Following session is not open to the press.
All right.
Great. Let's get started. My name is Phil Coover. I'm part of David Roman's U.S. MedTech team here. We're pleased to be joined by management from Embecta. We have Jake Elguicze, SVP and CFO. In the audience, we also have Pravesh Khandelwal, who's the head of IR. I thought we'd start, since we're less familiar with the story, with a brief overview of the company, its history, separation, and then recently had an analyst day, so maybe set out where we are in your phased evolution of the company.
Sure. First off, really appreciate the invitation and a really good set of very quality conferences and a very good set of meetings. Really appreciate you having us here. For those of you who may not be as familiar with Embecta, Embecta is the spinout of the legacy Becton Dickinson Diabetes Care Business. We spun out from BD a little over three years ago. It was around the April 1st of 2022 timeframe. Embecta generates around $1.1 billion in revenue. We have three main product categories we provide, essentially all of which are in some way focused on single-use disposable products that are used to inject insulin into the body for people with diabetes, whether they are type 1 or type 2.
Our three main product categories are pen needles, conventional syringes, which is sort of a legacy technology, as well as then safety products associated with these safety pen needles and safety syringes. Essentially, if you're not injecting yourself and you're having a caregiver do it, there's some safety features that are added to that as well. Geographically, we are very diverse. We generate around 50% of our revenues within the U.S., a little less than 30% of our revenues in sort of the Europe/East Africa area, a little less than 20% of our revenues within Asia-Pacific, including China. Lastly, we generate around 5% or so of our revenues in Latin America. Pretty product diverse, pretty geographically diverse. Obviously, we're not involved in sort of elective procedures. It's something where there's a pretty sustainable, stable, recurring revenue base.
Okay. Great. That's a great overview. Maybe before we go forward, in the recent analyst day, you can give us a quick look back, kind of a summary of how things have gone as we think about this phased evolution of the company.
Sure. spins and separations are very, very unique. I think in our case, Becton Dickinson is obviously a very, very large global multinational company. Certainly for us, we inherited a footprint in which we operate and have a sales presence within close to 140 different countries. That made the spin very complex. Post-spin, we had around a two- to two and a half-year period of time that the TSAs, the transitional service agreements, covered. We had to do some pretty complex things. We had around 11 major separation programs. Probably some of the more complex had to do with the creation from scratch of a brand new ERP system to service those 140 different countries, as well as to create our own distribution network. We had to create 16 distribution centers from scratch and transition that over from BD.
As you can imagine, needing to do that in a very, very short two and a half-ish year period of time took a lot of effort. I'm really pleased to say we sort of took the approach of, during the first couple of years post-spin, we want to separate ourselves as quickly as we possibly can and avoid as much disruption as possible and keep the business as stable as possible, which I think because of the manner in which we were able to go through a separation, we certainly did things like phased implementation approaches of ERP, which really sort of minimized the risk there. We did not see any disruption at all when we went live in all of those countries. In fact, India is the very last country that we are going live with now, any day now, and things continue to go quite well there.
Generally speaking, I would say we've probably at spin, this was sort of a company that was kind of a flattish revenue growth profile, but very profitable and very cash flow generative, and one that had a fair amount of leverage that was put on it at spin, and also had to go through, obviously, some pretty complex separation programs, requiring us using somewhere between, let's call it, $400 million-$450 million in cash over the last three years to try and stand ourselves up. That sort of masked, I would say, the true free cash flow capabilities of the company, which is, I'm sure, if we get into some questions regarding the LRP, one of the things that we really highlighted in the LRP was just the future free cash flow capabilities.
If I recollect, you were able to either achieve or exceed most of the targets that you put out at the time of spin. Maybe remind us of those, and then we'll transition over to the recent analyst thing.
Sure. At the time of spin, in March of 2022, just before the spin, we sort of did an investor event where we put out a longer-term outlook for the company in two kind of main financial metrics, one being what we thought our constant currency revenue CAGR would be, and then the second being what we thought our adjusted EBITDA margins would be as a standalone entity. I am pleased to say that we were able to exceed both. From 2022 through 2024, we had initially called for a constant currency revenue CAGR of relatively flattish. Ultimately, we did around 1.3%. Within that, I would say 85% of our revenue tends to be generated in sort of the two main categories being pen needles and safety products. Those products had tended to grow somewhere between, let's call it, 2-2.5%.
