Hello and welcome to BD's Third Fiscal Quarter 2020 Earnings Call. At the request of BD, today's conference is being recorded. It will be available for replay through August 13th, 2020 on the Investors at bd.com website or by phone at (800) 585-8367 for domestic calls and area code (404) 537-3406 for international calls using confirmation number 3197917. [Operator Instructions] Beginning today's call is Ms. Monique Dolecki Senior, Vice President of Investor Relations. Ms. Dolecki you may begin.

Thank you, Stephanie. Good morning everyone and thank you for joining us to review our third quarter results. We hope that everyone continues to be healthy and safe. With safety in mind, we are again taking a more virtual approach to our call today while also to exercising social distancing. Joining me in person we have Tom Polen, our Chief Executive Officer and President; and Chris Reidy, Executive Vice President and Chief Financial Officer and Chief Administrative Officer. Joining by phone we have Alberto Mas, Executive Vice President and President of the Medical segment; Simon Campion, Executive Vice President and President of the Interventional segment; and Patrick Kaltenbach, Executive Vice President and President of the Life Sciences segment. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at 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 third fiscal quarter press release and in the MD&A sections of our recent SEC filings. In particular there continues to be significant uncertainty about the duration and contemplated impacts of the COVID-19 pandemic. The commentary that we are providing today includes information regarding the July trends we are seeing in our businesses. We have made certain assumptions in how we are managing our business but that could change as we move forward. We will also discuss some non-GAAP financial measures with respect to our performance. Reconciliations to GAAP measures that include the details of the purchase accounting and other adjustments can be found in our press release and its related financial schedules and in the appendix of the Investor Relations slides. A copy of the release including the financial schedules is posted on the bd.com website. It is now my pleasure to turn the call over to Tom.

Okay. Thank you, Monique and good morning everyone. I hope you and your families are doing well and staying healthy. If I had to summarize Q3 in two words, it would be execution and impact. I'm very proud of our team for the performance they delivered in the third quarter given the challenging environment. What stands out to me the most is the progress the BD team made executing and delivering on both our short and long-term agenda creating value for patients, customers, and shareholders. We launched the COVID-19 assay on Veritor, secured injection device orders for future vaccination campaigns, and scaled manufacturing to ensure continued supply of critical medical technologies across the continuum of care. We announced several U.S. government collaborations to expand U.S. capacity in critical to COVID product areas. We worked closely with our customers as they resumed medical procedures throughout the quarter. And we saw those procedures continue to increase as we exited the quarter. At the same time, the team never lost sight of the long-term advancing our growth strategy, driving our innovation pipeline, and executing on our cost savings and simplification initiatives. I'm confident the steps we're taking now will help BD emerge from the pandemic strong and put us in the best position for the long-term. Let's jump into the quarter on slide four. Our third quarter results reflect the impact of COVID-19 on healthcare around the world as we saw strong demand for COVID-19 related diagnostics and significant pressure on the parts of our portfolio that support elective procedures research routine care and lab testing. We anticipated we'd see the biggest negative impact from COVID-19 in Q3 and it's largely played out that way. All-in COVID-19 had a net negative topline impact of $600 million in Q3. Chris is going to provide…

Thanks, Tom, and good morning, everyone. I'd like to begin with some comments regarding BD's ongoing response to the COVID pandemic. First, I'm very proud of our organization as we have continued to adapt to the rapidly changing environment and evolving needs of our customers and associates. We have responded with both strength and agility to ensure the continued safety and well-being of our BD associates and to also best serve our customers and their patients as they battle the pandemic. Second, we continue to see strong demand for our COVID related solutions. This includes diagnostic test on our BD MAX platform where we are continuing to increase capacity to meet demand. We are also actively ramping our efforts around the recently launched rapid antigen test on BD Veritor point-of-care system. And we continue to grow our pipeline of orders for syringes and needles to support future global vaccination campaigns. Third, as we continue to adapt and meet our customer needs, we also remain focused on the execution of our long-term strategy, which positions us well for the future. In addition to the COVID related solutions, we launched four additional products in the quarter and we remain on track to execute against our new product pipeline for fiscal year 2020. We are also continuing our work on Project Recode as part of our plans to simplify BD, which will help drive future operating margin expansion. We are 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 third quarter including a review of the COVID impacts. As Tom discussed our third quarter performance reflects the impact of the global COVID-19 pandemic. Revenues declined…

The floor is now for questions. [Operator Instructions] Our first question comes from the line of Brian Weinstein with William Blair.

Hey, guys.

Good morning, Brian.

Thanks for taking -- good morning. Thanks for taking the question. No surprise, I'll start out on antigen. Can you give us an idea a little bit more about the demand and where it's coming from. And we saw the HHS deal and we saw the news from the governors' consortium, I guess that was on Monday or Tuesday. But beyond that can you talk more about where you're seeing the demand start to come from? And your thoughts on the size of what that market could be considering between you and the other player there. There's going to be about 30 million tests per month in the market by next spring.

