Becton Dickinson and Co (BDX) 2009 Q1 法說會逐字稿

(Operator Instructions) At the request of BD today's call is being recorded. It will be available for replay through Wednesday, February 4th on the investor's page of the bd.com website, or by phone at 800-642-1687 for domestic calls and area code706-645-9291 for international calls, using conference ID number 81318661. I would like to inform all parties that your lines have been placed in a listen only mode until the question and answer segment.

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. During today's call we will be making some forward-looking statements and it's possible that actual results could differ from our expectations. Factors that could cause such differences appear in our first fiscal quarter press release and in the MD&A sections of our recent SEC filings.

We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and the related financial schedules. A copy of the release which includes the financial schedules is posted on the BD.com website. Leading the call today is John Considine, Vice Chairman. Also joining us are: Vince Forlenza, President, Dave Elkins, Executive Vice President and Chief Financial Officer, and BD Executive Vice-Presidents, Gary Cohen and Bill Kozy. I will now turn the call over to John.

Thanks, Pat. And good morning, everybody. Prior to our brief comments regarding the financial results which Dave Elkins, our new CFO will handle, I'd like to remind you that we had announced a number of executive changes effective January 1st, specifically Vince Forlenza became BD's President, Gary Cohen assumed responsibility for international operations and our Preanalytical Systems business unit and Bill Kozy assumed responsibility for our medical segment. Because their responsibilities didn't take effect until the first of the year, the calendar year, Vince, Gary and Bill will each respond to questions regarding the segments they led during the first quarter of 2009. I would also note that Vince and Gary are at locations outside of BD where we sit today. Since making those announcements, we have announced additional leadership positions which I would like to ask Vince to please cover with you.

Thanks, John, and good morning, everyone. I'm pleased to announce two key leadership appointments that became effective January 1st. Philippe Jacon was appointed President Diagnostic Systems. Philippe has responsibility for microbiology systems, molecular diagnostics, TriPath, GeneOhm and rapid diagnostics. Philippe began his career at BD Biosciences in France in 1988 and joined BD Diagnostics as President of Microbiology Systems in 2006. Bill Rhodes was appointed President of BD Biosciences. Bill has responsibility for Cell Analysis and Discovery Labware including the advanced bioprocessing business. Bill's career with BD spans more than a decade. In 2003 Bill became VP/GM for Immunocytometry Systems. His most recent role was President of Cell Analysis. We're fortunate to have two talented experienced leaders with proven track records to take on these broader responsibilities and I'm sure you will agree once you had the opportunity to meet them and speak with them in the future. So with that I will turn the call over to David to walk us through the numbers.

Thank you, Vince. Good morning, everyone. I assume you all had time to review the earnings release and the attachments that we sent out this morning. We'd like to devote as much time as possible to answering questions. But before beginning we would like to make some brief comments regarding our first quarter results. As reported in our press release, diluted earnings per share from continuing operations increased by 18% over the prior year's quarter. Reported revenue growth was about 2% after about a three percentage point unfavorable impact from foreign currency translation. In the medical segment, first quarter revenues declined 2% after a four percentage point unfavorable impact from our foreign currency translation.

On a currency neutral basis underlying growth increased by about 2%. Strong sales of insulin delivery devices in the diabetes care unit was more than offset by softer than expected medical surgical systems and the expected decline in US sales of pharmaceutical systems products. Global sales of safety engineered products in the segment grew about 1% to $193 million, after about two percentage points of unfavorable impact from foreign currency translation. Revenues in our BD diagnostics segment grew about 3% after about a three percentage point unfavorable impact from foreign currency translation. On a currency neutral basis, underlying growth was about 6%. Sales of safety engineered devices, cancer diagnostic products and infectious disease testing products contributed to the revenue growth. Global sales of safety engineered products in the segment grew about 7% to $210 million, also reflecting about a three percentage point unfavorable impact from foreign currency translation.

Now, looking at combined medical and diagnostics global safety, sales grew about 4% to $403 million after a three percentage point unfavorable impact from foreign currency translation, resulting in underlying growth of 7% on a currency neutral basis. The US growth rate was about 1% and ex-US was 11% after approximately eight percentage points of unfavorable impact from foreign currency translation. The underlying growth rate of international safety was 19% on a currency neutral basis. In the biosciences segment worldwide revenue grew 11% reflecting a one percentage point favorable impact from foreign currency. The underlying growth rate was 10% on a currency neutral basis. Clinical and research instruments were the primary growth contributors.

