Becton, Dickinson and Co. F3Q09 (Qtr End 6/30/09) Earnings Transcript

Jul.30.09 | About: Becton, Dickinson (BDX)

Becton, Dickinson and Co. (NYSE:BDX)

F3Q09 (Qtr End 6/30/09) Earnings Call

July 30, 2009 10:00 AM ET

Executives

Patricia A. Spinella - Director of Investor Relations

Vincent A. Forlenza - President

David V. Elkins - Chief Financial Officer and Executive Vice President

William A. Kozy - Executive Vice President

Analysts

Bruce Cranna - Leerink Swann LLC

Michael Weinstein - JPMorgan

Kristen Stewart - Credit Suisse

Peter Lawson - Thomas Weisel Partners

David Lewis - Morgan Stanley

Sarah Michelmore - Cowen & Co.

Jon Wood - Bank of America/Merrill Lynch

Keay Nakae - Collins Stewart

David Toung - Argus Research Company

Jeffrey Frelick - ThinkEquity

Operator

Hello and welcome to BD's Third Fiscal Quarter 2009 Earnings Call. At the request of BD today's call is being recorded. It will be available for replay through Tuesday, August 6 on the Investors page of the bd.com website or by phone at 800-642-1687 for domestic calls and area code 706-645-9291 for international calls using conference ID 16834521. I'd 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. Patricia Spinella, Director of Investor Relations. Ms. Spinella, you may begin.

Patricia A. Spinella

Thank you. Good morning everyone. And thank you for joining us to review our third fiscal quarter results. As a relatively new practice and as we referenced in our press release in this morning, we are presenting a set of slides to accompany our remarks on this call. The slide presentation is posted on the Investor Relations page of our website at bd.com.

During today's call, we will make some forward-looking statements and it's 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. A copy of the release, including the financial schedules is posted on the bd.com website.

Leading the call this morning is Vince Forlenza, President. Also joining us are David Elkins, Executive Vice President and CFO; and BD Executive Vice President, Garry Cohen and Bill Kozy. I will now turn the call over to Vince.

Vincent A. Forlenza

Thanks Pat. Good morning everyone. And thank you for joining us today. Before turning the call over to David to review our third quarter results in more detail I would like to briefly comment on some of the highlights from the quarter.

First let me comment on the divestiture of our Home Healthcare product line to 3M this month. While this was a difficult decision since the ACE brand has been a part of the BD since the early 1900s, it will allows that diabetes care unit to focus on the core business and expand into new growth areas 3Ms acquisition of these products from BD complements the current portfolio of consumer based healthcare products.

Moving on to our performance this quarter; you may recall that our revenue guidance for Medical in the second half was to increase about 6% from the 2% growth we experienced in the first half, currency neutral. Some analysts and investors were concerned about our ability to guide such a significant increase. But as we had explained on call, we expected all business units in medical to improve. In particular, we expected our diabetes care and pharmaceutical systems units to accelerate.

As you can see from our third quarter results, Medical is achieving higher growth rates. We also had guided revenue growth improvement in Diagnostics in the second half and Diagnostics actually fared better than our expectations. Strong sales of molecular diagnostics, TriPath products and rapid flu test contributed to growth. Biosciences on the other hand fared worse than our expectations.

Capital spending constrains continue to dampen demand for research and clinical instruments in the U.S. In international markets demand for Biosciences instruments in Japan as well as some countries in Europe began to weaken.

Overall however, we are very pleased with our third quarter results. As stated in our press release, our third quarter results exceeded our expectations and as a result, we are revising our revenue and earnings guidance for the year to the upper end of the range that we had previously communicated in our second quarter call.

Our guidance is for revenues to increase 4 to 5% currency neutral. Given our third quarter results, we now expect revenues to increase about 5% currency neutral for fiscal 2009. Our earnings also exceeded our expectations, resulting from gross margin improvement and continued tight expense control while we continue to fund our growth opportunities. We have revised our guidance on diluted earnings per share from continuing operations for fiscal 2009 to an increase of 11 to 12% over diluted earnings per share from continuing operations, excluding specified items, of $4.42 for fiscal 2008 which is equivalent to the upper end of the range that we had previously communicated in our second quarter call.

Before I turn the call over to David, I want to point out that many of you had asked about our hedging program and its impact on our results. Therefore, David will cover our hedging program in greater detail as he takes you through a detailed review of our third quarter results and outlook for full fiscal year 2009. I'll now turn the call over to David.

David V. Elkins

Thank you Vince and good morning everyone.

First turning to slide six. Let me point out that the financials we'll be discussing this morning represent results from continuing operations. Therefore exclude the Home Healthcare product line as Vincent had mentioned earlier. The results also exclude two specified items covered in our press release. The first charge relating to the pending antitrust settlement recorded in the second quarter and the second a tax benefit relating to various tax settlements recorded in the third quarter.

Now, I'd like to highlight some of our third quarter results. Revenue came in better than expected at 5%, currency neutral growth, with Diabetes Care, Pharmaceutical Systems and Diagnostics all achieving solid growth. The additional revenue and our operational efficiencies produced fully diluted earnings per share in the quarter of a $1.30, excluding specified items. The economic environment continues to impact some customers. Although customer de-stocking appears to have stabilized during the quarter, currency continues to impact year-on-year reported growth.

