Becton, Dickinson & Co.
Tyson Banbury (an independent analysis for consideration)
2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/ataglance_med.html
Agenda
1
Summary
2
Industry Overview
3
Company Overview
4
Competitors
5
SWOT Analysis
6
Valuation
7
Recommendation
Summary
• Leading global medical technology company
• Develops, manufactures, and sells medical devices, instrument
systems and reagents
• Founded in 1897
• Headquarters in Franklin Lakes, NJ
• Employs over 29,000 associates in over 50 countries
• Ticker: (NYSE:BDX)
• Current Price: $81.43 (12/05/2010)
2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/description.html
Industry Overview
Key Issues
Medical Equipment and Supplies
• Aging population has lead to increased levels of medical treatment
and hospital admissions
• Diabetes mellitus has reached epidemic status according to the US
Center for Disease Control (CDC)
– Accounts for more than $130 billion of healthcare spending in
US annually
– Market for diabetes diagnostic, monitoring, and treatment
devices will increase rapidly
• High crude oil and natural gas prices has driven up the cost of
plastic resins used for the manufacture of many disposable medical
supplies
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
Industry Overview
Significant Trends
•
•
•
Consolidation – US medical equipment and supplies market favors large
companies
– Better able to negotiate with Group Purchasing Organizations (GPOs)
– Can better afford high cost of product development including FDA
approval process
– Smaller companies often targeted by large firms looking to acquire new
technologies
E-Procurement – Growth in internet sites featuring medical products and
purchasing information has introduced price transparency
– Increased purchasing power of healthcare institutions and GPOs
R&D Expenditure – Maintaining a healthy product pipeline is key to
protecting market share and maintaining revenues
– Many companies continue to increase R&D expenditures in an attempt
to stay at the forefront of this industry
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
Company Overview
Recent Performance
• Significantly outperformed market over last 5 years
• Held even with market during financial crisis
http://finance.yahoo.com/echarts?s=BDX+Interactive#chart15:symbol=bdx;range=5y;compare=^gspc;indicator=sma(20,200)+volume;charttype=line;crosshair=on;ohlcva
lues=0;logscale=on;source=undefined
Company Overview
History
• 1897: BD founded by Maxwell W. Becton and Fairleigh S. Dickinson
as a medical device import company
• 1904: First acquisition of Philadelphia Surgical Company enables
BD to manufacture its own surgical instruments
• 1950: Sale of first sterile disposable product to American Red Cross
marks successful transition from reusable to disposable products
• 1954: BD produces first completely disposable syringe for use in a
field test of the Salk polio vaccine
• 1962: BD goes public, offering stock at $25/share
• 1973: BD produces first fluorescence-activated cell-sorting system
• 1999: Goal of becoming as universally recognized as the Red Cross
http://www.bd.com/aboutbd/history/
Company Overview
Segments – BD Medical
Focus: Products that reduce spread of infection and enhance
diabetes treatment, drug delivery, and ophthalmic surgery
•
•
•
•
Insulin syringes and pens
Needles and syringes
Intravenous catheters
Safety-engineered and auto
disable devices
• Prefillable drug delivery
systems
• Surgical blades and scalpels
• Ophthalmic surgical
instruments
2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/ataglance_med.html
(FY 2009)
Company Overview
Segments – BD Diagnostics
Focus: Products that improve the accuracy and efficiency of diagnosis
• Blood collection systems
• Automated blood culturing
systems
• Molecular testing systems
for STDs
• Microorganism identification
systems
• Rapid diagnostic assays
• Plated media
2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/ataglance_diag.html
(FY 2009)
Company Overview
Segments – BD Biosciences
Focus: Products that help with cellular analysis and growing living
cells and tissues
• Fluorescence-activated cell
sorters
• Monoclonal antibodies
• Reagent systems
• Cell imaging systems
• Cell culture media
• Tissue culture supplies
2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/ataglance_bio.html
(FY 2009)
Company Overview
Segment Performance
($ in millions)
Revenue
BD Medical
Combined
Segments
2008
2009
2010
3,106.2
3,343.8
3,720.0
3,730.8
3,796.4
7.7%
7.6%
11.3%
0.3%
1.8%
% Tot. Rev.
