Becton Dickinson and Co (BDX) 2003 Q3 法說會逐字稿

Hello and welcome to BD's third quarter fiscal release conference call. At the request of BD, the call is being recorded for replay and will be available on the BD web site at www.bd.com through July 31st 2003. I would like to inform parties that your lines have been placed on a listen-only mode until the question and answer. Beginning today's immediate is Mr. Dean Paranicus, Vice president of IR and Public Affairs. Sir, you may begin.

Thank you, Tammy. I want to express a good morning to all of you and welcome you and thank you for joining this conference call to discuss our third quarter results for fiscal 2003. Today's conference call is being simultaneously web cast and will remain available at the time noted on our web site, www.bd.com and foreplay back at 1-800-391-9851, domestic and 1-402-220-9825 international through the close of business on July 31, 2003.

On this call, we will discuss the non-GAAP financial measures with respect to our performance. A reconciliation of these non-gaap measures to GAAP measures can be found in our third quarter press released and attached financial tables. A copy of the press release and the related financial tables is posted on the investor page of the BD.com web site. Also joining us on this conference are members of the media. In the course of this morning's discussions we expect that some of the forward-looking statements that could cause the actual results could differ from the expectations we discuss today. Factors that could cause such differences appear in the third quarter press release and our recent SEC filing. Leading the call this morning is John Considine our executive vice president and Chief Financial Officer. Also joining us are Gary Cohen, president of BD Medical Systems, Bill Kozy, president of BD Clinical Laboratory Solutions and Vinz Forlenza president of BD buy your sciences. With that I'll tune turn the call over to John.

Thank you Dean. By this time I assume you've add a chance to review the attachments we've send out this morning. We would like to devote as much time to answering questions but before beginning, I would like to make brief comments regarding our third quarter results.

Reported revenue increase of 17% reflected about a 6 percentage point benefit from currency translation, in particular, due to the strong euro. Each segment benefited in the range of 5 to 7%, due to currency. Even without the currency impact, we had solid growth in all of our segments, and in all of our international regents with the exception of Latin America. Speaking about the segments, medical systems revenue growth is continuing to be driven primarily by sales of safety engineered devices in the U.S. and globally by our pharmaceutical systems prebuilt products. Regarding our company wise U.S. safety sales ref new, which you recall come from medical systems and the pre-- sorry, pre-analytical solutions unit of our clinical lab solutions segment, they grew about 15% to 167 million in the third quarter. We continue to estimate that U.S. safety sales will be between 675 and 680 million for the full year, which would represent growth over last year of 18 to 19%. I would point out that our consumer healthcare unit of medical systems showed an increase in the U.S. of about 16%. As you know, our U.S. diabetes business is housed in this unit and last year sales were negatively impacted by about $8 million, based on an incorrect reporting by a distributor of its U.S. inventory levels. That was something we mentioned to you in that quarter. Also within our diabetes business are our blood glucose monitoring products which we launched in march. Sales of these products for the quarter were $3.6 million. This result is below our expectations primarily due to the timing of launch programs. First was about a one-quarter delay in the launch of our marketing programs to Medtronic’s existing customer base. While a one-quarter delay is not significant, in the longer term context we had anticipated a ramp up in sales towards the close of fiscal year and the highest level of sales months were pushed out by this delay.

In addition, the most important new product launch for our BDM program the paradigm link monitor that works in conjunction with the new Medtronic paradigm 512 insulin pump is occurring later in the year than we had originally estimated. The link launch is important because the BD meter is an integral component of the total Medtronic insulin pump delivery system. We're please pleased that the FDA cleared the pump and link meter and as we reported this month, it is being launched nationwide. We are revising our fiscal year 2003 revenue forecast for our blood glucose monitoring products to $15 million down from our initial guidance of $40 to $50 million communicated earlier in this year. Now, I'll address our overall guidance for the fourth quarter in terms of profits and revenues in a minute, and for the year for that matter. Also in case you didn't see our form 8K filing yesterday, I'd like to provide some context on the voluntary Canadian recall of three lots of BD test strips that we announced. This is a recall of test strips that were sold only in Canada for use with the BD latitude diabetes management system. The three lots being recalled represent a small percentage of test strips being produced to date. By the way, this recall is totally unrelated to the revision in our revenue expectations that I just mentioned. The reason we are recalling these three lots is because an internal quality review indicated that test strips from these lots did not meet all of the company's quality and performance specifications. Although we have not received any reports of serious injury associated with these lots, it is possible that inaccurate readings at low blood glucose levels could cause diabetics using test strips from these lots not to take appropriate action to address low blood sugar, particularly those who are asymptomatic to their hypo glycolic condition. We have notified the FDA and health Canada of this corrective action. We are continuing our quality review of test strips. We'll work with the FDA and Canada in connection with these issues associated with the recall and market notification process and will take any other corrective actions that may be required. The financial impact of the recall are not expected to be significant and have been reflected in our third quarter results. Total sales value of these three lots is approximately $400,000. The recall affects only the Canadian market as these lots were not sold in the U.S The recall does not impact the ongoing supply of DB test strips as we have an ample supply of that product available. Let me also make it clear that the recall does not involve any BD logic or latitude blood glucose meters or any paradigm link meters used with Medtronic’s new paradigm 512 insulin pump. Turning now to the pharmaceutical systems product piece of med co-their performance continues to be impressive. Their 23% revenue growth before the positive impact of currency exchange reflect strong sales of products in the US and in Japan, several of their pharmaceutical partners. There is some cyclically to this business. As we told you last year as well, we are anticipating a lower growth rate in the fourth quarter, but a strong year over all in the range of 30% up on a reported basis or about 20% on a currency neutral basis. In the Clinical Labs Solutions segment, in addition to the strong safety sales and pre-analytical, the diagnostic systems unit enjoyed sells of its instrument platform which nearly doubled in the quarter from a year ago to 19 million versus 10 million. Diagnostic systems also benefited from a favorable comparison to last year's third quarter, which was effective by about a 5 to 7 million dollar inventory stocking in the second quarter of that year by U.S. distributors in advance of the SAP enterprise resource planning system installation, and this was something we also talked to you about last year.

