Becton Dickinson and Co (BDX) 2013 Q3 法說會逐字稿

Hello and welcome to BD's third fiscal quarter 2013 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through August 8, 2013, 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 confirmation number 15535210. We 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. Monique Dolecki, you may begin.

Thank you, Jacky. Good morning, everyone. And thank you for joining us to review our third 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 third fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and its related financial schedules 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, Chairman, Chief Executive Officer, and President. Also joining us are Chris Reidy, Chief Financial Officer and Executive Vice President of Administration; Suky Upadhyay, Senior Vice President Finance; Bill Kozy, Executive Vice President and Chief Operating Officer; Tom Polen, President of Diagnostics Systems; and Gary Cohen, Executive Vice President.

As we stated in our press release, we experienced a charge relating to a pending litigation settlement of $22 million, or $0.07 per share, related to the indirect purchaser, anti-trust class action cases. We also experienced a charge relating to the medical device tax of $13 million, or $0.04 per share. For the purposes of our conference call today, we will refer to adjusted diluted earnings per share, excluding the pending litigation settlement, and the medical device tax. It is now my pleasure to turn the call over to Vince.

Thank you, Monique. And good morning, everyone. Our solid results against the backdrop of a challenging environment demonstrate that we are executing on our strategy and delivering on our commitments. Revenue and EPS growth in the third quarter were in line with our expectations. Revenue growth in the third quarter was driven by our medical and diagnostic segments. We experienced a decrease in our Biosciences segment which we will provide more details on later.

Strong international growth overcame slower US sales growth in the quarter. Growth in the US was impacted by ongoing softness in our women's health and cancer business, and the timing of orders in advanced bio processing. We also saw continued strong growth in international safety sales and emerging markets, and we continue to deliver on our strategy of improving patient and healthcare worker safety. Based on our third quarter and year to date results, we feel confident in our previously communicated guidance ranges. We will review our guidance for the full year in more detail shortly.

On Slide 5 we've outlined our third quarter revenue and EPS results which I will speak to on a currency neutral basis. Total company revenues were solid, increasing by 5.1%. Fully diluted adjusted EPS, excluding the device tax, came in at $1.58, which grew 7.2% in the quarter.

Now I would like to turn the call over to Chris Reidy to make a few opening comments. As you may already know, Chris was previously at ADP Corporation where he served as Corporate Vice President and CFO for six years. He is well positioned to help drive BD's strategy of accelerating growth through innovation, geographic expansion and operating effectiveness. We're extremely pleased to have Chris on board, and we will leverage his diverse experience as we lead the Company through its next phase of growth.

Thanks, Vince. And good morning, everyone. It is a pleasure to be here. I'm equally pleased to have joined the team at BD. The Company's long history, core values and ethical standards are attributes that really resonated with me. It is a particularly exciting time to join the Company as we focus on product innovation, strategic acquisitions and geographic expansion, and I'm delighted to be a part of it. While I have only been here a few weeks, it is evident that BD leaders and associates are committed to delivering healthcare products that are more effective, efficient and safe. I am also very much aligned with the financial model here at BD which is similar to the model used at ADP. I'm looking forward to working with the Board and the management team to continue to execute against the Company's strategy. We're committed to accelerating top line growth, driving margin expansion, and returning cash to shareholders, through dividends and share repurchases.

I would also like to take the opportunity to thank Suky for his contributions and the work he has done serving as interim CFO. As you all know, Suky, along with the rest of the strong finance team, ensured a seamless transition over the past nine months. Suky's productive working relationship with the management team and the Board, as well as his commitment to shareholders, is invaluable to the Company. Now I would like to turn the call over to Suky to review our third quarter fiscal results and our guidance for the total year.

Thank you, Chris. And good morning, everyone. It has been my pleasure to have had this opportunity. Today, I would like to begin by discussing the key financial highlights for the third quarter.

The diversity of our portfolio in tandem with strong execution helped deliver solid performance in a challenging environment. From a macro perspective, we continue to view developed markets as stable but constrained and emerging markets as a continued source of growth. Revenue growth in the third quarter was in line with our expectations, driven by new product sales, acquisitions, safety products, and geographic expansion. In addition, the quarter benefited as a result of the reversal of some negative timing matters from the second quarter. We also experienced a better-than-expected price and mix profile. Adjusted earnings per share, excluding the device tax, were better than expected, due to the timing of certain legal expenses, which we now expect to incur in the fourth quarter. We also completed an additional $50 million of our share repurchase plan, bringing our year to date total repurchases to $406 million.

Overall, we are pleased with our results, and we are on track to deliver our commitments of accelerated revenue growth and underlying margin expansion, which will ultimately translate into an improved quality of earnings profile. As Vince mentioned, our third quarter and year to date results give us the confidence to reaffirm our guidance for the total year. We expect revenue growth to approach about 5%, which is the upper end of our previously communicated guidance range. We also expect adjusted earnings per share growth, excluding the medical device tax, to be at the upper end of our previous range, of 11% to 11.5%.

On slide 9, I will review our revenue growth by segment on a currency neutral basis. Third quarter revenue growth was 5.1% for the Company, with acquisitions contributing about 80 basis points. We also experienced the impact of positive pricing mix of about 20 basis points in the quarter. This reflects the benefit of new product launches, and more effective pricing management, in a challenging environment. BD Medical third quarter revenues increased 7.9%. Growth in this segment was driven by strong international sales, safety, and the normalizing of unfavorable ordering patterns from the second quarter as discussed earlier. Medical surgical systems growth was 6.6%, led by emerging markets and international safety-related sales. Growth in diabetes care was 9.4%. This reflected continued strong sales of pen needles which include our Nano and PentaPoint products, along with our AutoShield duo safety product. Growth in diabetes care also reflects the timing -- favorable timing benefit from the normalization of second quarter impacts. Pharmaceutical systems growth was 9.2%, also driven by favorable timing of orders from the second quarter, and our SSI acquisition.

