Becton Dickinson and Co (BDX) 2015 Q3 法說會逐字稿

Hello and welcome to BD's third fiscal quarter 2015 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through August 13, 2015 on the investor's page of the BD.com website or by phone at 800-585-8367 for domestic calls and 404-537-3406 for international calls using confirmation number 78953246.

I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment.

Beginning today's call is Ms. Monique Dolecki, Vice President of Investor Relations. Mr. Dolecki, you may begin.

Thank you, Jackie. 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 performances as we will speak to our revenue and earnings results on an adjusted basis which excludes certain items we recorded during the quarter.

These items primarily reflect purchase accounting adjustments that include the amortization of acquisition related intangibles as well as adjustments to reflect CareFusion's inventory, fixed assets, debt and deferred revenue balances at fair value as of the acquisition date.

As a reminder, our third-quarter results now reflect the new BD which includes the results of CareFusion for the full quarter. To provide additional revenue visibility into the new BD, we will speak to our revenue results this morning on a comparable currency-neutral basis which includes BD and CareFusion in the current and prior year periods. The comparable basis presents current period revenues on an adjusted basis that excludes a small impact related to a purchase accounting adjustment to record CareFusion's deferred revenues at fair value as of the acquisition date.

Details of the purchase accounting and other smaller adjustments and the comparable basis revenue results can be found in the reconciliations to GAAP measures in the financial schedules in our press release or the appendix of the investor relations slides.

Lastly, we have provided slides that illustrate the new reportable segment and business unit structure of the combined company which can also be found in the appendix of the investor relations slides. Copies of the release including the financial schedules and the investor relations slides are 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; Bill Kozy, Executive Vice President and Chief Operating Officer; Tom Polen, Executive Vice President of BD Medical; and Linda Tharby, Executive Vice President of the BD Life Sciences segment.

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 performance this quarter which was ahead of our expectations. This quarter marks an important milestone in BD's history as it is the first time reporting our results as the new BD, which combines the BD and CareFusion businesses generating over $3 billion in revenues in the quarter.

We continue to be on target with the integration of BD and CareFusion. We have made excellent progress with our leadership assessment across the organization and are confident we have the team in place to execute on our strategy. We remain on track to achieve our fiscal 2015 and 2016 accretion commitments.

Our solid results this quarter clearly demonstrate our early progress as the new BD. This performance was driven by continued solid mid single-digit topline performance from the BD business coupled with better than expected revenue performance across the CareFusion businesses. Once again, our solid results highlight the benefit of our diverse portfolio both on a product and geographic basis.

Additionally, the operating leverage in the quarter demonstrates we are making good progress toward delivering on our synergy commitments.

Our strong performance to date and full-year outlook gives us the confidence to raise our adjusted diluted EPS guidance despite additional foreign currency headwinds.

Now I would like to turn things over to Chris for a more detailed discussion of our third-quarter financial performance and our updated fiscal year 2015 guidance.

Thanks, Vince, and good morning everyone. I would like to begin by discussing our third-quarter revenue and EPS results as well as the key financial highlights for the quarter.

Total third quarter revenues of $3.1 billion grew 55.6%. On a comparable basis, revenues grew 2.4% which is above the 1% to 2% growth we had anticipated and communicated on last quarter's earnings call. This reflects solid growth in line with our expectation of 4.7% in the BD business. The CareFusion business declined 2% in the quarter due to a tough comparison in Infusion which was better than the 5% to 7% decline we had anticipated and communicated last quarter.

Fully diluted adjusted earnings per share came in ahead of our expectations at $2.05 growing at 34.3% over the prior year. Growth was driven by continued solid underlying performance of the BD business coupled with the inclusion of CareFusion.

As we just discussed, CareFusion's revenue performance exceeded our expectations and we were able to realize some cost synergy benefits beginning in the third quarter which is sooner than we had anticipated. However, we continue to see an increasingly negative impact from FX given the year-over-year strengthening of the US dollar.

As Vince mentioned earlier, we are very pleased with our first quarter as a combined entity. Our results year to date combined with our full-year outlook give us the confidence to increase our EPS guidance despite the increased FX headwinds. These financial metrics remain consistent with our expectation for high teens currency-neutral earnings accretion in fiscal 2016 from the CareFusion acquisition. I will provide more detailed guidance commentary later in my remarks.

We are also pleased to announce that we have continued to deleverage as we reduced the debt associated with the acquisition of CareFusion. In addition to the $650 million paydown at the end of April, we paid down an additional $250 million of our $1 billion term loan facility in July. We remain on track to achieve our commitment of 3 times gross debt leverage within 24 months of close.

Moving on to slide seven, I will review our third-quarter revenue growth by segment on a comparable currency-neutral basis. In the quarter, pricing was about flat on a Legacy BD basis. Year-to-date pricing is better than our expectations. As such, we are revising our full-year guidance for pricing to be about flat year-over-year. BD Medical third-quarter revenues increased 1.6%. Underlying medical revenue growth was approximately 4%, which includes normalizing for the tough comparison in Infusion.

