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Becton, Dickinson and Company (NYSE:BDX)

F2Q 2014 Earnings Conference Call

May 1, 2014 8:00 a.m. ET

Executives

Monique Dolecki - VP of Investor Relations

Chris Reidy - CFO

Bill Kozy - COO

Tom Polen - Group President

Linda Tharby - Group President

Alberto Mas - President of Diagnostic Systems

Analysts

Brandon Couillard - Jefferies

Kristen Stewart - Deutsche Bank

David Lewis - Morgan Stanley

Matt McDonough - Goldman Sachs

Mike Weinstein - JP Morgan

Richard Newitter - Leerink

Doug Schenkel - Cowen

Jeff Frelick - Canaccord

Vijay Kumar - ISI Group

Jon Groberg - Macquarie

Brian Weinstein - William Blair

Derik De Bruin - Bank of America

Larry Keusch - Raymond James

Operator

Hello, and welcome to BD's Second Fiscal Quarter 2014 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through May 8, 2014 on the Investors page of the bd.com Web site or by phone at (800) 585-8367 for domestic calls and area code (404) 537-3406 for international calls, using confirmation number 24652897. (Operator Instructions)

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

Monique Dolecki

Thank you, Kristy. Good morning, everyone, and thank you for joining us to review our second fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on 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 second fiscal quarter press release and in the MD&A sections of our recent SEC filings.

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

Leading the call this morning is Bill Kozy, Executive Vice President and Chief Operating Officer; Vince is not able to join you today. He is recovering nicely from orthopedic procedure, and will be back to work next week. Also joining us today are Chris Reidy, Chief Financial Officer and Executive Vice President of Administration; Tom Polen, Group President; Linda Tharby, Group President and Alberto Mas, President of Diagnostic Systems.

It is now my pleasure to turn the call over to Bill.

Bill Kozy

Thank you, Monique, and good morning, everyone. As we stated in our press release, we are pleased with our performance in the second quarter. Our results this quarter highlight our consistent performance and the benefit of our diverse geographic and product portfolio. We delivered solid revenue and EPS growth where were in line with our expectations.

Revenue growth in the second quarter was driven by our Medical and Biosciences segments. Diagnostics' international growth was partially offset by continued challenges in the U.S., which we will provide some color on later in the call. We saw continued strong international safety and emerging market sales and they remain as the key growth drivers for the company.

Based on our solid results for the second quarter and the first half of the year, we are reaffirming our previously communicated currency-neutral revenue guidance and we are raising our adjusted EPS guidance for the full fiscal year 2014.

On Slide 5 we have outlined our second quarter revenue and EPS results, which I will speak to on a currency-neutral basis. Total company revenues were solid, increasing by 5.1%. Fully diluted EPS came in at $1.45 growing at 10.1% over the prior year. On an adjusted basis EPS of $1.53 grew 15.8%.

Now I would like to turn things over to Chris to give you more detailed discussion of our second quarter financial performance.

Chris Reidy

Thank you, Bill, and good morning, everyone. I'd like to begin by discussing the key financial highlights for the second quarter. As Bill just mentioned, we delivered solid performance.

Revenue growth in the second quarter was in line with our expectations. We experienced strong growth in our Medical and Biosciences segments which were aided in part by timing of orders. As Bill just mentioned, there were some challenges in the Diagnostic segment, particularly in the U.S. I'll speak to that in just a moment.

In the second quarter, performance improvements in our gross profit margin were more than offset by the unfavorable impact of foreign currency. On a currency-neutral basis we improved gross profit by 60 basis points.

Our tax rate improved substantially due to geographic mix and some discreet one-time items. This benefited earnings by about $0.03. Adjusted earnings per share were $1.53 and grew 15.8% in the second quarter. Also during the second quarter we completed an additional 24 million of our approximate $450 million share repurchase plan for 2014. This brings our total share repurchases year-to-date to 213 million.

As Bill just mentioned we are reaffirming our currency-neutral revenue growth guidance and raising adjusted EPS guidance for the total year.

On Slide 8, I will review our revenue growth by segment on a currency-neutral basis. Organic revenue growth was 5.1% for the total company. The impact of price erosion was about flat in the quarter. And as a remainder the SSI acquisition is now included in our base.

BD Medical second quarter revenues increased 6.3%. Growth in this segment was driven by a range of new products, emerging market strength and some timing benefits. Growth in Diabetes Care was 10.4%. This reflects continued strong sales of pen needles, which includes our Nano and AutoShield Duo products.

