obviously the sensors we would want to integrate with our commercial anyway.
Right now what we are doing, and this is an important step in advance of the clinical trial, is obviously integrating the algorithm with our pump so that it can take in the CGM data and calculate the proper insulin dosing. And then obviously we need to do the trial. Now, I don't want to get too far ahead of ourselves here, because the first step here is getting our IDE, Investigational Device Exemption application, cleared by the FDA. And once we have that, we will have a firmer scope of the size of the clinical trial. But I think it's fair to assume at this point, this is going to be a multi-site trial. It will enroll a fair number of patients, so think 100+ , right? This is not a small trial. It's going to be hundreds, maybe a couple hundreds, maybe more.
The primary endpoint here, again, likely will be A1C reduction, as is common in these kinds of trials, over a period of time, you know, likely again, about thirteen weeks. But if I think, just generally speaking, about what timelines are associated with these kinds of trial, you know, all the way from sort of IDE approval to a final study report, I mean, this could easily be a couple of years. So it's a fairly substantial sort of time commitment. With respect to cost, you know, I don't want to specifically talk about numbers, because that obviously has implications to 2025 and beyond. But, so we'll talk more about the cost in 2025 . It is fair to say, Kristen, I'll go back to the comments about the open loop pump.
I mean, one of the things, ways we are thinking about pump investments broadly, whether they be in the clinical trial for the closed loop, enhancements on the open loop, infrastructure spend, commercial spend, is just thinking about what is the overall investment level that we want to do in the pump. Because clearly we have investments we could make in the organic business, specifically around, you know, taking more small packs, which are pen needles for GLP-1 delivery. We did one of those in Germany, right?, debt paydowns that we talk about and being opportunistic about, you know, are there products we can add to the portfolio that leverage some of the core strengths that we already have as a company.
So those are the trade-offs that we are making, but I think it's fair to assume that the pump spending, you know, will have to be limited in aggregate, regardless of which line item on the P&L it hits, and then so that we can do the right trade-offs with some of the other priorities that we have.
Okay, so it sounds like you guys will wait a couple years before you get to the closed -loop pump before making the investments to commercialize. Is that fair to say?
I think it's fair. Again, I don't want to get too far ahead of our Analyst Day, but I think it's fair to say that we'll monitor and measure and be very thoughtful in the investments required over the next couple of years, particularly given our net leverage, which is already at about 3.7 last quarter, right? So we are insensitive to not overextending ourselves from a leverage standpoint.
Okay, and it does sound like it is a couple years before the closed loop version is in market, just given what we've talked about before.
Again, yeah, I think it's fair to think about timelines at that level, Kristen. Again, I want to be guarded here. We just got clearance on the open loop. We still have an IDE to get cleared by the FDA on closed loop, so I don't want to get too far ahead of myself. But I think it's fair to say this is not a timeline that's going to be measured in months or quarters, right? A couple of years may be in the right ballpark, but we'll get crisper on this over time.
Okay, and maybe switching gears to talk about the base business today. Can you talk a little bit about the trends you're seeing in the market and how it's been affecting your core pen needle business?
I would be happy to, and I think to talk about that, first, you just got to zoom back and look at what's happening with insulin trends, particularly in the U.S., where there has been, if you will, the most significant GLP-1 adoption, right? As far as we can tell, insulin prescriptions have been quite stable. Maybe a slight decline in the low single digits all the way from 2017, you know, when you look at 2023 through full year 2023. But what's really interesting is if you look within the data, what we are seeing is that insulin vials are decreasing, whereas insulin pens are stable to maybe even slightly growing, right? And that has implications to our syringe portfolio, which I'm sure we'll talk about as well, and the pen needles.
The syringe portfolio, I mean, look, long story short, syringe pen needles flat to growing and offsetting, if you will, the decline in syringes, and so insulin in total stable, vials decreasing, and so our pen needle performance, even over the last few years, has been fairly stable, strong, if you will. You know, our hypothesis remains the same. GLP-1s obviously not indicated for Type 1 at all, so this is Type 2, may delay the onset of requiring insulin, but do not eliminate, right, the need for insulin.
And so some of the things we are thinking about and always think about or look for in the data is, given that our business has been living with GLP-1, so Ozempic since 2018, how much of the decline or delay in the need for insulin is already embedded, if you will, in the base performance of the business, right? And when people talk about GLP-1s impacting insulin, are they talking about the total daily dose, or are they talking about injections? Because total daily dose does come down likely with GLP-1 usage. But really what impacts our business is if you're just taking fewer injections of them, right? So that's something that we watch carefully as well. And the number or percentage of patients on insulin just stop insulin to move to GLP-1s, that still remains a very small number.
