Embecta Corp. Q2 FY2026 earnings call

• Deb assessed company's second quarter performance and financial guidance implications, including progress on strategic objectives and expected closing of Owen Mumford acquisition. • Dev addressed second quarter performance, full year guidance revision, strategic priorities like global brand transition program, development of market appropriate pen needles and syringes, portfolio expansion on GLP-1 B2B strategy, and financial flexibility with debt repayment. • Jake took through second quarter financial results in more detail, including revenue breakdown by U.S. and international, gross profit and margin, operating income and margin, net income and earnings per share, balance sheet and cash flow. • Dev discussed updated capital allocation framework with three-year share repurchase program and reduced quarterly dividend.

During the second quarter, Embecta generated approximately $222 million in revenue, a year-over-year decline of 14.4% on an as-reported basis or 17.4% on an adjusted constant currency basis. U.S. revenue for the quarter totaled approximately $95 million, a year-over-year decline of 29.4% on an adjusted constant currency basis. International revenue totaled approximately $126 million, an increase of 2.1% on a reported basis but a decline of 4.1% on an adjusted constant currency basis. Pen needle revenue declined 20.4% adjusted to constant currency, syringe revenue declined 14.6%, safety product revenue declined 2.3%, and contract manufacturing revenue declined 43.2%. Pen needles account for approximately 70% of the $75 million revenue guidance reduction, syringes account for approximately $13 million of the remaining reduction, and the decision to discontinue swap products accounts for approximately $5 million. Safety products account for the remaining amount of approximately $4 million.

• Revised revenue guidance to a range of between $1,015,000,000 and $1,035,000,000, assuming organic as reported revenue range of between $985,000,000 and $1,005,000,000 and $30 million from Owen Mumford acquisition. • Lowered adjusted operating margin guidance from 29%-30% to 22.25%-23.25% and adjusted earnings per share guidance from $2.80-$3 to $1.55-$1.75. • Expect to repay approximately $150 million in debt during 2026 and generate free cash flow of between $95 million and $105 million inclusive of Owen Mumford acquisition.

• Factors causing actual results or events to differ materially include those referenced in press release and SEC filings. • Difficulty qualifying alternate supplier for active ingredient in alcohol swabs led to decision to cease production of alcohol swabs. • Uncertainty in pen needle market volume estimates and potential for continued share loss and market volume softness affecting revenue.

Q: Good morning. I want to spend a little time better understanding the U.S. weakness this quarter and assumptions going forward. I think you said in your commentary that in the U.S. pen needle segment, the losses were concentrated at a single customer. I wanted to understand if that was The same customer as was referenced last quarter where there were pricing concessions made and why, if so, the volumes weren't stabilized by that move. And then secondly, you called out weakness in insulin pen prescriptions. Can you tell us a little bit more about what's driving that? Could that be short-lived or is that a long-term trend?

A: Murray, good morning. Let me start by taking the market question first on insulin pens and pen needles, and then go to the competitive loss question. So first on insulin pens, if we look at prescriptions for insulin pens, we have now begun to see a decline, you know, maybe more pronounced in the most recent quarter that we reported. That decline is actually greater in the retail channel than it is in other channels. And insulin pens are sold primarily in retail, but some in long-term care and very little in the specialty care channel. So insulin pens mostly sold in retail, and there has been a decline. That decline is greater in long-acting than fast-acting, and it seems to be driven by a decline in new prescriptions. That obviously translates into the pen needle market as well, but maybe a bit exacerbated in the pen needle market because what we are also seeing is a decline in retail that maybe is a little bit faster for pen needles than there is for insulin pens. Now, some of this is likely being caused by shift in purchasing patterns from retail to perhaps lower cost channels or where pen needles are available at a lower price. We've also seen declines in accounts as a reference where we believe we have a stable share position. So more indicative of market than anything else. And those are the market trends that we are seeing. You know, of all the variables that we try to account for in our guidance, This is perhaps the one where there is maybe more uncertainty because what we are observing is more of a recent shift than certainly what we've seen over the past several years. So that's about the market. Now, with respect to the competitive loss, Yes, it was the same customer that we had referred to earlier. Obviously, I don't want to talk about pricing at any specific customer or even broadly in the U.S. market. But I think what we've ended up is the share loss at that customer is a little bit deeper than we anticipated. But I want to point out a couple of factors that I referenced in my prepared remarks. So when there is a shift in share at a particular retailer, we believe that much of that share loss occurs with patients who are not on preferred plans with us. And so they can move to a different brand of pen needles and still use their insurance plan. And so when that happens, the revenue impact of that share loss is higher since if we are not on a preferred plan for that patient, obviously the rebate amount for that payer plan is less for us. Secondly, while yes, most of that competitive loss was concentrated at that aforementioned account, we are seeing some declines in smaller regional players as well as independent pharmacies. Now with these smaller regional players and independent pharmacies, You know, the rates that these retailers get are obviously less than our large customers. And so that has an impact on the revenue as well. And so the competitive share loss, you know, affects us maybe at a higher rate than one might imagine just by using an average unit price. So those are the two factors that are impacting the U.S. results this quarter and, you know, drove the majority of the guidance revision for the year.

Q: Good morning, everyone. So maybe on the pen needle contract, obviously a competitive loss there, but just wondering, you know, the length of the contract. in terms of the loss there, and when maybe it comes up for renewal, do you think looking ahead, whenever there is another, you know, request for proposal there and RFP that, you know, you can, you know, look at that contract and be more competitive on the next go around. And then I'll have a couple of follow-ups.

