Becton Dickinson and Co (BDX) 2006 Q2 法說會逐字稿

Hello and welcome to BD's second fiscal quarter 2006 earnings release conference call. At the request of BD, today's call is being recorded. I would like to inform all participants that your lines have been placed on a listen-only mode until the question-and-answer segment. (OPERATOR INSTRUCTIONS). Beginning today's meeting is Ms. Patricia Spinella, Director of Investor Relations. Ms. Spinella, you may begin.

Good morning, everyone, and thank you for joining us to review our (inaudible) quarter results. Today's call is being simultaneously webcast and will be available for playback through Thursday of next week on the investor's page at the BD.com webcast or by phone at 1-800-272-5921 for domestic calls and 1-402-220-9717 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 second-quarter press release and its related financial table which is posted on the investor's page of the 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 second-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 everyone. 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.

Overall this was a very strong quarter and first six months. Our revenue growth has been strong; we've continued to improve our operating margin while increasing R&D by 13 to 14%. We exceeded our expectations by $0.03 for the second quarter and increased our guidance for the year by that amount.

Consistent with the practice we've been following, there are three primary topics we'd like to first discuss. First, since there are certain items that affect the comparability between periods, we want to review these analyses of the second quarter and six months 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 second quarter; and third, we'll review our guidance for the third and fourth quarters and full-year fiscal 2006.

Starting with our earnings, I suggest that you first turn to the table in the press release that is headed analysis of second quarter and six-month period of fiscal 2006 and 2005 earnings. The second fiscal quarter of 2006 we begin with reported diluted EPS from continuing operations of $0.60 and subtract $0.02 resulting from an insurance settlement finalized in the quarter related to our former latex glove business that was sold in 1995. We then add back $0.21 resulting from the in process R&D charge of $53 million related to the GeneOhm acquisition. This gives us diluted EPS from continuing operations excluding specified items of $0.79.

For the second fiscal quarter of 2005 there are no specified items that impact comparability; therefore comparing the $0.79 this quarter to the $0.71 in the prior year's quarter gives us an adjusted EPS increase of 11%.

Moving to our six-month results for fiscal 2006, we begin with reported diluted EPS from continuing operations of $1.45, we subtract $0.04 of EPS -- that's $0.02 in each of the first and second quarters resulting from insurance settlements on latex, and add back the $0.21 from the in process R&D development charge. This gives us diluted EPS from continuing operations excluding specified items for these six months of $1.62.

For the six-month period of 2005 we begin with reported diluted EPS from continuing operations of $1.45, subtract $0.04 of EPS that was recorded through the reversal of tax reserves no longer required, and subtract $0.02 relating to certain discrete events that caused the quarter's tax rate to vary from the expected rate for the year. After considering $0.01 due to rounding our comparative diluted EPS from continuing operations, excluding those specified items for the six months, are $1.38. Comparing the $1.62 to the $01.38 gives us an EPS increase of about 17%.

One final comment regarding second-quarter and six-month results, in both cases they include $0.01 of dilution from the GeneOhm operations. We elected not to exclude this amount in the table. Although not comparable to prior year's results, GeneOhm operations are now a continuing part of BD and as such must be included in the analysis of any performance of ours.

Moving to the second topic, that is what drove our growth, we'll begin with our revenue growth of 6% for the quarter. This included an approximate 3% unfavorable impact from foreign currency translation. In the medical segment second-quarter revenues grew about 9% which included about 2.5% unfavorable impact from foreign exchange. Primary contributors were the diabetes care and pharmaceutical systems units. Sales of our BGM products totaled $28 million for the quarter and our guidance remains at about $115 million for fiscal 2006 in relation to BGM.

U.S. and international sales of safety engineered products in the second quarter both grew about 7% to $123 million and $22 million respectively. International safety sales results included about a 3 to 4% unfavorable impact from foreign exchange. Revenues in the BD diagnostics segment increased 1% in the second quarter which included about 2% unfavorable impact from foreign exchange. The segment's low growth rate is due for the most part to the diagnostic systems unit reporting a decline in revenues of 8%.

This decline is entirely related to flu diagnostic test sales. In fact, there were two factors which influenced flu results. In contrast to 2005, 2006 turned out to be a relatively mild flu season in both Japan and the U.S. In total, flu sales for the first half of 2006 declined by 22% and to a lesser extent, by the contrast in timing of flu sales in the first six months of each year. In fiscal 2005 about 34% of the six-month sales occurred in the first quarter while in fiscal 2006 64% occurred in the first quarter.

Moving to the pre analytical systems unit, reported revenue growth of 11% was achieved, U.S. sales of safety engineered products grew 22% to $97 million due in large part to the continued success of our push button blood collection set. International safety sales grew about 16% to $55 million which included about a 4 to 5% unfavorable impact from foreign exchange.

Looking at combined medical and diagnostics U.S. safety, sales grew about 13% for the quarter to $220 million. Combined medical and diagnostics international safety sales grew about 14% for the quarter to $77 million which included about a 4 to 5% unfavorable impact from foreign exchange. In the BD biosciences segment worldwide revenues grew about 8% for the quarter which included about 3.5% impact from foreign exchange. Flow cytometry instruments and reagent sales continue to be the primary growth contributors. In addition, sales of the Discovery Labware unit as well as sales of cell imaging products also contributed to our revenue growth.

Moving to earnings and beginning with gross profit, we continue to improve our performance. In particular product mix, including increased revenues for higher margin products and continued operating effectiveness, yielded a gross margin improvement of 70 basis points to 51% for the quarter. After excluding the insurance settlement that I referenced and the in process R&D charge, our operating income as a percentage of revenues improved to 19.5%; that's up 80 basis points from last year's second quarter.

This improvement was due to the previously mentioned gross margin advancement as well as increased leverage in SG&A spending of about 60 basis points. These two increases more than offset increased R&D spending of about 15% in absolute terms over the second quarter of last year. All this led to solid cash flow for the quarter of about $200 million from operations; approximately $125 million was used to repurchase 1.9 million shares of common stock and we invested about $90 million in capital.

In terms of earnings per share in comparison to our prior guidance for the second quarter, our adjusted diluted earnings per share from continuing operations excluding specified items was $0.79; it was about $0.03 higher than our guidance.

The last topic we'd like to cover is our guidance for the third and fourth quarters of the full fiscal year. Once again, I suggest that you turn to the second table in the press release which immediately precedes the conference call information. I assume you all know we completed the acquisition of GeneOhm Sciences in the second quarter. The second table presents estimated earnings compared with prior year period and includes GeneOhm's operations since February 14th which is -- as I have said previously are now part of BD.

Starting with the third quarter, revenue growth is expected to be about 5 to 6% including an estimated 2% impact from unfavorable FX due in large part to a difficult comparison with last year's very strong euro. Our revenue estimate for BD Medical and BD Diagnostics is about 5% each and BD Biosciences is about 7 to 8%. Third-quarter diluted EPS from continuing operations including GeneOhm operations are expected to increase in the 3 to 5% range from last year's earnings per share of $0.74.

