Becton Dickinson and Co (BDX) 2002 Q3 法說會逐字稿

Hello and welcome to the BD 3rd fiscal quarter Earnings Release Conference Call. At the request of BD, today's call is being recorded for replay and will an available on the BD website at BD.com through August 1st, 2002. I would like to inform parties, your lines have been placed on a listen-only mode until the question and answer segment. Beginning today's conference is Mr. Dean Paranicas, Vice President of Investor Relations and Public Affairs. Sir, you may begin.

Thank you, Missy and good morning to all of you. And we welcome you and thank you for joining us on our conference call to discuss the results of our 3rd fiscal quarter of 2002. Today's conference call is being simultaneously webcast, as you were just informed, and in addition to being available on our website for playback, it will also be available at 1-800-945-3063 in each case through the close of business on August 1, 2002.

Also joining us on this conference call are members of the media. In the course of this morning's discussion, We will make forward-looking statements and it is possible that actual results could differ from the expectations we express today.

Factors that could cause such differences appear in 3rd quarter press release and in the management discussion and analysis section of our recent SEC filings. Joining us this morning are John Considine, our executive Vice President and Chief Financial Officer, who will take you through the quarter's results, together with Gary Cohen, President of BD Medical Systems. William Kozy, President of BD Clinical Laboratory Solutions and Company Operations, Deborah Neff, president of BD Biosciences. And Vincent Forlenza, Senior Vice President of Technology, Strategy and Development. Now I'll turn the call over to John.

Thank you, Dean and good morning. By now I assume you've all had time to review the earnings release and the attachments we issued yesterday after the market's close. We're going to try to make our remarks brief so we can devote as much time as possible to answering your questions. Before we get into the questions, let me just say a few things about the quarter.

Our revenue growth for the quarter of 6% on a reported basis reflected growth across all three business segments. Medical systems reported revenue growth of about 7%, is continuing to be driven by sales of safety-engineered devices in the U.S., and globally by pharmaceutical systems prefillable products.

Overall safety sales--and for this I will include the sales recorded in pre-analytical solutions within clinical labs--grew about 32% for the quarter and almost 41% for the first nine months. These are both in line with our expectations 3rd quarter sales of safety; were about $145 million.

The overall growth rate in the medical systems segment was offset in part by reduced sales of conventional devices in the U.S. as the market continues to convert to safety-engineered devices. In addition, in consumer health care, which was down about 5% for the quarter and the only part of medical that was down, by the way, we recorded lower than expected sales of diabetes syringes resulting from having learned recently that one of our distributors held about 8 million more of inventory than had been previously reported to us.

Consistent with our revenue recognition policy, which you will recall changed in connection with the adoption of staff accounting bulletin 101, in the 4th quarter of 2001, we recognized sales of diabetic syringes in the U.S. only when they are sold from the distribution channels partner to the ring customer. On a quarterly basis to get this information, we confirm with each distributor channel partner, its sales and inventory on hand.

In this case, new information concerning the existence of additional inventory was confirmed, which for accounting purposes is a change in accounting estimate. As such, reported sales of diabetes syringes were negatively impacted by about $8 million in the current quarter. While we can't say for certain, we believe this inventory may date back to as far back as early 1999 or 2000 and, in fact, we have no idea why it wasn't reported to us earlier.

That said it should be noted that the sales that actually left the distribution channels to their end customers were in line with our expectations for the quarter and we continue to expect the diabetes syringes will increase in the 4th Quarter.

As I've already said, the clinical laboratories solution segment also benefited from U.S. safety sales, which was the key driver in the pre-analytical solutions side of the segment. As with medical, these sales were partially offset by reduced sales of conventional counterparts of these products.

Overall segment growth was in line with our expectations, taking into consideration an anticipated decline in diagnostic systems in the quarter that reflected inventory stocking in the 2nd Quarter by distributors in advance of the installation of our new SAP system and our diagnostic hub in the U.S. Overall, we continue to expect full-year diagnostic systems revenues to be in line with our projections. I'd remind you that the diagnostic system sales were up 10% in the 3rd quarter -- I'm sorry, in the 2nd quarter versus about plus 3 in the 1st quarter.

This quarter they're down about 2% and for the year should be normalized at about 4% up. In the press release, you will note that we have broken down the product groups within BD biosciences into four parts. Discovery Lab Wear, [INAUDIBLE] Instruments and Reagents, Molecular Biology Reagents and Immunology Cell Biology Reagents.

As to growth in this segment it came from Immunology Cell Biology Reagents, that's our pharmagin product, of over 15% and Discovery Lab Wear of almost 8%. The growth rate for the quarter for the flow cytometry's instrument and reagent products--that's our immuno cytometry systems products--were slightly down compared to last year, though growing at about 9% year to date. Various factors, including most specific to this quarter impacted those results.

Several customers delayed installation of their instruments into the 4th quarter due to their delayed lab readiness.

