Becton, Dickinson and Company (BDX) Q3 2010 Earnings Report, Transcript and Summary

Hello, and welcome to BD's Third Fiscal Quarter 2010 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday, August 5, 2010, on the Investors page of the bd.com website or by phone at (800) 642-1687 for domestic calls and area code (706) 645-9291 for international calls, using conference ID 85449987. [Operator Instructions] Beginning today's call is Ms. Sherry Bertner. Ms. Bertner, you may begin.

Thank you, Jackie. Good morning, everyone, and thank you for joining us to review our third fiscal quarter results. As we referenced in our press release this morning, we are presenting a set of slides to accompany our remarks on this call. The slide presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our third fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and the slide presentation. A copy of the release, including the financial schedules, is posted on the bd.com website. Unless otherwise noted, all of the growth rates expressed in our remarks will be on a foreign currency-neutral basis. The accompanying slides and financial tables also provide as-reported growth rates. Starting us off this morning is Edward J. Ludwig, Chairman and Chief Executive Officer. Also joining us are Vince Forlenza, President and Chief Operating Officer; David Elkins, Executive Vice President and Chief Financial Officer; BD Executive Vice Presidents, Gary Cohen and Bill Kozy; as well as Bill Rhodes, President of BD Biosciences; and Philippe Jacon, President of Diagnostic Systems. It is now my pleasure to turn the call over to Ed.

Thank you, Sherry, and good morning, everyone. Today, I'd like to begin our presentation with a few remarks regarding BD's solid third quarter, and then spend some time on discussing our current view of the marketplace and BD's opportunities within that context. I'll also discuss our strong commitment to delivering shareholder value and some of the things we're doing to enhance shareholder returns now and in the future. It is clear that we're managing through a very challenging time for the global economy and for the healthcare industry segments in which we participate. We recognize that we're not immune to these challenges, and we are committed to aggressively managing the company to deliver strong bottom line growth while continuing to invest for the future. We expect to be a steady ship through these choppy waters based on a combination of actions we're taking. So what are these actions? First, we will continue to drive operational efficiency initiatives which are aimed at gross profit improvements such as ReLoCo. Next, we will also reduce G&A costs by streamlining our administrative processes and with the implementation of our SAP upgrade program EVEREST. While EVEREST will be an investment up front, it will deliver significant cost savings longer term. Ultimately, our strong product platforms and planned product extensions, along with our focused execution in important emerging markets, will help us accelerate revenue growth. We'll also use our strong cash flow to accelerate share repurchases. Our steadfast commitment to achieving top line and bottom line growth is a key message I want to leave with you all this morning. So now let me comment on the quarter which was a solid one for BD. We delivered EPS from continuing operations of $1.29 per diluted share, which was in-line with company expectations. Importantly, we saw a good performance across the businesses, with all three segments contributing bottom line results consistent with expectations. That being said, as you all know, the quarter was not without significant macroeconomic headwinds for our industry. Globally, spending on healthcare products continue to be challenged. Hospital spending remains at muted levels and lab testing has moderated. Doctor visits in the U.S. continue to show declines due to high unemployment. And the increase in syringe and diagnostic testing volumes from the H1N1 virus in 2009 have not been sustained in 2010. These factors are global but have been even more pronounced in regions, such as the European Union, where they continue to sort through a number of difficult issues. We anticipated these market conditions in April when we provided our guidance for fiscal 2010. However, as we have assessed our markets during the third quarter, we now believe that evidence suggests that these conditions are likely to persist in the near term. Despite these global macroeconomic conditions, we expect to deliver bottom line FX-neutral earnings growth of 9% for fiscal 2010, which is in-line with our previously communicated range of 8% to 10% in spite of a higher tax rate than we had originally forecasted. Regarding the top line, as we continue to face these macroeconomic spending challenges, we see that fiscal 2010 FX-neutral revenue growth will come in at around 5% rather than the 6% we guided to in our April call. We're confident that the fundamental business strategy we're following is a sound one that will enable us to deliver annual EPS growth over the next three years of 10% to 12% FX-neutral from continuing operations, with revenue expectations of an average of 6% over the same three-year time horizon. This is slightly muted from our prior 7% average three-year growth that we had been discussing. Additionally, we expect that our top line during this interval will improve in the later part of the period as the global economy improves and very importantly, as our R&D programs, new product launches and line extensions come through fruition, again, in the later part of the next three years. We're confident in our ability to deliver consistent bottom line growth due to a number of factors, including our strong product pipeline and our operational excellence programs, which we continue to expect to drive 50 basis points of operating income improvement annually over the next three years, with the programs I mentioned in the beginning of my remarks. Additionally, the company remains committed to efficient utilization of our strong cash flow. As a component of that, for fiscal year 2010, we are raising our guidance for share repurchases to $700 million, and we expect that we will execute approximately $600 million in share repurchases in 2011 next year. So it's $700 million this year and $600 million next year in share repurchases. Before I conclude, I would like to express my congratulations to Vince Forlenza regarding the announcement we issued today. At the board meeting this week, the board elected to add the title of Chief Operating Officer to the title of President, which he now holds. This is a well-deserved recognition of Vince's execution against the additional duties that he has taken on over the last two years. It is also a recognition of the key role he continues to play in developing and implementing BD's strategy and vision and the great leadership and commitment Vince has demonstrated throughout his career at BD. As President since January 1, 2009, Vince has overseen BD's three business segments, international and the quality function. In January of this year, Vince also assumed responsibility for the Integrated Global Supply Chain and the IT functions. So I'm now delighted to turn the call over to our President and Chief Operating Officer, Vince Forlenza.

