Becton, Dickinson and Company

Hello and welcome to BD's second fiscal quarter 2021 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through May 13, 2021 on the investors page of the BD.com website or by phone at 855-859-2056 for domestic calls and area code 404-537-3406 for international calls. using confirmation number 633-4356. I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment. Beginning today's call is Ms. Kristen Stewart, Senior Vice President of Strategy and Investor Relations. Ms. Stewart, you may begin.

Thanks, Regina, and good morning, everyone, and thank you for joining us. This call is being made available via webcast at bd.com. We have a lot of exciting news to discuss today. Earlier this morning, we issued two press releases. The first discusses our second quarter results of fiscal 2021. The second announces our intention to spin off our diabetes business into a separate public company. You can find these press releases along with an accompanying presentation that we will be referring to during today's call on the investor page of BD.com. Leading this morning's call today is Tom Poland, BD's chairman, chief executive officer, and president. and Chris Reedy, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer. Given the announcement of the spinoff of our diabetes business, we will also have Dev Kertekar, our Worldwide President of Diabetes Care, who has been named CEO of NUCO, to provide his early thoughts on the transaction. Following our prepared remarks, Tom and Chris will be joined for Q&A by our three segment presidents, Alberto Mas, President of the Medical Medical segment, Simon Campion, President of Interventional segment, Dave Hickey, President of the Life Sciences segment. And before I turn it over to Tom, I want to address a few items. During the call, we'll be making some forward-looking statements, and it is possible that these actual results could differ from our expectations. Risks, uncertainties, and other factors that could cause such differences can be found in our earnings release and our SEC filings, including our 2020 Form 10 and subsequent Form 10Qs. We will also be discussing some non-GAAP financial measures with respect to our performance. Reconciliations to GAAP measures that include details of our purchase accounting and other adjustments can be found in our earnings release and its financial schedules. They are also in the appendix of the investor relations presentation slides available at the BD.com website. Unless otherwise specified, all comparisons will be on a year-over-year basis. versus relevant period. When we discuss revenue percent changes, they are an FX neutral basis unless otherwise noted. To avoid any confusion, when we refer to any given period, whether that's on a quarter or year basis, we will be referring to the period in fiscal terms unless we specifically call it out as a calendar period. Finally, when we refer to NUCO during today's call, we are referring to the independent publicly traded diabetes company following the effective date of the spin while RemainCo refers to BD post-separation. And with all that said, I am very pleased to turn it over to Tom. Tom?

