Becton Dickinson and Co (BDX) 2010 Q2 法說會逐字稿

Hello and welcome to BD's second fiscal quarter 2010 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Thursday, May 6, 2010, 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 67104728. 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. Sherry Bertner.

Thank you, Jackie. Good morning, everyone, and thank you for joining us to review our second 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 website at www.bd.com. During today's call we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our second 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 schedules. A copy of the release including the financial schedules is posted on the BD.com website. Leading the call this morning is Vince Forlenza, President. Also joining us are David Elkins, Executive Vice President and Chief Financial Officer, BD Executive Vice Presidents Gary Cohen and Bill Kozy, as well as Bill Rhodes, President of BD Biosciences, and Philippe Jacon, President of Diagnostic Systems. I will now turn the call over to Vince.

Thanks, Sherry. Good morning, everyone, and thank you for joining us today. Before turning the call over to David to review our second quarter results in more detail, I would like to briefly comment on some of the highlights regarding the quarter results which are noted on slide four. As Ed stated in our press release, we were very pleased with our second quarter results, which were in line with the Company's expectations. Our overall revenue growth for the quarter was solid. BD Medical revenue growth was primarily driven by diabetes care and pharmaceutical systems. BD Diagnostics, on the other hand, grew less than expected. We experienced an exceptionally mild flu season. As a result, we saw reduced testing levels in most of our diagnostics businesses, which was partially offset by strong growth in our cancer, diagnostics, and molecular STD product platforms. Finally, we are continuing to see an improvement in our biosciences segment.

Overall, we were quite pleased with the Company's performance in a difficult environment. Our second quarter and year to date earnings results provide us with the confidence to reaffirm our adjusted EPS guidance for the full fiscal year. Moving to slide five you will see that the Company experienced solid top line and strong bottom-line growth for both the second quarter and our six-month year to date results. For the second quarter, our revenues grew 7%, or 6.6% on a currency neutral basis. We experienced strong adjusted EPS growth of 8.5%, or 16.2% on a currency neutral basis. For the six-month year-to-date results, revenue growth was 9.3%, or 7.8% currency neutral. Adjusted EPS grew at 6.6% or 14.1% on a currency neutral basis.

Before reviewing our guidance for the fiscal year, I would like to briefly mention that, throughout our commentary, we will be discussing two types of flu. The pandemic flu, which has had a positive impact on our year-to-date revenue growth, and the seasonal flu, the absence of which has had a negative impact on our revenue growth. David will cover the impact of the pandemic flu related revenues on the Company later in his remarks. Now let's move on to slide six, which looks at our guidance for fiscal 2010.

You may recall that our previous revenue guidance was about 7% or about 6% on a currency neutral basis. We have adjusted our reported revenue growth to approximately 6% to reflect the strengthening dollar. On a currency neutral basis, we continue to expect revenues to increase approximately 6%, which is in line with our previously communicated guidance. With that said, we are reaffirming our previous guidance for adjusted EPS to increase 2% to 4% to $5.05 to $5.15, or 8% to 10% on a currency neutral basis, excluding the healthcare reform charge. Now, I'll turn the call over to David to review our financial results.

Thank you, Vince, and good morning, everybody. As Vince just summarized, we're pleased with the first half results. I would now like to turn to slide eight to highlight some of our second quarter results. Medical revenues grew 7.8% currency neutral, driven by strong performance in the pharmaceutical systems and diabetes care businesses. Diagnostics revenue growth on a currency neutral business was 2.7%, which is impacted by an exceptionally mild flu season and a reduction in lab testing. Biosciences showed continued improvement, with underlying growth at 9.8%. This is mainly driven by a solid instrument and reagent sales in the US and in Japan. Revenue growth in the quarter came from most geographies, with the US revenue growth of 6% and international revenue growth of 7% currency neutral. Our strong bottom line performance was driven by revenue and operating margin expansion on a currency neutral basis. On slide nine, we begin to review our growth by segment. First, you can see total top-line growth for the Company in the quarter was 7%, or 6.6% currency neutral, with pandemic flu related sales contributing less than 1%. For the first half, the company grew 9.3%, or 7.8% currency neutral, benefited by pandemic-related sales of a little more than 2% of growth.

BD Medical second quarter revenues increased 9.7%, or 7.8% currency neutral. As mentioned earlier, we experienced strong sales in pharmaceutical systems and diabetes care businesses. Strong diabetes care growth was primarily attributable to pen needle sales, and a non-product co-marketing agreement discussed on our last call. We also experienced significant growth across emerging and developed markets. The strong growth in pharmaceutical systems is due partially to timing, new product lines, and some benefit from pandemic related revenues. For the first half, the medical segment grew 13%, or 10.2% currency neutral. Again, benefited by pandemic related sales of about 4 percentage points of growth.

Revenues in the BD Diagnostics segment grew 3%, or 2.7% currency neutral. This was caused by the slower growth of our PAS and diagnostic systems products, as a result of lower US hospital admissions and lower lab testing volumes in the quarter. Our cancer and molecular diagnostics businesses continued to experience solid growth of about 8%. For the first half, the diagnostic segment grew 6.6%, or 5.4% currency neutral. In the Biosciences segment, revenues increased 6% with underlying growth of 9.8% currency neutral. We are pleased that the Biosciences segment continues to improve. Solid US growth was driven by research instrument and reagent sales and key customer purchases benefiting our advanced bioprocessing business. Cell analysis experienced strong instrument growth, particularly in Japan. This was driven by supplemental government funding of cell analysis instruments for stem cell research, mainly by academic institutions. For the first half of the fiscal year, our biosciences segment grew 3% or 5.2% on a currency neutral basis.

