Becton, Dickinson and Company

Hello and welcome to BD's third fiscal quarter 2019 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through August 13, 2019 on the Investors page of the BD.com website. or by phone at 800-585-8367 for domestic calls and area code 404-537-3406 for international calls using confirmation number 1475284. I would like to inform all parties that your lines have been placed in a listen-only mode until the question and answer segment. Beginning today's call is Ms. Monique DeLecke, Senior Vice President of Investor Relations. Ms. DeLecke, you may begin.

Thank you, Lori. Good morning, everyone, and thank you for joining us to review our third fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our third fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. Reconciliations to GAAP measures that include the details of purchase accounting and other adjustments can be found in our press release and its related financial schedules and in the appendix of the investor relations slides. A copy of the release, including the financial schedules, is posted on the BD.com website. As a reminder, to provide additional revenue visibility, we will speak to our fiscal 2019 third quarter revenue results and fiscal 2019 revenue guidance on a comparable currency neutral basis. The comparable basis includes BD and BARD in the current and prior year periods and excludes intercompany revenues and revenues associated with divestitures, among other adjustments. Leading the call this morning is Vince Forlenza, Chairman and Chief Executive Officer. Also joining us are Chris Reedy, Executive Vice President, Chief Financial Officer and Chief Administrative Officer, Tom Poland, President and Chief Operating Officer, and Alberto Moss, Executive Vice President and President of the Medical Segment, Simon Campion, Executive Vice President and President of the Interventional Segment, and Patrick Kaltenbach, Executive Vice President and President of the Life Sciences Segment. It is now my pleasure to turn the call over to Vince.

Thank you, Monique, and good morning, everyone. At BD, our strategy is driven by our purpose. advancing the world of health. Our results this quarter demonstrate that our strategy is working and our core remains strong. Our progress with Bard is enabling us to deliver even more impactful, comprehensive solutions for our customers. Turning to slide five and our third quarter highlights. Our third quarter performance was strong. Revenue growth reflects the planned back half acceleration that we've been discussing with you throughout the year. As expected, growth was broad-based, and we drove mid-single-digit growth in all three segments. Third quarter EPS was also in line with our expectation, and our results through the first nine months of the fiscal year are right on track. As we approach the final year of the deal model, we continue to successfully integrate BARD as evidenced by our sustained top-line momentum, cadence of new product launches, and and progress towards our cost and revenue synergy capture. We're also pleased with the level of engagement across the organization as our associates are highly motivated by a common purpose. Looking forward to the remainder of fiscal year 2019, we expect momentum from the third quarter to continue and are reaffirming our full fiscal year 2019 revenue and EPS guidance. I'll now turn things over to Chris for a more detailed discussion of our third quarter financial performance and our fiscal year 2019 guidance.