The LSR 2 flow cytometry platform launch, scheduled for mid-4th quarter, shifted booked orders that were previously scheduled for the LSR 1 instrument into the 4th quarter and changed these to the LSR 2 instrument, a much more highly-designed instrument. And the government also delayed release of some research funding into the 4th quarter. We expect growth in the 4th quarter for these products to be in the 12 to 14% range and for the year about 10% overall.

So that the one area of issue within the biosciences business that we have to deal with in terms of loss growth is within molecular biology reagents. Both the year to date growth for the quarter and the year were negatively impacted by weakness in the array in R&A molecular biology reagent product lines, again, our clone tech products, with growth down about 7% for the quarter compared to last year.

Other core microbiology product lines associated with later-stage drug development continue to grow in double digits. We expect some turn around in the 4th quarter while we complete a realignment of the business priorities to match the market needs, and Deb can expand on that as I'm sure you will have questions.

For the year, these products for the whole -- that whole product lin--are about $75 million in sales and will be down about 4%. Overall, the segment is still expected to grow between 9 and 10% for the year and a little bit better on a currency neutral basis. As we said it was -- would--our gross profit margin of 48.5% reflected sequential improvement over the 2nd quarter of this year.

Sales of safety-engineered devices added about 50 basis points to our gross margin. With pharmagin and lab we're adding 30 basis points. Offsetting this was among other factors, the effect of lower sales of high margin U.S. diabetes syringes, in particular the $8 million I talked about earlier and molecular biology immuno-cytometry system sales in biosciences by variances recording connection with our inventory reduction efforts, both of which were discussed in April and by sales mix primarily with respect to pharm systems, which had lowered gross profits in our corporate average, but, importantly, tracks less SSG&A support costs and higher hedge costs, which are no longer front-ended, as we've discussed many times.

We expect the impact related to diabetic syringes to turn around in the 4th quarter and as we've said before, the inventory of various variances to have turned around in fiscal of 2003, which will favorably impact gross margin. I just add that that $8 million that we talked about in diabetes would have alone moved the gross margin up by 50 to 60 basis points for the whole company.

So that if there is any -- any worry that the margin is -- isn't improving, you should take that in to consideration. In terms of cash flow for the first nine months of the year, we generated over $600 million in net cash from operations. As we've discussed before, we put about $100 million into the pension plan in the 1st quarter. We've spent $160 million so far in capital expenditures and we've repurchased about 4.9 million shares of common stock per $174 million.

We expect to make our capital target of $300 million, in fact, we think we will come in less than that. I now want to just speak to our restructuring and divestiture initiatives, regarding the medical system's manufacuring restructuring, we reported a 4 cent per share charge in the 3rd quarter, primarily for severance and asset impairment costs, And operating results, as we had said they would, reflected a 1cent share cost primarily in association with accelerated depreciation in connection with the restructuring. That's recorded in cost of products sold. So that obviously also took down margin.

We currently estimate those same costs to be about 1 cent in the 4th quarter as well as we said we think next year it should be neutral to about -- about neutral for the year. Regarding the divestitures, as you know, in April we entered into a letter of intent to sell the critical care product line. The transaction remains subject to the currency of a number of events and assuming they are concluded in the 4th quarter were recorded substantially non-cash loss on a pre-tax basis in the 35 to $40 million range.

That went up somewhat from what we told you before and that's frankly a -- a recognition that in the cumulative translation adjustments went in equity we have some -- some write-offs to take for past translation losses that are booked to the balance sheet. I want to just give you one piece of information that will be in our 10Q, is of no moment, but I don't want anyone to miss it.

In connection our kind--of try deal with millennium, ourselves and Tri-Path for the development of oncology products, gene markers, we invested about $15 million in Tri-Path stock and that stock has been trading under our book value, not under our book value, but I'm sorry, under -- under the price that was at the time we bought it, it is down about 2/3 or 8 to $10 million. We'll continue to look at that.

There's an accounting world, if it is under water for six months, you have to look at that factor among others, including its -- its viability as a long-term project, it's prospects focus returning to above water. If it's not and if we don't meet any of those tests, we and our accountants, outside accountants, Earnst and Young, would decide to reflect that as a write down. Any write downs now are reflected in other comprehensive income but don't run through the P&L.

If we did that, we would take in non-cash write-off for the decline in the market value if it is deemed to be permanent. Looking at the rest of the year, I refer you to the table in the press release, our diluted earnings per share outlook prior to the manufacturing and restructuring charges and potential loss on critical care, anything that happens with the tri-path is 53 cents for the 4th quarter and $1.88 for the year, which includes--as I said before--the 2 cents from manufacturing restructuring costs which are booked to product, cost of products sold and operations.

Just before I open this to Q&A, I want to just say two quick things. Obviously Ed and I will be signing the certificate, as you would expect. We will do this [INAUDIBLE] with our filing of the 10Q. And the second thing, I'm sure you saw the GPO story.