Growth in this segment was primarily driven by medication and procedural solutions or MPS. As a reminder, MPS includes BD's medical surgical systems unit as well as CareFusion's infection prevention and medical specialties businesses. MPS growth was 5% which reflects growth across all platforms including strength in Flush, ChloroPrep and safety engineered products.

Revenues in Medication Management Solutions, or MMS, declined 6.1%. The infusion business had a difficult compare to last year's June quarter which grew 40%. The dispensing business also had a difficult comparison to the prior year however we are experiencing continued strong demand for our Pyxis ES product and it has continued to perform in line with our expectations. Adjusting for the difficult comparisons, underlying MMS revenues grew about 5% in the quarter.

Respiratory Solution revenues declined 2% reflecting the lost revenues associated with the previously announced recall as anticipated. This was partially offset by favorable timing of other respiratory solution products which shifted from the fourth quarter to the third quarter.

Growth in Diabetes Care was 3.4% reflecting some softness in the US due primarily to the slowing of conversion from syringes to pen needles and flattening of price trends. Offsetting this were solid sales in international markets.

Pharmaceutical Systems growth of 8% reflects favorable timing of ordering patterns as expected with year-to-date growth of 3.6%. BD Life Sciences third-quarter revenues increased 4.2% primarily driven by growth in Biosciences and Preanalytical Systems. Biosciences revenue growth was 5.1% in the third quarter driven by strong performance in research, instruments and reagents and the timing of orders in our Advanced Bioprocessing business.

As we expected and communicated to you on our last quarter earnings call, we saw a small favorable impact related to the timing of government funding in Japan. Preanalytical Systems growth of 4.1% was driven by safety engineered products and growth in emerging markets.

Diagnostic Systems growth of 3.7% reflects solid core Microbiology growth and double-digit growth in our BD MAX molecular platform partially offset by the impact of extended interval testing in the US and continued pressure in our ProbeTec Viper platforms.

Moving on to slide eight, I will walk you through our geographic revenues for the third quarter on a comparable basis. US revenues declined 1.5%. I would like to note that our third-quarter results in the US are not indicative of our year-to-date results or our go-forward expectations as we expect growth in the US to normalize next quarter.

US Medical revenues declined 2.8% due to the aforementioned tough comparisons in Medication Management Solutions, or MMS. Normalizing for the tough comparison in MMS, US revenues and US Medical segment revenues each grew about 2%. We saw solid growth in our medication and procedural solutions unit driven by Flush and ChloroPrep partially offset by a tough comparison in Pharmaceutical Systems and the AVEA ship hold impact on respiratory solutions.

US revenues in Diabetes Care were about flat. US Life Sciences segment grew 2.9%. This reflects strong growth in our US Biosciences business driven by research, instrument, and reagent sales and timing in our Advanced Bioprocessing business. In our US Diagnostics business we saw continued strength in our core Microbiology business and growth in our BD MAX molecular platform offset by the extended interval testing impact and continued pressure in our ProbeTec Viper platforms.

Moving on to International, revenues grew 6.6%. The Medical segment grew 7.4% driven by strong performance in Pharmaceutical Systems and international safety sales. The Life Sciences segment grew 5.2% reflecting strength in Preanalytical Systems and Diagnostic Systems.

Moving on to slide nine, before I get into the emerging market results, I would like to start with some comments on developed markets. US revenues grew about 2% on an underlying basis as we just discussed. In the non-US developed markets we saw strong performance with Europe, Japan and Canada all growing in the mid-single digits on a currency-neutral basis. With the inclusion of CareFusion, developed markets have become a larger and more impactful portion of the total Company revenue base.

Moving on to emerging market results, you will see that emerging markets are presented on a Legacy BD basis as this provides more a meaningful comparison to the guidance we have been providing all year. Beginning in fiscal 2016, we will provide a bridge through a new emerging market baseline that combines BD and CareFusion. With CareFusion revenues predominantly in developed markets, emerging markets will clearly be a lower percentage of total Company revenues on a combined basis. It is important to note that emerging markets will continue to be a very important growth driver for the Company.

In the third quarter, emerging market revenues grew 11% currency-neutral over the prior year bringing our total growth year to date to 10.4%. This growth was driven by Latin America and China. As we expected, our growth in Brazil improved slightly compared with last quarter's growth rate. For the total year, we expect growth in the emerging markets in the BD Legacy base of about 10%.

China growth for the third quarter was 15.4%. We saw some softness in China and as a result have revised our growth outlook slightly lower to 16% to 17% for the total year.

Moving to global safety on slide 10, comparable currency-neutral sales increased 6.2%. Safety revenues in the US grew 0.9% while international sales grew 13.5% currency-neutral with continued strength in Europe which grew double digits as compliance with safety legislation continues. Safety revenues grew 13.5% in emerging markets.

