Becton Dickinson and Co (BDX) 2006 Q1 法說會逐字稿

Hello, and welcome to BD's first fiscal quarter 2006 earnings 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 segment. At that time if you would like to ask a question, you may press star 1 on your telephone touchpad. Beginning today's meeting is Ms. Patricia Spinella, Director of Invesh -- Investor Relations. Ms. Spinella, you may begin.

Thank you. Good morning everyone and thank you for joining us today. Today's call is being simultaneously webcast and will be available for playback through Thursday, February 2nd on the investor's page of the BD.com website or by phone at 1-800-937-5460 for domestic calls and 1-203-369-3865 for international calls.

During today's call we will discuss some non-GAAP financial measures with respect to our performance. A reconciliation of the non-GAAP to GAAP measures can be found in our first quarter press release, it's related financial tables and BD's current report on Form 8-K dated January 26, 2006, all of which are posted on the investor's site of the BDD -- 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 first quarter press release and in the MD&A sections of our recent SEC filings. Leading the call this morning is John Considine, BD's Executive Vice President and Chief Financial Officer. Also joining us today are 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

Thanks, Pat, and good morning to everybody. I assume you all have our earnings 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 introductory comments will be brief. As has been our recent practice there are three primary topics we'd like to address. First, since there are certain items that affect the comparability between periods, we want to review the analyses of the first quarter and fiscal year expectations that we have provided in the press release. Second, we'll describe some of the key drivers of our revenue and earnings growth for the first quarter, and third we'll review our guidance for the second quarter and full fiscal year.

Beginning with our earnings I suggest you turn to the first table in the press release that appears under the heading analyses of first quarter fiscal year 2006 and 2005 earnings. For the first fiscal quarter of 2006, we begin with reported diluted EPS from continuing operations of $0.85 and subtract $0.02 resulting from an insurance settlement related to our former latex glove business that was sold in 1995. This gives us diluted EPS from continuing operations, excluding specified items, of $0.83. For the first quarter of 2005, we begin with reported diluted EPS from continuing operations of $0.74, and subtract $0.04 related to the -- or reflecting the reversal of tax reserves resulting from the favorite conclusion of certain international tax examinations and then subtract $0.02 related to certain discrete tax events that caused that quarter's tax rate to be lower that the underlying effective tax rate for the year of 25.5%. This gives us diluted EPS from continuing operations, excluding specified items, of $0.68. Comparing the $0.83 this quarter to the $0.68 in the prior year's quarter gives us an adjusted EPS increase of 22 percent.

Moving to the second topic, that is what drove our growth, we'll begin with our revenue growth of 10% for the quarter. This growth included an overall 1% unfavorable impact from foreign currency translation. In the medical segment first quarter revenues grew about 11% which included a 1% unfavorable impact from foreign exchange. The primary contributors were pharmaceutical systems unit, as certain pharmaceutical customers prepared for key product launches, and the diabetes cure unit. Sales of our blood glucose monitoring products totaled 23 million for the quarter and our guidance remains at about $115 million for 2006. U.S. sales of safety engineered products grew 5% to $132 million while international safety sales grew 4 million to 22 million. With respect to our U.S. safety sales growth rate, you may recall that the first quarter of fiscal 2005 represented a tough comparison having been very strong with growth of 10%, in part, due to an inventory build-up by a major distributor. You may also recall that this same distributor reversed its buying pattern in our last year's second quarter, which caused that year's period U.S. safety sales to drop to 5%.

Revenue in the BD Diagnostics segment grew about 7% in the first quarter, which included about a 1.5% unfavorable foreign exchange impact. The diagnostic systems unit reported revenue growth of 8% due primarily to strong sales of flu diagnostic tests in Japan as distributors built inventory in anticipation of the coming flu season. This favorably impacted the first quarter and will have a correspondingly unfavorable impact in the second quarter. Overall flu product sales grew about 50% to $27 million from the prior year's quarter, and I'd also mention our ProbeTec and Phoenix platforms also contributed to growth. The Preanalytical Systems unit reported revenue growth of 7%, U.S. sales of safety engineered products grew 12% to $96 million due in large part to the continued success of our push button blood collection set. International safety sales grew about 21% to $52 million.

Looking at combined medical and diagnostic U.S. safety sales grew about 8% for the quarter to $228 million. Combined medical and diagnostics international safety grew about 21% for the quarter to 74 million, which included an unfavorable foreign exchange impact of about 1 or 2 percentage points.

In the BD Biosciences segments, worldwide revenues grew about 10% for the quarter, which included a 2.5% unfavorable impact from foreign exchange. Research instruments and reagent sales continued to be the primary growth contributors driven by increased demand for both research analyzers and sorters.

