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McIntire Investment Institute Michael Nugent, COMM 2010 Election Memo BDX December 1, 2008

Becton, Dickinson and Company

Sector: Healthcare | Industry: Medical Equipment and Supplies | NYSE: BDX

Thesis: A global leader in medical devices, Becton, Dickinson and Company presents a long-term investment opportunity for the McIntire Investment Institute because of the resilience of the firms sales in economic downturns, the solid performance of the company driven by innovation, the boon that healthcare reform in the United States should provide, and strategic acquisitions.

I. Financial Summary

Share Price 11/28/08 Shares Outstanding Market Cap LT Debt P/E (forward) 52 Week Range Float Short Interest Avg Daily Volume (3m) Beta

$63.53 243.57 million $15.47 billion $955.7 million 11.74 $58.14 - $93.24 241.22 million 1.12 million 1,963,240 0.73

II. Business Overview Becton, Dickinson and Company (BD) manufactures and sells a host of medical devices, diagnostic equipment, and cell analysis products to healthcare institutions, clinical laboratories, and private consumers. Incorporated in New Jersey in 1906, the company is divided into the BD Medical, BD Diagnostic, and BD Bioscience product segments. BD Medical comprises the majority of the firms revenues and includes Medical Surgical Systems, Diabetes Care, Ophthalmic Systems, and Pharmaceutical Systems. As the secondary sales-generating division of the company, BD Diagnostic is comprised of the Diagnostic and Preanalytical Systems divisions. Supplying life science research labs with tools for cellular anaylsis, BD Bioscience is the smallest revenue contributor. Becton,

Dickinson and Company employs around 28,000 people in 50 countries and derives 55% of its revenues from countries other than the US. BD Medical The leading segment in terms of sales with 54% of 2007 revenues, BD Medical consists largely of the Medical Surgical Systems division. This division includes the most basic medical supplies the company sells: syringes, scalpels, and medical needles. In particular, BD is major supplier of delivery systems for regional anesthesia such as spinal, epidural, and peripheral block. The Medical Surgical Systems segment Infusion Therapy is the worldwide market leader in IV catheters. They also provide fluid management components, site prep materials, and peripherally inserted central and midline catheters. The BD Nexiva Closed IV Catheter System, for example, successfully reduces insertion attempts and exposure to blood borne pathogens for healthcare specialists. The Injection Products component enjoys the leading market position in hypodermic needles and syringes. Precisionglide needles by BD are proven to be the sharpest in the world, making them reliable for healthcare professionals. The safety of these professionals is an obvious complementary concern for the company, and their Sharps Disposal Products ensure exactly that. These are devices designed for the safe disposal of used needles. The Surgical Products division of Medical Surgical Systems includes surgical blades and scalpels, blade handles, and disposable scalpels. Diabetes Care is another major branch of BD Medical, providing the worlds leading insulin injection devices and educational programs to patients suffering from diabetes. More accurate control of blood glucose levels is achieved with the exact insulin delivery systems offered by BD. Under the Diabetes Care segment is the Sports Injury Treatment products, which includes soft orthopedic care goods likes ACE, TRU-FIT, and ACE Gold elastic bandages. Digital thermometers also fall under the Diabetes Care segment. The third division of BD Medical is Ophthalmic Systems, which provides tools for cataract surgery, refractive correction procedures, and glaucoma treatments. BD Medical products designed to deliver prescription drugs effectively are included in the Pharmaceutical Systems segment. Prefilled drug delivery containers made by BD are used by more than 200 pharmaceutical companies. The delivery systems utilize glass and plastic syringes, nasal spray devices, and microinjection systems, which allow for precise vaccine delivery interdermally. BD Diagnostics Broken down into Diagnostic Systems and Preanalytical Systems, BD Diagnostics provided 30% of BDs 2007 fiscal year revenues. The Diagnostic Systems segment is the global leader of products and instruments used for diagnosing infectious diseases. BDs Diagnostic Systems are used in clinical markets for detecting a microbial presence, and the industrial market uses such products for ensuring sterility in pharmaceuticals and medical devices. As an example, the BD Phoenix Automated Microbiology System is an increasingly popular tool for rapidly identifying the genus and species of a potentially dangerous cellular organism. Having acquired TriPath Imaging Inc. in 2006 for $350 million, BD has commercialized molecular diagnostic products for various cancers including cervical, prostate, ovarian, and breast.