Medical safety sales grew 7.4% driven by a range of safety-engineered products including infusion disposables with strong international growth across Diabetes Care and Pharmaceutical Systems. Life Sciences safety sales which are driven by our Preanalytical Systems unit grew 4.3% in the quarter.

Turning to slide 11 and our gross profit margin for the third quarter, foreign currency had an unfavorable impact of about 50 basis points on our gross profit margin in the quarter. On a performance basis, margin expansion was driven by continuous improvement initiatives and favorable raw materials. These contributions were partially offset by higher pension expenses, product mix and other items.

Slide 12 recaps the third-quarter income statement and highlights our foreign currency-neutral results on an adjusted basis. As we discussed, revenues were ahead of our expectations while gross profit was in line with our expectations. SSG&A as a percentage of revenue was 24.3%. We are very pleased with the leverage we are getting that includes the accelerated cost synergy capture as previously discussed.

When you look at the results on a comparable basis to what the combined company would have been last year, we achieved 110 basis points of improvement year-over-year.

R&D as a percentage of revenue was 5.7% which is slightly lower due to the timing of spending with the fourth quarter. We continue to invest in innovation and expect R&D spend to be about 6% for the full-year.

Operating income grew 62.9% in the quarter on revenue growth of 55.6% reflecting strong P&L leverage as the new BD. Our tax rate increased by 110 basis points as expected due to the inclusion of CareFusion's US-based results.

In the quarter, adjusted earnings per share were $2.05 which is a 34.3% increase versus the prior year. This reflects operating profit growth partially offset by the transaction impact on the tax rate, interest expense and increased shares outstanding. Earnings were ahead of our expectations due to the underlying strength in the CareFusion business as well as our ability to achieve some cost synergies and eliminate some costs in the third quarter that we had anticipated would take place in the fourth quarter.

On slide 14, I would like to update you on our organic revenue growth profile and phasing in fiscal 2015.

Third quarter performance across the CareFusion business exceeded our expectations. While some of the respiratory solutions sales reflect favorable timing in the third quarter, we now expect organic CareFusion growth of about 3.5% for the fiscal year. When combined with our continued expectation of about 5% organic BD growth, we continue to expect about 4.5% growth for the full fiscal year.

Moving on to slide 15, there are a number of moving parts that impact earnings per share expectations. For modeling purposes and to ensure consistency, I would like to provide more color on EPS guidance.

Starting at the top of the slide with Legacy BD, the guidance we provided last quarter of $6.43 to $6.50 assumed adjusted earnings per share growth of 9% to 10% on a currency-neutral basis and an estimated unfavorable impact from foreign currency headwinds of about 10 percentage points.

Since our May update, the dollar has strengthened further against the euro and other major currencies to which we have exposure such as the yen, the Canadian dollar and the Brazilian real. The result is that we now expect an additional 50 basis points of FX pressure to Legacy BD EPS at today's spot rates. Incremental FX pressure results in a reduction of about $0.03 to our estimated BD Legacy adjusted earnings per share guidance to a range of $6.40 to $6.47.

The chart at the bottom of the slide presents our total Company guidance. As you will recall we had expected about 10% currency-neutral accretion from the CareFusion acquisition and a currency headwind to CareFusion's earnings of about 100 basis points which when applied to our May Legacy BD base of $6.43 to $6.50 resulted in a May total Company earnings guidance of $7.00 to $7.10.

Given the stronger than expected performance in the third quarter from the CareFusion business and our ability to realize some cost synergies and eliminate some costs earlier than we had anticipated this year, we expect an additional 100 basis points of currency-neutral accretion in fiscal 2015 partially offset by the incremental 50 basis points of headwinds from FX. This gives us the confidence to raise our guidance to a range of $7.08 to $7.12.

With the revised BD Legacy base of fiscal 2015, we remain comfortable with what we have previously disclosed in terms of our currency-neutral Legacy BD and CareFusion accretion profile of high teens accretion in fiscal 2016. We will update you for the FX impact of fiscal 2016 when we give guidance in November based on rates in effect at that time.

Turning to slide 16, I would like to walk you through the additional elements of our guidance for the full fiscal year 2015. Expect total Company currency-neutral revenue growth of 28.5% to 29% with BD Medical growing 48.5% to 49%, both of which are at the higher end of our previous ranges given better than expected CareFusion performance in the third quarter. We continue to expect Life Sciences growth of about 5%.

Also to note beyond revenues and EPS, all other P&L guidance for May remains unchanged. We continue to expect gross profit margin of 52% to 52.5% and SSG&A and R&D as a percentage of revenues of about 25% and 6% respectively. Our operating margin and tax rate guidance also remain unchanged.

With that I would like to turn the call back over to Vince who will provide a brief update on our progress around our key initiatives.

Thank you, Chris. Moving on to slide 18, I would like to review the program and product launches in our Medical segment and the Life Sciences unit. We remain excited about the Intelliport opportunity.

