Today I'm joined by Devdatt Kurdikar, CEO and President of Embecta. Thanks for joining us today, Dev.
It's a pleasure to be here. Thank you for having us.
Maybe just to start out, Q1 earnings last week, talking a little bit about a U.S. business reset. The U.S. business was stable around $1 billion post-spin, but you started to see some instability earlier this year and then worsening in March, leading to cutting FY 2026 guidance. Can you just maybe start out by walking us through what changed, how much was customer-specific share loss versus broader market softness?
Yeah, happy to do so. Listen, in the Q1 calendar year or Q2 fiscal year, unquestionably a challenging quarter for the company, right? The U.S. business, which is, you know, approximately 50% of our global business, right, has been stable for a long period of time. You know, this is now our fifth year post-spin. Even while we've had COVID waves and, you know, inflation and disruptions, that business has been stable. This quarter, most recent quarter that we reported, we did see some signs of instability, but also we had a confluence of factors that really sort of all unfortunately came together in the quarter. If I just sort of listing them, right? I think the one that you referred to or a couple that you referred to, share loss.
With us in the U.S., you know, our customers are certainly retailers where most patients would get their products, but the product flows through drug wholesalers, and we obviously contract with payers as well. What we saw is that with one particular retailer, we lost some share. That does not mean our products are no longer available at that retailer, but certainly, you know, we were number one position, now we are number two position. That impact on our revenue guide for the year, I would say was maybe disproportionate to the volume lost, primarily because the patients that can move from our product to a competitive product, we think they are on payer plans that obviously reimburse a range of products, and by definition on those payer plans, you know, the rebates are less than what they would be on a preferred or exclusive plan.
The second factor, and I know you mentioned this, Craig, was sort of market softness, right? One of the things we follow, one of the lead indicators that we have, if you will, we just watch insulin pen prescriptions. Insulin pen prescriptions have been stable for a long period of time. Again, recently, we saw some early signs of insulin pen prescriptions declining with a more pronounced decline in retail. That was the second factor that, you know, really came to light in the quarter that really led to us rethink about how we see the rest of the year. There were some other factors like inventory. You know, we've gone through ERP transitions, brand transitions. We don't have direct line of sight into inventory because all the product does flow through wholesalers.
There was an adjustment we made for that. Syringe. Syringe has been in a long-term decline because patients are using pens instead of vials. What happened actually last year was that that decline got mitigated because a large wholesaler was buying syringes, we think to serve their customers that were compounding pharmacies. Since that business has declined, that compounding pharmacy drug business has declined, it is impacting sort of our syringe uptake. We think syringe will just go back to its sort of long-term secular decline that's been happening for a number of years. Swabs was a decision made by us to discontinue the product globally. It was comparatively a low margin product for us.
You know, it uses, an active ingredient that we were unable to find a qualified supplier for, so we just decided to discontinue that, right? Having said all of these, you know, these all factors sort of came together. Some of these, you know, we knew at some point might impact us, which is why we sort of started on our diversification strategy, which I'm hoping we can talk a little bit more about to make the business more resilient over time.
Maybe just to double-click on that. Like, you've talked about it a little bit, but what's more transient versus the structural changes? For the ones that are transient, how can you give investors confidence that the issue is?
Yeah
contained there?
If you think about just various factor by factor, right? If you take the competitive share loss, right? Certainly over the past several weeks, we've seen stability in share. Now, you know, obviously we want to think hard about what do we want to do to win back that share, and certainly, you know, we intend to come up with the right value and value propositions to, you know, try to win back that share, right? Market softness, I think that's the one that I think we still need a few more quarters of data to see where that stabilizes, right? Where this insulin pen prescription stabilizes. I think syringe, as I said, will just continue down that now the previous secular decline. Swabs is just out of the picture. The inventory corrections we expect, you know, will be made during the year.
Wholesalers in general are trying to be more efficient with inventory. It's not just for our products, but for everybody else's products as well. I think the big ones that we are watching is uncertainty around sort of market volume, seeing how that shapes out, and then, you know, figuring out our own action plans to see how we can bring in some of that share.
