Becton Dickinson and Co

NYSE:BDX

Earnings Call Transcript 2020-Q2

[Operator]

Hello, and welcome to BD’s Second Fiscal Quarter 2020 Earnings Call. At the request of BD, today’s call is being recorded. It will be available for replay through May 14, 2020, on the Investors page of the bd.com website or by telephone at [phone] for domestic calls and area code [phone] for international calls using confirmation number 2189907. I would like to inform all parties that your lines have been placed in listen-only mode until the question-and-answer segment. Beginning today’s call is Ms. Monique Dolecki, Senior Vice President of Investor Relations. Ms. Dolecki, you may begin.

[Monique Dolecki, Senior Vice President-Investor Relations]

Thank you, Stephanie. Good morning, everyone, and thank you for joining us to review our second quarter results. We hope that everyone is healthy and safe during these unprecedented times. With safety in mind, we are taking a more virtual approach today in exercising social distancing while conducting this call.

Joining me in person, we have Tom Polen, our Chief Executive Officer and President; and Chris Reidy, Executive Vice President, Chief Financial Officer and Chief Administrative Officer.

Joining by phone, we have Alberto Mas, Executive Vice President and President of the Medical segment, Simon Campion, Executive Vice President and President of the Interventional segment and Patrick Kaltenbach, Executive Vice President and President of the Life Sciences segment.

As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at bd.com. During today’s call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our second fiscal quarter press release and in the MD&A sections of our recent SEC filings.

In particular, there’s significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. The data we are providing today is based on our preliminary April sales results and the trends we are seeing in our businesses.

We have made certain assumptions in how we are managing our business, but that could change as we move forward.

We will also discuss some non-GAAP financial measures with respect to our performance. Our second quarter results include a $39 million non-cash charge to write down the carrying value of developed technology related to the planned retirement of the BD Accuri flow cytometer platform within our Biosciences business.

In addition, we are working with the FDA with respect to certain features of our Alaris infusion pump products that are additive to our current remediation efforts. As a result, we have recorded a charge of approximately $200 million to reflect the estimated probable future costs relating to remediating Alaris’ products. It is possible that this estimate could increase over time. Any remediation actions will continue to be guided by our proactive commitment to patient safety.

In addition, due to challenges associated with the global COVID pandemic, among other factors, we no longer expect to submit our Alaris 510(k) filing in the fourth quarter. We are working closely with the FDA to assess how quickly we can get back to our previous plan and we will provide an update on our August earnings call. These items, along with details of purchase accounting and other adjustments can be found in the reconciliations to GAAP measures in the financial schedules, in our press release and in the appendix of the Investor Relations slides. A copy of the release including the financial schedule is posted on the bd.com website.

It is now my pleasure to turn the call over to Tom.

[Tom Polen, Chief Executive Officer and President]

Thank you, Monique, and good morning, everyone. I certainly hope you and your families are doing well as we navigate this unprecedented time. Our thoughts are particularly with those personally affected by COVID-19, including healthcare workers on the frontline who are caring for patients and battling this virus. As you’ve seen in our press release, our second quarter results were ahead of our expectations even though the Q2 impact for COVID-19 was larger than we anticipated. While we’ve seen strength in our portfolio that’s more directly tied to COVID-19 diagnosis and treatment, we’re also experiencing significant pressure in other areas such as products relied on elective procedures, research, and routine care. Chris will cover this in more detail later in the call. This remains a dynamic situation, and the timing and phasing of research and more elective healthcare returning is hard to predict. That’s why we’ve decided to withdraw our guidance for FY 2020.

As I’ve shared in the past, you can expect transparency and straight talk, and so Chris will share with you what we know so far including what we saw in April, and he’ll give you more color on the many factors impacting recovery. Before we get into the impact to our business, I want to spend time on BD’s response to COVID-19, because I believe it embodies what we stand for and our purpose and what makes BD unique.

And so on Slide 4, I’d like to start by sharing my deepest thanks to the BD team around the world. I’ve been with the company nearly 20 years and it never ceases to amaze me how our team rises to the occasion for our customers, especially during times of uncertainty. What I’ve seen in the last two months is truly inspirational, and I’m so proud to serve alongside this team.

Turn to Slide 5. We defined four priorities that have guided our response to COVID-19 since January when we convened our crisis management team. First was to protect the health and safety of our employees. Second, maintain business continuity and mobilize our world-class operations to help combat the pandemic. Third, bring new solutions across the entire continuum of care from discovery and diagnosis to delivery of care. And fourth take proactive measures and continue to advance our strategy so that we ultimately can emerge from this pandemic strong and in a better position.

And while we are actively working to address near-term pressures related to COVID-19, we will always operate our business for long-term value creation. I’ll discuss each of these in more detail now.

First, protecting the health and safety of our associates, on Slide 6. We took a number of actions very early on to help safeguard our team, including adapting the workplace for social distancing, increasing cleaning and disinfection protocols, and adding temperature monitoring at our manufacturing and distribution centers, beginning in February.

We’ve also increased personal protective equipment for employees, including leveraging our 3D printing and large scale molding capabilities to manufacture our own face shields so we can further protect our employees. Even as we made our own difficult decisions to furlough a small percentage of our manufacturing associates, we preserved full access to healthcare benefits for impacted associates in the U.S., including covering both the employer and the employee payroll reductions during the furlough period.

Turning to Slide 7 and our second priority, mobilizing global operations. As you know, world-class manufacturing excellence is a core competency and focus for BD. All of our critical to COVID manufacturing and distribution centers are operating at or near full capacity. You can imagine that’s not easy in this environment. We have BD associates stepping up around the world to make this happen. Just one example is we’ve had more than 100 of our manufacturing associates from Malaysia volunteer to temporarily relocate to live in Singapore during the border closure. They moved away from their families to Singapore in the middle of the pandemic just to help maintain operations at our Singapore plant.

Two thirds of all BD associates or more than 43,000 of our workforce who work in our manufacturing plants, distribution centers, and field service roles have continued to come into BD or to customer sites nearly every day during this crisis to help ensure our products and solutions are there when patients need us most. And I thank each and every one of them for that.

We’ve leveraged our scale and ramp production to the highest degree possible in this environment, and three examples stand out to me. First is to reduce the risk of exposure to caregivers. Some clinicians move the Alaris system from the bedside to outside the patient room dramatically increasing demand for IV extension sets. BD team responded with urgency, increasing production of these sets 100-fold within just a month. We’ve dramatically increased the number and types of specimen collection swabs from about 500,000 each week in February to an expected 3 million in June – 3 million a week in June.

We’ve significantly scaled production of our BD MAX reagents used for open-assay tests including our new molecular assay for COVID-19. We have increased output of open-assay kits by more than 80-fold between February and June and we’re currently manufacturing six times more each month than we did all of last year and we continue to scale that up.

We’re also looking ahead recognizing a potential second wave of COVID-19 which could align timing wise with flu season. We’re preparing additional capacity to ensure we can address both demand for a flu test and an antigen COVID-19 assay. Given that the symptoms are pretty similar, we’re also anticipating potential higher demand this fall as well. I also want to reassure you that we’ve ramped production as we’ve ramped production our commitment and focus to delivering the highest quality products has remained extremely unfocused.

While we’re experiencing historically high demand for critical to COVID products, there’s also negative pressure on product categories tied to routine health care visits and lab testing, elective procedures, and non-COVID research. For example, during Q2, we began to see a significant decline in elective procedures. During the end of the second quarter, demand for research reagents and instruments slowed dramatically as research institutions and labs temporarily closed due to lockdown.

As a result, we have temporarily slowed or suspended production at a few of our non-COVID related manufacturing sites to preserve liquidity. We’re in frequent contact with our customers and we’re closely monitoring demand signals and we’re ready to start immediately – resumed production immediately as soon as those procedures and research restarts.

Our ability to adapt and mobilize our global operations to respond to the pandemic is a testament to our best-in-class manufacturing capabilities, the dedication of our employees and the strength of our public-private partnerships.

Throughout the pandemic, we’ve regularly engaged federal, state and local government officials around the world to help safeguard operations and minimize the risk of supply chain disruption. It’s clear the strength of our global operations network is a significant advantage for BD and the healthcare providers who rely on us.

Turning to Slide 8, another advantage unique to BD is the strength and diversity of our portfolio, which I believe, as I’ve said in the past, is unmatched in our industry. We’re leveraging our expertise and capabilities to deliver solutions across the continuum from research to understand immune response to diagnosis and surveillance, to medication management, delivery and critical care, and ultimately to prevention as we look ahead to a potential vaccination campaign.

First, in order to treat a disease, you have to better understand it. And that’s why scientific research on COVID-19 continues to move forward even as many labs and institutions pause or postpone other important studies. And our Biosciences business has been helping researchers better understand how the immune system responds to COVID-19 and why some people are more effected and others show only mild or no symptoms. And we believe this scientific research is key to better understanding and ultimately battling COVID-19.