I did mention we have sort of a legacy conventional syringe business. That business, particularly in the U.S., had actually been declining. When you put it all together, overall, our constant currency revenue growths were somewhere around that 1.5% level, so a little bit better than what we had initially indicated. Likewise, I think from a profitability standpoint, we had called for EBITDA margins of approximately 30%. We ended up coming in closer to like 31.4%. Sort of a similar drop through, if you will, in terms of exceeding the EBITDA margins. Candidly, that came when we had put out those targets, March of 2022, inflation was nowhere near what it ended up becoming over that period of time. We probably absorbed close to 400-500 basis points of incremental inflationary pressures that were unforeseen at the time that we put those targets out there.
Yet through pricing and cost-cutting initiatives, we were still able to exceed it.
Okay. That's great. I think that sets the plate well. What were the primary motivations of the analyst day? What were you trying to kind of message big picture? Maybe you can bridge us from the financial targets you set out at the initial analyst day and now to this analyst day. How does that compare big picture?
Sure. So generally speaking, I think we called for an overall kind of flattish constant currency revenue CAGR from 2025 through 2028.
Similar to the prior that you had put out?
Similar to the prior, but I would say the components are a little bit different. We called for that, and we called for relatively flattish operating margins, somewhere to [28%-30%] in terms of operating margins. We also talked about free cash flow generation of cumulatively around at least $600 million of free cash flow generation from 2026 through 2028. We talked about essentially using that free cash flow in two main areas. One, delevering. We talked to the investment community about reducing our debt by somewhere between $450-$500 million during that period of time, and also continuing to pay a dividend and returning capital to shareholders in that way.
Okay. Maybe you can help walk the difference in the complexion of that flattish forward revenue growth.
Sure. First of all, again, for those of you who do not know us as a company or a management team, I think we are always going to err on the side of being a little bit more cautious or conservative, certainly when we are putting out there multi-year financial targets. We certainly want to err on the side of having a high likelihood of candidly not just meeting those longer-term objectives, but hopefully exceeding those longer-term objectives. I think that is always the framework that we are sort of going to start with. In terms of the revenue growth, we sort of called for around a 1-2% headwind in terms of revenue on kind of the core businesses, sort of getting offset by around a 2%-ish type growth in terms of new product revenue contributors.
From the kind of core business, I would say despite 85% of our revenues that are growing 2-2.5% and our overall kind of constant currency revenue growing around 1.5%, we had called for the 1-2% decline. That is really due to sort of two main things. I talked about our conventional syringe business. In the U.S., this business in 2019 was sort of in the, let's call it, $90 million revenue range. By 2024 into 2025, that is going to be around a $35 million business. There has been a pretty significant shift, if you will, in terms of that revenue base to either our pen needle products or other types of therapies like pumps. In terms of that, coupled with the fact that we continue, as part of the separation, as you can imagine, BD had different plants.
We have three main manufacturing facilities, and we actually continue to manufacture and sell some non-diabetes products back to our former parent, relatively small revenue base. The combination of sort of the U.S. syringe business, around $35 million, coupled with our contract manufacturing business, which in 2025 makes up around $20 million, through the LRP, we've sort of assumed that that would either go down in half, leading to around a 1% constant currency revenue CAGR, or maybe on the more conservative side that it would actually decline to zero. That was sort of the working framework regarding what the drivers were of the 1-2% decline. Despite our pen needle business and our safety product revenues sort of historically growing in that kind of 2-2.5% range, we sort of took the view that that would remain relatively flat throughout the LRP.
Now, offsetting that is some of the new product revenue contributors that we have, and I'm sure we'll go into the impact that GLP-1s, GLP-1s for one, I think, will certainly be and is certainly the single biggest revenue growth opportunity that we had in front of us. Our pen needles, given some of the market shares and the strong market share that we have on the pen needle side, as GLP-1s begin to sort of transition from a mode of administration, which is today predominantly single-use auto injectors, in the future, we expect that to actually transition into multi-dose pen injectors that are going to require our pen needles. There's a real nice revenue opportunity for us there.
Okay. You said the legacy 2-2.5%, but you're assuming flattish for that core business. What bridges or explains the delta in your assumptions?
Yeah. Historically, that 2-2.5% has sort of been basically a combination half and half price and volume. We took the approach that our products tend to be higher-priced products for purposes of the multi-year LRP. We did not factor in an ability to continue to try and drive increased price. Now, obviously, we'll do our best to try and increase list prices, but the underlying base case assumption was that pricing in sort of the pen needle and safety products would remain relatively flat, as was the case in terms of volumes, largely seeing a slightly lower growth rate, if you will, internationally. Again, that could very well prove to be somewhat conservative.