On slide seven you can see top-line growth for the company in the third quarter was 5%, currency neutral and we are guiding about 5% for the full fiscal year. As I mentioned earlier, EPS for the quarter was $1.30 representing 10% growth. For the full fiscal year, we're guiding $4.92 to $4.96, representing 11% to 12% growth.

On slide eight, we began a review of revenue growth by segment. Medical's third quarter revenues declined about 3%,after an 8% favorable impact from foreign currency translation. On a currency neutral basis underlying growth was about 5%. On a currency neutral basis, solid sales of insulin delivery, safety-engineered and prefillable devices contributed to the growth. For the nine months period, underlying growth was about 3% on a currency neutral basis.

Revenues for BD Diagnostic segment grew about 2% after a 6% point unfavorable impact from foreign currency translation. On a currency neutral basis, underlying growth was a solid 8%. Solid sales of safety-engineered devices, cancer diagnostics products and infectious disease testing systems, including flu related products contributed to the growth. For the nine months period underlying growth increased about 6.5%.

In the Biosciences segment, worldwide revenues declined about 4% in the quarter. On a currency neutral basis they declined about 1%. As Vince pointed out, demand for instruments in the research and clinical segments in U.S. continue to be impacted by a lack of research funding.

Weakening demand for instruments in Japan and parts of Europe began to emerge during the quarter. For the nine months period, underlying growth increased about 4% on a currency neutral basis.

Now, moving to Global Safety on slide nine; reported sales grew about 4% in the quarter to 422 million. On a currency neutral basis underlying growth was about 9%. This comprised of 4.5% growth rate in U.S. and a strong underlying international growth rate of 18%. For the nine month period underlying growth was about 8% on a currency neutral basis, which is the combination of a 3% growth rate in U.S. and an underlying growth rate in International Safety of about 19% on a currency neutral basis.

Safety in the Medical segment increased about 8% in the third quarter currency neutral. In the Diagnostic segment, safety increased about 11% in the quarter currency neutral. The currency neutral growth for the nine month period for the medical safety was about 6% and diagnostic safety increased about 10%.

The next slide looks at revenue by region. In the third quarter BD's U.S. reported revenues increase 3%. U.S. medical revenues increased by 3% year-on-year reflecting solid sales of prefilled flush syringes and pen needles (ph) which were offset in part by the anticipated decline in prefillable devices.

U.S. sales of Diagnostic products increased 7% reflecting strong sales of molecular diagnostics. Biosciences revenues in U.S. declined reflecting continue weak demand for research and clinical instruments due to funding constrains. As a result of this market dynamics total year-to-date reported revenues increased 2% in the U.S. with Medical increasing about 1.5%, Diagnostics increasing about 4% and Biosciences declining about 2%.

Reported International revenues in the third quarter declined 5% year-on-year reflecting 11 percentage point unfavorable impact from foreign currency translation. On a currency neutral basis however, underlying growth was 6.5%, driven by particularly strong double-digit performance in Asia Pacific and Latin America and solid performance in Western Europe.

In third quarter International revenues, our currency neutral basis resulted in underlying growth of about 6% for Medical, 9% for Diagnostics and 2.5% for Biosciences. For the nine months period, reported International revenues declined about 1% from the prior year period reflecting an eight percentage point unfavorable impact from foreign currency translation. On a currency neutral basis, international revenues increased about 6.5% year-to-date with Medical, increasing 4.5%, Diagnostics increasing 9.5% and Biosciences increasing 7%.

Now turning to slide 11 we look at the components of our third quarter revenue growth year-on-year. Gains from underlying performance and our hedging program were more than offset by currency, reflecting approximately $149 million of lost revenue due to a strengthening dollar.

Moving to slide 12, gross margin improved to 180 basis points in the third quarter or 52.8%. This was driven by lower raw material costs, primarily resins, offset in part by start-up costs, product mix which collectively contributed to 70 basis points. Hedging gains contributed an additional 70 points and foreign currency translation added the remaining 40 basis points of improvement.

Slide 13, now examines SSG&A and R&D expenses in the third quarter as well as operating income. SSG&A spending decreased by 6 million in the quarter. This was primarily driven by favorable foreign exchange. Underlying expense growth was flat after counting for miscellaneous non-recurring charges in the quarter, which included reserves for bad debts in Europe.

R&D spending decreased about 1%, primarily due to favorable currency. On an underlying basis our R&D spend increased. We continue to focus more of our spending on our key growth initiatives.

Our third quarter operating income increased by 6%, to 432 million. As a percent of sales operating income increased 160 basis points to 23.7%. This was a result of the positive impact that the hedge gains, the foreign currency translation and lower resin cost had on our gross margins, as well as the margin expansion we get from our continued focus on expense management.

The next slide illustrates the degree to which currency has negatively impacted revenues year-to-date. The 6.1% positive impact of performance and hedge gain on a combined basis has been entirely offset by 6.1% negative impact of currency.

As you can see on the next slide, slide 15, year-to-date our gross margin has improved116 basis points. This was driven by currency and hedge gain, offset in part by start-up cost and a change in product mix.

