Becton Dickinson and Co (BDX) 2012 Q2 法說會逐字稿

Hello and welcome to BD's second fiscal quarter 2012 earnings call. At the request of BD today's call is being recorded. It will be available for replay through Tuesday, May 8, 2012, on the Investors page of the BD.com website or by phone at 800-585-8367 for domestic calls and area code 404-537-3406 for international calls, using conference ID 68128968.

I would like to inform all parties that your lines have been placed in listen-only mode until the question-and answer-segment. Beginning today's call is Ms. Monique Dolecki. Ms. Dolecki, you may begin.

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, we are presenting a set of slides to accompany our remarks on the 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 cause such differences appear in our second fiscal quarter press release and in the MD&A section 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, everyone. As we stated in our press release, we are very pleased with our second-quarter results. We believe we continue to demonstrate BD's commitment to drive revenue growth and our focus on high-growth areas with our recent acquisition of KIESTRA Lab Automation. This acquisition offers total lab automation solutions to hospitals and laboratories worldwide and nicely complements our microbiology portfolio.

We expect this acquisition to add about 1 percentage point of growth through the Diagnostic Systems unit in the near future. The integration is going as planned, and the KIESTRA platform was very well received at the European Conference of Clinical Microbiology and Infectious Diseases back in March.

Recently, we announced our plans to sell the majority of our Discovery Labware unit, excluding Advanced Bioprocessing. This sale will enable BD Biosciences to focus resources and management attention on both our recent Biosciences acquisition and our recently launched new instrumentation products, which are important to our accelerated growth efforts. David will provide more details around this later in the call.

In the second quarter, we continued to face challenges in our Biosciences business in the US due to an uncertain research spending environment and lack of overall demand for instrument and research reagents. David will provide more details around this later in his financial discussion.

Despite these headwinds, we posted solid overall revenue growth, driven by our Medical and Diagnostics segments. We believe our results this quarter highlight the diversity of our portfolio, with softness in one segment being offset by strength in our other two segments. We saw organic growth from new product launches in addition to growth coming from recent acquisitions.

On a positive note, we continue to see strong growth in international safety sales and emerging markets. Also, our initiatives around new products are in line with our expectations, as we continue to invest for future growth.

We recently went live with our new ERP system in North America, with BD Biosciences as the first implementation under EVEREST. This is our global ERP project that we have been discussing for the past few years. Our largest go-live will be next year with the balance of North America, which includes our manufacturing plants.

Our results year-to-date give us confidence to increase the bottom end of our currency-neutral revenue growth guidance to 3% to 4%. We expect currency-neutral EPS growth to be 4% to 5% as we continue to invest in new products and absorb costs from our recent acquisitions.

On slide 5, we have outlined our second-quarter revenue and EPS results, which I will speak to on a currency-neutral basis. Revenues were solid, increasing by 4.6%. Fully diluted EPS came in at $1.38, growing at 2.9% over the prior year, as expected.

For the six-month year-to-date results, revenue growth was 3.5%. EPS of $2.59 declined by 3.3% due to a difficult comparison over the prior-year period, as we outlined on our first-quarter conference call.

Now I would like to turn things over to David for a more detailed discussion of our second-quarter financial performance.

Thank you, Vince, and good morning, everyone. I would like to begin by discussing the key financial highlights for the second quarter. As Vince just stated, we are very pleased with the results, which were in line with our financial projections.

We saw solid growth in our Medical and Diagnostics segments. As expected, we experienced higher SSG&A expenses in the quarter due to increased investments in emerging markets, new product launches, and acquisition-related expenses, and EVEREST costs, as Vince just mentioned.

We are raising the bottom end of our total-year revenue growth guidance to 3% to 4%. We expect EPS growth of 4% to 5% as we increase investments in new products and absorb costs from our recent acquisitions. I'll provide additional guidance details later on the call.

On a reported basis, we are raising our full-year revenue and EPS guidance to reflect the anticipated effects of favorable currency translation. Our revised guidance assumes a full-year average year exchange rate of $1.32.

Additionally, during the second quarter, we completed about $600 million in share repurchases. Year to date, we have completed approximately $1 billion of our estimated $1.5 billion share repurchase program.

Now let's move on to slide 8, where we'll review our revenue growth by segment, which I will speak to on a currency-neutral basis. As I just mentioned, revenue growth was 4.6% for the total Company. Pricing erosion was about 110 basis points, which was also in line with our expectations.

BD Medical second-quarter revenues increased 5.3%. The growth in this segment was driven by positive results across all three business units, which benefited from the recent product launches including our newly acquired PhaSeal product.

Diabetes Care growth was driven by continued strong sales of pen needles and fueled by BD Nano.

We had a solid second quarter in our Medical Surgical Systems unit, with strong performance coming from our BD PhaSeal product and safety engineered products.

Pharmaceutical Systems growth was 7%, aided by some favorable timing of orders. For the first half of the fiscal year, the Medical segment grew 4%.

BD Diagnostics second-quarter revenues increased 5% despite a very mild flu season. Growth in this segment was driven by Preanalytical Systems, which benefited from a favorable prior-year comparison in the quarter, and continued strength in our Women's Health and Cancer platforms. For the first half, BD Diagnostics grew 4.1%.

BD Biosciences revenue came in at about 1.7%, with strong international growth being offset by declines in the US. I will provide more details around this on the next slide. For the first half of the fiscal year, our Biosciences segment grew 1%.

Moving to slide 9, I'll walk you through our geographic revenues for the second quarter. Overall, BD's US revenues were up 2.2% versus prior year. Growth in our Medical segment was 5%. This was given by strong growth in our Pharmaceutical Systems and Diabetes Care, and partially offset by difficult pricing comparisons in our Medical Surgical Systems unit, which we discussed last quarter.

Growth in our Diagnostics segment was 2.6%, driven by solid sales in our Preanalytical Systems unit. Diagnostic Systems growth of 1% was attributed to the lack of a flu season and softness in our HAI platform due to a tough competitive environment. In response to this situation, our expectation of an FDA approval of BD MAX MRSA assay in the fourth quarter remains on track.