When you exclude the estimated $0.03 of dilution from GeneOhm, our apples-to-apples growth would have been about -- would have been then expected to be about 7 to 9% over last year's quarter. And once again, the third-quarter EPS growth is below our yearly guidance due primarily to unfavorable foreign exchange.

Fourth-quarter revenue growth is expected to be about 7 to 8% including about 1% from unfavorable foreign exchange. Our revenue estimate for BD Medical is 6 to 7% with BD Diagnostics and BD Biosciences both about 8%. Fourth-quarter diluted earnings per share from continuing operations, again including the GeneOhm operations, are expected to increase 5 to 8% from last year's earnings of $0.76. Again, if you exclude the estimated $0.03 of dilution from GeneOhm our growth would have been about 9 to 12% over last year's fourth quarter.

Looking at the year, diluted EPS from continuing operations -- including GeneOhm but excluding insurance settlements and the in process R&D charge related to the acquisition -- are expected to increase approximately 10 to 12% from last year's adjusted base of $2.88 which is favorable to our previous full-year guidance by about $0.03.

Lastly, if you exclude the $0.07 of dilution from the GeneOhm operations our growth would have been about 13 to 14% over last year which, again, exceeds our previous full-year guidance. Perhaps another way to look at this year's expected performance is to take note that despite the $0.07 dilution of GeneOhm operations we have made up that investment and now we'll exceed that by another $0.03.

Before ending I'd like to give you some additional guidance for the full year which, again, includes GeneOhm and excludes the insurance settlements and in process R&D charge. Full-year revenue growth for the Company is expected to be about 7% including 2% of an expected unfavorable foreign exchange. Our revenue estimate for BD Medical is at 7 to 8%, BD Diagnostics 5 to 6% and BD Biosciences 8 to 9%. We continue to look for U.S. sales of safety engineered products to increase about 8% over fiscal 2005 and anticipate international safety sales to increase about 20% which includes about a 3% unfavorable FX effect.

Our SSG&A improvement is now estimated at about 10 basis points, down from our prior guidance of 20 to 30 basis point improvement and that's entirely as a result of now including the impact of the GeneOhm operation where we will continue to build awareness of HAI. Our R&D spending is expected to increase in absolute terms by 13 to 14%. Our effective tax rate is projected to be about 26% for the year and, as you know, will vary from quarter to quarter. The tax rate for the first half was somewhat above [corrected by the Company from ‘below’ following the call] the 26% rate and obviously therefore is expected to be a little bit lower [corrected by the Company from ‘higher’ following the call] in the second half.

We expect to generate about $1.2 billion of net cash from operations and repurchase about $450 million in shares. Our capital expenditures spending is actually going to accelerate somewhat over our existing guidance of $400 million probably to the range of about $450 million as we continue to invest in the high margin new products like pen needle lines, farm systems and pushbutton blood collection sets.

In summary, we had a strong quarter, exceeding expectations by about $0.03 and indications that our operations will cover the $0.07 expected dilution from GeneOhm and in fact will exceed our previous annual guidance by that same $0.03. With that said we can begin the Q&A and, again, in order to allow for broad participation we'd appreciate it if you'd limit your questions to one plus a follow up. So I thank you and, operator, you can now open the call for questions.

(OPERATOR INSTRUCTIONS). David Lewis, Thomas Weisel.

Good morning, guys. Maybe Gary, just starting off with you, if you could give us some kind of broader trends of what you're seeing in the glucose business, how specifically BGM performed? And then just secondarily, with a variety of continuous monitoring solutions approvals in the last two to three months, at what point do you start discussing with Medtronic about reevaluating your relationship or expanding your relationship going forward?

I'd be happy to respond. First, in terms of just the sales trends, as you know, we had sales in the second quarter of $28 million, which we were pleased with, it was in line with our growth expectations and in line with what we're expecting for the full year and a nice step up from the first-quarter revenues. So that seemed to be going according to how we would plan. On the whole we're getting a little bit more demand coming through from our direct to consumer marketing efforts, maybe a little bit less from the DME side and the sales associated with Medtronic are consistent.

Looking beyond that and your question about the continuous monitoring systems, a few comments. One, this is something that's been anticipated. It's a general trend towards for the most intensive -- people who are managing diabetes in the most intensive fashion towards continuous monitoring. But there are a few things that are important to keep in mind. One, this is and will remain a limited sub segment of the market of people with Type I diabetes who are using the most intensive means to manage their disease and typically these are people who also are on pump therapy.

Also the nature of these systems that are being developed require calibration with episodic meters. They don't effectively fully replace the metered strip combination, they are used in addition to meter and strip technology to provide a higher level and more consistent level of data. So we don't perceive there to be a near term or even mid term fundamental change in our outlook associated with the introduction of continuous monitoring systems.

Over the long-term many companies including BD are looking at this field of technology as something that potentially could be more of a replacement for episodic testing, but that's still a ways out and I don't believe that any of the systems currently in development are intended for that purpose at present.

Great, that's very helpful. And then either for John or for Bill, I think you talked about potentially giving some GeneOhm revenue guidance post the close of the acquisition, and I may have missed it but I didn't hear any specific guidance. If you could provide any kind of granularity on that that would be wonderful. If not, if you could just talk us through market development as it relates to whether you think you'll target high-risk patients first or more diagnostic screening -- give us a sense of how that business will ramp?

Let Bill talk about the market build. I think for right now I'd be glad to tell you that we think this year GeneOhm -- as you remember, it had about $5 million last year. For the period that we will own it from February 14th through September 30th we think about $10 million in sales. But we're going to hold off on any guidance for next year as you'd understand until our normal year-end wrap up and we finish our budget process and everything else that we would go through.

In terms of the market buildup, which is a good question and we'll turn it over to Bill -- and let me just mention for the call, if anybody hears some feedback there, both Bill and Gary are away from Franklin Lakes right now and Gary happens to be overseas. So you may get a little static but I trust everybody can hear them. So Bill, you want to go-ahead?

Yes, John, I hope you can hear me. Just in response to the market development activity, the HAI organization is in place within the Company and that team is formed and operational and collaborating with GeneOhm. The product pipeline on the GeneOhm side in terms of the diagnostics that we expect to launch by the end of calendar year '06 are very much on target at this stage.

The advocacy and policy work is in early stages, David, but it is underway. I've personally participated in three meetings in Washington and we have our group also starting to engage with some of the other key advocacy organizations, particularly focusing their attention on the state of Illinois where a lot of interesting legislative activity is underway at the state-level.

We're also collaborating on the molecular reimbursement side and sharing information and at least that process is underway. And as John mentioned, we think GeneOhm will come in at about $10 million for FY '06 and we're still working on our planning for '07. This is a pretty dynamic market, as I know you understand.

Thanks, Bill. And John, I hope you're not lonely there in Franklin Lakes.

No, I have full support I would say.

Thank you very much.