Then maybe on the large customer that they had the share decline. What maybe was the biggest factors in those changes, and what are you doing to sort of stabilize that count and also contain that so it's not?
Yeah
customers as well.
Yeah. You know, it's one of the retailers, it's a large retailer. Every retailer has its own sort of unique dynamics, right? They're not, I would necessarily not call them sort of replicas of each other, right? They have different considerations, different dynamics. Some of them we have multifaceted relationships with. In this particular case, I would say the single largest factor was price. It wasn't product quality. I should also say that, you know, we don't think the competitive landscape has changed. It's not like suddenly there's a new entrant or, you know, suddenly excess capacity. Sometimes some of those things can cause pricing dislocations. I don't think it's that. It is really a choice that a customer made to, you know, increase their purchasing of products that have lower upfront cost.
We have strong relationships, like I said earlier, sort of our customers are wholesalers, payers, retailers. It's a pretty symbiotic relationships. We maintain strong relationships with all of them. I mean, if you think about our payer customer base, right, which really drives a lot of adoption of our products because we are covered in formularies, you know, either as exclusive or preferred access in almost half of all the covered lives that we have contracts with. Most of the covered lives in the country, we have some contract with. I think it provides sort of a, you know, an interconnected system that we operate in. In this case, admittedly, like I said, it was a choice that a particular customer made, but, you know, we don't intend to be sort of just complacent about it.
We want to think of a place where we can regain that share.
Just on the market softness, maybe the insulin prescriptions and pen market volume trends have worsened a bit. What do you think is driving that acceleration? Is that GLP-1 affordability? Is ACA disruption?
Yeah
pump adoption or?
Yeah. Let me first sort of describe what we see, right? We use IQVIA data for insulin pens. We look at total prescriptions as well as new prescriptions. If you look at insulin pens in total, you know, that has been relatively stable, then more recently, we saw a decline. The decline was greater in long-acting than in fast-acting, right? Fast-acting insulin is used for mealtime insulin for multiple daily injection users, it was greater in long-acting. It was also observed in new prescriptions. That was insulin pens. If you look at insulin pens by channel, now most of insulin pens are in the retail, right? Greater than 75%. Some of the remainder, most of the remainder is in long-term care.
The decline was more acute in the retail channel than in the long-term care channel. Long-term care channel is actually growing. When you look at the pen needle market. Now, the pen needle market, you know, is not like a single source of data. We get a variety of data sources that we sort of aggregate together. It tends to be more imprecise because sometimes there are, you know, internal inconsistencies. From the data we put together, we sort of see that the pen needle decline in retail is even greater than the decline in pens in retail. We ask ourselves, as we mentioned before, a long period of stability, the U.S. marketplace. What changed in that December-ish timeframe, right, or January-ish timeframe? You brought up pump adoption. Pump adoption has been growing steadily, right?
Certainly, I haven't seen any signs of that pump adoption is suddenly now increasing at a much faster rate than before. GLP-1s. GLP-1s have been around since January 2018, but something did change in GLP-1s, right? The products got far more affordable, particularly late last calendar year, right? GLP-1 affordability increased. The other thing that happened is ACA subsidies expired. Now, initially, when those subsidies expired, I know there was some press reports saying that, you know, 1 million people less had enrolled, which does not seem like a big number. More recent, you know, press reports have said that number could be much bigger. We know ACA subsidies expired.
As we put this all together, you could think about scenarios in which, look, if patients have lost insurance, and if they're already on insulin, they are going to continue taking insulin, right? Insulin prices have come down. They can go get co-pay assistance program for pharma companies. They could get older kinds of insulin, right? There are some other brands now you can get for $35 a month. Pen needles, if they don't have insurance, and if they want our pen needles, that's probably gonna cost them even more than insulin. In that case, what they might wanna do is shift to a lower cost. That could be a cash pay product, it could be a private label product, it could be something they buy online versus going to retail, and so on and so forth. Right?
