Embecta Corp Fiscal Q4 2025 Earnings Call - Strategic Progress Amid Revenue Pressure and Promising GLP-1 Partnerships

Conference Call Operator: Welcome, ladies and gentlemen, to the Embecta Corp’s fiscal fourth quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode. Please note that this conference call is being recorded, and a replay will be available on the company’s website following the call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Mr. Khandelwal, please go ahead.

Pravesh Khandelwal, Vice President of Investor Relations, Embecta: Thank you, Operator. Good morning, everyone, and welcome to Embecta’s fiscal fourth quarter 2025 earnings conference call. The press release and slides to accompany today’s call and webcast replay details are available on the Investor Relations section of the company’s website at www.embecta.com. With me today are Dev Kurdikar, Embecta’s President and Chief Executive Officer, and Jake Elguicz, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. Such statements are, in fact, forward-looking in nature and are subject to risk and uncertainties, and actual events or results may differ materially.

The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today, as well as our filings with the SEC, which can be accessed on our website. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation. Our agenda for today’s call is as follows. Dev will begin with an overview of Embecta’s fiscal year 2025 performance and discuss progress across our strategic priorities. Jake will then review the financial results for the fourth quarter and full year 2025 and share our preliminary thoughts for fiscal year 2026.

Following these updates, we will open the call for questions. With that said, I would now like to turn the call over to our CEO, Dev Kurdikar.

Dev Kurdikar, President and Chief Executive Officer, Embecta: Good morning, and thank you for taking the time to join us. During fiscal year 2025, we achieved several key milestones. We made the decision to end our patch pump program, and we executed a restructuring plan aimed at enhancing our profitability and free cash flow. We completed the implementation of our own ERP system and operationalized a new distribution network and shared service capabilities in Latin America and India, marking the completion of a major complex multi-year stand-up program. With this, 100% of our revenue now flows through our systems, and all TSAs and LSAs that we had at spin have been exited. We substantially completed our brand transition efforts in North America, with more than 95% of our US and Canadian revenue now converted to the Embecta brand.

This was carefully managed to ensure continuity for customers and patients, and with this foundation in place, we have now commenced the next phase of the initiative globally. Transition activities have already begun in certain international markets, and we expect to be significantly complete in most regions by the end of calendar year 2026. Together, the completion of these separation and stand-up activities have freed up capacity, which we are now devoting to initiatives that we anticipate will help transition the company towards long-term sustainable growth. Supporting this goal, we advanced our GLP-1 strategy meaningfully during fiscal 2025. We are now collaborating with more than 30 pharmaceutical partners to co-package our pen needles with generic GLP-1 therapies. Several of these partners have already signed agreements and placed purchase orders, and our products are included in multiple GLP-1 partner-managed regulatory submissions expected to lead to commercial launches.

Our generic GLP-1 partners are anticipating launches in Canada, Brazil, and India during calendar year 2026. While we do not control the timing and content of the company’s regulatory submissions, nor the timing of their launches upon receiving regulatory approval, we are encouraged by their momentum and remain ready to support our partners by providing them with our pen needles. In parallel, we are continuing to expand the availability of pen needles in consumer-friendly small packs for the Canadian and select European markets. These small packs are targeted specifically towards out-of-pocket customers like GLP-1 users. Taken together, we continue to believe that the use of our pen needles with GLP-1s represents at least a $100 million annual revenue opportunity by 2033, and we anticipate that this will be a growing contributor to our results over the next several years.

We also initiated new product development programs for market-appropriate syringes and pen needles aimed at strengthening and expanding our portfolio with the goal to maintain our leadership position in our core product categories. These programs are important because we believe they will allow us to expand our reach into market segments that we do not significantly participate in. We continue to prioritize financial discipline and debt reduction, as throughout the year, we generated approximately $182 million in free cash flow, and we paid down approximately $184 million of debt, exceeding our original fiscal year 2025 target of $110 million. With leverage now at 2.9 times net debt to adjusted EBITDA, we continue to create financial flexibility to invest in potential organic and inorganic opportunities that can reshape Embecta’s long-term growth profile.