Thanks, Vince, and good morning, everyone. Moving on to slide seven, I'll review our third quarter revenue and EPS results, as well as the key financial highlights. Third quarter revenues grew 5.7% on a comparable currency neutral basis. As Vince mentioned, our strong third quarter revenue growth was broad-based, and is a strong indicator of the health of the business. As we have discussed previously, there are a number of drivers across our segments that gave us confidence in our planned second half acceleration. I'll provide more color on the third quarter revenue growth in a moment when I take you through the results by segment and geography. EPS was also in line with our previously communicated expectations for the quarter. Despite significant FX headwinds in the quarter, we delivered adjusted EPS of $3.08, crossing the $3 per share mark for the first time since closing the BART acquisition. On a currency-neutral basis, EPS grew 14.8%. We also continued to deleverage during the third quarter, paying down approximately $450 million of debt. Gross leverage was 3.7 times as of June 30th, and we remain on track to achieve our commitment to deliver to below three times over three years. Moving on to slide eight, I'll review our medical segment revenue growth. BD Medical third quarter revenues increased 6%. As expected, performance in the medical segment was driven by continued momentum and share gains in medication management solutions and strength in pharmaceutical systems. In addition, growth in medication delivery solutions normalized, as anticipated, and was driven by our leading vascular access portfolio, which also reflects our revenue synergy investments. Growth in diabetes care was in line with our expectations, driven by strength in emerging markets. Now turning to slide nine in the BD Life Sciences segment, revenues increased 5.4% in the third quarter, with all three business units delivering strong growth of 5% plus. As anticipated, performance in the life sciences segment was mainly driven by strength in our molecular platforms and diagnostic systems, with continued double-digit growth in BDMAX, as well as our microbiology solutions for IDAST, including our Phoenix panels. In biosciences, we saw strong growth in research reagents and in research instrument sales in the U.S., Growth in pre-analytical systems was driven by strong demand in emerging markets. Turning to slide 10 and the BD interventional segment, third quarter revenues increased 5.2%, reflecting the diversity of the portfolio. As anticipated, BDI's results include a reduction of approximately 50% in planned DCB-related sales in the quarter. Excluding the DCB impact, BDI segment revenues would have grown over 7%. Revenues in peripheral intervention grew in the low single digits in the third quarter. Excluding the DCB impact, revenue growth would have been in the high single digits. Our Wavelink, Covera, and Bonovo products continue to perform extremely well. Third quarter revenue growth in surgery reflects strong performance in biosurgery in the U.S., as ProGel sales continue to ramp, and double-digit growth in infection prevention and biosurgery in Europe, where we continue to see the benefit from our revenue synergy investments. Revenue growth in urology and critical care continues to be driven by new product innovation in acute urology, as well as continued strength in our home care and targeted temperature management businesses. Now moving to slide 11 and our geographic revenues for the third quarter. Growth in developed markets was driven by strong performance in the medical and interventional segments in the U.S. and strength in Europe in the pharmaceutical systems, MMS, and surgery units. Revenue growth in emerging markets was driven by broad-based double-digit growth in China and EMA. We expect continued double-digit growth in China for the full fiscal year. Turning to slide 12, which recaps the third quarter income statement. As discussed, revenues grew 5.7% in the quarter on a comparable basis. Now, moving down the P&L, gross profit grew 2.4% year-over-year, excluding the impact of currency, as our continuous improvement and cost synergy initiatives were partially offset by the impact of unfavorable mix. The mix impact was driven by strong revenue performance in the quarter and and products with lower relative gross margin profiles, as well as lower DCB sales, which, as you know, have a margin profile above the company average. The mixed impact mostly reflects timing within the year, and we are maintaining our full-year gross profit margin guidance as we continue to anticipate accelerated revenue growth, continuous improvement in synergy capture to drive strong Q4 margins as FX headwinds abate. SSG&A as a percentage of revenues was 24.7%. SSG&A grew at a pace slower than sales, which reflects our disciplined spending as well as continued achievement of barred cost synergies. R&D as a percentage of revenue was 5.6%. For the full fiscal year, we will invest approximately $1 billion in R&D, which reflects our continued commitment to drive innovation. Operating margin of 25.4% was in line with our expectation as pressure and gross profit was mitigated by favorability and operating expenses. Our tax rate in the quarter was 12.8%, which is below our full-year guidance range due to the timing of discrete items. We had anticipated these items would occur throughout the fiscal year, and as such, these items are already reflected in our full-year guidance range. As expected, we paid preferred dividends of $38 million in the quarter. As we've been discussing, the preferred shares are not included in the share's outstanding calculation. As previously discussed, adjusted earnings per share of $3.08 grew 5.8% versus the prior year and 14.8% on a currency-neutral basis. Now turning to slide 13 in our gross profit and operating margins for the third quarter. Gross profit margin was 55.6% in the quarter. The decline in gross margin was driven primarily by unfavorable currency and mix, as previously discussed. Operating margin was 25.4% in the quarter. On a performance basis, operating margin was flat as the decline in gross margin was offset by operating expenses leverage, as previously discussed. Currency had a negative impact of 120 basis points on operating margin. Now moving on to slide 15 in our full fiscal year 2019 revenue guidance. As we discussed, our third quarter performance was strong and in line with our expectations for accelerated revenue growth in the second half of the fiscal year. We expect continued momentum across our businesses and regions in the fourth quarter. As a result, we have reaffirmed our total company and segment level revenue guidance for fiscal year 2019, as well as our expectations for growth and developed and emerging markets and China. Moving on to slide 16, we have also reaffirmed our full fiscal year 2019 adjusted EPS guidance. Our fiscal 2019 EPS growth expectations continue to reflect strong underlying performance driven by revenue growth and solid operating performance. All in, we expect to deliver adjusted EPS of $11.65 to $11.75. Turning to slide 17 in our detailed P&L guidance, we have updated our expectations for interest other net to approximately $450 million to reflect proactive measures we have taken to lower interest expense. The balance of our P&L guidance expectations for the full fiscal year 2019 remain unchanged. We also continue to expect to achieve approximately $100 million in cost synergies in fiscal year 2019, and we're on track to fully realize $300 million in annualized cost synergies over the three-year deal period. We feel good about the momentum we have across our businesses, and we're very confident that we will deliver on our commitments in fiscal year 2019 and beyond. Now I'd like to turn the call back over to Vince to We'll provide you with an update on our product portfolio.

