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Becton expects growth in China, focus on plug-in M&A as balloon devices stumble

Becton Dickinson and Co. saw double-digit business growth in China during the third fiscal quarter, driven by high volume sales of disposable products and a lack of competition in unique areas like biosurgery and diagnostic systems.

President Thomas Polen said on an earnings call that the company is confident about growth continuing in China because of investments made over the last 25 years, particularly in the "localized, highly automated manufacturing."

CEO Vincent Forlenza noted that there has been a considerable improvement in recent years with regards to the funding of the Chinese healthcare system, which keeps "some positive momentum going" despite a slowdown in the rest of the economy.

The CEO said Becton Dickinson is "really well positioned" in China because, in addition to a strong portfolio and commercial organization, the company continues to invest in its four plants there and is also investing in innovation for China.

"We expect to [see double-digit growth in China] for the rest of the year. You know that we have a great business there, a great team there and a strong partnership with the Ministry of Health. That is all going extremely well," Forlenza said.

Sales slump in drug-coated balloon business

On the other end of the spectrum, the company saw a 50% decline in planned drug-coated balloon, or DCB, sales during the quarter following a March letter from the U.S. Food and Drug Administration that warned that the devices have a potentially higher risk of premature death in cardiovascular patients.

"[Excluding the impact of the decline in drug-coated balloon sales], the revenue growth for the third quarter would have been in the high single digits," according to CFO Christopher Reidy.

Simon Campion, executive vice president and president of the interventional segment, said the company expects the reduction in DCB sales to continue, barring any unforeseen upsides. However, he noted that the devices represent only 1% of the company's total business.

Cowen analyst Joshua Jennings said in an Aug. 2 research note that Becton Dickinson will be able to financially manage the sales erosion of Lutonix DCBs. He anticipates that any short-term investor sentiment hit will reverse once the path forward for such devices is clear.

Campion said the company expects new products in surgery and urology to offset headwinds from the sales of DCBs.

Regulatory challenges; M&A outlook

An FDA advisory panel meeting in June determined that paclitaxel-coated balloons and paclitaxel-eluting stents pose a long-term risk of premature death for patients.

While responding to an analyst question on what will be needed to bring back the prior levels of utilization and implementation of DCBs, Campion said he believes the FDA would need to make a statement to answer that the benefits outweigh the risks for the market to begin to rebound.

"I think our customers feel like their hands are tied right now with the Dear Doctor letter from March 15, and that's reflected in the current 50% or thereabouts decline in business, not just with us but with others too," Campion added.

The company is also facing delays in bringing its below-the-knee DCB to the market as the FDA has informed the medical-device maker that the device is not approvable in its current form. Forlenza said the approval process timeline has extended with an answer from the FDA no longer expected in 2019.

Becton Dickinson also withdrew an application submitted to the FDA for a type 2 insulin patch pump and is working on strategic options for the device.

On the M&A front, Forlenza was of the view that acquisitions are an important part of the company's strategy but the real focus is on meeting the leverage targets. The company paid almost $450 million of debt during the third quarter and its gross leverage was 3.7x as of June 30.

The CEO noted that the company remains committed to plug-in M&A as an important part of its strategy, plus the dividend and share repurchases moving forward.

"We have tremendous capability in terms of our ability to do M&A, but we're not a serial acquirer, we are a strategically driven company," Forlenza said.