Becton Dickinson and Co (BDX) 2010 Q1 法說會逐字稿

Hello, and welcome to BD's first fiscal quarter 2010 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday, February 4, 2010, on the investors page of the BD.com Web site or by phone at 800-462-1687, for domestic calls, and area code 706-645-9291 for international calls, using conference ID 49382392. 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 to review our first fiscal quarter results. 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 Web site at www.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 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 the related financial schedule. A copy of the release, including the financial schedules, is posted on the BD Web site. Leading the call this morning is Vince Forlenza, President. Also joining us are David 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 Vince.

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

But first, let me introduce two of our business leaders on the call with us today, Bill Rhodes and Philippe Jacon. Bill Rhodes is President of BD Biosciences and has responsibility for cell analysis and labware including the advanced bio processing business. Bill's career with BD spans more than a decade. In 2003, Bill became Vice President and General Manager for Immunocytometry Systems and was named President of Cell Analysis. Under Bill's leadership, the cell analysis business revamped and improved its product development capabilities, bringing to market the successful FACSAria and FACSCanto product lines, while developing a successful special order research product business. He was appointed President of the Bioscience segment one year ago.

Philippe Jacon is President of Diagnostics Systems which covers infectious diseases including microbiology and GeneOhm, as well as women's health and cancer, including TriPath and testing for sexually transmitted diseases. He began his career at BD Biosciences in France in 1988, and joined BD Diagnostics as President of Microbiology Systems in 2006. Under Philippe's leadership, the microbiology business improved its growth rate while successfully bringing to market new products such as CHROMagar, MRSA and the BACTECFX. He was appointed to his President role last January.

Moving on to our performance this quarter, results for the quarter exceeded the company's expectations aided by flu-related sales in the medical and diagnostic segments. However, regarding flu-related sales for the full fiscal year, we expect sales in the diagnostic segments to be about the same as in fiscal 2009. In our medical segment, we expect sales of flu-related products for the fulfill year to be approximately $60 million to $65 million, which is slightly higher than fiscal 2009 and it is consistent with our discussion in our November earnings call. We estimate our sales related to the US Barda order to be approximately $30 million for the full fiscal year.

Now, let's move to segment performance for the quarter. BD Medical is off to a strong start, driven by sales of medical surgical systems and pharmaceutical systems products including flu-related products. International safety revenues continue to be strong in our medical surgical business unit. Sales of diabetes care products also contributed to revenue growth. Strong emerging market and pen needle growth, coupled with incremental revenues from a nonproduct-related comarketing agreement led growth in this business. In BD Diagnostics, solid revenue growth was driven by sales of safety-engineered devices and infectious disease testing products, including flu-related products.

In BD Biosciences, capital spending constraints continued to dampen demand for research and clinical instruments as we expected. We continue to expect the majority of US stimulus-related sales will occur during the second half of the fiscal year. I would also like to point out that US revenues in the Discovery Labware business were impacted by a distributor destocking and a decline in sales of advanced bioprocessing products to a large customer, due to timing of orders. Lastly, you may recall Biosciences grew 10% in the prior year period, making for a difficult comparison. Overall, biosciences is off to a good start, and we are seeing strength, some strengthening of demand, particularly for research and clinical reagents in the US.

We are very pleased with our first quarter results. Our earnings exceeded our expectations, resulting from strong revenue growth, gross margin improvement, and continued tight expense control while we continue to fund our growth opportunities. As Ed stated in our press release, our first quarter revenue and operating performance was solid, and gives us confidence to raise guidance for fiscal year 2010.

Moving to slide five, our prior guidance was for revenue to increase 5 to 6% currency neutral. Given our first quarter sales results, we now expect revenues to increase about 6% currency neutral, for fiscal 2010. We have also raised our guidance on diluted earnings per share from continuing operations for fiscal 2010, from 7 to 9% currency neutral, to 8 to 10% over diluted earnings per share from continuing operations, excluding specified items of $4.95 for fiscal year 2009.

Now, I will turn the call over to David to review our financial results.

Thank you, Vince. And good morning, everyone. As Vince just summarized, we're off to a good start this fiscal year.

I would now like to turn to slide seven to highlight some of our first quarter results. Strong flu-related orders in the quarter benefited both our medical and diagnostic segments worldwide. Medical revenue grew about 13% currency neutral, driven by strong performance in the medical surgical and pharmaceutical system business units, as well as diabetes care products. Diagnostics revenue growth on a currency neutral basis was about 8%, driven by strong diagnostic systems growth of 11%. Biosciences revenue grew 0.5% currency neutral versus a challenging comparison to the prior year period. Revenue growth in the quarter came from all geographies, with U.S. revenue growth of about 10%, and international growth about 8.5%, currency neutral. Good operating performance, continued tight cost control, and favorable commodity prices versus the prior period drove margin improvement during the quarter. As a result, our operating income grew about 15% on a currency neutral basis.