Now, turning to slide ten, we'll look at our geographic results. In the second quarter, BD's US reported revenues increased 6%. US medical revenues increased 6.7% year-over-year, reflecting solid sales of prefillable devices and Nexiva, as well as flu-related products. US sales of diagnostics products increased 2.7%, and was impacted by an extremely mild flu season and the lower lab testing. Bioscience revenues in the US increased 12.6% due to revenue growth in cell analysis business, which was led by research, instrument, and reagents. International revenues grew 7.7%, or 7% on a currency neutral basis in the quarter.

Growth in our medical segment grew at 8.6% currency neutral by strong growth in our prefillable devices, pen needles, and infusion therapy products. The diagnostics segment grew 2.8% currency neutral, mainly as a result of the mild flu season. Biosciences grew at 8.4% currency neutral by exceptionally strong growth in Japan. This growth was offset by continued delays in western Europe government funding of cell analysis instruments. For the first half, reported US revenues were 7.9% with medical increasing 10.9%. Diagnostics increased 5.3% and biosciences growing 4.6%. International revenues were strong and our medical segment with underlying growth of 9.8% currency neutral, while our diagnostics and biosciences grew at 5.5% on a currency neutral basis.

Now moving to global safety on slide 11, reported sales grew 6.8% in the quarter to $418 million. On a currency neutral basis underlying growth was 5.9%. This was comprised of a 5.4% growth rate for the US, and an underlying international growth rate of 6.8%. International safety slowed in the quarter due to backorder products, the weak flu season, and reduced testing. For the first half, underlying growth was 8.4% on a currency neutral basis, which is a combination of an 8.2% growth rate in the US, and an underlying growth rate of international safety of 8.6% on a currency neutral basis. This also reflects the quarter two softness as I just mentioned, due to some back orders, the weak flu season and reduced testing volumes. Vince will provide you an update on the EU safety legislation in his closing remarks.

Now moving to slide 12 and looking at the second quarter revenue growth year-over-year, gains from our underlying performance of 6.6%, and the 3.9% favorable impact from currency translation were offset in part by the 3.5% unfavorable impact from our hedging program. Moving to slide 13, gross margin remained flat year-over-year, underlying gross margin improved 130 basis points, mainly driven by positive product mix. Strong performance this quarter and marginal favorable currency translation had a positive impact on gross margin, but were offset by the unfavorable hedge impact in the quarter. Slide 14 recaps the second quarter income statement and highlights our foreign currency neutral results. As discussed earlier, second quarter revenue growth was 6.6% currency neutral. Gross profit remained flat year-over-year as a percentage of sales. However, on a currency neutral basis, gross profit improved, reflecting the stronger underlying performance, driving gross profit up 9.3%.

Moving down the income statement, SSG&A increased 5.9% currency neutral. This was impacted by an increase in our deferred compensation plan, which is offset by a gain on our interest income line. Increased pension cost and the cost of our Everest program have also contributed to the unfavorable impact on SSG&A. R&D increased 1.7% currency neutral, which is lower than what we expected for the year due to timing within the year. Our spending will accelerate in the second half of the year. Our operating income increased 14.5%, currency neutral as a result of the strong revenue growth and improved operating margins on a currency neutral basis.

Moving to slide 15, and our year-to-date performance, I will review revenue growth -- our revenue growth increased 9.3%. Performance and currency contributed 7.8% and 4.6% respectively. Which was partially offset by the hedge with the 3.1% unfavorable impact. Looking at slide 16, our gross margin change year-over-year, we experienced 80 basis points decline, favorable resins and favorable mix were offset by pension and start-up costs which were primarily related to our reloco program. Our strong year-to-date performance was also offset by hedging and unfavorable foreign currency translations, which includes the effect of a one-time holding gain in the first quarter fiscal year 2009.

Slide 17 recaps the six-month year to date income statement and highlights our foreign currency neutral results. Revenue growth was 7.8% currency neutral. Gross profit margin declined 80 basis points due to the unfavorable hedging and foreign currency translation. However, on a currency neutral basis it was higher than revenue growth, reflecting the favorable margin expansion. Moving down the income statement, SSG&A increased about 6% currency neutral, again impacted by Everest and pension costs and an increase in our deferred compensation plan, which has an offset in the interest income line. Similar to what I mentioned earlier for the second quarter results, R&D increased 1.5% currency neutral which is lower than we expect for the year due to timing. And as said earlier, spending we anticipate to accelerate in the second half of the year. Our operating income increased 14.7% as a result of strong revenue and the improved operating margins on a currency neutral basis.

Now moving to slide 18 to recap our results for the first half, we are really pleased with our results in the first half of the year. We ended the second quarter with a strong first half revenue growth aided by pandemic flu related orders. The biosciences segment continues to show improvement. On a currency neutral basis operating margins improved, benefiting from favorable resins as well as product mix. We generated solid operating cash flow of $688 million with $450 million used for share repurchases during the first half of the year. Solid first half performance gives us confidence to reaffirm our previous EPS guidance of $5.05 to $5.15, excluding the healthcare reform charge. Now moving to slide 19, I would like to walk you through the impact of the pandemic flu on the Company's total revenue growth during each of the two halves of our fiscal year 2010. In the first half of fiscal year 2010, pandemic flu provided a benefit to our revenue growth of 2.4% which is mainly in the US. While in the second half of fiscal year 2010 the pandemic flu is expected to result in a 2% negative impact to our revenue growth due to the international pandemic revenues that were recorded in the second half of fiscal year 2009. Adjusting for the effect of pandemic related orders, the underlying growth is consistent the full year, with a growth rate of about 6% currency neutral.

