Hello, and welcome to BD's Second Fiscal Quarter 2021 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through May 13, 2021 on the Investors page of the bd.com website or by phone at (855) 859-2056 for domestic calls and area code (404) 537-3406 for international calls using confirmation number 6334356. I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment. Beginning today's call is Ms. Kristen Stewart, Senior Vice President of Strategy and Investor Relations. Ms. Stewart, you may begin.

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

Thanks Kristen. Good morning everyone and thank you for joining us. Today we will provide an update on how we are executing on creating value for our stakeholders through our BD 2025 strategy. We have a lot of exciting updates for you, so let's jump right in. Our second quarter results came in better than expected and we delivered strong revenue and EPS growth. We are very pleased with the continued momentum in our core business, and therefore, based on our first half results and our projections for the second half we are reaffirming our fiscal 2021 guidance. We are making steady progress on each of our growth initiatives, which include very purposely shifting our investments and portfolio into higher-growth categories and shifting our weighted average market growth rate over time. We are advancing our product pipeline as well as our tuck-in M&A strategy, which now includes making selective investments in earlier stage and potentially disruptive technologies. And this morning we announced our intention to spin-off our Diabetes Care businesses into a separate public company. We see this planned spin as a significant value-creating opportunity for all stakeholders for our patients, customers, associates and shareholders. As an independent public company, we believe the diabetes business can leverage its global leadership position and unleash its growth potential in this attractive market category through the more efficient allocation of its own capital. For RemainCo BD, this transaction allows us to focus on our prioritized core businesses. We expect this transaction to strengthen our mid single-digit revenue and double-digit total return growth profile. We expect the spin to be completed in the first half of calendar year 2022 subject to customary closing conditions, including final approval by the BD Board of Directors and the SEC declaring our registration statement effective. We are progressing…

Thanks Tom, and hello to everyone listening to today's call. I'm incredibly excited to embark on this journey. I see a tremendous opportunity to build shareholder value and advance care for patients who suffer from diabetes. I'm also very humbled, to be leading this amazing organization. The Diabetes Care business has a long history of caring for patients living with the disease, dating back to BD's introduction of the world's first specialized insulin syringe, almost 100 years ago in 1924. Since then, BD has played a leading role in the delivery of insulin, including helping to drive the adoption of insulin pens, which utilize our pen needle technology, as a leading modality for insulin injection. Our Diabetes Care business now reaches more diabetic patients, than any other medical device company in the world today. We manufacture eight billion devices per year and are the global leader in insulin injection devices. As Tom mentioned earlier, the business generated nearly $1.1 billion in revenue in fiscal 2020, derived from the sale of insulin injection devices such as, pen needles and insulin syringes as well as other accessories. One factor that attracted me to this opportunity was the global breadth of the business with 48% of the revenues generated outside the United States, including 17% in emerging markets. And why is this important? As you can see on slide 21, diabetes is a growing chronic condition across the globe, with some of the higher prevalence rates expected to be in the emerging market regions. The International Diabetes Federation estimates that the number of adults living with diabetes is expected to grow from 463 million in 2019 to 578 million in 2030 and 700 million by 2045. Most of these patients will likely continue to rely on traditional injection devices for their insulin needs.…

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

Thanks Tom. And before I turn to the results, let me also share my enthusiasm for the spin-off of our Diabetes Care business. I see the transaction is a win-win for all stakeholders, our shareholders, our employees, our customers and our patients. I'm confident that we have the right leadership to navigate NewCo on this exciting journey ahead. Now let me turn to the second quarter financial results. Slide 27 summarizes our high-level revenue performance. Our revenues came in just over $4.9 billion, up 15.4% on a reported basis and up 12.2% on an FX-neutral basis. As Tom mentioned, we were very pleased with our results. Our core segment results excluding COVID-19 diagnostic testings were ahead of our expectations across all segments. Now turning to slide 28. Our medical segment delivered 4.7% FX-neutral revenue growth led by our market leading BD Pharmaceutical Solutions Systems business, which continues to deliver robust revenue growth of nearly 10%. We are proceeding with our capacity expansion to support the future growth of this business unit. MDS grew a solid 8.1%, which included $43 million from COVID-19 vaccination injection device revenues. We also benefited from higher patient acuity and higher utilization internationally particularly in China where we anniversaried the impact of COVID-19. Now turning to slide 29. Our Life Science segment delivered revenue growth of nearly 38% on an FX neutral basis. Our COVID-19 diagnostic testing revenues totaled $480 million and are included in our Integrated Diagnostics Solutions business. While BD Veritor ASPs were as expected in the low to mid-teens, the market's overall demand for symptomatic COVID diagnostic testing was lower. Looking at our IDS business excluding COVID testing, our routine diagnostic testing has not yet fully recovered to pre-COVID-19 levels. There was virtually no traditional flu this year, so we did not have…

The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Bob Hopkins with Bank of America.