BD biosciences revenue for the quarter were 14% ahead of last year, ahead of last year. These results were generally consistent with where we had guided I'm mean to say tree system sales reflecting very favorable customer response in the U.S. and in Japan to the new fax Aria (ph) instrument platform that was just launched at the end of the second quarter. Biosciences sold 55 instruments, fax area instruments that generated revenue. Instrument reagent revenue growth benefited from the continued introduction of new reagents. On the other hand, the performance of the gene discovery portion of our CloneTech product line continues to be significantly affected by a slowdown in some research segments as well as by competitive pressures.

As we discussed in the second quarter call, Vince Forlenza has undertaken a thoroughly review of BD biosciences since he became its president. In addition to the work force reductions of facility shutdown we discussed during our second quarter call, our biosciences portfolio review was completed, and a decision discussed in today's press release was made from resulted in non-cash charges of $34 million or 8 cents per diluted share related to certain asset impairments and inventory an intellectual property write downs. These actions were the results of taking a fresh look at the BD image and instrument platform that was part of the acquisition of biometrics imaging in 1999, and the prospects for certain underperforming portions of our molecular biology product line or CloneTech. I would refer you to the attachments in the press release for a reconciliation of these charges and as Dean said, Vince is here if we want to talk more about them.

Turning to the P&L and looking at it on a pro forma basis, that is excluding the biosciences related non-cash charges which we recorded in cost of sales, we were very pleased that our gross margin of 49.5% represented a 100 basis point improvement over the third quarter of last year and a 50-basis point sequential increase over the second quarter of this year. This increase is consistent with our overall expectation for the first year for the full year improvement of about 75 basis points, and in fact, GP has increased by 80-basis points through the first three quarters.

Of note, contributors to grows margin for the quarter included strong sales of safety engineered devices which carry a higher GP as well as the absence in variances in the prior year in connection with the inventory reduction effort and the favorable implant of last year's manufacturing restructuring in our medical systems segment. These increases were partially offset by a number of other factors, including increased cost associated with blood glucose monitoring rollout and pension expenses.

SSG&A percentage of sales increased over last year by 110 basis points. About 25% of this increase was due to foreign exchange. As expected, the remaining was primarily due to incremental expenses related to our SAP implementation, and the blood glucose monitoring launch in the U.S

In terms of cash flow, for the first 9 months of the year, we generated about 607 million in gross cash flow from operations, of which we used $100 million in November for the pension contribution and about 168 has been invested in capital expenditures through the third quarter. During the third quarter, we repurchased about 2.6 million shares of common stock for $99 million, and through June, we have repurchased a total of 5.9 million for about $206 million. Finally, before I open the call to questions, I want to speak to our guidance.

As you no doubt notice our revised EPS guidance for the year is 206, which if you add back the 8 cents of non-cash charges recorded in the third quarter would represent an increase from the previous guidance of 212 to 214. And we're just doing that for analytical purposes, but obviously the 8 cents has been recorded in cost of sales. Our outlook for the fourth quarter is 60 cents per diluted share. Our fourth quarter and full-year guidance reflects the present level of U.S. dollar against foreign currencies particularly the Europe row and our projections assume that the major currencies remain at the same rates as they are today. As for revenue expectations in the fourth quarter and full year, we're looking for a reported top line growth of 9 to 10% in the quarter, or about 5% on a currency neutral basis. The fourth quarter revenue will reflect the absence of a number of events that benefited last year's fourth quarter, specifically in pharmaceutical systems which obtained a major customer in the fourth quarter of 2002, and in the Clinical Labs Solutions segment which benefited in 2002 from the clearing of back orders of our blood collection sets. Some inventory stocking of higher back tech sales following the SAP go live, as well as higher probe tech sales resulting from Abbott's withdrawal from the market. We look for a full-year revenue growth of about 12 to 13% this year or about 8% on a currency neutral basis, which is consistent with our previous guidance.

