Hello, and welcome to BD's Fourth Fiscal Quarter and Full Fiscal Year 2020 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through November 12, 2020, on the Investors page of the bd.com website or by phone at (800) 585-8367 for domestic calls and area code (404) 537-3406 for international calls, using confirmation number, 4475229. [Operator Instructions] Beginning today's call is Ms. Kristen Stewart, Senior Vice President of Strategy and Investor Relations. Ms. Stewart, you may begin.

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

Thanks, Kristen. Good morning, everyone. I hope you're doing well, and thank you for joining us. For today's call, I want to address three main topics. First, my high level perspective on the quarter and full-year performance; second, I'll give an update on several hot topics we're fully focused on; and finally, I will share progress on BD strategy. Then I'll turn it over to Chris for a review of the P&L and an update on our outlook. So let's jump right in. First, I'll start with the quarter and the full-year performance. In Q4, we had better-than-expected revenue and not only our COVID-related diagnostics testing, but also our core business that allowed us to not only deliver EPS upside, but also importantly gave us the opportunity to make some strategic investments aligned to our BD 2025 growth strategy. Revenues were up 4.4% on a reported and FX-neutral basis as we were able to offset the overall impact of COVID-19 and grew despite the Alaris ship hold. I want to acknowledge the exceptional execution by our Integrated Diagnostic Solutions business this quarter, particularly the BD Veritor team. The team exceeded our commitments, successfully developing the BD Veritor COVID-19 assay in an accelerated timeframe, securing several regulatory approvals, scaling up manufacturing and continuing to advance the science behind the utility and effectiveness of rapid antigen point-of-care testing. Total COVID-19 testing revenues allowed us to offset the ongoing COVID headwinds and other businesses from lower hospital utilization, surgical procedures, routine lab testing volumes, and research spending. In fact, because of our COVID testing revenues, we were able to move from a net negative COVID impact in Q3 to a net positive COVID impact in Q4. If you exclude COVID-19 testing and look at performance of the base businesses, we are very pleased…

Thanks, Tom, and good morning, everyone. Thanks for joining us today. We are pleased with our fiscal fourth quarter revenue and adjusted earnings per share performance. Overall revenues were $4.8 billion up 4.4% on both a reported and an FX-neutral basis. We estimate the net impact of COVID was a positive 210 basis points as COVID-19 testing revenue more than offset the ongoing negative impact from lower utilization across our businesses. Even after adjusting for the net COVID-19 effect, we are pleased that we're still able to grow our revenues despite the Alaris Pump ship hold. We estimate the negative impact of the Alaris ship hold was 240 basis points. BD Medical revenues totaled $2.3 billion and were down 4.9% year-over-year. We estimate COVID negatively impacted the business by about 370 basis points. We estimate the Alaris ship hold negative impact was 450 basis points. Medication Delivery Solutions saw sequential improvement consistent with healthcare utilization trends, but still continue to be impacted negatively by COVID-19 on a year-over-year basis. Internationally, MDS is declined, largely reflected the impact of China's volume-based procurement, as well as inventory reductions we took in the quarter. Medication Management Solutions, the Alaris ship hold continues to have a negative impact on the business units overall results and there was a difficult comparison with the prior year. International MMS sales were very strong driven by infusion pumps sales in Europe. In U.S. dispensing, we saw a solid growth and close the year with strong new committed contracts. In Diabetes Care, sales declines reflected ongoing market price pressures. Pharm System sales were up double-digits this quarter and ended the fiscal year with a strong 9.4% growth driven by our pre-filled and safety syringe portfolios. BD Life Sciences revenues totaled $1.5 billion and were up 31.4%. We estimate the…

Thank you. We will now open the call for questions. [Operator Instructions] Your first question comes from Bob Hopkins with Bank of America.

Hi. Thank you, and good morning.

Good morning, Bob.

Good morning, Bob.

Good morning. So just the – first question is maybe a clarification on the 2021 guide that you're giving. Can you just sort of sum all that up for us in terms of what does it imply for revenue dollars and how much it's assumed in there in terms of total COVID testing, not just Veritor? And then I know you said you're going to reinvest some of that. Like, what is sort of the, maybe the net EPS impact of COVID testing, including that reinvestment?

Yes. So on the issue of the guide related to – you know that we guided Veritor at $1 billion to $1.5 billion. When you add BD MAX, that's running at around 400 in that area, so you can add that on top of that.

Okay. And then any clarity on just a thoughts on reinvestment, just trying to get a – because what we're trying to do obviously is get a sense of the underlying business versus – EPS contribution on the underlying business versus total testing. So what are the kind of reinvestment plans implied?

So the way to think about how much is within the $1 billion to $1.5 billion of revenue that we're forecasting. Our guidance assumes a certain amount of reinvestment of that. So not letting it all flow through. As you think about – if Veritors looking like it'll be above $1.5 billion, we would look to invest more than that going forward. And we would likely have some investment depending on the investments in the pipeline and we'll talk to that in a moment. And let some of it flow through to the bottom line as well. So we'll assess that as we're going through the year. But if it's over the $1.5 billion, we would look to invest more, but still allow a portion of that flow to the bottom line as well.

