Becton Dickinson BDX Thesis East Coast Asset Mgmt

8/6/2019 Becton Dickinson BDX Thesis East Coast Asset Mgmt

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Anant Ahuja MD, Associate Research Analyst

Christopher Begg CFA, Chief Investment Officer

Jack McManus CFA, Director of Research

July 14 2010

Becton, Dickinson and Co. BDX (millions $ except per share data)Share Price as of July 14, 2010 69.59$ Cash 1258 P/E 13.5

Shares Outstanding 233.3 Debt 1691 EV / EBITDA 7.7

Market Cap 16235 TEV 16668 ROIC 23.5%

EPS 4.92$ Debt/Capital 27% Short 2.76% Summary of Valuations

Curr. Price FCFx Intrinsic Value FCFx Discount to Intr. Val.

DCF* 69.59$ 13.4 94$ 18.1 -35.5%

EPV w/ FCF Growth** 69.59$ 13.4 92$ 17.7 -32.9%

EPV No FCF Growth (Risk)* 69.59$ 13.4 65$ 12.5 6.5%

*asssumes discount 8% IRR to 2013 17.56%**assumes discount 8% ROIC 22%

East Coast Investment Thesis Summary

Becton Dickinson is a valuable niche business with a diverse line of products that are well suited to increase in demand

with the aging trend of the baby boomer generation. It has been oversold due to weak 2009 sales, unfavorable FX and

concerns over exposure to European sovereign debt (35% sales in EU), all of which are transient and overstated,

respectively.Despite this selloff, we see the core fundamentals of the business as unchanged. The company has

multiple sources of double digit revenue growth across high margin products, has been maniacal about improving

margins through cost cutting and benefits from competitive barriers that are sustainable. Upcoming catalysts for the

business include US stimulus dollars, European legislation mandating safety equipment in hospitals, continued

expansion into emerging markets and organic growth in volume due to expansion of access and aging population.

They are trading at 8x EV/EBITDA and 14x trailing earnings, both well below their historical 5 year averages of 10.1

and 21.3, likely due to myopia from concerns over Europe and fear of a double dip recession. From a free cash flow

perspective, they are essentially trading at a ~4% premium to intrinsic value assuming no future growth in free cash

flow. This is obviously an unrealistic scenario given their historical performance, substantial market share and

diversified nature of the business. In valuing the reproduction value of assets (or current market value) upon which BD

operates, the market has valued the franchise itself at just over $1.8B, a slight premium to last years free cash flow

alone. Management has a history of conservatism but recently had salaries frozen to 2009 levels due to missed revenue

targets, leading to unrealistically low revenue guidance for 2010. Using conservative proforma estimates of growth in

free cash flow and revenue correlated to historical ROIC, we estimate thebusiness has an intrinsic value of $90-

$95/share representing a 35-40% upside and 17.6% annualized IRR over three years.

THE BUSINESS

1. BD Medical: Parenteral drug delivery supplies including IV tubing, needles and syringes (52% revenue) soldto hospitals and pharma/biotech companies

2. BD Diagnostics: Blood and urine collection supplies along with diagnostic system technology formicrobiology detection (31% revenue) sold mostly to hospitals

3. BD BioSciences: Laboratory research machines and reagents/kits (17% revenue) sold to laboratories andprivate sector for drug discovery and basic science research

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Approximately 80% of their products are disposable Price points evenly spread: 30% low priced, 30% mid-tier, 30% premium 55% of sales are international, 35% from Europe Diversified supplier and customer base, no customer accounting for >10% sales and 60% of all sales are to

medical facilities

THE MOAT

BD benefits from multiple competitive advantages that have helped maintain a formidable moat which makes

meaningful competition from new entrants incredibly challenging.

Economies of Scale: BD has a massive distribution network spanning the US, Europe, Asia, Latin America andAfrica. They are well positioned to accommodate pricing pressure due to smaller local low cost competitors.

BD continues to build manufacturing facilities closer to the point of sale further helping to reduce costs. They

have a track record of acquiring niche businesses with specialized products and then plugging those products

into a global distribution network. Their bulk purchasing of raw materials, much of which is resin, also helps to

insulate them from fluctuations in costs.

