Becton Dickinson and Co (BDX) 2005 Q4 法說會逐字稿

Hello, and welcome to BD's fourth fiscal quarter and full year 2005 earning release conference call. At the request of BD, today's call is being recorded. I would like to inform all parties that your lines have been placed in a listen-only mode until the question and answer session. [ OPERATOR INSTRUCTIONS ]

Beginning today's meeting is Ms. Patricia Spinella, Director of Investor Relations. Ms. Spinella, you may begin.

Thanks, Julie. Good morning everyone, and thank you for joining us to review our fourth fiscal quarter and full year results. Today's call is being simultaneously Webcast and will be available for replay through Thursday, November the 10th on the investors page of the BD.com website or by phone at 1-866-347-5807 for domestic calls, and 1-203-369-0023 for international calls.

During today's call we will discuss some nonGAAP financial measures with respect to our performance. A reconciliation of these nonGAAP to GAAP measures can be found in our fourth quarter press release and its related financial table. A copy of the release including the financial tables is posted on the investors page of the BD.com website. We will also make some forward-looking statements. And it's possible that actual results could differ from our expectations. Factors that could cause such differences appear in the fourth quarter press release and in the MDNA sections of our recent SEC filings.

Leading the call this morning are Ed Ludwig, Chairman, President and Chief Executive Officer, and John Considine, Executive Vice President and Chief Financial Officer. And although our three worldwide presidents are not able to be in Franklin Lakes today, they are joining us from various global locations. Calling in is Gary Cohen, President of BD Medical, Bill Kozy, President of BD Diagnostics, and Vince Forlenza, President of BD Biosciences. I will now turn the call over to John.

Thank you, Pat, and good morning to everyone. I assume you've all received our earning release and the attachments that we sent out this morning and have had an opportunity to review them. As usual, we'd like to devote as much time as possible to answering your questions. Therefore, my comments will be brief.

Consistent with our most recent calls there are three primary topics I'd like to address. First, since there are certain items that affect the comparability of our diluted earnings per share from continuing operations for the fourth quarter and twelve-month periods of 2005 and 2004, we want to review the analyses of these results we have provided in the press release. Second, we'll describe some of the key drivers of our revenue and earnings growth for the fourth quarter and full year 2005. And third, we'll review our guidance for the first quarter and fiscal year 2006.

Beginning with our earnings, I'd suggest you turn to the first table in the press release that appears under the heading, Analyses For the Fourth Quarter and Full Year 2005 and 2004 Earnings. This table is provided to assist you in comparing the current years diluted earnings per share from continuing operations to the prior year results. To accomplish this, we have highlighted certain items which we believe are unique to the periods presented.

For the fourth quarter of 2005 we begin with reported diluted earnings per share of $0.58 and subtract a gain of $0.11 resulting from the sale of Clontech on August 31 of 2005 which gives us diluted earnings per share from continuing operations of $0.47. As you will recall, we announced our intentions to sell Clontech last year end and recorded a charge of $0.44 which reflected our best estimate of the net value of that unit. $0.11 recorded as income from discontinued operations in this quarter relates primarily to additional tax benefits and to a lesser extent higher net proceeds realized upon the sale. We next add back $0.02 related to certain discrete tax events that caused this quarters tack rate to vary from the underlying effective tax rate for the year of 25.5%. You will recall that we highlighted the related $0.02 variation which has the opposite effect in our first quarter analysis. As a result for the year these quarterly impacts had no effect on our results.

Next we add back $0.27 charge related to the Company's plan repatriation of 1.3 billion of foreign earnings under the provisions with the American Jobs Creation Act. Lastly we add back $0.07 related to share-based compensation which you will recall relates to our adoption of FASB 123 R. We've isolated this expense given our broad-based equity -- that our broad-based equity began to be expensed in this years first quarter. After we take into account our diluted -- these items into account our diluted earnings per share from continuing operations excluding specified items and share-based compensation expense for the fourth quarter of '05 is $0.83. For the fourth quarter of 2004 we begin with reported diluted earnings per share of $0.26 and add back the previously disclosed -- discussed $0.44 related to the write down of Clontech net assets, which gives us diluted earnings per share from continuing operations of $0.70. Comparing $0.83 to the $0.70 in the prior years quarter gives us adjusted EPS of 19% up.

Moving to our full year results, we begin with reported diluted earnings per share of $2.77 and subtract $0.01 related to the income from Clontech's operations and the $0.11 gain from its sales. Taking into account $0.01 of rounding we have diluted earnings per share from continuing operations at $2.66. From that we subtract $0.04 related to the reversal of tax reserves in the first quarter in connection with favorable conclusions of certain international tax examinations. We then add back $0.27 for the planned repatriation of 1.3 billion and after accounting for $0.01 of rounding that gives us diluted earnings per share from continuing operations, excluding specified items, of $2.88. The last operation -- adjustment we have is to add back $0.19 of share-based compensation expense recorded over the fiscal year, and again this is isolated since there is no comparable expense recorded in 2004. This gives us diluted earnings per share from continuing operations excluding specified items and share-based compensation of $3.07 for 2005.

For fiscal 2004 we begin with reported diluted EPS of $1.77 as we did in the fourth quarter analysis we add back $0.44 related to the write down of Clontech which gives us diluted earnings per share from continuing operations of $2.21. We next add back $0.11 per diluted share recorded in connection with the voluntary recall and write off of blood glucose strip inventory, and other actions taken with respect to our blood glucose monitoring products in fiscal 2004. We also add back $0.24 related to the RTI litigation settlement. As a result, on a comparative basis, our diluted earnings per share from continuing operations, excluding specified items and share-based compensation expense for 2005, is $3.07 versus $2.56 in the prior year, or an increase of 20%.

Moving to the second topic, that is what drove our growth, we'll begin with a revenue growth of 10% for the quarter. This growth included approximately a 2% benefit from foreign currency translation due to favorable foreign exchange rates in Latin America, Asia Pacific, Canada and to a lesser extent, Europe. Our revenues for the full year, which also increased 10%, benefited by about 3 percentage points from foreign currency translation due to favorable exchange rates in all regions, and in particular Europe, which accounted for a little better than half of the impact, and that's the 3% impact.