Thank you, Chris. Turning to slide 19 in our planned product launches by segment. As we have been discussing with you, we have a very robots pipeline across the company. There are a number of things we're excited about. I'll touch on just a few recent launches here, starting with the BD medical segment. In May, we launched the BD Pixis EF system version 1.6, which brings software enhancements achieved through upgrades to the core EF software, as well as through system integration of three technologies, BD Pixis EF Refrigerator, BD Pixis Track and Deliver, and BD HealthSight Data Manager. These enhancements improve clinical workflow efficiency, pharmacy flexibility, and end-to-end medication safety. Regarding our HealthSight platform, Feedback from customers continues to be very positive, and we are gaining traction across our applications. Before we move on to our life science segment, I would like to discuss the type 2 insulin patch pump. As we discussed on our call last quarter, the feedback we received from the FDA was more comprehensive than we had anticipated. Based on this feedback and given the intricacies of this product category, We have decided to withdraw our FDA application and have engaged a third-party R&D partner with expertise in this space while we work through our strategic options. As a result, our previous timeline has been extended, and we will provide you with additional information as we make progress. Moving on to the BD Life Science segment, we are excited by the recent launch of BD Core, a Our new high-throughput molecular diagnostics platform aims at providing automation of molecular testing in core and other large centralized labs. Early customer interest and placement of our BD Core units are exceeding our expectations. We also continue to see strong growth on the BD Max platform, supported by the commercial success of recently introduced assays, such as the BD Max vaginal panel, as well as our enteric panel suite. In addition, we have seen success with our Phoenix M50 IDAST instrument, along with our recently launched CPO detect assay. Pre-analytical systems continues to benefit from capacity investments in our UltraTouch push-button blood collection sets. UltraTouch has been very well received by our customers and is driving continued conversion from conventional solutions. Within biosciences, we continue to see strong performance in our FACS Symphony high-parameter instruments and flow reagents, as well as the BD Rhapsody AbSeq single-cell multi-omic solution that improves RNA and protein analysis. In addition, our FACS Lyric clinical instrument continues to do well, and when combined with the recently launched FACS Duet automated sample prep instrument, provides a solution for clinical laboratories to improve the accuracy and repeatability of their tests. Within the BD interventional segment, we are excited that we recently launched OptiFix AT, an articulating fixation device for laparoscopic and robotic compatible use, and Phasix ST-OVHR, which is a mesh designed specifically for open hernia repairs that leverages our existing Phasix technology and a newly developed positioning system. In addition, our Wavelength Q endovascular AV fistula system, as well as our Venovo and Cavera products that launched earlier this year as part of our stent product category, all continue to see positive momentum in the market. Regarding our FDA PMA submission for Lutonix below the knee, as you are all aware, we have been working with the FDA in a collaborative review process. Subsequent to the FDA Advisory Committee meeting on Paclitaxel, the statutory review time for our BTK PMA submission concluded, and the FDA notified us that our PMA was not approvable in its current form. While this determination was based on the clinical evidence provided to date, we continue to review, collaborate, and align with the FDA on the path forward regarding our submission. including the need to potentially provide additional clinical data. As a result, the approval process timeline has extended out from our previous expectations, and we no longer expect approval this calendar year. We will keep you informed as we work with the FDA and make further progress. Before I move on, I would like to speak for a moment about our commitment to sustainability, which is a key component of our strategy. We're pleased to have recently published our FY 2018 sustainability report, which provides an update on our progress towards achieving our 2020 sustainability goals. These goals provide the framework for how we manage and make an impact on the most relevant social and environmental issues for our company. We are pleased with the progress we have made towards our 2020 goals and believe there are opportunities ahead to make a real difference as we work to address global challenges such as climate change and antimicrobial resistance. In addition, we received several acknowledgments in 2018, including CR Magazine's 100 Best Corporate Citizen list and the Human Rights Campaign Foundation Best Places to Work for LGBTQ Equality. More recently, we were proud to have been named as one of the 2019 Best Places to Work for Disability Inclusion by Disability In. These awards highlight the success of our business, our responsibility to the environment, our commitment to inclusion and diversity, and our ethical standards. Looking forward, we now have a broader, more impactful portfolio and will continue to refine our sustainability strategy and set new ambitious goals that will not only ensure our resilience over the long term, but also consider the expectations of our shareholders and stakeholders around the world. In the appendix of today's presentation, we have again included a slide that provides you with some more details on our sustainability initiatives. We hope you find this information useful in understanding BD's commitment to this important topic. Moving on to slide 20, I would like to reiterate the key messages from our presentation today. we delivered strong revenue growth in the third quarter in line with our planned second half acceleration. Growth was broad-based across the businesses and regions, which reflects the breadth and diversity of our portfolio. The integration of BART is on track, and we are confident in our ability to achieve our cost and revenue synergy commitments. Looking forward to the remainder of fiscal year 2019, We expect our momentum to continue and have reaffirmed our full-year revenue and EPS guidance. In summary, we are confident that our core remains strong. Our progress with BART is enabling us to deliver even more impactful, comprehensive solutions for our customers. Thank you, and we'll now open the call to questions.

The floor is now open for questions. At this time, if you have a question or a comment, please press star 1 on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. In order to allow for broad participation, please limit your questions to 1. We ask that while you pose your question, that you please pick up your handset to provide optimal sound quality. Our first question comes from the line of Kristen Stewart of Barclays. Hey, good morning, everybody.

Good morning, Kristen.

So I guess I just want to kind of start off with, I guess, just kind of longer-term expectations. I can appreciate that you guys probably don't want to give any specific color around 2020 and guidance in that respect. But heading into the call, I think 2020 outlook was definitely one of investors' top concerns. And Given the update on Lutonics below the knee and it not being approvable, I think that's only to kind of increase the concerns on the street. So I was wondering if you could just maybe help provide your thoughts on puts and takes for how we should think about fiscal year 20. I know that you had talked about the deal model being kind of mid-teens growth. Obviously, there's been some changes with Lutonics, but also Gore royalties. Just how should we think about that? and the year ahead and the puts and takes. Thanks.

So, Kristen, thanks very much for the question. I have to say we're not surprised to get the questions. I'm surprised that you asked it right out the back. But let's get it on the table. We're making good progress on 2020 is what I want you to know and everyone to know. We're making good progress on the budget. We're a little early on. We are not finished yet. But with knowing that, you know, we had the Gore royalty going away, we started this process earlier, and I feel really good about the process that we are running and the progress we're making there. So with that, I'm going to turn it over to Chris, who's going to give you a little more detail. We're not going to completely guide today, but we'll give you a good sense of the progress we're making.

