Earnings Call Transcript - BDX Q1 2025

Operator, Operator

Good day, everyone. Welcome to today's Conference Call to discuss BD's First Quarter Fiscal 2025 Earnings and BD's announcement of its intent to separate BD's Biosciences and Diagnostic Solutions Business from the Rest of BD. At the request of BD, today's call is being recorded and will be available for replay on BD's Investor Relations website, investors.bd.com or by phone at 1-800-839-2486 for domestic calls and area code 402-220-7223 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 Mr. Greg Rodetis, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead, sir.

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. We have a lot of exciting news to discuss today. Yesterday afternoon, we issued two press releases that first discusses our first quarter results of fiscal 2025. The second announces our intention to separate BD's Biosciences and Diagnostics Solutions business. The press releases and accompanying presentations can be accessed on the IR website at investors.bd.com. For the purposes of today's call, we have posted a combined presentation, and we'll be providing slide reference cues to assist you in following along with our prepared remarks. In connection with the separation announcement, the company has decided to postpone its Investor Day previously scheduled for February 26, 2025, to allow BD to focus on the transaction. The company expects to provide a comprehensive update on strategy and outlook in the future closer to the separation. 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; Mike Feld, President of the Life Sciences 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 made 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 presentations. With that, let's turn to Slide 5, and I am very pleased to turn it over to Tom.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks, Greg, and good morning, everyone. We have a number of significant updates to share on how we are creating value through our BD 2025 strategy. This includes yesterday's announcement of the planned separation of our Biosciences and Diagnostics Solutions business, our strong Q1 results, updated fiscal 2025 guidance, and progress on our innovation pipeline. So, let's jump right in. Starting with our Q1 results. We continued to demonstrate strong execution, exceeding each of our financial goals. This includes 9.6% revenue growth or 3.9% organic; we delivered 370 basis points and 340 basis points of adjusted gross and operating margin expansion, respectively; and 28% growth in adjusted diluted EPS to $3.43. Chris will provide more color on our Q1 results, but I'd like to take a moment to thank our team whose execution and momentum of BD Excellence is powering continued strong margin expansion, earnings and cash flow performance. We returned over $1 billion to shareholders in Q1. This includes $300 million in dividends and a $750 million accelerated share buyback, which we see as a value-creating action based on our view of BD's intrinsic value. With strong operational performance in Q1 and confidence in the year, we affirmed our full year currency-neutral and organic revenue growth guidance. Our Q1 outperformance enables us to derisk growth expectations for the second half and also raise the midpoint of our reported EPS guidance despite incremental translational currency impacts. Moving to Slide 6. Innovation is core to our growth strategy and we continue to make strong progress against our pipeline. I'd like to share an update on some key milestones. In BD Medical, we continue to progress our Connected Care strategy, and, as planned, submitted the next 510(k) for our BD Alaris Infusion System, that enables over-the-air software updates and includes a new EtCO2 module. BD Alaris is the only infusion system with an integrated EtCO2 module, enhancing patient safety by monitoring their respiratory system and pausing the pump when necessary to reduce the risk of opioid overdose. The pace and impact of innovation also continues to be strong in advanced patient monitoring, where we received 510(k) clearance on the next-gen HemoSphere Alta Monitor and the new Swan IQ and ForeSight IQ smart sensors. In BDI, we continue to advance our strategy in advanced tissue regeneration and expand into new applications. Most recently, we received EU approval for the prevention of incisional hernias using the Phasix resorbable mesh. This makes Phasix the first resorbable mesh with a broad indication for preventing incisional hernias. Our US trial remains underway. We also enrolled the first patients in our GalaFLEX capsular contraction prevention clinical trial. This product is BD's first in a series of new innovations using our resorbable biomaterial to improve outcomes in patients undergoing breast surgery. Finally, in Life Sciences, we continued to advance our strong cycle of innovation and remain on track to launch the first BD FACSDiscover Analyzer, the A8, in the second half of this fiscal year. Additionally, in our molecular diagnostics portfolio, we're continuing to advance our position in the $2 billion high-volume molecular testing market. Our BD Onclarity HPV Assay is the only test with extended genotyping to be FDA-approved for self-collection and we're seeing accelerating sales funnel momentum as a result of recent changes in US cervical cancer screening guidelines and increased US reimbursement. Before I turn it over to Chris to provide further color on our financials and outlook, I want to again express my appreciation of our team's strong work in advancing our BD 2025 strategy, a strong quarter and for what's ahead. Chris?