Okay. Can you frame the impact that conversion to insulin pumps has had on your business in terms of eating into the pie and the outlook on what is now an accelerating type 2 adoption and insulin pumps seemingly on the come?
Sure. If we sort of step back and look at what our business has done, whether it's globally or particularly in the U.S., where I think most of the historical pump adoption has occurred, from 2018, I think, through 2023, our U.S. business has grown somewhere in the magnitude of around 1.3%. Very similar to our overall kind of constant currency growth rates, very stable, and I would say pretty predictable. That comes to your point, despite seeing really significant increases in terms of pump adoption, particularly in the type 1 space. I think we sort of saw pumps go from around a 30% penetration level around 2019 up to around, let's call it, 40% or so today, and it's kind of hovered in or around that area.
Despite that and despite alternate types of therapies like GLP-1 drugs, our base business in the U.S. has remained relatively consistent. I think our thought moving forward is that our U.S. business, largely because of some of the declines I mentioned in terms of syringe, is going to be, let's call it, low single digits down, so very representative of what we're kind of calling for in terms of kind of the core base business.
Okay. What is the state or the impact of formulary changes for patients? Is that an accelerating headwind? Is it a decelerating headwind? Is it a headwind at all?
I mean, generally speaking, I would say anything that makes insulin more affordable for someone with diabetes should be a good thing for us and for our business.
Okay. All right. That's helpful. If you provided it, what's sort of the geographic complexion of the growth algorithm or outlook in your view?
Sure. So again, kind of 50% of our business in the U.S. over the LRP, we're talking about low single-digit declines, somewhere in that kind of 1%-2% rate. Internationally, that's really where we would expect there to be more outsized growth. Today, around 20% or so of our revenue come from emerging markets. Historically, that's sort of been growing kind of mid-single digits, and that's something that we would expect to continue in the future.
Okay. China, how material is it for you? Is it still a good guy?
China is an important market for us. If you sort of think about kind of the revenue growth profile as well as the profitability profile of our regions, at a consolidated level, we tend to have gross margins sort of in, let's call it, low to mid-60% range. Our U.S. business is slightly above the overall corporate averages. Our business in Europe, Middle East, and Africa tends to have a profitability level at the gross margin side that is slightly lower than the corporate average. Latin America, different market for us. It's more of a distributor market, but those margin profiles tend to be a little bit lower. Coming to your point on sort of Asia and China, Asia and China actually have the highest gross margins for us, well in excess of 70%.
Very profitable in terms of our business in both broader Asia-Pacific and China. Historically, those businesses combined, again, sort of represent a little less than 20% of our overall revenue and had been growing sort of in that kind of mid-single digit range.
Okay. Great. Maybe see if anybody in the audience has any questions first. I was going to move to the GLP and kind of the future growth opportunities next. All right. I tried. So for us that aren't on the pharma side that hear about it but don't have a great frame, how do you frame up the GLP-1 opportunity and sort of what is embedded in your forward guidance, that LRP guidance that we should know about?
Yeah. If we were here maybe two years ago, I think GLP-1s, the conventional thought at that point in time was that GLP-1s were almost going to make medical devices as we know it sort of irrelevant. Obviously, that has not happened. I mean, it certainly had impacts, if you will, on improving obesity levels and whatnot. I think there is lots of information out there in the markets regarding the fact that GLP-1s may slow down someone's need or becoming insulin-dependent, but it is not going to reverse those trends, and it is not going to eliminate the need for insulin. I mean, that is certainly our thought sort of moving forward. For us, GLP-1s is the single biggest growth opportunity that we have.
I think that may be somewhat of a surprise to people when they think of GLP-1s and what impact it might have on a company like ours, someone that manufactures devices that are used to inject insulin. If you think about the way that GLP-1s are sort of predominantly administered today, it's largely through single-use auto injectors. We do not manufacture those auto injectors today, although it's something that in the future we would certainly consider sort of broadening out the product portfolio into. However, we've been having conversations with somewhere between 20-25 different generic pharmaceutical companies over the last 15-18 months to varying degrees, several of which we've already signed arrangements with.
As they come to market, they intend to come to market instead of going to market with a single-use auto injector, they plan to come to market with those GLP-1s via a multi-dose pen injector, which, given the significant market share that we have on the pen needle side, there's a high likelihood that we'll have a pretty strong attachment rate with our pen needles getting used with those pen injectors. We have sort of framed that as at least a $100 million market opportunity by 2033. I think that that could prove to be highly conservative, particularly once sort of the U.S. market kind of comes into play in sort of that 2031 timeframe. This could be something that begins to add revenue to Embecta's business as early as 2026, as early as next year, and certainly will continue to ramp up through the LRP timeframe.