BD Diagnostics third quarter revenue increased 3.6%. The segment's growth was driven by solid sales in pre-analytical systems. Growth in diagnostic systems was softer than expected, due to the timing of lab automation systems, installations on a global basis, and due to continued softness in women's healthcare and cancer in the US. BD Biosciences revenue declined 2.5% versus the prior year. Slight growth in instrument placements in the US were more than offset by a few geographic factors which I will speak to on the next slide.

Moving to slide 10, I will walk you through our geographic revenues for the third quarter. As we expected, softer growth in the US was offset by continued strong international growth. BD's reported US revenues increased 1.3%, versus the prior year. Revenue in our US medical segment increased by 4.4%. As expected, this was partially driven by the reversal of unfavorable timing in both our pharmaceutical systems and diabetes care businesses, in addition to the positive contribution from our acquisition of SSI.

US growth in the Diagnostics segment declined by 1.5%. This reflects growth in pre-analytical systems which was more than offset by continued softness in women's health and cancer, due to extended cervical cancer screening intervals. The US Biosciences revenues declined by 3.3%. As I just mentioned, slight growth in the US instrument placements were more than offset by an unfavorable timing of orders in Advanced Bioprocessing. While we have seen low single digit growth in instrumentation this year, we remain cautious on the macro economic outlook related to research funding. This has been contemplated in our full-year guidance.

Moving on to international, we continue to see strong growth. Revenues grew 7.9%, currency neutral, driven by Medical and Diagnostics segments. Medical segment grew 10.3% and Diagnostics grew 8.6%. This reflects strong growth in emerging markets and international safety sales. Biosciences declined 2.1%. This reflects continued softness in Western Europe, due to austerity measures and continued delays of government research funding in Japan.

On Slide 11, we continue to see strong growth in emerging markets which accounted for approximately 25% of our total revenues. Emerging markets revenues grew 12.8%, currency neutral, over the prior year. This is driven by good performance across all segments and regions. China revenues and safety sales in emerging markets both grew by about 18%. We continue to see solid growth across all key geographies, driven by an attractive return on investment profile.

Moving on to global safety on Slide 12, currency neutral sales increased 8.7%, and grew to $538 million in the quarter. Revenues in the US grew 5.6%, which benefited in part from our acquisition of SSI. International sales grew 12.7%. We are encouraged by the positive results in Europe as the market continues to convert to safety engineered products. Medical safety sales grew 12.8% driven by a range of safety engineered products, and Diagnostics growth was 4.8% in the quarter, with particularly strong growth in emerging markets.

Moving on, since we have already discussed revenues in detail, I will not cover Slide 13. Turning to Slide 14, as we expected and outlined for you on the last call, sequentially, gross margins improved by about 100 basis points. However, on a year-over-year basis, reported gross margin declined by 60 basis points, due to the unfavorable impact of foreign currency. On a performance basis, positive contributions from Reloco and pricing were offset by acquisition and startup-related costs. For the full year, we continue to expect underlying gross profit improvement of about 40 basis points.

Slide 15 recaps the third quarter income statement and highlights our foreign currency neutral results. As we discussed, revenue and GP were in line with our expectations. SSG&A increased about 11% due to investments in new product, acquisition-related expenses, legal fees, and the medical device tax. The medical device tax unfavorably impacted SSG&A by about $13 million, or about 300 basis points. As mentioned, the third quarter included a year-over-year increase in legal fees. We expect a further increase in the fourth quarter as we prepare for the RTI trial in September. R&D increased 5.6%. This remains in line with our expectations at 5.9% of revenues as we continue to invest in new products.

Operating income, excluding the aforementioned settlement, declined by 0.9% in the quarter. However, when you exclude the medical device tax, together with the increased in legal and acquisition costs, operating income growth was broadly in line with underlying sales growth. Our tax rate declined by 180 basis points, reflecting the benefit of the reinstated R&D tax credit in the US, and favorable geographic mix. In the quarter, adjusted earnings per share, excluding the medical device tax, were $1.58 which represents a 7.2% increase over the prior year.

Slide 16 recaps the adjusted year to date income statement and highlights our foreign currency neutral results. I will not review this slide in detail but would like to highlight our year to date operating income growth of about 4%. Excluding the medical device tax, underlying operating income growth was a little over 6% and ahead of overall revenue growth. As we have communicated previously, we are still on track to deliver about 40 basis points of underlying operating margin expansion this year.

Slide 17 illustrates our revenue guidance by segment. We expect revenue growth for the total company to approach 5%, or the upper end of our previous guidance range. This assumes a euro to dollar exchange rate of about $1.31 and a dollar to yen exchange rate of about JPY0.99 for the balance of the year. Within the Medical segment, we expect growth to be between 5% to 6%. This is primarily driven by better-than-expected results across international, safety-related sales, and acquisitions. The Diagnostics and Biosciences segments remain unchanged. We expect growth of about 5% and 1% to 2% respectively. Adjusted EPS guidance is expected to be at the upper end of 11% to 11.5%, excluding the impact of the medical device tax. Now, I would like to turn the call back over to Vince who will provide you with an update on our product portfolio.

Thanks, Suky. Moving on to Slide 19, I would like to review the program and product launches in our Medical segment. In June, we closed a licensing agreement with CRISI, which is a privately held company in California. CRISI is currently developing a drug delivery device for verifying, monitoring, and documenting manual IV injections. CRISI nicely aligns with our strategy in medical surgical systems around the elimination of medication delivery errors. Additionally, this links with our latest acquisition of Cato Software Solutions to create a preparation and delivery solution for certain safety gaps.

For BD Simplist, we are continuing to make progress. We recently received FDA approval of Ondansetron and we expect to launch this by the end of our fiscal year. Ondansetron is a anti-medic used to treat nausea and vomiting often following chemotherapy treatments. We have three additional drugs in various stages of the FDA regulatory approval process. As you can see, by Cato, Simplist, and now CRISI, we are continuing to focus on medication error management and enabling safer and more effective preferential drug delivery in both hospital and pharmacy settings.