In spite of the recent market focus on GLP-1s over the last year to eighteen months, you know, we haven't seen any dramatic inflection points in our business. If you look at the other extreme of our business in emerging markets, you know, still a source of growth for us and a strong contributor. You know, we benefit from having a really strong commercial presence in emerging markets that can take advantage of what's happening with just increasing rates of diagnosis of diabetes in emerging markets and increasing use of insulin in emerging markets.
Okay, great. And you did mention the syringe needle business that's been declining. Can you comment on just the relative size of that in the portfolio and whether we should expect continued declines ahead?
Yeah. So our syringe business has been declining for a number of years. So first thing is this is not new. It's a continuation of a trend that's been going on for a number of years. You know, currently, as a percentage of our total revenue, the last time we, by the way, disclosed our syringe pen needle mix was in our Form 10, we haven't actually disclosed it. But I think it's fair to say it's in the low double-digit range in terms of a percentage of our total revenue in syringes. The decline has been largely in the U.S., and, you know, it's not surprising given my previous comments about the decline in insulin largely being the decline in insulin vials. If that's declining, syringe use is going to decline.
Now, there is a number of reasons why syringe use or syringe volume will decline over time, but obviously the most likely reason is patients continuing to move from insulin vials to insulin pens. You know, driven by the availability of certain insulin formulations only in pens versus vials, changing payer coverage, or healthcare providers continuing to, you know, talk to their patients about moving to insulin pens versus vials, just from a convenience factor, right? We also think one factor to keep in mind is that the pandemic impacted seniors in a disproportionate way. Senior citizens are 3x more likely to have diabetes than the general population, also because of advanced age, may be more likely to be on insulin, right, and more likely to be syringe users than pen users, certainly as compared to the general population.
And so that decline in syringe might have been impacted by just the sheer number of fatalities we had among seniors during COVID as well. Now, we do expect, broadly speaking, that the syringe business, particularly in the U.S., will continue to decline over time. And offsetting that growth, certainly over the past few years, or decline, has been the growth in our pen needle business. So if you just zoom back and go, you know, this business has been about $1.1 billion over the last several years, it's really been the decline in the syringe business that's been offset by growth in the pen needle business. At a high level, that's the story. And our margins are much better in the pen needle portfolio than the syringe portfolio, so that shift in the mix actually helps us from a margin perspective.
Look, we'll continue to see whether that trend I spoke about continues over an extended future period of time, particularly given the FDA notifications around the use of syringes made by certain manufacturers in China. Given, you know, we don't quite know where tariffs are going to settle for syringes coming from China into the U.S. All our syringes are made in the U.S., and so, you know, we don't have some of those considerations. And we've seen a small uptick, Kristen, but, you know, at this point, we are not putting that into any of our projections. We just think that decline is going to continue.
But I do want to point out some of the things that we are watching to see if it actually does have a change in the trend that we've seen over the past seven years.
Okay, great. And you'd mentioned kind of the impact of GLP-1s on your business. Can you maybe just comment going forward on both the risks and the opportunities there?
Yeah, look, from the risk standpoint, you know, I've already commented in terms of what we've seen, and again, you know, broadly speaking, we haven't seen a tremendous inflection point of any magnitude really on our business, right? So the stability around our business, certainly, you know, we have no reason to believe that that's going to shift abruptly. Now, we are excited about the opportunities that GLP-1s delivered by pens can provide to our business. You heard on our last quarter's call that we introduced a small pack pen needles in Germany, and that's because Mounjaro is being launched by Lilly in Germany using a pen injector, and they're using a KwikPen. KwikPen is the same pen injector that we've used in the past for insulin. pen needles can be used with the majority of pen injectors.
So if a pen injector is used for GLP-1s, pen needles can be used. The small pack in Germany is a fourteen-count pack. It's the right package for a three-month supply. You know, so if a patient's going to pick up a three-month supply of Mounjaro in Germany, they can pick up a fourteen-count. It allows us to price it differentially than a than a standard hundred-count box that's designed for insulin users. And look, over time, both as current manufacturers but also as new manufacturers enter with GLP-1s, and to the extent that they come in pen injectors, you know, pen needles can be used, right? We don't need any design modifications.
If there are new entrants into the GLP-1 space in biosimilars or that that make biosimilars or generic GLP-1s, you know, we are looking to partner with them to consider whether we should or we would together want to co-package pen needles with them. Importantly, pen needles, again, the ones that we manufacture today, can be used as is in the co-packaging pen needles. we believe we have the data that's necessary to support that. So broadly speaking, if GLP-1s continue going down this, you know, path of furious growth as new entrants come into GLP-1s, if they come in with pen injectors or if we sign agreements to co-package pen needles with pen injectors, we think this can be organic growth opportunity for us.