I think it's fair to say, we plan to reinvest among the initial $1 billion to $1.5 billion range. We're investing roughly 20% of the profits back into the business bump.

Okay. Thank you very much.

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

Good morning, David.

Good morning, guys. How are you? So I appreciate. It's a very tight guidance in a very uncertain environment. I think a lot of investors will largely view this as a floor. But I did want to come back to the underlying business team one more time here. I think everyone's trying to compare the forward year 2021 to a base year, which is 2019, and I appreciate you all has a different comparisons there. But I think when people want to try to get to is if we take out some level of Veritor, we get to sort of some earnings number that's sort of in that 10, 10.50 range with reinvestment, maybe it's in 11 range. But if we look at the implied revenue growth 2021 over 2019, it's sort of low-single digits adjusted for pumps. And if we look at the margins, they seem kind of down in 2021 versus 2019. So for Tom and Chris, what investors want to hear is, it could be suggested that there's a problem in the underlying business or it could simply suggest that you're being conservative to begin the year. Help us understand the strength of that core business, and whether you think 2021 underlying margins can be up over the base year in 2019. And how you think that underlying business is sort of performing relative to that classic 5% BD growth rate that you're trying to get to? And then I had a quick follow-up.

Yes. David, good question. So I think if you look at it on an underlying basis, we are in that range that we're talking about that we've talked about around that 5% plus. We're in that. So if you look at we're in the low to mid-single digits in the core, of course, that has, and it maybe on that lower side of that. You've got the Alaris headwind, of course, which is still annualizing in the year as well. So that is a headwind that is built in to the core. If you take that out, you're back in right in that range that you mentioned before. So I'll let Chris add some more commentary on that. But just a reminder on that, we still do have annualization of the Alaris impact built into that.

Yes. I would say David, the core is strong. You saw that in the fourth quarter as well. It's doing well. The margins are improving. To your point around the 2019 to 2021, there are a number of things. We are seeing synergies from the BARDA transaction over that period of time kicking in. Then obviously it's impacted. You have to take out the COVID impact, the drag, and then the add back for Veritor. But keep in mind, if we had a bit of a drag during that period in the China VBP and the Alaris, and when you adjust for that, we are seeing growth in the margins and feel very comfortable with the long-term view of the underlying 5% and 10% on the bottom, and that's very consistent with what we've seen.

And David, the only thing I would add is that, our assumption is that we still are not getting back to a normalized level throughout fiscal 2021. So our guidance and margin forecast would still assume that the overall business continues to see headwinds on a margin perspective as we're still not back to pre-COVID levels overall.

I think to your point, we are looking – you're seeing some depression of the margins from the investments that we're making as well. So we're not letting it all flow through. We're making the investments that we outlined.

Totally understand. So there's some COVID adjustment factor there. Okay. Very good. I think investors will appreciate that clarity. And then just Tom, as you think about COVID testing for next year, obviously it's for this year for you guys. First half, obviously hard and second half that's very consistent with some of the PCR providers have suggested in terms of what their assumptions are for peak testing. Can you sort of help us understand your capacity expansion plans sort of first half and second half, and what is embedded in terms of price pressure for next year and where's that coming from? And thanks so much.

Sure. Good questions, David. So as you think about what we've shared before, we shared 8 million tests per month by October, which we’re in. 12 million tests per month starting in March of 2021, that's our capacity ramp on Veritor. And so those capacity plans remain firmly intact and so that's the basis of our outlook that we've shared. I made the comment, of course, we do continue to monitor the supply demand dynamics of the market, and we'll provide you with any updates on additional capacity expansions beyond that if we were to make those, but we won't provide those until that capacity were to come online. So that's just a little bit of background there. As we come to ASPs, we had said $20 ASP, we did a little bit better than that in Q4, as I mentioned. But we do expect to see pricing headwinds, ASP erosion, as there are more competitors in the market now than there were at the start of Q4. And we expect that there will be other entrance. And so we would expect that $20 ASP could come down as we move through the year. Okay. Thanks, David.

Your next question comes from Amit Hazan with Goldman Sachs.

Good morning, Amit.

Thanks. Good morning.

Good morning.

Good morning. Just one clarification for this coming fiscal year on utilization. Can you just talk a little bit more to what you're assuming in the guidance for underlying hospital admissions and utilization versus what you've been seeing and what the impact would be, not just on BD Medical, but just on the entire business routine diagnostic testing as well.