Bruce Cranna, Leerink Swann.

Good morning. John, can you give us some size -- or anyone -- give us some ideas to how big your microbiology business is today?

I think Bill Kozy could probably give you an idea of that.

I'm here. The question is around the size of just the microbiology piece of DS?

Yes. And what I'm trying to get at is -- yes is the answer and then I'd like to have if possible some sense as to what percent you've actually converted automation, i.e. Phoenix accounts?

Okay, well, I just want to clarify your question. I'm going to exclude the molecular piece or do you have ProbeTec in your question there, Bruce?

No, no. Just Phoenix and conventional microbiology I guess.

Phoenix and conventional microbiology. If you carved out our molecular business at this stage -- let's just round this out. This is roughly for this year an $800 million business. Carving out the molecular piece of somewhere in the 130 to 140 range. Maybe you could think about this rounded off the microbiology business in the high 600's. You've got the Bactec business which continues to be a very sizable and the biggest piece of that. You've got the core microbiology piece which is traditional plated media. And then you've the IDAST or the Phoenix piece that at this stage -- let me just grab my numbers here. We have -- for the first half of the year are in that 10 to $12 million range in terms of our global revenues on Phoenix.

Okay, that's helpful. And I guess what I'm trying to get a feel for is thinking for -- and I know you don't want to talk about GeneOhm a lot, but thinking ahead as to what accounts you might go at. When you think about your microbiology business specifically in the U.S., what do you think your share is in U.S. hospitals? And I guess are you going to go at those accounts first -- that would be logical -- or not go at more of a broad shotgun approach to the market?

I'll ask Bill to respond to the second part of that. Market share is something that I think you can understand we never talk about hear on the call or otherwise. Bill, you might want to talk about how you intend to target hospitals.

Again I'm going to focus on this -- the GeneOhm targeting is the way I interpreted the question.

Yes.

We'd like you to think about us trying to focus on those larger hospitals. Typically right now they tend to be in the 400 bed and above category. If you were to profile that hospital they would typically have an MD epidemiologist. They would have a very active infection control program in place with high collaboration between infection control and the microbiology department. They would typically have an active [C suite] organization; either the CEO or the COO or the CFO in that hospital is aware of the economics associated with healthcare associated infections and we don't have to spend a lot of time doing the education.

Now at this stage and, of course, these are -- obviously what I'm describing to you are people that would be best characterized as early adopters. Those are the target accounts right now in the U.S. Actually it's very similar in terms of the European activity as well. It's larger hospitals. It's particularly in Western Europe. It's right now UK, France, Belgium and the Netherlands as the points of highest focus. We're exploring Spain, Italy, Nordic on a go forward basis.

Thanks. And then lastly, John, you gave us actually a rapid flu number last quarter broken out. Can you do that again?

A total flu number? As I said, the six-month results are $20 million apart. And if you look at the quarter, total flu in 2005 was $35 million to $36 million in the second quarter and about $15 million in this quarter. Therefore the first-half swing is actually about $12 million and the quarter itself is about $20 million.

Okay, thank you.

Mike Weinstein, JPMorgan.

It's actually Kim here for Mike. The first question is on gross margin, which actually was a little bit light of our thinking but probably pretty consistent with what your guidance was. And we're just wondering if you could break down for us what the FX impact on the gross margin was and maybe even if you had any significant resin pricing impact on that line as well?

Year-on-year resin isn't as significant and may have cost us about 10 basis points actually in the quarter. Resin, because it has obviously increased year-on-year, but we took the biggest hit on it last year. FX is probably 20 to 30 basis points in this year, but there are obviously other things going positively in the other direction.

You have to remember that some of the effect of this, without getting into too much accounting, is as the inventory turns -- as FX hits us rather it tends to be capitalized in cost that we have and actually rolls through as inventories turn. So sometimes you get a little bit of a change quarter on quarter and that's why we're getting a little bit more maybe this quarter.

But overall for the year I think, to your point, our guidance was about on where we thought this quarter would be and we are maintaining the increase that we see in gross margin for the whole year and that does include where we think resins are and what we think gross margin will do to us.

And that's about a 30 to 50 basis point improvement year-over-year?

Yes, about 40 to 50 basis -- it's actually about 50 to 60 basis points actually.

Okay, great. And then the second question is just on your -- I guess 3Q and rest of your guidance particularly as it pertains to BD Medical. You talked about 5% growth expect for the third quarter. And in light of the strong performance we've seen from diabetes care, that might seem a little bit conservative. Can you maybe talk about what plays into that 5% growth expectation in the third quarter and maybe what your expectations are for diabetes care as it pertains to that 5% growth?

Gary, were you able to pick that up?

Yes, I got it, no problem. We are anticipating slower growth and, of course, we don't now how this is going to turn out until it occurs to say the obvious. But more of that lower growth in the third quarter in particular is expected to be attributed to pharmaceutical systems where we had really a gangbuster first quarter and a very solid second quarter, particularly if you look at it on an FX neutral basis. And therefore -- and that business can be a little bit lumpy in terms of timing of sales.

So we're anticipating the third-quarter growth to be lighter there, quite a bit lighter. Somewhat lighter in diabetes care, not as demonstrable as in pharm systems. And medical surgical we're expecting to be more or less in the range, maybe just a tad below what it's been year to date, but more or less in the same range, ophthalmic perhaps a touch better although that's a small business. So what you're seeing I think is more of an anticipated pharm systems impact than a diabetes, but we'll know for sure when we close the quarter.

Okay. Is it fair -- and this is the last one and I'll drop. Is it fair to say on that note that pharm systems probably benefited from continued inventory build in the quarter and then we probably won't see that as much over the rest of the year?

Actually as we look out over several years the outlook for pharm systems is quite positive. So we didn't see this as just a one quarter or two quarter aberration and similarly in pen needles the outlook is positive. Within pharm systems at any given time there may be some more demand coming in either associated with a new drug launch or seasonal timing. Despite the soft flu season, the global concern about pandemic flu has actually stimulated a lot more interest in normal flu immunization. And we're seeing the positive impact on that on our prefillable syringe sales.

Also demand for low molecular weight heparin, which is the largest single application for these devices, remains strong. So I think what we'll see in quarterly to quarterly patterns may pertain to certain of our customers bringing in devices for a particular need that they're going to fulfill in terms of their own capacity, but what we saw in the first six months was not an aberration just associated with inventory filling.

Thanks.

Does that answer it for you?

Yes, that's actually very helpful.

John Calcagnini, CIBC World Markets.

Good morning. I wanted to ask -- first of all, in talking about flu diagnostics, is there any opportunity in avian flu diagnostics, is that meaningful? Could you comment on that?

Bill, do you want to?

Yes, I've got it. The protocols that have been set up pretty much around the world right now are to use government managed molecular-based avian flu tests, protocols that are already created. So in the event of an outbreak you would see local governments and/or health agencies arrive on a scene with pre established molecular platforms ready to do the testing. So we're not convinced or sure that there will be a big diagnostic opportunity in the long-term. It could most likely end up in some kind of a panel format -- a flu panel format in the longer-term, but for right now we don't see it as a manufacturer-based opportunity.

