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Understanding Becton Dickinson’s Emerging Market Position—and Potential Risks

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Apr. 1 2016, Updated 9:06 a.m. ET

Overview

The US medical device industry is going through a difficult, revolutionary phase of disruptive changes and macro factors. As the dollar strengthens, markets around the world have continued to be volatile, and China’s spending has slowed down considerably—all of which have weighed down the financials of medical device companies. Meanwhile, pricing pressures and generic competition continue to pose serious risks to the performance and the profitability of companies like Becton Dickinson (BDX), or BD.

Understanding Becton Dickinson's Emerging Market Position—and Potential Risks

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Emerging market challenges

Emerging markets constitute ~16% of BD’s total revenues while international revenues on the whole account for 46% of total revenues. In 1Q16, BD’s international revenues grew by ~2.2%. Emerging market revenues increased by ~2.4%, and developed markets saw revenue growth of ~1.7% on a YoY (year-over-year) basis. Specifically, Brazil and China continue to witness challenging market conditions, whereas Mexico, Columbia, and India have registered solid growth and are expected to continue that trend.

Notably, BD has a strong presence in China, which contributes ~5% to the company’s total revenues. But with the decrease in capital spending in China, the company’s revenues took a hit, primarily in its Lifesciences segment. Consequently, BD made inventory changes that impacted the company’s 1Q16 revenues by ~3.5%. Still, the company remains positive on China’s potential, expecting it to be a crucial market for the company in the future.

Hospital spending

The medical device industry in the US has made a crucial pivot from a focus on products to a focus on value. At the same time, the hospital industry has undergone consolidation, and reimbursement models shift and technology advances have led to increased competition and the need for end-to-end healthcare solutions at lower costs and higher efficiency.

To be sure, Medtronic (MDT), Abbott Laboratories (ABT), and Stryker (SYK) are facing the same pricing pressures as BD, and these companies have also identified sustainable business models for improving profitability and market position. For indirect exposure to this industry, you might consider the SPDR S&P 500 ETF (SPY), which is one of the largest ETFs around and has about ~0.18% of its total holdings in BDX’s stock.

Now let’s take a look at Becton Dickinson’s capital allocation.

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