Yes. Great question, Amit and good morning. So during the quarter, as I mentioned, we did observe sequential improvements across our businesses that are more elective procedure oriented, as well as in lab testing volumes. We saw them through the quarter evolve to around 90%. We've got – obviously we have access to some pretty unique information through our BD MedMined platform, which is in about 338 hospitals that gives us literally real time insights into hospital trends on inpatient admissions, ICU admissions, ER trends, ER outpatient versus inpatient, we can see that literally on a daily basis, what happened yesterday in these institutions, which are broadly distributed across the U.S. And so, as we look at that, we see hospital inpatient admissions trending around 85% to 90%, and we've posted some of this data in our deck so that we can share that more broadly. We thought there would be some information that you'd be interested in. So our projections and outlook do not assume any significant change to that on the positive nor on the downside as we think about the potential of a COVID resurgence. We do see, and as we talk to healthcare providers around the world, there's been a lot of preparation and learnings from the initial COVID surge, how to better keep facilities open, how to make patients more comfortable. We’re still coming in for elective procedures. So I think we certainly don't expect that it would retrench back if there is a significant resurgence, retrench back to the lower utilization levels that we saw last year. But of course, that's difficult to predict, and it could be somewhere between where it is today and there could be, could it stay where it is, could be, could it get better if there's not a large resurgence could be. But we've taken a more moderate kind of middle of the road assumption that it will be relatively stable as it is today as we think about our forward-looking guidance.

Simon, do you want to share some of your survey work that you've done through?

Yes. Just to back that, I think we shared some survey work on the August call, and we've repeated that survey work with about 600 physicians in our Surgery and PI business. And they are seeing volumes rebound I would say significantly, their capacity is at I think quite significant level compared to pre-COVID, their office-based volumes are increasing for the most part, so the funnel of patients is pretty robust. And there's still some – what we turn rollover patients as well that are in the mix of patients that were scheduled earlier this year, but have the procedure postponed. And so they're still in the mix as well. So it's pretty robust on the elective side right now.

Thanks for the question Amit.

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

Good morning, Vijay.

Hey guys. Good morning, Chris. Thanks for taking my question. And Chris, maybe on the guidance here. I guess if I just look at the gross COVID tailwinds, right, $1.5 billion at the high-end on Veritor, $400 million of MAX that's about $1.9 billion here. And I think we had somewhere something north of $600 million in 2020. So on a net basis we're looking at $1.2 billion, $1.3 billion of net diagnostic tailwinds for fiscal 2021?

That’s right.

So you get high singles, you pick up high singles just on the tailwind. FX is another point, is that implying like the base is going to be flattish for next year. And the reason I ask is, you have $800 million of headwinds in 3Q. And assuming just to normalize this rate, shouldn't the base be up, contribute a few hundred basis points of topline next year?

No it doesn't imply that, we'd have to look at how you're doing the math, but it would imply more in that mid-single digits on the underlying ex-COVID testing. So thinking that 4% to 5% range, which is very healthy. We do still see the drag. As I pointed out in some of the prepared remarks, we see that tough compare in Alaris against the first quarter. We do still have the tough compare against the first half of the year in the base business until we overlap the COVID period, but then rebounding in the second half of the period. So when you cut through all of that you think in the mid-single digits for the underlying business.

I think that's just an important point to reiterate Vijay as Chris mentioned, right. Because of the timing of our fiscal year, we don't anniversary the lower utilization rates from a COVID impact until Q3, right. The first and second quarter, our compares are still at a pre-COVID basis of utilization. And so that obviously has an impact on that. And so it still be – even despite that in those mid-single digits, low-single digits, and the base business is actually quite strong.

Understood. And then one quick on margins and free cash flows here. Maybe at [indiscernible], I just want to check if I'm doing the math right. Is the implied operating margins for fiscal 2021, is that that close to a 26.5% and free cash flow conversion where back to north of 90%, were there any timing impact or this now getting back to historical trends of BD printing north of 9% free cash conversion. Thank you.

Yes. So we have to work with you on the math there too. But I think, what we're saying is if you use Q4 as a jumping off point of the year. We’re likely to have some headwinds as we talked about. And we are making adjustments for the investments that we were talking about, what have you, Veritor does lift that. But taking all that into consideration, we would expect to see some good margin growth compared to the baseline of where we were in 2020. But it doesn't quite get to the 26 number that you're talking to.

Understood. So just on the free cash Chris, was there any one-time effect?

I'm not sure what your question is there. We did give the free cash flow – what was your question on that Vijay?

Where there any timing elements that benefit free cash flow or is this normalized free cash conversion metric, we should be looking forward to them?

Nothing looking forward, but obviously a lot of impacts throughout the year, lumpiness from the COVID drop through and what have you. We did a lot to offset that. We reduced the inventory levels as we talked about. So it did feel like a lot of lumpiness, but we were able to offset a good portion of the drag to be in a solid position as we exited the year. But going forward, I don't see anything that would be lumpy in nature.

Thanks guys.

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

Hey. Good morning, Robbie.