In our pharmaceutical systems business we launched the BD Neopak this quarter. This is a new glass pre-fillable syringe system specifically engineered for the administration of biopharmaceutical injectable drugs. This new product is designed to address industry challenges in developing, manufacturing and marketing biological drugs to patients. As you can see, we continue to make good progress with our product portfolio in the Medical segment.

Turning to Slide 20, you will see the various product launches in Diagnostics. We're extremely pleased with our BD Veritor system since its launch in early fiscal year 2012. More than 5,300 units of this system have been placed to date. We continue to broaden our customer base, as well as capture share gains with this innovative point of care platform. We have now expanded beyond doctor's offices, and have gained the interest of large pharmacy retail chains across the US.

Moving on to molecular, on the BD MAX platform, we're pleased with the progress we're making as shipments continue to accelerate in the third quarter. We expect shipments to continue to accelerate in the fourth quarter as well. Our Staph SR, enteric bacteria and GC/CT/Trichomonas assays are also progressing well through clinical trials. Our BD Viper molecular platform remains well positioned for the high volume screening market and the launch of the BD Viper Trichomonas assay remains on track for launch in the fourth quarter of this fiscal year. The launch of the new Viper LT platform, which includes our Onclarity HPV- Genotyping assay and GC/CT assays, has been delayed by one quarter. However, we have completed the European clinical trial and are very pleased with the data. On front end automation system for women's health, the BD Totalys is now shipping in Europe after being delayed by one quarter. The launch remains on track for the US next year.

On Slide 21, I would like to review the program and product launches in our Biosciences segment. In the third quarter, we announced the launch of our new BD LSRFortessa. This is the latest cell analyzer in this line of high performance research flow cytometers. The LSRFortessa will enable researchers to conduct complex experiments with the additional parameters and increased sensitivity they need. It has been designed by BD's special order program, that enables customers to configure BD flow cytometers and cell sorters to fit precise research and assay needs. This program is tailored to meet the needs of researchers at the leading edge of biomedical discovery. And we will continue to invest in this business in order to continue our expansion in this market and drive future growth.

On Slide 22, before we open the call to questions, I would like to reiterate the key messages from our presentation today. First, we are pleased with our continued improved revenue and underlying operating income performance in the third quarter, and year to date. Second, we continue to demonstrate we are making progress delivering against our strategy of accelerating revenue growth, delivering underlying margin expansion, and driving effective capital deployment. Third, we are seeing continued success with our key drug drivers of geographic expansion, new products and acquisitions, which are performing in line or better than our expectations. Finally, we are positive about our outlook for fiscal year 2013. Despite the challenging environment, we believe we are positioned to continue our track record of delivering value to our customers and shareholders. Thank you. And we will now open the call to questions.

(Operator Instructions)

David Lewis, Morgan Stanley.

Good morning. Just want to focus in on earnings growth for this quarter and for the balance of the year. So you talked about the legal settlement for the third quarter. Suky, I wonder if you could break out for us, what was sort of the magnitude of the legal shift in the third versus the fourth quarter? And is the fourth quarter number -- you initially had talked about the earnings growth building throughout the balance of the year, the fourth quarter implied guidance has a sequential down tick to a certain extent. Is that entirely due to the legal expense or does that reflect some type of conservatism? Just helping us net out that map would be helpful. Thank you.

Sure, David. Thanks for joining in. The back half as we talked about the last quarter remains in intact. It is really about the calendarization and the phasing of those legal expenses, so what we are seeing is about a $0.06 beat versus overall consensus on EPS. That is primarily driven by those legal expenses which will now occur in the fourth quarter. So the second half still remains intact. It is just a shift from the third quarter into the fourth.

Just maybe a quick one for Vince. In terms of the European safety, obviously it continues to be a driver for the business, post the regulatory action in May, have you begun to see any change in the relative growth rate here in this particular quarter and would you expect to see that as early as the fourth quarter? Thank you.

We did see a bit of a step up in the quarter in European safety. In fact, it grew just under 10%. So it was strong in the quarter. We expect it to continue to be strong. As we've said all along, more so in northern Europe than Southern Europe. Thanks, David.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. I was wondering if you could just dive in a little bit more into the Medical business since you are raising guidance there. Just want to get a better understanding of the components that give you a higher expectation for the balance of the year and just generally whether you think it is sustainable going forward into 2014.

We're encouraged by what we're seeing in the Medical segment. And Bill will comment on that.

Good morning. This is Bill. Just the real basis for our slight change there is driven by the success of the recent acquisitions and the new products. If you could literally break the performance of those two categories out of the segment, they're contributing in the quarter we just concluded, a little over $95 million on the top line, or growth that would have been a little north of 8%. So anyhow, as we had planned quite a while ago, the impact of new products and recent acquisitions would offset some of the known kind of non-growth contributors that we have in the more mature pieces of the Medical segment, particularly in med-surg. So right now, that is the basis for us moving up. For the quarter, for the Medical segment, new products as a percent of sales were a little north of 15%, which is the highest number we've achieved there for quite some time. And so that is the basis for the uptick.

Okay. And then you had also commented just generally on improved pricing and mix. Can you also expand there? I don't know if that is specific medical or if it is --

That is company-wide. Bill can comment on that as well.

Kristen, it is a comment I just made, we tend to think about our pricing always in the same kind of phrase with mix. So what is happening, there is a number of examples in the medical business, for example, in our packaging care business, every time we make a conversion to Nano, we gain some slight improvement, but some slight benefit in terms of price mix. We like converting customers to the Nano or the PentaPoint because of the slight advantage we're creating. That's what is giving us a little bit of favorability. And you have to look back to that very assertive price management and contractual management system that we talked to you about on the last call. Those two factors allow us to get a little better performance in that price mix category.