In the medical segment, fourth quarter revenues grew about 11% with about 2 of these percentage points coming from foreign exchange. Key drivers were products in the diabetes care, safety, pharmaceutical systems and flush lines. Sales of our BGM products totaled 24 million for the quarter, which was consistent with our guidance. U.S. sales of safety engineered products grew 7% to 130 million, while international safety sales grew about 29% to 21 million. For the year, revenues in the medical segment grew about 10% with 3 of those percentage points coming from favorable foreign exchange. Our safety, diabetes, pharmaceutical systems and flush product lines led growth. Sales of our BGM products totaled 76 million for the year. U.S. sales of safety engineered products grew about 7% to 490 million, while international sales sales grew about 28% to 81 million.

Revenues in the BD Diagnostics segment grew about 8% in the fourth quarter with about 1.4 of those percentage points coming from foreign exchange. The Diagnostics Systems Unit reported revenue growth of 9% and the Preanalytical Systems unit reported 7%. U.S. sales of safety engineered products grew 10% to 94 million, due in large part to the success of our push button blood collection set. International safety sales grew about 25% to 49 million. For the year revenues in the BD Diagnostics segment grew about 8% with about 2 of those percentage points coming from foreign exchange. U.S. sales of safety engineered products grew at 11% to 352 million. International safety sales grew about 37% to 192 million. Our ProbeTec and Phoenix platforms also contributed to the segments growth.

Looking at combined medical and diagnostics U.S. safety, sales grew about 8% for the quarter and 8.5% for the full year, to 224 million and 842 million respectively. Combined medical and diagnostic international safety sales grew about 26% for the quarter and about 34% for the full year, 270 million and 273 million, with about 6 to 7 percentage points of the annual increase related to foreign exchange.

In the BD Biosciences segment , worldwide revenues excluding Clontech grew 12% for the quarter with about 1% of those percentage points, or 1 of those percentage points, rather, coming from foreign exchange. Research Instrument and Reagent growth continued to be the primary growth contributor driven by increased demand for research analyzers. Also contributing to the growth were increased sales in the Discovery Labware unit. For the year, worldwide BD Biosciences revenues grew 11% with about 2.5 of these percentage points coming from foreign exchange. Similar to the fourth quarter, Research Instruments and Reagents continued to be the primary revenue growth drivers with Discovery Labware also contributing.

Moving next to earning, the number I'm going to reference -- numbers I'm going to reference have been adjusted to exclude the impact of share-based compensation expense which is detailed in the tables attached to the press release. Beginning with gross profit, even with the impact of oil based cost increases for medical grade resins and other raw materials we were able to deliver another strong quarter. Among other things product mix including increased worldwide safety revenues and higher insulin delivery sales combined with positive foreign exchange to produce a gross profit margin improvement of 170 basis points to 52.2% for the quarter. For the year gross profit margin improved to 80 basis points to 51%, led again by product mix and positive foreign exchange.

Our operating income improved 70 basis points to 20.9% from last year's fourth quarter. And 140 basis points to 20.3% for the year. In addition to improved gross profit, this impact reflects SSG&A improvement of about 80 basis points for the year offset in part by increased R&D spending of about 13% in absolute terms over 2004. All of this led to strong cash flow for the year of about 1.2 billion from operations, of which approximately 550 million was used to repurchase approximately 9.7 million shares of common stock and to invest 318 million in capital expenditures.

In relation to our prior guidance for the fourth quarter, our adjusted diluted earnings per share from continued operations, excluding the specified items and share-based compensation expense of $0.83, was about $0.08 higher than the midpoint of our guidance range. Stronger revenues in the quarter, particularly with double-digit growth contributions from Immunocytometry Systems , Diabetes Care and Discovery Labware, contributed about $0.03 of that difference. The remaining $0.05 came primarily from a combination of favorable foreign exchange, lower net interest expense and lower shares outstanding as a result of increased buybacks.

The last topic we'd like to cover is our guidance for the full fiscal year, 2006 and its first quarter. Once again I'd suggest you now turn to the second table in the press release which immediately precedes the conference call information. With respect to the table, I've already described all of the specified items you will note. For the year, diluted earnings per share from continued operations are expected to increase approximately 10% from last year's adjusted base of $2.88. In achieving that growth, our underlying performance, that is our results excluding the expected negative impact of foreign exchange, should increase about 14%. The foreign exchange impact is essentially due to an expected lower Euro in 2006 versus 2005.

Full year revenue growth for the Company is expected to be reported at 6% including an approximate 2 percentage point unfavorable FX impact. Our revenue estimate for BD Medical and BD Diagnostics ranges from about 5 to 6% and BD Biosciences between 8 and 9%. We look for U.S. sales of safety engineered products to increase by about 8% over 2005 and anticipate international safety to increase about 20%. BGM sales are currently estimated to increase about to 115 million for fiscal '06.

We expect gross profit margin improvement of about 30 to 40 basis points and SSG&A of about 40 to 50 basis points. By the way, these estimates all include the impact of share-based compensation and that is included in both years numbers. R&D spending is expected to increase about 12%, and our effective tax rate is projected to be about 26% for the year, and as you know that can vary between quarters. We expect to generate about 1.3 billion in net cash from operations. Our capital expenditures are expected to be about 400 million, which is somewhat higher than the average of recent years, due to investments in our push button blood collection set, manufacturing, sterilization, pharmaceutical systems, our distribution network, and pen needles and reagent manufacturing.

And finally, we expect share repurchases to be about 450 million, and the average number of fully diluted shares outstanding to be approximately 257 million for the year. For our first quarter, our comparable diluted earnings per share from continued operations are expected to increase about 10% from our first fiscal quarter 2005 adjusted basis of $0.68. Revenue growth for the first quarter is expected to be about 7 to 8%, with revenue growth for Medical, 7 to 8%, Diagnostics being 4 to 5%, and Biosciences being about 10 to 11%.

