Please stand by. Welcome, ladies and gentlemen, to the second quarter of fiscal year 2022 earnings conference call for Embecta Corp. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly.

During the call, the company will make forward-looking statements and it is possible actual results could differ from management's expectations.

Risks, uncertainties and other factors that could cause such differences can be found in the company's earnings release and latest SEC filings, including the information statement dated February 11, 2022, filed as Exhibit 99.1 to the company's current report on Form 8-K and Form 10-Q.

You're cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date made.

Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Management will also discuss -GAAP financial measures regarding our performance.

Reconciliations to GAAP measures including the details of purchase accounting and other adjustments can be found in our earnings release and financial schedule and the appendix of the investor relations presentation. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period.

Revenue percent changes are on an FX neutral basis unless otherwise noted. When management refers to any given period, they are referring to the fiscal period unless specifically noted as a calendar period.

The earnings press release, slides that accompany today's call, and webcast replay details are available in the Investor Relations section of the company's website www.embecta.com. I would now like to turn the call over to Mr. Dev Kurdikar, Embecta's President and Chief Executive Officer. Please go ahead, sir..

Thank you, Shannon. And welcome, everyone, to Embecta's second quarter of fiscal year 2022 earnings call, which also marks our first quarterly earnings call as a newly public company. My name is Dev Kurdikar. I'm the President and CEO of Embecta and I'm joined on the call today by Jake Elguicze, Embecta's Chief Financial Officer.

As you know, we successfully executed the spinoff from Becton Dickinson on April 1, just about six weeks ago. Being able to ring the closing bell at the NASDAQ on day one was a motivating and uplifting day for our global team of 2,000 employees who are dedicated to our mission of developing and providing solutions for people with diabetes.

I would like to thank all those who worked tirelessly for almost a year to ensure that the spin was executed smoothly, including all our former colleagues at Becton Dickinson. While we are now an independent company, we have a series of transition services agreements, or TSAs, with Becton Dickinson that we are now operating under.

We have begun the work of recruiting people, implementing processes and setting up the systems that we will need to have in place before we exit the TSAs.

In addition, our team continues to work tirelessly to overcome the multiple challenges that currently exists globally, including inflationary pressures, supply chain disruptions, COVID-19 restrictions, and geopolitical uncertainties.

Throughout all these challenges, our focus remains on ensuring that people with diabetes that use our products continue to have access to them. Here's what we plan to cover during our prepared remarks this morning.

As this is Embecta's first quarterly earnings call as a public company, we thought it would be helpful to spend a few minutes describing our company's history, our business and our competitive strengths as a diabetes injection devices company.

After my opening remarks, Jake will provide you with a more in depth review of the financial results for the second quarter and first six months of fiscal 2022, as well as our financial guidance which we introduced in our earnings press release issued earlier today.

I will then provide some thoughts on why we believe we've emerged from our spin in a strong, stable position with global growth opportunities. We will then open up the call for questions. Slide 5 please. Let me first start with who we are.

Quite simply, we are an organization with a truly unique opportunity to create a preeminent diabetes focused company in the world. Our mission is to develop and provide solutions that make life better for people with diabetes. That is our entire focus.

We've built an incredible leadership team to advance our vision of empowering people to live a life unlimited by diabetes. Jake and I joined this business from outside of BD and have significant experience in the medical device industry.

Our global team of 2,000 employees are excited about what we can do with this business for people with diabetes, for our customers and for our shareholders. I'm thrilled to have this opportunity and I know our global team feels the same way as well. Slide 6 please.

Post spin, we believe we will merge as an independent company with some enduring strengths. We are a trusted leader with best-in-class products and unmatched capabilities, strengths we have developed after making these devices for almost 100 years. We believe we have best-in-class products and brands across our portfolio in all geographies.

As a reminder, insulin was first used to treat diabetes in 1922. And we introduced the first specialized insulin syringe in 1924. Since then, we have continued to earn a reputation for quality and reliability that we believe is unrivaled in the marketplace.

In preparation for the separation from BD, we've taken care to ensure that our new name, Embecta, and logo retain the linkage to the BD brand, and have decided to keep the names of our products unchanged. As we transition to the Embecta brand over the next couple of years, we will be careful to ensure that our brand recognition is maintained.

In addition to the history, reputation, and brand strength that I just discussed, our leadership is based on our core strengths where our scale, quality and efficiency create competitive advantages. We have unmatched manufacturing, distribution and sales capabilities. We are the number one producer of injection devices.

We produce almost 8 billion units a year in three facilities around the world and we distribute them to over 100 countries, where we estimate they're used by 30 million people annually. Our commercial efforts globally are supported by approximately 600 of our team members.

Taken together, this extensive distribution capability, along with our sales infrastructure, provides a significant ability to reach people with diabetes around the world. Furthermore, we are especially proud of the fact that we have strong presence in infrastructure in emerging markets.