Hi, good morning. Two questions both on free cash flow and capital allocation. Maybe just to follow-up on Vijay’s question. I think part of the question is there's a number of exclusions in the fiscal 2021 guidance that some of them appear to be cash exclusions. I just want to see – should free cash flow conversion next year take a step down on legal and some of those other items? Are there further offsets in the working capital to make it look more normal?

Good question, Robbie. So, no, I think some of the cash impacts that we consider kind of below the line or having the past been integration spending in EUMDR. Those were the biggest ones. And the integration spending has been – will be lower going into 2021. EUMDR is still with us. We continue to invest to make sure we're in good shape with the regulations there. So there will be a portion of that, but the free cash flow conversion will increase in 2021.

Got it. That's helpful. And maybe a broader question just on your theory and thought process behind guidance. I don't envy you having to give guidance here in the middle of the pandemic for forward 12 months. We've seen guidance that we've had a lot of beats, but then lowered guidance over time. How did you approach fiscal 2021 guidance here? What ends up to be a pretty narrow range? How should we assume – what's your tolerance levels around it? What were some of just the strategic thinking that you and the Board did? And I'm really trying to get at how confident are you that this is more of a floor and a beatable target rather than it could be better, could be worse in certain areas. Thanks.

Sure. It’s a great question. Obviously, we've been following things very, very closely. We do see, as we said sequential improvement in our businesses. And so we took that into account. Obviously we're watching the potential for a resurgence very closely. And I think we were very clear when we gave the guidance that we're not assuming a major resurgence that would have a big impact on utilization and in elective surgeries. So we are not assuming that. And that's something that we'll have to wait and see. But at the same time, as we look at the course of the business and the way hospital systems are able to handle the current level, that gives us a certain amount of comfort and visibility as we go forward. I think the other thing that we have in here is the fact that Veritor gives us some natural offset if there is some level of utilization impact, it would probably go hand in hand over the course of the year with a bit more incremental Veritor testing. So there's some opportunity there. And obviously we have built in some piece of our investment of the Veritor revenues and we can gate that to some extent. And so with all of those things, we felt comfortable again, assuming that there's no major change in the resurgence that we could achieve the guidance that we gave.

Appreciate the color.

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

Hey guys. Thanks for taking the question. Just a couple of questions on Veritor testing. I'll kind of rapid fire a couple of these. So first are you guys looking to kind of expand your offering there? And are you thinking about anything on the non-instrumented side? And then you mentioned that you doubled the installed base here recently to over 50,000 units. Does that include the roughly 11,000 into the nursing homes? And I'm curious what the utilization you would expect in total for Veritor post-pandemic in order to help us gauge the long-term value creation that you're driving there. So a few on Veritor. Thanks.

Yes. Good questions, Brian. So the double install base of over 50,000 does include those that have been put in the nursing home. As I mentioned, we are looking at what additional menu we can put on that platform. We have a number of opportunities that we think are pretty exciting. Of course, we've never had an install base in the nursing home segment itself. And so part of that work that we've done is actually identifying what specific assays are relevant to the nursing home segment. There's other segments that we now have Veritor placements, and we wouldn't have looked at before in terms of – is there some unique menu that is more relevant to these segments that haven't been traditional call points for us. And so we're actually just wrapping up. We've just wrapped up that work. And again, we'll be using. That'll be an area of investment is in additional menu expansion on Veritor, where you reinvest some of those profits to add additional menu that we think are relevant to some of the new call points that we have Veritor placed in. So we see longevity there beyond the COVID-19 testing itself. Of course, as you know, we are expanding the menu there, very actively working on our COVID-19 flu assay. As we've always said, we’ll provide timing on that when we're ready to – when we get EUA, and we launched that same thing on BD MAX beyond the assay that we've already launched in Europe with our partner CerTest. So we feel really good about the momentum on Veritor. We hear great feedback from our customers on that. And again, we do see longevity on the install base, not only for COVID-19, which as I mentioned before. We think we'll have more longevity. If you ask me this time last quarter, said how much testing is going to happen in FY2022? I would just say that I feel more confident today that there will be longer testing runway beyond 2021 of COVID testing into 2022 and potentially beyond. Obviously then our work on adding menu to that will prolong the growth opportunities for Veritor beyond the COVID window. Thanks Brian for the call. Go ahead.

Yes. Obviously, is there anything on the non-instrumental? Or are you guys looking to develop anything that would be an antigen test that would not be on the Veritor platform?

