Summary
- BD management has had to deal with new revenue headwinds from COVID-19 while also trying to resolve longer-standing issues like the Alaris pump recalls.
- COVID-19 has created revenue opportunities worth multiple hundreds of millions of dollars in testing (Veritor) and vaccines (pre-filled syringes).
- The long product life cycle of drug infusion pumps should mitigate some of the damage of the Alaris recall, but Baxter and ICU Medical will still likely take some share.
- With mid-single-digit long-term revenue growth and steady margin improvement, BD shares look priced for a decent high single-digit long-term annualized return.
COVID-19 has created challenges for most med-tech companies, but Becton Dickinson (BDX) ("BD") already had a lot of balls to juggle before COVID-19 disrupted hospital and physician procedure counts. While COVID-19 has itself created some opportunities in testing and the pre-filled syringe business, longer-term issues in the drug-coated balloon and drug pump businesses have caused some headaches for management.
Becton Dickinson has actually been a pretty meaningful sector underperformer since announcing the deal for Bard back in 2017, though the shares are relatively popular with the sell-side on assumptions that BD will benefit from increased COVID-19 testing volumes, an eventual vaccine, resumption of elective procedures, and an eventual resolution of its Alaris pump recall. Although I don’t value BD has highly as those on the sell-side, I do believe the shares are still somewhat undervalued today.
COVID-19 Creates Both Headwinds And Tailwinds
Not unlike the situations faced at companies like Abbott (ABT) and Roche (OTCQX:RHHBY), COVID-19 has created both revenue headwinds and opportunities for BD. On the negative side, BD has seen a sharp decline in elective procedure counts, driving lower sales for interventional products, medication delivery products, and core hospital testing. All of that was evident in the fiscal third quarter results, where revenue declined about 9% on an 18% decline in Med Delivery and a 19% decline in Interventional.
In the interests of clarity, though, there are many moving parts to BD and not all of them have been impacted to the same extent. Med Management was still up 4% despite the Alaris recall, Diabetes was down just 3%, Pharma Systems was up over 4%, and Diagnostics increased 12% as increased COVID-19 testing volumes for BDMax offset weakness in more traditional hospital testing.
Anyway, BD is also seeing emerging opportunities tied to the pandemic. The company got FDA Emergency Use Authorization for its SARS-CoV-2 test on the Veritor platform in early July, and BD is working to ramp capacity to 12 million tests/month by February of 2021. Although Abbott recently received approval for an even more accurate test that it is offering at a low price ($5 versus around $15 for most other rapid tests), I still believe BD could generate $400M or so in revenue from the Veritor-based test just in calendar 2020.
Abbott’s test may be more appealing, but Abbott has its own capacity constraints. Depending upon how prevalent COVID-19 remains in 2021, $1 billion in testing revenue from this single product is not out of the question. I’d also note that BD had about 30,000 testing systems in place for Veritor versus around 18,000 or so for the comparable Abbott test, and that too will keep BD relevant in the rapid testing space.
BD has also started ramping up in anticipation of providing pre-filled syringes to vaccine manufacturers for a COVID-19 vaccine. This, too, should be a multi-hundred-million dollar opportunity for BD that continues on into 2021 and maybe beyond.
