Becton, Dickinson and Company

Hello and welcome to BD's first fiscal quarter 2020 earnings call. At the request of BD's, today's call is being recorded. It will be available for replay through February 13th, 2020 on the investors page of the BD.com website or by phone at 800-585-8367 for domestic calls and area code 404-537-3406 for international calls using confirmation number 688-6458. I would like to inform all parties that your lines have been placed in a listen-only mode into the question and answer segment. Beginning today's call is Ms. Monique DeLecke, Senior Vice President of Investor Relations. Ms. DeLecke, you may begin.

Thank you, Pasha. Good morning, everyone, and thank you for joining us to review our first fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the investor relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our first fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. Our first quarter results include a charge of $59 million related to a voluntary recall in the MMS infusion business to address certain software and alarm prioritization matters. This item, along with the details of purchase accounting and other adjustments, can be found in the reconciliations to GAAP measures in the financial schedules in our press release and in the appendix of the investor relations slides. A copy of the release, including the financial schedule, is posted on the BD.com website. Leading the call this morning is Tom Poland, Chief Executive Officer and President. Also joining us are Chris Reedy, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, Alberto Moss, Executive Vice President and President of the Medical Segment, Simon Campion, Executive Vice President and President of the Interventional Segment, and Patrick Kaltenbach, Executive Vice President and President of the Life Sciences segment. It is now my pleasure to turn the call over to Tom.

Thank you, Monique, and good morning, everyone. You saw in our earnings release this morning where we brought down revenue and EPS guidance for the year. And let me just say that resetting expectations is certainly not how I want to start my first call as CEO. And so before we jump into what's happening with Alaris, I want to say that how we're going to discuss topics on today's call is what you can expect from me. Straight talk, accountability, and an unwavering commitment to quality and regulatory compliance, our values, and doing what's right. At our core, BD is a very purpose-driven company. It's what defines who we are, how we operate, and what actions we take. And you can expect that our purpose and values will be at the heart of how we respond to the current situation with Alaris. Every company is going to face challenges, and the real measure of the company's strength isn't whether or not we face challenges. It's how we respond. And I'm personally focused, along with my entire leadership team, on fully resolving this situation. So let me take you through what happened, starting with what we said in November and even more recently, and how our conversations with the FDA have continued to evolve, even specifically this week. In November, we told you we were planning to make some improvements to our Alaris pump software, including upgrades to alarm prioritization and optimization. We indicated then that we were in active discussions with the FDA about the timing and implementation of these improvements. Relying on our quality process within the infusion business and how we've managed Alaris software updates over time, the team believed we could take a phased approach to releasing Alaris software updates and that these releases did not require of 510 clearance. We then issued the first phase of our software updates in December, and we resumed shipping as we shared with you last month. Through ongoing dialogue with the FDA, including an in-depth discussion this past Monday, we learned that the FDA disagreed with our conclusion about the need for a new 510 clearance for these software upgrades. And in light of the consent decree, the FDA has requested that we combine all Alera software enhancements recall remediation updates, and changes made to the ALERIS system over time into a single comprehensive 510 filing, which we're going to submit in the fourth quarter of FY20. We're actively continuing to collaborate with the FDA to ensure we meet their expectations for this upcoming regulatory submission. I want to be clear here that while we relied on our infusion quality process and system, We have now learned that in this case it did not meet FDA's expectations, and we're committed to taking the appropriate actions to get this right. I also want to be clear that we fully stand behind the safety and the clinical benefits of our product, which is used in the care of 70% of patients undergoing infusion therapy, and that's a responsibility we do not take lightly. We've provided guidance to our customers on how to mitigate potential risks until our software is fully remediated, We've also created a dedicated team of clinical consultants to support live training for healthcare providers. And we will continue to support existing customers to ensure they have access to the Alaris system under medical necessity. As CEO, my foremost focus is on ensuring the right supporting processes, capabilities, and execution within the company to ensure we deliver on FDA expectations. Chris will discuss this more, but as you saw in our news release, Based on this situation, we reduced our guidance range by approximately $400 million in revenue and $0.60 in EPS for fiscal year 20. I also want to comment on China's volume-based procurement initiative, which we've shared would be impacting our MDS catheter business, and that we now have a much better sense of how the situation is evolving than we did last month. So while it's progressing faster than we initially forecasted in November, We expect to fully offset the impact at the BDX level. We've got several upsides from the rest of our business in China, which are expected to grow double digits during the year, and there are also a few other areas that we're doing better than expected in so far, including flu testing, DCBs, and FX. We are a strong company with a diverse portfolio, both in terms of our products and our geographies, and there's a lot of good things happening across BD. And I want to highlight just a few. First, our Q1 results were in line with the expectations we shared with you in November. The businesses in the regions delivered solid performance, led by life sciences, where we saw an incremental benefit from the flu, and our interventional segment, where we saw growth from new products and DCBs, also started a bit better than expected. During the quarter, we continued to make good progress on the BD-BART integration. We remain on track to deliver $100 million in cost synergies this year, which brings our total to $300 million over the three-year deal period. We also continue to scale our commercial programs as part of our commitment to achieve $250 million in revenue synergies by 2022. We've continued to make good progress there with things we've talked to you about in the past, such as the European Biosurgery Incubator, vascular access management, and our international product registrations. Another strength in FY20 is our ability to deliver on a robust pipeline of new products, and we're already off to a solid cadence with 11 new launches so far in Q1. And there's three I'd like to just call your attention to. In medical, we're continuing to innovate in our vascular access portfolio, and we recently launched the new PowerPik Provena catheter with Solo 2 valve technology, which makes the catheter easier to care for. Our early feedback from customers is extremely positive. In life sciences, we recently introduced the BD-Core molecular system that's targeted in Europe. This flagship innovation completely automates the molecular laboratory workflow, and our initial system configuration is available with the BD on Clarity HPV assay, which is used for cervical cancer screening and diagnosis. We're still very early in this launch, but we feel really good about the progress we've made so far, having already signed 10 high-value volume accounts in Q1. Of course, we're new to the HPV market, and so all of that is new business for BD. In interventional, we received clearance for Elevation, our next-generation vacuum-assisted breast biopsy device, which helps ensure tissue samples, high-quality tissue samples, regardless of the density of the breast tissue. It's early. but we're getting very positive clinical feedback here as well. We're excited by these and our other launches and our long-term innovation pipeline. What you see on slide five captures our major launches for FY20, but it's only a small portion of the total active R&D projects that we expect to bring to market over the next three to five years. We're also entering several new higher growth market spaces with our overall R&D pipeline focused in markets growing 1% to 2% faster than our existing product portfolio. And we see elements of our automation and informatics capabilities in the pipeline across each of our three segments, including now in interventional, where we're starting to leverage BD's capabilities to digitize the legacy BARD portfolio. Before I turn things over to Chris, I want to make some comments on the coronavirus. First, as it comes to the coronavirus, the health and the safety of employees in China and around the world is our top priority. We're closely tracking the virus in China, and we're paying particular attention to the guidance from the US CDC, the WHO, and health officials in China. As you'd expect from us, we're also supporting response efforts in China by providing in-kind and monetary donations to the Wuhan Red Cross and Project HOPE. BD doesn't manufacture, we don't have any manufacturing or distribution operations in the Wuhan or Hubei province, and we are adhering to the guidance from the Chinese government and extending the Chinese New Year holiday until February 10th at our offices and facilities in Suzhou and Shanghai. From a supply chain perspective, about 95% of the products we manufacture in China are sold and used within China. We currently have sufficient inventory of the few products that we export from China to meet current demand. And within China, imports of goods and raw materials are being received as expected. In terms of business impact, of course, the situation is still very dynamic. We are closely watching and balancing two trends. First, we are seeing fewer people go to the hospital to seek standard care. At the same time, we have received and installed several urgent orders for additional BDMAX molecular systems, which are being used in coronavirus testing. Chris will take you through how we're contemplating this within our guidance. We'll continue to closely monitor the situation and keep you updated as it evolves. With that, let me turn the call over to Chris.