Slide 16 examines SSG&A and R&D expenses and operating income year-to-date. SSG&A decreased 36 million, primarily due to favorable currency, partly offset by inflation and the aforementioned nonrecurring miscellaneous charges in the third quarter. R&D increased 7 million to 5.6% of revenue, reflecting our continued investment. Our year-to-date operating income increased by 9.6% or to 23.9% of sales for the reasons I mentioned earlier.

Now let's move to slide 17. Since we continue to have unusual swings in currency and hedges on a quarterly basis, I would like to walk you through the components that make up our year-to-date earnings per share and our underlying growth.

We start with diluted earnings per share from continuing operations of $3.67, which is within our guidance range of 11 to 12%. From this we remove two specified items, I mentioned earlier. This yields earnings per share of $3.70, which is also within our guidance range of 11 to 12% growth. We further remove an approximate $0.23 gain which resulted from our hedging program and approximate $0.07 from unfavorable currency, which yields an adjusted level of EPS of $3.54 for fiscal year 2009. This results in an underlying growth of approximately 7% when compared with our EPS for 2008.

You may recall that during the second quarter earnings call, we reported an underlying growth for the first half of the year of 4.2%.

Now let's go to slide 18 to discus our revenue guidance for the full year. BD's underlying growth for the nine month period was about 4%. We now expect underlying growth for the full fiscal year to be about 5% currency neutral, reflecting strong growth in our Medical segment, primarily driven by continued improvement in our Farm Systems businesses, demand for flu pandemic related products and continued solid performance by our Diabetes Care business.

Continued strong growth is also expected from our Diagnostic segment, driven by safety-engineered devices, cancer diagnostics products and infectious disease testing systems. As a result the reported growth for the full fiscal year is expected to be about 1% on a currency neutral basis. On a currency neutral basis, the full year revenue outlook for Medical is expected to increase about 5%; Diagnostics about 6 to 7% and Biosciences about 2%.

Moving to slide 19; I'll walk through our guidance for operating margins and cash flows. We expect our gross profit margin to improve from 51.3% to a range of 52.5% to 53%. SSG&A is expected to improve from 24% of revenues to a range of 23.0% to 23.3% of revenues. R&D spending is expected to increase 5.6% to a range of 5.6% to 5.8% of revenues. Therefore, our overall operating income margin is expected to improve from 21.7% to a range of 23.5% to 24%, which is approximately a 180 basis point improvement year-over-year.

Operating cash flows are expected to be about 1.6 billion for the full fiscal year. Capital expenditures guidance is revised to about 600 million from the previous 650 million. And we continue to guide share repurchases of about 450 million for the year.

Let's now turn to slide 20, for EPS outlook for the full fiscal year. I'd like to take this opportunity to review the impact of our hedging program on fiscal year 2009, earnings and our expectations as we go forward. As we reported in our earnings release our third quarter results included $0.07 gain from our hedging program. Year-to-date our results include a $0.23 hedge gain and we estimate the full fiscal year will include a gain of about $0.28. This significant gain is primarily the result of the unusual volatility in euro U.S. dollar rate of exchange year-on-year.

As a reminder we hedge 60% of our euro currency exposures; 100% of Canadian dollar and a 100% of the yen. We do this by entering into forward contracts to buy U.S. dollars in the future at a fixed rate of exchange at the time we enter the contract. In the spring of last year the dollar had reached unprecedented lows against the euro. At that time we decided to enter into forward contracts to ensure against the strengthening of the dollar versus the euro.

At the start of the fiscal year 2009, we experienced a significant strengthening of the dollar, which created a large unfavorable currency variance to our year-over-year reported revenues and earnings. This in turn resulted in gain from the forward contracts that we entered into last year on the hedged currencies. This helped, medicate the downside impact of the strengthening dollar and the resulting lower reported revenues and earnings. It also resulted in the forecasted $0.28 benefit on slide 20.

Although, we continue our hedging program, we would not expect the currency moves and resulting hedging that we experienced this fiscal year to repeat next fiscal year. We viewed this hedge gain as a discrete effect for the purposes of establishing our 2009 base line. As a result we'll utilize the $4.64 to $4.58 earnings per share as the baseline for establishing our fiscal 2010 earnings estimate.

In summary, there are several key takeaways for today. First, Medical and Diagnostics currency neutral revenue growth improved in the quarter as we had expected. This gives us further confidence in our guidance for the year. Biosciences continued to experience slowing growth through the capital funding constraints and this is anticipated to continue in the fourth quarter. We continue to see improvement in our operating margins and just stated earlier, extraordinary currency movements resulted in a significant hedge gain that will not repeat itself in 2010. We tightened our guidance to the top end of the EPS range.

Lastly, the underlying business continues to exhibit strong growth, despite the economic challenges that we face. Thank you and I'd now like to turn the call back over to Vince for his closing remarks.

Vincent A. Forlenza

Thank you, David. Before we open the call to questions I would like to comment on our preliminary outlook for fiscal 10 as well as our longer term outlook going forward. As you know we will provide our annual guidance for fiscal 2010 in November as part of our final year end analyst call.

We were pleased to revise our earnings and revenue guidance for fiscal 2009 to the top end of our range driven by strong performance of our Medical and Diagnostic segments, particularly in light of the challenging global economy.

