tyson banbury (an independent analysis for consideration)

Tyson Banbury (an independent analysis for consideration)

Becton, Dickinson & Co.

2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/ataglance_med.html

Agenda

Summary

Recommendation

SWOT Analysis

Industry Overview

Competitors

Valuation

11

22

33

44

55

66

77

Company Overview

• 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)

Summary

2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/description.html

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

Industry OverviewKey Issues

Source: 2010 OneSource Information Services, Inc., Becton Dickinson OneStop Report

• 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

Industry OverviewSignificant Trends


• Significantly outperformed market over last 5 years• Held even with market during financial crisis

Company OverviewRecent Performance

http://finance.yahoo.com/echarts?s=BDX+Interactive#chart15:symbol=bdx;range=5y;compare=^gspc;indicator=sma(20,200)+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

• 1897: BD founded by Maxwell W. Becton and Fairleigh S. Dickinson as a medical device import company

• 1904: First acquisition of Philadelphia Surgical Company enablesBD to manufacture its own surgical instruments

• 1950: Sale of first sterile disposable product to American Red Crossmarks 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

Company OverviewHistory

http://www.bd.com/aboutbd/history/

• 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

Company OverviewSegments – BD Medical

2009 Annual Report: http://media.corporate-ir.net/media_files/irol/64/64106/reports/AR09/ataglance_med.html

Focus: Products that reduce spread of infection and enhance diabetes treatment, drug delivery, and ophthalmic surgery

(FY 2009)

Company OverviewSegments – 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 OverviewSegments – 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)

($ in millions) 2006 2007 2008 2009 2010

BD Medical

Revenue 3,106.2 3,343.8 3,720.0 3,730.8 3,796.4

% Growth 7.7% 7.6% 11.3% 0.3% 1.8%

% Tot. Rev. 54.1% 53.2% 52.6% 52.1% 51.5%

BD Diagnostics

Revenue 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%

BD Biosciences

Revenue 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%

Combined Segments

Revenue 5,738.0 6,282.8 7,074.9 7,160.9 7,372.3

% Growth 7.4% 9.5% 12.6% 1.2% 3.0%

Company OverviewSegment Performance

Data Source: 2010 and 2007 10-K’s, Notes to Financial Statements (Segment Data), pages 72 and 21-22 respectively

Company OverviewSegment 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


Company OverviewFinancial 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%

1 Based on 5 year average

Efficiency

Receivables Turnover Inventory Turnover Asset Turnover

BD: 6.21 3.08 0.78

Industry: 6.12 4.56 0.72

• 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

Company OverviewManagement

BD Q1 FY 2010 Conference Call: http://seekingalpha.com/article/185207-becton-dickinson-and-company-f1q10-earnings-conference-call

• 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

CompetitorsBaxter International, Inc.

Source: 2010 OneSource Information Services, Inc., Baxter International, Inc. Company Summary

• 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

CompetitorsStryker Corporation

Source: 2010 OneSource Information Services, Inc., Stryker Corporation Company Summary

• 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

CompetitorsZimmer Holdings, Inc.

Source: 2010 OneSource Information Services, Inc., Zimmer Holdings, Inc. Company Summary

CompetitorsRelative 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

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

SWOT AnalysisSummary


• 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

SWOT AnalysisStrengths


• 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

SWOT AnalysisWeaknesses


• 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

SWOT AnalysisOpportunities


• 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

SWOT AnalysisThreats


ValuationDrivers & Discount Rate

• CAPM yielded ~7% cost of equity

• This value was not used in this analysis

ValuationMarket Multiples Analysis

• Market Multiples Valuation two ways:– DCF with terminal value determined by industry market multiples– Traditional comparable companies analysis

ValuationMarket 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=undefined

• DCF with a more reasonable long-term growth rate of 3.5% yields the following per share price range:

ValuationDiscounted Cash Flow – Moderate LT Growth

• 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

Recommendation

tyson banbury (an independent analysis for consideration)

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