Here's How Obamacare Moves the Needle for Becton Dickinson

Despite launch headaches surrounding the Affordable Care Act's online marketplaces, millions of Americans will overrun doctors' offices in the coming year. That's going to drive higher demand for medical supplies, including Becton Dickinson's needles and syringes.

Competing for share
Demand for Becton's needles, syringes, and systems are increasing as new infusible drugs targeting diabetes, cancer, and autoimmune diseases hit the market.

Those new treatments have industry analysts predicting that specialty drug sales will be the fastest-growing drug category over the next five years, growing from $171 billion in 2012 to $230 billion-$240 billion in 2017, according to IMS.

That's great news for Becton, given that the market for delivering injectible drugs is expected to climb a compounded 14% annually, from $22.5 billion in 2012 to $43.3 billion in 2017.

A lot of that growth will come from growing global demand for treating diabetes. In that market, Becton sells needles for insulin pens made by market-share leaders Novo Nordisk and Eli Lilly , as well as syringes.

That's a fast-growing market, given that the rising incidence of diabetes is expected to drive 6.8% annual growth for related devices through 2016.

That growth got the attention of Novo, the leader in insulin with a 49% market share. Novo, the largest seller of injectible prefilled pens, won FDA approval for two new auto-dose insulin pens in November.

It's also gotten the attention of Lilly; in November, it announced plans to invest $700 million to boost global insulin production for pen cartridges. $350 million of that will be spent to bulk up capacity in China, a market Lilly estimates will be home to 142 million diabetics by 2035.

As a result, diabetes products are the fastest-growing piece of Becton's largest business, the BD Medical segment. Sales of Becton's diabetes products grew from $866 million in fiscal 2011 to $969 million in the just completed fiscal 2013, up 11.9%.

Emerging markets and acquisitions lift sales
Becton has embraced emerging markets' rising demand for health care. As a result, emerging markets sales, led by China, jumped nearly 15% last quarter, leading to a 10% lift in the company's international sales to $1.25 billion. That growth far outpaces the 3.4% notched by domestic markets during the quarter.

But rising demand isn't the only thing driving the top line at Becton. The company is an avid acquirer of bolt-on businesses, and this year, Becton acquired Safety Syringes and Cato Software Solutions. It also inked a licensing agreement with CRISI Medical Systems. Those deals are expected to boost Becton's sales by nearly 1% next year.

Operationally better
Rising sales only help if they send more money to the bottom line -- an area of rising scrutiny at Becton.

The company's cost-cutting program is targeting rising raw materials expenses, which last year pushed the cost of goods sold, or COGS, to 49% of the company's sales. To fight back, Becton's reliable low cost plan, or ReLoCo, has saved $50 million in its medical surgical segment, helping COGS dip to 48.3% of sales last quarter. The early success has Becton planning to roll out the program across all its segments, which should help support the company's falling operating margin.

BDX Cost of Goods Sold (% of Quarterly Revenues) Chart
BDX Cost of Goods Sold (% of Quarterly Revenues) Chart

BDX Cost of Goods Sold (% of Quarterly Revenues) data by YCharts

But that doesn't mean Becton isn't innovating. The company launched 20 new products in 2013, which have gone on to represent 13% of its fourth-quarter sales. It also plans to roll out another 20 to 30 products next year, too, all while keeping R&D spending at roughly 6% of sales.

Foolish final thoughts

This industry's likely to remain a bare-knuckle competition for market share, as demand tied to rising Medicaid and reform-driven insurance enrollment climbs.

That means Becton will need to keep cutting costs to offset the 2.3% medical device tax included in Obamacare. But with a 41-year track record of boosting dividends, and $450 million in share buybacks this past year, Becton's commitment to rewarding shareholders suggests that investors should give the company the benefit of the doubt when it comes to navigating these challenges -- especially given the growth the company is likely to enjoy from needles and syringes.

The article Here's How Obamacare Moves the Needle for Becton Dickinson originally appeared on

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisor's. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Becton Dickinson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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