Thanks, Kristen. Good morning, everyone, and thank you for joining us. Today we will provide an update on how we're executing on creating value for our stakeholders through our BD 2025 strategy. We have a lot of exciting updates for you, so let's jump right in. Our second quarter results came in better than expected, and we delivered strong revenue and EPS growth. We are very pleased with the continued momentum in our core business. And therefore, based on our first half results and our projections for the second half, we are reaffirming our fiscal 2021 guidance. We are making steady progress on each of our growth initiatives, which include very purposely shifting our investments and portfolio into higher growth categories and shifting our weighted average market growth rate over time. We are advancing our product pipeline as well as our tuck-in M&A strategy, which now includes making selective investments in earlier stage and potentially disruptive technologies. And this morning, we announced our intention to spin off our diabetes care businesses into a separate public company. We see this plan spin as a significant value-creating opportunity for all stakeholders, for our patients, customers, associates, and shareholders. As an independent public company, we believe the diabetes business can leverage its global leadership position and unleash its growth potential in its attractive market category through the more efficient allocation of its own capital. For RemainCoBD, this transaction allows us to focus on our prioritized core businesses. We expect this transaction to strengthen our mid-single-digit revenue and double-digit total return growth profile. We expect the SPIN to be completed in the first half of calendar year 2022, subject to customary closing conditions, including final approval by the BD Board of Directors and the SEC declaring our registration statement effective. We are progressing well against our simplification initiatives, which are focused on reducing complexity, enhancing our product quality, refining our customer experience, and improving cost efficiencies. Our recode initiatives are progressing on track to generate savings of $300 million by the end of FY24. And these initiatives help unlock value and allow us the flexibility to reinvest back into our business to fuel future growth. Chris will talk more about our capital allocation strategy later in the call. But we expect share repurchases to return as part of a more balanced capital allocation strategy as our balance sheet position and cash flows have strengthened over the past year. We also continue to be guided by our purpose of advancing the world of health and continue to make great progress on our ESG initiatives. On Earth Day, we reaffirmed our climate change targets which includes our pledge to be carbon neutral by 2040 across our direct operations. Last week, as I was preparing for our board meeting. I reflected on where we were a year ago, where we are today, and the progress we've made. First, we achieved my number one priority since taking over as CEO. Last week, we announced that we submitted our Alaris 510K pre-market notification. This is an important milestone in our commitment to our customers and our patients. The Alaris pump is the leading infusion pump in the US market administering more than 1 million infusions each day. Second, we've significantly strengthened our balance sheet and cash flows. Over the past year, we've improved our net leverage ratio by a full turn from 3.4 times to 2.4 times and taken actions to meaningfully strengthen our cash flows. Third, we answered the call to action with COVID. We developed a series of innovative COVID diagnostic tests and scaled these to diagnose patients and help control the spread. We secured our global supply chain to ensure that our essential medical devices were available to treat COVID patients in ICUs around the world, including BD devices used in the treatment of an estimated 90% of US ICU patients. And today, we continue to add capacity and enable over 1 billion doses of COVID-19 vaccine to be delivered using our injection devices. I am very proud of our team's impact when it matters most. Fourth, we reinvested in growth. We set up the BD Innovation and Growth Fund and advanced impactful new innovation programs in each of our businesses. We acquired 11 tuck-in acquisitions since the beginning of 2020, along with early stage investments. And we're reinvesting some of BD Veritor profits back into the business and behind our BD 2025 strategy. Fifth, we started to shift the BD culture to one of a growth mindset. We've been systematically advancing our leadership capabilities and culture in this area, which includes partnering with the Neuro Leadership Institute to embed an enhanced focus on innovation and growth across our culture and mindset. And the progress we're making with shifting the culture is very real and tangible. And today, we are announcing our intention to spin off the diabetes business. We believe this spinoff will be another value creating opportunity for our shareholders. But what excites me most is not what we've done, it's where we're going and what's to come. Over the next several years, all of our future successes and milestones to come. The BD2025 value creation story has only just begun. And later this year, We are planning to host an investor day and we'll look forward to sharing greater insights into our 2025 strategy and pipeline. So with that, let's turn to slide eight and our second quarter results. Chris is going to run through our financial results in greater detail later on, but just to highlight, we are very pleased with our second quarter results as the BD team continued to execute well. Our second quarter revenues totaled $4.9 billion, up 15.4% on a reported basis, and up 12.2% on an FX neutral basis. I was particularly pleased with the continued momentum of our core businesses, which were above our expectations in all three business segments. To call out a few, our market-leading BD Pharmaceutical Systems business continues to deliver robust revenue growth of nearly 10%. Medication delivery solutions business was up over 8% as we continue to deliver on our COVID vaccine injection devices commitments, and our results were also driven by higher patient acuity. Our bioscience business turned in double-digit growth as research activity has rebounded, and urology and critical care continue to perform well, driven by PURWIC and targeted temperature management. In China, where we began to anniversary the impact of COVID-19, we saw strong revenue growth of 62%. And we continue to invest to support our future growth, including reinvesting some of the profits from our COVID diagnostics. Our R&D spending was up 18.7% year over year on a currency neutral basis. Adjusted EPS were $3.19, representing year-over-year growth of 25.1% on a reported and 22.7% on a currency-neutral basis. The performance of our business, particularly our core, gives us comfort to reaffirm our fiscal 2021 guidance ranges, which include currency-neutral revenue growth of 10% to 12%, an adjusted EPS guidance of $12.75 to $12.85, up 25 to 26 percent on a year-over-year basis. Turning to slide nine. As I discussed before, we are proud to play such an important role in the COVID-19 pandemic response across the continuum of care, from diagnostics to treatment and now prevention. As vaccination campaigns continue to progress, I am pleased to announce that we now have cumulative commitments for over 1.7 billion injection devices to administer COVID vaccines globally. These commitments will stretch through our fiscal 2022 period, and therefore, we now see higher demand in our MDS hypodermic business as being durable into next year. We also see potential opportunity for our pre-filled business in the future and are now working with several partners at various stages of formulation testing on possible pre-filled COVID-19 vaccines. Turning to slide 10, I will provide an update on our COVID-19 diagnostic testing business. We recently announced several emergency use authorizations, or EUAs, from the FDA. We received EUAs for our combination COVID flu assays for both BD Veritor and BD Max, and we believe combination tests are going to be important in the next flu season. We extended our EUA for the BD Veritor COVID-19 test to include a claim for screening asymptomatic individuals by serial testing. Several peer-reviewed publications have supported the benefits of serial rapid antigen testing. And we are continuing to develop our BD Veritor at-home test. Our test is designed to deliver a clear, digitally displayed record of test results on a smartphone to eliminate the reading guesswork. And we also designed it to allow the data to be digitally shared by the user to eliminate errors in report sharing. Our BD Veritor at-home antigen test is also expected to have some other features that we believe will further differentiate it versus others on the market. Our antigen tests will all be manufactured on the same production lines to leverage economies of scale in our capital investments. Turning to slide 11, growth through innovation is central to our BD 2025 strategy. We're advancing our R&D pipeline across all three of our segments. And as you can see on this slide, identified by the green circles, several products have launched or achieved clearance since the beginning of the year. I've already covered our regulatory clearances related to COVID diagnostics. And I'm happy to share that we've made steady progress in our medical segment with a healthy cadence of relevant portfolio expansions and extensions across the MDS portfolio, such as the broadening of our leading peripheral IV catheter position with the introduction of our first passive safety catheter in the United States, the BD-Cathena IV safety catheter. We launched a new catheter stabilization solution for peripheral IV catheters with the BD-Secura stabilization device. and further advanced the safety of the BD-facil optimal product family with a locking injector. In interventional, we're launching Sensica, a smart, connected Foley catheter, which can be an important tool for the ICU. It provides weight-normalized urine output data that is one of the early parameters used by clinicians to help identify acute kidney injury. BD-Sensica can wirelessly transmit this data to the hospital's electronic medical records. We're also looking forward to launching Pristine later this quarter. Pristine is our new long-term hemodialysis catheter with a unique side-hole-free symmetric Y-tip distal lumen design. The design of the product is intended to help minimize thrombus adhesion, facilitate blood clot aspiration prior to hemodialysis treatment, and help minimize recirculation rates in both forward and reverse. Turning to slide 12. As I have often said over the last year, Alaris was my number one priority, and last week we announced a very important milestone. We submitted our 510 pre-market notification to the FDA for our BD Alaris system. I am extremely proud of our MMS regulatory affairs, quality, and R&D teams for their dedication and hard work to ensure a comprehensive submission. We're also very appreciative of the FDA's collaboration. We recognize this is one important step and we look forward to working with them through the FDA review process to obtain clearance for the updated BDLR system. Just to give a sense of what is included in the submission and how comprehensive it is, the 510 submission is intended to bring our file up to date for all changes to the pump since the last 510 was cleared. We are also implementing updated features and addressing open recall issues, including through a new version of the BD Alaris system software that will provide clinical, operational, and cybersecurity updates. These updates are part of our overall commitment to safeguard and fusion programming. And included in the software will be updates to our BD Alaris guardrail suite and BD Alaris EMR interoperability, including cybersecurity updates, network security, and advanced data encryption. From a hardware perspective, our submission includes updated PCU, LVP, syringe, and ETCO2 modules, as well as our existing PCA module. We plan to continue to advance the BD Alaris system with future updates and subsequent submissions. We filed a substantial amount of data to support the filing. This is a complex and comprehensive submission. Therefore, we would expect that the FDA review process will take some time to complete. And while we're not intending to predict the FDA's specific timeline, we certainly recognize that our stakeholders would like to have some input for modeling purposes. And we believe it would be prudent to think about Alaris' clearance sometime during the second half of our fiscal year 2022. We plan to update you if there are any significant developments. And for now, we expect to continue to ship to our customers who qualify under medical necessity. We've learned a lot of valuable lessons and gained insights during this journey that we're applying to our ongoing next generation pump platform programs, as well as our quality and risk management systems. Turning to slide 13, we are making significant progress with our tuck-in M&A strategy. Year to date, we've closed five acquisitions and we have a robust funnel of opportunities at various stages. We continue to exercise financial discipline in addition to ensuring deals meet our strategic and operational criteria. This includes them being accretive to our growth profile, supporting our key innovation themes, advancing our strategic positions, meeting our financial hurdles, and creating shareholder value. As part of building a more holistic approach to expanding our inorganic growth funnel, we also expanded our evaluation and selective investment in early-stage strategic opportunities. On slide 14, we highlight our key innovation themes and list some of our tuck-in acquisitions and R&D products across our three business segments that align to these themes, some of which I've already highlighted. So within this theme of applying smart devices, robotics, analytics, and artificial intelligence to improve care processes, I've already discussed our smart Foley catheter, Sensica. We also continue to develop new modules of Keystra, our total lab automation system. Keystra, as you know, can improve standardization, significantly enhance lab efficiencies, and staff productivity. Within medical, our health site platform is designed to continue to support enterprise-wide medication management. We continue to evolve our capabilities with health site diversions, which was originally launched in fiscal 2019 for Pixis. We have scaled tremendously over the last year in terms of our commercial sites, and we have plans to expand into the OR, followed by integration of infusion data and central pharmacy. Within the theme of enabling new care settings, you've seen us acquire MedBank and GSL solutions, to expand our medication management offering into the faster growth non-acute settings and strengthen our existing dispensing leadership position. Our PureWIC dry dock urine collection system has been helping women with urinary incontinence outside of the acute setting and contributing to the strong growth in our UCC franchise. And I've already talked about how we're excited about the upcoming launch of our BD Veritor at-home COVID-19 test, that enables the expansion of testing into everyday settings. Lastly, our third theme is improving diagnosis and treatment of chronic diseases. I already mentioned Pristyn, and I've talked about, in the past, our BD Oncology HPV assay, which offers extended genotyping that supports risk stratification. And we look forward to launching this assay on our BD core system in the United States later this year. One other product that we haven't talked a lot about is our BD Libertas subcutaneous drug delivery system for the administration of viscous biologics. Our pharmaceutical systems business is excited to offer this option to our biopharmaceutical partners as a combination product. These products not only add value to our customers, patients, and healthcare system, but they add to our confidence in a sustainable, durable, mid-single-digit growth profile. Now turning to slide 15. As I've described so far on this call, we are making substantial progress in advancing our BD 2025 strategy, which is about unleashing the growth potential of BD, delivering innovation to our customers, empowering our associates, and creating value for our shareholders. And I'm really excited today to announce a bold step in our BD 2025 strategy, our intention to spin off our diabetes business to our shareholders, which we believe is a value creating transaction. Our diabetes care business generated $1.1 billion of revenue in fiscal 2020. It is a global leader in insulin injection devices. Consistent with our continuing focus on delivering shareholder value, we undergo strategic reviews to identify ways to create value and determine that the strategic priorities of BD have diverged from those of our diabetes care business. We believe a spinoff will position both companies for long-term growth and success by allowing both to focus on their respective core markets, innovations, and customer outcomes. Each company will be able to more efficiently allocate its resources and capital, best positioning the respective companies for their success and value creation. We see tremendous potential to create value for our diabetes care business ahead. And let's turn to slide 16 to dive into some of the benefits in greater detail. We see the spinoff as an operating catalyst for our diabetes care business. As an independent public company, NUCO will be able to more effectively allocate its human, operational, and financial resources to implement a refined growth strategy that will allow it to focus on innovation and improving the care of patients living with diabetes. Being a separate entity will also better enable NUCO to attract and retain talent, align management and employee incentives, and have a stock currency that it can use for future acquisitions. For RemainCOBD, we expect the spinoff to strengthen our mid-single-digit FX-neutral revenue growth. We estimate the uplift to our revenue growth rate to be about 30 basis points and see this as strengthening our double-digit total return growth profile. This spinoff will allow RemainCo to focus on our R&D, tuck-in M&A, and customer growth strategies, simplify our overall focus, and maintain financial flexibility. Considering all of these benefits, we believe this transaction has the potential to create value for our shareholders which will be owners of both companies. Slide 17 provides an overview of the relevant transaction details. And I've already covered many of these topics. The spinoff is expected to be implemented by a means of a distribution of 100% of the shares of a newly traded, publicly traded entity to BD shareholders and is intended to be tax-free for U.S. federal income tax purposes. Over the next several months, we will be filing our Form 10, which will include the carve-out financial statements. Again, we expect the spinoff to be completed in the first half of fiscal year 2022, subject to market, regulatory, and other conditions, including final approval by the Board of Directors and the effectiveness of a Form 10 registration statement that will be filed with the SEC. Turning to slide 18. NUCO will be led by an experienced management team, and I am very pleased to share that Dev Kirtikar, who joined us earlier this year as the worldwide president of diabetes care, will be the CEO of NUCO. Dev has a long history in the medtech sector, most recently serving as the CEO of Cardiac Science. Dev has been engaged with the business now for the last few months, and we'll share some of his preliminary thoughts in a moment. I'm also very happy to announce that Jake Elgouiz, the former treasurer and vice president of investor relations of Teleflex, has joined BD and will be the CFO of NewCo upon spin. Jake brings extensive experience in treasury, financial planning, reporting and analysis, and investor relations. We're confident that Dev and Jake are the right team to lead NewCo as they embark on this journey that we believe will create value for all stakeholders. So with that, I want to turn it over to Dev to provide his perspectives on today's announcement. Dev?