Hey, Brian. This is Tom. Good morning. So as we mentioned earlier on the call, certainly demand is expected, as I think has been said by others, to exceed supply in the foreseeable future at least. And we certainly see that ourselves. Demand, as I mentioned before, is coming from many of our traditional customers, healthcare providers themselves. We've had quite strong demand there as well as non-traditional accounts. Nursing homes for us would have been a non-traditional account. We've seen announcements come out recently from states looking to acquire rapid antigen tests and the use in other settings. I think the value of near real-time 15-minute testing has gotten increasing traction. I'd say we've really seen the awareness of that increase over the last couple of weeks even more so. And that probably also coincides with increases in COVID rates across the country. So again, very, very strong demand, as I mentioned, both on the instrument side, which we've shipped already in the first month more than we normally would ship in a year. And our supply plans are on track to our ramp plans that we've shared before. But the demand is broad across both traditional and non-traditional segments.

Great, thanks for that. And then, as we think about a little bit longer-term here and start thinking about 2021, based on what you're seeing, can you talk about some things that we should be thinking about when evaluating how things could play out, especially considering the extended time line on Alaris, the recovery rates that you just mentioned currently being at about 80% to 85% of pre-COVID expectations in July and how COVID-19 testing could play out? Can you kind of give us some goalposts to be thinking about around those things and other things as we think about trying to factor in 2021 here?

Sure Brian. This is Chris and I'll start with that. And obviously normally on this call we get questions about the following year at this time of year and we hesitate to give any indications. This is probably even a tougher year to do that. We're giving guidance for the next two months, because we have a sense of the near-term visibility, but when you think about where things end up with hospital utilization and elective procedures of where does it top off, that's a tough one to call. Clearly we're seeing a good trend. We talked about that in our prepared remarks. June was better than May. July was better than June. So, that's a good indication. But where that tops out at, you see hospital utilization in that 80% to 85% range. Does it stay there? Does it get back to 100%? Those are the calls that you have to make. So that's a high variable and we'll be monitoring that obviously as we approach the November call. When you think about margins, clearly the decremental headwinds from COVID impact are strong 80%. And so, we're going to continue to see that with the -- into the fourth quarter. And then we'll have some lapping next year. But as that comes down, that headwind will lessen certainly over time. And then, on the more traditional stuff that we look at, FX right now looks like a push to slight tailwind. Resins, looks like it's a slight tailwind. We would expect to see some headwind in 2021 as we continue some of the COVID investments from this year and the full year impact of that. And on T&E, we are seeing some favorability from lower T&E. and we would expect that to carry over into the beginning of next year. And then we'll see with what kind of recovery, as people may be coming back from virtual work that might increase and have a little bit of pressure. Those are some of the things that you can start to think about, but it's a tough one to call this early. Thanks for the questions, Brian.

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

Hi. Good morning. Thanks for taking the questions.

Hi, David.

I guess, Chris, I wonder if you could help us sort of better understand some of the key drivers into the fourth quarter. And then we obviously have Veritor interventional recovery and some comparable issues to consider. But maybe just sort of comment on some of the headwinds and tailwinds such as stocking dynamics, things that are harder for us to model. And we have the net COVID impact in the third quarter of $600 million. What does that impact look like in the fourth quarter? And then I had a quick follow-up.

Sure. So as we said, we are seeing those headwinds abate and you can see that trend through June and July. So we would expect that $600 million to come down significantly, but it's -- there still will be a headwind and so we have that and those headwinds do go down at the 80% level. So, I think, we've given you a lot of transparency into that. And so, that should help with the models. The biggest thing that I would point to in the fourth quarter that, I think, people have to remember, is the tough compare that we have particularly in MMS. And MMS had a record quarter at $738 million; as I mentioned in the prepared remarks last year, and that's a real tough grow over. And so, with that, the decremental margins being 80% on the COVID impact, that's significant. I think the other is that there are COVID operational investments that we have. Those will continue and drag into the quarter. And the other thing to remember about the fourth quarter is, generally, if you think about the Alaris ship hold, that's certainly impacting us again. The demand on the medical necessity, we're not expecting that to be what it was in the third quarter. So those are the kinds of things that we look at in the fourth quarter to get to the guidance that we gave.

Okay. And then, Tom, just a quick question on Alaris. The following is, sort of, six months push versus the prior September, which is actually kind of consistent with our expectation. But with factor testing, kind of, in the bag here, what are the biggest outstanding deliverables in the submission? And timing aside, I think, investors are most focused on what's your level of confidence you can return a safe pump to market. Thanks so much.

Okay. Dave, thanks for the question. So we -- as I mentioned before, we have completed quite a bit of the testing and other work required for the submission and we have a much better visibility to submission timing than we did and when we gave you update last, in May. I think from a human factor testing, we still have the other part of it. We did the -- we've completed 100% of our formative testing, which is the initial phase. Again, 12 different human factor tests, as I described, and we're pleased with the data and outcome. Now we've got to progress to that next stage, which is a broader set of testing. So that's still in front of us. A little bit of some of the other testing that we have completed. We've completed a retrospective risk assessment on the changes that have -- every change that's been made to the Alaris system since the initial 510(k). That work is almost complete. We see that as retiring significant risk to the submission. We've completed software verification based on the original scope, closing out most outstanding anomalies. Of course, that software is not going to be released until all of our integrated testing is complete. But this is -- that's a tremendous amount of work and a testament to the team being agilely working from home. I think the other area is, V&V and reliability testing. So we're pleased with our progress there, good progress made on both fronts, but we've -- we're at -- we've begun testing on selected components in certain types of tests. And we await feedback from the FDA on the overall set of protocols. And so, at this point, that testing is -- it's not necessarily that workstream on a critical path for the overall project, but it's still more testing that's in front of us. Just to give a little bit more color of the testing that remains. So, thanks for the question.