Thanks, Tom, and good morning, everyone. Before I take you through our first quarter results and guidance for the full year, I'd like to reinforce Tom's remarks on the Alaris pump issue. As you would expect from us, we take this matter very seriously. We did not anticipate the current Alaris pump situation to materialize the way that it has, and I assure you that the senior management team is fully committed to resolving the situation. So with that, let me review our first quarter results. As Tom mentioned, we delivered solid performance in the first quarter. First quarter revenues grew 2.5% on a currency neutral basis. Revenue growth was in line with our expectations. I'll provide more color on the first quarter revenue growth in a moment when I take you through the results by segment and geography. First quarter adjusted EPS was $2.65, which is at the high end of our guidance range. Adjusted EPS declined about 2% year over year, and it was about flat on a currency neutral basis. As expected, adjusted EPS growth reflects solid operating performance offset by the expiration of the Gore royalty and a very tough compare to last year's first quarter tax rate of 11.2%. Operating margins of 24% were in line with our expectations for the quarter. We also continued to deleverage during the first quarter, paying down approximately $90 million of debt. At December 31st, our gross leverage ratio was 3.5 times and we remain on track to achieve our commitment to delever to below three times this calendar year. Moving on to slide 10, I'll review the medical segment revenue growth. BD medical revenues declined 1.1% in the first quarter, in line with our expectations. As expected, first quarter performance in the medical segment was impacted by the new volume-based procurement process being adopted in certain Chinese provinces, which is specific to our catheter business within our medication delivery solutions portfolio in China. Outside of China, we saw strong growth in our vascular access management portfolio of solutions. In addition, as anticipated, revenues in medication management solutions declined due to limited installations of Larus pumps. In pharmaceutical systems, strength of over 9% reflects our ability to meet high demand for pre-fillable syringes, as a result of our ongoing investments in capacity as conversion from vials to pre-fillable devices continues. As expected, diabetes care revenues were about flat compared to the prior year, driven by anticipated pricing pressure in the U.S. and the timing of orders that drove a strong Q4 last year, as discussed on our previous earnings call. Now turning to slide 11 in the BD Life Sciences segment, Revenues increased 7.4% in the first quarter. Revenue growth was driven by strong performance in diagnostic systems and biosciences units. Growth in diagnostic systems was broad-based across point-of-care, flu, our molecular diagnostic platforms, and our microbiology solutions, as well as our women's health and cancer portfolio. We continue to see over 20% growth in BDMAX, and are receiving very positive feedback on our BD core launch in Europe. Very strong growth in biosciences was driven by licensing revenues and demand for instruments and reagents. This was partially offset by a tough comparison due to the divestiture of the advanced bioprocessing product line during last year's first fiscal quarter. Growth in pre-analytical systems reflects a tough comparison to the prior year when revenues grew 7.6% driven by additional capacity brought on to meet demand for our push-button blood collection sets and the timing of distributor orders. Now, turning to slide 12 in the BD interventional segment, revenues increased 5% in the first quarter with mid-single-digit growth across all three business units. Revenue growth and peripheral intervention was broad-based, including performance in our Wavelength, Covera, and Venova products that continue to perform extremely well. DCB-related revenues were slightly better than planned as the trend we have been seeing since the FDA letter has improved. Excluding the DCB impact, revenues in peripheral intervention grew over 8%. First quarter revenue growth in surgery reflects strong double-digit performance in biosurgery and high single-digit growth in hernia. We saw robust growth across the U.S., Europe, and China. As you may recall, we relaunched ProGel last year and are now approaching our historical run rate in sales. Revenue growth in urology and critical care continues to be driven by performance across our acute urology, home care, and targeted temperature management business. Moving to slide 13 in our geographic revenues, developed markets grew 2% in the first quarter as growth in the U.S. in the life sciences and interventional segments was partially offset by a decline in the medical segment, as anticipated due to the infusion pump software upgrade as previously discussed. We also saw a strong performance in Europe in vascular care within MDS, molecular diagnostics, lab automation, and women's health and cancer and diagnostic systems, and hernia and biosurgery within the surgery unit. Emerging markets revenues grew 5.1% for the first quarter. Performance was driven by nearly double-digit growth in China and the broader Asia-Pacific region. China revenues reflect strong double-digit growth in life sciences and interventional segments as anticipated. The medical segment's performance in China was also in line with our expectations, as strong double-digit growth across MMS, diabetes care, and pharmaceutical systems was offset by the impact of volume-based procurement related to peripheral catheters and MDS. As we started the new fiscal year, the situation in China remained fluid. When we provided guidance in November, we told you about a new