Thanks, Tom, and hello to everyone listening to today's call. I'm incredibly excited to embark on this journey. I see a tremendous opportunity to build shareholder value and advance care for patients who suffer from diabetes. I'm also very humbled to be leading this amazing organization. The diabetes care business has a long history of caring for patients living with the disease, dating back to BD's introduction of the world's first specialized insulin syringe, almost 100 years ago, in 1924. Since then, BD has played a leading role in the delivery of insulin, including helping to drive the adoption of insulin pens, which utilize our pen needle technology as a leading modality for insulin injection. Our diabetes care business now reaches more diabetic patients than any other medical device company in the world today. We manufacture 8 billion devices per year and are the global leader in insulin injection devices. As Tom mentioned earlier, the business generated nearly $1.1 billion in revenue in fiscal 2020, derived from the sale of insulin injection devices such as pen needles and insulin syringes, as well as other accessories. One factor that attracted me to this opportunity was the global breadth of the business, with 48% of the revenue generated outside the United States, including 17% in emerging markets. And why is this important? As you can see on slide 21, diabetes is a growing chronic condition across the globe, with some of the higher prevalence rates expected to be in the emerging market regions. The International Diabetes Federation estimates that the number of adults living with diabetes is expected to grow from 463 million in 2019 to 578 million in 2030 and 700 million by 2045. Most of these patients will likely continue to rely on traditional injection devices for their insulin needs. The rapid growth of the disease will likely place a significant burden on healthcare systems around the world as patients with diabetes are often afflicted with multiple comorbidities like cardiovascular disease, hypertension, diabetic retinopathy, and lower limb complications. While I've only been with the company for a few months now, I can assure you that my passion and vision for NUCCO is one of growth. Injection devices like pen needle and syringes are likely to remain a key part of the treatment paradigm for people with diabetes on a global basis for the foreseeable future. we will look to leverage our global footprint to capitalize on these demographic trends. However, we'll also look to invest in novel insulin delivery technologies, including our internal type 2 patch technologies. We also plan to supplement our internal R&D product development efforts more broadly and accelerate our growth profile through strategic M&A to broaden our product offerings and enter adjacencies on new growth categories. Let me end by saying how excited and humbled I am to have this opportunity to lead NUCO. I am confident that our team will work tirelessly to advance care for our patients while building shareholder value. With that, I'll turn it over back to Tom.

Thanks, Dev. We see this as a great opportunity for those BD associates that will be part of NUCO, and we're happy to have you and Jake on board. Turning to slide 25, I'd like to provide an update on our ESG initiatives across BD. Over the past quarter, we continue to advance our company-wide ESG initiatives, including our recent commitment to be carbon neutral across direct operations by 2040. We also continue to make progress towards identifying our 2030 goals, and we look forward to sharing more details behind our 2030 sustainability plan with you in future engagements. Before turning it over to Chris, I want to say again how proud I am of the organization for the progress we've made in advancing the BD 2025 strategy. We are purposely shifting our focus to growth opportunities, simplifying the organization to remove complexity, as I firmly believe complexity gets in the way of growth, and we're empowering our associates with a growth mindset. We are committed to doing the right things the right way and fulfilling our purpose of advancing the world of health. I also want to reiterate how excited I am for what's ahead for both RemainCoBD and NUCO. BD's board of directors and management team believe our plans to spin off the diabetes care business will create value for all stakeholders.