Hi, Bob. Good morning.

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

Yeah. On that first one Bob, we'll be clearer on that as we do the carve-out financial statement. So you can expect to see that going forward. But as you know, we don't break it out at that level at the operating basis – on an ongoing basis. But as we do carve-outs that will be clearer.

Any rough sense though just as I'm sure it will be –

Too early to say right now as we're still going through the midst of that.

Okay.

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

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

Yes. So as you can see this year, we're spending and investing to drive future growth from the Veritor proceeds. And so that will be something that does not reoccur next year so you will see a lift. And clearly, you would get a lift from Alaris coming back because that was a drag on our operating margins as well. And I would also add the – in terms of FX you see some FX pressure that we pointed out this year. We'll continue to see some of that rolling through our inventory for the remainder of this year. That should turn around next year as well.

Any sense for what that roughly sums to though just directionally?

Yeah. We're not going to give 2022 guidance this early. A lot of that will be impacted as you know by what happens to COVID testing. And we're pulling all the levers we can to make COVID testing more sustainable as we think about the combined COVID and flu assay and we're also – we're working on the at-home test. So that should have some ability to have sustainability in COVID testing. But clearly, it will come down. And where that goes will have a big impact on operating margins and gross margins in total as you would know.

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

Yes. Thanks.

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

Hey. Good morning, Robbie.

Good morning, Robbie.

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

Yes. I can start with maybe just some comments on Medical, and then turn it to Simon on Interventional. So certainly, in Medical you see a couple of things happening. One is we see continued durable growth you saw last year in Pharmaceutical Systems. You saw it again in the quarter that they were in 8% plus I think last year growth, and we see that durably higher than average company growth is my intention there. And you saw us obviously communicate I think, it was last quarter or the quarter before, over $1 billion, $1.2 billion of incremental investment, capital investment in that business to support the long-term growth outlook. So that's number one. We also reaffirm that we expect -- we are in discussions and we have collaborations going on with several pharma companies about putting COVID vaccines in prefilled syringes. So again, another opportunity as we think about that business long-term. In MDS, we also commented that I remember, a year ago or less than a year ago, we were talking about that we could do up to one billion syringes to help in the COVID vaccination. We now -- today announced, we have orders -- commitments in hand for 1.7 billion syringes that spans well into FY 2022. And so we see, while we were wondering was there going to be a cliff of syringes into 2022, we see that demand in our MDS business as being durable into 2022. And certainly, as we think about potential even further demand, from things like booster shots, that would just make that demand even more durable. Overall, that business continues to do well in terms of taking share in the catheter space as well as a series of new innovations. They obviously had had some benefits from higher acuity patients in the ICU, which are maybe using products like midlines or PICCs, which have higher ASPs than peripheral catheters for shorter-time stays, but there's strong durable trends there I think in MDS. And obviously MMS, we look forward with the submission of the 510(k) to have bigger growth opportunities as we look ahead to 2022. I think I'll turn it over to Simon on BDI. But I would say what you saw is that the impact from the pandemic was very minimal in the first two months of the quarter last year for BDI. And so, I think you see just that comparable happening given our product mix. And then, we did see strong trajectory and uptake in March and we saw that continue into April. Simon.

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

I would just add two comments. In terms of Interventional it actually exceeded our expectations in the quarter, because we had seen January and the resurgence from COVID and we had seen that going into the February call. And that did turn around in March and happy to see it turn around in April. But I'd also take a step back in terms of the core momentum and point to the fact that we see that improving. It's helping us with the outlook for the remainder of this year. And I would also point to the fact that we showed that confidence in what we said about 2022 by moving the core guidance for 2022 from low single to mid digits to solid mid-single digits. And that's reflective of the momentum across the business that we see as sustainable.

Great. And I realize you're not going to be able to comment on COVID testing or Alaris sales necessarily for next year, but maybe if we think about the balance of fiscal 2021 here. I just want to make sure I have some of the data points right. One is that, at the high end of Veritor testing, that implies another $250 million or so in each of fiscal 3Q and 4Q. And as we think about a second half approval next year for Alaris, just maybe remind everyone about the process of how long it takes from order to delivery to booking revenue, just so we can appropriately scale up our sales and the models for next year? Thanks.

