Becton, Dickinson and Company

Hello and welcome to BD's third fiscal quarter 2020 earnings call. At the request of BD, today's conference is being recorded. It will be available for replay through August 13, 2020 on the investors page at 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 3197917. I would like to inform all parties that your lines have been placed on listen-only mode until 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, Stephanie. Good morning, everyone, and thank you for joining us to review our third quarter results. We hope that everyone continues to be healthy and safe. With safety in mind, we are again taking a more virtual approach to our call today while also exercising social distancing. Joining me in person, we have Tom Poland, our Chief Executive Officer and President, and Chris Threedy, Executive Vice President and Chief Financial Officer and Chief Administrative Officer. Joining by phone, we have Alberto Mas, 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. 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 bc.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 third fiscal quarter press release and in the MD&A sections of our recent SEC filings. In particular, there continues to be significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. The commentary that we are providing today includes information regarding the July trends we are seeing in our businesses. We have made certain assumptions in how we are managing our business that that could change as we move forward. We will also discuss some non-GAAP financial measures with respect to our performance. Reconciliations to GAAP measures that include the details of the purchase accounting and other adjustments can be found in our press release and its related financial schedules and in the appendix of the investor relations slides. A copy of the release, including the financial schedules, is posted on the bd.com website. It is now my pleasure to turn the call over to Tom.

Okay. Thank you, Monique. And good morning, everyone. I hope you and your families are doing well and staying healthy. If I had to summarize Q3 in two words, it would be execution and impact. I'm very proud of our team for the performance they delivered in the third quarter, given the challenging environment. What stands out to me the most is the progress the BD team made executing and delivering on both our short- and long-term agenda, creating value for patients, customers, and shareholders. We launched the COVID-19 assay on Veritor, secured injection device orders for future vaccination campaigns, and scaled manufacturing to ensure continued supply of critical medical technologies across the continuum of care. We announced several U.S. government collaborations to expand U.S. capacity in critical to COVID product areas, We worked closely with our customers as they resumed medical procedures throughout the quarter, and we saw those procedures continue to increase as we exited the quarter. At the same time, the team never lost sight of the long term, advancing our growth strategy, driving our innovation pipeline, and executing on our cost savings and simplification initiatives. I'm confident the steps we're taking now will help BD emerge from this pandemic strong and put us in the best position for the long term. Let's jump into the quarter on slide four. Our third quarter results reflect the impact of COVID-19 on healthcare around the world, as we saw strong demand for COVID-19 related diagnostics and significant pressure on the parts of our portfolio that support elective procedures, research, routine care, and lab testing. We anticipated we'd see the biggest negative impact from COVID-19 in Q3, and it's largely played out that way. All in, COVID-19 had a net negative top line impact of $600 million in Q3. Chris is going to provide more detail on performance during the quarter and our perspectives on recovery, but let me share a high-level summary of what we're seeing, starting with BD Interventional. Across the interventional segment, we saw sequential improvement each month during the quarter, as hospitals and patients started to resume elective and non-urgent procedures. In June, China delivered positive year-on-year growth in all three BDI businesses, We continue to watch China closely since they're further along in their post-COVID restart. We exited Q3 seeing BDI procedure volumes at approximately 80% of pre-COVID levels. Moving on to the medical segment, we're really pleased with the continued strength in our pharmaceutical systems business, which is growing high single digits on a year-to-date basis. We view both the farm systems business and diabetes care businesses as more insulated and less impacted by COVID-19. As you know, the rest of the segment's portfolio is closely tied to overall healthcare consumption. So naturally, the impact of lower hospital utilization was very pronounced across the medical device consumables portfolio, even more so than we had initially anticipated. That said, we're encouraged that we saw demand for medical device consumables improve in June. Lastly, early demand for infusion pumps under medical necessity did spike in April as expected and then tapered down throughout the quarter. Now, looking closer at life sciences, as expected, we saw very strong demand for COVID-19 diagnostic tests and supplies during the quarter, which was offset by a deferral of routine lab work, as well as delays in capital investments on both the research and the diagnostic side. In Q4, we expect continued strong demand for our COVID-19 diagnostic solutions with the addition of the Veritor assay to the portfolio. In addition, We did see reagent orders begin to pick up in June for both research and clinical applications, which demonstrates that researchers continue to get back into the labs. While this remains a dynamic situation, we're providing revenue and EPS guidance for Q4 in the total year, as we have improved near-term visibility. Based on what we know today, we believe our guidance range reflects the trends we saw in June and July, and account for our expectations as we close out the year. And Chris will go into more detail later on the call. Despite the challenging environment, it's clear that BD's durable capabilities and critical healthcare portfolio have been and will continue to be a vital part of the COVID-19 solution. And I'm confident that the actions we've been taking position BD increasingly well to support our customers through the pandemic and to return to growth as the global economy and healthcare industry continue to stabilize and recover. During the slide five, on our last call, we discussed how the strength and diversity of BD's portfolio enables us to support the world's response to COVID-19 across the full continuum of care. The BD team made significant progress executing this agenda during the quarter, positioning us well to finish the year with momentum. So let me share a few highlights with you starting on slide six. First, today marks one month since we launched the SARS-CoV-2 antigen assay for the Veritor Plus system, which received FDA EUA in early July. We believe this platform is a real game changer, dramatically expanding access to COVID-19 testing at the point of care and reliably diagnosing SARS-CoV-2 in 15 minutes. In the first month since launch, we've received very strong demand for both the Veritor Plus system and the SARS-CoV-2 assay, including from our traditional customers, as well as non-traditional accounts. In our first month of launch, we've shipped more Veritor readers than we normally do in an entire year. This is a strong indicator of the unprecedented interest and demand for near real-time point-of-care COVID testing. As one example, we're proud to partner with the U.S. Department of Health and Human Services on their efforts to expand access to rapid point-of-care testing in nursing homes through their initial order of 2,000 Veritor Plus systems and 750,000 SARS-CoV-2 antigen test kits. To support the very strong demand we're seeing, we are leveraging our world-class manufacturing scale and expertise to significantly increase supply capacity. And we're feeling good about both our original goal of producing 10 million tests in Q4 and our scale-up to our initial 8 million tests per month run rate by the end of the fiscal year. In addition, last week we announced a $24 million investment from the U.S. Department of Defense in collaboration with HHS to support the additional scale-up of U.S. manufacturing, which is expected to bring global production of the Veritor assay to 12 million tests per month at the end of February 2021. We're putting the full capabilities of BD behind this, including not just those in our life sciences segment, but we're pulling in talent from both BD medical and interventional to support the scale-up. Detecting and containing coronavirus globally, take a collaborative industry-wide response. We're proud to partner with AdvenMed on the National Diagnostic Supply Registry to help ensure widespread availability of testing. The Veritor assay joins the portfolio of three molecular solutions for our COVID-19 testing that BD's already delivered for use with the BD Max molecular system. That includes two with EUAs and two with CE marks. We're now producing 1 million COVID-19 rapid molecular diagnostic tests each month produced on BDMAX, and as I've shared, we're investing in further expanding BDMAX capacity so we can produce an additional 900,000 tests per month. The installation of these additional production lines is well underway and remains on track to be at our new 1.9 million BDMAX tests per month run rate by the end of the calendar year. Cumulatively, we've produced more than 3.5 million rapid molecular tests for BDMAX. In addition to investing to expand capacity, we're also investing to expand our portfolio. Our R&D teams are actively advancing our work to develop flu plus COVID assays for both our Veritor and MAX platforms so we can better support healthcare providers and patients. I'm very proud of the entire BD team for driving scale and impact through our COVID-19 diagnostic solutions. We move on to slide seven. To date, we've now received orders for 470 million needles and syringes from the US, Canada, and the UK and other entities in anticipation of vaccine programs we expect late this year or early 2021. These orders represent a mix of safety and conventional device types. While we anticipate initial shipments to the UK in FY20, the majority of these orders will be delivered in FY21. In addition, we formed a strategic public-private partnership with the Biomedical Advanced Research and Development Authority, known as BARDA. BARDA will invest an estimated $42 million into a $70 million capital project to expand U.S. manufacturing capacity for injection devices. The new capacity is expected to be online within 12 months, and once completed, BARDA will have priority access to injection devices from these new manufacturing lines to support max vaccination campaigns for COVID-19 and future potential pandemics. As the world's largest manufacturer of syringes and needles, we are focused on fulfilling routine customer demand, such as for annual flu vaccination programs, while also ensuring we can support surge demand for pandemic response. We're continuing active discussions with governments around the world about the need to place injection device orders quickly to ensure timely delivery for 2021. As expected, I also want to provide an update on Alaris. We are working diligently and with urgency to prepare the 510 file. Our focus is on ensuring a comprehensive submission that will ultimately help enable timely FDA review and clearance. We expect to submit the updated 510 in late fiscal Q2 or early fiscal Q3 2021 based on ongoing dialogue with the FDA. We recognize there's a focus on the timeline for the 510K submission, and that's important. But taking a step back, we feel really good about the overall collaborative process we are engaging in with the FDA. In our pre-submission conversations, the focus has been on having a complete and robust submission, and we have been spending additional time on aligning the testing protocols up front, which is time and effort well spent. We believe the more work we do up front to ensure the most robust submissions, the better we are enabling a timely review and clearance process. As expected, our team has completed quite a bit of the testing and other work required for the submission, and we have a much better visibility to our submission timing now than we did when we last updated in May. When it comes to human factor testing, we've completed 100% of our formative testing, which was a significant milestone involving 12 different human factor tests in the middle of the pandemic. We are pleased with the data and outcomes. We have also completed substantial software system verification. Completion of formative human factor testing and software verification retires significant risk to the submission. We are taking a bit longer to ensure full alignment with the FDA on the final phase of human factor testing, which is referred to as assumative testing. And again, we feel this investment in time now best serves us in meeting our ultimate goal of timely 510 clearance. We have submitted our summative testing protocols to the FDA and expect feedback shortly. Concurrently, we are continuing to recruit clinicians for the next phase of human factor testing. And once we have that feedback from the FDA, we will be able to complete the summative testing. In addition, in our ongoing feedback discussions with FDA, we made a decision to include an update to our specialty ETCO2 module, which is important for clinical care and especially COVID response. The ETCO2 module is used to help monitor patients on ventilators while medication is being administered. We believe this is the right decision for the Alaris system over the long term. The patients we serve and far outweighs the additional timeline of a few weeks it takes to include it. Again, providing the most comprehensive submission to the FDA to help enable a timely review and clearance. I can't emphasize enough how seriously we take this matter. As with any project of this magnitude and complexity, there are always obstacles along the way, but we're confident that we have the right resources, the right plan, and the right team in place. We will continue to address any issues that may arise in a way that ensures the most comprehensive submission to achieve our ultimate goal of a timely clearance. This dedicated team is executing well, and we will keep you updated as we make further progress on key milestones. Moving on to slide eight and our innovation agenda, each of our segments are focused on driving consistent, durable growth for the long term. They are doing this through innovation in areas where we are our strongest, where we see disproportionate new growth opportunities, and that are aligned with emerging healthcare and technology trends. During the quarter, we launched four new products, and we remain on track to deliver our robust innovation pipeline for the year, as shown on this slide. Taking a closer look in BD Life Sciences, let me call out a few milestones in our biosciences business. This quarter, we launched an upgrade to the BD FACTS Melody to expand from two-way sorting to four-way sorting, enabling customers to capture more cell types. This capability is available as an upgrade to our existing install base. It helps to further strengthen our position in the fast-growing entry-level sorter market. During the quarter, we also launched software version 1.1 for FACTS Duet, This software enables the automated preparation of antibody reagent cocktails, which is traditionally a manual, time-consuming, and error-prone step in clinical flow cytometry workflows. This release enables our team to continue driving the successful launch of the FACTS-DUET base model, as well as extend into the larger leukemia, lymphoma, and mixed lab markets. In BD Medical, we continue to see good traction with BD Facile Optima, a next-gen closed-system drug transfer device we launched late in FY19. Our customers are increasingly choosing Optima to protect healthcare workers handling hazardous drugs because of the product's safety, ease of use, and demonstrated performance, as the device minimizes residual drug loss in vials compared to other similar systems. Sales of Optima have grown sequentially throughout FY20, despite the challenging pandemic period, and the launch has helped drive high single-digit growth across our CSTD platform. I also want to comment on our farm systems business, which is a great example of the diversity of BD's portfolio and how it's a real strength and strategic advantage. Farm systems continues to perform very well, growing high single digits on a year-to-date basis. We continue to be positive about the outlook for this business, in addition to favorable market trends enabling strong growth in the pre-filled syringes platforms We've also been investing in advancing our self-injection systems to meet the needs of our pharmaceutical customers. And lastly, in BD Interventional, we recently received FDA clearance for our next-generation targeted temperature management system. The AS-STAT temperature management system offers a way to non-invasively control temperature within a narrow range for all appropriate patients. We have now leveraged and integrated BD's capabilities around EMR integrations and data analytics into the AS-STAT system, which also incorporates advanced algorithms and capabilities to enhance the patient and the physician experience. In our peripheral intervention business, which is a global market leader in biopsy and implantable sports, we recently launched our first interventional oncology product, Caterpillar. This novel technology is used for embolization of the arteries serving tumors. While commercializing new products during the pandemic has been challenging, The device has been used in more than 50 interventions to date, with excellent feedback on its deliverability, visibility under angiography, and ability to cause rapid and sustained embolization of the artery. While still early, we believe the positive response from customers is a good indicator of the growth opportunity ahead. Before I pass it over to Chris, I want to briefly comment on slide 9 and the other drivers of our long-term growth strategy, Simplify and Empower. As we discussed last quarter, we've been extremely focused on cash and expense management throughout this pandemic period, and this discipline was reflected in our SSG&A this quarter. In addition to helping to strengthen our bottom line, these efforts ensured we flow investments to the most significant opportunities. In addition, Project Recode remains on track. As you'll recall, Project Recode is our comprehensive internal simplification initiative that we expect to deliver approximately $300 million in savings over the next four years. We're focused on operating the business with discipline, including how we can best deploy resources to maximize our impact. And lastly, in Empower, in July, we released our FY19 sustainability report, sharing our latest progress against our 2020 sustainability goals and reinforcing that ESG remains a fundamental element of our strategy. We look forward to announcing our 2030 impact goals later this year. And as always, you can find our quarterly sustainability updates in the appendix of today's presentation. All in, I'm proud of the progress that our team is making. With the successful launch of Veritor and a significant injection device orders from multiple governments, we're clearly delivering on our short-term COVID-19 response plan. We're making the necessary investments and are working as quickly as possible to fully resolve the ALERIS matters to ensure the completeness of this complex system to aid the FDA's review and clearance. At the same time, we continue to execute against our strategy for long-term value creation. While we continue to navigate a challenging environment, I'm confident the steps we're taking now will put BD in the best position for the long term. With that, let me turn the call over to Chris.