Sure. Thanks, Vince. And good morning, Chris. You know, you're right. It's too early to give a level of precision to guidance for next year. There'll be some things that we're watching. But what I would say is that the message essentially remains the same as last quarter, with the one exception being BTK. But if you think about it on the revenue side, we still expect to drive 5% to 6% growth for 20, despite the DCB status quo and the BTK delay. So we'll still be able to drive that 5% to 6%. And then on APS, At worst, the BTK impact, even if we don't have it for the full year, is about 1%. And we would intend to mitigate as much of that as possible. A little bit of pressure on FX. We'll watch that. But despite all of this, barring anything that, you know, unforeseen changes from here, we're very confident in our ability to deliver double-digit earnings growth next year. Where we are in that double-digit will depend on things that transpire between the next couple of months. So, But we feel good with that floor of double digits, and, you know, we'll see where BTK plays out and where FX goes. But everything else is pretty consistent with what we've said before.

So all in all, good progress. And maybe I'll just ask Simon to comment. Simon, you know, you're having some really good performance on some new products that give us this confidence on the 5 to 6. Maybe you want to talk about some of the other products that are offsetting some of these things in the DCB area.

Sure, Vince. So I think Chris earlier on in the statements mentioned, you know, Venovo, Covaira, and Wavelink within the PI business. And I'm sure you have seen the recent Trump proclamation on kidney disease, which will only serve to help the visibility of this ailment. And another great quarter in end-stage renal disease domestically and internationally. I think also very significantly for the BDI segment is our performance globally as we begin to leverage the scale of BD, particularly in areas where BARD was only commencing its investment profile. So, for example, biosurgery and infection prevention in Europe had a tremendous quarter. And that was driven by the investments that we made as part of the acquisition. And urology continues to perform terrifically well, driven by home care internationally and new products domestically. And we foresee that great progress continuing in all three businesses within BDI.

So thanks, Simon. You know, the bottom line of what Simon is saying is we're right on the deal model. The mix in new products is a little different. We didn't expect a DCB situation. But as Simon just detailed for you, there's a whole series of other new products, including in urology, that is going quite well. So that's enabling us to hold that guidance rate. So thanks, Kristen, for the question. We appreciate it.

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

Good morning. Just two quick ones for me, one for Chris and one for Simon. Chris, just thinking about the fourth quarter, you obviously maintained 25%, 26% margins, but it sort of implies 20% fourth quarter margins to get to the midpoint. So should we be thinking about the low end of the range for the year on margins, and how do you get that two-and-a-half point step up? And same question on growth, Chris. You talked about acceleration into the fourth quarter, but it's a pretty significant momentum step up into the fourth quarter just to get to the low end of the five to six. So basically your confidence top and bottom for the fourth quarter. And just quickly for Simon, post the panel and now with the BTK update, have you made any commercial decisions about the DCB commercial organization in terms of its size? Is it right size for the opportunity and then the level of growth? Thanks so much, guys.

Sure, I'll start. So clearly, we've been saying that the revenue is going to accelerate in the second half of the year. You saw that starting to happen in Q3. We see that accelerating even further in Q4. Again, it's the continued strength in UCC and surgery, the MMS momentum that we have. MDS is accelerating and strong growth in biosciences and DS, which is essentially across the business. So We have strong confidence in that. And then on operating margins, we do see acceleration in the operating margins in the fourth quarter. Don't forget we don't have the FX drag. That goes away in the quarter. We continue to see revenue synergies, cost synergies in CI continuing to build. And, again, FX abates there. So we have a lot of confidence in being able to get solidly within that 25 to 26% range that we gave guidance on.

Simon. Hi, David. It's Simon. So certainly we've been preparing for all eventualities with respect to DCBs and BTK as well. And while we won't provide you any details here, I think it's important to recognize that the territory managers, for example, within the peripheral intervention business, they sell far more than DCBs. And we have seen positive uptake in stents and other areas. So to begin to affect those, I think, would be not a great move. But obviously, as part of this process, we have sought to offset as much of this as possible without impacting the commercial performance of the organization. Yeah.

And we're still waiting to see where the FDA comes out, of course, on labeling changes and the letter to physicians. So we'll stay tuned for, you know, how that works out. Thanks for the question.

Our next question comes from the line of Bob Hopkins of Bank of America, Merrill Lynch.

Yeah, thank you, and good morning. Good morning, Bob. Yeah, just a lot of questions one could ask, but I can't help but just one more on paclitaxel. I'm just curious if you could elaborate just in however you can on kind of what you heard from FDA after the panel meeting. And, you know, do you have a sense at this point whether you think you might need a whole new trial or just longer-term data or any incremental sense as to what you heard from them would be helpful?

You're asking on BTK?

Yes. That's what I thought. On BTK, well, I don't think, Bob and Simon, I don't think we'd provide the specific information here. You know, we did provide the six-month data and interim 12-month data in the PMA that we filed, and we continue to cooperate and work with FDA as we work through this. But to provide any specifics about it, I think would confer a competitive advantage on others, and I'm loathe to do that. So it... It remains a very active PMA. Our teams are collaborating with FDA, and we expect to have face-to-face meetings here with them in the not-too-distant future to really nail down what that data requirement will be.

And we have more data to bring to the table, too. So, you know, we continue to work on it. But thanks for your question, Bob.

Our next question comes from the line of Robbie Marcus of J.P. Morgan.