Medical Surgical Systems growth was 4.4% led by emerging markets and international safety sales. Pharmaceutical System growth was 6.6%. As we expected and as we typically see in this business, this reflects a favorable impact from a timing of orders. Timing of orders in the quarter positively impacted growth by about 350 basis points within the Pharmaceutical Systems unit.

BD Diagnostic second quarter revenues increased 1%. Solid sales in the Preanalytical Systems unit and the BD MAX GeneOhm platform were partially offset by a decline in our Women's Health and Cancer business. This was due to extended cervical cancer screening intervals and U.S. share losses.

BD Biosciences revenue growth was 10.2% versus the prior year period due to solid clinical and research instrument placements and reagents along with strong emerging market growth. Growth in this segment also benefited from the timing of a government order in Latin America, a large tender order in Africa and more normalized stimulus spending in Japan. These items benefited growth by about 350 basis points. Growth in the second half of this year will decelerate due to these timing items.

Moving to Slide 9, I'll walk you through our geographic revenues for the second quarter. As we expected softer growth in the U.S. was supplemented by continued strong international growth. BD's reported U.S. revenues increased 0.2% versus the prior year. We view the environment in the U.S. as constrained, but stable.

Revenue on our U.S. Medical segment increased by 5.2%, which was largely driven by timing of orders in our Pharmaceutical Systems business and strong growth in Diabetes Care.

U.S. Growth and Diagnostic segment declined by 6.4%. This was due to the challenges I just mentioned a moment ago coupled with the mild flu season. Growth in the U.S. this quarter was largely impacted by challenges in this segment. We are seeing some stabilization in our U.S. Biosciences business which experienced growth of 1.4%.

Moving on to international, we continue to see strong growth. Revenues grew 8.5% currency-neutral with growth coming from all three segments. Medical segment grew 7.0% and Diagnostics grew 8.1%. This reflects strong growth in emerging markets and international safety sales.

Biosciences grew 14.3% and benefited from the timing items I just mentioned. Our Biosciences segment also experienced strong growth in emerging market.

On Slide 10, we continue to see strong growth in emerging markets, which accounted for approximately 24.5% of our total revenues. Emerging market revenues grew 13.9% currency-neutral over the prior year. This was driven by strong performance across all segments in those geographic regions. Slightly slower growth in China of 17% reflects a tough comparison to the prior year period. We continue to expect low double-digit growth in emerging markets, and growth in China is expected to be in the 20% range for the balance of this fiscal year.

Moving to global safety on Slide 11, currency-neutral sales increased 4.9% and grew to 531 million in the quarter. Safety revenues in the U.S. were about flat. Our international sales grew 11.2% currency-neutral with emerging markets growing about 20%.

Medical Safety sales grew 4.4% driven by a range of safety engineered products. Diagnostic safety growth was 5.5% in the quarter.

As I mentioned earlier, the benefits of our SSI acquisition have annualized and are now included in the base. This impacted our U.S. safety and medical safety growth rates in the quarter.

Moving on to gross profit on Slide 12, positive performance in the quarter reflects benefits from ReLoCo and other continuous improvement initiatives and pension savings. These items will more than offset by an unfavorable currency and higher raw material and startup costs. Our gross profit guidance remains on track for the year.

Slide 13 recaps the second quarter income statement and highlights our foreign currency-neutral results on an adjusted basis. As we discussed, revenue and gross profit were in line with our expectations. SSG&A increased about 1.4% which reflects the benefit of the one-time item in Europe. R&D increased 3.8%. This remains in line with our expectations at 6.1% of revenue as we continue to invest in new product development and innovation.

Operating income grew 13.5% in the quarter reflecting our ongoing focus on earnings quality at the corporate and business unit level. Our tax rate declined by 170 basis points, which benefited from geographic mix and some discreet one-time items. In the quarter, adjusted earnings per share were $1.53 which is a 15.8% increase versus the prior year.

On Slide 14, we will review our revised outlook for the total year. As we mentioned earlier, we are reaffirming guidance for currency-neutral revenue growth and raising guidance for adjusted earnings per share. On a reported basis, our guidance assumes a Euro exchange rate of $1.37. Reported revenue growth is being negatively impacted by other currencies. As such, we are lowering our reported revenue guidance by 50 basis points.

In our Medical and Biosciences segments, we have increased our revenue growth expectations. Our revised guidance in Medical of 5.5% to 6% reflects solid core growth and a benefit from new product launches. The Biosciences segment is now expected to grow 4% to 5% reflecting continued international growth.

We now expect the Diagnostic segment to grow about 3% to 3.5% due to some of the U.S. challenges we mentioned earlier in addition to a lighter flu season than anticipated.