And, with all that I'd like to turn the call over to Ed.

Thank you very much, John. And good morning, everyone. Our stronger than expected results for the year just ended and our outlook for '06 make us confident that the strategy we began implementing several years ago is a good one and is being effectively implemented by our team. This is the 50th consecutive year, some 21 quarters in a row in which we have achieved or exceeded our expectations and our objectives. Before turning to your questions, I would like to expand a little bit beyond the fiscal '06 guidance that John has shared with you, and briefly elaborate with you on our strategic direction and outlook for the next few years.

In summary we will continue to aggressively implement the strategy we've been pursuing over the past several years. The first element of our strategy is to drive revenue growth by designing, manufacturing and marketing innovative products that demonstrably improve the lives of healthcare workers, patients and researchers. This fundamental innovation strategy is enabled and fueled by the second element of our strategy which is our commitment to achieve outstanding operating effectiveness in productivity. Our success in the operating effectiveness component of our strategy should result in outstanding customer satisfaction and strong cash flow and it will also very importantly enable us to increase our investment in innovation. By successfully pursuing this strategy we expect to continue to deliver strong results.

And so, beyond the '05, '06 time frame, over the next several years we expect the following: Company revenue growth to be in the range of 6 to 8% on an FX neutral basis. We also expect to see continued improvements in our gross profit and SSG&A ratios. This improvement -- or these improvements will allow us to continue to increase the pace of our R&D spending while also targeting double-digit earnings growth. As some of you may know, John is chairing a multifunction operating effectiveness task force, and we are confident that this dynamic integrated approach will enable us to continue our progress in this area. Driving operating effectiveness throughout the Company will also delight our customers and at the same time enable to us make important new investments in innovation.

I'm again happy, as I was last year, and I'm very pleased to advise you that another major national distribution partner recently honored BD with awards for operational and marketing effectiveness, citing us as among -- the best among our peers. We've always said that when we talk about outstanding performance we will look for our customers to affirm that our results and this -- our results, and this award is a good indication that we are on track.

We expect R&D spending, again starting in '05 and continuing in '06 and beyond that, will increase annually by approximately 12%. Building on our core strengths and adding new capabilities. Continuously improving our performance and making these investments in innovation go hand in hand to build a platform to generate sustainable double-digit growth. We expect that our performance should also enable us to contribute -- to continue to generate strong cash flow over $1 billion in operating cash flow again in '06. Very importantly, this should allow to us increase our returns to our shareholders in the form of share repurchases and increased dividends.

I would like to now address our growth drivers. In the near term our growth drivers will be the same as derived from those products that have driven our growth in recent years. We expect continued good growth from our safety initiative, both in medical and diagnostics segments, both domestically and internationally. Also contributing to the medical growth will be prefillable syringes, blood glucose monitoring and diabetes care products, immunization products, auto disabled syringes, and our flush -- prefilled flush initiative.

In Diagnostics, the drivers will continue to be our ProbeTec and Phoenix Instrument platforms for infectious disease diagnostics as well as our recently acquired protein separation system from FFE Weber. In Biosciences, drivers will be our new line of Immunocytometry Instrument platforms, namely FACSAria., FACSCanto, CD4 Instruments and Reagents, Pathway HT, our new Cell Imaging Instrument from our acquisition of Atto. As in the past few quarters, Discovery Labware is expected to also achieve higher growth rates in its core business. As you may have heard me say our plan is to increase R&D spending, and this is critical as we make additional important investments in innovation and it can provide us with new advanced drug delivery systems, high impact diagnostics and advanced bioscience research platforms in the years beyond 2006.

In summary we've come a long way over the past five years. 2005 achievements were the latest affirmation that our strategy to drive innovation and operating effectiveness is working. By continuing on this course we are confident that our progress should continue in the years ahead. We are working even now by increasing our investments in innovation to address much bigger healthcare challenges in the future. Let me give you a few examples.

We are using our new expanded R&D investments, and by this we are investigating the use of microneedles and needleless technologies to provide safer, more effective and painless drug delivery systems, and we will shortly announce an important new development agreement in this area with a major pharmaceutical firm. Another example is that we're attempting to address the problems of hospital acquired infections with superior devices, diagnostics and know how. We're developing rapid and more accurate diagnostics systems which will improve therapy and patients health. We're working to help people with diabetes live healthier lives by developing advanced drug delivery, glucose sensing and information management systems. We are also endeavoring to contribute to finding a cure for diabetes with investments in cellular therapies.

We are continuing the fight against the spread of infection diseases, particularly HIV Aids, with safer drug delivery systems, advanced immunization practices and real time, accurate diagnostics. We are also working to further improve the effectiveness of life science researchers and drug developers by providing advanced discovery systems, bio nutrients and reagents. We can achieve these exciting breakthroughs by building on our core strengths and investing in new capabilities. The future holds many opportunities for our BD associates around the world, to continue our quest for greatness and pursue with passion our purpose to help people live healthy lives.

With that, we're happy to take your questions. In order to allow for a broad participation we'd appreciate it if you would limit your question to one plus a follow up. I'll turn it back over to the operator and we can start with the questions.

Thank you, sir. At this time we are ready to begin the question and answer session. [ OPERATOR INSTRUCTIONS ] First question comes from Rick Wise with Bear Stearns, you may ask your question, sir.

Good morning, everybody, this is Jonathan [Tyberski]. here for Rick. Just a quick question. John, this quarter was real good with the gross margins, 52% is pretty much the highest we've seen. Is there anything going on this quarter that might not make this number representative of gross margins going forward? And I think you had mentioned for next year 30 to 40 basis point increase, but I think you said that that may have been on an after stock option compensation expenses included. Can you clarify that for me and also one follow up after that.