On slide eight, we begin our review of growth by segment. First, you can see total top line growth for the company in the quarter was about 9% currency neutral. Medical's first quarter revenues increased about 16%, or about 13% currency neutral. As Vince discussed earlier, we experienced strong sales across medical surgical systems, pharmaceutical systems and diabetes care. Flu-related sales contributed about 7 percentage points of growth in the quarter.

Revenues in the BD Diagnostics segment grew about 10%, or about 8% currency neutral. Sales of both safety engineered devices and infectious disease testing systems contributed to the growth. Flu-related sales contributed about 2 percentage points of growth in the quarter. In the biosciences segment, revenues increased 0.5%, currency neutral. After two quarters of revenue decline, we are seeing evidence of some strengthening in the biosciences business.

I would now like to turn to our U.S. and international revenues. Slide nine. In the first quarter, BD's U.S. reported revenues increased about 10%. U.S. medical revenues increased about 15% year on year, reflecting strong sales of prefillable devices, pre-filled flush syringes and Nexiva as well as flu-related products. U.S. sales of diagnostics products increased about 8%, reflecting strong sales of infectious disease testing systems, and flu-related products.

Biosciences in the U.S. declined about 3%. As Vince discussed, our Discovery Labware business results were impacted by a distributor destocking and a decrease in purchases from a large customer in the advanced bioprocessing business due to the timing of orders. Reported international revenues for the first quarter increased about 13% year-on-year, or 8.5% currency neutral. Underlying growth was driven by double digit performance in Asia-Pacific and Latin America. First quarter international revenues on a currency neutral basis were strong in medical and diagnostics, with each growing about 11% and 8% respectfully. Biosciences grew about 3% currency neutral.

Moving to global safety, on slide ten, reported sales grew about 13% in the quarter, to $454 million. On a currency neutral basis, underlying growth was about 11%, both in the U.S. and in international markets. On a segment basis, medical safety revenues were the largest contributor to our growth, with revenues growing about 16% on a currency neutral basis.

Now, turning to slide 11, we look at the components of first quarter revenue growth year-on-year. Gains from our medical and diagnostics business segment drove the underlying performance of 9%. The favorable currency impact of 5.2% in the quarter versus the prior year was partially offset by our hedging program, which had an unfavorable impact of 2.7%.

Moving to slide 12, gross margins declined 160 basis points, mainly driven by the impact of foreign currency movements and our hedging program, previously entered into. After taking out the effect of foreign currency and hedges, our margin is slightly ahead of last year, driven by lower raw material costs, primarily resins. Lower raw material costs this quarter were consistent with our expectations. And as previously guided, we expect unfavorable price variances in the second half of the fiscal year to offset first-half favorability.

Slide 13 recaps the first quarter income statement and highlights our foreign currency neutral results. As discussed earlier, first quarter revenue growth was about 9% currency neutral, with growth profit increasing almost 10% due to gross margin improvement in the quarter. Moving down the income statement, SSG & A increased about 6% currency neutral impacted by a litigation contingency and costs related to our HandyLab acquisition. In addition, there was a increase in our deferred compensation plan liability. This increase was offset by a corresponding increase in our interest income line. R&D increased about 1% currency neutral, which is lower than what we expected for the year, due to timing within the year. Our operating income increased about 15% currency neutral, as a result of the strong revenue growth and improved operating margin.

Moving to guidance, on slide 14, I would like to walk you through increases for fiscal year 2010. We expect revenues to increase about 7% on a reported basis, or about 6% currency neutral. This is up from our previous guidance of 6% reported and 5 to 6% currency neutral. I would like to point out that given our first quarter revenue growth of 9% and guidance of about 6% currency neutral, implies the remainder of the year will be less than 6%. You may recall that in our prior-year results, we benefited from flu-related orders of about $76 million in the second half of fiscal year 2009. This presents a difficult comparison.

Earnings per share are expected to increase 2 to 4%, over adjusted EPS of $4.95, or 8 to 10% on a currency-neutral basis. This is up from prior guidance of 1 to 3% on a reported basis, or 7 to 9% on a currency neutral basis. Operating margins are expected to be largely in line with our previous guidance, as difficult comparisons occur in the second half of the year, driven by higher raw material prices and lower flu-related orders. Our operating cash flows are expected to be about $1.7 billion for the full fiscal year, with share repurchases of about $450 million.

Now, moving to slide 15, to recap our results for the quarter, we had a strong start to the year. Strong revenue growth in medical and diagnostics segments were aided by flu-related orders. Biosciences underlying demand is improving and on track to meet full-year expectations. Higher revenues, along with operating margin improvement in the quarter, gave us confidence to raise EPS guidance to $5.05 to $5.15. We continued our solid generation of operating cash flow of about $400 million, with $191 million used for share repurchases.

Thank you. I would now like to turn the call over to Vince.