More than half of our 600 commercially focused employees are in emerging markets, which is where we expect the vast majority of the growth in the number of people with diabetes to occur going forward. These trends have been developed and enhanced over many decades. And they provide a strong foundation for our business. Slide 7, please.

We believe that Embecta has begun its life as a public company in a position of strength. Specifically, we have a strong core business, we are in an expanding category, and the spin has created immediate benefits for our organization.

Looking further ahead, we have opportunities for growth, and our stable core provides a solid foundation for us to seek out and realize these new growth opportunities. Now, let me walk you through each of these reasons in a bit more depth. First, our core business of injection devices is strong.

We have been making and selling insulin injection devices for almost 100 years. Our global manufacturing infrastructure is unmatched. And we have a geographically diverse sales and distribution network, as I noted earlier. Second, we participate in large and expanding disease area that continues to have unmet needs.

We are a pure play diabetes company, one of a handful, that provides products for the treatment of a chronic condition. Third, post spin, we have a compelling financial profile with the flexibility to invest for growth.

As a newly independent public company, we continue to attract talent and have the opportunity to create a streamlined operating model that will provide enhanced agility and drive decision making closer to our customers. Finally, we are well positioned to identify and drive opportunities for growth.

These include investing in commercial initiatives, a development program with the potential to enter into the infusion segment, as well as seeking M&A and partnership opportunities. This is why we believe that our company is uniquely positioned.

We have a strong stable core business, upon which sit opportunities to drive growth in a market that is large, growing and with unmet needs. Slide 8, please. Here are our strategic and operating highlights during the second quarter and first half of 2022.

The company successfully completed the planned spinoff from BD on April 1, 2022, giving Embecta the strategic, operational and financial independence, and the opportunity to optimize product portfolio and achieve more efficient resource and capital allocation to address the significant unmet need for chronic diabetes care.

The spin-off occurred by means of a pro rata distribution of all of Embecta's issued and outstanding shares of common stock on the basis of one share from Embecta common stock for every five shares of BD common stock held as of the close of business on March 22, 2022, the record date for the distribution.

The distribution qualified is tax free to BD and its shareholders for US federal income tax purposes. As of the spin-off date, the diabetes care business was completely transferred to Embecta. Upon completion of the distribution, Embecta became an independent publicly traded company, and BD retained no ownership interest.

Regular way trading of Embecta common stock began on the spin-off date of April 12 under the ticker symbol, EMBC.

In connection with the spin-off, BD and Embecta entered into various agreements to effect the spin-off and provide a framework for the relationship between BD and Embecta after the spin-off, including a separation and distribution agreement, a transition services agreement, manufacturing and supply agreements, reverse manufacturing and supply agreements, an employee matters agreement, a tax matters agreement, a lease agreement, and certain other commercial agreements.

We are highly focused on creating a solid foundation for sustainable growth going forward. We already have an established presence in the injection space, where we are focused on innovation and driving improved outcomes and the reduction of complications for those people who live with diabetes.

As such, an as discussed in our pre-spin investor presentation, we continue to advance the development of an insulin patch pump specifically designed for people with Type 2 diabetes. Success there will expand our total addressable market significantly, and increase our long-term organic growth rate.

We are proud to say that the Type 2 closed loop insulin delivery system utilizing this proprietary patch pump is being developed under the breakthrough device program of the US FDA. This offers us an opportunity to interact with the FDA's experts to efficiently address topics as they arise during the pre-market review phase.

This has allowed us to have multiple discussions with the FDA and receive feedback even during the pandemic period. The breakthrough device program will also allow us to prioritize review of our submission when made.

Over the course of 2022, our team has faced unprecedented global supply chain supply chain disruptions, inflationary pressures, continuing COVID-19 restrictions and geopolitical uncertainties. We are proud of our team's ability to deliver strong execution despite the challenging operating environment.

As has been widely reported in the press, these headwinds are impacting the financial results of companies doing business around the world. Embecta unfortunately has not been immune to these either.

While we are continuing to mitigate the impact of COVID-19 restrictions in some markets that are impacting operations, inflationary pressures on raw materials, shipping costs and delays, and fluctuations in foreign currency exchange rates continue to impact our financial results.

The scale and scope of our operations, along with the long history of working with our suppliers, have allowed us to maintain continuity of supply and minimize customer and patient disruption. With that, let me turn it over to Jake to discuss our Q2 results and our expectations for the second half of the year.

Jake?.

Thank you, Dev. And good morning, everyone. It is my pleasure to have the opportunity to speak with you today about Embecta as, during the next several years, we believe that we have a truly unique opportunity to create the preeminent diabetes focused company in the world.