Okay. And Tom your confidence, you can return a safe pump to market here, timing aside, regardless of timing.

We don't -- we remain very confident in the safety of the Alaris product. And as I said, we've been working very collaboratively with the FDA on advancing this submission. So, we feel good about that progress that we're making.

Okay. Thanks so much.

Your next question comes from the line of Kristen Stewart with Barclays.

Hi. Thanks for taking my questions. Chris, I was just wondering, how we should think about gross margins going forward, just as we balance some of the decremental margins, as you've talked about, just with the Veritor assay coming in, as you've talked about the different capacity coming online and then think about kind of the puts and takes that you've talked about with FX and resin and everything else. I appreciate you've had a lot of moving parts here, but it seems that we should have continued pressure but obviously some moving parts particularly as we think about modeling, out next quarter and even thinking about 2021.

Sure. So thanks for the question, Kristen. We're looking at Q4 margins in the 54% to 55% kind of range. And when you're thinking beyond that, also remember that there's continued higher shipping costs as well. And you know what, we've been able to continue to drive leverage. In the charts that we gave on the third quarter, we broke it out where you could actually see the impact from the decremental margins from COVID. So we'll still have some of that, as we described earlier. We'll have some -- so that impact will lessen as the impact of COVID lessens in the fourth quarter. And that's why we get from that 51-ish percent kind of range up to the mid-54s. And in the mix as well, is the COVID investments that we have, as well as our ability to continue to drive underlying leverage through continuous improvement. So that gets you kind of to that 54% to 55% range. One other thing that I neglected to mention earlier in the question regarding Q4 is, also you saw the lumpiness of our tax rate. Those discrete items were anticipated for the year, but a lot of them fell into the third quarter. So as you're modeling the fourth quarter, you would expect to see a high-teens Q4 tax rate. And then, also keep in mind, the preferred shares and the dividend and that's what leads you to that $2.40 to $2.60 kind of EPS range.

Okay. And then, that 54% to 55%, does that seem like a reasonable number to think about as a jumping off point, as we think about 2021 as well? Obviously, recognizing there's a lot going on with COVID and whatnot, but a reasonable point to look forward to...

There's certainly is a lot going on. But yes, I think that's a reasonable jumping off point. So that's why we're trying to give you -- on that chart we're trying to break down the various contributors. So as the COVID impact abates you can -- that's a big driver at 80%. So as that goes away it starts coming. It starts improving. Again and again, we feel really good about the fact that we're able to on an underlying basis continue to drive improvements through, continuous improvements and synergies. And as we mentioned, Recode is a project that we will continue and think about that as a continuation of the simplification of the combinations of the companies that we've had over the number of years.

Okay. Thanks so much.

Thank you, next question.

Your next question comes from the line of Rick Wise with Stifel.

Hi.

Good morning, Rick.

Good morning.

Good morning.

Good morning, Simon and Hi Chris. You're going to be surprised to hear me say, I'd like to talk about fiscal 2022.

That's a first forward looking.

I know, that's right, but I thought, you said. I do -- I'm not looking for guidance but more just reflect -- if I reflect on things, it seems reasonable to think that fiscal 2022 might be a year when that thing gets more back to normal, the economy hopefully recovering, volumes returning, maybe a vaccine all sorts of things testing in better shape. And my question really revolves around that return to growth, and how you, Tom and Chris are thinking about Becton. How would you have us think about Becton and what may be a more normal year? Does that -- if we assume that fiscal 2022, is a more normal year you return to fiscal 2019 or 2018, kind of mid-single-digit top line low double-digit bottom line. Or do we think, because of things like Project Recode, all the cost reduction the efficiency, the new products, the expanded testing, that actually maybe your normalized growth as we think a little longer term about the company is actually a little better or you're a little more optimistic. I think that maybe, it'd be interesting to hear your thoughts.

Sure. I'll take a start at that. And then, I'm sure Tom will chime in with his view. But you're absolutely right. 2021 is going to be a mixed bag. And the compare is very different. So as you think about 2022, as we think about it, we're still very much focused on the five plus on the top and the 10 plus on the bottom. And all of what you talked about in some of the growth drivers go towards, getting to that five plus on a sustainable basis. So we feel really good about the underlying business, the sustainability of that, mid-single digits kind of five plus kind of growth on the top. And things like Recode are designed to get us that kind of multiple to get you to the 10% on the bottom, on a sustainable basis. So we feel good about it getting back to that kind of level. And we feel good about the fact that where the business is on an underlying basis, performing extremely well in the face of all of the COVID impact that, we've had. And that is lessening. As we said, we see those headwinds abating. Now obviously that could change, with the change in the course of the pandemic. We're just calling that based on what we see today and so that does seem to be abating somewhat. And you've seen some of the tailwinds that have been increasing. But again, how much of that continues into 2022 will play out over time.

