Market news and an update from healthcare company Becton Dickinson.

Market News

Equity markets around the world are falling heavily, while safe haven investments out-perform. The yield on the 10-year Treasury has fallen below 4% and the yellow metal trades at $2,465 an ounce, closing in on an all-time high.

In the US, the S&P 500 (+1.4%) and Nasdaq (2.3%) sold off and the S&P Futures are currently predicting another 1% fall at the open this afternoon. The move followed disappointing US ISM Manufacturing PMI data: 46.8 vs. 48.8 expected. All eyes are now on the US non-farm payrolls out later today – 175k jobs added is the forecast. The unemployment rate is seen holding at 4.1%.

Intel fell by more than 20% following the announcement of large headcount reduction, lower capital spending, and a dividend cut. Amazon fell 8% after-hours after reporting slowing online sales growth in the second quarter.

In Asia this morning, the Nikkei 225 Index sank by almost 6%, hitting its lowest levels in nearly six months as investors sold off Japanese equities following a hawkish shift in Bank of Japan monetary policy. The yen rose to 149 against the dollar. The Hang Seng (-2.4%) and Shanghai Composite (-0.9%) also fell.

The FTSE 100 is currently trading 0.5% lower at 8,240. The Bank of England cut interest rates for the first time in four years. The quarter of a point reduction to 5% was narrowly voted through 5-4. Five-year swap rates that are used to price mortgages have fallen to 3.65%, their lowest level since February. Sterling trades at $1.2736 and €1.1791.

Source: Bloomberg

Company News

Yesterday lunchtime, Becton Dickinson released results for the three months to 30 June 2024, the third quarter of its financial year to 30 September 2024. Revenue came in below forecast and guidance for full-year organic growth was trimmed. In contrast, margins, earnings, and cash flow were all ahead of expectations and in response the group raised its full-year margin and EPS guidance. Overall, given previous disappointments on achieving targets, the market was looking for consistency of performance and the ability to execute on reported metrics. Although this was achieved for margins and EPS, the revenue miss (albeit small, and market related) was disappointing. In response, the shares were marked down by 2% against a weak overall market backdrop.

Becton Dickinson (BD) is a leading global supplier of medical devices and instrument systems. The group’s products help achieve better healthcare outcomes, mitigate healthcare cost pressures, and improve healthcare safety. 90% of revenue comes from products where the group is the market leader, with 85% from recurring or non-capital related purchases. As a result, the company is well placed to benefit from increased demand for healthcare from an  improving patient admissions and surgical volumes and a stable capital investment environment.

The BD 2025 Strategy is targetting sustainable mid-single-digit revenue growth (i.e., 5.5%+), margin expansion of 540bps (to 25%), and double-digit earnings and free cash flow growth. The group is actively managing its portfolio – the diabetes care unit has been spun off and the surgical instrumentation platform sold. In addition, the group is exiting lower margin products and markets – the number of stock lines has been cut by 20%, achieving the 2025 target a year early, with further a further reduction expected. The result is a more simplified portfolio and increased efficiency able to drive improved operating leverage.

In the latest quarter, revenue was up 4.3% on a currency-neutral basis to $5,057m, slightly below the market forecast of $5,076m. Organic growth (i.e., excluding acquisitions) was 5.2%, was lower than the previous quarter (+5.7%).

Growth was impacted by transitionary market dynamics in BD Biosciences (lower market demand for instruments) and Pharmaceutical Systems (from customer inventory destocking). However, the group continues to grow ahead of the market, taking share across the portfolio. The macro environment in China remains a challenge, stemming from value-based pricing and a slowdown in exports of pharmaceutical products. However, the group believe it remains a large market with a significant unmet need.

By region, growth in the US (+4.9% to $2.9bn) outpaced the International business (+4.0% to $2.0bn).

By division:

·       BD Medical (51% of sales) grew by 5.6% in organic terms, driven by Medication Delivery Solutions and Medication Management Solutions. The group increased domestic production of syringes to support US health care needs following an FDA safety communication regarding certain non-BD plastic syringes.