Thank you, Ed, and good morning, everyone. Starting with Slide 5, I'd like to briefly highlight some of our third quarter results. As Ed mentioned in his remarks, our third quarter results were in-line with the company's expectations. Revenues came in at 3.9% currency neutral, which was impacted by a tough comparison to fiscal year 2009 pandemic flu purchases and slowed by softness in the BD Diagnostics segment. BD Medical revenue growth was primarily driven by Diabetes Care products, which were partially offset by the H1N1 flu pandemic impact of about one percentage point and softer Pharmaceutical Systems revenue due to timing of orders in the quarter. BD Diagnostics was impacted by the economic pressures in the U.S., resulting in reduced physician office visits and reduced diagnostic volumes in Europe. The comparison to prior year is also negatively impacted by 1.6 percentage points due to the H1N1 flu pandemic in fiscal year 2009. We experienced an improvement in our Biosciences segment, primarily driven by Cell Analysis, instrument and reagent sales in the U.S., available supplemental funding in Japan and a favorable comparison versus the prior year. We're also pleased with the results in our emerging markets experiencing double-digit top line growth. We believe the company's performance has fared well in a challenging global economy and in the healthcare industry. Based on our results year-to-date, we are confident that we're able to achieve bottom line growth of about 9% currency neutral, which is in-line with our previous range of 8% to 10% for the full fiscal year 2010. Moving to Slide 6, you'll see that the company experienced top line growth of 3.9% on a currency-neutral basis for the third quarter. Adjusted EPS decreased by 0.8% to $1.29, however, on a currency-neutral basis, increased by 6.9%. Our nine-month year-to-date results reflect solid revenue growth of 6.5% on a currency-neutral basis and adjusted EPS growth of 11.4% currency neutral. Now let's move on to Slide 7, which looks at our guidance for fiscal 2010. As Ed mentioned earlier in his remarks, we have modified our revenue guidance to 6% currency neutral. Our adjusted EPS guidance of about 3% or about 9% on a currency-neutral basis remains in line with our previously communicated range. On Slide 8, we will review our revenue guidance by segment. For the Medical segment, currency-neutral growth remains unchanged at about 6%. For the Diagnostics segment, we are modifying our revenue growth to about 4% on a currency-neutral basis due to reduced diagnostic testing and physician visits. For our Bioscience segment, we expect revenues to be approximately 6% currency neutral. Now I'll turn the call over to David to review our financial results.