We have written a response to the "New York Times" letter to the editor which is or will be posted shortly on our website. And we've heard from the Times that they are considering a version of that letter to be included in the Times. I don't think we have that editorial license over what they put in, but they've been good enough to call us and say they're considering it and so you might look forward that.

If you have any questions, I or Gary are willing to talk about that, but it's actually of no moment right now. With that said, why don't we begin the Q&A and in order to allow for the broadest participation, we'd like you to limit your questions to one with a follow-up. Thanks. Dean, why don't you take it from here?

Yeah, Missy, would you just please repeat the instructions for those who wish to ask questions?

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press star then1. You will be announced prior to asking your question and to withdraw your question, you may press star then 2. Once again, to ask a question, please press star then 1. Our first question today is from Glen Resik of Morgan Stanley. You may ask your question.

Good morning, folks. Can you hear me?

Yeah.

Okay. In the press release you talked a little bit about the decline in the conventional business as a result of safety. Is that a new flag or is that just continuation of the, you know, cannibalization that occurs, is sort of the basic question. And maybe you can give us a little color about how Tyco has been in the marketplace given the problems they're experiencing?

Gary will talk to the second part of that. But that's the typical cannibalization, as you point out, Glen, which we have always said is in the plus or minus kind-of 35% range. We view it that for every safety device we sell, we lose one conventional. That may or may not be true, but that would be the most conservative way to approach it, about 35%.

Gary, you might want to talk about the business side.

Just to confirm that the cannibalization or the offset we that referred to in the release is entirely consistent with what we reported previously and just to flush it out a little bit, in the U.S. we had $21 million of safety sales growth in the medical segment and about $5 million in decline in conventional products. That correlates actually with the lower than the cannibalization rate we had reported previously--nothing new there.

Regarding Tyco, we typically wouldn't want to talk too much about competition on these calls. The marketplace for our products is highly competitive. Tyco is a large competitor in the market and we believe they're going to compete for as much business as they can get.

The question I'm really asking is, have they been getting share or losing share over the last say three to six months? And has pricing in the overall market -- the pricing trends in the overall market been changing at all?

We have not seen any significant changes in either area over the last three to six months.

Thank you.

Our next question is from Rick Wise of Bear Stearns. You may ask your question.

Hi. Good morning, John. I guess my question would focus on the diabetes distributor situation. John, you've been turning over rocks at Becton for a couple of years now. Why is this emerging so late in the game? How confident are you that this is the last of these? What are the implications for 4th quarter sales? I mean, do you think the situation reverses itself in the 4th quarter?

And in light of all this, the impact on gross margins, does this change at all your outlook or your previous thoughts about achieving or exceeding a 49% gross margin for the year? Thanks.

This -- this is one distributor who we confirmed amounts with both sales and inventory balances, when was he adopted SAB 101 in the 4th quarter of 2001, we did it again in the 1st quarter, again in the 2nd quarter and now in the 3rd quarter. And this piece of inventory came out of the blue.

I'm not going to say which distributor it was, but it was a particular location that they had which they had never confirmed before. As I say, we think, in fact, this inventory probably dates back to before 2001. But we can't say that absolutely for certain. So, it's a one-time change in estimate which means that we need to adjust down the sales for the quarter to reflect that because we have to stay consistent with the way we do this.

And, so it's a one-off. I don't expect it to occur again. I see it making no change in our ability to again increase the margin in the 4th quarter and in the 4th quarter we do believe that the margin will -- will achieve 49%. And so, I think we've got it, Rick, I for the life of you can't tell you why this happened, but it did and it's the right accounting. We're not going to--you know, you don't feather these things in, you take them when they come and we book it through the P&L.

Just--and the 49% gross margin, John? Overall for the company as a whole?

For the whole we think again, that, we will be up again in the 4th quarter in terms of gross margin. We think it will be, you know, 49%, maybe a little higher than that. You know, it's--we have--obviously we've got the growth, you know, the manufacturing restructuring which will [INAUDIBLE] it again for about the cost of a penny. So that may make it closer to the 49 than the 41. You know, so, it's in that, you know, 48.9 to the 49.1 kind of for the -- for that quarter.

So, for the -- for the year you're looking at over 48% and next year we're buying the manufacturing restructuring. Which shouldn't have an effect. During the year, the inventory reduction program starts to go away. Safety will continue to contribute to it and diabetes should actually be very helpful to us next year in terms of gross margin because we're not dealing again with the higher fees that were associated with the sales that were going through in the 1st two and a half, three quarters.

And last, related to that, can you update us on the timing of the blood glucose [INAUDIBLE] launch? Are you going to be launching it at the Diabetes Educator Meeting In the next month or so?

Let's have Gary talk to that. He knows it much better.

As you know, we have really not been disclosing anything about our plans and we're going to continue to maintain that policy until we're in the marketplace.