As David explained we do not except the fiscal 2009 hedge gain to repeat in fiscal 2010. Therefore, we're reviewing it more as a discreet item which should be discounted from fiscal 2009 results in order to determine an earnings base for projecting estimated fiscal 2010 earnings. This results in a fiscal 2009 earnings per share base of $4.64 to $4.68.

Also with the limited view of what the economy will be like next year, we would expect preliminarily our underlying earnings performance in fiscal 2010 to be similar to our underlying performance of about 7% year-to-date for fiscal 2009, which David just reviewed with you.

Longer term however, we continue to believe strongly that we are well positioned to increase our top-line growth in the 7 to 9% range and accelerate our bottom line EPS growth in the 10 to 12% range as the global economy recovers. We expect to achieve this through good revenue growth performance in all three segments and regions. As well as gross margin improvement and SSG&A leverage.

We're committed to funding our growth initiatives and developing our organization to best position BD to meet the healthcare challenges of our customers. Our ongoing investments in growth opportunities along with our continued focus on productivity improvements and disciplined expense management will ensure our future success. Thank you. And we will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Thank you. Our first question is coming from Bruce Cranna with Leerink Swann.

Bruce Cranna - Leerink Swann LLC

Hi good morning guys.

David Elkins

Good morning.

Vincent Forlenza

Good morning.

Bruce Cranna - Leerink Swann LLC

Dave, can you just run through the gross margin pickup year-over-year again by pieces I missed some of those?

David Elkins

Okay. For year-to-date or did you want the third quarter?

Bruce Cranna - Leerink Swann LLC

Just the quarter.

David Elkins

Just the quarter, so revenue growth year-over-year that is 5 percentage points that related to performance. 1.4%...

Vincent Forlenza

He's asking about

Bruce Cranna - Leerink Swann LLC

No. I'm sorry yes the gross margin

David Elkins

So the gross margin moved from 51% to 52.8%, performance was 0.7, hedge gained was 0.7 and currency was 0.4.

Bruce Cranna - Leerink Swann LLC

And did you make a comment on resin in there, if you did I missed it?

David Elkins

No, I did not.

Bruce Cranna - Leerink Swann LLC

Okay. And then on flu side, can you quantify the actual uptick in the quarter in dollars for flu sales and weather or not you thinks that's, I guess indicative of what the next couple of quarters might look like or should we think about that moving back down.

Vincent Forlenza

Bruce this is Vince. So I'll take the diagnostics piece of it. Diagnostics had about $8 million in flu sales in the quarter, with bulk of that 5 million being at ex U.S. And then medical had... I'm sorry 5 U.S., ex switched 5 U.S. for the flu products. Bill on the medical side?

William Kozy

$5 million of revenue in medical business in the third quarter.

Vincent Forlenza

Now in terms of looking forward it's difficult to predict exactly what's going to happen here, but we do expect that we will see on a medical side in the syringe area ongoing orders for flu products, in fact Bill do you want to comment on the balance of the year.

William Kozy

Sure as of July 23rd, in terms of -- we've received about $45 million of firm commitments, 27 million of those are in the medical surgical business the remaining $18 million went to the pharmaceuticals systems business. As Vince, has already mentioned we shift $5 million for those orders in the 3Q and we estimate shipment of another $27 million in the fourth quarter with the remainder to follow-up and first follow FY '10.

Bruce Cranna - Leerink Swann LLC

Okay, and then last from me, just philosophically the change clearly with taking hedges out of the base, the hedge gains out of the base and then looking forward with some other, I think moderate earnings expectation, caught some of us by surprise, can you guys just walk us through the timing of this now and that why was it better, let's say more precisely talked about in quarters past?

David Elkins

Well let's go back to the hedge first, I think we have been calling out very clearly the hedge gains, especially on our second quarter earnings call and in following conferences that I, that I did myself in fact, we had a slide, it was slide 17, I believe last year, last quarter I'm sorry, that called out the hedge gain.

And so number one, I think we have been talking about it and talking about it as a discrete event. In terms of the mechanics of the hedge, I think in understanding the hedge, the background and calling out where the euro was, both on the second quarter and in following comments we've made since then, we've been very clear that the hedge was resulting from this large change in euro and the mechanics would lead you to it as a discreet event.

Bruce Cranna - Leerink Swann LLC

Okay. Thank you, thanks.

Operator

Our next question comes from the line of Mike Weinstein with JP Morgan.

Michael Weinstein - JPMorgan

Thanks. I have several questions, just maybe targeted first on the commentary on the FX and back, if I do my math now, right now and have to adjust for your hedges on the revenue line that it would seem by our math you would have about 2% FX, sorry, tail wind in your fiscal 2010 at this point. Negating any of your hedging that you would have so you would have a benefit on the top-line in 2010 and because of your hedging, you're 60% hedged on the euro, you should have some benefit that would flow down to the bottom-line, that's when you're talking about underlying growth for 2010 comparable to what we've seen in the first nine months of 2009. A, are you factoring that in. B, are you factoring in any benefit from stimulus in Biosciences and then see what impact you can get out from it (ph)? Thanks.

