Becton Dickinson and Co (BDX) 2006 Q3 法說會逐字稿

Hello and welcome to BD's Third Fiscal Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] Beginning today's call is Ms. Patricia Spinella, Director of Investor Relations. Ms. Spinella, you may begin.

Thank you. Good morning, everyone and thank you for joining us to review our third fiscal quarter results. During today's call, we will discuss some non-GAAP financial measures with respect to our performance. A reconciliation of the non-GAAP to GAAP measures can be found in our third quarter press release on the related financial table posted on the investor's page of the BD.com Web site. We will also make some forward-looking statements and it's possible that actual results could differ from our expectations. Factors that could cause such differences appear in the third quarter press release and in the MDNA sections of our recent SEC filings.

Leading the call this morning is John Considine, BD's Chief Financial Officer. Also joining us today are Gary Cohen, BD Medical; Bill Kozy, BD Diagnostic; and Vince Forlenza, BD Biosciences. I will now turn the call over to John.

Thank you, Pat, and good morning, to everyone. I assume you all have our earnings release and the attachments we sent out this morning and have had an opportunity to review them. As usual, we'd like to devote as much attention as possible to your questions and therefore introductory remarks will be brief. This was a strong quarter on all fronts. We achieved record revenues and better than anticipated earnings. All segments contributed to our growth, and we increased our guidance for the year from a range of $3.18 to $3.22 to a new range of $3.26 to $3.27.

Broadly speaking, there are three topics we'd like to address before taking your questions. First, since there are certain items that affect comparability between periods, we want to review the analyses of third quarter and nine-month period that we have provided in the press release. Second, we'll describe some of the key drivers of our revenue and earnings growth for the second quarter. And third, we'll review our guidance for the fourth quarter and full-year 2006. Starting with our earnings, I'd suggest that you turn first to the table in the press release that appears under the heading, Analysis of Third Quarter and Nine-Month Period of Fiscal 2006 and 2005 Earnings. For the third fiscal quarter of 2006, reported diluted EPS from continuing operations were $0.81. There are no specified items in the 2006 quarterly results that impact comparability. For the third fiscal quarter of 2005, we begin with reported the diluted earnings per share from continuing operations of $0.73 and add back $0.01 related to the tax events that caused quarterly tax rate to be somewhat higher than the expected effective tax rate for the fiscal year 2005. Comparing the $0.81 this quarter to the $0.74 in the prior year's quarter gives us an adjusted EPS increase of a little better than 9%.

Moving to our nine months results for fiscal 2006, we begin with reported diluted earnings per share from continuing operations of $2.26. We subtract $0.04 results from insurance settlements related to our former latex glove business and add back $0.21 which represents the in-process research and development charge related to the GeneOhm acquisition. This gives us EPS from continuing operations excluding specified items for the nine-month period of 2006 of $2.43.

For the nine-month period of 2005, we begin with a reported diluted earnings per share from continuing operations of $2.18. We then subtract $0.04 that was recorded due to the reversal of certain tax reserves no longer required due to the favorable of certain tax examinations and subtracted $0.02 related to certain discrete tax events that caused the fiscal 2005 nine-month tax rate to be somewhat lower than the expected effective tax rate for the year. That results in comparative diluted earnings per share from continuing operations excluding specified items for the nine-month period of 2005 of $2.12. Comparing this $2.43 for the nine months of 2006 to the $2.12 in the prior year's period gives us an adjusted EPS increase of 15%. One final comment regarding the third quarter nine-month results. In both cases, they include dilution from the GeneOhm operations of $0.02 in the third quarter and $0.03 in the nine-month periods. Although not comparable to prior year's results, the GeneOhm operations are now a continuing part of BD results and as such should be included in any analysis of our performance.

Moving to the second topic, that is, what drove our growth, we'll begin with our revenue growth of 7% for the quarter. This growth included an approximate 0.5% to 1% favorable impact for foreign currency translation in each segment. In the medical segment, third quarter revenues grew almost 8%. In particular, sales were particularly stronger in the U.S. with our Medical-Surge systems, Diabetes Care, and Pharmaceutical Systems business unit all posting double digit sales increases.

U.S. sales at safety engineered products in the second quarter grew about 11% to $132 million. International safety sales grew about 12% to $24 million. Revenue in the BD Diagnostics segment increased 6% in the third quarter. The Diagnostic Systems unit reported revenue growth of 5% and a pre analytical system unit reported revenue growth of 7%. U.S. sales of Safety Engineered Products grew about 11% to $102 million due in large part of the continued success of our push button blood collection set. International Safety sales grew about 15% to $60 million. Looking at combined medical and diagnostic U.S. safety sales grew about 11% for the quarter to $234 million. Combined medical and diagnostic international safety sales grew about 14% for the quarter to $84 million. In the BD Biosciences segment, worldwide revenues grew about 9% for the quarter. The fluorocytometry instrument and reagent sales continued to be the primary growth contributors. However, sales of sale imaging products also contributed to revenue growth.