We remain excited about the Intelliport opportunity, our system for eliminating bolus IV injection errors at the bedside. We are receiving early positive customer interest and we remain on track for a commercial release.

We continue to expect to launch our insulin infusion sets in fiscal year 2016. Our collaboration with Medtronic announced in June will enable BD FlowSmart technology to be made widely available to as many people living with diabetes as possible. We had presented three different evidence posters at the American Diabetes Association's annual meeting with data on BD FlowSmart technology. This included results showing a 75% reduction in pressure rise events or silent occlusions. We are confident this product will have a meaningful impact for diabetes patients globally.

Within Biosciences we continue to anticipate the launch of two additional BD horizon dies based on the Sirigen technology. As we have been sharing with you, these dies combined with our high-end research instrument are enabling significant gains in multiparameter flow cytometry analysis. We also continue to anticipate the launch of two instruments, the X-14 high parameter multicolor research instrument and the BD FACSVia clinical instrument aimed to enable increased market adoption in emerging markets particularly in China.

Turning to slide 19, you will see the various product launches in Life Sciences Diagnostic unit. Our BD MAX molecular instrument continues to gain traction with customers in Western Europe where our expanded menu that includes the CE Mark GC/CT and GC/CT/Trich assays launched last quarter are enabling increased placements. We remain focused on menu expansion on the BD MAX platform and expect the enteric parasite assay to launch later this quarter in the US.

Followed in fiscal 2016 by the extended enteric bacterial and enteric viral assays in the EU, US in 2016/2017. In 2016, we also expect to launch GC/CT in the US and the Vaginitis/Vaginosis assays in the EU and the US. We also expect to launch the BD Totalys system in the US in women's health and cancer for cervical cancer screening automation in the first half of fiscal 2016. As you can see, we continue to have strong opportunities in our pipeline and we look forward to sharing our progress with you going forward.

On slide 20 before we open the call to questions, I would like to reiterate the key messages from our presentation today.

First, we are very pleased with our results as the new BD. Second, our performance was driven by continued solid mid single-digit topline performance from the BD business coupled with better than expected revenue performance from the CareFusion businesses. Once again, our solid results highlight the benefits of our diverse portfolio both on a product and geographic basis.

Third, we are making significant progress successfully integrating CareFusion and BD while achieving cost synergies. Fourth, our strong performance in the quarter and our full-year outlook gives us the confidence to raise our guidance for fiscal year 2015. Finally, we look forward to the future with confidence as we continue to deliver on BD's strategy of providing complete solutions for global healthcare needs.

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

(Operator Instructions). Mike Weinstein, JPMorgan.

Thank you, guys. Good morning. Maybe I will start with just the question of now that we are a quarter in, anything new or surprising that you found in CareFusion either positive on the opportunity side or negative that you have to deal with?

So, Mike, I can't think of any significant surprises. What I would tell you is I think that the implementation -- it's not a surprise, we planned it out -- is going very well. We are very much on track with what we expected as we think about both the cost synergies and the planning for the revenue synergies. I think all of that detailed planning has come together quite nicely. And I wouldn't say it is a surprise but I did mention in my opening remarks that the talent assessment and integration we feel very good about the team that we now have in place.

Now was it a little bit of a surprise in terms of the strong performance in the quarter of the CareFusion businesses? Yes. We had communicated a revenue expectation that was less and so that was a bit of an upside for the short run but in the longer run kind of issues, really nothing really on track performance.

Okay, good. Let's talk about China because there were a number of reports over the course of the earnings season from companies with issues in China. Most of them more consumer facing companies than Becton Dickinson but you did comment that you thought China was a little bit softer and your expectations came in a little bit.

So number one, can you talk about that? Second, was hoping you could spend a few minutes on the infusion opportunity in China, which infusion pumps are so very, very early in China that it is in a market that is a really developed at this point and I was hoping you could talk a little bit about how you plan on developing that market? I know there was a product that you acquired from Israel that you thought might be a good fit and I was hoping you could spend a few minutes on that. Thanks.

Sure, Mike. That is great. So I will take China and the quarter and then I will ask Tom Polen to talk about the exciting opportunity that we have in the infusion business in China going forward.

So we did see a little bit of softness in China in the quarter. It was mostly on the diagnostic side where we saw longer purchasing cycles for equipment. So that is what impacted the third quarter. We did change the guidance to 16% to 17%, down slightly from where we were last quarter. We do we expect that there will be some inventory adjustments on the medical side of the business in the fourth quarter. That is just being proactive with our distribution partners to make sure that they have the right level of inventory. That is how we get to 16% to 17%.

But when we look at it more broadly, it is still a very exciting opportunity for us, we are still outperforming our peers. But what is going on, it is becoming very big and as it is becoming bigger just the law of large numbers is starting to come into effect here. So at these growth rates, it is still going to be contributing significantly going forward and as you mentioned and asked about, we see the opportunity in the core continuing but on top of that as we go forward, the opportunity not just infusion but in other product lines.