Preanalytical Systems provides modern blood collection systems, evacuated tubes, and needles. BD offers products for urine, venous, and capillary fluid collection, transfer, and transport. This segment includes the BD Vacutainer and Microtainer brands. For example, the BD Vacutainer Push Button Blood Collection Set is the worlds only collection device utilizing simple push-button technology to safely extract blood. BD Bioscience Comprising 16% of 2007 revenues, BD Bioscience includes advanced bioprocessing equipment, bioimaging devices, cellular reagents, cell analysis software, and basic lab items like plastic containers and tubes. Each of these product lines facilitates drug and vaccine discovery and development, biopharmaceutical production, and disease management. Customers include blood banks, transplant centers, hospitals, and pharmaceutical companies. Of particular interest is the BD BACSCounta clinical flow cytometry platform that allows researchers to monitor cellular reactions to HIV/AIDS therapies. This same technology is used to specify variants of leukemia and lymphoma. Competitors Becton, Dickinson and Company competes against other major producers of medical devices, such as Abbott Laboratories, Baxter International, Covidien, CR Bard, DENTSPLY International, Henry Schein, and Patterson Companies. Compared to its rivals, BD is a mid-level firm in terms of market capitalization. In a manner distinct from most of its peers, the firm is focused on revenues from its basic medical supplies and diagnostic equipmentnot advanced pharmaceuticals, dental devices, veterinary care products, or the treatment of single ailments. With the exception of Covidien, which derived 60% of its 2007 revenue from medical devices, no competitor has the exact product commitment as BD. Covidien itself is positioned more in wound closure instruments than IVs, scalpels, and catheters. Overall, BD enjoys an established market position in the basic medical instruments which it produces. Management The management team at Becton, Dickinson and Company is competent and experienced in the medical industry. The Chairman, President, and CEO Edward Ludwig has been a director since 1999. He is also on the board of the health insurer Aetna. Vincent Forlenza will replace him as President in January 2009. Forlenza has been held posts in strategic planning, marketing, and management in each of BDs three business segments since 1980. Scott Bruder, M.D., Ph.D. has served as the Chief Technology Officer since September of 2007 and previously held positions at Johnson & Johnson. Outgoing Chief Financial Officer John Considine is to be replaced in December 2008 by David Elkins, who served as Chief Financial Officer of AstraZeneca since 2006. III. Investment Theses

1.) The products sold by Becton, Dickinson and Company are removed from broad economic variability
As a provider of essential medical devices, BD enjoys the inelastic demand for its products that characterizes much of the healthcare industry. Despite the current economic malaise, BD can expect

demand to remain stable. Hospitals, blood banks, and independent healthcare professionals will require medical tools regardless of the macroeconomic conditions facing consumers. Recall the stocks low beta of 0.73. To say that BD is a firm with countercyclical offerings is not to differentiate it from the rest of its entire industry. But, BD provides the most basic and the most necessary pieces of medical hardware. In an industry known for secure demand, BD provides products that cannot be conceived as discretionary. During recessionary times, unemployment typically rises. The Federal Reserve currently forecasts unemployment in 2009 to be between 7.1% and 7.6% nationally. Most US workers get their health insurance through their employer, but when jobs are lost so too is this coverage. Elective treatments, surgeries, and preventative checkups offered by healthcare service providers are thus negatively impacted. But BD largely provides the basic tools for health professionals like scalpels, syringes, and IV cathetersitems that are used consistently and not just with specific treatments. Furthermore, blood and pathogen diagnostic devices sold by BD are required operational implements.