Kristen, across the Company, maybe Suky might want to make a comment or two, but think about this, what Bill said, we had good mix in Medical with the new products with diabetes care. PAS did well. One business where we generally would have a positive mix effect from the corporate level that was lower was Biosciences but net-net was positive, right, Suky?

I think you're right on point, both Bill and Vince. I think the one comment I would make is we still do continue to see the environment as challenging, both from a pricing and reimbursement perspective. And year to date, we are still seeing erosion overall in year-over-year pricing. But we are very optimistic with these results but we're taking it one quarter at a time.

I will sneak one last one in. Suky are you still expecting, within the guidance range for this year, about 60 to 70 basis points from acquisition contribution?

Actually we're expecting a little bit closer to 70 to 80 basis points. So as Bill talked about, we're doing a little bit better on SSI as well as KIESTRA which we have been talking about so we see that contribution going up slightly.

Thanks very much.

You're welcome.

David Roman, Goldman Sachs.

Thank you. And good morning, everybody.

Good morning, David.

Good morning, Vince. I was hoping you could actually dive into a little bit more detail on the US Diagnostics systems business. And particularly in the context of your comment that BD MAX placements had accelerated in the quarter.

Sure, Tom can handle that, no problem.

Sure, hi, David. This is Tom. Let me just walk through some of the key elements. So overall, in the US, we certainly do see overall lower testing volumes I think as you see reported by others in the industry and from labs. The most significant area of that of course for us, is being LBC testing volumes due to interval extension. We see that impact in the US. We also see, obviously, the lack of, just from a timing perspective, from the lab automation install. Molecular, specifically we saw flat overall in the quarter. And that was really a mix of lower GC/CT volumes that were partially offset by the increasing MAX sales. So we actually saw MAX sales double quarter on quarter, going from Q2 to Q3, and we're expecting that type of continued trajectory going forward. As Vince mentioned, we reached another milestone on MAX placement, at over 200, at the end of the third quarter, and we expect a ramp to continue going forward.

So we are seeing that, that impact of MAX. Of course, Veritor has been another key growth driver of ours. You don't see that in Q3 because it is really a respiratory focused product. We saw that in our 7.8% growth that was reflected in Q2. It came out of the Q3 numbers. So overall, we are seeing that ramp of MAX. But we are seeing some of those challenge, specifically on overall testing volumes in the US, with -- I will point specifically to that LBC segment.

And keep one other thing in mind as you think about this. As we said on the previous call, a lot of what we are doing with MAX now is converting out our own base. Not all but a lot of what we are doing. So you didn't see as big of an impact as you might have thought in the quarter because of the cannibalization, which of course will change over time.

And are you willing to quantify in any way sort of if you were to break out the Diagnostic Systems segment the percentage of the business that is facing some of the pressures that Tom just discussed versus the percentage of the business that is seeing growth?

Well, I think what Tom is really concerned about is the women's health and cancer piece, and specifically, the LBC business, that Pap smear business, where testing volumes are down. I think office visits for OBGYNs were down about 6% or 7%. That is the focus for him, right?

Correct. On a worldwide basis, our women's health business actually in the quarter we saw down about 10% and that was driven by that being a higher number in North America, where the vast majority of our business is. And then you saw continued double digit growth in emerging markets and even in Europe, continued strong double digit growth in that segment. So specifically within the US, women's health is in that 10% to 15% range of sales. So the bulk of the business is in our other, microbiology is by far the largest, followed by molecular, followed by the smallest piece being our women's health.

And one more quick one on Biosciences. I think this is the second quarter in a row where you talked about delays in Japanese funding, as well as European austerity measures. Any sense that either of those might be abating or anything that you're looking for to see those pressures start to lift?

Sure, Bill will address that.

David, this is Bill. We have been waiting for the release of some of the funding of the Japan stimulus program as part of their economic policy. And we do have a signal that after these delays we are expecting that some of this at least to show up in the fourth quarter. We have orders in house for the first time already, and we have some formal release of funding from the government in Japan, just in the last three weeks. So we are treating those as good signals and expecting to see some impact in the fourth quarter. Hard to say exactly what it is, but it will get back on kind of the trajectory that we had described previously.

Okay, great. Thank you.

Okay, thanks, David.

Mike Weinstein, JPMorgan.

Thank you. Maybe a clarification first. For the fourth quarter, just to make sure we're apples-to-apples here, the implied guidance is $1.44 to $1.47 on continuing ops?

That's correct.

Okay. Perfect. One thing, Suky, would be helpful, you guys don't talk about cash flows on these calls, and when we got the 2Q or sorry the 10-Q from last quarter, it showed kind of a disconnect in the first half of the year between earnings growth which I think net income growth was 4%, net operating cash flows were down 5% to 6%. Can you talk about how cash flows did this quarter and whether inclusive of this quarter or next quarter we will see an improvement in the back half of the year? Thanks.

We do expect to see an improvement in overall free cash flow in the back half of this year. We're making several improvements around working capital. As well as we're going to see some abatement of sort of slowdown of overall Everest capital spending. So we do expect to see an improvement in the back half of the year on free cash flow.

Okay. And then, Vince, you guys have historically used this call, I will say it opportunistically to touch on the upcoming fiscal year. Is there anything that preliminarily you guys see where the street may be mismodeling or you want us to think about as we go into updating our models post this call for FY '14?

So Mike, there is nothing unique going on right now that we would want to talk about. I think we will address '14 once we finish up our work for the year. So we will be talking to you about it in the fall. But there is nothing exceptional to call out.

Okay, perfect. Thank you, guys.

Sure.

Amit Bhalla, Citi.

Thanks. Two questions on Bioscience and Diagnostics. Both of those segments do need to rebound sequentially into the fourth quarter. So first on Biosciences, is it strictly your expectation that Japan stimulus is going to flow through that leads to you bounce back Biosciences? And in Diagnostics, can you talk about what is happening in the competitive front in Diagnostics, and how that will play out in the fourth quarter? Thanks.

