Becton Dickinson and Co (BDX) 2012 Q1 法說會逐字稿

Hello and welcome to BD's first fiscal quarter 2012 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Tuesday, February 14, 2012 on the Investors page of the BD.com website or by phone at 855-859-2056 for domestic calls and area code 404-537-3406 for international calls, using conference ID 42951440.

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. Monique Dolecki. Ms. Dolecki, you may begin your conference.

Thank you, Jackie. Good morning, everyone and thank you for joining us to review our first fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at 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 first fiscal quarter press release and in the MD&A sections of our recent SEC filings.

We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and its related financial schedules and in the slides. A copy of the release, including the financial schedules, is posted on the BD.com website.

Leading the call this morning is Vince Forlenza, Chief Executive Officer and President. Also joining us are David Elkins, Executive Vice President and Chief Financial Officer; BD Executive Vice Presidents, Gary Cohen and Bill Kozy; and Tom Polen, President of Diagnostic Systems. It is now my pleasure to turn the call over to Vince.

Thank you, Monique and good morning. As we stated in our press release, we are off to a solid start this year and we are pleased with our performance in the first fiscal quarter. Revenue growth was 2.4% currency-neutral, which was slightly better than our expectations. Fully diluted EPS of $1.21 declined by 9.6% on a currency-neutral basis. This reflects a $0.04 favorable benefit relating to various tax settlements in multiple jurisdictions, which we expected later in the year. Excluding the tax benefit, earnings per share would have been $1.17, which is in line with the expectations we outlined on our conference call in November.

We saw softer results in the US due to an uncertain research spending environment and difficult pricing comparisons versus the prior year. David will provide more details around this later in his remarks. We continue to see strong growth in emerging markets. Our initiatives around new product platforms and extensions and operational excellence programs continue to be on track with our expectations.

We are also reaffirming our full fiscal year revenue and EPS guidance on a currency-neutral basis. On a reported basis, we are lowering our revenue and EPS guidance to reflect the impact of the strengthening US dollar. We expect reported revenue and EPS growth to be about flat. Now I would like to turn things over to David for a more detailed discussion of our first-quarter financial performance.

Thank you, Vince and good morning, everyone. I would like to begin by discussing key financial highlights for the quarter. As Vince just stated, the quarter was in line with our financial projections with revenue growth coming in a little higher than our guided range. We saw good performance in our underlying business and with solid growth coming from Accuri and Carmel acquisitions.

We experienced higher expenses in the quarter due to increased investments in our business. EPS of $1.21 reflects lower gross margin and higher SG&A costs. This includes the effects of pricing erosion, higher raw material costs, the rollout of investments in emerging markets, higher legal costs and some acquisition-related expenses from Accuri and Carmel. This is in line with our expectations we outlined on our year-end call in November.

As Vince also mentioned, we are on track to deliver our revenue and EPS guidance on a currency-neutral basis. We are lowering our full year guidance on a reported basis due to the strengthening of the US dollar. Our revised guidance assumes a full year average euro exchange rate of $1.30.

Additionally, during the first quarter, we completed about $400 million of our $1.5 billion share repurchase plan. Our guidance for the program remains unchanged at $1.5 billion.

Now let's move on to slide 7 where we will review our revenue growth by segment, which I will speak to on a currency-neutral basis. As I just mentioned, revenue growth was 2.4% for the total Company. Pricing erosion was about 130 basis points, which is consistent with the guidance we provided on our year-end conference call. BD Medical first-quarter revenues increased 2.6%. The growth in this segment was primarily driven by Diabetes Care with continued strong sales of pen needles and solid international growth in our Medical Surgical Systems unit.

Pharmaceutical Systems growth was 0.6% in the quarter. This resulted from strong 2011 US sales due to biotech sampling, a difficult prior-year comparison due to launch of low molecular weight heparin and adjustments in customer inventory levels. When excluding the one-time impact from these items, revenue growth in our Pharmaceutical Systems units would have been about 4% in the quarter, which is in line with estimated global market growth.

BD Diagnostics' first-quarter revenues increased 3.3%. Growth in this segment was driven by Preanalytical Systems, safety-engineered products and overall Diagnostic Systems growth with strength in Women's Health and Cancer and our microbiology products.

BD Biosciences revenue growth was about flat versus prior year driven by solid international growth mostly offset by declines in the US. I will provide more details around this on the next slide.

Moving to slide 8, I will walk you through our geographic revenues for the first quarter. Overall, BD's reported US revenues were flat versus prior year. Growth in our Medical segment was 2.3%. This was driven by strong growth in Pharmaceutical Systems and Diabetes Care and partially offset by difficult pricing comparisons in our Medical Surgical Systems unit. Growth in our Diagnostic segment was about 1% due to flat testing volumes impacting our Preanalytical Systems unit.

As I just noted, Biosciences' sales for the first quarter declined 10%, or $12 million on a currency-neutral basis in the US. About one-third of this decline is related to lower sales in our Discovery Labware unit driven by product rationalization. Another third of the decline is related to cell analysis research reagent sales. These were unfavorably impacted by uncertainty around NIH research funding levels in the first quarter, with the NIH budget not being approved until late in the quarter. The balance of the decline is related to lower demand for high-end instruments in cell analysis due to a contraction in pharmaceutical and biotech research spending.

International revenues grew 4.4% currency-neutral with growth coming from all three segments. The Medical segment grew 2.8% with Diagnostics and Biosciences both growing at about 6%. Additionally, we saw strong growth in emerging markets across all three segments with total emerging markets growth coming in at 12%.