Just so, Robbie, on the question around Veritor, just as a reminder, we've always used, and emphasized the word, towards the high end, not the high end, which is what you just calculated. So if you -- you're maybe a little bit less per quarter than what you said to get towards the high end of the range, right? But to your point, we're almost -- we ended the first two quarters at almost $1 billion of revenue on Veritor. So you could think, we're on basically roughly two-thirds of the way through that number halfway through the year, which gives us confidence in reiterating that towards the high end of that range. And as you said, it's maybe a little bit less than what you indicated, would be split by quarter there. On the Alaris, we do have a backlog of orders that we would be able to ship initially. And then as we think about upgrades, those are shorter install times than, let's say, Pyxis, so it would be a couple of months typically in that space, from an order to implementation for Alaris.

Great. Thanks.

Yes.

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

Good morning, Vijay.

Hey, guys.

Good morning.

Good morning, Chris. Good morning, Tom. Thanks for taking my question. One -- actually, a couple on the spin itself. I guess, the base business is now going to accelerate by 30 basis points. So if I look at the prior guidance of 5% to 6% top line, are we now looking at perhaps the base being north of 5.5%? And on the spinco I heard some comments on patch pump. What should the growth rate for spinco be? Is that going to accelerate the north of 5%?

Yes. Go ahead, Chris, take that one.

Yes. Let me take the first one. So you're absolutely right. We put in that, there would be growth of 30 basis points. And just think of that as a $1 billion or so of revenue, which has been relatively flattish compared to the rest of the $17 billion growing that mid-single digits. If you do that math, you can see the drag that that has of 30 basis points. And I would remind you that, our guidance is a recurring mid-single-digit kind of growth rate and so that 30 basis points gives us greater confidence in the ability to achieve that on an ongoing regular sustainable basis. So that's a positive. We haven't addressed the growth rate of spinco going forward. You heard Dev say that his emphasis is on growth. And we think that, being a separate public company, it unleashes that growth potential, because right now spinco would be fighting or diabetes care within BD is fighting for investment against other items that we are -- feel more strategic. So as a separate company, it can invest, whether that is internally more investment in R&D or through M&A, it can do that. So more to come on the growth profile of spinco as a separate entity, but that's kind of directionally the way to think about it.

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

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

Yes. So as we said this strengthens -- the spin actually strengthens and gives us more confidence in both the top-line and the bottom-line. And that will be clear as we talk about the operating margins as we said from the SpinCo. So this gives us more confidence in that and so it supports that effort.

There is no change from prior LRP correct?

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

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

That’s helpful. Thanks, guys.

Okay.

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

Good morning, Larry.

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

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

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

Sure. So, number one is that the core is actually accelerating and so the growth rate in the core will be ramping and we're now saying we'll end the year at mid-single digits in the core. So, a couple of things going on as we think about and contemplate the remainder of 2021. So, number one that core momentum is increasing. We did mention that Veritor is still within that towards the high end of that 1% to 1.5% range. But it has moderated slightly as volumes have come down a bit from the last time we gave guidance. And so that offsets that a little bit. And when you're looking at the pure dollars it's that Veritor testing and the COVID testing that's impacting the pure dollars. So, the bottom-line is -- the good news is the momentum is in the core moderating slightly on COVID testing as we look out the second half of the year. You put all those together and we're right where we said we would be in terms of both the topline and the bottom-line. On the bottom-line, we're also seeing a little bit of an impact on the profitability of Veritor as the prices begin to move more rapidly towards the typical flu pricing. And so that's having an impact and that's being offset in the second half of the year. So, we're still within the guidance range on the top and the bottom.

And keep in mind Larry too in Q3 there is that large amount of revenues associated with medical necessity in MMS so that does have a little bit of upticks--

On a year-on-year basis. Last year there's a very large -- yes.

And stronger revenues for the second half of the year in MMS too for the European revenues too for pumps.

That's when pandemic was in it's in its peak. Yes.

Thanks for the question. Next question.

Your next question will come from the line of Richard Newitter with SVB Leerink.

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

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

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

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

Thank you very much.