Great. Thanks for taking the question. I was hoping you could talk about your strategy around M&A in general. You're down at three-seven times leverage. We saw you not wait until you got all the way to your target last time with the bar deal. You know, just how you're thinking about where to add, what to add, valuations in the space. And then also, if you could just touch on maybe – your thoughts on M&A specifically and diabetes. This is an area, you know, I think back to the last analyst day, there was a long list of product innovations you were hoping to bring to market. I don't think, you know, it probably turned out as positive as you hoped. Just your thoughts in diabetes and your plans for the future there. Thanks a lot.

Yeah, sure. And happy to answer the question. First, just a little bit of a correction. We did hit our deleverage target. on the CareFusion deal before we did the BARD deal. And we are very politic in the way you have to answer the question, so there's no problem at all. But anyway, so we are really focused on meeting our leverage target as we go forward. Now, what we've been saying and remain committed to is that You know, a must-do plug-in M&A is an important part of the strategy. And as we put the deal model together, we made allowance for that. And you've seen us do stuff like Wavelength Q because it's an important part of the growth strategy. You should expect, you know, over the next year that we will continue doing that as we move forward towards deleveraging and getting down below three times. And then, you know, as we look forward, you know, we have tremendous capability in terms of our ability to do M&A, but, you know, we're not a serial acquirer. We are a strategically driven company. And, you know, you should expect us to be thinking about plug-in M&A and then looking at, you know, the dividend and share repurchase as we move forward.

So, Chris, anything else you want to add to that? I'll just point you back to the presentation I made at your conference back in January, Robbie, where we talked about future cash flow considerations. And the bottom line of that is we throw off a lot of cash. We happen to be using it to pay down $6 billion of debt. But at the same time, when that is done, which is within the next year, we will have a lot of cash to allocate to And we started getting some sense of that. We'll be talking more about that as we move on. But, again, it gets back to what Vince said is, you know, we're not going to let it build up in the balance sheet. We are going to be more active and tuck in M&A on a strategic level across the whole portfolio and likely to start going back to share buybacks once we start building up the cash balances and have gotten down to that three times leverage. And we are, you know, we made that correction because we are very proud about the fact that we live up to our commitments. We committed that we would get down to three times leverage in the CareFusion deal, and we did that before moving into the BART transaction. We're going to get down to the three times leverage this time as well.

So, you know, as Chris said, you know, plug in M&A across the entire portfolio, and that could include diabetes, obviously any other business here. In the short run, we remain committed to the patch pump. You heard me comment that we have taken on a development partner for doing that, and we'll continue to work on that as the number one priority as well as investing in the core of that business where we see some nice opportunities. But thanks for the question.

Your next question comes from the line of Vijay Kumar of Evercore ISI.

Hey, guys. Thanks for taking my question. Hey, Vijay. I have a couple of housekeeping questions, Chris. One on Q4, the implied at the lower end of the 5 to 6 for the annual rate, it implies Q4 of 6% organic. Where is the acceleration coming from just given the tougher concept? You can walk us through that. And second on TQ, you know, the new NDR regulation, incrementing costs. Is that sort of an ongoing, you know, implementation cost? Are we annualizing that in Q4? Thank you.

Yeah, so it was a little hard to hear you, Vijay, but at the same time, I think I got it. You were looking for a little bit more on Q4 revenue, And we're not talking about accelerating much more from the 5.7. It's a little bit. And, you know, I went through before where we're seeing strength in some of the new products that we've brought to market. Venovo, Cavera, Wavelength are very helpful, continued strength, and UCC. We're seeing great momentum in MMS, as you saw from the results this quarter. MDS is accelerating as we expected it to, and we see strong growth in biosciences and diagnostic systems. Don't forget we have some revenue synergies that kick in towards the back end of this year, particularly in the fourth quarter. So that's where we're seeing it come from. And I think I talked about the margins. Gross profit, as I mentioned in my prepared remarks, We saw some one-time kind of timing items that go away in the fourth quarter and rebound, not to mention FX not being a headwind both on gross profit and operating margin. We see CI and synergies ramping. So we're very comfortable with the direction. And, you know, very similar message to what I said last quarter. You saw that, you know, move in that direction in the third quarter. and we expect that to continue in the fourth quarter.

So, Vijay, the only thing I would add to that, you know, is the emerging markets growth is going to continue to be strong. I mentioned already that, you know, in China we were double digits. We expect to be double digits for the rest of the year. You know that we have, you know, a great business there, a great team there, and a strong partnership, you know, with the Ministry of Health. That is all going extremely well. We don't expect this environment with tariffs on retail products and stuff to be impacting that business. So we expect that to do double digits for the entire year. I feel good about that. We feel good about the rest of Asia. And, of course, EMA you saw was very strong this quarter, and we expect that to continue too. So there's a lot of drivers both from the business side and from the geography side.

I think just for clarity, I would add two other points, Vijay. We do expect lower interest other to be about $450 million, as we mentioned in our prepared remarks. And then I would expect tax to be closer to the middle of the range. There's a lot of intricacies in tax, but you saw it. It was lower in this quarter at 12.8%. That will rebound upwards in the fourth quarter, putting us right towards the middle of the guidance range that we gave. Thanks for the question.

Our next question comes from the line of Larry Beagleson of Wells Fargo.