volume-based procurement process that several provinces had adopted, which was modeled after similar initiatives for generic drugs and other spending categories. While the program covers a wide variety of consumable medical products for BD, it's focused on our $200 million peripheral catheter portfolio within our MDS business. While we anticipated that it would expand, we have now seen volume-based procurement expand at a faster rate. In addition, we are seeing distributors reduce inventory levels in large part due to and in anticipation of this new procurement process, and we are assuming that will continue. As Tom said, we expect to fully offset the impact at the BDX level. However, as a result of these dynamics, we now expect low single digit growth in China for the full fiscal year. Excluding the MDS portfolio, we are seeing high double digit growth in China and are pleased with our performance in that region. Now turning to slide 14, which recaps the first quarter income statement. As discussed, revenues grew 2.5%. This includes 80 basis points of pricing pressure, which is in line with our expectations as we had anticipated pricing would be most acute in the first quarter as certain prior year pricing agreements annualized. For the full fiscal year, we expect pricing to decline approximately 50 to 60 basis points. Moving down the P&L, gross profit grew approximately 3% year over year. Gross margin was a solid 56.5%. SSG&A as a percentage of revenue was 26.5%. This reflects additional deferred compensation expense due to strong stock market performance in the quarter. For your reference, deferred compensation expense is fully offset in the other income net line. On an underlying basis, SSG&A expenses grew in line with sales and reflect our ongoing focus on disciplined spending and the achievement of barred cost synergies. R&D as a percentage of revenues was 6%. For the full fiscal year, we expect to invest $1 billion in R&D, which reflects our continued commitment to drive innovation. As a result, operating margins decrease 50 basis points or 40 basis points on a currency-neutral basis, which is in line with our expectations. Our tax rate was 15.3% in the quarter, in line with our full-year guidance range of 14% to 16%. And as expected, we paid preferred dividends of $38 million in the quarter. As a reminder, the preferred shares will convert in May of this year. Adjusted earnings per share were $2.65, as previously discussed. Now turning to slide 15 in our gross profit and operating margins for the first quarter. Gross profit margin of 56.5% improved 30 basis points on a performance basis. This reflects our continuous improvement initiatives and cost synergies partially offset by the impact of pricing. Operating margin of 24% declined 50 basis points in the quarter, or 40 basis points on a currency-neutral basis. As previously discussed, this was driven by higher deferred compensation expense recorded within SSG&A that is offset below operating income in the other income net line items. Excluding the impact of deferred compensation, operating margins would have increased 40 basis points currency neutral. Currency had a negative impact of 10 basis points on both gross and operating margins in the quarter. Now moving on to slide 16 in our full fiscal year 2020 revenue and P&L guidance. As you've already heard from Tom, we are revising our revenue growth guidance to 2.5% to 3.5%. specifically due to the Alaris situation. Our updated range reflects several scenarios based on our ongoing conversations with the FDA, with the bottom end of our range assuming a very limited ability to ship Alaris pumps this fiscal year. By segment for the full year, we now expect BD medical revenue growth to be about flat. We expect both BD life sciences and BD interventional revenue growth to be at the high end of our previous guidance ranges, of 6% to 7% and 5% to 6% respectively. We now anticipate low single-digit growth in developed markets in fiscal 2020. In emerging markets, we now expect mid-single-digit growth driven by a diversified base with low single-digit growth in China, as previously discussed, and strength in EMA. Based on our new guidance for FY20, we now expect revenue growth in the second quarter to be approximately 2%, and EPS to be between $2.40 and $2.50. This includes an approximately $20 to $30 million headwind from coronavirus within the quarter. This impact is contemplated within our full-year guidance range. Moving down to P&L, we have updated our gross profit margin, SSG&A, and operating margin guidance to reflect the infusion pump impact. Our updated SSG&A and operating margin guidance ranges also include the first quarter impact of deferred compensation. For the full fiscal year, we now expect gross margin to be about flat year over year at the midpoint of the range and operating margin to improve approximately 50 basis points on a currency neutral basis. The balance of our P&L guidance expectations for the full fiscal year 2020 remain unchanged. Moving on to slide 17, this reflects our revised EPS guidance for the total year. As you can see, we now expect to deliver adjusted EPS of $11.90 to $12.10, which reflects our latest view on FX and the impact of Alaris pumps. In summary, we delivered a solid first quarter in line with our expectation. We continue to make good progress on the BD-BART integration and on bringing to market our robust innovation pipeline, launching 11 new products during the quarter. Moving to the balance of the year, we take the news we delivered today very seriously, and we are fully committed to resolving the Alera situation and returning to our longstanding track record of delivering value to customers, their patients, and shareholders. Thanks, and I'd like to now open the call up for Q&A.