One that importantly is not going to require any significant commercial investment, because it's all using the same channels that we have today from a retail perspective, and is not going to involve any manufacturing investment because, you know, we certainly believe that our plants that are highly automated can certainly handle any incremental volume associated with this business. So we remain excited about the opportunity. It's still early days with the first small pack. This is the first one that we've introduced in Germany, so we'll certainly be monitoring its performance closely over the next few quarters. And look, where GLP-1s come with pen injectors, you know, certainly it's our priority to have the right package pen needles available to those patients that they can pick up at retail and use with their GLP-1 pens.
Do you eventually think there could be an opportunity to co-package the needles with Mounjaro, or will they always kind of be on a separate basis?
Look, I would never rule anything out, but one of the considerations, and I will put Mounjaro aside, but one of the sort of considerations in co-packaging is obviously when you co-package and you have a B2B relationship, right? You certainly benefit from volume, but certainly there is going to be a different B2B price than the one that we get at retail. And depending on which market, given the strength that we have in our category in some of these markets around the world, right? It's a trade-off that we have to make. You know, are we better off using our current channel in retail, having the right packaging so we can sort of differentiate our product from a look and feel and potentially a pricing perspective versus having a B2B arrangement, right? So those are trade-offs that we will make over time.
More importantly, right, what our focus is on, if it's a GLP-1, it's using a pen injector, we want to have the right solution for the patients available in their market.
Okay, great. I want to shift gears a little bit to talk about once-weekly insulin. Novo received European approval for its once-weekly insulin, but received a complete response letter in the U.S., and Lilly recently had some positive data on their once-weekly insulin. Can you provide us your latest thoughts on the potential impact this could have on your business?
Yeah, yeah. Look, and it's, as you realize, it's too early to be definitive about this, right? I mean, we always need some real-world evidence, and as we've learned many times that real-world evidence sometimes differ from clinical trial data once patients start using it in real life, right, but there are several factors that we will be watching. We have continued to watch, and we will watch carefully, right? Number one is going to be cost of weekly insulin, right? Especially if in developed markets, you consider that cost relative to the recently reduced insulin prices, and potentially, you know, if you're showing essentially non-inferior, non-inferiority with daily basal insulin, the cost will become important, payer coverage will become important in terms of adoption. Promotional focus will matter, right?
I mean, the two companies you referenced are also, you know, heavily involved in GLP-1 adoption, and so whether it's going to be GLP-1, weekly insulin, the promotional focus will matter. Hypoglycemia has been a concern, right? May be an even bigger concern with primary care physicians, which is where T2 basal patients are mostly seen, right?, and so managing somebody's insulin dose with one dose every week is obviously potentially more complex than for a primary care physician, you know, that is, you know, has limited time with each patient, and then if you're an MDI patient, you're taking multiple daily injections anyway, so you've got to think about the use case for moving to a weekly basal, but still having multiple daily, you know, fast-acting insulin doses.
So our hypothesis is, you know, if everything sort of lines up, it might be more likely that new basal patients might start on weekly. Potentially patients that are reluctant to start daily basal, right? So these are not currently on daily basal, and they keep pushing back insulin because they don't want to do daily at all, might start with weekly. So those are some of the considerations that we'll be watching for. But look, realistically, given that Novo has said that they won't file a response until 2025 , given that Lilly certainly has some positive data, but it's clinical data, you know, it might be a period of time before we see some real-world evidence and have a better formulation of the impact of weekly insulin.
Okay. And then, shifting gears, where are you with your separation from BD? You've commented you've been spending a lot on separation activities, but where are you today, and what's the outlook for spending going forward?
Yeah. So where, you know, where... I'll talk about where we are today, but it's important for the audience to know where we came from, right? So when we spun off, we essentially had the sales team, but not really the sales support, but sales team in markets around the world. We have people in the manufacturing plants that came with us. And then really small R&D center that we had to augment to do the pump development. But essentially, everything else we had to stand up, so all the corporate functions, IT, HR, legal, we all had to stand up. So over the last two and a half years, we've stood up those corporate functions. We implemented our own ERP. We implemented our own distribution network, right? So we are out of BD's distribution and DCs network.
We put in our own logistics and transportation providers, and we stood up our own shared services infrastructure, outsourced, but our own, to support markets that get us 93% of our revenue and all three of our brands. And we've done that over the last two and a half years. A lot of those implementations occurred in 2024, while still keep revenue stable. And I think as your audience realizes, there's no small feat because ERP implementations often have revenue-related hiccups. But we've been able to do those and manage those quite smoothly. We did it without any real material disruption to product flow.
What remains now is that we have to do the same distribution center, shared services, ERP implementation in Latin America, which is about 5% of our revenue, and that will occur here in a matter of weeks, in early fiscal 2025 . We have to do the same in India. India is still a deferred market. It was a deferred market at close, still a deferred market. We anticipate that it'll close sometime in fiscal 2025 , and so when it closes, we'll implement that, and we will be done with stand-up work, as in we'll be using our own people, we'll be using our own processes, we'll be using our own systems. It's taken a lot of expense, and I hope we get to talk about that as well.