Moving to slide 9, currency-neutral sales increased 7.8% and grew to $488 million in the quarter. Revenues in the US increased by 2.4%. International sales were up 16.8% on a currency-neutral basis with both Western Europe and emerging markets showing double-digit growth. Medical Safety sales grew 12% driven by IV catheter products and our newly acquired PhaSeal closed system drug safety device. Diagnostic Safety sales increased about 4% driven by a range of safety-engineered products.

Slide 10 recaps the first-quarter income statement and highlights our foreign currency-neutral results. As discussed earlier, first-quarter revenue growth increased by 2.4%. Our gross margin declined by 210 basis points, in line with the guidance we provided on our year-end earnings call. This primarily reflects the negative effects of price erosion, higher raw material costs, software amortization in our Biosciences business and amortization of intangibles related to our acquisitions of Accuri and Carmel Pharma. Unfavorable currency translation contributed about 10 points. These unfavorable effects were partially offset by lower manufacturing costs from continuous improvement and our ReLoCo program.

We expect pricing, raw material costs and acquisition-related expenses to be less of a headwind in the second half of the fiscal year. For the total year, we are reaffirming our guidance and our expected gross margin to be between 51.3% and 51.5%.

Moving down the income statement, SSG&A increased about 9% primarily due to EVEREST SAP implementation costs, higher expenses related to our Accuri and Carmel Pharma acquisitions and increased investments in emerging markets.

Our legal fees also increased due to trial preparation costs associated with the RTI litigation, which has subsequently been postponed until November. R&D increased 1.4%, which is in line with our expectations as the prior-year period had significant R&D costs.

Our operating income decreased 12.8% due to lower gross margin and the higher SSG&A costs. We expect to see improvement in the second half of the year as we move past the tough comparisons, higher raw material costs and legal expense timing and the acquisition-related expenses become less dilutive. For the total year, we are reaffirming our guidance and our expected operating income to be between 21.5% and 21.7%. This resulted in an earnings per share of $1.21. When excluding the tax benefit of $0.04, earnings per share was $1.17, which is at the high end of our guidance provided in November.

Turning to slide 11, as I indicated earlier, we expect our total revenue growth to be between 2% to 4% on a currency-neutral basis. We are raising the lower end of our Medical segment guidance and expect revenues to grow between 2% and 3%. We expect Diagnostics revenues to grow about 2% to 4%. For our Biosciences, segment we are lowering our revenue guidance to 2% to 4% from our previously communicated guidance of 4% to 6%. This is due to the weakness in the US market as I previously described.

Turning to slide 12, as we have discussed, we are reaffirming our total Company revenue growth of about 2% to 4% currency-neutral based upon the current market environment. On a reported basis, we are lowering revenue guidance we provided in November to 1% to 3% to be about flat as a result of the strengthening US dollar. We now expect EPS to be between $5.60 and $5.70 for the total year, which reflects recent spot rates.

While we don't normally provide guidance for the quarter, I would like to outline our expectations for the second quarter based on our first fiscal quarter results and what we are expecting for the balance of the year. From a revenue perspective, we are expecting a step-up in growth rates in certain units. In our Medical Surgical Systems business, we expect growth rates to improve in the second half of the year as we move past pricing comparisons.

In Pharmaceutical Systems, we anticipate continued growth due to timing of orders associated with seasonal customer demand. And in Diabetes Care, we expect continued growth fueled primarily by strong sales of pen needles. In our Diagnostic Systems unit, we are expecting a step-up from our BD MAX launches. Due to these factors, we are expecting total Company revenue growth to be between 3% and 4% on a currency-neutral basis.

From an EPS perspective, we anticipate earnings per share to be between $1.36 and $1.40 or about flat versus the prior period. Second-quarter EPS growth versus the prior-year period will continue to be unfavorably impacted by tough comparisons to 2011. These tough comparisons include price erosion and increased investments in SSG&A, which began in the second half of fiscal year 2011 and will continue through the second quarter of fiscal year 2012. It also reflects an increase in SSG&A from Carmel Pharma and increased legal costs in the fiscal year. We expect a step-up in EPS growth during the second half of the year once we move past fiscal comparisons for 2011. We will continue to update you and tighten our guidance range as we make more progress throughout the year.

Now I would like to turn the call back over to Vince who will provide a more detailed update on our performance in emerging markets and progress against the key initiatives.

Thank you, David. Moving on to slide 14, I would like to highlight our emerging market results. We continue to see strong growth in emerging markets, which accounted for approximately 22% of our total revenues in the first quarter. Emerging market revenues grew about 12% in total over the prior year.

We continue to see double-digit growth in a number of key markets with China growing at about 27%. We are very pleased with Safety revenue growth in emerging markets, which was up about 27% over the prior year. We will continue to accelerate our investment in geographic expansion, market development and market-appropriate product solutions to sustain long-term growth in these markets.

Now moving on to slide 15. On our year-end earnings call, we discussed a number of key product initiatives and milestones. I would like to provide an update on these key initiatives. This fiscal year, we have many exciting opportunities in our pipeline. In our Medical segment, we launched the BD Nexiva Diffusics closed IV catheter system with a diffusion tip. This product is an innovation from the already-proven and effective BD Nexiva closed IV catheter system.

The second half of the fiscal year, we also plan to launch the world's first 6 millimeter insulin syringe and our BD PENTAPOINT pen needle, which is more comfortable and anticipated to be preferred by patients.

In our Diagnostics segment, in the first quarter, we launched our BD Veritor platform and CLIA-waived Flu A+B test in the United States. This is the first flu test to be CLIA-waived in over four years and represents a significant advancement in the sensitivity of point-of-care-based flu testing. In the first month, we made about 70 new Veritor placements. Early customer feedback is positive. While we are making placements, the incidence of flu in the US has been below normal levels so far this season.