Adjusted earnings per share of $6.22 to $6.25 reflect the benefit of an improved tax rate for the total year, partially offset by unfavorable foreign currency. Our expected tax rate is 23% to 23.5% contemplates a more favorable geographic mix.

Moving on to Slide 15, I'd like to review the revenue guidance in further detail, one with the facing for the second half of the year as it is compared with a particularly strong back half of 2013. I'll speak to this slide in a currency-neutral basis.

As you can see we delivered strong growth in the first half of the year, where the total company revenues grew 5.9%. Strong growth in the Medical segment of 7.4% benefited from timing in our Medical Surgical Systems and Pharmaceutical Systems business, and the acquisition contribution from SSI. You will see that the growth rate is expected to return to about 4% to 4.5% in the back half of the year as to normalizing for those items. We are also contemplating less favorable pricing. For the total year, we expect the Medical segment to grow between 5.5% to 6%.

Diagnostic growth in the first half of the year was 2.6%, a benefit from share gains and point of care flu sales were offset by the U.S. challenges we mentioned earlier in Women's Health and Cancer. In the second half of the year we expect revenue growth to rebound a bit. Our revised guidance of 3.5% to 4.5% for the second half contemplates strong KIESTRA placement.

For the total year we expect the Diagnostic segment to grow 3% to 3.5%. Despite the challenges we are facing in the U.S. Diagnostic Systems business we are still seeing success in our international businesses and are making good progress with various new product launches. We are confident we can continue to deliver solid growth in this segment.

Our Biosciences segment grew 8% in the first half of the year. The strong growth was driven by the timing of orders I mentioned earlier. We expect growth in this segment to be between flat to 2% in the back half. It will be weighted more heavily in the third quarter. As you may recall the fourth quarter of last year was particularly strong as a result of the stimulus spending in Japan, which presents a difficult comparison. For the total year we expect the Biosciences segment to grow about 4% to 5%.

Now, I'd like to turn the call back over to Bill, who will provide a more detailed update on our progress around our key initiatives.

Bill Kozy

Thank you, Chris. Moving on to slide 17, I'd like to review the program and product launches in our Medical and Biosciences segment. In the Medical segment we continued to rollout our new BD Simplist line of prefilled generic injectables. We currently have four drugs approved by the FDA, and have applied for four additional drug approvals.

As expected, we recently launched the morphine product. As we have been sharing with you, this is still a very new initiative, and it will take some time for these products to gain their traction in the marketplace. In our Biosciences segment, we recently launched our BD FACSPresto, CD4 and Hemoglobin Analyzer.

The BD FACSPresto expands the ability to stage and monitor HIV/AIDS patients close to their homes. It is an easy-to-use system that meets the need of resource limited setting. The FACSPresto can be easily transported and operates off a rechargeable battery enabling patients even in remote settings to receive critical CD4 testing. Early customer feedback has been very positive. Also this year we have launched three dyes and plan to add several additional dyes to the surgeon portfolio.

Turning to Slide 18 you will see the various product launches and diagnostics. On our BD Veritor platform, we launched our Strep A Test in the U.S. this past quarter. We also received clear waivers on both our Strep A and RSV tests, making these tests more accessible to clinicians in the U.S. To-date we have made over 12,000 Veritor replacements.

On our BD MAX molecular platform, we look forward to the U.S. launch of our Enteric Bacterial Panel and CE marking of our Enteric Parasite Panel later this year. These tests which traditionally take three to five days to achieve results, it can be completed in minutes, which also reduces the need for unnecessary antibiotics in the meantime. We are excited about the unique assays in our pipeline which combine our deep microbiology know-how with our molecular capabilities.

Our BD Onclarity HPV Assay was launched recently in Europe. This assay runs our new Viper LT automated platform, which is capable of both SDA and real-time PCR molecular amplification formats.

During the second quarter there were numerous installations across Europe and Asia. We will add our CT/GC assay for the Viper LT as soon as we receive CE marking which is expected in the next quarter. We are also expecting U.S. FDA 510(k) clearings of CT/GC on the Viper LT in the third quarter. Of course we will continue to update you as we do make progress on these pipeline initiatives.

On Slide 19, before we open the call to questions, I would like to reiterate the key messages from the presentation today. First, we are pleased with our consistent solid performance in the second quarter and our results here today. Second, we continue to execute on our strategy and deliver top and bottom line growth and margin expansion. Third, we saw solid growth in our medical and biosciences segments and continue to be pleased with the progress we have made on the key growth drivers across our various businesses and regions.