Razor and Blade: BD Biosciences consists mostly of laboratory research equipment in which large machinesare complimented with reagents. It currently represents 17% of sales, with 9% revenue CAGR over the

previous five years and an average operating margin of 26%. The nature of this business is such that research

facilities continue to buy reagents from BD and do not upgrade machinery frequently due to the high upfront

cost ($100,000+) per machine.

Customer Captivity and High Switching Costs: Approximately 60% of their customers are hospitals whotypically do not switch to other manufacturers once they have established relationships as there are high

switching costs due to retooling of their entire laboratory. Additionally, there is a high level of brand loyalty

among their customers due to quality assurances from BD.

Technology and Innovation: BD has pioneered the use of safety equipment in both drug delivery anddiagnostics (blood collection). By selling only push button collection systems they have set the standard in

worker safety. The safety business generates $1.6B in sales with 60% gross margins and is their fastest

growing segment (>10% annually). The US has already widely adopted the use of safety technology but BD

still has ample room to grow sales in Europe and Asia where they can build upon their existing supply chain

NONDISCRETIONARY PRODUCTS

BD is the antithesis of a one-trick pony. They have diversified their business in products, price points and geographies

and benefit from having a nondiscretionary nature to their core business. The overall market for BDs products is

growing due both to the aging population in US and Europe and their growing expansion into emerging markets. The

revenue stream is very predictable and correlates with increases in global healthcare delivery. Although a significant

number of their products could be considered commodities (needles, syringes, tubing etc) very few competitors have

the distribution capacity of BD and cannot absorb price compression which the same ease. Additionally, few

competitors have the safety and quality record of BD, making switching to a low cost supplier potentially risky.


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BD Medical

BD Medical consists of drug delivery platforms such as IV tubing, syringes and needles for the delivery of parenteral

medications. It comprises 52% of revenue with operating margins averaging 28% over the past five years. BD has

carved out a niche in safety products related to medication delivery (needle locks, splash guards) and has the leading

market share in US, Europe and Asia for autoinjectors and safety needles with user-friendly caps. The IV catheter

business alone has over 1000 SKUs and generates $500m annually in revenue. Their newest product, Nexiva, is far

advanced to existing catheters and is correspondingly priced 3x higher than older products. As medical centers work

towards improving safety and reducing adverse events due to medication error, the demand for these products will

continue to grow. Many medical centers have attempted to reduce medication errors by increasing the use of preloaded

syringes, which is an area in which BD has excelled.

BDs total diabetes business is 10% of revenue and is growing at double digits year over year. Erratic glucose levels

due to errors in dosing are still a very common problem, particularly among the elderly, leading to hospitalizations and

high costs to the healthcare system. BD has focused on developing pen needles for insulin injection and has grown

revenue from this business at 12% annually. They have five new insulin pen products they plan to launch in the next

four years and they recently launched the smallest insulin pen needle on the marketat 4mm (32 gauge). This is a

significant development in their arms race in insulin needles with Novo Nordisk, with whom they are a global duopoly.

BD Diagnostics

Diagnostic testing makes up 3% of all healthcare dollars spent but influences 70-80% of medical decision making.

The growth in elderly population over the next decade will be a natural boost to BDs diagnostics business. It is very

rare that a patient over the age of 65 is seen for an ailment without some form of accompanying labwork. The

diagnostics business is 2/3 microbiology related and with the recent acquisition of HandyLabs, BD has made progress

in healthcare associated infections (MRSA), an area of increasing costs and scrutiny. The preanalytics products consist

of blood tubes (vaccutainers), pushbutton needles for blood drawing and urine collection devices, all of which are used

in high volume but with lower margins than their other products. The diagnostic systems business has more pricing

power as it focuses on more complex samples and testing.

The current market for HAI testing is estimated to be a $1.2B global opportunity and approximately 35% penetrated

in the US with forecasted global growth of 20%, leaving ample room for profitable growth given their vast

manufacturing and distribution network in which they can plug these high margin products. BD also has a valuable

growing franchise in cervical cancer screening with their Tripath product, growing at 10% per annum with significant

sales from Asia due to an increase in legislation mandating pap smears as part of routine healthcare.

BD only sells push button collection systems which are far superior to traditional caps for worker safety. They have

had ample success in the US as evidenced by the chart below and have begun to see an uptick in sales in China and

India. A recent paper by Frost and Sullivan reported a 77% decline in needle stick injuries following conversion to BD

safety collection devices.