In summary, fiscal year 2025 was a year of solid execution on multiple fronts while outlining and initiating a new strategic direction for the company. From the standpoint of our financial results, we exceeded our previously provided fiscal year 2025 adjusted gross margin, adjusted operating margin, and adjusted EBITDA margin ranges, while our adjusted diluted earnings per share was at the top end of our previously provided guidance range. As we move into fiscal year 2026, we remain focused on the priorities and the long-term financial targets outlined at our 2025 analyst and investor day. Now, let’s review our revenue performance for the fourth quarter and full year. During the fourth quarter of fiscal year 2025, Embecta generated $264 million in revenue, reflecting a 7.7% decline year-over-year on an as-reported basis or a 10.4% decline on an adjusted cost and currency basis.

Within the U.S., revenue for the quarter totaled $142 million, reflecting a year-over-year decline of 15.2% on an adjusted cost and currency basis. The year-over-year decline was primarily driven by an unfavorable comparison to the prior year fiscal fourth quarter, which benefited from additional distributor orders that occurred because of the then looming U.S. port strike, totaling approximately $10 million, as well as the unwinding of the favorable order timing associated with the July 4 holiday that positively impacted our third quarter of 2025 results, totaling approximately $7 million. Additionally, year-over-year price in the U.S. was unfavorable by approximately $7 million, primarily due to milestone payments made to a large U.S. pharmacy customer. Turning to our international business, revenue for the fourth quarter totaled $122 million, representing an increase of 2.8% on a reported basis, but a decline of 4% on an adjusted cost and currency basis.

This decline was anticipated primarily due to lower volumes and year-over-year pricing headwinds within China. This was driven by heightened competitive intensity in China, fueled by the growing preference of local Chinese brands amidst an evolving U.S.-China geopolitical and trade environment. This was partially offset by performance in other emerging markets. While from a product family perspective, during the quarter, adjusted cost and currency pen needle revenue declined approximately 13.9%, syringe declined by approximately 4.5%, safety products grew approximately 3.7%, and contract manufacturing revenue grew approximately 8.5%. The year-over-year decline in pen needle revenue was driven by the same factors that impacted our U.S. and international results. Turning to our syringe products, the decrease was primarily due to ongoing end-market volume declines within the U.S.

This trend is not new and has persisted over the past several years and is consistent with the decrease in prescriptions for insulin vials as compared with insulin pens. This decline was partially offset by improved pricing. Finally, our safety products grew 3.7%, primarily due to improved pricing. For the full year, Embecta generated adjusted revenues of approximately $1 billion and $80 million, which represented a decline of 3.9% on an adjusted cost and currency basis. US revenues totaled $579.1 million, which is a decrease of 4.6% on an adjusted cost and currency basis. The year-over-year decline in the US was largely due to the aforementioned advanced distributor ordering that occurred in Q4 of fiscal 2024, associated with the potential port strike, as well as the continued end-market declines in syringe volumes. Meanwhile, international revenues totaled $501.3 million, which equated a year-over-year adjusted cost and currency decline of approximately 3.1%.

The decline in international revenue was primarily due to lower revenue contribution from China. Turning to our product family revenue performance, globally, our pen needle revenue declined approximately 7.1%, totaling $784.1 million. Fiscal year 2025 pen needle revenue reflects the confluence of several transitory factors, including advanced distributor ordering in the prior year, lower China revenue, and pricing headwinds in certain markets. Turning to our syringe products, revenues grew year-over-year by 1.7%, primarily driven by improved pricing, while our safety products grew 6.3% due to a combination of improved pricing and volume increases. Lastly, contract manufacturing revenue grew approximately 53.9% as compared to the prior year. With that, let me turn the call over to Jake for him to review other financial highlights, as well as to provide our preliminary financial guidance for fiscal year 2026. Jake.