With all of that said, we can begin the Q & A and in order to allow for broad participation, we would appreciate it if you would limit your questions to one, plus a follow-up, and with that, operator, I think we can open the call.

Thank you, sir. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press star 1. You will be announced prior to asking your question. To withdraw your question, you may press star 2. Once again, to ask a question, please press star 1.

Our first question comes from Dan Lemaitre with Merrill Lynch.

Good morning, John. I have one question focused on the glucose monitor. I was struck by your comment, John, that you referred to the paradigm link as your most important initiative. Does that mean you guys have really decided to stay out of the mainstream and really try to leverage the pump user base of minimized? Can you help us flesh out if you've had any change in strategic direction based on what's happened so far with the launch?

I'm going to have Gary and also Kevin Seifert is here who is the president of that business, just so I'm clear of what I said. Issued have said near-term, because this is a staged launch. I don't think the strategy has changed any bit, but this is the key element of the Medtronic piece of that, and I'll let Gary and Kevin expand on it.

Good morning, this is Gary. To reiterate what John just stated, we haven't changed our strategy, but perhaps this is a good opportunity to clarify our strategy, and I do think you picked up on something that is very central to our strategy, and that is that we are in the early stages of launch, which probably will be the first year to 18 months. Particularly targeted high frequency strip users that have the highest likely likelihood of adoption. For that reason, the pump user segment is of particular importance because pump users do represent the highest frequency strip users. We estimate 6 to 12 tests per day, plus the relationship that we have with Medtronic and in particular, the paradigm system where the meters meter is an integral part of the system. I'll describe more about it in a few moments .

The likelihood of adoption of our meters is higher there than anywhere else, and I would say our strategy might be different if this were a new market, if the blood glucose monitoring market were a new market and there were no established positions and there was a rapid land grab strategy to try to get as much market share as possible in a short window, that would suggest a very broad sampling strategy, and that -- akin to -- the analogy we have used is the way the AOL approached the Internet market initially where they put out their disks everywhere because the key then was to establish an initial market position. The circumstance we're in now the market positions are established. We're making an investment to establish our own foundation for position. It's a long-term strategy. We believe in doing so, it makes the most sense to put our focus on the areas where our sampling expenses get the most return. And the priorities associated with that first priority is the pump usage segment and the relationship with Medtronic with the paradigm link system, the paradigm system and the paradigm link meter being the top of that priority list, and then also, the connection we have through our own insulin syringe and pen needle business to insulin injecting, people with diabetes who inject with their relationship with Lily, because people who inject insulin are also higher frequency testers than the type II population, we're managing through injection and oral and exercise therapy.

That has been our strategy from the beginning, and we believe it's appropriate, because overall, we're seeking to establish a position in the market while as a total company, sustaining consistent earnings growth. And this, we believe, will enable us to do both, and we don't believe we're going to be missing opportunity as a result of this, because this is not a question of grabbing a market position while the market is first being established. So we think this is actually a good strategy. We do know that different analysts and different investors have very different risk tolerances relative to the BGM entry and we believe this strikes the right balance. And the right emphasis on paradigm (inaudible) -- me speak about the paradigm system. The paradigm system is the first integrated meter and pump system. When you take a reading on the meter supplied by BD, that is automatically transferred through radio frequency to the pump and the pump calculates using its wizard an appropriate dose. It avoids the need for the user to do the complicated math they would do to calculate the dose and then the user triggers the dose delivery through pushing a button. It's a major step in diabetes management. It's the first step toward a closed loop between meter and pump. It's very, very significant.

Okay, great. Just one follow-up as we're allowed. John, I know last quarter you announced or you talked about what the logic latitude spending was and cost of goods sold and also the SG&A line with giveaways and what not. Can you quantify spending on this program for this quarter's numbers?

You know, versus last -- I can give you an idea of what we spent, you know, versus last year. I think that's what you are talking about, kind of the incremental spending. Or I can give you the total spending too. But incrementally, it's a little over $2 million on the gross profit line net, that's net of the sales. And on SSG&A, it's probably $5 or $6 million incremental to last year.

Okay, great. Thanks, you guys.

Our next question comes from Fredrick Wise with Bear, Stearns.

Good morning. My first question is also on blood glucose monitor, help me understand a little better two numbers, one, you indicated that -- I think 3.6 million in sales in the current quarter and if I remember correctly, you did $5 million or so last quarter. Why would sales be sequentially lower? I understand that they might not ramp as rapidly as the rest of the year as you thought. Does this suggest that people who use the product stopped using it or did we not understand clearly what the mix was last quarter? Can you help us understand that and maybe if you want to talk a little bit about what kind of numbers we might be thinking about for '04.

Rick, you know, if we need to, we can have Gary expand on this, but there is some, you know, there are different elements of sales that happen, not the least of which is the initial stocking of the retail side, and as certain customers come on, you get that kind of the variation. We should see more steady state rises once we get through this year and into the middle of next year in terms of our sales. So you're going to have lumpy sales. As a matter of fact there is one large summer that we have coming on this quarter, and that's going to cause some more lumpiness. That's all that is. It does not infer that patients who -- it does not infer that patients who began to use it have ceased to use it. Anything further you want to add Gary?