Earlier this month, in Japan, we received clearance for the Veritor Flu A+B assay from the Ministry of Health and we are preparing for launch in the next couple of weeks.

In Molecular Diagnostics, we continue to be pleased with the early progress of the new six color BD MAX open system. This is positioned in the mid-volume molecular assay market with more than 15 assays active in our pipeline. Also, customers can develop their own assays on their systems using its open channel architecture.

In the first quarter, we also launched the BD MAX MRSA assay in the EU, which was one quarter ahead of schedule. We made our first several conversions with this new assay and we are receiving positive feedback from customers. The US launch of MRSA on BD MAX remains on track for later in 2012.

We have a series of additional MAX assays launches scheduled, including our Group B strep assay in the second quarter of this year. Our BD MAX C. difficile assay remains on track for launch in the EU in the third quarter followed by a US launch in the beginning of fiscal year 2012.

Our BD Viper molecular platform remains positioned as delivering best-in-class lab efficiency and performance for high-volume screening assays. In the fourth quarter of fiscal year 2012, we will begin launching the Trichomonas assay on this platform. Our launch of the bench-top BD Viper LT and chlamydia/gonorrhea assay remains on track for fiscal year 2013 globally, followed immediately by the launch of our HPV genotyping assay on Viper LT ex-US.

Complementing this launch, our Women's Health front-end automation system remains on track for launch in fiscal year 2013 and will automate the decapping and transfer of liquid-based cytology samples to the Viper and Viper LT molecular systems, as well as prepare a cell palate for testing on our SurePath cytology system. Our BD SurePath Plus molecular Pap test completed the initial phase of our clinical trial with very promising results and we are continuing the US trial to its endpoint. Our launch remains on track.

In our Bioscience segment, we launched our new cell culture medium, Mosaic, in the first quarter of fiscal year 2012. In fiscal year 2013, we plan to launch two new analyzers for CD4 testing. One is meant for mid and smaller volume laboratories in both emerging markets and the developing world, while the other is a more portable point-of-care instrument targeted towards rural clinics in the developing world. Of course, we will continue to provide you with updates on our products and programs as we continue to make progress throughout the year.

On slide 16, before we open the call to questions, I would like to reiterate the key messages from our discussion today. First, we are pleased with our solid start to the fiscal year given the challenging macroeconomic climate. We continue to see strong growth in our emerging markets and international sales of safety-engineered products. Second, our key product launches and operational excellence programs remain on track and are producing results. Third, based on our expectations for the balance of the year, we are reaffirming our previously communicated guidance on a currency-neutral basis. On a reported basis, we are lowering guidance due to the strengthening of the US dollar.

Lastly, we remain focused on delivering on our strategy and driving efficiency throughout BD. Despite the challenging environment in which we operate, we believe we are positioned to continue our track record of delivering value to customers and shareholders. Thank you and we will now open the call to questions.

(Operator Instructions). Larry Keusch, Morgan, Keegan.

Hi, good morning, everyone. Could you -- obviously, Safety, Vince, I think you said was strong in Western Europe and obviously, in the emerging markets. Could you just remind us sort of where we stand with the whole program in Europe for the adoption of Safety? How much is left on that timeline and kind of where do you think we are at this point relative to the adoption?

Yes, Larry, you are referring to the fact that a couple years ago they set a three-year deadline and where are we in terms of moving towards that whole implementation. So I will ask Gary to talk about that.

Sure thing, Vince. This is Gary. So you are testing my memory a bit, but I believe it is around June 2013 that the official compliance date occurs, although we are getting solid conversion growth already in Western Europe. We are seeing strong growth overall in a number of countries, particularly the northern countries in Western Europe.

I should also mention we are getting double-digit growth in Safety now in every market except the US and Canada, which have been more largely converted with particularly strong growth in Latin America and Asia Pacific, but also EMEA and even Japan. So we are just seeing strength across the board in the markets that still have a ways to go to full transition. And we can anticipate, particularly in Europe as we move towards that compliance date, that that growth should continue.

Perfect. Thank you.

Brian Weinstein, William Blair.

I'm hoping that maybe you can quantify the impact of the lighter flu season. Not just on Diagnostics, but also what it might have meant in the Medical segment as well. Thanks.

I don't think we really have a quantification of the flu. The flu was not really material to our results. We really haven't seen any flu year-over-year.

Okay and then a quick follow-up. You talked a little bit about what the euro is expected to be in your model. I think you said $1.30. Can you just go through what the exposure is to the euro and then the other currencies? Can you refresh us on that and then what the assumptions would be on some of those other currencies as well? Thanks.

Sure. David can talk to that.

Sure. The euro -- we have a little over $2 billion in euro-related sales and we haven't broken out the other currencies other than to say that the other exposures are the Canadian dollar, the Australian dollar, Brazilian real and the Japanese yen.

Jon Groberg, Macquarie.

Good morning. Thanks for taking the questions. Maybe just focusing on the Biosciences segment a little bit. Can you maybe just talk about -- other players in that space have seen varying degrees of weakness or saw it throughout 2011. It sounds like it hit you pretty hard in the US here in this last quarter. Can you maybe just talk about how that played out and then also why you are comfortable with that business kind of overall improving for the remainder of the year given that there could be even more uncertainty with potential cuts with sequestration? So maybe just kind of talk about your outlook for that business. Thanks.

Sure, John. As you mentioned, it was really the US market where we saw the difficulties and Bill will break that out a little bit more for you. Europe and the rest of the world did well in that business. And you're right also, Jon, from just talking to folks around the industry, I think the research market, depending on the segment you are in, you more or less saw what we were talking about that, but there was some variability there. But in particular, we saw the uncertainty affecting our customer base in the academic and the government marketplaces and some impact from biotech. And Bill will break those out for you.