Now I'd like to move to guidance on slide 20. We'll first look at our revenue guidance by segment, on a reported and currency neutral basis. As Vince mentioned earlier, we have adjusted our reported revenue growth to approximately 6% to reflect the stronger dollar. On a currency neutral basis we continue to expect revenues to increase about 6% which is in line with our previously communicated guidance. In our medical segment, we expect revenues to increase 7% to 8% on a reported basis, and about 6% currency neutral. For our diagnostics segment, we expect revenues to increase 5% to 6%, or about 5% on a currency neutral basis, which is lower than our previous guidance of about 6%, mainly due to the global milder seasonal flu and the lower anticipated hospital admissions in the US. We expect biosciences revenue to increase about 4%, or 6% currency neutral, which is better than our previous guidance of about 5% due to strong sales in the quarter in Japan and the US.

Overall, we expect our operating margins for the fiscal year 2010 to remain broadly the same as previously communicated. Given our year-to-date results, we are reaffirming our previous guidance for EPS to increase 2% to 4%, or $5.05 to $5.15, or 8% to 10% on a currency neutral basis excluding the healthcare reform charge. We have also increased our expected share repurchases from $450 million to $550 million for the year. Thank you. And I'll now turn the call back over to Vince.

Thank you, David. Moving to slide 22, I would like to provide you with the latest news surrounding the pending EU healthcare workers' safety legislation. The publication by the EU commission of the directive is imminent and could be published within the next couple of months, around May or June of 2010. Once the directive is published, the member states have three years from the publication date in which to adopt the directive and bring into force the laws, regulations, and administrative provisions necessary to comply with this directive. You can see on slide 22 some of the key dates that reflect the progression of the legislation and the projected time line for adoption. With this adoption schedule we are not projecting any changes to our revenue guidance.

Before we open the call to questions I would just like to reiterate that we are very pleased with the Company's performance in a difficult environment that has been challenged by lower hospital admissions and an exceptionally mild flu season. The diversity of our product portfolio and the Company's global presence provides with us a resilient platform for growth. As you can see in our year-to-date results, our operating margin improvements will enable us to fund strategic investments and continue to drive return to shareholders. Thank you. We will now open the call to questions.

The floor is now open for questions. (Operator Instructions) At the request of BD, in order to allow for broad participation, they would appreciate if you would limit your questions to one plus a follow-up. (Operator Instructions) Thank you. Our first question is coming from the line of Rick Wise with Leerink Swann.

Good morning, Vince Good morning, David. Let me start with diagnostics. Is there a way to think about underlying growth of the business ex the mild flu season, or is there any way to normalize it and maybe think about how we're going to see growth progress in the second half?

Sure. Philippe can address that.

Sure. We looked at this, and what we say right now, is that if we exclude the impact of this flu pandemic, it would be 5% growth for the business for the year. The quantification of the seasonal flu is a little bit more of a difficult issue because the comparison is always a little bit difficult to do compared to previous years. So this one here we don't really guide on the seasonal flu but on pandemic flu it would be about 5%, year on year.

Yes. And, maybe, following up on the margin side, maybe it's more for you, David, can you talk a little bit more about -- remind us the acceleration in the second half and how do we think about either growth or as a percentage of sales, how that is likely to look for the year, and maybe relate that to EBIT margin. You ran ahead of our operating margin forecast for the year. It just went by fast. Can you remind us what we're we're thinking about for 2010 as whole year again? Thanks.

Yes, Rick, I'll just go through EPS. Now if you recall, for the first half of the year, currency neutral, our EPS grew about 14%. What we're saying for the full year, it's going to grow about 8% to 10%. So that means in the second half of the year, it's about 5% growth.

The flu impact on EPS is around 4%. So that means if you strip 4% out of the first half, it's about 10% EPS growth, currency neutral. If you add 4% back to the second half that would get to you around 9%. So that 10% and 9% in the second half gets you to the range that we're guiding of 8% to 10%.

Okay. Thank you very much.

Your next question comes from the line of John Wood with Jefferies.

Good morning. Vince, or maybe this is for Bill Rhodes, just looking at that flow business, is it possible to quantify the Japan impact from the Japan stimulus?

Bill, would you like to take that?

It is. In fact, we saw a very strong growth in the second quarter. It contributed significant amounts. It is a non -- it will not be sustained through the balance of the year. It provided international growth, offset some weakness in other parts of the world, but we would say that it was an exceptionally strong second quarter.

Jon, when we talk about the stimulus in Japan, that's an annual decision that the government makes. So I think what Bill is saying is that we don't expect that to continue in the second half of the year. What happens next year, we'll have to wait and see what the government does.

And it's not stimulus money as much as supplemental funding.

Right.

So that was released in the back part of the calendar year, which was made available in our second quarter.

All right, so if you take the international flow business was up 9% organically, just -- if you strip out Asia, was western Europe flat, down, up? Give us some sense on western Europe there.

Western Europe was slightly down primarily because of timing issues and instruments, government funding for instruments. We see those moving into the third and fourth quarter. Of course, Asia Pac and China continue to be strong and Japan was, of course, the strongest region.

Okay. Did you see anything from the US stimulus? I mean, it looks like the US business did pretty well. Any update on the NIH impact?

Yes, we wound up pretty much where we expected to be for the first half of our year in stimulus. We expected to be about $20 million in total for FY 10.

So you've already recognized the $20 million?

Oh, no. First half of the year, we basically wound up where we expected to be. We've been saying that, for the full year, between $15 million and $25 million. We expect it to be around $20 million.

Thank you.

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

Good morning.

Good morning.

Philippe, I wondered if you could talk a little bit about underlying trends in the diagnostic segment. It sounds like STD was strong. So I'm wondering if -- are we taking share in STD? When you talk about underlying hospital weakness, are you referring more to micro trends with MRSA, or are you referring more to blood collection.