It's not a result of people not using the product, the majority of the initial stocking on the retail channel occurred in the second quarter and in fact, we also are beginning to track retail sales out the door, and the first retail of the stock or product which was Walgreen's is seeing substantial sales growth out the door which is a positive side. We're lower in the third versus the second quarter. And we're also seeing steady growth in the number of pump users who are adopting the system. So this is strictly a function of the initial stocking. It's typical to see a little bit of a lag after an initial stocking of a retail product, and you know, we anticipate going forward the growth will be higher.

And the '04 comment?

Rick, I think it would be premature for us to get into '04. We're rolling up our budgets now, and we'll be giving you that guidance at the end of the fourth quarter, but I would point out, but I would point out that, you know, as we've said all along this year, you know, while we don't take the first year sales or the first half year sales as they well may be lightly, this strategy wasn't built on the first year of sales or the second year of sales for that matter. It's our longer-term expectation, which, as you know, was 10% of the broader market for blood glucose products, and that's something that hasn't changed. And the introduction of paradigm is, as I said, and as Gary said, a key element of that strategy which has many legs. So, again, we will get back at you next quarter with some guidance for '04.

My official follow-up question is, you expected to place 100 fax areas this year. You did 55 in the first quarter. Does that mean that there will be sequentially less in the fourth quarter or is it fair to bump that number up now?

Vince is here and he'll tell me. I think we did 10 to 14. I just can't remember the numbers in the -- at the end of the second quarter. We 55.

Yeah, we did 14 in the second. We did 55 in the 3rd. And I think I'll do about the same number in the 4th quarter.

Thank you.

Meaning another 55 or so.

Thank you.

Our next question comes from Glenn Reicin with Morgan Stanley

I'm going to press down on a couple of issues. I did notice that safety on the pre-analytical front did slow dramatically this quarter versus last. Is this something we need to worry about, and then just to give you a chance to talk about the good stuff, clearly even if you exclude currency, the overseas medical systems business is doing extremely well. Can you talk about some of the trends and what's driving the growth overseas?

Sure, and you know, Bill Kozy, who is our president of clinical is here. Why don't I let him handle the safety side just with the introduction that, you know, obviously, that, unlike medical, there is the blood collection side of clinical, which is the PAS side. That was our fastest conversion, as you would expect, but go ahead, Bill.

Yeah, our sales in the safety for the third quarter were still up about 15%, very much in line with the expectations we set at the beginning of the year. If you look at our major sharps categories, particularly at wing sets and conventional blood collection needle types of products, our conversion rates now are well into the mid-80s, even approaching 90% in some of those categories. So we had projected that rate to start slowing down in the second half of the year. It's pretty much right where we thought it would be. The only other impact, we did see a little bit of inventory fluctuation in the distribution channel in the third quarter, but that's not really behind the story. The story is, you know, just -- we're completing the conversions in the U.S

Okay, I thought under the new accounting rules, we didn't have to worry about inventory stocking and de-stocking from quarter to quarter. I wonder if you want to comment on that in general.

That's -- well, we don't in terms of kind of self-inflicted, you know, when we were -- with respect to diabetic syringes and we had certain incentive programs, we certainly were subject to some fluctuations and therefore we made an accounting change on those. We had stopped all promotions on anything else through medical or pre-analytical solutions way back in 2000. You still, though, have the other side of the equation being the customer, where large customers decide to not -- not to demean any of them, but to window dress at the end of the year and to drop down their sales. So they'll buy in one quarter, drop down in the next quarter and get a big influx in their first quarter. That's the thing Bill is talking about. We should let you before you do your follow-up, lets Gary talk a little bit to the international medical which is the second part of your question.

Okay. Just to reiterate what the growth was on a currency neutral basis, the medical-surgical unit grew 12.8%, consumer grew 10.5% the pharmaceutical systems grew 17.5%. I'll give you a feel for what's been driving that strong performance. In the medical-surgical area, Europe had a very good quarter driven by a large NHS order in the UK that reversed inventory reductions that occurred there. That will impact a little bit growth in the fourth quarter. And also in the medical-surgical and pharmaceutical systems unit, we've had good strong sales of bifurcated needles in Europe that are use for delivery of the smallpox vaccine. In the consumer business, we had particularly strong growth in Japan and Asia Pacific. Japan was primarily driven by the pen needle business, but Asia Pacific was driven in part by SARS concerns. That gave us, let's say, an unplanned benefit, in a sense, relative to thermometers and other related products that have been used extensively in Asia. That wouldn’t be seen as a continuing benefit. The pharmaceutical systems business continues to perform very well overall. In Europe it was driven by the core business. We continue to get strong growth in Japan, which is a newer market for us based on new customers coming on. That's another area we don't expect to sustain at that level, because as the new customers come on, it results in a beneficial impact in initial sales. So those are the primary factors driving growth. And the underlying core businesses have been doing well outside of the U.S. as well as in the U.S. as well.

And the big order of the U.K., that was conventional needles and syringes you said?