Thanks, Tom, and good morning, everyone. I'd like to begin with some comments regarding BD's ongoing response to the COVID pandemic. First, I'm very proud of our organization as we have continued to adapt to the rapidly changing environment and evolving needs of our customers and associates. We have responded with both strength and agility to ensure the continued safety and well-being of our BD associates and to also best serve our customers and their patients as they battle the pandemic. Second, we continue to see strong demand for our COVID-related solutions. This includes diagnostic tests on our BD Max platform, where we are continuing to increase capacity to meet demand. We are also actively ramping our efforts around the recently launched rapid antigen test on BD Veritor point-of-care system. And we continue to grow our pipeline of orders for syringes and needles to support future global vaccination campaigns. Third, as we continue to adapt and meet our customer needs, we also remain focused on the execution of our long-term strategy, which positions us well for the future. In addition to the COVID-related solutions, we launched four additional products in the quarter, and we remain on track to execute against our new product pipeline for fiscal year 2020. We are also continuing our work on Project Recode as part of our plans to simplify BD and which will help drive future operating margin expansion. We are confident that BD will emerge from this global health crisis from a position of strength and will continue to create and deliver value to all stakeholders. With that context, let's move on to our results for the third quarter, including a review of the COVID impacts. As Tom discussed, our third quarter performance reflects the impact of the global COVID-19 pandemic. Revenues declined 9.4% on a currency-neutral basis. This was driven by approximately $600 million in net COVID headwinds, which impacted growth in the quarter by approximately 1,400 basis points. As we shared previously, we saw significant impacts to our results in April and May. We were pleased that the sequential improvement we saw from May to June across our businesses continued into July, with Q3 Q3 being the trough in terms of negative impact of COVID to our businesses. I'll discuss more regarding the trends across our businesses later in my presentation. Third quarter operating margins were 20.1%. This reflects the impact of high decremental margins on lost revenues due to COVID-19, as well as COVID-related investments. Adjusted EPS was $2.20. which represents a decline of 28.6% year-over-year or 25% on a currency-neutral basis. Following our $3 billion equity issuance in May, we retired both the $1.9 billion term loan and the $695 billion we had outstanding on the revolver. Our liquidity position remained strong with $2.9 billion of cash as of June 30th. Prior to the equity offering, We plan to pay down approximately $1 billion in debt in fiscal 20, and we remain on track to do that. Combined with the revolver paid down in May, we will have paid down a combined $1.7 billion by the end of fiscal 20. Moving forward, we believe it's more meaningful to talk about our leverage on a net basis, with leverage being 3.1 times net of cash as of June 30th. Moving to slide 13, before I discuss our revenue performance by segment, I'd like to provide some color on the COVID impact in the third quarter. As we expected, continued adherence to COVID-related stay-at-home measures resulted in a decline in elective procedures and lower hospital admissions and procedure volumes, as well as fewer routine lab tests and related specimen collections. In addition, we saw reduced demand from research labs due to closures. There were also some delays in capital instrument installations as facilities and staff were not easily accessible due to COVID. During our third fiscal quarter, these headwinds resulted in a gross impact of approximately $800 million to revenues. In terms of recovery, we are pleased to see sequential monthly improvement from May to June across our businesses, and in some cases, like elective procedures, we saw sequential improvement throughout the quarter. Gross headwinds in the quarter were partially offset by approximately $200 million in COVID-related tailwinds. This was driven by strong demand for COVID-19 diagnostic testing and infusion pumps. As we anticipated, demand for Alaris infusion pumps under medical necessity was significantly higher in the month of April compared to May and June. Now, turning to slide 14 in the medical segment, BD medical revenues declined 6% in the third quarter, including a net headwind from COVID of approximately 600 basis points. In the medication delivery solutions unit, our performance reflects the impacts of declines in hospital admissions due to COVID, which resulted in fewer procedures. The majority of our MDS portfolio, catheters, flush, and the like, track closely to hospital admission trends. If we look at the US as an example, admission rates were down most significantly in April. We saw sequential improvement over the quarter, exiting with admissions at approximately 80% to 85% of pre-COVID admission levels. Lower procedure volumes drove reduced customer demand and resulted in distributors rebalancing inventories in May and June following distributors' stocking that took place during March and into April in the U.S. and Europe. MDS performance also reflects distributor inventory reductions and lower volumes related to the ongoing volume-based procurement process in China, which were in line with our expectations. Similar to the U.S. and Europe, we saw an improvement in the impact related to COVID in China as the quarter progressed. Revenues in the Medication Management Solutions Unit reflect strong demand for infusion pumps in the U.S. under medical necessity and strong growth outside the U.S., particularly in Europe. Within the quarter, the majority of the U.S. medical necessity demand occurred in April, as expected. This strength was partially offset by delayed capital installations of dispensing systems due to COVID, as anticipated. And similar to our MDS portfolio, lower hospital admissions also impacted sales of infusion sets and MMS. Pharmaceutical systems performance reflects our continued ability to meet high demand for pre-fillable syringes. Farm systems third quarter revenues also reflect some timing of customer orders within the year. Year to date, farm systems revenues grew a strong 8.1%, and we expect continued momentum in the fourth quarter. Third quarter performance in our diabetes care business reflects distributor and retailer reductions to inventories as expected after inventory increases that occurred towards the end of the second quarter due to customer stocking related to the COVID pandemic. Now turning to slide 15 in the BD Life Sciences segment, revenues declined 7.8% in the third quarter, including a net headwind from COVID-19 of approximately 1,700 basis points. In diagnostic systems, growth was primarily driven by strong demand for COVID-19 diagnostic testings on the BD Max platform. This was partially offset by a decline in routine diagnostic testing due to COVID. Results in pre-analytical systems were impacted by fewer specimen collections due to lower routine diagnostic testing. And in the biosciences units, performance reflects slower research and clinical lab activity due to COVID-19 that led to reduced demand for instruments and reagents. Now turning to slide 16 in the BD interventional segment. Revenues decreased 19.2% in the third quarter, including a net headwind from COVID of approximately 3,000 basis points. Revenues in both the peripheral intervention and surgery units were impacted by the deferral of elective procedures due to COVID. Within peripheral intervention, the impact of COVID was most notable within oncology across the U.S., Europe, and China as women delayed mammographies and in our EFKD and PAD platforms in the U.S. and Europe. Sequential improvement was seen during the quarter across all platforms, Revenues in China were flat year over year as the declines in oncology were offset by solid performances in end-state kidney disease and PAD. Within the surgery unit, the impact was primarily related to hernia repair and infection prevention in the US and Europe, as well as biosurgery in the US. Third quarter performance in urology and critical care reflects the impact of COVID-19 on the acute urology portfolio due to lower hospital admissions. We continue to see solid performance in our targeted temperature management and home care portfolios. As Tom mentioned, China delivered positive growth in the month of June in all three BDI businesses. We are continuing to watch China's recovery closely. For your reference, we have included a slide in the appendix of today's deck that provides our total company third quarter results by geography. I'll now turn to slide 17 in our gross profit and operating margins for the third quarter. Gross profit margin of 51.7% declined 340 basis points on a currency neutral basis. This reflects the impact of decremental margins of approximately 80% on lost revenues due to COVID headwinds in the quarter. This was driven by the mix of impacted revenues as well as the high fixed cost nature of our business, which resulted in unabsorbed manufacturing variances, which were expensed in the quarter. The COVID impact to gross margin also reflects investments we made in PPE facilities and the like to ensure the health and safety of our associates. The COVID impact was partially offset by gross margin leverage of approximately 50 basis points, driven by our