Vincent Forlenza

Let me take the business side of it and I'll let David comment on the FX piece of it. On the Bioscience piece and we won't get into guiding by business or anything, but thinking about where Bioscience the market factors for Bioscience is, we are expecting some turnaround from the stimulus in the U.S. So we would expect to see some improvement in the U.S. Our concern is that we will see -- we will not see a recovery in the Biotech and Pharma segment in the United States and then ex-Europe will have tough comp next year in the first quarter of the year on Biosciences. So in terms of FX I'll turn that over to David.

David Elkins

Yeah. Let me just go through that with you, Mike. I think the best way is two conversations, looking at this year versus last year and last year we locked in our forward contracts, up around a $1.57. So we were very fortunate to do that and as you know the average rate this year, dollar to euro is about $1.36. Sitting here today looking at next year we've been hedging as each month goes by. And I think the spot rate is around a $1.40. So we wouldn't see any kind of significant gains next year on the top line because of the hedge.

Michael Weinstein - JPMorgan

You hedge out the gains that you could be getting into 2010 from the dollar tailwind is what you are saying.

David Elkins

Yes, we have been locking it in as each month goes by this year we've been locking it in. So for a comparison basis, last year we were fortunate in that we locked it in at 1.56-1.57 range.

Michael Weinstein - JPMorgan

And that's let's say around 6% of your exposure?

Vincent Forlenza

You're right.

David Elkins

That's right.

Michael Weinstein - JPMorgan

Okay and then that remaining 40% didn't get dropped to the bottom line if there's a tail wind?

David Elkins

Yes that's correct

Michael Weinstein - JPMorgan

Okay and then do you want to pitch on flu impact for 2010. Just be clear when you're talking about, so we can get apples-to-apples here. When you're talking about underlying growth which is I think the term you guys used for 2010, are including any benefit on the currency, you do have exposed and are you including any benefit from the some of these other items we are talking about? Thanks.

Vincent Forlenza

Well on the revenue side, kind of all-in. We are expecting business performance in Medical and Diagnostics to be similar to what we are seeing with in second half of this year, continued performance that way. And as I said some, mild improvement in Biosciences year-on-year. And we do expect within that to be some sales of flu products.

David Elkins

I think might thinking about next year, we just use the current spot rate. So if currencies changed from where they are today than obviously that would impact what we're forecasting for next year. We kind of think about dollar, euro at around today's spot rate around 1.40?

Operator

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

Kristen Stewart - Credit Suisse

Thanks for taking my question. Just I guess going back to the syringe, did you say that you are going to look at it from the base I think 4.64 4.68 and that 2010 would be preliminarily up 7% of that numbers, is that correct.

Vincent Forlenza

That's correct.

Kristen Stewart - Credit Suisse

Okay. So then just walking through kind of the P&L where I mean is it just that we see the removal of this hedging gains within the gross margin lines or we see SG&A be a little bit higher or which of the kind a more about the muted top line just flowing through.

David Elkins

We're not going to get into guiding through the P&L, we'll come back and we do that in November. We are just trying to give you a really kind of a top line preliminary outlook as to what we see with the limited visibility that we have to the world economy.

Kristen Stewart - Credit Suisse

Okay.

David Elkins

But certainly changing, the hedge gains coming out of the base is the biggest impact.

Vincent Forlenza

And Kristen we are still finalizing our financial plans for 2010. So it's a little bit early for us to get into details, but we will give a formal guidance towards the end of the year, when we give our end results.

Kristen Stewart - Credit Suisse

And what was the reason for the change in CapEx guidance for the full year; is that part of maybe some expense initiative that has offset some of the 2010?

David Elkins

No, I think the CapEx we are constantly looking that as part of our expense management as well as managing our cash position. We're constantly looking that updating those estimates and updating those estimates based upon when we think the work is going to be done. So there wasn't anything in particular, I think its just latest estimates of what we believe we'll spend this year.

Kristen Stewart - Credit Suisse

And then just on the interest expense line item. Was there anything else in there? I know you guys had some sort of pension or deferred comp that might be in that number as well?

David Elkins

Yeah, just bear with me one moment. The interest income in the third quarter increased about $2 and that was mainly due to lower interest income, both balances as well as the interest rates that we're receiving versus last year because interest rates have come down. Does that answer your question?

Kristen Stewart - Credit Suisse

Yeah.

David Elkins

Okay.

Kristen Stewart - Credit Suisse

Thank you.

Vincent Forlenza

Welcome.

Operator

So our next question comes from the line of Peter Lawson with Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

I wonder if you could just talk through the divestiture on BD how that business is going to change going forward, what do you thinking about M&A for that space.

Vincent Forlenza

Well. We wouldn't get into discussing M&A in that space. The comment that we made was that we got out of the business that really wasn't cored to this strategy of that business. It enables the management team to better focus on that core business, on the core diabetes side of things. The other piece was clearly becoming a little bit of a distraction. And so and that's about as far as I would go with the comment.

Peter Lawson - Thomas Weisel Partners

What part of that business you really kind of want to focus upon and wonder if I could crunch it that way.

Vincent Forlenza

So I'll let Bill make a comment.

William Kozy

Hey, good morning. The real strategic focus there is on the pen needle categories, the market is growing at low double-digits globally, it's got significant international expansion and investment around the R&D line and product array will it be targeted at that category.

Peter Lawson - Thomas Weisel Partners

I wonder if you just talk through the strength you're seeing in infectious disease business at the moment?