The floor is now open for questions at this time. If you have a question or comment, please press star 1. or your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. In order to allow for broad participation, please limit your questions to one. We ask that while you pose your question, please pick up your handset to provide optimal sound quality. Thank you. Our first question comes from the line of Robbie Marcus with JP Morgan.

Robbie Marcus Great, and thanks for taking the question. Maybe we could just start with the pump impact and help us understand, of the $400 million plus or minus that you lowered guidance by, how much exactly is for the pump? Will this linger into fiscal 21? And I'll just ask all my questions here. Maybe as you walk us down through the P&L, it seems like there's a 40% contribution margin hit. from that $400 million to the $0.60? Help us get to that number.

Hey, Robbie, this is Tom. I'll take the first two questions and then turn it to Chris for your last one. So of the $400 million, that essentially is pump capital that we're unable to ship. Of course, we have a very large install base in the field. We aren't expecting any meaningful impact on our consumable business there. we actually have seen some increase in consumable demand, certainly because of the flu season. And as we mentioned, we stand very strongly behind the quality of the product, and it's continued usage in delivering 70% of infusions, particularly in the U.S. Lingering into 21, so what I could say at this point is, look, we know what we need to do to address this situation, and that's to submit the updated 510K within Q4, So that's what we're focused on right now. The timing in which we're going to get, we're working collaboratively with the FDA, and I'd say we'll give you updates as that progresses in terms of our ability to open up and resume shipping. So as we continue that collaboration with the FDA, we'll have more visibility and we'll keep you updated.

I would just add, to provide clarity to the guidance change, Up until the infusion pump issue this week and our meeting with the FDA this week, we were fully planning to reaffirm our guidance for fiscal year 2020. The 2.5% to 3.5% revenue growth guidance assumes essentially on the low end that we sell virtually no pumps. And, you know, of our 450-ish kind of U.S. infusion pump business, the range above that would expect a normal range of of guidance that we would have had prior to this issue, as well as the potential of selling some pumps under medical necessity.

So maybe just quickly, what's the breakdown of how much you're lowering for pump versus coronavirus and for the increased reimbursement?

What I would say is it's 100% pumps because as you think about The puts and takes that we had this year, we are seeing upside on the flu side. We're seeing better performance in DCBs, as we talked about. So we have some strong performance in the rest of the business. China, outside of the volume-based procurement, is doing extremely well, strong double digits across interventional and life science. So we had some upside. We did take into consideration the acceleration of the volume-based procurement. That stepped up just to kind of give you a sense. That's a $200 million peripheral catheter business for us. Last quarter, we took it down by about 40. We've accelerated that by about 60, partly because of accelerations in the province tenders that we're seeing and But even more dramatically, the distributors taking down inventories in anticipation of these tenders. And so that's an additional 60. So we've taken down an additional 60. So that takes us down to about 100 million left in that business going forward. That 60 plus the coronavirus of about 20 to 30, we're offsetting. with the strong performance as I talked about in other parts of the business. So as I said, going into this week, we had all that in the mix and would have still reaffirmed our guidance for the year. So you can think about the takedown as entirely the Alaris pump issue. Thanks a lot.

Our next question is coming from the line of David Lewis with Morgan Stanley.

Good morning. Thanks for taking the question. Just wanted to start initially, Tom, with if you go back historically and look at the Baxter colleague recall, that share loss bill, Tom, over a series of years. So do you have any early comments on what can be done to support customers and incentivizing them to wait for resolution or how customers are going to evaluate this buy from another provider or wait decision during this interim shithole period?