ongoing synergy and continuous improvement initiatives. Currency had negative impact at 50 basis points on gross margins in the quarter. Operating margin of 20.1% declined 480 basis points on a currency neutral basis. This reflects the COVID impact to gross margin, as well as additional operating expenses and investments related to COVID. This includes increased shipping costs, investment in areas such as IT to support associates working from home, as well as new product development, including our BD Veritor Rapid Diagnostic Test. The COVID impact to operating margin was partially offset by operating expense leverage of approximately 70 basis points that reflects our ongoing discipline and initiatives to reduce expenses, particularly within G&A. I'll provide more details on that in just a moment. Higher deferred compensation expense due to strong stock market performance in the quarter also negatively impacted operating margin in the third quarter. As a reminder, deferred compensation expense is recorded within SSG&A and is entirely offset in the P&L in the other income net line item. Currency had a negative impact of 50 basis points on operating margin in the quarter. As we look forward, we continue to expect COVID pressure on gross margins to improve as revenues return. However, in the immediate term, looking to the fourth quarter, we continue to anticipate decremental margins of approximately 80% related to COVID headwinds. Turning to slide 18, which recaps the third quarter income statement. As discussed, revenues declined 9.4%. This includes a 10 basis point decline in pricing in the quarter, which was slightly better than anticipated. Gross margin was 51.7%, as I discussed a moment ago. SSG&A as a percentage of revenues was 25.4%, including the expenses related to deferred compensation. As a reminder, this is fully offset in other income. SSG&A expenses were down 6.7 percent year over year on a currency neutral basis, or 8.9 percent excluding the impact from deferred compensation. This decrease reflects our ongoing expense discipline and the proactive measures we took to mitigate the impact of COVID. Some of these items include compensation reductions at the management level, and suspension of the company's 401 match, as well as hiring restrictions. The decrease in SSG&A also reflects lower T&E expenses as the majority of our associates continue to work virtually. R&D as a percentage of revenues was 6.3% as we continue to invest in innovation to support our COVID response plan and our long-term growth strategy despite COVID-19 pressures. Our third quarter tax rate was 5%. This was driven by discrete items that occurred within the quarter that were contemplated in our prior guidance range. For the full year, we continue to expect our tax rate will be between 14% and 16%, with a high teens rate in the fourth quarter. Preferred dividends on our BDXP shares that were issued during the quarter were $9 million. Adjusted earnings per share was $2.20, as previously discussed. This includes an FX headwind of 11 cents in the quarter, which was more than we anticipated. As expected, the expiration of the Gore royalty impacted adjusted EPS growth by about 580 basis points. As a reminder, we will anniversary the expiration of the Gore royalty this month. As we look forward, we continue to monitor several macroeconomic factors and the potential impacts to our businesses. First, Countries, states, and even localities are in various stages of the COVID-19 pandemic. As a result, there is still great uncertainty regarding future infection levels, recovery rates, and resurgence, as well as general healthcare utilization. Second, a continued weak macroeconomic environment will likely keep pressure on the overall healthcare system, utilization, and consumer spending. Third, the pace at which deferred procedures return the normal continues to be one of the biggest variables. This will depend on several factors, including disease condition and acuity, COVID-19 testing availability, reopening and resurgence in countries around the world and state by state within the U.S., and patient willingness to seek care. It's difficult to predict how that will all play out over the long term. And finally, the timing, effectiveness, and timeline for potential COVID-19 vaccines around the world. and the impact of the vaccine on surveillance testing is all yet to be determined. Looking forward, while we are encouraged by the sequential improvement, we expect to continue to see unfavorable impacts from COVID-19 in our surgery and peripheral intervention business due to elective procedures, and we cannot anticipate the pace at which those procedures will fully return to normal. Moving on to the acute and non-acute area where our MMS, MDS, and UCC businesses participate, we are continuing to monitor hospital admissions and utilization levels for both COVID and non-COVID patient care, as well as care in the non-acute setting. As we have shared previously, we do not expect demand for infusion pumps under medical necessity to continue at the same level going forward. In diagnostics, we are continuing to monitor COVID and non-COVID testing volumes globally. As I mentioned earlier, we anticipate continued strong demand for our BD Max diagnostic test for COVID-19. Also, as we expected, we have seen very strong demand in our rapid point-of-care antigen test on the BD Veritor platform, and we are working to scale up manufacturing of both our Veritor readers and assays. And lastly, in our biosciences business, the pace of recovery will continue to depend on levels of research activity and clinical testing and how quickly they scale up to normal operations and capital spending. Now, moving on to slide 20, before we move on to our guidance for the fourth quarter and fiscal year, I'd like to spend a moment highlighting the trends we saw during the third quarter related to the impact of COVID across our businesses. We shared this slide with you on our May earnings call, which at that time depicted our results for April. This slide has been updated to reflect the third quarter COVID impact. When comparing the Q3 slide to the month of April, you'll note several things, and I'd like to speak to two of those. First, the quarter shows an improvement versus the month of April as the recovery continues to progress. The other trend worth noting is in our MDS business, where we saw a larger COVID impact in May versus April. We saw improvement sequentially in June from the May low point. In total, the COVID impact to our MDS business was approximately $200 million. On average, in the third quarter, our businesses were impacted by approximately 25 to 40% versus our pre-COVID expectations. We exited the quarter with the month of June approximately 20 to 25% below pre-COVID expectations, or said another way, June had recovered to 75 to 80% of pre-COVID expectations. We were encouraged to see that exiting the third quarter and into July, COVID headwinds started to abate, and tailwinds started to improve. Note that we saw a sequential improvement in recovery rates in July versus June. Recovery rates across elective procedures, hospital admissions, and routine testing ranged from 80% to 85% versus our pre-COVID expectations in the month of July. We are also seeing strong early demand for our Veritor rapid point-of-care antigen testing and continued demand for COVID-19 tests on BDMAX. As expected, there was a small amount of demand for infusion pumps under medical necessity, as well as continued delays in large capital installations. Turning to slide 22, despite the continued variability and uncertainty due to the pandemic, we are providing a view into our revenue and EPS expectations for the remainder of the year based on what we are seeing today. For the fourth quarter, we expect revenues to be down low single digits an adjusted EPS to be between $2.40 and $2.60. As a result, we expect a revenue decline of a negative 2% to a negative 1.5%, an EPS of $9.80 to $10 for the full fiscal year 2020. As a reminder, our fourth quarter of fiscal year 2019 was a record quarter with over $730 million in sales in MMS, creating a very tough comparison. All in, we feel good about the remainder of the year based on the latest view of our business and assessment of macroeconomic environment. Before we open the call for questions, I'd like to summarize the key messages from our presentation today. First, we continue to be uniquely positioned to respond to COVID-19 by leveraging our core capabilities across research, diagnosis, and patient care. Despite a challenging and dynamic environment, our third quarter results reflect encouraging trends across our businesses in June. We have established a solid guidance range for the fourth quarter and the full fiscal year as we have improved near-term visibility into our expected results. Based on what we know today, COVID-related headwinds appear to be abating and tailwinds are improving, driven by high demand for BD Veritore. And lastly, we remain focused on executing on our long-term strategy and continue to deliver value to customers, their patients, and our shareholders around the world. 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 a comment, please press star 1 on your touchtone phone. If at any point your question is answered, you may remove yourself from queue by pressing the pound key. In order to allow for broad participation, please limit your questions to one and one follow-up. We ask that while you pose your question, please pick up your handset to provide optimal sound quality. Our first question comes from the line of Brian Weinstein with William Blair.

