Becton Dickinson and Co (BDX) 2003 Q2 法說會逐字稿

Hello. Welcome to the Becton, Dickinson Second Quarter Fiscal Earnings Release Conference Call. At the request of BD, today's call is being recorded for replay and available on the Website at www.BD.com through May 2, 2003. I would like to inform parties, your lines have been placed on a listen-only mode until the question and answer segment. Beginning today's meeting is Dean Paranicus, Vice President of Investor Relations and Public Affairs. Sir, you may begin.

Good morning Trisha. Good morning to all of you. Welcome and thank you for joining us to discuss our Second Quarter Results for Fiscal 2003. As the operator just noted, this call is being simultaneously Web cast and will be available for playback on our Website on the investor page and for play back at 1-800-945-6737 for domestic callers, and 1-402-220-3456 for international callers, through the close of business on May 2,2003.

On this call, we will discuss some non-GAAP financial measures with respect to our performance. A reconciliation of these non-GAAP measures to GAAP measures can be found in our second quarter press release and attached financial tables. A copy of the press release and related financial tables is posted on the investor page of the BD.com website. Also joining us on this conference call are members of the media. In the course of this morning's discussion, we will make some forward-looking statements, and it is possible that actual results could differ from the expectations we express today. Factors that could cause such differences appear in the second quarter press release and in the management discussion and analysis section of our recent SEC filing. Participating on the call this morning are John Considine, our Executive Vice President and Chief Financial Officer, Gary Cohen, President of BD Medical Systems, Bill Kozy, President of BD Clinical Laboratory Solutions and Company Operations and Vince Forlenza, President of BD Biosciences. With that I'll turn it over to John Considine.

Thanks, Dean, and good morning. By now I assume you've all had time to review the earnings release and the attachments we sent out earlier this morning. And we'd like to devote as much time as possible to answering any questions you may have, but before beginning, I'll make some brief comments regarding the second quarter results. The reported revenue increase of 12% reflected about a 5% point benefit from currency translation, in particular due to the strong Euro. Asset to currency impact, we had solid growth in BD Medical Systems and BD Clinical Laboratory Solutions, and as expected, essentially flat results in BD Biosciences.

Medicals revenue growth is continuing to be driven primarily by sales of safety engineered devices in the U.S. and globally by our pharmaceutical systems refillable products. With respect to our companywide U.S. safety revenues, which, as you know, includes sales in both Medical Systems and Preanalytical Solutions, they grew about 24% to 166 million in the second quarter. In terms of the U.S. market conversion to safety engineered products, last week we announced that we would be discontinuing many conventional needles and other sharps devices across a range of product categories to reflect a high degree of conversion of the U.S. market for those products. We do not expect this to have any meaningful impact on future results.

Based upon our current growth rates, we now estimate that U.S. safety sales will be about $675-680 million for this year. Which would represent growth over last year of 18 or 19%. We expect that our sales of safety devices in the U.S. will continue to grow in the coming years based upon continuing conversion of additional product categories and ongoing introduction of new products. For 2004, we expect approximately 15% growth, and thereafter, between 10 and 15% per year with an ultimate potential in excess of $1 billion.

As you know, we recently launched our blood glucose monitoring products in the U.S. in January. While it's too early to give you too much in the way of definitive information on how we're doing, we are very pleased with the initial launch and customer reaction. Qualitative feedback from customers is very positive, and we have experienced no major problems with the products to date. Sales were about $5 million in this quarter, and also, the products achieved a high level of acceptance in the retail trade with about 70% carrying our products. And we expect this to grow to 90% by year end. As a result of having gained more shelf space than we anticipated, and by virtue of having the retail trade request a higher number of meters than we anticipated, we have incurred higher sampling costs this quarter than we had anticipated.

Our joint programs with Medtronic kicked off in March, and we began shipping BD logic meters to pump users. Early feedback there is very favorable. We have also made good progress in gaining managed care coverage and reimbursement for our strips. As I've already said, the clinical lab solutions segment also continues to generate increased U.S. safety sales, which was the key growth driver in Preanalytical Solutions. Diagnostic Systems had strong growth for the quarter, and we were pleased, in particular, with the BD Pro-tech diagnostic platform which achieved sales of 16 million versus 9 million in last year's second quarter.

BD Biosciences revenues for the quarter were 6% ahead of last year, on a constant foreign exchange basis overall Biosciences revenues would have been slightly below the prior year. These results were generally consistent with where we had guided you. I'll discuss key elements of the Biosciences performance and outline some of the actions we are taking to address the current market conditions and improve performance going forward. And as you know, Vince Forlenza, who you might recall was our Senior Vice President of Technology, Strategy and Development, is now our new President of BD Biosciences and Vince is here with us on the call and will be available to add more to any questions you may have.