That would have been conventional medical products, catheters and injection devices. We have some safety business in Europe which we'll talk about more in a fume call, but this is the mainstream medical devices.

Can you size that order in terms relative to sort of normal growth, you don't have to give us the exact size of the order but incrementally that added in the quarter?

I don't think I can actually give you that information here. It's beyond the detail I have available to me.

Okay, thank you very much.

Our next question comes from Larry Keusch with Goldman Sachs.

Good morning. I guess two questions, John or whoever might be appropriate to take this one. On BGM, given that revenues are now running, you know, substantially below what you had anticipated for the year and I assume that your spending plans were predicated on that 40 to $50 million, could you talk a little bit how that may alter your spending goals or plans going forward, and where do you think profitability now kind of lines up for that business? I think you had been talking about certainly fiscal '03 and most likely '04 as being spending years where you would not be profitable, but how does that work itself out? And then I guess for Gary, just any update from Europe on safety legislation, could we see something coming this year?

Larry, I think Gary can take all of those, both the revenue and spending and the European safety. I would say that we're going to not guide yet on '04, and '05, obviously, but I would say, and we have said this before, that initially we had said we would break even next year. We won't. We'll investment spend next year, and we fully expect that now and we have for sometime. When it becomes profitable, we'll talk about at the end of this year, when we give guidance for next year, but incrementally this year, you know, we will have not slowed down investment spending greatly. We're still going to invest and spend pretty well, but I'll let Gary give you some flavor on that.

So to touch on the first one relative to the spending on BGM, in fact, as you would expect as a result of the lower than anticipated revenues which I think we can -- which John correctly attributed to short-term programmatic delays as well as the inherently lower level predictability we have with this product launch relative to other sales, we've offset that through expense control and performance throughout the medical segment, and that entailed two things. One is as I've mentioned in previous calls, we have very good reach into our expense base throughout the world, and this is a very critical program for us, it's our most important investment and certainly among the most important sources of future growth and we continue to support that and when we run into an issue like this where the revenues were lower than anticipated, resulting in, you know, relatively higher expense impact on the bottom line, we put the clamps down elsewhere to offset it. There is also lower spending in BGM. That's not as a result of pulling back, but when we had these short-term programmatic I can delays, we elected not to substitute those programs with other programs that would be of lesser value. For example, we didn't just go out and start distributing a lot of meters at no charge elsewhere into market segments that would offer lower returns, rather, we chose to hold back on the expenses associated with these programs until these programs were launched. And we do think again that that's an appropriate strategy. Somebody is interrupting on the line here. Relative to the -- we're not providing guidance today, but you were correct in saying we were anticipated to being in an investment spending mode. Certainly through '03 and '0 4, probably in the range of '05 we would expect to return to profitability, '05, '06. There will be an improvement year to year relative to investment spending as we grow the business. There will be a sequential spending or loss associated with this investment. Turning to your question on safety in upper, without -- there is some inherent degree of unpredictability associated with legislative processes. We've been working with the trade associations in Europe, which is comprised of other companies and other interest groups associated with building the case around healthcare worker safety in Europe and as a result of that we do get feedback on progress. We have some reason to believe that there will be some form of legislation passed in Germany for high risk hospital units, things like the emergency room, infectious disease wards. That is not a definitive statement, because until things like that happen, they can't be definitive. Those were the signals we're getting from Germany which would be a positive development. That's pending it actually occurring. That seems to be at this stage, the country that's most out front.

Okay, thank you.

Thanks, Larry.

Next question, please.

Thank you. If you would like to ask a question, please press star 1. You will be announced prior to asking your question. One moment for the next question. Our next question comes from Bruce Cranna from Leerink Swann & Co

Hi, good morning, everyone. A couple quick follow-ups. I know last quarter on the logic side we were talking about the retail presence being somewhere around 70%. Has that number moved at all? And I guess I missed -- I know there was some discussion about the cost effect of BGM on both SG&A and Cogs. Can you run those numbers by us?

Sure. Versus last year a little over $2 million on gross profit and 5, 5-1/2, 6 million on SSG&A.

So clearly --

Incremental.

So that's down from last quarter, right?

That is down from last quarter on the SSG&A and on the gross profit, yes.

On the question of retail coverage, the coverage this quarter is consistent with what we've said last quarter. We have one additional major east coast based retail that we're expecting to come on in the fourth quarter, and that would essentially complete what we expected to accomplish this year in terms of retail coverage.

So where might that number go?

We -- I think we estimated in the 80 to 90% range and we would still claim that to be the case.

Just a follow-up quickly on the FACSSria. I'm trying to figure out, I think there was a back log last quarter. I think 50 was the number. So did we ship that and reestablish another backlog number of sort of 50 or, I guess the expectations going forward, is the backlog maintain where it is or are those really new sales?

I'm about a third of the way to, you know, my next -- to Q4 in terms of orders already, and a very nice pipeline is continuing to build. So, you know, I see demand in terms of, you know, new customer interest, funnel building. And as I said, towards 50 to 55 for next quarter in that range and about a third of the way there.

