Becton Dickinson and Co (BDX) 2009 Q3 法說會逐字稿

Hello and welcome to BD's third fiscal quarter 2009 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday, August 6, on the investors page of the BD.com website or by phone at 800-642-1687 for domestic calls and area code 706-645-9291 for international calls, using conference ID 16834521.

I would like to inform all parties that your lines have been placed in a 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 to review our third fiscal quarter results. As a relatively new practice, and as we referenced in our press release this morning, we are presenting a set of slides to accompany our remarks on this call. The slide presentation is posted on the Investor Relations page of our website at BD.com.

During today's call, we will make 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 third fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and its related financial schedules. A copy of the release, including the financial schedules, is posted on the BD website.

Leading the call this morning is Vince Forlenza, President; also joining us are David Elkins, Executive Vice President and CFO; and BD Executive Vice Presidents, Gary Cohen; and Bill Kozy. I will now turn the call over to Vince.

Thanks, Pat. Good morning everyone and thank you for joining us today. Before turning the call over to David to review our third quarter results in more detail, I would like to briefly comment on some of the highlights from the quarter.

First, let me comment on the divestiture of our home healthcare product line to 3M this month. While this was a difficult decision since the ACE brand has been a part of BD since the early 1900s, it will allow the Diabetes Care unit to focus on the core business and expand into new growth areas. 3M's acquisition of these products from BD complements their current portfolio of consumer-based healthcare products.

Moving on to our performance this quarter, you may recall that our revenue guidance for Medical in the second half was to increase about 6% from the 2% growth we experienced in the first half, currency neutral. Some analysts and investors were concerned about our ability to guide to such a significant increase but as we had explained on the call, we expected all business units in Medical to improve. In particular, we expected our Diabetes Care and Pharmaceutical Systems units to accelerate. As can you see from our third quarter results, Medical is achieving higher growth rates.

We also had guided slight revenue growth improvement in Diagnostics in the second half and Diagnostics actually fared better than our expectations. Strong sales of molecular diagnostics, TriPath products and rapid flu tests contributed to growth. Biosciences on the other hand fared worse than our expectations. Capital spending constraints continued to dampen demand for research and clinical instruments in the US. In international markets, demand for biosciences instruments in Japan as well as some countries in Europe began to weaken. Overall, however, we are very pleased with our third quarter results.

As Ed stated in our press release, our third quarter results exceeded our expectations. And as a result, we are revising our revenue and earnings guidance for the year to the upper end of the range that we had previously communicated in our second quarter call. Our guidance was for revenues to increase 4 to 5% currency neutral. Given our third quarter results, we now expect revenues to increase about 5%, currency neutral for fiscal 2009. Our earnings also exceeded our expectations, resulting from gross margin improvement and continued tight expense control while we continued to fund our growth opportunities. We have revised our guidance on diluted earnings per share from continuing operations for fiscal 2009 to an increase of 11 to 12% over diluted earnings per share from continuing operations excluding specified items of -- excluding specified items of $4.42 for fiscal 2008, which is equivalent to the upper end of the range that we had previously communicated in our second quarter call.

Before I turn the call over to David, I want to point out that many of you had asked about our hedging program and its impact on our results. Therefore, Dave will cover our hedging program in greater detail as he takes you through a detailed review of our third quarter results and outlook for full fiscal year 2009. I'll now turn the call over to David.

Thank you, Vince, and good morning everyone. First, turning to slide six, let me point out that the financials we will be discussing this morning represent results from continuing operations. Therefore, exclude the home healthcare product line as Vince mentioned earlier. The results also exclude two specified items covered in our press release. The first charge relating to the pending antitrust settlement recorded in the second quarter and the second, a tax benefit relating to various tax settlements recorded in the third quarter.

Now, I'd like to highlight some of our third quarter results. Revenue came in better than expected at 5% currency neutral growth with Diabetes Care, Pharmaceutical Systems and Diagnostics all achieving solid growth. The additional revenue and our operational efficiencies produced fully diluted earnings per share in the quarter of $1.30, excluding specified items. The economic environment continues to impact some customers. Although customer destocking appears to have stabilized during the quarter. Currency continues to impact year on year reported growth. On slide seven, you can see that topline growth for the Company in the third quarter was 5% currency neutral and we're guiding about 5% for the full fiscal year. As I mentioned earlier, EPS for the quarter was $1.30 representing 10% growth. For the full fiscal year we're guiding $4.92 to $4.96, representing 11 to 12% growth.

On slide eight, we began our review of revenue growth by segment. Medical's third quarter revenues declined about 3% after about an 8 percentage point unfavorable impact from foreign currency translation. On a currency neutral basis underlying growth was about 5%. On a currency neutral basis, solid sales of insulin delivery, safety engineered and prefillable devices contributed to the growth. For the nine month period, underlying growth was about 3%, on a currency neutral basis.