I was just curious. I thought with all the paranoia that maybe the desire when anybody has flu-like symptoms to want to screen at some point. But can you talk about the components of gross margin in the quarter? I think you mentioned 70 basis point year-over-year. What were the components of that margin expansion?

The biggest single component was product mix and that was basically 1% and offset by other items. As I said, a little bit on additional resin impact and also the 123 comp expense, since we're amortizing a little bit more year on year. That also impacted it, but both of those are strong numbers. The big thing is product mix and it's the higher margin items that are going through -- I think pen needles and immunocytometry, Pharmingen reagents, our safety product and immunization. Those type things going through and some of those are also the things that we talk about in terms of where we are going. And you're going to see maybe some acceleration or pull-forward of capital expenditures. although not significant for this year.

So what was the impact of currency in the quarter on the gross margin?

We said it was maybe 10 basis points, 20 basis points or something like that, but it was offset by a bunch of other things.

Okay. Last question then, for the full year I think you had originally said 30 basis point type improvement. Why more tempered for the full year margin expansion if you are seeing this gross margin expansion related to mix?

Just the timing of these. As Gary said, we may have -- there is some lumpiness he said with pharm systems, some of that stuff goes through -- in accordance with buying patterns. Immunization can vary and like that. And there will be a little bit more FX, you know, because as I said, some of that rolls forward. It gets capitalized in the inventory. Our inventories turn about 3.5, 4 times a year, so you can see that it tends to hit in the later quarters.

But all in all, 50 to 60 basis points year-over-year improvement in gross margin even with more healthy eye expense, if you will, and still more resin costs and like that. So we think a 50 to 60 basis point improvement is right on and consistent with where we've been.

All right, thank you.

Lee Brown, Merrill Lynch.

Just a question on the U.S. med surgical safety products. Is that slowing considerably here and what is the long-term outlook in terms of growth rate for that segment?

Gary, I think will take that.

Sure. Well, you can see in the numbers there has been somewhat of a slowing in the U.S. med safety numbers which is a combination of having achieved a fairly high-level of transition in the safety catheter market, a reasonably high-level of transition in the injection safety market in hospitals and still not as high as we'd like to see in the alternate site facilities, the clinics and doc's offices. But that has lagged in part due to the less -- the much more limited enforcement by OSHA which is the agency enforcing the national safety law.

What we have been anticipating and still do anticipate is a rebound in safety growth as the new BD Nexiva and Q-Syte platforms start to take hold in the market. That was delayed somewhat, we have described on previous calls vis-à-vis our original launch timing expectations. Those devices are now in the market, they are doing well. As has been our intent from the outset, we're introducing them in a phased manner first starting in major teaching institutions to facilitate adoption and putting a lot of care and feeding around those initial transitions or conversions because these are very technique-oriented devices.

We probably are six months to a year behind where we thought we would have been a few years ago in terms of timing, that's mostly based on the timing of product launch. We still do anticipate that when that growth kicks in it will start to tick the safety number growth upward again, but they won't be back where they were three or four years ago when we were in the height of the safety conversion in the U.S.

But the Nexiva and Q-Syte to the medical segment are not unlike what the pushbutton has turned out to be to the pre analytical business in our expectation. The Nexiva device sells for about $4.00 replacing the Autoguard. If it replaces our own catheter -- replacing catheter it sells for about $1.50. And what makes it unique is it's both a healthcare worker safety and a patient safety device in that it's a closed or integrated IV catheter that limits the potential for bacterial ingress or blood flow out of the catheter.

It's just taking a little bit more time -- and these devices in general in our industry, they're not like a consumer electronic where they get introduced and the peak of the opportunity happens within the first few months. It's usually -- and I've stated this on past calls as well -- it's usually two to three years post introduction based on the hospital decision-making processes that you see the peak of the growth really start to kick in.

So just to summarize perhaps on an acceleration in growth in the second half relative to the first half, but certainly maybe an uptick to the high single digits in F '07. I'm talking about just the U.S. market here, sorry.

I understand. Just talking about the U.S., yes, no problem. I would say in the back half of this year we shouldn't expect any market differences from what you've seen thus far in U.S. medical safety growth. And I would say into '07, perhaps in the back half of '07, because we're also scaling our supply according to how we expect demand to ramp up. You should start to see this pick up and then into '08 as well.

Super. And then just tied to the $0.03 of EPS impact as a result of the GeneOhm acquisition in the next two quarters. Will that hit SG&A -- will all of that hit SG&A? And secondly, what's the appropriate tax rate to gross up that impact? Should we be using the corporate average or something closer to the U.S. tax rate?

Most of it will hit G&A as we, again, build the market. And as I had said in the comments, it's largely -- almost entirely responsible for us pulling down the -- although we'll improve on leverage of SG&A for the Company for the year, that has had and will have an impact as we go into these next two quarters. In terms of the tax rate, it's a bit complicated because a lot of the business is up in Canada and I think right now that if you kind of use a 30% number on the GeneOhm operations, that's about where we would be.

Okay, super. So that's about $11 million a quarter here. And would it be safe to say that 85% of that's going to fall into SG&A?

I don't want to give you exact numbers yet, but again, just think about most of it going in SG&A. And I think too just on the diabetes I wanted to say one more thing -- not on diabetes, on safety. If you recall, for years we were -- our growth was really a safety story and we said and obviously have delivered on the fact that there are other things now being included and our target was about $800 million of safety. And if you use the numbers we've given you right now you're going to quickly get to a U.S. safety number that's going to be $900 million already.

And we said the strategy was to continue to build on that by introducing new products. And as Gary well referenced, we have the pushbutton blood collection sets in diagnostics and now with Nexiva as the next in the medical side, that's coming to fruition and you can see that that expansion beyond $800 million is well happening.

And then, as we also said, we would begin to get into the international markets, albeit that they are difficult and we're not dealing with one pan-European law for instance in terms of safety. So I think that what he says -- it was important. I just want to make sure everybody understands it's not just a safety story anymore, but safety is still a significant contributor to us.

Just two quick housekeeping questions here -- stock comp in the quarter and what's your guidance for the full year?

Our total comp for the full year is going to be just around $100 million I believe. This year, as I said, in the first quarter we had to book a little bit more because the rules require you to book immediately for people who are retirement eligible, for instance stock options and things like that. So it's again about $100 million for the year. The impact was about $0.09 in the first quarter. That would be about $0.27 for the year and it's about $0.06 in each of the second, third and fourth quarters.

Okay. I must be using an inappropriate tax rate there. I'm getting much more than $0.27 for $100 million, but I'll talk with you off-line. And then lastly, the GeneOhm acquisition -- the incremental sales there, will those be booked in diagnostic systems I assume?

Yes.

Okay, that's all I have. Thank you very much.

Quintin Lai, Robert W. Baird.