And Bruce, we did shift 55 this quarter.

Yes.

Okay. Can you comment as to whether or not that's helping on the flow side? Is there any kind of pull through there?

I don't think that that has -- in this quarter, I don't think that's changed our reagents. I think a reagent growth came more out of our cancer markers in the clinical business, and just some growth at NIH spending got released in Pharmingen. So I don't think it was a big impact, you know. I think it will help going forward, but I couldn't quantify it for you right now.

Okay, thanks.

Our next question comes from David Lewis with Thomas Weisel partners.

Good morning, guys. First question, maybe one follow-up, Vince, on CloneTech, given the restructuring charge as well as your new role, maybe talk about strategic changes and competitive changes you've made specifically with CloneTech?

Sure. In terms of CloneTech, you know, we had talked for sometime about needing to refocus the R&D efforts, and I think as we move into next year, you will start to see some of those new products coming out, and specifically in the real-time PCR market and the RNAI market and these are -- these will be areas where we think we're going to introduce differentiated products, you know, where we think we can gain some shares. So I'm expecting to see this, you know, this negative growth rate that we've had over the course of this year, you know. That start to improve. I expect that the third quarter would, you know, minus 18%, I think it'll be better than that in the fourth, and I'm not going to -- you know, I don't think we're going to get to a flat growth rate next year, but I think we're going to narrow this thing down quite a bit. Then in terms of strategically, you know, we are -- we're not investing at all behind the array business, clearly from a competitive position standpoint, and we're significantly -- you know, significantly behind, so we've run that for profitability and not invest in the R&D piece of that, and the same is true on the gene discovery product. So we're going after some other market segments as I indicated where we think we can do better.

Okay, maybe jumping over to clinical solutions. (inaudible) given that success, has there been a broader strategy to get more aggressive on virology and compete in the broader market?

Bill, do you want to talk about that?

Is there a specific around the virology you are members?

Specific specifically HIV, HIV,HPV.

That's a market we're not targeting in our strategies. We're focused in -- obviously the areas where we're expanding right now, as well as in some areas of other infectious disease categories that we hope to get after in '04 and '05.

Can you expound about what some of those may be that you can leverage given the success in gonorrhea and Chlamydia?

I think it would be premature to talk about that at this stage. We might be better positioned to talk about that after we've done another couple months of work.

We want to hold off on that so we have a little bit of time to deal with it more here, but there is a strategy in place, but it would be premature to discuss that right now.

Okay. Thanks.

Our next question comes from Steven Lichtman with Banc of America Securities.

Thank you. Just a follow-up on an earlier question. Vince, where are you now relative to your goals of stream-lining the business and taking some of the costs out of the system? Do you feel you are correctly positioned now?

Well, I think that we have, the U.S. organization, you know, we took about 6% of the work force, and I think, you know, that's by and large what we're going to do, and as we head into '04, think you'll see extremely tight expense control across this business, and I'll be looking for expense leverage as I move in. And as I said on last quarter, we're -- we're investing in systems improvement in the business. We have our SAP project ongoing, and as we do that, that's going to enable me to do some let me call them share service work across the support functions as we move into '04 and '05. So we'll continue -- you'll continue to see that kind of work going forward.

Great. And just follow-up for John. On the fourth quarter revenue guidance, can you break that down a little bit growth rate wise by segment on a reported or constant currency basis, if possible?

Yeah, let me give you some idea of what it would look like. You're probably looking at medical revenues in the 11, 12% range reported basis. Clinical is probably about 7 and a lot of that is obviously the result of some of those comparisons I talked about. And biosciences, you know, 9, 10, 11, in that kind of a range on a reported basis.

Okay, thank you.

Our next question comes from Robert Goldman with Buckingham research.

Thank you. Just a couple of questions on the non-cash charges. Now, there is the financial community now about pro forma results. But just wondering from your perspective of when do these kinds of charges become charges that we should take out of the income statement versus not? Because I imagine this type of thing, although on a smaller basis, you know happens every quarter. And related to that, when we are here a year from now, third quarter of next year Looking back to the comps for this year should by be basing your growth on the reported earnings of share of 49 cents or on the, if you will, pro forma results of 57 cents?