Moving to earnings and beginning with our gross profit, we delivered another strong quarter. In particular, product mix, including increased revenues for worldwide safety, insulin delivery and research instruments and reagents along with productivity improvements yielded a gross profit margin improvement of 140 basis points to 52.2% for the quarter. We also benefited from foreign exchange in this quarter, however we do not expect that to continue throughout the remainder of this year. After excluding the insurance settlement, our operating income as a percentage of revenues improved to 20.8% from last year's first quarter due primarily to our improved gross margin. SSG&A was about flat with last year as a percentage of sales and R&D increased about 12% in absolute terms over the first quarter of last year. All of this led to strong cash flow for the quarter of about $300 million from operations before $150 million of pension contributions, which we made. Approximately $100 million was used to repurchase about 1.7 million shares of our common stock, and we invested about 64 million in capital expenditures.

In relation to our prior guidance for the first quarter, our adjusted diluted earnings per share from continuing operations, excluding specified items, of $0.83 was about $0.08 higher than our guidance. This was due primarily to our strong revenues in the quarter and related improvements in gross margin. Of the favorable $0.08, we have estimated that about $0.03 was attributable to timing with the remaining $0.05 flowing through and benefiting the year. This timing would be attributable in part to early flu product sales in Japan which I've previously mentioned and strong pharmaceutical system product sales in support of key product launches by customers, which I also have mentioned.

The last topic we'd like to cover is our guidance for the second quarter and full fiscal year. Once again, I suggest you now turn to the second table in the press release, which immediately precedes the conference call information. As many of you know two weeks ago we announced an agreement to acquire GeneOhm Sciences, which we expect to close before the end of March. This second table presents estimated earnings with and without the GeneOhm operations compared with prior years. It also shows estimated earnings for the first half and second half of -- of fiscal 2006 over the prior year periods. Starting with the second quarter, revenue growth is expected to be about 5% including 3 to 4% of unfavorable foreign exchange due in particular to a tough comparison with last year's very strong Euro. Our revenue estimate for BD Medical is about 5 to 6%, BD Diagnostics is about 3%, and BD Biosciences about 7 to 8%. As previously noted, the 3% growth in BD Diagnostics reflects the fact that this year's flu sales were strong in the first quarter while last year's had exceptionally strong flu sales in the second quarter.

Second quarter diluted earnings per share from continuing operations, excluding the GeneOhm operations and the remaining insurance settlements, are expected to increase in the 7 to 8% range from last year's earnings per share of $0.71. When you include the estimated penny of dilution from the GeneOhm operations, our growth would be about 6 or 7% over last year's second quarter. Second quarter EPS growth rate is below our yearly guidance due primarily to the previously noted $0.03 of timing that occurred in the first quarter.

The Q2 estimate taken together with our first quarter results combine for an estimated first half EPS growth of about 15 to 16% over last year excluding GeneOhm operations and specified items or about 14 to 15% when you include the estimated penny of GeneOhm dilution. Table 2 also highlights the second half of the year EPS growth excluding specified items and GeneOhm operations of about 9 to 11%, which happens to be consistent with our prior full-year guidance. This growth rate is about 5 to 7% when you include the $0.06 of estimated dilution from GeneOhm operations in the second half and exclude the specified items from last year. Looking at the year, diluted earnings per share from continuing operations excluding the GeneOhm operations and the insurance settlements are expected to increase by approximately 12 to 13% from last year's adjusted base of $2.88. This includes about 3% of unfavorable foreign exchange assuming rates stay at about current levels. Lastly, when you include the estimated $0.07 of dilution from GeneOhm operations, our growth would be about 9 to 11% over last year consistent with our previous full year guidance.

In summary, the net $0.05 pickup from Q1 plus an additional estimated $0.02from the balance of the year totals about $0.07 above our prior guidance and offsets the anticipated $0.07 dilution from GeneOhm operations. Additionally, our guidance does not reflect the expected in-process research and development charge, which we estimate will probably be in the range of $0.20 to $0.25.

Before ending, we'd like to give you some additional guidance which excludes the GeneOhm operations and also excludes the insurance settlements. Full-year revenue growth for the Company is expected to be about 6 to 7% including about 2% of negative foreign exchange impact. Our revenue estimate for BD Medical is in the 6 to 7% range, BD Diagnostics about 6% and BD Biosciences about 8 to 9%. We continue to look for U.S. safety sales to increase about 8% over fiscal 2005 and anticipate international safety sales to increase about 20%. We expect gross profit margin improvement of about 50 basis points for the year and SSG&A of about 20 to 30 basis points. Our R&D spending is expected to increase in absolute terms 12 to 13%. Our effective tax rate is projected to be about 26% for the year. And as you know can vary quarterly. We estimate that the tax rate for the first half of the year might be somewhat above the 26% rate and the second half somewhat below.

We expect to generate about $1.3 billion of net cash from operations, and that includes the $150 million contribution to the pension. We expect share repurchases to be about 450 million during the year and the average number of fully diluted shares outstanding to be about 256 million. I'd also mention that consistent with our commitment of returning value to shareholders, in November, as you may recall, the board approved a 19.4% increase in our quarterly dividend to $0.21.5 or an annualized $0.86 rate.