54.1%
53.2%
52.6%
52.1%
51.5%
1,715.1
1,905.1
2,159.8
2,226.2
2,318.9
% Growth
5.1%
11.1%
13.4%
3.1%
4.2%
% Tot. Rev.
29.9%
30.3%
30.5%
31.1%
31.5%
Revenue
BD
Biosciences
2007
% Growth
Revenue
BD
Diagnostics
2006
916.3
1,033.9
1,195.1
1,203.8
1,257.0
% Growth
11.2%
12.8%
15.6%
0.7%
4.4%
% Tot. Rev.
16.0%
16.5%
16.9%
16.8%
17.1%
Revenue
% Growth
5,738.0
7.4%
6,282.8
9.5%
7,074.9
12.6%
Data Source: 2010 and 2007 10-K’s, Notes to Financial Statements (Segment Data), pages 72 and 21-22 respectively
7,160.9
1.2%
7,372.3
3.0%
Company Overview
Segment Performance
•
•
•
•
Maintained positive revenue growth in all segments despite financial crisis
Segment revenues maintain stable proportion of total revenues
Stable growth in BD Medical and BD Diagnostics consistent with industry
drivers of aging US population and continued growth of diabetes epidemic
High growth in BD Biosciences reflects growing emphasis on biotechnology
as the market recognizes the applicability of these medical technologies
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
Company Overview
Financial Strength
Profitability
Financial Strength
Management
Effectiveness
Gross
Margin1
Profit
Margin1
Current
Ratio
D/E
ROA1
ROE1
BD:
51.80%
15.26%
2.70
0.31
12.93%
22.43%
Industry:
56.54%
10.40%
3.04
0.42
6.07%
14.66%
Efficiency
1
Receivables Turnover
Inventory Turnover
Asset Turnover
BD:
6.21
3.08
0.78
Industry:
6.12
4.56
0.72
Based on 5 year average
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
Company Overview
Management
• Ongoing investment in growth opportunities
• Operational initiative to reduce costs of medical surgical
products about 20% to 30%
• Define functional transformation strategies to continue
leveraging G&A cost structure, reducing costs going
forward
• Focus on productivity improvements
• Continue expense management
BD Q1 FY 2010 Conference Call: http://seekingalpha.com/article/185207-becton-dickinson-and-company-f1q10-earnings-conference-call
Competitors
Baxter International, Inc.
• Develops, manufactures, and markets products that save and
sustain lives of people with hemophilia, immune disorders, infectious
diseases, and other chronic and acute medical conditions.
• Baxter manufactures products in 27 countries and sells them in
more than 100 countries
• Three business segments:
– BioScience
– Medication Delivery
– Renal
• Generates 60% of revenues outside US
• FY 2010: Q1-Q3 Revenues up 3% but Net Income down 39% due to
increased cost of sales, marketing expenses, and declining margins
Source: 2010 OneSource Information Services, Inc., Baxter International, Inc. Company Summary
Competitors
Stryker Corporation
• Medical technology company focusing on orthopaedics among other
medical specialty areas
• Two business segments:
– Orthopaedic Implants
– MedSurg Equipment
• Orthopaedic Implants: Hip, knee, and spinal implant systems
• MedSurg Equipment: Surgical equipment, communications systems,
patient handling, and emergency medical equipment
• In 2010, multiple acquisitions including Porex Surgical and
Neurovascular division of Boston Scientific
• FY 2010: Q1-Q3 Revenues up 9%, Net Income up 22% due to
increased gross profit and decreased SG&A expenses
Source: 2010 OneSource Information Services, Inc., Stryker Corporation Company Summary
Competitors
Zimmer Holdings, Inc.