Sure, on Biosciences, Bill talked about improving situation on the Japan funding. Keep in mind, too, that we had some negative timing in this quarter with advanced bio processing. So that would be the other factor Bill would pick up on. So Tom, in terms of the competitive situation on Diagnostics?

And maybe just a comment overall on Q4, so we do expect, and we do have in-house, as I mentioned earlier, lab automation timing impacted us in Q3, negatively, and we see that have more of a positive impact in Q4. And keep in mind, for lab automation, these orders typically come in six to eight months before we actually ship these pieces of very large capital. So we do have those orders not only in-house but equipment built and literally being installed now, which we will bill in the fourth quarter. So we will see that as an impact in the fourth quarter. We will obviously see the continued ramp of MAX we expect in the fourth quarter. Also in women's health, as Vince mentioned earlier, in the ex-US we have Totalys launching and have instruments literally shipping now which we will bill in the fourth quarter as well.

So those are where we see some rebound expected from that perspective. As we think about competitive dynamics, I would say that we certainly do see, within molecular of all of the categories, which has been well documented across the board, increasing competition there, certain pricing pressures in some categories, and also well documented by others. Expect the continued pricing pressures in the GC/CT space and some of the more, call them mature segments of the HAI markets such as MRSA, and we have been managing through those accordingly. I would say that is the most specific focus from a competitive dynamic perspective.

Okay. And Vince, just a quick one on generic injectables. Any guidance you can give us on the contribution from that business in the quarter? Thanks a lot.

It is very small, as we thought it would be. We're encouraged by the fact that we are gaining accounts, and of course, we have the launch and pending launch of this third drug. And for us, it is about continuing to get this breadth of product line out there. But the reaction from the customer base has been very positive.

Thanks a lot, Vince.

Sure.

Brian Weinstein, William Blair.

Hey, guys. I appreciate the comments that you just made on the women's health space. But if you could just give us a little bit more on kind of what is the long term outlook here? You're seeing changes on the competitive front and macro headwinds. How should we think about this business over kind of the more than just the next quarter or next couple quarter time frame and what is BD's strategy to kind of offset some of these headwinds? Thanks.

Hey, Brian. This is Tom. So as we look at -- maybe just let me talk -- break that into two parts, just an overall comment on the market and where we see that going, and then maybe break down into our strategy. So we still continue to see strong double digit growth ex-US and we expect that to continue because the vast majority of women still lack access to basic Pap testing. And that's really what is driving the growth ex-US. Increased access, as well as in some markets like in Europe, Germany in particular, would be a conversion from conventional Pap to LBC.

In North America, we've again, well documented that from our contemporaries, as well, this decline in Pap volumes due to extending intervals. The data that we see shows that about 60% of physicians have now implemented that expanding interval testing. That is up from about 25% two years ago. So as you think about just the longer term trends there, the interval extension is not fully matured yet in the US. We think there is going to be some further occurrence of that through FY '14. And then of course, you also have to monitor the implementation, potentially in the future, it is not certain, but the role of primary HPV screening which could have a further impact on the LBC market, and we recognize that.

Obviously, our strategy is providing a more integrated solution across cervical cancer, and that includes really the next two major product launches that we have coming in that category, which is our Totalys front end automation which is launching this quarter Q4, ex-US and next year in the US. Which fully automates that up front process, fits with the consolidation of our customer base as well and making it much more labor efficient and reducing errors. And the other piece is, of course, us entering into that HPV market with a highly differentiated genotyping assay, which is also launching of course very shortly in Europe. And we have not communicated the date yet for the US.

So participating on both sides of that, we think will be important long term. And we recognize and are investing appropriately in the segments of the market that we think will be most attractive, specifically that molecular HPV segment and creating efficiencies in that large consolidated customer segment of LBC.

Okay. And if I can follow up on Veritor, with the group in Strep product, is that actually being sold right now? I know it is out of season a little bit but is there anything that has to happen as far as the units, do you have to swap those out as you bring in the group A Strep because of some differences there with the flu and the RSV product? Thank you.

We have not launched the Strep A product yet. We do have FDA approval for our clinical kit. The Clio waiver is still ongoing. And so we -- the CLIA waiver is still ongoing. So clearly the waiver market is the large segment for Strep A and so, therefore, we have held up the launch for that. Regarding reader changes, et cetera, that is still under evaluation, if that would ever be needed, based on us and our CLIA waiver submission. So it is not something that we're actively doing at this point, no.

Bill Quirk, Piper Jaffray.

Great. Thanks. Good morning, everyone. A couple of questions. First, Tom, I'm sorry to keep harping on this but obviously several moving parts in the Diagnostic franchise right now, just to confirm it does sound like KIESTRA is going faster than expected since the acquisition. And secondly, staying on microbiology, do you expect the MALDI-TOF approval by the end of the calendar year? And just quick housekeeping question here, was there any effect of Quest on the women's health franchise in the quarter? Thanks.

This is Tom. Yes, KIESTRA is doing actually, as Suky mentioned earlier, better than our expectations. Certainly we see that ability to lower our lab's overall cost per test through labor efficiencies and accelerating time of results is really hitting home with our customers, particularly in Europe and the US. So very positive feedback there. Related specifically to Quest, in the quarter we did not see any impact of that within Q3. That is something we would anticipate more as an impact going into FY '14.

And just the MALDI approval?

MALDI, we understand that is submitted and under active review. That is Bruker's submission though so I would rather not comment on someone else's submission time and approval time.

Understood. Just a quick one, Vince. On the Biosciences franchise, as you think about the performance here over the past couple of years, a bit of a lagger here relative to the other two major segments, how are you feeling about the portfolio? Do we need to look at maybe some additional M&A in this space or is there some internal developments? How do you think about the franchise the next couple of years? Thank you.