That might explain why pen needles decline in retail are even greater than pen decline in retail. Secondly, if you suddenly lose insurance and you are sort of going along the progression of type 2 diabetes, particularly, you may not see a doctor, you may not get on insulin at all. You could ask, but that's a factor that should also affect GLP-1s, except because GLP-1s have suddenly become more affordable. You know, our thesis is that maybe the penetration is happening at a faster rate for GLP-1s than it is. Some of the data that we have seen, you know, the new prescriptions for insulin coming down, new starts, these are just new patients starting on insulin, is now coming down a little bit, but GLP-1s are increasing.
These might be a couple factors, but I think it's going to take probably a few quarters to get enough data to understand whether that was really tied to because we only have three months of data right now, right? All these changes are pretty recent. You know, when we thought about, when we talked about our guidance a little bit before, so when we thought about it, because some of this is so new and evolving, what we did in our guidance was assume sort of that there is, that the conditions we saw sort of persist through the rest of the year. That the share loss is where it is now and just stays that way, that the market softness will stay that way, and that remains to be seen.
Mm-hmm. I guess just maybe with that data, obviously, you said it's preliminary, but how are you setting up your strategy for the rest of the year to maybe, you know?
Yeah
be able to hit the guidance
also maybe provide some better than expected or just position Embecta more broadly to shift into a new structural trends.
Yeah
in the market.
Yeah. You know, honestly, that's a strategy we've been pursuing now for a while, right? I mean, it started with the termination of our patch pump program, now 18 months ago, right? Just to remind everybody, I mean, that was really sort of predicated on a thought of, look, these GLP-1 headwinds, they're not going away anytime soon. The pump space was gonna get more competitive, as we've seen it has. We terminated the patch pump program. We said, "Look, let's focus on paying down debt, because that creates some financial flexibility in case we wanted to do an acquisition." We brought net leverage down.
At the last, the Investor Day a year ago, we said, "Look, we are going to pursue a diversification strategy." We were at its core, right from spin, really an insulin injection delivery company. We said, "We need to diversify. Even with an insulin injection, given that we are a premium priced product and there was going to be likely pricing pressure, we need to have some alternatives for our customers that want lower priced products," right? We started a program on a new pen needle. We started a program on new syringe. The new syringe actually had its first commercial sale in China, and as, you know, we get registrations and regulatory approvals, we will expand that around the world. The new pen needle is now under regulatory review in the U.S., Brazil, and for CE mark in Europe.
Again, as those approvals come in, that product will go on. We also said, "Look, these GLP-1s, they're gonna turn generic. Because they're gonna be generic forms of Ozempic, and Ozempic comes co-packaged with pen needles, these generic drug companies are gonna want to co-package pen needles." Right? Remember, we had no real B2B channel, but we built that. Now fast-forward today, you know, of the 30 generic partner drug companies that we're talking to, 40% of them have chosen us as a supplier. Those that are now launched in India, majority of them come full packaged with our pen needles. Two of them have gotten approved in Canada, and while we can't use company names, you know, we are looking forward to those launches. I read just yesterday that those launches might occur this month.
In fact, the first U.S. FDA tentative approval, you know, is our partner, though that is still some years away. We think Brazil might still happen this year. China, we think, is going to likely happen next year. My point is that was a brand-new strategy. At that time we said, "Look, this could be at least a $100 million opportunity." We said that a year ago. That was predicated on a few assumptions. That was predicated on, we will only count patients with type 2 diabetes indication and obesity. If anything, GLP-1 companies are pursuing additional indications. We said these drugs would only be available really with the affordability restrictions that existed a year ago. As we talked about, affordability has gotten better.
We said, "Listen, the U.S. really is not going to be a market for us because Novo comes co-packaged with their pen needles, and Lilly is in an autoinjector in the U.S." Well, in February, Lilly launched Zepbound with a pen in the U.S. Right? As they have launched more pens, it has created more opportunity for us to have our pen needles be used for those. My point is, that $100 million opportunity, if anything, over the last year has just seemed more and more real. Came the Owen Mumford transaction, where now we are adding a bunch of medical devices that are not insulin injection delivery. Those devices are primarily sold in a handful of European countries and the U.S. As you know, we have global infrastructure, particularly in Latin America and Asia, that's strong.