Turning to Slide 9. We’ve launched a full portfolio of COVID-19 diagnostic solutions which help healthcare providers answer two basic questions, who has it and who had it? And so as you think about who has COVID-19, we’ve leveraged our strength in molecular diagnostics to bring the market three molecular tests, two as a CE mark and two that have received EUA approval from the FDA in the U.S.

These tests are designed exclusively for the BD MAX system, which has already in use at over 1,000 laboratories worldwide. The tests are conducted on onsite, mostly at hospital labs, and increased time to result to just two to three hours of up to 24 samples at a time. We’ve now shipped test kits to more than 500 hospitals around the world and moving forward we’re able to provide approximately 250,000 tests per week or about 1 million a month. We’re also hard at work developing a forced [ph] diagnostic point-of-care antigen test that leverages our Veritor platform targeted to diagnose COVID-19 in less than 15 minutes.

There’s broad interest in this test and with nearly 30,000 Veritor devices already in mostly non-acute care centers across the U.S. We expect this could be a real game changer for testing capacity and helping and restoring the economy. This test is still under development and we’re evaluating performance with samples now. Pending that outcome, we would submit for EUA authorization and we’ll keep you updated as this progresses. To test for who had COVID-19, we’ve partnered with BioMedomics to market a serology test that can detect antibodies in blood to confirm current or past exposure to COVID-19 in as little as 15 minutes.

In fact, the published data in the Journal of Medical Virology was one of the world’s first for COVID-19 serology test. Given the latest guidelines from the FDA on performance characteristics for EUA approval of serology tests, we’re currently validating performance of a second generation enhanced version of this kit which is produced and we are testing moving forward with that testing now. We are proud of the portfolio of COVID-19 diagnostics. We’ve built and launched in record time to help address this urgent public health need.

Turn to Slide 10. And our solutions for treatment and care. BD’s global scale is nearly unparalleled enabling patient care in almost every country around the world. In fact, about 90% of patients that enter an acute care setting are touched by a BD product. Although overall hospital utilization is down due to COVID-19, countries and healthcare providers have been preparing for the worst, setting up surge field hospitals and expanding ICU beds. BD teams around the world answered the call working to help set up these facilities and ensure access to critical to COVID medical technologies. For an example, we recently saw increased demand for our Pyxis rapid emergency deployment offering where we can deploy and install Pyxis med stations in about a week to help set up temporary field hospitals like we did at the McCormick center in Chicago.

We’ve also seen high demand for our portfolio of vascular access devices, infusion sets and injection devices which are critical to safe and effective medication delivery. Hospitals have also turned to our targeted temperature management devices to help in the care of symptomatic COVID-19 patients and we’ve seen strong demand for our acute dialysis catheters as one of the complications of serious COVID-19 is a multiple organ failure including acute kidney injury.

I also want to comment on infusion pumps, which as you know are critical devices in acute care and especially the ICU as each patient on a ventilator is often connected to multiple infusion systems. Outside of the U.S., we have more than tripled manufacturing and customer shipments of our infusion pumps for EMEA in response to COVID-19. We’ve accelerated the distribution agreement that will expand BD’s offering an infusion and help address rising demand for infusion pumps in select countries throughout Europe.

And I’ll speak to this in further detail later on. In the U.S., we’ve established a process for existing customers at the BD Alaris system to receive additional Alaris pumps upon certification of medical necessity. Our team is continuing to work diligently and with urgency to prepare the comprehensive five, 10-K filing we discussed in February. And while our team has been driving to submit that filing in the fourth quarter due to challenges associated with the global pandemic among other factors, we anticipate extending our initial timing for submission until after Q4. We don’t have a more precise timing at this point and we’re actively continuing to collaborate closely with the FDA to ensure we meet their expectations.

I want to ensure you that we are committed to getting this done and done right. It’s our top priority and we’ve added significant dedicated resources. We’re making significant incremental investments and we’re rotating in top talent from across BD to drive this program to completion.

My executive team is directly on this on a daily and weekly basis to ensure that we are best positioned to work through any potential obstacles that might challenge our progress. And as I said, this is the critical priority for the company.

In connection to the charge that Monique described, we’re working with the FDA following their onsite inspection of our MMS facility in San Diego during the quarter. The FDA made a number of observations in a Form 83 notice we received an April and why we were early in the process. We were already beginning to implement certain corrective actions to address the observations. We’re also taking this seriously and we’re working collaboratively with the FDA and making necessary investments and keeping our focus on quality and doing what’s right for our customers and patients. We’re going to continue to keep you posted on our progress here.

Finally, looking ahead to the development of a potential vaccine, we’re an active and ongoing discussions with multiple countries around the world to provide the maximum support possible for the world’s response to COVID-19 including production of syringes for potential large scale vaccination campaign. As the world’s largest manufacturer of needles and syringes, we have already ramped up production of injection devices in anticipation of a surgeon demand for these products. It’s important to acknowledge, of course, that BD is not immune to the financial impacts of the coronavirus, which we certainly saw in China this quarter.

And while our underlying pre-COVID business remains strong as evidenced by our solid Q2 results. We expect to continue to see significant pressure on certain businesses as we move forward.

And on Slide 11, I want to give you a better sense of these headwinds and the uncertainties around the pace of recovery, which Chris is going to explain in more detail. So elective and non-urgent procedures are down significantly, which is having a direct impact on our Surgery and Peripheral Intervention portfolio. There’s a wide range here with elective procedures for oncology and end-stage renal disease being least impacted and our hernia and peripheral arterial disease and biosurgery businesses being the most impacted.

As some states begin to allow elective procedures to resume this month, there’s clear interest and willingness by hospitals and physicians to restart elective procedures in a controlled and phased way. A survey of our top accounts that we’ve done indicates that 80% of our customers want to begin resuming these elective procedures by some degree by early June. While our customers clearly want to restart procedures, there are some questions of patient’s readiness to return and we’re monitoring that closely as well. We certainly have to date has seen sentiment among patients mix, particularly for procedures that fall in the mid-range of procedure prioritization.

Secondly, with non-COVID hospitalization down, we’re monitoring the impact of our business both in terms of products used in inpatient care as well as to capital budget. Since China and several other countries are a few months ahead of the U.S., we’re closely monitoring their recovery and utilization to see what we can expect as we look forward.

In diagnostics, we’re seeing strong demand for our comprehensive portfolio of COVID-19 offerings, however, the deferral of routine care as you know is having a significant negative impact on diagnostic testing overall, which of course leads to temporarily lower use of sample collection devices. Again, we’re closely watching China here to see what we can learn about the pace of recovery for routine tests and sample collection. And in research where temporary lab closers have had an immediate and significant impact on demand for our Biosciences reagents and research instruments.

We expect recovery is going to take some time. We’re paying attention to when researchers going to be able to head back to work and how long it’s going to take for lab testing and experiments to restart. In anticipation of the pressures, we’re now seeing in our business. We’ve been very prudent and proactive taking swift action to reduce costs and reinforce our strong liquidity position. And Chris is going to speak in greater detail to those in just a few moments.

At the same time, we’re taking proactive measures. We’re also continuing to advance our long-term growth strategy and prepare for our next phase of value creation. In each of our segments, we’re deeply focused on executing our strategies to grow, simplify and empower as shown on Slide 12. We’re always going to drive growth through category innovation and we’re not taking our foot off the gas when it comes to R&D. Across each of our segments, we have a strong portfolio with a robust innovation pipeline that’s weighted towards solutions for faster growing markets.

During the quarter, we continued our strong cadence of delivering our R&D pipeline, introducing nine new products in the quarter. Let me share a few highlights of our strategic progress to demonstrate why I’m confident we’re seizing the right opportunities to emerge from this pandemic strong.

In medical, I mentioned earlier we had accelerated the distribution agreement with Medcaptain Medical Technology Company, who developed in CE marked and innovative new infusion pump platform that’s tailored for the European market and we’re very pleased with the first steps in this collaboration and it’s enabling us to help advance our medication management presence in the region as well as our global expansion strategy.

In interventional, we’re continuing to execute our strategy and advanced solutions for faster growing markets. During the quarter, we released both the 300 millimeter and AV low-profile Lutonix balloon. Supported by these launches, we continue to see sequential improvement in the use of drug coated balloons prior to COVID. We were also early in our launch of Dry Dock 2.0 which is a technology designed to enable the continued use of the PureWick female incontinent device in the post acute and in the home.

Shortly after the close of the quarter, we completed the acquisition of Straub Medical, which is a privately held company focused on devices that treat or restore blood flow to clotted or blocked vessels. This acquisition further expands our portfolio with a proven device with – it’s approved with dual indications for arterial atherectomy and thrombectomy in the U.S. It has solid existing sales in Europe and China. We’d be leveraging our strong existing channel and expertise in endovascular technology as we bring this product to the U.S. and accelerate existing sales around the world.