Thank you, Vince, and good morning, everybody. On Slide 10, we begin a review of our revenue growth by segment. First, you can see total top line growth for the company in the quarter was 3.9% currency neutral. For the nine-month period, the company grew 6 1/2% currency neutral. BD Medical third quarter revenues increased 2.7% currency neutral. Excluding the impact of pandemic sales, revenue growth within the quarter was up 3.4%. As Vince mentioned earlier, the growth in this segment was mainly driven by the Diabetes Care businesses with continued strong sales of pen needles. Our pen needle growth was led by the successful launch of our new Nano product, the world's smallest pen needle, along with strong growth in emerging markets. Pharmaceutical Systems revenue in the quarter was flat mainly due to the timing of orders in the quarter. For the nine-month period, the Medical segment grew 7.6% on a currency-neutral basis. Excluding the impact of pandemic sales, revenue growth for the nine-month period was up 5.2%. Revenues in the BD Diagnostics segment grew 2% currency neutral. Diagnostic Systems business growth was flat year-over-year on a currency-neutral basis, partly due to the H1N1 impact in quarter three fiscal year 2009 and the soft demand in the U.S. and Western Europe due to lower diagnostic testing. Partially offsetting these testing declines is a strong growth in our GeneOhm platform of 14% in the quarter. Our Preanalytical Systems business grew 3.9% in the quarter, with strong growth in emerging markets offset lower lab testing volumes in the U.S. For the nine-month period, the Diagnostics segment grew 4.3%. BD Biosciences' growth 11.6% currency neutral due to the reasons Vince mentioned earlier in his remarks. In addition, the Advanced Bioprocessing business also experienced very strong double-digit growth in the U.S., primarily due to accelerated timing of large customer order. For the nine-month period, the Biosciences segment grew 7.3%. Now I'll turn to Slide 11. We'd like to walk you through the impact of the pandemic flu on the quarterly revenue growth of our business in fiscal year 2010. In the first half of the year, pandemic flu provided a benefit to our revenue growth of 2.4%, which is mainly in the U.S. For the second half of the fiscal year, we expect the pandemic flu to result in a 2% negative impact to our revenue growth due to the international pandemic revenues that we recorded in the second half of fiscal year 2009. Adjusting for the effect of pandemic-related orders, the underlying growth is consistent with the full year growth rate of about 5% to 6% currency neutral. Now turning to Slide 12, we'll look at our geographic revenue results. On an as-reported basis, in the third quarter, BD's U.S. revenues increased 3%. U.S. Medical revenues increased 1% year-over-year. U.S. sales of diagnostics products increased 1.4%, impacted by reduced physician offices visits and lower diagnostic testing. Biosciences revenues in the U.S. increased 14.8% due to strong revenue growth in the Cell Analysis business, led by research, instruments and reagents. International revenues grew 4.6% on a currency-neutral basis in the third quarter, with soft Western Europe being offset by growth at Asia-Pacific and Latin America. Growth in our Medical segment at 3.9% was driven by strong emerging market growth, partially offset by timing in orders with our Pharmaceutical Systems business. The Diagnostics segment grew 2.7% currency neutral, driven by growth in Preanalytical System's emerging markets, partially offset by Western Europe. Biosciences grew at about 10% currency neutral mainly driven by strong growth in Japan. For the nine-month period, reported U.S. revenues were 6.3% with Medical increasing 7 1/2%, Diagnostics increasing 4% and Biosciences growing 8%. International revenues were strong in our Medical segment with underlying growth at 7.6% currency neutral. The Diagnostics segment grew at 4.6% and Biosciences grew at 6.8% currency neutral. Moving on to global safety on Slide 13. Sales grew 3.3% on a currency-neutral basis to $436 million in the quarter. This was comprised of a 1.6% growth rate in the U.S. and an underlying international growth rate of 6 1/2%, but the Medical and Diagnostics segments are being negatively affected by previous pandemic orders. For the nine-month period, underlying growth was 6.6% on a currency-neutral basis, which is a combination of the 5.9% growth rate in the U.S. and an underlying growth rate international safety of about 8% on a currency-neutral basis. Next, I will review the third quarter revenue growth. Looking at the third quarter revenue growth, gains from our underlying performance of 3.9% and the 0.9% favorable impact of currency translation were offset in part by the 1.6% unfavorable impact from our hedging program. Moving to Slide 15, gross margin declined 100 basis points year-over-year. Gross margin performance, however, improved 20 basis points, mainly driven by strong favorable product mix that was partially offset by increased resins and start-up costs of our ReLoCo program and pension costs. This favorable performance was more than offset by the unfavorable currency translation and unfavorable hedging costs. Slide 16 recaps the third quarter income statement, highlights our foreign currency-neutral results. As discussed earlier, third quarter revenue growth was 3.9% and gross profit grew faster at 4.2%. Moving down the income statement, SSG&A increased 3% currency neutral, which is 100 basis point improvement over the prior year as a percent of revenue. This reduction was primarily driven by a decrease in our deferred compensation plan expenses, reflecting lower returns that reduces our SSG&A expense and correspondingly is offset by a loss on the interest income line. Additionally, we continue to place tight controls on our G&A spending that were able to more than offset the unfavorable pension and EVEREST expense we've been incurring. R&D almost increased 10% or 40 basis points as a percent of revenue over the prior period. The acceleration is in-line with our expectation, which continues to increase in the second half of the fiscal year due to funding of key strategic initiatives. Our operating income increased 10.2% as a result of the improved operating margins on a currency-neutral basis. I would also like to point out that the tax rate for the quarter is higher than prior year due to the absence of the R&D tax credit and the unfavorable impact related to geographic mix of income. In our full year guidance, we have increased the tax rate to 28.5% to reflect this unfavorable mix. Moving to Slide 17, year-to-date revenue growth increased 7.2%. Performance and currency contributed 6 1/2% and 3.3%, respectfully, which was partially offset by the hedge with a 2.6% unfavorable impact. Looking at our gross margin change year-over-year on Slide 18, we experienced a 90 basis-point decline as a percent of revenue. Favorable performance of 50 basis points reflects favorable product mix, partially offset by unfavorable startup and pension costs. This favorable performance was more than offset by the currency and hedging costs. Slide 19 recaps the nine-month year-to-date income statement, highlights our foreign currency-neutral results. Revenue growth was 6 1/2% currency neutral and gross profit was 7.7%. Moving down the income statement, the SSG&A increased about 3% currency neutral impacted by EVEREST and our pension costs. For the nine-month period, R&D expense increased 4.3%, which is lower than what we expect for the full year. We expect R&D spends to accelerate in the fourth quarter. Operating income increased 13.1% as a result of our strong gross margin and controlled SSG&A expenses. Moving to slide 20 to recap our results for the nine-month period. We are pleased with the results in a difficult macroeconomic environment. We experienced lower-than-expected revenue growth which is mainly due to the euro weakness and lower hospital admissions and lab testing. We expect slightly higher operating margins reflecting the gross margin improvement and operational excellence programs. Earnings are in-line with expectations, and we are committed to delivering about 9% adjusted EPS growth for the full fiscal year 2010 despite the higher tax rate that I just discussed. I would like to point out that our year-to-date EPS performance is just over 11%, and our total year is 9%, which implies the fourth quarter is essentially flat. There are two contributing factors impacting our expected results. First, as I previously mentioned to you, the absence of fourth quarter pandemic revenue as compared to prior year impacted revenue by 3%. Secondly, we're seeing higher resin costs as compared to prior year as discussed on our quarter two earnings call. Our cash flows remain strong and we'll be increasing our share repurchases from $550 million to $700 million, which supports our ongoing commitment to return value to shareholders. I would like to reiterate Ed's comments in the beginning of our call today that while we are not immune to the challenges in the macroeconomic environment, we are confident that we have the tools to overcome these challenges through our strong product platform and geographic diversity, along with the operational excellence programs we have put in place. Before we open the call to questions, I'd like to introduce and welcome to BD, Zac Nagle, our new Vice President of Investor Relations. Zac will serve as the primary liaison between BD and its investors and the analyst community. Zac is a seasoned investor relations leader who brings over 16 years of experience and a deep understanding of the investment community to BD, including investor relations positions that he had in both Flowserve and Dell. Sherry Bertner will continue to work with BD in a advisory role. We look forward to introducing Zac to everyone in the coming months. Thank you. I'll now turn the call over to Vince to begin the Q&A.

Operator, can we start with the Q&A, please?

[Operator Instructions] Our first question is coming from Jon Wood with Jefferies. Jon Wood - Jefferies & Company, Inc.: So David or Vince, are you in a position to disclose the net proceeds from the asset divestiture in the fourth quarter?