Jake Elguicz, Chief Financial Officer, Embecta: Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta’s fourth quarter financial performance at the gross profit line. GAAP gross profit and margin for the fourth quarter of fiscal 2025 totaled $158.5 million and 60%, respectively. This compared to $173.8 million and 60.7% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted gross profit and margin totaled $159.5 million and 60.6%. This compared to $178.3 million and 61.4% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year volume and mix and price that Dev mentioned earlier, as well as the negative impact of foreign currency translation.

These headwinds were partially offset by manufacturing cost improvement programs, the favorable impact of net changes in profit and inventory adjustments, and lower freight costs. Turning to GAAP operating income and margin, during the fourth quarter, they were $56.5 million and 21.4%. This compared to $26.2 million and 9.2% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted operating income and margin totaled $66.7 million and 25.3%. This compared to $61.2 million and 21.1% in the prior year period. The year-over-year increase in adjusted operating income is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year, coupled with no TSA expenses within the current year.

This was partially offset by lower revenue and gross profit as compared to the prior year period. Turning to the bottom line, GAAP net income and earnings per diluted share were $26.4 million and $0.45 during the fourth quarter of fiscal 2025, as compared to $14.6 million and $0.25 in the prior year period. While on an adjusted basis, during the fourth quarter of fiscal 2025, net income and earnings per share were $29.4 million and $0.50, as compared to $25.9 million and $0.45 in the prior year period. The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, as well as a reduction in interest expense. This was offset by an increase in our adjusted tax rate from approximately 9.5% in Q4 of 2024 to approximately 25% in Q4 of 2025.

Lastly, from a P&L perspective, for the fourth quarter of 2025, our adjusted EBITDA and margin totaled approximately $89.9 million and 34.1%, as compared to $73 million and 25.2% in the prior year period. Turning to our full year results, GAAP gross profit and margin for fiscal 2025 totaled $676.8 million and 62.6%, respectively. This compared to $735.2 million and 65.5% in the prior year. While on an adjusted basis, our 2025 gross profit and margin totaled $687.3 million and 63.7%. This compared to $740.7 million and 65.7% in the prior year. The year-over-year decrease in adjusted gross profit and margin was primarily driven by lower year-over-year volume and mix and an unfavorable year-over-year impact from profit and inventory. This was partially offset by manufacturing cost improvement programs. Turning to GAAP operating income and margin, during 2025, they were $242.1 million and 22.4%.

This compared to $166.8 million and 14.9% in the prior year. While on an adjusted basis, our 2025 adjusted operating income and margin totaled $337.7 million and 31.3%. This compared to $296.9 million and 26.3% in the prior year period. Similar to the comments relating to the fourth quarter, the year-over-year increase in adjusted operating income and margin is due to similar factors that impacted the fourth quarter, those being the lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year, coupled with a reduction in TSA expenses. This was partially offset by lower revenue and gross profit as compared to the prior year.

Turning to the bottom line, GAAP net income and earnings per diluted share was $95.4 million and $1.62 during fiscal 2025, which compared to $78.3 million and $1.34 in the prior year. While on an adjusted basis, net income and earnings per share were $173.9 million and $2.95 during fiscal 2025. This compared to $143.1 million and $2.45 in the prior year. Like my comments relating to the fourth quarter, the increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I discussed, as well as lower year-over-year interest expense resulting from a reduction in outstanding borrowings under our term loan fee facility as we continue to pay down debt, somewhat offset by an increase in our adjusted tax rate from approximately 20% in 2024 to approximately 25% in 2025.

Lastly, from a P&L perspective, during 2025, our adjusted EBITDA and margin totaled approximately $415.3 million and 38.5%. This compared to $353.4 million and 31.4% in the prior year. Turning to the balance sheet and cash flow, during fiscal year 2025, we generated approximately $182 million in free cash flow. Additionally, during the year, we repaid approximately $184 million of outstanding debt and ended 2025 with a net leverage level of approximately 2.9 times, as defined under our credit facility agreement, compared to our covenant requirement of below 4.75 times. Finally, we recently executed an agreement with a third party to sell certain intellectual property rights and long-lived assets associated with the discontinued patch pump program for $10 million. This transaction occurred subsequent to year-end and therefore had no impact on our fiscal fourth quarter results.