Now moving to gross profit, favorable foreign currency translation of 260 basis points coupled with product mix and productivity of 40 basis points were offset by continued start up costs of unfavorable raw material costs of 80 basis points, resulting in a net gross profit improvement of 220 basis points versus the prior quarter. SSG&A as a percentage of sales improved 110 basis points, reflecting continued disciplined expense management. R&D spending increased about 7% over the prior year's quarter after about two percentage points of favorable currency translation. In terms of cash flow, we generated about $270 million of net cash flow from operations after taking into account about $50 million related to an inventory build to ensure continuity of supply including resins and about $120 million in pension contributions -We accelerated our share repurchases, buying back about 4.4 million shares of common stock for approximately $2.80 million. We also invested about $95 million in capital expenditures.

Next and last topic I would like to cover is our guidance for fiscal year 2009. We are revising total company reported top line guidance to the lower end of our 1% to 2% range, reflecting the softer revenue in medical in the quarter and the continued solid growth in biosciences and diagnostics. We are raising our EPS guidance for fiscal year 2009 to approximately 9% to 11% from our previous guidance of 8% to 10%. Primary drivers of the improvement relate to the one time benefit resulting from lower cost of sales due to favorable currency translation, the effects of our accelerated share repurchases and our continued cost efficiency programs. Moving to revenue guidance by segment, BD Medical is expected to be about negative one to negative two percentage points on a reported basis, including about six percentage points of unfavorable foreign currency impact or about 4% to 5% on a currency neutral basis. BD Diagnostics is expected to be about 2% to 3% on a reported basis including a four to five percentage point unfavorable foreign currency impact or about 7% on a currency neutral basis. BD Biosciences revenues will be about 6% to 7% on a reported basis including about a two to three percentage point unfavorable foreign currency impact or about 9% on a currency neutral basis.

US sales of safety engineered products are estimated to increase about 5%. International sales of safety engineered products are also estimated to increase about 5%, after about 12 percentage points of unfavorable impact from foreign currency. The underlying growth rate is 17% on a currency neutral basis. We expect our gross profit margin to improve about 80 basis points for the full year. SSG&A is expected to improve about 90 basis points as a percentage of revenues. Our R&D spending is expecting to increase about 7%(speaker mistakenly stated 2%), after about a two percentage point favorable impact from foreign currency translation. Our overall operating income margin is expected to improve about 120 to 140 basis points. We expect to generate about $1.8 billion of net cash from operations and invest about $650 million in capital expenditures. And we expect the average number of fully diluted shares outstanding to be in the range of 247 to 248 million shares.

So in summary, despite guiding to the lower end of the revenue range due to the weaker sales in our medical surgical systems products, we have raised our earnings guidance based on continued strong performance in our biosciences and diagnostic segments, a less than expected unfavorable impact from foreign currency, accelerated share repurchases and our continued cost efficiency improvements. Now I would like to turn the call back to John.

Thanks, David, and we will now open the call for Q&A. As always we'd ask you to limit your questions to one plus a follow up. And we'd now like to take our first question, Operator.

The floor is now open for questions. (Operator Instructions) Thank you. Our first question comes from Mike Weinstein with JPMorgan.

Thank you for taking the questions. Good morning, guys.

Good morning.

There are a couple of key issues we want to tackle. One is the performance of the medical business, specifically the surgical systems piece, and for you to give us a better insight into what you are seeing there. I think the sense people had a couple weeks ago is the economy, broadly across the company, was not having a meaningful impact, so if you could talk about what is impacting the business. And then second, I think everybody wants to understand a little better the FX hedging gains that showed up in the gross margin line this quarter. Why did those occur in this specific quarter? It sounds as if they are one time based on your gross margin and EPS guidance for the balance of the year. Thanks.

Mike, I will have Gary address the medical side. Then David will explain the gross margin to you.

John, unfortunately my line had disconnected momentarily. I had to call back in on another line. Was the question regarding medical sales, particularly medical surgical in the quarter?

What Mike was asking is to give him more color in terms of what we had heard. What the analyst had heard in the past is that we weren't seeing a relationship between the economic debacle that we are in and hospital take downs in terms of inventories and like that, and could you just talk more about the MedSurge business.