Before I discuss the financial results for the second quarter of 2022, I would like to provide some background information and highlight a few items regarding the presentation of financial results for the second quarter and first half of fiscal years 2021 and 2022. First, Embecta has a September 30 year-end.

So, the financial results for Embecta's fiscal second quarter and first half are for the three and six months ended March 31.

Second, the Q2 and first half of fiscal years 2021 and 2022 results are based on carve-out accounting principles derived from the unaudited, interim condensed consolidated financial statements and accounting records of Becton Dickinson.

These financial statements reflect the historical results of operations, financial position, and cash flows of BD's diabetes care business, as they were historically managed in conformity with US Generally Accepted Accounting Principles.

In addition, these financial statements include general corporate expenses of BD, and shared segment expenses for certain support functions that are provided on a centralized basis within BD and which were not historically allocated to the BD diabetes care business.

Nonetheless, these financial statements do not include all the actual expenses that would have been incurred had Embecta been a standalone public company during the periods presented. Third, we have introduced financial guidance for the second half of fiscal year 2022 in today's earnings press release, which I'll review in a few moments.

These financial guidance items represent the company's expectations for financial performance as an independent company. This makes the evaluation of our historical financial results compared to our forward-looking guidance for the second half of 2022 a bit challenging as it is not on an apples-to-apples basis.

Given the fact that Embecta's historical financial results do not include all the actual expenses that would have been incurred had Embecta been a standalone public company during the periods presented, I plan on focusing most of my prepared remarks this morning discussing Embecta's second half of 2022 financial guidance.

Turning quickly to Embecta's financial performance for the three and six-month periods. For the second quarter, Embecta generated revenue of $274.5 million. This represents a decrease of 3.4% on an as reported basis and a decline of 1.3% on a constant currency basis.

The constant currency revenue decline was due to a decrease in volume to customers located within the US and Europe.

This volume decline was primarily due to conscious decisions that the Embecta management team made during the latter portion of 2021 to no longer participate in certain business moving forward due to several considerations, including the length of contract term, premium [indiscernible] brand, quality, reliability and clinical support and profitability.

While these deliberate decisions to walk away from certain customers will cause a temporary volume impact during 2022, it creates a healthier Embecta moving forward. On a year-to-date basis, revenue was $563.8 million. This represents a decrease of 1% on an as reported basis and an increase of 0.2% on a constant currency basis.

The constant currency revenue increase was primarily driven by an increase in volume in certain emerging markets, which consists of countries within Eastern Europe, the Middle East, Africa, Latin America, Central and Southeast Asia, as well as Mainland China.

The volume increase we experienced in emerging markets was somewhat offset by the decisions not to participate in certain business I referred to earlier. Moving to gross profit and margin. Gross profit and margin for the second quarter of 2022 totaled $191.2 million and 69.7%, respectively.

This compares to $196.3 million and 69.1% in the prior-year period. The 60 basis point improvement in gross margin was primarily due to favorable product mix. On a year-to-date basis, gross profit and margin totaled $395.1 million and 70.1%, respectively. This compares to $387.6 million and 68.1% in the prior-year period.

The 200 basis point improvement in gross margin was primarily due to a $10 million impairment charge associated with the write-off of certain construction and progress assets that were recorded in the first quarter of 2021.

If you were to normalize for the impairment charge recorded in 2021, gross margin would have improved approximately 20 basis points year-over-year. Turning to net income. During the second quarter of 2022, it totaled $79.6 million. This compares to $107.9 million in the prior year.

The decrease of approximately $28 million is due to a combination of factors, including a decrease in gross profit dollars that I just mentioned, an increase in selling and admin expenses of approximately $11 million, driven by an increase in marketing and advertising spend, as well as an increase in compensation and benefit costs due to increased headcount in anticipation of spin and becoming a standalone publicly traded company, an increase in R&D of approximately $4 million driven by increased investments in the development of new products, specifically including our insulin patch pump.

Interest expense of approximately $5 million that was incurred in the second quarter of 2022 as compared to zero in the prior-year period, as well as approximately $7 million of other operating expenses that was incurred related to the spin off. This is somewhat offset by lower year-over-year tax expense, which totaled approximately $6 million.

On a year-to-date basis, net income totaled $178.4 million, and that compares to $213.2 million in the prior year. The year-to-date net income decrease is due to the same factors that impacted our second quarter results. Lastly, moving to adjusted EBITDA and margin.

It totaled approximately $116.8 million and 42.6% for the second quarter of 2022 and $254.8 million and 45.2% for the six months of 2022. This compares to $141.6 million and 49.8% and $289.8 million and 50.9% in the year-ago periods.

Once again, I would like to reiterate that the historical financial results that I just referred to do not include all the actual expenses that would have been incurred had Embecta been a standalone public company during the periods presented.