So in summary, I'd reiterate that we had a very strong first quarter and indications are that our current operations will exceed our previous guidance by about $0.07 for the year. We also expect to soon complete the strategic acquisition of GeneOhm, which while bringing with us dilution of $0.07 will put us in a leading position in molecular diagnostics and I'm sure Bill Kozy can add more to that as we go through the call. With that said, we can begin the Q&A. And as always in order to allow for broad participation we'd appreciate it if you'd limit your questions to one plus a follow-up. With that, thank you, and operator please open the call for questions.

Thank you. At this time we're ready to begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Mike Weinstein from J.P. Morgan, you may ask your question.

Hi, it's Kim Gailun for Mike. Thanks for taking the question. I guess congratulations on a great quarter, and that's our first question, it pertains to the upside we saw in the first quarter. We've seen EPS upside for the last couple of quarters of anywhere from $0.04 to $0.07, a lot of which has been driven by gross margin. We saw another notably strong gross margin in the current quarter, and I'm just sort of wondering if you can walk us through what makes you think this upside can't continue on a quarterly basis. I know you had some currency helping you out this quarter. Maybe you could quantify that too.

Sure. Without getting into too much detail, as I said, for the year we think that the gross margin in comparison to last year will be up about 50 basis points. The first quarter is particularly strong for a couple of reasons. One is we had outstanding product mix. We had very good diabetes injection sales. We had very good pharmaceutical sales. We had very high flu sales compared to last year's first quarter, and all of that and more product mix, gave us about a little over 1% of the increase. Added to that, as you know, we have been after productivity gains in the Company, and we continue to believe that we can achieve those. And that probably gave us about 70 basis points in the quarter.

To your other point, foreign exchange was positive this quarter to the extent of about 30 basis points. However, as I've said, with the strong comparison to the Euro coming up primarily in these next two quarters when it was at 1.32 from one of the quarters and 1.29 for the other, we don't expect that to reoccur. And lastly, even that we overcamethe lion's share of the resin issue in in '05, we still have incremental resin costs this year, probably right now at a pace of 30 or 40 basis points. So when you consider that all and how it plays out in the year, you're right. The upside is still there on gross margin. However, it wouldn't be right to take the first quarter and think that we could just impute that into any other quarters, but if you look at the year, we're thinking 50 basis points.

Okay. I guess switching gears a little bit to GeneOhm, I wonder if you could give us a little bit more detail on what we should expect in terms of a revenue ramp. I know there were $5 million in sales from GeneOhm in 2005, and we're probably not going to put a whole lot in 2006. But as we move into kind of fiscal '07, maybe you can characterize some of the new product approval time lines and how that translates into our revenue modeling?

You know, they are all great questions. Our policy on GeneOhm's going tobe this. Until we really own it, we're not going to get into that kind of granularity right now. The $0.07 that we talk about this year is based on an acquisition sometime before the end of March, our second quarter, and that's why there's very little dilution in that quarter and you see about $0.06 in the second half of the year. We really want to get in there. We're already working, within the parameters that we can, with GeneOhm waiting and fully anticipating that the close will come. And once that does, we'll be back to you with a better outlook in terms of how we can expect sales to ramp. I would say initially that this year is not going to be the story. This was both a buy and a build strategy. It puts us well ahead of anyone else that we know. The key products that we're starting with are already FDA approved, and we'll try to put a lot more flavor on that once we've made the acquisition.

Okay. That -- that's helpful. And just one follow-up on that, and I will drop. How much visibility do you feel like you've had in the early stages of your working with GeneOhm into their R&D pipeline?

We won't get specific, but I would just say that we did very thorough due diligence, as you would expect. This deal was done from the bottoms up, if you will, from a due diligence standpoint, and they are a terrific company. They have great scientists. They've got terrific people. This was not a synergy play for us, and we took a great look at that. Obviously, diagnostics are a place where we play, so we felt very comfortable with that research. And if we had had reservations, I promise you we would not be at this point waiting for regulatory approval.

Okay. Thanks a lot.

Okay.

Glenn Reicin from Morgan Stanley. You may ask your question.

Good morning folks. Just one follow up to a previous question. The benefit from FX and gross margins, is that a hedge? And then just a much more important question. I would love to get some perspective, if Gary's on the phone, as to what is happening in diabetes. Three years ago, and well before that, you had trouble growing that business. It was always a flat business. And it's been growing very strong the last several quarters. Last quarter you mentionedByetta, but when you work through the numbers in terms of Byetta users it wasn't all that material, it was like $0.5 million and obviously BGM is not big enough yet. Can you please talk a little bit about what is changing out there in terms of pen and needle usage that would account for such a large increase in growth.

I'll do that Glenn. I'll just say that there's very -- it's a very small amount of hedge in the first quarter. You know, depending on where the rates stay in the second quarter, we could have some of our hedge work to mitigate some some of the issue. As you recall, we hedge about 60% of that exposure.

Is that 30 basis point improvement, though, is not a hedge?

No. That's predominantly not a hedge. And Gary, you answer it. You know it.