With that, I'll turn it over to Chris. Thanks, Tom. And before I turn to the results, let me also share my enthusiasm for the spin-off of our diabetes care business. I see the transaction as a win-win for all stakeholders, our shareholders, our employees, our customers, and our patients. I'm confident that we have the right leadership to navigate NUCO on this exciting journey ahead. Now let me turn to the second quarter financial results. Slide 27 summarizes our high-level revenue performance. Our revenues came in just over $4.9 billion, up 15.4%, on a reported basis and up 12.2% on an FX-neutral basis. As Tom mentioned, we were very pleased with our results. Our core segment results, excluding COVID-19 diagnostic testings, were ahead of our expectations across all segments. Now, turning to slide 28, our medical segment delivered 4.7% FX-neutral revenue growth led by our market-leading BD Pharmaceutical Solutions Systems business, which continues to deliver robust revenue growth of nearly 10%. We are proceeding with our capacity expansion to support the future growth of this business unit. MDS grew a solid 8.1%, which included $43 million from COVID-19 vaccination injection device revenues. We also benefited from higher patient acuity and higher utilization internationally, particularly in China where we anniversary the impact of COVID-19. Turning to slide 29, our life science segment delivered revenue growth of nearly 38% on an FX neutral basis. Our COVID-19 diagnostic testing revenues totaled 480 million and are included in our integrated diagnostic solutions business. While BD Veritor ASPs were as expected in the low to mid-teens, the market's overall demand for symptomatic COVID diagnostic testing was lower. Looking at our IDS business excluding COVID testing, our routine diagnostic testing has not yet fully recovered to pre-COVID-19 levels. There was virtually no traditional flu this year, so we did not have our usual flu test revenues and this impacted our IDS growth rate by 540 basis points and our BD Life Sciences growth rate by 410 basis points. The impact to our overall BD growth rate was 110 basis points. Our Biosciences business unit delivered strong growth of over 12% as research lab activity has recovered nicely. We are seeing strong demand for research instruments and reagents as well as from biopharmaceutical companies for vaccine research and development. As shown on slide 30, the BD interventional segment was flat this quarter, which was better than expected given the COVID-19 resurgences. The performance in surgery and PI reflected the early impact from the COVID resurgence. However, we did see recovery in elective procedures as the quarter progressed, and this trend has continued into April. Our urology and critical care franchise continues to deliver solid growth, led by our PureWIC and targeted temperature management product lines. Turning to our results by geographic regions on slide 31, in the United States, revenues were up 1.9%. As we had discussed on our February earnings call, we did see some early impact from COVID-19 resurgence, which waned as the quarter progressed, and we exited March with improved momentum, and this continued in April. International revenues were up 25.7% on a currency-neutral basis as we begin to anniversary the initial impact of COVID-19, particularly in China, where our revenues were up 62%. We also benefited from our COVID-19 responses, our diagnostic testing and vaccine injection delivery device revenues. Turning to the P&L on slide 32, As expected, our gross margin was sequentially lower as compared to our first quarter. Our gross margin was 53.8% driven mostly by the lower COVID diagnostic testing revenues. On a year-over-year basis, the gross margin included a 70 basis point negative impact from foreign exchange and 70 basis points from reinvestment initiatives. Favorable impacts from our continuous improvement initiatives were offset by product quality-related expenses. Our SSG&A spending rose 9% year-over-year on an FX-neutral basis, including a 380 basis point impact from deferred compensation, which, as you know, is fully offset in other income expense. The remaining increase in SSG&A is primarily related to higher shipping costs and investment spending as part of our BD Veritor profit reinvestments. Our R&D spending ramps sequentially as planned as we reinvested some of the BD Veritor profits behind new pipeline innovations. R&D increased 18.7% year-over-year on an FX-neutral basis to $295 million, representing 6% of our revenues. Our operating income grew 14.3% on a year-over-year reported basis and 13% on an FX-neutral basis. Our operating margin was 24.5 percent, up 20 basis points on an FX neutral basis. Deferred compensation was an 80 basis point headwind. Our interest and other expenses totaled $111 million versus $170 million in the year-ago period. The reduction of interest other net on a year-over-year basis primarily reflects a decrease in deferred compensation, offsetting increases in SSG&A as previously mentioned. It also reflects reduced interest expense due to debt repayment and refinancing activities and lower interest rates. Our tax rate was 12%, lower than expected due to discrete tax items that occurred this quarter. Our adjusted EPS increased 25.1% over the prior year to $3.19 on a reported basis, and we're up 22.7% on an FX neutral basis. The average diluted share count used to calculate our EPS in the quarter was $293.6 million. Turning to slide 33, I'd like to provide an update on our capital allocation priorities. But first, I want to update you on the great progress we made with our cash flows and balance sheet on a year-to-date basis. For the first half of the year, our cash flows from operations have more than doubled, growing from $1.2 billion to $2.8 billion driven by the improvement in our net income as well as working capital. We ended the quarter with $3.7 billion in cash and equivalents, and our net leverage ratio was 2.4 times, a full turn lower than a year ago. Going forward, our capital allocation strategy will be more balanced than it had been in the past as we were paying down our debt. Now, more of our cash can be deployed to support our growth strategy, tuck in M&A, maintaining a competitive dividend, and returning capital to our shareholders through share repurchases. As a reminder, under the existing share repurchase authorization plan, we have just under 7.9 million shares, or roughly $2 billion remaining. Also note that we would expect BD's dividend to be unaffected by the diabetes spinoff, and therefore would increase BD's payout ratio. Next, I want to address our fiscal 2021 guidance and provide some general commentary on our overall outlook, which you can see on slide 34. From a reporting perspective, we will continue to report our diabetes business with our BD results until the spinoff of the diabetes business is complete. We're very pleased with the results for the quarter, how we are building momentum in our core, advancing our pipeline, and achieving critical milestones. We are also pleased with the early progress we see from the BD Veritor profit reinvestments. We believe these projects should begin to provide incremental growth beginning in late 2022. We are reaffirming our fiscal 2021 financial guidance ranges. We continue to expect reported revenue growth of 12% to 14% for the full year 2021. This reflects FX-neutral revenue growth in the range of 10% to 12%. BD Veritor revenues towards the higher end of the 1 to 1.5 billion range, and foreign currency adding approximately 200 basis points. We also continue to expect adjusted EPS in the range of $12.75 to $12.85, which represents growth of 25% to 26% year-over-year. Now, we wanted to give you some color as you consider your models for the back half of the year. We continue to reinvest some of the Veritor profits to fund projects in line with our BD 2025 strategic pillars of Grow, Simplify, and Empower. Our investments continue to put temporary pressure on both our gross and operating margins in 2021. As we mentioned last quarter, we continue to expect our operating margins in the second half of the year to be in the low 20s, reflecting our reinvestment initiatives as well as higher raw material costs. As a reminder, we expect the reinvestment pressures that you're seeing on our margins to lift next year. As you've seen in the past, from time to time there can be some volatility in our tax rate. We now expect our FY21 tax rate to be slightly lower than FY20's tax rate. This helps to offset some gross margin pressure from the lower ASPs from Veritor as pricing is now approaching our Veritor flu test price a bit faster than we originally anticipated. Regarding 2022, given the momentum we are seeing, our progress with our R&D pipeline, the reinvestments of our BD Veritor proceeds, and our tuck-in acquisition strategy, we have increased confidence in our core outlook. In fiscal 2022, excluding COVID-19 testing and Alaris 510K clearance, we expect our revenues to grow solidly in the mid-single digits. As you heard Tom mention, while we're not intending to predict the FDA's timeline, we recognize the desire to have some input for modeling purposes. We believe it would be prudent to think about Alaris' 510 clearance sometime during the second half of our fiscal 2022. We believe it would also be prudent to model both our revenues and our margins gradually ramping as we scale our selling and manufacturing efforts. In conclusion, we are really pleased with our second quarter results and the momentum across our businesses. We are excited about our plans to spin off of the diabetes business and see this as an important opportunity to create value for our shareholders. With that, Tom, Alberto, Simon, Dave, and I are happy to take any questions you have. Operator, please open up the line 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 the 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 Bob Hopkins with Bank of America.