Revenues for BD Diagnostics segment grew about 2% after a 6 percentage point unfavorable impact from foreign currency translation. On a currency neutral basis, underlying growth was a solid 8%. Solid sales of safety engineered devices, Cancer Diagnostics products and infectious disease testing systems including flu related products contributed to the growth. For the nine month period underlying growth increased about 6.5%. In the biosciences segment worldwide revenues declined about 4% in the quarter. On a currency neutral basis they declined about 1%. As Vince pointed out, demand for instruments in the Research and Critical segments in the US continued to be impacted by a lack of research funding. Weakening demand for instruments in Japan around parts of Europe began to emerge during the quarter. For the nine month period, underlying growth increased about 4% on a currency neutral basis.

Now, moving to global safety on slide nine, reported sales grew about 4% in the quarter to $422 million. On a currency neutral basis underlying growth was about 9%. This comprised a 4.5% growth rate in the US and a strong underlying international growth rate of 18%. For the nine month period, underlying growth was about 8% on a currency neutral basis which is a combination of 3% growth rate in the US and underlying growth rate in international safety of about 19% on a currency neutral basis. Safety in the Medical segment increased about 8% in the third quarter currency neutral. In the Diagnostics segment safety increased about 11% in the quarter currency neutral. The currency neutral growth for the nine month period for Medical Safety was about 6% and Diagnostic Safety increased about 10%.

The next slide looks at revenue by region. In the third quarter, BD's US reported revenues increased 3%. US Medical revenues increased by 3% year on year reflecting solid sales of prefilled flush syringes, Nexiva and pen needles which were offset in part by the anticipated decline in prefillable devices. US sales of Diagnostics products increased 7%, reflecting strong sales of Molecular Diagnostics. Biosciences revenues in the US declined reflecting continued weak demand for research and clinical instruments due to funding constraints.

As a result of these market dynamics, total year-to-date reported revenues increased 2% in the US. With Medical increasing about 1.5%, Diagnostics increasing about 4%, and biosciences declining about 2%. Reported international revenues in the third quarter declined 5% year on year, reflecting 11 percentage point unfavorable impact from foreign currency translation. On a currency neutral basis, however, underlying growth was 6.5%, driven by particularly strong double-digit performance in Asia Pacific and Latin America. And solid performance in Western Europe.

In third quarter international revenues, a currency neutral basis resulted in underlying growth of about 6% from Medical, 9% for Diagnostics and 2.5% for Biosciences. For the nine month period, reported international revenues declined about 1% from the prior year period, reflecting an 8 percentage point unfavorable impact from foreign currency translation. On a currency neutral basis, international revenues increased about 6.5% year-to-date with Medical increasing 4.5%, Diagnostics increasing 9.5%, and Biosciences increasing 7%.

Now, turning to slide 11, we'll look at the components of our third quarter revenue growth year on year. Gains from underlying performance and our hedging program were more than offset by currency, reflecting approximately $149 million of lost revenue due to a strengthening dollar.

Moving to slide 12, gross margin improved 180 basis points in the third quarter, to 52.8%. This was driven by lower raw material costs, primarily resins, offset in part by startup costs, product mix, which collectively contributed to 70 basis points. Hedging gains contributed an additional 70 points and foreign currency translation added the remaining 40 basis points of improvement.

Slide 13 now examines SSG&A and R&D expenses in the third quarter as well as operating income. SSG&A spending decreased by $6 million in the quarter, this was primarily driven by favorable foreign exchange. Underlying expense growth was flat after accounting for miscellaneous non recurring charges in the quarter which included a reserve for bad debts in Europe. R&D spending decreased about 1%, primarily due to favorable currency. On an underlying basis, our R&D spend increased. We continue to focus more of our spending on our key growth initiatives.

Our third quarter operating income increased by 6% to $432 million. As a percent of sales, operating income increased 160 basis points to 23.7%. This was a result of the positive impact of the hedge gains, the foreign currency translation, and lower resin costs had on our gross margins as well as the margin expansion we get from our continued focus on expense management.

The next slide illustrates the degree to which currency has negatively impacted revenues year-to-date. The 6.1% positive impact of performance and hedge gains on a combined basis has been entirely offset by 6.1% negative impact of currency.

As you can see on the next slide, slide 15, year-to-date our gross margin has improved 160 basis points. This was driven by currency and hedge gain, offset in part by startup costs and a change in product mix.