Yes. We're looking at that Brian. And again, if we decide to do that, we'll share that when we're ready to launch it. But I would just say at this point, particularly in developed markets, we are very confident in the value that the instrumented platform brings. Again, just as a reminder, our instrumented platform is at a very different cost base than most any other instrumented platform right in that $250, $300 range. So it's not a significant capital, it’s not a challenge for any customer when it comes to that. It wouldn't even be a challenge significantly to bring it into the home necessarily, and we get the benefits, right. Remember, we’re one of the original inventors of lateral flow testing. Our first technologies were manual as we're all, and all of those technologies move to instrumented platforms because they got higher performance on flu and RSV and COVID is of course even a more critical assay to get right. And we see the benefits of an instrumented platform when it comes to sensitivity specificity. We still believe strongly in that. We continue – you've seen us put out a number of – support a number of publications, whether or not it's comparisons of technologies or recent publication, you probably saw around the role of antigen testing versus molecular testing when it comes to projecting infectivity, and that was relative to cell culture methods, which are the reference for, I believe that for patient to be infective. So we're going to continue to invest very heavily behind scientific evidence, and you can expect more of that from us. Again, it would support the value of Veritor and the technology that we're deploying.

Great. Thank you.

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

Hey, Larry. Good morning.

Good morning, Larry.

Yes. Good morning, everyone. Two questions. I guess, first, Tom for you. You obviously said in a couple of spots during the call that you are more confident in the timing for the filing of the Alaris 510(k). So just again, want to get a little sense of what makes you more confident than where we were three months ago? Is it just – again, you've knocked off some of the key objectives there that we're in the way. And as part of that question, given some of the hardware recalls that you've had recently. How does that get handled? Does that have to find its way into a filing as well? And then I guess, Chris for you, obviously heard the commentary around pulling some of the 4Q for 2021 into the first half as you talked about the various headwinds and tailwinds. As you look at the first quarter numbers that are out there for the consensus, do you have any – just any high-level thoughts as sort of how those feel?

Good questions, Larry. So when it comes to – let me take the first two and then I'll turn it over to Chris for the third. So in terms of what gives us more confidence, I think you nailed it. It's the fact that we are systematically working our way through the various testing stages. And so we've completed that much more testing since the last update. And that gives us confidence. We also continue to have very active and ongoing dialogue with the FDA around our progress. And that's why as I made earlier, we do have greater confidence in the timelines that we’ve shared last, which is late Q2, early Q3 of this fiscal year. When it comes to the hardware recalls, that's really part of our remediation of the Alaris franchise. It’s us looking at all the different complaint history and are there any further improvements we can be making to the platform. That's also part of our 43 response and activities. And so there's no other filings or anything, those are all built into the current 510(k) submission work. They do not have any impact on the timing of the 510(k) submissions.

Yes. And then in terms of your question regarding the phasing, I'd say we commented in our prepared remarks that as we looked at the consensus, we did feel that consensus was a bit high in Q4. We wanted to correct that and that we think that some of that should be moved to the first half. I would say move a little bit more of that to the Q2 then to Q1, but Q1 is a bit light given what we're looking at. And so we just wanted to kind of get the quarterly phasing right up front out of the box as we enter the year. And so that's why we were very specific around, take it out of the fourth quarter, put it in the first half. And I would add a little bit more in Q2 than Q1.

Okay. Terrific. Thanks guys. Appreciate it.

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

Good morning. Thanks for taking the question.

Good morning, Larry.

Good morning. One on international, one on fiscal 2022, we heard a lot of good color commentary on this call that what you're seeing in the U.S., but obviously we're seeing things deteriorate in places like Europe. How do your comments about the COVID impact in the U.S. compared to what you're seeing outside the U.S., and I have one follow-up.

Yes. So we're seeing still strong performance in Asia in terms of utilization. We're seeing very strong control of COVID across pretty much all Asian nations at this point. But as you mentioned Europe, we are seeing quarantine measures tighten. I would say that – again, European countries are much better prepared this time to continue to deliver care through that period of time. Can there be an impact on procedure volumes as we look forward? Yes. Out of Europe, it may be slightly less prepared, obviously there's different factors in public versus private healthcare systems as well that influenced that. But I think from what we're seeing now, we're definitely seeing better management and continued use of procedures early in this resurgence. But again, that's one of the caveats that we had to make. We can't predict the extent of everything on a forward-looking basis. And so our assumptions, we do recognize that particularly in Europe, there can be some increase, but if it's a significant increase, that would be something that’s not in our current assumptions.

Thanks for that, Tom. Chris, in your prepared remarks, you gave some good color on fiscal 2022. I heard that 5% plus topline growth and double-digit EPS growth, the algorithm, it sounds like you expect to return there in fiscal 2022, but in your prepared remarks, I heard kind of topline on an underlying basis. So I'm assuming you kind of want us to adjust for the COVID testing delta there. But I didn't hear anything on how to think about EPS. Should the starting point be the guidance you gave for $12.40 to $12.60, or is there some different way we should be thinking about EPS growth beyond fiscal 2021? Thanks for taking the question.