Moving to earnings and beginning with our gross profit, we continued to improve our performance. The 30-basis point improvement seen quarter to quarter was due in particular to product mix and productivity, offset in part by a higher based oil resin cloth and to a greater degree, unfavorable foreign exchange. SG&A as a percentage of sales was about the same as in the prior year and R&D spending increased about 16% in absolute terms over the third quarter of last year. Cash flow in the quarter was about $300 million from operation, approximately $208 million was used to repurchase about 3.4 million shares of common stock and we invested $108 million in capital expenditures. In comparison to our prior guidance for the third quarter, our adjusted diluted earnings per share from continuing operations, excluding the specified operations of $0.81 was about $0.03 higher than our guidance.

The last topic we would like to cover is our guidance for the fourth quarter of the full fiscal year. Once again, I would suggest you turn to the second table in the press release, which immediately proceeds the conference call information. Starting with fourth quarter, revenue growth is expected to be about 7% to 8%. Our estimate for BD medical ranges from 6% to 7%, BD diagnostics from about 7% to 8%, and BD bioscience, 8% to 9%. Fourth quarter diluted earnings per share from continuing operations including the GeneOhm operations are expected to increase in the 9% to 11% range from last year's earnings per share of $0.76. Looking at the year, full-year revenue growth for the Company is expected to be about 7% to 8%, and that includes about 1% of expected unfavorable foreign exchange. Our revenue estimate for BD medical is about 8%, BD diagnostics, 6%, and BD biosciences, about 9%. Diluted earnings per share from continuing operations, again including the GeneOhm operations but excluding the insurance settlements, and the end process research and development charge related to the GeneOhm Mack position, are expected to increase approximately 13% to 14% from last year's adjusted base of $2.88, which is favorable to our most recent full-year guidance at the high end by about $0.05.

Before ending, we'd like to give you some additional guidance for the full fiscal year, including GeneOhm operation and excluding the insurance settlements and the end process research and development charge. We continue to look at U.S. safety sales of products to increase 8% to 9% over 2005 and expect international safety to increase about 20%, which includes about 2% of unfavorable foreign exchange. Our gross profit margin is expected to increase by 50 points to 60 basis points for the year. Our SG&A leverage is expected to improve by about 20 basis points, R&D spending is expected to increase in absolute terms by 13% to 14%. We expect to have generated over $1 billion of net cash from operations, repurchased at least $450 million worth of shares and invested about $450 million in capital expenditures as we continue to invest in our profitable pen needle line, pharmaceuticals system facility and push button blood collection set line. In summary, we had a strong quarter, a very strong quarter, exceeding the higher end of our expectations by about $0.03 and indications are we will exceed our annual guidance by about $0.05. With that said, we can begin the Q&A. As we have said before, in order to allow for the broadest participation we'd appreciate you if you'd limit your questions to one plus a follow-up. Thank you for attention, and operator, please open the call for questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Glenn Reicin with Morgan Stanley.

Good morning, folks. So many questions here. I'll try to limit. Can you give us a little bit more insight into the elements of growth on the U.S. medical business? Quite strong. Is it across the board really in injection systems? And secondly, can you do the same with diabetes, specifically give us the blood glucose monitoring numbers, talk us to a little bit about your long-term plans in that business, and then specifically in the fourth quarter, could it be up sequentially? I know those are a lot of questions.

Gary will do that, Glenn. The only caution I would give you -- Gary will talk about the fourth quarter, we're not going to get into guidance for 2007 until we do our November call. But let Gary take that question.

Good morning, Glenn. We did have a very strong quarter in the U.S. Med/surge benefited from a few things. It had an easy comparison to what was a weaker third quarter last year, which we had communicated in last year's call that we believe that there was some inventory reductions that occurred last year that affected med/surge, including some of the safety sales. There was strength in the business overall, but there was a comparison. The BD sales in the third quarter were $29 million. We're not expecting dramatic change going forward. And although we are still expecting to be around our guidance of $115 million for the year and the diabetes care beyond BGM also had a very good quarter in the U.S. and that was principally driven by strength in pen needles. And the pharmaceuticals system business in the U.S. had a very strong quarter, which was favorably impacted by some new introductions, including the new Merck PC vaccine which is in our device.

To push a little bit on the diabetes front, could you potentially have a sequentially up quarter in absolute dollar terms? In the fourth quarter?

Well, our guidance would suggest that it will be up from the third.

And then on med/surge, is it really just injection systems, or is it across the board with infusion systems and some of the surgical products as well?

We had some benefit across the board. As you know in safety, in IV flush syringes, which have been a good source of growth for us. Unlike most quarters, the core base business was impacted by cannibalization by the safety devices, that was up in the quarter and that's more likely an impact of the comparison based on the inventory changes of the last year.

