Embecta Corp’s (EMBC) CEO Dev Kurdikar on Q3 2022 Results – Earnings Call Transcript

Embecta Corp. (NASDAQ:EMBC) Q3 2022 Earnings Conference Call August 15, 2022 8:00 AM ET

Company Participants

Pravesh Khandelwal – Head-Investor Relations

Dev Kurdikar – Chief Executive Officer

Jake Elguicze – Chief Financial Officer

Conference Call Participants

Travis Steed – Bank of America

Cecilia Furlong – Morgan Stanley

Marie Thibault – BTIG

Operator

Please stand by. Welcome, ladies and gentlemen, to the Third Quarter Fiscal Year 2022 Earnings Conference Call for Embecta Corp. At this time all participants have been placed in listen-only mode. Please note that this conference call is being recorded, and that recorded will be available on the company’s website for replay shortly.

I would now like to hand the conference over to your speaker today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead.

Pravesh Khandelwal

Thank you, operator. Good morning, everyone. Thank you for joining our fiscal third quarter 2022 earnings call. With me today are Dev Kurdikar, Embecta’s Chief Executive Officer; and Jake Elguicze, our Chief Financial Officer. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements within the meaning of the federal securities laws which may be identified by words like anticipate, expect, may, believe, estimate and other similar words. And it is possible actual results could differ from management’s expectations. As stated in more detail in our accompanying slides, these forward-looking statements include statements concerning our cost and growth opportunities, our cash flow and expected use, and our financial performance, and also include statements concerning future dividends.

Risks, uncertainties and other factors that could cause such differences can be found in the company’s earnings release and latest SEC filings, including the information statement dated February 11, 2022, filed as Exhibit 99.1 to the company’s current report on Form 8-K and Form 10-Qs. 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 the press release and conference call presentation. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percent changes are on an FX-neutral basis, unless otherwise noted.

When management refers to any given period, they are referring to the fiscal period unless specifically noted as a calendar period. The earnings press release, slide to accompany today’s call and webcast replay details are available on the Investor Relations section of the company’s website, www.embecta.com. Starting on Slide 3. Our plan for today’s call is as follows: Dev will make a few opening remarks on the overall performance of our business. Jake will provide you with a more in-depth review of financial results for the third quarter of fiscal 2022 as well as our updated financial guidance, as stated in the earnings press release issued earlier today. Dev will then provide some closing thoughts on our strategic imperatives. We will then open the call for questions.

I would now like to turn the call over to our CEO, Dev Kurdikar. Dev?

Dev Kurdikar

Good morning, everyone, and thank you for joining us today for Embecta’s third quarter of fiscal year 2022 earnings call, which also marks our first full quarter as a standalone public company. Before we get into the content of today’s call, let me also welcome Pravesh Khandelwal, whom you just heard. Pravesh has joined us as our VP of Investor Relations. He was most recently in Investor Relations at a health care company and has prior experience in equity research. We are excited to have him join our team.

Turning to Slide 5. Let me first start with who we are. Quite simply, we are an organization with a truly unique opportunity to create the preeminent diabetes-focused company in the world. Our mission is to develop and provide solutions that make life better for people with diabetes. That is our entire focus. We are the global leaders in the business of injection devices. We’ve been making and selling insulin injection devices for almost 100 years. Our global manufacturing infrastructure is unmatched, and supported by a geographically diverse sales and distribution network.

We have built an incredible leadership team to advance our vision of empowering people to live a life unlimited by diabetes. We have recently added to our leadership talent by recruiting experienced leaders for our regulatory affairs, R&D and quality functions, roles critical for our current business as well as for achieving our longer-term objectives. Our global team of 2,000 employees have been hard at work standing up Embecta and driving our business for people with diabetes, for our customers and for our stakeholders.

Switching to Slide 6. Here are our financial and operating highlights for the third quarter of fiscal 2022. We are pleased with the company’s strong performance in the quarter, our first as a standalone public company, amidst the current challenging operating environment, which includes having to navigate through raw material inflationary pressures, supply chain challenges, geopolitical concerns and varying COVID-19 restrictions. This performance reflects the resilience of our business model, the defensive segment in which we operate and most importantly, the character and determination of our global team that works tirelessly to serve our customers and people with diabetes who use our products. An important nuance of this business is that our products are primarily single-use disposable products and, hence, their use is not significantly financially burdensome in contrast with some other therapies.