Yes. I think you got – for the most part, I think you are talking about it, right. Obviously, we feel good about – there's going to be a lot of movement in 2022 from a number of things on the topline. And the biggest variable obviously is what happens to Veritor and you heard Tom say, that we feel better about the testing going into 2022, but we've also said it wouldn't be prudent to assume the same level of testing in 2022 from 2021. And we'll obviously update you as we go from quarter-to-quarter. But you would expect to see some drop off in that piece. And obviously that slope, whether it's a cliff, it doesn't look like it's a cliff in 2022 right now. But it's certainly a downward slope as we think about it. And some of what we're doing in terms of the investing of Veritor spending will help mitigate some of that slope to a certain extent. So we're watching that very closely. But as we look at it, the other variable is when does Alaris revenues start coming back to pre-ship hold kind of levels. And we were very clear. We did not include anything in our 2021 guidance for that. And we're not predicting where that's going to be in 2022, but at some point 2022, we would expect that to start kicking back in. It's probably not as big a pent-up demand because of the medical necessity amounts that we've had in 2020 and potentially into 2021. But those are the things to keep in mind. But we do feel that the base business in 2022 on an underlying basis will be very solid and continue to be solid. So that's just some ways to think about it.

And then maybe Larry, this is Tom. Let me just maybe add on a little bit to Chris's good comments there. I'd say what you're seeing us do is from in the face of a pandemic and the utilization impact, you're seeing us work our way back to that driving durable, sustainable growth, right. We all recognize the markets are anything but predictable. And we worked hard – your earlier question was, spend a lot of time thinking about that range, you can debate and should you have a wide range or a narrower range that at least keeps people from getting on either end of it, which is where we ended up at. But we believe we’ve executed well against challenges in remarkable times. So you can see us doing that as we offset the COVID headwinds this quarter. And I think if you take, for example, this year, in our worst months, we saw significant headwinds across our business. We develop COVID testing. We saw the return of procedures, and we turn a negative headwind into a tailwind, and we showed mid-single digits growth. If you think about prior to COVID, we thought about our end markets growing about 4% and our investments in R&D being in higher growth markets and select investments in tuck-in M&A further supplementing that growth. We feel still strong about that path forward to 5% plus growth that you’ve heard me talk about. And of course, what we're doing now is, this year, in fact with Veritor of course, we're going to be nearly double that level. But what we're doing is we're taking a portion of those profits and we're further investing in our growth and innovation fund. We're investing behind further growth opportunities and right, we're continuing that work on accelerating inorganic innovation or our tuck-in M&A. Again, all in the spirit of driving that durability and consistency of our growth profile. So just to summarize that, we feel good about our capabilities, our innovation, and the factors that are in our control as we think about the business going forward.

Thanks so much.

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

Good morning, everybody.

Good morning, Rick.

Nothing else is clear. It's very clear that innovation is a top priority for you. And one element of that as you discussed is R&D spending, and you emphasize strongly the 8% growth there. So my question really is how do we think about R&D going forward? I mean, you've historically or in recent years has been more around that plus or minus 6% of sales range. Are you suggesting that I mean, that we should think about that either as a percentage of sales or growth as meaningfully higher going forward? Just again any perspective there would be great. Thank you.

Let me comment on just at a high level perspective and then turn it to Chris to talk about kind of how we think about it within the P&L. So obviously you're going to see R&D at, what we'll call higher than a normalized level in 2021 because of the reinvestment of the Veritor proceeds. I would expect it to see that. Of course, as I mentioned, that 8% growth that you saw in Q4 were coming off of relatively flat R&D growth over the last five, six years during the synergy window. And so it is – as you mentioned, it's a notable step up and we will be continuing to increase R&D because of not just our base strategy has that in it, but we're using this opportunity to reinvest those Veritor proceeds and leveraging that growth and innovation fund and the way that we're selecting incremental projects through that process, which was a process that was very successful, obviously at BARDA and the John has helped implement here at BD. So as we think about going forward on the P&L beyond what we're going to see in 2021, I'll turn that over to Chris. But you would expect to see R&D growing in line with revenue on a forward basis beyond 2021, at least in that level.

Sure. So what I would say and reemphasize, we clearly are, as you said, focus on innovation, and you would expect R&D to increase. You're absolutely right that we did emphasize that 8% growth year-over-year because we need to get back to that 6% mark. We had fallen below that over the last few years, and it's important that we get back there. I think that is probably a good proxy for 2021 to use because that 6% is off of a much higher revenue base as well. So from a dollar standpoint, that's a pretty big step up. So that's a good proxy to think about is that 6% of revenue going forward.

Thank you. And just last for me. First, just want to make sure I understood. I don't think you said – what assumptions are you making about flu as you give us your first half and fiscal 2021 projections. And just last, Chris, congratulations, leveraged down to 3x. Is that where you both want to be? Where are we heading? Just help us think through at a high level your balance sheet goes as well. Thanks so much.