We're not in a position today. But once the transaction closed, we'll go ahead and do that. Jon Wood - Jefferies & Company, Inc.: And how are you thinking about the urgency of the deployment of that cash? I mean, should we assume basically that's partially responsible for the stepped-up repurchase commitment this year and next, or basically, do you have an earmark for those funds at this point?

You should assume that we took into account the proceeds from the divestitures in the new cash, new share repurchase numbers. Jon Wood - Jefferies & Company, Inc.: On the Biosciences side, so your outlook's unchanged obviously 6% for the year, you're tracking over 7% in the first nine months. So just give us some context if the roads is there? Is this just conservatism or have you seen a dramatic change really in the bookings of flow thus far in the fourth quarter?

So Bill can speak to that. But he'll tell you that there's an issue in some timing in Advanced Bioprocessing. You want to comment, Bill?

Yes, and you just say flow, Jon, but in terms of BD B [BD Biosciences], the third quarter was positively impacted by an order that came in from a large customer for AB [Advanced Bioprocessing] which was anticipated fourth quarter came in third quarter, which is good, because our customers are getting back to getting safety stock in place. In terms of overall orders, we're pretty much exactly where we expected to be.

So that one order that moved from the fourth to the third, that's what you're seeing. Jon Wood - Jefferies & Company, Inc.: And that's a Bioprocessing comment not Flow Cytometry?

Yes.

Our next question is coming from Mike Weinstein of JPMorgan. Kimberly Gailun - JP Morgan Chase & Co: It's actually Kim for Mike. I guess the first one is, wondering if you guys saw in your quarter any kind of change in procedure volume particularly in the month of June? We actually have heard that from one or two other large cap companies in the space. So wondering if you guys saw any kind of change in the cadence of volume as you move through the quarter?

So we don't track procedure volume, we're tracking hospital visits and physician visits. I think we did see -- and some of the data I saw that month-to-month, there was some, let's say, volatility on a month-to-month basis, but it's not something that would have a significant impact on us. Kimberly Gailun - JP Morgan Chase & Co: And then the follow-up question is just on, Ed, your outlook on the kind of three-year outlook that you gave, which was essentially on an FX-neutral basis, 6% top line and 10% to 12% on the bottom line. Just making sure we're thinking about that 10% to 12% from continuing ops correctly. I wanted to confirm that this would be off of the diluted 2010 number, so basically the 5%, 10% to 5%, 15% guidance decreased by $0.20 once the divestitures are accounted for?

That's correct. Kimberly Gailun - JP Morgan Chase & Co: And so, I guess the question on that is, with the diluted 2010 number, we might have thought that the 10% to 12% would look a little bit higher. I'm wondering, is some of this investment in systems and should we be thinking about higher spend in some of your system investment in 2011?

Yes. In the near term of this plan, which spans from '11 through '13, I can be descriptive now, we will be more specific in November when we give guidance. But within this trajectory of three years, as we pointed out, the EVEREST program is a net investment in the near term. We are accelerating R&D investments. And that will be negatively impacting the near term of the plan that will show benefits in the later part of the plan. But very aggressively looking at -- I think we're very pleased even now to be starting to show operating performance improvements in our gross profit rate based on mix of products sold and productivity. And we also have communicated previously that we're going to be very aggressive about managing downward our core G&A expenses.

Our next question is coming from Kristen Stewart of Deutsche Bank.

David, I was just wondering if you could go over again kind of the typical hedge and EPS impact commentary and just kind of how do you feel given where rates are in terms of looking at what the appropriate base year is going to be, given where rates are again for 2010 to assess kind of where we go from 2011?

I think, as I remember, the last guidance that we provided, we said the currency is going to have a $0.17 impact being offset by hedge losses of about $0.12, so a net impact of about $0.05. Year-to-date, where we're sitting is currency has benefited us about $0.16 on an EPS basis, being offset by hedge losses of $0.11, so that's about a nickel sitting here today, net impact. As we look at for the full fiscal year, it's about $0.15 currency, is our best estimate and the hedge would probably decrease. That hedge loss would probably decrease to about $0.06, which would be about $0.09 for the year. So I think you for the remainder of the year, between where we are right now, year-to-date, and our guidance is, probably the way for you to think about, is as far as volatility in rates. So it's not a significant impact in our results from now until the end of the year.

So then thinking about just kind of 2011, it sounds like you have. Is it correct to think about having $0.09 of cushion, if you will, just on a year-to-year basis to absorb some of the negative impact of currency?

Well, we'll have to see where this year comes out to see where that hedge loss comes in at. But where we are at year-to-date is about $0.11 loss. And what we're putting into our guidance is about a $0.06 loss on that, so it's in that range. But since you mentioned, fiscal year '11, it's probably good for me right now to discuss foreign currency and our hedging program as we look forward. We made a rough estimate on how currencies may impact our next year results if they held at current rates. We estimate that revenues would be negatively impacted by about 2%. If you factor in the normal drop of roughly 25% to 35% to operating income. And tax effect that, the negative impact would be about 2% to our EPS growth, reported EPS growth. And at this point, we still haven't entered into any hedges as they continue to be very costly and there's a lot of volatility obviously that still exists. So we'll continue to monitor it and keep our eyes on this, and reserve the right to examine the [ph](39:46) contracts if we see the situation changing. But that's just top line, we're kind of looking at currency going into fiscal year '11.

So basically, using rates as they look today and then kind of projecting that on to fiscal '11. So in other words, your 10% to 12% EPS growth on an FX-neutral basis can also be layered into that negative kind of 2% given where rates are for currency?

That's right.

Just kind of on the pricing environment that you're seeing, I know Diagnostics is kind of softer with lower volumes and physician visits. So I'm just wondering how pricing is tracking in light of the middle or lower volume expectations?

