Earnings Call Transcript
BECTON DICKINSON & CO (BDX)
Earnings Call Transcript - BDX Q3 2024
Operator, Operator
Hello and welcome to BD's Third Quarter Fiscal 2024 Earnings Conference Call. At the request of BD, today's call is being recorded and will be available for replay on BD's Investor Relations website at investors.bd.com or by phone at 800-839-2385 for domestic calls and area code +1 402-220-7203 for international calls. For today's call, all parties have been placed in a listen-only mode until the question-and-answer session. I will now turn the call over to Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead.
Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations
Good morning and welcome to BD's earnings call. I'm Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations. Thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released results for the third quarter of fiscal 2024. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Tom Polen, BD's Chairman, Chief Executive Officer and President; and Chris DelOrefice, Executive Vice President and Chief Financial Officer. Following this morning's prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents: Mike Garrison, President of the Medical segment; and Rick Byrd, President of the Interventional segment. Before we get started, I want to remind you that we will be making forward-looking statements. You can read the disclaimer in our earnings release and the disclosures in our SEC filings available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant fiscal period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. Reconciliations between GAAP and non-GAAP measures are included in the appendices of the earnings release and presentation. Specifically, during the quarter, we recorded accruals resulting from recent developments relating primarily to the Italian government medical device payback legislation which essentially relates to years prior to the current fiscal year. We are presenting adjusted revenues, excluding the impact of these accruals. With that, I am very pleased to turn it over to Tom.
Tom Polen, Chairman, CEO and President
Thanks, Greg and good morning, everyone. We continue to make excellent progress advancing our BD 2025 strategy. This quarter demonstrates the durability of our portfolio and strength of new innovations, delivering mid-single-digit organic revenue growth of 5.2%. Growth was broad-based and reflects strong volume and share gains across the portfolio. Our team executed very well through transitory market dynamics in BDB and PS and macro factors in China. We continue to grow above the market and believe we are extremely well positioned as these markets recover. We have growing momentum from our BD Excellence operating system that enabled us to deliver significant sequential and year-over-year adjusted gross margin increases. This drove strong operating margin expansion contributed to over 18% adjusted earnings per share growth and is allowing us to raise our earnings guidance once again. Our team's excellent execution also drove over 100% year-to-date growth in free cash flow, reaching over 80% free cash flow conversion year-to-date, with margins, earnings and cash flow all ahead of plan. As a reminder, our strategy consists of 3 pillars: driving growth through innovation and tuck-in M&A, simplifying through BD Excellence and empowering our organization with the capabilities and systems to deliver on our strategy. I'd like to provide updates on each of these this morning. Starting with our growth pillar and the Critical Care acquisition. Things continue to progress well towards a successful close and as we've gotten to know more members of their team, we only become more excited to welcome them to the BD family. Critical Care significantly advances our connected care strategy to use AI and digital tools to help clinicians deliver more efficient and higher quality care. Additionally, it adds a high-growth business that is immediately accretive to margins and earnings. Turning to several of our most significant long-term growth drivers. To begin with, our connected medication management strategy has strong momentum, with Q3 setting another new all-time record for the number of Alaris pumps shipped in a quarter. The scale of upgrading our fleet is unprecedented and I'm very proud of the work our teams are doing to support our loyal customer base and deliver ahead of our commitments. Customer feedback has been very positive and we gained a market position in the quarter. We are now back at our historical quarterly run rate of about $100 million and have built a healthy committed contract backlog which puts us in a position to be above our historical run rate for FY '25. Our connected medication management portfolio which includes Alaris, is just one example of how BD is at the forefront of combining AI, automation and robotics to improve the core processes that run health care. Through our strategy, BD is advancing our leadership in automating the pharmacy, the medication management process and the microbiology lab. Today, BD has a $4 billion-plus business in health care automation and informatics AI and we'll increase this to over $5 billion as we complete the acquisition of Critical Care. This expands BD in the smart critical care space and creates new opportunities to combine AI-driven monitoring with systems such as infusion technologies to simplify nursing workflow and improve patient care. Looking ahead to 2030, we view health care process automation and informatics AI as having the potential to become a business exceeding $7 billion as we continue to build more connected, automated and intelligent solutions to transform the core processes underlying care delivery. Turning to other key platforms. Q3 was the 28th consecutive quarter of double-digit growth in our PureWick platform. Our recently launched next-generation female external catheter, PureWick Flex, is expected to support this continued momentum. PureWick Flex delivers improved performance for a wider range of body types, both in acute and home care settings. Given the incredible