Becton, Dickinson and Company

Hello and welcome to BD's fourth fiscal quarter and full fiscal year 2020 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through November 12, 2020 on the Investors page of the BD.com website or by phone at 800-585-7000. for domestic calls and area code 404-537-3406 for international calls using confirmation number 4475229. I would like to inform all participants that your lines have been muted until the Q&A segment. Beginning today's call is Ms. Kristen Stewart, Senior Vice President of Strategy and Investor Relations. Ms. Stewart, you may begin.

Thanks, Crystal, and good morning, everyone. Welcome to BD's review of our fiscal fourth quarter results. Joining me today, we have Tom Pullen, Chief Executive Officer and President, and Chris Reedy, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer. During the Q&A portion of the call, we will have three segment presidents joining us. Alberto Mas, President of the Medical Segment, Patrick Kaltenbach, President of our Life Sciences Segment, and Simon Campion, President of Interventional Segment. A few logistics before we get into the call. This call is being made available via the webcast at bd.com, where you can also find accompanying slides. Unless otherwise specified, all comparisons will be made on a year-over-year basis versus fiscal 2019. and percent changes are an FX-neutral basis. During the call, we will be making some forward-looking statements, and it is possible that actual results could differ from our expectations. Risks, uncertainties, and other factors that could cause such differences can be found in our SEC filings, including our 2019 Form 10-K and subsequent Forms 10-Qs. In particular, there continues to be significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. The commentary we are providing today includes our best estimate based on the information that we currently have. We have made certain assumptions in how we are managing our business, but 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 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. These are all available on the BD.com website. With that, I'll turn it over to Tom. Tom?

Thanks, Kristen. Good morning, everyone. I hope you're doing well, and thank you for joining us. For today's call, I want to address three main topics. First, my high-level perspective on the quarter and full-year performance. Second, I'll give an update on several hot topics we're fully focused on. And finally, I will share progress on BD strategy. Then I'll turn it over to Chris for a review of the P&L and an update on our outlook. So let's jump right in. First, I'll start with the quarter and the full-year performance. In Q4, we had better-than-expected revenue in not only our COVID-related diagnostics testing, but also our core business. That allowed us to not only deliver EPS upside, but also importantly gave us the opportunity to make some strategic investments aligned to our BD 2025 growth strategy. Revenues were up 4.4% on a reported and FX neutral basis as we were able to offset the overall impact of COVID-19 and grew despite the hilarious ship hold. I want to acknowledge the exceptional execution by our integrated diagnostic solutions business this quarter particularly the BD Veritor team. The team exceeded our commitments, successfully developing the BD Veritor COVID-19 assay in an accelerated timeframe, securing several regulatory approvals, scaling up manufacturing, and continuing to advance the science behind the utility and effectiveness of rapid antigen point-of-care testing. Total COVID-19 testing revenues allowed us to offset the ongoing COVID headwinds in other businesses from lower hospital utilization, surgical procedures, routine lab testing volumes, and research spending. In fact, because of our COVID testing revenues, we were able to move from a net negative COVID impact in Q3 to a net positive COVID impact in Q4. If you exclude COVID-19 testing and look at performance of the base businesses, we were very pleased with the sequential improvement across all of our three segments during the quarter. As you'd expect, the pace of the recovery varied by both product category and by geography. So all in, the BD team was able to deliver Q4 mid-single-digit sales growth, overcoming the headwinds from COVID-19 and the Alera shiphold, the latter we estimate to be 240 basis points in the quarter. Our Q4 adjusted EPS was $2.79, down 15.7% on a year-over-year basis. While our revenues returned to growth, we did did continue to see some COVID-related pressure, dilution from our May equity issuance and headwinds from the last quarter of the Gore royalty contributed to our EPS decline. As I look back on the year, we faced a number of challenges from the Alaris ship hold to COVID-19 and its significant impact on healthcare utilization globally. In our fiscal Q3, COVID-19 had about a $600 million negative impact to our top line. However, the beating team executed strongly. swiftly launching multiple innovative COVID-19 diagnostic solutions and focusing on execution to return to growth in Q4 and finish the year with revenues flat