As for the results for this quarter, Pharmingen reagent growth benefited from the continuing introduction of new research reagents, as well as a release of funding from the 2003 NIH budget. While a 15% increase in the NIH budget had been previously approved, some of the funding increase expected during October 2002 was delayed until February of this year. We believe that this funding delay mitigated some of Pharmingen's sales growth in the U.S. during the early part of the second quarter. Immunocytometry systems sales, as anticipated, were essentially flat with last year. As in the first quarter sales, growth was impacted by an unfavorable comparison to last year resulting from a reduction in the backlog of uninstalled instruments in 2002. Deliveries of our new BD FACSAria cell sorters in the U.S. and Japan began in late March as planned. This rollout affected sales of our other flow cytometry instruments in both first and second quarters as some customers waited for the FACSAria to be available. Early indications are that customers are very pleased with the performance of the instrument.

We exceeded our initial second quarter targets for both orders and sales of the Aria, and we have a goal to sell over 100 of them in the second half of the year, and that would generate approximately $35 million in revenues. We expect the Aria will help, therefore, to improve results for the third and fourth quarters for Biosciences. Loan tech performance continues to be significantly impacted by a slowdown in some research segments as well as by competitive pressures. Accordingly, we are taking aggressive actions to adjust the size and focus of that business to align it with the current opportunities in the molecular biology market. In the environment of reduced funding growth, we are taking actions to improve Biosciences' overall operating effectiveness. During April, we began the process to eliminate 6% of our Biosciences U.S. work force. As part of this plan, we announced that we will close Pharmingen's Lexington, Kentucky facility, and transfer its operations to San Diego. Beyond these initial steps, we are reviewing our business strategies and the context of the changing market competitive environment. And this review includes looking at our product and reagent portfolios, our organizational model and our facilities and could result in further refinements or changes in the way we do business within Biosciences.

Given these ongoing activities we now expect full year 2003 Biosciences’ reported revenue growth to be in the 8-9% range. Our gross profit margins for the company as a whole was 49%, reflecting a 60 basis point improvement over the second quarter of last year. This increase is consistent with our overall expectation for full-year improvement of about 75 basis points. Strong sales of our safety engineered devices in the absences of variances incurred in the prior year in connection with our inventory reduction efforts were the primary contributors to the gross margin for the first quarter. This increase was partially offset by a number of other factors, including the increased costs associated with Blood Glucose Monitoring rollout and the write-down of certain Clontech Biosciences inventories. SSG&A expenses as a percentage of sales increased over last year by about 190 basis points. About 22% of the increase was due to foreign exchange. And as expected, the remainder was primarily due to incremental expenses related to our SAP implementation and to the Blood Glucose Monitoring Launch.

In terms of cash flow for the first six months of the year, we generated about 390 million in gross cash from operations. And used about 100 million for the pension contribution. We spent 108 million on capital expenditures and repurchased 3.4 million shares of common stock for about $107 million.

I also wanted to mention the impact of the West Pharmaceutical plant explosion in January. You'll recall at that time we indicated that the potential impact in the second quarter could be up to $0.02 per diluted share, which would be recovered in the second half of the year. I'm pleased to say that the crisis management of what was a very complex problem by both BD and West, resulted in only a negligible negative impact to our results for the second quarter and impact for the balance of the year is also expected to be negligible.

Finally, before I open the call to questions, I want to speak to our earnings guidance. As you no doubt noticed, we've increased guidance for the year from 209 to 212. Our outlook is approximately $0.54 in third quarter and $0.61 for fourth quarter. The increased guidance reflects the present level of the U.S. dollar against foreign currencies, particularly the Euro, and the projection assumes that the Euro and these other major currencies remain at approximately the same rates as they are today.

With that said, we can begin the Q and A, and as always, in order to allow for the broadest participation, we'd ask you to limit your questions to one plus a follow-up. And I thank you for your cooperation in that. And with that, operator, why don't we commence with the questions.

Thank you. If you would like to ask a question, please press “star” “1” on your touch-tone phone. And you will be announced prior to asking your question. Please stand by as we wait for questions to register. And our first question comes from Glenn Reicin from Morgan Stanley.

Morning, folks.

Morning, Glenn.

I'm going to try to tie two questions into one here. And the issue really is the Blood Glucose Monitor and how that all sort of fits into SG&A spent. I'm trying to get a sense of how flexible that SG&A spent spend is and how much -- if, in fact, the Blood Glucose Monitor sales do not materialize, where does that leave us for the remainder of the year and into next year?

Okay. Well, I'm sure Gary will chime in here, too. In terms of just the absolute numbers so that you can understand them, within SSG&A, there's about $8 million in this quarter related to the BGM product. And as I have said before, when we feed the meters, we – if there's any cash that changes hands, they actually go up against our gross margin. And there is some money up there that's quarter on gross margin-That would be in a rebate situation, for instance. If we simply give the meters away, they go to SSG&A. I'll let Gary talk about the flexibility of the product, if you will.