Hey, guys. Good morning. Thanks for taking the questions. No surprise. I'll start out on antigen. Can you give us an idea a little bit more about the demand and where it's coming from? And we saw the HHS deal and we saw the news from the Governor's Consortium. I guess that was on Monday or Tuesday. But beyond that, can you talk more about where you're seeing the demand start to come from and your thoughts on the size of what that market could be considering between you and the other player there? there's going to be about 30 million tests per month in the market by next spring.

Hey, Brian, this is Tom. Good morning. So, as we mentioned earlier on the call, certainly demand is expected, as I think it's been said by others, to exceed supply in the foreseeable future, at least. And we certainly see that ourselves. Demand, as I mentioned before, is coming from many of our traditional customers, healthcare providers themselves. We've quite strong demand there, as well as non-traditional accounts. Nursing homes for us would have been a non-traditional account. You've seen announcements come out recently from states looking to acquire rapid antigen tests and the use in other settings. I think the value of near real-time 15-minute testing has gotten increasing traction. I'd say we've really seen the awareness of that increase over the last you know, a couple weeks even more so, and that probably also coincides with increases in, you know, COVID rates across the country. So, again, very, very strong demand, as I mentioned, both on the instrument side, which we've shipped already in the first month, more than we normally would ship in a year, and our supply plans are on track to our ramp plans that we've shared before, but the demand is broad across both traditional and nontraditional segments.

Great. Thanks for that. And then as we think about a little bit longer term here and start thinking about 2021, based on what you're seeing, can you talk about some things that we should be thinking about when evaluating how things could play out, especially considering the extended timeline on Alaris, the recovery rates that you just mentioned currently being at about 80 to 85% of pre-COVID expectations in July and and how COVID-19 testing could play out. Can you kind of give us some goalposts to be thinking about around those things and other things as we think about trying to factor in 2021 here?

Sure, Brian. This is Chris, and I'll start with that. And obviously, you know, normally on this call we get questions about the following year at this time of year, and we hesitate to give any indications. This is probably even a tougher year to do that You know, we're giving guidance for the next two months because we have a sense of the near-term visibility. But when you think about, you know, where things end up with hospital utilization and elective procedures, where does it top off, that's a tough one to call. You know, clearly we're seeing a good trend. We talked about that in our prepared remarks. June was better than May. July was better than June. So that's a good indication. But where that tops out at, you see a hospital utilization in that 80% to 85% range. Does it stay there? Does it get back to 100%? Those are the calls that you have to make. So that's a high variable. And we'll be monitoring that, obviously, as we approach the November call. You know, when you think about margins, clearly the decremental headwinds from COVID impact are strong, 80%. And so we're going to continue to see that into the fourth quarter. And then we'll have some lapping next year. But as that comes down, that headwind will lessen certainly over time. And then on the more traditional stuff that we look at, FX right now looks like a push to slight tailwind. Resins looks like it's a slight tailwind. We would expect to see some headwind in 21 as we continue some of the COVID investments from this year and the full-year impact of that. And on T&E, we are seeing some favorability from lower T&A, and we would expect that to carry over into the beginning of next year. And then we'll see, you know, with what kind of recovery, people maybe coming back from virtual work, that might increase and have a little bit of pressure. Those are some of the things that you can start to think about, but it's a tough one to call this early. Thanks for the question, Brian.

Your next question comes from the line of David Lewis with Morgan Stanley.

Good morning. Thanks for taking the questions. I guess, Chris, I wonder – if you could help us sort of better understand some of the key drivers into the fourth quarter. I mean, we obviously have Veritor, interventional recovery, and some comparable issues to consider. But why don't you just sort of comment on some of the headwinds and tailwinds, such as, you know, stocking dynamics, things that are harder for us to model. And, you know, we have the net COVID impact in the third quarter of $600 million. What does that impact look like in the fourth quarter? And then I had a quick follow-up.

Sure. So as we said previously, You know, we are seeing those headwinds abate, and you can see that trend through June and July. So we would expect that 600 to come down significantly, but there still will be a headwind. And so we have that, and those headwinds do go down at the 80% level. So I think we've given you a lot of transparency into that, and so that should help with the models. The biggest thing that I would point to in the fourth quarter that I think – people have to remember is the tough compare that we have, particularly in MMS. And MMS had a record quarter at $738 million, as I mentioned in the prepared remarks last year. And that's a real tough grow over. And so with that, you know, the decremental margins being 80% on the COVID impact, that's significant. I think the other is that there are COVID operational investments that we have, those will continue and drag into the quarter. And the other thing to remember about the fourth quarter is, you know, generally if you think about the Alera ship hold, that's certainly impacting us again. The demand on the medical necessity, we're not expecting that to be what it was in the third quarter. So those are the kinds of things that we look at in the fourth quarter to get to the guidance that we gave.

Okay. And then, Tom, just a quick question on Alaris. The filing is sort of six months push versus the prior September, which is actually kind of consistent with our expectation. But with factor testing, you know, kind of in the bag here, what are the biggest outstanding deliverables in the submission? And timing aside, I think investors are most focused on what's your level of confidence you can return a safe pump to market? Thanks so much.

Thanks for the question. So, you know, we, as I mentioned before, you know, we have completed quite a bit of the testing and other work required for the submission, and we have a much better visibility of submission timing than we did, you know, when we gave the update last in May. I think from a human factor testing, we still have, right, the other part of it. We've completed 100% of our formative testing, which is the initial phase. Again, 12 different human factor tests, as I described, and we're pleased with the data and outcome. Now we've got to progress to that next stage, which is a broader set of testing, so that's still in front of us. A little bit of some of the other testing that we have completed. We've completed a retrospective risk assessment on the changes. Of every change that's been made to the ALERA system since the initial 510K, that work's almost complete. We see that as retiring significant risk to the submissions. We've completed software verification based on the original scope, closing out most outstanding anomalies. Of course, that software is not going to be released until all of our integrated testing is complete. But this is a tremendous amount of work and a testament to the team being agilely working from home. I think the other area is V&V and reliability testing. So we're pleased with our progress there, good progress made on both fronts. But we've begun testing on selected components and certain types of tests. And we await feedback from the FDA on the overall set of protocols. And so at this point, you know, that testing is not necessarily that work stream on a critical path for the overall project, but still more testing that's in front of us, just to give a little bit more color of the testing that remains. So thanks for the question.