Finally, with respect to our balance sheet and financial condition at quarter-end, as of March 31, 2022, we held approximately $264 million in cash and cash equivalents and $1.65 billion in debt.

As we created our initial capital structure and leverage levels, we also tried to be mindful of our current financial profile, the need to increase the level of investment into the business and shareholder returns.

Effective day one of spin, we have a balance sheet that we can use to invest both organically as well as use for M&A and partnership opportunities. And as of March 31, 2022, our last 12 month ended net leverage ratio stood at approximately 2.8 times.

We also intend to provide shareholders with a sustainable return of capital in the form of a dividend that is targeted at a 20% payout ratio of GAAP net income.

We think that we can provide this return to shareholders while preserving the ability to increase the level of investment in the business to drive accelerated constant currency revenue growth rates in the future, all while maintaining a very strong liquidity profile.

That completes my prepared remarks as it relates to Embecta's historical financial performance. Next, I'd like to outline for you Embecta's financial guidance for the last six months of fiscal year 2022.

Beginning with certain key assumptions, unlike the first half of 2022, our second half of 2022 guidance attempts to take into consideration the various costs that Embecta will incur moving forward as an independent publicly traded company.

This includes various contract manufacturing agreements that we will have in place with BD, which result in third-party revenue for Embecta at very little gross margin. While certain other supply agreements are for inputs that Embecta that needs to obtain from BD, such as cannulas which are used in Embecta's product offerings.

In addition to these contract manufacturing and supply agreement impacts, our second half of 2022 financial guidance also assumes incremental expenses that we will incur because of the lease of our Holdridge, Nebraska facility from BD, as well as additional expense that we'll incur as a result of BD continuing to factor certain accounts receivable on Embecta's behalf.

Furthermore, our second half of 2022 financial guidance also assumes six months' worth of transition services expense related to a variety of things that BD will perform for Embecta. The transition services expenses were determined and costed out at a very detailed line item level.

These TSAs can last for a period not to exceed two years, and can be terminated earlier by Embecta with a defined notice period. As part of our second half of 2022 financial projections, we also included estimates associated with costs that we anticipate incurring as we stand up our own public company.

These costs include expenses associated with stock based compensation, external audit fees, stock exchange listing fees, and most notably, the expenses associated with the creation of various corporate functions and infrastructure, such as finance, treasury, tax, HR, IT, legal supply chain, and regulatory and quality.

Moreover, as we prepared our second half of 2022 financial guidance, we also attempted to take into consideration the impact that COVID-19 is having on China and some other markets, geopolitical concerns, such as the war in Ukraine, as well as having negative impacts stemming from inflation and supply chain disruptions.

We have attempted to give due consideration to these elements, but we realize that the future trajectory of these factors is inherently unpredictable.

Lastly, given that approximately half of Embecta's business is derived internationally, I wanted to take a moment and highlight what we assumed for some of the key currency pairs that affect our business. Those being the euro/dollar, dollar/Japanese yen, and dollar/Chinese yuan.

We based our second half of 2022 financial estimates on spot rates that existed at the end of April, including a euro to dollar rate of approximately $1.07, a dollar to Japanese yen rate of approximately ¥127 and a dollar to Chinese yuan rate of approximately CNY 6.6.

These assumptions compared to the second half of 2021 rates of approximately $1.19, ¥109, and CNY 6.5, respectively.

Now that I've outlined some of our key assumptions, I'd like to now take you through our financial guidance for the last six months of 2022 and provide some perspective as to what some of the key drivers of change are, as compared to the first half of 2022 results.

Beginning with revenue, we expect to generate approximately $555 million in the second half of 2022 or approximately $1.1 billion for the 12 months of fiscal year 2022.

This -year revenue assumption is largely consistent with the revenue dollar amount that BD had included in its original fiscal year 2022 revenue guidance for diabetes care, as well as what it recently removed when it provided remainco guidance approximately one week ago.

The approximately $555 million of revenue in the second half of 2022 would represent a decrease of approximately 7% on an as-reported basis as negative foreign currency headwinds are anticipated to drive about half of the decline, while constant currency revenue is expected to be down approximately 3.5%.

The constant currency revenue decline that we expect to see in the second half of 2022 is due to a few main items. First, COVID-19 continues to be a headwind, and this comes in two forms as during the second half of 2021, we saw a rebound from COVID and an increase in the volume of our products that were purchased.

While during the second half of 2022, we're now faced with disruption impacting China and some other countries. These COVID dynamics create a difficult revenue comparable for us in the second half of 2022. However, to date, we have been able to maintain our operations and continuity of supply throughout this period.

Next, while we do not have a material amount of revenue in Russia and Ukraine, the war and the resulting geopolitical and certainties are expected to have an adverse impact on our business in the second half of 2022.