Slide 16 examines SSG&A and R&D expenses and operating income year-to-date. SSG&A decreased $36 million primarily due to favorable currency, partly offset by inflation and the aforementioned non-recurring miscellaneous charges in the third quarter. R&D increased $7 million to 5.6% of revenue, reflecting our continued investment. Our year-to-date operating income increased by 9.6% or to 23.9% of sales for the reasons I mentioned earlier.

Now, let's move to slide 17. Since we continue to have unusual swings in currency and hedges on a quarterly basis, I'd like to walk you through the components that make up our year-to-date earnings per share and our underlying growth. We start with diluted earnings per share from continuing operations of $3.67, which is within our guidance range of 11 to 12%. From this we remove two specified items I mentioned earlier. This yields earnings per share of $3.70, which is also within our guidance range of 11 to 12% growth. We further remove an approximate $0.23 gain which resulted from our hedging program and approximate $0.07 from unfavorable currency which yields an adjusted level of EPS of $3.54 for fiscal year 2009. This results in an underlying growth of approximately 7% when compared with our EPS for 2008. You may recall that during the second quarter earnings call, we reported an underlying growth for the first half of the year of 4.2%.

Now let's go to slide 18 to discuss our revenue guidance for the full year. BD's underlying growth for the nine month period was about 4%. We now expect underlying growth for the full fiscal year to be about 5% currency neutral, reflecting strong growth in our Medical segment primarily driven by continued improvement in our Pharm Systems businesses, demand for flu pandemic related products and continued solid performance by our Diabetes Care business. Continued strong growth is also expected from our Diagnostics segment driven by safety engineered devices, cancer diagnostics products, and infectious disease testing systems. As a result, we reported growth for the full fiscal year is expected to be about 1% on a currency neutral basis. On a currency neutral basis, the full year revenue outlook for Medical is expected to increase about 5%. Diagnostics, about 6 to 7%, and Biosciences, about 2%.

Moving to slide 19, I'll walk through our guidance for operating margins and cash flows. We expect our gross profit margin to improve from 51.3% to a range of 52.5 to 53%. SSG&A is expected to improve from 24% of revenues to a range of 23.0 to 23.3% of revenues. R&D spending is expected to increase 5.6% to a range of 5.6 to 5.8% of revenues. Therefore, our overall operating income margin is expected to improve from 21.7% to a range of 23.5% to 24%, which is approximately 180 basis point improvement year-over-year. Operating cash flows are expected to be about $1.6 billion for the full fiscal year. Capital expenditure guidance is revised to about $600 million from the previous $650 million. And we continue to guide share repurchases of about $450 million for the year.

Let's now turn to slide 20 for our EPS outlook for the full fiscal year. I would like to take this opportunity to review the impact of our hedging program on fiscal year 2009 earnings and our expectations as we go forward. As we reported in our earnings release, our third quarter results included a $0.07 gain from our hedging program. Year-to-date, our results include a $0.23 hedge gain, and we estimate the full fiscal year will include a gain of about $0.28. This significant gain is primarily the result of the unusual volatility in the euro, US dollar rate of exchange year on year. As a reminder, we hedge 60% of our euro currency exposures. 100% of Canadian dollar, and 100% of the yen. We do this by entering into forward contracts to buy US dollars in the future at a fixed rate of exchange at the time we enter the contract.

In the spring of last year, the dollar had reached unprecedented lows against the euro. At that time, we decided to enter into forward contracts to ensure against the strengthening of the dollar against the Euro. At the start of the fiscal year 2009 we experienced a significant strengthening of the dollar which created a large unfavorable currency variance to our year-over-year reported revenues and earnings. This in turn resulted in gains on the forward contracts that we entered into last year on the hedged currencies. This helped mitigate the down side impact of the strengthening dollar and the resultant lower reported revenue and earnings. It also resulted in the forecasted $0.28 benefit on slide 20.

Although we continue our hedging program, we would not expect the currency moves and the resulting hedge gain that we experienced this fiscal year to repeat next fiscal year. We view this hedge gain as a discrete event for the purposes of establishing our 2009 baseline. As a result, we will utilize the $4.64 to $4.68 earnings per share as the baseline for establishing our fiscal 2010 earnings estimates.

In summary, there are several key take-aways for today. First, Medical and Diagnostics currency neutral revenue growth improved in the quarter as we had expected. This gives us further confidence in our guidance for the year. Biosciences continued to experience slowing growth due to the capital funding constraints and this is anticipated to continue in the fourth quarter. We continue to see improvement in our operating margins. And as stated earlier, extraordinary currency movements resulted in a significant hedge gain that will not repeat itself in 2010. We tightened our guidance to the top end of the EPS range. Lastly, the underlying business continues to exhibit strong growth, despite the economic challenges that we face. Thank you and I would now like to turn the call back over to Vince for his closing remarks.