What remains to be done beyond the smaller implementations that I referred to in Latin America and India is really we have to finish the brand transition. So essentially change the packaging and, you know, replace the BD logo with Embecta logo. It's been something that we've been working on for a long time. We've gotten input from patients, from customers, from pharmacists and healthcare providers in multiple countries around the world. And in that brand transition, what we've tried to be very mindful of is keep the things that our patients and customers care about, try to change none of that. None of that, right? So color, the overall design, the product names, these are all the same, right? To mitigate any discontinuity because of brand transition.
That will occur over the next couple of years, you know, starting with the U.S. first in calendar year 2025, and then we'll roll that out, as I said, over the next couple of years in other countries around the world. That's what remains.
Okay, and just the spending levels, you'd mentioned that. I think this year you're expected to spend about $180 million. Where does that go going forward, and what will be your desired use of that cash, that your savings?
Yeah. So you're right. You know, this year we anticipate closing, you know, spending up to $180 million, mix of OpEx and CapEx, but one-time use of cash. For reference, last year, fiscal 2023, it was $145 million. I think from life to date since then, it's probably been $400 million plus. Next year, with what we have to do now on brand transition, that I talked about, this will be a two-year plan, and the spend is going to be significantly lower than, than the on an annual basis than we've certainly had to spend this year, right? I mean, significantly lower, right? I mean, we should think like one third, right?
We'll talk about more and more specific numbers when we have the Analyst Day in December, but certainly a lot lower than it is now. Other than that, honestly, over the next few years, we don't have any other major separation-related costs left, which means that, you know, we should be able to see a healthy level of free cash flow generation in 2025 and beyond. In terms of what we want to do, you know, what's front and center of our minds is net leverage and putting some, paying down some debt beyond the mandatory debt pay downs that we've done recently.
... Now, you mentioned the Investor Day a couple times. What are some of the things that investors should be expecting from the day? For example, will you be providing a three or five-year LRP?
Yeah, look, I mean, certainly, again, I don't wanna get too far ahead of our agenda here, but I think it's fair to assume that we'll certainly provide, you know, our thoughts on financials over the next few years. Three years is very likely, right? And what we wanna do is spend some more time further educating on the fundamentals of our core injection business. We might dive a little bit deeper on syringes pen needles. we'll provide our latest thoughts on the pump. And really just from a strategic standpoint, just try to lay out what our future path is going to be over the next several years strategically. But certainly, you know, three-year sort of thoughts on the financial projections will be part of that discussion, Kristen.
Okay, great. And then, just thinking about financial projections, what are some of the puts and takes investors should be mindful of as we look ahead to fiscal 2025?
You know, so the number one positive I would see from a cash perspective, certainly, which has been, I know a source of focus for many investors, is that the one-time use of cash will go down, right? So our free cash flow should improve in 2025, and further improve in 2026. I think the trade-offs we are going to make over the next three years is, you know, what is the right level of pump investment we wanna make? What are the investments that are required in our core business to make sure that that remains strong?
And then, you know, just keeping our desire for debt paydowns and frankly, thinking a little bit more aggressively in terms of, are there products that could more naturally fit into our portfolio, where we can leverage either our manufacturing strengths or whether we can leverage our commercial channels? So those are the various factors that we are thinking about, but I think the one thing is fair to expect is our free cash flow in 2025 should see a sizable improvement, and certainly in 2026 see further improvement compared to 2025.
You mentioned, you know, new products coming in. Would you be willing to diversify away from diabetes into a new area, or how should we think about that?
I think... Look, the short answer is yes, right? What we wanna do is we wanna leverage our strengths. And if you think about our strengths, what are we really good at? High-volume medical devices using a quality system that stood the test of time. I mean, over the last two and a half years, we've undergone multiple third-party audits, and our team has done really, really well. We have a world-class operations team that can keep products supplied to customer shelves. We can keep products stocked no matter what's going on, COVID, the Ukraine war, what have you. We are great at injection molding, right? I mean, we start with truckloads, trainloads of resin pellets and make medical devices. We have a strong commercial channel. Unique to us is having a retail channel as a medical device company. And then you look at emerging market infrastructure.
I think we have an excellent emerging market infrastructure, where we're going to see continued growth in those regions from healthcare spending and adoption of medical devices and therapies. If we can find things that leverage one or more of those core strengths, Kristen, we are very open to that.
Okay, perfect. And with that, I think we're out of time, so any closing remarks that you might have, that you'd like to make?
Thank you for having us, and thank you for the broad discussion. I really enjoyed it. Thank you.
Yeah. Thanks so much, Dev. I really appreciate it. So with that, I'll ask everyone to disconnect. Take care.