Hi, Bob. Good morning. Hey, good morning. Boy, a lot to unpack here. I'll just ask kind of two straightforward questions. First is kind of a housekeeping on the diabetes side. You told us it was roughly 67% of revenues in fiscal 2020. I'm just curious. what rough percentage of operating profit it was in that year. And then I've got, you know, one follow-up. Thank you.

Yeah, on that first one, Bob, we'll be clearer on that as we do the carve-out financial statement. So you can expect to see that going forward. But as you know, we don't break it out at that level at the operating basis on an ongoing basis. But as we do carve-outs, that'll be clearer. Any rough sense, though, just Too early to say right now. We're still going through the midst of that.

Okay.

Bob, just a note.

So maybe what we can say is that the diabetes care business, it certainly is profitable, and the gross and operating margins are above our corporate average. Certainly the company's positive cash flow, which is going to allow it to pursue the growth agenda that we discussed. And then, again, as we file the Form 10 report, later this year, the more detailed carve out financials will be available then.

Okay, great. And then one quick follow up. So many things we could ask about 2021. But you offered a few little comments on 2022. So I'll skip right over to next year for a quick second. You know, what, what are your comments suggest about the kind of the outlook for operating margins next year relative to where you're ending in the back half of 2021?

Yeah, so as you can see, this year, you know, we're spending and investing to drive future growth from the Veritor proceeds. And so that, you know, will be something that does not reoccur next year, so you will see a lift. And clearly, you would get a lift from Alaris coming back because that was a drag on our operating margins as well. And I would also add the... In terms of FX, you see some FX pressure that we pointed out this year. We'll continue to see some of that rolling through our inventory for the remainder of this year. That should turn around next year as well. Any sense for what that roughly sums to, though, just directionally? Yeah, we're not going to give 22 guidance this early. A lot of that will be impacted, as you know, by what happens to COVID testing. And we're pulling all the levers we can to make COVID testing more sustainable as we think about the combined COVID and flu assay. And we're also working on the at-home test. So that should have some ability to have sustainability in COVID testing. But clearly, it will come down. And where that goes will have a big impact on operating margins and gross margins in total, as you would know.

And, Bob, just as a reminder, we've said we expect to reinvest about $200 million of Veritor profits back into the business this year, which are one-time expenses hitting the R&D line as well as the GP line, as we discussed, that will come out next year, which will be obviously a tailwind. The expected relaunch of Alaris is Obviously, next year would also be a margin tailwind from that perspective as we start getting absorption back in that plant, as well as tends to be a higher margin item. And so those are all positives, as well as continued volume returning in as we think about the recovery post-pandemic, particularly in areas like BDI, which we saw, and we can talk about later on, we saw good continued recovery, particularly in the back end of the quarter in March, And we continue to see that strong momentum, and Simon can comment on that later on, as we look at April in procedure volume recovery. So thanks for the question. Yep, thanks.

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

Hey, good morning, Robbie. Good morning. As Bob said, there's a lot to unpack here. You know, maybe I could ask about some of the base businesses here, particularly... you know, maybe the interventional business seemed a bit weaker than expected and the medical business continues to benefit from COVID. So I was wondering if you could tease out some of, you know, what's impacting interventional and how do you expect that to recover? And then on the flip side within medical, how much of that is benefiting from COVID here and, you know, should start to come out over the balance of the year?

I can start with maybe just some comments on medical and then turn it to Simon on interventional. So certainly in medical, you see a couple things happening. One is, you know, we see continued durable growth. You saw it last year in pharmaceutical systems. You saw it again in the quarter that they were in 8% plus, I think, last year growth. And we see that durably. Higher than average company growth is my intention there. And you saw us obviously communicate, I think it was last quarter, the quarter before, over a billion dollars, $1.2 billion of incremental investment, capital investment in that business to support the long-term growth outlook. So that's number one. We also reaffirm that we expect, we are in discussions and we have collaborations going on with several pharma companies about putting COVID vaccines in pre-filled syringes. So again, another opportunity as we think about that business long-term. In MDS, we also commented that I remember a year ago, or less than a year ago, we were talking about that we could do up to a billion syringes to help in the COVID vaccination. We now today announced we have orders, commitments in hand for 1.7 billion syringes that spans well into FY22. And so we see, while we were wondering, was there going to be a cliff of syringes into 22, we see that demand increasing. in our MDS business as being durable into 22, and certainly as we think about potential even further demand from things like booster shots, that would just make that demand even more durable. Overall, that business continues to do well in terms of taking share in the catheter space, as well as a series of new innovations. They obviously have had some benefits from higher acuity patients in the ICU, which are maybe using products like midlines or PICs, which have higher ASPs than peripheral catheters for shorter time stays but they're strong durable trends there I think in MDS and obviously MMS we look forward with the submission of the 510k to have bigger growth opportunities as we look ahead to 22. I think I'll turn it over to Simon on BDI but I would say what you saw is that the impact from the pandemic was very minimal in the first two months of the quarter last year for BDI. And so I think you see just that comparable happening given our product mix. And then we did see strong trajectory and uptake in March, and we saw that continue into April. Simon?

Yeah, good morning, Robbie, Simon. So let me just start at the bottom here with UCC, a really strong quarter. as you see, driven by double-digit growth in Purewick and TTM. So it continues to be a mid-to-high single-digit performer for us this quarter. Peripheral, as Tom has mentioned, peripheral, we did see impact early in the quarter in this space, and particularly in the ESKD business. And that is, I should not be surprised to you, based on what you've probably heard from from others involved in that space, but sequential improvement through the end of March and into April, and the outlook remains positive there. And then with surgery, no great surprise to us. Two factors are driving that. Number one, a hernia is not an emergent procedure, so patients have had hernias for several years, so that is typically impacted first when when a resurgence happens and are treated later when the recovery is initiated. And secondly, the Q2 of last year for us had a particularly high growth in chloroprep, I would say higher than normal, so that's a bit of an offset as we move into this quarter. But the sustainability of our business I think is demonstrated In China, for example, this past quarter, we were very significantly impacted in Q2 last year in China, and it has rebounded really strongly in Q2 of this year. So we remain confident in our ability to recover our business as the resurgence debates here.

I would just add two comments. In terms of interventional, it actually exceeded our expectations in the quarter because we had seen January 18th and the resurgence from COVID, and we had seen that going into the February call, and that did turn around in March, and happy to see it turn around in April. But I'd also take a step back in terms of the core momentum and point to the fact that we see that improving. It's helping us with the outlook for the remainder of this year, and I would also point to the fact that we showed that confidence in what we said about 22, by moving the core guidance for 22 from low single to mid-digits to solid mid-single digits. And that's reflective of the momentum across the business that we see as sustainable.