Vincent Forlenza

Sure. So a number of the pieces of the business did well. First the molecular business grew double-digits, that was both the ProbeTec and Viper product lines did well, as longer the smaller piece of the business which is the firm product line, which is vaginosis testing system. So we are very pleased with those results. We introduce the new version of Viper and we saw some of that impact in the quarter. In TriPath we also had excellent results. And TriPath in the quarter was up 13% and that was driven by some strong instrument placements, especially ex-U.S.

Rapid Diagnostics we mentioned the flu test already. That was about little over 6 million of the 8 million that I commented on, in terms of flu related sales so good performance in all of those pieces.

Peter Lawson - Thomas Weisel Partners

Okay, thank you so much.

Operator

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

David Lewis - Morgan Stanley

Good morning Vince and everyone. Just to be clear I know you got several questions on this, just want to understand the 7% number. Are you talking about 7% revenue and inline growth from the bottom or you're really talking about 7% bottom line growth?

Vincent Forlenza

Bottom line growth

David Lewis - Morgan Stanley

Okay. So David should we think about fiscal '10 over fiscal '08 on the GM line as being flat? There's something around 51% gross margins for 2010, is that a realistic assumption?

David Elkins

As I said to Kristen, we're really not operating this down at this point. We're still doing our internal plans. What we are really trying to do here is just highlighting as we did in the second quarter, what the true underlying performance of the business was at the bottom line and wanted to share with you how we're thinking about the base this year to hedge not repeating next year and that the underlying business this year, year-to-date has gone about 7%.

So that's about as far as our thinking and the analysis that we are dealing at this point in time. And we'll go through more analysis with year end, we really don't want to get into guiding this early, given the current economic environment.

David Lewis - Morgan Stanley

Okay and then, so Vince when you talk about long-term targets of I think 7% top, 10 to 12% on the bottom line. Are we talking about these targets we are trying in the 11 time range in the 12 time rate or this is more aspirational over a three to five year CAGR basis.

Vincent Forlenza

Well I don't know that I wouldn't call them aspirational. I would say that as we do our strategic planning that we see improvement as we get beyond 10, moving to 11 and into 12.

David Lewis - Morgan Stanley

Okay and then since we are seeing some direct comparables on the Bioscience segment, starting to talk about visibility on stimulus. And outside spending you don't seem to as bullish as some of your competitors. You have obviously different lines. Is there a reason why you are not as positive the next six to nine months about the potential impact of stimulus or you are just taking an overly cautious tone?

Vincent Forlenza

I think we're responding to what we see in the business. In this quarter we received orders of about $1 million in stimulus funds in the business, that was not shipped, that was just orders. And we have visibility in next quarter to over $4 million at this point and we expect that number, could be somewhat higher. So we do expect that over the course of 10, we are going to see some significant improvement in U.S. Biosciences based on the stimulus.

The visibility we have to the scheduling of that says that the bulk of that starts to come in because of the way the programs run out, starting in the second half of the year. We'll see some in the first quarter, second quarter. But I think the other piece that I was pointing out was that the business is not completely driven by the stimulus package, that there are other segments to that business and academic makes up about 50% of the sales in the U.S. So you still have Biotech and Pharma. So why are we being a little conservative? Yes, we may be a little bit conservative and as I get visibility, the business gets more visibility, we'll come back and revise that with you.

David Lewis - Morgan Stanley

Okay. And then one last question and I'll jump back in queue. David, when you think about fiscal 2010, I know you are not giving specific guidance, but when you think about that level of growth at around 7%, in that expectation do you forecast a significant acceleration or significant increase in the buyback program?

David Elkins

No. I think right now our thinking is consistent. Obviously that's a Board decision to lever for our share repurchases that we do. But as we think going forward right now, it's at that 4.50 range.

David Lewis - Morgan Stanley

Okay. So to the extent buyback programs in excess than what we've seen historically will be upside of that 7% growth range.

David Elkins

If we were to do it. We're not forecasting that.

Vincent Forlenza

I guess again, we're just not getting into that level of detail right now, and we're not guiding what the share repurchases are for next year. We'll do that with the year end results.

David Lewis - Morgan Stanley

Okay, thank you very much.

Operator

Our next question comes from the line of Sarah Michelmore with Cowen & Co.

Sarah Michelmore - Cowen & Co.

Just back on the Med/Surg business since it obviously was a better quarter. But in terms of that being sustainable, what gives you confidence that you can continue to deliver the revenue growth at the mid-single digit range? You have been tracking at obviously lower single-digit range last couple of quarters.

Vincent Forlenza

I'll make an initial comment and then I'll turn it over to Bill. But number one, the diabetes care business, the lower growth rate we saw on the first half of the year was significantly impacted by distributor de-stocking. So we see much more we see a consistent demand based on what I'd call the worldwide pandemic of diabetes and as Bill was mentioning continuing growth in pen needles worldwide.

So we have pretty high level of confidence there and then some improvement in the Farm Systems business. But Bill I'll let you make whatever other comments you'd like to make on that.

William Kozy

Was there some specific interest there on the Med/Surg?

Sarah Michelmore - Cowen & Co.

I'll say, yes. Because that had been more moderate in recent quarters and it did look like you had a better quarter this quarter.