Moving to the financial results for this quarter, Embecta generated revenues of $291.1 million. This represents a decline of 1.3% on an as reported basis and growth of 2% on a constant currency basis. The constant currency revenue growth was primarily driven by higher volumes and to a lesser extent, price in the United States and in Central and Southeast Asia. I’ll comment on geographic revenue breakdown on the next slide in a moment.

GAAP gross profit end margin for the third quarter of 2022 totaled $202.9 million and 69.7%, respectively. Adjusted gross and EBITDA margins remained robust at 69.8% and 40.5%, respectively. And based on our strong third quarter results and outlook for the remainder of the year, we’re raising our financial guidance for constant currency revenue growth, adjusted gross margin and adjusted EBITDA margin for the second half of this fiscal year, while reiterating our as reported revenue growth guidance despite incremental FX headwinds. Additionally, we continue to make progress building up our internal organization, systems and processes so that we can exit the transition service agreements that we have with Becton Dickinson within the planned time periods. And lastly, we continue to advance the development of type 2 closed loop insulin delivery system, utilizing our proprietary patch pump technology.

Now clicking through geographic revenues on Slide 7, third quarter U.S. revenues of $158 million increased by 4.1% on both an as reported and constant currency basis. International revenues of $133.1 million decreased by 7.1% on an as-reported basis and 0.3% on a constant currency basis. Overall, constant currency growth of 2% was primarily due to an increase in base business volume in part due to the timing of certain orders within the U.S., the impact of contract manufacturing revenue to BD and improved pricing. Somewhat offsetting this was the rebate reserve adjustment that occurred in the third quarter of 2021, which did not reoccur in the third quarter of 2022. And while we benefited from the timing of certain orders this quarter, we continue to focus on the second half business performance as the timing and cadence of order patterns varies quarter-to-quarter.

On a year-to-date basis, revenues were $854.9 million. This represents a decrease of 1.1% on an as reported basis and an increase of 0.8% on a constant currency basis. Overall, constant currency growth was driven by favorable price and volume, partially offset by the conscious decisions we made during the latter portion of 2021 to no longer participate in certain business and which we have discussed on our prior call.

With that, let me turn it over to Jake to discuss our Q3 results and our updated expectations for the second half of this year. Jake?

Jake Elguicze

Thank you, Dev, and good morning everyone. Before I discuss the financial results for the three and nine-month periods ended June 30th, I would like to remind the investment community that Embecta was spun-off from BD on April 1st of 2022, and that the financial results during the pre-spin periods were based on carve-out accounting principles, and do not reflect what Embecta’s financial results would have been had Embecta operated as a standalone public company. Therefore, financial results for the three and nine-month periods ended June 30, 2022, and June 30, 2021 are not meaningfully comparable. Given the fact that Embecta’s historical financial results for the pre-spin periods do not include all the actual expenses that would have been incurred had Embecta been a standalone public company during the periods presented, I plan on focusing most of my time discussing Embecta’s recently updated second half of fiscal 2022 financial guidance.

Turning to Embecta’s financial performance for the third quarter on Slide 8. Given the discussion that has already occurred regarding revenue, I will start at the gross profit line. GAAP gross profit and margin for the third quarter of 2022 totaled $202.9 million and 69.7%, respectively. This compares to $202.6 million and 68.7% in the prior year period. The 100 basis-point improvement in GAAP gross margin was primarily due to favorable product mix. This was partially offset by the negative impact of inflation on raw material costs, direct labor, and overhead.

While from an adjusted gross profit and margin perspective, for the three months ended June 30, 2022, they totaled $203.1 million and 69.8%, respectively. This compares to 206.4 million and 70.0% in the prior year period. Despite incurring additional costs associated with standing-up Embecta as an independent entity, adjusted gross margin for the third quarter of 2022 came in strong at approximately 70%, and this was better than we previously anticipated.