Great. And I realize you're not going to be able to comment on COVID testing or Alaris sales issues, necessarily for next year. But maybe if we think about the balance of fiscal 21 here, I just want to make sure I have some of the data points right. One is that at the high end of Veritord testing, that implies another $250 million or so in each fiscal 3Q and 4Q. And as we think about a second half approval next year for Alaris, just maybe remind everyone about you know, the process of how long it takes from order to delivery to booking revenue, just so, you know, we can appropriately scale up our sales and the models for next year. Thanks.

Just so, Robbie, on the question around Veritor, just a reminder, we've always used and emphasized the word towards the high end, not the high end, which is what you just calculated. So if you... maybe a little bit less per quarter than what you said to get towards the high end of the range, right? But your point, we're almost, we ended the first two quarters at almost a billion dollars of revenue on Veritor. So you could think, you know, we're on basically roughly two thirds of the way through that number halfway through the year, which gives us confidence in reiterating that towards the high end of that range. And as you said, it's maybe a little bit less than what you indicated would be split by quarter there. On the Alaris, we do have a backlog of orders that we would be able to ship initially. And then as we think about upgrades, those are shorter install times than, let's say, Pixis. So it would be a couple months typically in that space from an order to implementation for Alaris.

Great. Thanks.

Yep.

Your next question comes from the line of Vijay Kumar with Evercore ISI.

Hey, guys. Morning. Morning, Chris. Morning, Tom. Thanks for taking my question. One, actually a couple on the spin itself. I guess the base business is now going to accelerate by 30 basis points. So if I look at the prior guidance of five or six top line, are we now looking at perhaps the base being north of five and a half? And on the SPINCO, I heard some comments on patch pump. What should the growth rate for SPINCO be? Is that going to accelerate to north of 5%?

Yeah, I'll let Chris take that one. Yeah, let me take the first one. So you're absolutely right. We put in that there would be growth of 30 basis points. And just think of that as a billion dollars or so of revenue, which has been relatively flattish compared to the rest of the 17 billion revenue growing that mid-single digits. If you do that math, you can see the drag that that has of 30 basis points. And I would remind you that, you know, our guidance is, you know, recurring mid-single digit kind of growth rate. And so that 30 basis points gives us greater confidence in the ability to achieve that on an ongoing, regular, sustainable basis. So that's a positive thing. We haven't addressed the growth rate of SpinCo going forward. You heard Dev say that his emphasis is on growth. And we think that, you know, being a separate public company, it unleashes that growth potential because right now SpinCo would be fighting or Diabetes Care within BD is fighting for investment against other items that we are, you know, feel more strategic. So, As a separate company, it can invest, whether that is internally more investment in R&D or through M&A, it can do that. So more to come on the growth profile of SpinCo as a separate entity, but that's kind of directionally the way to think about it.

And, Vijay, you did ask about the – this is Tom – about the patch so that does continue in our patch pump that continues in our pipeline with external development partner as we've shared in the past and certainly as we approach the actual timing of the spin you can expect that there will be further discussions on the strategy the diabetes business and updates on that and other products within our R&D pipeline and on Dev and his team's vision for the business post-spin. But those discussions, as is typical in these situations, wouldn't happen until we get closer to the spin.

That's helpful, Tom. And maybe a follow-up. I think the press release noted the transaction to strengthen the mid-singles top line and double-digit TSR profile. Just want to clarify, are there any disenergies? I'm assuming there are some. I know in the past you had spoken about double-digit EPS. Is that still intact on an underlying basis? Perhaps parse out the double-digit TSR versus what it means for EPS?

Yeah, so as we said, this strengthens, you know, the spin actually strengthens and gives us more confidence in both the top line and the bottom line. And that will be clearer as we talk about the the operating margins, as we said, from the spin co. So this gives us more confidence in that, and so it supports that effort.

Very good. There is no change from prior LRP, correct?

You did mention, Vijay, that the stranded costs, there would be some stranded costs in any transaction like this, We feel good about the fact that we can address those stranded costs, and obviously we'll have a couple of years of TSA agreements that will mitigate those for a couple of years. So we're not concerned about stranded costs having an impact.

And, Vijay, as a reminder, we've been reaffirming ever since I've been in the role. mid-single-digit revenue growth, double-digit TSR, and we're reaffirming that this actually strengthens our position on both of those. So diabetes care was growing below the company on revenue and on operating income.

That's helpful. Thanks, guys. Okay.

Your next question will come from the line of Larry Beagleson with Wells Fargo.

Good morning, Larry. Good morning. Thanks for taking the question. One on the diabetes spin, one on the underlying growth assumed in the guidance for fiscal 2021. Just to start with the diabetes spin, Tom, diabetes is seen as a high growth area. It did grow 3% before 2020 for a few years. Why not invest in it? I mean, the slide presentation suggests that this is an attractive area.

So it's a great question as we think about other opportunities in the company that we have, whether or not it's across our interventional segment and just the tremendous technology opportunities that are happening there in our BD medical segment as well, future of medication management and the opportunities in the non-acute space, the opportunity, again, to apply automation and informatics across both our interventional and medical and our life science business. are significant for us. We see very attractive opportunities in those areas that also, of course, diabetes business, as we look at it, it has a more unique business profile relative to our other franchises. So, for example, they have very distinct patients, physician, and distribution channel dynamics as compared to our other businesses. As you think about our BD Medical, excluding diabetes, our interventional, and our life science franchises, they have very significant overlap in call points. They all call on healthcare systems. It's where we sell the majority of our life science products, our interventional products, and our beating MMS and MDS products into that channel. That's very different than diabetes. And as we think about that digital footprint that we've been building out, how we're leveraging data and connectivity connected into electronic medical records across the segments, that's also a different dynamic than what we see in the diabetes care business, which is, again, it's not connecting into EMRs in the same way. It's more directly outbound in the patient. And as you think about future technologies like patch pump or other options, they also will require a very different commercial channel than is what's inherent in the rest of the BD businesses, BDI, life sciences, or the rest of medical. So we think that absolutely there are tremendous opportunities for BD Diabetes care business, which is why we're excited that spinning them will allow them to unleash that potential, not competing with other programs in the company, allowing them to attract the best talent, reinvest their profits back into driving their strategy in a very focused way, and will allow RemainCoBD to also be more focused in executing our strategy. So that's why we, again, reiterate why we're so excited about this being a tremendous opportunity for not only the business, but for our shareholders and our associates.

That's helpful, Tom. And Chris, what are you assuming for the underlying growth ex-COVID testing in fiscal 2021? I'm getting about 4% at the high end, but this, if I'm doing the math right, implies about Let's call it flat sequential underlying sales in fiscal Q3 and Q4. I'd call it $4.4 billion. But your sales typically increase in fiscal Q3 and fiscal Q4 if I look at historical seasonality. So is this math right, and is this just conservatism given the recovery that we're seeing? Thanks for taking the questions, guys.