And then finally, on BGM, when do you make a decision about the future of that business?

Not on today's call, I would say.

I'm sorry?

Not on today's call. The direction has been sequentially up quarter to quarter. I think it'd be fair to say that we're not looking at that as being the major growth driver in the future. We have a lot of other things that are growing nicely, particularly the pharmaceutical system business and needles and the prefilled syringes, and continuing growth from safety.

What does that mean, that we get a formal announcement that at some point you're exiting that business?

I don't think we're saying that.

I think -- Glenn, I think what we're saying is that there is an ongoing process here. We look at all of our businesses every quarter. Some of them require a lot more looking than others. We look at -- right now, things are going very well for us in in terms of investing capital. We're pretty ice cold about how we look at these businesses and when we make decisions, we make them. I don't think I want to go any further than that, but you could take it as a certainty that we look at these businesses every quarter. All of them.

Fair enough. Fair enough. Thank you very much.

Next we'll hear from David Lewis with Thomas Weisel.

Good morning. Gary, about pharmaceutical systems, I know last quarter you talked about that business being flattish in the earlier part of the year. That came in stronger. I'm trying to understand, has there been a change in sentiment? Is there some kind of trend we're missing there in terms of future ability to grow?

In general, the future -- our expectation on the future ability to grow is quite positive. We did guide and mention last quarter that we expected the third quarter to be slower than what we had seen in the first two and that's really based on the time of product introductions from our customers and they're building of stock for the purpose of production introductions. But the overall outlook for this business continues to be quite positive based on positive underlying trends which income the trends toward single dose packaging versus multidose packages which favors prefill. The innovation that's occurring in the vaccine market, which is also good for prefills, and the concern about pandemic flu has had a beneficial impact on the non pandemic flu market, which benefits us as well. We have quite a bit of confidence going forward in this business and what we mentioned last quarter about this quarter trending a little lower was really a quarter-to-quarter variation. It was not intended to be a comment.

Gary, the HPV vaccine. Does that have any impact for your business now or in the next 18 months?

Yes, it's a favorable impact. The HPV is packaged in our [inaudible] We're already seeing good impact from that. It's one of the reasons you see the U.S. sales as strong as they are. And that should continue.

Great. Vince, a question about the international business. It was strong in two key areas. The first being flow and the second being pharm-gen. Are the two related in any way? Is there a reason we are seeing stronger than expected trends internationally in this quarter?

On the flow side, the instrument side, that's the continued strength that we've had as BD 4 monitoring around the world. As you get more funding for these HIV programs. So they are not related, but keep in mind on the pharm-gen side, last year we deferred $1 million worth of income when we were buying out Astellas, that positively impacted the international sales of the pharm-gen sales. We've got a distribution contract in Japan and that's helping us as well. So from an overall market standpoint it's really two different things.

Lastly before I get back into the queue. Bill, in terms of the Phoenix launch plan and progression, do you feel you are more competitively well against Dade and Atamaru [ph] in terms of how your product is developed, or is it too early to tell?

I think it's a little bit early to tell on the U.S. side. But we think we're favorably positioned more naturally against probably against the Day given our menu of organism idea. We're up over 300 bugs right now and we're pretty happy with the software package, the performance of the epicenter. We would expect it to have reasonable success against both competitors, probably Nicroscan, given their current technology status, may be somebody we can compete with even more effectively.

Great.

This is Vince, one other thing I'd want to add for you. We launched the second version of FACSCanto in Europe this quarter and that drove international sales.

Okay, thank you.

We'll take our next question from Rick Wise with Bear, Stearns.

Good morning. I wanted to follow-up on gross margin a bit. Gross margin was a touch lighter sequentially than I might have thought. Is this foreign exchange impact and oil or mix or -- and why does it get better sequentially in the fourth quarter other than seasonal or higher sales volume?

If you look discretely at third quarter, Rick, the benefit as I have said are two. One is product mix and the other is productivity. Offsetting that in particular is foreign exchange, we're also feeling some impact of resin, although the resin is not -- while it's there, it hasn't been that significant to us in terms of overall gross margin, it sank in the quarter of about 20 basis points, likely to stay there in the fourth quarter. What happens with the foreign exchange, if you think about the prior year, '05, you had very positive foreign exchange for all four quarters. Starting in '06 in the first quarter and to a greater extent in the second quarter but continuing into the third, we had negative foreign exchange. If you think about the way inventory moves through the P&L without getting too bean counter type our inventories turn over every 3.5 or 4 times a year, every three or four months they're kind of turning over. So since the costs of the product that would be subject to those translation rates when they're going negative as they have for the first three quarters of this year, there is a delay in that foreign exchange hitting the P&L.