We think there is opportunity for this business and to broaden the footprint of the business. Primarily, right now, I would think it is more organic than acquisition. There is opportunities to use flow in different ways, and we have programs both internally and with partners to do that, at the moment. So areas such as using flow at the front end for next generation sequencing, we believe is going to be an emerging market. We just published on using flow, not on the cell surface, but also inside the cell and measuring RNA. Just to name two things that we're looking at, but we're also looking at more. So we do think that in a reasonable funding environment, that this business can return to growth, but there is work to do here. Thanks for your question. It is a good one.

Thanks.

Doug Schenkel, Cowen and Company.

Good morning. So first, just some guidance cleanup. I guess this is a multi-part one. You noted delays in global automation, installations were a driver, or one of the drivers to moderation and diagnostics revenue in fiscal Q3. It sounds like you expect this to be recaptured in fiscal Q4 based on your answer to Amit's question. What was the magnitude of this dynamic? The second part is, was the delay in the RTI legal dispute, was that about a $20 million pre-tax charge? And then related to that, just to make sure we understand this correctly moving forward, is it your policy to exclude legal settlement charges but not litigation charges?

Why don't you do the first one, Tom.

Hi, Doug. This is Tom. KIESTRA in the quarter, we essentially had no KIESTRA shipments in the quarter. I don't have the number right here in terms of the exact percentage on that but it was essentially zero within the quarter. And you will see there is a significant pop in Q4. We also had shipments in Q3. So it was just a matter of timing of those shipments. Again, it is not actually anything related to orders. Those orders typically come in six to eight months prior. It is literally just when we do the installation and get customer acceptance.

We have a very nice backlog of orders.

Absolutely.

It is a matter of the customer being ready for installation and those sort of factors. Suky?

Regarding legal expenses around RTI within the third quarter, the expectation, you are directionally right, was roughly around $20 million. We expect now about $15 million of that to reside in the fourth quarter of the year. And it is our philosophy and our policy on legal settlements to actually put those into adjusted or pro forma basis from earnings per share perspective, but ongoing litigation type trial expenses or costs, we expect to keep into core earnings.

And then, Tom, if I heard correctly, I believe you indicated that you saw lower chlamydia, gonorrhea, I don't know if it was volumes or revenue in the quarter. So correct me if I'm wrong, but if you did say that, my question is keeping in mind that since the beginning of the calendar year we've seen the approval of a couple, I think what could be described as formidable competitive platforms for molecular chlamydia, gonorrhea testing, I would be curious to get your take at this point on competitive dynamics in the US market, specifically with regard to pricing, your ability to lock in customers and how we should be thinking about how BD is going to position the new products as you get the new approvals over the next few quarters on MAX and Viper. Thank you.

Thanks, Doug. Let me just give you one other bit of information actually on KIESTRA just to help maybe get a little more perception. The average price of a KIESTRA full automation line ranges from $2 million to $4 million. So just getting some perspective, if you get a couple of those in a quarter or not in a quarter, you can see that swing, the Diagnostics Systems business within that three-month window pretty significantly.

Related to GC/CT and competitive dynamics happening in that space, certainly that is, as I mentioned, an area that is well documented of increasing competition, prices. Price pressure in that segment is happening. Prices are coming down there. And that is something that we're actively managing. We are seeing, from ourselves, as we are actively solidifying and renewing our customer base, pricing pressure that we're managing through in that segment. We're working -- we're obviously doing some offsetting of that in other parts of the business, but that is an area that we do not expect to alleviate in the near term. As you mentioned, there are a number of new competitors in that segment.

In terms of our portfolio and how we really view that, within the lower tier segment, we will be of course launching our MAX assay next year for GC/CT, which is really meant for those that are more mid-sized hospitals, or those who may be sending it out. So that segment will be covered there.

We have, obviously, our high through put Viper platform, Viper XTR which is on the ultra high through put segment of the marketplace. And then our Viper LT which is also launching next year, as our bench top version, which will also have HPV in the future, is in that call it upper mid to low high volume segment of the marketplace. That will ultimately replace our ProbeTec manual product as well. So we do see it as kind of our oldest platform within that segment, which is ProbeTec, which is a highly manual system, where we also tend to see the pricing pressures, the Viper LT, at that launch is early in 2014. We will be actively upgrading that business to what we see as a much more competitive and automated system.

And I'm sorry, just one follow-up, Suky, on your comments on the legal charge. The fact that you said it was basically about $20 million that slipped out of this quarter, and you expect it to be $15 million in fiscal Q4, does that suggest that your expectation now is that the timing of that, of incurring that charge would be late in fiscal Q4, in which case, is there a chance that this actually slips into fiscal '14?

Yes, just one clarification, we said about 15 slips into Q4. Not that full 20 that I mentioned, which was the absolute amount that we had originally expected in Q3. And we do have a trial date set for early September. And where we stand today, we still believe that, that trial will occur in September and in the fourth quarter.

Okay. So 5 of the 20 was in this quarter, you expect the balance in Q4.

That's right.

Okay. Thank you.

Great. You're welcome.

Jon Groberg, Macquarie.

Good morning. Thanks for taking the question. Just a couple of cleanups and I'm sorry if I missed this earlier but on Quest, I know you said you didn't see anything in this quarter but have you kind of sized what you expect that impact to be on an annual basis, in say 2014?

We're not going to disclose that. But it will be, to your point, at 2014. There will be some impact in 2014, and we don't know what that is yet. So we can't even comment on it.

Okay. And have you disclosed before for Diagnostic Systems, what percent of revenues it is for you guys?

No.

Okay.

We don't bring those down to a customer level.

I just assumed it was a fairly -- it was a fairly public piece of information around what had happened there. And then on the microbiology platform, I'm just curious, I think that is still roughly all in close to two-thirds or so of your revenues in that Diagnostic Systems. And many of us who go out and speak with folks in those labs hear about new technologies, obviously have the MALDI bio type review, but others think that ultimately that moves to more of a sequencing application, as costs come down. I'm just curious how you're thinking technologically about your position in microbiology over the next say five years or so.