Let me give you my view on that, bob. Let's just start with, if you look at our 2002, in that, we did $1.79 in that, and we said we had two that were taken -- three charges, but two groups. One was medical manufacturing restructuring, which was about 6 cents. It was 2 cents in the second quarter, 4 cents in the third quarter, and they were recorded as a special charge below the line. And we also had to write off of a stock investment that was part of an ongoing research deal in the stock. The charge was 3 cents. We said to the market, you can't judge us on $1.79, we should grow off $1.88, which added back those charges, because we said, it wouldn't be fair for us to take the benefit of those charges since we thought that they were unusual and therefore you should expect more from us. In this year, when we looked at this quarter, for instance, so I don't prolong this too much -- well, first of all, with respect to these charges, we took the view of recording them right in operations. So as you noticed, we -- unlike maybe some other companies, we decided to record them in cost of sales, tell the market about them, since they are without, you know, trying to debate whether they are or they aren't, they are certainly unusual. They are not something that we talked about before, because the review that Vince was doing was something that was ongoing, and by didn't know about that one, and CloneTech was something that we were dealing with and we tried to sell this inventory off and we found out during the third quarter or concluded in the third quarter that, in fact, we didn't think that was very likely. So we called them out and we said that we should tell you about them. I think it's in the eye of the beholder. I would think that if I were trying to look at our performance next year that I certainly would take the, for instance, the $27 million that was booked to right off the intangible assets related to the IMIGEN program to give us the benefit of having that out of our numbers and think that our growth was really that high, so that's why we called it out. I think when you look at it this year, I think that I personally think that that is a business restructuring that's coincident with a new leadership, but I leave it to the market as to how they want to judge that, and that's why we put at some point in operations with. With respect to the CloneTech inventory, CloneTech has been our -- and again, that's a $65-75 million business. It's been our major issue within biosciences for some time now, and the right off of that -- the write-off of that inventory, you can judge that as operations because we have write-offs of inventory all the time. I will they tell you that the leadership of this company take that charge in their bonus calculations. So we don't avoid it. With all of that said, that's a lot said, I'm kind of saying, you're going to have to judge where -- how you would rate next year versus this year.

If I could just quickly follow-up, because I do applaud the way you did it. I think it's very up front. It's clear, it's honest, but I am still wondering, you know, if the basis for basis of comparing next year results and I know you haven't given guidance yet for this year for this quarter, should we use $0.49 or $0.57?

Well, we're going to grow up the 57, I will just tell you, internally, and I think that's how our board of directors will hold us to grow off of 57. I think that's a reasonable way to do that is to have us go off of 57. It's the most conservative, and frankly, I think the best comparison in my view.

Okay, thank you.

Our next question comes from Glenn Reicin.

Share count was a bit higher, despite the share repurchases. Is that just an issue of stock price or is there something else that we need to take into account?

Let me just look at a number. I think what happens here we could really put the audience to sleep if I get into too much about how to compute the fully diluted shares, but as the stock price rises, some options that weren't heretofore in the calculation because they were under water now come into the calculation. All options are now in the calculation stock price where it is now.

Okay. So what's the guidance for Q4?

For Q4, in terms of shares, let me see if I -- what I have here. We would use -- to be conservative, use about 267 and see where we come in.

Okay, and then the other expense, what is that this quarter?

We ended up selling a building in overseas that had a loss of a little over a million dollars, and then we had a trademark that we -- that was no longer being used, the business had decided not to use it, and we wrote that off. That was about the difference.

So just conception of trying to understand is, in this quarter, you sort of blew through the estimates relative to consensus by 3 pennies . The year guidance is only going up by 2. Is that a factor of the share count or is that a factor more having to do with the lack of BGM ramp and the one-time sales at HHS and SARS that are not reproducible in the fourth quarter or all of the above?

Well, I think it's all of the above for sure, Glenn. There is a lot of moving pieces there. I think -- I wouldn't put it to that one order, nor would I put it to BGM. I think we have that spending in there. It's just a lot of moving parts and that's just where we think it's going to come, right around 60.

Okay, thank you.

Our next question comes from Fredrick Wise with Bear, Stearns.

Also some additional small questions. Tax rate, if I computed correctly was 23.8% in the quarter, John. We're going to see the tax rate for the fourth quarter in the year fall slightly below 24%?

Yeah, just slightly be low but between 23.5 and 24% it's in that range. Right around 24% is the right number.

Okay. And just update us -- remind us where you are with authorization session of the share repurchase plan. Are we likely to see similar levels in the fourth quarter if that is that your top priority?

I wouldn't say it's my top priority, but we're certainly going continue it. So far this year, we've purchased 5.9 million shares at an average of about just a little under -- under 35. We said we would buy about 5. We've already done that. We continue to think that it's still a good investment for us and a good return to shareholders. I think you'll see us back in. I don't want to forecast how many shares we'll buy right now, Rick. There is a lot of moving parts here, trying to keep our debt to cap in good shape. It is, it's below 32 right now, but it's certainly priority in terms of give-back to the shareholders. So you could expect to see us in.

Okay, thank you.

Our next question comes from Matthew Buton with Argos partners.

On the biosciences charge, how much of that was inventory related?

That's about $7 million.

The full amount was inventory?

Pretty much.

Do you expect more of those kinds of charges going forward as you rationalize the product line?

No, this one was in particular to CloneTech, and the gene discovery related products, RNA products, and I need, Vince if you wanted to know any more science around those, but I don't expect any more of that right now, but that's not to say that we won't have inventory write-offs from time to time, but this was certainly unusual, the size of it.

Thanks. As it relates to fourth quarter guidance and the local currency growth, which, you know, is assuming some kind of a deceleration, and I know you mentioned a couple one-time events, can you normal lies that for us? -- normalize that for us? I know you are not providing '04 guidance, but I'm wondering if that's a negative trend.