And third, I referenced earlier certain decisions that we made in the latter part of 2021 to not participate in certain business moving forward. Like the first half of 2022, this will also be a modest headwind in the second half of the year as well.

This is a temporary headwind for Embecta as we compare the second half of 2022 results to the second half of 2021 results. Lastly, as we prepare for the spin, during the second half of 2021, we analyze our rebate reserves, which caused us to reverse some previously established liabilities.

This caused us to recognize additional revenue in the second half of 2021 and that is not expected to reoccur in 2022. These rebate reversals which occurred in 2021 would have been a headwind for us in the second half of 2022.

However, that is being offset almost one for one by approximately $15 million worth of contract manufacturing revenue we expect to generate during the second half of this year related to product we will sell to BD. Turning to adjusted gross margin. During the second half of 2022, we expect our adjusted gross margin to be somewhere in the low 60s.

This represents a decrease from the 70% level that we achieved during the first half of 2022, and it's due to a few factors. One being increased expenses that we will incur relating to standing up Embecta.

Second being the combined impact of contract manufacturing and supply agreements that are in place with BD, both from the perspective of purchasing cannula from BD at a markup, as well as from selling certain product back to BD at only upper single digit gross margin.

And third being incremental inflation, raw material and supply chain costs we expect to incur during the second half of the year. Moving next to TSA expense. As I stated earlier, the TSAs last for up to two years.

Assuming we maintain every TSA, during the first 12-month period, we will be charged a total of $70 million or approximately $35 million during the second half of 2022. Again, that assumes we maintain every TSA that is currently available to us.

Finally, that takes me to adjusted EBITDA margin, which during the second half of 2022, we expect to be in the low 30s. Like gross margin, the decline in adjusted EBITDA margin from the first half of 2022 to the second half of 2022 is due to a few primary drivers.

These include the change in gross margin discussed earlier, incremental standup costs and additional investments in R&D. Despite these incremental investments, Embecta is very well positioned with robust adjusted EBITDA margins as we embark as an independent company. That completes my prepared remarks. Let me now turn the call back over to Dev.

Dev?.

Thank you, Jake. Slide 12, please. On slide 12, you will see some of the reasons why we think we have a strong business. First, as we showed earlier, we have a strong core, which translates into a compelling financial profile. Second, our core is broadly defensible.

We have solid intellectual property, comprised of approximately 2,000 patents, knowhow and trade secrets. Our manufacturing knowhow has been gained over decades of experience, and it's carefully protected. And we have a long-term agreement with BD to continue to provide cannulas. These are the needles that are used in our products.

Finally, we are able to build an organizational capability around the single-minded mission of developing and providing solutions for people with diabetes. This purpose motivates our workforce and continues to attract talent to Embecta. Slide 13 please. Let me now walk you through how our business today provides the financial foundation for growth.

Both our business model and our healthy balance sheet provide a strong core. First, we have a stable, recurring, geographically diverse revenue base with almost half of our revenue coming from outside the United States. Our products are chronic use and the vast majority of people with diabetes will continue to use injection devices.

Second, our margin profile is healthy. This is supported by our brand recognition, long history of reliable supply, scale and efficient manufacturing and distribution infrastructure. Third, we have a history of generating strong positive cash flow from our operations.

Fourth, we have modest leverage and are considerably below the net leverage covenants in our credit agreement. Fifth, our starting cash balance will allow us to quickly capitalize on any suitable growth opportunities that we identify. Taken together, you can see that these elements allow us the financial flexibility to invest for growth.

On slide 14, you will see that we intend to make strategic investments to accelerate our long-term growth profile. We expect to do this through commercial investments, the introduction of next gen products, and M&A. First, we can continue to expand and penetrate through our core business.

This includes ecommerce investments, as well as educating people with diabetes and other stakeholders on the benefits of using a new device for every injection. Second, we intend to increase our investment in R&D. And we remain excited about our patch pump that has been developed for the Type 2 market.

Finally, we will seek partnerships and acquisitions where we can use our manufacturing strength and commercial capabilities to add value.

Before we open up the line for Q&A, I would like to extend my thanks to the global Embecta team for everything they have done and continue to do to serve people with diabetes even as we stand up Embecta as an independent company. To summarize, Embecta is in a strong position after the spin.

We are excited about the unique opportunity we have to create a preeminent diabetes-focused company in the world. Thank you for your interest in Embecta. With that, operator, we'll now open up the line for questions..

[Operator Instructions]. And our first question will come from Marie Thibault with BTIG..

Dev and Jake, congrats on your first quarter here as a public company. I wanted to start here – thank you for the extensive detail on the financial guidance. Just two quick questions on that.

With the decision to discontinue some of the business, is that a process that you go through annually? Or is that part of a rolling review? I certainly understand the impact to this year's guidance on a year-over-year basis. But wondering if that's something we should expect in future years.