2.) Strong historical performance and innovative new products signal future growth
Becton, Dickinson and Company has enjoyed tremendous revenue and earnings growth over the last ten years. Since 1998, the firm has seen earnings grow at a 17% annualized rate. In fiscal 2008, earnings rose 27% over 2007. Revenues over the same period have increased at a compound annual growth rate of 8%. Fiscal 2008 saw revenue growth of 13%. It follows that the companys projected 2009 earnings growth of 8-10% is plausible. The company has signaled its confidence in its growth prospects. On November 25th the firm authorized a 10 million share repurchase and an increase in its quarterly dividend of 33 cents per share, an increase of 4.5 cents. R&D spending by BD has grown at 10% annually since 2005, totaling $396.2 million in 2008. Fueling this growth is the creation of innovative products like the BD ProbeTec, the BD Viper, the Vacutainer line, safety engineered products, the prefillable drug delivery line, and the BD Nexiva System. The BD ProbeTec ET System is the worlds first immediate DNA amplification assay for the detection of Chlamydia and gonorrhea in cellular specimens. The system is the fastest on the market as it is able to test 552 samples in 8 hours. The system includes tools for collecting and keeping samples viable and is used in conjunction with the BD Viper, which automates the handling of the samples. According to the Centers for Disease Control and Prevention, Chlamydia is the worlds leading cause of infectious blindness, and some 89 million chlamydial cases are reported globally each year. In the US it is the most frequently reported bacterial sexually transmitted disease and cases increase annually. Gonorrhea cases in the US total 700,000 annually and are growing. With more people getting tested to ensure they are free of STIs and more people contracting these STIs each year, demand for the efficient BD ProbeTec ET System is assured. The BD Vacutainer System of blood collection offers medical professionals an entire line of products related to the safe extraction and storage of blood samples. As previously mentioned, Vacutainer Push Button Blood Collection devices greatly prevent exposure to contaminated needles by allowing healthcare workers to extract the needle with the push of a button. Using a single hand, safer blood collection can be assured without compromising patient care. The Vacutainer collection tube is the worldwide market leader in evacuated blood collection tubesa technology first invented by BD. These systems are the best in the world when it comes to protecting healthcare

professionals from exposure to potentially deadly blood borne pathogens such as hepatitis B and C, and HIV. Hospitals and blood banks do not sacrifice quality for price when it comes to such important implements. Safety engineered products refers to a host of devices designed specifically with the safety of healthcare professionals in mind. These products typically involve highly specialized needles such as those used in anesthesia and parenteral drug delivery. General and ophthalmic surgical blades, syringes, and pen needles also fall under this segment. Proprietary technology is used in these items. For example, the SafetyGlide system for syringes offers fast, single-handed needle shielding to prevent needlestick injury. Similarly, the Integra syringe is the worlds only retracting syringe with a detachable needle. Such benefits reduce waste space for hospitals and allow them cut costs since multiple uses can be derived from a given vial. Pharmaceutical companies recognize the benefits of using prefilled packages for their drugs, and BDs prefillable drug delivery products look to benefit from this. Prefilled drugs, which are prepackaged for immediate use in a syringe or nasal device, reduce the risk of dosage errors and contamination and are easy to use for healthcare workers and patients. Indeed, an independent study conducted for BD revealed that the majority of healthcare professionals prefer prefillable drug delivery systems instead of hospital vials. BD offers prefillable glass and plastic syringes for rapid use in emergencies, self-injection devices for patient compliance in taking medications, and auto-disable injection systems which can be used by non-professionals for intramuscular injections. These prefilled systems will continue to sell as innovative medications continue to consist of larger molecules like monoclonal antibodies. Such medication molecules will require the use of intravenous or parenteral delivery systems that can be used by average people in their own homes. The BD Nexiva system is the worlds first all-in-one IV catheter system. The system is designed to reduce insertion attempts and workers exposure to a patients blood through an innovative bloodcontainment system. As the needle is withdrawn, a needle-shield is immediately engaged. The system comes preassembled to minimize blood leakage and dual access ports allow for simultaneous administration of other needed fluids and medications. Significantly, the system uses patented BD Vialon Biomaterial, which softens by 70% after entering a blood vessel. As a result, the IV can be in place far longer than it would with a simple plastic tube.

