Becton, Dickinson and Company (BDX) Q3 2011 Earnings Report, Transcript and Summary

William Kozy - Executive Vice President Monique Dolecki - Tom Polen - Vince Forlenza - President and Chief Operating Officer Edward Ludwig - Chairman, Chief Executive Officer and Chairman of Executive Committee David Elkins - Chief Financial Officer and Executive Vice President Gary Cohen - Executive Vice President William Rhodes -

William Quirk - Piper Jaffray Companies Sara Michelmore - Brean Murray, Carret & Co., LLC Brian Weinstein - William Blair & Company L.L.C. Jonathan Groberg - Macquarie Research Michael Weinstein - JP Morgan Chase & Co David Roman - Goldman Sachs Group Inc. Matthew Buten - Sapphire Capital Kristen Stewart - Deutsche Bank AG Jeffrey Frelick - Canaccord Genuity Frederick Wise - Leerink Swann LLC David Lewis - Morgan Stanley Lawrence Keusch - Morgan Keegan & Company, Inc. Peter Lawson - Mizuho Securities USA Inc. Doug Schenkel - Cowen and Company, LLC Jon Wood - Jefferies & Company, Inc. Charles Butler - Barclays Capital Amit Bhalla - Citigroup Inc

Hello, and welcome to BD's Third Fiscal Quarter 2011 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through Tuesday, August 2, 2011, 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 conference ID 82566570. [Operator Instructions] Beginning today's call is Ms. Monique Dolecki. Ms. Dolecki, you may begin your conference.

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, 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 its related financial schedule and in the slides. A copy of the release, including financial schedules is posted on the bd.com website. Starting the call this morning is Ed 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 Tom Polen, President of Diagnostic Systems. It is now my pleasure to turn the call over to Ed.

Thank you, Monique, and good morning, everyone. Before we discuss the results of the quarter, I would like to take a moment to discuss the announcement issued last week regarding the leadership change in our organization. As you may already know, the Board of Directors elected Vince Forlenza to succeed me as Chief Executive Officer effective October 1, 2011. Vince will also become a member of the board at that time. I will remain Executive Chairman of the board through June of 2012. Vince's election is the culmination of a careful, long-term succession plan and the process, which was conducted by the board with my full support, which began in 2009 when Vince was named President. Over the past 30 years, Vince has distinguished himself as a leader. He has had an outstanding career that has spanned strategic planning, marketing, international, technical, business development, general management and executive leadership roles. His experience and achievements eminently qualify him to lead this company and our leadership team into the next phase of growth. It's now my pleasure to turn the call over to Vince.

Thank you, Ed, and good morning, everyone. I'm honored to have been elected by the board to succeed Ed as Chief Executive Officer when we begin our new fiscal year. I've had the privilege of working with Ed for 28 years, and I believe he's done an outstanding job over the past 12 years as CEO. Ed has led the company through both prosperous and challenging times, always ensuring that we maintained our purpose of helping all people live healthy lives. He created a strong platform for growth, and we will continue to build off the key initiatives Ed put in place during his time as Chief Executive Officer. Now moving on to Slide 4. I'll start off today's presentation by carrying a few of the key messages from our third fiscal quarter results. As Ed stated in our press release, we were pleased with our results in the quarter. Revenue growth came in at 4.8% currency neutral. Strong international safety revenues and emerging market growth were partially offset by our results in Western Europe. We continue to see softness in Western Europe due to various austerity measures and lower health care utilization. Moving on to Japan. I would like to provide a brief update since our last earnings call subsequent to the March earthquake and tsunami. We're pleased to report that our business in Japan is fully operational. We restarted the manufacturing of the BD Hypak prefillable syringes in early May, which was ahead of schedule. We are still evaluating the longer-term impact on the company, but we believe that the bulk of the challenges are behind us. For the full year, we are reaffirming that the impact of Japan will be approximately $50 million on revenue and about $0.05 to EPS. This was already built in to the total year guidance we have provided you back in April. I would also like to briefly discuss the newly announced planned acquisition. Last week, we announced that we had signed a definitive agreement to acquire Carmel Pharma, a Swedish company that manufactures the PhaSeal System. This is the leading closed system drug transfer device for the safe handling of hazardous drugs that are packaged in vials. This system minimizes the risk of exposure to potentially harmful liquids and vapors from toxic drugs such as those used in treatment of cancer. The expected dilution of the acquisition for the fiscal year is approximately $0.05. This is not built into our total year guidance because the deal has not yet closed. We expect the deal to close prior to the end of the fiscal year. We believe this is an attractive market with sales of approximately $100 million with historical growth rates at about 10% a year. Annual revenues for the company last year were approximately $45 million. This acquisition is a key safety platform, which is aligned with our core strategy and operating capabilities, and demonstrates our commitment to drive revenue growth through innovation. Additionally, we are pleased that a couple of key products were launched in the third quarter, and I will spend some time discussing those launches later in my remarks. On Slide 5, we've outlined our third quarter revenue and EPS results. We're pleased with our results this quarter, which I will speak to on a currency-neutral basis. Revenues were solid, increasing by 4.8%. Fully diluted EPS came in at $1.51, growing at 13.8% over the prior year. For the 9-month, year-to-date results, revenue growth was 2.6%. EPS growth was 8.1% on an adjusted basis. Moving to Slide 6. I'd like to briefly summarize our outlook for fiscal year 2011. David will provide more details later in his remarks. We were favorably impacted by the weak U.S. dollar due to our strong presence outside of the U.S. As a result, we are raising our reported revenue growth guidance to approximately 6%, which is the higher end of our previously communicated range of 5% to 6%. We are also raising our reported EPS guidance to 14% to 15% from 12% to 14% on an adjusted basis. The current global macroeconomic environment continues to be a challenge, most notably in Western Europe. We had stated on our Q2 conference call that we believe the growth rate in Western Europe would be approximately 2% for the total year. However, our results year-to-date indicate that the growth rate for the year will be closer to 1%. As I mentioned earlier, this region continues to be impacted by various austerity measures and lower health care utilization. We continue to manage the company accordingly, but we believe that it is prudent to lower our currency-neutral revenue growth guidance to approximately 3% as we do not anticipate these conditions will abate in the near term. We believe the company has fared well in this environment. Based on our financial results year-to-date, we remain confident in our ability to deliver on our bottom line, and we reaffirm our currency-neutral EPS guidance of about 10%. Now I'd like to turn things over to David for a more detailed discussion of our third quarter financial performance.

