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 year’s 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 the business 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) sold
to hospitals and pharma/biotech companies
2. BD Diagnostics: Blood and urine collection supplies along with diagnostic system technology for
microbiology detection (31% revenue) sold mostly to hospitals
3. BD BioSciences: Laboratory research machines and reagents/kits (17% revenue) sold to laboratories and
private sector for drug discovery and basic science research

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 x Approximately 80% of their products are disposable
x Price points evenly spread: 30% low priced, 30% mid-tier, 30% premium
x 55% of sales are international, 35% from Europe
x 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.

x Economies of Scale: BD has a massive distribution network spanning the US, Europe, Asia, Latin America and
Africa. 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.

x “Razor and Blade”: BD Biosciences consists mostly of laboratory research equipment in which large machines
are 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.

x Customer Captivity and High Switching Costs: Approximately 60% of their customers are hospitals who
typically 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.

x Technology and Innovation: BD has pioneered the use of safety equipment in both drug delivery and
diagnostics (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 BD’s 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.
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 SKU’s 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.

BD’s 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 market at 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 BD’s 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.
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 $100,000
which 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 Avg

Gross 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 as ReLoCo (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.
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:

x ROIC average 23.5% over past 5 years

x ROE average 22.2% over past 5 years
x EPS CAGR 15.8% over past 5 years
x 37 consecutive years of dividend increases
x 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, EPS
and true revenue growth (not factoring currency exchange). Management incentives are designed for long term
value creation instead of short-term risk taking, such as ownership minimums, caps at 200% of target for
exceeding goals and equity-based comp that vest over three years. The board members are voted for one year
terms and have minimum stock ownership requirements, further protecting shareholders.
 x The CEO, Ed Ludwig, owns 1.1M shares, the most of any insider and total insider ownership equals
1.4% of CSO
x BD has a clawback provision for internal groups that surpass financial goals if it is later realized it was
done through nefarious means
x Compensation for non management directors was changed in 2006 to replace stock options with restricted
stock units, not to be distributed until completion of their service on the board
x 2010 salaries for senior management were frozen at 2009 levels due to missed revenue growth target
x Equity based comp in 2009 for the top four executives ranged between 61-70%

RECENT DISCLOCATION (Street View)

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

x 2009 was a year of frozen budgets, facility closures and layoffs for medical centers. There were little to no
capital expenditures or upgrades to existing equipment. BD was impacted significantly by this as 60% of their
sales are to hospitals

x 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 in
tandem to those visits

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

x The winter of 2009 saw a 9% drop in infectious disease testing due in large part to a very mild flu season. Not
only 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

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

UPCOMING CATALYSTS (East Coast View)

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

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

x The European Union passed a mandate on March 8, 2010 to require safety devices for the administration of
medication and collection of blood for any member state hospital. They have set a mandate that all facilities must
be converted by 2013. Most European healthcare facilities are heavily government funded so it is likely this
requirement will be met in order to secure future assistance. BD’s safety business, spread across medical (drug
delivery) and diagnostic (blood collection) is currently a $1.7B business with gross margins of 60% and is the
fastest growing segment of their business. This regulatory catalyst will further fuel this growth given their
substantial presence in Europe (35% sales).
x Approximately $1.3B in annual sales come from China, India, Middle East, Africa and Latin America but China
will likely be the most significant source of volume growth. China is experiencing the largest urban migration in
the history of the world, with one new city with a population > 1 million being created every year. These “tier
two” cities (Chongqing, Wuhan, Guangzhao) will likely see the most growth in healthcare infrastructure as they are
well behind more established cities such as Shanghai, Beijing and Hong Kong. China is also underway in a three
year health reform to build 2000 hospitals and insure 90% of the total population. BD’s efforts to move
manufacturing closer to the point of sale will help them capitalize on this explosive growth in emerging markets.

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

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

Comps Mkt Cap (b illions) P/E EV/EBITDA 5 Yr EPS CAGR Debt/Capital

BDX 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%

x Management has a history of conservative guidance. When examining earnings in 1H:2010, they are well on track
to beat street expectations and their own guidance for year-end revenue growth (6%). This is likely due to
management incentives, which include revenue growth as a target. Management exceeded their EPS threshold in
2009 but missed revenue growth targets. The forward threshold for payout for 2010 revenue growth was
subsequently lowered to 7% from 8.5%. The weighting for revenue growth was also increased to 70% from 60% in
2009. In light of frozen salaries, it is very likely management’s conservative revenue guidance for 2010 is at least
partially linked to their desire to earn their payout given it was missed it last year.

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

x Earnings Power Valuation With ZERO Growth in FCF

Current share price is valuing future free cash flow at only ~ $4.50/share. At current free cash flow of $1.3B, for
the stock to drop below $65/share would imply the market is expecting future free cash flow to contract or remain
flat, 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 towards
growth 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 144 436 684 226 497 383
ROIIC (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 millions 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
x Earnings Power Valuation with Growth in FCF

When using historical performance and reasonable estimates of future growth in free cash flow, the business is
worth 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 millions of $ except per share data) FCF Growth

$ 92 5% 6% 7% 8% 9% 10%
6.0% 112 119 127 135 144 153
6.5% 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 94
19.0% 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% 113 116 119 120 122 123
7.0% 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
x Proforma

Using a combination of management guidance, consensus estimates and factoring normalized economic conditions
in 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 1416
Total 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 millions 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 23149
Net Debt 429
Fair Value Equity 22720
Shares Outstanding 241
Price* $ 94
* not including sharebuybacks; assumes flat dividend growth
 x Balance Sheet Valuation

In adjusting the asset base for reproduction value (from a new entrant’s perspective) or current market value (from
the 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 allowance for doubtful accnts 48.0 1190.2
Inventory - 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 0.0 250.1
Accrued 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

x In using the above adjustments to assets to represent reproduction/market value, the book value of equity is
correspondingly 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 last
twelve month’s free cash flow alone.
RISKS

x Ethane prices, which could drive up the cost of polyethylene used in manufacturing
x 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
x Medical Device Excise Tax of 2.3%, to go into effect January 2013- still unclear what portion of the business this
will impact if at all
x Low cost manufacturers in China, India or other rapidly developing emerging markets
x Difficulty in continued margin improvement with a forecasted 30 bps increase in R&D expense- BD has historically
lagged in R&D relative to its competitors, which management stated will close over the next 3 years.
x Further sovereign debt exposure from Europe. They are not hedged to the euro beginning 2011
x 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. Our
underlying investment strategy with BD can be described quite simply as being greedy while others are fearful. The
current share price offers a margin of safety that is rare for a business of this quality. BD is what we categorize as a
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 transparent
balance sheet.

BD has a unique and valuable combination of innovation and distribution. They achieve innovation through a
combination of internal R&D and acquisitions. In combination with a vast, efficient and growing international
distribution network, we see a lethal combination of attributes that will further differentiate this company from its
competitors- essentially, the strong will get stronger. Additionally, their dedication to sustainability is something we
value. 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 not
implicit in the underlying metrics of the core business. Given our long term investment philosophy, we see this
opportunity in a 2-3 year holding period at a minimum. Assuming a holding period to 2013, at a discount of 8% we
estimate the IRR of a current BDX share purchase to be 17.6% on an annualized basis.

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