Good morning, this is Bill. Just two factors as Vince just referenced. Number one, we saw a notable slowdown in the pharma and biotech purchasing. And this was driven mostly by significant restructuring that we saw across several of the major pharmaceutical companies as they are in the process of assessing their R&D, as well as moving significant volumes of R&D offshore. And generally speaking, it touched a number of our big pharma customers. So that was factor one.

Factor two relates to the academic and government spending and there was some uncertainty created by many of the discussions, by the way, that you have followed related to the NIH budget. As you know, that budget never got finalized until December 23, 2011. So we pretty much went through a whole quarter where a lot of our grant-driven procurement activities were really slowed down and delayed.

So to get back to the other part of your question, Jon, the reason we have got a little bit of optimism in the remainder of the year, now that the budget is set and even though it is only at a 1% increase, there is some stability in some of the understanding of available funds and we think that will help us the remainder of the year in terms of some bounceback.

The single biggest impact in the quarter was, because of this uncertainty, was on high-end instruments, things like Aria, some of our high-end sorters and analyzers. And again, we know that there is a little bit of interest in those instruments and we are expecting that to be a factor also in a little bit of the US recovery in quarters two, three and four.

Okay.

Thanks, Jon. Next question.

Mike Weinstein, JPMorgan.

Good morning. This is Kim in for Mike. So I guess two questions. The first is on the updated guidance and wanting to come back to the change in outlook relative to FX. So it looks high to us, first of all. It looks like you have raised that FX headwind for the year by about 100 to 300 basis points relative to early November. And if we are looking at it in our currency models, just that delta and maybe this is just the euro, but we are looking at really across your currencies, it looks like it should be closer to a 100 basis point delta. So just maybe, David, if you could help us understand how we could get ourselves to that, call it, 300 basis points of incremental pressure from FX.

Yes, I think it really comes down to -- the major mover is the euro, but, obviously, other currencies have moved as well. But for the remainder of the year, obviously, where we were at the first quarter, it was around $1.36. For the remainder of the year, we are anticipating that to be in the high $1.20s, which gets you to about a rate of $1.30 for the full year. And that is versus the rate of last year, which averaged around $1.40. So that is the biggest driver. But as you know, the dollar has moved pretty consistently across most currencies.

Okay, so you are using for the rest of the year a euro into the $1.20s.

That's right. High $1.20s.

Okay. And I guess the follow-up is I wanted to ask maybe Vince to talk about on the investment spending side, particularly as we look at the EVEREST program, the SAP upgrade. Can you just talk through the cadence of that spend in fiscal '12 and '13 and relative to when you're going live in Europe, when you're going live in the US and kind of how you would compare the overall level of spend for EVEREST in fiscal '12 and fiscal '13?

Sure. So our first go-live is going to be this year, Biosciences and then next year, we will have a go-live for North America, then another wave following that. But from a spending perspective, the spending on the project continues -- it increased '11 to '12. It will continue to increase in '13 and then the project spending will go down. And as we go live, the amortization of the system kicks in, which means the spending starts to flatten out after you get past '13. That is the dynamic on the system. Right now, the project is on track. It is, obviously, a large effort. Our Bioscience group is doing a great job on it, but that is the dynamic that we have.

Okay, that is super helpful. And so can you quantify for us just ballpark what that spending is, sort of what the impact on the SG&A line is in terms of kind of the spending on EVEREST this year and next?

Well, for this year, David, year-over-year, I think the increase is about 25? 20?

Yes.

Around 20 to 25, in that range. And we haven't quantified it for next year at this point.

Okay, thank you.

David Lewis, Morgan Stanley.

Good morning. Just maybe one question, one very quick follow-up. Just first off, Vince and maybe even for Gary as well, you've talked a lot about Europe austerity pressures. I just sort of noticed in the quarter China remains very strong for the Company. In the last several weeks, we have seen sort of some macro weakening across China Mainland. Is there any sort of economic sensitivity to the business in China we should be thinking about throughout the remainder of the year or from what you have seen, the business remains very well insulated in China?

So we don't think so. We have been talking to our China team about it and Gary can comment on what we are hearing directly from them.

This is Gary. What our team is seeing is that while there may be some downward pressure on overall GDP growth, we are not seeing that downward pressure on healthcare investments. What they are tracking is the level of commitment the Chinese government has, the central government, to rolling out the investments in healthcare, which clearly seem to be remaining on track. And also what is funding that are the tax revenues and if you dig a little deeper, you see the tax revenues that the central government is getting are actually up. They are probably higher than what had been expected. And that is what is behind the funding for healthcare. So we are not seeing that slow down. We have been asking the same questions and watching the same indicators and what we are seeing so far is that the healthcare investments are remaining on track.

Okay, and then, David, just a real quick follow-up. On Discovery Labware, you talked about product rationalization. Could you just sort of give us some more granularity on that? Thank you.

Yes, we continue to look at products within our portfolio that may be growing slower than the Company average, but as well from a profitability perspective -- from a profitability perspective that we are looking to rationalize. So there are several products that, in order to drive efficiencies in the supply chain, we rationalize SKUs. So as we start to do away with some of those products, that impacts the sales growth the first year you do it. But further out years, you start to see improvements as a result of that.

Okay, thanks a lot. Next question.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. I was wondering if you could just quantify first the impact of acquisitions both from a top-line perspective, as well as from an earnings perspective because I think you had mentioned last year that those might be a little more dilutive early in the year?

Sure. David can take that.

From a margin perspective, what we have said for the full year on our gross margins, the acquisitions would dilute margins by about 20 basis points. In the quarter, obviously, it is a little heavier when comparing versus prior year when it was around 30 basis points.