I can confirm to you that we will be launching a product as planned on the schedule we originally planned, which will be various places between now and the end of the calendar year. And that's as much as we're disclosing now. But as soon as we launch to market, we will be providing more information.

Thank you.

Our next question is from Dan LeMafor of Merrill Lynch. You may ask your question.

Okay. Good morning, everybody. I have one question on the quarter then a totally unrelated follow-up for Deborah Neff. But, John, with the $8 million surprise in knowing how profitable that diabetic business is, did you -- you saw it coming early enough so that you could adjust some spending and that's why you were still able to hit the earnings numbers? I'm just a little concerned about some deferred spending or something that may hit the 4th quarter that may make it a little more sensitive to whatever happens at the top line in the 4th quarter?

No, as a matter of fact, we didn't, Dan. You know, it came in late in the quarter. We do this, as you would expect, we do the -- the survey of confirmations with the distributor channel partners later in the quarter rather than early. So it came to us late.

As you know, we've been controlling the heck out of SSG&A spending since the beginning of 2000, or the end of 2000. And when we put in those programs. So it was just a condition continuation of that.

With respect to R&D, you know, we finished off and Deb can talk, when she responds to your other question about, some -- some research and development that we had done on a new instrument platform which is now being completed. There is no deferrals of anything else. There was a one-planned payment of about $1 million, which we initially thought was going to be in the 3rd quarter, which turns out to be in the 4th but wasn't related to this. So we would have hit the number and in fact probably exceeded it had we not had that.

Okay. Okay. And Deb, where I know you guys don't have anything planned for next week's American Association of Clinical Chemistry meeting because it's not a show that covers an awful lot of what you do, but one of your competitors [INAUDIBLE] will be there.

I was just wondering if you could comment on the competitive landscape in flow cytometry, so we can get comfortable that whatever's happening here is mostly a reflection of in-market demand,versus market share issues?

Sure--and in fact, we will be at the AACC. So, you should expect to see us there. In terms of the competitive marketplace, we continue to hold and maintain, in fact, grow our market share across whether it is clinical or the research market. As you know, Beckman Colter has announced launches of a new instrument platform and we feel that our new product, the LSR-2, will be very competitive in the marketplace. So, we are not losing shares. Shares is holding very steady and, in fact, we're continuing to make incremental share gains.

Okay. Thanks.

Our next question is from Ted Seiver from Bank of America Securities. You may ask your question.

Thanks, questions on two of the segments. Can you talk about for a minute about the pharm systems number. Clearly one of the best you've put up in the business in a little while. We expect that kind of growth moving forward with items of contracts that really contributed to the 20% growth. And on the negative side, I -- I'd just like to get a little more color on the diagnostic systems business, how some of the key product areas are doing there and what we can expect in the next quarter for that business?

Let me just say one thing, and then turn it over to Gary and Bill, Ted. You know that, business, pharm systems, has a pattern of having very strong sales in the first three quarters. On a reported basis, you know, if you go back to your notes you will see it, you know, pharm systems was up almost 27% in the 1st quarter, was up about 15% in the second. It is up 20% this one. The 4th quarter always drops down, but we expect that. It's been in our numbers. And Gary can respond to that.

And then, you know, just with that backdrop, Gary, why don't you talk about the business stuff, and then Bill can talk about the pieces of diagnostic businesses.

I'm going to confirm what John said. The business has performed exceptionally well this year. The 4th quarter typically is from a year to year growth standpoint, the quarter where we have the lease growth.

We do anticipate that the growth in the 4th quarter will be much lower than it was in the first three. However, over the course of the full year, the growth will be a little bit higher than we had originally expected for the full year, reflecting the underlying strength in the business.

Bill, do you want to just expand on diagnostics?

Yes, to reiterate John's earlier statement, we did see a 5 to $7 million transfer of sales between quarters, again associated with the successful go-live of the SAP operating system in Baltimore. We do not see any implications of that for the 4th quarter. This business is growing in the mid-single digit range. We would project that it would continue at that rate in the 4th quarter and the key instrument platforms, both Probe Tech and Phoenix, continue to do well with -- with Probe Tech performance maintaining its well-above-planned year to date performance both for the quarter and projected for the end of the year.

John, this is a follow-up, just a quick update on the buyback program, what your expectations are there?

Well, as I said, just in case anyone missed it, we -- we had a target this year of about 5 million shares and we bought 4.9 through three quarters. We have a total authorization of 10. So we have 5.1 left we can buy under the current authorization. It should be no surprise to you that we believe the stock is significantly undervalued, so does everybody else on the street with respect to their stock. So, we will be back in the market as soon as we can get back in the market. I always said and Ed always said we will be opportunistic in terms of how we buy and we're not in any way limited to buying that 5 million. We do have to keep in mind our debt to cap, and our debt to cap is so strong right now, it's about 32.5%, total debt to total cap that, we have room to buy more so you would expect us to be out there. I won't say exactly how much, but we will be there.

