Becton, Dickinson Should See Normalization in 2024 With Alaris' Return

Regional Director

Alex Morozov

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BD Medical

BD Life Sciences

BD Interventional

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After a tumultuous few years, Becton, Dickinson is undergoing course correction. The COVID-19 revenue windfall has been reinvested, which should lift the firm's core business growth in the upcoming years as the testing revenue fades. As Alaris has now returned to the market, the last remaining uncertainty has been resolved, although it is still to be seen whether the damage experienced by the franchise will be long-lasting or whether Alaris can regain its market-leading share rapidly.

Historically, BD was considered a virtually recession-resistant business. The essential nature of many of BD's medical products had typically shielded the firm from any capital spending-related volatility, and this business continued to fare fine during the COVID-19-induced hospital admission deceleration. However, many of the businesses acquired with Bard have exposed BD to revenue volatility. Combined with the setbacks and revenue deceleration in the peripheral segment, the Bard acquisition has not been a smashing success. We're not quite ready to call that deal capital-destructive even though the steep price paid has given BD very little margin for error. 

The Alaris recall also represented a significant blemish on the company's previously very clean execution track record. The magnitude of the damage to the pump franchise is still not certain, but based on early momentum, we think BD should retain many of its installations. The company needs almost flawless execution in the upcoming years to reverse investors' skepticism regarding its performance.

Business Strategy & Outlook

The foundation of BD's moat is its manufacturing scale in its basic surgical products segment, which accounts for roughly half of the company's business. The company is the largest manufacturer of needles/syringes; competition can't match BD's scale, making competing on price very difficult. That said, the company is not entirely a price-setter, as the business is very commoditylike, so the pricing increases are primarily achieved through product mix (decreases on mature lines offset by higher pricing on new product introductions), which are more difficult to obtain. BD's diagnostic business is squarely in the narrow-moat bucket: Its robust installed base, responsible for steady recurring revenue, provides a switching cost defence against new entrants. However, the company's assays lack significant differentiation, and it is reliant on continuing innovation to offset pricing pressure in the ageing portfolio. The cell analysis business on its own would also likely receive a narrow moat rating, as the firm holds leading positions in flow cytometers and invested heavily to expand its presence in a broader cell therapy market but still lacks the breadth and capabilities of its peers.

Legacy CareFusion's narrow moat stems from high product switching costs and substantial barriers to entry. It derives a large portion of its revenue from products for which it is the market leader, such as intravenous infusion pumps, medication dispensers, respirators, ventilators, and infection-control products. CareFusion maintains the number-one market position in many of its product categories, especially in infusion pumps and medication-dispensing equipment. The infusion market, in particular, is a relative oligopoly, with BD, Baxter, ICU Medical, and a few smaller players controlling most of the U.S. market. New or smaller entrants have a hard time contending because of these established players' scale, breadth of product offerings, and product familiarity. Once hospitals are familiar with a particular brand of device, they rarely switch, thanks to retraining costs as well as product and process familiarity. Companies like BD, with a large installed base of devices, enjoy low customer turnover and a stream of recurring revenue from associated disposables over the long operating life of their devices. That said, a sizable recall, like the one currently experienced by BD, is likely to lead to market share losses as we had seen in the past with Baxter. BD's return to the market is a must if it is to retain its leadership role.

Legacy Bard has dug a narrow moat through its diverse portfolio of differentiated products and the patents that protect its innovations. Additionally, management has done a credible job of adding new products, including the new technologies that require market development. By expanding its wide range of products primarily through various acquisitions, the firm was well positioned to provide hospital customers (and group purchasing organizations) with one-stop shopping and the prospect of bundled deals. The company's ability to make meaningful innovations to its key products, such as the Foley catheter, has allowed the firm to stave off pricing pressure and maintain its presence on the equipment shelf. Bard has solidified its narrow moat through its relationships with practitioners in the vascular, surgical, urology, and oncology areas. Through these ties, Bard seeks to cultivate physician preference for its products.

The company's business has less presence in weaker diagnostic and biosciences areas but faces too many challenges to warrant a wide economic moat. The medication delivery and management business is an oligopoly in mature domestic markets, but we aren't certain it would be able to deploy its current tactics in emerging markets, where BD is attempting to expand its presence. Higher-price-point products are more susceptible to capital-spending fluctuations and potential substitution. High switching costs in the developed world are less pronounced in the emerging markets, and initial barriers to entry are rather low.

Narrow

Economic Moat

Becton, Dickinson and Co.

Becton, Dickinson & Co. engages in the development, manufacture, and sale of medical supplies, devices, laboratory equipment, and diagnostic products. It operates through the following segments: BD Medical, BD Life Sciences, and BD Interventional. The BD Medical segment produces medical technologies and devices that are used to help improve healthcare delivery. The BD Life Sciences segment provides products for the safe collection and transport of diagnostics specimens, and instruments and reagent systems to detect infectious diseases, healthcare-associated infections, and cancers. The BD Interventional segment offers vascular, urology, oncology, and surgical specialty products to hospitals, individual healthcare professionals, extended care facilities, alternate site facilities, and patients via its Homecare business. The company was founded by Maxwell W. Becton and Fairleigh S. Dickinson in 1897 and is headquartered in Franklin Lakes, NJ.

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Becton, Dickinson & Co. is a global medical technology company, which engages in the development, manufacture, and sale of medical supplies, devices, laboratory equipment, and diagnostic products. It operates through the following segments: BD Medical, BD Life Sciences, and BD Interventional. The BD Medical segment produces medical technologies and devices that are used to help improve healthcare delivery. The BD Life Sciences segment provides products for the safe collection and transport of diagnostics specimens, instruments, and reagent systems to detect infectious diseases, healthcare-associated infections, and cancers. The BD Interventional segment offers vascular, urology, oncology, and surgical specialty products to hospitals, ambulatory surgery centers, individual healthcare professionals, extended care facilities, alternate site facilities, and patients via its Homecare business. The company was founded by Maxwell W. Becton and Fairleigh S. Dickinson in 1897 and is headquartered in Franklin Lakes, NJ.

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