Turning to GAAP net income, during the third quarter of 2022 it totaled $62.4 million. This compares to $104.7 million in the prior year period. The decrease of approximately $42 million is due to a combination of factors, which include: an increase in selling and admin expenses of approximately $23 million, which is driven by an increase in compensation and benefit costs due to increased headcount, and to a lesser extent, increases in marketing and advertising spend both attributed to the separation and Embecta becoming a stand-alone publicly traded company. A decrease in R&D of approximately $1 million, driven by the timing of certain spend and interest expense of approximately $20 million that was incurred in the third quarter of fiscal 2022, as compared to zero in the prior year period.

Lastly, moving to adjusted EBITDA and margin, it totaled approximately $117.9 million and 40.5% for the third quarter of 2022. This compares to $143.6 million and 48.7% in the prior year period.

Like our performance at the adjusted gross margin line, our adjusted EBITDA margin for the third quarter of 2022 also came in better than we initially anticipated and it was primarily driven by: Revenue in the quarter being better than expected. Favorable product and geographic mix positively impacting our gross margin. And R&D expense being slightly lower than originally planned due to the timing of certain spend.

Finally, with respect to our balance sheet and financial condition at quarter-end. As of June 30, 2022, we held approximately $292 million in cash and cash equivalents, and approximately $1.65 billion in debt.

As we created our initial capital structure, and leverage levels, we tried to be mindful of our current financial profile; the need to increase the level of investment into the business; and shareholder returns. We have a balance sheet that we can use to invest both organically, as well as use for M&A and partnerships opportunities. And as of June 30 2022, our last 12 months ended net leverage ratio stood at approximately 2.8x.

Lastly, this morning we announced that our Board of Directors approved our inaugural cash dividend, which was set at $0.15 per share. Given that our GAAP net income could fluctuate quarter-to-quarter, we attempted to arrive at a dividend per share for quarter amount that would approximate 20% of our second half of 2022 expected GAAP net income.

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

That completes my prepared remarks as it relates to Embecta’s historical financial performance.

Next, I would like to outline Embecta’s updated financial guidance on Slide 9. Beginning with certain key assumptions. Unlike the first half of 2022 financial results, our second half of 2022 guidance attempts to take into consideration the various costs that Embecta will incur moving forward as an independent, publicly traded company.

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

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

Furthermore, our second half of 2022 financial guidance also assumes six-month’s worth of transition services expense related to a variety of activities that BD will perform for Embecta. The transition services expenses were determined, and costed out, at a very detailed line-item level. These TSAs can last for a period not to exceed two years and can be terminated earlier by Embecta with a defined notice period.

As part of our second half of 2022 financial projections, we also included estimates associated with costs that we anticipate incurring as we stand up our own public company. These costs include expenses associated with stock-based compensation, external audit fees, stock exchange listing fees, and most notably, the expenses associated with the creation of various corporate functions and infrastructure, such as, finance, treasury, tax, HR, IT, legal, supply chain, regulatory and quality, et cetera.

Moreover, as we prepared and updated our second half of 2022 financial guidance, we also attempted to take into consideration the impact that COVID-19 is still having on certain markets; continued geo-political concerns; as well as the negative impact stemming from inflation and supply chain disruptions. We have attempted to give due consideration to these elements, but we realize that the future trajectory of these factors is unpredictable.

Lastly, given that approximately half of Embecta’s business is derived internationally, as well as the fact that several foreign currency exchange rates have changed significantly since we initially provided financial guidance for the second half of fiscal year 2022.

I wanted to take a moment and highlight what we assumed for some of the key currency pairs that effect our business. Those being the euro/dollar; dollar/Japanese Yen; and dollar/Chinese Yuan.

We based our updated second half of 2022 financial estimates on spot rates that existed near the beginning of August, including a euro to dollar rate of approximately 1.05 for the second half of the year, and approximately 1.02 in the fourth quarter; a dollar to Japanese Yen rate of approximately 131 for the second half of the year, and approximately 136 in the fourth quarter; and a dollar to Chinese Yuan rate of approximately 6.61 for the second half of the year, and approximately 6.71 for the fourth quarter. These assumptions compare to second half of 2021 rates of approximately 1.19, 109, and 6.5, respectively.

Now that I have outlined some of our key assumptions, I would now like to take you through our updated financial guidance for the second half of fiscal 2022 and provide some perspective as to what some of the key drivers of change are as compared to our previously provided financial guidance.