Great. Thanks, John.

Our next question is from Ryan Rouche of Adams, Harkness and Hill. You may ask your question.

Good morning, just a couple of quick questions. What were safety sales both on the medical side and the clinical lab solutions side? And what was the growth rate year-over-year?

I'll let Gary and Bill give you the exact, but I think both of them were up about 32, 33% for the quarter and for the year the whole thing is up 41%. Gary, do you have specifics?

Yes, for the quarter in the medical segment, sales were up 32% year-to-year in the 3rd quarter.

And for clinical lab solutions, sales for safety products up 33% for the 3rd quarter.

Okay. And then what were Phoenix and Probe Tech's placements in the quarter and what's your current install basis each?

On probe tech, placements for the quarter were at 20, which would put the three quarters year to date at 110, as I mentioned earlier, those sales and those placements continue to run ahead of plan on a year to date basis for Probe Tech. Revenues are slightly over $25 million, which puts us rough cut about 20% ahead of where we expected to be at this time. On Phoenix, our -- our placements continue to be right on track, our revenue stream associated with reagents continues to trail a little bit due to the slower ramp-up of full utilization of the Phoenix platforms. But placements year to date for Phoenix were 10 for the quarter and just under 40 year to date.

Thanks a lot.

Our next question is from Steve Lipton of Credit Suisse First Boston. You may ask your question.

Hi, guys. I wonder if Deb can provide more details with respect to the redirection efforts in the molecular biology segment, what it involves and how long the process will take? And also, for John, for the 4th quarter, could you give us your thoughts on total revenue growth on an actual and constant currency basis? Thanks.

Deb, why don't you go head first.

Sure, I'm happy to. First of all, the redirection has really been to really direct particularly the R&D investment as well as the supporting, marketing, and technical support, from early stage target I.D.-related products. To more later-stage drug development products and particularly those like those associated with gene expression, protein interaction, reporter systems.

And we started that process earlier this year, as I think I started mentioning that we were seeing weakness in the area that's affecting us and the other players in the molecular biology area. And we are expecting to see those actions start paying off even in the 4th quarter as we start seeing some turn around from the negative growth.

This also included us doing some reorganization in the company that included actually resizing the business to be appropriate for what we see the ongoing growth will be for that business and to be able to take advantage of the continuing synergy and integration across the biosciences business.

Okay.

And -- and just when you look at it for the year, for the 4th quarter, I'm sorry, you're looking at about 7% in both reported and performance or FX-neutral --kind-of, you know, obviously the Euro has gone up, but Latin America has gone down. So, it is about even for us, you know, we should be up for the year overall for the company, again, around 7%, which is just about where we said. The only real likeness is in the clone tech business that you just asked about. And that's about it. When you look at medical, you know, medical is going to be up 7 and 8-plus on a currency neutral basis for the year and clinical labs would be about 6 and 7 and biosciences is going to be, you know, 9, 10 kind of a range. So that's where the company should end up for the year.

Okay, great, thank you.

Once again, if you would like to ask a question, please press star, then 1. Our next question today is from Robert Goldman of Buckingham Research. You may ask your question.

Thanks. A couple of questions just to clarify the GPO issues. When there is money that changes hands between a supplier such as BD and the GPO, oftentimes it is called the administrative fee.

How is that treated for accounting on the suppliers' books? On Becton's books? Is it [INAUDIBLE] for revenue? Is it a cost? What's the timing of that, and perhaps you can aggregate for us the amount of those administrative fees in the aggregate by Becton Dickinson to the GPOs on an annual basis?

Let me just -- Gary, you may want to put flavor on this. But let me just cover the accounting. We look at all of this as price. So, it's booked as a reduction of sales and it tracks the sales. So, if the contract stipulates that's we pay a fee based on sales, we track the underlying sales and we book it as a price reduction or a reduction in sales on our income statement.

All I would add is that the payment of administrative fees to purchasing organizations is standard practice throughout the health care industry as John indicated. These are recorded in the revenue line and they're recorded come we sell products to the distributor.

Could you add, as a percent of your product sales to GPO's what the magnitude is of these fees?

As with all manufacturers, they vary by contract, typically in the 2 to 3% range.

Okay. Thank you.

Obviously, all of our sales don't go through GPO's. If you look at the company, we've got $4 billion in sales and the GPO's are probably, oh, 3/4 of a billion dollars. So, it's something like that. Just to put this all in perspective.

Thank you.

Our next question is from Glen Beason of Morgan Stanley. You may ask your question, sir.

Just a follow-up really on two issues.

Number one, as we start to look at 2003, I know you haven't finished budgeting yet, but I'd be curious if you have a preliminary sort-of outlook on what sales growth will look like and whether you think you need make changes with respect to the normalized growth rate for the bio science business, knowing what you know today about the whole molecular business?