Sure. I'd be pleased to. A few years ago one of the things we mentioned that we saw coming, although we were not precise on timing when we spoke about it maybe two years ago, was the transition of the U.S. market to pen needles, which is one of the positive impacts on growth here. We did get disproportionately strong growth of pen needles in the U.S. –Aventus’ Lantus is a key growth driver. I would also say, you can't pick up the paper nowadays without reading about the explosive growth of diabetes, and in particular Type II diabetes. tThat certainly is a contributor as well. Diabetes is growing at an epidemic rate, and that will ultimately mean more people giving injections. And I think we're seeing some impact of that now even if initially people with Type II diabetes would start with oral treatments or exercise and diet. But it's a combination of those factors. The transition to pen needles beginning in the U.S., although it's still at a low rate relative to Europe, Canada, Japan, and other areas of the developed world. The positive impact of Lantus as well as Byetta both, and the underlying growth in the population of people, excuse me, with diabetes, all of which are contributing to the growth.

Now this is, if I remember correctly, this is your highest gross margin business in the entire corporation. So what kind of sustainable growth now should we expect from diabetes?

I wouldn't go as far to say the type of growth we had experienced this quarter would be sustained. We've had several strong quarters of growth in pen needles. We are planning on building more pen needle capacity going forward. I'd say one big positive here is we've been able to keep up with the level of demand without having any service disruptions because the demand has exceeded even our own expectations. I don't want to give a precise figure because I don't think we're in a position to guide by product line. But I would say that what had been a lower single digit growth business, insulin injection, is looking more like a mid to high single digit growth business based on the trends.

Great. Thank you very much.

John Calcagnini from CIBC World Markets. You may ask your question.

Hi guys, good morning. Couple of questions. Ed, if I understand correctly you were saying that the, tell me if I'm wrong, the $0.08 upside relative to your former guidance in the quarter, you're saying that $0.03 of that was due to timing on flu and pharmaceutical systems? Did I understand that right?

Yes, it's John, but Ed is actually in Davos --

Oh, sorry.

But -- that's okay. I -- I feel complimented. But -- that's exactly right. $0.03 we believe is timing and based again on the flu and on the pharm systems products, so a net $0.05 would stick. And then we think we have $0.02 beyond that, which we know is coming.

Okay. And then if I look at GeneOhm, the dilution there, sounds like 2Q $0.01, 3Q $0.05 and another penny in the fourth quarter. Is that right?

No, the $0.06 is about $0.3 and $0.03.

Okay. Because I thought it said in the release the dilution is $0.01 in the March quarter and $0.05 in the September quarter. At least that's the way I understood it. I guess my point was, are you expecting that dilution to drop off by the end of the year, and if so, why is that and are there any sort of one-timers in there that are accounting for this dilution you're modeling of $0.07 for the year?

No. And -- I'm sorry for any confusion on that. The $0.01 that hits in the March quarter is because we're making the assumption that we only have it for about a month anyway and so therefore it would be rather low and we think it's about $0.03 in each of the next two quarters, so $0.07 for the year. While I said I wouldn't get specifically into this, if you just reference back to what we said when we bought it, that it had had about $5 million in sales. So obviously this is, albeit that the sales were products already approved, this is a business that we are going to have to build and we're fully ready for that. There are no one big one-timers, but where you see the spending is where you would expect it. There's going to be R&D spending, there's going to be SSG&A spending because it's a different marketing and it's a different selling than we might have done otherwise in the kind of the plated media area. We're going to a different decision-maker, and it'll just take some time. And once we close, we'll give you our idea of when we think the sales will ramp up and the margins so much so that the dilution will go away. But importantly we've had enough time to look at the dilution that would go into 2007, and I don't want to get ahead of ourselves here. But even with that dilution, it is not yet profitable, if you will, John, in 2007. But that will not change the trajectory of our bottom line anticipation of kind of a 10 to 12% on the bottom line.

Okay. And then I had a question on the gross profit margin as well, though, before I lose you. The 70 basis point productivity benefit, was that divisionally focused, is that focused on any one division or can you talk about where that was achieved?

It's throughout the Company. The operating task force as we say is really something new, but this Company has been doing it for a long time. Every one of the businesses are involved and have productivity targets. I wouldn't necessarily try to break it down between them, but there's productivity gains being seen in medical and in diagnostics and in biosciences. And on a positive note, I don't see them stopping, you know. There's plenty of room there, and we have the right people and in the right spots. So that's a key part of our whole operational strategy.

Okay. Thank you.

Larry Keusch of Goldman Sachs. You may ask your question.

Yes. Hi, good morning, John. Just a couple of questions. Coming back to the gross margin, it would seem to me that maybe you can help with some color around this, that pharma systems within the mix that you saw in the quarter would have been a pretty solid contributor to that 100 basis points. And what I'm just trying to understand is, help me think about how pharma systems sort of works through the remainder of the year. I know companies were ramping up some products here, but why couldn't that continue to be a very positive contributor to the gross margin on a go-forward basis?