Sure. Tom will talk to that.

And just to give some context of the Quest, we haven't given a specific percentage but I would just say less than 5% is the number that I could share. That's how much that represents of the full applied sale.

In terms of events specifically in microbiology, I think we're very actively, first off we see the most near term areas as you mentioned will be mass-spec which we have a partnership and now have our own BD branded mass-spec that is pending FDA approval. That is one that we are actively behind and engaged in. Of course, that is being completely automated as part of our KIESTRA system. So for those who've attended shows would see, for example at AACC this week, us demonstrating our fully automated colony picking system that completely integrates our KIESTRA with the Bruker mass-spec system, taking advantage of that trend going forward.

After that you see molecular starting to really in the near term, I think begin to have an impact on optimizing turn-around time and efficiency within the microbiology lab, and you can see we're investing in a series of assays on our MAX platform to do exactly that. The Enteric bacterial panel is the probably one of the examples that Vince talked about earlier, that is really meant to eliminate enteric cultures within a microbiology lab and upgrade that to molecular testing. We have other assays in our pipeline that are meant to do the same thing, including our OMP assay or our respiratory assay that is in the pipeline that we've talked about.

As we are look at sequencing, we are making I would say some low level investments at this point in time in sequencing. We're monitoring that very closely. We would see sequencing within the infectious disease space as being a bit longer term, beyond that five-year horizon. Really driven by, as you mentioned, still iterations of the platform needed but also collapsing of the turnaround time and the level of automation that is required in that space. And that is very consistent with the feedback that we hear from partners within the marketplace, as well as with our customers. With that said, we are investing to some level, exploring opportunities for infectious disease and microbiology testing and NGS but we do see that as a third wave as I just described it, beyond Bruker, beyond molecular, and the next window after that would be NGS.

That's helpful. And then if I could ask one more quick one. On diabetes, can you just remind me, Vince or whoever wants to answer that, given these significant reimbursement cuts that have happened there and others kind of commenting around that particular business, can you -- I know it is more around strips and stuff -- can you just remind us whether or not you think that will have much of an impact on your business over the next 12 months? Thanks.

No, it won't. That is in a very different segment. You're thinking about BGM and durable medical equipment. So different segment.

Okay. Thanks.

You're welcome.

Derik De Bruin, Bank of America.

Good morning and thank you for taking the question. I will be quick. Hey, the R&D as a percentage of sales in the third quarter came down a bit, 5.8 I think, versus it was portraying north of 6. Can you talk about how you see sort of R&D and spending for the rest of the year? And where you sort of see that number on a go forward basis?

I think Suky guided R&D for the year, if I'm remembering right, it is like around 5.9. Did I get that right?

It was low 6. Somewhere around 6.1.

So there is just a little bit of lumpiness here. What is happening from a clinical trial standpoint, those sorts of things.

And Suky, can you just give me the breakout of M&A between Medical and Diagnostics?

From what perspective?

Basically what it was in contribution to the growth.

We haven't directly quoted that. What we are saying is that our acquisitions from 2012 are beginning to turn accretive in 2013 and those acquisitions that we've done towards the end of '12 and within '13 are starting to approach becoming neutral or slightly accretive into 2014.

So Suky, the acquisitions we're talking about this year are which ones?

So there will be Cato and SSI.

Great. And then just one quick one.

Yes.

Which are medical acquisitions, okay?

Got you. Okay. Great. Just one quick one. There has been a couple of other companies that have noted some issues with order timing and bio process. Could you shed some light on that and what you are sort of seeing?

Anything we can add to that at all.

This is Bill. Not much we can really add. We do expect a normalized fourth quarter, meaning that we will recover in that timing mode in the fourth quarter with BDAB. And this business because of the kind of the big pharma relationships, it just tends to be lumpy. So we had a softer-than-expected third quarter. We're expecting that to recover in the fourth quarter and be very much in line with our FY '13 expectations.

Great. Thank you very much.

You're welcome.

Matthew Taylor, Barclays.

Hi, thanks for taking the question. Just wanted to ask one on the margins. You had some underlying improvement in gross margins this quarter and negative impact from FX. Could you help us think about those two factors over the next few periods? Just curious in terms of your ability to continue to drive organic improvement in gross margins?

Go ahead, Suky. We feel good about our continued ability to drive gross margin improvements. And there was some acquisition costs and some other one-off things this quarter. But, Suky, maybe you want to mention --

Yes, for the year, we talked about Reloco, excuse me, for the quarter, Reloco as well as some improved pricing being offset by some acquisitions and startup costs that has been talked about. Really, I think for the full year is probably the better way to look at it because there is always going to be lumpiness from quarter to quarter when you think about $4 billion cost based cost of goods. And overall the way we see it for the year is you get about 100 basis points of improvement, or tailwind from Reloco, some of the 2012 acquisitions now becoming accretive, as well as continuous improvement. That is broadly being offset by about 60 basis points, driven by acquisitions, startup, several other types of things, like year-over-year resins, et cetera.

So that is kind of the makeup. Again, it is primarily driving our operating margin improvement, is through gross margin. And we see that profile from a top level sort of continuing forward, as we continue to invest SSG&A against new products and acquisitions.

Great. And I wanted to ask one about SG&A and as it is related to investments specifically in emerging markets. Your emerging market sales growth has been remarkably consistent over a multi-year time frame and I'm wondering, is that a growth goal you're driving towards and getting your investments to grow at about that level? Could you grow faster and how has some of the declines in overall GDP in some of those areas impacted or not impacted your business?

Sure. So we were concerned going into this year that we would see a decrease in healthcare, the growth of healthcare spending in those regions. We haven't seen that. We have seen the government's prioritize healthcare specifically in China. But also, in Latin America of course, where there has been a lot of discussion about potential government cut-backs. And as you saw in the quarter, we're doing quite well in Latin America. We're doing well in the Middle East and in Asia. So across all of those, because it is so important to social stability, we see continued spending.