And secondly, you gave some details on inflationary pressures, certainly on the cost input side. Curious if there's also inflationary pressure for the consumer and whether that changes their choice of whether to choose an Embecta brand or another perhaps less expensive brand. .

Mary, this is Dev. With respect to the process of evaluating the choice of business that we do, let me just step back here. We have – you can imagine, over sort of our global scope hundreds of thousands of customers, and the way we do transact business with those customers depends certainly on the geography we are in.

And those customers tend to be everything from retail, serving customers to patients, retail pharmacies, hospitals to pharmacies, distributors, vendors. The place where we pay particular attention to, as business comes up for renewal often is, is certainly on the tender side. And the dynamics of the tender business can differ year-over-year.

I would say that the choice that we made almost 12 months ago, it's a process we go through every year certainly, but I would not certainly expect to see that level of change year-over-year. That's not something that I would expect to see, though it is a process that we go through certainly annually.

We play pay close attention obviously to the business that we transact. With respect to the inflationary pressure, again, just given the diversity of our geographic revenue, the contracts that we have with our customers are different. We do have the ability to take price and adjust price as we renew our contracts, and we have done so.

So we do have the opportunity to pass on some of these inflationary sort of cost pressures that we are feeling to the customer base.

I would also like to point out that, if you are a person with diabetes that is incurring spend on obviously treating diabetes, the cost of our products tends to be a very small part of, if you will, the total spend on managing the disease. And so, that allows us a certain flexibility as well. .

Maybe if I can just jump in just real quick just to add to what Dev said, again, we certainly do not think that these types of things moving forward would necessarily still have the same impact.

Obviously, as the new management team came on board – and though for the past year, we were working on the spin and being prepared for the spin, we also wanted to make sure that from a longer term standpoint, that the health of the business was in a really good position as we sort of embarked as our own company.

So, as we thought about which customers and which business we may want to no longer do business with, that was certainly taken into consideration.

And we certainly feel that we are in a much better position from a health standpoint moving forward to grow Embecta more sustainably as a result of some of these decisions, even though they'll have temporary impacts in 2022.

And just as it relates to sort of our longer term guidance or financial thoughts that we had put out there a few months ago in early March when we had an investor event, these types of things were taken into consideration when we talked about our nearer term through 2024 financial targets, which would have called for flattish constant currency revenue CAGR.

So, we still feel very, very comfortable with those near-term numbers that we put out a few months ago..

A question here then on R&D and M&A thoughts. We're all very curious to hear more about the closed loop patch pump.

Do you think that's something we'll hear more sort of on progress on that this year? Or is that more of a 2023 event where we might start to hear about some milestones? And secondly, as you consider M&A in the future, what's the ideal profile for something that you would look to? Is it all insulin delivery? Is it large? Is it small? Is it fast growing? Is it pre revenue? Any color you can give there would be helpful..

I'll take both the questions. Certainly, Jake can expand on them afterwards. With respect to the insulin patch pump, as I mentioned in my remarks, it's been developed into a breakthrough device designation of the FDA, and we continue to have this discussion with the FDA. It's progressing nicely.

With respect to the milestones that you should expect to see, certainly, when we are ready to file our 510(k) on the hardware, the pump itself, certainly that's something that we'll be talking about. With respect to timing, I'm going to try to stay away from it.

I think as you just heard, when we gave our near term guidance through the end of 2024, we hadn't included any revenue from the pump in that near term guidance. With respect to milestones, though, I would say certainly you'll hear more about that in fiscal 2023 from us as we achieve certain milestones.

And let me leave it on that on the pump for now, Marie. With respect to your second question, maybe I'll ask Jake to start off and then I'll jump in..

Marie, could you just repeat the second part of the question, please?.

It was essentially trying to understand M&A profile of what you see in a potential target? Would they be large, small? Is it totally focused on insulin delivery, pre-revenue, early stage or commercial stage? Any details?.

From an M&A standpoint, I think this is truly where I think a company of our size has real advantages. We're at $1.1 billion or so in revenue. We have the scale, I think, to be relevant to our customers and to patients. And that's both in the US and internationally.

But at only about $1 billion or so in revenue, I think we also have the unique opportunity to use M&A as a real growth accelerator for us. And the types of transactions I think that we would be sort of interested in really fall in three, I would say, different types of categories.

First, pre-revenue, technology type deals that we would use in order to try and augment our own internal R&D product development efforts. And those tend to be smaller in nature and may have certain milestones and contingent payments tied to it.

So, minimal cash up front and then maybe a series of milestones based on revenue achievement or certain regulatory approvals. Second, I think we're also interested in continuing to be more and more direct in certain international markets. So, we're largely direct today, but in some countries, we still go through distributors.

So, to the extent that it might make financial sense and we would look to potentially become more direct in certain markets and recoup that pricing, that distributor pricing, and that would show up as improvements in revenue and improvements in margin for us.