response from the first PureWick Flex users, we couldn't be more excited about the impact this will have on patients and their providers. As I think about PureWick overall, we see this as having the potential to become a $1 billion franchise by 2030, continuing its double-digit growth momentum. We're also advancing our impact in immune health in oncology, continuing the super cycle of innovation within BD Biosciences which positions it well as a long-term growth driver. Coming off the landmark BD FACSDiscover S8 Cell Sorter launch in FY '23, we recently released additional 3 and 4 laser configurations which contain the same new-to-world BD SpectralFX and BD CellView technologies, enabling new discoveries in a broader range of fields. We expect to continue our innovation cadence with our FY '25 launch of the BD FACSDiscover A8 Analyzer which will provide customers high-throughput sample analysis with the same innovative technologies. The combination of BD FACSDiscover and our BD RealBlue and RealYellow reagents were used in the world's first 50 color flow cytometry experiment which was published this year in the Journal of Cytometry. This serves as a testament to these ground-breaking new technologies. The immune health and oncology space remains a primary focus for research and as the market returns to growth, we believe a leading technology and portfolio position us well to capitalize on future opportunities in this space. Finally, within our Pharmaceutical Systems business, in Q3, biologics drug delivery continued to grow double digits. Biologics now represent over 40% of our total Pharmaceutical Systems revenue and we see it as a significant growth opportunity, including GLP-1s. Since the start of BD 2025, we've been implementing a strategy to enhance our innovation leadership, expand our manufacturing scale and prioritize quality excellence to be the preferred partner for biologic drug delivery. And we believe that no other company in med tech is better positioned than BD to capitalize on this trend. First, the majority of biologics that use a prefilled syringe have and continue to be launched in the BD device. Since 2023, BD has been the chosen partner for 19 out of the 23 new biologic drug approvals that use a prefilled syringe. Second, as we consider the significant clinical potentials of GLP-1s, the strength of BD's innovation in this category and our previously announced capacity expansion, we view GLP-1 drug delivery as a potential $1 billion product category by 2030. Today, we serve multiple market leaders, have device contracts with multiple novel GLP-1 therapies advancing through clinical trials and beyond novel molecules, we now have over 40 signed GLP-1 biosimilar agreements across our pen, auto-injector and syringe platforms. We are actively supporting biosimilars for early generation GLP-1s that are entering the market over the next 12 months. Outside of GLP-1s, our customers are working to develop next-generation biologics that have the potential to revolutionize care and conditions like Alzheimer's, certain immunological disorders and types of cancer. Many of these are extremely complex molecules and proteins that will involve significantly greater volumes for injection and higher viscosity compared to therapies presently available in the market. At the same time, we see the trends to enable patient self-treatment that point to the need for wearable on-body injectors. We've developed the BD Libertas and BD Evolve wearable injectors to support the unique delivery needs of these therapies. We're actively supporting multiple customers testing their pipeline molecules with our wearable solutions and have provided product to support their clinical trials. While this is a longer-term opportunity that we expect to develop in line with drug development timelines, we believe we are well positioned for this future trend and are getting very positive feedback on our platforms. Moving to our simplification strategy and BD Excellence. First, let me express my gratitude to everyone in our organization who is accelerating BD Excellence through our global supply chain, through the completion of over 500 Kaizen events this year. I especially like to thank those working in our manufacturing plants and warehouses to improve product quality and reliability for our customers this year while delivering double-digit improvements in both waste reduction and production yield. We are seeing the outcomes of BD Excellence in accelerating margin progression and delivering strong cash flow. Our plans to reduce our manufacturing network by over 20% remain on track. And as we are consolidating our plant architecture, we're investing in smart factories. Our top 30 sites are already accelerating performance, leveraging smart automation and digital capabilities such as predictive analytics. We're excited about the opportunity to further accelerate manufacturing productivity through the combination of BD Excellence and our smart factory strategy. The momentum in our simplification programs, including BD Excellence, positions us for success as we finish FY '24 and as we look ahead to FY '25 and beyond. Lastly, we continue to empower our organization through strong corporate responsibility and recently issued our FY '23 Corporate Sustainability Report. Notably, in FY '23, we reduced Scope 1 and 2 greenhouse gas emissions by 18% versus our FY '19 baseline, surpassing our goal of 13%. We doubled the number of sites using green electric power and solar power and we reduced our water usage by 21% and waste by 18% over the same time frame. In summary, we delivered above-market mid-single-digit organic revenue growth and significant margin expansion and cash flow generation. On the strength in the quarter, we are once again raising our adjusted diluted EPS guidance for fiscal 2024 and believe we are well positioned for continued strong financial performance next year. We have leadership positions in many of the most significant trends reshaping health care, positioning us well in FY '25 and beyond. I'll now turn it over to Chris to review our financials and outlook.