Yeah. I would just add to what John said by first, clearly, we're expecting there to be sales so that we would expect that the issue of how we pull back, if there are not sales, it would be a contingency plan rather than something that would be expected to happen. There's a good degree of variability in -- the biggest part of the expense, which as John pensioned, has both the BP line and SG&A line is the meter sampling. And we have obviously some control over that. And that control goes to a point. If no sales at all materialize, then he'll have an expense problem the back half of the year. But we don't expect that to be an issue. And if less sales materializing, then we anticipated we have the option of pulling back on meter sampling, or we have the option, if we believe we can cover it in other areas, of continuing with our plan and driving forward to generate sales if we think it's more of a sales timing issue.

I would also mention, just to flesh out a little bit the story on BTM, it is very early. We just began sales at meter sampling and sales through the retail trade in late January. We began shipping meters to Medtronic pump users through Medtronic in March, so that's really just about a month ago. All the initial signs are very positive, as John had mentioned, we've had very positive customer reaction. There have been no problems reported with the product, the product's performing very well in the field. It's clearly too early to provide any firm information regarding the impact of our initial launch. One of the key rates that we will ultimately measure is something that's called stickiness rate, how many strips are you selling per meter that's sampled. It will probably take us six months to get a handle of what the stickiness rates are in the various channels. But as John mentioned, the reception in the retail trade has been very positive. We're expecting 90% of retailers nationally in the U.S. to be carrying our products by the end of year. We're already around 70% coverage. We've had very good response in terms of coverage by managed care plans. Thus far this year, and we're expecting very strong coverage between now and the end of the year, managed care plans. We think that there will be maybe 20% of the covered lives that we may not have access to, but that means we'll have access to about 80% of the covered lives by the end of the year. And in some cases, we're getting up to a second tier level. We expect to get up to a second tier level on formulary placement in the managed care plan.

We've kicked off our promotional programs. Obviously we always have some discretion in how far to go with advertising. Most of this is trade journal advertising. And our go to market strategic relationships with both Medtronic and Lily have kicked off in full steam. Their sales organizations have been fully trained as well as ours. We have a very large force between the three companies now, out promoting these products in the marketplace. So that gives you a general sense of what's going on and reasons why we have confidence that the sales will build as planned.

Can I ask a follow-up?

Let me add just one thing to that, Glenn. There's also -- that number I gave you is incremental, obviously, in SSG&A and cost of sales is probably about $6 million. Most of these costs are not people costs. You know, these are costs of choice. As we said, the retail was a positive. We seeded more meters than we thought we would because there just was such an overwhelming call for them. And more of them in the stores, how that bodes for us in terms of future sales, we will see. But the answer to your question about flexibility, obviously we have some, since these are variable costs, however, it is our intention, as we’ve said, and always has been, to make sure that we have a seamless introduction, get the products out there and give this thing a real chance. We’re not worried about losing money or investment spending this year or even next if we had to, and therefore we have flexibility, but we don’t want to cut off our nose despite our face. In introducing this product you have to get these meters out there.

Just one follow-up. And I want to push you a little bit on this whole managed care issue and PBMs. For the Type I diabetic, who is the most intensive user, who has the highest out–of-pocket costs, is Tier III or II enough to really capture significant share of that segment of the market? Or do you really have to be tier I – I mean, we’re talking about the difference of $0.70 a strip times five a day for two weeks versus say, $5 out-of-pocket if you're Tier I. Maybe you could address that a little bit.

We believe Tier II will be sufficient. Our strategy specifically targets Type I, people with diabetes type I, given that's our current customer base. And also certainly Medtronic’s customer base are the most intense people, who treat themselves with the most intensive therapy as well as Lily’s customer base because they’re Insulin users, and we believe we have exceptional access to that customer base, and we believe that gaining placement -- our initial plans didn't even necessarily call for Tier II. We believe Tier II given some of the financial concessions that might be required for Tier I make sense.

Next question?

Thank you. Our next question comes from Bruce Jacobs from Deutsche Bank Securities.

Thanks so much. Guys, can you talk a little bit about the pharmaceutical systems growth and what the key drivers have been and how sustainable you think that might be?

Sure. I'll take that one. This is Gary. Clearly, we've had exceptional performance from the pharmaceutical systems business. Globally and in particular, in the U.S. and in Japan. We do anticipate standing strong performance but don't expect it at the rate that it's been. There have been a number of factors that have contributed to the particularly strong growth in the second quarter, both U.S. and Japan. In the U.S., we had strong growth both for the core business, which are Hypak glass prefillable syringes with new customers coming on, as well as pens that we supply to two large customers in the U.S. And we had some, essentially some startup of pen sales, and with that, there's initial higher order demand on the part of the pharmaceutical company customers.