on an FX neutral basis. I'm proud of the team for their hard work, closing the year strong and offsetting the continued COVID-19 headwinds. Now I want to turn to several hot topics. Let's start with a review of our COVID testing in the quarter. As I said, I was very pleased with the IDS team's execution this quarter, with COVID-19 testing sales coming in at approximately $440 million, with Veritor revenues at over $340 million in the quarter. We were able to ramp up Veritor manufacturing capacity faster than originally expected, a testament to BD's world-class manufacturing excellence. We were also able to sustain a higher average selling price for longer than we anticipated. Looking ahead, we do expect price erosion as additional competitors have come to market, and more may do so. We continue to work diligently to expand our BD Veritor and BD Max manufacturing capacity. Our previously communicated capacity expansions remain firmly intact. We continue to monitor the supply and demand dynamics of the market, and we'll provide you with updates on additional capacity expansions to the extent any further new capacity comes online. On the customer side, we continue to see very strong demand for BD Veritor and BD Max COVID-19 tests. Regarding BD Veritor, we've seen strong adoption and interest from both traditional and non-traditional accounts in the U.S. Since the last quarter, we have doubled our U.S. install base of active Veritor readers to over 50,000 units, and we continue to see strong instrument demand, further extending our footprint. We believe that this broadened Veritor footprint will provide us with additional future growth opportunities beyond COVID-19 testing for current and future planned assays. On September 30th, we received the CE mark for our COVID-19 assay on BD Veritor, and we've been very pleased with the reception of the assay in international markets. We've signed a number of contracts and are actively leveraging one of BD's strengths, which is our large international footprint. And in fact, we're now shipping Veritor instruments and assays to customers across Europe, Asia, Latin America, and Canada. As we head into the flu season, we recently launched a combination COVID-19 flu RSV test in Europe on our BD Max system with our partner Sirtest. We continue to work toward the launch of combination flu and COVID-19 assays on our BD Max and BD Veritor platforms globally. Now let me take a minute and walk through our thinking on the outlook for Veritor. You've heard me say before that there are a number of variables at play. There's the ramp up of our manufacturing, the number of competitive products and ASPs, and then you have to take into consideration many variables around COVID-19 vaccines, like their timing, availability, effectiveness, and how widely they are adopted. But taking all of that into consideration, We are comfortable forecasting fiscal 2021 Veritor testing in a range of $1 to $1.5 billion, with the weighting of these revenues being more in the first half of the fiscal year than the second. I know many of you also have questions on the long-term durability of COVID-19 testing and the outlook for fiscal 22 and beyond. Again, there are many factors at play, and there are a variety of scenarios that we're planning for and will be ready to execute. I would say, though, that we do now believe that there is a higher likelihood for testing to continue into fiscal 22. However, given the uncertainty around demands and ASPs, we believe it would not be prudent to model a continuation of revenues at the same level as fiscal 21. This leads me to our next topic, our COVID-19 testing reinvestment plans. We are electing to reinvest a portion of our FY21 COVID-19 testing profits back into the business to ensure long-term, durable growth. These profits will be invested consistent with our strategy and value creation framework of grow, simplify, and empower. Our top focus is investing in growth. We activated the organization and investment plan in Q4, initiating a bottoms-up process to identify high-impact projects and programs based on risk-adjusted returns and our capacity to execute. As part of this initiative, we increased investment in the recently launched BD Innovation and Growth Fund. We have also kick-started other programs that accelerate go-to-market investments in the U.S. and internationally and ongoing R&D projects. You have heard me talk about our simplification efforts around Project Recode. We plan to look for ways to optimize that program even more. We're also using COVID-19 profits to accelerate further investments in our Inspire quality program and enhance our risk management systems. We believe these investment programs should generate returns beginning in late FY22. Our current reinvestment plans contemplate fiscal 2021 Veritor testing revenues of, as I said, $1 to $1.5 billion. If Veritor testing revenues are above this level, we plan to make additional investments towards long-term growth, yet still allow a portion of the higher revenues to flow through the bottom line. Next, I'd like to take a moment to update you on our readiness for a