As the U.S. portion of the market goes generic in around that 2031 timeframe, that's where we could see a pretty significant inflection.
Okay. Over the LRP, you have a, paint your downside 1%-2.5% it sounds like, headwind from U.S. syringe, predominantly U.S. syringe, and your contract manufacturing is still doing for Becton. This GLP opportunity that you're baking in over the LRP essentially offsets that to get you back to flat.
Correct. That's the way to think about it. There are some other new product revenue streams that we've also added into our business in terms of distribution agreements. We continue to really be focused on how do we continue to broaden out the product portfolio. We have entered into several different distribution agreements, all of which are really meant to try and leverage our commercial channel internationally, given that we are in 140 different countries. We have signed some distribution agreements for products like BGMs, for products like insulin pumps, for ultrasound products. That also, in addition to the GLP-1, is going to help offset some of our kind of core assumptions.
Okay. So some benefit from it, but not near to the magnitude of the GLP-1s in your conception.
Agreed. Yeah.
Were you precluded from being able to do that previously for some reason by the nature of the spend?
Somewhat, yes. As we were going through the separation, again, the focus was, let's separate as quickly as we can and keep the business stable. As part of that, we were sort of prohibited from putting in new product SKUs into the pre-existing ERP system. It was not until now that we are through that separation and we have our own ERP system and distribution network that now we can sort of add those additional SKUs and kind of broaden our portfolio.
Understood. All right. In part explains the timing of the analyst moving on beyond that and now able to look at new opportunities and new growth drivers.
That's right.
Okay. All right. Maybe if we zoom into FY25, ask you to talk a little bit about the pharmacy closure impact that drove the guidance reduction first.
Sure. For us, we go through, obviously, the retail pharmacy channel for our products domestically. Internationally, we go through a combination. Some of our products are used in retail pharmacies. Some of them are used actually in the hospital setting, depending on the country. Exactly. The impact that we ended up seeing, typically, store closures are nothing new in terms of retail pharmacy store closures over the last several years. I think the thing that sort of differed here was just the magnitude of one particular customer's retail pharmacy channels, the amount of store closures that they were expecting to occur during the course of 2025. As a result of those store closures, they really needed to sort of figure out where are those patients going? Are they going to go to existing stores? Because the patients aren't going away.
Not a demand question.
It's not a demand question. Those patients aren't going away. They're still going to require the product. It's sort of just a temporary pause, if you will, until they figure out where those, now that they've determined the stores, where are those patients going? What is the existing inventory? Where is that existing inventory of those stores? Where is that going to move to? That sort of just caused this one particular retail pharmacy player to sort of then put a pause in terms of how much inventory they're purchasing from distributors, which then impacts the amount of revenue for us as well.
Okay. I imagine the transient nature of that in part explains how you walk back up to your LRP for the remainder of the forecast.
Exactly. For us, we saw more significant headwinds, if you will, in terms of kind of constant currency revenue growth rates in the first half of the year, largely because of some of the ERP implementations that we did in 2024. In the back half of the year, we would actually expect to see flat to low single-digit positive constant currency growth in 2025. That still includes this impact, if you will, from the pharmacy store closures.
Okay. All right. That's great. We talked bigger picture about operating margin aspirations. Help us maybe decompose a little bit and talk about the gross margin element of that separately from the below.
Yeah. Today, we have gross margins that are somewhere around, let's call it around 63% at the midpoint. Now, we didn't specifically provide longer-term gross margins at the analyst day. We talked about operating margins sort of being in that kind of 28%-30% range. At the midpoint, the operating margins today for us are around, let's call it, 30%. Essentially around a 100 basis point or so decline midpoint to midpoint from 2025 through 2028. It's really focused on two things. One, our thoughts on tariffs, and two, a slight increase in terms of R&D expense. Right now, we are factoring in some incremental tariffs largely associated with the U.S. and China. They have been temporarily put on pause, but we'll have to see exactly what happens. If they were to go back into effect, we've sort of factored in that headwind.
That's causing about half of the decline from 2025 levels to our thoughts on 2028. If that were to go away, we obviously see a margin uplift there of somewhere between 50-60 basis points. The additional item is just an increase in R&D expense. Today, we only spend around [$150 million, 1.5% or so in terms of R&D. We anticipate taking that up into sort of the 2% or plus type level. That is really focused primarily on trying to qualify another supplier or suppliers to provide the cannula or needles that go into our product. If you sort of step back at the time of spin and at the time of separation, Becton Dickinson provides us with all of our cannula or needles today. We probably purchase somewhere between 9-10 billion cannula. We are the biggest customer of BD in terms of cannula today.