And maybe I think, Chris that was very well said. I think Rick maybe the only thing I could add is, our -- we are running the company. Obviously we're managing it through COVID, but we are very much executing not only our short-term opportunities areas like Veritor and MAX and helping on the vaccination campaign around the world, but very much executing our long-term strategy. And so, as we think about for example our new product development pipeline and how we've been executing it, I've shared in the past, we've been really focused on continuing to improve our on-time delivery of products or on-time milestones. This year despite COVID we're going to improve. We're very much on track to improve our performance year-on-year again this year, even better than we had last year. Really proud of how the team is executing that. We just finished our strategic portfolio review. And we went through all the segments. And we're making those tough trade-offs, in terms of which programs give us the best returns and growth profiles going forward. And we're allocating and making sure those investments are continuing or adding in new opportunities that we see. And we're executing those pipelines on the Recode, as I mentioned. We've allocated resources to that this year. They're executing they're on track. And even in areas like our plant I continue to be astounded. In the middle of managing -- with our large manufacturing scale, you can imagine the complexity that COVID adds in. We watch our supplier base, a huge team that's just watching suppliers and any economic challenges they have. And how do we start preparing for backup suppliers to make sure there’s no interruption in our supply chain. A lot of that is incremental, going on in COVID. And even during that, right our operations team is very focused on continuing to deliver, the routine CI savings. And they're again doing very well on that this year, incremental to the work that they're doing on COVID. And so, hopefully the takeaway from that is that, we are managing and navigating COVID with a high level of discipline, while at the same time, maintaining very much so our execution discipline on the long-term strategy.

And the only thing I would add from a slightly different perspective too is, given the level of uncertainty what you can count on us is a, high level of transparency. And I think -- I hope you'd agree that what we just gave on the third quarter and into July is very transparent. We've been very clear as to what we expect in the fourth quarter from Veritor for example. We'll go to great pains to break that out, so that as we navigate through that, it will be very clear, what's coming from Veritor. And what's coming from the base business.

And MAX.

Yeah. The disclosure there's something and we all appreciate it. Just as a quick follow-up if I could. Chris, you highlighted the 3.1 times net leverage on June 30th. Last quarter you said, post-Bard leverage reduction timing was pushed out. Maybe just help us understand what's your latest thinking there? Where are you heading? And what's that all mean for capital allocation? Thanks a lot.

Sure. So nothing's really changed from a standpoint of our intent to delever the company. I think with the pandemic, as we've discussed right now, we're focused on cash. We're continuing to pay down deb. But at the same time, that net leverage, the gross leverage has been pushed off a little bit but we will continue to work that down over time. We feel good about the fact that the net leverage is where it's at. So that really hasn't changed. We'll see --we feel really well positioned in this time of uncertainty from a cash and liquidity standpoint. And as we've talked about that that gives us the firepower to invest in new products, invest in things like Veritor protection for example. And so it gives us the firepower to do that. It will continue to fuel M&A of tuck-in acquisitions et cetera. So we feel really good about the balance sheet. As we come out, as you think about 2022 for example, our overall capital allocation really hasn't changed. The good news is we do throw off a lot of cash and so we feel good about our dividend. We've had a long history of increasing the dividend. We've continued that through everything. I think you can expect that from us going forward as well. I look forward to the day when pandemics and the --this is sort of behind us and that strong cash generation leads us to a point where we can start buying back shares again. And we will come to that and get through this period. But the overall capital allocation really hasn't changed.

Your next question comes from the line of Robbie Marcus with JPMorgan.

Good morning, Robbie.

Good morning. We can all take your supply of the Veritor antigen test and MAX out against the ASP and we can come up with really big numbers over the next 12-plus months. How should -- how do you want to frame the revenue potential in fourth quarter and even into next year as you're sitting here? I know you haven't given guidance for next year but what's your latest base case thinking on antigen testing for COVID over the next 12 months or so?

So I'll start with --just to be very clear on the fourth quarter, we have talked about the 10 million tests and that is what is in our guidance is the 10 million tests. So we said that the demand for that is very strong. We feel good about our ability to produce that at that level. But that's what's in the guidance for the fourth quarter. And longer term I'll turn it to Tom.

Yes. And we've shared as we think about the fourth quarter right we assume the 10 million tests July through September at about $20 ASP per test, which is what we had shared in the -- historically. As you think about 2021, obviously it's going to depend upon -- the number one factor will be the intensity of the COVID pandemic and its duration timing of vaccine et cetera. And so I think the most that we can focus on is that we will --the 8 million tests per month by the end of September. And then we'll be ramping up production of more than -- right at 12 million tests per month at the end of February. Those are the numbers. The percent utilization of those is to be determined as things evolve. We want -- we don't think it's appropriate for us to comment on that at this point in time.

Okay. Thanks. And maybe as a quick follow-up. You answered this briefly before on capital allocation but you raised some capital during the quarter. Part of that was to have potential firepower to go on the offensive for M&A should that come up. What's your latest view on where M&A would be most appropriate in the portfolio? What you view the current environment like? And do you think there are willing sellers out there right now?

Thanks, Robbie. So I would just say, as we've shared in the past, we always are evaluating and have historically. Tuck-in M&A has been a long part of BD's history in how we've grown many of the businesses that exist in the company from BDB to Vacutainer to of course --much of the Bard portfolio came in through tuck-in acquisitions and licensing inorganically. We continue to look at opportunities across all three of the segments and we're very focused on deals that we would look at. We're not -- as we've made very, very clear we have zero interest in any large transformational deals. We won't be doing those. We're looking at tuck-ins, which is traditionally what BD has done going back in time and has been critical to Bard. We prioritize very much and are looking at accretive deals. We're not looking at --we have zero interest in any significant dilution at all. So those are some of the key criteria I'd say we're looking at. Specific areas as I've shared before, we're not looking at areas far aside from our existing businesses. We're looking to leverage where we have strengths and competitive advantage and really rounding out those portfolios as we've done again in each of the three segments over time. And Chris anything to add?