Despite challenges we are facing the U.S. diagnostics systems business, we are confident we can continue to deliver solid growth in the diagnostic segment. Finally, we are positive about our outlook for fiscal year '14. We are committed to delivering current neutral revenue growth of 4.5% to 5% and 11% to 11.5% adjusted EPS growth. Our diverse product and geographic portfolio and the operational effectiveness programs we have in place provide BD with a strong foundation. We believe we are well positioned for continued success in fiscal year '14 and beyond.

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

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question is coming from the line of Brandon Couillard of Jefferies.

Brandon Couillard – Jefferies

Thanks. Good morning.

Chris Reidy

Good morning.

Bill Kozy

Good morning.

Brandon Couillard – Jefferies

I didn't catch if Alberto is there or not, but if so, could you elaborate on the U.S. Diagnostic Systems business in the second quarter slowed materially even though Quest has already been in the run rate? And then the guidance implies an acceleration in the back half, could you quantify the effect of the KIESTRA placements in that acceleration?

Bill Kozy

Sure. This is Bill. I'll take a first shot, and Alberto is here and I'll ask him to comment also. One thing I will do is let me just give you our view on Diagnostics, including the U.S. piece. Our international growth is up about 6% in the second quarter, and year-to-date it's at about 7%. We're continuing to see good solid growth in the core part of our microbiology business and particularly our BACTEC business and our IDAST business are solid at round 4% or 5%. Also in the second quarter we had a very strong degree of placements with the BACTEC FX. That's one of the best quarters we've had in quite some time. That's a big part of some of our second half projection here that we will talk about.

Additionally, the emerging markets continue to be pretty strong, both China and Latin America growing at strong double-digits contributing to an overall emerging market growth rate around 10%. Now, the equation of KIESTRA, we do have very strong demand, and as Chris indicated in his comments, we've got expectations for a strong placements in the second half of the year. I'll give that part to Alberto here in a second.

Additionally, our POC, our Point of Care category share gain, which was somewhat dampened by weak flu season still should promise, gives us some encouragement on the second half of the year as does the MAX GeneOhm growth that we experienced in the quarter. To get at the challenge part, its Women's Health and Cancer, and it's in the United States. You might recall last year we described to you a major account loss. That of course is still playing out in fiscal year '14.

Chris already mentioned the interval testing and the impact on cervical cancer, which is ongoing, particularly on our SurePath reagent business. And we've had some sales erosion on our ProbeTec platform, again concentrated in the U.S. We're hoping that we get Viper LT launched in the third quarter with CT/GC, which I mentioned in my remarks. That's key to defending that business and slowing down some of that sales erosion.

Let me just slip in. Alberto, any color you would like to add particularly around the KIESTRA placements in the second half?

Alberto Mas

Yes. If I focus on why we think the second half is going to be stronger, it's some of the underlying positive trends that we are seeing in the business are highlighted in the second half. And again, the KIESTRA obviously are going to be beginning to be placed in the market more strongly in the second half and into next year. We actually feel very positive about the demand patterns that we are seeing going forward.

One of the things that is driving that is our expected launch of ReadA Compact, which was one of the components of the Lab Automation KIESTRA that we will expect in the next month and a half. We have it in four sites right now and with very positive feedback. We are expecting a global launch of that platform in the next couple of months. So that should be certainly an accelerated growth for the second half and in the future.

MAX, again we are expecting -- we had a good quarter. We expect even stronger quarters in quoting the next couple of quarters and going forward. So this is an accelerating product line for us. And we are pretty much where we expected to be in overall revenues. As Bill said, BACTEC placements should begin to generate reagent revenue in the second half and going forward. And again, lots of the Viper LT will enable us to begin to -- it's a good tool for us to begin to defend our CT/GC business going forward as well.

Operator

Thank you. Your next question comes from Kristen Stewart of Deutsche Bank.

Kristen Stewart - Deutsche Bank

Hi. Thanks for taking the question. I was just wondering if you could -- I know you mentioned a couple of times the different timing orders and the impact within the individual businesses. What's the impact in aggregate I guess for the quarter, the 5.1 currency-neutral, what would that have been in your estimate excluding some of these one-time factors or timing factors?

Chris Reidy

Great. This is Chris. The way to think about that is really on a first half/second half, because there is some timing even between the first and the second quarter. So if you look at the first half that's 5.9% that we had year-to-date, about 40 basis points of that was the lift from the SSI acquisition. And then there was about 50 basis points of timing of orders, and so that's from systems the BDB orders that we talked about and some Med/Surg timing of orders.