Sure. Yes. MedSurge sales were softer than we expected. We expected pharm systems to perform as it did. It's not clear that it's coming primarily from economic factors. There's a series of things I can explain, one of which is most likely related to economic factors. The others are independent of that. So first we had been enjoying fairly strong revenues internationally from sales of auto-disabled syringes in developing countries and those sales have been off considerably in the first quarter, largely as a result of a decision that had been made a year ago of India to pull out of tendering with UNICEF for procurement of those devices. We have been waiting for some time for results from India's local procurement tender but that keeps getting postponed. They've already postponed it twice. That was actually the largest single number in the quarter in terms of a shortfall to prior year for a particular product.

We were also in the US, as we've reported in previous calls, one of our key product areas in safety, needleless iv access cannulas, which is one of our older still very viable but older product lines, has been experiencing declines. It essentially offsets the gains that we are getting in Nexiva sales. Nexiva sales were quite good, they were up 40% but they were more than offset by the declines in that product line. Then where we are seeing some economic impact is primarily in the region we call EMEA, eastern Europe, Middle East and Africa, and particularly related to Russia, where distributors who deal with us in dollars have become much more conservative and have been cutting down both inventory levels and their purchases and that affected international sales. Those were the three primary factors that caused the softness in medical surgical in the quarter. We were watching closely the US trends relative to the economy. It's too soon to say whether we are seeing an impact there. We have done correlation work on unemployment rates which have pretty conclusively shown that increases in unemployment will not have a negative effect on our revenues, or not a discernible negative effect. But those three things I mentioned were the primary reasons for the softness in the quarter, plus in general, safety in the US is not growing as rapidly as it had been, although internationally it continues to grow in line with what we expected, around 20%.

That's helpful.

Mike, this is David. In relation to your question, you are right. There is the nonrecurring aspect of the foreign currency movement. And that's related to our cost of sales in Euro denominated sales which were purchased in US dollars. And if you remember, in November and December there was a significant swing in the Euro/dollar exchange rate. So the stuff goes into inventory at a higher exchange rate and comes out where the dollar is now, which is $1.30, so there is a gain on that and a one time gain that we realized that we built in.

Okay. And so let's say the dollar from here goes to $1.35 in the course of the next quarter. Do you have another one time gain?

Yes. It will happen, but what's different about this time is that the drop happened in a few weeks. And it happened over the quarter. So that's why you saw such a change. Usually you don't see -- you usually don't have that impact because the exchange rates don't move that quickly. I think it went from about mid-$1.40s to low $1.30s within a few weeks.

Okay. And let me just follow up. If I look at the balance of this year, relative to I think what the street was at, I think you came in at $0.11 ahead of consensus, and you're taking your EPS guidance up by one percentage point. You are actually over the balance of the year your EPS outlook is -- you're pulling it in a little bit. You're being a bit more conservative. I think second, third, fourth quarter and your first margin guidance would be more conservative for the second, third and fourth quarter. One, am I reading that right? And two, is that because of medical or there is anything else we should be aware of? Thanks.

I think just going on to gross margin, we originally guided around 51.8%. We are saying that will improve conservatively it's going to improve to 52%. So that's where we are on gross profit.

But if I think about the gain you picked up this quarter versus your expectations, the implication would be that for the next three quarters gross margin would be lower than you were thinking before.

Yes. Maybe I could just shed a little light on it, Mike. We, as David said, we have that one-time gain. And while that popped this quarter substantially since it's unique to this quarter and for the year, we were only going to get a quarter's basis of percentage of it. So if it were 100 basis points for the year, it's going to average out to 25 basis points. When we looked at the remainder of this year, you are right we risk adjusted MedSurge business within medical. The other businesses pharm systems was on target for what we projected. Diabetes care, as we said in the press release was strong, so all of that was there. When we looked at the remainder of the year there is a lot going on. Oil is down. But the resins haven't followed it dollar for dollar, but we think there is an upside there. We don't know how significant other things might be, so we've just kind of given you, as we always would, what we think we can all believe in. And that's the 52%. It's a little lighter. You said because we were a little bit stronger in the first quarter than we might have otherwise been.

Okay. Great. Thank you, guys.

Your next question comes from Peter Lawson with Thomas Weisel Partners.

What's been driving the strength in the bioscience business? And is that strength likely to continue for '09 with the CapEx issues we are seeing out of pharma and hospitals?

Bill, why don't you take that, please.