Yes. No nothing to add other than to emphasize that the key metrics there are strategic fit in our core businesses and non-dilutive accretive deals. We're not looking for a lot of dilution. And returns -- ROIC greater than the cost of capital in year four .Those are the kind of standard metrics we look at. But first and foremost a strategic fit.

Thanks, Robbie.

Your next question is from Vijay Kumar with Evercore ISI.

Good morning, Vijay.

Good morning, Tom. Good morning, Chris. Thanks for taking my question. One, just maybe a cleanup question on Q4 Chris. The tailwinds that you guys saw in 3Q $200 million, obviously the pump revenues go away for Q4. Are the tailwinds also decreasing for Q4? And I think you made a comment on the preferred dividends and share count. Perhaps, could you just remind us really on, what we should be expecting for share count in preferred dividends in Q4?

So let me take the first part of that. So just to make it clear I mean, we said that the $600 million in the last quarter we're modeling in the area of around $200 million net impact in Q4. And we do expect the tailwinds to go up with Veritor. We --Tom gave the number 10 times 20, so that's $200 million. We expect --I think we noted in the charts we expect BD MAX to be another $100 million as we -- impacts out there. And you would expect the Alaris to be --medical necessity to come down from third quarter to fourth quarter. So when you net all that out and with the abatement of the headwinds that we're seeing in elective procedures, hospital utilization going up a little bit still not back to normal but abating that's kind of where our thinking is. And the --I missed the last part of your question but I think it was Q4 share count. And you could use in your models about $293 million.

Okay. That's extremely helpful for us. And just on one fiscal 2021 then. Tom, we can do the math -- like Chris said on the Veritor antigen test. But more stepping outside of numbers, it just feels that from your comments stepping up on capacity for these antigen tests. It feels like you guys are a little bit perhaps more incrementally bullish on the prospects for antigen test. Is that the right way to look at it? And syringes, obviously, you saw the orders for that. Is there a dollar number, sort of, what The Street could monitor for 2021? Thank you.

Yes. On antigen tests, I think, what's fair to say is that we've seen as I mentioned very strong demand right off the bat. I mean we're only -- we're literally at a month today. It's the anniversary. And we have very strong -- extremely strong demand on that product both on the Readers antigen tests themselves. I think what's very, very clear is there is a high need to know this person have COVID right now. And I don't want to wait a day I don't want to wait two days, three days, four days depending on how the system -- how effective the testing system is if you're sending samples out, you can get up to those durations. And I think there's a whole need where that just doesn't work that type of testing turnaround time and people -- high value on this getting an answer within 15 minutes. So that's -- and that ease of use there is unbeatable on the antigen testing approach. So right we're very focused on -- a we've been engaging a wide range of customers on that. As I mentioned, we've -- we're deploying not just the resources of life sciences, but of BD against that opportunity on the scale-up and making sure we have the right infrastructure to support the broader base of customers. Even logistically right shipping this volume out of product, and so again we're applying the full capabilities of the company behind this. So I think that's a fair approach to it. How that evolves again from a disease prevalence rate and consumption through 2021 no one knows the answer to that. But as long as it exists I would expect there's going to be a high need for antigen tests.

Just on the syringes, Tom.

Yes. On syringes as you said you heard us we gave a number on this call that was incremental to the number we gave last time right? So we have continued orders coming in not only in the U.S. but in other parts of the world. We think that's still relatively -- no change from what we had shared historically, right that we have capacity to add one billion units over the next -- we had always shared 12 months to 18 months. And we still see that opportunity side. I did call out right the devices that we are selling are a mix of safety devices and conventional devices. Safety devices have a bit higher ASP than conventional devices. So we'll see how that mix evolves over time. But overall, we're right in line. We're still on track to be able to produce that one billion units over the next 12 months to 18 months. And you can see right at over 450 million or -- well 470 million units right those orders are starting to come in quite steadily. I think that answer..

Yeah. Okay.

Thanks, Vijay.

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

Great.

Good morning, Bob.

Good morning, Bob.

Good morning. So thanks. I just have two questions and I'll include them upfront. Given the kind of focus on testing I was wondering if you could -- just to be clear what was the total COVID testing revenue in Q3. And what is total COVID testing revenue assumed in the Q4 guide? And then the other thing I'd love you to comment on is that the one kind of incoming e-mails I've gotten on this report more than anything else is just that Q4 earnings are way below where The Street was guiding and it's about an $0.80 year-over-year decline, 25% year-over-year decline. So if you wouldn't mind trying to just, sort of, break that down for us those $0.80. And you've mentioned a bunch of things on the call today. But I was wondering if you could just summarize the factors that are leading to that kind of $0.80 year-over-year decline and the kind of $0.50 below or so what The Street was modeling.