So we haven't seen significant changes in pricing on the environment. We've always been in a tough pricing environment, and maybe I'll ask Gary Cohen to comment a little bit about Europe because we've been getting that question a lot. Gary?

I've just been in a number of other, let's say, industries similar not the same as our industry where there's been some more pronounced pricing pressure reported. We're not seeing that and I don't know whether to say, yet, but I think we don't necessarily say, yet. As Vince mentioned, we've been in constrained tender-driven pricing environments for many years. We haven't had to rely on price increases to drive revenue growth and we have not seen any substance of change in that environment in Europe, where others, perhaps more in the pharmaceutical side or some of the other segments in the device industry, are perhaps seeing some things migrating to tenders that might not have been doing so previously. But the only environmental change we've been able to pick up is the potential movement in Spain to go to a national tender rather than regional tenders. It's not clear whether that can happen or will happen, so that's about the only thing. But we're watching this very closely. From what we've seen so far, we're in a constrained pricing environment and has not really changed where it's been over the last several years in that respect.

Our next question is coming from David Lewis of Morgan Stanley.

It's actually Marshall Urist in for David. So first question was just on the thoughts on leverage and where this sort of incremental leverage is coming from, below the line or above the line as we think about growth going from 6% but maintaining that earnings growth. Can you just talk about, as we think about where that incremental leverage is coming from, is that increase in buybacks versus increased confidence in the middle of the income statement?

Well, we do have a strong confidence in the middle of the income statement, to start out with. Number one, we have been investing in cost reduction programs on the manufacturing side, our usual continuous improvement, but of course, we've added ReLoCo to that. And ReLoCo will be a positive impact going forward. In a minute, I'll ask Bill Kozy to comment on that, but we're making excellent progress on that program. So that's one element that is in our thinking. The second element is that we have started a while ago on a G&A efficiency and effectiveness program. The backbone for that program is Everest, going from five ERP systems down to one, but we're also laying these functional excellence programs on top in finance, HR and IT. And we feel that we have that well organized. We're making good progress on that. So while Everest itself is a bit of an expense increase in the near term, as Ed mentioned, then we start to see benefits from these programs as they get layered in. And then just to kind of complete the three-year look, we start to see product launches, as Ed also mentioned, and they'll start in the '12, '13 time frame to be significant. I'd like to ask Bill to just comment on ReLoCo for a minute.

Sure. Just to add very quickly, you might recall that we've been in investment mode on ReLoCo for the last couple of fiscal years. And as Vince already mentioned, FY '11 will be that important transition year when we'll move from kind of negative investment impact on the P&L with the business and the company and start to neutralize that and improve in terms of benefit accrual as we go forward throughout fiscal years '11, '12 and '13. And that project remains right on track.

And so of course, just to finish up here, we did mention of course increasing the share buyback to $700 million and then $600 million. So obviously, that will have an impact as well.

With tempered kind of three-year growth expectation, is that changing the way that you're thinking about the role that acquisitions could potentially play over the next couple of years? And what are the kind of markets or opportunities that you might be thinking about?

Well, it's not a significant change to the way that we're thinking about acquisitions. We think we will still have flexibility to do the acquisitions with our strong balance sheet over that planned period. We don't feel we're in need of having to do a acquisition. We still expect to do plug-in acquisitions that are strategically obvious and create shareholder value. We are increasing our R&D and becoming more confident in those programs, as we're moving forward, as they're moving through the product development process. And then lastly, just one investment we have haven't mentioned is that as industry you're playing, you should also expect that we'll be investing in geographic expansion. We mentioned on this call already that we're seeing double-digit growth in emerging markets. And we continue to see strong opportunity there, and then particular in China.

Our next question is coming from Jon Groberg of Macquarie Capital.

I know you mentioned some of the softer volumes on the diagnostics side, and I can appreciate in particular some of the headwinds on the rapid flu and given some of the comps there. Can you maybe just provide a bit more detail in terms of what you're seeing in STD, TriPath and then some of the hospital-acquired infection products?

Certainly. Philippe Jacon will address that.

Sure. Again, it's a little bit of a mixed bag of performance if you look worldwide. So overall, U.S. is, I would say, doing okay. And I will separate the TriPath and molecular so that you understand better. But really, Europe and Canada are the two regions where we've been suffering. So although in TriPath, the sales this quarter were about $33 million, and we see a growth which is kind of slow in the U.S., reflecting the economy, the weak economy, and the lower visits to the physicians. We're seeing very good growth in Asia on the TriPath products. But unfortunately, these have been offset by a decline in Europe where we see, in some of the countries, the increase in troubles being mandated. So for instance in Belgium today, instead of having one cervical cancer test per year, it's now every two years, and this is really impacting directly the business. And the last piece is that we have, in the same quarter of last year in Canada, a very large cash order of instrument that didn't repeat this year. In molecular, the picture is a bit different. Actually, the U.S. has been doing pretty good. But clearly, it's because of the good performance of our Affirm product. We know that the CT/GC market seems to be flattening in terms of its growth overall. Europe also is kind of declining for several reasons. But one of them is really that we see some increased competition in the mid- to low-volume segment popping up. And also, again in Europe, we're seeing some instrument sales that we had last year, cash sales, which really account for 3% to 4% growth that did not repeat this year. So that's basically the picture on the Women's Health and Cancer.

So it's a little bit more reagent rental compared to cash sales.

Yes, absolutely.

Then on HAIs, Philippe?