That completes my prepared remarks on our fourth quarter and full year 2025 results. Next, I’d like to discuss our preliminary 2026 financial guidance and certain underlying assumptions. Before I go into all the details surrounding our fiscal year 2026 guidance, let me remind you that in May of 2025, at our analyst and investor day, we laid out our long-range plan through fiscal year 2028. Those expectations included that our revenue growth CAGR would remain flattish on a constant currency basis from fiscal year 2026 through 2028, with modest declines of approximately 1%-2% in core injection and contract manufacturing revenue over the LRP period, offset by contributions from new revenue streams, including GLP-1 opportunities and distributed product partnerships that were expected to build as we move through fiscal years 2026 through 2028.

Additionally, the financial targets that we provided at our analyst and investor day anticipated adjusted operating margin to be between 28% and 30% by fiscal 2028, as R&D expenses were expected to increase from 2025 levels as we support key value creation initiatives through 2028, while SG&A expenses were expected to remain flattish as compared to 2025 levels. Despite a dynamic geopolitical and trade backdrop, I’m pleased to say that we believe our initial fiscal 2026 financial guidance is well aligned with the expectations established in our long-range plan. Beginning with revenue, on an adjusted constant currency basis, we currently anticipate that our revenues will be flat to down 2% as compared to 2025 levels. At the high end of our constant currency revenue range, we have factored in modest volume declines within our core injection business, primarily related to syringe declines within the U.S.

That reduced contract manufacturing revenues contribute to approximately 50 basis points of the decline, that pricing is relatively flat year-over-year, and that the contribution from new revenue streams contribute positively by approximately 100 basis points. While at the low end of our range, we are assuming that volumes within our core injection business contribute to approximately 150 basis points of the decline, that reduced contract manufacturing revenues contribute to approximately 50 basis points of the decline, that pricing is relatively flat year-over-year, and that the contribution from new revenue streams is negligible. Turning to our thoughts on FX, our initial guidance calls for a foreign currency tailwind of approximately 1.2% during 2026. This assumption is based on foreign exchange rates that were in existence in the early November timeframe.

Somewhat offsetting FX is an estimated 0.1% year-over-year headwind associated with the Italian payback measure, primarily driven by the favorable adjustment recognized in fiscal year 2025. On a combined basis, our as-reported revenue guidance calls for a range of between -0.9% and 1.1%, resulting in an initial revenue guide of between $1,071 million and $1,093 million. Turning to adjusted operating margin, our initial guidance range calls for a range of between 29% and 30%, or lower by approximately 180 basis points at the midpoint as compared to 2025 levels. The expected decline at the midpoint is due to two factors contributing equally. First, adjusted gross margin is expected to decline due to increased cannula costs. While in terms of tariffs, based on current information, we expect incremental tariffs to have a negligible impact as compared to the prior year.

We anticipate R&D expense to approximate 2% of revenue as we continue to invest in the development of market-appropriate pen needles and syringes and advance our efforts to qualify and onboard alternate cannula suppliers. SG&A as a percentage of revenue is expected to remain relatively consistent with fiscal 2025 levels. All totaled, our initial guidance range for adjusted operating margin aligns with the margin framework outlined in our analyst and investor day and reflects our disciplined approach to balancing reinvestment for growth with sustained profitability as we advance through the next phase of our transformation. Moving to earnings, during 2026, our initial guidance calls for an adjusted diluted earnings per share range of between $2.80 and $3.00, and it’s based on a weighted average diluted share amount of approximately 60 million shares.

Our initial adjusted earnings per share range includes an assumption that during 2026, we will repay approximately $150 million in debt and that our annual net interest expense will be approximately $93 million. While from a tax perspective, our initial adjusted earnings per share range assumes that our adjusted tax rate will be approximately 23% as compared to approximately 25% in fiscal year 2025 due to tax planning initiatives we put in place, U.S. tax reform, and lower interest expense. Before I turn the call over to the operator, I’d like to highlight some considerations regarding the cadence of quarterly revenue expectations during 2026. Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis.