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BD Biosciences

This business benefits greatly from recurring revenue due to its razor-and-blade nature. BD Biosciences generated 17%

of sales in 2009 with average operating margin of 26%. Approximately 50% of their sales are to NIH funded

laboratories in the US but they have steadily increased sales in emerging markets such as China, who are investing in

basic sciences research and are in dire need of reliable equipment. The average price of a BD machine is over $100,000which is followed with sales of reagents and supplies specific to BD machines. Reagents constitute on average 60% of

the sales while machines are 40%. BD has approximately 65% of the flow cytometry market in the US, which is a

staple process in basic cell research. BD also sells basic laboratory supplies such as pipettes, petri dishes and culture

media, comprising 25% of the BD Bioscience sales.

THE ECONOMICS

Since 2005 BD has improved gross margins 170bps, operating margins 370bps and net income margin 370 bps.

2005 2006 2007 2008 2009 5yr AvgGross Margin 50.9% 51.3% 51.7% 51.3% 52.6% 51.6%

EBITDA Margin 25.7% 26.4% 27.8% 28.5% 30.2% 27.7%

Operating Margin 19.9% 20.5% 20.8% 21.7% 23.7% 21.3%

Net Margin 13.5% 13.1% 14.2% 15.9% 17.2% 14.8%

They have been consistently focused on improving their cost structure and are very well equipped to absorb pricing

pressure without impacting the bottom line. Management has shown an extraordinary focus on costs and makes it a

point to discuss cost cutting efforts in nearly every presentation/conf. call they conduct. A key driver to their COGS is

resin which is used in medical plastics manufacturing and is linked to oil prices. BD has set up a supply chain that can

easily adjust to fluctuations in resin prices through internal initiatives such asReLoCo (Reliable Low Cost) which is a

cost cutting program recently unrolled with the goal of cutting 20-30% of all costs in half of all medical-surgical

products (impacting 27% of total revenue). They have also launched efforts specifically towards a more streamlined

supply chain for their IV catheter production, currently a $500M business, which they anticipate will take 2-3 years to

complete. This has been part of the EVEREST program, created for overall cost cutting in supply chains across all

product lines.


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Management has guided that the effects of this will begin to be seen in the back half of 2011 and into 2010. They have

also stated a long term goal of 50bps per year improvement in operating margins, which based on historical

performance is likely a conservative target.

BD also has an impressive record of creating shareholder value:

ROIC average 23.5% over past 5 years ROE average 22.2% over past 5 years EPS CAGR 15.8% over past 5 years 37 consecutive years of dividend increases Consistent, predictable record of share repurchases with $450M allocated for this year

THE OVERALL STRATEGY

BD has a long track record of making disciplined acquisitions of companies with specialized products and then

plugging those products into their vast distribution network. Their methodical acquisition strategy involves three key

metrics: strategic fit, ROIC and minimal/transient earnings dilution.Management has stated repeatedly they

absolutely do not acquire a business unless all three criteria are met. With regard to margins, they set a goal of 1-2

years for the acquisition to be accretive.

With regard to other uses of cash,since 2005 BD has bought back ~$500M of shares/year, and future buybacks are

very likely. The CEO recently stated they do not plan to allow cash to pile up on the balance sheet and if there are no

good acquisition targets they will return cash to shareholders. Additionally, management has closed manufacturing

facilities that were not strategically located near point of sale, further helping to reduce costs. Core measures of the

business demonstrate a safe level of predictability:

2005 2006 2007 2008 2009 2010

Rcvbl Days 57.6 56.3 62.9 55.7 59.6 55.7

Inventory Days 53.0 55.7 61.1 55.7 59.0 56.9

Pybl Days 35.1 31.8 32.1 27.6 28.4 29.0

Cash Cycle (Days) 75.5 80.2 91.9 83.8 90.1 83.6

Working Capital 1,366.5 1,517.9 1,868.1 1,898.6 2,061.2 2,308.2

Change in Wrkng Capital 27.3 151.4 350.2 30.5 162.6 247.0

Wrkng Capital as % Sales 25.6% 26.5% 29.7% 26.8% 28.8% 30.9%

BD also has an admirable dedication to sustainability, from both an environmental and social perspective, and use

triple bottom line analysis in every business unit. They have an internal Global Office of Sustainability and have

maintained their commitment even during recent economic difficulties. Management recently discussed their continued

efforts to reduce the amount of plastic per item, and the company has embarked on an ambitious 2015 goal to reduce

energy and water consumption in manufacturing by 30% and 15% respectively.