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Thanks, Tom. Echoing Tom's comments, I'm truly excited about our plan to separate Biosciences and Diagnostic Solutions. It's an exciting next step in our strategy that we believe can unlock significant value for both New BD and Biosciences and Diagnostic Solutions. Both businesses will be positioned to thrive in their respective markets and deliver value for all stakeholders, shareholders, employees, and of course, our customers and the patients they serve. Let me start on Slide 7 and our Q1 results. Strong execution drove revenue, margin and earnings ahead of our expectations. Q1 revenue grew 9.6% or 3.9% organic. Organic growth was led by our MedTech business with about 5% growth, driven by volumes and share gains across core devices and strong performance in our growth platforms, including double-digit growth in PureWick, Peripheral Vascular Disease and Phasix. Diagnostic Solutions grew modestly as strength in Lab Automation and momentum in BD MAX molecular platform IVD assays was partially offset by respiratory season timing. Q1 performance also reflects the expected decline in Biosciences, given market dynamics, the reduced research funding in China and the US. Regionally, total company organic growth was led by strong performance in the US and was partially offset by the decrease in China, predominantly in Biosciences. To allow time to share our perspective on the separation of Biosciences and Diagnostic Solutions and have sufficient time for Q&A, please refer to the slides accompanying today's call for additional performance details by segment. Turning to our P&L results. Q1 adjusted diluted EPS of $3.43 grew 28%, driven by strong operational performance ahead of our expectations and the timing of a discrete tax item that was contemplated in our full year tax rate. Consistent with our commitments, we delivered strong margin to start the year with adjusted gross margin of 54.8% and adjusted operating margin of 23.6%, up 370 basis points and 340 basis points year-over-year, respectively, both ahead of our expectations and fueled by momentum in BD Excellence. Strong margin performance continued to enable outsized investments in selling and R&D to drive growth. Regarding cash and capital allocation, free cash flow of approximately $600 million was in-line with our expectations and was impacted by the timing of planned one-time cash payments. Full year cash flow continues to be in line with our prior expectations. In the quarter, we returned over $1 billion to shareholders, including dividends and a $750 million accelerated share repurchase. Cash and short-term investments at December 31st totaled $728 million. We ended the quarter with net leverage of 2.9 times, and are on track to meet our deleveraging commitments. Turning to Slide 8 and our updated fiscal '25 guidance. As we look ahead to the balance of the year, we remain focused on driving areas of momentum and continue to monitor transitory market dynamics, notably in China and biosciences research funding levels. We are maintaining our currency-neutral total and organic revenue growth guidance. Regarding foreign currency, based on current spot rates for illustrative purposes, we expect a headwind to revenue from translational currency of approximately $250 million for the full fiscal year, which is an increase of approximately $200 million from our prior guidance view. As a result, we now expect fiscal 2025 total revenues to be in a range of $21.7 billion to $21.9 billion. For tax, we now expect our adjusted effective tax rate to be between 14% and 15.25%. On the strength of our Q1 performance, particularly our margin execution and our confidence in the full year, we are increasing the midpoint of our fiscal 2025 adjusted reported EPS guidance. We now expect adjusted reported EPS of $14.30 to $14.60, which reflects growth of 10% at the midpoint. Our updated EPS guidance reflects an operational increase of $0.175 that is absorbing $0.15 of estimated incremental translational currency. As you think about phasing over the balance of fiscal '25, the following are some considerations. Q1 revenue performance allows us to further derisk our second half growth by about 25 basis points. Our expectation for the first half organic revenue growth remains largely unchanged versus our prior expectations with some timing of revenues shifted into Q1. As a reminder, Q2 includes the comparison to prior-year licensing revenue, which creates a headwind of nearly 150 basis points. Excluding licensing, our Q2 organic revenue growth expectation reflects sequential acceleration that is around the midpoint of our full year organic guidance range. We expect strong gross and operating margins in Q2, with solid sequential improvement in adjusted operating margin or about flat year-over-year, inclusive of absorbing the planned licensing comparison. Our updated expectation for Q2 adjusted EPS reflects timing impacts from our updated translational FX assumptions, and a tax rate of about 16.8%, which assumes a ratable rest of year tax rate. In summary, our strategy is demonstrating strong momentum and we are delivering on our commitments. I will now turn it back to Tom, starting on Slide 10, to provide further detail on the exciting news announcing our intention to separate our Biosciences and Diagnostics Solutions business.