Thanks, David. Before we open the call to questions, I would like to comment on the progress of several of our strategic and operational initiatives. First, we are pleased with the integration of the HandyLab acquisition, and the progress being made on developing the new instrument. Also, you may have seen the joint press release issued by the Juvenile Diabetes Research Foundation and BD announcing our collaboration to improve the treatment of type one diabetes by developing novel insulin delivery products that enhance the use of insulin pumps. We and the JDRF believe there are significant opportunities to improve product performance in the area of infusion disposables. We believe we can apply technologies and know-how from our infusion business to address many of these immediate opportunities. We will work with the JDRF to bring these technologies and our micro-needle technology to contribute to closing the loop or creating a reliable artificial pancreas.

We are not entering the pump business, and we intend to work with all manufacturers of pumps. Switching to operational initiatives, EVEREST, our SAP upgrade is moving forward as planned. We informed you on the last call that we expect our expenses to increase incrementally on this program this year which will enable us to retire several legacy systems and improve our core supply chain processes. ReLoCo, our local operation initiatives to reduce the costs of the medical surgical products about 20 to 30%, is on track. We have also made good progress defining the functional transformation strategies to continue leveraging our G&A cost structure, which we call Global Service Excellence or GSE. We believe our continued focus on productivity improvements and disciplined expense management, along with our ongoing investments in growth opportunities will ensure our future success.

Thank you. We will now open the call

The floor is now open for questions. (Operator Instructions). Thank you. Our first question is coming from David Lewis of Morgan Stanley.

Hi, guys. Good morning. And it is actually Marshall Urist in for David. I wanted to ask you guys about Biosciences, and how you guys are thinking about that now, as we have gotten into the beginning of the year, and your expectations over the rest of the year, sort of ex-stimulus. Should we be thinking about new product flow in year as we go throughout year or is that going to be more of a 2011 dynamic when we think about reacceleration in biosciences?

This is Vince. I will make an opening comment and then I will turn it over to Bill Rhodes. We're expecting growth to improve over the back half of the year, but from a product launch standpoint, the major new product launches are more in 2011. Bill, do you have anything else you would like to add?

That's exactly right. We do expect the second half of the year to be the higher growth rate, and our products that are in queue are generally to the 2011 time frame.

Okay. Great. And just one follow-up, I know there has been some discussion of hedging and how you guys are thinking about that over the rest of the year. So could you just update us on where that stands? And again, will kind of the 1Q FX and how that flows to the income statement, can we roll that through the remainder of the year?

David can do that for you.

Okay. Thank you.

David, as far as the hedging policies, let me just clarify what we're doing there, we still fully hedge all of our balance sheet transaction exposures. Beginning in October of 2009, we ceased buying forward contracts for our translation exposures so for the foreseeable future we don't anticipate entering into forward contracts for our cash flow exposures. As far as the currency impact for the first quarter, you can refer to -- in the back of the slide deck, you will see that we break out the impacts, and in the first quarter, the currency had a positive impact of about $0.12 and then the hedge impact had a negative impact of about $0.04. And if you recall, we had a holding gain last year of about $0.09 and a favorable hedge impact of about $0.08. So the net impact of currency impact in the quarter was $0.09. The details of the impact on that in the P&L you can see on slide 19.

Okay. Great. Thanks.

Our next question comes from the line of David Roman with Goldman Sachs.

Good morning, everybody. Thank you for taking the question. Just a quick follow-up on the guidance you gave in November with respect to some of the stimulus. I think you talked about $20 million of stimulus coming in fiscal 2010, I guess two questions, A, is that still the case, and B, was there any contribution in this quarter?

So as regards to stimulus, there was a very small contribution in the quarter, it was a little over $2 million and we saw some administrative delays at the agency, but the previous guidance of somewhere between $20, $25 million still holds.

Okay. Thank you. And then SG&A, I know there was one-time moving parts in SG&A this quarter but could you maybe help us think about SG&A for the rest of the year, and then as you go forward, as biosciences and diagnostics become a bigger part of your overall revenue base, what type of spending levels are required to sustain growth in those businesses, given the relative competitive nature versus medical?

So there were two questions there. So I'm going to ask David to take on the question about the particulars over the course of this year, and then we will come back to the -- kind of the longer term trends.

Yes, so SG&A as a percent of revenue in the quarter was about 23.5%. And we're still -- our guidance is 22.7 to 23 for the full year. And we did have some items in the first quarter as a reason why we came in at that 23.5, and so the remainder of the year, we feel confident coming in at that range and we didn't really have a change.

Okay.

And then as regards kind of the longer term, let's call it SS G&A cost, there are two elements of this, and one is just focus on G&A for a second. And we have a program, as I mentioned in my opening remarks, around focusing on G&A and taking costs out of it. We're looking at our support functions within G&A on a global basis and benchmarking against best practices and setting some aggressive goals, and as we do that, implement those strategies, complement them with let me call it service centers around the world to take further costs out. So that is one element that we will go after G&A. At the same time, we look to, as we have been doing in the past, so this is not a new dynamic, continue to invest and feet on the street as we grow those businesses. That has been more of an international issue for the entire company. But with that, we still think that as we look at the income statement, some years as we've said, we will get more leverage on the SS G&A side and some years we will invest in G&A and get more out of manufacturing, depending on where we are with our programs.