Biosciences sales for the second fiscal quarter declined by 8% or $9.5 million. Segment growth continues to be negatively affected by weakness in the US research market as well as a tougher competitive environment in our research reagent sales. There continues to be lower demand for high-end instruments in Cell Analysis due to continued funding concerns in the academic markets.

International revenues grew 6.3% currency-neutral, with growth coming from all three segments. Medical segment grew 5.4%, driven by strong sales of safety products and continued growth in emerging markets.

The Diagnostics segment grew 7.6%, mainly due to strong emerging market growth. Biosciences grew at 7%, driven by strong performance in Japan due to favorable comparison to prior year, which was impacted by the earthquake and tsunami. We also saw good performance in the emerging markets.

For the first half, reported US revenues grew 1%, with Medical increasing 3.6%, Diagnostics growing at 1.7%, and Biosciences declining about 9%. Total international revenue growth was solid at 5% currency-neutral in the first half, with Medical growing 4.2%, and Diagnostics and Biosciences both growing at 6.7%.

Moving to global Safety on slide 10, currency-neutral sales increased 11.5% and grew to $488 million in the quarter. Excluding the PhaSeal product, growth in the quarter would have been about 8%.

Revenues in the US increased 7.3%. International sales were up 17.7% on a currency-neutral basis, with Western Europe and emerging markets both growing double digits in the quarter.

Medical Safety sales grew 15.6%, driven by infusion therapy products and our PhaSeal device. Diagnostic Safety sales increased 7.9%, driven by a range of safety engineered products.

For the first half, Safety growth was 9.6% on a currency-neutral basis. This was due to a combination of international growth of 17.2% and a growth rate of 4.8% in the US.

On slide 11, we will review our revenue growth in the second quarter. On a reported growth rate was 3.6%. Performance contributed 4.6% to growth, offset by about 1% of unfavorable currency.

Moving to slide 12, looking at our gross margin, we experienced 90 basis points of decline, which again was in line with our expectations. This primarily reflects the negative effects of higher raw material costs, our acquisition-related expenses, and software amortization in our Biosciences business unit.

Unfavorable currency translation contributed about 30 basis points of the decline. The negative effects of pricing erosion were offset by efficiency gains, including our ReLoCo program.

Now, slide 13 recaps the second-quarter income statement and highlights our foreign currency neutral results. As discussed earlier, second-quarter revenue increased 4.6%.

Our gross margin declined 90 basis points due to the aforementioned items. This is in line with our expectations and the guidance we provided on our first-quarter earnings call.

Moving down the income statement, SSG&A increased almost 13%. This was primarily due to increased investments in emerging markets, acquisition-related expenses. EVEREST and SAP implementation costs were higher than expected, as we prepared for our recent go-live on the system. We also experienced higher legal expenses and higher medical benefit claims in the quarter.

R&D was about flat, which was in line with our expectations, as the prior year had accelerated R&D costs.

Our operating income decreased by 5% due to lower gross margin and the higher SSG&A cost. This resulted in earnings per share of $1.38, which is a 2.9% increase over the prior-year period.

Now turning to slide 14, as indicated earlier we expect our total-year revenue growth to be between 3% to 4% on a currency-neutral basis. Based on our results year-to-date we are raising our guidance for the Medical and Diagnostics segments to reflect revenue growth between 4% and 5%. For our Biosciences segment we are lowering our revenue guidance to about flat from our previously communicated guidance of 2% to 4%. This is due to continued weakness in the US research market and a tougher competitive market.

Turning to the next slide I would like to outline our expectations as we move down the P&L. I will start with gross profit. We expect gross profit margin to be between 51.3% and 51.5%. This is in line with our previously disclosed guidance.

SSG&A will be higher for the year, as we estimate it to be between 24.4% and 24.6%. This is primarily due to accelerated investments in new product launches, acquisition-related expenses, legal fees, and higher medical benefit claims. We also have an increase in our deferred compensation plan expense, which was offset in our interest income line.

R&D indeed remains in line with our previously communicated range of 6.0% to 6.1% of revenues.

For the total year we expect our operating income margin to be between 20.9% and 21.1%. This reflects the aforementioned expenses I just reviewed in the SSG&A and product mix.

We also expect an improvement in our tax rate due to positive geographic mix. Our expected range is now 25.5% to 25.7%.

We expect revenues to be in the upper end of our previous guidance range. We now expect EPS to be in line, in the range of $5.68 and $5.73 for the total year, or about 4% to 5% growth, currency-neutral. Total-year EPS guidance reflects the aforementioned items that resulted in lower operating margin guidance.

I would like to take a moment to discuss the impact of our pending sale of the majority of our Discovery Labware, excluding our Advanced Bioprocessing platform. The transaction is expected to be completed by the end of the calendar-year 2012, subject to the satisfaction of customary closing conditions, including regulatory approvals. Therefore, the financial results associated with this unit should be treated as continuing operations.

We will update you on this on our next call. At that time, BD will determine if the asset group will be reported as discontinued operations for all comparable periods.

The transaction will be a cash sale for approximately $730 million. For fiscal-year 2013 we expect the transaction to have a dilutive impact of about $0.23 to $0.27 to earnings per share on a full-year basis.

Also, as a reminder, in fiscal-year 2013 we have to account for the new medical device excise tax, which is estimated to be about $55 million to the SSG&A line, which is tax-deductible. This tax excludes research sales in our Biosciences segment, our Pharmaceutical prefilled devices sold business-to-business, and our Diabetes Care products sold at retail.

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 our progress against key initiatives.

Thank you, David. Moving on to slide 17, I would like to highlight our emerging market results. We continue to see strong growth in emerging markets, which accounted for approximately 21.4% of our total revenues in the second quarter. Emerging market revenues grew about 10% in total over the prior year, bringing the first half to 10.8%.

We continued to see double-digit growth in a number of key markets, with China growing at about 17% in the quarter and 21.6% year to date. We are very pleased with Safety revenue growth in emerging markets, which was up about 26% over the prior year.

Progress continues on policy-related activities, with regulations already in place in Brazil and Taiwan, and similar provisions in progress in Russia and Korea. We are encouraged by the positive actions of these governments in making protection of health workers a priority, as has been accomplished in the US, European Union, and Canada.