Okay. And, Tom, your confidence you can return a safe pump to market here, timing aside, regardless of timing?

We remain very confident in the safety of the Alaris product, and as I said, we've been working very collaboratively with the FDA on advancing this submission. So we feel good about that progress that we're making.

Okay. Thanks so much.

Your next question comes from the line of Kristen Stewart with Barclays. Hi.

Thanks for taking my question. Chris, I was just wondering how we should think about gross margins going forward just as we balance some of the decriminal margins, as you've talked about, just with the Veritor assay coming in, as you've talked about the different capacity coming online, and then thinking about kind of the puts and takes that you've talked about with FX and resin and everything else. I appreciate you've had a lot of moving parts here, but it seems that we should have continued pressure, but obviously some moving parts, particularly as we think about modeling out next quarter and even thinking about 2021.

Thanks for the question, Chris. We're looking at Q4 margins in the 54% to 55% kind of range. When you're thinking beyond that, also remember that there's continued higher shipping costs as well. We've been able to continue to drive leverage in the charts that we gave on the third quarter. We broke it out where you could actually see the impact from the decremental margins from COVID. So we'll still have some of that, as we described earlier. We'll have some, you know, so that impact will lessen as the impact of COVID lessens in the fourth quarter. And that's why we get from that 51-ish kind of range up to the mid-54s. And in the mix as well as the COVID investments that we have, as well as our ability to continue to drive underlying leverage through continuous improvement. So that gets you kind of to that 54 to 55 percent range. One other thing that I neglected to mention earlier in the question regarding Q4 is also you saw the lumpiness of our tax rate. Those discrete items were anticipated for the year, but a lot of them fell into the third quarter. So as you're modeling the fourth quarter, you would expect to see a high-team two-square tax rate. And then also keep in mind the preferred shares and the dividend, and that's what leads you to that 240 to 260 kind of EPS range.

Okay. And then that 54 to 55, does that seem like a reasonable number to think about as a jumping-off point as we think about 2021 as well, obviously recognizing there's – a lot going on with COVID and whatnot, but a reasonable point to look for.

There certainly is a lot going on, but, yes, I think that's a reasonable jumping-off point. So that's why we're trying to give you, you know, on that chart, we're trying to break down the various contributors so as the, you know, the COVID impact debates, you know, you can, you know, that's a big driver at 80%. So as that goes away, it starts coming, you know, it starts improving again. And, again, we feel really good about the fact that we're able to, on an underlying basis, continue to drive improvements through continuous improvements and synergies. And as we mentioned, you know, Recode is a project that we will continue and think about that as a continuation of the simplification of the combinations of the companies that we've had over the number of years.

Perfect. Thanks very much.

Thank you. Thanks, Kristen.

Your next question comes from the line of Rick Wise with Staple.

Good morning, Rick. Good morning. Hi, how are you doing? Good morning, Tom. Hi, Chris. You're going to be surprised to hear me say I'd like to talk about fiscal 22. That's a first. Forward looking.

I know.

That's what I thought you'd say. I'm not looking for guidance, but more just reflecting. As I reflect on things, it seems reasonable to think that fiscal 22 might be a year when that thing gets more back to normal. The economy hopefully recovering, volumes returning, maybe a vaccine, all sorts of things, testing in better shape. And my question really revolves around that return to growth and how you, Tom, and Chris are thinking about Beckham, how would you have us think about Beckham in what may be a more normal year? If we assume that fiscal 22 is a more normal year, do you return to fiscal 19 or 18 kind of mid-single digit top line, low double digit bottom line, or do we think because of things like project free code, all the cost reduction, efficiency, the new products, the expanded testing, that actually maybe your normalized growth as we think a little longer term about the company is actually a little better or you're a little more optimistic. I think it would be interesting to hear your thoughts.

Sure. I'll take a start at that, and then I'm sure Tom will chime in with his view. But you're absolutely right. 21 is going to be a mixed bag, and – to compare is very different. As you think about 22, as we think about it, we're still very much focused on the five plus on the top and the 10 plus on the bottom. All of what you talked about in some of the growth drivers go towards getting to that five plus on a sustainable basis. We feel really good about the underlying business, the sustainability of that mid-single digits kind of five-plus kind of growth on the top. And things like Recode are designed to get us that kind of multiple to get you to the 10% on the bottom on a sustainable basis. So we feel good about it getting back to that kind of level. And, you know, we feel good about the fact that, you know, where the business is on an underlying basis performing extremely well in the face of all of the COVID impact that we've had. And that is lessening. As we said, we see those headwinds abating. Now, obviously, that could change with the change in the course of the pandemic. We're just calling that based on what we see today. And so that does seem to be abating somewhat. And you've seen some of the tailwinds that have been – you know, increasing, but again, how much of that, you know, continues into 22 will play out over time.

And maybe I think that, Chris, that was very well said. I think, Rick, maybe the only thing I could add is, you know, our – we are running the company. Obviously, we're managing it through COVID, but we are very much executing not only our short-term opportunities, you know, areas like Veritor and, you know, Max and helping on the vaccination campaign around the world, but very much executing our long-term strategy. As we think about, for example, our new product development pipeline and how we've been executing it, I've shared in the past, we've been really focused on continuing to improve our on-time delivery of products or on-time milestones. This year, despite COVID, we're going to improve. We're very much on track to improve our performance year-on-year again this year, even better than we had last year. Really proud of how the team's executing that. We just finished our strategic portfolio review and We went through all the segments, and we're making those tough tradeoffs in terms of which programs give us the best returns and growth profiles going forward, and we're allocating and making sure those investments are continuing or adding in in new opportunities that we see, and we're executing those pipelines on the recode, as I mentioned. We've allocated resources to that this year. They're executing. They're on track. And even in areas like our plant, I continue to be astounded in the middle of managing With our large manufacturing scale, you can imagine the complexity that COVID adds in. We watch our supplier base, a huge team that's just watching suppliers and any economic challenges they have, and how do we start preparing for backup suppliers to make sure there's no interruptions in our supply chain. A lot of that is incremental going on in COVID, and even during that, our operations team is very focused on continuing to deliver the routine CI savings, and they're, again, doing very well on that this year. incremental to the work that they're doing on COVID. And so, you know, hopefully the takeaway from that is that we are managing and navigating COVID with a high level of discipline while at the same time maintaining very much so our execution discipline on the long-term strategy.

And the other thing I would add from a slightly different perspective, too, is, you know, given the level of uncertainty, you know, what you can count on us is a high level of transparency. And I think I hope you'd agree that what we just gave on the third quarter and into July is very transparent. We've been very clear as to what we expect in the fourth quarter from Veritor, for example. We'll go to great pains to break that out so that as we navigate through that, it'll be very clear what's coming from Veritor and what's coming from the base business.

Yeah, the disclosure of that phone number, and we all appreciate it. Just as a quick follow-up, if I could, Chris, you highlighted the 3.1 tons net leverage at June 30. Last quarter you said post-barred leverage reduction timing was pushed out. Maybe just help us understand what's your latest thinking there, where are you heading, and what's that all mean for capital allocation? Thanks a bunch.

Sure. So, you know, nothing's really changed from a standpoint of our intent to delever the company. I think, you know, with the pandemic, as we've discussed right now, you know, we're focused on cash. We're continuing to pay down debt. But at the same time, that, you know, net leverage, that the gross leverage has been pushed off a little bit. But we will continue to to work that down over time. We feel good about the fact that the net leverage is where it's at. So that really hasn't changed. We'll, you know, see, we feel really well positioned in this time of uncertainty from a cash and liquidity standpoint. And, you know, as we've talked about that, that gives us the firepower to invest in new products, invest in, you know, things like Veritor Protection, for example. And so it gives us the firepower to do that. It will continue to fuel M&A, you know, of tuck-in acquisitions, et cetera. So we feel really good about a balance sheet. You know, as we come out, you know, as you think about 22, for example, our overall capital allocation really hasn't changed. The good news is we do throw off a lot of cash, and so we feel good about our – Our dividend, you know, we've had a long history of increasing the dividend. We've continued that through everything. I think you can expect that from us going forward as well. You know, I look forward to the day when, you know, pandemics and the sort of behind us and that strong cash generation leads us to a point where we can start buying back shares again. And we will come to that point. and get through this period. But the overall capital allocation really hasn't changed. Thanks again.

Your next question comes from the line of Robbie Marcus with J.P. Morgan.

Good morning, Robbie. Great. Good morning. You know, we can all take your supply of the Veritor antigen test and max out against the AST, and we can come up with really big numbers over the next 12-plus months. You know, how do you want to frame the revenue potential in fourth quarter and even into next year as you're sitting here? I know you haven't given guidance for next year, but, you know, what's your latest base case thinking on antigen testing for COVID over the next 12 months or so?