Yes. Great question. And let me take the first one on flu and then Chris on leverage. So flu is certainly light in the Southern hemisphere, so it's unclear what the impact will be this season. I think for us, COVID obviously overwhelms the whole thing. I mean, we're selling every Veritor test we can make. So the whole balance between are we making Veritor tests or COVID tests. We're selling at this point obviously a lot of COVID tests. We are making flu tests and we are shipping flu tests. But if flu tests aren't being utilized that level, we'll make more COVID tests at least for the first couple of quarters. And then obviously we do have a combination assay in development that we look forward to launching later this year. And again, we'll give more color on that. So I think it is fair to say that, I mean, the reality is, is if people are isolated more and are wearing masks and are doing things, will there be a lighter flu season in the Northern hemisphere as well, logic would say so, but the impacts on our business, I think will be different this year because of the role of COVID and the presence of COVID.

And I would say in terms of the 3x leverages, we're proud that we got down to 3.0x this past quarter on a net basis. And as we've always said, that was the initial commitment, but then we would expect that to continue to float down with increasing EBITDA as we go forward. And so that is still the commitment. We wouldn't want to operate just at the 3x level. We think a company like ours should be in that 2.5-ish kind of range at least. And so we would expect that to float down that way over time.

Thanks so much.

Thanks for the question.

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

Good morning, Jason.

Hey guys. This is [Jerome] for Jason. Thank you for taking the questions. I just wanted to refer back to a slide you guys have in your deck where you point out that procedures that rarely trended above that 100% of normal range. Obviously pretty interesting data set. Just wondering if you had any feedback on whether that would be primarily related to patient willingness or challenges of processing those patients through the hospital. And then I guess, any thoughts on the relative outperformance of the inpatient versus outpatient as it seems to show?

Yes, it's Kristen. Just to comment on that. I mean, we don't have any further data on this. It's just come from the MedMined dataset, we will say just obviously anecdotally just because of the data that we see, which is the data that you see. Certainly, I would say that there has been general apprehensiveness around patients going into care settings in the United States, which this is. This is a dataset of 338 U.S. hospitals. Just to be clear, this is a U.S. dataset. So that likely is influencing some of the trends here.

Maybe Simon as well.

Yes. Thanks, Tom. And again, referring to that survey that we've just completed. Certainly, the majority of physicians we spoke to reflected on patient sentiment being one of the driving factors moving here. And some significant data came out about the oncology patient set, breast cancer and colon patients in particular. The decline in screening that's happened in the early phase of COVID is going to contribute to an extra 36,000 deaths – 33,000 deaths in the U.S. from cancer because of a lack of screening in the early phases of COVID. And so as you walk around different cities in the U.S. and certainly where I live in Rhode Island, you see billboards now with hospitals and practices encouraging patients to go attend. And I think the protocols that they've implemented are certainly establishing great framework for patients to feel comfortable about it. But still, I think hospitals want to do procedures, physicians want to do them, and the big variable here is getting the patients back in for screening and subsequent procedures after that.

Thanks for the questions, Jerome.

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

Good morning, Matt.

Hey. Good morning, Tom and Chris. Thanks for taking the question. So I just wanted to ask you about the forward years. You made some comments before. I guess what I'm wondering is if there is a testing cliff at some point if you have a tough compare, are there things that you would do proactively like a buyback or you phase down some of those investments that you're making now in growth to kind of smooth earnings and help with that transition?

Sure. Great question. And thanks to allow us to add some clarity there. That's exactly the thought process. As we initially looked at this, we thought that it could be very much a cliff from 2021 to 2022, and that one way to mitigate that, that cliff would be to make investments in 2021 that help us drive long-term growth, but also are kind of one-year investment boluses that will kind of mitigate that cliff to a certain extent. That logic still continues as we think about testing extending into 2022 because it wouldn't be characterized, as I said by a cliff, but it certainly the potential for a downward slope. And by making some of these investments in 2021, it would help mitigate that slope to a certain extent. The biggest variable is what that slope looks like. But I think we're very comfortable that we can do that in 2021, and then see where that testing in 2022 is going. So it's looking less like a cliff. Those investments certainly are the kinds of investments that we could make. That would be an expense in 2021, but not only would go away in 2022, but would potentially drive increases in 2022 in earnings by investing in a variety of things, R&D, M&A kind of deals that become more accretive in year two, that kind of thing. So it's exactly what your question implies what we're doing.

Thanks for the question, Matt.

Thanks, Chris. Thanks, Tom. I just had one follow-up on the pricing in testing. Have you actually seen any price pressure yet, or is this just something that you're thinking could happen and so you're being conservative in baking in some potential pressure for Veritor especially?

Yes. It's still latter. We haven't seen the pressure yet. But as Tom mentioned, I think earlier in Q4 the ASP was a bit higher than we had signaled. But we don't think it's prudent to continue to think that that would hold up as other competitors move into the market and the different dynamics that we'll be facing as we go throughout the year. So we had originally signaled the $20 ASP and we think it was – it certainly was higher than that in our Q4. But we think that will be under pressure as we go through, and that is what we have in our guidance assumptions.

Great. Thank you.

And Crystal, we'll take just one more question just given the time, apologies to those left in the queue.

Thank you. Your last question comes from the line of Josh Jennings with Cowen.