On top of that you have a little bit of favorable pricing in there, and you had the Japan stimulus which is accelerated this year year-over-year, as we said, it all came in the fourth quarter. So if you normalize all of that, we get in the 4.5% to 5% range for the first half of the year.

Then if you look at the second half, the 3.5 to 4 that we showed, the timing of orders brings you back to 4 to 4.5. The Japan stimulus and the unfavorable pricing flip get you in that 4.5 to 5 range. So that's the way to think about first half/second half.

Operator

Thank you. Your next question comes from David Lewis of Morgan Stanley.

David Lewis - Morgan Stanley

Hi, good morning.

Chris Reidy

Good morning.

David Lewis - Morgan Stanley

Bill, just thinking about your commentary on China and specifically the Biosciences slowed down in the back half of the year; can you give us a sense of how you expect your accounting to trend in the back half of the year relative to Biosciences? Some of your peers have talked about delays at the Ministry of Health is specifically affecting capital. I am wondering what impact, if any, that could have on your flow business. Thank you.

Bill Kozy

Hi, David. Linda is obviously here with us and she is closest to that. Let me just pass that question over to her and ask for her comments. You are specifically interested in China, David, in second half impact on government influence.

Linda Tharby

Good morning, David. It's Linda here. So we continue to see in our Biosciences business very strong growth in China, and we are seeing that come not only from the clinical market and expansion in lab presence and flow cytometry there, but also really strong presence from Accuri, which is our personal flow. So we continue to see our growth in the very high double-digits in China in the back half. And at this point we are not projecting anything with respect to a slowdown in that market due to a good balanced portfolio between both our research and clinical settings.

Chris Reidy

I would like to take the opportunity to just emphasize as I mentioned in prepared remarks the 17% that we had in this quarter was driven more by the -- they are difficult compared to the second quarter of last year. So we see the rest of this year being in the 20% plus range.

Operator

Thank you. Your next question comes from David Roman of Goldman Sachs.

Matt McDonough - Goldman Sachs

Good morning. This is actually Matt McDonough in for David. Continuing with emerging markets, I was hoping you could provide a little bit more detail just on some of the moving parts, the different dynamics; you're now talking extensively about the China slowdown being driven more by the comp than actual slowing, but could you perhaps talk about trends you are seeing in other markets?

Bill Kozy

Sure, I can -- let me make a couple of comments here. First of all, as we look at the scale of our emerging markets, China and Latin America are very, very critical drivers both in terms of scale and growth. Chris has already commented that we really see sustainability in China around that 20% number for the remainder of that year. We are seeing similar types of numbers coming out of Latin America. It's across -- I hate to generalize to your question, but it's pretty much strength across all of our businesses, medical, diagnostics and biosciences all reflecting very, very strong double-digit growth in each of those markets. That's supplemented a little bit at a lesser scale by Middle East and Africa. But think about China and Latin America as real drivers of our emerging market growth particularly at this window and time in fiscal year '14.

Operator

Thank you. Your next question comes from Mike Weinstein of JP Morgan.

Mike Weinstein - JP Morgan

Thank you, good morning. So just a couple of questions, number one, just one income statement question, in the SG&A lines you called out some benefit from Europe. I hope you could just clarify what that was?

Bill Kozy

I think we are not hearing you. Operator, can you help us repeat that question? We didn't catch it.

Mike Weinstein - JP Morgan

Is it a bad connection?

Chris Reidy

Yeah.

Bill Kozy

No, I think we got a bad connection. I am sorry, we just can't hear you. I apologize. We can't catch it.

Mike Weinstein - JP Morgan

No worries. I will try again.

Bill Kozy

Thank you.

Operator

Your next question comes from Richard Newitter ofLeerink.

Richard Newitter - Leerink

Hi, thanks for taking my question. I notice that price -- I think you said it was flat this quarter, it was up about 40 bips last quarter, can you maybe just comment on what you are seeing there in the environment and expectations for the rest of the year?

Chris Reidy

Yes. So, this is Chris. I'll take a shot at that. The second quarter pricing was just about where we expect it to be. It was flat to slightly down a couple of basis points, right where we expected as we said pricing in the first quarter was a little bit better than we expected. So we had adjusted the pricing guidance for the year to about 20 basis points down. As we have been saying it's all about the second half of the year and particularly the fourth quarter. So we are still looking at it being down about 20 basis points for the year based on fourth quarter tenders that we are looking at and the pressures we see there, really no change since last quarter on that, kind of in line with where we were.

Richard Newitter - Leerink

Okay, thanks a lot.

Operator

Thank you. Your next question comes from Douglas Schenkel of Cowen and Company.