And then number two, from a cost side, I am curious to know where you think R&D is going to be going on a growth basis and whether you can continue to hold it, you know, at low single digit growth?

Okay, in -- you're right, Glen, we are in the midst of our budget right now and as you can well imagine, you know, we've got a lot of things going in different directions. But that said, overall we don't see any -- any reason to take them to companies overall, revenue growth. You know, we --

Which is what now, would you say?

We said we'd be in the kind of 7% plus reported moving up, but, you know, not leaping up, but moving up each year and we continue to think, therefore that, we will move up this year over that reported growth rate in 2003. You know, not withstanding that clone tech and just to put it in perspective, again, remember, this is a $75 million business. Now, obviously this year it is down.

You know, right now I don't want to give you an exact number of where we think it's going to go, but it's not going to leap up. You know, depths turning change the business. It's -- it's not early stage. It is later stage drug development they're looking at. We've rightsized the business in terms of its work complement. We've targeted the -- the R&D and I will let her expand on that. So, that even with that we continue to think we can go up in terms of revenue.

And as Ed said, this is a story we're not going to, you know, we licensed, you know, 10%, but we're -- we're going to keep pushing up and, you know, our absolute reported growth is -- should go up again next year. Deb, do you want to talk about what you're doing in bio?

We talked a little bit about it.

I think the other thing we've done that I probably didn't mention, is really brought in seasons management to the organization, which includes particularly -- I'm staying on clone tech for a minute, which includes a new Vice President General Manager who brings 20 years of experience in this industry, a new head of our marketing organization there and some people into our R&D group to just strengthen, particularly the investment areas we're now focusing on. So, I think those things bode well for us kind of turning the tide of the growth rate for that business.

So,John, do you want to bring this together and give us a commentary on EPS ranges for '03 at this point?

Not right now, Glen, I think, you know, I want to finish off the budget. We will be doing that. -- in the next call. And it just -- it's just too early because we're still going through the budget and that's the process. We will stay with where we are right mow.

Okay, so I want to repeat what I heard, you're sticking with the 7% growth rate given the size of the molecular business, R&D would grow roughly in line with sales?

Yeah, I didn't touch the--thank you for -- I said that whatever, you know, indeed this year's growth rate for the whole company is around 7, we will do better than that next year. I just don't want to say exactly how much that is going to be right now. You know, we're -- we're -- we're comfortable with what's out there now in terms of you guys as a kind of a consensus estimate of where we're going to be in terms of, you know, the streets guidance, anyway.

With respect to R&D, you know, I think it's going to kind of track sales, our long-term objective is obviously to get that up. It's been a bit fortuitous that some of the stuff we've had, Some of tithe larger developments like Probe Tech, Phoenix and the instrument that have come off and that we were able to structure the deal with Tri-Path and Millennium. But that said, top-line growth is an objective, so is bottom line growth, but we're not going to, you know, forget research. So we want-- Ed wants to get that spending up and we're going to try to do that over the next few years.

I promise, this is my last one, can you talk a little bit about what's happening below the operating line and what the trends are there?

Below the operating unit line.

Well, as I said we're generating -- we continue to generate cash, there is a big focus on cash, as I'm sure all businesses do, so, debt should come down or, you know, and share repurchases will continue, but we will still take net debt down. You know, I wish I knew exactly how to project interest rates, but right now we don't see them moving up significantly. Other incomes become kind of non-consequential for us.

You know, we continue to do -- do our appropriate hedging to make sure that we protect the top line and that goes through P&L, but it is no longer down there, it is up there with income and other sales, so you shouldn't see much down there. You know, if the share price ends up staying down low, you know, shares in the EPS calculation fall out because options are under water. And when you guys--you know how that's done under the treasury share method.

You know, that could move the shares down enough to give us an extra penny next year or something like that, but right now I don't think that's anything anybody ought to be factoring in, because who knows what the market is going to do, but there's not much else there. We will just keep buying the shares and generating the cash and hitting the top line.

Thank you.

Our next question is from John [INAUDIBLE] of CIBC World Markets. You may ask your question.

Hi, guys, good morning. I wondered if you could, Ed, maybe talk a little bit about the divestitures in 2003. You talked about 8% sound like a little better than 7. 8% reported growth next year. Does that include divestitures and what should we assume in terms of the timing of divestitures? And if you want to comment on the businesses, feel free.

Yeah, let me do that. Let me add one other thing, that Glen's below the line, also, we don't see the tax rate moving up next year, either, so, that should stay right around the 24% range. Just to finish that off. In terms of the divestitures, the aortec one is small, I mean you're talking about a 45 to $50 million in sales.

Uh-huh.

That will come out of the business, you know, when I think about the growth, you know, if I say we're going to be 7.5, 8% on a reported basis, I'm thinking same store sales. If that comes out, you know, that has to come out.