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you, Chris. Building off our strong performance in the quarter, I'd like to share more details about our plan to separate BD's Biosciences and Diagnostics Solutions business to enhance strategic focus, drive growth through targeted capital deployment and unlock significant value for what will become the New BD and the separated business. This separation decision was the result of a comprehensive business portfolio evaluation launched in early 2024, and this is the next natural step of our evolution, building on the strong foundation and momentum of BD 2025 and the high-growth platforms we've built and have been scaling. The New BD will be well-positioned as a pure-play MedTech company with leading positions in large attractive end markets. With this added focus, we're excited about the opportunity for New BD to drive concentrated capital deployment in high-impact R&D as well as growth-accretive M&A, which positions us to deliver differentiated and durable growth rates in MedTech. At the same time, we're also excited about the opportunity for Biosciences and Diagnostics Solutions to realize its full market potential as a pure-play leader in Life Sciences Tools & Diagnostics, continuing to accelerate growth through its strong innovation pipeline and industry-leading solutions. As we turn to Slide 11, let me start by setting some context on why this is the next natural step in our evolution, building on the strong foundation and momentum of BD 2025. Over the past five years, we've been transforming into a faster-growing, more profitable organization, positioned at the forefront of long-term growth trends. We've been systematically increasing our WAMGR and long-term growth by intentionally shifting our portfolio mix towards higher-growth markets and executing against a strong innovation pipeline. In fact, by the end of this year, we're on track to have more than doubled new product revenue since the launch of BD 2025. We established and honed our M&A and divestiture capabilities, deploying about $7 billion in capital to complete 20 value-creating transactions since 2020. These include the spin-off of Embecta, the sale of our surgical instruments business, V. Mueller, and the acquisitions of the Edwards Lifesciences' Critical Care Product Group, Parata Systems, Straub Medical, Tepha and others. We created an embedded BD Excellence, simplifying our operations and enabling us to deliver on aggressive long-term margin expansion targets. Through our disciplined capital deployment strategy, we've built significant balance sheet capacity and strengthened cash flows, allowing us to both invest in our business and return capital to shareholders through competitive dividends, value-creating tuck-in M&A and share repurchases. This was all achieved while advancing our quality systems and putting customer-centricity at the heart of how we plan and operate throughout BD. We've achieved 70% reduction in non-conformances and a 25% reduction in field actions since launching BD 2025. Moving on to Slide 12. We have also built and have been scaling multiple new growth platforms as part of BD 2025. These platforms are directly linked to the most critical areas of healthcare, such as Connected Care, new care settings, and addressing chronic diseases, and are some of the platforms which will reshape our growth profile for the long-term. Over 25% of BD revenue now comes from platforms that are growing high-single-digits or more, and this is just the beginning as we continue to expand our exposure to higher-growth categories. Moving to Slide 13. We are well on track to exceed every financial target established at our 2021 Analyst Day, and we have outperformed historical averages. In November 2021, we targeted a base organic revenue CAGR of 5.5%-plus through 2025. Based on the midpoint of this year's guidance, we expect to deliver 5.9%. We targeted an increase of base operating margins by 400 basis points through 2025. And in fiscal year 2022, we increased the target to 540 basis points. We are on track to deliver 560 basis points of margin expansion to margins of 25%-plus. We also targeted double-digit base adjusted EPS CAGR and now expect to be well over double-digits at 13.8%. On to Slide 14. This track record creates momentum as we move into our next phase of value-creation and positions both New BD and the Biosciences and Diagnostic Solutions business to focus and win in attractive growth categories. Let me start by sharing a perspective on the profile of the New BD. The new company will be a MedTech leader with scale and global reach across the $70 billion-plus addressable market, growing at about 5%. Each day, New BD will touch more patients than any other MedTech company in the world, including over 90% of patients admitted to a US hospital. We expect New BD will have an accelerating growth profile, attractive margins and a best-in-class recurring revenue profile of over 90%. The separation will also enable enhanced focus, with targeted investment and a tailored capital deployment strategy towards attractive high-growth categories. This will be complemented by our strong execution, driving continued margin expansion and cash generation through BD Excellence. As I look over at the Biosciences and Diagnostic Solutions business, it's expected to be a leader across an attractive $22 billion-plus addressable market, growing at mid- to high-single-digits. We expect the business to have a highly attractive growth and margin profile with more than 80% recurring revenue. We will also have an opportunity to further accelerate its strong innovation pipeline in markets with significant growth potential and realize its full market potential as a pure-play Life Science Tools & Diagnostics business. Turning to Slide 15, let's go deeper on the New BD, a $17.8 billion MedTech leader. On to Slide 16. We plan to organize New BD into four operating segments, each being market leaders in attractive end markets with significant headroom for growth. First, Medical Essentials will consist of our Medication Delivery Solutions and Specimen Management businesses that truly represent the backbone of healthcare delivery. These are our products such as IV catheters, PICCs, flush, syringes, IV sets and blood collection systems. We are the market leader in each of these spaces, manufacturing tens of billions of devices each year, resulting in durable recurring revenue and strong cash generation. Second, Connected Care will include our Medication Management Solutions business, which includes our pharmacy automation platform, and our advanced patient monitoring business, with millions of smart devices that use automation, artificial intelligence and analytics to improve the efficiency and effectiveness of patient care and creates compelling growth potential in new areas. Third, BioPharma Systems will bring a new name and increased focus to our Pharmaceutical Systems business unit, which is the global leader in biologic drug delivery, developing and manufacturing drug delivery