Let me say a couple things and have Gary ping in here on the business. You remember that the pharm systems products themselves, are not higher gross margin products when compared to other things like pen needles, they tend to have lower gross margins on the net basis but they have very good operating margin because they attract a lot less SSG&A. With our successes come the issues of startup -- new lines. We've had great success with blood collection sets -- push button blood collection sets. We have new lines going in there. Always the startups of those lines, as Gary referenced, pen needles and those pen needles are a big contribution to this performance in the first quarter here. New pen needle lines have the same kind of work out the kinks startup issues. So we have those going across the board. Pharm systems is one of the things that we saw here, as I said, one of the reasons we think some of that $0.03 among the $0.08 that some of the $0.03 really would have otherwise ended up in the second quarter is because these pharmaceutical customers have products coming out such as like Wyeth with a Prevnar. Last thing they want to do is be in a position where they don't have the product to fill and get that key new drug out there. So they buy in a lot faster. So I would just tell you right now when you look at what our pharm systems sales serially will not necessarily grow that greatly next quarter. The first quarter comparison was quite easy, actually, with them. The next quarter will be a little bit tougher. And Gary, you might want to talk a little bit about how you see the business unfolding for the year there.

Sure. I'd just add a few points. One, I think you can anticipate that pharmaceutical systems will continue to be a positive contributor to the top line, certainly not the level of the first quarter, which was 30% up versus prior year on a reported basis, in part based on a favorable comparison and in part based on a number of other positive factors such as strong demand for flu and a few new startups on a few drugs. Also, we had a few major customers who probably brought their inventory levels down a little bit too low last year, so they were getting them up to more normal levels. It's been a positive contributor to GP as well even though it's GP is below both the medical segment and Company average, but it's going in the right direction. And as John has mentioned so many times the offset to that slightly lower GP versus the Company average is the SG&A is very low so the return levels are actually higher.

Going forward, both in pharmaceutical systems and in pen needles, one of the benefits we're getting in GP is we're producing flat out because the demand is so strong. And clearly in that type of circumstance you get very good asset utilization. You can anticipate over the coming years we're going to be investing more in capacity in both of these businesses because the demand we anticipate will continue to grow. This is a very, very good investment for us and for shareholders because the return on those investments tends to be quite high in a market where we have such a good market position. But that'll be coming, and as you put in new capital you don't necessarily get immediately the same margin, although you get pretty close. It's not like the startup of a safety market where you have a new design and you're building the market. Here, the demand's already in place. So I would anticipate continued good contribution through revenue growth in pharm systems though not anywhere near the level you saw in the first quarter. Continued positive impact to margin growth mitigated somewhat by the need for new capital investment.

Okay. Great. And then just two last quick questions. First, John, can you remind me again dove tailing off the Gary's comments on increased capital spending where you think CapEx comes out for this year? And then you may not have this at your fingertips, but any broad brush strokes of the employee stock options, kind of where that went in your SG&A, COGS, R&D, kind of how that moved through the P&L this quarter?

Yes. Let me give you an idea on CapEx. Again, it's early in the year and we're still working on it.We're almost have it triage some of the pro -- projects because they're all good productivity projects like pen needles, like blood collection, like pharm systems. We had given you guidance at about $400 million. I always tell you that can go up or down by a slight amount. Whether it was the years when we were forecasting $300 and came in at $260 in those two years. So, I'm still using around $400. My gut instinct is it could be slightly higher, but we're not close enough yet to change that forecast, although I don't think it's that meaningful. But, if you guys wanted to use about $400, it would be right.

When you turn to what we call our LTIP, long term incentive program, which we now have for the broad population for two years, we had given you early guidance that we would be about $0.23 for this year. Now I don't have the number right in front of me, Larry, about how that underlying cost, which line it hits. I don't mind we can give you those. But we think that's going to go up this year for a couple reasons. We've refined with prior guidance after having adopted over a year ago certain vesting periods related to new instruments when performance instruments that have acceleration upon retirement so that if you have an option and it has five years to go, that's not a good example. Say that it's been out there a year, and somebody retires and they'd have to have 55 years of age and 10 years of service to do that, that option would accelerate. In the past we would look at amortizing that over the four-year option time frame. The accounting would say you've got to pull that up front and book it all at once. So what does this do for us? It accelerates some of the amortization or these costs that we would have. There's no change otherwise. It's geography among years. So that's kind of like this year we probably think that 23 cents is going to go up to about 27cents, and that's about $0.02 higher than we would have thought it was and some of that just relates to some catch-up that we had to do.

Okay. Great. I will circle back to Pat to try to get that mix through the P&L. Thank you, John.

Okay. You're welcome.

Lee Brown of Merrill Lynch. You may ask your question.

Hi everyone. How are you doing?

Good. How are you?

Good. Thanks. I wanted to press on the guidance a bit. I'm assuming when you made the announcement of the GeneOhm acquisition on January 10th, you were already aware of Q1 results. And given the fact that you had $0.13 or so of upside, you take out the 7 from GeneOhm that leaves you with 6 and if you take out $0.03 from the timing, that's still $0.03 of potential upside. I know that sounds like getting to the realm of nit-picking but why not pump up the range by $0.03 on the low and high end?