Beginning with revenue, we are reaffirming our previously provided as-reported revenue amount, as we continue to expect to generate approximately $555 million during the second half of fiscal 2022. This comes despite significant fluctuations in various FX rates since we last provided guidance, which we now expect to be a headwind of approximately 4% in the second half of the year as compared to the prior year period, or an incremental FX headwind of approximately 50 basis points as compared to our previous financial guidance.

While from a constant currency perspective, I am pleased to say that we are raising our expectations for the second half of the year by 50 basis points, as we now expect to see a decline of approximately 3% during the second half of fiscal 2022 as compared to the second half of fiscal 2021. The raise in our constant currency revenue expectations for the second half of the fiscal year come even though we now expect to generate approximately $5 million less of contract manufacturing revenue with BD.

Had the amount of contract manufacturing revenue remained consistent to our prior expectation, we expect that our constant currency revenue growth would have been better by an additional 80 basis points. The ability for us to raise our constant currency guidance is due to our base business, which is performing slightly better than we initially anticipated.

Given that we only have one quarter left in fiscal 2022, our updated financial guidance for the second half of 2022 implies a fourth quarter revenue amount of approximately $264 million. The sequential deceleration between Q3 revenue, and our expectations for Q4, are due to a combination of factors, including the timing of shipments and orders that Dev referenced earlier that positively impacted Q3, as well as larger expected sequential FX headwinds, being two of the primary drivers.

And when comparing Q4 against prior year results, it is important to understand that we are still dealing with uneven comps, given COVID-related peaks and troughs that impacted revenue timing in prior and current year periods.

That said, for the entirety of the second half of 2022 as compared to our previous guidance, our base business is expected to do slightly better, thereby allowing us to raise our constant currency revenue performance expectations.

Turning to adjusted gross margin. We are raising our expectations for adjusted gross margin, as we now expect our adjusted gross margin to be in the mid-60s during the second half of this fiscal year. That compares to our initial guidance which called for second half of the fiscal year adjusted gross margin to be in the low-60s.

Given our performance during the third quarter, this would imply that our fourth quarter adjusted gross margin would be in the low-60s. The expectation for a sequential decline in adjusted gross margin from Q3, to our forecast for Q4, is primarily due to: Contract manufacturing and supply agreement impacts, most notably the impact of increased cannula costs.

Product and geographic mix shifts between quarters, incremental investments and stand-up costs, and the continued negative incremental impacts of inflation and increased labor and material costs. With each of these factors contributing approximately equally to the expected sequential decline in Q3 to Q4 adjusted gross margin.

Moving next to TSA expense. Here, our thoughts are unchanged, as we continue to expect to incur approximately $35 million in expense, with roughly half of that expense expected to be incurred during Q4.

Finally, that takes to me to adjusted EBITDA margin, which, like adjusted gross margin, we are raising from our previous expectation. Given the strong results we achieved during the third quarter, we are increasing our expectations from our previous guidance that adjusted EBITDA margin would be in the low-30s, to our current expectation which now calls for second half of the year adjusted EBITDA margin to be in the mid-30s.

As we look forward, our updated guidance for second half of fiscal 2022 adjusted EBITDA margin would imply a low-30s margin during Q4, with the expected sequential decline from Q3 to Q4 primarily driven by: Our fourth quarter adjusted gross margin which is expected to be in the low 60s. And a sequential increase in operating expenses, primarily due to additional R&D expense, as well as additional expenses incurred associated with standing up Embecta as an independent company

In closing, Embecta continues to be very well positioned to exit fiscal year 2022 with a strong financial profile as we complete our first six months as an independent company.

That completes my prepared remarks, and at this time, I would like to turn the call over to Dev for some final remarks.

Dev Kurdikar

Thank you, Jake. Wrapping up our discussion on Slide 10, you will see that our capital allocation priorities are set with the intention to make strategic investments to accelerate our long-term growth profile. We expect to do this through commercial investments, the introduction of next-gen products, and M&A.

First, we can continue to expand and penetrate through our core business. This includes e-commerce investments as well as educating people with diabetes and other stakeholders on the benefits of using a new device for every injection.