We have many exciting opportunities in our pipeline this year. I would like to review our key products that have launched year-to-date.

In our Medical segment, we launched the BD Nexiva Diffusics closed IV catheter system with a diffusion tip. Also, at the end of the second quarter, we launched a BD insulin syringe with the ultra-fine 6-millimeter needle. This is the shortest insulin syringe needle made by BD and is preferred by the majority of 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. Despite the weak flu season in the US, we have made about 400 new Veritor placements to date.

In the first quarter, we launched the BD MAX MRSA assay in the EU. We have made several conversions with this new assay, and we continue to receive positive feedback from customers.

In the second quarter, we launched the BD MAX Group B Strep assay, which received FDA clearance. Also in the second quarter, we launched the BD MAX C. difficile assay in Europe, which was one quarter ahead of schedule.

In our Biosciences segment we launched our new cell culture media, Mosaic, in the first quarter of fiscal year 2012.

Now, on slide 19 I would like to provide an update of our key products and our expectations for the balance of the year. In our Medical segment, we are planning to launch our BD Pentapoint pen needle, the first and only pen needle with a patented five-bevel needle tip. This is expected to launch in the second quarter of the year.

In the Diagnostics segment, the US launch of MRSA on BD MAX remains on track for later in 2012. The US launch of C. difficile remains on track for the first quarter of fiscal-year 2013. These are important milestones in our effort to develop a range of clinical tests on the BD MAX system, and we believe it is well positioned to be a vital resource for lab testing needs.

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 plan to launch the Trichomonas assay on this platform. The Trichomonas launch in the US has been delayed until the back half of fiscal-year 2013.

Our launch of the benchtop BD Viper LT and the Chlamydia/gonorrhea assay remains on track for fiscal year 2013 globally, followed by the launch of our HPV genotyping assay on Viper LT, ex-US.

Along with this launch our Women's Health front-end automation system remains on track for launch in the beginning of fiscal-year 2013 in the EU and later in the year in the US.

Our BD SurePath molecular Pap test completed the initial phase of our clinical trial with very promising results. Our launch remains on track.

Also, as we have mentioned in previous earnings calls, we have two new CD4 analyzers launching in the near term. Both analyzers have been delayed from our original launch expectations. In fiscal-year 2013 we plan to launch a CD4 analyzer that is designed for a mid and smaller volume laboratories in both emerging markets and the developing world.

The other CD4 analyzer is a more affordable point-of-care instrument targeted towards rural clinics in the developing world. This is now expected to launch in fiscal-year 2014.

Of course, we will continue to provide you with updates on our products and programs as we continue to make progress throughout the year.

Before we summarize our key messages and open the call for questions, I would like to announce a new strategic and organizational change effective June 1. In a new role reporting to me, Gary Cohen, Executive Vice President, will advance BD's leadership in creating shared value, achieving strong business performance aligned with positive social impact, through a primary focus on external engagement and cross-sector collaboration.

One of the most effective ways to address healthcare challenges is through collaborative efforts among governments, corporations, and nongovernmental organizations to create shared value. We have a notable track record in this area, and Gary is ideally positioned to help BD extend our legacy of contracting to society through such collaborations.

Global geographic leadership will be shared by two senior leaders in new roles, also reporting to me. Alex Conroy, President, will be responsible for Europe, EMA, and the Americas; and James Lim, President, will be responsible for Greater Asia, including Asia-Pacific, China, and Japan. We're extremely pleased to have these leaders in their new roles and believe these changes will advance our evolution to becoming a truly global company.

Moving on to slide 20, before we open the call to questions I would like to reiterate the key messages from our discussion today. We are very pleased with our second-quarter and year-to-date results. Despite the headwinds we face in our Biosciences business in the US, we posted solid top-line growth.

This was driven by new product launches in addition to growth coming from recent acquisitions, which are on track versus our expectations. We look forward to moving past the tough comparisons that occurred in fiscal-year 2011, which are impacting our year-to-date results.

We are encouraged by our results in emerging markets and international Safety sales. We continue to build capabilities in these areas, and we believe they are well positioned for future growth.

Also, we have many exciting opportunities in our pipeline across our three segments, and we continue to invest in these opportunities to drive our top line.

Our results year-to-date give us confidence to raise the bottom end of our revenue growth guidance on a currency-neutral basis. While we are not immune to challenges in the macroeconomic environment, we believe we have the tools to overcome these challenges through our product and geographic diversity, as demonstrated this quarter by the performance in our three segments. Lastly, we remain committed to executing against our strategy of investing and innovating for growth, and we believe our ongoing investments in growth opportunities will ensure our future success.

Thank you. We will now open the call to questions.

(Operator Instructions) Kristen Stewart, Deutsche Bank.

I was just wondering if you could just maybe provide a couple broad comments just on healthcare utilization trends. It has certainly been something that investors have been focused on this entire reporting season.

You guys clearly touch a lot of the end-markets within hospital and lab, so any update on how you are feeling just in trends in the US? And then maybe just a couple comments on Europe as well.

Sure, and thanks for the question. I think we saw a stabilization of healthcare trends in the US. I know if we look back to last year we saw some falling doctors' office visits; but this quarter things seem to have flattened out. I think you saw that in both -- you saw it clearly in our Medical segment and in our Diagnostics segment, even if it was a little camouflaged by a weak flu season.

So, on the clinical side, US flattening out. Obviously still some issues in the high end of the Biosciences marketplace, especially around high-ticket research instrumentation, where we have a large presence.

Europe once again was quite good, continuing a trend that we saw last quarter. Then moving on to emerging markets, as we go through the emerging markets we continue to see strong growth across the emerging markets especially in Asia-Pacific and in Latin America.

The only issue from an environmental standpoint that is giving us more concern internationally right now, of course, is we are tracking what the European governments are doing, especially Spain, from a payment standpoint. You might be aware that they have announced a deal. Receivables for the industry have been going up.

We think we are appropriately reserved in this situation, but they have also announced a deal to refinance and then pay the industry, which we are expecting will happen in the back half of the calendar year. So, that it is the one kind of warning sign we're watching.