But let me turn it over to Tom to talk about the opportunity in infusion.

Mike, this is Tom. As we think about the opportunity in infusion, maybe I will break it into time horizon approach and so across both consumables and capital. We have actually recently just launched CareFusion's IV needleless connectors through our sales channel in China and so that is a near-term opportunity associated with the infusion process. They are actually getting our first incremental sales from putting that through the BD sales force. So that is actually in the market underway.

The next product that we are looking to launch there related to infusion are the infusion sets and those are actively being prepared for SFDA submission. But those will be the next products to be launched. And following that are the pumps. As you mentioned, the pumps per hospital bed in China are a fraction less than 10% of the ratios that you see in the US and we do see opportunities there confirmed by research with them directly in the market space. We see both -- and we have confirmed interest from customers for CME pumps broadly across hospitals segments but we also actually see opportunity for Alaris in the very top tier of hospitals segments. And so we are preparing registration for both of those products now in China with more to come. But those will take a couple of years to get through the SFDA process.

I know you were coming up on a potentially new memorandum of understanding in China related to the medication delivery business. Has that gone into place and is there anything different about the new memorandum versus the prior one?

So, Mike, I am going next week to China to sign the new memorandum of understanding so I am really looking forward to that. The last one was a couple of years ago. This will include infection control products as well and it will be focused on infusion therapy.

Perfect. Thank you, guys.

David Roman, Goldman Sachs.

I just had one question on the business and one financial follow-up. Maybe first on the business, could you talk a little bit more about the special order research processing franchise and just remind us how big that is? And one of the things we have seen across the bio pharma industry is a resurgence of R&D spending and to what extent that might influence that business on a go-forward basis? And I had one financial follow-up.

Sure, so our sort business is over $100 million and has been a strong franchise for us for a long time and I think at the high-end of the research market you are now starting to see some real traction with that product line.

So maybe - Hi it is Linda here - a couple of additional comments to what Vince mentioned. So with the addition of our Sirigen dies, we are now -- and are multiparameter flow analysis, we are really able to drive multiparameters up above 50 parameters now which is unheard of in the market which is fantastic and driving double-digit growth across that research platform.

The other area that you mentioned is spending, of course we are seeing stability in spending both in the US and Western Europe which is helping and also the NIH budget which just saw an increase recently with the passing of the 21st Century Cures Act. So overall as we look ahead to our research business, we continue to see strong performance and with the funding continue to see a positive outlook as we move forward.

So as Linda says that, it is more than just the sort product line that I mentioned, Linda is also talking about the standard research products which we are very excited about.

David, you had a follow-up on the financials?

FY16, just want to confirm that you are still comfortable with that which was taking the base BD earnings for FY15, growing that at 10% FX neutral and then adding in a high teens accretion number and at that point in time you had talked about kind of being comfortable with a mid 8 number. Has anything change with respect to those assumptions and how should we think about changes in foreign currency in that context?

So you hit it on the head, David, as we said and I said in my prepared remarks, we have the baseline of what BD would have been in 2015, you grow that 9% to 10%, it is high teens accretion off of that but obviously currency-neutral. And so you have seen the strengthening US dollar impact that it had this year so that is why I said we will address that on the next call based on where rates are at that time.

Got it. Thank you very much.

David Lewis, Morgan Stanley.

Good morning. Maybe just a couple of quick questions. Chris, just coming back to margins for a second here, so they are obviously so far tracking higher than even our expectations. So two things. Where is the strength coming from the core BD? I think you talked about over 100 basis points so where is that strength coming from?

And then as it relates to CareFusion, you talked about some strength there. Is this faster implementation of the synergy plan or frankly is the magnitude of some of the opportunities proving to be larger?

Yes, so far what we are seeing is the savings are coming sooner so we don't think it is a magnitude issue but we were able to get some savings right out of the box in the third quarter that we originally thought would have been fourth quarter items. So you actually pick up an extra quarter of that because we will get those same kind of savings in the fourth quarter as well. So that is a nice little benefit.

In terms of the margin improvements core business as you know, the raw materials when we laid that out on the gross profit side is certainly benefiting us. That is offset as we always expected by some pension expense and the like. And then on SSG&A, that 110 basis points improvement is fairly significant and that is certainly driving good operating margins.

So it is all of those things contributing to very nice margins.

Okay, then maybe just two product segment questions. You talked about obviously CareFusion was stronger than expected, respiratory was much stronger than we would have expected. I know some of that reflects timing. But how much of that is timing and then can you just update us on the progress on the recall either revenue impact or earnings impact?

And then on the core Company, the only business line that looked a little weak to us was diabetes. Is there anything in particular we should focus on or is that simply order timing or stocking? Thank you.

Before we moved to Tom, let me just say on the recall issue, I will remind you that we gave an estimate last quarter of the impact that would have. That is already contemplated in our guidance and so we are in good shape from 2015. In 2016, it is really not material and I would just point out that this is a product line that is about $35 million in revenue. So not material going forward either. So I think we have got it contemplated both in 2015 and our expectations for 2016.