You're right. That is after compensation expense and compensation expense would be loaded into both years. And if you look in the tables attached to the press release you can see what this year's would have looked like with comp expense which we took out just for comparability. And our guidance next year, without dealing specifically first with this quarter is 30 or 40 basis points off of the year. I wouldn't project on a quarter by quarter basis. There are things that run in and out of quarters, but there is no one big item that I worry about in that gross margin. We did have things, as I explained the quarter, the increase over our earlier estimate was mainly revenues, some interest, some shares and some foreign exchange. And there are some other things in there but there are only a few million dollars and some of them may have been gross margin. But I think if you look at that fully loaded '05 with comp expense and look for 30 to 40 basis points over that that's where you will see us move to.

And one follow up regarding Biosciences, last quarter you mentioned two larger issues, one is the acquisition of the distributor and also a slow down in the procurement process in Japan. I wonder if you can give us an update on that? And in particular the procurement process whether that -- you mentioned that that was back on track but whether there is any developments there that would indicate that it's not on track.

Yes, in summary --, this is Ed, in summary, it is as we represented, and let me ask Vince Forlenza to elaborate a little bit. But it is exactly as we said and as you recall -- but, Vince, you want to give a little more color?

Sure. On the Japan, on both situations, first on the instruments, as I talked last quarter, we were expecting that to get back on track and it did, as Ed said. So it was up 5.8% in Japan. So that was a major change back to the positive. So I do expect that that tender process has worked its way through the system. So that was the first thing. The second thing was the acquisition of the distributor. And this quarter, okay, we reversed $5.3 million worth of sales in Japan. So we sold them to our distributor, reversed them back out so we did not record those sales. And for the total year the impact was $6.3 million. So that the results for biosciences that you were given was 12% growth for the quarter. If you add back those sales it would have been 14.7 on a reported basis, 13.8 on a performance basis.

And, this is Ed again, before we go to the next question let me just, what you will be hearing from us is that we have observed nothing in the revenue, in the margins or any other performance in this quarter which leads us to believe it is anything other than just a good quarter. There is no timing issues, nothing anomalous about it and in fact our preliminary look at October leads us to be confident with the guidance that we've provided you for '06.

It was a good quarter and thanks so much for answering the questions.

Okay. Good. Next question.

Michael Weinstein with J.P. Morgan, you may ask your question.

Hi, guys, it's actually Kim [Weeks] here for Mike. I guess our first question would be a follow up on the gross margin there which was pretty strong in the quarter especially in light of the resin pricing pressure that's going on. I think that last quarter you can actually broke out this impact for us. Could you do that again for the fourth quarter? And then, maybe just a comment sort of as we look forward at the gross margin guidance. In these comparisons maybe get a little easier in the back half of the year what keeps you from doing a bit better there?

We'd be glad to do that. Looking at the fourth quarter first, there are a number of things that hit gross margin, and as I said, product mix is important as we sell our higher margin products such as diabetes, injection products which are high and some of the reagents in Biosciences, for example. And if you looked at this quarter that might have given us about 80 basis points. Important to recognize is that when foreign currency is going up you get a benefit in foreign exchange, and we've talked about that before and you find that in the fourth quarter probably about 70 basis points. But you also have offsetting that the cost of resins. Now resins were particularly painful for us in 2005, and in the fourth quarter probably cost us 80 basis points. So it kind of offset the gross margin -- I mean the FX impact. And then there's a bunch of other things in that.

When you look forward, in terms of gross margin, obviously this year as you can tell by our guidance, although we are going to be up on an apples-to-apples basis by 14%, we are going to run into that foreign exchange head wind and that will cause our results to be up 10%. Some of that is resident in gross margin with negative foreign exchange. And we have a little bit more resins coming through there probably resins in the 20ish, 30ish basis point impact.

But, the productivity that Ed talked about in terms of operations effectiveness, even with the task force, it's been a long a mantra of this company and the various disciplines that are involved in that whole supply chain are working to offset more and more waste, if you will, that exist in the system. So we still look for improvement, as I said of 30 to 40 basis points, but it is somewhat mitigated by two things, we said we have the effect of downward pressure from foreign exchange anticipated in '06, and we still have the, kind of the, hopefully it's the end of, but the incremental resin impact which we also estimate in '06. But, even with all that we expect to be up by the 30 or 40 basis points.

Okay. Thanks. That's actually very helpful. I guess, our other question would be on your diabetes pipeline. Can you just talk a little bit about your investment in this business and maybe give us a little bit of detail in the pipeline? I know you touched on your closing comments on glucose testing and diabetes management work. Could you talk a little bit, I guess more detail on those? And then if would you have any interest in maybe entering the pump market at all?

Thanks, I will comment.We’re really not in a position to talk in great detail about specific products. First of all, we have no immediate plan to get into the pump business. Future developments in blood glucose testing will be, I think an the area of ergonomics. In terms of sample size and speed, we are reaching some limits there in terms of 3/10 of a microliter in 5 seconds. I think future systems you will see will be much easier to use, will be more information gathering and sharing intensive and those are the things that we are working on. I'll ask Gary to see if he has anything that he'd like to elaborate on that.

Sure, Ed. Two points I make; One is, that I think we would have to choose the right time and place to go to the extend of disclosing our future plans that you might be seeking. I would just build on what Ed said to indicate that in the coming several years I think you will see further improvement upon the types of systems that are used today, but we're also investing in some fundamental research that in the years past that should lead to more breakthrough oriented means on the sensing and treatment side, and I think we can't really go much beyond that right now, but it is a considerable area of importance and investment for us.

Okay. Thanks. Actually, can I just get one more quick one on the repatriation, what portion of that 1.3 billion needs to be borrowed actually before it's brought back?

We have a little over 1.1 billion at the end of the year over there. And actually, because of the way that we've done it, which is to declare the dividend payable in '06 we have all of '06 to bring it back. So it's very possible that with cash generation overseas we won't have to borrow anything. If we did, the borrow rate over there versus the investment rate over here is actually accretive. So it shouldn't have any impact no matter how we do it.

Thank you so much.

John Calcagnini with CIBC World Markets, you may ask your question.