As we talked about on the acquisitions, from a revenue perspective, on the Accuri, there's about 1 to 2 basis points of growth we anticipate getting for the full year this year. And Carmel Pharma, I will get that number for you on what we think the full year impact is on the Medical business.

During the quarter, we spent $20 million in sales for the two of them.

Okay. On an organic level, do you have the organic growth rate on the top line for this quarter?

As Vince just said, it is about $20 million worth of sales in the quarter. That is in relation to both acquisitions.

Okay.

Bill has got a follow-on comment here. Bill?

Just to get to the question on Accuri -- or excuse me -- Carmel will contribute this year incremental. Remember, we acquired that in August of the fourth quarter of last year, so just fiscal year '12 incremental impact, about $45 million of revenue.

For the year.

For the year.

Okay, thank you for your question.

David Roman, Goldman Sachs.

Good morning, everyone. I wanted just to come back to Biosciences and maybe for David's comments on the rationalization of certain parts of the Labware business. How much of the reduction in guidance is due to weak underlying market trends versus the rationalization of those product categories?

So I will let Bill Kozy actually walk you through that, but -- Bill, do you want to talk to that?

Sure. This is Bill. Actually our international sales in the Labware business were relatively solid and the most significant impact of the rationalization did take place in the United States. As David mentioned, these are products that weren't contributing a lot of long-term growth or profitability to the unit. And our guidance is not in any way affected by the DL activity. We already have started that in 4Q of last year. It will carry through our 3Q of this year and then it will be behind us.

(multiple speakers) about a third of the reduction in the US if I remember correctly, right?

The total US.

Of the total (multiple speakers), so it was a fraction of that.

If you took the 12, it is a $3 million to $4 million impact on the quarter.

Got it. Okay. And then a follow-up, I don't know if you have had a chance to review the IRS filing on the medtech tax, but it looks as though some of your businesses actually might be excluded from that, such as the diabetes. Can you maybe provide some clarity as to which of your franchises you think fall in the exclusion category from the medical device tax that begins in calendar '13?

David, do you --?

Yes, it's some of the diabetes businesses that are excluded, our Biosciences and a good portion of our Diagnostics business would be excluded from the tax. As we talked about before, it is a little more than $2 billion in revenue that would be exposed to that tax and initial indications is, at 2.4%, it is around a $55 million impact to our business next year. We are going through -- as everyone else, just received this on Friday. We are going through and evaluating the details and going SKU by SKU so we can get a better figure of that and we will let you know as soon as we finish that work.

Thank you.

Amit Bhalla, Citi.

Hi, good morning. I wanted to see if you can go into a little more detail about the strength in Women's Healthcare, Cancer and the level that you believe that is sustainable there.

Sure. Tom Polen will take that.

Hi, Amit, this is Tom. So overall, we saw -- in Women's Health and Cancer, we grew 6.9% for the quarter and if you look at actually our last few quarters, we have been growing at that rate. So we see a continued -- that has been the trend for the last few quarters and we see that trend going forward. As well certainly for the balance of this year sustainable and we don't see an end to it.

And Tom, can you go into a little more detail about the growth rates between TriPath, genome and STD?

Yes, will do. Let me just finish a note there on Women's Health and Cancer specifically. So we still see the US being relatively flat with Pap volumes, relatively flat due to both low physician visits and the extended interval. Ex-US is really what is driving that growth and we are seeing double-digit growth in nearly every single region outside of the US.

To your other question regarding molecular STDs and then the separate question on genome, so in molecular STDs, we saw solid growth at 4.5% for the quarter. Genome was a tough quarter in the fact that we grew just over 1% in the quarter for genome and the mix of that is we are continuing strong double-digit growth in our C. difficile business there, north of 25% growth, but have seen that offset by performance in MRSA and that is due to new competition driving down price in the market for MRSA, as well as the rollout of some lost accounts that I mentioned last year. We are also still seeing customers hold for MAX on MRSA. Of course, we just launched MRSA about a month ago in Europe. Sales are ramping up there and we have MRSA in the US planned for a launch in Q3.

Okay, great. And I just have a quick follow-up for David. David, you talk about hospital acuity being an issue over the last quarter or so. Can you just give us an update on what your latest thoughts are on the impact from hospital acuity?

We really haven't seen any further deterioration, pretty steady in the quarter on where it has been. So I think it is positive. We are seeing things stabilize out there.

Okay, thank you.

Sure.

Jon Wood, Jefferies.

Thanks a lot. Good morning. Hey, so Vince, just going back to your guidance for 3% to 4% top line in the second quarter, it looks like that is the toughest comp of the year. First, am I accurate in that statement?

And second, if that is true, it just seems like you have got a bit more core momentum in your business than that 2% to 4% for the year would suggest. So would you give us some kind of clarity around piecing?

I would come back to what David just said, which is we did see a stabilization. If we talk clinical marketplace now, and put aside the research market for Biosciences, and say clinical seemed to stabilize. Of course, that was a concern going into the year, and I think you see that reflected in our second-quarter guidance. You also see a bounceback in the Pharm Systems business, which also helps us as well.

So it is those issues that are causing the pattern that we are talking about. And as Bill mentioned, we will see what happens on the life science side with now that the NIH budget is set because we just saw people, not just on NIH-funded programs, but other academic programs just kind of in a hesitation mode. So those are the things that are impacting. David, anything else on that?

I think the only other thing I would add, Vince, is on -- the way to think about it is there would have to be a deterioration from where we are today to be at the bottom end of our revenue guidance and at the top end, we would see continued improvement.

Okay, so, Vince, it is safe to say that, based on your first-quarter numbers and your second-quarter guidance, that you feel marginally better about the world at this juncture than you did last update, is that correct?