So I'll start with just to be very clear on the fourth quarter. We have talked about, you know, the 10 million tests. And that is what is in our guidance is the 10 million tests. So, you know, we said that the demand for that is very strong. We feel good about our ability to produce that at that level. But that's what's in the guidance for the fourth quarter. And longer term, I'll turn it to Tom.

Yeah, and we shared, you know, as we think about the fourth quarter, we assume the 10 million tests July through September at about $20 ASP per test, which is what we had shared in the – Historically. As you think about 21, obviously it's going to depend upon the number one factor will be the intensity of the COVID pandemic and its duration, timing of vaccine, etc. I think the most that we can focus on is that we will the 8 million tests per month by the end of September and then we'll be ramping up production of more than right at 12 million tests per month at the end of February. Those are the numbers. The percent utilization of those is to be determined as things evolve. We don't think it's appropriate for us to comment on that at this point in time.

Okay, thanks. And maybe as a quick follow-up, you know, you answered this briefly before on capital allocation, but you raised some capital during the quarter. Part of that was to have potential firepower to go on the offensive for M&A? Should that come up? What's your latest view on where M&A would be most appropriate in the portfolio? What do you view the current environment like, and do you think there are willing sellers out there right now?

Thanks, Robbie. I would just say, as we've shared in the past, we always are evaluating and have historically. Tuck in M&A has been a long part of BD's history and how we've grown many of the businesses that exist in the company, from BDB to Vacutainer to, of course, much of the Bars portfolio came in through tuck-in acquisitions and licensing inorganically. We continue to look at opportunities across all three of the segments, and we're very focused on deals that we would look at. We're not, as we've made very, very clear, we have zero interest in any large transformational deals. We won't be doing those. We're looking at tuck-ins, which is traditionally... what BD's done going back in time and has been critical to BARD. We prioritize very much looking at accretive deals. We're not looking at zero interest in any significant dilution at all. Those are some of the key criteria I'd say we're looking at. Specific areas, as I've shared before, we're not looking at areas far aside from our existing businesses. We're looking to leverage where we have strength and competitive advantage and really rounding out those portfolios as we've done, again, in each of the three segments over time. And Chris, anything to add?

Yeah, no, nothing to add other than to emphasize, you know, that the key metrics there are, you know, strategic fit in our core businesses and, you know, non-dilutive, you know, accretive deals. We're not looking for a lot of dilution and, you know, Returns ROIC greater than the cost of capital in year four. Those are the kind of standard metrics we look at. But first and foremost, the strategic fit. Thanks, Robbie.

Your next question is from Vijay Kumar with Evacor ISI.

Good morning. Good morning, Tom. Morning, Chris. Thanks for taking my question. One, just maybe a cleanup question on Q4, Chris. The tailwinds that you guys saw in 3Q, 200 million, obviously the pump revenues go away for Q4. Are the tailwinds also decreasing for Q4? And I think you made a comment on the preferred dividends in share count. Perhaps could you just remind the street on, you know, what we should be expecting for share count and preferred dividends in Q4? Sure.

So let me take the first part of that. So just to make it clear, I mean, you know, we said that the 600 in the last quarter, we're modeling in the area of around 200 net impact in Q4. And, you know, we do expect the tailwinds to go up with Veritor. You know, Tom gave the number, 10 times 20. So that's 200 million. We expect, I think we noted in the charts, we expect BD Max to be another $100 million as we're maxed out there. And you would expect the Alaris medical necessity to come down from third quarter to fourth quarter. So when you net all that out and with the abatement of the headwinds that we're seeing in elective procedures, hospital utilization going up a little bit, Still not back to normal, but abating. That's kind of where our thinking is. I missed the last part of your question, but I think it was Q4 share count, and you could use in your models about $293 million.

That's extremely helpful, Chris. And just on fiscal 21... You know, you can do the math, like we said, on the regulatory antigen test. But more, you know, stepping outside of numbers, it just feels like we're stepping up on capacity, you know, for these antigen tests. It feels like you guys are a little bit perhaps more incrementally bullish on the prospects for antigen tests. Is that the right way to look at it? In the syringes, obviously, we saw the orders, which is the dollar number sort of, you know, what the street could model for 21. Thank you.

Yeah, on antigen tests, I think what's fair to say is that we've seen, as I mentioned, very strong demand right off the bat. I mean, we're only, you know, we're literally at a month today. It's the anniversary. And we have very strong, extremely strong demand on that product. both on the readers and the antigen tests themselves. I think what's very, very clear is there is a high need to know this person has COVID right now, and I don't want to wait a day. I don't want to wait two days, three days, four days, depending on how effective the testing system is. If you're sending samples out, you can get up to those durations. And I think there's a whole – where that just doesn't work, that type of testing turnaround time, and people value on this getting an answer within 15 minutes. So that's, and that ease of use there is unbeatable on the antigen testing approach. So we're very focused on engaging a wide range of customers on that. As I mentioned, we're deploying not just the resources of life sciences, but of BD, against that opportunity on the scale up and making sure we have the right infrastructure to support the broader base of customers, even logistically, right, shipping this volume out of product. So, again, we're applying the full capabilities of the company behind this. So, I think that's a fair approach to it. How that evolves, again, from disease prevalence rate and consumption through 21, no one knows the answer to that. As long as it exists, I would expect there's going to be a high need for antigen tests.

Just on the syringes.com.

Yeah, on syringes, as you said, you heard us. We gave a number on this call that was incremental to the number we gave last time, right? So we have continued orders coming in, not only in the U.S., but in other parts of the world. We think that's still relatively no change from what we had shared historically. that we have capacity to add a billion units. Over the next, we had always shared 12 to 18 months, and we still see that opportunity side. I did call out the devices that we are selling are a mix of safety devices and conventional devices. Safety devices have a bit higher ASP than conventional devices, so we'll see how that mix evolves over time. But overall, we're right in line. We're still on track to be able to produce that billion units. units over the next 12 to 18 months, and you can see right at over 470 million units, those orders are starting to come in quite steadily, I think. Thanks, Vijay.

Your next question comes from the line of Bob Hawkins with Bank of America.

Oh, great. Good morning. Good morning. So thanks. I just have two questions and I'll include them up front. You know, given the kind of focus on testing, I was wondering if you could just to be clear, what was the total COVID testing revenue in Q3 and what is total COVID testing revenue assumed in the Q4 guide? And then the other thing I'd love you to comment on is that The one kind of incoming emails I've gotten on this report more than anything else is just that Q4 earnings are way below where the street was guiding, and it's about an 80-cent year-over-year decline, 25% year-over-year decline. So if you wouldn't mind trying to just sort of break that down for us, those 80 cents. And you've mentioned a bunch of things on the call today, but I was wondering if you could just summarize the factors that are leading to that kind of 80-cent year-over-year decline and and kind of 50 cents below or so what the street was modeling. Thank you.

Sure. So let me start on the first part of your question was the COVID-related testing that we saw in Q3. That was $100 million on max. So think about $100 million on max and $100 million on the – the Alaris medical necessity or thereabouts. So that was the 200 of tailwinds that we were talking, give or take. On Q4, we've talked, I think you can think about that 100 going up to 300, because the max is, if we're running at full capacity, and so we expect that to be about 100 million in Q4, and then you add in the Veritor of 10 million times 20, So that's $200 million gets you to, you know, the $300 kind of thing. So moving on to the second part of your questions, I think, you know, again, the revenue decline, we're still seeing, you know, low single digits kind of a decline in the fourth quarter. I think, you know, the COVID impact, particularly in the MDS business in Q3, was something that folks had been missing is very much driven by hospital utilization, and you saw what that was. So we would expect that to continue because although utilization is getting better, it's still under pressure. And so, you know, we do expect that revenue decline of low single digits. Then you drop that, you know, at a decremental GP. I think on the last call we were signaling kind of in the 75% range. it's really coming in closer to the 80% range. And again, that's a testament to the fact that these are very high margin products that are being impacted by COVID. And then in addition, we're doing the right things in terms of not building inventory during this period of time. And that's a very important point because as you're not building inventory, you've got absorption of variances that come in and hit the quarter. And we're taking that charge this quarter. We're not capitalizing it in inventory and carrying it forward. So that is a big part of what gets you up to the 80%. Obviously, we're making COVID investments as well. And those investments range from what you would anticipate in terms of cleaning and those kinds of things, PPE, those will continue. But in addition, it would include all the work we're doing to scale you know, the Veritor and the Max. And so those are some investments we're making. I think the other thing that would be new news compared to your models is the tax rate. And, you know, as we think about Q3 earnings, the 220, we acknowledge the fact that that's, you know, there's probably 20 cents of tax benefit there. But in addition, compared to what we were expecting and what I think the street was expecting, the drag from FX was about twice what we would have thought at 11 cents. So I think when you do that, we're kind of in line with the street for the third quarter. Then as you think about the fourth quarter, though, our range for the tax rate for the year isn't changing. So that just assumes a very high team tax rate in the fourth quarter. So I think when you plug that in, and then you do the calculation for the preferred shares, all of that kind of gets you into the range where we're at. Great. Thanks for the detail.