I don't want to talk myself into guiding for next year, but I would not believe either quarter to be purely indicative of a trend. I think more along the lines of where the guidance is for this entire year, which is, you know, we're going to do about 8% if you take all of the currency out of here. That's really representative of the underlying growth and obviously, you know, as good as we do feel and confident as we do feel about our strategy around blood glucose monitoring, that really had no big impact on that growth. So that should represent reasonably our underlying growth.

Okay, and vis- a-vis procedure value slowdowns or hospital trends and lab value slowdowns in the U.S., are you seeing any impact in your business as it relates to that?

I'll let Gary and bill talk to that.

We're not.

No.

It would seem that neither the medical business nor the pre-analytical solutions business are seeing that.

And on the pre-analytical side, the U.S. growth slowed somewhat from 11 to 6 and there must have been some one-time aspects of that, but is there anything else going on there?

I believe the comments that we probably had mentioned a little earlier, number one, we're seeing the safety contribution to the business really start to decelerate, which we had projected for the second half of the year, would be the first part, and I briefly alluded to some distribution based inventory adjustments that were made in the third quarter. Those are the only notable factors.

And so nothing in terms of volume overall?

Not that we're seeing in any of the core product lines.

Great. Thanks very much.

Operator, we're getting near the end of the hour, why don't we take two more calls and then close down.

Thank you, sir. Next question is from David Zimbalas with Blalock.

If you could talk about gross margin. Your gross margin trends have been fairly positive. How much of this is a one-time step up as we peak on safety volumes? Are we going to see the gross margin trend up slightly from here, and second, if we could talk a little bit about probe tech placements, where you are at today, and you know, how far you are into replacing avid LCX.

I'll do the gross margin first, and then Bill can take the probe tech. If you looked at this quarter, safety is probably 70 basis points of an increase in this quarter alone. You know, we had the manufacturing restructuring last year, and there were some hits to cost of sales on that, and some on inventory reduction, and they are absent this year. So that gives us 20 or 30 basis points. FX gives us some. BGM on the other hand costs us 40 basis points, in this quarter. You know, the kind of good news scenario on our pharmaceutical systems products, if you remember, and we've talked about this, I guess, on every call, they carry a lower gross margin, 39 or 40%, but attract much less SSG&A, so they have a very positive operating gross -- gross operating margin impact, but they would have cost us about 10 basis points. And then there are a bunch of other things. In terms of this -- what we're looking for in gross margin is sustainability, I think safety will continue to give us gross margin increases as we go forward. I think the manufacturing restructuring will continue through the at least the middle part of next year. And I think we'll just take it from there. We certainly think longer term that we can get over 50% on this margin, but I'm not going to guide for next year right now. And Bill, you want to just talk about probe tech?

Yeah, David, hi. We we're not really talking about replacements anymore, but John mentioned earlier, we did do $19 million in the quarter. That was pretty much close to double what we had done last year. Our placements for the quarter, as you referenced, very much driven by good success that we had in capturing on the avid opportunity. Per Abbott's prior commitments, they pretty much have completed their exit at this stage, and the opportunity for us has been in the last two quarters. We think we've been -- we've captured a good portion of that, and that's really the significant factor in the U.S. increase that drove this total product line success in the third quarter.

Okay, thanks, bill.

And operator do we have one more question?

Thank you, sir, last question comes from Dan Lemaitre.

Bill, I'm disappointed you're not going to give out those numbers in anymore. Last quarter you talked about 70 and an installed basis 725. If we were having to guess, could you replicate those kind of placement numbers again in the third quarter?

I'm sorry, Dan, give me the question again, I'll see if I can help pickup

I think last quarter we thought that you had placed about 70 systems bringing the worldwide installed base to a little over 700 million. Can we assume that you are close to 800 million for ballpark purposes at the end of this quarter?

Yes, you know, the action has been so hot and heavy in the month of June in particular, that I'm not sure I've even got an exact number, but your assumption there around 800 is a real good one.

And then just lastly, at the AACC, you guys were -- I'm sorry, at the ACC you guys were still showing the viper. I am just wondering where you stand in terms of being able to -- what kind of reception you have there and if you have such a large installed base, could the Viper per really be an upside surprise as we look out to this business and what follows all of these placements, full, that can put a big old sample handling system in front of a lot of those placements?

Well, the first part of your question, the viper has been a little bit of an up side. The placements on this are relatively small, they are still in for the year, you know, we're talking about, you know, roughly 8 to 10, you know, placements of vipers. This is only a high throughput instrument. What we need to see is a few more major accounts taking advantage of this product. I think that as you think about it going forward, we're pretty optimistic. If you believe that we would add array in the next year or two and be able to take advantage of a broader probe tech capability, viper is more of a platform. It's a key part of our long-term look at how we grow the business. I don't see it in the next couple of quarters as a significant opportunity, but I see it as very crucial to what we might do in the next two or three years with the probe tech base.

Okay. Thanks, you guys.

Well thank you, and thank everybody. And since it's about 9 35 now, you know, we'll conclude and as long as we can stay within the four corners of what we've talked about, if you have some other questions, you can talk with Pat, and we thank you very much. Goodbye.