Well, I would say we feel marginally better about the clinical marketplace. I would say we feel consistent with Biosciences outside of the US and of course, we had some issue in the US. Those are the pieces.

Okay, thanks.

And very good about emerging markets, quite frankly.

Understood. Thank you.

Bill Quirk, Piper Jaffray.

Thanks, good morning, everybody. First off, I guess it looks like, excluding the emerging markets, the balance of business was pretty flat in the quarter. If we think about I guess longer-term resource utilization, Vince, what type of, call it, three-year growth are you funding in the developed world and how dependent are you on this between new product development versus say macro improvements like NIH stabilization, for example?

So I'm trying to make sure I understood your question first off. So you were talking about the research business and the longer-term trends in research funding and how we see that and how things might be impacted.

Actually, Vince, I am speaking kind of more broadly to the developed market in terms of -- the Company has, obviously, made efforts to increase emerging markets resources and focus a lot of the growth there. If I turn the business to the developed side, what are you thinking from a three-year standpoint and how do we get there?

Sure. So we do see that growth will come back in the developed world and it is going to be driven by new product development. So just [say] for a second and we say stabilization in volumes and in the marketplace because of improving economic conditions. Number one, in the US, it's a wildcard, which I cannot predict, which is going to be the impact of healthcare reform. One would think, in the back half of '13, '14 timeframe, you would start to see some impact, some positive impact as the economy gets better and people are covered by healthcare reform. We haven't quantified that, but we are watching that and that could be a positive.

Then, from the new product side, and I can't split it into developed versus developing, but many of the new products that we are talking about are going to have their major impact in the developed world and we said that was about -- for the products we went through on our Analyst Day, if you go back and look at that presentation, that is about 250 basis points of growth. And a lot of that is going to be driven in the developed world. And then, of course, expansion -- those products will hit the developing world as well, but probably a little later term. But the molecular assays will be first, so we have got both of that. Gary, do you want to make a comment on emerging?

The only other thing I would add about the developed world in fact is even now in Western Europe, the picture, when you look at the total content area of Western Europe, is not as clear as if you start to break it to its pieces. We have eight country organizations in Western Europe and five of those eight are growing and some of them are growing quite nicely. And you have one France where we ship all Pharmaceutical Systems in Europe out of France and because of the impact of Pharmaceutical Systems, that's down. And then Italy and Spain, as you might expect, because economic conditions are slightly down. But we are getting very good growth otherwise in Western Europe. So even now, driven by Safety and other factors, the developed world picture there is a little better than what it looked like.

Got it. Thanks a lot, guys.

Okay, sure.

Bill Bonello, RBC Capital Markets.

Yes, I was hoping to follow up a little bit on the pricing comments. Both -- if you can just give us a little bit more detail, sort of where -- I don't mean geographically where, but product where you saw some of the pressure and then you specifically made a comment about seeing increased competition in MRSA that was driving down price and maybe you could just tell us what that is.

Sure. We said 130 basis points in the quarter, which was in line with what our expectation was. We knew we would have more pricing in the first half of the year than the second half of the year. Going back to last year, remember, we talked about that about half of what we were seeing coming into this year was driven by a one-off situation in our MedSurg business. We are seeing the majority of the pricing issues in device businesses, not so much on Diagnostics. I will come back to MRSA in a second. And not so much -- a little bit in Biosciences in the research reagents, which has gone on for a number of years, but not really the instrument side, not so much the clinical piece of it, but the research reagent. On MRSA, it is probably -- I will let Tom comment -- but I think it is more Roche as a new entrant coming into the marketplace.

So specifically it was. As Vince just mentioned, last year, about midyear, Roche entered into the marketplace. It had been primarily BD and Cepheid. Roche entered in at a substantial price discount, north of a 30% price discount and their approach. So we are seeing MRSA pricing down year-on-year overall about 5%. And that is where you see that impact. We don't see pricing as an issue across the rest of the Diagnostic business; we see it very focused within that MRSA space.

Okay. And is that a -- sorry to have to ask this, but is that a US market entry?

That was a US market entry. Happened midpoint last year.

Thanks.

Miroslava Minkova, Leerink Swann.

Hi, good morning, everyone. I was wondering if you could help us understand the impact of the Biosciences business declining in the US this quarter on your gross margins. And with that, perhaps if you could help us also understand when do we see your gross margins perhaps recovering from here?

All right, well, I can't -- I'm sorry. This is Vince. I can't break out the impact of the decline in the US margin on how that translates into gross margin, but I wouldn't expect it would be a very big impact. In terms of where our gross margins go, we are sticking with the gross margin guidance that we gave you in the beginning of the year. We haven't changed that.

Now remember what is going to happen here is that the pricing comparisons are going to change over the course of the year, number one. So I will give you a couple of factors why it is going to improve. Number two, the raw material cost is a bigger negative in the first half of the year as well. Three, amortization and deal costs are kind of front-end-loaded a little bit as well. So you have all of those three things impacting the first half of the year disproportionately. So that is why we are lower right now and it will improve over the course of the year.

Okay, great. That is very helpful. And just a bit of a more broader picture question. Also, on the margin side, your operating margins sort of -- and I understand there is a lot of investment and factors going into that, but they are kind of at the very low in the last at least five years that we have seen them. I guess I am kind of wondering if you would be willing to provide some of your thoughts on whether you see your operating margins recovering to a level that we have seen them in the past and what could take you there? And how long it might take.

So I am not going to forecast, but I will tell you this that we still remain committed to 50 basis points a year in terms of operating leverage. Some years we get it, some years we don't. Some years we get more or less. We are working very hard on it. We haven't really talked through ReLoCo 1, ReLoCo 2 as part of the call today. Those programs are on track, number one.