Thank you, Vince, and good morning, everyone. I'd like to begin by discussing the key financial highlights for the third quarter. As Vince stated earlier, we are pleased with our results. Revenue growth was 4.8% currency neutral. We experienced solid growth in all 3 of our segments. We saw continued strength in emerging markets, which grew at about 13% currency neutral. Our gross profit margin also improved by 100 basis points with 50 basis points being driven by performance, offsetting some of the headwinds we faced in the challenging macroeconomic environment and higher resin cost. As a percentage of revenue, R&D spending was moderated as we accelerate spending in the first half of the fiscal year. The company's earnings of $1.51 benefited from favorable currency of about $0.11 on a year-over-year basis. Additionally, during the third quarter we completed $215 million of our $1.5 billion share repurchase program, which brings the year-to-date total to about $1.3 billion. Our guidance for the program in 2011 remains unchanged at $1.5 billion. Turning to Slide 9 and our revenues by segment. I'll start with the total company performance, which I will discuss on a currency-neutral basis. As I mentioned earlier, revenue increased by 4.8%. This includes about 1 percentage points of unfavorable pricing. For the 9-month period, the company grew 2.6%. Excluding the impact of the sales related to H1N1 flu pandemic and the stimulus in supplemental spending in fiscal year 2010, the company grew about 5%. BD Medical's third quarter revenues increased 4.9%. Growth was primarily driven by Pharmaceutical Systems, International Safety and solid growth in our Diabetes Care business. For the 9-month period, the Medical segment grew 1.7%. And excluding the impact of H1N1 flu pandemic in fiscal year 2010, underlying growth was about 4.6%. BD Diagnostics third quarter revenues increased 4.8%. Revenues reflected solid growth in our Preanalytical Systems Safety products. Diagnostic Systems experienced strong growth driven by both women's health and cancer and our infectious disease product offerings. For the 9-month year-to-date results, the Diagnostics segment grew 3.9%. Excluding the impact of H1N1 flu pandemic, revenue growth was 4.7% year-to-date. BD Biosciences revenue growth in the quarter was 4.3%. Revenue growth was impacted by tough comparison to the strong stimulus spending in the U.S. and the supplemental spending in Japan in fiscal year 2010, which is approximately $9 million. Additionally, the Biosciences segment was negatively impacted by the delays of research funding for high-end instrumentation in Western Europe. Segment growth was primarily driven by instrument reagent sales in the Cell Analysis unit, and this was partially offset by Discovery Labware softness in the U.S. For the 9-month period, our Biosciences segment grew 2.7%. Excluding the impact of the supplemental spending in Japan and the U.S. stimulus spending in fiscal year 2010, revenue growth was 7.1%. Now moving to Slide 10. I'll walk you through our geographic revenues for the third quarter. Overall, BD's reported U.S. revenue growth was 5.7%. U.S. Medical revenues increased 9.2% year-over-year, reflecting strong sales of Pharmaceutical Systems products. U.S. sales of diagnostics products grew 3%, reflecting solid growth in infectious disease and molecular diagnostics, which was partially offset by the softness in women's health and cancer due to suggested increase in intervals and pap testing. Biosciences revenue in the U.S. increased 1.4%, which is impacted by tough comparisons of prior year period due to stimulus spending in the U.S. Softness in our Discovery Labware products were due to weakness in core consumables, also impacted results in the U.S. Excluding the difficult comparisons due to the stimulus spending in fiscal year 2010, Biosciences revenue growth in the U.S. was 4%. International revenues increased about 4.1% on a currency-neutral basis. The Medical segment grew by 2.1% impacted by geographic mix in the Pharmaceutical Systems business. Specifically, this was due to strong Pharmaceutical Systems sales in the U.S. related to a shift in multiple customers sourcing from Western Europe to the U.S. We experienced solid growth in both Diagnostics and Biosciences segment growing at 6.7% and 6.2%, respectfully. The Diagnostics segment was driven by strong growth in Women's Health and Cancer platform as governments are expanding programs for cervical cancer screening in the developing markets. The Biosciences segment was driven by Cell Analysis instruments and reagents in Asia-Pacific, Latin America and EMA. For the 9-month year-to-date results, reported U.S. revenues grew 2.4%, with Medical and Biosciences increasing about 2% and Diagnostics increasing about 3%. Total U.S. sales grew at about 5%, excluding the impact of H1N1 flu-related sales in fiscal year 2010. Total international revenue growth was about 2.8% currency neutral for the 9-month results and about 4.8% excluding the flu and supplemental impact. Now moving on to Slide 11. Global Safety results reported sales increased 11.8% and grew to $479 million in the quarter. On a currency-neutral basis, revenue growth was 7.6%. This growth was driven by international Safety sales, which increased about 14% on a currency-neutral basis. U.S. sales were up about 3.7%. For the 9-month period, Safety growth was 4.5% on a currency-neutral basis. After adjusting for the flu, growth was almost 7%. This was a combination of strong international growth of 12.6% and growth rate of 3.5% in the U.S. International Safety sales were very strong in the Medical segment, particularly in emerging markets. Emerging markets now account for over 3/4 of our overall international Safety growth in the quarter. Looking at the total company, third quarter revenue growth year-over-year currency contributed about 5% to our growth, and performance contributed 4.8%. The remaining gain is due to hedge loss from the fiscal 2010 not recurring in fiscal year 2011. Moving to Slide 13. Our gross margin improved 100 basis points to 52.7% with currency contributing 50 basis points of the improvement. Positive productivity and mix, coupled with lower start-up costs contributed to about 120 basis points. This was partially offset by higher raw material costs and pension expense. For the total year, we don't see currency having an impact on our margins as we anticipate having unfavorable currency impact in the fourth quarter. Slide 14 recaps the third quarter income statement and highlights our current foreign currency neutral results. As I mentioned earlier, third quarter revenue grew 4.8%. Gross profit increased by 5.7% and improved 100 basis points as a percentage of revenue. Moving down the income statement line, SSG&A increased 9%, primarily due to increase in investments in emerging markets, pension expense and our EVEREST SAP implementation costs. We also experienced an increase in our deferred compensation, which is offset by gain on the interest income line. Additionally, we recorded a European receivable reserve and incurred higher legal costs in the quarter. The aforementioned items account for about 6% of the growth in SSG&A. R&D increased 5.7%. The moderation of R&D spend is in line with our expectation as the investment was accelerated in the first half of the year. Overall, our operating income increased 2.5% impacted by the SSG&A costs. EPS growth came in at 13.8% currency neutral benefited by our share repurchase program and an improved tax rate. We expect our cash flow for the fiscal year to be approximately $1.8 billion versus the previously communicated $1.9 billion. This is primarily driven by higher inventory levels than our previous estimate. As Vince mentioned earlier, we are slightly lowering our revenue growth expectations. We expect to grow approximately 3% on a currency-neutral basis. When excluding the impact of the flu, supplemental and stimulus spending, the underlying growth of the business is about 5%. We have modified guidance due to the ongoing challenges that Vince mentioned earlier in Western Europe. For the Medical segment, we are anticipating growth neutral of about 2% with underlying growth of 4%. In the Diagnostics segment, we anticipate currency-neutral growth of approximately 4% with underlying growth at about 4.5%. We expect Biosciences currency-neutral growth of about 3.5% with underlying growth of about 6.5%. Slide 16 summarizes our expectations for the total year. On the top line, we expect revenue growth of about 6% on a reported basis aided by currency. On a currency-neutral basis, we expect revenue growth to be approximately 3%. On our bottom line, we anticipate EPS growth of about 14% to 15% off the adjusted 2010 EPS of $4.94. We are reaffirming our currency-neutral EPS growth of about 10% despite lower sales and higher resin costs. I'll now turn the call back over to Vince who will provide an update on our emerging market opportunities and our product launches.