Finally, within BDI last week, we completed the submission of additional data for Lutonix BTK filing. This is now continuing FDA review.

Turning to Life Sciences. This quarter we launched the FACSymphony S6 system, our new cell sorter with six-way sorting and up to 60 panels of detection. The S6 enables an end-to-end solution for high parameter cellular analysis and reinforces our commitment to research solutions. We also launched the BD Kiestra ReadA instrument in Europe and we submitted the five, 10-K filing with the FDA this quarter.

Continuing to execute on our strategy of modular laboratory automation solutions, the BD ReadA system – the BD Kiestra ReadA system transforms the manual hands-on workflow of plate reading into a fully automated and digital process that enhances lab efficiency and reduces time to result. I also want to give you an update on our launch of the BD core system in Europe, which as you’ll recall, is a fully automated molecular platform for high volume labs.

When we announced this new innovation last quarter, we were still very early in the launch. The BD core continues to exceed our expectations and installations move forward even in light of COVID-19, I think reinforcing the customer interest in this platform. Also during the quarter, we completed the acquisition of NAT Diagnostics, an early stage company with a very innovative platform in the fast growing molecular point of care market. This acquisition will ultimately extend the breadth of BD solution offerings into molecular point of care testing. We are advancing this new molecular point-of-care platform in development and we’ll keep you updated as this system advances closer towards launch in the next few years.

I’m excited about the progress we’re making and the three agreements we’ve completed, the Straub Medical, NAT Diagnostics, and Medcaptain, which are evident that we continue to invest in growth in all three segments even during this pandemic. And while we’re navigating real near-term pressures, I’m confident the steps we’re taking now will put BD in the best position for the long term.

With that, let me turn the call over to Chris.

[Chris Reidy]

Thanks, Tom, and good morning, everyone. I’d like to begin my comments by addressing BD’s response for the COVID-19 pandemic. First, as the coronavirus emerged, I was very proud to see the response and collaboration across our team and the immediate focus on ensuring the safety and wellbeing of our BD associates around the world.

Also vital to our crisis response was our focus on taking care of our customers and the communities we serve. Beyond the actions we took at a company level, I’ve been truly amazed by the reaction from our associates, from our frontline to our back office staff and everywhere in between our associates that put the wellbeing of our customers and our communities above their own personal priorities.

Second, from a cash perspective, we took early and prudent actions to protect our business during the time when liquidity is paramount. And lastly, as we contemplated these actions, we did so with the continued focus on our long-term strategy. We’re confident that BD will emerge from this global health crisis from a position of strength and will continue to create and deliver value to all stakeholders.

With that context, let’s move on to our results for the second quarter, including a review of the COVID-19 impacts. As Tom mentioned earlier, performance in the second quarter was ahead of our prior expectations. Revenues grew 2.4% on a currency neutral basis, despite a larger than anticipated impact from COVID. As you’re well aware, the virus worsened significantly in China during February and subsequently spread beyond China’s borders quickly becoming a global pandemic by mid-March.

I’ll provide more color on second quarter revenue growth and the impact from COVID in a moment when I take you through the results by segment. Second quarter adjusted EPS was $2.55, which represents a decline of 1.5% year-over-year or 1.9% on a currency neutral basis. EPS performance was above the high end of our guidance range due to revenue over performance and lower operating expenses as well as a small benefit related to foreign currency.

As expected, the expiration of the Gore royalty impacted adjusted EPS growth by about 600 basis points. Operating margin of 24.7%, we’re also ahead of our expectations for the quarter, largely driven by lower deferred compensation expense due to weak stock market performance in the quarter and lower operating expenses.

Turning to Slide 16, I’ll provide an update on cash and liquidity and the early improvement actions we took during the quarter to reinforce our strong liquidity position. In March, we successfully completed $1.9 billion of term loan funding at very favorable rates. This resulted in an increase in our gross leverage to 3.9 times at March 31. During the second quarter, we also increased capacity available under our revolver by $381 million to $2.63 billion to further strengthen our liquidity position. It’s also important to note that we remain committed to achieving our below three times gross leverage target, continuing to delever remains a very important commitment to the company and we currently plan to pay down approximately $1 billion in debt in FY 2020.

However, due to the near-term anticipated pressure on EBITDA and given our current focus on cash conservation and the importance of liquidity, we now expect it will take longer to reach out deleverage target. In addition to our treasury related actions, we have instituted a number of cash conservation measures. This includes lowering capital expenditures as well as working capital initiatives with a focus on inventory management.

From an operation standpoint, as I mentioned earlier, our employees are going above and beyond to serve our customers in their patients and this includes keeping our plants operational. Manufacturing teams are ramping up much needed products and we’re making additional investments as a result of the increased demand we are seeing in some of our businesses due to COVID-19.

In other areas where scaling back and have made the difficult decision to temporarily furlough some employees as we manage inventories and adjust in near-term demand levels. In addition to the temporary furloughs, we felt it was important and consistent with our values to share the impact across our global team. So we’ve taken actions more broadly across the company to reduce salaries at the management and Board levels and also for senior leaders. The executive team and Board took the largest percent reduction. The decision was also made to suspend the company match for the 401(k) and other benefit plans for the remainder of the calendar year and to limit hiring to critical positions. While difficult, the actions we are taking today will reinforce our financial strength as we emerge on the other side of the coronavirus pandemic.

Now moving on to Slide 17, before I discuss our revenue performance by segment, I’d like to take you through the COVID impact in the quarter. All in, we estimate that COVID reduced revenue growth by approximately 140 basis points in the second quarter. This is about double the impact we had estimated at the time of our last earnings call, which was prior to the escalation of the virus in China and the global spread of COVID during the last two weeks of March.

As you would expect, the majority of the COVID headwind in the second quarter was in China. This was driven by strict adherence to stay at home measures which resulted in lower hospital utilization and a decline in elective procedures as well as fewer routine lab tests and related specimen collections. In addition, there was reduced demand from research labs due to closures amid the stay-at-home measures. Within the U.S. and Europe, there was a net tailwind from COVID in the second quarter. This was driven by increased demand for critical healthcare devices during the pandemic. We also saw the initial use of BD MAX for COVID testing. While demand increased in the acute care setting, this was partially offset by a decline in the non-acute area as people generally stopped seeking care outside of treatment related to the virus.

Turning to Slide 18 and the Medical segment, BD Medical revenues in the second quarter declined slightly compared to the prior year, including a net headwind from COVID of approximately 40 basis points, but then the medication delivery solutions unit as anticipated, our performance reflects distributor inventory reductions related to the ongoing volume-based procurement process in China which were in line with our expectations.

Outside of China, we saw strong growth in our vascular access management portfolio of solutions. With respect to COVID, the most notable headwind in the quarter was in China and was driven by significant declines in hospital utilization. In the U.S., COVID was a net tailwind that was driven by surge demand and distributor stocking partially offset by the impacts from lower routine and elective procedures and acute care and lower utilization in the non-acute setting.

We also experienced COVID-driven surge demand in Europe in the second quarter. Revenues in the medication management solutions unit reflect limited installations of Alaris pumps as anticipated.

Within the quarter, Alaris sales on the medical necessity approval were approximately $10 million. Alaris pending order volume on the medical necessity was high at the end of March. However, these orders were not filled before the quarter end. As a result, the revenues associated with those orders were recorded in April. We currently anticipate demand for Alaris pumps on the medical necessity will continue in the third quarter as hospitals respond to the COVID situation, albeit to a lesser extent than April as we expect demand to follow the evolution of the virus curve.

In Pharmaceutical Systems, growth of over 11% reflects our continued ability to meet high demand for prefilled syringes and it was also aided by the timing of shipments. Within our diabetes care business, we saw an increase in sales of insulin pen needles and syringes as distributors and retailers increase their inventories on hand as a result of the COVID pandemic. Diabetes Care performance also reflects a tough comparison. The timing of what is that drove a strong Q2 last year.

Turning to Slide 19 in the BD Life Sciences segment. Revenues increased 7.1% in the second quarter, including a net headwind from COVID of approximately 120 basis points. Revenue growth was driven by strong performance in diagnostic systems and pre-analytical systems units. Growth in diagnostic systems was driven primarily by a point-of-care BD Veritor flu assay and our swab collection and transport systems. This was due to a stronger flu season in comparison to the prior year and was aided in March by COVID-19. We also continue to see strong growth of our BD MAX instruments and assays for routine testing as well as an increased demand globally for using COVID-19 testing. This was partially offset by a decline in routine testing and our microbiology and women’s health and cancer products due to the COVID-19 pandemic particularly in China.