Also in Japan we brought on a major new customer, and there were some startup higher than normal order patterns associated with that. So we would say for the second half of the year, if you were to think about, you know, mid -- you know, mid to high teens on an FX neutral basis or mid high 20s, in terms of growth on a reported basis, that would represent what we expect on the back half, which is lower than it's been year to date, but still represents very strong performance.

And just one follow-up, if I could, it relates to your comments on your safety products and your growth 2004 beyond, can you talk a little bit about what comprises that growth? Specifically I'm just wondering how much is international expansion, new products in the U.S., additional penetration in the U.S. and maybe in that context let us know where you are today in the United States?

Sure. The numbers John mentioned, were strictly U.S. We believe that over the coming years, the sales potential for BD will exceed $1 billion. It doesn't include international growth. Clearly we continue to work hard on developing international markets for safety, and I think we'll be providing more detail on that in future calls. But there's a lot of policy-related work that's going on among various organizations including industry organizations, as well as professional health care organizations. And we'll be providing guidance in the future relative to the global opportunity. So that -- those numbers were just U.S.

So 15% growth you think you can do in 2004 just on increased penetration and products in the U.S. basically?

That's correct. You had asked about levels of transition. There are some categories that have reached a very high level of transition, things like IV catheters and blood collection, needles, particularly wing sets, but there's other categories at a lower level, syringes and needles, about half of the market is transition with a higher level of that in hospitals but lower in physicians' offices and clinics. Some categories are still at a low level, surgical instruments, surgical blades are only around 10% transition. So there's still quite a bit of opportunity as well as new products that have been introduced that offer the opportunity for upgrading, even among safety devices.

Perfect. Thanks, guys. Appreciate it.

No problem.

Thank you. Our next question comes from Rick Wise (ph) from Bear, Stearns.

Morning, everybody. I'd focus on Bioscience. Obviously Bioscience continues to be weak, and John, you mentioned, you know, one reason was the customers, perhaps, waiting for the FACSAria. Sort of a two-part question. One, can you help us understand why the outlook for the second half should be better and maybe help us try to quantify in our own minds the contribution from some new products and what they could mean? And second, maybe we could hear from Vince and just what's going to be different now going forward? What's he focused on in terms of either new product, new market, new growth initiatives and or costs, just help us understand what's going to change there?

Why don't we let Vince take that whole thing because he can probably make great sense of it.

Sure. If you look at the second half of the year versus the first half of the year, the big difference is really the launch of the FACSAria. And as John mentioned in his remarks, we're looking to sell about $35 million worth of FACSAria in the second half of the year. It's quite clear that the sorter market in the first half of the year really stalled out, and we were, as John mentioned, customers were waiting for this new generation of technology. So a big portion of the growth in the back half of the year is coming from the IS business and is coming from the FACSAria. In addition to the FACSAria, we will also launch the FACSArray in the July time frame. And that will add a few million dollars in the fourth quarter.

In terms of Clontech, I don't see a lot of difference from the first quarter to the second quarter in the growth rates. I expect that that's going to continue to trend down a little bit because of the gene discovery and gene expression products. And that's about $24 million out of the, you know, $70 million in sales in that business. Discovery lab ware will trend at about the same rates. And Pharmingen will pick up in the second half of the year as well. And that's going to pick up because of the release of the NIH funding that has already occurred. But in the first quarter, it had not been released, and Pharmingen was softer. But as the second quarter progressed, we saw Pharmingen sales increasing. So we're looking at it -- if I add that all up for you -- on a reported basis for the entire second half, about a 14% reported growth rate and about between 9 and 10 on a performance basis. So that's --

And just some of your thoughts as you step into this new role, Vince, again, markets, products, just, you know, what's different now?

Well, you know, I think, as we all know that, you know, the market has changed. It is a tougher marketplace with the, you know, the slowdown in the Pharma spending, the projected slowdown in NIH funding. So you saw us already immediately take some actions in terms of streamlining the organization. And closing down the Lexington facility and beginning to simplify the organization.

You asked first about new product launches. I believe, you know, firmly that systems products like the Aria and the FACSArray and complete systems where you'll have the information systems, the automation and the reagent, and those are systems that can drive customer productivity and are going to be extremely important in the future, and I think we're very well positioned to do that.

Second, I think that being more focused in the strategy is an important piece. And so we'll be looking-- we've made the first moves in terms of the Clontech product line and refocusing it more towards some growth areas. It hasn't shown up much many the numbers because people haven't really figured out how to use scientifically, some of these newer products, but they are starting to grow at smaller rates. I think that then, how we're organized, and I think we can be more effective in terms of our go to market strategies, our facility strategies and shared service strategies, so I'll be looking at all of those things and in fact have teams working on them already.