During fiscal year 2025, we generated approximately 48% of our adjusted revenue dollars during the first half of the year, with revenue split roughly evenly between the first and second fiscal quarters. During fiscal year 2026, we currently expect something similar to occur. Finally, during fiscal 2026, we expect to generate between $180 million and $200 million in free cash flow, which includes using approximately $20 million of cash for capital expenditures, as well as approximately $30 million of cash on one-time spend, primarily focused on advancing the global brand transition program, which remains on track to be substantially complete by the end of calendar year 2026.

Importantly, the free cash flow that we expect to generate during fiscal year 2026 keeps us firmly on pace with the commitment we outlined at our analyst and investor day to generate approximately $600 million of cumulative free cash flow from fiscal 2026 through fiscal 2028, and demonstrates the strength of our cash generation model and reinforces our confidence in achieving our long-term deleveraging and investment objectives. That completes my prepared remarks, and at this time, I would like to turn the call over to the operator for questions. Operator? Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Marie Thievault with BTIG. Your line is now open. Good morning.

Thanks for taking the questions. I wanted to start here and see if I could learn a little bit more about the GLP-1 partnerships that you have. Can you just give us a little more detail on how many partners you have signed POs with and anything on timing, how they might be ordering ahead of any approvals that they get on their side, just so we can sort of get a little more detail on how this might impact fiscal year 2026, of course, understanding that it’s not being assumed in your revenue guidance? Yeah. Good morning, Marie. Thanks for the question. We are in discussions with 30-plus potential GLP-1 entrants. As you remember, this is all about co-packaging of pen needles. They are moving through various stages of discussions. You can imagine we go through quality agreements.

We talk about MSAs, the orders that they provide, and a handful of them have already provided orders, and we’ve actually shipped product during 2025. Much of the volume, I would say, is for their own development purposes as they work out what data they need beyond the data we supply for their regulatory submissions. Several of them have actually submitted to the regulatory authorities. Now, they control the timing and the content of the submissions. These submissions, we believe, include many of them will include specs that our product satisfies. Obviously, timing of commercial quantities is contingent on when they get approval, which one of them gets approval, and when they get approval. As you might have heard publicly, the generic GLP-1s could be available in calendar year 2026 in China, India, Brazil, and Canada.

There is obviously some uncertainty associated with timing, but overall, we are very, very pleased with the progress that we made in fiscal 2025. I mean, you might remember a year ago, we were just starting these discussions, and the team has made tremendous progress, and we continue to remain confident in the assumptions that we had laid out or the estimates that we had laid out during the analyst day of this being over $100 million opportunity for us by 2033. Marie, this is Jake. I’ll just jump in regarding guidance. I think the low end of our guidance range assumes really a negligible impact in terms of new revenue streams mostly associated with GLP-1s, while from a high end of our revenue guidance range, we assume that new revenue streams, again, mostly coming from GLP-1 additional revenue, would contribute positively by about 1%.

We feel very good about where this is all going. Dev mentioned that over the longer term we feel that this can be at least $100 million annual product revenue for Embecta through 2033, and we feel like we’re well on our way towards achieving that. Thank you for that clarification, Jake, on the guidance as well. I guess I’ll ask my follow-up here on China. You referred to it at the beginning, some of the geopolitical tensions. What are you seeing on the ground in China in terms of consumer willingness to buy non-Chinese products? Of course, the product is made in China, but not a Chinese brand, I suppose. Any further updates on how that dynamic is playing out? Thanks for taking the questions.

Yeah, Marie, on that, first, let me just say China in Q4 2025 performed very close or almost exactly in line with our expectations. Our thoughts when we had formulated or revised our FY25 guidance incorporated a significant year-over-year decline, partially because of the pressures that you mentioned, partially because of some inventory rebalancing, and Q4 2025 played out exactly as we thought it would. We’ve certainly taken steps to stabilize the situation, including reorganizing our sales team. We’ve actually introduced a more price-competitive pen needle, which also has a lower manufacturing cost. Our guidance for 2026 does incorporate some expectations around headwind in 2026 compared to 2025, but our current expectation is that it’s going to be much less as compared to what we experienced in 2025.