Yeah. Hey, David. So what I would say is, of course, we've Customers have been increasingly selecting the Alaris product, as you know, for many years, and we've seen that in continued share gains within the category. I would say going into FY20 this year, that momentum is continuing to be very, very strong. So high level of customer engagement and interest going right up to this point in continuing to convert to the platform. So I think people's conviction in terms of they see the value of the product, obviously not only the power of having one integrated system, but the interoperability ability which we have. We'd expect nearly 90% of all interoperability pumps in the U.S. are BD pumps today. It's a capability that we have that we think is at another level. than others are able to offer. And we also, of course, have the integrated medication management solution that connects more broadly. And so, you know, feedback early on is that customers still see that value and will be working to help people, you know, as possible to wait for that. Of course, there's a large, we have a very, very large install base. And that normally takes, you know, we see people upgrade every, let's say, 10 years in general. we see people begin to refresh their fleet. So we also recognize people have flexibility in terms of do they do that right now or do they wait until we get our updated 510K in place. Of course, we'll have a better sense of how fast we'll be able to reengage with customers as we continue our dialogue with the FDA and as we get that 510K updated and submitted. And that's our number one focus right now is getting that filing done which will reflect not only the upgrades that we're making right now, but it's going to reflect the changes to the software that have also been made historically will all be included in this updated 510K that we'll be submitting.

Our next question is coming from the line of Brian Weinstein with William Blair.

Hey, guys. Thanks for taking the question. Can you be a little – Can you be a little bit more specific here on the steps that are required with respect to submission of the 510K, the software upgrades that you're doing? Can you tell us kind of where you are there, why that would take so long to maybe submit sometime in the fourth quarter? It seems like some of these software upgrades were kind of already done, and you've got to kind of repackage them. And then I just want to dig into – What specifically did the FDA come in and say that they didn't like about your quality systems? What changes do you think you need to make more broadly on the quality system side? Thanks.

Yeah. Hey, Brian. Tom. So let me start with your last question and then work our way forward. So as I mentioned, based on the quality system in our infusion business, we've made software upgrades over time to the Alaris system. And over that period of time, and we're talking not this year, we're talking a number of years, our quality process determined that those upgrades that we've been making in that business did not require a 510K clearance. And so most recently, on the most recent changes and updates that we made, we followed that same process. And our team determined based on that process that those recent updates in November also did not require a new 510K clearance. And so we released that software improvement in December, and we resumed shipping as we had shared with you last month. Since what we've learned, and as I mentioned, we had a key meeting with the FDA as recently as this Monday. Through our ongoing dialogue with the FDA, we learned that the FDA disagreed with that determination about the need for a new 510 clearance for the updated software. And that applies not just to the upgraded software that we're talking about in November, but that decision process that had occurred over time. And so, as I said, we're collaborating with the FDA on their request to combine all the Alaris software enhancements and remediation upgrades with the additional changes made to the Alaris system over time, over years, into a more comprehensive regulatory filing, which is going to be submitted this summer. And so while you're right, we have the information ready for the recent software upgrades, The work that has to take place between now and the submission date is more reference to the historical changes that have been made over multiple years going back and some additional testing that we need to do on those historic changes to reflect the testing requirements today. So that's the work that has to be done.

Our next question is coming from Bob Hopkins with Bank of America.

Hi. Thanks for taking the question, and good morning. Morning. Morning. On Alaris, I guess the question I have is a little bit bigger picture. In your view, is this 100% a Becton-specific issue with the FDA, or is the FDA changing their requirements for pumps broadly? The reason I ask the question is I'm struggling to understand how you got caught off guard and how this went from a software upgrade to something much more significant.

Bob, this is Tom. I can't comment on other organizations, but what I can say is that it's not unprecedented where there are situations where over time a product evolves and then the FDA looks and says, wait a minute, your current 510K needs to be updated to reflect those series of changes over time. And in this case, there's a process in the business and there's a specific quality process that's within the infusion business within the consent decree that the team was following that said each of those individual changes didn't require a 510K process. Again, when the FDA looks back at it over a 5-10 year period, they say, wait a minute, you actually need to put in a 510K given that series of changes that have been made. And that's the exact work that we're doing.

Our next question is coming from the line of Kristen Stewart with Barclays.

Hi, thanks for taking the question. I guess just to, not to beat a dead horse, but on Alaris, I guess once you do submit this software upgrade platform, I guess, in the summer, what would be the timeline that you would expect for this package to be approved by the FDA? And then what would be your expectation for it to be rolled out to customers? I'm just trying to gauge, again, going back to the impact for you know, FY21 and I guess how should we just think about this in terms of customer, you know, waiting on the sidelines and just the degree with medical necessity. How difficult is that for customers to qualify for it? Thanks.

Yeah, thanks, Kristen, for the question. So let me answer your last question first. When it comes to medical necessity, we are working collaboratively with the FDA to put in place a process for customers to continue to get access to new Alaris pumps under medical necessity. And that's, again, as required for medical necessity. And that process is getting finalized now. We'll be reviewing that process with the FDA and then providing that to customers. Of course, it is a life-sustaining product in many cases, and there will be needs for medical necessity pumps, we expect, and we have requests for those now, certainly in-house. When it comes to clearance and timing for that, I'd say, of course, we're very focused right now on getting that 510 submitted. Clearance timing, we're working again with the FDA, and I think it's probably not prudent to speculate until we get feedback from the FDA. In parallel, though, I would say that the work on the catch-up 510 that I've described, we've started that work in full. and have momentum well underway. That's why we have a good sense of and confidence in the timing of submission. Thanks, Kristen.