Thanks. One last quick follow-up, John, you gave us earnings guidance of third fiscal quarter. Can you do the same for top line?

Yeah. Let me give you some idea in the top line. I would think you should think about, again, with the Euro staying where it is and all other currencies, we'd be in the kind of the 15 kind of top-line growth on a reported basis, probably, 11 or 12% on the performance basis.

Thanks.

And if you look across the businesses, I'll just give you -- if you take the currency out, , medical is no longer, you know, just a safety story. I mean, we've got a good growth there around. We're probably around 12%. 11%, 12%, you know. We're 9 or 10% for CLS and Biosciences, as Vince said, is around the 14% range. So for the company, that would get you in the -- that's in the third quarter. You know, near that 12% range or maybe 15% on a reported basis if the currency stays the way it is.

Thank you.

Thank you. Our next question comes from Dan Lemaitre from Merrill Lynch.

Okay. Just a bunch of quick little follow-ups on all of this. By the way, good morning.

Good morning.

John, I've just got to pick up right where you left off there. Obviously, the operations growth this quarter was 7%, and then you got the 5% from currency. Is the backlog already that visible in flow cytometry, or does the logic latitude stuff kick up so much sequentially that those are the two biggest drivers to that kind of a pickup in underlying growth from 7% to 12?

Well, you know, a lot of it's Biosciences. I mean, you have a 7% growth for the company with Biosciences which is 15, 16% of the company being, you know, zero to slightly down. And so that pickup, Dan, is the biggest singular thing.

And I guess -- my question is do you have the backlog in hand so that that's not we hope it, it's if we make it.

Well, I'll let Vince talk to that. You also mentioned blood glucose. Blood glucose is not significant to that growth in the third quarter. And Vince can actually give you a little bit of flavor on the amount. He said we want to do 100 of these things. He can kind of tell you how much we've done already and how much we have already booked.

Yeah. Dan, for the Aria, we have to do a little over 100 on the back half of the year. In the second quarter, we sold 14, and we have over 50 orders already in-house. And the funnel is building. Of course, you know, we track also prospects and suspects like everybody in the industry does and we see that funnel filling. So we're off to the strongest start that, you know, the old-timers in the business, that we ever have with an instrument. So it's going very well.

Then just one follow-up on the glucose monitoring, and actually, as it relates to the earnings guidance, but if you have had more success early on here in terms of gaining more shelf space and some of the initial uptake here, I'm wondering if you're thinking the $40 or $50 million guidance initially for the year is low. And John -- I guess as you guys think about this philosophically, if you are really starting to get some traction here, I just wonder why the inclination of raise the guidance and why not spend it and really make sure that if this things looks like it is what it is, just go for it and get as many meters out there as you could this year?

Let Gary take the first half and I'll come back to you.

Okay. On the first part, we are not in any way restricting our supply of meters. And, in fact, we are sampling a lot more, we're getting about double the retail shelf space than we originally anticipated. Obviously, that brought a higher cost which we're covering just through expense controls in other areas as well. And by the way, even some response to the first question, if at any point we hit higher than expected expenses, we don't just necessarily look at BGM, which is expected to be an important provider of future growth as an area to clamp down on spending, we look across the entire segment and the entire company of things that may be of lesser priority.

But in any case, we're not changing the outlook for the year. Some of the programs got a little bit later start than we anticipated. The -- as I mentioned earlier, the shipment to Medtronic customers kicked off about a month ago. We had originally hoped earlier that be that, but by the time we got organized, it took longer. So we believe that the information we provided earlier relative to the year in the 40 million range is appropriate, and at the same time, we're not holding back on building the market. We agree with your comments. And as long as we can continue to do that and build the market for the future sales potential and manage expenses collectively across the company well, that's what we'll continue to do.

Yeah. And just, you know, macro-wise, Dan, really what we let flow through is rather than have somebody ask me a lot of questions about the Euro, you know, there is just that much more exchange gain if the rates stay where they are. And that's what the increase is about. The strength of medical, you know, has been obvious without blood glucose monitoring. In fact, if you just looked at us incrementally in this quarter alone, the total cost of the company on blood glucose was in excess of $13 million over last year's quarter. We are in no way going to hold back on this. And you know, early acceptance by the retail stores, as I said before, that's great news. They wanted more meters, more of them, wanted the meters faster. But in the consumer game, you wait for the strip sales to happen. So we're not at all reluctant to place them out there. In terms of other seedings, you have to be more judicious because there's no sense in just sending them out and not having them used, for instance, with certain patients. You need nurse educators and others to make sure that the meter has a realistic chance of maintaining a sticky position. So we're judicious about that, but we're not judicious about spending the money. We're going to spend this and give this thing a real chance.

Okay. Thank you, guys.

Thank you. Our next question comes from Bruce Cranna from Leerink Swann.

Hi. Good morning.

Hi, Bruce.

