What threatens to be a major migraine for hospitals will be a shot in the arm for BD.
The Franklin Lakes, N.J.-based needle manufacturer (also known as Becton, Dickinson and Co.) is counting on recently passed safe-needle legislation to revitalize the anemic financial results that have plagued the company for the past few years.
Safety-engineered syringes, needles, blood-collection devices and the like were the stars of the analysts' conference BD held in New York earlier this month, which even featured a live demonstration of its advanced protection devices. Designed to prevent potentially deadly needlestick injuries, the now-federally mandated safety devices cost considerably more than their conventional counterparts, although many argue that the benefit to hospitals more than offsets the price (Nov. 13, p. 6.)
The company expects the nationwide conversion to be responsible for two percentage points of predicted 7% sales growth in 2001.
"It's one of the main growth engines of the company," Edward Ludwig, BD's president and chief executive officer, said in an interview.
Although the company's biosciences and clinical laboratory units will play a role in its projected 10% earnings growth, Ludwig described safety needles and biosciences as the company's "one-two punch."
In particular, BD expects U.S. sales of safety-engineered devices to grow 38% to $370 million in 2001. Accounting for the negative impact the newer devices will have on its sales of conventional devices, the growth will net a 32% increase in companywide sales, or about $245 million in revenues.
By 2003, with hospital conversion to the new devices almost complete, BD anticipates U.S. sales of its safety devices will climb to $700 million, a net of $445 million after the impact on conventional devices is factored in.
Net growth in BD's safety-needle business over the next three years is expected to reach 34%--not bad for a company that announced a restructuring last September that would eliminate 1,000 jobs worldwide.
Last August, ratings agency Standard & Poor's assigned BD a negative outlook based on its soft operating performance.
Now S&P is "certainly looking at new products such as safety needles as important to the company's growth," said Michael Kaplan, the agency's director for corporate healthcare ratings.
Ludwig said the federal legislation, which gives teeth and the force of a deadline to OSHA regulations, will create the kind of impact that, for BD, has occurred only twice in a century. The last big change was in the late 1950s when the industry converted from glass, reusable syringes to plastic, single-use devices that now dominate the market, he noted. That shift spurred the company to finance the conversion by going public.
"This is a watershed event," Ludwig said. "We haven't spent this kind of money on manufacturing and retooling in 40 years."
BD has invested more than $500 million in the safety needle business over about 10 years. Of that amount, the company has earmarked $300 million for the retrofitting effort, about half of it already spent.
In the early 1990s, the company spent about $400,000 to familiarize hospitals with safety issues through its safety-compliance initiative. Several hundred thousand more was spent more recently as hospital compliance issues came to the forefront, Ludwig said.
Part of the initiative has included sponsoring events such as an educational seminar recently held at the New Jersey Hospital Association. That meeting was crashed by a news crew from "60 Minutes," which is preparing a segment on the competition in the safe-needle-technology market (Nov. 6, p. 94.)
In 1998, BD spent $620,000 on lobbying efforts in Washington, according to the latest available figures from the watchdog group the Center for Responsive Politics. But BD officials say none of that lobbying effort was to push for the mandated use of its key product, nor has the company ever contributed as a corporation to politicians.
"We just don't do that," said Camilla Jenkins, a spokeswoman.
As hospital conversion moves forward, the needle manufacturer is well-positioned to reap increased profits. BD won't necessarily manufacture more sharps, but the added cost of the safety devices coupled with the decreasing cost of production will help its bottom line.
"The story of safety growth will be even more so a story of margin expansion, due to the substantially higher dollar as well as the somewhat higher percentage margins we're expecting over time on safety devices," said Gary M. Cohen, president of BD Medical Systems, at the analysts' conference.
Ludwig says hospitals also will benefit.
Hospital purchasing departments will have to pay more for the product, but the price "more than offsets what happens when people actually stick themselves. So by the end of the year, hospitals will have more money in their pockets," he said.
Ludwig attributes the company's recent sluggish outlook to two major difficulties: The worst problem was the global company's failure to hedge against volatility in the foreign exchange market.
It also made the mistake of getting involved in "noncore businesses" such as a blood-glucose-monitoring business that didn't perform well, he said. Investors were told that the company is redrawing its plans for the blood-glucose business. In other areas, the company has since scaled back its overly optimistic expectations, Ludwig added.
Analysts are excited about the safety-needle strategy, but also "properly skeptical" about the company's overall performance in the next few years, Ludwig said.
Scott Davidson, a senior research analyst for investment bankers U.S. Bancorp Piper Jaffray in San Francisco said he thinks Ludwig and other company officials painted a realistic picture at the analysts' conference.
The safety-needle business is "a critical part" of BD's story, but it won't come without complications, most notably the difficult process of converting hospitals. It may take a little longer to turn things around than BD thinks, perhaps until 2002 or beyond, Davidson added.
"I think a lot of people view this as the single most important engine of (BD's) near-term growth," Davidson said.