Good morning. Thanks for taking the question. Just one on Lutonics, one on China. So on Lutonix, there have been a lot of questions on BTK, but my question is on the current indications and kind of what you're seeing since the FDA panel and your expectation, you know, once the updated FDA results The guidance comes out. And just, Vince, I heard your comments on China and your confidence there, but we're getting questions from investors about potential backlash in China against U.S. products, given all the rhetoric here. Maybe you could help us understand why you're confident. in that growth continuing and why some of this noise won't, you know, have an impact domestically. Thanks for taking the question.

Yes, sure. I'll handle that and then Simon can handle the intricacies of what's going on in DCBs. So on China, you know, as I was mentioning just a minute ago, you know, our experience through this whole situation with what's going on with trade has been that, they've been keeping very separate what's happening in health care versus what's happening on the trade side. And I think that reflects, number one, a strategic priority to continue to develop the health care system in this environment. And that's what we hear from the Ministry of Health. And, in fact, more recently over the past six months, we've had conversations where they've explicitly told us that. So that's the first part of it. The second part of it is, you know, we had our team in here, and the China health care system is now better funded than it was a year ago or three years ago. And so there's some positive momentum going on in China as the rest of the economy slows down that I think is important to them. And then thirdly, we are really well positioned to with the portfolio and the organization that we have in China. And it's not just the fact of our commercial organization, but it's what we do in terms of investing in China. We have four plants in China. We continue to invest behind that. We continue to invest in innovation for China as well. And I know Tom's excited about the portfolio. He's been working very closely with John DeFord. and our team in Asia. So, you know, we've built a partnership over 25 years there. And so we do think that different aspects of the environment will be difficult, and we are ready for that. But we also expect that with what we've done to fully invest in China and not just a commercial organization, we're very, very well positioned. That's what we hear. And Tom's got another one or two things he'd like to add.

Larry, this is Tom. Good morning. Maybe just one small thing to add to Vince's good overview there is that those investments that we've made over the last 25 years, particularly in that localized highly automated manufacturing, today the majority of the high volume disposable medical devices that we sell in China, we make in China locally. So we're actually importing a relatively low percentage particularly of our high volume disposable devices where there can be local competition, we're actually behaving as a local in that employing local associates, acquiring raw materials locally, et cetera, and engaging in those local communities. It's much more on some of the unique areas where there's actually not local competition in areas such as BDB, BDS, et cetera, or BDI, where we would be doing importing and we're actively moving some more of that manufacturing into China as well. Yes.

Okay, so Simon's got to sit on GCVs and the intricacies there. So morning, Larry, Simon. So I think, as you obviously know, the panel happened in June, and I think industry really did put the best foot forward here in a collaborative nature. I think many of the physicians that spoke were speaking on on behalf of the role of Pactitaxel, not only within PAD, but also the use of Pactitaxel in other areas, and not seeing a signal associated with that. And everyone continues to work with FDA as they look to refine their dear doctor letter. What we've seen is approximately 50% reduction. I think we communicated that on the last call. It has remained at about that point. in the last quarter and bearing any unforeseen upsides I think we should expect that to continue as we roll forward here but once again You know, DCDs are just about 1% of the total BDX business, as Chris has spoken to and I've spoken to, with new products in PI, with new products in surgery that are just launched, and with the outstanding performance and funnel within urology, I think we're well-placed to offset as much of that headwind as we can moving forward. Thanks, guys. Sure, thanks.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

Great. Thanks. Good morning, everyone. Hey, Bill. A couple of questions. So, Chris, can you maybe just elaborate on the lower interest expense? It does look like it should be additive to earnings for the full year. So I'm just trying to figure out where the offset is, just given that the overall earnings guidance didn't change. And then secondly, would you care to elaborate on, I guess, the durability of the BD Max growth? We've seen several very strong quarters now. Thank you. Yes.

Sure. So you already saw some of the interest reduction in the third quarter, and that was actually used to offset the additional pressure. We saw about $0.05 of pressure, more than we expected to in FX. We thought it would be about $0.20. It was more like $0.25 of pressure. So you've already seen some of that, and that's why I pointed you to the fact that the tax rate goes back up in the fourth quarter to get to the middle of the range for the year. It's 13.3 year-to-date through the third quarter, and we expect it to be closer to the 15% for the year. So obviously that is an offset that you see, and it was much lower. So when you put all that together in your model, I think you get back to right where we are. And there's no question that FX has put pressure. It was real in the third quarter. But we're holding our range for the year despite that pressure. Okay, Patrick?

Yeah, let me comment quickly on BDMAX. And as we said in the quarters before, we saw growth north of 20%. And again, this quarter, it was north of 20%. And it's driven by the strong assets we have, the Interreg panel, the NDP panel, et cetera. So we have pretty confidence that this has a long runway, building out more panels on BDMAX. And, again, there's strong demand, and we're pretty happy with the business.

Patrick, anything you want to add on BD Core? You know, I mentioned it as one of the new product launches. Maybe a little more color on that?

Yeah, so we just launched BD Core in Europe, and we are really, really happy with the initial demand we're seeing and the interest we're seeing from our customers in Europe. It's still early days because we have – just one assay so far on it, but we were building out that panel and we think we have a very competitive platform here on hand that will drive the future growth within our business here. We will have the same assays that we have on BD Max today, we port them over on BD Core, build out a complete platform approach so we can cover both the acute and the core labs. So that's a very strong driver for the business.