Yeah, I guess if I could, just another quick follow-up on the logic. John, did I understand you to say that in the quarter 8 million was incremental within SG&A, and that was all meter giveaways?

It was predominantly meters. There's a lot of meter costs in there.

Promotional spending as well.

Some promotional spending, and then up in the cost of sales line, there's probably 6 million, and the majority of that is meter costs.

Okay. So the majority. So just my math would tell me, and tell me if I'm way off base, but it sounds like, based upon typical retail pricing, and given the strip sales of 5 million, we're talking maybe 40, 50,000 users at this point?

You know, I just do not, honestly, have that number right now. On the user number. And if I had it, I don't know if it would be very meaningful. We don't have that right yet, Bruce. I think as we get further into this thing, we'd be glad to give you and the rest that number, but I simply do not have it.

Can you give us any feel at all for selling per 100 strips selling price?

The range is $0.70.

Yeah. I don't know if you heard that, but Gary said $0.70 per strip.

Okay. Great. And lastly, just if you could, a quick, I guess, overview of in terms of detailing program nurses or nurse educators, what's the strategy there, and how many, I guess, high youth centers can you go at in the first couple quarters here, and are you sort of stratifying your approach, or can you give us some sort of feel there?

I'll give you a general feel. As I mentioned earlier, we have very strong feet on the street coverage. There are over 800 salespeople out now between Lily, Medtronic and BD, detailing and promoting these meters, and that gives us reach into all appropriate segments of the market, into endocrinologists and GPs who prescribe, into diabetes educators, into the retail channel, and to people who are educating in the hospitals as well. And, you know, certainly there is some stratification based on the anticipated intensity of patient volume, in particular, clinics. But we actually have many feet on the street now as all the other companies in the U.S. combined. So we believe we're getting very good coverage across the board and diabetes educators are one of the primary call points.

Great. Thank you very much.

Thank you. Our next question comes from Larry Keusch from Goldman Sachs.

Yeah, good morning. Just a couple of quick questions here. First off, when you guys were talking about the retail channel I guess 70% carrying your products moving to 90% by the year end, are you measuring that by sort of outlets or by volume? Because I guess what I'm getting at, are you missing any very large obvious retailers such as a Wal-Mart or somebody else be somebody else out there that you still need to capture? That's question one. Question two is you've done about a 60 basis point lift in gross margin for the first half of the year. You are still talking 70 to 100, so clearly we need to accelerate that in the back half of the year, again, just want to see what really lifts that gross margin up. And then lastly, just any update on share repurchase.

Our coverage is measured by outlets. We don't anticipate having any major retailers not participating in the stocking and launch of our products. There has been some staging on the order retailers. We elected to go major retailer by major retailer because we thought it was a more orderly way to introduce the products to the market. But that's based on true coverage in the various stores.

Yeah. And, you know, your math is right, it does accelerate. I'm very pleased with the 60 in each of the first two quarters. We do think there's an acceleration that will still allow -- that will allow us to be in that 75 to 100 basis point range. We should see that in both the third and fourth quarters. On share repurchase, you know, we had the program expanded to add another 10 million shares, as you know. 3.4 through the first six months of the year. You know, we had initially said a target of about $5 million. We still think the stock is very buyable, and it's viable to buy it, our cash position is terrific. So we will continue to buy the shares.

Okay. Great. Thanks very much.

All right.

Thank you. Our next question comes from Steven Lichtman from Bank of America.

Hi, guys. Most of my questions have been answered. Just two quick ones on the quarter. First, how did probe-tech do in the quarter, and is does that continue to attract as expected? And then secondly, John, did you wind up seeing any of the impact from distributor stocking in this past quarter ahead of the SAP implementation?

Most of that happened in the prior quarter with our Franklin Lakes go live where we actually sold on a consignment basis and did not recognize the sales, and therefore they came in this quarter. So we didn't have any stocking in this quarter whatsoever. And in the prior year there was a little in Baltimore that would have been into this quarter and maybe comparison, slight anomaly there, more difficult. But you really don't have any of that right now. And Probe-tech Billy?

I think John referenced earlier that the revenues were the quarter were about $16 million. That kind of translates to a quarterly shipment total of about 74 new placements bringing the year to date placements for probe tech to about 130 new operating instruments.

Great. Thank you.

Thank you. Our next question comes from Scott Wilkin from SG Cowen.

Thank you. Just two questions. Actually just if you could comment on the wholesale buying that took place -- buy-in that took place in Q1, did you burn down all that inventory in Q2 and are we at a normalized level? And then I have a follow-up.

You mean against the SAP buy-in Scott?

I thought there were some other products you said back last quarter where you had a medical product that you have a certain amount of inventory buy-in.