When I look at BD Biosciences it looks like that you're forecasting sort of stable growth that we saw in the first for the second half of the year. I think we're coming up on the anniversarying or maybe in the past the anniversarying of some competitive market shifts in Discovery Labware. Maybe could you elaborate a little bit on what your expectations are for this part of the business?

You're right, we are basically forecasting continued trends for similar growth for the second half of the year as for the first half of the year. And we're still rolling out competitive accounts that we have picked up in Discovery Labware. So even though there's an anniversary of starting the program, we expect to continue to see growth in the second half of the year. We expect also in Labware to have good growth in Gentest on the second half of the year. And then of course back to the flow cytometry business. It's the same factors that have been driving it for the last few quarters -- continued strong growth across the productline.

This quarter we saw -- we're starting to see the impact of the instrument that we've been putting in the developing world and the reagent pull through we're starting to get off of them. So we had strong reagent growth in the quarter. In fact, the clinical reagents were up on a performance basis 15%. So we get the installed base in, we expect that to continue.

And then the other thing, in terms of growth for the rest of the year -- we've had a good quarter for bioimaging which was the Atto acquisition. And we expect -- we launched two new instruments this quarter so we expect to get some traction with those new instruments in the back half of the year.

Thank you very much. And John, maybe for you or for Bill. Could you give us a little update on BD Viper placements and customer validation times? And then kind of as a follow-up to that, when you look at your GeneOhm, do you see that as a near-term or mid-term opportunity on Viper or do you think that some of those GeneOhm tests will need to be run on another type of instrument?

Bill, are you going to take that one?

Sure, let me take the first part on the Viper and I'm going to reference -- I'm assuming this question is about the Viper ER launch. Most of our attention continues to be focused on the Quest activity and then just giving you some color maybe on that and that's where almost all the ER effort is going right now. We do have -- as of about April -- the first week of April we have about 32 Vipers installed in over 25 different Quest sites at this stage. About 20 of those sites have completed both their training at BD as well as their training on site at their location. And of those 20 we've got seven of those sites live at this stage. So we are very pleased with the progress, the acceptance and the performance of Viper ER at this stage.

To your second question, we would not see anything on Viper from a GeneOhm side in the short-term. But your question is strategically something of very high interest to us and we're right now doing our platform planning and we'll have more on that question probably in the next six to nine months about how these technologies can collaboratively better serve our customers.

Thank you.

Sara Michelmore, Cowen.

I'm hoping you can give us just a little bit of a sense of the ProbeTec growth in the quarter given that it's hard to see what it's like with that diagnostic systems business down so much. If you could just give us some color on the trends there that would be helpful.

Bill?

Sure, I've got it. We had -- obviously given my comments I just made on Quest, we've had a nice second quarter with ProbeTec Viper. Our double-digit sales increase continues and we're kind of running right now in that 11 to 13% growth range for the quarter. And we believe that we'll be able to continue that as we go forward. So we've had a real nice quarter on our molecular business.

Great. And just a strategic question for you, John. Post this GeneOhm acquisition, it was obviously one of the first acquisitions I think maybe the Company has even done since you've been there. If you could just update us on your thoughts about the importance of acquisitions to the Company's strategy going forward? Thanks.

I'd be glad to. As you probably heard Ed say and I, we kind of look at the growth strategy like a stool with a number of legs. Certainly our internal innovation drive has and will continue to provide growth to the Company. We also look strongly at licensing and partnering where appropriate. And kind of the third leg of the stool is acquisitions. We have done a number since I have been here about six years now -- Atto, FFE, Gentest and a number -- but however, they've tended to be smaller relative to what you saw with GeneOhm. I think the highest was about 25 to $30 million, in that range.

We continually look at acquisitions where they make sense obviously. And we also look at are they in the space that we know best in that we can complement a GeneOhm fit perfectly in that solution. We already had a large or a meaningful position, state-of-the-art actually, in the space with CHROMagar in terms of MRSA. This is a natural complement to it and a change in healthcare awareness and this one I think just fit perfectly the way we would look.

So we'll continue to look at these from a dilution standpoint. We knew that this would be dilutive this year and probably dilutive next year, but that was about our tolerance in terms of dilution. And that's how we look at them. We use a very strong and sound process in reviewing acquisitions. But I would never want to leave you with any idea that that was the single element of our strategy. I think you would first look towards innovation where we're driving kind of year-on-year absolute dollar spending in the 13 to 15% range.

Okay. So not a signal of a change in strategy at all?

No, it's a continuance. If they were there we looked at them and we're not afraid to do something like this. We obviously have great cash flow. But you know, they're never as easy as they seem and certainly as Bill -- without responding directly to it -- indicated, the integration of those into BD and the importance to make sure that they achieve what we believe they will is very important to us. There were some in the past that frankly didn't work out and we as a company have taken care of those, the most recent being Clontech. So we're very much interested in them but we're very much interested in our own internal innovation capabilities.

Great, that's helpful. Thank you.

Lawrence Keusch, Goldman Sachs.

This is Charlie [Chon] on for Larry. Just a follow-up on Kim's question from before on resin pricing. With oil prices ramping in recent weeks and hitting new highs, at what oil price does the gross margin guidance that you've given become outdated due to the impact from rising resin costs? And would you be willing to go so far as telling us at which price we would need to start thinking about this -- $75, $80 per barrel?

Well, it's pretty close to $75 right now. The oil prices, while a reasonable proxy for what we use, is not an absolute proxy. By that I mean we're using medical grade resin. It's price is also impacted by the supply here. It does use obviously petroleum-based oil-based products to manufacture it. I don't know if I have a price for you where you should start thinking about it. We obviously have looked at the forecasts. We know where it is right now, around $73. We've looked at the remainder of our year and we believe we are still okay with our guidance.

Without even having studied it I can tell you if oil goes to $200 a barrel I'm sure that there will be some impact on us. When this all started we were, just to put it in perspective, using about 130 to maybe $150 million worth of medical grade resin. And the price went up I believe I told you guys last year by about $50 million. But if you think of it in terms of a cost of goods line that gets over $2 billion, it's certainly not -- it's not insignificant but it is not the singular most significant item within there.

So we're able to handle these. Our operating efficiency team is doing a terrific job at driving other savings through the line. And believe me, we look at this often, but I don't want to give you an absolute price to look at. But I promise we'll talk if it hits 100.

At some point will a hedging strategy -- might be more appropriate for the situation?

It can be. We look at it -- again, as I said, it's not an absolute proxy so you have to find a market where you can hedge things or a way to hedge the medical resins. There are some out there. You also have to worry about some accounting where if you use pure oil this might be a speculative type hedge, we'll be marking to market and driving ourselves and you crazy.

We're looking at that right now. We're also looking at even longer term about non petroleum-based resins that we can use. But I don't want to in any way signal that's nearer term. But we look at the hedging from -- continually and I think at year-end when we give our guidance we'll talk to you in terms of the strategy that we employ with respect to the medical grade resins going forward.