Good morning, everybody. Ed, I guess the question is on the gross profit margin what people are a little perplexed about is it was up, I don't know, 200 basis points versus, if I'm not mistaken, versus a year ago. And you didn't see that kind of a gross margin jump in the earlier quarters of the year. So I just wonder if you could help us understand a little better, was BGM gross profit margin profitable? Is there something that's having a big swing factor that's helping drive that in addition to the factors that you talked about like FX and resins, I think you said diabetes injection systems and one other product drove margin expansion as well, but maybe if you could help flush that out?

I think if you think about it more on an annual basis it's a little bit easier. There are some differences in mix that might impact one quarter to the next, but on balance, safety continues to be strong in the quarter. Diabetes care grew very nicely. These are higher than average margins. Biosciences, as Vince pointed out had a good quarter. That is higher than average. And beyond that, I don't know if there is anything else really worth commenting on it.

I think that the guidance that we've given -- this year we increased overall, apples to apples, about 80 basis points in gross profit. Next year we are guiding at 30 to 40. I think the conservatism that we are using going forward is a function of having a little bit of tail wind from foreign exchange this year and a little bit of head wind from foreign exchange next year. And beyond that I've been saying to our investors all year that I believe we can continue this up to a 50 basis point average increase in gross profit margin for the foreseeable future as a function of these product mixes, and again, the great focus that we have on productivity.

Can you talk about the margins in the BGM Business? And also, what did you say the SSG&A improvement would be in '06?

The '06 SSG&A is a little bit more than the gross margin improvement -- it's a 40 to 50 basis points is what we are saying leverage improvement, reduction in SSG&A as a percent of sales. BGM, as it grows it was $24 million this quarter, as it grows it becomes less of an investment mode. It's still in an investment mode. We are OIBT negative in that business, and we are working hard to, as we grow the base, it'll be each year less of a burden, but it is nonetheless in absolute terms a burden. So as we move forward, as the strips begin to take on a greater proportion relative to the pumps -- the meters that we are placing, excuse me, there is a positive gross profit trend that is coming from that business on a relative basis, not on an absolute basis. John do you want to -- John's been sort of looking at some of the background stuff here, is there anything else that might help to understand?

We've talked, John, to you and to everyone else about the fact that we are still in an investment mode here that, back if you went back to kind of 2004 and kind of looked at it, we were investing about $57 million it showed up as a loss in our P&L in OIBT. That still had a slight positive gross margin. The offset was in SSG&A and R&D. In 2005 that overall performance improved by about 7% so that the loss was $50 million and the gross margin was better. And in '06 we think that that might mitigate itself a little bit more, just a little bit more about probably $45 million of loss or investment spending. Our margin, our gross margin has actually improved in each one of those years. The issue really resides on the SSG&A line, which is where the preponderance of the meters that we see out there go, as well as building sales forces and things like that go. So that, overall, you'd have to say to your next question I assume, are we pleased with that, no, but we are making some progress on it, and we're going to keep plugging away on it, but it's slightly better year on year.

Okay. Thank you.

John, this is Vince, maybe I could just add one other element to this?

Sure.

Biosciences in the fourth quarter, our gross margin versus last year was 55.8 and that's well above the corporate average, but this year it's 57.9 and that's really driven by production efficiencies that we're getting in the business on the instrument side and on the reagent side. And we are past the start up phase with these new instruments and, of course, you saw excellent volume in the quarter so that was also helping.

So a big part of that was start up costs sort of subsiding?

The biggest part is just overall productivity in the business in manufacturing, in instrumentation and some of it, yes, as we launch those new instruments.

But again, just to be clear, as we're looking at this year on sort of an X-items basis, but inclusive of the charge or the cost of our equity based compensation, we're showing about a 50.8% gross profit this year, and it's on that that we are guiding to a 30 to 40 basis point improvement. So that would, in any event get us over 51% for the year next year ,and so I would like to point out that that is a very good number for us, and let me reaffirm our commitment that we think we can keep making those kinds of 30 to 50 basis point improvements because growth continues in safety, there has been some questions about that. Biosciences is very much back on track. And some of these other systems and Diabetes Healthcare continues to grow nicely. So there were some questions elsewhere about the sustainability of that gross profit and we are confident that it's a sustainable trend.

Okay. Good. Thanks.

Glenn Reicin with Morgan Stanley, you may ask your question.

One big picture question and a couple of small ones, the finer detail that I'll ask John in a second. But, Ed, when you talk about sustainability of growth, obviously if anyone's been through your factories you can understand it's a high fix cost business, you put through more volumes and you can grow your bottom line faster than your top line. but, I was curious in your long-term projections here of double-digit growth, what is the role of repurchases and acquisitions, and what are you assuming in the way of pricing?

Pricing in the marketplace?

Yes.

Well, first of all when I talk about double-digit growth I am talking about income.

I understand, 6 to 8% --

…we're still looking at high single digits, next year FX neutral 8%, which, by the way, is a little bit higher than this years FX neutral 7%, so if you note that this was 10% net 7%, next year is 6% net 8% of the impact of FX again I hate to sounds like a broken record but it's, our combined U.S. and international safety growth is slightly above the corporate average. It's in the 8 to 9% with U.S. at 8 and ex U.S. at 20. So, that story is by far not over. In fact next year we will see for the first time some additional traction on Nexiva, which just got started this year and on our Push Button Vacutainer Brand Blood Collection System.

Diabetes Healthcare both on the injection delivery -- the insulin delivery and on the blood glucose side, is making a difference. You remember in John's guidance we were talking about $115 million in blood glucose on a $76 million base. That accounts for about a point of incremental growth in the medical segment. Our Pharm Systems business tends to be cyclical. You may recall several years ago we were experiencing some really strong high teens growth in that business. Well that business is back on track with double-digit growth as a function of new drugs coming into that pipeline.