Thank you, David. Before we open the call to questions, I would like to comment on our preliminary outlook for fiscal '10 as well as our longer term outlook going forward. As you know, we will provide our annual guidance for fiscal 2010 in November as part of our final year end analyst call.

We were pleased to revise our earnings and revenue guidance for fiscal 2009 to the top end of our range driven by strong performance of our Medical and Diagnostics segments, particularly in light of the challenging global economy. As David explained, we do not expect a fiscal 2009 hedge gain to repeat in fiscal 2010. Therefore, we are viewing it more as a discrete item which should be discounted from fiscal 2009 results in order to determine an earnings base for projecting estimated fiscal 2010 earnings. This results in a fiscal 2009 earnings per share base of $4.64 to $4.68.

Also with a limited view of what the economy will be like next year, we would expect preliminarily our underlying earnings performance in fiscal 2010 to be similar to our underlying performance of about 7% year-to-date for fiscal 2009 which David just reviewed with you. Longer term, however, we continue to believe strongly that we are well positioned to increase our topline growth in the 7 to 9% range and accelerate our bottom line EPS growth in the 10 to 12% range as the global economy recovers. We expect to achieve this through good revenue growth performance in all three segments and regions, as well as gross margin improvement and SSG&A leverage.

We are committed to funding our growth initiatives and developing our organization to best position BD to meet the healthcare challenges of our customers. Our ongoing investments in growth opportunities along with our continued focus on productivity improvements and disciplined expense management will ensure our future success. Thank you. And we will now open the call to questions.

(Operator Instructions) Thank you. Our first question is coming from Bruce Cranna with Leerink Swann.

Hi, good morning, guys.

Good morning.

Good morning.

Dave, can you just run through the gross margin pickup year-over-year again by pieces? I missed some of those.

Okay. For year-to-date or did you want the third quarter?

Just the quarter.

Just the quarter? So revenue growth year-over-year, there's 5 percentage points that's related to performance. 1.4%--.

He's asking about the--.

I'm sorry, the gross -- the--?

Oh, the gross margin. Okay.

Yes.

So the gross margin moved from 51% to 52.8%. Performance was 0.7. Hedge gain was 0.7. And currency was 0.4.

Did you make a comment on resin in there? If you did, I missed it.

No, I did not.

Okay. And then on the flu side, can you quantify the actual uptick in the quarter in dollars for flu sales and whether or not you think that's indicative of what the next couple of quarters might look like or should we think about that moving back down?

Bruce, this is Vince. So I'll take the Diagnostics piece of it. Diagnostics had about $8 million in flu sales in the quarter, with a bulk of that $5 million being ex-US and then medical had--.

I'm sorry, 5 million, US. I switched it. 5 million US for the flu products. Bill, on the Medical side?

$5 million of revenue on the Medical business in the third quarter.

Now, in terms of looking forward, it's difficult to predict exactly what's going to happen here. But we do expect that we will see on the Medical side in the syringe area ongoing orders for flu products. In fact, Bill, do you want to comment on the balance of the year?

Sure. As of July 23, in terms of syringe orders, we had received about $45 million of firm commitments. $27 million of those are in the Medical Surgical business. The remaining $18 million went to the Pharmaceutical Systems business. As Vince already mentioned, we shipped $5 million of those orders in the 3Q and we estimate shipment of another $27 million in the fourth quarter with the remainder to follow in the first quarter of our FY '10.

Okay. And then last from me, just philosophically, the change clearly with taking hedges out of the base, the hedge gains out of the base and looking forward with somewhat of I think a moderate earnings expectation, catching some of us by surprise, can you guys just walk us through the timing of this now and why it wasn't better, more precisely talked about in quarters past?

Well, let's go back to the hedge first many I think we have been calling out very clearly the hedge gains, especially on our second quarter earnings call, and in follow-on conferences that I did myself. In fact, we had a slide, it was slide 17, I believe last year -- last quarter, I'm sorry, that called out the hedge gain. And so number one, I think we have been talking about it and talking about it as a discrete event. In terms of the mechanics of the hedge, I think in understanding the hedge, the background and calling out where the euro was, both on the second quarter and in follow-on comments we've made since then, we've been very clear that the hedge was resulting from this large change in the euro and the mechanics would lead you to it as a discrete event.

Okay. I'll get back in queue. Thanks.

Your next question comes from the line of Mike Weinstein with JPMorgan.

Thanks. I have several questions. Let me just maybe target it first on the commentary on the FX impact. If I do my math right, right now, it's tough to adjust for your hedges on the revenue line but it would seem by our math you would have about a 2% FX tailwind in your fiscal 2010 at this point, negating any of your hedging that you would have. So you would have a benefit on the topline in 2010 and because of your hedging, you're 60% hedged on the year you should have some benefit that would flow down to the bottom line from that. So when you're talking about underlying growth for 2010 comparable to what we've seen in the first nine months of 2009, A, are you factoring that in? B, are you factoring in any benefit from NI stimulus in Biosciences? And then C, what impact are you thinking about for flu? Thanks.