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Thanks, Tom and good morning, everyone. As Tom noted, the quarter's results reflect strong performance across multiple parts of our portfolio, even amid the previously noted transitory market dynamics and macro factors. Importantly, with strong execution of our BD Excellence programs, we exceeded our margin, earnings, and cash flow goals. I'll now provide some further insight into our adjusted revenue performance. Q3 revenue grew 5.2% organic, driven by volume growth and share gains. Regionally, over 90% of our revenue which includes our 3 largest geographies, grew 6% plus organic. This strong performance was partially offset by a decrease in China from continued market dynamics. BD Medical growth was led by MMS with exceptional performance in infusion systems, driven by the BD Alaris return to market and higher utilization of infusion sets, partially offset by a tough prior year comparison in dispensing. Broad volume growth and share gains across our MDS consumable portfolio in developed markets also contributed to the segment's growth. Pharm Systems had another quarter of increasing demand with double-digit growth in prefilled devices for biologic drugs, primarily GLP-1s. This growth was offset by transitory market dynamics across the industry, including expected customer inventory destocking. BD Life Sciences performance was led by IDS with high single-digit growth in specimen management which reflects both increased utilization and customer upgrades to higher-value products to provide an enhanced patient experience. The segment's growth was partially offset by transitory market dynamics in biosciences that resulted in lower market demand for instruments. Given our leading portfolio in instruments and reagents, we significantly outperformed the category in the quarter. Strong organic growth in BD Interventional was led by high single-digit growth in UCC with continued momentum in our PureWick franchise, delivering another quarter of double-digit growth. Surgery delivered another strong quarter across all 3 major platforms with double-digit organic growth across advanced repair and reconstruction, infection prevention, and biosurgery. We continue to make excellent progress with conversion to our bioresorbable Phasix technology which we see as a durable contributor to future growth. BDI performance was also supported by peripheral intervention with double-digit growth in peripheral vascular disease that was partially offset by a decrease in oncology, driven primarily by market dynamics in China. Now moving to our P&L. We realized strong sequential and year-over-year margin improvement with adjusted gross margin of 54.3% and adjusted operating margin of 25.2%, both above our expectations. The gross margin year-over-year increase of 170 basis points was primarily driven by increased productivity and cost improvement from our BD Excellence initiatives and moderating inflation. Our operating margin increased by 220 basis points year-over-year, driven by the increase in gross margin and healthy operating expense leverage with expenses increasing slightly on a dollar basis year-over-year. As a result of these items, we exceeded our Q3 operating income and adjusted diluted EPS expectations, resulting in adjusted diluted EPS of $3.50 which grew double digits or 18.2% on a reported basis. Regarding our cash and capital allocation, I'm really pleased with our strategic choices and the execution on cash flow. As a result, year-to-date free cash flow increased $1.2 billion year-over-year to $2.2 billion reflecting continued improvement in working capital, including continued inventory optimization, planned phasing of certain cash flow items, and the ability to leverage our capital expenditures as we benefit from BD Excellence productivity gains. We remain focused on free cash flow conversion and are on track to deliver another double-digit step improvement in fiscal year '24, with our year-to-date free cash flow conversion above 80% and we remain well positioned to achieve our long-term cash goals. Net leverage improved to 2.4x and cash and short-term investments totaled $5.3 billion, inclusive of about $3.4 billion in proceeds from the February debt refinancing and the Critical Care acquisition financing in June. Moving to our updated guidance for fiscal year '24. The detailed assumptions underlying our guidance can be found in our presentation. As we look ahead, we are confident in a strong close to fiscal year '24. We remain focused on driving multiple areas of momentum and share gains across our portfolio, including Alaris. For the full year, even with this broad-based momentum, it is prudent for us to reflect the latest market dynamics which others are also experiencing. As a result, we now expect organic revenue growth to be 5% to 5.25% for the full year. Based on the strength of our margin performance, we were able to absorb the revised organic revenue growth guidance and are raising our adjusted diluted EPS guidance range to $13.05 to $13.15 on a reported basis. This reflects an increase of $0.05 at the midpoint and $0.10 at the bottom of the range. We believe we are well positioned to achieve our updated adjusted operating margin guidance of over 50 basis points improvement which implies full year adjusted operating margins of over 24%. We continue to expect margin acceleration in Q4, driven by our BD Excellence and continuous improvement efforts and continued expense leverage on our expected strong revenue performance, including Alaris. Looking ahead to fiscal year '25. While it's too early to provide guidance as we are in our planning process, I can offer the following thoughts. We are continuing to monitor dynamics in select markets. Even in an environment where these dynamics continue to exist, we are confident in delivering strong performance, particularly our ability to exceed our 25% adjusted operating margin goal and deliver double-digit EPS growth, given the increasing benefit to gross margin from accelerating BD Excellence momentum. We think 10% EPS growth would be a good starting point for fiscal year '25, including Critical Care and the expected impact of Pillar 2. So in summary, based on the durability of our portfolio and momentum in Alaris, we are confident in delivering another year of strong growth. Our team's execution supported overdelivering on our margin expectations. And as a result, as we enter Q4, we are on track to exceed our full year margin improvement goals, deliver another year of double-digit free cash flow growth, and once again increase our fiscal year '24 earnings outlook. Our strategy is demonstrating positive momentum and we remain well positioned to continue to deliver on our BD 2025 value creation objectives. With that, let's start the Q&A session. Operator, can you please assemble our queue?
Operator, Operator
Our first question will come from Robbie Marcus with JPMorgan.
