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?