Our next question is coming from the line of Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking the question. Tom, just one on just trying to go through the map. The $400 million cut to pump revenues, Is that assuming no placements at all, pump placements? If the market is $2 billion, I'm just trying to make the math work here on the impact for the back half here. Or if this is just a software, given you guys are so deep in the connectivity part on the digital part, this is connected to your PIXIS, can customers purchase their older version of the pump and then upgrade the software once the FDA – I guess approves the new 510K. And related to that, do you think this has any impact on Pixis at all now? Because I know you have some bundle sales going on. Thank you. Yeah, Vijay.

Tom, thanks for the question. So we don't expect any impact on Pixis. We continue to have strong momentum there. And, again, we have late-stage ongoing discussions with customers who we think many of them will wait for the Alaris product to be able to resume shipping in order to either convert or to upgrade their fleet. Again, we stand by the safety of the product, and so this is a delay in terms of when we can ship new pumps is what we're focused on. So I think that we will not be, by the way, when we ship under medical necessity, we will be shipping, we expect the prior version of the software to your question, and we can't ship, I think you had alluded to, can we just go back and ship the prior version of the pump more broadly? And no, the answer is no, we can't do that. We're limiting shipments of pumps exclusively to that under medical necessity as we work with the FDA. And again, we'll keep you updated as we progress and once we get past the 510 submission.

And I would just say in response to your first part of your question, just again for clarity, that the low end of our range, the 2.5%, would assume that there are essentially no pumps sold and the entire amount of revenue is taken out. And we would have to assume that there would be pumps sold under medical necessity would be limited, but the rest of the range up from the low end of the range would account for some sales of pumps under medical necessity, as well as the normal range that we would have in the guidance.

As you can imagine, given the situation, we want to be particularly prudent and make sure that, again, as we work collaboratively with the FDA here, we'll know more as those discussions progress.

Our next question is coming from the line of Larry Kirsch with Raymond James.

Thanks. Good morning. Just a two-part question here. So I guess once you have this new software package cleared by the FDA, I'm curious as to where that puts you relative to just overarching FDA desires within the pump space. It's my sense that the FDA has been a little bit frustrated that that a lot of the pumps out there really are not up to the standards that they would like. So I'm trying to get a sense of where this ultimately puts you once you kind of go through the pain of getting this all done. And I guess the second part of the question is, in other areas of the business where there have been software upgrades over time, such as Pixis, have you gone back and had a review there of might you need 510K filings there as well? Thank you.

Larry, thanks for the question. So in terms of the question regarding the overall pumps, this catch-up 510K is going to be extremely comprehensive. And so to your point, we feel that this will put us actually in a good spot in terms of getting full compliance. Again, we're working with the FDA so that at the end of the day, once we get this 510K established, the new one, we'll be fully meeting the expectations of the FDA. And we're having that active dialogue, obviously understanding their expectations, how our process may have led us to make some different decisions there. But we're getting all of that reflected and put into an FDA that will be completely comprehensive with the latest expectations and requirements. And that's the reason for that submission timeline, because we are being prudent and fully comprehensive to the full expectations of the FDA. So you could say that should put us in a good position going forward. On Pyxis, remember, Pyxis is not a 510K-approved product. It's not regulated in the same way as it's a dispensing system. So certainly on other products in the company, we are assessing that, but it doesn't pertain to Pyxis.

Our next question comes from the line of Rick Wise with Stifel.

Good morning, Tom. Hi, Chris. Two questions for me, and I'll just ask them up front. I was last night rereading your comments at the BD annual meeting where you very clearly restated, emphasized your goals for a 5% to 6% durable Top line growth, I think was your language, and low double digit bottom line. I guess I'm wondering how you're thinking about those goals today. Two, what impact do we imagine this has on your goal of 50 to 100 basis point annual improvement in operating margin? And last part of this, it's sort of all of a piece, we're all gonna have to contemplate what to do with our fiscal 21 and beyond numbers. I'm sure you're not ready to give guidance. But do we imagine that wherever we end up this year, and obviously I hope it's a little better than you're shaping today, but will the longer-term guidance, should we imagine that you'll frame taking these long-term goals, frame the longer-term outlook off this year? Or would we imagine, no, fiscal 21, if all goes well, could be a year of accelerated growth relative to these targets? Thank you.

So let me take a shot at that, Rick. Thanks for the question. I'd say that, you know, we're only a quarter into this year, so clearly it's a little tough to talk about 21 at this point. And, you know, this is very recent developments that occurred this week with the FDA, which we're addressing. We've sized the impact for FY20. Keep in mind that a big chunk of the revenue base is coming out this year, which does create a bit of an easier compare year over year. That's not our focus. Our focus is getting through this issue and working with the FDA to get the pumps shipping again. And I think there's nothing about this situation that that changes are 5% to 6% double-digit growth going forward. The underlying business is extremely strong and continues to be strong and will continue to be strong. This is, you know, as I said, the only thing taking our guidance down is this issue. We'll get past this issue and be back to that same standard of delivering value going forward.

Our next question is coming from the line of Richard Newlitter with SVB Learing.

Hi. Excuse me. Thank you for taking the question. I just was curious on the – going back to the China volume-based pricing pressure that you kind of took that guy a little bit more conservative based on what you saw between the two quarters. I guess what gives you confidence – that this is the right level of headwind to put in there for that issue. And just remind me again, sorry if I missed it, what was contemplated in the full year outlook and what gives you confidence that this doesn't kind of become a moving target? Thanks.