Robbie Marcus, Analyst
Great, two for me. First, I wanted to ask on guidance, particularly fourth quarter. What's implied there in revenue guidance and the margins, it looks like by my math, about 6.5% organic growth and still healthy operating margin performance. Maybe just walk us through some of the things that happened in third quarter that led to the touch lower organic growth and the confidence in fiscal fourth quarter, both from a revenue and a margin perspective where you did well in the quarter.
Tom Polen, Chairman, CEO and President
Thank you for the question, Robbie. This is Tom speaking. I'll begin and then pass it to Chris. Looking at Q3, we are very pleased with our strong performance across nearly all areas of the company, particularly in relation to the market, where we experienced significant share gains in several segments. Our volume performance was robust, even in markets facing temporary shifts, specifically the BDB research market and the destocking in Pharm systems. In terms of our performance, I am optimistic about our competitive standing in these sectors. Our results have exceeded what others have announced thus far. As these markets recover, we've discussed new innovations in BDB and our strong position in biologics, which is leading to differentiated growth and share gains in both new molecules and biosimilars. We are confident about our long-term prospects in that area. Regarding Q3, those trends in those sectors, along with the ongoing developments in China, shaped our observations. I'll now hand it over to Chris to elaborate on our Q4 guidance, which should be fairly straightforward.
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Yes. Thanks, Tom. Thanks, Robbie, for the question. Yes, Q4 is actually pretty straightforward. So to your point on the top line revenue organic it implies upper 6% range, consistent with what you shared, maybe a little north of that. It's really attributed to one key dynamic. It's the continued momentum of Alaris. By the way, we obviously have a much stronger line of sight based on our committed contract position. This is the strongest quarter that we have this year as it relates to line of sight of that because now we're 3 quarters in that. In addition to that, if you recall, last year in Q4, we have a favorable comp in Alaris as well because we had stopped shipping under medical necessity, as we got the approval and were preparing for launch. So you actually have a favorable comp and you have continued momentum with Alaris which as you saw was very positive in the quarter. The rest of the portfolio, we actually assume similar performance. So we're not making assumptions of significant market recovery or things of that. We're going to continue to outperform in those spaces from a relative standpoint. So I feel good about revenue. Margin, hopefully, everyone had an opportunity to see, Q3 was really strong. We outperformed margin. It led to the outperformance on EPS. The story there is straightforward. Gross margin, it basically just have to repeat Q3 which is already flowing through our cost base, right? We're in our cap and roll period there. So there's not a substantive change in terms of gross margin. On operating margin, the gross margin will flow through. We're actually increasing expenses slightly from an OpEx standpoint where you end up with that, call it, high 6% growth. You get a little bit of a natural leverage there that will flow through and we feel really good about that. I think importantly and we can talk more about this, pretends well for '25 as we think of margins.
Robbie Marcus, Analyst
That's a great transition to my follow-up question about fiscal '25. You mentioned a projected 10% EPS growth, and I want to clarify that figure. There are various factors to consider, including the timing of the Critical Care transaction and its potential contribution, as well as the dynamics between China and Alaris. When you arrived at the 10% estimate, which seems to align with market expectations, could you share some details, particularly regarding the anticipated 25% operating margin? Any additional insights you can provide about the bottom line would be appreciated.
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Yes. Thanks, Robbie. Yes. Look, we're excited about '25. It's setting up nicely to deliver strong performance. First, top line, I'll just reiterate, we're extremely pleased. Our strategy is paying off in terms of strength of portfolio. Continue to focus on driving volume and share gains. And what you're really seeing in this quarter is the ability to deliver strong performance despite these market dynamics, most notably BDB, Pharm Systems and as Tom noted, China. So we're not dependent on one thing. The durability of our portfolio sets us up nicely. And then from a margin standpoint, I shared that on the momentum we have this year, we expect to now exceed 25%. I think importantly, what you'll see different in '25 going forward is the significant majority of that will come from gross margin. And actually, if you look at where we are in the back half of the year, you can kind of think of Q3 as sort of a nice number directionally to think of '25 and carrying that through. So I feel very good about line of sight to margin. As you noted, we're excited about Critical Care. It just gives us another positive catalyst to continue to deliver double-digit earnings growth. We are contemplating headwinds from Pillar 2. So still more to come on that. It's premature to share specifics but we do anticipate that's a headwind that we will absorb as part of that. And so all that collectively sets us up nicely, to your point, I think what I see externally where the Street is, we would see that more in the low end of the range and it would be 10% and that is on a reported basis. So FX at this point, there's a modest headwind into the year but we've contemplated that. The other thing, just we did actually activate formally. We had talked about doing this but partially derisk transactional FX. But we are active with now cash flow hedges that give us another lever just to help solidify that performance.
Operator, Operator
Our next question will come from Travis Steed with Bank of America.