• Designs, develops, manufactures, and markets orthopaedic
reconstructive implants, dental implants, spinal implants, and related
surgical products
• Operations in more than 25 countries and markets products in more
than 100 countries
• Three geographic segments:
– Americas
– Europe
– Asia Pacific
• FY 2010: Q1-Q3 Revenues up 3%, Net Income down <1% due to
increased sales in Asia Pacific offset by higher SG&A, R&D and cost
of production expenses
Source: 2010 OneSource Information Services, Inc., Zimmer Holdings, Inc. Company Summary
Competitors
Relative Performance
http://finance.yahoo.com/echarts?s=BDX+Interactive#chart1:symbol=bdx;range=5y;compare=bax+syk+zmh;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;
logscale=on;source=undefined
SWOT Analysis
Summary
Helpful to Achieving Objective
Harmful to Achieving Objective
Attributes
of
Company
Strengths
• Financial Strength
• Focused R&D
• Global Presence
• Diverse Product Portfolio
Weaknesses
• Product Recalls
• FDA Warning Letter
• Pending Lawsuits
Attributes
of Industry
Opportunities
• Growing Diabetes Care Device Market
• Agreements and Collaborations
• Strategic Acquisition
• Global Expansion
• Market Growth in Emerging Economies
Threats
• Extensive Government Regulation
• Competitive Environment
• Government Funding
• Industry Consolidation Challenges
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
SWOT Analysis
Strengths
•
•
•
•
Financial Strength – Continued growth in sales, total assets, and current assets despite financial crisis
– Strong cash & equivalents position: $830.5 million in 2008 to $1,216.0 million in 2010
– This increase in cash is driven by cash from operations
Focused R&D – R&D activities conducted at operating units and at BD Technologies located in
Research Triangle Park, North Carolina
– Heavy investment in R&D to maintain innovation (greater than 5% of Total Revenues annually)
– In addition to in-house R&D, BD collaborates with universities and medical centers to stay at
cutting edge of technologies
– High investment on product development allows BD to deliver new technologies early to the
market, allowing it to gain significant market share
Global Presence – International operations organized into Europe (including Middle East and Africa),
Japan, Asia Pacific, Latin America, and Canada
– Diverse geography of manufacturing sites (16 countries) shields BD from macroeconomic risks
associated with have production concentrated in a single area
– Diverse customer base includes healthcare institutions, clinical laboratories, life science
researchers, the general public, and the pharmaceutical industry worldwide
– 2009 Revenues: 44.8% from US, 34.6% from Europe, and 20.6% from other countries
Diverse Product Portfolio – Diverse set of products create segment revenues that are stable with
strong future growth potential
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
SWOT Analysis
Weaknesses
•
Product Recalls – On February 8, 2010, BD voluntarily recalled some lots of BD Q-Syte Luer Access
Devices and BD Nexiva Closed IV Catheter Systems
– Recall initiated because devices may cause air embolism, leakage of blood, injury or death
– Such recalls have the potential to impact BD’s reputation as well as projected sales and profits
•
FDA Warning Letter – The US Food and Drug Administration (FDA) issued a warning letter to BD
identifying that BD sells products intended to diagnose, prevent, and treat the 2009 H1N1 Flu Virus
that have not been approved for this treatment.
– Such letters have the potential to negatively impact BD’s image and possibly its operations
•
Pending Lawsuits – BD is a defendant in several pending lawsuits, a majority of which involve direct
and indirect purchasers of its products
– Antitrust violations
– Patent infringement
– These lawsuits may negatively impact BD’s brand and image
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
SWOT Analysis
Opportunities
•
•
•
•
•
Growing Diabetes Care Device Market – The frequency of diabetes among children and adults is
increasing worldwide and is the 6th leading cause of death in the US
– Global market for diabetes care devices: $5,432.4 million in 2000 to $12,201.9 million in 2009
(CAGR = 9.4%). This market is projected to grow to $21,777.0 in 2016 (CAGR = 8.6%)
– Growing incidence of diabetes provides new avenue of revenue growth; however, market
penetration of diabetes care devices is as low as 1% in emerging economies, 30% in Western
Europe, and 35% in the US. This low penetration rate provides opportunities for future growth.