We had done this consignment program, and we allowed certain major customers to buy in against that on a consignment basis. There were one or two others that weren't afforded the program that actually bought in preparation for our go live. We believe that is all normalized now. And so those sales were after this quarter and into the prior quarter. If memory serves me, that was an estimate, but about $5 million worth of inventory in the first quarter.

Okay. That's helpful. And I just had a follow-up question of Biosciences for Vince. You know, just relative to the NIH funding, it has been released in February, but my understanding is that there's still some risk that the funding will be curtailed given some of the budgetary pressures that are being felt out there by various governments. Also, you know, you have a more modest growth rate on tap for '04. Could you just comment on the impact to this on the flow business potentially? You talked about 50 orders. Are these orders with a deposit, or could they be at risk of delay? And if you could also just talk about manufacturability on those orders.

Well, first, I don't think the 50 orders are at any risk. You know, I think that these are people who have the budgets, and they're going to go ahead and spend the money. So I think, you know, so you know, I feel very strong in terms of, you know, our ability in the third quarter. Your question in terms of as we move ahead into the fourth quarter, does the funnel continue to grow, I think it will, but, you know, only time will tell on that. We're seeing more stuff moving into the funnel. Now, the other piece where it would impact us would be primarily the Pharmingen business. And we have seen, as I mentioned before, during the second quarter as the funding was released, Pharmingen sales increasing. And we've only gotten the forecast of about a 2% increase over the incremental growth, over the first half of the year. So we've got some pickup, but not a real big pickup. Now, moving forward into ‘04, people are saying it's probably going to be ultimately in the 5 to 6% range.

I think that the important thing for us here is to be able to target specific areas. The good news for us is that we're in application areas that are very high on the priority list, in terms of funding. In particular, some of the infectious disease applications driven by concerns about bio-defense and new infectious agents are going to grow a lot faster than the 5-6%. And in addition, there's bio-defense spending that's going to be on top of the NIH funding. So I think we're going to see an impact in '04, but I think there are some strategies we can pull off to mitigate that as well. And, in fact, we're already starting to partner with some of our customer base to apply for grants to do that.

And just the last part of my question was on the manufacturing on the FACSAria. Are there any constraints there to hit the 100 placement?

No.

Okay. That's helpful. Thank you.

Thank you. And our next question comes from Glenn Reicin from Morgan Stanley.

Just a couple quick follow-ups. John, what was in the other income line? Is that all FX losses?

No. It's mostly-- we have certain stock investments in companies that are aligned with research projects that we have going on. And when there were secondary offerings in some of them, and we reflected the write-down for those.

Okay. And then can you give us updates on Phoenix and the safety business overseas?

Bill, you want to go Phoenix first?

Give you some quick update on Phoenix. Through the second quarter. The total number of instrument placements at this point including customers evaluating is right around 200, and we've got 155 routine users, either instruments placed and operational on a clinical setting. It's pretty much right on our plan.

What does that compare with last quarter or the beginning of the year?

In terms of instrument placements?

Yes.

Give me just a second and I'll come right back to you on that. I can give you a comparison against the prior quarter, I just need to grab the number.

You know, importantly there, too, Glenn, is obviously the U.S. introduction of the 5-10-K has been submitted, and I think we still expect approval of that. Do you recall, Vince, or Bill?

I think they're shooting for beginning of next year, first quarter, yeah. For U.S. FDA approval.

FDA approval in the late first, early second quarter.

And that will be with a full menu?

Full menu for the U.S. market.

Right.

While Bill's looking for the numbers, I'll give you a little more information on what's going on outside the U.S. with safety. Much of our efforts are focusing on complementing policy work that's going on in various countries around the world as well as doing additional product development work that's appropriate for specific markets and different usage procedures. We were pleased to see that the first safety -- and in fact safety mandate to use safety devices outside of the U.S. occurred last quarter, and that was in Alberta, Canada, the way Canada's system works is that the safety regulations will happen province by province. And Alberta was the first to adopt those regulations. Thee code becomes law in September of 2003. And the compliance date for hospitals is March 2004. There were substantial fines for noncompliance. We're expecting in Canada that Manitoba and Saskatchewan will be the next provinces to put safety device usage requirements into effect.

In Europe, there's a lot of activity. I'm going to try to summarize it for you just to give you a sense of what's going on. At the European Union level, there's a group that was formed in Ukomed (ph), which is the Eurpoean trade association, called the ESI or Eliminating Sharps Injuries group. Groups where other countries in Europe is very active and going on among health care workers and public service workers and other organizations. There was a special seminar in sharps injuries held at the European parliament in March 2003 that was well attended by European Union representatives and other various state organizations. The Spanish Nurses's Association took a prominent role, Spain is one of the areas that's a little ahead of the other countries and working on policy activities as well as the French Blood Safety Agency, the U.K. Royal College of Nursing and others. There was discussion of development of specific guidelines at the EU level that occurred. And these are all sort of steps in the process of working towards what we expect at some point will be usage requirement in Europe, although the timing of such is still difficult to predict at this moment. In the U.K., there will be a second reading of a Needle Stick Protection bill that was rescheduled for July 4, 2003. We're not expecting that. It's not expected that that's going to progress further beyond that. It's more a means to bring additional attention and publicity to the issue.