Travis Steed, Analyst
I have two main questions. I wanted to focus on the change in guidance. It seems that the primary reasons for lowering the revenue guidance this quarter were China biosciences and pharma. However, it appeared that everything was on track throughout the quarter. I'm curious about what changed, what caught you off guard, and when it all occurred. I was under the impression that you didn't expect improvement in those markets, so I'm wondering if your assumptions about their recovery are changing going forward.
Tom Polen, Chairman, CEO and President
Travis, this is Tom. Thanks for the question. Yes, so as we mentioned before, we feel really good about the performance across the different businesses. Of course, mid-single-digit growth is a strong position, particularly given those dynamics that we see in those spaces. And even at flat essentially in BDB, that's differentiated versus what you're seeing competitively. I think what we're doing is just recognizing that we're not calling that those markets are going to turn in Q4, that we're going to continue to see some transitory dynamics in those spaces. We assume we're going to continue to compete and perform above market in those spaces which we've been doing all year. And so that's what we've built in here. The same dynamic a bit in China. I'd say China has played out as we look at Q3 and into Q4. So MDS, BDB playing out as we projected at the beginning of the year. no real change in that. I'd say in China, the two things are the bioscience dynamic is certainly noted in China. You're seeing that reported across essentially every peer where research spending is down in China, just given the economic macro environment. And so we're projecting that, that would continue. And then also as we see anticorruption in certain markets, one of the things that we see happen and we saw that in Q3 is that distributors, when there's uncertainty, they'll pull back on their inventory until they better understand it, right? So they won't let their inventory levels come down. We saw that play out a bit in Q3. We don't expect Q3 China performance to repeat in Q4. We do think there are some onetime dynamics there. But nevertheless, particularly on the bioscience side, we expect that dynamic to continue through the year. That's really it, Travis.
Travis Steed, Analyst
Okay. And then I guess the follow-up question is more into next year, kind of what kind of revenue growth do you need to kind of get to that double-digit reported EPS growth. Before you were kind of talking about BD at 5.5% plus, is that still possible if some of these headwinds that you're seeing this year linger into next year? Just kind of doing the math this year, kind of ex-Alaris, looks like the growth is close to looking at 3.5% to 4%. I just wanted to see how to think about the next year revenue growth.
Tom Polen, Chairman, CEO and President
We won't be providing revenue guidance on this call, Travis. However, I can share some insights. Even in the current environment, we expect the Pharm Systems segment to show clearer recovery timing since you can't destock indefinitely. Some dynamics around life science research spending suggest that many players in those areas anticipate recoveries happening later in the next year. We'll have a better view of that in the next quarter before issuing guidance in that area. Overall, we're feeling positive. Despite the challenging market dynamics, we continued to achieve mid-single-digit growth this quarter and expect improvements as we approach fiscal year 2025.
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Travis, I want to mention two things. First, in my prepared remarks, I mentioned that even in an environment where these dynamics persist, we are confident in our ability to deliver strong performance, as we did this quarter. This continues to reflect quality growth. Regarding your comment on Alaris, those transitory market dynamics alone carry more value than the Alaris benefit. We have high single-digit growth businesses nearing $4 billion, and Pharm Systems was previously a consistent double-digit grower. We are still witnessing robust biologics performance, which presents a significant headwind that we are managing. To Tom's point, we are outperforming these markets, and our performance remains strong. As these trends recover, we believe they are long-term sustainable trends, and we feel positive about that. Additionally, regarding consensus, our overall portfolio is performing well; BDI across the board is strong, MDS is doing well, and specimen management is showing strong growth, indicating robust performance throughout our portfolio.
Tom Polen, Chairman, CEO and President
Yes. As we evaluate our core business, the durable portfolio is characterized by high-volume products. We are experiencing substantial volume growth and gaining market share in areas such as MDS and PAS, as well as the consumable segment of MMS, and we do not anticipate a slowdown in this momentum, which is encouraging. Regarding our strategy in healthcare automation and AI informatics, particularly with Alaris now part of our connected medication management portfolio, we are making excellent progress. In the third quarter, we returned to over $100 million per quarter in revenue, which is 3 to 6 months sooner than we initially anticipated. We are optimistic about this continued momentum moving forward. We have established a solid backlog of orders for Alaris, growing from zero at the beginning of the year, and we expect to finish this year with a normalized backlog similar to the levels we had before the shipping hold. Additionally, we are enthusiastic about other components of our connected care healthcare automation portfolio for next year, including our pharmacy and laboratory automation strategies, both of which are well-received by customers. Products like PureWick, which are aimed at new care settings, will see both a new PureWick female product launch and a mobile PureWick launch next year, which we are looking forward to. In chronic disease management, we discussed double-digit growth in biologics within Pharm Systems, which we anticipate will continue strongly into 2025. As inventory adjustments related to vaccines and anticoagulants ease, we expect overall improvement. We do not foresee any change in our underlying momentum in biologics. In biosciences, we are currently experiencing flat performance. While the market has declined, we have remained an outlier by maintaining stability. We have noted a slight increase in instrument purchases on a quarter-to-quarter basis. Looking ahead at China, there has been conversation about potential stimulus which is expected, but the timing remains somewhat uncertain, likely towards 2025. More detailed guidance regarding this will be available in our November call. From a bioscience standpoint, our current outlook shows no deterioration and some early signs of improvement in specific areas. We are also seeing a positive trend with grant approvals from NIH for applicants who were previously denied, leading to an increase in purchase orders for instruments.