Thank you, David. Moving on to Slide 18, I'd like to discuss our emerging market opportunities. We continue to see strong growth in emerging markets, which accounted for approximately 22% of our total revenues in the third quarter. Emerging market revenues grew about 13% in total over the prior year with double-digit growth in a number of key markets and across all segments. Growth in the Asia-Pacific region was led by sales in China, which were up about 27%. We're very pleased with Safety revenue growth in emerging markets, which was up about 28% over the prior year. We continue to invest in growing markets that are aligned to BD's capabilities, and we expect to see continued strong growth in these markets. On Slide 19, I'll provide an update on our key product initiatives starting with BD Medical. In the second quarter, we announced the launch of our BD ecoFinity Life Cycle Solution program. In the third quarter, on May 20, we launched the first products from our ReKindle program. The suite of products is called the Emerald portfolio of products. The first 2 products that were launched with the BD Emerald and the BD Emerald PRO. The BD Emerald is a conventional syringe that combines high-quality performance and reduced environmental impact and is produced in a more sustainable manner using 30% less material than other BD syringes. The Emerald PRO is a disposable syringe with passive reuse prevention technology for broad usage applications. Based on initial market response, we feel encouraged that the Emerald portfolio of products will be a success. As I mentioned on our Q2 conference call, we are also planning to launch an extension to our flagship IV catheter product, Insyte Autoguard, with a blood control feature. This product recently received FDA clearance. We are also planning to launch Nexiva with a diffusion tip. Both of these products will be launched before the end of the fiscal year 2011. In our Diabetes Care business, we plan to launch a next-generation safety pen needle in the first quarter of fiscal year 2012 and other innovative products throughout the year. On Slide 20, I'll walk through some of the key initiatives in our Diagnostics segment. We are continuing to invest in the BD Viper XTR with fully automated specimen processing. Last quarter, we launched our HSV assay on this platform. In the fourth quarter of fiscal year '12, we will be launching the Trichomonas assay on the BD Viper. At the end of fiscal year 2013, we'll be launching the Viper LT, our next-generation mid-volume Viper platform. In the beginning of the third quarter of this fiscal year, we launched the new automated microbiology plate streaker called the BD Innova. We were also excited about the 6-color BD MAX, which was launched as an open system in May. As I mentioned in our previous conference calls, in fiscal year 2012, you can expect the launch of the BD MAX MRSA and C. difficile assays midyear in the EU. The U.S. launch will be towards the end of the year. In fiscal year 2012, we expect to launch our molecular pap test, the BD SurePath Plus, which is in the data analysis phase of the clinical trial. On 21, we will review our BD MAX molecular platform, which as I just mentioned, was launched as an open system in Europe and in the U.S. during the third quarter. We are very pleased by the very positive customer interest that we've received so far, and we expect BD MAX to be an important contributor to our Diagnostics business growth over the next several years. We are also investing to rapidly broaden the BD MAX menu of clinically important assays. We are complementing our internal R&D pipeline with the range of assays being developed in collaboration with several leading assay development partners. You can expect to see additional menu expansions in the future. On Slide 22, we will review the product launches for our Biosciences segment. We announced our BD Recharge media supplement for bio production in the second quarter of this year. In the third quarter, we launched our new 8-color research analyzer, the FACSVerse. Our desk top sorter, the FACSJazz was released as a limited launch in Q3 complementing our BD Acurri C6, the 4-color analyzer. Both instruments are intended to expand and develop the personal Flow Cytometry market and make Flow Cytometry more affordable and widely used. In the fourth quarter, we expect to launch our new cell culture medium, Mosaic. As we look to fiscal year 2012, we plan to launch a new analyzer for CD4 testing for the developing world in the fourth quarter. Turning to Slide 23. I'd like to highlight a few of the key operational excellence programs we're working on and the progress we're making. One key program is ReLoCo. As we mentioned last quarter, the program will be cost neutral this year, and we are on track to realize $50 million to $60 million in savings by fiscal year 2013. This program is a key element of our strategy in the Medical Surgical Systems business unit. We plan to drive these efficiencies through our business where appropriate through our ReLoCo II program. We'll provide more details on ReLoCo II on our conference call in November. Another key operational excellence programs is EVEREST. As a reminder, this is our global Enterprise Resource Planning initiative designed to optimize processes and refresh technology. We believe this will drive operating effectiveness and improve service to our customers. The program remains on track with our first go-live mid-fiscal year 2012 for North America. Three additional phases will follow with a full implementation early in fiscal year 2014. We will be in the investment phase of this program for an additional 2 years, but it will deliver long-term savings and provide the foundation for our IT infrastructure. We continue to look for further efficiencies in our P&L and remain focused on SSG&A. Currently, we are creating 4 shared service centers to consolidate back-office transactions in HR, finance, customer service and procurement. Last year, we announced our shared service center in San Antonio, which consolidates work for North America. We've made significant progress in that location and have about 140 associates in place. We're also consolidating transactions in Asia-Pacific with a shared service center in Singapore. We're pleased with the progress we have made so far. The efficiencies created through our new service centers further enable us to continue to invest in our growth opportunities. Before we open the call to questions, I would like to reiterate some of the key messages from our discussion today. First, we're pleased with our results in the third quarter. We are navigating through a challenging time for the global economy. While we are not immune to the various effects of the macro environment, we do believe we have the programs in place to continue to succeed in this environment. When excluding the difficult comparisons to fiscal year 2010, we are still seeing top line growth of about 5% and 10% growth on the bottom line. As we look forward, we don't see the environment changing and anticipate similar results for fiscal year 2012. We will provide additional guidance for fiscal year 2012 on our conference call in November. Second, we continue to see strong growth in emerging markets, and we will continue to invest in growing markets in line with our capabilities. Third, we are committed to aggressively managing our cost base while investing in innovation. We believe we have demonstrated this through recent and planned acquisitions such as Acurri and Carmel Pharmaceuticals and by continuing to invest in the various products in our pipeline that I discussed earlier in my remarks. We continue to drive operational efficiency programs aimed at gross profit improvement such as ReLoCo and ReLoCo II. We will also continue to manage G&A costs by streamlining various processes. Lastly, we remain committed to deliver significant value to shareholders through dividends and our share repurchase. Thank you. We will now open the call to questions.