Hi David, this is Tom. Just maybe one or two other comments on respiratory. Some of the better performance we saw this quarter was driven primarily in our respiratory capital business with favorable timing of orders as one could expect within those capital type businesses. So that is the one point there.

Regarding the AVEA product as Chris mentioned, it is about a $35 million product line. We have not assumed in our guidance that that returns to the market within this fiscal year and so we don't see a risk for that from a timing perspective.

On diabetes and your question there, as Chris had mentioned earlier, we did see some softness in the diabetes care growth of about 3.4% driven essentially exclusively by the US which was 0.3% growth. And we really see that due to flattening of the price trend coupled with a decrease in the conversion rates from syringes to pen needles and as we sell pen needles at higher prices then syringes, a slower conversion creates a drag on the revenue growth.

Now with that said, more broadly we remain really excited about the future in diabetes care and we are focused on meeting the needs of our customers and growth opportunities both in the core business as well as in new adjacent spaces such as the new upcoming infusion set launch in FY16 as Vince mentioned in detail with Medtronic.

Okay, thank you very much.

Larry Keusch, Raymond James.

Two questions actually dovetailing on your answers. Stepping back on CareFusion, I understand the comments around the respiratory business and the timing of orders. But could you also speak to perhaps what else did a bit better there CareFusion broadly?

Separately, on the insulin infusion set opportunity which I think is a really good opportunity for you guys, could you help us think about either sizing that or putting some parameters around what this might mean to the Company?

This is Tom. So in the CareFusion business across the board we saw good growth. As we mentioned in MMS underlying, we were about 5% growth for the quarter so Pyxis ES and Infusion are both doing well there. As Chris had mentioned, we had a very large 40% growth in the prior year quarter in Infusion which made a tough comp.

We also saw very good performance though in the medication and procedural solutions business, the Legacy CareFusion products with a focus on both the ChloroPrep products but also the Infusion consumables, the IV sets, valves, etc. So really positive momentum there.

As we think about the infusion set in diabetes care, we haven't sized that opportunity but maybe some comments that I can mention is that we have received FDA, CE and Health Canada approval. At this point we are really focused on ramping up our manufacturing for that product and preparing for launch in partnership with Medtronic in FY16.

Okay, terrific. Thank you.

Rick Wise, Stifel Nicolaus.

Maybe starting off if you would with two product questions. First on pumps, the pump side of the business, Baxter reported their pump business; how their pump system rebounded nicely. And in talking to (inaudible), I had the sense that one of your other competitors, regulatory and other dislocations, are maybe helping out.

Are you seeing any benefit on that side of the business? I had assumed you all gained share in pumps, but is that going to be an incremental better driver going forward?

We do continue to do very well in our pump business. That is probably what we would say there.

That sounds good. On the Baxter CareFusion and on the Pyxis side, just rereading last quarter's transcript you were saying that you are seeing improve -- you are throwing additional resources into the Pyxis install profits. Acknowledging the complexity of the installs, are you gaining those efficiencies; are you accelerating the penetration of your existing backlog? What is happening there?

This is Tom. Good question. We do have significant work underway. As we mentioned before, we've put in some Lean Six Sigma teams to help lean out the Pyxis ES installation process and the team is making some early positive progress there.

Now with that said, we do continue to experience very strong demand for the Pyxis ES system and so while we are installing off of the backlog, the backlog does remain essentially at those record high levels still because the pipeline is being filled in with new orders at quite a good rate. And so the process improvements are underway. We have made progress. More to do there I would say but we are heading in the right direction.

We are early on but we think it is a real opportunity for us and as Tom is saying, we are seeing the initial impacts but we've got a long way to go.

Rick, maybe just one other comment I could add is to your earlier question on infusion pumps, that you're maybe looking for a little bit more color on, one other comment I could add is that we are seeing customers respond very favorable to the medication management end-to-end vision and the connectivity of our solutions across that process valuing both the pumps and the Pyxis ES being interoperable with one another through the electronic medical record and our SmartWorks platform. So that is resonating very positively with our customers.

Both Tom and I have been out visiting accounts and we have seen this firsthand. It is a really powerful value proposition that we have now.

I appreciate that. Thank you.

Brian Weinstein, William Blair.

Good morning. Thanks for taking the question. So you talked about product mix a little bit and one of the things I'm trying to get my arms around is in the new BD, can you talk about within the different sub segments which sub segments have significantly stronger and significantly weaker growth in operating margins relative to the corporate average so that we can have some idea going forward about where strength is going to come from one and what that could potentially mean for margins?

I will take that, Brian. I actually don't see anything to point to across the business. I think it is partly again what we point to is the diversity of the business and so there is nothing that is I would call out as exceptionally weak or exceptionally strong. I think each of these businesses have the ability to drive the mid-single digits kind of revenue growth and improving profitability from where they are now. So I don't think there is really nothing to call out there.