Operator, Operator
Our next question will come from David Roman with Goldman Sachs.
David Roman, Analyst
I wanted to ask one question on revenue then one on capital allocation. But maybe starting on the revenue side, appreciate some of the perspective around Alaris and the contribution that you expect that to drive this year than the sort of high-level perspective into next year. But how should we think about the growth drivers in that business beyond the bolus of performance you have from Alaris. I think you have a next-generation Pyxis platform launching. You have some of the pharmacy automation products starting to pick up steam. Maybe sort of contextualize the growth in that business beyond just the Alaris boost that we should see for the next 5 quarters?
Tom Polen, Chairman, CEO and President
Yes, I'll start off, David, thanks for the question. This is Tom, and then I'll turn it to Mike Garrison who is here with us. In MMS, I can break it down into three or four categories. First, let's discuss the consumables space. We are experiencing significant growth in overall procedure volumes, which is driving strong demand for consumables like IV sets that work with Alaris. As you pointed out, Alaris has returned to its historical run rate, and we believe we gained market share in the last quarter based on independent market data as well as our own insights. We are quite confident in our position there. Additionally, this growth is also benefitting other parts of our connected care portfolio, including interoperability, health site, and various solutions. We have the next-generation Pyxis scheduled for launch in the latter half of next year, which we are excited about for the long term, and Mike can elaborate on that. Moreover, we are strengthening our pharmacy automation initiatives in both the U.S. and Europe, addressing trends such as pharmacy shortages, rising labor costs, and the growing demand for productivity enhancements. We are well-positioned to meet these customer needs and are leading the market in these areas. Mike, could you provide more details on what we are observing?
Mike Garrison, President of the Medical Segment
Sure. In addition to the next-gen Pyxis launch planned for next year, we have around 10 other launches in the connected medication management portfolio. We have established a rhythm of innovation across various areas, including the core pharmacy, the growing MedKeeper acquisition, and our MedBank acquisition aimed at long-term and non-acute care settings. These initiatives align with the shift towards less acute care environments while ensuring hospitals remain connected in terms of data and inventory management. We believe we're well-positioned in terms of innovation in this space. Growth in this market is cyclical, influenced by capital investments, but we maintain a robust service model and flexible financing options for capital and operating leases, resulting in less volatility compared to some competitors. Our pharmacy automation initiatives through Parata, ROA, and RapidRx have formed what is likely the largest pharmacy automation robotics company globally, generating strong customer interest and reporting high double-digit growth last year. While changes in tax incentives in Europe have caused some slowdown this year, we have seen an increase in orders quarter-over-quarter in both the U.S. and Europe. We are optimistic about the strong fundamentals related to labor efficiency, safety, and the implementation of artificial intelligence and robotics in healthcare, retail, long-term care, and hospital pharmacies. Both connected medication management areas are performing well, especially with Alaris making a strong comeback since we secured clearance a year ago, and the fundamentals of our strategy continue to resonate positively with our customers.
Tom Polen, Chairman, CEO and President
Thanks for the question, David.
David Roman, Analyst
Sorry, may I ask a follow-up here?
Tom Polen, Chairman, CEO and President
Go ahead, David.
David Roman, Analyst
Could you elaborate on the profit and loss comments for next year? It would be helpful to understand how you are thinking about your growth rate, especially as many of the factors you've mentioned relate to macroeconomic trends and end market dynamics that impact you due to your significant market share. What steps can you take to differentiate BD from a performance standpoint, particularly given the expected flat operating expenses? Additionally, what are the assumptions regarding discretionary spending that align with the 10% earnings floor you've indicated for next year? How should we approach the remainder of the profit and loss statement below gross margin?
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Yes, thanks, David. It's Chris. I believe the exciting shift is that we can view Q3 as a sign of what we expect in full year '25, based on my earlier comments. We mentioned that we anticipate exceeding a 25% operating margin in FY '25, which suggests over 100 basis points of improvement, primarily from gross margin. The benefits of BD Excellence will contribute significantly, allowing us to reshape our strategies below gross margin. Our goal with the 10% baseline is to increase investments in R&D and business growth, digital advancements, and commercial activities, among other initiatives. We aim to achieve natural leverage in our G&A space and are progressing toward a global business services model, which will serve as a minor catalyst in '25. This leverage will also help us in the future. We view this approach as a way to extract more value from gross margin, which in turn will facilitate sales growth and reinvestment to support continued expansion and leverage our core infrastructure.