Thanks. Then would you be able to also just provide what the constant currency organic growth was? Just the impact of acquisitions in the quarter from a top- and bottom-line basis?

Kristen, it's David. On the quarter it is $24 million is the revenue impact, so it's about 1%. And on an EPS perspective it is about $0.02.

Okay. All right. Perfect. Thanks very much.

Amit Bhalla, Citi.

You called out the strength within Diagnostics and specifically Women's Health. Can you talk in more detail about the components there and the growth rates within Women's Health?

Sure, Amit; thanks for the question. Tom will do that.

Sure. Hi, Amit; this is Tom Polen. So, TriPath, our Women's Health business, grew 5% in the quarter. And that was a mix, as we have talked about the past few quarters. In the US relatively flat as physicians continue to increasingly recommend a three-year interval for testing. Ex-US we continue to see strong double-digit growth in essentially every region outside of the US.

And that is happening really by two things. One is as customers are upgrading from conventional Paps with liquid base cytology and as developing countries continue to expand access to cervical cancer screening. So we continue to be pleased with solid performance in our Women's Health business.

Tom, can you go into some of the other components within Diagnostic Systems? GeneOhm, your STD testing, growth rates there.

And can you also comment on your views of the announcement yesterday within the Women's Health space -- Hologic, Gen-Probe and your impact on strategy?

Sure. So just in terms of growth characteristics across the business, so as we think about the quarters -- and we're at 3.2% growth, which was driven on a couple pluses and a couple minuses there.

So on the negative impact side, we saw obviously an extremely light flu season. Our flu business was down 25% for the quarter as a result of that. Obviously we see that as a one-time event that we don't expect to repeat for the balance of the year.

The second topic, which Vince mentioned at the beginning of the call, was that our GeneOhm business was down 7% for the quarter driven exclusively by increased MRSA competitiveness and MRSA pricing pressures in the US. I emphasize that's strictly in the US.

That is ahead of our BD MAX assay in the US, which is planned for launch later this year. I don't know -- I've mentioned that trend on MRSA pricing and competitive tendency over the last few calls.

C. diff continues to grow at very strong double digit both in the US and ex-US. Of course that's off of a smaller base than the MRSA market.

On the other side we are continuing very solid performance this quarter in our microbiology business. I don't think we have typically disclosed the growth rate of that.

Our molecular STD business was up 6% for the quarter, so we are very pleased with ongoing performance there. And of course as Vince mentioned, we are very pleased with the acquisition of KIESTRA, which we finished this quarter; and the integration is moving forward as planned.

On your other question, just regarding Hologic's acquisition of Gen-Probe and how we view that, of course Gen-Probe has been very publicly in play over the last year, so the acquisition doesn't come as a surprise to us. We have made our integrated molecular cytology strategy in Women's Health clear for some time now. And I think actually through this move, Hologic is making it clear that they see value in a similar type of approach.

We are moving full speed ahead with no specific change in our strategy, and our new solutions remain on track to begin launching next year as has been described.

Then just to summarize, those being our Viper LT molecular platform with the new HPV genotyping assay, our Trichomonas assay on Viper, our new SurePath Plus molecular Pap, and our new Women's Health automation that manages that front-end sample processing across both our molecular and cytology platforms.

Right, thanks, Amit.

Thanks a lot, Tom. Thanks.

David Lewis, Morgan Stanley.

Hey, good morning. This is actually James in for David. I wanted to see if there's any way to put the higher spending in context a little bit here. You talked in the past about needing some near-term investment in new products, emerging markets, and EVEREST to build the business and set the stage for driving positive operating leverage in the future.

Obviously your new guidance, looking for operating margins down over 150 bps year-over-year. Can you just talk a little bit about the path forward for margins and timing of when we can see operating income start to grow faster than sales again?

So we're not going to get into guiding next year, but there's a number of trends I think that we can talk about to help you out here. One is in terms of the gross margin this year. We have talked about the higher material costs that we were seeing, plus the major impact on pricing with the biggest impact being on the first half this year, and that starts to get better in the second half.

Pricing was pretty much where we expected it to be this quarter, around 100 basis points. Still including that, the big issue from last year.

On the gross margin, some of the things to be thinking about going forward is we will be seeing an increased benefit from ReLoCo 1 and ReLoCo 2 going forward, with ReLoCo 2 being about a year behind ReLoCo 1. And we will continue to look at driving that.

On the SSG&A line, we do expect that we'll continue to invest in emerging markets going forward. We would start to -- we expect one more year of increasing spending on EVEREST. We are happy that we've got the first go-live now behind us. We are in the -- what I would call the stabilization, optimization phase on this first phase. But we have the biggest go-live coming up next year, so we would expect that to peak, that spending to peak next year, and then to flatten out from there as the amortization of the system comes in.

Then lastly, on the SSG&A line, we would expect going forward to start to see some benefit from our shared service center in the US as we get towards the tail end of '13 or so.

R&D, we will continue to invest, pretty much the same rate that we already are. So those are the major components that we think that are going to start to drive operating leverage.

I will come back to the point -- I know this is a timing issue that you are asking. But we do remain committed to getting 50 basis points of leverage.

I realize we didn't get it this year. We have some significant investments.

We're actually pleased that we have to accelerate some of these investments against new products in the back half of the year, because things are on track, they're accelerated for most of our programs with the exception of those two analyzers in the main at Biosciences.

Perfect. That's helpful. Then just second a question on the Discovery Labware divestiture. First, can you tell us what the after-tax proceeds from the sale would be?

Then the dilution, obviously about 4% to 5%. Should we just expect that to run through the P&L off this year's earnings base? Or is there anything you can do in terms of offsetting cost reductions or redeploying some of the proceeds into buybacks you would use to cushion the earnings impact?

Yes, this is David. Just a couple things. One is the proceeds from the sale, $730 million as we talked about, a good estimate is probably net of tax will be around $500 million, so for planning purposes, [just] for viewing it.

As far as dilution, as we said, dilution going into next year, the full-year impact of the divestment will be about $0.23 to $0.27. That will be -- right now it is in continuing operations. There's a couple things as far as determining when we move that to disc ops, around manufacturing agreements and transition services agreements before we can make that accounting change.