Sure. The strong contributors in the first quarter were instrument sales, both research and clinical, continued strong performance in the sorter category has sustained itself throughout the quarter. We continue to have a good feel that we will meet our commitments in that instrument category for the year. At this early stage of research and clinical CapEx implications, we have seen a little less on the research side, particularly as interest -- ongoing interest in research in topics like cancer, stem cells and so forth have continued. And our pipeline continues to look steady, looks like it did a couple months ago, and so we were confident at this stage that '09 is a commitment that we will achieve.

John, on the other income line, the $9 million, where did that come from and what is the likely projection for 2009?

You may have heard us talk about this. We have a deferred compensation program. The way the accounting -- did you say other income or other interest?

Other income.

I will have David take it then.

Other income, there's really three things driving that. We had some hedge gains that came through under that line. Also we had a one time research fee of about $3 million. And we also sold a small diagnostic product line which is a few million dollars.

Okay. What's that likely to be for 2009, that line item? Kind of $.5 million a quarter?

I don't see material changes to where it is today. Those were all one-off gains that we had.

Okay. Thank you so much. I will get back into the queue.

Your next question comes from Kristen Stewart with Credit Suisse.

Thanks for taking my question. Just wanted to circle back on the safety sales and just see if you are seeing any push back just from a pricing perspective? It's kind of unusual to see the slowdown in this quarter and maybe if you could just break down the safety sales growth numbers for us for BD medical and then BD diagnostics as well.

Let me take that. First on the first part of the question, what we are seeing in the US is not really related to pricing. It's more so related to the high level of conversion that has already been achieved and reduction in sales in the category I mentioned. So the primary underlying market growth is not as strong as it has been based on the conversion level. Nexiva will be a growth contributor going forward and the push button set in preanalytical will continue to contribute to growth and they're being offset by a product line that was once called interlink,we now call blunt plastic canula, so it's not a pricing impact, it's more of a volume impact. In terms of breaking out the numbers, do you want in terms of percentage changes or in what form would you like it?

Percentage changes would be fine.

Okay. So first quarter US compared to prior year, medical was down 1.7%. Diagnostics was up 4.6%. So that netted out to 1% for the company. We are expecting it to be stronger than that over the balance of the year. Then international versus last year, first quarter medical was up 20.5%. Diagnostics were up 18.7%. So that's 19.3% total. And balance of the year we were expecting medical to be a little bit higher than that and diagnostics to be lower than that internationally. And then the total just putting those together on a currency neutral basis, the international numbers we gave you. And currency, I will give you reported numbers if you like them. On the currency neutral basis total 3% in the first quarter for medical, 10.4% for diagnostics and total company 6.7%, and again we are expecting that to be stronger over the balance of the year.

Just a question on oil and resin pricing. I know last time you had budgeted in I think it was $90 a barrel. Can you give us an update what you are thinking there, why gross margins shouldn't be a little bit better than what you are guiding to, given the FX impact in the first quarter then given the oil through the balance the year?

Hi, Kristen, it's David. In the first quarter we did see unfavorable versus the prior year. You are right with oil prices coming down, resin prices are favorable. I think the one thing we need to be cautious of is the correlation between oil and resin prices. The correlation isn't as strong as it used to be. We were seeing some further favorability in resin prices. With everything that's going on with the automotive industry, the prices of resins are continuing to come down. So there could be potentially more upside to the margin as you highlighted. But right now we are taking a conservative view on that and we will see how it progresses. We will give you an update on that in the second quarter after we get more experience here on our purchases. But we are trying to take advantage of where the price is right now.

You guys don't have any particular -- I know last time you gave a dollar per barrel that was assumed in your guidance. Are you seeing lower, is that incorporated already, or are you still assuming $90 a barrel?

What I'd say is that resin prices are going lower. What we are finding is that the correlation with oil is out the door right now, just because the resin markets are acting on their own.

Could you comment on where resin prices are today versus the peak as they come down, kind in what degree of correlation are you seeing?

They are coming down right now, they are coming down faster than what oil had.

Okay. Thanks.

You're welcome.

Your next question comes from David Roman with Morgan Stanley.

Good morning, everyone. Thank you for taking the question. Could we get an update on some of the new product introductions. Did the Focal Point have any contribution in the quarter and maybe just give us some sense as to where we are on GeneOhm and TriPath?