Let me take the business side of it and I'll let David comment on the FX piece of it. On the Bioscience piece, and we won't get into guiding by business or anything, but thinking about where Bioscience, the market factors for Bioscience is, we are expecting some turnaround from the stimulus in the US. So we would expect to see some improvement in the US. Our concern is that we will see -- we will not see a recovery in the biotech and pharma segment in the United States and then ex-Europe we'll have a tough comp next year in the first quarter of the year on Biosciences. So in terms of FX, I will turn that over to David.

Yes, let me just go through that with you, Mike. I mean, I think the best way is two conversations. Looking at this year versus last year and last year we locked in our forward contracts up around $1.57. So we were very fortunate to do that. And as the average rate this year, dollar to the euro, is about $1.36. Sitting here today, looking at next year, we've been hedging as each month goes by. And I think the spot rate is around $1.40 so we wouldn't see any kind of significant gains next year on the topline because of the hedge.

You've hedged out the gains that you could be getting in 2010 from the dollar tailwind is what you're saying?

Yes. We've been locking in. As each month goes by this year we've been locking it in for comparison basis. Last year we were fortunate in that we locked it in the $1.56, $1.57 range.

That's on 60% of your euro exposure?

60% of the euro exposure, that's right.

Is that remaining 40% then drop to the bottom line if there is that tailwind?

Yes, that's correct.

Okay. And then do you want to touch on flu impact for 2010? Just be clear. When you're talking about so we can get apples to apples here, when you're talking about underlying growth which is I think the term you guys used for 2010, are you including any benefit on the currency you do have exposed and are you including any benefit from some of these other items we're talking about? Thanks.

On the revenue side, kind of all in, we're expecting business performance in Medical and Diagnostics to be similar to what we were seeing in the second half of this year, continued performance that way. And as I said, some mild improvement in Biosciences year on year. And we do expect within that to be some sales of flu products.

I think, Mike, thinking about next year, we just used the current spot rate. So if the currencies change from where they are today, then obviously that would impact what we're forecasting for next year. We're kind of thinking about a dollar/euro at around today's spot rate, around $1.40.

Your next question comes from the line of Kristen Stewart with Credit Suisse.

Thanks for taking the question. Just going back to this guidance, you did say that you were going to look at it from the base of I think it was 4 -- was it $4.64 to $4.68, and that 2010 would be preliminary up 7% off of that number. Is that correct?

That's correct.

So then just walking through kind of the P&L, I mean, is it just that we see the removal of those hedging gains within the gross margin lines? Will we see SG&A be a little bit higher or will we just see kind of more of a muted topline flowing through?

Well, we're not going to get into guiding through the P&L. We'll come back and we'll do that in November. We're just trying to give you kind of a topline preliminary outlook of what we see with the limited visibility we have to the world economy. The hedge gains coming out of the base is the biggest impact.

And, Kristen, we're still finalizing our financial plans for 2010 so it's a little bit early for us to get into this detail but we will give our formal guidance towards the end of the year when we do our year end results.

And what was the reason for the change in CapEx guidance for the full year? Is that part of maybe some expense initiative to offset some of the 2010?

No, I think the CapEx, we're constantly looking at that as part of our expense management as well as managing our cash position. We're constantly looking at updating those estimates and updating those estimates based upon when we think the work is going to be done. There wasn't anything in particular. It's just the latest estimates of what we believe we'll spend this year.

Then just on the interest expense line item, was there anything else in there? I know you guys have some kind of pension or deferred comp that might be in that number as well.

Yes, just bear with me one moment. The interest income increased about -- in the third quarter, increased about $2 that was mainly due to lower interest income, both balances as well as the interest rates that we're receiving versus last year because interest rates have come down. Does that answer your question?

Yes.

Okay.

Thank you.

You're welcome.

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

I wonder if you could just talk through the divestiture on diabetes and how that business is going to change going forward? What are you thinking about M&A for that space?

Well, we wouldn't get into discussing M&A in that space. The comment that we made was that we got out of a business that really wasn't core to the strategy of that business. It enables the management team to better focus on that core business, on the core diabetes side of things. The other piece was clearly becoming a little bit of a distraction and so that's about as far as I would go with a comment.

What parts of that business do you really kind of want to focus upon? I wonder if I could grab you that way?

I'll let Bill make a comment.

Good morning. The real strategic focus there is on the pen needle category. It's a market that's growing at low double-digits globally. It's got significant international expansion and investment around the R&D line and target array will really be targeted at that category.