For instance, in our first quarter, even though we had negative foreign exchange on revenues and the period costs of SG&A and R&D to a lesser extent, foreign exchange was not negative to us on the gross margin line as such because we still had the -- less expenses if you will, because they didn't have the negative impact of foreign exchange items rolling through. But the big numbers of the second quarter in particular and some of the third, mostly of second will run through this quarter, that's why you've got the big hit. That was about 90 basis points. What happens is in the fourth quarter, we'll have a little bit more of that, but if rates stay where they are, it should mitigate itself than if you were to stay right where we are now for the entire year, foreign exchange would have a negative impact on the gross margin line by about 20 basis points for the entire year. And I know that's a lot of stuff, but if you just kind of think about that one element being cost of goods sold lagging the sales line, because you're selling on a first-out, first-in basis, so they're attracting those costs and then may move through at that normal pace of three or four times a year, that's why you have that specifically in this quarter.

Very clear and I'm no accountant, but it also might suggest that as things normalize on the cost side that fiscal '07 gross margin all things equal should be better, all things equal.

Well, if I had a crystal ball, I could tell you. But you're right. If you could draw a flat line right now from where rates are, you wouldn't have a negative impact because of foreign exchange, I give you that. We'll have to wait and see. Right now, the fourth quarter looks positive in terms of foreign exchange. That should not hurt us in the gross margin line ultimately, but we'll still get a little bit in the fourth quarter. But it will have mitigated itself greatly.

Two last quick ones. Can you update us on GeneOhm, just the progress with the integration and not remembering, but what we can expect next in terms of either product or clinical milestones and last, just on the R&D front, this is like the third or fourth quarter in a row where you have quite strong growth in R&D spending and I know you've been fairly quiet about where it's going and what we might see and when we might see it, but I feel like I need to ask again, where in the heck is it going?

I think if -- let me take the R&D one and let Bill talk about GeneOhm and I'll give you a comment or two there first. There's kind of an unusual comparison in this one quarter that causes the rate to be up about 16% on a quarter to quarter basis, third quarter to third quarter basis. But if you remember, as Ed explained the strategy, was one to increase the pace of R&D spending. That didn't mean throwing money at the thing, but it did mean more spending, extreme changes in our process to assure that the investments were being made in the right things and the things that had the greater chance to give us higher margin, new product. If you look at the total year of 2006, our estimate is you're probably going to see R&D overall growing year on year at about 11% to 12%, kind of in that range. It could be a little bit higher. It depends on exactly how much spending occurs in the fourth quarter.

And I don't to get into '07 right now, but it's not -- we're not projecting kind of a 16% increase continually, but I think you will see in the lower teens it could be 12%, 13%, 14,%. We're paying for that with better margin and better earnings and still being able to present the types of earnings that you've been seeing, increases that you've been seeing. With respect to GeneOhm, we're only three months away from where we were last quarter, to state the obvious. And I'm not -- and Bill speaks to that business, not I. So we don't want to get too far here. It's still brand new.

As you know, it was a buy and build business. It had relatively low sales but great prospects, we all know that. I'll let Bill talk about how well the integration is going, but I would say we're not going to be forecasting in terms of GeneOhm right now. We'll probably say something when we get to November, set some expectations for '07, but not right now. But Bill, why don't you go ahead.

Good morning. I think we're pretty much on plan in terms of investment and revenue activity at this early stage. We think our integration is essentially complete. By integration complete, we're fully organized in the U.S., Europe, and Canada in terms of all our sales marketing and customer facing activity. We expect to be ready to go in Japan no longer than October 1. So we're pretty comfortable there. Our new product menu is on target and I believe that as we had indicated in previously communications that you'll see early in our fiscal year '07 the MRSASA product launch and that will be followed by BRE in the months to follow. And then our dedicated HRI leadership and team are in place, our advocacy policy planning are actually moving into an early implementation mode, working directly with the GeneOhm leadership and key external health care advocates and agencies. So we feel comfortable that we're where we wanted to be at the early stage of the program.

Thank you very much.

We'll take our next question from Mike Weinstein with J.P. Morgan.

Thank you. Just a couple things to clarify. First to make sure I understand your fourth quarter guidance, what your assumption is top line, incoming currency?

Let me just pull out that sheet and, I apologize. You know Mike, my head doesn't always remember all those things. But we're looking for top line sales in the 7% to 8% range. And I think you'll see continued good leverage on SG&A. The bottom line growth should be in the 9% to 11% range and gross margin, I think you'll see it kick back up from the place it resided at this quarter. So you're going to get -- because you're going to get rid of some of this -- if rates stay where they are -- this foreign exchange. If you want to go back into the revenue by business --

Before we do that, I want to make sure I understand a couple pieces there. That's what we had it at. But the 7% to 8%, what is that assume on currency?

Kind of where we are now. And no real weakening of currency overall.

So that's a tailwind of about how much? 1%? 1.5%?