Performance and pre-analytical systems reflect solid growth in wingsets in develop markets as well as favorable comparison due to distributor ordering patterns in the prior year. Within Europe, we saw some stocking of specimen collection devices related to COVID. This was partially offset by a decline in routine specimen collections due to the COVID-19 pandemic, particularly in China.

Performance in the Biosciences unit reflects a tough comparison to the prior year, driven by the timing of licensing revenues and tenders in emerging markets. Results in the Biosciences unit also reflect reduced demand for instruments and reagents as research lab activity slowed significantly through the COVID-19 pandemic, particularly in the U.S. and Europe as well as in China.

Turning to Slide 20 and the BD Interventional segment, revenues increased 3.3% in the second quarter, including a net headwind from COVID of approximately 350 basis points. Excluding the impact of COVID on elective procedures, revenue growth and peripheral intervention was broad-based, including continued strong performance in our WavelinQ, Covera and Venovo products.

Additionally, there was an improvement in the year-over-year decline in DCB related revenues driven by continued commercialization of DCBs in Japan and sales related to two new product launches in the U.S. Within PI, the decline in elective procedures in China resulted in reduced demand across our portfolio. Revenues in the surgery unit were broadly impacted by the global slowdown in elective procedures due to COVID, particularly related to hernia repair across the U.S., Europe and China as well as biosurgery in China.

Prior to the outbreak of COVID-19, growth was strong in both hernia and infection prevention. Revenue growth in urology and critical care continue to be driven by performance and targeted temperature management, home care and PureWick.

I’ll now turn to Slide 21 in our gross profit and operating margins for the second quarter. As you’ve already heard from some of our peers in MedTech, COVID will put pressures on margins in the near-term given the high fixed cost nature of our business. In addition, we’ll see an impact from the lost revenues carrying your gross margin rate that is higher than the company average. We expect this pressure on margins to improve as the revenues return.

In this quarter, gross profit margin of 54.7%, declined 110 basis points on a performance basis. We had anticipated a year-over-year decline in gross margins due to the impact from lower Alaris sales and volume based procurement in China, particularly partially offset by our continuous improvement and synergy and initiatives. Due to a larger than anticipated impact to revenues from COVID and the related impact to mix, gross margin came in slightly below our expectations.

Currency had a positive impact of 50 basis points on gross margin in the quarter. Operating margin of 24.7%, increased 110 basis points in the quarter or 70 basis points on a currency neutral basis. This was driven by lower deferred compensation expense recorded with an SSG&A that is offset in the P&L and the other income net line item.

Excluding the 110 basis point benefit from deferred compensation, operating margins decreased 40 basis points currency neutral. Unfavorable gross margin performance was partially offset by lower ongoing initiatives to reduce expenses, particularly within G&A. Currency had a positive impact of 40 basis points in operating margin in the quarter.

Now turning to Slide 22 which recaps the second quarter income statement. As discussed, revenues grew 2.4%. This includes 10 basis points of positive pricing in the quarter. For the full fiscal year, we expect pricing to decline approximately 40 basis points versus our previous estimate of 50 basis points to 60 basis points.

Gross margin was 54.7% as I discussed a moment ago. SSG&A as a percentage of revenues was 24.2% including the benefit from deferred compensation. On an underlying basis, excluding deferred comp SSG&A expenses grew at a rate below sales and reflect our ongoing focus on discipline spending and the achievement of Bard cost synergies.

R&D as a percentage of revenue was 5.8% as we continue to invest in innovation and future growth, despite COVID-19 pressures. Our tax rate was 16% in the quarter in line with our expectations and our full year guidance range of 14% to 16%. As expected, we paid preferred dividends of $38 million in the quarter and as a reminder, the preferred shares converted on May 1. Adjusted earnings per share were $2.55 as previously discussed.

In these uncertain times, we believe it’s critical to maintain our unwavering commitment to transparency and to share with all of our stakeholders the anticipated financial effects of COVID-19 on our business to the best of our ability. Unfortunately, despite having April results, as we navigate these unprecedented times, there are still too many variables to guide the fiscal year or even the third quarter.

As we look forward, we are considering the following macroeconomic factors. First we’re in the early stages of recovery and there’s still great uncertainty regarding the scope and duration of the pandemic. Key to the recovery and the impact to BD is the return of general healthcare utilization. While we have begun to see some improvement in China as they are earlier in the recovery phase, the U.S. and Europe are lagging and this can be seen in our April results, which I’ll speak to in just a moment.

Second, we are clearly operating in a much weaker macroeconomic environment and as you know, a weaker environment generally puts pressure on the overall healthcare system utilization and consumer spending. And finally, the pace at which deferred procedures return to normal is the biggest variable. This will depend on several factors including disease condition and acuity, COVID-19 testing availability, reopening of countries around the world and state by state within the U.S. and patient willingness to seek care. It’s too early to call how that will all play out.

And that brings me to the bottom of this slide. As we move forward, we expect to see the biggest unfavorable impact of COVID-19 in our Surgery and Peripheral Intervention businesses because surgeries or other procedures in which our products are used are being deferred. We cannot anticipate the pace at which those procedures will return and how our customers will manage pent-up demand.

Moving on to the acute and non-acute area where our MMS, MDS and UCC businesses participate. We see some pluses and minuses. We expect these dynamics to shift going forward and I’ll provide more details on the next slide.

In diagnostics, as I mentioned earlier, we expect to see strong growth of our BD MAX instruments and assays for use in COVID-19 testing. In addition, we had good traction with our serology test in April and as Tom mentioned, we’re currently validating performance of an enhanced version of the kit. Additionally, we currently have point-of-care test for coronavirus in development leveraging the BD Veritor system. The team is working 24/7 to get this test to market as early as possible, but as Tom mentioned, we could still face some unforeseeable issues during the clinical evaluation phase.

As a result, it’s too early to talk about a specific timeline for this potential product and what the market opportunity may be, but it could be a meaningful driver of growth. And lastly, in our Biosciences business, our recovery will largely depend on when research labs and institutions reopened and how quickly these scale up to normal operations and resume capital spending.

We have also seen some impact on clinical flow applications like leukemia and lymphoma testing because hospitals are focused on COVID-19. On the positive side, there is potential for a modest benefit should NIH or other COVID-19 stimulus programs receive funding.

Now moving on to Slide 24. This is a view into what we saw in the month of April, which includes our preliminary sales results. Going forward, our Surgery and PI businesses will continue to see significant pressure as a result of elective procedure deferrals. In the month of April the decline and procedures impacted Surgery revenues by 50% to 70% and Interventional revenues by 30% to 40%.

In China, Surgery revenues are still approximately 50% of pre-COVID expectation and across the U.S. and Europe, Surgical and Interventional revenues are down 60% to 90%. In terms of loss revenues, we saw a decline of approximately $60 million in our Surgery business and $50 million in Peripheral Intervention.

Moving on to MMS, we saw increased demand for infusion pumps under medical necessity, which we do not expect to continue at the same pace moving forward. This was partially offset by continued delays in Pyxis and [indiscernible] installations, which we do expect to continue going forward. This resulted in a net tailwind to MMS of approximately $70 million. In our MDS business in the United States, we continue to see reduced demand in our acute and non-acute businesses due to continued softness and routine and elective procedures.

Within the month of March, these negative impacts were offset by tailwind from COVID-related surge demand and distributed stocking. Conversely, in April as the virus curve began to flatten, the COVID search demand began to abate and the distributors acted accordingly. As a result in April, we saw revenue in the U.S. that was approximately 15% to 20% below pre-COVID expectations. In China while hospital volumes in April broadly returned as isolation restrictions have been lifted, revenues was still approximately 30% to 40% below pre-COVID expectations.

And lastly in Europe we saw the continuation of some COVID surge demand with revenues approximately 5% above our pre-COVID expectations. Combined, we started the decline of approximately $50 million in April in MDS largely driven by lower volumes in China and the U.S. Correspondingly in UCC, we saw a decline of approximately $20 million related to Foley catheter demand in April.

Moving on to diagnostics and pre-analytical systems continues lower routine testing volumes resulted in fewer specimen collections and lower non-COVID diagnostic testing. Conversely, demand for COVID related testing remained high. In terms of revenues, we saw a decline of approximately $40 million for the month of April. In addition, we expect more meaningful delays in large capital installations such as Kiestra as we move forward.

And lastly in our Biosciences business, we saw a decline of approximately $20 million in April due to lab closures. We expect a continued negative impact on capital spending related to ongoing reduced research activity.

If we aggregate the pluses and minuses across the portfolio, we estimate that COVID-19 had a negative impact of approximately $240 million in the month of April. And this impact was partially offset by a tailwind of approximately $70 million related to increased demand for Alaris Pump under medical necessarily in MMS that we do not anticipate will continue at the same pace moving beyond April.

I would also like to remind you once again of my earlier comment regarding the pressure on margins due to the high fixed cost in our operations and lower sales on high margin products. We hope this level of transparency is helpful as you think about the diversity and enduring nature of the BD portfolio.