Hopefully that helps. Yep. Thanks, Bob. Thank you.

Your next question comes from the line of Larry Diegelson with Wells Fargo.

Hey, guys. Good morning, Larry. Thanks for taking the question. Good morning, Chris. One on testing or just actually two on testing. I'll ask them both up front. As people have said on this call, we can do the math on the potential sales. I guess my question is, we also know the margin is relatively high. I don't know if you would bless a 75% incremental operating margin or not, but that's what people believe. The EPS contribution could be quite high if the demand is strong. I guess my question is, will you let this drop to the bottom line? How should we think about that versus reinvesting And then just, you know, Tom, I know you don't know how sustainable the testing is, but long-term, you know, once we have COVID under control, is Veritor for COVID, you know, similar to kind of flu, which is about $100 million per year, or is there any reason why this could be a greater long-term opportunity? Thanks for taking the questions.

So let me start with the last question and then, you know, Chris can discuss the margins, which, by the way, we have shared, you know, we're not sharing the specific margins of Veritor, but we have said that they're higher than the company average, I think is the comment that we've shared in the past and probably what we're comfortable to continue to share, which is to your point. So on the long-term opportunity for COVID testing, I think, again, very difficult to predict at this point in time. I think there's still a lot of uncertainties, even around the vaccines. You know, are you, is it going to be a permanent vaccine? Is it going to be, you know, a vaccine that you have to get every year more like the flu? I think those things will, if it's something like polio that gets eradicated because of a vaccine that you get, you know, a couple shots of it up front and then it's longer term, that obviously will lead to a very different outcome than if it's something that you have to get annually and if you forego that annual vaccination. and now you're susceptible to get COVID. These things, I think, are still being understood and will evolve. What I think we can say is that, look, we're placing a lot of Veritor instruments right now, and I shared that up front in my commentary around demand just for the instruments in the first quarter. We certainly see point-of-care diagnostics as an area of focus of investment for the company, and we have, I think, an example, a clear indicator of that is we acquired a point-of-care molecular company, you know, earlier this year, pre-COVID coming up. because we saw the attractiveness of this space and we're continuing to invest in that area very heavily. I think the broader footprint of Veritours out in the marketplace, you know, could you say, regardless of how COVID evolves, will that create a bigger opportunity for Veritour of consumption of how long COVID will last is an unknown, but will they be using, you know, will there be more people out available to use flu strep other tests on Veritour, and will there be a societal impact continued shift to want to have testing results faster than they were before COVID happened. And I think, you know, those are all trends that I do think are going to be more permanent after COVID. Point of care is an area that I would say we are increasingly bullish on overall as a market. People understand now, of course, a lot of people understand lab testing a lot more now than they did pre-COVID. because they have a lot more interest. And understanding, too, when you have to wait days to get a result when you really need to know the answer, I think people also understand the value of that point-of-care technology. And so we do see that as a long-term trend, and it's an area of continued investment, and we see some near-term opportunities that could continue to prevail for Veritor due to the larger placement base. And then, of course, we are continuing to invest in new technologies in that space as well.

And back to the first part of your question, I think it is fair to say, and we have said in the past, that the margins here would be harder than the company margins. I think, you know, some of the numbers you were quoting seem a little rich to me, particularly in the short term. You know, this fourth quarter, I don't think you can expect us to ramp production and immediately get to those kind of margins in the fourth quarter. So I think And some models that I've seen have just assumed we can get to those kind of margins day one. That's not practical. But, you know, clearly building over time to margins that are higher than the company average. Thanks, guys. Thanks.

Your next question comes from the line of Amit Hazan with Goldman Sachs.

Hi, Amit.

Good morning, Amit. Let me just a couple quick ones. I know we're running late on time here. I wanted to ask the first one on just routine testing and get a sense from you if the recovery there is similar to what you cited elsewhere, and even if we think about getting into not just agnostic but even PI oncology and things like memo, whether you have any insight to the pace of that recovery. It all seems very relevant to downstream procedure revenue.

Yeah. Yeah, let me start with that. This is Tom. And actually, we do have Simon on the phone as well. We have all of our segment presidents. And Simon, I'll ask you to comment on the oncology piece in a moment. I know that was one that we did see a little bit more impact in COVID than some of the other procedure areas. Asthmagraphies have been delayed. But just before we get to that, you know, when it comes to actually more laboratory-based testing, you know, IVD testing, that That is one that we recognize that non-COVID diagnostic testing and specimen collection improved from about 75% in June to about 80% in July. One of the indicators that we look at very closely are the National Reference Lab volumes, and I think it's fair to say that the information that they share in terms of overall underlying testing demand correlates very well with demand signals that we see in our vacutainer business, which is, of course, a large business for us on the diagnostic testing side. Obviously, our IDS business gets a little bit more fluctuated because it is an infectious disease diagnostic testing, and it's gotten both max and now going forward very toward it, so we'll see more fluctuations there. But as we think about our PAS business, very much we see the impact there correlated with what you would see in national reference labs and commentary that they have around increased improvements from June to July match with what we've seen as well. Simon, maybe some further comments on the procedure side?

Yeah, so good morning. So certainly with oncology, we did see an impact over the quarter, but month by month, we saw sequential growth as well. So it was slightly heavier impacted than some other parts of the PI business. But we... We also completed a survey. We actually surveyed 815 of our interventional customers, of which 119 were involved in oncology. And most of our business, as you know, in oncology is either in plant reports or biopsy, and we've recently gone into interventional oncology. And what they're saying is that we've got interesting information that The patients that they've been treating, it's a good mix between rescheduled cases and new cases. And these customers are also saying that their office volumes are beginning to rebound and they have a positive outlook as to what office volumes look like over the next 60 to 90 days. So while it was impacted, the funnel was certainly impacted earlier on during COVID. The outlook remains reasonably positive. for oncology as well as other kinds of .

That's great. And Tom, one for you on the vaccination, if I can. I'm just understanding dynamics a little bit better. Obviously, there's just a whole bunch of vaccine companies now going at risk at the same time. They're building inventory ahead of data. Two doses per vaccine, generally. And obviously, that could suggest demand that, you know, for actual syringes, that could be several multiples greater than population size. You've obviously made the comments today, again, about the billion in incremental synergies, syringes over the next 12 to 18 months, and the BARDA investment taking 12 months, and you're obviously the biggest syringe player in the world. So the question is, you know, are we heading for supply challenges with regard to syringes, injection devices for COVID vaccination?

I can't answer that. We don't know it. At this point, we are... We've got visibility to supply the orders that we've received is a fair way to say it. We don't, as I mentioned, that billion units, we've gotten 470 million units worth of demand on that. And when I said the billion units, we mean that as truly incremental to just our ongoing demand remaining the same. And so that is another factor. Of course, we make way more than a billion units. We make billions of units a year of syringes. you know, on a global basis. And we're assuming all that base gets consumed normally. That includes a strong flu vaccination campaign that we would have syringes sufficient to provide that. And then this is incremental to that. And so people will have to make choices. People could say, I don't know if that's true, that all those, that the base syringe consumption would remain normal, that people wouldn't reallocate the syringes for other purposes in that. but there is a large base of other syringes that we're providing to the market as well. So what we can say right now is the current visibility of demand that's coming in from governments around the world is still within our supply capabilities.

Thanks, everyone.

Good question. It's something we're obviously watching closely as well.

Your next question is from the line of Larry Cush with Raymond James.

Oh, hi. Good morning, everyone. One minute. Tom, I wanted to just go back to Alaris and just kind of think through the timeline a little bit relative to the update that you provided today. I think, you know, as I sort of recount how this came about, when the issues first came up, you were sort of talking about an early fourth quarter FDA filing and then Of course, given the pandemic and challenges with human factor testing, that pushed out again. So I'm just trying to square, now that we think about the revised timing, what sort of changed? Do you need to do more testing than you initially thought as you got into deeper discussions with the FDA? Is there something that you're doing incremental that you believe puts you in a better position? You obviously talked about the entitled CO2. And does the observation that the manufacturing facility, you know, also sort of play into this timeline as you think about it?