Second, we intend to increase our investment in R&D – and we remain excited about our patch pump that is being developed for the Type 2 market.

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

Before we open up the line for Q&A, I would like to extend my thanks to the global Embecta team for everything they have done and continue to do to serve people with diabetes while we stand up Embecta as an independent company.

With that, operator, we will now open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Travis Steed with Bank of America. Your line is open.

Travis Steed

Hi, good morning everybody. Congrats on a good quarter. I guess I’d start with – maybe just talk about the performance in the quarter, the ability to kind of raise the guidance on the better performance in the quarter. And it seems like on the margin side, most of the second half guide raise is all because of the Q3 outperformance and you’re assuming some of the similar things for Q4. And so just trying to think through how that could actually impact some of the longer term, is your view on the long-term margins are kind of in the same place, the low 60% by 2024 and 30% by on EBITDA margin?

Dev Kurdikar

Thanks, Travis. This is Dev. Thanks for the question. Maybe I’ll start off, and I’ll ask Jake to jump in here. With respect to our thoughts on the longer term that we laid out in March, nothing has changed, really. And with respect to this quarter’s performance that we just disclosed today, those were all aligned with the guidance that we had provided earlier this year when we provided guidance for the second half of the year. Maybe, Jake, you can comment on some specifics on the quarter?

Jake Elguicze

Yes. So Travis, again, thanks for the question. I think that really across different line items within the P&L, I think, for our first quarter as an independent entity, they did largely come in better than expected. I think from a revenue perspective, some of that had to do with the fact that, as Dev mentioned in his prepared remarks, we had some orders that ended up just from a timing perspective falling into Q3 as compared to, say, what we previously would have expected it being in Q4.

Now that said, we provided guidance for the entirety of the second half of the year. And as compared to that prior guidance, our business, our base business is doing slightly better than expected, so I think off to a good start and candidly had the contract manufacturing revenue to BD, which we’ve always said we viewed as sort of transient in nature, had that remained consistent at our prior guide of roughly $15 million instead of now us expecting $10 million in the second half of the year, that would have added another, let’s call it, 80 basis points or so to our constant currency revenue performance. So I think from an underlying base business standpoint, you should think of our kind of core injection franchise in doing something north of, let’s call it, 1% to 1.5%, give or take, better than what we previously anticipated. So a positive start for the year.

Likewise, I would say from a gross margin and an EBITDA margin standpoint, still very, very robust at roughly 70% and a little over 40.5% for the third quarter. So I think out of the gate, continuing to manage cost well, continuing to stand up the company and continuing to drive leverage through the P&L. So very happy to see for our first quarter. For the guidance for the second half of the year, we tried to be pretty prescriptive in the prepared remarks and talking about what that would imply for Q4. And essentially, it still points people back to a thought that that the margin profile for Embecta, the gross margin line will be roughly in that kind of low 60s-ish area, and that the adjusted EBITDA margin will be in sort of that low 30s-ish area for the fourth quarter.

So nothing changed from our perspective regarding certainly the longer-term outlook. Inflation is probably a little bit more of a negative headwind right now than what we would have previously anticipated back when we provided sort of those 2024 goals and objectives back in March. But I think I’m happy to say that that nothing has changed regarding our thoughts concerning the financial profiles of to Embecta either really near-term or longer term through 2024.

Travis Steed

All right. That’s helpful. And if you think about all the different buckets that you gave, your content manufacturing agreement, the lease, the TSA, the whole list of things that you gave is kind of baked in, I don’t know if there is a way to help quantify the different buckets or the totality of those things and to think about how much of that could roll off next year? And then additionally, with since you’re a new company, I don’t know if there is a way to think about FX and how like FX changes impact margins. If there’s any rule of thumb you’d love to give on that, would love to hear that.

Jake Elguicze

Sure. So look, from an FX standpoint, maybe I’ll start there first. But from an FX standpoint, I think that that impacted our gross margins, for instance, by roughly somewhere between 200 to 250 basis points negatively year-over-year in the third quarter. And from a standup cost standpoint, I think we’re not necessarily going to provide specific dollar amounts associated with each individual line item. Some of them, obviously, from a TSA standpoint, as we begin to kind of stand up the company, some of the TSAs could fall off. But I would sort of point you back to sort of that move from kind of Q3, either gross or EBITDA margins to as sort of being the main drivers, right?

