Becton, Dickinson and Co. (BD) (NYSE:BDX) reported revenue of $4.23 billion for the first quarter of fiscal year 2020, ended Dec. 31, up 1.6% from the same period a year ago. Revenue grew 2.5% on a currency-neutral basis. However, an unexpected regulatory hurdle for its Alaris infusion pumps caused the Franklin Lakes, N.J.-based company to lower its 2020 revenue and earnings guidance.

In a Feb. 6 earnings call, Thomas Polen, BD’s president and CEO, said the U.S. FDA informed the company just three days earlier that it would need to submit a comprehensive 510(k) covering all Alaris software enhancements, recall remediation updates and modifications that were made over time to the Alaris system. The request follows a consent decree tied to a recall of Alaris pumps in July 2019 and came as a surprise to the company, which had been planning to release software updates in a phased approach.

Polen said the company is focused now on submitting the 510(k) during the fourth quarter of FY 2020. In the meantime, it has provided guidance to customers on how to mitigate potential risk until the software remediation is completed. The company is also taking steps to ensure that existing customers have access to Alaris systems under medical necessity.

Faced with remediation efforts and lost sales tied to Alaris, BD officials now expect 2020 revenue growth of 1.5% to 2.5%, down from a previous projection of 4% to 4.5%.

“Resetting expectations is certainly not how I want to start my first call as CEO,” said Polen, who assumed the reins of the company just last week. “Based on this situation, we’ve reduced our guidance range by approximately $400 million in revenue and $.60 in EPS for fiscal year ’20.”

BD stock took a sharp dive, dropping more than 13%, or nearly $33, to $245.05 in the morning on Feb. 6 after the announcement. At 4 p.m., it had rebounded to $252.25.

‘Bit of turbulence’

William Blair analysts saw no cause for alarm, calling Alaris a one-off setback. “[T]his update seems to be more of a bit of turbulence in the current year than any change in altitude for the company as we would expect growth to rebound once the team moves on from this headwind,” they wrote in a note. “Therefore, we continue to recommend purchase and believe the stock sell-off this morning represents a compelling entry point or opportunity to round out positions.”

During the quarter, worldwide revenue in BD’s life sciences segment grew 6.4% to $1.12 billion, fueled by solid performances in the biosciences and diagnostic systems units. A stronger flu season vis à vis last year helped to boost revenue in diagnostic systems. Christopher Reidy, BD’s chief financial officer, cited strong growth in that unit across point-of-care, flu, molecular diagnostic platforms and microbiology solutions, as well as the women’s health and cancer portfolio. That includes 20% growth in the BD Max molecular testing platform and early positive feedback on BD Cor.

The company rolled out the BD Cor molecular diagnostics system last summer in Europe, with an initial assay for the detection of human papillomavirus – a new market for BD. “We’re still very early in the launch, but we feel really good about the progress we’ve made so far, having already signed 10 high-value volume accounts in Q1,” Polen said.

Coronavirus headwinds

Meanwhile, BD is anticipating a $20 million to $30 million headwind from the coronavirus 2019-nCoV that originated in Wuhan, China, as fewer people seek standard care in hospitals. On the upside, the company has filled “several urgent orders” for additional BD Max systems to aid in coronavirus testing, he said.

From a supply chain perspective, BD is expecting little if any disruption, though that could change with the uncertainty of the situation. All but 5% of products manufactured in China are sold and used in the country, and its inventory of items for export is sufficient to meet demand.

In the interventional segment, revenue increased 4.4% year over year to $1.01 billion, representing growth across the surgery, urology and critical care and peripheral intervention units. “DCB-related revenues were slightly better than planned as the trend we have been seeing since the FDA letter has improved,” Polen said, referring to a March 2019 warning letter concerning increased long-term mortality with its Lutonix drug-coated balloon.

The company attributed a 2.1% drop in medical segment revenue, to $2.09 billion, to declines in medication management and diabetes care revenue, as well as flat revenue in medication delivery systems, but said the result also reflects growth in its pharmaceutical systems unit.

A shift in FDA expectations?

Questions about Alaris dominated the earnings call. Merrill Lynch analyst Robert Hopkins asked whether the situation pointed to a broader change in FDA requirements for pumps. “I’m struggling to understand kind of how you got caught off guard and how this went from sort of a software upgrade to something much more significant,” he said.

While he couldn’t comment on other companies, Polen said it is not unprecedented for the agency to require an updated 510(k) when a product has evolved over time. “Each of those individual changes didn’t require a 510(k) process …[but] when the FDA looks back at it over a five-, 10-year period, they say, wait a minute, you actually need to do a 510(k) given that series of changes that have been made.”

Polen declined to speculate on a time frame for FDA clearance of the package of Alaris updates, but said work on the 510(k) is already underway.

Despite the shadow cast by the Alaris news, BD beat Street expectations for the quarter – clocking in at $4.23 billion vs. $4.18 billion.

“F1Q EPS was $2.65, matching our estimate and at the top end of management’s guidance range of $2.55-$2.65,” Cowen’s Joshua Jennings wrote in a research note. “This result was $0.02 better than the consensus forecast. Gross margin of 56.5% came in ahead of both our 56.4% estimate and the Street’s 56.1% forecast.”

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