- BD announced Thursday a last-minute decision to lower 2020 revenue and earnings guidance after learning from FDA as recently as Monday that it must submit a comprehensive 510(k) package covering software changes to certain infusion pump systems.
- Execs now anticipate revenues will only grow 1.5% to 2.5% during the fiscal year, down from the 4% to 4.5% predicted on BD's November earnings call, based entirely on remediation efforts and potential loss of sales tied to the Alaris product line.
- BD's stock price fell more than 13% Thursday morning following the announcement. William Blair analysts called the sell-off "unwarranted." "[W]e do not believe that a roughly $400 million reduction in revenue for the year justifies a more than $7 billion reduction in market cap," concluding that "the remainder of the business is operating on solid footing."
"Resetting expectations is certainly not how I want to start my first call as CEO," said BD vet Tom Polen, who officially transitioned into the top role last week.
The Alaris systems are used in care of 70% of patients who are on infusion pump therapy, BD said. The company reported on a call with investors in November it was planning upgrades to the pump systems, including changes to alarm prioritization and optimization.
At the time, CFO Chris Reidy said BD was "in discussions with FDA about the timing of these upgrades and the possibility of bundling them with a new software version release." That followed FDA's decision in July to slap a Class I label on BD's recall of more than 600,000 of the pumps due to faulty bezels that could alter dosing.
On Thursday, Reidy said BD "did not anticipate the current Alaris pump issue to materialize the way that it has," adding the company was "fully planning" to reaffirm its previous guidance up until the FDA meeting this week. The new guidance assumes BD will sell "virtually no pumps" this fiscal year.
Polen said the company had been taking "a phased approach" to releasing software updates based on its own quality system, which BD did not believe required additional 510(k) clearances. FDA disagreed. As recently as Monday, BD met with the agency and formed plans to submit a package covering changes to pump software, much of it retrospective, during its fiscal fourth quarter this summer.
Until FDA signs off on those changes, the company does not plan to make new pump sales or deploy software upgrades in the field, besides potentially some that are deemed medically necessary.
A few analysts on the call questioned whether FDA's crackdown is a sign of regulators' frustration with product updates in the broader infusion pump market. The team at William Blair said the agency appears to be requesting the "added level of scrutiny" out of "an abundance of caution." Polen could not comment on FDA's work with other companies, but said it's "not unprecedented" for FDA to say regulatory filings need to be updated as a product evolves.
The 2020 guidance cut equates to about $400 million in anticipated lost revenue, which CFO Chris Reidy attributed entirely to the Alaris issue. Sales in the medical unit, which houses Alaris, are now projected to be flat in 2020.
At the same time, the company is contending with a few other headwinds. A volume-based procurement initiative in China is "progressing faster" than BD initially forecast, leading peripheral catheter customers to reduce inventories.
BD is also bracing for a $20 million to $30 million hit during the quarter due to the novel Wuhan coronavirus, as fewer people are going to the hospital to seek standard care, Polen said. On the flip side, BD has received orders and installed additional BD Max testing systems. And only 5% of BD products manufactured in China are sold outside of China, for which BD has sufficient inventory to cover demand.
Although overshadowed by the Alaris news, BD beat expectations during its first quarter with revenues up 1.6% to about $4.23 billion, edging out Wall Street's consensus estimate by about $40 million. The medical segment declined 2.1% during the quarter. But life sciences grew 6.4%, helped by flu-related business in the diagnostic systems unit, and the interventional segment increased 4.4% thanks in part to better-than-expected recovery in the drug-coated balloons business.
"While this update is frustrating for all parties involved, our longer-term thesis remains intact despite growth falling below the standard recipe for growth we have seen from the company over the last several years," analysts at William Blair concluded following the call. "Simply put, this update seems to be more of a bit of turbulence in the current year than any change in altitude for the company as we would expect growth to rebound once the team moves on from this headwind."