Number two, on the G&A side, the shared service centers are still in investment mode. In a year or so, they start to turn positive. We talked through the EVEREST impact and EVEREST goes up next year then starts to flatten out. And so we haven't -- and then the investments in emerging markets, we are comfortable that they are going to pay off. We are seeing good progress on those pieces.

Then lastly, we have the new products that I spent a lot of time on the prepared remarks going through and those new products have good margins. So there is a mix impact as well. And lastly, one other factor, which is this growth in Safety that we are talking about with both Europe doing well and starting to do better and emerging markets doing well. Those are a whole series of factors that factor into our analysis on the margin going forward.

Okay, great. Thank you very much.

(Operator Instructions). Peter Lawson, Mizuho Securities.

David, just a clarification. The $0.15 delta versus the prior-year guidance, it sounds like it is all FX and not higher assumed costs coming from Carmel or any other puts and takes.

That is correct. It is all currency.

And then R&D, is there any change in the outlook on this year being kind of a high year for investment into R&D? It just seemed you had lower R&D costs in the quarter. I just wondered if that was a lever that you pulled as you saw rising costs.

Peter, no. If you go back and look at last year, we had an unusual pattern in the first quarter where R&D spiked in the first quarter because of some timing on some projects. So no, it is just an anomaly in the spending pattern.

Great, thank you so much.

Jonathan Palmer, CLSA.

Good morning, thanks for taking my questions. Vince, you mentioned emerging markets and the China growth. I was wondering if you could give us some color on the markets maybe outside of China.

Sure. Gary can do that for you because quite frankly we are having some good growth in those other markets as well.

This is Gary. We had double-digit growth in all the emerging markets in the first quarter. We had a particularly strong quarter in EMEA -- Eastern Europe, Middle East, Africa and that was some impact of year-to-year comparison. Also particularly a lighter fourth quarter last year, but it was very strong growth in the first quarter. And that tends to be a little lumpy based on the timing of some major orders. We actually had one aspect in the first quarter around immunization sales to UNICEF that was lower than expected. But despite that, we had very strong high teens double-digit growth in EMEA.

We had double-digit growth again in Latin America. We had strength throughout all the country hub organizations in Latin America, particularly in the southern part -- Brazil, Argentina, Chile, very strong. And Asia-Pacific, we had double-digit growth, which we are anticipating with our investments to sustain through the year. So we just had a really solid quarter in emerging markets right across the board.

And then one quick follow-up, if I could. On ReLoCo, any improvement in terms of the targets or timing?

The program is on track, really hasn't changed.

Thank you very much.

Sure.

Doug Schenkel, Cowen and Company.

Hi, good morning and thanks for taking the question, which is a clarifying one on Biosciences. In listening to your prepared remarks and answers to some of the other questions on the call thus far, it sounds like there were three negative dynamics that impacted Biosciences in fiscal Q1 and how you were thinking about the business moving forward through the year.

The first was the uncertainty related to the outlook for funding in the US. The second was some product rationalization on your part and the third was I guess a change in big pharma spending patterns?

Yes.

So if that is the case, it seems like the uncertainty related to research funding was there when you provided guidance for the year three months ago. I imagine you were planning for some of the product rationalizations that you mentioned on this call. So was the major change really that big pharma dynamic and I guess did you see improvements in the US academic end market at the end of the quarter that some others have spoken about? Thank you.

So big pharma was certainly a new change we were not seeing in the fourth quarter, number one. Number two, on the academic and NIH side, there was a bigger impact than we anticipated. We were seeing some falloff in the fourth quarter. We couldn't quite tell whether that was a trend or not. So it was bigger than we thought when we gave you the guidance.

On the rationalization, the rationalization certainly impacted the results. It's kind of noise in the background. I don't want to make a big deal about that. And then there was just some timing on some things in the marketplace. So those are the major impacts. Now go forward, we will have to see how the US market shakes out from a research standpoint.

Okay. That is helpful. I guess just one very quick follow-up. Some of the other companies that you compete with said things got a little bit better at the end of the quarter as there was a little bit more certainty in that end market. Did you guys see that as well? Thank you again.

Not yet.

Okay. Thank you.

Nandita Koshal, Barclays Capital.

Good morning. Vince, if you could comment a little bit broader and longer term on the pricing environment and how we should think about pricing for BD going forward. Is it basically weak and down one percentage on an ongoing basis or is there something that changes in terms of the environment?

Sure. So let's focus on this year and as we said, slightly over 100 basis points. And a little less than half of that is a rollout of a one particular situation where we were -- it was a competitive situation that a three-year contract -- a bunch of three-year contracts were all up at the same time and you had a competitor who had expanded their capacity and was looking to fill volume in a plant. So that is half of what we saw going into this year and was built into our expectation.

In terms of the pricing environment going forward, we're not seeing any changes based on what we saw this year in the way people buy, the tender structures and obviously, we will keep our eye on that going forward.

Okay. And I guess ex-US more than in the US, are you seeing any government-related sort of programmatic price cuts either in Europe or -- the pharma companies, for instance, are certainly seeing those. Are you seeing that on your side of things? And then, even in China, we are hearing some fairly bearish commentary around pricing as that broader healthcare coverage is built out. So is that consistent with what you are seeing or is it different?

Sure. So first off, just to back up a little bit, between '11 and '12, we are really not seeing much of a change in pricing. We are certainly not seeing what you're talking about in Europe for the pharma companies and Gary can give you a little more color on what we are seeing. But I don't think we are seeing any big change in the environment. Gary?