[Operator Instructions] Our first question is coming from David Roman with Goldman Sachs.

I wanted to see if you could go into a little bit more detail on Europe. It sounds as though either things worsened materially in the third fiscal quarter relative to where performance had been in the first half of the year or your previous guidance had contemplated an improvement in Europe in the back half of the year that you're not seeing materialize. Could you maybe comment on which of those is more the case and then whether, in fact, if things worsened in Europe, is it the beginning of a deterioration of trend there?

Sure. We'd be happy to give you some more color on that, David. Just a little bit of housecleaning before I do that. I mentioned in my remarks SurePath Plus was going to launch in fiscal '12. I meant to say fiscal 2013. That was the first thing. The second thing, and David, this is not directed at you. But we're changing the way we're doing the questions a little bit. We're asking you to stay to one question. We haven't been able to get to the questions at the end of the call, and so we're going to do that. I'm going to hold people to that. But, David, as regards Western Europe, we are seeing slower growth than we anticipated when we guided you last time. And Gary is going to give you a little color around that. It's in a few particular areas. Gary, you want to comment?

Sure. Yes. This is Gary Cohen. And I think that the general look at Western Europe masks to some degree what's actually occurring and what we're seeing. There's been a few analysts who have commented that some of the other peer companies see slightly different trends. And if you strip it apart a little bit, you'll see it's not as different as it may first appear. In the quarter, our weakness in Western Europe was pretty much concentrated in France, which is disproportionally impacted by the Pharmaceutical Systems business, which had the combination of 2 factors going on. One is the sales mix shift in part to the U.S. and the second is some overall weakness in Pharmaceutical Systems in Europe. Based on the way we transact, all of our Pharmaceutical Systems sales in Europe are registered in France. So it has a disproportionate impact there, and France is a much larger country relative to the others. All the other countries were up year-to-year. In some cases, up mid- to high-single digits. In other cases, flat- to low-single digits. And on the overall basis, we would say flat- to low-single digits characterizes what the ongoing sales trend is in Western Europe. The other business that was impacted is BD Biosciences, which had some what we believe to be short-term trends in research funding that are negatively impacting our reported sales. Other than Pharmaceutical Systems and Biosciences, all the other businesses were up and reflect more of what you might see in the mainstay Medical device market that would be reported by other companies. In a moment, I think we'll ask Bill Kozy and Bill Rhodes to comment on Pharmaceutical Systems and Biosciences, but that's where it was concentrated and among countries, it was concentrated in France.

So why don't we ask Bill Kozy to comment on Medical first.

Yes. This is Bill Kozy. In terms of Medical performance in Western Europe, I'm not going to repeat what Gary said. It's concentrated very much on the challenge of the Pharmaceutical Systems business in France. Our Diabetes Care business growth was solid, and so was our Med/Surg growth for Western Europe. So most of the impact did come just as Gary described from the Pharma Systems activity.

And this is Bill Rhodes. In Biosciences, we look very carefully. It turns out that in the U.K. in particular France and a little bit in the Benelux region, we saw an impact of customers seeing delayed research funding coming in to be able to complete their purchase of larger analyzer systems. But our view and our thought with our customers and those in-country is basically a delay, not a major trend.

Your next question comes from the line of Bill Quirk with Piper Jaffray.

First question, here. David, just wanted to follow up on your comment around the fourth quarter assumptions. I believe you said that negative gross margin for currency. A little confused here. Would you mind elaborating on that a little bit? Maybe you can give us some background into which rates you're using.

Yes, it's comparison to the fourth quarter of last year. What we're saying overall for the year. When you do the math as far as the impact on currency to gross margins, it'll be neutral for the full year. So within the quarter, there'll be slightly negative to offset the positives that we've had year-to-date.

Our next question comes from the line of Amit Bhalla with Citigroup.