Well, just so you understand what the process is, we actually do a worldwide roll up by country, by business, and through our corporate consolidations and take a look at where we think the year is going to come out. I would never want to leave you with any inference that we tried to match the 7 with the 7, the 7 dilution with the 7 increase. That's kind of where we really think it is right now. Again, I understand the question, but it's early in in the year. It was a very strong first quarter. Our instincts are that it was about $0.03 hot due to flu in particular and in terms of the pharm systems products. That flu is going to turn around in the second quarter. As I said, we won't have -- well, I would love to be surprised that we have positive foreign exchange on the gross margin line in the next quarter, but I don't think we will. So there are a lot of other things in here. And this was a well-thought-out range and that's kind of where we are right now. I really can't say anything beyond that because that's honestly where we think it's going to come out.

I understand that. But just to push you a bit you did all that work when you announced the GeneOhm acquisition on the 10th and you knew that was going to impact earnings by $0.06 to $0.07 and you knew that there was $0.13 of outside in Q1 and I'll grant you that the $0.03 of timing, if that built up Q1 it's going to hurt possibly Q2 with the flu season front loaded. That still leaves you with $0.03 to a nickel depending on how you look at it that you sort of are keeping dry.

No. I don't know where you're getting $0.13. I mean --

In the 74 to 75 guidance in Q1, which you affirmed when you announced the acquisition was in place and the assumption being since it was announced January 10th you had Q1 results.

Are you counting in the latex settlement with that?

No. It's the -- the 74 to 75 guidance for Q1, which was left steady in the full year, which was left steady. It just seems like there's $0.03 or a nickel that if all else aside if you take the $0.07 from GeneOhm, you take the $0.03 from timing out, you still have $0.03 there.

Well, I must confess we can certainly talk to you about that. If we gave you that inference, I don't know how we did it. But if we did, I'm sorry about it because it's $0.08, $0.03 is timing that's 5, we're going to pick up 2 more through the year that we know about now. That's 7. And I know GeneOhm is about 7 right now. I don't have any more on the table.

Okay. That's fine. I also just wanted to ask you about your net interest income and other line. Did you mention a full year target for that?

We hadn't mentioned a full-year target for that. We will -- once we do -- what we did mention is that we'd be bringing back cash from our tax havens. And we had provided taxes last year on that, and that if we do GeneOhm obviously and that's in the numbers, that the lost interest income that'll get in there and there's some different rate plays. It's probably, net interest income, is around 18 to 20, something like that. It could be 15 to 20. But I think it depends on when we close, with the money, on GeneOhm.

Okay. I think that's all I have. I'll follow-up after the call. I appreciate it.

No problem.

Rick Wise from Bear Stearns. You may ask your question.

Hi Ed -- oh, I mean John. Just joking.

I'm taller.

I thought you were the good looking one.

No, no, no, no, no, no.

Two questions. One, John can you talk about the diabetes sales in the quarter and outlook a little more specifically? And even more specifically, we were all very aware on the BGM launch that you all were investing in and in effect losing money on an operating basis. Has that all turned profitable, and maybe you could help us appreciate that swing, where that all stands?

All right. I'm going to go back to Gary on the diabetes of how the business plays out, and that the pen needle conversion obviously, which is a large part of the story in the U.S. We had guided last year on BGM. It hasn't changed a whole lot. We're still looking at having invested last year about $50 million in the P&L when you include everything -- that's positive gross margin, but we spent a lot in SG&A and not small in R&D. That resulted in about 50. We think that'll improve by about 7 this year. It -- we're still trying to get some penetration in that business. So it is incrementally positive, and Rick, I just wouldn't want to get at when that thing would be positive or break even on the bottom line, which is I think the question you may be asking.

Leaning toward it. I'm not looking for next quarter, but it's going to be a couple more years of investment ahead of us still directionally?

Well, there's clearly investment no matter what happens this year, and then I think that I would have to say that after that point in time it is uncertain. It won't get worse. I promise you that, but it's uncertain as to where our diabetes glucose monitoring spend would go.

Okay. And Gary, will give us the color?

Gary, could you do that? I think it was in reference more to the injection side of the diabetes business, was it not, Rick?

Injection and if you could quantify the BGM sales if you're all willing.

Well, let me -- I'll touch base briefly on both. I think John touched on all the key points already. On BGM we are still in investment mode. It's front end heavy investment business, because you distribute the meters at a loss, basically at no cost and then recoup that investment on the sale of strips. And depending on how aggressive we're going in to build the market position, the more you seek to build the position the more meters you distribute the more it costs you in the short term. At any given time we're evaluating, you can almost call it a ratio of meters distributed versus the return we're going to get through the strips, and based on what we've been seeing so far, the sales build-up has been more or less in accordance with our expectations. John mentioned that we're anticipating $115 million sales for the year, and that hasn't changed. In the first quarter we saw a little bit less demand coming in from the DME segment of our sales, which tends to be the lower profit segment relative to others. We also think that in the fourth quarter of last year due to diabetes shows and other similar events but particularly diabetes shows there may have been more pull-in through that than we originally thought. But on the whole things are going more or less as planned.