Obviously, that's a sole source arrangement for us. There have been some more significant markups, if you will, that BD has put on those cannula sort of post-spin that's kind of negatively impacted our gross margins. One of the things, now that we have the ERP system and we're fully separate, that we're sort of working on now is trying to qualify one or more alternate suppliers of those needles, which will sort of help, I think, in two different fronts. One, it's always good to have alternate suppliers. Two, hopefully, that introduces some price competitiveness now that BD would have to, that we'd have an alternate supplier for that product. We're factoring in, essentially, we're factoring in the incremental costs associated with that through 2028.
However, any of the margin benefits most likely would come after the 2028 timeframe. Assuming that we're able to qualify one or more alternate suppliers, hopefully, we would actually see some gross margin uplift as a result of that moving forward.
If I can frame up gross margin, historically, you've seen positive price. That's no longer assumed in top line. That could be a driver of gross margin upside over the LRP if it's realized. Tariffs, taking a conservative approach, if that alleviates at all, that could be a driver of upside. This transitioning from sole to multi-source will most likely not be a positive driver over the LRP, but beyond that could potentially be another area of potential upside.
I think that's fair.
Okay. All right. Great. We have not touched on capital allocation yet, which you put out there earlier. Maybe you just frame it for us again. The aspirations you have from a debt paydown standpoint, remind us where your leverage levels are today, where you aspire to get to, and what that is going to afford you in the future.
Sure. I think the leverage levels at spin were relatively high. That coupled with the fact that we needed to incur a fair amount of expenses and cash usage associated with standing up the organization really then temporarily actually drove leverage levels even higher. Right now, at the end of our fiscal second quarter, our net leverage was around 3.7 times. By the end of this year, we committed to paying down at least $110 million in debt. I think we're well on our way to doing that or hopefully even a little bit better by the end of 2025. Our net leverage levels are expected to be somewhere around that three times mark by the end of our fiscal 2025.
Now, moving forward, we do expect to generate somewhere in the magnitude of at least $600 million in free cash flow, pay down somewhere between $450-$500 million in debt. Assuming that that sort of occurs ratably, I think it's probably reasonable to think that our net leverage levels could be sort of in the low to mid-two's by 2027. By 2028, could certainly be slightly below two times.
Another turn and then another maybe half a turn beyond that.
Agreed. I think it'll really, now that we're through separation and through all the cash usage there, it'll really allow us to sort of create some additional balance sheet flexibility that we can continue to sort of build this business out and diversify that product portfolio in the future through either organic or inorganic means.
Okay. You brought up the inflationary pressures that you experienced over the prior Long Range Plan period. What is the nature of the status of your forward view on inflation embedded in your operating margin guidance?
We sort of factored in around a 4% inflationary impact, kind of cost of living impact globally, depending on markets. Some may be lower than that. Some may be higher than that. That was sort of the overall amount that we kind of factored in. I mean, our team does a really great job considering that our products are really pennies on the dollar and the costs are pennies on the dollar. I mean, our team does a tremendous job in trying to drive cost reductions each year to the tune of at least a 1% level per year.
Okay. It kind of hearkens back to the pricing comment that you made earlier. At such a low expense level, is there anything that you've seen that informed that decision to take a more conservative view on price?
I think we have some larger customers, obviously, particularly in the U.S., and trying to make sure that we lock those customers up into multi-year arrangements. Our prices, again, historically have sort of been on the higher end. We certainly want to just take a balanced approach to make sure that we maintain those volumes, maintain those customer relationships over the LRP.
Okay. All right. In the last minute, I thought I'd maybe open it up to you to characterize or describe what maybe has been misunderstood or the nature of your investor conversations since the analyst day to maybe clarify what you want to get out there to the market.
I mean, I think we've had a lot of good reception with investors over the last couple of weeks. A lot of interest in the company, I think, following the analyst day. I think that we're always going to err on the side of being a little bit more cautious with the understanding that we want to create a multi-year set of financial projections that we have a high degree of probability and not just meeting, but hopefully exceeding. I do think that the free cash flow characteristics of the company post-spin have really been masked because of all the cash flow needs towards separation. That will become very, very apparent very quickly here.
Okay. All right. That's great. Thanks so much for being here. We really appreciate it.
Yeah. Thanks for having us.
Thank you all for your interest.