About 1%

And the gross margin, the implied 50 basis points to 60 basis points for the full fiscal year would suggest that year-over-year for the September quarter that you're flat. Any reason why that one the case?

We had an extraordinary year in the prior year. We had a lot of benefit from foreign exchange in that year -- [overlapping voices]

Last September?

Yeah. And some great extraordinary mix in that quarter. They just don't always fall in absolute sync line with us.

Understood. It's interesting because he relative to what you guys were were guiding and generally what the industry was modeling, you ended up with less of a currency hit in the third quarter than what you're assuming three months ago. The upside really came from your U.S. businesses, really came from within the medical -- the U.S. side geographic side of the medical business. As I look at the fourth quarter, most of which you talked about so far in the call relative to the drivers of some of that upside, any of that, what you talked about with the pharmaceutical system business, the new product launch, or within the medical/surgical piece, any reason why some of doesn't continue?

We have a favorable comparison in medical/surgical in the third quarter, which I mentioned. We think the trend for the year in medical/surgical or for the fourth quarter will be more akin to what we saw in the first half than what we saw in the third. And in pharmaceutical systems, our outlook continues to be positive in the U.S. You know it's going to vary somewhat quarter to quarter, but you can anticipate continuing strong growth there.

Great, thanks.

We'll take our next question from Quintin Lai with Robert W. Baird.

With respect to your diagnostics, could you give us an update a little bit on the how the Quest installations of the Vipers are going, and did that impact your Q3 results?

Bill will take that.

Good morning. We're right on schedule with our Quest activities. We've actually placed and validated over 30 Viper ERs in about 30 Quest sites. They're uptake has been, actually, even just slightly better than we had hoped for. So we're real encouraged we've got that key installation mode behind us and feeling confident that we'll be able to, in the fourth quarter, see some revenue impact. We did get positive revenue impact in the third quarter as well, though it's very early-stage. But Probe Tec overall grew a little bit north of 15% in the third quarter.

And any new contracts on the -- that's either signed or on the horizon?

Well, we're getting a lot of interest from pending customers and it would be premature for me to even speculate on what else going to happen. But we've got a lot of activity in both U.S. and Europe given the performance of the ER and the reliability data that's floating around. Let me come back to you next quarter since ER is still so new in terms of its acceptance. That's probably a more accurate way to depict what's going on. If that's okay?

All right. Thanks. John, just a bigger picture question, in light of increased resources from nonprofit organizations like the Bill and Melinda Gates Foundation, how do you see that impacting BD or interacting with BD as more worldwide vaccination initiatives are taking off?

Let me defer that -- not defer, but have Gary talk to, that because he's right in the heart of it and has spent more time than anyone in the Company dealing with that [inaudible]. So Gary, do you want to --?

You are picking up on an important trend. There is a lot of funding going into health care in the developing world, both around vaccination and also around the primary infectious diseases that are causing such high mortality rates like HIV/AIDS and TB, which is the leading cause of death for people with HIV/AIDS, and malaria. We are deeply involved in this, working with the NGOs across the public and private sectors. We've been very active in advocacy for the need to build health care capacity in sub-Saharan Africa and particularly in other areas in the developing world. The investments we've been making over a number of years in Asia, and in particular in China and India, are also well positioned to enable us to emerge as an important provider of health care technology in some cases, supporting services such as training and also instrument service. We've been one of the few to invest around the diagnostic side.

And I think this is a longer-term picture, but we've already had a lot of impact in childhood immunization and in particular in the clinical side in both cytometry, principally with CD4 accounting for people with HIV/AIDS. Still with the impact that's been had, there's a lot more potential going forward based on the need. There's still only a fairly small of percentage of people being reached particularly for HIV/AIDS and TB with the appropriate technology and we're very active in advocacy and working with the funding organizations to trying to put the necessary on the ground.

For child immunization, that's probably one of the better-covered areas already. The work of UNICEF and other agencies has led to fairly broad coverage with appropriate types of devices for immunizing children and we see that growing in the future around general injections and the need to protect against the spread of disease associated with the use of general injections. More effective TB diagnosis and the training and other needs associated with that are areas we're very engaged in and I would say we are orienting ourselves to establishing long-term position in the developing world.

Thank you.

Next from Goldman Sachs we'll hear from Larry Keusch.

Good morning. John, I just want to understand the resin cost issue. Obviously it's something you guys have been dealing with for a while and have been very successful at generally offsetting it. Can you help us understand, given all the geopolitical uncertainty out there out quickly resin prices move on changes in oil and how much inventory do you guys generally carry, so how long does it take for you to feel it?