But as far as going forward, I would use that guidance range of $0.23 to $0.27. There are some stranded costs in there that over time we will be looking to take out, associated with the business. But for planning purposes now, we are guiding in that $0.23 to $0.27.

Got it. Thank you.

All right. Thank you. Next question, please.

David Roman, Goldman Sachs.

Good morning, everyone. Thank you for taking the questions. I was hoping we could talk a little bit more about the mix of business between emerging markets and developed markets. Obviously, EM has been a key part of your growth story, although that business looks to have slowed a little bit versus the performance in last quarter.

But what I was hoping you could provide some perspective on is, taking out the acquisitions it looks like the organic growth rate in developed markets is running between 1% and 2%, and that emerging market is just below 10%. Why isn't that the new normal on a go-forward basis for the Company?

Well, the reason it is not the new normal will be the impact of both the acquisitions as they are normalized into our base, and number two, launches of new products. In terms of -- and I was just talking about the developed world, as I said that.

On the emerging market, we do expect to see continued strong growth there. I think Gary can comment on a little bit more in terms of what we saw in the quarter and what we expect going forward. Gary?

Yes, so in general, the emerging markets were strong. One of the reasons that the second quarter was a little bit lighter than the first really pertained to our Eastern Europe Middle East Africa region, which had an extremely strong, unusually strong first quarter; so that came a little bit at the expense of the second quarter. Otherwise, the trends were very consistent, Asia-Pacific and Latin America both in double digits.

So over the course of the remainder of the year we are expecting the second half in total to be very similar to what the first half was. And otherwise generally similar in China; we are expecting the second half for China to be similar to the first half, which would imply some stronger growth in the back half of the year relative to what you saw in the second quarter.

All the signs otherwise are positive in the emerging markets. The situation in EMA was based principally in Africa, which is a little bit lumpy based on timing of orders from international funding -- national and international funding agencies.

So, David, to go back to the beginning of your question, you know, I would go back to what we were saying in November in terms of the new product launches and the impact that we expect to have by 2014. So that was 250 basis points.

So we are expecting a gradual increase. And then, of course, Safety now is really starting to do well around the globe as one of those drivers.

Okay. Then I know it hasn't been really that much time since the November meeting, but is there any early sign or indicators you can provide us with that track some of those new product launches? Those products that you have launched since that time period, to what extent are they tracking toward the incremental growth benefit that you had put out there in November? And are there any that have deviated from that?

Yes, so I am going to ask Bill Kozy to talk about that because I think he has got some good news on the acquisition front and some of the product launches. So, Bill, you want to talk?

David, morning. This is Bill Kozy. We are going to give you an example here from BD Medical related to your question. But if you looked at Medical's growth for the quarter of about $52 million year-on-year, foreign exchange neutral, about $30 million of that growth is coming from either acquisition or new product launches.

You saw some of those products and heard them mention during Vince's remarks. But if you took Pharmacy Solutions, Autoguard with blood control, Diffusics, ReKindle, Nano, and the AutoShield Duo pen needle, that is kind of the category of products and the mix of both acquisition and organic new product launches that are starting to have some impact.

These are all, as you know -- with the exception of the acquisition are all very early stage. So we are encouraged by those launches and at least some of the early penetration activities that are underway. We are tracking this, as you would expect, quarterly; and we will look forward to discussing this more.

Okay. Maybe just a clarification to the earlier question on HAI. Are you saying that the competitive environment is intensifying because the market is challenging, or there are new players coming in posing a competitive threat when it comes to pricing?

This is Tom Polen. Specifically again to the US, it is referring to more of a competitive player. This goes back actually to the last quarterly call. It goes back to last year as Roche entered the MRSA market in the US with a very different pricing approach, where we started seeing the significant change, competitive intensity and price around MRSA in the US.

So it is really that specific event and that specific entrant that we saw begin to change the US dynamics a bit.

Yes. Okay. Thanks very much.

Thank you.

Jon Wood, Jefferies.

Hey, thanks a lot. Good morning. So just want to better understand the comments around the Labware divestiture. Should we assume from David's comments that you guys are not focused on directly replacing that operating income? Or is it just a function of not being able to call out your options at this point?

I want to make sure that you are actually looking at those proceeds in a reallocation event around those proceeds next year in a discrete fashion.

Yes, Jon, this is David. I think really we will update you on what we do with those proceeds -- we will update you on November. Clearly it will go to general corporate purposes, which as we talked about from an acquisition perspective looking what's out there, if there's opportunities to fund those. But obviously we are not looking to let cash stay idle on our balance sheet either. So we could do share repurchases.

But at this point, it is too soon. And we will update you when we provide guidance on the '13 in November.

All right. Understood. My follow-up question is on the Biosciences business. So it seems like the comments around the funding environment are pretty consistent. But the comment about the intensifying competitive landscape in reagents, that seems new to me. Can you flesh out those comments? Where you are seeing the competition; how much is that impacting your view from the prior guidance of 2% to 4% there?

Sure, so Bill Kozy will give you some more detail on that. Just would say before he does, majority of what we are talking about was related to the large instrument sales. But there was a competitive situation that has been going on for a while, but maybe a bigger impact right now with some pricing on reagents, particularly in the research market. Bill, you can talk to that.

Yes, this is Bill. I think Vince has hit the key topic here. This is on the -- not the clinical reagents but the life science research reagents. And the competitive activity particularly in the US and Europe we have seen escalate in the last year or two, driven by both numbers of competitors and price.

So it is classic competitive situations in a market where it's a little bit soft. So we are seeing a little bit more intensity there than we have seen in the past. It's combined with the slower instrument activities. It really put some pressure on the Biosciences business in this last quarter.

Thank you.

Jon Groberg, Macquarie Capital.

Good morning. Thanks a million. I will try and just keep it to one; been a bunch of questions. But maybe just to clarify a couple items, that will be my question.

One, David, just to be clear, obviously you gave -- when you talk about '13 you talked about the device tax as well as this divestiture; it's clearly a moving target. But wouldn't it make more sense to assume that you do a buyback to at least -- for the numbers for 2013? I just want to be clear there, or if there is some other message that you are trying to get across as you think about estimates for '13.