devices for the pharmaceutical industry. BioPharma Systems is uniquely positioned to enable the transition to more biologics, including GLP-1 treatments, and capitalize on the large growth potential of pharmaceutical industry trends as more drug launches rely on patient self-injection. Fourth is the Interventional segment, which will include our Urology & Critical Care, Peripheral Intervention and Surgery businesses that advance the treatment of high-burden chronic conditions such as urinary incontinence, peripheral vascular disease, cancer and tissue reconstruction, all of which are high-growth categories with attractive margin profiles and meaningful headroom for new innovation. We will share more about timing of this new segment structure as we near completion of the transaction. On to Slide 17. We have an exciting and robust innovation pipeline across the New BD segments with a significant number of $50 million-plus revenue opportunities, fueling above-market performance. The New BD will have a meaningful runway for additional new innovation and growth both organically and through growth accretive tuck-in M&A. In conclusion, as we turn to Slide 18, New BD will deliver a durable and differentiated mid-single-digit growth profile, supported by attractive end markets and best-in-class recurring revenue. We will continue to systematically increase WAMGR through disciplined capital allocation and our BD Excellence operating system will continue to enable investments in growth and meaningful margin expansion with the majority being realized from gross margin. And our targeted financial profile will support strong earnings growth and value creation. Let's move to Biosciences and Diagnostic Solutions on Slide 19. We are excited by the opportunity this separation has to unlock meaningful value for customers, the business and shareholders. Turning to Slide 20, the opportunity here is an attractive $22 billion-plus addressable segment. The businesses have strong portfolios and pipelines and are positioned well for growth. Biosciences and Diagnostic Solutions operate in a market growing mid- to high-single-digits with more than 80% recurring revenue and expected 30% adjusted EBITDA margins. Now, turning to Slide 21. Each of these businesses are leaders in large attractive markets. Biosciences had $1.5 billion in FY '24 revenue, addressing a $7 billion-plus market with 6% to 7% category growth. Diagnostic Solutions had $1.8 billion in FY '24, addressing a $15 billion-plus market with about 6% to 7% category growth. As we turn to Slide 22, Biosciences is the undisputed pioneer that created the modern field of flow cytometry, helping scientists revolutionize our understanding of cell biology in the fields of cancer, infectious disease and immune health, and enabling countless breakthrough therapies. Scientists and clinicians around the world continue to rely on our flow cytometry platforms and reagents to enable the next generation of discoveries, including through our new FACSDiscover flow cytometry platform. Biosciences has a very strong innovation pipeline of future FACSDiscover instruments, new antibodies, dyes and assays. This includes continuing to scale our single-cell multiomics platforms with a significant increase in commercial headcount to support strong double-digit growth. Moving to Diagnostic Solutions, this business is a pioneer in microbiology research and clinical diagnostics with multiple world firsts in advancing the diagnosis of conditions such as sepsis, TB, COVID and other infections, and in applying robotics and AI to advance infectious disease testing. This primarily comprised of our microbiology and molecular diagnostics platforms, which both have strong innovation pipelines. Our molecular portfolio is among the leaders in the high-growth molecular market and is anchored by the BD COR high-throughput and BD MAX medium-throughput systems. Our BD COR plus our Onclarity HPV assays offer a complete paradigm shift in cervical cancer screening, and it starts with the ease of self-collection. Overall, this business is well-positioned to create value under multiple types of separation structures where the investments and deployment of capital are entirely focused on the life science industry. Turning to Slide 23, now I want to talk more about the milestones of the separation. Moving into Slide 24. In terms of the form the separation could take, we are committed to exploring all opportunities to execute the separation in a manner that maximizes shareholder value. Separation options include a Reverse Morris Trust, sale, spin-off or other transaction. We expect to announce more specifics on the separation plans by the end of fiscal 2025 and are targeting to complete the transaction in fiscal 2026. As the company pursues the separation, we will remain focused on execution and continuing to operate the Biosciences and Diagnostic Solutions businesses and the other BD businesses consistent with our BD 2025 strategy, including continued investments in commercial growth, innovation, M&A and other initiatives that are part of the company's multi-year strategic operating plan. Finally, turning to Slide 25, we are excited about what the future holds for New BD and the Biosciences and Diagnostics Solutions businesses as we establish two strategically aligned entities with mission-critical portfolios to maximize impact. In summary, we believe the separation has the potential to unlock value through simplification, enhanced focus and tailored investment in capital allocation. We believe New BD will have an enhanced strategic focus and growth-oriented portfolio that positions the company for long-term value creation. And as a pure-play Life Sciences Tools & Diagnostics business, we believe Biosciences and Diagnostics Solutions will realize its full market potential while continuing to accelerate growth. In the meantime, we continue to execute against our fiscal year 2025 plan, as seen in our Q1 performance. Thank you for joining and for your continued interest and support. I look forward to our next chapter and to sharing more specific details upon formalizing the form of the transaction that involves BDI. With that, we'll open it up to questions.