Thanks. And second question just on the diagnostic segment. If I recall correctly, I believe there was a substantial buildup in inventories, particularly in Japan, during the December quarter. And obviously with the softer flu season in 2006 the numbers probably reflect some of those inventory levels changing around. How should we think about growth in international diagnostics going forward, particularly in the context of the full-year guidance that you gave for diagnostics?

Bill, are you prepared to talk to that?

I'm here. Just to confirm, there was some stocking of flu in the first quarter of fiscal year '06, particularly in Japan. And I think John referenced that also as one of the impacts on the second quarter that we just experienced. We are actively working. You might be aware of the fact that there's an active tender process, particularly in Asia-Pacific and in the rim, for flu. And of course, particularly in the Southern Hemisphere, that runs counter.

So we're actively engaged in that tender season under the premise that we will do what we can to move some of that distributor inventory so that there is minimal impact on a forward basis. We won't have any answers on that until kind of the winter has played out in the Southern Hemisphere. Is that clear?

Yes, that is. I guess so in terms of full-year guidance for the international diagnostics, obviously it's probably going to be much less than what the total diagnostics sales guidance is -- 5 to 6%. Should I be thinking about it that way?

No, I don't think there's any -- here again, for the last two quarters of the year, when you say international of course we've got Europe in there. We have continued solid performance in Europe, continued solid performance in Asia and Japan for the second half of the year. So I don't see any big differences in international because we typically don't see any related respiratory activity or flu activity on an international basis in the second half of the year. Occasionally we'll see an order or two in September, but that's not the norm.

All right, thank you very much.

Rick Wise, Bear Stearns.

A couple things. First, R&D clearly continues to grow well above the top line growth rate. Maybe you could give us some perspectives on what you're up to there and what we might see come of it?

You're right, we have, as Ed kind of keyed in the strategy -- our kind of strategy is to drive innovation. And as I talked about, that's to a number of things. We've moved up our spending and I would think you'd see it for the foreseeable future ranging from 13 to 15% a year. We're going -- I don't want to talk about things that we haven't really talked about, but there's a great deal of spending within the areas that you already know we deal in. For instance BGM and GeneOhm, HAI type things and in farm systems in terms of what else might be able to be -- utilize the prefillable syringe.

Bioimaging is an area where we are and related Viper. We've talked about work that we do among all the business units, but it isn't so near term that we're prepared to talk just yet. I'm hoping that we will be within the next year and have kind of what you might call an R&D day to really lift up the kilt, if you will, on the R&D.

Okay. Just some clean up questions on some topics you've addressed. On the diabetes side, you long ago stopped giving us guidance on the amount you were investing or losing, however you want to say it. Has it reached profitability on the BGM side? Is it likely to? Maybe just generally fill in your thoughts there. And I wasn't clear, Gary, what exactly you were suggesting in terms of the penetration - like you were emphasizing the more niche nature of your business. Maybe give us a little clearer picture of what you think the addressable portion of the market is for the Becton product?

I'll let Gary take that part of it. Just on the spending, probably the key take away here is we're seeing reasonable growth in line with our expectations target this year at about $115 million of total BGM and it is not yet profitable to us. And much of that is being driven by the fact that it's expensive to seed the market and pull in the users, the patients. And we continue to do that and that investment spending continues. Right now it's certainly within our numbers. We don't expect it to move dramatically one way or the other.

Is it shrinking, John?

It has shrunk year on year. Until this year gets over I don't want to say it will shrink versus its prior year. It did and, as you remember last year, it was about $10 million under the prior year. Until we finish this year I'm going to take the Fifth on that one, Rick, until I know exactly what happens. And Gary, you'd be much better at answering the other.

I think that from what I described before, there's really I would define three market segments that we are marketing to. One which is the largest and the most important, and it's certainly not a niche segment, are high frequency injectors, high frequency testers. And these tend to be people who are within BD's existing customer base on insulin delivery.

It's not the entire market of testers we're necessarily going after because there's a large population of Type 2's that test infrequently and may or may not inject insulin that perhaps one day in the future as we build a stronger franchise we will go after. But for today the return on our investment among that population of people with diabetes is not sufficiently high relative to the high frequency testers.

So we're going after people who are either pump users but perhaps are not using an integrated system that might be testing six to 12 times per day or insulin injectors but who are tightly controlling their diabetes who are injecting three to five times per day. We're marketing to those people through various means of direct marketing including now television advertising which we're doing on a regional basis in the U.S. And this represents the largest source of new growth that we're experiencing -- which we're pleased about because in effect that's the most important long-term market for us.

Coming out of the gate when we first entered, aside from having some technical issues that you're aware of that set us back, two of the segments that may have had a little bit more disproportionate impact in the early years were the relationship with Medtronic around the integrated system which remains important but is not a disproportionate amount of the business we're doing now. It will remain important because they tend to be among the most intensive testers, but there's a fairly limited population in the world of diabetes of people who are using pumps and using them in an integrated system.

So you could perhaps characterize that as more of a niche. It's a very important niche though that we think will continue to be important in the future. And the third is the DME channel where we had and have a relationship that brought us some business. It tends to be at a lower price level than compared with the other channels of sales, the normal retail drug wholesaler and chain channels of sale. And that is declining in its significance to us more so based on the growth of the direct marketing to frequent injectors.

And this is not unlike what we would have anticipated to happen. The Medtronic relationship and the DME relationship helped us get out of the gate with a little bit of a head start with always the intention being of building the strongest part of the franchise in the direct to consumer marketing among frequent testers and frequent injectors.

And if I could just ask one last follow-up with you, Gary. You've answered this before but I keep getting asked all the time about the upcoming launch of Exubera and the impact that Becton expects or how you're countering it or dealing with it impacting your needle business. Can you just share with us your latest thoughts? Thank you.

Sure. Our thoughts here really haven't changed -- there's nothing that's happened as of late that has modified these thoughts, although there has been some recent news. I'm not going to comment so much on Exubera itself, I will leave that to Pfizer and the other experts out there, but I will comment on the benefits of injection.

Injection therapy has been and remains the only method that we can see that allows for very precise dosing and therefore allows for more precise control of diabetes. And precision of dosing and precision of control is very directly related to the devastating complications that can come from diabetes and this has been proven through decades of clinical studies.

The method by which insulin is injected vis-à-vis the way it's inhaled through Exubera allows for much tighter control of the dosing. And do a little background on Exubera research and you'll understand why; it relates to the manner in which that device allows for dosing. So in our view people who are injecting today or people who need to be injecting -- the injection method allows for better controlled diabetes.

What we think could be an opportunity for Exubera -- again, it's not really for us to talk about -- is that there are a lot of people who are not on insulin today who ought to be on insulin who are failing on oral therapy. And if fear of injection, which we think is more fear than reality based on all of our experience of people with diabetes. But if the fundamental fear of starting to inject is the critical barrier, if an inhalable form of insulin gets them on insulin it's doing a service.