However, before the end of the summer, it's expected that the National Audit Office in the U.K. will issue a report of health and safety in the NHS and it's expected to include significant coverage of needle sticks a as a primary cause of occupational injury, and it's hoped that that's going to prompt the health services secular regarding services in the U.K. In France, there's been a reasonably high level of adoption of safety devices and measures, particularly relative to the handling of blood and blood-filled needles, that the adoption rate has been faster in the public sector than in the private sector. In Germany, there's a guideline on health care workers safety that's expected to be published in the fall. It will specifically – we believe through the work with Ukomed (ph) and others, we believe it will identify the value of safety engineered technology and preventing sharps injuries but won't be a specific mandate.

In Spain I mentioned one of the countries that had been moving a little bit faster. Legislation was drafted almost a year ago that would have mandated the use of safety devices. The passage was delayed due to government changes in Spain, but again, it's getting back to the forefront by the Spanish Nursing Association. And also, it's been supported by other European nursing associations and the world health organization at the recent European Parliament event. It's tough to predict timing, but it's gaining a lot of political momentum again in Spain. Data surveillance systems have been implemented in all these countries to identify sharps injury risks, and that is a very critical first step. It was a critical first step in the U.S. as well to gaining momentum by providing data to health care professionals that could be analyzed to get a better sense of the issue. We're engaged in significant product development activities in Europe in a number of different product categories. As mentioned earlier, we'll start to provide some outlook guidance in a future conference call in terms of sales potential.

: Thank you. And our last question comes from Christian Sud (ph) from Argus.

Operator, hold on one second. We were trying to amplify a question to one answer.

Thank you. The Phoenix question, we were looking for a comparative sales number between second and third quarters of this year. The total sales all in consumables and instruments are relatively flat for the two quarters. You had an unusually strong instrument quarter in the first quarter. Followed by about 30% growth on the consumable side, and the second quarter given particularly the stage of launch in Europe. So you've got a little bit of anomaly in terms of growth. But looking at the consumables, look at those of up about 30%, particularly in Europe in the second quarter.

I wanted to make sure I didn't confuse anyone, when we were talking about on growth rates, the 5- 6% I was talking about was the NII funding growth rate versus the two to three budget proposal not the Pharmingen growth rate, the Pharmingen we'd still expect to be up double digits driven by the new products and some of those products already launched such at the CBA as says which are doing quite well in relation to '04.

Next question, operator.

Our next question comes from Christian Sud from Argus.

Thank you for taking my question. What percentage of your business is in Asia, and you know, do you at this point, even think about the whose SARS issue, or is it something that is not even on your mind at this stage? Thank you.

Well, you know, clearly it's on our mind. All three businesses touch Asia-Pacific, also touch Canada. No major impact that we expect with respect to it yet. I don't know if any of the business leaders here, Bill, or Gary or Vince want to contact. Bill?

I think at this stage it would be fair to say that we, through the Advermed (ph) organization in the U.S., there's been interest in us collaborating on looking at the possibility of diagnostic assay applications. And we are doing that through the Advermed organization, and their liaison work with the U.S. State Department. Very early stage, obviously. It's all happened in the last month.

By the way, it's about 5 or 6% of our sales.

Thank you.

Thank you. Our next question comes from Rick Wise from Bear Stearns.

John, one last small follow-up here. Ophthalmic systems seemed exceptionally weak this quarter. It's been sort of lackluster for a while for understandable reasons, but seemed like it took a slight nosedive. What's going on, and does it get better in the second half?

This is Gary. I'll take that one. You're correct. And there's a few factors at play here. One is, the refractive market in general, which is one of the segments that we sell into, has been soft in the U.S. There's also been some internal issues as we did the systems changeover, ophthalmic being the small business with less resources was less well prepared and because it's one of the few businesses where we ship direct to the end user, there was more of an impact from the systems changeover in depressing sales, particularly in the second quarter, than we had expected. So we're working hard to correct those issues. We do expect better performance in the second half of the year as the systems issues dissipate and we can sort of replenish or complete orders that weren't being serviced properly during the second quarter.

The impact of the refractive market will take a longer time to recover. And I would say, as I said in past calls, it's good as a small business because be given the performance in second quarter I'm glad it wasn't a larger business.

Thanks.

Thank you. And I'm showing no further questions at this time.

Okay. Well, thank you very much, Operator, and thank you for all of those still on the phone, and we'll talk to you next quarter.

Thank you. This conference call is concluded. You may disconnect at this time