So, STD first. I think you guys know, the STD market overall is actually slowing down a bit globally, so we are really pleased with the performance we have on both our CT/ GC and our Affirm products in that space where we've been doing and growing about 8% during the quarter. So, I think, we will still need to watch the CT/GC growth over time. There is less conversions happening right now. But we believe that our Viper is well-positioned in terms of lab efficiency, as you will see some data published very soon. So, that was the first question. Can you remind me of the second question you had?

Sure, the negative underlying trends. I'm just wondering, if it's non STD, was it blood collection systems or was it other segments of the diagnostic business?

Well it -- two things. It's certainly the infectious disease testing overall. We have some data in that regard from various sources, one from IMS, clearly showing that in the three months, December to February, all the infectious disease testing have been going down over 8%. So this is a big impact on testing and also lean to less admission in the hospitals. We saw a little bit of a rebound in March, but nothing that could compensate what we've seen between December and February. So, I think this is really about our point-of-care franchise. It's certainly goes also into our blood culture, because sepsis testing has happened during the quarter as well as ID/AST testing, and certainly we see also a link to the less admissions and lower testing in the labs that our clinical system of business also has been impacted by that.

Okay. Very helpful. Vince, just a clarification on EU. How do you see the traction in the European market progressing? Do you think this is going to be largely a step function in sort of the back half of 2013 into 2014, like it was sort of in the US, on government regulation, or do you think there's an opportunity to increase penetration, accelerate growth prior to the full implementation?

We think that implementation is going to take awhile. I'll let Gary comment further. And it probably will proceed at different rates in different countries, but I'll let Gary comment.

I'll just support what Vince just mentioned. Since in the US we were dealing -- ultimately with the national law. It had followed 26 states passing individual laws, and therefore we were seeing some progress there. But the national law became a uniform impact throughout the country, whereas in Europe, even though it's a uniform policy that's being put into place, it will be implemented individually by the countries and we're expecting some variance in how they implement it. So, on the whole, we're not expecting an immediate impact as Vince had indicated.

The countries have three years to move into full compliance. We think the impact will be toward the back end of that at different rates, plus there's been some progress already in the absence of a legislating environment in Europe that varies by country. So some countries have moved pretty far along already while others are at a very early stage. That also varies by product category. So, we would say on the whole, two to three years out we'll see more of the impact. It's going to be more of a progression than a quantum step function like we saw in the US.

Okay, just one quick one for David. I'll jump back in queue. There are some mix changes, David, on intersegment mix. Is it safe to assume that gross margin guidance for the year is the same?

Yes. Gross margins probably be to the top end of the range that we had originally communicated, so we'll see some improvement because of the product mix.

Okay, thank you very much.

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

Thanks for taking my question. I was just wondering if could you comment on the sales of GeneOhme and TriPath in the quarter? Break those out specifically?

Sure, we certainly can. And, Philippe, will take that.

Sure. So, on GeneOhm, the sales of GeneOhm, there's a little bit of -- normally this quarter as compared to previous quarter, the same quarter last year, which is in Q2 of fiscal 2009, if you recall, we at the time said that we were recording one-time payment of royalties. That, of course, did not really happen this quarter. So, if we exclude that growth of GeneOhm for the quarter is about 8% compared to the same quarter of last year. Now, if we look at TriPath, TriPath growth quarter on quarter is close to 9%, so we are also very pleased with the underlying market growth.

Year on year.

Yes. Year on year is about 9%.

Okay, and then, I guess, question for David. Just in terms of the dollar's move and your hedging strategy, I know this year you're locked into, I believe hedges at 136. Can you just maybe talk about what the impact may or may not have been on your of full year as you recut the numbers given the change in rates? And just the strategy. Again remind us for 2011 whether or not we could see some pressure in absence of any hedges.

Sure. So, when we did January guidance we said currency would have a favorable impact year over year of about $0.23. Offset by a hedge loss of about $0.16, which gave us a net gain of about $0.07. What we're guiding now is about $0.17 currency, so you see the impact of the strengthening dollar there. And therefore, the hedge losses is only about $0.12, which is about $0.05. So there's about $0.02 gain that we're losing, but we're absorbing that within our guidance. As far as going forward, as you said, we've hedged this full fiscal year, and on our cash flow hedges, we're continuing to do our regular balance sheet hedges going forward, but for fiscal year 2011, we are not intending to do any of the cash flow hedges.

Should we look at that just in terms of the change as being looking at it versus the 136 that you hedged on, relative to where the dollar may be at a particular point in time, or will we then be in the situation where we're not seeing these hedge losses or hedge gains so that there might be more pressure on 2011 earnings?

I think it's anybody's guess on where the dollar is going to go into next year. We certainly wouldn't forecast it where we are today. We do have the hedge loss this year of about $0.12 that we won't have next year, so that's one thing for you to consider. But with the volatility that we're seeing in the currencies, the forward contracts as well as the option contracts are just very expensive right now.

Thanks very much.

You're welcome.

Your next question comes from the line of Amit Bhalla with Citi.

Hi, good morning.

Good morning.

I wanted to just ask you, on diagnostics -- if you could tell us more about China and diagnostics. It was very strong in the first quarter. Could you also tell us how much that China makes up in the segment?

China is actually a fairly small part of the diagnostics business, so it wasn't one of the real big growth drivers for us. Philippe, do you have anything else?

No, I don't have the exact numbers. What I can say is it's a pretty rapidly growing region for us. It's strong double digits. Certainly close to 30% growth that we see in China right now. Like everybody else, we see a lot of new hospitals, new -- higher population [that we are getting] and so a lot of investment in that field. But that's about what I can say today about the growth of China. That's going to be an important country for us.

Just a follow-up. First on biosciences. Can you -- Discovery Labware had some distributors' destocking take place. Are you through that? Then, back in medical, could you give us a little more detail on medical surgical? It was a little bit weaker. And how did Nexiva perform?