Wonder if you could talk through the strengths you're seeing in the infectious disease business at the moment?

Sure. So a number of the pieces of the business did well. First, the molecular business grew double digits. That was both the Probe Tech and Viper product lines did well. As well as a smaller piece of the business which is the Affirm product line which is the vaccinosis testing system. So we're very pleased with those results. We introduced a new version of Viper and you saw some of that impact in the quarter. In TriPath, we also had excellent results and TriPath in the quarter was up 13% and that was driven by some strong instrument placements, especially ex-US. Rapid Diagnostics we mentioned the flu test already and that was about a little over $6 million of the $8 million that I commented on in terms of flu related sales. So good performance in all of those pieces.

Okay. Thank you so much.

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

Good morning, Vince, and everyone. Vince, just to be clear here, I know you've gotten several questions on this. I just want to understand the 7% number, are you talking about 7% revenue and in line growth from the bottom or are you really talking about 7% bottom line growth?

Bottom line growth.

So, David, should we think about fiscal '10 over fiscal '09 on the GM line being flat, something like 50% gross margins for 2010 is that a realistic assumption?

As I said to Kristen, we're really not breaking this down at this point. We're still doing our internal plans. What we're really trying to do here is just highlighting as we did in the second quarter what the true underlying performance of the business was at the bottom line and wanted to share with you how we're thinking about the base this year, the hedge not repeating next year, and that the underlying business this year, year-to-date's grown about 7%. So that's about as far as our thinking and the analysis that we're doing at this point in time and we'll go through more analysis with you at year end. We really don't want to get into guiding this early, given the current economic environment.

Okay. And then so, Vince, when you talk about long-term targets of I think 7% top, 10 to 12% on the bottom line, are we talking about these targets returning in the '11 time frame, in the '12 time frame or are those more aspirational over a three to five year CAGR basis?

I wouldn't call them aspirational. I would say that as we do our strategic planning, that we see improvement as we get beyond '10, move into '11 and into '12.

Okay. And then, Vince, we are seeing some direct comparables in the Biosciences segment, starting to talk about visibility on stimulus and outside spending. You don't seem to be as bullish as some of your comparables. You have obviously different product lines. Is there a reason why you are not as positive for the next six to nine months about the potential impact of stimulus or are you just taking an overly cautious tone.

I think we're responding to what we see in the business. In this quarter, we received orders of about $1 million in stimulus funds in the business. That was not shipped. That was just orders. And we have visibility in next quarter to over $4 million at this point and we expect that number could be somewhat higher. So we do expect that over the course of '10, we're going to see some significant improvement in US Biosciences based on the stimulus. The visibility we have to the scheduling of that says that the bulk of that starts to come in, because the way the programs run out, starting in the second half of the year. We'll see some in the first quarter, second quarter. But I think the other piece that I was pointing out was that the business is not completely driven by the stimulus package, that there are other segments to that business and academic makes up about 50% of the sales in the US. So you still have Biotech and Pharma. So are we being a little conservative? Yes, we may be a little bit conservative and as I get more visibility and the business gets more visibility, we'll come back and revise that with you.

Maybe one last question. I'll jump back in queue. David, when you think about fiscal 2010, I know you're not giving specific guidance but when you think about that level of growth at around 7% in that expectation do you forecast a significant acceleration or significant increase in the buyback program?

No, I think right now our thinking is consistent. Obviously that's a Board decision to a level of share repurchases that we do. But as we think going forward, right now it's at that 450 rage.

Okay. So to the extent that -- buybacks program in excess of what we've seen historically will be the upsides of that 7% growth range.

If we were to do it. We're not forecasting that.

I guess again, we're just not getting into that level of detail right now and we're not guiding with a share repurchases are for next year. We'll do that with the year end results.

Okay. Thank you very much.

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

Just back on the Med Surge business, obviously this was a better quarter but in terms of it being sustainable, what gives you confidence that you can continue to deliver the revenue growth at this mid single digit range? It had been tracking obviously lower single digit range the last couple quarters.

I'll make an initial comment and then I'll turn it over to Bill. But number one, the Diabetes Care business, the lower growth rate we saw in the first half of the year was significantly impacted by distributor destocking, so we see much more -- we see a consistent demand based on what I'll call the worldwide pandemic of diabetes and as Bill was mentioning, continuing growth in pen needles worldwide. So we have a pretty high level of confidence there and then some improvement in the Pharm Systems business. But Bill, I'll let you make whatever other comments you would like to make on that.

Yes, I think -- was there some specific interest there on the Med Surge product line?

Yes, because that had been more moderate in recent quarters and it did look like it had a better quarter this quarter.