Sure. So let me start on the first part of your question was the COVID-related testing that we saw in Q3. That was $100 million on MAX. So think about $100 million on MAX and $100 million on the Alaris medical necessity or thereabouts. So that was the $200 million of tailwinds that we were talking give or take. On Q4, we've talked I think you can think about that $100 million going up to $300 million because the MAX is if we're running at full capacity and so we expect that to be about $100 million in Q4 and then you add in the Veritor of 10 million x 20. So that's $200 million gets you to the $300 million kind of thing. So moving on to the second part of your questions. I think again the revenue decline we're still seeing low single digits kind of a decline in the fourth quarter. I think the COVID impact particularly in the MDS business in Q3 was something that folks had been missing is very much driven by hospital utilization and you saw what that was. So we would expect that to continue because although utilization is getting better it's still under pressure. And so we do expect that revenue decline of low single-digits. Then you drop that at a decremental GP. I think on the last call, we were signaling kind of in the 75% range. It's really coming in closer to the 80% range. And again that's a testament to the fact that these are very high-margin products that are being impacted by COVID. And then in addition, we're doing the right things in terms of not building inventory during this period of time. And that's a very important point because as you're not building inventory, you've got…

Great. Thanks for the detail.

Hopefully that helps.

Yes.

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

Good morning, Larry.

Hey, guys. Thanks for taking the question. Good morning. Good morning, Chris. One on testing or just actually two on testing. I'll ask them both upfront. As people have said on this call, we can do the math on the potential sales. I guess, my question is we also know the margin is relatively high. I don't know, if you would bless kind of a 75% incremental operating margin or not, but that's kind of what people believe. So the EPS contribution could be quite high, if the demand is strong. So I guess my question is will you let this drop to the bottom line? How should we think about that versus reinvesting? And then just, Tom, I know you don't know how sustainable the testing is. But long term once we have COVID under control is Veritor for COVID similar to kind of flu, which is about $100 million per year? Or is there any reason why this could be a greater long-term opportunity? Thanks for taking the questions.

So let me start with the last question then Chris can discuss the margins, which by the way we have shared. We're not sharing the specific margins of Veritor, but we have said that they're higher than the company average I think is the comment that we've shared in the past and probably what we're comfortable to continue to share, which is to your point. So on the long-term opportunity for COVID testing, I think again very difficult to predict at this point in time. I think, there's still a lot of uncertainties, even around the vaccine. Are you --is it going to be a permanent vaccine? Is it going to be a vaccine that you have to get every year more like the flu, I think those things will --if it's something like polio that gets eradicated because of a vaccine that you get a couple of shots of it upfront and then it's longer term that obviously will lead to a very different outcome than if it's something that you have to get annually. And if you forego that annual vaccination then now you're susceptible to get COVID. These things, I think are still being understood and will evolve. What I think we can say is that look we're placing a lot of Veritor instruments right now, and I shared that upfront in my commentary around demand just for the instruments in the first quarter. We certainly see point-of-care diagnostics as an area of focus of investment for the company and we have I think an example a clear indicator of that is we acquired a point-of-care molecular company earlier this year pre-COVID coming up. Because we saw the attractiveness of this space and we're continuing to invest in that area very heavily. I think the broader footprint…

And back to the first part of your question, I think it is fair to say, and we have said in the past that the margins here would be higher than the company margins. I think some of the numbers you're quoting seem a little rich to me particularly in the short term. This fourth quarter, I don't think you can expect us to ramp production and immediately get to those kind of margins in the fourth quarter. So I think some --the models that I've seen have just assumed we can get to those kind of margins day one. That's not practical, but clearly building over time to margins that are higher than the company average.

Thanks, guys.

Thanks.

Your next question comes from the line of Amit Hazan with Goldman Sachs.

Hi, Amit. Good morning.

Hey, Amit.

Let me --just a couple of quick ones. I know we're running late on time here. I wanted to ask the first one on just routine testing and get a sense from you, if the recovery there is similar to what you cited elsewhere. And even if we think about getting into not just diagnostics but even PI oncology and things like mammo whether you have any insight to the pace of that recovery? It just all seems very relevant to downstream procedure revenue?

Yeah. We --let me start with that. This is Tom, Amit. And actually we do have Simon on the phone as well. We have all of our segment presidents. And Simon, I'll ask you to comment on the oncology piece in a moment. I know that was one that we did see a little bit more impact in COVID than some of the other procedure areas as mammographies have been delayed. But just before we get to that, when it comes to actually more laboratory-based testing IVD testing that is one that we recognize that non-COVID diagnostic testing and specimen collection improved from about 75% in June to about 80% in July One of the indicators that, we look at very closely are the national reference lab volumes and I think it's fair to say that the information that they share in terms of overall underlying testing demand correlates very well with demand signals that we see in our Vacutainer business, which is of course a large business for us on the diagnostic testing side. Obviously, our IDS business gets a little bit more fluctuated because it is an infectious disease diagnostic testing. It's gotten both MAX and now going forward Veritor. And so we'll see more fluctuations there. But as we think about our PAS business very much we see the impact there correlated with what you would see in national reference labs. And the commentary that, they have around increased improvements from June to July match right with what we've seen as well. Simon maybe some further comments on the procedure side?

Yeah. Good morning. So certainly with oncology we did see an impact over the quarter, but month-by-month, we saw sequential growth as well. So it was slightly heavier impacted than some other parts of the PI business. But we also completed a survey. We actually surveyed 815 of our interventional customers of which 119 were involved in oncology. And most of our business as in oncology is either a implant or ports or biopsy and we've recently gone into interventional oncology. And what they're saying is that -- we've got interesting information that the patients that they've been treating are -- is a good mix between rescheduled cases and new cases. And these customers are also saying that their office volumes are beginning to rebound and they have a positive outlook as to what office volumes look like over the next 60 to 90 days. So while it was impacted the funnel was certainly impacted earlier on during COVID the outlook remains reasonably positive for oncology as well as other parts of the business too.