3.) Healthcare reform in the US will increase demand for Becton, Dickinson and Companys products
Typically, broad healthcare reform by national governments is seen as a cause for concern for the entire healthcare industry. In truth, the effect of a national healthcare plan on the industry depends on the type of plan being implemented. In a single-payer health system, payments to healthcare providers are made from a single national fund. National systems in Canada and the UK operate on this principle. With the national government as the single-payer, a sole buyer enters the market for healthcare goods and services. Unsurprisingly, a national government in such a position leverages its monopsony power to lower prices across the healthcare industry. Correspondingly, the national government has a limited amount of funds with which to procure medical treatment for its citizens. Margins on medical goods and services fall, as does demand for expensive or elective treatments. Fortunately for Becton, Dickinson and Company, the new American presidential administration under Barack Obama has expressed its interest in subsidized healthcare reform. In such a system,

healthcare coverage would be extended. It has been proposed that existing coverage by employers be expanded, and coverage for children be mandated. By creating a National Health Insurance Exchange, Obama hopes to create options for health insurance coverage by having the federal government subsidize part of the cost borne by citizens. Essentially, a national healthcare reform in the mold proposed by Barack Obama would allow more Americans to pay for healthcare. This would directly increase the demand for medical goods and services considering that more people would have the ability to pay. Indeed, there are no politically viable movements for a single-payer system in the US. Because the government would not be able to exercise monopsonistic pricing power, margins will not be drastically altered. In fact, the Obama healthcare reform plan was criticized in the September 2008 edition of Health Affairs because it fundamentally fails to curb the underlying high prices of healthcare goods and services. Simply put, Obamas plan has the federal government paying the high costs of healthcare instead of consumers. It follows that the demand for medical treatments and devices will rise as more people have the ability to payor have the government pay on their behalf through subsidized insurance.

4.) Strategic acquisitions serve to enhance Becton, Dickinson, and Companys market position
Becton, Dickinson, and Company improves its capabilities through the acquisition of smaller, more specialized medical device firms. Recent purchases by BD include GeneOhm Sciences, TriPath Imaging, Plasso Technology, and Cytopeia. On February 14, 2006 BD bought all remaining shares of GeneOhm Sciences for $233 million in cash. GeneOhm is an emerging leader in devices and instruments used to rapidly diagnose infectious microorganisms. These products are typically employed to monitor deadly types of healthcareassociated infections (HAIs) like methicillin-resistant Staphylococcus aureus (MRSA). These drugresistant pathogens arise in healthcare settings more frequently every year. The CDC reports that some 90,000 people die in the US each year from such infections. The BD GeneOhm assay detects these infections in just 2 hours, whereas conventional analysis takes 24-72 hours. Also, this detection system is unique because it pinpoints several different strands of MRSAs that may be present in a single sample. Less sophisticated devices simply declare analysis errors in these cases. BD purchased the remaining outstanding shares of TriPath on December 20, 2006 for $362 million in cash. TriPath develops and manufactures products designed to detect and diagnose different types of cancers. The stage of cancerous development in the body is also determined with TriPaths products. This acquisition came as the result of a five-year collaborative relationship between BD and TriPath to develop diagnostic instruments for cancers. Within BD Diagnostics, the TriPath product line includes several instruments used in the preparation and processing stages of cytology screenings. Such instruments use proprietary molecular biomarkers to flag cells that could be cancerous. Plasso Technology was acquired by BD for $10.4 million in cash on May 4, 2007. Plasso Technology was purchased very early in its development as a business. Adding to the BD Biosciences segment, the firm has designed a specialized binding plate that allows researchers to immobilize certain chemicals without modifying them at the molecular level. Such technology has a wide range of applications, including the mapping of functional sites on proteins and antibodies.

On May 13, 2008, BD announced its acquisition of Cytopeia for $42.9 million in cash. Cytopeia develops advanced flow cytometry cell sorting instruments. The acquisition enhances the BD Bioscience business unit. The Influx cell sorter by Cytopeia is a configurable cell sorting platform that can be applied to a broad scope of research uses. The sophistication of the controls is important for life science researchers developing pharmaceuticals. Complemented by the market-leading BD FACSAria II cell sorter, the Influx offers BD Bioscience the chance to better position itself in the industry.