Tom Polen, Chairman, CEO and President
Yes, David, I'd like to add to Chris' insightful comments. As we mentioned in our prepared remarks, we launched BD Excellence last year and are very pleased with its progress. This year, we've conducted over 500 Kaizen events. BD Excellence is inspired by the Shingijutsu Kaizen philosophy, which focuses on achieving excellence through continuous improvement, equipping our team with the necessary tools and capabilities for everyday tasks. These extensive events, including the 500-plus Kaizen activities, have led to reduced waste and enhanced productivity on our production lines. This improved efficiency is reflected in our strong cash flow performance, enabling us to run the company with lower capital expenditures due to these productivity enhancements. Additionally, Project RECODE, which is part of our excellence initiative, aims to consolidate over 20% of our manufacturing plants. While we will see some initial benefits in 2024, we anticipate a significant ramp-up in 2025, which will further enhance our margins. By consolidating to fewer, larger plants, we are also investing in our smart factory strategy. We believe that BD is uniquely positioned to leverage advancements in technology such as AI, predictive analytics, and companion robotics, thanks to our scale of production. We have already digitized many operations, making several areas completely paperless, which allows us to utilize predictive analytics effectively. Our focus has been on optimizing performance in our top 30 plants, and we are integrating our excellence Kaizen approach with our smart factory strategy. This integration will continue to drive our growth strategy, not only in 2025 but will also be a central theme for our Investor Day in the second quarter of 2025, where we will share more insights about our margin enhancement plans for the phase following BD 2025.
Operator, Operator
Our next question will come from Patrick Wood with Morgan Stanley.
Patrick Wood, Analyst
I'll keep it to one, just given the timing. And I appreciate you guys have covered this but I definitely want to dig into China a little bit more because you've had quite a few companies come out across a range of different industries and have a reasonable tough time in the market. So I guess, obviously, the VBP dynamics, we know there's biosciences on that side, as you said, lots of companies flagging on that. I guess my question is like what are you hearing from some of the customers? Have you seen any MDS vol changes outside of stocking? I'm just trying to dig into underlying in the market. Is there anything that you feel has structurally changed? Or are these genuinely transitory dynamics?
Tom Polen, Chairman, CEO and President
Thank you, Patrick, for your question. We have a strong team in China and still consider it a large market with significant unmet needs. We continue to address this market opportunity with our entire portfolio and are investing in improving healthcare access in China. As you noted, value-based pricing has been developing in medical device sales as expected. Interestingly, our volumes in this sector in China have increased significantly. While we do see price pressure in categories affected by value-based pricing, we're also experiencing strong volume growth in those same areas, keeping our plants busy due to the increased demand. The reduced research funding you mentioned is a trend observed industry-wide, but we believe this is a temporary situation that will change as the market recovers and research investment resumes. We don't anticipate a long-term decline in research spending in China. Moreover, broader economic challenges in China have also contributed to some hesitancy among distributors, who may be reducing inventory amid uncertainty. We expect these conditions to improve as the economy stabilizes. We remain committed to investing in the market, viewing it as a key long-term opportunity for us. Additionally, we have segments of our business that are performing very well in China, despite the temporary challenges we are facing. This provides a general overview of our perspective as we look ahead.
Operator, Operator
Our next question will come from Larry Biegelsen with Wells Fargo.
Larry Biegelsen, Analyst
Two quick ones for me and I'll ask them both upfront. On Alaris, the $350 million in fiscal '24 sales implies about a $600 million annual run rate using the implied Q4 sales of about $150 million, if I'm doing the math right, is that the right way to think about fiscal '25 Alaris sales, about $600 million? And just lastly, Chris, the last two years, growth in margins have been very back-end weighted. And obviously, it's caused a lot of investor anxiety, is there any way or do you expect fiscal '25 to look different from a cadence standpoint?
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Larry, thanks for the question. Yes, on the second question but we're still in our planning stance and we need to continue to monitor market dynamics, all these factors. I think the one thing is for sure that the margin rhythm is going to be much more balanced throughout. I mean last year, we had one a strategic choice on inventory takedown that was all front-end loaded, right? That was a predominant driver. The execution this year played out exactly as we talked about. As a matter of fact, the past few years, I mean we've executed against everything we said from a margin standpoint the past two years. So that's a big change. FX also was another big front-end item that we don't see that same degree. So I think naturally, we're going to end up with a much more balanced phasing and we'll share more when we provide our official guide in November. But I don't think that's an item that should be tough.
Tom Polen, Chairman, CEO and President
This year, a significant development was the ramp of Alaris in the second half since we launched it at the end of Q4. As a result, we expect much more consistent performance from Alaris throughout Q1 to Q4 next year. We anticipate smoother outcomes moving forward, and we're eager to return to that stability. Regarding Alaris, we won't provide specific guidance by product line for 2024, as we're not ready for that. I wouldn't suggest using the current run rate to project into 2025. However, I can say that we've returned to at least the historical run rate of $100 million, and there’s certainly potential to exceed that as we approach 2025. We'll share more details in our November call.