The other divestiture that we're considering which we haven't put a name on is actually looking like -- you're talking about a business with 75, $80 million in terms of sales there which still has -- it's still significantly profitable. It's, you know, about a nickel profitable. I can't right now say whether that one will happen or not. If it happens, it happens next year. And -- and you actually take those sales out, so that would be -- I can't put a probability on that one right now, but we continue to look at it.

Okay, so there's only another 75 to $80 million in divestitures.

Yeah it depends on what we bolt onto it. I mean, the user range of 75 to 100 depending on if everything that's in the business goes with it or if we keep a piece of it.

And based on what we know now, the only thing that's likely to close is the aortec deal for the critical care business. And when do you think that will close?

I think that if that one is going to work it will work in the 4th quarter, it will be reflected in the 4th quarter whether or not we have actually signed the closing papers in the 4th quarter won't much matter, but we will reflect it in the 4th quarter.

Okay, and just a quick follow-up for Gary, I guess. Gary, the $88 million you had in the press release for safety within medical, how -- can you break that out between syringes and the I.V. piece?

The I.V. piece has been growing faster as the hospitals in the U.S. appear to be putting emphasis on blood-filled needles, which include blood collection and I.V. needles. That was as expected. But the growth rate is faster with I.V. catheters than it is with hypodermic, but both grew significantly.

Can--you don't want to give us those growth rates?

I don't think I want to disclose it.

Okay, can you talk then a little bit about the impact of retractable needles and how that influences those two pieces and, you know, where the market is going and then maybe talk about med design and what the dispute over royalty rates is, where you are, where they are?

Okay, let me tough on each of those. First, on the I.V. catheter market, the leading product that we have, would be the [INAUDIBLE] catheter, is a center-line retracting needle product. It is the leading retracting needle sold in the United States. We believe whether the strong preference in the market for that product is based on the retracting feature or the overall effectiveness of the product would be for the hospital to decide. But it is a very effective product. It's very, very well-accepted.i It has a leading market position in the U.S. based its effectiveness.

Is that basically all of the sales there?

Not all, but it is the majority. There is also another product called Safety Intimate, it is an integrated catheter set and IV site, different design, also basically activates automatically in the use of the device. Not a retracting design but very effective.

Okay, and is there any royalty dispute there?

There is no royalty dispute on any of those products, no.

Okay, and is there any royalties paid there?

I believe not. I believe those were technologies bought a number of years back.

Okay, just making sure. Okay, go ahead.

In the injection market, we have four platforms, four safety platforms in the market. We have sliding shield design and safety lock. We have two safety needle designs, a safety glide and the Eclipse and we have the BD Integra, launched a few months back, which is a retracting needle product.

And we believe by having four different platforms, we're essentally offering customers to choose the designs they prefer. They have different features and there are different price points. It is unclear if we were to look out over the next several years to what degree the market will convert to those platforms and what order and what portion and because that is not fully clear, we developed an offer-all for the platforms for the market.

We believe there will be customers who prefer center line retracting products based on the usage characteristics of those products. They tend to be on the upper end of the pricing category. Safety needles are also a very effective product. [INAUDIBLE] They're very versatile. If a syringe is filled with medication, that syringe is going be delivered IV to a quart without a needle, it can just be injected into the port.

However, if it's going to be an IM injection, then a safety needle can be attached. So it enables hospitals to standardize on syringes and attach safety needles when they're going to be giving an injection. So, in terms of how that will all transpire, we will know over the next several years, but we're well-positioned by having what we believe to be the highest quality products in each of the categories.

What is the total penetration of retractables in the injection side of the market?

Retracting designs?

Yes.

I don't know if I have that figure off hand to give to you. It -- it would be a -- it would not be a majority, certainly; it would be a minority figure because of the other platforms that are on the market.

We believe today the safety needle designs are the highest level [INAUDIBLE] at least for BD, our leading sale in product today is the safety glide syringe and needle. But, then again, the BD Integra product was just released. So I think we need to give more time for the market to convert to draw conclusions about what portion of the market will go to which design.

Okay. Thanks. And can you talk about the dispute with Med Design?

Yeah, the -- I want to -- the relationship between Med Design and BD is a very positive relationship. Within the terms of our contract, the -- we anticipated that there would be potentially a varying royalty level based on the degree to which the intellectual property [INAUDIBLE] design was incorporated into the products. BD and Med Design have differing views on that issue.

And therefore, there were provisions already in our agreement that call for arbitration if there were differing views. That's the process we're working for. We both agreed that it made sense to go through the process. Med Design initiated the process and whichever way it turns out is fine because we have excellent products on the market and a good relationship with Med Design.

Just one final comment, can you give us unit growth for injection systems and IV catheters year-over-year, would you be willing to give us that?

What I have here is the -- give you a quote for injections IV catheters?

Yeah.

I don't--we can--I can see if we can find the data for you.

Why don't we--If we can get that, if someone here has that data, you know, we will give you some idea of it as we go through another call.

Thanks, guys, I appreciate it, Gary.