The investment spending is going to continue for the foreseeable time, although as John said, we're seeing year-to-year incremental improvement though still operating at a loss. And I think the points on the pen needles are going to be very similar to what I mentioned before. There is very strong underlying demand for pen needles. The market growth is better than what we would have anticipated, although not out of sync with what we saw coming as longer term trends when we talked a few years ago about the transition of the U.S. market. Lantus has been a positive contributor. And we also have a lot of -- we've had very good installed capacity, based on decisions made in previous years. We'll be putting more capacity into place going forward meaning more capital investment. And the underlying demographic trends in diabetes, whether it's pen needles or blood glucose monitors or other forms of treatment, if diabetes continues at the current rate there's going to be a lot of people needing those products. We actually hope it doesn't continue at the current rate because there's a lot of people getting sick as a result. But that's the trend and it's a trend in the U.S. and internationally, and there are far more people who are not receiving any treatment than those who are receiving treatment internationally. And even in the U.S. about a third of the people who have Type II diabetes are undiagnosed. So there's some underlying dynamics in the market that are consistent with what we're seeing.

If I could sneak in one quick additional one. Some new product launches. Can you update on where you stand with the broader based U.S. launches the Nexiva catheter and maybe Bill could at that talk about the BD Viper. And aybe give us some flavor, are these going to be meaningful incremental sales contributors and margin enhancers? Thanks.

Well, I'll start with Nexiva. The short answer is yes, we anticipate it will be an important revenue contributor, and at some point, though not today, a margin enhancer. And as we mentioned before, we move through these launches in a scaled manner. So I don't think you should anticipate a demonstrable impact in '07. It'll have a positive impact. But both based on the way that customers transition to newer versions of these types of technologies and also in the way that we scale manufacturing and our go-to-market activities to that level of customer conversion it happens over time. And it's happened with each of those safety engineered products. The very positive results that in Bill's segment we see today in push button blood collection sets are based on a product that was introduced I believe about two and a half years ago.

Likewise, the Insyte AutoGuard safety catheter that we had very strong growth in the period around 2001 to 2003 was originally introduced mid-'90s with scale up occuring around '99. So, these are not very different from other industries where a new product sort of immediately replaces existing devices and particularly in the consumer industries. There is a process of going through transitioning hospitals that usually occurs over several years. We believe Nexiva is among the most important new devices that we've designed. It's different and better than other type of catheters that are in the market, and over the course of the coming years it'll be a positive contributor. Yes, Go ahead Bill.

Yes, real quick on ProbeTec and Viper. We had a solid quarter again, steady low-double digit growth. Good traction outside the U.S. with Canada and Europe having exceptionally strong sales. I guess more importantly from a '06 outlook we did sign the Quest agreement and since the signature mid-December we have successfully installed 10 Vipers in major Quest sites and we hope by April, May to have virtually all of the installations and validations completed so that in the second half of the year Viper will become a key platform in the Quest laboratory testing activity with STDs.

Thanks, Bill.

Quintin Lai of Robert Baird. You may ask a question.

Good morning, everyone. Nice quarter. A question for you, Vince. As I look at discovery labware, it was up in the U.S. but not so good in international, and then the reverse happened in Pharmingen where international was strong and the U.S. wasn't. Could you give us a little color about what you're seeing geographically?

Sure. Let's take labware first. As I've mentioned on previous calls, two factors going on here. One in the U.S., and somewhat in Europe, but much smaller. We have this this partnership going on with VWR where we've taken over their private label business, so that's driving primarily very strong growth in the U.S. and we are gaining some share on the branded side as well as the changes in the distribution strategy with Corning exiting VWR. So you see strong growth in the U.S. in the core product line. Outside the U.S., the lower growth is really primarily coming from Japan. That's been the situation where just, weak buying in the Japanese market. And that's taken down the international growth.

Coming back to Pharmingen, we see lower growth in the market in the U.S., good growth in Europe, and then for Japan this quarter is much stronger compared to last year because as you recall we recaptured our distribution rights from Fujisawa now called Astellas and so this is the first quarter that we've taken them over. And so Japan had a growth of 13.8% this quarter versus last year, and so the impact of Fujisawa on the sales line was about $2.5 million -- most of that is Pharmingen some of that is IS product line, and that's why you're seeing the difference in the mix.

Thanks, very much. And John, just to confirm, when you were talking about the stock options expense earlier saying that now it's $0.23 to $0.27, is that part of the updated guidance that you've just given today?

Yes. That is in there.

Okay. All right. Thank you very much.

Bruce Cranna from Leerink Swann. You may ask your question.

Hi. Thank you. John, I just want to flog pharm systems a little bit more because you're confounding those of us who have to model for a living. The sales this quarter, just that I'm clear on this, I know it's somewhat unpredictable and will always be a bit lumpy. But, is this an existing customer with a new drug, or are we talking about actual new business?