Operator, Operator

Thank you. We'll go first this morning to Travis Steed of Bank of America.

Travis Steed, Analyst

Hi, congrats on the spin.

Tom Polen, Chairman, Chief Executive Officer and President

Good morning, Travis.

Travis Steed, Analyst

Hey, good morning. Congrats on the spin. I guess, one question for Tom on the spin. Why now? How you're thinking about the different separation options, spin versus sell? And how you manage the dissynergies? And then, Chris, wanted to ask on the Q2 guide. Looks like 2.75% on revenue, but you've got the 150 basis point licensing headwind. And there is still the 50 basis points to 75 basis points from China Pharm Systems? Just trying to get the kind of the true underlying growth on Q2. Thank you.

Tom Polen, Chairman, Chief Executive Officer and President

Hey, thanks, Travis. I'll start, and then, turn it to Chris. So, obviously, we're really excited about both the performance in Q1 as well as the announcement today on the New BD and the separation and the opportunities ahead for our Life Science business. Just as we step back, this process started in the first half of FY '24, as we really took time to reflect on the strong progress that we've had been making against our BD 2025 strategy as we were coming into our last year. As I discussed on the call, BD 2025 has really transformed BD into a faster-growing portfolio, more profitable organization positioned at the forefront of multiple long-term growth trends. And those are, obviously, indicated by a number of the new growth platforms that we've built, whether or not that's our advanced patient monitoring business, our urinary incontinence business, peripheral vascular, our tissue reconstruction business that we've built, biologics drug delivery, which we are now the world leader in, and pharmacy automation. At the same time, of course, over the last several years, we created and have embedded BD Excellence across the company and you're seeing over the last number of quarters how that's impacting accelerated gross margin performance and cash generation. And this quarter was certainly no exception to that with very strong performance in that camp. And so, as we reflected on that, we've looked at how we've meaningfully increased the intrinsic value of the company through execution of that strategy and looked at ways that we could further unlock that in the next phase. And we believe that the separation that we're announcing today, we're extremely excited about this as a next step in unlocking significant value for all of our stakeholders. We believe that the separation both positions New BD as a scaled pure-play MedTech leader with leading positions in large attractive markets. We see this as the added focus creating an exciting opportunity for New BD to drive concentrated investments, not only in high-impact R&D, but continued disciplined capital allocation that's allowing us to continue accretive growth and value-creating transactions, perhaps even in an accelerated way as we move forward, all while continuing exceptional progress on our margins and cash generation that will fuel that as well. At the same time, right, BDB and DS are operating from a position of strength, right? This is a decision based on portfolio and really a tremendous opportunity we see to unlock value from these great businesses to create pure-play Life Science Tools & Diagnostics leaders across the large $22 billion market growing mid- to high-single-digits with a very attractive revenue and margin profiles. So, in terms of the form that the transaction will take place, obviously, that's still to be determined, and we'll share more information as that advances, which we described should be by the end of FY '25. Key is we're open to the transaction formats that best maximize shareholder value creation. That's our number one decision criteria, and we'll keep that at the top of our mind as we go through that process.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Yeah. And Travis, on the question on sales in Q2, maybe just bigger picture on top-line performance. One, it was great to see outperformance in Q1. So, really strong start to the year where we're exiting ahead of our plan. If everyone recalls kind of at the start of the year, there were some questions about the ramp. So, a couple of things. It's nicely derisked the remaining portion of the year in each quarter, the second half, by about 25 basis points. So, I think you have a much more balanced top-line profile first half to second half. As you think about Q2, you called it out. I mean, think of it as a very discrete one-time kind of headwind with the prior year licensing comp. If you take that out, we're right at the midpoint of our guidance at 4.25%. And if you think of that more broadly, you do have those market dynamics that are still playing out in the first half of the year, most notably in China, BDB, a little bit in Pharm Systems. Those are directionally worth about that 125 basis points for the year. It's probably similar in that range in the quarter. So, it puts kind of the core business then operating at sort of a 5%-plus level. So, right in line, if not ahead of plan and a more derisked revenue profile that we feel good about.