This is Gary. I just want to mention that we, based on the nature of our businesses, have been working in a highly constrained pricing environment for many years historically. I would say, in Western Europe, that may be intensifying somewhat, but it is not a fundamental change. So we are seeing governments being a little bit more price-oriented in their tenders, but I would consider that more of an evolutionary rather than revolutionary change in pricing perspective and more of a continuation of what we are accustomed to.

Likewise, I would say, in the emerging markets, we have to know how to serve those markets very efficiently from a price and cost perspective and align what we do to the access requirements of being able to buy our products at a very reasonable cost and that is something we are also accustomed to. So in that respect, these are not changes in the environment let's say like we saw in the US, particularly around the product that Vince mentioned.

But most of the pricing pressure we see, the majority will be in US and Europe, some small amount in emerging markets.

Okay, thank you, Vince and Gary.

Sara Michelmore, Brean Murray.

Yes, hey, thanks for taking my question. Most of my questions have been answered, but as we think about this pricing dynamic, Vince, and the issue that happened in the US, I am just wondering if you can talk about the competitive environment for the infusion systems and the injection products because, typically, we do think of those as being areas where you have very dominant marketshares and I am just wondering if you can comment if there has been any changes in the competitive environment.

And then my follow-up would just be back on Europe. I think I did what an earlier questioner did, which was back out the emerging markets numbers out of the international numbers. It does look like Europe was flat. You talked about growth in Diabetes Care and some of the other issues. Is that just a Pharma Systems issue or is there something else there that is in a state of decline? Thanks.

Well, it is pretty much Pharma Systems and Gary, do you want to comment any further on Europe?

Yes, just what I had mentioned before. Of the eight country areas in Europe, five are growing quite nicely, four of them are growing above mid-single digits and it is really the Pharma Systems impact in France and then a small decline in Italy and Spain given the economic conditions there. But I think low single digits is a good assumption for Europe growth.

Okay.

It was four in the quarter when you pulled all of those.

Okay, that's helpful.

And Bill will talk to you about the environment. Now we would disagree. We don't have dominant positions. We have done a good job in the US market, but I will turn it over to Bill.

This is Bill. Just on the competitive environment, first of all, on the infusion side, remember that we have got an array of Safety products, some of which are very new, which are launched in both the US and in Europe. If you start in Europe, we did get accelerated capacity in place last year on the Venflon Pro Safety. That is the Safety product for sideport infusion. We are getting very, very solid growth there. We are also getting double-digit growth on our Nexiva platform worldwide and we just launched just a few months ago, so it is too soon to talk much about the Insyte Autoguard with blood control, but we have got a significant number of evaluations going on with that product. So we are comfortable that we are well-positioned on the infusion side to compete, particularly in the developed markets. And our Safety product also in China continues to grow at very high rates, well into double digits.

So we think we are just fine in terms of competing in that category. We are also just starting to roll out our ReKindle product portfolio for the hypodermic side. That really doesn't complete its full array availability until we get into late second quarter or third quarter. That is more of a second-half factor. But anyhow, all those changes that I know we have talked to you about for a couple of years now starting to roll out. So we are probably a little more confident in our ability to compete around the world than we might have been even a year and a half, two years ago.

Okay, that is really helpful commentary. Thank you.

Jeff Frelick, Canaccord.

Yes, a question for David with respect to MedSurg. The challenges over the last four or five quarters with the US MedSurg business, and then you had talked about maybe bumping up the low end of the guidance for this year for the overall MedSurg business. Is that due to a change in the US business or mainly some outperformance or improvement in O-US?

Just to clarify, the improvement in MedSurg is globally, number one. Number two, the difficulty, the recent difficulty that we had with MedSurg is the pricing that we talked about. And Vince mentioned earlier one particular product in particular had that pricing pressure, which is impacting it in the last half of 2011 and the first half of 2012. So we will see improvement in the US as that tough comparison goes away.

And then, overall, we are seeing very good growth and increased confidence internationally on MedSurg business and the fact -- those two factors combined is why we are bringing up the bottom end of the range on the Medical segment overall.

Okay, thanks, David, for the clarification.

Robert Goldman, CL King.

Okay, thank you and good morning. Going back to the guidance and on the currency, it does look like since you had the analyst meeting that the dollar did appreciate relative to the euro by about 3%. And lowering earnings per share and sales guidance as you have seems quite logical unless you have, which I would imagine you do, some natural hedges and if you have any synthetic hedges. And I wonder if you would speak to that. And also is it sort of your intent every time the dollar does move up or down a couple 3% relative to the euro to be changing your annual guidance on a quarterly basis?

First, we don't have hedges anymore in relation to cash flows. Second, in relation to how we provide guidance, we have been pretty consistent over the years on how we look at guidance in relation to movements in currency. As we talked about earlier, euro is our base exposure to the currencies. As I said earlier, it is a little over $2 billion. So we provide guidance, changes in those major currencies. We update it through reported numbers. So we do do that on a quarterly basis.

And the natural hedge question?

Well, we have a natural hedge and what we said is about 25% of any impact on the top line flows through to the bottom line. So that gives you an idea of the natural hedge that we have.

Which we take into account when we make this change in guidance.

Yes, and recall, we don't make any statements about where we think currencies are going to be. When we provide guidance, it is usually right around where the spot rates are. In November, the spot rate on the euro was around $1.38 and as we said earlier, we are at the high $1.20s when we pulled together our guidance of where we think it is going to be for the remainder of the year.

Okay, thank you.

All right. You are welcome. So listen, I would like to thank all of you for your questions. I would like to say that we are pleased with the start to the fiscal year. As I mentioned, we saw some strong growth in emerging markets, good Safety growth. The product launches are on track and so are our operational excellence programs. We look forward to talking to you during the balance of the year. Thank you very, very much.

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