MANAGEMENT INCENTIVES / CORPORATE GOVERNANCE

BD uses a pay-for-performance system for its management compensation that is weighted to factor ROIC, EPSand true revenue growth (not factoring currency exchange).Managementincentives are designed for long termvalue creation instead of short-term risk taking, such as ownership minimums, caps at 200% of target forexceeding goals and equity-based comp that vest over three years. The board members are voted for one yearterms and have minimum stock ownership requirements, further protecting shareholders.


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The CEO, Ed Ludwig, owns 1.1M shares, the most of any insider and total insider ownership equals1.4% of CSO

BD has a clawback provision for internal groups that surpass financial goals if it is later realized it wasdone through nefarious means

Compensation for non management directors was changed in 2006 to replace stock options with restrictestock units, not to be distributed until completion of their service on the board

2010 salaries for senior management were frozen at 2009 levels due to missed revenue growth target Equity based comp in 2009 for the top four executives ranged between 61-70%

RECENT DISCLOCATION (Street View)

35% of sales are from Europe. BD had some exposure in receivables to Greeks sovereign debt problems andwhen factoring unfavorable FX (stronger dollar) revenue growth was only 1% in 2009. BD has historicallyhedged its currency exposure with futures, but stated that beginning in 2011 it will cease to hedge currencyexposure as they felt it was not a wise use of capital. The street is concerned about additional weakening of theEuro and the potential impact it could have to the top line without these currency hedges

2009 was a year of frozen budgets, facility closures and layoffs for medical centers. There were little to nocapital expenditures or upgrades to existing equipment. BD was impacted significantly by this as 60% of theirsales are to hospitals

High unemployment in 2009 translated to a drop in preventive care due to loss of health insurance coverage.As a result physician visits were down along with ancillary testing and medication administration that go intandem to those visits

Much of the BD Medical franchise consists of prefilled syringes which are sold to pharma and biotechcompanie, both of whom suffered in 2009

The winter of 2009 saw a 9% drop in infectious disease testing due in large part to a very mild flu season. Notonly did this impact testing related to flu, but also impacted other areas that are tethered to a physician sick

visit such as blood draws and medication delivery

The broader Healthcare Index has been down over 9% year-to-date

UPCOMING CATALYSTS (East Coast View)

Factoring currency fluctuation, or the next country in Europe to default, is difficult and ignores core fundamentalsthe business and the natural boost from higher volume will add to the top-line

As part of the Federal Stimulus, $10B was allocated to NIH laboratories, which are forecasted to increasepurchasing of capital equipment in 2H:2010.

The European Union passed a mandate on March 8, 2010 to require safety devices for the administration ofmedication and collection of blood for any member state hospital. They have set a mandate that all facilities mube converted by 2013. Most European healthcare facilities are heavily government funded so it is likely thisrequirement will be met in order to secure future assistance. BDs safety business, spread across medical (drugdelivery) and diagnostic (blood collection) is currently a $1.7B business with gross margins of 60% and is thefastest growing segment of their business. This regulatory catalyst will further fuel this growth given theirsubstantial presence in Europe (35% sales).


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Approximately $1.3B in annual sales come from China, India, Middle East, Africa and Latin America but Chinawill likely be the most significant source of volume growth. China is experiencing the largest urban migration inthe history of the world, with one new city with a population > 1 million being created every year. These tiertwo cities (Chongqing, Wuhan, Guangzhao) will likely see the most growth in healthcare infrastructure as they arwell behind more established cities such as Shanghai, Beijing and Hong Kong. China is also underway in a threeyear health reform to build 2000 hospitals and insure 90% of the total population. BDs efforts to movemanufacturing closer to the point of sale will help them capitalize on this explosive growth in emerging markets.