That's great. And Tom one for you on vaccination if I can. I'm just understanding dynamics a little bit better. Obviously, there's just a whole bunch of vaccine companies now going at risk at the same time. They're building inventory ahead of data, two doses per vaccine generally. And obviously that could suggest demand that -- for actual syringes that could be several multiples greater than population size. You've obviously made the comments today again about the one billion in incremental synergies --syringes over the next 12 to 18 months and the Bard investment taking 12 months. And you're obviously the biggest syringe player in the world. So the question is are we heading for supply challenges with regard to syringes injection devices for COVID vaccination?

Yes. I can't answer that. We don't know. At this point we are -- we've got visibility to supply the orders that we've received is a fair way to say it right? We don't as I mentioned that one billion units we've gotten 470 million units' worth of demand on that. And when I said the one billion units, right we mean that as truly incremental to just our ongoing demand remaining the same. And so that is another factor. Of course, we make way more than one billion units. We make billions of units a year of syringes on a global basis. And we're assuming all that base gets consumed normally. That includes a strong flu vaccination campaign that we would have syringes sufficient to provide that. And then this is incremental to that. And so right people will have to make choices. People could say I don't know if that's true that all those -- the base syringe consumption would remain normal that people wouldn't reallocate the syringes for other purposes in that. But there is a large base of other syringes that we're providing to the market as well. So what we can say right now is the current visibility of demand that's coming in from governments around the world is still within our supply capabilities.

Thanks.

Good question. It's something we're obviously watching closely as well.

Your next question is from the line of Larry Keusch with Raymond James.

Hi, good morning, everyone. Tom I wanted to just go back to Alaris and just kind of think through the time line a little bit relative to the update that you provided today. I think as I sort of recount how this came about when the issues first came up you were sort of talking about an early fourth quarter FDA filing. And then of course given the pandemic and challenges with human factor testing that pushed out again. So I'm just trying to square now that we think about the revised timing what sort of changed? Do you need to do more testing than you initially thought as you got into deeper discussions with the FDA? Is there something that you're doing incremental that you believe puts you in a better position. You obviously talked about the end tidal CO2. And does the observations of the manufacturing facility also sort of play into the time line as you think about it?

Okay. Good question, Larry. So first-off, we had always shared that the original assumption was end of Q4 right? And obviously with -- that was pre-COVID pandemic and we indicated that that would have impacts on our ability to do the testing. And it has and we recognize that. As I shared we've completed quite a bit of the testing and we had shared that versus when we had given an update in May that we felt that we would have quite a bit of that testing done by now and that we'd have much better visibility in our submission time line and that is the case. And it's the basis upon which we've given the update today. As I answered I think it was David's question earlier on this topic I'd already walked through the testing that we've done on human factor testing as well as some of the other testing that's been completed. In terms of incremental things, we have continued to have dialogue with the FDA and understand their feedback. So that's been part of the process. And that's been a really strong part of the process our collaboration with the FDA and it's something that we think is very important to get aligned on the testing. So that when again we submit the actual 510(k) that we're in a position to make it as comprehensive as possible so that the FDA is put in a position to be able to give us as timely of an approval hopefully as is possible that we do our best job in enabling that. The one thing that is added in -- and there may be others. But certainly one thing that I mentioned is the EtCO2 module which was in development before but we did make the decision that…

Okay. Terrific. Thanks. That's all I had.

Great. Yeah.

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

Good morning, Matt.

Good morning, Matt.

Hey, good morning. Good morning guys. Thanks for taking the question. I wanted to ask one about the installation progress and time line. You called out the fact that hospitals are not allowing a lot of large capital installations and there's been some tempering of the appetite there. I'm just wondering what the funnel looks like. Are you seeing any cancellations? And when do you think that will pick up relative to the improvement in utilization?

Sure. So clearly, the -- where we saw that the most was access to facilities and installation. And that was certainly true in April and May. I think we commented that in June that we saw that getting better. And we certainly saw that to be the case in July as well. So it really has to do -- what we've seen thus far is really more access related than any lack of appetite for installations. We haven't seen any cancellations that were other than deferrals. And so we haven't seen that. Certainly that's something that is -- I talked about as our watch outs going forward. But at this stage, we haven't seen that manifest itself yet. It's really just about the installations at this point.

And then just to follow-up on that. Conversely the negative impact on demand from hospital operations, do you think that the continued stimulus being given to hospitals could help you in some of these areas? Is there encourage to spend it on COVID-related things?

Yes. Clearly, that's the case. And I think that's what's helped bridge a lot of hospitals from a cash flow standpoint. So I think those programs have certainly helped from that standpoint. So absolutely.

Thank you very much.

Thanks, Matt.

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

Hey, Josh.

Hey, Josh.

Hi, good morning, Tom and Chris. I just wanted to ask about China. I think they're ahead of the curve in terms of the COVID recovery. You guys were down 17%. The China business in fiscal 3Q seems like medical was the biggest anchor in China. Anything you can do just division-by-division to help us understand the impact in fiscal 3Q? And then what's assumed for China guidance in fiscal fourth quarter? And then I just have one really quick follow-up.