Hey, Richard, let me just start and then I'll turn it over to Chris. Certainly, as we had shared, it was just getting started when we gave guidance. It hadn't started really rolling out across the provinces. It was in discussion. Very few of them had started their processes, and others were beginning the dialogue. And so the pace of that happening and the number of provinces was still uncertain. And we made that very clear, I think, when we shared that at that time. So we've had another quarter to understand how that's evolving, and I would say it's evolving a bit faster than we had originally thought it would. Again, we've seen this has happened in the generic drug industry, so we have surrogates to see, to model the pace at which it goes, and we've also seen some of the tenders now go through in the last quarter, and we've been able to see exactly what pricing changes are being finalized in those tenders. And so now we've been able to say, okay, here's the exact pricing reductions that we're going to see and the number of provinces, and we've built that in. As we mentioned, as Chris said, it's a $200 million business today in China. Again, that's out of our $1.2 billion total China business. And what we've built in, it is a significant drop in that $200 million business. We've built that in. At the same time, we are redirecting resources today. from that portfolio of businesses into some of the areas and opportunities we see in life sciences and interventional, and we see some opportunities for acceleration in China in those two. It's not a level to offset fully, as you heard from Chris, but it's certainly that combined with the increased level of flu testing, DCBs, and other areas that are doing better than expected, it offsets it for us across the company. and thus why Chris's comment that the complete change in guidance here is 100% associated with the Alaris pump.

The only thing I would add to that is that the other thing that we saw as the situation developed is the distributors taking down their inventory levels much quicker than we would have originally anticipated as they saw this issue develop as well. You know, a big chunk of that happened since the last time we spoke. And we really see that mostly impacting the second quarter. And so, you know, the bulk, the biggest hit from that additional 60 million that we took China down will hit us in the second quarter and then moderate somewhat in the third and fourth quarter. But again, you know, just to kind of go through the math, $200 million business. Last time we spoke, we took it down by 40%. 200 being the FY19 number. We took it down by 40, and we're now taking it down an additional 60. So the impact this year across that is $100 million just for that specific item, taking that business down to $100 million going forward. And there will be some spillover into next year, but as you might expect, to a somewhat lesser extent.

And Richard, maybe just give you a little bit more color because it can be a little tricky. The comment on the distributors, the way that works and it has a little bit disproportionate impact in the first year is of course we're selling, we and other companies in China, we sell our products to distributors who then sell them to the customers. And so if we've been selling them at a certain price to the distributors and they have a large inventory of those, they see this process now happening. And the ability to now – they don't want to get stuck with a bunch of inventory at a higher price if the market price is going down. And so they're bringing down their day's inventory on hand, both so that they wait to see the pricing evolve because they don't want to have bought at high prices and selling at low. And the other thing is they're looking at who's going to win these tenders becomes more uncertain in this environment now. And so, again, they don't want to get stuck with a large amount of inventory. And you see the channel then taking down inventory concurrent with the situation. We've comprehended – that's all comprehended in the updated guidance that we've given, but just want to give a little bit more color on why we made the comment on distributors have an impact.

That's really helpful color. Thank you.

Our next question is coming from the line of Larry Bigelson with Wells Fargo.

Good morning. Thanks for taking the question. Just one on the pump and one on DCBs, Tom. So first, on the pump side, is it consent to create new – I'm sorry if I missed that. And what's the status of your next generation pump? Alaris has obviously been very successful, but I think it's been in the market for a while. And I'll just ask my follow-up now. On the below-the-knee refiling, what's the status there? And how do you think the 12-month data link and the new meta-analysis could impact the chances of approval? Thanks for taking the questions.

Sure. Larry, I'll take the first question, and I'll turn it over to Simon. So on the consent decree, of course, that's been in place from CareFusion at the time of acquisition. That does put certainly a heightened regulatory oversight over that business, which also can influence certainly our dialogue with the FDA and as well and expectations. And so that's always been in place. That's nothing new. And we're moving forward there. As we think about timing of our next generation pump, we do have a next generation pump in the pipeline. I'd say it's progressing well. We certainly don't want to talk about timing of submission of that today. The Alaris pump remains We believe it certainly is clearly the most preferred product by clinicians across the U.S., and you can see that based on the trajectory of the last several years. And we remain very confident that it will be in a position to continue, not only because of the benefits of the product itself, but how it's integrated across a broader medication management suite of solutions, that it is very well positioned to be of continued preference going forward and we've got to get this 510K catch-up submitted so that we can return to making that available to our customers and for patients. So, Simon on DCB.

Good morning, Simon. So with respect to the submission on BTK, I would say that we're well advanced in our preparation of that submission, and I would say we'll be going into FDA sooner rather than later, potentially. So that's about the size of things on that. And then with respect to the – I think you were asking about the more recent data that was published by Cat Thanos. If you saw the information from Link a couple of weeks ago where we published three-year safety data, We continue to not see any safety signal with our data. And indeed, despite the limitations of the Katanos 2 paper, I think you will note that the significance with respect to the harm signal that they were seeing did not exist when you use a low-dose DCB, which is what we have. So is it going to materially impact FDA? I don't know. But we are well advanced in our preparation for that, and the data that we continue to release supports the safety of our products.

Our next question is coming from the line of Matt Taylor with UBS.

Hi. Thank you for taking the question. I just wanted to have two little follow-ups on this situation. The first is for the comprehensive 510K that you're filing and you got it to the end of the year for that. Can you talk about any risks or upside that could be to the timing? How is that progressing? Is that a date you're pretty confident about? Is there any risk that slips or could it get pulled forward?