Okay, good question, Larry. So, first off, we had always shared that the original assumption was end of Q4, right? And obviously, that was pre-COVID pandemic, and we indicated that that would have impacts on our ability to do the testing, and it has, and we recognize that. As I shared, we've completed quite a bit of the testing, and we had shared that versus when we had given an update in May that we felt that we would have quite a bit of that testing done by now and that we'd have much better visibility in our submission timeline, and that is the case, and it's the basis upon which we've given the update today. As I answered, I think it was David's question earlier on this topic, I'd already walked through the testing that we've done on human factor testing as well as some of the other testing that's been completed. In terms of incremental things, you know, we have continued to have dialogue with the FDA and understand their feedback, so that's been part of the process, and that's been a really strong part of the process, our collaboration with the FDA, and it's something that we think is very important to get aligned on the testing so that when, again, we submit the actual 510 , that we're in a position to make it as comprehensive as possible. so that the FDA is put in a position to be able to give as timely of an approval, hopefully, as is possible, that we do our best job in enabling that. One thing that is added in, and there may be others, but certainly one thing that I mentioned is the ETCO2 module, which was in development before, but we did make the decision that based on feedback from the FDA, and where the technology ultimately came out in development, that as we were working in parallel with our product development roadmap, we made a decision to include that update in the 510 module. As I mentioned, it monitors patients on ventilators while medication is being administered, and given the importance of having this generation module in, we felt it was the best decision, and the FDA agreed to include that in the filing. Just on the 483 itself, that you brought up, what I would say there is that resolving the 483 items, the 510 submission is not contingent upon that specifically. And so maybe I can just make a couple comments on that is that we have been, separately from the 510 submission work, we've been continuing our remediate remediation efforts associated with that Form 483 that we mentioned on our last call. And in addition to providing a comprehensive response to the FCA, we've already begun taking actions. That includes initiating a voluntary field action at the end of June and another earlier this week that we announced. And so we're going to continue to take action, including initiating program changes, process improvements, and field actions when necessary in a way that provides the best-in-class support to our customers and minimizes disruptions to patient care. which is more important than ever given the COVID-19 pandemic. So as I said before, we continue to stand behind the safety of the product, which continues to provide significant clinical benefits to patients and healthcare providers. And as I said before, to be clear, the timing of our 510K filing is not dependent on resolving every item in the 483. We are taking all appropriate actions to ensure that comprehensive 510K submission as we also work in parallel to resolve the 483 observations.

Okay, terrific. Thank you very much.

That's all I had.

Your next question is on the line of Matt Taylor with UBS.

Good morning, Matt. Good morning, Matt. Hey, good morning. Good morning, guys. Thanks for taking the question. I wanted to ask one about the installation progress in Thailand. You called out the fact that hospitals are not allowing a lot of large capital installations, and there's been some tempering of the appetite there. I'm just wondering what the funnel looks like. Are you seeing any cancellations, and when do you think that'll pick up relative to the improvement in utilization?

Sure. So, clearly, where we saw that the most was access to facilities and installation, and that was certainly true in April and May. I think we commented that in June that we saw that getting better, and we certainly saw that to be the case in July as well. It really has to do – what we've seen thus far is really more access-related than any lack of appetite for installations. We haven't seen any cancellations, you know, that were, you know, other than deferrals. And so, you know, we haven't seen that. Certainly, that's something that is, you know, I talked about as our watchouts going forward. But at this stage, we haven't seen that happening. manifests itself yet. It's really just about the installations at this point.

And then just to follow up on that, conversely, the negative impact on demand from hospital operations, do you think that the continued stimulus being given to hospitals could help you in some of these areas? Is there encourage to spend it on COVID-related things?

Yes. Clearly, that's the case, and I think that's what's helped bridge a lot of hospitals from a cash flow standpoint. So I think those programs have certainly helped from that standpoint. So absolutely. All right. Thank you very much.

Thanks, Matt.

Your next question comes from the line of Josh Jennings with Cowan.

Hey, Josh. Hi. Good morning, Tom and Chris. Thanks. I just wanted to ask about China. I think they're ahead of the curve in terms of the COVID recovery. You guys were down 17%. The China business in fiscal 3Q seems like medical was the biggest anchor in China. Anything you can do, just division by division, to help us understand the impact in fiscal 3Q and then what's assumed for China guidance in fiscal fourth quarter? I just have one really quick follow-up.

Yes, the one thing I would mention, and I think we mentioned it in our prepared remarks, is that, you know, across BDI, for example, we were positive in June. And so we are watching, you know, China, as we said, very closely. And, you know, we are seeing some recovery there. Bear in mind that we also have in China in the medical area that you mentioned in the medical segments, that we do have the impact of the volume-based procurement. So we did see, I think also in our prepared remarks, we said that we continue to see some of that distributive stocking impact, destocking impact as we go through that. Really no news on that volume-based procurement. That, you know, continues. It's a continuous thing. But, you know, outside of that, the The recovery is happening in China and improving across the businesses.

Great, thanks. And then just on the pump business, medical necessity was a tailwind in fiscal 3Q. I believe you mentioned when you called out April on your fiscal 2Q call that the run rate in fiscal 2Q for medical necessity was around $10 million a quarter. Is that the normal run rate outside of the COVID tailwind?

Yeah, I'm not sure what you're referring to there because there is no normal run rate on medical necessity. That was something new. We did mention, I think, in the quarter in April, I think we might have noted how much that was, and I think we said it was in the 70 million kind of range for medical necessity. And as I mentioned, you know, the quarter was in the 100 kind of range. And so obviously May and June were significantly lower than April. And I think, you know, and we're not expecting too much in the fourth quarter in terms of medical necessity. And obviously that's a function of resurgence and everything else, but we're not anticipating anything significant there.

Great, thanks.

Your next question is from the line of Richard Neuiger with SBB Lerank.

Thanks for squeezing me in, guys. Just one question. I'm curious, did you give any color on where this initial demand that you said is very high for point of care, where or what sectors of the economy or in what types of uses are you seeing the highest levels of of that elevated demand for this type of test, just trying to get a feel for kind of where this is probably going to have the biggest use. And if you have any initial comments there, thanks very much.

Richard, this is Tom. Good question. As I had shared before, it is a broad sector of both traditional customers and customers who are new to us. where this demand is coming from. And we also, of course, a lot of this, given the, of course, our traditional customers, we often are engaging with them directly. So think about hospitals and clinics and those types of locations. We are dealing with them directly, and we see strong demand from those areas. We, of course, are also providing this product through most all the major distributors, and they are mostly directly managing a broader nontraditional customer base who are approaching them or are calling us and then we'll refer them through distributors. The shift twos are much broader than we would ever be set up to manage directly and we typically sell Veritor through distributors. Anyway, but, you know, there it's, as you saw, I mean, you know, HHS announced acquiring four nursing homes. Normally that's a whole new customer segment. It's normally not doing Veritor point of care testing as an example. There are schools in states that are buying them to test symptomatic kids when they're thinking about starting up school. What if a kid says, you know, I've got XYZ symptoms that mimic COVID, what do you do? Do you send them home and wait a couple days to get a test result, or is it really important for you to know if that kid has COVID before they leave the building so that you can determine what do you do with all the other kids and the teacher that were in that classroom? with that child. These are the questions that people are working through. We've had employers order the product for similar types of purposes and use of understanding, again, if employees come up with symptoms, et cetera, while at work, how do you triage and make decisions for the rest of the workforce that's there and helping keep the environment safe. So those are just a few of the examples that we see the testing, but hopefully it just gives a color that it is. much more diverse base than would traditionally be doing flu or strep or a normal point of care test.

Thank you. Your next question is from the line of Jason Bednar with Piper Sandler.

Hi. Good morning, guys. This is . Thank you for taking the questions. I just have two real quick ones here, and I'll ask them both up front. Any updated thoughts on the BTK Lutonics product? How are you preparing for a rollout strategy at this point? And then the second one is, I know it's super early, but any thoughts you can offer on the upcoming flu season, any challenges, headwinds, tailwinds, anything that we need to contemplate in our model? Thank you.

That's a good question. So on BTK, so we have nothing in our outlook in Q4 for BTK. I think we shared that in the past, but just to reiterate that, of course we have. Last we had shared is that we had submitted additional information as part of that PMA review, and it continues to be under active review by the FDA. So we'll provide an update, you know, as we hear information from the FDA on that, but nothing to share with that. point in time. In terms of the flu season, as I mentioned, we're making sure that, you know, first off that we have product to help support the flu vaccination campaigns this year. Obviously, we're also expected to continue to provide flu testing on the Veritor platform. And as I mentioned, we do have combination COVID flu tests in development on both our MAX and our Veritor platform. And so those are our We have teams actively working on both of those to support where we could have flu and COVID needing differential diagnosis as that season intensifies going forward. You know, the other thing that we watch is, and no one knows the answer to this, you know, we have seen some evidence that the incidences of using PPE and social distancing and quarantine have reduced the intensity of the flu season in other geographies around the world, which are still in their winter season, how that's going to actually happen in the northern hemisphere is still to be determined. I don't think anyone knows the answer to that. It has big variables on how society is effectively quarantining and masking as well. But all factors that we're watching closely and that we're preparing for. Thanks for your question.

Thank you. I would now like to turn the floor back over to Tom Pollin for closing remarks.

Okay. Well, thank you, Operator, and thanks, everyone, for the good discussion on today's call. While our results this quarter show the impact of COVID-19 on the entire healthcare industry, they also demonstrate our focus on execution and making an impact during a consequential time. I'm very proud of the way our team has rallied around our purpose of advancing the world of health, to find impactful solutions to help the world respond to COVID-19. And I'm proud of the BD team for their continued focus on executing our long-term strategy so we can emerge from this pandemic period strong and well-positioned to drive growth. Thank you all for your time today. Thanks, everyone.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day. Speakers, please hold the line.