Sure. This is Vince. I will take that. The Focal Point did not have a contribution in the quarter. The first sales of Focal Point are taking place within this quarter. So, no, is the first answer, but we are excited about the product. And the claims that we got with the product, it appears to be 25% more sensitive than manual in detecting cancer and has about 20% fewer ASCUS than the competitive imager. We are excited on that. In terms of the development on the molecular PAP. We were still on the same path that we discussed last quarter which was to restart that trial in Q1 FY '10, and on the ovarian trial we expect to start that in Q3 of our fiscal year in '09. Growth for TriPath was 9.3% on a performance basis. Coming to GeneOhm, GeneOhm was up 25.6% versus last year, but it was slightly down versus the previous quarter. There were a number of things that were impacting that. Clearly, we are seeing slower market development in these more difficult economic times. That's one of the things that has impacted us. But we also had a problem with some leaking tubes which cost us during the quarter and some end of the year buying probably also impacted us somewhat. So those are some of the things that were happening in the short run.

In terms of the product launches-- the C-difficile which has been announced in Europe is now launched in the United States as of January 12. We are hopeful that we will be through the FDA on VRE sometime during February. We think we have submitted all the data that they are looking for. Of course, that is subject to their final review. We continue to expect to have our new chemistry out in the fall of this year. And follow that with some off the shelf automation. With all of that and looking how this market is developing in terms of guidance for GeneOhm, we are looking more in the range of around $53 million to $55 million versus the $61 million I was talking about last time.

And then on the international medical surgical systems, the issues in India and the other regions, could you walk us through how those get resolved and how to think about the timing of that and connect that to the guidance that you gave?

Can you hear me okay? So in terms of the volume for auto disable syringes in India, the resolution of that is out of our hands. There has been, as I mentioned, tendering that used to be done by UNICEF in India, the government of India decided to do that independently. Initially locally through UN OPs, a different agency and through their government tendering process. And in both circumstances they went through the process and then didn't award the tenders, with all of the bids coming in and for quite a substantial volume. So we have been awaiting the results for both of those tenders in which case we believe we would have emerged successfully based on what we had offered in our tenders. So we are waiting. We have really no control over what happens in that process.

Other than that and then as I mentioned in Russia where the distributors, we use two significant distributors that both pay us in dollars. One is based in Germany and one based in Russia for our sales into that market, and the circumstances in Russia more generally speak for themselves. They have been more conservative in terms of managing their inventories and we were being more conservative also in managing our receivables in that respect. Other than that, international sales in medical are more or less where we expected them to be. Diabetes has been particularly strong, more so than even as reflected in the numbers we see because we actually had negative revenues in the smaller home health care, the elastic goods product line which is nonstrategic for us. So the core product line of insulin delivery devices actually had faster revenue growth than what was reflected overall. And if you want to think about the year on the currency neutral basis, of course, we are getting hit by the changing currency. We were looking at in medical surgical growth in 3% to 4% range both US and internationally that's what we are expecting over the course of the year, neutral currency, of course, with the currency impact the international goes negative.

Lastly, you look across maybe both medical and diagnostics, whether it's Nexiva or push button collection sets, could you talk about where we are on penetration in each of those businesses and when those respective products become big enough to be growth drivers here?

I will comment on Nexiva and then perhaps Vince will comment on push button. Two products are in two different places. Push button was in the market several years earlier and I will say and I'm sure Vince will verify it's significant. Nexiva is still in an earlier stage, as I mentioned we had 40% growth in the quarter versus prior year. So we were getting solid growth. And as I mentioned in previous calls I would say it's going to take several years for it to start to reach its true revenue potential. So it's going more or less as we expected. It's a fairly significant change for hospitals relative to the insertion procedure, it requires a lot of in servicing. The hospitals can convert one by one. This is not something that will happen rapidly.

So adding on push button. Push button did well in the quarter. It was up about 25%. And it's in the range of $25 million, $26 million in the quarter. So it is substantial. The reason that you didn't see more of an effect from push button is in the PAS business. Last year one of our distributors lost a major customer. And so they did not adjust their inventory in time. They did that adjustment in the second quarter. So there was some double ordering which did smooth out over two quarters but it gave us a tough comp and that impacted the safety numbers this quarter.

Okay, great. Thank you.

Next question, operator.

Your next question comes from David Toung with Argus Research.