COVID-19 vaccine campaign, where we continue to make great progress. To date, we now have commitments for over 800 million needles and syringes, which includes commitments from countries like the US, UK, and Canada, and various non-government organizations around the world as they prepare for COVID-19 vaccination campaigns. Last June, we estimated the total vaccine syringe and needle opportunity over a 12 to 18-month period could be in the $100 to $150 million range, and we continue to feel this is an achievable objective. Now I'd like to update you on Alaris. The highest priority of the organization continues to be preparing for a comprehensive 510 filing, obtaining clearance for Alaris, and returning our market leading infusion pump franchise to growth. Over the last quarter, the team has made further progress and retired risk. We are systematically working our way through various testing stages, and we continue to engage in open dialogue with the FDA about our progress. My confidence level today is higher than it was last quarter that we will be able to submit our 510 in late fiscal Q2 or early fiscal Q3 2021. As I mentioned in the past, our focus remains on ensuring a comprehensive submission that will ultimately help enable timely FDA review and clearance. While it is not our intention to predict the FDA's timeline, given the size and complexity of the submission, we do not assume any revenue contribution from a 510 clearance in fiscal 2021. The last item on my hot list is I want to comment on innovation in our product pipeline. Category innovation remains one of the core drivers of our growth strategy. We have been focused on improving our pipeline execution and R&D effectiveness, and we continue to make great strides to that end. This quarter, R&D spending increased 8% year over year. the first meaningful increase for the company in many years. Looking ahead, we will continue to focus on driving new innovation and a higher level of R&D investment, including through our new BD Growth and Innovation Fund, which we established earlier this year. Through the fund, projects are funded for a maximum of two years and can be completely new product development opportunities, unfunded or underfunded line extensions that have significant incremental revenue opportunities, or commercial programs designed to accelerate product adoption. We received a lot of great submissions across all three segments, and we initiated the first round of funding in Q4. Looking ahead to the next year or so, we are advancing a robust product portfolio with many singles and doubles like we've long been known for. We also have some more notable programs in the pipeline, and I'd like to highlight a few of those for you now. The IDS team is acutely focused on advancing our combination COVID and flu assays on both our BD Veritor and BD Max platforms as soon as possible for the benefit of patients. I also want to highlight the great strides of our women's health and cancer franchise that they're making. In July, we received FDA approval of the BD on Clarity HPV assay for extended genotyping. which can improve risk stratification and support risk-based patient management. We're receiving great customer feedback on this assay, and in fiscal 2021, we look forward to bringing this assay and BD Core, which is our new high-throughput molecular diagnostic system with fully integrated specimen processing. We look forward to bringing both of those to customers in the United States. The BD Core system and our OnClarity assay are both available in Europe, and we've been receiving very positive feedback on the initial rollout. In BD Medical in Q4, we launched the BD UltraSafe Plus 2.25 mL passive safety system, which adds to our proven high-growth safety portfolio in pharmaceutical systems. It has been designed to deliver up to a 2 mL dose volume while enabling an ergonomic and safe injection experience for both patients and healthcare providers. We have secured a number of pharmaceutical partners that plan to commercially launch our new product towards the end of fiscal 2021. Also in BD Medical during fiscal 21, we'll launch the BD Pixis ES 1.7, which adds new capabilities and deeper integration of pharmacy and nursing by enhancing automation in the operating room with the Pixis anesthesia stations. In BD Interventional, we had a robust year of product launches across its three businesses. Of particular note, the peripheral intervention team launched the 0.18 and 300-millimeter Lutonix DCBs in the U.S. and launched Lutonix in Japan. PI also launched the elevation single insertion multiple sample breast biopsy device. In addition to the caterpillar embolization device, which represents our first foray into the world of interventional oncology. Our surgery business launched a completely robotic compatible version of our market-leading anatomically configured 3D Max inguinal hernia mesh, as well as the PurePrep infection prevention product. Finally, our UCC business capitalized on our developing position in female incontinence by launching DryDoc 2.0, which is designed to help women who suffer from incontinence to use PureWick