On HAI, so GeneOhm has had a good quarter at $40 million in sales, which globally is up 14% compared to the previous year. Actually, I think it's important to mention the very good growth that we've had in the U.S., which is about 20% growth year-on-year in this quarter. And this is really driven by Cdiff, which is very strong, but also, I would say supported by the new MRSA achromopeptidase and chemistry we have for MRSA, which is getting a lot of traction on the market and has enabled us also to gain some competitive conversion to our systems. So I'm very pleased on the this front. A couple of things I want to mention also on both sides is that for GeneOhm and HAI, we're doing good progress with our new platform, BD MAX. As you know, we've got the approval for [indiscernible] (49:33) on the two colors in May and we're working with the FDA to gain moderate complexity status. And so I just would like you to stay tuned on that. So as soon we know more, we will let you know. The plan to develop the BD MAX six colors is going on as planned and so far launch by the end of 2011, beginning of 2012. We are still on plan to do that. Clinical trials starting at the end of this calendar year. We can see very clearly a lot of good traction already. Customers asking us for this platform, given its potential use as an open platform. So this is great on GeneOhm. And just the last thing I want to come back on TriPath is that we are doing our BBL trials on GasPak Plus, which are doing very well. And so we are also on track to start our clinical trials at the end of this quarter for GasPak Plus.

And maybe just quickly, can you kind of handicap how you're thinking about Europe on the safety initiative given the initiative that was passed or put in context of the broader environment there in Europe?

Certainly. Gary Cohen is going to do that for you.

Well, as we communicated on the previous two calls, we're anticipating the impact of the new directive, which is moving forward and as been published to be sort of the latter part of our three-year planning period, because that's around the time that the directive moves into compliance mode. In the meantime, we are seeing good safety contribution from Europe across those two businesses. And our expectation for the full year is that it's going to be in the 9%-plus range, safety growth overall from Europe. So we're getting strong contribution, and that should uptick over the latter part of the period, as the directive comes in place.

Our next question comes from the line of Rick Wise with Leerink Swann.

Maybe for Ed and Vince, talk about the growth goals. We've seen pretty steady -- and understandably, we've seen pretty steady downward pressure on your three-year growth goals, I think a year ago or so, it was 7% to 9%, then 7%, now we're talking about 6%. I assume you have a lot of confidence in your cost reduction and share buyback initiatives helping EPS grow faster. But basically, two questions. One, a lower broader range now as opposed to just sort of the steady downward drift of guidance on that front? And then two, where does the EPS growth goal get challenged at that double-digit goal?

Maybe I'll take the first shot at that. We just completed our three-year planning exercise, Rick. And so we took it down by a percentage point based on, really, our best view of what's happening out there. And we did say in the remarks that we expected the conditions in the short run to be very, very similar. I'm talking about the macroeconomic conditions, and that the growth would improve over time as our product development programs started to take hold. We're also bullish on our opportunities in geographic expansion, as I was mentioning. So it was kind of a sequence here in geography moving to product launches. And so we feel pretty good about what we just gave you. So that would be the first part. In terms of the $0.10 to $0.12 EPS, we think it's secure even at this lower revenue guidance that with the programs that we have in place from an operations effectiveness standpoint that we have multiple levers to pull here. And so we feel good about that.

Going back to BD Bio, you've been arguing in recent quarters that you've said [ph] (54:10) recently that the business have stabilized. It seems that there's a lot of concern obviously about the capital spending recovery. Can you help us think ahead to the next two to four quarters next year? Has it indeed stabilized now? And are you still confident in the stability of that business?

Well, I think we're optimistic about the long run opportunities in that business and continue to invest heavily in both new product platforms and some new opportunities. And we really haven't talked about the product launches. Bill can talk a little bit about where that product line is doing.

Yes. And just to put a little added color in terms of sort of the macroeconomics, we certainly see that areas of Europe, country by country, we've seen some stabilization. We actually see some opportunities. At least in this last quarter, we saw our opportunities for growth. In terms of going forward, we've talked about the fact that in late FY '11, we'll be launching a new product platform out of our Flow Cytometry business. And that will lead to subsequent platforms as well. So quite honestly, we also see that we will be a big participant in the geographic expansion opportunities on a worldwide basis. So I think Vince used the word optimistic. We remain very optimistic. In terms of new markets and new products, we are, again, as Vince said before, we are, during that three-year period, we'll be introducing a new modular flow cytometry platforms, new reagents, our Advanced Bioprocessing facility is online. So we're very optimistic about it.

Rick, just one last comment coming back to the growth to keep in mind. As we look towards next year, remember that we're going to have to jump over these pandemic sales and the sales from the stimulus in Bill's business in Biosciences. And that was part of the reason why we changed the outlook.

Our next question is coming from Amit Bhalla of Citi.

I wanted to just continue with Biosciences with two questions. Can you just talk a little bit about just the outlook for U.S. stimulus contributions in the Biosciences? I think in the prepared comments, you mentioned that Japan had some positive contributions from the stimulus there. Are you still expecting that to continue into the second half of the year?

I can comment on both. We began the year with U.S. stimulus estimating a $20 million to $25 million impact to our U.S.-based business and flow primarily. I think in the last call, we said it would be closer to the $20 million in our estimate. We now see it coming in at about $19 million to $20 million. So that's basically where we are, fairly close to where we anticipated. With Japan, what you're actually seeing in the third quarter is essentially a timing overhang of sales that were made in the second quarter but installed in the third quarter. So that really is the bulk of the supplemental funding that has been spent in Japan. So we don't anticipate additional supplemental funding until the next round it becomes available.

Just a question on the asset sale, was that just part of a broad -- that was, I'm assuming, part of a broader review? Should we expect more announcements such as those over the next year or two?

It was part of a broader review. And no, you shouldn't be expecting more announcements.

Our next question is coming from the line of David Roman with Goldman Sachs.