Thanks, Matt. So, again, we just had the most recent discussion with the FDA this Monday. So I don't want to certainly – we're very focused on – and we're already starting that work on the 510K. We had had some of that momentum going well before then. But we're going to be in a better position to give you an update on that once we get through it. Our goal right now is to submit and seek clearance as quick as possible and to meet the expectations of the FDA. So I think it will be premature to speculate on any timing of the clearance process. Thanks.

Assuming that you do file that.

Sorry, Matt, I think we lost you. We go to the next question.

Our next question is from the line of Josh Jennings with Cowan.

Hi. Good morning. Thanks. I was hoping to just ask about the interventional business. You commented about the Paclitaxel, Dracutaballoon headwind improving. Any details you can provide just relative to that 50% decline stake that you put in the ground historically? And then also, any details just around the shifting of products from vascular surgery into peripheral and what those products were and any rationale for that. Thanks a lot for taking the question.

Josh, I'll let Simon answer that.

Yes, so Simon here, Josh. I think we've seen a sequential increase in performance here with respect to SFA DCBs. I won't give you the specifics, but I would classify it as a material increase in our performance prior to what we saw in Q3 and Q4 last year. And then with respect to Salesforce alignment, we transferred some of our PlurX business, which is our drainage catheter business, from the surgery business into the peripheral intervention business. And that's simply synergistic with the call points that we have there. We focus heavily on breast biopsy and implant reports and delivery of chemotherapy. So taking care of patients at the end of their life in relation to their preexisting cancer, PlurX is a perfect fit for that sales force. So that's what we've done. Thank you, Josh.

Our next question is coming from the line of Matthew Michon with KeyBank. Okay.

Great. Thank you for taking the questions. A quick follow-up and then a broader one. Does this also expand to the syringe and the pain pump in addition to the LVP pump? And then as I think about Becton, I think the broader value proposition in medication management you have in the hospital, on the good side, I think that probably allows customers to be patient as you kind of work through some of these issues. But on the other side of it, Would this not also affect the overall conversation or conversion of some of the broader portfolio with some of your customers? Would it not relate in maybe some delays in conversion in other areas?

Hey, Matthew, thanks for the question. So Alaris as a system, it includes – it's all one system, right? So the Alaris system, which is one of the reasons that customers do prefer it so much, is that it includes an LVP, the syringe, and the PCA, they all snap on as modules that you can choose from based on the patient's, the types of medications that the patient requires and the administration route. So those are all fully in scope and comprehended within the guidance that we gave you an update on. In terms of the broader medication management strategy, I think you're exactly right that customers deeply value the full set of solutions there and that that provides an impetus that people want want to move in that full direction and not necessarily say I want to just move to having an isolated product that's not helping me manage, you know, medication. It's just literally doing a pumping activity. And I can't use the data to do things that I can like how we're using data from pumps and Pyxis and other things to do diversion analytics that you just can't do with other solutions. So I think you're right there. You know, we don't see at this point impact even as we are doing broader medication management deals. Of course, there's multiple other products as part of that suite of solutions. There's Pixis. There's Pixis Logistics. There's Pixis Prep. There's HealthSite. There's a number of other products. And those products, of course, can still be used with the existing Alaris base. So there's nothing stopping people from continuing to add those products on as they continue to use their Alaris products and utilize the data coming off of Alaris to be used as part of that full solution. Thank you for the question.

Our final question is a follow-up from the line of Kristen Stewart with Barclays.

Hi, thanks for taking the question. Just going back to, I guess, China, what's the risk that, I know you're talking about this $200 million business, but just that it continues to spill into other product categories within China? the broader China business for you? Maybe just talk about the number of provinces that you are seeing, and I guess just risk that it spreads more broadly within medical products.

Thank you. Thanks for the questions. Kristin, I'll turn it over to Alberto to answer that.

Yes, the first thing that I'll say is that we're seeing no evidence of value-based procurement applicable to any other category at this moment. The way that we tend to think about it is that there's probably three big variables here to consider, whether they would consider any new categories that we're in. The first one will be total spend of that category. Is it in the top 10 or in the top 20 spend in hospitals? And the two biggest parts of the portfolio you have left, which is flush and pigs, do not fall into that category. the number of competitors. And again, the other categories within MDS, there's a significantly less amount of categories. We're talking about a handful versus the peripheral catheters where there are over a dozen approaching 20 plus small players. And then the perception of cometization as well is another factor. And we do not think these conditions are necessarily all that applicable today to the other categories.

Thank you, Alberto. Thank you, Kristen.

There are no further questions at this time. I will now turn the floor back over to Tom Poland for closing remarks.

Okay, thank you. So as we close today, I want to reiterate BD's strong commitment to product quality, regulatory compliance, and patient safety. You expect it, our customers deserve it, and their patients depend on it. While I'm very disappointed that we had to lower our guidance today, I'm also confident that we'll look back on this moment as a catalyst for driving a better BD. Let me assure you that we are taking accountability, we're acting with urgency, and we're proceeding with an unwavering commitment to our purpose and the patients we serve. I'm also confident that our broad portfolio, our global reach, and our passionate team of associates provide an incredible opportunity to drive long-term growth and enable us to make a bigger impact on customers, patients, and shareholders around the world. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.