Operator, Operator
Our next question will come from Rick Wise with Stifel.
Rick Wise, Analyst
Maybe back to the fiscal '25 guidance. I want to ensure I'm understanding it correctly. It's been discussed multiple times, but I would like to hear your explanation once more. The 25% EPS growth commentary and the operating margin for over 25% clearly include Critical Care, if I understand correctly. But doesn't that suggest that everything else on a total basis might not grow as quickly in fiscal '25 as it has in '24? If I'm thinking about this correctly, perhaps I’m just too immersed in earnings season and not seeing it clearly. Does this imply that you are being conservative or cautious in this initial commentary? I just want to ensure we're on the same page.
Chris DelOrefice, Executive Vice President and Chief Financial Officer
Thank you for the question, Rick. There's a lot to be excited about for 2025. While Critical Care is part of our focus, it should be noted that it doesn't significantly contribute to our margins, which are primarily derived from our core business. We believe we are well positioned to surpass our goal of a 25% operating margin. The source of our margin improvement will be from gross margin changes. Current external estimates are just under 9%, and we aim for at least 10% reported, which is a solid starting point that exceeds external expectations. As we do each year, our goal is to create opportunities to exceed these estimates throughout the year; it's still early. We wanted to provide this context as we've managed to deliver strong performance despite market conditions. We will keep monitoring the situation but feel confident as we head into 2025.
Operator, Operator
Our last question will come from Vijay Kumar with Evercore ISI.
Vijay Kumar, Analyst
I have just one question. Some of the issues you've mentioned, particularly on the pharmaceutical side, are also being discussed by your close competitors regarding destocking reaching a bottom. From your perspective, how do you see the impact of this destocking? When considering transitory issues such as China, bioscience, and pharmaceutical destocking, it seems like biosciences will continue to face headwinds. Most tool companies appear to be cautious about the first half of 2025. How should we view the situation in China? Do you expect it to return to growth, or are the VBP headwinds likely to persist for some time?
Tom Polen, Chairman, CEO and President
That's a great question, Vijay. Let me start with biosciences and then discuss Pharm Systems and China. Regarding biosciences, as you mentioned, it's been widely noted among tool companies that we expect to outperform the market this year. It's clear that we are among the few in that space seeing no decline. In our prepared remarks, we shared some exciting innovations we anticipate will drive our success. These innovations, such as FACSDiscover, along with our continued flow of new technologies, including next year's launch of our first analyzer in that segment and advancements in dies and other technologies for increased multiplexing, should benefit us as the market improves and larger volumes of systems are purchased. We are optimistic about this, but the timing of the recovery is crucial. As you pointed out, we expect challenging conditions to persist through the rest of this year, influencing our updated guidance. We anticipate providing more detailed guidance for 2025 in November based on our observations of Q4. Regarding Pharm Systems, we continue to see strong demand in biologics, which sets us apart from our peers, with double-digit growth in that area. There is no indication of a slowdown, especially with GLP-1 drugs playing a significant role. Our established positions in substantial market molecules are beneficial, and we are positioned with several new GLP-1s set to launch, with our devices already specified. Additionally, we have signed over 40 agreements for biosimilar GLP-1s, with launches possibly occurring within the next 12 months, contributing to longer-term growth. However, the destocking trend that many in our sector are experiencing centers on the anticoagulant and vaccine segments. This situation cannot persist indefinitely, and we expect a return to more normalized growth as we approach FY 2025. We will provide more specific timing details in future guidance, but we anticipate growth will begin to normalize in the latter half of the year. On China, we do not anticipate a rapid return to high growth next year as we aim for our target of double-digit EPS growth. We have adopted a conservative view in our internal projections and will monitor the market closely moving forward. We are particularly interested in biopharma research spending in China and the overall macroeconomic recovery, which will play a vital role in our assessments. Regarding MDS, we do not expect significant changes in the timing for the decline in VBP. The situation has unfolded as anticipated this year, and we foresee less pressure in MDS from VBP in China next year compared to this year. There will be more insights on China as we approach guidance updates, but this should provide some context on our preliminary thinking regarding next year's EPS figures.
Operator, Operator
Thank you. That concludes today's question-and-answer session. At this time, I'd like to turn the floor back over to Tom Polen for any additional or closing remarks.
Tom Polen, Chairman, CEO and President
Okay. Thank you, operator and thank you to all of our investors for joining us on our call today. We are pleased to deliver strong, above-market, broad-based growth and are well positioned to achieve our increased FY '24 earnings guidance. As we look ahead to FY '25, we are excited by multiple growth opportunities across our portfolio, momentum in BD Excellence, driving continued strength in gross margins and cash flow and welcoming the Critical Care team to BD. We look forward to connecting with everyone again in November and thank you for your continued support of BD. Thank you, operator.
Operator, Operator
Thank you. This does conclude this audio webcast. On behalf of BD, thank you for joining today. Please disconnect your lines at this time and have a wonderful day.