So, just two things on biosciences. Bill will comment on the distributor performance in the lab work business, but I also want to point out that advanced bio processing, that growth was not distributor -- it wasn't affected by distributor destocking. This is end user customers -- these are pharmaceutical customers who are now starting to purchase again. Remember that we had a conversation over the last year and a half or so about one major customer who had a problem with their drug, so they had a lot of inventory. They've run that inventory down now, so that's the big increase in advanced bioprocessing. But, Bill, do you want to comment?

Yes. In terms of -- well, Vince is exactly right with regard to pharma customers who had run down inventories last year, who we now see are starting to buy back into their safety stock, so that's been an improvement for us, and that impacts our advanced bioprocessing business. In DL what you may be thinking about is in our first quarter there had been some lower orders from some of our distributors, but, in fact, we've seen that reverse in our second quarter and we've benefited from that.

We think that, that life science market, not just for us, but for other companies as well, was strong with the stimulus impacts out there.

And the question on medical?

Yes, Bill, will take that. Bill Kozy.

Sure, I think the question was on med surge. We've kind of returned more of a normalized growth rate. The US pandemic impact for the whole quarter for med surge was only $1 million as the Barta contract pretty much was eliminated in early January. Secondarily, we did see some distribution channel inventory being worked off in the US in the quarter, which had anticipated much heavier vaccination activity in Q2. Additionally, some revenue from Sharps Disposal product. The unused products from the pandemic period are still in the channel. So, anyhow, those couple of variables put us much more on a more normalized underlying growth rate of a little over 4% for med surge, and that's not unusual if you think back to where we were before pandemic.

Thanks.

Your next question comes from the line of Larry Keusch with Morgan Keegan.

Hi. Good morning. Two questions. First, David or Vince, you guys spoke repeatedly about R&D spending and being a little bit lower than you had anticipated. That's actually, I believe, the second quarter in a row that you guys have made those similar comments. So, I'm just trying to understand what's perhaps causing the delays, and how should we be thinking about that acceleration in the back half of the year?

You're right, it was lower than actually we had expected in the first half of the year and that was due to some -- both some hiring delays and some timing on some clinical trials which are occurring in the back half of the year. So this is not a change in strategy in terms of our intent to continue to accelerate and drive our programs. It's really just implementation issues in the businesses, and so in conversations with the businesses, they are -- each, all three of the businesses are indicating that they will be ramping up R&D in the second half of the year.

And, Vince, for that, how should we be thinking about that second half ramp?

You mean in total dollars?

Total dollars, or percent of sales, however you guys think about it.

Okay, sure. S,o I don't think we have changed our R&D guidance for the year, basically. We've --

About 5.5% of revenue.

Yes, 5.5%, thanks, David.

Okay, perfect. And then, just a couple of bigger picture questions. I'm just wondering if you guys might have any comments broadly on Europe for the business, and then specifically, as we're watching some of these issues crop up relative to Spain and Portugal and Greece, could that have any potential impact? Then here in the US, again, just some broad comments on how you're thinking about the price environment, underlying surgical procedures without flu, and sort of distributor inventory. Just trying to get some broad look.

Right . So, I'll take the US first and then I'll hand it over to Gary for some comments on Europe. But, we really haven't seen a significant change in the pricing environment in the United States over the last couple of quarters. And it's always price competitive, but maybe in molecular diagnostics a little bit more price competition in the STD segment, but other than that, I would say that it's been pretty constant. We're not seeing big changes in our distributors' policies in terms of inventory, either. At this point in time it didn't have any big impact in the quarter. So, we don't have any other expectation except for our normal expectation, that as we continue to improve our supply chain performance, which is quite good, they're always looking to tweak their inventories, and see if they can take them down, but we don't expect any major changes. With that I will turn it over

Sure. Let me give a general feel for how we're thinking about Europe, maybe in the context of how things are going globally. On the whole, we're getting very good growth out of the Asia Pacific region with particularly strong growth in China and India, which are two strong areas of strategic focus for us, both in the near term and in the long term. We're getting very strong growth out of Latin America. We're having a very positive year in Japan relative to past years for reasons already discussed on the call. And then, in comparison, western Europe, US, and Canada, in terms of our outlook, are more reflective of them both, A, being very mature markets, also the constraints on spending.

And then I think you were also getting at some of the issues that emerged in Greece and seem to be spreading a bit to some of the other countries. I'm going to, in a moment defer to David on how we're managing the credit risk there, because we've been on top of the situation in Greece for some time. And in general manage this very tightly, particularly as we look at the other countries, like Spain and Portugal, Ireland is another one that comes up. But on the whole, to answer your question, Europe growth is stable, but certainly well below the Company average, and it's being more than offset by very strong growth in the regions that we're investing more heavily in now, particularly Asia Pacific and Latin America.

Larry, it's a good question. It is something that's very much top of mind, managing our exposures in Greece, Italy, and Spain. We've put programs in place. We believe we're appropriately reserved, in all those countries, as we've looked at it. We've increased our reserves as we talked about, I believe in the first quarter, particularly around Greece. Our DSOs overall, though, have been pretty consistent, so we're not seeing any major changes in our DSOs.

But, Greece is significantly higher. And Greece, overall they owe the healthcare industry about $9 billion. Advamed and pharma have been working with the health authorities there, to try and resolve that. But that's something we are very much keeping a close eye on, and making sure that our exposures don't increase there. We are seeing in Italy and pockets within particular counties where the DSOs are increasing a bit. But. nowhere near what we had been seeing in Greece.

Okay, terrific. Thanks very much.

You're welcome.

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

Good morning, everybody. Thank you for taking the question. Just a follow up on -- on your earnings growth. If you look at the guidance for the year, it looks like you're saying you can grow earnings about -- on a constant currency basis about 50% faster than you can grow constant currency revenue. When I think about the long-term guidance that you've given, it's a little faster than that. How should we think about through the sustainable amount of earnings numbers that you can generate, assuming is you buy back stock at sort of the same rate that you've been the past several quarters?