Because BD returns strong operating cash flows, the company is able to make such acquisitions at will. Cash flows from continuing operations in 2008 were $1.7 billionan increase of $452 million over 2007. IV. Value-Added Research Contacts
Amalia Miller, Associate Professor University of Virginia Economics Department, ECON 416 Economics of Health o Widely recognized that single-payer national health insurance would shrink margins of medical device companies and erode business for private insurers o Variations on the principle of subsidized insurance, like Obamas plan, would serve to cover more people with insurance o It seems reasonable to expect medical products to grow in use as more people have the option of going to a doctor. This benefit to healthcare providers often gets ignored in political healthcare debates Jason Shafrin, Ph.D. Candidate in Economics at the University of California-San Diego, Author of the blog Healthcare Economist o Considering systems in the UK, Canada, and France, margins on basic medical supplies fall drastically when single-payer national healthcare systems are employed o All realistic reform proposals in the US ignore the issue of high prices in healthcare and just expect the federal or state governments to pay o Suppliers of medical goods and services are tacitly hoping for a subsidized system since it inserts a big new customer in the market: government Clay Cole, Analyst, UBS Investment Banking Division, Healthcare Coverage Group o The socialist fears surrounding national healthcare reform blind most people to the benefits that a subsidized plan would have for parts of the industry o Health insurers would suffer in such a plan, but any firm making revenues by providing medical care stands to benefit from having what is essentially an injection of customers into the market Dr. Patrick Ballard, Private Practice Cardiologist, Atlanta GA o BD known for quality of productsespecially in terms of worker safety o Sales consultants from BD in regular contact with his office, ensuring product satisfaction o For the basics like scalpels and syringes, he couldnt even think of a competitor

Linda Carr, Blood Collections Representative, Virginia Blood Services o Virginia Blood Services uses BD needles for intravenous blood extraction o Satisfied with the product and with the BD sales representatives Dr. Rebecca Dillingham, Infectious Disease Physician in the University of Virginia Health System o Appreciates the focus the company has on needlestick protection o Familiar with their needlestick protection products and is impressed with how safety features are often built-in components of their basic medical devices like syringes Dr. John Dick III, Hospitalist in the Dartmouth-Hitchcock Medical Center of Dartmouth College o Awaiting response Dr. Stephen Miller, Hematology/Oncology at the University of Tennessee Medical Center o Awaiting response

V. Ideas for MII Improvement Statement of Ethics: Currently, the MII has no known ethical guidelines when considering investment opportunities. I do not propose a Socially Responsible Investing ethic for the MII, but I believe that it is necessary to have a statement of our ethical considerations. This fall, Philip Morris International was presented as a Long. While the stock was not added to the portfolio, a concern for many membersthe presenting analyst includedwas the ethical implications of owning the firms shares. Adopting the approach UVIMCO takes to these matters would serve the MII well: make no constraints on the group in terms of investing opportunities, but if specific events arise, impose limits as desired. For example, UVIMCO has no limits on the companies in which it can invest, but they have a stated policy of avoiding investments related to events in the Darfur region of Sudan. Charter Transparency: So that members are aware of the MIIs structure, the groups charter should be posted to the MII website if possible. Member Education: Part of the MIIs mission is educating students in investment matters. There is a substantial amount of investing knowledge on the MIIs website. More than just past presentations and memos, the Analyst Handbook and Company Research Template documents provide analysts and interested members with useful methodologies for research and analysis. The Griffin Book List offers titles of interest to engaged members. Short PowerPoint presentations about investing fundamentals are also available. These documents should be updated where needed and brought to the attention of members. This semester, the MII management held brief seminars about investing fundamentals for the Stock Analysis Competition. A similar seminar could be offered at the beginning of each semester to introduce investing concepts and terms to members and interested UVA students alike.

Annual Reports: Reviving the practice of putting an annual report on the website would provide a convenient record of past portfolio holdings. Included in the annual report would be detailed information on the years holdings and the investment theses that led to those holdings. This would help management track stocks in the portfolio and avoid senselessly keeping investments which have exhausted their potential. Including summaries of the investment pitches that were made during the year and an explanation of managers decisions in the annual reports would serve to increase member-manager transparency.