And as you can see there are a number of variables which make it very difficult to provide guidance as the COVID-19 situation continues to progress and we get more clarity around each of these variables, we’ll keep you informed.

Before we open the call for questions, I’d like to summarize the key messages from our presentation today. As the world faces the COVID-19 pandemic, we are uniquely positioned to respond by leveraging our core capabilities and expertise to deliver solutions across the full continuum of care from research, to diagnosis and surveillance, to medication management, delivery and critical care. Our second quarter results reflect the strength and diversity of our portfolio despite the increased impact from COVID-19.

Going forward, we have put initiatives in place to actively manage our business as we navigate the negative near term impact of the virus. Importantly, these measures include the actions we took to reinforce our strong cash and liquidity position. As we look forward, we remain confident in our ability to deliver value for all stakeholders and emerge from this crisis in a position of strength.

Thanks for that. Now like to open the call up to Q&A.

[Operator]

Floor is now open for questions. [Operator Instructions] Thank you. Our first question comes from Kristen Stewart with Barclays.

[Tom Polen, Chief Executive Officer and President]

Good morning Kristen

[Chris Reidy]

Hey Kristen are you there?

[Tom Polen, Chief Executive Officer and President]

Are you on mute?

[Kristen Stewart, Barclays]

Are we okay?

[Tom Polen, Chief Executive Officer and President]

Yes we can now.

[Kristen Stewart, Barclays]

Oh good.

[Tom Polen, Chief Executive Officer and President]

Hey Chris.

[Kristen Stewart, Barclays]

Hi, good morning. Thanks so much and thanks for all you guys are doing out there on the frontline. And really thank you for all the transparency, the slide deck is really fantastic. So I really appreciate all that you guys put into that. I’m sure that was a lot of work.

[Tom Polen, Chief Executive Officer and President]

Thank you.

[Kristen Stewart, Barclays]

I just wanted to kind of ask a little bit more and dive into just kind of what you are seeing just kind of on the medication management side, just with the puts and takes there. So, I was just kind of curious just in terms of -- with medical necessity and just kind of what you are seeing with the increase on sets and whatnot. I know you talked about the $70 million and kind of inferred that that was not something we should extrapolate going forward. I’m just kind of curious as to, I guess, why not assume kind of a continued benefit for that kind of product line. I guess, we had all hoped that since you were getting medical necessity that that could be something that we could expect to continue for the rest of the year, and maybe just any additional details that you could give on that, a little bit of slippage on that 510 K.

If there’s anything you can add, that’d be helpful. Thank you.

[Tom Polen, Chief Executive Officer and President]

Hey Kristen, this is Tom. Good question. So let me talk about maybe the 510(k) piece first, and then I can turn it over to Chris to give a little bit more color on the financial components there. So, on the 510(k), the main factor there that really drove the commentary around the delay is, of course one of the biggest areas of testing which we have to complete as part of the filing is human factor testing. So that’s -- for those not familiar with it, that’s going to – all the variety of people who could be using the pump, training naive healthcare workers, people who aren’t familiar with using the pump, having them use the instructions for use and be able to successfully make infusions.

Of course in a pandemic, it’s more challenging to access the nursing staff, et cetera, to get that testing done in a timely way. So that’s the number one main item. And then in addition, we are evaluating feedback that we got from that 483 to understand are there any implications to the 510(k) submission. It’s too early to comment or there’s nothing that’s specific from that, but it’s something that we’re evaluating. Again, we’re continuing to work very collaboratively with the FDA, and we’ll provide you an update on the August earnings call. Again, we’re very focused on getting that in as soon as possible, but we’re also extremely focused on making sure that it gets done right, so that once it does get submitted, it can go through the process as fast as possible. Right?

So, let me turn it over to Chris just to give an update on the numbers. And just maybe one caveat is, I think the $70 million that you referred to, that’s a net number in MMS that has a higher number for infusion that’s partially offset by some takes in other areas.

[Chris Reidy]

That’s exactly right. So, I guess the way to think about this is, in the second quarter we had $10 million of medical necessity that really wasn’t COVID-related, that was kind of normal medical necessity that we would have expected when we gave guidance last quarter. We had something similar to that in the month of April as well. But above and beyond that, we had a spike in medical necessity for Alaris Pumps as you might imagine in the peak of the fight against the pandemic.

And so that spiked, we did have a bit of offset from the Pyxis installations and Rowa installations, et cetera, but the bulk of that was the spike in the Alaris. Now, as we look going forward, we would expect that spike to abate somewhat. Not completely, but we would expect it to abate in May and in June and not be at the same levels as it was in April. We would also expect to see a little bit of a spike in the deferral of Pyxis and Rowa installations and keep that – that would keep going. So that would offset.

So as you think about the next few months, we just wanted to make sure people were clear that we would expect that $70 million to come down in May and June.

[Tom Polen, Chief Executive Officer and President]

Again, that’s just based on assumptions that COVID-19 will abate over that period of time and then hospitals may recognize that the need for this additional building of ICU beds may not need to continue at the same pace, but if that were to change, of course, the situation would change.

[Kristen Stewart, Barclays]

Got you. And then I guess what can you tell us a little bit about what you are seeing in terms of early days now just across the country here in the United States? You guys are in a unique spot just with all your touch points at hospitals, just from a recovery perspective. Are you seeing signs that in some places that things are starting to get a little better, just in terms of surgeries, and what you’re seeing maybe within the Interventional business or just in terms of hospital census [ph] starting to pop back up, are you starting to get a little bit more optimistic, or are things -- I’m sure things are very regionalized and anything you can kind of add there that’d be helpful.

[Tom Polen, Chief Executive Officer and President]

So good question. I think that your last comment there is very accurate, it is very regionalized. And we certainly – we’re doing a lot of primary research surveys of our customers directly to have that real time data. And what our data shows is again a very regionalized kind of healthcare recovery areas like Texas, a few other states we see elective procedures really ramping back up strongly. Again, you’ll see that though in pockets you’ll see certain hospitals could be back at 90% of elective procedures and in hernia to where they were before. And then the hospital down the road is saying we’re not doing that for another 30 days. And they’re basically still at a 90% drop-off.

But we are seeing it generally begin to increase in certain regions early in late April in particular. And I think we’ve reflected that a bit. But it’s still early days.

I think the other thing is I’m getting increasing calls, probably fair to say over the last couple of weeks if you step back a month or two, a lot of the dialogues that I was having with CEOs of many of our largest customers were around getting access for diagnostics for patients in need of coronavirus diagnosis today.

Today, I get a lot more of those calls where those needs are being better met today and people are looking at now getting access to tests to start screening patients prior to them coming into elective surgery. And that is happening, I’d say much more on a national basis. So even if they haven’t actually started doing the procedures yet, pretty standard across the nation I see the people are starting to think about and putting in place timelines for how they are going to get those elective procedures back up and running. And they are thinking about how testing is going to be used to actually test people before they come in. And so we’re seeing that occur. And I think that’s a sign, a positive sign of people’s intentions and the timing of those intentions.

So we’ll continue to keep you updated as that progresses but just a few of the things that may be helpful.

[Kristen Stewart, Barclays]

Thank you so much. Take care.

[Tom Polen, Chief Executive Officer and President]

Okay, thanks Kristen. Be safe.

[Kristen Stewart, Barclays]

You too.

[Operator]

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

[Tom Polen, Chief Executive Officer and President]

Hey David.

[Chris Reidy]

Good morning David. There seems to be a pause David?

[David Lewis, Morgan Stanley]

Good morning.

[Chris Reidy]

There you are.

[David Lewis, Morgan Stanley]

Can you hear me?

[Chris Reidy]

Yes we can.

[David Lewis, Morgan Stanley]

Great, that’s good news. I got one thing right this morning. So just a quick diagnostic question, a diagnostic follow-up, either for Tom or Roberto. So the first question is just on, I appreciate the update on Veritor this morning. I wonder, I know it’s kind of a fluid situation, but are we talking weeks away or months away? And then if you could get approved, what type of potential manufacturing capacity can we think about post EUA approval? Then I have a quick follow-up.

[Tom Polen, Chief Executive Officer and President]

A good question, David. So it’s – we’re in clinical testing right now with patient samples. So at that phase we have an assay that we’ve developed and we’re testing for performance to generate data that if it works we could submit for EUA approval. So that’s where we are.

I always – we’re cautious and one of the things we always talk about internally is of course typically it’s a three-year process to develop these assets and get them through clinical studies and approved. We are doing that in three months essentially. And so, even where it could be a couple of weeks away from submitting an EUA in the general timeline of what you can learn in that window. You are learning almost a year of what you had normally learned because that also includes manufacturing, scale-up, et cetera. And so that’s why we’re a bit cautious to give specifics yet because there’s still a lot to learn even though it’s a relative – could be a relatively short period of time.