Tom Polen, Chairman, Chief Executive Officer and President

Thanks, Travis.

Larry Biegelsen, Analyst

Good morning. Thanks for taking the question, and congrats on the separation announcement. Hey, Tom, I'd love to get your thoughts on the tariffs and the export controls that were announced. So, the 10% China tariff, I think, went into effect. And then, if the 25% tariff on Mexico and Canada go into effect, what would be the impact on BD and your ability to offset that? Thanks for taking the question.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you for the question, Larry. Our primary manufacturing presence is in North America, especially in the US, which is our largest market. Mexico plays a significant role after that, followed by Europe and Asia. It was encouraging to witness progress in discussions among leaders from the US, Mexico, and Canada that led to a temporary resolution regarding tariffs this past week. We are closely monitoring this situation, particularly any future tariffs that might exempt medical devices to avoid potential shortages, mitigate negative impacts on healthcare costs, and safeguard public health. Currently, there is no confirmation regarding the specifics or timing of any potential tariffs, and we will continue to track this closely to assess any impacts when more information becomes available. It's still early, and we are managing this attentively.

Larry Biegelsen, Analyst

Thank you.

Patrick Wood, Analyst

Thank you for taking my question, and congratulations on the separation. If you decide to pursue a sale and receive a cash injection, are there specific areas where you would like to increase investment or parts of the business where additional funding could be beneficial? Additionally, once the process is complete, will there be areas where your team will have more time to focus? Are there aspects of the business that you wish you could have devoted more attention to in the past? I would love to hear your thoughts. Thank you.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you for the question, Patrick. To address your point about priority, let's start with the last part of your inquiry. Our various businesses have been performing exceptionally well compared to both the markets and peers in their respective sectors. Each of our core medical, interventional, and life science businesses is achieving growth rates at or above those of their markets and peer groups. We are very confident in our performance. While some markets are in different stages of their cycles, such as research spending, we have been managing through those changes effectively in light of the overall market growth and peer performance. From a capital allocation standpoint, we prioritize high-growth and accretive opportunities, as evidenced by our capital deployment strategy over the past few years. Our Interventional segment holds numerous significant market opportunities that we intend to capitalize on. We are also focusing on accelerating our R&D efforts to ensure we fully leverage the potential of our new product launches. We've introduced some exciting products recently and have many more planned in areas such as advanced procedure management, incontinence, biologics, wearables, surgery, and peripheral vascular. Our goal is to maximize growth in our current sectors while continuing to steer our portfolio toward higher growth and higher margin opportunities. We are fortunate to be in attractive markets where we have a competitive advantage and are excited about our future prospects.

Patrick Wood, Analyst

Great stuff. Thank you so much.

Operator, Operator

Thank you. We go next now to Matt Taylor of Jefferies.

Matt Taylor, Analyst

Great. Thanks for taking...

Tom Polen, Chairman, Chief Executive Officer and President

Matt, good morning.

Matt Taylor, Analyst

Hey, good morning. So, the question I wanted to ask was really on the operational performance. A nice start to the year. And with the FX headwinds, you weren't able to raise guidance as much as maybe the performance deserved. I know you called out the ongoing headwinds from China and some of the funding that we've seen. And I was just hoping that you could give us some color on that. I know you didn't change the number, but maybe just talk about the trend in China and some of the headwinds that you've been seeing.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Thank you for the question. Let me start with a broader perspective regarding Q1 and our guidance. We had a strong beginning to the year and are ahead of our plans, surpassing all of our financial metrics. Initially, we addressed concerns about our growth ramp, and we are reducing risks for the second half by 25 basis points, with some adjustments for Q2 as well. This creates a smoother path for top-line growth throughout the year. The market dynamics are unfolding as anticipated, and we will continue to monitor these areas closely. Additionally, our profit and loss statement reflects exceptional quality, with an operating income and a gross margin of 54.8%, increasing by 378 basis points and exceeding last year's exit point. This demonstrates the expected benefits from our business development excellence, with even stronger performance than planned. This success has led to robust operating income and earnings per share, prompting us to raise our operational EPS by nearly $0.18 at the midpoint. Regarding translational foreign exchange effects, we have managed this well; it impacts our earnings by over a full point. Despite these challenges, we are achieving strong double-digit EPS growth of 10% at the midpoint. Overall, it has been a solid start to the year, we have increased our guidance at the midpoint, and we are committed to executing our plans.