As we all read in the press, I mean, the situation continues to evolve, but certainly, we are focused on controlling what we can control to stabilize the situation there as quickly as possible. Maybe just one final comment. Over the long term, we still continue to believe that this is going to be an important market for us. The market itself is growing mid-single digits. As you know, we have strong commercial and manufacturing infrastructure in China. You’ve heard us refer to the development of a market-appropriate pen needle. In fact, that pen needle is being developed by our team in China, and I’m quite hopeful that it will serve a segment in China that we do not serve today. As well as you asked about GLP-1s earlier, there are generic GLP-1 companies in China that have global aspirations that obviously we want to serve as well.

Over the long term, we still think it’s going to be an important market for us, and we’ll find a way to weather through the evolving landscape over there. Thank you. Our next question comes from the line of Michael Plark with Wolf Research. Your line is now open. Hi, good morning. Thank you for taking the questions. Two smaller ones for me. I’m interested in the cannula comments. You talked about increased costs there and an effort to source alternative suppliers. Maybe can you just unpack that for us a little bit? Why are the costs up, and what does the opportunity set look like to find other sources to mitigate that creep? Thank you. Yeah. Good morning, Mike. Maybe I’ll kick us off just as a reminder.

The entire supply of cannulas that we get is from our previous parent, BD, and we have a cannula agreement with them to supply those cannulas that goes until 2032. It is sole source from BD right now. You can imagine that we do want to have an alternate supplier for cannula. Our team has been working on this for the last couple of years. We have identified a couple of alternate cannula suppliers, and the team has made significant progress, including running some trials with alternate cannulas and doing some development work. I feel confident that certainly we have our current supply of cannula to 2032, but the team is making remarkable progress, and I feel reasonably confident that we are going to have at least one alternate supplier here qualified certainly well before our current cannula agreement runs out.

With that, obviously, that allows us an alternate supply with a different cost profile because since we became independent, the increase in cannula cost to us has been a significant contributor to the pressure we’ve faced on gross margin. Jake, anything you’d like to add? Yeah, Dev. Just maybe to add a little bit more, Dev had mentioned sort of what the margin profile of the company sort of looked like at the gross margin line kind of pre-spin as to sort of where we were during, say, 2025 and exiting 2025. Pre-spin, our gross margins were sort of or right at spin, right around, let’s call it 67%. This year for 2025, our adjusted gross margins finished just under 64%. Really, Mike, the entirety of the decline over those years really came down to just increased cannula costs.

It really is important for us to find an alternate provider both from a risk mitigation standpoint, and you never want to be beholden to one sole source, and then also to drive some price decreases in the future as well, which we would certainly hope to do. In terms of our fiscal 2026 guidance in relation to 2025, we talked about our adjusted operating margins being down about 180 basis points at the midpoint compared to 2025 levels. About half of that is in the gross margin line entirely due to increased cannula costs, and the other half of that is just increases in terms of R&D expense as we need to make some investments in order to come to market with an alternate cannula provider as well as some of those market-appropriate low-cost products for pen needles and syringes to service some of the emerging markets.

Helpful color. For the follow-up, I wanted to ask on one of the comments about the fourth quarter performance. I heard price unfavorable year on year in the U.S., $7 million, mention of milestone payments to a large U.S. pharmacy customer. I just want to make sure I understand what that is, what you’re saying there. The word milestone specifically tripped me up. If you can add any color on that dynamic, I’d appreciate it. Thank you. Yeah, Mike, I’m happy to. Obviously, I won’t talk about this specific contract, but our contracts with the U.S. change. There is a rebate level, right? There are sometimes marketing spend items that we contribute to marketing of our products. Finally, on achievement of certain volume levels, typically, there is an additional payment, and we often refer to them as milestone payment.