at home. Fiscal 2021 promises to be another year of innovative product launches across the interventional segment. The team worked hard to minimize the impact of COVID on our product launch schedule, leading to further commercialization of products across all businesses. For competitive reasons, we won't share any specifics with you, but suffice to say, you should expect further commercialization activity of new products in our oncology, infection prevention, and acute urology platforms in particular. Finally, I want to provide an update on our FDA PMA submission for the Lutonix drug-coated balloon and its use in below-the-knee. The FDA has recently notified us that our PMA supplement remains non-approvable. We are working collaboratively with the FDA to determine what our next steps may be, if any. As a reminder, our entire Lutonix business today represents less than 1% of our overall sales, and we do not include any revenues in our forecasts related to this submission. Before we move on, I want to take a moment and acknowledge John DeFord, who will retire from BD at the end of the calendar year. As you all know, John has had a remarkable career and has made a tremendous and lasting impact since joining BD three years ago. While he will continue to serve as an advisor and a consultant for us, of course, we're going to miss John's leadership and we're going to miss his humor, but we're very excited for Patrick's appointment to the Chief Technology Officer And we're confident that he's the right leader to deliver on our innovation strategy and product pipeline in our next phase of value creation. And as Patrick takes on this important new responsibility, we could not have asked for a better successor than Dave Hickey to lead BD Life Sciences and build on Patrick's track record of success. Dave has been leading the IDS team and the BD Veritore COVID-19 launch. Finally, I want to provide a quick update on our strategy. When I became CEO earlier this year, I outlined my vision for BD's next phase of value creation. It's what we call BD 2025, which included three drivers, grow, simplify, and empower. And the drivers build upon BD's strengths, our world-class manufacturing, global scale, our strong category leadership, and deep capabilities in software and informatics. And we've made great progress in fiscal 2020 in building the foundation and beginning to execute against our new playbook. As I mentioned, we've been steadfast in strengthening our R&D capabilities and continuously improving our R&D effectiveness, and I'm excited about what is to come from the BD growth and innovation fund. We also look to augment our internal innovation strategy through tuck-in acquisitions. In fiscal 2020, we executed on six tuck-in transactions in higher growth markets, and I'll highlight just three. The first is Nat Diagnostics, which is an early-stage, privately-held company developing a molecular diagnostic platform for point-of-care testing. This acquisition broadens our point-of-care testing capabilities in infectious disease. And while this product is still under development and a few years from launch, we are very excited about the technology and our point-of-care diagnostics business more broadly and how this adds in a molecular capability to that. Another acquisition we closed on this year was Straub Medical, a privately held medical device company that markets mechanical atherectomy and thrombectomy devices that treat peripheral arterial diseases. This acquisition expands our robust portfolio of PAD and venous solutions within our BD interventional segment. And the third acquisition I'd like to highlight is Adaptec, an innovative startup company that developed the Sensica UO, which is an automated urine output measurement solution. It captures hourly urine output measurements and integrates this into the electronic medical record through the BD HealthSite platform. This is actually going to be BD Interventional's first connected smart device, which leverages BD's interoperability position that we have today in about 70% of all US hospitals. We have a robust funnel of deals and we continue to increase our focus here as we move into fiscal 2021. Our efforts around simplification, and project recode and inspire quality all remain on track. If anything, we have the opportunity to accelerate some projects with some of the COVID-19 test reinvestment proceeds. As I reflect on FY20, I am proud of how the company worked to navigate through the headwinds of COVID and the hilarious ship hold. Our response to these challenges, along with the successful launch of COVID-19 testing, enabled BD to deliver flat revenue performance on an FX neutral basis for the year. As I look ahead, there are some challenges that we face as a company, namely COVID and the Alaris remediation, the latter of which I am confident we will resolve. But there are many more opportunities ahead to drive growth and accelerate our impact on health care around the world. We have the right strategy. We're making the right investments. With that, I'd like to hand the call over to Chris Reedy, and then I'll make a few concluding remarks.