Tom Polen, Chairman, Chief Executive Officer and President

And maybe for China, let me turn it to Mike Feld to make some comments there.

Mike Feld, President of the Life Sciences Segment

Thank you, Tom. As many of you I'm sure have read, our high-end FACSDiscover platform was recently impacted by a ban as it directly targets spectral analyzers and analyzers with 26-plus colors. That said, it is important to remember that while the FACSDiscover portfolio is our newest offering, we do have the most robust lineup of flow cytometers in the world with many models that are not impacted by this ban. The ban also does not impact our clinical and research reagent portfolio or our clinical instrumentation offering anchored by our FACSLyric platform. Additionally, while we appreciate the US government's national security concerns, we believe the previous administration erred in its risk assessment in this case, and we are actively engaging with policymakers during the 60-day commentary period to advocate for a different approach tied to this ban. While not material at the BDX level, this ban was unplanned. We will continue to give updates related to this matter once we know more post the conclusion of the commentary period.

Tom Polen, Chairman, Chief Executive Officer and President

Okay. Thanks, Mike.

Matt Taylor, Analyst

Great color.

David Roman, Analyst

Thank you, and good morning, everybody. I wanted just to dive in a little bit more on some of the end market performance here and what you're just observing as things evolve. I think for some of the sort of problem children businesses that you saw last year, whether that was Pharm Systems, Biosciences, China, you contemplated no improvement in the '25 guidance, but as we kind of start the year, it looks like both Biosciences and Pharmaceutical Systems deteriorated from where you exited 2024. So, maybe you could just give us an update on what's happening in these categories and the extent to which you think you can get back to consistent performance at least what you saw in '24 and which would imply an improvement to the balance of this year?

Tom Polen, Chairman, Chief Executive Officer and President

Thank you for the question, David. I will start with BDB and then discuss Pharm Systems. In Biosciences, we did not observe a decrease in research spending at the beginning of fiscal year 2024. This was a factor we anticipated, leading to more challenging comparisons in the first half of this year, contributing significantly to our performance as we faced easier comparisons in the second half, supported by the strength of our pipeline in BDB. We experienced a delayed impact from the decrease in research spending, lagging by approximately six to twelve months compared to our peers, due to the robustness of our funnel. Consequently, the key issue here is the timing of the recovery in research spending. We maintain a cautious perspective regarding this, and our budget for the year reflects that outlook. We will closely monitor this situation, particularly in the US and China, where we have noticed the effects of the slowdown in research spending. We are well-positioned to benefit when these markets recover, which is our current focus. In Pharm Systems, we anticipate a recovery in the latter half of this year. As you may have noticed, several companies have reported ongoing destocking, especially in the vaccine sector, due to a slower uptake of vaccines in various areas this past year. These trends are seen throughout the market. We continue to be in a strong position in the biologic sector, particularly with GLP-1s; we now have over 50 GLP-1 biosimilar contracts. We are making considerable progress in securing new molecules and, over the past few years, approximately 80% of approved biologic drugs have been incorporated into our BD devices. This figure remains high, even with the recent approvals. We are focused on capitalizing on market recoveries, and we are confident in our ability to leverage our position. The timing of these recoveries is as I have outlined. Thank you, David.

David Roman, Analyst

Thank you.

Robbie Marcus, Analyst

Great. Good morning, and congrats on this announcement. I'm sure there's been a lot of work put behind it. Either Chris or Tom, you talk about in the slides the desire, this will allow for better streamline and focused capital allocation. Maybe you could give us some examples of how you're thinking about what that might entail versus the limitations as a combined company today? Thanks a lot.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you for your question, Robbie, and I appreciate your comments. Looking at our businesses, I want to start with Life Sciences, where we have a strong presence in several attractive markets. In the area of immunology research, particularly regarding cell therapy and immuno-oncology, we hold a leading position. As we consider investments in related fields, such as single-cell analysis, we are exploring opportunities to enhance our growth in that area. Similarly, in the infectious disease sector and related fields like oncology screening, we maintain a leading role in HPV screening. However, we haven't been allocating significant capital to these areas recently. Over the last decade, we have invested around $43 billion in mergers and acquisitions, with most of that, $36 billion, going into the acquisitions of Bard and CareFusion, along with Advanced Patient Monitoring, Parata, and other smaller acquisitions. Most of our capital efforts have been focused on strengthening our MedTech segment. Despite this, two of our three highest R&D spending businesses are Diagnostics and Biosciences, where we've been investing organically. There are certainly opportunities for this business to accelerate capital growth as a standalone entity, given the attractive markets and core operations we are involved in. Regarding New Business Development, as I've shared earlier, we are now focused on several promising areas, and our ability to shift our portfolio—both organically and through smaller M&A—toward higher-growth sectors is a significant opportunity that this transaction presents. We're excited about this focus and believe we have a strong portfolio across the four segments we've identified. Not only do we see compelling growth opportunities, but we also have a unique cash flow generation model with over 90% recurring revenue. Our BD Excellence initiative aims to expand gross margins, which will enhance both cash flow and operational margin, allowing us to reinvest in further growth. We believe both sectors are positioned well to unlock new forms of value.