Okay. And then just lastly, if I look at the quarter on an FX neutral basis you grew the top line obviously a little over 9% and the bottom line a little over 11%. Historically though, if you go back, have you been able to generate more earnings leverage than that. Is this quarter not the right way to think about the normalized amount of leverage you can generate on a go-forward basis?

I will left David add on to this, but we've been talking about that during the course of a year, we get about 50 basis points of leverage through the P&L, and we are still thinking about it that way, and in terms of top line growth that we are leveraging, you know, we have said we're going to increment up the growth rate over the next couple of years. David, would you like to add to that?

Yes, I would. David, also, if you think about in the quarter, it was around $45 million of SG&A increase, versus the prior year. Half of that was related to foreign currency. So our expenses, as they get translated back, increased about $20 million in U.S. dollar terms. So if you look at it, if you strip out the other $20 million, with some of the special items that we had talked about, we are getting leverage as we drive that top line growth faster than what our investment in expenses are, we continue to get leverage in SS G&A, and we anticipate continuing doing that, given the outlook for our sales growth and our tight cost controls. So we will continue to get operating leverage in that respect.

Okay. Thank you very much.

And that's why we had the 15% in the quarter.

Right. Okay.

Our next question is coming from Rick Wise of Leerink Swann.

Good morning. Let me start with the Biosciences segment. You are seeing some strengthening you said, maybe help us get a little flavor from where you are from here, flow cytometry is up great, but not Discovery Labware? I thought you had annualized the loss of a customer there and things should be improving. Maybe give us a little color on that and again where you think we go especially given what I thought were sort of encouraging, directionally encouraging comments from President Obama on the NIH budget. Thanks.

To start, in the U.S., we saw some delay in the stimulus orders. So we saw $2.5 million in this quarter of orders, and the delays were related to administrative delays at the government, and in fact, they had to go back and do some of their normal purchasing. We expect that the stimulus is going to -- our guidance on $20 million to $25 million, we think that that is still going to hold for the year. And of course, that is really impacting the flow cytometry business and particularly more on the instrumentation side. As for the Labware business, I will let Bill Rhodes comment on what is going on there.

So the question was specifically around advanced bio processing. What essentially has happened there is that one of our larger customers in terms of managing their own production around the world shifted some dates and regions, but on a full-year basis, we expect to be exactly where we had said we were going to be. And Vince talked about the stimulus, which is exactly right.

Turning to divisional guidance, David, do you want to -- is this a good time to update the divisional guidance you gave us earlier, or does the stronger first quarter change all of that? And maybe just the second part of that, does the stronger start to the year, or the stronger -- it seems like fiscal 2010 growth, it suggests more optimism about 2011. How do we, you know, as we look way out --

David, you want to take that?

Sure. From medical, we guided 5 to 6% in November. And we are seeing the underlying performance in that business improve, and we increased our guidance there to about 6%. In diagnostics, you have good solid performance as anticipated. We guided 6 to 7%, and you know, we're not changing that guidance, we still have that in the 6 to 7% range. Looking at Bioscience, we're off to a strong start, I think the point that Vince had raised earlier around the stimulus, it was a little lighter but the underlying business came in good, and so we have full confidence in that 5% currency neutral that we had guided, that that's what we will do for the remainder of the year. So we're feeling good about, all three businesses. We have real strength across all three segments, and as we talked about earlier, we saw strength across all geography, US and internationally. So that is where we have the confidence to raise guidance for the year.

And on 2011, Vince, do you -- are you feeling a little more optimistic about hitting your sort of return to normal growth targets now?

Well, it is early on in the year, but let me make -- so I think we're encouraged by what we've seen in the first quarter. I'm also encouraged by, if you pull out the flu sales in the medical business and what we saw in the first quarter, pull that out you had 6%, so I am encouraged by that, and diagnostics was about the same and I don't see any major change there. And the Biosciences business, we have the stimulus in this year. We do expect that the stimulus program is going to continue into 2011. We don't have an estimate for that yet. And then the last factor in thinking about 2011 will be that if you recall the sequence of events was that the US market turned down in the research market before the European market. So we will be watching the European market and how that will impact 2011 and hopefully we see some more turn-around there.

Thank you so much.

Our next question comes from the line of Jon Groberg of Macquarie.

Good morning. Thanks for taking the call. Just a quick, some clarifications around flu. When you give some of the flu numbers that you talk about, can you just remind us, are these sales that you know are directly related to flu, so for example, syringes being used in the flu vaccines and then on the diagnostic you have the rapid flu test, you can just remind us how you're coming up with the numbers for flu?

Sure. We can do a good job of understanding what the flu-product related sales are. So we understand the diagnostics business, that, you know, when you increase in flu kits obviously is, and some sample collection device, so if you do see a spike. There on the medical products side, we can track those as well. If they're going to Barda or to a pharmaceutical partner through the pharma systems business. What we can't pull apart is anything related to H1N1 and the seasonal flu. So there we have to make some judgment. As we all know, the seasonal flu has been very light and pretty much nonexistent so far. But we would have had a usual pattern of some buying in anticipation of some flu in this year as well.