A: Yeah, Anthony, on that, maybe it's worth clarifying. It's not like we've lost all the share. It's just our share position is reduced versus what it was. So it's not like we are out of that customer entirely. Now, with respect to, you know, when we can get back, look, I mean, we have action plans right now underway. to not only stem competitive losses, but also figure out ways to get back and win that share. So I don't want to sort of forecast exactly when that will happen, but I do want to convey that we are not going to be standing still waiting for contract renewals or what have you, since it's not like we are completely out of those accounts. I think our share position has been reduced in those accounts, and we are certainly going to work as hard as possible to bring our share position back up. Yeah, you know, look, I don't expect it to be a multi-year effort, honestly. You know, So, again, I don't want to put a specific timeframe on it, obviously, for competitive and other reasons, but maybe I'll leave it at that. I don't expect it to be a multiyear effort, no. No, all good. And then just, you know, when you think about the pressure, you kind of highlighted almost three areas here. You know, there's lower cost providers coming in. There's the GLP-1 question that Maria asked. And then, you know, just legacy, there was this pressure moving away from multiple daily injections to, you know, patch pumps as well as automated insulin delivery devices. When you think of those three buckets, you know, it seems like the lower cost, you know, strategy kind of won the day here. But if you had a bucket, those three headwinds, you know, how would you, you know, kind of weight, if you had to put a weighted average on those three competitive headwinds in the pen needle business, how would you weight those? And then just A real quick one here would be you had a trade receivables factoring agreement, you know, where there were receivables sold, I think, to Becton. It was roughly like $64 million. Just given the impacts in the business here, I want to make sure that that trade receivable agreement is intact.

A: Yeah, I'll let Jake take the trade receivable agreement. But with respect to sort of putting a weight on each of the factors, you know, maybe you You know, there are three different things, I think, factors that affect the market in three different ways, right? The increasing affordability of GLP-1 drugs potentially affects insulin pen prescriptions, and we have seen insulin pen prescriptions trend downwards most recently. Could that be because of the increasing affordability of GLP-1 drugs? Maybe so. And what we've seen over there is the long-acting insulin, which is what you would expect the GLP-1 effect to be concentrated on, is decreasing faster than long-acting insulin. With respect to movement towards maybe lower price products, You know, what it is is really maybe more a shifting of where patients are buying pen needles. So instead of the traditional retail channel, and maybe they are going to retail, but maybe, you know, more patients buying sort of cash pay products or over-the-counter products or in channels where, you know, lower-priced products are available. That affects the pen needle market. And then thirdly, you ask about pump adoption. You know, the way sort of we think about that is we look at fast acting, right? So mealtime insulin prescription trends. And yes, while there has been a decline in fast acting insulin, really what's driving, I believe, the total prescription decline has been the decline in long acting. So really, pump adoption is something that, as you know, this business has been dealing with for a number of years. It's hard at this point to look at the data and say that that is the primary factor, Anthony. So I would say it's more towards the shift towards lower price products and potentially the two other factors I outlined earlier in my question, in my answer to Marie, is it the increasing affordability of GLP-1 drugs? Could the impact of the ACA subsidies have had some impact on overall market volume as well, potentially? It's going to take months, maybe a couple quarters to really get the data. And then, Anthony, on the receivables factoring program, this is a standard AR factoring program that we have actually with a third-party bank. So very common in the industry to have something like this. It doesn't have anything to do with Beckman-Dickinson in any way. It was something I think that we put into effect, you know, around a year or so ago. We continue to factor receivables under normal due course, and we would continue to expect to do so in the future. So none of that is necessarily really changed by 2020. by this. And in terms of liquidity and whatnot, we continue to expect good free cash flow, continue to expect to repay $150 million in debt during the course of this year, which was our original guidance assumption coming into the year. And obviously, that's despite the revenue call down in the U.S. today.

Q: Good morning. Thanks for taking the questions. I was hoping... We could look out further to next fiscal year, understanding there is no formal guidance in place, but maybe how are you thinking about the FY27 revenue growth given all the pressure in the U.S.?

A: Yeah, Ryan, I think it's too early to comment on that. As you heard me say, right, some of the trends that we are observing now in the most recent quarter are all sort of early. So really our plan right now is to focus on executing on 2026. you know, closing the impending Oven Mumford acquisition, getting those products in our bag, advancing the pipeline both on our B2B products for pen needles as well as the auto injector platform. And really, then we'll talk about 2027. It's far too early at this point for me to comment on 2027.

Q: OUS, finished in line with your expectations in the quarter. I'm hoping you can give us the latest on what you're seeing in China and any updated growth outlook there.

A: Yeah, very pleased with our international performance, certainly performing per expectations. With regard to China, just as a reminder, obviously, we don't disclose China separately, but we think about greater China, which includes mainland China, Taiwan, and Hong Kong. You know, and over there, we sell the product to, you know, three or four national distributors that then go on to sell to sub-distributors. You know, certainly last year, fiscal 2025, there was significant decline, and we took a bunch of steps to stabilize the situation. We are seeing early signs of sequential stability. You know, we really reordered our sales team. We had a more price-competitive pen needle that we launched over there. We will see likely some headwind this year, but certainly it's going to be significantly less than what we saw last year. And look, over the long term, our view on China hasn't changed, right? The market is growing there in mid-single digits. We have a strong commercial and manufacturing infrastructure over there. The new pen needle that I referenced where we've already submitted for regulatory approvals That is being developed and manufactured over there. And finally, I also mentioned in the GLP-1 generic space that there are Chinese companies that want to get into the generic GLP-1 market as well, and obviously we want to partner with them. So for all those reasons, you know, we continue to remain optimistic on how China will end up. Now, obviously cognizant of the fact that China, you know, the geopolitical considerations when it comes to China can impact In the short term, but we still remain optimistic in our long-term view on China.