Ed, you gave us some helpful information looking at year-to-date growth rates, stripping out things like pandemic flu. If I sort of look at the weighted average of the three segments x flu, that comes out sort of a 5% top line growth rate. Is it the right way to sort of think about things that the overall macroenvironment takes 100 basis points off the growth rate? So in fiscal 2010, the underlyings or normalized growth rates for the businesses is 6%?

Well, that's probably not a bad way to look at it, actually. It's very difficult to kind of normalize for the things that are going on. But if you look at over the next three years, which is the way we like to look at things and normalize for things like the stimulus and the pandemic, we believe that in the mid to later part of this three-year horizon, you will see a normalized growth rate for Biosciences in the higher-single digits, something in the 7%, 8%, 9% range. We think that with the launch of new products in Molecular Diagnostics and in cancer screening and with the recovery of testing to more normal levels, we think that the Diagnostics business can be in the 6% to 7% range. It is a little bit below that now. In Medical, with strong growth in Diabetes Care, which is above trend. With a return to stronger growth in Pharma Systems with the launch of some new products that we see in the pipeline and with international expansion, particularly in China and India and Latin America, et cetera, we think Medical can kind of be at the average in the 5%, 6%, 7% range. So if you put that into your longer-term perspective, we think that 6% on average over the next three years is a prudent way to go. And with higher rates in the latter part of the plan, as we sort of come through, a, the economic situation; b, some of the anomalies of flu and stimulus; and c, as we get some line extensions and some new product launches in the '12 and '13 time frame. And within that context, for all the reasons that Vince and David commented on related to very good performance in gross profit expansion, G&A reductions and share buybacks, we're very confident of the 10% to 12% FX-neutral continuing operations guidance.

And can you just talk a little bit about the dynamics in the Flow Cytometry market. I mean, one of your larger competitors had talked about getting more aggressive with respect to sales and marketing and product introductions, and there does appear to be sort of a propensity of lower-cost players entering that space. Can you maybe sort of update us on your latest thinking on growth in that market? And also, how you're responding from a competitive standpoint?

I'll let Bill give you a little color on that. But I think we're very pleased with -- there's two different issues that you brought up, let's say, the high end of the marketplace and the competition there and then smaller players at the low end. But we're very happy with the product launches that we've had in the program that we're moving ahead on the high end of the market and then Bill, and then we have some programs coming on at the lower end of the market two. So Bill, why don't you give a little bit of color?

Yes, and it echoes what Vince said. And you do have to breakout the clinical flow from the research flow and then within research flow, analysis and sorting. But on the research side, we've not only introduced new products but have new products to be introduced. The high end and mid end of the analysis range, we're very comfortable and confident about and have done well, continue to perform well. On the sorting side, frankly, based on our Cytopia acquisition and the Aria III launch, we've done quite well there. And we continue to improve and bring new products out during the period. So on the very low end, which is the other part of your question, research market benchtop analysis, and we do believe that as we go forward in developing our new products, we'll be able to reach into that market as well.

And just one last comment on this, on the clinical side in the developing world, we were also moving ahead on programs for the very low end of the clinical piece.

And then maybe just can you quantify it for us, the breakdown of your business, high end versus low end?

We don't have that right here off the top of our head.

Our next question is coming from Bill Bonello of RBC capital.

I have a follow-up question to Philippe's comments on CT/NG, you mentioned flattening U.S. growth. I'm just wondering if you can give us some sense of what the growth x U.S. looks like? And then whether you think the slower U.S. growth is part of a long-term trend in demand, is it may be due to the near-term pressure on Physician business or are you maybe losing share in the U.S.?

So we don't see that we are loosing share in the U.S. on that market at all. We see that there is a definite flattening of the growth of the test. I think that's been reported in some different reports I have been able to read. And that's what we see also. I'm sure you know also that the reference labs have reported lower testing, and part of it was really this kind of screening test. So I think one of the issue that we are dealing with is again, people being unemployed and not having any more coverage are kind of keeping some of the screening tests that they used to do on a regular basis. So this is really about the U.S. Outside of the U.S., I would say that we've seen a little bit of, again, a slowdown in Europe and mainly in the U.K., where they were programs in place and have been a little kind of discontinued or kind of phased out. And this is basically what we are talking about. And that's the point I was making earlier also is that there is definitely more competition on the mid- to low-volume market, and we see that today mainly in Europe, so that's why we're also -- I cannot say that we've been losing share today, but we're certainly not been gaining share. So that's the other way to look at it. And we continue to gain market but we've been losing a little more than what we used to lose before.

And then just in terms of -- my follow-up question, just big picture, have you guys given any consideration to sort of further expansion in the diagnostics space, either to increase your scale and your existing businesses, some of them were your pretty distant number too or maybe to expand your scope to just have more touch points with your hospital customers in particular?

We don't really think that scale is a significant issue for us. We're following a focused strategy and investing behind it. I think you should expect that in the short run, we're focused on implementing behind the platforms that we've acquired. In the long term, we continue to look for plug-in acquisitions that could expand our footprint.

Our next question is coming from the line of Bill Quirk with Piper Jaffray.

Vince, first question is a bit of a trend here that I guess we see in the call. But in terms of the overall environment for physician office trends and visits and such, do you consider this to be, by and large, an economic phenomenon? In other words, we should expect to see that improve as employment levels improve? Or do you actually think this is a type of longer-term trend here?