But just general products, that could be used as people visit, see their doctor more and more, there is more uses, I guess, in some of these products, just as people are going in for flu symptoms, I'm just curious, so you feel very comfortable that the flu numbers you have are accurate in terms of what your comp is going to be as you go throughout the year?

Yes, I think we feel pretty confident in the flu number, yes.

And then on the diagnostics side, you mentioned diagnostic systems, I think it was 11% organically, it looks like preanalytical may be outside of some of the safety which I think I heard you say was strong but maybe you could talk about the growth there? It looked like it was a little less than normal.

The preanalytical systems business, there are two growth drivers in that business, and it is international, and it is the safety products. And specifically push button in the US. International safety was just a little lighter in this quarter than we had seen in the previous quarters but there was nothing more than that.

And this is Gary, if I can just chime in on that, there was a specific reason why international safety was a little light in preanalytics. There was essentially a large one time order last year and as a comparison on our lancet safety products because one of the customers who was buying from a competitor, the competitor couldn't supply so they bought a rather large quantity from us that wasn't going to repeat so that tended to dampen the international safety sales a little in this quarter but that is not an ongoing factor.

And last question here, as you think about what obviously may or may not happen with health care reform, does that change at all kind of your view of -- I know there are certain provisions in there that could have helped, for example, some of the screening associate the with hospital acquired infections. Is there any kind of change to your near-term outlook for how that market outlook grows, and another government regulated related question, is there any update on the announcement that was out of the European Commission a while ago, where they were trying to come up with the draft proposal for safety agreement and the health worker unions and if there is any kind of update on where that stands. Thanks.

I will address the health care reform. So there are provisions regarding value-based purchasing in the bills. And it is not clear what is going to happen. And certainly, and those provisions related to some impacts on reimbursements to the hospitals if they did not meet certain quality targets related to infectious disease, and other things as well. Some of the discussions that are now occurring are about a much smaller bill with those sorts of reform measures still in it. So we can't make a call and we're not going to say now that those are going to be out. But certainly, they would be helpful to us, and we're still looking for, as the JCAHO regulations go into effect, we are going to see some positives from that element as well. And what was the second piece of the question?

Is there any update on the draft proposal that was in the European Union that could potentially accelerate some of the safety products?

Sure, I will ask Bill Kozy to comment on that.

Thanks, our information is pretty much in line with what we've been communicating in that in late October the European Commission completed a proposal for an EU Council directive to create a law on the prevention of sharps injury. If that were adopted by the Council, it would make the agreement between hospital workers and employers legally binding across the EU. This could potentially be published in the spring or summer of 2010, and we anticipate that some action will be taken in that time frame later this year. If adapted, there would be about a two-year period of expected compliance, probably followed by a one-year grace period to ensure engagement. And we will continue to monitor that closely and keep you informed.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

Thanks, good morning. Vince, just I guess a quick question, you beat consensus by $0.10, the middle point of the guidance was raised by a $0.05 could you help you think a little bit why the overall number for the year did not go up by the $0.10? Thank you.

I think that as we -- you know, it is still early on in the year. We've been -- in terms of how we have approached the back half of the year, with the flu, we know that we had large flu sales last year. Our approach to looking at the balance of the year was basically to -- an assumption, because we had heard nothing from our customers, that there is no impact from the swine flu, you know, that would recur in the fall. And then in addition, we know that in the first quarter, on the gross margin line, that we had positive resins, and we expect that is going to be a tough comparison in the second half of the year. And David, would you want to add anything else to that?

I think that is exactly right, Vince. The thing I would also add is that given what we saw with the Biosciences and the performance there, we also saw some opportunities for investment in a couple of our businesses. So we're investing for growth here.

Understood. And then just as a follow-up, can you give us an update on both the Viper and the GeneOhm performance in the quarter? Thank you.

Sure. I will ask Philippe Jacon to talk to that.

Sure. As far as GeneOhm is concerned, in the first quarter, it was $15 million, and so this is an increase of about 23% compared to prior year. The drivers, there are two drivers, very good transaction on the CDiff assay that we just launched and very good traction in the US on this new assay. Now, your question about Viper, so the sales of Viper in the quarter, we're kind of growing about 3.5%. This is certainly due to timing. We see that there has been several instruments that have not closed during the quarter but we still believe that we are going to have -- for the full year, a growth that is going to be still about 9% for the full year. So most of it is really due to timing and that's why we've been a little below what we were expecting for this quarter.

Very good. Thank you.

We saw some customers that were very occupied with the flu and that seemed to put off getting some things done.

Our next question comes from the line of Mike Weinstein of JPMorgan.