We think as people become oriented to the benefits of insulin, which not only is fewer long-term complications, but just feeling better every day, as people become oriented to the benefits of insulin it will as likely lead to increasing the population of people who inject as it will to decreasing the population of people who inject. The other point we would note is that insulin injection, particular pen-based injection, and as you know, the pen needle segment of the product category is growing very rapidly in this overall industry -- is very discreet. You can sit at a table over lunch and inject yourself and the people around you wouldn't know that you did it. And that's not the case with inhalable delivery.

So we think there are a number of benefits that will continue to sustain themselves with the introduction of inhalable insulin. We do not regard it as a replacement of technology; we regard it as a companion technology that may serve to increase the population of people who are on insulin which would be a good thing.

The other recent piece of news you may have picked up is that the National Health Service in England actually decided not to fund the availability of Exubera. And I think their decision was based on the cost benefit of the alternate therapy, not seeing a benefit in additional therapy but seeing additional cost. Whether that will be modified over time we don't know and I'm sure Pfizer will want to try to respond you that. But we think there's room for both technologies in the market. We think the benefits of injection will ultimately prevail over anyone who thinks that injection could be overtaken by inhalable.

Very helpful. Thank you so much, Gary.

I know we have two more callers on the phone and I don't want to leave them, so we'll limit the remaining calls to two, operator, and take them, please.

James Baker, Neuberger Berman.

I wanted to ask a little bit about the third-quarter guidance. The stock is down almost $2.00. I think the reason is because of confusion about that June quarter. If you look at last June, we should recall that you had $12.5 million of non-recurring expenses for an intangible asset write-down and also $7 million for the termination of the Japanese distribution agreement with Fujisawa and that cost you $0.03 last year. And as a result, the $0.73 you reported arguably would have been $0.76, and here you're guiding us to a range of %0.76 to $0.78. And I recognize you have $0.03 of GeneOhm dilution this year, but you also had $0.03 of nonrecurring last year.

So, in effect, you're really saying that 3 to 5% gain on a recurring basis, and that really seems extremely disappointing to us stockholders and I wonder if you could comment on that.

Well, one big piece too that is in there that we touched on is obviously our foreign exchange. And if you looked at that growth and took out the impact of foreign exchange which is about $0.03 in the quarter, you would obviously be back up to a number of probably 7 to 9% for the quarter. And GeneOhm, as you say, itself drops us down if you took GeneOhm out, and I don't suggest taking GeneOhm out because it is part of our ongoing operations. But nonetheless, on a comparative basis if you took that out, you would be up about 11 to 14%.

Yes, but John, you had a foreign exchange hit this quarter too, actually probably a larger one in the March quarter than you're going to have in June, and you even had $0.01 of GeneOhm in this quarter as well. And if you had made all of those adjustments and plus you had the flu weakness versus last year. So I think overall, you are still talking about a much smaller gain, even if you make all of the adjustments you just mentioned in the June quarter than you just had here in the March quarter.

Well, actually foreign exchange was less in this quarter by a penny than the coming quarter, but that is what it would be underlying. If we didn't have foreign exchange and if we didn't have GeneOhm, you would be up in the 11 to 14% range, but I think you have to leave GeneOhm in there. So I think on an apples-to-apples basis, you are looking at a 7 to 9% kind of gain.

If you look at our whole year, growth is going to be very solid even with GeneOhm in there. And obviously, in the second quarter it was $0.01 of GeneOhm, and it is going to be $0.03 now.

The other question I want to ask is on your gross margin guidance for the year, because you've really had -- you got about a 60 basis point gain this quarter, obviously a much larger gain in the fiscal first quarter, something like 180 or so basis points. And you are only talking about 60 for the year, and I think you mentioned that GeneOhm isn't really going to affect the gross margin line virtually at all. So could you explain that a little bit?

Well, if you look out in the year, we are also impacted obviously by the sales mix for the remainder of the year, although it will be positive. We are going to run against a fairly tough comparison. Fourth-quarter gross margin last year was about 52%. When I look at the numbers right now, that is what I am getting. I'm getting about -- and GeneOhm has some impact, although not significantly, and it is negative. But I am getting an increase of 50 to 60 basis points for the entire year, notwithstanding that the first quarter which had all of that pull-through of flu product into it and gave us a very high gross margin.

Also, FX is obviously getting in there, but I think that is where I am comfortable with guidance for the year, is an improvement of about 50 to 60 basis points for the entire year.

Okay, fair enough. Then just on your tax rate comments, I wanted to be clear because your tax rate this year, let's say if you exclude all the onetime items like the insurance settlement and the in-process R&D and so on, I think is running around 27.3% year-to-date.

That is correct.

So if you look at it on that basis, what do you think the tax rate would be for the full fiscal year?

About 26%.

26%, okay. And that is after adjusting for the others. So you're saying it will be lower in the second half, or is this 26% on a reported basis? That's what I wanted to clarify.

It will be lower in the second half.

Okay, will be lower in the second half. And then the final point is on the share repurchase it looks as if actually sequentially, your account jumped a little bit between the December and the March quarters. I'm sure there was a lot of option exercises with the stock having gone up. But shouldn't that suggest that maybe you guys should consider stepping up the pace of share repurchase here to sort of keep the count? Because my impression was you were hoping to get the count down on the order of 2% or so or 1.5 to 2% for the year. Obviously at the rate of 450 for the year, you're probably not going to accomplish that. So I'm wondering if you could just comment on that.

Yes. Well, we have stepped it up. As a matter-of-fact, last year as you recall at the end of the year, we went to the Board and pulled in another $100 million worth of share repurchases. Our authorization currently stands at $450M. You are right, option price -- not option price -- market price exercise all of that, gets into it. We still have the hangover of the large options that were out there.

We switched to the LTI plan a couple of years ago, which is going to significantly reduce the amount of shares that are going to be used if you think about us buying, for argument's sake, 5 million shares or so a year as we used to. The LTI uses about 1.7 million - 1.8 million shares a year, so there is a significant benefit there. But you're not seeing that yet because we still have the overhang of the other shares.

My current number for this year is probably going to average out in the 255 256 kind of range for shares, and we ran that off of a $65 stock price. If it goes up, that can go up, and if it goes down, that can go down because you can buy more shares under the treasury share market. You're right, the strategy is to drive shares down through this program, and we will have to look beyond one year, but I am certain this will continue to drive shares down.

The final one, and this is the last one I'm going to ask, is one of your earlier questioners asked what tax rate should you apply to the stock option expense. In other words, the 100 million you see for the whole year, what would that be on an after-tax basis?

It is probably around a 33% tax rate. There is obviously a large contingent of shares in the U.S., because you have a significant amount of leadership in the U.S., albeit we are 52% international importantly. But when you look at that and some of that has been exacerbated by some of us being in the 50-year-old range, I will say, for my friends around the table, and that has caused a shorter amortization period for us. So it attracts more U.S. rate. That is why it is getting closer to the 35 than federal rate, and there's state tax in here, so it's really below that. So a pure domestic rate would be about 38, and this is about 33 for us. So it's that balance between U.S. and international that's causing it.