Sure. Just a few comments on some areas of revenue acceleration. We had a really good third quarter on our prefilled flush devices. They were up well into double digits and we've been able to capitalize on some competitive supply issues and we have gained that business and we believe we're going to continue to hold that business. We're also right on target with our Nexiva closed IV catheter system revenue commitments and expect to minimally meet our expectations for FY '09 and we're actually adding incremental salespeople, focused only on Nexiva for FY '10 because we've got confidence that that dedicated sales commitment can further move the Nexiva revenue contribution along.

On the international side, if you exclude the EMA region, which we continue to have a few challenges, we got a nice impact in the third quarter from the pandemic revenues, which are just getting started and we've got higher impact in the fourth quarter as well as expectations of some continued first quarter benefits. So I would say those couple of factors are what are kind of building our confidence around trying to sustain around this 5% number which you're seeing now which is quite a bit different from the first six months of the year.

And, Vince, big picture question. It does sound like you're tracking at least near term at growth rates maybe below what the Company has done historically or what you're targeting internally. Does that change your appetite at all for M&A at near term and should we expect the activity there to pick up? Thanks.

No, it doesn't change our strategy around M&A. As we've said numerous times, one, we do it strategically and we're looking at for usually a strategic fit that expands our capabilities. We're going to continue to do that. But I want to express that we have confidence in this long run plan for the Company and that when we look at our strategic plans, we come back to those 7 to 9 topline growth rates and 10 to 12 on the bottom line and we think that we'll move back there over time based on the increase in R&D spending that we've done, internal projects we have going on, so we're not including necessarily acquisitions as a major driver of getting back there.

Your next question comes from the line of Jon Wood with Bank of America/Merrill Lynch.

Okay. Thanks a lot. Sorry to keep going into this, but I mean, the discretion on disclosing this hedging situation on FY '10 now when you don't really have a view on the core business, if you will, for FY '10, is the Board -- I'm not sure why they would be happy with a flat EPS situation in fiscal year '10. I mean, understanding that this hedging situation kind of came out of nowhere for us, but I mean, is there -- I mean, could there be a commitment to use the balance sheet to show some level of EPS growth next year to offset some of this hedging dilution?

So first off, on the hedge, I think we've been very clear over the last couple of quarters what our hedge gains have been and what the mechanics of the hedge are and so the hedge gains as they reside in the P&L, I think they've been out there. Number one. Number two, the $0.28 that we're talking about is a very large hurdle to try to overcome year on year. We will have, as we move into FY '10, very stringent expense controls as you would expect. We'll be doing everything to promote the efficiency of the Company. In terms of whether or not we use the balance sheet, we haven't made that decision yet.

Okay. Just looking back on the initial view was last year was 10 to 12, then that went to 8 to 10 with the FX and now you're tracking obviously considerably above that. You're saying we should not as a financial community think that that will happen again, if you will, when you provide your initial fiscal year '10 outlook in November?

Jon, I think that's right. I think we have to think about it, the forward contracts last year, we're locking those in in that $1.56 range and none of us would have anticipated that it would have dropped down to $1.30 at the beginning of this fiscal year. So that's just a huge gain. That's why last quarter we really tried to highlight what the underlying growth was and stripping out the impact of both the currency and the hedge. All we're doing this quarter is just providing even greater clarity that on what that means from our starting point this year and what our true underlying growth rate which we shared with you in the second quarter, what we're saying that is for 2010, preliminarily. We're going through our own internal planning processes right now. That's why we're not providing guidance here. We'll do that towards the end of the year. But there's a lot of moving parts in that and as this quarter goes on we'll get greater insight into that.

Okay. Thank you.

Your next question comes from the line of Keay Nakae with Collins Stewart.

As we look at the top line for next year, can you talk about any new products that could be contributors to driving revenue growth next year?

Well, as I said, at this point we're just staying very general in terms of how we view the performance and until we finish our budgeting process, we're not going to get into specifics. We're a little ahead of ourselves. This is the normal time, we're working on our budget. We felt compelled because of these hedge gains to put some information out there ahead of normal -- normally where we are and normally where our processes are. So we're not going to get into specific products at this point in time but, in terms of some areas, we do expect that there will be some benefit from some flu going forward into next year, probably both on the Medical side and the Diagnostics side. We expect to see continued, as I said, kind of strong performance in the Medical side that we've seen in the second half of the year, based on diabetes long-term trends and Pharm Systems and then international growth will continue to be stronger than US.

And just a second question on the hedges for next year, appreciate that you've been putting on the hedges monthly. So if we thing about those, in aggregate, at what point would their performance be neutral, is that the EUR1.40 and what would it be for the yen?