Well, again, while oil can be a quasi proxy for us since these polymers are petroleum based, it's certainly not a straight absolute correlated link to what we feel. And we do have some contracts and we do buy over time and we're trying to be advantageous here and stock it a little bit when we think it's moving up. What I could tell you is in terms of our -- if you think of our entire cost of goods sold this year being just under $3 billion, when this oil thing started, we, just the polymers -- now, you can obviously say to me the trucks that carry our stuff, the fuel goes up and all that -- but just dealing with I think you're after, which is syringes and the plastic components of our product, that was about $120 million when it all started. And in that first year, it was significant because it went up about $50 million to us in our P&L. Or in terms of our buying out some of that just as I was explaining with foreign exchange, kind of moved later into our costs. That was the prior year.

This year it has probably gone up another $20 million to $25 million. So you're still at a point where the total cost of these resins is probably in the $200 million range, maybe somewhat higher. So it's less than probably 8% of our total cost of goods sold. Or somewhat less than that. Now, the issue that we face is right now that is certainly under control but if oil went through the $100 a barrel target that is a number that you probably hear as much as I do on the radio, that would be a different deal because -- and I can't give you an analysis right now. We haven't finished our work on that what would happen, but certainly if you just think about that being 40% of its current price, that can certainly have a significant impact and that impact might be in the $80 million to $100 million range.

We're going to continue to flush that out and look at it. Right now, we have it under control as best we can. We're considering, we don't hedge right now, but we're looking at some hedging. Our only hedges are done in terms of buying inventory up a little early. But it's certainly something as you would expect has a lot of attention around here. Right now, I don't have a whole lot more than that to really say, Larry.

Okay, thanks, John. Just two other questions. Maybe, John, you could -- you obviously indicated you bought become stock in the quarter. Maybe you can talk a little bit about philosophically how you think about share repurchase versus changes to dividend and cash back to shareholders, that would be question two. And then three, just so I make sure I'm thinking about this correctly, and I'm not sure who's this is, maybe for Gary, do you get any impact from the small pox request or proposal three that's going through right now? That's 20 million doses and maybe as much as 80 million.

I'll do the share repurchases and dividends first. We think of the two of those being absolutely linked and both representing a return to the shareholders and if you think about a dividend in the $200 million range and 450 of share repurchases, which is our current target, that's $650 million going back to the shareholders. In terms of dividend, if you break those apart there is obviously always more certainty. Because for many reasons, they have more -- they attract a bit more attention if you stop them. It's certainly in the Board's purview, but we have been following a course for the last three years of paying out about 30% of our trailing earnings or last year's earnings. Since our earnings have been going up in the teens and higher, that has resulted in the first catch up was a 50% increase in the dividend and then after that, it went up 20%. I think in the year after that, it went up near that. So we think that that's a good -- we've benchmarked that 30% against other companies. We think we're in the right range there.

The other part is an amount of money that we think is a reasonable use of funds. It in no way limits our ability to -- and I don't want anybody to think I'm advertising acquisitions here, but our capability to access capital markets if we were so inclined to do any kind of an acquisition is really unimpacted by that at most levels. And if we were going to do something that was quite substantial, again, I am not signaling anything here, I'm just doing a financial analysis for you, that is an easy one to turn off and that certainly generates a lot, or frees up a lot more capacity on the debt line if need be. So that kind of strategically how we think about them. We also think about them in terms too of capital that feeds the business. I hope that answered the question for you and I'll have Gary move on to the smallpox.

The short answer is if we don't have anything of significance built in around smallpox going forward in the near future. We are prepared to respond to stockpiling needs, both across the biodefense activities and also the concern about pandemic fuel, and there was some pandemic flu stockpiles we did get. We got quite a bit of stockpiling sales in 2003 from the special needles, fiber needles, that are used to administrator the small box vaccine. We have people that are very active in this arena, more so from the standpoint of social responsibility because sometimes the agencies that are involved in biodefense and pandemic planning don't have a lot of insight as to what they would need to do to be prepared in the event of a problem and we have a lot of knowledge of that from the device side. We have people that specifically work on advocacy and knowledge transfer in this area so we're well-prepared to deal with stockpiling. And stockpiling is a good-to-have but not great-to-have business opportunity. It's generally one-time, unless it's a disaster. It's usually disruptive to manufacturing. Of course, it's good business. We'll take it when it comes, but it's one of the reasons we reach out to engage to make sure capacity plans can be aligned to what stockpiling needs may occur in the future.

Okay. Great. Thanks very much.

We'll take our next question from Jeff Frelick with Lazard.

Good morning, guys. Thanks. Gary, real quick on the safety products. You guys are kind of a little over a near on the next gen roll out like Nexiva, Q-Syte, so forth. Did you see traction this quarter, or is that still yet to unfold?

We are starting to see some traction. As I've said in the past and our experience with all the new safety devices and including the success Bill is having with push button would attest, it's usually a few years after introduction when you really start to see the sales ramp. With Nexiva and Q-Syte, we're seeing a lot of interesting Q-Syte in part linked to the health care associated with infections, issued in our strategy. There is emerging data indicating our Q-Syte device and in general split [inaudible] devices performed better from an infection control standpoint than other devices that are in the market. There'll be a study published on that that is not a BD study, that's an external study. The outlook actually Q-Syte is going a little stronger than we expected this year as a result of that.