Thanks, guys. It is Kim here for Mike. Just starting off looking at the bottom line growth for 2010, you brought up your FX neutral guidance range to plus 8 to 10%. I know we had talked about a couple of items that were holding back EPS growth in 2010, the higher pension expense, and the SAP upgrade which collectively I think were about 3%. And so I'm wondering if we kind of adjust that 8 to 10, up 3%, you're kind of at the 11 to 13% range. And I know there is always going to be some puts and takes in any given year, but is the 11 to 13% range a fair range to think about in terms of your organic growth potential at the bottom line?

We're looking at it this year, I think -- I believe we said we had about $30 million worth of expenses, incremental expenses related to those items. So I think you're very close.

Okay. Great. And I guess just separately, touching on your collaboration with the JDRF, is there any way you can frame your expectations for sort of the timing and the magnitude of revenues from that collaboration, and then also the status of the micro-needle project? Thanks.

It is really too early to start talking about revenues from that product, I mean from that collaboration. But you've got two pieces, one of which -- so this is an R&D program right now, so we're talking about several years out before we see revenues, but think of it, you know, working it out some of these issues with the actual infusion sets, as a shorter term program than a longer term program applying the micro-needle technology to closing the loop. Bill, would you like to add anything?

No, Vince, I think you got it.

Our next question comes from the line of Jon Wood of Jefferies.

Hi, thanks. Good morning.

Good morning, Jon.

David, the share repurchases are running a little bit ahead of the $450 million guidance, any reasons why you wouldn't continue on the 1Q pace in the coming quarters?

When you look at the opportunities there, we're really not commenting what we're doing forward, but given where the share price was, we thought it was reasonable to do the $191 million, Jon. We are still guiding to $450 million for the year and will continue to give updates on that as we progress through the quarters.

Okay. Sounds good. And Vince, can you just comment broadly on the M&A pipeline, the potential for additional transactions like the HandyLab deal in the coming quarters?

Well, from the deal pipeline perspective, we don't comment on specifics, but there are still some reasonable valuations out there. We haven't changed our strategy of looking for plug-in strategically obvious acquisitions, and I would you know, think more broadly than just pure technology acquisitions, like HandyLab, but including things that are both technology but also bring some sales along with them as well that are natural plug-ins for us. So we continue to actively look at those sorts of things.

And focus is in all three business units, not specifically diagnostics -- I mean you've been active in diagnostics and biosciences more, but anything in medical interesting?

We are looking across all three segments, as you said, we've done more in diagnostics and biosciences, but we continue to look in the medical space as well.

Okay. One quick last one. It looks like the international flow business actually had a pretty good quarter. Is there any discernible impact from international stimulus programs? I know Japan has a big stem cell component to their stimulus program and Germany has one to their program as well. Is there a way to tell if some of that is flowing into the cell analysis business internationally?

We, I think, in both Japan and in China, and I don't know if I recall so much stimulus related, as to these governments are committed in the cellular research area, to moving ahead and being aggressive, and so Bill, maybe you might want to comment a little bit more.

Absolutely. And you are spot-on. Japan, for example, because of the increasing government funding for stem cell research, has been an area that our products and technologies have benefited from that. In Western Europe, it depends on country and area. But again, we've seen some growth there. And in China, there is a lot of concentration by the Chinese government, and supporting academics in terms of stem cell related research, for example, and again, our products, particularly on the flow side, particularly on the sorting side, benefit from that. We've also gained some traction we believe in India. The same reason.

Okay. Thank you.

Our next question comes from the line of Sara Michelmore of Cowen.

Great. Thank you for taking the question. Vince, I just was hoping you could clarify, I'm just -- and maybe I'm splitting hairs here, when I look at the quarter and the up side, I know that the quarter definitely benefited from the flu orders, but I'm not sure from your comments if the flu-related revenue is ahead of your expectations or not. And when you talk about the optimism on the full-year revenue growth moving from I guess 5 to 6% to 6%, you're talking a little bit more about being optimistic on the trends in the base medical business and the bioscience demand trend. So just hoping you could clarify what specifically was ahead of your expectations in the quarter, and again, just for me, just give a sense of magnitude in terms of what gives you the optimism on the full-year revenue growth.

You have it right. It is not that we're expecting higher flu sales for the year. We did see an acceleration of some of the -- the way we were forecasting things, of some flu sales from quarter two, into quarter one, and then we saw of course that H1N1 was dying out. So we're not raising our projections for flu-related products. So you're right.

It was the base business that was causing us to change our guidance. And in particular, it was medical. And in medical, we saw a -- once you pulled the flu out of those very good numbers, they also had very good base growth of 6%. And med-surge is performing better. We're getting good traction with Nexiva. We were encouraged by that. Over the last 12 months, we have been putting more sales resources behind that. We have a full product array. So we are encouraged there.

So that is going well. And diabetes care was also off to a good start. So we were pleased with that. We continue to see good pen needle growth in that business and opportunity in the international market. So those were two of the reasons that we became more bullish for the year.