William Kozy

Sure, just a few comments on some areas of revenue acceleration. We had a really good third quarter on our prefilled flush devices. They were up well into double-digits and we've been able to capitalize on some competitive supplier issues. And we have gained that business and we believe that we're going to continue to hold that business. We are also right on target with our Nexiva Closed IV Catheter System revenue commitments and expect to minimally meet our expectations for FY '09 and we're actually adding incremental sales people focused only on Nexiva for FY '10 because we've got confidence that, that dedicated sales commitment can further move the Nexiva revenues contribution along.

On the international side if your exclude the EMA region, where we continued to have a few challenges, we got a nice impact in the third quarter from the pandemics revenues, which are just getting started and we've got higher impact in the fourth quarter as well as expectations of some continued first quarter benefits. So I would say those couple of factors are what are kind of building our confidence around trying to sustain around this 5% number, what you are seeing now, which is quite a bit different from the first six months of the year.

Sarah Michelmore - Cowen & Co.

And then big picture question, and it does sound like you are tracking, near term at a growth rate maybe below what the company has been historically or what you are targeting internally, does that change your appetite at all for M&A near term and should we expect the activity there to pick up, thanks?

Vincent Forlenza

Doesn't change our strategy around M&A. As we said numerous times; one, we do it strategically and we are looking at usually strategic fit that expands our capabilities. We're going to continue to do that. But I want to express that we have confidence in this long run plan for the company and then when we look at our strategic plans, we come back to those seven to nine top line growth rates and 10 to 12 on the bottom line and we think that's will move back in over time based on the increase in our R&D spending that we've done, internal projects we have going on. So we're not including necessarily acquisitions as a major driver of getting back there.

Operator

Your next question comes from the line of Jon Wood with Bank of America/Merrill Lynch.

Jon Wood - Bank of America/Merrill Lynch

Okay. Thanks a lot. Sorry to keep going into this, but I mean the discretion on disclosing this hedging situation in FY '10 now when you don't really have a view on the core business if you will for FY '10. Is the Board I'm not sure why they would be happy with a flat EPS situation in fiscal year '10, understanding that this hedging situation kind of came out of nowhere for us, could there be a commitment to use the balance sheet to show some level of EPS growth next year to offset some of this hedging dilution?

Vincent Forlenza

So, first of all on the hedge. I think we been very clear over the last couple of quarters, what our hedge gains have been and what the mechanics of the hedge are. And so the hedge gains as they reside in the P&L, I think they've been out there, number one.

Number two, the $0.28 that we're talking about is a very large hurdle to try to overcome year-on-year. We will have as we move into FY '10 very stringent expense controls as you would expect. We'll be doing everything to promote the efficiency of the company. In terms of whether or not we use the balance sheet, we haven't made that decision yet.

Jon Wood - Bank of America/Merrill Lynch

Okay, just looking back, the initial view was last year was 10 to 12 and that went to 8 to 10 with the FX and now you're tracking obviously considerably above that. You are saying we should not as a financial community think that, that will happen if you will when you provide your initial fiscal year '10 outlook in November.

David Elkins

So I think that's right. I think we had the big benefit before contracts last year we are lock those in that $1.56 range and none of us would have anticipated that they would have dropped down to $1.30 at the beginning of this fiscal year. So that's just a huge gain and that's way last quarter we really tried to highlight what the underlying growth was, striping out the impact of both the currency and the hedge.

So all we're doing this quarter is just providing even greater clarity on that, on what that means a our starting point this year and what our true underlying growth rates which we shared with you in the second quarter, what we're saying that is for 2010 preliminarily. We're going through our own, internal, planning processes right now. That's why we're not providing guidance here. We'll do that towards the end of the year. But there's a lot of moving parts in that. And I'll disclose as we'll get greater insight into that.

Jon Wood - Bank of America/Merrill Lynch

Okay thank you.

Operator

Our next question comes from the line of Keay Nakae with Collins Stewart.

Keay Nakae - Collins Stewart

Vince, as you look at top line for the next year, can you talk about any new products that could be contributors to driving revenue growth next year?

Vincent Forlenza

Well as I said, at this point we are just staying very general in terms of how we view the performance and until we finish our budgeting process, we are not going to get into specifics. We are little bit ahead of ourselves. This is the normal time we're working on our budget, we felt compelled because of these hedge gains to put some information out there ahead of normal. Normally where we're, and normally where our processes are.

So we are not going to get into specific products at this point of time. But in terms of some areas we do expect that there will be some benefits from some flu, going forward into next year. Probably, both on the Medical side and the Diagnostic side we expect to see continued, as I said, kind of strong performance in the Medical side that we've seen in the second half the year, based on diabetes long-term trends and farm systems. And then international sales growth will be -- continue to be stronger than U.S.

Keay Nakae - Collins Stewart

And just a second question on the hedges for next year, appreciate that you've been putting on the hedges monthly. So if we think about those in aggregate at what point would be their performance be neutral, is that the €1.40 what it would be for the year?

David Elkins

I think again, what we're thinking about it right now at this point in time with the spot rate at a $1.40, it's anybody guess on what that will move and therefore what the currency impact would be to our revenue and our earnings and what the hedge impact would be.

So I think probably so the best way to think about it right now is just think about the spot rate at $1.40 and then let's see when we have our conversation at the year-end results, what the exchange rate is there and then we'll share with you our thinking about that.