We're also beginning to get good traction with Nexiva. Just this morning I received a report of conversion of one of the major medical centers as one of our pilot institutions because we didn't ask them -- I don't want to say which one it was, but it was a very well-known name and it is just an indication of the positive response we're getting to Nexiva. The nature of these types of devices is we need to go through a fairly lengthy evaluation and process and it usually has started with early adopters and then it goes to the mainstream. And that will unfold over a series of years. We're pleased with the progress we're making with both.

Great, thanks. One quick follow-up for Vince. Vince, I missed the beginning of your comments, but with respect to bioscience, can you point to growth greater in the research side or the clinical segment side in the quarter?

On the clinical side, as I mentioned before, we introduced in Europe the new IBD version of the FACSCanto 2. That's why some of the European growth is there. In addition to the answer Gary was giving, the CD4 monitoring and the placements in the development world remain strong for us. That's a second growth driver. Those are on the clinical side. So we had strong reagent growth along with that. In the U.S. as well as -- as we continue to roll out for example in Quest as a standardize on the clinical side on our flow system. So that's helping us as well. On the research side, we continue to see kind of our special order instruments be strong and in addition, bioimaging for this quarter was up about $2 million versus last year. So we're starting to get some good traction with that product line as well. Great. Thanks.

We'll take our next question from Lee Brown with Merrill Lynch.

Hi. How are you? I think most of the questions have been answered, so I'll keep this short as the call's been going on. My only question is on international immunocytometry, it had a strong quarter. Could you touch on that a bit more and what's driving that growth?

I just answered that, one was we just launched the second version of the FACSCanto 2 in Europe. We have not launched that in the United States yet. We have some submitted the 510-K and hopefully that will be out the end of next quarter or the beginning of our fiscal year next year. We continue to see strong growth in CD4 testing in the developing world helping us. As I mentioned real early on the call, in Japan, we had the deferral of -- you have to figure into these numbers -- we had the deferral of the $1 million in sales while we were in the process of buying out of our distributor contract in Japan. And we've gone direct in Japan. So that's helping the international sales as well. And then the bioimaging is kind of U.S. and Europe.

That's very helpful. I'm sorry that I missed that. That's all I had. Congratulations on a strong quarter.

Thank you.

We'll take our next question from Bruce Cranna with Leerink Swann.

Good morning, guys. This is Jim Natusane [ph] actually in for Bruce. Thanks for taking my call. Just going back to Viper at Quest, was that 30 boxes in the quarter, or was that split between second and third quarter?

We started in the second quarter. So that's split between second and third.

And how many boxes was it in the third quarter?

Oh, I don't even have that information here. I don't remember exactly what the third quarter was. Think about Quest as a little north of 30 installed and validated Viper ERs.

Okay. And would you say that a lot of heavy lifting has been done at Quest in terms of 30 boxes and that's pretty much where we're going to get it to, or do you think you can place some more Vipers there?

No, we think by far the heavy lifting for Quest is done. Could there be one or two more, possibly. But this was right in line with the expectations that both organizations had about what would be done, just at Quest.

Great. And then, downstream to Viper with regards to ProbeTec, could you give us a sense for how ProbeTec is doing from a placements perspective?

Well, the bulk of our focus right now is obviously on the high throughput in the Viper ER. And we've got -- if you get outside Quest worldwide, there's 43 new Viper installations as well as four, five other notable contracts that are pending. So our strategic focus is around the benefits and automation advantages of Viper ER. And recognizing that in many cases, we're upgrading existing ProbeTec customers to the ER platform. So Viper is really our focus right now and actually in my package, I don't even have the pure ProbeTec view. It's Viper ER, the strategic focus.

Good. And then with regards to Europe, have you guys seen any impact from Abbott's M2000 machine. Impact on ProbeTec?

In terms of impact, it's too early to say. I would have to answer that no. The product is launched, they are actively marketing, particularly in the Nordic areas of the continent is where they are most active. And we're obviously paying close attention to that.

Great. And one last question with regards to GeneOhm. Earlier this week, one of your competitors had announced they received a 510-K approval for their version of a Group B molecular test. So, obviously the space is getting a tad more competitive. I was wondering if you could walk us through your thinking on how you view the GeneOhm products relative to the competition and the points of differentiation relative to this product? Thank you.

I think that was the Group B strep launch and we don't know exactly what's going to happen or when. We do agree this is an attractive space. With the other competitors we can only speculate in the THAI areas we'll have some first-mover advantage for a period of maybe 12 months to 18 months, but that's just our speculation at this stage. We're comfortable with the entry platform as well as the menu that we've got, we'll be well-positioned to compete.

Great. Thanks for taking my question.