Yes. So one thing I would mention and I think we mentioned it in our prepared remarks is that across BDI for example we were positive in June. And so we are watching China as we said very closely. And we are seeing some recovery there. Bear in mind that we also have in China in the medical area that you mentioned in the medical segment that we do have the impact of the volume-based procurement. So we did see -- I think also in our prepared remarks, we said that we continue to see some of that distributor stocking impact -- destocking impact as we go through that. Really no news on that volume-based procurement. That continues. It's a continuous thing. But outside of that, the recovery is happening in China and improving across the businesses.

Great. Thanks. And then just on the pump business medical necessity. It was a tailwind in fiscal 3Q. I believe you mentioned when you called out April on your fiscal 2Q call that the run rate in fiscal 2Q for medical necessity was around $10 million for the quarter. Is that the normal run rate outside of the COVID tailwind on the quarter?

Yes. I'm not sure what you're referring to there because we're -- there is no normal run rate on medical necessity. That was something new. We did mention I think in the quarter in April, I think we might have noted how much that was. And I think we said, it was in the $70 million kind of range for medical necessity. And as I mentioned, the quarter was in the $100 million kind of range. And so obviously May and June were significantly lower than April. And I think -- and we're not expecting too much in the fourth quarter in terms of medical necessity. And obviously, that's a function of resurgence and everything else, but we're not anticipating anything significant there.

Great. Thanks.

Our next question is from the line of Richard Newitter with SVB Leerink.

Thanks for squeezing me in guys. Just one question. I'm curious can you give any color on where this initial demand that you said is very high for point of care, where what sectors of the economy? Or what types of uses are you seeing the highest levels of that elevated demand for this type of test? Just trying to get a feel for kind of where this is probably going to have the biggest use. And if you have any initial comments there? Thanks very much.

Richard this is Tom. Good question. As I had shared before, it is a broad sector of both traditional customers and customers who are new to us where this demand is coming from. And we also of course a lot of this given the -- of course our traditional customers we often are engaging with them directly. So think about hospitals and clinics and those types of locations. We are dealing with them directly and we see strong demand from those areas. We of course are also providing this product through most all the major distributors and they are mostly directly managing a broader nontraditional customer base who are approaching them or calling us and then we refer them through distributors. The ship-tos are much broader than we would ever be set up to manage directly and we typically sell Veritor through distributors anyway. But there it's -- as you saw I mean HHS announced acquiring for nursing homes. Normally that's a whole new customer segment. It's normally not doing Veritor point-of-care testing as an example. There are schools that in states that are buying them to test symptomatic kids when they're in the -- as they're thinking about starting up school. What if a kid says I've got X Y Z symptoms that mimic COVID what do you do? Do you send them home and wait a couple of days to get a test result? Or is it really important for you to know if that kid has COVID before they leave the building, so that you can determine what do you do with all the other kids and the teachers that were in that classroom with that child. These are the questions that the people are working through. We've had employers order the product for similar types of purposes in use of understanding, again if employees come up with symptoms et cetera while at work. How you triage and make decisions for the rest of the workforce that's there and helping keep the environment safe? So those are just a few of the examples that we see the testing. But hopefully, just gives a color that it is much more diverse base than would traditionally be doing flu or strep or our normal point-of-care test.

Thank you.

Your next question is from the line of Jason Bednar with Piper Sandler.

Hi. Good morning guys. This is Andrew [ph] on for Jason. Thank you for taking the questions. I just have two real quick ones here and I'll ask them both upfront. Any updated thoughts on the BTK Lutonix product? How are you preparing for a rollout strategy at this point? And then the second one is I know it's super early, but any updated or any thoughts you can offer on the upcoming flu season, any challenges, headwinds, tailwinds anything that we need to contemplate in our model? Thank you.

Yes, Andrew, good question. On BTK, so we have nothing in our outlook in Q4 for BTK. I think we shared that in the past, but just to reiterate that. Of course, we have -- last we had shared is that we had submitted additional information as part of that PMA review and it continues to be under active review by the FDA. But we'll provide an update as we hear information from the FDA on that, but nothing to share at this point in time. In terms of the flu season, as I mentioned, we're making sure that first off that we have product to help support the flu vaccination campaigns this year. Obviously, we’re also expect to continue to provide flu testing on the Veritor platform. And as I mentioned, we are -- we do have combination COVID-flu tests in development on both our MAX and our Veritor platform. And so those are -- we have teams actively working on both of those to support where we could have flu and COVID needing differential diagnosis as that season intensifies going forward. The other thing that we watch is -- and no one knows the answer to this. We have seen some evidence that the incidences of using PPE and social distancing and quarantine have reduced the rate of -- or the intensity of the flu season in other geographies around the world, which are still in their winter seasons. How that's going to actually happen in the Northern Hemisphere is still to be determined. I don't think anyone knows the answer to that and it has big variables on how society is effectively quarantining and masking as well. So -- but all factors that we're watching closely and that we're preparing for.

Okay. Thank you.

Thank you. I would now like to turn the floor back over to Tom Polen for closing remarks.

Okay. Well, thank you operator, and thanks everyone for the good discussion on today's call. While our results this quarter show the impact of COVID-19 on the entire health care industry, they also demonstrate our focus on execution and making an impact during a consequential time. I'm very proud of the way our team has rallied around our purpose of advancing the world of health to find impactful solutions to help the world respond to COVID-19 and I'm proud of the BD team for their continued focus on executing our long-term strategy, so we can emerge from this pandemic period strong and well positioned to drive growth. Thank you all for your time today.

Thanks everyone.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day. Speakers, please hold the line.