Doug Schenkel - Cowen

Hi, good morning. Thanks for taking my questions. My first question is it appears you terminated European diagnostic distribution agreement in the quarter. Was there any revenue impact in the quarter, and do you expect any hangover associated with that? And I guess the second question somewhat related is SG&A was quite a bit lower than we expected in the quarter and dropped quite a bit sequentially. It's unclear if your guidance implies that this going to continue. Could you just talk us through how we should think about SG&A over the balance of the year? Thank you.

Chris Reidy

Sure. The SG&A was 1.4%. As we mentioned, there was a one-time item in Europe that benefited us. It was collection of receivables that had been written off that we collected. That does flow through to the year. We increased the earnings per share by $0.03, but offsetting that was the impact of foreign exchange. As you saw that we adjusted our reported revenue guidance for foreign exchange that actually flows down through the EPS as well. So that was a couple of cents. So that foreign exchange pressure offset the benefit of the one-time item and then the [3%] (ph) rise that we had in EPS was essentially attributable to tax rate declines. So SG&A for the rest of the year absent that one-item will be still in the range basically that we had guided to.

Bill Kozy

This is Bill. We did discontinue a distribution arrangement in Spain related to a couple of our businesses primarily with a Preanalytical systems relationship that does not carry any revenue impact for us on a go-forward basis. It's just a realignment of how we are going to go to market in that particular country.

Operator

Thank you. Your next question is from Mike Weinstein of JP Morgan.

Mike Weinstein - JP Morgan

Hi. (Indiscernible). So just a follow-up on that, the SG&A, the receivable benefit this quarter was about $0.03, is that what you said?

Chris Reidy

It was actually more like $0.02. It is just slightly more than $0.02 and it was exactly offset by the FX pressure which is slightly more than $0.02.

Mike Weinstein - JP Morgan

Perfect. Okay. And then just want to focus on the Biosciences business. It's hard to separate out the one-time positives in the first half in terms of versus the second half. Can you just talk a little bit more about the underlying business and maybe try and give us a better picture to how that second half would look actually the orders that pull them to the first half?

Linda Tharby

Hi, Mike.

Chris Reidy

Let me start by just saying, the best way to think about that is for the guidance for the full year. So there is lots of puts and takes quarter-to-quarter and as you remember the big impact in the fourth quarter. At the end of the third quarter last year, I think our Biosciences growth rate was 0.9%. I don't think we are close to 12% in the fourth quarter. So, lots of puts and takes. But when you boil it down or running about what we are for the year with our guidances for the year in Biosciences. And that's probably the way to think about the underlying business.

Bill Kozy

This is Bill. I think the big factor to remember in that fourth quarter was the movement in fiscal year '13 of the Japan stimulus spend into the fourth quarter of '13. So our fourth quarter of '14 is up against a very unusual comp, a very strong Japan stimulus driven comp from FY'13. That's really the single biggest factor on that second half Bioscience growth.

Mike Weinstein - JP Morgan

Okay. And then just to comment about less favorable pricing in the second half, what does that tie to?

Bill Kozy

I think I didn't catch that whole thing. I heard -- less favorable pricing in the second half of the year, Chris.

Chris Reidy

That's consistent with what we have been saying. I mean as we looked at vendors particularly in Europe, they come primarily in the fourth quarter. So I don't think you are going to see any much in the third quarter evidence either. We will be sitting here next quarter still kind of guessing what it's going to be for the year. But our best guess is kind of be down 20 basis points at this point.

Mike Weinstein - JP Morgan

Thank you.

Operator

Thank you. Your next question comes from Jeff Frelick of Canaccord.

Jeff Frelick – Canaccord

Hi, good morning, folks. I just wanted to follow up on the strong Veritor placements on where you are to-date. Can you share kind of the mix, U.S. versus OUS on the 12,000 placements? Thanks.

Bill Kozy

Sure. Let me just get back. This is Bill. I am going to give it to Alberto. He is here. Would you comment please?

Alberto Mas

The big majority is in the U.S. There is also a component in Japan and the rest is a lot less. So those are the biggest components driving it. In the U.S. the season was milder as you probably already know in Japan it was slightly stronger than usual, but it's mainly U.S-driven.

Operator

Thank you. Your next question is from Matt Taylor of Barclays.

Unidentified Analyst

Hi, guys, good morning. This is actually Elliot filling in for Matt. I just wanted to touch on diabetes for a second, another nice quarter there; can you touch on any of the underlying fundamentals in that market? And maybe any other areas within that segment that maybe of interest to you guys going forward, whether it would be sensors or pumps or any other sort of product lines within that segment? That's been growing nicely for you guys that maybe of interest?