We are looking forward to that transaction closing so that we can take those products and put it in our commercial channels' hands. Additionally, now we have access to an autoinjector. I mean, the company makes the autoinjector for HUMIRA, they make autoinjectors for EpiPens. They make a reusable pen injector for other applications, including, I think, growth hormones. Now we have a drug delivery franchise, and it really, you know, vastly builds out on this diversification strategy that we laid out a year ago, right? Yeah, sort of the longer term.
Longer term, you know, I think of this company as yes, core insulin injection delivery company, but then a portfolio of medical devices that is not insulin injection, and then a channel to serve pharma companies where we can supply pen needles, autoinjectors, and we are developing a pen injector so that we can supply drug delivery devices to pharma companies that are looking for a partner to supply these devices, right? It changes the profile of the company significantly. That's why we are so excited about the Owen Mumford transaction because it really, you know, accelerates our transformation that we began a little over a year ago.
Yeah. Maybe just to follow up on that, like, why was Owen Mumford the right transaction right now, how have you set yourself up to really capitalize on the synergies that it's gonna provide for you guys, maybe what risks in integration exist today?
Yeah. Yeah. You know, a lot of factors sort of came together, right? Number one, I go back to, you know, if we hadn't terminated the patch program when we did and paid down the debt, that created the ability to do the transaction at all. Because obviously when we spun off, we had a lot of debt that we've been sort of paying down, right? Secondly, as you think about sort of, you know, I always say the three things need to come together, right? Actionability, affordability, and strategic fit. Strategic fit, we just talked about. Owen Mumford was clearly a company that we had been watching, and it was, you know, it was great timing for us that it became actionable when it did.
The affordability piece, we had been paying down debt, so we could actually get it financed, you know, for this month when it closes. We were also able to structure the transaction in such a way that $100 million is upfront, but $50 million is really contingent on it hitting the milestones associated with the new product, which, you know, we'll be happy to pay, right? It is really gonna build out our B2B franchise. It's gonna inflect some growth in the company. That's why we are so excited about it. You know, if you think about the synergies, right, that we can get from the transaction. You know, clearly I talked about we could take their medical device portfolio and globalize it. We put it in the hands of our commercial people around the world.
That was not, is not in our model, really. We are looking forward to doing that and capturing those revenue synergies. If you go sort of to the manufacturing cost, you know, we have three plants. They have two plants in U.K. and one in Malaysia. That over time allows us the opportunity to do some manufacturing network optimization. You know, our company is a world-class manufacturing operation, right? We really didn't factor in any manufacturing cost synergies in the modeling that we did. R&D, look, they're a well-known, particularly in the drug delivery space for their R&D expertise. You know, some of these autoinjectors I mentioned, these are bespoke autoinjectors that were developed for pharmaceutical companies.
The autoinjector Aidaptus for which the contingent payments are based on, I mean, that's a novel autoinjector that I think affords pharma companies with a lot of flexibility with respect to their manufacturing, without really giving up on any of the patient-centric features that pharma companies want, right? On the OpEx side, we just dialed in a modest amount of OpEx synergies. You know, what we need to do, get right about it, is obviously we don't want to disrupt the innovation that's going on, we really want to protect their R&D, we certainly want to globalize medical devices. We wanna look for these manufacturing synergies and over time sort of get them in. On the OpEx side, you know, we'll take a look to see, because they have a commercial infrastructure.
It's concentrated in a few countries, but it's also the same countries we are present in, and certainly a lot of the back office, you know, that we can rationalize. Not to mention some of the savings they could get by consolidating some of the logistics suppliers and our distribution network and so on and so forth.
Very excited about the transaction.
Maybe just, you know, now we're a year past Investor Day, like you gave an LRP, obviously a little preliminary to change that LRP. How should we think about maybe 2027 and especially now that you've made that acquisition?
Yeah
have changed in the business? What's the right framework to think about Embecta growth in the medium and long term now?
I mean, realistically and candidly, right? Obviously, we need to take a new look at the LRP, right? Given that, given what we're going through this year, right? There are a few things we wanna do. First, like I said, we wanna execute on 2026. We wanna see where some of these big drivers, particularly market softness in insulin pens, where that settles. You know, get our action plans together to win back some of that competitive share. We wanna do that. We wanna close the transaction. We wanna sort of absorb Owen Mumford, right? Integrate these companies. We want to globalize that medical device, and we really want to make sure that we do what we can to support the autoinjector development. We finish 2026, we set the guide for 2027, we do all of this work.