Then second clarification if you wouldn't mind, on your revised revenue guidance. Would you mind talking about, in the Medical and Diagnostics segment, how much of that is a better organic outlook, or is that the KIESTRA deal principally? Maybe just talk about the components of what on a currency-neutral basis is allowing you to upgrade the growth there. Thanks.

Okay. Yes, really all we are saying, Jon, as far as the proceeds from the Discovery Labware is just wait until November. And when we do total guidance on what we are doing with our capital allocation, we will provide at that time. We are not saying anything more other than that at this point.

Then in terms of the organic growth, in Diagnostics, it's -- there's some KIESTRA in there; but also good performance as we start to get some of these new products out. So it's a nice balance there.

The same thing is basically true in Medical, where we do expect PhaSeal -- the products continue to do well. It is off to a good start.

But also, as Bill can say, that we are seeing good growth in Diabetes Care. And we went through a series of product launches that we have going on in that business, in the both syringe and pen needle category.

And then Pharm Systems is also doing better as well. So there is a nice piece of organic growth driven by the new products that we are seeing as well, and not just the acquisition. So both things going for us.

Okay. But fair to say, relative to your initial outlook in Medical and Diagnostics, that organically the business is doing a little bit better than you had anticipated?

That is a very fair comment. We are on track with the acquisition and a little better with the new products.

Okay. Thanks a lot.

Rick Wise, Leerink Swann.

Good morning, Vince. Good morning, David. Let me come back to, David, your comment, I think it was your comment on Pharm Systems. I think you mentioned it was helped by favorable order timing.

Can you just give us some sense of the fiscal second-quarter impact? Will you see it go the other way in some sense in the fiscal second-half?

Yes, I think as we talked about on the last-quarter call, Pharm Systems came in at around 7%, and that market is growing in that 3% range. So as we always talk about, there is timing of orders, given the customers that we have. We do expect to see an improvement in the second half of the year as we normally do with the cycle of our business.

I will just ask -- I will pass it over to Bill to see if there is any more color he wants to provide around Pharm Systems second-half growth.

Hey, Rick, this is Bill. Just a little bit more color to build on David's comments related just to the quarter and to the 7% growth. We had some strong demand from vaccine customers in the quarter, and we also got some increased demand related to the expanding use of generic low molecular weight heparin as another competitor has entered that market, but of course also utilizing our product portfolio.

We also had some favorable impact in Europe due to some one-time demands from one of our major pharmaceutical customers who was up against a favorable comp versus the prior year. So just to build on David's comments we probably got a good 3%, 3.5% growth in the quarter. That is a little stronger than what we see for the year. So we had a little tailwind in the quarter.

And it will be bumpy on the second half of the year, too. It is not going to be flat growth rates, just the way the orders come in.

And, Bill, when you said that there was a new competitor in low molecular weight heparin, you meant a pharmaceutical.

A pharmaceutical competitor in that space also using pre-fill (multiple speakers).

They are using our devices.

Correct, right.

I got you. On a separate topic, sorry to drag you back to fiscal '13 again. Thanks, Vince, that was very helpful color. Just two follow-up questions on that. How do we think about Discovery Labware when we are thinking -- how are you likeliest to give us guidance?

Off a fiscal '12 base that doesn't include it? That pro forma's it out? Will it be in there, and therefore you are highlighting the dilution the following year?

I am not sure that you said -- apologize if you did -- on the share repurchase side, my impression is that you are likelier to repurchase fewer shares in fiscal '13; that is your thought as of now, if I am correct. I just want to make sure I understood. Thanks.

So, a couple of things. One is that what we have said is that $1.5 billion was certainly at the high end of our buyback range, and that we haven't guided to exactly where we are going to be on share repurchases, and we are not going to do that now.

In terms of -- we will guide you -- we have giving you the $0.23. And it will be in November, as David just said a little while ago, that we'll finalize our share repurchase with the Board, and then we will give you some guidance so you can put the whole thing together.

On the pro forma thought, David, is it likely to be in the base when you give guidance or out of the base when you give guidance?

As I said there's a couple things as far as the transition, the deal stuff, to close and get regulatory approvals. When you look at doing the accounting from a disc ops perspective you have to finalize all the transition services agreements; you have to finalize any kind of toll manufacturing agreements; and that determines when.

Eventually it will go to discontinued ops. You just have to finalize all those parts of the agreement before determining when actually you go to discontinued ops.

But our expectation is once all those things are finalized it will go into discontinued ops. And for your planning purposes, as you look at fiscal-year 2013, I would take out the $0.23 to $0.27 that we talked about, once it goes into discontinued operations.

Thanks.

Brian Weinstein, William Blair.

Hi, thanks for taking the question. Maybe you can talk a little bit about any early uptake that you have seen or any comment on BD MAX outside the US, and if you are seeing any competitive wins there? Or just comment on how that launch is going in general; thanks.

Sure. We have seen some competitive wins, and Tom can talk about it.

Yes. Hi, Brian. This is Tom Polen. We have seen typically in Europe obviously, which is where we launched our MRSA and more recently our C. diff assay, we have seen some competitive conversions. We're off to about 60 placements year-to-date there.

So solid initial traction. About that many customers also using the system as an open platform. Obviously the most significant launch for MAX will be the MRSA launch in the US just driven by that market size. And as Vince mentioned earlier, we remain on track for that launch, scheduled for later this year.

Okay. Then we haven't seen anything out of you guys as far as assay development deal for a little while now. Are there more coming? Or have you guys just stopped announcing those?

No; there are more coming. We have got some in the pipeline. Just more to come later this year, we would expect.

Yes, there was just some sequencing in terms of the R&D work and getting the -- let me call them the sample prep kits and whatnot lined up so we could handle more partners. So you couldn't throw them all out at one time; but we have a lot of companies that are interested in working with us.

And just a note, so at this point for MAX we've got about -- we have 18 assays in the pipeline as a combination of internal and external partnerships. Again, by the end of this year, we would expect that number to be well north of 20, as we communicated in the past.

Thanks for your questions.

(Operator Instructions) Mike Weinstein, JPMorgan.

Good morning. It's Kim in here for Mike. First question for David; you made some helpful comments earlier on the moving pieces for gross margin. For the year here, your gross margin guidance is unchanged.