Bill Kozy

This is Bill. We did have a solid quarter in diabetes. Interestingly enough we had double-digit growth both U.S. and international, both at right around 10% give or take a few basis points. The U.S. favorability is a continuing story. It's really around pen needle growth, and it's particularly been driven by our ongoing penetration with the Nano product. We had growth in the quarter in the U.S. on Nano that was well north of 50%.

So we are really driving our penetration rates with Nano. We are wide now. We are actually north of 25% on Nano penetration. So that continues to be very, very key to the Diabetes Care business.

International was also strong, and you had -- emerging market growth is the driving contributor there. Think about that being right around 17%, 18% for the quarter, similar comments to what I made before about emerging market, Latin America and Greater China being the real critical drivers there.

In terms of what's next for us in Diabetes, we have referenced the fact that we continue to do product development in the area of insulin infusion. And at this point in time that is the high priority kind of product development activity in the company in the Diabetes Care business.

Operator

Our next question is from Vijay Kumar of ISI Group.

Vijay Kumar - ISI Group

Hey, guys, thanks for taking my question. I have a couple of specific questions on the Diagnostic piece, and one was Women's Health. In the past given this market conversion on related to end forecasting. I think you said core to 60% number. Where do you think we are?

And second on BD MAX, your comments were up pretty positive. How many systems did you place in the queue, and what kind of acceleration can we expect going forward? Thanks.

Bill Kozy

Okay. This is bill. Your question, Vijay, really on the interval testing, we got it somewhere right now, somewhere -- we think that about 60% to 65% of the physicians have adapted. It's a hard number to grab on to, but the takeaway is that we still think there is some room to go before you can see that there has been a significant 90% or higher adoption of a new interval testing.

On BD MAX in terms of our placements to-date, we are right around 340 placements worldwide at this point in time. Alberto, double-check my numbers, is that …

Alberto Mas

That's correct. It's 340 is around that number, but we are seeing encouragingly a lot of reagent throughput that is coming to our machine. So from a reagent perspective we are very really encouraged by what we are seeing and hopefully with the new launches of Enterix and other assays, we should see that increasing a lot.

Operator

Thank you. Your next question comes from Jon Groberg of Macquarie.

Jon Groberg - Macquarie

Hi, good morning. Thanks for taking the question. And Vince if you're listening, I hope you feel better soon. So, Bill, you guys obviously had another very strong quarter, 5% growth which is great. So I think you guys deserve some congratulations. Obviously if you break it down to one blemish is diagnostics and if I look at your second half guidance for the year, that's the one that you expect to improve in the second half. So I know you've been answering some questions on it, but maybe I can just -- if I think about the U.S. specifically, I think Women's Health at this point on your Diagnostic Systems is only like 10% to 13%, somewhere in there in terms of the revenue. So it seem like it's fairly small. Can you maybe talk about all the different pieces of the business within the U.S., and then whether or not you expect the U.S. business specifically to improve in the second half to drive that increase to 3.5 to 4.5 for the second half of the year? Thanks.

Bill Kozy

Sure. This is Bill. I'll take a shot here. There are four key factors on that second half guidance that we provided. 1) For sure, if we have got this KIESTRA demand and we are expecting positive impacts from placements of KIESTRA, and particularly in the fourth quarter, more in the fourth quarter than in the third. 2) I mentioned the ongoing revenue performance of international. We expect that to continue, and again sustainably in that 6% or 7% range. 3) We are counting on BD MAX; we just commented on placements. Alberto mentioned our reagent pull-through running a little bit ahead of our expectation. That's a factor. And then there is a minor one, it's less important, but we don't have any point of care drag in the second half, and we took a little bit of a parachute drag on point of care in the first half. That goes away in the second half. So I'd say those four things are our key factors in upscaling that second half guidance.

Operator

Thank you. Your next question comes from Brian Weinstein of William Blair.

Brian Weinstein - William Blair

Hi, thanks for taking the question. You guys have talked a lot about some of the discreet benefits in the first half of the year, but what about any discreet headwinds? Can you quantify anything on seasonality, the impacts from flu, maybe calendar impacts that your peers have been consistently highlighting as calendar first quarter headwinds that should abate in the remaining quarters of the year? Thanks.

Bill Kozy

This is Bill. We steered down a couple of other -- the things that we are paying attention to. We have to say that we didn't quantify any headwinds related to weather. It was nominal if we had anything. We did not quantify any headwinds related to U.S. utilization. I think Chris commented it's constrained but stable. And so we couldn't quantify anything there. I mean our commentary around -- our challenges, if you would, was all in that Diagnostic Systems area, and it was all concentrated in the U.S.