At the end of the day, it all comes down to price, but depending upon the timing of the payments, it can lead to year-over-year unfavorability or favorability during the course of a quarter. Thank you. Thank you. Our next question comes from the line of Anthony Petroni with Mizuho Americas. Your line is now open. Thanks. Good morning, everyone. Happy early Thanksgiving here to everyone, teams, family. Maybe start on GLP-1 and the generic contracting phase. I’m wondering, Dev and/or Jake, if you could talk a little bit about how those contracts are going to be structured here. Typically, when we have drug-device combination solutions, you’re in the clinical phase, but if you get to market, you essentially get written into the drug master file and the instructions for use, and that can be a multi-year contract.

How does contracting work with the generic GLP-1 providers in the clinical development phase, and what will those look like once we get with success to a commercial phase? How long will they be? Will there be minimum quantities baked in? How do the economics work over, let’s say, a medium-term contract? I have a couple of follow-ups. Thanks. Yeah, Anthony. I do not want to get too far ahead of myself with respect to commercial quantities and commercial contracts until some of these generic manufacturers get approved. Let me at least provide additional color, right? As we go through the contracting phase, you can imagine the early discussions and initial discussions. We get NDAs in place. We get qualified as a vendor in our system that includes providing some data on our product from a quality standpoint, from a regulatory standpoint.

We have quality agreements in place. We actually start talking about contracting, get a contract complete, but the commercial contract, I think we’ll talk about once some of these drugs are commercial. The quantities that they are ordering now are really to do their own development work. You can imagine the way this is all going to play out is we will be supplying bulk pen needles to these manufacturers. They are going to co-package our pen needles with their pen injector, and they will be the ones to market that combined product to patients. They also, as I think you implied, are going to be responsible for the regulatory submission for the whole package that includes the drug and the device. Certainly, we’ll help with providing data, but they are responsible for that submission, and our pen needle will get specced in.

Now, obviously, once you are part of that combination, that imparts a level of stickiness to the product. Beyond that, since they are going to be doing the co-packaging, the co-packaging lines will be configured, if you will, to be accepting of our pen needles, and that provides some additional stickiness, if you will, to our product as part of that combined package. Perhaps most importantly, I want to point out something that might seem obvious. We have a long history in demonstrating reliability of supply. If you’re a generic manufacturer that’s introducing a generic GLP-1 drug, I would think that you would want your pen needle supplier to be somebody you can depend upon and has that long demonstrated reliability of supply. Not to mention, our pen needles are already approved in markets where you would expect generic GLP-1s to launch.

With respect to profitability, what I would also say is that these are, as I pointed, bulk pen needles. We do not expect to spend any significant CapEx in meeting this demand. We would expect that there to be some incremental margin drop through as compared to our corporate averages of gross margin. Obviously, I will not comment on pricing. Maybe one final comment. Because we have established these conversations now with generic drug companies, we are also expanding the conversation to work with them on potential supply of other devices that they may use. I think on analyst day, I said the most sort of nearest adjacent device to us would be a pen injector.

I’m hopeful that supplying devices to generic drug companies for their generic GLP-1 drugs is just the start as we transition from pure injection delivery for insulin company to a broader-based medical supplies company. Hopefully, that was helpful, Anthony. No, very helpful and provides some color as we think about the next few years ahead. The follow-up here will just be on capital deployment. You mentioned a little bit of CapEx here, but the leverage ratios are coming down. The company in the past has talked about potentially forging additional partnerships, perhaps outside of GLP-1 or being a little bit more focused a little bit on tuck-in M&A. Just a little bit to take the temperature on capital deployment outside of GLP-1 and the CapEx needs immediately. Do you see any tuck-in M&A opportunities over the next couple of years? Thanks. Yeah, thanks, Anthony.