I think in late calendar year 2027, here's what, you know, we hope to be at, right? We hope that the B2B pen needle franchise has advanced and, you know, certainly that trajectory becomes clear as more generic launches take place. The new pen needle, new syringes, which are sort of in the very early stages right now, getting regulatory approval, certainly we have a much better sense of where we are gonna launch them and when. Medical devices from Owen Mumford have been globalized, right? We will have a much finer sense of what sort of the overall growth algorithm for the company looks like. Really, you know, our goal is that the aspirational profile of the company is now becoming real.
Because yes, while you still have insulin injection delivery, you now have medical devices that treat or are used by patients other than those with diabetes. You have now a channel into pharma companies selling drug delivery devices, certainly an autoinjector, a pen injector, and pen needles, and a pen injector that's in development right now that is advanced enough that we can begin to have serious conversations with pharma companies that are looking for a pen injector as part of their development programs for new drugs.
Makes a lot of sense. I guess just even despite the reset in the U.S. this year, you are still expecting meaningful free cash flow and debt repayment. Just what kind of gives you the confidence in the cash flow durability, and then for those maybe less familiar with how attractive your free cash flow can be. Can you just walk us through that?
Yeah. Yeah. Look, even after the reset, we said, you know, base number is sort of like $100 million free cash this year. By the way, I should also talk a little bit about maybe the change in capital allocation that we did this year. We reduced our dividend. Used to be $0.15 a share a quarter down to $0.01. Really, that was There've been sort of couple ideas here. One is, given our valuation, you know, we thought that would be a worthwhile option to pursue share buybacks, so we got a $100 million share authorization from the board, a three-year authorization from the board.
What it really allows us to do over time is to deploy that free cash in the most meaningful way in sort of the real time, right? Whether it be share buybacks or debt paydown . You know, currently, certainly our thought is those are going to be the two primary sources of free cash. The free cash that we mentioned for this year, 2026, that's after about $40 million in one-time cost, $30 million for brand transition, which is still on track to be substantially done by the end of this calendar year, so some of that might bleed over. You know, Owen Mumford integration will take some cash next year, particularly systems integration. Those tend to be the pricey part of these integrations, right? As you meld these ERP systems together.
You know, depending upon what happens with the autoinjector platform, obviously there's the contingency payments that might need some of that free cash as well, that we need to make. There are puts and takes, right? You know, we added about $30 million for four months worth of Owen Mumford revenue. Next year, you know, if you just annualize that's $90 million worth. You know, certainly we'll, as I said, we'll look to globalize some of their medical devices and see what extra revenue can we get. I mean, GLP-1 B2B revenue, you know, next year, as I said, should be more than this year. New pen needles, new syringes should be accretive next year again versus this year, just the giving up in the ramp-up phase.
You know, while we don't wanna give, certainly don't wanna give guidance for fiscal 2027 as people think about free cash for next year. Those are sort of the puts and takes that one should think about, you know, how does $100 million this year, you know, what could that be next year?
With the last minute, maybe wanted to give you the opportunity to tap on anything that you wanted to mention today that we haven't gotten to so far.
Look, you know, just finished the four-year mark, right? We started off as a core insulin injection delivery company. Spent a lot of time and effort, as you know, just standing up the company. ERP systems, distribution systems, payroll systems. Even finding new office space in dozens of cities around the world, right? Like I said, 18 months ago, we said, "Listen, we need to diversify both our product portfolio and customer base." That is exactly what we have been doing. Unquestionably the most recent quarter was a difficult one, it's not causing us to deviate from our strategy. We still believe that's the right strategy.
In fact, the work that we've done over the last 12 months, 18 months really has prepared us to the point where we are today with the Owen Mumford acquisition closing. Really looking forward to see what we can do with that acquisition to accelerate our transformation.
Okay. Well, thank you so much.
Thank you.
Next time.
Thank you for having us. Appreciate it.