They are pretty much clustered around the corporate average. Diagnostics may be a little bit below but we see the margins there improving so nothing in terms of modeling and going forward that I would really be pointing to I think pretty much a cluster.

Okay. And then on BD MAX, you guys talked about -- I think you said double-digit growth. Were you looking at new products driving that, was it an easier comp, what is going on with BD MAX and should we expect this level of growth going forward? Thanks.

It is Linda here. Thanks for the question, Brian. So on BD MAX we continue to see expansion of the instrument in the US and in EU being driven by the expanded assays. So we launched CT/GC and CT/GC/Trich in Europe and in our enteric panels. We expect that to follow in the US. And then Vince provided very good commentary on our expected assay launches in 2016 and 2017. So really now starting to see double-digit growth in the MAX platform and positive feedback from our customers.

Linda, maybe you want to comment on what you are seeing in Europe with the expanded menu.

So in Europe what we are seeing there is a again very high double-digit growth and in terms of instrument placement, a double-digit growth percentage in terms of the uptake in overall instruments. So very positive in Europe and as we get our expanded menu expect great things in the US market as well.

Great. Thanks, Linda.

Derik De Bruin, Bank of America Merrill Lynch.

Good morning. Just a quick question. The adjusted revenues for this quarter, is that a one-quarter phenomenon or do we need to think about that $13 million or something similar to that going forward? How do we think about that?

There is a little bit going forward that will continue to bleed in. It is not significant.

Great. And then just one quick follow-up on the intervals and on the Viper headwinds, when do those begin to subside, when do you start to annualize those?

It is Linda here. Of course the guidelines came into effect in late 2012. We put that number today at about 70% to 75% penetration in terms of doctors who have adopted that new interval testing. So probably over the next year or so we say where does that finish out 85% to 90% of doctors adopting? So we probably have another year or so of the interval testing to get through.

Great. Thank you very much.

Bill Quirk, Piper Jaffray.

Thanks and good morning, everybody. I guess first question, Linda, just to follow up on that last response, we saw CMS recently talk about a five-year interval from three and this actually follows up on if I remember correctly the additional guideline or recommendations that was made last year. So I guess on a long-range basis, should we think at all about intervals potentially going to five years on pap testing?

So I think those guidelines are probably way too early for us to comment on. I can tell you that what is out there publicly from a medical community would say that five years depending on age bracket is way too long for screening. So it is something that we continue to monitor but today there is no health care system on a global basis that has moved to a five-year interval timing. So we will monitor it. Too early to comment but nothing that concerns us in the short-term on that.

And then staying on a similar diagnostic topic, microbiology in the US, can you flesh out for us a little bit how that is performing? I would certainly expect that we should see some pretty good things here given the pretty updated suite of products that you have into that space.

Yes, thank you. Our core microbiology business is doing very, very well in the US and ex US and it is driven by the strength of our BACTEC platform, driven by the strength of IDAST and our new partnership with Bruker on the MALDI platform. And really tying all this together is our new KIESTRA Lab Automation system so we have now just begun our footprint on that in the US.

We have less than a 2% market penetration so see a lot of opportunity as we move forward to really reinvent that microbiology lab from the specimen through the IDAST really starting with automating the workflow. We will have papers now globally published that say efficiency with the KIESTRA Lab Automation system installed are 60% to 70% improvements in their workflow efficiency. And the next thing we will look to do is really introduce Smart Imaging into that platform.

So I am very excited about our US microbiology business and what we are doing across the entire platform.

And it really (multiple speakers) growth this quarter.

It did, very nice.

Very good. Thanks.

Jon Groberg, UBS.

Good morning, so just two quick questions. One, Vince, can you update us where you are on the strategic review process? Obviously there were a number of press reports that there could be some businesses that might be divested.

And then secondly, I think you maintained your emerging market growth outlook but China which is a big part of that was brought down. Just curious where you saw some offsets there to maintain it?

Then what do think is a reasonable emerging market growth rate for the next three to five years just given a lot of the macro noise that we see there?

We haven't changed our perspective on emerging markets. We kept it at 10 for the year. I think that is a good way for us to be thinking about it. And you are right, there are moving pieces there. We saw Brazil bounce back for example, India actually we don't talk about has been doing better and better for us. So we expect Asia to continue to be strong.

So it is not just China. And as we said, China is going to continue to be strong for us, it is not going to be at 20% going forward so that is the way we think about that.

In terms of the strategic review process, we are making good progress on that program and we are to the point of doing some market checks on appropriate assets and we will keep you updated as that moves forward.

Thank you.

Doug Schenkel, Cowen and Company.

Good morning. If cost synergies were to continue to track ahead of plan, how do you balance the opportunity to let that flow through versus accelerating the pace of investment and growth in sales synergy initiatives?