And then just a clarification in biosciences as well, I think coming into this year, you were a bit cautious on Japan and Europe specifically, and it sounds like at least in those end markets things haven't deteriorated relative to your expectations. I'm just wondering if you could clarify that. I'm just wondering if you could clarify that.

That's right. They have not deteriorated. We haven't yet seen an increase in demand in the European markets, and we think that we have to wait until further on in the year, until the budget cycles play out in Europe. So it is where we expected it in Europe, and Japan did all right.

Okay. And last question, for me, on a couple of the calls we've been on this week, we've discussed exposure to Venezuela. Just wondering if you could quantify your exposure there if any. Thanks.

Our exposure in Venezuela is small, and we were pretty proactive in managing that situation which is why it was small. So David, I don't know if you want to make any other comment on it.

We started preparing for this, Sara, last year, and as Vince said, it is relatively small and we think the team in Venezuela deserves a lot of credit for getting out ahead of this.

Okay. Great, thank you.

Our next question comes from the line of Amit Bhalla of Citi.

Hi, good morning. I wanted to ask a question within diagnostics in women's health, TriPath. Could you comment on if you're seeing any impact from testing volumes based on recent changes to ACOT guidelines? Can you give us an update on the pipeline as well as O.U.S. penetration for TriPath? Thanks.

So just to make an initial comment and I will turn it over to Philippe, I don't think we've seen any impact from the change in the pap smear testing guidelines. But Philippe can give you a little more color and answer on the international side.

Sure. As of now, we don't see any impact of the new kind of guidance in the USA. Relative to outside of the US, things are moving in Europe. There is also -- we are expecting and at least looking forward to the decision of the Japanese government on potentially changing the reimbursement for liquid-based cytology tests which would really help us there where there is some movement already. And we stopped seeing a good traction also of these kind of products out of China.

Okay. Thanks. And then just going back to an earlier question about the $0.10 amount in the quarter and the full year raise by only a nickel. I thought David I heard you mention something about increasing some spending on projects but you didn't necessarily change any of the line item guidance or expenses. Is something a little weaker for the rest of the year? Or are some line items changing in terms of guidance? Whether it is R&D, or any of the other items? Thanks.

You have pluses and minuses throughout. But as we go down the income statement, overall, we're going to continue to invest. We see opportunities for investment. We had a good quarter, and we want to make sure that the businesses are capitalizing any of those opportunities that are out there. So that is really what was driving it.

So there is no changes to the R&D or gross margin, any of those guidance?

No, the R&D was a little under, but we will pick that up in the second half of the year. And no changes from an SG&A perspective either.

Okay. Thanks.

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

Thanks for taking the question. This is a follow-up to that. Is your gross margin guidance for the full year also unchanged?

Yes. That is unchanged for the year. The biggest driver to our performance, underlying performance in our gross margins was resins. And as you recall, Kristen, that we talked about in the previous quarter, we are going to have favorable resins in the first half of this year, and then they flip to being unfavorable. So if we look at our resins, year-over-year, there is -- they will be broadly in line, fiscal year 2010, versus fiscal year 2009.

Have you guys made any changes in terms of ways to look at that in terms of hedging or are you just going to be subject to just kind of the market fluctuations?

There is no change to our hedging program. We entered into our contracts last year. And as I said earlier, we're not buying forward contracts going forward. So there is no change in the hedging program. And as you note in the back of the slide deck, you can see what happened in the first quarter around the hedging and the impact that that had on our gross margin.

I meant like in terms of resin costs, is there any way to hedge that?

We've looked at that. It is a great question. But there is just not a market out there right now. If you hear of one, let us know. But every time we've asked the question, nobody is out there actually hedging resins.

And just looking internationally, are you seeing any increased competition in whether it is China or Europe or other Asian countries, just from some lower costs, manufacturer, any dynamics changing there?

No, we don't see any change in the dynamic. We're being proactive in that regard. The ReLoCo program where we we're focused kind of on an architectural, product design, looking at our material cost, really comprehensive approach on the medical devices, to deal with that competition, long term, but we haven't seen anything change over the short run, so we're trying to be proactive there. But not just do it from a cost standpoint but also, enable, a future set that is going to be very attractive.

Sorry if I missed this but did you guys give specific dollar numbers in the quarter. I know in the press release commented on just kind of the percent changes. But did you break out within pharma system, and then how it broke out within diagnostics as well on a dollar basis?

We didn't break it out by business unit. We mentioned that the flu, David, make sure I get this right, was around $60 million? In the medical?

Last year, the total flu was around $76 million. And this year, we're forecasting it to be around $84 million which is really no change to what we said before. The bulk of it obviously, as Vince talked about earlier, is in medical.

So this quarter specifically, it was 60 in medical and there was a little bit obviously within diagnostics, too.

That's correct.

And then last year, 76 was medical, plus diagnostics.

That's right. And again, the bulk of that was in medical. About $55 million.

Okay. Perfect. Thanks very much.

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

Good morning. This is actually Eric filling in for Peter. I guess just my first question, the sequential decline in the interest -- the increase in the net interest expense, actually, what was the reason for that?