And then last, I would say kind of scale transactions, right? And a scale transaction for Embecta is going to be far, far different than maybe the types of things that some other companies would be looking at.

So, we wouldn't necessarily envision ourselves competing with different targets for, say, some very, very large companies because, candidly, the types of things I think that we could look at that could move the needle in a more material fashion for us are not the types of things that would really move the needle on a more material way for a larger company.

So, I think those are sort of the three large buckets of different types of M&A that we're interested in..

With respect to the therapeutic area question, Marie, about would it be diabetes focused, and the way we think about it, honestly, are does it leverage strengths and capabilities that we have, right? Is it going to leverage emerging market infrastructure? Can we leverage our manufacturing capabilities? Can we leverage our distribution strengths? Right? Is it a product that can be sold to the retail pharmacy where we have long history of working with retailers to provide our products to patients? So, we will certainly remain focused on diabetes, but I wouldn't preclude other products that we can sell to our existing channels where we can leverage our strengths as well..

Our next question comes from Cecilia Furlong with Morgan Stanley. .

I wanted to turn back to your guidance for the back half of the year.

If you could provide a bit more color, just what you're contemplating, specifically US versus international contributions, taking into account both what's going on in Russia-Ukraine, China, lockdowns and then also your decision to step away from certain businesses, just how all of that rolls into your 2H – your back half guidance and then anything you can provide also and how you're looking from [indiscernible] standpoint 2Q to 4Q would be helpful...

For the second half of the year, for revenue, we would expect to generate somewhere around $555 million.

And again, that would equate to about $1.1 billion in full-year revenue, which is largely aligned with what BD had in their original guidance for diabetes care and what was recently taken out from their numbers when they're providing remainco guidance.

So, the decline in constant currency revenue in the second half of the year of 3.5%, again, it's really in those three buckets that I mentioned in the prepared remarks.

COVID being more of a year-over-year headwind because of the fact that we had some benefits last year in terms of purchasing, whereas now there are some disruptions and we're certainly, obviously, trying to navigate through them, but there are some temporary disruptions going on in some markets.

Russia and the Ukraine, that's going to have a smaller impact to us in the second half of the year. We probably do somewhere to the tune of maybe like $6 million or so in annual revenue to Russia and Ukraine.

So, right now, in the second half of the year, we're sort of factoring in that that might be somewhere to the tune of like a 3-million-dollarish headwind. We're not really contemplating really much, if any, revenue in the second half of the year there.

And then, the larger impact that it's going to have in the second half of the year, for us, really comes back down to those decisions that we refer to sort of walk away and exit certain business. Again, that, in our mind, is more temporary in nature, and it's certainly not something that is indicative of Embecta's ability to grow in the future.

So, while it's going to have somewhat – it had somewhat of a temporary impact in the first half of the year compared to 2021, it's going to have another temporary impact in the second half of the year as compared to 2021.

But when we step back and we made those decisions last year, we really did it for the health and improvement of the business in the long term, and it's something we feel very comfortable with..

And if I could follow up also, just on R&D, really, what you're contemplating from an investment standpoint, both behind the patch pump this year, as well as going forward, but also the rest of your pipeline, just if you could talk a bit more about your expectations for R&D both, again, the back half of this year, but also into 2023. .

From an R&D spend standpoint, we obviously are very committed to making sure that Embecta continues to accelerate the investment in R&D and other commercial initiatives as well to really try and drive an accelerated constant currency revenue growth rate in the future.

There are a few different new product introductions that will be coming to the market over the next few years, probably, most notably, hopefully, the insulin patch pump. In the second half of the year, we would expect R&D expense to ratably tick up from sort of the first half of the year levels.

And that will obviously be one of the areas that is going to be causing – we talked about EBITDA margin. And maybe I'll just mention EBITDA margin just very quickly just so that the investment community understands.

I would caution people that the first half of the year does not – it's not indicative of all of the costs that Embecta will incur as we move forward.

But in the second half of the year, going from the first half of the year, the EBITDA margin, one of the items that is going to be driving it is obviously a very deliberate decision on our part to continue to invest within R&D, but then there are other items, including increased raw material costs and inflation, as well as all the investments that we need to make in order to stand up Embecta.

And as we step back and think about sort of the first half of the year to second half of the year adjusted EBITDA margin trends getting into the low 30s in the second half of the year, I would say well over 80% of that sequential movement from the first half of the year to the second half of the year has to do with increased costs to stand up Embecta as its own company, including the impact from the different contract manufacturing agreements..

Our next question comes Danielle Antalffy from SVB Securities..

I just have a question on – more of a high level question.