David, would you like to take that?

Yes, I think, what we grow -- we talked about revenue growth in the first half, which was about 7.8%, and EPS on a currency neutral is around 14%. What we're saying in the second half of the year is around 4% revenue growth currency neutral and 5% on EPS. And if you adjust for the flu, remember that 2 percentage points, would you have, currency neutral revenue growth of about 6% versus 10% EPS, adjusting for flu. So, very consistent with what we saw in the first half of the year. And as we're saying ,for the full year, we think 6% growth is what we're shooting for, for this year. And if we look at our -- what we compensate ourselves over the next three years, what we're saying is we're shooting for that 7% growth over the next three years is the revenue growth rate that we're striving for. Also, just recall this year, we have those additional Everest expenses that we talked about, as well as the one time noncash adjustments related to the pension. So those -- we're absorbing those costs this year as well.

Okay. That's helpful. As you think about the gross margin this quarter, you said it was about 130 basis points improvement on a performance basis. Can you break down for us how much of that was mix and how much was FX?

Within the quarter, the bulk of it is mix being offset by pensions and start-up costs related to our reloco program in our medical business. And resins obviously was a bit of favorable impact as well. If you look on the first half of the year, it's pretty much split pretty evenly between resin impact and mix. And, as we talked about on the first quarter call, that resin impact will switch to negative in the second half of the year. So, what we've been saying is resins year over year will be about the same, with favorability in the first half of the year and unfavorable impacts in the second half of the year.

Okay. I know it's early, but are you willing to quantify the European safety implementation opportunity, if not for BD but for the overall market?

So, we're really not ready to talk about that. As we were saying, we think we have a little time to better understand that, as we've got a three-year implementation, probably, window here. With, as we were saying before, publication is probably in next couple of months, and then they have up to three years to implement. We do think that it's probably going to be different than in the US by business, and we're quantifying that because the infusion opportunity is probably a little less in Europe than it was in the United States. We have good opportunities, we think, in hypodermic and PAS, but we're still getting our arms around those.

Okay, and then lastly, the growth in TriPath has been pretty consistent in that 9% to 10% range, but GenOhm, even if you ex out the royalty, the 8% growth this quarter, is I would think below what you had thought the run rate would be when you made the acquisition. Could you talk to the dynamics? I know some of it is probably CapEx spending related, but just what's happening in the MRSA testing market, and through the market development or market share.

Yes, I'm going to give you a quick answer to that and then we're going to have to move on, in light of the line that we have for questions. But in the MRSA marketplace, we are below where we hoped to be. We think we're going through a bit of a transition. We're just launching the new version of our MRSA test, and customers are just starting to evaluate that. We've had a little initial success. Cdiff is going well. Certainly the market growth has been suppressed because of what's going on in the environment, but thanks for your question.

Thank you.

Your next question comes from the line of John Groberg with Mcquarie Capital.

Hi Jon.

Hi, good morning. Thanks for taking the questions. Congratulations on a good quarter, and obviously what seemed like a difficult environment, from what we've heard from many. But, can you maybe, just a couple, I guess, clarification questions here. One, you mentioned when international safety you mentioned back order products. Can you maybe just remind us what products those are and what was driving that?

So, we were talking -- those products were in the medical business, in the infusion therapy area. Specific to European catheters, basically.

Okay. And the expectation is that those -- I'm just trying to remember what was causing the orders to build up there. Is that on your side, on the customer side?

No, it was more some manufacturing issues that we're working our way through.

Okay. And then just a follow-up, last question here, trying to put this in context again, with what you're -- we talk about Europe. In the past, when we've talked to you about Europe, you thought that could be an opportunity for you, maybe something that helps you think about your goal to accelerate revenues the next couple of years. I guess as you think about this, how it's currently playing out, maybe it's three years before these are implemented into law, and I don't know exactly when, then those individual countries are actually then going to implement these. But, does this change your view overall of your targets or goals or your ability to accelerate revenues over the next couple years, or not, I guess is the simple question.

Well, I don't think it really changes our confidence in our ability to grow revenues. It gives us a lot of confidence that Europe is actually moving ahead on this. As Gary said, we don't think this is a step change situation. We may see some ramp-up over the next couple of years, depending on the country, and then a bigger ramp-up after that. So, I think we feel very good about the European safety opportunity. It's probably not that big an opportunity in the next 12 months.

So let me -- this is Gary. I'll also jump in. It's clearly an opportunity. It's just we're trying to accurately share our outlook of how that opportunity is going to unfold. And once this is published, which, as Vince indicated is eminent, it'll be three years until implementation compliance is, in effect, mandatory in the EU system.

Now, whether every country complies that in a uniform manner and enforces, is something we'll only know with time. We're anticipating strong enforcement in many of the countries and maybe lighter in some of the others. And, there's no doubt this will help the growth in western Europe, without a doubt, because the markets will be driven more towards safety engineered devices. If it's implemented effectively, it will also even more importantly, create the environment -- the safety environment in western Europe that we've been advocating for, for years, as well as elsewhere in the world. It's just not likely to be a step function.

The growth impact will start before three years, but we don't anticipate a big impact this year. And it will ramp. And, what that will be worth and how rapidly it'll ramp, we need a little more time to start to get some actual experience as the countries begin to enact these laws. But, it's unfortunately not going to be until three years that they'll mandatory have to be in compliance. We thought originally it would be two. Turned out to be three. But, that won't change the long-term picture.

All right, I guess just to clarify, the question is if you do that, do you -- you've given three-year views, in terms of what you'd be able to grow revenues this year, next year, the year after. As you do that diligently does it change your view on your ability to do what you said?