Robbie Marcus, Analyst

Appreciate it. Thanks a lot.

Joanne Wuensch, Analyst

Good morning. Thank you for taking the question. Two brief ones. I want to make sure I understand the EPS gating for the remainder of the year, particularly with the lower tax rate in the first quarter and how that blends out for the remaining of the year? And then, I just want a few comments, if you can, on how Critical Care is being integrated and what you're seeing from those early days? Thanks.

Chris DelOrefice, Executive Vice President and Chief Financial Officer

Thank you, Joanne. Regarding the EPS guidance, the strength we experienced in Q1 is already reflected in our updated guidance. We have a roughly $0.18 increase at the midpoint of the guidance based on operational performance. Looking ahead, our core operating plan remains unchanged, with a bit of a derisking of the top-line. There are two main elements to consider: first, the translational foreign exchange impact on the top-line, which will be consistent over the next three quarters, with Q2 being the highest. We previously mentioned an estimated impact of about $250 million. Secondly, we slightly reduced our tax rate by 0.25 points for the full year due to a favorable discrete item in Q1. I suggest spreading the remaining tax rate evenly over the rest of the quarters. Although there may be other discrete items that arise, they will lead to a higher average tax rate in the latter half of the year, which I estimate to be around 16.8%. In summary, the operating strength from Q1 is included in our guidance, and we just need to adjust for the translational FX and the tax rate for the second half, resulting in a lower risk sales growth outlook.

Tom Polen, Chairman, Chief Executive Officer and President

And Joanne, great question on APM. We're off to a fantastic start with the APM part of BD. The past quarter grew high-single-digits, ahead of our deal model. The teams there, I was just with the team out in Irvine last week at the sales meeting, extremely high energy, great cultural fit. Our integration planning is at or ahead of schedule. We've invested a bit more in selling already as they've come into the organization as well as in R&D. Teams are already focused on revenue synergy planning ex-US, which has been our focus, particularly in Asia and parts of Europe. And as we look at R&D, we've already got the core team stood up working on the integration of the APM technology with our Infusion platform. I've already seen some initial work that's been done there. Really excited by how fast the team's been able to move and get that team together and already start on advanced prototyping, et cetera. So, we're doing exactly what we said, and if anything, the team is off to a bit of a stronger start. So, great to have the APM team part of BD.

Joanne Wuensch, Analyst

Thank you.

Matt Miksic, Analyst

Hey, thanks so much for taking the question. Can you hear me okay?

Tom Polen, Chairman, Chief Executive Officer and President

We can. Good morning, Matt.

Matt Miksic, Analyst

Good morning. Returning to the topic of separation, I want to acknowledge the effort that has gone into this. I would like to understand what your different mechanisms for separation are. Could you provide some insights into the process? Was there any process in place for these assets prior to this moment? Additionally, what factors might influence your decision towards one option over the others? Thank you.

Tom Polen, Chairman, Chief Executive Officer and President

Yeah, thanks, Matt, for the question. Obviously, as we said, we'll be sharing more as that process advances and we expect to conclude that process and announce the final form of the transaction within FY '25. Obviously, that timing can vary based on some of those transaction formats can happen sooner than later. At the end of the day, I'll stick to what I shared earlier, which is we're focused on transaction structures that maximize shareholder value creation and that can take a number of forms, which we've communicated, can range from RMT structures to outright sales to spin, we think there's multiple different ways to unlock value there. And again, we'll be focused on doing so in a way which maximizes value creation for our shareholders in the company.

Matt Miksic, Analyst

Great. Thanks.

Operator, Operator

And ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I would like to turn the floor back over to Mr. Tom Polen for any additional or closing comments.

Tom Polen, Chairman, Chief Executive Officer and President

Thank you. And thanks, everyone, for joining today and for your continued support of BD. I couldn't be prouder of our team whose execution of our strategy has positioned us for the journey ahead. This is an exciting time for BD, and we look forward to sharing more about the separation plan as we progress. Thank you, and have a great rest of the day.

Operator, Operator

Thank you. Again, this does conclude the audio webcast. On behalf of BD, thank you for joining us today. Please disconnect your lines at this time, and everyone have a wonderful day. Goodbye.