David?

Are you talking abaout the interest expense line?

Yes.

We had about, if you recall, we did a debt issue last year, so our interest expense in the first quarter of last year was around $8 million. And this year, it was around $13 million. And if you recall, we had incremental debt of about $500 million. And we borrowed $750 million, and about $250 million went to pay off a loan, and that is about $500 million of additional interest expense. Also, if you recall earlier, when we're looking at interest income and expense, there is the offset in there related to our deferred comp that I talked about earlier.

Okay. Great. Thanks for the clarification there. And lastly, on the China geographic exposure, and I was just kind of wondering if you've seen any -- or if you could update us on the progress that you're seeing as far as the hospital buildout that China is doing, the 2,000 hospitals in three years, and if you're seeing any incremental revenue or any upside from that program.

I don't think so in the short run, but I will let Gary Cohen comment on maybe the longer term.

Sure. So we're seeing excellent growth in China to mention first, and also in response to your earlier question, and also excellent growth in India. Those are two countries that we're continuing to put a lot of focus on, strategy development, and long-term development, and the Chinese government had announced about a year ago that they were expanding health care access to 90% of the population, so there is a buildout in that second tier. And part of our strategy planning is how to put the deployment in place, so that we can serve that second tier of hospitals. As with many multi-nationals, much of our business today is in the top tier of hospitals. That's where most of the -- let's say western quality medical practices has been going on. And a lot of that will start shifting to the second tier, with the top tier doing more specialty work, which also lends itself to revenue growth, and we're planning deployment strategies that will enable us to serve that tier, both directly through our own people, and also through broadened distribution networks. We see China as a big opportunity for many years to come.

Thank you.

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

Yes, thank you for taking my call. Taking another shot at the outlook for gross margin, I appreciate that you called out the items, the reversal in the resin costs that will be a negative for the rest of the year, and also that you're increasing some investments in the bioscience area. So given the mix change with the lower flu sales, are there any other items that are contributing to gross margins either on a positive way or a negative way, and it seems like maybe there is some other things in there with the offsetting the two items that you called out.

David, you want to take that?

Yes. Resins really is the major driver in the quarter. Well it outshadows anything else, any of the pluses and minuses we have in there from a performance perspective. As we said before, if you think about margin improvement, for the full year, if I go back to that, what we had said before, we said for the full year, we were going to be at about 52.6%, going from 51.1 to 51.3. And if you recall, about 100 basis points of that is FX. And then we also had additional pension expenses and startup expenses that were going to hit us this year, which is unfavorable, about 60 basis points. And the underlying performance of the business was improvement about 20 basis points. So that gets you to the 51.1, 51.3.

In the first quarter, we came in at 52% versus last year at 53.6, and as I said earlier, about 190 basis points of that was related to negative because of the currency. Pension and startup was around 50 basis points, and performance was around 80 net, and that again, the bulk of it is really driven by the resin prices. So you will see gross margins for the year, we're not changing the outlook for the full year. As those unfavorable resin prices come through, in Q3, and Q4, as we forecast we will see our gross margins come down a little bit, and that's why we gave the guidance as we did.

All right. But there is nothing -- there is nothing else in mix change that would contribute to -- contribute there?

With mix, it is always built into our performance. And splitting that out is -- we don't really split that out individually. So there always is a little bit of mix.

We have a little bit more medical sales, obviously, because we raised the forecast on medical but we are keeping diagnostics and biosciences where they were.

Right. Okay. Thank you.

Our next question comes from the line of Jeff Frelick of ThinkEquity.

Good morning, everyone. Vince, a question for you. As you exit the quarter, you can give us a sense of maybe your customer's appetite for loosening up budgets for capital equipment spending and premium pricing of safety products?

Let me take the safety products first. We think that worldwide, the downturn did not have a real big impact on customers' desire to move to safety products. And some of the acceleration that we saw in the first quarter was good performance by Nexiva, which is a significant step-up in price, and push button continued to do well. So from a customer standpoint, I think they see the value propositions there, and they're strong ones. So I think from kind of an attitude standpoint, you know, it is good. On the diagnostics side, we continue to see in the clinical business real focus on reagent rentals as you would expect.

We are encouraged in the quarter that we saw sales of the BACTEC on reagent rental, some good reagent growth there so that seemed to be a step in the right direction as well. On the HAI side, the GeneOhm side, where we're seeing the difference is on the C difficile test and that is on reagent rental. And that market growth was probably the segment that was more impacted over the last 12 months, and we really haven't seen a big change there, except for -- as Philippe mentioned before, this nice developing pipeline on the C-DIFF side.

Okay. Great. Thanks, Vince.

At this time, we have no further questions. I will now turn the floor back over to Mr. Forlenza for any closing remarks.

Well, thank you all for joining us on the call today. We were pleased with the first quarter results. We're encouraged for the rest of the year. I'm very happy to raise our guidance. And we look forward to talking to you again. Thank you very much.

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