No, it doesn't change our ability to do it.

Okay, great. Thanks.

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

Hi guys, it's Kim here for Mike. The first is just a follow-up on Kristen's question from earlier just regarding the cash flow hedge strategy, and how it could impact your fiscal 2011 results. We just want to make sure that we're thinking about it right. So, as we look at fiscal 2010, you've said you're going to have roughly a $0.12 net negative impact from FX. And, if we take today's rates and apply them to fiscal 2011 it looks like the FX head wind for the med tech group and probably broadly, you guys should be somewhere in the 100 basis-point range for your fiscal 2011. If I look at that, it looks like the drop through is something in the neighborhood of $0.15 if there's no hedges in place. I just want to make sure if I'm thinking about that right.

Let me just clarify that, Kim. It's a good question. What we're guiding is that the currency impact this year is about 17%. This is just the currency impact. The hedge loss is about $0.12. So, the net effect is $0.05. As you start to think about fiscal year 2011, that hedge loss of $0.12 won't repeat. So, where you got to in the end is the right answer.

Now, what's going to happen next year with currency is anybody's guess. We're pretty much looking at forward rates this year as where we are today, in that 135 range. And if it finished off the year at 135, we'd probably be about 140, so it's -- it really comes down to what you assume the exchange rate's going to be for next year. And also, remember that 60% of our business, just about, is outside the United States, so it's just not the Euro that would be impacted by it. It's the other basket of currencies as well. But that's the way for you to think about it. It's really the $0.12 hedge loss is what won't repeat next year.

Okay, that's helpful. Is it right to think about the drop -- there's just a couple of other companies in our space that don't, essentially, hedge on a cash flow basis. The drop-through tends to be somewhere in the 25% to 30% -- maybe 20% to 30% range to net income. Is that going to be a fair approximation for you guys?

I'd be happy to follow up with you -- just a call just to go through some details because I know we have a bunch of other folks on the line still waiting for questions. So Kim, Sherry and I will follow up with you to go through the hedging.

Okay, great. Thanks, guys.

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

Thanks for taking the question. Vince, you talked a little about US and Japanese markets in biosciences, and I know Europe has continued to be slow, but you had some optimism at some point that you may see some indications that demand is picking up. So, just curious if we can get an update on that first.

Certainly. But, in western Europe so far we haven't seen the rebound in government budgets year-to-date, and so it's going to take longer in the year for us to understand where the governments are going. Obviously we're seeing some pressure in southern Europe. We talked about Italy being difficult, Spain, Portugal, those areas. So, we see those trends continuing, probably not turning around immediately, but we'll get a much better update on that in the second half of the year. Bill, any other comments?

No, it's what we commented on before. Essentially what we've seen or anticipated sales for the first and second quarters moving into the third and fourth, but it's dependent on, in most cases, government grant monies being made available.

So, we expect that in the short run, we're going to continue to see good growth out in Asia Pacific, driving it -- the stimulus funding in the US in the second half of the year. So, those will be more of the growth drivers than Europe for the second half of the year.

Okay. And then on diabetes care, you've obviously had a couple very good quarters here. How should we think about the sustainability of that growth trend in the high single 10% growth range?

I'll let Bill comment on it, but I think the underlying fundamentals here, in terms of the need for these products on a worldwide basis, are quite strong and likely to continue. But Bill, do you want to comment more specifically?

No, I think, Vince, you've got it. The high end drivers, pen needles, there is a one-year favorability we're getting from the partnership agreement we got that will only run through the end of the fiscal year. Think about that contributing 1%, maybe a little more than 1%, maybe 2% to the year. That will go away next year. Hopefully offset by some of the new product launches that we've been describing to you.

I guess last follow-up, when will we get some visibility on what those products are? Is that something we could see at ADA or is it going to be later in terms of getting a first look at those?

It will be -- sure, the nanoproduct was just released. It's got its approval in the last four or five business days. You'll see that promptly. We will be back to you on the next product to follow probably in our late 1Q of 2011 or at the latest, early 2Q.

Great, thanks.

Your next question comes from the line of Brian Weinstein with William Blair.

Hi, good morning. Thanks for taking the question. My question has to deal with resins. Oil does continue to move a bit higher and you guys are still saying that think that you're going to be flat year over year on the resins. Where would oil to have go before it makes impact on 2010 gross margins and earnings?

Great. As we said, we have the favorability in the first half of the year. If you remember, you've got to be careful using oil as a proxy. Last year in the first quarter, our fiscal quarter, was around $118 and about $79 in the second quarter. And, what we're predicting for the second half of the year, sitting here today, it's about where the spot rates are now, in that mid $70 range for the second half of the year. And that will be unfavorable to last year, which was in the $40 to $50 a barrel was the price range. So that's what I was saying. For the full year, we have the favorability in the first half of this year, and a little bit of unfavorable in the second half.

Okay, thanks. Real quickly, on repurchases, you guys, I think, said $550 million for the full year. Did I hear you right that you've already done $450 million in the first two quarters, so, any reason why that $550 million is not a conservative number?

We -- you're absolutely right, we completed the $450 million in the first half of the year. That's a conversation that we continue to have with our board, but right now it's $550 million is what we're planning for this year.

Okay, thank you.

Your next question comes from the line of Bill Bonello with RBC.

Hi, just a question on the pre analytical system. We're under the impression that you're at the very beginning of pretty broad-based adoption of the push-button needles. Just curious if we should think of that as a business where we could see some accelerating growth going forward.

Well, the push-button needle program continues to be a strong growth driver. What we've said, we're about, in the United States, about mid-30s converted to push button, and we had good performance with push button in the quarter. Now, if you look at the overall performance of the business, the business suffered from a lack of testing that occurred in the United States. We saw testing decreases in the hospital market and the clinical lab market ,driven by lower hospital admissions. So, that took us off the trend line, but Gary can comment more a little bit more specifically on the push button.