I was hoping that maybe Tom Polen could give us some detail on the segment performance specifically within Diagnostics and the Women's Health portion. And can you also comment on just your view on diagnostic volumes across the markets?

This is Tom Polen. So overall, as Vince had indicated, for the quarter, we're up 5.7% if we look specifically at our women's health TriPath business that had a strong quarter 7.8% TriPath growth for the quarter. We continue to see as it relates to that business' secular pressures on pap testing volumes driven by changes in the testing intervals. So in the U.S., our U.S. sales for TriPath were down 1% in the quarter driven by that dynamic. And internationally, we continue to see strong double-digit growth in most markets as countries continue to both expand access to cervical cancer screening programs, and we also continue to upgrade customers from conventional pap to our liquid-based cytology technology. In terms of overall diagnostic volumes and sample volumes, I think we would continue to observe pretty flat overall testing in the U.S. and of course, that varies within segments of the market with molecular testing volume certainly much higher than that and pap volumes lower than that.

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

David, a question perhaps on next year's operating income. I know you're not going to speak specifically to guidance, but if you think about sort of the headwinds and tailwinds, this year operating income growth grew slower than revenue. I know '12 is still an investment year for the company and '13 is probably year of greater leverage. But as you think about what you know today, can operating income grow at or faster than revenue heading into fiscal '12? And just related on Carmel, the dilution of $0.05 seems heavier to me given the $45 million of revenue. So maybe just those 2 comments and how they affect operating income next year.

David, we'll comment on the operating income in November when we break out all the components. It's probably best to wait until then to do that. But as Vince said on the call, as we think about this year 5% top line growth and 10% bottom line growth, given all the levers and even with the investment that we have in our SAP and EVEREST programs next year, we still believe that we can continue to get that margin expansion. And I'll turn it back over to Vince for the acquisition.

So I think there's 2 things. One is the transaction costs that you're seeing there is driving a piece of that. And then there's some dilution from the operating income and then there's an inventory step up on intangibles. So those are the 3 main components. We do expect it to be slightly dilutive next year then turn around after that.

Your next question comes from the line of Mike Weinstein with JPMorgan. Michael Weinstein - JP Morgan Chase & Co: Maybe 2 items. One, David, it still wasn't clear why fourth quarter gross margin would be negatively impacted by FX when you'll have a significant FX tailwind on the top line. So if you could maybe just explain that. And then second, I just want to make sure your preliminary commentary on FY '12 is clear. You were saying 5% to 10% -- 5% top, 10% bottom. Is that off of a 555 to 570 reported base, or are you adjusting that base for FX and the steel dilution and some other number we should be thinking about?

So on the first question, if you think through most of the hedge loss that we had was in the year-to-date numbers. So that has a bigger impact. You don't get the benefit of that in the fourth quarter. It's also the benefit of currency that we had in the fourth quarter of last year and comparing that to what the currency year-on-year effects are in the fourth quarter of this year. So it's those 2 factors on that. And then on your second question?

The question was are we giving the 5%, 10%, 10% of the bottom line of the reported number or are we making any adjustments to the reported number.

No. Michael Weinstein - JP Morgan Chase & Co: That 555 to 570, which includes the benefit from currency on a year-over-year basis is the number you want us to use when thinking about FY '12?

Yes. That's correct.

Your next question comes on the line of Lawrence Keusch with Morgan Keegan. Lawrence Keusch - Morgan Keegan & Company, Inc.: I guess the question is as you think about, again, '12 and your capital allocation, you've indicated that you don't anticipate the environment to be much different than it is currently. And Vince, I'm just wondering or, David, if you can sort of discuss how you're thinking about capital allocation. You'll obviously drive significant amount of cash flow next year and is there a scenario that you could actually do more than the $600 million in share repurchase that you initially targeted for '12?

We're not ready to start guiding on the share buybacks at this point. There's too many moving pieces. So we'll come back to you in November on that piece. But you're right. One of the things that we're very fortunate is that we have such strong cash flow as a company. We're in good position to fund our growth initiatives and our capital needs. So we'll get back to you on that. Lawrence Keusch - Morgan Keegan & Company, Inc.: And what about just broadly capital allocations. Just how you guys are thinking about it.

Well, first, of course, we think about funding the needs of the business, our growth initiatives, R&D and then of course, moving to capital. On the capital side, our biggest requirement right now is the Pharmaceutical Systems business. It's not so much capacity expansion as it is a new manufacturing process and, of course, going forward with ReLoCo and. Then from there, of course, it's dividends and share buybacks.

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

Maybe you can expand a little more, Vince, on the new product impact. It sounds like basically all the new products, you went through them, are pretty much on track. I'd be curious to know a couple of things. First, on the BD Medical side of those new products, it all sounds good. But is that all things equal going to drive growth acceleration? And second, just as you said in the past that I believe that some of the new products like FACSVerse, the Acurri are on track, but do you think they could add 1% or 2% to sales starting in 2012. Has anything changed there that would make us think differently about the growth impact?

So nothing has really changed from either a market or a product side for the new products across the business. They are on track pretty much. Diabetes Care is doing well with Nano. That uptake is going well, and the new Nexiva products that we're talking about and ReKindle. So we see the same prospects. I think I would say the same for both Biosciences and Diagnostics. As we look out towards '12, I think one of the factors we haven't mentioned so far from an environmental standpoint, and I hate to even mention this word is kind of looking forward towards the flu season. And one of the things that we know and I'm not talking about diagnostic testing, I'm talking about on the Pharmaceutical Systems side. The forecast are that the flu is going to be the same strain and that there is -- it was a very mild flu season last year. So we're looking out at that being potentially a weaker market next year. Bill, do you have any other comments on that? Is that pretty much it?

That's accurate.

So I guess that was the one environmental difference and some of the research funding in Europe that we mentioned. Bill Rhodes was talking about the fact that in the U.K. and in France, we see delays in funding. There's actually 3 different pathways in the U.K. to funding. In one of those pathways, which is the biggest one, they have dropped a percentage that they will fund on an individual instrument. So customers are having to seek other sources of funding. So those are the kind of the environmental things that we're dealing with. But the new products are basically on track.

Your next question comes from the line of Jon Groberg with Macquarie.