That's a very interesting question, Bill, and you probably saw the front page article in the Wall Street Journal this morning speculating on that issue. So we're all speculating as we see it. In past recessions, it has bounced back. The decrease in physician's office visits has been more severe in this downturn than before. Unemployment is higher and there are higher co-pays out there. So I think insurance pricing is going to have an impact on this. I think the underlying healthcare needs are there, number one. Number two, as healthcare reform kicks in, I don't think that's been factored into people's thinking, and you're going to see coverage for preventive care. So I think as employment improves, this is a personal opinion, as employment improves and healthcare reform starts to take hold, I think you're going to see volumes business come back.

As a follow-up, Philippe, you talked about some orders coming in as reagent rentals rather than cash sales. Is there kind of a bigger-picture trend that we should be reading into here just in terms of hospital's appetite for capital equipment?

Not that I can really relate to right now. It's difficult to draw conclusions out of only one quarter where we see the comparison to the same quarter a year ago. But I cannot say today that we a trend going one way or the other. I think it's pretty much, I think, overall when you look at a 12-month basis, it's pretty much the same.

So in other words, the appetite for instrumentation itself is not changing, it's just a question of how to pay for it?

Let me just put a little bit of color here. It is changing in the south of Europe. I mean, countries like Italy and Spain has been changing but it's really because of delay, as Gary explained before, in the way they are looking at the healthcare systems. So clearly, the tenders have been postponed in Italy, for instance. And because of what Spain is trying to implement today, things are not moving as fast as they used to move. But the appetite overall is not really changing. I would say even that I'm sure you've seen our new BD Innova, the Plate Streaker and what was I talking, referring to with BD MAX before, we see that hospital customers are really, really interested in bringing these platforms on board. So I don't think there is any change there.

Our next question is coming from Brian Weinstein of William Blair. Brian Weinstein - William Blair & Company L.L.C.: Just curious, Philippe, a little bit about the BD MAX strategy here. While part of HandyLab Jaguar was contemplated for STD testing in the hospital setting, is that still in the cards? Or does your new Viper, I think you're calling it Viper LT, taken its place there? And also, does the LT incorporate the XTR technology as well?

So the LT is actually incorporating the XTR technology as it is both PCR, that's what the LT. So of course CT/GC is going to be on the LT. Clearly, BD MAX today, we focus our efforts in making sure that we're going to get BD MAX in the market with our HAI assay, which is really the burning issue for us, so that's where we put all our efforts. Soon after that, we'll expand the menu. Menu is key to this platform, and certainly the customers will be able to run assays later on like CT/GC or others on BD MAX have a different type of volume than what you see on customers using Vipers today. So it's a more flexible platform and on which we intend to increase menu after we get the HAI assay's on board. But again, you're going to have, I think, the segmentation that we're looking at and we've been discussing internally about the market in terms of volume batch versus on demand and also with the BD MAX again being an open platform where our customers will be able to run their own assays. And I could even think like in the case of a pandemic, like we've seen last year, instead of us putting a lot of effort in developing a molecular test, our customers could develop their own that they would get from either the CBC in the U.S. or the equivalent of the CBC in other country and be able to run on BD MAX very quickly. So we believe this is a pretty compelling argument for our customers to get into BD MAX. Brian Weinstein - William Blair & Company L.L.C.: As my follow-up there, on Pharma Systems, I think you guys said it was flat due to timing. Should we anticipate Q4 would be a much stronger quarter?

Yes, you should.

Our next question is coming from Jaimin Patel with Greenlight Capital.

What is our current outlook for the tax rate next year and our best guess for the few years after that?

We'll provide updated guidance on that when we do full year guidance for fiscal year '11 in November. But right now, what we've got for this year is 28.5% based on the mix of our business.

And then does the outlook for a two percentage point FX impact in fiscal '11 at the EPS line effectively reflect four percentage points of translation headwind with a two percentage point year-over-year hedge benefit?

That's just the currency. We really don't know what the hedge loss will be this year. We've provided guidance on what we think it will be. But again, when we do guidance for fiscal year '11, by that time, we'll know what the actual hedge loss was. So going back to the point, the way we're looking at currency, I was just giving you the straight currency impact.

And so right now, our expectation is for a $0.09 hedge loss for the full year, and that if what we expect now is true, that would be roughly a $0.09 offset to the 2%?

That's right.

And then could you help us understand that translation, just the translation headwind. How much of that is Europe?

Well, there's a mix of currencies in total. But the majority of it has a tendency to be euro. But in any given quarter, there can be fluctuations based upon individual currencies.

Our next question is coming from the line of Jeff Frelick with ThinkEquity.

David, SG&A was a bit below our estimate. Are you still targeting as a percent of revenues in that 22.7% to 23% range or will come in lower for the year?

SG&A, we're saying it's around 23% for you to think about it for the full year.

And just a quick follow-up for Philippe, with respect to the solid GeneOhm growth in the quarter, was that mainly driven by new customer adds or adding new assays to the existing customer base?

It's really the new customers. The assays, we've got C. difficile launched earlier this year already, so it's not a new assay. And we've got the MRSA achromopeptidase also launches earlier this year. So there's no new assay in the quarter. And now there is a good traction Cdiff. I think that the molecular testing on Cdiff is proving to be extremely compelling to our customers. You don't have to repeat this thing, and they like the way they can run the test on our box. And the same thing for MRSA achromopeptidase and the new chemistry that is extremely easy to validate and easy to use. So we've seen a lot of new customers using these existing assays.

At this time, there are no further questions. I'll now turn the floor back to Mr. Vince Forlenza for any closing remarks.

I want to thank all of you for participating on the call today. We were pleased to announce the quarter in line with our expectations and reaffirm our earnings guidance for fiscal FY '10 in spite a higher tax rate. We're also pleased to update you on our longer-term outlook and our share repurchase program, which reflects our continued focus on shareholder value. So thank you very much for joining us.

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