And those were really, I would say, four main items. So the sequential move from kind of Q3 adjusted gross margin to Q4 adjusted gross margin serves as sort of a good proxy as to kind of where we were sort of pre-spin to sort of post-spin and the longer-term outlook through 2024. So in the third quarter to fourth quarter, we talked about gross margins going from sort of 70% into the low 60s and the fourth being driven by a combination of the supply agreement, probably most notably the cannula cost, different product and geographic mix shifts as well as just a variety of different incremental investments and standup costs and then lastly, obviously, the impact of inflation. So each of those we would expect to probably impact Q3 to Q4 about equally.

Travis Steed

All right, great. Thanks. Thanks for taking my question and congrats on a good quarter.

Dev Kurdikar

Thanks, Travis

Jake Elguicze

Thank you.

Operator

Our next question comes from Cecilia Furlong with Morgan Stanley. Your line is open.

Cecilia Furlong

Great. Good morning and thank you for taking the questions. I wanted to turn back to just your comments on the timing of some of the orders, the impact in Q3 and really how you’re thinking about 4Q contribution to U.S. versus OUS on a sequential basis, really what you saw in Q3 and how we should think about relative contributions in 4Q? And tied in with that too just how you’re thinking about both China, some of the other geopolitical potential impacts on the business as well as the potential for pricing in 4Q as well?

Dev Kurdikar

Hi, Cecilia. This is Dev. Again, I’ll start off here, try to go through each one of the, I think, topics you had raised. So the first one, with respect to timing of orders, in our business, there is some order pattern variation that can occur quarter-to-quarter. But frankly, it’s in line with what we had thought would be could potentially happen when we gave second half guidance, and that’s why we gave second half guidance versus quarter-to-quarter.

I think, as you think about shifts from Q3 to Q4, and if you will, the geography mix between U.S. and international, that is likely to shift a little bit more towards international in Q4 versus Q3. And it’s one of the factors that impacts the quarterly gross margin for Q4. If you look at it from a – certainly a normalized period of 12 months, I think you’re going to find that the U.S. and international mix is well aligned with expectations that we’ve set previously.

With respect to China and geopolitical concerns, again, when we gave guidance for the second half of the year, we knew that there were COVID-19 disruptions going on in China. You may remember at that time, lockdowns are still pretty fresh in everybody’s mind. And the way things have played out in China again, have been within the range of outcomes that we are expected. Clearly, it’s a fluid situation. I think the geopolitical concerns in China may have heightened a little bit. We’ve all read about the drills that impact China, Taiwan. So it’s a situation we are watching closely. But certainly even the updated guidance that we’ve given, we think, we’ve assumed sort of moderate level of continued impact on the China business as a result, both of COVID-19, as well as the geopolitical issues.

And then frankly – finally with respect to pricing, I did comment that we had some favorable price that we got in the most recent quarter in the U.S. and then some parts of Asia. And so, again in line with my previous commentary, where we get a chance to adjust and optimize price, certainly we do. That happens on an ongoing basis, given just the diversity of the geographic revenue that we have and the diversity of customers that we have. Some of our contracts allow us to take price periodically. And so we exercised that when possible, and you saw the favorable impact of that in the quarter that we just supported.

Jake, anything you’d like to add to that?

Jake Elguicze

So the only thing I think I’d add is just maybe just a little bit more color regarding sort of the sequential move in kind of Q3, maybe revenue dollars to what we are essentially implying for Q4. And I think that’s really just due to a handful of items, the timing issue that Dev’s mentioned. Second, we would expect there to be sequentially more of an incremental FX headwind from Q3 to Q4.

And then lastly, we would expect there to be more of a net headwind between the rebate reserve adjustments that we would’ve generated in the fourth quarter of last year versus sort of the – there’s going to be incremental rebate reserve adjustments that we are going to see, sort of negatively impacting us in in the fourth quarter. So – but all that said, I think we’re very pleased that for the first quarter as a publicly traded company, that we have the opportunity to increase our second half of the year constant currency revenue expectations, and that’s really all due to slight improvements in that base business.