Sure. So, you know, number one is that the core is actually accelerating. And so the growth rate in the core will be ramping. And we're now saying we'll end the year at mid-single digits in the core. So a couple of things going on as we think about and contemplate the remainder of 21. So number one, that core momentum is increasing. We did mention that Veritor is still within the towards the high end of that one to one five range. But it is moderated slightly as volumes have come down a bit from the last time we gave guidance. And, you know, so that offsets that a little bit. And, you know, when you're looking at the pure dollars, it's that Veritor testing and the COVID testing that's impacting the pure dollars. So, you know, the bottom line is the good news is the momentum is in the core and moderating slightly on COVID testing as we look at the second half of the year. You put all those together and we're right where we said we would be in terms of both the top line and the bottom line. On the bottom line, we're also seeing a little bit of an impact on the profitability of Veritor as the prices begin to move more rapidly towards the typical flu pricing. And so that's having an impact, and that's being offset in the second half of the year. So we're still within the guidance range on the top and the bottom. Thanks, Chris.

And keep in mind, Larry, too, in Q3, there is that large amount of revenues associated with medical necessity in MMS. So that does have a little bit of optics. On a year-on-year basis.

Last year, there was a very large, yes.

And stronger revenue. revenues for the second half of the year in MMS, too, for the European revenues, too, for pumps. That's the pandemic was in its peak, yeah.

Thanks for the question. Next question. Your next question will come from the line of Richard Newiter with SVB Learing.

Hey, Richard, good morning. Hi, thank you. Hi, good morning. Just maybe going to the The tuck-ins that you've been executing on, and I'm sure you'll get a little bit more into this when you have your investor day later on this year, but is there any particular asset amongst the five that you did year-to-date, and I think you pointed to six last year, anything that's more needle-moving or that will be contributing in your mind as we head into fiscal 2022? And then also, you know, how should we think collectively of what these might be able to add in terms of basis points to growth on top of that mid-single-digit normalized rate in 2022? Just ballpark.

Yeah, so we obviously view that as a form of, we think about organic and inorganic innovation opportunities as both fueling that growth profile that we have and that we've defined. I think, you know, as we think about just the five that we've done this year, obviously six last year, There are a number of them that are meaningful within the businesses that we have. We're really excited about the new catheter, for example, in BDI and their peripheral intervention business, which is where that will show up. That's going to be a great product for them. It's really a breakthrough technology that's in a market that, again, is growing much faster than the company average. As we think about the two acquisitions in MMS that get us into the non-acute medication management area. That's an area that's growing much faster than the acute care medication management. As we've made very clear in our strategy, helping to enable the shift of care into the non-acute sector is important to us. And we want to continue our leadership in the acute, but be the leader also in enabling the trend that's happening, building up the capabilities in the non-acute sector. And so those two acquisitions I think we'll look back on as being very strategic in enabling that. And both of those markets are growing in the teens. So again, very positive growth rate there. And there's a couple that we haven't disclosed yet. You can see on the slide 13 that we had shared, products like an infection prevention product. We haven't launched a new infection prevention product for a while. Obviously, we have our Chloroprep franchise and a great commercial organization that drives that product globally. This will be a nice new addition to their bag, and we'll talk about that forthcoming, just like we did with Pristine. We had acquired that last year, but we didn't announce it until now, until we're actually launching it. So we'll do the same there. And the same factor with a new vascular access product that we're excited about that we just closed in the last month or so, which we'll talk about very forthcoming as we We bring that to market. So a number of different opportunities, all very relevant in driving our business strategy. All of those acquisitions are participating in markets, and we expect to grow faster than the BD average. And, again, it's part of our growth strategy.

That's helpful. And then just looking forward, do we think of, you know, now that you're obviously grooming the portfolio a little bit with the diabetes plan spinoff now, Do we kind of think of you guys as potentially moving up the size of the M&A target pool that you'll be willing to do going forward in 2022 and beyond once the spinoff occurs?

Richard, we're still very focused on tuck-in M&A. Obviously, for us as a company of our size, tuck-in M&A can be probably in a couple billion dollar range in terms of deal size, but we certainly are not looking to do anything on the transformational side of like a Carefusion or Bard type size. And that's very consistent with the strategy that we've communicated. Could you see larger tuck-in M&A deals than what we've done to date? Yes, but they would still be tuck-in M&A. Thank you very much.

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

Hi, good morning. Thanks for taking the questions. Just one question on Alaris and one follow-up. On Alaris, you know, a lot of focus there, some great updates by the Becton team today. I was just wondering if you could help us understand, you know, how much of a drag the Alaris mediation has been on the core business's organic revenue growth and just thinking about coming back on board in the second half of fiscal 2022 and how to attempt to forecast that return It might help just to understand what the drag has been. It may be difficult to parse out just because of the pandemic, the medical necessity orders, et cetera. But any help there would be really appreciated.

Sure. I'll turn it over to Chris to share some thoughts on that element. There certainly has been a drag. And we've been investing. As we've shared, we have a team of over 200 people who have been working on that submission. They'll continue to be engaged in responding to any FCA questions and Obviously, we'll pivot them towards innovation opportunities as we move forward beyond that as well. But maybe just another point as you think about the timing of it, I can give a little bit more color, is if you look back, just factually look back and say, over the last few years, how long has the FDA taken to clear pumps? And the clearance time ranges from 161 days to 412 days. So those are the facts. So call it five and a half to 14 months. So that's a little bit of the logic. While we're not predicting the FDA timeline right now, clearly the timing of approval within FY22 will have a meaningful impact in the answer to your question in terms of how we see the recovery and how much that contributes in 22. And again, as I mentioned before, as we get further in the review process, we'll provide updates as we can. but right now we're saying it will be prudent based on, again, historical clearance timings, as I just described, to think about the clearance during the second half of our fiscal year 2022. So, Chris, maybe any comments on the drag that it's been?

Yeah, just to give a little bit on the revenues. In last year, we had medical necessity revenues of about $130 million or thereabouts, and don't forget we had some non-medical necessity earlier in the year. So you think about $200 million of revenues last year. You know, the run rate prior to that was about 450 thereabouts. So you could see that step down. And then this year, you know, we see less medical necessity, a little bit over 60 or so in the first half of the year. We see that tailing off in the second half of the year. So that gives you some things to work with to show that there is certainly a drag on growth rate from the step down, offset by some of the medical necessity revenues, but certainly a step down in both 20 and 21. As you think about next year, what we were giving you a sense of is that we think it's prudent to model that as during the second half of the year. It could happen sooner. We'll work to try to make it happen sooner, but it's prudent to think about it in the second half of the year. And we did point to the fact that there is some ramping that will happen. The good news is that we'll get the full year benefit of that coming back to us in FY23 regardless. But we do expect to see some of that ramping in the second half of the year. Good.

Thank you, Josh. Thanks a lot. Very helpful.

Your next question will come from the line of Matt Taylor with UBS.

Hey, Matt. Good morning.

Hi, guys. Good morning. Thanks for taking in the question. So I just wanted to circle back on the spending comments and see if we could get some help on understanding how you're going to reinvest the Veritor profits over the next couple quarters, the impact on the margin. So maybe... The way to ask this question would be to start with how much of the $200 million have you spent already? Or just to ask, you know, spending was about flat sequentially. Is that a good way to think about modeling the second half and getting to that low 20s margin?