So we could not, if you would assign any of our shortfalls to any other external factors, and I think that our ongoing international presence in emerging growth is kind of a foundation which shields us a little bit. Some of my comments about the diversity of the regional and product portfolio; that really helps us to get through these sporadic regional or country-based activities that you can experience during the course of the year.

Chris Reidy

The thing I'd add is we did talk a little bit about the flu season being less severe. The good news for us is we actually took share with the Veritor product, and that helped make it essentially flat year-over-year, so much less severe, but upside on the market share. But having said that flat year-over-year is not what we're shooting for, so it's a little bit of a drag. But that would be the only one that I would add.

Operator

Thank you. Your next question comes from Derik De Bruin of Bank of America.

Derik De Bruin - Bank of America

Hi, good morning.

Chris Reidy

Good morning.

Derik De Bruin - Bank of America

So a little bit on the Bioscience, on the flow cytometry market, particularly on the high-end, I know we are starting to see some interest from researchers using some technologies like Mass Cytometry, sort of like with the deal that Fluidigm did with the DVS business. I'm just wondering how do you see the high-end Mass -- the high-end flow cytometry market, can you quantify how much of your business is bad versus some of the more clinical aspects, just a little bit more color on your businesses there.

Bill Kozy

This is Bill. I'm going to turn this over to Linda. I'm not sure she -- a few comments you have that kind of a detail here today or …

Linda Tharby

Yeah. What I can comment on is we certainly see very nice growth in our high-end research market. We had several launches in that market in the last several years. And with respect to the Fluidigm acquisition of DVS, we feel very comfortable relative to our ability to compete in that area in terms of our ease-of-use that we have with our instrument versus CyTOF placements.

Operator

Thank you. Your next question comes from Larry Keusch of Raymond James.

Larry Keusch - Raymond James

Hi, good morning. Two questions; on Simplist and the morphine launch specifically, obviously I know that's an important one for you guys, and you'd made some brief comments, but I'm wondering if there is anything that you can sort of add to that just relative to how that seems to be playing out?

And then secondly, just on the capital allocation side, you're targeting $450 million of share repurchase for the year, but again if you can remind us how you're thinking about deployment of cash and also how much of your cash currently is sitting overseas?

Bill Kozy

This is Bill. I'm going to turn the Simplist question over to Tom, and then he'll pass it on to Chris for the second question, if that's okay, huh?

Tom Polen

Hi, Larry, good morning. This is Tom. So, on Simplist, just as a remainder, as Bill mentioned we've got four drugs now launched in the Simplist format. Morphine is as we have always said is actually our most significant launch to-date. It is the first drug that's both in the prefilled device, but it's also a high risk drug, the strongest value proposition of all the products today, and we view as a lead within our portfolio.

We are getting very positive customer response on that early on. And as we've said before, this is a very new initiative and we still do expect that it's going to take some time for us to start seeing that ramp come through in our numbers, but positive overall feedback on morphine.

Chris Reidy

Good, and to part two, really no change from what we've said in terms of capital deployment. We are still on track to do the 450 million of share buybacks. As you see the dividend has grown over time. We kind of like where the payout ratio is right now, so really no change from that standpoint.

And from the outside the U.S. cash, the way to think about that is as we look at it between the cash on hand, it's right now in the U.S. at the end of this quarter is probably about 400 million, out of the 2.6 global. So a lot of it is outside the U.S. But between the U.S. cash on hand, the cash flow and our legal entity and dividend structure we know issues over the planning horizon and having cash to support the dividend and the share repurchase.

Operator

Thank you. Your next question comes from Kristen Stewart of Deutsche Bank.

Kristen Stewart - Deutsche Bank

Hi. Thanks for taking my follow-up. I just wanted to get your thoughts on M&A, if we should expect any additional activity here in the coming quarters?

Chris Reidy

Really no change from what we had said in the past. And we've done more M&A over the last three years. I guess we've done seven deals now in the last three years or so. We are always looking for tuck-in acquisition. As usual, M&A is lumpy. So you don't do it just to do it. You do it when you got the right prospect at the right price. So no real difference in our M&A strategy from where we've been over the last two years.

Operator

Thank you. There are no further questions. I'll now turn the floor back over to Vince Forlenza for closing remarks.

Bill Kozy

This is Bill sitting in for Vince. Thank you all for your attendance today and participation. We appreciate your engagement and questions. And we remain committed to finishing our fiscal year '14 for the discussion we had earlier. Thanks very much.

Chris Reidy

Thanks, everyone.

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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