So my question, I guess, is just around emerging markets because you're talking about continuing trends and obviously, for the last few years, emerging markets have been growing at very high rates. It's become a larger percentage of your sales. And so I'm just curious, there are some concerns out there in terms of what could happen in emerging markets. China is starting a new 5-year plan, and they invested heavily in health care over the last few years. So maybe you can just discuss, I guess, current trends there and what gives you the confidence that those will continue to grow at similar rates.

Sure. I'll make a first comment and then turn it over to Gary. Specifically on China, we see a multi-year commitment, not just this 5-year plan to building the health care system. And I think they see that fundamental to their, I call it, country strategy and social stability. So we think there's going to be continued commitment to health care, and they're really in the early stages of building that system. And we see more opportunity across the region, which Gary can comment on and not just in Asia.

This is Gary Cohen. I would say that we don't see things that would give us any cause for concern that the growth won't continue in emerging markets. And that's on the basis of having a business array that's very well aligned to the health needs that exist emerging markets. Whether it be infectious disease, chronic disease such as diabetes, cervical cancer, all these areas where we have a lot of depth are well aligned to primary areas of interest and health care investment. Plus, as health care access broadens, which is a principal factor in health care reform processes in many countries, China, of course, but also other countries like Indonesia, Russia is passing a major health care reform bill. We're seeing in Latin America, because of the economic strain growth going forward there as well, and as basic health care access improves that also lends itself to the type of very core products that we have such as injection infusion, blood drawing and so forth. The other factor I would say is that we've developed over the past decade a sound experience and a good business model for how to engage and collaborate with health authorities and in developing countries with NGOs on addressing health needs. And that business model is also a key part of our ongoing success. And finally, as noted in the quarter, we're seeing strong growth in safety engineered devices where we have a lot of strength. So we can say it's going to be the same growth every quarter going out over the next several years but the general trends and dynamics we think are positive. And the whole notion of health care reform in emerging markets is a very positive thing. In the West, it's constrained. But in health care reform in the emerging markets it means investment. We don't see this changing as the economies continue to improve.

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

I just wanted to recircle on commentary that you had provided, Vince the tail end on fiscal '12 to make sure we all understood it. You had mentioned 5% top and 10% bottom line in the context of FX neutral growth, and then you had kind of alluded to the fact that this seemingly was also including an FX benefit. And I just want to be clear. Is that just simply the FX benefit offset by deal dilution and is the 45 or actually higher estimated sales from Carmel actually included in that 5% top line as well?

David will take that.

Kristen, the way to think about it is our base for growing going into next year is what our reported number is this year. The only adjustment you would ever make is if you had any hedges, and we don't have any hedges this year. So when we talk about 10% growth on a reported number this year, the only adjustment being is the dilution from the acquisition.

Okay. So the 10% bottom line growth will then be diluted for the acquisition?

Well, you got to take the net effect of the dilution this year and the dilution next year. So there'll be, as Vince said, there is the $0.05 dilution this year and minimal dilution in fiscal year '12, which we'll provide guidance on in November.

Okay. And so the 5 and 10 does include the deal year to year?

No, what we've said was the impact of the acquisition has not been built into our guidance because we haven't closed the deal yet. But the dilution impact for this year is $0.05. We have not given you what the number is for next year.

Okay. So the '12 numbers were excluding the deal from the top line perspective, but excluding FX?

The reason we've said excluding the deal so far. I'm sorry, we weren't clear on that.

And excluding FX or including FX?

It includes FX. That's your base.

Your next question comes from the line of Jon Wood with Jefferies. Jon Wood - Jefferies & Company, Inc.: This is for Bill Rhodes. In the Flow business, you guys called out the European Union again, but any changes to your outlook in the U.S. given the headlines we've seen of late?

This is Bill Rhodes. I'm assuming you're talking about the debt ceiling and what's happened in Washington over the last few days. Obviously, it's too early for us to prognosticate and we really wouldn't at this point. But again, what we generally see obviously the discretionary spending is where the U.S. government is going to go. That may have an impact on NIH and NSF funding. On the other hand, then we've said this in prior quarters, we tend to see that our Flow business and in the instrumentation are in areas that are actually preserved within the NIH budget. So right now, we're not seeing anything that modifies our view.

Your next question comes on the line of Doug Schenkel with Cowen and Company.

I guess a related question, specific to the outlook for government funding and the macroeconomic budgetary backdrop. Have you seen any impact -- did you see any impact to your business during a quarter that you believe was linked to the ongoing uncertainty in Washington? And you did mention a delay in the release of funding in certain European markets during quarter, has anything changed over the past month?

So we'll ask Bill to comment on that.

This is Bill Rhodes. Assuming that we are talking about research funding in particular, no, we haven't seen anything, Doug.

And in terms of impact in the previous quarter of the uncertainty in Washington, anything notable?

No, not really.

Your next question comes the line of Peter Lawson with Mizuho Securities.

Just on the developing world CD4 launch. What's the cost point of that CD4 instrument versus competitors and then wonder if you could talk about the long-term benefit to the developing world or rather the developed world.

So Bill, you want to take that? I think he's talking about the replacement for the FACS account.

Actually, I'd like to get some clarity on that question because the product launched that we're talking about the FACSVerse, which is a CD4 analyzer for the developed world. We can talk about that. But were you talking about the CD4 analyzer that we are planning to launch in fourth quarter?

Yes. Exactly. The planning to launch one.

The best I can tell you about that is that it's essentially a replacement for an existing system that we considered the gold standard around the world, which is the FACSCount. So you should anticipate that it would be -- and you didn't ask cost but I'll talk price. You should consider it to be at about that same price point so that's available as an upgrade or replacement to those laboratories. It basically is an instrument that depending upon quantity, et cetera, would be anywhere from about $25,000 to $32,000.

And then the eventual benefit on the developed world?

Well, actually on the developed world, the FACSVerse is the product that would likely be the one to become the clinical product in the developed world because of the need for higher throughput. And that essentially, in the developed world today, the instruments that are in most of the laboratories doing HIV testing, CD4 testing are really the higher-end analyzers, not the FACSCount.