And so, on the medical side, we are continuing to see contributions to growth. Again diagnostics more of the same with safety. ProbeTec continues to be a double-digit grower. Phoenix, which is starting from a very small base is starting to gain some critical mass now that it's approved here in the United States and in Japan. And again, I can't say enough for the great job that Vince and his team are doing at Biosciences.

We really don't factor in acquisitions. So when I talk about the top line and bottom line this assumes same store and if we were to do an acquisition we would obviously adjust both years as if and go forward from there. And in terms of buybacks I think you could continue to think about us buying back shares as I said next year at the $400 million to $450 million level. And the other thing we've done very importantly on the share side of it is that the way we constructed our long-term incentive plan our usage of shares to run that plan by virtue of going to restricted shares and using SARS, stock awards to settle the options we are issuing far fewer shares in our long-term incentive plans. So therefore you are starting to see a net reduction in shares because our buybacks are exceeding the amount of shares that are being used in our incentive plans.

I'm just curious on your LRP, if you seeing 7% top line and 10% EPS growth, does that include share repurchases or not?

Yes, it does, sure, it does.

And then --

But in terms of net income growth, dollars of net income, spendable net income, we expect that's going to be double-digit as well.

Okay.

As it will be next year and maybe get a little bit of a kicker out of the shares.

So you're using share repurchase to offset options, issuance and the like and opportunistically taking back stock but it's not part of the LRP, in terms of delivering the 10% EPS growth, the reduction in share count from share repurchases?

Yes. The 10% growth is real growth in net income.

That's what I'm asking. Okay. And then in terms of the quarter, can you talk a little bit about the role of acquisitions in the quarter and how much it contributed? I would love to also hear, I always ask this question after conference call so I could get it on the record on the conference call, Phoenix and ProbeTec, try to quantify what -- how those businesses are doing, are doing as well as? Thanks.

There was no effect from -- we had two acquisitions that we made in the last two years both of which are fairly small, Atto and Weber FFE. We are excited about future prospects for both of those business but there's really no, no year on year effect. So as I said there was nothing anomalous about the performance in this quarter, and I'll let Bill talk about ProbeTec and Phoenix at whatever level of granularity he wishes. Bill?

Yes, Ed. I think that it was already mentioned that ProbeTec had a solid quarter again of double-digit growth. The growth for the year, our fiscal year was also double-digit. Viper ER is on track, as we've mentioned several times, to be out either late in our first quarter or early in our second quarter. That is the next-generation automation platform. And we've got in the development pipeline, I think as we've also spoken of recently the A-Typical pneumonia assays were expected in the second half of '06 for U.S., Europe and Asia Pacific. We also did a press release a few weeks ago, the urine transport product is out. So we are right where we had expected to be and actually encouraged with the ER launch coming.

On the Phoenix side, the U.S. right now has just crested at about 30 cumulative contracts. We continue to get a lot of good positive evaluation activity. As always this takes awhile for customers to make decisions and get their capital funding. But both the U.S. and Japan at this stage are pretty much where we had hoped they would be in terms of valuations and early stage placements.

On ProbeTec, when you say double digits, it's low double digits, right, like around 10 or so?

We actually are in that 10 to 13% range is kind of where we have lived for a while now, Glenn, and that's pretty much where we are hanging out right now.

And, has that business broken $30 million a quarter?

Not yet.

Not yet. So it's still in that $25 to $30 million range?

Right in that neighborhood.

Has Phoenix broken a million per quarter?

On a global basis you mean or on a U.S. basis?

You tell me.

On a global basis, yes, we are well past.

So what is the number on a global basis, roughly?

On a global basis we finished the year in that $17 million range.

So you can say it's like $5 million on a global basis this quarter?

Just for the quarter, the fourth quarter?

Yes.

We had -- yes, we had a pretty nice increase, yes.

And that is what kind of increase?

60, 65ish percent.

Great. Okay. I'll get back in line. Thank you.

Next question, please.

Bruce Cranna with Leerink Swann, you may ask your question.

Good morning, guys. John, just another quick question on resin expense. I think you said last quarter you put it in EPS parameters I think you said it cost you $0.08 last quarter? Is that right?

Not the quarter, for the year, that was the year. It costs us about 8 -- for the whole year this year, it's about 80 basis points for the year.

The $0.08 was year-to-date last quarter?

That was an estimate for the whole year how much we thought it was going to cost.

Just so I'm clear on the '06 guidance, you are contemplating resin expense being flat, up or down, can you tell us?

Well, the resin cost would continue to go up and cost us even more on a year to year basis, and I said that I thought that that was probably in the 20, 30 basis point range.

Up on a year to year basis but not necessarily sequentially?

Well, no, I would imagine you'll see it sequentially, yes. So it would be throughout the year, so I think it's going to probably go through the entire year.

And we've contemplated that in our current guidance.

It's in our numbers, though.

I understand that. I was trying to get the magnitude. And then just quickly on BGN. Was there any meaningful contribution in the quarter from OUS, can you part with that number by chance if it was meaningful?

OUS.

Probably small.

Small, mostly Canada and we just went into Germany, frankly, a couple million bucks.

Two out of $24 million.

Two out of $24 million, and we are really not targeting any other markets right now.

On flow, which continues to surprise me, and I think if you look at your competitors quarters it's strong there, too, so can you just quickly give us a sense about strength in flow? And I don't know if you want to part with an equipment and consumable split there in percentage terms, but if not maybe you can just talk about it from a reagent trail perspective are you seeing strength from volume or pricing or is it both?

I am going to let Vince -- I've given you sort of the topside of that, and I will let Vince give you a little more color.

We had good instrument growth. It is clearly leading the way. It's in the, and it's cross the analyzer product line. It's in both the research market and in the clinical market. The other piece that is kicking in in the clinical market, besides the Canto, has been this HIV therapy monitoring in the developing world. So, we have close to double-digit growth in our clinical reagents, as well as that market is expanding outside the U.S., Europe and Japan. So it is both strength on the research side, strength on the clinical side and then -- that's the flow business. And then, for the first time, even though as Ed mentioned it's small and it's not significant to BD, but we had our first good quarter with the Atto instrument as well, which also helped us.