Okay, thanks Patrick. And thanks for the question.

Your next question comes from the line of Rick Wise of Stifel.

Hi. Good morning, Vince. Hi, Chris. How are you doing?

Good morning.

We're doing great. One quick one and one guidance one. Just, Vince, as always, I'm curious to hear your thoughts about the politics and MedTech tax. I always like to hear your thoughts about that. I'd like to ask a guidance question. I think you're making it abundantly clear and for multiple reasons why fiscal fourth quarter is going to look good and accelerate and sort of sounds like at a minimum look a lot like the growth we saw in the fiscal third quarter. But you do have your dramatically most challenging comp of the year. Maybe help us understand how you'd hit the upper end or get toward the upper end of guidance, what would have to happen? It would seem to me to get to that full-year guidance more toward 6%, you'd have to post an upper single-digit fourth quarter. Is that remotely possible, or are there some variables that I'm not understanding? Any color would be much appreciated.

Thank you. We have provided guidance in the past calls that because of DCB, because of the The flu season, as it played out, those are the biggest drivers that we would be towards the lower end of our guidance range of five to six in spite of those pressures. So the guidance for Q4 really implies the low end of that five to six range.

As you just mentioned, it would take a real blowout to get up to the top. But the businesses are performing strongly today. But as you said, with the content, that makes it really difficult.

Yeah. I mean, we feel really good about the fact that the businesses are delivering well. We talked about BDI and the performance in this quarter. It would have been well over 6%, but for the DCB impact. And as I said, even with the DCB impact and the potential BTK impact, we feel strongly about the ability to drive 5 to 6 next year as well. Yeah. You know, we're feeling good about that momentum. In order to get to high ends of the range, we would have had to have a blowout flu season because we know that was a tough compare against last year's flu season. And, you know, DCB was a curveball. Yeah.

Tom?

Hey, Rick, this is Tom. Good morning. Maybe just one other comment to add there. You mentioned the comp in last year's Q4, and you're right. As Chris mentioned, we feel really good about the momentum from Q3 going into Q4. And one of the biggest comp areas last year, I believe, was in MMS. We saw very strong growth. And I think one of the things I'm surprised we haven't got the question of a really strong number in MMS this quarter. as well, which is reflecting the continued momentum that we see in that business. And I don't know if Alberto has any other comments to add there, but I think we'll continue to be pleased at growing significantly above market in the MMS business, which we expect to continue.

Yes, very good quarter for MMS, clearly growing at 9% plus. And I It just reflects an ongoing momentum for this business. Yes, we have been severely impacted by some timing of installations, particularly on the last side, on the pump side. But that will normalize over time. We do have a very strong – we had a very strong quarter last year in Q4. We will jump over that. And we won't grow at the 9% growth rate clearly, but we're expecting good performance given the high quarter. And the drivers are the ones that we had mentioned in the past. in terms of our core platforms in M2, Alaris, Fixus ES, the health site analytics that is really driving the integrated platform approach and interoperability where we already have 475 sites live, and it just shows that momentum and that by the market of what we're offering as an integrated platform. Yeah, the business is performing great, really, really well.

Thanks, Alberto. And thanks for the question.

Your next question comes from the line of Richard Newlitter of SVB Learing.

Hi, thanks for the questions. I have two here. One on molecular. You know, the double-digit growth trend is very strong. You also had a competitor that put up and continues to put up strong double-digit growth. So I guess my question here is how much of the performance and the momentum in that business is, you know, something happening in terms of improvement in the underlying market versus share? And then the second question would just be on drug-coated balloons. I'd love to just hear, following the FDA panel, what are your customers and docs saying in terms of what it's going to take to kind of either get back to levels or close to levels of utilization and implantation where they were pre-panel and the study? And where do they think that level is? Is it half of what it used to be? What are your customers saying with respect to that view post-panel? Thanks.

All right, so let's do molecular first, and then we'll come back to DCT.

I'll take that. Thanks, Richard, for the question. So on molecular, as you said, our growth is pretty strong, not only driven by BDMAX, but that's one of the big contributors there. If you look at our growth rate compared to market growth, I would say it clearly indicates that we are taking some share right now. Given the strong growth rates we have and we are, again, confident in in our assays that they are hitting the right market segments. And there's also, for example, on Enteric, we are not using multiplexed assays, we're using a more target approach. And that is also in terms of the reimbursement model very beneficial for us. So I would say definitely points toward taking market share for us.

Okay. Simon on DCBs. So with respect to DCBs, I think the FDA needs to come out with a statement and says that the benefits outweigh the risks, in summary, for the market to begin to rebound. I think our customers feel like their hands are tied right now with the doctor letter from March the 15th, and that's reflected in the current 50%. They're about a decline in business, not just with us, but with others too. I think in one sentence, benefits need to outweigh the risks. And the benchmark for a recovery profile is if you reflect back on drug-eluting stents in the coronary system, you can see the recovery profile that they experienced over a prolonged period of time.

Yeah, which took a few years, right?

Which took a few years. But we still have to wait to see what the content of this letter holds for us. and more importantly for the patients that we serve. If it remains the same way, then patients that we serve will not have the treatment option available to them to the scale it was before the Dear Doctor letter.