First, let me just say I’m very pleased with how our profitability metrics ended up with respect to our guidance. As you saw, we sort of exceeded the top end for gross margin, adjusted EBITDA margin, adjusted operating margin, and that really allowed us to pay down significantly more debt in 2025 and brought our net leverage down, as you pointed out, to 2.9. Our capital allocation plans remain unchanged from what I said on investor day. We think $600 million in free cash flow over the next three years. Most of that will go to debt pay down. We pay a dividend at this point. We are not considering changing that. Our highest priority still remains paying down debt. As our leverage comes down, certainly it’s already below 3, and we drive it down further in 2026. We are very open to organic and inorganic investments.

M&A by, obviously, its very nature, is very opportunistic. We will continue to be alert and aware if such an opportunity arises, and we feel that it is going to be value creative to our company and help transition the company towards long-term sustainable growth. We certainly will be ready to act on it. Thank you again. Thank you. As a reminder, to ask a question at this time, please press star 11 on your touchstone telephone. Our next question comes from the line of Travis Steed with Bank of America Securities. Your line is now open. Hey, this is Grace Shawn for Travis. Thanks for taking the questions. I just wanted to ask a follow-up on, in your prepared remarks, you mentioned selling certain intellectual properties of $10 million associated with a patch pump subsequent to year-end.

Just wondering if you could add any more details around this and what’s baked into your assumptions moving forward that is associated with this. Yeah. Grace, thanks for the question. Yeah, we did sell certain IP and associated assets to a buyer for $10 million. We are pleased to be able to monetize these assets from the patch pump program that we discontinued about a year ago. I’ll let Jake comment on. This was a Q1 event really for 2026 for us, but I’ll let Jake comment on how you should expect to see that run through the financials. Yeah. Grace, it’ll obviously be an increase to cash from a guidance standpoint. This isn’t going to impact our adjusted results that we provided guidance metrics for today. There’ll be a gain most likely on the sale of these assets.

As a result of that, we’re just going to normalize that for purposes of our adjusted operating margins or earnings per share. Great. Thank you. Maybe just one follow-up on the pharmacy closures that you saw earlier this year. You had the stocking dynamic for July 4th and ahead of the brand transition. A lot of one-time benefits. Can you just speak to any more detail of how you saw that play out in the second half of 2025? Maybe if there’s any sort of visibility on that into 2026 on how the pharmacy volumes are moving forward. Thanks. Yeah. As you pointed out earlier in the year, we had commented on planned store closures at a major US pharmacy chain. We don’t sell directly to that pharmacy chain. We sell to a third-party distributor that also serves other customers.

I think, as I said at that point, our product is medically necessary. What happens is if a chain, if a store closes, patients will shift to other chains, other sources to procure product. As expected, we saw strength at some other chain outlets. We incorporated our thoughts around what the impact of that closures will be into our 2026 guidance. In the guidance that Jake went through, he talked about a 100 basis point range in the volume assumptions. That includes our thoughts on what might happen with the US pharmacy volume as well. Maybe one just final point on how 2025 played out. We had started the year with the original guidance. Actually, as the year played out, we did see what I’ll say China year-over-year headwinds that were not incorporated in our original guidance.

Actually, the year played out, including the impact of store closures with us being within the range of our original guidance had it not been for China. I think the store closures are playing out as we thought they would. Patients will move to other outlets and we’ll see strength. We incorporated our thoughts in the 2026 guidance. Thanks, Grace. Thank you so much. Thank you. I’m currently showing no further questions at this time. I’d now like to hand the call back over to Dev Kurdikar for closing remarks. As we close the call, I just want to express my sincere gratitude to all my colleagues at the company around the world. Fiscal 2025 represented a meaningful milestone as we completed the first phase of our strategic roadmap, standing up our core systems and infrastructure needed for the next stage of growth.

Despite a complex trade and geopolitical backdrop, we continue to perform well and strengthen our operational foundation. We enter fiscal 2026 confident in the direction of the company. Our focus remains clear, maintaining leadership in our core categories, advancing our innovation programs, and delivering strong profitability and cash flow in order to execute on the commitments we outlined at our 2025 analyst and investor day. Thank you for calling in, for your interest in Embecta, and happy Thanksgiving all. This concludes today’s conference. Thank you for your participation. You may now disconnect.