I think, again, we're thinking about it right now at this point in time with the spot rate at EUR1.40. It's anybody's guess on what that will move and, therefore, what the currency impact would be to our revenue, our earnings and what the hedge impact would be. So I think probably for the best way to thing about it right now is just think about the spot rate at EUR1.40 and then let's see when we have our conversation at the year end results, what the exchange rate is there and then we'll share with you our thinking about that.

How about for the yen?

I'm sorry, could you repeat the question?

He asked how about on the yen.

I don't have that in front of me. It's not as material. The main currency for us is the euro which we hedge at 60% and we fully hedge the yen.

And the yen hasn't been very volatile either.

Understood. Okay. Thanks.

Your next question comes from the line of David Toung with Argus Research.

Good morning. Thank you for taking the call. I want to go back to some comments made in the prior call about requests for quotes, requests for prices. If you can give any updates on that, what you're hearing anecdotally.

So your question is around the stimulus package in Biosciences?

Yes. I think it does relate to that. And I know Ed has referred to it too. And also I want to look at the market more than just stimulus. There is probably other forces going on in research market other than just the stimulus. There are probably other forces going on in the research market other than just stimulus. What you're--?

Sure. I think I know what you're talking about and last quarter on the call I did indicate that there was a large increase in requests for quotations and that was primarily driven by the stimulus money. In fact, if I'm not remembering, something in the range of 300% increase in request for quotations. And the follow on comment was that what we don't know from that is how many of those requests for quotations will ultimately result in a grant that is funded and then ultimately an order to us. Now updating that information, we have received our initial orders, we haven't shipped any yet based on the stimulus package. We are starting to see visibility for orders for the fourth quarter right now around $4 million. We think that that number will continue increasing over the quarter as we get more visibility. Then lastly, the stimulus package has a number of different pieces to it and we expect that we'll see more activity in the second half of the year from an order standpoint because of the types of programs and how they're run.

That's great. The other point I wanted to follow up on and I know you've talked about some destabilization in the destocking. And as it relates to diabetes. Is there any more you can say about that and what are -- what's the feeling among distributors and--?

From a destocking standpoint it appears to be behind us. We didn't really see any significant destocking in this quarter across all our businesses. So we think that -- for the time being anyway they've taken it as low as they can gowithout impacting service levels.

Thank you very much.

Our last question comes from the line of Jeff Frelick with ThinkEquity.

Yes. Maybe a question for David. One more time on the kind of early read. So I guess the question really is, is your own view that the climate is not improving? Given what's pushing your business is consumables and disposables, not a lot of impact on cap equipment, pushback, you did your price increase last year. Is diagnostics supposed to be fairly solid and stable. You have your SG&A leverage. Has something popped up on the radar? Do you think the worst of the climate is behind you? What's your thought process here on this early read of 7% EPS growth?

I think you summarized it well. If you really think about the performance of the business, we're feeling good about the medical business and the diagnostics and the strong growth that we're seeing in the quarter despite all these economic challenges the business is faring very well. The one factor that is out there that we're being very cautious on as we start to look forward is the Biosciences business. That's why we're saying that right now there is nothing out there that would indicate that the fourth quarter is going to improve. Now, there's been a few questions around NIH and the stimulus package and all of that, but you guys know as well that we don't cap on those things until we have better visibility and confident that they're going to occur. As we said on the second quarter call and we're reiterating on this call, we don't anticipate those types of orders coming through until the fourth quarter of the calendar year. So we're not going to bake any of that in at this point in time. But as Vince talked about, we're setting the long term growth on an EPS basis is 10 to 12%. The way we think about it is we have years that we exceed that 10 to 12% and there's years that we're under. This year we're saying the underlying growth is about 7%. The fundamental business between Medical and Diagnostics and the fundamental business of the Biosciences over the next couple of years is looking strong.

Let me ask you a follow up then, David, on Bioscience. Are reagent sales also being materially affected or is it just instrumentation or is it also reagents being impacted?

It's mainly instrumentation. In fact, on the Bioprocessing side of things we saw recovery in the third quarter. So that business is looking good. It's really, as Vince and I talked about, it's limited to the capital spending and the US has been particularly impacted and as I said in my comments we saw a little bit in this quarter in Europe.

So you're not seeing the existing research programs being shut down, those are still being maintained with products that they have, they are reordering reagency, just the expansion and additional capital equipment purchases that are affected?

Yes, it's really been large capital equipment purchases that have been affected. Reagents were up in the quarter about 5% with strong growth in clinical reagents. So it's really the capital piece of this and the larger instruments in particular.

Okay. Thanks.

Thank you. Mr. Forlenza, are there any closing remarks?

I'd like to thank everyone for participating in the call. We look forward to giving you further information as we move forward in the year and towards the year end. So thank you all very much.

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