Yes. Good morning. Thank you for taking my call. I want to dive into a little deeper on a couple of things. One is you talked about instrument sales. Are you seeing any different tone given the research community's spending's been down the last couple of years and the new administration is talking about increased spending in the sciences? And I also have a question on pricing.

At this point we have not seen a change in the customer tone. I think your question is a good one. I think this is all fairly fresh news. The administration has gotten real public about possible NIH spending increases and moving them to a tangible discussion really in the last two weeks, so we have not seen any customer response other than the same buzz that you probably have seen in some of the media. So it would be too early for us to say that there's been any impact at all on people's outlook or how they might spend. But there is high interest particularly in the US with NIH funded grants to see what is going to happen.

All right. On pricing, since you mentioned that in your -- well, within your gross margin, how much effect was pricing and do you see any opportunities across your product line for pricing increases given the economic situation we are in.

As we said before, we will have .2% built into gross profit for price increases. And right now as far as what we are able to accomplish, we aren't changing that view. We have been successful in taking small price increases. We don't see any significant changes to that for the remainder of the year.

Okay. Thank you.

Your next question comes from Sara Michelmore with Cowen and Company.

Thank you for taking the question. Maybe Vince, could we get an update on ProbeTec and Viper in the quarter, and maybe a time line update on the Viper XTR? And I don't know that you mentioned it, but if you could talk about the timing of the new HAI instrument platform. Thanks.

Sure. Let me do molecular first. Molecular was up a little bit over 13% for the quarter. So that is the Viper, the ProbeTec and the Affirm product lines. So we continue to grow a little bit -- I should say faster than the marketplace. Then coming to your question on the Viper XTR, that has been approved by the FDA. So we are starting the sales. Europe has converted a couple of accounts to the Viper XTR. So things are going well, continue to go well in that business and we continue to take some share on the margin. Coming back to the GeneOhm instrument, so let me clarify a little bit. So in the short run our plan is to come out with the chemistry in the fall and add some off the shelf automation. Now, as we do that, that chemistry is going to be first put on the current thermocycler. We were doing that to take advantage of the menu that we have on the system and to significantly upgrade the work experience for the current customer base. Also, because of the slower ramp in the market, we have the ability to time this conversion a little differently. On the new more automated system, we are looking at more of FY '11 for more of a fully automated system at this point in time.

Great. And just to follow up maybe for Bill on the biosciences, I just want to clarify your comments. What were the key drivers for that business kind of tracking ahead expectations in terms of product line both if cell analysis and the international lab work business were ahead of our views?

First of all, sticking with the earlier theme, it was instruments and it was Aria, the sorter category, Aria II. And the special order research products, the sorter products all performing modestly above expectations for the quarter. On the labware side, we have seen stronger global demand for fluid handling as well as our ADME/Tox products, and we had some good international contribution particularly from Asia/Pacific with some favorable timing from China and Singapore contributing significantly to kind of what you noted as a slightly improved growth rate for that business.

And how did the -- remind me, the Aria II was a launch in fiscal year '08. But we've got to be getting on the back end of the Aria product cycle. What does the outlook look like for the instrument?

It actually came out exactly a year ago. Just about a year ago. And by the way, we aren't always the expert at predicting the growth curves for these new products. But given the interest in sorters, we do think that Aria II has got some momentum and a good chance to contribute significantly to the year in '09.

Okay. That's helpful. Thanks.

Our next question comes from Jason Sheer with the Roosevelt Investments.

Hi, actually my questions have just been answered. But thanks very much.

Your next question comes from Robert Ralston with Banc of America Securities.

This is actually Brandon calling in for Jon Wood this morning. Can you give us a sense of how much of the bioscience revenues is tied to government academic budgets, and would you expect the NIH stimulus to materially boost that business flow cytometry growth rate?

First of all, let me come at it from the latter part of the question. We do not -- we think it's too early to think that the stimulus package will have a factor, because everybody seems to be lacking some details and specifics on what could happen. Most of the researchers we are calling on have read the same media launches that we have about the possibility or the feasibility of maybe as much as $1 billion being added to the NIH budget. But there is no targeted focus of that money. So it's a little soon on our part to make assumptions about where that might go. So we are just taking a cautious position on that one. In terms of your bigger question about how much flows through government funded, probably the only reasonable guess we can give you is US based. And remember, a big part of this business is outside the US. But for sure the NIH can have a 60%-ish kind of impact on funding in just the US market as we look across all the businesses of bioscience.