So you are at kind of a $0.24 run rate. Is there any objective? That is a little higher, I think, than average, certainly for the average S&P company; maybe slightly less so within the medical technology universe. But that is a little higher than average as a percent of pre option earnings than most companies. Is there any thought process in maybe trying to drive that a little lower over time?

We actually looked at -- the strategy may do that. What really moved us was the performance. We used the performance shares, and the performance in the last two years has exceeded where it had been established, and we had some pretty good hurdle rates in there in terms of ROIC and revenue. And we do have a concept of trying to not vary the amount of value that we are delivering year on year to the people. What we've had to do here, though, is accrue beyond that value because that is the way the accounting goes on the restricted stock.

When we first targeted this and looked at other people, kind of our dilution was in the 6, 7% range, and we were at much lower than our peer groups by some wide margin. It is a very broad plan, goes to about 3000 associates around the Company. And we have it looked at by the Board's compensation consultants; they report directly to our Board. So we are always aware of it, and on the one hand -- the good news is the performance has been better, but the implication is that it has cost us a little bit more on this line.

Thank you very much. That is all I have got today.

I know there is one other fellow.

Glenn Reicin, Morgan Stanley.

Wow, I was starting to take it personally. A bunch of wrap-ups here, and I'll go from easiest to hardest. On the 450 million share repurchase, is that the gross number, not a net number of -- I assume the net number is much lower because of the proceeds from options?

That is correct.

Have any estimates what you think the net number will be?

Let me just look up while you go to your next question what it has been through half the year.

Okay, next question is not for you actually. There were two numbers thrown out. On ProbeTec we had assumed that you were in that sort of $25 million range on a quarterly basis, but then I heard earlier you said the molecular business was 130 for the year. Which number is closer to being right? Is it $100 million for ProbeTec or is it 130?

Glenn, this is Bill. The molecular business includes ProbeTec and the Affirm business. And the Affirm business is having a very strong year as to the vaginitis product. That's also growing at a high rate. So when I use molecular, you have both ProbeTec Viper, category one is the large category, and Affirm also in that category.

So last year I had ProbeTec at around $20 million, can we assume this quarter it was around $22 million?

The second-quarter actual for worldwide ProbeTec was higher, Glenn. We're more in the -- we're running a little bit above that.

Okay. So still in that 20 -- still under $25 million though?

Yes, just about there and we're looking -- given that comment we're hoping that $25 million is a good place for us to be.

Glenn, let me answer -- through the first half of the year about $95 million in proceeds back from stock options.

And if you get to your 256 number for the year what does that mean? Is that 256 by the fourth quarter or 256 as an average for the year?

Average for the year. $95 million came in to the coffers for the exercises -- for half of the year because the price has been high. And last year for the entire year $123 million came in to the -- in dollars came in to the coffers for exercises of options. I don't know what the next six months are going to bring. We do have an overhang; people here tend to keep options for a long time. But if the stock price stays high you could well see accelerated options. It brings more net money in but it also can cost us on the share line, but not significantly.

But 256 is your number on a reported basis?

that's what I'm thinking (multiple speakers) shares.

Which means you've got to really step it up in terms of the share repurchases. But what have you spent so far of the 450? What did you go on a half-year term?

About half of it.

So you're at 258, how do you get down to 256?

You've got to remember that the stuff we bought at the end of the last year is still now rolling in. Because that's over time, you don't see that all at once or at one time.

Okay. So 256 on a reported basis for the year is what you're shooting; stock price goes up it could be a tad higher but not 258?

I think so.

Okay. Last question, Gary. And this is a more difficult question to answer. If I look at the diabetes business we've been having these quarters of 20% plus growth. If I look at the constant currency numbers this quarter I'm sort of thinking last year the glucose monitoring business had easy comps, I think I have 28 versus 14, which still means that the core diabetes business on an FX neutral basis is growing at 9%.

This was a no growth business two years ago. What is happening with this business and what truly is a sustainable growth rate here? You've mentioned Byetta, but the numbers are not bit enough to really make a difference. So is there stocking going on that makes this unsustainable or what should we use as a normalized growth rate for this business?

Without giving you a number, because I don't think it would be appropriate to do so, let me just give you a clear sense. This is not a no growth business. I had indicated that I think in the last call or the call before. We're seeing a systemic higher level of demand for pen needles which is being driven by a number of factors.

The most fundamental factor is the continuing explosive growth rate in diabetes as a disease, both Type II and Type I, and the higher number of injectors associated with that. Byetta certainly is having a positive impact as well. Fanties has had a positive impact on us as well as Byetta because both Sanofi Aventis and Lily exclusively recommend use of BD pen needles with their systems.

So as they progress in their market penetration it helps us as well and that's globally. But the most important factor here is that there is a higher level of systemic growth in insulin injection and it's reflected principally in pen needles and we see that occurring over the coming years. This is certainly not an inventory effect.

So if you have -- I don't know if this is a good way of looking at it. Pen needles obviously are a lot more expensive than conventional needles. What's the difference between unit growth for this business versus the reported 9%?

Well, pen needles aren't a lot more expensive than a conventional syringe. There are differences in price around the world, but typically the price of a pen needle and the price of a syringe in the U.S. or in Europe are pretty equivalent to each other. What we're seeing is not strictly a cannibalization impact. Through the years Europe and Japan and Canada -- and not yet the U.S. but it's starting in a more significant way in the U.S. -- went through a transition from syringes to pen needles which was a little bit of a benefit for us either because of slight differences in pricing or a slightly better margin.

But what we're seeing now is more fundamental underlying growth in insulin injection which is manifesting itself principally in pen needles as the more up-to-date way of injecting insulin. And so far year-to-date in terms of revenues, and I'm sure you know this just by looking at the numbers, we're seeing better than 9% growth in insulin injection. And I don't want to give you a number because I don't want to give you something that might be misleading. But what I had said in the previous call was that what we had looked at as a flat to low single-digit growth market wise we're now seeing as a mid to high single-digit grower and in certain periods maybe better.

Okay, very helpful. I promise, last question. If I look at this business -- this is your single highest gross margin business if memory serves me correctly. So this obviously has long-term implications on your gross margin line. I weigh that though against the recent acquisition, the up spending for CapEx and the increased spending on R&D. If I net this all up are we still going to see improvements or return on invested capital at this Company? Or are we at a short-term -- have we hit sort of a short-term peak?

Our plan is increasing ROIC, and it's one of the metrics that we've used in our LTI. And in fact the Board took it up and assigned us a higher target and that was well before we did GeneOhm.

So net of GeneOhm you still see -- I mean you have a step-down this coming year because of GeneOhm? You still have sustained improvements?

We won't have a step-down because of GeneOhm.

You won't? Okay. Very helpful. Thank you.

(indiscernible) cash in the business. Okay, thank you and if you have other questions please call Pat.