It is not that we have targeted a particular growth rate for emerging markets. And as I said, we are going to fund to that growth rate. We are funding to the opportunities that we have, our capability to build really strong organizations, do the right training and the right partnering in those marketplaces and that's working quite well for us. So the result has been very consistent growth. And we're very encouraged by what we're seeing, not just on the top line but the capability that we're building.

Great. Thanks a lot for the comments.

Sure.

Vijay Kumar, ISI Group.

Thanks for taking my question. I had a couple of follow-up questions. One on LBC, I know that you mentioned the extension of intervals is impacting volumes. When you look at it sequentially, do you think, can you parse out what the impact of lower overall healthcare utilization was versus the actual extension of intervals? Do you think the complete 67% decline was adjusted because of extension of intervals?

So Tom can comment on that.

Vijay, this is Tom. By far and away intervals is the most significant piece. Again, putting it in perspective, you are looking at women going from once a year to once every three years in most cases. So that is obviously a significant impact.

We're up to about 60% of the market, or so, converting to that longer interval, from 25%, Tom, you --

Two years ago, 25%.

So it has been a major shift. That is the biggest portion.

Got you. And my next one was in BD MAX. I know you mentioned sort of 50 plus placements in the Q. And most of it was replacing your existing install base. My question is, when do you think you will run through replacing your existing install base and how should we think about placements beyond that?

This is Tom again. So not all of our placements, about 70% of the placements, were upgrades, which was part of our base strategy. As you can see, the menus, the menu that we began with was an HAI menu which was specifically the exact same assays that were on our GeneOhm platform. To secure that it was a manual system up to a more automated system in MAX. We have been working our way through that very aggressively. There are, of course, a portion of those, about a third, are brand new accounts that we have been converting to date and within the quarter. We will expect that to continue to ramp as we not only work through our upgrades and our focus now shifts into other areas, but also as our menu expansion goes into areas where GeneOhm was not present in.

So enteric bacteria is a very good example of that, as well as the GC/CT Trich assay in that market is another good example of that, of ones that are in the clinical trial. Pretty much every other assay, we have over 15 assays in the MAX pipeline, every other assay that we will be launching on that platform are new markets for us that are not going after GeneOhm upgrades.

Thanks, guys.

Thanks a lot.

Robert Goldman, CL King.

Thanks. Good morning. I wanted to follow up as well on the step-up you said you're seeing in the European safety sales growth.

Sure.

I think it was only within the last few weeks that half the member states of the EU enacted the regulation or legislation that was required. So I'm wondering, in your quarter, if this step-up in growth related near as you can tell to a step-up in the market, or a share shift in your favor. And then the second part of the question is previously you had thought that the EU council directive wouldn't result in a step-up. We just continue the growth that you have already had. But since in fact you're now seeing a step-up, just wanted to see if you're internally prepared for greater growth than you've been projecting relative to capacity, and your infrastructure for order fulfillment.

Well we're prepared for the marketplace. Let me just start there. And just remember, too, a lot of these countries started implementing before the directive went into force. The UK started, Germany was moving ahead, but Bill, anything else, any other color that we can add on safety growth, this quarter, in Europe?

I think to the longer term piece, the policy work has continued to progress. Remember that not all of the countries had their legislation in place back in May at the time of the expectation. But there is a lot of good policy work that is being done there. And in part by the way led by a number of companies from the industry, including BD. And we're seeing really good progress in same countries. Now, if their legislation drafted and at least start the front end process of figuring out how they might move. I don't think that impacted the quarter. And to your question about market growth, or share, I think it is more market evolution taking place, and particularly as Vince already mentioned in the northern part of Europe where the conversion rates and the growth tend to be higher than what we have historically seen.

And if I could just follow up with that, since, as you say, you don't think the regulation or legislation has yet impacted the market, and since I believe every member state of the EU, except for Croatia, has now passed legislation and regulation, is it rational to assume the 10% growth that you saw in the quarter is sort of the new base and you would expect growth beyond that going forward?

It is one quarter. It is hard for us to say. Keep in mind that countries, you mentioned Croatia, but Spain, and Portugal, and Italy, their going to move slow on this. So it is going to take us another quarter or so to see what happens here, and do they get more aggressive, in terms of ramping up safety. They have moved slow. So we've got one quarter at a higher rate. So we're not going to project one quarter. But we will come back and take another look at this at the end of the year. So we should talk about it then, see if we got two in a row.

Okay. Thank you.

Sure.

Eric Criscuolo, Mizuho Securities.

Hi, good morning. Just filling in for Peter. The share count, looks like it ticked up a little bit in the quarter. What was the cause of that? And wonder if maybe you could talk about how you think that is going to look going forward or at least for the next quarter.

Yes, so as I mentioned as part of my opening remarks, we completed another $50 million of repurchases in the third quarter, bringing our total to about $410 million. And we have been talking through that this year of repurchases up to $500 million. So we're about 80% there. And we're still on track to continue to work somewhere between the $400 million to $500 million range.

Okay. And then the Veritor systems, are you placing them with customers that haven't had any real point of care testing, or are they displacing competitive products out there?

Eric, this is Tom. Nearly all of those are competitive displacements.

Okay. Great.

Positions are office marketplace primarily. And now starting to go into retail chains.

And that is not a segment that we've been in historically, so there is -- we're not upgrading really any BD base. It is all brand new.

So everything we're doing is taking from competition.

Thank you.

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

Thank you very much for your participation on the call. As I said in my remarks as I was finishing up, we are pleased with the progress in the third quarter, and year to date. We're very happy to reaffirm the guidance and take you up to the higher end of the guidance range. And we're encouraged by both our growth strategies and our operating effectiveness strategies and we look forward to updating you on our next call. Thanks very much.

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