Okay. Great. Can you give us a sense of has anything changed on the M&A landscape over the last few months, especially in diagnostics or in the bioscience franchise?

Not more than what you have seen across the broad industry. Obviously market values have come down across the board. So other than saying that which you are well aware of, I couldn't point to anything specific at this point in time.

Okay. That's great. Thanks.

Your next question comes from Jim Baker with Neuberger Berman.

Yes. I wanted to ask you if you could repeat that breakdown of how you had the 225 basis point improvement in gross margin, so we can understand a little better which elements of those are likely recurring and which are not. And I wanted to observe that kind of what Mike Weinstein was saying, you seem to be projecting gross profit for the rest of the fiscal year, 51.5% versus 51.14% for the calendar nine months of '08. And that just seems like an extremely modest -- you are really talking about a 35 basis point improvement for the balance of the year. So I'm wondering, this is so much less than what you did. I wonder if you could explain that again.

Sure. So I will just walk you through the foreign currency. The foreign currency that flowed through to the margin was 260 basis points. Of that 160 basis points relates to the one time nonrecurring improvement that we talked about earlier. The remaining 100 basis points relates to the net impact of our FX movement as well as our hedging program that we put in place. If you think about the other components mix and productivity is about 40 basis points positive, and then we have start up and raw material costs in the quarter which is negative 80 basis points, so that gets you to 220 or for a total gross profit of 53.6% for the quarter.

Okay. Now that last thing you mentioned, the start up and the raw material, could that conceivably go to zero for the rest of the year and not be a negative anymore?

I don't think it would go to zero. We will always have the start up costs for the year. Previously we set that around 40 basis points, the start up costs. The raw materials I believe it was Kristen that asked about that. It all comes down to what happens with resins. You could see further favorability there, but we aren't banking on that at this point in time.

Okay. I wanted to mention there were inventory writeoffs last year, $4 million in the March quarter, and $6 million in the June '08 quarter which affected gross profit negatively. Are you expecting inventory write downs this year or is that not necessarily in your -- or are you not anticipating that?

We always anticipate having some inventory write downs. I think the levels that we have this year. I don't see any reason why they would be different than the levels we had last year.

Thank you very much.

Your next question comes from Kristen Stewart with Credit Suisse.

Hi. Thanks for taking my follow up. I just wanted to ask real quickly on the other I think it was income or other expense line item you had mentioned a gain on the sale of something. What was that specifically again?

It was a small diagnostics product that we had sold in the quarter. It was only about $1 million. It was [AccuGlass].

So this is Vince. It's a very nonstrategic product line. We had sold another piece in the year and as David said that it was only about $1 million in this quarter in terms of sales. It was a $5 million revenue product line.

Sorry if I missed this. How should we think about that line on a go-forward basis? Are your hedges -- I realize there is hedging in there as well. How should we think about that other operating income -- or other expense income item should expense for the full year?

Kristen, I wouldn't see any material changes to that from where we are today other than the ups and downs that we have from the hedge gains. Any one off things will occur but we are not anticipating any further one off at this point in time.

So most of the hedging really will flow through more of your cost to goods sold line, if I'm understanding how you're accounting for your hedges right now?

Yes. That's correct.

So they aren't netted against revenue or included with the other income or expense line items?

Sorry. Could you repeat the question?

So just hedging is only in cost of goods sold and then smaller portion in the other income?

There is -- hedging does hit the sales and does flow through to gross profit.

And it hits sales --

And there are some translation hedges that occur in the company that come down through the other income line.

Alright. So the hedges don't go through sales, right? They go through costs of goods sold.

They do.

Perfect. Thank for clarifying.

I would now like to turn the floor back over to John Considine for any additional or closing remarks.

Well, thank you all for calling in. Glad to be with you. Just to summarize, we think obviously a strong quarter. We believe of the 11 or 12 businesses we have, we had one with some risk in it that we took out in terms of MedSurg. I think the margin improvement of 80 basis points is solid. Could there be more? I think the resin is probably an upside. We will continue our strong cost control measures and our -- as you can see on our SG&A line in terms of the leverage there. We've used our cash to support the stock and repurchased those shares early so that will give us a benefit. So all in all we are happy with the quarter. We think it's a good start into '09. Certainly a lot on the horizon in '09, and we will update you again at the second quarter. Thank you.

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