So more to come as we complete our clinical testing, we started that clinical testing last week. I can share that. And again, pending the results of that testing we have already had discussions with the FDA on pre-EUA filing discussions. And so we know what it takes to get that product through. And again, pending the testing results, the study results we’ll be in a position to file. Concurrently we have been working to ramp up our production of that assay. So our manufacturing teams are ready, we’ve actually started to invest in some additional equipment as well so that we would be in a position to scale that over the balance of the year in a meaningful way.

[David Lewis, Morgan Stanley]

Okay. That’s very helpful.

[Tom Polen, Chief Executive Officer and President]

We’re doing millions of tests, right, millions of tests, not a million millions a week.

[David Lewis, Morgan Stanley]

Okay, so production capacity is not going to be limited there. Thank you. And then just kind of related questions for you, Tom or others, of BD MAX production right now is sort of a third of your peers within that testing, can anything be done to ramp up BD MAX production capacity? And then just, love to get your kind of macro views on serology or immunity testing, what do you think there’s significant demand for point-of-care immunity test or you think most of that demand is really going to get filled by some of the larger IVD analyzer companies? Thanks so much for all you are doing this morning.

[Tom Polen, Chief Executive Officer and President]

Yes, thanks David. So on MAX, you are right, there are peers that have much higher volume on very different platforms of course. They are high throughput platforms which are designed for that. Obviously the benefit of BD MAX is that it is more of a real time system that’s much more usable in select hospital settings that aren’t going to have those high throughput platforms. So, at this point in time, I’d say that million tests a month is where we’re at with our current systems and instrumentation that we have in manufacturing. We have approved and are proceeding to invest an additional capacity there. But the timing of that coming online, I’m not ready to share that, but we are investing for additional capacity recognizing that we’ll need that in the future as well. But about a million tests a month is what we’re saying right now.

In terms of immunology testing, we are seeing strong demand for point-of-care immunology testing. And we think that will continue certainly a central lab based approach is a good one. It does use a different specimen, the whole blood, obviously the convenience of the finger stick we see interest in that from an employer’s, as well as healthcare providers being used from screening think about patients coming in and being able to do testing much more real time than having to send samples out and maybe a less invasive sample collection procedure as well. So we are seeing strong demand and we expect that will continue.

[David Lewis, Morgan Stanley]

Thanks so much.

[Operator]

Your next question is from Richard Newitter. [SVB Leerink LLC]

[Tom Polen, Chief Executive Officer and President]

Hi Richard, good morning.

[Richard Newitter, SVB Leerink LLC]

Hi, can you hear me?

[Chris Reidy]

Yes we can.

[Richard Newitter, SVB Leerink LLC]

Okay, great. Thank you. And thanks for all of the detail in this morning’s presentation or release. It was very helpful. I wanted to just maybe go back to the testing question, follow-up on David’s, the old line of questioning here. So very helpful on color with respect to how your portfolio fits in perhaps on the hospital testing side. Can you give us any sense as to how you think the back to work on the more of the private sector and just kind of employers in general, what the algorithm is potentially going to be either at a national level or whatever you’re seeing out there as a conversations are being had. Just trying to get a sense for how serology fits in with a point-of-care testing and/or kind of high-throughput testing, so what was other automated systems? Thanks.

[Tom Polen, Chief Executive Officer and President]

It’s a great question, Rich. I don’t have the algorithm figured out specifically yet. I would say that that, again, as we’re thinking – as we’re talking to our customers, we’re getting a lot of interest on antigen testing to screen patients, at least before they come in for elective surgery. So I can make that comment that they’re more focused on antigen testing what I’m seeing then antibody for at least patients screening before they come in for surgery. Certainly as we think about employers getting their associates pace back to work, it’ll be a mix. I would imagine. We are of course spending a lot of time ourselves thinking through that question. And we were very focused on prioritizing.

We actually just communicated yesterday some phasing for starting to get some of our associates back to work next phase of our commercial teams being able to support customers in the field starting this month in the U.S. as an example and then starting to get increasing numbers of R&D associates back to work as the priority after that. And then we’ll be working on more office based associates in extended period of time after that. And so I think you also expect regardless of the use of testing some phasing of people getting back to work based on the importance of them really being in what do they have to access in a work setting that they can’t access from home.

[Richard Newitter, SVB Leerink LLC]

That’s helpful. Thank you. And just on the ramping production of the, the swab kits that you referenced, I think, you said millions per week by June. That’s a substantial ramp from where you had been. Do you think that that will no longer – or seems to be a bottleneck for the testing situation, at least in the U.S. by that point in time? Is that the right level? And can you go even further than that? Thank you.

[Tom Polen, Chief Executive Officer and President]

Yeah. Good question. So just to clarify that’s three million a week by June is where we expect to be, that’s up from 500,000 a week at the start of the crisis so it’s a dramatic ramp. And of course we’re heading strongly in that direction where we already at a couple of million a week. So the big thing that’s happened there is – and we’ve been right in the middle of that working with the FDA, other partners from across the industry as well as organizations like the Gates Foundation. At the start of the pandemic, there were very few products that were validated for testing. And so that was clearly a constraint at the beginning.

What’s happened now is there has been a lot of systematic work across the swab manufacturers as well as the test providers. And again organizations like the Gates Foundation who have been driving some of that testing in collaboration with the FDA to systematically expand to beyond viral transport media, which was limited to in the beginning to now other types of swabs including dry swabs and swabs in sailing, which have dramatically increased the capacity of the different types of devices that are available.

And so, yes, I’m not hearing significant issues on swab stopping testing. Today, I was getting a ton of those calls a month ago and that was an issue and we were very actively managing to make sure that testing didn’t stop having our teams coming in at midnight on Sundays to package things up and drive them to the hospitals around the country and regionally to make sure the testing didn’t stop. And we were really proud of the work that we did there. We don’t get those calls anymore at this point in time or they are much more rare if they do occur.

[Richard Newitter, SVB Leerink LLC]

Thank you very much.

[Operator]

Your next question is from the line of Bob Hopkins with Bank of America.

[Bob Hopkins, Bank of America]

Great, thank you. And good morning.

[Tom Polen, Chief Executive Officer and President]

Good morning Bob.

[Bob Hopkins, Bank of America]

Yes good morning. Again I appreciate all the detail. So just maybe one follow-up on April. And I realized this is a little bit short term, but we’re also hungry for information. Regarding the $70 million, I realize you’re saying that probably won’t be sustained, but I’m just curious if we sum up everything for the month of April, the positives and negatives related to COVID and then just the other parts of the business by my math that may be suggested in April, the total company revenues maybe down high single digits year-over-year. Is that ballpark or am I missing something?

[Tom Polen, Chief Executive Officer and President]

No, we’re mid-teens down. So in total at the 240 level that’s mid-teens and then somewhat offset by the $70 million.

[Bob Hopkins, Bank of America]

Okay. So that mid teens would not include the $70 million benefit that you are seeing. That’s right. Okay, okay. And then the other thing I want to ask about is thinking a little bit longer term Tom you mentioned, hopefully, the progress being made on vaccines obviously vaccine will be a part of the solution there. I’m just curious if we do get a vaccine do you guys have the capacity to meet that demand for J&J is out talking about a billion doses.

Kind of how do you frame that for investors that BD being part of the solution and your ability to meet potential demand?

[Tom Polen, Chief Executive Officer and President]

Hey, it’s a great question, Bob. And it’s something that we’ve been very active in talking to governments around the world. And what’s important here is, is that people have to be proactive in beginning to order and stockpile these devices now, it cannot be waited until the last minute and expect that those products will be able to be manufactured because to your point, that scale can’t be produced in that period of time.

So we are seeing some governments around the world, we’ve gotten very large orders already beginning that stockpile to cover the citizens in their country of vaccines. Others haven’t done that yet. And we’ve been really pretty much on a daily basis working with our public policy team to create greater awareness in governments of the need to start doing larger scale buys now. We have presented our production capabilities over the next a year. There are opportunities for us to invest further in capital, some of that we’re doing proactively our self.

But it needs to be done from a stockpiling perspective. And again, I think, there’s further actions needed to do that. And again, we’re working to help ensure that happens. That includes here in the U.S.

[Chris Reidy]

And just to be clear on your first question, Bob, when you adjust for that $70 million it comes out to low double digits impact on a year-over-year basis.

[Bob Hopkins, Bank of America]

Thank you very much.

[Operator]

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

[Larry Biegelsen, Wells Fargo]

Good morning. Thanks for taking the question. And yes, thank you for all the color. Just a couple of questions from me. One, Chris on the P&L I appreciate the color on the margin impact. Any other color you can provide on the P&L? For the second half it sounds like R&D you are going to maintain that spending. How should we think about SG&A and maybe some of the other lines of the P&L? And I had one follow-up.