Your next question comes from the line of Brian Weinstein with William Blair. Brian Weinstein - William Blair & Company L.L.C.: You mentioned TriPath had some issues due to some interval changes. How far into the structural change and the demand curve, are we there? And how does this affect how you think about other women's health test like Trich and CT/GC if women are maybe not coming in for this basic testing? Do you see them putting off other tests as well?

Well, I'll ask Tom Polen to comment on that. But they're probably 2 different things that we're talking about.

Yes. Right. This is Tom Polen. Good question. So I think in terms of the trends that we're seeing in pap volumes, we've all seen there is general decline in OB/GYN patient visit volumes happening as an underlying phenomenon. And then in addition to that, of course, there are recommendations made earlier last year or the year before in terms of stemming the intervals. And we've looked at actually some interesting data where if you look back 3 years ago, only 14% of doctors of OB/GYNs recommended doing pap testing every 3 years. Now 34% of doctors recommend doing pap testing every 3 years. So we see that certainly as a trend that's moving in an extended interval. But right now, it's 34% of doctors. And so if you ask how long is this dynamic going to exist in the U.S., I think it's hard to put an end in. Certainly, we would expect that trend to continue for the balance of this year and certainly into FY '12. We don't have a recovery built into our U.S. and expect a similar growth next year in the U.S. as we see this year. As I mentioned in earlier commentary, x U.S. is a very different story as pap testing is really something which is being implemented in most of the developing world today. In terms of impacts on other women's health test like Trich and GC/CT, we've actually have not seen that type of impact in our GC/CT business. I know we have reported that, that business performance in the past we were up 5.1% in that business in the quarter, which is similar to our year-to-date performance, if not slightly up. So we don't see the impact there. And Trich is a different dynamic. So unlike pap in the U.S. where pap is a routine screening, we see Trich is still in the dialogue about becoming more routine screening for asymptomatic women. And so that's a very small market today, but we certainly don't see it declining.

Your next question comes from the line of Jeff Frelick with Canaccord.

Maybe a question for Tom. Tom, could we get an update on the molecular path, the SurePath Plus just looking for maybe some timing of the pivotal study, the size of the study, when do you expect that to be completed and filed.

This is Tom Polen. So as Vince mentioned, that study we started, a U.S. study in Q4 last year. That trial is ongoing. We are in the data analysis phase of that, and our launch date of 2013 remains unchanged from what we shared in the past. In terms of any other commentary regarding the actual data that we're seeing, I'll not comment on that at this point in time.

Your next question comes from the line of Sara Michelmore with Brean Murray. Sara Michelmore - Brean Murray, Carret & Co., LLC: I was hoping you could just go back and clarify the commentary on Pharm Systems business in Europe. I have to say I'm a little surprised that given part of the customer base there anyways, which is industry that, that would be something that would be affected by European austerity. So I'm wondering if you can just clarify that. And also just give an update on the non-European Pharm Systems. So I guess that would be primarily Japan, what the underlying trend is there.

So let me ask Bill Kozy to just comment on Pharm Systems. And Sara, you're right it's not an austerity thing in Pharm Systems. It's a different dynamic going on. So Bill, why don't you comment on that?

Sure. This is Bill Kozy. Let me start with the European piece. What we've seen, now this is going to relate to Vince's earlier comments about last year being a lighter flu season than was expected. And of course, we've got inventory that's sitting in the big pharma channel that does not need to be replaced this year. So we're seeing some natural sales reduction based on inventory requirements associated with big pharma in Europe. Additionally, we've seen fewer and some pushback on launches of new drugs. And a lot of those do come out of Europe for the Pharm Systems business, so that has slowed down Europe. And then the third piece to note was this sourcing transfer. Occasionally these big pharmaceutical companies will move their sourcing from 1 region to another. So about $6 million, particularly just in this quarter was sourced out of the U.S., which explains the very strong U.S. Pharmaceutical Systems sales. And then, of course, the corresponding impact in Europe. SO just building that on the second part of the question about what's going on rest of world, the U.S. had a very strong quarter, driven by this regional sourcing transfer, also by inventory build around low molecular weight Heparin, and the U.S. is the geography where that inventory build is taking place. And additionally, we know that there's been a migration to more pre-fill applications for the upcoming flu season that's coming in the United States. More people in U.S. sourcing will be using pre-fill applications, and that's our vial to pre-fill strategy. And that was actually in the quarter worth about $9 million. So of that U.S. growth, it was very strong year-on-year of $25 million, $26 million year-on-year. About $22 million had some onetime impact. The rest of it was the underlying piece. Japan, we actually continue to do well. We've got solid sales growth of mid-single digit in Japan despite the impact that we had on our plant, and that sales are recovering. And Asia-Pacific, we are pretty much running just a little bit off our plan for the year driven by slower-than-planned uptake in China as we look at particular progress we had expected to make this year. And that's just driven by drug launches at this point in time. Sara Michelmore - Brean Murray, Carret & Co., LLC: Okay. And then just a follow-up then, so just to clarify on the EU austerity impact. If it's not Pharm Systems and part of the lower outlook in Europe is related to austerity, what businesses specifically are you talking about?

This is Gary Cohen. In the quarter, Medical Surgical, Diabetes Care and all Diagnostic Systems both Preanalytical and what we call Diagnostic Systems, the Diagnostic business both had low- to mid-single digit growth. It was really Pharmaceutical Systems and Biosciences that have the lighter quarter.

So in addition, when we were talking austerity, remember we are also including Biosciences in that and the impacts that we were seeing both in France and the U.K. But what we're saying is, we're looking at about a 1% decrease from our forecast going forward in Western Europe when we take all of that into account.

Your next question comes from the line of Tony Butler with Barclays Capital.

Back to Tom Polen's on Diagnostics, if I may. Could you comment about BD MAX initial launch. Also, if in fact, it's tracking at above or below your expectations.