And given your leverage to emerging markets, I would love to hear your views on how emerging market device innovation is evolving and how rapidly that could potentially accelerate and sort of how you're positioned against that? Kind of thinking, are emerging markets where the US was from a device perspective a decade ago, 20 years ago, and sort of how that's changing?.

Emerging markets, as I mentioned before, is a source of strength for us.

Right? And so, you sort of asked about it in the context of what United States was maybe a decade ago, but I think there are some differences as we look forward, right? So, as we think about the fact that we have 300 commercially focused employees in emerging markets, we have a plant in China, one of our newer plants, right, that's in one of the key emerging markets for us, that makes products for China as well as other emerging markets.

As we look forward, the majority of the growth in the number of people with diabetes is expected to occur in emerging markets, right? So, if we start at the very top, that's where we're going to have growth in number of patients as we look forward.

Secondly, as the GDP per capita sort of increases and as economies improve, those folks are getting better access to care and better access to insulin.

And I think that's where I think you will see the strengths of our company really match with what the needs of that market are because, as those folks get access to care, they are going to focus on insulin, they are going to focus on injection devices. And we are well positioned there.

Now, there will be a section of the market that will adopt newer drugs, the more advanced technology, but I think that is indeed decades away. I think we are just perfectly positioned to really match our strengths with the needs of the region.

As we think about our M&A as well, by the way, we keep looking for, and we will keep looking for, and finding opportunities to really add to the bag for emerging markets. Part of our M&A strategy isn't that we need a product that's going to serve – the same product to serve our entire global market.

So, we tend to use our sense over in emerging markets to continue to widen our product portfolio over there, so we can really meet the needs of those patients more holistically..

Our next question comes from Mathew Blackman with Stifel..

And just one for me with two parts. First is, just want to make sure I heard, Jake, what you said. You sort of touched on this. I think you said, like, 80% of the second half versus first half sequential step up in investments were standup costs.

So, first, did I hear that correctly?.

Yeah, Matt. You did. So, as we think about going from the first half of the year to the second half of the year, gross margin, obviously, is going from, again, 70%.

But that is something that is not necessarily reflective of Embecta and all the costs that we would really incur moving forward, to the second half of the year, which we would expect it to be sort of in the low 60s.

And from a gross margin standpoint, I would say that there's really three main drivers, the first of which I would sort of put in the bucket of kind of business related, that being incremental inflation, raw material and kind of some supply chain increased expenses that we would expect to incur in the second half of the year.

And then, the other two are really I would say in the bucket of kind of spin related. And that's really related to an increase in expenses related to standing up Embecta.

And then, second, just the impact of the different contract manufacturing agreements that we're going to have in place where we're selling product to BD at very low upper single digit gross margin. We would expect to sell about $15 million worth of product at upper single digit margin in the back half of the year to them.

And then, on the flip side, there is product that we need to source from them and that's going to come at a markup, and none of that is necessarily included in the first half of the year. So, gross margin is obviously going to have an impact in terms of the flow through to adjusted EBITDA margin.

And then, the other things that are impacting sort of the first half of the year to second half of the year adjusted EBITDA margin, which, again, I would caution you that the first half of the year isn't necessarily obviously reflective of Embecta as a standalone publicly traded company, whereas the second half of the year, we're certainly trying to take into consideration all the different costs that we think that we're going to incur.

But gross margin is, obviously, going to have an impact. There are going to be some incremental standup costs that are going to impact OpEx. And then, there's additional investment in terms of R&D as well.

Now, all that said being, expecting to be sort of in the low 30s in terms of adjusted EBITDA margin in the back half of the year, that is very, very robust adjusted EBITDA margin, and it's going to allow us really to continue to make all the necessary investments that we think we need to do moving forward to try and get Embecta to a more sustainable top line growth moving forward.

And also, adjusted EBITDA margins in the low 30s really still allows us that flexibility in terms of being able to invest organically, and then also use our balance sheet to the extent that M&A becomes available..

I guess the follow-up there is, if I think about those incremental investments, let's say, largely in R&D, that other portion of the incremental increase of second half versus first half, is there any way to tease out even in the roughest sense, those investments that you're making that you would expect to have – and I'm making these timeframes up, but sort of near-term payouts or payoffs or returns like the next 12 to 24 months, balanced versus, say, sort of longer term projects that may play out visibly, maybe on the top line three to four years.

Is there any way to sort of balance or give us a sense of the balance between those investments?.

I would say, most of our increased R&D spend is really around our insulin patch pump. And as you've commented before, certainly, we wouldn't sort of encourage anybody to think about revenue from that through the near-term guidance we've provided through 2024. So, it's an area of intense focus for us.

We're committed to sort of investing as needed to make to make that project come to life and achieve commercial success. But revenue from the patch pump, we certainly haven't included in our near-term guidance through the end of 2024..

Thank you. That is all the time we have for today's call. Thank you for your participation..