Cecilia Furlong

Great. And if I could follow-up as well and appreciate your commentary on R&D and just the timing there. But can you speak to just your expectations?

Jake Elguicze

Expectations and that’s really all due to slight improvements in that base business.

Cecilia Furlong

Great. And if I could follow-up as well and appreciate your commentary on R&D and just the timing there. But can you speak to just your expectations, both for 4Q as well as 2023, fiscal 2023, as you ramp contributions to the patch pump program, 3Q was a bit lighter than we were expecting. So just I’d love some more commentary on how you envision that ramping both the – through the balance of this year and into 2023?

Dev Kurdikar

Yes. So let me talk about Q3 and Q4 in R&D. So first of all, our patch pump program is progressing as we would expect it to continue to be pleased with the progress that we are making in the development of that product. With respect to R&D spend in Q3 and Q4, again, Cecilia, it’s a timing, it’s purely a timing thing in terms of total our expectations having changed with respect to what we expect to spend on R&D for this year. So I wouldn’t draw any big conclusions from the timing shift from Q3 to Q4 for R&D spend.

And respectfully – with respect to FY 2023, we’ll comment on that more specifically when we have our Q4 earnings call and we set guidance for 2023. I would say though that our expectations that we laid out in March through sort of what we call long term, then FY 2024, none of that has changed with respect to either revenue or we had laid out expectations for R&D. So that hasn’t changed either. But – so respectfully, I’ll reserve our comments for FY 2023 when we speak in a little over 90 days.

Cecilia Furlong

Okay, understood, and congrats on the quarter and thank you for taking the questions.

Dev Kurdikar

Thank you, Cecilia.

Operator

[Operator Instructions] Our next question comes from Marie Thibault with BTIG. Your line is open.

Marie Thibault

Good morning, Dev. Good morning, Jake. And I’ll add my congrats here also on a strong quarter, nice to see. Wanted to ask maybe a very high level question. You’ve given us some commentary around timing shifts and some thoughts on standing up costs for the public company. But just at a very high level, I’d love to hear a few months here into the transition what’s gone according to plan and what has surprised you either to the upside or downside about this whole process?

Dev Kurdikar

Marie, this is Dev. Thanks for your comments and for the question. Look, at a high level, I must say I’m very, very pleased with how our team has performed in the first quarter as an independent company. This business has been part of BD for almost a 100 years. So now you’re separate and you stand up a company and I’m very pleased with how the team has performed as I said.

In terms of positive surprises, the morale and just the sort of leaning forward attitude of the team continues to drive our business forward. I think on the – on negative side, candidly, it would’ve been nice to start off as an independent company without the raft of geopolitical issues, the inflationary pressure, the transportation disruptions that I know all companies are facing with. But sort of having to wrestle through all of that in the first quarter as an independent company, let’s just say, I wouldn’t have been disappointed to avoid.

Marie Thibault

Of course, makes sense. And then maybe I can ask my follow-up here. Maybe on a timely issue, obviously, hearing news about a pricing cap on insulin here in the U.S., is that going to have any impact on your business at all? Does that present a tailwind at all? I’d just love to hear your thoughts. Thank you.

Dev Kurdikar

Yes. Look, in general, anything that expands access to insulin, so that people can – people with diabetes can manage their diabetes appropriately will help us, right. Also my hypothesis, Marie, is that, pricing sort of caps and insulin are going to help more people get access to insulin than previously, which again, sort of the hypothesis would be, I mean, these are likely people that will be using injection devices to deliver their insulin and so could be a tailwind. Now, all of this is still being wrestled through the legislative process. So it’s not something we are dialing in into any of our projections. But certainly I would expect it to be a net positive.

Marie Thibault

All right. Very good. I’ll jump back in queue. Thank you.

Dev Kurdikar

Thank you, Marie.

Operator

There are no further questions. I’d like to turn the call back over to Dev Kurdikar for any closing remarks.

Dev Kurdikar

Thank you all for attending our call and for your interest in our company. It’s something we deeply appreciate. I also want to end again by thanking our team for doing everything that they have done to continue to support people with diabetes, even as we stand up Embecta as its own independent separate company. Have a great day all. And we look forward to speaking with you again next quarter.

Operator

This concludes the program. You may now disconnect.

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