Agreements and Collaborations – BD has recently entered into strategic collaborations with
ReaMetrix, The US President’s Emergency Plan for AIDS Relief, and Luminex Corporation
– These first two of these projects focus on improving technologies for diagnosis and treatment of
the AIDS virus as well as expanding BD’s reach into resource-limited settings such as Africa
Strategic Acquisitions – Acquisition of smaller companies has been one of the main growth strategies
of BD in the past, and will continue in the future
– Acquisitions will help bring in new technologies and allow BD to meet the demands of growing
customer requirements
Global Expansion - Building new manufacturing facilities in Hungary, China, and Canada will continue
to diversify BD across international markets
Market Growth in Emerging Economies – Medical equipment market in China, India, and Brazil has
grown at a CAGR of 6.5% over the last 8 years and is projected to grow at a CAGR of 7.3% until 2015
– Growth due to increased income levels and awareness of medical conditions
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
SWOT Analysis
Threats
•
•
•
•
Extensive Government Regulation – Subject to local, state, federal, and foreign laws and regulations
– Regulatory bodies include the FDA, Drug Enforcement Agency (DEA), National Research Council
(NRC), Department of Health and Human Services (DHHS), and other comparable agencies
across the world
– Regulation will likely increase in the US as the financial crisis eventually passes and individuals’
focus returns to the recently passed healthcare bill and the general state of healthcare in the US
Competitive Environment – BD operates in a highly competitive industry where technology changes
rapidly along with customer expectations
– Recent improvements in transparency have given customers more pricing power
– Entry by manufacturers based exclusively in China and other low-cost manufacturing locations
continues to put pricing pressure on BD and may inhibit BD’s ability to capture market share in
emerging markets
Government Funding – Many customers depend on grants from US government agencies, such as the
National Institute of Health (NIH), for projects that require the purchase of BD’s products.
– These availability of these funds fluctuates, making the future demand for BD’s products uncertain
Industry Consolidation Challenges – Consolidation in the medical device industry is leading to intense
competition with larger companies better able to negotiate price concessions with buyers
– May force BD to lower prices to maintain competitive stance, decreasing revenues
Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report
Valuation
Drivers & Discount Rate
• CAPM yielded ~7%
cost of equity
• This value was not
used in this analysis
Valuation
Market Multiples Analysis
• Market Multiples Valuation two ways:
– DCF with terminal value determined by industry market multiples
– Traditional comparable companies analysis
Valuation
Market Multiples Analysis – Implied Growth
• BD trades dead on the average multiples for the industry  Industry is
trading at an excessive premium due to high growth prospects
• Terminal value determined by industry market multiples yields implied
long-term growth rate of 6.60%
• This long-term growth rate is unreasonably high, even given BD’s
history of consistent high growth
http://finance.yahoo.com/echarts?s=BDX+Interactive#chart14:symbol=bdx;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=un
defined
Valuation
Discounted Cash Flow – Moderate LT Growth
• DCF with a more reasonable long-term growth rate of 3.5% yields
the following per share price range:
Recommendation
• Current Price: $81.43 (12/05/2010)
• Average price using market multiples: $81.37
• Price using moderate LT growth rate: $62.98
Recommend:
• Add BD to the watch list
• Monitor for opportunities to purchase at ~20% discount to current price
due to market fluctuations or investor fears
• Explore small and mid-cap firms in medical equipment and supplies
industry that escape high analyst coverage and have high potential to
be targeted by larger firms