Our next question is from Robert Dunn of Jeresner, Kleinwort, and Wasserstein. You may ask your question.

Hi, really, two questions for Gary. The restructuring, is this done now? And what actually has been restructured? And looking beyond next year when it is supposed to be neutral, what would be the benefit to doing this? And secondly, can you tell us just broadly what percentage of the U.S. hypodermic market has been converted to safety products so far and whether there are any plans to do the same thing in other parts of the world?

Let me take each of the questions. First, on the manufacturing restructuring, the -- I wouldn't say it is done, but it is fully initiated in all sites. To give you a sense of what we're doing, we're closing two facilities in the U.S. They tend to be mid to smaller size manufacturing facilities. One had been previously planned, one was the subject of this restructuring. We are closing another facility in Sweden, consolidating from 2 to 1.

We are substantially restructuring the facility in Ireland, shifting out all of the manufacturing equipment to a lower cost location and we plan to refill that plant in the future, basically restructuring it to enable to us achieve more efficient restructuring in that facility in the future. We restructured our plant in China, shifting again to a lower-cost location. And we'll be filing that plant with [INAUDIBLE] a higher labor content, lending itself naturally to the lower labor cost in the China market.

We're closing the facility in Germany and all of these steps have been implemented very, very smoothly as -- I don't know if you're familiar with this type of restructuring in Europe, but there are specific social laws that need to be very closely adhered to. Those have been very closely adhered to. All this has been negotiated and agreed to with the worst counsels in Europe and all is proceeding smoothly.

And as indicated, it's expected to have a neutral impact next year and there'll be about a $15 million positive impact on a go-forward basis from '04 onward.

Okay. Will the change in Ireland effect your tax rate?

No! [ Laughter ] That was in stereo by the way! Well...

Okay, thank you.

Why don't we take two more questions, we're getting near the end of the hour that we had set aside for this.

Certainly, thank you. Our next question is from Dan LeMajor of Merrill Lynch. You may ask your question.

Okay. I will just ask one, John, when the currency stuff moves around on us like this, our models tend get a little funky on us and right now based on our estimates, there could be a sizeable currency benefit at the top line, I know you hedge, but just at the top line and as much as to 2% or maybe even more in 4th quarter and first half of next year. And can you just give us a rough sense of the numbers, are you showing anything like that benefit at the top line?

Well, we are seeing some benefit there. As I said, though, since we're not small in some of these other regions, like Latin America, we're also seeing some going the other way right now. I think you could give us a little bit in the 4th quarter, more next year, Dan.

And I hate -- I don't mean to bad word, but hedge around that right now, but right now I'm not prepared to just put a number on it, but we will -- this -- this quarter didn't give us anything, really, being it was offset by Latin America.

Right.

And we might have just a bit of it in the 4th Quarter, you know, for instance, pharmaceutical systems, as Gary said, which is really strong in a big European business, it is lower in our 4th quarter, so we don't get the bang there on the currency as much. So, think of it as -- as really not material to us in our 4th quarter. And I'm going it have to give you guidance for next year. Next fiscal year at a later time.

Okay, so, you're suggesting if our numbers are saying something like 2, 3%, it's because we're not not picking up things that are going the other way. We should not assume that's going to happen at the top line?

Right.

Okay, thanks.

Our final question today is from Rick Wise of Bear Stearns. You may ask your question.

Hi, just two last things. First, minor knit, what kind of 4th quarter share base should we be assuming?

And second, maybe,John, you talked a little bit about your free cash flow goals, you articulated the strong gross cash flow for the nine months and the declining CAP-X,-- can you talk about your progress on the receivable in the inventory front and what kind of free cash flow you're expecting this year?

Okay. Just in terms of the shares for the 4th quarter on a fully diluted basis, you know, given where the -- the market has been, you're looking at -- at probably -- for the 4th quarter, 265 million shares, something like that.

And, you know, I might -- could move up a couple million, depends on the share price there, Rick, if you did that versus -- included the three prior quarters, you know, you'd be in the 2.69, less say $2.70 range for the year.

Okay.

In terms of cash flow objectives, as I said, you know, this will give us, we expect for the year to be generating north of $800 million in free cash flow. You know, that's good. We think net share will be -- be even better. The businesses have done a very good job.

They never wasted capital, but, you know, obviously as things like restructuring and as safety has been more fully integrated into the company and other things happen, you know, we're really judicious in terms of our capital spending. You know, I would think we will -- we're able, as you know, -- cash is up and debt is flat. Cash is up about, you know, 80 or $90 million.

That is about flat and we've spent $175 million already on share repurchases, so, there is a lot more cash generation coming I would think next year you should look for it, you know, if you use 8 as total cash generation this year, I think that should go up to about 880, probably $900 million next year.

Thank you very much.

Well, thank you very much and, you know, we -- we hope that that was helpful and we look forward to talking to you in the -- in the next quarter and thanks for your attention.