This is Tom Polen. So we're very pleased with the launch. It's tracking right through our expectations, and we're seeing very positive feedback from customers. We have to shift, of course, a number of instruments. We do have, particularly in Europe, a number of our customers have begun to develop their own assays on the system using the open channel capabilities. And the feedback that we're getting certainly the most consistent is just around the full automation, which customers are very pleased with, as well as the flexibility that the system offers with its open capabilities, which is all we that we've launched at this point in time. Obviously, as Vince mentioned in his earlier commentary, our BD branded assays begin to launch in FY '12.

Your next question comes from the line of Matthew Buten with Catapult.

You guys, with your cash flow generation, what are you assuming for buybacks in the context of that 10% target for next year roughly?

So we haven't guided on the share buybacks for next year at this point. What we said was that we'll come back to you in November, and we'll give you all the pieces at that time.

Your next question is from Jaimin Patel with Greenlight Capital.

Okay. The question is regarding SSG&A in the quarter. The $60-odd million increase from the quarter and the prior year, can you break that down for us a little bit in the components? And on a dollar basis, how much was the receivable reserve?

Receivables is about $6 million. This is David, Jaimin. And we had legal fees, which were around $7 million, and then between EVEREST and our pension, there's about $10 million there. And remember we also talked about the deferred compensation, which is offset other income, which comes through. So those were the main drivers in the quarter. For the full year obviously, they're a little larger.

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

You'd mentioned in the prepared remarks that pricing was down about 1%. Just wanted to see if you're seeing overall, I guess, given the austerity measures, if that's any different than kind of the trend I forgot kind of where you have been tracking, I thought it was a little less than 1%. So maybe if you could just help us understand maybe pricing trends in the outlook you're expecting.

Yes. So it has increased a little bit. It's up slightly from where it was before. We continue to see price pressure on selected products. Really in the device category over the last several months and, Kristen, I expect that this is going to continue slightly more than last quarter.

Okay. And just again, I guess, on the guidance or not guidance but commentary on next year, the 5% underlying that is a little bit weaker than I guess where you've historically talked about your longer-term targets, which I presume we'll get in November. Is that just simply continuation of utilization in Western Europe or is that also reflecting your expectation for perhaps worsening price?

So Kristen, it's an all-in number that we gave you. We don't have all the details broken out. But from a preliminary analysis standpoint, we're kind of stepping back and saying we're looking at Western Europe, we're looking at the cost controls in the U.S. So kind of a developing world, low growth in utilization. I also mentioned the issue that Bill Kozy went into a little bit of detail on in terms of our expectations around inventory in the chain and the Pharm Systems business. We had that in our minds as well. So it's more of an environmental, including the pricing trends that we have seen. All of that together.

And that would also be a deceleration from this year, given that the 5% includes FX. So is that fair as well, if you were to normalize this year for flu?

No, I'm not seeing this as a real deceleration. As I said, more in line net-net, if we were to go through everything.

Our final question comes from the line of Bill Quirk with Piper Jaffray.

Tom, quickly, the GenOhm growth number in the quarter and then on a related question, can you comment a little bit on just on the BD MAX longer range menu. It looks like you're going to have a little overlap here between the Viper LP and the BD MAX.

So this is Tom. For the quarter, GeneOhm was -- it was an interesting quarter for GeneOhm. We grew 5.5% for the quarter, which was impacted largely by timing of orders. Let me just give a little bit more color there. So the first month of the quarter was light, and the last 2 months of the quarter were quite strong, actually above our full year run rate. And so we saw those balancing out. You may recall we had a real jump in our growth in Q2, and what we expect was there is probably a bit of pull forward on a stocking situation. All of these are direct ship to customers inventory as we went into the summer period. And so as we look across the year-to-date, we're up 14% and that's still the trend that we expect to continue for the balance of the year. As you mentioned, the question on menu and potential overlap with the Viper platform assuming most specifically looking at the STD area of GC/CT and Trich. So we do see that certainly the MAX and the Viper serve 2 very different segments. So if you think about the Viper, that is used primarily for a large volume tests, often screening tests like GC/CT, Trich as that moves into screening in the future, HPV. As you're aware, we have HPV in development and actually a good [indiscernible] article came out this month on our HPV assay. As we think about wanting low-cost, high-throughput solution for high-volume screening laboratories, Viper is going to be a platform of choice for that. It's extremely efficient from a workflow perspective, and the design of that product allows a very low cost of goods for us to be able to provide a very competitive price point to customers who have that high-throughput, high-workflow efficiency need. For customers more characterized as acute care setting customers, MAX is a moderately complex instrument. So not only can a MAX go into a hospital laboratory, but also laboratories that would perhaps be currently using our Affirm product, not hospital-based laboratories that are moderately complex, MAX can fit into those environment. So there, they may be setting out their testing today or have just a different dynamic where the throughput isn't quite as important. And they're looking for flexibility and breadth of assays that they can run on the MAX system to fully utilize it. We see that. Those types of customers wanting access to test like GC/CT and Trich and therefore, we're putting those on. We'll be at a different price points, so it will be more expensive than if you wanted to run that same assay on the Viper. But it'll service that segment very nicely. And we are putting actually the GC/CT Trich that is going to be a triplex combo assay single well.

That was our final question. And now I'd like to turn the floor back over to Vince Forlenza for any closing remarks.

Yes. Let me thank all of you for your questions and your interest. Let me just make a final comment on the revenue growth rate '11 versus '12. And just to remind everyone that if you look at FY '11 and you adjust for the flu and the stimulus on an FX-neutral basis for the total company, we're at approximately 5%. And just to clarify what we're saying for next year on an FX-neutral basis is basically the same numbers. So ultimately, when you factor all these issues in that we've talked about, we're saying about the same. I'd also like to say that we're pleased with the quarter. The product launches that we've discussed with you are on track. We're excited about those products. We're excited about what we're seeing in Diabetes Care with the Nano and the MAX and the launches in Biosciences as well, and they're offsetting some headwinds from the marketplace. Our operational programs are on track, and we're pleased that we started them on a proactive basis several years ago. And we look forward to the benefits of those programs in the years to come and the expansion of those programs with ReLoCo 2. The business as we set for next year, 5% on the top line and 10% on the bottom line on an underlying basis, and so we look forward to giving you more detail as we move forward. And thanks very much for your participation today.

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