With the FX easing in your guidance, I would think that all else equal the gross margin outlook would also rise. So curious; what is the offset in there versus your prior guidance that keeps the gross margin steady for the year?

Yes, as we talked about before, if you look at for the full year from a guidance perspective, price is about 50; raw materials is sitting around 20. And the acquisitions as we talk about building that into all the line components, particularly the recently announced KIESTRA, is really having the offsetting effect.

Then the software amortization as we talked about before is unchanged at about 20 basis points. So to your point, Kim, you have the incorporating the acquisitions in, into the gross profit line, is offsetting any minor improvements that you have from a currency perspective.

Okay, that helps, so it is really the acquisition piece, which makes sense. The follow-up questions from us is just on pricing, wanting to tie up the pricing discussion we have had here this morning.

We have talked through the impact in Diagnostics with Roche's pricing strategy and hoping to improve upon that, with both the anniversary of the Roche impact and also your own launch, where your hope is to bring pricing back up to a more rational level with the BD MAX MRSA.

But what is going on in Medical from a pricing standpoint? How would you characterize the overall -- that is your largest segment. We're just trying to look at pricing on an ongoing basis. How would you characterize the pricing?

Sure, Bill can talk to that.

Hi, this is Bill. For the quarter, just looking at the second quarter we saw a little bit more of a normalized price impact of that range of 1% to 2%, which we have talked about historically. If you think about that, the largest pressure is on the Med Surg business. Positive impact from Diabetes Care; and pretty much close to flat in Pharm Systems.

So think about Diabetes Care and Pharm Systems serving as a little bit of an offset to some ongoing difficulty) price pressure that we have in the Medical Surgical business. But pretty much in the range that we planned on.

So for the year we think pricing is about where we guided you right from the start across the Company, pretty much. Thanks a lot.

Jonathan Palmer, CLSA.

Good morning. I just wanted to come back to the topic of industry M&A. We have seen some consolidation in both the Diagnostic and Biosciences businesses the last few years. Vince, I was wondering if you could just talk about how you are thinking about the scale of your businesses in light of those deals.

And then has your appetite changed at all to do a larger scale acquisition?

Sure. We haven't changed our outlook and our strategy in terms of acquisitions. Certainly aware that there has been consolidation.

Let me start on the Biosciences side, and that has been going on for quite a long time, not just the last couple years. But we feel good about where we are in terms of the Bioscience businesses and the opportunities that we have there.

On the Diagnostics front, as Tom was talking about, not just in the Women's Health and Cancer space but with what we are doing with BD MAX, we think that still you have to compete vertically more than horizontally. And we think we have the right programs in place. So we think we can be very competitive.

So we will continue to look for plug-in acquisitions to round out the portfolio. We have always looked at larger acquisitions, and we have done that for years. They just have to make sense both strategically and financially in creating shareholder value.

So, we're not sitting here saying we wouldn't do a larger one. But we have -- we continue to be more focused on plug-in acquisitions in adjacent spaces. That is our strategy.

Thanks again. That's all for me.

Peter Lawson, Mizuho Securities.

Just a broad question. Where do you think you're taking share in the product lines? And which products passed expectations in the quarter?

So, okay. Across the entire Company. I think we are continuing to do very well in the Medical business. I think in Diabetes Care we are doing well. Obviously we are creating a category with PhaSeal. Bill, do you have a couple of other remarks there?

I think probably worth mentioning our success in the quarter with Safety and particularly with the IV catheters.

Sure.

Particularly outside the US.

Yes. Going extremely well. And as we create some momentum behind that we are usually developing the market, we are gaining share at the same time so. So Safety would probably be the number-one area where we have gained some share.

Tom, any other comments? We have some conversions with BD MAX going on. We lost, obviously, some business going back a year ago. We expect to reverse that as MAX comes out.

As you said, I think our Women's Health and core Pap business is growing ahead of, above market rates. And our microbiology business is solid, again, on a global basis as well.

Right. I think basically in Biosciences, in the instrumentation side we continue to maintain share. It is more of a market issue, and we did have this pricing and a little bit of share loss in the research reagents. So those are kind of the big factors across the Company.

Thank you. And just quickly, did you have an extra selling day in the quarter?

Did we have an extra selling day?

Yes. Yes, we did.

Thank you so much.

Bill Quirk, Piper Jaffray.

Thanks. Good morning, everybody. Two-part question. First off for Bill, I just want to come back to this. Given that the weaker flu season, can you talk just a little bit about how we should be thinking about the Pharm Systems business, really over I guess I would say the next six months? But to the extent we can look out about a year from now, that would be great.

And then secondly, Tom, any update on HPV? I saw it obviously noted in your pipeline. But any color on both O-US and US? Thanks, guys.

Sure, this is Bill. In terms of the vaccine campaigns that ran a course in the first half of the fiscal year, those were pretty much on expectation. Nothing extraordinary, nothing way behind, no disappointments.

So we would anticipate our second half of the year to reflect traditional ordering. And that is the way we are thinking about it in the guidance that we provided.

As you might recall, it is that third quarter where we tend to see our flu vaccine order processing take place. So we will have much more for you in the next quarter to affirm that position.

Tom?

Hi, Bill. This is Tom Polen. So our HPV assay is progressing well in development. We are pleased with the performance we are seeing internally, as well as roughly two or three published studies now against peer assays, and (technical difficulty) assays performing very, very well.

As Vince mentioned earlier, as we communicated in the past, remain on track to launch in the EU in FY '13. We have not shared yet but we will be sharing later this year our timing on the US launch. We will be beginning trials for both of those launches within the next few months though.

Very good. Thank you.

Doug Schenkel, Cowen.

Hey, guys. Thanks for taking the questions. First, Roche recently indicated there were some reimbursement challenges in diabetes across several key European markets for them. Did you see any impact from this in the quarter?

No, we didn't.

Okay. Then just a few loose ends. Peter asked, I think, about the extra day in the quarter. Could you quantify the impact?

I think last quarter you talked about a $0.04 per share benefit from tax. You said that was going to come back over the balance of the year. Did you take that hit in Q2?