BD is growing revenue across all three lines of business, but their highest margin business (safety $1.7B) is actualthe fastest growing. They are also growing the global diabetes business ($700M) and healthcare associatedinfections business ($1.1B) at double digits.As they move towards higher margin products and away from legacycommodity products along with continued cost cutting, margins will likely expand at an even greater rate thanhistorical averages

We define high quality earners as having high earnings, stable earnings and low levels of leverage. BD falls into thcategory of high quality healthcare businesses that are suppliers of nondiscretionary products and services, whoalong with the broader healthcare index have dropped in price this year. BD, however, is the cheapest and highestquality earner in comparison to its three leading competitors. Its current debt/capital, although not the lowest, is inline with previous years and has shown little variation year-to-year.

CompsMkt Cap (billions)

P/E EV/EBITDA 5 Yr EPS CAGR Debt/CapitalBDX 16.3 13.5 7.7 12.5% 27%

CR Bard 7.4 16.6 9.0 8.5% 6%

Baxter 24.4 15.4 9.9 11.9% 36%

Covidien 20.3 17.4 9.4 2.3% 27%

Management has a history of conservative guidance. When examining earnings in 1H:2010, they are well on trackto beat street expectations and their own guidance for year-end revenue growth (6%). This is likely due tomanagement incentives, which include revenue growth as a target.Management exceeded their EPS threshold in2009 but missed revenue growth targets. The forward threshold for payout for 2010 revenue growth wassubsequently lowered to 7% from 8.5%. The weighting for revenue growth was also increased to 70% from 60% i2009.In light of frozen salaries, it is very likely managements conservative revenue guidance for 2010 is at leapartially linked to their desire to earn their payout given it was missed it last year.

With regards to future free cash flow, the CEO recently stated he sees CAPEX leveling off in the coming year ortwo,suggesting the business is headed towards maintenance CAPEX. Management does not break outmaintenance from total CAPEX, but it is safe to assume the maintenance CAPEX will be lower than currentnumbers, setting the stage for a boost to FCF.


8/12

VALUATION

Earnings Power Valuation With ZERO Growth in FCFCurrent share price is valuing future free cash flow at only ~ $4.50/share. At current free cash flow of $1.3B, fothe stock to drop below $65/share would imply the market is expecting future free cash flow to contract or remainflat, however everything about the business suggests exactly the opposite, making this a reasonable floor for

valuation. This has factored in a healthy level of conservatism in assuming no CAPEX is being allocated towardsgrowth but instead towards steady state

Free Cash Flow 2005 2006 2007 2008 2009 2010

EBIT 1,064 1,178 1,307 1,537 1,695 1,750

Cash Interest Expense (69) (63) (51) (36) (26) (26)

Effective Interest Rate 0 0 0 0 0 0

Cash Tax Expense (184) (399) (345) (331) (369) (369)

Effective Cash Tax Rate 0 0 0 0 0 0

Amortiz of Intangibles 30 35 113 111 94 95

Depreciation Expense 282 301 328 366 376 393

CAPEX (316) (457) (556) (602) (591) (598)

CAPEX Maintenance (316) (457) (556) (602) (591) (598)

Owner's Earnings (FCF) 875 658 847 1,082 1,206 1,272

growth 4.1% -24.8% 28.6% 27.8% 11.5% 5.5%

FCF/share 3.36$ 2.57$ 3.32$ 4.28$ 4.89$ 5.21$

PPE + LTA 2,164 2,449 2,782 2,977 3,312 3,448

WC 1,366 1,518 1,868 1,899 2,061 2,308

Total Capital Base 3,531 3,966 4,650 4,876 5,373 5,756

ROIC 24.9% 19.6% 20.7% 24.7% 24.7% 24.0%

Incremental Return 131 (101) 183 244 120 55

Incremental Capital 144 436 684 226 497 383ROIIC (Ret on Incr Capital) 90.6% -23.2% 26.7% 108.3% 24.2% 14.4%

Value of Business With ZERO FCF Growth:

No Growth in FCF

(in mil lions of $ except per share data)

Discount Current FCF EPV Cash Debt Mkt Cap FD Shares Price

7.0% 1,272 18,177 1,258 1,480 17,955 241 75

7.5% 1,272 16,965 1,258 1,480 16,743 241 70

8.0% 1,272 15,905 1,258 1,480 15,683 241 65

8.5% 1,272 14,969 1,258 1,480 14,747 241 61

9.0% 1,272 14,138 1,258 1,480 13,915 241 58

9.5% 1,272 13,394 1,258 1,480 13,171 241 55

10.0% 1,272 12,724 1,258 1,480 12,502 241 52

10.5% 1,272 12,118 1,258 1,480 11,896 241 49

11.0% 1,272 11,567 1,258 1,480 11,345 241 47


9/12

Earnings Power Valuation with Growth in FCFWhen using historical performance and reasonable estimates of future growth in free cash flow, the business isworth closer to $92/share.

