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.