So just to add to that a little bit, this is probably not a black and white situation. There's a lot of degrees of gray in what the FDA can say here. And so... We don't know exactly where that will come out. Simon mentioned before industry has given a lot of input. We expect the KLLs are also giving input on that, and we think very shortly we will get an updated letter. The FDA, I should say, will be coming forth with an updated letter in terms of exactly what Simon was talking about. So we're waiting to see where that comes out, and I would agree with Simon. Industry... More so, the healthcare providers have made some great arguments as to why this product is important for patients. And so we'll see how that plays out over the next couple of days. Thanks for the question.

Our next question comes from the line of Matt Taylor of UBS.

Hi, thanks for taking the question. So I just had a clarification question on your commentary on DCBs and next year at Synergy. So it sounds like when you're talking about being able to grow 5% to 6%, that's not predicated on any real snapback in the core DCB business. Is that correct? And then also, when you reiterated the barred revenue synergies, you're right on track there. So no major impact or insurmountable impact from DCBs. Is that right?

Yes. So you're right. As we think about 2020, we're assuming that that 50% holds through 20. So no snapback in that. On the synergies, the cost synergies were right on target. We did mention that. We'll do $100 million this year, and we're well on our way to the $300. I think from our revenue synergies, we're on track as well.

Tom? This is Tom. I'll just make a little bit more color on the revenue synergies. We are seeing... The three areas that we've shared before, we're seeing very good momentum across both the vascular access area. We brought the barred pick and midline business in and integrated with our catheter team. I'd say in the last two quarters, we're really seeing an increase in the number of competitive conversions, which was exactly our strategy, and that gives us confidence going forward in that, continuing to fuel performance, particularly in the MBS business. You see that now in the back half of this year going into next year. We're seeing the benefits in our surgery business. You're seeing some of that play out actually this quarter, that the investments that we made in the combined biosurgery and chloroprep infection prevention sales force in Europe, we're seeing biosurgery and infection prevention now growing strong double digits in Europe because of those synergy investments that we've made. And then, of course, the third area of just geographic expansion in markets, particularly beyond China that BART had invested in significantly. We're seeing strong growth in BDI in those other geographies as well. And so, you know, we feel very confident in our revenue synergies being on track this year and continuing that momentum into 2020.

Thanks, Tom. And then just one follow-up. It sounds like the BD Core product could be a really interesting driver, and you had some comments on it today, but they're a little general. Could you talk a little bit more about how big you think that product could be over time as it builds on your success with Max?

Yeah, I can take that. Look, again, current revenues are still – it's early days, right? We're ramping the product, so it's just ramping into Europe with the HPV panel on it. As I said, this is for us a revenue driver in 2021. I think we will see large revenue contributions coming from the platform when we also have it available worldwide. We think it's a very attractive platform given the automation capabilities it has, especially also taking care of the pre-annual step within the platform. So we think we will see a very nice revenue contribution and growth contribution in our diagnostic solutions business in the years 2021 and 2022. But this year it's definitely not making a huge contribution.

Okay. Right. Thanks. Thanks, Patrick.

Your final question will come from the line of Josh Jennings of Cowan.

Hi. Good morning. Thanks for taking the questions. Sure, Josh. Appreciate it. Just two questions. First, on the peripheral business, just in terms of attempting to leverage the sales force even more, some of the DCB pullback, I was wondering about your views on the need for an atherectomy platform. I think prior to the acquisition, there was rumblings that BART had a system in development in the pipeline. I just wanted to hear if that's still the case within Becton's pipeline. And secondarily, just wanted to hear some updated thoughts on the hernia business. I mean, Phasic seems to be doing very well. There is some controversy around synthetic non-reservable mesh. I just wanted to hear your views on the market and Phasic's positioning. Thanks for taking the questions.

So it's Simon here. Listen, I wouldn't comment specifically on what's in our NPD funnel until we're ready to actually give a commercial launch date. As you know, PI plays in every category within the PAD space with the exception of arthorectomy. So it's obviously something we keep a close eye on internally and externally. But to comment any further on that, I wouldn't do so. And then with respect to hernia, at long last, I can stop referring to the hurricane because Q3 saw the last comp, again, versus the hurricane. That happened, I believe, two years ago. So we had a very strong underlying quarter in Q3. We continue to grow above the market. And, you know, Phasix performance within our complex elbow oil business continues to do really well. We've just released three-year data on Phasix, which continues to do really well. We've just released another version of Phasix, as Vince mentioned, Phasix ST-OVHOR, which incorporates a new positioning system, and that's off to a great start. And, again, we just released a new articulating fixation system that, thus far has got tremendous feedback from our customers. So Hernia continues to do very well, and we continue to look for other ways that we can leverage that sales team that we have domestically and internationally. So you should expect to see that continue in that vein. Okay, Josh, thanks for those questions.

Thank you. I'll now return the call to Vince Forlenza for any closing comments.

Okay, so let me wrap this up. A couple of thoughts. Our revenues were strong across all the businesses and regions in line with the second half, our second half planned acceleration. We're very excited about that. We expect our momentum to continue and have reaffirmed our fiscal year 2019 revenue and EPS guidance. And as we approach the final year of the bar deal model, I'm confident that we will continue to deliver on our commitments and and create more value for our customers, their patients, and our shareholders. Once again, thank you for your questions. We look forward to updating you again around this exciting business that we've built. Thanks very much. Thanks, everyone.

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