So we did give some insights into the impact of that spending. You know, we did point to a lot of folks don't realize that some of that actually hits our gross margin. And so we pointed to the fact that there was a 70 basis point hit to the gross margin number within Q2. We, you know, the way to think about that spending and the 200 plus is that it is more rateable. We do see some, you know, you would expect some of that to ramp a bit. And so, you know, we're not being precise about exactly how much is in each quarter. But, you know, it is, there's more to come. And so it is putting pressure on the margins, which is, you know, why we're saying that the, you know, the guidance for the second half is what it is, as we expected it would be. So, you know, it is important to keep in mind that, you know, that investment that we're making does drive future growth. It's not

something that will impact margins going forward it's not going to repeat and it is as a result suppressing both gross margin and operating margins uh this year okay okay that's helpful and then i don't that's one on the guidance um slide that you have here was saying that you're assuming that the acute killer oriented businesses do not return to pre-covered levels i guess Can you talk about how close they're going to get to that or when you think they will return to pre-COVID levels or just recent trends? It sounds like April was a continuation of March. Anything like that to help us kind of triangulate how the recovery is expected to progress?

Sure. So we have seen some improvement in utilization in March, for example, and that's continuing in April. But as we said, we don't expect that to get back to the 100% level. It does get up into the 90s by the back end of the year. We're more in the 80s, high 80s now. So we expect that to start creeping back, but not completely get back in the second half of the year.

And there are areas, as we look at that, maybe Simon, it's something we monitor very, very closely. We feel very good in terms of where we're in all of our categories, particularly on all of our categories overall, but on the procedural side, we feel very good about our share positions and where we're trending there. So maybe, Simon, to comment what you see from a recovery, because it does vary. We do have some areas that are at 100% of prior year today and some procedural areas that just take a little bit longer. Again, I think that's associated with the severity of the conditions. as it's opened up, and it varies by geography as well.

Yeah, so obviously our European business was disproportionately impacted, I think, in the last quarter, but as Tom alluded to, we do track this every couple of weeks. We've done monthly surveys with customers, and sequentially, as I noted earlier on, it has improved across the two main businesses that are impacted, P.I., and surgery. And some aspects of those businesses or some platforms did strike 100% of pre-COVID levels in March, and that continues into April. As I noted earlier, hernia is one of those areas that's severely impacted early and recovers late. So that's a bit of a laggard. But in general, the procedures that that are critical to healthcare are coming back. And not only do we see it in our numbers, but the survey data that we gather from physicians, and we typically survey about 300 a month, they're indicating that their volumes are rebounding. And obviously patients that were put on hold are now going to start to come back over the next four to six months as well. So we're in a reasonable spot. Very good.

Thank you, guys.

Thanks for the question, Matt.

Your next question will come from the line of Matthew Michon with KeyBank.

Hi, Matthew. Good morning. Good morning, and thank you for squeezing me in. First, just a quick clarification. The revenue growth of mid-single digits for FY22, excluding Alaris and testing, obviously testing is like the negative, but is Alaris a good guy or a bad guy for next year? Because I think first half would be less medical necessity, but then you'd have the timing of the FDA. Okay. We would expect that to be a net good guy.

Yeah, it would be a net good guy. So when we're giving that, we're saying specifically excluding the COVID testing, which we'll give more clarity on as we go forward, and excluding the comeback of the 510K from Alaris. So that would be incremental to that solid mid-single-digit core growth.

Yeah, we will continue, of course, to ship under medical necessity for those customers that qualify. Um, but once we get the 510 K, which again, we'll have more clarity on the exact timing of that, which will be meaningful. Um, you know, to answer how much of that will fall in 22, we certainly expect a full year in, in 23, but, uh, stay tuned on that. But in, in any situation we would expect it to be a, a, a positive.

Okay. And then just your thoughts on, on Alaris's impact on, on the overall portfolio. you know, they got like a, like a Texas, did it have a, did it have a negative impact on the Texas? And when it comes back, we'll have a broader portfolio impact outside of just the Lawrence.

Yeah, we, we have seen no impact. Um, of course the customers have, have very, very broadly stuck with Alaris. Uh, you know, Alaris is the market leading product for a reason. Um, that we've talked about the percentage of, of infusions, particularly in the U S that happened with Alaris. And it's a tremendous number. And customers, we do expect the majority of customers to upgrade to the new product as we end up launching that, hopefully in 22, as we know it is our expectation. So because of that, we don't see any impact on Pixis. Obviously, there is a great value that one gets from having the full BD Enterprise Medication Management Suite that allows you to do things like diversion analytics and and other parts of our health site platform to use data from not only dispensing but infusion as well as our software that's in the central pharmacy. And so all of those things remain the case going forward and we think customers will continue to see strong value in that. Great, thank you very much.

Operator, we'll take one last question. Our final question will come from the line of Jason Bednar with Piper Sandler.

Hi Jason, good morning. Good morning, Jason. Hey, good morning. Thanks for taking the questions. Squeeze me in. I'll just start with one on the spin, then I'll follow up. Just on the spin, what should we be thinking about for the balance sheet for NUCO? You mentioned NUCO would have the flexibility to make investments and advance the strategy, but also seems reasonable that maybe some level of debt will transfer over to the diabetes care business. So are those decisions made or will they still be kind of in process? How to think about that?

Yeah, so no, those are decisions that will come as we move forward, and we'll provide more details on that closer to the spend date. We do expect that the capital structure, along with the existing cash profitability, will provide them the flexibility to pursue inorganic growth opportunities. So we want to make sure that they have that kind of flexibility, and that'll be part of what goes into the equation in terms of how much debt they'll carry.

Okay, great. That's awful. Thanks. And then, you know, what's, what's the right timeline to think about for the, the at-home COVID test? I know it's still in development, but just timeline there. And then what's the, what's the right way to think about the go-to-market effort? We do have a proxy out there with an at-home offering that has an established price point. So do you come in at a similar level or do you have a feature set that maybe justifies a higher price point?

Yeah, we, um, so has, has been our practice until we get the, uh, the EUA in hand, we don't project the specific launch timings, but we've been very active in development on that for a bit. It's been advancing very well in our pipeline, and so stay tuned. As soon as we get an EUA for that product, you and everyone else will be among the first to know on that, and obviously we are taking actions to prepare for that channel, which we recognize is a unique channel versus the other ones, and we're taking those actions to prepare for that launch. So we think we'll be well-positioned when we do get the EUA, and stay tuned. We'll look forward to announcing that. All right, great. Thanks so much. Okay. Thank you, Jason.

I'll now turn the call back over to Tom Poland for closing remarks.

Okay. Well, thank you everyone for the excellent questions. And before we sign off, I would be remiss not to wish Vince Forlenza a wonderful retirement. And I expect that Vince is listening. Vince's last day on the BD board was last week. And I've mentioned in the past that Vince's leadership transformed BD. And I'm also grateful for the time I got to work alongside him and for his mentorship. So on behalf of everyone at BD, I just want to wish Vince all the best And lastly, on behalf of the board and the entire executive team, I want to thank BD's 70,000-plus associates around the globe. Your efforts and sacrifices have not gone unnoticed. We are making great progress. We're making meaningful impacts for our customers, and most importantly, we are advancing care around the world. I've never been more excited about what lies ahead for us. for those who will remain part of BD, and for those that will ultimately become part of NUCO. These are exciting times, and I hope everyone stays safe and healthy, and thank you for listening today.

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