And then could you define what the M&A contribution is that you factored into full-year guidance? Thank you.

Okay, the M&A we mentioned earlier -- this is David. It's about 1 percentage point of growth in total; and dilution for the full year is about $0.10.

As far as the extra day it is really not material for our business within the quarter. And I believe your last question -- could you repeat your last question?

The tax.

It was the $0.04 tax.

As we said for the full year we are going to be coming in that 25.5% to 25.7% for the year. And that is mainly driven by the geographic mix of our business.

Okay, thank you.

Bill Bonello, RBC Capital Markets.

Hey, thanks. Just one additional follow-up question on the guidance. How much of the EPS boost is coming just from the favorable currency outlook?

For the full year, the currency is about -- we're sitting at about $0.24. It's about $0.18 is the currency impact. So about $0.06 is -- and that is what we raised the guidance by, so it had about a 1% impact on our EPS growth rate.

Okay. Sorry, I just wanted to make sure I understand that. The impact was about $0.06 on the raise?

That's right. On the guidance. That is why we raised our guidance was the $0.06.

Okay, but if we think about it, the acquisitions are diluting EPS by about $0.10; the currency is boosting it about $0.06. So should we be thinking about it as a net-net kind of a raise? Or am I missing something there?

No, I think net-net what we are saying is we are still within our range.

Within the range? Okay. That makes sense.

Then all of the revenue boost is really from the acquisition -- of the currency-neutral boost? Is that right?

Well, we had two offsets going on. So we had very solid performance as we talked about in the Medical business, which was benefited by the acquisition. But as you saw in the quarter and as you saw last quarter, we continue to have very strong growth from a Safety perspective.

On the Diagnostics side we had good solid performance in our Preanalytical Systems within the quarter. And offsetting that was the challenges that we saw in the research instrumentation within Biosciences, and the tougher competitive environment in the research reagents as Vince and Bill both talked about earlier.

Again this just shows that geographic as well as business diversity in us, despite some headwinds, be able to deliver some solid numbers on the top line.

Okay, great. Thank you.

Sara Michelmore, Brean Murray.

Yes, thanks for taking the question. Vince, just to go back to this fiscal '13 commentary on -- and just thinking about the margins. I mean, I look at some of the headwinds that we know exist for you guys, and as I think about the SG&A line in particular, which has often been a source of leverage in your model, you have got EVEREST again as a headwind; it sounds like the intent is to continue to invest in emerging markets; some of the other things like pension and medical claims I assume would still be going in the wrong direction.

Now we have med tech tax as well. Where does the cost savings come from? It is really easy for me to pick out the headwinds, and I am just not sure where the leverage points are in the model at this point. So if you could talk about that, that would be very helpful. Thanks.

We don't think that pension is going to be a big issue going forward. So, yes, on the negative side, we are going to be seeing an increase in EVEREST. We haven't finalized that number. It is likely to be smaller than what we have seen the last couple years.

And in emerging markets, yes, we will continue to build. But it will be getting good productivity from the investments we are already making there.

In terms of other elements of leverage it is really going to be around the functional effectiveness. We will start to see some leverage from the acquisition piece that we have done as well too, because we had that infrastructure come in. So you have Accuri that now starts to improve, PhaSeal starts to improve, and even KIESTRA will get better.

So I think that is where the leverage is going to come from.

Okay. Then specifically, you guys did call out the med tech tax. I know it is sort of a tricky question, but how do you deal with that? I mean, you're passing through some of the costs? Are you making specific cuts to offset it? What's the framework that we should think about you absorbing that incremental cost next year? Thanks.

On the device tax? This is where in seeing this coming and seeing the pricing pressure that is out there we started focusing on ReLoCo 1 and ReLoCo 2. So really attacking the gross margin line in and then supporting that with some of the shared service center work that we have been discussing with you.

Now, in terms of paths -- so we will attack every element of the P&L basically to try to offset the $55 million. On the more difficult side, a lot of our US business that will be impacted by this will be under contract, and so we can't just go out and start changing prices.

So there will be a whole dynamic there that we are going to have to work our way through. It's really -- a lot of this is going to have to come from the efficiency side.

Okay. That's helpful. Thanks so much.

Jeff Frelick, Canaccord.

Good morning, folks. Just a Molecular Diagnostic question for Tom. Tom, could you share with us the total Molecular Diagnostic growth rate in the quarter? And then just specifically, how would you characterize the MRSA test volume?

We don't report (technical difficulty) reported GeneOhm separate from our STD business. As I described earlier, the STD business, our Viper and ProbeTec is up 6% in the quarter, and GeneOhm down 7% as I described.

In terms of MRSA volume overall in the US, certainly we have seen a stabilization -- not a stabilization at zero, but a stabilization of growth in MRSA. The conversion to the screening in the US, specifically around MRSA is certainly not the same growth rate that it was several years ago, but it is still growing north of probably that 10% range in the US.

Okay. Thanks, Tom.

Kristen Stewart, Deutsche Bank.

Just a clarification I guess on the impact of acquisitions for the full year. David, I think you had said $0.10. That does include not only KIESTRA, which was new since you last gave guidance, but also prior acquisitions that you closed. Correct?

That's right. That includes three acquisitions that Vince mentioned earlier, Carmel, Accuri, and our KIESTRA acquisitions.

Okay. So the impact of acquisitions this quarter, the $24 million I think you had referenced earlier, those are primarily the past acquisitions, not KIESTRA?

That includes a tiny bit of KIESTRA, about $1 million.

Okay. Then just to go back to the med tech tax, are you guys comfortable that you will be able to offset most of it? Or do you think that that will be net-net an additional headwind impacting the year-to-year comps?

Well, it's something we are working on. So as I was mentioning just before, we will be looking at all elements of our P&L to see where we can go for efficiencies, not just in the US but globally, to see what we can do to offset it.

So it will be a challenge. It is a headwind, but one that we're going to take on.

Okay, perfect. Thank you.

That was our final question and now I would like to turn the floor back over to Vince Forlenza for any closing remarks.

So thank you very much for your participation today. We look forward to next quarter and further updates. I'm very pleased with the results in the quarter and the progress on our programs.

And have a great day. Thanks very much.

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