Then, one last question if I could, maybe this is for Gary, but, just on the medical side, which was definitely ahead of what I was looking for, can you comment just quickly on whether or not there is more strength on the needle piece of that or the infusion piece? And then, I'm curious if whether or not you have any exposure via interlink to Baxter's issues with Colleague? Thank you.

Gary, I'll let you, and then John wants to come back on something.

So, let me just before I forget that.

Okay.

Sure. Well I would say both for the quarter and the year we had pretty good consistency on what's been driving the growth in Medical, in addition to Safety, which has been a growth driver for a number of years, as you know. The insulin delivery side of Diabetes has been very strong, very strong growth in the pen needle market, as we have been indicating would happen a few years back, perhaps even, it's been a bit stronger than we had anticipated, and that's being driven also by other drugs besides insulin that are being put into pens, like Byetta exenatide and we do see continued good growth going forward in the pen needle market.

We've had very good growth in syringes. We are prefilling with IB flush solutions, normal saline and heparin. These are not prefillables, per se, that we provide the drug companies, these are syringes that have very high volume that we fill ourselves, and we have a proprietary, fully owned automated process that goes from raw material to finish package filled sterile syringe, all fully automated. So we have, we believe, a competitive advantage in that field and that's been a very good source of growth. And BGM, of course, has been the other key good source of growth. If you look at those four, it probably constitutes something like 75% of the growth we are seeing in medical and we anticipate that we'll continue to get growth in those areas, those are all growing faster than the underlying market.

Relative to Interlink, about the only thing I would want to comment on is that happens to be one of the early stage safety engineered devices that's very effective for eliminating use of needles for intravenous therapy applications. It's still a very effective system. The growth there has been flat to down the last several years. It's a product line that had matured. I don't have much insight on the Baxter side, other than to say that we still view Interlink as being among the most effective systems for that purpose. And we do think it will have staying power, although it's not contributing to growth as other safety devices are, and, therefore, we see growth -- safety growth numbers in Medical that includes Interlink, our sales [inaudible], therefore whatever growth we are getting overall, in fact there's higher growth on the other safety engineered devices offsetting some slight decline in Interlink sales.

Thank you.

Let me just come back on one thing, the thinking about that $0.08, and the 80 basis points on the resins if you looked in our P&L in 2005, the impact from resins was probably $0.13 of EPS that we were hit by. And our guys, our procurement guys, our manufacturing guys, our distribution guys, our process guys all did a great job at offsetting that, as you can see in the numbers, not by one time items but by truly removing waste and doing other things in the system. If you go into this year -- and there was no offset by any increased sales price on that whether it be temporary or otherwise. In this years numbers on a gross basis, instead of $0.13 it's probably more like $0.09. However, there are strategies outside of the operating effectiveness side that are also playing a part in offsetting that. And some of those have to do with price, and you get down to probably really a net, if you want to use pennies of EPS, of maybe $0.03 or $0.04, on that, on a net basis. On a gross basis it would have been probably about another 9.

Thanks, John.

If that helps.

Thank you, John.

Lee Brown with Merrill Lynch, you may ask your question.

Hi, how are you? Going back to the syringes, is that part of the safety within Med Surgical or is that part of the Med Surgical other line? Because that is what was a bit stronger relative to my expectations?

Safety syringes are in the Meds -- in the injection line.

But I guess what I'm getting at is what is driving -- I was just wondering if perhaps you categorized these other syringes within -- so they are not, just to clarify, they are not categorized in Med Surgical Safety, is that correct?

Safety syringes in Medical Surgical are categorized within Safety.

So, then, within Med Surgical Other what is driving the growth in that business because that's what was strong relative to my expectations? You had about 9% growth in the U.S., 8% OUS, that's pretty good given the trends in that business historically?

The single largest next growth driver in Medical Surgical outside Safety are flush syringes, that I was referring to earlier.

That's what I was trying to clarify. Thank you.

Robert Goldman with KeyBanc.

Thanks. My apologies if this was answered, but it's on the cash flow and cash balances. But could you tell us what your ending balances were in the quarter on cash and debt, what the changes in both were during the course of the quarter? And give us some, if you would, net interest expense guidance for fiscal '06?

I am going to -- this is Ed, I'll ask John to comment on that.

Hi, Bob. The cash on the balance sheet at the end of the year is about 1 billion 43 million. Our long-term debt same as just slightly lower than last year. Last year was 1billion 172. This year is 1 billion 061. Up in current liabilities it's probably a couple hundred million of commercial paper. So that's kind of where we are now on the balance sheet in terms of cash. And then I forgot the interest expense. Net interest expense? We are looking at about $20 million next year right now in terms of net expense.

And that's your net expense net of the interest income on your cash balance?

Yes. And capitalized interest, as you would know, under the accounting as we put in capital, we have to capitalize some of the --

And then, the only other piece on that was the net change or the changes on cash and debt during the course of the fourth quarter?

I don't know if I have that right here. Let me just see. The cash -- I can only give you -- the cash generation in the fourth quarter was about $400 million in total. Obviously, working capital and everything gets into there. I really don't have that number. We will see if we can help you with that later, Bob.

If I can just do a follow up on the cash, the estimate of $20 million of net interest expense next year, I might have thought it would have been a negative number less than that, in other words closer to 0, on the assumption that you are going to be making some more interest income on your cash balances.

Well, there are, we're a little conservative in that. I don't think it would get near the 0. I think 20 is a pretty good number. There is some capital coming in that's outside of our normal range, and the like, and I think right now, I'm not trying to sand bag you, but I think that 20 is a pretty good number.

Okay. Thank you.

Quintin Lai with Robert W. Baird, you may ask your question.

Congratulations on a nice quarter and a nice year. With respect to diagnostics you are forecasting 4 to 5% revenue growth in Q1. If memory serves me right, last year you had a little bit weaker than expected sales due to a slow start to the flu season. What were your expectations or your order flow patterns for some of your flu diagnostics tests?