Good morning. Josh.

Good morning. Thanks for taking the questions. I was hoping you maybe able to share just the percentage of the revenue base levered to hospital's capital equipment budgets. And if you could talk about just the recovery of the capital franchise maybe hard to parse out lot of moving pieces with Veritor instrument placements and the Alaris ship hold. But anything you can share just about those non-Veritor instrument and Alaris Pumps, but on the – the rest of the capital franchise recovered in fiscal 4Q and the outlook for the chunk of the revenue base in fiscal 2021.

Yes. And this is consistent with what we've said in the past. The percentage of revenue that are focused on capital is in that kind of 15%-ish range. We've said that in the past. And you might imagine where that is. It's in, in areas like KIESTRA and in the M&A side for the most part, a little bit in Biosciences. We have seen pressure on capital during the third quarter, particularly and we have seen that improve. A lot of it has to do with the inability to install during the third quarter because hospitals weren't allowing people to come in that were not patients appropriately. So we did see that pressure, we saw that sequentially improve into Q4. And so we would expect that to continue to improve through 2021 as well, and we don’t – assuming that there's no major resurgence. As we said, our guidance contemplates that assuming and being at normal levels in 2021.

I would say that – as we – we did see some improvements on the capital in the research area, BDB, we saw it across the Board. I’d say dispensing is another area, obviously capital part of that’s operating leases. We still do sell some in capital. But I’d comment, we did see the U.S. dispensing business returned to the modest growth in Q4. And we ended the year with strong net gains and committed contracts with a very strong Q4 in committed contracts and we ended the year net positive there from a competitive perspective as well. So we're seeing good signs there. As you mentioned, it's a little bit difficult with Alaris to fully compare that, but we were seeing the restarting of it, and we’re able to get back into labs now to do those installations, the Kiestra installation. There is a big complex, those are big complex walls, change electricity sockets, but they weren't happening throughout the pandemic that are restarting now.

Great. Thanks for that. Just one follow-up. Just on the – LUTONIX is a small piece of the overall corporate revenue pie. But a little bit more important for the Interventional segment. The VOYAGER PAD Analysis at TCT was probably the most compelling rebuttal of the Katsanos Meta-Analysis. Maybe you could help us or give an update on the state of affairs of the drug-coated balloon market, and relative to the high watermark in 2018. And really just – my questions is just trying to get a sense of with this VOYAGER PAD data out there, the other data sets that have been presented over the last 12 months, I mean, could LUTONIX from where it sits today, become a growth driver for Interventional over the next 12 to 24 months. Thanks for taking the questions.

Yes. Hi, it’s Simon. As I think over the past pre-COVID, certainly we had seen a, I think a significant rebound in our LUTONIX business in or around the 70% to 80% of Q1 2019 numbers, so before Katsanos, and so on. Over the past several months or Q3 was our Q3, that obviously deteriorated quite a lot. But I'd say coming out of September, we were pretty much at the pre-COVID levels, which were in that 70% to 80% of pre-COVID levels. That's all making sense. And again, some recent work that we've done a year ago and I just repeated, a year ago about 80% of physicians that we surveyed were less than comfortable with Paclitaxel safety based on Katsanos and based on the FDA panel and so on and so forth. And now that has flipped. The recent data that we got that has flipped that 80% are now comfortable with Paclitaxel safety and the VOYAGER data, and the data that was provided at panel and so on and so forth. I think that reiterate the safety of Paclitaxel in general and LUTONIX specifically. So it was a significant driver for us in Q4. In the peripheral business, both domestically and in Japan where we've had a really successful launch since we commercialized fully in December. And we continue to get FDA approvals on the 018 platform, and the 300 millimeter balloon platform and the low profile AV platform. So we're pretty pleased with where we are right now on LUTONIX.

Okay. Thanks.

Thank you for the question.

So thanks everyone for the good dialogue this morning. We've shared with you the challenges, opportunities, and successes that shaped Q4 and fiscal 2020, and that are influencing our expectations for the year ahead. One thing we didn't talk about though, were the people of BD, the 70,000 associates around the globe, who rallied around our purpose of advancing the world of health at a time when the need was most urgent. So I want to close with a message to the BD team. Thank you for your focus on our purpose, for your resilience when it came to executing our most critical priorities and your willingness to embrace bold new ideas, you delivered a strong Q4 that exceeded our expectations to finish a trying year on a high note. By building on the bold actions we took in FY2020, and by continuing to execute our long-term strategy to grow, simplifying and empower, we will address healthcare's immediate needs while bringing more innovative new solutions that will support our growth across all three of our segments. In FY2021, there will be no shortage of opportunities for you to think boldly make a meaningful impact and change more lives for the better. On behalf of the entire executive team, I want to say thank you to BD associates around the world for your efforts, sacrifices, and achievements over the past year. You showed the world and each other just how vital BD is to the delivery of healthcare. Thanks again, and let's keep going forward.

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