You want me to take that? It's actually a series of factors. There was as we said a favorable comparison to last year. There was -- I don't want to get into specific companies because they may not want us to talk about their drugs but one of our key biotech -- bioengineer drug customers had brought their inventories down too far last year. And I guess their drugs are doing well, so they brought their demand and their forecast up considerably vis-a-vis where it had been. We've having the benefits of flu, not only on the diagnostic side but also on the prefill side so we're seeing benefit there. And then there are several other -- at least two other important new drugs that are going into prefills. They're not brand new pharmaceuticals but they're either new into the U.S. or new into prefills. All those were positive contributors in the first quarter. Some of those will continue to be positive contributors going forward but not all of them.

So overwhelmingly or more new products from existing customer side rather than actual new customers coming to you with their drugs?

It would probably be a combination again. Favorable comparison, more demand with existing customers and some new drugs in prefills from existing customers.

Okay. Let's jump to flu season just for a second. Was the comment that I think someone said -- I guess a strong flu season, I assume that meant in the U.S. or Japan was that the comment?

Bill can fill you in. What I had said is that the Japan bought early in anticipation of a strong flu season, and therefore, we don't expect them to buy as much in the second quarter. Bill, you want to --

Just a quick dynamic. The prior year,now this is the previous year flu season had closed very slowly, so last year in the quarter there was excess inventory in Japan and purchases in the first quarter of our fiscal year '05 were relatively light. The flu season in Japan closed very actively last year, particularly in February and actually ran into March, which is very unusual. So inventories were low as the new year approached. So the orders of Japanese distributors in our first quarter this year were much higher than the previous year.

I think we're seeing also flu-related a little different dynamic on the injection side in that with all the media talk about avian flu, it's having some spillover effect into people going for the regular flu vaccination. So there's been reasonably good demand for flu vaccine from what we can see, which has a beneficial effect on the prefills.

Okay. But strictly from the rapid test side, do you think your share in that market is stable or is it moving? And is it possible to differentiate your product vis-a-vis the competition or is the name of the game a ton of physician office presence?

There's a bunch of questions there. When we look at the market it's really Japan and the U.S. and our share in those two developed markets is relatively stable. In Japan we do play very actively on the physician side. In the U.S. we play more on the hospital side and do not have at this point a heavy position on the physician side. So our share in those respective segments right now is relatively steady, maybe up very slightly but nothing of note.

Okay. And I guess last question for Gary. I just want to revisit BGM. I think it was Gary who made the comment that the sequentially down quarter was due to a couple issues. One was -- prior quarter there was pull-in from a convention is that what you said?

Yes, I did. In diabetes they actually have -- have some conventions. They typically occur in the summer where they'll actually place orders during the meeting. And those are a little bit out of the normal course of how the products are ordered, and that did occur in the fourth quarter. So there may have been a little bit of this. It was not based on our doing anything. There were no incentives associated with this. This was not a promotion on our part. It's part of what occurs at some of the diabetes conventions.

And you're referring to the strips obviously not the meters because that's a zero dollar issue.

Meters are given away or sold and then discounted back to them.

Right. So you're saying the strip pulling into the prior quarter?

As a result of those shows in the fourth quarter, that didn't -- wouldn't have represented the normal order demand but was not a result of our doing anything different. And also I mentioned that the DME demand was a little bit lighter but also on any given quarter to quarter there -- we don't get a precise order demand that aligns to end customer demand. So the difference between 23, 24, $25 million is probably not significant in any given quarter. It could go one way or the other.

Okay. And lastly, when you think about investing in BGM and we've kind of kicked this topic around, specifically are you guys contemplating increasing your DTC or media spend this year when you talk about investment in BGM? Is that a component of it?

Steadily increasing DTC, which is a combination of different activities. A lot of times people just associate it just with television. It's not just television. We've been doing it through trade publications. We do have some pilot work going on with TV. Also, where our primary investment was over the past year was building the go-to-market, the personal selling side where we had a substantial increase in our sales force. As we look forward, we're going to continue investing in those areas. The combination of the meter distribution and increased investment at direct to consumer represents the reason that we're still in investment mode

What's the most expensive piece of that? The media piece or giving away the meter?

If we were full blown in television, that might overtake giving away the meter. At present, since we're not really active on television, giving away the meters is by far the primary piece followed by direct selling efforts.

Great. Thank you.

Our final question comes from Jim Baker from Neuberger Berman.

Yes. Good morning. I wanted to just get some clarification on -- I know this doesn't affect comparability but the stock options expense for this quarter, I think you mentioned $0.23 to $0.27 for the full year, but what was the impact on this quarter, and can you give us some sense of how that broke down by line item?

Yes, I don't have it by line item, Jim, but it's about $0.09 in this quarter and should be about $0.06 in each of the following three quarters.

Thank you very much, John.

Okay. Well, that concludes the call. We thank you for your attention and look forward to talking to you next quarter. Thank you.