I will let Bill take care of that. Bill?

Let me just make a comment. This flu dynamic flips around every year, but just to connect back to '05, first quarter -- this is October to December of last year, we actually had a very, very strong start, reasonably strong start, where we did in that $18 million range, and from a flu perspective, we really are not budgeting anything of consequence beyond that from the flu side. So, we don't see any dynamics and we certainly don't see much growth. There's some modest growth in flu in the '06 plan but it's not much.

On a follow up, Ed. Has BD been approached with respect to flu pandemic preparedness as worldwide health authorities have been thinking about, what would happen if a widespread vaccination program would need to be put into place?

We are very much part of that dialogue. We have in fact just recently named one of our top executives in our research area who is an expert in drug delivery systems which is principally where we would participate. And so, yes, we are doing everything within our power to -- I think the thing we have to prepare for first is what's likely to happen this year and sort of the garden variety flu, we are ready.

We like to point out that our syringes with their dose-sparing characteristics actually save an average 1 out of every 10 doses, so you get 11 in a vial where you used to get 10 so that's helpful. And our people are talking with the CDC and other members of the administration to make sure isn't we are doing everything we can to be part of the solution for this eventuality. Beyond that there's some weighting and seeing. Obviously, also, our flu test kits could play a crucial role again by being able distinguish whether one has flu A or flu B or not flu at all. We are doing everything we can. We're part of that dialogue and some of our people are involved very actively.

Just to mention, I wouldn't say the agencies are reaching out to us but we've been reaching out to them for about year. In the U.S. the unfortunate reality is that if there was a pandemic even if there was vaccine there wouldn't be enough devices to deliver the vaccine. As of today, because there hasn't been the type of cooperative planning to ensure that either a stock pile is created, or the appropriate additional capacities put into place, particularly around dose bearing devices, which, as Ed mentioned, can play a very instrumental role if a pandemic occurs. The estimates we have is that around 100,000 lives, additional lives could be saved in the U.S. in a pandemic situation if those sparing devices were used.

So, we've seen a recent uptick in activity, which has been very much broadcast in the news as well. We are working with other countries internationally, Europe, Canada, Australia, that have begun a little bit further ahead in the planning on the device side as is typically the case, the focus always tends to be on the drug, but we are very much out there advocating to make sure there's preparing on the device side and the diagnostic side as well.

Victor Gezunterman with Thomas Weisel, you may ask your question.

Good morning. I had a follow up question on the flow [indiscernible] line it seems that growth in the U.S. was quite robust, I think about 14%. I was wondering how much of that was driven by your new contract with [Quest] or relatively new contract with Quest? Another question was, with respect to your Pharmingen business, it seems that that business was down year on year and I was wondering what caused that? Thanks.

Let me just take the Pharmingen first, and refer you back to what I said earlier in the call. The reason the Pharmingen was back is because we bought back our distribution rights in Japan, and because we would have been selling to a distributor then taking the inventory back that negatively impacted the quarter total reagents for Pharmingen by $3.9 million. Of course those sales will be recorded during fiscal year '06, during this first quarter. So that's the big anomoly that you are seeing with Pharmingen on the Quest, we are still converting. It really was a moderate impact within the quarter. What really drove the U.S. was much more research based analyzers in the United States market.

Thank you, Vince. We have time for one more question.

[Mayur Tipnis] with Goldman Sachs, you may ask your question.

One high level question and some quick housekeeping questions here. Ed, you guided to long-term sustainable 6 to 8% constant currency growth. Do you see the incremental investment in R&D to step up the revenue growth part the Company and could you comment on when we could start seeing some pick up in the growth rate here? And in terms of some quick housekeeping questions let me just quickly, item out here, now, given some of the moving parts in terms of FX and resin costs could you help me with the quarterly gating for your gross margins? And one more on the higher CapEx that you mentioned is it going to be more back end loaded?

Let me talk to you about the growth rate. Yes. We would expect that the acceleration of our spending in R&D would, I call it evolutionary trends as opposed to revolutionary, but not for the foreseeable future. So if you are looking at '06, '07, again, next year, FX neutral we are looking at 8%, this year was 7%. So we are making some progress. I think the effects -- the first thing on the R&D line would be perhaps in the '08 and beyond, the getting into the 8,9, maybe even 10% might be doable, but it's going to be a steady progression and we are going to keep our investors well apprised of our progress and hold ourselves accountable to that progress, but the evolutionary improvement will happen over the next several years. But nothing immediate or radical. Housekeeping?

Negating the gross margin our practice is to give you some guidance for the year and then give you guidance on a quarterly basis updating each quarter to the next. But we don't get to that kind of granularity. But taking off an earlier question, I think you would see that that kind of improvement due to the same thing as this year it would be quarter on quarter improvement as we went along.

On the Capex back ends versus front end?

Our CapEx historically runs, tends to run back ended, and I would say that this year I think you might actually see that change somewhat and see some of the bigger capital projects take hold early in the year and maybe it would be a little bit more averaged, but to be perfectly honest I couldn't tell you it would be 100 a quarter. I think it will still be somewhat back ended.

One follow-up question on the hedging, you guys thinking of any, any hedging into this year or we should just expect the similar kind of international hedges and the exposure from the Euro to kind of flow down to the bottom line?

Well, we've hedged for a number of years, particularly with respect to the Euro, we hedge about 60% of the exposure there. And that's because, that's our limit of being able to find hedgeable transactions. And in Europe, we've exclusively used options, and because foreign exchange was stronger we were happy about just ripping them up and throwing them away. We do put in hedging, have continued to put in hedges there. In and around the 120 mark to protect our down side for the [60%] extent that I mentioned. We also hedged 100% of the Canadian dollar, sometimes there we use options, sometimes we use forwards and we hedged 100% of the Yen. And all that rates that we're not far from where we are today.

Great. Thank you all very much for joining us. We don't have any other comments here. Operator, we are going to sign off. Thanks again for joining us and your questions