[Chris Reidy]

Okay. Thanks, Larry it’s a good question. And the way to think about it is a lot of what’s being negatively impacting the business such as a surgery and PI we’re fortunate to have very high gross margin profiles. So, think in the 70 plus kind of range. In addition to that, as you think about the impact you’ve got to consider manufacturing variances which are going to impact the P&L as we adjust for the revenue and adjust our inventories accordingly which is the right thing to do.

So, as we think about it, we’re also making investments in COVID-related ramping as we’ve talked about on the call here. So we’re making those investments. We’re also investing in the safety and health of our associates making our own PPNE which we talked about, facilities cleaning and those kinds of things. So those are additional costs. And then we’re also seeing higher shipping costs as you are probably not surprised by.

So when you take that and then we’re taking – offsetting that we’ve taken cost mitigating actions that we talked about in our remarks. We limited travel and hiring freeze early in the second quarter and we saw the benefits of that. But we’ve also taken salary deductions for management and the Board, the 401k match, so that offsets things.

So when you net all of that out, you should be thinking about the margin impact of the lost revenues going forward in that 75% kind of range when you net everything together. So hopefully that gives you some more color.

[Larry Biegelsen, Wells Fargo]

Very helpful thanks. For my follow-up, Tom, how are you thinking about the long-term implications of coronavirus. You mentioned for BD and the industry, you mentioned in the slides, the shift of care to the non acute settings, for example. How does that impact BD? Thank you for taking the questions.

[Chris Reidy]

So we’ve been – of course in our strategy, we’ve been very specifically developing additional solutions for the nonacute sector, be it our Rowa platform for retail pharmacy, our Veritor platform or even commercial teams that we’ve put in place, bringing our medication management solutions and including catheters, et cetera, into the surgery centers and non-acute. So we’ve been shifting our resources in that direction. It’s been a faster growing segment, but we’ll certainly only increase in that direction going forward.

I think you heard some of the announcements that we talked about today on our new product development platforms like the acquisition of Nat DX, which will give us a point-of-care molecular platform, to supplement, right? So Veritor will be a lateral flow based. This platform will be molecular based similar time to resolve we would expect as Veritor.

Again, that’s an investment that we’re making, seeing that we expect diagnostics will continue to shift in that direction. We’re making other investments even in our PAS business that allow self blood collection and other types of sample collection that are much more appropriate for the retail setting, et cetera.

So we definitely see it a trend. It’s something we’ve been investing in and will only continue to double down on that as we go forward.

[Larry Biegelsen, Wells Fargo]

Thanks guys.

[Operator]

Thank you. Your next question comes from the line of Brian Weinstein with William Blair.

[Brian Weinstein, William Blair]

Hey guys, thanks for taking the questions. Probably not surprisingly coming from me, some very Veritor questions here for you. Just kind of rapid fire. So, Tom, I wanted to confirm did you say millions per week? I think that’s what you said I wanted to confirm that. And then are we talking about a COVID-19 assay and are there any plans for a combo flu AV COVID assay on that? Can you speak to the performance characteristics that you’re expecting to be seen on that, especially relative to, I know you have to compare relative to PCR when you’re doing these studies?

[Tom Polen, Chief Executive Officer and President]

Sure. Good, questions, Brian. Good morning. So yes, you heard right on Veritor that would be where we would be ramping up towards. We wouldn’t have that available necessarily at launch. We will have that ramping up towards that way. We have plans and we’ll share those plans from a timing perspective later on.

From a performance perspective, again, we’re in studies right now, so it’s inappropriate to say what our performance is. We’re getting actually that right now in clinical specimens, obviously we recognize the comparative to PCR is typical obviously for anything. We also recognize that these assays, they won’t be as sensitive as PCR, no lateral flow assay is as sensitive as PCR, but no PCR assay is as ease of use, cost base, mobile as what you see in a platform like Veritor, which is why you see wide used applications in flu and strep testing still today. And it has a very important role.

We see and we hear also from be it the FDA, the White House, other key constituents, our customers see a very important role in need for a lateral flow based COVID assay. We are focused on getting the COVID asset out first, Brian, the antigen test. And then to your point, can we add in a – combine that with our flu test in a single strip. Absolutely we’ve started to think about that. That of course becomes much simpler to do once you confirm that the COVID assay is secure done, we’ve launched that, then the ability to put that down with a flu test, both of which are now well characterized assays would be a next phase for us to think about.

[Brian Weinstein, William Blair]

Okay, great. And then as a follow-up going back to the pump business for a second, would you be willing to share some of the bigger observations that you received in the 483, just a kind of broad stroke, the things that you are going to be kind of looking to deal with here?

[Tom Polen, Chief Executive Officer and President]

Yes, Brian, we don’t share those at this point in time, obviously we’re in – we’re working very closely with the FDA in that response. We’ve actually already submitted our response plans on that. We’ve already started taking actions on many of those and we’ll share more as we go forward.

[Brian Weinstein, William Blair]

Understood, thank you.

[Tom Polen, Chief Executive Officer and President]

Yes, okay, thanks Brian.

[Operator]

Your next question is from Rick Wise with Stifel.

[Tom Polen, Chief Executive Officer and President]

Rick good morning.

[Rick Wise, Stifel]

Good morning, Tom. Good morning, Chris. Let me start again if I could with your excellent representation of what happened in April. Very clear. But I wanted to make sure I understood and pauses for the short term nature of it. Other large companies have been commenting on recent weekly trends and stuff like that.

I’m looking for something specific but have it indeed, did things get less bad or improve somewhat state as you will that last week of April into May? Are you seeing that? And as we think about, the reason I ask is that that $240 million negative April impact shouldn’t we assume that that gets less bad? Yes, the $70 million positive will be less of a positive contribution, but shouldn’t we assume that in coming months as things reopen that the $240 million goes down month by month?

[Chris Reidy]

Yes, so it’s really hard to predict. There wasn’t enough in the last week of April differential to really give us a sense of that. And when you think about it’s really elective procedures. So we didn’t see enough of a change in the elective procedures to be able to call May and to get any sense of anything changing. To your point around what might be up and down, we think that the lab closures, the impact in May might get a little bit worse and capital spending levels over the next couple of months would also be something that could get a little worse. And so it’s just there’s so many variables, it’s what makes May and June, very, very hard to predict. And, I think we’ll learn more as time goes on as you said, but there was nothing about the last week of April, that would give us a sense of where this is going. It’s just too early to tell at this point.

[Tom Polen, Chief Executive Officer and President]

And Rick, maybe we take advantage we’ve got. We do have Simon on the line. May be we turn over to Simon just for a quick comment on what you are seeing on the procedure side at a high level.

[Simon Campion]

Yes, hey, Rick Eric, it’s a final so in certain pockets we did see an uptick certainly in England on the ventral hernia. They are heavily reimbursed. They are also England, in particular, is very much outpatient based. So, they get the patients in, they treat them, they get reimbursed nicely and the patients go home. So that’s been – that has picked up nicely at the back end of April.

And also another point worth noting is something hit the back end of April, our salesforce began to receive more calls from their customers about beginning to re-attend cases. So, Tom said, we’re about to let those at those guys loose here again in the in the middle of the month. And in fact just yesterday we began as shipping them all their PPE so that they can attend cases and go back into hospitals where they’re allowed. So there are several things in certain pockets that are pointing in the right direction in respect to some aspects of our elective business.

[Tom Polen, Chief Executive Officer and President]

And just to clarify, our reps will not be going in just to hospitals unless they are specifically requested to attend a case. And I think as we see that – while we’re seeing that in some very small subsets that Simon just described, I’d say as we think about medical and life sciences, as Chris commented on not seeing that at any real difference at the end of April. For example, I can specimen collection or MDS, anything notable there difference.

[Rick Wise, Stifel]

That’s great. And Tom, maybe just one for you, your grow, simplify and empower initiatives, just focusing on the simplify aspect from a couple of angles, I know you’ve focused and prioritized optimizing manual factoring efficiencies, cost reduction initiatives, SKU reduction, et cetera. What’s happening to all those initiatives right now and you could – is this an appropriate time to accelerate those initiatives? Actually, ironically would that be helpful as we contemplate Becton’s potential fixed costs as you might – as we recover from this COVID period. Thank you.

[Tom Polen, Chief Executive Officer and President]

Hey Rick, great question. Absolutely. So near term over the last two months, we’ve actually – the work on the SKU rationalization has in fact accelerated to your point with folks at home, the ability to engage actually the sales team in working through products – the product list of what we’re looking to remove from the portfolio, the substitute products actually been able to – number of teams have been able to engage them in a way which has been much more than we would have been able to do traditionally.

Actually I think we had a number of businesses already starting that product simplification initiative. And that expanded pretty significantly across the company to other businesses during this window of time where the marketing teams, et cetera, were also had bandwidth to accelerate that work. So that’s been one that we’ve taken advantage of this period to double down on.