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

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

Sure. I'll turn it over to Chris to share some thoughts on the -- that element that there certainly has been a drag and we've been investing. As we've shared we have a team of over 200 people who have been working on that submission. They'll continue to be engaged in responding to any FDA questions. And obviously, we'll pivot them towards innovation opportunities as we move forward beyond that as well. But maybe just another point as you think about the timing of it, I can give a little bit more color is, if you look back right just factually look back and say over the last few years, how long has the FDA taken to clear pumps. And the date -- the clearance time ranges from 161 days to 412 days. So those are the facts. So call it 5.5 to 14 months. So that's a little bit of the logic. While we're not predicting the FDA time line right now, clearly the timing of approval within FY 2022 will have a meaningful impact in the answer to your question in terms of how we see the recovery and how much that contributes in 2022. And again, as I mentioned before, as we get further in the review process we'll provide updates as we can. But right now we're saying it will be prudent based on again historical clearance timings as I just described. So think about the clearance during the second half of our fiscal year 2022. So Chris, maybe any comments on the drag that it's been...

Yeah. Just to give a little bit on the revenues the -- in last year, we had medical necessity revenues of about $130 million or thereabouts. And don't forget, we had some non-medical necessity earlier in the year. So you're thinking about $200 million of revenues last year. The run rate prior to that was about $450 million thereabouts. So you could see that step down. And then this year, we see less medical necessity a little bit over $60 million or so in the first half of the year. We see that tailing off in the second half of the year. So that gives you some things to work with to show that there is certainly a drag on growth rate from the step down offset by some of the medical necessity revenues, but certainly a step down in both 2020 and 2021. As you think about next year, what we were giving you a sense of is that we think it's prudent to model that as during the second half of the year. It could happen sooner, we'll work to try to make it happen sooner, but it's prudent to think about it in the second half of the year. And we did point to the fact that there is some ramping that will happen. The good news is that we'll get the full year benefit of that coming back to us in FY 2023 regardless. But we do expect to see some of that ramping in the second half of the year.

Great. Thank you, Josh.

Thanks a lot. Pretty helpful.

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

Hey, Matt. Good morning.

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

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

Okay, okay. That's helpful. And then I want to ask one on the guidance slide that you have here saying that, you're assuming that the acute care-oriented businesses do not return to pre-COVID levels. I guess can you talk about how close they're going to get to that, or when you think they will return to pre-COVID levels, or just recent trends it sounds like April was a continuation of March. Anything like that to help us kind of triangulate how the recovery is expected to progress.

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

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

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

Very good.

Thank you, guys.

Thanks for the question, Matt

Your next question will come from the line of Matthew Mishan with KeyBanc.

Hi, Matthew. Good morning.

Good morning and thank you for squeezing me in. First just a quick clarification. The revenue growth of mid-single digits for FY 2022 excluding Alaris and testing, obviously testing is like the negative. But is Alaris a good guy or a bad guy for next year? Because I think first half would be less medical necessity but then you have the timing of the FDA.

So we would expect that to be a net good guy.

Yes, a net good guy. So when we're doing that we're saying specifically excluding the COVID testing, which will get more clarity on as we go forward. And excluding the come back of the 510(k) from Alaris. So that would be incremental to that mid-single-digit core growth.

Yes. We will continue of course to ship under medical necessity for those customers that qualify. But once we get the 510(k), which again, will have more clarity on the exact timing of that, which will be meaningful. To answer how much of that will fall in 2022, we certainly expect a full year in 2023. But stay tuned on that but in any situation we would expect it to be a positive.

Okay. And then just your thoughts on Alaris' impact on the overall portfolio. Think of it like a Pyxis. Did it have a negative impact on the Pyxis? And when it comes back will it have a broader portfolio impact outside of just Alaris?

Yes. We have seen no impact. Of course, the customers have very, very broadly stuck with Alaris. Alaris is the market-leading product for a reason. We've talked about the percentage of infusions, particularly in the US that happened with Alaris and it's a tremendous number. And customers – we do expect the majority of customers to upgrade to the new product as we end up launching that, hopefully in 2022, as we noted is our expectation. So because of that we don't see any impact on Pyxis. Obviously, there is a great value that one gets from having the full BD enterprise medication management suite that allows you to do things like diversion analytics and other parts of our HealthSight platform to use data from not only dispensing but infusion, as well as our software that's in the central pharmacy. And so all of those things remain the case going forward and we think customers will continue to see strong value in that.

Thank you very much.

Operator, we'll take one last question.

Our final question will come from the line of Jason Bednar with Piper Sandler.

Good morning, Jason.

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

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

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

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

All right. Thanks so much.

Okay. Thank you, Jason.

I will now turn the call back over to Tom Polen for closing remarks.

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

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