Historical Proforma

FCF Growth 8.3% 8.0%

ROIC 23.5% 23.5%

Reinvestment 35.4% 34.0%

NPV 22,497

Debt 1,480

Cash 1,258

Mkt Cap 22,275

FD Shares 241

Price 92$

discount 8%

(in mi llions of $ except per share data) FCF Growth

92$ 5% 6% 7% 8% 9% 10%

6.0% 112 119 127 135 144 1536.5% 102 108 115 122 129 138

7.0% 93 99 104 110 117 124

7.5% 86 90 95 101 107 113

Discount 8.0% 79 83 88 92 98 103

8.5% 74 77 81 85 90 95

9.0% 69 72 75 79 83 87

9.5% 64 67 70 73 77 81

10.0% 60 63 65 68 71 75

10.5% 57 59 61 64 67 69

FCF Growth

92$ 5% 6% 7% 8% 9% 10%

15.0% 74 77 80 83 87 90

17.0% 76 79 82 86 90 9419.0% 77 81 84 89 93 98

21.0% 78 82 86 90 95 100

ROIC 23.0% 79 83 87 92 97 103

25.0% 80 84 89 93 99 104

27.0% 80 85 90 95 100 106

29.0% 81 85 90 96 101 107

31.0% 81 86 91 96 102 109

33.0% 82 87 92 97 103 110

ROIC

92$ 16% 18% 20% 22% 24% 26%

6.0% 126 129 132 134 135 137

6.5% 113 116 119 120 122 1237.0% 102 105 107 109 111 112

7.5% 93 96 98 100 101 102

Discount 8.0% 85 87 90 91 93 94

8.5% 78 80 82 84 86 87

9.0% 71 74 76 78 79 80

9.5% 66 69 71 72 74 75

10.0% 61 64 66 67 69 70

10.5% 57 59 61 63 64 65


10/12

ProformaUsing a combination of management guidance, consensus estimates and factoring normalized economic conditionin 2010-2013 relative to 2009, a proforma indicates a similar target of$94/share:

Proforma 2010E 2011E 2012E 2013E

BD Med-Surgical Revenue 3987 4280 4617 5002

BD Diagnostics Revenue 2372 2539 2731 2951

BD Biosciences Revenue 1249 1299 1355 1416Total Revenue 7608 8119 8703 9370

EBITDA 2271 2400 2569 2761

Net Income 1252 1356 1470 1603

Total FD Shares 240.9 240.9 240.9 240.9

EPS 5.19$ 5.63$ 6.10$ 6.65$

P/E 13.0 12.0 11.1 10.2

Cash 1646 2463 3377 4202

Total Debt 2545 2616 2698 2590

EV/EBITDA 7.4 7.0 6.5 6.1

FCF/Share 5.28$ 5.70$ 6.16$ 6.65$

FCFx 12.8 11.9 11.0 10.2

ROIC 23.50%

IRR to 2013 17.47% DCF 2010E 2011E 2012E 2013E TV

(in mi llions of $ except per share data)

Revenue 7608 8084 8591 9130

Operating Income 1773 1873 1986 2106

Taxes (495) (512) (551) (593)

D&A 498 517 550 584

CAPEX (776) (639) (679) (721)

Less Increase in WC (30) (131) (139) (148)

Free Cash Flow 970 1109 1167 1228 25302

Discount Period 0.5 1.5 2.5 3.5 3.5

DCF 934 988 963 938 19327

PV 23149Net Debt 429

Fair Value Equity 22720

Shares Outstanding 241

Price* 94$

* not including sharebuybacks; assumes flat dividend growth


11/12

Balance Sheet ValuationIn adjusting the asset base for reproduction value (from a new entrants perspective) or current market value (fromthe perspective of buying the whole business) it is clear the true value of their assets is grossly understated:

(in millions of $ except per share data)

Assets Stated Value Adjustment Incremental Cost Total Reproduction Cost

Cash 830.7 none 0.0 830.7

ST Investments 427.4 none 0.0 427.4

Receivables 1142.2 add back al lowance for doubtful accnts 48.0 1190.2Inventory - marked at FIFO - -

Materials 160.3 none (FIFO) 0.0 160.3

WIP 233.2 none (FIFO) 0.0 233.2

Finished Products 772.6 none (FIFO) 0.0 772.6

Prepaid Exp, Deferred Tax 373.2 markdown (373.2) 0.0

PPE 2967.7 Add accumulated depreciation 3339.1 6306.8

Goodwill 764.1 3 Years SG&A expense 4500.0 5264.1

Core/Developed Technology 296.7 Add 3 Years R&D 1200.0 1496.7

Other Intangibles 266.6 add back accumulated amortization 448.2 714.8

Capitalized Software 228.3 add back amortization x 3 years 160.0 388.3

Other LTA 480.6 none 0.0 480.6

Total Assets 8944 - - 18266

Liabilities Stated Value Adjustment Incremental Cost Total Reproduction Cost

Payables 250.1 none 0.0 250.1Accrued Expenses 1016.8 none 0.0 1016.8

4.55% due 4-2013 201.1 none 0.0 201.1

4.90% due 4-2018 205.2 none 0.0 205.2

5.00% due 5-2019 493.7 none 0.0 493.7

6.00% due 5-2039 245.3 none 0.0 245.3

6.70% due 8-2028 167.1 none 0.0 167.1

7.00% due 8-2027 168.0 none 0.0 168.0

Total LTD 1480.4 none 0.0 1480.4

Other Liabilities 1046.5 none 0.0 1046.5

Total Liabilities 3794 - 3794

In using the above adjustments to assets to represent reproduction/market value, the book value of equity iscorrespondingly much higher than reported

At current market cap of $16.3B, the market has valued the franchise itself at ~$1.8B, just a slight premium to the lasttwelve months free cash flow alone.


12/12

RISKS

Ethane prices, which could drive up the cost of polyethylene used in manufacturing Rising oil prices, which would drive up the cost of resin, a substantial portion of their COGS. The effects of this

would be delayed approximately 6 months as they use FIFO inventory

Medical Device Excise Tax of 2.3%, to go into effect January 2013- still unclear what portion of the business thiswill impact if at all

Low cost manufacturers in China, India or other rapidly developing emerging markets Difficulty in continued margin improvement with a forecasted 30 bps increase in R&D expense- BD has historical

lagged in R&D relative to its competitors, which management stated will close over the next 3 years.

Further sovereign debt exposure from Europe. They are not hedged to the euro beginning 2011 Delays in distribution of federal stimulus dollars to NIH

CONCLUSION

We think the current share price is a result of macro fears and lack of granular clarity in the short term. Ourunderlying investment strategy with BD can be described quite simply as being greedy while others are fearful. Th

current share price offers a margin of safety that is rare for a business of this quality. BD is what we categorize as high quality compounder franchise. They have year over year increases in dividend, improving profitability,increasing ROIC and increasing free cash flow all while maintaining, most importantly, a healthy and transparentbalance sheet.

BD has a unique and valuable combination of innovation and distribution. They achieve innovation through acombination of internal R&D and acquisitions. In combination with a vast, efficient and growing internationaldistribution network, we see a lethal combination of attributes that will further differentiate this company from itscompetitors- essentially, the strong will get stronger. Additionally, their dedication to sustainability is something wvalue. East Coast firmly believes that sustainability and profitability are not mutually exclusive but in fact self-reinforcing.

The market, in its predictable myopia, has oversold BD out of concerns and speculation over matters that are notimplicit in the underlying metrics of the core business. Given our long term investment philosophy, we see thisopportunity in a 2-3 year holding period at a minimum.Assuming a holding period to 2013, at a discount of 8% westimate the IRR of a current BDX share purchase to be 17.6% on an annualized basis.

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Becton Dickinson BDX Thesis East Coast Asset Mgmt