In terms of the manufacturing, network consolidation that does continue to move forward. We haven’t been able to necessarily accelerate that during this period of time. Obviously manufacturing teams focus primarily on supply right now and navigating that. Of course you can imagine every day there’s items that we have to manage in our supply chain, as well as in our own facilities. But that is fully still moving forward in all ways and we’ll continue to keep you updated on that.

[Rick Wise, Stifel]

Thank you.

[Operator]

Your next question comes from Robert Marcus with JPMorgan.

[Robert Marcus, JPMorgan]

Great. Thanks for taking the question. I’ll ask both of them all in one. I noticed you took down your CapEx for the year by about $200 million hoping you could just touch on your thoughts around pipeline delays that are potential coming out of this. What should and shouldn’t be effected. And then also, how are you thinking about your ability down the road, is this reduction in CapEx temporary? Could we see something more permanent come out of this? Really just how you are thinking about capital investing and your capital allocation in general plus the pipeline? Thanks.

[Tom Polen, Chief Executive Officer and President]

Yes I’ll start with that Robert, thanks for the question. And as you might imagine, the first thing that we wanted to make sure of is that we were able to mitigate the cash impact from the headwinds from COVID. And we’ve made great progress on that in a few short weeks. And we are able to mitigate a substantial part of the, what we see as the capital impact. And we think that was the prudent thing to do.

Now, one of those things that we did to get there in addition to some of the P&L items that we talked about that clearly impact P&L and cash. But from a cash perspective one of the items that we did take down was the CapEx. And we’re prioritizing mission critical capital spending, and we’re cutting and basically delaying some of the investments that we’re making that are more discretionary. And we’re being very careful on that because we want to make sure that we’re not cutting anything that would inhibit any capacity going forward

So we’re being very targeted on that and it clearly is not a permanent adjustment in CapEx. We would expect that when we come out of this pandemic that we would, some of those things that we’re cutting, we will are just deferring and we’ll have to spend that. And so you can expect us to go back to the normal $900,000 to $1 billion kind of thing. And that is particularly true as we think about investing in areas that are necessary for COVID. We continue to invest in those areas, and ramp and make sure that we have capacity as terms articulated on a number of fronts. We’re ramping capacity. So think of that as a temporary reduction.

Thanks for the question.

[Operator]

Your next question comes from Matt Taylor with UBS.

[Matt Taylor, UBS]

Hi. Good morning. Thank you for taking the question. So I just wanted to circle back and if we could revisit some of Bob’s question about the vaccine, given that could be a material ramp up, could you just remind us what kind of share you have, the global syringe market, how material that is for you today? And what it could mean if you were to get an order for, say, one billion syringes in Q1, would you be able to get there and how material would that be?

[Tom Polen, Chief Executive Officer and President]

Good question, Matt. So we don’t share our specific shares on a global basis. We are, as we said, the leader in worldwide, we’re clearly the leader in the U.S. And we make billions and billions of syringes and needles a year. We make billions and billions of them specifically just for the U.S. market as well each year. So to be able to provide it, let’s just say in your example, a billion syringes spontaneously, there’s not capacity to just provide those in a month. We have provided plans to different governments around the world where we can provide hundreds of millions of product and over months, periods of time. And there is opportunity to go above that, but it needs to be done in partnership with those governments.

So again, some of those governments we’ve engaged have strongly engaged with us to do that. Others are still working through their plans. On that point, what’s most important is you’ve got to get ahead of that and start to start to get those orders and things in now.

The other thing is, it’s just a little caveat there is the reason I hesitate is there is global capacity as well, there’s certain products that we sell, for example, in the U.S. that we don’t sell ex-U.S. and there’s many products that we sell ex-U.S. that we don’t sell in the U.S. So for example, we pretty much exclusively sell safety devices in the U.S. We have a lot of capacity of non-safety devices ex-U.S.

In a pandemic vaccine delivery situation one may not prioritize the need for safety needles on the end of a vaccine delivery. And so you can free up additional capacity to come into the marketplace. But those, again that’s working with the governments on the specific requirements. And the stockpiling, again, some governments have already started taking those actions aggressively, others we’re really focused on getting them to act sooner.

[Matt Taylor, UBS]

Understood, thanks for that. And then one follow-up, obviously you’re seeing increased demand for fusion pumps. I was just wondering if you could offer some thoughts given you touched so many points in the acute care setting, whether you think that hospitals and providers will in the medium term or the long run actually, permanently increase the size of their ICU or acute care capacity to be able to be responsive if there is a second wave or just ongoing COVID management.

[Tom Polen, Chief Executive Officer and President]

It’s a good question. I honestly don’t know the answer of that. That’s something that I would imagine that that many hospitals are thinking about what it could be a second wave in the fall and next winter. And thinking about how they balance that, including some of these field hospitals that have been set up and how you think about those. In fairness, we haven’t had deep discussions with our customers on the long-term implications of ICU beds and how they may or may not maintain that over a longer period of time.

Certainly, particularly in the U.S., I think, that may be a little different in some areas like in Europe where you’ve seen countries, you’ve seen the stats of ICU beds per capita in different countries in Europe and how disparate those are. What we have heard were some of those countries that did not have as many ICU beds may want to permanently maintain a higher ratio of ICU beds. But I think that’s on some that were well below benchmarking levels.

[Matt Taylor, UBS]

Great, thanks for the clarification.

[Tom Polen, Chief Executive Officer and President]

Yes.

[Operator]

Thank you. Your next question comes from Josh Jennings with Cowen.

[Josh Jennings, Cowen]

Hi, good morning. Thanks for taking the questions. I had a follow-up similar question to Matt’s most recent question. But just thinking about the potential need for hospitals to build out the capacity, maybe individual fleets, more Pyxis systems as they move forward to reopening and they are looking at distinct COVID-19 wards, or units, or floors versus non-COVID-19 units or floors and the potential to avoid cross-contamination even of medication delivery or these pumps?

[Tom Polen, Chief Executive Officer and President]

Josh, we’re not seeing widespread requests for that at this point in time. And I think the question would be would they be reallocating? Remember, overall hospital utilization in the U.S. is still relatively low rate, it’s not 90% across the board in normal terms, so how much they would allocate to COVID-specific wards, et cetera. I think that’s still being figured out. Obviously all hospitals were being dedicated to that at this point in time. We don’t see – it’s not visible today that there would be some type of spike in pump or Pyxis growth as people are trying to build a separate COVID systems from their main wards. But something we’ll monitor but we’re not seeing that today.

[Josh Jennings, Cowen]

Great. And then just to follow-up, I heard you mentioned that the Lutonix BTK submission was put forward or filed. Any incremental details you can share about back and forth with the FDA? What was required – what more was required from Becton for that submission? And any comments on just your confidence for approval? Thanks a lot.

[Tom Polen, Chief Executive Officer and President]

Yes, we can’t comment really with many details at this point in time. Obviously it includes a number of additional clinical data studies that were generated on BTK. And we submitted those various data sets to the FDA. So again, we believe that there remains a significant unmet need for that patient population that there’s not strong alternatives for today. We strongly believe in the safety of the BTK product and it’s under active review. So we’ll continue to keep you updated as it progresses. But we’ve submitted the data that we believe isn’t complete and so it’s now under the review process. Thank you.

[Operator]

Thank you for your questions. We will now turn the floor back over to Tom Polen for your closing remarks.

[Tom Polen, Chief Executive Officer and President]

Okay, well thanks everyone for the great discussion today. As I close today’s call, I’m reminded of something a mentor of mine once shared, which is that crisis doesn’t make character, it reveals character. And that’s truly the way, I think, that we’ve seen BD respond here that the COVID-19 crisis has really revealed the best of BD reinforcing the commitment of our associates who never forget that there’s a patient at the end of everything we do. It’s revealed the breadth, the depth and necessity of our product portfolio reinforcing the central role we play from discovery and diagnosis to the delivery of care and treatment of disease and it’s revealed our ability to adapt and innovate, mustering our resources to bring new solutions to help solve healthcare’s biggest problems. That track record is why healthcare providers and health officials worldwide have put their trust in us during the most significant health crisis in the past century.

And it’s what gives us the confidence that we will continue to drive growth, innovation, and value creation in the many categories we serve long after COVID-19 has been contained. I think it’s fair to say that the road to recovery for the healthcare industry and global economy is going to take some time. It’s likely to have its own bumps, but I’m confident BD will navigate these near term challenges, take the necessary actions and execute our strategy to emerge strong.

I’ve been so inspired by the response of BD associates. We have an incredibly dedicated and committed team. And I can’t thank the team enough for going above and beyond in these challenging times.

I want to thank all of you for your time today. Stay well.

[Chris Reidy]

Thanks everyone.

[Operator]

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