We'll take our next question from Glenn Novarro with Banc of America.

Hi. Just a quick follow-up on share buyback. John, can you remind us how large the current share buyback is currently, how much have you used, and can you give us a sense of what's a good share count for the fourth quarter?

Yeah, we had authorization to spend $450 million. We don't have to do it equally across quarters, so when the stock was lower, we bought a little early. I think there's about $25 million of remaining right now. We always have the ability to go back to the Board and ask for more, but our planning was and approved by the Board was $450 million. In terms of a number that we would be thinking about for the fourth quarter in terms of shares -- give me a second to take a look at one. Hang on a second here. You're probably -- As you know, stock goes up, you buy less, or under the treasury share method, you get less, stock goes down, you get more. I think if you used 255, 256, you'd probably be okay for the fourth quarter.

Okay, thanks, John.

and at this time, it looks like we have time for one more question. We'll take that question from James Baker with Newburger Burton. [ph]

Good morning, fellows. I had a couple of questions for John. One, I wanted to ask about the pension situation. Your fiscal year ends in September. You know when the rates were at the end of June and perhaps the date for determining your assumptions for pension expense for next year. So I'm wondering if you can comment on that?

And also on the cash -- I guess I've been thinking you'd be contributing about $150 million a year to the pension plan going forward, the pension plans. So if you could comment on that. And the second question I had was just on stock options expense, I note -- first of all, if you could tell us what was the impact on this quarter you just reported. And also, I note that there was about a $0.07 impact in the fiscal fourth quarter a year ago. Do you see that impact being more or less than that in this year's fourth quarter?

Okay. Starting with the first one on pensions, we actually used the rate at the very end of September, the most important one being the discount rate. The other rates tend not to move our volatility and things like that. So obviously it's helped us and dropped the -- and I know you know this, Jim, so drops the rate So we won't know until the end of September but we assume it will be a higher rate and should drop that pension expense by some number.

Do you have a sense how much that will be if rates stay where they are today?

It'd be wrong if I told you I didn't have a sense, but I don't want to give it out because of there are other things in the calculation, but we will be giving that out in November.

That's fair. And what about the contribution, John?

You had it about right. We're using about 150 kind of a year. That can go up and down, but as you know, based on where we sit, but in terms of the U.S. plan, that's about what we've been doing. So I think you've got that exactly right.

And then in terms of the LTI expense, I'd remind you that this year if remember in the first quarter, we were high versus our last year's first quarter. Last year's '05 first quarter was $0.03 and this year was $0.09. And $0.04 of that $0.09 was a catchup on this concept that if people are at or near retirement eligibility, you didn't amortize this cost over time. You kind of took it all at once. So if you are 55 and have more than 10 years, you could retire and would get the options. So what we do is we book that right away. There was a catchup of about $0.02 and then to start to do that, which would have theoretically related to the prior year and then $0.02 would have been this year. And so that $0.04 happened there.

The other thing that drove it up, because our performance is good, as you may recall, there are two legs to the LTI side here. One is revenue growth and the other, the return on invested capital. And the good news -- revenue growth has been pretty good and that is even weighted more because that's obviously where the Board wants us to drive. But the return on invested capital has been very strong and as a matter of fact, over the initial plan that was approved by the Board, they actually raised that bogey on us, appropriately so, for the next plan that went out.

But anyway the long of it is, given that performance, we had to accrue more. So kind of for this year, you'd be seeing a number of like $0.27. Of that, there's $0.04, $0.02 of which is a catchup from the prior year. So kind of the same-store sales would have been about a $0.25 and the prior year was about $0.19. And that would have been about $0.21. So it's gone up by about $0.04 for the year-on-year in true apples-to-apples math.

Okay.

That's really based on the performance that we have seen --

Okay but year-to-date so far, you mentioned the $0.09 in the first quarter. As I recall, last quarter was about $0.06 --

That was in the third quarter so it would be the fourth.

The $0.06 for the last of the two quarters?

Yes, sir.

Okay, and for next year, you'd expect it to be maybe slightly higher, depending again on the performance?

I would guess that's right. I would guess that would be the -- and that is even considering the fact we moved the bogey up on the ROIC, on a planned year. So, yes. I would. I just can't give you numbers just yet, Jim.

Okay, and I recall, all that hits the SG&A line? Is that right?

That's not true.

That's right, it's split between -- you're right, you're exactly --

A big hunk of it hits SG&A line, but some hits cost of sales and some hits R&D.

Yes, I remember. You laid that out on the 10-Qs if I recall. Okay, John, I think that's all I've got.

Okay. Thank you, all. I hope we got to all your calls and if there's anything we can more fully explain without getting outside the four corners of what we can do under FC, we'd be glad to. And we look forward to talking to you in November. Good-bye.

And that does conclude our conference. Thank you all for your participation. We hope you enjoy the rest of your day.