Keay Nakae - Collins Stewart

And how about for the yen?

David Elkins

I'm sorry, could repeat the question?

Vincent Forlenza

He asked how about on the yen.

David Elkins

I don't have that in front of me. It's not as material, I mean the main currency for us is the euro which we hedge at 60% and we fully hedge the yen.

Vincent Forlenza

And the yen hasn't been very volatile either.

Keay Nakae - Collins Stewart

I understand. Okay, thanks.

Operator

Our next question comes from the line of David Toung with Argus Research.

David Toung - Argus Research Company

Yes, good morning. Thank you for taking the call. I want to go back to some comments made in the prior call about requests for closed requests for prices. Can you give some any update on that what you're hearing?

Vincent Forlenza

So your question is around the stimulus package in Biosciences?

David Toung - Argus Research Company

Yeah, I think it does relate to that and I know that is referred to and I also I want to look at your market more than just stimulus. I mean there's probably other forces going on in research market, than just stimulus.

Vincent Forlenza

So I think I know what you're talking about and last quarter on the call, I did indicate that there was a large increase in requests for quotations. And that was primarily driven by the stimulus money. In fact, if I'm not remembering, something in a range of 300% increase in requests for quotations. And the follow-on comment was that what we don't know from that is how many of those requests for quotations will ultimately result in a grant that is funded. And then ultimately an order to us.

Now with updating to that information, we have received our initial orders, we haven't shipped any yet, based on the stimulus package. We are starting to see from that large bowers (ph) of quotations, so now it's not so much about the quotations as it is about orders coming in. And we're starting to see visibility or orders for the fourth quarter right now around $4 million. We think that number will continue increasing over the quarter as we get more visibility.

Then lastly, the stimulus package has a number of different pieces to it. And we expect that we'll see more activity in the second half of the year from the orders standpoint because of the types of programs and how they're run.

David Toung - Argus Research Company

That's great, the other point I want to follow up and I know you've talked about to these stabilization in the de-stocking and as it relates to diabetes is there anymore you can say about that and what are -- what it is the saying distributors and...

Vincent Forlenza

So from a de-stocking standpoint, it appears to be behind us. We didn't really see any significant de-stocking in this quarter across our businesses. So we think that for the time being any way we they have taken it as low as they can go, without impacting service levels.

David Toung - Argus Research Company

Okay, all right. Thank you very much.

Vincent Forlenza

Sure

Operator

Our last question comes from the line of Jeff Frelick with ThinkEquity.

Jeffrey Frelick - ThinkEquity

Yes, maybe a question for David. One more time on the kind of early read. So I guess question really is, is your own view that the climate is not improving, given what's pushing your businesses is consumables and disposables, not a lot of impact on cap equipment, push back. I think your price increase last year, Diagnostics looks to be fairly solid and stable. You have the SG&A leverage. Has something popped on the radar I think kind of worst of the climate's behind you. Just kind of what's your thought process, early read of 7% EPS growth.

David Elkins

I think you summarized it well. If you really think about the performance of the business we're feeling good about the Medical business and the Diagnostics and the strong growth that we're seeing in the quarter. Despite all these economic challenges the business is faring very well.

The factor that's out there that we're being very cautious on as we start to look forward is to Biosciences business. And that's why we're saying that right now there is nothing out there that would indicate that the fourth quarter is going to improve.

Now, there is been a few questions around NIH and stimulus package and all of that. But you guys know as well that we don't count on those things until we have better visibility and confidence that they're going to occur. And as we said on the second quarter call and we're reiterating on this call, we don't anticipate those types of orders coming through until the fourth quarter, the fourth quarter of the calendar year. So we're going to bake any of that in at this point of time. But as Vince talked about; we are saying the long-term growth on an EPS basis is 10-12%.

The way we think about it is we have years that we exceed that 10 to 12% and those years that we're under and this year we're saying that the underlying growth is about 7%. The fundamental business between the Medical and Diagnostics and the fundamental business of the Biosciences over the next couple years is looking strong.

Jeffrey Frelick - ThinkEquity

Let me ask you a follow-on Bioscience. Are region sales also being materially affected or it's just instrumentation or is it also reagents being impacted?

David Elkins

It's mainly instrumentation that we see impacted. In fact on the bioprocessing side of things, we saw recovery in the third quarter. So that business is looking great. It's really as Vince and I have talked about it's limited to the capital spending. And the U.S. has been particularly impacted. And as I said in my comments, we saw a little bit in this quarter in Europe.

Jeffrey Frelick - ThinkEquity

So, you're not seeing the existing research programs being shut down. Those are still being maintained with their products that they have they are reordering reagents which is the expansion and additional capital equipment purchases that are affected.

David Elkins

Yeah, it's really been large capital equipment purchases that have been affected. Reagents were up in the quarter about 5% with strong growth in clinical reagents. So it's really the capital piece of this and the larger instruments in particular.

Jeffrey Frelick - ThinkEquity

Okay, thanks.

Operator

Thank you Mr. Forlenza. Are there any closing remarks?

Vincent Forlenza

Yeah I'd like to thank everyone for participating in the call. We look forward to giving you further information as we move forward in the year and towards the year-end so thank you all very much.

Operator

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

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