·       BD Life Sciences (25% of sales) was up 3.5%, driven by Integrated Diagnostic Solutions offset by lower demand for Biosciences instruments.

·       BD Interventional (24% of sales) rose by 6.4%, driven by good performance across the division as a result of increased uptake of new products.

The company enjoyed an accelerated margin expansion driven by the BD Excellence operating system and moderating inflation. The gross margin rose by 170bps at constant currency to 54.3%, while the adjusted operating margin increased by 220 bps at constant currency to 25.2%, well ahead of management guidance for a modest improvement versus the previous quarter. Adjusted EPS rose by 22.6% on a currency-neutral basis to $3.50, well above the market forecast of $3.31.

The group has generated $2.2bn of free cash flow in the financial year to date, up 106%, helped by improved inventories. This leaves financial gearing at 2.4x net debt to EBITDA. Cash flow is being directed to internal growth opportunities, bolt-on M&A, and shareholder returns. The group currently spends around 6% of revenue on R&D, with 60% directed towards what the company calls transformative solutions. The group has launched more than 50 key new products in the past two years and is on track to launch 100 products through to 2025, generating incremental revenue of $1.7bn versus $0.8bn in 2020.

In June, the group announced the acquisition of the Critical Care unit of Edwards Lifesciences for $4.2bn. The business is a high-growth, innovative industry leader in advanced patient monitoring with advanced AI algorithms serving millions of patients globally. The company invented the hemodynamic monitoring category, and its solutions are currently used in more than 10,000 hospitals globally to better understand the cardiovascular condition in real-time for critically ill patients, which helps improve outcomes. The acquired business will operate as a separate unit within BD’s Medical division. It has grown by 7% p.a. over the last five years, generating $928m in revenue in 2023, of which 80% was recurring. An adjusted operating margin of at least 25% is expected to increase over time. The deal will be funded with $1bn of cash and $3.2bn of new debt. At closing, BD is expected to have leverage of 3x net debt to EBITDA and expects to de-lever to its 2.5x long-term net leverage target within 12 to 18 months of closing, primarily by deploying its free cash flow to debt repayment. Although the deal is larger than the guidance spend for M&A ($1.5bn-$2.0bn per year), it is in line with the group’s strategy and represents an attractive addition to its stable of innovative products.

A progressive dividend policy has been maintained for 52 consecutive years, with an indicated annual rate for FY2024 of $3.80, up 4.4%, and equal to a yield of 1.6%.

Last summer, Becton received FDA clearance for its Alaris Infusion System, a product that was removed from the market in 2020 following a call for more information on a software upgrade. The group is gradually resuming full commercial operation with an enhanced and updated market-leading system that can safely deliver medications, fluids, and blood products to support patient care. The ramp-up of the product has been faster than planned, with an all-time record number of pumps manufactured and shipped. BD Alaris is now at its historical quarterly run rate of $100m, with healthy committed contract backlog and momentum into FY25.

The group has updated its full-year guidance:

-          Organic revenue is now expected to grow by between 5.0% and 5.25% (vs. 5.5%-6.25% previously) to $20.1bn-$20.2bn. The company highlights this prudently reflects current market dynamics. By division, Medical is in-line with the guidance range, Life Sciences below, and Interventional above. The current quarter is expected to grow by 6.5%-7.0%.

-          The operating margin is now expected to grow by at ‘over’ 50bps (vs. 23.5% in FY2023). This compares to an improvement of ‘at least’ 50bps previously.

-          Adjusted EPS is now expected to be $13.05 to $13.15, up 5c at the mid-point, and fully absorbing the lower sales guidance forecast. This includes an estimated 75bps negative impact from the divestiture of the Surgical Instrumentation platform.

Although the group isn’t scheduled to provide precise guidance for FY2025 until its next results in November, on the analysts’ call management did highlight they would see the current consensus forecast for 10% EPS growth as ‘a floor’ as margins exceed 25% driven by improved gross margin.

Source: Bloomberg