I would say, the push button -- we're not at the very beginning, because the product has been out for a number of years, now. We've been getting steady, strong growth, including overall double-digit growth in the quarter. It's at an earlier stage in other parts of the world, and as we look at, for example, the anticipated ramp-up of conversion in Europe, push button will be one of the key products, along with other blood collection safety engineered devices, and then the devices in medical as well. So, it continues to be a very important part of our portfolio, and I would say we're several years into progress, but as with many of these devices, the transition rates actually go over years, whether they're safety engineered or other new device categories. It's very different from some other industries that have very rapid adoption.

Okay, that's very helpful. And then, just, I know it's still far off in the future, but just anything to comment on HandyLabs, BD Max, or is Europe continuing to develop that platform?

It would be great for Philippe to give you a quick update on our progress so far, because we're making some good progress.

Absolutely. I think, again, you said it. We are really hitting our milestones with the BD max, so actually kind of two phases, and then we're going to stop selling the two-color, which was the existing one in Europe, and we are shipping it next month. Actually, we already have customers there taking the product and our Group B Strep, and we are hitting all the milestones in R&D, developing the platform in six colors. At this stage we confirm that the launch will occur at the end of 2011, beginning of 2012 as we said previously.

So, we're very excited about the potential for this instrument.

Okay, thank you.

You're welcome.

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

Good morning. Couple of quick ones here. Vince or Philippe, can you give us an update on the CapEx or call it the instrument environment of the diagnostics business.

Sure, Philippe, do you want to take that?

Yes, well, I think it's, again, we have capital expenditure and reagent rental, so the market is kind of split between the two, so it's not as critical as we may see in other businesses. So, overall I think we see a little bit of an easing -- the market has been easing a little bit on capital expenditure right now, and we see our customers being ready to take on new platforms. So we've got some actually pretty good placements in the second quarter, unfortunately offset by less admissions and lab testing that brings it down. But, in terms of the instruments themselves, the trend is pretty good.

Very good. Then just a quick follow-up. Thanks for the color on the pricing trends in the molecular side of the business. Can you just give us the same update for microbiology?

Well, it's not very different, but I would say these are competitive markets, where most of what we do is through bidding processes and so on. So, I would say there is a little bit of tension on the pricing, more in the -- I would say the product, like prepared media, things like that. Pricing is pretty stable, so nothing really to report that would change the picture for the business really at this stage.

Operator, next question.

Is that all the questions?

Ladies and gentlemen, please remember to limit your questions to one plus a follow-up. Your next question comes from the line of Peter Lawson with Thomas Weisel.

Just going back to the cytology question, the volumes in that business, what were they like, and was the growth of that TriPath based on volume or pricing?

The growth in TriPath is not based on pricing. It's based on instrument placing and reagant volumes. So, that business, it's not a price play.

And the Medicare Part D charge, I may have missed this, but what was the product that was related to, and if there were any further impacts from healthcare reform coming other than the device tax.

It wasn't product related. In the healthcare reform bill, there's an impact on tax adoptability of retiree prescription drug coverage, and we had a deferred tax asset that we had written off, because going forward, it won't be tax deductible, so you wouldn't get that benefit. That's the only charge that we'll have associated with that looking forward. The other major factor from a medical tax perspective is the -- on medical devices, there's a 2.3% tax that will go into effect in 2013. About, if you take a look at our US sales, in 2009, it was about $3.2 billion. About 20% of our product, or 20% of the value of our sales would be excluded from that tax, and that's more of the consumer type products. So, therefore that tax, if you did it on a 2009 basis, would be about $60 million.

Thank you.

Your next question comes from the line of Evan Lodes with Barclays Capital.

Good morning. Thanks for taking the question. First, I was wondering, would you be willing to quantify the impact of volume versus price for the medical and diagnostic businesses?

I don't think we can go there.

Okay, and then secondly, on the healthcare reform question, how much of that tax do you think is going to be able to be passed on, and of the remaining part, how much will be offset by volume when that kicks in a year later?

It's really too early to say what the specific dynamics on that are going to be. The entire industry is going to have to pay that tax. From a volume standpoint, we think there will be some increase, really hard to quantify at this point in time because people are being treated. We think that the preventive care is going to be something that will be new in the system, so there will be some positive impact, but very difficult to say at this point.

Okay, thank you.

And Evan, just for your knowledge, when you think about price/volume for BD generally, the bulk of our growth is all volume. Price plays very little impact on our year-over-year growth.

Thank you. Your final question comes from the line of Jeff Frelick with ThinkEquity.

Real quick Philippe. Just a follow up on HandyLab Jaguar. When do you expect to complete and submit the clinical studies there, and then which assays will you be submitting?

We will start with the HAI assay, which are MRSA C-Diff. So, again, the launch date that we have, and again we confirm and we're very optimistic about that, is by the end of 2011, beginning of 2012. So it's -- one year.

About a year from now. And, of course, the assays are MRSA.

MRSA and C-Diff are the two main assays we're going to have, and so then we will continue with additional menu.

Lastly, just the next sweep of business uptake. How would you characterize that? Capturing new accounts or upgrading the existing basic customers?

Bill will take that.

It's a mix of business right now, and we can't get you the exact numbers on that. Product penetration continues to be pretty much at rates we expected the growth for the quarter was, was well north of 35%.

Great, thank you.

You're welcome. So, thank all of you for your very thoughtful questions on the call. We're very pleased once again with our first half performance, and as we look towards the second half of the year, as we said, we expect the underlying performance to be, once we neutralize for the flu, to be very similar in the second part of the year, and we look forward to speaking with you again next quarter. Thanks very much.

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