Clearly we have some commitments and targets to meet. I would say right now we are not seeing the acceleration increase in the total amount of synergies. So there is -- we are not saying that and so we are going to meet our commitments of high teens and that is very important to us. Clearly there is always a balance but we feel like we are making the right investments, we are not holding back in investments. You saw us last quarter announce that we were going to do some registrations in China right out of the box because even though it was a little bit of drag we knew that it was the right thing to do.

So I don't see anything we are holding back on because of that so that is the way I would leave it.

And I do have a second question but just to be clear on that, you did pull forward some of the cost synergies into this quarter. I guess really the question is as we think about the next few quarters if there is opportunities to do more of that? Does that allow you to accelerate investment or would you actually allow some of the upside to flow through for investors?

Yes, it is a hypothetical question. We are going to do the right thing. If we think there is a benefit to accelerating something, we would accelerate it keeping in mind, if we were in that position keeping in mind our commitments that we are making. We did and we talked to you I think it was last quarter about the fact that we accelerated the work on registration for China. Those kind of one-off decisions we would be making. We will just be rational about it.

Okay. And then I think for Tom, earlier this year we had talked about the ability to move some of the CareFusion products in Europe out of distributors and into BD direct channel. I think that was something that maybe was at least one area of focus within the context of the annual strategic review. Any update on that? Thank you.

We haven't been driving that yet. We have been focused on in some markets where the products were not necessarily launched yet has been our focus such as ChloroPrep has been a primary area. The other thing I would say perhaps is that we have integrated in our distributor for dispensing in Europe and so we do now take that -- we are taking those products direct so the entire dispensing business we are now taking direct through Europe.

Okay, thank you.

Vijay Kumar, Evercore ISI.

Thanks for squeezing me in here. Maybe one quick housekeeping question. On the guidance for the year, it looks like CareFusion came up a little bit and you sort of kind of hinted Legacy BDX was around the mid single-digit range so I'm wondering did the organic for the combined entity, did it just come up versus the prior guidance?

As we laid on that chart, we are still at about 4.5 and so a little bit up on CareFusion but it is more rounding than anything else. So we have continued to show the 4.5 and we laid that out on the chart as to where that is coming from so pretty much in line with what we would have expected.

Great. And then one on pricing, it is heartening to see pricing actually coming in flat. I think that is the first time we have had a flattish pricing year in quite a number of years. And I am just wondering is this sort of a market phenomenon? Are you seeing anything on the comparative front? Is that what is going on? I'm just curious how should we be thinking about pricing on a go-forward basis?

We will have to look at that again next year as we get into it. Last year we saw a little bit of negative pricing in the fourth quarter. And I know we are guiding pretty much flat pricing for this year but it is still a very competitive marketplace. I am very happy with the way we have managed pricing this year, it is something we are really intensely focused on.

But I think we have to stay tuned to our plan before I say -- the market has changed. I would not be making that statement. I think we have done a good job this year and so we will revisit next year.

I would just add that it feels to me pretty much the same as it did last year. We did have a little bit of a blip in the fourth quarter last year but it was pretty flat up to that point, it feels the same here.

That's what I think.

And the last one, leverage levels you kind of refigured at 3X within 24 months of deal closure. I am just curious are there any adjacencies that you would be interested? You are obviously getting into medication management a lot of (inaudible) informatics kind of opportunities and would that be appealing for you?

Vijay, I wouldn't comment on a particular adjacency but we do continue to think about plug-in acquisitions as we go forward and we look forward to having more flexibility as we take those debt levels down.

Thanks, guys.

Rich Newitter, Leerink Partners.

Thanks for squeezing me in. Just on the CareFusion side of things, Pyxis or Pyxis ES, can you just update us on where you are with respect to the installed base, the opportunity and the upgrade cycle kind of whether it is in innings our actual quantification? Can you give us a sense of where you are, where you see you can go?

Sure, this is Tom. We are less than 20% converted our base business and so we are in the early innings.

Long way to go.

That is very encouraging. Maybe higher level, as you kind of engage further with customers with the combined portfolio and kind of the broad kind of complementary nature of the BD and CareFusion full suite of offering across the hospital, are the conversations or can you characterize how the conversations are going there? Anything to suggest that maybe some revenue synergy potential could begin to formulate even faster than expected as we look to 2016 and beyond? Anything to increase or decrease your confidence on that front? Thanks a lot.

We are pretty much where we said we were going to be. Tom mentioned that the concept in terms of the medication management is resonating very well. We have some work to do with integrating Cato and CRISI into the system and getting the software aligned. So there is some technical work to be done that gates us a little bit in the short run. But in terms of how we are thinking about it and the timing, I think we are right on track. Tom also mentioned we are making progress getting product into the market outside of the US as he mentioned in China. So right where we expected to be.

Thank you.

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

Thank you very much for your participation today and your thoughtful questions. It is a very exciting time at BD and we look forward to updating you on the progress of this strategy as we wrap up the year. Thanks very much.

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